2011 HALF-YEAR NATURAL CATASTROPHE REVIEW

July 12, 2011

Agenda

Welcome/Introduction Terese Rosenthal U.S. Natural Catastrophe Update Carl Hedde Global Natural Catastrophe Update Peter Höppe Economic Implications of Natural Catastrophe Losses Dr. Robert Hartwig

Questions and Answers

2

U.S. NATURAL CATASTROPHE UPDATE
Carl Hedde, SVP, Head of Risk Accumulation Munich Reinsurance America, Inc.

MR NatCatSERVICE
One of the world‘s largest databases on natural catastrophes The Database Today  From 1980 until today all loss events; for USA and selected countries in Europe all loss events since 1970.  Retrospectively, all great disasters since 1950.  In addition, all major historical events starting from 79 AD – eruption of Mt. Vesuvius (3,000 historical data sets).  Currently more than 30,000 data sets
© 2011 Munich Re 4

U.S. Natural Catastrophe Update

2011 Headlines

 Very active thunderstorm (tornado-hail) season with insured losses exceeding $16 billion, far above the 2001 to 2010 January – June average thunderstorm loss of $6.4 billion (in 2010 Dollars). It was also the deadliest thunderstorm season in over 50 years.  Extensive severe flooding events in Midwest and Great Plains  Large, damaging wildfires in Texas, Arizona, and New Mexico.  Major blizzard and ice storm in Midwest; severe freezing conditions in Southwest  Seasonal forecasts indicate “active” hurricane season; neither El Niño or La Niña conditions are expected to be a factor this year
© 2011 Munich Re 5

U.S. Natural Catastrophe Update

Natural Disaster Losses in the United States
First Six Months of 2011

As of July 6, 2011

Number of Events 43

Fatalities 593

Estimated Overall Losses (US $m) 23,573

Estimated Insured Losses (US $m) 16,350

Severe Thunderstorm Winter Storm Flood Earthquake

8 8 2

15 15 1

1,900 2,100 105

1,425 in progress in progress

Tropical Cyclone

0

0

0

0

Wildfire

37

7

125

50

Source: MR NatCatSERVICE

© 2011 Munich Re

6

U.S. Natural Catastrophe Update

Natural Disasters in the United States, 1980 – 2011
Number of Events (January – June Only)

120

100

First Six Months 2011 98 Events

80

60

40

20

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Geophysical events (Earthquake, tsunami, volcanic eruption)

Meteorological events (Storm)

Hydrological events (Flood, mass movement)

Climatological events (Extreme temperature, drought, forest fire)

Source: MR NatCatSERVICE

© 2011 Munich Re

7

U.S. Natural Catastrophe Update

Natural Disasters in the United States, 1980 – 2011
Number of Events (Annual Totals 1980 – 2010 vs. First Six Months 2011)

300

250

First Six Months 2011 98 Events

200

150

100

37 8

50

51 2

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Geophysical events (Earthquake, tsunami, volcanic eruption)

Meteorological events (Storm)

Hydrological events (Flood, mass movement)

Climatological events (Extreme temperature, drought, forest fire)

Source: MR NatCatSERVICE

© 2011 Munich Re

8

U.S. Natural Catastrophe Update

2011: Year of the Tornado

Pratt City, Alabama

Joplin, Missouri
Source: FEMA © 2011 Munich Re 9

U.S. Natural Catastrophe Update

2011: Year of the Tornado

 Deadliest tornado year since 1953: 593 fatalities  Deadliest single tornado since 1947: Joplin, Missouri, 155 fatalities  Most observed tornadoes in a month: 875, April  Largest number of tornadoes in a day: 226, April 27  Most EF5 Tornados in a year: 6 (tied for first with 1974)  Five insured billion-dollar outbreaks  Two thunderstorm outbreaks each caused insured losses of about $5 billion  Late April (Alabama) outbreak is among top 10 largest natural catastrophe losses in U.S. history
© 2011 Munich Re 10

U.S. Natural Catastrophe Update

U.S. Thunderstorm Loss Trends
January – June only, 1980 - 2011

Thunderstorm losses for the period January – June in 2011 were more than double of the 2006-2010 5-year average. First Half 2011 $16.4 bn

