The State of the P/C Insurance Industry:

Emerging from the COVID Era

Robert P. Hartwig, PhD, CPCUClinical Associate Professor of Finance, Risk Management & Insurance

Darla Moore School of Business ¨ University of South CarolinaRobert.Hartwig@moore.sc.edu ¨ 803.777.6782

Verisk Elevate ConferenceFebruary 9, 2021

Pandemics & P/C Insurance: Outline n P/C Financial Overview & Outlook Amid the COVID-19 Pandemic

n COVID-19: Actual vs. Expected Impacts on Key Lines

n Investment Market Issues: Volatility Rules, Low Interest Rates are Back

n The Economy and COVID-19: Overview & Outlook

n CAT Loss Update

n Commercial Lines Rate Trends & Reinsurance Market Developments

n COVID-19 Litigation Trends

n Summary and Conclusions

n Q&A

3

P/C Insurance Industry: Financial Overview Amid the

COVID-19 PandemicThe P/C Insurance Industry Entered the COVID-19 Pandemic from a Position of

Financial Strength

Economic, Financial Market, Regulatory and Tort Risks Are Major

Challenges Going Forward3

4

Policyholder Surplus (Capacity), 2006:Q4–2020:Q3

Sources: ISO, A.M .Best; Risk and Uncertainty Management Center, University of South Carolina.

($ 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

$583.5

$586.9

$607.7

$614.0

$624.4 $653.4

$671.6

$673.9

$675.2

$674.2

$673.7

$676.3

$700.9

$717.0 $750.7 $781.5

$742.1 $779.5

$802.2

$812.2 $847.8

$771.9 $819.7 $865.1

$662.0

$570.7

$566.5

$505.0

$515.6

$517.9

$400$450$500$550$600$650$700$750$800$850$900

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:Q2

12:Q3

12:Q4

13:Q1

13:Q2

13:Q3

13:Q4

14:Q1

14:Q2

14:Q3

14:Q4

15:Q2

15:Q4

16:Q1

16:Q4

17:Q2

17:Q4

18:Q3

18:Q4

19:Q1

19:Q2

19:Q3

19:Q4

20:Q1

20:Q2

20:Q2

Financial Crisis

(-16.2%)

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business.

Drop due to near-record 2011 CAT losses

(-4.9%)

Policyholder Surplus is the industry’s financial cushion against large insured events, periods of economic stress and

financial market volatility. It is also a source of capital to underwrite new risks.

The P/C insurance industry entered the COVID-19 pandemic from a position strength and was able to withstand the 9.0% surplus decline in

Q1 2020 (far less than during the Financial Crisis). 2020 ended with record surplus.

P/C Industry Net Income After Taxes, 1991–2020E*n 2005 ROE= 9.6%n 2006 ROE = 12.7%n 2007 ROE = 10.9%n 2008 ROE = 0.1%n 2009 ROE = 5.0%n 2010 ROE = 6.6%n 2011 ROAS1 = 3.5%n 2012 ROAS1 = 5.9%n 2013 ROAS1 = 10.2%n 2014 ROAS1 = 8.4%n 2015 ROAS = 8.4%n 2016 ROAS = 6.2%n 2017 ROAS =5.0%n 2018 ROAS = 8.0%n 2019: ROAS = 7.7%n 2020: ROAS = 4.1%**

*2020 estimate based on annualized actual Q3:20 figure of $35.5B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014).**Through Q3 2020. Sources: A.M. Best, ISO.

$14,178

$5,840$19,316

$10,870 $20,598

$24,404 $36,819

$30,773

$21,865

$3,046

$30,029

$62,496

$3,043

$35,204

$19,456 $3

3,522

$63,784

$55,870

$56,826

$42,924

$36,813

$59,994

$47,333

$38,501

$20,559

$44,155

$65,777

-$6,970

$28,672

-$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 13 14 15 16 17 18 20E

COVID’s impact on net income is more modest than assumed

early in the pandemic. 21% drop based on annualized Q3 data

$ Millions

ROE: Property/Casualty Insurance by Major Event, 1987–2020:Q3*

6

*Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2020:H1 estimate is based on actual Q1 2020 figure of 8.8%. Sources: ISO, Fortune; USC RUM Center.

-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 11 12 13 14 15 16 17 18 19 20*

P/C Profitability Is Influenced Both by

Cyclicality and Volatility

Hugo

Andrew, Iniki

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis* ROE fell by 8.3 pts from 12.7% to 4.4%

(Percent)

Record Tornado Losses

Sandy

Low CATs

Harvey, Irma, Maria,

CA Wildfires

2019 7.7%

2020:Q3 4.1%

Covid-19

Percentage Point Change in P/C ROEs During Past Economic Downturns: 1971 - Present

7Source: USC Center for Risk and Uncertainty Management.

