Overview & Outlook for the P/C Insurance Industry: Trends & Challenges for 2013 and Beyond

1. Overview & Outlook for the P/C Insurance Industry:Trends & Challenges for 2013 and Beyond SITA Annual Meeting Hilton Head, SC October 2, 2012 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

2. The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Will Expand Insurer Exposure Base Across Most Lines Will Agriculture Remain Strong? America’s Manufacturing Renaissance?Construction Activity Awakening? 2

3. US Real GDP Growth* The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8% Real GDP Growth (%) Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway 2012 is expected to see slow growth lasting into 2013; Fed’s QE3 could push 2013 GDP up 0.2% Demand for Insurance Continues To Be Impacted by Sluggish Economic 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 9/12; Insurance Information Institute.

4. Percent Change in Real GDP by State, 2011 Growth varied considerably across states but in total was weak in 2011 with US overall growth at just 1.7% TX has been an economic growth leader Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute.

5. Consumer Sentiment Survey (1966 = 100) January 2010 through September 2012 Optimism among consumers Increased in September, and is well above year-ago levels; Suggests concern, but not fear on the part of consumers. Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially in late 2011 and early 2012 Source: University of Michigan; Insurance Information Institute

6. Auto/Light Truck Sales, 1999-2022F New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is still far below 1999-2007 average of 17 million units, but a recovery is underway. (Millions of Units) Job growth and improved credit market conditions will boost auto sales in 2012 and beyond Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector. Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 9/12); Insurance Information Institute.

7. Monthly Change* in Auto Insurance Prices, 1991–2012* Cyclical peaks in PP Auto tend to occur approximately every 10 years (early 1990s, early 2000s and likely the early 2010s) Pricing peak occurred in 2010 at 5.1%, falling to 2.8% by Mar. 2012 “Hard” markets tend to occur during recessionary periods The Aug. 2012 reading of 3.8% is up from 3.4% a year earlier *Percentage change from same month in prior year; through Aug. 2012; 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. 7 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

8. Personal Auto: Premiums vs.Loss Cost Spread, Dec. 1997- Aug. 2012 Margin improvement; CR improves to 94.3 by 2004 Margin compression; CR deteriorates to 109.5 by 2000 Margin compression; CR rises above 100 in 2008 Commercial Lines $226.8B/49% Homeowners $68.2B/15% Price gains exceeded loss cost increase (pure premium) by 1.2 percentage points in Aug. 2012 Pvt. Pass Auto $165.0B/36% Sources: Bureau of Labor Statistics, ISO, Evercore Group LLC; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

9. New Private Housing Starts, 1990-2022F New home starts plunged 72% from 2005-2009; A net annual decline of 1.49 million units, lowest since records began in 1959 (Millions of Units) Job growth, improved credit market conditions and demographics will eventually boost home construction Low inventories of existing homes, and low mortgage rates and stimulating new home construction for the first time in years Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 9/12); Insurance Information Institute.

10. Construction Employment,Jan. 2010—August 2012* Construction employment is still below where it was in Jan. 2010. In a normal recovery, construction employment would be growing robustly (Thousands) *Seasonally adjusted Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute. 11 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

11. Value of Construction Put in Place, June 2012 vs. July 2011* Growth (%) Private: +15.0% Public: -0.7% Private sector construction activity is up in both the residential and nonresidential segments Public sector construction activity remains depressed Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue *seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

12. Value of Private Construction Put in Place, by Segment, June 2012 vs. July 2011* Led by the Lodging and Power industries, Private sector construction activity is up by double digits in many segments after plunging during the “Great Recession” Growth (%) Private Construction Activity is Up in Most Segments, Including Residential Construction but Led by Power *seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

13. ISM Manufacturing Index (Values > 50 Indicate Expansion) January 2010 through September 2012 Manufacturing activity contracted in June for the first time in nearly 3 years, but a resumption of expansion began in September The manufacturing sector expanded for 35 of the 38 months from Jan. 2010 through Sept. 2012. The question is whether this will continue. Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.

14. Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—July 2012 $ Millions ENERGY INTENSIVE The value of Manufacturing Shipments in July 2012 was up 32% to $479B from its June 2009 trough. June figure is only 1.3% below its previous record high in July 2008. Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to July 2012 was 35%. Manufacturing is an energy intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages *seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 17 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

15. Manufacturing Growth for Selected Sectors, 2012 vs. 2011* Growth (%) Non-Durables: +2.4% Durables: +8.8% Manufacturing of durable goods has been especially strong in 2012 Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Energy Demand and Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages *Seasonally adjusted; Date are YTD comparing data through July 2012 to the same period in 2011.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

16. Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures March 2001 through August 2012 The US operated at 78.2% of industrial capacity in Aug. 2012, above the June 2009 low of 68.3% and tied for the highest level since April 2008 “Full Capacity” Percent of Industrial Capacity Hurricane Katrina The closer the economy is to operating at “full capacity,” the greater the inflationary pressure March 2001-November 2001 recession December 2007-June 2009 Recession 19 Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.

17. Manufacturing Employment,Jan. 2010—August 2012* Manufacturing employment is up by more than 500,000 or 4.6% since Jan. 2010—a surprising source of strength in the economy (Thousands) *Seasonally adjusted Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute. 20 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

18. ISM Non-Manufacturing Index (Values > 50 Indicate Expansion) January 2010 through August 2012 Optimism among non-manufacturers was stable in late 2011 and remained expansionary in 2012 Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue. Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.

19. Business Bankruptcy Filings,1980-2012: Q1 % Change Surrounding Recessions 1980-82 58.6% 1980-87 88.7% 1990-91 10.3% 2000-01 13.0% 2006-09 208.9%* 2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1:2011 Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute 22 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

20. Private Sector Business Starts, 1993:Q2 – 2011:Q4* Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000* (Thousands) Business starts were up 2.2% to 748,000 in 2011 vs. 2010. 742,000 new business starts were recorded in 2010, up 6.0% from 700,000 in 2009, which was the slowest year for new business starts since 1993 Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But Are Recovering Slowly * Data through Dec. 31, 2011 are the latest available as of Sept. 20, 2012; Seasonally adjusted. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. 23 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

21. 12 Industries for the Next 10 Years: Insurance Solutions Needed Health Care Health Sciences Energy (Traditional) Many industries are poised for growth, though insurers’ ability to capitalize on these industries varies widely Alternative Energy Petrochemical Agriculture Natural Resources Technology (incl. Biotechnology) Light Manufacturing Insourced Manufacturing Export-Oriented Industries Shipping (Rail, Marine, Trucking)

22. Presidential Politics & the P/C Insurance Industry How Is Profitability Affected by the President’s Political Party? 26

23. P/C Insurance Industry ROE by Presidential Administration, 1950- 2012* OVERALL RECORD: 1950-2012* Democrats 7.67% Republicans 7.97% Party of President has marginal bearing on profitability of P/C insurance industry *Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments. Estimated ROE for 2012 = 7.0%. Source: Insurance Information Institute

24. P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2012* BLUE = Democratic PresidentRED = Republican President Nixon/Ford Clinton Bush II Reagan/Bush I Carter Obama Truman Eisenhower Kennedy/ Johnson *ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0% Source: Insurance Information Institute

25. Labor Market Trends Massive Job Losses Sapped the Economy and Commercial/Personal Lines Exposure, But Trend is Improving 29

26. Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling January 2000 through August 2012, Seasonally Adjusted (%) U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 14.7% in Aug. 2012 Recession ended in November 2001 Unemployment kept rising for 19 more months Recession began in December 2007 Unemployment stood at 8.1% in Aug. 2012 Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983. Peak rate in the last 30 years: 10.8% in November - December 1982 Aug 12 Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving Source: US Bureau of Labor Statistics; Insurance Information Institute. 30 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

27. Monthly Change in Private Employment January 2008 through August 2012 (Thousands) 103,000 private sector jobs were created in August Monthly Losses in Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period Private Employers Added 4.65 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

28. Cumulative Change in Private Employment: Dec. 2007—August 2012 December 2007 through August 2012 (Millions) Cumulative job losses peaked at 8.444 million in December 2009 Cumulative job losses as of June 2012 totaled 3.709 million All of the jobs “lost” since President Obama took office in Jan. 2009 have been recouped Private Employers Added 4.74 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

29. Cumulative Change in Government Employment: Jan. 2010—August 2012 January 2010 through August 2012* (Millions) Government at all levels has shed more than a half million jobs since Jan. 2010 even as private employers created 4.74 million jobs. Cumulative job losses through Aug. 2012 totaled 579,000 Temporary Census hiring distorted 2010 figures Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the Financial Crisis, Causing Them to Reduce Staff Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

30. Net Change in Government Employment: Jan. 2010—August 2012* State government employment fell by 1.8% since the end of 2009 while Federal employment is down by 2.1% (Thousands) Local government employment shrank by 426,000 from Jan. 2010 through Aug. 2012, accounting for 74% of all government job losses, negatively impacting WC exposures for those cities and counties that insure privately *Cumulative change from prior month; Base employment date is Dec. 2009. Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute eSlide – P6466 – The Financial Crisis and the Future of the P/C

31. Unemployment Rates by State, August 2012:Highest 25 States* In August, 26 states reported over-the-month unemployment rate increases, 12 states and the District of Columbia had decreases, and 12 states had no change. *Provisional figures for August 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

32. Unemployment Rates by State, August 2012: Lowest 25 States* In August, 26 states reported over-the-month unemployment rate increases, 12 states and the District of Columbia had decreases, and 12 states had no change. *Provisional figures for August 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

33. US Unemployment Rate Forecast Jobless figures have been revised slightly upwards for 2012/13 2007:Q1 to 2013:Q4F* Rising unemployment eroded payrolls and workers comp’s exposure base. Unemployment peaked at 10% in late 2009. Unemployment forecasts have been revised slightly upwards for 2012 and 2013. Optimistic scenarios put the unemployment as low as 7.3% by Q4 of nextyear. * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/12 edition); Insurance Information Institute.

34. Payroll vs. Workers Comp Net Written Premiums, 1990-2012E Payroll Base* WC NWP $Billions $Billions 12/07-6/09 7/90-3/91 3/01-11/01 WC premium volume dropped two years before the recession began +9% in 2012E WC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in 2005 Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005 *Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is I.I.I. estimate based YTD 2012 actuals. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

35. Mass Layoff Announcements,Jan. 2002—August 2012* Mass layoff announcements peaked at more than 3,000 per month in Feb. 2009 There were 1,276 may layoffs announced in Aug. 2012, close to pre-recession levels *Seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute. 43 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

36. Number of “Discouraged Workers,”Jan. 2002—August 2012 Thousands Large numbers of people are exiting (or not returning to) the labor force “Discouraged Workers” are people who have searched for work for so long in vain that they actually stop searching and drop out of the labor force There were 844,000 discouraged workers in Aug. 2012 In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007). Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted. Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Ins. Info. Inst. 49 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

37. P/C Insurance Industry Financial Overview Profit Recovery Was Set Back in 2011 by High Catastrophe Loss & Other Factors 54

38. P/C Net Income After Taxes1991–2012:Q1 ($ Millions) P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due primarily to lower catastrophe losses • 2005 ROE*= 9.6% • 2006 ROE = 12.7% • 2007 ROE = 10.9% • 2008 ROE = 0.1% • 2009 ROE = 5.0% • 2010 ROE = 6.6% • 2011 ROAS1 = 3.5% • 2012:Q1 ROAS1 = 7.2% * ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO, Insurance Information Institute

39. A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs A combined ratio of about 100 generates an ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10,10% in 2005 and 16% in 1979 Combined Ratio / ROE Year Ago 2011:Q1 = 102.2, 6.1% ROE Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs * 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio including M&FG insurers is 99.0, ROAS = 7.2%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

40. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q1* History suggests next ROE peak will be in 2016-2017 ROE 1977:19.0% 1987:17.3% 2006:12.7% 10 Years 1997:11.6% 2012:Q8.2% 10 Years 9 Years 2011:4.6%* 1975: 2.4% 2001: -1.2% 1992: 4.5% 1984: 1.8% *Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% including M&FG. Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

41. Personal Lines Profitability Analysis Significant Variability Over Time and Across States 60

42. Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*) Top 25 States (Percent) Hawaii was the most profitable state for auto insurers from 2001-2010 *Latest available. Sources: NAIC.

43. Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*) (Percent) Bottom 25 States Michigan was the least profitable state, in large part due to fraud in its no-fault system *Latest avaiiable. Sources: NAIC

44. Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*) Top 25 States (Percent) Hawaii was the most profitable state for home insurers from 2001-2010 *Latest available. Sources: NAIC.

45. Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*) Bottom 25 States (Percent) Home insurance profitability in catastrophe prone states suffered the most over the past decade *Latest available. Sources: NAIC

46. Top 16 Most Costly World Insurance Losses, 1970-2011** 5 of the top 14 most expensive catastrophes in world history have occurred within the past 2 years (Insured Losses, 2011 Dollars, $ Billions) Taken as a single event, the Spring 2011 tornado and thunderstorm season would likely become the 5thcostliest event in global insurance history *Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only. **Figures do not include federally insured flood losses. Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.

47. Natural Loss Events: First Half 2012World Map Cold wave Eastern Europe, Jan–Feb Fatalities: 745 Winter Storm Andrea Europe, 5–6 January Winter damage/avalanches Afghanistan, Jan–March Fatalities: 160 Severe storms USA, 28–29 April Severe storms, tornadoes USA, 2–4 March Fatalities: 41 Earthquake Italy, 20/29 May Fatalities: 18 Floods, landslides China, May–June Fatalities: 127 Earthquake Mexico, 20 March Floods, flash floods Australia, Feb–March Numberofevents: 450 Cyclone Funso Mozambique, 19–28 January Fatalities: 46 Natural catastrophes Geophysical events(earthquake, tsunami, volcanic activity) Hydrological events(flood, mass movement) Climatological events(extreme temperature, drought, wildfire) Selection of significant loss events (see table) Meteorological events (storm) Source: MR NatCatSERVICE 75

48. U.S. Insured Catastrophe Loss Update 2012 Catastrophe Losses Were Close to “Average” in the First Half of 2012 2011 Was the 5th Most Expensive Year on Record 86

49. US Catastrophe Loss Summary: First Half 2012 • $12.5 Billion in Insured Losses in the US Arising from ~90 CAT Events • Down 49% from $24.4B in 2011:H1; But loss is still 44% above average over past 10 yrs. • Represents 80%+ of global total • Mild winter helped keep first half losses down • T-storm (includes tornado, hail and wind damage) accounted for est. $11.9B or 95% of first half insured losses and represent the 3rd most expensive spring t-storm season ever • ~$19.6 Billion in Economic Losses in the US • Down from approximately $75B in 2011:H1 • Mild Winter Helped Keep First Half Insured Losses Down • Lack of heavy precipitation limited spring flood but exacerbated drought conditions • Severe Droughts Now Impacting Central and Southwest Parts of US • Two major wildfires in Colorado in June caused record $500 mill damage in the state • Largest wildfire in New Mexico history occurred in May • Insured crop losses could be high in 2012 • Mild Hurricane Season • While season got off to an early start, insured losses are not large by historical standards Isaac likely in the lower end of modeled loss range of $600M to $2B Source: Munich Re; PCS; Insurance Information Institute.

50. Natural Disaster Losses in the United States: First Half 2012 Source: MR NatCatSERVICE 88