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AFP Insurance Client Conference Miami, FL October 16, 2012 Download at iii/presentations

Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond. AFP Insurance Client Conference Miami, FL October 16, 2012 Download at www.iii.org/presentations. Robert P. Hartwig, Ph.D., CPCU, President & Economist

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AFP Insurance Client Conference Miami, FL October 16, 2012 Download at iii/presentations

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  1. Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL October 16, 2012 Download at www.iii.org/presentations Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5520  Cell: 917.453.1885  bobh@iii.org  www.iii.org

  2. Reasons for Optimism, Causes for Concern in the Insurance Industry The Outlook for the Economy Is Still Cloudy, But the Outlook for Insurance Could Improve 2

  3. Reasons for Optimism, Causes for Concern in the Insurance Industry • Slow Economic Growth Will Persist through 2013 • No Double Dip or Second Recession unless we go completely off the “Fiscal Cliff” • Economy is more resilient than commonly presumed • Consumer Confidence Has Improved • Consumer Spending is Recovering Gradually, Albeit Unevenly • Consumer and Business Lending Are Expanding, Albeit Fitfully • Housing Market Remains Weak but Has Bottomed Out • HousingConstruction will become a more important growth driver by mid-2013/2014 • Private Sector Hiring is Consistently Positive for 33 Months • Acceleration in hiring is possible in 2013 compared to 2012 • Government employment may be begin to turn positive • Interest Rates Remain Low (Fed to Keep Rates Lows Until mid-2015) • Good for borrowers; Challenge for savers and institutional investors like insurers • Major contributing factor to pension shortfalls • Inflation Is Up Marginally But Remains Under Control • Stock and Bond Markets More Stable, Less Volatile Compared to 2008/09 • Eurozone Recession/ China Slowdown Don’t Push US into Recession • Eurozone does not (completely) disintegrate; Greece could exit • Political Uncertainty, Fiscal Cliff, Regulatory Uncertainty Loom Large in US eSlide – P6466 – The Financial Crisis and the Future of the P/C

  4. The Strength of the Global and US Economies Will Influence Insurer Growth Opportunities Consumer Demand for Insurance Products Should Increase 4

  5. US Real GDP Growth* The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8% Real GDP Growth (%) Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway 2012 is expected to see slow growth lasting into 2013; Fed’s QE3 could push 2013 GDP up 0.2% Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and Gradually Benefit the Economy Broadly * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 10/12; Insurance Information Institute.

  6. Annual Inflation Rates, (CPI-U, %),1990–2013F Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble reduced inflationary pressures in 2009/10 Higher energy, commodity and food prices pushed up inflation in 2011, but not longer term inflationary expectations. Annual Inflation Rates (%) The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and commodity prices, plus U.S. debt burden, remain longer-run concerns Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/12 (forecasts).

  7. Medical Cost Inflation Has Outpaced Overall Inflation For Over 50 Years A claim that cost $1,000 in 1961 would cost nearly $17,500 based on medical cost inflation trends over the past 51 years. Source: Department of Labor (Bureau of Labor Statistics)

  8. P/C Net Premium Growth: Annual Change, 1971—2012:H1 (Percent) 1975-78 1984-87 2000-03 Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33. 2012:H1 growth was +3.6% Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  9. 3 Decades of U.S. GDP vs. L/A Premiums:Fairly Strong Association Premiums, Billions GDP, Billions 2001 Recession 2008-09 Recession Note: 2011 premium data is premiums for 2011:Q3, annualizedSources: http://www.bea.gov/national/xls/gdplev.xls , NAIC Annual Statement data, via SNL Financial; I.I.I. calculations

