Property/Casualty Insurance Industry Overview & Outlook

1. Property/CasualtyInsurance IndustryOverview & Outlook PIWA Annual Convention Pearl River, New York September 24, 2009 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Office phone: (212) 346-5540  Cell: (917) 494-5945 steven@iii.org  www.iii.org

2. Presentation Outline • A Glance at the U.S. Economy • P/C Industry Financial Performance • Catastrophe Loss Management • Investments • Capital & Capacity • Q & A

3. A Glance atthe U.S. Economy2009-10 Outlook:Time for a Rebound?

4. Total Industrial Production, monthly Mar 2001-July 2009 (Index 2002=100)* Index Recession began December 2007 March 2001-November 2001 recession Hurricane Katrina Nearing a bottom? 4 Source: http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt. *seasonally adjusted

5. Near-Term Forecasts for QuarterlyIndustrial Production: A Wide Range Source: Blue Chip Economic Indicators (8/09)

6. Single vs. Multi-Family Housing Starts The 2007-09 slump was mainly in single-family housing, but starts of multi-family units finally began dropping in late 2008 and continued in 2009. Thousands of Units 2008 single family starts down 40% vs. 2007 Not seasonally adjusted *average of first seven months of 2009, annualizedSource: US Census Bureau at http://www.census.gov/const/newresconst.pdf

7. In the Near Term, Millions Fewer Private Housing Starts Measured by number of new units started, exposure growth for HO insurers is low. Housing start data also affects commercial insurers with construction risk exposure. Millions of Units Housing bubble Recession Recession I.I.I. estimate: each 100,000 decline in housing starts “costs” home insurers $90 million in gross premium. Estimated premiumloss in 2008 vs. 2005: about $1 billion. Sources: US Department of Commerce; Blue Chip Economic Indicators (8/09); Insurance Information Inst.

8. Unemployment and UnderemploymentRates: Rocketing Up in 2008-9 January 2000 through July 2009, seasonally adjusted Percent U-6 went from 9.2% in April 2008 to 16.5% in June 2009 9.5% June 2009 unemployment rate (U-3) was the highest monthly rate since 1983. Peak rate in the last 30 years: 10.8% in Nov-Dec 1982. Source: US Bureau of Labor Statistics; Insurance Information Institute.

9. U.S. Unemployment Rate ForecastsQuarterly, 2009:Q3 to 2010:Q4 Unemployment is expected to peak in late 2009 or first quarter of 2010. Rising unemployment will erode payrolls and workers comp’s exposure base. Sources: Blue Chip Economic Indicators (8/09); Insurance Info. Inst.

10. Real Quarterly GDP Changes(annualized),2005:Q3-2010:Q4F Red bars are actual; Yellowbars are forecasts/estimates Spike due almost entirely to the weak dollar (growing exports and slowing imports) The Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4% Sources: US Department of Commerce, Bureau of Economic Analysis (actual) at http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htmBlue Chip Economic Indicators 8/09 issue (forecasts).

11. P/C IndustryFinancial Performance2009 Outlook is Dim

12. 40 Years ofHard and Soft Markets 1975-78 1984-87 2000-03 Shaded areas denote “hard market” periods In 2007 net written premiums fell, the first decline since 1943 Sources: A.M. Best, ISO, Insurance Information Institute

13. Year-to-Year Change in Net Written Premium, 2000-2009* P/C insurers are experiencing their slowest growth rates since 1943 Soft markets and slow economy => continued negative or slow growth Sources: A.M. Best (historical through 2008; ISO for 2009. *first quarter 2009 only

14. P/C Net Income After Taxes1991-2009:Q1* Billions 2008 industry profits dropped 96.2% vs. 2007 *2009:Q1 Sources: A.M. Best, ISO, Insurance Information Inst.

15. P/C Insurance Industry ROEs,1975 – 2009F* 1977:19.0% 1987:17.3% 2006:12.2% 1997:11.6% 10 Years 10 Years 9 Years 2009F: 7.4% 2008: 0.5% 1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2% Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2%. Sources: ISO; A.M. Best (2009F);Insurance Information Institute. 15

16. P/C Insurance Industry Combined Ratio, 2001-2009:Q1E Combined Ratio The industry’s combined ratio appears to be on a “cyclical upturn” dating to 2006. In 2008, even excluding net CAT losses (which added 3.4 points to the combined ratio vs. 2007) and M&FG losses (another 4.1 points vs. 2007), the 2008 ratio would have been 97.6. 09:Q1 combined ratio was 98.4 excl. M&FG vs. 96.8 in 08:Q1 Sources: A.M. Best, ISO; III preliminary estimates.

17. Underwriting Gain/(Loss)1975-2009:Q1 Billions In the past 34 years, only twice has the p-c insurance industry earned an underwriting profit of over $1.7 billion. In contrast, in that span it’s had underwriting losses of $20 billion or more in 14 years. Sources: A.M. Best; ISO; Insurance Information Institute

18. Personal, Commercial Lines Combined Ratios* Varied Widely Since 1993 Results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms, and reserve releases Sources: A.M. Best; Insurance Information Institute *after dividends to policyholders .

19. Catastrophe Losses

20. 2008 Insured Catastrophe Loss Distribution by Category $ Billions 2008 CAT Facts • The $25.2 billion in insured losses was the 4th highest ever, behind only, 2005, 2004 and 2001 • There were 37 designated catastrophes in 2008, the highest since 1998 (also 37) • Commercial losses accounted for 27% of insured losses but just 9% of claims *Includes homeowers, condominium and rental policies. **Includes commercial and private passenger vehicles Source: PCS; Insurance Information Institute research. 20

21. Catastrophic Losses*: Was 2005an Outlier or a Harbinger? $ Billions Is $25 billion the new level of expected yearly CAT losses? Before 2001, CAT losses averaged about $8-10 billion per year. *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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. Source: Property Claims Service/ISO; Insurance Information Institute 21

22. A Million More Florida Resident Households in the Next Decade? Millions of Households The State of Florida now (Feb 09) forecasts nearly 1 million more households by 2019 (up almost 13%). There will be more businesses, too. Hurricane Wilma Hurricane Andrew Source: http://edr.state.fl.us/conferences/population/demographic.htm Data are from Feb. 18, 2009 Florida Demographic Estimating conference

23. August Forecast for the 2009 Hurricane Season: 10 Named Storms Source: Philip Klotzbach and Dr. William Gray, Colorado State University, August 4, 2009. 23

24. Major (Category 3, 4, 5) Hurricanes Striking the US by Decade Mid-1990s – 2030s? AMO Warm Phase Mid 1920s – mid-1960s: AMO Warm Phase Colorado State team forecasts 3 more intense hurricanes in 2009 *Figure for 2000s is extrapolated based on data for 2000-2008 (7 major storms: Charley, Ivan, Jeanne (2004), Katrina, Rita, Wilma (2005), Ike (2008)). Sources: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.; I.I.I.

25. Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1988-2007¹ 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III. 2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires. Source: Insurance Services Office (ISO)..

26. Number of Tornadoes in Each Calendar Quarter, 2005–2009:Q2 The first two quarters of 2009 were more typical of prior years than 2008. Sources: US Dept. of Commerce, Storm Prediction Center, National Weather Service,at http://www.spc.noaa.gov/climo/torn/monthlytornstats.pdf 2009:Q2 is I.I.I. estimate

27. Investments

28. P/C Investment Income as a % of Invested Assets Follows 10-Year U.S. T-Note Investment yield historically tracks 10-year Treasury note quite closely Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.

29. P/C Industry Investment Income*, 1994-2008 Investment income might moderate further if rates for new bond investments stay low and/or if insurers shift to shorter-maturity bonds and more US government notes. Investment income CAGR 1994-2007 was just 3.8%. *Primarily interest and stock dividends. ** Investment income (excluding one-time dividend) jumped in 2005 as insurers that had accumulated cash captured rising bond interest rates. Also, 2005 figure includes special one-time dividend of $3.2B. ***2009 figure is Q1 actual, annualized Sources: ISO; Insurance Information Institute.

30. P/C Industry Net Realized Capital Gains and Losses, 1990-2009:Q1 $ Billions Nearly $9 billion in realized capital gains in 2007, but$-19.7 billion in 2008. Sources: A.M. Best, ISO, Insurance Information Institute.

31. Capital & Capacity

32. Policyholder Surplus by Quarter,2006:Q4 – 2009:Q1 Decline Since 2007:Q3 Peak 2009Q1: -$84.7B (-16.2%) Source: ISO

33. U.S. P/C Industry Premiums-to-Surplus Ratio: 1985-2009:Q1 Premiums are a rough measure of risk accepted; surplus is funds beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater the industry’s capacity to handle the risk it has accepted. Ratio at year-end 1.03:1 as of 3/31/09 19980.85:1–the lowest (strongest) P:S ratio in recent history. Sources: A.M. Best, ISO, Insurance Information Institute.

34. Largest Capital Events asa Percent of Surplus, 1989-present The financial crisis now ranks as the largest “capital event” over the past 20+ years Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. Sources: PCS; Insurance Information Institute.

35. Premium-to-Surplus Ratios Before Major Capital Events* P/C insurance industry was better capitalized going into the financial crisis than before any “capital event” in recent history *Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Latest available Source: PCS; Insurance Information Institute.

36. Historically, Hard Markets Follow When Surplus “Growth” is Negative Sources: A.M. Best, ISO, Insurance Information Institute

37. In 2008, A.M. Best Affirmed or Upgraded 88% of P/C Insurers* In 2008, despite financial market turmoil, high cat losses and a soft market, A.M. Best lowered ratings on just 3.9% of P-C insurers. It placed another 4.4% under review *Through December 19. Source: A.M. Best. 37

38. Reasons for US P/C Insurer Impairments, 1969-2008 Deficient loss reserves and inadequate pricing are the leading cause of insurer impairments, underscoring the importance of discipline. Investment catastrophe losses play a much smaller role. Source: A.M. Best: 1969-2008 Impairment Review, Special Report,Apr. 6, 2008

39. Summary • The slumping economy has affected P/C exposure growth but this might begin reversing soon • Combined ratios seem headed up, continuing a recent trend • Likely continued low investment returns are probably insufficient to overcome a continued soft market • Clear need to remain underwriting focused • A growing CAT threat continues • The industry has had a major capital shock but is still in fairly strong shape

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