Percentage Point Change

0.8%

-8.3%-7.1% -7.0%

-3.6%-3.0%

-2.4%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

2007-08 2000-01* 1973-75 2019-20** 1981-82 1979-80 1990-91*2000-2001 decline impacted by 9/11 losses.**As of Q3 2020 vs. annualized Q3 2019 figure

Change in P/C ROE During Past Economic Downturns (pre-Covid)

Avg.: -4.5% (-4.0% ex. 2000-01)Median: -5.0% (-3.0% ex. 2000-01)

COVID-19’s economic and financial market impact

helped drive down industry ROEs but well within the

range of expectation based on history

-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 12 13 14 15 16 17 18 19 20

P/C Insurance ROE vs. Fortune 500, 1975–2020E*

*2020 Fortune 500 figure is an estimate. P/C figure is actual through Q3 2020.Profitability = P/C insurer ROEs. 2011-20 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, Fortune.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

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

ROE

1975: 2.4%

2013 9.8%

2017 5.0%

2020E 4.1%

Average: 1975-2019 Fortune 500: 13.3%P/C Insurance: 9.0%

2020E* 13.0%

Profitability & Politics

9

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

15.10%8.93%

8.65%8.35%8.33%

8.20%7.98%

7.68%6.98%6.97%

6.25%5.43%

5.03%4.83%

4.68%4.43%

3.55%

16.43%

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

CarterReagan II

NixonClinton I

G.H.W. BushG.W. Bush II

Obama IIClinton IIReagan I

Nixon/FordTruman

TrumpEisenhower IEisenhower II

G.W. Bush IObama I

JohnsonKennedy/Johnson

OVERALL RECORD: 1950-2020*

Democrats 8.1%Republicans 7.8%

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

P/C Insurance Industry ROE by Presidential Administration, 1950-2020*

*Trump figure is 2017-2020:Q3 average. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments.Source: Risk and Uncertainty Management Center, University of South Carolina.

11

Growth and Underwriting Performance

COVID-19 Has Had a Mixed Impact on the P/C Insurance Industry

11

Net Premium Growth (All P/C Lines): Annual Change, 1971—2020:Q3

-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 13 14 15 16 17 18 19 20

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

*Pre-COVID-19 forecast from A.M. Best Review & Preview (Feb. 2020). NOTE: Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina .

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.

2020F: 3.8%*2020:Q3: 3.1%

2019: 3.6%2018: 10.8%2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2

2013: 4.4%2012: +4.2%

2020 OutlookPre-COVID: 3.8%Through Q3: 3.1%

2020 Pre- vs. Post-COVID Growth Expectations for P/C Insurance: From Modest to Miserly

Source: 2020 Pre-COVID-19 figures from Best’s Review & Preview (Feb. 2020); Post-COVID estimates from USC Center for Risk and Uncertainty Management.

Percentage Change in Net Premiums Written

3.1% 3.0%3.3%

3.8% 3.7%4.0%

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

All Lines Personal Commercial

2020: Pre-COVID 2020: Post-COVID

Note: 2020 expectations are based on a modestly optimistic scenario for recovery in Q3 and Q4 and that premium volume in

Q1 was largely unaffected

P/C Insurance Industry Combined Ratio, 2001–2020:Q3*

*Excludes Mortgage & Financial Guaranty insurers 2008--2014.*First 9 months 2020.Sources: A.M. Best, ISO (2014-2019).

95.7

99.3101.1

106.5

102.5

96.4 97.097.8

100.798.798.9

103.7

99.2101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20**

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

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

Cyclical Deterioration

Sharply higher CATs are driving

large underwriting losses and

pricing pressure

Pre-COVID 2020 Combined Ratio Est.

99.1 (A.M. Best)

COVID-19 has had no

discernable net impact on

pre-COVID expectations

for the combined

ratio though Q3 2020;

8.3 pts. due to CATs, about twice avg.

How Have Actual Results Differed from Reality?

A Review of Early Predictions of COVID’s Impact on Insurers

15

US P/C Results Have Generally Been Better than Anticipated

Potential Impacts of COVID-19 on Written Premium in 2020, by Key LineLine Estimated Premium ImpactWorkers Compensation 12.5% to 25% reduction in premium written in 2020

(equates to $5.9B to $11.75B DWP)Business Interruption & Contingency

7% to 13% reduction in premium volume (US & UK)

General Liability* $1.5B to $6.3B premium reduction in US

Personal Auto ~$10B in refunds, rebates (equates to ~4% of DWP)

Personal Travel Insurance 29% to 78% reduction in premium written (US & UK)

Personal/Comm. Motor ~10% reduction in US; 0% to 11% reduction in UK

Marine/Aviation/Transport $0.7B-$1.5B (US); $0.6 - $1.2B (UK)

16

*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.

