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Antitrust Notice

• The Casualty Actuarial Society is committed to adhering strictly

to the letter and spirit of the antitrust laws. Seminars conducted under the auspices of the CAS are designed solely to provide a forum for the expression of various points of view on topics described in the programs or agendas for such meetings.

• Under no circumstances shall CAS seminars be used as a means

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• It is the responsibility of all seminar participants to be aware of

antitrust regulations, to prevent any written or verbal discussions that appear to violate these laws, and to adhere in every respect to the CAS antitrust compliance policy.

Alison Felix

Economist & Branch Executive Federal Reserve Bank of Kansas City Denver Branch

Economic Update

• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 2007 2008 2009 2010 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2011 2012 Projections

• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5%

U.S. GDP growth slowed slightly in the second quarter and is expected to continue to grow at a modest pace.

2

Source: Bureau of Economic Analysis & Federal Open Market Committee (FOMC)

REAL GROSS DOMESTIC PRODUCT (GDP)

Annualized Percent Change from Previous Period June 2012 FOMC Central Tendency Projections

• 2%
• 1%

0% 1% 2% 3% 4% 5%

• 2%
• 1%

0% 1% 2% 3% 4% 5% Total GDP Consumer Spending Residential Investment Business Investment Net Exports Government Spending Inventories 2011Q3 2011Q4 2012Q1 2012Q2

Consumer spending makes up more than 70% of GDP.

3

Source: Bureau of Economic Analysis

CONTRIBUTIONS TO PERCENT CHANGE IN GDP

Annualized Percent Change from Previous Period

5.1% 4.6% 4.6% 5.8% 9.3% 9.6% 9.0% 8.3% 4% 5% 6% 7% 8% 9% 10% 4% 5% 6% 7% 8% 9% 10% 2005 2006 2007 2008 2009 2010 2011 July 2012 2013 2014 2012 Projections

Unemployment rates have fallen over the past year but remain stubbornly high.

4

U.S. UNEMPLOYMENT RATE

Source: Bureau of Labor Statistics & Federal Open Market Committee (FOMC)

June 2012 FOMC Central Tendency Projections

0% 1% 2% 3% 4% 5% 0% 1% 2% 3% 4% 5% 2005 2006 2007 2008 2009 2010 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2011 2012 Projections

Inflation increased earlier this year but moderated in the second quarter as oil prices fell.

5

Source: Bureau of Economic Analysis & Federal Open Market Committee (FOMC)

U.S. PERSONAL CONSUMPTION EXPENDITURE (PCE) INFLATION

Annualized Percent Change from Previous Period June 2012 FOMC Central Tendency Projections

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

6

Source: Board of Governors of the Federal Reserve System

EFFECTIVE FEDERAL FUNDS RATE

“…the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

• FOMC August Statement

• $3
• $2
• $1

$0 $1 $2 $3

• $3
• $2
• $1

$0 $1 $2 $3 2007 2008 2009 2010 2011 2012

7

Source: Board of Governors of the Federal Reserve System

FEDERAL RESERVE BALANCE SHEET

“The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”

• FOMC August Statement

Traditional Portfolio Currency in Circulation Reserves Other Federal Agency & Mortgage-Backed Securities Foreign Currency Swaps Short-Term Lending

Assets Liabilities

Trillions Trillions

$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 Oct '10 Sep '11 Jul '12 Jan '13

8

Source: Board of Governors of the Federal Reserve System

FEDERAL RESERVE BANK ASSETS Trillions

>10 years 6 to 10 years 3 to 6 years ≤3 years Federal Agency & Mortgage Backed Securities All Other Treasuries by Duration QE2 Projected Operation Twist Operation Twist “The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”

• FOMC August Statement

9

Source: Federal Reserve Bank of Kansas City

Board of Governors

FEDERAL RESERVE BANK DISTRICTS

95 100 105 110 Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12

Employment growth slowed in the second quarter but remains well above year ago levels.

10

Source: Bureau of Labor Statistics

U.S. NONFARM EMPLOYMENT GROWTH

Index 100 = July 2002, Seasonally Adjusted

United States

1.4% July 2012 Year-over-Year Change

JULY 2012 NONFARM EMPLOYMENT

Seasonally Adjusted, Year-over-Year Change

Most states have experienced employment gains over the past year.

11

Source: Bureau of Labor Statistics

More than 3% 2 to 3% 1 to 2% 0 to 1%

• 1 to 0%
• 1.6 to -1%

United States 1.4%

0.6% 13.5% 2.5% 10.2% 12.8% 4.2% 3.3% 9.0% 5.8% 4.0% 11.1% 4.1% 0.4% 3.8% 10.6% 2.0% 2.1%

Over the past year, employment gains were widespread across industries.

