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

The Global Economy, Rising Risk and Marine Insurance Markets

Risk and Reward in a Troubled WorldSan Francisco Board of Marine Underwriters

San Francisco, CAMay 1, 2014

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

2

Outlook: Property/Casualty Modest growth will continue in 2014 (~ 4.5% DPW)

Exposure growth tied primarily to overall GDP growth/key sector drivers Rates remain in positive territory though more concern for commercial

lines in second half of the year Underlying loss cost trends remain manageable Very well capitalized

For primary insurers, falling reinsurance pricing and alternative capital are benefits

Traditional reinsurers challenged by continued entry of new capital and accumulation of “organic” capital

Regulatory/Legislative concerns manageable TRIA, Systemic risk, FIO & general federal “intrusions”

Personal Lines: StableCommercial Lines: Negative

Reinsurance: Stable

3

Risk & Insurance U.S. and Global Perspective

Marine Insurance Is Very Sensitive to the Global Economic and Political

Environment

4

5 Major Categories for External Global Risks, Uncertainties and Fears: Insurance Solutions

1. Economic Risks2. Geopolitical Risks3. Environmental Risks4. Technological Risks5. Societal Risks

Source: Adapted from World Economic Forum, Global Risks 2014; Insurance Information Institute.

While risks can be broadly

categorized, none are mutually exclusive

5

Multitude of Exogenous Factors Influence Growth, Performance & Cyclicality

Economic Issues in US, Europe Weakness in China/Emerging Economies Political Upheaval in the Ukraine, Middle East

Argentina, Venezuela, Thailand Trade sanctions (e.g., Iran, Russia)

Political Gridlock in the US, Europe, Japan Fiscal/Monetary Imbalances/Low Interest Rates Unemployment Resurgent Terrorism Risk Cyber Attacks Sabre Rattling (e.g., US-China, China-Japan) Severe Natural Disaster Losses Climate Change/Sea Level Rise Environmental Degradation (Over)Regulation: Systemic Risk?

Are “Black Swans” everywhere or

does it just seem that way?

7

Top 5 Global Risks in Terms of Impact,2007—2014: Insurance Can Help With Most

Source: World Economic Forum, Global Risks 2014; Insurance Information Institute.

Concerns Over the Impacts of Economics Risks Remained High in 2014, but Societal, Environment and Technological Risks Also Loom Large

In 2014, economic

and environ-mental issues

dominated severity

concerns

88Sources: Guy Carpenter, Swiss Re; Insurance Information Institute .

Gap Between Economic and Insured Losses: 1980—2013

The gap between economic and insured losses is growing—suggesting both a problem

and an opportunity

Globalization:The Global Economy Creates and Transmits Cycles & Risks

9

Globalization Is a Double Edged Sword—Creating Opportunity and Wealth But

Potentially Creating and Amplifying Risk

9

Emerging vs. “Advanced” Economies

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

70 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 13F

14F

15F

Advanced economies Emerging and developing economies World

Source: International Monetary Fund, World Economic Outlook , April 2014; Insurance Information Institute.

Emerging economies (led by China) are expected to grow by 4.9% in 2014 and

5.3% in 2015.

GDP Growth: Advanced & Emerging Economies vs. World, 1970-2015F

Advanced economies are expected to grow at a modest pace of 2.2% in

2014 and to 2.3% in 2015.

World output is forecast to grow by 3.6% in 2014 and 3.9% in 2015. The world economy shrank by 0.6% in

2009 amid the global financial crisis

GDP Growth (%)

11

Real GDP Growth Forecasts: Major Economies: 2011 – 2015F

Sources: Blue Chip Economic Indicators (4/2014 issue); IMF; Insurance Information Institute.

1.8%

1.5%

0.9%

2.2% 2.

7%

1.1%

2.7% 3.0%

2.3%

7.4%

3.0%

1.4%

2.5% 3.

3%

2.7%

7.3%

9.3%

2.6%

4.6%

-0.6

%

7.8%

3.0%

0.2%

1.8%

1.4%1.

9%

-0.4

%

1.7%2.

6%

7.7%

-2%

0%

2%

4%

6%

8%

10%

US Euro Area UK Latin America Canada China

2011 2012 2013F 2014F 2015F

Growth Prospects Vary Widely by Region: Growth Returns to Most Areas Even as China Slows; Some strengthening in Latin America

The Eurozone is ending

Growth in China has outpaced the US

and Europe

US growth should

acceleratein 2014

12

Real GDP Growth Forecasts: Selected Economies: 2011 – 2015F

Sources: Blue Chip Economic Indicators (4/2014 issue); Insurance Information Institute.

3.6% 4.

1%

7.7%

4.3%

3.9%

2.0%

1.3%

3.4%

0.9%

3.6% 3.9%

2.8%

2.0%

4.6%

1.6%

2.4% 2.5%

1.4%

3.6%

3.3%

5.4%

1.0%

1.9%

2.6% 3.

