Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges...

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Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL October 16, 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 [email protected] www.iii.org

Transcript of Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges...

Page 1: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

Insurance Industry Overview & Outlook

Economic Challenges and Opportunities for 2013 and Beyond

AFP Insurance Client Conference

Miami, FL

October 16, 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 [email protected] www.iii.org

Page 2: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

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Reasons for Optimism, Causes for Concern in the Insurance

Industry

The Outlook for the Economy Is Still Cloudy, But the Outlook for

Insurance Could Improve

Page 3: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

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Reasons for Optimism, Causes for Concern in the Insurance Industry

Slow Economic Growth Will Persist through 2013

No Double Dip or Second Recession unless we go completely off the “Fiscal Cliff”

Economy is more resilient than commonly presumed

Consumer Confidence Has Improved

Consumer Spending is Recovering Gradually, Albeit Unevenly

Consumer and Business Lending Are Expanding, Albeit Fitfully

Housing Market Remains Weak but Has Bottomed Out

HousingConstruction will become a more important growth driver by mid-2013/2014

Private Sector Hiring is Consistently Positive for 33 Months

Acceleration in hiring is possible in 2013 compared to 2012

Government employment may be begin to turn positive

Interest Rates Remain Low (Fed to Keep Rates Lows Until mid-2015)

Good for borrowers; Challenge for savers and institutional investors like insurers

Major contributing factor to pension shortfalls

Inflation Is Up Marginally But Remains Under Control

Stock and Bond Markets More Stable, Less Volatile Compared to 2008/09

Eurozone Recession/ China Slowdown Don’t Push US into Recession

Eurozone does not (completely) disintegrate; Greece could exit

Political Uncertainty, Fiscal Cliff, Regulatory Uncertainty Loom Large in US

Page 4: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

The Strength of the Global and US Economies Will Influence Insurer Growth Opportunities

4

Consumer Demand for Insurance

Products Should Increase

4

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US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.

Source: US Department of Commerce, Blue Economic Indicators 10/12; Insurance Information Institute.

2.7

%

0.5

%

3.6

%

3.0

%

1.7

%

-1.8

%

1.3

%

-3.7

%

-5.3

%

-0.3

%

1.4

%

5.0

%

2.3

%

2.2

%

2.6

%

2.4

%

0.1

%

2.5

%

1.3

%

4.1

%

2.0

%

1.3

%

1.7

%

1.8

%

1.7

%

2.2

%

2.6

%2

.8%

-8.9%

4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

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

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

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

2012 is expected to see slow growth lasting into 2013; Fed’s QE3 could

push 2013 GDP up 0.2%

Page 6: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

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Annual Inflation Rates, (CPI-U, %), 1990–2013F

2.82.6

1.51.9

3.3 3.4

1.3

2.52.3

3.0

3.8

2.8

3.8

-0.4

1.6

3.2

2.1 2.0

2.9

2.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/12 (forecasts).

The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and

commodity prices, plus U.S. debt burden, remain longer-run concerns

Annual Inflation Rates (%)

Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the

commodity bubble reduced inflationary pressures in 2009/10

Higher energy, commodity and food

prices pushed up inflation in 2011, but

not longer term inflationary

expectations.

Page 7: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

Medical Cost Inflation Has Outpaced Overall Inflation For Over 50 Years

752.3

1747.1

0

300

600

900

1200

1500

1800

61

66

71

76

81

86

91

96

01

06

11

Ind

ex

Va

lue (

19

61

=1

00

)

All Items

Medical Care

Source: Department of Labor (Bureau of Labor Statistics)

A claim that cost $1,000 in 1961 would cost nearly $17,500 based on

medical cost inflation trends over the past 51 years.

7

Page 8: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

8

-5%

0%

5%

10%

15%

20%

25%

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

P/C Net Premium Growth: Annual Change, 1971—2012:H1

(Percent)

1975-78 1984-87 2000-03

Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

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.

2012:H1 growth

was +3.6%

Page 9: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

$13,000

$14,000

$15,000

$16,000

$100

$200

$300

$400

$500

$600

$700

81

82

83

84

1985

86

87

88

89

1990

91

92

93

94

1995

96

97

98

99

2000

01

02

03

04

2005

06

07

08

09

2010

11

L/H Industry Premiums Nominal GDP

3 Decades of U.S. GDP vs. L/A Premiums: Fairly Strong Association

Note: 2011 premium data is premiums for 2011:Q3, annualized Sources: http://www.bea.gov/national/xls/gdplev.xls , NAIC Annual Statement data, via SNL Financial; I.I.I. calculations

Premiums,

Billions GDP,

Billions

2001 Recession

2008-09 Recession

Page 10: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

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Real GDP Growth Forecasts: Major Economies: 2011 – 2013F

Sources: Blue Chip Economic Indicators (9/2012 issue); Insurance Information Institute.

1.7

%

0.7

% 1.5

%

3.1

%

2.2

%

-0.3

%

0.9

%

7.8

%

2.3

%

2.1

%

1.1

%

0.3

%

1.1

%

8.2

%

1.4

%

9.2%

-0.7%-0.5%-2%

0%

2%

4%

6%

8%

10%

US UK Euro Area Germany China Japan

2011 2012F 2013F

Growth Prospects Vary Widely by Region: Stabilizing in the US, Mild Recession in the Eurozone, A “Soft Landing” in China and India,

Reconstruction Stimulus in Japan and Modest Growth in America’s Largest Trading Partners—Canada and Mexico.

The Eurozone and UK are in

recession. Both should end by early

2013

China growth has slowed, but remains strong in an expected “soft landing”

scenario

Tepid US recovery

continues

Rebuilding acts as a

stimulus to Japanese economy

Page 11: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

F1

3F

Advanced economies Emerging and developing economies World

Source: International Monetary Fund, World Economic Outlook , Oct. 2012; Ins. Info. Institute.

Emerging economies (led by China) are expected to grow by 5.3% in 2012 and

5.6% in 2013.

GDP Growth: Advanced & Emerging Economies vs. World, 1970-2013F

Advanced economies are expected to grow at a sluggish pace of 1.3% in

2012 and 1.5% in 2013.

World output is forecast to grow by 3.3% in 2012 and 3.6% in 2013. The world economy shrank by 0.6% in

2009 amid the global financial crisis

GDP Growth (%)

Page 12: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

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Global Real (Inflation Adjusted) Nonlife Premium Growth: 1980-2010

Source: Swiss Re, sigma, No. 2/2010.

-10%

-5%

0%

5%

10%

15%

20%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Real growth rates

Total Industrialised countries Emerging markets

Nonlife premium growth in emerging markets has

exceeded that of industrialized countries in

27 of the past 31 years, including the entirety of the

global financial crisis..

Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as

well as a lack of consistent cyclicality

Average: 1980-2010

Industrialized Countries: 3.8%

Emerging Markets: 9.2%

Overall Total: 4.2%

Page 13: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

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Nonlife Real Premium Growth in 2010

Source: Swiss Re, sigma, No. 2/2011.

Latin and South American markets performed

relatively well during and after the global financial crisis in terms of growth

There was also growth in the Middle East, East and South Asia as well as Australia and New

Zealand

Page 14: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

Percent Change in Real GDP by State, 2011

Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute. 14

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

Page 15: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

74

.4

73

.6

73

.6

72

.2

73

.6 76

67

.8

68

.9

68

.2

67

.7 71

.6 74

.5

74

.2 77

.5

67

.5 69

.8

74

.3

71

.5

63

.7

55

.7 59

.5

60

.9 64

.1

69

.9

75

.0

75

.3

76

.2

76

.4 79

.3

73

.2

72

.3 74

.3 78

.3

40

45

50

55

60

65

70

75

80

85

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Consumer Sentiment Survey (1966 = 100)

January 2010 through September 2012

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

Optimism among consumers Increased in September, and is

well above year-ago levels; Suggests concern, but not fear on

the part of consumers.

15

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16

16

.9

16

.5

16

.1

13

.2

10

.4

11

.6 12

.7

14

.3 14

.8

14

.7

15

.1

15

.4

15

.5

15

.4

16

.9

16

.617

.1

17

.5

17

.8

17

.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 18-

22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2022F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 10/12); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector.

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.

Job growth and improved credit market conditions will boost auto sales in

2012 and beyond

Page 17: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

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(Millions of Units)

New Private Housing Starts, 1990-2022F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

1 0.7

5 0.8

9

1.3

4

1.2

3

1.3

2

1.3

8

1.4

2

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F 18-

22F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 10/12); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged

72% from 2005-2009; A net annual

decline of 1.49 million units, lowest since

records began in 1959

Low inventories of existing homes, and low mortgage rates and stimulating new home

construction for the first time in years

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

Page 18: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

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Construction Employment, Jan. 2010—September 2012*

*Seasonally adjusted

Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,5

93

5,5

29 5

,55

2

5,5

59

5,5

18

5,5

07

5,4

91 5,5

11

5,4

92

5,4

99

5,4

88

5,4

77

5,4

56

5,4

89

5,4

96

5,4

95

5,4

98

5,4

95

5,5

08

5,4

98

5,5

28

5,5

19

5,5

20 5

,54

6 5,5

64

5,5

63

5,5

49

5,5

42

5,5

10

5,5

14

5,5

17

5,5

18

5,5

23

5,400

5,450

5,500

5,550

5,600

5,650

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

2/3

0/2

10

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Construction employment is still below where it was in

Jan. 2010. In a normal recovery, construction employment would be

growing robustly

(Thousands)

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Value of Construction Put in Place, August 2012 vs. August 2011*

-3.5%

-27.7%

-2.7%

6.5%

12.1%

17.8%

7.2%

-30%

-20%

-10%

0%

10%

20%

30%

Total

Construction

Total Private

Construction

Residential--

Private

Non-

Residential--

Private

Total Public

Construction

Residential-

Public

Non-

Residential--

Public

Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue

Growth (%)

Private sector construction activity is up in both the residential and nonresidential segments

*seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +12.1% Public: -3.5%

Public sector construction activity remains depressed

Page 20: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

58

.3

57

.1

60

.4

59

.6

57

.8

55

.3

55

.1

55

.2

55

.3 56

.9 58

.2

58

.5 60

.8

61

.4

59

.7

59

.7

54

.2 55

.8

51

.4 52

.5

52

.5

51

.8

52

.2 53

.1 54

.1

52

.4 53

.4 54

.8

53

.5

49

.7

49

.8

49

.6 51

.5

40

45

50

55

60

65

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

ISM Manufacturing Index (Values > 50 Indicate Expansion)

January 2010 through September 2012

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.