Potential Impacts of COVID-19 on LOSSES in 2020, by Key LineLine Estimated Loss ImpactWorkers Compensation $0.2B - $92B (depends on severity of pandemic

and “presumption” determination)Business Interruption & Contingency

$2B - $22B (US); $1.1B - $13.9B (UK)

General Liability* $0.7B to $27B loss across US & Bermuda markets

Personal/Comm. Motor $26B - $57B reduction in personal auto and $4.2B - $9.4B commercial (US); $1 - $7B overall reduction in UK

Mortgage $0 - $1.7B loss across US & Bermuda markets

D&O $0.6 - $4.0 loss across US & Bermuda markets

Marine/Aviation/Transport $0.3B-$1.3B reduction (US); $0.6 - $1.1B (UK)

17

*Includes nursing home professional liability.Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina.

COVID-19 Announced Losses vs. Top-Down Industry Estimates (as of May 12, 2020)

*Lloyd’s CEO John Neil appearance on CNBC, May 14, 2020: https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.htmlSources: Company disclosures, Dowling & Partners, Barclays Research, Autonomous Research, BofA Global Research, UBS Securities, Willis Towers Watson from Artemis.bm accessed at https://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/; Risk and Uncertainty Management Center, University of South Carolina.

Global P/C COVID-19 loss consensus $30B - $100B

(~$60B as midpoint)

UBS

30-60bn

Q1 reported COVID claims totaled $4.2B according to Willis, but Q2 will be a truer

reflection of actual loss

Lloyd’s: Says its own p/c claims could reach $4.3B by June 30. Estimates global p/c losses at $107B; Global investment losses = $96B*

Reasons Why P/C Insurance Worst-Case COVID Scenarios Failed to Materialize (So Far)n Economic Recovery Proceeding More Quickly than Anticipated

n Rapid Financial Market Recovery (and then some…)

n Massive Government Stimulus and Accommodative Fed Policy

n Worst-Case Epidemiological Outcome Avoided

n Record Pace of Vaccine Development

n Employers Did a Reasonably Good Job Protecting Workers from Exposure

n Many States Did Not Repeat Spring Lockdowns

n Litigation Outcomes Generally Favor Insurers

n WC Presumption Expansions Did Not Lead to Explosion in Claims

n Offsetting Exposure Reductions in Many Lines

BUT…There Is No Questions that the Economic Consequences of

COVID Are Massive and Ongoing

20

The Economic Costs of COVID Vastly Outstrip the Insured

Loss Component

Viral Outbreaks Are Not An Insurable Risk

21*Sources: APCIA using published reports, including IMF, World Bank, Learnbonds.com; APCIA adjustment to 2020 USD

For Reference

2005 Katrina$58 Billion

2001 9/11$48 Billion

(insured losses)

Pandemics are frequent, severe, and widespread

(7 pandemics with multi-

billion$ economic

losses in just the last 18

years)

Economic Losses from Pandemics

Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—Potential Range (<100 Employees; $Bill)

Source: APCIA, April 2020.

$52

$223 $255

$431

$0

$100

$200

$300

$400

$500

Small Business w/ BI - Low Small Business w/ BI - High All Small Businesses - Low All Small Businesses - High

The potential for such losses for all businesses of all sizes is currently

estimated at $1 - $1.1 trillion per month.

* Businesses impacted: Proportion of businesses completely or substantially closed related to coronavirusAssumptions: Losses if standard insurance policy exclusions for viruses/pandemics are voided and physical loss/damage requirement is stricken; three main coverages - profit lost, payroll/benefits, additional expenses; average annual $2m revenue and 7% profit margin; non-wage benefits of small businesses are 25% less than that for average US businesses

60% Businesses impacted*10% of Payroll for additional expenses

33.3% Have BI coverage50% Have BI payroll/benefits coverage

90% Businesses impacted*30% of Payroll for additional expenses

60% Have BI coverage80% Have BI payroll/benefits coverage

60% Businesses Impacted*10% of Payroll for additional

expenses

90% Businesses impacted*30% of Payroll for additional

expenses

Monthly BI losses for small business vary widely depending on underlying

assumptions but expansive legislation would result in higher estimates; For

all businesses <500 employees, BI losses range between $393B - $668B

Paper on Insurability of Pandemic Risk

n Large scale business continuity risks from pandemics are generally note insurable in the private sector

n Business continuity risks are largely undiversifiable within private insurance markets and are highly correlated with other risks (e.g., investment risks)

n Large scale business continuity losses pose a potentially systemic risk to the industry and overall economy

n Import role for government Download at: https://www.uscriskcenter.com/wp-content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf

Government Mandated Business Closures Were the Real Black Swan, Not the Coronavirus

Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina

• The US (and world) has endured several other major infectious disease outbreaks killing 100,000+ Americans without shutting down the economy• Hong Kong Flu (1968-70)• Asian Flu (1957-58)

• It is the reaction to the virus that is unprecedented and represents the true Black Swan event

• The ramifications of this decision will be consequential for a generation (e.g., $3 trill. in debt)

25

COVID-19: Impacts on Premiums and Claims

Economically Sensitive Commercial Lines Were Most Impacted in Terms of GrowthAuto Claims Plunged During the Early Stage of COVID—Will Claims Spike as

the Economy Recovers?

26

COVID’s Impact on DPW Growth for Largest P/C Lines: First 9-Mos. 2020 and 2019 vs. Same Period Previous Year

7.9% 8.9%

14.5%

-2.9%

7.7%

2.3%

8.1%

-8.5%

-2.2% -1.6%

0.2% 1.0%

5.5%4.3%

11.4%

5.3%

12.5% 12.3%

-10%

-5%

0%

5%

10%

15%

20%

WorkersComp*

Inland Marine Pvt. Pass.Auto Liab

Auto Phys.Damage

CommercialAuto Liab.

Homeowners Other Liab. Allied Fire

2020 vs. 2019 2019 vs. 2018

Percent Change: First 9-Most 2020 vs. First 9-Mos. 2019

Source: A.M. Best, First Look: 9-Month 2020 P/C Financial Results; Risk and Uncertainty Management Center, Univ. of South Carolina.

Workers Comp, Inland Marine and PP Auto Liability have experience the largest

decline in DPW

Down $3.5B

27

Personal Auto Claim Frequency Trends Significantly Impacted by COVID: Q2 and Q3 2020 vs. Q2 and Q3 2019

-22.8%

-32.6% -31.3%

-37.5%-33.6%

-21.1%

-13.6%

-24.6%-23.3%

-10.1%

-40%-35%-30%-25%-20%-15%-10%

-5%0%

Collision Prop. DamageLiability

PIP Bodily InjuryLiability

Comprehensive

Q2 Q3Year-over-Year Change

Auto Claims Fell Sharply at the Height of the Pandemic, at least through Q3 2020

Collision and PD Liability claims plunged by more

than 1/3

Source: ISO/PCI Fast Track data for Q3 2020; Risk and Uncertainty Management Center, Univ. of South Carolina.

28

Personal Auto Claim Frequency Trends Significantly Impacted by COVID, Q2 vs. Q2 2020 (latest available)

-37.5%-33.6%

-21.1%

-13.6%

-6.9%

-40%-35%-30%-25%-20%-15%-10%

-5%0%

Collision Prop. DamageLiability

PIP Bodily Injury Liability Comprehensive

Change in Q2 2020 from Q1 2020

Auto Claims Fell Sharply at the Height of the Pandemic. Anecdotal Evidence Suggests Claiming

Behavior Has Come Close to Normalizing

Collision and PD Liability claims plunged by more

than 1/3

Source: ISO/PCI Fast Track data for Q2 2020; Risk and Uncertainty Management Center, Univ. of South Carolina.

29

6.145.66 5.80 5.81 5.68

3.54

4.48

3.41 3.24 3.28 3.23 3.25

2.15 2.21

0

1

2

3

4

5

6

7

19:Q1 19:Q2 19:Q3 19:Q4 20:Q1 20:Q2 20:Q3

Collision PD Liability

(Number of Claims per 100 Earned Car Years)

Personal Auto BI Collision and Property Damage Liability Claim Frequency: 2019:Q1 – 2020:Q3

Down 37.5% from

2019:Q2

Claim frequencies fell s in sharply during the pandemic, but are beginning to rebound

Source: ISO/PCI Fast Track data for Q2 2020; Risk and Uncertainty Management Center, Univ. of South Carolina.

Down 33.6% from

2019:Q2

30

-0.1%

-1.2%

0.5%0.6%

0.6% 1.9%

-0.3%

-0.1%

1.6%

-1.8%

-3.4%

-9.3%

-9.5%

-2.6%

-1.6%

4.0%

-2.6% -0.5%

8.4%

6.5%

-1.8%

-1.7%

-2.0%

-3.3%

-6.9%

-5.44%

2.3%

1.4% 2.7%

0.6%

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

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20*

Annual Change (%)

Source: Insurance Institute for Highway Safety and Highway Loss Data Institute: https://www.iihs.org/iihs/topics/t/general-statistics/fatalityfacts/overview-of-fatality-facts; NHTSA: https://www.nhtsa.gov/press-releases/2019-fatality-data-traffic-deaths-2020-q2-projections#:~:text=The%20FARS%20data%20indicate%20that,the%20same%20period%20in%202019; Risk and Uncertainty Management Center, University of South Carolina.

Motor vehicle deaths saw their

largest increase in 50 years in 2016

U.S. Annual Change in Automobile Deaths, 1991- 2020*

Driving Has Been Getting Safer For Decades, A Trend that Is Likely to Continue, though a Post-COVID Spike Is Likely

Sharp increase in

use of seatbelts

Steep drop due to less

driving during the Great

Recession

Q2 2020 vs. Q2 2019 drop in auto deaths is more modest than expected. Drop was much steeper during

Great Recession

31

Catastrophe Loss Update: Major Driver of Rate Pressure

The 2020s Got Off to an Ominous Start

CAT Losses for the 2010s Were Up Materially—Costliest Ever

Primary, Reinsurance and Retro MarketsAll Impacted and Are Pressuring Rates

31

2020 U.S. Insured Catastrophe Highlights

n $67B in insured nat CAT losses—(3rd costliest year ever behind 2017, 2005)

n 71 designated PCS CATs, the most in PCS’s 72-year history

n 10 declared hurricane/TS events, a PCS record (30 named storms in 2020)w ~$26B insured losses in North America

n 17 declared wildfire events, a new record (6 events in 2017 = previous record)w ~$11B insured

n ~5 million CAT claims

n 18 PCS events with insured losses > $1B, a new record

n ~$1.5B in insured riot losses + other unusual manmade events (Nashville)

U.S. Inflation-Adjusted Insured Cat Losses

Sources: Property Claims Service, a Verisk Analytics business (1980-2019); 2020 figure from Munich Re; Insurance Information Institute; University of South Carolina, Risk & Uncertainty Management Center.

4037

79

104

53

1980s:$5 B

1990s: $15 B

2000s: $25 B2010s: $35 B

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

808182838485868788899091929394959697989900010203040506070809101112131415161718

Bill

ion

s, 2

01

8 $

Average for Decade

Hurricane Andrew WTC

Katrina, Rita, Wilma

Average Insured Loss per Year for 1980-2020 is $22.2 Billion

Harvey, Irma, Maria

36

19

2020 CAT losses in the

US totaled $67B (not including COVID-related

losses) from a record 71 PCS events20

67

30 named storms,

wildfires, riots

Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1

34

(Insured Losses, 2017 Dollars, $ Billions)*

$9.7 $10.0$10.0$11.7$14.2$14.2$15.9

$18.0$19.8$21.9

$25.3$26.0$27.1

$51.6

$6.0 $7.1 $7.5 $7.9 $8.3 $9.3

$0

$10

$20

$30

$40

$50

$60

Frances(2004)

Rita (2005)

Torn./T-Storms (2011)

Torn./T-Storms (2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Laura(2020)

Michael(2018)

Wilma(2005)

Camp Fire(2018)

Ike (2008)

Harvey (2017)

Irma (2017)

Sandy(2012)

Maria (2017)

Northridge(1994)

9/11 (2001)

Andrew(1992)

Katrina(2005)

9 of the top 20 mostly costly insured events in US history

occurred between 2010 and 2020 (inclusive)

17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004

*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.

35

0

50

100

150

200

250

300

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

(Percent)

US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions.

Post-Andrew surge

US Property Catastrophe Rate-on-Line Index: 1990 – 2020*

*As of January 1 each year.Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index

Post-9/11 Adjustment

Post Katrina, Rita, Wilma

period

Post-Ike adjustment Adjustment

following record tornado losses in 2011 and Sandy in

2012

Record CATs in 2017 and high CAT losses in 2018/19 pressured US

reinsurance prices in recent years (+9.0% in 2020, +2.6% in 2019,

+7.5% in 2018)

2020 Global RoL+5%

CAT Bond Issuance and Risk Capital Outstanding, 2010 – 2020

36Source: Guy Carpenter Securities, January 2021 Renewal Report; Risk and Uncertainty Management Center, University of South Carolina.

Despite COVID, both CAT bond issuance and Risk Capital Outstanding

reached new record highs in 2020

Major and Rapid Changes in the Reinsurance Markets: C-19

n Property: COVID-19 and Concerns Over BI Are Driving Reinsurers to Exclude Communicable Disease (CD) Globally in Virtually All Property Treatiesw Primary insurers are running into DOI resistance to gain approvals for exclusions

w Commercial and personal lines

w Exclusion is all CDs, not just pandemic or epidemic

n Casualty: Some Reinsurers Starting to Exclude CDw Exclusions being driven by London market

– GL, WC (esp. WC CAT)

w No universal exclusion push in non-London markets (yet)

w Not affecting financial lines yet (D&O, E&O, Fiduciary, Fidelity) or Cyber

n Reinsurers Try to Manage Global Aggregation Risk

These same factors are

contributing to capacity issues in the retrocessional

market

Paper on Communicable Disease Exclusions and Market Stability

n CD exclusions are becoming more commonplace in reinsurance treaties

n Regulators are generally not approving primary insurers filings for exclusions in underlying primary policies

n Paper addresses the global factors (e.g., accumulation risk, risk aversion, uninsurability) driving the exclusions

n Also addresses market consequences if misalignment persists Download at: https://www.uscriskcenter.com/wp-

content/uploads/2020/08/CD_Exclusion_Whitepaper-Aug-2020-No-Typo.pdf

INVESTMENTS: THE NEW REALITY

Investment Performance Is a Key Driver of Insurer Profitability

Aggressive Rate Cuts Will Adversely Impact Invest Insurer Earnings

Financial Crisis Déjà Vu?

Property/Casualty Insurance Industry Investment Income: 2000–2020E

$38.9$37.1$36.7

$38.7

$54.6

$51.2

$47.1$47.6$49.2$48.0$47.3$46.4$47.2$46.6

$48.9

$59.6$61.4

$50.3

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* 19 20

Due to persistently low interest rates, investment income remained below pre-crisis levels for a decade. Lower interest rates post-COVID will drive investment income down once again.

*2020 figure is annualized based on YTD Q3 actual of $37.7B. 2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries.

1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.

($ Billions)

Investment income had just recovered from a decade-long slump. Aggressive Fed

actions and recession are pushing interest rates lower and will adversely impact investment income for years to come.

Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*

4.4

4.0

4.6 4.5

3.7 3.83.7

3.43.7

3.2 3.1 3.13.4

3.1 3.0

4.6

4.23.9

2.5

3.0

3.5

4.0

4.5

5.0

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 through 2018 halted the slide in yields, but rate cuts in

2019/2020 will preclude future gainsSources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.

(Percent) Investment yields remained depressed--down about 150 BP from pre-crisis

levels. COVID-19 Fed rate cuts, bond purchases will push asset yield down

Average: 1960-2019 = 4.9%Low: 2.8% (1961)

High: 8.2% (1984/85)

US Treasury Security Yields:A Long Downward Trend, 1990–2020*

*Monthly, constant maturity, nominal rates, through Dec. 2020.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, University of South Carolina.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'20

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year US Treasury Notes have been essentially

below 5% for more than a decade

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for many years to come.

Fed emergency rate cuts and QE in response to the COVID-19 pandemic and

market volatility have pushed rates to their levels

below those in the financial crisis

10-YR. TREASURYJan. 2020: 1.76%Dec. 2020: 0.93%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%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 14 16 18 20

,*Through Dec. 31, 2020.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina

Tech Bubble Implosion

Financial Crisis

Annual Return

Energy Crisis

S&P 500 Index Returns, 1950–2020*

Fed Raises Rates

The S&P 500 was up 28.9% in 2019, the best year since 2013, following a decline of 6.2% in 2018. The S&P plunged as the

economy dove into recession, falling 34% by March 23rd

2020 YTD+16.3%

2019: +28.9%2018: -6.2%2017: +19.42016: +9.5

THE ECONOMY

COVID-19 Pandemic Will Directly and Severely Impact Growth As Exposure Growth Rapidly Shrinks

The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure Base Across Most Lines

The Links Between the Economy and the P/C Insurance Industry Are Strengthening

Length of US Business Cycles, 1929-Present*

43

13 8 11 10 8 10 11 166

168 8

1912

50

80

3745

39

24

106

36

58

12

92

120

73

128

0102030405060708090

100110120130

Aug.1929

May1937

Feb.1945

Nov.1948

July1953

Aug.1957

Apr.1960

Dec.1969

Nov.1973

Jan.1980

Jul.1981

Jul.1990

Mar.2001

Dec.2007

Feb.2020

ContractionExpansion Following

Duration (Months)

Month Recession Started

Average Duration*Recession = 13.4 MonthsExpansion = 63.8 Months

* As of August 2020 but excluding current COVID-19 recession which began in Feb. 2020 but with an indeterminate end.Sources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.

The most recent

economic expansion

ended in Feb. 2020 and was the longest in

US history (began July

2009)Will likely take

2+ years to recover lost

growth

?

US Real GDP Growth*

* Estimates/Forecasts from Wells Fargo Securities.Source: US Department of Commerce, Wells Fargo Securities 1/21; Center for Risk and Uncertainty Management, University of South Carolina.

