Why Rate?Factors Driving Rate in the

Commercial P/C Insurance Industry

Robert P. Hartwig, Ph.D., CPCUClinical Associate Professor of Finance, Risk Management & Insurance

Darla Moore School of Business ¨ University of South CarolinaRobert.Hartwig@moore.sc.edu ¨ 803.777.6782

Chubb Commercial Market ForumChicago, IL

July 10, 2019

http://moore.sc.edu

The Case for Rate: Outline n P/C Financial Overview

w History and forecasts

n Profitability and Growth Trends

n Economic Overview & Impacts on the P/C Insurance Industryw Influence on P/C exposure and premium growthw Trade wars, P/C insurance and pricing pressure

n Financial Market Performancew Interest rates, pricing and profitability

n Commercial Lines Performance Overvieww Underwriting performance and rate trends, by key line

n Catastrophe Loss Trends/Reinsurance Market Pressure

n Tort, Cyber Pressures

n Q&A

3

P/C Insurance Industry Financial Overview

CATS, Non-CAT Underwriting Losses Impacted Insurer Balance Sheets

Industry Remains Strong but Continued Strength Requires

Improved Profitability3

P/C Industry Net Income After Taxes, 1991–2019Fn 2005 ROE= 9.6%n 2006 ROE = 12.7%n 2007 ROE = 10.9%n 2008 ROE = 0.1%n 2009 ROE = 5.0%n 2010 ROE = 6.6%n 2011 ROAS1 = 3.5%n 2012 ROAS1 = 5.9%n 2013 ROAS1 = 10.2%n 2014 ROAS1 = 8.4%n 2015 ROAS = 8.4%n 2016 ROAS = 6.2%n 2017 ROAS =5.0%n 2018 ROAS = 8.0%

•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2%ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; Sources: A.M. Best, ISO.

$14,178

$5,840

$19,316

$10,870 $20,598

$24,404 $36,819

$30,773

$21,865

$3,046

$30,029

$62,496

$3,043

$35,204

$19,456 $33,522

$63,784

$55,870

$56,826

$42,924

$36,813

$59,994

$36,600

$38,501

$20,559

$44,155

$65,777

-$6,970

$28,672

-$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 14 15 16 17 18 19

Net income is up sharply in 2018 due to lower CATs

and the TCJA

$ Millions

-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 14 15 16 17 18 19F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2019F

Profitability = P/C insurer ROEs. 2011-18 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, A.M. Best, USC RUM Center.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

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

10 Years10 Years

9 Years

ROEs in 2017 plunged to their lowest levels since 2008 but

rebounded in 2018 due to lower CATs and the TCJA.

ROE

1975: 2.4%

2013 9.8%

2017 5.0%

2015: 8.4%

2019F 4.8%

2018 8.0%

6

ROE: Property/Casualty Insurance by Major Event, 1987–2019F

*Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; A.M. Best (2018E-2019F); USC RUM Center.

-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 13 14 15 16 17 1819F

P/C Profitability Is Influenced Both by

Cyclicality and Volatility

Hugo

Andrew, Iniki

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Harvey, Irma, Maria,

CA Wildfires

-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 14 15 16 17 18

P/C Insurance ROE vs. Fortune 500, 1975–2018*

*2018 Fortune 500 figure is an estimate.Profitability = P/C insurer ROEs. 2011-18 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, Fortune.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

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

ROE

1975: 2.4%

2013 9.8%

2017 5.0%

2018 8.0%

AverageFortune 500: 13.3%P/C Insurance: 9.0%

2018* 14.5%

8

Professor Hartwig’sInsurance Quiz!

Q1: Since 1950, under which President was the US P/C insurance industry the most profitable (in terms of ROE)?

8

Q2: Since 1950, under which political party has the US P/C insurance industry been the most profitable, on average (in terms of ROE)?

15.10%8.93%

8.65%8.35%8.33%8.20%

7.98%7.68%

6.98%6.97%

6.50%5.43%

5.03%4.83%4.68%

4.43%3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

CarterReagan II

NixonClinton I

G.H.W. BushG.W. Bush II

Obama IIClinton IIReagan I

Nixon/FordTruman

TrumpEisenhower IEisenhower II

G.W. Bush IObama I

JohnsonKennedy/Johnson

*Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: University of South Carolina, Risk and Uncertainty Management Center.

OVERALL RECORD: 1950-2018*

Democrats 7.61%Republicans 7.75%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950-2018*

10

P/C Insurance Industry Combined Ratio, 2001–2019E

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.; 2017 (est.) based on actual 104.1 through Q3 (Q3 combined ratio alone was 110.7). Sources: A.M. Best, ISO (2014-2016); Figure for 2017 from ISO.

95.7

99.3101.1

106.5

102.5

96.4 97.097.8

100.7101.2

103.7

99.2101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F

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

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

Cyclical Deterioration

Sharply higher CATs are driving

large underwriting losses and

pricing pressure

2019 Combined Ratio Est.101.2

11

Policyholder Surplus (Capacity), 2006:Q4–2018:Q4

Sources: ISO, A.M .Best; Center for Risk and Uncertainty Management, University of South Carolina.

($ 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 $653.4

$671.6

$673.9

$675.2

$674.2

$673.7

$676.3

$700.9

$717.0 $750.7 $781.5

$742.2

$662.0

$570.7

$566.5

$505.0

$515.6

$517.9

$400$450$500$550$600$650$700$750$800$850

06:Q4

07:Q1

07:Q2

07:Q3

07:Q4

08:Q1

08:Q2

08:Q3

08:Q4

09:Q1

09:Q2

09:Q3

09:Q4

10:Q1

10:Q2

10:Q3

10:Q4

11:Q1

11:Q2

11:Q3

11:Q4

12:Q1

12:Q2

12:Q3

12:Q4

13:Q1

13:Q2

13:Q3

13:Q4

14:Q1

14:Q2

14:Q3

14:Q4

15:Q2

15:Q4

16:Q1

16:Q4

17:Q2

17:Q4

18:Q3

18:Q4

Financial Crisis

Surplus (Capacity) as of 12/31/18 at $742.7B was still close to its

all-time record high

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 .

Drop due to near-record 2011 CAT losses

Capacity/Capital “shocks” typically do not on their own drive a sustained firming of the

pricing environment. Insurers need to generate risk-appropriate ROEs.

Surplus dropped by $8.5B or 1.1%

in 2018

Net Written Premium Growth (All P/C Lines): 2006-2019F

Sources: A.M. Best (2006-2013, 2019F), ISO (2014-18).

3.8%

0.0%

-0.4%

-4.5%

0.8%

3.2%4.2%4.3%4.2%3.9%4.1%

2.8%

4.6%

10.8%

3.6%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

06 07 08 09 10 11 12 12 13 14 15 16 17 18 19F

Total Net Written Premiums Show a Return to Trend for 2019

13

-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 15 16 17 18 19F

Net Premium Growth (All P/C Lines): Annual Change, 1971—2019F

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

*Figure is actual 2018:9M vs. 2017:9M change adjusted for affects of the TCJA of 2017. Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 18E, 19F), ISO (2014-17).

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.

2019F:3.6%2018E: 10.8%

2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2

2013: 4.4%2012: +4.2%

Outlook2019F: 3.6%2020F: 3.8%

15

Growth in Net Written Premium: Personal vs. Commercial, 2015 – 2018*

5.7%

3.1%

-1.4%

2.7%

6.6%

2.7%1.8%

4.1%

6.7%5.8%

4.8%5.8%

3.5%

1.5%

3.3%

5.3%

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

Personal Lines Predominating

Diversified Commercial LinesPredominating**

All Insurers

2015 2016 2017 2018*

Annual Change in NWP

The divergence in growth between personal and commercial lines remains large

*2018 is an estimate based on actual data through Q4:2018. Commercial lines figure has been adjusted from actual value of 19.3% to account for distortionary affects from the TCJA 2017, which impacted reinsurance utilization, largely in the commercial segment.

Source: ISO. University of South Carolina Risk and Uncertainty Management Center.

Commercial lines growth has been

much weaker than personal lines

Net Written Premium, by Line: 2017 vs 2018*

$222

.2

$82.

3

$50.

1

$39.

8

$34.

1

$26.

4

$30.

6

$67.

2

$240

.4

$88.

2

$62.

4

$43.

2

$37.

4

$30.

1

$35.

7

$74.

2

$0

$50

$100

$150

$200

$250

$300

Personal Auto Homeowners Other Liability WorkersComp

CommercialMulti-Peril

Fire & Allied CommercialAuto

All OtherLines

20172018

NWP ($Bill)

Total P&C Industry2017 = $552.8B2018 = $611.6B

Change = +10.6% (+$58.8B)

* 2018 figure is preliminary. Figure is impacted by Tax Cuts and Jobs Act of 2017.Sources: NAIC; NCCI; Risk and Uncertainty Management Center, University of South Carolina.

Commercial Lines growth in 2018 was materially

impacted by the TCJA 2017

+8.2%

+7.2% +24.6%+8.5% +9.7% +14.0% +16.7%

+10.4%

109.

411

0.2

118.

810

9.5 1

12.5

110.

210

7.6

104.

110

9.7

110.

2

102.

5 105.

491

.194

.510

4.4

100.

7 103

.810

7.3

105.

496

.396

.095

.299

.010

2.1

102.

010

2.7

102.

0

111.

1

112.

3

122.

3

90

95

100

105

110

115

120

125

90 92 94 96 98 00 02 04 06 08 10 12 14 16

18E

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2019F).

Commercial Lines Combined Ratio, 1990-2019F*Commercial lines underwriting

performance deteriorated materially in 2017 as record CATs and rising loss cost trends took there toll. Little improvement is

expected in 2018 or 2019

17

Combined Ratio, by Line: 2017 vs 2018*

103107

101

89

108

125

111

98

104

98

104 102

83

107 109 108

92

99

50

60

70

80

90

100

110

120

130

PersonalAuto

Homeowners OtherLiability

WorkersComp

CommercialMulti-Peril

Fire & Allied CommercialAuto

All OtherLines

All P&CLines

20172018

NWP ($Bill)

* 2018 figure is preliminary.Sources: NAIC; NCCI; Risk and Uncertainty Management Center, University of South Carolina.

