Robert P. Hartwig, Ph.D., CPCU President Insurance Information Institute

1. After the Crisis: The Global Economics of the P/C Insurance IndustryEnergy Markets Trends and Challenges Robert P. Hartwig, Ph.D., CPCU President Insurance Information Institute

2. Presentation Outline • After the Crisis: Europe’s Weak Economic Recovery • Exposure Impacts on the Insurance Industry and Energy Concerns • Post-Crisis: Trends in Energy Consumption, Generation and Carbon Emissions • Changes in global and regional demand, supply for energy and insurance • Focus on Europe • Impact of the Global Financial Crisis on the Energy Business • Insurer Financial Strength & Ratings • (Re) Insurers Weathered the Storm Well

3. Presentation Outline (cont.) • P/C Insurance Industry Financial Performance • Profitability, Capital & Capacity • Energy Insurance Market Review • Capacity, Rating, Exposure, Profitability, Reinsurance, ART • The Financial Crisis: Global Energy Supply, Demand and Investment • Catastrophe Losses • 2010 Already Producing Large Losses in Energy Sector • Post-Crisis Changes to the Insurance Regulatory Environment • Systemic Risk Regulation

4. After the Crisis Europe’s Weak Recovery and Exposure Impactson the Insurance Industry and Energy Concerns

5. Real GDP by Market 2007-2011F (% change from previous year) Slow growth in GDP will constrain exposure growth on a global scale Source: Blue Chip Economic Indicators, 3/10/10 edition.

6. Real GDP for Largest European Economiesand Euro Area, 2007-2011F (% change from prior year) All European economies are growing slowly Source: Blue Chip Economic Indicators, 3/10/10 edition.

7. US Real GDP Growth* Recession began in December 2007. The economic impact affected energy demand on a global scale. The steepest decline since the 6.4% drop in Q1:1982 *Gold bars are Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 3/10; Insurance Information Institute.

8. Length of US Recessions 1929-Present* Current recession began in Dec. 2007 and is already the longest since 1981. If is now tied for the longest recession since the Great Depression. Months in Duration * Estimated end date of recession was June 2009. Sources: National Bureau of Economic Research; Insurance Information Institute.

9. GDP Growth: Advanced and Emerging Economies vs. World Emerging economies (led by China) are expected to grow by 6.0% in 2010 1970-2011F World output is forecast to growby 3.9% in 2010, following a-0.8% drop in 2009 Advanced economies will grow slowly in 2010, dampening energy demand Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Insurance Information Institute.

10. Global Industrial Production Rebounds from a Tailspin, Raising Energy Demand Annualized 3-Month Percent Change Industrial demand for energy was particularly hard hit Global industrial production was down over 25% in early 2009, adversely impacting energy demand, but growing at a 9% clip in late 2009 Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Insurance Information Institute.

11. Inflation Rates for Largest European Economies and Euro Area, 2008-2011F (% change from prior year) Inflation is below 1.5% across Europe, reducing claim severity concerns Source: Blue Chip Economic Indicators, 3/10/10 edition.

12. 3-Month Interest Rates for Major Global Economies, 2008-2011F Interest rates remain generally low, depressing insurer investment earnings and putting more pressure on rates Source: Blue Chip Economic Indicators, 3/10/10 edition.

13. Real GDP Growth vs. Real P/C Premium Growth: Modest Association P/C insurance industry’s growth is influenced modestly by growth in the overall economy Real GDP Growth Real NWP Growth Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 3/10; Insurance Information Institute.

14. Global Industrial Production and Exports: 2005 to 2009 Annual Percentage Change of 3-Month Moving Average Industrial production and global trade crashed extraordinarily during the financial crisis Source: International Monetary Fund, January 2010; Insurance Information Institute.

