Economic Trends, Challenges, and Opportunities Affecting the P/C and Surety LOB

Transcription

1 Economic Trends, Challenges, and Opportunities Affecting the P/C and Surety LOB New Jersey Surety Association September 13, 2012 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 Economics 2012: Most Signs Are Weak but Positive Favorable Consequences for P/C Insurers, if Current Trends Continue 2

3 08:1Q 08:2Q 08:3Q 08:4Q 09:1Q 09:2Q 09:3Q 09:4Q 10:1Q 10:2Q 10:3Q 10:4Q 11:1Q 11:2Q 11:3Q 11:4Q 12:1Q 12:2Q 12:3Q 12:4Q 13:1Q 13:2Q 13:3Q 13:4Q -8.9% -5.3% -3.7% -1.8% -0.3% 1.3% 1.4% 0.1% 2.3% 2.2% 2.6% 2.4% 2.5% 1.3% 2.0% 1.7% 1.7% 1.9% 1.8% 2.4% 4.0% 2.7% 4.1% 2.9% The US Economy is Forecast to Keep Growing*, but Slowly Real GDP Growth (%) 6% Recession 3% 0% -3% -6% -9% -12% Worst quarterly drop since 1958:q1 (-11.1%) Not reflected here: Some economists worry that as of Jan 1, 2013, planned federal spending cuts, the expiration of income tax rate reductions, and the end of some unemployment benefits will sap growth and could trigger another recession in Demand for insurance continues to be affected by a sluggish economy * Estimates/Forecasts from Blue Chip Economic Indicators Sources: US Department of Commerce, ; Blue Chip Economic Indicators 8/2012 issue (forecasts); Insurance Information Institute. 3

4 Real GDP Annual Growth Rate 5.0% 4.0% 3.0% August 2012 Forecasts of Quarterly US Real GDP for % 10 Most Pessimistic Median 10 Most Optimistic 2.7% 2.9% 3.3% 2.4% 3.5% 2.7% 3.8% 2.9% 2.0% 1.0% 0.0% 1.7% 1.1% 1.9% 1.8% 1.1% 0.6% 1.6% 2.0% 2.1% 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 As of early August 2012, virtually every forecast predicts improving growth throughout the 6-quarter period, except for 2013:Q1. But this might change. Sources: Blue Chip Economic Indicators (8/12); Insurance Information Institute 4

5 A Look Back: August 2011 Forecast of US Real GDP for Next 4 Quarters Real GDP Annual Growth Rate 5.0% 10 Most Pessimistic Median 10 Most Optimistic 4.0% 3.3% 3.0% 3.1% 3.0% 2.5% 2.4% 2.2% 3.1% 2.6% 2.0% 1.0% 1.8% 1.8% 2.0% 1.4% 11:Q3 11:Q4 12:Q1 12:Q2 Sources: Blue Chip Economic Indicators (8/11); Insurance Information Institute 5

6 Off Target: August 2011 Forecasts for Next 4 Quarters vs. Actual US Real GDP Real GDP Annual Growth Rate 5.0% 10 Most Pessimistic Median 10 Most Optimistic Actual 4.0% 4.1% 3.0% 3.0% 2.2% 3.3% 2.5% 3.1% 2.4% 3.1% 2.6% 2.0% 1.0% 1.8% 2.0% 1.8% 2.0% 1.4% 1.3% 1.5% 11:Q3 11:Q4 12:Q1 12:Q2 Sources: Blue Chip Economic Indicators (8/11 and 8/12 issues); Insurance Information Institute 6

7 State-by-State Leading Indicators for 2d Half of Fastest Growing States Ohio 3.2% Idaho 2.5% California 2.4% Indiana 1.7% Rhode Island 1.6% 5 Slowest Growing States West Virginia -4.1% Alaska -3.9% Michigan -3.4% Alabama -3.0% Nevada -2.0% Sources: Federal Reserve Bank of Philadelphia at ;Insurance Information Institute. 7

8 VA TN FL AR KY GA LA MS NC SC AL WV NY NJ DE MD PA RI MA ME VT CT NH AK HI Leading Indicator Indexes Vary Widely by State and Region* Southeast Mid-Atlantic New England *Data for July-December; next release to be posted October 2, Sources: Sources: Federal Reserve Bank of Philadelphia at ;Insurance Information Institute 8

9 Leading Indicator Indexes Vary Widely by State and Region*(cont d) AZ TX OK NM 2.45 ID UT CO MT WY 2.38 CA 0.97 WA OR NV 3.21 OH 1.65 IN WI IL MI MN SD ND IA KS NE MO 4 Southwest Mountain Far West Great Lakes Great Plains *Data for July-December; next release to be posted October 2, Sources: Sources: Federal Reserve Bank of Philadelphia at ;Insurance Information Institute 9

10 Construction Trends 10

11 The Architecture Billings Index is a Leading Indicator of Construction A score over 50 indicates an increase in billings. June 2012 score was 45.9 There is roughly a 9-12-month lag between architecture billings and construction spending 11

12 PRIVATE CONSTRUCTION 12

13 Nov '08 Dec Jan '09 Feb '09 Mar '09 Apr '09 May '09 Jun '09 Jul '09 Aug '09 Sep '09 Oct '09 Nov '09 Dec Jan '10 Feb '10 Mar '10 Apr '10 May '10 Jun '10 Jul '10 Aug '10 Sep '10 Oct '10 Nov '10 Dec Jan '11 Feb '11 Mar '11 Apr '11 May '11 Jun '11 Jul '11 Aug '11 Sep '11 Oct '11 Nov '11 Dec Jan '12 Feb '12 Mar '12 Apr '12 May '12 Jun '12 Jul '12 Value* of Private Construction Put In Place Billions Official Recession Months Residential Private Nonresidential Private $425 $400 $375 $350 $325 $300 $275 $250 $225 $200 Since the recession started in Dec 2007, private nonresidential construction activity plunged by 41% (as of Jan 2011), then rose by 26% (as of July 2012), but is still down 25% vs. Dec *Seasonally adjusted annual rate Source: 13

14 Jan 2010 Feb Mar Apr 2010 May Jun Jul 2010 Aug Sep Oct 2010 Nov Dec Jan 2011 Feb Mar Apr 2011 May Jun Jul 2011 Aug Sep Oct 2011 Nov Dec Jan 2012 Feb Mar Apr 2012 May Jun Jul 2012 Value* of Nonresidential Private Construction Put In Place, by Sector $ Millions $95 $85 Power Manufacturing Commercial $75 $65 $55 $45 $35 $25 Power-related construction rose in but since then dropped off. Manufacturing construction took an opposite path. *Seasonally-adjusted annual rate Sources: U.S. Census Bureau; Insurance Information Institute 14

15 Jan 2010 Feb Mar Apr 2010 May Jun Jul 2010 Aug Sep Oct 2010 Nov Dec Jan 2011 Feb Mar Apr 2011 May Jun Jul 2011 Aug Sep Oct 2011 Nov Dec Jan 2012 Feb Mar Apr 2012 May Jun Jul 2012 Value* of Nonresidential Private Construction Put In Place, by Sector $ Millions $33 Health Care Office Educational $30 $27 $24 $21 $18 $15 $12 Private health-care construction has been virtually flat since July 2010, but private educational construction rose 37.7% in that time. *Seasonally-adjusted annual rate Sources: U.S. Census Bureau; Insurance Information Institute 15

16 PUBLIC CONSTRUCTION 16

17 Nov '08 Dec Jan '09 Feb '09 Mar '09 Apr '09 May '09 Jun '09 Jul '09 Aug '09 Sep '09 Oct '09 Nov '09 Dec Jan '10 Feb '10 Mar '10 Apr '10 May '10 Jun '10 Jul '10 Aug '10 Sep '10 Oct '10 Nov '10 Dec Jan '11 Feb '11 Mar '11 Apr '11 May '11 Jun '11 Jul '11 Aug '11 Sep '11 Oct '11 Nov '11 Dec Jan '12 Feb '12 Mar '12 Apr '12 May '12 Jun '12 Jul '12 Value* of Nonresidential Public Construction Put In Place Billions $320 $310 $300 $290 $280 $270 $260 Since the recession started, private residential and nonresidential construction together are down $300 billion (annual rate), a drop of 38%. Public construction has hardly moved. *Seasonally adjusted annual rate Source: 17

18 Jan 2010 Feb Mar Apr 2010 May Jun Jul 2010 Aug Sep Oct 2010 Nov Dec Jan 2011 Feb Mar Apr 2011 May Jun Jul 2011 Aug Sep Oct 2011 Nov Dec Jan 2012 Feb Mar Apr 2012 May Jun Jul 2012 Value* of Nonresidential Public Construction Put In Place, by Sector $ Millions $90 $85 $80 $75 $70 $65 Highway & Street Educational $60 In 2010, Highway & Street construction rose with federal stimulus, but was virtually flat since then. Since the start of 2010, public spending for Educational construction is down $12.6B (-16.0%). *Seasonally-adjusted annual rate Sources: U.S. Census Bureau; Insurance Information Institute 18

19 Jan 2010 Feb Mar Apr 2010 May Jun Jul 2010 Aug Sep Oct 2010 Nov Dec Jan 2011 Feb Mar Apr 2011 May Jun Jul 2011 Aug Sep Oct 2011 Nov Dec Jan 2012 Feb Mar Apr 2012 May Jun Jul 2012 Value* of Nonresidential Public Construction Put In Place, by Sector $ Millions $35 Transportation Sewage & Waste Disposal Office $30 $25 $20 $15 $10 Since July 2010, public Sewage & Waste construction is down significantly (-$5.2B, or -19.7%), public Office construction is down $2.4B (-17.7%), and Transportation construction is down $3.8B (-12.4%). *Seasonally-adjusted annual rate Sources: U.S. Census Bureau; Insurance Information Institute 19

20 The Labor Market 20

21 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug Monthly Change in Private Employment* December 2007 through August 2012 (Thousands) (200) Official Recession Months (400) (600) (800) (1,000) Nov. 08. Apr. 09 monthly losses were the largest in the Post-WW II period Private employers added jobs in every one of the last 30 months At the rate of private-sector employment growth in the last six months, the headline unemployment rate could be under 8% by 2012 year-end. *seasonally adjusted Sources: U.S. Bureau of Labor Statistics: Insurance Information Institute.

22 This Looks Good: Increasing Job Openings in the Private Sector* Thousands Most recent peak reached in Nov 2006 at 4.27 million openings. July 2012 openings were 3.28 million. In the 3 years since the recession s end, openings grew by 57% Low point reached in July 2009 at 1.9 million openings. '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 *Monthly, December 2000 through July 2012; data published Sept. 11, Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics ; National Bureau of Economic Research (recession dates); Insurance Information Institutes. 22

23 Unemployment and Underemployment Rate Normality : Years to Go January 2000 through August 2012, Seasonally Adjusted (%) Traditional Unemployment Rate U-3 Unemployment + Underemployment Rate U-6 U-6 hit 17.5% in Oct 2009 U-6 is now 14.7%, down 2.8 percentage points from its peak Recession Gap between U-3 and U-6 is normally 4 percentage points but is now 6.6 points; at peak, 7.5 points August 2012 unemployment rate (U-3) was 8.1%. Peak rate in the last 30 years: 10.8% in Nov - Dec Recession Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute. 23