1%3.7%

3.7%

6.0%

2.2% 2.3% 2.

8%

3.9%

2.7%

2.4%

4.0%

0%1%2%3%4%5%6%7%8%9%

S. Korea Taiwan India Russia Brazil Australia Mexico

2011 2012 2013 2014F 2015F

Growth Is Expected Accelerate in Most of the World in 2014 and 2015

Strong economies in smaller industrialized nations will bolster demand for products, services, international trade and insure

13

Global Industrial Production (2000-Feb. 2012)

Source: IMF, World Economic Outlook, April 2012; Insurance Information Institute.

12

Global industrial production has

been volatile but is growing

14

World GDP and Industrial Production (2005-Feb. 2015F)

Source: IMF, World Economic Outlook, April 2014; Insurance Information Institute.

Global industrial production should continue

to rise as should exports and imports of

manufactured goods

15

World Trade Volume: 1948—2015F

$7,380

$17,930 $18,468 $19,262 $20,283

$3,676$1,838

$579$157$84$59$0

$5,000

$10,000

$15,000

$20,000

$25,000

1948 1953 1963 1973 1983 1993 2003 2012 2013E 2014F 2015F

Sources: World Trade Organization data through 2012 from International Trade Statistics 2013; Insurance Information Institute estimates and forecasts for 2013-2015 based on IMF World Economic Outlook forecasts as of April 2014.

$ Billions

Insurance Regulation Will Necessarily Become More Transnational, Following Patterns of Global Economic Growth, the Creation of New

Insurable Exposures and International Capital Flows

Global trade volume will exceed $19 trillion in 2014, an increase of nearly 160% over

the past decade

15

16

2.8% 3.0%

4.3%

5.3%

0%

1%

2%

3%

4%

5%

6%

2013 2014F 2015F 2016F

World Trade Volume Growth*,2012 – 2015F

World trade volume growth is expected to accelerate modestly through 2015—translating into

$2.25 trillion in net trade growth

*Goods and services.Source: International Monetary Fund, World Economic Outlook , April 2014; Insurance Information Institute.

17

World Trade Volume: IMPORTS2010 – 2015F

15.3%

8.8%

5.8% 5.6% 5.2%6.3%

11.5%

4.3%

1.1% 1.4%

3.5%4.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2010 2011 2012 2013 2014F 2015F 2010 2011 2012 2013 2014F 2015F

Growth (%)

Import growth in emerging economies outpaces

Advanced Economies by a wide margin but will slow in

2014

Advanced Economies Emerging Economies

Sources: IMF World Economic Outlook (April 2014 ); Insurance Information Institute.

Import growth in Advanced Economies is expected to

accelerate in 2014

18

World Trade Volume: EXPORTS2010 – 2015F

14.7%

6.7%

4.2% 4.4% 5.0%6.2%

12.2%

5.3%

2.1% 2.3%

4.2% 4.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2010 2011 2012 2013 2014F 2015F 2010 2011 2012 2013 2014F 2015F

Growth (%)

Export growth in emerging economies has

decelerated sharply

Advanced Economies Emerging Economies

Sources: IMF World Economic Outlook (April 2014); Insurance Information Institute.

Export growth in advanced economies

should accelerate in 2014

19

Country Shares of World Merchandise Exports

Source: World Trade Organization accessed 4/30/14 at: http://www.wto.org/english/res_e/statis_e/statis_e.htm ; Insurance Information Institute.

The US, China, Japan and Western Europe lead the world in merchandise exports

20

Potential Output of Total Economy: US, China, India, Indonesia and Japan, 2000-2060F

Source: OECD; Insurance Information Institute . 20

$ 2005 PPP

Growth in economic output will be

concentrated in certain developing economies

such as China and India

China will likely become the

world’s largest economy between

2025 and 2030

Ocean Marine Overview

21

Vessel Losses Have Dropped though Underwriting Performance Remains

Volatile21

22

Ferry Sewol Sinking in South Korea Is One of the Greatest Maritime Tragedies in Recent History

The Sewol and Costa Concordia disasters

will impact risk management in the

maritime sector

23

Total Vessel Losses by Top 10 Regions: 2002 – 2013

73 51 51 50

417

8296135

207215

296

050

100150200250300350400450

S. C

hina

,In

do C

hina

,In

done

sia

&

E. M

edit.

,B

lack

Sea

Japa

n,K

orea

and

N. C

hina

Brit

ish

Isle

s,N

. Sea

, Eng

.C

hann

el,

Ara

bian

Gul

f&

App

roac

hes

W. A

frica

Coa

st

W. M

edit.

Wes

t Ind

ies

E. A

frica

Coa

st

Bay

of

Ben

gal

Oth

ers

Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global Corporate and Specialty; Insurance Information Institute.

Total Vessel Losses

S. China, Indo China, Indonesia and the Philippines was the region that saw the most losses (296) from 2002

through 2013. The U.S. eastern seaboard dropped of the list as there were no total

losses last year.

