Economic Trends, Challenges, and Opportunities Affecting

the P/C and Surety LOBNew Jersey Surety Association

September 13, 2012

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

Economics 2012:Most Signs Are Weak

but Positive

Favorable Consequencesfor P/C Insurers,

if Current Trends Continue

2

3

The US Economy is Forecastto Keep Growing*, but Slowly

* Estimates/Forecasts from Blue Chip Economic IndicatorsSources: US Department of Commerce, http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm ;Blue Chip Economic Indicators 8/2012 issue (forecasts); Insurance Information Institute.

1.4%

4.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.7%

1.7%

1.9%

1.8% 2.4% 2.7%

2.9%

-1.8

%

1.3%

-3.7

%

-8.9

%

-5.3

%

-0.3

%

-12%

-9%

-6%

-3%

0%

3%

6%

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

11:1

Q

11:2

Q

11:3

Q

11:4

Q

12:1

Q

12:2

Q

12:3

Q

12:4

Q

13:1

Q

13:2

Q

13:3

Q

13:4

Q

Demand for insurance continues to be affected by a sluggish economy

Real GDP Growth (%)

Not reflected here: Some economists worry that as of Jan 1, 2013, planned

federal spending cuts, the expiration of income tax rate reductions, and the end

of some unemployment benefits will sap growth and could trigger another

recession in 2013.

Worst quarterly drop since

1958:q1 (-11.1%)

Recession

4

August 2012 Forecasts of Quarterly US Real GDP for 2012-13

2.0% 2.1%

2.7%2.9%

3.5%3.8%

1.6%

1.1%

0.6%

1.1%

2.4%

1.7%1.9% 1.8%

3.3%

2.9%2.7%

2.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4

10 Most PessimisticMedian10 Most Optimistic

Sources: Blue Chip Economic Indicators (8/12); Insurance Information Institute

Real GDP Annual Growth Rate

As of early August 2012, virtually every forecast predicts improving growththroughout the 6-quarter period, except for 2013:Q1. But this might change.

5

A Look Back: August 2011 Forecastof US Real GDP for Next 4 Quarters

2.0%1.8% 1.8%

1.4%

2.6%

2.2%2.5% 2.4%

3.1%3.1%3.3%

3.0%

1.0%

2.0%

3.0%

4.0%

5.0%

11:Q3 11:Q4 12:Q1 12:Q2

10 Most Pessimistic Median 10 Most Optimistic

Sources: Blue Chip Economic Indicators (8/11); Insurance Information Institute

Real GDP Annual Growth Rate

6

Off Target: August 2011 Forecasts forNext 4 Quarters vs. Actual US Real GDP

1.3%

4.1%

2.0%

1.5%

2.0%1.8% 1.8%

1.4%

2.6%

2.2%2.5% 2.4%

3.1%3.1%3.3%

3.0%

1.0%

2.0%

3.0%

4.0%

5.0%

11:Q3 11:Q4 12:Q1 12:Q2

10 Most Pessimistic Median 10 Most Optimistic Actual

Sources: Blue Chip Economic Indicators (8/11 and 8/12 issues); Insurance Information Institute

Real GDP Annual Growth Rate

State-by-State Leading Indicatorsfor 2d Half of 2012

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 7

5 Fastest Growing StatesOhio 3.2%Idaho 2.5%California 2.4%Indiana 1.7%Rhode Island 1.6%5 Slowest Growing StatesWest Virginia -4.1%

Alaska -3.9%Michigan -3.4%Alabama -3.0%Nevada -2.0%

8

Leading Indicator Indexes Vary Widely by State and Region*

0.71

0.45

0.32

0.26

0.14

0.02

0.02

-0.0

8-0

.22

-0.3

1-2

.98

-4.1

4

0.76

0.13

-0.3

7-0

.49

-0.8

3

1.55

1.31

0.21

-0.1

5-0

.79

-1.5

6

-3.8

6

0.95

-5

-4

-3

-2

-1

0

1

2

3

4V

A TN FL AR KY

GA LA MS

NC

SC AL

WV NY NJ

DE

MD

PA RI

MA

ME

VT

CT

NH

AK HI

*Data for July-December; next release to be posted October 2, 2012.