24 Number of Discouraged Workers : Elevated, but Dropping Jan 1994 August 2012 Thousands 1,400 1,300 1,200 1,100 1, A discouraged worker in a month did not actively look for work in the prior month for reasons such as --thinks no work available, --could not find work, --lacks schooling or training, --thinks employer thinks too young or old, and other types of discrimination. '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 In recent good times, the number of discouraged workers ranged from 200, ,000 ( ) or from 300, ,000 ( ). Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted. Sources: Bureau of Labor Statistics; National Bureau of Economic Research (recession dates). Latest reading: 844,000 in Aug

25 Average Hourly Earnings,* Private Sector Workers, Monthly, March 2006 August 2012 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Hourly Wage $24.00 $23.50 $23.00 The average hourly wage in August 2012 was $23.52, up 10.7% from $21.25 when the recession began in Dec $22.50 $22.00 $21.50 $21.00 $20.50 $20.00 Wage gains continued during the recession, despite massive job losses Annual Growth Rates 2008: 3.1% 2009: 2.7% 2010: 1.7% 2011: 2.1% $19.50 *Seasonally adjusted Recession indicated by gray shaded column. Sources: US Bureau of Labor Statistics at National Bureau of Economic Research (recession dates); Insurance Information Institute. 25

26 Average Weekly Hours, All Private Workers, March 2006 August 2012 Hours Worked Hours worked plunged during the recession, affecting payroll exposures, but we re nearly back to the prerecession workweek '06 '07 '08 '09 '10 '11 '12 *Seasonally adjusted Notes: Recessions indicated by gray shaded columns. This BLS data set starts in March Sources: US Bureau of Labor Statistics at National Bureau of Economic Research (recession dates); Insurance Information Institute. 26

27 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 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 Nonfarm Payroll (Wages and Salaries): Quarterly, :Q2 Billions $7,000 $6,750 Peak was 2008:Q1 at $6.60 trillion Latest (2012:Q2) was $6.87 trillion, a new peak $6,500 $6,250 Pace of payroll growth is accelerating $6,000 $5,750 Recent trough (2009:Q3) was $6.25 trillion, down 5.3% from prior peak $5,500 Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: National Bureau of Economic Research (recession dates); Insurance Information Institute. 27

28 Manufacturing Employment, Dec August 2012* 13,743 13,723 13,695 13,656 13,600 13,569 13,510 13,435 13,356 13,272 13,142 13,028 12,849 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 12,252 12,386 12,214 12,035 11,868 11,725 11,664 11,623 11,579 11,530 11,496 11,466 11,458 11,462 11,470 11,502 11,536 11,546 11,566 11,549 11,551 11,551 11,560 11,575 11,627 11,664 11,690 11,718 11,726 11,738 11,768 11,771 11,768 11,777 11,780 11,808 11,860 11,890 11,932 11,942 11,955 11,962 11,985 11,970 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 (Thousands) 14,500 14,000 Manufacturing employment grew every month from January 2010 through July At the end of that span a half million more were working in manufacturing. 13,500 13,000 12,500 12,000 The Great Recession. 11,500 11,000 *Seasonally adjusted; the July and August 2012 data are preliminary Sources: US Bureau of Labor Statistics at Insurance Information Institute. 28

29 Manufacturing Employment, June 2009 August 2012* 11,725 11,664 11,623 11,579 11,530 11,496 11,466 11,458 11,462 11,470 11,502 11,536 11,546 11,566 11,549 11,551 11,551 11,560 11,575 11,627 11,664 11,690 11,718 11,726 11,738 11,768 11,771 11,768 11,777 11,780 11,808 11,860 11,890 11,932 11,942 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 11,955 11,962 11,985 11,970 Jun-12 (Thousands) 12,250 12,000 June 2009: official final month of the Great Recession. Manufacturing employment grew every month from January 2010 through July At the end of that span a half million more were working in manufacturing. 11,750 11,500 11,250 *Seasonally adjusted; the July and August 2012 data are preliminary Sources: US Bureau of Labor Statistics at Insurance Information Institute. 29

30 Construction Employment, Jan Aug. 2012* 30

31 Construction Employment, Dec August 2012* 7,490 7,481 7,435 7,401 7,331 7,282 7,216 7,161 7,115 7,042 6,965 6,810 6,705 6,558 6,448 6,295 6,151 6,094 6,007 5,925 5,846 5,775 5,717 5,687 5,654 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 5,593 5,529 5,552 5,559 5,518 5,507 5,491 5,511 5,492 5,499 5,488 5,477 5,456 5,489 5,496 5,495 5,498 5,495 5,508 5,498 5,528 5,519 5,520 5,546 5,564 5,563 5,549 5,542 5,510 5,514 5,514 5,515 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 (Thousands) 7,750 7,500 7,250 The Great Recession. Construction employment has been essentially flat (at about 5.5 million) since January In a normal recovery, construction employment would be growing robustly 7,000 6,750 6,500 6,250 6,000 5,750 5,500 5,250 *Seasonally adjusted; July and August 2012 are preliminary data Sources: US Bureau of Labor Statistics at Insurance Information Institute. 31

32 Construction Employment, June 2009 August 2012* 6,007 5,925 5,846 5,775 5,717 5,687 5,654 5,593 5,529 5,552 5,559 5,518 5,507 5,491 5,511 5,492 5,499 5,488 5,477 5,456 5,489 5,496 5,495 5,498 5,495 5,508 5,498 5,528 5,519 5,520 5,546 5,564 5,563 5,549 5,542 5,510 5,514 5,514 5,515 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 (Thousands) June 2009: official final 6,250 month of the Great Recession. 6,000 Construction employment has been essentially flat (at about 5.5 million) since January In a normal recovery, construction employment would be growing robustly 5,750 5,500 5,250 *Seasonally adjusted; July and August 2012 are preliminary data Sources: US Bureau of Labor Statistics at Insurance Information Institute. 32

33 Mar 01 Sep Mar 02 Sep Mar 03 Sep Mar 04 Sep Mar 05 Sep Mar 06 Sep Mar 07 Sep Mar 08 Sep Mar 09 Sep Mar 10 Sep Mar 11 Sep Mar 12 Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures March 2001 through July 2012 Percent of Industrial Capacity 82% 80% Hurricane Katrina Full Capacity The US operated at 79.3% of industrial capacity in May 2012, above the June 2009 low of 68.3% and close to its post-crisis peak 78% 76% 74% 72% 70% 68% March November 2001 recession The closer the economy is to operating at full capacity, the greater the inflationary pressure December June 2009 Recession 66% Source: Federal Reserve Board statistical releases at

34 The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Will Expand the Exposure Base and Fuel Confidence 34

35 F 13F Construction of Private Housing Is Picking Up Housing Starts, Millions of Units Forecast range for 2012: 660,000 to 800, Forecast range for 2013: 730,000 to 1,200, Weak home construction forecast implies little exposure growth likely for Homeowners insurers and insurers with a residential construction book of business for the next few years. Sources: U.S. Census Bureau and Department of Housing and Urban Development (history) at ; Blue Chip Economic Indicators (8/2012), forecasts; Insurance Information Institute. 35

36 But the Pickup is Mostly in Multi-Family Housing Starts Thousands of Units, Multi-Family 400 units in multi-family buildings single family units Thousands of Units, Single Family Multi-family-unit starts rose in 2011, and more in Single family plunge began in 2006 Multi-family plunge didn t begin until * 400 Multi-unit starts, currently at a seasonally-adjusted annual rate of 215,000, are double the 2009 rate. Average annual rate for : 339,000. *January-July 2012 data, annualized, seasonally-adjusted, preliminary (July) Source: US Census Bureau at

37 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan Price Index for Residential Maintenance & Repair, Monthly, Price Index % increase in Sept vs. Sept during the Great Recession!) The effect of repair costs on claims depends on when the work is priced. Annual Price Changes 2005: +7.9% 2006: +7.3% 2007: +3.3% 2008: +7.8% 2009: -3.9% 2010: +4.3% 2011: +7.1% Prices for residential maintenance & repair rose by nearly 40% since December 2004 (through June 2012). Sources: US Bureau of Labor Statistics, Producer Price Index; Insurance Information Institute 37

38 :Q1 94:Q3 95:Q1 95:Q3 96:Q1 96:Q3 97:Q1 97:Q3 98:Q1 98:Q3 99:Q1 99:Q3 00:Q1 00:Q3 01:Q1 01:Q3 02:Q1 02:Q3 03:Q1 03:Q3 04:Q1 04:Q3 05:Q1 05:Q3 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q Business Bankruptcy Filings: Falling but Still High in 2012 (1994:Q1 2012:Q1) (Thousands) Recessions in orange New Bankruptcy Law Takes Effect Business bankruptcies were down 46.5% in 2012:Q1 vs. recent peak in 2009:Q2 but were still higher than 2008:Q2, early in the Great Recession. Bankruptcies restrict exposure growth in all commercial lines. Sources: American Bankruptcy Institute at ; Insurance Information Institute 38

39 Private Sector Business Starts, 1993:Q2 2011:Q4* (Thousands) Business Starts 2006: 872, : 843, : 790, : 697, : 722, : 758, Recessions in orange Business starts were down nearly 20% in the Great Recession, holding back most types of commercial insurance exposure, but now are recovering. * Data through Dec 31, 2011 are the latest available as of August 2, 2012; Seasonally adjusted. Sources: Bureau of Labor Statistics, NBER (recession dates) 39

40 Surety Industry Trends 40

41 $2.60 $2.75 $2.86 $3.27 $3.04 $3.33 $3.28 $3.38 $3.82 $3.87 $4.44 $4.81 $4.96 $4.84 $4.85 $4.85 Surety: Net Premiums Written $ Billions 5.0 NPW Avg. Ann. Growth rate : 7.75% : 0% Recession, March- 4.0 November Recession, Dec June Within two years after the 2001 recession, surety NPW surpassed its prior peak. The recession has had a much more persistent lid on surety premiums. Sources: NAIC Annual Statements, via SNL Financial; Insurance Information Institute. 41

42 Surety: Expense Ratios % 60 Acquisition Expenses Other Expenses Since 2003, total expenses have been consistently below 50%, mainly because of a drop in acquisition expenses. Sources: NAIC Annual Statements, via SNL Financial; Insurance Information Institute. 42

43 Surety: Combined Ratio Recession, March- November Recession, Dec June Remarkable: profitable combined ratios throughout the most severe recession since the 1930s. Sources: NAIC Annual Statements, via SNL Financial; Insurance Information Institute. 43

44 Investments: The New Reality Investment Performance is a Key Driver of Profitability 44

45 U.S. 10-Year Treasury Note Yields: A Long Downward Trend, * 9% 8% 7% 6% 5% 4% Yields on 10-Year U.S. Treasury Notes have been essentially below 4% since January 2008 and below 3% for the last year. 3% 2% Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a decade. 1% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come. *Monthly, through August Note: Recessions indicated by gray shaded columns. Sources: Federal Reserve Bank at National Bureau of Economic Research (recession dates); Insurance Information Institutes. 45

46 Property/Casualty Insurance Industry Investment Gain 1 : ($ Billions) Investment gains in 2011 were $2.8B above 2010 levels a $75 surprise given falling interest rates and flat stock markets $50 $35.4 $42.8 $47.2 $52.3 $58.0 $51.9 $56.9 $44.4 $36.0 $48.9 $45.3 $59.4 $55.7 $64.0 $31.7 $39.2 $56.2 $53.4 $ * Investment Gains Recovered Significantly in 2011 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to Fall by 50% in 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.

47 Key Takaways 47

48 Takeaways: Insurance Industry Predictions for 2012 P/C Insurance Exposures Will Grow With the U.S. Economy Personal and commercial exposure growth is certain in 2012 But restoration of destroyed exposure will take until mid-decade Wage growth is also positive and could modestly accelerate P/C Industry Growth in 2012 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional hard market emerges in 2012 Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, severity in some key lines But WC will be tough to fix Industry Capacity Hits a New Record by Year-End 2012 (Barring Meg-CAT) Investment Environment Is/Remains Much More Favorable Return of realized capital gains But Interest rates remain low 48

49 Insurance Information Institute Online: Thank you for your time and your attention! 49

50 P/C Insurance Industry Financial Overview Profit Recovery Was Set Back in 2011 by High Catastrophe Loss & Other Factors 50

51 P/C Net Income After Taxes :Q1 ($ Millions) $14,178 $5,840 $19,316 $10,870 $20,598 $24,404 $36,819 $30,773 $21,865 $20,559 $3,046 $30,029 $38,501 $44,155 $65,777 $62,496 $3,043 $28,672 $35,204 $19,150 $10,141 $80,000 $70,000 $60,000 $50, ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS 1 = 3.5% 2012:Q1 ROAS 1 = 7.2% P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due primarily to lower catastrophe losses $40,000 $30,000 $20,000 $10,000 $0 -$10,000 -$6, :Q1 * ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for Sources: A.M. Best, ISO, Insurance Information Institute

52 Profitability Peaks & Troughs in the P/C Insurance Industry, :Q1* * 12: ROE 25% 1977:19.0% 1987:17.3% History suggests next ROE peak will be in % 1997:11.6% 2006:12.7% 15% 10% 9 Years 2012:Q 8.2% 5% 0% 2011: 4.6%* -5% 1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2% *Profitability = P/C insurer ROEs figure is an estimate based on ROAS data. Note: Data for exclude mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% including M&FG. Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

53 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 $487.1 $496.6 $478.5 $455.6 $437.1 $463.0 $512.8 $490.8 $521.8 $517.9 $515.6 $505.0 $511.5 $540.7 $530.5 $544.8 $556.9 $564.7 $559.1 $538.6 $550.3 $570.6 ($ Billions) $625 $600 Policyholder Surplus, 2006:Q4 2012:Q1 At end of 2012:Q1 the industry had $1 of surplus for every $0.79 of NPW, close to the strongest claims-paying status in its history 2011:Q1 = previous surplus peak $575 $550 $525 $500 $475 $450 $425 Note: Beginning in 2010:Q1 figures include $22.5B of paid-in capital from a holding company parent to a subsidiary insurer. It was a single investment in a non-insurance business. Quarterly Surplus Changes Since 2011:Q1 Peak 11:Q2: -$5.6B (-1.0%) 11:Q3: -$26.1B (-4.6%) 11:Q4: -$14.4B (-2.6%) Source: ISO; A.M.Best. 53

54 Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989* (Percent) 18% 15% 12% 9.6% The Financial Crisis at its Peak Ranks as the Largest Capital Event Over the Past 20+ Years 10.9% 13.8% 16.2% 2011 severe storms reduced capacity by just 3.8% 9% 6% 3% 3.3% 6.9% 6.2% 3.8% 0% 6/30/1989 Hurricane Hugo 6/30/1992 Hurricane Andrew 12/31/93 Northridge Earthquake 6/30/01 Sept. 11 Attacks 6/30/04 Florida Hurricanes 6/30/05 Hurricane Katrina Financial Crisis as of 3/31/09** 3/31/11 Tornados & Severe Storms * Ratio is for end-of-quarter surplus immediately after the 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 54