Is the World Becoming a Riskier Place?

P/C Insurance Industry in the Age of Uncertainty

Insurance Council of Texas Annual Symposium Austin, Austin TX July 15, 2011 Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

Presentation Outline
Review of Recent Events
What in the World is Going On?

Summary of P/C Financial Performance y Catastrophe Loss Developments & Trends

Global US

Will the Market Turn? Four Necessary Criteria:

Underwriting Loss Trends Capital/Capacity Reinsurance Markets Pricing Discipline

Texas Markets: Performance Overview

Profitability and Growth

Other Contributing Factors to the Underwriting Cycle

Investment Environment Tort/Casualty Environment Inflation Economic Growth

What in the World Is Going On?

Is the World Becoming a Riskier Place? What Are the Implications for Insurance and Risk Management?
3

Uncertainty, Risk and Fear Abound

Japan, New Zealand, Haiti, Chile Earthquakes Nuclear Fears , g , Record Tornado, Flooding in the US, TX Wildfires Cyber Attacks Resurgent Terrorism Risk (e.g., Bin Laden Killing) Political Upheaval in the Middle East Echoes of the Financial Crisis Housing Crisis Persistently High Unemployment US Debt and Budget Crisis Sovereign Debt & Currency Crises Inflation/Deflation Runaway Energy & Commodity Prices Era of Fiscal Austerity Reshuffling the Global Economic Deck China Becomes #2 Economy in the World Manmade Disasters (e.g., Deepwater Horizon)
Are Black Swans everywhere or does it just seem that way?
4

P/C Insurance Industry Financial Overview

Profit Recovery Will Be Set Back by High CAT L B k b Hi h CATs, Low Interest Rates, Diminishing Reserve Releases
5

P/C Net Income After Taxes 19912011:Q1 ($ Millions)

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.9% 2010 ROAS = 6.5% 2011:Q1 2011 Q1 ROAS = 5.6% 5 6%

$6 65,777 $4 44,155

$70,000 $70 000 $60,000 $50,000 $50 000 $40,000

$36,819

$38,5 501

,496 $62,

$80,000

P-C Industry 2011:Q1 profits were down 12.2% to $7.8B vs. $8.9B in 2010:Q1, as underwriting results Q , g deteriorated

$30,773

$30,029

24,404 $2

$20,598

$21 1,865

$14,178 8

$30,000 , $20,000 $10,000 $0 -$10,000

316 $19,3

$10,870

$20,559

$28,672

0 $34,670
10 11*

$ $5,840

$3 3,046

-$6,970
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.5% ROAS for 2011:Q1, 7.5% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO, Insurance Information Institute

$3 3,043

$7,807

A 100 Combined Ratio Isnt What It Once Was: Investment Impact on ROEs
Combined Ratio / ROE
110 105 100 95 8.9% 90 85 80 1978 1979 2003 2005 2006 2008* ROE* 2009* 2010* 2011* Combined Ratio 4.4% 14.3% 100.6 97.5 100.1 100.7 9.6% 9 6% 92.6 7.4% 7.5% 6.5% 12.7% 101.0 99.3 100.8 102.2 15.9% 5 9%

A combined ratio of about 100 generated ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979

18% 15% 12% 9% 6% 3% 0%

Combined Ratios Must Be Lower in Todays Depressed Investment Environment to Generate Risk Appropriate ROEs
* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurers Source: Insurance Information Institute from A.M. Best and ISO data.

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 2011*
ROE

25%

1977:19.0%
20% 15%

1987:17.3%

History suggests next ROE peak will be in 2016-2017 2007:12.3% 2011: 6.1%* 6 1%*
10 Years

1997:11.6%

10% 5% 0%

1975: 2.4%
-5%

1984: 1.8%

1992: 4.5%

2001: -1.2%

*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for Q1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

Profitability and Growth in Texas P/C I T Insurance Markets M k t

Analysis by Line and Nearby y y y State Comparisons
9

RNW All Lines: TX vs. U.S., 2000-2009

(Percent)
25% 20% 15% 10% 5% 0% -5% -10% -15% -20%
00 01 02 03 04 05 06 07 08 09

P/C Insurer profitability in TX is highly variable and g y below that of the US overall over the past decade US: 7.0% TX: 3.7%
US All Lines TX All Lines

Sources: NAIC.

10

RNW PP Auto: TX vs. U.S., 2000-2009

25% 20% 15% 10% 5%

Pvt. Passenger Auto profitability in TX is has been somewhat below the US in recent years

Average 2000-2009
0% -5% -10%
00 01 02 03 04 05 06 07 08 09

US: 7.2% TX: 6.1%

US PP Auto

TX PP Auto

Sources: NAIC.

11

RNW Comm. Auto: TX vs. U.S., 2000-2009

(Percent)
20% 15% 10% 5% 0% -5% -10%
00 01 02 03 04 05 06 07 08 09

Commercial Auto profitability in TX is generally below the US ll b l th average

Average 2000 2009 2000-2009 US: 8.5% TX: 5.6%

US Comm Auto

TX Comm Auto

Sources: NAIC.

12

RNW Comm. Multi-Peril: TX vs. U.S., 2000-2009

(Percent)
30% 20% 10% 0% -10% -20% -30% -40% -50%
00 01 02 03 04 05 06 07 08 09

Hurricane Ike put a big dent in CMP profitability in 2008

Average 2000-2009 US: 8.0% TX: 0.4%

US Comm M-P

TX Comm M-P

Sources: NAIC.

13

RNW Homeowners: TX vs. U.S., 2000-2009

(Percent)

50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60%
00

Homeowners Profitability: Mold, Hurricanes, Hail & Tornadoes (Need Say More?) (N d I S M ?)

Average 2000-2009 US: 4.7% TX: -2.3%

01

02

03

04

05

06

07

08

09

US HO
Sources: NAIC.

TX HO
14

RNW Workers Comp: TX vs. U.S., 2000-2009

(Percent)
20%

15%

Workers comp profitability in TX has generally ll outperformed the US

10%

5%

Average 2000 2009 2000-2009 US: 6.4% TX: 9.2%

0%

-5%
00 01 02 03 04 05 06 07 08 09

US WComp

TX WComp

Sources: NAIC.

15

All Lines: 10-Year Average RNW TX & Nearby States

2000-2009
10.5% 7.0% 6.9% 6.0% 3.7% -9.3% -13.0% 13 0%
Mississippi Louisiana New Mexico U.S. Arkansas Oklahoma Texas

Texas All Lines profitability is below the US and regional average

-15%

-10%

-5%

0%

5%

10%

15%

Source: NAIC, Insurance Information Institute

PP Auto: 10-Year Average RNW TX & Nearby States

2000-2009
11.1% 7.2% 6.8% 7.6% 6.1% 4.7% 0.8% 0 8%
Texas PP Auto profitability is below the US and regional average
New Mexico U.S. Arkansas Oklahoma Texas Mississippi Louisiana

0%

2%

4%

6%

8%

10%

12%

Source: NAIC, Insurance Information Institute

Top Ten Most Expensive And Least Expensive States For Automobile Insurance, 2008 (1)
Most expensive states
D.C. Louisiana New Jersey Florida New York Delaware Rhode Island Nevada Connecticut Maryland

Rank
1 2 3 4 5 6 7 8 9 10

Average expenditure
$1,126 1,105 1,081 1,055 1,044 1,007 986 970 950 922

Rank
1 2 3 4 5 6 7 8 9 10

Least expensive states

North Dakota Iowa South Dakota Nebraska Idaho Kansas Wisconsin North Carolina Maine Indiana

Average expenditure
$503 519 520 547 562 576 581 595 600 612

Texas ranked 15th in 2008, with an average expenditure for auto insurance of $854.

(1) Based on average automobile insurance expenditures. Source: 2010 National Association of Insurance Commissioners.
18

Comm. Auto: 10-Year Average RNW TX & Nearby States

2000-2009
11.1% 8.5% 6.1% 7.2%
Oklahoma New Mexico U.S. Arkansas

5.6% 5 6% 3.1% -3.8%

Texas Commercial Auto profitability is below the US and regional average

Texas Mississippi Louisiana

-5%

0%

5%

10%

15%

Source: NAIC, Insurance Information Institute

Comm. M-P: 10-Year Average RNW TX & Nearby States

2000-2009
Texas Commercial Multi-Peril profitability is below the US and regional average i l

13.3% 8.0% 6.4% 11.0% 0.4%

New Mexico U.S. Arkansas Oklahoma Texas Mississippi Louisiana

-10.0% -20.2% 20 2%

-30%

-20%

-10%

0%

10%

20%

Source: NAIC, Insurance Information Institute

Homeowners: 10-Year Average RNW TX & Nearby States

2000-2009
12.0% 4.7% -6.9% -1.6% -2.3% -29.0% -32.4% 32 4%
Texas Homeowners profitability is below the US and regional average
New Mexico U.S. Arkansas Oklahoma Texas Mississippi Louisiana

-40%

-30%

-20%

-10%

0%

10%

20%

Source: NAIC, Insurance Information Institute

Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2008 (1)
Texas ranked as the most expensive state for homeowners insurance in 2008, with an average expenditure of $1,460.
Rank
1 2 3 4 5 6 7 8 9 10

Most M t expensive states

Texas (3) Florida (4) Louisiana Oklahoma Massachusetts New York Connecticut C ti t Mississippi D.C. Kansas

Average A expenditure
$1,460 1,390 1,155 1 155 1,048 1,026 983 980 980 926 916

Rank
1 2 3 4 5 6 7 8 9 10

Least L t expensive states

Idaho Utah Oregon Washington Wisconsin Delaware Ohio Ohi Maine Pennsylvania Kentucky

Average A expenditure
$387 432 439 471 503 535 565 572 586 601

(1) States with the same premium receive the same rank. (2) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides all risks coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. (3) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms. (4) Florida data excludes policies written by Citizen's Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly comparable to other states. Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data. Source: 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.

22

Workers Comp: 10-Year Average RNW TX & Nearby States

2000-2010
8.7% 6.4% 13.2% 3.7%
Texas Workers Comp profitability is above the US 9.2% average but similar to the regional 9.5% average
New Mexico U.S. Arkansas Oklahoma Texas Mississippi Louisiana

9.9% 9 9%

0%

5%

10%

15%

Source: NAIC, Insurance Information Institute

All Lines DWP Growth: TX vs. U.S., 2001-2010

(Percent)
25% 20% 15% 10% 5% 0% -5% -10% 01 02 03 04 05 06 07 08 09 10 US DWP: All Lines
Source: SNL Financial.

1 2.0% 15.7%

14.3%

0.5% 20 % 9.8% 7.9%

7.4%

3 .4% 6.2%

0.5% % 3 3.7%

2.2 2% 1.4% %

2.9%

TX DWP: All Lines

24

-3.3% 6% -1.6

-2.1% %

0.0% 0.7% %

0.3%

Comm. Lines DWP Growth: TX vs. U.S., 2001-2010

(Percent)

30%
15.3% % 9.2% 19

25% 20% 15% 10% 5% 0% -5% -10% -15%

19 9.0%

27.2% 11.4% 9.2%

35%

4.5 5% 0.1%

5.4 4% 10.4%

0.2% 4.1% %

3.3% % 2.3% %

0.0%

01

02

03

04

05

06

07

08

-7.3% -7.4%

09

US DWP: Comm. Lines

Source: SNL Financial.

TX DWP: Comm. Lines

-2.5% % -0.9 9%

-1.2 2%

10

25

Personal Lines DWP Growth: TX vs. U.S., 2001-2010

(Percent)
20%
16.8% 11.3% 11.1% 9.2% % 7.2% 8.2%

15%

10%

5.4%

5.4%

1.2% 3.0%

4 4.3% 1.1%

2.3% % 0.5%

1.3%

2.3% % 2.4% %

5%

0% 01 -5% US DWP: Personal Lines 02 03 04 05 06 07

-0.1%

08

09

TX DWP: Personal Lines

Source: SNL Financial.

2.5% % 2.2% %

10

26

Private Passenger Auto DWP Growth: TX vs. U.S., 2001-2010

(Percent)
20%
10.2% 13.6% %

15%

8. .2% 11.3%

3.6% 1.4% 1

6.3% % 0.0 0% 2.0% 0. .5% 1.8%

10% 0%

7.9 9% 7.6 6%

0% 01 -5% 02 03 04 05
-0 0.4%

0. .6%

06

07

08
-0 0.4%

09

-10% US DWP: Personal Lines TX DWP: Personal Lines

Source: SNL Financial.

1.5% 1 1.4%

5%

-0.1% 3.5%

10

27

Homeowners MP DWP Growth: TX vs. U.S., 2001-2010

(Percent)
25.7% 14.4% % 8.3% 11.5% 13.5%

30% 25% 20% 15% 10% 5% 0% 01

11.1%

6.3%

% 7.3%

7.4% %

3.9% 6.0%

4.2% 5.3%

02

03

04

05

06

07

0.5 5% 3.5%

0.9 9%

2.6%

08

09

US DWP: Personal Lines

TX DWP: Personal Lines

Source: SNL Financial.

4.9% 3.6%

3.5%

10

28

Catastrophe Loss p Developments and Trends

2011 and 2010 Are Rewriting Catastrophe Loss and C t t h L d Insurance History
29

Global Catastrophe Loss Summary: First Half 2011

2011 Is Already (as of June 30) the Highest Loss Year on Record Globally
Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss

$260 Billion in Economic Losses Globally

New record for the first six months, exceeding the previous record of $220B in 2005 Economy is more resilient than most pundits presume

$55 Billion in Insured Losses Globally

More than double the first half 2010 amount Over 4 times the 10-year average

$27 Billion in Economic Losses in the US

Represents a 129% increase over the $ $11.8 billion amount through the first half of 2010

$17.3 Billion in Insured Losses in the US Arising from 100 CAT Events
Represents a 162% increase over the $6.6 billion amount through the first half of 2010

30

Insured Loss Estimates for Selected Major Catastrophes in 2011

Japan Earthquake Eqecat RMS AIR $22 to $39 billion $21 to 34 billion $20 billi t billion to $30 billion

April Tornadoes

May (Joplin) Tornadoes $5 billion to $1 billion to $7 billion $3 billion $3.5 to $6 $2 to $6 billion billion $5 billion t billi to $2 t $6 to $7 billion billion

31

US Second Quarter Insured Catastrophe Losses, 20002011

$ Billions 2011:Q2 CAT losses totaled $15.09 billion and $ are the highest on record

$16 $14 $12 $10 $8

Q2 CAT losses from 2000-2010 average $4.0 billion. 2011:Q2 CAT losses were nearly 4 times that amount at $15.09 billion

$15.09

$7.11 $6.24 $5.05 $2.79 $1.46 $2.33 $0.93

2001 2002 2003 2004 2005 2006 2007 2008 2009

$6.38 $4.47

$6 $4 $2 $0
2000

$5.04 $2.30

2010

2011

Record Q2 (and First Half) CAT Losses Will Adversely Impact Insurer Results in 2011
Sources: ISO/PCS; Insurance Information Institute.
32

Top 15 Most Costly World Insurance Losses, 1970-2011*

(Insured Losses, 2010 Dollars, $ Billions)

$80 $70 $60 $50 $40 $30 $20 $10 $0

Three of the top 15 most expensive catastrophes in world history have occurred in y the past 18 months
$35.0 $14.0 $14.9 $10.0 $11.3 $7.8 $8.0 $8.0 $9.0 $9.3
Winter Chile Hugo Typhoon Charley New Rita e C e ugo yp oo C a ey e a Storm Quake (1989) Mirielle (2004) Zealand (2005) Daria (2010) (1991) Quake (1991) (2011)

$72.3

$24.9 $20.5 $20.8 $ $20 5 $20 8 $23.1

Wilma Ivan a a Ike e Northridge WTC Andrew Japan Katrina o dge C de Japa a a (2005) (2004) (2008) (1994) Terror (1992) Quake, (2005) Attack Tsunami (2001) (2011)*

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable. Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

33

Top 16 Most Costly World Insurance Losses, 1970-2011*

(Insured Losses, 2010 Dollars, $ Billions)

$80 $70 $60 $50 $40 $ $30 $20 $10 $0

Winter Storm Daria (1991)

Taken T k as a single event, the i l h Spring 2011 tornado season would likely become the 9th costliest event in global insurance history
$11.3 $7.8 $8.0 $8.0 $9.0 $9.3 $10.0

