1. State of the P&C Market

2. State of the P&C Market P&C Market Presenters : Jim Dwane, Chartis Insurance Jim O’Connor, Willis 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” 2004 Capacity Increased Combined's Improved Rates come down 2006 Best Insurance Year Ever Combined's at 92.4% Investment return record 12.7% 2007 Investment return 10.9% 2008 Many natural disasters (bad year) Investment return.1% 2009 Investment return of 4.7%

9. Historical Perspective 2010 Investment Return of 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 Industry Combined 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 Taxes 1991–2011: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 with Catastrophe 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