P/C Insurance in the Post-Pandemic World An Industry Overview & Outlook

National Association of Mutual Insurance Companies March 24, 2021

Robert P. Hartwig, PhD, CPCU Clinical Associate Professor of Finance, Risk Management & Insurance Darla Moore School of Business ¨ University of South Carolina [email protected] ¨ 803.777.6782 Pandemics & P/C Insurance: Outline n P/C Financial Overview & Outlook Amid the COVID-19 Pandemic n COVID-19: Actual vs. Expected Impacts on Key Lines n Investment Market Issues: Volatility Rules, Low Interest Rates are Back n The Economy and COVID-19: Overview & Outlook n CAT Loss Update n Commercial Lines Rate Trends n COVID-19 Litigation Trends n Summary and Q&A P/C Insurance Industry: Financial Overview Amid the COVID-19 Pandemic The P/C Insurance Industry Entered the COVID-19 Pandemic from a Position of Financial Strength

Economic, Financial Market, Regulatory and Tort Risks Are Major Challenges Going Forward

3 3 The P/C insurance industry entered the COVID- Policyholder Surplus (Capacity), 19 pandemic from a position strength and was able to withstand the 9.0% surplus decline in 2006:Q4–2020:Q3 Q1 2020 (far less than during the Financial Crisis). 2020 ended with record surplus. ($ Billions) $900

Drop due to near-record $865.1

Financial $847.8 $850

2011 CAT losses $819.7 Crisis $812.2 $802.2

(-4.9%) $781.5 $800 $779.5 (-16.2%) $771.9 $750.7 $750 $742.1 $717.0 $700.9

$700 $675.2 $676.3 $673.9 $674.2 $673.7 $662.0 $671.6 $653.4

$650 $624.4 $614.0 $607.7 $586.9 $583.5 $566.5

$600 $570.7 $567.8 $559.2 $559.1 $550.3 $544.8 $540.7 $538.6

$550 $530.5 $521.8 $517.9 $515.6 $512.8 $511.5 $505.0 $496.6 $490.8 $487.1

$500 $478.5 $463.0 $455.6

$450 $437.1 $400 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 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4 15:Q2 15:Q4 16:Q1 16:Q4 17:Q2 17:Q4 18:Q3 18:Q4 19:Q1 19:Q2 19:Q3 19:Q4 20:Q1 20:Q2 20:Q3 Policyholder Surplus is the industry’s 2010:Q1 data includes $22.5B of paid-in capital from a holding company parent financial cushion against large insured for one insurer’s investment in a non- events, periods of economic stress and insurance business. financial market volatility. It is also a

Sources: ISO, A.M .Best; Risk and Uncertainty source of capital to underwrite new risks. Management Center, University of South Carolina. 4 P/C Industry Net Income After Taxes, 1991–2020E* n 2005 ROE= 9.6% $ Millions n 2006 ROE = 12.7% n 2007 ROE = 10.9% n 2008 ROE = 0.1% $80,000 n 2009 ROE = 5.0% n 2010 ROE = 6.6% 1 $70,000 n 2011 ROAS = 3.5% 1

n 2012 ROAS = 5.9% $65,777

1 $63,784

n 2013 ROAS = 10.2% $62,496

1 $59,994 $60,000 n 2014 ROAS = 8.4% $56,826

n 2015 ROAS = 8.4% $55,870 n 2016 ROAS = 6.2% $50,000 n 2017 ROAS =5.0% $47,333 n 2018 ROAS = 8.0% $44,155 n 2019: ROAS = 7.7% $42,924

$40,000 n 2020: ROAS = 4.1%** $38,501 $36,819 $36,813 $35,204 $33,522 $30,773 $30,029 $30,000 $28,672 $24,404 $21,865 $20,598 $20,559 $19,456 $20,000 $19,316

$14,178 COVID’s impact on net income is $10,870 $10,000 more modest than assumed

$5,840 early in the pandemic. 21% drop $3,046 $3,043 based on annualized Q3 data $0

-$10,000 -$6,970 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 20E *2020 estimate based on annualized actual Q3:20 figure of $35.5B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). **Through Q3 2020. A,M, Best estimate for 2020 is $48.8B (as of 2/25/21). Sources: A.M. Best, ISO. ROE: Property/Casualty Insurance by Major Event, 1987–2020:Q3*

(Percent)

20% P/C Profitability Is Influenced Both by Katrina, Harvey, Cyclicality and Volatility Rita, Wilma Irma, Low Maria, 15% CATs CA Wildfires

10% 2019 Sept. 11 7.7%

5% Hugo Lowest CAT Losses in 4 Hurricanes Sandy 15 Years Andrew, 2020:Q3 0% Iniki Financial Crisis* Record Northridge ROE fell by 8.3 pts Tornado 4.1% from 12.7% to 4.4% Losses Covid-19 -5% 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 12 13 14 15 16 17 18 19 20*

*Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2020:H1 estimate is based on actual Q1 2020 figure of 8.8%. Sources: ISO, Fortune; USC RUM Center. 6 Percentage Point Change in P/C ROEs During Past Economic Downturns: 1971 - Present Change in P/C ROE During Past Economic Downturns (pre-Covid) Percentage Point Avg.: -4.5% (-4.0% ex. 2000-01) Change Median: -5.0% (-3.0% ex. 2000-01) 2.0% 0.8% 0.0%

-2.0% -2.4% -3.0% -4.0% -3.6% COVID-19’s economic and financial market impact -6.0% helped drive down industry -7.1% -7.0% ROEs but well within the -8.0% range of expectation based -8.3% on history -10.0% 2007-08 2000-01* 1973-75 2019-20** 1981-82 1979-80 1990-91

*2000-2001 decline impacted by 9/11 losses. **As of Q3 2020 vs. annualized Q3 2019 figure

Source: USC Center for Risk and Uncertainty Management. 7 P/C Insurance ROE vs. Fortune 500, 1975–2020E* Average: 1975-2019 Fortune 500: 13.3% ROE P/C Insurance: 9.0% 25% 1977:19.0% 1987:17.3%

20% 1997:11.6% 2006:12.7% 2013 9.8% 15% 2020 13.2% 10%

5% 2020E 4.1% 0% 2017 1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2% 5.0% -5% 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 12 13 14 15 16 17 18 19 20

*2020 Fortune 500 figure is an estimate. P/C figure is actual through Q3 2020. Profitability = P/C insurer ROEs. 2011-20 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers. Source: NAIC, ISO, Fortune. Profitability & Politics

How Is Profitability Affected by the President’s Political Party?

9 P/C Insurance Industry ROE by Presidential Administration, 1950-2020*

Carter 16.43% Reagan II 15.10% Nixon 8.93% Clinton I 8.65% G.H.W. Bush 8.35% G.W. Bush II 8.33% OVERALL RECORD: Obama II 8.20% 1950-2020* Clinton II 7.98% Reagan I 7.68% Democrats 8.1% Nixon/Ford 6.98% Republicans 7.8% Truman 6.97% Trump 6.25% Eisenhower I 5.43% Party of President has Eisenhower II 5.03% marginal bearing on G.W. Bush I 4.83% profitability of P/C Obama I 4.68% Johnson 4.43% insurance industry Kennedy/Johnson 3.55%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

*Trump figure is 2017-2020:Q3 average. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments. Source: Risk and Uncertainty Management Center, University of South Carolina. P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2020*

BLUE = Democratic President RED = Republican President 25% Reagan/Bush I Clinton Bush II Obama Trump Carter

20% Johnson Truman Kennedy/ Kennedy/ Nixon/Ford Eisenhower

15%

10%

5%

0%

-5% 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 14 16 18 20

*2020 figure is through Q3. ROEs for the years 2008-2014 exclude mortgage and financial guaranty segments. Source: Risk and Uncertainty Management Center, University of South Carolina. Growth and Underwriting Performance

COVID-19 Has Had a Mixed Impact on the P/C Insurance Industry

12 12 Net Premium Growth (All P/C Lines): Annual Change, 1971—2020E 2020F: 3.8%* 2020E: 1.8%** (Percent) 2020:Q3: 3.1% 1984-87 1975-78 2000-03 2019: 3.6% 2018: 10.8% 25% Net Written Premiums Fell 0.7% in 2007 (First Decline 2017: 4.6% Since 1943) by 2.0% in 2008, 2016: 2.7% 20% and 4.2% in 2009, the First 3- Year Decline Since 1930-33. 2015: 3.5% 2014: 4.2 15% 2013: 4.4% 2012: +4.2%

10%

5% 2020 Outlook Pre-COVID: 3.8% 0% Through Q3: 3.1% Full-Year Est: 1.8**

-5% 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 12 13 14 15 16 17 18 19 20 * **Pre/Post-COVID-19 forecast from A.M. Best Review & Preview (Feb. 2020, 2021). NOTE: Shaded areas denote “hard market” periods Sources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina . P/C Insurance Industry Combined Ratio, 2001–2020E**

Pre-COVID 2020 Combined Ratio Est. Higher As Recently as 2001, Relatively Low CAT CAT 99.1 (A.M. Best) Insurers Paid Out Losses, Nearly $1.16 for Every Losses, Reserve Shrinking $1 in Earned Reserve Premiums Releases Sharply Relatively Releases, higher CATs Low CAT Avg. CAT Toll of Soft are driving Heavy Use of Losses, Losses, Market large Reinsurance Reserve 120 More underwriting Lowered Net Releases 115.8 Losses Reserve losses and Releases pricing COVID-19 has Cyclical pressure had no Best Deterioration Sandy discernable Combined net impact on 110 107.5 Impacts Ratio Since 106.5 pre-COVID 1949 (87.6) Lower 103.7 expectations 102.5 CAT for the 100.8 101.0 101.1 Losses100.7 99.2 combined 100.1 99.3 98.9 99.3 100 98.4 ratio though 97.0 97.8 95.7 96.4 Q3 2020; 92.6 ~7.5 pts. due to CATs vs. 4.1 in 2019 90 and about 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20** twice avg. *Excludes Mortgage & Financial Guaranty insurers 2008--2014. **Estimate from A.M. Best Review and Preview (Feb. 2021). Actual though first 9 months 2020 was 98.7. Sources: A.M. Best, ISO (2014-2019). How Have Actual Results Differed from Reality?

A Review of Early Predictions of COVID’s Impact on Insurers US P/C Results Have Generally Been Better than Anticipated

15 Potential Impacts of COVID-19 on Written Premium in 2020, by Key Line Line Estimated Premium Impact Workers Compensation 12.5% to 25% reduction in premium written in 2020 (equates to $5.9B to $11.75B DWP) Business Interruption & 7% to 13% reduction in premium volume (US & Contingency UK) General Liability* $1.5B to $6.3B premium reduction in US Personal Auto ~$10B in refunds, rebates (equates to ~4% of DWP) Personal Travel Insurance 29% to 78% reduction in premium written (US & UK) Personal/Comm. Motor ~10% reduction in US; 0% to 11% reduction in UK Marine/Aviation/Transport $0.7B-$1.5B (US); $0.6 - $1.2B (UK) *Includes nursing home professional liability. Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina. 16 Potential Impacts of COVID-19 on LOSSES in 2020, by Key Line Line Estimated Loss Impact Workers Compensation $0.2B - $92B (depends on severity of pandemic and “presumption” determination) Business Interruption & $2B - $22B (US); $1.1B - $13.9B (UK) Contingency General Liability* $0.7B to $27B loss across US & Bermuda markets Personal/Comm. Motor $26B - $57B reduction in personal auto and $4.2B - $9.4B commercial (US); $1 - $7B overall reduction in UK Mortgage $0 - $1.7B loss across US & Bermuda markets D&O $0.6 - $4.0 loss across US & Bermuda markets Marine/Aviation/Transport $0.3B-$1.3B reduction (US); $0.6 - $1.1B (UK) *Includes nursing home professional liability. Source: Derived from Willis Towers Watson, Scenario Analysis of COVID-19 Pandemic (Fig.11, 14), May 2020. and other sources; Risk and Uncertainty Management Center, University of South Carolina. 17 Lloyd’s: Says its own p/c COVID-19 Announced Losses vs. Top-Down claims could reach $4.3B by Industry Estimates (as of May 12, 2020) June 30. Estimates global p/c losses at $107B; Global investment losses = $96B* Global P/C COVID-19 loss consensus $30B - $100B (~$60B as midpoint)

30-60bn

UBS Q1 reported COVID claims totaled $4.2B according to Willis, but Q2 will be a truer reflection of actual loss

*Lloyd’s CEO John Neil appearance on CNBC, May 14, 2020: https://www.cnbc.com/2020/05/14/lloyds-of-london-coronavirus-will-be-largest-loss-on-record-for-insurers.html Sources: Company disclosures, Dowling & Partners, Barclays Research, Autonomous Research, BofA Global Research, UBS Securities, Willis Towers Watson from Artemis.bm accessed at https://www.artemis.bm/news/consensus-emerging-on-30bn-to-100bn-covid-19-industry-loss-willis-re/; Risk and Uncertainty Management Center, University of South Carolina. Reasons Why P/C Insurance Worst-Case COVID Scenarios Failed to Materialize (So Far) n Economic Recovery Proceeding More Quickly than Anticipated n Rapid Financial Market Recovery (and then some…) n Massive Government Stimulus and Accommodative Fed Policy n Worst-Case Epidemiological Outcome Avoided n Record Pace of Vaccine Development n Employers Did a Reasonably Good Job Protecting Workers from Exposure n Many States Did Not Repeat Spring 2020 Lockdowns n Litigation Outcomes Generally Favor Insurers n WC Presumption Expansions Did Not Lead to Explosion in Claims n Offsetting Exposure Reductions in Many Lines BUT… There Is No Questions that the Economic Consequences of COVID Are Massive and Ongoing

The Economic Costs of COVID Vastly Outstrip the Insured Loss Component

20 Viral Outbreaks Are Not An Insurable Risk

Economic Losses from Pandemics Pandemics are frequent, severe, and widespread (7 pandemics with multi- billion$ economic losses in just the last 18 years)

For Reference

2005 Katrina $58 Billion

2001 9/11 $48 Billion

(insured losses)