2.7%

1.8%

-1.3%

-2.8%

2.5%

2.2% 2.7% 4.5%

0.8% 1.4% 3.5%

2.1%

1.2% 3.1%

3.2%

2.9%

2.5% 3.5%

2.9%

1.1% 3.1%

2.0% 2.1%

-5.0%

33.4%

4.0%

1.3% 4.0% 9.1%

6.6%

3.8%

3.5%

3.2%

3.0%

-31.4%

3.1%3.6%

2.5%

1.8%

1.1%4.1%

1.8% 2.1%

1.6%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

2008

2009

2010

2011

2012

2013

2014

2015

16:1

Q16

:2Q

16:3

Q16

:4Q

17:1

Q17

:2Q

17:3

Q17

:4Q

18:1

Q18

:2Q

18:3

Q18

:4Q

19:1

Q19

:2Q

19:3

Q19

:4Q

20:1

Q20

:2Q

20:3

Q20

:4Q

21:1

Q21

:2Q

21:3

Q21

:4Q

21:1

Q21

:2Q

21:3

Q21

:4Q

Demand for Insurance Will Be Severely Impacted As the Economy Slows but Is Improving

Real GDP Growth (%)

“Great Recession”

began in Dec. 2007

Financial Crisis

Strong 2nd half 2021 growth

expected

COVID CRASHQ2 2020

plunged by 31.4%

Full Year 2020 was -3.5%, the worst since the end of WW II

The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2020:Q3*

Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.

-6%

-4%

-2%

0%

2%

4%

6%

8%

2008:Q1

2008:Q3

2009:Q1

2009:Q3

2010:Q1

2010:Q3

2011:Q1

2011:Q3

2012:Q1

2012:Q3

2013:Q1

2013:Q3

2014:Q1

2014:Q3

2015:Q1

2015:Q3

2016:Q1

2016:Q3

2017:Q1

2017:Q3

2018:Q1

2018:Q3

2019:Q1

2019:Q3

2020:Q1

2020:Q3

DWP y-o-y change y-o-y nominal GDP growth

Negative GDP growth in the first half of 2020 and loss of exposures caused DWP to decelerate overall and

turning negative in some lines. Rebates, discounts and rate decreases will amplify the deceleration.

Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably linked to economic performance.

Unemployment Rate: Jan. 2019 – Dec. 2020

Source: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Unemployment Rate

3.7%

3.7%

3.5% 3.6%

3.5%

3.5% 3.6%

3.5% 4.4%

14.7%

13.3%

11.1%

10.2%

8.4%

7.8%

6.9%

6.7%

6.7%

3.7%

3.6%

3.6%3.8%

3.8%4.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Jan-19

Feb-19

Mar-19

Apr-19

May-19

Jun-19

Jul-19 Aug-19

Sep-19

Oct-19

Nov-19

Dec-19

Jan-20

Feb-20

Mar-20

Apr-20

May-20

Jun-20

Jul-20 Aug-20

Sep-20

Oct-20

Nov-20

Dec-20

COVID-19 shutdowns pushed the unemployment rate up to a shocking 14.7% in April before

improving beginning in May

12.4M jobs were created from May through Sept. (after a loss of 22.2M in March/April) helping bring down the

unemployment rate to 6.7% from its April peak of 14.7%. So far, ~56% of jobs lost have been recovered. Employment in Dec. 2020 was 6.5% below Feb. 2020.

US Unemployment Rate Forecast: 2007:Q1–2022:Q44.5%

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%

8.9% 9.1%

9.1%

8.7%

8.3%

8.2%

8.0%

7.8%

7.7%

7.6%

7.3%

7.0%

6.6%

6.2%

6.1%

5.7%

5.6%

5.4%

5.2%

5.0%

4.9%

4.9%

4.9%

4.7%

4.7%

4.4%

4.3%

4.1%

4.1%

3.9%

3.8%

3.8%

3.9%

3.6%

3.6%

3.5% 3.8%

13.1%

8.8%

6.8%

6.6%

6.4%

6.0%

5.4%

5.1%

4.8%

4.5%

5.7%

9.6%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%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:Q2

12:Q3

12:Q4

13:Q1

13:Q2

13:Q3

13:Q4

14:Q1

14:Q2

14:Q3

14:Q4

15:Q1

15:Q2

15:Q3

15:Q4

16:Q1

16:Q2

16:Q3

16:Q4

17:Q1

17:Q2

17:Q3

17:Q4

18:Q1

18:Q2

18:Q3

18:Q4

19:Q1

19:Q2

19:Q3

19:Q4

20:Q1

20:Q2

20:Q3

20:Q4

21:Q1

21:Q2

21:Q3

21:Q4

22:Q1

22:Q2

22:Q3

22:Q4

Great RecessionRising unemployment eroded

payrolls and WC’s exposure base.Unemployment peaked at 10% in

late 2009.

= forecasts ; = actualsSources: US Bureau of Labor Statistics; Wells Fargo Securities (1/21 edition); Risk and Uncertainty Management Center, University of South Carolina.

The unemployment rate peaked at 14.7% in April

(13.1% Q2 avg.)

At 3.5%, the unemployment rate in Feb. 2020 WASat its lowest point

in 50 years.

