September 20, 2010 2010 CLRS – Orlando FL

2010 U.S. INSURANCE MARKET UNDERWRITING CYCLE TRENDS

2

UW CYCLE ANALYSIS n  2009 Casualty results n  Analysis of Casualty trends and

relationships • Premiums and price • AY and Cal Year results • Reserves and Cash Flow

n  Lines of business • Workers Compensation • Other Liability – Occurrence

3

UW CYCLE - DRIVERS Casualty Market

Pricing Competition

Loss Trends

Economic Environment

n  Pricing responds to Calendar Year results n  Accident Year results ultimately reflect pricing n  Ultimate AY results affect Cal Yr results – cyclical

•  aka reserve development

n  Loss trends reflects economic, social, and legal issues – frequency / severity

n  Pricing response lags loss changes – cyclical n  If losses stable, UW cycle dominated by pricing

n  Capital, asset, interest, and inflation changes important, but secondary issues

n  Casualty pricing does not appear to be ROE based n  However, watch UW cash flows – cyclical

I M P

O R

T A

N C

E

4

UW CYCLE - PHASES Casualty Market

Unprofitable Hard

Profitable Hard

Profitable Soft

Unprofitable Soft

•  AccYr Ult L/R •  AY Ult vs Orig •  Indicated Reserve Development • Ceded WP

• Pricing Level • CalYr L/R • CalYr vs AY L/R • Reported Development • UW Cash Flow

Position in Cycle 2009 year-end

5

UW CYCLE - ISSUES Casualty Market

Pricing Competition

n  Recent profitable Calendar Year results have driven significant price decreases

n  Price level still declining n  Accident year results have “bottomed out”, and appear to becoming inadequate

n  Calendar years will soon turn unfavorable •  Reserve position

worsening •  UW cash flows negative

and deteriorating Ø  Pricing near turning point?

Loss Trends Economic Environment

n  Benign for over a decade •  Moderate severity

trends •  Declining frequency

n  Reform gains under pressure in various states

n  Possible return of inflation •  Economic recovery •  Monetary policy

n  Calendar year implications •  Pressure on AY results •  Reserves reflect implicit

historical inflation rate Ø  Nowhere to go but up?

n  Industry emerged from recent turmoil relatively unscathed •  Watch treasury yields

n  Pricing did not respond to increase in capital costs

n  Need to bolster liquidity •  Will insurers compete

to generate cash? n  Business cycle downturn

reducing policies •  Will insurers compete

to cover fixed costs? Ø  Wildcard?

6 6

WORKERS COMPENSATION

7

WORKERS COMPENSATION Premium & Price

Price = WP / Payroll n  National exposure

from Bureau of Labor Statistics

n  2009 slight payroll decline

Historical cycles n  Prior peak in1991 n  Soft cycle to 2000 n  Peak in 2005 n  Soften to 2009 n  Slightly lower

price decrease in 2009 0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

55,000,000

60,000,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Direct WP

DWP/Payroll

8

WORKERS COMPENSATION Ceded Premium & Utilization

Ceded utilization also tied to UW cycle

n  Increases in hard market

n  Decreases in soft market

Reinsurance may prove valuable going forward

n  Pricing uncertain n  AY’s

deteriorating n  Loss trends

uptick potential

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

CWP (non-affl)

CWP/DWP

9

WORKERS COMPENSATION Acc Yr Gross, Ceded, Net Results

Ceded L/R’s follow same cycle as gross L/R

n  More volatile During inadequate soft cycles, ceded business fares significantly worse During other parts of cycle, slightly better

n  Excess ceded business generally has low expenses

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

130.0%

140.0%

150.0%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Gross AY Ult LossLAE RatioCeded AY Ult LossLAE RatioNet AY Ult LossLAE Ratio