Manufacturing activity contracted in June for the first time in nearly 3

years, but a resumption of expansion began in September

20

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$200,000

$300,000

$400,000

$500,000

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—August 2012

*seasonally adjusted Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to Aug. 2012 was 31%. Manufacturing is an

energy intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages

ENERGY INTENSIVE

The value of Manufacturing Shipments in Aug. 2012 was up 31% to $477B from its June 2009 trough. June figure is only 1.7% below its previous record high in July 2008.

$ Millions

21

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50

.7 52

.7 54

.1

54

.6

54

.8

53

.5

53

.7

52

.8 53

.9

54

.6 56 5

7.1 5

9.4

59

.7

56

.3

54

.4

53

.3

53

.4

53

.8

52

.6

52

.6

52

.6

52

.6

53

.0

56

.8

57

.3

56

.0

53

.5

53

.7

52

.1

52

.6 53

.7 55

.1

40

45

50

55

60

65

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

ISM Non-Manufacturing Index (Values > 50 Indicate Expansion)

January 2010 through September 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.

Optimism among non-manufacturers was stable in late 2011 and remained

expansionary in 2012

22

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23

43

,69

4

48

,12

5

69

,30

0

62

,43

6

64

,00

4

71

,27

7

81

,23

5

82

,44

6

63

,85

3

63

,23

5

64

,85

3

71

,54

9

70

,64

3

62

,30

4

52

,37

4

51

,95

9

53

,54

9

54

,02

7

44

,36

7

37

,88

4

35

,47

2

40

,09

9

38

,54

0

35

,03

7

34

,31

7

39

,20

1

19

,69

5

28

,32

2 43

,54

6

60

,83

7

56

,28

2

47

,80

6

10

,99

8

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

:Q1

Business Bankruptcy Filings, 1980-2012: Q1

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

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

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

% Change Surrounding Recessions

1980-82 58.6%

1980-87 88.7%

1990-91 10.3%

2000-01 13.0%

2006-09 208.9%*

23

Page 24: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

24

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

175

186

174

180

186

192

188

187 189

186 1

90 1

94

191

199 2

04

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 2

05

204

204

197

203

209

201

192

192

193

201 204

202

210 212

209

216 2

20 223

220

220

210

221

212

204

218

209

207

207

199

191 193

172 1

76

169

184

175 1

79

188

200

183 1

87 1

91

197

203

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 Recession, Holding Back Most Types of Commercial Insurance Exposure, But

Are Recovering Slowly * Data through Dec. 31, 2011 are the latest available as of Oct. 3, 2012; Seasonally adjusted.

Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(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 2006: 872,000 2007: 843,000 2008: 790,000 2009: 697,000 2010: 742,000 2011: 748,000*

24

Page 25: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

NFIB Small Business Optimism Index

January 1985 through September 2012

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 25

Small business optimism has increased but is still only at

the level it was when the Financial Crisis began

Page 26: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

26

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking)

Page 27: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

27

Healthcare Employment, 2002—September 2012*

11,536.0

11,817.1

12,055.3

12,313.9

12,601.8

12,946.8

13,289.9

13,543.0

13,776.9

14,045.7

14,424.8

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

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

Employment in the Healthcare industry increased by 9.8%-- a

gain of 1.3 million jobs between Dec. 2007 (start of the

recession) and Sept. 2012

*Seasonally adjusted

Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands)

The increase in healthcare employment has driven workers comp payroll

exposures up faster than almost any other industry

Page 28: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

28

Oil & Gas Extraction Employment, Jan. 2010—August 2012*

*Seasonally adjusted

Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

15

6

15

7

15

7

15

8

15

9

15

8

15

8

16

0

16

0

16

2

16

1

16

1 16

3

16

4 16

7 17

0

17

1 17

3 17

5

17

7 18

0 18

3

18

3 18

6 18

8

19

0 19

2

19

3

19

4

19

5

19

6

19

7

150

155

160

165

170

175

180

185

190

195

200

Ja

n-1

0

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0

Ju

l-1

0

Au

g-1

0

Se

p-1

0

Oct-

10

No

v-1

0

De

c-1

0

Ja

n-1

1

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Ju

n-1

1

Ju

l-1

1

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

2/3

0/2

10

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Oil and gas extraction employment is up 26.3% since Jan. 2010 as the energy sector booms. Domestic

energy production is essential to any robust economic recovery in the US.

(Thousands)

Page 29: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

29

P/C Growth Analysis by State: 2006 - 2011

Premium Growth Rates Vary Tremendously by State

29

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30

Direct Premiums Written: Total P/C Percent Change by State, 2006-2011

71

.5

41

.8

26

.4

22

.8

22

.6

20

.8

18

.2

11

.8

10

.5

6.6

6.3

6.1

5.8

4.9

4.7

4.2

3.9

2.4

2.2

2.1

2.1

2.1

0.9

0.9

0.7

0.4

0

10

20

30

40

50

60

70

80

ND

SD

MT IA

NE

KS

OK

WY

TX

MN LA

AR

WI

TN IN AK

DE

NM

NC

KY

SC

WA

DC

MO VT

MS

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial, LLC.; Insurance Information Institute.

Top 25 States

A limited number of states showed strong growth over

the past 5 years

Page 31: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

31

Direct Premiums Written: Total P/C Percent Change by State, 2006-2011

0.4

-0.6

-0.8

-0.8

-1.1

-1.3

-1.4

-1.6

-1.9

-2.0

-2.5

-3.1

-3.2

-3.5

-4.1

-4.4

-5.2

-5.8

-6.0

-10

.3

-10

.5

-10

.8

-11

.7

-12

.0

-13

.5

-19

.2

-25

-20

-15

-10

-5

0

5

AL

OH IL VA

NY

UT

US

GA

CT

PA

NJ

CO

MD

MA ID

OR RI

ME MI

HI

NH

WV

FL

CA

AZ

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

States with the poorest performing economies also produced the most negative net change in premiums of

the past 5 years

Sources: SNL Financial, LLC.; Insurance Information Institute.

Page 32: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

32

Presidential Politics & the P/C Insurance Industry

How Is Profitability Affected by the President’s Political Party?

32

Page 33: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

15.10%

9.40%

8.93%

8.65%

8.35%

7.98%

7.68%

6.98%

6.97%

6.65%

5.43%

5.03%

4.83%

4.43%

3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Carter

Reagan II

G.W. Bush II

Nixon

Clinton I

G.H.W. Bush

Clinton II

Reagan I

Nixon/Ford

Truman

Obama

Eisenhower I

Eisenhower II

G.W. Bush I

Johnson

Kennedy/Johnson

*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

OVERALL RECORD: 1950-2012*

Democrats 7.67% Republicans 7.97%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950- 2012*

Page 34: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

-5%

0%

5%

10%

15%

20%

25%

50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

E

BLUE = Democratic President RED = Republican President

Tru

ma

n

Nixon/Ford

Ke

nn

ed

y/

Jo

hn

so

n

Eis

en

ho

wer

Ca

rte

r

Reagan/Bush I Clinton Bush II

P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2012*

*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0%

Source: Insurance Information Institute

Ob

am

a

Page 35: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

35

Labor Market Trends

Massive Job Losses Sapped P/C Life Exposures, But Trends Are Improving

35

Page 36: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

36

Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling

2

4

6

8

10

12

14

16

18

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 7.8% 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

Source: US Bureau of Labor Statistics; Insurance Information Institute.

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 14.7%

in Aug. 2012

January 2000 through Sept. 2012, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving

36

Sep.

12

Page 37: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

186

79

213

65

127

42

15

-109

-14

65 9

723

-12

-85 -58

-161

-253

-230

-257

-347

-456

-547

-734 -6

67

-806-7

07

-744 -6

49

-334

-452

-297 -2

15

-186

-262

75

-83

16 6

2

229

51 61117

143

112193

128 167

119

257

261

264

108

102 1

75

52

216

139 178 234 277

254

147

85 1

16

63

163

97 104144

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-0

7F

eb-0

7M

ar-

07

Apr-

07

May-0

7Jun-0

7Jul-07

Aug-0

7S

ep-0

7O

ct-

07

Nov-0

7D

ec-0

7Jan-0

8F

eb-0

8M

ar-

08

Apr-

08

May-0

8Jun-0

8Jul-08

Aug-0

8S

ep-0

8O

ct-

08

Nov-0

8D

ec-0

8Jan-0

9F

eb-0

9M

ar-

09

Apr-

09

May-0

9Jun-0

9Jul-09

Aug-0

9S

ep-0

9O

ct-

09

Nov-0

9D

ec-0

9Jan-1

0F

eb-1

0M

ar-

10

Apr-

10

May-1

0Jun-1

0Jul-10

Aug-1

0S

ep-1

0O

ct-

10

Nov-1

0D

ec-1

0Jan-1

1F

eb-1

1M

ar-

11

Apr-

11

May-1

1Jun-1

1Jul-11

Aug-1

1S

ep-1

1O

ct-

11

Nov-1

1D

ec-1

1Jan-1

2F

eb-1

2M

ar-

12

Apr-

12

May-1

2Jun-1

2Jul-12

Aug-1

2S

ep-1

2

Monthly Change in Private Employment

January 2008 through Sept. 2012 (Thousands)

Private Employers Added 4.83 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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

104,000 private sector jobs were created in September

37

Page 38: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

38

(Thousands)

851

822

744

741

671

631

576

477

394

860

872

878

1,391

1,769

1,840

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Construction

Retail Trade

Offices of Health Practioners

Hospitals

Home Health Care Serv.

Food Serv. & Drinking Places

Individual & Family Serv.

Nursing & Residential Care Facil.

Wholesale Trade

Local Govt. Education

Computer Systems Design & Rltd. Serv.

Employment Services

Mgmt., Tech., Scientific Consulting Serv.

Colleges, Universities & Prof. Schools

Outpatient, Lab. & Ambulatory Care Serv.

Surprisingly, growth in Construction

employment is projected to lead all industries from 2010 to 2020.

Reason: Starts from low base and assumes a resumption of more

normal economic growth patterns

Sources: US Bureau of Labor Statistics: http://www.bls.gov/news.release/ecopro.t03.htm ; Insurance Information Institute.

Top 15 Industries with Largest Projected Growth in Wage and Salary Employment: 2010-2020P

Page 39: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

0

-8

40 8

6

518

259

109

-70

-212

-188

-201

-221

-230

-267

-282

-295

-349

-367

-446

-413

-427

-454

-475

-486

-488

-483

-487

-504

-533

-551

-533

-488

-478

-700

-500

-300

-100

100

300

500

700

Jan-1

0

Feb-1

0

Mar-

10

Apr-

10

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-

10

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct-

11

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Cumulative Change in Government Employment: Jan. 2010—Sept. 2012

January 2010 through Sept. 2012* (Millions)

Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

Cumulative job losses through Sept. 2012 totaled 478,000

39

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

Government at all levels has

shed nearly half a million jobs

since Jan. 2010 even as

private employers created

4.83 million jobs, though

losses may now be ending.

Temporary Census hiring distorted 2010

figures

Page 40: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

40

Unemployment Rates by State, August 2012: Highest 25 States*

12

.1

10

.7

10

.6

9.9

9.7

9.6

9.4

9.2

9.1

9.1

9.1

9.0

8.9

8.8

8.8

8.6

8.5

8.5

8.5

8.3

8.3

8.2

8.1

8.1

7.8

7.6

0

2

4

6

8

10

12

14

NV RI CA NJ NC SC MI GA IL MS NY CT OR DC FL WA AL KY TN AZ IN CO US US AK ME

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for August 2012, seasonally adjusted.

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

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.

Page 41: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

41

7.5

7.5

7.4

7.4

7.3

7.2

7.2

7.1

7.1

6.9

6.5

6.3

6.3

6.2

6.1

5.9

5.9

5.8

5.7

5.7

5.5

5.3

5.1

4.5

4.0

3.0

0

2

4

6

8

WV WI ID LA AR MO OH MD TX DE NM MA MT KS HI MN VA UT NH WY IA VT OK SD NE ND

Un

em

plo

ym

en

t R

ate

(%

)

Unemployment Rates by State, August 2012:

Lowest 25 States*

*Provisional figures for August 2012, seasonally adjusted.

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

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.

Page 42: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

42

P/C Insurance Industry Financial Overview

Profit Recovery Was Set Back in 2011 by High Catastrophe

Loss & Other Factors

42

Page 43: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

P/C Net Income After Taxes 1991–2012:Q2 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,1

50

$1

6,4

23$

28

,67

2

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12:H1

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:H1 ROAS1 = 5.9%

P-C Industry 2012:H1 profits were up 245% from 2011:H1, due primarily to lower catastrophe losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for 2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

Sources: A.M. Best, ISO, Insurance Information Institute

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A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:H1 combined ratio including M&FG insurers is 102.2, ROAS = 5.9%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%.

Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.9 101.1

106.4

95.7

6.2%

4.6%

7.6%7.4%

4.4%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012:H1

0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Year Ago

2011:H1 = 109.4, 2.3% ROE

Page 45: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

*1

2:

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:H1*

*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:H1 ROAS = 5.9% including M&FG.

Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%

2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

9 Years

2011:

4.6%*

History suggests next ROE

peak will be in 2016-2017

ROE

1975: 2.4%

2012:H1: 6.2%

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46

ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2012:H1*

* Excludes Mortgage & Financial Guarantee in 2008 – 2012. 2012 Fortune 500 figure is III estimate. Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112:H1

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

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47

Life/Health Insurance Industry Financial Overview

Steady but Unspectacular

47

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48

Billions

Life/Annuity Industry Profits, 2001-2011

$31.6

-$52.3

$21.5

$28.1

$14.4

$37.0$36.6$32.5

$25.9

$3.6

$11.0

($60)

($40)

($20)

$0

$20

$40

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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

The Life/Annuity industry has produced steady (if unspectacular) profits, except for years in which the industry’s investment results produced

significant realized capital losses.

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Realized Capital Losses Depress Net Income

$1

3.6

$1

9.2

$2

1.7

$1

8.0

$2

0.9

$2

2.2

$9

.8

$4

.1

$2

6.6

$3

2.2

$3

6.0

$3

6.2

$3

1.9

-$5

2.6

$2

1.1

$28

.1

$1

4.4

-$60

-$50

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

L/H Net Income L/H Realized Capital Gains (Losses)

Source: NAIC Annual Statement data, Summary of Operations and Exhibit of Capital Gains (Losses)

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50

Median ROEs for Insurers and Other Financial Services in the “Fortune 500,” 2010

Profits as a % of Owners’ Equity: Median of Fortune 500 Companies in Selected Industries

Source: Fortune, May 23, 2011; Insurance Information Institute.

12.0%

10.0%

9.0%

8.0%

8.0%

8.0%

5.0%

3.5%

12.0%

0% 2% 4% 6% 8% 10% 12% 14%

Health Insurance/Managed Care

Diversified Financials

P/C Insurance (stock)

L/A Insurance (stock)

Securities

Commercial Banks

L/A Insurance (mutual)

P/C Insurance (mutual)

Fortune 500

Industry

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51

Don’t Call It the “Life Insurance” Industry

Annuities Dominate

Industry Premiums and Profits

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Distribution of Premiums by Line of Business, 1996-2011

48

.8%

50

.0%

52

.3%

56

.7%

57

.7%

54

.5%

54

.8%

55

.0%

53

.5%

52

.3%

51

.8%

50

.8%

51

.7%

44

.2%

49

.1%

52

.7%

28

.6%

28

.6%

28

.3%

24

.9%

24

.7%

26

.9%

27

.2%

25

.7%

26

.6%

26

.5%

25

.2%

22

.6%

22

.8%

23

.6%

17

.5%

19

.8%

21

.3%

19

.8%

17

.4%

16

.6%

15

.7%

17

.7%

17

.9%

19

.2%

23

.0%

21

.0%

22

.9%

23

.5%

25

.0%

31

.8%

29.4

%

27

.2%

1.4% 1.9% 2.2% 1.8% 1.9% 0.8% 0.1% 0.1% 0.3% 3.1% 0.5% 0.4% 4.2% 0.3%

0%

25%

50%

75%

100%

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

Credit/Other

A&H

Life

Annuities

Source: NAIC, via SNL Financial; I.I.I.

In 2011 life insurance was 19.8% of total premiums, down from 28% a dozen years prior. Annuities have been the main premium source for decades.

Insurance

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U.S. Life/Annuity Insurance Industry Profit Sources, by Percent, 2011

19.9%

-2.3%

12.7%

5.9%

19.1%

22.3%

1.3%

21.2%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Sources: NAIC Annual Statements, p. 6, from SNL Financial; I.I.I. calculations

17.6% 18.6% 41.4%

2011 was a very unusual year. Normally, annuities provide the bulk of profits, with life and A&H each about one-quarter (see next slide).

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U.S. Life/Annuity Insurance Industry Profit Sources, by Percent, 2010

8.7%

35.6%

13.8%

4.6%

12.7% 11.6%

0.6%

12.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Sources: NAIC Annual Statements, p. 6, from SNL Financial; I.I.I. calculations

44.3%

18.4% 24.3%

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55

Life/Health:

Markets, Revenues, and Revenue Drivers

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56

Billions

Life/Annuity Industry Capital & Surplus + AVR, General Account, 1990-2010

$1

47

.2

$1

60

.1

$1

72

.7

$1

81

.2

$1

88

.5

$1

90

.7

$2

02

.3

$2

31

.3

$2

49

.6

$2

54

.6

$2

65

.9

$2

81

.8

$2

63

.3

$3

01

.2

$3

15

.0

$1

50

.9

$1

36

.7

$1

28

.0

$1

15

.2

$1

06

.0

$9

1.4

$50

$100

$150

$200

$250

$300

$350

19

90

91

92

93

94

19

95

96

97

98

99

20

00

01

02

03

04

20

05

06

07

08

09

10

C&S AVR*

*prior to 1992, this was the Mandatory Securities Valuation Reserve (MSVR) Sources: ACLI 2011 Life Insurance Fact Book; Insurance Information Institute.

Life/Annuity insurers are stronger than the C&S dollars indicate, because the Asset Valuation Reserve (AVR), booked as a liability, is essentially a surplus account to

“cushion” asset value drops. The Interest Maintenance Reserve (IMR), another liability account, buffers the insurer’s C&S against drops in investment income.

From 1990 to 2009, the industry’s capital ratio—(C&S+AVR)/General

Account Assets)—ranged from 8.5% (1990) to 11.9% in 1996. Ratio

in 2009 was 9.7%

$346.3

$292.4

$226.4

$180.6

$106.2

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$0

$100

$200

$300

$400

$500

$600

$700

81

82

83

84

1985

86

87

88

89

1990

91

92

93

94

1995

96

97

98

99

2000

01

02

03

04

2005

06

07

08

09

2010

11

Life/Annuity Industry Premiums, 1981-2011: Fairly Steady Growth, but Changing Composition

Sources: NAIC Annual Statement data, via SNL Financial; NBER (recession dates)

Premiums, Billions 2001

Recession

2008-09 Recession

1991 Recession

1981-82 Recession

Overall Life/Annuity premiums in 2011 ($623.9B) nearly equaled the 2008 prior peak ($625.2B). 2011 annuity premiums hit a new peak in 2011 ($327.0B) but life insurance

premiums of $122.8B are significantly off the 2008 peak of $142.8B.

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Life/Annuity/A&H Direct Premiums by Market, 2011

Individual Products 50%

Group Products, 38%

Some of Each, 18%

Source: NAIC Annual Statement data, from SNL Financial; I.I.I. calculations

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Individual Life Insurance & Annuity Premiums Generally Track DPl

$7

.65

$8

.01

$8

.38

$8

.89

$9

.28

$9

.92

$1

0.4

0

$1

0.9

5

$11

.03

$11

.13

$11

.55

$11

.89

$150

$170

$190

$210

$230

$250

$270

$290

$310

$3

$6

$9

$12

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

Disposable Personal Income

Individual Life Insurance & Annuity Premiums

*DPI is 2012:Q2 estimate, published Sept. 28, 2012

Sources: www.bea.gov and SNL Financial; I.I.I. calculations

DPI

($ Trillion)

Individual Life

Insurance & Annuity

Premiums ($ Billion)

Individual Life Insurance & Annuity premiums dropped

31% in 2009 vs. 2008, although DPI rose by 1%

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Group Insurance Premiums (line) Track Nonfarm Employment (bars)

131

.8

130.3

130.0

131.4

133.7

136.1

137.6

136.8

130.8

129.8

131.4

13

3.8

$190

$210

$230

$250

125

130

135

140

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

Group Premiums (billions)

Nonfa

rm E

mplo

ym

ent (m

illio

ns)

Nonfarm employment* Group Ins Premiums

*2012 is preliminary August 2012; Data are not seasonally adjusted

Sources: NAIC Annual Statements, via SNL Financial; http://www.bls.gov/ces/

Page 61: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

Deferred + Immediate Individual Annuity Sales, 1999-2010

$1

22

.0

$1

37

.0

$111.0

$11

7.0

$1

29

.4

$1

32

.9

$1

36

.9

$1

60

.4

$1

84

.0

$1

55

.7

$1

28

.0

$140.5

$4

2.0

$5

3.0

$74.0

$1

03

.0

$8

9.4

$8

7.9

$7

9.5

$7

8.3

$7

2.8

$1

09

.3

$11

0.6

$80

.8

$0

$25

$50

$75

$100

$125

$150

$175

$200

$225

$250

$275

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Variable Fixed

Source: LIMRA International; I.I.I.

