Challenges and Opportunities for the P/C

Insurance IndustryProfessional Insurance Wholesalers Association

Annual DinnerNew York, NY

October 25, 2011

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: (917) 494-5945 stevenw@iii.org www.iii.org

2

What in the World Is Going On?

Is the World Becoming a Riskier Place?

What Are the Implications for Insurance and Risk Management?

3

Uncertainty, Risk, and Fear Abound US Debt/Budget Crisis and S&P Downgrade

Short-term: Slow Growth/A Double Dip Recession? Long-term: Era of Fiscal Austerity?

Housing Crisis Persistently High Unemployment European Sovereign Debt Crises Earthquakes/Nuclear Reactor Meltdowns Record Tornadoes, Floods, Wildfires, in the US Manmade Disasters

Deepwater Horizon, “Fracking”

Resurgent Terrorism Risk? Political Upheaval in the Middle East China on Track to Be #1 Economy in the World

Is the U.S. era over? Are “Black Swans” everywhere or

does it just seem that way?

4

US Real GDP Growth, quarterly*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/2011 issue (forecasts); Insurance Information Institute.

-3.7

%

-8.9

% -6.7

%

-0.7

%

1.7%

3.8%

3.9%

3.8%

2.5%

2.3%

0.4% 1.0% 1.

9%

1.9%

1.9%

2.2% 2.5%

2.7%

0.5%

3.6%

3.0%

1.7%

-1.8

%

1.3%

-12%

-9%

-6%

-3%

0%

3%

6%

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

11:1

Q

11:2

Q

11:3

Q

11:4

Q

12:1

Q

12:2

Q

12:3

Q

12:4

Q

Demand for insurance continues to be affected by a sluggish economy

Real GDP Growth (%)

2011 started slowly, but somewhat

higher growth is expected in the rest

of the year.

Worst quarterly drop since

1958:q1 (-11.1%)

6

Unemployment and UnderemploymentRate “Normality”: Years to Go

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3Unemployment + Underemployment Rate U-6

September 2011 unemployment rate (U-3) was

9.1%. Peak rate in the last 30

years: 10.8% in Nov - Dec 1982

Source: U.S. Bureau of Labor Statistics; Insurance Information Institute.

U-6 is now 16.5%

January 2000 through September 2011, Seasonally Adjusted (%)

Gap between U-3 and U-6 is

normally 4 percentage

points but is now 7.4 points

U-6 hit 17.5% in Oct 2009

Recession

Recession

186

7921

365

127

42 15-1

09-1

465 97

23-1

2-8

5 -58

-161

-253 -230

-257

-347

-456

-547

-734 -6

67-8

06-7

07-7

44-6

49-3

34-4

52-2

97 -215 -186

-262

75-8

316

62

241

51 6111

714

310

9 193

128 16

794

261

219

241

99 7517

342

137

158

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Monthly Change in Private Employment

(Thousands)

Private employers added 2.88 million jobs in 2010-2011,after having shed 4.66 million jobs in 2009 and 3.81 million in 2008.

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

Private employers added jobs in every one of the last 21 months

Not Enough: We need to average about 125,000 new jobs (private and public) per month just to absorb labor

force growth

January 2007 through September 2011

27

-19 -9

12

1

-53

-63 -49

3

-39

38

-11

-26

3

-14

28 48

41

0

-25

7

-14

2

-16

9

-13

8

17

-35 -15

-26

-26

-25

-24

-46

-55

-46

15

-34

(300)

(200)

(100)

0

100

200

300

400

500

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Se

p-0

9

No

v-0

9

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-

10

Se

p-1

0

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-

11

Se

p-1

1

Monthly Change in Government Employment

(Thousands)

Employment by government at all levelsdropped every month in 2011 except August.

Total (net) government jobs lost through September: 267,000.

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

January 2009 through September 2011

Census

9

U.S. Employment in the DirectP/C Insurance Industry: 1990–2011*

*As of August 2011; Not seasonally adjusted; Does not including agents & brokers.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Thousands

440

460

480

500

520

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

As of August 2011, P/C insurance industry employment was down by 37,300 or 7.6% to 453,800 since the recession began in Dec. 2007 (compared to

overall US employment decline of 5.2%).

10

U.S. Employment in the Reinsurance Industry: 1990–2011*

Thousands

24

28

32

36

40

44

48

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11*As of August 2011; Not seasonally adjusted; Does not including agents & brokers.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

As of August 2011, US employment in the reinsurance industry was up by 900 or 3.3% to 27,800 since the

recession began in Dec. 2007 (compared to overall US

employment decline of 5.2%).

11

U.S. Employment in Insurance Agencies & Brokerages: 1990–2011*

Thousands

500

550

600

650

700

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11*As of August 2011; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

As of August 2011, employment at insurance agencies and brokerages

was down by 38,300 or 5.6% to 641,300 since the recession began in

Dec. 2007 (compared to overall US employment decline of 5.2%).

12

U.S. Employment in Insurance Claims Adjusting: 1990–2011*

Thousands

40

45

50

55

60

Jan

-90

Oct

-90

Jul-

91

Ap

r-9

2

Jan

-93

Oct

-93

Jul-

94

Ap

r-9

5

Jan

-96

Oct

-96

Jul-

97

Ap

r-9

8

Jan

-99

Oct

-99

Jul-

00

Ap

r-0

1

Jan

-02

Oct

-02

Jul-

03

Ap

r-0

4

Jan

-05

Oct

-05

Jul-

06

Ap

r-0

7

Jan

-08

Oct

-08

Jul-

09

Ap

r-1

0

Jan

-11

*As of August 2011; Not seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

As of August 2011, claims adjusting employment was down by 4,000 or 7.7% to 48,200 since the recession began in

Dec. 2007 (compared to overall US employment decline of 5.2%).

Katrina, Rita, Wilma

Economic Drivers of P/C Insurance Exposures

13

14

(Millions of Units)

Private Housing Starts, 1990-2012F

1.481.47

1.621.641.571.60

1.711.85

1.962.07

1.80

1.36

0.90

0.550.590.590.70

1.351.46

1.291.20

1.01

1.19

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

F

12

F

Sources: U.S. Department of Commerce (history) ; Blue Chip Economic Indicators (10/2011), forecasts; Insurance Information Institute.

Weak home construction forecast implies little exposure growth likely for Homeowners insurers for the next few years,

but multi-family housing starts are picking up.

Through August 2011 we’re slightly behind this

pace

Single vs. Multi-Family Housing Starts,Annually, 2001-2011*

100

150

200

250

300

350

400

450

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

400

600

800

1000

1200

1400

1600

1800

units in multi-family buildings single family units

*seasonally-adjusted annual rate, through Sept 2011Source: US Census Bureau at http://www.census.gov/const/newresconst.pdf

Thousands of Units, Multi-Family

The slump is mainly in single-family housing,but starts of multi-family units also plunged in 2009-10.

Multi-family-unit starts are rising in 2011, but

single-family starts are still hitting lows.

Thousands of Units, Single Family

Multi-family plunge didn’t begin until 2009

Single family plunge began

in 2006

16

16.916.5

16.1

13.2

10.4

11.6

12.613.3

16.916.617.1

17.517.817.4

9

10

11

12

13

14

15

16

17

18

19

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

(Millions of Units)

The Car-Buying Slump Means Roads With More Aging Vehicles

Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11); Insurance Information Institute; USA Today 8/10/2011 edition (AAA Survey).

In what once was a “normal” 3-year span,new cars would replace about 35 million old cars,

but in 2008-10 only about 27 million old cars were replaced

2011 AAA Survey: 1 in 4 drivers have neglected

repairs and maintenance because of the economy

17

Miles Driven*, 1990–2011

*Moving 12-month totalNotes: Recessions indicated by gray shaded columns. Latest data (as of 10/24/2011) is for 12 months ended August 2011.Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

2,100

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

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

Sharp rise in gas prices, then pullback

Will the trend toward hybrid and non-gasoline-powered vehicles affect

miles driven? What about the aging and

retirement of the baby boomers?

Growth per Decade1999 vs. 1989: 27.2%2009 vs. 1999: 9.4%

Some of the growth in miles driven is due to population growth: 1999 vs. 1989: 10.5%2009 vs. 1999: 12.6%

18

Recent History of Crude Oil Prices* Monthly, 2006-2011

Note: Recession indicated by gray shaded column.

*per barrel of light, sweet crude oil for future delivery as traded on the New York Mercantile Exchange (NYMEX); last weekly close in each month, except Decembers (which are 12/31 closing prices)Sources: NYSE at http://www.nyse.tv/crude-oil-price-history.htm NBER (recession dates)

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

Dec

-05

Mar

-06

Jun-

06

Sep

-06

Dec

-06

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

2008Is this another

2007-08-like spurtin gas prices?

Gas/oil prices began rising a year before the

Great Recession started

$ per barrel

Or is it headed down again?

Do Changes in Miles Driven AffectAuto Collision Claim Frequency?

6.91

6.65

6.32

6.025.94

5.71

5.85

5.705.62 5.60 5.62

5.5

6.0

6.5

7.0

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

Pa

id C

laim

Fre

q

2750

2800

2850

2900

2950

3000

3050

Bil

lio

ns

of

Mil

es D

rive

n

Collision Claim FrequencyBillions of Vehicle Miles

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 2d Qtr. 2011, published September 30, 2011, and earlier reports.

Paid Claim Frequency = (# of paid claims)/(Earned Car Years) x 100

“Pay-As-You-Go” Auto Insurance: Fluctuations in miles driven will affect exposure

The frequency drop is slowing

*data for 2011 covers 12 months ending 6/30/2011

20

7.67 7.70 7.75 7.79

7.78

7.80 7.

86 7.92

7.92

7.94 7.97 8.02

8.03

8.04 8.

12 8.19

8.20 8.25 8.

34 8.39 8.41 8.45 8.

54 8.62

8.57 8.

65 8.72 8.78

8.74 8.77 8.81 8.84

8.67

8.69 8.73

8.75

8.63 8.66 8.

778.

78

8.72

7.50

7.75

8.00

8.25

8.50

8.75

9.00

9.25

2001

:Q1

2001

:Q2

2001

:Q3

2001

:Q4

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

Number of Private Business Establishments, 2001:Q1-2011:Q1*

*data for 2011:Q1 are preliminary Note: quarters when the economy was in recession are indicated by orange barsSources: U.S. Bureau of Labor Statistics “Quarterly Census of Employment and Wages”; Insurance Information Institute

The number of employees in new businesses is typically lowerthan the number in formerly-operating businesses that closed.

Millions No net growth in number of businessesfrom 2007:Q3 to 2011:Q1.

Catastrophe Loss Developments and Trends

21

2011 is Rewriting Catastrophe Loss and Insurance History

Number of Federal Disaster Declarations, 1953-2011*

13 1

7 18

16

16

7 71

21

22

22

02

52

51

11

11

92

91

71

74

84

64

63

83

02

2 25

42

23

15

24

21

34

27 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

18

9

43

0

10

20

30

40

50

60

70

80

90

100

53

55

57

59

61

63

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

11

*

*Through October 24, 2011. Sources: Federal Emergency Management Administration at http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

There have been 2,039* federal disaster declarations since 1953.Note that 2005 was a relatively low year for number of disaster

declarations in the 1996-2010 period,but that year included Hurricanes Katrina, Rita, and Wilma.

The number of federal disaster declarations set

a new record in 2011.

From 1953-71, the average number of declarations

per year was 16.5.

The average number from

1996-2010 was 58.4.

The average number from

1972-1995 was 31.7.

24

$8.3

$7.4

$2.6

$10.

1

$8.3

$4.6

$26.

5

$5.9 $1

2.9

$27.

5

$61.

9

$9.2

$6.7

$27.

1

$10.

6

$13.

6 $24.

0

$7.5

$2.7

$4.7

$22.

9

$5.5

$16.

9

$0

$10

$20

$30

$40

$50

$60

$70

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

US Insured Catastrophe Losses

*First three quarters of 2011 (est).Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.

First half 2011 US CAT losses already exceed losses from all of 2010. Even modest hurricane losses will put 2011 among the worst ever for CATs

CAT Losses Surged on Near- Record Tornado

Activity

($ Billions) 2000s: A Decade of Disaster

2001-2010: $202B (up 122%)

1991-2000: $91B

25

15 Costliest World Insurance Losses, 1970-2011*

Insured Losses, 2010 Dollars,$ Billions

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

$14.0 $14.9 $16.3$20.5 $20.8 $23.1 $24.9

$35.0

$72.3

$11.3$10.0$9.3$9.0$8.0$8.0

$0

$10

$20

$30

$40

$50

$60

$70

$80

ChileQuake(2010)

Hugo (1989)

TyphoonMirielle(1991)

Charley(2004)

NewZealandQuake(2011)

Rita (2005)

Wilma(2005)

Ivan (2004)

SpringTornadoes

(2011)

Ike (2008)

Northridge(1994)

WTCTerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado season

would be the 7th costliest event in global insurance

history

3 of the 11 most expensive catastrophes in world history occurred in

the past 9 months

26

P/C Insurance Industry Financial Overview

Profit Recovery Will Be Slowed by High CATs,

Low Interest Rates, Diminishing Reserve Releases

27

-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*

Soft Market Persisted in 2010 but Growth Returned: More in 2011?

(Percent)1975-78 1984-87 2000-03

*2011 figure is an estimate based on 1H data. 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.

NWP was up 0.9% in 2010

2011:1H growth

was +2.6%

29

P/C Insurance Industry Combined Ratio, 2001–2011:H1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.1 Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-M&FG was 102.2).

95.7

99.3100.8

108.0

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*

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

Cyclical Deterioration

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

30

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

11

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2011E

Reserve releases remained strong in 2010but are expected to taper off in 2011

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: Barclay’s Capital; A.M. Best.

Prior year reserve releases totaled $8.8

billion in the first half of 2010, up from

$7.1 billion in the first half of 2009

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurers. 2011 figure is estimate through first half.Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.3100.8

108.0

101.0

2.5%

7.5%7.4%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010* 2011:H1*0%

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 generated ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

-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

*

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011*

*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for H1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:H1 ROAS = 1.7% including M&FG.Sources: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2007:12.3%

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

10 Years

10 Years10 Years

2011:2.3%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

Investments

33

Interest-Based InvestmentsBenefit from Higher Inflation

Bond Yields Tend to Follow Inflation

-3%

0%

3%

6%

9%

90

91

92

93

94

95

96

97

98

99 00

01

02

03

04

05

06

07

08

09

10

11

F

12

F

CPI-U % Change U.S. Treasury 10-Year Note Yield

Sources: US Bureau of Labor Statistics (history); Blue Chip Economic Indicators, 10/11 issue (forecast)

Recession

35

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2011*

*Monthly, through September 2011 Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y10.txt 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

Yields on 10-Year U.S. Treasury Notes have been essentially

below 5% for nearly a 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 have

been essentially below 4% since January 2008.

36

Daily Yields, 10-Year U.S. T-Notes vs. Moody’s Seasoned AAAs, 2010-2011*

*through 10/20/2011Sources: Federal Reserve Board at http://www.federalreserve.gov/releases/h15/data/Business_day/H15_TCMNOM_Y10.txt and http://www.federalreserve.gov/releases/h15/data/Business_day/H15_AAA_NA.txt

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

01/0

1/10

01/2

2/10

02/1

2/10

03/0

5/10

03/2

6/10

04/1

6/10

05/0

7/10

05/2

8/10

06/1

8/10

07/0

9/10

07/3

0/10

08/2

0/10

09/1

0/10

10/0

1/10

10/2

2/10

11/1

2/10

12/0

3/10

12/2

4/10

01/1

4/11

02/0

4/11

02/2

5/11

03/1

8/11

04/0

8/11

04/2

9/11

05/2

0/11

06/1

0/11

07/0

1/11

07/2

2/11

08/1

2/11

09/0

2/11

09/2

3/11

10/1

4/11

UST 10-YrMoody's AAA

The spread between the two yields reflects confidence (or lack of it) in the economy’s prospects. A wider spread indicates worry; narrower = confidence.

We saw a slump like this in March

- August 2010

Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q21

$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

$52.9

$28.4

$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 11:1H

Investment Gains Recovered Significantly in 2010 Due to Realized Capital Gains; The Financial Crisis Caused Investment Gains to Fall

by 50% in 2008

1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2010 were the best

since 2007

37

P/C Net Income After Taxes1991–2011:H1 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

4,6

70

$4

,75

8

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$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*

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.9% 2010 ROAS = 6.5% 2011:H1 ROAS = 1.7%

P-C Industry 2011:H1 profits were down 71.6% to $4.8B vs. 2010:H1,

due to high catastrophe losses and as non-cat underwriting

results deteriorated

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 2.3% ROAS for 2011:H1, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

39

Policyholder Surplus, 2006:Q4–2011:Q2

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$556.9 $559.1

$564.7

$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:Q1*10:Q210:Q310:Q411:Q111:Q2

2007:Q3Previous Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)10:Q1: +$18.9B (+3.6%)

10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)11:Q1: +$42.9B (+8.2%)11:Q2: +37.3B (+7.1%)

Surplus as of 6/30/11 fell 1% below its 3/31/11 $564.7B record high. Further declines are likely.

*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 $0.78 of

NPW—the strongest claims-paying status in its history.

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute Online: