Bca Ace 041612 155752

EQUITY RESEARCH
16 April 2012
U.S. INSURANCE/NON-LIFE PRIMER:

PRICING IS FIRMING; STOCKS OFFER ATTRACTIVE ENTRY POINT
Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 237.
Barclays | U.S. Insurance/Non-Life
16 April 2012
CONTENTS
Part I: P&C Insurance Stocks Should Benefit As Cycle Firms............................................................ 4 Part II: Primary Commercial Lines: Full Cycle Turn In 2013?..........................................................32 Part III: Reinsurers: A Leveraged Play on the Property-Casualty Cycle .......................................54 Part IV: Insurance Brokers Are The Best Early P&C Cycle Play.......................................................76 Part V: Have Personal Lines Insurance Returns Peaked? ................................................................94 Part VI: P&C Stock Performance & Valuation.................................................................................. 112 ACE: Strong Global Franchise & Solid Book Value Growth......................................................... 123 ACGL: Balanced Presence in Insurance & Reinsurance ................................................................ 127 TRV: Strong Track Record and Attractively Valued....................................................................... 131 BRK.A/B Geared to Economic Recovery, Attractive Valuation ................................................ 135 CB: 2012 Guidance Could Be Conservative ..................................................................................... 139 PRE: Balanced Reinsurer with Potential For Improving Results.................................................. 143 XL: P&C Business Has Stabilized, Valuation Attractive ................................................................. 147 RNR: Superior Property Catastrophe Reinsurer.............................................................................. 151 Everest Re: Will Results Improve in 2012? ....................................................................................... 155 AWH: Reserve Releases Could Slow.................................................................................................. 159 AHL: Reinsurance Prices Could Improve, Limited Excess Capital .............................................. 163 MRH: Re-Focused On Core Property Catastrophe Reinsurance Business................................ 167 FSR: Increasingly Dependent on Retrocessional Support ........................................................... 171 OB: Facing Top-Line Pressure ............................................................................................................ 175 MMC: Improvement in Brokerage Organic Growth ...................................................................... 179 WSH: Earnings Could Recover in 2013............................................................................................. 184 AJG: Leverage to Improving P&C Prices & Recovering Economy ............................................... 188 BRO: Highest Leverage To Improving Pricing................................................................................. 193 AON: Leveraged To Improving Economy And Insurance Market .............................................. 197 PGR: Best-In-Class Operator.............................................................................................................. 202 ALL: ROE Goal of 13% by 2014 Appears Optimistic.................................................................... 206 THG: Chaucer Acquisition Expands THGs International Presence .......................................... 210
16 April 2012
Part I: P&C Insurance Stocks Should Benefit as Cycle Firms

We are constructive on the P&C insurance sector based on a positive inflection point in P&C pricing
We are constructive on the P&C insurance sector based on a positive inflection point in P&C pricing for the first time since 1999. We expect positive pricing momentum to persist, which could result in valuation multiple expansion for P&C stocks. This positive inflection point in P&C rates appears to be driven by deteriorating underwriting results, stabilizing industry capital positions, and rising property reinsurance costs. Although a full commercial P&C cycle turn may not occur until 2013, pricing trends are gaining positive momentum.
Summary View Commercial Lines Insurers Reinsurers
Top Picks
Pricing trends are positive, which is the most important factor for ACE, ACGL, CB, the P&C stocks. We prefer primary commercial insurers with strong TRV, XL balance sheets and high quality managements. Reinsurers are a more leveraged play than the primary insurers to a P&C cycle turn but typically generate volatile earnings. Reinsurers ROEs could recover assuming a return to normalized catastrophe activity. Insurance brokers benefit the most from rising P&C prices because most of the benefits of higher prices drop to the bottom line. Unlike the insurers, the insurance brokers do not assume underwriting risk or have large capital requirements. Personal auto margins and ROEs have likely peaked in the current cycle. We prefer low-cost operating model of direct writers (PGR and GEICO), which are gaining profitable market share from the exclusive agency insurers (ALL and State Farm). PRE, RNR
Insurance Brokers
MMC, WSH, AJG, BRO
Personal Lines Insurers
PGR
Source: Barclays Research
Among the P&C insurance stocks, we prefer primary commercial insurers ACE, ACGL, CB, TRV and XL because of their high quality managements, potential for strong book value growth, and better-than-average underwriting performance. Among the reinsurers, we prefer PRE despite its recent challenges due to its discounted valuation and potential for meaningful ROE recovery in 2012. Berkshire Hathaway should generate attractive earnings power as well as book value per share growth. We anticipate BRKs GEICO unit as well as PGR should gain profitable auto insurance market share. Our outlook is favorable on the insurance brokers, especially MMC (our top pick among the brokers), WSH, AJG and BRO. These companies should benefit from a revenue tailwind as the economy recovers. Also, improved P&C prices should translate into rising organic revenue growth and operating margins. P&C pricing has bottomed, which means the insurance broker stocks could generate attractive upside potential because of positive operating leverage and improved investor sentiment. Our outlook for personal lines insurers, including ALL, PGR and THG, is mixed. Automobile insurance results have been strong, but margins have probably peaked. Meanwhile, loss frequency trends remain favorable, although this benefit will likely reverse as the economy improves. We view consumers growing preference for the direct sales channel in personal auto lines as a secular trend that should result in PGR and GEICO continuing to take market share from exclusive agency insurers including Allstate. Also, PGR and GEICO avoid natural catastrophe losses by not writing homeowners insurance business unlike ALL and THG.
16 April 2012
Year-to-date 2012, the Barclays P&C insurance index has underperformed both the S&P 500 Index (by 7 percentage points, as of April 11, 2012) and the S&P Financial index (by 15 percentage points) as a result of a shift to high-risk financial stocks that previously underperformed the P&C stocks in 2011. Since the March 2009 low, during the impact of the global financial crisis, the Barclays P&C insurance index rose 57% but has underperformed both the S&P 500 and S&P Financials. Figure 1: Barclays P&C Price-to-Book Index Historical Valuation
2.2 2.0 Absolute price-to-book 1.8
9/11 1Q04 P&C pricing peaks
Figure 2: Barclays P&C Price-to-Book Index Relative to S&P Financials

Beginning of Financial Crisis
60%
30%
1.6 1.4 1.2 1.0 0.8
ar -9 9 Fe b00 nJa 01 De c01 No v02 Oc t -0 3 pSe 04 Au 8 11 12 07 05 l-06 0 9 r-1 0 -0 rbngna ay Ju Ja Ju Fe Ap M M
0%
Hard P&C Market Begins
Hurricane Katrina
-30%
-60%
Support Level
Source: SNL, FactSet, Barclays Research
P&C insurer stock valuations are currently at the low end of the historical range
P&C insurer stock valuations are currently at the low end of the historical range, which provides an attractive entry point, in our view, although we acknowledge the overall valuation for the financials sector is depressed. As a point of reference, commercial P&C insurer valuations expanded in 2000 from approximately 1x book value to nearly 2x book value when price improvement became evident. Even if the P&C insurance sector recovers to an historical median valuation of 1.4x book value, it implies significant upside potential for the stocks. Figure 3: Stock Performance Since March 2009 Low
175% 150% 160%
Figure 3: Stock Performance YTD 2012

20% 17% 16% 12% 12% 9% 8% 4% 0% S&P Financial Barclays Life Index S&P 500 Barclays P&C Index 2%
125% 100% 75% 50% 25% 0% Barclays Life Index
Source: Bloomberg, Barclays Research.
Source: Bloomberg, Barclays Research.
As the commercial P&C cycle bottoms, earning power and ROE will likely deteriorate for several years due to worse accident year underwriting results, reserve strengthening, weak
16 April 2012 5
ar O - 99 c M t-99 ay D -00 ec -0 Ju 0 l F e -01 b Se -0 2 p Ap -02 r N - 03 ov Ju -03 nJa 04 n Au -05 g M -05 ar O - 06 c M t-06 ay D -07 ec -0 Ju 7 l F e -08 b Se -0 9 p Ap -09 r N - 10 ov Ju -10 nJa 11 n12
102% 86% 57%
S&P Financial
S&P 500
Barclays P&C Index
investment income growth, and reduced share buyback activity. However, P&C industry balance sheet strain typically sets the stage for improved pricing, which should elevate P&C valuations as investors focus on the potential for rate improvement.
The P&C insurance sector faces long-term risks
The P&C insurance sector faces long-term risks from catastrophe losses (both natural and man-made), rising interest rates, increased inflation, and inadequate loss reserves. Current challenges also include:
Modest top-line growth as lower retention due to non-renewing unprofitable business offsets higher pricing, as well as low (although bottoming) exposure growth, and rockbottom interest rates. Expectations of declining EPS, returns on equity, and book value growth based on normalized catastrophe losses. Current earning power being overstated due to the meaningful benefit of loss reserve releases from prior years and the risk of reserve strengthening. Slowing share buybacks. Few consolidation opportunities (at current valuations) that could extract value from the property-casualty stocks.
Interest rates are expected to remain low through at least 2014, which curtails EPS growth for P&C insurers. Interestingly, the P&C stocks have historically shown a weak correlation to interest rate shifts.
In a low interest rate environment, insurers asset values would be expected to increase including the value of their large fixed income investments. However, net investment income could decline as invested assets are reinvested at lower interest rates. In a rising interest rate environment, the value of insurers fixed income investments would likely decline and result in an impact to book values. There is essentially no correlation between P&C insurance stocks and interest rates since 2001, which means the level of interest rates is not a meaningful driver of P&C insurance stock performance unlike other sectors within financials.
Figure 4: Barclays P&C Insurance Index Vs 10-Year Treasury Yield

Ba rc la y s P&C Inde x A bsolute Pric e 180 160 140 120 100 80 60 40 20 0 D ec-01 Beginning of the fina ncia l crisis E uropea n crisis 10-Y r T re a sury Y ld. 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 D ec-02 D ec-03 D ec-04 D ec-05 D ec-06 D ec-07 D ec-08 D ec-09 D ec-10 D ec-11
Ba rcla ys P&C Insura nce Index Absolute Price
10 Yea r Trea sury Yield
Source: FactSet, Barclays Research.
P&C insurance stocks would be expected to perform better in a deflationary economic environment than an inflationary one because it should lead to lower claims costs and
16 April 2012 6
higher earnings. Barclays economists estimate that inflation (as measured by core CPI) will persist at levels slightly above 2% y/y (not seasonally adjusted) throughout most of 2012, but rise more sharply by the end of the year and end 2013 around 2.8%.
In a deflationary environment, claims inflation would likely be constrained, potentially leading to loss reserve redundancies (insurers largest liabilities) and a benefit to earnings. In an inflationary environment, claims costs could rise leading to loss reserve deficiencies and reduced earnings.
Property-Casualty Insurance Sector: Commercial Insurers, Reinsurers, Brokers, and Personal Lines Insurers
The property-casualty insurance sector has several segments that have different dynamics:
Primary commercial insurers provide property and liability insurance to businesses and institutions. Major writers include AIG, Travelers, ACE, XL, and Chubb. Reinsurers provide contingent capital to primary commercial and personal lines insurers to spread the risk of claims. Put another way, reinsurance is insurance for insurance companies. This is a global market with major writers including Munich Re, Swiss Re, General Re (owned by Berkshire Hathaway), PartnerRe, and XL. Insurance brokers are distributors of insurers products and, unlike insurers, do not assume underwriting risk or have large capital requirements. The largest commercial insurance and reinsurance brokers are Marsh & McLennan, Aon and Willis. Personal lines insurers provide automobile and homeowners insurance to U.S. consumers. The largest auto and home insurers include policyholder-owned State Farm, Allstate, Geico (owned by Berkshire Hathaway), and Progressive.
Pricing trends are gaining positive momentum which could result in valuation expansion for P&C insurance stocks
Primary Commercial Insurers Benefit from an Improving Pricing EnvironmentPrimary commercial insurers benefit from a rising pricing environment for
the first time in a decade driven by deteriorating underwriting results, stabilizing industry capital positions, and rising property reinsurance costs, in our view. Although a full commercial P&C cycle turn may not occur until 2013, pricing trends have positive momentum. Premium volume growth could improve, reflecting higher P&C pricing and stabilizing exposure growth, although this could be partially offset by P&C insurers nonrenewing unprofitable business. That being said, as the commercial P&C cycle bottoms, earning power and ROE will likely deteriorate for several years due to worse accident year underwriting results, reserve strengthening, weak investment income growth, and reduced share buyback activity. However, P&C industry balance sheet strain typically sets the stage for improved pricing, which should elevate P&C valuations as investors focus on the potential for rate improvement.
Among the primary insurers, we view ACE and ACGL as having the best potential to generate profitable growth in an improving environment. CB, TRV, and XL should also benefit.
16 April 2012
Figure 5: U.S. Commercial Lines Insurance Premium Volume

$300 $250 $206 $200 $149 $150 $100 $50 $0 2000
Source: SNL, Barclays Research
Direct Written Premiums in $ billions
20% $230 $172 $240 $247 $261 $261 $257 $239 $233 $236 $242 $251 15% 10% 5% 0% -5% -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E % Change in DWP
8
A more leveraged play than the primary insurers to a P&C cycle turn but typically generate volatile earnings.
As Do the Reinsurers. The reinsurers are also benefitting from higher P&C prices after over $100bn of insured global catastrophe losses in 2011. In addition, we anticipate the trend of primary insurers retaining increased exposure to boost their net premium volume has ended and demand for reinsurance is stabilizing. That being said, most of the Bermuda reinsurers are unlikely to increase their capacity in 2012, perhaps with the exception of RNR, after suffering meaningful catastrophe losses in 2011. Separately, the anticipated implementation of Solvency II in 2013 could result in some increased demand for reinsurance from European primary insurers. Among the reinsurance stocks, we prefer PRE despite its recent challenges due to its discounted valuation and potential for meaningful ROE recovery in 2012. We view RNR as the best-in-class property catastrophe reinsurer, and if its valuation were to compress we could become more constructive in our outlook.
Many reinsurers are based in Bermuda because of its proximity to the United States, the ability to write global exposures, Bermudas flexible regulatory system, and no taxes levied on profits generated out of Bermuda. However, pressure is increasing to charge taxes on Bermuda companies doing business with U.S. customers. As a result, several insurers have re-domesticated to Switzerland (ACE, AWH) or Ireland (XL) where there is less potential uncertainty regarding tax treaties. We expect more insurers to change their domicile outside of Bermuda, although there should be little if any impact to their business or earnings as a result. Lloyds of London remains an attractive venue to write specialty commercial P&C insurance lines due to this markets strong ratings, worldwide licenses, and opportunities to access global P&C businesses.
16 April 2012
Figure 6: Reinsurance Composite Shareholders Funds

in $ bil $200 $159 $160 $120 $90 $80 $40 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 $104 $110 $140 $129 $166 $171 $174
Source: Guy Carpenter, Barclays Research
Insurance brokers benefit the most from rising P&C prices because most of the benefits of higher prices drop to the bottom line
The Insurance Brokers Benefit the Most from Improved P&C Pricing. The insurance broker stocks should benefit from improved sentiment and valuation multiples as pricing improves. Higher P&C prices should improve the brokers organic revenue growth (the most important metric for these stocks), margins and earnings. Notably, margins could continue to expand, nearing peak levels seen in the last hard market in 2000-2004 driven by positive operating leverage.
The success of (as well as investor sentiment regarding) the insurance brokers including MMC, AON, and WSH is typically driven largely by commercial P&C insurance and reinsurance premiums (pricing and exposures). Improving pricing power in commercial lines insurance and reinsurance benefits the brokers commission-based business, while fee-based business could be mostly stable as customers look to contain costs. Moreover, exposure growth appears to be bottoming and could help insurers top-line growth once the economy recovers. For the insurance brokers, these trends should result in improving organic growth, operating margins, and annual EPS growth. Our top picks among the insurance brokers are MMC and WSH followed by BRO and AJG. MMC should have strong organic revenue growth and margin expansion opportunities in each of its businesses even in a slow-growth macro environment. WSH is a pure-play global insurance broker with the lowest valuation among its peers, although 2012 will likely be another transition year. BRO and AJG have the highest leverage to rising P&C prices because nearly all of their revenues are commission-based, although these stocks already trade at a premium valuation. AON (rated 2-Equal Weight/1-Pos) should also benefit from higher P&C prices, but we see a longer road to achieve improved organic growth and margin expansion compared to the other insurance brokers. Nearly all of BRO and AJG's brokerage revenues are commission-based, while the larger brokers (MMC, AON and WSH) contain a mix of both commissions and fees. This means the benefit of improved pricing should be more significant for BRO and AJG than MMC, AON, and WSH.
16 April 2012
Figure 7: Average Insurance Brokerage Organic Growth

16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 15% 11% 9% 11%
Loss of contingent commissions

4% 2% 1% 0% -1% 0% -2% 2%
3%
4%
Hard Market
Soft Market
00 001 002 003 004 005 006 007 008 009 010 011 12E 13E 2 2 2 2 2 2 2 2 2 2 2 20 20 20
Note: Based on the average insurance brokerage organic for MMC, AON, WSH, AJG, BRO. Source: Company data, Barclays Research estimates.
Figure 8: Average Insurance Broker Margins

27% 25% 23% 21% 19% 17% 15% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E
Note: Based on the average insurance brokerage segment margin for MMC, AON, WSH, AJG, BRO. Source: Company data, Barclays Research estimates.
26% 24% 23% 22% 21% 18% 21% 20% 24% 23% 22% 23% 24% 22%
Personal auto margins and ROEs are benefiting from mostly benign claims inflation
Personal Auto Margins Have Likely Peaked; Homeowners Insurance Prices Up. Personal auto lines insurance underwriting margins are strong, and price increases are
positive, but slowing. However, competition is expected to intensify due to attractive margins in auto insurance and underwriting margins have probably peaked. Personal lines insurer growth is a function of growth in registered vehicles and the housing stock (for homeowners insurance), which should recover as the economic environment improves. A major factor for homeowners insurers is natural catastrophe losses which range in the U.S. from winter storms, tornadoes, and wind-related hurricane losses. Flood losses are typically not covered by private market homeowners insurers because the U.S. National Flood Insurance Program addresses this risk. Despite a slow-growth environment, auto insurers focused in the direct sales channel including GEICO and Progressive are gaining market share because consumers are increasingly comfortable with buying auto insurance over the telephone or internet directly. Allstates declining auto policies-in-force (PIF) also appears to be linked in part to its
16 April 2012
10
strategy of reducing catastrophe exposure in its homeowners insurance business because Allstate tends to offer competitive pricing when auto and homeowners insurance is bundled. Mutual insurer State Farm has the largest personal lines market share at 19%, although the company is losing money in its core underwriting business. Figure 9: U.S. Personal Lines Industry Premium Volume
in $ bil $250 $200 $150 $100 $50 $0 2001 2002 2003 2004 2005 2006 Auto
Source: A.M. Best, Barclays Research estimates.
2007
2008
2009
2010
2011E 2012E
Homeowner's
Figure 10: U.S. Private Passenger Auto Insurance Industry Combined Ratio vs State Farm
130%
Figure 11: U.S. Homeowners Insurance Industry Combined Ratio vs State Farm
145%
Catastrophes
120%
State Farm
135% 125%
110%
115% 105%
100%
95%
State Farm
90%
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 E 20 12 E
85%
Auto Insurance Industry including State Farm State Farm

Source: A.M. Best, Barclays Research.
Homeowner's Insurance Industry including State Farm State Farm

16 April 2012
8 20 09 20 10 20 11 E 20 12 E
4 20 05
6 20 0
20 0
20 0
20 0
20 0
20 0
20 0
11
Figure 12: Non-Life U.S. Insurance Sector Coverage

NON-LIFE INSURANCE SECTOR RATING: 1-POSITIVE
Company
Ticker
Rating
Price 4/11/2012
52-Wk Price Range
Mkt Cap (Bil)
Operating EPS 11E 12E
13E
% Change EPS 11/12 12/13
Consensus EPS 12E 13E
Div. Yield
4Q11 Price/BV ex Gdwill
Price/Stated BV 4Q11A 12E 13E
P/E 12E
13E
ROE 12E 13E
Commercial Lines & Reinsurance

Travelers ACE Limited Arch Capital Group Partner Re Berkshire Hathaway (a) Chubb XL Group Everest Re OneBeacon Allied World Assurance Aspen Holdings Montpelier Re Flagstone Re RenaissanceRe TRV ACE ACGL PRE BRK.B CB XL RE OB AWH AHL MRH FSR RNR 1-Overweight 1-Overweight 1-Overweight 1-Overweight 1-Overweight 1-Overweight 1-Overweight 2-Equal Weight 2-Equal Weight 2-Equal Weight 2-Equal Weight 2-Equal Weight 2-Equal Weight 2-Equal Weight $58.17 72.11 37.79 66.86 79.05 69.61 21.18 93.43 14.69 68.90 27.69 19.30 7.39 74.79 64 - 46 75 - 57 39 - 30 82 - 50 84 - 65 72 - 55 25 - 18 95 - 73 17 - 12 71 - 49 29 - 22 20 - 15 10 - 6 79 - 60 $22.9 24.3 5.1 4.4 195.8 18.8 6.7 5.0 1.4 2.6 2.0 1.1 0.5 3.9 $3.28 6.97 2.20 (9.50) 4.35 5.12 0.28 (1.73) 0.51 4.63 (1.26) (2.50) (3.98) (3.22) $5.65 7.60 2.75 8.10 5.45 5.90 2.10 11.35 0.90 7.00 3.00 1.65 0.75 8.15 $5.50 7.00 2.50 7.50 5.80 6.00 2.20 10.50 0.80 6.00 2.75 1.50 0.70 7.50 73% 9% 25% NM 25% 15% NM NM 77% NM NM NM NM NM -3% -8% -9% -7% 6% 2% 5% -8% -11% -14% -8% -9% -7% -8% $5.75 7.56 2.78 7.64 5.11 5.77 1.86 11.90 1.06 6.89 2.79 2.19 0.86 8.30 $6.06 7.65 2.80 7.37 5.46 5.96 2.16 12.43 1.09 6.39 3.03 2.26 0.89 8.96 2.8% 2.6% 0.0% 3.6% 0.0% 2.2% 2.1% 2.1% 5.7% 2.2% 2.2% 2.2% 2.2% 1.4% 1.10 1.23 1.18 0.88 1.75 1.26 0.75 0.83 1.27 0.96 0.73 0.85 0.68 1.28 0.93 0.99 1.18 0.79 1.19 1.22 0.71 0.83 1.27 0.86 0.72 0.85 0.68 1.26 0.87 0.90 1.07 0.69 1.04 1.16 0.66 0.74 1.39 0.78 0.67 0.80 0.64 1.12 0.82 0.85 0.99 0.64 0.94 1.09 0.61 0.69 1.42 0.73 0.62 0.76 0.62 1.03 10.3 9.5 13.7 8.3 14.5 11.8 10.1 8.2 16.3 9.8 9.2 11.7 9.8 9.2 10.6 10.3 15.1 8.9 13.6 11.6 9.6 8.9 18.4 11.5 10.1 12.9 10.5 10.0 9% 10% 8% 9% 8% 11% 7% 10% 9% 8% 8% 7% 7% 13% 8% 9% 7% 8% 7% 11% 7% 8% 8% 7% 7% 6% 6% 11%
Median Insurance Brokers

Marsh & McLennan Willis Group Arthur J. Gallagher Brown & Brown Aon Corp. MMC WSH AJG BRO AON 1-Overweight 1-Overweight 1-Overweight 1-Overweight 2-Equal Weight $31.85 35.05 34.87 23.72 47.94 33 - 25 42 - 33 36 - 24 27 - 17 54 - 40 $17.4 6.1 4.1 3.4 15.6 $1.77 2.74 1.28 1.13 3.29 $2.15 2.90 1.80 1.30 3.60 $2.45 3.20 2.10 1.45 4.05
25%
21% 6% 41% 14% 9%
-8%
14% 10% 17% 12% 13% $2.14 2.86 1.88 1.29 3.61 $2.43 3.19 2.16 1.45 4.14
2.2%
2.8% 3.0% 3.8% 1.3% 1.3%
1.03
NM NM NM NM NM
0.90
2.89 2.44 3.07 2.07 1.92
0.84
2.74 2.20 3.03 1.94 1.76
0.79
2.56 1.98 2.93 1.77 1.64
10.0
14.8 12.1 19.3 18.3 13.3
10.5
13.0 11.0 16.6 16.4 11.8
9%
20% 19% 16% 11% 14%
7%
21% 19% 18% 11% 15%
Median Personal Lines

Progressive The Hanover Group Allstate Corp. PGR THG ALL 1-Overweight 2-Equal Weight 2-Equal Weight $22.62 39.73 32.24 23 - 17 46 - 31 34 - 22 $13.8 1.8 16.1 $1.49 0.32 1.32 $1.45 4.00 3.80 $1.55 3.75 3.75
14%
13%
2.8%
2.44
2.20
1.98
14.8
13.0
16%
18%
-3% NM 189%
7% NM NM
$1.55 4.00 3.70
$1.69 4.15 4.04
1.8% 3.0% 2.6%
2.39 0.77 0.94
2.39 0.71 0.87
2.16 0.68 0.80
2.02 0.65 0.75
15.6 9.9 8.5
14.6 10.6 8.6
15% 8% 10%
14% 7% 9%
Median S&P 500 10 Yr Treasury

SPX US10YR 1,368.71 2.03 1422 - 1075 3.57 - 1.71 $96.85 $111.05 $105.50
93%
14.7%
7%
-5.0%
2.6%
2.1%
0.94
NA
0.87
NA
0.80
NA
0.75
NA
9.9
12.3
10.6
13.0
10%
NA
9%
NA
Note: S&P 500 EPS estimates are a bottom-up calculation of consensus earnings forecasts.
Company
Ticker
Rating
Price 4/11/2012
4Q11 Book Value/Share Stated ex-AOCI Tangible
4Q11 Price/Book Value Stated ex-AOCI Tangible
Historical Price/Stated BV Share Price Performance Hi Lo Avg. Median 1 Mo. 12 Mos. 5 Yrs.
Commercial Lines & Reinsurance

Travelers ACE Limited Arch Capital Group Partner Re Berkshire Hathaway (a) Chubb XL Group Everest Re OneBeacon Allied World Assurance Aspen Holdings Montpelier Re Flagstone Re RenaissanceRe TRV ACE ACGL PRE BRK.B CB XL RE OB AWH AHL MRH FSR RNR 1-Overweight 1-Overweight 1-Overweight 1-Overweight 1-Overweight 1-Overweight 1-Overweight 2-Equal Weight 2-Equal Weight 2-Equal Weight 2-Equal Weight 2-Equal Weight 2-Equal Weight 2-Equal Weight $58.17 72.11 37.79 66.86 79.05 69.61 21.18 93.43 14.69 68.90 27.69 19.30 7.39 74.79 $62.32 72.76 32.03 84.82 66.57 57.15 29.64 112.99 11.57 80.11 38.43 22.71 10.90 59.27 $55.01 67.09 30.88 77.94 59.44 50.78 27.80 106.16 11.56 79.74 32.58 22.77 11.08 59.05 $52.65 58.43 32.03 75.85 45.08 55.44 28.36 112.99 11.57 71.91 38.16 22.71 10.90 58.45 0.93 0.99 1.18 0.79 1.19 1.22 0.71 0.83 1.27 0.86 0.72 0.85 0.68 1.26 0.90 1.06 1.07 1.22 0.86 1.33 1.37 0.76 0.88 1.27 0.86 0.85 0.85 0.67 1.27 0.97 1.10 1.23 1.18 0.88 1.75 1.26 0.75 0.83 1.27 0.96 0.73 0.85 0.68 1.28 1.03 2.05 2.03 1.76 1.62 1.99 2.20 2.45 2.08 1.70 1.37 1.69 1.96 1.10 2.63 1.98 0.80 0.81 0.61 0.61 1.10 0.96 0.19 0.66 0.70 0.68 0.60 0.67 0.54 0.99 0.67 1.23 1.26 1.22 1.15 1.53 1.45 1.25 1.21 1.12 0.92 1.00 1.12 0.82 1.56 1.21 1.25 1.29 1.27 1.20 1.53 1.46 1.39 1.23 1.11 0.83 1.04 1.05 0.81 1.52 1.24 1% 0% 2% 3% 0% 3% 0% 2% -3% -1% 1% 5% -11% 2% 1% -3% 8% 11% -17% -3% 13% -15% 3% 8% 9% -1% 7% -14% 6% 4% 9% 24% 62% -4% 8% 34% -58% -3% -44% NA 7% 12% NA 41% 9%
Median Insurance Brokers

Marsh & McLennan Willis Group Arthur J. Gallagher Brown & Brown Aon Corp. MMC WSH AJG BRO AON 1-Overweight 1-Overweight 1-Overweight 1-Overweight 2-Equal Weight $31.85 35.05 34.87 23.72 47.94 $11.02 14.39 11.37 11.47 25.03 NM NM NM NM NM NM NM NM NM NM
2.89 2.44 3.07 2.07 1.92 2.44
NM NM NM NM NM
NM NM NM NM NM
7.91 6.13 9.23 6.04 3.43 6.13
1.61 1.76 2.07 0.57 1.29 1.61
3.57 3.71 4.28 3.44 2.06 3.57
2.95 4.03 3.54 3.26 1.94 3.26
-1% 0% -1% -1% -1% -1%
9% -13% 16% -9% -8% -8%
6% -12% 23% -12% 25% 6%
Median Personal Lines

Progressive The Hanover Group Allstate Corp. PGR THG ALL SP621 1-Overweight 2-Equal Weight 2-Equal Weight $22.62 39.73 32.24 205 $9.47 56.24 36.92 191 8.36 52.16 34.40 NA 9.47 51.46 34.31 NA
2.39 0.71 0.87 0.87 1.07
2.71 0.76 0.94 0.94 NA
2.39 0.77 0.94 0.94 NA
4.17 1.50 1.89 1.89 2.66
1.50 0.26 0.67 0.67 1.42
2.79 0.89 1.35 1.35 1.89
2.64 0.85 1.41 1.41 1.80
3% -2% 1% 1% 3%
6% -12% 2% 2% -7%
-1% -12% -47% -12% -57%
Median S&P Financials
(a) Market cap for Berkshire Hathaway includes Class A and B shares outstanding.
Source: Company data, Barclays Research
Industry Consolidation Unlikely. With perhaps few exceptions, we do not anticipate

increased industry consolidation among primary commercial insurers and reinsurers given current depressed valuations and the potentially high cost of using stock as currency for acquisitions. The appetite for M&A appears to have slowed and we expect this trend to continue as the level of excess capital has likely peaked for commercial insurers, and reinsurers do not have substantial excess capital. One notable exception is ACE, which has been increasingly active in making accretive acquisitions using existing cash. Other recent examples of industry consolidation include Alleghanys $3.5 billion acquisition of Transatlantic (over competing offers from Validus Re, Berkshire Hathaway and AWH),
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12
Allstates acquisition of Esurance and Answer Financial from White Mountains for $1.0 billion, and Nationwides $816 million acquisition of Harleysville. Figure 13: Recent Property-Casualty M&A Activity
Buyer Name QBE Insurance Group Ltd. Berkshire Hathaway CNA Financial Hanover Insurance Group, Inc. Allstate Corp. Doctors Company AmTrust Financial Services, Inc. ACE Ltd. Nationwide Mutual Insurance Co. Selective Insurance Company Alleghany Corp. CNA Financial Target Name Balboa Insurance Wesco Financial Corp. CNA Surety Chaucer Holdings Plc Esurance and Answer Financial FPIC Insurance Group, Inc. International Credit Mutual Reinsurance Penn Millers Holding Corp. Harleysville Group Inc. Montpelier U.S. Insurance Co. Transatlantic Holdings, Inc. Hardy Underwriting Bermuda Ltd. Deal Value ($MN) 700 548 477 503 1,000 361 315 105 816 56 3,535 227 Announce Price/ Book Price/ Tangible Date (%) Book (%) 02/03/2011 02/04/2011 04/20/2011 04/20/2011 05/17/2011 05/23/2011 06/30/2011 09/07/2011 09/28/2011 09/19/2011 11/20/2011 03/21/2012 NA 106 111 101 269 136 NA 101 208 NA 86 136 NA 119 128 112 NA 152 NA 101 215 NA 86 155
(a) CNA Financial already owned 61% of CNA Surety. Source: SNL data, Company data, Barclays Research
Catastrophe Losses Generate Volatile Earnings for Insurers. Catastrophe losses are unavoidable for the property-casualty insurance industry and result in volatile earnings that typically result in a discounted valuation for the P&C sector versus other financials. Insurers try to manage catastrophe risk by using risk modelling tools, limiting exposure to the most catastrophe-prone areas, and by purchasing reinsurance. U.S. catastrophe losses in 2011 were $34bn, the second highest level of annual catastrophe losses since 1990. Globally, insured catastrophe losses exceeded $100bn in 2011 driven by the Japan and New Zealand earthquakes as well as Thailand floods.
Figure 14: U.S. P&C Industry Insured Catastrophe Losses, 1990-Present
$80 $70 $60 in $ billion $50 $40 $30 $20 $10 $0
Hurricane Andrew Northridge Earthquake
Hurricane Katrina Hurricane Gustav/Ike
9/11
Hurricane Irene/US Tornadoes
Source: Insurance Services Office, A.M. Best, Barclays Research estimates.
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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 E 20 12 E 20 13 E
In the U.S., the largest catastrophe exposures include Florida and the Gulf Coast hurricane windstorm risk, and California earthquake risk. Tornadoes as well as winter and spring
13
storms can also cause substantial insured losses including an impact of $28bn in 2011. Hurricane Katrina in 2005 was the largest insured catastrophe in the United States with onshore losses of $46 billion (total insured losses were higher including damage to offshore oil rigs). The industry suffered significant international catastrophe losses in 2011 from the Japan earthquake ($30bn) and Thailand flooding ($10-$15bn). Among the largest manmade catastrophe losses are the terrorist attack on the World Trade Center ($32.5 billion of insured losses) in 2001 and the recent Deepwater Horizon oil rig loss ($4-$6 billion of industry losses). Insurers must address mega-catastrophe exposure to protect their solvency. Notably, catastrophe modeling firm AIR Worldwide estimates insurers could suffer approximately $100 billion of losses if there was a recurrence of the 1926 Miami Hurricane, the 1906 San Francisco earthquake, or the 1812 New Madrid, Missouri earthquake. Typically, we would not view an insured natural catastrophe loss of less than $10 billion to be a major event for the insurance industry because the claims expense would probably not exceed one years earnings for most individual insurers or reinsurers. As a point of reference, insured losses from major catastrophes are on average roughly half of economic damage. Homeowners insurers typically suffer the largest weather-related losses, but commercial insurers also have exposure. If an industry catastrophe loss in the U.S. is less than $5 billion, the reinsurers would normally be expected to have low exposure. Statesponsored facilities including the California Earthquake Authority, the Florida Hurricane Catastrophe Fund, and the Texas Windstorm Insurance Association can absorb some of the impact from catastrophic events. Figure 15 Distribution of U.S. Insured Catastrophe Losses by Geography, 1980-2010
Texas 11% Louisiana 10%
Figure 16: Distribution of U.S. Insured Catastrophe Losses by Catastrophe Type, 1990 1H2011
Wind/Hail/ Flood, 3.4% Geological events, 4.9% Terrorism, 6.6%
Fires, 2.4% Other, 0.2%
Rest of US 62%
Florida 17%
Winter Storm, 8.0% Tornado, 31.8%
Hurricanes/ Tropical storms, 42.7%
Source: ISO Property Claim Services, Insurance Information Institute, Barclays Research
Source: ISO, Barclays Research
Is the P&C Insurance Industry on the Cusp of a Hard Market? The last hard
market, in which insurance capacity declines and demand rises in a favorable environment for P&C insurance stocks, occurred from 2000-2005 and was exacerbated by large, unexpected losses from the September 11, 2001 World Trade Center terrorist attacks. The prior hard market was from 1984-1986 and was driven in part by a shortage of reinsurance capacity. Broad commercial P&C pricing improvement is now at a tipping point being led by workers compensation and property insurance, which together account for about half of U.S. commercial P&C insurance industry premium volume. Commercial P&C prices are
16 April 2012 14
rising driven by deteriorating underwriting results, stabilizing industry capital positions, and rising property reinsurance costs. Although a full commercial P&C cycle turn may not occur until 2013, pricing trends (the most important factor for the stocks) are clearly improving and should result in increasingly favorable investor sentiment. Figure 17: U.S. Commercial Net Written Premiums 2011
Workers Comp 18%
All Other 54%
Commercial Property 28%
Figure 18: U.S. P&C Industry Net Written Premium Growth

25%
20%
15%
10%
5%
0%
-5%
-10% 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
2007-2009: First-ever three year period of annual declines 2007 2008 2009 2010 2011E 2012E 2013E
Note: Shaded years represent hard markets. Source: Insurance Services Office, Barclays Research
There are four factors we monitor to tell us when the commercial P&C insurance cycle is poised to reach a sustained tightening phase. Critically, all four factors (not just one or two) need to be achieved before a broad cycle turn should occur. As of now, most of these factors are in transition with momentum toward improvement and we anticipate a broad cycle turn could occur in 2013:
16 April 2012 15
Large underwriting losses Industry underwriting losses are increasing, driven by deterioration in property lines and workers compensation. Notably, the U.S. P&C industrys estimated combined ratio of 107.5% for 2011 reflects large catastrophe losses and is likely among the worst underwriting results on record. The industry underwriting loss for 2011 is expected to be substantial at $34bn and is on track to be the largest since 2001. A decline in industry surplus Likely to be achieved in 2011, which signals reduced capacity to absorb underwriting losses. We estimate the U.S. P&C industry is overcapitalized by roughly $120 billion (20% excess capital) assuming normalized industry operating leverage, although this outlook could be overly optimistic if reserve deficiencies emerge. A tight reinsurance market Property reinsurance rates are up 5%-10% at mid-year 2012 after a series of large international catastrophe models although casualty reinsurance pricing is weak. Reinsurance is a global market, with Munich Re, Swiss Re, and General Re (part of Berkshire Hathaway), and the Bermuda market being major participants. Renewed management underwriting discipline Increased discipline appears to be emerging with primary insurers increasingly pushing for rate increases at renewal although competition for new business remains strong.
Figure 19: U.S. P&C Industry Capital May Have Peaked

$700 2.5 2.0 1.5 1.0 0.5 0.0
Statutory Surplus (in $ bil)
$500 $400 $300 $200 $100 $0
Note: Hard market years are shaded. Source: Source: Insurance Services Office, Barclays Research
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19 8 19 4 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 11 20 E 1 20 2 E 13 E
Statutory surplus
Premiums/Surplus
Critical Factors Affecting the Property-Casualty Insurance Market

There are several additional factors influencing the P&C cycle that we track closely including the industrys excess capital position, declining profits from the core underwriting business, and reduced underwriting cash flow.
P&C Industrys Excess Capital Position Has Likely Peaked. The U.S. P&C
insurance industry appears to be in a significant excess capital position with historically low operating leverage. Based on our analysis, we believe U.S. (not counting Bermuda or Europe) industry excess capital could be roughly $120 billion (20% of U.S. industry capital)
16
Premiums-to-surplus
$600
at year-end 2011, although industry excess capital has likely peaked. We note that pricing was improving in 1999 despite a significant technical level of excess capital, which means the same situation could occur now. Our sense is excess capital could be eroded if premium growth accelerates, capital positions decline, or both. Figure 20: U.S. P&C Industry Excess Capital
$150 Surplus Redundancy (Deficiency), in $Bil Excess Capital $100
Excess Capital $93
$135 $119 $118
40% $103 30% 20% 10% 0% Percent Redundant (Deficient)
$50
$0
-10% -20% -30%
-$50
-$100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 1994
-40%
Surplus Redundancy
Percent Redundant (Deficient)
Note: Hard market years are shaded. Source: Barclays Research
The rating agencies, especially A.M. Best domestically and Standard & Poors outside the U.S., have a strong influence on insurers capital requirements. This situation is partly due to property-casualty insurance in the U.S. being regulated almost entirely at the individual state level rather than at the federal level. The commercial P&C insurers and reinsurers are particularly sensitive to ratings because many customers as well as insurance agents and brokers would likely switch insurers if ratings fell below the A- level. Also, an insurer would not want to be in a position where it was forced to raise dilutive equity capital after suffering significant underwriting losses or an erosion of its capital base due to investment losses. After significant industry loss events, such as the World Trade Center attack in 2001 or Hurricane Katrina in 2005, many insurers needed to recapitalize with equity or equity-linked units to preserve adequate ratings from the rating agencies. Insurers were able to stabilize their franchises once they recapitalized and expanded, but it reduced the pace of price improvement since the industrys balance sheet faced reduced strain.
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17
Figure 21: Estimated Excess Capital at YE 2011 (in $ bn)
Figure 22: Estimated Excess Capital at YE 2011 as a % of 4Q11 Book Value

25% 20% Median excess capital of 9% of reported book value
in $ bil $4
$3
15%
$2
10% 5% 0%
$1
AL L M RH TR V PR E PG R AW H
R AC E GL AC E
AH L TH G
O B RN R XL
2009 2010 2011E
O B AW H PR E PG R RN R AC G L RE AL L TR V
AH M L RH TH G
XL AC E CB
Reduced Underwriting Profits. The U.S. P&C industry is generating large underwriting
losses (claims and underwriting expenses more than offset premiums collected) resulting from catastrophe losses and several years of weak commercial P&C pricing. Notably, topquartile insurers meaningfully outperform the industry average. We expect the U.S. P&C industrys combined ratio to deteriorate to 109% by 2013, which would be the highest level since 2001 and above the 15-year average of 104%. Figure 23: U.S. P&C Industry Reported Combined Ratio
120% 115% 110% 105% 100% 95% 90% 85% 80% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 9/11
Figure 24: U.S. P&C Industry Accident Year Combined Ratio

115% 110% 105% 100% 95% 90% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2012E 2013E Hard Market 9/11 Soft Market Cat losses
Acc Yr CR
Acc Yr CR ex cat's
Pre-cat CR
Cat CR impact
Note: Hard market years are shaded. Source: Insurance Services Office, Barclays Research.
Note: Accident year combined ratio excludes effect of loss reserve development from prior years. Source: Insurance Services Office, Barclays Research
U.S. P&C industry underwriting results have benefitted from reserve releases over the past six years that boost current period earnings. We expect the pace of reserve releases to slow through 2012 with deficiencies recognized in subsequent years.
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CB
$0
18
Figure 25: U.S. P&C Industry Prior Year Loss Reserve Development, 1992-2013E
$30 $25 $20 $15 $10 $5 $0 ($5) ($10) ($15) ($20) 8% 6% 4% 2% 0% -2% -4% -6% Combined Ratio Points
2012E 2013E
in $ billion
Source: A.M. Best, Insurance Services Office, Barclays Research
The U.S. P&C insurance industry's underwriting cash flow is deteriorating
Deteriorating Underwriting Cash Flow. We view negative underwriting cash flow

(premiums collected less paid claims and expenses, not including the benefit of investment income) as a leading indicator of when managements will focus on tightening underwriting discipline. The U.S. P&C insurance industry's underwriting cash flow is deteriorating, reflecting rising paid versus incurred claims expenses. In other words, the industrys reserves are not growing faster than paid losses. Based on our calculations, the industrys underwriting cash flow turned slightly negative in 2008 (the first time since 2001) and this trend is likely to accelerate through 2013. As a point of reference, the industrys underwriting cash flow was negative for most of the 1990s before pricing trends improved. Figure 26: U.S. P&C Industry Underwriting Cash Flow
$80 $60 $40 $20 $$(20) $(40) 1984 1985 1986 1987 1988 1989 1990 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 1991 1992 1995
Note: Hard market years are shaded. Source: Insurance Services Office, Barclays Research
Property-Casualty Insurance Industry Overview

The property-casualty insurance industry is mature with few organic growth opportunities and is often viewed as a commodity product for companies rated A or higher by the rating agencies. As a result, most companies win business based on price, as well as customer relationships, service capabilities, and/or product differentiation. Top-performing companies are able to generate attractive track records based on superior leadership,
16 April 2012 19
in $ billions
19 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 00 20 0 20 1 0 20 2 0 20 3 04 20 0 20 5 0 20 6 0 20 7 20 08 0 20 9 E 1 20 0 E 1 20 1 E 1 20 2 E 13 E
PY Reserve Development ex A&E Combined Ratio Points Asbestos & Environmental Development
effective distribution and superior service capabilities, strong risk management, and careful monitoring of claims trends. Companies that best meet these hurdles in our view include TRV, ACE, ACGL, CB, PGR, and Berkshire Hathaway.
There is a strong relationship between P&C insurers long-term stock price performance and book value per share growth
There is a strong relationship between P&C insurers long-term stock price performance and book value per share growth (Figure 27), which confirms our view that this metric is important to track for P&C insurers. Figure 27: Book Value Growth vs. Share Price Performance, 2002-Present
25%
ACGL 15% AWH PGR Share price CAGR YE02-Present 5% RE TRV PRE AHL -5% OB XL FSR MRH ALL CB ACE
RNR THG
-15%
-25%
-35% -5%
0%
5%
10%
15%
20%
25%
Avg Annual BV growth YE02-YE11
Investors also appear to reward P&C insurers that generate a strong, sustainable net return on equity (includes realized investment gains/losses excluded from operating results). Figure 28 shows the companies generating the highest returns with the lowest volatility are CB, ACE, TRV, ACGL, and PGR. On the other hand, the companies producing the lowest long-term returns with the highest volatility include MRH, FSR, and XL.
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20
Figure 28: Net Return on Equity vs. Standard Deviation (2002 2011)
25%
Hi ROE/Low Vol
PGR
Hi ROE/HiVol
20%
ACGL
RNR
15% Net Return on Equity

CB ACE TRV AWH PRE OB
10%
RE THG ALL AHL MRH
5%
FSR XL
0%
Low ROE/Low Vol Low ROE/Hi Vol
-5% 2002 Operating Income and Net Income are for Travelers as a standalone entity.
OB Common shareholder's equity is net of the remaining adjustment of subsidiary preferred stock to face value. 0% 5% 10% 15% 20% OB Operating and Net Income are adjusted for economically defeasing the Company's mandatorily redeemable preferred stock.
Net ROE and Operating ROE are calculated off of average shareholder equity.
25%
Standard Deviation (Net ROAE)

The U.S. P&C insurance industry generates $440 billion of annual premium volume which is roughly evenly split between commercial lines and personal lines. Other major commercial lines and reinsurance markets are in Bermuda, the U.K., continental Europe, and the Far East.
In recent years, industry premium volume has stagnated due to competitive pricing and low exposure growth, but this trend is reversing
In recent years, industry premium volume has stagnated due to competitive pricing and low exposure growth, but this trend is reversing. Commercial lines insurance is economically sensitive because exposure growth is driven by factors including payroll trends, corporate sales volumes, new business formations, and real estate development activity. In personal lines, exposure growth drivers include growth in registered passenger vehicles, and to a lesser extent the pace of home sales. In a challenging economic environment, consumers hold onto vehicles longer, and used vehicles cost less to insure than new cars and trucks.
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21
Figure 29: U.S. P&C Insurance Industry Premiums, 2011
Other 2%
Commercial 45% Personal 53%
$439bn
Other 4% Homeowner's 28%
Private Passenger Auto 72%
Commercial Property 46%
Commercial Liability 50%
Source: SNL data, Barclays Research
Figure 30: U.S. Commercial Lines Market Share, 2011

9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
AI G Tr av el Li er be s rty M ut ua l CN A at io nw id e Fi na nc ia W l .R .B er kl ey As su ra nt FM G lo ba O l ld Re pu bl ic Be F ar rk m sh er i re s H at ha w ay To ki o M ar in e h Ch ub b AC E fo rd Q BE St an z Zu ric ar t Al li Fa rm Am
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er ic an
at e
22
Figure 31: U.S. Private Passenger Auto Insurance Market Share, 2011
20% 19% 16% 12% 8% 4% 0%
rm t ls Fa e Al t a e at O IC s GE gre o Pr e siv l h de e rs ily AA tua ric m wi ve l u US a n Zu a F M tio n Tr rty N a i ca e r b e Li Am
Figure 32: U.S. Homeowners Insurance Market Share, 2011
22% 21% 18% 10% 9% 13% 8% 6% 5% 9% 5% 4% 2% 2% 4% 0%

l s e h b e il y AA id ua le r rm tat uric ub ut ave US n w Ch Fam ls Fa l Z e M Tr A io n at at rty St N ica e b er Li Am
Source: SNL Insurance, Barclays Research.
9% 6% 5% 5% 5% 4%
2%
2%
1%
G AI
St
Commercial Lines & Reinsurance Pricing Has More Momentum Than Personal Lines. Commercial lines P&C pricing is now in positive territory for the first time
since late 2003. Rates are also increasing at an accelerating pace. Currently, commercial P&C pricing is only about 8% above 1999 levels (end of the last soft market) on average, and prices are about 50% below peak pricing achieved at year end 2003. In 4Q11, commercial P&C pricing increased 3% y/y on average, up from 1% y/y in 3Q11, and flat prices in 2Q11, according to the latest survey by the Council of Insurance Agents and Brokers. P&C price increases accelerated across all lines in 4Q with the largest increases in workers compensation (up 8%) and commercial property (up 6%), which together account for about half of U.S. commercial P&C insurance premium volume. P&C prices also increased across all account sizes. Insurance carriers are asking for rate increases on renewal business, walking away from underpriced business, and terms and conditions are tightening. Competition for new business still exists, although the gap between pricing for new and renewal business is narrowing. Figure 33: Average and Cumulative Commercial Rate Changes by Account Size
40%
9/11
175
2005 Hurricanes
165 155
30%
20%
2005 Hurricanes
Japan earthquake Financial Crisis
Average rates continue to rise in 4Q11
Financial Crisis
145
9/11
10%
135 125
Japan earthquake
0% 115 -10% 105 95 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 Small Accounts Midsized Accounts Large Accounts
-20%
Small Accounts
Midsized Accounts
Large Accounts
Source: Company data, Barclays Research, Council of Insurance Agents and Brokers
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23
U.S. property catastrophe reinsurance pricing has increased following over $100bn of global insured catastrophe losses in 2011. This shift represents the first time reinsurance pricing increased since 2006 after the devastating impact of Hurricane Katrina. Reinsurers capital shrank in 2008 during the financial crisis as a result of mark-to-market losses on investments and rebounded in 2009 and 2010 and remained largely unchanged in 2011 despite large catastrophe losses. Reinsurance broker Guy Carpenter estimates the reinsurers included in its global composite are overcapitalized by roughly 12% as of yearend 2011, which implies roughly $20 billion of excess capital. Figure 34: Global Reinsurance Composite Shareholders Funds
in $ bil $200 $159 $160 $120 $90 $80 $40 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 $104 $110 $140 $129 $166 $171 $174
Personal lines insurance pricing is highly regulated by each U.S. state and tends to be a politically sensitive issue for consumers. As a result, volatility in personal lines pricing is typically much lower than in commercial lines and reinsurance. Currently, personal automobile insurance pricing is up 3% y/y, and homeowners insurance rates are up 2% according to CPI data, although this level of increase appears understated following significant U.S. catastrophe losses in 2011. Figure 35: Personal Auto Insurance Y/Y Price Change Figure 36: Tenants and Household Insurance Y/Y Price Change
10% 8% 6% 4% 2% 0% -2%
12% 10% 8% 6% 4% 2% 0% -2% 1/1/1999 1/1/2001 1/1/2003 1/1/2005 1/1/2007
Auto prices are increasing, but at a slowing pace
1/1/2009
1/1/2011
-4% 12/1/1998 12/1/2000 12/1/2002 12/1/2004 12/1/2006 12/1/2008 12/1/2010

24
Source: Bureau of Labor Statistics, Barclays Research
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How Do Property-Casualty Insurers Make Money?
There are two ways: underwriting profits and investment income. Insurers strive to generate underwriting profits by charging enough premiums to more than offset expenses for claims and operating expenses. Insurers typically focus on consistently generating an underwriting profit regardless of market conditions, although this result is not easy to achieve. If there are few opportunities to write profitable business, the most disciplined insurers will reduce premium volume to protect underwriting profits, although this result appears to be difficult to achieve. We view Arch Capital and Berkshire Hathaway as being among the few companies disciplined enough to walk away from underpriced insurance and reinsurance business. Investment income is a function of invested assets and portfolio yields. On average, about 75% of P&C insurers investment portfolios are in fixed income investments. Notable exceptions are Berkshire Hathaway and State Farm, which both have significant allocations to equities. As a result, investment income growth is difficult to generate as a result of modest growth in investment portfolios along with the low interest rate environment. For example, new money yields are 100bps-150bps below the portfolio yield for many P&C insurers, which is a headwind for future investment income as well as earnings.
Figure 37: U.S. P&C Industry Underwriting Profits and Net Investment Income
Net Investment Income
Net Investment Income, in $Bil $60 $50 $40 $30 $20 $10 $0 9% 8% 7% 6% 5% 4% 3% Avg. Portfolio Yield
Underwriting gains/losses
Underwriting Profits (In $Bil) $40 $20 $$(20) $(40) $(60)
Hurricane Andrew Hurricane losses
Sept. 11 attacks
Hurricane losses
19 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 2099 2000 2001 2002 2003 2004 2005 2006 2007 2008 2 09 20010 2011E 2012E 13 E
Note: Hard P&C market years are shaded. Source: Insurance Services Office, Barclays Research
P&C insurers core loss reserve redundancies appear to be largely exhausted
Are Loss Reserves Adequate? P&C insurers core loss reserve redundancies appear to
be largely exhausted. This situation could result in future reserve deficiencies that cause a drag on earnings, returns on equity, and share prices of property-casualty companies. Insurers set aside loss reserves to pay future claims costs because they do not know the ultimate cost of these claims when the insurance policy is written. The establishment of initial loss reserves is an estimate of future claims expense that is adjusted over time. If claims costs are determined to be less than initially expected, the insurer releases reserves and earnings benefit this has been the situation since 2006. On the other hand, if not enough loss reserves are established to cover claims costs, the company suffers from adverse reserve development and earnings suffer which occurred from 2001-2005. It is important to note that establishing accurate loss reserves for long-tail casualty lines such as workers compensation and commercial liability is a more challenging task than setting reserves for short tail lines such as commercial property insurance. This is because long-tail claims often involve complex litigation and may take years to settle (product liability, for instance) while short-tail claims are typically less complex to quantify (a fire loss, for example) and settle quickly. However, there was substantial reserve strengthening
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19 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 2099 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20 1 0 2011 2012E 13E E
Net Investment Income Average Portfolio Yield
25
particularly by reinsurers on large international cat losses including the Japan and New Zealand earthquakes, as well as the Thailand floods As an example, the figure below shows a reconciliation of Chubbs beginning and ending net loss reserves, which is the largest liability on its balance sheet.
Incurred losses (inclusive of prior year loss reserve development, which show reserve releases for the past three years) are reflected in the income statement. Meanwhile, claim payments only affect cash flow and not the income statement. The difference between incurred losses and paid losses (with an adjustment for FX) are equal to the change in loss reserves.
Figure 38: Chubb Reconciliation of Beginning and Ending Net Loss Reserves
Year Ended December 31 In $ mil Net loss reserves, beginning of year Net incurred losses and loss expenses related to Current year Prior years Net payments for losses and losses and loss expenses related to Current year Prior years 2,746 4,300 7,046 Foreign currency translation effect Net loss reserves, end of year
Source: Company data.
2011 $20,901
2010 $20,786
2009 $20,155
8,174 (767) 7,407
7,245 (746) 6,499
7,030 (762) 6,268
2,280 4,074 6,354 (30) $20,901
1,943 4,063 6,006 369 $20,786
67 $21,329
The P&C industry is most likely now in an increasingly deficient loss reserve position
The P&C industry is most likely now in an increasingly deficient loss reserve position since most commercial lines insurers and reinsurers released substantial reserves on unseasoned business. If loss cost inflation rises, reserve releases could reverse course to adverse development at a fast pace. One reason for robust reserve releases over the past several years are lower than anticipated claims (loss cost) inflation. The sustainability of this trend is questionable in our view, especially if tort costs or general economic inflation rise. Notably, the rating agencies have warned that loss reserve redundancies are largely exhausted, and we tend to agree with this assessment. We expect the pace of reserve releases to slow through 2012 with deficiencies probably being recognized in subsequent years. A.M. Best estimates U.S. P&C industry core loss reserves (excluding asbestos and environmental reserves, and statutory discounts mostly in the workers compensation line) are deficient by $9 billion (less than 2% of carried loss reserves). Reserves strengthened over the period of 2002-2007, but appear to be weakening since then, and A.M. Best expects insurers will need to increase reserves in accident years 2008-2010. Workers compensation reserves appear the most deficient.
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26
Figure 39: U.S. P&C Estimated Reserve Deficiencies 2011 (in $ bil)
Product Line Workers' Compensation Reinsurance - Nonproportional Assumed Other/Products Liability Commercial Multiple Peril Commercial Auto Liability Homeowners Personal Auto Liability Medical Professional Liability All Other Lines Total Core Reserves Asbestos & Environmental Total Reserves
Total Deficiency 8.2 3.4 4 1.5 0 -0.2 -1.8 -4 -2.2 8.9 7.4 16.3
Note: Excludes mortgage guaranty and financial guaranty segments. Also excludes statutory discounting. Source: A.M. Best Co., Barclays Research
We closely monitor tort costs trends. A strong correlation exists between tort costs and the property-casualty underwriting cycle based on our analysis. The peak of the 1980s hard P&C market occurred in 1986-1987 when tort costs were at historically high levels as a percent of GDP. Also, the last hard market began in late 1999 when tort costs were at their lowest point in 20 years. Rising tort cost inflation could lead to worse underwriting profits for P&C insurers. Tort costs as a percent of GDP could bottom in 2011, which could signal a P&C cycle turn. Figure 40: U.S. Tort Costs As A Percentage of GDP, 1980-2013E
Peak of last hard commercial Trough of last soft prop/cas market (Profits commercial deteriorate) 2.4% prop/cas market 2.2% (profits improve)
2.6%
Trough of last soft commercial prop/cas market (profits improve)
Peak of last hard prop/cas mkt (profits deteriorate) Deepwater Horizon Oil Rig Explosion
2.0% 1.8% 1.6% 1.4% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E
Source: Towers Perrin, Barclays Research.
Property-Casualty Insurers Investment Portfolios Are Mostly Conservative

P&C insurers collect premiums from customers and invest it until claims are paid, which generates investment income that is a critical driver of insurers earnings. Insurers typically strive to match the duration of their assets (investments) with the duration of liabilities (loss reserves). Currently, most insurers desire a low duration of approximately three years on fixed income investments to minimize the impact increased interest rates would have on their bond portfolios as well as shareholders equity. Insurers also desire substantially liquid investments to pay claims.
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Figure 42 shows the U.S. P&C insurance industrys investment portfolio is heavily weighted toward high-grade fixed income investments, with a 14% overall allocation to equities, and 5% to other total return investments. Notably, Berkshire Hathaway and State Farm own about approximately 63% of the industrys equity exposure. Excluding these companies, the industry investment allocation to equities would be about 6%. Figure 41: U.S. P&C Industry Investment Allocation - 2011
Contract Loans 0% Cash & Short Term Other Investments 6% 5%
Real Estate 1%
Mortgage Loans 0%
Common Stocks 14% Preferred Stocks 1%
Bonds 73%
Total Cash & Investments: $1.3 trillion

Note: Excludes affiliated company cash and investments. Source: SNL data, Barclays Research.
Figure 42: Fixed Income Allocation - 2011

Other Investments 1% U.S Gov't 15% Foreign Gov't 3% States, Territories 6% Political Subdiv. 10% Special Revenue 29%
Figure 43: Bond Maturity Distribution - 2011

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Industrial 36%
< 1 Year
1 - 5 Years 5 - 10 Years
Total Fixed Income Allocation: $928 billion
10 - 20 Years
> 20 Years
Note: Excludes affiliated company investments. Source: SNL data, Barclays Research.
Source: SNL data, Barclays Research.
P&C insurers invested asset leverage at 266% is low compared to other financials
P&C insurers invested asset leverage at 266% is low compared to other financials including banks, securities brokers, and life insurers. This means that declining investment valuations would not be expected to have a substantial impact on shareholders equity. We estimate each 100bp parallel upward shift in the yield curve could reduce book value per share on average by 5%. XL appears to have the most risk to rising interest rates, with each 100 bps increase in yields potentially impacting its book value by 13%.
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Figure 44: P&C Invested Asset Leverage Is Low (as of YE 2011)

600%
Figure 45: Impact of a 100 Bps Increase in Interest Rates as a Percent of Book Value (as of YE 2011)
Impact of 100 bps Increase in Interest Rates As a Percent of Book Value A/T 0%
500%
400%
Median=266%
-3% -6% -9% Median = -5% -12% -15%
300%
200%
100%
0% RNR AHL ACE AWH RE THG TRV PRE CB PGR ACGL XL ALL
Source: Company data, Barclays Research.
(a) As of YE11, ALL estimates a 100 bp immediate, parallel increase in interest rates would decrease the net fair value of assets and liabilities by $127 million pre-tax. In addition, in the event of a 100 bp increase in interest rates, the assets supporting Allstates life insurance products of $8.1 billion would decrease in value by $660 million pre-tax. Source: Company data, Barclays Research.
The insurers with the lowest-risk investment portfolios in our view include Travelers and Chubb. Although both have significant exposure to municipal bonds, our sense is the risk of loss is low based on the strong diversity and high credit quality of their portfolios. Allstate, Arch Capital, and PGR appear to have the highest risk tolerance in their investment portfolios among the P&C insurers we cover.
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R AC E GL M RH TR V AW H O B RN R FS R PG R AL L
XL PR E CB AC E TH G AH L
29
Figure 46: P&C Exposure to Topical Invested Assets, as a % of Book Value, December 31, 2011
60%
50% % of common shareholder's equity, A/T
40%
30%
20%
10%
0% ALL ACGL PGR XL AWH THG RNR PRE CB RE ACE AHL TRV
Subprime/Alt-A RMBS
CMBS
ABS/CDO
Whole Loans
Figure 47: P&C Exposure to Topical Invested Assets, December 31, 2011
$14 $13 $12 $11 $10 $9 in $ billion $8 $7 $6 $5 $4 $3 $2 $1 $0 ALL XL PGR CB ACGL ACE AWH PRE TRV RE THG RNR AHL
Subprime/Alt-A RMBS
CMBS
ABS/CDO
Whole Loans
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Figure 48: Exposure to Equities and Alternative Assets, as a % of Book Value, December 31, 2011
% common shareholders' equity, A/T
50% 40% 30% 20% 10% 0% ALL ACGL RE RNR AWH XL PGR Equities PRE CB TRV THG ACE AHL
Alternative Investments
Figure 49: Exposure to Equities and Alternative Assets, December 31, 2011
$12,000 $10,000 $8,000

in $ mil
$6,000 $4,000 $2,000 $0 ALL TRV CB ACE XL RE PGR ACGL Equities PRE AWH RNR THG AHL
Alternative Investments
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Part II: Primary Commercial Lines: Full Cycle Turn in 2013?

We are constructive on the P&C insurance sector based on a positive inflection point in P&C pricing
We are constructive on the P&C insurance sector based on a positive inflection point in P&C pricing for the first time since 1999. We expect positive pricing momentum to persist, which could result in valuation multiple expansion for P&C stocks. This positive inflection point on rates appears to be driven by deteriorating underwriting results, stabilizing industry capital positions, and rising property reinsurance costs. Although a full commercial P&C cycle turn may not occur until 2013, pricing trends are gaining positive momentum. We view commercial P&C insurance pricing trends as the most important factor for the stocks because it is a leading indicator of revenue growth, margins, earnings, and ROE. In addition, rate trends have a significant influence on investor sentiment in the P&C sector. That said, as the commercial P&C cycle bottoms, earning power and ROE will likely deteriorate for several years due to worse accident year underwriting results, reserve strengthening, weak investment income growth, and reduced share buyback activity. However, P&C industry balance sheet strain typically sets the stage for improved pricing, which should elevate P&C valuations as investors focus on the potential for rate improvement. Among the P&C insurance stocks, we prefer primary commercial insurers ACE, ACGL, CB, TRV and XL because of their high quality managements, potential for strong book value growth, and better-than-average core underwriting performance. The following figure shows positive momentum in pricing and exposure growth in TRVs core commercial P&C insurance business. Figure 50: Travelers Commercial Insurance Pricing Business Insurance excluding National Accounts
Note: Statistics are subject to change based on a number of factors, including changes in actuarial estimates. Source: Travelers Cos.
In a confirming trend, commercial P&C pricing increased 3% y/y on average in 4Q11, up from 1% y/y in 3Q11, and flat prices in 2Q11, according to the latest survey by the Council of Insurance Agents and Brokers. This reinforces our view that P&C pricing is at a positive inflection point. Prices are clearly improving after pricing increased on average in 3Q11 for
16 April 2012 32
the first time since late 2003, which is clearly a favorable result for the sector. TRV and CB see similar trends as well as an accelerating rate of improvement over the past several months. Interestingly, P&C prices are on average only about 8% above 1999 levels (end of the last soft market), and prices are about 50% lower than peak prices in 2003. Figure 51: Average Year-over-Year Commercial P&C Rate Changes by Account Size
40% 9/11 30%
Figure 52: Cumulative Index Of Commercial P&C Rate Changes by Account Size
175 165 155 145 9/11 135 125 2005 Hurricanes Financial Crisis Japan earthquake
20%
2005 Hurricanes
Japan earthquake Financial crisis
4Q11 P&C rates +3%
10%
0%
115 105
-10%
95 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11
-20% 4Q99 2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11
Small Accounts
Midsized Accounts
Large Accounts
Small Accounts
Midsized Accounts
Large Accounts
Source: The Council of Insurance Agents and Brokers. Chart prepared by Barclays Research.
Commercial rate increases accelerate. P&C price increases accelerated across all lines in 4Q11 with the largest increases in workers compensation (up 8%) and commercial property (up 6%), which together account for about half of U.S. commercial P&C insurance premium volume. P&C prices also increased across all account sizes. Insurance carriers are asking for rate increases on renewal business, walking away from underpriced business, and terms and conditions are tightening. Competition for new business still exists, although the gap between pricing for new and renewal business is narrowing. Figure 53: Average Commercial Rate Changes by Lines
60%
Figure 54: Cumulative Commercial Rate Changes by Lines

220
50%
2005 Hurricanes
200
40%
9/11
180
Financial Crisis
Japan earthquake
30%
20%
2005 Hurricanes
Financial Crisis
Japan earthquake
160
9/11
140
10%
0%
120
-10%
-20% 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
100 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 Commerical Auto Workers' Compensation Commercial Property General Liability Umbrella
Commercial auto
Workers' compensation
Commercial property
General liability
Umbrella
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3Q11
33
The commercial P&C insurers appear optimistic about the P&C pricing environment
The commercial P&C insurers appear optimistic about the P&C pricing environment. For example, TRV said it achieved rate increases in 4Q11 in all products for the fourth consecutive quarter, while CBs renewal rate increases in its commercial insurance business continued to accelerate and rate increases were secured on almost three-quarters of business renewed in the fourth quarter. ACE CEO Evan Greenberg said U.S. commercial P&C business began to achieve flat to modestly positive rate increases in most products in 2011. Notably, improved pricing continued in 2012, led by property and workers compensation insurance. Outside the United States, P&C pricing remains soft with the exception of catastrophe-exposed areas. Insurance brokers AJG and AON both see pricing continuing to rise. Figure 55: Commercial P&C Pricing Commentary Increasingly Positive
Commercial Lines TRV Pricing remained positive across all segments for the fourth consecutive quarter and accelerated in 4Q11. Renewal rate gains in Business Insurance exceeded 6%, up from 3% in 3Q11, led by workers compensation and commercial auto. Commercial accounts increased 8% (up from 4% in 3Q11), the highest level since the end of 2003. For the month of December 2011, renewal rate gain was 8% and preliminary review of January 2012 suggests similar progress. TRV believes that these written rate levels exceed current views of loss trends. U.S. commercial renewal rates rose 6% in 4Q11 compared to 4% in 3Q11 and 2% in 2Q11. CB saw renewal rates increase across every line of business, with property increasing the most, followed by general liability, workers comp, excess umbrella, package, commercial auto, boiler, and marine. CB secured rate increases on about 70% of standard commercial insurance business renewed in 4Q11 vs. 30% a year ago. Outside the US, rate increases were obtained in cat-exposed regions, while Europe renewal rates were flat. Separately, professional liability renewal rates turned positive in the fourth quarter to +1% compared to -1% in 3Q11, the first positive rate increase in the US for professional liability since 2009. ACE saw P&C rates steadily firming in North America with overall rates increasing 1.6% in 4Q11. Notably, December price increases were the highest with rates increasing over 4%. International P&C rates are softer than U.S. rates. ACGL continued to see improvement in rates across the board. Rates in most lines of business moved into positive territory with the exception of the executive assurance (down 6%) and medical malpractice (down 1%-7%).
CB
ACE
ACGL
Insurance Brokers MMC MMC views the overall P&C rate environment as improving, with property catastrophe, particularly in the U.S. and Pacific, showing the most firming. Rate increases for property cat ranged from +5-15%. U.S. property, workers comp, excess casualty, and general liability rates all increased in 4Q. Rates were also flat to down internationally. Commercial P&C insurance placed by Aon renewed flat on average in 4Q11, an improvement to -1.9% in 3Q11, from -2.5% in 2Q11, and -5.3% in 1Q11. WSH saw mid-single digit rate increases for property catastrophe renewals in its North America segment, however rates overall were flat in the fourth quarter for the segment. Separately, renewal rates increases were segmented by individual loss history for January 1 renewals, with positive trends continuing for catastrophe-affected property renewals in the U.S. The new RMS 11 wind model did not affect January 1 renewals in Europe. AJG is seeing P&C rates increasing at the same rates as the CIAB 4Q11 Survey (small accounts +3.1%, medium accounts +3.5%, large accounts +1.8%). Property rates are generally increasing more than 3% and in particular the middle market is showing firming. AJG has seen up to 100% rate increases in catastrophe-exposed property accounts and views this line as being in a hard market. BRO is seeing an intensifying push by insurers to increase rates. However, it views noncatastrophe exposed areas and certain product lines are still very competitive.
AON WSH
AJG
BRO
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Stabilizing demand. Commercial P&C insurance exposure growth is low driven by a slow economic recovery, but appears to be stabilizing. Insured exposures, including payrolls and commercial real estate development, declined significantly during the economic recession, but appear to have troughed. We view commercial P&C insurance as a late-cycle economic recovery opportunity because overall economic conditions need to improve before demand for insurance coverage rises. Recent commentary from insurers signals demand has likely stabilized, although the recovery is expected to be slow. Broad economic indicators including payrolls and construction show that demand for insurance coverage is poised to recover. Private nonfarm payrolls are recovering (Figure 56) but are still 5% below peak levels. In addition, U.S. private non-residential construction is improving however current levels are nearly 38% below the peak in January 2008 (Figure 58). The most recent data reported shows U.S. private non-residential construction continues to recover. Figure 56: Private Nonfarm Payrolls
Improving payrolls lead to increases in Workers' Comp premiums
Figure 57: U.S. Private Nonresidential Construction

Increased construction activity leads to P&C exposure growth
$400
$120 $116 in $ million $112 $108 $104 $100

Jan 3 -0 Jan 4 -0 Jan 5 -0 Jan 6 -0 Jan 7 -0 Jan 8 -0
$350 in $ billion
$300
$250
$200
Jan 9 -0 Jan 0 -1 Jan 1 -1 Jan 2 -1
2 1 0 9 8 7 6 5 4 3 -0 n -0 n -1 n -1 n -1 -0 n -0 n -0 n -0 n -0 Ja Ja Ja Ja Jan Ja Ja Ja Ja Jan
Source: U.S. Census Bureau.
Source: Automatic Data Processing.
Figure 58: P&C Exposures Are Stabilizing a Tailwind for Expanding Premiums Volume
Exposure commentary ACE TRV MMC WSH Exposure growth increased 3.5% in 4Q11 as a result of gradually improving economic growth. Exposures are up in 4Q and audit premiums increased y/y. Exposures in the Business Insurance segment remain positive and show continued improvement. MMC sees a macroeconomic environment similar in 2012 similar to 2010 and 2011. Audit premiums were flat overall in 4Q11. WSH sees signs that the economy is improving in the U.S., although International was negatively impacted by tough economic conditions in the U.K. The company sees exposures growth normalizing in 2012. Economic conditions improved for AJGs clients with some audit premium increases in the most recent quarter. Exposures are stabilizing overall.
AJG BRO
Insurers book value growth is expected to slow as accident year margins deteriorate and reserve releases slow late in the P&C cycle. A composite of commercial P&C insurers reported book values grew nearly 7% in 2011 despite larger catastrophe losses and reduced investment income (5% growth excluding unrealized investment gains). Reported book value growth in 2012 could be around 9% (+9% excluding AOCI from investment gains)
16 April 2012 35
and 6% in 2013. Unlike the life insurers, book value excluding AOCI for the P&C insurers is unlikely to be the most relevant base line for valuation near-term because unrealized investment gains could fluctuate due to changes in interest rates. Figure 59: Commercial Insurers As-Reported Book Value Growth for Top Quartile Performers
Reflects recovery from financial crisis
Figure 60: Commercial Insurers Book Value Growth Ex AOCI for Top Quartile Performers
30%
35% 30%
29.3%
Cat losses and low interest rates
25% 20% 17.0% 15% 13.9% 14.2% 10.8% 8.5% 3.7% 4.8%
25% 19.9% 20% 16.3% 15% 10% 5% 0% -5% -1.1%

Financial crisis and cat losses
17.4% 9.0%
6.6%
6.1%
10% 5% 0%
7.2%
2006 2007 2008 2009 2010 2011 2012E 2013E

Note: A composite of ACE, CB, TRV, ACGL, XL, AWH, and AHL is used to calculate book value growth for the commercial P&C subsector. Source: Company data, Barclays Research estimates.
2006 2007 2008 2009 2010 2011 2012E 2013E

Note: A composite of ACE, CB, TRV, ACGL, XL, AWH, and AHL is used to calculate book value growth for the commercial P&C subsector. Source: Company data, Barclays Research estimates.
Our Channel Checks Confirm Improving Commercial P&C Market Conditions

Our positive view on the commercial P&C market is affirmed by the results of our proprietary Commercial P&C Insurance Buyers Survey. Twice a year, we interview 75 large buyers of commercial P&C insurance known as risk managers to learn about their experience of purchasing and renewing insurance. Following are some comments from large commercial P&C insurance buyers we interviewed: Insurers are pushing for gradual rate increases. (Risk manager in Financial Services) The P&C insurance market is stable and starting to harden. Insurers are asking for rate increases due to weak profits, although there is still adequate capacity. (Financial Services) I expect insurers to push for rate increases in 2012 similar to post-Hurricane Katrina. (Utility) The commercial P&C market is constricting capacity and coverage. (Manufacturing) Our property insurance prices could increase double-digits because we have meaningful U.S. catastrophe exposure, although we did not have any catastrophe losses this year. (Manufacturing)
Commercial P&C Prices Are Increasing

Based on our proprietary buyers' survey, commercial P&C pricing is up 3% vs. a year ago in early 2012 renewal season. This result is an improvement compared to a median flat renewal six months ago, in part reflecting significant catastrophe losses in 2011. In
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36
property lines, the renewal pricing range was wide; however the majority of risk managers we surveyed saw prices increases.
Notably, price increases are no longer limited to loss-impacted programs
Notably, price increases are no longer limited to loss-impacted programs. The overall median year-over-year price change for all commercial property/casualty lines is 3% as of early 2012, with a range of down 7% to up 38%. In our most recent survey, only 12% of respondents anticipate rate decreases in commercial P&C insurance programs, with 21% noting flat renewals, and 67% anticipating price increases. Six months ago, 30% of respondents experienced rate decreases in their P&C programs, 38% noted flat renewals, and 32% anticipated price increases.
Figure 61: Directional Changes in Commercial P&C Rates

Roughly 90% of buyers said flat or lower rates Rate changes are more evenly spread between decreases, flat rates, and increases. Majority of buyers seeing rate increases
Early 2011
8% 32% 28%
Mid 2011
Early 2012
12% 30%
21%
64%
67%
38%
Rate increases
Rate decreases
Flat renewals
A Small But Increasing Percentage of Buyers Characterize the P&C Market as Hard
More risk managers characterized the overall commercial P&C market as hard
In our most recent survey, 7% of risk managers called the P&C market hard (up from 0% six months ago) and 81% characterized the overall commercial P&C market as stable (up from 70% six months ago). Meanwhile, 13% of respondents called the market soft, compared to 30% six months ago. Notably, roughly half of risk managers we interviewed viewed the catastrophe-exposed property insurance market as hard (vs. none six months ago). None of the respondents said the catastrophe-exposed property insurance market is soft, versus roughly 10% six months ago.
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Figure 62: Where Are We in the P&C Insurance Market Cycle?

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
y2 ul 5 00 J an 06 20 J y ul 06 20 J an 07 20 J y2 ul 7 00 J an 08 20 J y2 ul 8 00 J an 20 09 J y2 ul 9 00 n Ja 10 20 J y2 ul 0 01 J an 11 20 J y ul 11 20 J an 12 20
Some buyers saying its a hard market
Soft
Stable
Hard
NA
Commercial P&C Policy Terms and Conditions Mostly Unchanged

A critical component of the P&C market conditions that is not captured in the reported pricing trends is changes in policy terms and conditions. In a hard market, policy conditions tend to tighten, which understates the magnitude of price increases. For example, if a risk manager renews at the same price but with higher deductibles, more exclusions, or reduced policy limits, then he or she receives less coverage for the same or a higher price which should improve the insurers underwriting margins. Policy terms and conditions are mostly stable versus a year ago. In our most recent survey, 84% of respondents said policy terms and conditions are expected to be stable versus a year ago, vs. 82% six months ago. The percentage of risk managers saying policy terms loosened fell to 4% vs. 14% six months ago, and 12% of respondents saw terms and conditions tighten up from 4% six months ago. Notably, insurers no longer appear interested in offering multi-year deals, which reflects increased discipline among the insurers. Several respondents asked their insurer to renew a multiyear deal, but the insurers refused.
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38
Figure 63: Did Policy Terms and Conditions Tighten?

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2 Ja n03 Ju l-0 3 Ja n04 Ju l-0 4 Ja n05 Ju l-0 5 Ja n06 Ju l-0 6 Ja n07 Ju l-0 7 Ja n08 Ju l-0 8 Ja n09 Ju l-0 9 Ja n10 Ju l-1 0 Ja n11 Ju l-1 1 Ja n12 Ju l-0
Mostly Stable
Tighter
No change
Less restrictive
P&C Renewal Process Is Increasingly Difficult for Buyers

An important signal about the mindset of insurers management is how risk managers perceive the difficulty of the renewal process. The renewal process is an indicator of underwriting discipline, because a more contentious renewal process could signal a stronger negotiating stance for insurers. Negotiations between the risk managers and their brokers and the insurers can begin months ahead of the renewal date for a complex commercial insurance program. In a hardening market, the renewal process tends to be tougher for buyers because underwriters hold the stronger negotiating position. Roughly 65% of buyers said the most recent renewal process was similar in difficulty to a year ago (vs. 85% six months ago) and only two buyers said it was easier. Notably, 33% said the renewal process was more difficult (up from 15% six months ago). More buyers viewed the renewal process as being harder than last year and many indicated that insurers were asking for more information. That said, the majority of buyers said the renewal process was no more challenging than a year ago, pointing to excess capacity, even after substantial 2011 catastrophes.
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39
Figure 64: How Difficult Was the Renewal Process This Year?
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Ja n04 Ja n05 Ja n06 Ja n07 Ja n08 Ja n09 Ja n10 Ja n11 Ja n03 Ja n12 Ju l-0 3 Ju l-0 4 Ju l-0 5 Ju l-0 6 Ju l-0 7 Ju l-0 8 Ju l-0 9 Ju l-1 0 Ju l-1 1
Renewal process was more difficult.
More difficult
No change
Less difficult
Commercial P&C Insurance Market: A Positive Inflection Point

The U.S. commercial property-casualty market makes up nearly half of the total propertycasualty market with approximately $200 billion written premiums annually. Liability lines are approximately half of the total commercial P&C market with property lines making up the rest. Commercial P&C prices are rising and broad commercial P&C pricing improvement is now at a tipping point, led by workers compensation and property insurance, which together account for about half of U.S. commercial P&C insurance industry premium volume. Although a full commercial P&C cycle may not occur until 2013, pricing trends are clearly improving.
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Figure 65: Total U.S. Commercial P&C Premiums, 2011

Commercial P&C Premiums: $204 billion
Other 4%
Property 46%
Liability 50%
Commercial liability insurance protects the assets of a business when it is sued for something the business did (or failed to do) that caused monetary damage, bodily injury or property damage to someone else. A businesss liability exposure includes not only paying damages and perhaps a penalty as the result of a successful lawsuit against it, but it also includes attorneys fees and other costs involved in defending a company against a liability claim. The top three liability lines as a percentage of total liability premiums are: Other Liability (Claims-made, which includes Directors & Officers Liability as well as Errors & Omissions insurance, and Occurrence, which includes general liability), Workers Compensation, and Commercial Auto Liability. Property insurance provides protection against most risk to property, such as fire, theft, and some weather damage. The top three property lines as a percentage of total property premiums are: Commercial Multiple Peril, Inland Marine, and Fire.
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Figure 66: U.S. Commercial P&C Lines

Earthquake 1% Aircraft 1% Other Liability 22% Product Liability/Warranty 2% Commercial Multi Peril 15%
Flood 1% Commercial Auto 11% Surety/Fidelity 2% Multi Peril Crop 4%
Marine 7%
Workers' Comp 19% Medical Prof Liab 4%
Fire & Allied Lines 11%
Source: A.M. Best, Barclays Research
Figure 67: Largest Commercial P&C Lines of Insurance

Line % of Total U.S. Market Description
Workers Compensation
18%
Provides coverage for medical care and rehabilitation for workers injured in the course of employment, as well as lost wages. It also provides death benefits for dependants, in the case where an employee is killed in work-related situations. A package policy that includes coverage for property (insurance on buildings and their contents), boiler and machinery (i.e., equipment breakdown), crime, and general liability. Protects a business when it is sued for something the business did (or failed to do) that caused monetary damage, bodily injury or property damage to someone else. Protects against physical damage (collision, comprehensive, and specified perils) and legal liability related to the operation of vehicles in the course of conducting business. Fire insurance provides coverage against losses caused by fire and lightening. Allied lines include coverage for wind, water damage, and vandalism. A commercial coverage that protects the policyholder from legal liability arising from negligence, carelessness or a failure to act that causes property damage or personal injury to others. Includes Directors & Officers and Errors & Omissions liability.
Commercial Multi Peril
15%
General Liability (Occurrence)
12%
Commercial Auto
11%
Fire & Allied Lines
11%
Other Liability Claims Made
8%
Source: Insurance Information Institute, Barclays Research
Commercial insurers are diverse in terms of size, specialty, and role in the industry. The four largest U.S. writers by market share are AIG (Chartis) (8% market share), Travelers (6% share), Liberty Mutual (6%), and Zurich (4%). Figure 68 shows the top 25 commercial P&C insurers by market share which accounts for nearly two-thirds of the total commercial P&C market. Notably, AIG still has the largest market share despite its past turmoil. The dozen largest predominately U.S. commercial lines insurers also account for approximately one-
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42
quarter of industry capital. We view these companies as price leaders with significant influence on P&C market conditions. Figure 68: U.S. Commercial Lines Market Share, 2011
9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
AI G Tr av el Li er be s rty M ut ua l CN A at io nw id e Fi na nc ia W l .R .B er kl ey As su ra nt FM G lo ba O l ld Re pu bl ic Be F ar rk m sh er i re s H at ha w ay To ki o M ar in e
CN A h FM W. R. Be rk l ey AC E x Fai rfa G lo ba l Al l i an z Zu ric
Ch ub b
AC E
fo rd
Q BE St
Ch ub b
an z
Zu ric
ar t
Al li
Figure 69: Largest U.S. Commercial P&C Insurers by Statutory Surplus, 4Q11
$30 $25 $20 in $bn $15 $10 $5 $0
AIG rs Tra ve le utu a Ha rtfo rd l
Improving Commercial P&C Insurance Industry Growth

Commercial P&C premium growth stabilized in 2010 and accelerated in 2011 after three years of declines. We expect commercial P&C premium growth to continue to increase through 2013 as P&C prices rise and the economy stabilizes. Commercial P&C premiums fell from 2007-2009 due to the dual impact of declining P&C prices and a weak economy. Commercial P&C premiums are sensitive to the overall economy because key economic factors such as payrolls and sales determine how much insurance coverage clients purchase. Premium growth lags an economic recovery by about one year since premiums are typically set at the beginning of a one-year period based on exposure data at that point in time. At the end of the one-year period, insurers audit client exposures and collect additional premiums or return funds based on the difference from initial estimates.
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L ib e rt yM
Am
er ic an
at e
Fa rm
43
Figure 70: U.S. Commercial P&C Direct Written Premiums

$300 $250 $206 $200 $149 $150 $100 $50 $0 2000
Direct Written Premiums in $ billions
20% $230 $172 $240 $247 $261 $261 $257 $239 $233 $236 $242 $251 15% 10% 5% 0% -5% -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E
% Change in DWP
44
Declining Commercial P&C Insurance Industry Profitability

Commercial P&C insurers combined ratios have been on the rise since 2007 due to increased competition. We anticipate combined ratios could deteriorate further driven by weaker underlying underwriting results and slowing reserve releases. As a result, earnings are expected to decline and book value growth will likely ease as the P&C cycle bottoms. Figure 71: U.S. Commercial P&C Combined Ratio
130% 125% 120% 115% 110% 105% 100% 95% 90% 85%
19 90 19 9 19 1 92 19 93 19 9 19 4 95 19 9 19 6 97 19 9 19 8 99 20 00 20 0 20 1 02 20 0 20 3 04 20 0 20 5 06 20 0 20 7 08 20 09 20 1 20 0 11 20 E 12 E
Source: Insurance Information Institute, A.M. Best, Barclays Research
Hurricane Andrew
9/11
Hurricane Katrina Hurricane Ike
Hurricane Irene/US tornadoes
Are Loss Reserves Redundancies Exhausted?