Underwriting performance

remains challenged in

many key commercial lines

19

Merger & Acquisition Activity

M&A Activity Picked Accelerated in 2018

Many Carriers Remain Unsatisfied with Organic Growth Opportunities

19

20

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2018 (1)

$5,100

$11,534

$8,059

$30,873

$19,118

$40,032

$1,249

$486

$20,353

$425

$9,264

$35,221

$13,615

$16,294

$3,507 $6,419

$12,458

$4,685

$4,393

$6,723

$39,970

$10,665

$7,404

$17,068

$55,825

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 17

Tran

sact

ion

valu

es

0

20

40

60

80

100

120

140

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 in 2015 totaled $40B, its highest level

since 2000, but fell sharply in 2016/17 in

dollar terms

Major 2018 Deals:AIG/Validus: $5.56B

Axa/XL: $15.3BApollo/Aspen: $2.6B

21

U.S. INSURANCE MERGERS AND ACQUISITIONS:DISTRIBUTION, 1996-2018 (1)

$1,934

$2,720

$55,903

$1,633

$542

$689

$446

$60

$212

$944

$15,205

$5,812

$615 $1,727

$2,271

$4,225 $8,246

$2,581

$18,695

$4,204

$6,594

$7,085

$7$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Tran

sact

ion

valu

es

0

100

200

300

400

500

600

700

Number 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 Distribution sector in 2018 totaled $7.1B, up (7.4%) from $6.6B in 2017; The number of

deals hit a record high 614 in 2018

Major 2018 Deals:Marsh/JLT: $5.62B

(4.3B Sterling)

INVESTMENTS: THE NEW REALITY

Investment Performance Is a Key Driver of Insurer Profitability

The Fed’s New Dovish Turn, Oval Office Pressure Don’t Bode Well for Insurers

Obstacles to Growing Investment Earnings Are Mounting

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

,*Through July 9, 2019.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina

Tech Bubble Implosion

Financial Crisis

Annual Return

Energy Crisis

2019: +18.9%*2018: -6.2%

S&P 500 Index Returns, 1950–2019*

Fed Raises Rate

Stock markets rose sharply following the 2016 election and continued to rise

throughout 2017, but trade, growth concerns and rising interest rates took a toll in late

2018 and in April – early June 2019 as well

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

Property/Casualty Insurance Industry Investment Income: 2000–2018

$38.9$37.1$36.7

$38.7

$54.6

$51.2

$47.1$47.6$49.2

$48.0$47.3$46.4$47.2$46.6$48.9

$55.3

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18*

Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.7%) increase in 2015—though 2016 experienced

another decline. Up 5.1% in 2017 and 13.1% in 2018

*2018 figure is distorted by provisions of the TCJA of 2017.1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.

($ Billions)Investment income is slowly

recovering. 2018 figure overstates improvement due to

provision of the TCJA 2017

Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2018*

4.4

4.0

4.6 4.5

3.7 3.8 3.73.4

3.7

3.2 3.1 3.13.3

4.6

4.23.9

2.5

3.0

3.5

4.0

4.5

5.0

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 have pushed up some yields, albeit

quite modestly. Shrinking of Fed’s balance sheet should help too.

Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017 figure is from ISO.

(Percent)

Investment yield in 2017 was down about 150 BP

from pre-crisis levels

26

Professor Hartwig’sInsurance Quiz #2!

Q: All else equal, when interest rates fall, the price of insurance:

a. Will generally fallb. Will generally risec. Will likely remain approximately unchangedd. There is no meaningful correlation between

interest rates and insurance pricing26

INTEREST RATE ANDINFLATION TRENDS

Persistently Low Interest Rates, Elevated Medical Inflation Exert

Pressure on P/C Insurance Rates

US Treasury Security Yields:A Long Downward Trend, 1990–2019*

*Monthly, constant maturity, nominal rates, through June 2019.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 '15 '16 '17'18 '19

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year US Treasury Notes have been essentially

below 5% for more than 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.

Fed tightening has pushed ST rates higher in late 2018,

but fears of a weakening economy have narrowed the

2-10 yield spread substantially. These factors

will pressure insurer earnings and thus rates in

the months and years ahead.

http://www.federalreserve.gov/releases/h15/data.htm

Interest Rate Forecasts: 2019F–2025F

2.8%2.5% 2.6%

3.1% 3.2%3.4% 3.5% 3.5%

2.4% 2.2%2.5% 2.6% 2.7%

2.8%

0%

1%

2%

3%

4%

19F 20F 21F 22F 23F 24F 25F 19F 20F 21F 22F 23F 24F 25F

A full normalization of interest rates is unlikely until the mid-2020s, nearly 20 years after the onset of the financial crisis.

Yield (%)

Sources: Blue Chip Economic Indicators (6/19 for 2019 and 2020; for 2021-2025 3/19 issue); University of South Carolina.

3-Month Treasury 10-Year TreasuryThe Fed’s pause in

rate hikes, its decision to

maintain large bond holdings and a weaker global economy are suppressing

interest rates—again. Significant political pressure

from President Trump could be a

factor as well. The resumption of monetary policy easing creates pressure on p/c insurance rates.

Annual Inflation Rates, (CPI-U, %),1990–2020F

2.8 2.6

1.51.9

3.33.4

1.3

2.52.3

3.0

3.8

2.8

3.8

-0.4

1.6

3.2

2.11.51.6

0.1

1.3

2.12.4

1.92.1

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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 15 16 17 18 19F20F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 6/19 (forecasts).

Inflation remains remarkably tame despite a tight US labor market, modest economic growth, rising energy prices, tariff-induced price increases and a

rapidly rising federal budget deficit.

Annual Inflation Rates (%)

Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the

commodity bubble reduced inflationary pressures in 2009/10

Inflationary expectations are

consistent with the Fed’s 2% target,

but trade war could increase

inflationary pressure

Trade War Alert

A sustained trade war with China could

increase inflation by 0.1 to 0.4 points.

Mexico tariffs will intensify inflationary pressures

-1%

0%

1%

2%

3%

4%

5%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Change in Medical CPI CPI-All Items

Medical Cost Inflation vs. Overall CPI, 1995–2018

Sources: US Bureau of Labor Statistics.

Average Annual Growth Average1995 – 2018

Healthcare: 3.4%Overall: 2.2%

Medical inflation typically exceeds inflation in the

overall economy

THE ECONOMY

The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure

Base Across Most Lines

The Links Between the Economy and the P/C Insurance Industry Are Strengthening

Length of US Business Cycles, 1929-Present*

43

13 8 11 10 8 10 1116

616

8 819

50

80

3745

39

24

106

36

58

12

92

120

73

121

0102030405060708090

100110120130

Aug.1929

May1937

Feb.1945

Nov.1948

July1953

Aug.1957

Apr.1960

Dec.1969

Nov.1973

Jan.1980

Jul.1981

Jul.1990

Mar.2001

Dec.2007

ContractionExpansion Following

Duration (Months)

Month Recession Started

Average Duration*Recession = 13.4 MonthsExpansion = 63.6 Months

* As of July 2019, inclusiveSources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.

The current economic

expansion (as of July 2019)

is now the longest in US history (began

July 2009)

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 6/19; Center for Risk and Uncertainty Management, University of South Carolina.

2.7%

1.8%

-1.3%

-2.8%

2.5%

2.2% 2.7%

4.5%

0.8% 1.4%3.5%

2.1%

1.2%3.1% 3.2%

2.9%

2.2%4.2%

3.4%

2.2% 3.1%

1.7% 1.9%

1.8%

1.7%

1.6% 1.7%1.6% 2.0%

1.8%

4.1%

1.1% 1.8% 2.5% 3.6%

3.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

2000

2001

2002

2003

2004

2005

2006

2007

20

0820

0920

1020

1120

1220

1320

1420

1516

:1Q

16:2

Q16

:3Q

16:4

Q17

:1Q

17:2

Q17

:3Q

17:4

Q18

:1Q

18:2

Q18

:3Q

18:4

Q19

:1Q

19:2

Q19

:3Q

19:4

Q20

:1Q

20:2

Q20

:3Q

20:4

Q

Demand for Insurance Should Increase in 2019 as GDP Growth Continues at a Steady Pace and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

“Great Recession”

began in Dec. 2007

Financial Crisis

2018 GDP forecasts were revised upward by ~0.4%

due to tax reform, but effects wane in 2019

Tax cuts help jolt growth from early 2018 to Q1 2019, but effects are waning. Trade war, weaker global growth are adversely

affecting US GDP growth in 2019/20.

Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; I.I.I.

-6%

-4%

-2%

0%

2%

4%

6%

8%

2008:Q1

2008:Q3

2009:Q1

2009:Q3

2010:Q1

2010:Q3

2011:Q1

2011:Q3

2012:Q1

2012:Q3

2013:Q1

2013:Q3

2014:Q1

2014:Q3

2015:Q1

2015:Q3

2016:Q1

2016:Q3

2017:Q1

2017:Q3

2018:Q1

2018:Q3

DWP y-o-y change y-o-y nominal GDP growth

Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably

linked to economic performance.

The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2018:Q4

Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

NFIB Small Business Optimism Index:Jan. 1988–May 2019

Source: National Federal of Independent Business; Wells Fargo Research.

Outlook: Small businesses increasingly concerned about the future

Trade wars (actual and threatened actions)

are introducing massive uncertainty in

to the markets

Small Business Optimism took a big hit in late 2018/early 2019 on fears of a greater

economic uncertainty (esp. trade war fears and concerns over

rising interest rates). Tax reform, reduced

regulations and strong sales have driven

investment, hiring and exposures.

Consumer Confidence Index: Jan. 1987– June 2019

Source: The Conference Board; Wells Fargo Research.

Outlook: Consumer confidence was shaken by financial volatility in late 2018/early 2019—but confidence is rebounding. Consumers are optimistic about the future, which is consistent with expectations for stronger economic growth (consumers account for nearly 70% of all

spending in the economy). Should positively influence growth of insurable exposures.

The Conference Board’s Consumer

Confidence Index stood at 121.5 in June, down from its post-recession high in Q3 2018 and the largest monthly decline

since 2015

New Private Housing Starts, 1990-2025F

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 0.610.78 0.92 1.00 1.11

1.17 1.20 1.26

1.23 1.26 1.34 1.37 1.41 1.45

1.45

1.351.46

1.29

1.20

1.011.19

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 13 14 15 16 17 18 19F20F21F22F23F24F25F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (6/19 for 2019-20; 3/19 for 2021-25F); University. of South Carolina, Center for Risk and Uncertainty Management..

Insurers Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” 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, and demographics should continue to stimulate new

home construction, but higher mortgage rates and a slowing

economy will slow the pace of growth

(Millions of Units)

39

16.9

16.5

16.1

13.2

10.411.612.7

14.4 15.5 16.4 17.4

17.5

17.1

17.2

16.7

16.4

16.2

16.2

16.4

16.5

16.7

16.7

16.9

16.617.117.517.8

17.4

910111213141516171819

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F20F 21F22F22F 23F24F25F

(Millions of Units)

Auto/Light Truck Sales, 1999-2023F

New auto/light truck sales fell to the

lowest level since the late 1960s.

Job growth and improved credit market conditions boosted auto

sales to near record levels by 2015/16

Truck, SUV purchases remain strong as smaller car sales slump

Yearly car/light truck sales are slowing slightly, as demand tapers. But shifting consumer preferences for more expensive trucks, SUVs and crossovers will

contirbue continued exposure growth. PP Auto premium might grow by 3.5% - 5%.

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (6/19 for 2019-20; 3/19 for 2021-25F); Univ. of South Carolina, Center for Risk and Uncertainty Management.

US Unemployment Rate Forecast: 2007:Q1–2020:Q4

4.5%

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%

6.6%

6.2%

6.1%

5.7%

5.6%

5.4%

5.2%

5.0%

4.9%

4.9%

4.9%

4.7%

4.7%

4.4%

4.3%

4.1%

4.1%

3.9%

3.8%

3.8% 3.9%

3.7%

3.6%

3.6%

3.6%

3.6% 3.7%

3.7%

9.6%

4%

5%

6%

7%

8%

9%

10%

11%

07:Q1

07:Q2

07:Q3

07:Q4

08:Q1

08:Q2

08:Q3

08:Q4

09:Q1

09:Q2

09:Q3

09:Q4

10:Q1

10:Q2

10:Q3

10:Q4

11:Q1

11:Q2

11:Q3

11:Q4

12:Q1

12:Q2

12:Q3

12:Q4

13:Q1

13:Q2

13:Q3

13:Q4

14:Q1

14:Q2

14:Q3

14:Q4

15:Q1

15:Q2

15:Q3

15:Q4

16:Q1

16:Q2

16:Q3

16:Q4

17:Q1

17:Q2

17:Q3

17:Q4

18:Q1

18:Q2

18:Q3

18:Q4

19:Q1

19:Q2

19:Q3

19:Q4

20:Q1

20:Q2

20:Q3

20: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 (6/19 edition); Risk and Uncertainty Management Center, University of South Carolina.

Optimistic scenarios put unemployment as low as 3.4% by Q4 2019 and 3.2% in Q4 2020, whereas pessimistic scenarios put it as high

as 4.4%, reflecting increased economic uncertainty ahead.

The unemployment rate is expected to remain below 4%

through 2020.

At 3.6%, the unemployment

rate is at its lowest reading

in 50 years.

Number of Unemployed Persons per Job Opening, Feb. 2003—Feb. 2019*

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

0

1

2

3

4

5

6

7

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

At the height of the recession,

there were nearly 7 job seekers for

every one opening

Today, there are just 0.9 job

seekers for every one opening,

down from 1.1 a year ago

Unemployed Persons per Job Opening

http://www.bls.gov/jlt/

US TRADE POLICY

How Will the P/C Insurance Industry Be Impacted by

Escalating Trade Disputes?

Trade Actions and Workers Compensationn Major Trade Actions Announced So Far

w March 2018: Steel and Aluminum– 25% tariff on foreign steel, 10% tariff on imported aluminum

w April 2018: $50B in tariffs announced on some 1,300 Chinese products w Sept. 2018: 10% tariffs on $200B worth of Chinese products

– China retaliates immediate with highly targeted tariffs on American products

w May 10, 2019: 10% tariffs à 25% on $200B on Chinese products– Threat to implement 25% on remaining $325B not currently subject to tariff– China retaliates with $60B in tariffs on US goods

w May 31: Tariffs of Up to 25% Threatened Against all $370B in Mexican Imports– Agreement reached June 8; Tariffs tabled for now but could pose future threat

n Potential Impacts: Job and Income Losses Could Be Severe if Targeted Countries Retaliatew Hundreds of thousands of jobs would be lost across many industries

w P/C premium shrinkage would be measured in the billions as hundreds of billions as exposure growth slows or shrinks in key lines

44

Trade Actions and P/C InsurancenPotential Impacts on P/C Insurance

w Personal Auto repair costs likely to rise by 2.7% or about $3.4B annually, assuming 25% tariffs on imported parts

w Tariffs against Mexico could have cost insurers/consumers up to $5B– Mexico is the largest source of imported auto parts (~40% or $60B)

w Analogous impacts in Commercial Autow Tariffs on Canadian lumber is raising construction costs

Tariffs will increase claims costs by

billions of dollars—impact personal

auto more than any other line

Source: Available at: http://news.ambest.com/articlecontent.aspx?refnum=276836&altsrc=43

http://news.ambest.com/articlecontent.aspx%3Frefnum=276836&altsrc=43

Who Bears the Cost of Tariffs on Chinese Goods?5 Possibilities1. Importer Gets Chinese Firms to Agree to Pay Tariffs

w Chinese firm absorbs full cost of tariff and makes due with lower profits

2. Chinese Firms Cut Costs to Partially Offset Impact of Tariffsw Reducing costs will allow the importer to moderate price increase to consumer

3. Importer Negotiates Discount on Chinese Productsw Results in only part of price increase being passed along to consumer

4. Importer Finds Alternatives to Chinese Productionw Benefits exporters in other countries; Helps limit domestic price increase

5. Pass Costs Through Cost of Tariff to Consumerw Buyer of product bears the full price increase due to the tariff

Note: As a practical matter, some combination of all 5 take placewThis includes insurers and ultimately policyholders

46

Catastrophe Loss Update: Major Driver of Rate Pressure

CAT Losses in 2017-2018 Were Among the Costliest Ever for US Insurers

Hurricanes, Wildfires and Floods Have Exacted a Huge Toll

46

U.S. Inflation-Adjusted Cat Losses

*2018: Inflation-adjusted estimate, subject to change. 2010s is average of 2010 to 2018.Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.

4037

79

104

50

1980s:$5 B

1990s: $15 B

2000s: $25 B2010s: $35 B

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

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 15 16 17 18*

Bill

ion

s, 2

01

8 $

Average forDecade Hurricane

Andrew WTC

Katrina, Rita, Wilma

2018 – Third worst year for U.S. Insured Catastrophe Losses. Average Insured Loss per Year for 1980-2018 is $19.3 B.

Harvey, Irma, Maria

48

US Insured Catastrophe Losses by Decade: 1980s – 2010s*

$15

$25

$35

$5

$33

$19

$9

$2$0

$5

$10

$15

$20

$25

$30

$35

$40

1980s 1990s 2000s 2010s 1980s 1990s 2000s 2010s

Serious efforts to mitigate against climate risk must be led by government at all levels. Requires enormous long-term infrastructure

investments that funded primarily through debt

($ Bill)

*2010s figures is the average of the years 2010-2018.Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.

Not Inflation Adjusted Inflation-Adjusted

Inflation-adjusted

insured CAT losses are

rising by $10 billion each

decade

49

Top 8 US Catastrophe Losses of 2018, by Insured Loss

(Insured Losses, 2018 Dollars, $ Billions)*

$10.0

$12.5

$5.0$4.0

$2.0$1.6$1.6$1.0

$0

$2

$4

$6

$8

$10

$12

$14

Colorado Hail ConvectiveStorms (March)

Winter Storms(March)

ConvectiveStorms (May)

Woolsey Wildfire HurricaneFlorence

HurricaneMichael

Camp Wildfire

Insured CAT losses in the US totaled ~$40 billion in 2018

.Sources: PCS; Munich Re; Reinsurance News: https://www.reinsurancene.ws/insurance-industry-losses-events-data/

https://www.reinsurancene.ws/insurance-industry-losses-events-data/

50

Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1

(Insured Losses, 2017 Dollars, $ Billions)*

$9.3 $9.7 $10.0$11.7$14.2$14.2$15.9

$18.0$19.8$21.9

$25.3$26.0$27.1

$51.6

$5.9 $6.0 $7.1 $7.5 $7.9 $8.3

$0

$10

$20

$30

$40

$50

$60

Jeanne(2004)

Frances(2004)

Rita (2005)

Torn./T-Storms (2011)

Torn./T-Storms (2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Michael(2018)

Wilma(2005)

Camp Fire(2018)

Ike (2008)

Harvey (2017)

Irma (2017)

Sandy(2012)

Maria (2017)

Northridge(1994)

9/11 (2001)

Andrew(1992)

Katrina(2005)

Harvey, Irma and Maria combined caused an

estimated $55B in privately insured losses in the US

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004—5 of those in 2017/18

*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.

51

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1997–20161

0.2%2.0%7.0%

5.9%

6.7%

39.9%

38.2%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2016 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, $161.1

Fires (4), $8.4

Events Involving Tornadoes (2), $168.1

Winter Storms, $28.2

Terrorism, $25.0

Other Wind/Hail/Flood (3), $29.7

Other (5), $0.8

Wind losses, by far, cause the most

catastrophe losses, even if hurricanes/TS

are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1997-2016

totaled $421.2B, an average of $21.1B per year or $1.76B

per month

Winter storm losses were much above average in 2014/15 pushing

this share up

52

0

50

100

150

200

250

300

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 15 16 17 18 19

(Percent)

US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions

Post-Andrew surge

US Property Catastrophe Rate-on-Line Index: 1990 – 2019*

*As of January 1 each year.Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index

Post-9/11 Adjustment

Post Katrina, Rita, Wilma

period

Post-Ike adjustment Adjustment

following record tornado losses in 2011 and Sandy in

2012

Record CATs in 2017 and high CAT losses in 2018

pressured US reinsurance prices in recent years (+8%

in 2018, +2.6% in 2019)

http://www.artemis.bm/us-property-cat-rate-on-line-index

53

Commercial Lines Growth, Underwriting Performance

& Pricing Cyclicality

Pricing Pressures Are Intense but Rational

53

109.

411

0.2

118.

810

9.5 1

12.5

110.

210

7.6

104.

110

9.7

110.

2

102.

5 105.

491

.194

.510

4.4

100.

7 103

.810

7.3

105.

496

.396

.095

.299

.010

2.1

102.