15. Post-Crisis Trends in Energy Consumption, Generation and Carbon Emissions

16. World & European Primary Energy Consumption 1990-2030P Between 2006 and 2030, energyconsumption is projected toincrease by 1.1% annually in OECDEurope and 1.5% worldwide Global energy consumption is expected to increase by 33.4% between 2010 and 2030 but by only 11.7% in OECD Europe Quadrillion BTUs Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

17. European Energy Consumption As a Shareof Global Consumption 1990-2030P OECD Europe Share of Global Energy Consumption European Energy Consumption (OECD Countries, Quad. Btu) Europe’s share of global energy consumption is projected to fall from 20.1%in 1990 to 16.2% in 2010and 13.5% in 2030P Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.

18. Average Annual Change in Total Energy Consumption by Country/Region 2006-2030P Europe/US have the slowest growth rates for energy consumption through 2030, growing at less than 1/6 the rate in China and 1/5 that of India Average Annual Change in Consumption (Quadrillion BTUs) Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

19. European Share of Global Electricity Generation Capacity As a Share of Global Capacity 1990-2030P OECD Europe Share of Global Electricity Generation Capacity European Electrical Generation Capacity (OECD Countries, Gigawatts) Europe’s share of globalenergy generationcapacity is projected tofall from 18.3% in 2010and 16.5% in 2030 Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.

20. Renewable Electricity Generation in OECD Europe by Fuel 2006-2030P Wind is by far the most important source of new generation capacity in OECD Europe (i.e., excludes Russia and Eurasian countries) Sources: Energy Information Administration: International Energy Outlook 2009; Insurance Information Institute.

21. World Crude Oil Prices: 1997- March 2010 PEAKJul. 2008 $145.29 Crude oil prices peaked at $145.29 in July 2008, fell 75% to $34.57 in Jan. 2009, but are rising again to over $78/bbl inmid-March 2010 RECENT12 Mar. 2010 $78.25 Dollars Per Barrel* Jan. 1998 $15.21 TROUGHJan. 2009 $34.57 *All countries spot market price weighted by estimated export volume. Source: Energy Information Administration; http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm

22. Global Net Electricity Generation is Growing Faster than Consumption • Electricity generation is growing faster than total energy consumption • This suggeststhat there is a net substitution away from other energy sources to electricity • Implies a bright future for utilities • Requires significant insurance capacity Sources: Energy Information Administration: International Energy Outlook 2009; Insurance Information Institute.

23. Average Annual Change in ElectricityGenerating Capacity by Country/Region 2006-2030P Electricity generation capacity will grow faster than consumption in Europe, suggesting a net substitution to electricity as a primary energy source Average Annual Change in Generating Capacity (Gigawatts) Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

24. World & European Carbon Dioxide Emissions 1990-2030P Between 2006 and 2030, CO2 emissions are projected to increase by 0.1% annually in OECD Europe and 1.4% worldwide Global CO2 emissions are expected to increase by 30.4% between 2010 and 2030 but by only 4.3% in OECD Europe Millions of Metric Tons Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

25. European Carbon Dioxide Emissions As a Share of Global Emissions 1990-2030P European CO2 Emissions (OECD Countries, Mill. Metric Tons) OECD Europe Share of Global CO2 Emissions Europe’s share of global carbon emissions is projected to fall from 19.3% in 1990 to 14.0% in 2010 and 11.2% in 2030P Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.

26. Average Annual Change in Carbon Dioxide Emissions by Country/Region 2006-2030P Europe has the slowest growth rates for CO2 emissions, growing at about1/30th the rate in China Millions of Metric Tons Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

27. World & European Nuclear Energy Consumption 1990-2030P Between 2006 and 2030, nuclear energy consumption is projected to decrease by 0.1% annuallyin OECD Europe and increase1.5% worldwide Global nuclear energy consumption is expected to increase by 39.2% between 2010 and 2030 but fall by 2.2% in OECD Europe Billion Kilowatt Hours Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

28. European Nuclear Energy Consumption As a Share of Global Consumption 1990-2030P OECD Europe Share of Global Nuclear Energy Consumption Europe’s share of global energy consumption is projected to fall from 38.9% in 1990 to 33.4% in 2010 and 23.5% in 2030P European Nuclear energy Consumption(OECD Countries, Bill. Kwh) Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.

29. Average Annual Change in Nuclear Energy Consumption by Country/Region 2006-2030P Europe is the only region with net negative nuclear energy consumption Billions of Kilowatt Hours *OECD Countries. Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

30. World Net Effective Electric Power Generation 1990-2030 (est.) Global electric power generation was dampened about 3% by the global financial crisis, but will still grow at 2.9% per year through 2030 compared to 1.9% for total energy consumption Trillions of Kilowatt Hours Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

31. Electricity Supply Infrastructure: Despite Crisis, Huge Investments Needed along with Insurance 2001-2030 (est.) European investment could total $1.351 trillion Investments in electricitysupply infrastructureglobally are expected tototal $9.841 trillionbetween 2001 and 2030 $ Billions Source: International Atomic Energy Agency, World Outlook for Electricity Investment.

32. World Energy Supply Infrastructure Investment by Category 2001-2030P Generation will account for 46% or $4.5 trillion of all investment through 2030 to meet rising demand. Financial crisis had no significant impact on long-term global energy demand and the need to develop supply infrastructure $ Billions Distribution $3,755 38% Transmission $1,568 16% Generation-Refurbished $439 4% Generation-New $4,080 42% Source: International Atomic Energy Agency, World Outlook for Electricity Investment.

33. World Electricity Generation by Fuel 2006-2030F The sharp increase in generation and the changing composition of fuel source will influence insurance demand and the nature of products sold Trillions of Kilowatt Hours Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

34. World Electricity Generation by Fuel Source Share 2005 vs. 2030F 2030 2005 Liquid 2% Liquids 6% Coal 41% Coal 47% Nuclear 11% Nuclear 15% Renewables 15% Renewables 18% Natural Gas 25% Surprisingly, coal as asource of electricitygeneration is expected torise through 2030. CO2,pollution issues? Natural Gas 20% Source: Insurance Information Institute from data reported in US Department of Energy Report #:DOE/EIA-0484 (Sept. 2008).

35. 4.67 4.44 4.21 3.97 3.70 3.30 European Electricity Generation, by Fuel 2005-2030F Gas and renewables grow, coal shrinks, implying different insurance needs in Europe Trillions of Kilowatt Hours Source: US Department of Energy Report #:DOE/EIA-0484 (Sept. 2008); Insurance Information Institute.

36. Electricity Consumption in the United States* 1999-2011P Electricity consumption in the US was hit severely due to the deep recession but is now rebounding modestly *Change based on billions of kilowatthours used per day. Source: Energy Information Administration, Short-Term Energy Outlook, March 2010, Insurance Information Institute.

37. US Total Electricity Consumption 1999-2011P Recession had a significant but in the long-run minor impact on electricity consumption Modest growth in consumption is projected for both 2010 and 2011 Source: Energy Information Administration, Short-Term Energy Outlook, March 2010, Insurance Information Institute.

38. Severe Recession Depressed US Energy Demand Change 2009 vs. 2008 Percentage Change in Consumption Industrial consumption of electricity has experienced the most severe declines Sources: Energy Information Administration based on Short-Term Energy Outlook, March 2009 and March 2010.

39. US Energy Expenditures As a % of GDP Have Been Hurt by Recession Energy demand is recoveringfrom the global recession and2008 energy price spike, butremains below pre-crisis levels Percentage of GDP The energy price bubble pushed energy expenditures to 9.9% of GDP in 2008. The bursting of the bubble and recession pushed expenditures down to 7.0% of GDP in 2009, rising to about 8% in 2010 and 2011. Source: Energy Information Administration, Short-Term Energy Outlook, March 2010; Insurance Information Institute.