23

There were 1,673 total vessel losses from 2002 through 2013. The top 10 regions account for about 75% of all total losses

24

Country Shares of World Merchandise Exports

Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global Corporate and Specialty; Insurance Information Institute.

Asia accounts for the largest share of total losses, followed by the Middle East and

E. Mediterranean

25

Total Vessel Losses by Year: 2002 – 2013

150

128 121

89

117

94

170154151152

174173

020406080

100120140160180200

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

Sources: Lloyd’s List Intelligence Casualty Service as published in Safety and Shipping Review 2014, Allianz Global Corporate and Specialty; Insurance Information Institute.

Total Vessel Losses

While total vessel losses are down sharply over the past decade, the question is whether this trend will continue

Total losses have declined by nearly 46% over the

past 11 years

25

26

Total Vessel Losses by Top 10 Regions: 2013

4 3 3 3

18

5689

1718

02468

101214161820

S. C

hina

,In

do C

hina

,In

done

sia

&Ph

ilipp

ines

Japa

n,K

orea

, N.

Chi

na

E. M

edit.

,B

lack

Sea

W. A

frica

Coa

st

Ara

bian

Gul

f&

App

roac

hes

Bay

of

Ben

gal

E. A

frica

Coa

st

Brit

ish

Isle

s,N

. Sea

, Eng

.C

hann

el,

Bay

of

Can

adia

nA

rctic

,A

lask

a

W. M

edit.

Oth

ers

Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global Corporate and Specialty; Insurance Information Institute.

Total Vessel LossesS. China, Indo China,

Indonesia and the Philippines was the region that saw the most losses (18) in 2013, but this was

down from 29 in 2012

26

There were 94 total vessel losses in 2013—about 8 per month

27

Total Losses by Type of Vessel: 2013

6 62 2

6

14

47

32

12

305

101520253035

Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global Corporate and Specialty; Insurance Information Institute.

Cargo vessels accounted for more than 1/3 of 94 total

vessel losses in 2013

27

28

Causes of Total Losses: 2002 – 2013

1096

312

30785

199

745

20160

0100200300400500600700800

Col

lisio

n(in

volv

ing

vess

els)

Con

tact

(e.g

.,ha

rbor

wal

l)

Foun

dere

d (s

unk,

subm

erge

d)

Fire

/Exp

losi

on

Hul

l dam

age

(hol

ed, c

rack

ed,

etc.

)

Mis

sing

/Ove

rdue

Mac

hine

ryda

mag

e/Fa

ilure

Pira

cy

Wre

cked

/stra

nded

(agr

ound

)

Mis

cella

neou

s

Sources: Lloyd’s List Intelligence Casualty Statistics as published in Safety and Shipping Review 2014, Allianz Global Corporate and Specialty; Insurance Information Institute.

Foundered vessels accounted for 45% of the 1,673 total vessel losses

from 2002-2103

28

Global Insurance Premium Growth Trends

29

Growth Is Uneven Across Regions and Market Segments

29

31

Distribution of Nonlife Premium: Industrialized vs. Emerging Markets, 2012

Sources: Swiss Re sigma No.3/2013; Insurance Information Institute research.

Emerging market’s share of nonlife premiums increased to 17.3% in 2012 from 14.3% in 2009. The share of premiums written in the $2 trillion global nonlife market remains much larger (82.7%) but continues to shrink.

The financial crisis and sluggish recovery in the major insurance markets will accelerate the expansion of the emerging market sector

Premium Growth Facts

17.3%82.7%

Industrialized Economies

$1, 647.5

Emerging Markets$344.1

2012, $Billions

Developing markets now account for about 40% of

global GDP but just 17.3% of nonlife premiums

32

Premium Growth by Region, 20122.

3%

2.0%

16.8

%

-3.1

% -0.4

%

1.9%

13.8

%

-4.9

%

2.6%

1.7%

-0.4

%

4.8% 5.8%

13.0

%

4.8%

-1.0

%

13.0

%

2.4%

1.8%

11.7

%

-2.0

%

4.9%

8.1%

4.2%

3.9%

10.5

%

-0.1

%

5.1%

8.8%

7.8%

-10%-5%0%5%

10%15%20%

World N.America

LatinAmerica

W.Europe

Central &E. Europe

AdvancedAsia

EmergingAsia

MiddleEast &Central

Asia

Africa Oceania

Life Non-Life Total

Global Premium Volume Totaled $4.613 Trillion in 2012, up 2.4% from $4.566 Trillion in 2011. Global Growth Was Weighed Down by Slow Growth

in N. America and W. Europe and Partially Offset by Emerging Markets

Latin America growth was

the strongest in 2012

Growth in Advanced Asia (incl. China) markets was

third highest in 2012

Source: Swiss Re, sigma, No. 3/2013.

33

Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2012

Source: Swiss Re, sigma, No. 3/2013.

Market Life Non-Life TotalAdvanced 1.8 1.5 1.7

Emerging 4.9 8.6 6.8

World 2.3 2.6 2.4

Real growth in non-life insurance

premiums was faster in China than the US

34

Global Real (Inflation Adjusted) NonlifePremium Growth: 1980-2010

Source: Swiss Re, sigma, No. 2/2010.

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

-10%

-5%

0%

5%

10%

15%

20%Real growth rates

Total Industrialised countries Emerging markets

Nonlife premium growth in emerging markets has

exceeded that of industrialized countries in

27 of the past 31 years, including the entirety of the

global financial crisis..

Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as

well as a lack of consistent cyclicality

Average: 1980-2010Industrialized Countries: 3.8%

Emerging Markets: 9.2%Overall Total: 4.2%

3636Sources: Guy Carpenter, World Bank, IMF; Insurance Information Institute .

Gap Between GDP Growth and Reinsurance Limit in Asia-Pacific Region: 2004—2013

The gap between GDP and reinsurance limit in Asia is growing—suggesting the

region is “under-reinsured”

41

The Unfortunate Nexus: Opportunity, Risk & Instability

Most of the Global Economy’s Future Gains Will be Fraught with Much

Greater Risk and Uncertainty than in the Past

42Source: Aon PLC; Insurance Information Institute.

The fastest growing markets are generally also

among the politically riskiest, including East and

South Asia and Africa

Latin and South America also present insurers with growth

opportunities but political instability has

increased markedly

Problems in the Ukraine will

intensify political risk in several former

Soviet republics

Political Risk in 2013: Greatest Business Opportunities Are Often in Risky Nations

43Source: Aon PLC; Insurance Information Institute.

Terrorism remains a greater concern in the Middle East,

Africa and South Asia

Latin and South America have modest

terrorist threats though Brazil is elevated

Terrorism Risk in 2013: Greatest Business Opportunities Are Often in Risky Nations

44

P/C (Re)Insurance Industry Financial Overview

2013: Best Year in the Post-Crisis Era

Performance Improved with Lower CATs, Strong Markets

44

P/C Net Income After Taxes1991–2013 ($ Millions)

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 = 6.1% 2013 ROAS1 = 10.3%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.8% ROAS in 2013, 6.3% 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

$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

$35,

074

$63,

784

$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 13

2013 ROAS was 10.3%

Net income in 2013 was up substantially

(+81.9%) from 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 13

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

*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.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

2011: 4.7%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013: 9.8 %

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

* 2008 -2013 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2013 combined ratio including M&FG insurers is 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5100.6 100.1 100.8

92.7

101.299.5

101.0

96.7

102.4

106.5

95.7

14.3%15.9%

12.7%10.9%

7.4% 7.9%

4.7%6.2%9.6%8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 20130%

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

Lower CATs helped ROEs

in 2013

48

ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2013E*

* Excludes Mortgage & Financial Guarantee in 2008 – 2013. 2013 Fortune 500 figure is I.I.I. estimate. Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

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 13E

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

51

-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 13 14

Net Premium Growth: Annual Change, 1971—2014F(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.

2014F: 4.0%2013: 4.6%

2012: +4.3%

52

Growth in Direct Written Premium by Line, 2013-2015F*

Source: Conning.

4.4%

4.4%

4.4%

4.1%

5.1% 5.

8%

8.6%

5.6% 6.

2%

4.0% 4.1%

3.9%

3.6%

5.1%

6.1%

8.0%

6.0%

3.7%4.

3%

3.9%

4.7%

3.2%

5.5% 6.

0%

7.5%

7.0%

3.4%

0%1%2%3%4%5%6%7%8%9%

10%

All Lines PersonalLines

CommercialLines

PersonalAuto

HomeownersCommercialAuto

WC CMP GL

2013F 2014F 2015F

(Percent) P/C growth is expected to remain fairly stable

through 2015

53

Average Commercial Rate Change,All Lines, (1Q:2004–4Q: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%

4.3%

3.4%

2.1%

-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

2Q13

3Q13

4Q13

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 Q4:2013 was positive for the 10th consecutive

quarter. Gains are likely to continue into 2014.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

P/C UNDERWRITING

54

Underwriting Losses in 2013 Much Improved After High

Catastrophe Losses in 2011/1254

55

P/C Insurance Industry Combined Ratio, 2001–2013*

* 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; 2013: = 96.1. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.7

101.0

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 2013

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

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

Ocean Marine vs. Commercial Lines Combined Ratio: 1989–2012

114.

2 118.

2

97.3

119.

4

89.6

102.

0

110.

4 115.

5

107.

2

102.

2

100.

0 104.

1

97.2

118.

4

98.7

113.

7

103.

6

91.0

96.4 10

0.8

108.

9

108.

7

109.

4

110.

2

118.

8

109.

5

112.

5

110.

2

107.