Fixed annuity sales spike

when the stock market tumbles

$ Billions

Variable sales dropped after the stock market plunge in 2000 but recovered by 2004. 2007 was a record year. 2009 variable sales vs. 2007 dropped by 30.4%.

In inflation-adjusted terms, total sales

since 2003 are essentially flat.

Page 62: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

Individual Immediate Annuity Sales, 2003-2010

$0.5 $0.3 $0.3 $0.4 $0.3 $0.1 $0.1 $0.0

$4.8 $5.3 $5.3

$6.1 $6.5

$7.9 $7.5 $7.6

$0

$2

$4

$6

$8

2003 2004 2005 2006 2007 2008 2009 2010

Fixed

Variable

Sources: LIMRA International, U.S. Individual Annuity Yearbook--2010, p. 10 (Table 1); I.I.I.

Almost no one buys variable immediate annuities or

indexed immediate annuities $ Billions

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Ordinary Life Insurance Lapse Rates, 1996-2010

5.9% 6.0%

5.6%

6.1% 6.1%

6.5%

9.0%

6.1% 6.4%

6.0% 6.2%

5.9%

7.1%

6.1%

5.4%

6.4% 6.7%

6.1% 6.2% 6.5%

5.9%

6.6%

5.7% 5.4%

4.9% 4.9% 5.1%

6.2%

5.7% 5.4%

4%

5%

6%

7%

8%

9%

10%

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

by number of policies

by amount of insurance

Sources: NAIC Annual Statements, p. 25 line 15 (lapses) and average of lines 1 and 21, from SNL Financial; I.I.I. calculations

Was the 2002 spike in lapse rates

related to the 2001 recession?

2008-09 recession

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Yearly Percent Change in Applications for Individual U.S. Life Insurance Policies

-4.3

%

-2.5

%

-0.9

% -3

.9%

-2.7

%

-2.6

%

-4.3

%

-2.0

%

1.7

%

-4.9

%

-1.9

%

5.2

%

-3.8

%

1.8

%

13.0

%

-4.4

%

-0.1

%

9.9

%

-2.2

%

0.1

%

8.9

%

2.1%

-0.4%

2.8%

-10%

-5%

0%

5%

10%

15%

Under 45 45-59 60 and over

2005 2006 2007 2008 2009 2010 2011 2012*

*for 2012, Sept 2012 vs. Sept 2011 Source: MIB Life Index, monthly releases

Since 2007, the age-60-and-over is the only group consistently increasing life insurance applications. And even in 2005-06, the drop-off in applications was smaller for the 60+ group vs. younger ones.

Ages

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INVESTMENTS: THE NEW REALITY

65

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

65

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66

Insurers Have Not Yet Fully Adapted to a Persistently Low Interest Rate Environment

No Expectation that Rates Would Be:

Pushed to Such Low Levels

Pushed Down so Rapidly

Held to Such Low Levels for So Long

Suppressed via Unprecedented Aggressiveness of the Federal Reserve

– Use of traditional and unconventional tools (QE)

– Unconventional ’s policies couldn’t be anticipated, esp. QE1, 2, and 3 (QE 4 Ever???)

Competitive PressureProtracted Soft Market

Ability to Release Prior Reserves Eased Urgency

Realization of Capital Gains

Page 67: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

Property/Casualty Insurance Industry Investment Income: 2000–2012F1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.0

$47.4

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12F

Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates

1 Investment gains consist primarily of interest and stock dividends. *2012F is based on annualized H1:2012 actual figure of $23.718B. Sources: ISO; Conning Research & Consulting; Insurance Information Institute.

($ Billions)

Investment earnings in 2012 are running 13% below their

2007 pre-crisis peak

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68

P/C Insurer Net Realized Capital Gains/Losses, 1990-2012:H1

Sources: A.M. Best, ISO, Insurance Information Institute.

$2

.88

$4

.81

$9

.89

$9

.82

$1

0.8

1 $1

8.0

2

$1

3.0

2

$1

6.2

1

$6

.63

-$1

.21

$6

.61

$9

.13

$9

.70

$3

.52 $8

.92

-$7

.90

$5

.85

$7

.19

$1

.71

-$1

9.8

1

$9

.24

$6

.00

$1

.66

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112:H1

Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital

Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE

($ Billions) Realized capital gains

through 2012:H1 are down 53% from $3.61B in 2011:H1

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Property/Casualty Insurance Industry Investment Gain: 1994–2012F1

$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

$50.8

$58.0

$51.9

$56.9

$0

$10

$20

$30

$40

$50

$60

$70

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

Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower Realized Investment 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; 2012F figure is III estimate based on annualized actual H1:2012 result of $25.424B. Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2012 are running approximately 20% below their pre-crisis peak

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70

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

*Monthly, through Sept. 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 full 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 recently

plunged to all time record lows

70

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71

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Sept. 2012

0.08% 0.11% 0.14% 0.18% 0.26%

1.12%

1.72%

4.82%4.96% 5.04% 4.96%

4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

0.67%0.34%

2.88%

2.49%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

September 2012 Yield Curve

Pre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level

in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2015

at the earliest.