Sources: Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute

Southeast Mid-Atlantic New England

9

Leading Indicator Indexes Vary Widely by State and Region*(cont’d)

2.38

3.21

1.07

0.95

0.89

-0.0

4

-1.9

7-0

.14

0.97

-0.3

3-3

.35

1.20

-0.1

3

1.33

1.361.

65

1.53

0.580.

860.94

2.45

0.55

-0.7

9-0

.96

1.18

-4

-3

-2

-1

0

1

2

3

4

AZ

TX OK

NM ID UT

CO

MT

WY

CA

WA

OR

NV

OH IN WI IL MI

MN

SD

ND IA KS NE

MO

*Data for July-December; next release to be posted October 2, 2012.

Sources: Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute

Southwest Mountain Far West Great PlainsGreat Lakes

10

Construction Trends

10

The Architecture Billings Index is a Leading Indicator of Construction

11

A score over 50 indicates an increase in billings. June 2012

score was 45.9

There is roughly a 9-12-month lag between architecture billings and

construction spending

12

PRIVATE CONSTRUCTION

12

13

Value* of Private Construction “Put In Place”

*Seasonally adjusted annual rate Source: http://www.census.gov/const/C30/release.pdf

Since the recession started in Dec 2007, private nonresidential construction activity plunged by 41% (as of Jan 2011), then rose by 26% (as of July 2012),

but is still down 25% vs. Dec 2007.

$200

$225

$250

$275

$300

$325

$350

$375

$400

$425

Nov

'08

Dec

Jan

'09

Feb

'09

Mar

'09

Apr

'09

May

'09

Jun

'09

Jul '

09A

ug '0

9S

ep '0

9O

ct '0

9N

ov '0

9D

ecJa

n '1

0Fe

b '1

0M

ar '1

0A

pr '1

0M

ay '1

0Ju

n '1

0Ju

l '10

Aug

'10

Sep

'10

Oct

'10

Nov

'10

Dec

Jan

'11

Feb

'11

Mar

'11

Apr

'11

May

'11

Jun

'11

Jul '

11A

ug '1

1S

ep '1

1O

ct '1

1N

ov '1

1D

ecJa

n '1

2Fe

b '1

2M

ar '1

2A

pr '1

2M

ay '1

2Ju

n '1

2Ju

l '12

Residential Private Nonresidential PrivateBillions Official Recession Months

14

$25

$35

$45

$55

$65

$75

$85

$95

Jan

2010 Feb Mar

Apr

201

0

May Ju

n

Jul 2

010

Aug

Sep

Oct

201

0

Nov

Dec

Jan

2011 Feb Mar

Apr

201

1

May Ju

n

Jul 2

011

Aug

Sep

Oct

201

1

Nov

Dec

Jan

2012 Feb Mar

Apr

201

2

May Ju

n

Jul 2

012

PowerManufacturingCommercial

Value* of Nonresidential Private Construction “Put In Place,” by Sector

*Seasonally-adjusted annual rate Sources: U.S. Census Bureau; Insurance Information Institute

Power-related construction rose in 2010-11 but since then dropped off. Manufacturing construction took an opposite path.

$ Millions

15

$12

$15

$18

$21

$24

$27

$30

$33

Jan

2010 Feb Mar

Apr

201

0

May Ju

n

Jul 2

010

Aug

Sep

Oct

201

0

Nov

Dec

Jan

2011 Feb Mar

Apr

201

1

May Ju

n

Jul 2

011

Aug

Sep

Oct

201

1

Nov

Dec

Jan

2012 Feb Mar

Apr

201

2

May Ju

n

Jul 2

012

Health Care Office Educational

Value* of Nonresidential Private Construction “Put In Place,” by Sector

*Seasonally-adjusted annual rate Sources: U.S. Census Bureau; Insurance Information Institute

Private health-care construction has been virtually flat since July 2010, but private educational construction rose 37.7% in that time.