Commercial P&C insurers have been releasing loss reserves for several years, and we are concerned this trend could reverse which would impair earnings. U.S. P&C industry loss reserves were adequate as of year-end 2011 according to Fitchs estimates and A.M. Best quantified the U.S P&C industrys reserves (excluding the effects of asbestos & environmental claims as well as discounting workers comp reserves) as $9 billion deficient or 1.5% of carried loss reserves. A.M. Best expects calendar-year operating results could continue to benefit from reserve releases in 2012, although at a declining rate. A.M. Best also said earnings for a number of
16 April 2012
insurers could be negatively impacted as a result of the need to increase reserves in the most recent accident years (specifically 2008 through 2010). The pace of reserve releases moderated in 2011 compared with recent years and the difference year-over-year would have been greater if not for AIGs substantial reserve strengthening in 4Q10. A.M. Best believes the overall P&C industrys reserve cushion is largely exhausted because of sizeable reserve releases over the past six calendar years. The declining impact of reserve releases are likely to weigh on the industrys bottom line in 2012. Figure 72 shows loss reserves and paid-to-incurred loss ratio for the U.S. P&C industry (including personal lines and balance insurers). The P&C industry experienced annual loss reserve growth in 2010 following a lack of growth since 2008. We expect continued loss reserve growth through 2013, which could imply upward pressure on calendar year combined ratios. Figure 72: U.S. P&C Industry Loss Reserves & Paid-to-Incurred Ratios, 1979-2013E
$700 $600 $500 in $ bil $400 $300 $200 $100 $0 1979 1981 1983 1985 1987 1989 1991 1993 1995
Lack of growth signals soft market
105% 100% 95% 90% 85% 80% 75%
1997
1999
2001
2003
2005
2007
2009
2011E
Loss Reserves
Paid-to-Incurred Ratio
Note: Historical data and estimates include commercial lines, personal lines, and balanced insurers. Hard commercial P&C insurance market periods are shaded. Source: A.M. Best, Insurance Services Office, Barclays Research estimates.
Overall, loss frequency and severity remain favorable due to a slowly recovering economy and low inflation, although if this situation reverses, we believe loss reserves could become deficient. Net loss reserves for commercial insurers we cover increased in 2011 following declines in the last several years, perhaps signaling efforts to improve the adequacy of reserves. Among the largest insurers, TRVs and XLs loss reserves declined the most since year-end 2005, although reserves increased for both companies in 2011. XLs premium volume also declined in part due to its financial difficulties during the financial crisis. Meanwhile, CB, ACE, and ACGLs loss reserves have increased over the same time period. For CB, we suspect part of this increase is due to directors and officers (D&O) liability claims arising from the global financial crisis.
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2013E
45
Figure 73: Net Loss Reserves by Company

Travelers Net Loss Reserves
$44.0 $43.0 in $ bil $42.0 $41.0 $40.0 $39.0 $38.0 in $ bil
Chubb Net Loss Reserves

$22.0 $21.0 $20.0 $19.0 $18.0 $17.0
YE 20 05
YE 20 06
YE 20 07
YE 20 08
YE 20 10
YE 20 09
ACE P&C Net Loss Reserves

$26.0 $24.0 in $ bil $22.0 $20.0 $18.0 in $ bil $7.0 $6.0 $5.0 $4.0 $3.0 $2.0
YE 20 11
YE 20 09
YE 20 06
YE 20 07
YE 20 08
YE 20 10
YE 2
XL Group P&C Net Loss Reserves

$18.5 $18.0 in $ bil $17.5 $17.0 $16.5 $16.0
YE 20 05
YE 20 06
YE 20 07
YE 20 08
YE 20 09
YE 20 10
Commercial P&C results have benefitted from the ongoing favorable development of loss reserves from business written in the hard market accident years of 2001-2005. We expect the pace of reserve releases to moderate in 2012, and subsequent years could show adverse development.
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YE 20 11
YE 20 06 YE 20 07 YE 20 08 YE 20 09 YE 20 10 YE 20 11
YE 20 05
01 1
YE 2
00 5
YE 20 05 YE 20 06 YE 20 07 YE 20 08 YE 20 09 YE 20 10 YE 20 11
Arch Capital Net Loss Reserves
46
Figure 74: U.S. P&C Industry Prior Year Loss Reserve Development, 1992-2013E
$30 $25 $20 $15 $10 $5 $0 ($5) ($10) ($15) ($20)
19 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 20 08 0 20 9 E 1 20 0 E 1 20 1 E 1 20 2 E 13 E
8% 6% 4% 2% 0% -2% -4% -6%

Combined Ratio Points
47
in $ billion
PY Reserve Development ex A&E Combined Ratio Points
Asbestos & Environmental Development
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Historical data and estimates includes commercial lines, personal lines, and balanced insurers. Source: A.M. Best, Insurance Services Office, Barclays Research estimates.
P&C Legacy Liabilities Appear to Be Manageable

U.S. P&C insurers have incurred more than $68 billion of losses from asbestos claims net of reinsurance on legacy liability policies according to A.M. Best, although the problem now appears to be largely contained. Asbestos was a common building product used in residential and commercial construction throughout the twentieth century. In the early 1960s, a link was established between asbestos dust and several diseases. Because the long latency period made it difficult for employees to seek compensation through workers compensation insurance, affected workers were forced to enter the court system to sue third-party asbestos producers or companies that used asbestos in products. Insurance policies with no aggregate limits of liability were tapped, which saddled insurers with significant losses. A.M. Best raised its estimate of ultimate industry losses related to asbestos from $65 billion to $75 billion in 2009, almost as much as the combined total for Hurricane Katrina and the September 11 terrorist attacks. However, the worst of the asbestos liability crisis appears to be behind the insurance industry, although individual companies could incur modest losses for lingering asbestos liabilities for years to come. While the existence of asbestos in buildings and products remains legal in the U.S., it has not been widely used since the late 1970s; therefore the risk of new claims developing is minimal. Figure 75 shows asbestos reserves for commercial insurers as of year-end 2011. Several insurers including AIG, ACE, and CNA have purchased retroactive reinsurance protection against adverse development of legacy liabilities from National Indemnity, which is a unit of Berkshire Hathaway.
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Figure 75: Asbestos Reserves by Company, 2011

$6 $5
in $ bil
Reflects transfer of liabilities to BRK.
$4 $3 $2 $1 $(a ) Tr av el er s Li H be ar tfo rty rd M ut ua l( a, b) AI G ta te Fa i rf ax (a ) Ch ub b AC E Re st

40% $119 $118 Percent Redundant (Deficient) $93 $103 30% 20% 10% 0% -10% -20% -30% -40%
an z
Al ls
Al li
Ev er e
Gross Reserves
Net Reserves After Reinsurance
(a) Figures include both asbestos and environmental reserves. (b) Year-end 2010 is shown for gross reserves because data is not available for 2011. Source: Company data, Barclays Research
Commercial P&C Insurers Excess Capital Position Has Peaked

We estimate the entire U.S. P&C insurance market has about $120 billion of excess capital at year end 2011
We estimate the entire U.S. P&C insurance market has about $120 billion of excess capital at year end 2011, which translates into about 21% of U.S. industry capital, although P&C industry excess capital has likely peaked. The industry's excess capital position reflects historically low operating leverage and growth in capital from retained earnings and investment gains. We anticipate that industry excess capital could ease reflecting both faster premium growth and stable capital. Notably, P&C prices rose in 1999 despite the industry being (on paper) almost 20% overcapitalized.
Figure 76: U.S. P&C Industry Surplus and Capital Redundancy
$150 Surplus Redundancy (Deficiency), in $Bil Excess Capital $100
Excess Capital
$135
$50
$0
-$50
-$100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 1994
Surplus Redundancy
Percent Redundant (Deficient)
Note: Historical data and estimates includes personal lines and balanced insurers Source: ISO, Barclays Research estimates
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XL
Ca
pi ta
l( a)
48
Commercial lines P&C insurers with the most estimated excess capital excluding AOCI at year end 2011 could be CB ($4bn), ACE ($3bn), and XL ($1.5bn). Excess capital for the P&C commercial insurers we cover could be redundant by 12% of common equity based on our analysis 1. Share repurchase activity is likely to slow as a result improved top-line growth opportunities as well as concerns about continued large catastrophe losses and slowing loss reserve releases. As a result, we anticipate several companies are likely to retain excess capital even though it would depress ROE. Figure 77: Estimated Excess Capital at YE 2011 (in $bn) Figure 78: Estimated Excess Capital By YE 2011 as a % of 4Q11 As-Reported Book Value
25% 20% Median=12% 15%
$4.0
$3.0
$2.0
10%
$1.0
5% 0%
$0.0 AHL AWH ACG L TRV XL ACE CB
AHL
TRV
AWH
ACGL
ACE
XL
CB
The commercial insurers excess capital position has likely peaked
The commercial insurers excess capital position has likely peaked. In 2011, excess capital declined driven by over $100bn of global catastrophe losses and increased operating leverage. As a result, insurers returned less excess capital to shareholders in the form of share repurchases as shown in the following figure. Figure 79: U.S. Commercial Industry Share Repurchase Activity
$25 $20
in $ bil
$19.1
Impact of Global Financial Crisis $16.7
Over $100bn of global insured catastrophe losses
$15 $10.5 $10 $6.9 $5 $0 2006 2007 2008 Industry ex AIG & HIG 2009 AIG HIG 2010 2011 $4.0 $10.3
Note: Excludes Allstate and Progressive. AIG repurchased $3bn in stock in 1Q12, which is not reflected in this chart. Source: Company data, Barclays Research
The following figures show share repurchases since 2005 for the commercial insurers we cover. The pace of share repurchases is likely to slow in 2012 and 2013 for commercial
1
We estimated P&C insurers excess capital by taking the average of estimated long-run operating leverage as well as financial leverage.
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49
insurers driven by deteriorating underwriting results and declining reserve releases. Notably, we do not anticipate ACE will repurchase stock except to offset dilution from shares issued for executive compensation because of its preference for acquisitions. Meanwhile, ACGL is unlikely to repurchase stock before 4Q12 due to increased potential for large transactions as well as perhaps committing more risk capacity to Japan earthquake and Florida wind. Figure 80: Cumulative Share Repurchases Since 2005 Net of Shares Issued
$20 $17 $16
Figure 81: Cumulative Share Repurchases Since 2005 as a Percent of Shares Outstanding, Net of Shares Issued
60% 50% 40% 30% 30% 41% 43% 48% 49%
in $ bil
$12 $10 $8
20% 10% 0% -10% -20%
$4 $0 $0 XL (b) AHL AWH (a) $1 $1
$3
-30% -40% -50% -41% XL (b) AHL AWH (a) CB ACGL TRV
ACGL
CB
TRV
Note: (a) Allied World's initial public offering was completed in July 2006. (b) XLs share repurchases are net the companys $2.2bn (143.8mn shares) issuance in August 2008. Source: Company data, Barclays Research
Note: (a) 2005 year-end share count is used for all companies with the exception of AWH, for which we used 2006 year-end share count. (b) XLs share repurchases are net the companys $2.2bn (143.8mn shares) issuance in August 2008. Source: Company data, Barclays Research
Commercial Insurers Operating Return on Equity Under Pressure

Commercial insurers normalized operating ROEs have declined to high single-digits. ROEs could compress as primary commercial insurers accident-year underwriting profits deteriorate, partially offset by share repurchases and continued reserve releases (although this trend appears to be slowing). In addition, lack of growth in investment income due to low new-money yields is a headwind to ROE improvement. As a point of reference, each 1point decline in investment portfolio yields is equivalent to roughly a 2 point increase in the combined ratio.
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50
Figure 82: Top-Tier Commercial P&C Operating ROE
Figure 83: Top-Tier Commercial P&C Operating ROE Excluding Prior Year Loss Reserve Development
20% 17%
20% 16% 13% 12% 8% 4% 0% 11%
18% 18% 15% 16% 12% 9% 9%
16% 12%
16% 13% 12% 9% 8% 5% 4% 0%

2012 E
2012 E 2013 E
10%
10%
9%
8%
8%
ACE, Chubb, Arch Capital, and Travelers are used as a proxy top-tier performers in the commercial P&C industry. Source: Company data, Barclays Research estimates
Source: Company data, Barclays Research estimates
Workers Compensation Results Are Grim

Workers compensation represents about one-fifth of the U.S. commercial P&C insurance market and is critical for industry results. Workers compensation provides coverage for medical care and rehabilitation for workers injured in the course of employment, as well as lost wages, regardless of whether the injured employee was at fault. These benefits are provided in exchange for relinquishment of the employees right to sue his or her employer for negligence. Workers compensation systems differ by each state. Figure 84: Top 10 Writers of Workers Compensation Insurance 2011 Market Share
12% 10% 8% 6% 4% 2% 0%
CN A s Y( a) AI G IG h AC E Tr av el er Re pu bl ic ut ua l Zu ric H of N CA (a )
ty
Fu nd
of
Li be r
Fu nd
at e
(a) YE2010 market share data used for State Fund of NY and State Comp Fund of CA which is the latest data available. Source: SNL, Barclays Research
Liberty Mutual is the largest writer of workers compensation insurance in the U.S. with 10% market share, and top ten largest writers in total account for 54% of the overall market. The market share of the next largest workers' comp writers are AIG (9% market share), TRV (8%), HIG (8%), and Zurich (6%).
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St
at e
Co m
St
ld
2013 E
51
2004
2005
2006
2007
2008
2009
2010
2011
2004
2005
2006
2007
2008
2009
2010
2011
HIG writes the most workers compensation insurance as a percentage of its overall U.S. P&C business
Of the stocks we cover, HIG writes the most workers compensation insurance as a percentage of its overall U.S. P&C business at 30% compared to 15% for TRV and 14% for ACGL. This data only captures U.S. workers compensation premiums as a percentage of U.S. P&C business, which means work comp business as a percentage of overall global P&C premiums would be much lower for AIG, ACE, and ACGL. From 2008-2010, AIGs profitability in workers compensation was worse than the industry average while TRV, HIG, ACE, and CB's workers comp underwriting results were better than the industry's, although HIGs results deteriorated in 2011. Figure 85: Workers Compensation Writers, % Total U.S. Company Premiums2011
35% 30% 25% 20% 15% 10% 5% 0% HIG TRV ACGL AIG ACE CB THG XL BRK
Note: For covered companies. Source: SNL, Barclays Research
The last economic downturn caused the workers comp market to lose more than a quarter of its total premiums and profitability declined significantly. Moreover, the most recent recession caused the largest percent decline in payrolls since the 1948-1949 recession. Reduced payrolls translate into lower workers' comp premium volume. Indeed, net written premiums fell for the fifth consecutive year in 2010 to $34 billion (-3% y/y), the lowest level since 2001. For 2011, while the line is expected to continue to face headwinds from growing medical costs and increased claims frequency, employment appears to have stabilized and workers comp could be among the first lines to see exposure gains as the macroeconomic environment improves. Notably, the Barclays economic research team expects the unemployment rate to continue to trend lower to 8.0% and 7.2% for 2012 and 2013, respectively. Workers comp loss costs could rise with increasing healthcare costs. In 2011, hospital services costs rose 5.2% vs. a 3.1% increase in the overall CPI and a 1.6% increase in the core CPI. Figure 87 shows workers comp combined ratios have increased dramatically since 2006. Notably, insurers results show significant variability with state funds reporting particularly challenged results since many of them are writers of last resort. In 2011, the workers comp industry combined ratio likely deteriorated another 2 points to 119%, representing the worst result since 2001. California workers compensation represents approximately 18% of the overall workers comp market and has faced significant profitability pressure. California workers comp rates are increasing rapidly. For example, Everest Re raised rates 15% in 2011 on top of 9% rate increases in 2010.
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52
Figure 86: Workers Compensation Net Written Premiums

in $ bil $50 $40 $30 $20 $10 $0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Figure 87: Workers Compensation Combined Ratio

125% 120% 115% 110% 105% 100% 95% 90% 85% 80%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E
Source: A.M. Best, Insurance Information Institute
Private Carriers
State Funds
Note: State Funds available for 1996 and subsequent. Source: National Council On Compensation Insurance (NCCI), Barclays Research
Reserves for the workers comp line also appear to be increasingly deficient according to A.M. Best, which estimates a $4.4bn deficiency in reserves (excluding discount) in 2010, up from $1.8bn in 2009. On a positive note, workers compensation rates increased in 2011 for the first time since 3Q04. Pricing appears to be improving as workers compensation rates were up 7.5% in 4Q11 based on CIAB data, however it remains to be seen whether price increases will outpace loss cost inflation. Figure 88: Workers Comp Average Rate Change y/y
30%
Figure 89: Workers Comp Cumulative Rate Change

190
25%
180
20%
170
15%
160
10%
150
5%
140
0%
130
-5%
120
-10%
110
Source: CIAB, Barclays Research
4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
Source: CIAB, Barclays Research
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4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
-15%
100
53
Part III: Reinsurers: A Leveraged Play on the Property-Casualty Cycle

The reinsurers ROEs are likely to recover through 2013
Reinsurers are a levered play on the P&C cycle and typically generate more volatile earnings and ROEs than primary insurers. When claims costs are low, the reinsurers earnings and returns on equity tend to benefit more than the primary insurers, with the reverse being true in a period of elevated claims activity. In 2011, the second largest year of insured global catastrophe losses along with depressed investment income resulted in negative ROEs for many Bermuda reinsurers. However, P&C reinsurers should now benefit from higher property catastrophe pricing. The reinsurers ROEs are likely to recover through 2013 assuming more normalized catastrophe activity, although reinsurers will continue to face headwinds from lower investment income growth, weaker accident year underwriting results, slowing reserve releases, and reduced share buyback activity.
Reinsurance Is Critical for Primary Insurers. Reinsurers are insurers of insurance

companies, which mean the reinsurers spread the risk of losses. Reinsurance is important for primary insurers such as AIG, CB, TRV, and ACE because it provides earnings and balance sheet protection as well as permits primary insurers, also referred to as cedants, to increase operating leverage (writing more business per unit of capital). When a large loss occurs, either in property or liability lines, the primary insurer pays the claim and then seeks recovery from the reinsurer above a predetermined loss threshold. Primary insurers of all sizes typically pay a portion of premium volume for reinsurance protection to guard against earnings volatility and safeguard capital positions. Some but not all reinsurers buy external reinsurance protection, which is known as retrocession. Reinsurers can be thought of as buyers of earnings volatility, while the primary insurers are selling volatility. Warren Buffett simply states, In effect, a reinsurer gets paid for absorbing the volatility that the client insurer wants to shed. As a result, reinsurers tend to show greater operating earnings volatility than primary commercial lines and personal lines insurers. Reinsurance is typically purchased to limit primary insurers exposure to major property exposures such as hurricanes, earthquakes, and terrorism, or for damage to significant commercial or industrial exposures. Reinsurance protection is also sought after for liability claims to limit exposure to losses. For example, primary commercial insurers purchase reinsurance to protect against outsized severity losses in lines including workers compensation, products liability, and directors and officers (D&O) liability. Pricing for casualty reinsurance appears to be stabilizing, although certain lines remain under pressure, including D&O liability. Treaty reinsurance coverage typically covers all risks written by a primary insurer in a specified period within certain parameters, meaning the primary insurer does not need to receive confirmation of coverage for each new exposure. Facultative reinsurance (a smaller market than treaty) is protection for one-off risks that fall outside the scope of treaty protection, or for which the primary insurer wants separate coverage to limit a potential impact to the treaty.
How to Distinguish Among Reinsurers. Reinsurers differentiate their businesses based on product line and geography. Some reinsurers focus on short-tail property lines including: RNR, MRH, VR, and FSR. Other reinsurers are global and diversified by product lines including: Munich Re, Swiss Re, General Re (part of Berkshire Hathaway), PartnerRe,
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Everest Re, and Transatlantic. Still other companies write commercial insurance with a less significant presence in reinsurance including XL, ACE, and ACGL. The worlds largest reinsurers based on P&C premium volume are Munich Re, Swiss Re, Lloyds of London, Berkshire Hathaway, and Hannover Re. Reinsurers compete mostly on the basis of pricing, size of capital positions (bigger is usually better), and ratings from S&P and A.M. Best. Importantly, primary insurers avoid reinsurers with questionable solvency because the primary insurers always want to be certain they can collect on claims they present to their reinsurers. Primary insurers are expert buyers of reinsurance coverage, which means it is important to discuss with primary insurers their purchasing trends when analyzing the reinsurers. Currently, demand from primary insurers for reinsurance protection is growing reflecting large catastrophe losses in 2011. In addition, demand for reinsurance is benefiting from the adoption of changes to catastrophe models. Specifically, RMS (a major catastrophe model vendor) changed its assumptions to reflect hurricanes impacting further inland resulting in larger loss expectations and therefore the need for increased reinsurance coverage. Figure 90: Top 25 Global P&C Reinsurers based on Gross Written Premiums, 2010
in $ bn $25 $20 $15 $10 $5 $0 RenaissanceRe PartnerRe Toa Re Transatlantic Tokio Marine Munich Re Swiss Re Hannover Re Odyssey Re Korean Re EverestRe Berkshire Hathaway China Re Caisse Centrale Catlin Lloyd's Allianz SE MAPFRE RE MS&AD Gen'l Ins. Corp. of India SCOR S.E. Aspen
55
Source: A.M. Best, Barclays Research
Reinsurers can either offer coverage directly (such as Munich Re, Swiss Re, or General Re), or through reinsurance brokers such as Aon Benfield, Guy Carpenter (part of Marsh & McLennan), or Willis Re. Reinsurers that distribute products through brokers include Transatlantic, Everest Re, and PartnerRe as well as most other Bermuda reinsurers. Competitive threats to traditional reinsurance coverage include reinsurance sidecars (collateralized facilities managed by a reinsurer with the risk assumed by investors), industry loss warranties (reinsurance protection based on total industry insured losses or other factors such as maximum wind speed rather than company-specific losses), and catastrophe bonds (transfers cat risk to the capital markets). Figure 92 shows the largest reinsurers based on shareholders equity, although the capital base for many of these companies supports primary insurance as well as reinsurance exposure.
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Axis
QBE
XL
Figure 91: Top 25 Global P&C Reinsurers based on Shareholders Equity

in $ bn $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Manulife White Mountains RenaissanceRe PartnerRe NKSJ Holdings Tokio Marine Munich Re Swiss Re EverestRe Hannover Re China Re Caisse Centrale Gen'l Ins. Corp. of India Transatlantic Berkshire Hathaway Lloyd's Allianz SE MS&AD SCOR S.E. Toa Re
56
ACE
Note: Values reflect total shareholders equity, which supports all business written including reinsurance. Source: A.M. Best, Barclays Research
Reinsurance pricing is rising as a result of large global catastrophe losses
Reinsurance Market Conditions Are Improving. Reinsurance pricing is rising as a

result of large global catastrophe losses, measured demand growth, and poor underwriting results. Catastrophe losses exceeded $100bn globally in 2011 and were the second worst year on record. The events in 2011 included substantial earthquake losses in Japan and New Zealand as well as flood losses in Thailand. Notably, these events proved to be manageable from a capital perspective for the reinsurers because the reinsurance industry was overcapitalized prior to 2011 and a significant portion of the international earthquake and flood losses were absorbed by domestic Japan insurers and large global reinsurers. Therefore, U.S. and European reinsurers did not need to raise capital following the 2011 catastrophes unlike after other major events such as the attack on the World Trade Center in 2001 or Hurricane Katrina in 2005. Reinsurance capacity is adequate reflecting solid risk-adjusted capitalization and flexible capital management strategies, although our sense is most of the reinsurers do not have meaningful excess capital positions. On the demand side, primary insurers are purchasing increased reinsurance protection as a result of new catastrophe models and primary insurers retaining less risk in loss-impacted regions. The impact of large underwriting losses from weather-related events, reduced capital positions, and increased demand for reinsurance protection has led to positive pricing momentum, although the pace of rate increases could slow at the mid-year 2012 renewals.
Reinsurers experienced modest balance sheet strain in 2011
Reinsurers experienced modest balance sheet strain in 2011 as a result of major reinsurance loss activity; however, this has set the stage for improved pricing. The Japan earthquake is estimated to have caused over $30bn in insured losses and ultimate losses from the Thailand floods could range from $10bn-$15bn. Among the P&C reinsurers we cover, the companies with the largest catastrophe losses in 2011 as a percentage of book value include FSR, PRE, MRH, and RE. Notably, while industry insured losses from the U.S. tornadoes ($13bn) and Hurricane Irene ($6bn) in 2011 were meaningful, these events largely affected the primary insurers.
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Arch
Axis
QBE
XL
Figure 92: FY11 Catastrophe Losses, as a % of Book Value

60% 50% 40% 30% 20% 10% 0% BRK OB CB TRV RE ACE PRE AWH ACGL MRH
$1
ALL
AHL
XL
THG
RNR
PGR
AIG
Figure 93: Major Insured Catastrophe Losses In 2010-2011 (in $ bil)

$35 $30 in $ bn $25 $20 $15 $10 $5 $0
Australia Cyclone New Japan US Hurricane Thailand Costa Chile New Yasi Zealand Earthquake Tornadoes Irene floods Concorida Earthquake Zealand Floods (Feb 2010) Quake (Dec-Feb Australia Quake (Feb (March (2Q11) (2Q11) (3Q11) (4Q11) 2011) (Feb 2011) 2011) 2011) (Sept 2010)
$30
$8 $5 $2 $1
$10
$13 $6
$15
Source: Insurance Council of Australia, Munich Re, AIR Worldwide, Insurance Information Institute
Other major historical catastrophe losses included Hurricane Andrew in 1992, the September 11, 2001 terrorist attacks, and Hurricane Katrina in 2005. These events resulted in many reinsurers recapitalizing to protect their ratings from the rating agencies, as well as revising their risk management framework. Start-up reinsurers formed as a result of supply-demand imbalances after these three events with mixed results. Notably, no startups emerged following significant catastrophe losses in 2011 because capacity was still adequate, although several reinsurers including RNR, Alterra, and Validus formed sidecars to take advantage of supply/demand imbalances in niche markets, such as retrocessional reinsurance (reinsurance for reinsurers).
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FSR
57
Figure 94: Guy Carpenter U.S. Property Catastrophe Rate on Line Index
Year Over Year Change in Rate On Line (Base 1989)
100% 80% 60%

141 237 230 200
255 233 215 199
9/11 184 173 147 121 133 108 111

20% 14% 14% 3%
250 200
152
154 145
195
40%
100
115
190 184 Hurricane Ike
150 100
8%
20% 0%
0% 15% 23% 68% -3% -13% -20%
10%
76% -8% -6% -11% -18% -11% -9% -16% -12%
-3%
50 0
-20%
Reinsurers Have Adequate Capital. Reinsurers should benefit from rising property
catastrophe reinsurance rates, although most of the reinsurers do not have substantial excess capital to increase their risk appetite or buy back stock. Also, we anticipate little appetite for M&A activity given current depressed valuations for P&C reinsurers and the potentially high cost of using stock as currency for acquisitions. This differs from the trend of consolidation of P&C reinsurers in prior cycles as companies sought to acquire growth and achieve economies of scale in the face of declining reinsurance prices and returns on equity. Also, several reinsurers have exited their non-core primary insurance operations due to insufficient scale and a lack of underwriting profits. Among those companies, MRH sold its U.S. primary insurance business to Selective, and RNR sold its U.S. primary insurance business to Australian insurer QBE. Most reinsurers slowed share buybacks in 2011 after suffering large catastrophe losses. We do not anticipate meaningful share repurchase activity in 2012 because most reinsurers excess capital positions are modest. Of the reinsurers we cover, PRE, MRH, and RE could repurchase stock, but we expect the pace to be modest. RNR, AHL, and ACGL are unlikely to repurchase stock until after the 2012 hurricane season.
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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 1/ 11 1/ 12
YOY Change
Cumulative ROL Index
Cumulative ROL Index (Base 1989=100)
Hurricane Andrew
Hurricane Katrina
300
58
Figure 95: P&C Reinsurance Share Repurchase Activity

$7.0 $6.0 $5.0
in $ bil
$5.9 Over $100bn of global insured catastrophe losses $1.5 $0.9
Financial crisis
$4.0 $3.0 $2.0 $1.0 $0.0 2006 2007 2008 2009 2010 $0.2 $2.2 $1.6
2011
Note: Data include PRE, RE, AWH, MRH, FSR, RNR, TRH, AXS, PTP, ALTE and VR. Source: SNL data, Barclays Research
PartnerRe Is Our Favorite Reinsurance Stock

PRE has faced challenges including large 2011 operating losses due to outsized exposure to international cat events. However, the company is likely poised for upside once it can generate several quarters of earnings recovery. We prefer PRE over other reinsurers due to its discounted valuation and potential for meaningful ROE recovery in 2012. Importantly, the company has a strong global franchise which should benefit from rising property catastrophe reinsurance pricing. RNR is a best-in-class performer of the reinsurers we cover. The company has an impressive long-term track record in terms of absorbing manageable losses in major industry catastrophe events, as well as generating superior book value per share growth and returns on equity. The company should benefit from rising property catastrophe reinsurance pricing and is one of the only reinsurers with sufficient excess capital to increase its risk appetite. However, RNRs valuation is expensive and above other Bermuda reinsurers.
Reinsurers Show Greater Earnings Volatility Than Primary Insurers

The reinsurers tend to exhibit a low frequency, high severity loss pattern as the second line of defense behind primary insurers against large losses. As a result, reinsurers earnings and ROEs can vary widely year to year based on claim activity as shown in the following figures. Companies with significant reinsurance operations appear to have elevated volatility in terms of both ROE and operating EPS compared to the commercial lines and personal lines insurers.
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Figure 96: Volatility of Operating Return on Equity, 2002-2011

25%
Volatility of Operating ROE
20% 15% 10% 5% 0%

H AH L AL L AC G L O B TH G AC E RN R
XL
R TR V
CB
PR E
RE
XL
Volatility is measured as the standard deviation of operating ROE. Source: Company data, Barclays Research estimates
Figure 97 Volatility of Operating EPS, 2002-2011

450% Volatility of Operating Earnings 400% 350% 300% 250% 200% 150% 100% 50% 0%
PG R AC G L TH G AW H RN R AH L PR E CB TR V O B AC E AL L RE FS R M RH
60
Note: To show comparable volatility of operating EPS, we divided each companys standard deviation of operating EPS by its average EPS. Source: Company data, Barclays Research
Hurricane Season Both a Risk and Opportunity for Reinsurers

Hurricanes have caused the largest U.S. insured losses in the past 10 and 20 years
Hurricanes have caused the largest U.S. insured losses in the past 10 and 20 years. As a result, investors often focus their attention on the reinsurers when it comes to hurricane (windstorm) risk, which runs from June to November and peaks in September. In 2011, there were 19 named storms during the Atlantic hurricane season, tying it with 1887, 1995, and 2010 as one of the busiest years for tropical storms, however insured losses were modest with only five tropical storms and one hurricane making landfall. Hurricane Irene was the first U.S hurricane to make landfall since 2008, resulting in approximately $6bn of insured losses. Notably, insured losses from the 2011 hurricane season did not reach levels to meaningfully impact the reinsurers.
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AW
FS R M RH
PG
Figure 98: Top Ten U.S. Hurricanes by Inflation-Adjusted Insured Losses
$50 Insured Damage (in $ bil, inflation adjusted) $45 $40 $35 $30 $25 $20 $15 $10 $5 $0
$45.5
$22.4 $12.7
$11.4 $8.5 $8.1 $6.7 $6.2 $6.0 $5.3
Katrina (2005)
Andrew (1992)
Ike (2008)
Wilma (2005)
Charley (2004)
Ivan (2004)
Hugo (1989)
Rita (2005)
Irene (2011)
Frances (2004)
Source: Insurance Information Institute , Barclays Research
We find it interesting that the reinsurance market seems to largely ignore the level of hurricane activity and instead focuses on whether there were insured windstorm losses. Notably, most of the largest insured industry catastrophe losses in the past 20 years were from U.S. hurricanes. Our analysis, which we describe on page 64, shows the reinsurer stocks have a history of outperforming the S&P 500 in September for eight of the past ten years regardless of insured hurricane damage as investors concerns ease regarding potential hurricane losses. Figure 99: Top Ten U.S. Hurricanes by Modeled Inflation-Adjusted Insured Losses
$120 2009 Modeled Insured Loss (in $ bil, inflation adjusted) $101.0 $100 $80 $60 $40 $20 $0
26 ) 65 ) i( 19 (1 9 (1 9 (1 9 (1 (1 95 0) Ea sy 5) 0) 19 47 ) 20 0 19 0 (1 9 96 0) 92 ) 28 ) 38 )
$57.0
$55.0
$51.0 $42.0 $40.0 $38.0 $36.0 $31.0 $21.0
da le (
st on (
a(
Be tsy
ke ec ho be e
Ka tr i n
nd r
Ga lve
lan d
iam
Fo rt La ud er
re at O
Source: AIR Worldwide Corporation, Insurance Information Institute, Barclays Research
In 2005, Hurricane Katrina Changed the Perspective on Risk Management

The impact on insurers and reinsurers from the $40+ billion of losses suffered as a result of Hurricane Katrina in 2005 offers an important example of how these companies are impacted differently by a large U.S. catastrophe loss. The reinsurers suffered disproportionately large losses, and many needed to raise fresh equity capital to prevent downgrades by the rating agencies. The reinsurers significant losses show why investors should not overly rely on companies modelled risk management efforts to avoid large losses because these models typically understate loss potential. Notably, hurricane losses account for six of the ten largest insured catastrophe losses on record, with the exceptions being the 2011 Japan earthquake, the 1994 Northridge, California earthquake, the 2011 Thailand floods, and the 2011 U.S. tornadoes.
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Gr ea tN
ew
En g
Do
nn a
ew
$5 $4 $3 $2 $1 $0
Figure 101: Impact from Hurricane Katrina in 2005
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in $ bil Lloyd's Munich Re Berkshire Hathaway XL Capital Swiss Re Montpelier Re Everest Re Axis Capital IPC Re Renaissance Re Zurich Re PXRe Partner Re Endurance Aspen Platinum Allied World White Mountains Arch Capital Transatlantic Odyssey Re Hannover Re Employer Re Max Re
Ja pa n Hu rr ica ne Ka tri na (
120% 100% 80% 60% 40% 20% 0%
PXRe
Montpelier Re
IPC Re
Renaissance Re Platinum Underwriters Endurance Specialty
$30 $20 $10 $0
$70 $60 $50 $40
Aspen
Axis Capital
$62
Everest Re
Allied World
$30
Partner Re
$19
Insured Losses
XL Capital
Lloyd's
$17
Odyssey Re
Insured Losses as a % of Book Value
Max Re
$15
Arch Capital
$15
Transatlantic
Hannover Re
$14
White Mountains
Munich Re
$13
Swiss Re
Figure 100: Top Ten Costliest Natural Catastrophes by Insured Losses (in $ bil)
$13
Zurich Re
Employer Re
Note: The $62 billion of insured losses from Hurricane Katrina in this exhibit includes losses from non-U.S. insurers and reinsurers as well as offshore oil rig losses that are not included in Figure 99. Source: Munich-Re, Insurance Information Institute, Barclays Research
20 ea 05 rth ) qu ak e (2 Hu 01 rr 1) ica ne Hu Ike rr (2 ica 00 ne 8) No A rth nd re r id w ge (1 ea 99 rth 2) qu ak es Th (1 ai 99 la 4) nd flo od s( Ih 20 ur 11 ric ) an e va Hu n rr (2 ica 00 ne 4) W ilm a U. (2 S. 00 To 5) rn ad oe s( Hu 20 rr 11 ica ) ne Ri ta (2 00 5)
$12
Berkshire Hathaway
62
Figure 102: Capital Raised After Hurricane Katrina
Capital Raised
in $ bil $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 XL Capital Axis Capital Endurance Partner Re Everest Re Montpelier Re Odyssey Re Max Re Platinum Arch Capital Arch Capital Axis Capital IPC Re Aspen PXRe Allied World
Capital Raised as a % of Book Value

200% 150% 100% 50% 0% XL Capital Max Re IPC Re Partner Re Endurance Everest Re Aspen Montpelier Re Odyssey Re Allied World Platinum PXRe
Enhanced Catastrophe Exposure Disclosure Should Become the Norm

MRH recently provided new disclosures of its property reinsurance treaty exposure by catastrophe zone, which shows the companys total exposure to large catastrophes is manageable. Notably, this disclosure is in addition to typical PML (probably maximum loss) disclosure. We view the disclosure of total exposed limits by zone as more helpful than PML because limits by zone shows total risk assumed, while PML typically is a modeled result based on a 1-in-100 or 1-in-250 year exceedance probability. We recommend other reinsurers and insurers provide similar data to offer investors a better sense of individual companies exposure to major catastrophe events.
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Figure 103: MRH Net Reinsurance Treaty Limits by Zone
U.S. Hurricane Mid-Atlantic hurricane Northeast hurricane Gulf hurricane Florida hurricane Hawaii hurricane U.S. Earthquake New Madrid earthquake California earthquake Northwest earthquake European Windstorm Western European windstorm UK & Ireland windstorm Scandinavia windstorm Other Countries Japan earthquake Canada earthquake Australia earthquake Australia cyclone Turkey earthquake New Zealand earthquake Japan windstorm Chile earthquake
Source: Company data
Treaty Limits $489 366 303 302 173
% of December 31 2011 Shareholders' Equity 32% 24% 20% 19% 11%
$541 369 360
35% 24% 23%
$329 303 111
21% 20% 7%
$295 233 177 171 162 161 156 122
19% 15% 11% 11% 10% 10% 10% 7%
Reinsurance Stocks Typically Outperform in September During Hurricane Season

Reinsurer stocks typically offer a short-term buying opportunity in the month of September
The annual Atlantic hurricane season lasts from June 1 to November 30. Although it may appear counter-intuitive, reinsurer stocks typically offer a short-term buying opportunity in the month of September as the typical peak of hurricane season approaches. Over the past ten years, on average, our index of P&C reinsurers increased 3% in September versus a 1% decline in the S&P 500. This average historical 400 basis points of outperformance versus the S&P 500 in September alone reflects relief as the risks subside from the historically most active part of hurricane season. Notably, RNR, RE, and PRE appear to have the greatest sensitivity to hurricane season.
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Figure 104: Average September Stock Performance for P&C Reinsurers (2002-2011)
4% 3% Average Price Performance (2002-2011) 2% 1% 0% -1% -2% -3% September P&C Reinsurance Index S&P 500 S&P Financials S&P P&C -0.8% -1.9% 0.7% 3.3%
Note: P&C Reinsurance Index includes XL, RE, PRE, RNR, AWH, AHL, and MRH as of respective IPO dates. Index is equal weighted. Source: SNL, Barclays Research
We have found the reinsurance stocks typically outperform in September:
Reinsurers typically rally in the month of September with the index of P&C reinsurer stocks gaining 3% on average in the past ten years versus a 1% average decline in the S&P 500. The index rose in September in eight of the last ten years, and also outperformed the S&P 500 in eight of the past ten years. There are two instances in the past ten years when the index underperformed the S&P 500 in September:
1) In September 2005 the index underperformed the S&P 500 by 2% due to the stock performance of two property catastrophe reinsurers after suffering losses from Hurricanes Katrina & Rita. 2) In September 2009 the index underperformed the S&P 500 by 1%, which we attribute to profit taking after the reinsurance stocks generated significant outperformance vs the S&P 500 of 10% in July and August 2009.
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Figure 105: Reinsurer Stocks September Absolute Performance

12% 10% 8% 6% 4% 2% 0% -2% -4% -2% -1% 4% 3% 5% 6% 9% 10%
Figure 106: Reinsurer Stocks September Performance Relative to S&P 500

20% 15% 15% 10% 8% 4% 4% 5% 3% 2% 0% 4%
3%
5%
-3% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-5%
-2%
-1%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: P&C Index includes XL, RE, PRE, RNR, AWH, AHL, and MRH as of respective IPO dates. Index is equal weighted. Source: FactSet, Barclays Research
Note: P&C Index includes XL, RE, PRE, RNR, AWH, AHL, and MRH as of respective IPO dates. Index is equal weighted. Source: FactSet, Barclays Research
Reinsurers Operating Return on Equity to Recover

Reinsurers tend to have a bad earnings year driven by outsized catastrophe losses about once every five years. Reinsurers operating ROEs have been mostly strong over this time with the exception of 2005 (reflecting over $60 billion of industry losses related to Hurricanes Katrina, Rita, and Wilma) and 2011, with over $100bn of global industry catastrophe losses. Earnings for the reinsurers declined sharply in 2011 and return on equity was -3%, the worst return since 2005 due to large catastrophe losses. We estimate average ROEs for the reinsurers could be in the high-single digit percentages in 2012 assuming normalized loss activity and reduced investment income. Reinsurers will likely benefit from improved property catastrophe pricing and increased demand, partially offset by weaker underlying underwriting results, slower reserve releases, and reduced share buybacks. Figure 107: U.S. P&C Reinsurers Combined Ratios
140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 2004 2005 2006 2007 2008 2009 2010 2011 105% 95% 95% 107% 102% 94% 95% 129% Hurricane Katrina, Rita, Wilma Hurricane Ike Catastrophe losses
Source: Reinsurance Association of America, Barclays Research
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Figure 108: Bermuda Reinsurance Industry ROE
Figure 109: Bermuda Reinsurance Industry Operating Income

$7
25% 20% 15% 12% 10% 5% 0% -5% -10% -15% 2000 2001 2002 9/11 1% 15%
20% 13%
23%
21% 17% 9% 10% in $ bil
$6 $5 $4 $3 $2 $1 $0 -$1 -$2 -$3 2000 2001 2002 2003 2004 2005 Hurricane Katrina Hurricane $100+ billion Ike cat losses 2006 2007 2008 2009 2010 2011
67
9/11
Hurricane Katrina 2003 2004
Hurricane -3% Ike $100+ billion -9% cat losses 2005 2006 2007 2008 2009 2010 2011
Based on results for Axis, Endurance, Everest Re, Flagstone, Montpelier, PartnerRe, Platinum, RenaissanceRe, Transatlantic, Validus, and Alterra. Source: Company data, Barclays Research
Based on results for Axis, Endurance, Everest Re, Flagstone, Montpelier, PartnerRe, Platinum, RenaissanceRe, Transatlantic, Validus, and Alterra. Source: Company data, Barclays Research.
Improved Reinsurance Market Conditions

P&C reinsurance pricing has steadily improved
P&C reinsurance pricing has steadily improved following several years of declines driven by large global catastrophe losses in addition to increased demand for reinsurance protection. U.S. property catastrophe reinsurance prices could increase 5%-10% at the mid-year 2012 renewals, following price increases of 10%-15% at the January 2012 renewals. Japan 4/1 property reinsurance rates are being quoted up 25%-30% on top of the 50%-60% rate increases in 2011. Most insurers expect pricing increases to continue in 2012 as reinsurers face deteriorating underwriting results and pressured investment yields.
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Figure 110: January 2012 Reinsurance Renewal Pricing Commentary

Reinsurance Commentary
RNR
XL
PRE
RNR saw U.S. property catastrophe rate increases of approximately 10% y/y, including increases of 25% for loss-impacted accounts and 15% for accounts with hurricane exposure. Pricing on renewals for international primary placement continued to be significantly softer than the U.S., which RNR largely expected. Consistent with what the company has seen in 2011, rate increases were greater on accounts with losses, with Australia and Japan renewals seeing increases of as much as 50% versus loss-free European renewals up 5%. XL saw increases of 7.5-12.5% y/y for loss-free U.S. property cat renewals versus 1540% increases on loss-impacted placements. International property cat increased 3070% for renewals with losses, while UK and Continental Europe renewals saw singledigit increases. PRE was pleased overall with the outcome of the January 1 renewal and saw positive indications of rate stability in most lines of business. U.S. property catastrophe pricing year-over-year increases varied from 5-20% and international rate increase were up 5% or less; however, cat-exposed zones like Australia saw increases of 50% or more. MRH said it achieved year-over-year rate increases of 10% overall in its property catastrophe book. Rates increased 14.7% in the U.S., with national and regional placements varied depending on exposure and loss history, while International property catastrophe business increased 5.1%. Pricing was relatively in line with MRHs expectation, although rate increases in European wind were not as high as the company anticipated. Everest Re saw rate increases on the order of 15% for property retrocessional (reinsurance for reinsurers) renewals, 5-10% for property catastrophe placements with no losses, and greater increases in loss-affected areas. This was consistent with the companys outlook for 1/1. RE expects rate increase of this magnitude to continue in 2012. U.S. property catastrophe rates rose 10-15% y/y while Europe remained flat to up 5%, which is in line with the companys guidance for improved pricing as a result of the high level of catastrophes going into the January 1 renewal reason. The company still expects further increases in cat-exposed property in the first two quarters of 2012, particularly for the Japan reinsurance renewals in April. Property catastrophe renewal rates were mixed, although there were some signs of improvement, particularly in North America. Rates were up single-digits year-over-year for U.S. property cat renewals with no international exposure versus 40-50% increases for accounts with catastrophe exposures worldwide. Rates were up as much as 300400% in loss-affected regions like Japan, New Zealand, and Australia.
MRH
RE
AHL
AWH
On the demand side, we expect demand for reinsurance protection to increase modestly in 2012 as primary insurers look to retain decreasing levels of exposure in loss-prone regions following large weather-related losses. Demand should also increase as primary insurers slowly adopt catastrophe model changes.
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Figure 111: Primary Insurers Gross Written Premiums

$185 $180 $175 in $ bil $170 $165 $160 $155 $150 $145 $140 2005 2006 2007 2008 2009 2010 2011 $154 $167 $175 $180 $181
Figure 112: Primary Insurers Premiums Ceded to Reinsurers

$31 $30 in $ bil $29 $30 $30 $29
$170
$169
$29 $28 $27 $26 $25 $24 $23 2005 2006 2007 2008 2009 2010 2011 $25 $26 $26
AIG, Chubb, CNA, The Hartford, Travelers, ACE, Allstate, W.R. Berkley, XL, and Arch Capital are used as a proxy for the P&C primary commercial insurance industry. Source: Company data, Barclays Research
AIG, Chubb, CNA, The Hartford, Travelers, ACE, Allstate, W.R. Berkley, XL, and Arch Capital are used as a proxy for the P&C primary commercial insurance industry. Source: Company data, Barclays Research
Overall, reinsurers anticipate improved demand for coverage driven by exposure growth as a result of the slow economic recovery. In addition, primary insurers appear to be purchasing more coverage in regions which experienced high catastrophe activity in 2011 as well as to support their own premium growth. Figure 113: Reinsurers Commentary on Demand Trends
Company Comment
MRH
MRH sees potential for increased demand in 2012 as a result of catastrophe model changes continuing to be implemented, buyers reducing their retention for risk, and exposure growth if global economic conditions improve. RNR could benefit from increased demand for reinsurance in Florida. Citizens, the state-run insurer of last resort, could purchase up to $1bn of reinsurance vs $575mn last year, and RNR is a large reinsurer on this program. Also, the Florida Hurricane catastrophe fund (FHCF) could provide less capacity resulting in increased demand for private market reinsurance. Finally, Demotech (a FL rating agency) may not give Florida insurers credit for purchasing reinsurance from the FHCF. RE expects opportunities to grow property catastrophe reinsurance premiums in 2012 as the adoption of catastrophe model RMS 11 continues globally. PTP said it has a comfortable capital cushion should the company see attractive opportunities to expand. The market has yet to digest the effects of catastrophe model RMS 11 and the company expects demand for capacity in peak catastrophe zones, particularly in Japan. FSR saw a balanced demand and supply for capacity at January 2012 renewal season versus over-subscription in the past. Early indications point to increased demand for capacity at the mid-year Florida renewals reflecting the full implementation of RMS 11.
RNR
RE PTP
FSR
Source: Company conference calls, Barclays Research
Major Reinsurance Renewals Occur in January and Mid-Year. Investors focus on the major reinsurance renewal seasons for indications of pricing trends. The first key reinsurance renewal period is in January for global reinsurance programs. The mid-year renewals in June and July are for reinsurance programs in the Southeast U.S. including Florida property catastrophe coverage. Japanese property reinsurance programs renew on April 1.
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Leading up to the January renewals, reinsurers meet at several conferences to discuss market conditions and negotiate contracts. The Monte Carlo Reinsurance Rendezvous is the first of these conferences, which occurs in September and is attended by both global and European-focused reinsurers. The Baden-Baden, Germany meeting takes place in late October and targets European programs. The annual meeting of the Property Casualty Insurers Association of America (PCI) also takes place in late October and caters to the U.S. primary insurance programs. Figure 114: Global P&C Reinsurance Renewal Calendar
U.S. Florida/ Southeast U.S. Europe including UK Asia-ex Japan Japan Notes
January February March April May June July August September October November December
Major
Major
Minor
Minor
1/1 key renewal date for property and casualty reinsurance coverage - U.S. nationwide, Europe.
Minor
Minor
Major
4/1 Japan property renewals. Mid-year renewal indications are provided.
Major Minor Major Minor Major
6/1 Florida homeowner's U.S. property catastrophe reinsurance renewals. 7/1 Southeast U.S. property catastrophe reinsurance renewals.
Early Sept. Monte Carlo Reinsurance Rendezvous (meetings for 1/1 reinsurance renewals). Late Oct. Baden-Baden, Germany (for 1/1 European renewals) & PCI of America (for 1/1 U.S. renewals). January renewal indications are provided.
Source: AON Re, Barclays Research
Reinsurance Market Share Is Increasingly Concentrated. Gross written premiums for the top 50 global property-casualty reinsurers in 2010 were $135 billion. Market share is highly consolidated with the large European reinsurers (Munich Re, Swiss Re, Lloyds, and Hannover Re) controlling nearly half of the entire global market share. The U.S. and Bermuda-based reinsurers control about one-third of the total market share.
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Figure 115: Global P&C Reinsurance Market Share (2010)
Figure 116: Global P&C Reinsurance Market Share by Region (2010)

Bermuda Market Cos Redomiciled in to Europe,
Other 31%
Munich Re 16% Swiss Re 13%
MS&D 2% Hannover 8% PartnerRe 3% Allianz SE 3% Berkshire Hathaway 7%
Americas and Bermuda Market Companies 28%
European Companies 55% Asian Companies 14%
RGA 4%
SCOR S.E. 5%
Lloyd's 7%
Total Gross Written Premiums: $135 billion

Source: A.M. Best, Barclays Research. Source: A.M. Best, Barclays Research.
Modest Reinsurance Premium Growth and Improved Profitability. We expect

reinsurance premium volume to increase modestly in 2012 as reinsurers benefit from rising property catastrophe reinsurance pricing and increased demand for reinsurance protection; however, most reinsurers do not have meaningful excess capital to increase their risk appetite. Figure 117: Guy Carpenter Reinsurance Composite P&C Premiums
in $ bil $140 $135 $130 $125 $120 $115 $110 $105 $100 2005 2006 2007 2008 2009 2010 2011 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2%
Gross Written Premiums
% Chg in GWP
Reinsurers combined ratios rose in 2011 to the worst result since 2005 as a result of large global catastrophe losses. We anticipate combined ratios could improve in 2012 assuming normal catastrophe activity as reinsurance pricing increases. However, slowing reserve releases could impact the bottom line.
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Figure 118: Guy Carpenter Reinsurance Composite P&C Combined Ratio

120% 115% 110% 105% 100% 95% 90% 85% 80% 2005 2006 2007 2008 2009 2010 2011 91% 91% 96% 91% 96% 113% Hurricane losses Over $100bn in global insured cat losses 107%
Reinsurers Have Adequate Capital. Reinsurers capital positions were stable in 2011 as the impact from significant catastrophe losses were mostly offset by growth in capital from retained earnings and investment gains as well as reduced share buyback activity. Notably, Guy Carpenter estimates the reinsurance sector held excess capital of approximately 12% (approximately $20 billion) as of year-end 2011.
Figure 119: Guy Carpenter Reinsurance Composite Shareholders Funds
in $ bil $200 $159 $160 $120 $90 $80 $40 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 $104 $110 $140 $129 $166 $171 $174
Excess capital for the reinsurers we cover could be redundant by 4% of common equity on average as of the end of 2011 (less than P&C insurers). We estimate the reinsurers with the most estimated excess capital as of year-end 2011 as a percentage of book value are likely to be RNR (15%), RE (9%) and PRE (6%). We suspect FSRs capital position could be deficient; however, this pressure should ease as FSR reduces its overall risk by reducing gross written premium by 30% in 2012. Reinsurers are expected to use excess capital toward organic growth opportunities instead of returning capital to shareholders in the form of share buybacks and/or M&A. Our outlook reflects improving property catastrophe reinsurance pricing and increased demand for reinsurance protection.
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Figure 120: Estimated Reinsurers Excess Capital by YE 2011 (in $ mil)

$650 $550 $450 $350 $250
Figure 121: Reinsurers Excess Capital by YE 2011: % of Book Value

16% 14% 12% 10% 8%
$150 $50 -$50 -$150 -$250 MRH PRE RNR RE 6% 4% 2% 0% MRH

Source: Barclays Research. Source: Barclays Research
PRE
RE
RNR
Figure 122: Reinsurers Cumulative Share Repurchases Since 2005 Net of Capital Issuance (in $ bil)
Figure 123: Reinsurers Cumulative Share Repurchases Since 2005 as a Percent of Shares Outstanding, Net of Capital Issuance
50% 40% 40% 33% 30%
$2.0 $1.5 $1.0
20% 20%
20%
$0.5 10% $0.0 -$0.5 PRE FSR MRH RE RNR -8% 0% -10% PRE RE FSR RNR MRH
Note: Data is adjusted for forward share issuance agreements. MRH, RE, and PRE all raised equity capital post-Hurricane Katrina. PREs share repurchases are net the companys $1.9bn (25.7mn shares) issuance in 2009. Source: Company data, Barclays Research
(a) Flagstones YE06 shares outstanding are used because FSR completed its IPO in March 2007. (b) PREs share repurchases are net the companys $1.9bn (25.7mn shares) issuance in 2009. Source: Company data, Barclays Research
Florida, Texas, and California Present Major Catastrophe Reinsurance Exposures

Florida, Texas, and California present some of the highest catastrophe risks for reinsurers in the U.S, but also create significant demand for property reinsurance coverage. With $2.5 trillion of coastal wind-exposed property values, Florida is the largest peak-catastrophe zone in the world and has the highest value of insured coastal exposure in the United States. Texas ranks third in insured coastal exposure in the U.S. at $900bn (behind New York with $2.4bn) according to data from AIR Worldwide.
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The Florida reinsurance market represents approximately 15% of the worlds property catastrophe reinsurance premiums according to reinsurance broker Guy Carpenter. Reinsurers with higher than average exposure to Florida market include RNR and RE, while PartnerRe is underweight the Florida market. The Florida market could see pricing increase as demand improves and capacity likely remains stable. A unique aspect of the Florida reinsurance market is The Florida Hurricane Catastrophe Fund (FHCF), a state-sponsored facility. In the wake of Hurricane Andrew in 1992 the FHCF was created one year later to provide capacity as national insurers threatened to exit the Florida residential property insurance market. The FHCF was hard-hit in 2004 as a result of several large hurricane losses. Since then, the FHCF reduced its capacity due to underfunding. As a result, some of the FHCF business could move to the private market and benefit property catastrophe reinsurers including RNR, RE, MRH, and FSR. In 2012, the FHCF could provide less capacity and Citizens (Florida state-sponsored primary insurer of last resort) could purchase up to $1bn of reinsurance protection vs $575mn in 2011. The Texas Windstorm Insurance Association (TWIA) is the insurer of last resort in Texas for wind and hail coverage. TWIA was formed after Hurricane Celia hit in 1970 and many insurers ceased writing coverage in the states coastal areas. TWIA suffered $2.5 billion of losses as a result of Hurricane Ike in 2008, of which $1.5 billion was covered by external private market reinsurance. TWIA stopped buying private reinsurance in 2009 due to substantial rate increases, although it has the ability to assess insurers operating in Texas to help fund shortfalls. The TWIAs total exposure is more than $60bn with the ability to cover only several billion of losses, meaning that TWIA would likely face substantial funding shortfalls if a major hurricane hits Texas. The most costly earthquake in the U.S. occurred in 1994 in Northridge, California and resulted in insured losses of $15 billion ($23 billion in inflation-adjusted dollars). After this event, insurers feared potential insolvency from another large earthquake and significantly reduced writings of new California homeowners insurance policies that are required to cover earthquake losses. The California Earthquake Authority (CEA) was established in 1996 to provide capacity to the residential property insurance market. As of year-end 2011, the CEA had $296 billion in total policy exposure with nearly $10 billion in claims-paying capacity, although only about 12% of homeowners in California purchase earthquake coverage. The CEA wrote over $600 million of premiums in 2011, while ceding approximately $200 million to external reinsurers.
Sidecars and Catastrophe Bonds Present Alternatives to Traditional Reinsurance

Sidecars provide temporary reinsurance capacity when the market suffers from a supplydemand imbalance. After large industry losses, sidecars allow reinsurers to capture part of the upside of tight short-tail reinsurance markets without further exposing the reinsurers balance sheets. In sidecar deals, an insurer or reinsurer cedes specific lines of business, typically with catastrophe exposure, to the sidecar. A sidecar is separately collateralized entity that is privately financed by outside investors and typically has a finite existence. Since sidecars are off-balance sheet, they do not affect the underwriting risk of the sponsoring (re)insurer. At the same time, the sponsoring reinsurer collects a management fee from the sidecar as well as a percentage of any profits. Sidecars have become more attractive lately because of reinsurance rate hardening and lack of growth in traditional reinsurance capacity.
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Catastrophe bonds present substitution risk for traditional reinsurance, especially in times of tight capacity. These bonds are primarily used to transfer (re)insurers peak zone property catastrophe exposure to the capital markets when traditional reinsurance coverage is either unavailable or too expensive. Catastrophe bonds can be attractive to investors because natural catastrophe trends are expected to be mostly uncorrelated with equity and fixed income markets. Catastrophe bonds are typically fully collateralized and pay interest to investors unless a catastrophe loss exceeds a predetermined trigger (based on the insurers actual losses, industry losses, or objective measures such as a hurricanes maximum wind speed). If a claim under the cat bond is triggered, the principal would be used to pay claims and bondholders risk losing future interest payments and principal. The catastrophe bond market currently addresses roughly $12 billion of exposure, which is equal to about 6% of the $200 billion global catastrophe reinsurance capacity. In terms of transaction count, 2011 was the second most active year in the history of the market according to Guy Carpenter. Further penetration by cat bonds could occur if their acceptance as a substitute for traditional reinsurance increases. Figure 124: Catastrophe Bond Issuance
$8 $7 $6
in $ bil
$7.0
$5 $4 $3 $2 $1 $0 $1.7 $1.0 $1.1 $1.0 $1.2 $0.6 $0.8 $1.1
$4.7 $3.4 $2.7 $2.0
$4.6 $3.9
Source: Guy Carpenter, Insurance Information Institute
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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
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Part IV: Insurance Brokers Benefit the Most from Improving P&C Pricing
In our view, the insurance brokers are attractive because most of the benefits of higher prices should improve earnings and margins. Insurance brokers are the distributors of insurers products and, unlike the insurers, do not assume underwriting risk or have large capital requirements. The fortunes of brokers (especially for commission-based revenues) are driven by commercial P&C insurance and reinsurance premium volume, which could increase. P&C prices are now in positive territory for the first time since 2003, and exposure growth, which is tied to the economy, is improving. As a result, the brokers should generate higher organic revenue growth, positive operating leverage, and higher valuations. The average insurance broker P/E is 15x our 2012 EPS estimates versus the historical range of 9x-32x (historical median=16x) and a P/E of 12x for the S&P 500.
Our top pick among the insurance brokers is MMC
Our top pick among the insurance brokers is MMC, followed by WSH, BRO, and AJG. MMC should have strong organic revenue growth and margin expansion opportunities in each of its businesses even in a slow-growth macro environment. WSH is a pure-play global insurance broker with the lowest valuation among its peers although it faces headwinds in 1H12. BRO and AJG have the highest leverage to rising P&C prices because nearly all of their revenues are commission-based, although these stocks trade at a premium valuation. AON (rated 2-Equal Weight/1-Pos) should also benefit from higher P&C prices, but we see a longer road to achieve improved organic growth and margin expansion compared to the other insurance brokers. Nearly all of BROs and AJG's brokerage revenues are commission-based, while the larger brokers (MMC, AON and WSH) contain a mix of both commissions and fees. This means the benefit of improved pricing should be more significant for BRO and AJG than MMC, AON, and WSH. MMC and AON are distinct because they each have sizable consulting operations. Consulting earnings will likely benefit from a rebound in demand as the economy improves. We see several opportunities for the P&C insurance brokers:
Brokers Organic Revenue Growth Could Accelerate. Organic revenue growth, a key metric for the insurance brokers, could benefit from rising P&C prices and exposures. Commercial P&C (re)insurance prices are rising, driven by deteriorating underwriting results, stabilizing industry capital positions, and rising property reinsurance costs, in our view. Also, economic conditions are improving, which could result in customers purchasing more insurance coverage especially as payrolls rebound.
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Figure 125: Average Insurance Broker Organic Revenue Growth

5% 4% 3% 2% 1% 0% -1% -2%
04 20 05 20 06 20 07 20 08 20
4% 3% 2% 1% 2%
4%
0%
-1% -2%
09 20
0%
10 20
11 20
E 12 20
E 13 20
Source: Company data, Barclays Research estimates.
Brokers Margins Could Expand. The insurance brokers successfully expanded margins due to aggressive cost cutting. Cost reduction efforts are mostly finished, although we expect margins to continue to expand driven by positive operating leverage. Interestingly, the average pre-tax brokerage margin could expand to 24% by 2013, approaching margins at the peak of the last hard market in 2003 before the loss of contingent commissions. The overall average recovery will likely be led by MMC.
Figure 126: Average Pre-Tax Insurance Broker Margins

27% 25% 23% 21% 19% 17% 15% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E
Note: Based on the average insurance brokerage margins excluding unusual items for MMC, AON, WSH, AJG, BRO. Excludes consulting operations. Source: Company data, Barclays Research estimates.
26% 24% 23% 22% 21% 18% 21% 20% 24% 24% 22% 23% 22% 23%
Insurance Brokers Could Show the Fastest Earnings Growth. We expect the insurance brokers to generate 13-14% average EPS growth each year in 2012 and 2013 driven by higher organic revenue growth as well as margin expansion, with MMC, AJG and BRO generating the strongest growth. Meanwhile, WSH and AON could generate the slowest EPS growth.
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Figure 127: Average Insurance Broker Earnings Growth

30% 20% 20% 10% 0% -10% -20% -30% 2002 2003 2004 -26% 2005 2006 2007 2008 2009 2010 2011 2012E 2013E -8% Loss of contingent commissions & NYAG investigations 15% 16% 19% 22% 14% 5% 5% 0% 13%
Note: Based on the average earnings per share growth excluding unusual items for MMC, AON, WSH, AJG, BRO. Source: Company data, Barclays Research estimates.
When Is the Right Time to Buy the Insurance Broker Stocks?

The insurance broker stocks are expected to generate impressive performance now that pricing has turned positive. During a cycle turn, the insurance broker stocks tend to outperform the P&C insurer stocks because the insurance brokers earnings show a large benefit while the P&C insurers typically need to rebuild balance sheet strength by adding to reserves. As shown in the following figures:
During the last P&C cycle turn, the pure-play broker stocks reacted to rate increases starting in 1Q99, about four quarters before the insurers. 2 In 1999, when commercial P&C price increases first emerged the insurance broker stocks increased about 30% on average (vs +20% for the S&P 500). In 2000, when P&C price increases accelerated to the low double digits, the insurance brokers rose 75% on average (vs a10% decline for the S&P 500).
2 We used stock performance data for HRH, BRO, and AJG during 1998-2000 because they are largely pure-play insurance agents. MMCs stock performance was boosted by its Putnam Investments unit during this time period, while Aons stock performance suffered from missteps after digesting several large acquisitions. WSH completed its IPO in June 2001.
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As a point of historical reference, the pure-play insurance broker stocks rose as P&C pricing declines slowed in 1998, but underperformed the S&P 500 by about 10% during this period. The insurance brokers stock prices then rose, in general, in 1999 as pricing turned positive, and increased considerably in 2000. Figure 128: P&C Insurance Broker Absolute Stock Performance, 1998-2000
120% Absolute Annual Stock Price Change 100% 83% 80% 60% 42% 40% 20% 0% 1998 BRO 1999 HRH AJG 2000 17% 10% 3%
-40% 1998 BRO 1999 HRH AJG 2000
Figure 129: P&C Insurance Broker Relative Stock Performance to the S&P 500, 1998-2000
120% Absolute Annual Stock Price Change 100% 80% 60% 40% 23% 20% 1% 0% -20% -9% -24% -10% 27% 51% 93% 107%
97%
47%
41%
28%
Source: FactSet, Barclays Research
Figure 130: P&C Price Change Versus BRO Stock Price and S&P 500, 1998-2004
P&C Prices Year-OverYear Change 30% 25% 20% 450% 15% 10% 5% 250% 0% 150% -5% 350% Cumulative Stock Price Performance 650%
Figure 131: P&C Price Change Versus BRO Trailing P/E, 1998-2004
P&C Prices Year-OverYear Change 30% 25% BRO Trailing P/E 60 55 50 45 40 35 5% 30 0% -5% -10%
1Q 98 2Q 98 3Q 98 4Q 98 1Q 99 2Q 99 3Q 99 4Q 99 1Q 00 2Q 00 3Q 00 4Q 00 1Q 01 2Q 01 3Q 01 4Q 01 1Q 02 2Q 02 3Q 02 4Q 02 1Q 03 2Q 03 3Q 03 4Q 03 1Q 04 2Q 04 3Q 04 4Q 04
BRO
550%
20% 15% 10% BRO P/E multiple contracts
25 20 15
S&P 500
-10%
1Q 98 2Q 98 3Q 98 4Q 98 1Q 99 2Q 99 3Q 99 4Q 99 1Q 00 2Q 00 3Q 00 4Q 00 1Q 01 2Q 01 3Q 01 4Q 01 1Q 02 2Q 02 3Q 02 4Q 02 1Q 03 2Q 03 3Q 03 4Q 03 1Q 04 2Q 04 3Q 04 4Q 04
50%
P&C Prices
BRO Traling P/E
P&C Prices
S&P 500
BRO
Source: Company data, FactSet, Barclays Research
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Figure 132: P&C Price Change Versus AJG Stock Price and S&P 500, 1998-2004
P&C Prices Year-OverYear Change 30% Cumulative Stock Price Performance 450%
Figure 133: P&C Price Change Versus AJG Trailing P/E, 19982004
P&C Prices Year-OverYear Change 30% 25% 35 P&C Year-Over-Year Price Chg 20% 30 15% 10% 5% 20 0% 15 -5% AJG P/E 25 AJG Trailing P/E 40
AJG
25% 20% 15% 10% 5% 0% -5% 400% 350% 300% 250% 200% 150% 100%
S&P 500
-10%
1Q 98 2Q 9 3Q 8 98 4Q 9 1Q 8 99 2Q 9 3Q 9 99 4Q 99 1Q 0 2Q 0 00 3Q 0 4Q 0 00 1Q 0 2Q 1 01 3Q 0 4Q 1 01 1Q 0 2Q 2 02 3Q 0 4Q 2 02 1Q 03 2Q 0 3Q 3 03 4Q 0 1Q 3 04 2Q 0 3Q 4 04 4Q 04
-10%
9 2Q 8 9 3Q 8 9 4Q 8 9 1Q 8 9 2Q 9 9 3Q 9 9 4Q 9 9 1Q 9 00 2Q 0 3Q 0 0 4Q 0 0 1Q 0 0 2Q 1 01 3Q 0 4Q 1 0 1Q 1 0 2Q 2 0 3Q 2 02 4Q 0 1Q 2 0 2Q 3 03 3Q 0 4Q 3 0 1Q 3 0 2Q 4 0 3Q 4 0 4Q 4 04
10
50%
1Q
P&C Prices
AJG Traling P/E
P&C Prices
S&P 500
AJG
Insurance Brokers Have an Attractive Business Model

Commercial insurers and reinsurers, particularly in the U.S. and Bermuda, do not have a direct sales force. Instead, insurers including AIG, Chubb, Travelers, ACE, and XL distribute products through insurance agents and brokers. Importantly, the insurance brokers, unlike the insurers, do not assume underwriting risk. These companies are different from insurers and most of the financial services industry because they have low financial capital requirements and generate substantial free cash flow. Insurance brokers collect fixed fees (typically paid by large customers) or commissions (paid by insurers as a percentage of premium volume). As a result, insurance brokers revenues are driven largely by commercial P&C insurance premium volume. An insurance middlemans contractual relationship with its customer can be in the form of either an agent or broker (in this discussion we use the term insurance broker interchangeably). An agent technically represents the insurer, while a broker represents the buyer of insurance. Insurance agents typically focus on small and middle market clients and their revenues are mostly commission based. Insurance brokers typically seek out largeaccount business and their revenues include fee-based business. As a result, insurance agents tend to have higher leverage to changes in P&C prices and exposures than insurance brokers. For example, Brown & Brown and A.J. Gallagher work in an agency capacity and nearly all revenues are commissions, while revenues at the large brokers (MMC, AON, and WSH) contain a mix of both fees and commissions. Notably, we expect fees to be mostly stable, while insurance broker commissions could rise as P&C premiums increase.
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Figure 134: Insurance Broker Revenues- Fee Versus Commission
BRO AJG WSH AON MMC 0% 20% 40% Commissions

60% Fees
80%
100%
Commissions and fees represent over 95% of insurance broker unit revenues. Insurance brokers also collect fiduciary income, which is income earned on unremitted premiums and claim proceeds (this practice dates back many years and has remained in place). Fiduciary income, which is pure profit for the insurance brokers, has declined meaningfully due to low short-term interest rates in recent years, and we expect it to remain compressed until interest rates increase. Figure 135 shows the trend in MMCs fiduciary assets as well as declines in the investment yield and investment income that is also a factor for peers. Figure 135: MMC Fiduciary Assets & Fiduciary Income
Fiduciary Assets & Investment Yield

$5 $4 in $ bil $3 $2 $1 $0
05 06 07 08 09 10 11 E 12 20 20 20 20 20 20 20 20 20 13 E
Fiduciary Income
6% Investment Yield 5% 4% 3% 2% 1% 0% $200 $160 in $ mil $120 $80 $40 $0
05 06 07 08 09 10 11 E 12 20 20 20 20 20 20 20 20 20
81
$180 $177 $151 $139
Impacted by low interest rates
$54
$45
$47
$48
$50
Fiduciary Assets
Investment Yield
MMC is Gaining Insurance Brokerage Market Share

The insurance brokerage industry is highly fragmented and consists of three global brokers (MMC, AON, WSH) focused on large-account and the high-end of middle market business, mid-sized brokers focused on small- and middle-market business (such as BRO and AJG as well as privately held firms) and thousands of small independent agencies. MMC, AON and WSH focus mostly on the large-account market, and are viewed at times as an oligopoly without pricing power. Competition among the insurance brokers is intense because of slow new business growth and high retention of existing clients.
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We examined market share trends for the worlds 10 largest insurance brokers. MMC has gained market share since 2009, although the company has not yet recaptured market share lost following the 2004 NY Attorney General-led investigations. Aon, the worlds largest insurance broker, lost market share in 2010 and 2011 for the first time since 2008. WSH gained market share with its acquisition of HRH in 2008. AJGs and BROs market share appear mostly stable over time. Figure 136: Insurance Brokerage Market Share among Worlds 10 Largest Insurance Brokers
NYAG investigations 40% 35% 30% 25% 20% 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 BRO WSH HRH acquisition MMC AJG
Benfield acquisition
AON
MMC
AON
WSH
AJG
BRO
Note: MMC & AON revenues are Insurance Brokerage only and exclude the Consulting operations. Source: Company data, Business Insurance, Barclays Research.
Insurance Broker Organic Revenue Growth Should Improve

The insurance brokers organic revenue growth should improve, driven by rising P&C prices and increasing exposure growth. Insurance brokers are paid a fee or commission. Fees are typically fixed, and commissions are a percentage of total insurance premiums paid by the client (typically 10-15 percentage points). Notably, we expect insurance broker commissions to rise as P&C premiums increase, while fees could be mostly stable. Clients are likely to resist paying increased insurance broker fees, and increased transparency of insurance broker compensation has also resulted in downward pressure on fees. On a positive note, the brokers client retention is high at approximately 90% or higher. This factor reflects the complexity of large-account insurance programs and high switching costs, although brokers at times appear to be reducing fees to retain customers.
Rising P&C Prices and Improving Exposures. The impact of changes in exposures is probably as meaningful as the impact from changes P&C rates. During the latest economic recession, clients purchased less insurance coverage due to declining rating factors such as sales volumes, payrolls, and commercial real estate occupancy. This headwind appears to have abated and exposure growth could begin to rise as the economy recovers. Insurance broker organic growth improved in 2011 and we expect this trend to continue in 2012 and 2013. Clients Resist Paying Increased Fees. We expect fees to be mostly stable, while insurance broker commissions could rise as P&C premiums increase. Based on the results of our 2012 Commercial Insurance Buyers Survey in which we interviewed 75 risk managers, we found risk managers resist paying increased insurance broker fees. Risk managers expect broker fees to be up 1% on average at the early 2012 renewals, versus flat renewals six months ago. Roughly 75% of respondents expect to pay their
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insurance brokers unchanged fees in 2012 compared to 2011, 19% could pay a higher fee, and 7% could negotiate a lower fee.
Insurance Brokers Turnover Slows. Competition among the insurance brokers increased in late 2010 driven by weak economic conditions and reduced new business growth, but slowed in 2011 and early 2012 as some risk managers already locked in multiyear agreements with customers. Based on the results of our latest Insurance Buyers Survey, fewer customers appear to be switching insurance brokers. The percentage of respondents that switched brokers decreased slightly to 3% compared to 4% six months ago in part due to risk managers signing multiyear fee agreements over the past year. Several risk managers signed multi-year deals with their brokers to lock in flat broker fees or modest (likely inflation-linked) increases.
Figure 137: Percentage of Respondents Changing Brokers in the Last Year
30% 25% 20%
More respondents switch brokers after the 2005 NY Attorney General investigations
Dissatisfaction with Marsh shortly before management shakeup
Turnover increases as broker competition increases. Risk managers unlikely to switch brokers.
Turnover at Marsh slows
15% 10% 5% 0%
Average=11%
06
05
07
08
11
10
l-0
l- 0
l- 0
l-0
n-
n-
n-
l-0
l-1
n-
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l-1 Ju
l-0
Ju
Ju
Ju
Ju
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Ja
Increased Insurance Broker Compensation Transparency. The large insurance brokers (MMC, AON, WSH, AJG) settled various conflict of interest allegations in 2004 with state regulators. The brokers paid significant fines, but more importantly agreed to stop collecting highly profitable commissions. Contingent commissions were viewed as posing a conflict of interest because these commissions are paid by insurers to brokers while the broker is obligated to represent its clients interests. As part of the settlement, disclosure requirements for insurance broker compensation increased. Interestingly, insurance agents such as BRO never had to stop taking contingent commissions. Recently, the ban on contingents for brokers has been relaxed by state regulators although it is not expected to result in meaningful benefits for the brokers because of customer pushback. For example, Marsh is not accepting contingent commissions from insurers in the U.S., Canada, or other large insurance markets. However, WSH is now
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Ja
Ja
Ja
n-
n-
12
09
83
accepting contingent commissions on employee benefits business due to a structural shift in compensation for this line of coverage. Organic revenue growth, a key metric for the insurance brokers, could improve in 2012 and 2013, reflecting rising P&C prices and a rebound in exposure growth. MMC could report the highest organic growth of +5% in 2012 and +6% in 2013 driven by international growth. Notably, revenues for BRO and AJG are tied to commissions and have greater sensitivity to P&C prices and exposures, whereas revenues for MMC, AON, and WSH are more fee-based and therefore have less sensitivity to P&C premiums than insurance agents. Figure 138: Insurance Brokerage Organic Revenue Growth
MMC
Loss of contingent commissions & NYAG investigations 0% -2% Hard Market -10% 2%
AON
Loss of contingent commissions & NYAG investigations
WSH
20%
15% 13% 15% 10% 8% 10% 5% 0% -5% -10% -15%
20% 15% 5% 5% 6% 10% 5% 0% -5% 8% 9% 13% 9%
20% 15%
18% 15% 12%
3% 4% 2% -1% -1% Hard Market -1%0%
2% 3%
4%
10% 8% 5% 0% -5% -10%
8% 5% 4% 3% 4% 2% 4% 2% 1% 2%
-1% -1% -2% Soft Market
-10%
Soft Market
Hard Market
Soft Market
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E 13 20 2E 1 20 1 1 20 10 20 9 0 20 8 0 20 7 0 20 6 0 20 5 0 20 4 0 20 3 0 20 2 0 20 1 0 20 0 0 20
E 13 20 2E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 7 0 20 6 0 20 5 0 20 4 0 20 3 0 20 2 0 20 1 0 20 0 0 20
E 13 20 2E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 7 0 20 06 20 5 0 20 4 0 20 3 0 20 2 0 20 1 0 20 0 0 20
AJG
BRO
20% 15% 10% 5% 0% -5% -10%
17% 14% 10%
20% 12% 15% 11% 11% Soft Market 4% 3% 4%
5% 2% 2% 2%
3%
5% 5%
10% 5% 0%
6%
0% 1%
-2%-2%-2% Hard Market Soft Market 20 20 20 20 20 20 20 20 20 20 20 20 20 01 02 03 04 05 06 07 08 09 10 11 12 13 E E
-5% -10%
Hard Market
-3% -4% -5% -6% -6%
Willis deconstructs its organic revenue growth between net new business growth and changes in P&C rates as well as other market factors such as exposure, which can be viewed as a proxy for the industry. For Willis, changes in rates and exposures continue to be a headwind on organic growth although this appears to be stabilizing. The benefit on organic growth from net new underlying business declined in 2011 due in part to defections from its 2008 acquisition of HRH. Notably, the company expects this impact to stabilize in 2012.
E 13 20 2E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 7 0 20 6 0 20 5 0 20 04 20 3 0 20 2 0 20 1 0 20 0 0 20
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Figure 139: WSH Organic Revenue Growth

10% 8% 6% 4% 6% 2% 0% -2% -4% 2005 2006 2007 2008 2009 2010 2011 2012E 2013E Net new underlying business Changes in rate & other market factors -1% 4% -1% -2% 8% 6% 5% 6% 4% 1% -3% -2% -2% 1% 1%
Risk Managers Are Satisfied with Brokers Performance

Based on the results of our latest Insurance Buyers Survey, risk managers appear largely satisfied with broker performance. We asked the risk managers to rank their satisfaction with their brokers service on a scale of 1 to 10, with 10 being the highest rating and 1 being the lowest. AON, MMC, WSH, and AJG all received ratings in the 7.5-8.5 range (Figure 140). Average ratings for AON and MMC were slightly below the results six months ago, but relatively in line with historical averages. AJGs average rating decreased to 7.6 from 8.0 six months ago and 8.4 historically. WSHs average ratings improved from six months ago and were above its historical average. Notably, our survey compares different populations and, therefore, some variation is expected.
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Figure 140: How Do You Rate Your Broker on a Scale of 1 to 10?
MMC
9.0 8.5 8.0 7.5 7.0 6.5
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11
AON
9.0 8.5 8.0 7.5 7.0 6.5
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12
WSH
9.0 8.5 8.0 7.5 7.0 6.5
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12
AJG
9.0 8.5 8.0 7.5 7.0 6.5
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12
Following are some comments from customers on relationships with their insurance brokers: I will propose to pay my insurance broker a flat fee even though I expect our P&C insurance prices to increase (Manufacturing risk manager) We received a 50% reduction in our broker fee in 2011 after marketing the program to other brokers, and I expect our fee to be unchanged in 2012 (Large financial company) Our broker fee will be flat for the next three years due to a multi-year deal, which we entered into in 2011 (Utility) Insurance brokers are asking for additional commissions but this could be difficult to achieve. (Technology) We will pay our insurance broker a slightly higher fee because our company is growing, although the increase is less than our broker requested. (Consumer)
International Growth Is an Opportunity

MMC, AON and WSH have large international insurance brokerage operations that account for about half of their broker revenues. MMC has shown the fastest growth internationally with mid-single digit organic growth in its International business in 2011. WSHs
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international organic growth was modestly lower than MMC, while Aon grew low-single digits internationally. Many large European insurers and reinsurers, which have a significant presence in the international P&C market, sell coverage directly and do not use an insurance broker. This factor could limit the insurance brokers growth opportunities abroad. Figure 141: Insurance Brokerage Revenues by Geography FY2011
MMC
AON
WSH
International 53%
U.S./Canada 47%
International 51%
U.S./Canada 45%
U.S. 43% International 57%
Insurance Brokerage Revenues FY 2011: $5.2 Bn
AJG International (a) 19%
International 1%
BRO
U.S. 81%
U.S. 99%
Note: MMC & AON revenues exclude reinsurance brokerage. (a) Mostly Australia, Bermuda, Canada & the U.K. Source: Company data, Barclays Research.
Figure 142: Reported International Insurance Brokerage Revenue Growth

12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 2008 2009
WSH (a) AON
Figure 143: Organic International Insurance Brokerage Revenue Growth

10% 8% 6% 4% 2% 0% -2% 2008 2009 2010 2011
2010
MMC
2011
WSH (a) AON (b) MMC
(a) WSH includes the international business, which represents roughly 53% of WSH's non-U.S. exposure. (b) Aons international revenues has been restated for years 2009-2011 to reflect the transfer of the Health and Benefits business from Consulting to Brokerage as of January 1 2012. Source: Company data, Barclays Research
(a) WSH includes the international business, which represents roughly 53% of WSH's non-U.S. exposure. (b) AON international organic growth is a weighted average of U.K., Europe & Asia Pacific organic growth for 2008. Aons organic revenue growth has been restated for years 2009-2011 to reflect the transfer of the Health and Benefits business from Consulting to Brokerage as of January 1 2012. Source: Company data, Barclays Research.
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Insurance Brokers Margins Could Expand

The insurance brokers successfully expanded brokerage margins over the past three years despite soft P&C prices due to significant cost-cutting efforts. Although cost reduction efforts are mostly finished, we expect margins to expand further driven by positive operating leverage. For example, WSH estimates 40% of each incremental dollar of revenue from organic growth falls to its bottom line, while BRO estimates that two-thirds of each incremental dollar from organic growth falls to its bottom line. BRO already has best-in-class margins at roughly 35% due to its focus on high margin small- to middle-market commercial insurance business, as well as aggressive expense discipline. AJG has the lowest margins among the insurance brokers we cover at 16% due to upward pressure on expenses. Interestingly, most of the insurance brokers pre-tax brokerage margin could return to levels equal to the peak of the last hard market in 2003 before the loss of contingent commissions. Aon believes it can eventually achieve a 25% margin including non-cash amortization expenses (up from 20% currently), although the company has not provided a timeframe for this goal. MMC has committed to long-term double-digit earnings growth, which appears achievable. Figure 144: Insurance Brokerage Margins
MMC
40% 35% 30% 25% 20% 15% 10% 5%
E 13 20 2E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 7 0 20 6 0 20 5 0 20 4 0 20 3 0 20 2 0 20 1 0 20 0 0 20
AON
40% 35% 30% 22% 25% 20% 15% 10% 5%
E 13 20 2E 1 20 1 1 20 0 1 20 09 20 8 0 20 7 0 20 6 0 20 5 0 20 04 20 3 0 20 2 0 20 1 0 20 0 0 20
WSH
40% 35% 30% 21% 25% 20% 15% 10% 5%
E 13 20 E 12 20 1 1 20 0 1 20 09 20 8 0 20 7 0 20 06 20 5 0 20 04 20 3 0 20 02 20 1 0 20
Loss of contingent commissions
23%
AJG
40% 35% 30% 25% 20% 15% 10% 5%
E 13 20 2E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 07 20 6 0 20 5 0 20 4 0 20 3 0 20 2 0 20 01 20 0 0 20
BRO
40% 35% 30% 25% 18% 20% 15% 10% 5%
E 13 20 2E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 7 0 20 6 0 20 5 0 20 4 0 20 3 0 20 2 0 20 1 0 20 0 0 20
36%
Will Growth Improve in MMCs and AONs Consulting Business?

MMC and Aon have substantial Consulting operations poised to benefit from a rebound in demand as the economy recovers. We expect growth in MMCs Consulting business to be faster than AONs due to MMCs business mix and integration issues at AON following the Hewitt merger. For example, MMCs Oliver Wyman consulting unit focuses on financial services firms and is benefitting from increased demand as financial services firms seek to reduce costs and headcount.
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Roughly 45% of MMCs overall revenues are from Consulting versus Insurance Brokerage, although one-third of its earnings are from Consulting and two-thirds are from Insurance Brokerage. Aon meaningfully increased its presence in Consulting with the acquisition of Hewitt in October 2010 for $5 billion. Roughly one-third of Aons overall revenues are now from consulting after the acquisition, up from 17% previously. WSH and BRO are pure-play insurance brokers. A.J. Gallaghers revenues are roughly three-quarters Insurance Brokerage and one-quarter Risk Management (Gallagher Bassett), a third-party claims administrator that derives most of its revenue from settling claims for corporate propertycasualty programs on a fee-for-service basis. Figure 145: Insurance Brokers Revenue Mix - 2011
MMC
Consulting, 33% Consulting, 46% Insurance Brokerage, 55% Insurance Brokerage, 100%
AON
WSH
Insurance Brokerage, 67%
MMC Total Revenues FY 2011: $11.5 Bn
AON Total Revenues FY 2011: $11.3 Bn
WSH Total Revenues FY 2011: $3.5 Bn
AJG
BRO
Risk mgmt, 26%
AJG Total Revenues FY 2011: $2.1 Bn
BRO Total Revenues FY 2011: $1.0 Bn
Note: AONs revenues have been restated for 2011 to reflect the transfer of the Health and Benefits business from Consulting to Brokerage as of January 1 2012. Source: Company data, Barclays Research estimates
MMCs Consulting business (Mercer & Oliver Wyman), is one of the largest in the U.S. with $5.3 billion in revenues and is larger than the combined Aon/Hewitt consulting business, which has about $3.8 billion in revenues. MMCs consulting operation focuses on retirement, health & benefits, outsourcing and management consulting. Aon/Hewitts consulting business focuses on benefits outsourcing as well as retirement and & financial management, talent and organization consulting, health management, and communications. Aons consulting revenue mix has a higher allocation to outsourcing business than MMCs.
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Figure 146: MMC Consulting Revenues
Figure 147: Aon Consulting Revenues
Oliver Wyman 28%
Retirement 20%
Investment Consulting & Mgmt 9%
Health & Benefits 18%
Outsourcing 60%
Consulting 40%
Outsourcing 14%
Other Consulting 11%
Total Consulting Revenues FY 2011: $5.3 billion

Total Consulting Revenue FY 2011: $3.8bn

MMCs Consulting business should benefit from improved demand. MMC believes it can improve margins by several points (from 12% currently) with new leadership at the Mercer unit. We expect high-single digit to low-double digit earnings growth in MMCs Consulting unit in 2012 and 2013. Our outlook for this MMCs Consulting unit assumes 5-6% revenue growth in both 2012 and 2013, and adjusted margins of 12-13% in 2012 and 2013 versus 13% margins both in 2003 and 2004 (perhaps a comparable phase of economic recovery), although this could be conservative. As a point of reference, each one-point change in MMCs Consulting margin is $0.07/share after-tax annually. Figure 148: MMC and AON Consulting Pre-Tax Earnings & Margins Excluding Unusual Items
MMC Consulting Pre-tax Earnings Ex Unusual Items
(in $ mil) $750 $600 $450 $300 $150 $0
97 998 999 000 001 002 003 04R 05R 06R 007 008 009 010 011 12E 13E 2 2 2 2 2 2 20 2 2 2 1 1 19 20 20 20 20
MMC Consulting Pre-tax Margin Ex Unusual Items

Growth Rate 40% 30% 20% 10% 0% -10% -20% -30% 0%
20 12 E 20 04 R 20 05 R 20 06 R 20 13 E 20 02 20 03 20 07 20 09 20 10 20 08 20 11
15% 12% 9% 6% 3%
14%
13%
13%
13% 12%
13% 11% 10% 11%
12%
12%
13%
Pretax earnings
% change
Aon Consulting Pre-tax Earnings Ex Unusual Items

$600 Hewitt acquisition $500 Pretax earnings (in $ mil) 15.0% $400 $300 $200 $100 0.0% 10.0% 20.0%
Aon Consulting Pre-tax Margin Ex Unusual Items

17% 14% 11% 9% 11% 9% 11% 15% 15% 13% 12% 12% 12%
5.0%
20 11 20 12 E
20 06
20 07
20 08
20 09
20 02
20 03
20 04
20 05
20 10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013
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20 01
20 13
$0
90
Aon acquired Hewitt Associates in October 2010 for $5 billion (a robust valuation of 15x 2011E EPS and 7.5x 2010E EBITDA based on consensus estimates). The transaction significantly expanded Aons economic exposure with 33% of overall revenues from the consulting business versus 17% previously. Aon anticipated this transaction will provide it with a leading global consulting brand, $3 billion in additional revenues, and $335mn in annualized cost savings by 2013 (10% of Hewitts expense base). Aons Consulting business operating margin is 12% at YE 2011 and 18% excluding non-cash amortization. Aon targets a long-term operating margin in its Consulting business of 22% excluding non-cash amortization although it is unclear how quickly this can be achieved.
Return of Contingent Commissions?

The largest insurance brokers are allowed to accept contingent commissions again, but the benefit has not been meaningful so far with the exception of AJG. This is because commercial P&C insurance buyers resist paying increased fees to brokers, and increased transparency of fees could make contingents difficult for brokers to justify. Notably, MMC does not expect to collect contingents in the U.S., or Canada as well as other major markets. Aon appears willing to accept contingents but has not gained much traction so far. Meanwhile, WSH does not accept contingent commissions in its core P&C business because it believes these agreements present a conflict of interest with clients, although it has begun accepting contingent commissions in its employee benefits business. Our sense is AJG has likely had more success collecting contingent commissions in its small to middle-market insurance business where its competitors also collect contingent commissions. AJG currently collects about $38mn of contingent commissions annually, near its historical peak levels. Contingent commissions paid by insurers to brokers are almost pure profits for the brokers. These contingent arrangements were banned in 2005 for the largest brokers as part of a settlement led by the NY Attorney General due to perceived conflicts of interest with insurance buyers. AON, WSH, and MMC announced revised agreements with the NY Attorney General in early 2010 revising this ban based on the argument that insurance agents could still accept contingent commissions. Figure 149: Differing Insurance Broker Perspectives on Contingent Commissions
Plans to Accept Any Contingents? Commentary on Contingent Commissions
MMC
Yes
MMC said its customer response to accepting contingent commissions is mixed and income from contingent commissions is insignificant but could grow over time. The company does not intend to accept contingent commissions in the U.S. or Canada. Aon said its customer response to potentially accepting contingent commissions has been muted. WSH does not accept contingent commissions in its core P&C business because it believes these agreements present a conflict of interest. However, WSH will be accepting contingent commissions in its Employee Benefits business starting in April 2012. WSH expects contingent commissions in Employee Benefits could be $4-$5mn in 2012. AJG is accepting contingent commissions. The company accepted $38mn ($0.23/shr A/T assuming a 100% pre-tax margin) in contingent commissions in 2011 and expects contingent commissions to be roughly flat in 2012. BROs contingent commissions were never banned due in part to BRO being an agent and representing the insurer. The companys contingent commissions were $43mn ($0.19/shr A/T) for the FY 2011.
AON WSH
Yes Yes
AJG BRO
Yes Yes
Source: Barclays Research.
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Insurance Brokers Pension Expenses Are Rising

AON, MMC and WSH have significant defined-benefit pension plans in the U.S. and internationally (most significantly in the U.K.). Increased pension expenses, especially for the international plans, have long been an earnings headwind, and increased pension contributions are a drain on excess cash. This was driven by low interest rates and volatile financial markets which led to increased pension expenses and higher pension contributions for the insurance brokers due to reductions in either the discount rate or the expected return on plan assets. Increased pension expenses and pension contributions will likely remain a drag on results if interest rates have bottomed and equity markets improve. AON expects pension contributions to increase in 2012 but decline annually beginning in 2013 and result in fullyfunded plans in 2016. MMC anticipates a rise in pension expenses for 2012, while WSHs pension expenses could be lower in 2012 and pension contributions could be flat-to-up modestly. As a point of reference, each 50 bps change in the discount rate or long-term rate of return on plan assets equates to roughly a $0.06 per share annual after-tax change in pension expense each for MMC, AON and WSH. Figure 150: Funded Status of Pension Plans, YE11
$0 ($122) ($500) In $ mn
In $ mn
Figure 151: Pension Expense, 2005-2011
$300 $250 $200 $150 $100 $50
MMC & AON curtail their pension plans
($1,000)
($1,500) ($1,551) ($2,000) ($1,817) AON

$0 ($50) 2005 2006 2007

AON
2008
MMC
2009
WSH
2010
2011
MMC
WSH
Insurance Brokers Generate Robust Cash Flow

Investors are often attracted to insurance broker stocks because these companies generate meaningful cash flow and have low capital requirements. The brokers cash flow is expected to be used for mergers and acquisitions, dividends, pension contributions, debt reduction, and share buybacks. BRO and AJG have a successful track record in aggressively purchasing small independent agents to supplement organic growth. Over the past several years, MMC has expanded its small and middle-market agency presence mostly through acquisitions. This business known as MMC Agency now represents $340mn of annual revenues for MMC and is no longer a drag on segment margins. Aon has made large acquisitions in recent years, including Benfield (reinsurance broker) in 2008 and Hewitt (consulting) in 2010. MMC and AON are currently repurchasing stock, while WSH expects to resume share repurchase activity in 2012.
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Figure 152: Insurance Broker Cash Flow from Operations

MMC
$2,500 $2,000 In $ mn $1,500 $1,000 $500 $0 ($500) Regulatory settlements & tax payments associated with Putnam sale In $ mn $2,000 $1,500 $1,000 $500 $-
AON
Pension contribution & restructuring charges Hewitt acquisition In $ mn $700 $600 $500 $400 $300 $200 $100 $0
WSH
Loss of contingents, pension contributions, 2005 accounting change
02
03
20 12 20 E 13 E
04
05
06
08
07
09
10
11
2012E
AJG
$350 $300 $250 In $ mn $200 $150 $100 $50 $0 2012E 2013E 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 In $ mn Headwaters synfuel settlement $400 $350 $300 $250 $200 $150 $100 $50 $0
BRO
2012E
Insurance Brokers Return on Invested Capital Should Improve

Return on capital for the insurance brokers should improve modestly in 2012 and 2013 from 10% in 2010 and 2011 driven by improving organic growth, margins and earnings. Excluding acquisition-related non-cash amortization expenses, the brokers return on capital for 2012 and 2013 is expected to be in the range of 10%-15%. MMC could generate the highest return on capital as it continues to achieve sustained organic revenue growth and margin expansion, while AONs return on capital could be the lowest among the insurance brokers reflecting stable margins and significant non-cash amortization expenses related to the Hewitt acquisition. Figure 153: Insurance Broker Return on Capital
MMC
20%
15% 15% 16% 18%
AON
20%
WSH
Hewitt acquisition
11% 12%
2013E
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
28% 24% 20%

19%
HRH acquisition
25% 24% 17% 17% 17% 12% 11% 10% 10% 10% 11%
15%
10%
New mgmt
9% 7% 5% 5% 6% 9% 11%
13%
14%
15%
11%
10% 5% 0%
10% 5% 0%
10% 8% 7%
9%
8%
8%
9%
9%
9%
9%
10%
16% 12% 8% 4% 0%
11%
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 E 20 13 E
AJG
32% 28% 24% 20% 16% 12% 8% 4% 0%
30% 21% 23% 19% 19% 15% 15% 9% 10% 11% 8% 10% 12%
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 E 20 13 E
Includes alternative energy tax benefit
40% 35% 30% 25% 20% 15% 10% 5% 0%
37% 34% 28% 25% 21% 20% 19% 18% 15% 13% 12% 12% 12% 13%
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 E 20 13 E
Note: Calculations based on net income excluding unusual items as a percentage of average total capital. Source: Company data, Barclays Research estimates.
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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 E 20 13 E
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 E 20 13 E
BRO
2013E
2002
2003
2004
2005
2006
2007
2008
2009
2010
20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 E 20 13 E
2011
20
20
20
20
20
20
20
20
20
20
93
Part V: Personal Lines Insurance Returns Have Peaked

Our outlook for personal lines insurance, which is coverage for consumers vehicles and homes, is mixed
Our outlook for personal lines insurance, which is coverage for consumers vehicles and homes, is mixed. Personal auto insurance pricing power is slowing, although personal auto margins and returns on equity are benefiting from mostly benign claims inflation. We expect attractive underwriting margins in auto insurance to result in increased competition and perhaps lower returns. Homeowners insurance prices, on the other hand, are rising after several years of large underwriting losses, although rates remain inadequate. As a result, increased homeowners rates are needed across the board in nearly all states and deductibles need to increase. The preferred personal lines operating model is to be a pure play auto insurer with little to no exposure to volatile homeowners insurance, in our view. Successful examples of the focused personal auto strategy include GEICO (owned by Berkshire Hathaway) and PGR based in part on their direct sales efforts. CB has a profitable niche in the high-end personal lines market that is largely driven by homeowner insurance, but the company largely avoids hurricane-prone regions. ACE and AIG (Chartis) seek to raise their presence in high-end personal lines coverage as well. In the Unites States, automobile insurance is compulsory and accounts for one-third of property-casualty insurance industry premiums. For the top-tier performers, auto insurance generates strong returns on equity in part because of the ability to generate underwriting profits while employing high operating leverage. Auto insurance rates can generally be changed every six months, which means insurers can quickly adjust pricing to shifts in claims trends (either frequency or severity) that impact underwriting margins. Currently, personal auto insurers profitability is benefitting from price increases outpacing loss cost inflation. Policyholder-owned State Farm, the largest personal lines insurer, is losing money in auto insurance, which provides opportunities for the industry to raise rates. Also, it remains to be seen whether automobile insurance loss frequency trends, which have been favorable for years, could remain benign due to less miles driven in a weak economy. Notably, auto insurers are seeing worse-than-expected physical damage loss severity trends as a result of increased costs for used vehicles. Homeowners insurance is mostly a volatile, catastrophe-prone business with high capital requirements generating adequate returns in years with low natural catastrophe claims activity but suffering large underwriting losses in years with adverse weather. Rate changes are subject to review by each state, and there is little ability for homeowners insurers to raise rates to adequate levels in the highest catastrophe-prone states including Florida. We view automobile insurer Progressive (PGR) as one of the best-managed companies in the industry. Its valuation is robust with P/E multiple of 16x our 2012 operating EPS estimate and a price-to-book multiple of 2.2x, although we believe this is justified due to its consistent and superior high-teens ROE and ability to gain market share. Allstate trades at a significant discount to PGR with a P/E of 8x and a price-to-book multiple of 0.9x, although this situation appears warranted due to Allstates declining auto insurance policies-in-force (PIF), earnings volatility due to weather-related catastrophe losses, a lower return on equity, and challenges in its life insurance business. We see several important trends emerging in the personal lines insurance industry:
Personal Lines Industry Growth Could Be Modest Despite Rate Increases. Automobile insurance (70% of the personal lines market) benefits from low-single digit rate increases, although rate increases are slowing. State Farm, the largest personal auto
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insurer, is expected to remain disciplined on pricing to offset the impact of poor underwriting results. However, low growth in registered vehicles places downward pressure on premium volumes. In homeowners insurance (30% of personal lines premiums), rates are rising after several years of higher than average claims activity, although unit growth could remain depressed due to weak home sales activity. Figure 154: U.S. Personal Lines Industry Premium Volume
in $ bil $250 $200 $150 $100 $50 $0 2001 2002 2003 2004 2005 2006 Auto
2007
2008
2009
2010
2011E 2012E
Homeowner's
Auto Insurance Margins Have Likely Peaked. The private passenger auto insurers currently benefit from rate increases modestly outpacing loss cost inflation, resulting in stable margins for top-tier insurers. It remains to be seen whether rate increases will continue to outpace loss cost improvement as the economy recovers. This is because loss frequency trends could worsen as unemployment declines because more people would be driving in increasingly congested traffic conditions.
Figure 155: Auto Insurance Prices and Loss Cost Inflation

15% 10% 5% 0% -5% -10%
Year-Over-Year % Chg
Auto insurance prices are higher than loss cost inflation
2Q 99
3Q 00
4Q 01
1Q 08
1Q 98
3Q 05
3Q 10
4Q 06
1Q 03
2Q 09
Auto Insurance Rate Chg
2Q 04
Loss Cost Inflation
Note: Results are adjusted for the 2005 hurricanes by excluding comprehensive costs in affected states in 3Q05, 4Q05, 3Q06 and 4Q06 and excluding comprehensive losses in 2Q11 and 3Q11 due to large catastrophe losses including Midwest storms and Hurricane Irene. Source: ISO, Bureau of Labor Statistics, Barclays Research
Direct Insurers Gain Market Share. We view market share gains by direct personal lines writers of the market, as a secular shift. Direct auto insurance writers such as PGR and GEICO are gaining market share mostly from the exclusive agency channel (such as ALL
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4Q 11
and State Farm). The exclusive agency sales channel, including State Farm and Allstate, still the controls more of the market than direct, but consumers show increasing comfort with buying auto insurance without an agent, and direct insurers often offer coverage for lower prices than competitors.
Personal Lines Returns Could Deteriorate

Personal lines insurers normalized underwriting margins will likely deteriorate reflecting increased competition. Notably, we expect a meaningful divergence in returns among personal lines insurers. For example, Progressive could report best-in-class ROEs in the mid-teens through 2013 due to its focus on personal auto and high operating leverage. We expect a 9%-10% ROE at Allstate through 2013 due in part to a drag from homeowners insurance and the life insurance operations. On the other hand, policyholder-owned State Farm reported a disappointing 1% ROE in 2011 due to an underwriting loss in P&C reflecting large catastrophe losses. Top-Line Growth Could Be Modest. Net written premium growth for the U.S. personal auto insurance industry is in the low-single digits reflecting low single-digit rate increases and higher unit sales in a slowly recovering economy. Net written premium growth improved modestly to 2% in 2011 and could rise at a similar level in 2012 as the impact of a weak economy slows. Insurers could continue to file for low single-digit rate increases, although competition could cap potential rate increases. Figure 156: U.S. Private Passenger Auto Insurance Net Written Premiums
Net written premiums, in $ bn $170 $160 $150 $140 $130 $120 10% 8% 6% 4% 2% 0% -2%
E 12 20 E 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20 03 20 02 20
Figure 157: U.S. Homeowners Insurance Net Written Premiums

Net written premiums, in $ bn
$70 $60 $50 $40 $30 $20
16% 14% 10% 8% 6% 4% 2% 0%

E 12 20 E 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20 03 20 02 20
Net Written Premiums

Growth Rate
Net Written Premiums

Growth Rate
Reduced Underlying Underwriting Profits. In personal auto, the combined ratio could be roughly unchanged in 2011 and 2012 versus 101% in 2010. In homeowners, the combined ratio likely deteriorated from 107% in 2010 to 124% in 2011 due to large catastrophe losses, but we expect it to improve in 2012 to 105% reflecting our outlook for normalized catastrophes. Notably, results at State Farm, the largest personal auto and homeowners insurer, are worse than the industrys results, and the top-tier insurers meaningfully outperform the industrys average combined ratio.
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Growth Rate
96
Growth Rate
12%
Figure 158: U.S. Private Passenger Auto Insurance Industry Combined Ratio
130%
Figure 159: U.S. Homeowners Insurance Industry Combined Ratio

145%
Catastrophes
120%
State Farm
135% 125%
110%
115% 105% 95%
100%
State Farm
90%
85%
10 20 11 E 20 12 E
07
05
01
06
02
03
04
08
09
Auto Insurance Industry including State Farm State Farm

Returns on Equity Could Decline. Return on equity for the personal lines insurance industry could compress reflecting increased competition and modest investment returns. Return on equity in personal auto should be higher than ROEs for insurers that write both homeowners insurance and personal auto, because auto insurance requires less capital and generates higher underwriting margins. Progressive, a pure-play auto insurer, could see its ROE fall to about 14% by 2013. Allstate, which writes personal auto, homeowners, and life insurance, saw its ROE fall from 13% in 2001 to 4% in 2011 (impacted substantially by catastrophe losses), but could rebound to 9-10% in 2012 and 2013 assuming normalized cat losses. Figure 160: PGRs Return On Equity, 2005-2013E
30% 25% 26% 25% 20% 15% 10% 5% 0%
20 11 20 12 E 20 13 E 20 08 20 09 20 06 20 05 20 07 20 10
Figure 161: ALLs Return On Equity, 2005-2013E

30% 25% Hurricane Katrina 23%
19% 19%
21% 17%
20% 18% 13% 10% 10% 5% 0% 2005 2006 2007 2008 2009 8% 9%
16%
15% 14%
15%
20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 E 20 12 E
20
20
20
20
20
20
20
20
20
20
Homeowner's Insurance Industry including State Farm State Farm
Hurricane Ike/ Financial crisis
Hurricane Irene/US Tornadoes
10% 4%
9%
2010
2011 2012E 2013E
Personal Lines Industry Overview

The U.S. personal lines insurance market represents $234 billion of annual premiums as of 2011 and accounts for roughly half of U.S. P&C insurance industry premium volume. Within the U.S. personal lines insurance market, approximately 70% of premiums represent personal auto insurance and 30% are from homeowners insurance. Auto insurance losses tend to be frequency-driven (a large number of small value claims), while homeowners
16 April 2012 97
insurance losses tend to be severity driven (a high average cost of claims) due to the impact of catastrophes and exposure to increased commodity prices. Returns in auto insurance have historically exceeded homeowners insurance with less volatility, which explains why auto insurers such as PGR are awarded higher valuation multiples than diversified personal lines insurers. As far as we can tell, most insurers appear to prefer to write auto insurance rather than homeowners insurance because homeowners suffers from elevated catastrophe exposure.
Automobile insurance: Provides consumers protection against losses resulting from owning or operating a vehicle, including physical damages to the automobile or bodily injuries resulting from an accident. In the United States it is compulsory to have auto insurance before using or owning a vehicle, although roughly 14% of U.S. drivers are estimated to be uninsured, according to the Insurance Research Council. Insurers pay for physical damage to repair or replace vehicles, as well as medical costs for people injured in auto accidents. Homeowner s insurance: Provides protection against losses to a home and its contents, and pays for living expenses if the home is unable to be occupied, as well as liability insurance for accidents that may occur at the home. Typical claims are for fire, water damage, theft, and wind/weather damage. Homeowners with mortgages are typically required to purchase replacement cost coverage on the home.
Figure 162: Personal Lines Insurance Market Dominated By Automobile Coverage - 2011
Homeowner's 28%
Private Passenger Auto 72%
Total Personal Lines Premiums: $234 bn

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Figure 163: Auto Insurance Industry Jargon

Auto Insurance Terms Definition
Preferred auto insurance Standard auto insurance Non-standard auto insurance No fault auto insurance
Insurance for drivers who have never had an accident. Insurance for drivers with few accidents. Insurance for drivers with poor driving records, lapse of insurance coverage, or no prior insurance coverage. Each driver recovers losses arising from an auto accident from their own insurer, regardless of fault, eliminating the need for expensive litigation. Drivers in no-fault states sometimes file fraudulent claims to pierce the threshold required to sue. States with no fault auto insurance include: Florida, Michigan, New Jersey, New York and Pennsylvania.
U.S. personal lines insurance market share is highly concentrated with the top ten insurers accounting for 65% of the market. State Farm and Allstate have the first and second largest market share, respectively, with Progressive and GEICO being the fastest growing companies. Direct auto insurance writers PGR and GEICO are gaining market share, while market share among the independent agency channel (TRV, HIG) has remained stable and the exclusive agency channel has lost share (ALL and State Farm). For example, GEICOs market share increased to 9.1% in 2011 from 8.5% in 2010, and PGRs market share (includes direct and agency) increased to 8.0% in 2011 from 7.7% in 2010, while Allstates market share fell slightly and State Farms was relatively unchanged. In homeowners insurance, market share among the largest insurers is mostly stable. Policyholder-owned State Farm is the largest homeowners insurer with 21% market share, more than double the presence of Allstate. Many homeowners insurers avoid coastal exposure in the Gulf states and along the East Coast as far north as New England to mitigate wind-related exposure. As a point of reference, each one point gain in U.S. personal auto insurance market share is equivalent to approximately $1.7 billion of annual premiums, and each one point gain in U.S. homeowners insurance market share is equivalent to approximately $800 million of premiums.
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Figure 164: U.S. Private Passenger Auto Insurance Market Share, 2011
20% 19% 16% 12% 8% 4% 0%
rm t ls Fa e Al t a e at O IC s GE gre o Pr e siv l h de e rs ily AA tua ric m wi ve l u US a n Zu a F M tio n Tr rty N a i ca e r b e Li Am
Figure 165: U.S. Homeowners Insurance Market Share, 2011
22% 21% 18% 10% 9% 13% 8% 6% 5% 9% 5% 4% 2% 2% 4% 0%

l s e h b e il y AA id ua le r rm tat uric ub ut ave US n w Ch Fam ls Fa l Z e M Tr A io n at at rty St N ica e b er Li Am
9% 6% 5% 5% 5% 4%
2%
2%
1%
G AI
St
Economy Is a Drag on Personal Auto Growth

The personal auto insurance industrys growth is impacted by the slow economic recovery as policyholders purchase reduced auto insurance coverage and the average age of vehicles increase. Although the economy is slowly recovering and new motor vehicle sales are rebounding off low levels, policyholders are keeping their cars longer and used car sales remain robust, which is putting downward pressure on premium growth. According to Polk, new vehicle sales are not expected to return to pre-financial crisis levels for a few years as a result of cautious consumer spending, the availability of attractive longterm financing, and more durable and reliable vehicles than in the past. Also, the current vehicle ownership trend is not expected to decline for several years. Figure 167 illustrates the increased preference of U.S. drivers to maintain their current vehicles rather than purchasing new vehicles as the average age of U.S. passenger cars increased to a record 11 years in 2011. Notably, auto insurance premiums are typically higher for new vehicles than for older vehicles, so this mix shift toward older vehicles will likely have a dampening effect on industry premium volume.
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Figure 166: Average Vehicle Age, 2000-2012E
Figure 167: Average Length of Vehicle Ownership, 1Q03-3Q11

Average Length Of Vehicle Ownership (months) 78 72 66 60 54 48 42 36 30 24 18 12 6 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11
12 Average Vehicle Age (years) 11 10 9 8 7 6 2012E 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Passenger Cars
Source: Polk, Barclays Research
Light Trucks
New Vehicles
Source: Polk, Barclays Research
Used Vehicles
Figure 168: Average U.S. Retail Gasoline Prices

$4.50 Inflation Adjusted ($/gallon) $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 High gas prices could lead to reduced miles driven.
Figure 169: U.S. Unemployed Persons

16 14 12 in millions 10 8 6 4 2 0
20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 M 11 ar -1 2
Automobile accidents could increase once unemployment declines.
Source: U.S. Energy Information Administration, Barclays Research
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20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 1 M 1 ar -1 2
The number of registered passenger vehicles (a proxy for unit growth for the auto insurers) could increase 0%-1% annually through 2015. Notably, the historical average annual growth in registered vehicles over the past 20 years is 2%. Also, the number of uninsured motorists, which is somewhat correlated with unemployment, is 14% and could curtail auto insurance industry growth.
101
Figure 170: U.S. Registered Passenger Vehicles

275 Registered Passenger Vehicles, In Mn 250 225 200 175 150 5% 4% Pct chg 3% 2% 1% 0% -1%
E 15 20 E 13 20 E 11 20 09 20 07 20 05 20 03 20 01 20 99 19
Figure 171: U.S. Auto/Light Truck Sales

in mn of units 20 18 16 14 12 10 8 6 4 2 0 1999
Registered passenger vehicles Annual percentage change

Source: Bureau of Transportation Statistics, Barclays Research estimates.
2001
2003
2005
2007
2009
2011 2013E
Source: CSM, JD Power, Barclays Research estimates.
Increases in auto insurance rates are slightly outpacing increases in loss cost inflation, resulting in favorable auto insurance underwriting margins. Auto insurers began raising rates in early 2008, with increases now averaging 3% year over year, but we expect competition to increase as a result of attractive margins. Importantly, the spread between rate increases and loss cost inflation decreased in 4Q11. Figure 172: Personal Auto Insurance Prices Change
12% Year-over-year change 10% 8% 6% 4% 2% 0% -2% 1/1/1999 1/1/2000 1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012
Price increases are slowing
Source: Bureau of Labor Statistics, Barclays Research.
Auto insurance loss costs consist of loss frequency (the number of claims) and severity (the average cost of claims). Industry loss frequency trends have been favorable for years but this benefit could ease as the economy recovers. For instance, as the number of unemployed persons declines, there could be an increase in loss frequency because more people would be driving on congested roads. Industry loss severity costs are a function of motor vehicle maintenance and repair costs, vehicle parts and equipment costs, medical costs, and used vehicle prices. Severity inflation trends have been benign in recent years but have increased recently as a result of rising costs for used cars which could pressure margins.
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The Barclays "Pure Premium Spread" is the difference between auto insurance price increases and loss cost inflation adjusted for loss frequency trends. It is a key factor in monitoring the personal auto insurance market. The spread has been positive since early 2008 as price increases outpaced loss cost inflation, although increased loss cost inflation could emerge as the economy recovers. Figure 173: Barclays Auto Insurance Pure Premium Spread
Annual price increases less pure premium
15% 10% 5% 0% -5% -10% -15% 1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
Note: Results are adjusted for the 2005 hurricanes by excluding comprehensive costs in affected states in 3Q05, 4Q05, 3Q06 and 4Q06 and excluding comprehensive losses in 2Q11 and 3Q11 due to large catastrophe losses including Midwest storms and Hurricane Irene. Source: ISO, Barclays Research.
Will Loss Frequency Remain Favorable? The improving trend in loss frequency over the past two decades can be largely attributed to improved safety of cars, roads, and drivers. For example, anti-lock brakes, daytime running lights, and graduated driver licensing all result in safer cars and driving habits.
Loss frequency is partly a function of miles driven, with accident rates typically rising as miles driven increase. Miles driven increased so far in 2012 reflecting modest economic improvement after declining in 2011. Also, demand for gasoline, which is an indicator for miles driven, fell 2.7% ytd 2012 (down from the original estimate of a 4.2% decrease). Near term, miles driven could increase if unemployment levels fall. Notably, Allstates loss frequency trends remained favorable in 4Q11, likely due to a decrease in miles driven in a weak economy. However, severity trends deteriorated modestly. We expect miles driven to rise as the economy recovers, which could translate into increased motor vehicle accidents.
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Figure 174: U.S. Motor Vehicle Crash Frequency

7,000,000 6,700,000 # Crashes Per Year 2.8 6,400,000 6,100,000 5,800,000 2.0 5,500,000 5,200,000
19 9 19 0 9 19 2 9 19 4 9 19 6 98 20 0 20 0 0 20 2 0 20 4 0 20 6 0 20 8 10
Figure 175: U.S. Miles Driven

3.2 # Crashes Per Million Miles Driven
6% 5% % Chg Miles Driven 4% 3% 2% 1% 0% -1% -2% -3% The Great Recession Miles driven is up ytd 2012
2.4
1.6
# Crashes
# Crashes Per Million Miles Driven

Source: U.S. Department of Transportation, Barclays Research
Source: Federal Highway Safety Administration, Barclays Research
Figure 176: DOE Implied Gasoline Demand, y/y change

4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979
Source: Department of Energy, Barclays Research.
Motor vehicle severity loss cost trends are a function of motor vehicle maintenance & repair costs, parts & equipment costs, and medical costs. Inflation for these factors has remained in the mid-single digits range for the industry in recent years, but could rise.
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19 7 19 9 8 19 1 8 19 3 8 19 5 8 19 7 8 19 9 91 19 9 19 3 9 19 5 9 19 7 9 20 9 0 20 1 0 20 3 0 20 5 0 20 7 09 20 11
Ytd 2012 -2.7%
104
Used Vehicle Costs Are Rising. Another factor affecting loss severity is the cost of
used vehicles, which are a factor in determining settlement values for insured vehicles. The cost of used vehicles is up 2.9% y/y in February 2012. Despite being down from doubledigit increases in 2010 (albeit from low levels), auto insurers are seeing loss severity increase above their expectations. For example, ALL said property damage severity increased 5.8% y/y in 4Q11 for Allstate brand standard auto with much of the increase reflecting rising prices for used auto parts. PGR also experienced increased property damage severity trends as a result of the increasing costs of used cars and parts, and TRV experienced a higher-than-expected level of physical damage severity in personal auto in 2011. Barclays U.S. Auto & Auto Parts analyst, Brian Johnson, expects used vehicle pricing to stabilize at strong levels as two years of weak new vehicle sales (and in particular curtailed leasing) is likely to limit supply of late-model vehicles. Figure 178 shows Manheim Consultings index of wholesale used car prices which is up 1.8% y/y and is currently at historically high levels. Figure 177: Manheim Used Vehicle Value Index
130 125 120 115 110 105 100 95 Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Source: Manheim Consulting, Barclays Research
Separately, national healthcare reform could also impact auto insurance loss cost trends. Under national healthcare reform, health insurance coverage could be expanded to more people, but with programs that traditionally under-reimburse. As a result, doctors and hospitals could have an incentive to shift medical costs to personal lines as well as workers compensation insurers, where reimbursement levels and coverage tend to be more robust. Also, no managed care system exists for people involved in automobile accidents, potentially leading to higher medical costs for auto insurers.
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Figure 178: Components of Auto Insurance Loss Severity Inflation Year-over-Year Price Change
Motor Vehicle Maintenance and Repair Motor Vehicle Parts and Equipment
9%
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1/1/2000 1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012
7% 5% 3% 1% -1% -3% -5% 1/1/2000 7/1/2000 1/1/2001 7/1/2001 1/1/2002 7/1/2002 1/1/2003 7/1/2003 1/1/2004 7/1/2004 1/1/2005 7/1/2005 1/1/2006 7/1/2006 1/1/2007 7/1/2007 1/1/2008 7/1/2008 1/1/2009 7/1/2009 1/1/2010 7/1/2010 1/1/2011 7/1/2011 1/1/2012
Medical Care
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1/1/2000 1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011
16% 12% 8% 4% 0% -4% -8% -12% -16% 1/1/2000 7/1/2000 1/1/2001 7/1/2001 1/1/2002 7/1/2002 1/1/2003 7/1/2003
Used Vehicle Costs
1/1/2004
7/1/2004
1/1/2005
7/1/2005
1/1/2006
7/1/2006
1/1/2007
7/1/2007
1/1/2008
7/1/2008
1/1/2009
7/1/2009
1/1/2010
7/1/2010
1/1/2011
7/1/2011
Distribution Is Key in Auto Insurance

Personal lines products in the U.S. are distributed through three channels: 1) exclusive agents (agents sell personal lines products on behalf of only one insurer, such as Allstate and State Farm), 2) direct to consumer (such as PGR and GEICO), and 3) independent agents (agents sell insurance on behalf of multiple insurers, such as TRV). Direct auto insurers are gaining market share mostly from the exclusive agency channel, which are still the largest share of the market. Consumers show increasing comfort buying auto insurance without an agent and direct insurers often offer coverage for lower prices than competitors. In the independent agency channel, market share has been mostly stable at roughly one third. Importantly, the ability for the direct channel to gain market share is restricted at some point. This is because many customers prefer to purchase their auto, homeowners and umbrella insurance through the same insurer (such as State Farm or Allstate) rather than buy these policies through separate insurers, and multi-policy discounts can result in competitive pricing.
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Figure 179: Direct Auto Insurance Market Share

PGR Direct, 0.4% PGR Agency, 3.6% PGR Agency, 4.8% PGR Direct, 3.5% GEICO, 9.2%
PGR Direct, 2.3% GEICO, 5.5%
PGR Agency, 4.6%
GEICO, 3.4%
1998
Others, 92.6%
Others, 87.4%
Others, 82.7%
2004
2011
Direct auto insurers, such as PGR and GEICO, are gaining market share
Direct auto insurers, such as PGR and GEICO, are gaining market share from insurers in the exclusive agency channel, such as Allstate, based on our analysis of policies-in-force (PIF) trends.
Direct: Auto PIF for PGR (direct channel) and GEICO increased 6% and 7% year-overyear, respectively, in 4Q11. Exclusive agency: ALLs standard auto PIF fell 1.5% year-over-year in 2011, after declining 1.5% in 2010. Allstate enhanced its presence in the direct channel in 2011 with its acquisition of Esurance, although Esurances underwriting results are weak and its premiums are small relative to Allstates. It remains to be seen whether the acquisition will result in sales channel conflict with Allstates own exclusive agents.
The trend of direct writers gaining market share has been exacerbated by a slow economic recovery as consumers seek reduced auto insurance costs. PGRs and GEICOs direct sales strategies and large advertising expenditures result in market share gains by stressing low prices. PGR has a strong track record of developing differentiated auto insurance products and we expect similar programs to be offered by competitors. Examples include Snapshot (usage-based insurance) and name-your-price auto insurance (consumers decide what they would like to pay, and coverage is adjusted accordingly). PGR continues to see increased adoption of its Snapshot product and expects higher retention rates from customers who elect to use the product. Other auto insurers are increasingly adopting the use of technology to voluntarily track individual driving habits including GPS. The Hartford is introducing its device and believes the data is compelling. Meanwhile, Liberty Mutual notes that privacy concerns are offset by consumers ability to benefit from safer-drive discounts. Notably, an online survey conducted by Deloitte Research of over 1,000 auto policyholders showed one-third of respondents said they would willing to install a device to monitor their driving behavior to be eligible for a discount on their auto insurance premium.
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Figure 180: GEICO and PGR Are Gaining Market Share in Auto Insurance
GEICO Policies-In-Force Growth Y-o-Y
25% 20% 15% 10% 5% 0% -5% 1999 2000 -1% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 9% 9% 11% 12% 12% 30% 20% 11% 10% 6% 7% 0% 0% -10% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD 2012 2%
Progressive Policies-In-Force Growth Y-o-Y
22%
24% 18% 9% 4% 1% 8% 2% 2% 8%
9%
8%
8%
5%
5%
6%
State Farm Policies-In-Force Growth Y-o-Y

25% 20% 15% 10% 5% 5% 0% -5% 1999 2000 2001 2002 -2% 2003 2004 2005 2006 -2% 2007 2008 2009 2010 1% 2% 1% 0% 2% 1% 2% 0% 5% 0% 0% -5% 1999 2000 2001 2% 2% 25% 20% 15% 10% 4%
Allstate Policies-In-Force Growth Y-o-Y
Losing market share

6% 2% 3% 3% 1% -1% 2009 -0.2%
-4% 2002
-2% 2003 2004 2005 2006 2007 2008
-1% 2010 2011
Note: ALL PIF is standard auto only. GEICO PIF is voluntary auto only. Direct auto insurance accounts for 43% of PGRs personal auto insurance premium volume. Source: Company data, Barclays Research.
Direct insurers GEICO and Progressive have aggressively increased advertising expenditures in an effort to grow policies-in-force. GEICO, using its ubiquitous Gecko and Caveman ads, has the largest annual advertising expenditures among the personal auto insurers at $1.0 billion in 2011, nearly double the amount PGR spends. Notably, we expect PGR, ALL, State Farm and GEICO to all grow their advertising budgets further. Figure 181: Personal Lines Advertising Expenditures, 2005-2011
$1,200 $1,000 $800 In $ mn $600 $400 $200 $0 PGR 2005

Source: SNL, Barclays Research.
ALL 2006 2007 2008
State Farm 2009 2010 2011
GEICO
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The direct insurers low cost competitive advantage is particularly evident when comparing their expense ratios to peers. GEICO has the lowest expense ratio of 18% versus 22% at PGR, 24% at State Farm, and 28% at Allstate. Figure 182: GEICO Is the Low Cost Producer
30% 28% Expense Ratio 26% 24% 22% 20% 18% 16% 14% 2004 2005 2006 ALL 2007 2008 2009 PGR 2010 2011 2012E 2013E GEICO State Farm GEICO State Farm PGR ALL
Note: State Farm is auto only and ALL is Allstate Brand standard auto only. Source: A.M. Best, Company data, Barclays Research estimates.
Favorable Auto Insurance Demographics

Auto insurers are expected to benefit from an aging U.S. population because older customers are more profitable than customers below the age of 35. We suspect this trend is due to drivers age 35 and younger driving more often in congested traffic conditions. Drivers 35 and older account for roughly two-thirds of U.S. drivers, but only half of auto accidents in the United States. Drivers under age 35, account for one-third of U.S. drivers but roughly half of the auto accidents. Interestingly, the trend of older drivers having fewer accidents is true for drivers over the age 75.
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Figure 183: Mature Drivers Account for Fewer Accidents

25% 20% 15% 10% 5% 0% Under 20 20-24 25-34 35-44 45-54 55-64 65-74 Over 75
Percentage Of Drivers
Source: National Safety Council, Barclays Research.
Percentage of Accidents
Homeowners Insurance in Need of Improvement

Homeowners insurance (30% of the personal lines market) generates lower returns with more volatility than private passenger auto insurance. Currently, the homeowners insurance industry is operating at an underwriting loss. As a result, homeowners insurers such as ALL are seeking meaningful rate increases to improve returns. For example, Allstate was approved for an average rate increase of 8% in 17 states in 4Q11 in order to improve returns in this business, although these changes take time to work their way into results. The following figures show the monthly CPI component data for homeowners and tenants insurance prices along with the change in costs to repair household items. Figure 184: Tenants and Household Insurance Y/Y Price Change
7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3%
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
Figure 185: Repair of Household Items (Severity) Y/Y Price Change

8% 7% 6% 5% 4% 3% 2% 1% 0%
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
Note: Year-end 2010 data not available. Instead, year-end 2010 represents the average for the year. Source: Bureau of Labor Statistics, Barclays Research.
Source: Bureau of Labor Statistics, Barclays Research.
Demand for homeowners insurance could be negatively impacted by depressed home sales and housing starts (number of new homes on which construction has begun). This is because homeowners are more likely to shop their homeowners insurance coverage when purchasing a new home. As a result, we expect low exposure growth in homeowners
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insurance over the next few years. Notably, homeowners insurance premiums are based on the replacement cost of a home, rather than the market value. If the market value of the home falls, this does not mean the replacement cost or the homeowners insurance premium will fall in lockstep. Figure 186: U.S. Housing Starts & Existing Home Sales
Housing Starts
2500 In Thousands, SAAR 2000 1500 1000 500 0
S e 05 pM 05 ar S e 06 pM 06 ar S e 07 pM 07 ar S e 08 pM 08 ar S e 09 pM 09 ar S e 10 p1 Ja 0 nM 11 ar M - 11 ay -1 Ju 1 lSe 11 pN o 11 v1 Ja 1 n12 ar
Existing Home Sales

8000 7000 In Thousands, SAAR 6000 5000 4000 3000 2000 1000 0
Se 0 5 pM 05 ar Se 0 6 pM 06 ar Se 0 7 pM 07 ar Se 0 8 pM 08 ar Se 0 9 pM 09 ar Se 1 0 p1 Ja 0 nM 11 ar M -1 1 ay -1 Ju 1 lSe 1 1 pN o 11 v1 Ja 1 n12
New Madrid earthquake exposure Less hurricane exposure Earthquake Exposure Most hurricane exposure
Homeowners insurance losses tend to be severity-driven and have high volatility due to the impact of catastrophes. U.S. regions with the highest catastrophe exposure include the southeast U.S. due to hurricane and tornado losses, California due to earthquakes, and to a lesser extent the mid-west U.S. and northeast U.S. due to storms. The largest catastrophe losses have historically mostly resulted from hurricanes, followed by tornados and winter storms. Figure 187: Insured Catastrophe Losses by Cause, 1990-1H11
Wind/Hail/ Flood, 3.4% Geological events, 4.9% Terrorism, 6.6% Winter Storm, 8.0% Tornado, 31.8%
Note: Catastrophe losses are for all U.S. P&C insurance coverage. Source: ISO Property Claim Services, Insurance Information Institute, Barclays Research. Source: Barclays Research.
Figure 188: U.S. States With the Largest Catastrophe Exposures
Fires, 2.4% Other, 0.2%
Hurricanes/ Tropical storms, 42.7%
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Part VI: P&C Stock Performance & Valuation

Valuations for property-casualty insurers and reinsurers appear inexpensive at less than 1x book value on average, although the P&C insurance sector is expensive relative to other financials. However, we expect P&C valuation multiples to expand, driven by improved commercial pricing trends. As a point of reference, commercial P&C insurer valuations expanded in 2000 from approximately 1x book value to nearly 2x book value when price improvement became evident. Even if the P&C insurance sector recovers to its historical median valuation of 1.4x book value, it implies significant upside potential for the stocks. P&C insurers especially ACE, ACGL, TRV, XL, and BRK are the likely candidates for improved price-to-book multiples based on their high quality managements, strong longterm track records of book value growth and better-than-average underwriting performance. We also view the insurance brokers especially MMC, WSH, AJG, and BRO as attractive, despite currently trading at a premium valuation to the S&P 500, as improving P&C prices and an economic recovery should translate into rising organic revenue growth and operating margins. Low Valuations for the P&C Insurance Sector. Valuations for the property-casualty insurance sector were mostly range-bound in 2011, although P&C shares outperformed both the S&P 500 and broader financials. Year-to-date 2012, P&C insurers have underperformed both the S&P 500 and broader financials as the equity market rebounded and investors sought higher risk beta stocks (Figure 190). Unlike banks, the P&C insurers have low exposure to increasing global capital requirements, as well as almost no exposure to non-performing loans and foreclosures. We expect positive pricing momentum to persist, which should result in valuation multiple expansion for P&C stocks. Separately, the insurance broker stocks performed strongly in 2011 which we attribute partly to the brokers benefiting from improved P&C rates as well as having less balance sheet risk than the rest of the financials sector. However, the brokers underperformed the S&P 500 and broader financials year-to-date 2012 similar to the P&C insurers. Importantly, the insurance brokers are the best early-cycle P&C stocks, in our view, because most of the benefits of improved prices should boost earnings and margins. Strong P&C Stock Price Performance. The Barclays P&C Index increased 3% in 2011, outperforming the S&P 500 (0%) and the S&P Financials Index (-18%). Year to date in 2012, the Barclays P&C Index has increased 2% versus a 9% increase in the S&P 500, and a 17% gain in the S&P Financials. Since the March 9, 2009, equity market low, the Barclays P&C Index has increased 57% since its low led by gains in XL, ACGL, ACE, TRH, and AWH. However, the Barclays P&C index has underperformed the S&P 500 (+86% since March 9, 2009) as well as the S&P Financials Index (+102% since March 9, 2009). On average, the insurance brokers are up 1% year to date, and up 73% since the March 9, 2009 low.
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Figure 189: Stock Price Performance YTD 2012

20% 17% 16%
12% 9% 8%
4%
2%
0% S&P Financial S&P 500 Barclays P&C Index
P&C Insurer & Reinsurer Valuation Is Based on Price-to-Book. For the property-casualty insurers and reinsurers, our baseline valuation metric is book value per share, which is a somewhat conservative starting point because it gives no credit to future earning power. We also monitor tangible book value per share (excludes goodwill) as a more constructive metric, although we believe most if not all of the intangibles of the insurers and reinsurers we cover are unlikely to become impaired. The P&C companies with the largest amount of intangibles related to past acquisitions include BRK.A/B, ACE, TRV, and CB. In establishing our price targets, we typically use a price-to-book multiple approaching current level multiplied by the end of the next years (currently 2012) estimated book value per share. Figure 191-Figure 193 show price-to-book valuation for 4Q11 for the commercial insurers, reinsurers, and personal lines insurers we cover. On average, the P&C commercial insurers, personal lines insurers, and reinsurers are trading at 0.87x 4Q11 book value, 0.96x tangible book value, and 0.94x book value per share excluding unrealized net investment gains. Valuations for the P&C insurers are near historical lows, but seemingly cheap multiples should be viewed in the context of the S&P Financials index trading at a depressed 1.02x book value. P&C insurers as-reported book value per share include accumulated other comprehensive income (AOCI) that is mostly unrealized net investment gains. A significant portion of these unrealized gains arises from P&C insurers meaningful investments in fixed income securities that have increased in value as interest rates declined. Interest rates have increased year-to-date in 2012 which could reduce unrealized gains, although Barclays Interest Rate Strategy team expects 10-year U.S. Treasury yields to be capped at about 2.5%, which likely limits the downside risk. A rising rate environment is typically unfavorable for P&C stock performance because it results in book value erosion, although we do not expect significant book value deterioration near-term due to rising rates. We will also closely monitor book value per share excluding shifts in unrealized investment gains and losses to track underlying trends. There is a wide range in price-to-book multiples for the P&C insurers, and return on equity is not always the best indication of valuation multiples for this sector. Figure 190 shows weak explanatory power for P&C insurers price-to-book value versus next years ROE (Rsquared=66%). Currently, the median price to stated book value multiple for the P&C insurers and reinsurers we cover is 0.90x, which signals that returns on equity will likely be
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mostly consistent with the cost of capital in coming years especially if the benefit of loss reserve releases were to slow. In terms of stock selection, we favor P&C stocks with the most potential to generate profitable growth in an improving environment, namely ACE, ACGL, BRK, TRV, XL, and PRE. Figure 190: P&C Insurance, Reinsurance & Personal Lines Price-to-Book Vs ROE
3.00 2.50 Price-To-Book 2.00 1.50 1.00 0.50 0.00 4% y = 14.027x-0.0247 R2 = 0.66
6%
8%
10%
12%
14%
16%
18%
2012E ROE
Note: Includes TRV, ACE, ACGL, PRE, RE, BRK.B, CB, OB, AWH, AHL, XL, MRH, FSR, RNR, THG, PGR, ALL. Source: FactSet, Barclays Research estimates
PGR is awarded the highest valuation in the P&C sector of 2.21x book value based on its strong track record of delivering high returns on equity with low volatility. Berkshire Hathaway is awarded a modest valuation of 1.19x book value (1.75x tangible book value) based on the benefit of CEO Warren Buffetts management and investing acumen, as well as impressive operating results and book value per share growth. CB is valued above peers at 1.22x book value because of its prized franchise in high-end personal lines as well as commercial insurance. RNRs valuation is above other Bermuda reinsurers at 1.26x book value because its a best-in-class property catastrophe reinsurer with a strong track record of generating superior book value per share growth and returns on equity. Several commercial lines insurers and reinsurers writing high-severity exposures that could result in increased earnings volatility (including PRE, FSR, MRH, and XL) are currently awarded low valuations. Price-to-book valuations for these companies are below 1x stated book value; however, these companies trade mostly in line with the sector average based on forward P/E multiples.
We use forward year P/E multiples mostly as a way to triangulate our valuation work for the P&C insurers and reinsurers. These companies are in the business of protecting customers against catastrophe losses that can cause significant volatility in insurers results. P/Es based on 2012 operating EPS (excluding net realized investment gains and losses) average about 10x currently for the commercial lines and reinsurers.
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Figure 191: Price-to-Book Valuation, 4Q11

2.4 2.0 1.6 Median= 0.87x 4Q11 BV 1.2 0.8 0.4 0.0
FS R TH G XL AH L PR E RE M RH AW H AL L TR V AC E BR K AC GL CB RN R O B PG R
Figure 192: Price-to-Tangible Book Valuation, 4Q11

2.5
2.0 Price-to-Tangible Book Value
Price-to-Book Value
1.5
Median = 0.96x 4Q11 Tangible BV
1.0
0.5
0.0
XL TH G RE M RH PR E AL L AW H TR AC V G L AC E
M edia n= 10x 2012E EPS
FS R AH L
Figure 193: Price-to-Book Valuation Ex AOCI, 4Q11

2.75 2.50 Price-to-Book Value Ex AOCI 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 BRK MRH AWH TRV ACE PRE ACGL AHL ALL OB RE XL RNR CB THG PGR FSR Median= 0.94x 4Q11 BV ex AOCI
Figure 194: P/E Multiples Based on 2012E Operating EPS

20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 BRK CB AWH TRV ACE MRH PRE FSR RNR ACGL AHL THG PGR ALL OB RE XL
We do not expect interest rates to increase meaningfully further in the near term which means P&C insurers could maintain sizeable cumulative net unrealized gain positions. As a result, as-reported book value per share growth will be our baseline for insurers valuation going forward. Figure 195 shows our expectations for year-end 2012 and 2013 book value per share, book value per share excluding AOCI (or before unrealized fixed income gains if available) and tangible book value per share including AOCI.
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CB O B RN R BR K PG R
115
Figure 195: As-Reported Book Value Per Share, Book Value Excluding AOCI, and Tangible Book Value
Book Value, as reported 4Q11 YE12E YE13E Book Value, ex AOCI 4Q11 YE12E YE13E Tangible Book Value 4Q11 YE12E YE13E
Commercial Lines & Reinsurance TRV ACE ACGL PRE BRK.B CB XL RE OB AWH AHL MRH FSR RNR Personal Lines PGR THG ALL $9.47 56.24 36.92 $10.49 58.76 40.09 $11.20 61.36 43.20 $8.36 52.16 34.40 $8.99 54.43 36.75 $9.67 57.03 39.66 $9.47 51.46 34.31 $10.49 54.66 37.49 $11.20 57.60 40.45 $62.32 72.76 32.03 84.82 66.57 57.15 29.64 112.99 11.56 80.11 38.43 22.71 10.90 59.27 $66.70 79.91 35.43 96.23 76.02 59.50 32.29 126.70 10.59 88.84 41.26 24.13 11.47 66.84 $70.60 84.81 38.06 104.71 83.72 63.10 34.59 135.96 10.34 94.20 44.36 25.35 11.86 72.66 $55.01 67.09 30.88 77.94 59.44 50.78 27.80 106.16 11.68 79.74 32.58 22.77 11.08 59.05 $58.59 73.00 33.74 86.15 64.80 52.72 32.29 115.94 10.71 86.52 35.11 24.20 11.65 65.94 $61.93 78.24 36.37 93.62 70.61 55.94 34.59 124.99 10.45 91.79 37.86 25.42 12.04 71.71 $52.65 58.43 32.03 75.85 45.08 55.44 28.36 112.99 11.56 71.91 38.16 22.71 10.90 58.45 $56.15 65.46 35.43 86.17 54.53 57.68 30.93 126.70 10.59 80.11 40.98 24.13 11.47 66.00 $59.33 70.26 38.06 93.65 62.23 61.17 33.14 135.96 10.34 85.12 44.23 25.35 11.86 71.78
(continued on next page)
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The companies with the largest AOCI (a proxy for net unrealized investment gains as a percentage of book value) are: AHL (15% of reported book value), PGR (12%), and TRV (12%). Figure 196: AOCI as a % of 4Q11 Reported Book Value
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4%
FS R M RH O
Median=6% of 4Q11 BV
B RN R AW H AC G L AL L
PR E BR K. B
TH G
The Barclays P&C Index vs. the S&P P&C Insurance Index. We created a Barclays marketweighted property-casualty index composed of: ACE, AXS, CB, RE, PRE, RNR, TRH, TRV, WRB, XL, ACGL. We believe this index is more relevant to property-casualty insurance investors compared to the S&P P&C Insurance index because the S&P P&C index has the majority (57%) of its value tied to Berkshire Hathaway. Looking at the Barclays index of large reinsurers and insurers, the property-casualty (re)insurance stocks currently trade at historical lows on an absolute basis at 0.99x book value (ten-year historical range=0.85x2.13x, median=1.37). However, low valuations should be viewed in light of depressed valuations for the overall financial sector since the beginning of the global financial crisis in 2008.
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R AH L
117
CB
TR V
RE
XL
AC E
PG
Figure 197: Barclays P&C Index Company Weightings

XL ACGL 7% 5% WRB 5%
Figure 198: S&P P&C Index Company Weightings

PGR 6% XL 3% CINF 2% CB 7%
ACE 23%
TRV 22% TRH 3% RNR 4%
AXS 4%
ALL 6% BRK.B 57%
CB 18% PRE 4% RE 5%
ACE 10% TRV 9%

Source: Bloomberg, Barclays Research
Figure 199: Barclays P&C Price-to-Book Index Historical Valuation

2.2 Absolute price-to-book 2.0 1.8 1.6 1.4 1.2 1.0 0.8
ar -9 9 Ja n0 N 0 ov -0 0 Se p01 Ju l -0 M 2 ay -0 M 3 ar -0 4 Ja n0 N 5 ov -0 5 Se p06 Ju l -0 M 7 ay -0 M 8 ar -0 9 Ja n10 N ov -1 0 Se p11
118
Hard P&C Market Begins Hurricane Katrina (August 05) 9/11 1Q04 P&C pricing peaks Beginning of Financial Crisis (Jan 08)
The P&C insurance stocks current valuation relative to the S&P Financials index appears elevated based on historical metrics, although we believe this trend should continue, driven by improved commercial pricing trends. The P&C index currently trades at a 3% discount to the S&P Financials versus a historical support level of roughly a 32% discount. If the price/book valuation of the S&P Financials index continues to rise, we anticipate the P&C insurance sector's valuation could increase as well. In addition, improving investor sentiment on P&C insurers as a result of price increases could very well push valuations higher.
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Figure 200: Price-to-Book: Barclays P&C Index versus S&P Financials
3.5 Absolute price-to-book 3.0 2.5 2.0 1.5 1.0 0.5

9 -9 ar M 0 -0 ay M Ju
S&P Financials Current Valuation: S&P Financials Index 1.02x BV Barclays P&C Index 0.99x BV
Barclays P&C Index

1 l-0 02 03 vNo 05 6 -0 ar M 8 7 09 -0 l-0 pay Ju Se M S&P Financials 0 Ja 12 n-
pSe
nJa
1 vNo
Barclays P&C Index

Although the P&C insurers currently trade at cyclical low valuations, we acknowledge the valuation of P&C insurers are expensive compared to the rest of Financials.
From late 1999 through year-end 2007, prior to the recent financial crisis, the Barclays P&C index traded at an average 32% discount to the S&P Financials index. Since the beginning of 2008 (approximately the start of the financial crisis), the Barclays P&C index has traded at an average 10% discount to the S&P Financials index.
It is important to note that current valuations for P&C insurers cannot be viewed in isolation and, instead, should be viewed relative to the valuation of overall financials. On an absolute basis, the historical trough valuation of P&C insurers is 1x book value. However, the last time this low valuation level occurred was in early 2000 around a broad-based P&C cycle turn during which time overall financials traded at approximately 3x book value. Currently, P&C trades at an attractive valuation of approximately 1x book value, but this valuation must be viewed in light of overall financials now trading at roughly the same valuation. Figure 201: Barclays P&C Index Price-to-Book Valuation Relative to S&P Financials
Relative Valuation Pre Financial Crisis (Pre 1/1/08) Minimum=60% discount Maximum=18% discount Median=32% discount Std. Deviation=12% Relative Valuation Post Financial Crisis (Post 1/1/08) Minimum=26% discount Maximum=82% premium Median=10% discount Current=3% discount Std. Deviation=22%
60% 30% 0% -30% -60%
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b0 No 0 v0 Au 0 g0 M 1 ay -0 2 Fe b03 No v0 Au 3 g0 M 4 ay -0 5 Fe b06 No v0 Au 6 g0 M 7 ay -0 Fe 8 b0 No 9 v0 Au 9 g1 M 0 ay -1 1 Fe b12

119
ay
Fe
-9
Insurance Brokers Trade Mostly on P/Es. Our outlook is favorable for the insurance brokers, especially MMC, WSH, AJG, and BRO because these companies should benefit from a revenue tailwind as the economy recovers. Also, improved P&C prices should translate into rising organic revenue growth and operating margins. P&C pricing has bottomed, which means the insurance broker stocks could generate attractive upside potential because of positive operating leverage and improved investor sentiment. The insurance brokers trade mostly on P/E multiples rather than price-to-book valuations because, unlike the insurers, the brokers have low earnings volatility and do not have significant capital requirements. The Street consensus estimates for brokers are based on adjusted GAAP EPS excluding restructuring costs but including non-cash amortization expenses from acquisitions (although Aon is moving to a focus on cash earnings). We also monitor the brokers valuations based on price-to-cash EPS (gives full credit for cash generation), and enterprise value-to-EBITDA (adjusts for different capital structures). Based on our market-weighted index, the insurance brokers currently trade at 14.9x 2012 adjusted GAAP EPS estimates, which is below the historical median of 15.6x, and trade at an 13% premium to the S&P 500 P/E of 13.2x compared to a historical average discount of 5%. We view this premium valuation to the S&P 500 as warranted because the brokers are the best early-cycle P&C stocks, in our view, and should benefit from positive pricing momentum. Interestingly, the brokers currently trade on average at 9.2x EV/EBITDA, which is below the historical average of 10.3x. Figure 202: Current Valuation Metrics for Insurance Brokers
EV/EBITDA
12.0 10.0 8.0 6.0 4.0 2.0 0.0 AON BRO MMC 2012E WSH AJG 0.0 AON WSH BRO 2012E MMC AJG 4.0 2.0 7.6 8.0 8.3 8.5 10.0 10.3 8.0 6.1 6.0 6.5 7.9 7.9
Price/EBITDA
8.9
P/E
20.0 18.3 14.8 15.0 12.1 10.0 13.3
19.3
Price/Cash EPS
16.0 14.0 12.0 10.0 10.0 8.0 6.0 10.7 13.6 12.4 14.1
5.0 WSH AON MMC 2012E BRO AJG
4.0 WSH AON MMC 2012E AJG BRO
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120
Figure 203: Insurance Broker Historical Valuation Metrics

Price-To-Fwd Earnings 28.0 26.0 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 20% 10% Median=15.6x 0% -10% -20% -30% -40% Dec-09 Dec-10 Dec-11
De c9 De 9 c0 De 0 c0 De 1 c0 De 2 c0 De 3 c0 De 4 c0 De 5 c0 De 6 c0 De 7 c0 De 8 c0 De 9 c1 De 0 c11
Relative Price-To-Fwd Earnings (S&P 500)
Median=-5%
EV/EBITDA 16.0 14.0 12.0 10.0 8.0 6.0 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Median=10.3x
Note: Index is market cap weighted and includes MMC, AON, WSH, AJG, & BRO. Source: FactSet, Barclays Research
We also value the insurance brokers based on a sum-of-the-parts analysis because Consulting represents a meaningful portion of MMCs and Aons earnings. Our price target valuation multiples for the insurance broker segments range from 14x for AON to 22x 2012 estimated earnings for BRO, based on BROs best-in-class margins. We value the consulting businesses at MMC and AON at 12x-15x 2012 estimated earnings, roughly in line with Towers Watson (13x FY12), which is likely the best comp, but below Accenture (16x FY12). Figure 204: Insurance Broker Sum of the Parts Valuation
Marsh & McLennan 1 -Overweight Pct 2012E P/E Segment Earnings Multiple Marsh 80% 18.0 Mercer 39% 15.0 Corporate -19% 15.0 Total 100% Willis Group 1 -Overweight Pct 2012E P/E Segment Earnings Multiple Brokerage 100% 15.3 Arthur J. Gallagher 1 -Overweight Pct 2012E P/E Segment Earnings Multiple Brokerage 81% 20.5 Risk Mgt. 23% 22.0 Financial Svcs. -4% 10.0 Total 100% Brown & Brown, Inc 1 -Overweight Pct 2012E P/E Segment Earnings Multiple Brokerage 100% 21.5 Aon 2 -Equal Weight Pct 2012E P/E Segment Earnings Multiple Brokerage 89% 13.5 Consulting 33% 12.0 Corporate -21% 10.0 Total 100%
Weighted avg. P/E 2012E EPS Price Target
17.4 $2.15 $37
15.3 $2.90 $44
21.3 $1.80 $38
21.5 $1.30 $28
13.8 $3.60 $49
Source: Barclays Research estimates. Sector rating is 1-Positive.
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The following pages provide for each company under our coverage: Investment thesis, potential catalysts, and risks; Major metrics that we believe investors should focus on; Long-term valuation trends; and a Summary financial model.
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ACE LIMITED 1-OVERWEIGHT/1-POSITIVE
ACE: Strong Global Franchise & Solid Book Value Growth

Figure 205: Key Statistics
Price 4/11/2012
$72.11
Price Target
$90
52-Wk Price Range

75 - 57 4Q11 Price/BV ex Gdwill
1.23
Mkt Cap (Bil)

$24.3
Operating EPS 11A 12E

$6.97 $7.60
13E
$7.00
% Change EPS 11/12 12/13

9% -8%

$7.56 $7.65
Div. Yield
2.6%

0.99 0.90 0.85
P/E 12E
9.5
13E
10.3
ROE 12E 13E

10% 9%
Investment Thesis ACE has the advantages of global scale, a strong management team, and has a solid balance sheet, in our view. The company has a superior franchise in global commercial P&C insurance, and a growing presence in accident and health, as well as international P&C. ACE has a strong balance sheet in our view, with $3bn of excess capital that could be deployed in acquisitions. Unlike most other P&C insurers, ACE does not typically repurchase its shares. We view ACE as having one of the strongest loss reserve positions, which should serve the company well as the P&C insurance cycle bottoms. Risks Similar to other property/casualty insurers, ACE faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, and rising interest rates. Lower than anticipated accretion from acquisitions could result in lower earnings than projected. A slowdown in reserve releases could be a headwind to earnings, although we believe ACE has one of the strongest reserve positions in the industry.
Potential Catalysts ACE could deploy excess capital for M&A, which could result in higher than projected earnings. Top-line growth could be better than anticipated as P&C insurance rates improve and exposures grow as the economy improves. ACEs growth opportunities appear to be in Latin America, A&H, and global specialty P&C. Attractive valuation.
Valuation Since 2000, ACE has traded at a median trailing price to stated book value of 1.3x, with a range of 0.81x2.03x. Since 2008, the median is 0.96x. Our $90 price target is based on 1.1x our YE12 estimated book value per share of $80, and a P/E of 12x our 2012 EPS estimate of $7.60. ACE currently trades at 0.99x 2011 book value, which is a slight premium to the overall sector, and 9.5x 2012E EPS of $7.60, mostly in line with the sector average.
ACE Limited, headquartered in Zurich, Switzerland, is one of the world's largest providers of property-casualty insurance and, to a lesser extent, reinsurance. The company provides products and services globally mostly to commercial clients.
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Figure 206: ACE Major Metrics

Business Mix Operating Earnings Per Share
$10.00 $9.00 $8.00 $7.05 $8.07 $8.17
Total Net Written Premiums FY 2011: $15.4 billion Life, 12% Global Reinsurance, 6%
$7.72
$7.79 $6.97
$7.60 $7.00
Insurance North America, 45%
$7.00 $6.00 $5.00 $4.00
Insurance Overseas General, 37%
$3.00 $2.00 2006 2007 2008 2009 2010 2011 2012E 2013E
P&C Combined Ratio & CR Ex Cats and PY Development
Book Value and Return and Operating ROE
100%
$90
Book Value
Operating ROE 20% 16% 12% Operating ROE
98%
Book Value Per Share
95% 93% 90% 88% 85% 83% 80% 2006 2007 2008 2009 2010 2011 2012E 2013E Combined Ratio CR Ex Cats and PY Development
$75 $60 $45
8% $30 $15 $0 2006 2007 2008 2009 2010 2011 2012E 2013E 4% 0%
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Figure 207: ACE Absolute 1Q Trailing Price-to-Book

2.1 1.9 1.7 1.5 1.3 1.1 0.9 0.7
N N N N N N 9 -9 ov
2.50 2.00 1.50 1.00 0.50 0.00
ay -9 9 ay -0 M 0 ay -0 M 1 ay -0 M 2 ay -0 M 3 ay -0 M 4 ay -0 M 5 ay -0 M 6 ay -0 M 7 ay -0 M 8 ay -0 M 9 ay -1 M 0 ay -1 M 1 ay -1 2 M M
Figure 208: ACE Relative Price-to-Book (S&P Financials)

40% 20% 0% -20% -40% -60% -80%
N 1 -1 ov N -10 ov N -09 ov N 08 ov N -07 ov N -06 ov N 05 ov N -04 ov N 03 ov N -02 ov N -01 ov N 00 ov N -99 ov
Figure 209: ACE Price-to-Book Ex Net Unrealized Gains/(Losses)
ay -0 3
ay -0 5
ay -0 7
ay -9 9
ay -0 1
Figure 211: ACE Absolute 4-Qtr Fwd Price-to-Earnings
Figure 212: ACE Relative 4-Qtr Fwd P/E (S&P 500)
16.0 14.0 12.0 10.0 8.0 6.0 4.0
-20% -40% -60% -80%

N 1 -1 ov N -10 ov N -09 ov N -08 ov N -07 ov N -06 ov N -05 ov N -04 ov N -03 ov N -02 ov N -01 ov N -00 ov N -99 ov
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0%
ay -1 1
ay -0 9
N 1 -0 ov
9 -0 ov
1 -1 ov
3 -0 ov
5 -0 ov
7 -0 ov
Figure 210: ACE Price-to-Tangible Book
4.90 4.40 3.90 3.40 2.90 2.40 1.90 1.40 0.90
09 bFe
1 t-0 Oc 99 cDe
7 r- 0 Ap 05 nJu 03 gAu
10 cDe
125
Figure 213: ACE Annual Summary Model

(Dollars in millions, except per share data)
Prop./cas. gross premiums written Life & annuity gross premiums written Total gross premiums written Prop./cas. ceded premiums Prop./cas. net premiums written Prop./cas. insurance retention rate Life & annuity net premiums written Total net premiums written Prop./cas. change in U.P.R. Prop./cas. premiums earned Life & annuity premiums earned Total net premiums earned Total paid losses (a) Total change in reserves Prop./cas. incurred losses Life loss & loss expense Life & annuity benefits Acquisition costs Administrative expenses Total operating expenses Underwriting income Goodwill expense Interest expense Total expenses Total losses & expenses P&C investment income Life investment income Total investment income Other income excl losses from sep account assets Other income from separate account assets Pretax income Total Income taxes Cumulative effect, change in accting principal (AT) Taxes on capital gains (d) Total operating income Feline PRIDES dividend Perpetual preferred dividend Adjusted operating income Capital gains (d) Taxes on capital gains (d) Nonrecurring expenses A/T Net income avail to ordinary shr hldrs Net Income, add back pfd dividends (as reported) Effective tax rate Per share data: Operating EPS A/T impact of Unusual Items Operating EPS ex. unusual items Realized capital gains Nonrecurring expenses A/T Net income avail to ordinary shr hldrs Actual shares outstanding Average basic shares o/s Effect of dilution Wtd. avg. shares out. diluted Dividends per share Book value per share (e) Linked qtr % change in book value per share Tangible book value per share Return on average equity Return on average equity ex AOCI Book value ex. AOCI Balance sheet Debt/capital Adj. debt/tangible equity (b) Year-over-year percent change P&C gross premiums written P&C net premiums written P&C net premiums earned Pretax investment income Operating earnings Book value per share Operating EPS Cat Losses in $ (P/T) P&C Combined ratio CR pnts for cats CR pnts for PY development P&C C/R ex. cats, PY devel, and unusual items Total investment income Interest expense and preferred dividends Effective Tax Rate Operating Cash Flow A-T impact of 1% change in total C/R Per share Average invested assets Portfolio Yield Shares Repurchased (in shares) Shares Repurchasd (in $) 2007 $17,349 391 17,740 5,751 11,598 68% 381 11,979 318 11,929 368 12,297 5,767 1,584 7,351 168 1,771 1,455 3,226 1,720 175 3,401 10,920 1,863 55 1,918 (14) 3,309 575 (22) 2,712 45 2,667 (156) (22) 2,533 2,578 18.0% $8.07 $0.00 $8.07 ($0.41) $0.00 $7.66 330 325 5 330 $1.05 $48.89 NA $42.30 17.2% 18.1% $48.25 11.4% 17.2% 1.3% -1.3% 3.3% 19.8% 15.7% 16.3% 14.5% 159 87.9% 1.3% -1.8% 88.4% 1,918 220 18% 4,701 98 $0.30 39,004 4.9% 2008 $17,915 1,327 19,242 6,033 11,882 68% 1,198 13,080 123 12,033 1,170 13,203 6,327 649 7,283 320 387 2,147 1,737 3,884 2,036 230 4,114 12,104 1,920 142 2,062 (18) 3,179 370 (218) 2,591 24 2,567 (1,612) (218) 1,173 1,197 18.5% $7.72 $0.00 $7.72 ($4.85) $0.00 $2.87 334 329 4 333 $1.11 $43.30 NA $32.07 16.5% 15.9% $49.04 18.2% 33.5% 3.3% 2.4% 0.9% 7.5% -3.7% -11.4% -4.4% 567 89.6% 4.7% -6.4% 91.3% 2,062 254 18% 4,101 98 $0.29 42,913 4.8% 2009 $17,615 1,549 19,164 5,791 11,824 69% 1,475 13,299 (59) 11,810 1,430 13,240 6,948 797 6,940 482 321 2,134 1,811 3,945 2,355 225 4,170 11,913 1,855 176 2,031 22 3,336 528 (49) 2,759 2,759 (259) (49) 2,549 2,549 17.3% $8.17 $0.00 $8.17 ($0.77) $0.00 $7.41 337 337 1 338 $1.20 $58.44 NA $46.76 16.2% 15.7% $56.00 14.2% 23.1% -1.7% -0.5% -1.9% -1.5% 7.5% 35.0% 5.9% 137 88.3% 1.2% -4.9% 92.0% 2,031 225 17% 3,335 98 $0.29 43,933 4.6% 2010 $17,932 1,579 19,511 5,780 12,152 70% 1,556 13,708 (204) 11,962 1,542 13,504 6,914 204 7,083 496 353 2,341 1,858 4,199 2,222 224 4,423 12,355 1,898 172 2,070 53 3,166 559 50 2,657 2,657 501 50 3,108 3,108 16.1% $7.79 $0.00 $7.79 $1.32 $0.00 $9.11 335 340 2 341 $1.30 $68.59 NA $54.67 12.5% 13.2% $63.83 16.7% 27.1% 1.8% 2.8% 1.3% 1.9% -3.7% 17.4% -4.7% 401 90.3% 3.4% -4.2% 91.1% 2,070 224 16% 3,546 100 $0.29 47,595 4.3% 5 303 2011 $18,990 1,841 20,831 5,404 13,586 74% 1,786 15,372 15 13,651 1,736 15,387 8,887 633 8,971 549 401 2,446 2,053 4,499 1,917 250 4,749 14,670 2,018 224 2,242 61 (36) 2,862 506 20 2,376 2,376 (771) 20 1,585 1,585 17.0% $6.97 $0.00 $6.97 ($2.32) $0.00 $4.65 337 338 3 341 $1.50 72.76 NA $58.43 10.0% 10.8% $67.09 15.7% 25.0% 5.9% 11.8% 14.1% 8.3% -10.6% 6.1% -10.5% 930 94.6% 6.8% -4.1% 91.9% 2,242 250 17% 3,470 113 $0.33 52,852 4.2% 2 $134 2012E $19,577 1,840 21,417 4,920 14,657 77% 1,775 16,432 (460) 14,237 1,735 15,972 8,000 1,725 9,167 558 400 2,545 2,129 4,674 2,131 252 4,926 15,051 2,000 225 2,225 3,146 566 2,580 2,580 200 2,780 2,780 18.0% $7.60 $0.00 $7.60 $0.59 $0.00 $8.19 336 337 3 339.26 $1.94 $79.91 NA $65.46 10.1% 10.9% $73.00 14.6% 22.5% 3.1% 7.9% 4.3% -0.8% 8.6% 9.8% 9.1% 395 93.0% 2.8% -2.1% 92.3% 2,225 252 18% 5,165 117 $0.34 56,122 4.0% 5 $365 2013E $20,370 1,875 22,245 4,604 15,766 79% 1,810 17,576 (604) 15,211 1,760 16,971 8,000 2,647 10,087 560 405 2,740 2,275 5,015 1,869 252 5,267 16,319 2,000 225 2,225 2,877 518 2,359 2,359 2,359 2,359 18.0% $7.00 $0.00 $7.00 $0.00 $0.00 $7.00 332 334 3 337 $2.15 $84.81 NA $70.27 8.6% 9.3% $78.25 13.9% 21.1% 4.1% 7.6% 6.8% 0.0% -8.6% 6.1% -7.9% 465 95.3% 3.1% 0.0% 92.2% 2,225 252 18% 6,016 125 $0.37 61,063 3.6% 5 $395 1Q $4,228 416 4,644 1,191 3,037 74% 409 3,446 (137) 2,910 399 3,309 1,645 618 2,135 128 91 555 494 1,049 125 63 1,112 3,466 498 46 544 20 367 97 (2) 268 268 (11) (2) 259 259 27.0% $0.79 $0.00 $0.79 ($0.03) $0.00 $0.76 337 337 3 340 $0.33 $69.33 1.1% $55.30 4.6% $64.04 16.7% 27.2% -3.9% -4.7% 0.4% 7.9% -53.7% 13.8% -53.7% 489 105.0% 16.4% -3.2% 91.8% 544 63 27% 1,003 21 $0.06 50,861 4.3% 2011 2Q 3Q $4,949 $5,431 474 469 5,423 5,900 1,455 1,542 3,494 3,889 73% 74% 459 454 3,953 4,343 (196) 147 3,305 4,042 452 448 3,757 4,490 1,802 2,595 424 150 2,079 2,615 147 130 108 83 604 666 515 517 1,119 1,183 559 692 62 62 1,181 1,245 3,515 4,073 510 504 59 60 569 564 11 20 (39) 800 922 122 165 8 2 686 759 686 759 (71) (788) 8 2 607 (31) 607 (31) 14.3% 17.7% $2.01 $0.00 $2.01 ($0.23) $0.00 $1.77 338 339 3 342 $0.35 $71.36 2.9% 56.98 11.6% $65.47 16.3% 26.3% 4.1% 15.4% 16.2% 9.8% -0.3% 12.9% -0.4% 134 92.6% 4.1% -4.4% 93.0% 569 62 14% 1,060 28 $0.08 52,629 4.3% $2.22 $0.00 $2.22 ($2.32) $0.00 ($0.09) 336 338 2 341 $0.35 $70.60 -1.1% 56.28 12.7% $65.14 16.1% 26.0% 17.5% 33.1% 33.1% 9.3% 10.3% 4.8% 10.1% 144 90.3% 3.6% -4.8% 91.6% 564 62 18% 935 33 $0.10 53,899 4.2% 2 $100 4Q $4,382 482 4,864 1,216 3,166 75% 464 3,630 201 3,394 437 3,831 2,845 (559) 2,142 144 119 621 527 1,148 541 63 1,211 3,616 506 59 565 10 3 773 122 12 663 663 99 12 750 750 14.2% $1.94 $0.00 $1.94 $0.26 $0.00 $2.20 337 338 3 341 $0.47 $72.76 3.1% 58.43 11.0% $67.09 15.7% 25.0% 5.5% 5.0% 6.6% 6.2% -5.6% 6.1% -5.1% 155 92.9% 4.6% -3.6% 92.0% 565 63 14% 472 29 $0.09 54,020 4.2% 0 $32 1Q $4,350 415 4,765 1,084 3,266 77% 410 3,676 (190) 3,081 405 3,486 2,000 (80) 1,795 125 100 610 519 1,129 563 63 1,192 3,212 500 55 555 830 149 680 680 200 880 880 18.0% $2.00 $0.00 $2.00 $0.59 $0.00 $2.59 337 337 3 340 $0.47 $75.15 3.3% 60.81 10.9% $68.68 15.2% 24.0% 2.9% 7.5% 5.9% 2.0% 153.9% 8.4% 153.9% 55 90.2% 1.8% -2.7% 91.1% 555 63 18% 890 25 $0.07 54,352 4.1% 0 $0 2012E 2Q 3Q $5,095 $5,610 475 470 5,570 6,080 1,334 1,436 3,761 4,174 76% 76% 455 450 4,216 4,624 (278) (143) 3,488 4,036 450 445 3,938 4,481 2,000 2,000 376 919 2,222 2,780 154 139 100 100 637 660 529 548 1,166 1,208 551 493 63 63 1,229 1,271 3,705 4,290 500 500 55 55 555 555 789 746 142 134 647 612 647 612 647 612 647 612 18.0% 18.0% $1.90 $0.00 $1.90 $0.00 $0.00 $1.90 337 337 3 340 $0.49 $76.58 1.9% 62.24 10.1% $70.11 15.0% 23.5% 3.0% 7.6% 5.5% -2.5% -5.7% 7.3% -5.2% 80 93.0% 2.3% -1.6% 92.3% 555 63 18% 1,401 29 $0.08 55,341 4.0% 0 $0 $1.80 $0.00 $1.80 $0.00 $0.00 $1.80 337 337 3 339 $0.49 $77.99 1.8% 63.63 9.4% $71.51 14.8% 23.0% 3.3% 7.3% -0.1% -1.6% -19.4% 10.5% -18.7% 170 94.8% 4.2% -2.7% 93.3% 555 63 18% 1,774 33 $0.10 56,763 3.9% 1 $100 4Q $4,522 480 5,002 1,067 3,455 78% 460 3,915 151 3,632 435 4,067 2,000 510 2,370 140 100 638 534 1,172 525 63 1,235 3,845 500 60 560 782 141 641 641 641 641 18.0% $1.90 $0.00 $1.90 $0.00 $0.00 $1.90 334 335 3 338 $0.49 $79.91 2.5% 65.46 9.7% $73.39 14.6% 22.5% 3.2% 9.1% 7.0% -0.9% -3.3% 9.8% -2.5% 90 93.4% 2.5% -1.3% 92.2% 560 63 18% 1,100 30 $0.09 58,033 3.9% 4 $265
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ARCH CAPITAL GROUP LTD. 1-OVERWEIGHT/1-POSITIVE
ACGL: Balanced Presence in Insurance & Reinsurance

Price 4/11/2012
$37.79
Price Target
$46
Price Range
1.18
Cap (Bil)
$5.1
Operating EPS 12E 11A

$2.20 $2.75
13E
$2.50
% Change EPS 11/12 12/13

25% -9%

$2.78 $2.80
Div. Yield
0.0%

1.18 1.07 0.99
P/E 12E
13.7
13E
15.1
ROE 12E 13E

8% 7%
Investment Thesis
Potential Catalysts
In our view, Arch Capital has one of the best-managed P&C franchises along with superior long-term track records in both P&C underwriting and book value per share growth. The company shrunk its reinsurance business in soft market conditions, and shifted its business mix in primary insurance toward short-tail lines with increased expected returns. Arch Capital consistently generates strong returns on equity driven in part by consistent underwriting profits, aggressive share repurchase activity, and a high quality investment portfolio. The company establishes conservative loss reserves as evidenced by its elevated accident year combined ratio and growth in net loss reserves.
Risks
ACGL could experience faster than anticipated top-line growth as it benefits from increased potential for large transactions. ACGL has a strong franchise in both primary insurance and reinsurance and can deploy capital where it sees fastest P&C prices increases and highest returns. Reserve releases could persist due in part to ACGLs conservative stance to reserving. Share repurchase activity could slow in 2012 due to increased potential for large transactions as well as perhaps committing more risk capacity to Japan earthquake and Florida wind.
Valuation
Similar to other property/casualty insurers, Arch faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, and rising interest rates. Arch is a large writer of casualty insurance and reinsurance, which means it could face risk if loss cost trends rise, perhaps in future years. A slowdown in reserve releases could be a headwind to earnings, although we believe ACGLs reserve position is strong. The pace of share repurchase activity could slow in 2012.
Since 2002, ACGL has traded at a median trailing price to stated book value of 1.27x, with a range of 0.61x1.76x. Since 2008, the median is 1.06x. Our $46 price target is based on 1.3x YE12 estimated book value per share of $35, and a P/E of 17x our 2012 EPS estimate of $2.75. ACGL currently trades at 1.18x 2011 book value and 13.7x 2012E EPS of $2.75, which is at a premium to the sector average, although we believe this is warranted due in part to ACGLs superior track record of growing book value and generating strong returns.
Arch Capital, based in Bermuda, writes commercial insurance as well as reinsurance on a worldwide basis through operations in Bermuda, the U.S., Europe, and Canada with a focus on specialty lines.
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127
Figure 215: ACGL Major Metrics

Total Net Written Premiums FY 2011: $2.7 billion
$4.50 $4.00 $3.50 $3.00 $3.21 $2.76 $2.20 $3.82 $3.51 $3.12 $2.75 $2.50
Reinsurance, 36%
$2.50 $2.00
Insurance, 64%
$1.50 $1.00 $0.50 $0.00 2006 2007 2008 2009 2010 2011 2012E 2013E
Combined Ratio & CR Ex Cats and PY Development
Book Value Per Share and Operating Return on Equity
100% 96%
Book Value $45
Operating ROE 30% 25%
92% 88% 84% 80% 2004 2005 2006 2007 2008 2009 2010
$30
20% 15%
$15
10% 5%
$0 2006 2007 2008 2009 2010 2011 2012E 2013E
0%
Combined Ratio
CR Ex Cats and PY Development
16 April 2012
128
Operating ROE
Figure 216: ACGL Absolute 1Q Trailing Price-to-Book

1.75 1.50 1.25 1.00 0.75
M
1.90 1.70 1.50 1.30 1.10 0.90 0.70
Au g02 Au g03 Au g04 Au g05 Au g06 Au g07 Au g08 Au g09 Au g10 Au g11
Figure 217: ACGL Relative Price-to-Book (S&P Financials)

60% 40% 20% 0% -20% -40% -60%
2 -1 ar M 11 ar M 10 ar M 09 ar M 08 ar M 07 ar M 06 ar M 05 ar M 04 ar M 03 ar M 02
Figure 218: ACGL Price-to-Book Ex Net Unrealized Gains/(Losses)
-0 2
-0 3
-0 4
-0 5
-0 6
-0 7
-0 8
-0 9
Au g
Au g
Au g
Au g
Au g
Figure 220: ACGL Absolute 4-Qtr Fwd Price-to-Earnings

25.0 23.0 21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0
Figure 221: ACGL Relative 4-Qtr Fwd P/E (S&P 500)

20% 10% 0% -10% -20% -30% -40% -50% -60% -70%
16 April 2012
Au g
Au g
Au g
Au g
Au g
-1 0
-1 1
2 -1 ar M 1 -1 ar M 10 ar M 9 -0 ar M 8 -0 ar M 07 ar M 6 -0 ar M 5 -0 ar M 4 -0 ar M 03 ar M 2 0
2.00 1.80 1.60 1.40 1.20 1.00 0.80
ar
ar
Figure 219: ACGL Price-to-Tangible Book
11 nJu 0 1 nJu 9 0 nJu 8 0 nJu 7 0 nJu 6 0 nJu 5 0 nJu 4 0 nJu 3 0 nJu 2 0 nJu
11 nJu 0 1 nJu 9 0 nJu 8 0 nJu 07 nJu 6 0 nJu 5 0 nJu 4 0 nJu 03 nJu 2 0 nJu
129
Figure 222: ACGL Annual Summary Model

($ in millions, except per share data) Gross written premium Premiums ceded Net written premium Retention Net premium earned Paid losses Change in reserves Losses and loss adj expenses Acquisition expense Other operating expenses Total underwriting expense Underwriting income Net investment income Net Realized investment gains Fee income Equity income from invst funds Other income Other expense Interest expense Net fx losses (gains) Pre-tax income Income tax Net income Preferred dividends Net income to common shareholders Net realized gains, A/T Equity income from invst funds, A/T Net FX losses (gains), A/T Operating income Per Share: Operating EPS Net realized gains, A/T Equity income from invst funds, A/T Net FX losses (gains), A/T Net Income Actual shares outstanding Avg basic shares outstanding Effect of dilution Fully diluted shares Shareholder Dividend Underwriting ratios: Loss ratio Acquisition Expense Ratio Other operating expense ratio Combined ratio CR points from catastrophes CR points from py development Combined ratio ex cats & py dev Year-over-year percentage change: Gross written premium Net written premium Net premium earned Net investment income Losses and loss adj expenses Total underwriting expense Operating income Operating EPS Book value per share A-T impact of 1% change in C/R Per share: Book Value Per Share Linked qtr % change in book value per share Book Value Per Share (ex FAS 115) Operating ROE Operating ROE ex FAS 115 Total ROE Debt/Capital Effective tax rate Average invested assets Average portfolio yield, P/T Change in avg invested assets Premium-to-shareholder's equity Cash flow from operations Shares repurchased $ Repurchased 2006 $4,282.4 1,265.0 3,017.4 70% 3,081.7 990.4 800.1 1,790.5 543.9 303.2 2,637.6 444.0 380.2 (19.4) 9.8 0.4 29.1 22.1 23.9 739.9 26.7 713.2 20.7 692.6 (17.8) 24.6 734.5 $3.21 ($0.08) $0.00 $0.11 $3.03 222.8 219.6 9.1 228.7 $0.00 58.1% 17.5% 9.8% 85.4% 1.5% -2.7% 86.7% 6.7% -3.9% 3.5% 63.2% -10.6% -7.6% 156.2% 151.0% 30.0% 29.7 $0.13 $14.66 NA $14.43 25.6% 24.4% 24.1% 7.7% 3.6% 8,249 4.6% 28.4% 0.84 1,588.9 2007 $4,140.1 1,238.2 2,901.9 70% 2,944.7 1,117.4 526.8 1,644.2 480.5 357.4 2,482.1 462.5 463.2 28.1 7.5 (0.2) 9.0 30.7 22.1 44.0 873.5 15.6 857.9 25.8 832.1 30.1 (0.2) 44.3 846.5 $3.82 $0.14 ($0.00) $0.20 $3.76 202.0 213.0 8.4 221.4 $0.00 55.8% 16.2% 12.1% 84.2% 1.8% -5.6% 88.0% -3.3% -3.8% -4.4% 21.8% -8.2% -5.9% 15.2% 19.1% 25.4% 28.9 $0.13 $18.37 NA $17.61 24.3% 22.8% 23.9% 6.9% 1.8% 9,760 4.7% 18.3% 0.72 1,436.5 23.3 $537 2008 $3,669.1 863.4 2,805.7 76% 2,845.5 1,259.9 588.9 1,848.7 490.5 367.3 2,706.6 138.9 468.1 (185.1) 4.7 (178.6) 12.3 28.5 23.8 (96.6) 304.5 13.5 291.0 25.8 265.1 (190.2) (178.6) (96.5) 537.4 $2.76 ($0.98) ($0.92) ($0.50) $1.36 181.5 186.3 8.1 194.4 $0.00 65.0% 17.2% 12.9% 95.1% 12.3% -10.0% 92.8% -11.4% -3.3% -3.4% 1.0% 12.4% 9.0% -36.5% -27.7% -6.8% 27.2 $0.14 $17.12 NA $18.53 15.8% 14.2% 7.8% 10.4% 4.4% 10,119 4.6% 3.7% 0.82 1,139.1 22.5 $513 2009 $3,592.9 829.8 2,763.1 77% 2,842.7 1,439.3 215.4 1,654.7 493.6 361.9 2,510.1 332.6 390.1 77.4 3.5 167.8 20.0 30.2 24.4 39.2 897.7 20.7 876.9 25.8 851.1 71.4 167.8 39.9 651.8 $3.51 $0.38 $0.90 $0.21 $4.58 164.3 178.7 7.1 185.8 $0.00 58.2% 17.4% 12.7% 88.3% 0.6% -6.4% 94.1% -2.1% -1.5% -0.1% -16.7% -10.5% -7.3% 21.3% 26.9% 42.2% 27.8 $0.15 $24.34 NA $23.49 18.3% 16.6% 24.0% 8.5% 2.3% 10,384 3.8% 2.6% 0.64 992.6 20.0 $458 2010 $3,266.8 755.8 2,511.0 77% 2,552.5 1,247.3 270.4 1,517.7 441.2 403.9 2,362.8 189.6 364.9 241.4 5.4 61.4 18.5 28.9 30.0 (28.1) 850.5 7.9 842.6 25.8 816.7 235.7 61.4 (28.5) 491.1 $3.12 $1.50 $0.39 ($0.18) $5.18 139.6 150.5 7.0 157.6 $0.00 59.5% 17.3% 15.8% 92.6% 4.7% -5.4% 93.3% -9.1% -9.1% -10.2% -6.5% -8.3% -5.9% -24.7% -11.2% 23.2% 25.3 $0.16 $29.99 NA $28.53 12.0% 11.6% 20.0% 8.1% 0.9% 11,046 3.3% 6.4% 0.56 802.0 29.1 $761 2011 $3,436.5 763.1 2,673.3 78% 2,631.8 1,452.6 274.9 1,727.6 462.9 400.1 2,590.6 41.2 338.2 101.6 3.4 (9.6) (2.1) 31.4 31.7 (17.4) 427.0 (9.3) 436.4 25.8 410.5 99.2 (9.6) (17.3) 303.6 $2.20 $0.72 ($0.07) ($0.13) $2.97 134.4 132.2 6.1 138.3 $0.00 65.6% 17.6% 15.2% 98.4% 15.4% -10.5% 93.5% 5.2% 6.5% 3.1% -7.3% 13.8% 9.6% -38.2% -29.6% 6.8% 26.9 $0.19 $32.03 NA $30.88 7.2% 6.9% 9.7% 8.0% -2.2% 11,595 2.9% 5.0% 0.58 866.1 9.6 $287 2012E $3,621.0 746.6 2,874.4 79% 2,799.5 1,300.0 456.0 1,756.0 494.5 418.5 2,669.0 130.5 328.0 4.0 25.0 (5.0) 31.5 31.8 419.2 12.6 406.7 23.0 383.7 383.7 $2.75 $0.00 $0.00 $0.00 $2.75 134.4 134.4 5.0 139.4 $0.00 62.7% 17.7% 14.9% 95.3% 5.8% -4.5% 94.0% 5.4% 7.5% 6.4% -3.0% 1.6% 3.0% 26.4% 25.4% 10.6% 27.2 $0.19 $35.43 NA $33.74 8.5% 8.2% 8.5% 7.3% 3.0% 12,252 2.7% 5.7% 0.57 912.0 0.0 $0 2013E $3,855.0 752.8 3,102.2 80% 2,988.3 1,300.0 616.0 1,916.0 540.0 444.0 2,900.0 88.3 328.0 4.0 25.0 5.0 31.5 31.8 387.0 11.6 375.4 22.0 353.4 353.4 $2.50 $0.00 $0.00 $0.00 $2.50 134.4 134.4 7.0 141.4 $0.00 64.1% 18.1% 14.9% 97.0% 4.7% -2.3% 94.7% 6.5% 7.9% 6.7% 0.0% 9.1% 8.7% -7.9% -9.2% 7.4% 29.0 $0.21 $38.06 NA $36.37 7.2% 7.0% 7.2% 6.9% 3.0% 13,244 2.5% 8.1% 0.57 1,071.3 0.0 $0 1Q $964.6 200.3 764.3 79% 633.7 338.3 155.6 493.9 108.8 95.4 698.0 (64.3) 88.3 18.0 0.8 29.7 4.6 7.0 7.7 36.9 25.4 (0.4) 25.8 6.5 19.3 18.9 29.7 37.1 7.9 $0.06 $0.13 $0.21 $0.26 $0.14 131.9 133.5 7.0 140.5 $0.00 77.9% 17.0% 15.1% 110.0% 28.2% -9.2% 91.0% 1.1% -0.5% -5.4% -5.0% 15.4% 7.9% -92.0% -90.6% 18.4% 6.4 $0.05 $30.34 1.2% $28.63 0.8% 0.7% 1.9% 8.5% -1.5% 11,467 3.1% 5.5% 0.58 224.6 8.1 $237 2011 2Q $911.9 205.4 706.5 77% 642.9 301.8 129.8 431.6 110.6 99.2 641.4 1.5 86.7 43.5 0.8 6.0 (4.3) 11.4 7.8 18.4 96.6 (1.7) 98.3 6.5 91.9 43.1 6.0 18.7 61.5 $0.45 $0.31 $0.04 $0.14 $0.67 132.8 131.2 6.7 138.0 $0.00 67.1% 17.1% 15.4% 99.7% 14.8% -8.9% 93.8% 11.6% 13.2% 3.2% -4.3% 18.9% 14.2% -53.5% -46.1% 13.3% 6.5 $0.05 $31.00 2.2% $29.02 6.1% 5.9% 9.1% 8.3% -1.8% 11,557 3.0% 4.3% 0.58 222.0 0.9 $30 3Q $860.3 168.9 691.4 80% 682.0 373.7 50.3 424.0 120.2 99.8 644.0 38.0 82.8 27.5 0.8 (30.5) 2.4 6.2 8.1 (60.0) 166.7 (2.3) 169.0 6.5 162.5 25.7 (30.5) (59.9) 107.4 $0.78 $0.19 ($0.22) ($0.44) $1.19 133.0 131.6 5.6 137.1 $0.00 62.2% 17.5% 14.6% 94.3% 8.7% -8.5% 94.1% 3.4% 8.7% 8.7% -8.8% 18.0% 13.4% -17.8% -8.0% 4.9% 6.9 $0.05 $31.20 0.6% $30.09 10.4% 10.1% 15.7% 8.2% -1.4% 11,530 2.9% 1.4% 0.59 309.9 0.7 $21 4Q $699.7 188.5 511.1 73% 673.2 438.9 (60.8) 378.1 123.3 105.7 607.1 66.1 80.5 12.6 1.0 (14.7) (4.8) 6.8 8.1 (12.6) 138.3 (5.0) 143.3 6.5 136.8 11.5 (14.7) (13.2) 126.8 $0.92 $0.08 ($0.11) ($0.10) $1.00 134.4 132.6 4.9 137.5 $0.00 56.2% 18.2% 15.7% 90.1% 10.5% -15.0% 94.6% 5.3% 5.8% 6.5% -11.2% 2.9% 3.5% -2.1% 7.1% 6.8% 7.0 $0.05 $32.03 2.7% $30.88 12.0% 11.5% 12.9% 8.0% -3.6% 11,641 2.8% 1.2% 0.58 109.6 0.0 $0 1Q $1,019.0 201.2 817.8 80% 681.7 330.0 92.0 422.0 122.0 100.5 644.5 37.2 82.0 1.0 10.0 (8.0) 7.0 8.0 107.3 3.2 104.0 6.5 97.5 97.5 $0.70 $0.00 $0.00 $0.00 $0.70 134.4 134.4 5.0 139.4 $0.00 61.9% 17.9% 14.7% 94.5% 6.6% -5.1% 93.1% 5.6% 7.0% 7.6% -7.1% -14.6% -7.7% NM NM 9.7% 6.6 $0.05 $33.30 4.0% $31.61 8.9% 8.6% 8.9% 7.7% 3.0% 11,960 2.7% 4.3% 0.57 327.6 0.0 $0 2012E 2Q $961.0 205.2 755.8 79% 694.0 290.0 133.0 423.0 121.0 106.0 650.0 44.0 82.0 1.0 5.0 1.0 11.5 8.0 113.6 3.4 110.2 5.5 104.7 104.7 $0.75 $0.00 $0.00 $0.00 $0.75 134.4 134.4 5.0 139.4 $0.00 60.9% 17.4% 15.3% 93.7% 4.3% -5.0% 94.4% 5.4% 7.0% 8.0% -5.4% -2.0% 1.3% 70.2% 68.6% 9.9% 6.7 $0.05 $34.08 2.3% $32.39 9.2% 9.1% 9.2% 7.5% 3.0% 12,272 2.7% 6.2% 0.57 298.0 0.0 $0 3Q $903.0 166.9 736.1 82% 705.2 375.0 90.0 465.0 123.5 107.0 695.5 9.7 82.0 1.0 5.0 1.0 6.0 8.0 84.8 2.5 82.2 5.5 76.7 76.7 $0.55 $0.00 $0.00 $0.00 $0.55 134.4 134.4 5.0 139.4 $0.00 65.9% 17.5% 15.2% 98.6% 7.4% -5.0% 96.2% 5.0% 6.5% 3.4% -0.9% 9.7% 8.0% -28.6% -29.7% 11.1% 6.8 $0.05 $34.65 1.7% $32.96 6.6% 6.5% 6.6% 7.4% 3.0% 12,520 2.6% 8.6% 0.57 196.1 0.0 $0 4Q $738.0 173.3 564.7 77% 718.6 305.0 141.0 446.0 128.0 105.0 679.0 39.6 82.0 1.0 5.0 1.0 7.0 8.0 113.6 3.4 110.2 5.5 104.7 104.7 $0.75 $0.00 $0.00 $0.00 $0.75 134.4 134.4 5.0 139.4 $0.00 62.1% 17.8% 14.6% 94.5% 4.9% -2.8% 92.4% 5.5% 10.5% 6.7% 1.9% 18.0% 11.8% -17.4% -18.5% 10.6% 7.0 $0.05 $35.43 2.2% $33.74 8.9% 8.7% 8.9% 7.3% 3.0% 12,663 2.6% 8.8% 0.57 90.3 0.0 $0
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THE TRAVELERS COMPANIES, INC. 1-OVERWEIGHT/1-POSITIVE
TRV: Strong Track Record and Attractively Valued

Price 4/11/2012
$58.17
$5.75 $6.06
Price Target
$74
Div. Yield
2.8%
52-Wk Price Range

1.10
Mkt Cap (Bil)

$22.9

$3.28 $5.65
13E
$5.50
% Change EPS 11/12 12/13

73% -3%
Price/Stated BV 12E 13E 4Q11A

0.93 0.87 0.82
P/E 12E
10.3
13E
10.6
ROE 12E 13E

9% 8%
Investment Thesis
Potential Catalysts
Travelers is one of the best positioned propertycasualty insurers, in our view. Long term, the company has delivered superior book value per share growth as well as ROE, and has one of the lowest-risk investment portfolios among peers. The companys focus on small- and middle-market commercial insurance as well as personal lines addresses its severity exposure to major industry catastrophe events, and as a result, reduces earnings volatility. Travelers is one of the most aggressive repurchasers of shares among P&C insurers, which generates strong EPS and attractive book value per share growth. The pace of share buybacks at TRV could slow through 2013, although share buybacks could still be faster than other P&C insurers.
Risks
Top-line growth could be stronger than anticipated as P&C insurance rates rise and exposures grow as the economy improves. TRV is raising P&C prices and its premium growth could be above peers based in part on strong partnerships with independent agents. Share repurchase activity could continue, although the pace of share buybacks could slow. TRVs loss reserve position appears strong and the company could continue to release reserves, although perhaps at a slower pace.
Valuation
Similar to other property/casualty insurers, TRV faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, and rising interest rates. Reserve releases have been significant, which could mean TRV has less reserve redundancy from prior years. Also, a slowdown or reversal in the companys substantial loss reserve releases could mean our EPS expectations are too high. TRV has exposure to workers compensation insurance and surety insurance, although the companys results have been stronger than the industrys over time.
Since 2000, TRV has traded at a median trailing price to stated book value of 1.25x, with a range of 0.80x2.05x. Since 2008, the median is 0.95x. Our $74 price target is based on 1.1x YE12 estimated book value per share of $67, and a P/E of 13x our 2012 EPS estimate of $5.65. TRV currently trades at 0.93x 2011 book value and 10.3x 2012E EPS of $5.65, which is mostly in line with the sector average.
Travelers, headquartered in New York, is the second-largest writer of commercial U.S. property-casualty insurance, and is the second largest writer of U.S. personal lines insurance through independent agents.
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Figure 224: TRV Major Metrics

Total Net Written Premiums FY 2011: $22.2 billion Personal Insurance, 35%
$8.00 $7.00 $6.00 $5.00 $4.00 $3.28 $5.83 $6.89 $6.21 $5.23 $6.29 $6.26 $5.65 $5.50
Business Insurance, 51%
Financial, Professional & International insurance, 14%
$3.00 $2.00 $1.00 $0.00 2005 2006 2007 2008 2009 2010 2011 2012E 2013E
110% 105%
Book Value $80 Book Value Per Share $70 $60 $50 $40 $30 $20 $10 $0
Operating ROE 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
95% 90% 85%
20 05
20 06
20 08
20 10
20 07
20 09
20 11 20 12 E
20 13 E
Combined Ratio
16 April 2012
20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 E 20 13 E
132
Operating ROE
100%
Figure 225: TRV Absolute 1Q Trailing Price-to-Book

2.0
Figure 226: TRV Relative Price-to-Book (S&P Financials)
40% 20%
1.5
0% -20%
1.0
-40% -60%
0.5
1 -1 ov N 10 ov N 09 ov N 08 ov N 07 ov N 06 ov N 05 ov N 04 ov N 03 ov N 02 ov N 01 ov N 0 -0 ov 9 -9 ov N N
2.50 2.30 2.10 1.90 1.70 1.50 1.30 1.10 0.90 0.70
ec -9 8 ec -9 9 D ec -0 D 0 ec -0 D 1 ec -0 D 2 ec -0 D 3 ec -0 D 4 ec -0 D 5 ec -0 D 6 ec -0 D 7 ec -0 D 8 ec -0 D 9 ec -1 D 0 ec -1 1 D D
40.0 30.0 20.0 10.0 0.0
N N N N N N N N N ov N ov -0 0 9 -9 N ov N ov 1 -0 N ov -0 3 2 -0 ov ov -0 4 ov ov ov ov ov ov -0 -0 -0 -0 -0 -1 -1
-80%
1 -1 ov N -10 ov N -09 v No -08 v No -07 ov N -06 v No -05 v No -04 ov N -03 ov N -02 ov N -01 ov N -00 ov N -99 v No
Figure 227: TRV Price-to-Book Ex Net Unrealized Gains/(Losses)
Figure 228: TRV Price-to-Tangible Book
2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 0.80

ec -1 0 D
133
ec -0 0
ec -0 2
Figure 229: TRV Absolute 4-Qtr Fwd Price-to-Earnings
Figure 230: TRV Relative 4-Qtr Fwd P/E (S&P 500)