The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through Mid-2015; This Adds to Pricing Pressure for Insurers.

Source: Federal Reserve Board of Governors; Insurance Information Institute.

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72

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Per

sona

l Lin

es

Pvt P

ass

Aut

o

Per

s Pro

p

Com

mer

cial

Com

ml A

uto

Cre

dit

Com

m P

rop

Com

m C

as

Fidel

ity/S

uret

y

War

rant

y

Sur

plus

Lin

es

Med

Mal

WC

Rei

nsur

ance

**

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

*Based on 2008 Invested Assets and Earned Premiums

**US domestic reinsurance only

Source: A.M. Best; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

72

Page 73: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

73

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 73

Page 74: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

74

$1

2.3

$1

0.7

$3

.7

$1

4.0

$1

1.3

$6

.0

$3

3.9

$7

.4

$1

5.9

$3

2.9

$7

1.7

$1

0.3

$7

.3

$2

8.5

$1

1.2

$1

4.1

$3

2.3

$1

3.8

$1

3.7

$4

.7

$7

.8

$3

6.9

$8

.6

$2

5.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

US Insured Catastrophe Losses

*PCS figure for H1 2012 (stated in 2012 dollars).

Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)

Sources: Property Claims Service/ISO; Insurance Information Institute.

US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation-Adjusted Basis

H1 2012 CAT losses were down $11.9B or 49% from

$24.4B in H1 2011

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2011 Dollars)

74

Page 75: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

UNDERWRITING

75

Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?

75

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76

P/C Insurance Industry Combined Ratio, 2001–2012:H1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:H1=102.2.

Sources: A.M. Best, ISO.

95.7

99.3100.8

106.4

101.1101.0

92.6

100.8

98.4100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012:H1

Best Combined Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Lower CAT

Losses

Page 77: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

Underwriting Gain (Loss) 1975–2012:H1*

* Includes mortgage and financial guaranty insurers in all years.

Sources: A.M. Best, ISO; Insurance Information Institute.

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Cumulative underwriting deficit from 1975 through

2011 is $479B

($ Billions)

Underwriting losses in

2012 totaled $7.0B

High cat losses in 2011 led to the highest

underwriting loss since 2002

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Financial Strength & Underwriting

78

Cyclical Pattern is P-C Impairment History is Directly Tied to

Underwriting, Reserving & Pricing

78

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79

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

1

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated

Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

Page 80: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

80

Number of Recessions Endured by P/C Insurers, by Number of Years in Operation

32

27

20

13

8

0

5

10

15

20

25

30

35

1-50 51-75 76-100 101-125 126-150

Sources: Insurance Information Institute research from National Bureau of Economic Research data.

Number of Recessions Since 1860

Many US Insurers Are Close to a Century Old or Older

Number of Years in Operation

Insurers are true survivors—not just of natural catastrophes but also economic ones

80

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P/C SURPLUS/CAPITAL/CAPACITY

81

Have Large Global Losses Reduced Capacity in the Industry, Setting

the Stage for a Market Turn?

81

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82

Policyholder Surplus, 2006:Q4–2012:H1

Sources: ISO, A.M .Best.

($ Billions)

$487.1

$496.6

$512.8

$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7

$530.5

$544.8

$559.2 $559.1

$538.6

$550.3

$567.8$570.7$566.5

$505.0

$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:H1

2011:Q1 Previous Surplus Peak

Surplus as of 6/30/12 was down $2.9B or 0.5% from the all time record high of $570.7B set as of 3/31/11.

*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.

The Industry now has $1 of surplus for every $0.80 of NPW,

close to the strongest claims-paying status in its

history.

Drop due to near-record 2011 CAT losses

Page 83: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

Shifting Legal Liability & Tort Environment

83

Will the Tort Pendulum Swinging Against Insurers?

83

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84

Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E

$0

$50

$100

$150

$200

$250

$300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A

Tort costs in dollar terms have remained high but relatively stable since the mid-2000s., but are down

substantially as a share of GDP

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

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Regulatory Environment & Financial Services Reform

85

State Regulatory Environments Vary Tremendously and Can

Impact Insurer Profitability and Ability to Compete

Page 86: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WV

VA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

RI B

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

AR NM

KY MO KS

SD WI

IN

OH

MT

CA

NV

UT

WY

CO

AK

= A = B = C = D = F = NG

Source: Heartland Institute, June 2012

B- B+

B

C

A

C

B

B

B

C-

A B-

C

C

C-

C

C+ D

B

C-

D+

C

C C+

A

B+

B+

A+

A+

C

B

B+

A+

B-

C+

B-

B

B+

B

C-

D+

C D

C

B-

C-

D F

D

2011 Property and Casualty Insurance Regulatory Report Card

Not Graded: District of Columbia

Page 87: Insurance Industry Overview & Outlook · Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL

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Thank you for your time and your attention!

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87