Construction, Manufacturing and Oil & Gas Industries and the P/C Insurance Industry: Trends, Challenges & Opportunities

Construction, Manufacturing and Oil & Gas Industries and the P/C

Insurance Industry: Trends, Challenges & Opportunities

Insurance Information InstituteJune 12, 2013

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

The Strength of the U.S. Economy Will Influence P/C

Insurer Growth Opportunities

2

U.S. Growth Will Expand Insurer Exposure Base Across Most Lines

2

3

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 6/13; Insurance Information Institute.

2.7%

0.5%

3.6%

3.0%

1.7%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

1.4%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3% 3.

1%

2.4%

1.8% 2.3% 2.6%

2.7%

2.8%

2.9%

2.9%

0.4%

-8.9%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   20

00   

   20

01   

   20

02   

   20

03   

   20

04   

   20

05   

   20

06   

07:1

Q07

:2Q

07:3

Q07

:4Q

08:1

Q08

:2Q

08:3

Q08

:4Q

09:1

Q09

:2Q

09:3

Q09

:4Q

10:1

Q10

:2Q

10:3

Q10

:4Q

11:1

Q11

:2Q

11:3

Q11

:4Q

12:1

Q12

:2Q

12:3

Q12

:4Q

13:1

Q13

:2Q

13:3

Q13

:4Q

14:1

Q14

:2Q

14:3

Q14

:4Q

Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction

was severe

The Q4:2008 decline was the steepest since the Q1:1982

drop of 6.8%

2013 is expected to see uneven growth,

then gradually accelerate throughout the year and into 2014

4

Real GDP by State Percent Change, 2012:Highest 25 States

13.4

4.8

3.9

3.6

3.5

3.5

3.4

3.3

3.3

3.3

2.7

2.7

2.6

2.4

2.4

2.4

2.4

2.2

2.2

2.2

2.2

2.1

2.1

2.1

2.1

2.0

0

2

4

6

8

10

12

14

ND TX OR WA CA MN UT IN TN WV NC SC AZ FL IA MD MS MA MI OH US CO GA MT OK MO

Perc

ent C

hang

e (%

)

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

North Dakota was the economic growth juggernaut of the US

in 2012—by far

Only 10 states experienced growth in excess of 3%, which is what we would see nationally in

a more typical recovery

5

1.9

1.7

1.6

1.5

1.5

1.5

1.5

1.4

1.4

1.4

1.3

1.3

1.3

1.2

1.2

1.1

1.1

0.7

0.5

0.5

0.4

0.2

0.2

0.2

0.2

-0.1

-0.4-0.20.00.20.40.60.81.01.21.41.61.82.0

IL PA HI LA NE NV WI KS KY RI AR NJ NY AL VT AK VA DC ME NH ID DE NM SD WY CT

Perc

ent C

hang

e (%

)Real GDP by State Percent Change, 2012: Lowest 25 States

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Connecticut was the only state to shrink in 2012

Growth rates in 8 states (and DC) were still below

1% in 2012

Federal Spending as a Share of State GDP: Vulnerability to Sequestration Varies

Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo; Insurance Information Institute. 6

Many northern states have relatively little exposure to

sequester cuts

7

Defense and Non-Defense Federal Spending as a Share of State GDP: Top 10 States*

14.6

10.5

9.8

9.8

9.8

8.0

7.0

5.9

5.3

5.2

10.0

10.0

10.0

9.2

4.9

3.8

3.1

2.8

2.7

2.6

0

2

4

6

8

10

12

14

16

HI AK DC MD VA KY AL MO CT AZ DC MD VA NM ID WV TN AK MT SC

Shar

e of

Sta

te G

DP

(%)

Federal defense spending accounts for approximately 10%+ of

GDP in 5 states

*As of 2010.Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo Securities; Insurance Information Institute.

Defense Spending Non-Defense Spending

Federal non-defense spending accounts for 10%+ of GDP in 3 states

Sequestration Could Adversely Impact Commercial Insurance Exposures Directly at Defense Contractors and Indirectly in Impacted Communities

State-by-State Leading Indicatorsthrough 2013:Q2

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 8

The economic outlook for most of

New England is relatively strong, suggesting future

strength in the creation of insurable

exposures

74.4

73.6

73.6

72.2 73.6 76

67.8

68.9

68.2

67.7 71

.6 74.5

74.2 77

.567

.5 69.8 74

.371

.563

.755

.7 59.5 60.9 64

.169

.9 75.0

75.3

76.2

76.4 79

.373

.272

.3 74.3

82.6

82.7

74.5

73.8 77

.678

.6 83.7

76.4

40

45

50

55

60

65

70

75

80

85

90

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Consumer Sentiment Survey (1966 = 100)

January 2010 through May 2013

Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact

consumers, but improved substantially in late 2011 and in 2012Source: University of Michigan; Insurance Information Institute

Optimism among consumers has remained fairly strong

despite tax hike, federal budget concerns. May’s reading was

the highest since July 2007

10

11

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4 15

.4 15.9

16.0

16.2

16.2

16.2

16.216

.9

16.617

.117.517.8

17.4

910

11121314

151617

1819

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F15F 16F17F18F 19F

(Millions of Units)

Auto/Light Truck Sales, 1999-2019F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/13 and 3/13); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector Along

With Workers Comp Exposures

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2013-14 is

still below 1999-2007 average of 17 million units, but a robust recovery is well underway.

Job growth and improved credit market conditions will boost auto sales in

2013 and beyond

Truck purchases by contractors are especially strong

12

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3756

,282

47,8

0630

,620

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112

:Q3

Business Bankruptcy Filings,1980-2012:Q3

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more

than tripled during the financial crisis. Through Q3:2012, filings were down 15.8% vs. Q3:2011

% Change Surrounding Recessions

1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*

12

13

Private Sector Business Starts, 1993:Q2 – 2012:Q3*

175

186

174

180 18

619

218

818

7 189

186 19

0 194

191

199 20

420

219

519

619

620

620

620

119

219

820

620

620

321

120

521

220

0 205

204

204

197

203 20

920

119

219

219

320

1 204

202

210 21

220

921

6 220 22

322

022

021

022

121

220

421

820

920

720

719

919

1 193

172 17

616

918

417

5 179

188

200

183 18

7 191

197

193

191 19

3

203

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But

Are Recovering Slowly* Data through Sep. 30, 2012 are the latest available as of May 13, 2013; Seasonally adjusted. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up an estimated 2.8% in 2012 to 769,000 following a 2.2% to 748,000 in 2011. Start-ups

could accelerate in 2013.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000 2012E: 769,000*

13

NFIB Small Business Optimism Index

January 1985 through April 2013

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 15

Small business optimism is off crisis lows but still suffering from economic

and regulatory uncertainty

16

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

17

The Construction Sector Is Critical to the Economy and the P/C Insurance Industry

17

18

Value of Construction Put in Place, April 2013 vs. April 2012*

-5.1%

-0.6%

-5.2%

4.3%

9.0%

18.8%

0.6%

-10%

-5%

0%

5%

10%

15%

20%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue

Growth (%)

Private sector construction activity is up in the

residential segment but down in nonresidential

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +9.0% Public: -5.1%

Public sector construction activity remains depressed

19

Value of Private Construction Put in Place, by Segment, Apr. 2013 vs. Apr. 2012*

3.0%

-4.5% -2.7%

-9.5%

0.8%

-8.3%-2.8%

2.2%

-8.2%

9.0%

18.8%

0.6%

20.7%16.5%

-15%-10%

-5%0%5%

10%15%20%25%

Tota

l Priv

ate

Cons

truct

ion

Resi

dent

ial

Tota

lNo

nres

iden

tial

Lodg

ing

Offi

ce

Com

mer

cial

Heal

th C

are

Educ

atio

nal

Relig

ious

Amus

emen

t &Re

c.

Tran

spor

tatio

n

Com

mun

icat

ion

Pow

er

Man

ufac

turin

g

Private Construction Activity is Up inSome Segments, Including the Key Residential Construction Sector, But Weakening in Early 2013

Growth (%) Led by the Residential Construction, Lodging, Office, and Manufacturing industries, Private

sector construction activity is mixed up across many segments after plunging during the

“Great Recession.” Most segments expanded in 2012 but weakened in early 2013.

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

20

Value of Public Construction Put in Place, by Segment, Apr. 2013 vs. Apr. 2012*

0.3%

-12.7%-6.5%

-12.2%

16.1%

-3.4%-4.2%

-0.1%

-11.2%

10.8%

-5.1%

-0.6%

-5.2%

-30.7%

-12.9%

-40%

-30%

-20%

-10%

0%

10%

20%

Tota

l Pub

licCo

nstru

ctio

n

Resi

dent

ial

Tota

lNo

nres

iden

tial

Offi

ce

Com

mer

cial

Heal

th C

are

Educ

atio

nal

Publ

ic S

afet

y

Amus

emen

t &Re

c.

Tran

spor

tatio

n

Pow

er

High

way

&St

reet

Sew

age

&W

aste

Dis

posa

l

Wat

er S

uppl

y

Cons

erva

tion

&De

velo

p.

Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2014.

Growth (%)

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Public sector construction activity is down substantially in most segments, a situation that will likely persist, dragging

on public entity risk exposures

Transportation and Power projects lead

public sector construction

21

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1.85 1.

96 2.07

1.80

1.36

0.91

0.55 0.59 0.61

0.78

1.01

1.21 1.

35 1.44 1.

501.

511.

50

1.351.

461.

291.

201.

011.

19

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (6/13 and 3/13); Insurance Information Institute.

Insurers Are Starting to See Meaningful Exposure Growth for the First Time Since 2005 Associated with Home Construction: Construction Risk Exposure,

Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage

rates and demographics are stimulating new home construction

for the first time in years

22

Construction Employment,Jan. 2010—May 2013*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

5 5,47

85,

485

5,49

75,

524

5,53

05,

547

5,54

6 5,58

35,

576

5,57

7 5,61

25,

629

5,64

45,

640

5,63

65,

615

5,62

25,

627

5,63

05,

633

5,64

95,

673 5,

711

5,73

5 5,78

35,

797

5,79

95,

804

5,400

5,450

5,500

5,550

5,600

5,650

5,700

5,750

5,800

5,850

5,900

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

132/

30/2

Mar

-13

Apr

-13

May

-13

Construction employment growth accelerated in the second half of

2012. Continued growth in this key sector is possible through 2013.

Construction is a key driver of workers comp exposure growth.

(Thousands)

23

Construction Employment, Jan. 2003–May 2013

Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

5,000

5,500

6,000

6,500

7,000

7,500

8,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

The “Great Recession” and housing bust destroyed 2.3 million constructions jobs

The Construction Sector Could Be a Growth Leader in 2013 and 2014 as the Housing Market and Private Investment Recover. WC Insurers Will Benefit.

Construction employment

troughed at 5.435 million in Jan.

2011, after a loss of 2.291 million jobs, a 29.7%

plunge from the April 2006 peak

23

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of May 2013 totaled 5.804 million, an

increase of 369,000 jobs or 6.8% from the

Jan. 2011 trough

24

Logging Employment,Jan. 2010—May 2013*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

4949

5051

5151 51 51

5050

4848

4849

5149

4848

4948 49

4749

5050

50 5049

51 5151

5151 51 51 51

4950

5051 51

45

46

47

48

49

50

51

52

53

54

55

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

132/

30/2

Mar

-13

Apr

-13

May

-13

Mining employment has been somewhat volatile but is up from its 2010/2011 lows.

Home construction activity in the US, wood pellet demand from Europe and pulp demand

from Asia should help this sector

(Thousands)

25

Logging Employment, Jan. 2003–May 2013

Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

45

50

55

60

65

70

75

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

The “Great Recession” and housing bust destroyed at least 15,000 logging jobs

The Logging Sector Is Benefitting from Residential Home Construction, Renewable Energy Regulations in Europe (encourage wood burning) and some Asian pulp demand

Logging employment troughed at

47,700 in Dec. 2010

25

Logging employment

peaked at about 71,000 in early 2003

(Thousands)Logging employment as of May 2013 totaled 51,000, an increase of

3,300 jobs or 6.9% from the Dec. 2010

trough

26

Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2012:Q4*

$1.1

6$1

.18

$1.2

2

$1.4

4$1

.48

$1.4

9$1

.50

$1.4

9$1

.43

$1.3

7$1

.27

$1.2

1$1

.18

$1.1

7$1

.17

$1.1

8$1

.20

$1.2

4 $1.2

8 $1.3

5$1

.37 $1

.42

$1.4

6$1

.46 $1

.51

$1.1

3

$1.2

5 $1.3

0$1

.39

$1.0

$1.1

$1.2

$1.3

$1.4

$1.5

$1.6

06:Q

1

06:Q

3

07:Q

1

07:Q

3

08:Q

1

08:Q

3

09:Q

1

09:Q

3

10:Q

1

10:Q

3

11:Q

1

11:Q

3

12:Q

1

12:Q

3

12:Q

4

Outstanding Commercial Loan Volume Has Been Growing for Over Two Years and Is Now Nearly Back to Early Recession Levels. Bodes Very Well for the Creation of Current and Future Commercial Insurance Exposures

*Latest data as of 5/13/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Balance Sheet spreadsheet); Insurance Information Institute.

$Trillions

Commercial lending plunged by 21.2% ($330B) during the financial crisis and ensuing

period of tight credit

Commercial lending activity is exceeds pre-crisis levels

(+29.1% or $340B above mid-2010 trough)

27

Percent of Non-current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks,Quarterly, 2006-2012:Q4*

0.70

%0.

74%

0.64

%

0.67

%0.

81%

1.07

%1.

18% 1.

69% 2.

25% 2.

80%

3.57

%3.

43%

3.05

%2.

83%

2.73

%2.

44%

1.89

%1.

65%

1.49

%1.

29%

1.17

%1.

09%

0.97

%0.

87%

0.71

%

0.63

%0.

62%

0.63

%

0%

1%

2%

3%

4%

06:Q

1

06:Q

2

06:Q

3

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08;Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

Non-current loans (those past due 90 days or more or in nonaccrual status) are back to early-recession levels, fueling bank willingness to lend.

*Latest data as of 3/18/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

Almost back to “normal” levels of noncurrent

industrial & commercial loans

Recession

28

Interest Rate on Convention 30-Year Mortgages: Headed Back Up, 1990–2013*

*Monthly, through June 2013 (as of June 6). Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

0%

2%

4%

6%

8%

10%

12%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Yields on 30-Year mortgages have been below 6% for a five

years

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

Yields on 10-Year U.S. Treasury Notes plunged to all time record lows in early 2013 but are now

rising as the Fed considers tapering its QE program

28

29

Mortgage Interest Rates Will Rise as Expectations Over the Fed’s Tapering of QE3 Persist; Still Low by Historical Standards

3.34

% 3.40

%

3.38

%

3.42

% 3.53

%

3.53

%

3.53

%

3.56

%

3.51

%

3.52

% 3.63

%

3.54

%

3.57

%

3.54

%

3.43

%

3.41

%

3.40

%

3.35

% 3.42

% 3.51

% 3.59

%

3.81

% 3.91

%

3.0%

3.1%3.2%

3.3%

3.4%3.5%

3.6%

3.7%

3.8%3.9%

4.0%

03-J

an

10-J

an

17-J

an

24-J

an

31-J

an

07-F

eb

14-F

eb

21-F

eb

28-F

eb

07-M

ar

14-M

ar

21-M

ar

28-M

ar

04-A

pr

11-A

pr

18-A

pr

25-A

pr

02-M

ay

09-M

ay

16-M

ay

23-M

ay

30-M

ay

06-J

un

30-year mortgage rates are up nearly 60 basis points since early May

30-Year Mortgages in 2013 Are Rising: What Will Be the Impact on Construction?

*Weekly through June 6, 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.; Insurance Information Institutes.

MANUFACTURING SECTOR OVERVIEW & OUTLOOK

30

The Manufacturing Sector Could See a Resurgence Benefitting the US Economy and the P/C

Insurance Industry30

31

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2013:Q1

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,25005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2013:Q4) was $7.01 trillion, a new peak--$762B

above 2009 trough

Recent trough (2009:Q3) was $6.25 trillion, down

5.3% from prior peak

Payrolls are 12.2% above

their 2009 trough and up 2.7% over

the past year

31

58.3

57.1

60.4

59.6

57.8

55.3

55.1

55.2

55.3 56

.9 58.2

58.5 60

.8 61.4

59.7

59.7

54.2 55

.851

.4 52.5

52.5

51.8

52.2 53

.1 54.1

51.9 53

.3 54.1

52.5

50.2

50.5

50.7 51

.651

.749

.950

.253

.1 54.2

50.7

49.051

.3

40

45

50

55

60

65

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

ISM Manufacturing Index(Values > 50 Indicate Expansion)January 2010 through May 2013

The manufacturing sector expanded for 39 of the 41 months from Jan. 2010 through May 2013. Recent weakness stems largely from woes in

Europe and a Slowdown in China.Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.

Manufacturing contracted in May, albeit modestly

32

34

Manufacturing Growth for Selected Sectors, 2013 vs. 2013*

5.2%

-0.8%

6.8%

-0.2%

3.3%

-1.1%-2.6%

2.4%5.0%

1.1%2.5%

14.4%

-2.5%

0.3%

-4%-2%0%2%4%6%8%

10%12%14%16%

All

Man

ufac

turin

g

Dur

able

Mfg

.

Woo

dP

rodu

cts

Prim

ary

Met

als

Fabr

icat

edM

etal

s

Mac

hine

ry

Ele

ctric

alE

quip

.

Tran

spor

tatio

nE

quip

.

Non

-Dur

able

Mfg

.

Food

Pro

duct

s

Pet

role

um &

Coa

l

Che

mic

al

Pla

stic

s &

Rub

ber

Text

ileP

rodu

cts

Manufacturing Is Expanding—Albeit More Slowly—Across a Number of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC,

Commercial Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durable goods was especially

strong in 2012 but weakened in 2013

*Seasonally adjusted; Date are YTD comparing data through April 2013 to the same period in 2012.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +2.5% Non-Durables: -0.3%Construction

machinery is up 35.4% YTD

36

Manufacturing Employment,Jan. 2010—May 2013*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

4111

,870

11,9

1011

,920

11,9

2611

,935

11,9

5711

,943

11,9

2511

,931

11,9

3811

,951

11,9

6511

,988

11,9

8411

,975

11,9

67

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Manufacturing employment is up by more than 500,000 or 4.4% since Jan.

2010—a surprising source of strength in the economy. The sector has weakened

recently as US corporations remains cautious and Europe, China slow.

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands)

ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT

37

US Is Becoming an Energy Powerhouse; Domestic Demand

and Exports Are KeyNeed Infrastructure Investment

37

US Oil & Gas Extraction: Value of Output: 2000–2012E

$125.2 $122.9$107.0

$146.6

$244.1

$326.8

$182.5

$242.1

$287.7

$332.0

$172.4

$219.0 $222.7

$0

$50

$100

$150

$200

$250

$300

$350

00 01 02 03 04 05 06 07 08 09 10 11 12E

Sources: U.S. Bureau of Economic Analysis (2000-2011); Insurance Information Institute (2012E).

($ Billions)

The contribution of oil & gas extraction to the US economy is

now at record high levels

Value of oil and gas activity in the US economy is up an

estimated 82% or $150 billion since 2009

39

Oil & Gas Extraction Employment,Jan. 2010—May 2013*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

6 169.

317

0.1

171.

017

2.5

173.

6 176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

019

1.7

191.

919

3.4

192.

419

3.1

193.

8

150

155

160

165

170

175

180

185

190

195

200

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Oil and gas extraction employment is up 23.9%

since Jan. 2010 as the energy sector booms.

Domestic energy production is essential to

any robust economic recovery in the US.

(Thousands)

347.7

472.4508.3

551.5595.7

637.3678.3

462.1

0

100

200

300

400

500

600

700

800

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

World Primary Energy Consumption, 1990-2030P

Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

Between 2006 and 2030, energy consumption in projected to increase

annually by 1.5% worldwide but only 0.5% in the US

Quadrillion BTUs

Global energy consumption is

expected to increase by 33.4% between 2010 and 2030 but by only 12% in

the US

41

World Energy Consumption by Fuel,1990—2035F

Source: US Energy Information Administration, International Energy Outlook 2011; Insurance Information Institute.

Renewables will account for 14% of global energy consumption by

2035, up from 20% in 2008

42

US Electric Power Generation by Fuel Source, 2010-2035F (Billions of Kilowatt Hours)

3225 26 26 27 27

776903 874 882 983 1,074

807 830 887 917 914 887390 504 544 579 594 630

1,799 1,531 1,604 1,710 1,757 1,803

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2010 2015 2020 2025 2030 2035

Coal Petroleum Natural Gas Nuclear Renewable Other

Source: US Energy Information Administration, Annual Energy Outlook 2012, Appendix A7.

Demand for Electricity Is Expected to Grow at a 0.6% Annual Rate Through 2035. Renewables and Natural Gas Will Account for an Increasing Share of Fuel Source

3,806 3,796 3,937 4,118 4,279 4,427

43

U.S. Annual Share of Fossil Fired Electric Power Generation, 1950-2012*

Source: US Energy Information Administration, http://www.eia.gov/todayinenergy/detail.cfm?id=7090# ; Insurance Information Institute.

Natural gas share of fossil fired

generation has more than tripled

to 45% in 2012 from less than 15% in 1988.

Coal’s share is down significantly and Petroleum’s

share is approaching zero

44

US Natural Gas Production and Non-Hydro Renewable Electricity Generation, 1990-2035P

Source: US Energy Information Administration, Annual Energy Outlook 2011; Insurance Information Institute.

Shale gas production is expected to grow rapidly in the US

Wind is expected to account for the majority of renewable

electricity generation

Tight gas production involves controversial

hydraulic fracturing (fracking) techniques

45

Distribution of Major Shale Deposits: 5.76 Tr. Cu. Ft. in 48 Shale Basins in 32 Countries

Source: US Energy Information Administration; Insurance Information Institute.

Europe and S. America also have large deposits

Initial assessments reveal 5.76 trillion cu. ft. of shale gas

worldwide, including 1.069 trillion cu. Ft. in North America

396

1,042 1,0691,225

1,404

624

0

200

400

600

800

1,000

1,200

1,400

1,600

Australia Europe Africa N.America

S.America

Asia

Technically Recoverable Shale Gas Deposits, by Region

Trillion Cubic Ft.tts North America has 1,069 trillion cu. ft. of technically

recoverable shale gas recources—18.6% of the

global total

Source: US Energy Information Administration; Insurance Information Institute.

Global Oil Consumption and Price, 2008 – 2035FMillions of Barrels per Day

Nominal Price/BBL

*Source: US Energy Information Administration; Insurance Information Institute

85.5

83.7 86

.0 87.4 88

.9 90.3

90.4

91.1 92

.592

.993

.5 94.3

95.1 96

.1 97.1 98

.2 99.3

100.

510

1.8

103.

210

4.5

106.

110

7.6

109.

111

0.8

92.0

91.5

89.6

$108

.10

$112

.36

$114

.21

$115

.96

$117

.54

$118

.99

$120

.25

$121

.34

$122

.30

$123

.09

$123

.71

$124

.20

$124

.53

$124

.68

$124

.94

$110

.30

$105

.71

$103

.15

$100

.50

$97.

62

$94.

58

$91.

38

$83.

21

$61.

66

$100

.51

$85.

73

$88.

03

$78.

03

80

85

90

95

100

105

110

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

0

20

40

60

80

100

120

140

   Total Consumption Nominal Price (Light, Low Sulfur Crude)

Oil Will Become Relatively More Expensive Over Time, With Price Increases Outstripping Income Growth in Many Parts of the World

The nominal price of oil is expected to rise by 2.8% per year

on average through 2035

Global oil consumption is expected to rise by 1.1% per

year on average through 2035

Biofuels, $0.3 , 1%

Oil, $10.1 , 27%

Natural Gas, $9.5 ,

25%

Power, $16.9 , 44%

Coal, $1.1 , 3%

Projected energy infrastructure investment

through 2035 total $38 trillion; Implies substantial

incurrence of risk.

Cumulative Projected Investment in Global Energy Infrastructure, 2011-2035 ($ Trill.)

Source: International Energy Agency, World Energy Outlook 2011.

49

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

49

50

Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 7.6% in

May 2013—nealry its lowest level in

4 years.Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.Peak rate in the last 30 years:

10.8% in November -

December 1982

Source: US Bureau of Labor Statistics; Insurance Information Institute.

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 13.8%

in May 2013

January 2000 through May 2013, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving

50

51

Unemployment Rates by State, April 2013:Highest 25 States*

9.6

9.3

9.1

9.0

8.9

8.8

8.7

8.5

8.5

8.4

8.2

8.0

8.0

8.0

8.0

7.9

7.9

7.8

7.6

7.5

7.2

7.2

7.1

7.1

7.0

7.0

0

2

4

6

8

10

12

NV IL MS CA NC RI NJ DC IN MI GA CT OR SC TN AZ KY NY PA US DE FL AR WI OH WA

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for April 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In April, 40 states and the District of Columbia had over-

the-month unemployment rate decreases, 3 states had increases, and 7 states had

no change.

52

6.9

6.9

6.9

6.7

6.6

6.6

6.5

6.5

6.4

6.4

6.1

6.0

5.5

5.5

5.5

5.3

5.2

4.9

4.9

4.8

4.7

4.7

4.1

4.0

3.7

3.3

0

2

4

6

8

AL CO ME NM MO WV LA MD MA TX ID AK KS MT NH MN VA HI OK WY IA UT SD VT NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, April 2013: Lowest 25 States*

*Provisional figures for April 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In April, 40 states and the District of Columbia had

over-the-month unemployment rate

decreases, 3 states had increases, and 7 states had

no change.

227

5416

850

123

661

-79

2468 74 51

2-1

14-1

05-2

22-2

19 -203

-267

-269

-429

-484

-786

-701

-821

-692

-812

-821

-288

-442

-282 -2

22 -162

-233

-34

-167

-17

-26

170

102

94 103 12

911

3 188

154

114

8024

322

3 303

183

177 20

612

925

617

4 197 24

9 323

265

208

120 15

278

177

131

118

217 25

622

416

431

915

415

717

8

111

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08Fe

b-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Monthly Change in Private Employment

January 2007 through May 2013 (Thousands)

Private Employers Added 6.90 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

178,000 private sector jobs were created in May

53

Jobs Created2012: 2.247 Mill2011: 2.420 Mill2010: 1.235 Mill

-0.0

17-0

.043

0.06

80.

238

0.34

00.

434

0.53

70.

666

0.77

90.

967

1.12

11.

235

1.31

51.

558

1.78

12.

084

2.26

72.

444

2.65

02.

779

3.03

53.

209

3.40

63.

655

3.97

84.

243

4.45

14.

571

4.72

34.

801

4.97

85.

109

5.22

75.

444

5.70

05.

924

6.08

86.

407

6.71

86.

896

6.56

1

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Mill

ions

Cumulative Change in Private Sector Employment: Jan. 2010—May 2013January 2010 through May 2013* (Millions)

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Cumulative job gains through May 2013 totaled 6.90 million

55

Job gains and pay increases have added more than $600 billion to payrolls

since Jan. 2010

Private Employers Added 6.90 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

4-1

033

9251

128

798

-68

-224 -1

84-1

94-2

13-2

24-2

71-2

89-2

88-3

56 -324

-452

-449

-480

-488

-511

-530

-542

-536

-539

-547

-574 -565

-589 -555 -535

-592

-601

-606

-622 -609

-629

-632-621

-800

-600

-400

-200

0

200

400

600

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Cumulative Change in Government Employment: Jan. 2010—May 2013January 2010 through May 2013* (Millions)

Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

Cumulative job losses through May 2013 totaled 632,000

56

Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the

Financial Crisis: Sequestration Will Add to this Toll

Government at all levels has shed more than 630,000 jobs

since Jan. 2010 even as private employers created 6.90 million jobs, though

losses may now be ending.

Temporary Census hiring distorted 2010

figures

57

US Unemployment Rate Forecast4.

5%4.

5% 4.6% 4.8% 4.9% 5.

4%6.

1%6.

9%8.

1%9.

3% 9.6% 10

.0%

9.7%

9.6%

9.6%

8.9% 9.1%

9.1%

8.7%

8.3%

8.2%

8.0%

7.8%

7.7%

7.5%

7.5%

7.4%

7.3%

7.1%

7.0%

6.9%

9.6%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

Rising unemployment

eroded payrolls

and workers comp’s

exposure base.Unemployment peaked at 10%

in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/13 edition); Insurance Information Institute.

2007:Q1 to 2014:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

unemployment as low as 6.5% by Q4 of next year.

Jobless figures have been revised

slightly downwards for 2013/14

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

59

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2012E

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2012 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005

7/90-3/91 3/01-11/0112/07-6/09

$Billions $Billions

WC premium volume dropped two years before

the recession began

WC net premiums written were down $14B or 29.3% to

$33.8B in 2010 after peaking at $47.8B

in 2005

+9% in 2012E

Workers Compensation Operating Environment

60

The Weak Economy and Soft Market Have Made the Workers Comp Operating

Increasingly Challenging

60

Workers Compensation Combined Ratio: 1994–2012P

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5 10

3.5

104.

5 110.

6 115.

0

115.

0

109.

0

121.

7

107.

0

115.

3

118.

2

80

85

90

95

100

105

110

115

120

125

130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-

2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute. 61

WC showed a better-than-expected

improvement for private carriers in 2012

Workers Compensation Premium: Second Consecutive Year of IncreaseNet Written Premium

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012p

0

10

20

30

40

50

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3 25.0 26.1

29.2 31.134.7

37.8 38.6 37.633.8

30.3 29.9 32.335.2

31.0 31.329.8 30.5 29.1

26.328.2 26.9 25.9 25.0

28.632.1

37.7

42.3

46.5 47.8 46.544.3

39.3

34.6 33.836.4

39.6

State Funds ($ B)Private Carriers ($ B)

Pvt. Carrier NWP growth was +9.0% in 2012, the

best since 2005

$ Billions

Calendar Yearp Preliminary

Source: 1990–20102p Private Carriers, Annual Statement Data, NCCI.1996–2012p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

63

2012 Workers Compensation Direct Written Premium Growth, by State*

PRIVATE CARRIERS: Overall 2012 Growth = +9%

*Excludes monopolistic fund states (in white): OH, ND, WA and WY.Source: NCCI.

While growth rates varied widely, all states experienced growth in excess of 5% in 2012

Workers Compensation Medical SeverityModerate Increase in 2012

64

Accident Year

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%

Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)

$8.1

$8.2

$8.1

$8.8

$9.2

$9.9

$10.9

$11.8

$13.1

$14.0

$15.9

$17.3

$18.7

$19.7

$21.2

$22.3

$23.7

$25.3

$26.4

$26.7

$27.7

$28.5

+6.8%+1.3%-2.1%+9.0%+5.1%+7.4%

+10.1%+8.3%

+10.6%+7.3%

+13.5%+8.8%

+7.7%+5.4%

+7.8%+5.4%

+6.3%+6.6%

+4.1%+1.4%+3.6%

+3%

5

10

15

20

25

30

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112012p

2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Cumulative Change = 252%(1991-2012p)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2011: +5.7%

Accident Year

65

Change in Price Paid for Medical Professional Services in WC, 2002-2012*

17 19

10

16

20

29 27

5

34

9

41

30

23

17

29

2

37

6 4

20

6

11

28 26

53

0

10

20

30

40

50

60

70

AR AZ

CA

CT FL GA IA IL IN LA MA

MD MI

MN

MO NC NJ

NY

OK PA SC TN TX VA WI

Pece

nt c

hang

e (%

)

*Data are preliminary as of 6/30/12. Sources: Workers Compensation Research Institute, WCRI Medical Price Index for Workers Compensation, 5th Edition; Ins. Info. Institute.

States in GOLD had no fee schedule in 2012. These

generally saw larger increases in WC medical

costs over the past decade.

Increases in WC med costs varied enormously

over the past decade from a high of 56% in

Wisconsin to a low of 2% in North Carolina

%

4.5%3.5%

2.8%3.2%3.5%4.1%4.6%4.7%

4.0%4.4%4.2%4.0%4.4%3.7%

3.2%3.4%3.0%

5.1%

7.4%

10.1% 10.6%

13.5%

5.4%

7.8%

6.3%6.6%

4.1%3.6% 4%

3%

1.4%

5.4%

8.8%7.7%

7.3%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12P

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaces the Medical CPI Rate

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

Average annual increase in WC medical severity form 1995 through 2011 was well above the medical CPI (6.8% vs. 3.8%), but

the gap is narrowing.

$9.8

$9.5

$9.2

$9.7

$9.8

$10.4

$11.2

$12.2

$13.5

$14.8

$16.2

$16.7

$17.5

$22.2

$22.4

$22.2

$22.4$18.2

$17.7

$19.2

$20.8

$21.7

+1%-3.0%

+0.7%+8.8% +2.2%

+5.6%+3.1%+1.0%+4.6%+3.1%+9.2%

+10.1%+10.1%

+9.0%+7.7%

+5.9%+1.7%+4.9%-2.8%-3.1%+1.0%

+6.2%

5

7

9

11

13

15

17

19

21

23

25

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112012p

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2011:+3.2%

Accident Year

Workers Comp Indemnity Claim Costs: Small Increase in 2012

Average indemnity costs per claim were up 1% in

2012 to $22,400

Average Indemnity Cost per Lost-Time Claim

2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Workers Compensation Lost-Time Claim Frequency Declined in 2012Lost-Time Claims

68

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p

-10-8-6-4-202468

1012

-4.2 -4.4

-9.2

0.3

-6.5

-4.5

0.5

-3.9-2.3

-4.5

-6.9

-4.5 -4.1 -3.7

-6.6

-4.5

-2.2

-4.3-5.7

11

-4-5.0

3.8

-0.9

AdjustedIndicated

Frequency Change: 2007—2012Contracting: 7.97.1 -9.3%

Manufacturing: 13.612.0 -11.8%

Percent

Accident Year*Adjustments primarily due to significant audit activity.2012p: Preliminary based on data valued as of 12/31/20121991–2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policiesFrequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost levelSource: NCCI.

Cumulative Change of –55.4%(1991–2011 adj.)

4.2%5.2%5.6%

4.7%

6.3%

2.3%1.1%

2.7%

4.3% 4.7%4.6%

2.7%

5.9%

7.7%

9.0%10.1%

4.6%3.6%

5.6%6.2%

8.8%

2%2.9%

2.3%1.1%3.5%

3.6%

1%

2.2%0.7%

-3.0%

1.0%1.7%

10.1%

9.2%

3.1%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12P

Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim

WC Indemnity Severity vs. Wage Inflation, 1995 -2012p

2011p: Preliminary based on data valued as of 12/31/2011; 1991-2010: Based on data through 12/31/2010, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI

WC indemnity severity turned

positive again in 2011

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2011:+3.2%

Indemnity severities usually

outpace wage gains

Average Approved BureauRates/Loss Costs

12.1

7.4

10.0

2.9

-6.4

-3.2

-6.0

-8.0

-5.4

-2.6

3.5

1.2

4.9

6.6

-6.0-5.1 -5.7

-6.6

-3.1-2.0

-0.7

0.4

7.8

1.0

-10

-5

0

5

10

15

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*

Percent (%)

Calendar Year

Cumulative1990–1993

+36.3%

Cumulative 2000–2003+17.1%

Cumulative 2004–2011-25.9%

Cumulative 1994–1999-27.8%

*States approved through 4/15/123Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.

History of Average WC Bureau Rate/Loss Cost Level Changes

2012 experienced the largest increase

since 2003

Workers Comp Rate Changes,2008:Q4 – 2013:Q1

Source: Council of Insurance Agents and Brokers; Information Institute.

-5.5%-4.6%-4.0%-4.6%

-3.7%-3.9%-5.4%

-3.7%-3.4%-1.6%

2.6%4.1%

7.5%7.4%8.3%8.1%

9.0%9.8%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

08:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q413:Q1

WC rate changes have been positive for 8

consecutive quarters, longer than any other

commercial line

(Percent Change)

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

Workers Comp Combined Ratio toAchieve Selected Cost of Capital in 2012

10198

9694

89 88 8785

9391 90

80

85

90

95

100

105

5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

Source: NCCI; Insurance Information Institute.. 75

WC insurers need to run combined ratios below 100 to

earn their cost of capital.

2012 private carrier combined ratio was 109.

Private Carriers

76

P/C Insurance Industry Financial Overview

Profit Recovery in 2012 After High CAT Losses; Ultimate

Impact of Sandy Still Unclear

76

P/C Net Income After Taxes1991–2012 ($ Millions)

$14,

178

$5,8

40

$19,

316

$10,

870 $20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$62,

496

$3,0

43

$35,

204

$19,

456 $3

3,52

2

$28,

672

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9%

P-C Industry 2012:Q3 profits were up 222% from 2011:Q3, due primarily to lower catastrophe losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5100.6 100.1 100.8

92.7

101.299.5

101.0102.4

106.5

95.7

6.2%4.7%

7.9%7.4%4.3%

9.6%

15.9%14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 20120%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Catastrophes and lower investment

income pulled down ROE in 2012

-5%

0%

5%

10%

15%

20%

25%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013F*

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers. 2012:Q3 ROAS = 6.2% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2012: 5.9%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013F: 6.2%

81

Policyholder Surplus, 2006:Q4–2012:Q4

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$559.2 $559.1

$538.6$550.3

$567.8

$583.5$586.9

$570.7$566.5

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

06:Q407:Q107:Q207:Q307:Q408:Q108:Q208:Q308:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q4

2007:Q3Pre-Crisis Peak

Surplus as of 12/31/12 was up $16.2B or 2.8% from the

previous record high of $570.7B set as of 3/31/12.

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.

The Industry now has $1 of surplus for every $0.80

of NPW, close to the strongest claims-paying

status in its history.

Drop due to near-record 2011 CAT losses

The P/C Insurance Industry Both Entered and Emerged from the 2012 Hurricane

Season Very Strong Financially.

UNDERWRITING

82

Underwriting Losses in 2011 and 2012 Were Impacted by High Catastrophe Losses

82

83

P/C Insurance Industry Combined Ratio, 2001–2012*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

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

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

LossesRelatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Lower CAT

Losses Before Sandy

Underwriting Gain (Loss)1975–2012*

* Includes mortgage and financial guaranty insurers in all years.Sources: A.M. Best, ISO; Insurance Information Institute.

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Cumulative underwriting deficit from 1975 through

2012 is $510B

($ Billions)Underwriting

losses in 2012 totaled

$16.7B

High cat losses in 2011 led to the highest

underwriting loss since 2002

86

2

(2)

(8)

(3)(7)

(10)(10)

(4)(0)

11

24

1411 9

(5)(9)

(13)(12)(10)(14)

(12)(10)

(7) (7)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$3092 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

13E

14E

15E

Prio

r Yr.

Res

erve

Rel

ease

($B

)

-6

-4

-2

0

2

4

6

8 Impact on C

ombined R

atio (Points)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2015E

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: A.M. Best, ISO, Barclays Research (estimates).

87

Performance by Segment

87

109.

4

110.

211

8.8

109.

5 112.

5

110.

210

7.6

104.

110

9.7

110.

2

102.

5 105.

4

91.1 93

.6

104.

298

.9

102.

110

6.7

104.

910

2.1

101.

4

101.

3

102.

0

111.

1

112.

3

122.

3

90

95

100

105

110

115

120

125

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F

14F

15F

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2011); Conning (2012-2015F) Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2015F*

Commercial lines underwriting

performance is expected to improve as

improvement in pricing environment persists

88

Commercial Auto Combined Ratio: 1993–2015F

112.

1

112.

0

113.

0

115.

9

102.

7

95.2

92.9

92.1

92.4 94

.3 96.8 99

.4

98.0

104.

6

107.

1

101.

7

100.

3

99.8

118.

1

115.

7

116.

2

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F 15F

Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends

89Sources: A.M. Best (1990-2012E);Conning (2012-2015F); Insurance Information Institute.

General Liability Combined Ratio: 2005–2015F

112.

9

95.1 99

.0

94.2

101.

4

104.

4

105.

8

108.

3

107.

1 110.

8

99.8

80

85

90

95

100

105

110

115

05 06 07 08 09 10 11 12 13F 14F 15F

Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years

Source: Conning Research and Consulting. 91

Inland Marine Combined Ratio: 1999–2015F

101.9

92.8

100.2

83.8

77.379.5

93.3

89.386.2

97.7 96.7

89.7 89.6 89.5

80.882.5

89.9

70

75

80

85

90

95

100

105

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F 15F

Inland Marine is Expected to Remain Among the Most Profitable of All Lines

Sources: A.M. Best (1999-2011); Conning (2012-2015F) 92

94

Insured Catastrophe Loss Update

2012 Catastrophe Losses Were Close to “Average” Until Sandy Hit

2011 Was the 5th Most Expensive Year on Record

94

95

$12.

6

$11.

0

$3.8

$14.

3

$11.

6

$6.1

$34.

7

$7.6 $1

6.3

$33.

7

$73.

4

$10.

5

$7.5

$29.

2

$11.

5

$14.

4

$33.

6

$35.

0

$14.

0

$4.8 $8

.0

$37.

8

$8.8

$26.

4

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

US Insured Catastrophe Losses

Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

2012 Was the 3rd Highest Year on Record for Insured Losses in US History on An Inflation-Adjusted Basis.

2011 Losses Were the 6th Highest.

2012 was likely the third most expensive year ever for insured

CAT losses

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2012 Dollars)

95

96

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

$7.8 $8.7 $9.2 $11.1 $13.4$18.8

$23.9 $24.6$25.6

$48.7

$7.5$7.1$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Hurricane Sandy could become the 4th or 5th costliest event in US

insurance history

Hurricane Irene became the 12th most expense hurricane

in US history in 2011

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

Occurred Over the Past Decade*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

Scenes from My Visit to Moore, Oklahoma, Tornado: High Claim Severity

97

Me with OK Insurance Commissioner John Doak

98

Top 12 Most Costly Hurricanesin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

$9.2 $11.1 $13.4$18.8

$25.6

$48.7

$8.7$7.8$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Andrew(1992)

Katrina(2005)

Hurricane Sandy became the 3rd costliest hurricane in US

insurance historyHurricane Irene

became the 12th most expensive hurricane in US history in 2011

10 of the 12 most costly hurricanes in insurance history occurred over the past 9 years (2004—2012)

U.S. Thunderstorm Loss Trends, 1980 – 2012

99Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

losses are up 7 fold since the early

1980s. The 5- year running average

loss is up sharply.

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss. 2008-2012 are the most expensive

years on record.

Thunderstorm losses in 2012 totaled $14.9 billion, the 2nd

highest on record

Outlook for 2013 Hurricane Season: 75% Worse Than Average

Forecast Parameter Median(1981-2010)

2013F

Named Storms 12.0 18

Named Storm Days 60.1 95

Hurricanes 6.5 9Hurricane Days 21.3 40Major Hurricanes 2.0 4

Major Hurricane Days 3.9 9

Accumulated Cyclone Energy 92.0 165

Net Tropical Cyclone Activity 103% 175%

Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 10, 2013, accessed at http://tropical.atmos.colostate.edu/forecasts/2013/apr2013/apr2013.pdf ; Insurance Information Institute..

Landfall Probabilities for 2013 Hurricane Season: Above Average

Average* 2013F

Entire US East & Gulf Coasts

52% 72%

US East Coast Including Florida Peninsula

31% 48%

Gulf Coast from Florida Panhandle to Brownsville

30% 47%

Caribbean 42% 61%

*Average over the past century.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 10, 2013.

102

Total Value of Insured Coastal Exposure in 2012(2012, $ Billions)

Source: AIR Worldwide

$293.5$239.3

$182.3$164.6$163.5

$118.2$106.7$81.9$64.0$60.6$58.3

$17.3

$567.8$713.9

$849.6$1,175.3

$2,862.3$2,923.1

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

New YorkFloridaTexas

MassachusettsNew JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

$2.923 Trillion Insured Coastal

Exposure in New York in 2012

In 2012, New York Ranked as the #1 Most Exposed State to Hurricane Loss, Overtaking Florida with $2.862 Trillion. Texas is very exposed too, and

ranked #3 with $1.175 Trillionin insured coastal exposure

The Insured Value of All Coastal Property Was $10.6 Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and

Up 48% from $7.2 Trillion in 2004

104

Total Potential Home Value Exposure to Storm Surge Risk in 2013*($ Billions)

*Insured and uninsured property. Based on estimated property values as of April 2013.Source: Storm Surge Report 2013, CoreLogic.

$65.2$51.0$50.3

$35.0$22.4$20.5

$15.9$10.4$7.2$4.7$3.1$2.7$2.6$0.6

$65.6$72.0$78.0

$118.8$135.0

$386.5

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450

FloridaNew York

New JerseyVirginia

LouisianaS. CarolinaN. Carolina

TexasMassachusetts

ConnecticutMarylandGeorgia

DelawareMississippi

Rhode IslandAlabama

MaineNew

PennsylvaniaDC

Nearly $400 billion in home value is exposed

to storm surge in FL

The Value of Homes Exposed to Storm Surge was $1.147 Trillion in 2013.* Only a fraction of this is insured, hence the huge demand for federal aid

following major coastal flooding events.

105

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.7

1.5

1.0

0.4

0.4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7 9.

4

3.6

0.9

0.1

1.1

1.1

0.8

0123456789

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

E

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 7.20*

Combined Ratio Points Catastrophe losses as a share of all losses reached

a record high in 2012

RENEWED PRICING DISCIPLINE

110

Evidence of a Broad and Sustained Shift in Pricing

110

112

-5%

0%

5%

10%

15%

20%

25%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Net Premium Growth: Annual Change, 1971—2012(Percent)

1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

2012 growth

was +4.3%

115

Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2013)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

% -8.2

%-4

.6% -2.7

%-3

.0%

-5.3

%-9

.6%

-11.

3%-1

1.8%

-13.

3%-1

2.0%

-13.

5%-1

2.9% -11.

0%-6

.4%

-5.1

%-4

.9%

-5.8

%-5

.6%

-5.3

%-6

.4%

-5.2

%-5

.4% -2

.9%

2.7% 4.

4%4.

3%3.

9% 5.0%

5.2%

-0.1

% 0.9%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

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

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

Pricing as of Q1:2013 was positive for the 8th consecutive

quarter. Gains are likely to continue through 2013.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

116

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q1

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

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

Percentage Change (%)

Pricing turned positive in Q3:2011, the first increase in

nearly 8 years; Q1:2013 renewals were up 5.2%, the largest increase since late

2003; Some insurers posted stronger numbers.

KRW : No Lasting Impact

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

120

Change in Commercial Rate Renewals, by Line: 2013:Q1

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Major Commercial Lines Renewed Uniformly Upward in Q1:2013 for the 8th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

5.5% 5.8%6.8%

9.8%

1.3%

4.1% 4.3% 4.6% 4.6%5.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%S

uret

y

Bus

ines

sIn

terru

ptio

n

Gen

eral

Liab

ility

Um

brel

la

Com

mer

cial

Aut

o

Con

stru

ctio

n

D&

O

EP

L

Com

mer

cial

Pro

perty

Wor

kers

Com

p

Workers Comp rate increases are large than any other line, followed

by Property lines

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

123

Growth Analysis by State and Business Segment

Premium Growth Rates Vary Tremendously by State

123

124

Direct Premiums Written: Total P/CPercent Change by State, 2007-2012*

58.4

25.4

24.5

21.0

19.2

17.6

16.3

13.2

13.2

12.4

9.9

9.2

9.2

8.5

8.0

6.2

5.8

5.2

4.5

4.4

4.3

4.3

4.2

4.0

3.8

3.6

0

10

20

30

40

50

60

70

ND SD OK NE IA KS VT AK

TX WY

MN AR

TN IN WI

KY

MT

OH LA VA NJ MI

SC CO

MO

NM

Pece

nt c

hang

e (%

)

*Data are preliminary as of 5/1/13 and do not yet fully reflect the impact of state-run pools and plans. Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

125

Direct Premiums Written: Total P/CPercent Change by State, 2007-2012*

3.6

3.1

3.0

2.9

2.7

2.2

2.1

2.1

2.0

1.8

1.1

0.0

-0.1

-0.3

-0.7

-0.9

-2.8

-5.6

-6.0

-7.2

-7.2

-9.3

-10.

1

-11.

2

-12.

5

-17.

3

-20

-15

-10

-5

0

5

CT

MS

NC AL

MD PA U

.S.

MA IL WA

GA

UT

NH RI

ID ME

NY FL CA

DC

WV HI

AZ

OR DE NV

Pece

nt c

hang

e (%

)

Bottom 25 States

*Data are preliminary as of 5/1/13 and do not yet fully reflect the impact of state-run pools and plans. Sources: SNL Financial LC.; Insurance Information Institute.

INVESTMENTS: THE NEW REALITY

134

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

134

Property/Casualty Insurance Industry Investment Gain: 1994–20121

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2$53.9

$58.0$51.9

$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12

Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower Realized Investment Gains; The Financial

Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2012 are running approximately 16% below their pre-crisis peak

138

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2013*

*Monthly, through May 2013. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

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

Yields on 10-Year U.S. Treasury Notes recently

plunged to all time record lows but are now up slightly

138

140

Distribution of Bond Maturities,P/C Insurance Industry, 2003-2012

16.0%

15.2%

15.7%

16.2%

16.3%

29.8%

29.2%

28.8%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

40.4%

31.3%

32.5%

34.1%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

27.6%

15.4%

15.4%

13.6%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

9.8%

9.2%

7.6%

7.6%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%

5.7%16.5%

15.2%

14.4%

16.0%

15.4%

0% 20% 40% 60% 80% 100%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Under 1 year1-5 years5-10 years10-20 yearsover 20 years

Sources: SNL Financial; Insurance Information Institute.

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds

(from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category (from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in investment income along with lower yields.

141

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

-8%-7%-6%-5%-4%-3%-2%-1%0%

Persona

l Line

s

Pvt Pass

Auto

Pers P

rop

Commerc

ial

Comml A

uto

Credit

Comm P

rop

Comm C

as

Fidelity

/Sure

ty

Warra

nty

Surplus

Line

s

Med M

al

WC

Reinsu

rance

**

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

141

Shifting Legal Liability & Tort Environment

152

Is the Tort PendulumSwinging Against Insurers?

152

153

Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E

$0

$50

$100

$150

$200

$250

$300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E

Tort

Syst

em C

osts

1.50%

1.75%

2.00%

2.25%

2.50%

Tort Costs as %

of GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A

Tort costs in dollar terms have remained high but relatively stable

since the mid-2000s., but are down substantially as a share of GDP

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

Business Leaders Ranking of Liability Systems in 2012

Best States1. Delaware

2. Nebraska

3. Wyoming

4. Minnesota

5. Kansas

6. Idaho

7. Virginia

8. North Dakota

9. Utah

10. Iowa

Worst States41. Florida

42. Oklahoma

43. Alabama

44. New Mexico

45. Montana

46. Illinois

47. California

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2012 Wyoming Minnesota Kansas Idaho

Drop-offs

Indiana Colorado Massachusetts South Dakota

Newly Notorious

Oklahoma

Rising Above

Arkansas

156

157

The Nation’s Judicial Hellholes: 2011

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinois

Madison , St. Clair and McLean

counties

New YorkAlbany and

NYC

Watch List Eastern District of

Texas Cook County, IL Southern NJ Franklin County, AL Smith County, MS Louisiana

Dishonorable Mention

MI Supreme Court AK Supreme Court MO Supreme Court

California

Philadelphia

NevadaClark County

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Thank you for your timeand your attention!

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Insurance Information Institute Online:

158