6

104.

1 109.

7

112.

3

111.

1

122.

3

110.

2

102.

0

102.

5

105.

4

91.1 93

.6

104.

2

98.9 10

2.4 10

7.9

103.

4109.

5

107.

9

92.4

80859095

100105110115120125

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

Ocean Marine All Commercial Lines

Ocean Marine has marginally outperformed Commercial Lines overall over the period from 1989 – 2012

Sources: A.M. Best; Insurance Information Institute. 56

Average: 1989-2012Ocean Marine: 104.9

All Commercial Lines: 107.0

59

Combined Ratios by Predominant Business Segment, 2013 vs. 2012*

*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute

102.3101.1

102.3

104.8

96.797.6

94.3

98.7

90

92

94

96

98

100

102

104

106

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2012 2013

(Percent)

The combined ratios for both personal and

commercial lines improved substantially in 2013

62

Some Key Drivers in the US Economy

Economic Factors Driving Exposure Growth and Insurer Performance

62

63

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/14; 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%

1.1% 2.

5%4.

1%2.

4%0.

1%3.

0%3.

0%3.

1%3.

0%3.

0%3.

0%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

15:1

Q15

:2Q

15:3

Q15

:4Q

Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits 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%

The remainder of 2014 into 2015 are expected

to see a modest acceleration in growth

64

Unemployment and Underemployment Rates: Still Too High, 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

Jan14

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 6.7% in March 2014. 4%

to 6% is “normal.”

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 12.7%

in Mar. 2014.8% to 10% is

“normal.”

January 2000 through March 2014, Seasonally Adjusted (%)

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

64

As the unemployment rate approaches 6%,

the Fed will begin signaling on short-

term rates

65

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%

7.6%

7.3%

7.0%

6.7%

6.5%

6.4%

6.2%

6.1%

6.0%

5.9%

5.8%

9.6%

4%

5%

6%

7%

8%

9%

10%

11%

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

15:Q

115

:Q2

15:Q

315

:Q4

Rising unemployment

eroded payrolls

and WC’s exposure base.Unemployment peaked at 10%

in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/14 edition); Insurance Information Institute.

2007:Q1 to 2015:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

unemployment as low as 6.0% by Q4 of this year.

Jobless figures have been revised

slightly downwards for 2014/15

66

Value of New Private Construction: Residential & Nonresidential, 2003-2013*

Billions of Dollars

$0$100$200$300$400$500$600$700$800$900

$1,000

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

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2013: Value of new pvt. construction hits $667.5B, up

33% from the 2010 trough but still

27% below 2006 peak

66

$261.8

$238.8

$311.5

$356.0

*2013 figure is a seasonally adjusted annual rate as of December.Sources: US Department of Commerce; Insurance Information Institute.

69

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Dec. 2013

*seasonally adjusted; Dec. 2013 is preliminary; data published February 4, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in Dec. 2013 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial

exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.

$ Millions

69

The value of Manufacturing Shipments in Dec. 2013 was $492.7B—a near record high.

70

Manufacturing Growth for Selected Sectors, 2013 vs. 2012*

3.0%0.0%

-3.4%

8.1%

0.2%2.7%

-1.8%-0.5%

3.1%

6.9%

1.7%3.1%

14.0%

0.4% 1.3%

-6%-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

.

Com

pute

rs &

Ele

ctro

nics

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 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 November 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: +3.4% Non-Durables: +0.2%

71

Manufacturing Employment,Jan. 2010—March 2014*

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

,977

11,9

7211

,965

11,9

4811

,963

11,9

9312

,011

12,0

4612

,053

12,0

6112

,080

12,0

79

11,250

11,500

11,750

12,000

12,250Ja

n-10

Feb-

10M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

2/30

/2M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb-

14M

ar-1

4

Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.

*Seasonally adjusted; Feb. and Mar. 2014 are preliminarySources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands) Since Jan 2010, manufacturing employment

is up (+619,000 or +5.4%)and still growing.

72

2.5%

4.9%

6.3%

7.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2013 2014F 2015F 2016F

Business Investment: Expected to Accelerate, Fueling Commercial Exposure Growth

Accelerating business investment will be a potent driver of

commercial property and liability insurance exposures and should drive employment and WC payroll

exposures as well (with a lag)

Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute.

73

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)

U.S. Natural Has Imports and Exports, 1990 - 2040

Sources: US Energy Information Administration, Annual Energy Outlook 2014 Early Release Overview; ;Insurance Information Institute. 74

Trillions of Cubic Feet

The US is now the largest gas producer in the world, though Russia is the

largest exporter. The US needs to

invest in its pipeline and

LNG infrastructure and expedite

regulatory approval to

realize its full export potential

78

Oil & Gas Extraction Employment,Jan. 2010—March 2014*

*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.

616

9.3

170.

117

1.0

172.

517

3.6

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

2.6

193.

119

3.3

195.

019

6.5

199.