10

WORKERS COMPENSATION Accident Year Loss Development

Original L/R’s stable over adjacent time periods Cyclical Ultimate L/R’s develop up to +/- 25pts Recent AY loss ratios appear under booked

n  Actuarial models not fully reflecting price deterioration

Indicated existing reserve deficiencies

n  Est. $4.5B industry-wide as of 2008

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Net AY Ultimate LossALAE Ratio

Net AY Original LossALAE Ratio

11

WORKERS COMPENSATION Calendar Year Development

Calendar Year results follow lagged Accident Year results Cal Year results recently less volatile than Acc Year results

n  Timely pricing change in 2000

n  2009 deteriorating Mixed development booked in 2009

n  Priors yr adverse development

n  Recent 10 AYs’ showing booked improvement

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(4,000,000)(3,500,000)(3,000,000)(2,500,000)(2,000,000)(1,500,000)(1,000,000)(500,000)-500,0001,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,000

Reserve Development (x Priors)Net AY Ultimate LossALAE RatioCal Year LossALAE Ratio (x Priors)

12

WORKERS COMPENSATION Acc Yr Premium & Loss Trends

Acc Year results move inversely with pricing

n  Pricing changes cause AY results not vice versa

Losses trends drove results from 1985-1995 Since then, cycle driven by price competition Recent trends flat

n  Investigate freq / severity trends

n  Classes, states Potential threats

n  Neg freq dissipates n  Reform roll-back

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

2.20%

2.40%Net AY Ult LossALAE RatioDirect WP/PayrollNet AY Ult Loss/Payroll

13

WORKERS COMPENSATION Pricing vs. Calendar Year Results

Pricing follows Calendar Year results

n  One year lag in pricing response

n  Loss and economic trends can obscure

Softening continued in 2009 but decelerated Uptick in loss ratio may imply coming end of soft market Forecasting pricing depends of Calendar Year projections

n  Indicated reserve position is key

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-25.0%-22.5%-20.0%-17.5%-15.0%-12.5%-10.0%-7.5%-5.0%-2.5%0.0%2.5%5.0%7.5%10.0%12.5%15.0%17.5%20.0%22.5%25.0%

Direct WP/Payroll (ann. %chg)Cal Year LossALAE Ratio (x Priors)

14

WORKERS COMPENSATION Reserve Position & UW Cash Flow

Industry Schedule P data can be evaluated to estimate indicated reserve position

n  Conning Research reports reserve deficiency as of 2008 (2009 indications mixed to flat)

n  Past indications in line with subsequent development with lagged response to loss/price trend changes

UW Cash Flow appears to be an early indicator of future reserve development

n  Price change are correlated with unrecognized reserve weakening •  If pricing is weak, reserves

generally inadequate paid losses rise relative to WP

•  Reverse is true as well n  Cash flow deteriorating

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(4,000,000)(3,500,000)(3,000,000)(2,500,000)(2,000,000)(1,500,000)(1,000,000)(500,000)-500,0001,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,000

Reseve Development (x Priors)Net Paid Loss/Net WP

Indicated SubsequentCalendar (Redundancy)/ Booked (x Priors)

Year Deficiency Development2009 ???? ????2008 4,467 (444) 2007 3,946 (2,311) 2006 (4,725) (2,731) 2005 N/A (3,205) 2004 10,684 2,170 2003 3,705 6,368 2002 5,209 10,122 2001 5,490 11,812 2000 4,526 10,897

15 15

OTHER LIABILITY Occurrence Policies

16

OTHER LIABILITY (Occ.) Premium & Price

Price = WP / GDP n  Industry measure

of exposures Historical cycles

n  Soft cycle to 2000 n  Peak in 2003 n  Soften continuing

through 2009 No current “hidden hard market”

n  Exposures down due to economy

n  Pricing still down 0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

0.50%

Direct WP

DWP/GDP

17

OTHER LIABILITY (Occ.) Ceded Premium & Utilization

Ceded utilization also tied to UW cycle

n  Increases in hard market

n  Decreases in soft market

Reinsurance may prove valuable going forward

n  Pricing uncertain n  AY’s

deteriorating n  Loss trends

uptick potential

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

CWP (non-affl)

CWP/DWP

18

OTHER LIABILITY (Occ.) Acc Yr Gross, Ceded, Net Results

Ceded L/R’s follow same cycle as gross L/R

n  More volatile During inadequate soft cycles, ceded business fares significantly worse During other parts of cycle slightly better

n  Excess ceded business generally has low expenses

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

130.0%

140.0%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Gross AY Ult LossLAE RatioCeded AY Ult LossLAE RatioNet AY Ult LossLAE Ratio

19

OTHER LIABILITY (Occ.) Accident Year Loss Development

Original L/R’s stable over adjacent time periods

n  2001 WTC impact Cyclical Ultimate L/R’s develop up to +/- 25pts

Recent AY loss ratios appear conservative

n  Actuarial models not fully reflecting loss improvement

Implied existing reserve redundancies

n  Est. $4.9B industry-wide as of 2009

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Net AY Ultimate LossALAE RatioNet AY Original LossALAE RatioNet AY Proj Ult LossALAE Ratio

20

OTHER LIABILITY (Occ.) Calendar Year Development

Calendar Year results follow lagged Accident Year results Cal Year results recently less volatile than Acc Year results

n  Timely pricing change in 2000

n  2009 deteriorating Favorable development booked in 2009 excl. 1999 and prior AYs

n  Past development n  Recent AYs’

showing booked improvement

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(2,500,000)

(2,000,000)

(1,500,000)

(1,000,000)

(500,000)

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Reserve Development (x Priors)Net AY Ultimate LossALAE RatioCal Year LossALAE Ratio (x Priors)

21

OTHER LIABILITY (Occ.) Acc Yr Premium & Loss Trends

Acc Year results move inversely with pricing

n  Pricing changes cause AY results not vice versa

Losses trends volatile through 2000, with spike in 1998 Recent trends moderate

n  Investigate freq / severity trends

n  Classes, states Potential threats

n  Neg freq dissipates n  Reform roll-back

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

Net AY Ult LossALAE RatioDirect WP/GDPNet AY Ult Loss/GDP

22

OTHER LIABILITY (Occ.) Pricing vs. Calendar Year Results

Pricing follows Calendar Year results

Softening continued in 2009 at same rate as 2008 Uptick in loss ratio may imply bottom of soft market Forecasting pricing depends of Calendar Year projections

n  Indicated reserve position is key

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-25.0%-22.5%-20.0%-17.5%-15.0%-12.5%-10.0%-7.5%-5.0%-2.5%0.0%2.5%5.0%7.5%10.0%12.5%15.0%17.5%20.0%22.5%25.0%

Direct WP/GDP (ann. %chg)Cal Year LossALAE Ratio (x Priors)

23

OTHER LIABILITY (Occ.) Reserve Position & UW Cash Flow

Industry Schedule P data can be evaluated to estimate indicated reserve position

n  Conning reports reserve redundancy as of 2008 (2009 Willis estimate)

n  Past indications in line with subsequent development with lagged response to loss/price trend changes

UW Cash Flow appears to be an early indicator of future reserve development

n  Price change are correlated with unrecognized reserve weakening •  If pricing is weak, reserves

generally inadequate paid losses rise relative to WP

•  Reverse is true as well n  Cash flow deteriorating

Indicated SubsequentCalendar (Redundancy)/ Booked (x Priors)

Year Deficiency Development2009 (4,894) ????2008 (6,029) (1,434) 2007 620 (3,376) 2006 (2,805) (2,549) 2005 N/A (3,205) 2004 6,295 413 2003 3,807 6,125 2002 8,095 8,447 2001 13,116 9,001 2000 3,117 7,471

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(2,500,000)

(2,000,000)

(1,500,000)

(1,000,000)

(500,000)

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Reseve Development (x Priors)Net Paid Loss/Net WP

24

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