Challenges and Opportunities for the P/C Insurance Industry

1. Challenges and Opportunities for the P/C Insurance Industry Professional Insurance Wholesalers AssociationAnnual DinnerNew York, NYOctober 25, 2011 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Office: 212.346.5540  Cell: (917) 494-5945  stevenw@iii.org  www.iii.org

2. What in the World Is Going On? Is the World Becoming a Riskier Place? What Are the Implications for Insurance and Risk Management? 2

3. Uncertainty, Risk, and Fear Abound • US Debt/Budget Crisis and S&P Downgrade • Short-term: Slow Growth/A Double Dip Recession? • Long-term: Era of Fiscal Austerity? • Housing Crisis • Persistently High Unemployment • European Sovereign Debt Crises • Earthquakes/Nuclear Reactor Meltdowns • Record Tornadoes, Floods, Wildfires, in the US • Manmade Disasters • Deepwater Horizon, “Fracking” • Resurgent Terrorism Risk? • Political Upheaval in the Middle East • China on Track to Be #1 Economy in the World • Is the U.S. era over? Are “Black Swans” everywhere or does it just seem that way? eSlide – P6466 – The Financial Crisis and the Future of the P/C

4. US Real GDP Growth, quarterly* Worst quarterly drop since 1958:q1 (-11.1%) Real GDP Growth (%) 2011 started slowly, but somewhat higher growth is expected in the rest of the year. Demand for insurance continues to be affected by a sluggish economy * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 10/2011 issue (forecasts); Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

5. Unemployment and UnderemploymentRate “Normality”: Years to Go January 2000 through September 2011, Seasonally Adjusted (%) U-6 hit 17.5% in Oct 2009 U-6 is now 16.5% Gap between U-3 and U-6 is normally 4 percentage points but is now 7.4 points Recession September 2011 unemployment rate (U-3) was 9.1%. Peak rate in the last 30 years: 10.8% in Nov - Dec 1982 Recession Source: U.S. Bureau of Labor Statistics; Insurance Information Institute. 6 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

6. Monthly Change in Private Employment January 2007 through September 2011 (Thousands) Private employers added jobs in every one of the last 21 months Monthly Losses in Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period Not Enough: We need to average about 125,000 new jobs (private and public) per month just to absorb labor force growth Private employers added 2.88 million jobs in 2010-2011,after having shed 4.66 million jobs in 2009 and 3.81 million in 2008. Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

7. Monthly Change in Government Employment January 2009 through September 2011 (Thousands) Census Employment by government at all levelsdropped every month in 2011 except August.Total (net) government jobs lost through September: 267,000. Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

8. U.S. Employment in the DirectP/C Insurance Industry: 1990–2011* Thousands As of August 2011, P/C insurance industry employment was down by 37,300 or 7.6% to 453,800 since the recession began in Dec. 2007 (compared to overall US employment decline of 5.2%). *As of August 2011; Not seasonally adjusted; Does not including agents & brokers. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute. 9 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

9. U.S. Employment in the Reinsurance Industry: 1990–2011* Thousands As of August 2011, US employment in the reinsurance industry was up by 900 or 3.3% to 27,800 since the recession began in Dec. 2007 (compared to overall US employment decline of 5.2%). *As of August 2011; Not seasonally adjusted; Does not including agents & brokers. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute. 10 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

10. U.S. Employment in Insurance Agencies & Brokerages: 1990–2011* Thousands As of August 2011, employment at insurance agencies and brokerages was down by 38,300 or 5.6% to 641,300 since the recession began in Dec. 2007 (compared to overall US employment decline of 5.2%). *As of August 2011; Not seasonally adjusted. Includes all types of insurance. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute. 11 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

11. U.S. Employment in Insurance Claims Adjusting: 1990–2011* Thousands Katrina, Rita, Wilma As of August 2011, claims adjusting employment was down by 4,000 or 7.7% to 48,200 since the recession began in Dec. 2007 (compared to overall US employment decline of 5.2%). *As of August 2011; Not seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute. 12 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

12. Economic Drivers of P/C Insurance Exposures 13

13. Private Housing Starts, 1990-2012F Through August 2011 we’re slightly behind this pace (Millions of Units) Weak home construction forecast implies little exposure growth likely for Homeowners insurers for the next few years,but multi-family housing starts are picking up. Sources: U.S. Department of Commerce (history) ; Blue Chip Economic Indicators (10/2011), forecasts; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