Source: Property Claims Service MR NatCatSERVICE

© 2011 Munich Re

11

U.S. Natural Catastrophe Update

U.S. Thunderstorm Loss Trends
Annual Totals 1980 – 2010 vs. First Half 2011

Average thunderstorm losses have increased fivefold since 1980. First Half 2011 First Half 2011 $16.4 bn $16.4 bn

Source: Property Claims Service MR NatCatSERVICE

© 2011 Munich Re

12

U.S. Natural Catastrophe Update

2011 U.S. Tornado Count

© 2011 Munich Re

13

U.S. Natural Catastrophe Update

Lower Mississippi Flood of 2011

April 2011

Source: NASA

© 2011 Munich Re

14

U.S. Natural Catastrophe Update

Lower Mississippi Flood of 2011

April 2011  Heavy snowmelt, saturated soils, and over 20 inches of rain in a month lead to the worst flooding of the lower Mississippi River since 1927.  Record river crests at Vicksburg and Natchez; Morganza Spillway opened in Louisiana to protect Baton Rouge and New Orleans from possible levee failures.  Extensive agricultural damage, property, and inland marine losses due to flood.  Economic Losses: $2 billion  Insured Losses: Estimation in Progress

© 2011 Munich Re

15

U.S. Natural Catastrophe Update

Other Notable Floods of 2011

June 2011  Similar to the triggers of the Mississippi River flood, heavy rains in the northern plains states and the melting of a heavy snowpack in the Rockies resulted in severe flooding along several river systems, including the:  Missouri River: Numerous breached levees (some intentional to prevent flooding in densely populated regions), agriculture and transportation networks severely disrupted, Fort Calhoun nuclear power plant threatened, but no damage.  Souris River: Record flood levels at Minot, North Dakota. Levees were overtopped by flood waters; an estimated 11,000 residents (25% of Minot’s population) was evacuated.

© 2011 Munich Re

16

U.S. Natural Catastrophe Update

Notable Wildfires in 2011

April – June  Texas: Over 3 million acres burned in west Texas from 12 major seats of fire. Over 200 homes and businesses destroyed, $50 million insured loss.  Arizona and New Mexico: “Wallow” fire largest in AZ history at 538,000 acres, Las Conchas fire near Los Alamos, 30 buildings destroyed.

Source: NASA

© 2011 Munich Re

17

U.S. Natural Catastrophe Update

Number of Acres Burned in Wildfires, 1980 – 2011 YTD

Source: Property Claims Service MR NatCatSERVICE

© 2011 Munich Re

18

U.S. Natural Catastrophe Update

U.S. Winter Storm Loss Trends
Annual totals 1980 – 2010 vs. First Half 2011

Average annual winter storm losses have increased over 50% since 1980. First Half 2011 $1.4 billion

Source: Property Claims Service MR NatCatSERVICE

© 2011 Munich Re

19

U.S. Natural Catastrophe Update

Notable Winter Storms of 2011

January 31-February 3, 2011  1-2 feet of snow in Chicago with 60+ mph wind gusts  Up to 1” of freezing rain across Ohio River Valley  Economic Losses: $900 million  Insured Losses: $650 million

Source: NOAA

Source: Property Claims Service MR NatCatSERVICE

© 2011 Munich Re

20

U.S. Natural Catastrophe Update

Notable Winter Storms of 2011

February 2-6, 2011  Cold arctic air over Rockies and Southwest  Deep freeze over agricultural areas of southwest during growing season  Economic Losses: $600 million  Insured Losses: $450 million (not including Agriculture)

-18
Source: Property Claims Service MR NatCatSERVICE

-9

0

9

18

27

36

45 ºF
Source: NOAA

© 2011 Munich Re

21

U.S. Natural Catastrophe Update

U.S. Tropical Cyclone Loss Trends
1980 – 2011

The current 5-year average (2006-2010) insured tropical cyclone loss is $3.2 bn.