40. Impact of the Global Financial Crisis on Energy Business

41. Global Financial Crisis Will Have Little Long-Term Impact on Consumption or Generation Financial Crisis: Energy’s Lessons • The net impact of the financial crisis was to reduce projected 2030 global capacity and consumption by 2 to 3% from levels projected pre-crisis • The long-term impact is therefore negligible, though there were some significant short- and intermediate term impacts, particularly for industrial energy consumption • Fossil fuel price volatility exacerbated the crisis • The trends toward renewable energy sources will continue with little disruption • The crisis, along with dissatisfaction over rising tax burdens in the US, have significantly reduced the chances of a comprehensive cap and trade systemin the US • Relative weakness of US and European recoveries will accelerate shift in consumption and generation shares in Asia

42. Financial Strength & Ratings The Global Insurance Industry Has Weathered the Economic Storm Well

43. P/C Insurer Impairment Frequency vs. Combined Ratio 1969-2009P Impairment rates arehighly correlated withunderwritingperformance andreached record lows in2007/08 Impairment Rate Combined Ratio 2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969 *Combined ratio of 101.7 is through Q3:09; 0.36% 2009 impairment rate is III estimate based on preliminary A.M. Best data. Source: A.M. Best; Insurance Information Institute.

44. Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009 Despite financial market turmoil and a soft market in 2009, 76% of ratings actions by A.M. Best were affirmations; just 2.9% were downgrades and 3.2% were upgrades Other – 216, 11.9% Under Review – 69, 3.8% Affirm – 1,375, 75.7% Initial – 44, 2.4% Upgraded – 59, 3.2% Downgraded – 53, 2.9% P/C insurance is by design aresilient business. The dualthreat of financial disastersand catastrophic losses areanticipated in the industry’s riskmanagement strategy Source: A.M. Best.

45. Reasons for US P/C Insurer Impairments 1969-2008 Deficient loss reserves and inadequate pricing are the leading causeof insurer impairments, underscoring the importance of discipline.Investment catastrophe losses play a much smaller role. Reinsurance Failure 3.7% Significant Change in Business 4.2% Deficient Loss Reserves/ Inadequate Pricing 38.1% Misc. 9.1% Investment Problems 7.0% Rapid Growth 14.3% Affiliate Impairment 7.9% Alleged Fraud 8.1% Catastrophe Losses 7.6% Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008. 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

46. P/C Insurance Financial Performance A Resilient Industry in Challenging Times

47. Profitability Historically Volatile

48. P/C Net Income after Taxes 1991-2009P P/C industry profits for full-year 2009 were up sharply from 2008, but are still well below pre-crisis levels • 2005 ROE*= 9.4% • 2006 ROE = 12.2% • 2007 ROE = 10.9% • 2008 ROE = 0.3% • 2009:Q3 ROAS1 = 4.5% $ Millions -$6,970 * ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 4.5% ROAS for 2008 and 5.9% for the first 9 months of 2009. 2009:Q3 net income was $20.5 billion excluding M&FG. Sources: A.M. Best, ISO, Insurance Information Institute.

49. ROE: P/C vs. All Industries 1987–2009:Q3* P/C profitability iscyclical and volatile Katrina, Rita, Wilma Sept. 11 Percent Hugo 4 Hurricanes Lowest CAT Losses in 15 Years Andrew Financial Crisis* Northridge * Excludes Mortgage & Financial Guarantee in 2008 and 2009 through Q3. Sources: ISO, Fortune; Insurance Information Institute. 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

50. A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s at Now Combined ratio of about 100generated a 16% ROE in 1979, 10% in 2005 and 6% in 2009 Combined Ratio / ROE Combined ratios must be lower in today’sdepressed investment environment to generaterisk appropriate ROEs *2009 figure is return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guarantee insurers. Source: Insurance Information Institute from A.M. Best and ISO data.