720

0.6

203.

020

4.1

205.

320

7.7

208.

1

150

160

170

180

190

200

210

220

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

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Oil and gas extraction employment is up 33.1% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in

the US.

(Thousands) Highest since Aug.

1986

CYBER RISK

79

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large

and Small in Every IndustryNEW III White Paper:

http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf

79

Data Breaches 2005-2013, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.

157

321

446

656

498

419447

619662

87.9

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013*020406080100120140160180200220

# Data Breaches # Records Exposed (Millions)

The Total Number of Data Breaches (+38%) and Number of Records Exposed (+408%) in 2013 Soared

Millions

87

U.S. Insured Catastrophe Loss Update

2013 Was a Welcome Respite from the High Catastrophe Losses in Recent Years

87

88

$12.

6

$11.

0$3

.8$1

4.3

$11.

6$6

.1

$34.

7$7

.6 $16.

3$3

3.7

$73.

4

$10.

5$7

.5

$29.

2$1

1.5

$14.

4$3

3.6

$35.

0$1

2.9

$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 13*

U.S. Insured Catastrophe Losses

*Through 12/31/13.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 U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Well

Below 2011 and 2012 YTD Totals.

2012 was the third most expensive year ever for insured CAT

losses

Record tornado losses caused

2011 CAT losses to surge

($ Billions, $ 2012)

88

89

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013*

*2010s represent 2010-2013.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.

71.

51.

00.

40.

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 8.9

3.43.6

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

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: 6.1E*

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

a record high in 2012

90

Top 10 States for InsuredCatastrophe Losses, 2013

$1,995

$1,509

$1,190

$909 $907$805 $773 $762

$677$593

0200400600800

1,0001,2001,4001,6001,8002,000

Oklahoma

Texas

Illinois

Minnesota

Colorado

Mississ

ippi

Nebras

ka

Georg

ia

Indiana

Louisiana

Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.

$ Millions

Oklahoma let the country in insured CAT losses in 2013

91

$9,756

$6,369

$2,318$1,511 $1,440

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

New York New Jersey Texas Kentucky Colorado

*Includes catastrophe losses of at least $25 million.Sources: PCS unit of ISO; Insurance Information Institute.

Top 5 States by Insured Catastrophe Losses in 2012*

NY and NJ let the US in CAT losses in 2012 due Sandy

(2012, $ Billions)

93

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1993–20121

0.1%

1.7%

3.8%4.7%

6.3%

7.1%

36.0%

40.4%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $158.2

Fires (4), $6.5

Tornadoes (2), $140.9

Winter Storms, $27.8

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.9

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1993-2012

totaled $391.7B, an average of $19.6B per year or $1.6B

per month

94

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 became the 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.

95

Top 16 Most Costly World Insurance Losses, 1970-2013*

(Insured Losses, 2012 Dollars, $ Billions)

*Figures do not include federally insured flood losses.**Estimate based on PCS value of $18.75B as of 4/12/13.Sources: Munich Re; Swiss Re; Insurance Information Institute research.

$11.1$13.4 $13.4$13.4$18.8

$23.9 $24.6$25.6

$38.6

$48.7

$7.8 $8.1 $8.5 $8.7 $9.2 $9.6

$0

$10

$20

$30

$40

$50

$60

Hugo (1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan (2004)

Charley(2004)

TyphoonMirielle(1991)

Wilma(2005)

ThailandFloods(2011)

NewZealandQuake(2011)

Ike (2008)

Sandy(2012)**

Northridge(1994)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)**

Katrina(2005)

5 of the top 14 most expensive catastrophes in

world history have occurred within the past 3 years

(2010-2012)

Hurricane Sandy is now the 6th costliest event in global

insurance history

2012 insured CAT Losses totaled $60B; Economic losses totaled $140B, according to Swiss Re

Num

ber

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2013Number of Events (Annual Totals 1980 – 2013)

Source: MR NatCatSERVICE 106

22

19

81

6

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 128 natural disaster events in 2013

Losses Due to Natural Disasters in the US, 1980–2013

107

Overall losses (in 2012 values) Insured losses (in 2013 values)

Source: MR NatCatSERVICE

(2013 Dollars, $ Billions) (Overall and Insured Losses)

50

100

150

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

2013 CAT LossesOverall : $21.8BInsured: $12.8B

Indicates a great deal of losses are uninsured (~40%-50% in the US) =

Growth Opportunity

2013 losses were far below 2011 and 2012 and were 44% lower

than the average from 2000-2012

Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014. 109

Geophysical events(earthquake, tsunami, volcanic activity)Meteorological events (storm)

Hydrological events(flood, mass movement)Climatological events(extreme temperature, drought, wildfire)Extraterrestrial events(Meteorite impact)

880Loss events

EarthquakeChina, 20 April

Severe storms, tornadoesUSA, 18–22 May

FloodsIndia, 14–30 June

HailstormsGermany, 27–28 July

Winter Storm Christian (St. Jude)Europe, 27–30 October

Typhoon HaiyanPhilippines, 8–12 NovemberSevere storms, tornadoes

USA, 28–31 May

Hurricanes Ingrid & ManuelMexico, 12–19 September

FloodsCanada, 19–24 June

FloodsEurope, 30 May–19 June

Heat waveIndia, April–June

Typhoon FitowChina, Japan, 5–9 October

Earthquake (series)Pakistan, 24–28 September

FloodsAustralia, 21–31 January

Meteorite impactRussian Federation, 15 FebruaryFlash floods

Canada, 8–9 July

FloodsUSA, 9–16 September

Geophysical events(earthquake, tsunami, volcanic activity)Meteorological events (storm)

Selection of significant Natural catastrophes

Natural catastrophes Hydrological events(flood, mass movement)Climatological events(extreme temperature, drought, wildfire)

Natural Loss Events:Full Year 2013

World Map

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters Worldwide,1980 – 2013 (Number of Events)

Source: MR NatCatSERVICE 110

Num

ber

200

400

600

800

1 000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 880 natural disaster events globally in

2013 compared to 905 in 2012

Losses Due to Natural Disasters Worldwide, 1980–2013 (Overall & Insured Losses)

111

Overall losses (in 2013 values) Insured losses (in 2013 values)

Source: MR NatCatSERVICE

(2013 Dollars, $ Billions)(Overall and Insured Losses)

100

200

300

400

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

US$ bn

2013 LossesOverall : $125BInsured: $34B

There is a clear upward trend in both insured and overall losses over the past

30+ years

10-Yr. Avg. LossesOverall : $184BInsured: $56B

Terrorism Update

112

TRIA’s SuccessConsequences of Expiration

Download III’s Terrorism Insurance Report at: http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2014.html

112

Life$1.2 (3%)

Aviation Liability

$4.3 (11%)

Other Liability

$4.9 (12%)

Biz Interruption $13.5 (33%)

Property -WTC 1 & 2*$4.4 (11%) Property -

Other$7.4 (19%)

Aviation Hull$0.6 (2%)

Event Cancellation

$1.2 (3%)Workers Comp

$2.2 (6%)

Total Insured Losses Estimate: $42.9B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.**$32.5 billion in 2001 dollars.Source: Insurance Information Institute.

Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2013)

($ Billions)

117

Terrorism Insurance Take-up Rates,By Year, 2003-2013

Source: Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014 and earlier editions.

27%

49%

58% 59% 59% 57%61% 62% 64% 62% 62%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

In 2003, the first year TRIA was in effect, the terrorism take-up rate was 27 percent. Since then, it has increased steadily, remaining in the

low 60 percent range since 2009.

TRIA’s high take-up rates, availability and affordability have benefitted businesses,

workers and the entire US economy since the program’s enactment

118

*Data for 27 states with sufficient data.Source: Marsh 2014 Terrorism Risk Insurance Report; Insurance Information Institute.

The overall US take-up rate for terrorism coverage was 62% in 2013 and ranged from

a lows of 41% in Michigan to a high of

84% in Massachusetts (where demand likely increased due to the

April 2013 Boston Marathon bombing)

Terrorism Insurance Take-Up Rates by State for 2013*

SURPLUS/CAPITAL/CAPACITY

124

2013 Recorded Yet Another Record High in the Primary and Reinsurance Sectors

124

125

Policyholder Surplus, 2006:Q4–2013: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

$607.7$614.0$624.4

$653.3

$570.7$566.5

$505.0$515.6$517.9

$400

$450

$500

$550

$600

$650

$700

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

13:Q

1

13:Q

2

13:Q

3

13:Q

4

2007:Q3Pre-Crisis Peak

Surplus as of 12/31/13 stood at a record high $653.3B

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .

The industry now has $1 of surplus for every $0.73 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 entered 2014in very strong financial condition.

129

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 2002-2012 (1)

$486

$20,353

$425

$9,264

$35,221

$13,615$16,294

$3,507$6,419

$12,458

$4,651

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tran

sact

ion

valu

es

0

10

20

30

40

50

60

70

80

90

Num

ber of transactions

($ Millions)

(1) Includes transactions where a U.S. company was the acquirer and/or the target.

Source: Conning proprietary database.

M&A activity in the P/C sector remains below

pre-crisis levels.

130

REINSURANCE MARKET CONDITIONS

Ample Capacity as Alternative Capital is

Transforming the Market—And Pushing Down

Prices130

Global Reinsurance Capital (Traditional and Alternative), 2007 - 2013

Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.

Total reinsurance capital reached a record $540B in 2013, up 58.8% from 2008. Of that, $50B (9.3%) is alternative capacity, up 163% from

$19B since 2008

Reinsurance Pricing: Rate-on-Line Index by Region, 1990 – 2014*

*As of Jan. 1.Source: Guy Carpenter

Lower CATs and a flood of new

capital has pushed reinsurance pricing

down in most regions, including

the US

Reinsurer Combined Ratios(Aon Benfield Aggregate), 2007 - 2013

Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.

Reinsurers posted a combined under 90 in 2013, the best result since 2009

Alternative Capacity as a Percentage of Global Property Catastrophe Reinsurance Limit

Source: Guy Carpenter

(As of Year End)

Alternative Capacity accounted for approximately 14% or $45 billion

of the $316 in global property catastrophe reinsurance capital as

of mid-2013 (expected to rise to ~15% by year-end 2013)

Alternative Capacity Development, 2001—2013:H1

Source: Guy Carpenter; Mid-Year Market Report, September 2013; Insurance Information Institute.

Catastrophe Bonds: Issuance and Outstanding, 1997- 2014:Q1*Risk Capital Amount ($ Millions)

*Through Jan. 31, 2014.Source: Guy Carpenter; Insurance Information Institute.

633.

0

846.

1

984.

8

1,13

0.0

966.

9 2,72

9.2

3,39

1.7

4,60

0.3

4,10

8.8

5,85

2.9

7,08

3.0

1,41

0.0

1,991.11,142.8

1,729.8

6,99

6.3

4,69

3.4

1,219.5

$3,4

50.0

$4,0

40.4

$4,9

04.2 $8

,541

.6

$14,

024.

2

$12,

043.

6

$12,

508.

8

$12,

185.

0

$12,

139.

1

$14,

835.

7 $18,

516.

7

$2,9

50.0

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:Q1Risk Capital IssuedRisk Capital Outstandng at Year End

Catastrophe Bond Issuance Is Approaching Pre-Crisis Levels While Risk Capital Outstanding Stands at an All-Time Record

CAT bond issuance reached a record high in 2013

Risk capital outstanding

reached a record high in 2013

Financial crisis depressed issuance

145

Questions Arising from Influence of Alternative Capital What Will Happen When Investors Face Large-Scale

Losses?

Does ILS Have a Higher Propensity to Litigate? Short-term focus could contribute to disputes Large share of triggered transactions ended up in dispute

How Low Will ROLs Be Pushed?

Does the New Interconnectedness with Capital Markets Lend Credence to the Suggestion that Reinsurance Is a Systemic Risky Business?

Will Alternative Capital Drive Consolidation Among Traditional Reinsurers? Has the mating dance begun? Endurance/Aspen

INVESTMENTS: THE NEW REALITY

146

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

146

Property/Casualty Insurance Industry Investment Income: 2000–20131

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Investment Income Fell in 2012 and 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing

1 Investment gains consist primarily of interest and stock dividends...Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings are running below their 2007

pre-crisis peak

152

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*

*Monthly, constant maturity, nominal rates, through February 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

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 '14

Recession2-Yr Yield10-Yr Yield

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.

U.S. Treasury yields plunged to historic lows in

2013. Only longer-term yields have rebounded.

152

New Waves of Regulations

168

2008 - PresentGlobal Crisis and Regulatory Response

168

171

Global Financial Crises & Global Systemic Risk The Global Financial Crisis Prompted the G-20 Leaders to Request

that the Financial Stability Board (FSB) Assess the Systemic Risks Associated with SIFIs, Global-SIFIs in Particular

In July 2013, the FSB Endorsed the International Association of Insurance Supervisors Methodology for Identifying Globally Systemically Important Insurers (G-SIIs)

For Each G-SII, the Following Will Be Required:(i) Recovery and resolution plans(ii) Enhanced group-wide supervision(iii) Higher loss absorbency (HLA) requirements

G-SIIs as Designated by the FSB as of July 2013: Allianz SE AIG Assicurazioni Generali Aviva Axa MetLife Ping An Prudential Financial Prudential plc

173

Global Financial Crises & Global Systemic Risk…There’s More… IAIS Also Plans to Develop the First-Ever Risk-Based Global

Insurance Capital Standards by 2016

Would be Tested in 2017-2018; Implemented in 2019

Would Be Included as Part of ComFrame and Apply to Internationally Active Insurance Groups (IAIGs): ~50 IAIGs Designations Likely

While Flexibility May Exist within the Standards, Doubts in the US Are Likely to Be Strong Concern that the standards may be bank-centric Questions as to whether such standards are even needed: “Although US state insurance regulators continue to have doubts about the

timing, necessity and complexity of developing a global capital standard given regulatory differences around the globe, we intend to remain fully engaged in the process to ensure that any development augments the strong legal entity capital requirements in the US that have provided proven and tested security for US policyholders and stable insurance markets for consumers and industry.” --NAIC President Ben Nelson (P/C 360, Oct. 16, 2013)

176

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2012

90

95

100

105

110

115

12069 70 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

Com

bine

d R

atio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Impairm

ent Rate

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2012 impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower than the 0.82% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated

Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

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180