010

2.7

102.

0

111.

1

112.

3

122.

3

90

95

100

105

110

115

120

125

90 92 94 96 98 00 02 04 06 08 10 12 14 16

18E

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2019F).

Commercial Lines Combined Ratio, 1990-2019F*

Commercial lines underwriting performance deteriorated

materially in 2017 as record CATs and rising loss cost trends took there toll. Little improvement is

expected in 2018 or 2019

54

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19F

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%

Post-9/112002: 22.4%

Great Recession:2009: -9.0%

ROE

2019F: +3.1%

Commercial Lines NPW Premium Growth:1975 – 2019F

Recessions:1982: 1.1%

Commercial lines is prone to far more cyclical volatility that

personal lines.

1988-2000: Period of

inter-cycle stability

Commercial lines premium

growth has been sluggish

for years, reflecting weak

pricing environment.

Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.

Post-Hurricane Andrew Bump:

1993: 6.3%

Post Katrina Bump:

2006: 7.7%

2016: -1.1%

2018: +10.2%

56

CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2019:Q1*

-0.1%

0.9%2.7% 4.4%

4.3%

3.9% 5.0% 5.2%

4.3%

3.4%

2.1%

1.5%

-0.5%

0.1%

-0.7%

-2.3%

-3.3%

-3.1%

-2.8%

-3.7%

-3.9%

-3.2%

-3.3%

-2.5%

-2.8% -1.3%

0.3% 1.7%

2.4% 3.5%

-2.9%

1.6%

1.5%

-16%

-11%

-6%

-1%

4%

9%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

*Latest available.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; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Largest increase since 2013(Percent)

Renewals turned positive in late 2011

in the wake of record tornado

losses and Hurricane Sandy

Poor results in 2017/18 may seem to have exerted enough pressure on markets to push overall rates up by +3.5% as

of Q1 2019

57

Change in Commercial Rate Renewals, by Line: 2019:Q1

Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

2.4% 2.6% 2.6% 2.8%3.2% 3.3%

5.9%

8.8%

-3.3%

0.3% 0.3% 0.5%1.1%

2.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Workers

Comp

Cyber

Surety

Terrorism

Marine

General

Liability

Business

Interruption

EPL

Construction

Flood

D&O

Umbrella

Commercial

Property

Commercial

Auto

Commercial Property, Business Interruption,

Flood are reflecting record CAT losses and

pressure from reinsurance markets

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

Commercial Auto saw the largest renewals

in 2018-19

Commercial Auto Combined Ratio: 1993–2019F

112.1

112.0

113.0

115.9

102.7

95.2

92.9

92.1

92.4 94.1 96.8 99.1

97.8103.4 106.8

106.7

103.3 108.8

110.5

111.1

112.9

113.3118.1

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 12 13 14 15 16 17 18E19F

Commercial Auto Results Are Challenged as Rate Gains Have Yet to Fully Offset Adverse Frequency and Severity Trends

58Sources: A.M. Best (1990-2019F); Center for Risk and Uncertainty Management, University of South Carolina.

Workers Compensation Operating Environment

59

Workers Comp Results Have Improved Substantially in Recent YearsCan Gains Be Maintained?

59

Workers Compensation Combined Ratio: 1994–2018P

102.0

97.0 100.0

101.0

112.6

108.6

105.1

102.7

98.5 103.5

104.5 110.6 115.0

115.0

109.0

102.0

100.0

94.0

94.0

89.0

84.0

121.7

107.0115.3

118.2

80859095100105110115120125130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

Workers Comp Is an Example of a Line that Was Recently Restored to Health Through the Return of Rate Adequacy as

Well as Declining Claim FrequencySources: A.M. Best (1994-2009); NCCI (2010-2018P) and are for private carriers only.. 60

WC results have improved markedly since 2011. The 2018 combined ratio is the

best in at least 80 years

Workers Compensation Premium: Down in 2017 After 6 Years of IncreaseNet Written Premium

31.0

31.3

29.8

30.5

29.1

26.3

25.2

24.2

23.3

22.3 25

.0

26.1 29

.2 31.1 34

.7 37.8

38.6

37.6

33.8

30.3

29.9 32

.3 35.1 36.9 38.5

39.7

40.1

39.8

35.3

35.7

34.3 35.4

33.6

30.1

28.5

26.9

25.9

25.0 2

8.6 3

2.1

37.7

42.3

46.5

47.8

46.5

44.3

39.3

34.6

33.8 3

6.4 39

.5 41.8 44

.2 45.5

45.6

45.0

0

10

20

30

40

50

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 15 16 17p

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

Pvt. Carrier NWP growth was -1.3% in 2017, +0% in 2016,

+2.9% in 2015, +4.3% in 2014, +5.1% in 2013 and 8.7% in 2012

$ Billions

Calendar Yearp PreliminarySource: NCCI from Annual Statement Data.

Includes state insurance fund data for the following states: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT.Each calendar year total for State Funds includes all funds operating as a state fund that year.

Workers Compensation Lost-Time Claim Frequency Declined Again in 2018

62

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 -4.9

10.6

-3.9

-5.8

-4.0-3

-5.1-6.2

-4.8

-1.0

3.6

-0.9

-10-8-6-4-202468

1012

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

IndicatedAdjusted*

Percent

Accident Year*Adjustments primarily due to significant audit activity.2017p: Preliminary based on data valued as of 12/31/2017.Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible policies; 1994-2017: Based on data through 12/31/17. Data for all states where NCCI provides ratemaking services, excluding WV.Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level

Average Annual Change = –3.5%(1994–2016)

$9.8$9.5$9.2$9.7$9.7$10.3$11.5$12.5$13.6$14.9$16.4$16.9$17.5

$22.1$22.2

$21.8$21.6

$22.6$22.8$22.9$23.9$24.6

$22.3$18.1$17.6

$19.1$20.8

$21.6

-0.9%

-2.7%

+0.5%

+8.3%

+0.9%

+5.5%

+2.8%

+0.6%

+3.6%

+3.0%

+10.1%

+9.6%

+8.8%

+8.7%

+11.7%

+5.9%

+1.7%

+4.9%

-2.8%

-3.1%

+1.0%

+6.8%

5

7

9

11

13

15

17

19

21

23

25

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

IndemnityClaim Cost ($ 000s)

Accident Year

Workers Comp Indemnity Claim Costs: Sharper Increase in 2018

Average indemnity costs per claim were up 3% in

2018 to $24,600

Average Indemnity Cost per Lost-Time Claim

+3%

+4.4

%

Cumulative Change = 151%(1991-2018p)

2018p: Preliminary based on data valued as of 12/31/2018.1991-2017: Based on data through 12/31/2017, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

+0.4

%

+1.3

%+3

.2%

$8.1$8.2$8.1$8.8$8.9$9.6$10.9$11.8$13.0$13.9$15.7$17.0$18.3

$24.2$25.2

$25.8$26.0

$27.4$27.2$27.6$28.7$28.9

$26.5$20.5$19.2

$21.7$22.9

$25.2

0.04

0.04

+3.7

+1.9

+0.8%

-0.2%

+4.2%

+5.6% +2.4%

+5.5%

+7.0%

+4.7%

+8.1%

+7.9%

+13.6%

+6.7%

+10.2%

+8.3%

+10.1%

+7.4%

+5.1%

+9.0%

+2.1%

+1.3%

+6.8%

+5.8%

0

5

10

15

20

25

30

35

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

MedicalClaim Cost ($ 000s)

Accident Year

Workers Comp Medical Claim Costs: Pace of Increase Decelerated in 2018

Average indemnity costs per claim were up just 1% in 2018 to $28,900, following a sharp 4.1% increase in 2017

Average Medical Cost per Lost-Time Claim

+1%

+4.1

%

Cumulative Change = 257%(1991-2018p)

2018p: Preliminary based on data valued as of 12/31/2018.1991-2017: Based on data through 12/31/2017, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

-1.0

%

+1.5

%

Tort Environment, Cyber Pressure

65

The Tort Environment Remains a Perpetual Challenge for Insurers

Cyber: Learning by Doing

65

66

The Nation’s Judicial Hellholes: 2017 – 2018

Source: American Tort Reform Association; Risk and Uncertainty Management Center, Univ. of South Carolina.

Florida

IllinoisCook County

Madison County

Louisiana

Watch Listn Baltimore, MDn Georgian Newport News, VAn OR Supreme Courtn PA Supreme Courtn West Virginia

Dishonorable Mention

n CT Supreme Courtn Governor of MNn WI Appeals Court

California

NYCAsbestos Litigation

St. Louis Philadelphia

New Jersey

Average Jury Awards, 1999 - 2016

$725 $747$756

$800 $799

$1,018$1,022

$950

$1,077$1,046

$654

$806

$1,098

$1,010$1,042

$1,132

$1,355

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015 2016

Source: Jury Verdict Research; Risk and Uncertainty Management Center, Univ. of South Carolina.

The average jury award reached an all-time record high in 2016.

Shareholder Class Action Lawsuits*

Source: Stanford University School of Law (securities.stanford.edu); Risk and Uncertainty Management Center, Univ. of South Carolina.

164 202

163231

188

111173241

209 216

498

266

227 238

182

119 176222

168

175 188

151 165

168 208271

412

403

0

100

200

300

400

500

600

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Shareholder litigation is surging, in part due to suits associated with M&A activity. Major

implications for D&O coverage.

Data Breaches 2005-2018, by Number of Breaches and Records Exposed

# Data Breaches/Millions of Records Exposed

Source: Identity Theft Resource Center.

157321

446

656498

419 447

1091

1632

1244

662783 780

619

197.6

127.7

16.2

222.5

66.9

19.135.7

22.9 17.3

87.9 85.6

177.9

366

446.5

100

300

500

700

900

1100

1300

1500

1700

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180

50

100

150

200

250

300

350

400

450

# Data Breaches # Records Exposed (Millions)

Millions

69

The number of data breaches and

records exposed is generally rising

Summary

n P/C Insurance Industry Remains Strong, but…

n ROEs Remain Below Risk-Appropriate Levels

n Combined Ratios in Many Key Commercial Lines > 100

n Low Interest Rates Preclude Cash Flow Underwriting

n Implies that Pressure is Primarily On Rate (and Expense Management)

n High Catastrophe Losses, Tort Environment, Politics Pressuring Rates Too

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email me at robert.hartwig@moore.sc.edu

71

http://moore.sc.edu