The Global Economy, Rising Risk and Marine Insurance Markets Risk and Reward in a Troubled World

Transcription

1 The Global Economy, Rising Risk and Marine Insurance Markets Risk and Reward in a Troubled World San Francisco Board of Marine Underwriters San Francisco, CA April 21, 2016 Download at Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell: bobh@iii.org

2 Outlook: Property/Casualty & Economy Modest growth will continue in 2016 (~ 3.5% DPW in US) Exposure growth tied primarily to overall GDP growth/key sector drivers Rates remain flat to marginally negative for commercial lines in 2016 Reinsurance pricing under pressure more so for property risks Underlying loss cost trends remain manageable Industry is very well capitalized on a global scale Continued pressure from alternative capital Anti-trade, nationalistic sentiments bad for marine ins. Sluggish growth abroad impacts trade flows Strong dollar has hurt US manufacturing, exports Commodity prices remain weak but have likely bottomed 2

3 Risk & Insurance U.S. and Global Perspective Marine Insurance Is Very Sensitive to the Global Economic and Political Environment 3

4 5 Major Categories for External Global Risks, Uncertainties and Fears: Insurance Solutions 1. Economic Risks 2. Geopolitical Risks 3. Environmental Risks 4. Technological Risks 5. Societal Risks While risks can be broadly categorized, none are mutually exclusive Source: Adapted from World Economic Forum, Global Risks 2014; Insurance Information Institute. 4

5 Multitude of Exogenous Factors Influence Growth, Performance & Cyclicality Tepid growth in US, Europe Weakness in China/Emerging Economies Political uncertainty in the US, Brazil, Argentina UK Brexit concern Low/Negative Interest Rates Resurgent Terrorism Risk: ISIS & Other Groups Cyber Attacks Sabre Rattling (e.g., US-China, Russia) Severe Natural Disaster Losses Supply Chain Nationalism International trade deals under siege (Over)Regulation: Systemic Risk? Strong dollar has impacted manufacturing Are Black Swans everywhere or does it just seem that way? 5

6 Top 5 Global Risks in Terms of Likelihood, : Insurance Can Help With Most In 2016, societal and environmental issues dominated frequency concerns Concerns Shift Considerably Over Short Spans of Time Includes a Mix of Environmental Economic, Social and Environmental Risks Source: World Economic Forum, Global Risks 2016; Insurance Information Institute. 6

7 Top 5 Global Risks in Terms of Impact, : Insurance Can Help With Most In 2016, societal issues dominated severity concerns Concerns Over the Impacts of Societal Risks Remained High in 2016, but Economic, Environment and Geopolitical Risks Also Loom Large Source: World Economic Forum, Global Risks 2016; Insurance Information Institute. 7

8 Globalization: The Global Economy Creates and Transmits Cycles & Risks Globalization Is a Double Edged Sword Creating Opportunity and Wealth But Potentially Creating and Amplifying Risk Emerging vs. Advanced Economies 8

9 Commercial Lines Outlook: 2016 Flat to modest deceleration in premium growth in 2016 Rate environment suggests flat-to-slightly negative renewals in 2016 Economic growth continues at a modest pace but unevenly across industries and regions; Nearly full employment and tighter labor market conditions are pluses and should drive new exposures Construction, Service sectors are positives but manufacturing, energy, commodities face headwinds Loss costs driven by modest frequency and severity trends, but helped by reserve releases, low cats, low infl. Property cat reinsurance costs continue to fall Investment income still under pressure from low yields 9

10 GDP Growth: Advanced & Emerging Economies vs. World, F GDP Growth (%) World output is forecast to grow by 3.4% in 2016 and 3.6% in The world economy shrank by 0.6% in 2009 amid the global financial crisis Emerging economy growth rates are expected to increase to 4.3% in 2016 and 4.7% in (2.0) (4.0) Advanced economies are expected to grow at a modest pace of 2.1% in 2016 and F 17F Advanced economies Emerging and developing economies World Source: International Monetary Fund, World Economic Outlook, Jan. 2016; Insurance Information Institute.

11 Real GDP Growth Forecasts: Major Economies: F 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% US growth should accelerate in % 2.4% 2.6% 2.6% 0.9% 1.5% 1.7% 1.8% The Eurozone remains weak but should improve 2.8% 2.4% 2.1% 2.2% Growth in the UK is stronger than in the Eurozone Brexit impact will be negative 1.6% 1.5% 1.8% 1.8% Growth in China has slowed but outpaces the US and Europe 2.7% 2.3% 2.1% 2.4% Germany s growth mirrors the Eurozone overall -0.1% 0.6% 1.0% 0.7% 2.4% 1.3% 1.8% 2.2% 7.3% 6.9% 6.4% 6.3% US Euro Area UK Germany Australia Japan Canada China F 2016F 2017F Growth Prospects Vary Widely by Region; US and the UK Lead the Advanced Economies; Germany Leads in the Euro Area; China Has Slowed Sources: Blue Chip Economic Indicators (2/2016 issue); IMF ( Jan. 2016); Insurance Information Institute. 11

12 Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2014 Real nonlife premium growth was stronger in the US in 2014 than in most of Europe Source: Swiss Re, sigma, No. 4/2015. Market Life Non-Life Total Advanced Emerging World

13 World Trade Volume Growth*, F 4% 4% 3% 2.8% World trade volume growth is expected to accelerate modestly by 2017 after dipping in 2015, % 3.3% 2.8% 3.1% 3.8% 3% 2% 2% 1% 1% 0% F 2017F *Goods and services. Source: International Monetary Fund, World Economic Outlook, April 2016; Insurance Information Institute. 13

14 World Trade Volume: IMPORTS F Growth (%) Advanced Economies Emerging Economies 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 11.5% 4.3% Import growth in Advanced Economies is expected to decelerate in % 1.4% 3.4% 4.3% 3.4% 4.1% 15.3% 8.8% Import growth in emerging economies outpaces Advanced Economies has been hit hard 5.7% 5.7% 3.6% 0.5% 3.0% 3.7% F 2017F F 2017F Sources: IMF World Economic Outlook (April 2016 ); Insurance Information Institute. 14

15 World Trade Volume: EXPORTS F Growth (%) Advanced Economies Emerging Economies 16% 14% 12% 10% 8% 6% 4% 2% 0% 12.2% Export growth in advanced economies is expected to decelerate in 2016 before accelerating in % 4.2% 3.4% 2.5% 3.5% 2.1% 2.3% 14.7% 6.7% Export growth in emerging economies has struggled but should improve in % 4.4% 3.8% 3.9% 2.9% 1.7% F 2017F F 2017F Sources: IMF World Economic Outlook (April 2016); Insurance Information Institute. 15

16 World Trade is an Increasingly Important Part of Global Economic Output Two decades ago, world trade powered just 20 percent of global economic activity now it s 30 percent but has struggled recently Sources: World Trade Organization data through 2014 from International Trade Statistics 2015; Insurance Information Institute 16

17 Potential Output of Total Economy: US, China, India, Indonesia and Japan, F $ 2005 PPP Growth in economic output will be concentrated in certain developing economies such as China and India China will likely become the world s largest economy between 2025 and 2030 Source: OECD; Insurance Information Institute. 17

18 Ocean Marine Overview Underwriting is Historically Volatile But Improved in Recent Years 18

19 U.S. Ocean Marine Combined Ratio: Ocean Marine results have improved markedly in 2013 and Ocean Marine Results Have Been Quite Volatile Over the Past Decade, with the Combined Ratio Ranging by More than 20 Points Sources: A.M. Best; Insurance Information Institute. 19

20 Ocean Marine vs. Commercial Lines Combined Ratio: Ocean Marine All Commercial Lines Average: Ocean Marine: All Commercial Lines: Ocean Marine has marginally outperformed Commercial Lines overall over the period from Sources: A.M. Best; Insurance Information Institute. 20

21 U.S. Ocean Marine Direct Written Premiums: $ Billions $4.2 $4.0 Ocean Marine premium volume has been volatile $ $ $ $ $ Ocean Marine Premium Volume Fell During the Global Financial Crisis, Increased but Is Now Falling Again Sources: A.M. Best; Insurance Information Institute. 21

22 Global Insurance Premium Growth Trends Growth Is Uneven Across Regions and Market Segments 22

23 Distribution of Global Insurance Premiums, 2012 ($ Trillions) Total Premium Volume = $4.613 Trillion* Non-Life, $1.99, 43.2% Life insurance accounted for nearly 57% of global premium volume in 2012 vs. 43% for Non-Life Life, $2.62, 56.8% Source: Swiss Re, sigma, No. 3/2013; Insurance Information Institute. 23

24 Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2014 Real nonlife premium growth was stronger in the US in 2014 than in most of Europe Source: Swiss Re, sigma, No. 4/2015. Market Life Non-Life Total Advanced Emerging World

25 Global Real (Inflation Adjusted) Premium Growth: Premium growth is very erratic in part to inflation volatility in emerging markets as well as a lack of consistent cyclicality Emerging market growth has exceeded that of industrialized countries in 30 of the past 34 years, including the entirety of the global financial crisis and subsequent recovery Source: Swiss Re, sigma, No. 3/

26 Premiums Written in Life and Non-Life, by Region: Emerging market shares rose rapidly over the past 50 years Source: Swiss Re, sigma, No. 3/

27 Population Distribution, by Region: F Enormous population shifts will impact insurance demand over the next half century Africa is expected to be the fastest population growth over the next 50 years, but no expectation now of Asialike growth in economies or insurance demand Source: Swiss Re, sigma, No. 3/2013 from United Nations Department of Economic and Sovial Affairs, Population Division. 27

28 Relationship Between Real GDP and Real Life and Non-Life Premium Growth, 2012 Advanced Markets Emerging Markets The was a clear but highly relationship between real GDP growth and real premium growth in advance markets in 2012 The correlation between real GDP growth and real premium growth in emerging markets was much stronger than in advanced markets in 2012 Source: Swiss Re, sigma, No. 3/

29 Insurance Density and Penetration for Advanced and Emerging Markets, 2012 Advanced Markets Emerging Markets Spending and penetration are generally much higher in advanced markets, though growth is fastest in emerging markets Chinese spending on insurance is very similar to Russia, but Russian spending is mostly non-life and in China the majority is life Source: Swiss Re, sigma, No. 3/

30 The Unfortunate Nexus: Opportunity, Risk & Instability Most of the Global Economy s Future Gains Will be Fraught with Much Greater Risk and Uncertainty than in the Past 30

31 Political Risk: Greatest Opportunities Often in Risky Nations As of 2015:Q4 Latin and South America have modest terrorist threats though Brazil is elevated Terrorism remains a greater concern in the Middle East, Africa and South Asia Source: Aon PLC; Insurance Information Institute. 31

32 Terrorism Risk: Greatest Opportunities Are Often in Risky Nations As of 2015:Q4 Problems in the Ukraine will intensify political risk in several former Soviet republics Latin and South America also present insurers with growth opportunities but political instability has increased markedly The fastest growing markets are generally also among the politically riskiest, including East and South Asia and Africa Source: Aon PLC; Insurance Information Institute. 32

33 Country Shares of World Merchandise Exports The US, China, Japan and Western Europe lead the world in merchandise exports Source: World Trade Organization accessed 4/30/14 at: ; Insurance Information Institute. 33

34 Loss Distribution by Type of Insurance from Sept. 11 Terrorist Attack ($ 2015) Aviation Liability $4.3 (11%) Event Cancellation $1.2 (3%) Other Liability $4.9 (12%) Life $1.2 (3%) Aviation Hull $0.6 (2%) Property - WTC 1 & 2* $4.4 (11%) Property - Other $7.4 (19%) Workers Comp $2.2 (6%) Biz Interruption $13.5 (33%) Total Insured Losses Estimate: $43.7B** *Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements. **$32.5 billion in 2001 dollars. Source: Insurance Information Institute. ($ Billions)

35 P/C (Re)Insurance Industry Financial Overview 2015 Was a Reasonably Good Year and Very Similar to

36 Commercial Lines Outlook: 2016 Flat to modest deceleration in premium growth in 2016 Rate environment suggests flat-to-slightly negative renewals in 2016 Economic growth continues at a modest pace but unevenly across industries and regions; Nearly full employment and tighter labor market conditions are pluses and should drive new exposures Construction, Service sectors are positives but manufacturing, energy, commodities face headwinds Loss costs driven by modest frequency and severity trends, but helped by reserve releases, low cats, low infl. Property cat reinsurance costs continue to fall Investment income still under pressure from low yields 36

37 $ Millions $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 P/C Industry Net Income After Taxes $14, 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 ROAS 1 = 5.9% 2013 ROAS 1 = 10.2% 2014 ROAS 1 = 8.4% 2015 ROAS = 8.4% $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 Net income in 2015 was on par with 2014; ROE unchanged at 8.4% $3,043 $28,672 $35,204 $19,456 $33,522 $63,784 $55,870 $56,622 -$10,000 -$6, ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; 2015E is annualized figure based actual figure through Q3 of $44.0 Sources: A.M. Best, ISO; Insurance Information Institute E

38 Profitability Peaks & Troughs in the P/C Insurance Industry, ROE 25% 1977:19.0% 1987:17.3% History suggests next ROE peak will be in % 1997:11.6% 2006:12.7% 15% 9 Years % 2015: 8.4% 10% 5% 0% 1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2% % -5% *Profitability = P/C insurer ROEs figures are estimates based on ROAS data. Note: Data for exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning

39 ROE: Property/Casualty Insurance by Major Event, (Percent) 20% P/C Profitability Is Both by Cyclicality and Ordinary Volatility Katrina, Rita, Wilma Modestly higher CATs 15% Low CATs 10% Sept. 11 5% 0% -5% Hugo Andrew, Iniki Northridge Lowest CAT Losses in 15 Years 4 Hurricanes Financial Crisis* Record Tornado Losses Sandy * Excludes Mortgage & Financial Guarantee in Sources: ISO, Fortune; Insurance Information Institute. 39

40 P/C Insurance Industry Combined Ratio, * As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Best Combined Ratio Since 1949 (87.6) 92.6 Relatively Low CAT Losses, Reserve Releases 95.7 Cyclical Deterioration Relatively Low CAT Losses, Reserve Releases Avg. CAT Losses, More Reserve Releases Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Sandy Impacts Lower CAT Losses * Excludes Mortgage & Financial Guaranty insurers Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = Sources: A.M. Best, ISO; Figure for is from A.M. Best P&C Review and Preview, Feb. 16,

41 Number of Years with Underwriting Profits by Decade, 1920s 2010s Number of Years with Underwriting Profits s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s** 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 * 2009 combined ratio excl. mort. and finl. guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit. **Data for the 2010s is for the period 2010 through Note: Data for based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data. 41

42 P/C Insurance Loss Reserve Development, E* Reserve Change Reserve releases are expected to gradually taper off slowly, but will continue to benefit the bottom line and combined ratio through at least 2017 Source: A.M. Best; Barclays research for estimates.

43 Policyholder Surplus, 2006:Q4 2015:Q4 ($ Billions) $700 $650 $600 $550 $500 $450 $487.1 $496.6 $512.8 $ :Q3 Pre-Crisis Peak $517.9 $515.6 $505.0 $478.5 $455.6 $437.1 $463.0 $490.8 $511.5 Drop due to near-record 2011 CAT losses $540.7 $530.5 $544.8 $559.2 $566.5 $559.1 $538.6 $550.3 $570.7 $567.8 $583.5 $586.9 $607.7 $614.0 $624.4 $653.4 $662.0 $671.6 $673.9 Surplus as of 12/31/15 stood at a near-record high $673.7B $675.2 $672.4 $673.7 $400 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 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. Sources: ISO, A.M.Best. The industry now has $1 of surplus for every $0.76 of NPW, close to the strongest claims-paying status in its history. The P/C insurance industry entered 2016 in very strong financial condition. 43

44 US Policyholder Surplus: * ($ Billions) $750 $700 $650 $600 $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Surplus as of 12/31/15 was a near-record $673.7, down 0.2% from $675.2 of 12/31/14, and up 54.1% ($236.6B) from the crisis trough of $437.1B at 3/31/09 Surplus is a measure of underwriting capacity. It is analogous to Owners Equity or Net Worth in noninsurance organizations The Premium-to-Surplus Ratio Stood at $0.76:$1 as of 12/31/15, a Near Record Low (at Least in Recent History) * As of 12/31/15. Source: A.M. Best, ISO, Insurance Information Institute.

45 RNW All Lines, Average: Highest 25 States (Percent) The most profitable states over the past decade are widely distributed geographically, though none are in the Gulf region Profitability Benchmark: All P/C US: 7.7% HI AK VT ME ND FL WY NH VA ID UT NC WA MA SC OH WV OR DC CA RI CT MD NM SD MT Source: NAIC; Insurance Information Institute. 45

46 RNW All Lines, Average: Lowest 25 States (Percent) Some of the least profitable states over the past decade were hit hard by catastrophes PA WI US IL TX IA KS MN AR NE IN CO AZ KY MO TN NV NJ GA NY DE AL MI OK MS LA Source: NAIC; Insurance Information Institute. 46

47 Net Premium Growth (All P/C Lines): Annual Change, (Percent) 25% 20% 15% 10% Outlook 2016F: 3.9% 2017F: 3.8% 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 : 3.4% 2014: 4.2% 2013: 4.4% 2012: +4.2% 5% 0% -5% * Shaded areas denote hard market periods Sources: A.M. Best ( ), ISO ( ). 47

48 NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, ROE 30% 25% 20% 15% 10% Start of WW II 1941: 15.8% Post WW II Peak: 1947: 26.2% Economic Shocks, Inflation: 1976: 22.0% : Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic volatility, high interest rates, tort environment all played roles Tort Crisis 1985/86: 22.2% : Period of inter-cycle stability Post-9/ :15.3% % 5% 0% -5% -10% -15% -20% Great Depression 1932: -15.9% max drop : Extended period of stability in growth and profitability. Low interest rates, low inflation, Bureau rate regulation all played a role Note: Data through 1934 are based on stock companies only. Data include state funds beginning in Source: A.M. Best; Insurance Information Institute. Twin Recessions; Interest Rate Hikes 1987: 3.7% Great Recession: 2010: -4.9% XX? Postrecession period of stable growth?

49 Direct Premiums Written: Total P/C Percent Change by State, Pecent change (%) Top 25 States North Dakota was the country s growth leader over the past 7 years with premiums written expanding by 70.7%, fueled by the state s energy boom Growth Benchmarks: Total P/C US: 13.0% ND OK SD TX NE KS IA VT WY CO MN IN MI TN AR WI GA SC NJ OH AK KY VA LA CT MT Sources: SNL Financial LC.; Insurance Information Institute. 49

50 Direct Premiums Written: Total P/C Percent Change by State, Bottom 25 States Pecent change (%) Growth was negative in 4 states and DC between 2007 and MO NY UT US NM MS MA AL NC MD WA RI NH IL PA ID ME CA OR FL AZ DC HI WV NV DE Sources: SNL Financial LC.; Insurance Information Institute. 50

51 Direct Premiums Written: Comm. Lines Percent Change by State, Top 25 States Pecent change (%) ND 36.8 SD 33.3 VT 29.4 OK 43 states showed commercial lines growth from 2007 through NE 22.5 IA 21.0 KS 20.6 TX 15.2 WY 14.6 AK 13.9 IN 11.8 MN 10.3 WI 8.7 MA 8.5 AR Growth Benchmarks: Commercial 8.4 CT 8.0 NY 7.9 NJ 7.6 CO US: 5.9% 7.1 NM 6.6 OH 5.9 LA 5.9 US 5.8 MS 5.4 NH 4.5 MO Sources: SNL Financial LLC.; Insurance Information Institute. 51

52 Direct Premiums Written: Comm. Lines Percent Change by State, Bottom 25 States Pecent change (%) Nearly half the states have yet to see commercial lines premium volume return to pre-crisis levels MI TN MD MT CA RI WA GA PA UT IL KY VA NC ME SC ID AL DC HI FL OR AZ DE NV WV Sources: SNL Financial LLC.; Insurance Information Institute. 52

53 Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2015:Q4 Percentage Change (%) Peak = 2001:Q % Pricing Turned Negative in Early 2004 and Remained that way for 7 ½ years KRW : No Lasting Impact Pricing turned positive in Q3:2011, the first increase in nearly 8 years; Q4:2015 renewals were down 2.8%; Some insurers posted stronger numbers. Trough = 2007:Q3-13.6% 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 and Brokers; Barclay s Capital; Insurance Information Institute. 53

54 Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2015:Q4 1999:Q4 = 100 Pricing for smaller accounts has more stable than for larger accounts 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 and Brokers; Barclay s Capital; Insurance Information Institute. 54

55 Change in Commercial Rate Renewals, by Line: 1999:Q4 to 2015:Q4 Percentage Change (%) Peak = 2001:Q4 Commercial Auto is currently experiencing the strongest rate trend, supplanting WC 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 and Brokers; Barclay s Capital; Insurance Information Institute. 55

56 Cumulative Qtrly. Rate Changes, by Line: 1999:Q4 to 2015:Q4 1999:Q4 = 100 Commercial Auto is currently experiencing the strongest rate trend, supplanting WC 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 and Brokers; Barclay s Capital; Insurance Information Institute. 56

57 CIAB: Average Commercial Rate Change, All Lines, (1Q:2004 4Q:2015) (Percent) 9% 4% -1% -6% -11% -16% -0.1% -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% -11.0% -6.4% -5.1% -4.9% -5.8% -5.6% -5.3% -6.4% -5.2% -5.4% -2.9% KRW Effect Q marked the last of 30 th consecutive quarter of price declines -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% Pricing as of Q4:2015 remained somewhat negative 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 3Q15 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; Insurance Information Institute 57

58 Change in Commercial Rate Renewals, by Line: 2015:Q4 Percentage Change (%) 4.0% 3.0% 2.0% Commercial Auto rate increases are larger than any other line, followed by D&O and EPL 1.6% 1.9% 2.7% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -3.5% -3.4% Commercial Property General Liability -2.8% Umbrella -2.6% -2.2% Workers Comp Business Interruption -1.3% Construction -0.1% Surety EPL D&O Commercial Auto Major Commercial Lines Renewals Were Mixed to Down in Q4:2015; EPL, D&O and Commercial Auto Saw Gains 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 and Brokers; Insurance Information Institute. 58

59 INVESTMENTS: THE NEW REALITY Investment Performance is a Key Driver of Profitability Depressed Yields Will Necessarily Influence Underwriting & Pricing 59

60 S&P 500 Index Returns, * Annual Return 60% 50% 40% 30% Stock market is off to its worst start ever but volatility is endemic to stock markets and may be increasing but there is no persistent downward trend over long periods of time 20% 10% 0% -10% -20% -30% Fed Raises Rate Tech Bubble Implosion 2016*: +1.8% -40% -50% Energy Crisis Financial Crisis * *Through Apr. 15, Source: NYU Stern School of Business: Ins. Info. Inst.

61 Property/Casualty Insurance Industry Investment Income: E 1 ($ Billions) $60 Investment earnings are still below their 2007 pre-crisis peak $50 $49.5 $52.3 $54.6 $51.2 $47.1 $47.6 $49.2 $48.0 $47.3 $46.2 $46.5 $40 $38.9 $37.1 $36.7 $38.7 $39.6 $ E Due to persistently low interest rates, investment income fell in 2012, 2013 and Investment gains consist primarily of interest and stock dividends. *2015 figure is estimated based on annualized data through Q3. Sources: ISO; Insurance Information Institute.

62 U.S. Treasury Security Yields: A Long Downward Trend, * 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Recession 2-Yr Yield 10-Yr Yield Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for more than a decade. Despite the Fed s December 2015 rate hike, yield remain low though shortterm yields have seen some gains '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 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, constant maturity, nominal rates, through March Sources: Federal Reserve Bank at National Bureau of Economic Research (recession dates); Insurance Information Institute. 62

63 Distribution of Invested Assets: P/C Insurance Industry, 2013 $ Billions All Other, 10% Bonds, 62% Cash, Cash Equiv. & ST Investments, 6% Stocks, 22% Total Invested Assets = $1.5 Trillion Source: Insurance Information Institute Fact Book 2015, A.M. Best.

64 Net Yield on Property/Casualty Insurance Invested Assets, * (Percent) Book yield in 2015 is down 77 BP from pre-crisis levels * The yield on invested assets remains low relative to pre-crisis yields. The Fed s plan to raise interest rates in late 2015 has already pushed up some yields, albeit quite modestly. *2015 figure is the average of the four quarters ending in 2015:Q2. Sources: SNL Financial; Insurance Information Institute

65 Net Investment Yield on Property/ Casualty Insurance Invested Assets, P* (Percent) Estimated book yield in 2016 is down about 140 BP from pre-crisis levels E 16P The yield on invested assets remains low relative to pre-crisis yields. The Fed s plan to raise interest rates in late 2015 has pushed up some yields, albeit quite modestly. Sources: A.M. Best; 2015E-2016P figures from A.M. Best P/C Review and Preview, Feb. 2016; Insurance Information Institute

66 P/C Insurer Portfolio Yields, :Q3 6% 5% 4% 3% 4.85% 4.44% 4.03% 4.59% 4.50% 4.49% 4.20% 3.93% 3.73% 3.83% 3.68% 3.43% 3.65% 3.15% 2% 1% 0% :Q3 P/C carrier yields have been falling for over a decade, reflecting the long downtrend in prevailing interest rates. Even as prevailing rates rise in the next few years, portfolio yields are unlikely to rise quickly, since low yields of recent years are baked in to future returns. Sources: NAIC, via SNL Financial; Insurance Information Institute. 66

67 Interest Rate Forecasts: Yield (%) 5% 3-Month Treasury 10-Year Treasury 4% 3% 2.3% 2.7% 2.9% 3.0% 2.2% 2.1% 2.8% 3.4% 3.7% 3.8% 3.9% 2% 1% 0% 0.1% 0.5% 1.3% The end of the Fed s QE program in 2014 and a stronger economy have yet to push longer-term yields much higher 15F 16F 17F 18F 19F 20F 21F 15F 16F 17F 18F 19F 20F 21F A full normalization of interest rates is unlikely until 2019, more than a decade after the onset of the financial crisis. Sources: Blue Chip Economic Indicators (4/16 for 2016 and 2017; for /16 issue); Insurance Info. Institute. 67

68 Annual Inflation Rates, (CPI-U, %), F Annual Inflation Rates (%) Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble reduced inflationary pressures in 2009/ Inflationary expectations have slipped (due in part to falling energy costs) allowing the Fed to maintain low interest rates F17F Slack in the U.S. economy and falling energy prices suggests that inflationary pressures should remain subdued for an extended period of times -0.4 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 4/16 (forecasts). 68

69 P/C Insurer Net Realized Capital Gains/Losses, :Q3* ($ Billions) $20 $15 $10 $5 $2.88 $4.81 $9.89 $9.82 $1.66 $6.00 $9.24 $10.81 $18.02 $13.02 $16.21 $6.63 Realized capital gains rose sharply as equity markets rallied in $6.61 $9.13 $9.70 $3.52 $8.92 $5.85 $7.04 $6.18 $11.37 $10.06 $8.87 $0 -$5 -$10 -$15 -$20 -$25 -$1.21 -$ $ * Insurers Posted Net Realized Capital Gains in Following Two Years of Realized Losses During the Financial Crisis. Realized Capital Losses Were a Primary Cause of 2008/2009 s Large Drop in Profits and ROE. *Through Q Sources: A.M. Best, ISO, SNL, Insurance Information Institute. 69

70 Property/Casualty Insurance Industry Investment Gain: :Q3 1 ($ Billions) $70 $60 $50 $40 $30 $35.4 $58.0 $56.9 $52.3 $51.9 $47.2 $42.8 $44.4 $36.0 $45.3 $48.9 $64.0 $59.4 $55.7 $31.7 $39.2 $53.4 $56.2 $58.7 $54.2 $56.2 $43.7 $20 $10 $0 Investment gains in 2015 will be similar to those earned in 2014 but still well below the pre-crisis highs * * Total Investment Gains Were Down Slightly in 2014 as Low Interest Rates Pressured Investment Income but Realized Capital Gains Remained Robust 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; 2015 figure is through Q Sources: ISO, SNL; Insurance Information Institute.

71 Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line* Personal Lines Pvt Pass Auto Pers Prop Commercial Comml Auto Credit Comm Prop Comm Cas Fidelity/Surety Warranty Surplus Lines Med Mal WC Reinsurance** 0% -1% -2% -3% -4% -5% -6% -7% -8% -1.8% -1.8% -2.0% -3.6% -1.9% -2.1% -3.1% -3.3% -3.3% -3.7% -4.3% -5.2% -5.7% -7.3% Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline *Based on 2008 Invested Assets and Earned Premiums **US domestic reinsurance only Source: A.M. Best; Insurance Information Institute. 71

72 Profitability & Politics How Is Profitability Affected by the President s Political Party? 72

73 P/C Insurance Industry ROE by Presidential Administration, * Carter Reagan II Obama II Nixon Clinton I G.H.W. Bush G.W. Bush II Clinton II Reagan I Nixon/Ford Truman Eisenhower I Eisenhower II G.W. Bush I Obama I Johnson Kennedy/Johnson 5.43% 5.03% 4.83% 4.68% 4.43% 3.55% 6.98% 6.97% 8.93% 8.93% 8.65% 8.35% 8.33% 7.98% 7.68% 15.10% 16.43% OVERALL RECORD: * Democrats 7.72% Republicans 7.85% Party of President has marginal bearing on profitability of P/C insurance industry 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% *Truman administration ROE of 6.97% based on 3 years only, ;. Source: Insurance Information Institute

74 P/C insurance Industry ROE by Presidential Party Affiliation, Truman Eisenhower Kennedy/ Johnson Carter 25% 20% BLUE = Democratic President Nixon/Ford RED = Republican President Reagan/Bush I Clinton Bush II Obama 15% 10% 5% 0% -5% Source: Insurance Information Institute

75 Trump vs. Clinton: Issues that Matter to P/C Insurers Issue Trump Clinton Economy Interest Rates Taxes International Trade Tort System Supply Side-Like Philosophy: Lower taxes Faster real GDP growth; Deficits likely grow as tax cuts are combined with targeted increased spending on Homeland Security, Defense, etc. May trend higher with larger deficits; Shift from monetary policy to fiscal focus (tax cuts, government spending) Favors lower tax rates for corporate and personal income tax rates; Tax code overhaul? Protectionist Tendencies Doesn t like trial lawyers but seems to like filing lawsuits Keynesian Philosophy: More government spending on infrastructure, education, social services; Deficits likely increase as tax increases likely difficult to pass Status quo at the Fed; Net impact on interest rates unclear Unlikely to reduce taxes or embark on major overhaul of tax code Has criticized Trans-Pacific Partnership but is a realist on international matters Status Quo 75

76 GLOBAL M&A UPDATE: A PATH TO GROWTH? Are Capital Accumulation, Drive for Growth and Scale Stimulating M&A Activity? 76

77 Number of transactions U.S. INSURANCE MERGERS AND ACQUISITIONS, P/C SECTOR, E (1) ($ Millions) Transaction values $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 $5,100 $11,534 $8,059 $30,873 $55,825 $19,118 $40,032 M&A activity in 2015 will likely reach its highest level since Globally, across all sectors, M&A activity exceeded $200B $1,249 $486 $20,353 $425 $9, E $35,221 $13,615 $16,294 M&A activity in the P/C sector was up sharply in 2015 $3,507 $6,419 $12,458 $4,651 $4,397 $6,723 $32, (1) Includes transactions where a U.S. company was the acquirer and/or the target. Source: Conning proprietary database; 2015 I.I.I. estimate. 77

78 Global M&A Activity Tends to Follow Equity Market Performance The number and volume of insurance M&A deals was up globally in 2015 Ṡource: Thomson Reuters, Capital IQ as of Oct and IMF from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation Facts vs. Sentiment: Deals in the Insurance Sector, by Aviva CEO Mark Wilson. 78

79 Huge Shift from Domestic M&A Activity to Cross-Border The share of M&A deal volume that was cross-border more than doubled in 2015 Ṡource: Thomson Reuters as of Oct from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation Facts vs. Sentiment: Deals in the Insurance Sector, by Aviva CEO Mark Wilson. 79

80 M&A Activity Has Shifted Away from Europe and Towards Asia and N. America Asian, N. American deal volumes were up sharply in 2015 Ṡource: Thomson Reuters as of Oct from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation Facts vs. Sentiment: Deals in the Insurance Sector, by Aviva CEO Mark Wilson. 80

81 M&A: Deal Rationale by Dollar Amount Scale drives most deals (excluding health sector) Source: SNL Financial and WCMA estimates from Geneva Association Newsletter Insurance and Finance, Jan , presentation What is the Logic Behind Consolidation? And Does It Create Value? A View from Outside, by Brian Shea, Head of Willis Capital Markets & Advisory Europe (WCMA). 81

82 Some Key Drivers in the US Economy Economic Factors Driving Exposure Growth and Insurer Performance 82

83 US Real GDP Growth* Real GDP Growth (%) 7% 5% 3% 1% -1% -3% -5% -7% -9% 4.1% 1.1% 1.8% 2.5% 3.6% 3.1% 2.7% 1.8% Recession began in Dec, % 1.3% The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8% -3.7% -5.3% -8.9% -0.3% 5.0% 1.4% 2.3% 2.2% 2.6% 2.4% 0.1% 2.5% 1.3% 4.1% 2.0% 1.3% 3.1% 0.4% 2.7% 1.8% 4.5% 3.5% Q1 2014/15 GDP data were hit hard by this year s Polar Vortex and harsh winter -0.9% 4.6% 4.3% 2.1% 0.6% 3.9% 2.0% 1.4% 2.0% 2.4% 2.4% 2.4% 2.2% 2.4% 2.2% 2.2% :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 14:1Q 14:2Q 14:3Q 14:4Q 15:1Q 15:2Q 15:3Q 15:4Q 16:1Q 16:2Q 16:3Q 16:4Q 17:1Q 17:2Q 17:3Q 17:4Q Demand for Insurance Should Increase in 2016 as GDP Growth Continues at a Steady, Albeit Moderate Pace and Gradually Benefits the Economy Broadly * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 3/16; Insurance Information Institute. 83

84 US Unemployment Rate Forecast 2007:Q1 to 2017:Q4F* 11% 10% 9% 8% 7% 6% 5% 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% 9.6% 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% 4.8% 4.7% 4.6% 4.6% 4.5% Unemployment forecasts have been revised modestly downwards. Optimistic scenarios put the unemployment as low as 4.3% by Q4 of Rising unemployment eroded payrolls and WC s exposure base. Unemployment peaked at 10% in late Jobless figures have been revised downwards for % 4.5% 4% 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 * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/16 edition); Insurance Information Institute. 84

85 10% 9% 8% 7% 6% Continued Business Investment Will Spur Commercial Exposure Growth 9.0% 6.2% The level and direction of interest rates is likely to affect these growth rates. 5% 4% 3% 3.0% 2.9% 2.6% 3.9% 4.4% 3.9% 2% 1% 0% F 2017F 2018F 2019F Continued business investment will be a potent driver of commercial property and liability insurance exposures. It should drive employment and WC payroll exposures as well (with a lag). Sources: Blue Chip Economic Indicators, 2/2016 (history and forecasts for 2016 and 2017, 10/2015 for forecasts for 2018 and 2019; Insurance Information Institute. 85

86 Annual Inflation Rates, (CPI-U, %), F Annual Inflation Rates (%) Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble reduced inflationary pressures in 2009/ Inflationary expectations have slipped (due in part to falling energy costs) allowing the Fed to maintain low interest rates F17F Slack in the U.S. economy and falling energy prices suggests that inflationary pressures should remain subdued for an extended period of times -0.4 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 4/16 (forecasts). 86

87 Commodity Prices Have Plunged to Lowest Levels Since 2000 Bank of Canada, Commodity price indices, weekly data, (indexed to Jan 2000=100) Energy and other commodity prices have tumbled Note: Total index includes energy, metals & minerals, agriculture, forestry and fish. Upside for most advanced economies, but a downside for commodity exporters Source: Datastream from IUMI Hamburg 2016 presentation by Doug Harrell, Aspen Insurance.

88 MANUFACTURING SECTOR OVERVIEW & OUTLOOK The U.S. Manufacturing Sector Is Being Buffeted by a High Dollar, Weak Export Markets and Plunging Oil Prices 88

89 ISM Manufacturing Index (Values > 50 Indicate Expansion) 5 January 2010 through December Manufacturing began to contract in late 2015 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 Aug-12 Sep-12 Oct-12 Nov-12 Dec- Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec- Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec- Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec- The manufacturing sector expanded for 68 of the 72 months from Jan through Dec Manufacturing sector now appears to be in contraction due to weakness abroad, strong dollar and collapse in oil prices Source: Institute for Supply Management at Insurance Information Institute. 89

90 Dollar Value* of Manufacturers Shipments Monthly, Jan December 2015 $ Millions $500,000 The value of Manufacturing Shipments in Dec was $467.0B down 8% from the July 2014 record high of $508.1B $400,000 $300,000 $200,000 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan Jan 13-Jan 14-Jan 15-Jan Monthly shipments in Nov exceeded the pre-crisis (July 2008) peak but has declined in recent months. Weakness abroad, falling energy prices and a strong dollar are hurting the sector, especially exports. Manufacturing growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages. * Seasonally adjusted; Data published Feb. 4, Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, and Orders, 90

91 Manufacturing Growth for Selected Sectors, 2015 vs. 2014* Growth (%) 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -4.2% 1.8% Durables: +1.8% Non-Durables: -9.6% -0.6% -9.5% -0.6% -2.3%-2.1% 8.0% 3.4% Manufacturing of nondurable goods is weaker than for durables -9.6% -1.3% -32.2% -2.3%-2.3% 2.6% All Manufacturing Durable Mfg. Wood Products Primary Metals Fabricated Metals Machinery Electrical Equip. Computers & Electronics Transportation Equip. Non-Durable Mfg. Food Products Petroleum & Coal Chemical Plastics & Rubber Textile Products Manufacturing Is Contracting Across a Number of Sectors, Especially Petroleum. Adverse Exposure Impacts Are Likely for: WC, Commercial Property, Commercial Auto and Certain Liability Coverages *Seasonally adjusted; Date are YTD comparing data through November 2015 to the same period in Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, and Orders, 91

92 CYBER RISK AND INSURANCE Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and Small in Every Industry 92

93 Data Breaches , by Number of Breaches and Records Exposed # Data Breaches/Millions of Records Exposed Source: Identity Theft Resource Center (updated as of Jan. 6, 2016); # Data Breaches # Records Exposed (Millions) The 781 reported data breaches in 2015 was virtually unchanged form the record 783 reported in The number of exposed records soared to million, and increase of 97.5%. Millions

94 Data/Privacy Breach: Many Potential Costs Can Be Insured Costs of notifying regulatory authorities Costs of notifying affecting individuals Defense and settlement costs Regulatory fines at home & abroad Data Breach Event Lost customers and damaged reputation Forensic costs to discover cause Business Income Loss Cyber extortion payments 94

95 Estimated Cyber Insurance Premiums Written, F $ Billions $8 $7 $6 $5 $4 Cyber insurance premiums written could more than triple to $7.5 billion by 2020 I.I.I. s Cyber Risk paper issued Oct $7.5 $3 $2 $1 $1.5 $2.0 $ E 2020F Source: Advisen (2014 est.); PwC (2015, 2020); Insurance Information Institute. 95

96 Insured Catastrophe Losses 2013/14 and YTD 2015 Experienced Below Average CAT Activity After Very High CAT Losses in 2011/ : Cat Activity Rising 96

97 U.S. Insured Catastrophe Losses ($ Billions, $ 2015) $80 $70 $60 $ was the 3 rd most expensive year ever for insured CAT losses $50 $40 $30 $20 $10 $0 $14.4 $5.0 $8.2 $38.9 $9.1 $27.2 $13.0 $11.3 $3.9 $14.8 $11.9 $6.3 $35.8 $ * 2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for more not fewer Costly Events *Estimate hrough 12/31/15 in 2015 dollars. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. 97 $16.8 $34.7 $10.9 $7.7 $30.1 $11.8 $14.9 $34.6 $36.1 $13.1 $15.5 $15.0 $15B in insured CAT losses though 12/31/15 (est.)

98 Combined Ratio Points Associated with Catastrophe Losses: E* Combined Ratio Points Avg. CAT Loss Component of the Combined Ratio by Decade s: s: s: s: s: s: 5.46* *2010s represent E. Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers. Source: ISO ( ); A.M. Best ( E) Insurance Information Institute Catastrophe losses as a share of all losses reached a record high in The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

99 Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, Winter storm losses were much above average in 2014/15 are will push this share up Winter Storms, $26.9 Tornado share of CAT losses is rising Wind/Hail/Flood (3), $21.4 Geological Events, $ % 5.4% Terrorism, $ % 0.1% 6.2% Events Involving Tornadoes (2), $ % 39.2% Fires (4), $6.0 Other (5), $ % Insured cat losses from totaled $395.6B, an average of $19.8B per year or $1.65B per month Hurricanes & Tropical Storms, $161.2 Wind losses are by far cause the most catastrophe losses, even if hurricanes/ts are excluded. 1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2014 dollars. 2. Excludes snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO s Property Claim Services Unit. 99

100 Top 16 Most Costly Disasters in U.S. History Katrina Still Ranks #1 $60 $50 $40 $30 $20 $10 (Insured Losses, 2014 Dollars, $ Billions) $4.6 Includes Tuscaloosa, AL, tornado $5.7 $5.8 $6.9 $7.3 Includes Joplin, MO, tornado $7.7 Storm Sandy in 2012 was the last mega-cat to hit the US; Northridge still ranks as the 4 th costliest disaster of all time $8.1 $9.0 $9.4 $11.4 $13.8 $24.6 $25.3 $26.4 $19.3 $50.2 $0 Irene (2011) Jeanne (2004) Frances (2004) Rita (2005) Tornadoes/ Tornadoes/ T-Storms T-Storms (2011) (2011) Hugo (1989) Ivan (2004) Charley (2004) Wilma (2005) Ike (2008) Sandy* (2012) Northridge 9/11 Attack Andrew (1994) (2001) (1992) Katrina (2005) 12 of the 16 Most Expensive Events in US History Have Occurred Since 2004 Sources: PCS; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI. 100

101 Catastrophe Bond Issuance and Outstanding: Risk Capital Amount ($ Millions) 30,000 25,000 20,000 15,000 10,000 5, , , , , , , , , , , , , , , , , , , , , , , , , , , , New Issuance Outstanding Cat Bond Issuance Declined Slightly in 2015 from 2014 s Record Pace. Lower Yields on Bonds Explain Some of the Contraction. Source: Guy Carpenter, Artemis accessed at 101

102 US Property CAT Rate on Line Index & Global Reinsurance ROE US Property CAT ROL Global Reinsurance ROE Record traditional capacity, alternative capital and low CAT activity have pressured reinsurance prices; ROEs are own only very modestly Source: Barclays PLC from Guy Carpenter; Insurance Information Institute. 102

103 Alternative Capital New Investors Continue to Change the Reinsurance Landscape First I.I.I. White Paper on Issue Was Released in March

104 Global Reinsurance Capital (Traditional and Alternative), Total reinsurance capital reached a record $570B in 2013, up 68% from But alternative capacity has grown 210% since 2008, to $50B. It has more than doubled in the past three years data is as of June 30, Source: Aon Benfield Analytics; Insurance Information Institute.

105 Alternative Capital as a Percentage of Traditional Global Reinsurance Capital 12% 10% 8% 6% 4% 10.2% 8.4% 6.5% 5.7% 5.9% 5.8% 5.4% 4.6% 11.5% 2% 0% Alternative Capital s Share of Global Reinsurance Capital Has More Than Doubled Since data is as of June 30, Source: Aon Benfield Analytics; Insurance Information Institute.

106 Catastrophe Bond Issuance and Outstanding: Risk Capital Amount ($ Millions) 30,000 25,000 20,000 15,000 10,000 5, , , , , , , , , , , , , , , , , , , , , , , , , , , , New Issuance Outstanding Cat Bond Issuance Declined Slightly in 2015 from 2014 s Record Pace. Lower Yields on Bonds Explain Some of the Contraction. Source: Guy Carpenter, Artemis accessed at 106

107 US Property CAT Rate on Line Index & Global Reinsurance ROE US Property CAT ROL Global Reinsurance ROE Record traditional capacity, alternative capital and low CAT activity have pressured reinsurance prices; ROEs are own only very modestly Source: Barclays PLC from Guy Carpenter; Insurance Information Institute. 107