60% 40% 20% 0% -20% -40% -60% -80%
1 -1 ov N 10 ov N 09 ov N 08 ov N 07 ov N 06 ov 5 N -0 ov N 4 -0 ov N 03 ov N 02 ov N 01 ov N 00 ov 9 -9 N N ov
16 April 2012
ec -0 8
ec -9 8
ec -0 4
ec -0 6
Figure 231: TRV Annual Summary Model

(In $Mil, except per share)
Gross written premiums Premiums ceded Net written premiums Retention Change in unearned premiums Net earned premiums Paid losses and LAE Reserve changes Claim and claim adjustment expense Amortization of DAC G&A Expenses Total other underwriting expenses Underwriting gain Policyholder dividends Underwriting gain after dividends Fee income Net investment income, pre-tax Other revenues Recovery from Citigroup Adjusted other revenues Interest expense Operating income before taxes Taxes Operating income Asbestos & environmental charge, A/T Nuveen operating income Gain on JNC sale, net of taxes Realized gains, after tax Net income (e) Effect of dilutive securities Net income for common shareholders Investment income, after-tax From fixed income From other Investment expense Earnings Per Share Basic operating EPS Fully diluted operating EPS (a) Unusual items (d) Operating EPS ex. Unusual Items Realized gains, after tax Cumulative effect of acctg. Change, A/T Restructuring charge, A/T Net income Actual shares outstanding Average basic shares outstanding Dilution Average diluted shares outstanding Dividends per share Year-over-year percentage change Gross written premiums Net premiums written Proforma net written premiums Net premiums earned Investment income, after-tax Investment income from fixed-income, after-tax Operating income Operating EPS Adjusted operating EPS Book value per share A-T impact of 1% change in C/R Per adjusted share Book value per share Linked qtr % change in book value per share Return on average equity (b) Tangible Book value per share Book value per share, ex FAS 115 ROE per Travelers (ex FAS 115) Cash flow from operations GAAP Loss Ratio GAAP Expense Ratio GAAP Combined ratio Catastrophes Other one-time items (f) A&E prior year development Other prior year development Total prior year development: C/R excluding cat's, ppd. devel. Balance sheet Debt/Capital (ex FAS 115) Debt/tangible capital Premiums/surplus Effective tax rate Avg Invested Assets Y-o-Y chg in avg. invested assets P/T net tot portfolio yield # shares repurchased $ amt share repurchased 2007 $24,198 2,580 21,618 89.3% 148 21,470 12,084 313 12,397 3,706 3,352 7,058 2,015 32 1,983 508 3,761 124 124 346 6,062 1,562 4,500 120 101 4,601 12 4,613 2,915 2,523 431 (39) $6.89 $6.71 $0.18 $6.89 $0.15 $0.00 $0.00 $6.85 627.8 652.9 19.1 672.0 $1.13 2008 $23,837 2,154 21,683 91.0% 104 21,579 13,176 (183) 12,993 3,880 3,518 7,398 1,188 30 1,158 390 2,792 131 131 370 4,131 936 3,195 (271) 2,924 (16) 2,940 2,299 2,464 (137) (28) $5.36 $5.23 $0.00 $5.23 ($0.45) $0.00 $0.00 $4.81 585.1 595.9 8.4 607.3 $1.19 2009 $23,285 1,949 21,336 91.6% (82) 21,418 12,954 (546) 12,408 3,813 3,366 7,179 1,831 25 1,806 306 2,776 163 163 382 4,694 1,094 3,600 22 3,622 (23) 3,645 2,290 2,333 (22) (21) $6.39 $6.29 $0.00 $6.29 $0.04 $0.00 $0.00 $6.33 520.3 563.2 5.4 568.6 $1.23 2010 $23,302 1,667 21,635 92.8% 203 21,432 13,723 (513) 13,210 3,802 3,406 7,208 1,014 30 984 287 3,059 70 70 388 4,042 999 3,043 173 3,216 (28) 3,188 2,468 2,247 243 (22) $6.33 $6.26 $0.00 $6.26 $0.36 $0.00 $0.00 $6.62 434.6 476.5 6.0 482.5 $1.41 2011 $23,887 $1,700 22,187 92.9% 97 22,090 15,407 869 16,276 3,876 3,556 7,432 (1,618) 44 (1,662) 296 2,879 126 126 386 1,297 (93) 1,390 36 1,426 (17) 1,443 2,330 2,112 239 (21) $3.31 $3.28 $0.00 $3.28 $0.09 $0.00 $0.00 $3.36 392.8 415.8 4.7 420.5 $1.64 2012E $24,592 1,711 22,881 93.0% 314 22,567 15,000 395 15,395 3,963 3,642 7,605 (433) 50 (483) 310 2,994 136 136 385 2,622 441 2,182 2,182 (32) 2,214 2,421 2,161 280 (20) $5.80 $5.65 $0.00 $5.65 $0.00 $0.00 $0.00 $5.74 360.0 376.4 4.0 380.4 $1.85 2013E $25,496 1,771 23,725 93.1% 422 23,303 15,000 1,075 16,075 4,180 3,718 7,898 (670) 50 (720) 320 2,904 136 136 385 2,305 334 1,971 1,971 (32) 2,003 2,348 2,168 200 (20) $5.66 $5.50 $0.00 $5.50 $0.00 $0.00 $0.00 $5.59 336.9 348.5 4.0 352.5 $2.00 1Q $5,961 $524 5,437 91.2% 66 5,371 3,346 36 3,382 948 883 1,831 158 10 148 74 779 34 34 96 949 123 826 13 839 (8) 831 622 534 92 (4) $1.91 $1.89 $0.00 $1.89 $0.03 $0.00 $0.00 $1.92 420.3 428.2 6.2 434.4 $0.41 2011 2Q 3Q $6,124 $6,226 $307 $554 5,817 5,672 95.0% 91.1% 314 67 5,503 5,605 3,934 4,222 1,207 (86) 5,141 4,136 970 982 907 860 1,877 1,842 (1,515) (373) 8 11 (1,523) (384) 74 79 758 690 34 31 34 97 (746) (369) (377) 13 (364) (2) (366) 606 527 84 (5) ($0.91) ($0.91) $0.00 ($0.91) $0.03 $0.00 $0.00 ($0.88) 419.5 418.6 418.6 $0.41 31 97 330 (2) 332 1 333 (2) 331 561 525 42 (6) $0.80 $0.79 $0.00 $0.79 $0.00 $0.00 $0.00 $0.79 412.8 415.0 3.5 418.5 $0.41 4Q $5,576 $315 5,261 94.4% (350) 5,611 3,905 (288) 3,617 976 906 1,882 112 15 97 69 652 27 27 96 764 155 609 9 618 (5) 613 541 526 21 (6) $1.51 $1.48 $0.00 $1.48 $0.02 $0.00 $0.00 $1.51 392.8 403.0 4.0 407.0 $0.41 1Q $6,078 $541 5,537 91.1% (35) 5,572 3,750 (10) 3,740 961 914 1,875 (43) 13 (56) 77 756 35 35 96 729 131 598 598 (8) 606 611 526 90 (5) $1.54 $1.50 $0.00 $1.50 $0.00 $0.00 $0.00 $1.52 384.6 388.7 4.0 392.7 $0.46 2012E 2Q $6,296 $328 5,968 94.8% 359 5,610 3,750 20 3,770 984 920 1,904 (65) 12 (77) 77 757 33 33 97 706 123 583 583 (8) 591 612 527 90 (5) $1.53 $1.50 $0.00 $1.50 $0.00 $0.00 $0.00 $1.52 376.4 380.5 4.0 384.5 $0.46 3Q $6,429 $532 5,897 91.7% 231 5,666 3,750 240 3,990 1,005 914 1,919 (243) 12 (255) 79 740 33 33 96 513 73 439 439 (8) 447 598 553 50 (5) $1.18 $1.15 $0.00 $1.15 $0.00 $0.00 $0.00 $1.17 368.2 372.3 4.0 376.3 $0.46 4Q $5,789 $310 5,479 94.6% (241) 5,720 3,750 145 3,895 1,013 894 1,907 (82) 13 (95) 77 741 35 35 96 675 114 562 562 (8) 570 599 554 50 (5) $1.54 $1.50 $0.00 $1.50 $0.00 $0.00 $0.00 $1.53 360.0 364.1 4.0 368.1 $0.47
0.7% 2.2% 2.2% 3.4% 7.5% 5.9% 7.1% 13.8% 10.9% 14.5% 139.6 $0.21 $42.22 NA 17.4% $35.56 $41.23 17.8% 5,316 56.6% 30.8% 87.4% 0.8% -0.9% 0.9% -3.4% -2.5% 90.1% 19.4% 22.2% 0.9 25.8% 73,867 3.6% 5.1% 56.2 $2,959
-1.5% 0.3% 0.3% 0.5% -21.1% -2.3% -29.0% -22.0% -24.1% 2.1% 140.3 $0.23 $43.12 NA 12.3% $36.19 $43.37 12.5% 3,135 59.4% 32.5% 91.9% 6.5% 0.3% -7.5% -7.1% 92.5% 19.5% 22.4% 1.0 22.7% 74,183 0.4% 3.8% 45.6 $2,150
-2.3% -1.6% -1.6% -0.7% -0.4% -5.3% 12.7% 20.2% 20.2% 21.8% 139.2 $0.24 $52.54 NA 13.7% $44.94 $48.96 14.2% 4,231 57.3% 31.9% 89.2% 2.1% 0.0% 0.9% -7.1% -6.2% 93.3% 20.3% 23.2% 0.9 23.3% 73,099 -1.5% 3.8% 69.4 $3,300
0.1% 1.4% 1.4% 0.1% 7.8% -3.7% -15.5% -0.5% -0.5% 11.3% 139.3 $0.29 $58.47 NA 11.5% $49.57 $54.19 12.4% 3,054 60.9% 32.2% 93.2% 5.2% -0.1% 0.7% -6.5% -5.8% 93.9% 21.9% 25.1% 1.1 24.7% 71,560 -2.1% 4.3% 95.7 $5,000
2.5% 2.6% 2.6% 3.1% -5.6% -6.0% -54.3% -47.7% -47.7% 6.6% 143.6 $0.34 $62.32 NA 5.6% $52.65 $55.01 6.2% 2,169 72.9% 32.2% 105.1% 11.6% 0.0% 1.0% -4.3% -3.2% 96.7% 23.4% 27.1% 1.2 -7.2% 70,447 -1.6% 4.1% 51.0 $2,900
3.0% 3.1% 3.1% 2.2% 3.9% 2.3% 57.0% 72.5% 72.5% 7.0% 146.7 $0.39 $66.70 NA 9.0% $56.15 $58.59 10.2% 1,598 67.4% 32.1% 99.6% 2.9% 0.0% 0.7% -2.4% -1.8% 98.5% 23.8% 27.6% 1.2 16.8% 68,257 -3.1% 4.4% 32.8 $2,000
3.7% 3.7% 3.7% 3.3% -3.0% 0.3% -9.7% -2.7% -2.7% 5.8% 151.5 $0.43 $70.60 NA 8.2% $59.33 $61.93 9.4% 2,336 68.2% 32.4% 100.6% 3.1% 0.0% 0.6% -1.4% -1.0% 98.5% 24.0% 27.9% 1.2 14.5% 68,930 1.0% 4.2% 23.1 $1,500
2.7% 3.5% 3.5% 2.7% 2.0% -6.5% 30.9% 56.0% 56.0% 12.0% 34.9 $0.08 $59.91 2.5% $46.55 $55.59 633 62.2% 32.6% 94.7% 3.4% -4.4% -4.4% 95.8% 22.0% 25.2% 1.1 13.0% 70,771 -2.6% 4.4% 18.9 $1,100
2.5% 2.3% 2.3% 3.1% -1.8% -6.4% NM NM NM 7.1% 35.8 $0.09 $59.62 -0.5% $50.48 $54.28 268 92.7% 32.4% 124.9% 30.3% 0.9% -3.9% -3.1% 97.8% 22.5% 25.9% 1.1 49.5% 70,476 -1.1% 4.3% 3.9 $237
3.7% 3.8% 3.8% 3.4% -6.0% -6.1% -61.3% -56.4% -56.4% 3.1% 36.4 $0.09 $60.98 2.3% $51.74 $54.63 917 72.9% 31.6% 104.5% 10.8% 3.1% -6.4% -3.3% 97.0% 22.7% 26.1% 1.1 -0.6% 70,474 -0.6% 3.9% 7.3 $375
1.0% 0.5% 0.5% 3.1% -16.0% -5.1% -29.5% -21.6% -21.6% 6.6% 36.5 $0.09 $62.32 2.2% $52.65 $55.01 351 63.7% 32.3% 96.0% 1.8% 0.0% -2.2% -2.2% 96.4% 23.4% 27.1% 1.2 20.3% 70,067 -1.8% 3.7% 20.9 $1,188
2.0% 1.8% 1.8% 3.7% -1.7% -1.4% -27.6% -20.7% -20.7% 6.1% 36.2 $0.09 $63.57 2.0% $53.69 $55.97 146 66.3% 32.1% 98.4% 2.0% -2.4% -1.8% 98.3% 23.5% 27.1% 1.2 18.0% 68,113 -3.8% 4.4% 8.2 $500
2.8% 2.6% 2.6% 1.9% 1.0% 0.0% NM NM NM 8.5% 36.5 $0.09 $64.71 1.8% $54.62 $56.94 654 66.4% 32.4% 98.8% 2.5% -2.4% -1.8% 98.1% 23.6% 27.2% 1.2 17.4% 68,131 -3.3% 4.4% 8.2 $500
3.3% 4.0% 4.0% 1.1% 6.7% 5.4% 32.3% 45.4% 45.4% 7.4% 36.8 $0.10 $65.52 1.3% $55.20 $57.58 626 69.6% 32.3% 101.9% 4.1% -2.5% -1.7% 99.5% 23.8% 27.5% 1.2 14.3% 68,388 -3.0% 4.3% 8.2 $500
3.8% 4.1% 4.1% 1.9% 10.8% 5.4% -7.8% 1.4% 1.4% 7.0% 37.2 $0.10 $66.70 1.8% $56.15 $58.59 171 67.3% 31.8% 99.1% 2.9% -2.4% -1.8% 98.1% 23.8% 27.6% 1.2 16.8% 68,396 -2.4% 4.3% 8.2 $500
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BERKSHIRE HATHAWAY INC. 1-OVERWEIGHT/1-POSITIVE
BRK.A/B Geared to Economic Recovery, Attractive Valuation

Price 4/11/2012
$79.05
Price Target
$85
52-Wk Price Range

1.75
Mkt Cap (Bil)

$195.8

$4.35 $5.45
13E
$5.80
% Change EPS 11/12 12/13

25% 6%

$5.11 $5.46
Div. Yield
0.0%

1.19 1.04 0.94
P/E 12E
14.5
13E
13.6
ROE 12E 13E

8% 7%
Investment Thesis
Potential Catalysts
We expect strong operating results at Berkshire Hathaway to continue, although earnings growth could slow, barring a large acquisition. Also, we view Berkshire shares as attractively valued. Berkshires five largest non-insurance businesses reported record profits in 2011. Unless the economy weakens, each of its five largest non-insurance businesses should report higher earnings in 2012. Long term, CEO succession remains a risk, although less so since Warren Buffetts management succession plans are now in place.
Risks
Berkshire could repurchase stock if its valuation falls to 1.1x book value, which we believe provides a strong support level. Notably, the company has made no mention of plans to pay a shareholder dividend. Berkshire is seeking acquisitions in the $5bn-$20bn range, which appears reasonable based on $34bn of current cash holdings and likely little interest in issuing stock for deals. Berkshire remains committed to holding at least $20bn in cash, which means it has about $14bn of deployable cash currently. Rising equity markets could result in faster than anticipated book value growth.
Valuation
Similar to other property/casualty insurers, Berkshire faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, and rising interest rates. CEO Warren Buffett is 81 years old. Berkshire has high exposure to equity market volatility due to its large and concentrated stock investments as well as its derivatives exposures. Berkshires ability to effectively acquire new businesses could result in slower earnings growth and ROE pressure.
Since 2000, BRK has traded at a median trailing price to stated book value of 1.53x, with a range of 1.10x1.99x. Since 2008, the median is 1.31x. Our $85 price target for BRK.B is based on a sum-ofthe-parts methodology that applies a P/E of 12.5x BNSF, 9x the Manufacturing, Service & Retail unit, 14x MidAmerican, 8x unrealized appreciation of investments, and 6x Finance, and also based on 1.1x YE12 estimated book value per share of $76. Berkshire currently trades at 1.19x 2011 book value and 14.5x 2012E EPS of $5.45 per B share, which is above other P&C insurers, although we believe this is warranted based on the companys strong track record.
Berkshire Hathaway, based in Omaha, Nebraska, and its subsidiaries engage in diverse business activities including property and casualty insurance and reinsurance, utilities and energy, freight rail transportation, finance, manufacturing, retailing and services.
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Figure 233: BRK.A/B Major Metrics

Business Mix - Total Revenue Business Mix - Pre-tax Segment Income
Total 2011 Pre-Tax Segment Earnings: $17.2 billion
BNSF 28%
Insurance, 26% BNSF, 14% Finance & Financial Products, 3%
Total Revenues FY 2011: $144 billion

MidAmerican, 8%
Insurance 28%
Finance and Financial Products 5% MidAmerican 10%

Manufacturing , Service, and Retail 29%
Manufacturing , Service & Retail, 50%
Operating Earnings Per Class B Share
Book Value Per Class B Share and ROE
$6.00 $5.00 $4.02 $4.00 $3.25 $3.00 $2.00 $1.00 $0.00 2006 2007 2008 2009 2010 2011 $4.16 $4.15 $4.52
$5.80 $5.45 $4.35
Book Value $90 $75 Book Value Per Share $60 $45 $30 $15 $0
Operating ROE 12%
8%
4%
0% 2006 2007 2008 2009 2010 2011 2012E 2013E
2012E 2013E
16 April 2012
Operating ROE
136
Figure 234: BRK.A/B Absolute 1Q Trailing Price-to-Book
Figure 235: BRK.A/B Relative Price-to-Book (S&P Financials)
2.00 1.80 1.60 1.40 1.20 1.00

N
3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0
1 -1 ec D 10 ec D 9 -0 ec D 08 ec D 07 ec D 06 ec D 05 ec D 04 ec D 03 ec D 02 ec D 01 ec D 00 ec D 99 ec D
120% 70% 20% -30% -80%

1 -1 ov N v-10 o N -09 ov N -08 ov N -07 ov N -06 ov N -05 ov N -04 ov N -03 ov 2 N v-0 o N -01 ov N -00 ov N -99 ov N
1 -1 ov N -10 ov N -09 ov N 08 ov N -07 ov N -06 ov N 05 ov N -04 ov N 03 ov N -02 ov N 01 ov N 00 ov N -99 ov
3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 1.3
Figure 236: BRK.A/B Price-to-Book Ex Net Unrealized Gains/(Losses)
Figure 237: BRK.A/B Price-to-Tangible Book
1 -1 ec D 0 -1 ec D 9 -0 ec D 8 -0 ec D 7 -0 ec D 6 -0 ec D 5 -0 ec D 4 -0 ec D 3 -0 ec D 2 -0 ec D 1 -0 ec D 0 -0 ec 9 -9 ec D
Note: AOCI is used instead of net unrealized gains/(losses) for the first, second, and third quarters of 2009 and 2010. Source: FactSet, Barclays Research.
Figure 238: BRK.A/B Absolute 4-Qtr Fwd Price-to-Earnings

175.0 155.0 135.0 115.0 95.0 75.0 55.0 35.0 15.0
D 1 -1 ec D 10 nJu 8 -0 ec D 07 nJu 5 -0 ec D 04 nJu 2 -0 ec D 01 nJu 9 -9 ec
Figure 239: BRK.A/B Relative 4-Qtr Fwd P/E (S&P 500)

60% 40% 20% 0% -2 0 % -4 0 % -6 0 % -8 0 %
N ov
N ov -9 9
N ov 0 -0
N ov -0 1
N ov 2 -0
N ov -0 3
N ov 4 -0
N ov -0 5
ov
ov
ov 7
ov
ov 6
-1
-1
-0
-0
-0
-0
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137
Figure 240: BRK Annual Summary Model

(In $millions, except per share) 2007 Insurance: Total P&C insurance net premiums earned Life/health net premiums earned Total insurance premiums earned P&C incurred losses & claims expense Loss reserve change Paid claims P&C pre-tax underwriting gain/(loss) Life/health pre-tax underwriting gain/(loss) Total Insurance underwriting income Insurance Investment Income Insurance pre-tax income Utilities, Energy, & Railroad: MidAmerican pre-tax income Burlington Northern Santa Fe pre-tax income Utilities, Energy & Railroad pre-tax income Manufacturing Service & Retail: Manufacturing Service & Retail pre-tax income Finance & Financial Products pre-tax income Total segment pre-tax income Investment gains/losses Other-than-temporary losses on investments Derivative gains/losses Interest expense, ex. interest allocated to op businesses Eliminations & other Earnings before taxes & equity method Income tax expense Earnings from equity method investments Net earnings Less earnings attributable to non-controlling interests Net earnings attributable To Berkshire Hathaway Investment & derivative gains/(losses) Operating income, A/T Net earnings attributable To Berkshire Hathaway Net chg in unrealized appreciation of investments Applicable income taxes Foreign currency translation & other Applicable income taxes Other comprehensive income, net Comprehensive income attributable to Berkshire Per share Operating earnings per Class A equivalent share Operating earnings per Class B share Net income per Class A equivalent share Comprehensive earnings per Class A equivalent share Class A shares outstanding Class B shares outstanding Class B shrs on equivalent class A basis Class A equivalent shrs outstanding Avg. Class A equivalent shrs outstanding Book value per Class A equivalent share Book value per Class B equivalent share Linked-qtr growth Book value per share, ex AOCI per A share Book value per share, ex AOCI per B share Tangible book value per Class A share Tangible book value per Class B share Operating return on equity Operating ROE, ex. AOCI Return on tangible equity Comprehensive ROE Comprehensive tangible ROE Cash dividends per share P&C Insurance combined ratio Pretax catastrophe losses Catastrophe comb. ratio impact Prior year reserve development Prior year development comb. ratio impact Retro reinsurance release Retro reinsurance release C/R pts. P&C Insurance combined ratio ex cats P&C Insurance CR ex cats & PY devel. Year-over-year percentage change Insurance: P&C net premiums earned Investment income Operating income MidAmerican pre-tax income BNSF pre-tax income Total Utilities & Energy pre-tax income Manufacturing Service & Retail pre-tax income Finance & Financial Products pre-tax income Total pre-tax segment income Operating EPS Book value per share Effective tax rate Adjusted total debt/capital Total insurance float Avg Insurance investments (excl cash, fixed income at cost) Average Insurance pre-tax yield Insurance invested assets (at fair value) per A share Non Insurance pre-tax earnings Non-Insurance earnings per A share Free cash flow $29,321 2,462 31,783 26,027 10,568 15,459 3,294 80 3,374 4,758 8,132 1,774 1,774 3,947 1,006 14,859 5,599 (1) (89) 52 (155) 20,161 6,594 13,567 354 13,213 3,579 9,634 13,213 2,523 872 (4,803) (1,795) (1,357) 11,856 $6,232 $4.16 $8,548 $7,670 1.08 700.00 0.47 1.55 1.55 $78,008 $52.01 NM $64,039 $42.69 $56,775 $37.85 8.4% 10.4% 11.7% 10.3% 14.5% $0.00 88.8% 226 0.8% (1,478) -5.0% 0.0% 88.0% 93.0% 2008 $22,945 2,580 25,525 20,332 4,941 15,391 2,613 179 2,792 4,896 7,586 2,963 2,963 4,023 771 15,343 918 (1,558) (6,821) 91 (217) 7,574 1,978 5,596 602 4,994 (4,645) 9,639 4,994 (23,342) (8,257) (2,376) (194) (17,267) (12,273) $6,223 $4.15 $3,224 ($7,924) 1.06 735.35 0.49 1.55 1.55 $70,530 $47.02 NM $67,977 $45.32 $48,725 $32.48 8.4% 9.4% 11.8% -10.7% -15.0% $0.00 88.6% 1,022 4.5% (1,140) -5.0% 0.0% 84.2% 89.1% 2009 $25,258 2,626 27,884 23,975 8,453 15,522 1,283 177 1,460 5,459 6,919 1,528 1,528 2,058 653 11,158 387 (3,224) 3,624 101 (292) 11,552 3,538 427 8,441 386 8,055 486 7,569 8,055 17,607 6,263 3,372 987 13,729 21,784 $4,879 $3.25 $5,192 $14,041 1.06 744.70 0.50 1.55 1.55 $84,487 $56.32 NM $73,020 $48.68 $62,594 $41.73 6.3% 6.9% 8.8% 18.1% 25.2% $0.00 94.9% 131 0.5% (905) -3.6% 0.0% 94.4% 98.0% 2010 $28,038 2,714 30,752 26,188 9,331 16,857 1,850 163 2,013 5,145 7,158 1,539 3,611 5,150 4,274 689 17,271 3,041 (956) 261 208 (358) 19,051 5,607 50 13,494 527 12,967 1,874 11,093 12,967 5,398 1,866 (1,121) (378) 2,789 15,756 $6,782 $4.52 $7,928 $9,633 0.95 1,050.99 0.70 1.65 1.64 $95,453 $63.64 NM $82,964 $55.31 $65,719 $43.81 7.7% 8.9% 10.8% 10.9% 15.3% $0.00 93.4% 1,078 3.8% (2,270) -8.1% 0.0% 89.6% 97.7% 2011 $29,151 2,875 32,026 29,040 10,917 18,123 111 137 248 4,725 4,973 1,659 4,741 6,400 5,037 774 17,184 2,153 (879) (2,104) 221 (819) 15,314 4,568 10,746 492 10,254 (521) 10,775 10,254 (2,146) (811) (2,489) (819) (3,005) 7,249 $6,531 $4.35 $6,215 $4,394 0.94 1,068.84 0.71 1.65 1.65 $99,860 $66.57 NM $89,166 $59.44 $67,626 $45.08 6.7% 7.6% 9.8% 4.5% 6.6% $0.00 99.6% 2,846 9.8% (2,202) -7.6% (865) -3.0% 89.9% 100.4% 2012E $30,750 2,970 33,720 29,360 12,360 17,000 1,390 245 1,635 4,200 5,835 1,710 5,598 7,308 6,526 775 20,444 236 (400) 19,808 5,744 14,064 560 13,504 13,504 13,504 15,574 5,451 10,123 23,627 $8,180.08 $5.45 $8,180 $14,312 0.94 1068.84 0.71 1.65 1.65 $114,033 $76.02 NM $97,207 $64.80 $81,799 $54.53 7.6% 8.8% 10.9% 13.4% 19.2% $0.00 95.5% 685 2.2% (1,500) -4.9% 0.0% 93.3% 98.1% 2013E $29,685 3,070 32,755 28,580 11,580 17,000 1,105 220 1,325 4,200 5,525 1,722 6,353 8,075 7,290 775 21,665 236 (400) 21,029 6,098 14,930 560 14,370 14,370 14,370 7,200 2,520 4,680 19,051 $8,705 $5.80 $8,705 $11,540 0.94 1,068.84 0.71 1.65 1.65 $125,574 $83.72 NM $105,912 $70.61 $93,339 $62.23 7.3% 8.6% 9.9% 9.6% 13.2% $0.00 96.3% 715 2.4% (1,500) -5.1% 0.0% 93.9% 98.9% 1Q $6,760 722 7,482 8,034 NA NA (1,274) (2) (1,276) 1,261 (15) 451 965 1,416 979 156 2,536 99 (506) 271 51 (115) 2,234 629 0 1,605 94 1,511 (82) 1,593 1,511 652 217 915 165 1,185 2,696 $966 $0.64 $917 $1,636 0.94 1,060.35 0.71 1.65 1.65 $97,081 $64.72 1.7% $83,880 $55.92 $67,312 $44.87 4.1% 4.8% 6.1% 7.0% 10.3% $0.00 118.8% 1,656 24.5% 2Q $8,260 689 8,949 8,360 NA NA (100) 91 (9) 1,404 1,395 320 1,071 1,391 1,354 177 4,317 1,289 0 (184) 50 (106) 5,266 1,725 0 3,541 123 3,418 713 2,705 3,418 (54) (40) (1,172) (448) (738) 2,680 $1,640 $1.09 $2,073 $1,624 0.94 1,065.77 0.71 1.65 1.65 $98,716 $65.81 1.7% $85,934 $57.29 $68,966 $45.98 7.1% 8.0% 10.4% 7.0% 10.3% $0.00 101.2% 283 3.4% 2011 3Q $6,957 688 7,645 5,296 NA NA 1,661 34 1,695 1,038 2,733 489 1,236 1,725 1,345 147 5,950 100 (8) (2,443) 61 (175) 3,363 953 0 2,410 132 2,278 (1,534) 3,812 2,278 (7,318) (2,575) (617) (35) (5,325) (3,047) $2,309 $1.54 $1,380 ($1,845) 0.94 1,067.40 0.71 1.65 1.65 $96,876 $64.58 -1.9% $87,318 $58.21 $64,589 $43.06 9.8% 11.0% 14.7% -7.9% -11.8% $0.00 76.1% 235 3.4% 4Q $7,174 776 7,950 7,350 NA NA (176) 14 (162) 1,022 860 399 1,469 1,868 1,359 294 4,381 665 (365) 252 59 (423) 4,451 1,261 0 3,190 143 3,047 382 2,665 3,047 4,574 1,587 (1,615) (501) 1,873 4,920 $1,614 $1.08 $1,846 $2,980 0.94 1,068.84 0.71 1.65 1.65 $99,860 $66.57 3.1% $89,166 $59.44 $67,626 $45.08 6.6% 7.5% 9.7% 12.2% 17.9% $0.00 102.5% 672 9.4% 1Q $7,545 750 8,295 6,885 NA NA 660 60 720 1,050 1,770 457 1,300 1,757 1,377 156 5,060 59 (100) 4,901 1,421 3,479 140 3,339 3,339 3,339 10,383 3,634 6,749 10,088 $2,023 $1.35 $2,023 $6,111 0.94 1,068.84 0.71 1.65 1.65 $105,832 $70.55 6.0% $91,050 $60.70 $73,598 $49.07 8.0% 9.3% 11.5% 24.1% 34.7% $0.00 91.3% 116 1.5% 2Q $7,595 715 8,310 7,235 NA NA 360 65 425 1,050 1,475 350 1,235 1,585 1,845 177 5,082 59 (100) 4,923 1,428 3,495 140 3,355 3,355 3,355 1,696 594 1,103 4,458 $2,032 $1.35 $2,032 $2,700 0.94 1,068.84 0.71 1.65 1.65 $108,532 $72.35 2.6% $93,082 $62.05 $76,298 $50.87 7.8% 9.1% 11.2% 10.4% 14.9% $0.00 95.3% 146 1.9% 2012E 3Q $7,785 710 8,495 7,660 NA NA 125 55 180 1,050 1,230 488 1,395 1,882 1,790 146 5,048 59 (100) 4,889 1,418 3,472 140 3,332 3,332 3,332 1,730 606 1,125 4,456 $2,018 $1.35 $2,018 $2,699 0.94 1,068.84 0.71 1.65 1.65 $111,232 $74.15 2.5% $95,100 $63.40 $78,997 $52.66 7.8% 8.8% 11.2% 10.4% 15.0% $0.00 98.4% 276 3.5% 4Q $7,825 795 8,620 7,580 NA NA 245 65 310 1,050 1,360 415 1,670 2,084 1,514 296 5,255 59 (100) 5,096 1,478 3,618 140 3,478 3,478 3,478 1,765 618 1,147 4,625 $2,107 $1.40 $2,107 $2,802 0.94 1,068.84 0.71 1.65 1.65 $114,033 $76.02 2.5% $97,207 $64.80 $81,799 $54.53 7.9% 9.0% 11.3% 10.5% 15.0% $0.00 96.9% 146 1.9%
0.0% 94.3%
0.0% 97.8%
(875) -12.6% 72.7%
10 0.1% 93.1%
0.0% 89.7%
0.0% 93.3%
0.0% 94.8%
0.0% 95.0%
35.7% 10.2% -0.3% 20.2% NM 20.2% 11.9% -13.1% 3.8% 3.3% 11.0% 32.7% 17.1% $58,698 $94,183 5.1% $90,343 $6,373 $4,123 $7,177
-21.7% 2.9% -6.7% 67.0% NM 67.0% 1.9% -23.4% 3.3% -0.2% -9.6% 26.1% 19.3% $58,488 $98,046 5.0% $77,793 $7,171 $4,630 $5,114
10.1% 11.5% -8.8% -48.4% NM -48.4% -48.8% -15.3% -27.3% -21.6% 19.8% 30.6% 16.5% $63,441 $104,019 5.2% $98,475 $3,853 $2,484 $10,909
11.0% -5.8% 3.5% 0.7% NM NM NM 5.5% 54.8% 39.0% 13.0% 29.4% 18.2% $65,832 $110,229 4.7% $89,631 $9,693 $5,926 $11,444
4.0% -8.2% -30.5% 7.8% 31.3% 24.3% 17.9% 12.3% -0.5% -3.7% 4.6% 29.8% 22.9% $70,571 $112,772 4.2% $93,233 11,533 $6,990 $12,285
5.5% -11.1% 17.3% 3.1% 18.1% 14.2% 29.6% 0.1% 19.0% 25.3% 14.2% 29.0% 20.6% $132,486 3.2% $111,109 $13,820 $8,372 $12,666
-3.5% 0.0% -5.3% 0.7% 13.5% 10.5% 11.7% 0.0% 6.0% 6.4% 10.1% 29.0% 19.1% $156,425 2.7% $123,969 $15,351 $9,299 $13,989
0.4% -1.7% NM 14.2% NM NM 14.8% 40.5% -26.8% -30.5% 8.6% 28.2% 22.0% $69,000 $107,358 4.7% $92,909 $2,457 $1,491 $2,444
33.5% -6.0% -36.9% -5.3% NM NM 14.0% 14.2% -11.3% -12.1% 13.9% 32.8% 21.7% $71,000 $109,560 5.1% $95,376 $2,799 $1,696 $4,939
-17.2% -14.8% 79.4% 17.5% NM NM 17.5% 5.0% 36.8% 36.4% 6.7% 28.3% 23.4% $70,000 $112,795 3.7% $89,317 $3,085 $1,868 $3,999
6.9% -11.1% -52.1% 2.3% 42.1% 31.2% 24.9% 3.9% -4.6% -11.6% 4.6% 28.3% 22.9% $70,571 $116,983 3.5% $93,233 $3,378 $2,046 $903
11.6% -16.7% NM 1.3% 34.7% 24.0% 40.7% 0.0% 99.5% NM 9.0% 29.0% 21.9% $122,493 3.4% $102,192 $3,092 $1,873 $3,166
-8.1% -25.2% 5.7% 9.4% 15.3% 13.9% 36.3% 0.0% 17.7% 23.9% 9.9% 29.0% 21.4% $129,155 3.3% $105,143 $3,409 $2,065 $3,166
11.9% 1.2% -55.0% -0.2% 12.8% 9.1% 33.1% -0.7% -15.2% -12.6% 14.8% 29.0% 21.0% $135,817 3.1% $108,116 $3,621 $2,194 $3,166
9.1% 2.7% 58.1% 3.9% 13.6% 11.6% 11.4% 0.7% 19.9% 30.5% 14.2% 29.0% 20.6% $142,479 2.9% $111,109 $3,697 $2,240 $3,166
16 April 2012
138
THE CHUBB CORPORATION 1-OVERWEIGHT/1-POSITIVE
CB: 2012 Guidance Could Be Conservative

Price 4/11/2012
$69.61
Price Target
$85
52-Wk Price Range

1.26
Mkt Cap (Bil)

$18.8

$5.12 $5.90
13E
$6.00
% Change EPS 11/12 12/13

15% 2%

$5.77 $5.96
Div. Yield
2.2%

1.22 1.17 1.09
P/E 12E
11.8
13E
11.6
ROE 12E 13E

11% 11%
Investment Thesis
Potential Catalysts
Chubb has a strong franchise in high-end personal lines, as well as specialty commercial insurance. Underwriting results have remained solid over time, the investment portfolio is low risk, and share repurchase activity is aggressive. CEO John Finnegan (age 63) is closing in on CBs mandatory retirement age of 65. The company recently elevated two business leaders to join the CFO on the executive committee. CBs valuation is above other P&C insurers, although we believe this is warranted based on its strong track record.
Risks
CB could be one of the most aggressive P&C insurers in terms of share buybacks based on its substantial excess capital position. CBs top-line growth could benefit from improving P&C prices and rising insured exposure growth as the economy recovers. The companys outlook for 2012 EPS could be conservative based on CBs strong reserving position. CEO John Finnegan is expected to retire in 2014.
Valuation
Similar to other property/casualty insurers, Chubb faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, rising interest rates and increased inflation. CB has higher exposure to D&O/E&O lines than other P&C insurers, although losses from the financial crisis appear to be manageable. Chubbs earnings have benefited from substantial loss reserve releases including in specialty lines such as D&O and E&O. If the company were to suffer adverse loss reserve development, out EPS estimates would likely be too high.
Since 2000, CB has traded at a median trailing price to stated book value of 1.46x, with a range of 0.96x2.20x. Since 2008, the median is 1.13x. Our $85 price target is based on 1.4x YE12 estimated book value per share of $60, and a P/E of 14x our 2012 EPS estimate of $5.90. Chubb currently trades at 1.22x 2011 book value and 11.8x 2012E EPS of $5.90, which is above other P&C insurers, although we believe this is warranted based on the companys strong track record.
Chubb is a top property/casualty insurer with a worldwide presence. The companys segments include Personal Insurance, Commercial Insurance, and Specialty Insurance.
16 April 2012
139
Figure 242: CB Major Metrics

$7.00 $6.00 $5.60
$6.41 $5.58
$6.14
$5.90 $5.12
$5.85
$6.00
Specialty Insurance, 23%
Personal Insurance, 34%
$5.00 $4.00 $3.00 $2.00
Commercial Insurance, 43%
$1.00 2006 2007 2008 2009 2010 2011 2012E 2013E
Combined Ratio 100%

$70 $60
Book Value
Operating ROE 20% 16% 12% 8% 4% 0% Operating ROE
95%
$50 $40 $30 $20 $10
90%
85%
80% 2006
$0
2007
2008
2009
2010
2011
2012E 2013E
2006 2007 2008 2009 2010 2011 2012E 2013E
16 April 2012
140
Figure 243: CB Absolute 1Q Trailing Price-to-Book

2.5 2.0 1.5 1.0 0.5
N
2.50 2.30 2.10 1.90 1.70 1.50 1.30 1.10 0.90
Figure 244: CB Relative Price-to-Book (S&P Financials)

60% 40% 20% 0% -20% -40% -60%
Figure 245: CB Price-to-Book Ex Net Unrealized Gains/(Losses)
Fe b99
Fe b01
Fe b03
Fe b05
Fe b07
Fe b09
Fe b9 Fe 9 b0 Fe 0 b0 Fe 1 b0 Fe 2 b03 Fe b0 Fe 4 b0 Fe 5 b0 Fe 6 b0 Fe 7 b0 Fe 8 b0 Fe 9 b1 Fe 0 b1 Fe 1 b12
Figure 247: CB Absolute 4-Qtr Fwd Price-to-Earnings

21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0
N N N N N N N N N N N N N ov ov ov ov ov ov ov ov ov ov ov ov ov -9 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -1 -1 9 0 1 2 3 4 5 6 7 8 9 0 1
Figure 248: CB Relative 4-Qtr Fwd P/E (S&P 500)

0% -10% -20% -30% -40% -50% -60%
16 April 2012
Fe b11
1 -1 ov N 10 ov N 9 -0 ov N 08 ov N -07 ov N 06 ov N 05 ov N 04 ov N 03 ov N 02 ov N 01 ov N 00 ov N 99 ov
2.30 2.10 1.90 1.70 1.50 1.30 1.10 0.90
Figure 246: CB Price-to-Tangible Book
N D
1 -1 ov N -10 ov N -09 ov N -08 ov N -07 ov N -06 ov N -05 ov N -04 ov N -03 ov N -02 ov N -01 ov N -00 ov N -99 ov
141
1 -1 ec D 10 ec D 09 ec D 08 ec D 07 ec D 06 ec D 5 -0 ec D 04 ec D 03 ec D 02 ec D 01 ec D 00 ec D 99 ec
Figure 249: Chubb Annual Summary Model

(Dollars in millions, except per share data) Net premiums written Change in U.E.P. Net premiums earned Paid losses Change in reserves Total losses Operating costs & expenses Policyholder dividends Stat. underwriting income Change in DAC GAAP U/W income Net investment income, P/T Goodwill & other charges Property-casualty income Chubb Financial Solutions Corporate and other Operating income before taxes Taxes Operating income Realized investment gains, A/T Net income Net investment income, A/T Per share Operating income Realized investment gains Restructuring charges Discontinued operations Net income Chubb Financial Solutions Op. EPS excluding unusual items (a) Average basic shares outstanding Dilution Average diluted shares outstanding Actual shares outstanding Dividends per share Underwriting ratios Loss ratio Expense ratio Combined ratio CR points, catastrophes (d) CR points, PY devel. Combined ratio ex. cats + PY devel. Pre-tax cat losses ($Mil) Cat losses per share Prior year loss reserve development ($Mil) PY loss development per share Year-over-year percentage change Gross premiums written Net premiums written Net premiums written excl. Chubb Re Net premiums earned A/T investment income Incurred losses Operating expenses Operating income Operating EPS Book value per share A-T impact of 1% change in C/R Per share Book value per share Linked qtr % change in book value per share Tangible book value per share ROE (b) Book value with fixed maturities at amortized cost Book value excluding unrealized appreciation ROE, per Chubb (c) ROE excluding unrealized appreciation Effec. tax rate Debt/total capital (hybrid as equity) Debt/total capital (hybrid as debt) Premiums/stat. surplus Cash flow from operations Average Invested Assets P/T Portfolio Yield (calc) # shares repurchased $ amt shares repurchased 2006 $11,974 (16) 11,958 5,588 986 6,574 3,467 31 1,886 19 1,905 1,454 10 3,369 (89) 3,280 913 2,367 161 2,528 1,166 $5.60 $0.38 $0.00 $0.00 $5.98 $0.00 $5.60 412.5 9.9 422.4 411.3 $0.96 55.1% 29.0% 84.1% 1.4% -2.5% 85.2% $155 $0.24 ($296) ($0.46) 0.4% -2.5% 1.8% -1.8% 10.4% -15.9% 0.9% 50.0% 45.0% 13.5% 77.7 $0.18 $33.71 NA NA 18.2% $33.38 $32.75 19.2% 18.0% 27.8% 15.1% 15.1% 1.1 $3,342 33,142 4.4% 25.4 $1,257.6 2007 $11,872 74 11,946 5,682 617 6,299 3,564 19 2,064 52 2,116 1,590 6 3,712 (149) 3,563 999 2,564 243 2,807 1,273 $6.41 $0.61 $0.00 $0.00 $7.01 $0.00 $6.41 393.6 6.7 400.3 374.6 $1.11 52.8% 30.1% 82.9% 3.0% -5.8% 85.8% $365 $0.59 ($697) ($1.13) 1.7% -0.9% 1.3% -0.1% 9.2% -4.2% 2.8% 8.3% 14.3% 14.4% 77.6 $0.19 $38.56 NA NA 18.9% $37.87 $37.16 19.2% 18.3% 28.0% 19.3% 19.3% 0.9 $3,191 35,923 4.4% 41.7 $2,183.8 2008 $11,782 46 11,828 6,438 490 6,898 3,546 40 1,344 17 1,361 1,622 9 2,992 (214) 2,778 733 2,045 (241) 1,804 1,297 $5.58 ($0.66) $0.00 $0.00 $4.92 $0.00 $5.58 361.1 5.7 366.8 352.3 $1.32 58.5% 30.2% 88.7% 5.2% -7.4% 90.9% $609 $1.08 ($870) ($1.54) 0.1% -0.8% -0.2% -1.0% 1.9% 9.5% -0.5% -20.2% -13.0% -1.1% 76.9 $0.21 $38.13 NA $36.80 15.1% $38.38 $38.53 14.7% 14.7% 26.4% 22.8% 22.8% 1.0 $2,544 36,565 4.4% 26.3 $1,310.5 2009 $11,077 254 11,331 6,006 262 6,268 3,377 28 1,658 (27) 1,631 1,549 (3) 3,177 (238) 2,939 771 2,168 15 2,183 1,252 $6.14 $0.04 $0.00 $0.00 $6.18 $0.00 $6.14 350.1 2.9 353.0 332.0 $1.40 55.5% 30.6% 86.0% 0.8% -6.7% 91.9% $91 $0.17 ($760) ($1.40) -5.1% -6.0% -5.6% -4.2% -3.5% -9.1% -4.8% 6.0% 10.2% 23.5% 73.7 $0.21 $47.09 NA $45.68 15.3% $44.37 $43.95 16.0% 14.9% 26.2% 20.3% 20.3% 0.8 $2,435 36,998 4.2% 22.6 $1,064.7 2010 $11,236 (21) 11,215 6,354 145 6,499 3,496 28 1,192 30 1,222 1,558 2 2,782 (220) 2,562 665 1,897 277 2,174 1,261 $5.90 $0.86 $0.00 $0.00 $6.76 $0.00 $5.90 319.2 2.4 321.6 297.3 $1.48 58.1% 31.2% 89.3% 5.7% -6.6% 90.3% $636 $1.28 ($745) ($1.51) 1.2% 1.4% 1.6% -1.0% 0.7% 3.7% 3.5% -12.5% -4.0% 10.9% 72.9 $0.23 $52.24 NA $50.67 12.8% $49.05 $48.47 13.3% 12.8% 26.0% 20.4% 20.4% 0.8 $2,352 38,078 4.1% 37.6 $2,008.4 2011 $11,758 (114) 11,644 7,046 361 7,407 3,695 31 511 63 574 1,562 21 2,157 (246) 1,911 420 1,491 187 1,678 1,265 $5.12 $0.64 $0.00 $0.00 $5.76 $0.00 $5.12 285.4 6.0 291.4 272.5 $1.56 63.8% 31.5% 95.3% 8.9% -6.6% 93.0% $1,033 $2.31 ($765) ($1.71) 4.7% 4.6% 4.6% 3.8% 0.3% 14.0% 5.7% -21.4% -13.2% 9.4% 75.7 $0.26 $57.15 NA $55.44 10.0% $51.38 $50.78 10.4% 10.3% 22.0% 18.7% 18.7% 0.8 $1,878 38,087 4.1% 27.6 $1,717.6 2012E $12,254 (183) 12,071 6,260 1,080 7,340 3,934 35 762 41 803 1,512 10 2,325 (240) 2,085 488 1,597 1,597 1,225 $5.90 $0.00 $0.00 $0.00 $5.90 $0.00 $5.90 263.6 6.9 270.5 255.9 $1.64 61.0% 32.2% 93.2% 2.9% -3.4% 93.7% $347 $0.83 ($415) ($1.00) 4.2% 4.2% 4.3% 3.7% -3.2% -0.9% 6.5% 7.1% 15.4% 5.0% 78.5 $0.29 $60.03 NA $58.21 10.7% $53.41 $53.25 11.5% 11.4% 23.4% 18.9% 18.9% 0.9 $2,564 38,291 3.9% 16.6 $1,200.0 2013E $12,885 (315) 12,569 6,260 1,504 7,764 4,129 35 641 71 712 1,512 10 2,234 (240) 1,994 456 1,538 1,538 1,225 $6.00 $0.00 $0.00 $0.00 $6.00 $0.00 $6.00 249.3 6.9 256.2 242.6 $1.75 61.9% 32.1% 94.1% 3.1% -2.8% 93.8% $390 $0.99 ($355) ($0.90) 5.1% 5.1% 5.1% 4.1% 0.0% 5.8% 5.0% -3.7% 1.7% 6.0% 81.7 $0.32 $63.66 NA $61.74 10.3% $56.67 $56.51 11.2% 10.9% 22.9% 18.8% 18.8% 0.9 $3,019 39,622 3.8% 13.3 $1,000.0 1Q $2,859 (5) 2,854 1,467 298 1,765 904 8 177 25 202 381 5 588 (63) 525 120 405 104 509 310 $1.35 $0.35 $0.00 $0.00 $1.70 $0.00 $1.35 294.9 5.1 300.0 292.5 $0.39 62.0% 31.7% 93.7% 9.5% -7.7% 92.0% $270 $0.59 ($220) ($0.48) N/A 3.4% 3.5% 2.6% -1.0% 2.0% 4.9% 6.3% 18.7% 10.6% 18.6 $0.06 $53.26 2.0% $51.66 12.9% $50.41 $49.62 $0.11 13.0% 22.9% 20.3% 20.3% 0.8 $491 38,433 4.0% 6.6 $386.6 2011 2Q $3,055 (142) 2,913 1,743 104 1,847 955 8 103 32 135 394 11 540 (63) 477 103 374 45 419 318 $1.27 $0.15 $0.00 $0.00 $1.42 $0.00 $1.27 289.2 6.2 295.4 285.9 $0.39 63.6% 31.3% 94.9% 11.3% -7.0% 90.7% $329 $0.72 ($205) ($0.45) N/A 5.9% 5.9% 4.1% 2.3% 11.3% 7.4% -18.7% -10.1% 11.8% 18.9 $0.06 $55.23 3.7% $53.60 12.3% $51.34 $50.50 10.0% 12.5% 21.6% 20.1% 20.1% 0.8 $357 38,841 4.1% 7.0 $455.0 3Q $2,879 53 2,932 1,728 326 2,054 931 7 (60) 13 (47) 396 8 357 (62) 295 43 252 46 298 321 $0.88 $0.16 $0.00 $0.00 $1.04 $0.00 $0.88 282.0 5.8 287.8 278.1 $0.39 70.2% 32.4% 102.6% 14.4% -5.3% 93.5% $422 $0.95 ($155) ($0.35) N/A 5.4% 5.3% 4.8% 1.3% 35.0% 7.8% -53.1% -48.3% 7.3% 19.1 $0.07 $56.23 1.8% $54.55 10.3% $51.11 $50.89 6.8% 10.6% 14.6% 20.3% 20.3% 0.8 $842 38,804 4.1% 8.0 $480.0 4Q $2,965 (20) 2,945 2,108 (367) 1,741 905 8 291 (7) 284 391 (3) 672 (58) 614 154 460 (8) 452 316 $1.63 ($0.03) $0.00 $0.00 $1.60 $0.00 $1.63 275.3 6.9 282.2 272.5 $0.39 59.3% 30.6% 89.9% 0.4% -6.3% 95.8% $12 $0.03 ($185) ($0.43) N/A 3.9% 3.8% 3.8% -1.3% 9.7% 2.7% -11.4% -3.5% 9.4% 19.1 $0.07 $57.15 1.6% $55.44 10.0% $51.38 $50.78 12.8% 10.3% 25.1% 18.7% 18.7% 0.8 $188 38,192 4.1% 6.0 $396.0 1Q $2,985 (14) 2,971 1,462 300 1,762 956 9 244 3 247 378 3 628 (60) 568 138 430 430 306 $1.55 $0.00 $0.00 $0.00 $1.55 $0.00 $1.55 269.8 6.9 276.7 267.1 $0.41 59.5% 32.1% 91.6% 2.7% -3.5% 92.4% $81 $0.19 ($105) ($0.25) N/A 4.4% 4.4% 4.1% -1.2% -0.2% 5.7% 6.1% 15.0% 8.0% 19.3 $0.07 $57.50 0.6% $55.75 10.2% $51.15 $51.00 12.1% 10.6% 24.4% 18.9% 18.9% 0.9 $678 37,823 4.0% 5.4 $375.0 2012E 2Q 3Q $3,187 $2,992 (183) 40 3,004 3,032 1,601 1,641 200 285 1,801 1,926 966 1,021 9 8 173 133 41 (9) 214 123 378 378 3 3 595 504 (60) (60) 535 444 127 95 408 349 408 349 306 306 $1.50 $0.00 $0.00 $0.00 $1.50 $0.00 $1.50 264.9 6.9 271.8 262.7 $0.41 60.1% 32.1% 92.3% 2.2% -3.5% 93.6% $66 $0.16 ($105) ($0.25) N/A 4.3% 4.4% 3.1% -3.7% -2.5% 6.9% 9.1% 18.6% 5.7% 19.5 $0.07 $58.36 1.5% $56.59 10.4% $51.91 $51.75 11.7% 10.9% 23.7% 18.9% 18.9% 0.9 $684 37,921 4.0% 4.5 $325.0 $1.30 $0.00 $0.00 $0.00 $1.30 $0.00 $1.30 261.5 6.9 268.4 260.3 $0.41 63.7% 32.4% 96.0% 4.5% -3.3% 94.8% $138 $0.33 ($100) ($0.24) N/A 3.9% 4.0% 3.4% -4.6% -6.2% 3.7% 38.5% 48.5% 5.2% 19.7 $0.07 $59.13 1.3% $57.34 11.0% $52.62 $52.46 10.0% 11.6% 21.4% 18.8% 18.8% 0.9 $541 38,242 4.0% 2.4 $175.0 4Q $3,090 (27) 3,064 1,556 295 1,851 993 8 212 6 218 378 3 598 (60) 538 128 410 410 306 $1.55 $0.00 $0.00 $0.00 $1.55 $0.00 $1.55 258.1 6.9 265.0 255.9 $0.41 60.6% 32.2% 92.8% 2.1% -3.4% 94.1% $63 $0.16 ($105) ($0.26) N/A 4.2% 4.4% 4.0% -3.1% 6.3% 9.7% -10.8% -5.0% 5.0% 19.9 $0.08 $60.03 1.5% $58.21 10.7% $53.41 $53.25 11.8% 11.3% 23.8% 18.9% 18.9% 0.9 $662 38,551 3.9% 4.3 $325.0
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PARTNERRE LTD. 1-OVERWEIGHT/1-POSITIVE
PRE: Balanced Reinsurer with Potential for Improving Results

Price 4/11/2012
$66.86
Price Target
$77
52-Wk Price Range

82 - 50
Mkt Cap (Bil)

$4.4

($9.50) $8.10
13E
$7.50
% Change EPS 11/12 12/13

NM -7%

$7.64 $7.37
Div. Yield
3.6%

0.88

0.79 0.69 0.64
P/E 12E
8.3
13E
8.9
ROE 12E 13E

9% 8%
Investment Thesis
Potential Catalysts
PREs recent results have been challenged by large catastrophe losses and the company losing its AA rating. However, PRE benefits from its diversified operations in terms of product lines and geography, and we believe the stock is poised for a recovery once it generates several quarters of consistent earnings. PartnerRe is among the worlds largest reinsurers after its acquisition of ParisRe, which significantly expanded its European presence. PREs capital position was impacted by the 2011 catastrophe losses, although the company maintains a modest excess capital cushion and views share buybacks as attractive at current valuations.
Risks
PREs treaty reinsurance renewal premiums increased slightly y/y at the January 2012 renewals (which accounts for 60% of its total annual non-life treaty business). Meanwhile, PRE reduced its catastrophe exposure, which should result in a higher modeled ROE. PRE has a conservative approach to setting loss reserves. As a result, loss reserve releases could continue, particularly if loss cost trends remain benign. PRE could resume share buybacks in 2012.
Valuation
Similar to other property/casualty insurers, PartnerRe faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, rising interest rates, increased inflation and changes to Bermuda tax advantage. PREs long-term ROE goal of 13% over the course of the cycle could be optimistic in a lower interest rate environment. PREs earnings have benefitted from substantial loss reserve releases, and earnings could face headwinds if this benefit slows.
Since 2000, PRE has traded at a median trailing price to stated book value of 1.20x, with a range of 0.61x1.62x. Since 2008, the median is 0.92x. Our $77 price target is based on 0.8x YE12 estimated book value per share of $96, and a P/E of 10x our 2012 EPS estimate of $8.10. PartnerRe currently trades at 0.79x 2011 book value and 8.3x 2012E EPS of $8.10, which is below other P&C insurers due to its recent challenges including outsized 2011 catastrophe losses.
PartnerRe, based in Bermuda, is a leading global reinsurer providing multiline reinsurance to insurers. Risks reinsured include property, casualty, motor, agriculture, aviation/space, catastrophe, and others
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Figure 251: PRE Major Metrics

$20.00 $15.00
Life, 17% North America, 25%
$14.29 $11.36 $8.43
$14.59
$10.00 $5.00 $0.00
$8.10 $6.29
$7.50
Catastrophe, 13%
Global (Non-US) P&C, 15%
-$5.00 -$10.00
-$9.50
Global (Non-US) Specialty, 30%
-$15.00 2006 2007 2008 2009 2010 2011 2012E 2013E
130% 120%
Book Value $120 $105 $90 $75 $60 $45 $30 $15
Operating ROE 25% 20% 15% 10% 5% 0% -5% -10% -15% Operating ROE
110% 100% 90% 80% 70% 2006
$0
2007
2008
2009
2010
2011 2012E 2013E
2006 2007 2008 2009 2010 2011 2012E 2013E
Combined Ratio
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144
Figure 252: PRE Absolute 1Q Trailing Price-to-Book

1.8 1.6 1.4 1.2 1.0 0.8 0.6
Figure 253: PRE Relative Price-to-Book (S&P Financials)

60% 40% 20% 0% -20% -40% -60% -80%
Figure 254: PRE Price-to-Book Ex Net Unrealized Gains/(Losses)
1.85 1.65 1.45 1.25 1.05 0.85 0.65 1.15 0.65 2.15 1.65
ec -0 0
ec -0 6
ec -0 8 D
ec -9 8
ec -0 0
ec -0 2
ec -0 4
ec -0 6
ec -0 8
ec -1 0
Figure 256: PRE Absolute 4-Qtr Fwd Price-to-Earnings
Figure 257: PRE Relative 4-Qtr Fwd P/E (S&P 500)

20% 0% -20% -40% -60% -80%
N 1 -1 ov N -10 ov N -09 ov N -08 ov N -07 ov N 06 ov N -05 ov N -04 ov N -03 ov N -02 ov N 01 ov N -00 ov N -99 ov
18.0 16.0 14.0 12.0 10.0 8.0 6.0

11 vNo -10 v No -09 v No -08 ov N -07 ov N -06 ov N -05 v No -04 v No -03 ov N -02 ov N -01 ov N -00 v No -99 v No
16 April 2012
ec -1 0
ec -9 8
ec -0 2
ec -0 4
1 -1 ov N 10 ov N 09 ov N -08 ov N 07 ov N 6 -0 ov N 05 ov N 04 ov N 03 ov N -02 ov N 01 ov N 00 ov 9 -9 ov N
2.65
Figure 255: PRE Price-to-Tangible Book
1 -1 ov N -10 ov N -09 ov N -08 ov N -07 ov N -06 ov N -05 ov N -04 ov N 03 ov N -02 ov N -01 ov N -00 ov N -99 ov
145
Figure 258: PRE Annual Summary Model

($ in millions, except per share data)
P&C gross written premiums Life/corp. gross written premiums Total gross written premiums P&C premiums ceded P&C retention rate P&C net written premium Life/corp net written premium Total net written premium P&C net premiums earned Life/corp. net premiums earned Net premium earned Paid losses Change in reserves Losses and loss expenses Acquisition costs Other operating expenses Total Expenses Net investment income Net realized investment gains Other income Interest expense Amortization of intangible assets Net foreign exchange losses (gains) Pretax Income Income Taxes Minority Interest Net Income Preferred Dividends Realized Gains (Losses), A/T Earnings (losses) in equity invst, A/T Net foreign exchange gains (losses), A/T Operating Income Per Share: Operating EPS Realized Gains (Losses), A/T Earnings (losses) in equity invst, A/T Net Income Actual shares outstanding Basic shares Dilution Fully diluted shares Dividend per share P&C Underwriting ratios: Loss Ratio Acquisition ratio Other operating expense ratio P&C Combined ratio CR points from Deepwater Horizon CR points from catastrophes CR points from prior year development P&C C/R ex cats and py dev Year-over-year percentage change: P&C gross Written premium P&C net written premium P&C net premiums earned Net investment income Total underwriting expense Operating income Operating EPS Book value per share A-T impact of 1% change in C/R Per share Book Value Per Share Linked qtr % change in book value per share Book Value excluding net unrealized gains/losses Tangible book value per share Operating ROE Operating ROE (beg equity) Operating ROE (ex FAS 115) Total ROE (ex FAS 115) Debt/Capital (ex FAS 115) Effective Tax Rate (excl. rlzd inv. gains) Average Invested Assets Portfolio yield (pre-tax) Premium-to-Shareholder's Equity Cash flow from operations Shares repurchased $ Repurchased 2007 $3,211 600 3,810 26 99% 3,185 572 3,757 3,204 573 3,777 1,620 462 2,082 850 326 3,328 523 (72) (17) 54 NA 16 883 82 (83) 718 35 (56) (83) NA 822 $14.29 ($0.98) ($1.44) $13.31 54.3 56.1 1.5 57.6 $1.72 50.8% 22.9% 6.7% 80.4% 0.0% 1.5% -12.9% 91.8% -0.2% -0.3% 1.0% 16.4% -0.4% 25.3% 25.8% 21.2% 33.7 $0.50 $67.96 NA $66.68 NA 23.3% 25.2% 23.5% 20.5% 19.1% 10.3% 11,126 4.7% 0.84 1,227 3.6 271 2008 $3,428 600 4,028 35 99% 3,393 596 3,990 3,335 594 3,928 1,581 1,028 2,609 899 365 3,918 573 (531) 10 51 NA (6) 62 10 (6) 47 35 (454) (4) NA 469 $8.43 ($8.15) ($0.07) $0.22 56.5 54.3 1.3 55.6 $1.84 63.9% 23.3% 6.9% 94.2% 0.0% 10.5% -12.5% 96.2% 6.8% 6.5% 4.1% 9.5% 18.9% -42.9% -41.0% -5.9% 34.0 $0.51 $63.95 NA $64.56 $56.48 12.5% 12.3% 12.6% 1.3% 15.9% 14.7% 11,648 4.9% 0.93 1,159 1.5 110 2009 $3,399 602 4,001 48 99% 3,351 598 3,949 3,524 595 4,120 2,044 251 2,295 885 431 3,641 596 680 22 28 (6) 1 1,783 262 16 1,537 35 554 16 1 932 $14.59 $8.67 $0.25 $23.51 84.3 62.8 1.1 63.9 $1.88 52.7% 21.9% 7.2% 81.8% 0.0% 0.0% -13.8% 95.6% -0.8% -1.2% 5.7% 4.0% -6.8% 98.6% 73.0% 32.2% 34.6 $0.48 $84.51 NA $81.73 $79.11 17.3% 25.3% 17.6% 29.0% 4.3% 12.3% 13,882 4.3% 0.48 1,099 2010 $4,132 752 4,884 171 96% 3,961 745 4,705 4,030 747 4,776 2,579 705 3,284 973 540 4,861 673 401 10 44 31 21 969 129 13 853 35 301 12 13 492 $6.29 $3.85 $0.15 $10.46 71.3 76.8 1.4 78.2 $2.10 64.6% 21.1% 7.9% 93.7% 1.6% 13.4% -11.5% 90.1% 21.6% 18.2% 14.4% 12.9% 32.8% -47.2% -56.9% 11.0% 44.7 $0.49 $93.77 NA $88.66 $84.88 7.1% 6.9% 7.4% 12.9% 11.4% 5.1% 16,225 4.1% 0.62 1,209 14.1 1,082 2011 $3,831 802 4,633 142 96% 3,689 797 4,486 3,844 803 4,648 2,991 1,382 4,373 938 435 5,760 629 67 8 49 36 (35) (445) 69 (6) (520) 47 15 (7) 66 (642) ($9.50) $0.22 ($0.11) ($8.40) 65.7 67.6 67.6 $2.35 96.7% 21.4% 7.4% 125.4% 0.0% 44.3% -13.8% 94.9% -7.3% -6.9% -4.6% -6.5% 19.8% NM NM -9.5% 46.4 $0.59 $84.82 NA $77.94 $75.85 -10.5% -9.6% -11.2% -9.1% 13.7% -3.4% 16,520 3.8% 0.69 573 5.4 397 2012E $4,027 710 4,737 145 96% 3,883 710 4,593 3,816 749 4,565 2,600 480 3,080 904 460 4,493 630 49 40 662 86 576 65 511 $8.10 $0.00 $0.00 $8.10 58.6 62.1 1.0 63.1 $2.48 65.1% 20.6% 7.3% 93.0% 0.0% 6.4% -9.0% 95.7% 5.1% 5.2% -0.7% 0.1% -22.7% NM NM 13.5% 40.0 $0.53 $96.23 NA $86.15 $86.17 9.1% 9.2% 10.0% 11.3% 13.9% 13.0% 16,761 3.8% 0.71 616 7.1 500 2013E $4,337 710 5,047 159 96% 4,178 710 4,888 4,030 710 4,740 2,600 705 3,305 951 460 4,765 630 49 40 565 74 492 65 427 $7.50 $0.00 $0.00 $7.50 53.3 55.9 1.0 56.9 $2.75 68.0% 20.6% 6.9% 95.5% 0.0% 6.2% -6.0% 95.4% 7.7% 7.6% 5.6% 0.0% 6.1% NM NM 8.8% 42.5 $0.62 $104.71 NA $93.62 $93.65 7.6% 7.6% 8.5% 9.8% 14.0% 13.0% 16,956 3.7% 0.78 532 5.3 400 1Q $1,348 210 1,558 86 94% 1,262 208 1,470 881 184 1,065 525 1,082 1,607 208 104 1,931 152 (112) 2 12 9 (1) (834) (26) 1 (807) 9 (88) 1 7 (736) ($10.82) ($1.30) $0.02 ($11.99) 68.5 68.0 68.0 $0.55 166.1% 20.2% 7.5% 193.8% 0.0% 115.6% -16.1% 94.3% -21.6% -21.5% -10.9% -12.4% 41.1% NM NM -1.9% 14.6 $0.13 $82.50 -12.0% $78.97 $73.43 -47.7% -44.0% -50.1% -55.0% 13.1% 0.3% 16,552 3.7% 0.66 486 2.8 227 2011 2Q $883 199 1,082 26 97% 857 199 1,056 905 202 1,107 617 198 815 229 114 1,161 158 78 2 12 9 (9) 175 50 (1) 124 9 41 (2) 9 67 $0.98 $0.60 ($0.02) $1.69 68.6 67.6 0.8 68.4 $0.60 71.4% 22.4% 7.8% 101.7% 0.0% 19.7% -17.8% 99.8% -9.2% -8.7% -2.8% -9.2% 4.4% NM NM -1.9% 9.2 $0.11 $83.71 1.5% $78.59 $74.81 4.7% 4.0% 5.0% 9.2% 13.1% 13.2% 17,129 3.7% 0.64 256 3Q $895 200 1,095 15 98% 880 200 1,080 1,083 211 1,294 1,063 (181) 882 262 104 1,250 164 26 1 12 10 (11) 226 42 (5) 180 14 6 (5) (0) 164 $2.41 $0.09 ($0.07) $2.43 68.2 67.7 0.4 68.2 $0.60 65.6% 21.1% 6.4% 93.1% 0.0% 16.4% -16.2% 92.9% 8.6% 9.5% -4.0% -0.5% 10.6% NM NM -8.5% 9.6 $0.14 $85.26 1.9% $77.90 $76.49 11.4% 9.8% 12.3% 13.5% 13.3% 10.9% 17,213 3.8% 0.41 (159) 4Q $705 193 898 15 98% 690 190 880 975 206 1,181 786 284 1,069 239 113 1,419 156 75 3 12 9 (15) (13) 3 (1) (18) 15 56 (2) 50 (138) ($2.06) $0.84 ($0.03) ($0.49) 65.7 66.9 66.9 $0.60 92.1% 21.6% 8.0% 121.7% 0.0% 33.8% -5.3% 93.2% 14.6% 12.9% -0.7% -3.3% 18.7% NM NM -9.5% 7.3 $0.12 $84.82 -0.5% $77.94 $75.85 -9.7% -8.2% -10.6% -1.4% 13.7% 17.0% 16,747 3.7% 0.69 (10) 2.6 170 1Q $1,415 190 1,605 92 94% 1,323 190 1,513 938 195 1,133 650 106 756 224 111 1,103 158 12 10 177 23 154 16 138 $2.10 $0.00 $0.00 $2.10 63.8 64.8 1.0 65.8 $0.62 64.2% 20.7% 7.0% 91.9% 0.0% 4.0% -8.2% 96.1% 5.0% 4.9% 6.4% 3.9% -43.2% NM NM 8.2% 13.2 $0.12 $89.24 5.2% $79.98 $80.00 9.8% 9.9% 10.8% 12.1% 13.8% 13.0% 16,840 3.7% 0.68 164 1.9 135 2012E 2Q $928 180 1,108 29 97% 900 180 1,080 948 191 1,139 650 122 772 221 116 1,121 158 12 10 165 21 144 16 128 $2.00 $0.00 $0.00 $2.00 61.9 62.8 1.0 63.8 $0.62 65.1% 20.6% 7.5% 93.2% 0.0% 4.7% -8.3% 96.8% 5.1% 5.0% 4.8% -0.5% -4.2% NM NM 9.4% 9.4 $0.13 $91.54 2.6% $81.99 $82.02 9.0% 9.2% 10.0% 11.3% 13.8% 13.0% 17,050 3.7% 0.70 154 1.9 135 3Q $941 180 1,121 16 98% 925 180 1,105 959 186 1,145 650 128 778 231 120 1,142 158 12 10 151 20 132 16 115 $1.85 $0.00 $0.00 $1.85 60.6 61.2 1.0 62.2 $0.62 66.1% 20.6% 7.8% 94.5% 0.0% 10.4% -10.8% 94.9% 5.2% 5.1% -11.4% -3.8% -9.5% NM NM 9.7% 9.6 $0.13 $93.55 2.2% $83.80 $83.82 8.1% 8.3% 9.1% 10.4% 13.8% 13.0% 17,054 3.7% 0.45 142 1.3 90 4Q $743 160 903 8 99% 735 160 895 971 178 1,148 650 125 775 228 112 1,128 158 12 10 168 22 146 16 130 $2.15 $0.00 $0.00 $2.15 58.6 59.6 1.0 60.6 $0.62 65.0% 20.4% 7.0% 92.4% 0.0% 6.2% -8.7% 94.9% 5.4% 6.5% -0.4% 1.3% -21.5% -194.5% -204.3% 13.5% 7.8 $0.14 $96.23 2.9% $86.15 $86.17 9.2% 9.3% 10.3% 11.6% 13.9% 13.0% 16,892 3.7% 0.71 156 2.0 140
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146
XL GROUP PLC 1-OVERWEIGHT/1-POSITIVE
XL: P&C Business Has Stabilized, Valuation Attractive

Price 4/11/2012
$21.18
Price Target
$25
52-Wk Price Range

0.75
Mkt Cap (Bil)

$6.7

$0.28 $2.10
13E
$2.20
% Change EPS 11/12 12/13

NM 5%

$1.86 $2.16
Div. Yield
2.1%

0.71 0.66 0.61
P/E 12E
10.1
13E
9.6
ROE 12E 13E

7% 7%
Investment Thesis
Potential Catalysts
XL's P&C business has stabilized and its balance sheet looks strong. The company is well positioned to generate profitable growth in an improving environment and is our top value pick within P&C insurance. XLs 2012 earnings should benefit from continued topline growth opportunities, accident year underwriting margin expansion versus 2011, and share buybacks. Our sense is the 2012 consensus EPS outlook for XL is too low. XLs ROE should improve measurably in 2012 and rise to attractive levels in 2013 (long-term ROE goal is 15%, but it faces likely downward pressure in a low interest rate environment).
Risks
XL appears confident it can improve its underlying underwriting results in 2012, especially in the U.S. and International Insurance businesses. XL plans to increase its operating expenses by $100mn in 2012 vs $1.1bn in 2011 as it invests in the business, although XL can reduce this increased spend by nearly half if margin expansion does not materialize. Share buybacks could exceed our outlook and the company likely has several billion dollars of excess capital. The companys debt/capital ratio is in line with its target, which provides increased flexibility for share buybacks. We estimate XL could repurchase at least $400mn of stock in 2012.
Valuation
Rising interest rates could have an outsized impact on XLs book value versus peers. Similar to other property/casualty insurers, XL faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, rising interest rates and increased inflation. XL still has significant structured credit and other exposures in its investment portfolio relative to its capital base. XL has higher D&O/E&O exposure than other P&C insurers, although this risk appears manageable.
Since 2000, XL has traded at a median trailing price to stated book value of 1.39x, with a range of 0.19x2.45x. Since 2008, the median is 0.70x. Our $25 price target is based on 0.8x YE12 estimated book value per share of $33, and a P/E of 12x our 2012 EPS estimate of $2.10. XL currently trades at 0.71x 2011 book value and 10.1x 2012E EPS of $2.10, which is below other P&C insurers.
XL Group is domiciled in Dublin, Ireland, and has substantial operations in Bermuda, the United States, and Europe. The company writes commercial P&C insurance and reinsurance.
16 April 2012
147
Figure 260: XL Major Metrics


Life Operations 6%
$12.00 $10.00 $8.00 $6.00 $9.79 $9.62
Reinsurance 30%
Insurance 64%
$4.00 $2.00
$3.49
$2.91
$2.40 $0.28
$2.10
$2.20
$0.00 2006 2007 2008 2009 2010 2011 2012E 2013E
110%
Book Value $60 $50
Operating ROE 25% 20% 15%

Operating ROE
100%
$40 $30 10% $20 $10 5% 0% 2006 2007 2008 2009 2010 2011 2012E 2013E
90%
80% 2006
2007
2008
2009
2010
2011
2012E
2013E
$0
Combined Ratio
16 April 2012
148
Figure 261: XL Absolute 1Q Trailing Price-to-Book

2.5 2.0 1.5 1.0 0.5 0.0
N
2.00 1.50 1.00 0.50 0.00
ec -0 2 ec -0 4 ec -0 6 ec -9 8 ec -0 0 ec -0 8 ec -1 0 D
Figure 262: XL Relative Price-to-Book (S&P Financials)
-5% -25% -45% -65% -85%

1 -1 ov N 10 ov N -09 ov N 08 ov N 07 ov N 06 ov N -05 ov N 04 ov N 03 ov N 02 ov N -01 ov N 00 ov N 99 ov N 9 -9 ov N 1 -0 ov N 3 -0 ov N 5 -0 ov N 7 -0 ov N 9 -0 ov N 1 -1 ov
Figure 263: XL Price-to-Book Ex Net Unrealized Gains/(Losses)
Figure 264: XL Price-to-Tangible Book
3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
Figure 265: XL Absolute 4-Qtr Fwd Price-to-Earnings

35.0 30.0 25.0 20.0
Figure 266: XL Relative 4-Qtr Fwd P/E (S&P 500)

100%
50%
0% 15.0 10.0 5.0 0.0

D 1 -1 ec D 10 ec D -09 ec D 08 ec D -07 ec D 06 ec D -05 ec D 04 ec D -03 ec D 02 ec D -01 ec D -00 ec D 99 ec
-50%
-100%
1 -1 ov N -10 ov N -09 ov N -08 ov N -07 ov N -06 ov N -05 ov N -04 ov N -03 ov N -02 ov N -01 ov N -00 ov N -99 ov N
16 April 2012
ec -1 0
149
ec -0 0
ec -0 2
ec -0 8
ec -9 8
ec -0 4
ec -0 6
Figure 267: XL Annual Summary Model

(Figures in $ millions, except per share)
General operations gross premiums written General operations premiums ceded General operations net premiums written General operations retention rate Total gross premiums written Total net premiums written Change in U.P.R. Net premium earned-general operations Net premium earned-financial operations Net premium earned-life operations Pretax investment income-general operations Pretax investment income-SCA and fin lnes Pretax investment income-life Total investment income Equity in net income of invest. affil. Net realized gains on investments Net realized gains on derivatives Fee income Total revenue General Op's-changes in net reserves General Op's-paid losses and loss expense Total losses and loss expenses Change in policy benefit reserves Acquisition costs and admin. expenses Exchange (gains) losses Interest expense Debt extinguishment costs Amortization of intangibles Loss on settlement of guarantee Impairment of Goodwill Total losses & expenses Pretax income Income taxes Minority interest Equity in net (income) of insurance affiliates Charge related to Syncora Net income Preferred dividend Gain on debt repurchase Non-controlling interest in net income of subsidiary Net income available to ordinary shareholders Net realized (gains)/losses on investments Net realized and unreal. (gains)/losses on derivatives Net realized and unreal. (gains)/losses on inv and deriv of Foreign exchange (gains) losses), net of tax Unusual items Operating income Total operating expenses Per share data Net income Net realized (gains)/losses on investments Net realized and unreal. (gains)/losses on derivatives Net realized and unreal. (gains)/losses on inv and deriv of One-time charges Operating EPS (a) Actual shares outstanding Wtd. avg. basic shares Effect of potentially dilutive securities Wtd. ave. diluted shares Operating return on average equity Operating return on average equity ex AOCI Reported cash flow from operations (d) Balance sheet Book value per share Fully Diluted Book Value per share Linked qtr % change in book value per share Book value per share ex. AOCI Tangible Book Value per share Linked qtr % change in tangible book value per share Debt/capital Debt/capital ex equity units Debt+pref/capital Dividends per share General operations underwriting ratios Loss ratio Acquisition expense ratio Admin expense ratio Expense ratio Combined ratio CR points, catastrophes (c) CR points, net PY devel. Combined ratio ex. cats and dev. Year-over-year percent change Gross written premium-general op's. Net premiums written-general op's. Premiums earned-general op's. Pretax investment income (total) Operating EPS Book Value Per Share Effective tax rate A-T impact of 1% change in C/R-general op's Per share Average invested assets Portfolio Yield Shares Repurchased Shares Repurchased (in $) -6.9% -4.1% -4.6% 13.7% -1.7% -5.3% 14.7% 54.8 $0.30 39,077 4.8% 13.2 $1,121.9 -6.5% -8.9% -6.7% -21.3% -63.7% -69.3% -25.5% 75.2 $0.31 33,871 4.1% -19.3% -17.3% -14.0% -25.4% -16.7% 59.3% 89.3% 5.5 $0.02 30,711 3.2% 2.5% 5.4% -2.3% -9.2% -17.6% 23.3% 23.8% 38.4 $0.11 29,221 3.0% 25.7 $528.2 10.2% 8.7% 5.9% -5.0% -88.2% -1.7% -14.2% 60.8 $0.19 27,229 3.0% 31.7 $666.5 5.0% 4.8% 5.4% -4.9% NM 9.0% 13.0% 48.8 $0.16 26,689 2.9% 19.0 $400.0 5.0% 5.1% 2.9% 0.0% 4.7% 7.2% 13.0% 50.2 $0.17 26,993 2.9% 17.4 $400.0 9.2% 7.4% 0.6% -9.1% NM 13.3% 13.6% 11.0 $0.04 27,761 2.9% 7.3 $166.7 16.9% 17.2% 7.4% -2.0% 6.0% 13.5% 12.0% 11.5 $0.04 27,972 3.1% 4.3 $92.3 16.4% 10.9% 7.4% -2.2% -45.1% 3.1% 37.7% 8.5 $0.03 27,904 3.0% 15.1 $307.7 -3.5% -0.2% 8.1% -6.7% NM -1.7% -9.5% 15.2 $0.05 27,063 2.8% 4.9 $99.9 5.0% 5.1% 8.5% -3.7% NM 2.8% 13.0% 12.0 $0.04 26,819 2.9% 4.8 $100.0 5.0% 5.1% 7.0% -8.6% -19.6% -0.3% 13.0% 12.2 $0.04 27,040 2.9% 4.8 $100.0 5.0% 5.1% 3.7% -6.6% 40.9% 2.8% 13.0% 12.3 $0.04 27,029 2.9% 4.8 $100.0 5.1% 3.5% 2.6% -0.3% NM 9.0% 13.0% 12.4 $0.04 26,898 2.9% 4.8 $100.0 59.8% 15.1% 13.9% 28.9% 88.7% 2.1% -6.8% 93.4% 66.2% 14.2% 14.6% 28.8% 94.9% 6.3% -10.3% 98.9% 61.5% 15.1% 16.9% 31.9% 93.4% 1.1% -5.5% 97.8% 63.8% 14.7% 16.3% 30.9% 94.8% 6.4% -7.4% 95.8% 76.6% 14.8% 16.1% 30.9% 107.5% 14.3% -5.3% 98.5% 66.0% 14.8% 16.5% 31.4% 97.4% 4.6% -3.5% 96.2% 66.1% 15.3% 16.1% 31.4% 97.5% 4.0% -1.9% 95.4% 95.1% 14.2% 16.5% 30.7% 125.8% 30.5% -5.6% 100.9% 63.1% 15.7% 16.1% 31.8% 94.9% 5.2% -9.8% 99.4% 72.5% 14.6% 14.6% 29.1% 101.6% 8.1% -1.4% 94.9% 76.3% 14.5% 17.4% 31.9% 108.2% 14.1% -4.9% 99.1% 66.5% 14.3% 16.0% 30.4% 96.9% 5.0% -5.1% 96.9% 65.5% 14.6% 16.4% 31.0% 96.5% 2.6% -2.4% 96.3% 67.8% 15.1% 16.7% 31.8% 99.5% 6.8% -3.5% 96.2% 64.2% 15.3% 17.1% 32.4% 96.5% 4.0% -3.0% 95.5% $50.30 $50.29 NA $50.24 39.9 NA 22.4% 16.6% 30.2% $1.52 $15.46 $15.46 NA $25.63 $12.88 NA 32.5% 24.9% 47.8% $1.28 $24.64 $24.60 NA $27.93 $22.13 NA 20.3% 20.3% 30.1% $0.40 $30.37 $29.78 NA $29.47 $27.18 NA 18.6% 18.6% 26.8% $0.40 $29.85 $29.64 NA $27.80 $28.56 NA 17.4% 17.4% 27.7% $0.44 $32.54 $32.29 NA $30.34 $30.93 NA 13.1% 13.1% 23.8% $0.48 $34.87 $34.59 NA $32.52 $33.14 NA 13.1% 13.1% 23.6% $0.52 $29.95 $29.03 -2.5% $28.48 $26.39 -2.9% 19.1% 14.6% 27.5% $0.11 $31.54 $30.87 6.4% $29.52 $28.17 6.7% 18.6% 14.2% 26.8% $0.11 $31.01 $30.80 -0.2% $29.39 $28.20 0.1% 17.2% 17.2% 24.7% $0.11 $29.85 $29.64 -3.8% $27.80 $28.36 0.5% 17.4% 17.4% 27.7% $0.11 $30.79 $30.57 3.1% $28.22 $29.27 3.2% 13.2% 13.2% 23.9% $0.12 $31.43 $31.20 2.1% $28.82 $29.88 2.1% 13.2% 13.2% 23.8% $0.12 $31.88 $31.64 1.4% $29.22 $30.30 1.4% 13.2% 13.2% 23.8% $0.12 $32.54 $32.29 2.1% $29.84 $30.93 2.1% 13.1% 13.1% 23.8% $0.12 $1.15 $3.09 $0.38 $4.99 $0.00 $9.62 177.9 178.2 1.4 179.6 18.6% 19.0% 2,240.9 ($10.94) $3.94 $0.35 $0.14 $10.00 $3.49 330.8 240.7 0.3 240.7 12.0% 9.6% (427.2) $0.61 $2.60 $0.10 ($0.01) ($0.62) $2.91 342.2 340.6 0.4 341.0 14.7% 11.0% (42.8) $1.73 $0.63 $0.10 ($0.16) ($0.05) $2.40 316.5 336.3 1.4 337.7 9.0% 8.5% 594.8 ($1.52) $0.56 $0.01 ($0.00) $1.32 $0.28 315.7 312.9 3.4 316.3 0.9% 1.0% 327.2 $2.10 $0.00 $0.00 $0.00 $0.00 $2.10 296.7 306.2 0.8 307.0 6.8% 7.2% 1,305.3 $2.20 $0.00 $0.00 $0.00 $0.00 $2.20 279.3 288.0 0.8 288.8 6.6% 7.0% 1,188.3 ($0.73) $0.20 ($0.02) ($0.00) $0.00 ($0.52) 309.4 311.5 311.5 -6.9% -7.0% 63.3 $0.69 $0.03 $0.04 $0.00 $0.00 $0.75 305.2 342.0 324.2 10.3% 10.6% 44.0 $0.14 $0.19 $0.07 ($0.00) $0.00 $0.28 320.6 311.7 2.1 313.8 3.6% 3.8% 258.2 ($1.62) $0.14 ($0.08) ($0.00) $1.30 ($0.25) 315.7 319.1 319.1 -3.3% -3.5% (38.3) $0.50 $0.00 $0.00 $0.00 $0.00 $0.50 310.9 313.3 0.8 314.1 6.6% 7.1% 711.9 $0.59 $0.00 $0.00 $0.00 $0.00 $0.60 306.2 308.6 0.8 309.4 7.8% 8.4% 301.0 $0.40 $0.00 $0.00 $0.00 $0.00 $0.40 301.4 303.8 0.8 304.6 5.1% 5.5% 242.7 $0.60 $0.00 $0.00 $0.00 $0.00 $0.60 296.7 299.0 0.8 299.8 7.5% 8.1% 49.6 7,542.1 1,593.6 233.9 23.9 1,059.8 275.9 69.5 206.4 555.4 68.7 896.6 1,727.1 1,144.9 990.0 8,021.1 (873.0) 222.6 1,458.2 (2,553.8) 78.6 (2,632.5) 948.1 85.2 33.8 2,405.7 840.3 1,171.9 6,055.7 134.7 120.3 (60.5) 74.9 80.2 211.8 (0.1) 206.6 891.3 34.7 (3.5) 75.0 (211.8) 992.3 1,063.6 2007 $8,097.8 1,800.0 6,297.7 77.8% 8,998.0 7,126.9 78.5 6,418.6 85.7 701.0 1,421.1 437.5 390.2 2,248.8 326.0 (603.3) (55.5) 14.3 9,135.7 24.6 3,815.0 3,841.0 888.7 2,208.6 (19.7) 621.9 1.7 2008 $7,569.4 1,831.1 5,738.3 75.8% 8,260.3 6,388.1 252.0 5,990.3 649.9 1,285.6 100.4 383.0 1,769.0 (277.7) (962.1) (73.4) 52.2 7,148.1 171.9 3,791.0 3,962.9 769.0 2,106.4 (184.5) 351.8 22.5 3.0 2009 $6,111.3 1,367.6 4,743.7 77.6% 6,687.5 5,276.6 430.3 5,151.7 555.1 962.1 25.3 332.4 1,319.8 78.9 (921.4) (33.6) 40.0 6,190.4 (707.2) 3,876.0 3,168.8 677.6 1,906.2 84.8 216.5 1.8 2010 $6,261.3 1,261.7 4,999.6 79.8% 6,673.3 5,381.7 32.4 5,031.1 382.9 872.4 12.5 313.2 1,198.0 51.1 (270.8) (33.8) 40.0 6,398.6 (257.2) 3,469.0 3,211.8 513.8 1,759.4 (10.2) 213.6 1.9 23.5 5,713.8 684.7 162.7 (121.4) 643.4 74.5 16.6 0.0 585.5 265.4 35.3 (52.6) (7.3) (16.6) 809.6 971.1 2011 $6,898.3 1,464.9 5,433.4 78.8% 7,292.8 5,795.8 (105.6) 5,327.1 363.0 819.7 318.1 1,137.8 26.3 (188.4) (10.7) 41.7 6,696.8 231.4 3,847.0 4,078.4 535.1 1,908.9 (40.6) 205.6 1.4 429.0 7,117.8 (421.0) 59.7 (76.8) (403.9) 70.9 (474.8) 178.4 3.9 (0.3) (34.0) 416.2 89.5 1,082.5 2012E $7,246.0 1,553.4 5,692.6 78.6% 7,646.0 6,049.6 (77.6) 5,614.0 358.0 780.0 302.0 1,082.0 90.0 44.0 7,188.0 (46.0) 3,750.0 3,704.0 513.0 2,062.0 196.0 2.0 6,477.0 711.0 92.4 (100.0) 718.6 73.0 645.6 645.6 1,186.0 635.5 1,188.0 6,642.0 699.4 90.9 (100.0) 708.5 73.0 635.5 2013E $7,610.0 1,625.8 5,984.2 78.6% 8,015.0 6,354.2 (218.8) 5,775.4 360.0 780.0 302.0 1,082.0 80.0 44.0 7,341.4 65.0 3,750.0 3,815.0 512.0 2,117.0 196.0 2.0 1Q $2,099.1 384.8 1,714.3 81.7% 2,196.8 1,804.0 (442.6) 1,271.7 89.7 203.3 77.0 280.3 27.2 (66.4) 3.6 8.9 1,614.9 133.9 1,075.0 1,208.9 133.2 449.0 9.5 54.1 0.5 1,855.2 (240.4) (32.8) (13.6) (193.9) 33.3 (227.3) 63.3 (5.2) (0.8) 7.2 (162.8) 260.5 2011 2Q $1,762.4 456.4 1,306.1 74.1% 1,862.7 1,398.3 0.1 1,306.1 92.2 214.4 82.1 296.5 10.3 (9.5) (11.0) 10.6 1,695.2 (9.4) 833.0 823.6 137.4 481.2 (8.5) 55.1 0.0 1,488.8 206.3 24.8 (46.3) 227.8 2.1 225.7 9.4 12.6 0.9 (5.5) 243.1 266.1 3Q $1,776.2 483.5 1,292.7 72.8% 1,876.7 1,383.5 69.9 1,362.5 90.8 209.8 80.3 290.1 (7.1) (62.4) (26.9) 11.0 1,658.0 24.1 964.0 988.1 139.5 454.5 (39.4) 48.9 0.9 1,592.5 65.6 24.7 (35.6) 76.4 34.0 42.4 59.6 23.1 (0.1) (36.2) 88.8 246.9 4Q $1,260.6 140.2 1,120.3 88.9% 1,356.6 1,210.1 267.0 1,386.8 90.3 192.2 78.7 270.9 (4.0) (50.0) 23.6 11.3 1,728.7 82.9 975.0 1,057.9 124.9 524.2 (2.2) 47.4 0.0 429.0 2,181.2 (452.5) 43.0 18.7 (514.1) 1.4 (515.5) 46.1 (26.6) (0.3) 0.5 416.2 (79.6) 308.9 1Q $2,205.0 402.6 1,802.4 81.7% 2,303.0 1,890.4 (420.0) 1,380.4 90.0 195.0 75.0 270.0 25.0 11.0 1,776.4 (19.5) 937.5 918.0 127.0 494.3 49.0 0.5 1,588.8 187.6 24.4 (25.0) 188.2 31.0 157.2 157.2 285.3 2012E 2Q $1,851.0 478.1 1,372.9 74.2% 1,951.0 1,462.9 26.2 1,397.1 92.0 195.0 76.0 271.0 25.0 11.0 1,796.1 (22.5) 937.5 915.0 133.0 507.3 49.0 0.5 1,604.8 191.3 24.9 (25.0) 191.5 5.0 186.5 186.5 293.3 3Q $1,865.0 507.0 1,358.0 72.8% 1,966.0 1,448.0 57.4 1,413.4 92.0 195.0 76.0 271.0 20.0 11.0 1,807.4 20.5 937.5 958.0 128.0 524.3 49.0 0.5 1,659.8 147.6 19.2 (25.0) 153.4 32.0 121.4 121.4 300.3 1,623.8 184.4 24.0 (25.0) 185.5 5.0 180.5 180.5 307.3 4Q $1,325.0 165.7 1,159.4 87.5% 1,426.0 1,248.4 258.8 1,423.2 84.0 195.0 75.0 270.0 20.0 11.0 1,808.2 (24.5) 937.5 913.0 125.0 536.3 49.0 0.5
16 April 2012
150
RENAISSANCERE HOLDINGS LTD. 2-EQUAL WEIGHT/1-POSITIVE
RNR: Superior Property Catastrophe Reinsurer

Price 4/11/2012
$74.79
Price Target
$85
52-Wk Price Range

1.28
Mkt Cap (Bil)

$3.9

($3.22) $8.15
13E
$7.50
% Change EPS 11/12 12/13

NM -8%

$8.30 $8.96
Div. Yield
1.4%

1.26 1.12 1.03
P/E 12E
9.2
13E
10.0
ROE 12E 13E

13% 11%
Investment Thesis
Potential Catalysts
Renaissance Re is a disciplined property catastrophe reinsurer with a growing presence in specialty reinsurance and Lloyds. The company has one of the best long-term track records in terms of both book value per share growth and returns on equity. We could become more favorable in our outlook for RNR shares if its valuation became more attractive. RNR invests heavily in its catastrophe modelling capabilities resulting in lower-than-peer claims costs in major industry loss events and above-peer ROEs.
Risks
RNR could benefit from higher U.S. property catastrophe reinsurance rates, although we expect property catastrophe reinsurance rate increases at the mid-year 2012 renewals increase about 5-10%, which is likely less than many investors are hoping for. RNR has opportunities to write additional business in the U.S. for nationwide covers and stressed regional insurers, as well as in its retrocessional, Lloyds and specialty reinsurance business. Despite large 2011 catastrophe losses, the companys capital position remains strong and its total capital managed inclusive of joint ventures approaches $7 billion, which is significant versus peers. RNR is unlikely to repurchase stock until after the 2012 hurricane season.
Valuation
Similar to other property/casualty reinsurers, RNR faces risks if property catastrophe reinsurance price increases do not persist, as well as from catastrophes and other large losses. RNRs earnings have benefitted from favorable loss reserve development, and earnings could face headwinds if this slows. Also, RNR faces the risk of adverse development from catastrophe losses, although its track record in estimating catastrophe losses is strong. Over half of RNRs IBNR reserves are related to earthquake claims and could be volatile because these losses are slower to develop than hurricanes. RNRs investment returns can be volatile due in part to its alternative investment exposure.
Since 2000, RNR has traded at a median trailing price to stated book value of 1.52x, with a range of 0.99x2.63x. Since 2008, the median is 1.17x. Our $85 price target is based on 1.3x YE12 estimated book value per share of $67, and a P/E of 10x our 2012 EPS estimate of $8.15. RNR currently trades at 1.26x 2011 book value and 9.2x 2012E EPS of $8.15, which is above other P&C insurers due to its strong track record.
RenaissanceRe, based in Bermuda, was established in 1993 to write principally property catastrophe reinsurance and today is a leading global provider of reinsurance and insurance coverage and related services.
16 April 2012 151
Figure 269: RNR Major Metrics

$15.00 $12.50 $12.25 $11.05 $10.24 $9.32 $8.15 $7.50

Lloyd's 10% Reinsurance Specialty 14%
$10.00 $7.50 $5.00 $2.50 $0.00 -$2.50
$3.04
Reinsurance Catastrophe 76%

-$5.00 2006 2007 2008 2009 2010
-$3.22 2011 2012E 2013E
140% 120%
Book Value $80 $70 Book Value Per Share $60 $50 $40 $30 $20 $10
Operating ROE 50% 40% 30% 20% 10% 0% -10% Operating ROE
100% 80% 60% 40% 20% 2006 2007 2008 2009 2010 2011 2012E 2013E
$0 2006 2007 2008 2009 2010 2011 2012E 2013E
Combined Ratio
16 April 2012
152
Figure 270: RNR Absolute 1Q Trailing Price-to-Book

2.6 2.3 2.0 1.7 1.4 1.1 0.8
Figure 271: RNR Relative Price-to-Book (S&P Financials)

80% 40% 0% -40% -80%
Figure 272: RNR Price-to-Book Ex Net Unrealized Gains/(Losses)

2.70 2.50 2.30 2.10 1.90 1.70 1.50 1.30 1.10 0.90
Fe b07
Fe b01
Fe b9 Fe 9 b0 Fe 0 b0 Fe 1 b0 Fe 2 b0 Fe 3 b0 Fe 4 b0 Fe 5 b0 Fe 6 b0 Fe 7 b0 Fe 8 b09 Fe b1 Fe 0 b1 Fe 1 b12
Figure 274: RNR Absolute 4-Qtr Fwd Price-to-Earnings
Figure 275: RNR Relative 4-Qtr Fwd P/E (S&P 500)
20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0

1 -1 ec D -10 ec D -09 ec D -08 ec D -07 ec D -06 ec D -05 ec D -04 ec D -03 ec D -02 ec D -01 ec D -00 ec D -99 ec D
90% 60% 30% 0% -30% -60% -90%

1 -1 ec D -10 ec D -09 ec D -08 ec D -07 ec D -06 ec D -05 ec D -04 ec D -03 ec D -02 ec D -01 ec D -00 ec D -99 ec D
16 April 2012
Fe b03
Fe b99
Fe b05
Fe b11
Fe b09
N ov
N ov 9 -9
N ov 0 -0
N ov 1 -0
N ov 2 -0
N ov 3 -0
N ov 4 -0
N ov 5 -0
N ov 7 -0
N ov 6 -0
N ov 8 -0
N ov 1 -1 0 -1
1 -1 ov 0 N -1 ov N 09 ov N 08 ov N 07 ov 6 N -0 ov N 05 ov N 04 ov 3 N -0 ov N 02 ov N 01 ov N 00 ov 9 -9 ov N
ov
9 -0
Figure 273: RNR Price-to-Tangible Book
2.30 2.10 1.90 1.70 1.50 1.30 1.10 0.90
153
Figure 276: RNR Annual Summary Model

(Dollars in millions, except per share)
Gross written premium Premiums ceded Net premiums written Net retention Change in U.E.P. Net premiums earned Realized capital gain (loss) Other income Foreign exchange gain (loss) Bond investment income Other Investment Returns (HF & PE) Total net investment income Total revenues Paid losses Net change in reserves Losses & loss expenses Acquisition expenses Operating expenses Corporate expenses Interest expense Total Expenses Income before minority interests Minority Interest - daVinci Discontinued operations Income before taxes Income tax expense Dividends on preference shares Net income Less capital gains, A/T Less unusual items, A/T Operating income avail to RNR shrhdrs Amount allocated to partic. common shareholders Operating earnings used to calc EPS Per share data Operating EPS Realized capital gain (loss) Net EPS Dividends per share Actual shares o/s Average basic shares o/s Dilution Wtd. ave. diluted shares outstanding Book value per share Linked qtr % change in book value per share Book value per share excluding AOCI Return on average equity Return on average equity ex AOCI Tangible book value per share Underwriting ratios Loss ratio Acquisition expense Operating expenses Expense ratio Combined ratio CR Points large catastrophes CR Points PY devel. CR ex. large cats + PY devel. A-T impact of 1% change in C/R Per share Percent change Gross written premium Gross written premium ex reinstatement premium Net premium written Net premiums earned Net investment income Losses & loss expenses Acquisition costs Total expenses Operating Income Operating EPS Book value per share Average invested assets Portfolio Yield Effective tax rate Shares Repurchased (in shares) Shares Repurchased (in $) Gross written premium Reinstatement premium Gross written ex reinstatement premium 2007 $1,809.6 374.3 1,435.3 79.3% (11.0) 1,424.4 1.3 (166.5) 4.0 297.0 105.5 402.5 1,665.6 430.4 48.9 479.3 254.9 110.5 28.9 33.6 907.2 758.4 164.4 594.0 (18.4) 42.9 569.6 165.9 735.5 2008 $1,736.0 382.4 1,353.6 78.0% 33.2 1,386.8 (206.3) 23.9 2.6 243.9 (219.6) 24.2 1,231.2 744.6 15.9 760.5 213.6 122.2 25.6 24.6 1,146.5 84.7 55.1 29.6 0.6 42.3 (13.3) 206.3 193.0 2009R $1,228.9 390.5 838.3 68.2% 43.9 882.2 71.2 12.8 (13.6) 158.9 163.6 318.2 1,270.8 550.6 (403.8) (70.7) 104.2 153.6 12.7 15.1 214.8 1,056.0 171.5 (6.7) 891.2 10.0 42.3 838.9 (70.7) 768.2 (19.1) 749.1 $12.25 $1.15 $13.40 $0.96 61.7 60.8 0.4 61.2 $51.68 NA $51.01 27.6% 28.2% $49.73 -8.0% 11.8% 17.4% 29.2% 21.2% 1.9% -30.2% 49.5% 8.8 $0.14 -29.2% -27.0% -38.1% -36.4% nm -109.3% -51.2% -81.3% 297.9% 302.4% 33.4% 6,148 5.2% 1.1% 0.9 $51 $1,229 $0 $1,229 2010R $1,165.3 316.3 849.0 72.9% 16.0 864.9 143.6 29.3 (17.1) 100.2 103.7 204.0 1,224.7 332.2 (202.9) 129.3 95.0 166.0 20.1 21.8 433.3 791.4 116.4 (62.7) 738.6 (6.1) 42.1 702.6 (143.6) (22.6) 536.4 (17.8) 518.6 $9.32 $2.58 $12.31 $1.00 54.1 55.1 0.5 55.6 $62.58 NA $62.22 16.3% 16.5% $60.55 15.0% 11.0% 19.2% 30.2% 45.1% 30.3% -34.9% 49.7% 8.6 $0.16 -5.2% -7.5% 1.3% -2.0% -35.9% nm -8.8% 101.8% -30.2% -23.9% 21.1% 6,177 3.3% -0.8% 8.2 $460 $1,165 $28 $1,137 2011 $1,435.0 422.2 1,012.8 70.6% (61.7) 951.0 70.1 (37.2) (6.9) 82.0 36.0 118.0 1,095.0 429.0 432.2 861.2 97.4 169.7 18.3 23.4 1,170.9 (75.8) (33.2) 15.9 (57.6) (0.3) 35.0 (92.2) (70.1) (0.0) (162.4) (1.0) (163.4) ($3.22) $1.38 ($1.84) $1.04 51.5 50.7 50.7 $59.27 NA $59.05 -5.0% -5.1% $58.45 90.6% 10.2% 17.8% 28.1% 118.6% 85.6% -13.9% 46.9% 9.5 $0.19 23.1% 12.1% 19.3% 10.0% -42.1% nm 2.5% nm nm nm -5.3% 6,280 1.9% 0.5% 2.9 $192 $1,435 $160 $1,275 2012E $1,552.9 419.3 1,133.7 73.0% (22.4) 1,111.3 80.0 60.0 140.0 1,251.3 375.0 (25.3) 349.7 106.1 165.0 20.0 25.0 666.8 584.5 120.0 465.2 8.0 35.1 422.1 422.1 422.1 $8.15 $0.00 $8.15 $1.08 50.6 51.4 0.4 51.8 $66.84 NA $65.94 13.1% 13.2% $66.00 31.5% 9.5% 14.8% 24.4% 55.9% 12.8% -8.1% 51.2% 11.1 $0.21 8.2% 21.8% 11.9% 16.8% 18.6% -59.4% 9.0% -43.1% nm nm 12.8% 6,465 2.2% 1.0% 1.0 $75 $1,553 $0 $1,553 2013E $1,714.0 460.3 1,253.7 73.1% (60.0) 1,193.7 80.0 40.0 120.0 1,313.7 375.0 73.5 448.5 111.0 172.0 20.0 25.0 777.5 536.2 120.0 416.2 8.0 35.1 373.1 373.1 373.1 $7.50 $0.00 $7.50 $1.12 48.2 49.4 0.4 49.8 $72.66 NA $71.71 10.8% 11.0% $71.78 37.6% 9.3% 14.4% 23.7% 61.3% 15.0% -4.9% 51.1% 11.9 $0.24 10.4% 10.4% 10.6% 7.4% -14.3% 28.3% 4.6% 16.6% -11.6% -8.0% 8.7% 6,870 1.7% 1.0% 2.4 $200 $1,714 $0 $1,714 1Q $610.5 157.9 452.6 74.1% 147.0 305.5 (5.2) 26.4 0.7 25.9 34.3 60.3 387.7 38.7 589.8 628.5 32.3 41.8 2.1 6.2 711.0 (323.3) (85.5) 1.5 (239.3) (0.1) 8.8 (248.0) 5.2 (0.0) (242.9) 6.3 (236.5) ($4.59) ($0.10) ($4.69) $0.26 51.5 51.5 0.0 51.5 $57.01 -8.9% $56.63 -30.7% -30.9% $56.01 205.7% 10.6% 13.7% 24.3% 230.0% 212.3% -22.3% 40.0% 3.1 $0.06 18.3% 1.6% 11.2% 21.9% -8.3% nm 22.3% nm nm nm 5.8% 6,202 3.9% 0.0% 2.7 $175 $611 $114 $497 2011 2Q 3Q $641.6 $139.9 213.6 36.9 428.0 103.0 66.7% 73.6% 210.8 (126.2) 217.2 229.2 35.0 16.5 (0.0) 2.8 (4.5) (2.7) 22.3 9.4 11.1 (37.4) 33.3 (27.9) 280.9 217.9 59.7 123.9 91.5 (46.0) 151.3 77.8 13.9 26.1 42.3 42.2 4.0 3.6 5.7 5.7 217.2 155.4 63.7 62.6 21.9 5.0 10.1 1.0 31.7 56.6 (1.8) (1.4) 8.8 8.8 24.8 49.3 (35.0) (16.5) (10.2) 32.7 (0.5) (0.9) (10.7) 31.8 ($0.21) $0.69 $0.48 $0.26 50.5 50.5 0.6 51.1 $57.30 0.5% $56.95 -1.4% -1.4% $56.34 69.6% 6.4% 19.5% 25.9% 95.5% 51.8% -9.5% 53.2% 2.2 $0.04 26.7% 22.9% 30.0% 2.4% 27.3% nm -41.1% nm nm nm 0.6% 6,049 2.2% -7.2% $0 $642 $23 619.1 $0.62 $0.32 $0.95 $0.26 50.5 50.5 0.5 51.0 $57.89 1.0% $57.67 4.4% 4.4% $56.95 34.0% 11.4% 18.4% 29.8% 63.7% 20.7% -3.8% 46.8% 2.3 $0.04 25.5% 13.1% 25.2% 7.9% -146.9% nm -0.3% nm nm nm -4.4% 6,026 -1.9% -2.9% $0 $140 $20 119.9 4Q $43.0 13.8 29.2 67.9% (169.9) 199.1 23.8 (66.4) (0.4) 24.4 28.0 52.3 208.5 206.7 (203.1) 3.6 25.1 43.4 8.6 5.7 86.3 122.2 25.4 3.3 93.5 2.9 8.8 81.8 (23.8) 58.0 (1.4) 56.5 $1.11 $0.47 $1.58 $0.26 50.5 50.5 0.4 50.9 $59.27 2.4% $59.05 7.7% 7.7% $58.45 1.8% 12.6% 21.8% 34.4% 36.2% 11.3% -17.4% 42.2% 2.0 $0.04 37.7% 1.5% -3.2% 4.9% -0.3% nm 33.5% nm -69.3% -67.9% -5.3% 6,233 3.4% 3.6% 0.2 $17 $43 $4 $39 1Q $605.9 145.6 460.3 76.0% 196.7 263.6 20.0 30.0 50.0 313.6 93.8 (39.6) 54.2 25.3 39.0 5.0 6.4 129.9 183.7 30.0 153.7 2.0 8.8 143.0 143.0 143.0 $2.75 $0.00 $2.75 $0.27 51.5 51.5 0.4 51.9 $62.44 5.3% $61.55 18.2% 18.4% $61.62 20.6% 9.6% 14.8% 24.4% 44.9% 3.8% -8.0% 49.1% 2.6 $0.05 -0.8% 21.9% 1.7% -13.7% -17.1% nm -21.8% nm nm nm 9.5% 6,365 3.1% 1.4% $606 $0 $606 2012E 2Q 3Q $741.0 $146.5 241.1 33.4 499.9 113.1 67.5% 77.2% 221.4 (168.1) 278.5 281.2 20.0 20.0 10.0 10.0 30.0 30.0 308.5 311.2 93.8 93.8 (3.3) 21.0 90.5 114.7 26.2 27.1 41.2 42.1 5.0 5.0 6.2 6.2 169.1 195.1 139.3 116.1 30.0 30.0 109.3 86.1 2.0 2.0 8.8 8.8 98.6 75.3 98.6 75.3 98.6 75.3 $1.90 $0.00 $1.90 $0.27 51.5 51.5 0.4 51.9 $64.08 2.6% $63.19 12.1% 12.3% $63.26 32.5% 9.4% 14.8% 24.2% 56.7% 9.0% -5.9% 53.7% 2.8 $0.05 15.5% 19.7% 16.8% 28.2% -10.0% nm 88.7% nm nm nm 11.8% 6,691 1.8% 2.0% $741 $0 $741 $1.45 $0.00 $1.45 $0.27 51.5 51.5 0.4 51.9 $65.27 1.9% $64.38 9.0% 9.2% $64.45 40.8% 9.6% 15.0% 24.6% 65.4% 24.9% -10.0% 50.5% 2.8 $0.05 4.7% 22.1% 9.8% 22.7% -207.4% nm 4.0% nm nm nm 12.8% 6,857 1.8% 2.7% $147 $0 $147 4Q $59.5 (0.8) 60.3 101.3% (227.7) 288.0 20.0 10.0 30.0 318.0 93.8 (3.5) 90.3 27.5 42.7 5.0 6.2 172.0 146.1 30.0 116.1 2.0 8.8 105.3 105.3 105.3 $2.05 $0.00 $2.05 $0.27 50.6 51.1 0.4 51.5 $66.84 2.4% $65.94 12.5% 12.8% $66.00 31.4% 9.5% 14.8% 24.4% 55.7% 12.8% -8.5% 51.5% 2.9 $0.06 38.5% 53.9% 106.5% 44.7% -42.7% nm 9.6% nm 81.7% 84.1% 12.8% 6,786 1.8% 1.9% 1.0 $75 $60 $0 $60
$10.24 $2.31 $7.93 $0.88 68.9 70.5 1.3 71.8 $41.03 NA $40.38 27.7% 28.1% $40.99 33.6% 17.9% 7.8% 25.7% 59.3% 11.6% -16.4% 64.0% 14.2 $0.20 -6.9% -6.9% -6.2% -6.9% 26.5% 7.4% -9.2% 1.0% -7.6% -7.3% 19.3% 6,489 6.2% -3.1% 3.3 $189 $1,810 $0 $1,810
$3.04 ($3.25) ($0.21) $0.92 61.5 62.5 0.9 63.4 $38.74 NA $37.52 7.4% 7.6% $37.54 54.8% 15.4% 8.8% 24.2% 79.0% 19.9% -16.9% 76.1% 13.9 $0.22 -4.1% -7.0% -5.7% -2.6% -94.0% 58.7% -16.2% 26.4% -73.8% -70.3% -5.6% 6,338 0.4% 1.9% 7.9 $428 $1,736 $54 $1,682
16 April 2012
154
EVEREST RE GROUP, LTD. 2-EQUAL WEIGHT/1-POSITIVE
Everest Re: Will Results Improve in 2012?

Price 4/11/2012
$93.43
Price Target
$100
52-Wk Price Range

0.83
Mkt Cap (Bil)

$5.0

($1.73) $11.35
13E
$10.50
% Change EPS 11/12 12/13

NM -8%

$11.90 $12.43
Div. Yield
2.1%

0.83 0.74 0.69
P/E 12E
8.2
13E
8.9
ROE 12E 13E

10% 8%
Investment Thesis
Potential Catalysts
Everest Res operating performance has been uneven in our view driven by the impact of largest catastrophe losses as well as underwriting losses in its primary insurance business. The company has over $7bn in capital, which gives it enough scale to effectively compete as a global reinsurer. RE has a diversified business model across both business lines and geographies. The company has a strong reinsurance business with a smaller primary insurance presence. Chairman and CEO Joseph Taranto is expected to remain in his current role through perhaps 2012 as a search for his successor continues. CFO Dom Addesso was promoted to President in June 2011. The company has been impacted by loss reserve strengthening in 2010 and 2011, which perhaps signals less of a reserve cushion than peers.
Risks
RE has about a $650mn share repurchase authorization. We estimate the company has about $600mn of excess capital which could be used for share buybacks. RE plans to grow in property reinsurance and crop insurance. Its workers' compensation insurance business is mostly in California and benefits from rate increases. The company plans to reduce its casualty reinsurance exposure. RE could benefit from elevated U.S. property catastrophe reinsurance rates resulting from large catastrophe losses, although property catastrophe reinsurance price increases appear to be slowing. REs primary insurance business has suffered from deteriorating underwriting results and reserve strengthening, and it is unclear how quickly the company can achieve improved results in this segment.
Valuation
Similar to other property/casualty reinsurers, RE faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses. Potential changes to Bermuda tax advantage could negatively impact REs earnings. Adverse loss reserve development is a risk and RE could have less of a reserve cushion than other P&C insurers.
Since 2000, RE has traded at a median trailing price to stated book value of 1.23x, with a range of 0.66x2.08x. Since 2008, the median is 0.82x. Our $100 price target is based on 0.8x YE12 estimated book value per share of $127, and a P/E of 9x our 2012 EPS estimate of $11.35. RE currently trades at 0.83x 2011 book value and 8.2x 2012E EPS of $11.35, which is mostly in line with other Bermuda reinsurers.
Everest Re, based in Bermuda, writes diversified primary insurance and reinsurance business in both the U.S. and international markets.
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Figure 278: RE Major Metrics

$14.00 $12.00
US Insurance, 20%

Bermuda Reinsurance, 18%
$12.52
$12.21
$12.51 $11.35 $10.50 $9.12 $9.08
$10.00 $8.00 $6.00 $4.00
International Reinsurance, 30%
$2.00
US Reinsurance, 33% Specialty Reinsurance, 0%
$0.00 -$2.00 -$4.00 2006 2007 2008 2009 2010 2011 2012E 2013E -$1.73
130% 120%
Book Value $140 $120 $100 $80 $60 $40 $20 $0
Operating ROE 20% 15% 10% 5% 0% -5% Operating ROE
110% 100% 90% 80% 70% 2006
2007
2008
2009
2010
2011
2012E
2013E
2006 2007 2008 2009 2010 2011 2012E 2013E
Combined Ratio
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156
Figure 279: RE Absolute 1Q Trailing Price-to-Book

2.0
Figure 280: RE Relative Price-to-Book (S&P Financials)

40% 20%
1.5
0% -20%
1.0
-40% -60%
0.5
N
2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60
-80%
1 -1 ov N 10 ov N 09 ov N -08 ov N 7 -0 ov N 06 ov N 5 -0 ov N 04 ov N 03 ov N -02 ov N 01 ov N 00 ov N 99 ov N 1 -1 ov N -10 ov N -09 ov N -08 ov N -07 ov N -06 ov N -05 ov N -04 ov N -03 ov N -02 ov N -01 ov N -00 ov N -99 ov
Figure 281: RE Price-to-Book Ex Net Unrealized Gains/(Losses)
Figure 282: RE Price-to-Tangible Book
2.40 2.20 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60
Fe b9 Fe 9 b0 Fe 0 b0 Fe 1 b0 Fe 2 b0 Fe 3 b0 Fe 4 b05 Fe b0 Fe 6 b0 Fe 7 b0 Fe 8 b0 Fe 9 b1 Fe 0 b1 Fe 1 b12
Figure 283: RE Absolute 4-Qtr Fwd Price-to-Earnings
Figure 284: RE Relative 4-Qtr Fwd P/E (S&P 500)
25.0 23.0 21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0
80% 40% 0% -40% -80%
16 April 2012
Fe b9 Fe 9 bFe 0 0 b0 Fe 1 bFe 0 2 b0 Fe 3 bFe 0 4 b0 Fe 5 bFe 0 6 b0 Fe 7 bFe 0 8 b0 Fe 9 bFe 1 0 b1 Fe 1 b12
1 -1 ec D -10 ec D -09 ec D -08 ec D -07 ec D -06 ec D -05 ec D -04 ec D -03 ec D -02 ec D -01 ec D -00 ec D -99 ec
1 -1 ov N -10 v No -09 v No -08 ov N -07 v No -06 ov N -05 ov N -04 ov N -03 ov N -02 ov N -01 v No -00 ov N -99 v No
157
Figure 285: RE Annual Summary Model

($ in millions, except per share data)
Gross written premium Premiums ceded Net written premium Retention Net premium earned Paid losses Change in reserves Incurred losses and loss expenses Commission, brokerage, taxes, fees Other underwriting expenses Total operating expenses Total underwriting expenses Underwriting income Net investment income, pre-tax Core investment income Partnership income Net realized capital gains (losses) Derivative Income (Expense) Other Income (Expense) Interest expense Pre-tax Income Income tax Net Income Net realized capital gains (losses), after-tax Operating income Per Share: Operating EPS Net realized capital gains (losses) Net Income Actual shares outstanding Basic shares Dilution Fully diluted shares Dividend per share Underwriting ratios: Loss ratio Commission and brokerage ratio Other underwriting expense ratio Combined ratio CR points from catastrophes CR points from prior year development Combined ratio ex cats and py dev Year-over-year percentage change: Gross written premium Gross written premium ex reinstatement prem Net written premium Net premiums earned Net investment income Core investment income Incurred losses and loss expenses Total underwriting expense Operating income Operating EPS Book value per share A-T impact of 1% change in C/R Per share Book Value Per Share Linked qtr % change in book value per share Book Value Per Share (ex FAS 115) Tangible book value per share Operating ROE Operating ROE (as reported) Total ROE (ex FAS 115) Debt/Capital (ex FAS 115) Effective Tax Rate (Op. Inc.) Average Invested Assets Investment portfolio yield (pre-tax) Change in avg invested assets Premium-to-Shareholder's Equity Cash flow from operations Shares repurchased $ Repurchased 2006 $4,000.9 125.2 3,875.7 97% 3,853.2 2,639.6 (205.2) 2,434.4 883.3 138.0 1,021.2 3,455.7 397.5 629.4 629.4 n/a 35.1 (0.4) (0.8) 69.0 991.7 150.9 840.8 22.9 817.9 $12.52 $0.35 $12.87 65.0 64.7 0.6 65.3 $0.60 63.2% 22.9% 3.6% 89.7% 7.3% 3.4% 78.9% -2.6% n/a -2.4% -2.8% 20.4% 20.4% -34.6% -27.4% nm nm 22.6% $0.50 $78.53 NA $73.17 NA 17.7% 18.7% 19.3% 17.3% 14.5% 13,464 4.7% 9.9% 0.76 634.8 0.0 $0 2007 $4,077.6 158.1 3,919.4 96% 3,997.5 2,367.9 180.3 2,548.1 961.8 152.6 1,114.4 3,662.5 335.0 682.4 623.2 59.2 86.3 (2.1) 11.2 84.7 1,028.0 188.7 839.3 62.3 776.9 $12.21 $0.98 $13.19 62.9 63.1 0.5 63.6 $1.92 63.7% 24.1% 3.8% 91.6% 3.2% 5.6% 82.9% 1.9% n/a 1.1% 3.7% 8.4% -1.0% 4.7% 6.0% -5.0% -2.5% 15.2% $0.52 $90.43 NA $87.83 NA 14.4% 14.6% 15.7% 17.6% 17.5% 14,381 4.7% 6.8% 0.69 854.2 2.5 $241 2008 $3,677.4 172.2 3,505.2 95% 3,694.3 2,311.5 127.5 2,439.0 930.7 162.3 1,093.0 3,532.0 162.3 565.9 608.1 (42.2) (695.8) (20.9) (15.9) 79.2 (83.6) (64.8) (18.8) (581.5) 562.7 $9.12 ($9.43) ($0.30) 61.4 61.7 61.7 $1.92 66.0% 25.2% 4.4% 95.6% 8.4% 0.8% 86.4% -9.8% -10.5% -10.6% -7.6% -17.1% -2.4% -4.3% -3.6% -27.6% -25.3% -10.7% $0.55 $80.77 NA $85.52 $80.77 10.6% 10.4% -0.3% 18.3% 8.1% 14,348 3.9% -0.2% 0.71 663.0 1.6 $148 2009 $4,129.0 199.2 3,929.8 95% 3,894.1 2,385.4 (11.3) 2,374.1 928.3 184.8 1,113.1 3,487.2 406.9 547.8 566.8 (19.0) 76.0 3.2 (22.5) 72.1 939.3 132.3 807.0 43.3 763.7 $12.51 $0.71 $13.22 59.3 60.7 0.4 61.0 $1.92 61.0% 23.8% 4.7% 89.6% 1.7% 3.2% 84.6% 12.3% 14.0% 12.1% 5.4% -3.2% -6.8% -2.7% -1.3% 35.7% 37.1% 27.4% $0.56 $102.86 NA $98.28 $102.86 13.8% 13.9% 14.7% 14.9% 11.5% 14,209 3.9% -1.0% 0.64 784.7 2.4 $191 2010 $4,200.7 255.1 3,945.6 94% 3,934.6 2,557.1 388.6 2,945.7 931.9 181.2 1,113.0 4,058.7 (124.1) 653.5 582.7 70.7 101.9 (1.1) 16.9 55.8 591.2 (19.5) 610.8 92.6 518.1 $9.08 $1.63 $10.70 54.4 56.8 0.2 57.0 $1.92 74.9% 23.7% 4.6% 103.2% 15.1% -0.4% 88.5% 1.7% 1.1% 0.4% 1.0% 19.3% 2.8% 24.1% 16.4% -32.2% -27.4% 12.2% $0.73 $115.45 NA $109.34 $115.45 8.4% 9.1% 10.7% 12.1% -5.9% 14,725 4.4% 3.6% 0.63 918.5 5.1 $399 2011 $4,286.2 177.3 4,108.9 96% 4,101.3 2,818.8 907.4 3,726.2 950.5 198.9 1,149.4 4,875.6 (774.2) 620.0 563.2 56.9 6.9 (11.3) (23.1) 52.3 (233.9) (153.5) (80.5) 13.1 (93.6) ($1.73) $0.24 ($1.49) 53.7 54.1 0.2 54.3 $1.92 90.9% 23.2% 4.8% 118.9% 31.7% 0.1% 87.1% 2.0% 1.2% 4.1% 4.2% -5.1% -3.4% 26.5% 20.1% -118.1% -119.0% -2.1% $0.29 $112.99 NA $106.16 $112.99 -1.5% -1.7% -1.4% 12.5% 61.1% 15,087 4.1% 2.5% 0.68 659.5 1.1 $92 2012E $4,399.2 167.6 4,231.6 96% 4,185.8 2,500.0 444.0 2,944.0 946.0 200.5 1,146.5 4,090.5 95.3 660.0 548.0 112.0 10.0 52.0 713.3 107.0 606.3 606.3 $11.35 $0.00 $11.35 52.7 53.2 0.2 53.4 $1.92 70.3% 22.6% 4.8% 97.7% 7.1% 0.5% 90.1% 2.6% 4.2% 3.0% 2.1% 6.4% -2.7% -21.0% -16.1% NM NM 12.1% $0.67 $126.70 NA $115.94 $126.70 9.5% 10.2% 10.2% 11.8% 15.0% 15,640 4.2% 3.7% 0.63 780.6 1.1 $100 2013E $4,570.0 162.0 4,408.0 96% 4,319.8 2,500.0 556.0 3,056.0 978.1 207.0 1,185.1 4,241.1 78.8 620.0 540.0 80.0 52.0 646.8 97.0 549.7 549.7 $10.50 $0.00 $10.50 51.7 52.2 0.2 52.4 $1.92 70.7% 22.6% 4.8% 98.2% 7.1% 0.4% 90.6% 3.9% 3.9% 4.2% 3.2% -6.1% -1.5% 3.8% 3.7% 3.6% -17.3% 7.3% $0.70 $135.96 NA $124.99 $135.96 8.0% 8.6% 8.6% 11.2% 15.0% 16,573 3.7% 6.0% 0.63 1,085.4 1.0 $100 1Q $1,064.9 45.0 1,019.9 96% 1,011.4 692.7 557.1 1,249.8 236.5 48.9 285.3 1,535.1 (523.7) 178.7 142.1 36.6 12.2 7.5 (3.4) 13.0 (341.7) (25.8) (315.9) 7.7 (323.6) ($5.95) $0.14 ($5.81) 54.2 54.3 0.1 54.4 $0.48 123.6% 23.4% 4.8% 151.8% 65.8% -0.1% 86.2% 4.3% 3.0% 5.2% 9.1% 10.7% -2.4% 37.8% 32.0% nm nm 6.5% $0.17 $109.07 -5.5% $102.85 $109.07 -21.2% -23.1% -22.6% 12.8% 8.6% 14,942 4.8% 0.7% 0.68 188.1 0.4 $38 2011 2Q $987.9 32.7 955.1 97% 1,039.8 599.4 136.4 735.8 237.4 49.7 287.1 1,022.9 17.0 158.6 144.3 14.3 (4.8) (3.4) (13.4) 13.1 140.8 9.5 131.3 (2.7) 134.0 $2.46 ($0.05) $2.41 54.3 54.3 0.2 54.5 $0.48 70.8% 22.8% 4.8% 98.4% 11.8% -0.2% 86.8% -2.5% -3.0% 0.6% 5.0% -4.3% -3.9% 14.3% 10.5% -27.5% -22.7% 5.5% $0.18 $113.21 3.8% $104.74 $113.21 8.9% 9.4% 9.3% 12.6% 8.0% 15,127 4.2% 1.2% 0.65 150.6 0.0 $0 3Q $1,128.5 37.7 1,090.8 97% 1,044.3 758.4 (37.7) 720.7 228.0 53.6 281.6 1,002.3 42.0 156.5 140.7 15.7 (137.7) (23.4) (14.9) 13.1 9.4 (53.7) 63.1 (83.6) 146.7 $2.70 ($1.54) $1.16 53.8 54.1 0.3 54.4 $0.48 69.0% 21.8% 5.1% 96.0% 12.7% 0.4% 82.9% -3.0% -4.1% 0.5% 4.7% 10.7% -1.2% 6.8% 4.4% -1.7% 0.9% -0.8% $0.19 $113.25 0.0% $105.76 $113.25 9.6% 10.3% 4.4% 12.6% 0.3% 15,248 4.1% 0.8% 0.66 207.9 0.6 $47 4Q $1,104.9 61.8 1,043.1 94% 1,005.7 768.3 251.6 1,019.9 248.7 46.7 295.4 1,315.3 (309.6) 126.3 136.1 (9.8) 137.3 8.0 8.7 13.1 (42.5) (83.5) 41.0 91.7 (50.7) ($0.94) $1.70 $0.76 53.7 53.8 0.1 53.9 $0.48 101.4% 24.7% 4.6% 130.8% 37.8% 0.2% 92.8% 10.2% 9.8% 10.7% -1.4% -31.7% -5.8% 41.6% 30.3% -119.7% -120.1% -2.1% $0.05 $112.99 -0.2% $106.16 $112.99 -3.3% -3.6% 2.9% 12.5% 71.8% 15,225 3.3% -0.2% 0.68 112.9 0.1 $8 1Q $1,098.0 45.5 1,052.5 96% 1,035.4 625.0 82.3 707.3 233.0 48.9 281.9 989.2 46.2 175.0 137.0 38.0 10.0 13.0 218.2 32.7 185.5 185.5 2.97 $3.45 $0.00 $3.45 53.5 53.6 0.2 53.8 $0.48 68.3% 22.5% 4.7% 95.5% 3.9% 0.5% 91.2% 3.1% 6.2% 3.2% 2.4% -2.1% -3.6% -43.4% -35.6% nm nm 9.8% $0.16 $119.80 6.0% $109.20 $119.80 11.9% 12.8% 12.8% 12.3% 15.0% 15,281 4.6% 0.4% 0.65 62.0 0.3 $25 2012E 2Q 3Q $1,018.0 $1,154.7 32.8 37.0 985.2 1,117.7 97% 97% 1,042.9 1,049.6 625.0 625.0 87.5 166.3 712.5 791.3 240.0 237.0 51.0 50.6 291.0 287.6 1,003.5 1,078.9 39.4 (29.2) 175.0 155.0 137.0 137.0 38.0 18.0 13.0 13.0 201.4 112.8 30.2 16.9 171.2 95.8 171.2 2.76 $3.20 $0.00 $3.20 53.2 53.3 0.2 53.5 $0.48 68.3% 23.0% 4.9% 96.2% 5.0% 0.4% 90.8% 3.1% 4.1% 3.1% 0.3% 10.3% -5.0% -3.2% -1.9% 27.8% 30.0% 8.3% $0.17 $122.66 2.4% $112.00 $122.66 10.6% 11.3% 11.3% 12.1% 15.0% 15,393 4.5% 0.7% 0.64 163.3 0.3 $25 95.8 2.37 $1.80 $0.00 $1.80 52.9 53.1 0.2 53.3 $0.48 75.4% 22.6% 4.8% 102.8% 12.0% 0.7% 90.1% 2.3% 3.5% 2.5% 0.5% -0.9% -2.7% 9.8% 7.6% -34.7% -33.3% 9.6% $0.17 $124.12 1.2% $113.41 $124.12 5.9% 6.3% 6.3% 12.0% 15.0% 15,631 4.0% 1.5% 0.64 312.6 0.3 $25 4Q $1,128.5 52.3 1,076.2 95% 1,057.9 625.0 108.0 733.0 236.0 50.0 286.0 1,019.0 38.9 155.0 137.0 18.0 13.0 180.9 27.1 153.8 153.8 2.38 $2.90 $0.00 $2.90 52.7 52.8 0.2 53.0 $0.48 69.3% 22.3% 4.7% 96.3% 7.6% 0.5% 88.2% 2.1% 3.0% 3.2% 5.2% 22.8% 0.7% -28.1% -22.5% -403.4% -407.7% 12.1% $0.17 $126.70 2.1% $115.94 $126.70 9.3% 10.2% 10.2% 11.8% 15.0% 15,909 3.9% 1.8% 0.63 242.7 0.3 $25
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ALLIED WORLD ASSURANCE HOLDINGS, LTD. 2-EQUAL WEIGHT/1-POSITIVE
AWH: Reserve Releases Could Slow

Price 4/11/2012
$68.90
Price Target
$75
52-Wk Price Range

0.96
Mkt Cap (Bil)

$2.6

$4.63 $7.00
13E
$6.00
% Change EPS 11/12 12/13

NM -14%

$6.89 $6.39
Div. Yield
2.2%

0.86 0.78 0.73
P/E 12E
9.8
13E
11.5
ROE 12E 13E

8% 7%
Investment Thesis
Potential Catalysts
Allied World has delivered consistently strong results since its 2001 inception. The company has a growing franchise in commercial P&C insurance and reinsurance, and is building an onshore primary insurance platform. However, we are concerned about the sustainability of the companys loss reserve releases. The company was unsuccessful in merging with TRH, which raises questions about AWHs future strategic plans. Allied Worlds expense ratio has increased as it builds out its U.S. platform. If the U.S. business does not achieve adequate scale, the company may need to reduce its presence. In terms of deploying excess capital, Allied World appears unlikely to pursue a large acquisition after it was unsuccessful in acquiring Transatlantic. The company has excess capital and views share buybacks as compelling.
Risks
Allied Worlds earnings have benefitted from a substantial pace of loss reserve releases. If this trend slows, it could result in difficult earnings comparisons, although the company believes loss cost inflation could remain low resulting in continued reserve releases. Underwriting results in AWHs Insurance business could improve as it achieves scale, although it is unclear how long this could take. Share buyback activity could persist driven by future earnings generated. AWH does not appear interested in a large acquisition. AWH could benefit from higher P&C prices.
Valuation
Similar to other property/casualty insurers, AWH faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, rising interest rates and increased inflation. A slowdown in reserve releases could be a headwind to earnings. AWHs expense ratio is elevated due in part to buildout of U.S. Insurance business.
Since 2006, AWH has traded at a median trailing price to stated book value of 0.83x, with a range of 0.68x1.37x. Since 2008, the median is 0.81x. Our $75 price target is based on 0.8x YE12 estimated book value per share of $87, and a P/E of 11x our 2012 EPS estimate of $7.00. AWH currently trades at 0.86x 2011 book value and 9.8x 2012E EPS of $7.00, which is mostly in line with other Bermuda reinsurers.
Allied World, based in Bermuda, also has offices in the U.S. and Europe. The company writes commercial lines P&C insurance as well as reinsurance with a focus on specialty lines.
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Figure 287: AWH Major Metrics

$12.00 $10.34 $10.00 $8.90 $8.27 $7.97 $7.00 $6.00 $6.00 $4.63 $4.00
Reinsurance , 37%
$8.00
$7.64
US Insurance, 42%
$2.00
International Insurance, 21%
$0.00 2006 2007 2008 2009 2010 2011 2012E 2013E
100%
Book Value $100
Operating ROE 30% 25%
95%
$75 20% $50 15% 10% $25 5%

Operating ROE
90% 85% 80% 75% 2006
2007
2008
2009
2010
2011
2012E
2013E
$0 2006 2007 2008 2009 2010 2011 2012E2013E
0%
Combined Ratio
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160
Figure 288: AWH Absolute 1Q Trailing Price-to-Book

1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6
12 bFe 11 gAu 1 1 bFe 10 gAu 0 1 bFe 09 gAu 9 0 bFe 08 gAu 8 0 bFe 07 gAu 7 0 bFe 06 gAu
Figure 289: AWH Relative Price-to-Book (S&P Financials)

20% 10% 0% -10% -20% -30% -40% -50%
12 nJa 1 l -1 Ju 1 1 nJa 0 l -1 Ju 0 1 nJa 9 l -0 Ju 9 0 nJa 8 l -0 Ju 8 0 nJa 7 l -0 Ju 7 0 nJa 6 l -0 Ju
Figure 290: AWH Price-to-Book Ex Net Unrealized Gains/(Losses)

1.60 1.40 1.20 1.00 0.80 0.60 0.40
Figure 291: AWH Price-to-Tangible Book
1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 0.70 0.60 0.50
Ju l -0 6 Ja n07 Ju l -0 7 Ja n08 Ju l -0 8 Ja n09 Ju l -0 9 Ja n10 Ju l -1 0 Ja n11 Ju l -1 1 Ja n12
Figure 292: AWH Absolute 4-Qtr Fwd Price-to-Earnings
Figure 293: AWH Relative 4-Qtr Fwd P/E (S&P 500)
9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5
6 l -0 Ju
16 April 2012
-30% -35% -40% -45% -50% -55% -60% -65% -70%
Ju l -0 Ja 6 n07 Ju l -0 Ja 7 n08 Ju l -0 Ja 8 n09 Ju l -0 Ja 9 n10 Ju l -1 Ja 0 n11 Ju l -1 Ja 1 n12
7 l -0 Ju
0 l -1 Ju
1 l -1 Ju
8 l -0 Ju
9 l -0 Ju
06 gAu
07 gAu
08 gAu
09 gAu
10 gAu
11 gAu
161
Figure 294: AWH Annual Summary Model

Gross premiums written Premiums ceded Net premiums written Retention Change in unearned premiums Net premiums earned Paid Losses Change in reserves Losses and loss expenses Acquisition expenses General and administrative expenses Total Operating Expenses Total underwriting expenses Underwriting income Net investment income Interest expense Pre-tax operating income Income Taxes Operating Income Net realized investment gains (losses) Foreign exchange gains (losses) Impairment of Intangible Asset TRH termination fees collected Net Income Per Share (a): Operating income Net realized gains (losses) on investments Net realized exchage gains (losses) Net Income Ending shares outstanding Average basic shares outstanding Dilution Average diluted shares outstanding Dividends per share Underwriting ratios Loss ratio Acquisition ratio G&A expense ratio Expense Ratio Combined ratio CR Points from Large Catastrophes CR Points PY Development Underlying combined ratio Year-over-year percentage change Gross premiums written, as reported Net premiums written Net premiums earned Net investment income Incurred losses Operating expenses Operating income Operating EPS Book Value per share A-T impact of 1% change in C/R Per share Diluted Book value per share (b) Linked qtr % change in book value per share Diluted Book Value per share (ex. AOCI) (b) Tangible Book Value Net ROE, based on rep'd shrhldrs' equity (c) Operating ROE (c) Book Value per share Operating ROE ex AOCI Effec. tax rate Debt/total capital Total capital Average Invested Assets (at amort. cost) Avg Portfolio Yield Change in Average Invested Assets Cash flow from operations Share Repurchase $ Repurchased $ 2008 2009 2010 2011 2012E 2013E 1,445.6 $ 1,696.3 $ 1,758.4 $ 1,939.5 $ 2,139.5 $ 2,405.0 (338.4) (375.2) (366.0) (405.8) (436.6) (476.5) 1,107.2 1,321.1 1,392.4 1,533.8 1,702.9 1,928.5 76.6% 77.9% 79.2% 79.1% 79.6% 80.2% (9.7) 4.2 32.8 76.8 56.4 112.8 1,116.9 1,316.9 1,359.5 1,457.0 1,646.5 1,815.7 474.2 458.2 591.7 684.8 500.0 500.0 166.9 145.8 116.2 274.4 497.1 667.2 641.1 604.1 707.9 959.2 997.1 1,167.2 112.6 148.8 159.5 167.3 190.0 209.5 186.6 251.8 286.6 271.7 302.5 332.5 299.1 400.6 446.0 439.0 492.5 542.0 940.3 1,004.7 1,153.9 1,398.1 1,489.6 1,709.2 176.7 313.7 204.8 58.9 157.0 106.5 308.8 300.7 244.1 195.9 180.0 180.0 38.7 39.0 40.2 55.0 55.2 55.0 446.7 575.4 408.7 199.8 281.7 231.5 7.6 (36.6) (9.1) (16.2) (16.9) (13.9) 455.0 537.7 397.8 183.7 264.8 217.6 (272.9) 76.8 267.6 0.2 0.0 0.0 1.4 (0.7) (0.4) (3.2) 0.0 0.0 (6.9) 93.8 183.6 606.9 665.0 274.5 264.8 217.6 $8.90 ($5.33) $0.03 $3.59 49.0 48.9 1.9 51.1 $0.72 57.4% 10.1% 16.7% 26.8% 84.2% 14.7% -25.1% 94.5% -4.0% -4.0% -3.7% 3.6% -6.0% 14.8% -4.4% 16.5% 8.3% 11.4 $0.22 $46.05 NA $44.03 $39.57 7.9% 19.5% $49.29 20.6% -1.7% 24% 3,159 5,739 5.4% -2% 657 $0 $10.34 $1.48 ($0.01) $11.67 49.7 49.5 2.4 52.0 $0.74 45.9% 11.3% 19.1% 30.4% 76.3% 0.0% -18.8% 95.1% 17.3% 19.3% 17.9% -2.6% -5.8% 33.9% 18.2% 16.2% 29.3% 12.3 $0.24 $59.56 NA $56.78 $53.47 21.6% 19.1% $64.61 20.0% 6.4% 13% 3,712 6,511 4.6% 13% 668 $0 $7.97 $5.36 ($0.01) $13.32 38.1 46.5 3.1 49.9 $1.05 52.1% 11.7% 21.1% 32.8% 84.9% 12.0% -22.4% 95.3% 3.7% 5.4% 3.2% -18.8% 17.2% 11.3% -26.0% -22.9% 24.7% 13.3 $0.27 $74.29 NA $72.91 $66.43 21.1% 12.7% $80.75 13.1% 2.2% 21% 3,874 7,162 3.4% 10% 451 12 $673 $4.63 $0.01 ($0.08) $6.92 37.7 38.1 1.7 39.7 $0.75 65.8% 11.5% 18.6% 30.1% 96.0% 20.1% -17.4% 93.3% 10.3% 10.2% 7.2% -19.7% 35.5% -1.6% -53.8% -41.9% 7.8% 13.4 $0.34 $80.11 NA $79.74 $71.91 8.8% 5.9% $83.44 6.0% 8.1% 20% 3,947 7,364 2.7% 3% 548 1 $87 $7.00 $0.00 $0.00 $7.00 35.4 36.5 1.4 37.8 $1.50 60.6% 11.5% 18.4% 29.9% 90.5% 4.4% -9.7% 95.8% 10.3% 11.0% 13.0% -8.1% 4.0% 12.2% 44.2% 51.2% 10.9% 15.5 $0.41 $88.84 NA $86.52 $80.11 8.2% 8.2% $92.77 8.4% 6.0% 20% 4,079 7,800 2.3% 6% 819 2 $150 $6.00 $0.00 $0.00 $6.00 33.9 34.6 1.6 36.2 $1.60 64.3% 11.5% 18.3% 29.9% 94.1% 4.0% -5.7% 95.9% 12.4% 13.3% 10.3% 0.0% 17.1% 10.1% -17.8% -14.2% 6.0% 17.1 $0.47 $94.20 NA $91.79 $85.12 6.6% 6.6% $98.55 6.7% 6.0% 19% 4,142 8,478 2.1% 0.09 995 1 $100 1Q $ 560.7 $ (79.8) 480.9 85.8% (146.0) 334.9 136.0 168.5 304.5 38.1 68.0 106.0 410.5 (75.6) 50.2 13.7 (39.1) (2.2) (41.3) 49.5 0.4 8.6 ($1.02) $1.23 $0.01 $0.21 37.9 38.2 2.2 40.4 $0.00 90.9% 11.4% 20.3% 31.7% 122.6% 39.5% -13.2% 96.3% 11.2% 11.0% -1.0% -27.1% 31.1% 1.7% NM NM 17.7% 3.5 $0.09 $74.23 -0.1% $73.40 $66.07 1.1% -5.5% $77.86 -5.6% -5.6% 21% 3,749 7,164 2.8% 0.0 175 1 $60 2011 2Q 519.6 $ (123.8) 395.8 76.2% (40.5) 355.3 128.7 107.1 235.8 43.0 67.2 110.2 346.0 9.3 52.4 13.7 47.9 (3.8) 44.2 50.8 (1.2) 93.8 $1.11 $1.27 ($0.03) $2.35 37.9 38.1 1.8 39.9 $0.00 66.4% 12.1% 18.9% 31.0% 97.4% 19.0% -15.8% 94.2% 5.2% 7.0% 4.8% -20.2% 25.0% 3.9% -53.8% -38.3% 14.3% 3.3 $0.08 $76.68 3.3% $76.09 $68.52 12.5% 5.9% $80.23 6.0% 7.8% 21% 3,842 7,342 2.9% 0.0 187 $0 3Q 442.7 $ (92.4) 350.3 79.1% 21.1 371.3 194.5 11.0 205.5 39.7 66.0 105.7 311.2 60.1 47.9 13.7 94.2 (8.1) 86.2 (126.4) (3.0) 32.3 (11.0) $2.19 ($3.21) ($0.08) ($0.29) 38.1 38.1 1.2 39.3 $0.38 55.4% 10.7% 17.8% 28.5% 83.9% 9.0% -16.9% 91.8% 17.0% 15.9% 9.4% -19.5% 61.9% -5.5% -40.0% -25.5% -0.1% 3.4 $0.09 $75.82 -1.1% $75.37 $67.66 -1.5% 11.4% $78.73 11.5% 8.6% 21% 3,801 7,498 2.6% 0.0 130 $0 4Q 416.5 (109.7) 306.8 73.7% 88.6 395.5 225.6 (12.3) 213.3 46.6 70.5 117.1 330.4 65.1 45.5 13.8 96.8 (2.1) 94.7 26.3 0.5 61.5 183.1 $2.40 $0.67 $0.01 $4.63 37.7 38.1 1.4 39.5 $0.38 53.9% 11.8% 17.8% 29.6% 83.5% 14.9% -23.4% 92.0% 9.1% 6.8% 15.4% -9.3% 33.3% -5.6% -2.7% 7.1% 3.3% 3.9 $0.10 $80.11 5.7% $79.74 $71.91 23.8% 12.3% $83.44 12.4% 2.2% 20% 3,947 7,454 2.4% 0.0 57 0 $27 1Q $ 621.3 $ (86.4) 534.8 86.1% (137.9) 396.9 125.0 113.0 238.0 45.0 73.0 118.0 356.0 40.9 45.0 13.8 72.1 (4.3) 67.8 67.8 $1.75 $0.00 $0.00 $1.75 36.9 37.3 1.4 38.7 $0.38 60.0% 11.3% 18.4% 29.7% 89.7% 3.3% -10.6% 97.0% 10.8% 11.2% 18.5% -10.4% -21.8% 11.3% NM NM 12.1% 3.7 $0.10 $83.70 4.5% $81.48 $75.34 8.5% 8.5% $87.25 8.6% 6.0% 20% 4,022 7,523 2.4% 0.1 319 1 $50 2012E 2Q 571.5 $ (134.0) 437.5 76.6% (30.2) 407.4 125.0 120.3 245.3 45.5 75.0 120.5 365.8 41.6 45.0 13.8 72.8 (4.4) 68.4 68.4 $1.80 $0.00 $0.00 $1.80 36.2 36.6 1.4 37.9 $0.38 60.2% 11.2% 18.4% 29.6% 89.8% 4.9% -10.7% 95.6% 10.0% 10.5% 14.7% -14.1% 4.0% 9.4% 54.8% 62.7% 11.3% 3.8 $0.10 $85.59 2.3% $83.33 $77.05 8.5% 8.5% $89.30 8.7% 6.0% 20% 4,027 7,742 2.3% 0.1 219 1 $50 3Q 4Q 488.8 $ 458.0 (102.0) (114.2) 386.8 343.8 79.1% 75.1% 29.7 82.0 416.5 425.7 125.0 125.0 131.8 132.0 256.75 257.0 48.5 51.0 76.5 78.0 125.0 129.0 381.8 386.0 34.7 39.7 45.0 45.0 13.8 13.8 65.9 71.0 (4.0) (4.3) 62.0 66.7 62.0 66.7 $1.65 $0.00 $0.00 $1.64 36.2 36.2 1.4 37.5 $0.38 61.6% 11.6% 18.4% 30.0% 91.8% 6.7% -8.9% 94.0% 10.4% 10.4% 12.2% -6.0% 24.9% 18.3% -28.1% -24.6% 15.1% 3.9 $0.10 $86.88 1.5% $84.61 $78.33 7.6% 7.6% $90.64 7.8% 6.0% 20% 4,075 7,909 2.3% 0.1 164 $0 $1.80 $0.00 $0.00 $1.80 35.4 35.8 1.4 37.1 $0.38 60.4% 12.0% 18.3% 30.3% 90.7% 2.6% -9.2% 97.2% 10.0% 12.0% 7.6% -1.1% 20.5% 10.2% -29.6% -25.0% 10.9% 4.0 $0.11 $88.84 2.3% $86.52 $80.11 8.1% 8.1% $92.77 8.4% 6.0% 20% 4,079 8,025 2.2% 0.1 117 1 $50
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ASPEN INSURANCE HOLDINGS LIMITED 2-EQUAL WEIGHT/1-POSITIVE
AHL: Reinsurance Prices Could Improve, Limited Excess Capital

Price 4/11/2012
$27.69
Price Target
$28
52-Wk Price Range

0.73
Mkt Cap (Bil)

$2.0

($1.26) $3.00
13E
$2.75
% Change EPS 11/12 12/13

NM -8%

$2.79 $3.03
Div. Yield
2.2%

0.72 0.67 0.62
P/E 12E
9.2
13E
10.1
ROE 12E 13E

8% 7%
Investment Thesis
Potential Catalysts
Aspen has a strong franchise in the U.K., U.S., and Bermuda commercial insurance and reinsurance markets. Over the past several years, the company has a good track record of returning excess capital to shareholders in the form of share repurchases, and presently appears to have little appetite for large acquisitions. The company has over $3bn in total capital, which most likely means it has adequate scale to effectively compete. AHL expects its business mix to shift to 60-65% insurance/35-40% reinsurance over the next few years as the company seeks to reduce volatility and price increases persist. AHLs CFO recently departed to pursue other opportunities and the company is searching internally and externally for a replacement.
Risks
AHL could benefit from improved P&C insurance and reinsurance prices. AHL believes it is appropriately capitalized and appears unlikely to repurchase stock until after the 2012 hurricane season. AHL believes its loss reserve position is conservative despite reserve strengthening in its Insurance business in 2010. The companys reserves are currently $400mn (10%) above the actuarial mean best estimate, which is the highest level ever. AHL expects its U.S. insurance business to achieve adequate scale in about two years.
Valuation
Similar to other property/casualty insurers, AWH faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, rising interest rates and increased inflation. Further adverse prior year loss reserve development could lead to lower than expected earnings. AHL believes it is appropriately capitalized, although it appears to have a less robust capital cushion than other P&C insurers.
Since 2004, AHL has traded at a median trailing price to stated book value of 1.04x, with a range of 0.60x1.69x. Since 2008, the median is 0.77x. Our $28 price target is based on 0.7x YE12 estimated book value per share of $41, and a P/E of 9x our 2012 EPS estimate of $3.00. AHL currently trades at 0.72x 2011 book value and 9.2x 2012E EPS of $3.00, which is below other Bermuda reinsurers.
Aspen, based in Bermuda, is a specialty property-casualty insurer and reinsurer. company has a diversified platform by product line and geography.
The
16 April 2012
163
Figure 296: AHL Major Metrics

$6.00 $4.99 $5.00 $4.00 $3.00 $3.73 $3.03 $3.00 $2.75 $5.16
Insurance, 43%
Reinsurance, 57%
$2.00 $1.00 $0.00 -$1.00
$1.44
-$1.26 -$2.00 2006 2007 2008 2009 2010 2011 2012E 2013E
120% 110%
Book Value $50 $40 $30
Operating ROE 25% 20% 15% 10%

Operating ROE
100% 90% 80% 70% 2006
$20 5% $10 $0 2006 2007 2008 2009 2010 2011 2012E 2013E 0% -5%
2007
2008
2009
2010
2011
2012E
2013E
Combined Ratio
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164
Figure 297: AHL Absolute 1Q Trailing Price-to-Book

1.8 1.6 1.4 1.2 1.0 0.8 0.6
D
1.70 1.50 1.30 1.10 0.90 0.70 0.50
Fe b04 07 Fe b08 Fe b12 05 06 09 10 ar ar ar ar ar ar 11
Figure 298: AHL Relative Price-to-Book (S&P Financials)

20% 10% 0% -10% -20% -30% -40% -50% -60%
Figure 299: AHL Price-to-Book Ex Net Unrealized Gains/(Losses)
Fe b04 M ar -0 5 M ar -0 6 M ar -0 7 Fe b08
Figure 301: AHL Absolute 4-Qtr Fwd Price-to-Earnings
Figure 302: AHL Relative 4-Qtr Fwd P/E (S&P 500)
0%
9.0
-10% -20% -30% -40% -50% -60% -70%
6.0
3.0
D 1 -1 ec D 0 -1 ec D 9 -0 ec D 8 -0 ec D 7 -0 ec D 6 -0 ec D 5 -0 ec D 4 -0 ec D 3 -0 ec
16 April 2012
11 Fe b12
165
09 ar -
10 ar -
ar -
1 -1 ec D 0 -1 ec D 9 -0 ec D 8 -0 ec D 7 -0 ec D 6 -0 ec D 5 -0 ec D 4 -0 ec D 3 -0 ec
Figure 300: AHL Price-to-Tangible Book
1.90 1.70 1.50 1.30 1.10 0.90 0.70 0.50
Figure 303: AHL Annual Summary Model

(Dollars in millions, except per share data) Gross written premiums Premiums Ceded Retention Net written premiums Change in unearned premiums Net earned premiums Paid Losses Change in reserves Losses and loss expenses Acquisition expenses General and administrative expenses Total Operating Expenses Total underwriting expenses Underwriting income Core investment income Alternative investments Total net investment income Interest expense Other expense (income) Pre-tax operating income Dividends declared on preference share P/T operating income adj for preference shr div Income Taxes Operating income, A/T Net realized gains (losses) on investments, A/T Net realized exchange gains (losses), A/T Net Income Common Dividends Paid Retained Income Per Share: Operating income Net realized gains (losses) on investments Net realized exchange gains (losses) Net Income Average basic shares outstanding Dilution Average diluted shares outstanding Dividends per share Underwriting ratios Loss ratio Acquisition ratio G&A expense ratio Combined ratio Catastrophe losses Catastrophe points CR Ex Cats PY development PY development (CR pts) CR ex cats and py development Year-over-year percentage change Gross premiums written Gross premiums written ex reinstatement prem Net premiums written Net premiums earned Net investment income Incurred losses Operating expenses Operating income Book value per share Operating EPS A-T impact of 1% change in C/R Per share Diluted Book value per share Linked qtr % change in book value per share Book Value Ex 115 Tangible Book Value Operating Return On Average Equity Net Return On Average Equity Operating Return on Avg Equity ex 115 ROE adj for preference dividend Effec. tax rate Debt/total capital Total Capital Cash flow from operations Share repurchased $ Repurchased Average invested assets Pre-tax yield 2006 $1,945.5 282.0 85.5% 1,663.5 12.7 1,676.2 469.7 420.2 889.9 322.8 167.9 490.7 1,380.6 295.6 NA NA 204.4 16.9 14.2 468.9 15.6 453.3 93.6 359.7 (6.7) 9.5 362.5 56.2 306.3 $3.73 ($0.07) $0.10 $3.75 94.8 1.9 96.7 $0.60 53.1% 19.3% 10.0% 82.4% 0.0 0.0% 82.4% (51.3) -3.1% 85.4% -7.0% NA 0.7% 11.1% 68.5% -34.5% 19.9% NM 16.0% NM $0.14 $21.83 NA $21.69 $21.79 18.9% 18.1% 16.3% 19.7% 20.6% 9.5% $3,062 722 7.6 $200.1 $4,281 4.8% 2007 $1,818.5 217.1 88.1% 1,601.4 132.2 1,733.6 695.6 224.3 919.9 313.9 204.8 518.7 1,438.6 295.0 254.5 44.5 299.0 15.7 11.9 566.4 27.7 538.7 87.8 450.9 (10.2) 20.6 461.3 53.0 408.3 $4.99 ($0.11) $0.23 $5.11 87.8 2.5 90.4 $0.60 53.1% 18.1% 11.8% 83.0% 75.6 4.4% 78.6% (107.4) -6.2% 84.8% -6.5% -5.7% -3.7% 3.4% 46.3% 3.4% 5.7% NM 24.5% 33.8% $0.15 $27.17 NA $25.90 $27.08 20.7% 21.1% 17.8% 22.2% 16.3% 8.1% $3,486 774 3.6 $100.0 $5,087 5.9% 2008 $2,001.7 166.2 91.7% 1,835.5 (133.8) 1,701.7 727.0 392.5 1,119.5 299.3 208.1 507.4 1,626.9 74.8 236.5 (97.3) 139.2 15.6 2.1 196.3 27.7 168.6 44.8 123.8 (39.5) (8.2) 76.1 50.2 25.9 $1.44 ($0.46) ($0.10) $0.89 83.0 2.6 85.5 $0.60 65.8% 17.6% 12.2% 95.6% 226.2 13.3% 82.3% (83.5) -4.9% 87.2% 10.1% 9.3% 14.6% -1.8% -53.4% 21.7% -2.2% -72.5% 3.8% -71.2% $0.16 $28.19 NA $26.53 $28.10 5.2% 3.2% 4.6% 4.1% 26.6% 8.2% $3,448 531 4.1 $100.0 $5,281 2.6% 2009 $2,067.1 230.0 88.9% 1,837.1 (14.1) 1,823.0 808.6 139.5 948.1 334.1 252.4 586.5 1,534.6 288.4 228.3 20.2 248.5 15.6 0.0 521.3 23.8 497.5 57.0 440.5 38.0 2.0 480.5 49.8 430.7 $5.16 $0.45 $0.02 $5.63 82.7 2.6 85.3 $0.60 52.0% 18.3% 13.8% 84.2% 0.0 0.0% 84.2% (84.3) -4.6% 88.8% 3.3% 4.1% 0.1% 7.1% 78.5% -15.3% 15.6% 255.8% 21.1% 259.2% $0.17 $34.14 NA $31.16 $34.04 16.6% 18.1% 15.5% 18.9% 11.5% 7.0% $3,909 617 0.3 $0.0 $5,315 4.7% 2010 $2,076.8 185.7 91.1% 1,891.1 7.8 1,898.9 666.8 582.0 1,248.8 328.5 258.6 587.1 1,835.9 63.0 232.0 0.0 232.0 16.5 (8.9) 287.4 22.8 264.6 21.8 242.9 44.0 2.9 289.8 46.5 243.3 $3.03 $0.55 $0.04 $3.62 76.3 3.7 80.0 $0.60 65.8% 17.3% 13.6% 96.7% 206.4 10.9% 85.8% (21.4) -1.1% 86.9% 0.5% -0.1% 2.9% 4.2% -6.6% 31.7% 0.1% -44.9% 13.9% -41.4% $0.19 $38.90 NA $34.53 $38.62 8.3% 9.9% 8.1% 10.6% 8.2% 7.1% $3,845 629 13.0 $407.8 $5,855 4.0% 2011 $2,207.8 278.7 87.4% 1,929.1 (40.6) 1,888.5 982.2 573.8 1,556.0 347.0 280.2 627.2 2,183.2 (294.7) 225.6 0.0 225.6 30.8 6.8 (106.7) 22.8 (129.5) (40.6) (88.9) (39.7) 0.0 (128.6) 42.5 (171.1) ($1.26) ($0.56) $0.00 ($1.82) 70.7 0.0 70.7 $0.60 82.4% 18.4% 14.8% 115.6% 528.3 28.0% 87.6% (92.3) -4.9% 92.5% 6.3% 6.9% 2.0% -0.5% -2.8% 24.6% 6.8% -136.6% -1.2% -141.6% $0.21 $38.43 NA $32.58 $38.16 -3.1% -4.5% -3.1% -3.8% 31.4% 13.6% $4,025 344 0.0 $0.0 $6,109 3.7% 2012E $2,350.0 297.5 87.3% 2,052.5 (47.0) 2,005.5 875.0 388.7 1,263.7 355.9 291.2 647.0 1,910.7 94.8 200.0 0.0 200.0 30.8 0.0 264.0 22.8 241.2 24.1 217.1 0.0 0.0 217.1 37.7 179.4 $3.00 $0.00 $0.00 $3.00 68.9 3.5 72.4 $0.60 63.0% 17.7% 14.5% 95.3% 190.0 9.5% 85.8% (81.5) -4.1% 89.9% 6.4% 6.4% 6.4% 6.2% -11.3% -18.8% 3.2% NM 7.4% NM $0.22 $41.26 NA $35.11 $40.98 7.6% 7.6% 7.8% 8.3% 10.0% 13.4% $4,090 723 3.4 $100.0 $6,374 3.1% 2013E $2,555.0 325.2 87.3% 2,229.8 (88.7) 2,141.2 875.0 523.0 1,398.0 373.2 305.3 678.5 2,076.5 64.7 200.0 0.0 200.0 30.8 0.0 233.9 22.8 211.1 21.1 190.0 0.0 0.0 190.0 38.4 151.6 $2.75 $0.00 $0.00 $2.75 65.6 3.5 69.1 $0.60 65.3% 17.4% 14.3% 97.0% 190.0 8.9% 88.1% (52.0) -2.4% 90.5% 8.7% 8.7% 8.6% 6.8% 0.0% 10.6% 4.9% NM 7.5% -8.3% $0.25 $44.36 NA $37.86 $44.23 6.5% 6.5% 6.7% 7.2% 10.0% 13.2% $4,142 807 3.2 $100.0 $6,971 2.9% 1Q $671.3 161.7 75.9% 509.6 (57.2) 452.4 214.9 314.0 528.9 81.4 61.4 142.8 671.7 (219.3) 55.5 0.0 55.5 7.7 11.5 (183.0) 5.7 (188.7) (19.6) (169.1) 7.0 4.7 (157.4) 10.6 (168.0) ($2.40) $0.10 $0.07 ($2.23) 70.6 0.0 70.6 $0.15 116.9% 18.0% 13.6% 148.5% 284.8 63.0% 85.5% (21.9) -4.8% 90.1% -4.5% -4.5% -12.2% -3.3% -6.6% 39.6% 4.2% NM 6.4% NM $0.04 $36.65 -5.8% $32.55 $36.37 2011 2Q $582.2 56.5 90.3% 525.7 (65.9) 459.8 206.6 119.8 326.4 86.7 69.6 156.3 482.7 (22.9) 58.6 0.0 58.6 7.7 (6.8) 34.8 5.7 29.1 2.9 26.2 (16.9) (4.8) 4.5 10.6 (6.1) $0.36 ($0.23) ($0.07) $0.06 70.8 2.8 73.6 $0.15 71.0% 18.9% 15.1% 105.0% 71.8 15.6% 89.4% (32.8) -7.1% 96.5% 6.7% 6.7% -2.4% -4.2% 1.9% 18.0% 11.3% -73.6% 1.3% -71.0% $0.04 $37.43 2.1% $32.52 $37.15 3Q $495.6 33.0 93.3% 462.6 24.3 486.9 224.5 81.7 306.2 93.4 71.0 164.4 470.6 16.3 57.3 0.0 57.3 7.7 9.1 56.8 5.7 51.1 0.3 50.8 (33.5) (0.8) 16.5 10.6 5.9 $0.70 ($0.46) ($0.01) $0.23 70.7 2.6 73.3 $0.15 62.9% 19.2% 14.6% 96.7% 50.0 10.3% 86.4% (15.6) -3.2% 89.6% 19.2% 19.2% 22.7% 7.8% -1.4% 7.1% 16.9% -20.6% 0.1% -10.6% $0.04 $38.27 2.2% $32.69 $37.99 4Q $458.7 27.5 94.0% 431.2 58.2 489.4 336.2 58.3 394.5 85.5 78.2 163.7 558.2 (68.8) 54.2 0.0 54.2 7.7 (3.6) (18.7) 5.7 (24.4) (24.8) 0.4 3.7 3.7 7.8 10.7 (2.9) $0.01 $0.05 $0.05 $0.11 70.6 2.6 73.3 $0.15 80.6% 17.5% 16.0% 114.1% 121.7 24.9% 89.2% (22.0) -4.5% 93.7% 11.1% 11.1% 9.1% -2.1% -4.9% 28.3% -3.2% -99.5% -1.2% -99.5% $0.04 $38.43 0.4% $32.58 $38.16 1Q $713.0 174.9 75.5% 538.1 (48.7) 489.4 217.0 85.0 302.0 85.0 69.5 154.5 456.5 32.9 50.0 0.0 50.0 7.7 0.0 75.2 5.7 69.5 6.9 62.5 0.0 0.0 62.5 9.4 53.1 $0.85 $0.00 $0.00 $0.85 70.2 3.5 73.7 $0.15 61.7% 17.4% 14.2% 93.3% 40.0 8.2% 85.1% (21.0) -4.3% 89.1% 6.2% 6.2% 5.6% 8.2% -9.9% -42.9% 8.2% NM 6.6% NM $0.04 $39.08 1.7% $33.15 $38.81 39.27 33.36 39.00 10.0% 13.5% $4,039 222 0.9 $25.0 $6,128 3.3% 2012E 2Q $621.0 61.0 90.2% 560.0 (62.0) 498.0 215.0 97.5 312.5 86.4 70.7 157.0 469.5 28.5 50.0 0.0 50.0 7.7 0.0 70.8 5.7 65.1 6.5 58.6 0.0 0.0 58.6 9.4 49.1 $0.80 $0.00 $0.00 $0.80 69.4 3.5 72.9 $0.15 62.8% 17.3% 14.2% 94.3% 50.0 10.0% 84.2% (23.5) -4.7% 89.0% 6.7% 6.7% 6.5% 8.3% -14.7% -4.3% 0.4% 123.5% 6.6% NM $0.04 $39.89 2.1% $33.89 $39.61 40.08 34.10 39.81 10.0% 13.5% $4,063 240 (0.9) $25.0 $6,324 3.2% 3Q $528.0 37.1 93.0% 490.9 14.2 505.0 223.0 105.5 328.5 93.5 76.5 170.0 498.5 6.5 50.0 0.0 50.0 7.7 0.0 48.8 5.7 43.1 4.3 38.8 0.0 0.0 38.8 9.4 29.4 $0.55 $0.00 $0.00 $0.54 68.5 3.5 72.0 $0.15 65.0% 18.5% 15.1% 98.7% 60.0 11.9% 86.8% (16.5) -3.3% 90.1% 6.5% 6.5% 6.1% 3.7% -12.7% 7.3% 3.4% -23.6% 5.7% -21.9% $0.05 $40.44 1.4% $34.36 $40.15 40.64 34.57 40.35 10.0% 13.4% $4,067 132 (0.9) $25.0 $6,475 3.1% 4Q $488.0 24.4 95.0% 463.6 49.5 513.1 220.0 100.7 320.7 91.0 74.5 165.5 486.2 26.9 50.0 0.0 50.0 7.7 0.0 69.2 5.7 63.5 6.4 57.2 0.0 0.0 57.2 9.4 47.7 $0.80 $0.00 $0.00 $0.80 67.6 3.5 71.1 $0.15 62.5% 17.7% 14.5% 94.8% 40.0 7.8% 87.0% (20.5) -4.0% 91.0% 6.4% 6.4% 7.5% 4.8% -7.7% -18.7% 1.1% 14193.2% 7.4% 14619.0% $0.05 $41.26 2.0% $35.11 $40.98 41.46 35.32 41.18 10.0% 13.4% $4,090 129 0.9 $25.0 $6,570 3.0%
10.4% 14.1% $3,903 155 0.0 $0.0 $6,001 3.7%
10.0% 13.8% $3,957 39 0.0 $0.0 $6,140 3.8%
0.6% 13.7% $4,003 84 0.0 $0.0 $6,179 3.7%
101.6% 13.6% $4,025 65 0.0 $0.0 $6,115 3.5%
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MONTPELIER RE HOLDINGS LTD. 2-EQUAL WEIGHT/1-POSITIVE
MRH: Re-Focused on Core Property Catastrophe Reinsurance Business

Price 4/11/2012
$19.30
Price Target
$20
52-Wk Price Range

20 - 15
Mkt Cap (Bil)

$1.1

($2.50) $1.65
13E
$1.50
% Change EPS 11/12 12/13

NM -9%

$2.19 $2.26
Div. Yield
2.2%

0.85

0.85 0.80 0.76
P/E 12E
11.7
13E
12.9
ROE 12E 13E

7% 6%
Investment Thesis
Potential Catalysts
Montpelier Re has a strong franchise in property reinsurance and is exiting its subscale U.S. primary insurance business, recently announcing the sale of the unit to Selective. MRHs results are mostly driven by its property catastrophe reinsurance business, and could benefit from higher property catastrophe reinsurance rates, although the pace of increases could slow. Long term, we anticipate increased consolidation among reinsurers with less than $3 billion in capital to achieve increased scale and diversification. In the meantime, MRH is right-sizing its balance sheet by repurchasing shares to match (re)insurance market opportunities.
Risks
MRH benefits from higher U.S. property catastrophe reinsurance rates as well as increased demand resulting from large catastrophe losses and changes to the RMS model although the pace of property reinsurance rate increases appears to be slowing. Consolidation activity in the sector over the long term could provide a catalyst, as Bermuda reinsurers seek to achieve scale. MRH has a modest excess capital position and can deploy up to $50mn plus future earnings for share repurchases.
Valuation
Similar to other property/casualty insurers, MRH faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, rising interest rates and increased inflation. MRHs earnings have benefitted from favorable loss reserve development, and earnings could face headwinds if this slows. Also, MRH faces the risk of adverse development from catastrophe losses, although its track record is strong in estimating catastrophe losses since Hurricane Katrina in 2005. MRH has a modest excess capital position, although it appears to have a less robust capital cushion than other P&C reinsurers.
Since 2003, MRH has traded at a median trailing price to stated book value of 1.05x, with a range of 0.67x1.96x. Since 2008, the median is 0.81x. Our $20 price target is based on 0.8x YE12 estimated book value per share of $24, and a P/E of 12x our 2012 EPS estimate of $1.65. MRH currently trades at 0.85x 2011 book value and 11.7x 2012E EPS of $1.65, in line with other Bermuda reinsurers.
Montpelier Re, based in Bermuda, is a provider of global property and casualty reinsurance and insurance products.
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167
Figure 305: MRH Major Metrics

$4.00 $3.05 $3.00 $2.30 $2.00 $1.09 $1.00 $1.65 $1.50 $2.93 $3.13
Total Net Written Premiums FY 2011: $624 million

MUSIC (Excess & Surplus lines) 8% c Syndicate 5151 (Lloyd's) 33% Bermuda 59%
$0.00 -$1.00 -$2.00 -$3.00 2006 2007 2008 2009 2010 -$2.50 2011 2012E 2013E
135% 120%
Book Value $30 Book Value Per Share $25 $20
Operating ROE 30% 20% 10% Operating ROE
105% 90% 75% 60% 45% 2004
$15 0% $10 $5 $0 2006 2007 2008 2009 2010 2011 2012E 2013E -10% -20%
2005
2006
2007
2008
2009
2010
Combined Ratio
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168
Figure 306: MRH Absolute 1Q Trailing Price-to-Book

2.0 1.8 1.5 1.3 1.0 0.8 0.5
Figure 307: MRH Relative Price-to-Book (S&P Financials)

20% 10% 0% -10% -20% -30% -40% -50%
1 -1 ct O 0 -1 ct O 9 -0 ct O 8 -0 ct O 7 -0 ct O 6 -0 ct O 5 -0 ct O 4 -0 ct O 3 -0 ct O 2 -0 ct O
Figure 308: MRH Price-to-Book Ex Net Unrealized Gains/(Losses)

2.10 1.90 1.70 1.50 1.30 1.10 0.90 0.70 0.50
Ja n05 Ja n06
Ja n09 Ja n10
Ja n07 Ja n08
Ja n03 Ja n04
Ja n11 Ja n12
Figure 310: MRH Absolute 4-Qtr Fwd Price-to-Earnings
Figure 311: MRH Relative 4-Qtr Fwd P/E (S&P 500)
13.0 11.0 9.0 7.0 5.0 3.0 1.0 -1.0 -3.0
-0.3 -0.4 -0.5 -0.6 -0.7 -0.8 -0.9 -1
16 April 2012
Ja n03 Ja n04 Ja n05 Ja n06 Ja n07 Ja n08 Ja n09 Ja n10 Ja n11 Ja n12
1 -1 ct O 0 -1 ct O 9 -0 ct O 8 -0 ct O 7 -0 ct O 6 -0 ct O 5 -0 ct O 4 -0 ct O 3 -0 ct
2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60
2 -0 ct
Figure 309: MRH Price-to-Tangible Book
1 -1 ov N 0 -1 ov N 9 -0 ov N 8 -0 ov N 7 -0 ov N 6 -0 ov N 5 -0 ov N 4 -0 ov N 3 -0 ov 2 -0 ov N
1 -1 ct O 0 -1 ct O 9 -0 ct O 8 -0 ct O 7 -0 ct O 6 -0 ct O 5 -0 ct O 4 -0 ct O 3 -0 ct O 2 -0 ct O
169
Figure 312: MRH Annual Summary Model

Total gross written premiums Ceded Premiums (in $) Net written premiums Retention Change in unearned premiums Net earned premiums Paid Losses Change in reserves Losses and loss expenses Acquisition expenses General and administrative expenses Total Operating Expenses Total underwriting expenses Underwriting income Net investment income Financing expense Other Revenue Other Expenses Pre-tax operating income Income Taxes Minority Interest - Blue Ocean Operating income, A/T Net realized gains (losses) on investments Net realized exchange gains (losses) Excess of FV of acq Blue Ocean assets Gain from MUSIC sale Net Income Other compr income (loss) items Comprehensive Income Per Share: Operating income Net realized gains (losses) on investments Net realized exchage gains (losses) Net Income Actual shares outstanding Average basic shares outstanding Dilution Average diluted shares outstanding Dividends per share Underwriting ratios Loss ratio Acquisition Ratio Administrative Expense Ratio Combined ratio CR Points PY Development CR Points from Large Catastrophes Unusual items Combined ratio ex. Cats, PY development, Unusual Year-over-year percentage change Gross premiums written, as reported Gross premiums written ex reinstatement prem Gross premiums written, ex. Blue Ocean Net premiums written Net premiums written, ex discontinued Net premiums written, ex. Blue Ocean Net premiums earned Net investment income Incurred losses Operating expenses Operating income Operating EPS Book Value per share A-T impact of 1% change in C/R Per share Diluted Book value per share Linked qtr % change in book value per share Tangible book value per share Book Value Ex AOCI Operating ROE ROE ex AOCI Comp. ROE (trailing 12 mos.) Effec. tax rate Debt/total capital Total capital Cash flow from operations Average Invested Assets Portfolio Yield # shares repurchased $$ shares repurchased Gross premiums reconciliation Montpelier premiums Blue Ocean premiums Total 2008 $620.1 78.9 541.2 87.3% (12.7) 528.5 317.9 (22.8) 295.1 83.9 102.0 185.9 481.0 47.5 86.4 26.8 0.9 11.9 96.1 (1.0) 1.9 94.2 (235.0) (4.7) 1.0 (145.5) (5.4) (150.9) $1.09 ($2.73) ($0.05) ($1.69) 83.9 85.7 0.4 86.1 $0.30 55.8% 15.9% 19.3% 91.0% -19.7% 38.2% 0.0% 72.6% -5.2% NA 1.5% -1.4% NA 6.9% -5.2% -34.8% 66.3% 13.2% -66.4% -62.7% -10.8% 5.3 $0.06 $15.94 NA $15.88 $15.97 6.3% 6.3% -10.0% -1.0% 20.6% 1,710 (5.2) 2,597 3.3% 7.0 $125.8 620.3 620.3 2009 $634.9 32.7 602.2 94.8% (29.0) 573.2 213.0 (74.3) 138.7 80.5 137.1 217.6 356.3 216.9 81.0 26.3 0.5 0.2 271.9 (1.1) 270.8 195.8 (3.1) 463.5 0.3 463.8 $3.13 $2.31 ($0.04) $5.36 80.0 84.9 84.9 $0.32 24.2% 14.0% 23.9% 62.2% -13.2% 5.6% 0.0% 69.8% 2.4% 5.8% 2.4% 11.3% NA 11.3% 8.5% -6.3% -53.0% 17.1% 187.5% 186.2% 32.6% 5.7 $0.07 $21.14 NA $21.08 $21.17 17.5% 17.5% 30.1% -0.4% 16.1% 2,060 3 2,577 3.1% 6.6 $112.6 634.9 634.9 2010 $720.0 51.2 668.8 92.9% (43.4) 625.4 189.3 113.0 302.3 98.7 112.1 210.8 513.1 112.3 74.1 24.6 0.8 (0.1) 162.7 (1.3) 164.0 43.7 4.3 212.0 (3.3) 208.7 $2.30 $0.63 $0.06 $2.97 64.6 69.7 69.7 $0.37 48.3% 15.8% 17.9% 82.0% -17.6% 25.1% -0.8% 75.3% 13.4% 10.9% 13.4% 11.1% 7.5% 11.1% 9.1% -8.5% 118.0% -3.1% -39.4% -26.7% 16.4% 6.3 $0.09 $24.61 NA $24.53 $24.70 9.8% 9.7% 12.4% -0.8% 16.7% 1,957 (73) 2,671 2.8% 15.6 $294.1 720.0 720.0 2011 $725.5 101.5 624.0 86.0% (1.3) 622.7 318.1 294.0 612.1 105.4 88.3 193.7 816.1 (193.4) 68.7 20.6 0.5 0.3 (145.1) (0.6) (154.4) 24.2 (5.2) 10.2 11.1 (124.3) 29.2 (138.3) ($2.50) $0.39 ($0.08) ($2.01) 60.9 61.8 61.8 $0.41 98.3% 16.9% 14.2% 129.4% -14.3% 60.2% 0.0% 83.5% 0.8% -1.1% 0.8% -6.7% -8.0% -6.7% -0.4% -7.3% 102.5% -8.1% NM NM -7.7% 6.2 $0.10 $22.71 NA $22.71 $22.77 -10.2% -10.2% -9.1% 0.4% 25.5% 1,877 167 2,869 2.4% 4.4 $82.7 725.5 725.5 2012E $688.0 111.5 576.5 83.8% 16.2 592.7 250.0 98.8 348.8 105.4 90.1 195.5 544.3 48.5 68.0 20.0 0.6 97.1 97.1 97.1 97.1 $1.65 $0.00 $0.00 $1.65 58.1 58.8 58.8 $0.45 58.8% 17.8% 15.2% 91.8% -6.7% 14.4% 0.0% 84.2% -5.2% -1.0% -5.2% -7.6% 0.8% -7.6% -4.8% -1.0% -43.0% 0.9% NM NM 6.3% 5.9 $0.10 $24.13 NA $24.13 $24.20 6.9% 6.9% 6.9% 0.0% 25.2% 1,898 120 3,118 2.2% 2.8 $50.0 688.0 688.0 2013E $712.1 95.1 617.0 86.7% (20.3) 596.8 250.0 108.0 358.0 107.0 95.0 202.0 560.0 36.8 68.0 20.0 0.6 85.4 85.4 85.4 85.4 $1.50 $0.00 $0.00 $1.50 55.6 56.8 56.8 $0.49 60.0% 17.9% 15.9% 93.8% 0.0% 15.0% 0.0% 78.8% 3.5% 3.5% 3.5% 7.0% 7.0% 7.0% 0.7% 0.0% 2.7% 3.3% NM NM 5.0% 6.0 $0.10 $25.35 NA $25.35 $25.42 6.0% 6.0% 6.0% 0.0% 25.1% 1,906 152 3,046 2.2% 2.5 $50.0 712.1 712.1 1Q $254.1 27.6 226.5 89.1% (60.4) 166.1 54.5 193.9 248.4 24.7 24.0 48.7 297.1 (131.0) 17.5 5.9 0.0 0.3 (119.7) (1.1) (118.6) 5.6 (2.0) 10.2 (104.8) 0.5 (104.3) ($1.90) $0.09 ($0.03) ($1.68) 62.3 62.5 62.5 $0.10 149.5% 14.9% 14.4% 178.9% -20.2% 120.4% 0.0% 78.7% -7.5% -9.7% -7.5% -13.5% -15.0% -13.5% 4.8% -5.4% 72.3% -5.4% NM NM 8.1% 1.7 $0.03 $23.10 -6.1% $23.02 $23.19 4.5% 4.5% 6.5% 0.9% 18.2% 1,800 66 2,735 2.6% 2.4 $47.4 254.1 254.1 2011 2Q $217.2 22.9 194.3 89.5% (41.9) 152.4 68.2 36.2 104.4 26.3 22.9 49.2 156.2 (3.8) 17.1 4.9 0.1 0.0 8.5 0.5 5.2 13.7 2.3 21.2 0.9 22.1 $0.08 $0.22 $0.04 $0.33 61.6 62.0 62.0 $0.10 68.5% 17.3% 15.0% 100.8% -12.9% 25.6% 0.0% 88.1% 8.9% 8.5% 8.9% -0.9% -2.1% -0.9% 2.8% -15.8% 139.4% 8.8% -92.8% -91.6% 4.7% 1.5 $0.02 $23.36 1.1% $23.29 $23.44 0.1% 0.1% 3.3% 5.9% 24.5% 1,948 52 2,806 2.4% 0.8 $15.0 217.2 217.2 3Q $162.5 40.9 $121.6 74.8% 34.3 $155.9 107.4 31.3 138.7 26.7 21.2 47.9 189.4 (33.5) 17.0 4.9 0.2 0.0 (21.2) (24.8) (37.2) (4.1) (66.1) 0.6 (65.5) ($0.40) ($0.60) ($0.07) ($1.07) 61.6 61.6 61.6 $0.10 89.0% 17.1% 13.6% 119.7% -11.5% 44.9% 0.0% 86.3% 13.3% 11.4% 13.3% 1.6% 3.0% 1.6% -0.3% -9.1% 166.7% -15.2% -140.9% -147.0% -6.3% 1.6 $0.03 $22.26 -4.7% $22.18 $22.32 -5.5% -5.5% -6.9% 0.0% 25.4% 1,878 17 2,933 2.3% $0.0 162.5 162.5 4Q $91.7 10.1 $81.6 89.0% 66.7 $148.3 88.0 32.6 120.6 27.7 22.1 49.8 173.4 (25.1) 17.1 4.9 0.2 0.0 (12.7) (16.2) 31.5 (1.4) 11.1 24.7 0.1 24.8 ($0.27) $0.52 ($0.02) $0.40 60.9 61.0 61.0 $0.11 81.3% 18.7% 14.9% 114.9% -12.1% 44.5% 0.0% 82.5% -10.4% -14.5% -10.4% -10.5% -14.4% -10.5% -8.6% 3.0% 93.0% -13.5% -130.1% -132.9% -7.7% 1.5 $0.02 $22.71 2.0% $22.71 $22.77 -10.2% -10.2% -8.1% 0.0% 25.5% 1,877 31 3,001 2.3% 1.2 $20.3 91.7 91.7 1Q $258.0 49.0 209.0 81.0% (57.4) 151.6 62.5 15.3 77.8 26.0 21.0 47.0 124.8 26.9 17.0 5.0 0.1 0.0 39.0 39.0 2012E 2Q $205.0 19.0 186.0 90.7% (36.5) 149.6 62.5 26.5 89.0 26.3 23.0 49.3 138.3 11.3 17.0 5.0 0.1 0.0 23.4 23.4 3Q $150.0 37.0 113.0 75.3% 34.4 147.4 62.5 35.5 98.0 27.0 23.1 50.1 148.1 (0.7) 17.0 5.0 0.2 0.0 11.5 11.5 4Q $75.0 6.5 68.5 91.3% 75.6 144.1 62.5 21.5 84.0 26.1 23.0 49.1 133.1 11.0 17.0 5.0 0.2 0.0 23.2 23.2 23.2 23.2 $0.40 $0.00 $0.00 $0.40 58.1 58.1 58.1 $0.12 58.3% 18.1% 16.0% 92.4% -3.5% 13.9% 0.0% 81.9% -18.2% -13.5% -18.2% -16.1% 3.6% -16.1% -2.8% -0.6% -30.3% -1.4% -243.4% -250.6% 6.3% 1.4 $0.02 $24.13 1.2% $24.13 $24.20 6.9% 6.9% 6.9% 0.0% 25.2% 1,898 (34) 3,144 2.2% $0.0 75.0 75.0
39.0 39.0 $0.65 $0.00 $0.00 $0.65 59.5 60.2 60.2 $0.11 51.3% 17.1% 13.8% 82.3% -9.9% 7.3% 0.0% 84.9% 1.5% 8.6% 1.5% -7.7% -3.0% -7.7% -8.7% -2.9% -68.7% -3.5% NM NM 1.1% 1.5 $0.03 $23.36 2.9% $23.36 $23.43 0.2% 0.2% 1.4% 0.0% 25.3% 1,885 85 3,049 2.2% 1.39 $25.0 258.0 258.0
23.4 23.4 $0.40 $0.00 $0.00 $0.39 58.1 58.8 58.8 $0.11 59.5% 17.6% 15.4% 92.5% -6.7% 13.4% 0.0% 85.8% -5.6% -3.7% -5.6% -4.3% 2.9% -4.3% -1.9% -0.6% -14.8% 0.2% 349.0% 373.3% 1.8% 1.5 $0.03 $23.78 1.8% $23.78 $23.85 1.5% 1.5% 1.5% 0.0% 25.5% 1,877 59 3,121 2.2% 1.39 $25.0 205.0 205.0
11.5 11.5 $0.20 $0.00 $0.00 $0.20 58.1 58.1 58.1 $0.12 66.5% 18.3% 15.7% 100.5% -6.8% 23.2% 0.0% 84.1% -7.7% -5.1% -7.7% -7.1% 2.8% -7.1% -5.5% 0.0% -29.3% 4.6% -146.4% -149.2% 7.2% 1.5 $0.03 $23.85 0.3% $23.85 $23.92 4.1% 4.1% 7.0% 0.0% 25.4% 1,882 10 3,156 2.2% $0.0 150.0 150.0
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170
FLAGSTONE REINSURANCE HOLDINGS SA 2-EQUAL WEIGHT/1-POSITIVE
FSR: Increasingly Dependent on Retrocessional Support

Price 4/11/2012
$7.39
Price Target
$9
52-Wk Price Range

0.68
Mkt Cap (Bil)

$0.5

($3.98) $0.75
13E
$0.70
% Change EPS 11/12 12/13

NM -7%

$0.86 $0.89
Div. Yield
2.2%

0.68 0.64 0.62
P/E 12E
9.8
13E
10.5
ROE 12E 13E

7% 6%
Investment Thesis
Potential Catalysts
FlagstoneRe has a global property reinsurance platform. However, FSRs growth opportunities could be limited as it reduces exposures following large 2011 catastrophe losses. Also, the company could face increased dependence on retrocessional support and the need to hold increased capital. FSR is divesting its Lloyds and Island Heritage business (about one-quarter of premiums and no contribution to earnings) after two years of high catastrophe losses. FSRs BV declined by 30% y/y in 2011. FSR is currently rebalancing its portfolio and reducing overall risk by cutting international and North American exposure limits and reducing overall gross written premiums by 30%.
Risks
FSRs top-line growth could trail other Bermuda reinsurers as it reduces its exposure following large 2011 catastrophe losses. FSR is currently rated A- with a negative outlook by rating agencies. FSR says its rating agency capital adequacy measures are sufficient and will increase with the Lloyds and Island Heritage divestitures, although this outlook appears optimistic after FSR reported a net EPS loss of $4.65 for FY11.
Valuation
Similar to other property/casualty insurers, FSR faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, rising interest rates and increased inflation FSRs capital base is around $1bn, which is at the low end of peers. FSR strengthened reserves in 4Q11, which could mean it has a less robust reserve cushion than other P&C reinsurers.
Since 2007, FSR has traded at a median trailing price to stated book value of 0.81x, with a range of 0.54x1.10x. Our $9 price target is based on 0.8x YE12 estimated book value per share of $11, and a P/E of 12x our 2012 EPS estimate of $0.75. FSR currently trades at 0.68x 2011 book value (below other Bermuda reinsurers) and 9.8x 2012E EPS of $0.75 (in line with other Bermuda reinsurers).
Flagstone Re, domiciled in Luxembourg with major offices in Bermuda and Switzerland, is a global reinsurer focused on specialty, property catastrophe, and short-tail casualty reinsurance.
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171
Figure 314: FSR Major Metrics

$3.00 $1.99 $2.00 $1.00 $1.89 $1.13 $0.75 $0.32 $0.70 $2.30
Total Gross Written Premiums FY 2011: $790 million
Short-tail specialty and casualty 23%
Property catastrophe 55%
$0.00 -$1.00 -$2.00 -$3.00 -$4.00
Property 22%
-$3.98 -$5.00 2006 2007 2008 2009 2010 2011 2012E 2013E
160% 140%
Book Value $20 Book Value Per Share $16 $12 $8 $4 $0

2007 2008 2009 2010 2011 2012E 2013E
Operating ROE 25% 15% 5% -5% -15% -25% -35% Operating ROE
120% 100% 80% 60% 40% 2006
2006 2007 2008 2009 2010 2011 2012E 2013E
Combined Ratio
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172
Figure 315: FSR Absolute 1Q Trailing Price-to-Book

1.10 1.00 0.90 0.80 0.70 0.60 0.50
Figure 316: FSR Relative Price-to-Book (S&P Financials)

40% 20% 0% -20% -40% -60%
Figure 317: FSR Price-to-Book Ex Net Unrealized Gains/(Losses)

1.10 1.00 0.90 0.80 0.70 0.60 0.50
Ju n07 D ec -0 7 Ju n08 D ec -0 8 Ju n09 D ec -0 9 Ju n10 D ec -1 0 Ju n11 D ec -1 1
Figure 319: FSR Absolute 4-Qtr Fwd Price-to-Earnings

10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0
Figure 320: FSR Relative 4-Qtr Fwd P/E (S&P 500)
-55% -70% -85% -100%

M 2 -1 ar M 1 1 pSe 1 -1 ar M 0 1 pSe 10 ar M 9 0 pSe 09 ar M 8 0 pSe 08 ar M 7 0 pSe 07 ar
16 April 2012
07 Se p0 M 7 ar -0 8 Se p0 M 8 ar -0 9 Se p0 M 9 ar -1 0 Se p1 M 0 ar -1 1 Se p1 M 1 ar -1 2
ar -
M ar 07
M ar 08
M ar 09
M ar 10
M ar 11
1.30 1.20 1.10 1.00 0.90 0.80 0.70 0.60 0.50
Figure 318: FSR Price-to-Tangible Book
M ar 07
ar 08
ar
ar
ar 09
ar 10
11
12
M ar 07
ar
ar 08
ar 10
ar
ar 09
12
173
11
Figure 321: FSR Annual Summary Model

(Dollars in millions, except per share) Gross Written Premiums Total Ceded Premiums (in $) Net Written Premiums Retention Change in Unearned Premiums Net Earned Premiums Paid Losses Change in Reserves Losses & LAE Acquisition Costs Total Underwriting Expenses G & A Expenses Underwriting Income Other Income Net Investment Income Interest in Earnings of Equity Investments Financing Expense Net Forex Gains (Losses) Pre-Tax Operating Income Income Taxes Minority Interest Fair Value of Warrant Issued Operating Income A/T Realized Gain on repurchase of debt Net Realized and Unrealized Gains (Losses) Unusual Items Net Income from continuing operations Net income from discontinued operations Net income attributable to Flagstone Other Comprehensive Income Comprehensive Income Per Share: Operating Income, Fully Diluted Net Realized and Unrealized Gains (Losses) Net Income continuing operations, Fully Diluted Net income attributable to Flagstone Other Comprehensive Income Comprehensive Income, Fully Diluted Average Basic Shares Outstanding Dilution Average Diluted Shares Outstanding Ending Shares Outstanding Dividends Per Share Underwriting Ratios Loss Ratio Acquisition Ratio G&A Expense (Operating) Ratio Expense Ratio Combined Ratio CR Points, PY Development CR Points, Notable Cat's CR Points, Unusual Items Combined Ratio ex. Cats & PY Devel. Loss ratio ex. large cats Year-over-year Percent Change Gross Written Premiums Gross Written Premiums ex reinstatement prem Net Written Premiums Net Earned Premiums Net Investment Income Losses & LAE Acquisition Costs G & A Expenses Operating Income Operating EPS Fully diluted book value per share A/T Impact of 1% Change in C/R Per Share Book Value per share (Basic) Book Value per share (Diluted) Linked qtr % change in book value per share Book value ex AOCI Tangible book value per share Operating ROE ROE ex. AOCI (operating income) ROE (net income) ROE (comprehensive income) Effective Tax Rate Debt/Total Capital Total Capital Gross Written Premiums/Beg. Capital Cash Flow from Operations $ amt of share repurchase Avg Invested Assets, as reported Average Portfolio Yield 2006 $302.5 (20.0) 282.5 93% (90.4) 192.1 4.1 22.5 26.7 29.9 56.6 34.7 100.7 6.1 34.2 1.8 4.6 2.1 140.2 0.1 140.1 12.2 152.3 152.3 (4.5) 147.8 $1.99 $0.17 $2.00 $2.00 ($0.06) $2.10 70.1 0.3 70.4 71.5 $0.00 13.9% 15.6% 18.1% 33.7% 47.6% 0.0% 0.0% 0.0% 47.6% 13.9% NM NM NM NM NM NM NM NM NM NM NM 1.9 $0.03 $12.08 $11.94 NA $11.95 NA NA 19.8% 21.6% 20.9% 0.1% 14% 1,002 NM 173 793 4.3% 2007 $577.2 (50.1) 527.0 91% (49.9) 477.1 39.6 158.5 192.9 82.3 275.2 72.5 129.5 5.8 73.8 1.4 18.7 5.3 197.1 0.8 35.8 155.3 7.4 167.9 167.9 7.9 175.9 $1.89 $0.09 $2.05 $2.05 $0.10 $2.14 82.0 0.1 82.1 85.4 $0.08 40.4% 17.2% 15.2% 32.4% 72.8% -1.9% 25.2% 0.0% 47.6% 15.3% 90.8% 86.6% 86.6% 148.4% 115.7% 623.4% 174.9% 108.6% 10.8% -5.0% 16.2% 4.8 $0.06 $14.17 $13.87 NA $13.78 NA 14.9% 15.0% 16.2% 17.0% 0.4% 18% 1,468 58% 328 1,525 4.8% 2008 $781.9 (87.2) 694.7 89% (40.5) 654.2 213.6 230.6 379.9 105.7 485.6 99.0 69.5 8.2 51.4 (1.3) 18.3 (21.5) 88.1 1.2 13.6 (3.6) 96.5 1.8 (260.6) (187.3) (187.3) (15.7) (203.0) $1.13 ($3.05) ($2.20) ($2.20) ($0.18) ($2.38) 85.3 0.0 85.3 84.9 $0.16 58.1% 16.2% 15.1% 31.3% 89.4% -2.4% 26.1% 0.0% 65.7% 32.0% 35.5% 32.2% 31.8% 37.1% -30.4% 97.0% 28.5% 36.7% -37.9% -40.2% -18.5% 6.5 $0.08 $11.61 $11.30 NA $11.39 $9.41 8.8% 8.8% -17.0% -18.5% 1.3% 20% 1,247 53% 288 1,879 2.7% 2009 $988.5 (196.0) 792.5 80% (34.0) 758.5 243.0 69.1 283.2 136.5 419.7 147.1 210.8 21.7 28.5 (1.4) 12.1 (3.2) 225.2 5.4 28.5 194.5 50.9 242.2 242.2 1.3 243.5 $2.30 $0.60 $2.87 $2.87 $0.02 $2.88 84.3 0.2 84.5 83.2 $0.16 37.3% 18.0% 19.4% 37.4% 74.7% -0.9% 3.1% 0.0% 72.5% 34.2% 26.4% 31.2% 14.1% 15.9% -44.5% -25.5% 29.1% 48.6% 101.6% 103.6% 23.7% 7.6 $0.09 $14.56 $13.97 NA $14.05 $13.45 17.7% 17.6% 21.9% 22.0% 2.4% 17% 1,470 79% 338 1,769 1.6% 2010 $819.5 (208.9) 668.7 82% (11.6) 657.1 N/A 80.5 409.8 112.0 521.9 134.5 0.7 7.9 30.6 (1.2) 10.4 0.9 27.7 2.1 (8.7) 25.6 57.3 83.8 4.6 97.1 0.8 89.2 $0.32 $0.73 $1.06 $1.23 $0.01 $1.13 78.7 0.2 78.9 68.8 $0.16 62.4% 17.0% 20.5% 37.5% 99.9% -2.8% 33.4% 2.1% 67.1% 29.0% -17.1% -18.9% -15.6% -13.4% 7.3% 44.7% -17.9% -8.6% -86.8% -85.9% 11.0% 6.6 $0.08 $16.48 $15.51 NA $15.59 $14.85 2.2% 2.2% 7.1% 7.6% 7.6% 18% 1,392 56% 292 $164.0 1,947 1.6% 2011 $789.7 (231.3) 558.4 71% 13.0 571.5 607.1 65.0 676.5 115.3 791.9 85.8 (306.2) 5.4 34.3 (0.9) 11.7 (4.5) (279.0) (0.1) 2.7 (279.0) (18.3) (301.7) (21.7) (326.1) (6.4) (329.8) ($3.98) ($0.26) ($4.30) ($4.65) ($0.09) ($4.70) 70.1 0.0 70.1 70.4 $0.16 118.4% 20.2% 15.0% 35.2% 153.6% -1.9% 83.6% 0.0% 71.9% 34.8% -3.6% -3.6% -16.5% -13.0% 12.1% 65.1% 3.0% -36.2% NM NM -29.7% 5.7 $0.08 $11.21 $10.90 NA $11.08 $10.90 -29.0% -28.7% -31.1% -34.0% 0.0% 24% 1,052 57% N/A $0.0 1,787 1.9% 2012E $537.0 (177.0) 360.0 67% 73.7 433.7 450.0 (219.8) 230.2 87.2 317.4 80.5 35.8 6.0 26.4 11.2 57.0 4.0 53.0 53.0 53.0 53.0 $0.75 $0.00 $0.75 $0.75 $0.00 $0.75 70.4 0.0 70.4 70.4 $0.16 53.1% 20.1% 18.6% 38.7% 91.7% 0.0% 19.8% 0.0% 71.9% 33.2% -32.0% -29.7% -35.5% -24.1% -23.1% -66.0% -24.4% -6.2% NM NM 5.2% 4.3 $0.06 $11.80 $11.47 NA $11.65 $11.47 6.5% 6.4% 6.4% 6.4% 7.0% 23% 1,094 51% (247) $0.0 1,458 1.8% 2013E $520.9 (177.1) 343.8 66% 4.9 348.7 450.0 (273.5) 176.5 70.5 247.0 70.0 31.7 6.0 27.0 11.2 53.5 4.0 49.5 49.5 49.5 49.5 $0.70 $0.00 $0.70 $0.70 $0.00 $0.70 70.4 0.0 70.4 70.4 $0.16 50.6% 20.2% 20.1% 40.3% 90.9% 0.0% 20.0% 0.0% 70.9% 30.6% -3.0% -3.0% -4.5% -19.6% 2.3% -23.3% -19.2% -13.0% -6.7% -6.7% 3.4% 3.5 $0.05 $12.34 $11.86 NA $12.04 $11.86 5.8% 5.7% 5.7% 5.7% 7.5% 22% 1,132 48% (235) $0.0 1,160 2.3% 1Q $352.7 (118.8) 233.9 66% (32.9) 201.1 82.3 225.3 303.0 38.1 341.1 16.1 (156.1) 1.1 9.2 (0.3) 2.9 (9.6) (148.9) (0.2) 0.8 (148.7) 10.1 (148.2) (12.2) (161.2) 2.9 (157.5) ($2.14) $0.15 ($2.14) ($2.32) $0.04 ($2.27) 69.4 0.0 69.4 70.4 $0.04 150.7% 18.9% 8.0% 26.9% 177.6% 0.0% 127.3% 0.0% 50.3% 23.4% -11.9% -14.1% -27.8% -7.3% NM 137.9% -11.1% -61.0% NM NM -6.4% 2.0 $0.03 $13.77 $13.34 -14.0% $13.38 $12.67 -56.5% -56.3% -56.1% -59.6% 0.2% 21% 1,224 42 $0.0 1,915 1.9% 2011 2Q $264.1 (44.4) 219.7 83% (101.1) 118.6 203.2 (77.8) 96.5 25.6 122.1 19.7 (23.2) 1.6 12.3 (0.2) 2.9 (27.4) (12.4) (0.8) 1.2 (11.6) 6.1 (33.0) 14.0 (20.2) 0.7 (18.3) ($0.16) $0.09 ($0.47) ($0.29) $0.01 ($0.26) 70.4 0.0 70.4 70.4 $0.04 81.3% 21.6% 16.6% 38.2% 119.6% -10.8% 56.5% 0.0% 73.9% 24.9% -28.5% -29.2% -25.2% -48.9% NM -36.5% -43.8% -53.8% NM NM -9.6% 1.2 $0.02 $13.45 $13.08 -2.0% $13.11 $12.41 -4.8% -4.8% -13.7% -7.6% 6.7% 21% 1,202 (137) $0.0 1,830 2.7% 3Q $92.2 (30.6) 61.6 67% 68.5 130.0 160.0 (72.5) 131.9 31.6 163.5 19.8 (53.2) 1.4 6.2 (0.3) 3.1 34.0 (49.1) 0.7 0.1 (49.8) (37.9) (53.7) (5.8) (59.5) (8.6) (68.1) ($0.71) ($0.54) ($0.76) ($0.85) ($0.12) ($0.97) 70.4 0.0 70.4 70.4 $0.04 101.4% 24.3% 15.2% 39.5% 140.9% -7.3% 70.3% 0.0% 78.0% 31.1% -50.4% -52.0% -61.4% -34.6% NM 10.7% 3.3% -59.9% NM NM -19.8% 1.3 $0.02 $12.46 $12.11 -7.4% $12.26 $11.46 -21.8% -21.7% -23.4% -29.6% -1.4% 22% 1,139 (3) $0.0 1,767 1.4% 4Q $80.7 (37.5) 43.2 54% 78.6 121.8 161.6 (10.0) 145.2 20.0 165.2 30.2 (73.6) 1.4 6.6 (0.2) 2.8 (1.4) (68.6) 0.4 0.6 (69.0) 3.5 (66.9) (17.6) (85.2) (1.4) (85.9) ($0.98) $0.05 ($0.95) ($1.21) ($0.02) ($1.22) 70.4 0.0 70.4 70.4 $0.04 119.2% 16.4% 24.8% 41.3% 160.5% 9.4% 52.0% 0.0% 99.0% 67.2% -2.9% 8.9% -18.1% -21.7% -19.2% 38.2% -36.9% 17.4% NM NM -29.7% 1.2 $0.02 $11.21 $10.90 -10.0% $11.08 $10.90 -33.1% -32.7% -31.7% -40.7% -0.5% 23.8% 1,052 N/A $0.0 1,637 1.6% 1Q $237.0 (79.0) 158.0 67% (28.6) 129.4 100.0 (32.0) 68.0 26.0 94.0 22.0 13.4 1.5 6.6 2.8 18.7 1.0 17.7 17.7 17.7 17.7 $0.25 $0.00 $0.25 $0.25 $0.00 $0.25 70.4 0.0 70.4 70.4 $0.04 52.6% 20.1% 17.0% 37.1% 89.6% 0.0% 13.1% 0.0% 76.5% 39.4% -32.8% -30.4% -32.5% -35.6% NM -77.6% -31.7% 36.9% NM NM -16.7% 1.3 $0.02 $11.42 $11.10 1.8% $11.28 $11.10 8.9% 8.7% 8.7% 8.7% 5.3% 23% 1,067 13 $0.0 1,530 1.7% 2012E 2Q $181.0 (58.0) 123.0 68% (17.8) 105.2 100.0 (46.5) 53.5 21.0 74.5 21.0 9.7 1.5 6.6 2.8 15.0 1.0 14.0 14.0 14.0 14.0 $0.20 $0.00 $0.20 $0.20 $0.00 $0.20 70.4 0.0 70.4 70.4 $0.04 50.8% 20.0% 20.0% 39.9% 90.8% 0.0% 15.2% 0.0% 75.6% 35.6% -31.5% -29.9% -44.0% -11.3% NM -44.6% -18.0% 6.4% NM NM -13.9% 1.1 $0.01 $11.58 $11.26 1.4% $11.43 $11.26 6.9% 6.8% 6.8% 6.8% 6.7% 23% 1,078 (16) $0.0 1,529 1.7% 3Q $63.0 (21.2) 41.8 66% 58.5 100.3 150.0 (92.5) 57.5 20.4 77.9 19.5 2.9 1.5 6.6 2.8 8.2 1.0 7.2 7.2 7.2 7.2 $0.10 $0.00 $0.10 $0.10 $0.00 $0.10 70.4 0.0 70.4 70.4 $0.04 57.3% 20.3% 19.4% 39.8% 97.1% 0.0% 34.9% 0.0% 62.2% 22.4% -31.6% -25.4% -32.1% -22.9% NM -56.4% -35.5% -1.4% NM NM -6.5% 1.0 $0.01 $11.64 $11.32 0.5% $11.49 $11.32 3.5% 3.5% 3.5% 3.5% 12.2% 23% 1,083 (145) $0.0 1,448 1.8% 4Q $56.0 (18.8) 37.2 66% 61.6 98.8 100.0 (48.8) 51.2 19.8 71.0 18.0 9.8 1.5 6.6 2.8 15.1 1.0 14.1 14.1 14.1 14.1 $0.20 $0.00 $0.20 $0.20 $0.00 $0.20 70.4 0.0 70.4 70.4 $0.04 51.8% 20.0% 18.2% 38.3% 90.1% 0.0% 18.2% 0.0% 71.9% 33.6% -30.6% -30.6% -14.0% -18.9% -0.7% -64.7% -1.1% -40.4% NM NM 5.2% 1.0 $0.01 $11.80 $11.47 1.4% $11.65 $11.47 6.8% 6.7% 6.7% 6.7% 6.6% 23% 1,094 (98) $0.0 1,326 2.0%
16 April 2012
174
ONEBEACON INSURANCE GROUP, LTD. 2-EQUAL WEIGHT/1-POSITIVE
OB: Facing Top-Line Pressure

Price 4/11/2012
$14.69
Price Target
$15
52-Wk Price Range

1.27
Mkt Cap (Bil)

$1.4

$0.51 $0.90
13E
$0.80
% Change EPS 11/12 12/13

77% -11%

$1.06 $1.09
Div. Yield
5.7%

1.27 1.39 1.42
P/E 12E
16.3
13E
18.4
ROE 12E 13E

9% 8%
Investment Thesis
Potential Catalysts
Our 2-EW rating on OB is based on our view that earnings could meaningfully decline after the sale of nearly half of OB's business, underwriting losses from run-off business are a risk, and valuation appears extended. However, OB could seek strategic alternatives after selling half its business. OB has $50-$75mn of excess capital and will free up about another $50-$60mn of excess capital in 2012 as its legacy business runs off, but this should be used to support growth in the business. As a result, OB is unlikely to announce another special dividend in 2012.
Risks
OB could seek strategic alternatives after selling half its business. Potential run-off losses could result in lower than anticipated earnings. OB appears unlikely to repurchase its stock or pay future special dividends near term. Our EPS estimates are below consensus because OBs earnings power is compressed as a result of reduced premium volume and we are concerned run-off losses could persist.
Valuation
Similar to other property/casualty insurers, OB faces risks if P&C price increases do not persist, as well as from catastrophes and other large losses, rising interest rates and increased inflation. OBs premiums and earnings could shrink meaningfully going forward after the sale of its personal lines and non-specialty commercial lines business (45% of total NWPs). OB could experience losses in its run-off business.
Since 2007, OB has traded at a median trailing price to stated book value of 1.11x, with a range of 0.70x1.70x. Our $15 price target is based on 1.4x YE12 estimated book value per share of $11, and a P/E of 17x our 2012 EPS estimate of $0.90. OB currently trades at 1.27x 2011 book value and 16.3x 2012E EPS of $0.90, above other P&C insurers.
OneBeacon Insurance Group, Ltd. is a Bermuda-domiciled holding company with its headquarters located in Canton, MA. OneBeacon offers a range of specialty commercial insurance products sold through independent agents and brokers.
16 April 2012
175
Figure 323: OB Major Metrics

$2.50 $2.00 $1.98 $1.93 $1.49 $1.50 $1.00 $0.90 $0.75 $0.51 $0.50 $1.90
Specialty Products 38%
MGA Business 27%
$0.80
Specialty Industries 35%
$0.00 2006 2007 2008 2009 2010 2011 2012E 2013E
105%
Book Value $25
Operating ROE 15% 12% 9% 6% 3% 0%
100%
$20 $15 $10 $5 $0 2006 2007 2008 2009 2010 2011 2012E 2013E
95%
90%
85% 2006
2007
2008
2009
2010
2011
2012E
2013E
Combined Ratio
16 April 2012
Operating ROE
176
Figure 324:OB Absolute 1Q Trailing Price-to-Book
Figure 325: OB Relative Price-to-Book (S&P Financials)

60% 30% 0% -30% -60%
1.8 1.6 1.4 1.2 1.0 0.8 0.6

N 6 -0 ov
2.10 1.90 1.70 1.50 1.30 1.10 0.90 0.70 0.50
ov -0 6 ay -0 N 7 ov -0 M 7 ay -0 8 N ov -0 M 8 ay -0 N 9 ov -0 M 9 ay -1 0 N ov -1 M 0 ay -1 N 1 ov -1 1 N M
D 6 -0 ec
D 7 -0 ec
8 -0 ec
9 -0 ec
0 -1 ec
1 -1 ec
Figure 326: OB Price-to-Book Ex Net Unrealized Gains/(Losses)
Figure 328: OB Absolute 4-Qtr Fwd Price-to-Earnings

16.0 14.0 12.0 10.0 8.0 6.0 4.0
Figure 329: OB Relative 4-Qtr Fwd P/E (S&P 500)
10% -10% -30% -50% -70%
16 April 2012
ov -0 6 ay -0 N 7 ov -0 M 7 ay -0 N 8 ov -0 M 8 ay -0 9 N ov -0 M 9 ay -1 N 0 ov -1 M 0 ay -1 N 1 ov -1 1
N 7 -0 ov
N 7 -0 ov
N 8 -0 ov
N 9 -0 ov
N 0 -1 ov
N 1 -1 ov
1.80 1.60 1.40 1.20 1.00 0.80 0.60
Figure 327: OB Price-to-Tangible Book
N 6 -0 ov
N 8 -0 ov
N 9 -0 ov
N 0 -1 ov
N 1 -1 ov
6 -0 ov
7 -0 ov
8 -0 ov
9 -0 ov
0 -1 ov
1 -1 ov
177
Figure 330: OB Annual Summary Model

($ In Mil, except per share)
Primary Insurance Operations Net premiums written Net written premiums excluding one-time items Change in unearned premium Net premiums earned Loss and LAE CY Loss and LAE PY Total Loss and LAE Change in loss & LAE reserves Paid losses and LAE Insurance acquisition expenses Other underwriting expenses Total Underwriting expenses Primary Insurance u/w income Net investment income Other revenue Other G&A expense Interest Expense Total Primary Insurance P/T income Other Operations P/T Income Total Operating P/T Income Property/casualty income tax Loss from discontinued operations Operating Income A/T Op Inc A/T ex pref stock items Unusual items (a) Op Inc A/T ex unusual items, pref stock items Net Realized Gains A/T Net Income Continuing Ops Discontinued Ops Gain on sale disc. Ops, A/T Net Income as reported Other comprehensive income (loss) Comprehensive Net Income Comprehensive EPS ex pref stock items Per Share Operating EPS Dividends and accretion on preferred stock Earnings on defeasement, net of tax Op Inc A/T ex pref stock items Unusual items (a) Op EPS ex unusual items and pref stock items Net Realized Gains Net Income Other comprehensive income (loss) Comprehensive EPS Comprehensive EPS ex pref stock items Actual shares outstanding Diluted average shares Primary Insurance Underwriting Ratios Loss ratio Expense ratio Combined ratio Pre-tax cat losses ($Mil) Catastrophes (CR pts) Prior Year development (favorable) unfavorable PY development (CR pts) CR ex cats and py development and unusual items Long-term incentive compensation LT incentive comp (CR pts) CR ex cats, py developmt, un items & LT incentive comp Year-over-year percentage change Net premiums written Net premiums written ex one-time items Net premiums earned Net investment income Loss & LAE Underwriting expenses Operating income Operating EPS Operating EPS ex unusual items Op EPS ex unusual items, purch accting, pref stock items Adj,. Book value Adj. Book value before dividends A-T impact of 1% change in C/R Per share Book value per share as reported AOCI per share Book value per share ex AOCI Adj. book value per share (b) Linked qtr % change in book value per share Adj. book value per share ex AOCI (b) Tangible book value per share Operating ROE ex AOCI pref, and unus items Operating ROE ex pref and unusual items Comprehensive ROE incl AOCI, ex pref items Effec. tax rate Debt/total capital incl preferred Debt/Capital ex preferred Statutory Surplus Premiums/stat. surplus Cash flow from operations Shareholder Dividends Shareholder dividend per share Average Fixed Maturity Invested Assets Pre-tax yield # shares repurchased $ amt shares repurchased 2007 $1,864 1,864 10 1,874 1,138 (48) 1,090 (160) 1,250 319 329 648 136 185 19 3 3 333 (108) 225 87 138 $193 (5) $188 113 251 251 (6) 245 $300 $1.38 $0.66 ($0.10) $1.93 ($0.05) $1.88 $1.13 $2.51 ($0.06) $2.45 $3.01 99 100 58.2% 34.6% 92.8% 13 0.7% (45) -2.4% 95.5% 32 1.6% 93.9% -4.8% -1.6% -3.6% 1.2% -7.7% -6.4% -1.9% -1.7% 13.6% -2.2% 11.3% 16.2% 12.2 $0.12 $19.36 $1.84 $17.52 $19.14 NA $17.30 NA 11.9% 10.4% 16.6% 30.0% 35.2% 28.4% 1,921 1.0 18 84 $0.85 4,581 4.6% 1.9 2008 $1,963 1,963 (84) 1,879 1,188 (62) 1,126 (72) 1,198 368 291 659 94 153 14 11 4 246 (85) 161 48 114 $143 6 $149 (496) (383) (383) 1 (382) ($353) $1.18 $0.35 ($0.04) $1.49 $0.06 $1.55 ($5.18) ($3.99) $0.01 ($3.98) ($3.68) 95.1 95.9 59.9% 35.1% 95.0% 52 2.8% (56) -3.0% 95.2% 12 0.7% 94.6% 5.3% 5.3% 0.3% -17.3% 3.3% 1.7% -17.6% -14.2% -17.5% -22.9% -36.5% -21.4% 12.2 $0.13 $12.15 ($1.40) $13.55 $12.15 NA $13.55 $12.04 9.9% 9.8% -23.2% 24.5% 38.8% 38.8% 1,192 1.6 44 275 $2.89 4,235 3.9% 3.4 $71 2009 1,907 1,907 53 1,960 1,205 (83) 1,122 (54) 1,176 398 330 728 109 127 41 17 2 259 (51) 208 26 0 180 180 0 $180 162 342 342 19 361 $361 $1.90 $0.00 $0.00 $1.90 $0.00 $1.90 $1.70 $3.60 $0.20 $3.79 $3.80 95.1 95.1 57.3% 37.2% 94.4% 21 1.1% (81) -4.1% 97.5% 41 2.1% 95.4% -2.9% -2.9% 4.3% -16.5% -0.4% 10.5% 58.9% 60.3% 22.3% 27.3% 23.7% 30.6% 12.7 $0.13 $15.03 $1.01 $14.01 $15.03 NA $14.01 $15.03 13.8% 14.0% 28.0% 12.4% 30.3% 30.3% 1,454 1.3 165 80 $0.84 3,845 3.3% $0 2010 $1,236 1,236 251 1,488 981 (51) 930 (109) 1,039 329 247 576 (18) 98 41 18 6 97 (45) 52 (18) 69.8 $70 0 $70 49 118 118 7 123 $125 $0.75 $0.00 $0.00 $0.75 $0.00 $0.75 $0.51 $1.25 $0.07 $1.30 $1.32 94.4 94.8 62.5% 38.7% 101.2% 55 3.7% (51) -3.4% 100.9% 25 1.7% 99.2% -35.2% -35.2% -24.1% -23.2% -17.1% -21.0% -61.3% -60.6% -60.6% -60.6% -20.3% 2.0% 9.7 $0.10 $11.98 $0.00 $11.98 $11.98 NA $11.98 $11.98 5.7% 5.5% 9.8% -33.8% 27.1% 27.1% 1,246 1.0 22 316 $3.34 3,443 2.8% 0.7 $11 2011 $1,096 1,096 (45) 1,051 612 (3) 609 (144) 753 223 180 403 40 71 (11) 10 21 70 0 70 (2) (23) 48 $48 19 $67 7 55 55 (11) 45 $44 $0.51 $0.00 $0.00 $0.51 $0.20 $0.71 $0.07 $0.58 ($0.12) $0.47 $0.46 95.0 94.8 57.9% 38.3% 96.2% 37 3.5% (3) -0.3% 93.0% 6 0.6% 92.4% -11.3% -11.3% -29.3% -27.1% -34.5% -30.0% -30.9% -31.9% -4.8% -31.9% -12.1% 3.3% 6.8 $0.07 $10.53 ($0.11) $10.65 $10.53 NA $10.65 $10.53 6.3% 6.3% 4.1% -3.3% 21.2% 21.2% 1,126 1.0 (119) 175 $1.84 2,854 2.5% 0.1 $0 2012E $1,130 1,130 (17) 1,113 658 0 658 (142) 800 213 210 423 32 70 5 7 16 84 0 84 (2) 86 $86 0 $86 0 86 86 0 86 $86 $0.90 $0.00 $0.00 $0.90 $0.00 $0.90 $0.00 $0.90 $0.00 $0.90 $0.90 95.0 95.1 59.1% 38.0% 97.1% 28 2.5% 0.0% 94.6% 20 1.8% 92.8% 3.1% 3.1% 5.9% -2.0% 8.0% 5.0% 77.9% 77.4% 26.8% 77.4% 0.6% 8.6% 7.2 $0.08 $10.59 ($0.11) $10.71 $10.59 NA $10.71 $10.59 8.5% 8.6% 8.6% -1.8% 21.1% 21.1% 1,132 1.0 (21) 80 $0.84 2,601 2.7% $0 2013E $1,170 1,170 (20) 1,150 702 0 702 (98) 800 213 218 431 17 70 5 7 16 69 0 69 (7) 76 $76 0 $76 76 76 0 76 $76 $0.80 $0.00 $0.00 $0.80 $0.00 $0.80 $0.00 $0.80 $0.00 $0.80 $0.80 95.0 95.0 61.0% 37.5% 98.5% 28 2.4% 0.0% 96.1% 20 1.7% 94.3% 3.5% 3.5% 3.3% 0.0% 6.7% 1.9% -11.6% -11.4% -11.4% -11.4% -2.4% 7.5% 7.5 $0.08 $10.34 ($0.11) $10.45 $10.34 NA $10.45 $10.34 7.5% 7.6% 7.6% -9.9% 21.5% 21.5% 1,108 1.1 16 100 $1.05 2,508 2.8% $0 1Q $278 278 (15) 264 150 (5) 145 (42) 186 51 52 103 16 21 1 2 6 29 0 29 1 27 27 0 $27 15 42 0 0 42.3 0 42 $42 $0.29 $0.00 $0.00 $0.28 $0.00 $0.29 $0.16 $0.45 $0.00 $0.45 $0.45 94.4 94.4 54.9% 39.2% 94.1% 7 2.8% (5) -1.9% 93.2% 5 2.0% 91.2% -25.1% -25.1% -41.9% -27.6% -56.7% -41.1% -196.5% -197.2% -197.2% -193.8% -10.6% 12.0% 1.7 $0.02 $13.26 $0.00 $13.25 $13.26 1.8% $13.25 $13.26 9.6% 9.3% 12.5% 4.9% 25.1% 25.1% NA NA (62) 20 $0.21 3,103 2.7% $0 2011 2Q $281 281 (16) 265 162 (10) 152 (55) 207 55 48 103 10 19 (12) 3 6 9 0 9 0 9 9 0 $9 7 16 0 0 16.0 0 16 $16 $0.09 $0.00 $0.00 $0.09 $0.00 $0.09 $0.08 $0.16 $0.00 $0.16 $0.16 95.1 94.7 57.3% 38.8% 96.1% 14 5.2% (10) -3.8% 94.7% 5 1.9% 92.8% -18.4% -18.4% -38.1% -25.2% -42.0% -33.1% -49.1% -49.0% -49.0% -49.0% -17.6% 11.9% 1.7 $0.02 $12.12 $0.00 $12.11 $12.12 -8.6% $12.11 $12.12 9.3% 9.1% 13.7% 1.1% 19.0% 19.0% NA NA (56) 115 $1.21 2,914 2.6% 0.1 $0 3Q $297 297 (38) 259 156 (10) 147 (27) 174 59 39 97 15 16 0 3 4 24 0 24 6 (21) (2) (2) 18 $16 (31) (33) 0 0 (32.9) 0 (33) ($33) ($0.02) $0.00 $0.00 ($0.02) $0.19 $0.17 ($0.32) ($0.35) $0.00 ($0.34) ($0.34) 95.1 95.1 56.7% 37.6% 94.3% 13 5.0% (10) -3.8% 93.1% (4) -1.5% 94.6% 3.2% 3.2% -18.7% -27.5% -18.5% -19.4% -103.9% -103.9% -70.0% -103.9% -10.4% 3.8% 1.7 $0.02 $11.57 $0.01 $11.56 $11.57 -4.5% $11.56 $11.57 5.3% 5.2% 4.8% 22.6% 19.7% 19.7% NA NA 27 20 $0.21 2,730 2.4% $0 4Q $241 241 24 264 144 22 166 (20) 186 58 41 99 (1) 16 (0) 2 4 8 0 8 (9) (2) 15 15 1 $16 16 31 0 0 30.6 (12) 19 $19 $0.16 $0.00 $0.00 $0.16 $0.01 $0.17 $0.16 $0.32 ($0.12) $0.20 $0.20 95.1 95.1 62.8% 37.5% 100.3% 3 1.1% 22 8.3% 90.9% 0 0.0% 90.9% 3.2% 3.2% -8.3% -28.1% 7.3% -21.0% -42.1% -42.6% -38.8% -42.6% -11.2% 3.0% 1.7 $0.02 $11.56 ($0.11) $11.68 $11.56 0.0% $11.68 $11.56 4.2% 4.2% 3.8% NM 19.7% 19.7% NA NA (28) 20 0.21 2,717 2.3% $0 1Q $287 287 (11) 276 163 0 163 (30) 193 50 56 106 7 20 1 2 5 22 22 (2) 24 24 24 24 24 24 $24 $0.25 $0.00 $0.00 $0.25 $0.00 $0.25 $0.00 $0.25 $0.00 $0.25 $0.25 95.1 95.1 59.0% 38.4% 97.4% 5 1.8% 0.0% 95.6% 7 2.5% 93.0% 3.2% 3.2% 4.8% -2.9% 12.7% 2.5% -13.7% -14.4% -14.4% -11.3% -12.5% 1.4% 1.8 $0.02 $11.60 ($0.11) $11.72 $11.60 0.3% $11.72 $11.60 3.8% 3.9% 2.2% -9.3% 19.6% 19.6% NA NA 10 20 $0.21 2,647 3.1% $0 2012E 2Q $288 288 (8) 280 166 0 166 (47) 213 54 53 107 7 18 0 3 5 17 17 (2) 19 $19 $19 19 19 19 $19 $0.20 $0.00 $0.00 $0.20 $0.00 $0.20 $0.00 $0.19 $0.00 $0.19 $0.20 95.1 95.1 59.3% 38.2% 97.5% 9 3.2% 0.0% 94.3% 6 2.1% 92.1% 2.6% 2.6% 5.7% -2.7% 9.4% 4.0% NM NM NM NM -4.3% 2.6% 1.8 $0.02 $11.59 ($0.11) $11.71 $11.59 -0.1% $11.71 $11.59 4.9% 4.9% 2.6% -11.6% 19.7% 19.7% NA NA (12) 20 $0.21 2,626 2.8% $0 3Q $307 307 (34) 273 161 0 161 (21) 182 58 45 103 9 16 2 2 3 22 22 3 19 19 $19 19 $19 $19 $19 $0.20 $0.00 $0.00 $0.20 $0.00 $0.20 $0.00 $0.20 $0.00 $0.20 $0.20 95.1 95.1 59.0% 37.7% 96.7% 10 3.7% 0.0% 93.0% 3 1.1% 91.9% 3.4% 3.4% 5.6% -2.5% 9.8% 5.9% NM NM 16.8% NM 0.1% 7.4% 1.8 $0.02 $11.58 ($0.11) $11.70 $11.58 -0.1% $11.70 $11.58 6.9% 7.0% 7.3% 13.8% 19.7% 19.7% NA NA 35 20 $0.21 2,617 2.4% $0 4Q $248 248 36 284 168 0 168 (44) 212 51 56 107 9 16 2 3 24 24 (1) 24 24 $24 24 24 24 $24 $0.25 $0.00 $0.00 $0.25 $0.00 $0.25 $0.00 $0.25 $0.00 $0.25 $0.25 95.1 95.1 59.2% 37.7% 96.8% 4 1.4% 0.0% 95.4% 4 1.4% 94.0% 3.1% 3.1% 7.5% 0.6% 1.2% 8.0% 60.3% 60.3% 50.4% 60.3% 0.5% 7.8% 1.8 $0.02 $11.63 ($0.11) $11.74 $11.63 0.4% $11.74 $11.63 7.7% 7.8% 7.8% -2.2% 19.6% 19.6% NA NA (55) 20 $0.21 2,587 2.4% $0
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MARSH & MCLENNAN COMPANIES, INC. 1-OVERWEIGHT/1-POSITIVE
MMC: Improvement in Brokerage Organic Growth

Price 4/11/2012
$31.85
Price Target
$37
52-Wk Price Range

NM
Mkt Cap (Bil)

$17.4

$1.77 $2.15
13E
$2.45
% Change EPS 11/12 12/13

21% 14%

$2.14 $2.43
Div. Yield
2.8%

2.89 2.74 2.56
P/E 12E
14.8
13E
13.0
ROE 12E 13E

20% 21%
Investment Thesis
Potential Catalysts
We are constructive on MMC reflecting our outlook for the company to generate sustained improvement in organic revenue growth and modest margin improvement. MMC can generate margin improvement when organic revenue growth exceeds 3%, which we anticipate in 2012-13. The company appears confident in its ability to generate double-digit earnings growth for the foreseeable future (in line with our view). MMCs consulting unit should benefit from an economic recovery. MMCs is searching for a new CFO (current CFO is leaving to join Google) and will consider internal and external candidates.
Risks
MMC could benefit from higher P&C prices. MMC could continue to report best-in-class organic growth. MMC could generate double-digit earnings growth driven by mid-single digit organic revenue growth in Insurance Brokerage and modest margin improvement. MMCs Consulting unit plans to focus on improving margins by several percentage points (from 12% level currently) with new leadership at the Mercer unit. MMCs shareholder dividend could grow modestly, but the payout ratio could decline over time from 48% currently to the mid-30% range.
Valuation
MMCs earnings could face headwinds if P&C price increases slow or if the economy deteriorates. A weak economy impacts both Brokerage organic growth and Consulting results. Increased pension expenses are a risk, although we expect no major changes in the foreseeable future to MMCs pension plan (a drag on cash deployment). MMCs ability to effectively integrate small bolt-on acquisitions as it builds out its middle market insurance brokerage business could be a risk.
Since 2000, MMC has traded at a median forward P/E of 16.3x, with a range of 8.6x-29.5x. Since 2008, the median is 14.7x. Our $37 price target is based on a P/E of 17x our 2012 EPS estimate of $2.15. MMC currently trades 14.8x 2012E EPS of $2.15, in line with the insurance broker sector average.
Marsh & McLennan, based in New York, is one of the world's largest insurance and reinsurance brokers. The company also has a substantial presence in consulting through Mercer and Oliver Wyman.
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Figure 332: MMC Major Metrics

Business Mix Adjusted Net EPS
$3.00 $2.50
$2.15 $2.45
Consulting, 46% Insurance Brokerage, 55%
$2.00 $1.50
$1.85 $1.61 $1.64 $1.31 $1.17 $1.01 $1.40
$1.77
$1.00 $0.50 $0.00
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 R 06 20 R 05 20 R 04 20
MMC Total Revenues FY 2011: $11.5 Bn
Insurance Brokerage Organic Growth
Insurance Brokerage Pre-Tax Margin
20% 15%
15% 13% 10% 8% 10% 5% 0% -5% -10% -15% -10% -2% -1%-1%-2% 0% 2%
30% 25% 21% 5% 5% 6% 20% 15% 10% 5% 0% 13% 12% 9% 13% 19% 19% 19% 20% 22%
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E 13 20 2 E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 7 0 20 6 0 20 5 0 20 4 0 20 3 0 20 2 0 20 1 0 20 0 0 20
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20
180
Figure 333: MMC Absolute 4-Qtr Fwd Price-to-Earnings
Figure 334: MMC Relative 4-Qtr Fwd P/E (S&P 500)

40% 30% 20% 10% 0% -10% -20% -30% -40%
28.0 23.0 18.0 13.0 8.0

11 vNo -10 v No -09 v No -08 v No -07 v No -06 v No -05 v No -04 v No -03 v No -02 v No -01 v No -00 v No -99 v No
1 -1 ov N -10 ov N 09 ov N -08 ov N 07 ov N -06 ov N 05 ov N -04 ov N 03 ov N -02 ov N 01 ov N -00 ov N 99 ov
Figure 335: MMC EV/EBITDA
14.0
12.0
10.0
8.0
6.0
ec -0 2
ec -0 3
ec -0 4
ec -0 5
ec -0 1
ec -0 8
ec -0 6
ec -0 7
ec -0 9
ec -1 0 D
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ec -1 1
181
Figure 336: MMC Annual Summary Model

(Dollars in millions, except per-share data) 2007 Revenue Risk & Insurance Services Risk Consulting & Technology Investment Management Consulting Corporate Eliminations Total revenue Expenses Compensation and benefits Other operating expenses General corporate expenses/other Total other operating expenses Regulatory and Other Settlements Goodwill Impairment Charge Total expenses Unusual items (a) Operating income Operating income ex. unusual items Debt retirement charge Interest income Interest expense Investment Income (Risk Capital Holdings) Pretax operating income Taxes Net income Continuing Operations Discontinued operations after-tax Net Income before non-controlling interest Less: net income attributable to non-controlling int Net income attributable to MMC Portion attributable to unvested shares Net income attributable to common shares Per-Share Data Net EPS Continuing Operations Unusual items Net EPS ex unusual Items Goodwill amort. per share Average basic shares Adjustments Average diluted shares Actual shares outstanding Consolidated P/T operating margin Consol. P/T op. margin incl. unusual items Effective tax rate Dividends per share Operating cash flow Book value Tangible book value Return on average equity Percent change Risk & Insurance Services revenue Consulting revenue Total revenue Organic Risk & Ins Serv revenue Compensation & benefits Total expenses Total expenses ex unusual items Operating income Operating income ex. unusual items Diluted EPS ex. unusual items Balance sheet Total Debt/capital Total Debt/tangible capital # of shares repurchased $ amount of shares repurchased $5,400 945 4,884 (94) 11,135 6,937 3,160 184 3,344 10,281 156 854 1,010 95 267 173 855 298 557 1,932 2,489 14 2,475 NA NA $0.98 $0.19 $1.17 $0.00 539 3 542 520 9.1% 7.7% 34.9% $0.76 (303) $15.04 $0.13 8.2% 2.6% 15.6% 8.2% -1% 7.8% 9.9% 10.2% -9.1% -8.8% -10.1% 40.3% 98.7% 46 $1,300 2008 $5,466 924 5,196 (68) 11,518 7,181 3,295 254 3,549 540 11,270 979 248 1,227 48 220 (12) 64 133 (69) 7 (62) 11 (73) (6) (67) ($0.15) $1.55 $1.40 $0.00 514 0 514 514 10.7% 2.2% NM $0.80 940 $11.21 ($2.73) -1.0% 1.2% 6.4% 3.4% -1% 3.5% 9.6% 1.6% -71.0% 21.5% 19.2% 38.5% 163.8% 2009 $5,284 4,609 (62) 9,831 6,182 2,711 160 2,871 205 9,053 524 778 1,302 17 241 (2) 552 21 531 (290) 241 14 227 5 222 $0.96 0.65 $1.61 $0.00 522 2 524 529 7.9% 7.9% 3.8% $0.80 640 $11.09 ($0.67) 9.1% -3.3% -11.3% -14.6% -2% -13.9% -19.7% -17.1% NM 6.1% 15.4% 38.0% 111.0% 2010 $5,764 4,835 (49) 10,550 6,465 2,987 159 3,146 400 9,611 539 939 1,478 20 233 43 769 204 565 306 871 16 855 6 849 $1.00 $0.64 $1.64 $0.00 540 4 544 540 14.0% 8.9% 26.5% $0.81 722 $11.87 ($0.75) 9.2% 9.1% 4.9% 7.3% 2% 4.6% 6.2% 6.4% 20.7% 13.5% 1.5% 32.1% 115.5% 3 $86 2011 $6,301 5,265 (40) 11,526 6,969 2,752 167 2,919 9,888 23 1,638 1,661 (72) 28 199 9 1,404 422 982 33 1,015 22 993 993 $1.73 $0.04 $1.77 $0.00 541 10 551 539 14.4% 14.2% 30.1% $0.87 1,705 $11.01 ($1.90) 15.9% 9.3% 8.9% 9.3% 5% 7.8% 2.9% 8.7% 74.4% 12.4% 8.2% 33.0% 153.7% 12 $361 2012E $6,735 5,530 (40) 12,225 7,248 2,941 165 3,106 10,354 1,871 1,871 28 200 35 1,734 537 1,196 1,196 20 1,176 1,176 $2.15 $0.00 $2.15 $0.00 538 10 548 537 15.3% 15.3% 31.0% $0.92 1,176 $11.63 ($1.08) 19.6% 6.9% 5.0% 6.1% 5% 4.0% 4.7% 5.0% 14.2% 12.6% 21.1% 31.9% 124.8% 12 $400 2013E $7,215 5,860 (40) 13,035 7,636 3,108 165 3,273 10,909 2,126 2,126 28 200 10 1,964 609 1,355 1,355 20 1,335 1,335 $2.45 $0.00 $2.45 $0.00 536 10 546 535 16.3% 16.3% 31.0% $0.98 1,335 $12.46 ($0.28) 21.0% 7.1% 6.0% 6.6% 6% 5.4% 5.4% 5.4% 13.6% 13.6% 13.9% 30.5% 105.4% 11 $400 1Q $1,634 1,261 (11) 2,884 1,721 650 41 691 2,412 1 472 473 7 51 19 447 128 319 12 331 6 325 325 $0.56 $0.00 $0.56 $0.00 544 8 552 548 16.4% 16.4% 28.6% $0.21 (376) $12.21 ($0.56) 19.5% 9.5% 9.2% 9.4% 4% 9.3% 9.1% 9.7% 11.1% 8.2% 9.6% 31.2% 111.2% 2011 2Q $1,620 1,319 (11) 2,928 1,728 691 44 735 2,463 (3) 465 462 5 49 (6) 415 129 286 3 289 7 282 282 $0.50 $0.00 $0.50 $0.00 547 8 555 540 15.9% 15.9% 31.1% $0.22 706 $12.56 ($0.41) 17.0% 11.0% 12.9% 12.4% 5% 7.1% -7.3% 11.4% NM 17.6% 10.3% 30.9% 107.8% 8 $235 3Q $1,475 1,339 (8) 2,806 1,753 706 37 743 2,496 7 310 317 (72) 9 49 198 65 133 2 135 5 130 130 $0.23 $0.01 $0.24 $0.00 540 9 549 538 11.0% 11.0% 32.8% $0.22 665 $12.02 ($0.87) 8.0% 11.2% 11.3% 11.2% 5% 10.5% 9.2% 10.4% NM 17.8% -9.3% 31.2% 119.0% 4 $126 4Q $1,572 1,346 (10) 2,908 1,767 705 45 750 2,517 18 391 409 7 50 (4) 344 100 244 16 260 4 256 256 $0.44 $0.02 $0.46 $0.00 538 10 548 539 13.4% 13.4% 29.1% $0.22 710 $11.02 ($1.90) 15.7% 5.8% 2.8% 4.4% 4% 4.6% 2.3% 3.9% 20.3% 7.9% 11.0% 33.0% 153.7% 1Q $1,740 1,325 (10) 3,055 1,781 722 41 763 2,544 511 511 7 50 19 487 151 336 336 5 331 331 $0.60 $0.00 $0.60 $0.00 539 10 549 538 16.7% 16.7% 31.0% $0.22 331 $11.25 ($1.42) 22.4% 6.5% 5.1% 5.9% 5% 3.5% 5.5% 5.5% 8.2% 8.0% 7.4% 32.6% 135.4% 3 $100 2012E 2Q $1,732 1,385 (10) 3,107 1,815 737 41 778 2,593 514 514 7 50 10 481 149 332 332 5 327 327 $0.60 $0.00 $0.60 $0.00 538 10 548 538 16.5% 16.5% 31.0% $0.23 327 $11.46 ($1.22) 21.7% 6.9% 5.0% 6.1% 5% 5.1% 5.3% 5.2% 10.5% 11.2% 18.6% 32.2% 129.0% 3 $100 3Q $1,569 1,405 (10) 2,964 1,821 739 41 780 2,601 363 363 7 50 3 323 100 223 223 5 218 218 $0.40 $0.00 $0.40 $0.00 538 10 548 537 12.2% 12.2% 31.0% $0.23 218 $11.47 ($1.23) 14.4% 6.4% 4.9% 5.6% 5% 3.9% 4.2% 4.5% 17.0% 14.4% 63.5% 32.2% 129.0% 3 $100 4Q $1,694 1,415 (10) 3,099 1,831 743 41 785 2,615 484 484 7 50 3 444 137 306 306 5 301 301 $0.55 $0.00 $0.55 $0.00 537 10 547 537 15.6% 15.6% 31.0% $0.24 301 $11.63 ($1.08) 19.7% 7.7% 5.1% 6.6% 5% 3.6% 3.9% 4.7% 23.7% 18.2% 20.1% 31.9% 124.8% 3 $100
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Figure 337: MMC Segment Model

Risk & Insurance Services Annual Earnings Model (Dollars in millions) U.S. & Canada EMEA Asia Pacific Latin America Risk management & insurance broking Less Market service revenue Core risk mgt. & insurance broking Reinsurance broking & services Risk Capital Holdings Fiduciary interest income Total revenue Investment income on fiduciary funds Commissions and fees Total revenue Operating expenses Goodwill amortization Total operating expenses Minority interest, net of tax Total expenses Pretax op. income Unusual items (a) Total expenses excl. Unusual items Pretax op. income ex. unusual items Pretax margin as reported Pretax margin ex. unusual items Pretax mgn ex. unusual items & goodwill Pre-tax margin ex cont comm and unusual items 1 point margin effect on EPS (35% tax rate) Percent change U.S. & Canada EMEA Asia Pacific Latin America Core risk mgt. & insurance broking Risk mgt. & insurance broking Reinsurance broking & services Investment income on fiduciary funds Commissions and fees Total revenue Total expenses Total expenses excl. Unusual items Pretax op. income Pretax operating income ex. unusual items Organic growth (b) Supplementary information Fiduciary assets Investment yield 2007 $2,138 1,618 374 239 4,369 2 4,367 854 177 5,400 177 5,223 5,400 5,058 5,058 5,058 342 120 4,938 462 6.3% 8.6% 8.6% 8.5% $0.06 NA NA NA NA 0.5% -0.3% -3.0% -9.7% 3.1% 2.6% 5.7% 7.0% -28.3% -28.7% -1% 3,612 4.90% 2008 $2,154 1,706 412 252 4,524 4,524 803 139 5,466 139 5,327 5,466 5,006 5,006 5,006 460 269 4,737 729 8.4% 13.3% 13.3% 13.3% $0.07 0.7% 5.4% 10.2% 5.4% 3.6% 3.5% -6.0% -21.5% 2.0% 1.2% -1.0% -4.1% 34.5% 57.8% -1% 3,263 4.26% 2009 $2,078 1,555 419 267 4,319 4,319 911 54 5,284 54 5,230 5,284 4,488 4,488 4,488 796 189 4,299 985 15.1% 18.6% 18.6% 18.6% $0.07 -3.5% -8.9% 1.7% 6.0% -4.5% -4.5% 13.4% -61.2% -1.8% -3.3% -10.3% -9.2% 73.0% 35.1% -2% 3,559 1.52% 2010 $2,269 1,674 503 298 4,744 4,744 975 45 5,764 45 5,719 5,764 4,792 4,792 4,792 972 111 4,681 1,083 16.9% 18.8% 18.8% 18.8% $0.07 9.2% 7.7% 20.0% 11.6% 9.8% 9.8% 7.0% -16.7% 9.3% 9.1% 6.8% 8.9% 22.1% 9.9% 2% 3,824 1.18% 2011 $2,471 1,796 612 334 5,213 5,213 1,041 47 6,301 47 6,254 6,301 5,072 5,072 5,072 1,229 (20) 5,092 1,209 19.5% 19.2% 19.2% 19.2% $0.07 8.9% 7.3% 21.7% 12.1% 9.9% 9.9% 6.8% 4.4% 9.4% 9.3% 5.8% 8.8% 26.4% 11.6% 5% 4,082 1.15% 2012E $2,645 1,885 703 351 5,584 5,584 1,103 48 6,735 48 6,687 6,735 5,370 5,370 5,370 1,365 5,370 1,365 20.3% 20.3% 20.3% 20.3% $0.08 7.0% 5.0% 14.9% 5.0% 7.1% 7.1% 6.0% 2.1% 6.9% 6.9% 5.9% 5.5% 11.0% 12.9% 5% 4,250 1.13% 2013E $2,835 1,980 810 370 5,995 5,995 1,170 50 7,215 50 7,165 7,215 5,662 5,662 5,662 1,553 5,662 1,553 21.5% 21.5% 21.5% 21.5% $0.09 7.2% 5.0% 15.2% 5.5% 7.4% 7.4% 6.1% 4.2% 7.2% 7.1% 5.4% 5.4% 13.8% 13.8% 6% 4,500 1.11% 1Q $545 551 125 61 1,282 1,282 340 12 1,634 12 1,622 1,634 1,251 1,251 1,251 383 1,251 383 23.4% 23.4% 23.4% 23.4% $0.02 11.7% 4.6% 26.3% 17.3% 9.9% 9.9% 7.9% 9.1% 9.5% 9.5% 9.3% 10.2% 10.4% 7.3% 4% 4,272 0.28% 2011 2Q 3Q $656 $601 445 367 169 158 83 84 1,353 1,210 1,353 1,210 257 251 10 14 1,620 1,475 10 14 1,610 1,461 1,620 1,475 1,264 1,289 1,264 1,289 1,264 1,289 356 186 (4) 1,268 1,289 352 186 22.0% 12.6% 21.7% 12.6% 21.7% 12.6% 21.7% 12.6% $0.02 $0.02 8.8% 12.1% 21.6% 25.8% 12.3% 12.3% 5.8% -9.1% 11.2% 11.0% 5.2% 9.6% 38.0% 16.6% 5% 4,177 0.24% 8.7% 10.5% 26.4% 15.1% 11.7% 11.7% 7.7% 27.3% 11.0% 11.2% 8.8% 10.9% 31.0% 12.7% 5% 4,118 0.34% 4Q $669 433 160 106 1,368 1,368 193 11 1,572 11 1,561 1,572 1,268 1,268 1,268 304 (16) 1,284 288 19.3% 18.3% 18.3% 18.3% $0.02 7.0% 3.6% 14.3% -0.9% 6.0% 6.0% 4.9% -8.3% 5.9% 5.8% 0.6% 4.6% 35.1% 11.2% 4% 4,082 0.27% 1Q $585 580 143 60 1,368 1,368 360 12 1,740 12 1,728 1,740 1,328 1,328 1,328 412 1,328 412 23.7% 23.7% 23.7% 23.7% $0.02 7.3% 5.3% 14.4% -1.6% 6.7% 6.7% 5.9% 0.0% 6.5% 6.5% 6.2% 6.2% 7.6% 7.6% 5% 4,176 0.29% 2012E 2Q $700 465 195 88 1,448 1,448 272 12 1,732 12 1,720 1,732 1,342 1,342 1,342 390 1,342 390 22.5% 22.5% 22.5% 22.5% $0.02 6.7% 4.5% 15.4% 6.0% 7.0% 7.0% 5.8% 20.0% 6.8% 6.9% 6.2% 5.8% 9.6% 10.8% 5% 4,196 0.29% 3Q $640 385 180 85 1,290 1,290 267 12 1,569 12 1,557 1,569 1,350 1,350 1,350 219 1,350 219 14.0% 14.0% 14.0% 14.0% $0.02 6.5% 4.9% 13.9% 1.2% 6.6% 6.6% 6.4% -14.3% 6.6% 6.4% 4.7% 4.7% 17.7% 17.7% 5% 4,216 0.28% 4Q $720 455 185 118 1,478 1,478 204 12 1,694 12 1,682 1,694 1,350 1,350 1,350 344 1,350 344 20.3% 20.3% 20.3% 20.3% $0.02 7.6% 5.1% 15.6% 11.1% 8.0% 8.0% 5.7% 9.1% 7.7% 7.7% 6.5% 5.1% 13.1% 19.4% 5% 4,250 0.28%
(a) 2004: settlement with NYAG, restructuring and other charges, 2005: restructuring, regulatory and compliance costs, employee retention awards and other unusual items. (b) Includes Risk Capital Holdings in 1Q08 and prior.
Mercer Annual Earnings Model (Dollars in millions) Consulting Retirement Health & Benefits Other Consulting Outsourcing Investment Consulting & Mgmt Total Mercer Oliver Wyman Total revenue Operating expenses Goodwill amortization Total operating expenses Pretax operating income Unusual items (c) Total expenses ex unusual items Pretax operating income ex. unusual items Pretax margin as reported Pretax margin ex. unusual items Pretax margin ex. unusual items & goodwill 1 point margin effect on EPS (35% tax rate) Revenue Percent change Total Mercer Oliver Wyman Total revenue Expense Expenses ex unusual items Operating income ex unusual items Organic growth 2007 1,079 827 509 509 271 3,368 1,516 4,884 4,278 4,278 606 8 4,270 614 12.4% 12.6% 12.6% $0.06 11.5% 25.9% 15.6% 13.8% 14.4% 24.8% 10% 2008 1,178 898 555 702 309 3,642 1,554 5,196 4,641 4,641 555 40 4,601 595 10.7% 11.5% 11.5% $0.07 8.1% 2.5% 6.4% 8.5% 7.8% -3.1% 4% 2009 1,091 857 456 620 303 3,327 1,282 4,609 4,204 4,204 405 72 4,132 477 8.8% 10.3% 10.3% $0.06 -8.6% -17.5% -11.3% -9.4% -10.2% -19.8% -7% 2010 1,053 900 488 671 366 3,478 1,357 4,835 4,706 4,706 129 424 4,282 553 2.7% 11.4% 11.4% $0.06 4.5% 5.9% 4.9% 11.9% 3.6% 15.9% 4% 2011 1,071 940 576 733 462 3,782 1,483 5,265 4,677 4,677 588 31 4,646 619 11.2% 11.8% 11.8% $0.06 8.7% 9.3% 8.9% -0.6% 8.5% 11.9% 5% 2012E 1,215 970 560 760 465 3,970 1,560 5,530 4,859 4,859 671 4,859 671 12.1% 12.1% 12.1% $0.07 5.0% 5.2% 5.0% 3.9% 4.6% 8.4% 3% 2013E 1,350 1,000 590 775 490 4,205 1,655 5,860 5,122 5,122 738 5,122 738 12.6% 12.6% 12.6% $0.07 5.9% 6.1% 6.0% 5.4% 5.4% 10.0% 4% 1Q 281 237 117 176 111 922 339 1,261 1,133 1,133 128 3 1,130 131 10.2% 10.4% 10.4% $0.01 8.6% 10.8% 9.2% 9.0% 8.8% 12.9% 6% 2011 2Q 271 241 127 188 118 945 374 1,319 1,167 1,167 152 2 1,165 154 11.5% 11.7% 11.7% $0.02 12.8% 13.3% 12.9% -19.1% 11.9% 21.3% 5% 3Q 261 239 173 186 116 975 364 1,339 1,178 1,178 161 7 1,171 168 12.0% 12.5% 12.5% $0.02 10.7% 13.0% 11.3% 10.6% 10.6% 16.7% 6% 4Q 258 223 159 183 117 940 406 1,346 1,199 1,199 147 19 1,180 166 10.9% 12.3% 12.3% $0.02 3.3% 1.8% 2.8% 3.5% 3.2% 0.0% 2% 1Q 310 240 120 190 115 975 350 1,325 1,185 1,185 140 1,185 140 10.6% 10.6% 10.6% $0.02 5.7% 3.2% 5.1% 4.6% 4.9% 6.9% 3% 2012E 2Q 305 250 130 195 115 995 390 1,385 1,220 1,220 165 1,220 165 11.9% 11.9% 11.9% $0.02 5.3% 4.3% 5.0% 4.5% 4.7% 7.1% 3% 3Q 295 235 175 195 120 1,020 385 1,405 1,220 1,220 185 1,220 185 13.2% 13.2% 13.2% $0.02 4.6% 5.8% 4.9% 3.6% 4.2% 10.1% 3% 4Q 305 245 135 180 115 980 435 1,415 1,234 1,234 181 1,234 181 12.8% 12.8% 12.8% $0.02 4.3% 7.1% 5.1% 2.9% 4.6% 9.0% 3%
16 April 2012
183
WILLIS GROUP HOLDINGS PLC 1-OVERWEIGHT/1-POSITIVE
WSH: Earnings Could Recover in 2013

Price 4/11/2012
$35.05
Price Target
$44
52-Wk Price Range

NM
Mkt Cap (Bil)

$6.1

$2.74 $2.90
13E
$3.20
% Change EPS 11/12 12/13

6% 10%

$2.86 $3.19
Div. Yield
3.0%

2.44 2.20 1.98
P/E 12E
12.1
13E
11.0
ROE 12E 13E

19% 19%
Investment Thesis
Potential Catalysts
Willis is a pure-play insurance broker with a strong international franchise that should benefit from improved P&C prices. WSH expects organic growth excluding Loan Protector (forced-placed homeowners insurance for banks) to rise in 2012 as retention improves, P&C rates increase, and exposures stabilize. We anticipate mostly unchanged adjusted margin in 2012, although margin could expand in 2013 as organic growth accelerates. We expect this result in 2012/2013 should be good enough given WSHs currently depressed valuation, which is below other insurance brokers. WSHs CEOs contract expires in July 2013 and the succession decision is the boards. No internal successor is evident and an external candidate is an increasingly likely possibility, in our view. It is unclear to us if WSH could seek strategic alternatives.
Risks
Brokerage organic growth excluding Loan Protector could improve in 2012. WSH can generate about 4% organic growth in the current environment, although this result is unlikely to be achieved before late 2012 due in part to Loan Protector. Organic growth could be faster than 4% if P&C rates or exposure growth accelerates. WSH expects expense growth of 3%-4% in 2012, which means organic revenue growth of at least this level is needed for margin expansion. WSH is resuming share buybacks and could repurchase $100mn in 2012.
Valuation
WSHs earnings could face headwinds if P&C price increases slow or if the economy deteriorates. WSHs earnings and margins could face downward pressure if organic growth does not exceed expense growth of 3-4%. Loan Protector could continue to be a drag on WSHs earnings. WSHs retention faces headwinds from defections from its HRH acquisition, although the company has not seen further defections in the past 2-3 months.
Since 2002, WSH has traded at a median forward P/E of 13.3x, with a range of 8.6x-20.6x. Since 2008, the median is 11.2x. Our $44 price target is based on a P/E of 15x our 2012 EPS estimate of $2.90. WSH currently trades 12.1x 2012E EPS of $2.90, below other insurance brokers.
Willis Group Holdings plc, headquartered in London and New York, is the worlds third largest insurance broker.
16 April 2012
184
Figure 339: WSH Major Metrics

Total Revenues Adjusted Net EPS
in $ bn 4.0 3.7 3.4 3.1 2.8 2.5 2.2 1.9 1.6 1.3 1.0 25% 20% 15% 10% 5% 0% -5%
$3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00

$1.89 $2.76 $2.55 $2.25 $2.55 $2.67 $2.75 $2.74 $2.90
$3.20
20 01 20 02 20 03 20 0 20 4 05 R 20 06 20 07 20 08 20 09 20 10 20 1 20 1 12 20 E 13 E
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 06 20 R 05 20 04 20
Total revenues
Growth rate
20% 15%
18% 15% 12% 8% 5% 4% 3% 4% 2% 4% 2% 1% 2%
40% 35% 30% 25% 20% 15% 10% 5% 29% 21% 23% 24% 21% 22% 23% 22% 23% 23%
10% 8% 5% 0% -5% -10%
16 April 2012
E 13 20 2 E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 7 0 20 6 0 20 5 0 20 04 20 3 0 20 2 0 20 1 0 20 0 0 20
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20
185
Figure 340: WSH Absolute 4-Qtr Fwd Price-to-Earnings
Figure 341: WSH Relative 4-Qtr Fwd P/E (S&P 500)
20.0 17.0 14.0 11.0 8.0
20% 0% -20% -40% -60%
Figure 342: WSH EV/EBITDA
Ju n09
Ju n01
Ju n03
Ju n04
Ju n06
Ju n08
Ju n10
16 April 2012
Ju n11
Ju n02
Ju n05
Ju n07
1 l -1 Ju 0 l -1 Ju 9 l -0 Ju 8 l -0 Ju 7 l -0 Ju 6 l -0 Ju 5 l -0 Ju 4 l -0 Ju 3 l -0 Ju 2 l -0 Ju
15.0 13.0 11.0 9.0 7.0 5.0
11 nJu 0 1 nJu 9 0 nJu 8 0 nJu 7 0 nJu 6 0 nJu 5 0 nJu 4 0 nJu 3 0 nJu 2 0 nJu
186
Figure 343: WSH Annual Summary Model

(Dollars in millions, except per-share)
Revenues Global North America International Total commissions and fees Contingent commissions (volume & profit based) Other market remuneration Core commissions and fees Interest income Other income Total revenues Operating expenses Salaries and benefits Other general and admin. expense (exc. non-cash consid.) Regulatory settlements Depreciation Net gain on disposal of operations Total general and administrative (excluding non-cash consid.) Non-cash compensation (performance options) Amortization of intangibles (Gain) loss on disposal of operations Unusual items (b) Total expenses (incl. cash and non-cash expenses) Pre tax operating income Add back non-cash comp. & (gain) loss on disposal of op's Pre tax adjusted operating income Interest expense Make-whole on redemptin senior notes EBIT before equ. in net inc of assoc. and min. int. Income tax expense Income before equ. in net inc of assoc. and min. int. Equity in net income of associates Minority interest Net income from Continuing Operations Non-cash compensation (performance options) (A/T) (Gain) loss on disposal of operations (A/T) Amortization of intangibles Non-recurring (gains)/losses A/T Adjusted net income Per diluted share Net income Non-recurring (gains)/losses (c) Non-cash compensation (performance options) (A/T) (Gain) loss on disposal of operations (A/T) Adjusted net income Cash EPS Nonrecurring gains (losses) Pre tax operating margin Effect of non-cash comp. & (gain) loss on disposal of op's Pre tax adjusted operating margin Salaries and benefits (% of revenues) ex unsual items Other general and admin. expense (% of revenues) ex unsual it Total general and administrative exp. (% of revenues) Actual shares end of period Average basic shares Dilution Wtd. average common shares - diluted Effective tax rate Common share dividends Operating cash flow Adjusted return on average equity Percentage change Global revenue North America revenue International revenue Commissions and fees Core commissions and fees Interest income Total revenues Organic growth Total expenses (incl. cash and non-cash expenses) Salaries and benefits Other operating expenses Total expenses ex unusual items Pretax operating income After-tax net income Net EPS Adjusted Net EPS Balance sheet Debt/capital Debt/capital (excl. intangible equity) EBITDA Debt/EBITDA Book value per share Tangible book value per share 1-point margin change, per share, after-tax # shares repurchased $ shares repurchased 2007 750 751 962 2,463 NA NA 2,463 96 19 $2,578 1,448 460 52 1,960 14 (16) 1,958 $620 (2) $618 66 554 144 410 16 (17) $409 (2) $407 $2.78 $0.00 $0.00 ($0.01) $2.76 $3.10 $0.00 24.0% -0.6% 24.0% 56.2% 17.8% 76.0% 144 145 2 147 26.0% $1.00 $275 29% 1.8% 0.9% 13.6% 5.8% 5.8% 10.3% 6.2% 3% 4.4% 3.4% 10.8% 4.4% 12.3% 12.2% -2.6% 22.6% 48.1% 143.5% 686 1.8 $9.39 ($2.64) $0.13 11.5 481 2008 784 905 1,055 2,744 2,744 81 2 $2,827 1,638 603 54 2,295 12 24 (7) 2,324 $503 97 $600 105 398 97 301 22 (21) $302 2 74 $378 $2.04 $0.00 $0.00 $0.01 $2.55 $2.95 $0.50 17.8% 0.2% 21.2% 57.9% 21.3% 81.2% 166 148 148 24.4% $1.03 $253 24% 4.5% 20.5% 9.7% 11.4% 11.4% -15.6% 9.7% 4% 18.7% 8.6% 24.8% 13.6% -18.9% -2.9% -26.5% -7.6% 50.3% -755.1% 581 3.2 $11.14 ($12.75) $0.14 2.3 75 2009 822 1,368 1,020 3,210 3,210 50 3 $3,263 1,827 595 60 2,482 100 (13) 2,569 $694 18 $712 174 520 96 424 33 (21) $436 (11) 27 $452 $2.58 $0.16 $0.00 ($0.07) $2.67 $3.38 $0.16 21.3% -0.4% 21.8% 56.0% 18.2% 76.1% 168 168 1 169 18.5% $1.04 $419 22% 4.8% 51.2% -3.3% 17.0% 17.0% -38.3% 15.4% 2% 10.5% 11.5% -1.3% 14.5% 38.0% 18.7% 26.4% 4.7% 49.9% 439.1% 854 2.5 $12.96 ($9.95) $0.16 2010 994 1,369 937 3,300 3,300 38 1 $3,339 1,873 566 63 2,502 82 2 2,586 $753 14 $767 166 587 140 447 23 (15) $455 3 12 $470 $2.66 $0.07 $0.00 $0.02 $2.75 $3.38 $0.07 22.6% 0.0% 23.0% 56.1% 17.0% 74.9% 171 170 1 171 23.9% $1.04 $489 20% NM NM NM 2.8% 2.8% -24.0% 2.3% 4% 0.7% 2.5% -4.9% 0.8% 8.5% 7.7% 3.1% 2.8% 45.6% 227.5% 898 2.4 $15.11 ($7.09) $0.15 2011 1,073 1,314 1,027 3,414 3,414 31 2 $3,447 2,087 656 74 (4) 2,813 68 2,881 $566 209 $775 156 171 239 32 207 12 (16) $203 (4) 283 $482 $1.15 $1.61 $0.00 ($0.02) $2.74 $3.34 $1.61 16.4% 0.0% 22.5% 60.5% 19.0% 81.6% 174 173 3 176 13.4% $1.05 $439 19% 7.9% -4.0% 9.6% 3.5% 3.5% -18.4% 3.2% 2% 11.4% 11.4% 15.9% 3.9% -24.8% 1.0% -56.7% -0.4% 48.5% 206.3% $708 3.3 $14.39 ($6.98) $0.17 2012E 1,124 1,335 1,073 3,532 3,532 22 1 $3,555 2,011 597 84 2,692 60 2,752 $803 $803 136 667 160 507 18 (16) $509 $509 $2.90 $0.00 $0.00 $0.00 $2.90 $3.51 $0.00 22.6% 0.0% 22.6% 56.6% 16.8% 75.7% 171 173 3 176 24.0% $1.10 $618 19% 4.8% 1.6% 4.5% 3.5% 3.5% -29.0% 3.1% 1% -4.5% -3.6% -9.0% 3.0% 41.9% 3.6% 151.4% 5.9% 46.4% 173.0% $947 2.5 $15.90 ($5.80) $0.15 2.6 100 2013E 1,185 1,365 1,122 3,672 3,672 23 1 $3,696 2,080 610 85 2,775 60 2,835 $861 $861 136 725 174 551 18 (16) $553 $553 $3.20 $0.00 $0.00 $0.00 $3.20 $3.83 $0.00 23.3% 0.0% 23.3% 56.3% 16.5% 75.1% 169 170 3 173 24.0% $1.15 $663 19% 5.4% 2.2% 4.6% 4.0% 4.0% 4.5% 4.0% 2% 3.0% 3.4% 2.2% 3.0% 7.2% 7.2% 10.3% 10.3% 44.1% 145.4% 1,006 2.3 $17.66 ($4.35) $0.16 2.4 100 1Q 358 356 286 1,000 1,000 8 0 $1,008 584 153 20 (4) 753 17 2011 2Q 271 326 257 854 854 8 1 $863 506 164 19 689 17 706 $157 29 $186 34 123 31 92 (3) (4) $85 23 $108 $0.48 $0.13 $0.00 $0.00 $0.61 NA $0.13 18.2% 0.0% 21.6% 58.6% 19.0% 79.8% 173 172 4 176 25.2% $0.26 $119 16% 8.8% -0.6% 21.2% 8.2% 8.2% -20.0% 8.0% 3% 12.1% 11.0% 21.5% 7.8% -7.1% -4.5% -7.2% 14.1% 46.0% 186.7% 193 2.8 $15.65 ($6.19) $0.04 3Q 236 316 203 755 755 7 0 $762 490 147 17 654 18 672 $90 15 $105 38 52 2 50 10 $60 12 $72 $0.34 $0.07 $0.00 $0.00 $0.41 NA $0.07 11.8% 0.0% 13.8% 64.3% 19.3% 85.8% 173 173 3 176 3.8% $0.26 $146 11% 12.4% -4.2% 10.9% 4.4% 4.4% -30.0% 4.0% 2% 7.2% 6.1% 14.0% 4.8% -15.1% -6.3% -8.9% 9.3% 45.9% 184.9% $125 2.8 $15.51 ($6.05) $0.04 4Q 213 322 281 816 816 8 1 $825 512 173 18 703 16 719 $106 50 $156 44 62 8 54 (11) (4) $39 42 $81 $0.22 $0.24 $0.00 $0.00 $0.46 NA $0.24 12.8% 0.0% 18.9% 62.1% 21.0% 85.2% 174 174 2 176 12.9% $0.27 $167 12% 4.4% -6.9% 2.2% -1.1% -1.1% -11.1% -1.2% -1% 9.3% 9.2% 13.1% 1.7% -40.1% -60.2% -61.1% -19.2% 48.5% 206.3% $140 3.2 $14.39 ($6.98) $0.04 1Q 371 352 295 1,018 1,018 6 $1,024 528 135 21 684 15 699 $325 $325 34 291 70 221 16 (8) $229 $229 $1.30 $0.00 $0.00 $0.00 $1.30 $1.45 $0.00 31.7% 0.0% 31.7% 51.6% 13.2% 66.8% 173 174 3 177 24.0% $0.27 $256 35% 3.6% -1.1% 3.1% 1.8% 1.8% -31.3% 1.5% -1% -9.2% -9.6% -11.8% 3.2% 36.3% NM NM 1.1% 47.0% 181.4% $361 2.9 $15.35 ($6.10) $0.04 0.7 25 2012E 2Q 283 323 265 871 871 6 $877 504 155 21 680 15 695 $182 $182 34 148 35 112 (3) (4) $105 $105 $0.60 $0.00 $0.00 $0.00 $0.60 $0.75 $0.00 20.7% 0.0% 20.7% 57.5% 17.7% 77.6% 173 173 3 176 24.0% $0.27 $132 16% 4.4% -0.9% 3.1% 2.0% 2.0% -31.3% 1.6% 0% -1.6% -0.4% -5.5% 2.7% 15.6% 23.6% 23.8% -2.6% 46.6% 176.8% 218 2.8 $15.61 ($5.93) $0.04 0.7 25 3Q 245 325 215 785 785 6 $791 494 147 21 662 15 677 $114 $114 34 80 19 60 10 $70 $70 $0.40 $0.00 $0.00 $0.00 $0.40 $0.56 $0.00 14.4% 0.0% 14.4% 62.5% 18.6% 83.7% 172 172 3 175 24.0% $0.28 $98 10% 3.8% 2.8% 5.9% 4.0% 4.0% -21.4% 3.7% 2% 0.7% 0.8% 0.0% 3.0% 26.1% 17.4% 17.9% -1.7% 46.7% 177.1% 150 2.7 $15.65 ($5.97) $0.03 0.7 25 4Q 225 335 298 858 858 6 1 $865 485 160 21 666 15 681 $184 $184 34 150 36 114 (5) (4) $105 $105 $0.60 $0.00 $0.00 $0.00 $0.60 $0.76 $0.00 21.2% 0.0% 21.2% 56.1% 18.5% 77.0% 171 172 3 175 24.0% $0.28 $132 15% 5.6% 4.0% 6.0% 5.1% 5.1% -31.3% 4.8% 2% -5.3% -5.3% -7.5% 1.8% 73.1% 168.3% 170.5% 30.3% 46.4% 173.0% 220 2.5 $15.90 ($5.80) $0.04 0.7 25
770 $238 93 $331 40 171 27 1 26 16 (8) $34 (4) 193 $223 $0.20 $1.11 $0.00 ($0.02) $1.28 $0.04 $1.11 23.6% 0.0% 32.8% 57.9% 15.2% 74.7% 172 171 3 174 3.7% $0.26 $7 34% 8.2% -2.5% 7.1% 3.8% 3.8% -11.1% 3.7% 4% 14.8% 20.2% 2.7% 2.7% -20.9% -83.3% -83.7% 0.9% 47.7% 185.4% 275 2.9 $15.54 ($6.52) $0.06 -
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ARTHUR J. GALLAGHER & CO. 1-OVERWEIGHT/1-POSITIVE
AJG: Leverage to Improving P&C Prices & Recovering Economy

Price 4/11/2012
$34.87
Price Target
$38
52-Wk Price Range

NM
Mkt Cap (Bil)

$4.1

$1.28 $1.80
13E
$2.10
% Change EPS 11/12 12/13

41% 17%

$1.88 $2.16
Div. Yield
3.8%

3.07 3.03 2.93
P/E 12E
19.3
13E
16.6
ROE 12E 13E

16% 18%
Investment Thesis
Potential Catalysts
AJG's Insurance Brokerage revenues and margins could grow as P&C prices increase and the economy improves. Roughly 80% of AJGs revenues are commissionbased, which means the company has significant leverage to higher P&C prices. AJGs risk management unit (Gallagher Bassett, a feefor-service claims management operation) could face improving revenue growth based on its economically sensitive business. AJG owns facilities that produce clean-burning coal that may qualify for tax credits. AJG could generate up to a $49-$56mn after-tax ($0.44-$0.50/shr) annual benefit over the next 10 years.
Risks
Organic growth could accelerate reflecting higher P&C prices and an improving economy. AJG could continue to aggressively pursue small bolton acquisitions to supplement its Brokerage organic growth. Claims activity could pick up, boosting results at Gallagher Bassett. AJGs potential benefit from clean coal investments could be higher than anticipated resulting in further upside to earnings. Healthcare reform could result in increased revenue opportunities in AJG's benefits brokerage business due to demand for advice and consulting services.
Valuation
AJGs earnings could face headwinds if P&C price increases slow or if the economy deteriorates. . Margin expansion could be challenging to achieve if organic growth deteriorates. AJGs clean coal investments could face volatility related to operational risk, supply chain risk, regulatory risk and displacement risk (for example the utility burns natural gas instead of coal and the plant sits idle).
Since 2000, AJG has traded at a median forward P/E of 16.2x, with a range of 12.8x-27.4x. Since 2008, the median is 16.8x. Our $38 price target is based on a P/E of 21x our 2012 EPS estimate of $1.80. AJG currently trades 19.3x 2012E EPS of $1.80, above other insurance brokers.
Arthur J. Gallagher & Co, based in Itasca, Illinois, is the fourth largest insurance broker.
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Figure 345: AJG Major Metrics

$2.50 $1.99
Risk mgmt, 26%
$2.10 $1.80 $1.59 $1.56 $1.31 $1.32 $1.28 $1.18
$2.00
$1.50 $1.00 $0.50 $0.00
$0.42
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20
AJG Total Revenues FY 2011: $2.1 Bn
30% 20% 15% 10% 5% 5% 0% -5% -10% -2%-2%-2% 10% 5% 2% 2% 2% 3% 5% 5% 17% 14% 10% 20% 15% 25%
21% 17% 17% 16% 14% 16% 16% 16% 16% 18%
20 20 20 20 20 20 20 20 20 20 20 20 20 01 02 03 04 05 06 07 08 09 10 11 12 13 E E
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20
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Figure 346: AJG Absolute 4-Qtr Fwd Price-to-Earnings
Figure 347: AJG Relative 4-Qtr Fwd P/E (S&P 500)
60%
26.0 22.0 18.0 14.0 10.0
40% 20% 0% -20% -40% -60%

1 -1 ov N -10 ov N -09 ov N -08 ov N -07 ov N -06 ov N -05 ov N -04 ov N -03 ov N -02 ov N -01 ov N -00 ov N -99 ov N
11 vNo -10 v No -09 v No 08 vNo -07 v No -06 v No -05 v No -04 v No -03 v No -02 v No -01 v No 00 vNo -99 v No
Figure 348: AJG EV/EBITDA
20.0
16.0
12.0
8.0
4.0
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
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190
Figure 349: AJG Annual Summary Model

(Dollars in millions, except per-share and where noted) 2008 Revenues Commissions Fees Investment income & other: Interest income from fiduciary funds Fin. Serv. investment income-ex. FIN 46 Investment income--effect of FIN 46 Realized investment gains (losses) Gross revenues Gains realized on books of business sales - Brokerage Revenues from consolidated clean-coal facilities Other net revenues (loss) - Corporate Less brokerage Total revenues Operating expenses Compensation Other expenses Depreciation Amortization Fin. Serv. investment expenses ex. FIN 46 Fin. Serv. investment expenses--effect of FIN 46 Litigation/unusual items Cost of revenues from consolidated clean-coal facilities Total operating expenses Net earnings before income taxes Pretax operating income (ex. realized gains/losses) Income taxes Net income cont ops Nonrecurring gains (losses), net of taxes Net Income ex non-recurring items Earnings (loss) on discontinued ops Net earnings (loss) Realized investment gains (losses) Operating income Per diluted share Net EPS Net EPS continuing ops Realized investment gains (losses) Operating income ex unsual items Net income incl discontinued ops Cash earnings (adds back A/T depr. & amort.) Pre tax operating margin Pre tax operating margin ex unusual items Actual shares end of period Average basic shares Dilution Wtd. average common shares - diluted Effective tax rate Common share dividends Operating cash flow Return on average equity (b) Year-to-date ROE, per AJG (c) Percentage change Commissions Fees Fin. Serv. investment income-ex. FIN 46 Total revenues Total revenues ex. FIN 46 Compensation Other expenses Total expenses Total expenses ex. FIN 46 Pretax operating income After-tax operating income Operating EPS Net EPS Cash EPS Total compensation as % of fees & comm. Empl. headcount (actual #, not mill.) Average number of employees (actual # not mill.) Comm. & Fees per avg. empl. (actual #, not mill.) Revenues per empl. (actual #, not mill.) Balance sheet Book value per share Tangible book value per share $899.9 711.3 17.7 0.8 (8.5) 1,621.2 23.8 1,645.0 989.2 389.9 30.0 43.7 28.6 1,481.4 163.6 172.1 52.2 111.4 111.4 (34.1) 77.3 (6.0) 117.4 $0.82 $1.18 ($0.06) $1.25 $1.18 $1.71 10.4% 96.2 93.8 0.4 94.2 31.9% $1.28 160.6 15.3% 15.6% 3.8% 8.4% -98.7% 1.3% 1.3% 8.5% 14.0% 4.1% 4.1% -12.6% -13.5% -25.8% -25.8% -16.7% 61.4% 9,863 9,683 41,642 $166,785 $7.67 ($3.32) 2009 $977.9 733.8 6.1 (0.2) 0.1 1,717.7 11.6 1,729.3 1,068.0 332.0 30.6 55.0 28.5 4.1 1,518.2 211.1 211.0 78.0 133.1 133.1 (4.5) 128.6 0.1 133.0 $1.28 $1.32 $0.00 $1.32 $1.32 $1.86 12.2% 102.5 100.5 0.1 100.6 36.9% $1.28 211.5 16.3% 18.0% 8.7% 3.2% NM 5.1% 5.1% 8.0% -14.8% 2.5% 2.5% 22.6% 13.3% 11.9% 11.9% 8.4% 62.4% 9,840 9,960 43,474 $175,742 $8.71 ($2.81) 2010 $1,054.9 735.0 6.9 2.0 3.5 1,802.3 5.9 63.1 (7.1) 1,864.2 1,117.3 354.8 32.3 60.8 34.6 (2.6) 64.0 1,661.2 203.0 199.5 39.7 163.3 163.3 10.8 174.1 2.4 160.9 $1.66 $1.56 $0.02 $1.53 $1.56 $2.27 10.7% 106.0 104.8 0.3 105.1 19.6% $1.28 231.8 16.3% 18.3% 7.9% 0.2% NM 7.8% 7.8% 4.6% 6.9% 9.4% 9.4% -5.5% 20.9% 18.2% 18.2% 21.9% 62.4% 10,736 10,368 44,781 $173,640 $10.44 ($2.46) 2011 $1,221.5 870.2 11.1 (0.6) 2,102.2 2.5 29.8 0.2 2,134.7 1,322.7 422.4 35.9 79.3 40.8 (6.2) 32.0 1,926.9 207.8 208.4 63.7 144.1 144.1 144.1 (0.4) 144.5 $1.28 $1.28 ($0.00) $1.28 $1.28 $1.99 9.8% 109.4 111.7 0.8 112.5 30.7% $1.32 283.1 12.3% 13.0% 15.8% 18.4% NM 14.5% 14.5% 18.4% 19.1% 16.0% 16.0% 4.5% -10.2% -18.1% -18.1% -12.1% 63.2% 12,383 12,138 45,857 $172,390 $11.36 ($4.33) 2012E $1,322.0 924.0 11.0 2,257.0 76.8 0.4 2,334.2 1,392.0 427.8 35.0 82.4 40.0 78.4 2,055.6 278.6 278.6 77.4 201.2 201.2 201.2 201.2 $1.80 $1.80 $0.00 $1.80 $1.80 $2.56 11.9% 112.4 110.8 0.8 111.6 27.8% $1.36 277.5 15.9% 16.2% 8.2% 6.2% NM 9.3% 9.3% 5.2% 1.3% 6.7% 6.7% 33.7% 39.2% 40.7% 40.7% 28.6% 62.0% 2013E $1,422.0 965.0 11.0 2,398.0 76.8 0.4 2,475.2 1,478.0 438.8 35.0 82.4 40.0 78.4 2,152.6 322.6 322.6 81.0 241.6 241.6 241.6 241.6 $2.10 $2.10 $0.00 $2.10 $2.10 $2.87 13.0% 115.4 113.9 0.9 114.8 25.1% $1.40 317.9 18.1% 18.7% 7.6% 4.4% NM 6.0% 6.0% 6.2% 2.6% 4.7% 4.7% 15.8% 20.1% 16.8% 16.8% 12.0% 61.9% 1Q $256.0 189.0 3.0 (1.1) 446.9 0.5 447.4 295.1 94.0 8.1 16.4 9.5 0.8 423.9 23.5 24.6 8.3 15.2 15.2 15.2 (0.7) 15.9 $0.14 $0.14 ($0.01) $0.14 $0.14 $0.22 5.5% 106.9 109.3 1.1 110.3 35.3% $0.33 (7.3) 5.4% 16.3% 3.4% 14.5% NM -7.3% -7.3% 12.5% 15.8% -3.5% -3.5% -35.4% -38.6% -51.4% -51.4% -38.3% 66.3% 10,845 10,607 41,955 $172,458 $10.73 ($2.51) 2011 2Q $317.9 214.7 2.2 0.5 535.3 2.5 9.9 (1.6) 546.1 324.8 108.2 9.1 18.3 10.6 (2.5) 11.7 480.2 65.9 65.4 24.2 41.7 41.7 41.7 0.3 41.4 $0.37 $0.37 $0.00 $0.37 $0.45 $0.46 12.0% 107.9 111.1 0.8 111.8 36.7% $0.33 104.7 14.2% 15.4% 15.1% 19.7% NM 18.8% 18.8% 17.9% 23.5% 21.4% 21.4% 0.3% -7.7% -13.7% -6.9% -3.8% 61.0% 12,315 11,461 46,471 167,161 $11.14 ($4.01) 3Q $332.4 225.1 3.4 560.9 0.7 1.2 562.8 341.8 113.9 9.4 20.0 10.3 (4.3) 0.7 491.8 71.0 71.0 24.3 46.7 46.7 46.7 46.7 $0.41 $0.41 $0.00 $0.41 $0.41 $0.50 12.6% 108.4 112.6 0.5 113.1 34.2% $0.33 84.6 15.4% 14.8% 22.4% 21.2% NM 21.5% 21.5% 21.9% 34.3% 25.2% 25.2% 0.9% 1.1% -5.5% -5.5% -1.8% 61.3% 12,324 11,892 46,879 169,469 $11.25 ($3.96) 4Q $315.2 241.4 2.5 559.1 19.2 0.1 578.4 361.0 106.3 9.3 24.6 10.4 (0.2) 19.6 531.0 47.4 47.4 6.9 40.5 40.5 40.5 40.5 $0.35 $0.35 $0.00 $0.35 $0.35 $0.40 8.2% 109.4 113.7 1.0 114.7 14.6% $0.33 101.1 13.2% 13.0% 21.5% 17.8% NM 26.0% 26.0% 20.7% 5.0% 22.5% 22.5% 83.7% -26.0% -17.6% -17.6% 56.6% 64.9% 12,383 12,138 45,857 175,873 $11.37 ($4.32) 1Q $276.0 201.0 2.7 479.7 19.2 0.1 499.0 311.0 94.7 8.7 20.6 10.0 19.6 464.6 34.4 34.4 6.8 27.6 27.6 27.6 27.6 $0.25 $0.25 $0.00 $0.25 $0.25 $0.30 6.9% 109.9 109.7 0.8 110.5 19.7% $0.34 46.7 8.9% 13.6% 7.8% 6.3% NM 11.5% 11.5% 5.4% 0.7% 9.6% 9.6% 39.8% 73.7% 81.6% 81.6% 39.8% 65.2% 2012E 2Q $347.0 227.0 2.8 576.8 19.2 0.1 596.1 338.0 109.2 8.8 20.6 10.0 19.6 506.2 89.9 89.9 29.0 60.9 60.9 60.9 60.9 $0.55 $0.55 $0.00 $0.55 $0.55 $0.63 15.1% 110.9 110.4 0.8 111.2 32.2% $0.34 80.1 19.6% 14.6% 9.2% 5.7% NM 9.2% 9.2% 4.1% 0.9% 5.4% 5.4% 37.5% 47.3% 48.1% 46.9% 36.8% 58.9% 3Q $358.0 239.0 2.8 599.8 19.2 0.1 619.1 360.0 113.7 8.8 20.6 10.0 19.6 532.7 86.4 86.4 24.6 61.8 61.8 61.8 61.8 $0.55 $0.55 $0.00 $0.55 $0.55 $0.63 14.0% 111.4 111.2 0.8 112.0 28.4% $0.34 81.0 19.5% 15.7% 7.7% 6.2% NM 10.0% 10.0% 5.3% -0.2% 8.3% 8.3% 21.7% 32.4% 33.8% 33.8% 24.9% 60.3% 4Q $341.0 257.0 2.7 600.7 19.2 0.1 620.0 383.0 110.2 8.7 20.6 10.0 19.6 552.1 67.9 67.9 17.2 50.7 50.7 50.7 50.7 $0.45 $0.45 $0.00 $0.45 $0.45 $0.52 11.0% 112.4 111.9 0.8 112.7 25.3% $0.34 69.8 15.8% 16.2% 8.2% 6.5% NM 7.2% 7.2% 6.1% 3.7% 4.0% 4.0% 43.2% 25.3% 27.5% 27.5% 30.3% 64.0%
$11.51 ($3.77)
$11.90 ($2.97)
$11.23 ($4.39)
$11.33 ($4.14)
$11.50 ($3.91)
$11.51 ($3.76)
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Figure 350: AJG Segment Model

Brokerage Segment
(Dollars in millions, except per-share) 2007 Revenues Core commissions Supplemental Contingent commissions Total commissions Fees Interest-fiduciary funds Gross revenues Gain realized on books of business sales Total revenues Expenses Compensation Other operating Depreciation Amortization Litigation/unusual items Total expenses Pre tax income Provision for taxes Net income Per diluted share EPS Cash EPS (ex. depr. & amort.) Percent change Core commissions Total commissions Fees Commission and fee growth Org. comm. and fees (a) Total revenues Total revenues ex contingent commissions Compensation expense Other expense Total expenses Pre tax income Operating ratios Pre tax margin Pre-tax margin ex unusual items P/Tmargin ex one-time items & cont comm Compensation expense ratio Compensation expense ratio ex cont comm Other operating expense ratio Eff. tax rate 1-pt change in P/T margin, A/T $863.2 NA 4.1 867.3 216.8 30.1 1,114.2 NA 1,114.2 655.9 229.9 16.1 28.8 930.7 183.5 71.2 112.3 $1.16 $1.44 9.2% 9.4% 16.3% 10.7% 2% 10.7% 10.5% 9.6% 14.1% 9.7% 15.6% 16.5% 16.5% 16.2% 58.9% 59.1% 20.6% 38.8% $0.07 2008 $854.2 NA 45.7 899.9 250.2 13.9 1,164.0 23.8 1,187.8 707.4 247.4 18.2 43.2 1,016.2 171.6 67.4 104.2 $1.11 $1.50 -1.0% 3.8% 15.4% 6.1% -2% 6.6% 2.9% 7.9% 7.6% 8.4% -6.5% 14.4% 14.0% 10.5% 60.8% 61.9% 21.3% 39.3% $0.08 2009 $912.9 37.4 27.6 977.9 282.1 4.6 1,264.6 11.6 1,276.2 778.7 218.0 18.8 54.3 4.1 1,073.9 202.3 78.6 123.7 $1.23 $1.67 6.9% 8.7% 12.7% 9.6% -2% 7.4% 9.3% 10.1% -11.9% 5.0% 17.9% 15.9% 15.9% 14.0% 61.6% 62.4% 17.2% 38.9% $0.08 2010 $957.3 60.8 36.8 1,054.9 274.9 4.9 1,334.7 5.9 1,340.6 817.1 223.6 19.5 59.8 (2.6) 1,117.4 223.2 87.7 135.5 $1.29 $1.75 4.9% 7.9% -2.6% 5.5% -2% 5.0% 4.4% 4.9% 2.6% 4.1% 10.3% 16.6% 15.7% 13.3% 61.7% 63.2% 16.8% 39.3% $0.08 2011 $1,127.4 56.0 38.1 1,221.5 324.1 8.4 1,554.0 2.5 1,556.5 965.0 270.7 21.2 77.0 (6.2) 1,327.7 228.8 88.6 140.2 $1.25 $1.78 17.8% 15.8% 17.9% 16.2% 3% 16.1% 16.5% 18.1% 21.1% 18.8% 2.5% 14.7% 15.8% 13.7% 61.1% 62.5% 17.4% 38.7% $0.08 2012E $1,228.0 56.0 38.0 1,322.0 325.0 8.0 1,655.0 1,655.0 1,010.0 273.0 21.0 80.0 1,384.0 271.0 108.4 162.6 $1.46 $2.00 8.9% 8.2% 0.3% 6.6% 5% 6.3% 6.5% 4.7% 0.8% 4.2% 18.4% 16.4% 16.4% 14.4% 61.0% 62.5% 16.5% 40.0% $0.09 2013E $1,325.0 56.0 41.0 1,422.0 325.0 8.0 1,755.0 1,755.0 1,066.0 280.0 21.0 80.0 1,447.0 308.0 123.2 184.8 $1.61 $2.14 7.9% 7.6% 0.0% 6.1% 5% 6.0% 6.0% 5.5% 2.6% 4.6% 13.7% 17.5% 17.5% 15.6% 60.7% 62.2% 16.0% 40.0% $0.09 1Q $225.7 13.5 16.8 256.0 59.1 2.3 317.4 317.4 $210.0 57.0 4.7 15.8 0.8 288.3 29.1 11.4 17.7 $0.16 $0.27 10.5% 3.4% 7.7% 4.2% 2% 4.3% 4.0% 9.7% 6.9% 8.8% -26.1% 9.2% 8.9% 3.8% 66.2% 69.9% 18.0% 39.2% $0.02 2011 2Q $296.0 14.0 7.9 317.9 81.8 1.6 401.3 2.5 403.8 $239.2 69.5 5.4 17.7 (2.5) 329.3 74.5 30.4 44.1 $0.39 $0.52 15.2% 15.1% 19.4% 15.9% 2% 16.4% 17.0% 15.7% 21.9% 15.9% 18.6% 18.4% 19.1% 17.5% 59.6% 60.4% 17.3% 40.8% $0.02 3Q $308.0 14.5 9.9 332.4 86.8 2.7 421.9 421.9 $248.5 77.7 5.6 19.4 (4.3) 346.9 75.0 28.5 46.5 $0.41 $0.55 22.3% 22.4% 16.0% 21.0% 2% 20.1% 20.5% 21.2% 36.1% 24.9% 1.9% 17.8% 17.6% 15.6% 58.9% 60.3% 18.4% 38.0% $0.02 4Q $297.7 14.0 3.5 315.2 96.4 1.8 413.4 413.4 $267.3 66.5 5.5 24.1 (0.2) 363.2 50.2 18.3 31.9 $0.28 $0.44 21.9% 21.5% 25.7% 22.5% 5% 22.3% 22.4% 25.0% 18.3% 25.0% 5.9% 12.1% 14.5% 13.8% 64.7% 65.2% 16.1% 36.5% $0.02 1Q $245.0 14.0 17.0 276.0 59.0 2.0 337.0 337.0 $222.0 58.0 5.2 20.0 305.2 31.8 12.7 19.1 $0.17 $0.31 8.6% 7.8% -0.2% 6.3% 5% 6.2% 6.5% 5.7% 1.8% 6.2% 9.3% 9.4% 9.4% 4.6% 65.9% 69.4% 17.2% 40.0% $0.02 2012E 2Q $325.0 14.0 8.0 347.0 82.0 2.0 431.0 431.0 $244.0 70.0 5.3 20.0 339.3 91.7 36.7 55.0 $0.49 $0.63 9.8% 9.2% 0.2% 7.3% 5% 6.7% 6.8% 2.0% 0.7% 2.3% 23.1% 21.3% 21.3% 19.8% 56.6% 57.7% 16.2% 40.0% $0.02 3Q $335.0 14.0 9.0 358.0 87.0 2.0 447.0 447.0 $260.0 78.0 5.3 20.0 363.3 83.7 33.5 50.2 $0.45 $0.58 8.8% 7.7% 0.2% 6.2% 5% 5.9% 6.3% 4.6% 0.4% 3.4% 11.6% 18.7% 18.7% 17.1% 58.2% 59.4% 17.4% 40.0% $0.02 4Q $323.0 14.0 4.0 341.0 97.0 2.0 440.0 440.0 $284.0 67.0 5.2 20.0 376.2 63.8 25.5 38.3 $0.34 $0.47 8.5% 8.2% 0.6% 6.4% 5% 6.4% 6.4% 6.2% 0.8% 3.5% 27.1% 14.5% 14.5% 13.7% 64.5% 65.1% 15.2% 40.0% $0.02
(a) 2001 is estimated based on the avg. quarterly organic growth, weighted by quarterly brokerage rev. 2002 represents commission growth only, which accounted for 90% of Brokerage revenues in 2002.
Risk Management Segment (Dollars in millions, except per-share) 2007 Revenues Fees Interest-fiduciary funds Total revenues Expenses Compensation Other operating Depreciation Amortization Unusual items Total expenses Pre tax income Provision for taxes Net income Per diluted share EPS Cash EPS (ex. depr. & amort.) Percent change Fees Organic fee growth Total revenues Compensation expense Other expense Total expense Pre tax income Operating Ratios Pre tax margin ex unusual items Compensation expense ratio Other operating expense ratio Eff. tax rate 1 pt margin change $439.4 4.1 443.5 255.7 112.1 11.2 0.5 379.5 64.0 24.4 39.6 $0.41 $0.48 10.6% 11% 10.5% 9.7% 9.8% 9.1% 20.1% 13.8% 58.2% 25.5% 38.1% $0.03 2008 $461.1 3.8 464.9 280.6 126.3 11.6 0.5 419.0 45.9 17.7 28.2 $0.30 $0.38 4.9% 5% 4.8% 9.7% 12.7% 10.3% -28.3% 10.0% 60.9% 27.4% 38.6% $0.03 2009 $451.7 1.5 453.2 282.3 109.9 11.7 0.7 404.6 48.6 17.9 30.7 $0.31 $0.38 -2.0% -1% -2.5% 0.6% -13.0% -5.3% 5.9% 12.4% 62.5% 24.3% 36.8% $0.03 2010 $460.1 2.0 462.1 288.0 109.1 12.4 1.0 410.5 51.6 20.3 31.3 $0.30 $0.38 1.9% -3% 2.0% 2.0% -0.7% 1.5% 6.2% 12.7% 62.6% 23.7% 39.3% $0.03 2011 $546.1 2.7 548.8 344.1 135.8 14.2 2.3 496.4 52.4 19.1 33.3 $0.30 $0.39 18.7% 10% 18.8% 19.5% 24.5% 20.9% 1.6% 12.9% 63.0% 24.9% 36.5% $0.03 2012E $599.0 3.0 602.0 366.0 142.0 14.0 2.4 524.4 77.6 31.0 46.6 $0.42 $0.51 9.7% 11% 9.7% 6.4% 4.6% 5.6% 48.1% 12.9% 61.1% 23.7% 40.0% $0.03 2013E $640.0 3.0 643.0 396.0 146.0 14.0 2.4 558.4 84.6 33.8 50.8 $0.44 $0.53 6.8% 10% 6.8% 8.2% 2.8% 6.5% 9.0% 13.2% 61.9% 22.8% 40.0% $0.03 1Q $129.9 0.7 130.6 $82.7 32.7 3.3 0.6 119.3 11.3 4.4 6.9 $0.06 $0.08 18.0% 6% 18.2% 22.2% 35.1% 25.4% -26.6% 12.7% 63.3% 25.2% 38.9% $0.01
2011 2Q $132.9 0.6 133.5 $84.2 35.3 3.6 0.6 123.7 9.8 3.9 5.9 $0.05 $0.08 19.8% 6% 19.8% 26.2% 25.2% 26.2% -26.9% 11.9% 63.1% 26.6% 39.8% $0.01
3Q $138.3 0.7 139.0 $88.3 33.0 3.6 0.6 125.5 13.5 5.2 8.3 $0.07 $0.10 24.7% 13% 24.8% 21.8% 32.5% 24.8% 25.0% 13.4% 63.5% 23.9% 38.5% $0.01
4Q $145.0 0.7 145.7 $88.9 34.8 3.7 0.5 127.9 17.8 5.6 12.2 $0.11 $0.13 13.1% 13% 13.1% 9.6% 9.4% 9.5% 48.3% 13.7% 61.0% 24.0% 31.5% $0.01
1Q $142.0 0.7 142.7 $85.0 33.5 3.5 0.6 122.6 20.1 8.0 12.1 $0.11 $0.13 9.3% 11% 9.3% 2.8% 2.4% 2.8% 77.9% 14.1% 59.6% 23.6% 40.0% $0.01
2012E 2Q $145.0 0.8 145.8 $90.0 36.0 3.5 0.6 130.1 15.7 6.3 9.4 $0.08 $0.11 9.1% 11% 9.2% 6.9% 2.0% 5.2% 60.2% 10.8% 61.7% 24.8% 40.0% $0.01
3Q $152.0 0.8 152.8 $96.0 32.5 3.5 0.6 132.6 20.2 8.1 12.1 $0.11 $0.13 9.9% 11% 9.9% 8.7% -1.5% 5.7% 49.6% 13.2% 62.8% 21.4% 40.0% $0.01
4Q $160.0 0.7 160.7 $95.0 40.0 3.5 0.6 139.1 21.6 8.6 13.0 $0.11 $0.14 10.3% 11% 10.3% 6.9% 14.9% 8.8% 21.3% 13.4% 59.1% 25.0% 40.0% $0.01
Financial Services Segment

(Dollars in millions, except per-share) 2007 Revenues Investment income Realized inv. gains (losses) Revenues from clean-coal facilities Other net revenues (loss) Impact of FIN 46 Total revenues Expenses Compensation Operating Cost of revenues from consolidated clean-coal faciliti Impact of FIN 46 Operating - state tax matters Interest Depreciation Litigation Total expenses Pre tax income Provision for taxes Net income EPS Eff. tax rate Net inc. ex. real inv. gains (losses) $62.4 3.2 NA 65.6 2008 $0.8 (8.5) NA (7.7) 2009 ($0.2) 0.1 (0.1) 2010 $2.5 3.5 63.1 (4.1) (0.5) 64.5 2011 $0.0 (0.6) 29.8 0.2 29.4 2012E $0.0 76.8 0.4 77.2 2013E $0.0 76.8 0.4 77.2 1Q (1.1) 0.5 (0.6) 2011 2Q $0.0 0.5 9.9 (1.6) 8.8 3Q 4Q $0.0 19.2 0.1 19.3 1Q 19.2 0.1 19.3 2012E 2Q 19.2 0.1 19.3 3Q 19.2 0.1 19.3 4Q 19.2 0.1 19.3
0.7 1.2 1.9
$95.0 NA 16.0 2.0 113.0 (47.4) (50.1) 2.7 $0.03 105.7% 2.9
$8.7 NA 7.5 28.6 0.2 45.0 (52.7) (32.9) (19.8) ($0.21) NM NM
$7.7 28.5 36.2 (36.3) (18.5) (17.8) ($0.18) NM NM
$13.1 $21.2 64.0 34.6 0.4 133.3 (68.8) (68.3) (0.5) ($0.00) NM NM
$13.6 $15.9 32.0 40.8 0.5 102.8 (73.4) (44.0) (29.4) ($0.26) NM NM
$12.8 16.0 78.4 40.0 147.2 (70.0) (62.0) (8.0) ($0.07) NM NM
$12.8 $16.0 78.4 40.0 147.2 (70.0) (76.0) 6.0 $0.05 NM NM
$2.4 $4.3 9.5 0.1 16.3 (16.9) (7.5) (9.4) ($0.09) 44.4% (8.8)
$1.4 $3.4 11.7 10.6 0.1 27.2 (18.4) (10.1) (8.3) ($0.07) 54.9% (8.5)
$5.0 $3.2 0.7 10.3 0.2 19.4 (17.5) (9.4) (8.1) ($0.07) 53.7% (8.1)
$4.8 $5.0 19.6 10.4 0.1 39.9 (20.6) (17.0) (3.6) ($0.03) 82.5% (3.6)
$3.2 4.0 19.6 10.0 36.8 (17.5) (14.0) (3.5) ($0.03) 80.0% (3.5)
$3.2 4.0 19.6 10.0 36.8 (17.5) (14.0) (3.5) ($0.03) 80.0% (3.5)
$3.2 4.0 19.6 10.0 36.8 (17.5) (17.0) (0.5) ($0.00) 97.1% (0.5)
$3.2 4.0 19.6 10.0 36.8 (17.5) (17.0) (0.5) ($0.00) 97.1% (0.5)
16 April 2012
192
BROWN & BROWN, INC. 1-OVERWEIGHT/1-POSITIVE
BRO: Highest Leverage to Improving Pricing

Price 4/11/2012
$23.72
Price Target
$28
52-Wk Price Range

NM
Mkt Cap (Bil)

$3.4

$1.13 $1.30
13E
$1.45
% Change EPS 11/12 12/13

14% 12%

$1.29 $1.45
Div. Yield
1.3%

2.07 1.94 1.77
P/E 12E
18.3
13E
16.4
ROE 12E 13E

11% 11%
Investment Thesis
Potential Catalysts
Brown & Brown is a pure-play insurance broker and nearly all of its revenues are commission-based, which means it has the highest leverage of the insurance brokers to improved P&C prices. Once organic revenue growth at BRO turns positive, the company could see significant positive operating leverage because two-thirds of each incremental dollar of organic growth should fall to the bottom line. BRO has a high-performance culture as evidenced by its 35% pre-tax margin that is the best among peers. Brown & Browns CEO Powell Brown (age 43) has taken a temporary leave of absence due to health reasons (details unknown). J. Hyatt Brown (age 73), Chairman of BRO and the companys prior CEO, will assume the interim CEO responsibilities. It is unclear to us what the health issue is, although Hyatt Brown provides a clear and strong backup on a temporary basis.
Risks
Organic growth and margin expansion could be faster than anticipated driven by improving P&C prices and economy. Notably, BROs organic growth in the 1H12 could face headwinds from market dislocations but turn positive by YE12. BRO could continue to actively make small bolt-on acquisitions that are immediately accretive and supplement organic growth. The return of CEO Powell Brown from a temporary leave of absence due to health reasons could be a positive catalyst. Approximately 30% of BROs revenues are from Florida, which is among the most economically challenged areas in the U.S. but could slowly improve. Also, BRO could benefit from a large hurricane impacting Florida. BRO is unlikely to be acquired, in our view, because it is a family-run business and the Brown family owns 15% of the stock.
Valuation
BROs earnings could face headwinds if P&C price increases slow or if the economy deteriorates. Margin expansion could be challenging to achieve if organic growth deteriorates. Contingent commissions could decline as P&C industry earnings deteriorate. BRO continues to collect highly profitable contingent commissions from insurers, which the largest brokers had to give up for several years. The Florida economy is weak, although BRO would likely benefit from a large hurricane impacting Florida.
Since 2000, BRO has traded at a median forward P/E of 20.0x, with a range of 13.7x-32.2x. Since 2008, the median is 17.0x. Our $28 price target is based on a P/E of 22x our 2012 EPS estimate of $1.30. BRO currently trades 18.3x 2012E EPS of $1.30, above other insurance brokers.
Brown & Brown, based in Daytona Beach, Florida, is the eighth largest U.S. insurance agency in the U.S.
16 April 2012 193
Figure 352: BRO Major Metrics

Total Revenues Adjusted Net EPS
in $ mn 1,400 1,200 1,000 800 600 400 200 0
% growth 40% 30% 20% 10% 0% -10%
$1.60 $1.40 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00
$1.45 $1.35 $1.30 $1.22 $1.17 $1.14 $1.13 $1.08 $1.08 $1.20 $0.93
20 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 12 20 E 13
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20
Total revenues
Growth rate
20% 15% 11% 12% 11% 10% 5% 0% -5% -10% -3% -4% -5% -6%-6% 6% 4% 3% 4%
38% 37% 40% 37% 38% 35% 30% 25% 0% 1% 20% 15% 10% 5%
35% 34% 35% 35% 35% 36%
16 April 2012
E 13 20 2 E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 7 0 20 6 0 20 5 0 20 4 0 20 3 0 20 2 0 20 1 0 20 0 0 20
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20
194
Figure 353: BRO Absolute 4-Qtr Fwd Price-to-Earnings
Figure 354: BRO Relative 4-Qtr Fwd P/E (S&P 500)
35.0 30.0 25.0 20.0 15.0 10.0 5.0
80% 60% 40% 20% 0% -20% -40% -60%

D 1 -1 ec D -10 ec D -09 ec D -08 ec D -07 ec D -06 ec D -05 ec D -04 ec D -03 ec D -02 ec D -01 ec D -00 ec D -99 ec
22.0 18.0 14.0 10.0 6.0
Figure 355: BRO EV/EBITDA
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
16 April 2012
Dec-11
195
Figure 356: BRO Annual Summary Model

(Dollars in millions, except per-share) 2006 Revenues: Florida Retail National Retail Western Retail Total Retail Professional Programs Special Programs Total Programs Wholesale Brokerage Services Total Core Commissions & Fees Contingent Commissions Divested Business Total commissions & fees Investment Income Other income, net Total revenues Operating expenses: Employee compensation & benefits Non-cash stock-based compensation Other operating expenses Amortization Depreciation Interest Total Expenses Change in estimated acquisition earn-out payab Income before taxes Income taxes Net Income Per diluted share: Basic income per share 2007 2008 2009 2010 2011 2012E 2013E 1Q 2011 2Q 3Q 4Q 1Q 2012E 2Q 3Q 4Q
$175.3 203.5 101.4 480.2 41.0 113.0 154.0 151.3 32.6 818.0 41.0 5.6 864.7 11.5 1.9 878.0 404.9 5.4 126.5 36.5 11.3 13.4 598.0 NA 280.0 107.7 172.4 $1.23 $1.22 $0.21 39.5% 335.3 38.2% 38.2% 35.2% 46.1% 14.4% 140.0 139.6 1.4 141.0 38.5% 225.2 4.9% 15.9% 25.1% 22.6% 10.8% 17.4% 11.5% 74.5% -49.5% 11.7% 4.0% 8.0% 19.8% 10.4% 14.7% 14.5% 13.4% 19.6% $6.64 19.3% 20.4% $0.04 0.0 0.0
$175.3 241.3 94.5 511.1 42.3 108.7 151.1 157.0 35.5 854.7 57.6 2.3 914.7 30.5 14.5 959.7 444.1 5.7 131.4 40.4 12.8 13.8 648.1 NA 311.6 120.6 191.0 $1.36 $1.35 $0.25 40.0% 371.5 38.7% 37.0% 34.1% 47.6% 14.1% 140.7 140.5 0.8 141.2 38.7% 215.3 6.4% -1.9% 3.8% 9.0% 4.5% 40.4% 5.8% 165.7% NM 9.3% -3.9% 9.7% 3.9% 8.4% 11.3% 10.8% 10.6% 17.2% $7.80 18.4% 18.8% $0.04 0.0 0.0
$168.6 294.6 98.3 561.4 43.4 122.5 165.9 150.0 32.1 909.6 56.4 0.0 966.0 6.1 5.5 977.6 485.8 7.3 137.4 46.6 13.3 14.7 705.1 NA 272.5 106.4 166.1 $1.18 $1.17 $0.29 36.3% 341.1 34.9% 34.9% 30.9% 49.7% 14.1% 141.5 141.0 0.6 141.6 39.0% 341.7 9.8% 9.8% -4.4% -9.5% 6.4% -2.1% 5.6% -80.1% -62.2% 1.9% -6.3% 9.4% 4.6% 8.8% -12.5% -13.0% -13.2% 17.0% $8.77 14.7% 14.2% $0.04 0.0 0.0
$156.1 308.7 98.7 563.5 44.2 134.1 178.3 142.1 32.7 916.5 47.6 0.7 964.9 1.2 1.9 967.9 484.7 7.4 143.4 49.9 13.2 14.6 713.1 NA 254.8 101.5 153.3 $1.11 $1.08 $0.30 35.1% 326.6 33.7% 33.7% 30.3% 50.1% 14.8% 142.1 137.2 0.3 137.5 39.8% 221.6 0.4% 7.4% -5.3% 1.7% 0.8% -15.6% -0.1% -80.9% -66.3% -1.0% -5.7% -0.2% 4.4% 1.1% -6.5% -7.7% -8.1% 15.4% $9.64 12.6% 11.7% $0.04 0.0 0.0
$151.5 313.7 93.9 559.1 41.7 124.1 165.8 140.7 46.3 911.9 54.7 0.0 966.7 1.3 5.2 973.2 487.8 6.8 135.9 51.4 12.6 14.5 709.1 -1.7 265.8 104.3 161.5 $1.17 $1.14 $0.31 36.1% 338.6 34.8% 34.8% 30.9% 50.1% 14.0% 142.1 137.9 1.4 139.3 39.3% 296.1 -0.8% -7.0% -1.0% 41.7% -0.5% 14.9% 0.2% 14.2% 183.3% 0.6% -4.8% 0.6% -5.3% -0.6% 4.4% 5.3% 5.4% 14.2% $10.60 12.2% 11.2% $0.04 0.0 0.0
$155.6 331.3 102.5 589.5 40.3 125.1 165.3 143.1 64.9 962.8 43.2 0.0 1,006.0 1.3 6.3 1,013.5 508.7 11.2 144.1 54.8 12.4 14.1 745.2 -2.2 270.5 106.5 164.0 $1.15 $1.13 $0.32 35.8% 350.6 34.6% 34.8% 31.9% 50.2% 14.2% 143.4 138.6 1.7 140.3 39.4% 237.5 5.4% -0.3% 1.7% 40.0% 5.6% -21.1% 4.1% -4.4% 20.3% 4.1% -3.0% 4.3% 6.1% 5.1% 1.8% 1.5% -0.5% 13.2% $11.47 11.6% 10.4% $0.04 0.0 0.0
$170.0 350.0 111.0 631.0 75.0 153.0 228.0 155.0 100.0 1,114.0 35.7 0.0 1,149.7 1.5 3.0 1,154.2 572.0 14.0 161.5 62.5 14.8 17.4 842.2 0.0 312.1 126.4 185.7 $1.34 $1.30 $0.34 36.5% 406.0 35.2% 35.2% 33.1% 49.6% 14.0% 141.3 138.4 1.9 140.3 40.5% 240.0 7.0% 37.9% 8.3% 54.1% 15.7% -17.4% 14.3% 18.4% -52.5% 13.9% 0.4% 12.4% 12.1% 13.0% 15.4% 13.2% 14.5% 12.6% $12.26 12.5% 11.0% $0.05 2.1 50.0
$190.0 385.0 120.0 695.0 80.0 170.0 250.0 170.0 105.0 1,220.0 35.0 0.0 1,255.0 1.5 3.0 1,259.5 623.0 15.0 174.0 66.5 15.0 17.4 910.9 0.0 348.6 141.2 207.4 $1.50 $1.45 $0.35 36.7% 447.5 35.5% 35.5% 33.7% 49.5% 13.8% 141.3 138.4 2.0 140.4 40.5% 264.8 10.1% 9.6% 9.7% 5.0% 9.5% -2.0% 9.2% 0.0% 0.0% 9.1% 1.0% 8.9% 7.8% 8.2% 11.7% 11.7% 11.9% 11.7% $13.37 12.9% 11.5% $0.05 0.0 0.0
$38.6 82.2 24.7 145.5 9.5 27.7 37.2 34.1 15.8 232.6 28.9 0.0 261.5 0.2 0.6 262.2 126.6 2.8 36.1 13.5 3.1 3.6 185.7 -0.1 76.7 30.4 46.3 $0.32 $0.32 $0.08 38.0% 96.6 36.8% 36.8% 29.0% 48.3% 13.8% 142.5 138.4 2.3 140.6 39.6% 51.6 6.2% -3.2% 1.0% 75.9% 6.6% -10.4% 4.4% -32.3% -56.5% 4.1% -2.3% 3.6% -0.7% 3.2% 5.3% 5.5% 3.8% 13.9% $10.83 12.0% 11.1% $0.01 0.0 0.0
$44.4 83.1 25.0 152.5 8.8 24.6 33.4 41.7 16.1 243.7 2.3 0.0 246.0 0.4 0.4 246.8 125.9 2.7 35.0 13.6 3.1 3.6 183.8 1.6 61.5 24.4 37.0 $0.27 $0.26 $0.08 34.2% 81.3 33.0% 33.0% 32.3% 51.0% 14.2% 142.9 138.4 1.6 139.9 39.7% 72.0 4.2% -10.2% 0.8% 65.7% 3.9% -64.7% 2.0% 13.6% -80.6% 1.3% -4.8% 3.7% 4.0% 4.3% -9.6% -10.1% -7.5% 13.7% $11.01 11.6% 10.6% $0.01 0.0 0.0
$34.8 87.3 26.7 148.8 11.5 38.6 50.2 34.5 16.5 249.9 7.2 0.0 257.2 0.3 2.9 260.4 126.9 2.9 38.4 13.7 3.1 3.6 188.5 -0.8 72.7 28.5 44.2 $0.31 $0.30 $0.08 36.8% 92.8 35.7% 36.7% 34.8% 48.7% 14.8% 143.4 138.7 1.8 140.4 39.2% 77.6 5.2% 1.9% 1.1% 41.4% 5.7% -25.2% 4.5% -8.1% NM 5.2% -2.4% 4.0% 22.8% 8.1% -0.5% -0.3% -1.0% 13.4% $11.27 11.9% 10.3% $0.01 0.0 0.0
$37.8 78.7 26.2 142.7 10.4 34.2 44.6 32.8 16.5 236.5 4.8 0.0 241.4 0.3 2.4 244.1 129.4 2.9 34.6 14.0 3.1 3.4 187.3 -2.9 59.7 23.2 36.5 $0.26 $0.25 $0.09 34.0% 79.9 32.7% 32.7% 31.4% 53.0% 14.2% 143.4 138.8 1.8 140.5 38.9% 36.3 6.2% 8.8% 4.5% 3.2% 6.2% -24.7% 5.4% 9.5% NM 6.2% -0.6% 5.8% 0.0% 4.8% 14.9% 13.5% 13.4% 13.2% $11.47 11.7% 10.4% $0.01 0.0 0.0
$40.5 87.0 26.0 153.5 16.0 33.0 49.0 36.0 22.0 260.5 25.0 0.0 285.5 0.4 0.8 286.6 143.0 3.5 40.2 15.6 3.7 4.4 210.4 0.0 76.3 30.9 45.4 $0.33 $0.32 $0.09 36.1% 99.7 34.8% 34.8% 28.6% 49.9% 14.0% 142.9 138.4 2.3 140.6 40.5% 58.9 5.5% 31.8% 5.7% 39.0% 12.0% -13.4% 9.2% 67.4% 35.9% 9.3% -0.5% 13.0% 11.4% 13.3% -0.5% -2.0% -1.4% 13.0% $11.66 11.3% 10.2% $0.01 0.4 10.0
$47.5 89.0 28.0 164.5 16.0 30.5 46.5 45.5 24.5 281.0 2.3 0.0 283.3 0.4 0.8 284.4 142.0 3.5 38.0 15.6 3.7 4.4 207.2 0.0 77.3 31.3 46.0 $0.33 $0.33 $0.09 36.7% 100.7 35.4% 35.4% 34.9% 49.9% 13.4% 142.5 138.4 1.6 139.9 40.5% 59.5 7.9% 39.1% 9.1% 52.0% 15.3% 1.1% 15.2% -4.6% 70.5% 15.2% 0.3% 12.8% 8.6% 12.7% 25.7% 24.1% 24.1% 12.9% $11.87 11.8% 10.5% $0.01 0.4 10.0
$38.0 92.0 29.5 159.5 22.0 48.0 70.0 37.0 24.3 290.8 7.4 0.0 298.2 0.4 0.8 299.3 144.0 3.5 42.8 15.6 3.7 4.4 213.9 0.0 85.4 34.6 50.8 $0.36 $0.35 $0.09 37.6% 108.8 36.4% 37.2% 35.6% 48.1% 14.3% 141.9 138.7 1.8 140.4 40.5% 64.4 7.2% 39.5% 7.2% 47.4% 16.3% 2.3% 15.9% 18.3% -74.2% 14.9% 0.7% 13.5% 11.2% 13.5% 17.4% 15.0% 15.5% 12.7% $12.09 12.1% 10.7% $0.01 0.6 15.0
$44.0 82.0 27.5 153.5 21.0 41.5 62.5 36.5 29.3 281.8 1.0 0.0 282.8 0.4 0.8 283.9 143.0 3.5 40.5 15.7 3.7 4.4 210.8 0.0 73.1 29.6 43.5 $0.32 $0.30 $0.09 35.4% 96.7 34.1% 34.1% 33.8% 50.4% 14.3% 141.3 138.1 2.0 140.1 40.5% 57.1 7.6% 40.3% 11.1% 77.5% 19.1% -79.2% 17.2% 12.6% -68.9% 16.3% 1.0% 10.5% 17.1% 12.5% 22.5% 19.2% 21.6% 12.6% $12.26 12.5% 11.0% $0.01 0.6 15.0
Fully diluted income per share

Dividends per share EBITDA margin Operating profit
Operating profit margin Operating profit margin ex unusual items

Op profit margin ex unusual items & cont comm Salary & benefit margin ex unusual items Other expense margin ex unusual items Actual shares end of period Average basic shares Dilution Wtd. average common shares - diluted Effective tax rate Operating cash flow Percentage change Total retail Total programs Wholesale Brokerage Services Total Core Commissions & Fees Contingent Commissions Total commissions & fees Investment Income Other income, net Total revenues Organic growth Employee compensation & benefits Other operating expenses Total expenses Income before taxes After-tax net income Net EPS Balance sheet Debt/capital Book value per share Return on capital Return on equity 1-point margin change, per share, after-tax # shares repurchased $ shares repurchased
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AON CORPORATION 2-EQUAL WEIGHT/1-POSITIVE
AON: Leveraged to Improving Economy and Insurance Market

Price 4/11/2012
$47.94
Price Target
$53
52-Wk Price Range

NM
Mkt Cap (Bil)

$15.6

$3.29 $3.60
13E
$4.05
% Change EPS 11/12 12/13

9% 13%

$3.61 $4.14
Div. Yield
1.3%

1.92 1.76 1.64
P/E 12E
13.3
13E
11.8
ROE 12E 13E

14% 15%
Investment Thesis
Potential Catalysts
Aon could benefit similar to other insurance brokers from improving P&C prices and exposure growth once the economy improves, although the companys Brokerage organic growth trails MMC. The company acquired Hewitt for $5bn in 2010, which doubled Aons revenue mix from consulting to onethird in a business with structurally lower margins than insurance brokerage. Aon recently moved its corporate headquarters to the U.K. from the U.S to structurally improve its tax rate, unlock excess cash flow, and be at the center of the global insurance market.
Risks
Organic growth could benefit from higher P&C prices and an improving economy. Aons Consulting business could benefit from an improving economy, although we are concerned about potential integration issues from the Hewitt acquisition. Expense savings in Aons insurance brokerage business are mostly complete, which means Aon needs to generate positive operating leverage to expand margins in this segment. Aon targets a 26% margin in Insurance Brokerage, although our sense is this could take 3-5 years to achieve. Aon has $1.2bn remaining in its share repurchase authorization. Aon does not currently plan to do another large acquisition.
Valuation
Aons earnings could face headwinds if P&C price increases slow or if the economy deteriorates. A weak economy impacts both Brokerage organic growth and Consulting results. Execution risks related to Hewitt acquisition. Increased pension expenses Low interest rates
Since 2000, AON has traded at a median forward P/E of 13.3x, with a range of 8.9x-17.8x. Since 2008, the median is 12.7x. Our $53 price target is based on a P/E of 15x our 2012 EPS estimate of $3.60. Aon currently trades 13.3x 2012E EPS of $3.60, which is below MMC but above WSH.
Aon Corporation, based in London, is a leading global provider of risk management services, insurance and reinsurance brokerage, and human capital consulting. In 2010, Aon acquired Hewitt, which substantially expanded is presence in consulting.
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Figure 358: AON Major Metrics

$4.50 Consulting, 33% $4.00 $3.50 $3.00 $2.50 Insurance Brokerage, 67% $2.00 $1.50 $1.00 $0.50 $0.00
$2.31 $1.74$1.76 $2.87 $2.30
$4.05 $3.60 $3.29 $3.13 $2.92
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20
AON Total Revenues FY 2011: $11.3 Bn
20% 15% 13% 9% 3% 4% 2% -1%-1% -1% 2% 3% 4% 9% 10% 8% 5% 0% -5% -10%
40% 35% 30% 25% 20% 15% 10% 5% 14% 15% 20% 20% 20% 20% 21% 18% 18% 19%
0%
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E 13 20 2 E 1 20 1 1 20 0 1 20 9 0 20 8 0 20 7 0 20 6 0 20 5 0 20 4 0 20 3 0 20 2 0 20 1 0 20 0 0 20
E 13 20 E 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 20 04 20
198
Figure 359: AON Absolute 4-Qtr Fwd Price-to-Earnings
Figure 360: AON Relative 4-Qtr Fwd P/E (S&P 500)
20.0 18.0 16.0 14.0 12.0 10.0 8.0

N
16 April 2012
20% 0% -20% -40% -60% -80%

D 1 -1 ec D -10 ec D -09 ec D -08 ec D -07 ec D -06 ec D -05 ec D 04 ec D -03 ec D -02 ec D -01 ec D -00 ec D -99 ec
N 1 -0 ov
Figure 361:AON EV/EBDITA

16.0 14.0 12.0 10.0 8.0 6.0 4.0
Ja n00 Ja n01
Ja n02 Ja n03
Ja n04 Ja n05
Ja n06 Ja n07
Ja n08 Ja n09
Ja n10 Ja n11
Ja n12
9 -9 ov
3 -0 ov
5 -0 ov
7 -0 ov
9 -0 ov
1 -1 ov
199
Figure 362: AON Annual Summary Model

(Dollars in millions, except per share data) 2006 Revenue Commissions and fees Premiums and other income Net investment income Other income Intersegment revenues Total revenue Benefits & expenses Compensation & benefits Other general expenses Commissions & general expenses Benefits to policyholders Interest Expense Depreciation Amortization Total depreciation & amortization Other income Total benefits & expenses Interest income Pretax income Unusual Items Pretax income ex Unusual Items Income tax expense Minority interest Net income from continuing Gain on disposal of disc. ops, net Discontinued operations A/T Cumulative effect of accounting change Restructuring charge A/T Net income Less: Net income attributable to non-controllin Net Income Available Common Stockholders PT margin excl. unusual items PT margin excl. unusual items and and intangib PT margin as reported Eff. tax rate Per share data Income Continuing Ops Unusual items Income Cont. Ops Ex Unusual Items Discontinued operations Net income Adjusted cash EPS ex amortization Shareholder dividends Dividend payout ratio Actual shares outstanding Average basic shares outstanding Options and equivalents Average diluted shares outstanding Operating cash flow Balance sheet Debt + TP/capital Debt + TP/tangible capital Total debt /total capital Book value ROE (operating income) ROE (net income) # shares repurchased $ amount shares repurchased Percent change Commissions and fees Net investment income Total revenue Total expenses Operating income Income Cont. Ops Ex Unusual Items Income Continuing Ops Organic growth-brokerage $6,610 202 17 (59) 6,770 4,172 1,546 5,718 129 NA NA 222 (27) 6,042 728 728 239 489 230 1 720 809 13.6% NA 10.8% 32.8% $1.43 $0.33 $1.76 $0.67 $2.08 NA $0.60 41.8% 299 317 29 346 968 30.5% 80.9% 30.5% $17.47 9.3% 9.3% 28 $1,048 1.9% -17.2% -20.3% -21.4% 10.1% 1.4% 1.4% 3% 2007 $7,049 214 (29) 7,234 4,341 1,697 6,038 138 NA NA 193 (58) 6,311 100 1,023 85 1,108 348 675 202 877 13 864 15.3% NA 14.1% 31.4% $2.04 $0.26 $2.30 $0.62 $2.69 NA $0.60 29.5% 291 295 32 327 1,263 25.6% 66.1% 25.6% $21.44 11.8% 11.8% 19 $750 6.6% 5.9% 6.9% 4.5% 6.8% 30.1% 30.1% 4% 2008 $7,368 185 (25) 7,527 4,581 1,785 6,366 126 157 65 222 29 6,743 94 878 351 1,229 242 636 841 1,477 16 1,461 16.3% 17.2% 11.7% 27.6% $2.04 $0.83 $2.87 $2.76 $4.85 NA $0.60 29.5% 272 272 33 305 968 27.1% 227.0% 27.1% $19.54 11.0% 11.0% 43 $1,924 4.5% -13.6% 4.1% 6.8% 69.1% 24.9% 24.9% 2% 2009 $7,499 73 49 (26) 7,595 4,597 1,793 6,390 122 149 93 242 (33) 6,721 17 891 356 1,247 268 623 111 734 45 689 16.4% 17.6% 11.7% 30.1% $2.00 $0.92 $2.92 $0.38 $2.52 $3.34 $0.60 30.1% 265 276 15 291 500 27.2% 389.9% 27.2% $20.28 11.7% 11.7% 15 $590 1.8% -60.5% 0.9% -0.3% -52.8% 1.7% 1.7% -1% 2010 $8,479 55 (22) 8,512 5,097 1,883 6,980 182 151 154 305 7,467 15 1,060 310 1,370 300 760 (27) 733 26 707 16.1% 17.9% 16.1% 28.3% $2.47 $0.65 $3.13 ($0.09) $2.46 $3.48 $0.60 24.3% 332 286 12 298 783 35.2% 813.4% 35.2% $25.00 11.1% 11.1% 6 $250 13.1% -24.7% 12.1% 11.1% 2.6% 7.4% 7.4% 0% 2011 $11,266 52 (31) 11,287 6,567 2,532 9,099 245 220 362 582 (5) 9,921 18 1,384 221 1,605 378 1,006 4 1,010 31 979 14.2% 17.4% 14.2% 27.3% $2.86 $0.42 $3.29 $0.01 $2.96 $4.06 $0.60 21.0% 324 328 13 341 1,018 35.6% 793.6% 35.6% $25.03 12.2% 12.2% 19 $828 32.9% -5.5% 32.6% 32.9% 38.5% 5.1% 5.1% 2% 2012E $11,945 52 (28) 11,969 6,652 2,811 9,463 240 220 411 631 10,334 22 1,657 81 1,738 481 1,176 14 1,162 36 1,126 14.5% 18.0% 14.5% 29.0% $3.42 $0.17 $3.60 $0.00 $3.49 $4.47 $0.60 17.5% 313 319 14 333.1 1,624 34.5% 466.6% 34.5% $27.18 14.1% 14.1% 11 $575 6.0% 0.0% 6.0% 4.2% 15.0% 9.3% 9.3% 3% 2013E $12,730 52 (28) 12,754 6,956 3,076 10,032 260 212 384 596 10,888 22 1,888 30 1,918 548 1,340 1,340 36 1,304 15.0% 18.0% 15.0% 29.0% $3.99 $0.07 $4.05 $0.00 $4.10 $4.88 $0.60 15.1% 313 313 14 327.2 1,764 30.9% 333.8% 30.9% $29.29 15.2% 15.2% 9 $500 6.6% 0.0% 6.6% 5.4% 15.8% 12.6% 12.6% 4% 1Q $2,755 11 (7) 2,759 1,597 622 2,219 63 53 91 144 (17) 2,409 6 356 85 441 103 253 2 255 9 246 16.0% 19.3% 16.0% 28.9% $0.71 $0.09 $0.80 $0.01 $0.74 $0.99 $0.15 21.2% 331 331 14 345 582 36.7% 513.7% 36.7% $25.68 9.2% 9.8% 7 $350 45.3% -15.4% 44.9% 45.3% 38.2% -3.8% 12.5% 3% 2011 2Q 2,806 12 (7) 2,811 1,612 616 2,228 63 58 91 149 23 2,463 4 352 19 371 87 265 2 267 9 258 13.2% 16.4% 13.2% 24.7% $0.75 $0.08 $0.83 $0.01 $0.78 $1.03 $0.15 20.1% 327 329 14 343 579 34.9% 843.8% 34.9% $25.91 10.4% 10.7% 6 $303 48.5% -20.0% 48.1% 48.6% 68.6% 1.7% 17.9% 1% 3Q 2,714 15 (6) 2,723 1,634 604 2,238 60 53 91 144 (7) 2,435 4 292 48 340 84 208 208 10 198 12.5% 15.8% 12.5% 28.8% $0.59 $0.10 $0.69 $0.00 $0.62 $0.88 $0.15 25.5% 327 327 10 337 252 35.6% 692.6% 35.6% $25.34 11.2% 11.6% 6 $175 51.6% 0.0% 51.2% 52.5% 37.5% 12.7% 15.2% 2% 4Q 2,991 14 (11) 2,994 1,724 690 2,414 59 56 89 145 (4) 2,614 4 384 69 453 104 280 1Q $2,914 13 (7) 2,920 1,616 695 2,311 60 55 103 158 2,529 6 396 20 417 115 281 7 274 9 265 14.3% 17.8% 14.3% 29.0% $0.81 $0.04 $0.85 $0.00 $0.81 $1.07 $0.15 18.6% 322 323 14 337 394 35.3% 673.5% 35.3% $25.53 12.2% 12.7% 2 $125 5.8% 18.2% 5.8% 5.0% 7.8% 6.8% 14.3% 3% 2012E 2Q $2,974 13 (7) 2,980 1,680 671 2,351 60 55 103 158 2,569 6 416 20 437 121 296 7 288 9 279 14.6% 18.1% 14.6% 29.0% $0.86 $0.04 $0.90 $0.00 $0.86 $1.12 $0.15 17.5% 319 321 14 335 408 35.1% 593.0% 35.1% $26.05 12.3% 12.9% 3 $150 6.0% 8.3% 6.0% 4.3% 8.3% 8.8% 14.7% 3% 3Q $2,871 13 (7) 2,877 1,622 676 2,298 60 55 103 158 2,516 6 366 20 387 106 260 260 9 251 13.4% 17.0% 13.4% 29.0% $0.76 $0.04 $0.80 $0.00 $0.78 $1.02 $0.15 19.8% 316 318 14 332 372 34.9% 547.7% 34.9% $26.48 12.9% 13.4% 3 $150 5.8% -13.3% 5.7% 3.3% 26.8% 16.4% 28.8% 3% 4Q $3,186 13 (7) 3,192 1,733 769 2,502 60 55 102 157 2,719 6 478 20 499 139 340 340 9 331 15.6% 18.8% 15.6% 29.0% $1.01 $0.04 $1.05 $0.00 $1.03 $1.27 $0.15 14.9% 313 315 14 329 451 34.5% 466.6% 34.5% $27.18 13.3% 13.9% 3 $150 6.5% -7.1% 6.6% 4.0% 19.3% 8.2% 22.6% 3%
280 3 277 15.1% 18.1% 15.1% 27.1% $0.82 $0.15 $0.97 $0.00 $0.83 $1.16 $0.15 18.3% 324 326 12 338 (395) 35.6% 793.6% 35.6% $25.03 11.9% 12.3% $0 3.0% 16.7% 2.9% 2.3% 19.4% 15.2% 22.0% 2%
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200
Figure 363: AON Segment Model

Risk Solutions (Dollars in millions) Revenue Risk management & insurance-Americas rev. Risk management & insurance-int. rev. Reinsurance rev. Claims services rev. Investment income Gross brokerage rev. Contingent commissions & unusual items Revenues ex one-time items and contingents Net brokerage ex. investment income Investment income Compensation and benefits Other expenses Total expenses Other income Pretax income as reported Unusual items (a) Expenses ex. Unusual items Pretax income ex. unusual items Pretax margin as reported Pretax margin excl. unusual items Amortization of intangible assets Pretax income ex unusual items and amortization of Pretax margin excl. unusual items and amortizati Salaries & benefits/revenues Year over year change Risk management & insurance-Americas rev. Risk management & insurance-int. rev. Reinsurance rev. Gross brokerage rev. ex unusual items Net brokerage revenue ex. investment income Investment income Total expenses Expenses ex. Unusual items Pretax income Pretax income excl unusual items Total org. growth 1 point margin effect on EPS (35% tax rate) 2007 $2,259 2,592 901 205 $5,918 5,918 5,713 205 3,488 1,516 4,918 1,000 59 4,859 1,059 16.9% 17.9% NA NA NA 58.9% 6.1% 10.8% 4.3% 7.0% 7.1% 4.1% 4.4% 5.5% 22.2% 21.2% 4% $0.12 2008 $2,280 2,755 1,003 192 $6,197 6,197 6,012 185 3,728 1,675 5,324 (6) 867 282 5,042 1,149 14.0% 18.5% NA NA NA 60.2% 0.9% 6.3% 11.3% 4.7% 5.2% -9.8% 8.3% 3.8% -13.3% 8.5% 2% $0.13 2009 $2,522 2,756 1,485 73 $6,835 6,835 6,762 73 4,038 1,794 5,832 11 1,003 349 5,483 1,352 14.7% 19.8% 93 1,445 21.1% 59.1% 10.6% 0.0% 48.1% 10.3% 12.5% -60.5% 9.5% 8.7% 15.7% 17.7% -1% $0.15 2010 $2,676 2,815 1,444 54 $6,989 6,989 6,935 54 3,933 1,743 5,682 1,307 124 5,558 1,431 18.7% 20.5% 114 1,545 22.1% 56.3% 6.1% 2.1% -2.8% 2.3% 2.6% -26.0% -2.6% 1.4% 30.3% 5.8% 0% $0.15 2011 $3,001 3,021 1,463 52 $7,537 7,537 7,485 52 4,179 1,944 6,123 1,414 83 6,040 1,497 18.8% 19.9% 129 1,626 21.6% 55.4% 12.1% 7.3% 1.3% 7.8% 7.9% -3.7% 7.8% 8.7% 8.2% 4.6% 2% $0.14 2012E $3,266 3,250 1,490 50 $8,056 50 8,006 8,006 50 4,301 2,114 6,415 1,641 6,415 1,641 20.4% 20.4% 160 1,801 22.5% 53.4% 8.8% 7.6% 1.8% 6.9% 7.0% -3.8% 4.8% 6.2% 16.1% 9.6% 3% $0.16 2013E $3,582 3,492 1,540 50 $8,664 50 8,614 $8,614 50 4,589 2,286 6,875 1,789 6,875 1,789 20.6% 20.6% 140 1,929 22.4% 53.0% 9.7% 7.4% 3.4% 7.5% 7.6% 0.0% 7.2% 7.2% 9.0% 9.0% 4% $0.17 1Q $631 822 387 11 $1,851 1,851 1,840 11 1,011 494 1,505 346 21 1,484 367 18.7% 19.8% 31 398 21.5% 54.6% 13.9% 6.5% -0.3% 7.2% 7.4% -15.4% 4.6% 8.5% 20.1% 2.2% 3% $0.03 2011 2Q $785 748 367 12 $1,912 1,912 1,900 12 1,058 480 1,538 374 (7) 1,545 367 19.6% 19.2% 33 400 20.9% 55.3% 14.6% 13.7% 2.2% 11.4% 11.6% -14.3% 10.7% 13.7% 14.4% 2.8% 1% $0.04 3Q 4Q $847 $797 $344 14 $2,002 2,002 1,988 14 1,096 531 1,627 375 55 1,572 430 18.7% 21.5% 32 462 23.1% 54.7% 6.3% 0.9% 2.4% 3.5% 3.4% 16.7% 6.7% 4.1% -8.5% 1.2% 2% $0.04 1Q $684 873 394 13 $1,964 13 $1,951 1,951 13 1,020 542 1,562 402 1,562 389 20.4% 19.9% 40 429 22.0% 51.9% 8.4% 6.2% 1.8% 6.1% 6.0% 13.6% 3.8% 5.3% 16.0% 6.0% 3% $0.04 2012E 2Q $853 795 373 13 $2,034 13 $2,021 2,021 13 1,111 519 1,630 404 1,630 391 19.8% 19.3% 40 431 21.3% 54.6% 8.7% 6.3% 1.6% 6.4% 6.4% 4.2% 6.0% 5.5% 7.9% 6.5% 3% $0.04 3Q $802 696 372 13 $1,883 13 $1,870 1,870 13 1,025 479 1,504 379 1,504 366 20.1% 19.6% 40 406 21.7% 54.4% 8.7% 6.4% 1.9% 6.2% 6.4% -16.7% 3.5% 4.5% 18.7% 9.9% 3% $0.04 4Q $927 886 351 13 $2,177 13 $2,164 2,164 13 1,145 574 1,719 458 1,719 458 21.0% 21.0% 40 498 23.0% 52.6% 9.4% 11.2% 2.0% 8.7% 8.9% -10.7% 5.7% 9.4% NM 6.4% 3% $0.04
$738 $654 $365 15 $1,772 1,772 1,757 15 1,014 439 1,453 319 14 1,439 333 18.0% 18.8% 33 366 20.7% 57.2% 15.3% 9.9% 1.1% 10.0% 10.1% 0.0% 9.3% 8.9% 13.1% 14.8% 2% $0.03
(a) 2000: Restructuring costs (BTP) 2001: Restructuring Costs (BTP), 9/11 Charges, 2002: Reversal of prior BTP charges, WTC insurance recoveries, 2004: settlement with NYAG, 2005-2006 restructuring costs. Note: Updated 2Q04 to remove discontinued operations
HR Solutions (Dollars in millions) Benef., comp., mang., & communications rev. Human resources rev. Other - Intersegment Net investment income Total consulting revenue Net consulting revenue ex. investment inc. Investment income Compensation & benefits Other expenses Hewitt restructuring costs Total expenses Pretax income Unusual items (a) Pretax income excl. unusual items Pretax margin as reported Pretax margin excl. unusual items Amoritization of intangible assets Pretax income ex unusual items and amortization of Pretax margin excl. unusual items and amortizati Salaries & benefits/revenues Year over year change Benef., comp., mang., & communications rev. Human resources revenues Total consulting revenue Operating expenses Operating expenses ex unusual items Pretax income Pretax income excl unusual items Organic growth 1 point margin effect on EPS (35% tax rate) 2007 $1,107 236 9 $1,345 1,336 823 340 NA 1,156 189 11 200 14.1% 14.9% NA NA 11.4% 61.2% 12.7% -20.0% 4.9% -0.5% 0.3% 57.5% 42.9% -1% $0.03 2008 $1,139 214 5 $1,356 1,356 815 331 NA 1,143 213 18 231 15.7% 17.0% NA NA 15.2% 60.1% 2.9% -9.3% 0.8% -1.1% -1.7% 12.7% 15.5% 3% $0.03 2009 $545 191 1 $737 737 493 144 NA 637 100 11 111 13.6% 15.1% 111 15.1% 66.9% -52.2% -10.7% -45.6% -44.3% -44.4% -53.1% -51.9% -5% $0.02 2010 $821 731 (8) 1 $1,545 1,545 1,041 383 NA 1,424 121 76 197 7.8% 12.8% 40 237 15.3% 67.4% 50.6% 282.7% 109.6% 123.5% 115.3% 21.0% 77.5% 0% $0.03 2011 $1,532 2,272 (23) $3,781 3,781 2,286 1,147 94 $3,433 348 95 443 9.2% 11.7% 233 676 17.9% 60.5% 86.6% 210.8% 144.7% 141.1% 147.6% 187.6% 124.9% 1% $0.07 2012E $1,631 2,308 2 $3,941 3,939 2,270 1,204 81 $3,555 386 81 467 9.8% 11.8% 251 718 18.2% 57.6% 6.5% 1.6% 4.2% 3.6% 4.1% 10.9% 5.4% 1% $0.08 2013E $1,751 2,365 2 $4,118 4,116 2,286 1,274 81 3,641 477 30 507 11.6% 12.3% 244 751 18.2% 55.5% 7.4% 2.5% 4.5% 2.4% 3.9% 23.6% 8.6% 1% $0.08 1Q $367 556 (8) $915 $915 563 269 23 832 83 24 107 9.1% 11.7% 60 167 18.3% 61.5% NM NM NM NM NM NM NM -1% $0.02 2011 2Q 3Q $362 $400 550 561 (6) (4) $906 $957 $906 $957 531 279 31 810 96 26 122 10.6% 13.5% 58 180 19.9% 58.6% NM NM NM NM NM NM NM 0% $0.02 587 304 26 891 66 34 100 6.9% 10.4% 58 158 16.5% 61.3% NM NM NM NM NM NM NM -1% $0.02 4Q $403 605 (5) $1,003 $1,003 605 295 14 900 103 11 114 10.3% 11.4% 57 171 17.0% 60.3% -1.5% 4.3% 2.2% -3.3% 3.1% 106.0% 106.0% 4% $0.02 1Q $393 570 1 $964 $963 576 280 20 876 87 20 108 9.1% 11.2% 63 171 17.7% 59.8% 7.1% 2.5% 5.3% 5.3% 5.9% 5.1% 5.1% 1% $0.02 2012E 2Q 3Q $388 $426 565 575 1 1 $954 $1,002 $953 $1,001 549 279 20 848 105 20 126 11.0% 13.2% 63 189 19.8% 57.6% 7.2% 2.7% 5.2% 4.7% 5.6% 9.6% 9.6% 1% $0.02 577 324 20 921 80 20 101 8.0% 10.0% 63 164 16.3% 57.6% 6.5% 2.5% 4.6% 3.4% 5.1% 21.6% 21.6% 1% $0.02 4Q $424 598 1 $1,023 $1,022 568 321 20 909 113 20 134 11.1% 13.1% 62 196 19.1% 55.6% 5.2% -1.2% 1.9% 1.0% 0.0% 10.0% 10.0% 1% $0.02
(a) 2000: Restructuring costs (BTP), 1Q01 & 2Q01: Restructuring costs (BTP)
Corporate and other (Dollars in millions) ENH warrant appreciation/(depreciation) Equity interest in Endurance Specialty Interest income Other corporate revenue (inv. inc.) Total investment income Auto finance rev. Total revenue Interest expense Other expenses Total expenses Pretax income Unusual items (a) Pretax income excl. special charges 2007 100 100 100 138 130 268 (158) 15 (143) 2008 94 94 94 126 165 291 (197) 51 (146) 2009 22 49 71 71 122 126 248 (176) (4) (180) 2010 15 15 15 177 202 379 (364) 70 (364) 2011 18 18 18 245 156 401 (383) 3 (383) 2012E 20 20 20 240 152 392 (372) (372) 2013E 1Q 6 6 6 63 33 96 (90) (90) 2011 2Q 4 4 4 63 36 99 (95) (95) 3Q 4 4 4 60 44 104 (100) (100) 4Q 1Q 5 5 5 60 38 98 (93) (93) 2012E 2Q 5 5 5 60 38 98 (93) (93) 3Q 5 5 5 60 38 98 (93) (93) 4Q 5 5 5 60 38 98 (93) (93)
20 20 20 260 140 400 (380) (380)
4 4 4 59 43 102 (98) 3 (95)
16 April 2012
201
THE PROGRESSIVE CORPORATION 1-OVERWEIGHT/1-POSITIVE
PGR: Best-in-Class Auto Insurer

Price 4/11/2012
$22.62
Price Target
$24
52-Wk Price Range

2.39
Mkt Cap (Bil)

$13.8

$1.49 $1.45
13E
$1.55
% Change EPS 11/12 12/13

-3% 7%

$1.55 $1.69
Div. Yield
1.8%

2.39 2.16 2.02
P/E 12E
15.6
13E
14.6
ROE 12E 13E

15% 14%
Investment Thesis
Potential Catalysts
Progressive Corp. is one of the largest automobile insurers in the U.S. We view PGR as one of the bestrun companies in the P&C insurance industry as evidenced by its focused and differentiated auto insurance product offerings, consistent earnings, and superior ROE. PGR is gaining profitable market share through its direct sales operation from exclusive agency insurers State Farm and Allstate. Loss frequency trends have been favorable resulting in strong margins, although it is unclear if this will persist as the economy improves. Also, physically damage loss severity trends are increasing.
Risks
Loss frequency trends have been favorable due to reduced miles driven in a weak economy, although it is unclear if this will persist as the economy improves. Auto insurance prices are rising but the pace of increases is slowing due to competition. PGR has excess capital and could continue to repurchase its stock. We expect PGR to continue to gain market share, particularly in its direct business. PGRs commercial auto insurance growth could increase as the economy improves.
Valuation
Progressives profitability is tied to the U.S. auto insurance market since it is a pure play auto insurer. Progressive could benefit if the personal auto market tightens and auto insurance prices rise. If loss frequency or severity trends rise, PGRs margins could face headwinds. Slowing growth especially in direct sales.
Since 2000, PGR has traded at a median trailing price/stated book value of 2.64x, with a range of 1.50x-4.17x. Since 2008, the median is 2.16x. Our $24 price target is based on 2.3x YE12 estimated book value per share of $10, and a P/E of 17x our 2012 EPS estimate of $1.45. PGR currently trades at 2.21x 1Q12 book value and 15.6x 2012E EPS of $1.45, which is above other P&C insurers, but we believe this is warranted based on its strong ROE with low volatility.
Progressive Corp., based in Mayfield Village, Ohio, is the fourth largest insurer of automobiles in the United States.
16 April 2012
202
Figure 365: PGR Major Metrics

$2.50 $2.11 $2.00 $1.55 $1.55 $1.29 $1.52 $1.49 $1.45 $1.55

Commercial business and other, 10% Personal lines agent, 51%
$1.50
$1.00
Personal lines direct, 39%
$0.50
$0.00 2006
2007
2008
2009
2010
2011
2012E 2013E
100%
$12
Book Value
Operating ROE 30% 25% 20% 15% 10% 5% 0%
97%
$10
$8 $6 $4 $2
91% 88% 85% 2006
2007
2008
2009
2010
2011
2012E 2013E
$0 2006 2007 2008 2009 2010 2011 2012E 2013E
Combined Ratio
16 April 2012
Operating ROE
94%
203
Figure 366: PGR Absolute 1Q Trailing Price-to-Book

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0
Figure 367: PGR Relative Price-to-Book (S&P Financials)

300% 260% 220% 180% 140% 100% 60% 20% -20% -60%
Figure 368: PGR Price-to-Book Ex Net Unrealized Gains/(Losses)

5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00
ec -9 8
ec -0 0
ec -0 2
ec -0 4
ec -0 6
ec -0 8 D
06
00
98
02
04
08
10
ec -
ec -
ec -
ec -
ec -
ec -
ec -
Figure 370: PGR Absolute 4-Qtr Fwd Price-to-Earnings
Figure 371: PGR Relative 4-Qtr Fwd P/E (S&P 500)
60.0 50.0 40.0 30.0 20.0 10.0 0.0
175% 150% 125% 100% 75% 50% 25% 0% -25% -50%
16 April 2012
ec -1 0
204
1 -1 ec D 10 ec D 9 -0 ec D 08 ec D 07 ec D 06 ec D 5 -0 ec D 04 ec D 03 ec D 02 ec D 01 ec D 00 ec D 99 ec
4.90 4.40 3.90 3.40 2.90 2.40 1.90 1.40 0.90
Figure 369: PGR Price-to-Tangible Book
1 -1 ov N 10 ov N 09 ov N 08 ov N 07 ov N 06 ov N 05 ov N 04 ov N 03 ov N 02 ov N 1 -0 ov N 00 ov N 99 ov
1 -1 ov N -10 ov N -09 ov N 08 ov N -07 ov N -06 ov N 05 ov N -04 ov N 03 ov N -02 ov N -01 ov N 00 ov N -99 ov
Figure 372: PGR Annual Summary Model

($ In Mil, except per share)
Net premiums written Earned premiums Paid losses Reserve change Losses and LAE Policy acquisition costs Other underwriting expenses Total underwriting expenses Underwriting income Investment income Investment expense Net investment income Service revenues Service expenses Pretax service income Other income Interest expense Income before taxes Income tax expense Operating income Capital losses after tax Non recurring items Net income Earnings Per Share Basic operating EPS Fully diluted operating EPS Realized capital gains, after tax Non recurring items Net income Actual shares outstanding Average basic shares outstanding Dilution Average diluted shares outstanding Dividends per share Loss and LAE ratio Expense ratio Combined ratio Catastrophe CR pts Combined ratio ex cats Prior Yr Development Prior Yr Development (CR points) CR ex cats and prior yr development Year-over-year percentage change Net premiums written Net premiums earned Net Investment income Losses and LAE Total underwriting expenses Operating income Operating EPS Book value per share A-T impact of 1% change in C/R Per Share Book value per share Linked qtr % change in book value per share Book Value Ex AOCI per share Return on average equity ROE per Progressive ROE ex AOCI Cash flow from operations Effective tax rate Balance Sheet Premiums/statutory surplus Debt/Capital # of shares repurchased $ amount of shares repurchased Average Invested Assets Pre-tax Yield 2005 $14,008 13,764 9,001 365 9,366 1,448 1,312 2,760 1,639 537 12 525 40 25 16 83 2,096 678 1,419 25 1,394 $1.80 $1.77 $0.03 $0.00 $1.74 789 788 12 799 $0.03 68.0% 20.1% 88.1% 2.1% 86.0% (355.9) -2.6% 88.6% 4.7% 4.5% 11.5% 9.5% 3.9% -11.2% -3.9% 20.3% $89.5 $0.11 $7.74 NA $7.25 25.2% 24.8% 1,994 2006 $14,132 14,118 9,344 51 9,395 1,442 1,403 2,845 1,878 648 12 636 30 24 6 77 2,443 789 1,654 6 1,648 $2.14 $2.11 $0.01 $0.00 $2.10 748 774 10 784 $0.03 66.5% 20.1% 86.7% 0.0% 86.7% (246.9) -1.7% 88.4% 0.9% 2.6% 21.2% 0.3% 3.1% 16.6% 18.9% 18.2% $91.8 $0.12 $9.15 NA $8.36 25.5% 25.4% 1,634 2007 $13,773 13,877 9,635 292 9,926 1,400 1,526 2,926 1,025 681 12 668 22 21 2 109 1,587 473 1,113 (69) 1,183 $1.57 $1.55 ($0.10) $0.00 $1.65 680 710 8 719 $2.17 71.5% 21.1% 92.6% 0.0% 92.6% 80.3 0.6% 92.0% -2.5% -1.7% 5.1% 5.7% 2.9% -32.7% -26.6% -20.7% $90.2 $0.13 $7.26 NA $6.57 18.9% 20.1% 20.8% 1,482 30% 3.0 30.6% 73.0 $1,546.1 $14,344 4.7% 2008 $13,604 13,631 9,786 229 10,015 1,358 1,523 2,882 735 638 9 629 16 20 (4) 137 1,223 353 869 939 (70) $1.30 $1.29 $1.39 $0.00 ($0.10) 676 668 6 674 $0.04 73.5% 21.1% 94.6% 1.0% 94.6% 33.2 0.2% 94.4% -1.2% -1.8% -5.9% 0.9% -1.5% -21.9% -16.7% -14.1% $88.6 $0.13 $6.23 NA $6.34 19.0% -1.5% 19.8% 192 29% 3.0 34.0% 9.9 $178.2 $13,615 4.7% 2009 $14,003 14,013 9,714 191 9,905 1,365 1,568 2,932 1,176 507 11 496 17 19 (3) 139 1,530 490 1,040 (18) 1,058 $1.56 $1.55 ($0.03) $0.00 $1.57 671 667 5 672 $0.19 70.7% 20.9% 91.6% 0.0% 91.6% (136.0) -1.0% 92.6% 2.9% 2.8% -21.1% -1.1% 1.8% 19.6% 19.9% 37.2% $91.1 $0.14 $8.55 NA $7.93 20.9% 21.2% 21.6% 1,487 32% 2.8 27.5% 11.1 $182.2 $14,097 3.6% 2010 $14,477 14,315 9,888 243 10,131 1,360 1,740 3,100 1,084 520 15 506 26 21 5 134 1,460 454 1,006 (62) 1,068 $1.53 $1.52 ($0.09) $0.00 $1.61 662 658 5 663 $1.43 70.8% 21.7% 92.4% 0.2% 92.2% (320.4) -2.2% 94.5% 3.4% 2.2% 2.0% 2.3% 5.7% -3.3% -2.0% 6.8% $93.0 $0.14 $9.13 NA $7.97 17.1% 18.1% 19.0% 1,077 31% 2.9 24.5% 13.5 $263.7 $14,816 3.5% 2011 $15,147 14,903 10,542 93 10,635 1,399 1,822 3,221 1,047 480 14 467 23 19 3 133 1,384 437 947 (68) 1,016 $1.50 $1.49 ($0.11) $0.00 $1.59 613 632 5 637 $0.44 71.4% 21.6% 93.0% 0.8% 92.1% (242.0) -1.6% 93.8% 4.6% 4.1% -7.7% 5.0% 3.9% -5.8% -1.9% 3.7% $96.9 $0.15 $9.47 NA $8.36 16.0% 17.1% 18.2% 1,498 32% 2.8 29.6% 51.4 $999.8 14,968.0 3.2% 2012E $15,940 15,847 10,200 1,128 11,328 1,782 1,712 3,494 1,025 476 12 464 24 18 6 122 1,374 434 939 939 $1.56 $1.55 $0.00 $0.00 $1.55 586 602 5 607 $0.42 71.5% 22.0% 93.5% 0.0% 93.5% (75.0) -0.5% 94.0% 5.2% 6.3% -0.5% 6.5% 8.5% -0.9% 4.1% 8.1% $103.0 $0.17 $10.24 NA $8.76 15.9% 15.9% 18.3% 2,160 32% 3.0 25.9% 30.7 $675.0 15,511.5 3.1% 2013E $16,755 16,592 10,500 1,373 11,873 1,867 1,794 3,661 1,058 476 11 465 24 18 6 122 1,407 446 961 961 $1.67 $1.65 $0.00 $0.00 $1.65 568 577 5 582 $0.46 71.6% 22.1% 93.6% 0.0% 93.6% (75.0) -0.5% 94.1% 5.1% 4.7% 0.2% 4.8% 4.8% 2.3% 6.7% 6.6% $107.8 $0.19 $10.91 NA $9.39 15.8% 15.8% 18.4% 2,497 32% 3.0 25.2% 21.3 $500.0 $16,609 2.9% 1Q $3,900 3,665 2,534 (26) 2,508 347 455 801 356 123 3 120 5 4 1 32 446 148 298 (65) 363 $0.46 $0.45 ($0.10) $0.00 $0.55 656 652 4 656 $0.01 68.4% 21.9% 90.3% 0.0% 90.3% (99.0) -2.7% 93.0% 3.2% 4.7% -4.8% 3.5% 5.5% 8.2% 9.9% 4.1% $23.8 $0.04 $9.64 5.6% $8.42 2011 2Q 3Q $3,837 $3,872 $3,720 $3,741 2,601 2,655 60 94 $2,661 $2,749 348 350 466 461 814 811 245 181 121 117 4 4 117 113 6 6 5 5 1 1 32 33 332 261 105 76 227 185 (18) 34 245 $0.35 $0.35 ($0.03) $0.00 $0.38 643 645 2 648 $0.01 71.5% 21.9% 93.4% 1.6% 91.8% (52.0) -1.4% 93.2% 3.5% 3.6% -6.9% 4.6% 3.7% -4.5% -1.8% 4.7% $24.2 $0.04 $9.88 2.5% $8.56 151 $0.29 $0.29 $0.05 $0.00 $0.24 621 627 5 631 $0.01 73.5% 21.7% 95.2% 1.6% 93.6% (72.5) -1.9% 95.5% 4.2% 3.9% -11.8% 8.1% 1.1% -24.3% -20.7% -7.4% $24.3 $0.04 $9.37 -5.2% $8.46 4Q $3,538 $3,777 2,752 (35) $2,717 354 440 794 266 119 3 116 6 6 1 36 346 108 238 (19) 257 $0.39 $0.39 ($0.03) $0.00 $0.42 613 608 5 613 $0.41 71.9% 21.0% 93.0% 0.0% 93.0% (18.5) -0.5% 93.4% 8.0% 4.2% -7.4% 3.6% 5.4% -4.4% 2.8% 3.7% $24.5 $0.04 $9.47 1.1% $8.36 1Q $4,105 3,822 2,550 155 2,705 430 413 842 275 119 3 116 6 5 2 30 362 115 247 247 $0.40 $0.40 $0.00 $0.00 $0.40 611 612 5 617 $0.01 70.8% 22.0% 92.8% 0.0% 92.8% 0.0% 92.8% 5.3% 4.3% -3.5% 7.8% 5.1% -17.2% -12.0% 4.5% $24.8 $0.04 $10.08 6.4% $8.66 2012E 2Q $4,035 4,070 2,550 350 2,900 458 440 897 272 119 3 116 6 5 2 30 359 114 245 245 $0.40 $0.40 $0.00 $0.00 $0.40 602 607 5 612 $0.01 71.3% 22.0% 93.3% 0.0% 93.3% (25.0) -0.6% 93.9% 5.2% 9.4% -1.1% 9.0% 10.2% 8.1% 14.5% 4.0% $26.5 $0.04 $10.28 2.0% $8.84 3Q $4,075 4,055 2,550 390 2,940 456 438 894 221 119 3 116 6 5 2 30 308 96 212 212 $0.35 $0.35 $0.00 $0.00 $0.35 594 598 5 603 $0.01 72.5% 22.0% 94.6% 0.0% 94.6% (25.0) -0.6% 95.2% 5.3% 8.4% 2.3% 6.9% 10.3% 14.5% 19.8% 11.3% $26.4 $0.04 $10.43 1.5% $8.97 4Q $3,725 3,900 2,550 232 2,782 439 421 860 258 119 3 116 6 5 2 30 345 109 236 236 $0.40 $0.40 $0.00 $0.00 $0.40 586 590 5 595 $0.39 71.3% 22.1% 93.4% 0.0% 93.4% (25.0) -0.6% 94.0% 5.3% 3.3% 0.3% 2.4% 8.3% -0.8% 2.2% 8.1% $25.4 $0.04 $10.24 -1.8% $8.76
674 33% 2.7 23.7% 6.8 $138.0 $15,497 3.2%
358 32% 2.6 23.6% 13.3 $282.8 15,645.8 3.1%
464 29% 2.8 29.6% 22.3 $413.3 15,940.7 2.9%
3 31% 2.8 29.6% 9.0 $165.7 15,469.3 3.1%
685 32% 2.8 25.4% 3.4 $75.0 15,759.5 3.0%
561 32% 2.8 25.3% 9.1 $200.0 16,010.9 3.0%
622 31% 2.8 25.2% 9.1 $200.0 16,344.0 2.9%
293 32% 3.0 25.9% 9.1 $200.0 $16,433 2.9%
3.0 17.4% 21.2 $492.3 $13,044 4.1%
2.8 14.8% 48.7 $1,218.9 $13,723 4.7%
16 April 2012
205
THE ALLSTATE CORPORATION 2-EQUAL WEIGHT/1-POSITIVE
ALL: ROE Goal of 13% by 2014 Appears Optimistic

Price 4/11/2012
$32.24
Price Target
$32
52-Wk Price Range

0.94
Mkt Cap (Bil)

$16.1

$1.32 $3.80
13E
$3.75
% Change EPS 11/12 12/13

189% -1%

$3.70 $4.04
Div. Yield
2.6%

0.87 0.80 0.75
P/E 12E
8.5
13E
8.6
ROE 12E 13E

10% 9%
Investment Thesis
Potential Catalysts
We remain concerned about Allstates loss of auto market share to direct writers as well as changes needed to achieve adequate multi-year returns in its homeowner's and life insurance businesses. ALLs acquisition of Esurance and Answer Financial is expensive for a business that has historically generated weak results. The Allstate-brand standard automobile insurance policies-in-force (PIF) is declining due to market share gains by PGR and Geico, which is a trend we expect to persist. Homeowners insurance earnings at ALL have been challenging due to large catastrophe losses. The company is raising prices but it could take several years to improve. The companys life insurance operation has been a drag on the companys overall capital position due to high exposure to stressed credit investments.
Risks
ALL's long-term financial goal is for an ROE of 13% by 2014, which appears optimistic to us based on an increasingly competitive auto insurance market as well as challenges in homeowners insurance. A recovery in auto insurance policies-in-force growth could be slower than anticipated. Auto insurance loss frequency trends have been favorable due to reduced miles driven in a weak economy, although it is unclear if this will persist as the economy improves. Allstate announced several internal leadership changes that we do not view as resulting in a change in Allstate's strategy. Matt Winter, formerly the CEO of Allstate Financial (life insurance) unit, will become President--Allstate Auto, Home and Agencies. Don Civgin, who was previously CFO, will become head of Allstate Financial. Steve Shebik, who has held several senior finance roles, will become CFO.
Valuation
ALL has substantial exposure to natural catastrophe losses, owing to its large homeowners insurance business. Rising interest rates and higher credit spreads could reduce ALLs book value. Personal auto claims inflation is mostly benign, but could rise if the economy improves and miles driven increases. Rates are above lost costs inflation in homeowners but remain inadequate after several years of large underwriting losses. It remains to be seen how quickly ALL could improve the profitability of the Esurance and Answer Financial businesses. The acquisition could also create channel conflict.
Since 2000, ALL has traded at a median trailing price/stated book value of 1.41x, with a range of 0.67x-1.89x. Since 2008, the median is 0.90x. Our $32 price target is based on 0.8x YE12 estimated book value per share of $40, and a P/E of 8x our 2012 EPS estimate of $3.80. ALL currently trades 0.87x 2011 book value and 8.5x 2012E EPS of $3.80, below other personal lines insurers.
Allstate, based in Northbrook, IL, is the second largest insurer of autos and homes in the U.S. The companys Allstate Financial unit offers life insurance and savings products.
16 April 2012 206
Figure 374: ALL Major Metrics

P&C Business Mix Operating Earnings Per Share
Total P&C Net Written Premiums FY 2011: $26.0 billion
$9.00 $8.00 $7.67 $6.47
Other, 9%
$7.00 $6.00 $5.00
Homeowners, 24%
$4.00 $3.00
Personal Auto, 67%
$3.22
$3.48 $2.84 $1.32
$3.80
$3.75
$2.00 $1.00 $0.00 2006 2007 2008 2009 2010
2011
2012E 2013E
110% 105% 100% 95% 90% 85% 80% 75% 2006 2007 2008 2009 2010 2011 2012E 2013E
Book Value $45 $40 $35 $30 $25 $20 $15 $10 $5 $0
Operating ROE 25% 20% 15% 10% 5% 0%
2006 2007 2008 2009 2010 2011 2012E 2013E
Combined Ratio
16 April 2012
Operating ROE
207
Figure 375: ALL Absolute 1Q Trailing Price-to-Book

2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6
1 -1 ov N 10 ov N 09 ov N 08 ov N 07 ov N 6 -0 ov N 05 ov N 04 ov N 3 -0 ov N 02 ov N 01 ov N 00 ov 9 -9 ov N N
2.10 1.90 1.70 1.50 1.30 1.10 0.90 0.70 0.50
Fe b9 Fe 9 b0 Fe 0 b0 Fe 1 b0 Fe 2 b0 Fe 3 b0 Fe 4 b0 Fe 5 b0 Fe 6 b0 Fe 7 b0 Fe 8 b0 Fe 9 b1 Fe 0 b1 Fe 1 b12
Figure 376: ALL Relative Price-to-Book (S&P Financials)

80% 60% 40% 20% 0% -20% -40% -60% -80%
Figure 377: ALL Price-to-Book Ex Net Unrealized Gains/(Losses)
Figure 378: ALL Price-to-Tangible Book
2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60
Figure 379: ALL Absolute 4-Qtr Fwd Price-to-Earnings
Figure 380: ALL Relative 4-Qtr Fwd P/E (S&P 500)
25.0 20.0 15.0 10.0 5.0 0.0
80% 60% 40% 20% 0% -20% -40% -60% -80%

N 1 -1 ov N -10 ov N -09 ov N -08 ov N -07 ov N -06 ov N -05 ov N -04 ov N -03 ov N -02 ov N -01 ov N -00 ov N -99 ov
16 April 2012
Fe b9 Fe 9 b0 Fe 0 b0 Fe 1 b0 Fe 2 b0 Fe 3 b0 Fe 4 b0 Fe 5 b0 Fe 6 b0 Fe 7 b0 Fe 8 b0 Fe 9 b1 Fe 0 b1 Fe 1 b12
12 bFe - 11 ar M - 10 ar M - 09 ar M 08 bFe - 07 ar M - 06 ar M - 05 ar M 04 bFe - 03 ar M - 02 ar M - 01 ar M 00 bFe
208
Figure 381: ALL Annual Summary Model

($ In Mil, except per share) 2007 Property-Liability Premiums written Premiums earned Paid claims Change in loss reserves Claims and claim expense Other costs and expenses Amortization of goodwill Restructuring and related charges Underwriting loss Net investment income Income tax Prop.-Liab. operating income Life operating income Corporate and other Total operating income Realized capital gains, after tax Gain on discontinued operations Preferred security dividends Cumulative effect of accounting change Minority interest Net income Earnings Per Share Basic operating EPS Fully diluted operating EPS Realized capital gains, after tax Gain on discontinued operations Preferred security dividends Preferred security dividends Minority interest Net income Actual shares outstanding Average basic shares outstanding Dilution Average diluted shares outstanding Dividends per share Effective tax rate Underwriting ratios Claims and claims expense ratio Expense ratio Combined ratio Catastrophe points C/R before catastrophes Restrucuturing points Discontinued lines points Litigation and other C/R pre cat's, restruc., discont'd lines, unusual items Other reserve development PY development ex discontinued lines C/R pre-cats, restruc, PY development Pre-tax cat. Losses Cat. losses per share, A/T Discontinued lines losses per share, A/T Restructuring charges per share, after tax EPS excl. cat's, disc. lines, retruc. Year-over-year percentage change Net premiums written Net premiums earned Investment income Property-liability operating income Life operating income Total operating income Operating EPS Book value per share A-T impact of 1% change in C/R Per Share Fully diluted book value per share Linked qtr % change in book value per share Return on average equity Return on average equity ex FAS 115 Cash flow from operations Balance Sheet Book value per share ex. FAS 115 Tangible Book Value per share Property-liability premiums/surplus Debt/capital Debt+TP/shareholder's equity # of shares repurchased $ amount of shares repurchased Average P&C invested assets Pre-tax yield $27,183 27,233 17,617 50 17,667 6,755 27 2,784 1,972 1,413 3,343 615 (95) 3,863 773 4,636 $6.50 $6.47 $1.29 $0.00 $0.00 $0.00 $0.00 $7.76 563 594 3 598 $1.52 29.2% 64.9% 24.9% 89.8% 4.7% 85.1% 0.1% 0.2% 0.0% 84.8% (219) -0.8% 85.6% 1,276 $1.39 $0.06 $0.03 $7.94 -1.2% -0.5% 6.4% -23.8% 3.5% -21.0% -15.7% 10.7% 177 $0.30 $38.58 NA 17.7% 18.2% 5,433 $38.11 $37.13 1.7 20.5% 25.8% 61.1 $3,552 39,786 5.0% 2008 $26,584 26,967 19,542 522 20,064 6,717 22 164 1,674 401 1,438 438 (118) 1,758 (3,436) (1,678) $3.21 $3.22 ($6.27) $0.00 $0.00 $0.00 $0.00 ($3.06) 536 548 548 $1.64 22.2% 74.4% 25.0% 99.4% 12.4% 87.0% 0.1% 0.1% 0.0% 86.8% 136 0.5% 86.3% 3,345 $3.96 $0.03 $0.03 $7.24 -2.2% -1.0% -15.1% -57.0% -28.8% -54.5% -50.3% -39.1% 175 $0.32 $23.51 NA 10.2% 9.3% 3,910 $30.08 $21.95 2.7 30.9% 44.6% 27.5 $1,307 37,028 4.5% 2009 $25,971 26,194 18,900 (154) 18,746 6,348 130 995 1,328 555 1,758 340 (217) 1,881 (1,027) 4 5 863 $3.49 $3.48 ($1.90) $0.01 $0.00 $0.01 $0.00 $1.60 536 540 1 541 $0.80 22.9% 71.6% 24.6% 96.2% 7.9% 88.3% 0.5% 0.1% 0.0% 87.7% (105) -0.4% 88.1% 2,067 $2.48 $0.04 $0.16 $6.16 -2.3% -2.9% -20.7% 22.3% -22.4% 7.0% 8.1% 31.2% 170 $0.31 $30.84 NA 12.8% 11.2% 4,301 $32.62 $29.44 2.2 26.1% 35.4% $0 34,048 3.9% 2010 $25,907 25,957 18,583 368 18,951 6,478 33 495 1,189 423 1,254 476 (191) 1,539 (604) 5 (12) 928 $2.85 $2.84 ($1.11) $0.01 $0.00 ($0.02) $0.00 $1.71 540 540 2 543 $0.80 25.4% 73.0% 25.1% 98.1% 8.5% 89.6% 0.1% 0.1% 0.0% 89.3% (20) -0.1% 89.4% 2,207 $2.64 $0.04 $0.04 $5.56 -0.2% -0.9% -10.5% -28.7% 40.0% -18.2% -18.4% 14.5% 169 $0.31 $35.32 NA 8.6% 8.5% 3,689 $34.26 $33.70 2.2 23.7% 31.1% 5.2 $160 34,930 3.4% 2011 $25,980 25,942 N/A N/A 20,161 6,612 43 (874) 1,201 (15) 376 529 (216) 689 324 (10) (215) 788 $1.32 $1.32 $0.62 ($0.02) $0.00 ($0.41) $0.00 $1.51 506 521 2 523 $0.84 14.7% 77.7% 25.7% 103.4% 14.7% 88.6% 0.2% 0.1% 0.0% 88.4% (209) -0.8% 89.2% 3,821 $4.75 $0.03 $0.05 $6.15 0.3% -0.1% 1.0% -70.0% 11.1% -55.2% -53.6% 4.5% 169 $0.32 $36.92 NA 3.7% 3.8% 1,929 $34.40 $34.31 2.2 24.0% 31.6% NA $946 36,781 3.3% 2012E $26,906 26,821 19,000 130 19,130 6,667 32 992 1,200 647 1,545 536 (204) 1,876 1,876 $3.83 $3.80 $0.00 $0.00 $0.00 $0.00 $0.00 $3.80 475 490 3 493 $0.88 28.9% 71.3% 25.0% 96.3% 6.0% 90.3% 0.1% 0.1% 0.0% 90.1% 0.0% 90.1% 1,605 $2.12 $0.03 $0.04 $5.99 3.6% 3.4% -0.1% NM 1.2% NM NM 8.6% 174 $0.35 $40.09 NA 9.9% 10.7% 3,476 $36.75 $37.49 NA 23.6% 30.9% 31.3 $1,000 38,510 3.1% 2013E $28,058 27,494 19,000 694 19,694 7,055 30 715 1,215 554 1,376 573 (207) 1,742 1,742 $3.78 $3.75 $0.00 $0.00 $0.00 $0.00 $0.00 $3.75 448 461 3 464 $0.92 28.2% 71.6% 25.8% 97.4% 8.9% 88.5% 0.1% 0.1% 0.0% 88.4% 0.0% 88.4% 2,436 $3.41 $0.03 $0.04 $7.24 4.3% 2.5% 1.3% NM 6.9% NM NM 7.8% 179 $0.39 $43.20 NA 9.0% 9.8% 4,237 $39.66 $40.45 NA 23.3% 30.4% 27.0 $1,000 38,423 3.2% 1Q $6,215 6,448 4,513 (37) 4,476 1,634 11 327 284 180 427 116 (46) 497 63 (15) (26) 519 $0.94 $0.93 $0.12 ($0.03) $0.00 ($0.05) $0.00 $0.97 530 531 3 534 $0.21 28.9% 69.4% 25.5% 94.9% 5.2% 89.8% 0.2% 0.1% 0.0% 89.5% (13) -0.2% 89.7% 333 $0.41 $0.01 $0.01 $1.36 -0.7% -0.8% -6.6% 49.3% -16.5% 32.5% 34.6% 13.2% 42 $0.08 $36.51 3.4% 10.4% 10.6% 726 $35.22 $34.60 2.1 23.4% 30.6% 9.5 $300 34,756 3.3% 2011 2Q $6,611 6,457 5,357 998 6,355 1,593 11 (1,502) 310 (462) (733) 141 (50) (642) 36 4 (18) (620) ($1.23) ($1.23) $0.07 $0.01 $0.00 ($0.03) $0.00 ($1.19) 522 523 523 $0.21 39.8% 98.4% 24.8% 123.3% 36.2% 87.0% 0.2% 0.1% 0.0% 86.8% (26) -0.4% 87.1% 2,339 $2.91 $0.00 $0.01 $1.70 -0.4% -0.9% 0.0% NM 12.8% NM NM 8.2% 42 $0.08 $35.95 -1.5% -13.5% -14.1% 534 $33.91 $34.27 2.2 23.9% 31.5% 6.6 $232 35,003 3.5% 3Q $6,728 6,432 5,365 (233) 5,132 1,603 8 (311) 298 (39) 21 134 (71) 84 170 1 (90) 165 $0.16 $0.16 $0.33 $0.00 $0.00 ($0.18) $0.00 $0.32 509 512 2 514 $0.21 -9.9% 79.8% 25.0% 104.8% 16.7% 88.1% 0.1% 0.2% 0.0% 87.8% (71) -1.1% 88.9% 1,077 $1.36 $0.02 $0.01 $1.55 -0.6% -1.0% 4.9% NM 24.1% NM NM 0.2% 42 $0.08 $35.56 -1.1% 1.8% 1.9% 411 $33.39 $33.70 2.4 24.6% 32.6% 11.8 $308 34,887 3.4% 4Q $6,426 6,605 N/A N/A 4,198 1,782 13 612 309 306 661 138 (49) 750 55 (81) 724 $1.49 $1.48 $0.11 $0.00 $0.00 ($0.16) $0.00 $1.43 506 505 2 507 $0.21 32.5% 63.6% 27.2% 90.7% 1.0% 89.7% 0.2% 0.0% 0.0% 89.5% (99) -1.5% 91.0% 66 $0.08 0.00 $0.02 $1.59 2.9% 2.5% 6.2% NM 32.7% NM NM 4.5% 43 $0.08 $36.92 3.8% 16.3% 17.4% 258 $34.40 $34.31 2.2 24.0% 31.6% 4.0 106 33,415 3.7% 1Q $6,508 6,646 4,750 (132) 4,618 1,663 8 357 300 200 457 118 (45) 530 530 $1.06 $1.05 $0.00 $0.00 $0.00 $0.00 $0.00 $1.05 498 502 3 505 $0.22 29.8% 69.5% 25.1% 94.6% 3.5% 91.1% 0.1% 0.1% 0.0% 90.9% 0.0% 90.9% 235 $0.30 $0.01 $0.01 $1.37 4.7% 3.1% 5.6% 7.1% 1.9% 6.6% 12.7% 3.2% 43 $0.09 $37.67 2.0% 11.3% 12.2% 618 $34.48 $35.19 NA 23.8% 31.3% 7.8 250 38,766 3.1% 2012E 2Q $6,879 6,739 4,750 66 4,816 1,678 8 237 300 158 379 144 (48) 474 474 $0.96 $0.95 $0.00 $0.00 $0.00 $0.00 $0.00 $0.95 490 494 3 497 $0.22 29.0% 71.5% 25.0% 96.5% 4.2% 92.3% 0.1% 0.1% 0.0% 92.1% 0.0% 92.0% 285 $0.37 $0.01 $0.01 $1.34 4.1% 4.4% -3.2% NM 2.3% NM NM 7.1% 44 $0.09 $38.50 2.2% 10.0% 11.0% 1,026 $35.26 $35.98 NA 23.7% 31.1% 7.8 250 38,663 3.1% 3Q $7,009 6,742 4,750 218 4,968 1,662 8 105 300 112 293 135 (60) 368 368 $0.76 $0.75 $0.00 $0.00 $0.00 $0.00 $0.00 $0.75 482 486 3 489 $0.22 26.9% 73.7% 24.8% 98.4% 10.1% 88.4% 0.1% 0.1% 0.0% 88.2% 0.0% 88.2% 680 $0.90 $0.01 $0.01 $1.67 4.2% 4.8% 0.7% NM 0.6% NM NM 10.1% 44 $0.09 $39.14 1.7% 7.8% 8.5% 1,191 $35.85 $36.58 NA 23.7% 31.1% 7.8 250 38,544 3.1% 4Q $6,511 6,694 4,750 (22) 4,728 1,665 8 293 300 178 415 138 (50) 504 504 $1.05 $1.05 $0.00 $0.00 $0.00 $0.00 $0.00 $1.05 475 478 3 481 $0.22 29.3% 70.6% 25.0% 95.6% 5.3% 90.3% 0.1% 0.1% 0.0% 90.1% 0.0% 90.1% 355 $0.48 $0.01 $0.01 $1.54 1.3% 1.3% -2.9% -37.1% 0.2% -32.9% -29.3% 8.6% 44 $0.09 $40.09 2.4% 10.6% 11.5% 642 $36.75 $37.49 NA 23.6% 30.9% 7.8 250 38,244 3.1%
16 April 2012
209
THE HANOVER INSURANCE GROUP, INC. 2-EQUAL WEIGHT/1-POSITIVE
THG: Chaucer Acquisition Expands THGs International Presence

