U.S. Property/Casualty Review Previebillion at year-end 2014 and USD 724.9 billion at year-end 2015, increases of 6.2% and 2.0%, respectively. A.M. Best does not include estimates

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BEST’S SPECIAL REPORTOur Insight, Your Advantage.

Analytical ContactJennifer Marshall, Oldwick+1 (908) 439-2200, Ext. [email protected]

Editorial ManagementRick Micchelli

U.S. P/C Industry Expected to Produce 2nd Consecutive Underwriting Profit The U.S. property/casualty (P/C) industry is expected to post a second consecutive year of underwriting profitability in 2014, despite increased catastrophe losses and reduced benefit from favorable development of prior years’ loss reserves. For 2014, A.M. Best estimates the industry combined ratio to be 97.2, a 0.8 point deterioration from 96.4 in 2013 (see Exhibit 1). Growth in net premiums written (NPW) fell to 3.9% in 2014 from 4.4% in each of the two prior years, with most lines of insurance posting lower NPW growth driven by a moderation in rate increases, particularly in the second half of the year (see Exhibit 2).

Pressure on operating and net income from low investment yields continues to hamper results, with the industry’s net income expected to decline 10.5% to USD 55.2 billion in 2014 on lower underwriting income and capital gains (see Exhibit 3). With realized capital gains declining and net investment income up just slightly on a larger invested asset base, pressure on insurers to remain vigilantly focused on underwriting results to drive returns is unabated.

Returns on revenue and equity declined in 2014, reflecting reduced net income and the industry’s increased capital base, which is projected to be at new record levels of USD 710.6 billion at year-end 2014 and USD 724.9 billion at year-end 2015, increases of 6.2% and 2.0%, respectively. A.M. Best does not include estimates of realized or unrealized capital gains in its 2015 projection.

For 2015, the combination of forecasted catastrophe losses returning to a normalized level, a reduction in rate increases in virtually all lines and a lower amount of favorable development of prior years’ loss reserves is expected to result in another modest deterioration in underwriting performance, with the industry combined ratio increasing to 99.1. If this forecast proves correct, it would mark the first time since the early 1970s that the industry’s

U.S. Property/Casualty

Review & PreviewFebruary 9, 2015

Exhibit 1U.S. Property/Casualty – Financial IndicatorsExcludes mortgage and financial guaranty segments.

Actual Estimates

2009 2010 2011 2012 2013 2014E 2015PChange in Net Premiums Written (%) -3.6 0.9 3.3 4.4 4.4 3.9 2.9Change in Surplus (%) 10.8 8.9 -1.3 6.3 10.7 6.2 2.0Combined Ratio (Reported) 99.7 101.1 106.5 102.5 96.4 97.2 99.1 Less: U.S. Catastrophe Losses1 3.4 4.5 9.4 8.0 3.9 4.4 4.9 Less: A&E Losses 0.6 0.9 0.6 0.6 0.7 0.6 0.6Combined Ratio (Normalized) 95.7 95.7 96.5 94.0 91.9 92.2 93.7 Less: Development of Prior Years’ Core Loss Reserves2 -3.3 -3.3 -3.6 -3.1 -3.5 -2.5 -1.6Accident Year Combined Ratio (Normalized) 99.0 98.9 100.1 97.1 95.4 94.7 95.2Change in Net Investment Income (%) -6.0 -1.2 2.8 -1.9 -1.4 3.0 0.3Net Investment Yield (%) 4.0 3.7 3.7 3.6 3.4 3.3 3.2Pre-tax Return on Net Premiums Earned (ROR) (%) 12.0 10.2 5.2 8.1 13.1 11.9 10.4After-Tax Return on Surplus (ROE) (%) 6.8 7.5 4.7 6.5 9.2 7.8 5.8Net-Premiums-Written-to-Surplus-Ratio 0.8 0.7 0.8 0.8 0.7 0.7 0.7E=Estimated, P=ProjectedFigures may not add due to rounding1 2009-2013 catastrophe losses based on A.M. Best data; 2014-2015 are A.M. Best estimates.2 Negative number indicates favorable development of prior years’ core loss reservesSource: A.M. Best data & research

Underwriting profits are expected for 2014 and 2015.

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Special Report U.S. Property/Casualty

A Note to ReadersWelcome to A.M. Best Co.’s 2015 Review & Preview report for the insurance industry. This report reflects A.M. Best’s official view, based on interaction with management teams of insurance companies and other authoritative sources.

Although the US economy is well positioned for further growth, the insurance industry still faces multiple challenges. The prolonged low interest rate environment has driven insurers to reallocate capital to higher growth products and markets. Alternative forms of capital continue to take market share from traditional insurance and reinsurance companies. In addition, regulatory burdens and risk management challenges from evolving issues such as cyber risk are looming concerns.

A.M. Best remains committed to understanding the emerging challenges insurance organizations face in their markets. The three sector-specific editions of this report more thoroughly examine the U.S. insurance industry:

• The U.S. property/casualty (P/C) industry is expected to post a second consecutive year of underwriting profitability for 2014. While these results, as well as 2015projections, are positive, they are offset by overarching segment issues. For the commercial lines segment, A.M. Best has continuing concerns with the ultimate adequacy of loss reserves; increasing competition driven by technological advances and abundant capital; and the poor investment environment. The reinsurance sector remains well capitalized, but compressed investment returns and underwriting margins are straining profitability and ultimately will weigh on financial strength. Equally important is the continued emergence of new forms of competition in the U.S. (and global) reinsurance segments. Conversely, personal lines writers have skillfully managed weather and catastrophe exposures through rates, underwriting actions and coverage revisions. Accordingly, the outlooks for the commercial and reinsurance segments remain negative, while the personal lines segment remains stable for 2015.

• The U.S. life/annuity sector rating outlook remains stable, supported by a benign credit environment, the effects of higher equity markets, high risk-adjusted capitalization and stable earnings. Nevertheless, the sector is also struggling with low interest rates, as well as tepid premium growth, regulatory uncertainty and subpar returns on some legacy blocks of business.

• The U.S. health insurance sector is adjusting to the Patient Protection and Affordable Care Act (ACA), which has materially affected the marketplace. We are actively monitoring the establishment of health Co-ops, which face a challenging road to profitability. A.M. Best’s rating outlook for the segment remains stable, however, as to date insurers have generally managed well throughout the ACA’s implementation.

As part of our commitment to open communication, we continue to issue regular updates to our rating methodology. To foster transparency with all our constituents, we will continue to significantly increase the number of Best’s Briefings, Special Reports and webinars. These communications illustrate the potential impact of evolving issues on our ratings.

During the past year, all of these reports were included in our analytical publication, Best’s Journal, a cumulative business resource that provides insight from A.M. Best’s perspective.

I hope you find this year’s Review & Preview publication to be valuable for learning more about our views on both the qualitative and quantitative issues that impact the insurance industry. Never hesitate to share your thoughts and concerns with me or our staff.

– Matthew C. Mosher, Senior Vice President - Rating Services

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underwriting has been profitable in three consecutive calendar years. With interest rates expected to remain well below long-term averages, a modest decline in the investment yield is anticipated in 2015, driven by lower rates on reinvestment of funds.

As discussed in the individual segment sections, A.M. Best maintains a negative outlook on the commercial and reinsurance segments, while the outlook for personal lines is stable. The negative outlook on the commercial segment reflects A.M. Best’s continuing concern with the ultimate adequacy of loss reserves; increasing competitive pressures driven by enhanced use of technology and availability of capital; and the poor investment environment, with investment yields continuing to decline. For the reinsurance segment, A.M. Best’s view is that the global reinsurance industry remains under significant pressure due to rate decreases that have been driven by a substantial inflow of capital from nontraditional sources, including hedge funds.


Exhibit 2U.S. Property/Casualty – Combined Ratio ComponentsExcludes mortgage & financial guaranty segments.

Net Premiums

Written (USD

Billions)

Net Premiums

Written Growth (%)

Loss Ratio (%)

Loss-Adjustment

Expense Ratio

Under-writing

Expense Ratio

Dividend Ratio

Combined Ratio

2009 424.2 -3.6 58.2 12.5 28.4 0.6 99.72010 428.2 0.9 59.4 12.6 28.5 0.7 101.12011 442.4 3.3 65.3 12.6 28.0 0.6 106.52012 461.9 4.4 61.3 12.4 28.2 0.6 102.52013 482.5 4.4 55.7 12.0 28.0 0.7 96.42014E 501.1 3.9 57.3 12.3 27.0 0.6 97.22015P 515.5 2.9 58.5 12.5 27.5 0.6 99.1E=Estimated, P=ProjectedSource: A.M. Best data and research

Exhibit 3U.S. Property/Casualty – Surplus RecapExcludes mortgage & financial guaranty segments.(USD Billions)

Actual Estimates

2009 2010 2011 2012 2013 2014E 2015PBeginning Policyholders’ Surplus 477.4 529.9 576.8 569.1 604.7 669.2 710.6 Net Underwriting Income 2.1 -5.4 -29.7 -13.9 14.0 9.7 1.6 Net Investment Income 49.0 48.4 49.7 48.8 48.1 49.5 49.7 Other Income/Expense 0.4 0.2 2.8 1.8 -0.4 -1.4 1.1Pretax Operating Income 51.5 43.2 22.8 36.7 61.7 57.9 52.4 Realized Capital Gains/ Losses -5.5 8.7 7.2 8.9 11.8 9.3 0.0 Federal Income Taxes 9.9 8.8 3.3 6.4 11.8 12.0 10.3Net Income 36.1 43.1 26.7 39.1 61.7 55.2 42.0 Unrealized Capital Gains/ Losses 23.6 15.5 -3.6 17.8 38.6 15.0 0.0 Contributed Capital 6.8 25.0 2.1 3.9 -3.1 3.2 3.3 Stockholder Dividends -17.6 -32.7 -27.5 -26.3 -33.4 -31.3 -30.4 Other Changes 3.5 -3.9 -5.5 1.2 0.7 -0.7 -0.7Ending Policyholders’ Surplus 529.9 576.8 569.1 604.7 669.2 710.6 724.9 Total Changes in Surplus $ 52.5 47.0 -7.8 35.7 64.5 41.4 14.3 Change in Surplus from Prior Year (%) 11.0 8.9 -1.3 6.3 10.7 6.2 2.0E=Estimated, P=ProjectedFigures may not add due to rounding.Source: A.M. Best data & research

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The stable outlook for personal lines reflects the segment’s ability to manage exposure to weather and catastrophe losses through rates, underwriting actions and coverage revisions in recent years.

For the purposes of this report, data for companies in A.M. Best’s Mortgage Guaranty and Financial Guaranty composites are excluded.

Operating ResultsPre-tax operating income for the industry – impacted by a reduced level of underwriting income partially offset by slightly higher net investment income – is expected to decline for 2014 (see Exhibit 3). With lower realized capital gains and higher income taxes also projected for the year, net income will decline to USD 55.2 billion from USD 61.7 billion in 2013. Notwithstanding the year-over-year decline, 2014’s net income is the second highest recorded by the industry over the past six years.

On the relative strength of this net income and unrealized capital gains – offset by shareholder dividends the industry is expected to post a USD 41.4 billion increase in policyholders’ surplus (PHS). However, with lower income earned on higher levels of premium and surplus, A.M. Best projects the industry’s returns on revenue and equity (ROR and ROE) to show declines for 2014 (see Exhibit 1).

As noted, the industry’s underwriting results are expected to deteriorate modestly for 2014, with an overall combined ratio of 97.2 projected. This is primarily due to a higher level of losses from catastrophes and a lower level of favorable development of loss reserves. The industry’s core underwriting results for the year improved slightly, primarily driven by lower growth of expenses relative to premiums as reflected by the improvement in the normalized accident-year combined ratio to 94.7 in 2014 from 95.4 in 2013. While insurers report that they have achieved – or are close to achieving – price adequacy in most lines, as 2014 progressed, rate increases began to moderate as competition rebounded, particularly for better risks and large commercial accounts.

The industry’s NPW continued to increase, but the rate of increase slowed substantially in 2014, up 3.9% after two years of NPW growth of 4.4%. While most lines continued to post higher premiums, NPW declined in two lines of business: medical professional liability and fire and allied lines (see Exhibit 4). MPL premiums have been decreasing steadily for several years, reflecting the impact of tort reform and increasing competition as the line’s profitability improved. The MPL line is expected to show significant deterioration in underwriting performance for 2014, with the combined ratio increasing 5.6 points to 95.1 from 89.5, due to the premium reduction. A further increase in the combined ratio is projected in 2015.

The NPW decline in fire and allied lines reflects, in part, the ability of insurers to reduce prices in the primary market due to continued soft pricing in the property reinsurance market. While catastrophe losses were up in 2014, reflected in higher expected combined ratios across property-predominant lines (including homeowners and commercial multiple peril, as well as fire and allied lines), there is no expectation of across-the-board increases in premiums for these lines, as competitive forces will continue to dominate. The forecasted deterioration in the combined ratios for these lines in 2015 is driven primarily by the inclusion of A.M. Best’s expectation of normalized catastrophe losses in the year, which is higher than those incurred in 2014.

Four lines are expected to show improved underwriting results for 2014, driven primarily by significant rate increases and underwriting actions in recent years. The growth rate of premiums for workers’ compensation fell substantially in 2014, primarily as a result of


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lower rate increases. After improving for several years, underwriting results are expected to deteriorate modestly for the line in 2015 as companies have reported increasingly competitive conditions that are expected to place downward pressure on pricing in 2015.

NPW by segment for 2014 reflects the impact of inter-company reinsurance transactions between Government Employees Insurance Co. (GEICO) and its Berkshire Hathaway affiliate National Indemnity Co. (NICO), under which GEICO ceded 50% of its in-force book under a loss-portfolio transfer and will cede 50% of its future business to NICO under a quota-share reinsurance agreement (see Exhibit 5). While total premium is unchanged at the industry level, the personal lines segment’s premium decline and the increase in NPW for the reinsurance segment are driven by these transactions.

Exhibit 5U.S. Property/Casualty – Segment IndicatorsExcludes mortgage & financial guaranty segments.

Personal Lines SegmentCommercial Lines

Segment Reinsurance Segment

2013 2014E 2015P 2013 2014E 2015P 2013 2014E 2015PChange in Net Premiums Written (%) 4.7 -2.8 6.7 5.1 3.6 2.8 -2.7 70.5 -18.2Change in Policyholders’ Surplus (%) 11.7 8.4 3.3 7.4 6.2 1.4 16.6 1.8 0.8Combined Ratio (Reported) 97.5 98.4 99.4 96.7 97.7 99.8 83.9 88.0 93.2 Less: Catastrophe Losses 4.3 5.5 5.0 3.5 3.5 5.0 2.4 2.0 3.5 Less: A&E Losses 0.1 0.1 0.1 1.2 1.1 1.0 2.1 1.4 1.2Combined Ratio (Normalized) 93.1 92.8 94.3 92.1 93.1 93.8 79.4 84.6 88.5 Less: Development of Prior Years’ Core Loss Reserves1

-1.9 -4.5 -2.1 -4.2 -2.2 -0.6 -13.0 8.3 -4.0

Accident Year Combined Ratio (Normalized)

95.0 97.3 96.3 96.3 95.3 94.4 92.4 76.3 92.5

Change in Net Investment Income (%) -5.3 5.5 -0.1 -1.7 2.8 -0.5 5.0 0.5 2.9Investment Yield (%) 2.7 2.7 2.5 3.5 3.4 3.3 4.3 3.7 3.7After-Tax Return on Surplus (ROE) (%) 7.9 6.5 4.6 9.7 8.9 6.2 10.9 7.8 7.3NPW/PHS (Reported) 1.0 0.9 0.9 0.7 0.7 0.7 0.2 0.3 0.3E=Estimated, P=Projected1 Negative number indicates favorable development of prior years’ core loss reservesSource: A.M. Best data & research

Exhibit 4U.S. Property/Casualty – Product Line Underwriting Trends

Net Premiums Written Combined Ratios

2014E (%) Actual Estimates

Product Line1 Share Growth 2009 2010 2011 2012 2013 2014E 2015PPrivate Passenger Auto 36.0 3.9 101.3 101.0 102.0 102.1 101.6 98.6 98.8 Homeowners & Farmowners Multi Peril 15.9 5.0 105.9 106.9 122.1 103.9 90.5 98.0 100.6 Workers’ Compensation 9.5 5.1 108.5 116.5 118.6 111.2 102.4 100.9 103.1 Other & Products Liability2 9.5 6.6 107.1 110.9 99.6 103.2 100.4 96.8 96.8 Commercial Multi Peril 6.8 3.5 96.9 100.1 113.2 105.0 97.7 101.1 104.6 Commercial Auto 5.6 6.1 99.4 97.8 103.6 107.0 106.9 106.8 107.0 Fire & Allied Lines3 5.5 -3.0 79.8 82.3 102.3 102.3 83.5 88.1 93.7 Inland Marine 2.1 6.6 89.3 86.2 97.1 96.1 83.8 80.5 83.7 Medical Professional Liability 1.5 -9.8 85.2 81.6 87.9 93.4 89.5 95.1 98.6 All Other Lines4 7.6 2.1 99.5 106.4 112.9 99.4 86.4 95.6 99.7 Total All Lines5 100.0 3.9 99.7 101.1 106.5 102.5 96.4 97.2 99.1 E=Estimated, P=Projected1 Source: Best’s Statement File Supplement - Insurance Expense Exhibit (IEE) - P/C, US (2009-2013)2 Other Liability includes professional liability, D&O, excess casualty/umbrella, environmental/pollution, general liability, and EPLI.3 Fire & Allied Lines includes earthquake, multiple peril crop, and federal flood.4 All Other Lines includes accident & health lines, mortgage guaranty, financial guaranty, ocean marine, aircraft, fidelity, surety, burglary & theft, boiler & machinery, credit, international, excess of loss reinsurance and miscellaneous.5 Source: A.M. Best data & research

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The projected deterioration in the combined ratio for 2014 was driven primarily by expected higher losses, reflected in a 1.6 point increase in the loss ratio (see Exhibit 2). Contributing to the loss ratio deterioration were a 0.5-point increase in losses attributable to catastrophes, a 0.2-point rise in non-catastrophe losses and a 1.0-point reduction in favorable development in core (i.e., not related to asbestos & environmental [A&E]) loss reserves. Partially offsetting these factors was a 0.1-point reduction in losses attributable to A&E claims. The combined ratio was also adversely impacted in 2014 by a 0.3-point increase in the loss-adjustment expense ratio.

Partially offsetting these negative impacts on the combined ratio were an improvement in the underwriting expense ratio and a decrease in policyholder dividends. Given that much of the premium growth in 2014 was driven by rate and exposure increases that did not generate significant underwriting expenses, growth in those expenses for the industry was negligible, producing a 1.0-point decline in the underwriting expense ratio. Policyholder dividends declined on an absolute basis, producing a reduction in the dividend ratio given the increase in premium.

In 2015, A.M. Best expects the industry combined ratio to deteriorate, reflecting a modest catastrophe loss increase to a level more in line with recent averages; an increase in underwriting expenses at a rate that exceeds the declining growth in NPW; and further reductions in the level of favorable development of prior accident years’ loss reserves. Despite the increase in the forecasted combined ratio, a record third consecutive underwriting profit is forecast.

After declining in each of the past two years, net investment income is expected to increase modestly in 2014 and 2015, driven by growth in invested assets from positive cash flow. Investment yields are projected to decline in each year, continuing a trend that has persisted over the past five years. Yields on new investments remain significantly lower than those on investments that mature or are called, and are expected to remain so into the medium term, even if interest rates do begin to increase as anticipated during 2015. But, as late 2014 and early 2015 illustrate, markets have a seemingly limitless ability to surprise, as yields on U.S. securities fell in response to increased strength of the U.S. dollar.

Catastrophe LossesCatastrophe losses increased in the United States in 2014, bucking a global trend. Many of the losses were related to a severe outbreak of cold weather that persisted through the eastern two-thirds of the country in January through much of February and caused an increase in claims related to water damage, frozen pipes, ice damming and automobile accidents. Many insurers also noted a spike in fire losses during the first quarter, although this increase did not appear to be connected to the cold weather outbreak or to any other identifiable phenomenon.

After the first quarter, a progressive decline in losses related to catastrophes was noted. The year 2014 was the ninth consecutive year without a major hurricane making landfall on the U.S. mainland, although several storms – including Hurricane Ike (2008) and Superstorm Sandy (2012) – that were not technically hurricanes caused substantial damage and rank among the costliest insured natural catastrophes in U.S. history. The 2014 season got off to an early start with Hurricane Arthur making landfall as a Category 2 storm in North Carolina, but activity was below average for the year. The Pacific was more active in 2014, with 20 named storms forming in the eastern North Pacific. In addition, Iselle, which made landfall on the Big Island of Hawaii as a tropical storm in August, was the first tropical system to strike one of the major Hawaiian islands in more than two decades.

The year 2014 also saw a decline in the number of U.S. tornadoes, with a total of 881 reported by the Storm Prediction Center of the National Weather Service as of Jan. 12, 2015. This is the

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lowest number of tornadoes reported in any of the past five years. An earthquake centered in Napa, Calif., caused extensive localized damage but had minimal impact on the industry’s results as most of the damage was to structures not covered by earthquake insurance.

Use of technology to assess the impact of a new risk on catastrophe exposure – including aggregations of potential losses and the by-risk impact of a new account on probable maximum losses (PMLs) – is now widespread in the industry. The ability to effectively assess and price for this exposure has improved not just risk selection, but reinsurance purchasing and capital management. Those companies that have not made use of these new tools may find themselves increasingly subject to the risks of adverse selection.

Loss Reserve DevelopmentA.M. Best’s expectation is that the industry’s reported favorable development of prior years’ loss reserves will slow considerably in 2014 as it begins to recognize that reserve levels are optimistic. The overall effect will be a decrease in the favorable benefit of loss reserve development to approximately USD 9.3 billion in 2014, down from USD 13.3 billion in 2013. In 2015, the level of favorable development is projected to decline further to USD 5.0 billion.

A.M. Best remains concerned about reserve releases recognized on long-tail lines for recent accident years. In the general liability and workers’ compensation lines, the industry appears to be moving quickly to recognize expected redundancies. Insurers believe that improved reporting of losses and, for workers’ compensation, reform legislation that affords insurers a greater role in determining the course of care for injured workers, should act to reduce future costs. Whether these benefits will be sustained over time is uncertain.

A number of commercial auto insurers have noted an increase in delays in loss reporting by injured third parties that resulted in several companies taking significant reserve charges in 2014. With price increases slowing in 2014 for many liability lines and expected to be even smaller in 2015, reserve adequacy could quickly become a substantial problem, particularly if medical cost inflation accelerates.

Policyholders’ Surplus & Capital ManagementDespite challenges with loss reserves and the low interest rate environment, the industry

continues to set higher surplus levels in each quarter. Year-end surplus for 2014 is projected to be USD 710.6 billion, up 6.2% or USD 41.4 billion (see Exhibit 3). Since year-end 2009, the industry’s surplus has increased 34.1% from USD 529.9 billion. Inflows of capital from nontraditional sources, including pension funds, private equity and hedge funds, have primarily been focused on the reinsurance segment outside the United States, but there have been several transactions in recent months involving primary companies. Insurance holding companies also have found markets receptive to debt issuance and, while not all of the proceeds raised through debt issuance were immediately invested in statutory insurance companies, A.M. Best recognizes the additional financial flexibility afforded by increasing liquidity at the holding

Exhibit 6U.S. Property/Casualty – 2014 Debt Issuance by Public Companies Rated by A.M. Best

Company Amount Issued(USD Millions)

Farmers Group Inc 835Liberty Mutual Group Inc 750ACE INA Holdings Inc 700Everest Reins Holdings Inc 400Nationwide Mutual Ins Co 400AmTrust Financial Services 383Progressive Corporation 350W. R. Berkley Corporation 350National General Holdings Corp 305Alleghany Corporation 300Fairfax (US) Inc. 300American Financial Group, Inc 150Kemper Corporation 150Total 5,373Source: A.M. Best data & research

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company so long as financial leverage remains within A.M. Best’s tolerances (see Exhibit 6). After increasing in 2013, payment of stockholder dividends by statutory companies is expected to decline modestly in 2014 and 2015, reflecting lower net income in those years. Proceeds from dividend payments from statutory entities and debt issuance at low interest rates have been used by many public insurance holding companies to fund share repurchases and other capital management activities.

Given the industry’s capital position, a greater level of merger and acquisition activity might be expected. While there have been a number of smaller acquisitions, the overall level of M&A in the industry has been relatively modest, typically smaller acquisitions to facilitate entry into new lines of business or territories. However, activity may increase in 2015, with several multibillion-dollar mergers announced in early January in the reinsurance space.

Personal LinesA.M. Best will maintain a stable outlook for the U.S. personal lines segment in 2015. The stable outlook implies that the majority of 2015 rating actions for the segment are likely to be affirmations, with a fairly balanced distribution of positive and negative rating actions driven by company-specific issues, as opposed to overarching market trends. (For a definition of an outlook please see www.ambest.com/ratings/guide.asp)

Although there was some pullback in results during 2014, overall, the personal lines segment will report favorable pretax and net income, along with an increase in surplus. However, on a year-over-year basis, the percentage increases of all of these measures will be lower than those reported at year-end 2013 (see Exhibit 5). Underwriting results will not be as favorable compared with the prior year, and the segment’s combined ratio also deteriorated slightly. Net premiums earned and written are both moderately lower, mainly due to GEICO’s reinsurance deal with NICO. Also, loss ratios increased slightly in 2014, mainly due to lower premium volume. Losses incurred, loss-adjustment expenses and other underwriting expenses have varied slightly when compared to the prior year end.

The auto line of business remains profitable, with relatively low volatility on a year-over-year basis. However, competition continues to stiffen as companies generally look to increase auto books of business and bundle products where possible. Once again, the United States had a benign hurricane season with only one named storm making landfall. Despite the quiet hurricane season, catastrophe losses remained a factor in 2014 due to a prolonged and harsh winter coupled with an active tornado/hail and straight-line wind season.

The segment and the industry as a whole continue to allocate significant resources toward improving technology systems, brand awareness and advertising. Companies continue to move away from legacy systems and invest in technology to improve and streamline all aspects of the insurance process. The flight to advanced technology systems is being undertaken by companies of all sizes in an attempt to reduce long-term expenses and gain or maintain a competitive advantage. Also, the level of saturation in the advertising space continues to grow and is mainly being driven by the larger national carriers. A.M. Best anticipates that the smaller

Exhibit 7U.S. Property/Casualty – Personal Lines Segment Key Figures(USD Billions)

2013 2014E 2015PNet Premiums Written 248.2 241.3 257.6Underwriting Gain/(Loss) 5.1 2.9 0.5Net Income 20.1 17.8 13.1Policyholders’ Surplus 254.0 275.2 284.2After-Tax Return on Surplus (%) 7.9 6.5 4.6E=Estimated, P=ProjectedSource: A.M. Best data & research

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players in this space will face increased pressure for top-line growth and retention of existing business, which will result in margin pressure.

In addition to allocating resources toward technology, there is a concerted effort from companies to bundle products to deepen and extend the customer relationship. This was illustrated by Progressive Insurance Group’s announcement that it was purchasing controlling ownership in ARX Holding Corp., the parent company of American Strategic Insurance Corp. and its affiliates, which offers homeowners insurance in various states. Also, companies are attempting to attract customers as early as possible for their insurance needs. Providing auto and renters insurance to a young person who owns a car and rents an apartment establishes a relationship that may expand to homeowners, umbrella and other coverages as that person’s life circumstances evolve.

The personal lines segment continues to maintain robust risk-adjusted capitalization, driven by relatively modest underwriting leverage, consistent overall net income and favorable unrealized capital gains. In 2014, net income and unrealized gains were lower than the prior year but continued on a positive trend (see Exhibit 7). Also, excess capacity in the reinsurance segment has led to very favorable pricing and renewal terms on reinsurance contracts, which has resulted in a fairly unique situation. Historically, pricing in primary and reinsurance markets changed in tandem, but in the current market, personal lines companies continue to get rate increases across most lines of business while their reinsurance costs are declining.

The segment in 2014 is expected to report an increase in surplus for the sixth consecutive year, driven by continued underwriting profitability and consistent net investment income. Favorable levels of unrealized gains driven by favorable U.S. equity markets also have contributed to the surplus growth. However, 2014 equity markets were not nearly as favorable as they were in 2013, and it remains to be seen whether that trend will continue in 2015.

As evidenced recently, year-to-year results always vary to some extent based on weather-related events. However, two overarching themes are reflected in the segment’s results: The first is continued development of more sophisticated pricing across both the auto and homeowners lines. The second is the changing landscape of distribution and interaction with customers.

Personal Auto Moderate rate increases continue for personal auto, but the real advancement is occurring in pricing segmentation and sophistication. The tools utilized continue to evolve as auto writers ramp up investments in data analytics and usage-based insurance. Usage-based insurance is becoming more commonplace, and advanced pricing segmentation is being achieved as insurers better understand the unique driving characteristics of each insured. The larger carriers are leading the charge in this arena as they continue to invest significant resources into these tools. As a result, it is anticipated that they will be able to attract business in the most sought-after risk categories. These advancements may make it more difficult for small and medium-sized companies to effectively compete in the market. A.M. Best believes companies that effectively use sophisticated pricing metrics will continue to build and maintain a considerable competitive advantage in personal auto insurance.

In addition, considerable investments are being made in multichannel distribution capabilities, as the ability to interact with potential and existing customers across a wide spectrum of channels remains a key differentiator. Customers not only expect but demand to interact with carriers whenever, however and wherever they choose. Such interaction can be of the self-

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service variety, but at times, customers also may seek varying levels of assistance. Importantly, customers continue to expect to be able to change the type of interaction (from self service to full service and vice versa) depending on circumstances. Carriers continue to seek ways to address consumers’ evolving expectations through strategic alternatives and technological investments.

Underlying these evolutionary trends in pricing and distribution is the stable year-over-year performance of personal auto. Loss cost trends remain generally moderate, although there has been some pressure from medical and auto repair costs. As new car technology continues to develop, the repair and replacement value of future automobiles will drive up expenses, despite additional premium, to reflect the higher value of vehicles.

Operating expenses continue to reflect investment in automation and enhanced risk management. These necessary investments provide companies with more streamlined processes, improved risk management capabilities, and the ability to react to the fast-paced market environment and satisfy an ever-changing customer base. These components are essential to remaining relevant in the market and potentially gaining a unique competitive advantage. Given the importance of scale and efficiency in the highly competitive personal auto segment, there is the potential for increased levels of consolidation. Over the longer term, consolidation could accelerate, given demographic trends coupled with decreased loss frequency associated with various technological enhancements available in vehicles. While driverless cars are likely in the distant future, some of the developments associated with this technology will eventually make their way into new cars in advance of the roll-out of fully automated vehicles. As a result, the market for automobile insurance – in terms of premium dollars – could conceivably shrink. Accordingly, scale and/or efficiency will be an increasingly important differentiator.

HomeownersRate increases on homeowners insurance continue, but not at the same level as in prior years. For the second straight year, the North Atlantic hurricane season was relatively benign. Despite these milder hurricane seasons, the homeowners line continues to be impacted by frequent and severe weather events that have caused tornado, hail and thunderstorm losses. Also, 2014 saw a disruption with the “polar vortex,” which resulted in prolonged winter weather conditions and a sharp increase in claims. However, weather-related losses were generally within expectations and are likely to further accelerate the key trends of pricing sophistication and risk management.

Pricing sophistication for property business has evolved with increased adoption of by-peril pricing algorithms. In addition, risk management in this line continues to expand as insurers increase their focus on risks that are more susceptible to severe wind and hail events as well as extremely hot and dry conditions that may lead to wildfires. Segmented pricing through the development of by-peril pricing algorithms, as well as greater granularity and deterministic modeling, continue to evolve and gain greater traction.

As a result, homeowners carriers largely appear to have moved from risk avoidance to a better understanding of risk and pricing. The advancements in pricing sophistication and risk management increase companies’ ability to pinpoint risks and geographic regions they deem advantageous to conduct business. The post-Hurricane Katrina risk management technique of simple risk avoidance has fully transitioned to risk understanding and acceptance with better pricing, underwriting and policy terms. A.M. Best believes those companies that have not been able to adapt to these changing pricing and product parameters will have trouble competing in this line of business and will face possible adverse risk selection.

11


OutlookDespite the challenges from frequent weather-related events and ongoing macroeconomic volatility, balance sheet strength has improved and, as in most years, the majority of rating actions in the personal lines segment have been affirmations. In general, companies have taken a comprehensive approach to protecting balance sheets. Rate increases continue, albeit at a slower pace in most segments of personal lines business. Companies have focused on risk management, better pricing segmentation and stricter underwriting guidelines to partly offset weather-related events and a historically low interest rate environment. As pricing grows more sophisticated and underwriting becomes more granular, A.M. Best expects the auto line to remain stable. While the homeowners line will likely continue to exhibit volatility, the more comprehensive approach to risk management, improved pricing and increased reinsurance capacity will provide offsetting benefits.

The stable outlook for the personal lines segment implies that most rating actions in 2015 will be affirmations and that the number of upgrades and downgrades will be similar. The outlook is rooted in continued stable auto results, which represent 60% of the segment’s NPW, ongoing risk management initiatives through greater segmentation of pricing in the auto and homeowners lines, and continued robust risk-adjusted capitalization.

Carriers that demonstrate success in overall risk management and improved performance while maintaining favorable risk-adjusted capitalization are generally viewed more favorably. While the market trends of pricing sophistication, scale/efficiency and risk management are unlikely to materially impact ratings over the near term, the longer term ramifications could be more significant, particularly for those carriers that do not effectively adapt to this dynamic market. While results for the personal lines segment have been consistent with limited volatility, the underlying market trends over the longer term are anything but static.

Commercial LinesGiven that the economic growth outlook for 2015 is relatively stable on all fronts – including gross domestic product, interest rates, unemployment and inflation – it is no surprise that limited changes in commercial lines operating performance are expected through 2015. While commercial lines market conditions have improved in recent years, and a certain level of rationality has prevailed in pricing, A.M. Best believes that the commercial lines outlook remains negative and the current underwriting results will not be sufficient to surmount the numerous challenges facing many insurers in the industry.

The main challenges include low returns on fixed-income investments; maintaining calendar-year results, which in some cases have not recognized the loss reserve shortfalls that A.M. Best estimates companies accrued during the soft market period; developing, attracting and maintaining underwriting talent; costs and challenges of regulation; the continued evolution of data and data analytics; and addressing the uncertainties surrounding historical and emerging issues such as terrorism, cyber risk and infectious diseases. This challenging market environment places pressure on companies that do not have the skills to adapt or differentiate themselves in the evolving marketplace.

Because the commercial lines segment is made up of more than 400 rating units, it is important to point out that the negative outlook pertains to the “segment” as a whole. Within the segment, A.M. Best expects the majority of companies will have their ratings affirmed, but that there will be more negative rating actions than positive, despite the favorable results over the past few years. The top 10 groups heavily influence the segment’s favorable results, as they collectively comprise more than half of the segment’s business based on NPW. Each of the three commercial lines groups that had positive rating changes in 2014 is among

12


these 10 groups. It is the remainder of the sector that is expected to feel most strongly the negative effects of the eventual adverse loss-reserve development recognition, continued low investment yields, a moderation in commercial lines price increases and difficulty in adapting to the rapidly changing market dynamics.

Operating results for the segment in 2014 and 2015 are expected to be profitable. A.M. Best expects the 2014 calendar-year combined ratio to be 97.7, deteriorating to 99.8 in 2015. The deterioration in calendar-year results is driven primarily by an increased estimate of catastrophe losses in 2015 to a more normalized level, and the expectation of a modest amount of adverse overall development of prior accident years’ loss reserves. Accident-year performance is expected to trend similarly, reflecting increased losses from catastrophes incorporated in the 2015 forecast. The accident-year combined ratio, normalized to exclude the effect of catastrophe losses, is expected to improve in 2014 and 2015, as the benefit of rate changes is earned through. However, with slowing rate increases, the trend may not continue beyond 2015.

Profit margins continue to be pressured by low investment yields and another year of new money needing to be reinvested at a time when interest rates remain at historical lows and yield curves relatively tight. Pretax ROR is expected to be 14.3% and 11.5% in 2014 and 2015, respectively, with after-tax return on surplus trending similarly at 8.9% and 6.2% for the two years. It should be noted that ROE calculations for 2015 do not reflect any benefit from unrealized capital gains, as A.M. Best does not project that item.

Catastrophe experience in 2014 was relatively low, although losses from winter storms were costly. For the commercial lines segment, catastrophe losses in 2014 totaled USD 7.4 billion and accounted for 3.5 points on the combined ratio, unchanged from 2013. For 2015, A.M. Best has estimated an “average” level of catastrophe activity, amounting to 5.0 points on the combined ratio.

Adequacy of prior-year reserves will remain the most influential driver for rating movements in the commercial lines sector, as the largest risk factor on the balance sheets of commercial lines insurers is typically loss-reserve adequacy. In 2014, commercial lines writers recorded favorable reserve development (including adverse development of reserves for asbestos and environmental losses) equating to 1.1 points on the segment’s combined ratio, compared with 3.0 points in 2013. A.M. Best believes the favorable development recognized will continue to decline and is close to reaching the point at which the segment will not, in total, be able to justify a further reduction in prior-year loss reserves. As a result, the 2015 projections reflect adverse development of loss reserves of 0.4 combined ratio points, primarily driven by a lower level of favorable development of core reserves, which can no longer offset the projected increases in A&E reserves.

Beginning in mid-2011, market conditions gradually improved, as companies benefitted from better pricing and an increase in exposures, particularly as the recovering economy bolstered construction and other businesses initially hit hard by the financial crisis in 2008. In late 2012 and through 2013, the pace of rate increases improved, causing NPW to grow an estimated 5.1% in 2013. In 2014, the pace of rate increases slowed and even declined for some non-catastrophe exposed property lines and medical professional liability. Commercial lines’ 2014 NPW increased 3.6% to USD 216.1 billion and is expected to increase to USD 222.2 billion in 2015, with the growth rate declining to 2.8% (see Exhibit 8). The 2014 growth in premium is driven primarily by higher premiums in the workers’ compensation, other liability and commercial auto lines. Growth in these lines was dampened by reductions in allied lines, MPL, and accident and health.

13


The industry’s premium volume benefited from improved pricing conditions, higher retention levels, lower reinsurance costs and slow, but growing, employment. These upswings in NPW were tempered by restructuring and re-underwriting actions taken by some commercial writers and the impact of lower 2014 commodity prices on crop insurers, among other less material trends. During 2015, A.M. Best expects with the possible exception of commercial automobile, those lines that have not yet

incurred rate declines will likely show a reduction in premium rate increases, the most material of which will come from worker’s compensation and other liability lines, which represent almost 40% of the market’s premium.

Surplus growth continues to outpace premium growth. In 2014, surplus growth moderated slightly from 2013 growth levels, mainly due to American International Group’s 2013 intercompany reallocation of assets. During 2015, growth in surplus is projected to be low since A.M. Best expects a reduction in underwriting and investment income. As noted previously, A.M. Best does not project changes in capital gains, which results in a 2015 projection that shows a lower level of surplus growth than has been achieved in recent years. While growth in surplus is expected to be relatively low in 2014 and 2015, the ratio of surplus to net written premiums is expected to remain flat. Taking this into consideration with A.M. Best’s perspective on the segment’s capital management plans, loss reserve adequacy and investment risk, A.M. Best continues to believe that – overall – the level of risk-adjusted capitalization in the segment is very strong. However, adverse loss-reserve development for some insurers may be problematic, but this is not expected to be a significant issue for the vast majority of commercial lines insurers.

A.M. Best expects balance sheets for many commercial lines insurers will continue to be right-sized in 2015 as insurers continue to return capital to stockholders through dividends and share repurchases. Also, the trend in merger and acquisition activity in recent years among commercial lines insurers has been lower than might be expected. U.S. commercial lines companies have focused somewhat on global and product diversification in order to remain competitive in the market, choosing to limit domestic acquisitions given concerns over the strength of sellers’ balance sheets. However, the opportunity for strategic acquisitions may increase as prior-year loss-reserve issues begin to impact some companies’ balance sheets, and as increased competition, low interest rates and lower insurance rates prompt companies to downsize through the divestiture of underperforming or noncore business lines.

In this constantly changing marketplace, successful insurers will be those that leverage data and technology; retain and attract talent in ways that optimize profits; and differentiate themselves through innovative products and better risk management, pricing metrics, speed and efficiency. Establishing appropriate reserves, maintaining conservative portfolio allocations and consistently applying underwriting guidelines, pricing and policy terms and conditions will remain hallmarks of the most successful commercial lines insurers.

Global ReinsuranceThe global reinsurance sector remains by all accounts overcapitalized. The reinsurance market has proved for some time to be a bit more resilient and disciplined than other sectors;

Exhibit 8U.S. Property/Casualty – Commercial Lines Segment Key Figures(USD Billions)

2013 2014E 2015PNet Premiums Written 208.7 216.1 222.2Underwriting Gain/Loss 4.9 3.5 -1.5Net Income 27.8 27.3 19.3Policyholders’ Surplus 287.4 305.4 309.5After-Tax Return on Surplus (%)

9.7 8.9 6.2

E=Estimated, P=ProjectedSource: A.M. Best data & research

14


however, as most companies continue to indicate intense competition is leading to lower underwriting margins for certain lines of business, the need for disciplined underwriting now more than ever should remain the focus. The market is expected to remain challenging in 2015, with rates continuing to decline for some lines of business, terms and conditions becoming even broader and ceding commissions increasing further.

In response to these pressures, companies that are managing the cycle continue to reduce their retained exposure to classes of business that do not meet acceptable return hurdles, and they are expanding in classes that offer better opportunities. In 2014 this led to significant reductions in reinsurance books of business, particularly for property catastrophe. For the most part, 2015 is expected to produce even more careful approach to risk selection. The orderly approach to risk selection appears to be working for global companies, and most are expected to remain cautious on the business they write as capacity remains high and the market becomes increasingly competitive.

Companies with both insurance and reinsurance books of business continue to be more weighted toward primary business, given that pricing continues to be relatively more attractive and access to the business easier. That said, some primary lines have started to show some negative pricing or a slowdown in price increases over the past few quarters. Conversely, companies that write predominantly reinsurance and focus on underwriting are in danger of reducing their books of businesses to levels that may render them less relevant in the market, which could lead to more merger and acquisition activity.

The cultural barriers that have been cited in the past as obstacles to consolidation may become less of a factor if companies shrink to where they can no longer compete in this increasingly global market. This past year, Validus Re acquired Western World in the United States. In January, 2015, two significant mergers were announced: XL Capital and Catlin on Jan. 9 and PartnerRe and Axis Capital on Jan. 25. IAll of these are examples of the need for greater global scale and diversified product lines and distribution, replacing the days of specialty focused reinsurance companies. Companies with well-diversified businesses and a global reach likely will only get larger as smaller players put themselves up for sale or seek strategic partnerships to survive.

Pricing Still Under Pressure, New Capital RemainsPricing in 2014 experienced double-digit declines in certain lines of business, and reinsurance pricing overall is expected to remain under pressure in 2015, given the lack of any price-changing event over the past few years. During 2014, reinsurance companies have seen property cat price declines of 20% in some cases (more pronounced in the United States) for all renewal seasons. The dramatic price declines in 2014 continue to be attributed to the lack of market-changing losses, as well as increased retentions by ceding companies and the continued inflow of capital from the capital markets, largely in the form of insurance-linked securities (ILS). January renewal pricing for property contracts was once again down 10% to 15% for both U.S. and European risk. U.S. casualty was up 5% to down 20%, depending on

Exhibit 9Global Reinsurance – CAT Bond Issues by Year

Source: A.M. Best data & research, Imetrix, Bloomberg, company reports

Exhibit 10U.S. & Bermuda – Reinsurance Combined Ratio Trend

Source: A.M. Best data & research, Artemis, company reports

16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%

Return on Equity 5-Yr Avg

Exhibit 12U.S. & Bermuda – Reinsurance Market Trends

Source: A.M. Best data & research, company reports

050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons

Exhibit 13Global Reinsurance – Estimated Total Dedicated Reinsurance Capacity

* Estimate by Guy CarpenterSource: A.M. Best data & research, Guy Carpenter

Upgrades, 5.7

Downgrades, 5.6

Initial Ratings, 4.5

Total Affirmations, 82.5

Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5

Initial Ratings, 2.4 Total

Affirmations, 85.0

Under Review, 2.1

Exhibit 19U.S. Property/Casualty – Issuer Credit Rating Activity, 2014�% of all rating units.

Source: A.M. Best data & research

Exhibit 20U.S. Property/Casualty – Issuer Credit Rating Activity, 2013% of all rating units.


Exhibit 21U.S. Property/Casualty – 12-Month Issuer Credit Rating Upgrades & DowngradesBy segment.


Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-

InvestmentGrade11.3%

Exhibit 26U.S. Property/Casualty – Issuer Credit RatingDistribution�% of total rating units, as of Dec. 31, 2014.

* rs = Regulatory Supervision/LiquidationNote: Numbers may not total due to rounding.Source: A.M. Best data & research

Exhibit 27U.S. Property/Casualty Commercial Lines – Issuer Credit Rating Distribution��% of total rating units, as of Dec. 31, 2014.


Exhibit 28U.S. Property/Casualty Personal Lines – Issuer Credit Rating Distribution�% of total rating units, as of Dec. 31, 2014.


17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60

2013 Upgrade 2013 Downgrade 2014 Upgrade 2014 Downgrade

Ratin

g Un

its

Personal Commercial Reinsurance P/C

633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons

Calendar Year Accident Year

Exhibit 16 U.S. Property/Casualty – Industry Reported Reserve DevelopmentOne year development for CY's, AY's as of 12/31/12.


Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade

Exhibit 29U.S. Property/Casualty Reinsurance – Issuer Credit Rating Distribution% of total rating units, as of Dec. 31, 2014.


56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%

Loss Ratio Expense RatioFavorable Loss Reserve Development

93.287.486.8

93.1

107.3

92.785.8

15


loss experience, and in Europe casualty rates were up 5% to down 10%, also depending on loss experience. Aerospace was flat to down 7.5%, and global trade credit was down 10% to 20%. Concessions in contract terms and conditions, including greater ceding commissions and multiyear contracts, continued for the Jan. 1, 2015 renewal season.

Third-party capital is expected to continue entering the market in upcoming years as large pension funds and hedge funds seek ways to diversify their portfolios while chasing higher returns. In 2014, 43 cat bonds were issued, totaling USD 8.8 billion (see

Exhibit 9) and representing 15% growth from 2013. This made 2014 a new record year for cat bond issues, with 44% of the bonds increasing in value before the deals closed, which implies a continuing appetite for the issued risks. With new capital and reduced reinsurance purchasing by some large cedants, market conditions are expected to remain challenging for the reinsurance business in 2015 and lead to continued pricing pressure, particularly in property and cat lines. The intensified competition in property reinsurance and cat continues to spill over to other lines of reinsurance and geographies as companies attempt to expand their product offerings and global presence. This, in turn, continues to put upward pressure on ceding commissions for quota-share placements and is leading to more multiyear contracts, broader contract terms and increased signings on aggregate covers.

Lack of Cats and Reserve Releases Continue to Aid ProfitabilityGiven the lack of major cat losses and ongoing favorable reserve development, most reinsurers continue to deliver solid combined ratios.

Over the past five years, the average combined ratio for the U.S. and Bermuda reinsurance composite is about 93.2 (see Exhibit 10), and that number reflects the significant losses in 2011 that included the Japan and New Zealand earthquakes, Australia floods, U.S. tornadoes and Thai floods. In 2011, these companies reported an average combined ratio of 107.3 due to all of these events, making that year among the toughest in recent memory. That said,

Exhibit 11U.S. & Bermuda Reinsurance – Key GAAP Financial IndicatorsBased on a composite of 20 interactively rated public insurance/reinsurance companies in the U.S. & Bermuda market.

2009 2010 2011 2012 2013 2014E 2015PNPW Growth (%) -2.4 4.5 4.6 3.1 1.3 0.8 -2.5Loss & LAE Ratio 56.1 61.8 77.3 63.4 55.3 54.2 63.2Underwriting Expense Ratio 29.7 30.9 30.0 29.8 31.5 31.3 31.6Combined Ratio 85.8 92.7 107.3 93.1 86.8 85.5 94.8 Less: Favorable Loss Reserve Development

-6.1 -6.2 -6.0 -5.8 -6.3 -6.0 -4.0

Accident Year Combined Ratio (Normalized)

91.9 98.9 113.4 98.9 93.2 91.5 98.8

Change in Equity (%) 30.8 8.8 -2.5 8.5 -4.0 12.6 4.2Return on Equity (%) 16.0 11.9 1.0 10.6 12.4 11.2 8.2E=Estimated, P=ProjectedSource: A.M. Best data & research





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

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13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8

16


all of these events did very little to change the trajectory of pricing, as available capital in the market remained abundant.

Favorable reserve releases and the lack of any major cats over the past few years continue to aid combined ratios for the entire industry. Over the past five years, favorable reserve releases have reduced combined ratios by an average of 6.1 points per year (see Exhibit 11). Only time will tell how commissions, lower premiums and possible diminishing reserve releases play out and which companies remain profitable as the market becomes more challenging.

Strong ROEs, but for How Much Longer?Although pricing continues to soften, and terms and conditions are becoming more challenging, the U.S. and Bermuda reinsurance sector continues to deliver solid returns on equity (ROEs). For the past five years, the average operating ROE for the sector is about 10.4% (see Exhibit 12), and that includes the significant losses of the 2011 events that led to negative results for many. Favorable reserve releases and low cats – which have produced solid margins – and efficient asset management continue to drive the strong ROEs, but as the industry continues to struggle, ROEs are expected eventually to settle into single-digit territory for some time, for most if not all companies.

It is expected to be increasingly challenging to deliver double-digit ROEs. That said, given the strong capital positions of many, share buybacks are also expected to remain a strategy for companies looking to improve returns for shareholders, and that will slightly offset some of the challenges companies face on the income side.

Returns are expected to become even more challenging if capital continues to enter the market at such a high rate, reserve releases decline, and pricing continues to soften in the double digits. The scenario for lower ROEs and an uptick in combined ratios – as commission expenses increase further and premiums continue to decline – is possible in 2015, particularly if pricing declines spill over to the primary side of the business at a faster rate throughout the year.

Overall, this remains a challenging market, but the reinsurance composite is expected to post solid results for 2014, which was aided by the lack of large cat losses, continued share repurchases and favorable reserve releases. Conditions will remain competitive and challenging, as primary companies are expected to continue retaining more business and/or seeking higher ceding commissions or multiyear contracts for sharing their profitable business. Margin compression also will likely continue as third-party capital seeks a larger piece of the pie. As a result A.M. Best is forecasting underwriting performance to produce an average combined ratio of 94.8 and an average ROE of 8.2%, representing a stubbornly difficult market environment and a normal level of catastrophe activity.





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*US

D Bi

llion

s



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8

17


Dedicated Global Reinsurance CapacityDedicated reinsurance capital is shown in Exhibit 13. This is the second year A.M. Best has compiled an estimate of dedicated global reinsurance capacity, working in conjunction with Guy Carpenter. This estimate is not a simple aggregation of the shareholders’ equity of all companies that write reinsurance, since some of that capacity is allocated to the insurance business or other outside interests. A.M. Best and Guy Carpenter have estimated the amount of capital dedicated to writing reinsurance by

using A.M. Best’s proprietary capital model, Best’s Capital Adequacy Ratio (BCAR), and reviewing line-of-business allocations for the majority of the top 50 reinsurance organizations, while giving consideration to reinsurance capacity offered by smaller participants in the market.

At year-end 2013 there was approximately USD 320 billion of traditional capital and USD 48 billion of convergence capital, including industry loss warranties, collateralized reinsurance and cat bonds. On this basis, A.M. Best estimated marginal growth in traditional sector capital as strong earnings again sustained share buybacks and dividends, and reinsurers sought to maintain but not expand their capital positions. As previously noted, convergence capital continued to pour into the industry. Cat bond issuance (shown in Exhibit 9) continued to grow strongly. Likewise, capital continued to flow into collateralized reinsurance vehicles and sidecars. Guy Carpenter’s current estimate of convergence capital, including cat bonds, is USD 60 billion for 2014, up USD 12 billion from the prior year.

P/C Industry Loss & LAE Reserve Position Weakens SlightlyLoss and loss-adjustment expense (LAE) reserves are typically the largest liability on a P/C insurer’s balance sheet. Any underestimation of those liabilities can result in a material negative impact on the insurer’s reported surplus, potentially resulting in adverse rating action. Unexpected reserve changes not only affect the balance sheet, but also A.M. Best’s view of an insurer’s operating performance, management team and enterprise risk management.

Adverse reserve development is one of the leading causes of insurer insolvency, so A.M. Best views reserve adequacy as a critical rating issue. A.M. Best may apply a charge for perceived reserve deficiencies, typically for companies whose reserve adequacy has been historically volatile, that have expanded rapidly into new markets and territories, or whose premium growth has outpaced A.M. Best’s tolerances. For certain liability lines of business that are highly subject to regulatory and legislative changes, a reserve deficiency charge may be applied even in the absence of historical volatility to reflect the potential impact of such changes on reserves. Companies that have demonstrated a history of conservative reserving throughout the underwriting cycle and that do not operate in these lines should not be affected materially by reserve deficiency charges in the analysis of their capital strength. A.M. Best’s view of an insurer’s reserve position can have a material impact on the assessment of its capital strength.

Exhibit 15 shows a history of the industry’s reported adverse/(favorable) reserve development from prior accident years through 2013. A.M. Best expects the industry to report its ninth consecutive year of favorable reserve development for calendar year 2014. Based on A.M. Best’s internal reserve review of the industry, its reserve position strengthened over the period 2002-2007. Since then, industry reserves have been weakening and are expected to continue

Exhibit 14U.S. Property/Casualty – U.S. Reinsurance Segment Key Figures(USD Billions)

2013 2014E 2015PNet Premiums Written 25.6 43.6 35.7Underwriting Gain/Loss 4.0 3.4 2.6Net Income 13.9 10.1 9.6Policyholders’ Surplus 127.8 130.1 131.2After-Tax Return on Surplus (%) 10.9 7.8 7.3E=Estimated, P=ProjectedSource: A.M. Best data & research

18


doing so, but at a much slower rate. The industry reserves as of year-end 2014 are estimated to be only USD 2 billion weaker than those reported at year-end 2013, with the reserve position deteriorating for all lines of business. The greatest changes are anticipated for the MPL, personal auto liability, homeowners and “All Other” lines. While many lines of business are showing increasing paid and case incurred loss-development trends, the personal auto liability booked ultimates for more recent accident years do not appear to contain the same margins as previously anticipated.

For year-end 2014, A.M. Best estimates that the P/C total net loss and LAE reserve deficiency was $42.2 billion, consisting of a $34.6 billion deficiency on core reserves and a $7.6 billion reserve deficiency on asbestos and environmental (A&E) reserves. Of the $34.6 billion deficiency on core reserves, $22.6 billion is due to statutory discounting, which A.M. Best considers a deficiency from full-valued reserves. As shown in Exhibit 17, the estimated deficiencies vary widely by line of business, with workers’ compensation showing the largest overall deficiency and the MPL and “All Other” lines showing the largest redundancies. Some of the lines included in the “All





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8

Exhibit 17U.S. Property/Casualty – Estimated Year End Loss & DCC Reserve Deficiencies, 2014Excludes mortgage guaranty & financial guaranty segments.(USD Billions)

Product Line Excluding Discount

Statutory Discount

Total Deficiency

Workers’ Compensation 9.1 17.1 26.2Other/Products Liability 4.6 1.4 6.0Reinsurance - Nonproportional Assumed 1.5 2.0 3.5Commercial Multiple Peril 2.8 0.1 2.9Commercial Auto Liability 1.2 0.4 1.6Homeowners -0.5 0.0 -0.5Medical Professional Liability -3.4 0.9 -2.5Personal Auto Liability -1.3 0.3 -1.0All Other Lines -2.0 0.4 -1.6Total Core Reserves 12.0 22.6 34.6Asbestos & Environmental 7.6 0.0 7.6Total 19.6 22.6 42.2Source: A.M. Best data & research

Exhibit 15U.S. Property/Casualty – Incurred Loss & DCC DevelopmentOne-year development for calendar years, accident years as of Dec. 31, 2013.Excludes mortgage guaranty & financial guaranty segments.(USD Billions)

AccidentYear

One-Year Reserve Development * Total AYDevelopment

Through 20132004 2005 2006 2007 2008 2009 2010 2011 2012 2013Prior 11.5 22.7 9.7 8.7 4.1 6.2 5.6 1.9 2.6 2.3 75.42004 -12.9 -4.6 -3.9 -2.6 -2.2 -1.0 -0.5 -0.6 -0.5 -28.72005 -9.5 -5.2 -4.0 -3.4 -2.0 -1.0 -0.7 -0.4 -26.22006 -8.3 -4.8 -3.7 -2.6 -2.0 -1.2 -1.1 -23.72007 -6.2 -4.5 -2.1 -2.4 -1.5 -1.5 -18.22008 -4.1 -2.6 -3.0 -1.4 -1.4 -12.62009 -5.6 -2.7 -1.5 -1.4 -11.22010 -3.5 -2.1 -1.4 -7.02011 -4.8 -1.2 -6.02012 -4.6 -4.6

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Total in Calendar Yr 9.8 -4.3 -8.8 -13.4 -11.7 -10.2 -13.4 -11.2 -11.2 -11.2

* Positive values indicate adverse development; negative values are favorable.Source: A.M. Best data & research

19


Other” category are auto physical damage, fire, allied, inland marine, warranty, fidelity, surety, credit, and accident and health. A&E reserve deficiencies are estimated to have declined USD 3 billion in 2014 in anticipation of continued reserve strengthening.

The estimated reserve deficiencies are based on industry statutory Schedule P cumulative paid and case incurred loss and expense development, using A.M. Best’s internal loss-reserve model. The same model is used to determine the reserve deficiency for each individual company and rating unit based on its own Schedule P data.

U.S. Property/Casualty Rating TrendsIndustry AssessmentIn 2014, A.M. Best took rating action on Issuer Credit Ratings (ICRs) of 820 rating units, of which 106 were rating changes (see Exhibit 18). For the second consecutive year, the P/C industry recorded a greater number of upgrades than downgrades and fewer downgrades from the prior year due to a generally improved macro-economic environment, mostly solid operating results, increased pricing sophistication and greater attention to enterprise risk management. This reverses the prior two- year trend of downgrades exceeding upgrades in 2011 and 2012, which were primarily caused by historic catastrophe losses and generally depressed macroeconomic conditions.

In 2014, the total number and percentage of rating changes declined to their lowest levels in the past five years. Concurrently, the total percentage of rating affirmations, which is the most common rating action, reached its highest level over the same period. Taken together, these two rating action trends reflect the stability and financial strength of the P/C industry. Total rating changes exclude affirmations and placement of ratings under review. The rating environment in 2014 reflects continued strong capitalization, increasing pricing sophistication and generally stable operating results. Nevertheless, individual insurers’ underwriting and operating results may continue to be pressured due to questionable loss-reserve adequacy, low investment yields, geographic and product concentration, inadequate rates and an increasingly competitive environment.

Rather than assessing the rating actions of each legal operating entity within the domestic P/C insurance market, this section summarizes rating trends on a rating unit basis. The term “rating unit” describes either an individual insurer or a consolidation of companies and is the financial

Exhibit 18U.S. Property/Casualty – Annual Issuer Credit Rating Activity, 2010-2014Rating units.

2010 2011 2012 2013 2014

Rating Units %

Rating Units %

Rating Units %

Rating Units %

Rating Units %

Upgrades 76 7.7 65 7.2 47 5.3 50 5.7 57 7.0Downgrades 52 5.3 78 8.6 82 9.3 49 5.6 29 3.5Initial Ratings 41 4.2 25 2.8 33 3.8 39 4.5 20 2.4Total Rating Changes 169 17.2 168 18.5 162 18.4 138 15.8 106 12.9Total Affirmations 771 78.4 693 76.4 689 78.3 719 82.5 697 85.0Under Review 43 4.4 46 5.1 29 3.3 9 1.7 17 2.1Total Rating Actions1 983 100.0 907 100.0 880 100.0 866 100.0 820 100.0For Best’s Ratings criteria and definitions, visit www.ambest.com.1 Total actions exceed the number of rated entities as certain company ratings were updated more than once a year.Source: A.M. Best data & research

20


basis on which A.M. Best performs its rating evaluations. The financial results of rating units represent the way insurance groups operate and manage their businesses.

Of the 820 rating actions taken in 2014, 697, or 85.0%, were affirmations (see Exhibit 19). This compares with 866 rating actions in 2013, of which 719, or 82.5%, were affirmations (see Exhibit 20). Total rating changes represented 12.9% of all rating actions in 2014, compared with 15.8% in 2013. Upgrades totaled 57, or 7.0% of total rating actions in 2014, up from 50, or 5.7% of rating actions in 2013. Conversely, downgrades totaled 29, or 3.5% of total rating actions in 2014, compared with 49, or 5.6% of rating actions, in 2013.

Initial Ratings and Under Review Assignments There were 20 initial ratings assigned in 2014, representing about 2.4% of total rating actions, compared with 39, or 4.5% of rating actions, in 2013 (see Exhibit 18). Initial ratings averaged 3.5% of total rating actions from 2010 through 2014 and were generally assigned to newly created affiliates and subsidiaries of larger holding companies. For personal lines, there were eight initial ratings, two each in the following composites: auto and homeowners, personal property, title and private passenger automobile (one standard and one nonstandard). There were 12 commercial lines initial ratings, including five workers’ compensation, four fidelity and surety, two MPL and one commercial casualty writer.

Seventeen rating units were assigned the under review modifier in 2014, up from 9 in 2013, but the second lowest level within the 2010-2014 timeframe. The under review rating modifier typically is assigned after a material event such as a merger or acquisition; significant new product announcement; executive management changes; or an abrupt change in financial condition as a result of an event such as recognition of reserve charges, shock losses or capital infusions. The under review modifier may have positive, negative or developing rating implications, depending on the nature of the event and its potential effect on the rated entity. After placing a rating under review, A.M. Best interacts with management to fully review the impact of the event before determining the ultimate effect on the rating. Generally, ratings remain under review for less than six months.

The primary reasons for the relatively low





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8

21


level of assignments of under review modifiers recorded in 2014 were the improvement in surplus in recent years that enabled insurers to absorb the impact of major catastrophes and weather-related losses without significantly decreasing risk-adjusted capitalization, as well as fewer weather-related events, particularly tornadoes and hurricanes making landfall.

Personal LinesThe personal lines segment showed modest improvement in 2014 as premium volumes continued to rise as a result of rate increases, mainly on the homeowners and farmowners lines of business, and as policyholders’ surplus continued to expand. These favorable financial trends continue to support the stability of the segment where historically the majority of ratings are affirmed with stable outlooks. Reflective of these positive rating factors, there were 21 upgrades and only 13 downgrades in 2014 (see Exhibit 21).

As in prior years, most rating changes occurred in carriers writing nonstandard auto business where ratings tend to be spread across a broad spectrum. Five nonstandard auto companies are highlighted in the top 10 personal lines rating changes, with three upgrades and two downgrades (see Exhibit 22). The remaining five rating changes in the top 10 personal lines writers were all upgrades of companies in assorted composites. The majority of upgrades were driven by consistently favorable operating results, acquisitions and/or direct parental support. Excessive growth and/or deteriorating operating performance drove the aforementioned downgrades.

Commercial Lines The majority of commercial lines insurers had their stable ratings affirmed in 2014 despite challenges from low investment yields and reduced loss-reserve releases. In total, there were 35 upgrades to commercial lines insurers’ ratings in 2014, compared with 16 downgrades (see

Exhibit 22U.S. Property/Casualty – Top 10 Personal Lines Rating Changes, 2014 Ranked by 2013 net premiums written.

Rating Change

Rating Effective

Date Company/Rating Unit AMB # Composite Ultimate ParentNPW (USD

Millions)Current ICR

Prior ICR

+ 5/30/14 State Farm General Insurance Co 02478 Personal Property State Farm Mutual Automobile Ins Co

1,919.0 a+ a

+ 3/26/14 Safety Group 18080 Private Passenger Standard Automobile

Safety Insurance Group, Inc. 697.5 a+ a

+ 12/4/14 Vermont Mutual Group 00951 Personal Property Vermont Mutual Insurance Company

313.7 aa- a+

+ 10/1/14 United Automobile Insurance Co 10781 Private Passenger Non-Standard Auto

United Automobile Insurance Group, Inc.

209.1 ccc+ ccc

+ 4/29/14 MGA Insurance Co Inc 02854 Private Passenger Non-Standard Auto

GAINSCO, INC 191.3 bbb bbb-

- 1/16/14 American Access Casualty Co 12428 Private Passenger Non-Standard Auto

American Access Group, LLC 175.9 bb+ bbb-

+ 5/8/14 MMG Insurance Co 04692 Private Passenger Stand Auto & Homeownrs

Maine Mutual Group 135.6 a a-

+ 7/11/14 National General Group1 14026 Private Passenger Non-Standard Auto

National General Holdings Corp.

89.2 a- bbb-

- 5/8/14 National Unity Insurance Co 01902 Private Passenger Non-Standard Auto

... 60.6 bbb+ a-

- 3/17/14 IFA Insurance Co 03542 Private Passenger Standard Automobile

Independent Financial Agents, Inc. (IFA)

43.6 b bb-

Note: NPW is the aggregate NPW of the companies within a rating unit that were either upgraded or downgraded. Ratings are for the operating companies that comprise the rating unit

1 One company in the rating unit was upgraded, Imperial Fire & Casualty Insurance Co, following its acquisition by National General Group.Source: A.M. Best data & research

22


Exhibit 21). The favorable rating actions primarily reflected the commercial lines insurers’ improved earnings and continued strong risk-adjusted capital position. Conversely, the unfavorable rating actions were primarily precipitated by adverse loss reserve development and declines in overall risk-adjusted capitalization. Commercial casualty writers represented half of the top 10 commercial rating changes by NPW, with commercial automobile, fidelity and surety, and workers’ compensation writers rounding out the top 10 (see Exhibit 23). All of the rating actions within the top 10 were upgrades. Notably, two of the largest groups, Travelers Companies, Inc. and ACE Ltd., were upgraded to the second highest ICR level of “aa+” in recognition of consistently positive five-year operating performance, overall strong ERM practices and strong business profiles, among other strengths.

Reinsurance The population of the U.S. reinsurance segment – which consists exclusively of reinsurers required to submit statutory filings to U.S. regulators – is very small and does not represent A.M. Best’s overall perspective on the global reinsurance industry. From a rating changes perspective, 2014 was a relative benign year as the ratings of only one U.S. reinsurer – PartnerRe – were upgraded and there were no rating downgrades. However, the lack of rating changes belies the challenges facing the segment from new entrants and alternative capital that will hinder the potential for positive rating outlooks and upgrades and, over the longer term, may result in negative outlooks and downgrades.

Rating Distribution There were 819 P/C rating units that had letter rating assignments at year-end 2014, compared with 859 in 2013. The rating distribution based on rating units is the most accurate gauge of A.M. Best’s overall opinion of the financial health of the universe of rated P/C insurance companies.

A.M. Best’s ICR scale is an independent opinion of an issuer/entity’s ability to meet its ongoing senior financial obligations. The ICR scale is composed of 22 rating levels grouped into nine categories (see Exhibit 25).

The percentage of rating units considered investment grade or secure was 91.9% at year-end 2014, slightly improved from 91.4% at year-end 2013 (see Exhibit 24). Although the absolute number of investment-grade ratings has trended downward, the percentage of rating units in the secure category has improved to its highest level in the latest five-year period, driven primarily by improved

Exhibit 23U.S. Property/Casualty – Top 10 Commercial Lines Rating Changes, 2014 Ranked by 2013 net premiums written.

Rating Change

Rating Effective

Date Company/Rating Unit AMB # Composite Ultimate Parent

NPW (USD

Millions)Current ICR

Prior ICR

+ 5/23/14 Travelers Group 18674 Commercial Casualty Travelers Companies, Inc. 21,619.5 aa+ aa+ 4/11/14 ACE American Group 18344 Commercial Casualty ACE Limited 4,652.9 aa+ aa+ 2/21/14 Great American Insurance Cos 05990 Surplus Lines American Financial Group, Inc 2,100.1 aa- a++ 5/23/14 Travelers Casualty and

Surety Co America03609 Fidelity & Surety Travelers Companies, Inc. 1,293.9 aa+ aa

+ 4/2/14 RSUI Group 18621 Commercial Casualty Alleghany Corporation 827.2 aa- a++ 10/3/14 Great West Casualty Co 00439 Commercial Automobile Old Republic International Corp 712.5 aa- a++ 4/17/14 Ally Insurance Group 18431 Warranty Ally Financial Inc 462.9 bbb+ bbb+ 10/3/14 Old Republic Insurance Cos 02976 Workers’ Compensation Old Republic International Corp 365.9 aa- a++ 8/12/14 Electric Insurance Co 02146 Commercial Casualty Wilmington Trust Company 353.3 a+ a+ 10/3/14 BITCO Insurance Cos 18434 Commercial Casualty Old Republic International Corp 333.1 aa- a+

Note: NPW is the aggregate NPW of the companies within a rating unit that were either upgraded or downgraded. Ratings are for the operating companies that comprise the rating unit


23


macroeconomic conditions over the past two years and historic policyholders’ surplus levels.

These same trends have driven a 6.3% increase in the number of rated entities with Superior ICRs (aa+, aa, or aa-). In 2014, 85 rating units, or 10.4% of rated entities, had superior ratings, the highest level over the five-year period. This is an increase from 80 rating units, or 9.3%, in 2013.

The majority of rating units remained in the Excellent (a+, a or a-) category at year-end 2014. These three ICR rating levels were assigned to 507 rating units, or 61.9% of the total ratings at year end, which was comparable to the 61.9% of ratings at year-end 2013.

Over the recent five-year period, there have been only three entities rated “aaa” (Exceptional) – GEICO, National Indemnity Group and United States Automobile Association (USAA). Both GEICO and National Indemnity are owned by Berkshire Hathaway Inc.

Exhibit 24U.S. Property/Casualty – Rating DistributionRating units.

2010 2011 2012 2013 2014

Category Rating LevelRating

Units %Rating

Units %Rating

Units %Rating

Units %Rating

Units %Investment Grade Exceptional aaa 3 0.3 3 0.3 3 0.3 3 0.3 3 0.4 Sub-Total 3 0.3 3 0.3 3 0.3 3 0.3 3 0.4

aa+ 13 1.4 14 1.6 14 1.6 17 2.0 16 2.0 Superior aa 16 1.8 15 1.7 18 2.1 17 2.0 16 2.0

aa- 56 6.2 48 5.4 43 5.0 46 5.4 53 6.5 Sub-Total 85 9.4 77 8.7 75 8.7 80 9.3 85 10.4

a+ 59 6.5 72 8.1 76 8.8 75 8.7 73 8.9 Excellent a 188 20.7 180 20.3 188 21.8 196 22.8 193 23.6

a- 301 33.1 293 33.1 273 31.7 261 30.4 241 29.4 Sub-Total 548 60.4 545 61.5 537 62.4 532 61.9 507 61.9 bbb+ 45 5.0 47 5.3 46 5.3 48 5.6 48 5.9 Good bbb 73 8.0 61 6.9 60 7.0 59 6.9 55 6.7

bbb- 76 8.4 71 8.0 61 7.1 63 7.3 55 6.7 Sub-Total 194 21.4 179 20.2 167 19.4 170 19.8 158 19.3

Total Investment Grade Ratings 830 91.4 804 90.7 782 90.8 785 91.4 753 91.9

Non-Investment Grade Fair bb+,bb,bb- 40 4.4 34 3.8 39 4.5 47 5.5 32 3.9 Marginal b+,b,b- 11 1.2 12 1.4 6 0.7 7 0.8 6 0.7 Weak ccc+,ccc,ccc-,cc 2 0.2 2 0.2 4 0.5 10 1.2 3 0.4 Poor c 2 0.2 0 0.0 0 0.0 1 0.1 0 0.0 Reg. Supervision/Liquidation rs 23 2.5 34 3.8 30 3.5 9 1.0 25 3.1Total Non-Investment Grade Ratings 78 8.6 82 9.3 79 9.2 74 8.6 66 8.1

Total Issuer Credit Ratings 908 100.0 886 100.0 861 100.0 859 100.0 819 100.0Note: Annual data as of Dec. 31 for each year. For Best’s Ratings criteria and definitions, visit www.ambest.com.Source: A.M. Best data & research

Exhibit 25Rating Translation Table

Financial Strength Rating Issuer Credit Rating

Secu

re

A++ aaa, aa+ Investment

Grade

A+ aa, aa-A a+, aA- a-B++ bbb+, bbbB+ bbb-

Vuln

erab

le

B bb+, bb

Non-Investment

Grade

B- bb-C++ b+, bC+ b-C ccc+, cccC- ccc-, ccD cE & F rs

24


The stability of the U.S. P/C industry is further reflected in the high percentage of investment-grade ratings of each of its segments, with the reinsurance segment having the highest percentage at 96%, the commercial segment at 94%, and the personal lines segment at 88.7% The relatively high percentage of non-investment grade ratings in the personal lines segment is due, in part, to its volatile property exposure, which is more susceptible to weather-related

losses from wind, hail and hurricane perils, and a greater number of rating units with single-state considerations.

The outlook for the ICRs of 78.8% of rated companies was stable at year-end 2014 (see Exhibit 30). However, while the overall number of negative outlooks declined in 2014 (due in part to an increase in the number of rating units with an “rs” outlook), there were a greater number of negative outlooks than positive in 2014 for the second consecutive year for the industry overall and in two of the three industry segments: commercial and personal (see Exhibit 31).

Exhibit 30U.S. Property/Casualty – Issuer Credit Rating Outlook ComparisonRating units.

2013 % 2014 %Stable 676 78.7 645 78.8Positive 47 5.5 41 5.0Negative 118 13.7 91 11.1Under Review 9 1.0 17 2.1SubTotal 850 99.0 794 96.9rs* 9 1.0 25 3.1Grand Total 859 100.0 819 100.0* rs = Regulatory Supervision/LiquidationSource: A.M. Best data & research





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8





16.2

11.9

1.0

10.6

12.410.9

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012 2013 2014 Q3 YTD

%




050100150200250300350400450

2012 2013 2014E*

USD

Billi

ons



Upgrades, 5.7

Downgrades, 5.6



Under Review, 1.7

Upgrades, 7.0

Downgrades, 3.5


Affirmations, 85.0

Under Review, 2.1







Exceptional1.3%

Superior9.5%

Excellent54.1%

Good23.7%

Fair6.0%

Marginal1.9%

Weak0.6%

rs*2.8%Non-








17

2521

13

2924

35

16

40 1 0

50 49

57

29

0

10

20

30

40

50

60


Ratin

g Un

its


633 846

985

1,13

9

967 1,22

0

1,73

0

1,14

3 1,99

1

4,68

8

7,65

5

2,78

5

3,36

3

5,24

6

4,95

7 6,30

4 7,63

0 8,78

0

0

2,000

4,000

6,000

8,000

10,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

USD

Mill

ions

Exceptional0.4%

Superior10.4%

Excellent61.9%

Good19.3%

Fair3.9%

Marginal0.7%

Weak0.4%

rs*3.1%

8.1%

Exceptional1.0%

Superior9.7%

Excellent66.6%

Good16.7%

Fair2.7%

Weak0.2%

rs*3.1%

6.0%Non-

InvestmentGrade

Non- Investment

Grade

(40)

(30)

(20)

(10)

0

10

20

30

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

USD

Billi

ons




Exceptional4.0%

Superior32.0%

Excellent52.0% Good

8.0%rs*

4.0%

4.0%

Non- Investment

Grade



56.1 61.877.3

63.455.3 55.7

62.8

29.730.9

30.0

29.831.5 31.7

30.4

0

20

40

60

80

100

120

2009 2010 2011 2012 2013 2014 Q3 YTD 5-Yr Avg

%


93.287.486.8

93.1

107.3

92.785.8


Published by A.M. Best Company

Special ReportChairman & President Arthur Snyder III

exeCutive viCe President Larry G. MayewskiexeCutive viCe President Paul C. Tinnirello

senior viCe Presidents Douglas A. Collett, Karen B. Heine, Matthew C. Mosher, Rita L. Tedesco

A.M. BeST CoMPAnyWoRLD HeADquARTeRS

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Phone: +52-55-5208-1264

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Phone: +852 2827-3400

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Currency house, diFCPo Box 506617, dubai, uae

Phone: +971 43 752 780*Regulated by the DFSA as a Representative Office

A Best’s Financial Strength Rating is an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a com-prehensive quantitative and qualitative evaluation of a company’s balance sheet strength, oper-ating performance and business profile. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. These ratings are not a warranty of an insurer’s current or future ability to meet contractual obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer’s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Financial Strength Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser.

A Best’s Debt/Issuer Credit Rating is an opinion regarding the relative future credit risk of an entity, a credit commitment or a debt or debt-like security. It is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile and, where appropriate, the specific nature and details of a rated debt security. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. These credit ratings do not address any other risk, including but not limited to liquidity risk, market value risk or price volatility of rated securities. The rat-ing is not a recommendation to buy, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser.

Any and all ratings, opinions and information contained herein are provided “as is,” without any expressed or implied warranty. A rating may be changed, suspended or withdrawn at any time for any reason at the sole discretion of A.M. Best.

In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information.

A.M. Best does not offer consulting or advisory services. A.M. Best is not an Investment Adviser and does not offer investment advice of any kind, nor does the company or its Rating Analysts offer any form of structuring or financial advice. A.M. Best does not sell securities. A.M. Best is compensated for its interactive rating services. These rating fees can vary from US$ 5,000 to US$ 500,000. In addition, A.M. Best may receive compensation from rated enti-ties for non-rating related services or products offered.

A.M. Best’s Special Reports and any associated spreadsheet data are available, free of charge, to all Best’s Insurance News & Analysis subscribers. Nonsubscribers can purchase the full report and spreadsheet data. Special Reports are available through our Web site at www.ambest.com/research or by calling Customer Service at (908) 439-2200, ext. 5742. Briefings and some Special Reports are offered to the general public at no cost. For press inquiries or to contact the authors, please contact James Peavy at (908) 439-2200, ext. 5644.

SR-2015-005

Exhibit 31U.S. Property/Casualty – Issuer Credit Rating Outlook, 2014Rating units, by business segment.

Personal % Commercial % Reinsurance %Stable 237 75.0 387 81.0 21 84.0Positive 17 5.4 22 4.6 2 8.0Negative 51 16.1 40 8.4 0 0.0Under Review 2 0.6 14 2.9 1 4.0SubTotal 307 97.2 463 96.9 24 96.0rs* 9 2.8 15 3.1 1 4.0Grand Total 316 100.0 478 100.0 25 100.0* rs = Regulatory Supervision/LiquidationSource: A.M. Best data & research

Contributors Andrew ColanninoMariza CostaKevin DorseyScott Mangan

Thomas MountGreg ReisnerDarian RyanRaymond Thomson

Documents

U.S. Property/Casualty Review Previebillion at year-end 2014 and USD 724.9 billion at year-end 2015, increases of 6.2% and 2.0%, respectively. A.M. Best does not include estimates