State of the P&C Market

1. State of the P&C Market

2. State of the P&C Market Presenters : Jim Dwane, Chartis Insurance Jim O’Connor, Willis

3. Agenda • Definitions & Historical Perspective • Industry Trends • Q & A

4. Definition of a Soft Market • Excess Capacity • Policy Holder Surplus (Current reserves to pay future losses) • The more surplus the more premium companies can write • Supply goes up; demand stays the same, Prices go down.

5. Impact of Combined Ratios • Combined ratio = losses paid out + expenses incurred / premiums • Combined ratio < 100% Insurance company making a profit • Combined ratio > 100% companies losing money on underwriting • Historical Industry average – 100% • Why would insurance companies write to break even? “Investment Return”.

6. Historical Perspective Middle 80’s • Industry was losing money • Rate of return had plummeted • Shortfall of capacity due to profitability • What Happened? • Coverage retracted • Prices go up an average of 25 – 50% • Tough to buy coverage

7. Historical Perspective 2001 • Worst Year in Industry History • Combined ratio was 115% • Industry lost money for the first time ever ($13.8 billion) • Surplus depleted • Rates sky rocketed

8. “Changes in the Wind” 2007 • Investment return 10.9% 2008 • Many natural disasters (bad year) • Investment return .1% 2009 • Investment return of 4.7% 2004 • Capacity Increased • Combined's Improved • Rates come down 2006 • Best Insurance Year Ever • Combined's at 92.4% • Investment return record 12.7%

9. Historical Perspective 2010 • Investment Returnof 3.1% Pop Quiz • What is the average long term rate of return for the Fortune 500?

10. 2011 Market • Soft Phase which began in 2004 continues • No major storms make land fall in US in 2010 • Deepwater Horizon spill. Insured losses 4.6 billion, only effects energy markets • Market remains “Over capitalized” • Mixed Underwriting Results – net income after taxes decreases 29% from 2010

11. 2011 Market • Recession Issues • Started with Sub-prime meltdown in 2007 • Economic slowdown – less to insure • Demand for Insurance has tumbled – “Capacity Increases” • Slow / No recovery – Continue pressure on premiums • Insurance companies still competing for their share of a shrinking market

12. What Could Change The Market? • Reserve release Issues • 2008 – 2010: Companies harvest “redundant” reserves to help offset losses on other parts of the balance sheets • 2011 reserves – will not have the benefit of prior year reserve releases • Possible release errors • Possibly to aggressive • Profitability could plummet • Inflation could put pressure on reserve adequacy.

13. What Could Change The Market? • Loss Activity – a large catastrophe or a number of smaller ones • Universal application of RMS 11- increase loss estimates 60% to 150% • Current spotty usage and blended with RMS 7 • Looming Workers Compensation crisis • Average Workers Compensation premium is now below Q4 2000 levels • Rates have dropped 63% since 2004 • Combined Ratio • 2005 – 54% • 2010 – 115%

14. Property /Casualty Ongoing and Future Trends • Low Levels of Premium Growth • Rate Stabilization • Continued Deterioration in Underlying Underwriting Results • Continued Strain on ROE • Continued Improvements in Governance & ERM – “Finally More than a Buzzword” • Increased Likelihood of Consolidation • More Sophisticated Modeling Driving Insurance Company Portfolio Management

15. Low Levels of NWP Growth • 2010 - .9% • 2011 – 3%-4% • 2012 – 4%-5% • 2013 – 5%-6% • Some recovery as a result of overall economic environment • Some recovery as a result of rate stabilization • Sources: AM Best; Insurance Information Institute; SNL Financial; Conning Research & Consulting

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

17. Rate Stabilization • Six straight years of decline • Through 2Q, pricing is flat • …But the market is not quite ready to “turn”

18. Average Commercial Rate Change, All Lines, (1Q:2004–2Q:2011)

19. Change in Commercial Rate Renewals, by Line: 2011-Q2

20. Criteria Necessary for a “Market Turn”: • All Four Criteria Must Be Met:

21. Continued Deterioration in Underlying U/W Results • Large underwriting losses are not sustainable in the current investment environment. • Industry combined ratio has climbed steadily since 2006 • 2011 is already the highest catastrophe loss year on record.

22. Underwriting Gain (Loss)1975–2011*

23. P/C Insurance IndustryCombined Ratio, 2001–2011:H1*

24. Continued Strain on Return on Equity • Combined ratios must be better than they used to be! • The industry continues to struggle to meet its cost of capital. • 2008 – 6.4% shortfall • 2009 – 3.2% shortfall • 2010 – 2.7% shortfall

25. A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs

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

27. Continued Improvements in Governance & ERM • ERM – “Finally more than a Buzzword” • Companies are more aware of their correlated and uncorrelated risk • Board Level Committees • More robust Chief Risk Officer function

28. Increased Likelihood of Consolidation Driven By: • Need for infrastructure & scale • Solvency II in Europe as a means of meeting the new Capital requirements • A protracted soft market that is having an “exhausting” effect on smaller and/or weaker carriers & brokers.

29. Improved Modeling Sophistication • Actuarial modeling has become more precise and more broadly used • Increased refinement of catastrophe modeling • There is an ongoing reduction in the correlation among lines as it relates to portfolio management. • Property markets have CAT & Casualty markets have TORT, inflation & public policy

30. Q&A

31. P/C Net Income After Taxes1991–2011:Q1 ($ Millions)

32. Global Catastrophe Loss Summary: First Half 2011

33. Insured Loss Estimates for Selected Major Catastrophes in 2011

34. US Second Quarter Insured Catastrophe Losses, 2000–2011

35. Top 15 Most Costly World Insurance Losses, 1970-2011*

36. Worldwide Natural Disasters,1980 – 2011*

37. Worldwide Natural Disasters 1980–2011,Overall and Insured Losses*

38. US Insured Catastrophe Losses

39. Combined Ratio Points Associated withCatastrophe Losses: 1960 – 2011:H1*

40. P/C Reserve Development, 1992–2011E

41. US Policyholder Surplus:1975–2011*

42. Policyholder Surplus,2006:Q4–2011:Q1

43. Historically, Hard Markets Follow When Surplus “Growth” is Negative* Historically, Hard Markets Follow When Surplus “Growth” is Negative*

44. P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter