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Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result,

investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 237.

EQUITY RESEARCH

16 April 2012

U.S. INSURANCE/NON-LIFE PRIMER:

PRICING IS FIRMING; STOCKS OFFER

ATTRACTIVE ENTRY POINT

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CONTENTS

Part I: P&C Insurance Stocks Should Benefit As Cycle Firms............................................................ 4

Part II: Primary Commercial Lines: Full Cycle Turn In 2013?.......................................................... 32

Part III: Reinsurers: A Leveraged Play on the Property-Casualty Cycle....................................... 54

Part IV: Insurance Brokers Are The Best Early P&C Cycle Play ....................................................... 76Part V: Have Personal Lines Insurance Returns Peaked? ................................................................ 94

Part VI: P&C Stock Performance & Valuation.................................................................................. 112

ACE: Strong Global Franchise & Solid Book Value Growth......................................................... 123

ACGL: Balanced Presence in Insurance & Reinsurance ................................................................ 127

TRV: Strong Track Record and Attractively Valued....................................................................... 131

BRK.A/B Geared to Economic Recovery, Attractive Valuation ................................................ 135

CB: 2012 Guidance Could Be Conservative..................................................................................... 139

PRE: Balanced Reinsurer with Potential For Improving Results .................................................. 143

XL: P&C Business Has Stabilized, Valuation Attractive ................................................................. 147

RNR: Superior Property Catastrophe Reinsurer.............................................................................. 151

Everest Re: Will Results Improve in 2012?....................................................................................... 155

AWH: Reserve Releases Could Slow.................................................................................................. 159

AHL: Reinsurance Prices Could Improve, Limited Excess Capital .............................................. 163

MRH: Re-Focused On Core Property Catastrophe Reinsurance Business................................ 167

FSR: Increasingly Dependent on Retrocessional Support ........................................................... 171

OB: Facing Top-Line Pressure ............................................................................................................ 175

MMC: Improvement in Brokerage Organic Growth...................................................................... 179

WSH: Earnings Could Recover in 2013............................................................................................. 184

AJG: Leverage to Improving P&C Prices & Recovering Economy ............................................... 188

BRO: Highest Leverage To Improving Pricing................................................................................. 193

AON: Leveraged To Improving Economy And Insurance Market.............................................. 197

PGR: Best-In-Class Operator.............................................................................................................. 202

ALL: ROE Goal of 13% by 2014 Appears Optimistic.................................................................... 206

THG: Chaucer Acquisition Expands THGs International Presence .......................................... 210

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Part I: P&C Insurance Stocks Should Benefit as Cycle Firms

We are constructive on the P&C insurance sector based on a positive inflection point in P&C

pricing for the first time since 1999. We expect positive pricing momentum to persist,

which could result in valuation multiple expansion for P&C stocks.

This positive inflection point in P&C rates appears to be driven by deteriorating underwriting

results, stabilizing industry capital positions, and rising property reinsurance costs.

Although a full commercial P&C cycle turn may not occur until 2013, pricing trends are

gaining positive momentum.

Summary View Top Picks

CommercialLines Insurers

Pricing trends are positive, which is the most important factor forthe P&C stocks. We prefer primary commercial insurers with strongbalance sheets and high quality managements.

ACE, ACGL, CB,TRV, XL

Reinsurers Reinsurers are a more leveraged play than the primary insurers to aP&C cycle turn but typically generate volatile earnings. ReinsurersROEs could recover assuming a return to normalized catastropheactivity.

PRE, RNR

InsuranceBrokers

Insurance brokers benefit the most from rising P&C prices becausemost of the benefits of higher prices drop to the bottom line. Unlikethe insurers, the insurance brokers do not assume underwriting riskor have large capital requirements.

MMC, WSH,AJG, BRO

Personal LinesInsurers

Personal auto margins and ROEs have likely peaked in the currentcycle. We prefer low-cost operating model of direct writers (PGRand GEICO), which are gaining profitable market share from theexclusive agency insurers (ALL and State Farm).

PGR

Source: Barclays Research

Among the P&C insurance stocks, we prefer primary commercial insurers ACE, ACGL, CB,

TRV and XL because of their high quality managements, potential for strong book valuegrowth, and better-than-average underwriting performance. Among the reinsurers, we

prefer PRE despite its recent challenges due to its discounted valuation and potential for

meaningful ROE recovery in 2012. Berkshire Hathaway should generate attractive earnings

power as well as book value per share growth. We anticipate BRKs GEICO unit as well as

PGR should gain profitable auto insurance market share.

Our outlook is favorable on the insurance brokers, especially MMC (our top pick among the

brokers), WSH, AJG and BRO. These companies should benefit from a revenue tailwind as

the economy recovers. Also, improved P&C prices should translate into rising organic

revenue growth and operating margins. P&C pricing has bottomed, which means the

insurance broker stocks could generate attractive upside potential because of positive

operating leverage and improved investor sentiment.

Our outlook for personal lines insurers, including ALL, PGR and THG, is mixed. Automobile

insurance results have been strong, but margins have probably peaked. Meanwhile, loss

frequency trends remain favorable, although this benefit will likely reverse as the economy

improves. We view consumers growing preference for the direct sales channel in personal

auto lines as a secular trend that should result in PGR and GEICO continuing to take market

share from exclusive agency insurers including Allstate. Also, PGR and GEICO avoid natural

catastrophe losses by not writing homeowners insurance business unlike ALL and THG.

We are constructive on the

P&C insurance sector based on

a positive inflection point in

P&C pricing

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Year-to-date 2012, the Barclays P&C insurance index has underperformed both the S&P 500

Index (by 7 percentage points, as of April 11, 2012) and the S&P Financial index (by 15

percentage points) as a result of a shift to high-risk financial stocks that previously

underperformed the P&C stocks in 2011. Since the March 2009 low, during the impact of

the global financial crisis, the Barclays P&C insurance index rose 57% but has

underperformed both the S&P 500 and S&P Financials.

P&C insurer stock valuations are currently at the low end of the historical range, which

provides an attractive entry point, in our view, although we acknowledge the overall

valuation for the financials sector is depressed. As a point of reference, commercial P&C

insurer valuations expanded in 2000 from approximately 1x book value to nearly 2x book

value when price improvement became evident. Even if the P&C insurance sector recovers

to an historical median valuation of 1.4x book value, it implies significant upside potential

for the stocks.

Figure 3: Stock Performance YTD 2012 Figure 3: Stock Performance Since March 2009 Low

17%

12%

9%

2%

0%

4%

8%

12%

16%

20%

S&P

Financial

Barclays Life

Index

S&P 500 Barcl ays P&C

Index

160%

102%86%

57%

0%

25%

50%

75%

100%

125%

150%

175%

Barclays Life

Index

S&P

Financial

S&P 500 Barclays P&C

Index

Source: Bloomberg, Barclays Research. Source: Bloomberg, Barclays Research.

As the commercial P&C cycle bottoms, earning power and ROE will likely deteriorate for

several years due to worse accident year underwriting results, reserve strengthening, weak

Figure 1: Barclays P&C Price-to-Book Index HistoricalValuation

Figure 2: Barclays P&C Price-to-Book Index Relative toS&P Financials

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Mar-99

Feb-00

Jan-01

Dec-01

Nov-02

Oct-0

3

Sep-04

Aug-05

Jul-06

Jun-07

May

-08

Apr-09

Mar

-10

Feb-11

Jan-12

Absoluteprice-to-book

HurricaneKatrina

Beginning of

Financial Crisis

9/11

Hard P&C

MarketBegins

1Q04 P&C

pricing peaks

-60%

-30%

0%

30%

60%

Mar-99

Oct-9

9

May

-00

Dec-0

0Jul

-01

Feb-0

2

Sep-02

Apr-03

Nov-0

3

Jun-04

Jan-05

Aug-05

Mar-06

Oct-0

6

May

-07

Dec-07Jul

-08

Feb-0

9

Sep-09

Apr-10

Nov-1

0

Jun-11

Jan-12

Beginning of Financial

Crisis

Support Level

Source: SNL, FactSet, Barclays Research Source: SNL, FactSet, Barclays Research

P&C insurer stock valuations are

currently at the low end of the

historical range

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investment income growth, and reduced share buyback activity. However, P&C industry

balance sheet strain typically sets the stage for improved pricing, which should elevate P&C

valuations as investors focus on the potential for rate improvement.

The P&C insurance sector faces long-term risks from catastrophe losses (both natural and

man-made), rising interest rates, increased inflation, and inadequate loss reserves. Current

challenges also include:

Modest top-line growth as lower retention due to non-renewing unprofitable business

offsets higher pricing, as well as low (although bottoming) exposure growth, and rock-

bottom interest rates.

Expectations of declining EPS, returns on equity, and book value growth based on

normalized catastrophe losses.

Current earning power being overstated due to the meaningful benefit of loss reserve

releases from prior years and the risk of reserve strengthening.

Slowing share buybacks.

Few consolidation opportunities (at current valuations) that could extract value from the

property-casualty stocks.

Interest rates are expected to remain low through at least 2014, which curtails EPS growth

for P&C insurers. Interestingly, the P&C stocks have historically shown a weak correlation to

interest rate shifts.

In a low interest rate environment, insurers asset values would be expected to increase

including the value of their large fixed income investments. However, net investment

income could decline as invested assets are reinvested at lower interest rates.

In a rising interest rate environment, the value of insurers fixed income investments

would likely decline and result in an impact to book values.

There is essentially no correlation between P&C insurance stocks and interest rates since

2001, which means the level of interest rates is not a meaningful driver of P&C

insurance stock performance unlike other sectors within financials.