21 *Sources: APCIA using published reports, including IMF, World Bank, Learnbonds.com; APCIA adjustment to 2020 USD Estimated Monthly U.S. Business Interruption Coronavirus Losses for Small Business—Potential Range (<100 Employees; $Bill)

Monthly BI losses for small business vary widely depending on underlying assumptions but expansive legislation would result in higher estimates; For The potential for such losses for all all businesses <500 employees, BI $500 businesses of all sizes is currently estimated at $1 - $1.1 trillion per month. losses range between $393B - $668B $431 $400 $300 $223 $255 $200

$100 $52

$0 Small Business w/ BI - Low Small Business w/ BI - High All Small Businesses - Low All Small Businesses - High

60% Businesses impacted* 90% Businesses impacted* 60% Businesses Impacted* 90% Businesses impacted* 10% of Payroll for additional expenses 30% of Payroll for additional expenses 10% of Payroll for additional 30% of Payroll for additional 33.3% Have BI coverage 60% Have BI coverage expenses expenses 50% Have BI payroll/benefits coverage 80% Have BI payroll/benefits coverage

* Businesses impacted: Proportion of businesses completely or substantially closed related to coronavirus Assumptions: Losses if standard insurance policy exclusions for viruses/pandemics are voided and physical loss/damage requirement is stricken; three main coverages - profit lost, payroll/benefits, additional expenses; average annual $2m revenue and 7% profit margin; non-wage benefits of small businesses are 25% less than that for average US businesses

Source: APCIA, April 2020. Paper on Insurability of Pandemic Risk n Large scale business continuity risks from pandemics are generally note insurable in the private sector n Business continuity risks are largely undiversifiable within private insurance markets and are highly correlated with other risks (e.g., investment risks) n Large scale business continuity losses pose a potentially systemic risk to the industry and overall economy

Download at: https://www.uscriskcenter.com/wp- n Import role for government content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper- Hartwig-APCIA-FINAL-WORD.pdf Government Mandated Business Closures Were the Real Black Swan, Not the Coronavirus

• The US (and world) has endured several other major infectious disease outbreaks • It is the reaction to the virus that is unprecedented killing 100,000+ Americans without shutting and represents the true Black Swan event down the economy • The ramifications of this decision will be • Hong Kong Flu (1968-70) consequential for a generation (e.g., $4 trill. in debt) • Asian Flu (1957-58) Sources: CDC; Risk and Uncertainty Management Center, University of South Carolina COVID-19: Impacts on Premiums and Claims

Economically Sensitive Commercial Lines Were Most Impacted in Terms of Growth Auto Claims Plunged During the Early Stage of COVID—Will Claims Spike as the Economy Recovers? 25 COVID’s Impact on DPW Growth for Largest P/C Lines: First 9-Mos. 2020 and 2019 vs. Same Period Previous Year

Percent Change: First 9-Most 2020 vs. First 9-Mos. 2019 Personal Auto insurers returned Workers Comp, Inland $8B to Marine and PP Auto policyholders in 20% Liability have 2020 experience the largest 14.5% decline in DPW 15% 12.5% 12.3% 11.4% 8.9% 10% 7.7% 7.9% 8.1% 5.5% 5.3% 4.3% 5% 2.3% 0.2% 1.0% 0%

-2.2% -1.6% -5% -2.9% 2020 vs. 2019 2019 vs. 2018 Down $3.5B -10% -8.5% Workers Inland Marine Pvt. Pass. Auto Phys. Commercial Homeowners Other Liab. Allied Fire Comp* Auto Liab Damage Auto Liab.

Source: A.M. Best, First Look: 9-Month 2020 P/C Financial Results; Risk and Uncertainty Management Center, Univ. of South Carolina. 26 Personal Auto Claim Frequency Trends Significantly Impacted by COVID: Q2 and Q3 2020 vs. Q2 and Q3 2019

Year-over-Year Change Q2 Q3 0% -5% -10% -10.1% -15% -13.6% -20% -25% -22.8% -21.1% -23.3% -24.6% -30% -31.3% -35% -33.6%-32.6% -40% -37.5% Collision Prop. Damage PIP Bodily Injury Comprehensive Liability Liability

Collision and PD Liability claims plunged by more Auto Claims Fell Sharply at the Height of the than 1/3 Pandemic, at least through Q3 2020

Source: ISO/PCI Fast Track data for Q3 2020; Risk and Uncertainty Management Center, Univ. of South Carolina. 27 Catastrophe Loss Update: Major Driver of Rate Pressure

The 2020s Got Off to an Ominous Start

CAT Losses for the 2010s Were Up Materially—Costliest Ever

Primary, Reinsurance and Retro Markets All Impacted and Are Pressuring Rates

28 28 2020 U.S. Insured Catastrophe Highlights n $67B in insured nat CAT losses—(3rd costliest year ever behind 2017, 2005) n 71 designated PCS CATs, the most in PCS’s 72-year history n 10 declared hurricane/TS events, a PCS record (30 named storms in 2020) w ~$26B insured losses in North America n 17 declared wildfire events, a new record (6 events in 2017 = previous record)

w ~$11B insured February 2021 winter storm and extreme cold in the south n ~5 million CAT claims caused an estimated $10B - $20B in insured losses n 18 PCS events with insured losses > $1B, a new record n ~$1.5B in insured riot losses + other unusual manmade events (Nashville) U.S. Inflation-Adjusted Insured Cat Losses Harvey, Irma, Maria

Katrina, 104 $100 Average for Decade Rita, Wilma 30 named storms, $90 Hurricane wildfires, Andrew WTC 79 $80 riots

$70 67 2020 CAT $60 2000s: $25 B 53 2010s: $35 B losses in the $50 1990s: $15 B US totaled 40 36 $40 37 $67B (not 1980s:$5 B including $30 Billions, 2018 $ COVID- $20 related

$10 losses) from a record 71 $0 PCS events 8081828384858687888990919293949596979899000102030405060708091011121314151617181920 2021 is off to an Average Insured Loss per Year for 1980-2020 is $22.2 Billion ominous start with ~$18B in estimated insured Sources: Property Claims Service, a Verisk Analytics business (1980-2019); 2020 figure from Munich Re; losses from Insurance Information Institute; University of South Carolina, Risk & Uncertainty Management Center. Winter Storm Uri Top 20 Most Costly Disasters in U.S. History—Katrina Still Ranks #1

(Insured Losses, 2020 Dollars, $ Billions)*

$60 10 of the top 20 mostly costly

insured events in US history $54.5 $50 occurred between 2010 and 2021 $40 (inclusive) $28.7

$30 $27.5 $26.7 $23.1 $21.0 $19.0 $18.0

$20 $16.8 $15.0 $15.0 $12.4 $10.6 $10.2 $10.0 $9.8 $8.8 $8.4 $7.9 $10 $7.5

$0 Rita Torn./T- Torn./T- Hugo Iv an Charley Laura Mic hael Wilma Camp Fire Ike Harv ey Winter Irma Sandy Mar ia Northridge 9/11 Andrew Katrina (2005) Storms Storms (1989) (2004) (2004) (2020) (2018) (2005) (2018) (2008) (2017) Storm Uri (2017) (2012) (2017) (1994) (2001) (1992) (2005) (2011) (2011) (2021)*

17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004 *Estimated (in 2021 dollars)

Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2020 dollars using the CPI. 31 US Property Catastrophe Rate-on-Line Index: 1990 – 2020*

Record CATs in 2017 and high CAT (Percent) losses in 2018/19 pressured US reinsurance prices in recent years 300 (+9.0% in 2020, +2.6% in 2019, Post Katrina, +7.5% in 2018) 250 Rita, Wilma period

200

150

Post-Ike 100 Post-Andrew adjustment Adjustment surge following Post-9/11 record tornado 2021 Global RoL 50 Adjustment losses in 2011 and Sandy in +4.5% 2012 0 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 15 16 17 18 19 20

US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions.

*As of January 1 each year. Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index 32 CAT Bond Issuance and Risk Capital Outstanding, 2010 – 2020

Despite COVID, both CAT bond issuance and Risk Capital Outstanding reached new record highs in 2020

Source: Guy Carpenter Securities, January 2021 Renewal Report; Risk and Uncertainty Management Center, University of South Carolina. 33 INVESTMENTS: THE NEW REALITY

Investment Performance Is a Key Driver of Insurer Profitability Aggressive Rate Cuts Will Adversely Impact Invest Insurer Earnings Financial Crisis Déjà Vu? Property/Casualty Insurance Industry Investment Income: 2000–2020E ($ Billions) $61.4 $59.6 $60 $54.6 $52.3 $51.2 $50.3 $49.5 $49.2 $48.9 $50 $47.6 $48.0$47.3 $47.1 $46.4$47.2$46.6

Investment income had just recovered from $39.6 $40 $38.9 $38.7 a decade-long slump. Aggressive Fed $37.1$36.7 actions and recession are pushing interest rates lower and will adversely impact investment income for years to come. $30 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* 19 20

Due to persistently low interest rates, investment income remained below pre-crisis levels for a decade. Lower interest rates post-COVID will drive investment income down once again.

*2020 figure is annualized based on YTD Q3 actual of $37.7B. 2018-19 figures are distorted by provisions of the TCJA of 2017. Increase reflects such items as dividends from foreign subsidiaries. 1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management. Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*

(Percent) Investment yields remained depressed-- 5.0 down about 150 BP from pre-crisis 4.6 4.6 levels. COVID-19 Fed rate cuts, bond 4.4 4.5 4.5 purchases will push asset yield down 4.2 4.0 3.9 4.0 3.8 3.7 3.7 3.7 3.4 3.5 3.4 3.2 3.1 3.1 3.1 3.0 3.0

2.5 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F

The yield on invested assets remains low relative to pre- Average: 1960-2019 = 4.9% crisis yields. Fed rate increases beginning in late 2015 Low: 2.8% (1961) through 2018 halted the slide in yields, but rate cuts in 2019/2020 will preclude future gains High: 8.2% (1984/85)

Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina. US Treasury Security Yields: Fed emergency rate cuts A Long Downward Trend, 1990–2021* and QE in response to the COVID-19 pandemic and 9% Yields on 10-Year US Treasury market volatility have Notes have been essentially 8% below 5% for more than a pushed rates to their levels decade below those in the 7% financial crisis 6% 10-YR. TREASURY 5% Jan. 2020: 1.76% Jul. 2020: 0.62% 4% Feb. 2021: 1.25% 3%

2% Recession 1% 2-Yr Yield 10-Yr Yield 0% '90'91'92'93'94'95'96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14'15'16'17'18'19'20'21 Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for many years to come. *Monthly, constant maturity, nominal rates, through Feb. 2021. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, University of South Carolina. S&P 500 Index Returns, 1950–2020* The S&P 500 was up 28.9% in 2019, the Annual Return best year since 2013, following a decline 60% of 6.2% in 2018. The S&P plunged as the 50% economy dove into recession, falling 34% rd 40% by March 23

30% 2019: +28.9% 2018: -6.2% 20% 2017: +19.4 10% 2016: +9.5 0%

-10% 2020 YTD -20% Fed Raises Tech Bubble +16.3% Rates -30% Implosion

-40% Energy Crisis Financial Crisis -50% 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 14 16 18 20 , *Through Dec. 31, 2020. Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina THE ECONOMY

COVID-19 Pandemic Will Directly and Severely Impact Growth As Exposure Growth Rapidly Shrinks

The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure Base Across Most Lines

The Links Between the Economy and the P/C Insurance Industry Are Strengthening Length of US Business Cycles, 1929-Present*

Duration (Months) Contraction 128 Expansion Following 130 120 120 Average Duration* The most 110 Recession = 13.4 Months 106 recent economic 100 Expansion = 63.8 Months 92 expansion 90 80 ended in Feb. 80 73 2020 and was 70 the longest in 58 US history 60 50 50 43 45 (began July 37 39 2009) 40 36 30 24 ? Will likely take 16 16 19 2+ years to 20 13 11 10 10 11 12 13 8 8 6 8 8 recover lost 10 growth 0 Month Aug. May Feb. Nov. July Aug. Apr. Dec. Nov. Jan. Jul. Jul. Mar. Dec. Feb. Recession Started 1929 1937 1945 1948 1953 1957 1960 1969 1973 1980 1981 1990 2001 2007 2020

* Excludes current COVID-19 recession which began in Feb. 2020 but with an indeterminate end. Sources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina. US Real GDP Growth* Strong 2nd half Real GDP 2021 growth Financial expected Growth (%) Crisis

40% 33.4% 30% 20% 9.2% 9.0% 7.8%

10% 5.4% 4.5% 4.3% 4.1% 4.1% 3.6% 3.5% 3.5% 3.5% 3.1% 3.1% 3.2% 3.1% 2.1% 2.7% 2.7% 2.9% 2.9% 2.8% 2.5% 2.5% 2.5% 2.6% 2.2% 2.1% 2.1% 1.8% 1.8% 1.8% 2.0% 1.6% 1.4% 1.2% 1.1% 1.1% 0% 0.8% -10% “Great COVID -1.3%

Recession” -2.8% CRASH -20% began in -5.0% Dec. 2007 Q2 2020 -30% plunged by 31.4% -31.4% -40% 2008 2009 2010 2011 2012 2013 2014 2015 16:1Q 16:2Q 16:3Q 16:4Q 17:1Q 17:2Q 17:3Q 17:4Q 18:1Q 18:2Q 18:3Q 18:4Q 19:1Q 19:2Q 19:3Q 19:4Q 20:1Q 20:2Q 20:3Q 20:4Q 21:1Q 21:2Q 21:3Q 21:4Q 22:1Q 22:2Q 22:3Q 22:4Q 2000 2001 2002 2003 2004 2005 2006 2007 Demand for Insurance Will Increase Materially in H2 2021—Particularly in Economically Sensitive Commercially Lines Such as WC

* Estimates/Forecasts from Wells Fargo Securities. Source: US Department of Commerce, Wells Fargo Securities 3/21; Center for Risk and Uncertainty Management, University of South Carolina. The Economy Drives P/C Insurance Industry Premiums: 2006:Q1–2020:Q3* Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change 8% DWP y-o-y change y-o-y nominal GDP growth

6%

4%

2%

0%

-2% Negative GDP growth in the first half of 2020 and loss of exposures caused DWP to decelerate overall and -4% turning negative in some lines. Rebates, discounts and rate decreases will amplify the deceleration. -6% 2008:Q1 2008:Q3 2009:Q1 2009:Q3 2010:Q1 2010:Q3 2011:Q1 2011:Q3 2012:Q1 2012:Q3 2013:Q1 2013:Q3 2014:Q1 2014:Q3 2015:Q1 2015:Q3 2016:Q1 2016:Q3 2017:Q1 2017:Q3 2018:Q1 2018:Q3 2019:Q1 2019:Q3 2020:Q1 2020:Q3

Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably linked to economic performance.

Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina. US Unemployment Rate Forecast: 2007:Q1–2022:Q4 Great Recession

14% Rising unemployment eroded The unemployment rate payrolls and WC’s exposure base. 13% peaked at 14.7% in April 13.1% Unemployment peaked at 10% in 12% late 2009. (13.1% Q2 avg.) The Fed considers 11% “Full

10.0% At 3.5%, the 9.7% 10% 9.6% 9.6% 9.6% 9.6% Employment” 9.3%

9.1% 9.1% unemployment rate 8.9% 8.8% to be 4.1% 9% 8.7% 8.3%

8.2% in Feb. 2020 WAS 8.1% 8.0% 7.8% 8% 7.7% 7.6% at its lowest point 7.3% 7.0% 6.9% 6.8%

7% 6.6% in 50 years. 6.2% 6.2% 6.1% 6.1% 5.8% 5.7%

6% 5.6% 5.4% 5.4% 5.2% 5.0% 5.0% 4.9% 4.9% 4.9% 4.9% 4.8% 4.7% 4.7% 4.7%

5% 4.6% 4.5% 4.5% 4.5% 4.4% 4.4% 4.3% 4.3% 4.2% 4.1% 4.1% 3.9% 3.9% 3.8% 3.8% 3.8%

4% 3.6% 3.6% 3.5% 3% 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 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4 15:Q1 15:Q2 15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4 17:Q1 17:Q2 17:Q3 17:Q4 18:Q1 18:Q2 18:Q3 18:Q4 19:Q1 19:Q2 19:Q3 19:Q4 20:Q1 20:Q2 20:Q3 20:Q4 21:Q1 21:Q2 21:Q3 21:Q4 22:Q1 22:Q2 22:Q3 22:Q4 = forecasts ; = actuals Sources: US Bureau of Labor Statistics; Wells Fargo Securities (3/21 edition); Risk and Uncertainty Management Center, University of South Carolina. U.S. National Debt, 1966 – 2020:Q3

($ Trillions) $30 $27 Trillion

$25 The national debt hit $26.95 Inflation Alert Trillion in Q3 2020 and will Large deficits continue to grow rapidly for $20 that increase the foreseeable future. as a share of Debt/GDP Ratio =100.1% $15 GDP are, at (Highest Since WW II) some point, $10 unsustainable and $5 inflationary

$0 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 1820

Source: Congressional Budget Office; Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/GFDEGDQ188S U.S. Inflation Rate: 2009-2022F* Inflation is expected to accelerate sharply in 2021—though diminish There’s a great deal of concern that thereafter—making the case for a Fed trillions of dollars of stimulus plus rate hike more remote (Fed is looking Percentage Change (%) the post-COVID recovery could to keep long-run inflation rate ~2%) cause the economy to overheat, resulting in inflation 3.5% 3.2% 3.0% 2.7% 2.4% 2.4% 2.5% 2.1% 2.1% 2.0% 1.8% 1.6% 1.5% 1.6% 1.5% 1.3% 1.2% 1.0% 0.5% 0.1% 0.0% -0.5% -0.4% Insurer Concerns -1.0% About Inflation 09 10 11 12 13 14 15 16 17 18 19 20 21F 22F Rate Inadequacy Reserve Inadequacy *Annual change in Consumer Price Index for All Urban Consumers (CPI-U). Source: U.S. Bureau of Labor Statistics; Wells Fargo Securities (3/21); USC Center for Risk and Uncertainty Management. Debt Held by the Public as a Percent of GDP: 1790 – 2020

2020 100.9% Debt/GDP ratio is at its highest 1945 level since WW II 112.7%

Source: Congressional Budget Office; Wells Fargo Securities (3/21); Risk and Uncertainty Management Center, University of South Carolina. 46 Commercial Lines Growth, Underwriting Performance & Pricing Cyclicality

Pricing Pressures Are Intensifying

47 47 Commercial Lines NPW Premium Growth: 1975 – 2020E

ROE Commercial lines is prone to Commercial far more cyclical volatility that lines premium 35% growth has Economic Shocks, personal lines. Inflation: been sluggish 30% 1976: 22.2% for years, Tort Crisis reflecting weak 1986: 30.5% pricing 25% environment. Post-9/11 20% 2002: 22.4% 2018: 1988-2000: +14.4% Period of Post-Hurricane 15% inter-cycle Post Katrina Andrew Bump: stability Bump: 1993: 6.3% 10% 2006: 7.7%

5% 2020: +3.2% 0% 2019: +6.7% -5% Recessions: 2016: -1.1% 1982: 1.1% Great -10% Recession: 2009: -9.0% -15% 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO. CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2020:Q4*

(Percent) Largest increases since 2003 for some accounts 14% 11.7% 10.8% 10.7% 9% 9.3% 7.5% 6.2% 5.2% 5.2% 5.0% 4.4% 4.3% 4.3% 3.9% 3.5% 4% 3.4% 2.7% 2.4% 2.1% 1.7% 1.6% 1.5% 1.5% 0.9% 0.3% 0.1% -0.1% -1% -0.5% -0.7% -1.3% -2.3% -2.5% -2.8% -2.8% -2.9%

-6% -3.1% -3.2% -3.3% -3.3% -3.7% -3.9% Renewals turned -11% positive in late 2011 High CAT losses and poor underwriting results in recent in the wake of years combined with COVID pressures, reduced capacity, record tornado lower interest rates and increased uncertainty are -16% losses and exerting significant pressure on markets with overall Hurricane Sandy rates up by +10.7% as of Q4 2020 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 *Latest available. Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Source: Council of Insurance Agents & Brokers; Center for Risk and Uncertainty Management, Univ. of South Carolina. Change in Commercial Rate Renewals, by Line: 2020:Q4 Umbrella now leads all major commercial lines in terms of rate gains, exceeding D&O and CP Percentage Change (%) All major commercial 25.0% lines experienced increases in Q4 2020 21.3% 20.0% 14.7% 15.0% 12.9% 11.1% 9.1% 9.7% 10.0% 7.8% 6.4% 7.3% 4.3% 5.0% 3.1% 3.3% 3.5% 1.5% 0.4% 1.3% 0.0% EPL D&O Flood Cyber Surety Marine Comp Liability General Auto MedMal Workers Umbrella Terrorism Business Property Interruption Broker E&O Broker Commercial Commercial Construction

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management. Litigation Trends— Including COVID-19

Court Decisions Have Largely Favored Insurers, but Concerns Remain

51 51 Weekly Number of COVID-Related Lawsuits Filed: (Weeks Ending Mar. 16, 2020 to Feb. 1, 2021) [Latest Available]

The number of new cases remains far below 2020 highs with just 11 filed the week ending Dec. 7, 2020. 79 Cumulative Total = 1,501

11

Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 3/11/21 at: https://cclt.law.upenn.edu 52 COVID Litigation: Merits Rulings on Motions to Dismiss: Federal vs. State Courts (Total through Feb. 1, 2021) [Latest Available]

Federal Courts State Courts

Insurers have won dismissals in 52% of state court cases involving Covid

Insurers have won dismissals in 91% of federal court cases involving Covid

Source: Covid Coverage Litigation Tracker, University of Pennsylvania School of Law. Accessed 3/11/21 at: https://cclt.law.upenn.edu 53 Average Jury Awards, 1999 – 2018 (latest available)

($000) $2,100 The average jury award reached an all-time record high in 2017 before falling modestly in 2018.

$1,900 $1,847 Median Award in 2018 = $100,000

$1,700 (a record) $1,669

$1,500 $1,355 $1,300 $1,132 $1,098 $1,077 $1,046 $1,100 $1,042 $1,022 $1,018 $1,010 $950 $900 $806 $800 $799 $756 $747 $725

$700 $654

$500 1999 2001 2003 2005 2007 2010 2012 2014 2016 2018

Source: Jury Verdict Research; Current Award Trends in Personal Injury (59th Edition), Thomson Reuters; Risk and Uncertainty Management Center, Univ. of South Carolina. Average and Median Jury Awards, 2018 (latest available)

Products Liability, Business Negligence and Med Mal generate the largest awards

Source: Thompson Reuters, Current Award Trends in Personal Injury (59th ed.); Ins. Info, Inst.; Risk and Uncertainty Management Center, Univ. of South Carolina. SUMMARY nThe P/C Insurance Industry Remains Strong, Stable, Sound and Secure nWorst-Case Scenarios Have, So Far, Been Averted nAn Anticipated Acceleration in the Economic Recovery in the Second Half of 2021 Should Help Restore Most P/C Exposures to Pre-Pandemic Levels by early-2022 or sooner nAsset Price Volatility Will Persist and Low Interest Rates Will Pressure Investment Earnings for Years nCOVID-19 Exposures Are Manageable with Headline Risk on BI

and WC Issues; Overall tort environment remains challenging56 QUESTIONS?

57 57 Thank you for your time and your attention! Twitter: twitter.com/bob_hartwig For a copy of this presentation, email me at [email protected] or Download at www.uscriskcenter.com

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