Key Issue in the P-C Insurance Industry: Overview & OutlookFocus on PA, VA and WV Markets

PAMIC VAMIC WVAMIC ConventionThe Greenbrier

White Sulphur Springs, WV

August 10, 2010Robert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

Presentation Outline

Reasons for Optimism, Causes for Concern

Insurance Industry Financial Overview & Outlook Profitability Premium Growth Underwriting Performance: Commercial & Personal Lines Financial Market Impacts

Profitability in PA, VA and WV P/C Insurance Markets

Mutual Insurers: Secrets of the Ancients

Financial Services Reform: Impacts on the Insurance Industry

Capital & Capacity

Tort System Review: Overview and Causes for Concern

Performance by Segment/Line Focus Medical Professional Liability Insurance and Workers Comp

Financial Strength & Ratings

The Global Economic Storm: Financial Crisis & Recession Crisis-Driven Exposure Issues: Personal & Commercial Lines Exposure, Growth & Profitability

Catastrophe Losses

3

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

Economic Recovery in US is Self-Sustaining: No Double Dip Recession

European Debt Crisis Will Pass; Concerns are Overblown Volatility will remain a reality, however

Era of Mass P/C Insurance Exposure Destruction Has Ended But restoration of destroyed exposure will take 3+ years in US

No Secondary Spike in Unemployment or Swoon in Payrolls/WC Exposure But job and wage growth remains sluggish

Exposure Growth Will Begin in Earnest in 2nd Half 2010, Accelerate in 2011

Increase in Demand for Commercial Insurance is in its Earliest Stages and Will Accelerate in 2011 Includes workers comp, commercial auto, marine, many liability coverages, D&O

Laggards: Property, inland marine, aviation

Personal Lines: Auto leads, homeowners lags

P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006

Investment Environment Is/Remains Much More Favorable Volatility, however, will persist and yields remain low

Both are critical issues in long-tailed commercial lines like WC, Med Mal, D&O

Source: Insurance Information Institute.

4

P/C Insurance Industry Capacity as of 3/31/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis As of 12/31/09 capacity was within 2% of pre-crisis high

Record Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist through 2010 and Potentially into 2011

There is No Catalyst for a Robust Hard Market at the Current Time

High Global First Half 2010 CAT Losses Insufficient to Trigger Hard Market Localized insurance and reinsurance impacts are occurring, especially earthquake coverage in

Latin/South America, Offshore Energy Markets, European Wind Cover

Inflation Outlook for US and Major European Economies and Japan is Tame Will temper claims inflation

Financial Strength & Ratings of Global (Re)Insurance Industries Remained Strong Throughout the Financial Crisis in Sharp Contrast With Banks

Insurers Avoided the Most Draconian Outcomes in Financial Services Reform Legislation

Tort Environment in US is Beginning to Deteriorate; No Tort Reform in US

Major Transformation of US Economy Underway with Major Opportunities for Insurers through 2020 in Health, Tech, Natural Resources, Energy

Source: Insurance Information Institute.

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

5

Profitability

Historically Volatile

P/C Net Income After Taxes1991–2010:Q1 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$8

,85

6

$2

8,3

11

-$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:Q1

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:Q1 ROAS = 6.7%

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 8.3% ROAS for 2010:Q1, 7.3% for 2009 and 4.4% for 2008. 2009 net income was $34.5 billion and $20.8 billion in 2008 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

P-C Industry 2010:Q1 profits rose vs. -$1.3B in 2009:Q1, due mainly to $1B in realized capital

gains vs. -$8B in previous realized capital losses

7

ROE: P/C vs. All Industries1987–2009*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009.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

US P/C Insurers All US Industries

P/C Profitability IsCyclical and Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

8

ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2010*

* Return on average surplus in 2008/09 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

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

ROE Cost of Capital

-13

.2 p

ts +1

.7 p

ts

+2

.3 p

ts

-9.0

pts

-6.4

pts

-3.2

pts

The P/C Insurance Industry WellShort of Its Cost of Capital in 2008 but

Narrowed the Gap in 2009 and Early 2010

US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from

1991 to 2002, but on Target or Better 2003-07, Fell Short in 2008/09

The Cost of Capital is the Rate of Return Insurers Need to

Attract and Retain Capital to the Business

(Percent)

-2.1

pts

A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s At Now

Combined Ratio / ROE

* 2009 and 2010:Q1 figures are return on average statutory surplus. 2008, 2009 and 2010:Q1figures exclude mortgage and financial guarantee insurersSource: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.5 99.0101.0

8.3%7.3%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010:Q1*0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

A combined ratio of about 100 generated a 7% ROE in 2009,10% in 2005 and 16% in 1979

11

Profitability in PA, VA, WV P/C Insurance Markets

Analysis by Line and Nearby State Comparisons

12

RNW All Lines: PA, VA, WV vs. U.S., 1999-2008

Sources: NAIC.

-5%

0%

5%

10%

15%

20%

25%

99 00 01 02 03 04 05 06 07 08

US All Lines PA All Lines VA All Lines WV All Lines

P/C insurer profitability in PA and WV is below that of the

US overall while VA is above

US: 7.0%

PA: 6.3%

VA: 10.6%

WV: 6.7%

(Percent)

13

RNW PP Auto: PA, VA, WV vs. U.S., 1999-2008

Sources: NAIC.

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05 06 07 08

US PP Auto PA PP Auto VA PP Auto WV PP Auto

Pvt. Passenger Auto profitability in PA has been somewhat below the US in recent years, VA is above

Average 1999-2008

US: 7.5%

PA: 6.5%

VA: 10.3%

WV: 5.7%

Avg. Expenditure on Private Passenger Auto Insurance, Mid-Atlantic States, 2007*

$1,140

$922

$820 $819$795

$661

$591

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

DC MD PA WV US VA NC

*Latest available.Source: NAIC; Insurance Information Institute.

Average auto insurance expenditures in PA and WV ranked 17th and 18th highest;

VA ranked 35th

15

RNW Comm. Auto: PA, VA, WV vs. U.S.,1999-2008

Sources: NAIC.

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05 06 07 08

US Comm Auto PA Comm Auto VA Comm Auto WV Comm Auto

(Percent)Commercial Auto

profitability in PA and WV is generally below the US

average, VA is above

Average 1999-2008

US: 7.9%

PA: 7.0%

VA: 10.9%

WV: 6.4%

16

RNW Comm. Multi-Peril: PA, VA, WV vs. U.S., 1999-2008

Sources: NAIC.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

99 00 01 02 03 04 05 06 07 08

US Comm M-P PA Comm M-P VA Comm M-P WV Comm M-P

(Percent)

Average 1999-2008

US: 7.4%

PA: 10.1%

VA: 14.3%

WV: 4.2%

Commercial Multi-Peril profitability in PA and VA are generally above the

US average, WV is above

17

RNW Homeowners: PA, VA, WV vs. U.S., 1999-2008

Sources: NAIC.

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

99 00 01 02 03 04 05 06 07 08

US HO PA HO VA HO WV HO

(Percent)Homeowners profitability is

above average and less volatile in PA; Below average in WV and

below average and volatile in VA due to coastal risk

Average 1999-2008

US: 4.8%

PA: 14.0%

VA: 3.7%

WV: 5.9%

Avg. Expenditure on Homeowners Insurance, Mid-Atlantic States, 2007*

$822

$692 $692 $683$674

$646

$500

$550

$600

$650

$700

$750

$800

$850

US MD PA VA NC WV

*Latest available.Source: NAIC; Insurance Information Institute.

Average homeowners insurance expenditures in PA and VA ranked 31st in the US; WV ranked 38th

19

RNW Workers Comp: PA, VA vs. U.S., 1999-2008

Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

99 00 01 02 03 04 05 06 07 08

US WComp PA WComp VA WComp

(Percent) Workers comp profitability in PA and

VA are not too different from the US overall

Average 1999-2008

US: 6.4%

PA: 6.0%

VA: 7.3%

WV: 3.2%

All Lines: 10-Year Average RNW PA, VA, WV & Nearby States

6.7%

8.9%

10.6%

10.9%

6.3%

7.0%

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

North Carolina

Virginia

Maryland

U.S.

West Virginia

Pennsylvania

Source: NAIC, Insurance Information Institute

1999-2008

Pennsylvania All Lines profitability is below the US

and regional average

PP Auto: 10-Year Average RNW PA, VA, WV & Nearby States

5.7%

8.3%

10.3%

6.5%

6.5%

7.5%

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

North Carolina

Virginia

Maryland

U.S.

West Virginia

Pennsylvania

Source: NAIC, Insurance Information Institute

1999-2008

Pennsylvania PP Auto profitability is below the US and regional

average

28

Lessons from History: What Types of Business Live a Very

Long Time and Why?

Longevity in the Business World Requires Focus, Long-Term ObjectivesYou Want the Same from Your Insurer

Number of Firms More than 500 Years Old, by Industry*

35

28

19

75 4

2 2 2 2 10

5

10

15

20

25

30

35

40

Total Number

Source: http://en.wikipedia.org/wiki/List_of_oldest_companies

The brewery industry

appears to have the greatest

longevity with 35 firms 500+

years old.

BENEATH THE SURFACE Most of these companies are:

1.Family Owned2.Highly focused on one specific business3.Have some geographic focus (product or client)

Benefits & Characteristics of Working with Firms that Stand the Test of Time

1. Business Model: Highly Focused Firms tend to remain true to core business Avoid businesses they don’t understand Some diversification is usually good, but leads to an exponential increase in

complexity and unforeseen interactions across units

2. Ownership Structure: There Exists Some Concept of Mutuality Some of the world’s oldest firms are family owned (artisans, craftsman) Many of the world’s oldest institutions are religious Others have some form of cooperative arrangement (agricultural) Such organizations also exhibit altruistic behavior, a proven survival trait In a mutual arrangement implies less cyclicality, volatility

3. Communal Interest: A Concern for the Greater Common Good Perpetuation of the species (i.e., the industry) is evident in behaviors Concept of mutuality extends beyond organization to communal interest A strong willingness to work for the common good

Benefits & Characteristics of Working with Firms that Stand the Test of Time (cont’d)

4. Growth: Tend to Grow Slowly

As with living species, the longest lived businesses in the world tend to grow only slowly, if at all

5. Size: Tend to Be Small Relative to Competition Size seems to matter when it comes to species longevity: smaller = longer

Also true among living species (e.g., bacteria, insects)

6. Profitability: Tend Not to Be the Most Profitable Object of continuous profit maximization is not consistent with longevity

Objective of a mutual is to expand the benefit of mutuality

A “will to survive” is still necessary

32

100-year-old Insurers: Mutual vs. Stock vs. Reciprocal

62.4%

35.9%

1.4%0.3%

Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

The vast majority (62.4%) of 100-year-old insurers are mutual insurers, while stock insurers account for 35.9% of the total.

Mutual, 62.4%,(179)

Stock, 35.9%,(103)

Reciprocal, 1.4%,(4)

Other, 0.3%,(1)

33

Attributes Found in Insurance Organizations that Reach 100+

Years

Secrets of the Ancients

Attributes Inherent in Long-Lived Insurance Companies1. Management Acts as a Steward of the Enterprise

Objective is to pass a healthy firm safely and securely to the next generation of management and policyholders

2. Management Financial Incentives In line with the goal of providing the protection purchased

There is typically no 3rd party (shareholders) to compensate (60%+ mutuals)

Objective of public company is to maximize profits

CEO (total) comp is a smaller multiple relative to average employee

3. Nimble: Environment for Small Insurers Can & Does Change Not always first to change, but adaptation occurs within reasonable

timeframe

4. Customer Focus & Relationship Driven Customer is the #1 priority

Traits to Admire in an Insurer and Its Management?1. A Firm Whose Management’s Incentives are Strictly

Aligned With the Insurer’s Principal Stakeholders Customers, employees, community

These include financial and operational objectives

2. Management Is Knowledgeable Management of small, long-lived insurer is no less

knowledgeable about industry trends, opportunities and threats than larger competitors

3. Intuitive and Comprehensive Understanding of Enterprise Risk Management Much is made of ERM today, but long-lived insurers practiced it

well before it had a name

What Do I Admire in an Insurer and Its Management?4. CEO is Willing to Seek Advice and Counsel

No imperial CEOs; Self-aggrandizement is rare

CEO is a listener and consensus builder

5. Commitment to Core Constituencies Customer is the #1 priority

6. Lack of a “Wandering Eye” Disciplined enough to stick with the business you know, but also

adapting to changing business conditions and seizing opportunities as necessary

Financial Services Reform

37

Insurers Are Impacted, But Not Significantly

38

Financial Services Reform:What does it mean for insurers?