  10. Real GDP Growth Forecasts: Major Economies: 2011 – 2013F The Eurozone and UK are in recession. Both should end by early 2013 China growth has slowed, but remains strong in an expected “soft landing” scenario Rebuilding acts as a stimulus to Japanese economy Tepid US recovery continues Growth Prospects Vary Widely by Region: Stabilizing in the US, Mild Recession in the Eurozone, A “Soft Landing” in China and India, Reconstruction Stimulus in Japan and Modest Growth in America’s Largest Trading Partners—Canada and Mexico. Sources: Blue Chip Economic Indicators (9/2012 issue); Insurance Information Institute. 10

  11. GDP Growth: Advanced & Emerging Economies vs. World, 1970-2013F Emerging economies (led by China) are expected to grow by 5.3% in 2012 and 5.6% in 2013. GDP Growth (%) World output is forecast to grow by 3.3% in 2012 and 3.6% in 2013. The world economy shrank by 0.6% in 2009 amid the global financial crisis Advanced economies are expected to grow at a sluggish pace of 1.3% in 2012 and 1.5% in 2013. Source: International Monetary Fund, World Economic Outlook , Oct. 2012; Ins. Info. Institute.

  12. Global Real (Inflation Adjusted) NonlifePremium Growth: 1980-2010 Nonlife premium growth in emerging markets has exceeded that of industrialized countries in 27 of the past 31 years, including the entirety of the global financial crisis.. Average: 1980-2010 Industrialized Countries: 3.8% Emerging Markets: 9.2% Overall Total: 4.2% Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as well as a lack of consistent cyclicality Source: Swiss Re, sigma, No. 2/2010. 12 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  13. Nonlife Real Premium Growth in 2010 Latin and South American markets performed relatively well during and after the global financial crisis in terms of growth There was also growth in the Middle East, East and South Asia as well as Australia and New Zealand Source: Swiss Re, sigma, No. 2/2011. 13 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  14. Percent Change in Real GDP by State, 2011 Growth varied considerably across states but in total was weak in 2011 with US overall growth at just 1.7% TX has been an economic growth leader Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute.

  15. Consumer Sentiment Survey (1966 = 100) January 2010 through September 2012 Optimism among consumers Increased in September, and is well above year-ago levels; Suggests concern, but not fear on the part of consumers. Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially in late 2011 and early 2012 Source: University of Michigan; Insurance Information Institute

  16. Auto/Light Truck Sales, 1999-2022F New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is still far below 1999-2007 average of 17 million units, but a recovery is underway. (Millions of Units) Job growth and improved credit market conditions will boost auto sales in 2012 and beyond Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector. Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 10/12); Insurance Information Institute.

  17. New Private Housing Starts, 1990-2022F New home starts plunged 72% from 2005-2009; A net annual decline of 1.49 million units, lowest since records began in 1959 (Millions of Units) Job growth, improved credit market conditions and demographics will eventually boost home construction Low inventories of existing homes, and low mortgage rates and stimulating new home construction for the first time in years Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 10/12); Insurance Information Institute.

  18. Construction Employment,Jan. 2010—September 2012* Construction employment is still below where it was in Jan. 2010. In a normal recovery, construction employment would be growing robustly (Thousands) *Seasonally adjusted Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute. 18 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  19. Value of Construction Put in Place, August 2012 vs. August 2011* Growth (%) Private: +12.1% Public: -3.5% Private sector construction activity is up in both the residential and nonresidential segments Public sector construction activity remains depressed Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue *seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

  20. ISM Manufacturing Index (Values > 50 Indicate Expansion) January 2010 through September 2012 Manufacturing activity contracted in June for the first time in nearly 3 years, but a resumption of expansion began in September The manufacturing sector expanded for 35 of the 38 months from Jan. 2010 through Sept. 2012. The question is whether this will continue. Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.

  21. Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—August 2012 $ Millions ENERGY INTENSIVE The value of Manufacturing Shipments in Aug. 2012 was up 31% to $477B from its June 2009 trough. June figure is only 1.7% below its previous record high in July 2008. Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to Aug. 2012 was 31%. Manufacturing is an energy intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages *seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 21 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  22. ISM Non-Manufacturing Index (Values > 50 Indicate Expansion) January 2010 through September 2012 Optimism among non-manufacturers was stable in late 2011 and remained expansionary in 2012 Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue. Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.

  23. Business Bankruptcy Filings,1980-2012: Q1 % Change Surrounding Recessions 1980-82 58.6% 1980-87 88.7% 1990-91 10.3% 2000-01 13.0% 2006-09 208.9%* 2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1:2011 Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute 23 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  24. Private Sector Business Starts, 1993:Q2 – 2011:Q4* Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000* (Thousands) Business starts were up 2.2% to 748,000 in 2011 vs. 2010. 742,000 new business starts were recorded in 2010, up 6.0% from 700,000 in 2009, which was the slowest year for new business starts since 1993 Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But Are Recovering Slowly * Data through Dec. 31, 2011 are the latest available as of Oct. 3, 2012; Seasonally adjusted. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. 24 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  25. NFIB Small Business Optimism Index January 1985 through September 2012 Small business optimism has increased but is still only at the level it was when the Financial Crisis began Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute.

  26. 12 Industries for the Next 10 Years: Insurance Solutions Needed Health Care Health Sciences Energy (Traditional) Many industries are poised for growth, though insurers’ ability to capitalize on these industries varies widely Alternative Energy Petrochemical Agriculture Natural Resources Technology (incl. Biotechnology) Light Manufacturing Insourced Manufacturing Export-Oriented Industries Shipping (Rail, Marine, Trucking)

  27. Healthcare Employment,2002—September 2012* (Thousands) Employment in the Healthcare industry increased by 9.8%-- a gain of 1.3 million jobs between Dec. 2007 (start of the recession) and Sept. 2012 The increase in healthcare employment has driven workers comp payroll exposures up faster than almost any other industry *Seasonally adjusted Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute. 27 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  28. Oil & Gas Extraction Employment,Jan. 2010—August 2012* (Thousands) Oil and gas extraction employment is up 26.3% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in the US. *Seasonally adjusted Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute. 28 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  29. P/C Growth Analysis by State: 2006 - 2011 Premium Growth Rates Vary Tremendously by State 29

  30. Direct Premiums Written: Total P/CPercent Change by State, 2006-2011 Top 25 States A limited number of states showed strong growth over the past 5 years Sources: SNL Financial, LLC.; Insurance Information Institute.

  31. Direct Premiums Written: Total P/CPercent Change by State, 2006-2011 Bottom 25 States States with the poorest performing economies also produced the most negative net change in premiums of the past 5 years Sources: SNL Financial, LLC.; Insurance Information Institute.

  32. Presidential Politics & the P/C Insurance Industry How Is Profitability Affected by the President’s Political Party? 32

  33. P/C Insurance Industry ROE by Presidential Administration, 1950- 2012* OVERALL RECORD: 1950-2012* Democrats 7.67% Republicans 7.97% Party of President has marginal bearing on profitability of P/C insurance industry *Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments. Estimated ROE for 2012 = 7.0%. Source: Insurance Information Institute

  34. P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2012* BLUE = Democratic PresidentRED = Republican President Nixon/Ford Clinton Bush II Reagan/Bush I Carter Obama Truman Eisenhower Kennedy/ Johnson *ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0% Source: Insurance Information Institute

  35. Labor Market Trends Massive Job Losses Sapped P/C Life Exposures, But Trends Are Improving 35

  36. Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling January 2000 through Sept. 2012, Seasonally Adjusted (%) U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 14.7% in Aug. 2012 Recession ended in November 2001 Unemployment kept rising for 19 more months Recession began in December 2007 Unemployment stood at 7.8% in Aug. 2012 Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983. Peak rate in the last 30 years: 10.8% in November - December 1982 Sep. 12 Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving Source: US Bureau of Labor Statistics; Insurance Information Institute. 36 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  37. Monthly Change in Private Employment January 2008 through Sept. 2012 (Thousands) 104,000 private sector jobs were created in September Monthly Losses in Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period Private Employers Added 4.83 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

  38. Top 15 Industries with Largest Projected Growth in Wage and Salary Employment: 2010-2020P (Thousands) Surprisingly, growth in Construction employment is projected to lead all industries from 2010 to 2020. Reason: Starts from low base and assumes a resumption of more normal economic growth patterns Sources: US Bureau of Labor Statistics: http://www.bls.gov/news.release/ecopro.t03.htm ; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  39. Cumulative Change in Government Employment: Jan. 2010—Sept. 2012 January 2010 through Sept. 2012* (Millions) Government at all levels has shed nearly half a million jobs since Jan. 2010 even as private employers created 4.83 million jobs, though losses may now be ending. Cumulative job losses through Sept. 2012 totaled 478,000 Temporary Census hiring distorted 2010 figures Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the Financial Crisis, Causing Them to Reduce Staff Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

  40. Unemployment Rates by State, August 2012:Highest 25 States* In August, 26 states reported over-the-month unemployment rate increases, 12 states and the District of Columbia had decreases, and 12 states had no change. *Provisional figures for August 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

  41. Unemployment Rates by State, August 2012: Lowest 25 States* In August, 26 states reported over-the-month unemployment rate increases, 12 states and the District of Columbia had decreases, and 12 states had no change. *Provisional figures for August 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

  42. P/C Insurance Industry Financial Overview Profit Recovery Was Set Back in 2011 by High Catastrophe Loss & Other Factors 42

  43. P/C Net Income After Taxes1991–2012:Q2 ($ Millions) P-C Industry 2012:H1 profits were up 245% from 2011:H1, due primarily to lower catastrophe losses • 2005 ROE*= 9.6% • 2006 ROE = 12.7% • 2007 ROE = 10.9% • 2008 ROE = 0.1% • 2009 ROE = 5.0% • 2010 ROE = 6.6% • 2011 ROAS1 = 3.5% • 2012:H1 ROAS1 = 5.9% * ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for 2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO, Insurance Information Institute

  44. A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,10% in 2005 and 16% in 1979 Combined Ratio / ROE Year Ago 2011:H1 = 109.4, 2.3% ROE Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs * 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:H1 combined ratio including M&FG insurers is 102.2, ROAS = 5.9%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

  45. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:H1* History suggests next ROE peak will be in 2016-2017 ROE 1977:19.0% 1987:17.3% 2006:12.7% 10 Years 1997:11.6% 10 Years 2012:H1: 6.2% 9 Years 2011:4.6%* 1975: 2.4% 2001: -1.2% 1992: 4.5% 1984: 1.8% *Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:H1 ROAS = 5.9% including M&FG. Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

  46. ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2012:H1* (Percent) P/C Profitability Is Both by Cyclicality and Ordinary Volatility Katrina, Rita, Wilma Sept. 11 Hugo Lowest CAT Losses in 15 Years 4 Hurricanes Andrew Record Tornado Losses Northridge Financial Crisis* * Excludes Mortgage & Financial Guarantee in 2008 – 2012. 2012 Fortune 500 figure is III estimate. Sources: ISO, Fortune; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  47. Life/Health Insurance Industry Financial Overview Steady but Unspectacular 47

  48. Life/Annuity Industry Profits,2001-2011 Billions The Life/Annuity industry has produced steady (if unspectacular) profits,except for years in which the industry’s investment results produced significant realized capital losses. Sources: NAIC, via SNL Financial; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  49. Realized Capital LossesDepress Net Income Source: NAIC Annual Statement data, Summary of Operations and Exhibit of Capital Gains (Losses)

  50. Don’t Call Itthe “Life Insurance” Industry Annuities DominateIndustry Premiums and Profits 51

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