Property & Casualty Insurance

Transcription

1 05:23 AM GMT Industry View Research North In-Line America Property & Casualty Insurance 2017 Industry Primer North America P&C Insurance Kai Pan ( ) Michael Phillips ( ) Chai Gohil ( ) Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. Provided Satellite for the image exclusive of use Superstorm of Michael Caldwell Sandy at Driehaus at 10am Capital ECT Management, Tuesday Inc. Oct on 19-Oct th, :41 Image PM. NASA GSFC via Masters. Source: Shutterstock

2 The Morgan Stanley P&C Insurance Team Kai Pan, Executive Director Morgan Stanley P&C analyst since Active investor in publicly traded Insurance stocks as a buy-side insurance analyst from at FrontPoint Partners & Stadia Capital. Spent 5 years with RMS & K2 Technologies in catastrophe risk modeling. PhD Johns Hopkins, MBA NYU, BE Tsinghua University (China). Mike Phillips, Vice President Morgan Stanley P&C analyst since Consulting actuary from Board member, United Fire Group, Mid-cap insurance analyst, Stifel Nicolaus, Inc, MBA Kenan-Flagler University of North Carolina Chapel Hill, BA Bucknell University. Associate of Casualty Actuarial Society, Chai Gohil, Vice President Morgan Stanley P&C analyst since 2014, Life Insurance, Insurance analyst, Markit Equities, MBA Pace University, BE Gujarat University (India). 2

3 P&C Insurance 2017 Outlook Navigating Crosscurrents Industry View: In-Line While lower US corporate tax and industry consolidation are positive catalysts, we see decelerating reserve releases and rising yields as headwinds for earnings and book value growth in Given the industry and market crosscurrents, we maintain in-line sector view. We estimate ~10% average ROEs for P&C carriers and ~10% average EPS growth for P&C brokers. CB and XL are our top picks. CB s merger benefits are emerging, and its strong balance sheet will enable increasing shareholder returns in XL is making solid progress toward a double-digit ROE while its discount to book valuation does not reflect that potential. P&C Pricing Pressure 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% U.S. P&C Insurance Pricing Commercial Lines Personal Lines Commercial lines pricing negative Please refer to our 2017 Outlook Navigating P&C Crosscurrents, January 5, 2017 Key Themes in 2017: Source: MarketScout, Morgan Stanley Research Tax reform: We estimate a move to 20% corporate tax would lift EPS by ~8% for our coverage, but interest non-deductibility and border adjustability could offset some of the benefits. Domestic P&Cs, including BRO, PGR, AIG, and ALL, are the largest beneficiaries. Industry M&A: Challenging operating environment, including soft pricing, core margin pressure, and lower investment yields, still favors consolidation, which supports P&C valuation. We see M&A focuses on smaller Bermuda reinsurers and US specialty insurers. Slowing reserve releases: Our actuarial analysis reveals a small industry reserve cushion, which points to lower future releases. Favorable reserve development accounted for 20%+ of industry earnings in We have seen early signs of lower reserve releases, a headwind to future earnings. Rising interest rates: P&C stocks historically underperformed in periods of rising 10-year yield, as bond portfolio depreciates and investors rotate out of P&C to Life and Banks. However, rising investment yields would aid P&C earnings over time. AIG, XL, and All have the largest BV impact while RNR, XL, and PGR benefit the most from higher investment income in the near term % -20.0%

4 Table of Contents 1. P&C Insurance Industry Overview 4 2. Key Investment Considerations 8 3. P&C Carriers: Primary Insurers and Global Reinsurers P&C Brokers Actuarial Reserve Analysis Catastrophes and P&C Stocks Emerging Trends in P&C Insurance Major P&C Lines of Business P&C Insurance Glossary 90 4

5 P&C Insurance Industry Supply Chain Premiums Ceded Premiums Insurance Purchaser Commissions & Fees P&C Broker Primary Insurer Commissions & Fees P&C Broker Reinsurer Claims Claims P&C Insurance Supply Chain The P&C supply chain above details the flow of payment (premiums) from the insurance purchaser to the insurance carrier (primary + reinsurance). In return for premiums, carriers agree to pay claims in the event qualifying future loss events occur. P&C brokers assist in the placement of risk in return for payment (commissions or fees) but assume no underwriting risk. Reinsurers provide insurance for insurance companies looking to lay off (cede) a portion of their assumed risk. Source: Morgan Stanley Research 5

6 P&C Stocks Have Driven Long-Term Portfolio Outperformance P&C Stocks Represent 3% of S&P 500 and 20% of Financials Top 10 US Listed P&C Companies $450,000 $400,000 Top 10 US Listed P&C Companies by Market Capitalization ($m) ~ 3% ~ 1% ~ 12% Other $350,000 $300,000 P&C Insuance $250,000 Life Insurance Other Financials $200,000 $150,000 $100,000 ~ 84% $50,000 $- Source: S&P, Morgan Stanley Research BRK AIG CB Source: Thomson Reuters, Morgan Stanley Research TRV MMC AON ALL PGR HIG WLTW P&C Stocks Have Outperformed Last 10 Years P&C Stocks Have Performed In-Line Index CAGR 25% MS P&C Insurance Index S&P 500 Index S&P 500 Financials 20% 15% 10% 5% 0% -5% -10% 3 Yr CAGR 5 Yr CAGR 10 Yr CAGR Source: Thomson Reuters, Bloomberg, Morgan Stanley Research P&C stocks represent ~3% of S&P 500 and ~20% of Financials. The top P&C constituents in S&P 500 are BRK, AIG, CB, TRV, MMC, AON, ALL, PGR, HIG, and WLTW. P&C stocks comprise ~5% of Russell 1000 Value and ~1% of Russell 1000 Growth, more of a value investment industry. P&C stocks delivered 10%/15%/5% absolute returns (CAGR) in past 3/5/10 years and have outperformed the S&P 500 in last 5 years by ~270bps. Risk-adjusted returns are even greater as P&C stocks are among the only industries in Financials with an aggregate beta below 1. 6

7 P&C Industry Segments More Consolidated Than Many Appreciate Top 10 US P&C Insurers: 46% market share Top 10 Global Reinsurers: 72% market share $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 Top 10 US P&C Underwriters by 2015 Net Premium Written ($m) Mutual Stock Top 10 Market Share: ~46% ~$588b in total annual premium $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 Top 10 Global Reinsurers by 2015 Gross Premium Written ($m) Top 10 Market Share: ~72% ~$218b total annual premium $10,000 $5,000 $- State Farm Allstate Berkshire Hathaway Liberty Mutual Travelers Progressive Nationwide Farmers American Intl USAA $- Munich Re Swiss Re Hannover Re SCOR Lloyd's Berkshire Hathaway RGA China Re Everest Re PartnerRe Source: NAIC, Morgan Stanley Research Top 10 Global Insurance Brokers: 70% market share $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $- MMC Top 10 Global Insurance Brokers by 2015 Total Revenues ($m) AON WLTW AJG Top 10 US Market Share: ~70% AON & MMC: ~40% of Global Revenues JLT BB&T BRO Hub Intl Lockton Cos. Wells Fargo Insurance Source: AM Best, Morgan Stanley Research P&C Insurance: Not A Commodity Business We frequently hear investors label the P&C industry as a commodity business. While the P&C industry is certainly plagued by structural over-capacity (2500+ competitors in the US alone) the P&C industry structure and long-term return data argue against the existence of pure commodity business. Market share among the top 10 players is 46-72% depending on the segment, and the long term ROE and stock return data reveal persistency of outperformance for market leading companies. Source: Business Insurance, IbisWorld, Morgan Stanley Research 7

8 Table of Contents 1. P&C Insurance Industry Overview 4 2. Key Investment Considerations 8 3. P&C Carriers: Primary Insurers and Global Reinsurers P&C Brokers Actuarial Reserve Analysis Catastrophes and P&C Stocks Emerging Trends in P&C Insurance Major P&C Lines of Business P&C Insurance Glossary 90 8

9 The P&C Cycle: Hard vs. Soft markets Real Premium y/y growth % & Operating ROE 30% 25% 20% 15% 10% 5% 0% -5% Real Premium y/y growth Operating ROE (left-axis) Combined Ratio Hard Market Years 125% 120% 115% 110% 105% 100% 95% Combined Ratio -10% % Source: Company Data, A.M. Best Aggregates & Averages, Morgan Stanley Research The P&C Underwriting Business Is Cyclical The P&C industry has one of the more unique business cycles in the economy. Long periods of pricing declines lasting years are punctuated by sharp spikes in pricing power lasting 2-4 years. While all P&C lines move differently the broader industry swings are driven more by inflections in the combined ratio of longer duration commercial lines than personal lines. Periods of concentrated pricing power are referred to as hard markets as it is during these dislocated periods that insurance capacity is difficult to obtain for insurance buyers. Periods where pricing is declining are referred to as a soft market. P&C pricing power broadly rose in , peaked in 2014, but started to decelerate in Primary commercial and personal lines rolled over to negative in 2015 (and remained so throughout 2016). Reinsurance is continuing to decline although at slower pace. Unforeseen large losses or rising claim inflation could reverse the downward trajectory. 9

10 The P&C Cycle Is a Key Stock Driver but Not the Only One P&C Stocks: Hard Market Average Returns % Return 30% 25% 20% 15% 10% 5% 0% -5% -10% 11% 4% Avg. Hard Mkt Perf. 8% P&C Universe S&P 500 3% '76 - '78 Period 16% 11% '84 - '87 Period 8% -3% '01 - '03 Period P&C Stocks have Always Outperformed In Hard Markets P&C stocks have historically outperformed meaningfully when P&C pricing power is rising during a hard market. Average return is a +11% CAGR which is 700bps better annually than the S&P 500 during the same period. The desire to capture this outperformance leads to constant analysis and speculation in the investment community on when the next P&C cycle may begin. Source: FactSet, Thomson Reuters, Morgan Stanley Research P&C Stocks: Soft Market Average Returns % Return 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 12% 9% Avg Soft Mkt Perf. -9% -5% '73 - '75 Period P&C Universe S&P % 17% 15% 12% '79 - '83 Peroid '88 - '00 Period 6% 3% '04 - '11 Period But P&C Stocks Have Also Performed Well In Soft Markets Fewer investors appreciate how well P&C stocks have performed during soft P&C markets. Average return is a +12% CAGR during soft market periods which is +300bps better than the annual returns of the S&P. We do not view P&C stocks as red light/green light investments around the P&C cycle. Statistically 75% of years the P&C cycle is soft so simplistically picking P&C upswings is likely to fail over time. Instead, we offer a researched opinion on the P&C cycle (i.e. where we are at/heading) which then serves as a filter for our investment recommendations. Source: FactSet, Thomson Reuters Morgan Stanley Research 10

11 P&C Stocks Have Historically Lagged When Interest Rates Are Rising P&C Stock Absolute Performance vs. 10-Yr Yield Change Quarterly Share Performance Absolute 8.0% P&C Share Performance Absolute ( ) 7.0% Quarterly Decrease in 10-Yr Yield Quarterly Increase in 10-Yr Yield 6.0% 5.0% Avg. +4.1% 4.0% Number of Quarters 3.0% 17 1 Avg. +1.4% 2.0% % % < -100bps (-50)-(-100) (-25)-(-50) (-25) > +100bps -1.0% Source: Thomson Reuters, Morgan Stanley Research, P&C Stock Relative Performance vs. 10-Yr Yield Change P&C Stock Performance Lags When Interest Rates Are Rising Absolute P&C stock returns have been larger when the 10-Year yield is falling. Since 1990, P&C stocks have risen an avg. +4.1% when the 10-Yr yield is falling (measured quarterly). This compares to a +1.4% avg. return when the 10-Yr yield is rising. P&C stocks have historically underperformed the S&P 500 when 10-Yr yield is rising. Our data shows that when the 10-Yr yield is rising (measured quarterly) P&C shares underperformed the S&P by 60bps. In contrast, declining 10-Yr yields offer a favorable backdrop for P&C stocks with the shares outperformed the S&P 500 an average of +230bps on average. Quarterly Share Performance Relative to S&P % 4.0% 2.0% 0.0% -2.0% -4.0% P&C Share Performance Relative ( ) Quarterly Decrease in 10-Yr Yield Quarterly Increase in 10-Yr Yield Avg. +2.3% Number of Quarters < -100bps (-50)-(-100) (-25)-(-50) (-25) > +100bps 15 Avg. -0.6% 17 1 The investment portfolio is the largest asset of a P&C company and a typical P&C investment portfolio is 75% invested in fixedincome securities with a 2-4 yr duration. Most P&C s carry 2-4x investment leverage (invested assets/equity) so a 100bps rise in interests rate lowers book value by 2-12% after tax. With P&C stocks trading on a Price/Book basis it is easy to see why historical P&C stock returns have lagged when rates are rising. -6.0% Source: Thomson Reuters Morgan Stanley Research 11

12 Rising Interest Rates Hurt P&C Book Value but Boost Longer-Term Earnings & ROE Rising Interest Rates Negatively Impact P&C Book Values Rising Interest Rate Hurts BV But Helps EPS and ROE 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0% +100 bps Interest Rate Impact on BV Leads to rising EPS With 75%+ of P&C industry earnings coming from net investment income the positive longer term impact of higher rates is clear for the P&C P&L. We estimate EPS would rise +7-40% EPS within our universe if the portfolio yield were to rise +100bps. We must note the 2-4 year portfolio duration delays the positive impact of higher rates in the P&L. And drives a higher long term ROE: We estimate the impact of a +100bps rise in interest rates drives a +250bps increase in ROEs given the positive impact to earnings (numerator) and negative impact on Book value (denominator). See our chart for company specific illustration. Source: Company Data, Morgan Stanley Research But Higher Yields Boosts Investment Income & EPS driving ROEs higher over time +100 bps Interest Rate Impact on EPS (Total Portfolio) +100 bps Interest Rate Impact on ROE Current 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Current Avg. 10.3% Pro-forma Pro-forma Avg. 12.8% Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 12

13 P&C Stock Returns Have Proven Defensive Over the Long Term Average Beta Across Financials 15-yr avg. Annual Beta P&C Stocks Have Been Less Volatile Than Most Other Stocks P&C stocks have an average beta of ~0.8 ranking the industry below other financials and the S&P 500. Beta is a measure of relative volatility with a Beta of 1.0 equaling the S&P500 return. For example, a stock with a beta of 1.2 would increase/decrease 1.2% for every 1% move in the S&P 500. P&C Brokers P&C Insurance Real Estate Life Insurance Banks Asset Mgmt Diversified FIG Source: Company Data, Thomson Reuters, Morgan Stanley Research P&C Performance During Recessionary Periods % Return 30% P&C Universe S&P % 10% 0% -10% -20% 9% -3% P&C Stocks Have Outperformed During Economic Recessions P&C stocks outperformed in 4 of the last 5 recessions posting average returns of +9% CAGR, exceeding the S&P by 1200bps. The next page explores the reasons P&C stocks have performed more defensively within an investment portfolio -30% 2/80-8/80 8/81-12/82 8/90-4/91 4/01-12/01 1/08-5/10 Avg. Perf. Source: Company Data, FactSet, Morgan Stanley Research 13

14 P&C Insurance Business Model Is Highly Recurring Investment Performance + Underwriting Performance % of 1 Net Investment Income (75%) Profits Renewal Business (20%) New Business (5%) Over 90% of P&C Business is Recurring Source: Morgan Stanley Research P&C Business Model Is Highly Recurring Outside of Large Cat/Reserve Losses P&C earnings are highly recurring as investment income contributes an average ~75% of earnings for a P&C company. The level of interest rates certainly impacts returns and the longer term growth rate but investment income is a predictable and highly recurring line item within our P&C forecasts. We liken P&C insurance to a financial utility. The product is required to drive a car or open a business so while the economic cycle impacts growth, product demand holds steady around GDP growth over the long term. 80%+ of clients renew annually. The P&C Insurance balance sheet is among the most conservative of all balance sheet based financials. The imminent threat of large payouts connected to catastrophe losses have forced P&C carriers to be very conservative balance sheet managers. Raw leverage metrics (Assets/equity and Debt/Capital) have long ranked lowest among balance sheet based financials and investment portfolios are very liquid (average duration is 2-4 yrs) and high quality (typically AA rated or better). NOTE: P&C earnings can be volatile due to weather (large catastrophe losses) and prior period reserve development. 14

15 P&C Insurance Is a Highly Regulated Industry P&C insurance industry is a highly regulated industry. In the US, each individual state has an insurance regulator that sets regulations. These state departments of insurance responsibilities include: (1) approving insurer rate filings (insurance pricing changes), (2) monitoring insurer capital adequacy through scrutinizing the balance sheet and key ratios. Rating agencies (A.M. Best, S&P, Moody s, and Fitch) also play a key role as industry watchdogs. They provide opinions (via ratings) on an insurer s financial strength based on several factors including capital adequacy, enterprise risk management (ERM), operating performance, management and corporate strategy. The importance of high ratings to the insurance business model (the promise to pay ) is so critical these agencies are sometimes referred to as de-facto regulators. Capital adequacy is measured by the risk-based capital ratio (RBC ratio) which is set by the National Association of Insurance Commissioners (NAIC). Total Adjusted Capital (TAC) is the actual amount of capital and surplus an insurer has. Risk-Based Capital is the minimum capital requirement calculated via an analysis of Assets (includes the Investment portfolio) and Liabilities (includes Underwriting exposures and Financial leverage). An RBC ratio below 200% triggers a company review, below 150% triggers a regulatory review, and below 100% triggers a regulatory take-over of the insurer. RBC Ratio = Total Adjusted Capital (TAC) Authorized Control Level Risk-Based Capital 15

16 P&C Valuation: Price/Book vs. ROE Relationship a Key Stock Driver P&C Operating ROE and Price-to-Book Operating ROE (pre-tax) 30% 25% 20% 15% 10% 5% 0% -5% -10% 2.8x Operating ROE (Pre-tax) P/B 2.6x 2.4x Source: Company Data, FactSet, SNL, Thomson Reuters, A.M. Best Aggregates & Averages, Morgan Stanley Research P&C Price/Book has a High Correlation with ROE 2.2x 2.0x 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 3.0x 3Q16 P/B vs. 2017e ROE PGR 2.5x IFC-T 2.0x NGHC WRB ACGL 1.5x ALL RNR TRV AXS CB 1.0x RE AIG TPRE XL 0.5x P/B 0.4x Price-to-book value P&C Valuation At Multi-Year Highs Strong 2016 P&C stock performance pushed valuations to levels not seen since before the 2008 Financial crisis. P&C stocks had long been cheap versus historical averages, but are now at multi-year highs, reflecting run up post U.S. election and M&A activity. The P&C industry ROE is in-line with its historical pre-tax average of ~7.2% (since 1973), with marginally profitable underwriting and strong capital distribution activity offset by lower investment income returns. P&C insurance is a balance sheet based business in which the net asset value (book value) and future business prospect (book value growth) should dictate business valuation. Therefore Price to Book (P/B) multiple is the most commonly used valuation metric for P&C carriers. P/E valuation matters less as earnings can be volatile quarter/quarter due to the unpredictability of catastrophe losses. ROE vs. P/B Relationship: Key Valuation Driver P&C stock P/B valuation has a high correlation with ROE. ROE improvement holds the key for multiple expansion which is one of the key drivers of stock appreciation. 0.0x 6% 8% 10% 12% 14% 16% ROE (2017e) Source: Company Data, Thomson Reuters, Morgan Stanley Research 16

17 Table of Contents 1. P&C Insurance Industry Overview 4 2. Key Investment Considerations 8 3. P&C Carriers: Primary Insurers and Global Reinsurers P&C Brokers Actuarial Reserve Analysis Catastrophes and P&C Stocks Emerging Trends in P&C Insurance Major P&C Lines of Business P&C Insurance Glossary 90 17