$ Millions

16

PUBLIC CONSTRUCTION

16

17

Value* of Nonresidential Public Construction “Put In Place”

*Seasonally adjusted annual rate Source: http://www.census.gov/const/C30/release.pdf

Since the recession started, private residential and nonresidential construction together are down $300 billion (annual rate), a drop of 38%.

Public construction has hardly moved.

$260

$270

$280

$290

$300

$310

$320

Nov

'08

Dec

Jan

'09

Feb

'09

Mar

'09

Apr

'09

May

'09

Jun

'09

Jul '

09A

ug '0

9S

ep '0

9O

ct '0

9N

ov '0

9D

ecJa

n '1

0Fe

b '1

0M

ar '1

0A

pr '1

0M

ay '1

0Ju

n '1

0Ju

l '10

Aug

'10

Sep

'10

Oct

'10

Nov

'10

Dec

Jan

'11

Feb

'11

Mar

'11

Apr

'11

May

'11

Jun

'11

Jul '

11A

ug '1

1S

ep '1

1O

ct '1

1N

ov '1

1D

ecJa

n '1

2Fe

b '1

2M

ar '1

2A

pr '1

2M

ay '1

2Ju

n '1

2Ju

l '12

Billions

18

$60

$65

$70

$75

$80

$85

$90

Jan

2010 Feb Mar

Apr

201

0

May Ju

n

Jul 2

010

Aug

Sep

Oct

201

0

Nov

Dec

Jan

2011 Feb Mar

Apr

201

1

May Ju

n

Jul 2

011

Aug

Sep

Oct

201

1

Nov

Dec

Jan

2012 Feb Mar

Apr

201

2

May Ju

n

Jul 2

012

Highway & Street Educational

Value* of Nonresidential Public Construction “Put In Place,” by Sector

*Seasonally-adjusted annual rate Sources: U.S. Census Bureau; Insurance Information Institute

In 2010, Highway & Street construction rose with federal stimulus,but was virtually flat since then. Since the start of 2010, public spending

for Educational construction is down $12.6B (-16.0%).

$ Millions

19

$10

$15

$20

$25

$30

$35

Jan

2010 Feb Mar

Apr

201

0

May Ju

n

Jul 2

010

Aug

Sep

Oct

201

0

Nov

Dec

Jan

2011 Feb Mar

Apr

201

1

May Ju

n

Jul 2

011

Aug

Sep

Oct

201

1

Nov

Dec

Jan

2012 Feb Mar

Apr

201

2

May Ju

n

Jul 2

012

Transportation Sewage & Waste Disposal Office

Value* of Nonresidential Public Construction “Put In Place,” by Sector

*Seasonally-adjusted annual rate Sources: U.S. Census Bureau; Insurance Information Institute

Since July 2010, public Sewage & Waste construction is down significantly (-$5.2B, or -19.7%), public Office construction is down $2.4B

(-17.7%), and Transportation construction is down $3.8B (-12.4%).

$ Millions

20

The Labor Market

20

47

41

-13

6-1

12

-21

5-2

16

-23

1-2

59

-29

4-4

25

-48

0-7

97

-65

8-8

39 -7

25

-78

7-8

02

-31

2-4

26 -2

96 -2

19

-18

4-2

32

-42

-12

0 -40

-27

14

1 19

38

4 92

92 12

81

15 1

96

13

41

40

11

9

26

12

64

10

81

02 1

75

52

21

61

39 17

8 23

4 27

72

54

14

78

5 11

66

31

62

10

3

25

7

(1,000)

(800)

(600)

(400)

(200)

0

200

400

De

c-0

7

Fe

b-0

8

Ap

r-0

8

Jun

-08

Au

g-0

8

Oct

-08

De

c-0

8

Fe

b-0

9

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct

-09

De

c-0

9

Fe

b-1

0

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Fe

b-1

1

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Fe

b-1

2

Ap

r-1

2

Jun

-12

Au

g-1

2

Monthly Change in Private Employment*December 2007 through August 2012

(Thousands)

At the rate of private-sector employment growth in the last six months, the “headline” unemployment rate could be under 8% by 2012 year-end.