14. Single vs. Multi-Family Housing Starts,Annually, 2001-2011* Thousands of Units, Single Family Thousands of Units, Multi-Family Single family plunge began in 2006 Multi-family-unit starts are rising in 2011, but single-family starts are still hitting lows. Multi-family plunge didn’t begin until 2009 The slump is mainly in single-family housing,but starts of multi-family units also plunged in 2009-10. *seasonally-adjusted annual rate, through Sept 2011Source: US Census Bureau at http://www.census.gov/const/newresconst.pdf

15. The Car-Buying Slump Means Roads With More Aging Vehicles (Millions of Units) 2011 AAA Survey: 1 in 4 drivers have neglected repairs and maintenance because of the economy In what once was a “normal” 3-year span,new cars would replace about 35 million old cars,but in 2008-10 only about 27 million old cars were replaced Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11); Insurance Information Institute; USA Today 8/10/2011 edition (AAA Survey). eSlide – P6466 – The Financial Crisis and the Future of the P/C

16. Miles Driven*, 1990–2011 Billions Growth per Decade1999 vs. 1989: 27.2% 2009 vs. 1999: 9.4% Some of the growth in miles driven is due to population growth: 1999 vs. 1989: 10.5% 2009 vs. 1999: 12.6% Sharp rise in gas prices, then pullback Will the trend toward hybrid and non-gasoline-powered vehicles affect miles driven? What about the aging and retirement of the baby boomers? *Moving 12-month totalNotes: Recessions indicated by gray shaded columns. Latest data (as of 10/24/2011) is for 12 months ended August 2011. Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute. 17 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

17. Recent History of Crude Oil Prices* Monthly, 2006-2011 $ per barrel 2008 Is this another2007-08-like spurtin gas prices? Gas/oil prices began rising a year before the Great Recession started Or is it headed down again? Note: Recession indicated by gray shaded column. *per barrel of light, sweet crude oil for future delivery as traded on the New York Mercantile Exchange (NYMEX); last weekly close in each month, except Decembers (which are 12/31 closing prices)Sources: NYSE at http://www.nyse.tv/crude-oil-price-history.htm NBER (recession dates) 18 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

18. Do Changes in Miles Driven AffectAuto Collision Claim Frequency? Paid Claim Frequency = (# of paid claims)/(Earned Car Years) x 100 The frequency drop is slowing “Pay-As-You-Go” Auto Insurance: Fluctuations in miles driven will affect exposure *data for 2011 covers 12 months ending 6/30/2011 Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 2d Qtr. 2011, published September 30, 2011, and earlier reports.

19. Number of Private Business Establishments, 2001:Q1-2011:Q1* Millions No net growth in number of businessesfrom 2007:Q3 to 2011:Q1. The number of employees in new businesses is typically lowerthan the number in formerly-operating businesses that closed. *data for 2011:Q1 are preliminary Note: quarters when the economy was in recession are indicated by orange barsSources: U.S. Bureau of Labor Statistics “Quarterly Census of Employment and Wages”; Insurance Information Institute 20 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

20. Catastrophe Loss Developments and Trends 2011 is Rewriting Catastrophe Loss and Insurance History 21

21. Number of Federal Disaster Declarations, 1953-2011* The average number from 1996-2010 was 58.4. From 1953-71, the average number of declarations per year was 16.5. The average number from 1972-1995 was 31.7. The number of federal disaster declarations set a new record in 2011. There have been 2,039* federal disaster declarations since 1953.Note that 2005 was a relatively low year for number of disaster declarations in the 1996-2010 period,but that year included Hurricanes Katrina, Rita, and Wilma. *Through October 24, 2011. Sources: Federal Emergency Management Administration at http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

22. US Insured Catastrophe Losses CAT Losses Surged on Near- Record Tornado Activity 2000s: A Decade of Disaster 2001-2010: $202B (up 122%) 1991-2000: $91B ($ Billions) First half 2011 US CAT losses already exceed losses from all of 2010. Even modest hurricane losses will put 2011 among the worst ever for CATs *First three quarters of 2011 (est). 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; Munich Re; Insurance Information Institute. 24 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

23. 15 Costliest World Insurance Losses, 1970-2011* 3 of the 11 most expensive catastrophes in world history occurred in the past 9 months Insured Losses, 2010 Dollars,$ Billions Taken as a single event, the Spring 2011 tornado season would be the 7th costliest event in global insurance history *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. eSlide – P6466 – The Financial Crisis and the Future of the P/C

24. P/C Insurance Industry Financial Overview Profit Recovery Will Be Slowed by High CATs,Low Interest Rates, Diminishing Reserve Releases 26

25. 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 3-Year Decline Since 1930-33. 2011:1H growth was +2.6% NWP was up 0.9% in 2010 *2011 figure is an estimate based on 1H data. Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

26. P/C Insurance Industry Combined Ratio, 2001–2011:H1* Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, Reserve Releases Relatively Low CAT Losses, Reserve Releases Avg. CAT Losses, More Reserve Releases Cyclical Deterioration Best Combined Ratio Since 1949 (87.6) * 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). eSlide – P6466 – The Financial Crisis and the Future of the P/C

27. P/C Reserve Development, 1992–2011E Prior year reserve releases totaled $8.8 billion in the first half of 2010, up from $7.1 billion in the first half of 2009 Reserve releases remained strong in 2010but are expected 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: Barclay’s Capital; A.M. Best. eSlide – P6466 – The Financial Crisis and the Future of the P/C

28. A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs A combined ratio of about 100 generated ~7.5% ROE in 2009/10,10% in 2005 and 16% in 1979 Combined Ratio / ROE Combined Ratios Must Be Lower in Today’s DepressedInvestment 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. 2011 figure is estimate through first half. Source: Insurance Information Institute from A.M. Best and ISO data.

29. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011* History suggests next ROE peak will be in 2016-2017 ROE 1977:19.0% 1987:17.3% 2007:12.3% 10 Years 1997:11.6% 10 Years 2011:2.3%* 10 Years 1975: 2.4% 2001: -1.2% 1992: 4.5% 1984: 1.8% *Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for H1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:H1 ROAS = 1.7% including M&FG. Sources: Insurance Information Institute; NAIC, ISO, A.M. Best.

30. Investments Interest-Based InvestmentsBenefit from Higher Inflation 33

31. Bond Yields Tend to Follow Inflation Recession Sources: US Bureau of Labor Statistics (history); Blue Chip Economic Indicators, 10/11 issue (forecast)

32. U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2011* Yields on 10-Year U.S. Treasury Notes have been essentially below 4% since January 2008. Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for nearly a decade. Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come. *Monthly, through September 2011 Note: Recessions indicated by gray shaded columns. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y10.txtNational Bureau of Economic Research (recession dates); Insurance Information Institutes. 35 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

33. Daily Yields, 10-Year U.S. T-Notes vs. Moody’s Seasoned AAAs, 2010-2011* We saw a slump like this in March - August 2010 The spread between the two yields reflects confidence (or lack of it) in the economy’s prospects. A wider spread indicates worry; narrower = confidence. *through 10/20/2011Sources: Federal Reserve Board at http://www.federalreserve.gov/releases/h15/data/Business_day/H15_TCMNOM_Y10.txtand http://www.federalreserve.gov/releases/h15/data/Business_day/H15_AAA_NA.txt 36 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

34. Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q21 ($ Billions) Investment gains in 2010 were the best since 2007 Investment Gains Recovered Significantly in 2010 Due to Realized Capital Gains; The Financial Crisis Caused Investment Gains to Fall by 50% in 2008 1 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. 37

35. P/C Net Income After Taxes1991–2011:H1 ($ Millions) P-C Industry 2011:H1 profits were down 71.6% to $4.8B vs. 2010:H1, due to high catastrophe losses and as non-cat underwriting results deteriorated • 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:H1 ROAS = 1.7% * ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 2.3% ROAS for 2011:H1, 7.5% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO, Insurance Information Institute

36. Policyholder Surplus, 2006:Q4–2011:Q2 Quarterly Surplus Changes Since 2007:Q3 Peak 09:Q1: -$84.7B (-16.2%) 09:Q2: -$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%) 10:Q3: +$23.0B (+4.4%) 10:Q4: +$35.1B (+6.7%) 11:Q1: +$42.9B (+8.2%) 11:Q2: +37.3B (+7.1%) Surplus as of 6/30/11 fell 1% below its 3/31/11 $564.7B record high. Further declines are likely. 2007:Q3Previous Peak ($ Billions) The Industry now has $1 of surplus for every $0.78 of NPW—the strongest claims-paying status in its history. *Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010. Sources: ISO, A.M .Best. 39 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

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