Nick Bloxham

NACUSO Property & Casualty

Advisory Board(April 2015)

Overview - P&C Industry: From the Carrier Perspective

Economic Changes, Catastrophes and their Impact on Insurers

Why do Credit Unions have a competitive advantage in the P&C arena?

Topics

P&C Insurers: How Many? What Types?

2,718 P/C insurance companies in US in 2013* These 2,718 companies consolidate to 1,266 groups Some larger insurance groups have dozens of subsidiaries

Shareholder-owned (Stock) insurers: 776organizations

Policyholder-owned Mutual companies: 397

Reciprocals-Business owned insurers-Government and partner owned Insurers- Make up the remainder

The P/C Insurance Industry(as of year-end 2013)

$467.9 Billion in Earned PremiumsAbout 51% personal lines, 49% commercial

$1.5 Trillion in Assets (compared to $3.5 trillion for life insurers)

$663.3 Billion in Policyholder Surplus

Three Key Drivers of Profits

Underwriting Results

Investment Results

Adequacy of Reserves and Capital/Surplus

P&C Historical Results

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:H1 combined ratio including M&FG insurers is 98.9; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.

Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

96.799.0

102.4

106.5

95.7

14.3%

15.9%

12.7%

10.9%

7.4%7.9%

4.7%

6.2%7.7%

9.6%8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:H1

0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

-5%

0%

5%

10%

15%

20%

25%

50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

14E

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers. 2014 figure is through Q3.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0%

1987:17.3%

1997:11.6%

2006:12.7%

1984: 1.8% 1992: 4.5%

2001: -1.2%

ROE

1975: 2.4%

2013 10.4%

2014:H1 7.6%

Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2014*

1969: 3.9%

1965: 2.2%1957: 1.8%

1972:13.7%

1966-67:

5.5%1959:6.8%

1950:8.0%

1950-70: ROEs were lower in this period. Low interest rates, low

inflation.

1970-90: Peak ROEs were much higher in this period. High interest

rates, and rapid inflation.

1990-2010s: Déjà vu. Excluding mega-CATs,

this period is very similar to the 1950-

1970 period

Number of Years with Underwriting Profits by Decade, 1920s–2010s

0 0

3

1

5

4

8

10

7

6

0

2

4

6

8

10

12

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s

Sources: Insurance Information Institute research from A.M. Best Data.

Number of Years with Underwriting Profits

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –

But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

Property/Casualty Insurance Industry Investment Income: 2000–20141

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4$45.7

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.

1 Investment gains consist primarily of interest and stock dividends. *2014 figure is estimated based on annualized data through Q3.Sources: ISO; Insurance Information Institute.

($ Billions)Investment earnings are still below their 2007 pre-crisis peak

11

Growth Will Expand Insurer Exposure Base Across Most Lines

Unemployment and Underemployment Rates:Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12

Jan

13

Jan

14

"Headline" Unemployment Rate U-3

Unemployment + Underemploy Rate U-6

“Headline” unemployment was

5.8% in Oct. 2014. 4.5% to 6% is “normal.”

Source: US Bureau of Labor Statistics; Insurance Information Institute.

January 2000 through Oct. 2014, Seasonally Adjusted (%)

U-6 went from 8.0% in March 2007 to 17.5%

in October 2009; Stood

at 11.5% in Oct. 2014.8% to 10% is “normal.”

0.0

55

0.0

58

-0.0

57

-0.1

63

-0.3

84

-0.5

99

-0.8

05

-1.0

66

-1.3

24

-1.7

46

-2.2

32

-3.0

08

-3.7

01

-4.5

22

-5.2

20

-6.0

30

-6.8

31

-7.1

25

-7.5

51

-7.8

23

-8.0

55

-8.1

96

-8.4

67

-8.4

82

-8.7

14

-8.6

94

-8.7

32

-8.6

19

-8.4

27

-8.3

33

-8.2

23

-8.1

03

-7.9

86

-7.8

79

-7.6

80

-7.5

31

-7.4

37

-7.3

65

-6.9

11

-6.5

91

-6.4

25

-6.2

39

-6.0

20

-5.8

95

-5.6

27

-5.4

50

-5.2

59

-5.0

37

-4.6

73

-4.4

45

-4.1

99

-4.0

97

-3.9

66

-3.8

91

-3.7

19

-3.5

83

-3.4

24

-3.1

69

-2.9

58

-2.7

43

-2.5

24

-2.2

61

-2.0

97

-1.9

09

-1.6

87

-1.4

86

-1.3

16

-1.1

36

-0.9

83

-0.7

36

-0.4

64

-0.3

78

-0.2

12

-0.0

11

0.1

89

0.4

59

0.6

75

-7.1

42

-10

-8

-6

-4

-2

0

2

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

Au

g-1

0

De

c-1

0

Ap

r-1

1

Au

g-1

1

De

c-1

1

Ap

r-1

2

Au

g-1

2

De

c-1

2

Ap

r-1

3

Au

g-1

3

De

c-1

3

Ap

r-1

4

Millio

ns

Cumulative Change in Private Employment:Dec. 2007—May 2014December 2007 through May 2014 (Millions)

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Cumulative job losses peaked at 8.765 million in

February 2010

It took more than 6 ½ years (79 months) to

recover all of the private sector jobs lost in the

Great Recession

Private Employers Added 9.39 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local

Governments Have Shed Hundreds of Thousands of Jobs)

Pvt. employment hit 116.6 million in April 2014—617,000

above its pre-crisis peak of 116.0 million

US Real GDP Growth%*

* Estimates/Forecasts from Blue Chip Economic Indicators.

Source: US Department of Commerce, Blue Economic Indicators 10/14; Insurance Information Institute.

2.7

%

0.5

%3.6

%

3.0

%

1.7

%-1

.8%

1.3

%-3

.7%

-5.3

%

-0.3

%1.4

%

5.0

%

2.3

%2.2

%

2.6

%2.4

%

0.1

%2.5

%

1.3

%

4.1

%2.0

%

1.3

% 3.1

%

2.7

%

1.8

%4.5

%

3.5

%

-2.1

%4.6

%

3.5

%3.0

%

2.9

%2.9

%

2.9

%2.9

%

0.4

%

-8.9%

4.1

%

1.1

%1.8

%

2.5

% 3.6

%

3.1

%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

15

:1Q

15

:2Q

15

:3Q

15

:4Q

Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction

was severe

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

Q1 2014 GDP data were hit hard by this year’s

“Polar Vortex” and harsh winter

$0

$10

$20

$30

$40

$50

$60

$70

$80

19

80

19

81

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82

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83

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84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

:Q1

Net Worth of Households*Recently Hit A Historic High

*Includes nonprofit organizations. Data are not seasonally adjusted or inflation-adjusted.Source: Federal Reserve Board: http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf ; Insurance Information Institute.

2008-09 recession: -15.7% $ Trillions

2001 recession

1992 recession

1982 recession

Housing “bubble”

Rising net worth fuels a “wealth affect” that helps fuel consumer spending, which accounts

for 70% of spending in the U.S. economy

16

.9

16

.5

16

.1

13

.2

10

.4

11

.6

12

.7

14

.4

15

.5 16

.4

16

.8

16

.8

16

.9

16

.8

16

.9

16

.9

16

.617

.1

17

.5

17

.8

17

.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F 15F16F 17F18F 19F

(Millions of Units)

Auto/Light Truck Sales, 1999-2019F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (11/14); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector Along With Workers Comp Exposures

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast

for 2014-15 is still below 1999-2007 average of 17 million units, but a robust

recovery is well underway.

Job growth and improved credit market conditions will boost

auto sales in 2014 and beyond

Truck purchases by contractors are especially strong

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

1 0.7

8 0.9

2

1.0

0 1.1

8 1.3

3

1.4

2

1.4

6

1.4

8

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (11/14); Insurance Information Institute.

Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk Exposure, Surety, Commercial Auto;

Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records

began in 1959

Job growth, low inventories of existing homes, low mortgage rates and

demographics should continue to stimulate new home construction for several more

years

Monthly Change* in Auto Insurance Prices, 1991–2014*

*Percentage change from same month in prior year; through September 2014; seasonally adjusted

Note: Recessions indicated by gray shaded columns.

Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Cyclical peaks in PP Auto tend to occur roughly every 10 years (early 1990s, early 2000s and

likely the early 2010s)

“Hard” markets tend to occur during

recessionary periods

Pricing peak occurred in late 2010 at 5.3%,

falling to 2.8% by Mar. 2012

The Sept. 2014 reading of 4.3% is up

from 3.9%a year earlier

Average Premium for Home Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates for 2011-2013 based on CPI data and other data.

$508$536

$593

$668

$822 $830

$880$909

$945

$983

$1,022

$804

$764$729

$400

$500

$600

$700

$800

$900

$1,000

$1,100

00 01 02 03 04 05 06 07 08 09 10 11* 12* 13*

Countrywide Home Insurance Expenditures Increased by an Estimated 4.0% in 2011-2013

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis

and the Future of the P/C

-5%

0%

5%

10%

15%

20%

25%

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

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97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15F

14F

Net Premium Growth: Annual Change, 1971—2016F

(Percent)

1975-78 1984-87 2000-03

*Actual figure based on data through Q3 2014.Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

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.

2015-16F: 4.0%

2014E: 3.9%*

2013: 4.6%

2012: +4.3%

22

U.S. Insured Catastrophe Loss Update

$1

2.8

$1

1.1

$3

.8

$1

4.5

$1

1.7

$6

.2

$3

5.2

$7

.7

$1

6.5

$3

4.2

$7

4.5

$1

0.7

$7

.6

$2

9.6

$1

1.6

$1

4.6

$3

4.1

$3

5.5

$1

2.9

$1

5.3

$1

4.2

$4

.9

$8

.1

$3

8.3

$8

.9

$2

6.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E

U.S. Insured Catastrophe Losses

*Through 12/31/14.

Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)

Sources: Property Claims Service/ISO; Insurance Information Institute.

2012 was the 3rd Costliest Year for Insured Disaster Losses in US History. 2013 returned to a more normalized year. Longer-term

Trend is for more—not fewer—Costly Events

2012 was the 3rd most expensive year ever for

insured CAT losses

$15.3 billion in insured CAT losses estimated for 2014

($ Billions, $ 2013)

12/01/09 - 9pm

Combined Ratio Points Associated with Catastrophe Losses:1960 – 2013*

*2010s represent 2010-2013.

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.

Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

0.4

1.2

0.4 0

.8 1.3

0.3

0.4 0

.71

.51

.00

.40

.4 0.7

1.8

1.1

0.6

1.42

.01

.32

.00

.50

.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7 8.9

3.43.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

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19

86

19

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19

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19

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19

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19

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19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

Avg. CAT Loss Component

of theCombined

Ratio by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52

2010s: 6.1E*

Catastrophe losses as a share of all losses reached

a record high in 2012

Location of Large Hail Reports:Through October 27, 2014

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2014_annual_summary.html#

There have been 5,495 “Large

Hail” reports in the US so far in 2014, causing

extensive property and

vehicle damage, 9,417 in 2011 and

7,033 in 2012

Number of Acres Burned in Wildfires, 1980 – 2013

Source: National Interagency Fire Center

27

Distribution Trends

Distribution by Channel Type Continues to Evolve Around the World

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and

the Future of the P/C

All P/C Lines Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

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

Direct Independent Agents

Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained

or held generally steady in recent years. Direct channels include exclusive agency companies, direct marketers and direct sales

(e.g., internet)

P&C Insurance: Why Credit Unions?

Should CU’s Consider offering P&C Insurance?

What options are available for Credit Unions to offer P&C Insurance?