18 The US P&C Market: Key Business Lines US P&C Market Size Key US P&C Segments US P&C Industry writes ~$590b of premiums annually. 52%/48% split between Personal Lines (insuring individuals) and Commercial Lines (insuring businesses). 47%/53% split between Property Lines (physical damage) and Casualty Lines (liabilities). Source: A.M. Best, SNL, Morgan Stanley Research Major Lines of Business Major Lines of Business Commercial Multiperil 7% Workers Comp 9% Other Liability 9% Other 21% Private Auto 38% Homeowner and Farmowner 16% Major personal lines include personal auto and homeowners insurance. Major commercial lines include workers compensation, other liability, and commercial multi-peril coverage. See Major P&C Lines of Business section (Page 73) for details of coverage and market statistics. Source: A.M. Best, SNL, Morgan Stanley Research 18

19 Leading US P&C Carriers by Segment Top 10 US Personal Line Carriers % State Farm Allstate Top 10 US Personal Line Carriers by 2015 Premium Market Share (%) Berkshire Hathaway Progressive Liberty Mutual USAA Top 10 Market Share: 66% Farmers Nationwide Travelers American Family Personal Lines: Top 10 have 66% share Top 10 personal line insurers command 66% market share with State Farm above 10% market share. Comprised of both mutual companies (owned by policyholders) and stock companies (owned by shareholders). Product distributed through captive agencies (e.g., State Farm and Allstate), independent agencies (e.g., Travelers and Chubb), and direct channels (e.g., GEICO and Progressive). Source: A.M. Best, SNL, Morgan Stanley Research Top 10 US Commercial Line Carriers % AIG Chubb Top 10 US Commercial Line Carriers by 2015 Premium Market Share (%) Travelers Liberty Mutual Zurich CNA Top 10 Market Share: 40% Nationwide Hartford Berkshire Hathaway Tokio Marine Commercial Lines: Top 10 have 40% share Top 10 commercial insurers command 40% of market share with no single company having 10% share. Dominated by stock companies (with the exception of Liberty Mutual and Nationwide). Product mostly distributed through independent brokers and agents. Source: A.M. Best, SNL, Morgan Stanley Research 19

20 Typical P&C Carrier Business Model % of Profit Insurance Purchaser Premiums Ceded Premiums P&C primary insurers provide insurance coverage (a promise to pay ) in return for Commissions & Fees Commissions & Fees premiums. Investment income is earned on P&C Broker Primary P&C Broker Reinsurer these premiums but if covered losses Insurer emerge then the carrier pays claims from its loss reserves. Claims Claims 75% of profits come from investment income and 20% from underwriting business that typically renews each year. Only 5% typically comes from new business written in that period. Underwriting Invested income is money earned on the investment portfolio. This portfolio or float is largely premiums which are invested before claims are paid out. Underwriting profitability is measure by Net Investment Income (75%) the Combined Ratio which is the sum of Renewal New (Losses + Expenses)/Net Premiums Earned. Net Investment Income (75%) Business Business The Loss Ratio captures total estimated (20%) (5%) losses while the Expense Ratio covers the cost of policy acquisition and overhead. Investment + A Combined Ratio < 100% = Profitable Underwriting Source: Morgan Stanley Research 20

21 Key Drivers of P&C Insurance Carrier ROE P&C Insurance Balance Sheet & ROE Drivers Underwriting Leverage Premiums to Equity (Hi/Low: x) Investment Leverage Invested Assets to Equity (Hi/Low: x) x Underwriting Margin Combined Ratio (Hi/Low: %) x Investment Yield = Yield (Hi/Low: %) = ROE Contribution ROE Contribution Balance Sheet & ROE Drivers Underwriting leverage: varies by line of business Underwriting margin: goal to make money (less than 100% combined ratio) Investment leverage: higher is better but predicated by lines of business written Investment yield: liquidity and safety top priority, duration 2 4 years, 80%+ = AA rated or higher Source: Company Data, Morgan Stanley Research P&C Insurance Income Statement Drivers Income Statement Drivers Investment Performance % of 1 Net Investment Income (75%) Profits + Underwriting Performance Renewal Business (20%) New Business (5%) 90%+ recurring revenues/profits Investment income is Key = so Yields matter! Underwriting losses = profit volatility making EPS unpredictable Over 90% of P&C Business is Recurring Source: Company Data, Morgan Stanley Research 21

22 Key Driver #1: Underwriting Ops Hinge on Leverage & Profitability Underwriting Leverage Premium to Equity Ratio Surplus ($Bil.) Source: Company Data, A.M. Best Aggregates & Averages, Morgan Stanley Research Underwriting Margin Combined Ratio Surplus Premiums to Surplus 1995 US P&C Industry Combined Ratio (%) 300% 250% 200% 150% 100% 50% Breakeven Underwriting % NWP % of Surplus Underwriting Leverage Has Declined As Capacity Builds Underwriting leverage is measured by the Premium to Equity Ratio. The P&C industry capital base has compounded faster than premiums resulting in a structural decline in underwriting leverage. Premiums/equity has declined from 2x in the 1970s to 1.5x in the 1980s to 1x in the 1990s to sub 1x in the 2000s. Excess underwriting capacity remains a structural and growing problem in P&C Insurance. Business lines with lower volatility (e.g., personal auto) have higher underwriting leverage while higher volatility lines (e.g., property catastrophe) have lower underwriting leverage. Underwriting Margin Rarely Positive The P&C industry has made an underwriting profit in just 9 of last 20 years. A large percentage of the industry is playing to not lose in underwriting while squeezing profitability out of investments to earn a return. Calendar year underwriting profitability includes current policy year profitability and expenses (the accident year combined ratio) plus reserve development on prior years policies. Source: Company Data, A.M. Best Aggregates & Averages, SNL, Morgan Stanley Research 22

23 Underwriting Profitability Key Drivers: P&C Pricing & Reserves US P&C Insurance Pricing 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% Source: MarketScout, BLS, Morgan Stanley Research U.S. P&C Insurance Pricing Commercial Lines Personal Lines Commercial lines pricing negative Morgan Stanley Actuarial Estimate of US P&C Reserves P&C Pricing Power Fading The inability to match initial P&C pricing to the actual loss trend (Cost Of Goods Sold) creates a P&C pricing cycle. A pricing increase above the current loss trend equals an improving margin and vice-versa. The P&C pricing cycle varies by line. Shorter duration liabilities that settle/realize losses quickly have short cycles (auto, property catastrophe) while longer tail liability lines (workers compensation, D&O, etc.) have a longer cycle. P&C pricing power broadly rose in , peaked in 2013, started to decelerate in 2014, turned negative in and remained so into Reinsurance is continuing to decline albeit at slower rate, primary commercial lines remains negative while personal lines is slightly positive. Large unforeseen large loss can stop the downward trajectory. Excess Reserve ($m) 25,000 20,000 15,000 10,000 5, ,100 15,310 8,980 Source: SNL, Company Data, Morgan Stanley Research 4,198 Excess Reserves Excess as % Carried 90% Decline 811 1,281 1,950 YE09 YE10 YE11 YE12 YE13 YE14 YE15 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Industry Carried Reserves: $564b (YE09), $562b (YE10), $567b (YE11), $575b (YE12), $575b (YE13), $577b (YE14), $585b (YE15) Excess as % Carried Reserves US P&C Industry Reserve Cushion Eroding 20%+ of US P&C industry earnings in were from prior period reserve releases. The industry effectively overpriced policies and later released the excess earnings as losses failed to emerge in line with original expectations. We believe P&C excess reserves have declined ~90% from 2009 levels at YE2015, with now only about $1.9b of excess supporting carried reserves of $585b. We believe the level of favorable reserve development will decline from here, negatively impacting earnings. 23

24 Key Driver #2: Investment Ops Rely on Leverage & Yield Investment Leverage Has Held Steady at ~2.2x P&C Investment Leverage Low Compared To Other Financials US P&C Industry Investment Leverage Assets / Equity 14x 12x 10x 8x 6x 4x 2x 0x Broker/ Dealer Asset Leverage (Total Assets / Ending Shareholders Equity) Bank Life Ins. Specialty Lender P&C Ins. Exchanges REITs Asset Managers Source: A.M. Best Aggregates & Averages, Morgan Stanley Research Investment Yields Have Declined Over The Long Term Source: SNL, (Average Assets to Equity), Equity excl. AOCI where available as of 3Q15, Morgan Stanley Research P&C Investment Returns Under Pressure Yield % 12% 10% 8% 6% 4% 2% 0% 8.4% 8.4% 7.8% 7.2% 7.4% 7.5% 7.3% 7.1% 6.5% 5.9% 5.8% 5.9% 5.7% 5.8% 5.2% 5.0% 5.2% 4.9% 4.9% 4.5% 4.1% 4.7% 4.6% 4.5% 4.2% 4.0% 3.7% 3.8% 3.7% 3.4% 3.7% 3.2% Source: A.M. Best Aggregates & Averages, Morgan Stanley Research US P&C Industry Investment Yield US 10-Yr Treasury MS 2017 Est. 2.50% Investment leverage is defined as Invested assets divided by equity. The invested assets are largely the investment portfolio/ float built up from premiums collected by the P&C carrier. P&C industry investment leverage averages ~2.2x currently and ranges from 2x 4x depending on the length of tails (claims payout period). These leverage levels are lower than other balance sheet based financials. Liquidity is critical for P&C s given loss cost uncertainty so the average asset duration is just ~3 yrs. The average portfolio is 70%+ in cash and bonds with the rest in equities, alternatives and real estate to add extra return at the margin. The long term decline in investment yields has put significant pressure on investment income which is the single biggest profit driver of any P&C carrier. 24

25 P&C Investment Portfolios Are Invested Conservatively Typical Investment Portfolio P&C Investment Portfolios Are Conservative Bonds 62% Source: Company Data, A.M. Best Aggregates & Averages, Morgan Stanley Research Investment Asset Allocation Equities 12% Cash 6% Other 15% The imminent threat of payouts connected to large catastrophe losses has forced P&C carriers to be very conservative portfolio managers. P&C portfolios are very liquid (average duration is yrs) and high quality (typically invest in A rated or better). As large investors across all asset classes, P&C carriers are under frequent scrutiny from investors concerned about particular asset classes. At various point in recent years, municipals, European sovereign holdings, mortgagebacked/asset-backed securities, oil related assets and alternative investments (real estate, private and public equities) have all been the focus of intense investor interest. Investment Leverage & Duration 100% 90% 80% 70% 60% 50% 40% 30% 20% 0.0% 3.0% 0.0% 0.0% 4.3% 3.8% 2.4% 0.0% 3.1% 3.5% 2.9% 1.5% 4.0% 0.0% 0.8% 2.2% 2.4% 0.0% 0.0% 9.9% 3.7% 14.6% 1.4% 0.0% 3.7% 25.0% 5.8% 5.6% 4.3% 16.9% 21.1% 2.9% 24.6% 0.9% 23.7% 12.1% 5.3% 7.3% 3.6% 0.0% 0.9% 35.7% 14.1% 0.8% 37.9% 90.1% 22.4% 84.1% 82.8% 80.8% 82.5% 66.9% 72.7% 73.1% 75.0% 75.5% 64.4% 57.5% 34.6% 33.3% Other Cash & Equiv. Alternative Equity Fixed Income Muni Fixed Income Other Investment Leverage / Duration 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x Avg 2.7x 10% 0% CB ACGL AIG ALL AXS NGHC PGR RE RNR TPRE TRV WRB XL IFC 0.0x ALL AIG WRB XL TRV PGR ACGL AXS IFC-T RNR RE CB TPRE NGHC Source: Company Data, * TPRE values are approximate given limited disclosure of fixed income securities Source: Company Data 25

26 Rising Dollar a Headwind for Global P&Cs Premium & Revenue Exposure By Geography 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% ROW Europe North America MMC AXS WLTW AON XL AIG RNR CB RE ACGL AJG WRB NGHC TRV BRO ALL IFC PGR TPRE Geographic exposure for global P&Cs US dollar strengthening can translate into less earnings for global P&Cs. Most companies do not have earnings breakdown by currencies. We estimate that companies with a higher portion of premiums (revenues for brokers) overseas could be more exposed to F/X impact. Source: Company Data, Thomson Reuters Impact of 10% Move In US Dollar Prices 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Pre-tax impact of 10% hypothetical strengthening of US dollar against all currencies TRV RE CB AIG ALL WRB AXS XL ACGL RNR Impact of currency moves Rising US dollar could also have negative mark-to-market impact on P&C book value as only assets are marked down while liabilities remain in GAAP accounting. Many P&Cs conduct a sensitivity analysis letting investors know how a 10% rise/fall in US dollar would effect foreign investments and therefore book value. These estimates are net and after hedges for those that hedge F/x exposure and range from 0-3% of shareholders equity. Source: Company Data, Morgan Stanley Research 26

27 Key Driver #3: Capital Management Is Key to Higher Returns Share Repurchases and Dividend Yields 120% Q16 % Shares Repurchased 3.0% P&C Carriers Are Active Capital Managers % Amount of Shares Repurchased 100% 80% 60% 40% 20% 0% 98% 66% 61% 61% 56% 47% 45% 44% 43% 27% 20% 9% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Dividend Yield Buybacks have been a key driver of ROE improvement as it reduces the equity base and repurchases below Book Value are accretive. P&C insurers have been among the only Financials actively returning excess capital to owners via sizeable buyback programs that have totaled ~50% of share outstanding on average since the dawn of the 2008 Financial crisis. Most P&C stocks have current dividend yields of 1-2%+. CB IFC-T PGR RE WRB AIG ALL ACGL RNR AXS TRV XL Source: Company Data, Thomson Reuters. Note: CB is legacy ACE. Power of Share Buybacks Median Relative Outperformance (bps) Relative Performance of Companies With Buyback Programs vs. S&P 500 ( ) Buyback as % Shares Outstanding <4% 4%-8% >8% ,283 The Power of Share Buybacks A 10-year Morgan Stanley study across all S&P industries reveals large share buybacks that result in a 4%+ reduction in shares outstanding have driven relative share outperformance in all periods up for as long as 3 years following the buyback announcement Mo +6 Mo +12 Mo +24 Mo +36 Mo Source: Bloomberg, FactSet, Morgan Stanley Research Months After Stock Buyback Announcement 27

28 P&C Carrier Valuations Near Historical Average on Price/Book P&C Carrier P/Book Valuations 2.4x Price to Book ( ) 200% P&C Carrier Valuations At Multi-Year Highs Price to Book 2.2x 2.0x 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x P/B P&C Insurance Index (Absolute) P/B P&C Index Relative to S&P Financials Index Historical Avg: 1.3x Historical Avg: 90% 180% 160% 140% 120% 100% 80% 60% 40% 20% P&C carrier stocks are typically valued using a Price/Book vs. ROE relationship as key inputs. P&C carrier valuations sunk to historical lows along with other financials during the 2008 Financial crisis. Valuations have reached multi-year highs are close to longterm historic averages. On a P/E basis P&C carriers have also recovered from the Financial crisis lows and relative P/E is above long-term trend. 0.6x 0% Source: Company Data, FactSet, Thomson Reuters, Morgan Stanley Research P&C Carrier P/E Valuations Major P&C M&A ( ) Price to Earnings NTM 24x 22x 20x 18x 16x 14x 12x 10x 8x 6x Price to Earnings NTM ( ) P/E NTM P/E Relative to S&P 500 Historical Avg: 13.1x Historical Avg: 81% 2008 Source: Company Data, Thomson Reuters, Morgan Stanley Research % 140% 120% 100% 80% 60% 40% Date Buyer Target Value ($m) P/B Feb-11 Berkshire Hathaway Wesco Financial x May-11 Allstate Esurance 1, x Nov-11 Alleghany Transatlantic 3, x Dec-12 Markel Alterra 3, x Jun-13 Travelers Dominion of Canada 1, x Nov-14 Renaissance Re Platinum Underwriters 1, x Jan-15 XL Group Catlin 4, x Feb-15 Fairfax Financial Brit 1, x Mar-15 Endurance Montpelier Re 1, x May-15 Fosun Intl Ironshore 1, x Jun-15 Tokio Marine HCC Insurance 7, x Jul-15 ACE Limited Chubb Corp 28, x Jul-15 China Minsheng Sirius Intl 2, x Aug-15 EXOR Partner Re 6, x Oct-16 Sompo Endurance 6, x Dec-16 Liberty Mutual Ironshore 3, x Dec-16 Fairfax Financial Allied World 4, x Source: SNL, Morgan Stanley Research 28

29 The Reinsurance Business Model Premiums Ceded Premiums Insurance Purchaser Commissions & Fees P&C Broker Primary Insurer Commissions & Fees P&C Broker Reinsurer Reinsurers provide insurance for insurers Claims Claims Losses Two main types of reinsurance Pro Rata Excess of Loss Insurer Reinsurer % of Losses Losses Reinsurer Insurer Limit Attachment Reinsurance Types Pro Rata or Quota Share: Reinsurers share losses proportionally with primary insurers. Excess of Loss or Non-Proportional: Reinsurers cover losses above the preset retention level of primary insurers (the attachment point). Reinsurers set upper end limits above which the loss is once again borne by the primary insurer. Treaty: reinsurance covering a group (portfolio) of customer risks. Facultative: reinsurance covering a specific customer risk. Source: Morgan Stanley Research 29

30 Reinsurance Is a Global Industry with Top 10 Having 70%+ Share Top 10 Global Reinsurers $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $- Munich Re Top 10 Global Reinsurers by 2015 Gross Premium Written ($m) Swiss Re Hannover Re SCOR Lloyd's Berkshire Hathaway Top 10 Market Share: ~72% ~$218b total annual premium RGA China Re Everest Re PartnerRe Leading Global Reinsurers Reinsurers insure primary carriers in either pro rata (a percentage of losses) or excess of loss (losses above attachment point) contracts. Top 10 global reinsurers command ~72% market share of the ~$225b total annual premium. Source: AM Best, Morgan Stanley Research Reinsurers Are Global North America EMEA RoW 0% 20% 40% 60% 80% 100% Munich Re Swiss Re Hannover Re Lloyd's SCOR Berkshire Hathaway RGA PartnerRe Everest Re RenaissanceRe Reinsurers Are Global Reinsurance is a global industry with major hubs in Continental Europe, Lloyd s and Bermuda. The largest global reinsurers have operations spread across the U.S., Europe and Asia Pacific. A global footprint optimizes the ability of a reinsurer to originate a diverse book of uncorrelated risks. Many reinsurers seek to compound investment returns in low tax jurisdictions to improve returns. Source: Morgan Stanley Research, Company Data 30

31 Many Reinsurers Operate in Bermuda and Lloyd s of London Top Bermuda Reinsurers $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- Source: Company Data, S&P, Morgan Stanley Research Top Lloyd s Syndicates $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- XL Catlin Catlin Everest Re PartnerRe Arch Capital Source: Company Data, SNL, Morgan Stanley Research Top Bermuda Reinsurers by 2015 Net Written Premiums ($m) Axis Capital Aspen Validus Endurance Renaissance Re Top 10 Lloyd's Syndicates by 2015 Gross Premiums Written ($m) Amlin Beazley Tokio Marine QBE Brit Hiscox Chaucer Liberty Argo Canopius Bermuda & Tax-Advantaged Domiciles Bermuda is a global reinsurance center due to its low tax rate, large talent pool, and convenient access from both US and European markets. Bermuda has grown in spurts since the early 1980s following large loss events. The Class of 1992 (RNR, PRE, etc.) followed Hurricane Andrew, the Class of 2001 (ACGL, AXS, etc.) followed the September 11 th tragedy, and the Class of 2005 (VR, etc.) was borne following Hurricane Katrina. Cayman Islands, Ireland, Switzerland, and Luxembourg are other tax-advantaged domiciles for global reinsurers. Lloyd s of London Established in 1688, Lloyd s of London is a leading global specialty insurance and reinsurance market. It is a higher cost marketplace but offers several unique features including: 1. Global licenses and distribution that stretch globally to originate hard-to-place risks. 2. An exchange marketplace where individual insurers or syndicates compete for businesses. 3. An efficient capital structure as each syndicate is backed by a Lloyd s fund and central monitoring that facilitates higher ratings. 4. Lloyd s develops some of the best underwriting talent in P&C. 31

32 Long-Term Loss Trend a Key Growth Driver for Reinsurance Demand Catastrophe Losses Increase ~6% Over Time 140 Global Insured Catastrophe Losses Average Catastrophe Losses: CAGR of 6% $b Weather-related Man-made Earthquakes 6% 5-Year Rolling Avg Loss CAGR Catastrophe losses for insurers have been increasing at a rate of 6% per annum since Insurable risk growth drivers: population density growth near coasts, rising wealth, higher emerging market penetration, rising adverse weather patterns. Source: Swiss Re Sigma, Morgan Stanley Research Liability Insurance Costs Increasing Over Time Casualty Costs: CAGR of 9% Liability insurance costs have increased by an average rate of 9% per annum. Source: AM Best, Tillinghast, Partner Re, Morgan Stanley Research 32

33 Reinsurance Pricing Is Cyclical Due to Excess Industry Capacity US Property Cat Reinsurance Pricing Hurricane Andrew ($26b) US Property Cat Rate on Line (ROL) Index 9/11 Terror Attacks($24b) Hurricane Katrina ($76b) Source: Guy Carpenter, Swiss Re Sigma, Morgan Stanley Research Superstorm Sandy ($35b) Japan EQ ($36b) Jun-13: Down 19% Jan-14: Down 15% Jan-15: Down 11% Jun-16: Jun-14: Down 5% Down 15% Jun-15: Down 5% Jan-17 Jun-16 Jan-16 Jun-15 Jan-15 Jun-14 Jan-14 Jun-13 Jan Jan-16: Down 5% Jan-17: Down 4% Property Cat Reinsurance Pricing Under Pressure Property cat reinsurance pricing fluctuates over time. Pricing usually spikes following major catastrophes (e.g., 1992 Hurricane Andrew, 9/11 terrorist attacks, and 2005 Hurricane Katrina). Pricing increased 5-15% following the March 2011 Japan earthquake pricing declined after Super Storm Sandy, a top-5 industry loss event pricing declined ~5%. We expect further stabilization at Jan 1, 2017 renewals. Top 10 Reinsurers Premium to Equity 300 Equity Premium to Equity 250% Reinsurance Industry Well Capitalized Equity ($b) % 150% 100% 50% Premium to Equity Reinsurance industry capital has risen faster than premium growth, resulting in the decline of premium to equity ratio over time; now below 100% for top 10 global reinsurers. Despite record 2011 catastrophe losses as well as high US crop losses and other major cat events since, the global reinsurance industry has an increased capital base, dampening pricing gains % Source: A.M. Best, Company Data, Morgan Stanley Research; Top 10 reinsurers in 2014 include: Munich Re, Swiss Re, Hannover Re, Berkshire Hathaway, SCOR, Lloyd s, RGA, China Re, PartnerRe and Everest Re. Lloyd s reinsurance data since 2000; Berkshire data excludes GEICO. 33

34 Traditional Reinsurance Threatened at the Margin by Alternative Capital Catastrophe Bonds Issued and Outstanding 30,000 Catastrophe Bonds Issued and Outstanding Alternative Capital In Reinsurance Amount ($m) 25,000 20,000 15,000 10,000 5,000 - Issued Outstanding 21% CAGR The days of raising common equity in the markets to replace lost capital following large loss events is being replaced by alternative capital providers. The Alternative markets encompass reinsurance capacity/risk transfers that are not provided by traditional reinsurance products. Alternative vehicles/providers include: catastrophe bonds, collateralized reinsurance, industry loss warranties (ILWs), sidecars, and hedge fund backed reinsurers. Source: Guy Carpenter, Artemis, Morgan Stanley Research Alternative Capital Growth Outpaced Traditional Capital Alternative Traditional Alternative Capital up +295% Traditional up +59% Alternative Capital Providers On The Rise Reinsurance disintermediation appears to be gaining traction as global capital pools seek higher returns and uncorrelated asset classes in a low return world. Alternative markets are providing ~$75b or ~13% of global reinsurance industry capital. Willis Re projects alternative capital to reach between $120b- $150b by H16 Source: Aon Benfield Analytics, Willis Re, Morgan Stanley Research 34

35 Alternative Capital Being Pursued in Different Structures Recent Reinsurance Start Ups Started Investment Manager Underwriter Greenlight Re 2004 Greenlight In-house (Hedges) Third Point Re 2011 Third Point In-house (Berger) Hamilton Insurance 2013 Two Sigma In-house (Dupperrault) PaCRe Validus 2012 Paulson & Co Validus Watford Re 2014 Highbridge Arch Capital ABR Re 2015 Blackrock ACE Nassau Reinsurance Group 2015 Golden Gate Capital In-house Fidelis 2015 Various In-house (Brindle) Harrington Re 2016 Blackstone Axis Capital Aligned Re Diligence UBS O'Connor Enstar Unknown Diligence JP Morgan Sirius (CMI) Potential Start-ups Unknown Diligence Goldman Sachs Aspen Source: Company Data, Green Light Re Investor Presentation, Morgan Stanley Research Sidecar Vehicles by Insurers/Reinsurers Reinsurer Start-ups Hedge funds and Asset managers are increasingly looking to partner with successful underwriters to provide permanent capital to reinsurance industry in a tax-advantaged fashion. Hedge fund backed reinsurers have tax advantaged strategies that differ but many are content to write sub 100 combined ratio business to garner free float. Hedge fund partners offer reinsurers the potential for a better investment return in the prolonged low-yield environment. Asset manager and (re)insurer JV are focused on utilizing efficient capital for (re)insurer while asset manager to provide diversified investment option to its institutional clients. Reinsurance Sidecar Sponsor Size ($m) Date Upsilon Reinsurance RenaissanceRe N/A Jan-14 AlphaCat 2014 Validus Holdings $160 Jan-14 Eden Re Ltd. Munich Re $63 Jan-14 Altair Re II Ltd. ACE $95 Jan-14 Atlas Reinsurance X Ltd. SCOR $55.50 Jan-14 Silverton Re Aspen $80 Oct-14 Mt. Logan Re Ltd. Everest Re ~$480 Oct-14 Eden Re I Ltd. (Series ) Munich Re $75 Dec-14 Eden Re II Ltd. Munich Re $290 Dec-14 Silverton Re Aspen $85 Dec-14 K-Cessions Hannover Re $400 Jan-15 Mt. Logan Re Ltd. Everest Re $810 Jan-15 AlphaCat 2015 Ltd. AlphaCat Managers (Validus) $155 Jan-15 K-Cessions Hannover Re $500 Jan-15 Versutus Ltd. Brit plc $75 Jan-15 Sector Re V Ltd. Swiss Re $191 Apr-15 Lorenz Re PartnerRe $84 Jul-15 Silverton Re Aspen $92 Jul-15 Mt. Logan Re Ltd. Everest Re $900 Oct-15 Eden Re II Ltd. (Series ) Munich Re $360 Dec-15 Silverton Re Aspen $125 Dec-15 Mt. Logan Re Ltd. Everest Re $860 Jan-16 K-Cessions Hannover Re $500 Jan-16 Versutus Ltd. (2016) Brit plc $83 Jan-16 Mt. Logan Re Ltd. Everest Re $1,000 Apr-16 Source: Artemis, Morgan Stanley Research Traditional Reinsurers Manage 3 rd Party Capital Through Sidecars To compete with the new breed of alternative capital providers, traditional reinsurers are adopting their own alternative solutions, i.e., sidecars. Sidecars are financial vehicles sponsored by existing reinsurers to underwrite specific risks within a certain timeframe (i.e. 1-2 years, Florida only). Sidecars give sponsors (reinsurers) additional underwriting capacity while enabling investors to surgically participate in hardening markets following large loss events. 35

36 Reinsurance Valuations Rising but Remain Below Historical Averages Global Reinsurance Operating ROE and Price-to-Book 25 Global Reinsurance Historical Returns and Valuation 2.5x Price/Book Value vs. ROE ROE (LHS) Average ROE P/B (RHS) ROE (%) x 1.5x 1.0x 0.5x 0.0x P/B Reinsurance stocks are typically valued using a Price/Book vs. ROE relationship as the key inputs. Reinsurance carrier valuations sunk to historical lows along with other financials during the 2008 Financial crisis. Reinsurance stocks are one of the cheapest sectors in Financials despite solid long-term ROE performance. Valuations remain below historical averages as ROE pressures remain including large catastrophe losses and low yields x Source: Company Data, Thomson Reuters, Morgan Stanley Research Estimates is est. Primary vs. Reinsurance: Valuation Over Time 3.4X Historical P/B Valuation ( ) Low Valuations, Little Differentiation 3.0X Primary Reinsurance 2.6X 2.2X 1.8X 1.4X 1.0X Reins avg: 1.38x Primary avg: 1.67x Reinsurance is the cheapest segment within insurance. Reinsurers trade at a discount to primary P&C s due to greater volatility in results. However, the long term ROE data between P&C primaries and reinsurance companies is roughly the same. Valuation dispersion in a tight range suggests a failure of investors to differentiate among Global Reinsurance names. 0.6X Source: Thomson Reuters, Morgan Stanley Research Investors that can stomach more volatility can earn the same ROE at a cheaper valuation in reinsurance. 36

37 Table of Contents 1. P&C Insurance Industry Overview 4 2. Key Investment Considerations 8 3. P&C Carriers: Primary Insurers and Global Reinsurers P&C Brokers Actuarial Reserve Analysis Catastrophes and P&C Stocks Emerging Trends in P&C Insurance Major P&C Lines of Business P&C Insurance Glossary 90 37

38 P&C Broker Business Model Insurance Purchaser EXPOSURE UNITS Premiums Commissions & Fees P&C Broker Claims Primary Insurer Ceded Premiums Commissions & Fees P&C Broker Claims PREMIUMS x COMMISSIONS = x PRICE SALARIES & BENEFITS (60%) OTHER EXPENSES (20%) Oligopoly + No Balance Sheet Risk + Capital Light = A Better Business Model Than Carriers Reinsurer P&C BROKER REVS OPERATING PROFITS (20%) P&C Brokers assist in the purchase of insurance. They serve as intermediaries between insured and insurers and between primary insurers and reinsurers. P&C Broker revenue includes commissions and fees. Commissions are a percentage (10-15%) of premiums placed while Fees are a fixed amount paid for broker services. Major P&C broker costs include: -- 60% of revenues are compensation -- 20% of revenues is operating expenses (rent, travel, technology, etc.) P&C Brokers do not assume underwriting risk. Capital requirements are limited so brokers enjoy robust cash flow. P&C Broker industry is an oligopoly with the Top 10 controlling 70% U.S. market share. The Top 2 (MMC and AON) control 40% market share. Source: Morgan Stanley Research 38

39 P&C Broker Industry Is an Oligopoly Top 10 Global Insurance Brokers $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $- MMC Top 10 Global Insurance Brokers by 2015 Total Revenues ($m) AON WLTW AJG Top 10 US Market Share: ~70% AON & MMC: ~40% of Global Revenues Top Global Insurance Brokers Global insurance brokerage industry is highly concentrated with top-10 players commanding ~70% U.S. market share. The top 2, Marsh & McLennan and Aon, comprise ~40% of the market and each has ~$12b in global revenues. Source: Business Insurance, Morgan Stanley Research Top 10 Global Reinsurance Brokers 1,600 Top 10 Global Reinsurance Brokers by 2014 Revenues ($m) 1,400 1,200 1, Top Reinsurance Brokers Reinsurance is distributed either direct or through reinsurance brokers. The leading P&C brokers each have large reinsurance brokerage operations. Aon has Benfield, Marsh has Guy Carpenter and Willis has Willis Re. 0 Aon Benfield Guy Carpenter JLT Willis Re BB&T JLT Re Cooper Gay Swett & Crawford Miller UIB THB BMS Lockton Re BRO Hub Intl Lockton Cos. Wells Fargo Insurance Source: Business Insurance, Morgan Stanley Research 39

40 P&C Pricing Is a Key Driver for P&C Brokers P&C Pricing Cycle 35.0% 30.0% U.S. P&C Insurance Pricing P&C Pricing An Important Top Line Driver 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% Commercial Lines Personal Lines Commercial lines pricing negative P&C pricing is a key driver to a P&C broker s revenue growth and operating margin improvement. Rising P&C pricing offers a tailwind to P&C broker organic growth. P&C pricing power broadly rose in , decelerated in 2014 and turned negative in It has since turned slightly positive for Personal Lines, but remains soft in Commercial Lines. Negative pricing is a headwind for brokers. Source: MarketScout, BLS, Morgan Stanley Research P&C Broker Stock Performance Rel. Performace vs. S&P % 20% 15% 10% 5% 0% -5% -10% Insurance Broker Relative Performance Soft Markets -3 Yr -2 Yr -1 Yr Before Hard Markets 1st Yr of Hard Markets 2nd Yr 3rd Yr P&C Brokers Are Early Cycle Stocks P&C broker stocks have historically outperformed the 2 years before and after the start of a P&C hard market. P&C brokers benefit from faster revenue growth and operating margin leverage in a hard P&C market. P&C broker stock P/E valuation multiples have historically expanded before a hard market in anticipation of faster earnings growth. Source: Company Data, Thomson Reuters, Morgan Stanley Research 40

41 P&C Distribution Channels and Broker Commission Rate Direct Market Gaining Shares Market Share Source: A.M. Best, Travelers Investor Day Presentation, Morgan Stanley Research P&C Commission Rate % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 63% 47% 36% 41% 40% 34% 31% 32% 25% 28% 17% 5% U.S. P&C Industry Net Commission Rate (%) Captive Agency Independent Agency Direct Direct Distribution Gaining Share In Auto US auto insurance is distributed through 3 channels: (1) Captive agencies: Agents are employees of a carrier selling just that insurer s products. (2) Independent agencies: Agents that sell multiple carriers products. (3) Direct channel: Customer purchases insurance directly from carrier via phone/internet. Led by GEICO and Progressive the direct channel has been gaining market share at the expense of captive agencies. We expect this trend to continue. P&C Commission Rate Near 10% The commission rate is commission dollars as a percentage of premiums. The overall industry commission rate is ~10.5% of premium. This rate has fluctuated over time but largely been steady hovering around an average of 10% P&C Industry Personal Lines Commercial Lines Source: Company Data, SNL, Morgan Stanley Research 41

42 P&C Broker EPS Growth Driver #1: Revenue Growth 15% P&C Broker Organic Growth vs. P&C Pricing & GDP Growth 45% Organic Growth YoY 13% 11% 9% 7% 5% 3% 1% -1% -3% -5% Hard Market Soft Market Ended in 4Q P&C Broker Organic Growth P&C Pricing Real GDP Growth e 35% 25% 15% 5% -5% -15% Comm. Pricing/ Real GDP YoY Chg P&C Brokerage Revenue Growth Depends on Both P&C Pricing and Economy : Revenues under pressure: P&C soft market, economic challenges, Spitzer investigation, interest rates decline : Revenue Growth Returning: P&C pricing improving, economy grinding higher 2014: P&C Pricing starts decelerating, economy growing 2015/16: P&C Pricing turns negative, economic growth slows 2017: P&C Pricing stabilizes, economy enjoys modest growth Source: MarketScout, BEA, Company Data, Morgan Stanley Research estimates 42

43 P&C Broker EPS Growth Driver #2: Margin Expansion P&C Broker Operating Leverage 40% P&C Broker Earnings Leverage 800 Broker Margin Leverage to P&C Pricing Earnings Growth 35% 30% 25% 20% 15% 10% 5% 0% 1% Revenue Growth = 50 bps Margin Expansion = 3.5% Earnings Growth Earning Growth Margin Expansion Revenue Growth Margin Expansion (bps) Every 100bps of revenue increase = bps margin expansion Commissions are typically a percentage of insurance premiums brokered. Rising P&C pricing increases premium volume therefore commission dollars. Source: Company Data, Morgan Stanley Research; Note: 20% baseline margin and 30% variable expenses P&C Brokerage As A Percentage Of Total Revenues Compensation Per Employee At P&C Brokers 100% 80% Insurance Brokerage Revenue Exposure Fees Commissions 130, , , Comp Per Employee 2015 Comp. Expense Ratio 80% 75% 70% 60% 40% Comp Per Employee 100,000 90,000 80,000 70,000 65% 60% 55% Comp Expense Ratio 20% 60,000 50% 0% BRO AON AJG WLTW MMC 50,000 40,000 WSH MMC AJG BRO AON 45% 40% Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research 43

44 P&C Broker EPS Growth Driver #3: Capital Management P&C Broker Free Cash Flow and FCF Yield FCF ($m) Free Cash Flow E 3,000.0 FCF 2015 FCF 2016E FCF 2017E FCF Yield 2016E 2, , , , % 8% 7% 6% 5% 4% 3% 2% 1% FCF as % Market Cap P&C Brokers Produce Robust Free Cash Flow Capital light business model: FCF yields of 5-8% Buybacks & M&A Add To EPS Growth - AON MMC WLTW AJG BRO 0% Source: Company Data, Thomson Reuters, Morgan Stanley Research P&C Broker Dividend Yield Dividend Yield Dividends Yield and Payout 3.5% Dividend Yield Dividends as % FCF 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Dividend as % FCF Dividend yields of 1-3% Dividends 20-60% of FCF P&C Brokers Dividend Yield 0.0% AJG MMC WLTW AON BRO 0.0% Source: Company Data, Thomson Reuters, Morgan Stanley Research 44

45 Private Healthcare Exchanges Growth Slower than Anticipated Private Exchanges Addressable Market ~75m Lives Retirees, Lower-Skill Workers, Temporary Workers are the Low-Hanging Fruit US Population ~ 300 million The Healthcare Exchange Opportunity Gov't / Individuals / Uninsured ~170 million High Skill Workers ~ 50 million Employed Population & Depdendents ~110 million Low Skill Workers ~ 50 million Source: U.S. Census Bureau, EBRI, Morgan Stanley Research Estimates Enrollment below Initial Estimates Retirees with Benefits and Dependents ~18 million Temporary Workers ~ 10 million Private Exhange Opportunity ~78 million Private exchanges allow employees to take their employer funded health insurance credit and purchase insurance on their own on an exchange managed by their benefits provider. Private healthcare exchanges offer employers a potential way to contain health care costs. MS estimates the private exchange addressable market is ~78m lives. Large P&C Insurance brokers Marsh & McLennan, AON, Willis Towers Watson should be beneficiaries of the move to private exchanges. Today s leaders include benefits consultants Hewitt (owned by AON), Mercer (owned by MMC), and Towers Watson/Liazon (owned by WLTW). Private exchanges offer upside optionality for brokers long term earnings potential. Initial estimates estimated ~12.5m lives by Slower adoption is driven by self-insured employers, delay in Cadillac tax, alternative plans (high deductible option) and potential alliance structures. Brokers have limited earnings impact near-term as brokers are closer to break-even on their initial investments. Management teams remain focused on long-term potential where economic benefits would take years to materialize. Source: Accenture, Company Data, Morgan Stanley Research 45

46 P&C Broker Valuation Near Long-Term Averages Historical P/E Valuation 140% P&C Broker P/E NTM 130% Avg. Abs. P/E 16.5x 120% 25x 20x P&C Broker Valuation Near Long Term Averages Rel. P/E NTM vs. S&P % 100% 90% 80% 70% 60% 50% Hard Market Relative P/E Absolute P/E Avg. Rel. P/E 102% 15x 10x 5x Absolute P/E NTM Both absolute and relative P/E slightly above long term averages Focus on the fastest growth 40% 0x Source: Thomson Reuters, Company Data, Morgan Stanley Research Historical M&A Valuation Date Acquiror Target Value ($m) P/S EV/EBITDA 01/16/2007 Sachs Holdings 1, x 12.8x Goldman USI 01/29/2007 Aon Corp Footman James & Co /27/2007 Towergate Partnership Broker Network Holdings x 14.4x 03/04/2008 Charterhouse Capital Giles Insurance Brokers x 05/15/2008 Evercore Capital Bollinger /08/2008 Willis Group Holdings Hilb Rogal & Hobbs Co 1, x 11.8x 08/22/2008 Aon Corp Benfield Group 1, x 16.2x 11/26/2008 QBE Holdings ZC Sterling Corp /19/2009 Astorg Partners SAS Gras Savoye SA x 12/18/2009 Marsh & McLennan Cos HSBC Insurance Brokers /20/2010 Stone Point Capital Sedgwick CMS Holdings 1,100 07/12/2010 Aon Corp Hewitt Associates 4, x 7.9x 12/20/2010 Sedgwick Claims Mgmt Specialty Risk Services /12/2011 A.J. Gallagher Heath Lambert Group x 7.9x 09/15/2011 JMH Investments Jardine Lloyd Thompson x 8.4x 12/15/2011 Brown & Brown Arrowhead General x 10.0x 02/03/2012 BB&T Crump Group x 9.0x 11/26/2012 Onex USI Holdings 2,300 ~10x 5/21/2013 Brown & Brown Beecher Carlson x 11.0x 8/12/2013 A.J. Gallagher Bollinger x 7.8x 9/4/2013 A.J. Gallagher Giles x 7.7x 9/20/2013 Jardien Lloyd Thompson Tower Watson Re x 1/15/2014 Brown & Brown Wright Insurance Group x 10.2x 4/1/2014 A.J. Gallagher Oval Limited x 10.7x 4/6/2014 A.J. Gallagher Wesfarmers x 10.8x 5/19/2014 A.J. Gallagher Noraxis Capital x 9.3x 5/27/2014 Willis Group Holdings Max Matthiessen AB x 7.5x 4/22/2015 Willis Group Holdings Gras Savoye SA x 8.5x 5/31/2015 Willis Group Holdings Miller Insurance x ~9x 6/30/2015 Willis Group Holdings Towers Watson 8, x 10.8x Source: Company Data, SNL, Thomson Reuters, Morgan Stanley Research P&C Broker M&A Given robust FCF generation P&C brokers have been acquisitive as the industry has consolidated Many M&A targets with ~18k agents/brokers in the US. Most have revenues less than $20m. M&A among smaller brokers tends to occur at cheaper valuations (5-7x EV/EBITDA) Larger deals usually command higher multiples ranging ~8x to ~12x. 46

47 Table of Contents 1. P&C Insurance Industry Overview 4 2. Key Investment Considerations 8 3. P&C Carriers: Primary Insurers and Global Reinsurers P&C Brokers Actuarial Reserve Analysis Catastrophes and P&C Stocks Emerging Trends in P&C Insurance Major P&C Lines of Business P&C Insurance Glossary 90 47

48 Why Should Investors Focus on Reserve Analysis? 1) The numbers are large and small changes can have a big impact Loss and loss adjustment expense (L&LAE) reserves are the largest liability on the industry s BS Total US P&C Industry liabilities: $1,121b (at year end 2015) Loss & LAE reserves: $610b (54.3% of total liabilities) A 1% change in reserves = $6.1b! 2) Reserve changes directly impact earnings Every $1 increase in reserves lowers pre-tax earnings by $1 Income statement incurred losses = Losses paid in year + Change in Reserves during year 3) Reserving is highly subjective; management judgment comes into play 4) Annual P&C Reserve disclosure is required by US regulators and offers a very detailed line by line look at insurance reserves by accident year Source: Morgan Stanley Research 48

49 Reserves & Actuarial Analysis Important Concepts & Terms Three components of the total ultimate loss estimate: (1) Paid loss: Losses that have been paid. (2) Case reserves: Reserves set by claims adjusters or formula and assigned to a specific claim. (3) IBNR reserves: Incurred But Not Reported reserves for future claims that have not yet been reported to the insurer. Key time periods for analysis: (1) Accident year: Monitors the development of claims from the same occurrence year over time ( age of accident year). This is where actuarial analysis is applied. (2) Calendar year: The focus is on current year reporting. Calendar year results include reserve changes for reporting purposes. Components of Ultimate Loss for Two Lines Of Business (LOB) After 1 Year and 5 Years Short-tailed LOB has little IBNR after 5 years Long-tailed LOB still has significant IBNR after 5 years Source: Morgan Stanley Research estimates, Company Data, SNL 49

50 Reserves Analysis: Top 5 Lines Are 69% of Industry Reserves Reserves by Line of Business Long Tail Lines The Bulk Of Industry Reserves 31% 6% 25% Work Comp Personal Auto Liability Other Liab' Occurrence Oth. Liab, C-M Top 5 lines account for 69% of consolidated reserves Four of top-5 are long-tailed lines which points to the importance of reserve accuracy in these lines 6% 15% 17% CMP Source: Morgan Stanley Research, Company Data, SNL Case / IBNR Reserve Split IBNR Reserves A Big Part of Industry Reserves IBNR reserves, the more subjective reserve component, accounts for a large portion of reserves for the top 5 industry lines For some lines, more than 10% of ultimate loss remains in IBNR after 10 years Source: Morgan Stanley Research estimates, Company Data, SNL Note: All data is on an all accident years combined basis 50

51 Reserves & Actuarial Analysis: Reserve Triangle Basics Paid Loss Triangle Prior - 11,213,345 20,455,220 26,735,626 31,953,279 36,513,623 40,818,774 45,067,502 48,380, ,261,049 11,216,827 14,947,423 17,088,168 18,521,138 19,602,528 20,380,280 21,164,790 21,615, ,407,521 11,920,277 15,590,548 17,900,057 19,498,077 20,669,503 21,618,645 22,278,785 22,794, ,522,094 11,984,001 15,798,682 18,246,160 19,944,811 21,172,921 22,075,635 22,724, ,047,914 10,974,816 14,438,403 16,658,019 18,278,842 19,417,924 20,165, ,189,467 11,326,715 14,996,496 17,342,883 18,974,609 19,946, ,386,408 11,619,083 15,352,966 17,715,774 19,276, ,245,156 11,421,019 14,901,814 17,092, ,091,325 11,180,161 14,698, ,130,712 11,264, ,994,092 Paid Loss Development Source: SNL, Morgan Stanley Research Paid loss development factors Predicting future cumulative paid losses from the above triangle is akin to completing the triangle Paid loss development factors can help Note that when AY10 grew from $5,189,467 to $11,326,715 it grew by a factor of Also note that month development factors are: (a) materially different than the factors in all other columns, and (b) are somewhat consistent (the coefficient of variation is < 1%) Thus, if we can select some average development factor for each age of development, we can use these selections to predict future paid losses and complete the paid loss triangle. Paid loss triangle Shows the cumulative amount over time of paid losses for all claims that occurred in each individual accident year Eg: For all claims that occurred in 2010 (AY10), the total amount of payments on these claims was $5,189,467 as of 12/31/10 (12 months from start of the AY = age 12) Twelve months later (as of 12/31/11; age = 24), paid losses on these same claims (AY10) had grown to $11,326,715 Note: Paid losses + Reserves = Ultimate Losses Over time, as an Accident Year matures, cumulative paid losses will increase, and reserves should decrease. Once all claims are paid, settled, and closed, reserves = $0 and paid losses = ultimate losses Our goal (in a very simplified world) is to predict the ultimate amount of paid losses for each accident year. Then, subtracting the actual cumulative amount of paid losses, we ll arrive at one estimate of needed reserves for that accident year. 51

52 Reserves & Actuarial Analysis: Reserve Triangle Analysis Paid Loss Triangle Squaring The Triangle Ultimate Reserve Prior - 11,213,345 20,455,220 26,735,626 31,953,279 36,513,623 40,818,774 45,067,502 48,380,571 51,387,229 64,234,036 12,846, ,261,049 11,216,827 14,947,423 17,088,168 18,521,138 19,602,528 20,380,280 21,164,790 21,615,970 22,007,106 27,508,883 5,501, ,407,521 11,920,277 15,590,548 17,900,057 19,498,077 20,669,503 21,618,645 22,278,785 22,794,105 23,136,017 28,920,021 6,125, ,522,094 11,984,001 15,798,682 18,246,160 19,944,811 21,172,921 22,075,635 22,724,095 23,292,197 23,641,580 29,551,975 6,827, ,047,914 10,974,816 14,438,403 16,658,019 18,278,842 19,417,924 20,165,667 20,831,134 21,351,912 21,672,191 27,090,239 6,924, ,189,467 11,326,715 14,996,496 17,342,883 18,974,609 19,946,952 20,844,565 21,532,435 22,070,746 22,401,808 28,002,259 8,055, ,386,408 11,619,083 15,352,966 17,715,774 19,276,835 20,471,999 21,393,239 22,099,216 22,651,696 22,991,471 28,739,339 9,462, ,245,156 11,421,019 14,901,814 17,092,248 18,767,288 19,930,860 20,827,749 21,515,065 22,052,941 22,383,735 27,979,669 10,887, ,091,325 11,180,161 14,698,162 16,976,377 18,640,062 19,795,746 20,686,554 21,369,211 21,903,441 22,231,993 27,789,991 13,091, ,130,712 11,264,143 14,846,140 17,147,292 18,827,727 19,995,046 20,894,823 21,584,352 22,123,961 22,455,820 28,069,776 16,805, ,994,092 10,987,002 14,480,869 16,725,404 18,364,493 19,503,092 20,380,731 21,053,295 21,579,628 21,903,322 27,379,153 22,385, ,914,707 Paid Loss Development ult We can fill in the rest of the triangle and then calculate the indicated reserve Once we select these factors Selected Note: This method (the paid loss development method ) is just one of many actuarial methods that can be used. Each method has its own pros/cons, and complete analysis would incorporate weights of the various methods to help arrive at a final reserve indication. But a thorough analysis also includes a review of various reserve metrics, a small sample of which will be reviewed next Source: Morgan Stanley Research 52

53 Actuarial Analysis: How Key Reserve Metrics Are Used Metric Useful for How? Booked loss ratio (accident year basis) Paid-to-reported ratio (accident year basis; all years evaluated at 12 months) IBNR-to-earned premium (accident year basis; all years evaluated at 12 months) Gauging aggressiveness in most recent accident year s reserves Gauging aggressiveness specifically with most recent accident year s case reserves Gauging aggressiveness specifically with most recent accident year s IBNR reserves If current AY s loss ratio is below recent prior years, could point to an aggressive reserve stance, especially if done in a soft rate environment If paid-to-reported ratio shows a marked increase for recent AY, could point to more aggressive case reserves, especially if done against a backdrop of a steady or declining paid loss ratio An increasing ratio could indicated a more conservative IBNR stance, especially if earned premium is flat or rising IBNR-to-case reserve (accident year basis; all years evaluated at 12 months) Gauging aggressiveness specifically with most recent accident year s IBNR reserves An increasing ratio could indicated a more conservative IBNR stance, especially if case reserve position seems unchanged Average paid per closed claim; average case per open claim (accident year basis; all years evaluated at 12 months) Source: Morgan Stanley Research Monitoring changes in case reserve adequacy If the trend in average case reserve per open claim lags that for average payment per closed claim, that could indicate weakening case reserves, particularly for the most recent accident year 53

54 Some Illustrative Examples of Reserves & Actuarial Analysis The tables on the following slides show: 1) Accident year (AY) 2015 booked loss ratio 2) The percentage points this ratio is higher or lower than accident year 2014 s ratio (noting that a material decrease would be a yellow flag given an external rate environment that is not overly hard) 3) The percentage points the company s AY15 booked loss ratio is higher or lower than the industry s 4) The company s track record (over the most recent nine accident years) of favorable / adverse development These are provided to serve as just one example of metrics that are used in an actuarial analysis, in order to help investors to begin to form a framework of the type of data to review and questions to ask management teams. Comments on specific companies are beyond the scope of this report. Source: Morgan Stanley Research 54

55 Example Actuarial Analysis on Major P&C Line: Workers Compensation The table helps to highlight companies that consistently take reserve charges. We note the following: CNA s 2015 loss ratio is 550bps lower than its 2014, 620bps below the industry s, and the company has seen adverse development for each of the past 8 years Employers Insurance Group is also book its 2015 loss ratio below both its 2014 loss ratio and the industry s 2015 loss ratio, and the company has seen more years of adverse development than favorable. Report for the Line of Business : Workers' Comp Entity Name Direct Higher/ Higher/ Was the initial loss ratio too low? Premiums Mkt 2015 (Lower) (Lower) Cumulative development: favorable / (unfavorable) Written Share Loss Ratio than 2014 than Industry Travelers Companies Inc. (SNL P&C Group) 4,467, % 71.8% -0.3% 5.0% 21.4% 9.8% 4.3% 0.9% -6.2% -3.4% -0.6% 0.5% 0.2% Hartford Financial Services (SNL P&C Group) 3,324, % 59.6% -1.3% -7.2% 8.6% 8.7% -2.3% -3.2% -13.6% -7.0% 0.6% 3.4% 0.7% AmTrust Financial Services (SNL P&C Group) 2,972, % 58.9% 2.0% -7.9% 17.2% 8.1% 2.7% -11.7% -7.4% 2.4% 8.6% 2.5% 6.4% Zurich Insurance Group (SNL P&C Group) 2,859, % 81.2% 5.3% 14.4% 8.1% -9.6% -9.4% -7.7% -0.5% -1.9% 7.6% 6.1% 4.1% American International Group (SNL P&C Group) 2,559, % 74.8% 0.4% 8.0% 5.6% 1.3% -6.9% -3.4% -14.8% -6.3% 2.7% -1.1% -1.7% Berkshire Hathaway Inc. (SNL P&C Group) 2,482, % 58.6% 3.0% -8.2% 15.4% 11.2% 2.1% 5.8% 3.4% 2.2% 4.2% 4.7% 5.7% Liberty Mutual (SNL P&C Group) 2,481, % 70.7% -3.4% 3.9% 14.2% 9.9% 3.0% 5.0% 5.6% 8.1% 12.3% 11.2% 1.2% Chubb Ltd. (SNL P&C Group) 2,437, % 56.6% 0.6% -10.2% 9.1% 11.4% 5.6% 5.7% 0.1% -0.7% 0.3% 1.1% 0.0% State Compensation Ins Fund 1,638, % 84.0% 3.7% 17.2% NA NA NA NA NA -6.5% -1.7% -2.5% 1.2% Old Repub International Corp. (SNL P&C Group) 1,443, % 70.0% -20.0% 3.2% 7.0% -9.0% -12.3% -18.8% -25.1% -26.3% -22.0% -21.8% -22.7% W. R. Berkley Corp. (SNL P&C Group) 1,394, % 57.7% 1.5% -9.2% 16.6% 9.2% -22.6% 1.5% 2.1% -3.6% -1.1% 3.7% 0.5% American Financial Group Inc. (SNL P&C Group) 1,314, % 58.9% -0.6% -7.9% -73.3% % % % % % % -82.3% 2.1% AF Group (SNL P&C Group) 1,139, % 57.2% 2.3% -9.6% -2.9% -8.9% -13.9% -11.5% -2.8% -0.9% -0.5% -1.5% 3.4% Texas Mutual Insurance Co. 1,087, % 57.5% 0.0% -9.4% 23.6% 21.2% 23.2% 26.9% 18.8% 13.8% 13.7% 9.5% 3.7% Fairfax Financial Holdings (SNL P&C Group) 905, % 50.5% -0.2% -16.3% 5.7% -3.4% -5.4% -6.6% -3.6% 4.8% 9.7% 6.0% 2.7% ICW Group (SNL P&C Group) 822, % 60.0% 4.5% -6.8% 24.3% 10.4% -7.4% -4.8% -5.1% 4.6% 10.5% 3.7% 4.3% CNA Financial Corp. (SNL P&C Group) 729, % 60.6% -5.5% -6.2% 5.4% -3.5% -7.8% -4.2% -15.9% -5.5% -7.9% -7.1% -1.8% Employers Insurance Group (SNL P&C Group) 684, % 61.2% -4.0% -5.7% 13.5% 1.8% -5.7% -8.8% -17.7% -11.7% -7.5% -4.0% 2.6% Pinnacol Assurance 633, % 61.3% -13.5% -5.5% NA NA NA NA NA 4.2% 6.8% 3.9% 0.3% NJ Manufacturers Insurance Co. (SNL P&C Group) 509, % 68.2% -11.2% 1.3% -5.6% 3.5% 3.4% 10.4% 6.4% -5.4% 4.0% 1.3% -0.7% Nationwide Mutual Group (SNL P&C Group) 506, % 63.9% -7.9% -2.9% 13.9% 5.7% -0.7% 4.1% 0.1% -1.6% 5.7% -1.5% -1.5% Sentry Insurance a Mutual Co. (SNL P&C Group) 476, % 77.2% 4.2% 10.3% 15.6% 9.5% 7.8% 9.7% 8.8% 10.4% 6.3% 8.0% 4.5% SAIF Corp. 469, % 97.5% 2.6% 30.7% 25.8% 24.3% 16.1% 22.2% 19.8% 24.0% 21.8% 11.0% 4.5% Erie Insurance Group (SNL P&C Group) 448, % 61.6% -7.5% -5.2% 22.8% 20.0% 19.9% 21.1% 15.7% 6.0% -0.2% 11.4% -2.7% Amerisure Mutual Insurance Co. (SNL P&C Group) 431, % 51.8% -4.2% -15.0% 17.9% 17.2% 7.4% 6.7% 6.9% 8.8% 0.3% 3.7% 1.0% P&C Industry 54,787, % 0.5% -4.0% -9.1% -7.0% -10.0% -2.3% 3.6% 1.3% 0.8% Source: Morgan Stanley Research estimates, Company Data, SNL 55

56 Example Actuarial Analysis on Major P&C Lines: Private Auto Liability State Farm booked its 2015 loss ratio below the industry; the first time it has done so in at least the last 10 years; recent accident years have developed adversely. Infinity also booked below the industry in 2015 (not common for the company) and has seen recent accident years develop adversely. Report for the Line of Business : Pvt Pass Auto Liab Entity Name Direct Higher/ Higher/ Was the initial loss ratio too low? Premiums Mkt 2015 (Lower) (Lower) Cumulative development: favorable / (unfavorable) Written Share Loss Ratio than 2014 than Industry State Farm Mutl Automobile Ins (SNL P&C Group) 22,058, % 70.7% -0.1% -2.1% -1.2% 0.6% 2.3% 3.3% 5.9% 6.4% 3.6% 0.6% -1.0% Berkshire Hathaway Inc. (SNL P&C Group) 13,987, % 79.1% 30.6% 6.3% 5.5% 3.1% 4.4% 6.1% 3.8% 4.4% 2.0% 1.2% 0.4% Allstate Corp. (SNL P&C Group) 11,570, % 74.5% 4.1% 1.7% 0.9% -0.3% -0.7% 0.6% 3.2% 1.7% 0.6% -0.7% -1.0% Progressive Corp. (SNL P&C Group) 11,335, % 65.0% 3.0% -7.8% -0.2% 0.9% 1.7% 3.3% 0.6% -0.7% -0.1% -0.1% 1.2% Farmers Insurance Group of Cos (SNL P&C Group) 5,980, % 66.9% 4.9% -6.0% 2.3% 2.2% 3.7% -0.4% 2.5% -1.6% -0.9% -1.7% -1.7% Liberty Mutual (SNL P&C Group) 5,773, % 70.3% -0.1% -2.5% 3.3% 4.2% 3.5% 0.0% -0.6% -2.3% -0.9% -1.6% -1.3% United Svcs Automobile Assn (SNL P&C Group) 5,744, % 94.1% 4.2% 21.2% 4.6% 6.6% 6.6% 7.3% 4.1% 3.2% 1.6% -0.5% -2.1% Nationwide Mutual Group (SNL P&C Group) 4,419, % 70.8% 4.1% -2.0% 0.6% -0.1% 1.3% 2.5% 1.3% 1.2% 0.7% -1.1% -1.5% American Family Insurance Grp (SNL P&C Group) 2,174, % 73.9% 3.3% 1.0% 5.3% 5.6% 6.9% 5.0% 1.2% 3.3% 2.4% 3.2% 3.0% Travelers Companies Inc. (SNL P&C Group) 2,091, % 64.0% 2.4% -8.8% 6.2% -2.5% -0.3% -0.8% -2.8% -3.1% -0.4% 1.8% 0.8% Hartford Financial Services (SNL P&C Group) 1,617, % 69.2% 0.6% -3.7% 4.2% 5.4% 4.0% 5.7% 4.2% 1.2% -0.3% -0.9% -0.7% Auto Club Exchange Group (SNL P&C Group) 1,453, % 67.6% 1.4% -5.2% 0.1% 1.2% 1.4% -0.2% -1.1% 0.9% 1.0% 1.1% -0.8% Erie Insurance Group (SNL P&C Group) 1,402, % 74.8% 2.2% 2.0% 8.5% 5.2% 1.9% 3.1% 1.8% 0.7% 2.6% 2.0% -0.3% Mercury General Corp. (SNL P&C Group) 1,378, % 65.1% 0.0% -7.7% -1.6% -2.7% 1.7% -0.4% -2.0% -4.1% 0.6% -0.6% 1.0% MetLife Inc. (SNL P&C Group) 1,327, % 71.6% 4.0% -1.2% 6.0% 5.4% 2.0% 3.2% 2.5% 0.7% 1.7% 1.6% -1.4% CSAA Insurance Exchange (SNL P&C Group) 1,246, % 81.7% 7.4% 8.8% 5.5% 6.2% 5.8% 3.9% 0.9% 0.9% -1.7% -0.6% 2.6% National General Holdings Corp (SNL P&C Group) 1,231, % 69.2% 1.3% -3.6% 1.4% -1.2% -5.5% -9.5% -6.3% 0.5% -3.0% 0.6% -0.9% Auto-Owners Insurance Co. (SNL P&C Group) 1,149, % 69.4% 0.8% -3.5% 2.4% 2.8% -2.6% -3.9% -7.3% -8.4% -7.6% -3.8% -1.9% Auto Club Insurance Association (SNL P&C Group) 977, % 70.1% 2.9% -2.7% 1.8% 3.9% -7.3% -7.3% -9.2% -10.0% 0.7% -6.8% 0.2% MAPFRE SA (SNL P&C Group) 936, % 70.6% 1.4% -2.3% 3.8% 4.0% 2.0% 0.4% -3.4% -7.2% -0.3% -1.8% -2.2% Infinity P&C Corp. (SNL P&C Group) 836, % 70.7% 2.0% -2.1% 7.3% 4.5% 5.4% 5.3% -3.5% -5.3% -2.7% 1.5% -0.3% Kemper Corp. (SNL P&C Group) 745, % 72.7% 3.6% -0.1% 6.3% 2.1% 1.4% 0.5% 1.4% 0.8% 3.1% 2.3% -1.3% Amica Mutual Insurance Co. (SNL P&C Group) 685, % 80.5% 5.4% 7.6% 3.5% 1.6% -0.1% -2.4% -3.3% -2.3% 1.8% 0.7% -1.1% NJ Manufacturers Insurance Co. (SNL P&C Group) 615, % 70.2% 2.4% -2.7% 6.0% 4.9% 6.6% 0.5% 2.0% -0.5% -1.7% 1.4% 1.7% Sentry Insurance a Mutual Co. (SNL P&C Group) 614, % 63.3% -0.3% -9.6% 10.3% 5.8% 2.4% 0.9% -2.2% 0.9% -2.2% 0.4% 0.3% P&C Industry 119,341, % 2.4% 2.1% 2.4% 2.5% 2.1% 1.5% 1.0% 0.0% -0.4% Source: Morgan Stanley Research estimates, Company Data, SNL 56

57 Example Actuarial Analysis on Major P&C Lines: Other Liability Occurrence We d note that this is a particularly long-tailed line, so in order to reach more concrete conclusions on any individual company, a full blown actuarial reserve study would be required. As noted above, the metrics here tell just one piece of the overall story. Companies we d monitor include: Travelers (its level of favorable development has slowed considerably); Markel (its AY15 loss ratio could be light); and American Financial Group. Report for the Line of Business : Oth Liab (Occurrence) Entity Name Direct Higher/ Higher/ Was the initial loss ratio too low? Premiums Mkt 2015 (Lower) (Lower) Cumulative development: favorable / (unfavorable) Written Share Loss Ratio than 2014 than Industry Chubb Ltd. (SNL P&C Group) 2,996, % 69.6% -2.2% 8.2% 12.1% 13.5% 11.3% 14.4% 4.4% 3.1% -1.4% -1.1% -0.7% American International Group (SNL P&C Group) 2,393, % 76.1% 1.1% 14.7% 2.0% -7.2% -4.6% -4.9% -8.1% -12.1% -6.0% -6.8% -1.7% Zurich Insurance Group (SNL P&C Group) 1,974, % 86.0% 0.8% 24.6% 16.8% 19.8% 19.6% 16.9% -9.7% -5.1% -7.5% -14.7% -6.8% Travelers Companies Inc. (SNL P&C Group) 1,897, % 52.9% -0.3% -8.5% 26.9% 19.0% 15.7% 19.6% 14.3% 8.1% 8.8% 2.8% 0.8% Liberty Mutual (SNL P&C Group) 1,827, % 61.3% -2.6% -0.1% 11.5% 11.7% 8.7% 9.8% 1.9% -2.2% -4.3% -1.9% -2.2% Assurant Inc. (SNL P&C Group) 1,573, % 59.0% 18.7% -2.4% 1.2% 3.5% 2.4% 7.9% 6.6% 6.2% 6.5% 10.9% 11.2% Nationwide Mutual Group (SNL P&C Group) 1,426, % 58.0% -3.0% -3.4% 7.7% 7.0% 9.3% 13.2% 10.3% -6.6% -1.2% 0.0% -1.8% W. R. Berkley Corp. (SNL P&C Group) 1,143, % 56.0% 1.2% -5.4% 10.3% 13.1% 27.7% 11.3% 2.0% -5.6% -0.2% -0.6% 3.6% CNA Financial Corp. (SNL P&C Group) 1,029, % 55.7% 2.3% -5.7% 26.1% 34.1% 6.1% -10.8% -3.9% 6.0% 5.0% 3.8% 1.3% XL Group Ltd (SNL P&C Group) 860, % 65.1% 2.0% 3.8% 13.7% 5.2% -2.9% 5.7% -6.1% -8.3% 0.2% -9.4% -1.0% American Financial Group Inc. (SNL P&C Group) 794, % 54.4% -0.1% -7.0% 24.2% 21.9% 11.9% 11.0% 5.0% -3.2% -1.6% -0.5% -1.6% State Farm Mutl Automobile Ins (SNL P&C Group) 792, % 54.0% 1.9% -7.4% -1.3% -0.7% 8.4% 5.0% 4.6% -2.4% -5.2% -5.9% -1.9% Fairfax Financial Holdings (SNL P&C Group) 769, % 59.6% 1.0% -1.8% 18.7% 16.6% 11.6% 8.6% 7.8% 5.6% 1.4% 6.6% -0.5% Berkshire Hathaway Inc. (SNL P&C Group) 744, % 67.8% 13.3% 6.4% 21.4% 30.8% 24.0% 29.2% 14.9% 15.3% 10.0% 8.3% 2.1% Virginia Surety Co. 732, % 63.4% 0.5% 2.0% % % % % % % 0.5% 0.9% 1.4% Cincinnati Financial Corp. (SNL P&C Group) 673, % 51.0% 2.4% -10.4% 23.2% 24.6% 29.2% 22.2% 20.8% 17.4% 9.1% 3.0% 1.7% Tokio Marine Group (SNL P&C Group) 637, % 75.3% 8.3% 13.9% -1.7% 5.8% -0.7% 5.5% -7.9% -10.1% -7.9% 3.1% 6.2% Hartford Financial Services (SNL P&C Group) 588, % 44.8% 0.3% -16.6% 39.3% 18.1% 10.2% 4.4% -8.1% -8.5% -5.1% -7.6% 0.5% Markel Corp. (SNL P&C Group) 567, % 59.0% -1.7% -2.4% 19.0% 23.2% 22.7% 25.4% 19.8% 9.8% 1.8% -1.0% 3.3% Navigators Group Inc. (SNL P&C Group) 548, % 60.8% 10.3% -0.6% 11.4% 8.8% 10.3% -6.0% 0.7% -5.2% 4.4% 7.7% 10.7% Starr International Co. (SNL P&C Group) 548, % 66.9% 6.8% 5.5% 26.0% -8.9% -21.4% -12.3% 12.9% 2.7% Selective Insurance Group Inc. (SNL P&C Group) 491, % 48.7% -3.4% -12.6% 14.6% 9.3% 7.3% 15.8% 6.6% -3.3% 3.3% -5.5% -5.2% AmTrust Financial Services (SNL P&C Group) 471, % 69.4% 4.1% 8.0% -3.4% 8.8% -4.7% -9.6% -18.4% -10.4% -20.7% -1.7% 2.4% Allied World Assurance Co. (SNL P&C Group) 454, % 66.6% -0.4% 5.2% 46.2% -6.5% -17.9% 15.2% 6.8% -7.7% -6.8% -6.9% -1.5% Allianz Group (SNL P&C Group) 436, % 33.0% -23.2% -28.4% 1.2% -6.4% 0.4% 5.5% -1.8% -0.3% -11.3% 6.6% 9.2% P&C Industry 39,554, % 10.9% 7.7% 7.3% 7.3% 2.0% -0.9% 0.2% -0.3% 0.5% Source: Morgan Stanley Research estimates, Company Data, SNL 57

58 Example Actuarial Analysis on Major P&C Lines: Commercial Auto Liability This line has troubled the industry for a few years, and while rates have rebounded in general, older accident years may still have reserve deficiencies. We d monitor the following companies: Hartford (its 2015 loss pick is below its 2014 and below the industry, and the most recent five AYs have all developed adversely); WRB (same reasons); and Old Republic. Report for the Line of Business : Comm'l Auto Liab Entity Name Direct Higher/ Higher/ History of booking below the industry? Premiums 2015 (Lower) (Lower) Initial loss pick: higher/(lower) than industry Written Loss Ratio than 2014 than Industry Progressive Corp. (SNL P&C Group) 1,687, % 2.6% -5.4% -7.9% -4.9% 1.2% -0.2% 0.9% 0.8% -1.6% -0.1% -5.3% Travelers Companies Inc. (SNL P&C Group) 1,571, % 0.0% -4.6% -4.3% -2.3% -1.7% -4.1% -5.6% -0.1% -1.1% -0.3% -3.3% Nationwide Mutual Group (SNL P&C Group) 1,331, % -5.2% 5.1% 2.6% 2.0% 4.4% 6.4% 2.9% 3.5% 3.0% 2.5% 7.2% Liberty Mutual (SNL P&C Group) 1,181, % -1.0% -5.9% 0.0% 2.9% 3.4% -1.3% -4.5% 4.2% 2.5% -0.2% -4.7% Zurich Insurance Group (SNL P&C Group) 1,153, % 1.8% 13.5% 5.7% 5.9% 8.6% 3.5% 5.9% 0.4% -1.3% 0.1% 5.1% American International Group (SNL P&C Group) 1,049, % -13.1% 10.3% 7.2% 3.2% 0.2% -0.9% 0.2% 2.4% 5.3% -0.1% 10.3% Berkshire Hathaway Inc. (SNL P&C Group) 873, % 1.8% -3.7% -7.6% -11.0% -3.9% -4.3% -0.3% -0.5% -1.5% -3.2% -6.1% Old Repub International Corp. (SNL P&C Group) 726, % -8.6% 12.1% 17.1% 14.3% 14.7% 15.6% 16.5% 15.2% 13.4% 13.2% 11.7% Chubb Ltd. (SNL P&C Group) 540, % 1.0% -1.5% -9.4% -5.8% -8.1% 0.5% 4.6% 1.3% -1.1% -4.3% -0.4% AmTrust Financial Services (SNL P&C Group) 533, % -0.8% 2.3% 1.3% -3.1% -6.8% -4.5% -7.6% -1.2% -4.1% 1.9% -2.8% Tokio Marine Group (SNL P&C Group) 501, % 1.0% 7.4% 13.3% -11.8% -18.4% -1.6% -2.2% 1.4% -0.1% 1.2% 2.8% Auto-Owners Insurance Co. (SNL P&C Group) 455, % -3.1% -9.5% -2.5% -0.3% -6.4% -1.7% -2.6% -14.7% -15.3% -10.9% -13.2% Hartford Financial Services (SNL P&C Group) 441, % -6.8% -5.9% -8.2% -7.1% -7.4% -4.3% -8.3% -8.4% 0.3% -0.8% -2.9% Cincinnati Financial Corp. (SNL P&C Group) 418, % 1.8% -0.6% 1.4% 1.7% 4.6% -0.9% -3.5% -2.5% -5.4% -9.3% -6.1% W. R. Berkley Corp. (SNL P&C Group) 392, % -2.7% -0.3% -1.8% -0.4% -0.6% 1.9% -2.0% -3.4% -6.0% -3.0% -2.1% American Financial Group Inc. (SNL P&C Group) 346, % -0.9% -1.8% -7.2% -6.7% -0.8% -2.9% -0.1% -12.7% -11.0% -1.7% -0.2% State Farm Mutl Automobile Ins (SNL P&C Group) 334, % -9.0% -3.8% -9.9% -13.3% -9.5% -8.6% -7.3% -7.9% -10.5% -10.3% -2.6% Erie Insurance Group (SNL P&C Group) 310, % 0.5% 6.1% 9.7% 8.2% 1.8% -0.9% -2.1% 1.8% 5.3% 7.2% 2.0% Selective Insurance Group Inc. (SNL P&C Group) 294, % -2.6% -6.0% -3.5% -3.5% -0.2% 4.1% -1.6% -6.8% -7.6% -8.1% -7.0% Allstate Corp. (SNL P&C Group) 287, % 0.1% 3.2% -0.3% -5.2% -8.1% -4.0% 6.7% 7.2% 2.5% -1.0% -1.8% Sentry Insurance a Mutual Co. (SNL P&C Group) 275, % -5.9% 6.8% 23.2% 14.5% 15.6% 30.5% 29.1% 21.1% 17.9% 10.6% 12.5% CNA Financial Corp. (SNL P&C Group) 263, % -1.6% 5.6% 1.0% 1.0% 5.7% 7.5% 4.1% 5.2% 8.3% 5.8% 11.4% Employers Mutual Casualty Co. (SNL P&C Group) 260, % -0.3% 5.6% -9.2% -7.8% -4.8% -4.2% -2.0% 0.5% -7.9% -6.2% 7.2% Farmers Insurance Group of Cos (SNL P&C Group) 248, % -0.6% -3.0% -2.0% -0.6% -7.4% -8.4% -1.9% -10.6% -0.1% 1.5% 2.7% Hanover Insurance Group Inc. (SNL P&C Group) 246, % 1.9% -2.0% -5.6% -4.6% -5.6% -5.1% -7.1% -11.5% -1.6% -1.4% -1.2% P&C Industry 23,768, % -2.2% Source: Morgan Stanley Research estimates, Company Data, SNL 58

59 Table of Contents 1. P&C Insurance Industry Overview 4 2. Key Investment Considerations 8 3. P&C Carriers: Primary Insurers and Global Reinsurers P&C Brokers Actuarial Reserve Analysis Catastrophes and P&C Stocks Emerging Trends in Insurance Major P&C Lines of Business P&C Insurance Glossary 90 59

60 P&C Stocks Have Outperformed After Large Catastrophe Losses Largest Historical Catastrophe losses Insured Start Insured Start Event Losses Date Event Losses Date 1 Hurricane Katrina $80b 8/25/05 11 Hurricane Wilma $15b 10/19/05 2 Japan Earthquake $37b 3/11/11 12 Hurricane Rita $12b 9/20/05 3 Superstorm Sandy $36b 10/24/12 13 US Drought $11b 7/15/12 4 Hurricane Andrew $27b 8/23/92 14 Hurricane Charley $10b 8/11/04 5 September 11th $25b 9/11/01 15 Typhoon Mireille $10b 9/27/01 6 Northridge Earthquake $24b 1/17/94 16 Hurricane Hugo $9b 9/15/89 7 Hurricane Ike $22b 9/6/08 17 Chile Earthquake $9b 2/27/10 Large Catastrophe Losses in Recent Years 2011 catastrophe losses were the 2 nd highest in industry history ($110b) and only exceeded by 2005 (Hurricane Katrina $80b, Rita $13b and Wilma $16b) Super storm Sandy was a Top-5 all-time loss at $37b. 2013, 2014 and 2015 have been very benign insured loss years with few notable large losses. 8 New Zealand Earthquake $17b 2/22/11 18 Winter Storm Daria $8b 1/25/90 9 Hurricane Ivan $16b 9/2/04 19 Winter Storm Lothar $8b 12/25/99 10 Thai Flood $16b 7/27/11 20 US Tornado Outbreak $8b 4/22/11 Source: Swiss Re Sigma, Morgan Stanley Research Stock Returns (%) Stock Performance Following Large Catastrophe Losses 5% 4% 3% 2% 1% Carriers Relative Carriers Absolute Brokers Relative Brokers Absolute P&C Stocks Have Outperformed After Large Cat Losses P&C brokers outperform immediately following large losses as brokers bear no underwriting risks but could benefit from higher P&C pricing. P&C carrier stocks lag during the first 2-4 weeks as investors assess damages and EPS adjusts lower. P&C carriers outperform after losses are certain and investor focus shifts to higher pricing. 0% Event +1-Wk +2-Wk +1-Mo +2-Mo +3-Mo +6-Mo Source: Swiss Re Sigma, Thomson Reuters, Chart shows top 15 all time insured loss events from above (ex. Thai Flood) 60

61 P&C Stocks Historically Outperform During Peak Hurricane Season Absolute Stock Performance during Peak Hurricane Season 8.0 Absolute Stock Performance during Peak Hurricane Seasons (Aug. - Oct.) P&C Insurance Primary Reinsurers Brokers P&C Stocks Outperform in Hurricane Season Absolute Returns (%) (2.0) P&C stocks have historically risen during peak hurricane season. The stocks returned an average of 4.0% during the peak of hurricane season (August-October) since (4.0) Average Active Seasons Benign Seasons Primary: ACE, ALL, CB, CINF, CNA, PGR, TRV, WRB Reinsurers: ACGL, AGII, AHL, ALTE, AWH, AXS, ENH, FSR, IPCR, MRH, PRE,, RE, RNR, TRH, VR Brokers: AJG, AON, BRO, MMC, WLTW Active Seasons: with insured loss $3b or more, include '95, '98, '99, '04, '05, '08, ' Benign Seasons: '93-94, '96-97, '00-03, '06-07, '09-10, '13-'16 Source: Thomson Reuters, Swiss Re Sigma Relative Stock Performance during Peak Hurricane Season Relative Returns to S&P 500 (%) (1.0) Relative Stock Performance during Peak Hurricane Seasons (Aug. - Oct.) P&C Insurance Primary Reinsurers Brokers P&C stocks have outperformed the index by an average 290bps the past 23 seasons. Active years resulted in negative returns for reinsurers. Reinsurance stocks in particular showed more downside volatility with an average decline of (309bps) during active seasons. The opposite held true during benign low loss years with reinsurance stocks appreciating 7%+. (2.0) Average Active Seasons Benign Seasons Primary: ACE, ALL, CB, CINF, CNA, PGR, TRV, WRB Reinsurers: ACGL, AGII, AHL, ALTE, AWH, AXS, ENH, FSR, IPCR, MRH, PRE,, RE, RNR, TRH, VR Brokers: AJG, AON, BRO, MMC, WLTW Active Seasons: with insured loss $3b or more, include '95, '98, '99, '04, '05, '08, ' Benign Seasons: '93-94, '96-97, '00-03, '06-07, '09-10, '13-'16 Source: Thomson Reuters, Swiss Re Sigma 61

62 Hurricane History: Frequency and Timing No. of Hurricanes Striking Mainland U.S. Each Decade Source: NOAA, Morgan Stanley Research US Hurricanes Striking Mainland by Month No. of Hurricanes Striking Mainland U.S. Each Decade Hurricanes Major Hurricanes (Category 3 and above) U.S. Hurricanes by Month ( ) Avg. 18 Hurricanes per Decade Avg. 6 Major Hurricanes per Decade How Often Do Hurricanes Occur? An average of 18 hurricanes have made landfall each decade since The decade of was been particularly active. This decade has averaged 18 hurricanes/year and major Cat 3+ hurricanes have also been more prevalent with 7 striking mainland US during this timeframe. Only 4 U.S. land-falling hurricanes during , none made landfall during the 2015 hurricane season. El Nino suppresses Atlantic hurricanes. Historically, there is 28% probability of 2 or more US land-falling hurricanes in an El Nino year vs. 46% in neutral years and 66% in La Nina years. When Do Hurricanes Happen? While hurricane season officially runs from June through November the Peak occurs from August-October. Of all hurricanes that touched mainland US, 80% occurred during this peak timeframe Jan-May Jun Jul Aug Sep Oct Nov Dec Source: NOAA, Morgan Stanley Research 62