3 of the top 15 most expensive catastrophes in world history have occurred in the past 18 months

$72.3

$35.0 $20.5 $20.8 $23.1 $20 5 $20 8 $23 1 $24.9

$14.0 $14.0 $14.9

Chile Hugo Typhoon Charley New Rita Spring Wilma Quake (1989) Mirielle (2004) Zealand (2005) Tornadoes (2005) (2010) (1991) Quake (2011) (2011)

Ivan (2004)

Ike Northridge WTC (2008) (1994) Terror Attack (2001)

Andrew Japan Katrina (1992) Quake, (2005) Tsunami (2011)*

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable. Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

34

Worldwide Natural Disasters, 1980 2011*

Number of Events
600

Already 355 events through the first 6 months of 2011

500

400

300

200

100

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Geophysical events (Earthquake, tsunami, volcanic eruption) *2011 figure is through June 30. Source: MR NatCatSERVICE

Meteorological events (Storm)

Hydrological events (Flood, mass movement)

Climatological events (Extreme temperature, drought, forest fire)

35

Worldwide Natural Disasters 19802011, Overall and Insured Losses*

First Half 2011
300

Overall Losses: $265 Bill Insured Losses: $60 Bill

250

200

US S$bn

150

100

50

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Overall losses (in 2011 values) *2011 figure is through June 30. Source: MR NatCatSERVICE

Insured losses (in 2011 values)

2011 Munich Re

36

JAPAN EARTHQUAKE/TSUNAMI & NUCLEAR DISASTER

March 11 Quake/Tsunami Is Just the Most Recent of Several L S l Large Global Catastrophe Losses Gl b l C t t h L

37

Insured Japan Earthquake Loss Estimates*

(Insured Losses, $ Billions)

Eqecat

$22 $39bn

RMS

$21 - $34 bn

AIRWorldwide

$20 $35bn

Economic losses are likely to total in the $200-$300 billion range, meaning only a fraction of the loss is insured

TowersWatson

$20 $45bn
$ $ $5 $5 $10 $10 $15 $15 $20 $20 $25 $25 $30 $30 $35 $35 $40 $40 $45 $45 $50 $50

*As of June 17, 2011. Towers Watson estimate includes $3.0 (low) to $4.9 billion (high) in life insurance losses. RMS estimate includes insured life/health losses of $3 to $8 billion. Sources: AIR Worldwide, Eqecat, RMS, Towers Perrin; Insurance Information Institute.

38

Recent Major Non-US Catastrophe Losses

(Insured Losses, $US Billions)
$40 $35 $30 $25 $20 $15 $10 $5 $0
Cyclone Yasi (Australia) Feb 2011 Australia Floods New Zealand Chile Earthquake New Zealand Japan Earthquake (Dec - Feb 2011) Quake (Sep 2010) (Feb 2010) Quake (Feb 2011) (Mar 2011)

The March 2011 earthquake in Japan will q p become among the most expensive in world history in terms of insured losses (current leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars) )
$10.0

$35.0

$8.0 $5.0 $0.5 $2.0

Insured Losses from Recent Major Catastrophe Events Exceed $60 Billion, an Estimated $53 Billion of that from Earthquakes

Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.

39

Nonlife (P/C) Insurance Market Impacts of Japan Earthquake

No Direct Impact for US Domestic Primary Insurers BUT: $2 - $5 Billion in Assumed Loss from Foreign Catastrophes Will Wind Up on the Books of US Insurers, Most with No Direct Exposure to Japan/Australia/NZ
US reinsurers Retrocessional market Blanket property insurance covers

Primary Insurance: Domestic Japanese Insurers Take Big Losses Few US/Foreign Insurers Had Direct Exposure to Japanese P/C Market
Low single-digit market share for a small number of companies

Significant Absorption of Loss by Japanese Government

Residential earthquake damage q g Nuclear-related property and liability damage

Significant Impacts for Global Reinsurers

Property-Catastrophe covers on Commercial Lines Business Interruption/Contingent Business Interruption

Supply Chain Disruption Concern (Now Waning) Currently an Earnings Event for Global Reinsurers
Not a capital event: Global reinsurance markets entered 2011 with record capital

Cost of Property/Cat Reinsurance Rising in Japan New Zealand Australia Japan, Zealand,
Up for all; Magnitude of increase is sensitive to size of loss

Impact on Cost of US Property-Cat Reinsurance is Possible/Likely

Market remains well capitalized and competitive
40

SPRING 2011 TORNADO OUTBREAK

2011 Will Be Among the Most Deadly and g y Expensive for Tornadoes In History

41

Insured Loss Estimates from April 2011 Tornadoes*

(Insured Losses, $ Billions)

Eqecat

$5 7bn

RMS

$3.5 - $6.0 bn

The April tornadoes killed more that 300 people and caused as much as $7 billion in insured losses

AIRWorldwide AIR W ld id

$5 $7bn $ $

$ $

$1 $1

$2 $2

$3 $3

$4 $4

$5 $5

$6 $6

$7 $7

$8 $8

$9 $9

$10 $10

*As of June 17, 2011. Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.

42

Insured Loss Estimates from May 2011 (Joplin) Tornadoes*

(Insured Losses, $ Billions)

Eqecat

$1 $3 bn

RMS

$2 - $6 bn

The May tornadoes killed more that 125 people and caused as much as $6 billion in insured losses

AIRWorldwide AIR W ld id

$2 $6bn

$ $

$1 $1

$2 $2

$3 $3

$4 $4

$5 $5

$6 $6

$7 $7

$8 $8

$9 $9

$10 $10

*As of June 17, 2011. Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.

43

Summary of Recent Tornado Activity

There Have Been 1,585 Tornadoes Through June 30 in the US 537 People Have Been Killed The April 27 Tornado Outbreak Killed at Least 342 People
Now the 2nd deadliest outbreak in US history (747 killed in march 1925 event) States impacted: AR, TN, LA, MS, GA and especially AL

Insured Losses Estimated at $3.5B to $7B Economic Losses Likely in the $7 Bill to $14 Bill Range The May 22 Tornado in Joplin, MO, Killed at Least 130 People
Largest number of deaths from a single tornado

Insured Losses Estimated at $1B to $6B y y g P/C Insurance Industry is Very Strong and Will Encounter No Difficulties in Paying these Claims
44

Number of Tornadoes and Related Deaths, 1990 2011*

2,000 1,800 1 800 1,600
1,297

Number of Tornadoes Number of Deaths

1,424 1,345

Tornadoes have already claimed more than 500 lives

1,6 692 1,819

600 537
1,585 5 1,282

500 Num mber of Dea aths

1,376

Numb of Tornad ber does

1,1 173

1,1 173

1 1,216

1,1 156

1,13 33

1,13 32

1,148

1,400 1,200 1,000 800 600 400 200 0

1 1,234

1,264

03 1,10

1,082 2

1 1,071

941

1,09 98

400

300

There were already y 1,585 tornadoes in the US by June 30

200

100

0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P

Insurers Expect to Pay $2 Billion on 165,000 Claims Arising from the 165 000 April 2011 Tornadoes in the Birmingham and Tuscaloosa Areas
*2011 is preliminary data through June 30. Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.
45

Insurers Making a Difference in Impacted Communities

Destroyed home in Tuscaloosa. Insurers will pay some 165,000 165 000 claims totaling $2 billion in the Tuscaloosa/ Birmingham areas alone.

Presentation of a check P t ti f h k to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm Recovery Fund
Source: Insurance Information Institute 46

U.S. Tornado Count, 2005-2011*

ThereTornado were 1,585 tornadoes in the US i 2010 li h l i activity was off slightly h in 2010, above average its record pace by mid-year

Deadly and costly April/ May spike

Source: http://www.spc.noaa.gov/wcm/

*Through July 2.

47

Location of Tornadoes in the US, January 1June 30, 2011

1,585 1 585 tornadoes killed 537 people through June 30, including at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in Joplin on May 22

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

48

Location of Large Hail Reports in the US, January 1June 30, 2011

There were 7,176 Large Hail reports through June 30, causing extensive damage to homes, businesses and vehicles

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

49

Location of Wind Damage Reports in the US, January 1June 30, 2011

There were 11,283 Wind Damage reports through June 30, causing 30 extensive damage to homes and, businesses

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

50

Severe Weather Reports, January 1June 30, 2011

There have been 20,044 severe weather reports through June 30; ; including 1,585 tornadoes; 7,176 Large Hail Hail reports and 11,283 high wind events

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

51

Number of Severe Weather Reports in US, by Type: January 1June 30, 2011
Tornadoes, , 1,585 , 8%

Wind Damage, Damage 11,283 , 56%

Large Hail Hail, 7,176 , 36%

Tornadoes accounted for just 8% of all Severe Weather Reports through June 30 b t more J but than 500 deaths

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

US CATASTROPHE INSURED LOSS UPDATE

First Half 2011 CAT Losses Already Exceed All of 2010 and Could Become One of the Most Expensive Years on Record

53

US Insured Catastrophe Losses

($ Billions)
$120 $100 $80 $60 $27.5 $ $16.9 $ $17.3 $40 $7.5 5 $2.7 $4.7 $20 $0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20?? $22.9 $26.5 $27.1 $ $100.0 $1 13.6
54

$100 Billion CAT Year is Coming Eventually

$1 12.9

$61.9

2000s: A Decade of Disaster 2000s: $193B (up 117%) 1990s: $89B

Record Tornado Losses Caused H1 CAT Losses to Surge

$10 0.1

$8.3 3

$7.4 4

$8.3 3

$9.2

$5.5 5

First Half 2011 US CAT Losses Already Exceed Losses from All of 2010. Even Modest Hurricane Losses Will Make 2011 Among the Most Expensive Ever for CATs
*First half 2011. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Sources: Property Claims Service/ISO; Insurance Information Institute.

$2.6

$4.6

9 $5.9

7 $6.7

$10 0.6

Natural Disaster Losses in the United States: First 6 Months 2011

As of July 6, 2011

Number of Events 43

Fatalities 593

Estimated Overall Losses (US $m) 23,573

Estimated Insured Losses (US $m) 16,350

Severe Thunderstorm Winter Storm Flood Earthquake

8 8 2

15 15 1

1,900 2,100 105

1,425 in progress in progress

Tropical Cyclone

Wildfire

37

125

50

Source: MR NatCatSERVICE

55

Top 12 (13?) Most Costly Disasters in U.S. History

(Insured Losses, 2010 Dollars, $ Billions)

$50 $45 $ $40 $35 $30 $25 $20 $15 $10 $5 $0

Taken as a single event, the Spring 2011 tornado season would likely become 5th costliest y event in US insurance history
$22.6 $23.1 $17.5 $5.3 $6.3 $6.7 $8.2 $8.6 $14.0 $ $11.5 $12.8

$45.8

$4.3

Jeanne Frances Rita (2004) (2004) (2005)

Hugo (1989)

Ivan (2004)

Charley (2004)

Wilma (2005)

Ike Spring Northridge Andrew 9/11 Attack Katrina (2008) Tornadoes* (1994) (1992) (2001) (2005) (2011)

*Losses will actually be broken down into several events as determined by PCS. Sources: PCS; Insurance Information Institute inflation adjustments.

56

Combined Ratio Points Associated with Catastrophe Losses: 1960 2011:H1*

Combined Ratio Points

1960 0

1962 2

1964 4

1966 6

1968 8

1970 0

1972 2

1974 4

1976 6

1978 8

1980 0

1982 2

1984 4

1986 6

1988 8

1990 0

1992 2

1994 4

1996 6

1998 8

2000 0

2002 2

2004 4

2006 6

2008 8

10 9 8 7 6 5 4 3 2 1 0

8.8 8

Avg. CAT Loss Component of the Combined Ratio by Decade 1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 4.15*

5 5.9

4 5.4

8.1 5.0 3.3 3.3 2 2.7 1.6 2010E E

3.3 2.8

3.6 2.9

3.6

1.2 0.4 0.8 1.3 0.3 0.4 0.7 1.5 1.0 0.4 0.4 0.7 1.8 1.1 0.6 1.4 0 2.0 1.3 0 2.0 0.5 0.5 0.7

2.1 1

2. .3

1.6

0.8 1.1 1.1 0.1 0.9

1.2

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
*Insurance Information Institute estimates for 2010 and 2011:H1 Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers. Source: ISO; Insurance Information Institute. 57

0.4

1.0

1.6

2 2.6 3.3

3.0

5.0

Natural Disasters in the United States, 1980 2011*

Number o Events ( u be of e ts (Annual Totals 1980 2010 and First Half 2011) ua ota s 980 0 0a d st a 0 )
300

250

There were 98 natural disaster events in the first half of 2011

200

N Number

150

100
37 8 51 2

50

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Geophysical (earthquake, tsunami, volcanic activity)

*Through June 30. Source: MR NatCatSERVICE

Meteorological (storm) Hydrological (flood, mass movement)

Climatological (temperature extremes, drought, wildfire)

58

U.S. Thunderstorm Loss Trends, 1980 2011*

Thunderstorm losses in the first half of 2011 totaled $16.4 billion, a new annual record through just 6 months Hurricanes get all the headlines, but thunderstorms are consistent producers of large scale loss loss. 2008-2011 are the most expensive years on record.

Average thunderstorm losses are up more than 8 fold since the early 1980s

*Through June 30, 2011. Source: Property Claims Service, MR NatCatSERVICE

59

U.S. Winter Storm Loss Trends, 1980 2010 (Annual Totals) vs. First Half 2011
Insured winter storm losses in 2011 totaled $1.4 billion and are up 50% since 1980. 1980

Source: Property Claims Service, MR NatCatSERVICE

60

U.S. Acreage Burned by Wildfires, 1980 2010 (Annual Totals) vs. First Half 2011
2011 could be a severe year for wildfire damage. Acres burned through June 30 already exceed all of 2010.

Source: National Forest Service, MR NatCatSERVICE

61

Notable Wildfires in 2011

April June

Texas: Over 3 million acres burned in west Texas from 12 major seats of fire. Over 200 homes and businesses destroyed, $50 million insured loss. Arizona and New Mexico: Wallow fire largest in AZ history at 538,000 acres, Las Conchas fire near Los Alamos, 30 buildings destroyed.
Source: Munich Re.

Source: NASA

62

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 19902011:H11

Wind/Hail/Flood (3), $12.7 Geological Events, $18.5 Terrorism, $24.9 Fires (4), $9.0 Other (5), $0.6

2.4%

4.9% 3.4%0.2% 6.6%

Winter Storms, $30.0

42.7% 8.0%
Hurricanes & Tropical Storms, $160.5

Tornado share of CAT l losses i is rising

31.8%
Tornadoes (2) $119 5 T d (2), $119.5

Wind losses are by far cause the most catastrophe losses, even if h i hurricanes/TS /TS are excluded.

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars. 2. Excludes 2 E l d snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISOs Property Claim Services Unit.

63

Number of Federal Disaster Declarations, 1953-2011*

90 80 70 60 50 40
29 22 20 2 25 2 25

45 45 9 49

8 48 46 46

48 8 52

43 45

38

42

38

30

22 2 25

13 17 18 16 16

19

12 12

11 11

15

20 10 0

17 17

24 21

23 3

30

*Through July 1, 2011. Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

7 7

The Number of Federal Disaster Declarations Is Rising g

11

27 28 3 23

31

32 36 32

34

44

48 8

There have been 1,998 federal disaster declarations since 1953. 1953 The average number of declarations per year is 34 from 1953-2010, though that few havent been recorded since 1995. 1995

63 56

The number of federal disaster declarations is on track to set a new record in 2011, with 48 declarations through July 1.

7 75

65

69

5 50

59

7 75

81

Federal Disasters Declarations by State, 1953 June 30, 2011: Highest 25 States
100
85

90 80
D isaster D e clarations s

Over the past nearly half century, century Texas has led the US in Federal Disaster Declarations
70 0 63 63 56 55

70 60 50 40 30 20 10 0

78

54

52

52

51

5 50

4 49

47 7

46 6

46 6

45

45

44

44

44

42

42

39

TX CA OK FL NY LA AL KY AR MO IL MS TN MN IA WV KS NE OH PA WA ND VA IN NC
Source: FEMA.
65

39

Federal Disasters Declarations by State, 1953 June 30, 2011: Lowest 25 States
50 40
D isaster D e clarations s
39 38

3 36

35 5

35 5 30 29

27

30 20 10 0

2 25

2 25

2 25

2 25

24

3 23

23 3 20 20 17 16

15

15

1 13 9 8

SD ME GA AK WI VT NJ OR HI MA MI NH AZ ID NM MD MT NV CO CT SC DE DC RI UT WY
Source: FEMA.
66

The BIG Question: When Will the Market Turn?

Insurance Cycle Dynamics

67

Criteria Necessary for a Market Turn: All Four Criteria Must Be Met
Criteria
Sustained Period of Large Underwriting Losses Material Decline in Surplus/ Capacity Tight Reinsurance R i Market Renewed Underwriting & Pricing Discipline

Status

Comments

Apart from Q2:2011, overall p/c underwriting losses remain modest d t Combined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at onset of last hard market) Not Yet Prior-year reserve releases continue reduce u/w losses, Happened b t ROEs boost ROE Surplus hit a record $565B as of 3/31/11 Analysts est. excess surplus of $75-$100B Some excess capacity may still remain in reinsurance Surplus is markets k t At/Near Weak growth in demand for insurance is insufficient to Record High absorb much excess capacity

Somewhat in Higher prices in Asia/Pacific Place Modestly improved pricing for US risks
Commercial lines pricing trends remain negative Competition remains intense as many seek to maintain Not Broadly market share Evident Terms & conditionsno broad tightening
68

Sources: Barclays Capital; Insurance Information Institute.

Do the Property Catastrophe Events of 2011 Impact Casualty Markets?

Unlikely that Record 2011 Property CAT Loss Will Impact Casualty Markets in Any Material Way Global P/C & Reinsurance Industries Entered 2011 w/ Record Capital
Events so far in 2011 are earnings events, rather than capital events

Natural Catastrophe and Casualty Risks Are Largely Uncorrelated

Risks are different Geographically, mostly distinct primary carriers: Japan-Australia-NZ-US Casualty markets generally dont influence property markets

Property and Casualty Risks Are Largely Siloed Record Property Losses in 2004/2005 Did Not Impact Casualty Mkts Mkts. Casualty Markets Have Their Own Issues
Tort environment Inflation Public policy
69

1. 1 UNDERWRITING

Have Underwriting Losses g Been Large Enough for Long Enough to Turn the Market?
70

P/C Insurance Industry Combined Ratio, 20012011:H1*

As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 16 $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, L Reserve Releases Relatively Low CAT Losses, L Reserve Releases Higher CAT Losses, Shrinking g Reserve Releases, Toll of Soft Market

120 115.8
Best Combined Ratio Since 1949 (87 6) (87.6) Cyclical Deterioration

Avg. CAT A Losses, More Reserve Releases

110

107.5

107.5

100.1 100

100.8 98.4 95.7 92.6

101.0

99.3 99 3

100.8

90 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
71

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.1 Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-M&FG was 102.2).

Underwriting Gain (Loss) 19752011*

($ Billions)
$35 $25 $15 $5 -$5 -$15 -$25 $25 -$35 -$45 -$55
The industry recorded a $10.4B underwriting loss in 2010 compared to $3.0B in 2009 $3 0B
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011*

Cumulative underwriting deficit from 1975 th f through h 2009 is $445B

Underwriting losses in 2011 will be much larger: $17.9B $17 9B based on annualized Q1 data

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

* Includes mortgage and financial guaranty insurers in all years. 2011 figure is annualized based on actual Q1 underwriting losses of $4.463 billion. Sources: A.M. Best, ISO; Insurance Information Institute.

Number of Years with Underwriting Profits by Decade, 1920s2010s

Number of Years with Underwriting Profits
12 10 8 6 4 2 0 1920s 1930s 1940s 1950s 1960s 1970s 0 1980s 0 1990s 2000s* 0 2010s** 6 5 4 3 7 10 8

* 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit. **Data for the 2010s includes 2010 and 2011. Note: Data for 19201934 based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data.

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

73

P/C Reserve Development, 19922011E

$30 Prior Yr. Reserve Release ($ r e $B) $25 $20 $15 $10 $5 $ $0 -$5 $10 -$10 -$15 -$20 92 2 93 4 94 95 96 97 98 99 00 01 2 02 03 04 4 05 06 07 -2.1 -8.3 -2.6 -6.6 -6 6 -9.9 -9.8 -4.1 67 -6.7 -9.5 -14.6-16 -15 E 10E 11E E 08 09 -5 2.3 1 Prior Yr. Reserve Development ($B) Impact on Combined Ratio 23.2 13.7 9.9

11.7

Prior year reserve releases totaled $8.8 billion in the first half of 2010, up from 2010 $7.1 billion in the first half of 2009
7.3

8 6 4 2 0 -2 -4 -6

Impac on Combined Ratio ( ct (Points)

Reserve Releases Are Remained Strong in 2010 But Should Begin to Taper Off in 2011
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best.

74

2. 2 SURPLUS/CAPITAL/CAPACITY
Have Large Global Losses Reduced Capacity i th I d t S tti C it in the Industry, Setting the Stage for a Market Turn?
75

US Policyholder Surplus: 19752011*

($ Billions)
$600 $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11*

Surplus as of 3/31/11 was a record $564.7B, up from $437 1B at the crisis trough at 3/31/09 Prior $437.1B 3/31/09. peak was $521.8 as of 9/30/07. Surplus as of 3/31/11 was 8.2% above 2007 peak; Crisis trough was as of 3/31/09 16.2% below 2007 peak.

Surplus is a measure of underwriting capacity. It is analogous to Owners Equity or Net Worth in non-insurance organizations

The Premium to Surplus Ratio Stood at $0.77:$1 as of Premium-to-Surplus 3/31/11, A Near Record Low (at Least in Recent History)**
* As of 3/31/11. Source: A.M. Best, ISO, Insurance Information Institute.

Policyholder Surplus, 2006:Q42011:Q1

($ Billions)
$580 $560 $540
$521.8$517.9 $515.6 $512.8 $520 $505.0 $505 0 $496.6 $500 $487.1 $478.5

2007:Q3 Previous Surplus Peak

Surplus set a new record in 2011:Q1*

$564.7 $564 7 $556.9 $544.8

$540.7 $530.5 $511.5 $490.8 $463.0

$480 $460 $440 $420

The Industry now has $1 of surplus for every $0.77 of NPWthe t NPW th strongest claimst l i paying status in its history.

$455.6

$437.1

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1

Quarterly Surplus Changes Since 2007:Q3 Peak

*Includes $22.5B of paid-in capital from a holding company parent for one insurers investment in a non-insurance business in early 2010.
Sources: ISO, A.M .Best.

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%) $58.8B ( 11.2%) 09:Q3: -$31.0B (-5.9%) 09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%) 10:Q2: +$8.7B (+1.7%) Q $ ( ) 10:Q3: +$23.0B (+4.4%) 10:Q4: +$35.1B (+6.7%) 11:Q4: +$42.9B (+8.2%)

77

Implied Excess (Deficit) Capital Assuming Premium/Surplus Ratio = 0.9:1

Excess/(Deficit) Capital (Policyholder Surplus)
100 50 0 ($10.6) -50 -5.1% -100 -8.8% 150 -150 2000 2001 ($103.0) ($124.6) 2002 2003 ($49.2) ($65.4) $ -1.5% ($76.5)
2005: Katrina, Rita, Wilma produce record CAT losses 2000-2002: Tech bubble bursts, 9/11, high / underwriting losses erode capital base

21.6%

2006/07: Low CAT losses, strong underwriting results since 1940s increase capital i it l

2009-10: End of financial crisis, rising asset prices. modest u/w losses push capital to h it l t record levels

Annual Change in Policyholder Surplus

$81.9 $41.7 25% 20% 15% 10% 8.9%

13.4%

14.4% $22.9

8.2% ($10.8)

12.3% 6.2% ($32.7)

5% 0%

2008: Financial crisis causes sharp drop in capital

-5% -10% -15% 15%

-12.0% 2004 2005 2006 2007 2008 2009 2010

Capital Excess (Deficit)

Annual Change in Capital

Record Policyholder Surplus (Capital) Has Resulted Significant Excess Capital in the P/C Insurance Sector As of Year End 2010. Deteriorating Underwriting Losses Higher 2010 Losses, CAT Activity, More Modest Market Returns Will Likely Shrink Excess Capital in 2011.
Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has $74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1. Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written

M&A Activity Globally Among P/C Insurers Remains Subdued: Little Capacity Leaving
Property-Casualty 6.5 $16 5.1 $45
2010

Life-Annuity $1.2 $2.4

Health/Managed Care $13 3.9

Distribution

Services

$15. .0

$24. .4

$5.8 8 $0.8 8 $5.5 $2.3 $9.8

2009

$30.3 3

2008

$50.6

$7.6

$9.4 4

$51.8

$13.8

$15.3

2007

$0

$35

$70

$105

$ Billions
Sources: Conning Research; Insurance Information Institute.
79

$6.9 $140

Paid-in Capital, 20052010

($ Billions)

$30 $25 $20 $15 $10

Paid-in capital for insurance operations rose b $27 4B ti by $27.4B in 2010, the largest on record dating back to 1959

$27.4

$22.5

$14.4
$5 $0

$12.3 $3.8 $3.2 2007 2008 $6.6 2009 $4.9 2010:Q3

2005

2006

In 2010 One Insurers Paid-in Capital Rose by $22.5B p y as Part of an Investment in a Non-insurance Business
Source: ISO; Insurance Information Institute.
80

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
(Percent)
18% 15% 12% 9.6% 9% 6.9% 6% 3.3% 3% 0% 6/30/1989 Hurricane Hugo 6/30/1992 Hurricane Andrew 12/31/93 Northridge Earthquake 6/30/01 Sept. 11 Attacks 6/30/04 Florida Hurricanes 6/30/05 Hurricane Katrina Financial Crisis as of 3/31/09** 6.2% 6 2% 10.9%

The Financial Crisis at its Peak Ranks as the Largest p Capital Event Over the Past 20+ Years
13.8%

16.2%

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event ** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9% Source: PCS; Insurance Information Institute

81

Historically, Hard Markets Follow When Surplus Growth is Negative*

(Percent)
30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 15%
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Surplus growth still exceeds premium growth, suggesting an ongoing build-up of capacity in early 2011 l

NWP % change

Surplus % change

Sharp Decline in Capacity is a Necessary but Not Sufficient Condition for a True Hard Market
* 2011 NWP and Surplus figures are % changes as of Q1:11 vs. Q1:10. Sources: A.M. Best, ISO, Insurance Information Institute
82

Ratio of Net Premiums Written to Policyholder Surplus, 1970-2011*

2.7 2.5 2 2.5 2 2.5

3.0 2.5
2.1 1.9 2.0

Record High P-S Ratio was 2.7:1 in 1974

2.3

2.1

The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.76:1 in 2010. It has decreased as PHS grows more quickly than NPW, with the effect of holding down profitability.

2.0 1.5 1.0 10

1.8

1.8 1.7 1 1 1.7 1.9 1.9 1.9 1.9 1 1.7 1.6 6 1.6 6 1.4 1.4 1.3 1.3

0.5 0.0 70 72 74 76 78 80 82 84 86 88 90 92

Record Low P-S Ratio was 0.76:1 as of 12/31/10, rising slightly to 0.77:1 as of 3/31/11 0 77:1

94

96

98

02

04

06

08

The Premium-to-Surplus Ratio in 2011:Q1 Implies that P/C Insurers Held $1 in Surplus Against Each $0.77 Written in Premiums. In 1974, Each $1 $0 77 Premiums 1974 of Surplus Backed $2.70 in Premium.
*2011 data are as of 3/31/11. Sources: Insurance Information Institute calculations from A.M. Best data.
83

10

0 0.9 0.8 84 0. .86 0 0.94 1.13 1.29 1.17 1.07 0.99 0 0.91 0.8 84 0.95 0.8 82 0.76 6 0.77 7

1.6

1.1 1.1

3. REINSURANCE MARKET CONDITIONS

Has Record Global H R d Gl b l Catastrophes Activity Erased Enough Capacity to Turn Markets?
84

Significant Market Losses, 1985-2011*

$100 $90 $80 $70 $60 Billions $50 $40 $30 $20 $ $10 $0
1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1998 1999 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011

REINSURANCE PRICING TRENDS Property/CAT reinsurance p ces e su a ce prices are up substantially in Asia/Pacific markets US pricing is up 1015%, but ex-Florida closer to flat

Reinsurers share of major market losses was exceptionally high in 2010 y and early 2011

Worldwide Direct Insured Losses

Source: Holborn; RAA.

Reinsured Losses

* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.

Significant Market Losses by Event, 1985-2011*

Reinsurers are bearing a very high share of recent catastrophe losses Losses are putting pressure on property cat reinsurance prices in affected regions. The impact for US property catastrophe pricing is uncertain uncertain.

Source: Holborn, RAA. *2011 events as of March 31 are preliminary and may change as loss estimates are refined further.

Outlook for the 2011 Atlantic Hurricane Season If Expected Above Average Activity Produces Costly Landfalls, R i L df ll Reinsurance Markets Could Harden Significantly
87

Outlook for 2011 Hurricane Season: 75% More Active Than Average
Average* Named Storms Named Storm Days Hurricanes Hurricane Days Intense Hurricanes Intense Hurricane Days Accumulated Cyclone Energy p y y Net Tropical Cyclone Activity 9.6 49.1 5.9 24.5 2.3 5.0 96.1 100% 2005
( (Katrina Year) )

2011F 16 80 9 35 5 10 160 175%

28 115.5 14 47.5 7 7 NA 275%

*Average over the period 1950-2000. Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2011

Average Average* Entire US Coast US East Coast Including Florida Peninsula Gulf Coast from FL Panhandle to Brownsville, TX 52% 31% 30% 2011F 72% 48% 47%

ALSOAbove-Average Major Hurricane Landfall Risk in Caribbean for 2011 (61% vs. 42%)
*Average over the period 1950-2000. Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.

US Property Residual Markets Remain Under Strain Most States Fail to Address Their Vulnerabilities to Catastrophic Coastal Loss
90

U.S. Residual Market Exposure to Loss ($ Billions)

($ Billions)
$900 $ $800 $700 $600 $500 $400 $ $300 $200 $100 $0 1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $54.7

Katrina, Rita and Wilma Wil 4 Florida Hurricanes

$430.5 $419.5 $372.3 $281.8 $221.3 $150.0 $292.0 $244.2 $244 2 $656.7

$771.9 $703.0 $703 0 $696.4

$ $757.9

Hurricane Andrew

In the 21-year period between 1990 and 2010, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54 7 $54.7 billion in 1990 to $757.9 billion in 2010.
Source: PIPSO; Insurance Information Institute (I.I.I.); http://www.iii.org/pr/last-resort-2010.
91

U.S. Residual Market: Total Policies In-Force (1990-2010) (000)

(000)
3,000
4 Florida Hurricanes Katrina, Rita and Wilma

2,780.6

2,840.4

2,841.4

2,500 2,209.3 2,203.9 2,000 ,

Hurricane Andrew

2,621.3 2 621 3 2,479.4

1,785.0 1 785 0 1,458.1

1,741.7 1 741 7 1,642.3

1,500

1,319.7

1,196.5

931.6 1,000 931 6 500 0 1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

In the 21-year period between 1990 and 2010 the total number of policies 21 year 2010, in-force in the residual market (FAIR & Beach/Windstorm) Plans has more than tripled.
Source: PIPSO; Insurance Information Institute; http://www.iii.org/pr/last-resort-2010.
92

Texas Windstorm Insurance Association (TWIA): Exposure to Loss (Building & Contents Only) ($ Billions)
TWIAs exposure to loss for building & contents has surged by more than 400 percent in the last 11 years from $12 1 $12.1 billion in 2000 to $67.8 billion in 2011.
$58.6 $58.6

$80 $70 $60 $50 $40 $30 $20 $10 $0

$64.4

$67.4 $67.8

$38.3 $23.3

$12.1 $13.2

$16.0

$18.8 $20.8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

May 312011

Source: TWIA at 05/31/11, Texas Department of Insurance, Southwestern Insurance Information Services (SIIS)

Texas Windstorm Insurance Association (TWIA) Total Exposure to Loss (Millions of Dollars)

$80,000 $70,000 $60,000 $60 000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 Building & Co te ts u d g Contents
Source: TWIA at 05/31/11, Texas Department of Insurance

By May 31, 2011, TWIAs total exposure y y had surged to $74.4 billion.

$67,765.8

$6,613.3

ALE/Business Income / us ess co e

Texas Windstorm Insurance Association (TWIA) New Financial Structure

New TWIA financing N fi i structure made available up to $2.5 billion to fund losses via three postevent bonding layers. The new structure eliminated the unlimited assessment on TWIA member insurers and does not call for TWIA to d t ll f t purchase reinsurance.

Source: Southwestern Insurance Information Institute (SIIS)

4. RENEWED PRICING DISCIPLINE

Is There Evidence of a Broad and Sustained Shift in Pricing?

96

Soft Market Persisted in 2010 but Growth Returned: More in 2011?

(Percent)
1975-78 1984-87 2000-03 Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3Year Decline Since 1930-33. 2011:Q1 growth was +3.5%; First Q1 growth since 2007

25%

20%

15%

10%

5%

0%
NWP was up 0.9% in 2010
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
*2011 figure is an estimate based on Q1 data. Shaded areas denote hard market periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
97

-5%

10%

15%

20%

-5% 0% 5%
10.2%

2002:Q1 2002:Q2 2002:Q3 2002:Q4 2003:Q1 2003:Q2 2003:Q3 2003:Q4 2004:Q1 2004:Q2 2004:Q3 2004:Q4 2005:Q1

-10%

P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter

Sources: ISO, Insurance Information Institute.

5.1% 15 16.8% 16.7% 12.5% % 10.1% 9.7% 7.8% 7 7.2% 5.6 6% 2.9% 5% 5.5

-4.6% 2005:Q2 -4.1% 2005:Q3 -5.8% 2005:Q4 -1.6%

2006:Q1 2006:Q2 2006:Q3 2006:Q4 2007:Q1 2007:Q2 2007:Q3 2007:Q4 2008:Q1 2008:Q2 2008:Q3 2008:Q4 2009:Q1 2009:Q2 2009:Q3 2009:Q4 2010:Q1 2010:Q2 2010:Q3 2010:Q4 2011:Q1

10.3% 10.2% 13.4 % 6 .6% -1.6% 2.1% 0.0% -1.9% 0.5%

Finally! Back to back quarters of net written premium growth Back-to-back (vs. the same quarter, prior year)
The long-awaited uptick. In 2011:Q1 occurring in personal lines predominating cos. (+3.8%) and commercial lines predominating cos. (+3.5%)
-1.8% -0.7% -4.4% -3.7% -5.3% -5.2% -1.4% -1.3% 1.3% 2.3% 1.3% 3.5%
98

Average Commercial Rate Change, All Lines, (1Q:20041Q:2011)

(Percent)
1Q Q04 2Q Q04 3Q Q04 4Q Q04 1Q Q05 2Q Q05 3Q Q05 4Q Q05 1Q Q06 2Q Q06 3Q Q06 4Q Q06 1Q Q07 2Q Q07 3Q Q07 4Q Q07 1Q Q08 2Q Q08 3Q Q08 4Q Q08 1Q Q09 2Q Q09 3Q Q09 4Q Q09 1Q Q10 2Q Q10 3Q Q10 4Q Q10 1Q Q11 -0.1% 0% -2% -4% -6% -8% -10% -12% -14%
KRW Effect Eff t

-5.9% % -7.0%

-9.4% -9.7 7% -8.2%

Magnitude of Price Declines Shrank During Crisis, Reflecting Shrinking Capital, Reduced Investment Gains, Deteriorating Underwriting g Performance, Higher Cat Losses and Costlier Reinsurance

-4.6% -2.7% -3.0% -5.3%

-9.6 6% -11.3% -11.8% -13.3% -12.0% -13.5% -12 2.9% -11.0%

-16%

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

-6.4% -5.1% -4 4.9% -5.8% % -5.6 6% -5.3% -6.4% -5. .2% -5.4 4% -2.9%
Q1 2011 decreases were the smallest since 2006, perhaps signaling a market firming
99

-3.2%

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q1

Percentage Change (%) Peak = 2001:Q4 +28.5%
Market has Been Soft for 7 years and Remains Soft as Capital Hits Record Levels; But Is Softness Moderating?

Pricing Turned Negative in Early 2004 and Has Been Negative Ever Since

KRW Effect: No Lasting Impact

Trough = 2007:Q3 -13.6%

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

100

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q1

1999:Q4 = 100

Pricing today is where is was in Q3:2000 (pre-9/11)

Downward pricing pressure is most pronounced for larger risks

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

101

Monthly Change* in Auto Insurance , Prices, 19912011*

10% 8% 6% 4% 2% 0% -2% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
*Percentage change from same month in prior year; through May 2011; seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Cyclical peaks in PP Auto tend to occur approximately every 10 pp y y years (early 1990s, early 2000s and likely the early 2010s)
A pricing peak may have occurred in 2010

Hard markets tend to occur during g recessionary periods

May 2011 change was 3.8%, down from 5.4% in Nov. 2010

102

Other Cycle-Influencing Factors

Could Other Factors Act as a Catalyst to Turn the Market?
103

INVESTMENTS: THE NEW REALITY

Investment Performance is a Key Driver of Profitability Does It Influence Underwriting or C li lit ? U d iti Cyclicality?
104

Property/Casualty Insurance Industry Investment Gain: 19942011:Q11

($ Billions)
$70 $60
$52.3 $58.0 $51.9 $44.4 $36.0 $31.7 $45.3 $39.2 $39 2 $47.2 $42.8 $56.9 $48.9 $59.4 $55.7 $52.9 $64.0

$50 $40 $35.4 $30 $20 $10 $0 94

Investment gains in 2010 were the best since 2007

$13.5

95

96

97

98

99

00

01

02

03

04

05*

06

07

08

09

10 11:Q1

Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to Fall by 50% in 2008
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. * 2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute.
1

Treasury Yield Curves: Pre-Crisis (July 2007) vs. June 2011*

6% 5% 4% 3% 2% 1% 0.02% 0 02% 0% 1M 3M 6M 1Y 2Y 3Y 5Y 0.04% 0 04% 0.10% 0 10% 0.18% 4.82% 4 82% 4.96% 5.04% 4.96% 4.82% 4 82% 4.82% 4 82% 4.88% 4 88% 5.00% 4.93% 4 93% 5.00% 5.19%

4.23%

Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2012. 2012
0.71% 0.41%

3.91% 3.00% 2.29% 1.58% 1 58%

QE2 Target

June 2011 Yield Curve* Pre-Crisis (July 2007) 7Y 10Y 20Y 30Y

The End of the Fed s Quantitative Easing Is Unlikely to Push Interest Feds Rates Up Substantially Given Ongoing Economic Weakness
*Average of daily rates. Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
106

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain y Constant ROE, by Line*
ty s l p to re s ne ia o u a p c l Li y Su Pr C al ro ss er lA s nt y/ na t t a P u M i m m m m ra P di s so pl el ar C ed om om re om om er er vt ur id P P P C C C C F W S M W C o ut A es in L * e* nc

ra su n ei

0% -1% -2% -3% -4% -5% -6% -7% -8%

-1.8%

-1.8%

.0% -2.

-1.9%

.1% -2.

-3.1% %

-3.3%

-3.6%

-3.3%

-3.7%

-4.3%

-5.2%

-5 5.7%

-7.3%

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums **US domestic reinsurance only Source: A.M. Best; Insurance Information Institute.

107

Shifting Legal Liability & g g y Tort Environment

Is the Tort Pendulum Swinging Against Insurers?

108

Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical
($ Billions)
$300 Tort Sytem Costs y Tort Costs as % of GDP 2.50%

$250 2.25% Tort Sys stem Costs $200 To Costs as % of GDP ort

$150

2.00%

$100

$50

Tort Costs Have Remained High but g Relatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as the Economy Expands
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10E 12E

1.75%

$0

1.50%

Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A

109

Business Leaders Ranking of Liability Systems in 2010

Best States
1. 1 2. 3. 3 4. 5. 6. 7. 8. 9. 10. Delaware North Dakota Nebraska Indiana Iowa Virginia Utah Colorado Massachusetts South Dakota
Midwest/West has mix of good and bad states.

New in 2010
41. 41
North Dakota Massachusetts South Dakota

Worst States
New Mexico Florida Montana Arkansas Illinois California Alabama Mississippi Louisiana

Newly Notorious N l N t i
New Mexico Montana Arkansas

42. 43. 44.

Drop-offs
Maine Vermont Kansas

45. 46. 47. 48. 49.

Rising Above Texas

South Carolina Hawaii

50. West Virginia

Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.

The Nations Judicial Hellholes: 2010

Watch List
Madison County, IL Atlantic County, NJ St. Landry Parish, LA District of Columbia NYC and Albany, NY St. Clair County, IL

Illinois
Cook County

West Virginia

Philadelphia

California
Los Angeles and Humboldt Counties

Dishonorable Mention

MI Supreme Court City of St. Louis CO S p Supreme C Court

Nevada
Clark County

South Florida
Source: American Tort Reform Association; Insurance Information Institute
111

Avg. Jury Awards 1999 vs. 2003 and 2008

$7,000 $ $4,838 $ $4,885 $6,000 $3,717 $3,722 $5,000 $5 000 $4,000 $3,000 $ $2,000 $64 44 $79 99 $1,000 $0 Overall Vehicular liability Premises liability Wrongful death* Medical malpractice Products liability $1,046 $2,338 $4,164 $5,446

$9 901

*Award trends in wrongful deaths of adult males. Source: Jury Verdict Research; Insurance Information Institute.

$201

$208

$327

$589 9

$849

$ $2,887

$3,499

1999

2003

2008

Sum of Top 10 Jury Awards 2004-2010

$6,000 $5,159 $5,000 $4,000 $3,000 $2,000 $1,344 $1,000 $0 2004 2005 2006 2007 2008 2009 2010 $815 $616 $2,954

$1,511

$1,568

Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009, and 2010.

Inflation
Is it a Threat to Claim Cost Severities

114

Annual Inflation Rates, (CPI-U, %), 19902014F

Annual Inflation Rates (%)
6.0 5.0 4.0 40 3.0 2.0 1.0 0.0 -1.0
-0.4
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F

4.9

5.1

Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble reduced inflationary dit b bbl d d i fl ti pressures in 2009/10
3.8 3.0 3.2 2.4 3.3 3.4 2.9 2.8 2.6 1.9 1.5 15 1.3 2.5 2.3 3.0 2.8 3.8

Higher energy, commodity and food prices are pushing up inflation in 2011, 2011 but not longer turn inflationary expectations.

3.0 2.2 2.1 2.2 1.6

The slack in the U.S. economy suggests that inflation should not heat up before 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/11 and 6/11 (forecasts).
115

Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years

1800 1500 Index Va alue (1961= 100) 1200 900 600 300 0
11 1* 6 61 6 66 7 71 7 76 8 81 8 86 9 91 9 96 0 01 0 06

All Items Medical Care

1589.8

A claim that cost $1,000 in 1961 would cost nearly $16,000 based on medical cost inflation trends over the past 50 years.
719.8

*Based on change from Feb. 2011 to Feb. 2010 (latest available) Source: Department of Labor (Bureau of Labor Statistics)

Regulatory Environment & Financial Services Reform

Insurers Not as Impacted as Banks, Banks But Dodd Frank Dodd-Frank Implementation Has Been a Concern for Insurers
117

Financial Services Reform: What does it mean for insurers?

The Dodd Frank Wall Street Reform and Consumer Protection Act
Systemic Risk and Resolution Authority
Creates the Financial Stability Oversight Council and the Office of Financial Research Regulator representative is MO Insurance Commissioner Huff No industry representative has been appointed yet Imposes heightened federal regulation on large bank holding companies and systemically risky nonbank financial companies, including insurers Concern some insurers may be labeled as systemically risky based on size alone

Federal Insurance Office (FIO)

Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury, headed by a Director appointed by the Secretary of Treasury FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis IL Insurance Director Michael McGraith will become first FIO Director on June 1 Creation of Federal Advisory Committee on Insurance to Advise FIO CONCERN: FIO morphs into quasi/shadow or actual regulator
Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP
118

2010 Property and Casualty Insurance Report Card

D
AK AL WA

A+
MT ND VT

ME

COR ID

A
NH MA CT RI

B
=A =B =C =D D =F =NG
CA

B+
SD

MN

C-

B+

B B-

C+ B- IA

WI

F
MI PA

DNY

B+ B C+ D-

WY

B+
IL IN

B
NE NV

B
MO

A+
OH WV

C
MD

NJ

DE

B F
AZ

UT CO

B+
NM

D+

C- KS
OK

A BD
TN

KY

VA C+ B+

B CD+

B-

C+
SC

NC

HI

C- AR CSource:JamesMadisonInstitute,February2008. AL C- MS GA B+ CC+ B LA
TX

B+ B

C+ NotGraded:DistrictofColumbia N t G d d Di t i t f C l bi F

FL

F Source:HeartlandInstitute,May2011

The Strength of the Economy Will Influence P/C Insurer Growth Opportunities
Growth Would Also Help Absorb p Excess Capital

120

US Real GDP Growth*

Real GDP Growth (%)
6% 4% 2% 0% -0.7% -2% -4% -6% -8%
Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway
07:1Q 07:2 2Q 07:3 3Q 07:4 4Q 2000 0 2002 2 2003 3 2004 4 2005 5 2006 6 2001

1.1% 1.8% 2.5% 3.6% % 3.1% 2.7% 0.9% 3.2% 2.3% 2.9%

0.6%

-0.7%

1.6%

-4.0% %

08:4 -6.8% 4Q

08:1Q

09:1Q

-4.9%

10:1Q

11:1Q

12:1Q

08:2 2Q

08:3 3Q

09:2 2Q

09:3 3Q

09:4 4Q

10:2 2Q

10:3 3Q

10:4 4Q

11:2 2Q

11:3 3Q

11:4 4Q

12:2 2Q

12:3 3Q

Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, Conditions but the Benefits of Even Slow Growth Will Compound and Gradually Benefit the Economy Broadly
* Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 7/11; Insurance Information Institute.
121

12:4 4Q

5.0 0% 3.7% % 1.7% 2.6% 3.1% 1.9% 2.0% 3.2% 3.2% 2.2% 2.1% 2.3% 2.2%
2011 got off to a sluggish start, but growth is expected to accelerate in the remainder of the year. This is a major positive for insurance demand and exposure growth.

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

4.1% %

2011 Financial Overview

State Economic Growth Varied in 2010
Hard hit Midwest and Northeast states finally entering recovery in 2010

Texas had one of the stronger economies in 2010 and has generally outperformed during the economic downturn

122

Unemployment Rates by State, May 2011: Highest 25 States*

14
12.1 10.9 10.6 10.3 10.3

12
U ne ploym ent R ate (% ) em e %

In May, 24 states reported overthe-month unemployment rate decreases, 13 states and the d d h District of Columbia had increases, and 13 had no change.
1 0.0 8 9.8 9.8 8 9.8 8 9.7 7 9.7 7 9.6 6 9.4 9.4 9.3 9.1 9.1 9.1

8.9

8.9

8.7

8.6

8.6

10 8 6 4 2 0

11.7

NV CA RI FL MI MS SC DC GA KY NC TN AL ID NJ OR AZ CT WA IL MO CO OH WV IN
*Provisional figures for May 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.
123

8.2

Unemployment Rates By State, May 2011: Lowest 25 States*

10
8.2 8.0 8.0 7.9 7.8 7.7

In May, 24 states reported over-themonth unemployment rate decreases, decreases 13 states and the District of Columbia had increases, and 13 had no change.
7.6 7 7.4 7 7.4 7 7.4 7 7.3 7 7.3 6.9 9 6.8

U ne ploym ent R ate (% ) em e %

8 6 4 2 0

6.6

6.6

6.0

6.0

6.0

6.0 5.4 5.3

4 4.8

4 4.8 4.1 3.2

124

The unemployment rate in Texas was 8.0% in May, below the 9.0% overall US rate

LA DE TX NY AR ME MA AK PA WI MT UT NM MD KS MN HI IA VA WY VT OK NH SD NE ND
*Provisional figures for May 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Insurance Information Institute Online:

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