*seasonally adjustedSources: U.S. Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute.

Nov. ‘08.–Apr. 09 monthly losses were

the largest in the Post-WW II period

Private employers added jobs in every

one of the last 30 months

Official Recession Months

22

This Looks Good: Increasing Job Openings in the Private Sector*

*Monthly, December 2000 through July 2012; data published Sept. 11, 2012. Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics http://www.bls.gov ; National Bureau of Economic Research (recession dates);Insurance Information Institutes.

1500

2000

2500

3000

3500

4000

4500

5000

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Low point reached in July 2009 at 1.9 million openings.

July 2012 openings were 3.28 million. In the 3 years since the

recession’s end, openings grew by

57%.

22

Thousands Most recent peak reached in Nov 2006

at 4.27 million openings.

23

Unemployment and UnderemploymentRate “Normality”: Years to Go

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Traditional Unemployment Rate U-3Unemployment + Underemployment Rate U-6

August 2012 unemployment rate (U-3) was

8.1%. Peak rate in the last 30

years: 10.8% in Nov - Dec 1982

Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

U-6 is now 14.7%,

down 2.8 percentage points from

its peak

January 2000 through August 2012, Seasonally Adjusted (%)

Gap between U-3 and U-6 is

normally 4 percentage

points but is now 6.6

points; at peak, 7.5

points

U-6 hit 17.5% in Oct 2009

Recession

Recession

24

Number of “Discouraged Workers”:Elevated, but Dropping Jan 1994 – August 2012

Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.Sources: Bureau of Labor Statistics; National Bureau of Economic Research (recession dates).

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

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).

Latest reading: 844,000

in Aug. 2012.

ThousandsA “discouraged worker” in a month did not actively look for work in the prior monthfor reasons such as--thinks no work available,--could not find work,--lacks schooling or training,--thinks employer thinks too young or old, and other types of discrimination.

25

Average Hourly Earnings,* Private Sector Workers, Monthly, March 2006—August 2012

*Seasonally adjusted Recession indicated by gray shaded column.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

$19.50

$20.00

$20.50

$21.00

$21.50

$22.00

$22.50

$23.00

$23.50

$24.00

Mar

06

Jun

06

Sep

06

Dec

06

Mar

07

Jun

07

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

Jun

10

Sep

10

Dec

10

Mar

11

Jun

11

Sep

11

Dec

11

Mar

12

Jun

12

The average hourly wage in August 2012 was $23.52,

up 10.7% from $21.25 when the recession began

in Dec. 2007

Wage gains continued during the recession,

despite massive job losses

Hourly Wage

Annual Growth Rates2008: 3.1%2009: 2.7%2010: 1.7%2011: 2.1%

26

Average Weekly Hours,All Private Workers, March 2006—August 2012

*Seasonally adjustedNotes: Recessions indicated by gray shaded columns. This BLS data set starts in March 2006.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

33.7

33.8

33.9

34.0

34.1

34.2

34.3

34.4

34.5

34.6

34.7

'06 '07 '08 '09 '10 '11 '12

…we’re nearly back to the pre-

recession workweek.

Hours worked plunged during the recession, affecting payroll exposures,

but…

Hours Worked

27

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2012:Q2

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,00005

:Q1

05:Q

2

05:Q

3

05:Q

4

06:Q

1

06:Q

2

06:Q

3

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

Peak was 2008:Q1 at $6.60 trillion

Latest (2012:Q2) was $6.87 trillion,

a new peak

Recent trough (2009:Q3) was $6.25 trillion, down

5.3% from prior peak

Pace of payroll growth is

accelerating

27

28

Manufacturing Employment,Dec. 2007—August 2012*

*Seasonally adjusted; the July and August 2012 data are preliminarySources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

13,7

4313

,723

13,6

9513

,656

13,6

0013

,569

13,5

1013

,435

13,3

5613

,272

13,1

4213

,028

12,8

4912

,252

12,3

8612

,214

12,0

3511

,868

11,7

2511

,664

11,6

2311

,579

11,5

3011

,496

11,4

6611

,458

11,4

6211

,470

11,5

0211

,536

11,5

4611

,566

11,5

4911

,551

11,5

5111

,560

11,5

7511

,627

11,6

6411

,690

11,7

1811

,726

11,7

3811

,768

11,7

7111

,768

11,7

7711

,780

11,8

0811

,860

11,8

9011

,932

11,9

4211

,955

11,9

6211

,985

11,9

70

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Manufacturing employment grew every month from January 2010 through July

2012. At the end of that span a half million more were working in

manufacturing.

(Thousands)

The “Great Recession.”

29

Manufacturing Employment,June 2009—August 2012*

*Seasonally adjusted; the July and August 2012 data are preliminarySources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

11,7

2511

,664

11,6

2311

,579

11,5

3011

,496

11,4

6611

,458

11,4

6211

,470

11,5

0211

,536

11,5

4611

,566

11,5

4911

,551

11,5

5111

,560

11,5

7511

,627

11,6

6411

,690

11,7

1811

,726

11,7

3811

,768

11,7

7111

,768

11,7

7711

,780

11,8

0811

,860

11,8

9011

,932

11,9

4211

,955

11,9

6211

,985

11,9

70

11,250

11,500

11,750

12,000

12,250

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Manufacturing employment grew every month from January 2010 through July

2012. At the end of that span a half million more were working in

manufacturing.

(Thousands)June 2009: official final month of the

“Great Recession.”

Construction Employment,Jan. 1969—Aug. 2012*

30

32

Construction Employment,June 2009—August 2012*

*Seasonally adjusted; July and August 2012 are preliminary dataSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

6,00

75,

925

5,84

65,

775

5,71

75,

687

5,65

45,

593

5,52

95,

552

5,55

95,

518

5,50

75,

491

5,51

15,

492

5,49

95,

488

5,47

75,

456

5,48

95,

496

5,49

55,

498

5,49

55,

508

5,49

85,

528

5,51

95,

520

5,54

65,

564

5,56

35,

549

5,54

25,

510

5,51

45,

514

5,51

5

5,250

5,500

5,750

6,000

6,250

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Construction employment has been essentially flat (at about 5.5 million)

since January 2010. In a normal recovery, construction employment

would be growing robustly

(Thousands) June 2009: official final month of the

“Great Recession.”

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Sep

Mar

02

Sep

Mar

03

Sep

Mar

04

Sep

Mar

05

Sep

Mar

06

Sep

Mar

07

Sep

Mar

08

Sep

Mar

09

Sep

Mar

10

Sep

Mar

11

Sep

Mar

12

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 33

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 79.3% of industrial capacity in May 2012, above the June 2009

low of 68.3% and close to its post-crisis peak

December 2007-June 2009 Recession

March 2001 through July 2012

33

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

34

Growth Will Expand the Exposure Base and Fuel Confidence

34

35

Housing Starts, Millions of Units

Construction of Private HousingIs Picking Up

1.481.47

1.621.641.571.60

1.711.85

1.962.07

1.80

1.36

0.90

0.550.590.610.75

0.89

1.351.46

1.291.20

1.01

1.19

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

F

13

F

Sources: U.S. Census Bureau and Department of Housing and Urban Development (history) at http://www.census.gov/const/newresconst.pdf ; Blue Chip Economic Indicators (8/2012), forecasts; Insurance Information Institute.

Weak home construction forecast implies little exposure growth likely for Homeowners insurers and insurers with a residential construction book of

business for the next few years.

Forecast range for

2012: 660,000 to

800,000

Forecast range for

2013: 730,000 to 1,200,000

But the Pickup is Mostlyin Multi-Family Housing Starts

100

150

200

250

300

350

400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*400

600

800

1000

1200

1400

1600

1800

units in multi-family buildings single family units

*January-July 2012 data, annualized, seasonally-adjusted, preliminary (July)Source: US Census Bureau at http://www.census.gov/construction/nrc/pdf/newresconst.pdf

Thousands of Units, Multi-Family

Multi-unit starts, currently at a seasonally-adjusted annual rate of 215,000,are double the 2009 rate. Average annual rate for 2001-2006: 339,000.

Multi-family-unit starts rose in 2011, and more in 2012.

Thousands of Units, Single Family

Multi-family plunge didn’t begin until 2009

Single family plunge began

in 2006

37

Price Index for Residential Maintenance & Repair, Monthly, 2002-2012

Sources: US Bureau of Labor Statistics, Producer Price Index; Insurance Information Institute

154.

515

6.3

158.

315

9.4

159.

016

0.3

161.

916

2.9

166.

216

8.8

166.

116

8.7

168.

617

0.5

173.

417

5.0

176.

117

6.9

177.

417

4.6

173.

017

2.9

173.

317

3.2

174.

317

6.5

178.

618

0.1

180.

018

1.4

179.

618

0.1

180.

018

3.0

182.

118

3.2

184.

218

7.8

190.

2 194.

719

8.2 20

2.7

201.

820

3.0

196.

719

0.1

184.

918

5.4

183.

618

2.5

183.

418

4.7

186.

518

5.5

187.

118

6.9

185.

818

7.0

187.

218

9.6

189.

319

1.6

193.

819

5.1

193.

819

3.5

194.

019

3.6

194.

619

5.5

196.

819

9.0

200.

9 205.

020

7.9

209.

920

9.6

210.

720

9.1

209.

720

8.4

208.

420

7.7

209.

421

0.6 214.

121

4.0

213.

021

1.7

165.

4

150

175

200

225

Jan

05

Jul 0

5

Jan

06

Jul 0

6

Jan

07

Jul 0

7

Jan

08

Jul 0

8

Jan

09

Jul 0

9

Jan

10

Jul 1

0

Jan

11

Jul 1

1

Jan

12

The effect of repair costs on claims

depends on when the work is priced.12.7% increase in Sept. 2008

vs. Sept. 2007— during the “Great Recession”!)

Price Index

Prices for residential maintenance & repair rose by nearly 40% since December 2004 (through June 2012).

Annual Price Changes

2005: +7.9%2006: +7.3%2007: +3.3%2008: +7.8%2009: -3.9%2010: +4.3%2011: +7.1%

38

Business Bankruptcy Filings: Fallingbut Still High in 2012 (1994:Q1 – 2012:Q1)

13.9

13.6

12.9

12.0 13

.112

.2 12.6

12.9 13

.4 14.0

13.2

12.9 13

.814

.013

.512

.712

.411

.610

.39.

99.

210

.49.

09.

0 9.5

9.2

8.2 8.4

10.0

10.3

9.5 10

.09.

89.

79.

49.

58.

8 9.3

8.3

10.6

8.2

7.6 7.8 8.1 8.

7 9.5

12.8

4.1 4.

9 5.3 5.6 6.

3 6.7 7.

2 8.0 8.

79.

711

.512

.914

.316

.014

.2 15.0

14.6

14.5

14.0

13.0

12.4

12.3

11.7

11.1

11.0

8.4

0

2

4

6

8

10

12

14

16

18

94

:Q1

94

:Q3

95

:Q1

95

:Q3

96

:Q1

96

:Q3

97

:Q1

97

:Q3

98

:Q1

98

:Q3

99

:Q1

99

:Q3

00

:Q1

00

:Q3

01

:Q1

01

:Q3

02

:Q1

02

:Q3

03

:Q1

03

:Q3

04

:Q1

04

:Q3

05

:Q1

05

:Q3

06

:Q1

06

:Q3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

Business bankruptcies were down 46.5% in 2012:Q1 vs. recent peak in 2009:Q2 but were still higher than 2008:Q2, early in the Great Recession.

Bankruptcies restrict exposure growth in all commercial lines.

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information Institute

(Thousands) New Bankruptcy Law Takes

Effect

Recessions in orange

39

Private Sector Business Starts, 1993:Q2 – 2011:Q4*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

620

420

419

420

4 208

201

193

191 19

320

020

720

320

921

020

921

6 221

221

220

221

210

221

214

206

216

208

207

200

191

188

172 17

716

918

217

5 179

188

200

183 18

7 191

19719

9

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Business starts were down nearly 20% in the Great Recession, holding back most types of commercial insurance exposure,

but now are recovering.* Data through Dec 31, 2011 are the latest available as of August 2, 2012; Seasonally adjusted.Sources: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. NBER (recession dates)

(Thousands) Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 758,000

39

Recessions in orange

40

Surety Industry Trends

40

41

$ Billions

Surety: Net Premiums Written

$3

.28

$3

.38 $

3.8

2

$3

.87

$4

.44 $4

.81

$4

.96

$4

.84

$4

.85

$4

.85

$3

.04$3

.33

$3

.27

$2

.86

$2

.75

$2

.60

2.0

2.5

3.0

3.5

4.0

4.5

5.0

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Sources: NAIC Annual Statements, via SNL Financial; Insurance Information Institute.

Within two years after the 2001 recession, surety NPW surpassed its prior peak. The 2007-09 recession has had a much more persistent lid on surety

premiums.

NPW Avg. Ann. Growth rate2001-2007: 7.75%2008-2011: 0%

Recession, March-

November 2001.

Recession, Dec. 2007-June 2009.

42

Surety: Expense Ratios

39

.9

37

.7

35

.2

35

.7

35

.6

35

.6

32

.7

35

.0

34

.5

34

.1

13

.31

13

.37

13

.33

12

.26

11

.87 1

2.7

12

.2

11

.9

11

.9

11

.9

13

.4

13

.3

11

.9 12

.2

13

.5

15

.4

42

.6

38

.5

38

.6

40

.3

38

.0

37

.7

20

30

40

50

60

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Acquisition Expenses Other Expenses

Sources: NAIC Annual Statements, via SNL Financial; Insurance Information Institute.

Since 2003, total expenses have been consistently below 50%,mainly because of a drop in acquisition expenses.

%

43

Surety: Combined Ratio

116.9122.1119.8

101.5

81.7

72.366.9

79.5

70.6 72.6

124.1

87.083.784.582.784.0

60

80

100

120

140

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sources: NAIC Annual Statements, via SNL Financial; Insurance Information Institute.

Remarkable: profitable combined ratios throughout the most severe recession since the 1930s.

Recession, March-

November 2001.

Recession, Dec. 2007-June 2009.

Investments: The New Reality

44

Investment Performance is a Key Driver of Profitability

44

45

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*

*Monthly, through August 2012. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Yields on 10-Year U.S. Treasury Notes have been essentially

below 5% for 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.

Yields on 10-Year U.S. Treasury Notes have

been essentially below 4% since January 2008 and below 3% for the

last year.

45

Property/Casualty Insurance Industry Investment Gain1: 1994–2011

$35.4

$42.8

$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4

$55.7

$64.0

$31.7

$39.2

$53.4$56.2

$58.0

$51.9

$56.9

$25

$50

$75

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11

Investment Gains Recovered Significantly in 2011Due to Realized Investment Gains;

The Financial Crisis Caused Investment Gains to Fall by 50% in 20081 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.

($ Billions) Investment gains in 2011 were $2.8B above 2010 levels — a surprise given falling interest rates and flat stock markets

47

Key Takaways

47

48

P/C Insurance Exposures Will Grow With the U.S. Economy Personal and commercial exposure growth is certain in 2012 But restoration of destroyed exposure will take until mid-decade Wage growth is also positive and could modestly accelerate

P/C Industry Growth in 2012 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional “hard market” emerges in 2012

Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, severity in some key lines But WC will be tough to fix

Industry Capacity Hits a New Record by Year-End 2012 (Barring Meg-CAT)

Investment Environment Is/Remains Much More Favorable Return of realized capital gains But Interest rates remain low

Takeaways:Insurance Industry Predictions for 2012

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute Online:

49