12

Source: Bureau of Labor Statistics

Percent Change

U.S. NONFARM EMPLOYMENT OVER THE PAST YEAR, JULY 2012

Seasonally Adjusted

5.8% 3.4% 2.8% 2.2% 2.0% 2.0% 1.9% 1.9% 0.8% 0.7% 0.6% 0.1% 0.1% 0.0%

• 0.5%
• 0.7%
• 1.3%

Natural Resources & Mining Professional & Business Services Educational Services Leisure & Hospitality Health Care & Social Assistance Wholesale Trade Transportation & Warehousing Manufacturing Financial Activities Other Services Retail Trade Construction Utilities State Government Local Government Information Federal Government Share of Total Jobs

However, employment is still down more than 10% in information, manufacturing, and construction.

13

Source: Bureau of Labor Statistics

U.S. NONFARM EMPLOYMENT

SINCE THE RECESSION STARTED (DEC. 2007 TO JULY 2012)

Seasonally Adjusted

0.6% 2.5% 12.8% 2.1% 10.2% 0.4% 13.5% 3.8% 4.0% 10.6% 3.3% 11.1% 5.8% 4.2% 2.0% 9.0% 4.1% 13.6% 11.9% 9.1% 2.1% 0.5%

• 0.3%
• 0.6%
• 1.7%
• 2.5%
• 2.9%
• 3.8%
• 5.2%
• 5.9%
• 6.6%
• 12.5%
• 12.8%
• 26.4%

Natural Resources & Mining Educational Services Health Care & Social Assistance Federal Government Leisure & Hospitality Utilities Professional & Business Services State Government Other Services Local Government Transportation & Warehousing Retail Trade Financial Activities Wholesale Trade Information Manufacturing Construction Percent Change Share of Total Jobs

Although unemployment rates have fallen, rates remain high across much of the country.

14

Source: Bureau of Labor Statistics

JULY 2012 UNEMPLOYMENT RATE

Seasonally Adjusted

United States 8.3%

Over 10% 9 to 10% 8 to 9% 7 to 8% 5 to 7% Less than 5%

20 30 40 50 60 70 80 90 100 110 120 Aug '02 Aug '04 Aug '06 Aug '08 Aug '10 Aug '12

60.6 August 2012

Consumer confidence has fallen in recent months.

15

Source: The Conference Board, Inc.

CONSUMER CONFIDENCE INDEX

Seasonally Adjusted

Slower employment growth and lower confidence have contributed to slower consumer spending growth.

16

Source: Federal Reserve Bank of St. Louis

REAL RETAIL & FOOD SERVICE SALES

Index 100 = July 2002, Seasonally Adjusted

United States

2.7%

July 2012 Year-over-Year

95 97 99 101 103 105 107 109 111 113 Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12

95 100 105 110 115 120 125 0% 2% 4% 6% 8% 10% Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12

Over the last few months personal income gains have outpaced growth in consumer spending leading to a higher savings rate.

17

Source: Bureau of Economic Analysis

REAL PERSONAL INCOME & SPENDING

Seasonally Adjusted Annual Rate Index 100 = July 2002 Disposable Personal Income (left) Personal Consumption Expenditures (left)

Savings Rate (right)

Seasonally Adjusted Annual Rate

July 2012 Year-over-Year 2.0% 2.0% July 2012 4.2%

30 35 40 45 50 55 60 65 Aug '02 Aug '04 Aug '06 Aug '08 Aug '10 Aug '12

The manufacturing sector continues to expand in the Tenth District.

18

Source: Institute for Supply Management & Federal Reserve Banks of Kansas City

MANUFACTURING ACTIVITY

Diffusion Index, Seasonally Adjusted, Month-over-Month

Note: Federal Reserve Surveys are computed on an ISM Basis (50 = no change)

Kansas City District 54.2 August United States (ISM) 49.8 July

Expanding Contracting

50

5 10 15 20 25 30 35 Production Volume of new

• rders

Number of employees Capital expenditures New orders for exports 2011Q4 2012Q1 2012Q2 Average July & August 2012

Manufacturers in the Tenth District expect higher levels of activity

• ver the next six months.

19

Source: Institute for Supply Management

TENTH DISTRICT MANUFACTURING EXPECTATIONS

Diffusion Index, Seasonally Adjusted, Six Months Ahead

More than 10% 5 to 10% 0 to 5%

• 5 to 0%
• 10 to -5%
• 25 to -10%

Less than -25%

Home prices fell sharply over the last few years in many parts of the country.

20

Source: Federal Housing Finance Agency

CHANGE IN HOME PRICES Peak (2007Q2) to Current (2012Q2)

FHFA Purchase-Only Index

United States

• 17.6%

However, home prices have stabilized over the past year.

21

Source: Federal Housing Finance Agency

United States 3.0% CHANGE IN HOME PRICES Year-over-Year, 2012Q2

FHFA Purchase-Only Index More than 4% 2 to 4% 0 to 2%

• 2 to 0%
• 4 to -2%
• 7.6 to -4%

20 40 60 80 100 120 140 160 180 Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12

VALUE OF RESIDENTIAL CONSTRUCTION CONTRACTS

Index 100 = July 2002, Seasonally Adjusted, Three-Month Moving Average

Residential construction activity is picking up but remains well below pre-recession levels.

22

Source: McGraw Hill/F.W. Dodge

July Year-to-Date over the Same Period Last Year

United States 24.6%

Residential construction activity has increased in almost every state over the past year.

23

Source: McGraw Hill/F.W.Dodge

More than 40% 30 to 40% 20 to 30% 10 to 20% 0 to 10%

• 15 to 0%

VALUE OF RESIDENTIAL CONSTRUCTION

Percent Change, Cumulative Year-to-Date January through July 2012

United States 24.6%

$15 $20 $25 $30 $35 $40 Jul '02 Jul '04 Jul '06 Jul '08 Jul '10 Jul '12

Non-residential construction activity has struggled to recover from the recent recession.

24

Source: McGraw Hill/F.W. Dodge

VALUE OF NON-RESIDENTIAL & NON-BUILDING CONSTRUCTION

Seasonally Adjusted, Three-Month Moving Average United States, Billions

United States

• 5.4%

July Year-to-Date over the Same Period Last Year

Improvements in non-residential construction activity have varied across the country.

25

Source: McGraw Hill/F.W.Dodge

More than 50% 25 to 50% 0 to 25%

• 25 to 0%
• 50 to -25%
• 71.9 to -50%

VALUE OF NON-RESIDENTIAL & NON-BUILDING CONSTRUCTION

Percent Change, Cumulative Year-to-Date January through July 2012

United States

• 5.4%

200 400 600 800 1000 1200 1400 1600 1800 Aug '90 Aug '95 Aug '00 Aug '05 Aug '10

Drilling activity is responding to prices with oil drilling up and natural gas drilling down.

26

Source: U.S. Department of Energy, Energy Information Administration & Baker Hughes

Crude Oil Natural Gas U.S. ACTIVE DRILLING RIG COUNT

• 2%

0% 2% 4% 6%

Advanced Economies Euro Area Germany France Italy Spain UK

2010 2011 2012 Forecast 2013 Forecast

27

Source: International Monetary Fund (IMF)

Growth has slowed sharply in Europe this year and is expected to remain slow in 2013.

WORLD ECONOMIC OUTLOOK PROJECTIONS

Percent Change

'11 '12

Exports to Europe make up about 18% of total U.S. exports.

28

U.S. EXPORTS BY TRADE PARTNER

Billions

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Total Trade 7.0% SHARE* All Other 8.2 38.1% Japan 7.0 4.5 Mexico 11.3 13.3 Canada 5.9 19.0 China 6.7 7.0 Eurozone 2.9 18.1

Source: International Trade Administration & WiserTrade *2011 Shares Note: The Eurozone includes the 27 European Union member countries

JUNE 2012 YEAR-TO-DATE Percent Change YTD through June

• 2%

0% 2% 4% 6% 8% 10% 12% World Emerging & Developing Countries China India Brazil Mexico Russia 2010 2011 2012 Forecast 2013 Forecast

29

Source: International Monetary Fund (IMF)

WORLD ECONOMIC OUTLOOK PROJECTIONS

Percent Change

Growth has also slowed somewhat among emerging and developing countries, but growth is expected to pick up next year.

0% 20% 40% 60% 80% 100% 120% 0% 20% 40% 60% 80% 100% 120% 1940 1950 1960 1970 1980 1990 2000 2010 2020

U.S. DEBT TO GDP RATIO

U.S. Federal government debt levels have increased significantly over the last few years.

30

Source: Bureau of Economic Analysis & Congressional Budget Office (August 2012 Projections)

Alternative Scenario Baseline

(Current Law)

Under current law, U.S. deficits are expected to fall sharply over the next several years.

31

U.S. DEFICIT TO GDP RATIO

Source: Congressional Budget Office (August 2012 Projections)

0% 1% 2% 3% 4% 5% 6% 7% 8% 2012 2013 2014 2015 2016 2017 2018 2019 2020

Debt Service Payments Spending Cuts Extended Tax Policies

Baseline (Current Law)

CBO Projections

• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 2007 2008 2009 2010 2011 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2013

32

Source: Bureau of Economic Analysis & Congressional Budget Office (August 2012 Projections)

GDP & THE “FISCAL CLIFF”

Percent Change (Annualized Quarterly Rates)

Baseline

(Current Law) CBO Projections 2012Q2 to 2013Q4

Under current law, several tax increases and spending cuts could lead to a slowdown in economic growth next year.

Alison Felix

Alison.Felix@kc.frb.org

United States

Economic Update

This presentation will be available at http://www.kc.frb.org/denver/