63 Hurricane History: Location and Severity No. of Hurricanes Striking Mainland U.S. by State 140 No. of Hurricanes Striking Mainland U.S. by State ( ) Hurricanes Major Hurricanes (Category 3 and above) TX LA MS AL FL GA SC NC VA MD DE NJ NY CT RI MA NH ME Source: NOAA, Morgan Stanley Research Where Do Hurricanes Hit in the US? Hurricanes prefer Florida and the Gulf. More than 100 hurricanes have hit Florida the last 150 years and it also has suffered from the most major events during the time period. The Gulf states (TX, LA, MS, and AL) also suffered from more than 100 hurricanes over this timeframe. The Carolinas are another popular target. North and South Carolina have seen significant activity over this timeframe. Northeast hurricanes are rare but include large events such as the 1938 Great New England Hurricane, Hurricane Irene in 2011, and 2012 Superstorm Sandy. Most Costly U.S. Hurricanes Most Costly US Hurricanes Insured Losses in USD bn, Indexed to 2015 $90 $80 $70 $60 $50 $40 $30 $20 $10 $79.7 $36.1 $27.0 $22.3 $16.2 $15.2 $12.3 $10.1 $8.7 $6.3 Hurricane Katrina (2005) is the most costly storm in history with insured losses of ~$80b in 2015 USD. The 10-year average 1Q/2Q/3Q/4Q cat losses are $14b/14b/$13b/$9b. These averages serve as the foundation for our catastrophe loss estimate in quarterly EPS. All else being equal losses below/above this threshold should lead to EPS beats / misses. $ Katrina 2012 Sandy 1992 Andrew 2008 Ike 2004 Ivan 2005 Wilma 2005 Rita 2004 Charley 1989 Hugo 2004 Frances Source: Swiss Re Sigma, Morgan Stanley Research 63

64 Market Share Data: Gulf States and Florida Gulf States: Market Share 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% State Farm Allstate 2015 Property Premium Market Share - Gulf States (TX, LA, MS, AL) Farmers USAA Liberty Mutual Progressive Berkshire Hathaway Nationwide Travelers Texas Farm Bureau Gulf States: Premium Detail and Concentration 2015 % of total Hurricane Gulf States (AL, LA, MS, TX) Property Mkt Company Top 15 ($000s) Premiums Share U.S. Premiums P&C Industry 33,449,293 6% 1 State Farm 5,702,703 17% 10% 2 Allstate 3,177,521 10% 11% 3 Farmers 2,149,405 6% 11% 4 USAA 1,980,494 6% 12% 5 Liberty Mutual 1,872,126 6% 6% 6 Progressive 1,451,630 4% 7% 7 Berkshire Hathaway 1,173,219 4% 4% 8 Nationwide 1,065,274 3% 5% 9 Travelers 971,013 3% 4% 10 Texas Farm Bureau 774,147 2% 68% 11 CNA Financial 653,375 2% 7% 12 Chubb 642,462 2% 3% 13 Alfa Mutual 560,111 2% 49% 14 AIG 506,613 2% 3% 15 Texas Windstorm Insurance 503,824 2% 100% 69% Florida: Market Share 8% 7% 6% 5% 4% 3% 2% 1% 0% State Farm Citizens 2015 Property Premium Market Share - Florida Berkshire Hathaway Progressive Universal Insurance Source for all exhibits: SNL, Morgan Stanley Research, Property premiums include: Allied Lines, Commercial and Private Passenger Auto Physical Damage, Commercial Multi Peril (Non-Liability), Farmowners, Fire, Homeowners, & Inland Marine. USAA Tower Hill Allstate Chubb AIG Florida: Premium Detail and Concentration 2015 % of total Florida Property Mkt Company Top 15 ($000s) Premiums Share U.S. Premiums P&C Industry 18,836,416 3% 1 State Farm 1,345,495 7% 2% 2 Citizens 1,218,667 6% 96% 3 Berkshire Hathaway 1,111,909 6% 4% 4 Progressive 1,072,986 6% 5% 5 Universal Insurance Holdings 799,226 4% 90% 6 USAA 756,182 4% 5% 7 Tower Hill 710,624 4% 92% 8 Allstate 688,657 4% 2% 9 Chubb 547,952 3% 3% 10 AIG 532,045 3% 3% 11 Heritage Insurance 484,347 3% 87% 12 Liberty Mutual 439,899 2% 1% 13 Federated National Ins Co. 408,022 2% 81% 14 Zurich 370,199 2% 3% 15 HCI Group 361,789 2% 91% 58% 64

65 Market Share Data: East Coast Southeast/Mid-Atlantic: Market Share 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% State Farm Allstate 2015 Property Premium Market Share - Southeast and Mid-Atlantic States (GA, SC, NC, VA, DC, MD, DE) Nationwide USAA Liberty Mutual Berkshire Hathaway Travelers Progressive Erie NC Farm Bureau Mutual Southeast/Mid-Atlantic: Premium Detail and Concentration 2015 % of total Hurricane SE (GA, SC, NC, VA, DC, MD, DE) Property Mkt Company Top 15 ($000s) Premiums Share U.S. Premiums P&C Industry 23,283,535 4% 1 State Farm 3,829,813 16% 6% 2 Allstate 2,106,153 9% 7% 3 Nationwide 1,800,178 8% 9% 4 USAA 1,586,125 7% 9% 5 Liberty Mutual 1,374,490 6% 5% 6 Berkshire Hathaway 1,230,718 5% 4% 7 Travelers 1,079,848 5% 5% 8 Progressive 738,084 3% 3% 9 Erie 651,230 3% 11% 10 NC Farm Bureau Mutual 591,112 3% 61% 11 Chubb 525,448 2% 3% 12 Auto-Owners 492,144 2% 8% 13 Hartford 426,650 1% 4% 14 CNA 386,664 1% 4% 15 Farmers 381,692 1% 2% 72% Northeast: Market Share 12% 10% 8% 6% 4% 2% 0% Liberty Mutual Allstate 2015 Property Premium Market Share - Northeast States (NJ, PA, NY, CT, RI, MA, NH, VT) State Farm Berkshire Hathaway Travelers Chubb Source for all exhibits: SNL, Morgan Stanley Research, Property premiums include: Allied Lines, Commercial and Private Passenger Auto Physical Damage, Commercial Multi Peril (Non-Liability), Farmowners, Fire, Homeowners, & Inland Marine. Nationwide Erie USAA Progressive Northeast: Premium Detail and Concentration 2015 % of total Hurricane NE (NJ, PA, NY, CT, RI, MA, NH, VT) Property Mkt Company Top 15 ($000s) Premiums Share U.S. Premiums P&C Industry 41,083,838 7% 1 Liberty Mutual 3,449,111 8% 12% 2 Allstate 3,417,275 8% 11% 3 State Farm 3,400,321 8% 6% 4 Berkshire Hathaway 2,486,213 6% 8% 5 Travelers 2,412,864 6% 10% 6 Chubb 2,089,321 5% 10% 7 Nationwide 1,628,174 4% 8% 8 Erie 1,321,583 3% 22% 9 USAA 1,167,395 3% 7% 10 Progressive 1,109,952 3% 5% 11 MAPFRE SA 1,027,954 3% 40% 12 AIG 777,372 2% 4% 13 Hartford 757,095 2% 7% 14 MetLife Inc. 657,410 2% 18% 15 CNA 612,202 1% 6% 64% 65

66 PMLs and Cat Modeling Are Critical for P&C Risk Management 1-in-100/250 PML Exposure for US Hurricane Risk 30% US Hurricane PML as % of Equity 25% 1-in % 1-in % 10% 5% 0% VR XL RE AXS ENH AWH AHL Y CB ACGL PMLs Reveal Tail Risk Exposure Probable Maximum Loss (PML) is a measure of the tail risk exposure of P&C companies to catastrophe losses. A 1-in-100 and 1-in-250 PML means the probability of losses exceeding the PML is 1% and 0.4% respectively. PML is a factor in financial strength ratings for rating agencies. Not all companies disclose PML figures and their use and definition can vary between companies making comparisons difficult. Source: Company Data 1-in-100/250 PML Exposure for California Earthquake Risk 18% California Earthquake PML as % of Equity 16% 1-in % 1-in % 10% 8% 6% 4% 2% 0% AHL AXS RE AWH XL VR ENH Y CB ACGL Catastrophe Models Play A Key Role In P&C Risk Management Catastrophe risk modeling employs meteorological, geological, engineering, and insurance data and statistic simulation techniques to assess losses from natural perils such as hurricanes, tornadoes, earthquakes, flooding as well as manmade disasters such as terrorism. Major cat modeling firms include AIR (a unit of Verisk), RMS, and EQECAT. Source: Company Data 66

67 Historical Losses as Percentage of Equity for Largest Cat Events 2005 US Hurricanes: Katrina, Rita, Wilma 2011 Japan Earthquake & Tsunami 70% 60% 2005 US Hurricanes KRW ($109b) Insured Losses 16% 14% 2011 Japan Earthquake ($38b) Losses 50% 40% 30% 20% 10% 12% 10% 8% 6% 4% 2% 0% MRH RNR PTP ENH RE AHL AXS PRE XL MKL ACGL Y ACE 0% PRE RNR RE Y MRH PTP AHL ENH AXS VR MKL XL AWH ACGL ACE 2012 US Super Storm Sandy 2008 US Hurricane Ike 12% 2012 US Superstorm Sandy ($37b) Losses 12% 2008 US Hurricane Ike ($23b) Losses 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% VR AXS Y MRH ENH PRE AHL AWH RE ACGL MKL RNR PTP XL ACE 0% PTP RNR MRH AHL AXS PRE ACGL RE ENH Y MKL ACE XL Source for all exhibits: Company Data 67

68 Table of Contents 1. P&C Insurance Industry Overview 4 2. Key Investment Considerations 8 3. P&C Carriers: Primary Insurers and Global Reinsurers P&C Brokers Actuarial Reserve Analysis Catastrophes and P&C Stocks Emerging Trends in P&C Insurance Major P&C Lines of Business P&C Insurance Glossary 90 68

69 Insurance and Technology Technology Could Reduce Risk Pools Over Time Risk Reduction through Adoption of Smart Devices Auto and Home Insurance could be more quickly disrupted compared to more complex products like casualty, commercial insurance. Technology could reduce 40-60% of risk in Home Insurance and 15-25% in Auto Insurance. Source: BCG case experience, Smart systems suppliers, BCG Analysis, Morgan Stanley Research Combined Ratio Could be Reduced by as Much as 21% Technology Could Significantly Improve Combined Ratio Process automation could reduce ~4-5% of combined ratio. Digital and online sales could reduce ~6-7% of combined ratio. Big data and analytics utilized for pricing and fraud detection could reduce ~6-10% of combined ratio. Please refer to Morgan Stanley Blue Paper, Insurance and Technology: Evolution and Revolution in a Digital World, September 8, Source: BCG Analysis, Morgan Stanley Research 69

70 Shared Mobility: Disrupting Auto Insurance One Mile at a Time Share Mobility: Shifting Auto Insurance Paradigm The Future of Auto Insurance Shared miles could potentially account for 50% of auto insurance market by Auto insurance business model could shift to (1) B2B from B2C, and (2) mileage-based insurance. Technology could hasten the decline of the risk pool. Source: SNL, Morgan Stanley Research Future Auto Insurance Market Scenarios Future Auto Insurance Market Scenarios While it is still early days, we see the most potential impact on personal auto insurers as (1) the overall risk pool shrinks, and (2) the remaining pie shifts from B2C (personal insurance) to B2B (commercial insurance). Please refer to Morgan Stanley Blue Paper, Motor Insurance 2.0, September 29, Source: Morgan Stanley Research 70

71 Digital Disruption in Small Business Insurance Digital Insurance Gaining Shares in SBI The ~$100b Small Business Insurance (SBI) Market is Ripe for Digital Disruption Demographics of small business owners favor digital insurance solutions. There are unmet insurance needs of small business owners % of SBI will be sold digitally by 2020, up from 4% today, creating a $17-33b market opportunity. Source: The Boston Consulting Group, Morgan Stanley Research Where the Tech Activity Has Focused So Far InsureTech Startups and Traditional Carriers are Positioning for the Change A growing number of startups are focusing in SBI, leveraging experiences from personal auto and other financial services, including FinTech companies. Large incumbents are ramping up their digital efforts to capitalize on this large (~$100b in annual premiums), profitable (~90% combined ratios), and fragmented market. Please refer to Morgan Stanley North America Insight, Digital Disruption in Small Business Insurance, June 29, 2016 Source: The Boston Consulting Group, Morgan Stanley Research 71

72 Cyber Insurance an Emerging Growth Opportunity Cyber Risk on the Rise 1,200 Total Breaches No. of Records Breached (in mn) 300 Cyber Risk A Growing Concern Total Breaches 1, No. of Records Breached (in mn) According to Identity Theft Resource Center, ~980 data breaches impacted ~35.2m records during 2016 in the US. McAfee estimates ~$400b annual cost of cybercrime, or ~0.8% of global GDP. Cyber insurance is an integral part of corporate risk management Source: Identity Theft Resource Center, Morgan Stanley Research Cyber Insurance is an Emerging Growth Opportunity Gross Premiums (in $Bn) 12 Cyber Insurance Market Size & Potential 10 ~8-10B 8 6 ~5B 4 ~2B 2 <1B ~1B e 2020e Cyber Insurance An Emerging Growth According to Ponemon survey, only ~19% companies have cyber insurance; only ~12% of potential loss to information assets is insured vs. ~51% coverage for physical assets. Currently at ~$2-3b of annual global premiums, we estimate cyber insurance market to grow 3-4x to $8-10b by Cyber insurance need is evolving. Changing technology and limited data/modeling challenge cyber insurance underwriting. Please refer to Morgan Stanley Blue Paper, Cybersecurity: Rethinking Security, April 5, 2016 Source: Travelers 2015 Investor Day Presentation, PWC & Morgan Stanley Research estimates 72

73 Table of Contents 1. P&C Insurance Industry Overview 4 2. Key Investment Considerations 8 3. P&C Carriers: Primary Insurers and Global Reinsurers P&C Brokers Actuarial Reserve Analysis Catastrophes and P&C Stocks Emerging Trends in P&C Insurance Major P&C Lines of Business P&C Insurance Glossary 90 73

74 P&C Line of Business Personal Auto US Direct Premiums Written: 10-yr CAGR of 2.0% Largest US Underwriters: Top 10 Have 71% Market Share Personal Auto - Direct Premium Written ($b) 10-Year CAGR 2.0% Personal Auto - Market Share (%) Top 10 Market Share: 71% State Farm Berkshire Hathaway Allstate Progressive USAA Farmers Liberty Mutual Nationwide American Family Travelers US Personal Auto Combined Ratio: 10-yr avg. of 100.4% Personal Auto - Combined Ratio (%) 10-Year Avg % Personal Auto: ~34% P&C Market The largest P&C segment in the U.S. Covers both property damage (comprehensive and collision) as well as liability (bodily injury). Distributed through captive agencies (e.g., State Farm and Allstate), independent agencies (e.g., Travelers and Chubb), and the direct channel (e.g., GEICO and Progressive) Loss Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research Expense Ratio 74

75 P&C Line of Business Homeowners US Direct Premiums Written: 10-yr CAGR of 4.9% Largest US Underwriters: Top 10 Have 60% Market Share Homeowners - Direct Premium Written ($b) 25 Homeowner - Market Share (%) Top 10 Market Share: 60% Year CAGR 4.9% State Farm Allstate Liberty Mutual Farmers USAA Nationwide Travelers American Family Chubb Erie Group US Homeowners Combined Ratio: 10-yr avg. of 100.7% Homeowners: ~16% P&C Market Homeowners - Combined Ratio (%) 10-Year Avg % Covers structures, contents, as well as some liability (e.g., slip and fall). Covered perils commonly include fire, windstorm, theft but flooding and earthquake are typically excluded. Among the most volatile lines due to weather losses. Sold stand alone or as part of a bundled policy with personal auto coverage. Deductible varies but Hurricane Deductible could be 1-5% of policy limit. Loss Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research Expense Ratio 75

76 P&C Line of Business Other Liability US Direct Premiums Written: 10-yr CAGR of 1.2% Largest US Underwriters: Top 10 Have 49% Market Share Other Liability - Direct Premium Written ($b) 10-Year CAGR 1.2% Chubb AIG Other Liability - Market Share (%) Travelers Zurich CNA Financial Liberty Mutual Top 10 Market Share: 49% XL Nationwide Tokio Marine US Other Liability Combined Ratio: 10-yr avg. of 101.4% Other Liability - Combined Ratio (%) Other Liability: ~10% P&C Market Year Avg % Covers legal liability negligence/carelessness causing property damage or personal injury to others. This line includes construction, E&O, D&O, personal injury, and umbrella policies. Policy form can be Occurrence or Claims made. An Occurrence policy covers claims which occur during the policy period regardless of when reported. A Claims-made policy covers only those claims that are reported during the policy period. Loss Ratio Expense Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research 76

77 P&C Line of Business Workers Compensation US Direct Premiums Written: 10-yr CAGR of 2.3% Largest US Underwriters: Top 10 Have 48% Market Share Workers Comp - Direct Premium Written ($b) 10-Year CAGR 2.3% Workers Comp - Market Share (%) Top 10 Market Share: 48% Travelers Hartford AmTrust Financial Zurich American International Berkshire Hathaway Liberty Mutual Chubb Ltd State Ins Fund State Comp US Workers Comp Combined Ratio: 10-yr avg. of 103.9% Workers Comp - Combined Ratio (%) 10-Year Avg % Loss Ratio Expense Ratio Workers Comp: ~10% P&C Market Covers medical expenses and lost wages from personal injury at work. Among the longest-tail lines as the liability can stretch for years. For example, a worker that suffered a work injury may take years to return to work. Carriers rely more on float profitability from the investment portfolio given significant lag between premiums and liabilities. This leads to more underwriting losses than some other lines (Combined Ratio above 100% in 9 of the last 10 years). Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research 77

78 P&C Line of Business Commercial Multi-Peril US Direct Premiums Written: 10-yr CAGR of 1.4% Largest US Underwriters: Top 10 Have 48% Market Share Comm. Multi-Peril - Direct Premium Written ($b) 9 8 Comm. Multi-Peril - Market Share (%) Year CAGR 1.4% Travelers Nationwide Liberty Mutual Chubb Hartford Tokio Marine Top 10 Market Share: 48% Farmers State Farm Cincinnati Financial CNA Financial US CMP Combined Ratio: 10-yr avg. of 98.8% Comm. Multi-Peril - Combined Ratio (%) Comm. Multi-Peril: ~7% P&C Market Year Avg. 98.8% Covers property and liability risk for businesses. Usually sold as part of a package with other insurance coverage. Covers multiple perils including fire, windstorm, theft, and flood damage. Business Interruption (BI) or Contingent Business Interruption (CBI) policies protect against the loss of business as a result of property damage or supply chain interruption. Loss Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research Expense Ratio 78

79 P&C Line of Business Crop Insurance US Direct Premiums Written: 10-yr CAGR of 9.4% Largest US Underwriters: Top 10 Have 90% Market Share Crop - Direct Premium Written ($b) 10-Year CAGR 9.4% Multi-Peril Crop - Market Share (%) Top 10 Market Share: 90% Zurich Farmers Mutl Hail of IA Chubb QBE American Fin. Grp. Endurance Tokio Marine CGB Insurance Everest Fairfax US Crop Insurance Combined Ratio: 10-yr avg. of 90.1% Crop - Combined Ratio (%) Year Avg. 90.1% Loss Ratio Expense Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research Multi-Peril Crop: ~2% P&C Market Covers crops against multiple perils such as wind and drought. Concentrated line of business: Top 10 write 90% of premiums. Only 19 companies have license to sell crop insurance. Highly subsidized: Gov t pays A&O costs on behalf of farmer. Avg. payment 18.9% of premium in 2011 down from 31% in The MPCI rate is set by USDA based on historical loss experience Insurers must write policies for all risks and cannot price select but can cede the risks they view as most unattractive to USDA. Gov t provides reinsurance protection indemnifying writers against losses above certain levels but also recouping excess profitability in low loss years (combined ratio lower than 60%). Premiums held by the gov t until harvest when claims settled, so underwriters earn almost no investment income on float. 79

80 P&C Line of Business Crop Insurance (Con t) Revenue protection contract example & Premium by Crop Cotton, 10% Wheat, 15% Other, 13% Soybeans, 22% Corn, 40% Government Crop Insurance Premium Subsidies Total Crop Contracts 1,047,788 2,106,492 2,192,690 2,212,191 2,239,033 Percent Buy Up Contracts N/A 93% 94% 94% 95% Protection in Force Total 13,608,332, ,901,264, ,580,847, ,602,315, ,384,380,410 Revenue Programs N/A 96,415,587,819 91,870,298,902 83,157,367,373 82,257,932,242 Acres Insured 99,638, ,402, ,819, ,952, ,718,502 Percent of Eligible Acres Insured 33% 74% 89% 88% 86% % of Eligible Acres Insured at Buy-up 33% 68% 83% 82% 81% Farmer Paid Premium 694,516,924 4,127,325,681 4,506,637,798 3,848,042,070 3,671,669,193 Government Paid Premium 254,875,004 6,960,373,136 7,284,767,323 6,194,927,443 6,076,121,204 Total Premium 949,391,928 11,087,698,817 11,788,405,121 10,042,969,513 9,747,790,397 Losses Paid 601,117,628 17,168,874,504 11,931,676,058 8,970,466,876 6,095,565,123 Multi-Peril Crop: How it Works Multi Peril Crop Insurance (MPCI) provides coverage for farmers against many types of adverse weather events (not Hail). Currently ~90% of eligible acres are insured in the private marketplace. Revenue protection contract is most common (75%+ of premiums). It protects farmers against estimated revenue (yield per acre times the forward crop price) fluctuations. Farmer chooses amount of yield to insure between 50%-85%. If insurer choose 75% protection and their revenue estimate was $100 then if their total revenue (market price of crop times farmers crop yield) at harvest is less than $75, a claim can be filed. The farmer enters into contract based on the forward contract price in March which they expect to sell the crop for upon harvesting in the fall (price determined based on avg price in Feb). If the crop price has dropped by more than their deductible (1 protection level) then the farmer would file a claim to recoup the revenue difference. Underwritten by government approved insurers. Premiums are subsidized by the federal crop insurance program and unwanted underwriting risks can be transferred to the US government via a reinsurance program (SRA). For example, in 2013 SRA limited insurers underwriting losses to % of loss ratio between %; 20-45% of LR between %; 5-10% of LR between %; and none above LR of 500%. Source for all exhibits: US Dept. of Agriculture, Rain & Hail 2015 Crop Insurance Update, Morgan Stanley Research 80

81 P&C Line of Business Medical Professional Liability US Direct Premiums Written: 10-yr CAGR of -2.4% Largest US Underwriters: Top 10 Have 49% Market Share Med Mal - Direct Premium Written ($b) 10-Year CAGR -2.4% Medical Prof. Liability - Market Share (%) Top 10 Market Share: 49% Berkshire Hathaway Doctors CNA Financial ProAssurance Medical Liability Mutl Coverys NORCAL Mutual AIG PRI MAG Mutual US Med Mal Combined Ratio: 10-yr avg. of 91.0% Med Mal - Combined Ratio (%) 10-Year Avg. 91.0% Med Mal: ~2% P&C Market Insures doctors and hospitals against lawsuits alleging negligence or errors during patient care. The plaintiff s damage may include compensatory and punitive damage. Medical Malpractice insurance combined ratio had been on the decline since early 2000 s and stabilized in recent years, attributable to stricter underwriting and tort reforms. Loss Ratio Expense Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research 81

82 P&C Line of Business Accident & Health US Direct Premiums Written: 10-yr CAGR of -2.4% Largest US Underwriters: Top 10 Have 74% Market Share A&H - Direct Premium Written ($b) 10-Year CAGR -2.4% State Farm Chubb AIG A&H - Market Share (%) CNA Financial Federated Mutual Zurich Top 10 Market Share: 74% Fairfax BCS Insurance QBE Assurant US A&H Combined Ratio: 10-yr avg. of 98.4% A&H - Combined Ratio (%) 10-Year Avg. 98.4% Loss Ratio Expense Ratio A&H: ~1% P&C Market Covers medical, dental, disability, long-term care, on group or individual basis. It also provides credit insurance related to personal injury or disability. Some broaden the definition of A&H insurance to include travel insurance and product warranty. The premium and market share data presented here are reported by P&C companies to state regulators. A&H is a less cyclical, faster growing P&C market segment, especially in international markets. It tends to be a lower loss ratio but higher expense ratio segment where distribution relationships are a key competitive advantage. Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research 82

83 P&C Line of Business Inland Marine US Direct Premiums Written: 10-yr CAGR of 4.9% Largest US Underwriters: Top 10 Have 63% Market Share 25 Inland Marine - Direct Premium Written ($b) Inland Marine - Market Share (%) Year CAGR 4.9% Top 10 Market Share: 63% Liberty Mutual CNA Financial AIG FM Global Chubb Allianz Travelers Zurich State Farm Assurant US Inland Marine Combined Ratio: 10-yr avg. of 86.8% Inland Marine - Combined Ratio (%) Inland Marine: ~3% P&C Market Year Avg. 86.8% Covers articles in transit by land and air transportation. Also provides special coverage for jewelry, fine arts, and silverware Source for all exhibits: SNL, A.M. Best, Morgan Loss Stanley Ratio Research Expense Ratio 83

84 P&C Line of Business Ocean Marine US Direct Premiums Written: 10-yr CAGR of 1.0% Largest US Underwriters: Top 10 Have 66% Market Share Ocean Marine - Direct Premium Written ($b) 10-Year CAGR 1.0% AIG Travelers Ocean Marine - Market Share (%) Allianz Starr Berkshire Hathaway Navigators ACE Top 10 Market Share: 66% Tokio Marine XL White Mountains US Ocean Marine Combined Ratio: 10-yr avg. of 98.3% Ocean Marine - Combined Ratio (%) 10-Year Avg. 98.0% Ocean Marine: ~1% P&C Market Covers property damage to vessels and water crafts. Policy typically excludes war and terrorism risk Loss Ratio Expense Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research 84

85 P&C Line of Business Product Liability US Direct Premiums Written: 10-yr CAGR of -2.0% Largest US Underwriters: Top 10 Have 49% Market Share Product Liability - Direct Premium Written ($b) 10-Year CAGR -2.0% Product Liability - Market Share (%) Top 10 Market Share: 49% Chubb Zurich Liberty Mutual Travelers Allianz Hartford American Financial Selective Group Fairfax W. R. Berkley US Product Liability Combined Ratio: 10-yr avg. of 126.7% Product Liability - Combined Ratio (%) 10-Year Avg % Product Liability: ~1% P&C Market Protects the manufacturer, seller, or distributor of a product against legal liability due to a defective condition of the product that results in personal injury or damage. Asbestos and Environmental (A&E) related claims have caused more than $120b industry losses since late 1990s and are still a drag on insurers legacy reserves. A&E claim uncertainty was a key driver behind the last P&C hard market ( ) Loss Ratio Expense Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research 85

86 P&C Line of Business Surety US Direct Premiums Written: 10-yr CAGR of 2.3% Largest US Underwriters: Top 10 Have 65% Market Share Surety - Direct Premium Written ($b) 10-Year CAGR 2.3% Surety - Market Share (%) Top 10 Market Share: 65% Travelers Liberty Mutual Zurich CNA Financial Chubb Tokio Marine Hartford IFIC Surety AIG RLI Corp US Surety Combined Ratio: 10-yr avg. of 76.6% Surety - Combined Ratio (%) Surety: ~1% P&C Market Year Avg. 76.6% Three-party contracts that guarantee that a principal will perform a specific obligation. Surety bonds can be obtained for both private and public contracts. Used in public construction projects, surety bonds protect taxpayers in case of contractor default Loss Ratio Expense Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research 86

87 P&C Line of Business Earthquake US Direct Premiums Written: 10-yr CAGR of 5.7% Largest US Underwriters: Top 10 Have 64% Market Share 3.5 Earthquake - Direct Premium Written ($b) 25 Earthquake - Market Share (%) Year CAGR 5.7% Top 10 Market Share: 64% CEA State Farm Zurich AIG Chubb Travelers GeoVera Liberty Mutual Berkshire Hathaway Swiss Re US Earthquake Combined Ratio: 10-yr avg. of 35.6% Earthquake - Combined Ratio (%) 10-Year Avg. 35.0% Earthquake: ~0.5% P&C Market Protects property from damage due to an earthquake or volcano. These perils are typically excluded from homeowners polices. The California Earthquake Authority (CEA) has ~20% of the market share in the U.S. The CEA is a government run insurance program Loss Ratio Expense Ratio Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research 87

88 P&C Line of Business Federal Flood US Direct Premiums Written: 10-yr CAGR of 3.9% Largest US Underwriters: Top 10 Have 82% Market Share 3.5 Federal Flood - Direct Premium Written ($b) 25 Federal Flood - Market Share (%) Year CAGR 3.9% Top 10 Market Share: 82% Wright Assurant Allstate Hartford Nationwide Selective USAA Farmers Progressive Tokio Marine Federal Flood: ~0.5% P&C Market The standard homeowners policy does not cover flood damage. Separate flood coverage can be purchased from the National Flood Insurance Program. Licensed private insurers underwrite flood insurance on behalf of NFIP but take no underwriting risk. Source for all exhibits: SNL, A.M. Best, Morgan Stanley Research 88

89 P&C Line of Business Excess & Surplus (E&S) Lines E&S Market Growing at 2x Standard Market Source: SNL, A.M. Best, Morgan Stanley Research Leading US E&S Underwriters 25 Surplus Lines ($b) CAGR 3.3% CAGR 7.0% Commercial Lines ($b) E&S - Market Share (%) E&S Is A Fast Growing Market Segment Excess & Surplus (E&S) underwriters are non-admitted (not licensed) in the state to transact business and they provide coverage for non-standard or hard-to-place insurance that standard (admitted) carriers do not write. The E&S market has grown 2x faster than the standard market the last 20+ years. The E&S market is volatile as E&S lines grow volume and pricing early in a hard market when standard carriers retrench and suffer from volume and price losses when these same carriers return as the market softens. Leading US E&S Underwriters Top 10 Market Share: 61% Lloyd s and AIG are the two dominant players in the US excess & surplus line market, each with 12-22% of market share. The rest of the market is more fragmented with the next 8 top insurers accounting for 25% of the market. 0 Lloyds AIG Chubb Source: SNL, Lloyds, Morgan Stanley Research W.R. Berkley Nationwide Zurich Markel XL Berkshire Hathaway Ironshore 89

90 Table of Contents 1. P&C Insurance Industry Overview 4 2. Key Investment Considerations 8 3. P&C Carriers: Primary Insurers and Global Reinsurers P&C Brokers Actuarial Reserve Analysis & Morgan Stanley Excess Capital Methodology Catastrophes and P&C Stocks Emerging Trends in P&C Insurance Major P&C Lines of Business P&C Insurance Glossary 90 90

91 Glossary Accident Year: The aggregate value of all losses occurring during a defined twelve month time period in which the accident actually occurs, usually a calendar year but does not have to be. Accident year losses change over time as opposed to calendar year losses which remain constant. Accident-year Loss and LAE Ratio: The incurred losses minus the prior period reserve developments divided by the actual earned premiums. Accident-year Combined Ratio: The combined sum of the accident year loss and LAE ratio divided by earned premium and all expenses divided by earned premium. Alternative Markets: Alternative markets encompass reinsurance capacity/risk transfer that is not provided by a traditional reinsurance product (i.e. a carrier sells a product that is provided from their own rated balance sheet). There are a variety of alternative vehicles offering risk transfer solutions (Cat bonds, ILWs, Side-Cars, Hedge Fund Backs Start-ups: see definitions for each) Brokerage Services: Typically encompasses any number of insurance related services which brokers may perform for the insured, such as: risk management, consulting, claims assistance, assisting with employee enrollment, helping resolve benefit issues and regulatory and legislative updates. Some of these services may be included as part of the insurance commission and some may be ancillary services to assist clients and produce revenue for the brokers. Broker/Agent: Independent insurance salesperson who represents particular insurers but also might function as a broker by searching the entire insurance market to place an applicant's coverage to maximize protection and minimize cost. This person is licensed as an agent and a broker. Calendar-year Loss and LAE Ratio: The incurred losses during a calendar year divided by the actual earned premiums. Calendar-year Combined Ratio: The combined sum of the calendar year loss and LAE ratio divided by earned premium and all expenses divided by earned premium. Captive Agents (aka Exclusive Agents): Represent a particular insurance company and share in the revenue and commissions they produce with their parent company. In return the parent insurance company helps to pay for advertising to drive consumers into their agency and may offer additional benefits. A majority of personal lines business is written by captive agents. Case Reserve: A reserve account set aside due to the estimate of the amount that a claim will ultimately be settled. Claims adjusters usually set the case reserve. 91

92 Glossary (cont d) Catastrophe bonds: Cat bonds are a form of risk-linked securities (ILS) issued by insurance companies to investors. Investors receive coupon payments through the maturity period of the bond (typically 3-5 years). In return, investors forfeit principal should a loss event be triggered by either event parameters (such as ground shaking, wind speed, etc.) or aggregate losses (such as modeled industry losses, etc.). Cat bonds have been in the market since the 1990s and have gained more traction since Hurricane Katrina (2005). The major impediments have been basis risk and cost. Product development improvements (i.e. indemnity bonds), increased supply of risk (i.e. Florida Citizens, AIG) and rising demand from investors (pension funds, hedge funds) seeking higher non-correlated yields are driving cat bond issuance near all-time highs. At the same time, cost of this alternative product is approaching that of traditional reinsurance. Capacity: The maximum amount of premium or risk that an individual insurer can write based on their balance sheet strength and financial situation. Cede: Reinsuring of liabilities if referred to as ceding the business. The original holder would be the cedant. The portion of the original written premium that is reinsured is referred to as ceded premium Combined Ratio: The ratio of expense and losses paid out to the amount of premiums the insurer has collected in that time period. Combined ratios over 100% mean that the insurer is paying out more in claims than they take in premiums. Commission: Fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing. Contingent Commission: A form of broker compensation from carriers based on business volume and profitability. Most of it flows directly to the bottom line, and thus has a much higher margin contribution than regular commissions. This practice came under fire by then NY Attorney General, Elliot Spitzer, in for potentially causing conflicts of interest and was largely done away with by the largest carriers. In recent years, the industry has reinstated contingent commissions, including Willis s announcement that it is accepting contingents in the Employment Benefit business in Direct Selling: Direct policies such as those offered by Progressive (PGR) and Geico are policy services offered through the Internet or phone and through independent insurance agents. Companies who use direct selling typically have a high marketing and advertising spend to generate customer interest but maintain their margins due to their lack of salaried agents. Earned Premium: An accrual based accounting set up for how the company can recognize revenues earned. Even though the insurer may be paid in full for a policy up front they recognize the earned premium on the amount of the contract that has already taken place. 92

93 Glossary (cont d) Excess of Loss (a.k.a. Non-Proportional) Reinsurance: Reinsurers cover losses above the pre-set retention level of primary insurers (the attachment point). Reinsurers set upper end limits above which the loss is once again borne by the primary insurer. Expense Ratio: Similar to COGS line or CAC, this is the amount of cost associated with acquiring, writing and servicing policies and holders. The sum of comm. Expenses divided by earned premium and all other underwriting expenses divided by earned premium. Exposure: The unit that the premium will be based on. For example total dollars of payroll may be the exposure which the insurer bases a workers comp premium on. Excess and Surplus Market (E&S): Facultative Reinsurance: Is specific reinsurance covering a single policy/risk. Each facultative risk is submitted by the insurer to the reinsurer. Facultative reinsurance is commonly used for large and unusual risks. Frequency: Number of losses per earned calendar year Guaranteed Supplemental Commissions: Similar to a contingent commission, a supplemental commission is an extra form of payment from the carriers to the brokers based on business volume and profitability. However, supplemental commissions are paid upfront to avoid the appearance of a conflict of interest to knowingly deliver more profitable business for the carriers. Hard Market: An insurance market environment characterized by high or increasing rates and constricted coverage and availability for consumers. IBNR Reserve: (Incurred But Not Reported claims) The reserve account for estimated claims that have occurred but not yet reported to the insurer. Incurred Loss and LAE: The aggregate amount of paid claims and costs over a given period of time. Industry Loss Warranties (ILWs): ILWs are a derivative contract between parties typically triggered by pre-determined levels of industry losses estimated by a third party such as Insurance Service Office (ISO) s Property Claims Services (PCS). Insurance carriers and reinsurers purchase ILWs as reinsurance or retrocessional coverage against large industry-wide losses. The sellers could be rated reinsurers or unrated hedge funds in which coverage limits are collateralized in third-party escrow accounts. Float: The money that the insurer holds as a result of receiving the premium from the policyholder well in advance of when the insurer may have to pay out losses. Investment income from these premiums is a major source of revenue for insurers and provides them with essentially a zero cost of capital. The time period can be referred to as the Long-tail. 93

94 Glossary (cont d) Hedge Fund Backed Reinsurance Start-ups: Hedge funds have directly participated in the reinsurance market by funding underwriting start-ups. In addition to driving underwriting profit via reinsurance these vehicles offer hedge fund backers: (1) a more permanent source of capital on which they seek to drive superior investment returns and (2) benefit from the compounding of investment returns in a tax advantaged jurisdiction. Third Point Re (TPRE) is a recent hedge fund start-ups to enter the reinsurance marketplace. Independent Agents: Represent multiple insurance companies and sell products and policies that are most appropriate for the buyers needs. Independent agents do not represent a particular insurance company but must be knowledgeable about the products of all companies, they may use wholesalers to help facilitate. Loss Adjustment Expense (LAE): The estimated liability of claims reported or the estimated expenses incurred to settle the losses and claims. When tied to a specific claim they are known as allocated loss adjustment expenses (ALAE) if they are not tied to a specific claim they are called unallocated loss adjustment expenses (ULAE). Loss Costs: The portion of an insurance rate used to cover claims and the costs of adjusting claims usually determined by estimating future loss and adding a cushion for unexpected expenses. Loss Ratio: A measure of loss experience. Equals frequency times severity divided by average premium. Loss Development: The change in the loss over the time period between when the claim or loss is first reported and when it is evaluated at a later date or when it is paid. Managing General Agent MGA : A wholesale insurance intermediary with the authority to accept placements from and appoint retail agents on behalf of an insurer. They generally provide underwriting and administrative services for the insurers they represent. Paid Loss and LAE: Aggregate amount of claims associated with a particular period of time. Prior-year Loss and LAE Ratio: Amount of over/under allocation of reserves as a percentage of total earned premium. Premium Written: Premium that is accounted for on the books at the time that a policy is entered into and paid for. Pro Rata (a.k.a. Quota Share or Proportional) Reinsurance: The reinsurer assumes a stated percentage share of each insured policy and will receive a percentage of premiums and payout that percentage of losses. Reserve: Amount that the insurer sets aside as the estimate for claims outstanding that have not yet been paid. Reinsurance: An instrument for insurance companies which gives them the ability to layoff some or all of the risk of their underlying policies to another insurance company in return for sharing the premiums. Retail Broker: An intermediary between the insured and the marketplace. Retail brokers may be independent or work for a particular carrier. 94

95 Glossary (cont d) Retrocession (aka Retro) Reinsurance: Reinsurance purchased by reinsurers. The purpose and benefits are similar to that of primary insurers purchasing insurance: diversification and balance of exposures, lower earnings volatility, etc. Schedule P: Found in the financial statements released by the company. The schedule P must be filed with the State Insurance Commissioner in all states in which they hold policies. It shows estimated reserves by business line as well as claim information and gross and net losses. Severity: Dollars of loss per each claim. Average cost of a claim. Sidecars: Sidecars are financial vehicles sponsored by existing reinsurers to underwrite specific risks within a certain time frame (i.e. 1-2 years, Florida only). Sidecars give sponsors (reinsurers) additional underwriting capacity while enabling investors to surgically participate in hardening markets following large loss events. Reinsurers typically invest along side investors and earn management fees and profit sharing participation (i.e. 2 and 20 ). These vehicles underwrite on either rated or collateralized basis. Post Katrina in 2005, sidecars raised about $5b capital. Since the Japan Earthquake in 2011, reinsurers including Alterra, Lancashire, RenaissanceRe, and Validus have raised more than $1b through various sidecars. Soft Market: An insurance market environment characterized by declining rates and expanding coverage and availability for consumers. A buyer s market. Treaty Reinsurance: Is a method of reinsurance that covers more than one policy requiring the insurer and the reinsurer to formulate and execute a reinsurance contract. The reinsurer then covers all the insurance policies coming within the scope of that contract. Underwriting: Selection process by which an insurer or reinsurer decides whether to take on the risk of the coverage and concurrently decides how much the premium should be. Underwriting Expense: All costs incurred by an insurer during the process of deciding whether to accept or reject coverage of a risk. Underwriting Profit: The difference between the amount of premium the insurer has collected and what they have paid out in claims or losses. Ultimate Loss and LAE: This is the final total loss that the insurer pays and includes paid losses, defense/lawyer fees, adjusters fees and incurred but not reported losses. The ultimate loss or LAE ratio is the ultimate loss and LAE divided by earned premiums. Wholesale Broker: A broker who acts as an intermediary between a retail agent and an insurer, while having no contact with the insured. Wholesale brokers are often used by retail agents for more specialized niche products and can also be referred to as surplus lines brokers. 95

96 Valuation Methodology & Risks American International Group (AIG): Our $71 PT is based on sum-of-the-parts valuation. Core P&C and Life performance improves, and management achieves their goals of ~9% ROE by Stock closes gap to fair value under sum-of-the-parts framework. SOTP: $47 from insurance operations, $24 from other assets. Risks include: Upside risks: Better underwriting improvement, higher investment income, top-line growth acceleration, continued low cat losses, improved reserve situation and releases, potential US tax reform, and stronger capital management. Downside risks include losses from underwriting (catastrophes, reserves), major equity market correction, investment losses, non-bank SIFI limiting capital deployment ability. Axis Capital (AXS): Our $65 price target is based on 1.05x 2017e P/B, in-line with its historical average. Decelerating pricing and business mix change pressure returns offset by stronger capital management. We estimate ROE ~8%. Downside risks include: Steeper pricing decline, catastrophe losses, and investment losses. Upside risks include: M&A transaction, reinsurance pricing stabilizes, investment return improves, increasing top-line growth. Arch Capital (ACGL): Our $84 price target is based on 1.4x 2017e P/B considering premium franchise valuation. Our valuation is in line with current levels of ~1.4x as softer pricing cycle lowers industry ROE and converges closer to industry peers. Continued execution of UGC acquisition and ACGL delivers on stated goals. We estimate ~9-10% ROE for 2017e. Downside risks include: underwriting losses (catastrophes and reserves), investment losses, M&A integration risk, new business risks, and above peer valuations. Upside risks include: better EPS (better underwriting margins/ higher investment income) and higher than expected earnings contribution from MI and Watford Re. Allstate (ALL): Our $78 price target is based on 1.4x 2017e Base Case BVPS, in line with historical average. Auto price increases above loss cost trend should sustain or improve margins. Investment income improves as yields increase. Management focuses on PIF growth. Downside risks include: Higher auto frequency and severity trend persists, lack of unit growth, performance volatility, unpredictable losses from catastrophes and investments, less than expected benefits from potential US tax reform. Upside risks include: Auto loss trend improves, unit growth drives top-line acceleration, continued strong share repurchase, benign cats, interest rates rise, more than expected benefits from potential US tax reform. Chubb (CB): Our $144 price target is based on 1.3x 2017e BVPS, which is a blended valuation of both legacy companies. We expect combined valuation to re-rate higher to ~1.3x as continued strong execution continues. CB remains on track with integration savings target, merger savings, and revenue synergy opportunities. We expect ROE ~10%. Risks include: Integration risk; declining P&C pricing; underwriting margin deterioration; global growth and F/X headwinds; investment portfolio losses; large catastrophes or adverse development. 96

97 Valuation Methodology & Risks National General (NGHC) Our $25 price target is based on 1.65x P/B which is at a premium to most US P&C peers due to NGHC s above peer ROE and EPS growth. We expect continued low teens EPS growth and ~14% ROE in e. Current valuation are in-line with historical averages. Downside risks: Integration issues; P&C pricing and inflation headwinds; higher catastrophe losses; financial leverage; related-party transactions. Upside risks: stronger margin improvement, accretive acquisitions, growth in emerging businesses, and lower tax rate. Progressive (PGR) Our $36 price target is based on 2.4x 2017e BV and 15x 2017e P/E plus half of potential upside from lower tax. Margins improve as new business penalty benefit earns in. Expect top-line to grow in mid- to high single digits. Larger investment portfolio churn leads to stronger investment income in rising rate environment. ROE ~14% drives premium valuation vs P&C peers. Upside risks:better underwriting margins, larger reserve releases, lower catastrophe losses, higher investment income, lower corporate tax rate. Downside risks: Margin deterioration, slower reserve releases, higher catastrophe and investment losses, technology disruption pressures valuation. Everest Re (RE) Our $216 price target is based on 1.05x 2017e P/B, below its ~1.2x historical average, reflecting declining ROE. Decelerating pricing pressures industry returns and we estimate high-single digit ROE. Downside risks include: catastrophe losses, investment losses, and reserve charges. Upside risks include: better P&C pricing, stronger underwriting margin expansion. Renaissance Re (RNR) Our $136 price target is based on 1.2x 2017e P/B, below its historical average of 1.3x P/B, due to continued pricing challenges and lower cross cycle ROE expectation compared to its historical average given business mix shift. Downside risks include: increasing market competition leads to worse pricing and terms and conditions; large catastrophe losses; ROEs deteriorate further. Upside risks include: stabilizing reinsurance pricing; lower catastrophe losses; improving investment returns; larger share buybacks. Third Point Re (TPRE) Our $13 price target is based on 0.9x 2017e BVPS, reflecting 12-13% ROE for e. Investment return of +10% and underwriting above break-even combined ratio. Downside risks include: Returns unpredictable, likely volatile, and may be negative; Regulatory / tax scrutiny; Limited operating history; key man risk; Insurance ratings below peers; Reinsurance pricing declining; lack of investment transparency. Upside risks include: Outsized investment returns; underwriting profitability faster than expected; multiple expansion above peers. 97

98 Valuation Methodology & Risks Travelers (TRV) Our $110 price target is based on 1.2x 2017e BVPS. Lower reserve releases and rising auto claims pressure earnings and ROE. BV growth in e in low to mid single digits. P/B multiple contracts from currently levels to historical average as ROE declines to 10-11%. Upside risks include: Favorable reserve development remains strong, faster auto margin turnaround, better investment income, absence of large cat losses, higher buybacks, accretive acquisitions. WR Berkley (WRB) Our $65 price target is based on 1.45x 2017e BVPS, in-line with historical averages. We estimate an Op ROE of ~9% in e. Upside risks include: underwriting improvement, higher investment returns, stronger capital management, and potential M&A. Downside risks include: greater P&C pricing pressure, margin deterioration, catastrophe losses, reserve charges, and investment losses. XL Group (XL) Our $41 price target is based on 0.9x 2017e BVPS. Declining pricing environment and competitive industry dynamics slow margin improvement post Catlin acquisition. Steady execution on integration goals, continued improvement on underwriting margin and accretive capital management drive ROE expansion toward ~10% by 2018e. P/B valuation remains below par in near-term. Risks include: declining P&C pricing hampers underwriting margin expansion; underwriting losses from catastrophes and/or adverse reserve development; subpar investment returns. Intact Financial (IFC-T) Our C$105 price target is based on 2.3x 2017e Base case or 2.1x UW 2017e BVPS + 16x Brokerage EPS, reflecting mid-teens ROE. IFC continues to achieve its stated goals of 500bps ROE outperformance and 10% EPS growth. Distribution segment is a hidden gem valued at median broker peers. Top-line continues to grow. Underlying margin deterioration moderates and starts to improve as higher rates and underwriting actions take effect. Downside risks include: large catastrophe or investment losses, rising auto claim frequency and severity, inability to execute on large acquisitions, and slowing economy in Canada. 98

99 Valuation Methodology & Risks Aon (AON) Our $114 price target is based on 14x 2018e P/E (12x EV/EBITDA), in line with peers. ~11% EPS CAGR in e with low-mid single digit organic growth, margin expansion and continued share repurchases. Lower US taxes aid economic growth. Valuation at historical levels and in-line with peer averages. Downside risks include: M&A, P&C pricing under pressure, Economic slowdown, Healthcare exchange adoption slows. Upside risks include: Faster organic growth and/or expense management drives higher margin expansion, accretive deals. Arthur J Gallagher (AJG) Our $52 price target is based on sum-of-parts valuation, valuing Core business at 18x 2018e EPS or 11x EV/EBITDA and Clean coal at 5x EPS. Economic growth is offset by pricing pressure and lead to organic growth ~3-4%. Tuck-in acquisitions on a global platform along with top line growth and margin expansion should drive ~12% CAGR in e. Downside risks include: M&A execution, P&C pricing declines, economic downturn, less than expected benefits from US tax reform, Clean coal business disappoints. Upside risks include: Faster top-line growth, better margin, improving economy, more than expected benefits from US tax reform. Brown & Brown (BRO) Our $42 price target is based on 17x 2018e EPS or 11x EV/EBITDA, in-line with historical averages, Economic improvement is offset by declining P&C pricing, driving 3-4% organic growth. Corporate tax reform benefit is partially realized. Technology investments pressure industry leading margins. Acquisitions and share repurchases help drive ~8% EPS growth. Upside risks include: faster organic growth; better margins; accretive acquisitions, additional benefit from potential US tax reform, and larger share repurchases. Marsh & McLennan (MMC) Our $68 price target is based on 16x 2018e EPS and 12x EV/EBITDA, modestly above MMC historical averages. We estimate ~12% EPS CAGR in e. Organic growth remains 3-4% as economic growth continues, offset by declining P&C pricing. Stronger growth in US could be offset by macro volatility. Expect low- to midsingle-digit EPS benefit from lower corporate tax. Expect continued strong shareholder returns. Upside risks include: less than expected F/X headwinds, better organic growth and margin expansion, larger share buybacks, benefit from potential US tax reform. Downside risks include: global economic slowdown, sharply declining P&C pricing impacting organic growth, poorly executed M&A. Willis Towers Watson (WLTW) Our $135 price target is based on 16x NTMe P/E, in line with historical averages. Combined company EPS CAGR ~15% in e through organic growth, margin expansion and strong capital management through underlying cost savings, tax savings and free cashflow generation. Valuation expands towards global peers AON & MMC.. Risks include: Integration issues; Decelerating P&C pricing or global economic uncertainties hurt organic growth; Inability to execute on current cost saving plan. 99

100 Morgan Stanley is acting as financial advisor to Endurance Specialty Holdings Limited ( Endurance ) in relation to its definitive agreement with Sompo Holdings, Inc. for the sale of 100% of the outstanding shares of Endurance, as announced on October 5, The proposed transaction is subject to approval by Endurance shareholders, customary closing conditions and regulatory approvals. This report and the information provided herein is not intended to (i) provide voting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in the procurement, withholding or revocation of a proxy or any other action by a security holder. Endurance has agreed to pay fees to Morgan Stanley for its financial services, that are contingent upon the consummation of the proposed transaction. Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. ( MUMSS ) is currently acting as financial advisor to Tokio Marine & Nichido Fire Insurance Co., Ltd. in relation to its announced discussions regarding a comprehensive strategic alliance with National Mutual Insurance Federation of Agricultural Cooperatives. Tokio Marine & Nichido Fire Insurance Co., Ltd. has agreed to pay advisory fees to MUMSS for its financial advisory services. 100

101 Disclosure section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., and/or Morgan Stanley Canada Limited. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., Morgan Stanley Canada Limited and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, USA. For valuation methodology and risks associated with any recommendation, rating or price target referenced in this research report, please contact the Client Support Team as follows: US/Canada ; Hong Kong ; Latin America (U.S.); London +44 (0) ; Singapore ; Sydney +61 (0) ; Tokyo +81 (0) Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Kai Pan; Michael W. Phillips. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at Important US Regulatory Disclosures on Subject Companies As of December 30, 2016, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: American Int'l Grp. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Allstate Corporation, Aon PLC, Axis Capital Holdings, Marsh & McLennan Cos, National General Holdings Corp, The Travelers Companies, Inc., W.R. Berkley Corp.. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Allstate Corporation, American Int'l Grp, Aon PLC, Axis Capital Holdings, Marsh & McLennan Cos, National General Holdings Corp, The Travelers Companies, Inc., W.R. Berkley Corp.. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Allstate Corporation, American Int'l Grp, Aon PLC, Arch Capital Group Ltd., Arthur J. Gallagher, Axis Capital Holdings, Brown & Brown Inc., Chubb LTD, Everest Re Group, Ltd., Intact Financial Corp, Marsh & McLennan Cos, National General Holdings Corp, RenaissanceRe, The Travelers Companies, Inc., Third Point Reinsurance Ltd, W.R. Berkley Corp., Willis Towers Watson PLC, XL Group PLC. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Allstate Corporation, American Int'l Grp, Aon PLC, Arch Capital Group Ltd., Arthur J. Gallagher, Chubb LTD, Intact Financial Corp, Marsh & McLennan Cos, Progressive Corp, RenaissanceRe, The Travelers Companies, Inc., W.R. Berkley Corp., Willis Towers Watson PLC, XL Group PLC. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Allstate Corporation, American Int'l Grp, Aon PLC, Arch Capital Group Ltd., Arthur J. Gallagher, Axis Capital Holdings, Brown & Brown Inc., Chubb LTD, Everest Re Group, Ltd., Intact Financial Corp, Marsh & McLennan Cos, National General Holdings Corp, RenaissanceRe, The Travelers Companies, Inc., Third Point Reinsurance Ltd, W.R. Berkley Corp., Willis Towers Watson PLC, XL Group PLC. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Allstate Corporation, American Int'l Grp, Aon PLC, Arch Capital Group Ltd., Arthur J. Gallagher, Axis Capital Holdings, Chubb LTD, Intact Financial Corp, Marsh & McLennan Cos, Progressive Corp, RenaissanceRe, The Travelers Companies, Inc., W.R. Berkley Corp., Willis Towers Watson PLC, XL Group PLC. An employee, director or consultant of Morgan Stanley is a director of Allstate Corporation. This person is not a research analyst or a member of a research analyst's household. 101

102 Disclosure section (cont.) Morgan Stanley & Co. LLC makes a market in the securities of Allstate Corporation, American Int'l Grp, Aon PLC, Arch Capital Group Ltd., Arthur J. Gallagher, Axis Capital Holdings, Brown & Brown Inc., Chubb LTD, Everest Re Group, Ltd., Marsh & McLennan Cos, National General Holdings Corp, Progressive Corp, RenaissanceRe, The Travelers Companies, Inc., Third Point Reinsurance Ltd, W.R. Berkley Corp., Willis Towers Watson PLC, XL Group PLC. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Equity Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Morgan Stanley trades or may trade as principal in the debt securities (or in related derivatives) that are the subject of the debt research report. Certain disclosures listed above are also for compliance with applicable regulations in non-us jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of December 31, 2016) The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm. For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equalweight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. 102

103 Disclosure section (cont.) Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Important Disclosures for Morgan Stanley Smith Barney LLC Customers Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at For Morgan Stanley specific disclosures, you may refer to Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Allstate Corporation, American Int'l Grp, Axis Capital Holdings, Chubb LTD, Marsh & McLennan Cos, National General Holdings Corp, Progressive Corp, RenaissanceRe, The Travelers Companies, Inc., XL Group PLC. Morgan Stanley Research policy is to update research reports as and when the Research Analyst and Research Management deem appropriate, based on developments with the issuer, the sector, or the market that may have a material impact on the research views or opinions stated therein. In addition, certain Research publications are intended to be updated on a regular periodic basis (weekly/monthly/quarterly/annual) and will ordinarily be updated with that frequency, unless the Research Analyst and Research Management determine that a different publication schedule is appropriate based on current conditions. Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Matrix at 103

104 Disclosure section (cont.) Morgan Stanley Research is provided to our clients through our proprietary research portal on Matrix and also distributed electronically by Morgan Stanley to clients. Certain, but not all, Morgan Stanley Research products are also made available to clients through third-party vendors or redistributed to clients through alternate electronic means as a convenience. For access to all available Morgan Stanley Research, please contact your sales representative or go to Matrix at Any access and/or use of Morgan Stanley Research is subject to Morgan Stanley's Terms of Use ( By accessing and/or using Morgan Stanley Research, you are indicating that you have read and agree to be bound by our Terms of Use ( In addition you consent to Morgan Stanley processing your personal data and using cookies in accordance with our Privacy Policy and our Global Cookies Policy ( including for the purposes of setting your preferences and to collect readership data so that we can deliver better and more personalized service and products to you. To find out more information about how Morgan Stanley processes personal data, how we use cookies and how to reject cookies see our Privacy Policy and our Global Cookies Policy ( If you do not agree to our Terms of Use and/or if you do not wish to provide your consent to Morgan Stanley processing your personal data or using cookies please do not access our research. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons. With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. Morgan Stanley may make investment decisions that are inconsistent with the recommendations or views in this report. To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these 104

105 Disclosure section (cont.) securities/instruments. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives. Morgan Stanley is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. Morgan Stanley Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. Neither this report nor any part of it is intended as, or shall constitute, provision of any consultancy or advisory service of securities investment as defined under PRC law. Such information is provided for your reference only. Morgan Stanley Research is disseminated in Brazil by Morgan Stanley C.T.V.M. S.A.; in Mexico by Morgan Stanley México, Casa de Bolsa, S.A. de C.V which is regulated by Comision Nacional Bancaria y de Valores. Paseo de los Tamarindos 90, Torre 1, Col. Bosques de las Lomas Floor 29, Mexico City; in Japan by Morgan Stanley MUFG Securities Co., Ltd. and, for Commodities related research reports only, Morgan Stanley Capital Group Japan Co., Ltd; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents) and by Morgan Stanley Asia International Limited, Hong Kong Branch; in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research) and by Morgan Stanley Asia International Limited, Singapore Branch (Registration number T11FC0207F); in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N , holder of Australian financial services license No , which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N , holder of Australian financial services license No , which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Indonesia by PT Morgan Stanley Asia Indonesia; in Canada by Morgan Stanley Canada Limited, which has approved of and takes responsibility for its contents in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main and Morgan Stanley Private Wealth Management Limited, Niederlassung Deutschland, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the US by Morgan Stanley & Co. LLC, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential Regulatory Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. RMB Morgan Stanley Proprietary Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley Proprietary Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. The information in Morgan Stanley Research is being disseminated by Morgan Stanley Saudi Arabia, regulated by the Capital Market Authority in the Kingdom of Saudi Arabia, and is directed at Sophisticated investors only. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who we are satisfied meets the regulatory criteria to be a Professional Client. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided exclusively to persons based on their risk and income preferences by the authorized firms. Comments and recommendations stated here are general in nature. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. 105

106 The Americas Europe Japan Asia/Pacific 1585 Broadway New York, NY United States Tel: +1 (1) Bank Street, Canary Wharf London E14 4AD United Kingdom Tel: +44 (0) Otemachi, Chiyoda-ku Tokyo Japan Tel: +81 (0) Austin Road West Kowloon Hong Kong Tel: Morgan Stanley 106