$0

$5

$10

$15

$20

$25

$30

66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 20

U.S. National Debt, 1966 – 2020:Q3

Source: Congressional Budget Office; Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/GFDEGDQ188S

The national debt hit $26.95 Trillion in Q3 2020 and will

continue to grow rapidly for the foreseeable future.

Debt/GDP Ratio =127%+ (Great exceeding the

previous record of 106% during WW II)

$27 Trillion($ Trillions)

18

Inflation AlertLarge deficits that increase as a share of GDP are, at some point,

unsustainable and

inflationary

51

Commercial Lines Growth, Underwriting Performance

& Pricing Cyclicality

Pricing Pressures Are Intensifying

51

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%

Post-9/112002: 22.4%

Great Recession:2009: -9.0%

ROE

2019: +6.7%

Commercial Lines NPW Premium Growth: 1975 – 2020E

Recessions:1982: 1.1%

Commercial lines is prone to far more cyclical volatility that

personal lines.

1988-2000: Period of

inter-cycle stability

Commercial lines premium

growth has been sluggish

for years, reflecting weak

pricing environment.

Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.

Post-Hurricane Andrew Bump:

1993: 6.3%

Post Katrina Bump:

2006: 7.7%

2016: -1.1%

2018: +14.4%

2020: +3.2%

CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2020:Q3*

-0.1% 0.9% 2.7% 4.4%

4.3%

3.9% 5.0%

5.2%

4.3%

3.4%

2.1%

1.5%

-0.5%

0.1%

-0.7%

-2.3%

-3.3%

-3.1% -2.8%

-3.7%

-3.9% -3.2%

-3.3% -2.5%

-2.8% -1.3%

0.3% 1.7% 2.4% 3.5% 5.2% 6.2% 7.5% 9.3% 10.8%

11.7%

-2.9%

1.6%

1.5%

-16%

-11%

-6%

-1%

4%

9%

14%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

4Q19

1Q20

2Q20

3Q20

*Latest available.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Largest increase since 2003 for some accounts(Percent)

Renewals turned positive in late 2011

in the wake of record tornado

losses and Hurricane Sandy

High CAT losses and poor underwriting results in recent years combined with COVID pressures, reduced capacity,

lower interest rates and increased uncertainty are exerting significant pressure on markets with overall

rates up by +11.7% as of Q3 2020

Change in Commercial Rate Renewals, by Line: 2020:Q3

Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

6.0% 6.7% 7.7% 7.9%9.6% 10.1%11.0%

14.2%16.1%

22.9%

1.5% 2.1% 2.6% 3.6% 4.4% 4.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Wor

kers

Com

p

Terro

ris,

Sur

ety

Floo

d

Bro

ker E

&O

Mar

ine

Med

Mal

Gen

eral

Liab

ility

Cyb

er

Con

stru

ctio

n

Bus

ines

sIn

terru

ptio

n

EP

L

Com

mer

cial

Aut

o

Com

mer

cial

Pro

perty D&

O

Um

brel

la

All major commercial lines experienced

increases in Q2 2020

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Umbrella now leads all major commercial lines in terms of rate gains,

exceeding D&O and CP

55

COVID-19 Litigation Trends

Court Decisions Have Largely Favored Insurers, but Concerns Remain

55

Weekly Number of COVID-Related Lawsuits Filed:(Weeks Ending Mar. 16, 2020 to Dec. 7, 2020) [Latest Available]

56Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 1/21/21 at: https://cclt.law.upenn.edu

The number of new cases filed is declining with just 7 filed the

week ending Dec. 7, 2020. Cumulative Total = 1,430

7

79

Coverage Sought in COVID-Related Lawsuits:(Total through Dec. 7, 2020) [Latest Available]

57Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 1/21/21 at: https://cclt.law.upenn.edu

BI, Extra Expense and Civil Authority coverage

account for the vast majority of cases

Industry is Still at Risk• Jan. 19th the US District Court in Cleveland refused to

dismiss a case: Henderson Road Restaurant Systems Inc. Zurich American Insurance Co. Judge claimed that the policy language was ambiguous and that the “microorganism” exclusion was in applicable

• On Jan. 14th an OK state judge refused to dismiss a case filed by the Cherokee Nation against AIG’s Lexington unit

58

SUMMARYnThe P/C Insurance Industry Remains Strong, Stable, Sound

and Secure

nWorst-Case Scenarios Have, So Far, Been Averted

nAn Anticipated Acceleration in the Economic Recovery in the Second Half of 2021 Should Help Restore Most P/C Exposures to Pre-Pandemic Levels by mid-2022

nAsset Price Volatility Will Persist and Low Interest Rates Will Pressure Investment Earnings for Years

nCOVID-19 Exposures Are Manageable with Headline Risk on BI and WC Issues

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email

me at robert.hartwig@moore.sc.edu or Download at www.uscriskcenter.com

59