Price 4/11/2012
$39.73
Price Target
$41
52-Wk Price Range

0.77
Mkt Cap (Bil)

$1.8

$0.32 $4.00
13E
$3.75
% Change EPS 11/12 12/13

NM -6%

$4.00 $4.15
Div. Yield
3.0%

0.71 0.68 0.65
P/E 12E
9.9
13E
10.6
ROE 12E 13E

8% 7%
Investment Thesis
Potential Catalysts
THGs ROE is expected to remain below its cost of capital and its results have been negatively impacted by elevated catastrophe losses. THGs acquisition of Chaucer increases exposure to high severity business and expands THGs business outside its core personal lines and small/middle market commercial lines.
Risks
THGs EPS and ROE volatility could increase due to the Chaucer acquisition THG could benefit from higher P&C prices. THG is unlikely to repurchase stock in 2012. THG does not appear overly concerned about profitability in its workers compensation business, because its business mix shifted to lower hazard risks, although we are less optimistic. Surety results could continue to face headwinds from a weak economy and stress in the contractor business.
Valuation
The Hanover has catastrophe exposure due to its concentration on the U.S. East coast, Southeast, and to a lesser extent the Midwest. The Chaucer acquisition increases THGs catastrophe exposure to high severity international losses. THG is entering the international market through its acquisition of Chaucer and expanding outside its core personal lines and small-to-middle market commercial lines business. Similar to other property/casualty insurers, THG faces risks if P&C price increases do not persist.
Since 2004, THG has traded at a median trailing price/stated book value of 0.85x, with a range of 0.26x-1.50x. Since 2008, the median is 0.85x. Our $41 price target is based on 0.7x YE12 estimated book value per share of $59, and a P/E of 10x our 2012 EPS estimate of $4.00. THG currently trades 0.71x 2011 book value (below other personal lines insurers) and 9.9x 2012E EPS of $4.00 (below PGR but above ALL).
The Hanover Insurance Group, Inc., based in Worcester, Mass., is a "super-regional" P&C insurer focused on commercial lines and personal lines P&C insurance through independent agents. The Hanover ranks among the top 30 property-casualty insurers in the United States. The company acquired Chaucer in the U.K. in 2011.
16 April 2012
210
Figure 383: THG Major Metrics

$5.00 $4.36 $4.00 $4.00 $3.76 $3.37 $3.09 $3.00 $2.64 $3.75
Chaucer, 12%
Personal Lines, 41%
$2.00
$1.00 $0.32
Commercial Lines, 47%
$0.00 2006 2007 2008 2009 2010 2011 2012E 2013E
110% $70 105% $60
Book Value
Operating ROE 12% 10% 8% 6%
100%
$40 $30 $20 $10 4% 2% 0% 2006 2007 2008 2009 2010 2011 2012E 2013E
95%
90% 2006
2007
2008
2009
2010
2011
2012E
2013E
$0
Combined Ratio
16 April 2012
211
Operating ROE
$50
Figure 384: THG Absolute 1Q Trailing Price-to-Book

1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2
D
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
ec -0 0 ec -9 8 ec -0 8 ec -0 6 ec -0 2 ec -0 4 ec -1 0 D
Figure 385: THG Relative Price-to-Book (S&P Financials)
30% 0% -30% -60% -90%

12 nJa 11 nJa 10 nJa 09 nJa 08 nJa 07 nJa 06 nJa 05 nJa 04 nJa 03 nJa 1 -1 ec D 0 -1 ec D 9 -0 ec D 8 -0 ec D 7 -0 ec D 6 -0 ec D 5 -0 ec D 4 -0 ec D 3 -0 ec D 2 -0 ec
Figure 386: THG Price-to-Book Ex Net Unrealized Gains/(Losses)
Figure 387: THG Price-to-Tangible Book
1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
Figure 388: THG Absolute 4-Qtr Fwd Price-to-Earnings
Figure 389: THG Relative 4-Qtr Fwd P/E (S&P 500)

100% 50% 0% -50% -100%
35.0 30.0 25.0 20.0 15.0 10.0 5.0
16 April 2012
ec -0 D 1 ec -0 D 2 ec -0 D 3 ec -0 D 4 ec -0 5 D ec -0 6 D ec -0 7 D ec -0 8 D ec -0 9 D ec -1 0 D ec -1 1
1 -1 ec D 0 -1 ec D 9 -0 ec D 8 -0 ec D 7 -0 ec D 6 -0 ec D 5 -0 ec D 4 -0 ec D 3 -0 ec D 2 -0 ec
11 cDe 0 1 cDe 9 0 cDe 8 0 cDe 7 0 cDe 6 0 cDe 5 0 cDe 4 0 cDe 3 0 cDe 2 0 cDe
212
Figure 390: THG Annual Summary Model

2006 2007 2008 2009 2010 2011 2012E 2013E 1Q 2Q 2011 3Q 4Q 1Q 2012E 2Q 3Q 4Q
Net written premiums Unearned premiums Net premiums earned Paid claims Change in loss reserves Policy benefits, claims, losses ex py developmt & cats Prior year reserve development (favorable) unfavorable Pre-tax catastrophe losses Loss adj expense ex py reserve development Policy acquisition expenses and other u/w expenses Policyholders' dividends GAAP underwriting profit (loss) Net investment income Other income Other operating expenses P&C P/T segment income Interest expense Total segment income before taxes Federal income tax expense on segment income Total segment income A/T Net realized investment gains, net of amoritization Other non-segment items Federal income tax benefit (expense) on non-segment income Income from continuing operations, net of tax Income from discontinued variable & life annuity business, net o Loss from discontinued accident and health business Gain (Loss) on sale A/T Income (loss before cumulative effect of accounting chg Other Cumulative effect of accounting chg, net of tax Net income (loss) Earnings Per Share Basic Segment EPS Fully Diluted Segment EPS Income from continuing operations Income from discontinued operations Loss on disposal variable life & annuity business Income (loss) before cumulative effect of accounting chg Cumulative effect of accounting chg Net income (loss) Ending shares outstanding Basic Average shares Dilution Fully diluted average shares Underwriting Ratios Losses excluding catastrophe losses (a) Catastrophe losses Loss Development Loss adj expenses Policy acquisition expenses and other u/w expenses Policyholders' dividends Combined Ratio Combined Ratio ex cats and reinstatement premiums PY development Unusual items CR ex cats, reinstmt prem & py development Year-over-year percentage change Net premiums written Net premiums earned Investment income P&C P/T segment Income Life P/T segment income Total segment income A/T Operating EPS Book value per share P&C book value per share A-T impact of 1% change in C/R Per Share P&C book value per share Life co book value per share Total fully diluted book value per share Linked qtr % change in book value per share Total Return on average equity Tangible book value per share Operating ROE ex AOCI Shareholder's dividend Total Cash flow from operations Balance Sheet Total Book value per share ex. FAS 115 Property-liability premiums/surplus Debt/capital # of shares repurchased $ amount of shares repurchased Average invested assets Pre-tax yield
$2,307.1 (87.9) 2,219.2 1,459.2 (76.2) 1,157.6 (128.6) 107.2 246.8 760.8 0.5 74.9 227.4 65.5 (39.7) 328.1 (39.9) 284.3 (88.2) 196.1 (3.5) (2.8) 191.7 0.0 (22.0) 169.7 0.6 170.3 $3.80 $3.76 $3.68 $0.00 ($0.42) $3.25 $0.01 $3.26 51.1 51.6 0.6 52.2 52.2% 4.5% -5.3% 11.0% 34.3% 0.0% 96.7% 92.2% -5.3% NA 97.5% 7.3% 2.7% 8.8% NM -79.1% NM NM 7.7% 11.5% 14.4 $0.28 $32.90 $6.22 $39.10 NA 9.9% $36.75 9.7% $0.26 41.8 $39.88 1.6 20.3% 4.0 200.3 $4,045 5.6%
$2,415.3 (43.3) 2,372.0 1,522.3 (65.4) 1,293.7 (152.7) 65.2 250.7 786.6 0.5 128.0 246.3 64.9 (56.9) 382.3 (39.9) 342.4 (113.7) 228.7 (0.9) 0.5 228.3 15.7 8.3 252.3 1 253.1 $4.42 $4.36 $4.36 $0.30 $0.16 $4.81 $0.00 $4.83 51.8 51.7 0.7 52.4 54.5% 2.7% -6.4% 10.6% 33.2% 0.0% 94.6% 91.9% -6.4% -0.3% 98.6% 4.7% 6.9% 8.3% NM NM NM NM 13.5% 15.6% 15.4 $0.29 $38.04 $6.34 $44.37 NA 10.6% $41.95 10.5% $0.34 73.3 $44.77 1.4 18.2% $4,485 5.5%
$2,518.0 (33.1) 2,484.9 1,712.3 (87.7) 1,347.6 (153.3) 169.7 260.6 825.4 1.6 33.3 258.0 46.3 (35.7) 300.6 (39.9) 260.7 (86.3) 174.4 (97.8) 0.0 82.9 (63.4) 0.0 19.5 (0.5) 19.0 $3.40 $3.37 $1.60 ($1.23) $0.00 $0.38 $0.00 $0.37 50.9 51.3 0.4 51.7 54.2% 6.8% -6.2% 10.5% 33.2% 0.1% 98.7% 91.8% -6.2% NA 98.0% 4.3% 4.8% 4.8% -21.4% NM -23.7% -22.7% -16.4% -6.6% 16.2 $0.31 $35.54 $1.53 $37.08 NA 8.3% $33.74 7.6% $0.45 209.5 $44.64 1.6 22.0% 1.0 43.3 $4,616 5.6%
$2,608.7 (62.3) 2,546.4 1,759.4 (121.2) 1,419.9 (133.1) 96.1 255.3 878.3 1.0 28.9 251.7 38.6 (49.5) 269.7 (34.7) 235.0 (77.5) 157.5 1 6 187.8 0 12 200.0 200.0 $3.11 $3.09 $3.68 $0.01 $0.23 $3.91 $0.00 $3.91 47.4 50.6 0.5 51.1 55.8% 3.8% -5.2% 10.0% 34.5% 0.0% 98.9% 95.1% -5.2% NA 100.3% 3.6% 2.5% -2.4% -10.3% NM -9.7% -8.3% 34.1% 39.9% 16.6 $0.32 $49.72 $0.00 $49.72 NA 7.4% $46.11 6.8% $0.75 91.6 $49.11 1.5 15.5% 3.6 148.6 $4,784 5.3%
$3,048.0 (207.0) 2,841.0 1,816.4 38.9 1,488.9 (88.5) 160.3 294.6 1,002.9 1.0 (18.2) 247.2 38.9 (40.2) 227.7 (44.3) 183.4 (61.2) 122.2 30 (2) 3 153.2 0 0 1 154.7 154.8 $2.71 $2.64 $3.31 $0.01 $0.02 $3.34 $0.00 $3.34 44.9 45.1 1.2 46.3 52.4% 5.6% -3.1% 10.4% 35.3% 0.0% 100.6% 95.0% -3.1% NA 98.1% 16.8% 11.6% -1.8% -15.6% NM -22.4% -14.7% 10.1% 10.1% 18.5 $0.40 $54.74 $0.00 $54.74 NA 5.1% $50.75 5.2% $1.50 83.6 $51.92 1.7 19.8% 3.0 130.6 $5,105 4.8%
$3,593.4 5.2 3,598.6 N/A N/A 2,292.5 (103.3) 361.6 NA 1,231.1 0.0 (183.3) 258.2 51.9 (54.3) 72.5 (55.0) 17.5 (2.9) 14.6 28 (23) 13 32 5 37.1 37.1 $0.32 $0.32 $0.70 $0.00 $0.00 $0.81 $0.00 $0.81 45.2 45.2 0.6 45.8 63.7% 10.0% -2.9% NA 34.2% 0.0% 105.1% 95.0% -2.9% NA 97.9% 17.9% 26.7% 4.4% -68.2% NM -88.1% -87.9% 1.5% 1.5% 23.4 $0.51 $55.57 $0.00 $55.57 NA 0.6% $51.46 0.6% $1.13 221.7 $52.16 2.3 26.6% 0.6 21.7 $6,211 4.2%
$4,152.0 $4,342.8 (49.3) (103.9) 4,102.6 4,238.9 1,850.0 1,825.0 792.2 911.0 2,530.2 2,564.5 (80.0) (5.0) 192.0 176.5 NA NA 1,417.8 1,480.0 (0.1) (0.1) 42.8 23.0 285.8 285.8 63.0 66.0 (45.0) (44.5) 346.6 330.3 (64.0) (65.0) 282.6 265.3 (98.9) (92.8) 183.7 172.4 183.7 172.4 183.7 172.4 183.7 172.4 $4.07 $4.00 $4.00 $0.00 $0.00 $4.00 $0.00 $4.00 45.2 45.2 0.8 46.0 61.7% 4.7% -1.9% NA 34.6% 0.0% 99.0% 94.3% -1.9% NA 96.2% 15.5% 14.0% 10.7% NM NM NM NM 5.8% 5.8% 26.7 $0.58 $58.76 $0.00 $58.76 NA 7.1% $54.66 7.6% $1.20 1071.2 $54.43 2.3 25.8% $7,792 3.7% $3.82 $3.75 $3.75 $0.00 $0.00 $3.75 $0.00 $3.75 45.2 45.2 0.8 46.0 60.5% 4.2% -0.1% NA 34.9% 0.0% 99.5% 95.3% -0.1% NA 95.4% 4.6% 3.3% 0.0% NM NM NM NM 4.4% 4.4% 27.6 $0.60 $61.36 $0.00 $61.36 NA 6.4% $57.60 6.9% $1.20 1230.9 $57.03 2.2 25.0% $8,943 3.2%
$749.9 11.8 761.7 481.7 29.3 489.8 (28.5) 49.7 NA 260.2 NA (9.5) 60.4 9.7 (13.5) 47.1 (10.4) 36.7 (12.5) 24.2 3.3 (2.5) 3 27.9 1.4 29.3 29.3 $0.54 $0.53 $0.61 $0.00 $0.00 $0.64 $0.00 $0.64 45.2 45.1 0.9 46.0 64.2% 6.5% -3.7% NA 33.7% 0.0% 100.7% 94.2% -3.7% NA 97.9% 3.4% 14.3% -1.1% -18.4% NM -24.4% -20.8% 6.7% 6.7% 5.0 $0.11 $55.06 $0.00 $55.06 0.6% 3.9% $51.10 $0.28 24 $52.06 1.7 18.4% $5,093 4.7%
$815.4 (44.9) 770.5 539.0 78.5 476.1 (15.3) 156.7 NA 259.6 NA (106.6) 61.0 10.2 (11.4) (46.8) (10.8) (57.6) 19.5 (38.1) 13.4 (15.5) 8 (32.4) 0.6 (31.8) (31.8) ($0.84) ($0.84) ($0.70) $0.00 $0.00 ($0.70) $0.00 ($0.70) 45.2 45.2 0.2 45.4 61.8% 20.3% -2.0% NA 33.2% 0.0% 113.3% 93.0% -2.0% NA 95.0% 1.7% 10.4% -1.3% NM NM NM NM 4.5% 4.5% 5.0 $0.11 $54.96 $0.00 $54.96 -0.2% -6.1% $51.00 $0.28 79 $51.12 1.9 25.7% $5,199 4.7%
$1,051.0 (32.4) 1,018.6 722.2 12.7 664.1 (28.8) 99.6 NA 357.2 NA (73.5) 67.8 14.6 (16.5) (7.6) (17.4) (25.0) 6.5 (18.5) 8.2 (1.9) 3 (9.7) (9.7) (9.7) ($0.41) ($0.41) ($0.21) $0.00 $0.00 ($0.21) $0.00 ($0.21) 45.2 45.2 0.1 45.3 65.2% 9.8% -2.8% NA 34.6% 0.0% 106.8% 97.0% -2.8% NA 99.8% 30.8% 39.9% 10.6% NM NM NM NM -0.5% -0.5% 6.6 $0.15 $54.98 $0.00 $54.98 0.0% -3.0% $49.85 $0.28 184 $50.89 2.0 26.9% 1 20 $6,354 4.3%
$977.1 70.7 1,047.8 N/A N/A 662.5 (30.7) 55.6 NA 354.1 NA 6.3 69.0 17.4 (15.6) 77.1 (16.4) 60.7 (15.5) 45.2 3.2 (0.7) (2) 46.1 3.2 49.3 49.3 $1.00 $1.00 $1.02 $0.00 $0.00 $1.09 $0.00 $1.09 45.2 45.2 0.1 45.3 63.2% 5.3% -2.9% NA 33.4% 0.0% 99.0% 93.7% -2.9% NA 96.6% 36.3% 39.9% 9.5% NM NM 3.4% 4.8% 2.7% 2.7% 6.8 $0.15 $56.24 $0.00 $56.24 2.3% 7.3% $51.46 $0.30 (65) $52.16 2.0 26.6% 0 2 $7,294 3.8%
$989.2 29.1 1,018.4 462.5 192.1 639.7 (20.0) 34.9 NA 350.3 NA 13.5 71.2 15.5 (13.3) 86.8 (16.0) 70.8 (24.8) 46.1 46.1 46.1 46.1 $1.02 $1.00 $1.00 $0.00 $0.00 $1.00 $0.00 $1.00 45.2 45.2 0.8 46.0 62.8% 3.4% -2.0% NA 34.4% 0.0% 98.7% 95.2% -2.0% NA 97.2% 31.9% 33.7% 17.9% 84.4% NM 90.3% 90.4% 2.9% 2.9% 6.6 $0.14 $56.63 $0.00 $56.63 0.7% 7.3% $52.53 $0.30 222.9 $52.30 1.9 26.5% $7,368 3.9%
$1,056.2 (37.8) 1,018.5 462.5 193.0 642.6 (20.0) 32.9 NA 352.3 NA 10.7 71.2 15.5 (10.8) 86.6 (16.0) 70.6 (24.7) 45.9 45.9 45.9 45.9 $1.02 $1.00 $1.01 $0.00 $0.00 $1.00 $0.00 $1.00 45.2 45.2 0.8 46.0 63.1% 3.2% -2.0% NA 34.6% 0.0% 98.9% 95.7% -2.0% NA 97.7% 29.5% 32.2% 16.7% NM NM NM NM 4.3% 4.3% 6.6 $0.14 $57.34 $0.00 $57.34 1.3% 7.1% $53.24 $0.30 288.0 $53.01 1.8 26.3% $7,623 3.7%
$1,088.4 (60.7) 1,027.7 462.5 211.5 618.4 (20.0) 75.6 NA 352.0 NA 1.7 72.2 15.6 (9.9) 79.5 (16.0) 63.5 (22.2) 41.3 41.3 41.3 41.3 $0.91 $0.90 $0.90 $0.00 $0.00 $0.90 $0.00 $0.90 45.2 45.2 0.8 46.0 60.2% 7.4% -1.9% NA 34.3% 0.0% 99.8% 92.5% -1.9% NA 94.4% 3.6% 0.9% 6.5% NM NM NM NM 5.4% 0.0% 6.7 $0.15 $54.98 $0.00 $57.95 1.1% 6.3% $53.85 $0.30 323.8 $53.62 1.8 26.1% $7,929 3.6%
$1,018.2 19.9 1,038.1 462.5 195.6 629.5 (20.0) 48.6 NA 363.3 (0.1) 16.9 71.2 16.6 (11.0) 93.6 (16.0) 77.6 (27.2) 50.5 50.5 50.5 50.5 $1.12 $1.10 $1.10 $0.00 $0.00 $1.10 $0.00 $1.10 45.2 45.2 0.8 46.0 60.6% 4.7% -1.9% NA 35.0% 0.0% 98.4% 93.7% -1.9% NA 95.6% 4.2% -0.9% 3.2% 21.5% NM 11.7% 10.0% 4.5% 4.5% 6.7 $0.15 $58.76 $0.00 $58.76 1.4% 7.7% $54.66 $0.30 236.6 $54.43 2.3 25.8% $8,209 3.5%
16 April 2012
213
COMPANY SNAPSHOT
ACE Limited
Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 15,372 16,432 17,576 N/A Net investment income (NII) ($mn) 2,242 2,225 2,225 N/A Underwriting income ($mn) 1,917 2,131 1,869 N/A Operating income ($mn) 2,376 2,580 2,359 N/A Net income ($mn) 1,585 2,780 2,359 N/A 18.0 18.0 N/A Tax rate (%) 17.0 Combined ratio (%) 94.6 93.0 95.3 N/A Combined ratio (ex cats & py development) (%) 91.9 92.3 92.2 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
U.S. Insurance/Non-Life
Stock Rating Sector View Price (12-Apr-2012) Price Target Ticker
1-OVERWEIGHT 1-POSITIVE USD 73.02 USD 90.00 ACE
6.97 1.50 72.76 58.43 340.8 67.09
7.60 1.94 79.91 65.46 339.3 73.00
7.00 2.15 84.81 70.27 337.0 78.25
N/A N/A N/A N/A N/A N/A
53,981 4,611 24,516 3,470
58,510 4,611 26,724 5,165
63,617 4,611 28,175 6,016
N/A N/A N/A N/A
0.6 4.2 15.7
0.6 4.0 14.6
0.6 3.6 13.9
N/A N/A N/A
CAGR N/A N/A N/A N/A USD 94.00 N/A Upside case N/A ACE could benefit from improving P&C pricing and favorable reserve releases. We view ACEs upside scenario as $94 based on 1.2x 2012E BV of $80. CAGR N/A Downside case USD 62.00 N/A Risks include rising interest rates, large catastrophe N/A losses and intergration risks related to recent N/A acquistions. We view ACE's downside case as $62 (0.8x 2012 BV of $80). Average 0.6 Upside/downside scenarios 4.0 14.7 Average 62.00 0.9 ( - 15.1% ) 1.1 Downside Case 1.0 10.2 13- Apr- 11 11- Apr- 12 2.6 Source: FactSet Fundamentals 9.6 10.4 Book Value and ROE N/A
$100 $80 $60 $40 $20 $0 2010A 2011A 2012E 2013E BVPS Operating ROE
Investment case Why a 1-Overweight? ACE has one of the strongest global property-casualty insurance franchises and benefits from a solid balance sheet and strong management, in our view. ACE also stands to benefit from recent positive pricing momentum in the commercial P&C market.
1.0 1.2 1.1 10.5 2.0 10.0 10.8 N/A
0.9 1.1 1.0 9.6 2.7 10.1 10.9 N/A
0.9 1.0 0.9 10.4 2.9 8.6 9.3 N/A
N/A N/A N/A N/A N/A N/A N/A N/A
123 105 88 70 53 35
90.00 ( 23.3% ) Price Target
94.00 ( 28.7% )
Upside Case
16.00% 12.00% 8.00% 4.00% 0.00%
Source: Company data, Barclays Research Source: Company data, Barclays Research Note:FY end Dec
16 April 2012
214
COMPANY SNAPSHOT
Arch Capital Group

Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 2,673 2,874 3,102 N/A Net investment income (NII) ($mn) 338 328 328 N/A Underwriting income ($mn) 41 131 88 N/A Operating income ($mn) 304 384 353 N/A Net income ($mn) 436 407 375 N/A 3.0 3.0 N/A Tax rate (%) -2.2 Combined ratio (%) 98.4 95.3 97.0 N/A Combined ratio (ex cats & py development) (%) 93.6 94.0 94.7 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 37.86 USD 46.00 ACGL
2.20 0.00 32.03 32.03 138.3 30.88
2.75 0.00 35.43 35.43 139.4 33.74
2.50 0.00 38.06 38.06 141.4 36.37
11,796 12,708 13,779 400 400 400 4,303 4,760 5,114 912 1,071 866
N/A N/A N/A N/A
CAGR N/A N/A N/A N/A USD 48.00 N/A Upside case N/A ACGL is expected to release loss reserves and could gain market share, resulting we believe in strong EPS, BV growth, and a solid ROE. We view ACGL's upside CAGR scenario as $48 based on 1.4x our 2012E BV of $35, N/A near the high end of its historical range since the N/A financial crisis. N/A N/A Downside case USD 34.00
Investment case Why a 1-Overweight? We view ACGL as one of the best managed P&C franchises, with a balanced presence in both primary commercial insurance and reinsurance. ACGL has a strong management and its impressive track record of book value growth and ROEs should continue in our view.
0.6 2.9 8.0
0.6 2.7 7.3
0.6 2.5 6.8
Average N/A 0.6 N/A 2.7 N/A 7.4
Similar to other P&C insurers, Arch capital faces risks from a return to a soft P&C market, catastrophes and other large losses, and rising interest rates. We view ACGL's downside case as $34 (1.0x 2012E BV of $35), which is near the low end of its historical range.
1.2 1.2 1.2 17.2 0.0 7.2 6.9 9.7
1.1 1.1 1.1 13.8 0.0 8.5 8.2 8.5
1.0 1.0 1.0 15.1 0.0 7.2 7.0 7.2
Average Upside/downside scenarios 1.1 1.1 62 53 1.1 34.00 44 15.4 ( - 10.2% ) 36 0.0 Downside 27 7.6 Case 18 7.4 12- Apr- 12 8.4 13- Apr- 11
Source: FactSet Fundamentals
46.00 ( 21.5% ) Price Target
48.00 ( 26.8% )
Upside Case
Book Value and ROE

$40 $30 $20 $10 $0 2010A 2011A
BVPS
14% 12% 10% 8% 6% 4% 2% 0% 2012E 2013E

Operating ROE
16 April 2012
215
COMPANY SNAPSHOT
The Travelers Companies, Inc.

Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 22,187 22,881 23,725 N/A Net investment income (NII) ($mn) 2,879 2,994 2,904 N/A Underwriting income ($mn) -1,662 -483 -720 N/A Operating income ($mn) 1,390 2,182 1,971 N/A Net income ($mn) 1,426 2,182 1,971 N/A 16.8 14.5 N/A Tax rate (%) -7.2 Combined ratio (%) 105.1 99.6 100.6 N/A Combined ratio (ex cats & py development) (%) 96.7 98.5 98.5 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 59.10 USD 74.00 TRV
3.28 1.64 62.32 52.65 420.5 55.01
5.65 1.85 66.70 56.15 380.4 58.59
5.50 2.00 70.60 59.33 352.5 61.93
68,232 6,605 24,477 2,169
68,285 6,605 24,015 1,598
69,575 6,605 23,788 2,336
N/A N/A N/A N/A
CAGR N/A N/A N/A N/A N/A Upside case USD 82.00 N/A Upside to our price target exists if the pace of share buybacks is faster or if P&C pricing continues to CAGR improve. We view TRV's upside scenario as $82 N/A based on our 1.2x 2012E BV of $67, which is near the N/A high end of TRV's valuation range since the financial N/A crisis. N/A Downside case USD 57.00 Downside exists if P&C pricing softens or if there is greater than anticipated deterioration in underlying underwriting results. We view TRV's downside case as $57 (0.9x 2012E BV of $67), at the low end of TRV's historical range since the financial crisis.
Investment case Why a 1-Overweight? TRV shares are attractively valued in our view given the companys strong balance sheet and solid ROE. TRV has one of the strongest P&C franchises in the sector and appears to be well capitalized. We view TRV as being more aggressive than competitors in its efforts to raise commercial P&C insurance rates.
1.2 4.1 23.4
1.2 4.4 23.8
1.2 4.2 24.0
1.0 1.1 1.1 18.0 2.8 5.6 6.2 N/A
0.9 1.0 1.0 10.5 3.1 9.0 10.2 N/A
0.8 1.0 1.0 10.8 3.4 8.2 9.4 N/A
Average 0.9 Upside/downside scenarios 1.1 1.0 106 13.1 88 57.00 3.1 70 ( - 3.6% ) 53 7.6 Downside 35 8.6 Case 18 N/A
13- Apr- 11 12- Apr- 12
74.00 ( 25.2% ) Price Target
82.00 ( 38.7% )
Upside Case
Book Value and ROE

$80 $60 $40 $20 $0 2010A 2011A BVPS 2012E 2013E Operating ROE 5% 0% 15% 10%
16 April 2012
216
COMPANY SNAPSHOT
Berkshire Hathaway Inc.

Income statement Net written premiums Net investment income (NII) ($mn) Underwriting income ($mn) Operating income ($mn) Net income ($mn) Tax rate (%) Combined ratio (%) Combined ratio (ex cats & py development) (%) Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%)
Source: Company data, Barclays Research Note:FY end Dec
2011A 2012E 2013E 2014E N/A N/A N/A N/A 4,725 4,200 4,200 N/A 248 1,635 1,325 N/A 10,775 13,504 14,370 N/A 10,254 13,504 14,370 N/A 29.0 29.0 N/A 29.8 99.6 95.5 96.3 N/A 100.4 98.1 98.9 N/A CAGR N/A N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 80.06 USD 85.00 BRK.B
4.35 5.45 5.80 0.00 0.00 0.00 66.57 76.02 83.72 45.08 54.53 62.23 2,474.2 2,476.2 2,476.2 59.44 64.80 70.61
120,396 60,384 164,850 20,476
137,200 60,852 188,247 22,838
144,401 61,452 207,297 26,261
N/A N/A N/A N/A
N/A 4.2 22.9
N/A 3.2 20.6
N/A 2.7 19.1
N/A N/A N/A
CAGR N/A N/A N/A N/A USD 103.00 N/A Upside case Berkshire could benefit if the P&C insurance market N/A hardens, the economy improves or equity markets rise. We view Berkshire's upside case as $103 based CAGR on 1.4x 2012E BV of $76, near its historical high N/A valuation since the financial crisis. N/A N/A Downside case USD 70.00 N/A Berkshire faces risks from declining equity markets, deterioration in the economy or soft P&C pricing. We Average view Berkshire's downside risk as $70 based on 0.9x N/A 2012E BV of $76, its all-time historical low valuation. 3.4 20.8 Upside/downside scenarios Average 130 1.1 111 1.5 70.00 92 ( - 12.6% ) 1.2 74 Downside 15.6 56 Case 37 0.0 7.2 13- Apr- 11 12- Apr- 12 8.3 Source: FactSet Fundamentals 9.2
103.00 ( 28.7% )
Investment case Why a 1-Overweight? Led by Warren Buffett, we expect Berkshire Hathaway to generate impressive results in Manufacturing, Service & Retail, as well as the Burlington Northern railroad operations, with stable results in Insurance (Berkshires largest business) and Utilities, with perhaps volatile investment results.
1.2 1.8 1.4 18.4 0.0 6.7 7.6 4.5
1.0 1.5 1.2 14.7 0.0 7.6 8.8 13.4
1.0 1.3 1.1 13.8 0.0 7.3 8.6 9.6
85.00 ( 6.2% ) Price Target
Upside Case
16 April 2012
217
COMPANY SNAPSHOT
Chubb Corp.
Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 11,758 12,254 12,884 N/A Net investment income (NII) ($mn) 1,562 1,512 1,512 N/A Underwriting income ($mn) 574 803 712 N/A Operating income ($mn) 1,491 1,597 1,538 N/A Net income ($mn) 1,678 1,597 1,538 N/A 23.4 22.9 N/A Tax rate (%) 22.0 Combined ratio (%) 95.3 93.2 94.1 N/A Combined ratio (ex cats & py development) (%) 93.0 93.7 93.8 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 70.51 USD 85.00 CB
5.12 1.56 57.15 55.44 291.4 50.78
5.91 1.64 60.03 58.21 270.5 53.25
6.00 1.75 63.66 61.74 256.2 56.51
37,882 3,575 15,574 1,878
38,700 3,575 15,366 2,564
40,545 3,575 15,445 3,019
N/A N/A N/A N/A
0.8 4.1 18.7
0.9 4.0 18.9
0.9 3.8 18.8
N/A N/A N/A
Investment case Why a 1-Overweight? CB has a strong franchise evidenced by robust underwriting results, excess CAGR capital and redundant loss reserves. N/A USD 93.00 N/A Upside case N/A Upside to our price target could exist if share N/A buybacks or reserve releases accelerate, or if P&C N/A pricing continues to improve . We view CB's upside N/A scenario as $93 based on 1.6x 2012E BV of $60, which is near the high of its valuation range since the financial crisis. CAGR N/A Downside case USD 62.00 N/A Our price target could have downside risk if there is a N/A significant slowdown in reserve releases or P&C N/A pricing softens. We view CB's downside case as $62 (1.0x 2012E BV of $60), which is the low end of its Average historical range. 0.9 4.0 Upside/downside scenarios 18.8
113 Average 94 1.2 62.00 75 ( - 12.1% ) 1.2 56 1.3 Downside 38 Case 12.5 19 2.3 13- Apr- 11 12- Apr- 12 10.3 Source: FactSet Fundamentals 10.9 N/A Book Value and ROE
$75 $60 $45 $30 $15 $0 2010A 2011A BVPS 2012E 2013E Operating ROE
85.00 ( 20.6% ) Price Target 93.00 ( 31.9% )
1.2 1.3 1.4 13.8 2.2 10.0 10.3 N/A
1.2 1.2 1.3 12.0 2.3 10.6 11.4 N/A
1.1 1.1 1.2 11.8 2.5 10.2 10.9 N/A
Upside Case
16% 12% 8% 4% 0%
16 April 2012
218
COMPANY SNAPSHOT
PartnerRe Ltd.
Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 3,689 3,883 4,178 N/A Net investment income (NII) ($mn) 629 630 630 N/A Underwriting income ($mn) -974 267 179 N/A Operating income ($mn) -642 511 427 N/A Net income ($mn) -520 576 492 N/A 13.0 13.0 N/A Tax rate (%) -3.4 Combined ratio (%) 125.4 93.0 95.6 N/A Combined ratio (ex cats & py development) (%) 94.9 95.7 95.4 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 67.61 USD 77.00 PRE
-9.50 8.10 7.50 2.35 2.48 2.75 84.82 96.23 104.71 75.85 86.17 93.65 67.6 63.1 56.9 77.94 86.15 93.62
16,630 16,892 17,020 750 750 750 5,574 5,637 5,582 616 532 573
N/A N/A N/A N/A
0.7 3.8 13.7
0.7 3.8 13.9
0.8 3.7 14.0
N/A N/A N/A
0.8 0.9 0.9 N/A 3.5 -9.6 -11.2 -9.1
0.7 0.8 0.8 8.4 3.7 9.2 10.0 11.3
0.6 0.7 0.7 9.0 4.1 7.6 8.5 9.8
Investment case Why a 1-Overweight? PREs results are challenged recently due to large catastrophe lines, however, PRE CAGR benefits from its diversified operations in terms of N/A product lines and geography, conservative N/A management, and AA-rated balance sheet. N/A USD 86.00 N/A Upside case PRE could benefit from higher property catastrophe N/A N/A reinsurance rates. We view PRE's upside scenario as $86 based on 0.9x 2012E BV of $96, which is near the low end of PRE's valuation range since the financial CAGR crisis. N/A N/A Downside case USD 60.00 N/A PartnerRe faces risks from a return to a soft N/A property/casualty market, catastrophes and other large losses, rising interest rates, and changes to Average Bermuda tax advantage. We view PRE's downside 0.7 case as $60, (0.6x 2012E BV of $96), which is at the 3.8 low end of PRE's historical range. 13.9 Upside/downside scenarios Average 0.7 86.00 106 77.00 0.8 ( 27.2% ) 88 ( 13.9% ) 60.00 0.8 71 ( - 11.3% ) 8.7 Upside Price 53 Downside Case Target 3.7 35 Case 2.4 18 13- Apr- 11 12- Apr- 12 2.4 4.0 Source: FactSet Fundamentals Book Value and ROE
$120 $100 $80 $60 $40 $20 $0 2010A 2011A BVPS 2012E 2013E Operating ROE 15% 10% 5% 0% -5% -10% -15%
16 April 2012
219
COMPANY SNAPSHOT
XL Group plc
Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 5,796 6,050 6,354 N/A Net investment income (NII) ($mn) 1,138 1,082 1,082 N/A Underwriting income ($mn) -397 148 144 N/A Operating income ($mn) 89 646 636 N/A Net income ($mn) -475 646 636 N/A 13.0 13.0 N/A Tax rate (%) -14.2 Combined ratio (%) 107.5 97.4 97.5 N/A Combined ratio (ex cats & py development) (%) 98.5 96.2 95.4 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 21.47 USD 25.00 XL
0.28 0.44 29.85 28.56 316.3 27.80
2.10 0.48 32.54 30.93 307.0 30.34
2.20 0.52 34.87 33.14 288.8 32.52
26,599 2,264 9,425 327
26,778 1,664 9,654 1,305
27,208 1,667 9,740 1,188
N/A N/A N/A N/A
CAGR N/A N/A N/A N/A N/A Upside case USD 28.00 N/A XL could benefit from higher US property catastrophe reinsurance rates resulting from large cat losses and CAGR changes to the RMS model. We view XL's upside N/A scenario as $28 based on 0.9x 2012E BV of $33, N/A which is near the high end of its valuation range since N/A the financial crisis. N/A Downside case USD 18.00 XL could face risks if P&C prices soften and interest rate rises. We view XL's downside case as $18 (0.6x 2012E BV of $33), which is at the low end of XL's historical range since the financial crisis.
Investment case Why a 1-Overweight? XL's P&C business has stabilized and its capital position is strengthening. While managements expectation for substantial ROE improvement from current levels could be overly optimistic, we believe the companys reserve position is strong, meaningful share buybacks could continue, and the valuation is attractive.
0.5 3.0 17.4
0.5 2.9 13.1
0.5 2.9 13.1
0.7 0.8 0.8 76.7 2.0 0.9 1.0 N/A
0.7 0.7 0.7 10.2 2.2 6.8 7.2 N/A
0.6 0.6 0.7 9.8 2.4 6.6 7.0 N/A
Average Upside/downside scenarios 0.7 0.7 35 0.7 30 32.2 25 18.00 ( - 16.2% ) 20 2.2 Downside 15 4.8 Case 10 5.0 13Apr11 12Apr12 N/A
25.00 ( 16.4% ) Price Target
28.00 ( 30.4% )
Upside Case
Book Value and ROE

$36 $34 $32 $30 $28 $26 2010A 2011A BVPS 2012E 2013E Operating ROE 10% 8% 6% 4% 2% 0%
16 April 2012
220
COMPANY SNAPSHOT
RenaissanceRe Holdings
Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 1,013 1,134 1,254 N/A Net investment income (NII) ($mn) 118 140 120 N/A Underwriting income ($mn) -177 490 462 N/A Operating income ($mn) -162 422 373 N/A Net income ($mn) -92 422 373 N/A 1 1 N/A Tax rate (%) 1 Combined ratio (%) 118.6 55.9 61.3 N/A Combined ratio (ex cats & py development) (%) 46.9 51.2 51.1 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 75.19 USD 85.00 RNR
-3.22 8.15 7.50 1.04 1.08 1.12 59.27 66.84 72.66 58.45 66.00 71.78 51 52 50 59.05 65.94 71.71
6,359 6,538 6,973 354 354 354 3,055 3,381 3,500 459 508 254
N/A N/A N/A N/A
CAGR N/A N/A N/A N/A USD 90.00 N/A Upside case N/A RNR could benefit from higher US property catastrophe reinsurance rates although it is unclear how long this could last. We view RNR's upside CAGR scenario as $90 based on 1.3x 2012E BV of $67, N/A which is near the high end of its range since the N/A financial crisis. N/A N/A Downside case USD 74.00
Investment case Why a 2-Equal Weight? Renaissance Re is a disciplined property catastrophe reinsurer with a growing presence in specialty reinsurance and Lloyds. The company has one of the best long-term track records in terms of both book value per share growth and returns on equity.
0.4 1.9 8.8
0.4 2.2 8.2
0.4 1.8 8.0
Risks include a softening in property cat reinsurance pricing, large cat losses, adverse development on cat losses and volatile investment returns. We view RNR's downside case as $74 (1.1x 2012E BV of $68), near the low end of its valuation range since the financial crisis.
1.3 1.3 1.3 N/A 1.4 -5.0 -5.1 N/A
1.1 1.1 1.1 9.2 1.4 13.1 13.2 N/A
1.0 1.0 1.0 10.0 1.5 10.8 11.0 N/A
Average 1.1 Upside/downside scenarios 1.2 119 1.2 105 9.6 74.00 90 ( - 1.6% ) 1.4 75 6.3 60 Downside 6.4 Case 45 N/A
13- Apr- 11 12- Apr- 12
85.00 ( 13% ) Price Target
90.00 ( 19.7% )
Upside Case
Book Value and ROE

$80.00 $60.00 $40.00 $20.00 $0.00 2010A 2011A 2012E 2013E BVPS Operating ROE 20% 15% 10% 5% 0% -5% -10%
16 April 2012
221
COMPANY SNAPSHOT
Everest Re Group
Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 4,109 4,232 4,408 N/A Net investment income (NII) ($mn) 620 660 620 N/A Underwriting income ($mn) -774 95 79 N/A Operating income ($mn) -94 606 550 N/A Net income ($mn) -80 606 550 N/A 15.0 15.0 N/A Tax rate (%) 61.1 Combined ratio (%) 118.9 97.7 98.2 N/A Combined ratio (ex cats & py development) (%) 87.1 90.1 90.6 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 94.29 USD 100.00 RE
-1.73 1.92 112.99 112.99 54.3 106.16
11.35 1.92 126.70 126.70 53.4 115.94
10.50 1.92 135.96 135.96 52.4 124.99
15,250 16,030 17,116 818 818 818 6,071 6,675 7,024 781 1,085 660
N/A N/A N/A N/A
CAGR N/A N/A N/A N/A N/A Upside case USD 108.00 N/A RE could benefit if EPS and book value growth is better than anticipated or from international growth CAGR and underwriting results. We view RE's upside N/A scenario as $108 based on 0.9x 2012E BV of $127, N/A which is near the high end of RE's valuation since the N/A financial crisis. N/A Downside case USD 90.00 RE faces risks from a return to a soft P&C market, catastrophes and other large losses, rising interest rates, and the risk of reserve strengthening. We view RE's downside case as $90, (0.7x 2012E BV of $127), which is at the low end of of RE's valuation since the financial crisis.
Investment case Why a 2-Equal Weight? Everest Res operating performance has been uneven in our view driven by the impact of large catastrophe losses as well as underwriting losses in its primary insurance business. The company has over $5 bn in capital, which gives it enough scale to effectively compete as a global reinsurer.
0.7 4.1 12.5
0.6 4.2 11.8
0.6 3.7 11.2
0.8 0.8 0.9 N/A 2.0 -1.5 -1.4 N/A
0.7 0.7 0.8 8.3 2.0 9.5 10.2 N/A
0.7 0.7 0.8 9.0 2.0 8.0 8.6 N/A
Average 0.8 Upside/downside scenarios 0.8 0.8 138 8.6 121 2.0 90.00 104 ( - 4.5% ) 5.3 86 5.8 Downside 69 Case N/A 52
13- Apr- 11 12- Apr- 12
100.00 ( 6.1% ) Price Target
108.00 ( 14.5% )
Upside Case
Source: FactSet Fundamentals Source: Company data, Barclays Research Note:FY end Dec
16 April 2012
222
COMPANY SNAPSHOT
Allied World Assurance

Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 1,534 1,703 1,929 N/A Net investment income (NII) ($mn) 196 180 180 N/A Underwriting income ($mn) 59 157 107 N/A Operating income ($mn) 184 265 218 N/A Net income ($mn) 275 265 218 N/A 6.0 6.0 N/A Tax rate (%) 8.1 Combined ratio (%) 96.0 90.5 94.1 N/A Combined ratio (ex cats & py development) (%) 93.3 95.8 95.9 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 69.26 USD 75.00 AWH
4.63 7.00 6.00 0.75 1.50 1.60 80.11 88.84 94.20 71.91 80.11 85.12 39.7 37.8 36.2 79.74 86.52 91.79
7,389 8,058 8,899 798 798 798 3,149 3,281 3,344 819 995 548
N/A N/A N/A N/A
CAGR N/A N/A N/A N/A N/A Upside case USD 80.00 N/A AWH could benefit from better than expected EPS and book value growth. We view AWH's upside CAGR scenario as $80 based on 0.9x 2012E BV of $89, N/A which is near the high end of AWH's valuation range N/A since the financial crisis. N/A N/A Downside case USD 66.00
Investment case Why a 2-Equal Weight? Allied World has delivered consistently strong results since its 2001 inception. The company has a growing franchise in commercial P&C insurance and reinsurance, and is building an onshore primary insurance platform. However, we are concerned about the sustainability of loss reserve releases.
0.5 2.7 20.2
0.5 2.3 19.6
0.6 2.1 19.3
Soft casualty insurance and reinsurance pricing could present headwinds for AWH in terms of premium growth and combined ratio improvement. We view AWH's downside case as $66, (0.7x 2012E BV of $89), which is at the low end of AWH's historical range.
0.9 1.0 0.9 15.0 1.1 5.9 6.0 8.8
0.8 0.9 0.8 9.9 2.2 8.2 8.4 8.2
0.7 0.8 0.8 11.5 2.3 6.6 6.7 6.6
Average 0.8 Upside/downside scenarios 0.9 107 0.8 91 66.00 12.1 76 ( - 4.7% ) 1.8 61 6.9 Downside 46 Case 7.0 30 7.9
13- Apr- 11 12- Apr- 12
80.00 ( 15.5% )
Upside Case
Source: Company data, Barclays Research Note:FY end Dec
16 April 2012
223
COMPANY SNAPSHOT
Aspen Insurance Holdings

Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 1,929 2,052 2,230 N/A Net investment income (NII) ($mn) 226 200 200 N/A Underwriting income ($mn) -295 95 65 N/A Operating income ($mn) -89 217 190 N/A Net income ($mn) -129 217 190 N/A Tax rate (%) 31.4 10.0 10.0 N/A Combined ratio (%) 115.6 95.3 97.0 N/A Combined ratio (ex cats & py development) (%) 92.5 89.9 90.5 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 27.99 USD 28.00 AHL
-1.26 3.00 2.75 0.60 0.60 0.60 38.43 41.26 44.36 38.16 40.98 44.23 70.7 72.4 69.1 32.58 35.11 37.86
6,035 6,617 7,324 499 499 499 2,818 2,884 2,935 723 807 344
N/A N/A N/A N/A
CAGR N/A N/A N/A N/A N/A Upside case USD 33.00 N/A AHL could benefit from higher US property catastrophe reinsurance rates resulting from large cat CAGR losses and changes to the RMS model. We view N/A AHL's upside scenario as $33 based on 0.8x 2012E N/A BV of $41, which is within its valuation range since N/A the financial crisis. N/A Downside case USD 25.00 AHL could be impacted by soft insurance and reinsurance P&C market conditions or large catastrophe losses. We view AHL's downside case as $25 (0.6x 2012E BV of $41), which is at the low end of AHL's historical range.
Investment case Why a 2-Equal Weight? Aspen has a strong franchise in the U.K., U.S., and Bermuda commercial insurance and reinsurance markets. Over the past several years, the company has a good track record of returning excess capital to shareholders in the form of share repurchases, and presently appears to have little appetite for large acquisitions.
0.7 3.7 13.6
0.7 3.1 13.4
0.8 2.9 13.2
0.7 0.7 0.9 N/A 2.1 -3.1 -3.1 -4.5
0.7 0.7 0.8 9.3 2.1 7.6 7.8 7.6
0.6 0.6 0.7 10.2 2.1 6.5 6.7 6.5
Average 0.7 Upside/downside scenarios 0.7 43 0.8 38 9.8 25.00 33 2.1 ( - 10.7% ) 27 3.7 22 Downside 3.8 16 Case 3.2
13- Apr- 11 12- Apr- 12
28.00 ( 0% ) Price Target
33.00 ( 17.9% )
Upside Case

$46 $44 $42 $40 $38 $36 $34 2010A 2011A BVPS 2012E 2013E Operating ROE 10% 5% 0% -5%
16 April 2012
224
COMPANY SNAPSHOT
Montpelier Re Holdings
Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 624 576 617 N/A Net investment income (NII) ($mn) 69 68 68 N/A Underwriting income ($mn) -193 48 37 N/A Operating income ($mn) -154 97 85 N/A Net income ($mn) -124 97 85 N/A 0.0 0.0 N/A Tax rate (%) 0.4 Combined ratio (%) 129.4 91.8 93.8 N/A Combined ratio (ex cats & py development) (%) 83.5 84.2 78.8 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 19.47 USD 20.00 MRH
-2.50 1.65 1.50 0.41 0.45 0.49 22.71 24.13 25.35 22.71 24.13 25.35 61.8 58.8 56.8 22.77 24.20 25.42
2,850 2,970 3,122 328 328 328 1,399 1,420 1,428 120 152 167
N/A N/A N/A N/A
0.4 2.4 25.4
0.4 2.2 25.2
0.4 2.2 25.1
N/A N/A N/A
0.9 0.9 0.8 N/A 2.1 -10.2 -10.2 N/A
0.8 0.8 0.8 11.8 2.3 6.9 6.9 N/A
0.8 0.8 0.8 13.0 2.5 6.0 6.0 N/A
Investment case Why a 2-Equal Weight? Montpelier Re has a strong presence in property catastrophe reinsurance while CAGR expanding to become a diversified, specialty insurer N/A and reinsurer. As part of this strategy, MRH has built N/A out its Lloyds and U.S. primary insurance platforms. N/A USD 22.00 N/A Upside case MRH could benefit from higher US property N/A N/A catastrophe reinsurance rates although it is unclear how long this could last. We view MRH's upside scenario as $22 based on 0.9x 2012E BV of $24, CAGR which is near the high end of MRH's valuation since N/A the financial crisis. N/A N/A Downside case USD 18.00 N/A Risks include large catastrophe losses, soft prepricing, as well as execution risk as the company Average begins to diversify. We view MRH's downside case as 0.4 $18 (0.7x 2012 BV of $24), which is the low end of 2.3 MRH's historical range since the financial crisis. 25.2 Upside/downside scenarios Average 0.8 22.00 26 20.00 0.8 ( 13% ) 23 18.00 ( 2.7% ) 0.8 ( - 7.6% ) 20 12.4 Upside 16 Price Downside Case 2.3 Target 13 Case 0.9 10 12- Apr- 12 0.9 13- Apr- 11 N/A Source: FactSet Fundamentals Book Value and ROE
$26 $25 $24 $23 $22 $21 2010A 2011A BVPS 2012E 2013E 15% 10% 5% 0% -5% -10% -15%
Operating ROE
16 April 2012
225
COMPANY SNAPSHOT
Flagstone Reinsurance Holdings Ltd.

Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 558 360 344 N/A Net investment income (NII) ($mn) 34 26 27 N/A Underwriting income ($mn) -306 36 32 N/A Operating income ($mn) -279 53 49 N/A Net income ($mn) -302 53 49 N/A 7.0 7.5 N/A Tax rate (%) 0.0 Combined ratio (%) 153.6 91.8 90.9 N/A Combined ratio (ex cats & py development) (%) 71.9 71.9 70.9 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 7.49 USD 9.00 FSR
-3.98 0.75 0.70 0.16 0.16 0.16 10.90 11.47 11.86 10.90 11.47 11.86 70.1 70.4 70.4 11.08 11.65 12.04
1,524 1,277 1,042 251 251 251 789 831 869 -140 -247 -235
N/A N/A N/A N/A
1.0 1.9 23.8
0.6 1.8 22.9
0.6 2.3 22.1
N/A N/A N/A
Investment case Why a 2-Equal Weight? The company has a global property reinsurance platform in our view. However, CAGR we are concerned FSRs franchise will be increasingly N/A dependant on retrocessional support, which could N/A limit its growth opportunities. N/A USD 10.00 N/A Upside case FSR could benefit from higher US property cat N/A N/A reinsurance rates resulting from large cat losses although it is unclear how long this could last. We view FSR's upside case as $10 (0.9x 2012E BV of CAGR $11), which is near the high end of FSR's valuation N/A range since the financial crisis. N/A N/A Downside case USD 7.00 N/A Risk include the softening in property catastrophe reinsurance pricing. We view FSR's downside case as Average $7 (0.6x 2012E BV of $11), which is towards the low 0.8 end of FSR's historical range. 2.0 23.0 Upside/downside scenarios Average 12 0.7 10 0.7 7.00 9 ( - 6.5% ) 0.6 7 Downside 10.3 5 Case 2.1 3 -5.6 13- Apr- 11 12- Apr- 12 -5.5 Source: FactSet Fundamentals -6.3 Book Value and ROE
$20 $15 $10 $5 $0 2010A 2011A BVPS 2012E 2013E Operating ROE 10% 0% -10% -20% -30% -40%
10.00 ( 33.5% )
0.7 0.7 0.7 N/A 2.1 -29.0 -28.7 -31.1
0.6 0.6 0.6 10.0 2.1 6.5 6.4 6.4
0.6 0.6 0.6 10.7 2.1 5.8 5.7 5.7
Upside Case
16 April 2012
226
COMPANY SNAPSHOT
OneBeacon Insurance Group

Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 1,096 1,130 1,170 N/A Net investment income (NII) ($mn) 71 70 70 N/A Underwriting income ($mn) 40 32 17 N/A Operating income ($mn) 48 86 76 N/A Net income ($mn) 55 86 76 N/A -1.8 -9.9 N/A Tax rate (%) -3.3 Combined ratio (%) 96.2 97.1 98.5 N/A Combined ratio (ex cats & py development) (%) 92.4 92.8 94.4 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 14.81 USD 15.00 OB
0.51 0.90 0.80 1.84 0.84 1.05 10.53 10.59 10.34 10.53 10.59 10.34 94.8 95.1 95.0 10.65 10.71 10.45
2,651 2,550 2,466 270 270 270 1,000 1,006 982 -21 16 -118
N/A N/A N/A N/A
1.0 2.5 21.2
1.0 2.7 21.1
1.1 2.8 21.5
N/A N/A N/A
Investment case Why a 2-Equal Weight? OB appears positioned to return excess capital to shareholders, although CAGR earnings power is compressed as a result of reduced N/A premium volume, underwriting losses from run-off N/A business are a risk, and valuation appears extended. N/A USD 18.00 N/A Upside case OB could benefit if it seeks strategic alternatives after N/A N/A selling half its business. We view OB's upside scenario as $18 based on 1.7x 2012E BV of $11, which is near the high end of OB's valuation range CAGR since the financial crisis. N/A N/A Downside case USD 13.00 N/A Risks include the soft primary P&C market conditions N/A and potential run-off losses. We view OB's downside case as $13 (1.2x 2012E BV of $11), which is near the Average low end of OB's historical range since the financial 1.0 crisis. 2.7 21.3 Upside/downside scenarios Average 23 1.4 20 1.4 13.00 17 ( - 12.2% ) 14 1.4 11 Downside 21.3 Case 8 8.4 7.5 13- Apr- 11 12- Apr- 12 7.4 Source: FactSet Fundamentals 6.8 Book Value and ROE
$12.5 $12.0 $11.5 $11.0 $10.5 $10.0 $9.5 2010A 2011A BVPS 2012E 2013E Operating ROE 10% 8% 6% 4% 2% 0%
18.00 ( 21.5% )
1.4 1.4 1.4 29.0 12.4 6.3 6.3 4.1
1.4 1.4 1.4 16.5 5.7 8.6 8.5 8.6
1.4 1.4 1.4 18.5 7.1 7.6 7.6 7.6
Upside Case
16 April 2012
227
COMPANY SNAPSHOT
Marsh & McLennan Cos

Income statement Revenue ($mn) Brokerage organic growth (%) EBITDA ($mn) EBIT ($mn) Pre-tax income ($mn) Net income (adj) ($mn) Net income ($mn) . Salaries and benefits (% revenue) Other operating expenses (% revenue) .. EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) Per share data EPS (adj) EPS (reported) ($) Diluted shares (mn) DPS ($) Balance sheet and cash flow ($mn) Cash and equivalents Short and long-term debt Net debt/(funds) Shareholders' equity Tangible equity Total invested capital Cash flow from operations Balance sheet metrics Total debt/capital (%) Valuation metrics P/E (reported) (x) EV/EBITDA (x) Price/cash EPS Dividend yield (%) ROIC (operating) Net ROE (operating) 2011A 2012E 2013E 2014E 11,526 12,225 13,035 N/A N/A N/A N/A N/A 2,489 2,699 2,954 N/A 1,661 1,871 2,126 N/A 1,404 1,734 1,964 N/A N/A 977 1,176 1,335 960 1,176 1,335 N/A CAGR N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 32.02 USD 37.00 MMC
60 25 21.6 14.4 14.4 8.6
59 25 22.1 15.3 15.3 9.6
59 25 22.7 16.3 16.3 10.2

CAGR N/A N/A N/A N/A CAGR N/A N/A N/A N/A N/A N/A N/A
Investment case Why a 1-Overweight? MMC appears among the best positioned of the insurance brokers to generate positive operating leverage in each of its businesses over the next few years even in a slow-growth macro environment. Upside case USD 43.00 MMC could benefit if P&C prices increase or the economy recovers faster than anticipated. We view MMCs upside scenario as $43 based on 20x 2012E EPS of $2.15, which is near the high end of MMC's valuation since the financial crisis. Downside case USD 28.00 Downside exists if pricing in commercial P&C and reinsurance deteriorates. We view MMC's downside scenario as $28 based on 13x 2012E EPS of $2.15, which is at the low end of MMC's historical range since the financial crisis. Upside/downside scenarios
43.00 ( 34.3% )
N/A 1.77 551.0 0.87
N/A 2.15 547.9 0.92
N/A 2.45 546.0 0.98
N/A N/A N/A N/A
2,113 2,928 815 5,940 -1,023 8,868 1,705
2,113 2,928 815 6,242 -581 9,170 1,176
2,113 2,928 815 6,672 -151 9,600 1,335
N/A N/A N/A N/A N/A N/A N/A
33.0
31.9
30.5
Average N/A 31.8 Average 15.4 N/A N/A 2.9 12.6 N/A
52 43 35 26 17 9 13- Apr- 11
28.00 ( - 12.6% ) Downside Case
37.00 ( 15.6% ) Price Target
Upside Case
11- Apr- 12
18.1 N/A N/A 2.7 10.7 N/A
14.9 N/A N/A 2.9 13.0 N/A
13.1 N/A N/A 3.1 14.2 N/A
Adjusted EPS
$3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 2010A 2011A EPS 2012E 2013E % change 25% 20% 15% 10% 5% 0%
16 April 2012
228
COMPANY SNAPSHOT
Willis Group Holdings Ltd.

Income statement Revenue ($mn) Brokerage organic growth (%) EBITDA ($mn) EBIT ($mn) Pre-tax income ($mn) Net income (adj) ($mn) Net income ($mn) . Salaries and benefits (% revenue) Other operating expenses (% revenue) .. EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) Per share data EPS (adj) EPS (reported) ($) Diluted shares (mn) DPS ($) Balance sheet and cash flow ($mn) Cash and equivalents Short and long-term debt Net debt/(funds) Shareholders' equity Tangible equity Total invested capital Cash flow from operations Balance sheet metrics Total debt/capital (%) Valuation metrics P/E (reported) (x) EV/EBITDA (x) Price/cash EPS Dividend yield (%) ROIC (operating) Net ROE (operating) 2011A 2012E 2013E 2014E 3,447 3,555 3,696 N/A N/A N/A N/A N/A 708 947 1,006 N/A 381 811 870 N/A 566 803 861 N/A 509 553 N/A 482 203 509 553 N/A CAGR N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 35.36 USD 44.00 WSH
60.6 19.0 20.5 11.0 16.4 5.9
56.6 16.8 26.6 22.8 22.6 14.3
56.3 16.5 27.2 23.5 23.3 15.0

CAGR N/A N/A N/A N/A CAGR N/A N/A N/A N/A N/A N/A N/A Average 46.3 Average 12.0 N/A 9.9 3.1 10.3 N/A
Investment case Why a 1-Overweight? Willis is a pure-play insurance broker with a strong international franchise that should benefit from improved P&C prices. Recent results have been challenged although a recovery could be evident by late 2012. Upside case USD 46.00 WSH could benefit if P&C prices improve or the economy recovers. We view WSH's upside scenario as $46 based on 16x 2012E EPS of $2.90, which is near the high end of its historical range since the financial crisis. Downside case USD 34.00 Risks include weak P&C pricing environment, slow exposure growth, reduced opportunities to reduce expenses and slowdown in new business. We view WSHs downside case as $34 (12x 2012E EPS of $2.90), which is the low end of its historical range since the financial crisis. Upside/downside scenarios
56 50 44 38 31 25 13- Apr- 11
46.00 ( 30.1% )
N/A 2.74 176.0 1.05
N/A 2.90 175.5 1.10
N/A 3.20 173.0 1.15
N/A N/A N/A N/A
436 2,354 1,918 2,502 -1,213 4,856 439
436 2,354 1,918 2,722 -993 5,076 618
436 2,354 1,918 2,980 -735 5,334 663
44.00 ( 24.4% ) 34.00 ( - 3.8% ) Downside Case Price Target
48.5
46.4
44.1
N/A
Upside Case
12.9 N/A 10.5 3.0 10.0 N/A
12.2 N/A 10.0 3.1 10.2 N/A
11.0 N/A 9.2 3.2 10.6 N/A
11- Apr- 12
Adjusted EPS
$3.40 $3.20 $3.00 $2.80 $2.60 $2.40 2010A 2011A EPS 2012E 2013E % change 12% 10% 8% 6% 4% 2% 0% -2%
16 April 2012
229
COMPANY SNAPSHOT
Arthur J. Gallagher & Co

Income statement Revenue ($mn) Brokerage organic growth (%) EBITDA ($mn) EBIT ($mn) Pre-tax income ($mn) Net income (adj) ($mn) Net income ($mn) . Salaries and benefits (% revenue) Other operating expenses (% revenue) .. EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) Per share data EPS (adj) EPS (reported) ($) Diluted shares (mn) DPS ($) Balance sheet and cash flow ($mn) Cash and equivalents Short and long-term debt Net debt/(funds) Shareholders' equity Tangible equity Total invested capital Cash flow from operations Balance sheet metrics Total debt/capital (%) Valuation metrics P/E (reported) (x) EV/EBITDA (x) Price/cash EPS Dividend yield (%) ROIC (operating) Net ROE (operating) 2011A 2012E 2013E 2014E 2,135 2,334 2,475 N/A N/A N/A N/A N/A 364 436 480 N/A 249 319 363 N/A 208 279 323 N/A 201 242 N/A 144 144 201 242 N/A CAGR N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 35.07 USD 38.00 AJG
18.4 19.0 17.0 11.6 9.8 6.8
5.2 1.3 18.7 13.6 11.9 8.6
6.2 2.6 19.4 14.6 13.0 9.8

CAGR N/A N/A N/A N/A CAGR N/A N/A N/A N/A N/A N/A N/A Average 34.1 Average 21.2 N/A N/A 3.9 10.2 N/A
Investment case Why a 1-Overweight? AJG's Insurance Brokerage revenues and margins could improve modestly in 2012 if the economy improves, although the stocks valuation appears expensive versus peers. However, AJGs valuation multiple appears poised to expand as P&C prices rise. Also, the companys dividend yield is robust. Upside case USD 43.00 AJG could benefit if P&C prices or the economy improves. We view AJG's upside scenario as $43 based on 24x 2012E EPS of $1.80, which is near the high end of its valuation range since the financial crisis. Downside case USD 31.00 Risk include the potential for pricing in commercial P&C and reinsurance to deteriorate and margin expansion could be challenging to achieve if organic growth is negative. We view AJG's downside case as $31 (17x 2012 EPS of $1.80, which is the low end of its historical range. Upside/downside scenarios
55 46 37 28 18 9 13- Apr- 11
43.00 ( 22.6% )
N/A 1.28 112.5 1.32
N/A 1.80 111.6 1.36
N/A 2.10 114.8 1.40
N/A N/A N/A N/A
291 675 384 1,244 -473 1,919 283
291 675 384 1,294 -423 1,969 277
291 675 384 1,374 -343 2,049 318
35.2
34.3
33.0
N/A
31.00 ( - 11.6% ) Downside Case
27.4 N/A N/A 3.8 8.1 N/A
19.5 N/A N/A 3.9 10.4 N/A
16.7 N/A N/A 4.0 12.0 N/A
Upside Case
11- Apr- 12
Adjusted EPS
$2.50 $2.00 $1.50 $1.00 $0.50 $0.00 2010A 2011A EPS 2012E 2013E % change 60% 40% 20% 0% -20% -40%
16 April 2012
230
COMPANY SNAPSHOT
Brown & Brown, Inc.

Income statement Revenue ($mn) Brokerage organic growth (%) EBITDA ($mn) EBIT ($mn) Pre-tax income ($mn) Net income (adj) Net income ($mn) . Salaries and benefits (% revenue) Other operating expenses (% revenue) .. EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) Per share data EPS (adj) EPS (reported) ($) Diluted shares (mn) DPS ($) Balance sheet and cash flow ($mn) Cash and equivalents Short and long-term debt Net debt/(funds) Shareholders' equity Tangible equity Total invested capital Cash flow from operations Balance sheet metrics Total debt/capital (%) Valuation metrics P/E (reported) (x) EV/EBITDA (x) Price/cash EPS Dividend yield (%) ROIC (operating) Net ROE (operating) 2011A 2012E 2013E 2014E 1,014 1,154 1,260 N/A N/A N/A N/A N/A 352 407 448 N/A 285 329 366 N/A 271 312 349 N/A N/A N/A N/A N/A 159 182 203 N/A CAGR N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 23.92 USD 28.00 BRO
50.2 14.2 34.7 28.1 26.7 16.2
49.6 14.0 35.2 28.5 27.0 16.1
49.5 13.8 35.5 29.1 27.7 16.5

CAGR N/A N/A N/A N/A CAGR N/A N/A N/A N/A N/A N/A N/A Average 12.5 Average 18.7 N/A N/A 1.4 12.3 N/A
Investment case Why a 1-Overweight? Our 1-Overweight rating on BRO reflects our outlook for sustained improvement in organic growth as the economy recovers, as well as modest margin expansion that should result in EPS growth. Improved P&C pricing will also lead to stronger EPS growth and improved margins. Upside case USD 30.00 BRO could benefit as P&C pricing increases or if the economy recovers. We view BRO's upside scenario as $30 based on 23x our 2012E EPS of $1.30, which is near the high end of BRO's valuation since the financial crisis. Downside case USD 21.00 Risks to our thesis include reduced top line growth due to a weak economy and the potential for P&C pricing increases to slow. We view BRO's downside case as $21 (16x 2012E EPS of $1.30), which is towards the low end of BRO's historical range. Upside/downside scenarios
39 32 26 20 13 6 13- Apr- 11
30.00 ( 25.4% )
N/A 1.13 140.3 0.32
N/A 1.30 140.3 0.34
N/A 1.45 140.4 0.35
N/A N/A N/A N/A
286 250 -36 1,644 -176 1,894 238
286 250 -36 1,731 -88 1,981 240
286 250 -36 1,889 70 2,139 265
13.2
12.6
11.7
N/A
21.00 ( - 12.2% ) Downside Case
28.00 ( 17.1% ) Price Target
Upside Case
21.2 N/A N/A 1.4 11.6 N/A
18.4 N/A N/A 1.4 12.5 N/A
16.5 N/A N/A 1.5 12.9 N/A
11- Apr- 12
Adjusted EPS
$2.00 $1.50 $1.00 $0.50 $0.00 2010A 2011A EPS 2012E 2013E % change 20% 15% 10% 5% 0% -5%
16 April 2012
231
COMPANY SNAPSHOT
Aon Corporation
Income statement Revenue ($mn) Brokerage organic growth (%) EBITDA ($mn) EBIT ($mn) Pre-tax income ($mn) Net income (adj) ($mn) Net income ($mn) . Salaries and benefits (% revenue) Other operating expenses (% revenue) .. EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) Per share data EPS (adj) EPS (reported) ($) Diluted shares (mn) DPS ($) Balance sheet and cash flow ($mn) Cash and equivalents Short and long-term debt Net debt/(funds) Shareholders' equity Tangible equity Total invested capital Cash flow from operations Balance sheet metrics Total debt/capital (%) Valuation metrics P/E (reported) (x) EV/EBITDA (x) Price/cash EPS Dividend yield (%) ROIC (operating) Net ROE (operating) 2011A 2012E 2013E 2014E 11,287 11,969 12,754 N/A N/A N/A N/A N/A 2,432 2,609 2,774 N/A 1,850 1,978 2,178 N/A 1,605 1,738 1,918 N/A N/A 1,122 1,198 1,326 1,010 1,162 1,340 N/A CAGR N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 48.50 USD 53.00 AON
58.2 22.4 21.6 16.4 14.2 8.9
55.6 23.5 21.8 16.5 14.5 9.8
54.5 24.1 21.8 17.1 15.0 10.5

CAGR N/A N/A N/A N/A CAGR N/A N/A N/A N/A N/A N/A N/A Average 33.7 Average 13.4 N/A 10.9 1.2 9.4 N/A
Investment case Why a 2-Equal Weight? We expect AON to benefit from higher P&C prices, but we see a longer road to achieve improved organic growth and margin expansion compared to the other insurance brokers. Upside case USD 55.00 AON could benefit if the economy or P&C prices improve. We view AONs upside scenario as $55 based on 15x 2012E EPS of $3.60 which, is near the high end of AONs valuation since the financial crisis. Downside case USD 44.00 Risk include execution risks related to Hewitt acquisition, P&C prices could deteriorate, and a sluggish economy. We view AON's downside case as $44 (12x 2012E EPS of $3.60), which is the low end of its historical range since the financial crisis. Upside/downside scenarios
68 60 52 45 38 30 13- Apr- 11
55.00 ( 13.4% )
N/A 3.29 340.9 0.60
N/A 3.60 333.0 0.60
N/A 4.05 327.2 0.60
N/A N/A N/A N/A
272 272 272 4,492 4,492 4,107 4,220 4,220 3,835 8,120 8,517 9,169 -3,926 -3,529 -2,877 12,612 13,009 13,276 1,018 1,624 1,764
44.00 ( - 9.3% ) Downside Case
Upside Case
35.6
34.5
30.9
N/A
11- Apr- 12
14.7 N/A 11.9 1.2 8.8 N/A
13.5 N/A 10.8 1.2 9.4 N/A
12.0 N/A 9.9 1.2 10.1 N/A
Adjusted EPS
$5 $4 $3 $2 $1 $0 2010A 2011A EPS 2012E 2013E % change 14% 12% 10% 8% 6% 4% 2% 0%
16 April 2012
232
COMPANY SNAPSHOT
Progressive Corp.
Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 15,147 16,082 17,030 N/A Net investment income (NII) ($mn) 466 444 454 N/A Underwriting income N/A N/A N/A N/A Operating income ($mn) 947 879 918 N/A Net income ($mn) 1,016 930 918 N/A 31.8 31.6 N/A Tax rate (%) 31.6 Combined ratio (%) 93.0 93.9 94.0 N/A Combined ratio (ex cats & py development) (%) 93.8 93.7 94.0 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
1-OVERWEIGHT 1-POSITIVE USD 22.59 USD 24.00 PGR
1.49 1.45 1.55 0.44 0.42 0.43 9.47 10.49 11.20 N/A N/A N/A 636.9 608.1 591.2 8.99 9.67 8.36
15,171 15,834 17,654 2,442 2,080 2,080 5,807 6,226 6,490 N/A 2,703 1,498
N/A N/A N/A N/A
2.8 3.2 29.6
2.8 3.0 25.0
2.9 2.8 24.3
N/A N/A N/A
Investment case Why a 1-Overweight? We view PGR as one of the best-run companies in the P&C insurance industry as CAGR evidenced by its focused and differentiated auto N/A insurance product offerings, consistent earnings, and N/A superior ROE. N/A USD 28.00 N/A Upside case PGR could benefit if the personal auto market N/A N/A tightens, auto insurance prices rise, or loss cost inflation is lower than anticipated. We view PGR's upside scenario as $28 based on 3x 2012E BV of CAGR $10.49, which is at the high end of PGR's valuation N/A range since the financial crisis. N/A N/A Downside case USD 20.00 N/A PGR could be impacted if loss frequency trends rise as the impact of the recession eases, although we Average have yet to see this trend. We view PGR's downside 2.8 case as $20 (2x 2012E BV of $10.49), which is at the 3.0 low end of PGR's historical range since the financial 26.3 crisis. Average Upside/downside scenarios 2.2 38 N/A 33 2.5 20.00 27 15.1 ( - 11.5% ) 22 1.9 16 Downside N/A Case 11 17.3 11- Apr- 12 15.0 13- Apr- 11
2.4 N/A 2.7 15.2 1.9 N/A 18.2 16.0
2.2 N/A 2.5 15.6 1.9 N/A 16.8 14.6
2.0 N/A 2.3 14.6 1.9 N/A 16.8 14.4
28.00 ( 23.9% )
Upside Case
Book Value and ROE

$11.50 $11.00 $10.50 $10.00 $9.50 $9.00 $8.50 $8.00 2010A 2011A BVPS 2012E 2013E Operating ROE 18% 17% 17% 16% 16% 15%
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COMPANY SNAPSHOT
Allstate Corp.
Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 25,980 26,906 28,058 N/A Net investment income (NII) ($mn) 1,201 1,200 1,215 N/A Underwriting income ($mn) -874 992 715 N/A Operating income ($mn) 689 1,876 1,742 N/A Net income ($mn) 788 1,876 1,742 N/A 28.9 28.2 N/A Tax rate (%) 14.7 Combined ratio (%) 103.4 96.3 97.4 N/A Combined ratio (ex cats & py development) (%) 89.2 90.1 88.4 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 32.87 USD 32.00 ALL
1.32 0.84 36.92 34.31 523.1 34.40
3.80 0.88 40.09 37.49 493.2 36.75
3.75 0.92 43.20 40.45 464.0 39.66
38,914 5,908 18,674 1,929
38,106 5,908 19,147 3,476
38,740 5,908 19,465 4,237
N/A N/A N/A N/A
2.2 3.3 24.0
N/A 3.1 23.6
N/A 3.2 23.3
N/A N/A N/A
CAGR N/A N/A N/A N/A USD 37.00 N/A Upside case N/A ALL could benefit if ALL Financial's ROE improves, if loss cost trends remain favorable, or if PIF improves. We view ALL's upside scenario as $37 based on 0.9x CAGR 2012E BV of $40, which is near the high end of ALL's N/A valuation range since the financial crisis. N/A N/A Downside case USD 29.00 N/A Downside exists if interest rates rise and credit spreads widen. The company has substantial Average exposure to catastrophe losses, owing to its large 2.2 homeowners insurance business. We view ALL's 3.2 downside as $29 (0.7x 2012E BV of $40), which is at 23.6 the low end of ALL's historical range. Average Upside/downside scenarios 0.8 50 0.9 43 0.9 29.00 36 ( - 11.8% ) 14.1 29 2.7 Downside 21 7.5 Case 14 8.1 12- Apr- 12 N/A 13- Apr- 11
Investment case Why a 2-Equal Weight? Why a 2-Equal Weight? Allstates balance sheet strength has improved from the depths of the financial crisis, although we remain concerned about the loss of auto market share to direct writers in ALLs existing business and the potential for loss cost trends to deteriorate.
0.9 1.0 1.0 24.9 2.6 3.7 3.8 N/A
0.8 0.9 0.9 8.6 2.7 9.9 10.7 N/A
0.8 0.8 0.8 8.8 2.8 9.0 9.8 N/A
32.00 ( - 2.6% ) Price Target
37.00 ( 12.6% )
Upside Case
Book Value and ROE

$50 $40 $30 $20 $10 $0 2010A 2011A BVPS 2012E 2013E Operating ROE 12% 10% 8% 6% 4% 2% 0%
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COMPANY SNAPSHOT
The Hanover Insurance Group

Income statement 2011A 2012E 2013E 2014E Net written premiums ($mn) 3,593 4,152 4,343 N/A Net investment income (NII) ($mn) 258 286 286 N/A Underwriting income ($mn) -183 43 23 N/A Operating income ($mn) 15 184 172 N/A Net income ($mn) 37 184 172 N/A Tax rate (%) N/A N/A N/A N/A Combined ratio (%) 105.1 99.0 99.5 N/A Combined ratio (ex cats & py development) (%) 97.9 96.2 95.4 N/A Per share data ($) EPS (reported) DPS BVPS BVPS (tangible) Diluted shares (mn) BVPS (ex unrealized gains/losses) Balance sheet and cash flow ($mn) Total investments Total debt Common shareholders' equity Cash flow from operations Balance sheet metrics Premiums/surplus (s'holders' equity) (%) P/T investment yield (%) Total debt/capital (%) Valuation metrics Price/BV (x) Price/BV (tangible) (x) Price/BV (ex unrealized gains/losses) (x) P/E (reported) (x) Dividend yield (%) ROE (operating) (%) ROE (operating ex AOCI) (%) ROE (%) CAGR N/A N/A N/A N/A N/A N/A N/A N/A
2-EQUAL WEIGHT 1-POSITIVE USD 40.15 USD 41.00 THG
0.32 4.00 3.75 1.13 1.20 1.20 55.57 58.76 61.36 51.46 54.66 57.60 45.8 46.0 46.0 52.16 54.43 57.03
7,256 8,328 9,558 911 923 923 2,510 2,654 2,772 222 1,071 1,231
N/A N/A N/A N/A
CAGR N/A N/A N/A N/A N/A Upside case USD 46.00 N/A THG could benefit if it generates better than expected P&C ROE or accretion from the Chaucer acquisition is CAGR higher than expected. We view THG's upside N/A scenario as $46 based on 0.8x 2012E BV of $59, N/A which reflects concerns over the Chaucer acquisition. N/A N/A Downside case USD 38.00
Investment case Why a 2-Equal Weight? Why a 2-Equal Weight? THG has opportunities to improve its ROE over time by deploying excess capital and leveraging its expense base, but it is unclear to us how long this could take. The Chaucer acquisition increases its exposure to high severity business and expands THGs business outside its core capabilities.
2.3 4.2 26.6
2.3 3.7 25.8
2.2 3.2 25.0
Risks include THG catastrophe exposure, economic pressures, and entry into the international market through its acquisition of Chaucer. We view THG's downside case as $38 (0.6x 2012E BV of $59), which is towards the low end of THG's historical range since the financial crisis.
0.7 0.8 0.8 125.5 2.8 0.6 0.6 N/A
0.7 0.7 0.7 10.0 3.0 7.1 7.6 N/A
0.6 0.7 0.7 10.7 3.0 6.4 6.8 N/A
Average 0.7 Upside/downside scenarios 0.7 59 0.7 52 48.7 38.00 44 ( - 5.4% ) 2.9 37 4.7 Downside 30 5.0 Case 22 N/A
13- Apr- 11 12- Apr- 12
46.00 ( 14.6% )
Upside Case
Book Value and ROE

$62 $60 $58 $56 $54 $52 $50 2010A 2011A BVPS 2012E 2013E Operating ROE 8% 6% 4% 2% 0%
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Valuation Methodology and Risks

U.S. Insurance/Non-Life Aspen Insurance Holdings (AHL) Valuation Methodology: Our 12-month $28 price target implies a multiple of 0.7x 2012E book value of $41, versus the historical range of 0.61.6x (median= 1.2x). Risks which May Impede the Achievement of the Barclays Research Price Target: The risks for Aspen include the company not reserving adequately for unexpected future losses, weather and non-weather catastrophes, future terrorist acts, interest rate fluctuations, and P&C market softening. Berkshire Hathaway Inc. (BRK.A) Valuation Methodology: We determine our price target for Berkshire Hathaway of $127,500 primarily by applying a price-to-book multiple of 1.12x (versus a historical average since 2000 of 1.53x) to our YE 2012 book value estimate of around $114,000. As a point of reference, our price target valuation implies a price-to-tangible book multiple of 1.6x, versus a historical average since 2000 of 2.30x. Risks which May Impede the Achievement of the Barclays Research Price Target: There are several risks that could impede the achievement of our price target for Berkshire Hathaway including managment succession, large and concentrated stock investments, derivative losses, earnings volatility, catastrophe losses, M&A risk and regulatory risk. Berkshire Hathaway Inc. (BRK.B) Valuation Methodology: We determine our price target for Berkshire Hathaway of $85 primarily by applying a price-to-book multiple of 1.1x (versus a historical average since 2000 of 1.59x) to our YE 2012 book value estimate of around $76. As a point of reference, our price target valuation implies a price-to-tangible book multiple of 1.60x, versus a historical average since 2000 of 2.30x. Risks which May Impede the Achievement of the Barclays Research Price Target: There are several risks that could impede the achievement of our price target for Berkshire Hathaway including managment succession, large and concentrated stock investments, derivative losses, earnings volatility, catastrophe losses, M&A risk and regulatory risk. Willis Group Holdings Ltd. (WSH) Valuation Methodology: Our 12-month price target for Willis of $44 is based on a P/E multiple of 15x our 2012 EPS estimate of $2.90. Risks which May Impede the Achievement of the Barclays Research Price Target: The risks for WSH include a decline in the insurance rates on which brokers' commissions are based; integration of the HRH acquisition; the inability to hire new producers or to make new acquisitions; the loss of key producers to competitors; and foreign currency fluctuations. XL Group plc (XL) Valuation Methodology: Our $25 price target for XL is based on a multiple of 0.8x '12E book value per share of $33, versus its historical median multiple of as-reported book value of 1.4x (range=2.5x-0.2x). Risks which May Impede the Achievement of the Barclays Research Price Target: Similar to other property/casualty insurers, XL Capital faces risks from a return to a soft property/casualty market, catastrophes and other large losses, uncollectible reinsurance recoverables, an investment market volatility. The company also could experience further adverse developments from U.S. casualty reinsurance business. XL's focus on insuring low-frequency but high-severity risks could mean that it experiences a large loss in property or casualty lines that could materially affect EPS.
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ANALYST(S) CERTIFICATION(S)
We, Jay Gelb, CFA and Sarah DeWitt, CFA, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
IMPORTANT DISCLOSURES CONTINUED

Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits. In order to access Barclays Statement regarding Research Dissemination Policies https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. and Procedures, please refer to
The Corporate and Investment Banking division of Barclays produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.
Primary Stocks (Ticker, Date, Price)
ACE Limited (ACE, 12-Apr-2012, USD 73.02), 1-Overweight/1-Positive Allied World Assurance Co. (AWH, 12-Apr-2012, USD 69.26), 2-Equal Weight/1-Positive Allstate Corp. (ALL, 12-Apr-2012, USD 32.87), 2-Equal Weight/1-Positive Aon Corporation (AON, 12-Apr-2012, USD 48.50), 2-Equal Weight/1-Positive Arch Capital Group Ltd. (ACGL, 12-Apr-2012, USD 37.86), 1-Overweight/1-Positive Arthur J. Gallagher & Co. (AJG, 12-Apr-2012, USD 35.07), 1-Overweight/1-Positive Aspen Insurance Holdings (AHL, 12-Apr-2012, USD 27.99), 2-Equal Weight/1-Positive Berkshire Hathaway Inc. (BRK.A, 12-Apr-2012, USD 120173.00), 1-Overweight/1-Positive Berkshire Hathaway Inc. (BRK.B, 12-Apr-2012, USD 80.06), 1-Overweight/1-Positive Brown & Brown, Inc. (BRO, 12-Apr-2012, USD 23.92), 1-Overweight/1-Positive Chubb Corp. (CB, 12-Apr-2012, USD 70.51), 1-Overweight/1-Positive Everest Re Group (RE, 12-Apr-2012, USD 94.29), 2-Equal Weight/1-Positive Flagstone Reinsurance Holdings Ltd. (FSR, 12-Apr-2012, USD 7.49), 2-Equal Weight/1-Positive Marsh & McLennan Cos. (MMC, 12-Apr-2012, USD 32.02), 1-Overweight/1-Positive Montpelier Re Holdings (MRH, 12-Apr-2012, USD 19.47), 2-Equal Weight/1-Positive OneBeacon Insurance Group (OB, 12-Apr-2012, USD 14.81), 2-Equal Weight/1-Positive PartnerRe Ltd. (PRE, 12-Apr-2012, USD 67.61), 1-Overweight/1-Positive Progressive Corp. (PGR, 12-Apr-2012, USD 22.59), 1-Overweight/1-Positive RenaissanceRe Holdings (RNR, 12-Apr-2012, USD 75.19), 2-Equal Weight/1-Positive The Hanover Insurance Group (THG, 12-Apr-2012, USD 40.15), 2-Equal Weight/1-Positive The Travelers Companies, Inc. (TRV, 12-Apr-2012, USD 59.10), 1-Overweight/1-Positive Willis Group Holdings Ltd. (WSH, 12-Apr-2012, USD 35.36), 1-Overweight/1-Positive XL Group plc (XL, 12-Apr-2012, USD 21.47), 1-Overweight/1-Positive
Materially Mentioned Stocks (Ticker, Date, Price)
AFLAC INC (AFL, 12-Apr-2012, USD 44.21), 1-Overweight/1-Positive MetLife Inc. (MET, 12-Apr-2012, USD 36.34), 1-Overweight/1-Positive Prudential Financial Inc. (PRU, 12-Apr-2012, USD 61.40), 1-Overweight/1-Positive
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Other Material Conflicts
The Corporate and Investment Banking Division of Barclays Bank PLC is acting as corporate broker to Catlin Group Ltd.
Guide to the Barclays Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the "sector coverage universe"). In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating 1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12month investment horizon. 3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking Division of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company. Sector View 1-Positive - sector coverage universe fundamentals/valuations are improving. 2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. 3-Negative - sector coverage universe fundamentals/valuations are deteriorating.
Below is the list of companies that constitute the "sector coverage universe":
U.S. Insurance/Life
AFLAC INC (AFL) Delphi Financial Group (DFG) MetLife Inc. (MET) Prudential Financial Inc. (PRU) Torchmark Corp. (TMK)
American International Group (AIG) Hartford Financial Services Group (HIG) Principal Financial Group (PFG) Reinsurance Group of America (RGA) Unum Group (UNM)
Ameriprise Financial (AMP) Lincoln National (LNC) Protective Life Corp. (PL) Symetra Financial Corp. (SYA)
ACE Limited (ACE) Aon Corporation (AON) Aspen Insurance Holdings (AHL) Brown & Brown, Inc. (BRO) Flagstone Reinsurance Holdings Ltd. (FSR) OneBeacon Insurance Group (OB) RenaissanceRe Holdings (RNR) Willis Group Holdings Ltd. (WSH)
Distribution of Ratings:
Allied World Assurance Co. (AWH) Arch Capital Group Ltd. (ACGL) Berkshire Hathaway Inc. (BRK.A) Chubb Corp. (CB) Marsh & McLennan Cos. (MMC) PartnerRe Ltd. (PRE) The Hanover Insurance Group (THG) XL Group plc (XL)
Allstate Corp. (ALL) Arthur J. Gallagher & Co. (AJG) Berkshire Hathaway Inc. (BRK.B) Everest Re Group (RE) Montpelier Re Holdings (MRH) Progressive Corp. (PGR) The Travelers Companies, Inc. (TRV)
Barclays Equity Research has 2280 companies under coverage. 42% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 54% of companies with this rating are investment banking clients of the Firm. 42% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 49% of companies with this rating are investment banking clients of the Firm. 13% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 38% of companies with this rating are investment banking clients of the Firm.
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Guide to the Barclays Research Price Target:
Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Barclays offices involved in the production of equity research: London Barclays Bank PLC (Barclays, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Capital Japan Limited (BCJL, Tokyo) So Paulo Banco Barclays S.A. (BBSA, So Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Toronto Barclays Capital Canada Inc. (BCCI, Toronto) Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Mexico City Barclays Bank Mexico, S.A. (BBMX, Mexico City) Taiwan Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Seoul Barclays Capital Securities Limited (BCSL, Seoul) Mumbai Barclays Securities (India) Private Limited (BSIPL, Mumbai) Singapore Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)
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EQUITY RESEARCH

U.S. INSURANCE/NON-LIFE PRIMER:

Barclays | U.S. Insurance/Non-Life

Barclays | U.S. Insurance/Non-Life

Barclays | U.S. Insurance/Non-Life

Part I: P&C Insurance Stocks Should Benefit as Cycle Firms

Summary View Commercial Lines Insurers Reinsurers

MMC, WSH, AJG, BRO

Personal Lines Insurers

Source: Barclays Research

Barclays | U.S. Insurance/Non-Life

Figure 2: Barclays P&C Price-to-Book Index Relative to S&P Financials

Hard P&C Market Begins

Source: SNL, FactSet, Barclays Research

Source: SNL, FactSet, Barclays Research

Figure 3: Stock Performance YTD 2012

125% 100% 75% 50% 25% 0% Barclays Life Index

Source: Bloomberg, Barclays Research.

Source: Bloomberg, Barclays Research.

102% 86% 57%

Barclays P&C Index

Barclays | U.S. Insurance/Non-Life

Figure 4: Barclays P&C Insurance Index Vs 10-Year Treasury Yield

Ba rcla ys P&C Insura nce Index Absolute Price

10 Yea r Trea sury Yield

Source: FactSet, Barclays Research.

Barclays | U.S. Insurance/Non-Life

Barclays | U.S. Insurance/Non-Life

Figure 5: U.S. Commercial Lines Insurance Premium Volume

Direct Written Premiums in $ billions

Barclays | U.S. Insurance/Non-Life

Figure 6: Reinsurance Composite Shareholders Funds

Source: Guy Carpenter, Barclays Research

Barclays | U.S. Insurance/Non-Life

Figure 7: Average Insurance Brokerage Organic Growth

Loss of contingent commissions

Figure 8: Average Insurance Broker Margins

Barclays | U.S. Insurance/Non-Life

Auto Insurance Industry including State Farm State Farm

Homeowner's Insurance Industry including State Farm State Farm

Barclays | U.S. Insurance/Non-Life

Figure 12: Non-Life U.S. Insurance Sector Coverage

52-Wk Price Range

Mkt Cap (Bil)

Operating EPS 11E 12E

% Change EPS 11/12 12/13

Consensus EPS 12E 13E

4Q11 Price/BV ex Gdwill

Price/Stated BV 4Q11A 12E 13E

ROE 12E 13E

Commercial Lines & Reinsurance

Median Insurance Brokers

Median Personal Lines

$1.55 4.00 3.70

$1.69 4.15 4.04

1.8% 3.0% 2.6%

2.39 0.77 0.94

2.39 0.71 0.87

2.16 0.68 0.80

2.02 0.65 0.75

15.6 9.9 8.5

14.6 10.6 8.6