Systemic Risk and Resolution Authority

Creates the Financial Stability Oversight Council and the Office of Financial Research

Imposes heightened federal regulation on large bank holding companies and

“systemically risky” nonbank financial companies, including insurers

Federal Insurance Office (FIO)

Establishes the FIO (while maintaining state regulation of insurance) within the

Department of Treasury, headed by a Director appointed by the Secretary of Treasury

FIO will have authority to monitor the insurance industry, identify regulatory gaps that

could contribute to systemic crisis

Surplus Lines/Reinsurance

Title V of the Dodd-Frank bill includes, as a separate subtitle, the Nonadmitted and

Reinsurance Reform Act (NRRA), which eliminates regulatory inefficiencies

associated with surplus lines insurance and reinsurance

The Dodd Frank Wall Street Reform and Consumer Protection Act

Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

39

Systemic Risk: Oversight & Resolution Authority

Financial Stability Oversight Council created to oversee systemic risk

of large financial holding companies) [a.k.a. TOO BIG TOO FAIL]

P/C insurers potentially could be determined to present systemic risk to the

financial system and thus be supervised by the Federal Reserve.

Such supervision would subject such insurers to prudential standards, if the

Council determines that financial distress at the company would pose a threat to

the U.S. financial system.

Orderly Liquidation

The legislation provides an “Orderly Liquidation Authority” mechanism whereby

the FDIC would have enhance powers to resolve distress at financial institutions.

Insurance holding companies and any non-insurance subsidiaries of insurers

may be subject to this authority.

Issues Related to Systemic Risk & Resolution Authority

Source: Insurance Information Institute (I.I.I.) updates/research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

40

Systemic Risk: Oversight & Resolution Authority

Orderly Liquidation (cont.)

Insurers are generally exempt from the liquidation authority, but the FDIC would

have “backup authority” to place an insurer into orderly liquidation under state

law if the state regulator has not done so within 60 days of a systemic risk

determination.

Liquidation Fund Assessments

The liquidation fund would be funded by assessments on large financial

companies, potentially including insurers.

But the insurance industry already has a funding system (state guaranty funds) to

pay for the unwinding of failed companies. Therefore, contributions to these state

guaranty funds must be considered.

Issues Related to Systemic Risk & Resolution Authority

Source: Insurance Information Institute (I.I.I.) updates/research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

New Rulemakings Under The Dodd Frank Wall Street Reform and Consumer Protection Act

24

6156

31

54

2

17

4

95

9

0

10

20

30

40

50

60

70

80

90

100

Bureau ofConsumerFinancialProtection

CFTC FinancialStability

OversightCouncil

FDIC FederalReserve

FTC OCC Office ofFinancialResearch

SEC Treasury

A total of at least 243 new rulemakings are expected under the Dodd-Frank financial reform by Federal Agency*

* Total eliminates double counting for joint rule-makings and this estimate only includes explicit rule-makings in the bill, and thus likely represents a significant underestimate.Source: Wall Street Journal, July 14, 2010; Davis Polk & Wardwell. 46

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

NJRI C

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

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

Source: Heartland Institute, May 2010

A- A-

A-

B-

B-

B-

B-

B-

B-B-

B-B-

B-

B-

B-

B-

B- C-

C-

C-

C -

C-

D-D-

A

A

A

A

B+

B+

B+

B

B

B

B

B

B

C+

C+

C

D+

D+D+

D

NG

NG

D F

F

2010 Property and Casualty InsuranceReport Card

Not Graded: District of ColumbiaMississippiLouisiana

Shifting Legal Liability & Tort Environment

54

Is the Tort PendulumSwinging Against Insurers?

55

Important Issues & Threats Facing Insurers: 2010–2015

Source: Insurance Information Institute

Bottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012–2014

No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration

Erosion of recent reforms is a certainty (already happening)

Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability

Torts twice the overall rate of inflation

Influence personal and commercial lines, esp. auto liability

Historically extremely costly to p/c insurance industry

Leads to reserve deficiency, rate pressure

Emerging Tort Threat

Reverse U.S. Supreme Court decisions on pleadings

Eliminate pre-dispute arbitration

Erode federal preemption

Expand securities litigation

Pass Foreign Manufactures Legal Accountability Act

Grant enforcement authorities to state AGs

Confirm pro-trial lawyer judges – “Federalize Madison County”

Roll back existing legal reforms

Source: Institute for Legal Reform.

Trial Bar Priorities

59

Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical

$0

$50

$100

$150

$200

$250

$300

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

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)

* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

2009–2010 Growth in Tort Costs as % of GDP is Due in

Part to Shrinking GDP

Business Leaders Ranking of Liability Systems in 2009*

Best States

1. Delaware

2. North Dakota

3. Nebraska

4. Indiana

5. Iowa

6. Virginia

7. Utah

8. Colorado

9. Massachusetts

10. South Dakota

Worst States

41. New Mexico

42. Florida

43. Montana

44. Arkansas

45. Illinois

46. California

47. Alabama

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2009 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2009

North Dakota Massachusetts South Dakota

Drop-offs

Maine Vermont Kansas

Newly Notorious

New Mexico Montana Arkansas

Rising Above

Texas South Carolina Hawaii

Midwest/West has mix of good and bad states.

61

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

New MexicoAppellate

Courts

Watch List

California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley,

TX

Dishonorable Mention

AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme

Judicial Court Sacramento County

New JerseyAtlantic County (Atlantic City)

New York City

Average Jury Awards 1999 - 2008

$725$747 $756

$800 $799

$1,018 $1,022

$950

$1,077$1,046

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Jury Verdict Research; Insurance Information Institute.

Financial Strength & Ratings

75

Industry Has Weathered the Storms Well

P/C Insurer Impairments, 1969–20098

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15

7 65

0

10

20

30

40

50

60

70

69

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

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

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

5 of the 11 are Florida companies (1 of these

5 is a title insurer)

79

Reasons for US P/C Insurer Impairments, 1969–2008

38.1%

14.3%8.1%

7.6%

7.9%

7.0%

9.1%

4.2%

3.7%

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/In-adequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business

P/C Premium Growth Primarily Driven by the

Industry’s Underwriting Cycle, Not the Economy

80

81

-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 0910

F

Soft Market Appears to Persistin 2010. Relief in 2011?

(Percent)1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: 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.

NWP down 1.3% in 10:Q1 vs. 09:Q1

82

Average Expenditures on Auto Insurance

$651$668

$691$705

$726

$786

$830$842

$831$816

$795$816

$844

$878

$690$685$703

$600

$650

$700

$750

$800

$850

$900

$950

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

Countrywide Auto Insurance Expenditures Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)

* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

84

Average Premium forHome Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

$508$536

$593

$668

$822 $835$854

$879

$804

$764

$729

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

00 01 02 03 04 05 06 07 08* 09* 10*

85

Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2010)

-3.2

%

-5.9

%

-7.0

%

-9.4

%

-9.7

% -8.2

%

-4.6

%

-2.7

%

-3.0

%

-5.3

%

-9.6

%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9% -1

1.0

%

-6.4

% -5.1

%

-4.9

%

-5.8

%

-5.6

%

-5.3

%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

Magnitude of Price Declines Shrank

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

Performance, Higher Cat Losses and

Costlier Reinsurance

(Percent)

Market Remains Soft as Capital Restored and Underwriting Losses Fall

87

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q1

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Percentage Change (%)

Market has Been Soft for 6 years

and Remains Soft as Capital is Restored and Underwriting Losses Fall

Peak = 2004:Q4 +28.5%

KRW Effect

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since

Capital/PolicyholderSurplus (US)

89

Shrinkage, but Not Enoughto Trigger Hard Market

91

Policyholder Surplus, 2006:Q4–2010:Q1E

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

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

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:Q410:Q1E

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%)09:Q1: -$84.7B (-16.2%)

09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-2.0%)10:Q1: +$18.9B (+3.6%)

Surplus set a new record in 2010: Q1*

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business

94

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute

3.3%

9.6%

6.9%

10.9%

6.2%

13.8%

16.2%

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Overthe Past 20+ Years

(Percent)

Merger & Acquisition

96

Barriers to Consolidation Will Diminish in 2010

97

U.S. P/C Insurance-RelatedM&A Activity, 1988–2009

$2$5

$19

$1 $0

$20

$0

$9

$35

$14$16

$4

$56

$31

$8$12

$2$3 $3 $5$6

$40

$0

$10

$20

$30

$40

$50

$60

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

Tra

ns

ac

tio

n V

alu

e (

$ B

illio

n)

0

20

40

60

80

100

120

140

Nu

mb

er o

f Tra

ns

ac

tion

s

Transaction Values

Number of Transactions

Note: U.S. Company was the acquirer and/or target.

Source: Conning Research & Consulting.

2010: No Mega Deals So Far, Despite Record Capital, Slow Growth and Improved

Financial Market Conditions

$ Value of Deals Down 78% in 2009, Volume Up 7%

Investment Performance

98

Investments Are a PrincipleSource of Declining Profitability

Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q11

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.0

$12.6

$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:Q1

In 2008, Investment Gains Fell by 50% Due to Lower Yields andNearly $20B of Realized Capital Losses

2009 Saw Smaller Realized Capital Losses But Declining Investment Income

1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

($ Billions) 2009:Q1 gain was

$3.7B

101

Treasury Yield Curves: Pre-Crisis (July 2007) vs. July 2010

0.16% 0.16% 0.20% 0.29%0.62%

2.43%

3.01%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

1.76%

0.98%

3.99%3.80%

0%

1%

2%

3%

4%

5%

6%

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

July 2010 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve is near its most depressed level in at least 45 years. Investment

income is falling as a result

Stock Dividend Cuts Have Further Pressured Investment Income

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

102

-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%

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

War

rant

y

Surplu

s Line

s

Med

Mal

WC

Reinsu

ranc

e**

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

*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.

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

104

Underwriting Trends – Financial Crisis Does Not

Directly Impact Underwriting Performance: Cycle, Catastrophes

Were 2008’s Drivers

105

P/C Insurance Industry Combined Ratio, 2001–2010:Q1*

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q1=101.1 Sources: A.M. Best, ISO.

95.7

99.3 99.0101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010:Q1

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

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Lower CAT

Losses, More

Reserve Releases

107

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

11

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2011E

Reserve Releases Will Expected to Taper Off in 2010 and Drop Significantly in 2011

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.

108

Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.

10

5.6

10

7.8

11

0.1 1

15

.9

10

7.3

10

0.1

98

.3 10

0.9

92

.4 95

.5

10

5.1

10

1.9 10

5.9

11

4.7

10

7.8 11

1.8

10

7.4

10

8.3

10

5.3 10

9.2

10

9.2

11

0.0

11

2.3

10

0.8

96

.6

96

.0

10

0.6

93

.9 97

.4

10

5.5

10

5.7 10

9.4

11

5.7

10

6.9

10

8.4

10

6.4

10

5.8

10

1.6

80

85

90

95

100

105

110

115

120

92 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E

Calendar Year Accident Year

Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases

109

Number of Years with Underwriting Profits by Decade, 1920s–2000s

0 0

3

54

8

10

76

0

2

4

6

8

10

12

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*

* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Number of Years with Underwriting Profits

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –

But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

110

Performance by Segment:Commercial/Personal Lines &

Reinsurance

115

Net Written Premium Growth by Segment: 2008-2010P

Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.

-1.1%

-7.9%

-1.5%

1.8%

-5.6%

-2.0%

3.5%

-4.0%

-0.7%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Personal Lines Commercial Lines Reinsurance

2008 2009E 2010P

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Low catastrophe losses and ample

capacity are holding down reinsurance prices while higher insurer retentions impact premiums

Personal lines will return to growth in 2010 while commercial lines and reinsurance are

expected to continue to shrink

Homeowners Insurance Combined Ratio: 1990–2010P

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.3

94

.2 10

0.1

89

.4 95

.7

11

7.0

10

5.5

10

5.0

11

8.4

11

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

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

Homeowners Line Is Expected to Be Marginally Profitable Overall in 2010, but in Many States Could Be Quite Profitable. Volatility Due to

Catastrophe Losses Will Persist

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

Private Passenger Auto Combined Ratio: 1993–2010P

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.3

99

.3

98

.5

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

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

Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry

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

Commercial Auto Combined Ratio: 1993–2010P

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4 94

.2 96

.8

97

.0

98

.5

11

8.1

11

5.7

11

6.2

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P

Commercial Auto is Expected to Remain Reasonably Profitable in 2010

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

Workers Compensation Combined Ratio: 1994–2010P

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4

10

3.5

10

4.3 1

09

.0

11

2.0

121.7

10

7.0

11

5.3

11

8.2

80

85

90

95

100

105

110

115

120

125

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

Workers Comp Underwriting Results Are Deteriorating Markedly

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

126

Wage & Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)

Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

* Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessions. **Estimated “official” end of recession June 2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books

Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums; Nearly 29% of NPW Has Been Eroded Away by the Soft Market and Weak Economy

7/90-3/91 3/01-11/01

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$0

$10

$20

$30

$40

$50

$60

Wage & SalaryDisbursements

WC NPW

WC net premiums written were down $13.7B or 28.7%

to $34.1B in 2009 after peaking at $47.8B in 2005

12/07-6/09**

Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)

*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).

-4.4%

-2.0%-1.1%

1.1%

3.7%4.6%

8.5%

3.5%

2.1%

-0.5%

-3.6%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1948-1949

1953-1954

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2007-2009

Recessions in the 1970s and 1980s saw smaller exposure impacts

because of continued wage inflation, a factor not present

during the 2007-2009 recession

The Dec. 2007 to mid-2009 recession

caused the largest impact on WC

exposure in 60 years

(Percent Change)

(All Post WWII Recessions)

Recession Dates (Beginning/Ending Years)

Where Will the Growth in WC Exposure Come From?

141

Industry and Occupation Growth Analysis

142

Fastest Growing Occupations, 2008–2018:Health/Science/Tech Dominate

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

OccupationsPercent change

Number of

new jobs(in thousands)

Wages (May 2008 median) Education/training category

Biomedical engineers 72 11.6 $ 77,400 Bachelor's degree

Network systems and data communications analysts

53 155.8 71,100 Bachelor's degree

Home health aides 50 460.9 20,460 Short-term on-the-job training

Personal and home care aides 46 375.8 19,180 Short-term on-the-job training

Financial examiners 41 11.1 70,930 Bachelor's degree

Medical scientists, except epidemiologists

40 44.2 72,590 Doctoral degree

Physician assistants 39 29.2 81,230 Master's degree

Skin care specialists 38 14.7 28,730 Postsecondary vocational award

Biochemists and biophysicists 37 8.7 82,840 Doctoral degree

Athletic trainers 37 6.0 39,640 Bachelor's degree

Physical therapist aides 36 16.7 23,760 Short-term on-the-job training

Dental hygienists 36 62.9 66,570 Associate degree

Veterinary technologists and technicians

36 28.5 28,900 Associate degree

Dental assistants 36 105.6 32,380 Moderate-term on-the-job training

Computer software engineers, applications

34 175.1 85,430 Bachelor's degree

Medical assistants 34 163.9 28,300 Moderate-term on-the-job training

Physical therapist assistants 33 21.2 46,140 Associate degree

Veterinarians 33 19.7 79,050 First professional degree

Self-enrichment education teachers

32 81.3 35,720 Work experience in a related occupation

Compliance officers, except agriculture, construction, health and safety, and transportation

31 80.8 48,890 Long-term on-the-job training

SOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook

WC exposure growth the fastest in the health, science and tech areas

143

Occupations with Largest Numerical Growth, 2008–2018: Health, Services Dominate

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

Dollar growth in WC exposures should grow the most (at current rate levels) in the health and services industries

Occupations

Number of

new jobs(in thousands) Percent change

Wages (May 2008 median) Education/training category

Registered nurses 581.5 22 $ 62,450 Associate degree

Home health aides 460.9 50 20,460 Short-term on-the-job training

Customer service representatives 399.5 18 29,860 Moderate-term on-the-job training

Combined food preparation and serving workers, including fast food

394.3 15 16,430 Short-term on-the-job training

Personal and home care aides 375.8 46 19,180 Short-term on-the-job training

Retail salespersons 374.7 8 20,510 Short-term on-the-job training

Office clerks, general 358.7 12 25,320 Short-term on-the-job training

Accountants and auditors 279.4 22 59,430 Bachelor's degree

Nursing aides, orderlies, and attendants

276.0 19 23,850 Postsecondary vocational award

Postsecondary teachers 256.9 15 58,830 Doctoral degree

Construction laborers 255.9 20 28,520 Moderate-term on-the-job training

Elementary school teachers, except special education

244.2 16 49,330 Bachelor's degree

Truck drivers, heavy and tractor-trailer

232.9 13 37,270 Short-term on-the-job training

Landscaping and groundskeeping workers

217.1 18 23,150 Short-term on-the-job training

Bookkeeping, accounting, and auditing clerks

212.4 10 32,510 Moderate-term on-the-job training

Executive secretaries and administrative assistants

204.4 13 40,030 Work experience in a related occupation

Management analysts 178.3 24 73,570 Bachelor's or higher degree, plus work experience

Computer software engineers, applications

175.1 34 85,430 Bachelor's degree

Receptionists and information clerks

172.9 15 24,550 Short-term on-the-job training

Carpenters 165.4 13 38,940 Long-term on-the-job trainingSOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook

147

The Economic Storm

What the Financial Crisis and Recession Mean for the Industry’s

Exposure Base, Growth and Profitability

148

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/10; Insurance Information Institute.

2.7

%

0.9

%

3.2

%

2.3

%

2.9

%

-0.7

%

0.6

%

-4.0

%

-6.8

% -4.9

%

-0.7

%

1.6

%

5.0

%

3.7

%

2.4

%

2.7

%

2.8

%

2.8

%

3.0

%

3.1

%

3.2

%

4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

   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

Demand for Energy and Commercial Insurance Have Been Impacted by Sluggish Economic Conditions

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%

Economic growth up sharply in late 2009 with rebuilding

of inventories and stimulus. More moderate growth

expected in 2010/11

152

Real GDP Growth vs. Real P/CPremium Growth: Modest Association

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 7/10; Insurance Information Institute

4.3

%1

8.6

%2

0.3

%5

.8%

0.3

%-1

.6%

-1.0

%-1

.8%

-1.0

%3

.1%

1.1

%0

.8%

0.4

%0

.6%

-0.4

%-0

.3%

1.6

% 5.6

%1

3.7

%7

.7%

1.2

%-2

.9%

-0.5

%-3

.8%

-4.4

%-3

.3%

-3.0

%

5.2

%-0

.9%

-7.4

%-6

.5% -1

.5%

1.8

%

-10%

-5%

0%

5%

10%

15%

20%

25%

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

E

Re

al N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Re

al G

DP

Gro

wth

Real NWP Growth Real GDP

P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy

Real GDP Growth vs. Real P/C (%)

153

Regional Differences Will Significantly Impact P/C Markets

Recovery in Some Areas Will Begin Years Ahead of Others

and Speed of Recovery Will Differ by Orders of Magnitude

154

State Economic Growth Varied Tremendously in 2008

US Bureau of Economic Analysis

Highest Quintile

Fourth Quintile

Third Quintile

Second Quintile

Lowest Quintile

Far West0.6

Rocky Mountain2.2

Southwest1.7

Plains2.0 Great Lakes

-0.4

New England1.0

Mideast1.3

Southeast0.0

US = 0.7

WA2.0

OR1.6

CA0.4

NV-0.6

ID0.0

MT1.8

WY4.4

UT1.4 CO

2.9

AZ-0.6 NM

2.0

TX2.0

OK2.7

KS2.2

NE1.3

SD3.5

ND7.3 MN

2.0

IA2.1

MO1.3

WI0.7

IL0.3

MI-1.5

IN-0.6

OH-0.7

NY1.6

PA1.1

NJ0.6

MD1.3

DE-1.6

DC3.0VA

1.3

WV2.5

KY-0.1

NC0.1

SC0.6

TN0.5

AR0.7

LA0.3

MS1.7

AL0.7

GA-0.6

FL-1.6

AK-2.0

HI0.7

ME1.4

NH1.8

VT1.7 MA

1.9

RI-0.9CT

-0.4

Mountain, Plains States Growing the Fastest

Percent Change in Real GDP by State, 2007–2008

155

Fastest Growing States in 2008:Plains, Mountain States Lead

2.1% 2.0%

7.3%

4.4%

3.5%2.9% 2.7% 2.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

ND WY SD CO OK WV IA TX, MN,NM, WA

Source: US Bureau of Economic Analysis; Insurance Information Institute.

Real State GDP Growth (%)

Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas

156

Slowest Growing States in 2008: Diversity of States Suffering

Source: US Bureau of Economic Analysis; Insurance Information Institute.

States in the North, South, East and West All Represented Among Hardest Hit, But for Differing Reasons

Real State GDP Growth (%)

-0.9%

-1.5%-1.6% -1.6%

-1.7%

-2.0%

-0.1%

-0.4%-0.6% -0.6% -0.6% -0.6%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%KY CT AZ GA IN NV RI MI DE FL OH AK

157

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

158

Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilizing in 2010?

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

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Jul10

Unemployment rate was 9.5% in

July

Unemployment peaked at 10.1%

in Oct. 2009, highest monthly rate since 1983.

Peak rate in the last 30 years: 10.8% in Nov -

Dec 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in Oct 2009; Stood at 16.5% in July

2010

January 2000 through July 2010, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

159

US Unemployment Rate

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.6

%

9.6

%

9.4

%

9.2

%

9.0

%

8.8

%9.5

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

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

Rising unemployment eroded payrolls

and workers comp’s exposure base.

Unemployment likely peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/10); Insurance Information Institute

2007:Q1 to 2011:Q4F*

Unemployment forecasts remain stubbornly high

through 2011

161

Unemployment Rates by State, June 2010:Highest 25 States*

10.0

10.0

10.1

10.0

10.0

10.1

9.2

9.0

9.1

8.89.

6

8.8

8.99.

610.711

.4

10.3

10.4

10.5

10.511

.0

13.2

12.3

12.0

14.2

0

2

4

6

8

10

12

14

16

NV MI CA RI FL MS SC OR OH IL AL TN IN NC KY GA DC NJ AZ PA MO MA WA ID CT

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for June 2010, seasonally adjusted.

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

In June the majority of states (39 and DC) recorded a decrease in unemployment rates, while just 5 out of 50 states had

increases.

162

6.8

6.5

6.3

6.0

6.8

6.87.

17.

2

4.54.

85.

9

7.0

7.0

3.6

6.8

8.08.2

7.37.57.

97.

98.08.

5

8.2

8.28.

5

0

2

4

6

8

10

WV DE TX NY NM ME CO WI AK AR MT UT MD VA LA WY OK MN IA KS HI VT NH NE SD ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, June 2010: Lowest 25 States*

*Provisional figures for June 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In June the majority of states (39 and DC) recorded a decrease in unemployment rates, while just 5 out of 50 states had

increases.

163

Monthly Change Employment*-7

2

-14

4-1

22

-16

0-1

37

-16

1

-12

8-1

75

-32

1

-38

0-5

97

-68

1-7

79

-72

6

-75

3-5

28 -3

87

-51

5 -34

6 -21

2-2

25

-22

46

4

-10

9

14 39

20

8 31

3 43

2

-22

1-1

31

-1,000

-800

-600

-400

-200

0

200

400

600

Jan

08

Fe

b 0

8

Ma

r 0

8

Ap

r 0

8M

ay

08

Jun

08

Jul 0

8

Au

g 0

8

Se

p 0

8O

ct 0

8

No

v 0

8

De

c 0

8Ja

n 0

9

Fe

b 0

9M

ar

09

Ap

r 0

9

Ma

y 0

9Ju

n 0

9

Jul 0

9A

ug

09

Se

p 0

9

Oct

09

No

v 0

9

De

c 0

9

Jan

10

Fe

b 1

0

Ma

r 1

0A

pr

10

Ma

y 1

0

Jun

10

Jul 1

0

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Job Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; Stands at 7.7 Million Through June 2010;

14.6 Million People are Now Defined as Unemployed

January 2008 through July 2010* (Thousands)

May’s gain of 432,000 jobs was distorted by the hiring of 411,000 temporary Census workers. Census job losses totaled 225,000 in June and

143,000 in July, distorting figures in both months. Private sector employment was up 31,000 in May,

51,000 in June and 71,000 in July.

Insurance Industry Employment Trends: 1990-2010

Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

173

Insurance Industry Employment Trends

Soft Market, Difficult Economy, Outsourcing, Productivity

Enhancements and Consolidation Have Contributed

to Industry’s Job Losses

174

U.S. Employment in the DirectP/C Insurance Industry: 1990–2010*

*As of June 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Thousands

460

480

500

520

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

As of June 2010, P/C insurance industry employment was down by 27,000 or 5.5% to 464,100 since the

recession began in Dec. 2007 (compared to overall US employment decline of 7.2%)

175

U.S. Employment in the DirectLife Insurance Industry: 1990–2010*

*As of June 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Thousands

300

325

350

375

400

425

450

475

500

525

550

575

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

As of June 2010, Life insurance industry employment was down by 9,300 or 2.6% to 345,000 since the recession began in

Dec. 2007 (compared to overall US employment decline of 7.2%)

176

U.S. Employment in the Direct Health-Medical Insurance Industry: 1990–2010*

*As of June 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Thousands

175

200

225

250

275

300

325

350

375

400

425

450

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

As of June 2010, Health-Medical insurance industry employment was

down by 7,300 or 1.7% to 434,600 since the recession began in Dec.

2007 (compared to overall US employment decline of 7.2%)

177

U.S. Employment in the Reinsurance Industry: 1990–2010*

Thousands

24

28

32

36

40

44

48

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of June 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of June 2010, US employment in the reinsurance industry was down by 1,400 or 5.2% to 25,500

since the recession began in Dec. 2007 (compared to overall US employment decline of 7.2%)

178

U.S. Employment in Insurance Agencies & Brokerages: 1990–2010*

Thousands

500

550

600

650

700

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of June 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of June 2010, employment at insurance agencies and

brokerages was down by 48,800 or 7.2% to 630,800 since the

recession began in Dec. 2007 (compared to overall US

employment decline of 7.2%)

179

U.S. Employment in Insurance Claims Adjusting: 1990–2010*

Thousands

40

45

50

55

60

Jan-

90

Sep

-90

May

-91

Jan-

92

Sep

-92

May

-93

Jan-

94

Sep

-94

May

-95

Jan-

96

Sep

-96

May

-97

Jan-

98

Sep

-98

May

-99

Jan-

00

Sep

-00

May

-01

Jan-

02

Sep

-02

May

-03

Jan-

04

Sep

-04

May

-05

Jan-

06

Sep

-06

May

-07

Jan-

08

Sep

-08

May

-09

Jan-

10

*As of June 2010; Not seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of June 2010, claims adjusting employment was down by 8,500 or 16.3%

to 43,500 since the recession began in Dec. 2007 (compared to overall US

employment decline of 7.2%)

Katrina, Rita, Wilma

Crisis-Driven Exposure Drivers

181

Economic Obstaclesto Growth in P/C Insurance

182

16.9

16.5

16.1

13.1

10.3

11.7

13.1

16.9

16.617

.117.5

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 10F 11F

(Millions of Units)

Auto/Light Truck Sales, 1999-2011F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (7/10); Insurance Information Institute.

Car/Light Truck Sales Will Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales;

Gas Prices Could Once Again Become a Factor, Too

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for

2010-11 is still far below 1999-2007 average of 17

million units

Sharply lower auto sales will have a smaller effect on auto insurance

exposure level than problems in the housing market will on home insurers

“Cash for Clunkers” generated about $300M in net new personal auto premiums

183

(Millions of Units)

New Private Housing Starts, 1990-2011F

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

0

0.5

6 0.6

6

0.8

8

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 10F11F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (7/10); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners InsurersDue to Weak Home Construction Forecast for 2010-2011.

Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged 34% from 2005-2007; drop

through 2009 was 72% (est.); A net annual decline of 1.49 million units,

lowest since records began

in 1959

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is

estimated at about $1.3 billion

Average Square Footage of Completed New Homes in U.S., 1973-2010:Q1

1,66

01,

695

1,64

51,

700

1,72

01,

755

1,76

01,

740

1,72

01,

710

1,72

51,

780

1,78

51,

825 1,90

5 1,99

52,

035

2,08

02,

075

2,09

52,

095

2,10

02,

095

2,12

02,

150

2,19

02,

223

2,26

62,

324

2,32

02,

330

2,34

9 2,43

42,

469

2,52

12,

519

2,43

82,

389

1,500

1,700

1,900

2,100

2,300

2,500

2,700

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

Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.

Square Ft

The trend to building larger homes reversed in 2009, affecting exposure growth beyond

the decline in number of units built

Average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions

185

188

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3714

,607

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 0910

:Q1

Business Bankruptcy Filings,1980-2010:Q1

Source: American Bankruptcy Institute; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines

There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:Q1 bankruptcies totaled 14,607, up 18% from Q1:2009

% Change Surrounding Recessions

1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*

189

Private Sector Business Starts,1993:Q2 – 2009:Q3*

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

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

199

191 19

317

117

716

9

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

Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure

*Latest available as of June 7, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

(Thousands)

169,000 businesses started in 2009:Q3, actually declining during

form the prior quarter. The figure is the lowest level since 1993.

193

Total Industrial Production

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/10); Insurance Information Institute

-9.0%

-13.0%

-17.6%

-10.3%

8.3%7.0% 6.9% 6.3%

4.9% 4.6% 4.4% 4.3% 4.2% 4.2%

1.5%3.2% 3.6%

0.3% 0.2%

-4.6%

-20%

-15%

-10%

-5%

0%

5%

10%

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

End of Recession in mid-2009, Stimulus Program Benefited Industrial Production and Insurance Exposure Both Directly and Indirectly, Albeit it

Very Modestly; Stimulus Effect is Waning in 2010 and Will Be Gone in 2011.

2007:Q1 to 2011:Q4F (%)

Industrial Production is Aided by a Rebuild of Inventories, Gradual Economic Recovery

and Stimulus Program (Q2:09 through 2010)

Industrial Production Began to Contract Sharply in Late 2008 and Plunged

in 2009:Q1

66%

68%

70%

72%

74%

76%

78%

80%

82%

Ma

r 0

1

Ju

n 0

1

Se

p 0

1

De

c 0

1

Ma

r 0

2

Ju

n 0

2

Se

p 0

2

De

c 0

2

Ma

r 0

3

Ju

n 0

3

Se

p 0

3

De

c 0

3

Ma

r 0

4

Ju

n 0

4

Se

p 0

4

De

c 0

4

Ma

r 0

5

Ju

n 0

5

Se

p 0

5

De

c 0

5

Ma

r 0

6

Ju

n 0

6

Se

p 0

6

De

c 0

6

Ma

r 0

7

Ju

n 0

7

Se

p 0

7

De

c 0

7

Ma

r 0

8

Ju

n 0

8

Se

p 0

8

De

c 0

8

Ma

r 0

9

Ju

n 0

9

Se

p 0

9

De

c 0

9

Ma

r 1

0

Recovery in Capacity Utilization is a Positive Sign for Energy & Insurance

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 194

Percent of Manufacturing Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the demand for insurance

Manufacturing capacity stood at

74.7% in May 2010, above the June 2009 low of 68.3% but well below the pre-crisis

peak of 80%+

Recession began December 2007

197

Year-Over-Year Change in Quarterly USState Tax Revenues, Inflation Adjusted

Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/.

2.4

%4

.7%

5.6

% 9.9

%9

.5%

4.4

%1

.8%

0.4

%-1

.3%

-1.7

%-3

.0%

-7.6

%-1

0.7

%0

.0%

1.6

%-0

.6%

0.1

% 4.0

%4

.7%

5.7

% 8.2

%3

.4% 6.0

%7

.0%

12

.4%

6.6

%4

.2%

3.7

% 6.3

%2

.6%

1.3

%3

.2% 5.5

%3

.1%

3.6

%2

.6% 5.4

%2

.8%

-3.9

%

-10

.9%

-4.1

%

-16

.4%-11

.6%

2.4

%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1Q

99

2Q

99

3Q

99

4Q

99

1Q

00

2Q

00

3Q

00

4Q

00

1Q

01

2Q

01

3Q

01

4Q

01

1Q

02

2Q

02

3Q

02

4Q

02

1Q

03

2Q

03

3Q

03

4Q

03

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

States Revenues Were Down 4.4% in Q4 2009, the 5th Consecutive Quarter of Revenue Decline. This Will Impact Public Infrastructure

Spending Significantly and Related Insurance Exposures and Demand.

Nationwide, state-tax collections for fiscal year 2009 declined by a record

$63 billion, or 8.2 percent from the previous year. That loss is roughly twice the amount states gained in fiscal relief

from the federal stimulus package

200

Mounting Pressure on Claim Cost Severities?

Inflation Trends:Concerns Over Stimulus Spending

and Monetary Policy

201

Annual Inflation Rates(CPI-U, %), 1990–2011F

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.7 1.5

2.92.4

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 10F11F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, July 10, 2010 (forecasts).

There is So Much Slack in the US Economy Inflation Should Not Be a Concern Through 2010/11, but Deficits and Monetary Policy 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 have reduced inflationary pressures

P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests

Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.

-0.4%

2.7% 3.0% 3.1%3.8%

4.3%

5.5%6.2%

-2%

0%

2%

4%

6%

8%

OverallCPI

LegalServices

US TortCosts

MedicalCare

MotorVehicleBodyWork

BodilyInjury

Severity

WC MedSeverity

No-FaultClaim

Severity

(Percent)

Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely

202

213

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

214

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $

27

.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$6

.1

$1

00

.0

$7

.5

$2

.7

$4

.7

$2

2.9

$5

.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*20??

US Insured Catastrophe Losses

*Through June 30, 2010.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.

2010 CAT Losses Are Running Below 2009, So Far Figures Do Not Include an Estimate of Deepwater Horizon Loss

$100 Billion CAT Year is Coming Eventually

First Half 2010 CAT

Losses Were Down 19% or $1.4B from

first half 2009

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Climatological events(extreme temperature, drought, wildfire)

Selection of significant natural catastrophes (see table)

© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 16 June 2010

Global natural catastrophes

1

2

3

4

5

7

6

8 911 10

12

Severe winter weather in the Eastern US produced insured

losses of produced at least $1B in insured losses and $2B

in economic losses

The 12 Jan. Haiti quake killed 225,500 people, caused $8B+ in economic damage, but little in the way of

insured losses

Chilean earthquake (mag. 8.8) on 27 Feb. produced at least $4 billion in insured losses, $20

billion in economic losses. Most costly insurance event in 2010

Winter Storm Xynthia produced

at least $2B in insured losses

and $4B in economic losses

Global Natural Catastrophes: January – June 2010

Largest International Oil Well Blowouts by Volume, as of July 12, 2010*

Date Well Location Bbl Spilled

April 20 2010-July 12, 2010

Deepwater Horizon Gulf of Mexico, USA est. 4,900,000

June 1979-April 1980

Ixtoc I Bahia del Campeche, Mexico 3,300,000

October 1986 Abkatun 91 Bahia del Campeche, Mexico 247,000

April 1977 Ekofisk Bravo North Sea, Norway 202,381

January 1980 Funiwa 5 Forcados, Nigeria 200,000

October 1980 Hasbah 6 Gulf, Saudi Arabia 105,000

December 1971 Iran Marine International Gulf, Iran 100,000

January 1969 Alpha Well 21 Platform A Pacific, CA, USA 100,000

March 1970 Main Pass Block 41 Platform C

Gulf of Mexico 65,000

October 1987 Yum II/Zapoteca Bahia del Campeche, Mexico 58,643

December 1970 South Timbalier B-26 Gulf of Mexico, USA 53,095

*Date well was capped. Federal government estimate as of August 2, 2010. Does not include offset for any amounts recovered.

Source: American Petroleum Institute (API), 09/18/2009; http://www.api.org/ehs/water/spills/upload/356-Final.pdf and updates from the Insurance Information Institute.

*Forecast as of June 2, 2010.Source: Colorado State University, Department of Atmospheric Sciences; Insurance Information Institute.

Probabilty of Landfall of at Least One Major Hurricane (CAT 3-4-5) in 2010*

The Probability of a Major Hurricane Making Landfall Somewhere Along the US Coast is Greatly Elevated in 2010, Including a 50%

Chance Along the Oil Spill-Impacted Gulf Coast

Region Average Over Last Century

2010 Forecast*

Entire U.S. Coastline 52% 76%

U.S. East Coast Incl. FL Peninsula

31% 51%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 50%

Caribbean 42% 65%

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

First Half 201095 Events

Number of events in first half of 2010 is close to the annual totals from five of past ten years.

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)

Source: MR NatCatSERVICE 219© 2010 Munich Re

Thunderstorm losses have quadrupled since 1980.

First Half 2010 $3.0 Bn

U.S. Thunderstorm Loss TrendsAnnual Totals 1980 – 2009 vs. First Half 2010

Source: Property Claims Service, MR NatCatSERVICE 220© 2010 Munich Re

Source: Property Claims Service, MR NatCatSERVICE 221© 2010 Munich Re

Average annual winter storm losses have increased over 50% since 1980.

First Half 2010 $2.4 Bn

U.S. Winter Storm Loss TrendsAnnual totals 1980 – 2009 vs. First Half 2010

Severe winter storms in early 2010 caused major

damage to energy infrastructure

224

Top 12 Most Costly Disastersin US History

(Insured Losses, 2009, $ Billions)

Sources: PCS; Insurance Information Institute inflation adjustments.

$11.3 $12.5

$18.2$22.8 $23.8

$45.3

$8.5$8.1$7.3$6.2$5.2$4.2

$0$5

$10$15$20$25$30$35$40$45$50

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;

8 of the Top 12 Disasters Affected FL

Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US

and World History

Share of Losses Paid by Reinsurers for Major Catastrophic Events

30%25%

60%

20%

45%

33%

0%

10%

20%

30%

40%

50%

60%

70%

HurricaneHugo (1989)

HurricaneAndrew (1992)

Sept. 11Terrorist

Attack (2001)

2004Hurricane

Season

2005Hurricane

Season

2008 TexasHurricane

Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.

Reinsurance plays a very large role in claims payouts

associated with major catastrophes

226

Total Value of Insured Coastal Exposure

(2007, $ Billions)

Source: AIR Worldwide

$224.4$191.9

$158.8$146.9$132.8

$92.5$85.6$60.6$55.7$51.8$54.1

$14.9

$479.9$635.5

$772.8$895.1

$2,378.9$2,458.6

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

$159B Insured Coastal

Exposure in Virginia in 2007

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B

in insured coastal exposure

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

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