Source: Property Claims Service MR NatCatSERVICE

© 2011 Munich Re

22

GLOBAL NATURAL CATASTROPHE UPDATE
Prof. Dr. Peter Höppe Head of Geo Risks Research/ Corporate Climate Center Munich Re

Global Natural Catastrophe Update

Natural loss events January – June 2011
World map

Severe storms, tornadoes USA, 20–25 May Floods USA, April–June Severe storms, tornadoes USA, 22–28 April Wildfires USA, May–June

Earthquake, tsunami Japan, 11 March Cyclone Yasi Australia, 2 Feb

Landslides, flash floods Brazil, 12/16 Jan

Floods, flash floods Australia, Dec 2010-Jan 2011

Number of events: 355
Natural catastrophes Selection of significant loss events (see table) Source: MR NatCatSERVICE Geophysical events (earthquake, tsunami, volcanic activity) Meteorological events (storm) © 2011 Munich Re

Earthquake New Zealand, 22 Feb Earthquake New Zealand, 13 June

Hydrological events (flood, mass movement) Climatological events (extreme temperature, drought, wildfire) 24

Global Natural Catastrophe Update

Worldwide Natural Disasters 2011
Significant Natural Disasters (January – June only)

Deadliest Disasters Date 11.3.2011 12/16.1.2011 22-28.4.2011 Event Earthquake, tsunami Landslides, flash floods Severe storm, tornadoes Area Japan Brazil USA Deaths 15,500 (still missing: 7,297) 1,350 350

Costliest Disasters (Insured Losses) Date 11.3.2011 22.2.2011 22-28.4.2011 Event Earthquake, tsunami Earthquake Severe storm, tornadoes Area Japan New Zealand USA Insured losses in US$m ~30.000 >10,000 5,050

Costliest Disasters (Overall Losses) Date 11.3.2011 22.2.2011 22-28.4.2011
Source: MR NatCatSERVICE

Event Earthquake, tsunami Earthquake Severe storm, tornadoes

Area Japan New Zealand USA

Overall losses in US$m 210,000 20,000 7,500
25

© 2011 Munich Re

Global Natural Catastrophe Update

Worldwide Natural Disasters 2011
Percentage Distribution of Insured Losses Per Continent (January – June only)

Insured losses 2011 (January – June only): US$ 60bn

49% 29%
<1%

<1% <1%
Continent Africa America Asia Australia/Oceania Europe
Source: MR NatCatSERVICE

Insured losses [US$ m] in 2011 Jan - June minor 17,800 30,080 12,900 100
© 2011 Munich Re

21%

26

Global Natural Catastrophe Update

Worldwide Natural Disasters 1980 – 2011
Percentage Distribution of Insured Losses Per Continent (January – June only)

Insured losses 1980 - 2011 (January – June only): US$ 389bn

12% 58% 21%

<1% 2% 6%
Continent Africa America Asia Australia/Oceania Europe
Source: MR NatCatSERVICE

Insured losses [US$ m] Jan – June only 1,000 237,200 45,100 25,100 80,900
© 2011 Munich Re 27

Global Natural Catastrophe Update

Worldwide Natural Disasters 1980 – 2011
Number of Events (January – June only)
600

500

First Six Months 2011 355 Events

400

300

200

100

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Geophysical events (Earthquake, tsunami, volcanic eruption)

Meteorological events (Storm)

Hydrological events (Flood, mass movement)

Climatological events (Extreme temperature, drought, forest fire)

Source: MR NatCatSERVICE

© 2011 Munich Re

28

Global Natural Catastrophe Update

Worldwide Natural Disasters 1980 – 2011
Overall and Insured Losses

Losses in 2011: Overall = US$ 265bn ; Insured = US$ 60bn
300

Loss figures 2011 January – June only

250

200

US$bn

150

100

50

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Overall losses (in 2011 values)

Insured losses (in 2011 values)

Source: MR NatCatSERVICE

© 2011 Munich Re

29

Global Natural Catastrophe Update

Natural Catastrophes, 2011
Overview and comparison with previous years

2011 (Jan – June)

2010 (Jan – June)

Average of the last 10 years 2001-2010 (Jan – June) 390 47,400

Average of the last 30 years 1981-2010 (Jan – June) 310 36,400

Top Year 1981 -2010 (Jan – June)

Number of events Overall losses in US$m
(original values)

355 265,000

480 97,200

2007 1995 (EQ Kobe) 1994 (EQ, US Northridge) 2010 (EQ Haiti)
30

Insured losses in US$m (original values) Fatalities

60,000

26,900

12,100

8,200

19,380

230,300

52,900

42,700

Source: MR NatCatSERVICE

© 2011 Munich Re

Global Natural Catastrophe Update

Worldwide Natural Disasters 2011
January – June only

Earthquake New Zealand

Three strong earthquakes in 9 months

High losses due to soil liquefaction

Earthquake Japan

Strongest EQ in Japan

Mw 9.0

Tornadoes, Wildfires, Floods US

Spring time brought extreme weather and climate events

Deadliest tornado outbreak since 1925 in the US (1. Half year : 589) Highest sea surface temperature off the Australian coastline
31

Floods Australia

The series of floods 2010/11 were the most devastating in modern Australian history
© 2011 Munich Re

Source: MR NatCatSERVICE

Global Natural Catastrophe Update

Normalised overall and insured losses from US thunderstorms All events
Overall losses Insured losses

Normalised overall losses: all events Wealth proxy: housing stock Estimated Trend: 1.9% p.a.

Normalised insured losses: all events Wealth proxy: housing stock Estimated Trend: 2.4% p.a.

p = 0.023

p = 0.010

Trends of losses in line with meteorological trend of thunderstorm conditions.

© 2011 Munich Re

32

Global Natural Catastrophe Update

Floods, Queensland, Australia
December 2010 to January 2011

Australia rainfall anomalies (Oct-Dec 2010)

Sea surface temperature is rising due to climate change
Region Australia Overall losses US$ 7,300m Insured losses US$ 2,550m
© 2011 Munich Re

Fatalities 35
33

Sources: MR NatCatSERVICE and New York Times

Global Natural Catastrophe Update

Deadliest/Costliest Earthquakes 1900 – June 2011

Date 1920 1976 2010 2004 1923

Affected Area China China Haiti Indonesia Japan

Fatalities 273,400 242,800 222,570 220,000 142,800

Date 2011 1995 2008 1994 2010
© 2011 Munich Re

Affected Area Japan Japan China USA Chile

Overall losses (US$m, original values) 210,000 100,000 85,000 44,000 30,000
34

Source: MR NatCatSERVICE

Global Natural Catastrophe Update

Costliest Natural Catastrophes Since 1950
Rank by insured losses

Year

Event

Region

Insured loss
US$m (in original values)

2005 2011 2008 1992 1994 2004 2005 2005 2011 2004

Hurricane Katrina EQ, tsunami Hurricane Ike Hurricane Andrew EQ Northridge Hurricane Ivan Hurricane Wilma Hurricane Rita EQ New Zealand Hurricane Charley

USA Japan USA, Caribbean USA USA USA, Caribbean USA, Mexico USA New Zealand USA, Caribbean
© 2011 Munich Re

62,200 ~30,000 18,500 17,000 15,300 13,800 12,500 12,100 >10,000 8,000
35

Source: MR NatCatSERVICE

Economic & Financial Implications of Natural Catastrophe Losses
First Half 2011
Insurance Information Institute July 12, 2011
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

Top 16 Most Costly World Insurance Losses, 1970-2011*
(Insured Losses, 2010 Dollars, $ Billions)

$80 $70 $60 $50 $40 $30 $20 $10 $0
Winter Storm Daria (1991)

Taken as a single event, the Spring 2011 tornado season would likely become the 9th costliest event in global insurance history
$11.3 $7.8 $8.0 $8.0 $9.0 $9.3 $10.0

3 of the top 15 most expensive catastrophes in world history have occurred in the past 18 months

$72.3

$20.5 $20.8 $14.0 $14.0 $14.9

$23.1 $24.9

$30.0

Chile Hugo Typhoon Charley New Rita Spring Wilma Quake (1989) Mirielle (2004) Zealand (2005) Tornadoes (2005) (2010) (1991) Quake (2011) (2011)

Ivan (2004)

Ike Northridge WTC (2008) (1994) Terror Attack (2001)

Andrew Japan Katrina (1992) Quake, (2005) Tsunami (2011)*

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable. Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

37

Top 12 (13?) Most Costly Disasters in U.S. History
(Insured Losses, 2010 Dollars, $ Billions)

$50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0

Taken as a single event, the Spring 2011 tornado season would likely become 5th costliest event in US insurance history
$22.6 $23.1 $17.5 $5.3 $6.3 $6.7 $8.2 $8.6 $14.0 $11.5 $12.8

$45.8

$4.3

Jeanne Frances Rita (2004) (2004) (2005)

Hugo (1989)

Ivan (2004)

Charley (2004)

Wilma (2005)

Ike Spring Northridge Andrew 9/11 Attack Katrina (2008) Tornadoes* (1994) (1992) (2001) (2005) (2011)

*Losses will actually be broken down into several “events” as determined by PCS. Sources: PCS; Insurance Information Institute inflation adjustments.

38

Insurers Making a Difference in Impacted Communities
Destroyed home in Tuscaloosa. Insurers will pay some 165,000 claims totaling $2 billion in the Tuscaloosa/ Birmingham areas alone.

Presentation of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm Recovery Fund
Source: Insurance Information Institute 39

Location of Tornadoes in the US, January 1—June 30, 2011

1,585 tornadoes killed 537 people through June 30, including at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in Joplin on May 22

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

40

Location of Large Hail Reports in the US, January 1—June 30, 2011

There were 7,176 “Large Hail” reports through June 30, causing extensive damage to homes, businesses and vehicles

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

41

Location of Wind Damage Reports in the US, January 1—June 30, 2011

There were 11,283 “Wind Damage” reports through June 30, causing extensive damage to homes and, businesses

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

42

Severe Weather Reports, January 1—June 30, 2011

There have been 20,044 severe weather reports through June 30; including 1,585 tornadoes; 7,176 “Large Hail” reports and 11,283 high wind events

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

43

Number of Severe Weather Reports in US, by Type: January 1—June 30, 2011
Tornadoes, 1,585 , 8%

Wind Damage, 11,283 , 56%

Large Hail, 7,176 , 36%
Tornadoes accounted for just 8% of all Severe Weather Reports through June 30 but more than 500 deaths
44

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

P/C Insurance Industry Financial Overview
Profit Recovery Will Be Set Back by High Catastrophe Losses & Other Factors
45

P/C Net Income After Taxes 1991–2011:Q1 ($ Millions)
$62,496
$80,000 $70,000 $60,000 $50,000 $40,000

$36,819

$38,501

$44,155

$30,773

$30,029

$24,404

$20,598

$21,865

$14,178

$30,000 $20,000 $10,000 $0 -$10,000

$19,316

$10,870

$20,559

$28,672

$34,670
10 11*

      

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.9% 2010 ROAS = 6.5% 2011:Q1 ROAS = 5.6%

P-C Industry 2011:Q1 profits were down 12.2% to $7.8B vs. $8.9B in 2010:Q1, as underwriting results deteriorated

$65,777

$5,840

$3,046

-$6,970
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.5% ROAS for 2011:Q1, 7.5% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO, Insurance Information Institute

$3,043

$7,807
46

A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs
Combined Ratio / ROE
110 105 100 95 8.9% 90 85 80 1978 1979 2003 2005 2006 2008* ROE* 2009* 2010* 2011* Combined Ratio 4.4% 14.3% 100.6 97.5 100.1 100.7 9.6% 92.6 7.4% 7.5% 6.5% 12.7% 101.0 99.3 100.8 102.2 15.9%

A combined ratio of about 100 generated ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979

18% 15% 12% 9% 6% 3% 0%

Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs
* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurers Source: Insurance Information Institute from A.M. Best and ISO data.
47

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

25%

1977:19.0%
20% 15%

1987:17.3%

History suggests next ROE peak will be in 2016-2017 2007:12.3% 2011: 6.1%*
10 Years

1997:11.6%

10% 5% 0%

1975: 2.4%
-5%

1984: 1.8%

1992: 4.5%

2001: -1.2%

*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for Q1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
48

Soft Market Persisted in 2010 but Growth Returned: More in 2011?
(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 3Year Decline Since 1930-33. 2011:Q1 growth was +3.5%; First Q1 growth since 2007

25%

20%

15%

10%

5%

0%
NWP was up 0.9% in 2010
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
*2011 figure is an estimate based on Q1 data. Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
49

-5%

-5% 0% 5%
10.2%

2002:Q1 2002:Q2 2002:Q3 2002:Q4 2003:Q1 2003:Q2 2003:Q3 2003:Q4 2004:Q1 2004:Q2 2004:Q3 2004:Q4 2005:Q1

-10% 10% 15% 20%

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

Sources: ISO, Insurance Information Institute.

15.1% 16.8% 16.7% 12.5% 10.1% 9.7% 7.8% 7.2% 5.6% 2.9% 5.5%

-4.6% 2005:Q2 -4.1% 2005:Q3 -5.8% 2005:Q4 -1.6%
2006:Q1 2006:Q2 2006:Q3 2006:Q4 2007:Q1 2007:Q2 2007:Q3 2007:Q4 2008:Q1 2008:Q2 2008:Q3 2008:Q4 2009:Q1 2009:Q2 2009:Q3 2009:Q4 2010:Q1 2010:Q2 2010:Q3 2010:Q4 2011:Q1

10.3% 10.2% 13.4% 6.6% -1.6% 2.1% 0.0% -1.9% 0.5%

Finally! Back-to-back quarters of net written premium growth (vs. the same quarter, prior year)
The long-awaited uptick. In 2011:Q1 occurring in personal lines predominating cos. (+3.8%) and commercial lines predominating cos. (+3.5%)
-1.8% -0.7% -4.4% -3.7% -5.3% -5.2% -1.4% -1.3% 1.3% 2.3% 1.3% 3.5%
50

Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q11
($ Billions)
$70 $60 $50 $40 $35.4 $30 $20 $10 $0 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:Q1
$47.2 $42.8 $58.0 $52.3 $51.9 $44.4 $36.0 $31.7 $45.3 $39.2 $56.9 $48.9 $59.4 $55.7 $52.9 $64.0

Investment gains in 2010 were the best since 2007

$13.5

Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to Fall by 50% in 2008
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. * 2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute.
1

51

Treasury Yield Curves: Pre-Crisis (July 2007) vs. June 2011*
6% 5% 4% 3% 2% 1% 0.02% 0% 1M 3M 6M 1Y 2Y 3Y 5Y 0.04% 0.10% 0.18% 4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%

4.23%

Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2012.
0.71% 0.41%

3.91% 3.00% 2.29% 1.58%

QE2 Target

June 2011 Yield Curve* Pre-Crisis (July 2007) 7Y 10Y 20Y 30Y

The End of the Fed’s Quantitative Easing Is Unlikely to Push Interest Rates Up Substantially Given Ongoing Economic Weakness
*Average of daily rates. Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
52

Financial Strength & Underwriting
Cyclical Pattern is P-C Impairment History is Directly Tied to Underwriting, Reserving & Pricing
53

P/C Insurer Impairments, 1969–2010
70
8 of the 18 in 2009 were small Florida carriers. Total also includes a few title insurers.

50 48

55

60 50

60 58

36

34

31 34

30

19

29

31

18 19

35 18 14 15

40

41

49 50 47

49

16 14 13

15 12

13 12

16

20 10 0

11

12

16 18 5 11
54

9

9

8

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
Source: A.M. Best Special Report “1969-2010 Impairment Review,” June 21, 2010; Insurance Information Institute.

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

7

9

Reasons for US P/C Insurer Impairments, 1969–2010
Historically, Catastrophe Losses Account for Only a Small Share of P-C Insurer Impairments.
Reinsurance Failure Sig. Change in Business Misc.

3.6% 4.0% 8.6%

Investment Problems
(Overstatement of Assets)

7.3%

40.3%

Deficient Loss Reserves/ Inadequate Pricing

Affiliate Impairment

7.8%

7.1%
Catastrophe Losses

7.8%

13.6%
Rapid Growth
55

Alleged Fraud

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010
Catastrophe Exposed Lines Account for a Relatively Small Share of the Premium Volume of Impaired Insurers Over the Past Decade
Financial Guaranty

Title Surety Med Mal

2.0% 4.4% 4.8% 26.6%

Workers Comp

6.5%
Other Liability

6.9%

Commercial Auto Liability

7.7% 8.1%
Pvt. Passenger Auto

22.2% 10.9%

Commercial Multiperil

Homeowners
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
56

SURPLUS/CAPITAL/CAPACITY
Have Large Global Losses Reduced Capacity in the Industry, Setting the Stage for a Market Turn?
57

US Policyholder Surplus: 1975–2011*
($ Billions)
$600 $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11*

Surplus as of 3/31/11 was a record $564.7B, up from $437.1B at the crisis trough at 3/31/09. Prior peak was $521.8 as of 9/30/07. Surplus as of 3/31/11 was 8.2% above 2007 peak; Crisis trough was as of 3/31/0916.2% below 2007 peak.

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

The Premium-to-Surplus Ratio Stood at $0.77:$1 as of 3/31/11, A Near Record Low (at Least in Recent History)**
* As of 3/31/11. Source: A.M. Best, ISO, Insurance Information Institute.
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Policyholder Surplus, 2006:Q4–2011:Q1
($ Billions)
$580 $560 $540
$521.8$517.9 $515.6 $512.8 $520 $505.0 $496.6 $500 $487.1 $478.5

2007:Q3 Previous Surplus Peak

Surplus set a new record in 2011:Q1*
$564.7 $556.9 $544.8

$540.7 $530.5 $511.5 $490.8 $463.0

$480 $460 $440 $420

The Industry now has $1 of surplus for every $0.77 of NPW—the strongest claimspaying status in its history.

$455.6

$437.1

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1

Quarterly Surplus Changes Since 2007:Q3 Peak
*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.
Sources: ISO, A.M .Best.

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%) 09:Q3: -$31.0B (-5.9%) 09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%) 10:Q2: +$8.7B (+1.7%) 10:Q3: +$23.0B (+4.4%) 10:Q4: +$35.1B (+6.7%) 11:Q4: +$42.9B (+8.2%)

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Outlook for the 2011 Atlantic Hurricane Season
Above Average Activity, More Landfalls Expected
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Outlook for 2011 Hurricane Season: 75% More Active Than Average
Average* Named Storms Named Storm Days Hurricanes Hurricane Days Intense Hurricanes Intense Hurricane Days Accumulated Cyclone Energy Net Tropical Cyclone Activity 9.6 49.1 5.9 24.5 2.3 5.0 96.1 100% 2005
(Katrina Year)

2011F 16 80 9 35 5 10 160 175%
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28 115.5 14 47.5 7 7 NA 275%

*Average over the period 1950-2000. Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2011
Average* Entire US Coast US East Coast Including Florida Peninsula Gulf Coast from FL Panhandle to Brownsville, TX 52% 31% 30% 2011F 72% 48% 47%

ALSO…Above-Average Major Hurricane Landfall Risk in Caribbean for 2011 (61% vs. 42%)
*Average over the period 1950-2000. Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.

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US Property Residual Markets Remain Under Strain Most States Fail to Address Their Vulnerabilities to Catastrophic Coastal Loss
63

U.S. Residual Market Exposure to Loss ($ Billions)
($ Billions)
$900 $800 $700 $600 $500 $400 $300 $200 $100 $0 1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $54.7

Katrina, Rita and Wilma 4 Florida Hurricanes
$430.5 $419.5 $372.3 $281.8 $221.3 $150.0 $292.0 $244.2 $656.7

$771.9 $703.0 $696.4

$757.9

Hurricane Andrew

In the 21-year period between 1990 and 2010, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7 billion in 1990 to $757.9 billion in 2010.
Source: PIPSO; Insurance Information Institute (I.I.I.); http://www.iii.org/pr/last-resort-2010.
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U.S. Residual Market: Total Policies In-Force (1990-2010) (000)
(000)
3,000
4 Florida Hurricanes Katrina, Rita and Wilma

2,780.6

2,840.4

2,841.4

2,500 2,209.3 2,203.9 2,000
Hurricane Andrew

2,621.3 2,479.4

1,785.0 1,458.1

1,741.7 1,642.3

1,500 1,000 500 0

1,319.7 931.6

1,196.5

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

In the 21-year period between 1990 and 2010, the total number of policies in-force in the residual market (FAIR & Beach/Windstorm) Plans has more than tripled.
Source: PIPSO; Insurance Information Institute; http://www.iii.org/pr/last-resort-2010.
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Insurance Information Institute Online:

www.iii.org
Thank you for your time and your attention! Twitter: twitter.com/bob_hartwig
66

More Information

Press Inquiries Terese Rosenthal Phone: 609.243.4339 E-mail: trosenthal@munichreamerica.com

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67

THANK YOU FOR ATTENDING TODAY’S WEBINAR.

© Copyright 2011 Munich Reinsurance America, Inc. All rights reserved. "Munich Re" and the Munich Re logo are internationally protected registered trademarks. The material in this presentation is provided for your information only, and is not permitted to be further distributed without the express written permission of Munich Reinsurance America, Inc. or Munich Re. This material is not intended to be legal, underwriting, financial, or any other type of professional advice. Examples given are for illustrative purposes only. Each reader should consult an attorney and other appropriate advisors to determine the applicability of any particular contract language to the reader's specific circumstances.

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