Figure 4: Barclays P&C Insurance Index Vs 10-Year Treasury Yield

0

20

40

60

80

10 0

12 0

14 0

16 0

18 0

D ec-01 D ec-02 D ec-03 D ec-04 D ec-05 D ec-06 D ec-07 D ec-08 D ec-09 D ec-10 D ec-11

Barclays P&C Index

Absolute Price

1. 5

2. 0

2. 5

3. 0

3. 5

4. 0

4. 5

5. 0

5. 5

6. 0

10-Yr Treasury Yld.

B a rc l ay s P &C I n su ra n ce I nd ex A bs o lu t e P r ic e 1 0 Y ea r T re a su ry Y ie l d

Beginning of the financial

crisis

European crisis

Source: FactSet, Barclays Research.

P&C insurance stocks would be expected to perform better in a deflationary economic

environment than an inflationary one because it should lead to lower claims costs and

The P&C insurance sector faces

long-term risks

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higher earnings. Barclays economists estimate that inflation (as measured by core CPI) will

persist at levels slightly above 2% y/y (not seasonally adjusted) throughout most of 2012,

but rise more sharply by the end of the year and end 2013 around 2.8%.

In a deflationary environment, claims inflation would likely be constrained, potentially

leading to loss reserve redundancies (insurers largest liabilities) and a benefit to

earnings.

In an inflationary environment, claims costs could rise leading to loss reserve

deficiencies and reduced earnings.

Property-Casualty Insurance Sector: Commercial Insurers,Reinsurers, Brokers, and Personal Lines Insurers

The property-casualty insurance sector has several segments that have different dynamics:

Primary commercial insurers provide property and liability insurance to businesses and

institutions. Major writers include AIG, Travelers, ACE, XL, and Chubb.

Reinsurers provide contingent capital to primary commercial and personal lines insurers

to spread the risk of claims. Put another way, reinsurance is insurance for insurance

companies. This is a global market with major writers including Munich Re, Swiss Re,

General Re (owned by Berkshire Hathaway), PartnerRe, and XL.

Insurance brokers are distributors of insurers products and, unlike insurers, do not

assume underwriting risk or have large capital requirements. The largest commercial

insurance and reinsurance brokers are Marsh & McLennan, Aon and Willis.

Personal lines insurers provide automobile and homeowners insurance to U.S.

consumers. The largest auto and home insurers include policyholder-owned State

Farm, Allstate, Geico (owned by Berkshire Hathaway), and Progressive.

Primary Commercial Insurers Benefit from an Improving PricingEnvironmentPrimary commercial insurers benefit from a rising pricing environment forthe first time in a decade driven by deteriorating underwriting results, stabilizing industry

capital positions, and rising property reinsurance costs, in our view.

Although a full commercial P&C cycle turn may not occur until 2013, pricing trends have

positive momentum. Premium volume growth could improve, reflecting higher P&C pricing

and stabilizing exposure growth, although this could be partially offset by P&C insurers non-

renewing unprofitable business.

That being said, as the commercial P&C cycle bottoms, earning power and ROE will likely

deteriorate for several years due to worse accident year underwriting results, reserve

strengthening, weak investment income growth, and reduced share buyback activity.However, P&C industry balance sheet strain typically sets the stage for improved pricing,

which should elevate P&C valuations as investors focus on the potential for rate

improvement.

Among the primary insurers, we view ACE and ACGL as having the best potential to generate

profitable growth in an improving environment. CB, TRV, and XL should also benefit.

Pricing trends are gaining

positive momentum which could

result in valuation expansion for

P&C insurance stocks

.

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Figure 5: U.S. Commercial Lines Insurance Premium Volume

$149

$172

$206

$230$240 $247

$261 $261 $257$239 $233 $236 $242

$251

$0

$50

$100

$150

$200

$250

$300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E

DirectWrittenPremiumsin$billions

-10%

-5%

0%

5%

10%

15%

20%

%

ChangeinDW

P

Source: SNL, Barclays Research

As Do the Reinsurers. The reinsurers are also benefitting from higher P&C pricesafter over $100bn of insured global catastrophe losses in 2011. In addition, we anticipate

the trend of primary insurers retaining increased exposure to boost their net premium

volume has ended and demand for reinsurance is stabilizing. That being said, most of the

Bermuda reinsurers are unlikely to increase their capacity in 2012, perhaps with the

exception of RNR, after suffering meaningful catastrophe losses in 2011. Separately, the

anticipated implementation of Solvency II in 2013 could result in some increased demand

for reinsurance from European primary insurers. Among the reinsurance stocks, we prefer

PRE despite its recent challenges due to its discounted valuation and potential

for meaningful ROE recovery in 2012. We view RNR as the best-in-class property

catastrophe reinsurer, and if its valuation were to compress we could become more

constructive in our outlook.

Many reinsurers are based in Bermuda because of its proximity to the United States, the

ability to write global exposures, Bermudas flexible regulatory system, and no taxes levied

on profits generated out of Bermuda. However, pressure is increasing to charge taxes on

Bermuda companies doing business with U.S. customers. As a result, several insurers have

re-domesticated to Switzerland (ACE, AWH) or Ireland (XL) where there is less potential

uncertainty regarding tax treaties. We expect more insurers to change their domicile

outside of Bermuda, although there should be little if any impact to their business or

earnings as a result. Lloyds of London remains an attractive venue to write specialty

commercial P&C insurance lines due to this markets strong ratings, worldwide licenses, and

opportunities to access global P&C businesses.

A more leveraged play than theprimary insurers to a P&C cycle

turn but typically generate

volatile earnings.

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Figure 6: Reinsurance Composite Shareholders Funds

$90

$110

$140

$159

$129

$166 $171$174

$104

$0

$40

$80

$120

$160

$200

2003 2004 2005 2006 2007 2008 2009 2010 2011

in $ bil

Source: Guy Carpenter, Barclays Research

The Insurance Brokers Benefit the Most from Improved P&C Pricing. Theinsurance broker stocks should benefit from improved sentiment and valuation multiples aspricing improves. Higher P&C prices should improve the brokers organic revenue growth

(the most important metric for these stocks), margins and earnings. Notably, margins could

continue to expand, nearing peak levels seen in the last hard market in 2000-2004 driven by

positive operating leverage.

The success of (as well as investor sentiment regarding) the insurance brokers including

MMC, AON, and WSH is typically driven largely by commercial P&C insurance and

reinsurance premiums (pricing and exposures). Improving pricing power in commercial

lines insurance and reinsurance benefits the brokers commission-based business, while

fee-based business could be mostly stable as customers look to contain costs. Moreover,

exposure growth appears to be bottoming and could help insurers top-line growth once

the economy recovers. For the insurance brokers, these trends should result in improving

organic growth, operating margins, and annual EPS growth.

Our top picks among the insurance brokers are MMC and WSH followed by BRO and

AJG. MMC should have strong organic revenue growth and margin expansion opportunities

in each of its businesses even in a slow-growth macro environment. WSH is a pure-play

global insurance broker with the lowest valuation among its peers, although 2012 will likely

be another transition year. BRO and AJG have the highest leverage to rising P&C prices

because nearly all of their revenues are commission-based, although these stocks already

trade at a premium valuation. AON (rated 2-Equal Weight/1-Pos) should also benefit from

higher P&C prices, but we see a longer road to achieve improved organic growth and

margin expansion compared to the other insurance brokers.

Nearly all of BRO and AJG's brokerage revenues are commission-based, while the larger

brokers (MMC, AON and WSH) contain a mix of both commissions and fees. This means

the benefit of improved pricing should be more significant for BRO and AJG than MMC,

AON, and WSH.

Insurance brokers benefitthe most from rising P&C

prices because most of the

benefits of higher prices drop to

the bottom line

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Figure 7: Average Insurance Brokerage Organic Growth

9%

11%

15%

11%

2%

4%

1%

0%

2%3%

4%

-1%

-2%0%

-4%

-2%

0%

2%

4%

6%8%

10%

12%

14%

16%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

2013

E

Soft MarketHard Market

Loss of contingent

commissions

Note: Based on the average insurance brokerage organic for MMC, AON, WSH, AJG, BRO.Source: Company data, Barclays Research estimates.

Figure 8: Average Insurance Broker Margins

18%

23%

24%

26%

24%

21%22%

21%20%

22%23% 22%

23%24%

15%

17%

19%

21%

23%

25%

27%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E2013E

Note: Based on the average insurance brokerage segment margin for MMC, AON, WSH, AJG, BRO.Source: Company data, Barclays Research estimates.

Personal Auto Margins Have Likely Peaked; Homeowners Insurance PricesUp. Personal auto lines insurance underwriting margins are strong, and price increases are

positive, but slowing. However, competition is expected to intensify due to attractive

margins in auto insurance and underwriting margins have probably peaked. Personal lines

insurer growth is a function of growth in registered vehicles and the housing stock (for

homeowners insurance), which should recover as the economic environment improves. Amajor factor for homeowners insurers is natural catastrophe losses which range in the U.S.

from winter storms, tornadoes, and wind-related hurricane losses. Flood losses are typically

not covered by private market homeowners insurers because the U.S. National Flood

Insurance Program addresses this risk.

Despite a slow-growth environment, auto insurers focused in the direct sales channel

including GEICO and Progressive are gaining market share because consumers are

increasingly comfortable with buying auto insurance over the telephone or internet directly.

Allstates declining auto policies-in-force (PIF) also appears to be linked in part to its

Personal auto margins and ROEs

are benefiting from mostly

benign claims inflation

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strategy of reducing catastrophe exposure in its homeowners insurance business because

Allstate tends to offer competitive pricing when auto and homeowners insurance is

bundled. Mutual insurer State Farm has the largest personal lines market share at 19%,

although the company is losing money in its core underwriting business.

Figure 9: U.S. Personal Lines Industry Premium Volume

$0

$50

$100

$150

$200

$250

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

Auto Homeowner's

in $ bil

Source: A.M. Best, Barclays Research estimates.

Figure 10: U.S. Private Passenger Auto Insurance Industry

Combined Ratio vs State Farm

Figure 11: U.S. Homeowners Insurance Industry Combined

Ratio vs State Farm

90%

100%

110%

120%

130%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

E2012E

Auto Insurance Industry including State Farm

State Farm

State Farm

85%

95%

105%

115%

125%

135%

145%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

Homeowner's Insurance Industry including State Farm

State Farm

Catastrophes

State Farm

Source: A.M. Best, Barclays Research. Source: A.M. Best, Barclays Research.

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Figure 12: Non-Life U.S. Insurance Sector Coverage

NON-LIFE INSURANCE SECTOR RATING: 1-POSITIVE

52-Wk Mkt

Price Price Cap Div.

Company Ticker Rating 4/11/2012 Range (Bil) 11E 12E 13E 11/12 12/13 12E 13E Yield 4Q11A 12E 13E 12E 13E 12E 13E

Commercial Lines & ReinsuranceTravelers TRV 1-Overweight $58.17 6 4 - 46 $22.9 $3.28 $5.65 $5.50 73% -3% $5.75 $6.06 2.8% 1.10 0.93 0.87 0.82 10.3 10.6 9% 8%ACE Limited ACE 1-Overweight 72.11 75 - 57 24.3 6.97 7.60 7.00 9% -8% 7.56 7.65 2.6% 1.23 0.99 0.90 0.85 9.5 10.3 1 0% 9%

Arch Capi tal Group ACGL 1-Overweight 37.79 39 - 30 5.1 2.20 2.75 2.50 25% -9% 2.78 2.80 0.0% 1.18 1.18 1.07 0.99 13.7 15.1 8% 7%

P ar tn er R e P RE 1 -Ov erw ei gh t 66.86 82 - 50 4.4 (9.50) 8.10 7.50 NM -7% 7.64 7.37 3.6% 0.88 0.79 0.69 0.64 8.3 8.9 9% 8%

Be rk sh ire H at ha wa y (a ) BR K.B 1 -Ov erw ei gh t 79.05 84 - 65 195.8 4.35 5.45 5.80 25% 6% 5.11 5.46 0.0% 1.75 1.19 1.04 0.94 14.5 13.6 8% 7%

Chubb CB 1-Overweight 69.61 72 - 55 18.8 5.12 5.90 6.00 15% 2% 5.77 5.96 2.2% 1.26 1.22 1.16 1.09 11.8 11.6 11% 11%XL Group XL 1-Overweight 21.18 25 - 18 6.7 0.28 2.10 2.20 NM 5% 1.86 2.16 2.1% 0.75 0.71 0.66 0.61 10.1 9.6 7% 7%

E ve re st R e RE 2 -E qu al W eig ht 93.43 95 - 73 5.0 (1.73) 11.35 10.50 NM -8% 11.90 12.43 2.1% 0.83 0.83 0.74 0.69 8.2 8.9 10% 8%OneBeacon OB 2-Equal Weight 14.69 17 - 12 1.4 0.51 0.90 0.80 77% -11% 1.06 1.09 5.7% 1.27 1.27 1.39 1.42 16.3 18.4 9% 8%

Al li ed Wor ld As su ra nc e AW H 2 -E qu al We ig ht 68.90 71 - 49 2.6 4.63 7.00 6.00 NM -14% 6.89 6.39 2.2% 0.96 0.86 0.78 0.73 9.8 11.5 8% 7%Aspen Holdings AHL 2-Equal Weight 27.69 29 - 22 2.0 (1.26) 3.00 2.75 NM -8% 2.79 3.03 2.2% 0.73 0.72 0.67 0.62 9.2 10.1 8% 7%

Montpelier Re MRH 2-Equal Weight 19.30 20 - 15 1.1 (2.50) 1.65 1.50 NM -9% 2.19 2.26 2.2% 0.85 0.85 0.80 0.76 11.7 12.9 7% 6%Flagstone Re FSR 2-Equal Weight 7.39 10 - 6 0.5 (3.98) 0.75 0.70 NM -7% 0.86 0.89 2.2% 0.68 0.68 0.64 0.62 9.8 10.5 7% 6%

RenaissanceRe RNR 2-Equal Weight 74.79 79 - 60 3.9 (3.22) 8.15 7.50 NM -8% 8.30 8.96 1.4% 1.28 1.26 1.12 1.03 9.2 10.0 13% 11%

Median 25% -8% 2.2% 1.03 0.90 0.84 0.79 10.0 10.5 9% 7%

Insurance Brokers

Marsh & McLennan MMC 1-Overweight $31.85 33 - 25 $17.4 $1.77 $2.15 $2.45 21% 14% $2.14 $2.43 2.8% NM 2.89 2.74 2.56 14.8 13.0 20% 21%

W il li s G ro up W SH 1-O verw ei gh t 35.05 42 - 33 6.1 2.74 2.90 3.20 6% 10% 2.86 3.19 3.0% NM 2.44 2.20 1.98 12.1 11.0 1 9% 19%

Arthur J. Gallagher AJG 1-Overweight 34.87 36 - 24 4.1 1.28 1.80 2.10 41% 17% 1.88 2.16 3.8% NM 3.07 3.03 2.93 19.3 16.6 16% 18%Brown & Brown BRO 1-Overweight 23.72 27 - 17 3.4 1.13 1.30 1.45 14% 12% 1.29 1.45 1.3% NM 2.07 1.94 1.77 18.3 16.4 11% 11%Aon Corp. AON 2-Equal Weight 47.94 54 - 40 15.6 3.29 3.60 4.05 9% 13% 3.61 4.14 1.3% NM 1.92 1.76 1.64 13.3 11.8 14% 15%

Median 14% 13% 2.8% 2.44 2.20 1.98 14.8 13.0 16% 18%

Personal Lines

Pro gr essi ve PGR 1-O verw ei gh t $22.62 23 - 17 $13.8 $1.49 $1.45 $1.55 -3% 7% $1.55 $1.69 1.8% 2.39 2.39 2.16 2.02 15.6 14.6 15% 14%

The Hanover Group THG 2-Equal Weight 39.73 46 - 31 1.8 0.32 4.00 3.75 NM NM 4.00 4.15 3.0% 0.77 0.71 0.68 0.65 9.9 10.6 8% 7%Allstate Corp. ALL 2-Equal Weight 32.24 34 - 22 16.1 1.32 3.80 3.75 189% NM 3.70 4.04 2.6% 0.94 0.87 0.80 0.75 8.5 8.6 10% 9%

Median 93% 7% 2.6% 0.94 0.87 0 .80 0.75 9.9 10.6 10% 9%

S&P 500 SPX 1,368.71 1422 - 1075 $96.85 $111.05 $105.50 14.7% -5.0% 2.1% NA NA NA NA 12.3 13.0 NA NA10 Yr Treasury US10YR 2.03 3.57 - 1.71

Note: S&P 500 EPS estimates are a bottom-up calculation of consensus earnings forecasts.

Consensus EPSOperating EPS % Change EPS

4Q11

Price/BV ex

Gdwill

P/E ROEPrice/Stated BV

Price Share Price Performance

Company Ticker Rating 4/11/2012 Stated ex-AOCI Tangible Stated ex-AOCI Tangible Hi Lo Avg. Median 1 Mo. 12 Mos. 5 Yrs.

Commercial Lines & Reinsurance

Travelers TRV 1-Overweight $58.17 $62.32 $55.01 $52.65 0.93 1.06 1.10 2.05 0.80 1.23 1.25 1% -3% 9%

ACE Limited ACE 1-Overweight 72.11 72.76 67.09 58.43 0.99 1.07 1.23 2.03 0.81 1.26 1.29 0% 8% 24%

Arch Capital Group ACGL 1-Overweight 37.79 32.03 30.88 32.03 1.18 1.22 1.18 1.76 0.61 1.22 1.27 2% 11% 62%

Partner Re PRE 1-Overweight 66.86 84.82 77.94 75.85 0.79 0.86 0.88 1.62 0.61 1.15 1.20 3% -17% -4%

Berkshire Hathaway (a) BRK.B 1-Overweight 79.05 66.57 59.44 45.08 1.19 1.33 1.75 1.99 1.10 1.53 1.53 0% -3% 8%

Chubb CB 1-Overweight 69.61 57.15 50.78 55.44 1.22 1.37 1.26 2.20 0.96 1.45 1.46 3% 13% 34%

XL Group XL 1-Overweight 21.18 29.64 27.80 28.36 0.71 0.76 0.75 2.45 0.19 1.25 1.39 0% -15% -58%

Everest Re RE 2-Equal Weight 93.43 112.99 106.16 112.99 0.83 0.88 0.83 2.08 0.66 1.21 1.23 2% 3% -3%

OneBeacon OB 2-Equal Weight 14.69 11.57 11.56 11.57 1.27 1.27 1.27 1.70 0.70 1.12 1.11 -3% 8% -44%

Allied World Assurance AWH 2-Equal Weight 68.90 80.11 79.74 71.91 0.86 0.86 0.96 1.37 0.68 0.92 0.83 -1% 9% NA

Aspen Hold ing s AHL 2-Equ al Weigh t 27.69 38.43 32.58 38.16 0.72 0.85 0.73 1.69 0.60 1.00 1.04 1% -1% 7%

Mon tpel ier Re MRH 2-Equal Wei ght 19.30 22.71 22.77 22.71 0.85 0.85 0.85 1.96 0.67 1.12 1.05 5% 7% 12%

Flagstone Re FSR 2-Equal Weight 7.39 10.90 11.08 10.90 0.68 0.67 0.68 1.10 0.54 0.82 0.81 -11% -14% NA

Renaissan ceRe RNR 2- Equal Weigh t 74.79 59.27 59.05 58.45 1.26 1.27 1.28 2.63 0.99 1.56 1.52 2% 6% 41%

Median 0.90 0.97 1.03 1.98 0.67 1.21 1.24 1% 4% 9%

Insurance Brokers

M ar sh & M cLennan M MC 1- Ove rw ei gh t $31.85 $11.02 NM NM 2.89 NM NM 7.91 1.61 3.57 2.95 -1% 9% 6%

Willis Group WSH 1-Overweight 35.05 14.39 NM NM 2.44 NM NM 6.13 1.76 3.71 4.03 0% -13% -12%

A rt hur J . Ga ll agher A JG 1 -Ove rw ei gh t 34.87 11.37 NM NM 3.07 NM NM 9.23 2.07 4.28 3.54 -1% 16% 23%

Brown & Brown BRO 1-Overweight 23.72 11.47 NM NM 2.07 NM NM 6.04 0.57 3.44 3.26 -1% -9% -12%

Aon Corp. AON 2-Equal Weight 47.94 25.03 NM NM 1.92 NM NM 3.43 1.29 2.06 1.94 -1% -8% 25%

Median 2.44 6.13 1.61 3.57 3.26 -1% -8% 6%

Personal Lines

Progressive PGR 1-Overweight $22.62 $9.47 8.36 9.47 2.39 2.71 2.39 4.17 1.50 2.79 2.64 3% 6% -1%

The Hanover Group THG 2 -Equal Weight 39.73 56.24 52.16 51.46 0.71 0.76 0.77 1.50 0.26 0.89 0.85 -2% -12% -12%

Allstate Corp. ALL 2-Equal Weight 32.24 36.92 34.40 34.31 0.87 0.94 0.94 1.89 0.67 1.35 1.41 1% 2% -47%

Median 0.87 0.94 0.94 1.89 0.67 1.35 1.41 1% 2% -12%

S&P Financials SP621 205 191 NA NA 1.07 NA NA 2.66 1.42 1.89 1.80 3% -7% -57%

(a) Market cap for Berkshire Hathaway includes Class A and B shares outstanding.

4Q11 Book Value/Share 4Q11 Price/Book Value Historical Price/Stated BV

Source: Company data, Barclays Research

Industry Consolidation Unlikely. With perhaps few exceptions, we do not anticipate

increased industry consolidation among primary commercial insurers and reinsurers given

current depressed valuations and the potentially high cost of using stock as currency for

acquisitions. The appetite for M&A appears to have slowed and we expect this trend to

continue as the level of excess capital has likely peaked for commercial insurers, and

reinsurers do not have substantial excess capital. One notable exception is ACE, which has

been increasingly active in making accretive acquisitions using existing cash. Other recent

examples of industry consolidation include Alleghanys $3.5 billion acquisition of

Transatlantic (over competing offers from Validus Re, Berkshire Hathaway and AWH),

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Allstates acquisition of Esurance and Answer Financial from White Mountains for $1.0

billion, and Nationwides $816 million acquisition of Harleysville.

Figure 13: Recent Property-Casualty M&A Activity

Buyer Name Target Name

Deal Value

($MN)

Announce

Date

Price/ Book

(%)

Price/ Tangible

Book (%)

QBE Insurance Group Ltd. Balboa Insurance 700 02/03/2011 NA NA

Berkshire Hathaway Wesco Financial Corp. 548 02/04/2011 106 119

CNA Financial CNA Surety 477 04/20/2011 111 128

Hanover Insurance Group, Inc. Chaucer Holdings Plc 503 04/20/2011 101 112

Allstate Corp. Esurance and Answer Financial 1,000 05/17/2011 269 NA

Doctors Company FPIC Insurance Group, Inc. 361 05/23/2011 136 152

AmTrust Financial Services, Inc. International Credit Mutual Reinsurance 315 06/30/2011 NA NA

ACE Ltd. Penn Millers Holding Corp. 105 09/07/2011 101 101

Nationwide Mutual Insurance Co. Harleysville Group Inc. 816 09/28/2011 208 215

Selective Insurance Company Montpelier U.S. Insurance Co. 56 09/19/2011 NA NA

Alleghany Corp. Transatlantic Holdings, Inc. 3,535 11/20/2011 86 86CNA Financial Hardy Underwriting Bermuda Ltd. 227 03/21/2012 136 155

(a) CNA Financial already owned 61% of CNA Surety.Source: SNL data, Company data, Barclays Research

Catastrophe Losses Generate Volatile Earnings for Insurers. Catastrophe lossesare unavoidable for the property-casualty insurance industry and result in volatile earnings

that typically result in a discounted valuation for the P&C sector versus other financials.

Insurers try to manage catastrophe risk by using risk modelling tools, limiting exposure to

the most catastrophe-prone areas, and by purchasing reinsurance. U.S. catastrophe losses

in 2011 were $34bn, the second highest level of annual catastrophe losses since 1990.

Globally, insured catastrophe losses exceeded $100bn in 2011 driven by the Japan and New

Zealand earthquakes as well as Thailand floods.

Figure 14: U.S. P&C Industry Insured Catastrophe Losses, 1990-Present

$0

$10

$20

$30

$40

$50

$60

$70

$80

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

E

2012

E

2013

E

in$billion

Northridge

Earthquake

Hurricane

Andrew

9/11

Hurricane

Katrina

Hurricane

Gustav/Ike

Hurricane

Irene/US

Tornadoes

Source: Insurance Services Office, A.M. Best, Barclays Research estimates.

In the U.S., the largest catastrophe exposures include Florida and the Gulf Coast hurricane

windstorm risk, and California earthquake risk. Tornadoes as well as winter and spring

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storms can also cause substantial insured losses including an impact of $28bn in 2011.

Hurricane Katrina in 2005 was the largest insured catastrophe in the United States with

onshore losses of $46 billion (total insured losses were higher including damage to offshore

oil rigs). The industry suffered significant international catastrophe losses in 2011 from the

Japan earthquake ($30bn) and Thailand flooding ($10-$15bn). Among the largest man-

made catastrophe losses are the terrorist attack on the World Trade Center ($32.5 billion of

insured losses) in 2001 and the recent Deepwater Horizon oil rig loss ($4-$6 billion of

industry losses).

Insurers must address mega-catastrophe exposure to protect their solvency. Notably,

catastrophe modeling firm AIR Worldwide estimates insurers could suffer approximately

$100 billion of losses if there was a recurrence of the 1926 Miami Hurricane, the 1906 San

Francisco earthquake, or the 1812 New Madrid, Missouri earthquake.

Typically, we would not view an insured natural catastrophe loss of less than $10 billion to

be a major event for the insurance industry because the claims expense would probably not

exceed one years earnings for most individual insurers or reinsurers. As a point of

reference, insured losses from major catastrophes are on average roughly half of economic

damage. Homeowners insurers typically suffer the largest weather-related losses, butcommercial insurers also have exposure. If an industry catastrophe loss in the U.S. is less

than $5 billion, the reinsurers would normally be expected to have low exposure. State-

sponsored facilities including the California Earthquake Authority, the Florida Hurricane

Catastrophe Fund, and the Texas Windstorm Insurance Association can absorb some of the

impact from catastrophic events.

Is the P&C Insurance Industry on the Cusp of a Hard Market? The last hardmarket, in which insurance capacity declines and demand rises in a favorable environment

for P&C insurance stocks, occurred from 2000-2005 and was exacerbated by large,

unexpected losses from the September 11, 2001 World Trade Center terrorist attacks. The

prior hard market was from 1984-1986 and was driven in part by a shortage of reinsurance

capacity. Broad commercial P&C pricing improvement is now at a tipping point being led by

workers compensation and property insurance, which together account for about half of

U.S. commercial P&C insurance industry premium volume. Commercial P&C prices are

Figure 15 Distribution of U.S. Insured Catastrophe Losses byGeography, 1980-2010

Figure 16: Distribution of U.S. Insured Catastrophe Losses byCatastrophe Type, 1990 1H2011

Louisiana10%

Florida

17%Rest of US

62%

Texas

11%

Tornado,

31.8%

Winter

Storm,

8.0%

Terrorism,

6.6%

Geological

events,4.9%

Hurricanes/

Tropical

storms,

42.7%

Other, 0.2%Fires, 2.4%

Wind/Hail/

Flood, 3.4%

Source: ISO Property Claim Services, Insurance Information Institute, Barclays

Research

Source: ISO, Barclays Research

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rising driven by deteriorating underwriting results, stabilizing industry capital positions, and

rising property reinsurance costs. Although a full commercial P&C cycle turn may not occur

until 2013, pricing trends (the most important factor for the stocks) are clearly improving

and should result in increasingly favorable investor sentiment.

Figure 17: U.S. Commercial Net Written Premiums 2011

All Other

54%

Commercial

Property

28%

Workers Comp

18%

Source: SNL, Barclays Research

Figure 18: U.S. P&C Industry Net Written Premium Growth

-10%

-5%

0%

5%

10%

15%

20%

25%

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

2007-2009:

First-ever three

year period of

annual declines

Note: Shaded years represent hard markets.Source: Insurance Services Office, Barclays Research

There are four factors we monitor to tell us when the commercial P&C insurance cycle is

poised to reach a sustained tightening phase. Critically, all four factors (not just one or two)

need to be achieved before a broad cycle turn should occur. As of now, most of these

factors are in transition with momentum toward improvement and we anticipate a broad

cycle turn could occur in 2013: