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Beyond the Crisis: The P/C Insurance in the Aftermath of the
“Great Recession”Insurance Information Institute
June 10, 2010
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦ bobh@iii.org ♦ www.iii.org
Presentation Outline
Reasons for Optimism, Causes for ConcernThe Economic Storm: Financial Crisis & Recession
Exposure, Growth & Profitability
Crisis-Driven Exposure Issues: Personal & Commercial LinesWhen and Where Will Growth Return?
Threats and Issues Facing P/C Insurers Through 2015Financial Strength & Ratings
Key Differences Between Insurer and Bank Performance During CrisisKey Differences Between Insurer and Bank Performance During Crisis
Insurance Industry Financial Overview & OutlookProfitabilityPremium GrowthUnderwriting Performance: Commercial & Personal LinesFinancial Market Impacts
Capital & Capacity
2
Catastrophe Loss TrendsQ&A
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry
Economic Recovery in US is Self-Sustaining: No Double Dip RecessionEuropean Debt Crisis Will Pass; Concerns are Overblown
Volatility will remain a reality, howeverVolatility will remain a reality, howeverEra of Mass Commercial Insurance Exposure Destruction Has Ended
But restoration of destroyed exposure will take 3+ years in USNo Secondary Spike in Unemployment or Swoon in Payrolls/WC ExposureNo Secondary Spike in Unemployment or Swoon in Payrolls/WC Exposure
But wage growth remains sluggishExposure Growth Will Begin in Earnest in 2nd Half 2010, Accelerate in 2011Increase in Demand for Commercial Insurance is in its Earliest Stages andIncrease in Demand for Commercial Insurance is in its Earliest Stages and Will Accelerate in 2011
Includes workers comp, commercial auto, marine, many liability coverages, D&OLaggards: Property, inland marine, aviationPersonal Lines: Auto leads, homeowners lags
P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006Investment Environment Is/Remains Much More Favorable
3
Volatility, however, will persist and yields remain lowBoth are critical issues in long-tailed commercial lines like WC, Med Mal, D&O
Source: Insurance Information Institute.
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry
P/C Insurance Industry Capacity as of 3/31/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis
As of 12/31/09 capacity was within 2% of pre-crisis highRecord Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist through 2010 and Potentially into 2011There is No Catalyst for a Robust Hard Market at the Current TimeHigh First Half 2010 CAT Losses Insufficient to Trigger Hard Market
Localized insurance and reinsurance impacts are occurring, especially earthquake coverage in Latin/South America, Offshore Energy Markets, European Wind Cover
Inflation Outlook for US and Major European Economies and Japan is TameInflation Outlook for US and Major European Economies and Japan is TameWill temper claims inflation
Financial Strength & Ratings of Global (Re)Insurance Industries Remained Strong Throughout the Financial Crisis in Sharp Contrast With Banksg g pInsurers Have Avoided (So Far) the Most Draconian Outcomes in Financial Services Reform LegislationTort Environment in US is Beginning to Deteriorate; No Tort Reform in US
4
Major Transformation of US Economy Underway with Major Opportunities for Insurers through 2020 in Health, Tech, Natural Resources, Energy
Source: Insurance Information Institute.
The Economic StormThe Economic Storm
Wh t th Fi i l C i i dWhat the Financial Crisis and Recession Mean for the Industry’s
E B G th dExposure Base, Growth and Profitability
5
Real GDP Growth*
%8%
Real GDP Growth (%) The Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4%
2.9%
1%4.
8%4.
8%
1.5% 2.
2%5.
6 %3.
0% 3.2%
2.9% 3.1%
3.0%
3.1%
3.2%
3.2%3.7%
.8% 1.6% 2.
5% 3.6%
3.1%
2%
4%
6%
8%
0.1
-0.2
%-0
.7%
7% -0.7
%
0
-4%
-2%
0%
2%
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump,Economic growth up sharply
in Q4:09 with rebuilding of
-2.7
-5.4
%-6
.4%-8%
-6%
0
1
2
3
4
5
6
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
in Q4:09 with rebuilding of inventories and stimulus.
More moderate growth expected in 2010/11
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
07:2
07:3
07:4
08:1
08:2
08:3
08:4
09:1
09:2
09:3
09:4
10:1
10:2
10:3
10:4
11:1
11:2
11:3
11:4
Personal and Commercial Lines Exposure Base Have Been Hit Hardand Will Be Slow to Come Back
6
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 5/10; Insurance Information Institute.
and Will Be Slow to Come Back
Length of US Business Cycles,1929–Present*
120120
Length of Expansions Greatly Exceeds
Contractions
Duration (Months)
80
106
9290
100110120 Contraction Expansion Following
Average Duration**Recession = 10.4 Mos
50
3745
39
58
73
4350607080 Expansion = 60.5 Mos
10 1116
616
8 819
37 39
2436
12 12138 11 10 810
203040
010
Aug1929
May1937
Feb1945
Nov1948
Jul1953
Aug1957
Apr1960
Dec1969
Nov1973
Jan1980
Jul1981
Jul1990
Mar2001
Dec2007
Month Recession Started
7
Month Recession Started
* Through June 2010. Assumes “official” end of recession was June 2009. ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
% 3%25% 8%R l NWP G th R l GDP
Real GDP Growth vs. Real P/C (%)
18.6
%20
.3
13.7
%%
15%
20%
25%
owth
4%
6%
8%
Real
Real NWP Growth Real GDP
4.3% 5.
8%0.
3% 3.1%
1.1%
0.8%
0.4%
0.6% 1.6%
5.6% 7.
7%1.
2%
5.2%
1.8%
0%
5%
10%
eal N
WP
Gro
0%
2%
l GD
P Grow
-1.6
%-1
.0%
-1.8
%-1
.0%
-0.4
%-0
.3%
-2.9
% -0.5
%-3
.8%
-4.4
%-3
.3%
-3.6
%-0.9
%.4
%6.
5%-1
.5%
-10%
-5%
0%Re
-4%
-2%
wth
-7 -6
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910
E
P/C I I d t ’ G th i I fl d M d tl
8Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 5/10; Insurance Information Institute
P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy
Regional Differences Will Significantly Impact P/C Markets
Recovery in Some Areas Will Begin Years Ahead of OthersBegin Years Ahead of Others
and Speed of Recovery Will Differ by Orders of Magnitude
9
y g
State Economic Growth Varied Tremendously in 2008
Mountain, Plains States Growing the Fastest
Percent Change in Real GDP by State, 2007–2008
Rocky Mountain2.2
Plains2.0 Great Lakes
-0.4
New England1.0
WA2.0
OR
MT1.8
ND7.3 MN
2 0 WI
ME1.4
NH1 8
VT1.7 MA
Mideast1.3
1.6
CA
NV-0.6
ID0.0
WY4.4
UT1.4 CO
NE1.3
SD3.5
2.0
IA2.1
WI0.7
IL0.3
MI-1.5
IN-0.6
OH-0.7
NY1.6
PA1.1
NJ0.6
MDDE
1.8 MA1.9
RI-0.9CT
-0.4
Highest Quintile
Far West0.6 US = 0.7
CA0.4
CO2.9
AZ-0.6 NM
2.0
OK2.7
KS2.2
MO1.3
MD1.3
-1.6DC3.0VA
1.3
WV2.5KY
-0.1NC0.1
SC
TN0.5AR
0 7 Highest Quintile
Fourth Quintile
Third Quintile
Second Quintile
L t Q i til
TX2.0
0.60.7
LA0.3
MS1.7
AL0.7
GA-0.6
FL-1.6
AK-2.0
HI
10US Bureau of Economic Analysis
Lowest Quintile
Southwest1.7
Southeast0.0
HI0.7
Fastest Growing States in 2008:Plains, Mountain States Lead
8%
Real State GDP Growth (%)
7.3%
6%
7%
8%
2 1% 2 0%
4.4%
3.5%2.9% 2.7% 2.5%3%
4%
5%
2.1% 2.0%
0%
1%
2%
0%ND WY SD CO OK WV IA TX, MN,
NM, WA
Natural Resource and Agricultural States Have Done Better Than Most
11Source: US Bureau of Economic Analysis; Insurance Information Institute.
Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas
Slowest Growing States in 2008: Diversity of States SufferingReal State GDP Growth (%)
KY CT AZ GA IN NV RI MI DE FL OH AK
-0.1%
-0.4%-0.5%
0.0%KY CT AZ GA IN NV RI MI DE FL OH AK
-0.9%
-0.6% -0.6% -0.6% -0.6%
-1.0%
-1.5% -1.6% -1.6% -1.7%
-2.0%-2.0%
-1.5%
States in the North South East and West All Represented Among
2.0%
-2.5%
12Source: US Bureau of Economic Analysis; Insurance Information Institute.
States in the North, South, East and West All Represented Among Hardest Hit, But for Differing Reasons
Labor Market TrendsLabor Market Trends
Fast & Furious:Massive Job Losses Sap theMassive Job Losses Sap the
Economy and Commercial/Personal Lines Exposure
13
Lines Exposure
Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilizing in 2010?
18 Traditional Unemployment Rate U 3 U 6 went from
January 2000 through May 2010, Seasonally Adjusted (%)
14
16
18 Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
U-6 went from 8.0% in March
2007 to 17.5% in Oct 2009; Stood at 16.6% in May
2010Recession ended in
Unemployment kept rising for Recession
12
14
Unemployment rate was 9.7% in
M
2010November 2001
kept rising for 19 more months
began in December
2007
8
10 MayUnemployment peaked at 10.1%
in Oct. 2009, highest monthly
4
6
May10
g est o t yrate since 1983.Peak rate in the last 30 years: 10.8% in Nov -
Dec 1982
14
2Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
10 Dec 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Unemployment Rates by State, April 2010:Highest 25 States*
16
The unemployment rate has been rising across the country, but in April just 6 out
of 50 states recorded increases,
4.8 5661.5
12.0
.9.0.01.21.6
13.7
12.6
12.514
.0
12
14
16
%)
,compared to 24 in March.
10.4
10.010 10
. 510
.610
.6
9.4
9.2
9.2
9.09.
5
9.1
9.29.
8
1 1011111 11
8
10
12
ent R
ate
(%
4
6
8
empl
oym
e
0
2
4
Un
15
0MI NV CA RI FL SC MS IL AL DC OH NC KY OR TN GA IN NJ AZ MO MA WA WV ID CT
*Provisional figures for April 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Unemployment Rates By State, April 2010: Lowest 25 States*
10
The unemployment rate has been rising across the country, but in April just 6 out
of 50 states recorded increases,
9.1.27.3 .1.2
8.38.4
7.57.
88.08.18.
49.0
8.7
8.59.
0
8
10
%)
,compared to 24 in March.
6.7
6.7
6.6
6.56.
97.77
4.75.
06.
47.7
6.7
6
ent R
ate
(%
43.
8
4
empl
oym
e
0
2Une
16
0DE PA NM WI AK NY TX ME CO AR MD UT MN VA MT WY IA HI LA NH OK KS VT NE SD ND
*Provisional figures for April 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
US Unemployment Rate
0%11.0% Rising unemployment
2007:Q1 to 2011:Q4F*
%
9.3% 9.
6% 10. 0
9.7%
9.6%
9.4%
9.2%
9.0%
8.8%
8.6%
9.4%
9.0%
10.0%eroded payrolls
and workers comp’s exposure base.
Unemployment likely
% 6.9%
8.1 % 8
7.0%
8.0%
p y ypeaked at 10% in late 2009.
Unemployment
5% 5% .6%
4.8% 4.9% 5.
4%
6.1 %
5.0%
6.0%
p yforecasts are being
revised downward for the first time in years
4. 4. 4
4.0%
5.0%
7:Q
1
7:Q
2
7:Q
3
7:Q
4
8:Q
1
8:Q
2
8:Q
3
8:Q
4
9:Q
1
9:Q
2
9:Q
3
9:Q
4
0:Q
1
0:Q
2
0:Q
3
0:Q
4
1:Q
1
1:Q
2
1:Q
3
1:Q
4
17
07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (5/10); Insurance Information Institute
Monthly Change Employment*
0 431600
January 2008 through April 2010* (Thousands)
64 14 3920
8 290 4
0
200
400
-72
-144 -122
-160 -137
-161 -128
-175
-321
-380
7 28 -387
15-3
46 -212
-225
-224 -1
09
-600
-400
-200
Monthly Losses in May’s gain of 431,000 jobs was -5
97-6
81-7
79 -726
-753
-52
-51
-1,000
-800
8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
distorted by the hiring of 411,000 temporary Census
workers. Private sector employment was up 41,000
Jan
08Fe
b 08
Mar
08
Apr
08
May
08
Jun
08Ju
l 08
Aug
08
Sep
08
Oct
08
Nov
08
Dec
08
Jan
09Fe
b 09
Mar
09
Apr
09
May
09
Jun
09Ju
l 09
Aug
09
Sep
09
Oct
09
Nov
09
Dec
09
Jan
10Fe
b 10
Mar
10
Apr
10
May
10
Job Losses Since the Recession Began in Dec. 2007 Total 8 4 Milli Th h M 2010
18
*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
8.4 Million Through Mar. 2010; 15.0 Million People are Now Defined as Unemployed
Labor Underutilization: Broader than Just Unemployment
16 8% 17 0% 17.5% 17.2% 17.3%16 8% 16 9% 17.1%18%
% of Labor Force
16.4% 16.5% 16.3%16.8% 17.0%
16.5% 16.8% 16.9% 17.1%16.6%
14%15%16%17%
11.2%11%12%13%14%
10%Sep08
May09
Jun09
Jul 09 Aug09
Sep09
Oct09
Nov09
Dec09
Jan10
Feb10
Mar10
Apr10
May10
M i ll Att h d d U l d P A t f 16 6% f thMarginally Attached and Unemployed Persons Account for 16.6% of the Labor Force in May 2010 (1 Out 6 People). Unemployment Rate Alone was 9.7%. Underutilization Shows a Broader Impact on WC and Other
Commercial Exposures
19
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Source: US Bureau of Labor Statistics; Insurance Information Institute.
US Nonfarm Private Employment
Monthly, Nov 2007 – May 2010 (Millions)The US Economy Lost About
8.4 Million Jobs in the 2 Years from Dec 07 Dec 09Employment Peak;
38.0
38.1
38.0
37.9
37.8
37.8
37.7
37.6
37.6
7.4
.0 7139
Years from Dec. 07 – Dec. 09 .
As employment expands, workers comp insurers will
be among the first
Recession Starts
13 13 13 13 13 13 13 13 13 137
137
136.
713
6.2
135.
133
.58135
136137138
gbeneficiaries
1313
2.8
132.
113
1.5
131.
213
0.6
130.
330
.129
.929
.629
.79.
629
.629
.629
.813
0.1
130.
6
131132133134
1 1 12 12 12 12 1 2 12 12 1
129130
ov 0
7ec
07
an 0
8eb
08
Mar
08
Apr
08
May
08
June
Jul 0
8ug
08
ep 0
8O
ct 0
8ov
08
ec 0
8an
09
eb 0
9M
ar 0
9A
pr 0
9M
ay 0
9un
09
Jul 0
9ug
09
ep 0
9O
ct 0
9ov
09
ec 0
9an
10
eb 1
0M
ar 1
0A
pr 1
0M
ay 1
0
20
N De J Fe M A M J A Se O N De J Fe M A M J J A Se O N De J F e M A M
Seasonally adjusted. Source: US Bureau of Labor Statistics
US Unemployment Rate Forecasts
11.0% 10 Most PessimisticC /Mid i t
Quarterly, 2010:Q1 to 2011:Q4
9.6% 9.5% 9 4%9.7%
9.9% 9.8%9.8%
9 6%
10.0%
10.5%Consensus/Midpoint10 Most Optimistic
9.4%
9.0%8.8%
8 6%
9.2%
9.6%9.4% 9.4%
8 6%8.9%
9.4%
8.5%
9.0%
9.5%
8.6%8.3%
8.1%7.8%
8.6%8.3%
7.5%
8.0%Unemployment will remain high even under
the most optimistic of scenarios, but forecasts are being revised downwards
7.0%10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4
g
Stubbornly High Unemployment Will Slow the Recovery of the
21Sources: Blue Chip Economic Indicators (5/10); Insurance Information Institute
Stubbornly High Unemployment Will Slow the Recovery of theWorkers Comp Exposure Base
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums
Wage & Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)
7/90-3/91 3/01-11/01 12/07-?
$6,000
$7,000
$35$40
$45
$3,000
$4,000
$5,000
$20
$25$30
$0
$1,000
$2,000
$0
$5$10
$15Wage & SalaryDisbursements
WC NPW
Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
$0
22
* Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessionsSource: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books
ea e g ay o s a e oded $ o e s Co p e u s
Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)y ( p p )
8.5%10% Recessions in the 1970s and 1980s saw smaller exposure impacts
because of continued wage
The Dec. 2007 to mid-2009 recession
caused the largest
(Percent Change)
(All Post WWII Recessions)
3.7%4.6%
3.5%4%
6%
8% because of continued wage inflation, a factor not present
during the 2007-2009 recession
caused the largest impact on WC
exposure in 60 years
1 1%
1.1%2.1%
-0.5%2%
0%
2%
-4.4%
-2.0%-1.1%
-3.6%-6%
-4%
-2%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 2007-2009
Recession Dates (Beginning/Ending Years)
*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).
Frequency: 1926–2008A Long-Term Drift DownwardManufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
25
30
15
20
10
15
0
5
24
Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research
'26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07
Insurance Industry Employment Trends
Soft Market, Difficult Economy, Outsourcing Have Contributed toOutsourcing Have Contributed to
Industry’s Job Losses
25
U.S. Employment in the DirectP/C Insurance Industry: 1990–2010*
Thousands
520
500500
480As of Apr. 2010, P/C insurance industry employment
was down by 27 700 or 5 6% to 463 400 since the
460
was down by 27,700 or 5.6% to 463,400 since the recession began in Dec. 2007 (compared to overall
US employment decline of 7.2%)
26
*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
U.S. Employment in the DirectLife Insurance Industry: 1990–2010*
Thousands575
As of Apr. 2010, Life insurance industry employment was down by 10,400 or 2.9% to 343,900 since the recession began in
Dec. 2007 (compared to overall US
500
525
550Dec. 2007 (compared to overall US
employment decline of 7.2%)
425
450
475
500
375
400
425
300
325
350
27
*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
U.S. Employment in the Direct Health-Medical Insurance Industry: 1990–2010*
Thousands450
375
400
425
300
325
350
375
250
275
300
As of Apr. 2010, Health-Medical insurance industry employment was
down by 4,400 or 1.0% to 437,500 i th i b i D
175
200
225 since the recession began in Dec. 2007 (compared to overall US employment decline of 7.2%)
28
*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
U.S. Employment in the Reinsurance Industry: 1990–2010*
Thousands
48
40
44As of Apr. 2010, US employment in the reinsurance industry was down by 1 800 or 6 7% to 25 100
36
40 down by 1,800 or 6.7% to 25,100 since the recession began in Dec.
2007 (compared to overall US employment decline of 7.2%)
32
24
28
29
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of April 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
U.S. Employment in Insurance Agencies & Brokerages: 1990–2010*
Thousands
700
650
600
550
As of Apr. 2010, employment at insurance agencies and
brokerages was down by 49,600 or 7.3% to 630,000 since the
500
,recession began in Dec. 2007
(compared to overall US employment decline of 7.2%)
30
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of April 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
U.S. Employment in Insurance Claims Adjusting: 1990–2010*
Thousands
60
55 Katrina, Rita, Wilma
50
45 As of Apr. 2010, claims adjusting employment was down by 8,500 or 16.3%
to 43 500 since the recession began in
40
n-90
p-90
y-91
n-92
p-92
y-93
n-94
p-94
y-95
n-96
p-96
y-97
n-98
p-98
y-99
n-00
p-00
y-01
n-02
p-02
y-03
n-04
p-04
y-05
n-06
p-06
y-07
n-08
p-08
y-09
n-10
to 43,500 since the recession began in Dec. 2007 (compared to overall US
employment decline of 7.2%)
31
Jan
Sep
May Jan
Sep
May Jan
Sep
May Jan
Sep
May Jan
Sep
May Jan
Sep
May Jan
Sep
May Jan
Sep
May Jan
Sep
May Jan
Sep
May Jan
*As of April 2010; Not seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
U.S. Employment in Third-Party Administration of Insurance Funds: 1990–2010*
Thousands
135
125
115
95
105
85
95
32
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of April 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Crisis-Driven Exposure pDrivers
Economic Obstaclesto Growth in P/C Insurance
33
Auto/Light Truck Sales, 1999-2011F
9917.5
17.8
7.4
1819
(Millions of Units)New auto/light truck sales
fell to the lowest level since the late 1960s. Forecast for
2010-11 is still far below 1999-2007 average of 17
16.9
16.5
16.116
.9
16.617
.1 7117
15161718 1999-2007 average of 17
million units
13.1
11.8
13.2
12131415
“Cash for Clunkers” generated about $300M in net new personal auto premiums
10.3
1
9101112
Sharply lower auto sales will have a smaller effect on auto insurance
exposure level than problems in the housing market will on home insurers
999 00 01 02 03 04 05 06 07 08 09 10F 11F
Car/Light Truck Sales Will Recover from the 2009 Low Point, but High Unemployment Tight Credit Are Still Restraining Sales;
34Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/10); Insurance Information Institute.
High Unemployment, Tight Credit Are Still Restraining Sales; Gas Prices Could Once Again Become a Factor, Too
New Private Housing Starts, 1990-2011F
(Millions of Units)
1 .85 1.96 2.
07
801 9
2.1
New home starts plunged 34% from 2005-2007; drop
through 2009 was
1.48
1.47 1.
62 1.64
1.57 1.60 1.
71 1 1.8
1.36
1.351.
46
.29
09
1.5
1.7
1.9g
72% (est.); A net annual decline of 1.49 million units,
lowest since records began
0.90
69
0.94
1
1.2
1.01
1.1
0.9
1.1
1.3 in 1959
I.I.I. estimates that each incremental 100,000
0.56 0.
6
0 3
0.5
0.7
,decline in housing starts costs home insurers
$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is estimated
at about $1.3 billion0.3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F
Little Exposure Growth Likely for Homeowners InsurersD t W k H C t ti F t f 2010 2011
35Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/10); Insurance Information Institute.
Due to Weak Home Construction Forecast for 2010-2011.Also Affects Commercial Insurers with Construction Risk Exposure, Surety
Average Square Footage of Completed New Homes in U.S., 1973-2010:Q1
2 700Square Ft
Average size of completed new homes often falls in recessions
(yellow bars), but historically bo nces back in e pansions
6 324
320
330
,349 2,
434
2,46
92,
521
2,51
92,
438
2,38
92,500
2,700 bounces back in expansions
95 ,035 2,08
02,
075
2,09
52,
095
2,10
02,
095
2,12
02,
150
2,19
02,
223
2,26
62,
32,
3 2,3 2,
2 100
2,300
60 695
5 700
,720 1,75
51,
760
1,74
0,7
2071
0,7
25 1,78
01,
785
1,82
5 1,90
5 1,9 9 2,
1,900
2,100
The trend to building larger homes reversed in 2009 affecting exposure growth beyond
1,66 1,
61,
645
1,7 1, 1 1, 1, 1
1,500
1,700in 2009, affecting exposure growth beyond
the decline in number of units built
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute. 36
Auto/Light Truck Sales, 1999-2011F
9917.5
17.8
7.4
1819
(Millions of Units)2010 forecast
revised upwards to
16.9
16.5
16.116
.9
16.617
.17117
15161718 11.8 million units
13.1
11.8
13.2
12131415
“Cash for Clunkers” generated about $300M in net new personal auto premiums in 2009
10.3
1
9101112 New auto/light truck sales fell by nearly 6
million units in 2009 vs. 2007, to the lowest level since the late 1960s.
999 00 01 02 03 04 05 06 07 08 09 10F 11F
Car & Truck Sales Are Beginning to Recover but Weak Economy, Credit Woes Are Still Restraining Sales;
37Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/10); Insurance Information Institute.
Economy, Credit Woes Are Still Restraining Sales; Gas Prices Could Once Again Become a Factor Too, But Overall
Exposure Trend is Becoming More Favorable
Unemployment’s Effect on Percent of Uninsured Motorists, 1989-2014F
19% 12%
Uninsured Motorist Percentage National Unemployment PercentageUnemployment
% Uninsured
The unemployment rate appears to be closely
l t d ith th In 2010 roughly 18% of
17%
18%
9%
correlated with the uninsured motorist
percentage.
In 2010 roughly 18% of motorists are expected to be driving without
insurance as high unemployment
prompts some people
15%
16%
prompts some people to drop coverage
13%
14%6%
12%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
E
2010
F
2011
F
2012
F
2013
F
2014
F
3%
Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Blue Chip Economic Indicators (Unemployment data, including forecasts); Insurance Information Institute. 38
New Boat Sales Symptomatic of Decline in Insured Exposure Growth for Luxury/Discretionary Items
30$1,000,000 $12.5New Boats Sold Value of Boats Sold
880,
300
844,
100
837,
900
870,
650
864,
450
912,
1 3
841,
820
$850 000
$900,000
$950,000
$11.5
$12.0
Valu8 8 8
04,8
20
$750,000
$800,000
$850,000
Boa
t Sal
es
$10 0
$10.5
$11.0
ue of Boats
593,
000
71,4
00
82,5
00
76,8
00
7 0
$600 000
$650,000
$700,000
New
B
$9.0
$9.5
$10.0 Sold ($ Bill)Boat sales fell by 16% in
2008 d h l f h5
57 5 5 7
$500,000
$550,000
$600,000
97 98 99 00 01 02 03 04 05 06 07 08$8.0
$8.5
$ )
2008 and the value of those sales plunged by 21%
39
97 98 99 00 01 02 03 04 05 06 07 08
Sources: National Marine Manufacturers Association, 2008 Abstract (latest available as of Feb. 2010); Insurance Information Institute.
Business Bankruptcy Filings,1980-2010:Q1
00 277
81,2
3582
,446
3 549
64390,000
% Change Surrounding Recessions
1980-82 58.6%1980-87 88 7%
694
8,12
569
,30
62,4
3664
,004 71,2 8
63,8
5363
,235
64,8
5371
,570
,662
,304
52,3
7451
,959
53,5
4954
,027
367
4 99 0 1 546 60
,837
60,000
70,000
80,0001980 87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
43,6 48
5 5
44,3
37,8
8435
,472
40,0
938
,540
35,0
3734
,317
39,2
0,6
95 28,3
2243
,5
0730,000
40,000
50,000
19
14,6
0
10,000
20,000 There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:Q1 bankruptcies totaled 14,607, up 18% from Q1:2009
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910
:Q1
Significant Exposure Implications for All Commercial Lines
40Source: American Bankruptcy Institute; Insurance Information Institute
g p p
Private Sector Business Starts,1993:Q2 – 2009:Q3*
6 220 22
322
022
022
1
18220
230
(Thousands)
4 199 20
420
295 96 96
206
206
201
198
206
206
203
211
205
212
200 20
520
420
497
203 20
920
1
320
1 204
202
210 21
220
921
6 2 2 221
0 212
204
2120
920
719
93
203
200
210
220
175
186
7418
018
6 192
188
187 18
918
6 190 19
419
1 19 19 19
192 1
192
192
193
191 19
317
7
180
190
200
169,000 businesses started in
1 17
171
169
160
1702009:Q3, actually declining during
form the prior quarter. The figure is the lowest level since 1993.
15093 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Business Starts Are Down Nearly 20% in the Current Downturn,
41
y ,Holding Back Most Types of Commercial Insurance Exposure
*Latest available as of June 7, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
Net New Business Formations*1999:Q1-2008:Q4*
3136343639
40
50Thousands 2008-2009
recession
14222020
2524
136
2
13
2317
126 6
142225
1824
3125 26
14
2819
3
15
210
20
30
2
-1-5 -3
3 2
-3
20
-10
0
10
-28-32
50
-40
-30
-20 March-November
2001 recession
In 2008, over 110,000 more businesses
disappeared than started
-48-50
99:Q
1
00:Q
1
01:Q
1
02:Q
1
03:Q
1
04:Q
1
05:Q
1
06:Q
1
07:Q
1
08:Q
1
Net Business Formations Likely Were Positive Again
42
Net Business Formations Likely Were Positive Again,at Least in the Second Half of 2009 and into 2010.
*Business “births” minus business “deaths.” Latest data on business “deaths” is for 2008:Q4.Sources: Bureau of Labor Statistics at http://www.bls.gov/news.release/cewbd.t07.htm ; Insurance Information Institute.
FDIC-Insured Banks AreReducing Credit: 2008, 2009, 2010:Q1
$Billions
$2 500
Down $128.5B (-6.3%)
April 2010: Many banks are maintaining tight loan standards; some are tightening further; virtually no one loosening; Hurts
business formation/expansion and commercial exposure
$1,916.7$1,887.37
$1 494 0
$2,045.2$2,000
$2,500 200820092010
Down $273.2B (-18.3%)
( 6.3%)
$1,220.8$1,187.61
$590 9
$1,494.0
$1,000
$1,500 Down $139.4B (-13.1%)
$451.5 $417.97$590.9
$0
$500
FDIC-Insured Institutions Had $541.1B (-13.1%) Less in Outstanding L i Th Th C t i t Y d 2009 2008
Construction andDevelopment Secured by
Real Estate
Commercial and Industrial 1-4 Family ResidentialMortgages
43Source: FDIC Quarterly Banking Profile, First Quarter 2010, Table II-A
Loans in These Three Categories at Year-end 2009 vs. 2008,and Even Less at End of 2010:Q1
Business Fixed Investment2008:Q1 to 2011:Q4F
9.0%
%
5%
20%
Structures Equipment & Software
1.0% 3.
0% 4.5%
5.0%
1.5%
1
5.7% 6.5% 7.6% 9.2% 10
.3%
9.7%
9.6%
9.3%
6.8%
14.
-0.1
%
0%
10%
20%
9% % .0% -5
.0%
-3.5
%
-0.5
%
-5.0
%
-9.4
% -4.9
%
-7.2
%
20%
-10%
0%
-18.
4% -13.
9
-15.
0
-11-
-25.
9%
%-1
7.3%
-40%
-30%
-20%
Investment in Structures is forecast to be down in 2010
Investment in Equipment &
Software is forecast to be positive in
-36.
4%-4
3.6%-50%
40%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
forecast to be down in 2010 and low in 2011. This will
hold exposure in many commercial lines down
both 2010 and 2011.
44Source: Wells Fargo Securities Economics Group, Monthly Outlook, April 7, 2010
08:Q
08:Q
08:Q
08:Q
09:Q
09:Q
09:Q
09:Q
10:Q
10:Q
10:Q
10:Q
11:Q
11:Q
11:Q
11:Q
Total Industrial Production
6.4% 6.6% 6.3% 5.3% 5 0% 5 0% 4 4%
2007:Q1 to 2011:Q4F (%)
5.3% 5.0% 5.0% 4.4% 4.2% 4.1% 3.9%1.5%
3.2% 3.6%
0.3% 0.2%0.0%
5.0%
-9.0%-10.4%
-4.6%
-10.0%
-5.0%Industrial Production is Aided
by a Rebuild of Inventories, Gradual Economic Recovery
SI d t i l P d ti -13.0%
-19.0%-20.0%
-15.0%and Stimulus Program (Q2:09 through 2010)
Industrial Production Began to Contract Sharply in Late 2008 and Plunged
in 2009:Q1
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
End of Recession in mid-2009, Stimulus Program Are Benefiting
45Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/10); Insurance Information Institute
Industrial Production and Therefore Insurance Exposure Both Directly and Indirectly, Albeit Very Modestly
State & Local Government Finances in Dire Straits
Large, Long-Term Cuts Necessary to Align Spending with Shrinking
Tax Revenues
46
Year-Over-Year Change in Quarterly USState Tax Revenues, Inflation Adjusted
% 9.9% .5%
% 2% % % 12.4
%% % % %
15%
20%2.
4% 4.7% 5.6 %
9 94.
4%1.
8%0.
4%%
0.0% 1.
6%%
0.1% 4.
0% 4.7% 5.7 % 8.
23.
4% 6.0% 7.0%
6.6%
4.2%
3.7% 6.
3%2.
6%1.
3% 3.2% 5.
5%3.
1% 3.6%
2.6% 5.
4%2.
8%
2.4%
0%
5%
10%
-1.3
%-1
.7%
-3.0
%-7
.6%
0.7%
-0.6
%
-3.9
%
0.9%
-4.1
%
.6%-15%
-10%
-5% Nationwide, state-tax collections for fiscal year 2009 declined by a record $63 billion, or 8.2 percent from the
previous year. That loss is roughly twice th t t t i d i fi l li f
-10
-10
-16.
4%-11 .
-25%
-20%
99 99 99 99 00 00 00 00 01 01 01 01 02 02 02 02 03 03 03 03 04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09
the amount states gained in fiscal relief from the federal stimulus package
1Q9
2Q9
3Q9
4Q9
1Q0
2Q0
3Q0
4Q0
1Q0
2Q0
3Q0
4Q0
1Q0
2Q0
3Q0
4Q0
1Q0
2Q0
3Q0
4Q0
1Q0
2Q0
3Q0
4Q0
1Q0
2Q0
3Q0
4Q0
1Q0
2Q0
3Q0
4Q0
1Q0
2Q0
3Q0
4Q0
1Q0
2Q0
3Q0
4Q0
1Q0
2Q0
3Q0
4Q0
States Revenues Were Down 4.4% in Q4 2009, the 5th Consecutive Quarter of Revenue Decline This Will Impact Public Infrastructure
47Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/.
Quarter of Revenue Decline. This Will Impact Public Infrastructure Spending Significantly and Related Insurance Exposures and Demand.
Inflation Trends:Concerns Over Stimulus Spending
and Monetary Policy
M ti P Cl i
y y
Mounting Pressure on Claim Cost Severities?
48
Annual Inflation Rates(CPI-U, %), 1990–2011FAnnual Inflation Rates (%) Inflation peaked at 5.6% in August 2008
on high energy and commodity crisis. The recession and the collapse of the
commodity bubble have reduced
3 3 3 43.8 3.8
5.14.9
4.0
5.0
6.0 commodity bubble have reduced inflationary pressures
2.8 2.6
1.51.9
3.3 3.4
1.3
2.5 2.33.0 2.8
2.0 1.9
2.92.4
3.23.0
2.0
3.0
0 4
0.0
1.0
-0.4-1.090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F
There is So Much Slack in the US Economy That Inflation Should Not Be a
49Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, May 10, 2010 (forecasts).
There is So Much Slack in the US Economy That Inflation Should Not Be a Concern Through 2010/11, but Depreciation of Dollar is Concern Longer Run
Forecasts of Annual Inflation Rates(CPI-U, %), 2010–2015FAnnual Inflation Rates (%) Even the pessimistic forecasts
don’t see the CPI rising much above 3% in the next five years
3.13.03.03.02.92.83.0
4.0
Blue Chip AvgPessimistic
Bl Chi A2.2
1.92.1 2.2 2.3 2.4
1.7
1 21.4
1.6 1.72.0
Blue Chip AvgMedian
Blue Chip AvgOptimistic
1.01.2
1.0
0.02010 2011 2012 2013 2014 2015
Inflation Will Accelerate Modestly through 2015 but Should Is Not
50Sources: Blue Chip Economic Indicators, Oct. 2009 and Mar. 2010.
Inflation Will Accelerate Modestly through 2015 but Should Is Not Expected to Become a Major Concern or Threat
P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests
5 5%6.2%
6%
8%(Percent)
2.7% 3.0% 3.1%3.8%
4.3%5.5%
4%
6%
0%
2%
-0.4%-2%
Overall Legal US Tort Medical Motor Bodily WC Med No-FaultCPI Services Costs Care Vehicle
BodyWork
InjurySeverity
Severity ClaimSeverity
Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are
Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.
Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely
51
WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests
6.9%8%
(Percent increase Dec 08 to Dec 09)
Excludes
Inpatient Services Rose 6.7%;
O t ti t S i
6%
Excludes Food and Energy
Outpatient Services Rose 7.4%
2.7% 3.0% 3.0%3.4% 3.1% 3.4%4%
1.8%2%
0%Overall CPI "Core" CPI Hospital
ServicesPhysicians'
ServicesDental
ServicesPrescription
DrugsMedical CareCommodities
Medical CPI
H lth C t A M j WC I C t D i Th A
Source: Bureau of Labor Statistics; Insurance Information Institute.
Healthcare Costs Are a Major WC Insurance Cost Driver. They AreLikely to Increase Faster than the CPI for the Next Few Years, at Least
52
WC Medical Severity Risingat Twice the Medical CPI Rate
13.6%14%
16% Average annual increase in WC medical severity form 1995 through 2008 was
more than twice the medical CPI (8.1%
10.1% 10.6%12%
14%(
vs. 4.0%). New healthcare reform legislation is unlikely to have any
impact on the gap.
7.4%8.3%
7.3% 7.6% 7.2%6 2%
9.2%8.6%
6 0%8%
10%
4.5% 4 1% 4.6% 4.7% 4 4% 4 2% 4 4%
5.1%6.2% 5.8% 6.0%
4%
6%
4.5%3.5%
2.8% 3.2% 3.5%4.1% 4.0% 4.4% 4.2% 4.0% 4.4%
3.7% 3.4%
0%
2%Change in Medical CPIChange Med Cost per Lost Time Claim0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Top Concerns/Risks for Insurersif Inflation Is Reignited
ConcernsThe Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Gov’t Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.
What are the potential impacts for insurers?What can/should insurers do to protect themselves from the risks of inflation?
p y y
Rising Claim SeveritiesCost of claims settlement rises across the board (property and liability)
Key Risks From Sustained/Accelerating Inflation
(p p y y)Rate Inadequacy
Rates inadequate due to low trend assumptions arising from use of historical data Reserve Inadequacy
Reserves may develop adversely and become inadequate (deficient)Reserves may develop adversely and become inadequate (deficient)Burn Through on Retentions
Retentions, deductibles burned through more quicklyReinsurance Penetration/Exhaustion
54Source: Insurance Information Institute.
Higher costs risks burn through their retentions more quickly, tapping into reinsurance more quickly and potentially exhausting their reinsurance more quickly
Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E*
14% Tort system is an inflation Tort costs move with inflation
but at twice the rate of inflation
10%
12%
%amplifier
Avg. Ann. Change: 1961-2009E*Tort costs: +8.4%Med costs: +5 9%
8%
10% Med costs: +5.9%Overall inflation: +4.2%
4%
6%
Are there healthcare reform spillover effects?
0%
2%Tort Costs Medical Costs CPI
reform spillover effects?
1961-70 1971-80 1981-90 1991-2000 2001-09E* CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast.Source: U.S. Bureau of Labor Statistics; Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; I.I.I.
Claim Trends in A t IAuto Insurance
Ri i C t H ld i Ch k bRising Costs Held in Check by Falling Frequency:
Can That Pattern Be Sustained?
56
Bodily Injury: Severity Trends Generally Above Decline in Frequency
Annual Change, 2005 through 2009
4.7%5.9% 6.1%
6%
8%
Severity Frequency
2.9%2.1%
0%
2%
4%
-3.8%-3.1% -3.2%-4%
-2%
0%
-5.4%3.8%
-5.0%-6%2005 2006 2007 2008 2009
Cost Pressures Will Increase if Current BI Frequency
57Source: ISO/PCI Fast Track data; Insurance Information Institute
Cost Pressures Will Increase if Current BI Frequency and Severity Trends Continue
Property Damage Liability: Frequency and Severity Trends Nearly Offset in 2009
Annual Change, 2005 through 2009
2.9%3.6%
2.1%3%
4%
Severity Frequency
0.8% 0.6%1.4%
0%
1%
2%
-1.6%
-0.3%
-3%
-2%
-1%
-3.5% -3.4%-4%2005 2006 2007 2008 2009*
Favorable Severity/Frequency Trends Keeping PD Costs in
58Source: ISO/PCI Fast Track data; Insurance Information Institute
Favorable Severity/Frequency Trends Keeping PD Costs in Check, But Are TheseTrends Sustainable?
No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse*
Annual Change, 2005 through 2009
5.9%4.7%
6.3% 6.4% 6.4%6%
8%
Severity Frequency
2.4%
0%
2%
4%
-4.8%-5 7%
-2.7%
-6%
-4%
-2%
-5.7%-6.9%-8%
2005 2006 2007 2008 2009*
Multiple States Are Experiencing Severe Fraud and Abuse
59
*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT.Source: ISO/PCI Fast Track data; Insurance Information Institute
Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ
Collision Coverage: Frequency and Severity Trends Have Been Favorable
Severity Frequency
Annual Change, 2005 through 2009
2.3%
3.9%3.1%
3%
4%
5%
y q y
0.7% 0.4%0%1%
2%
-1.8%
3 %
-2.4%-1.6%
-2.3%
4%
-3%
-2%
-1%
-3.5%-4%2005 2006 2007 2008 2009*
The Recession, High Fuel Prices Have Helped Push Down Frequency and Temper Severity But this Trend Will Likely Be
60Source: ISO/PCI Fast Track data; Insurance Information Institute
Frequency and Temper Severity, But this Trend Will Likely Be Reversed Based on Evidence from Past Recoveries
Comprehensive Coverage: Frequency and Severity Trends Favorable in 2009
Severity Frequency
Annual Change, 2005 through 2009
15.5%13.0%
10%
15%
20%
y q y
1.6%0%
5%
10%
-3.1%
-9.8%-6.6%
-1.6%-1.4% -1.4% -2.0%
15%
-10%
-5%
-15%2005 2006 2007 2008 2009*
Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper
61Source: ISO/PCI Fast Track data; Insurance Information Institute
Recession Has Helped Push Down Frequency and Temper Severity, But This Factors Will Weaken as Economy Recovers
Fraud & Abuse in Private Passenger Auto InsurancePassenger Auto InsuranceSk k ti N F lt (PIP) Cl iSkyrocketing No-Fault (PIP) Claim
Costs Are a Major Concern in S l St tSeveral States
62
Average No-Fault Claim Severity, 2009:Q4
89
$50,000MI, NJ, NY and FL currently are the
largest states that have the most severe problems in their no-fault system
$37,
48
$35,000
$40,000
$45,000 problems in their no fault system$1
7,72
7
2 0 6
$20,000
$25,000
$30,000
$8,8
62
$8,6
70
$5,5
17
$5,1
98
$4,8
87
$4,3
27
$4,1
21
$4,0
31
$2,9
98
$2,8
95
$2,9
91
$2,5
51
$2,2
19
$1,7
49$8,1
86
$7,5
38
$6,9
44
$5,000
$10,000
$15,000
$0MI NJ NY DC DE FL MN KY ND HI WA PA OR TX MD KS SC UT MA
Several States Have Severe and Growing Problems With Rampant Fraud
63
g pand Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.
Source: ISO/PCI Fast Track data; Insurance Information Institute.
Increase in No-Fault Claim Severity: 2004-2009*
$32 778$35 000
+34.4% 8.25% annual average compound
growth rate$32,778
$17 198
$24,385
$20 000
$25,000
$30,000
$35,000
+41.7%
+48 5% +18 6%**$17,198
$8,716 $7,524$6,674$5,871
$12,136
$5 000
$10,000
$15,000
$20,000 +48.5% +18.6%**
$0
$5,000
Michigan New Jersey New York Florida
2004 2009
The no-fault systems in MI, NJ, NY and FL are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers
64
*2009 figure is for the 4 quarters ending 2009:Q4.**Since 2006 the increase in Florida was 17.3% (average severity that year was $6,344). Sources: Insurance Information Institute research from ISO/PCI Fast Track data.
Critical Differences Between P/C Insurers and Banks
Superior Risk Management Model and L L M k Bi DiffLow Leverage Make a Big Difference
65
How P/C Insurance Industry Stability Has Benefitted Consumers
Bottom Line:
Insurance markets – unlike banking – are operating normally
The basic function of insurance – the orderly transfer of risk from li t t i ti i t t dclient to insurer – continues uninterrupted
This means that insurers continue to:Pay claims (whereas 246 banks have gone under as of 5/28/10)y ( g )
– The promise is being fulfilledRenew existing policies (banks are reducing and eliminating lines of credit)W it li i (b k t i l d b i hWrite new policies (banks are turning away people and businesses who want or need to borrow)Develop new products (banks are scaling back the products they offer)Compete intensively (banks are consolidating reducing consumer choice)
66
Compete intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute
Reasons Why P/C Insurers Have Fewer Problems Than Banks
Emphasis on Underwritingf ( )
A Superior Risk Management Model
Matching of risk to price (via experience and modeling)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk
Strong Relationship Between Underwriting and Risk BearingI l i i k i h b i h d i k i “ ki i hInsurers always maintain a stake in the business they underwrite, keeping “skin in the game” at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences – straightforward moral hazard problem from Econ 101
Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry
Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid
Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds private equity complex securitized instruments credit derivatives – CDS’s)
67
funds, private equity, complex securitized instruments, credit derivatives – CDS s)
Greater TransparencyInsurance companies are an open book to regulators and the public
Source: Insurance Information Institute
Obama Administration Proposal to Scale Back Terrorism Risk Insurance Program
Administration’s Budget Proposal for FY 2011:
I l d l t l b k f d l t f t i i k
5Includes proposal to scale back federal support for terrorism risk insurance program
Proposal projects savings of $249 million from 2011-2020j g
Administration’s justification is that this would “encourage the private sector to better mitigate terrorism risk through other means, such as developing alternative reinsurance options and building saferdeveloping alternative reinsurance options and building safer buildings.”
Key Concerns Among Industry Observers Over Proposed Reduction in Federal Support
S ti f h t l ld h d t i t l ff tSuggestion of changes to law would have detrimental effect on availability and affordability of terrorism insurance
A 2009 Aon study estimated some 70-80 percent of the commercial
68Source: Budget of the U.S. Government Fiscal Year 2011
property insurance market would revert to absolute exclusions for terrorism, if TRIA is changed.
Terrorism: Insurance Concerns Resurface
Reasons Why Concerns Are Mounting in 2010
Perception (Reality) that U.S. vulnerability is risingThwarted Christmas Day attack by “underwear bomber”
And new bin Laden tape claiming al Qaeda is responsibleAnd new bin Laden tape claiming al Qaeda is responsibleFoiled NYC Subway Bomber Plot (Zazi case)Failed Times Square Car Bombing on May 1Trials of Guantanamo 9/11 suspects in Manhattan Court (?)U.K. in January Raised Terror Alert Status to 2nd Highest LevelIncreased anti-terror efforts, including full-body scans, g yEffort by government to appear more vigilant, preparedRise of groups such al Qaeda in the Arabian PeninsulaU S military surge in Afghanistan operations
69
U.S. military surge in Afghanistan operationsMost buyers/producers haven’t thought about coverage recentlyObama Administration’s Intent to Reduce Support for TRIA
2010 Property and Casualty InsuranceReport Card
ME
NH
ND
MN
WA
AL
VTMT
AK
B-B-
B
C -
AB
F NH
MA
CT
PA
NE
MN
MI
IL
IA
IDOR
NJRI C
DE
NY
MD
SD WI
INOH
NV
WY
= A= B= C= D
A-
B-
B
B-B-
B-
B- C-A
B+B+
BB
C+
C+
C
D+F
WVVA
NC
OK
IL
AZSC
TN
ARNM
KYMOKS
IN
CA
NV
UTCO
D= F= NG
A- A-
B-B-
B
B-
B-
B-C-
C-
D-D-
AB
B
C+
D+D+D
Source: James Madison Institute, February 2008.
LATX
HI GAAL
FL
MS
NM
B- B-B-C-
C-A B+ BNG
NGN t G d d Di t i t f C l bi
Source: Heartland Institute, May 2010
D FNot Graded: District of ColumbiaMississippiLouisiana
Shifting Legal Liability & g g yTort Environment
Is the Tort PendulumSSwinging Against Insurers?
71
Important Issues & Threats Facing Insurers: 2010–2015
Emerging Tort Threat
No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration
Erosion of recent reforms is a certaint (alread happening)Erosion of recent reforms is a certainty (already happening)
Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability
T t t i th ll t f i fl tiTorts twice the overall rate of inflation
Influence personal and commercial lines, esp. auto liability
Historically extremely costly to p/c insurance industry
Bottom Line: Tort “crisis” is on the horizon and will be
Leads to reserve deficiency, rate pressure
72Source: Insurance Information Institute
Bottom Line: Tort crisis is on the horizon and will be recognized as such by 2012–2014
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$300 2.50%Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
$250
2.25%
To
y
$150
$200
stem
Cos
ts
2.00%
ort Costs as
$100Tort
Sys
1.75%
% of G
DP
2009–2010 Growth in Tort
$0
$50
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E1.50%
2009 2010 Growth in Tort Costs as % of GDP is Due in
Part to Shrinking GDP
73
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E
* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
The Nation’s Judicial Hellholes: 2010
West VirginiaIllinoisCook County
Watch List
California
New York City
AlabamaMadison County, ILJefferson County, MSTexas Gulf CoastTexas Gulf CoastRio Grande Valley, TX
Dishonorable Mention
AR Supreme CourtMN Supreme Court
S C
New JerseyAtlantic County (Atlantic City)
New MexicoAppellate
ND Supreme CourtPA GovernorMA Supreme Judicial Court
74Source: American Tort Reform Association; Insurance Information Institute
South Florida
Appellate CourtsSacramento County
Average Jury Awards 1999 - 2008
$1,200
$1,018 $1,022$1,077
$1,046
$1 000
$1,100
$800 $799
$950
$900
$1,000
$725 $747 $756$800 $799
$700
$800
$500
$600
$5001999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Jury Verdict Research; Insurance Information Institute.
Avg. Jury Awards 1999 vs. 2003 and 2008
$7,000
$4,8
38
64 $4,8
85$5,4
46
$5 000
$6,000
38 $2,8
87
$
$4,1
$3,4
99
$3,7
17
$3,7
22
$
$
$4,000
$5,0001999 2003 2008
44 9
$2,3 $
99 901
1,04
6
49$2,000
$3,000
$64
$201 $5
89$79
$208
$9$
$327 $8
$0
$1,000
Overall Vehicular Premises Wrongful Medical ProductsOverall Vehicularliability
Premisesliability
Wrongfuldeath*
Medicalmalpractice
Productsliability
*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.
Sum of Top 10 Jury Awards 2004-2009
$6,000
$5,159$5,000
$2,954$3,000
$4,000
$1,344 $1,511$2,000
$3,000
$815$616
$0
$1,000
$02004 2005 2006 2007 2008 2009
Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009 and 2010.
Financial Strength & RatingsFinancial Strength & Ratings
Industry Has Weathered the Storms Well
78
P/C Insurer Impairments, 1969–2009p
60 5860
70 5 of the 11 are Florida companies (1 of these
5 is a title insurer)
649 50 48
55
541
49 5047
40
50
6034
19 6
36
3134
296
3118 19
351820
30
40
815
127
11 9 913 12
19
16 14 13
1 612
1 1 114 15
711
5
0
10
20
0
69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09p
The Number of Impairments Varies Significantly Over the P/C Insurance
Source: A.M. Best; Insurance Information Institute.
p g yCycle, With Peaks Occurring Well into Hard Markets
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009p
115
120
1.8
2.0Combined Ratio after Div P/C Impairment Frequency
110
115
Rat
io
1.2
1.4
1.6
Impair
100
105
Com
bine
d
0.6
0.8
1.0
rment R
ate
90
95
0 0
0.2
0.4
0.6
2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969
90
69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* 0.0
g
Impairment Rates Are Highly Correlated With Underwriting Performance
80*Combined ratio of 101.7 is through Q3:09; 0.36% 2009 impairment rate is III estimate based on preliminary A.M. Best data.Source: A.M. Best; Insurance Information Institute
p g y gand Reached Record Lows in 2007/08
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009
Despite financial market turmoil and a soft market
in 2009, 76% of ratings ti b A M B t
11 9%
actions by A.M. Best were affirmations;
just 2.9% were downgrades and 3.2%
were upgradesOther – 216
3.8%2.4%
11.9%75.7%
were upgrades
Affirm – 1,375
Initial 44Under Review – 69
2.9%3.2%
Downgraded –53
Upgraded – 59Initial – 44
P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses
81
.Source: A.M. Best.
pAre Anticipated in the Industry’s Risk Management Strategy
Reasons for US P/C Insurer Impairments, 1969–2008
Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.
Investment Catastrophe Losses Play a Much Smaller Role
3.7%4 2%
Investment Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Mi
Sig. Change in Business
4.2%9.1%
7.0% 38.1% Deficient Loss Reserves/In adequate Pricing
Investment Problems
Misc.
7.9%
38.1% In-adequate Pricing
Affiliate Impairment
7.6%
8.1% 14.3%Catastrophe Losses
82Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Rapid GrowthAlleged Fraud
P/C Insurance Financial Performance
A Resilient Industry in Challenging Times
83
ProfitabilityProfitability
Historically Volatiley
84
P/C Net Income After Taxes1991–2009 ($ Millions)
,496
65,7
77
$70 000
$80,000 2005 ROE*= 9.6%2006 ROE = 12.7%
P-C Industry profits for full-year 2009 were up sharply from 2008, but are still well
below pre crisis levels
19
$62$6
44,1
55
501
$50,000
$60,000
$70,000 2007 ROE = 10.9%2008 ROE = 0.3%2009 ROAS1 = 5.8%
below pre-crisis levels
78 ,316
0,59
8
$24,
404 $3
6,81
$30,
773
1,86
5
$30,
029
$28,
311$4
0,55
9
$38,
5
$30,000
$40,000
$50,000
$14,
17
$5,8
40
$19,
$10,
870 $20 $ $2
$3,0
46
$3,0
43
$20
$10,000
$20,000
$ $
-$6,970-$10,000
$0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.3% ROAS for 2009 and 4.4% for 2008. 2009 net income was $34.5 billion and $20.8 billion in 2008 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute
ROE: P/C vs. All Industries1987–2009*
20%P/C Profitability is
Cyclical and Volatile Katrina,
(Percent)
15%
y at a,Rita, Wilma
%
10%
Hugo
Sept. 11
0%
5%g
Andrew
Northridge
Lowest CAT Losses in 15 Years
4 Hurricanes
Fi i l
-5%87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
US P/C Ins rers All US Ind stries
Northridge Financial Crisis*
86
* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.
US P/C Insurers All US Industries
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2009*
18%The P/C Insurance Industry Fell WellShort of Its Cost of Capital in 2008/09
(Percent)
12%
14%
16%p
6%
8%
10%
ts
-1.7
pts
+2.3
pts
0 pt
s
-6.4
pts
-3.2
pts
2%
4%
6%
-13.
2 pt -9.0 -
US P/C Insurers Missed Their Cost of Capital by an Average 6 7 Points from 1991
The Cost of Capital is the Rate of Return Insurers Need to
-2%
0%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09*
Capital by an Average 6.7 Points from 1991 to 2002, but On Target or Better 2003-07,
but Fell Well Short in 2008/09
Insurers Need to Attract and Retain
Capital to the Business
87
* Return on average suplus in 2008/09 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute
ROE Cost of Capital
Median ROE for Insurers vs. Financial Firms & Other Key Industries 2009(Profits as a % of Stockholders’ Equity)
21%Food Consumer Products
14%14%
19%21%21%Food Consumer Products
PharmaceuticalsComputers, Office Equip.
Health Insurance & Mgd. CareSpecialty Retailers
9%9%
10.5%12%
14%Specialty RetailersEnergy
All IndustriesDiversified FinancialsT l i ti
Stock P/C insurers earned a 7% ROE in 2009, below the
10 5% d b th9%9%
7%7%
TelecommunicationsUtilities
P/C Insurance (Stock)L/H Insurance (Stock)
10.5% earned by the Fortune 500 as a whole and well below health insurers’ 14%. P/C Mutuals’ average
ROE was 3 5%5%4%
0%3.5%
EntertainmentCommercial Banks
P/C Insurance (Mutual)*L/H Insurance (Mutual)
ROE was 3.5%.
Commercial bank ROE was 4% in 2009
88Source: Fortune, May 3, 2010; Insurance Information Institute.
$0 $0 $0 $0 $0 $0
A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 is Where It’s At NowCombined Ratio / ROE
15.9%110 18%
Combined ratio of about 100 generated a 6% ROE in 2009, 10%
in 2005 and16% in 1979
97.5100.6 100.1 100.7
99.3101.0
9 6%
5 9%14.3%
12.7%
100
105
12%
15%
92.6 7.3%
9.6%
8.9%90
95
6%
9%
4.4%
80
85
1978 1979 2003 2005 2006 2008* 2009*0%
3%
1978 1979 2003 2005 2006 2008* 2009*
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s Depressed
* 2009/2008 figures are return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data
Investment Environment to Generate Risk Appropriate ROEs
P/C Premium GrowthP/C Premium GrowthPrimarily Driven by the
I d t ’ U d iti C lIndustry’s Underwriting Cycle, Not the Economy
90
Strength of Recent HardMarkets by NWP Growth
25%
(Percent)1975-78 1984-87 2000-03
Good News
15%
20%
Good NewsP/C insurance
industry should see positive
growth in 2011
10%
15% growth in 2011 for the first time
since 2006
0%
5%
Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) b 2 0% in 2008 and 3 7%
-10%
-5%
1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 F
Decline Since 1943) by 2.0% in 2008, and 3.7% in 2009, the First 3-Year Decline Since 1930-33
During the Great Depression. Expected decline of 1.6% in 2010.
91
7 72 73 74 75 76 77 78 79 80 8 8 2 83 84 85 86 87 88 89 90 9 9 2 93 94 95 96 97 98 99 00 0 0 2 03 04 05 06 07 08 09 10F
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Average Expenditures on Auto Insurance
$950
$830 $842 $831$816 $816
$844
$878
$850
$900
$705$726
$786$816
$795$816
$703$750
$800
$651$668
$691$705
$690$685$703
$650
$700
$60094 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10*
Countrywide Auto Insurance Expenditures Increased
92
Countrywide Auto Insurance Expenditures Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)
* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
Monthly Change in Auto Insurance Prices*
(Percent)
6%
Auto Insurance Price Increases Seem to Have Leveled Off in Recent Months,
Averaging 4.5% for All of 2009
% .7% 4.0%
4.0% 4.
3% 4.4% 4.
7%4.
4% 4.7%
4.6% 4.7%
4.5% 4.6%
4.5% 4.
7%
4%
5%
%2.
6%2.
6% 2.7% 3.
0% 3.1% 3.
4 % 3.
3%
4%
0.8%
0.8%
0.5%
0.4%
0.3%
0.3% 0.
5% 0.6%
0.5%
1% 0.5% 0.
9% 1.1% 1.
3% 1.7%
2%
1%
2%
0 0 0 0.1 0.
0%
Jan
07eb
07
Mar
07
Apr
07
May
07
Jun
07Ju
l 07
Aug
07
ep 0
7O
ct 0
7N
ov 0
7D
ec 0
7Ja
n 08
eb 0
8M
ar 0
8A
pr 0
8M
ay 0
8un
08
Jul 0
8A
ug 0
8ep
08
Oct
08
Nov
08
Dec
08
Jan
09eb
09
Mar
09
Apr
09
May
09
Jun
09Ju
l 09
Aug
09
ep 0
9O
ct 0
9N
ov 0
9D
ec 0
9
93
* Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
J F M A M J J A S O N D J F M A M Ju J A S O N D J F M A M J J A S O N D
Average Premium forHome Insurance Policies**
$950
$822 $835$854
$879
$804$764$800
$850
$900
$668
$764$729
$6 0
$700
$750
$
$508$536
$593
$550
$600
$650
$508$500
00 01 02 03 04 05 06 07 08* 09* 10*
94
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2010)
Q04
Q04
Q04
Q04
Q05
Q05
Q05
Q05
Q06
Q06
Q06
Q06
Q07
Q07
Q07
Q07
Q08
Q08
Q08
Q08
Q09
Q09
Q09
Q09
Q10
(Percent)-0
.1%
-2%
0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
Magnitude of Price Declines Shrank
During Crisis,
-3.2
%% -4
.6%
-2.7
%-3
.0%
3% .1%
4.9% % 6% 3%-6%
-4%
During Crisis, Reflecting Shrinking
Capital, Reduced Investment Gains,
Deteriorating Underwriting
-5.9
%-7
.0%
4% 7%-8
.2%
-
-5.
6%
-6.4
% -5 -4-5
.8%
-5.6 -5.
-10%
-8%
Underwriting Performance, Higher
Cat Losses and Costlier Reinsurance
-9.
-9.7
-9.6
-11.
3%-1
1.8%
.3% -12.
0%5% 2.
9% -11.
0%
-14%
-12%
KRW Eff t
Market Remains Soft as Capital
95
-13
-13. -1
2-16%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effectp
Restored and Underwriting Losses Fall
Change in Commercial Rate Renewals, by Line: 2010:Q1Percentage Change (%)
n
All Com
mercial
Comml P
ropGL Umbre
llaCom
ml Auto
Constr
uctio
nW
C
Bus. In
terrup
tion
EPL
D&O
Surety
0.4%
-1.0%
0.0%
1.0%
-3.9%
-2.9% -2.5%-2.1%
4 4%-3.9%
-4.0%
-3.0%
-2.0%
Most Major Commercial Lines Renewed Down in Q1:2010 by
-5.3% -5.4%-5.0%
-4.6% -4.4%
-6.0%
-5.0%
96Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
j yRoughly the Same Margin as a Year Earlier
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q1Percentage Change (%)
Market has Been Soft for 6 years
Peak = 2004:Q4 +28.5%
Pricing Turned Soft for 6 years and Remains Soft
as Capital is Restored and Underwriting Losses Fall
Pricing Turned Negative in Early
2004 and Has Been Negative
Ever SinceLosses Fall
KRW Effect
Trough = 2007:Q3 -13.6%
97Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q1
1999:Q4 = 100
Pricing today is where is was inwhere is was in
Q4:2000 (pre-9/11)
98Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Merger & AcquisitionMerger & Acquisition
Barriers to Consolidation Will Diminish in 2010
99
U.S. P/C Insurance-RelatedM&A Activity, 1988–2009
$56$60 140Transaction Values
$35$40
$40
$50
($ B
illio
n)
100
120
Num
be
Number of Transactions
$19 $20
$35
$16
$31
$20
$30
ctio
n Va
lue
60
80
er of Transa
$2$5
$1 $0 $0
$9$14
$16
$4$8
$12
$2$3 $3 $5$6
$10
$20
Tran
sac
20
40
ctions
$$0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090
2010: No Mega Deals So Far, Despite Record Capital Slo Gro th and Impro ed$ Value of Deals Down 78%
100
Note: U.S. Company was the acquirer and/or target.Source: Conning Research & Consulting.
Record Capital, Slow Growth and Improved Financial Market Conditions
$in 2009, Volume Up 7%
Capital/Policyholderp ySurplus (US)
Shrinkage, but Not Enoughto Trigger Hard Market
101
US Policyholder Surplus:1975–2009*
$550
($ Billions)
Surplus as of 12/31/09 was $511.5B, up from $437 1B as of 3/31/09 Recent peak was $521 8
$
$400
$450$500
$437.1B as of 3/31/09. Recent peak was $521.8 as of 9/30/07. Surplus as of 12/31/09 is now
only 2.0% below 2007 peak; Crisis trough was as of 3/31/09 16.2% below 2007 peak.
$200
$250$300
$350
“Surplus” is a measure of
$50$100
$150
$200 underwriting capacity. It is analogous to “Owners
Equity” or “Net Worth” in non-insurance organizations
$0
$
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09*
organizations
The Premium-to-Surplus Ratio Stood at $0.82:$1 as of
* As of 9/30/09Source: A.M. Best, ISO, Insurance Information Institute.
The Premium to Surplus Ratio Stood at $0.82:$1 as of12/31/09, A Record Low (at Least in Recent History)
Policyholder Surplus, 2006:Q4–2009:Q4($ Billions)
$521 8 $$540
Capacity Peaked at $521.8 as of 9/30/07
Capacity as of 12/31/09 was just 2.0% below the 2007 peak and will likely
set a new record in
$487.1$496.6
$512.8$521.8
$478.5$463 0
$490.8
$511.5$505.0$515.6$517.9
$480
$500
$520set a new record in
2010
$455.6$437.1
$463.0
$420
$440
$460
$380
$400
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
Declines Since 2007:Q3 Peak
08:Q2: -$16.6B (-3.2%) 08:Q3: $43 3B ( 8 3%)
09:Q2: -$58.8B (-11.2%)09:Q3: $31 8B ( 5 9%)
103Source: ISO, AM Best.
08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%)09:Q1: -$84.7B (-16.2%)
09:Q3: -$31.8B (-5.9%)09:Q4: -$2.5B (-0.5%)
Global Reinsurance Capacity Shrankin 2008, Mostly Due to Investments
Global Reinsurance Capacity Source of Decline
$360
$350
$370 RealizedCapitalLosses
$310
$33031%
$300
$290
$310 55% 14%
Change inUnrealizedCapital Losses
Hurricanes
$2702007 2008
Global Reinsurance Capacity
Capital Losses
104Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.
Global Reinsurance CapacityFell by an Estimated 17% in 2008
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
18%
The Financial Crisis at its Peak Ranks as the Largest
“Capital Event” Over
(Percent)
13.8%
16.2%
15%
18% pthe Past 20+ Years
9.6%
6.9%
10.9%
6 2%
9%
12%
3.3%
6.2%
3%
6%
0%6/30/1989Hurricane
Hugo
6/30/1992HurricaneAndrew
12/31/93NorthridgeEarthquake
6/30/01 Sept.11 Attacks
6/30/04Florida
Hurricanes
6/30/05Hurricane
Katrina
FinancialCrisis as of3/31/09**
105
* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute
Hugo Andrew Earthquake Hurricanes Katrina 3/31/09**
Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*
30%
(Percent)Surplus growth is now positive but premiums
continue to fall, a departure from the historical pattern
15%
20%
25%p
0%
5%
10%
15%
-10%
-5%
0%
-15%78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E10P
NWP % change Surplus % change
Sharp Decline in Capacity is a Necessary but
106
* 2009 NWP and Surplus figures are % changes as of Q4:09 vs Q4:08Sources: A.M. Best, ISO, Insurance Information Institute
Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market
Investment PerformanceInvestment Performance
Investments Are a PrincipleS f D li i P fi biliSource of Declining Profitability
107
Property/Casualty Insurance Industry Investment Gain: 1994–20091
$64.0$70
($ Billions)
$42.8$47.2
$52.3
$44.4 $45.3$48.9
$59.4$55.7
$39 0
$58.0$51.9
$56.9
$50
$60
$35.4 $36.0$31.7
$39.0
$20
$30
$40
$0
$10
$20
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09P
Investment Gains Fell by 50% In 2008 Due to Lower Yields,Poor Equity Market Conditions. In 2009, the Lower Realized Capital Losses
Helped Offset Lo er In estment IncomeHelped Offset Lower Investment Income1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
P/C Insurer Net Realized Capital Gains, 1990-2009
1 18.0
2
02 6.21
($ Billions)$2
.88
$4.8
1 $9.8
9
$9.8
2
$10.
81 $1
$13.
0
$16
$6.6
3
$6.6
1
$9.1
3
$9.7
0
$3.5
2 $8.9
2
$9.2
4
$6.0
0
$1.6
6
$0$5
$10$15$20
-$1.
21
-$7.
98
$20-$15-$10-$5$0
-$19
.81
-$25-$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09Q3
Realized Capital Losses Hit a Record $19.8 Billion in 2008 Due to Financial Market Turmoil, a $27.7 Billion Swing From 2007,
109Sources: A.M. Best, ISO, Insurance Information Institute.
Followed by an $8.0B Drop in 2009. This is a Primary Cause of 2008/2009’s Large Drop in Profits and ROE
Treasury Yield Curves: Pre-Crisis (July 2007) vs. May 2010*
4 82% 4.96% 5.04% 4.96% 4 82% 4 82% 4 88% 5.00% 4 93% 5.00% 5.19%6%
3 31%
4.82% 4.96% 4.96% 4.82% 4.82% 4.88% 4.93%
4.22%4.05%4%
5%
Treasury yield curve is near its most depressed level in at
2.75%
3.31%
2.10%2%
3%
most depressed level in at least 45 years. Investment
income is falling as a result
0.15% 0.16% 0.22% 0.34%0.76%
1.26%
1%
2%
April 2010 Yield Curve*Pre-Crisis (July 2007)
0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Stock Dividend Cuts Have Further Pressured Investment Income
110
Stock Dividend Cuts Have Further Pressured Investment Income
*Week ending May 24, 2010.Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*, y
l Line
sAutop cia
lAuto Prop Cas Sure
tyy Lin
es
nce*
*
1 0%0.0%
Person
al L
Pvt Pas
s APers
Prop
Commerc
iCom
ml Au
Credit
Comm P
roCom
m Ca
Fidelity
/Su
Warr
anty
Surplus
LiMed
Mal
WC
Reinsu
ran
-3.1%-3.3%-3.3% 3 7%
-1.8%-1.8%-2.0%
-3 6%
-1.9%-2.1%
-4.0%-3.0%-2.0%-1.0%
-3.7%-4.3%
-5.2%-5.7%
-3.6%
-7.0%-6.0%-5.0%
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
-7.3%-8.0%
111
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance only.Source: A.M. Best; Insurance Information Institute.
Underwriting and Pricing Discipline
Distribution of P/C Insurance Industry’s Investment Portfolio
Portfolio Facts As of December 31, 2008
Invested assets totaled $1.214 trillion as of 12/31/08
68.4%
Bonds
Insurers are generally conservatively invested, with more than 2/3 of assets invested in bonds as of
68.4%
12/31/08
Only about 15% of assets were invested in common stock
f 12/31/08 8 0%14.8%6.1%
P f d St k
Other
as of 12/31/08
Even the most conservative of portfolios was hit hard in 2008
8.0%
0.9%1.8% Common
StockReal Estate
Cash and Short-term
Investments
Preferred Stock
112Sources: NAIC; Insurance Information Institute research.
Underwriting Trends –Underwriting Trends Financial Crisis Does Not
Directly Impact UnderwritingDirectly Impact Underwriting Performance: Cycle, Catastrophes
Were 2008’s DriversWere 2008’s Drivers
113
P/C Insurance Industry Combined Ratio, 2001–2009*
Best C bi d
As Recently as 2001, Insurers Paid Out
Relatively Low CAT C li l
2005 Ratio Benefited from H U f Combined
Ratio Since 1949 (87.6)
Insurers Paid Out Nearly $1.16 for Every
$1 in Earned Premiums
Low CAT Losses, Reserve Releases
Cyclical Deterioration
Heavy Use of Reinsurance
Which Lowered Net Losses
115.8120
99 3101.0100.8100.1
107.5110
95.7
99.3
92.6
98.4
90
100
114
* Excludes Mortgage & Financial Guaranty insurers in 2008/2009. Including M&FG, 2008=105.0, 2009=101.0 Sources: A.M. Best, ISO.
902001 2002 2003 2004 2005 2006 2007 2008 2009
Underwriting Gain (Loss)1975–2009*
$
$35 Cumulative underwriting deficit f 1975 th h
($ Billions)
$5
$15
$25 from 1975 through 2009 is $445B
-$25
-$15
-$5
$55
-$45
-$35
$ 5
The industry “improved” as of 2009:Q3 to an underwriting loss of $3.1 billion, compared to a
loss for all of 2008 of $21.2 billion.
Large Underwriting Losses Are NOT Sustainable
-$55
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
* Includes mortgage and financial guarantee insurers.Sources: A.M. Best, ISO; Insurance Information Institute.
in Current Investment Environment
P/C Reserve Development, 1992–2011E
23.2
$20
$25
$30
e ($
B)
6
8 Impact o
Prior Yr. ReserveDevelopment ($B)
I t
2.3 1
11.7 13.79.9
7.3$5
$10
$15
$
rve
Rel
ease
2
4
on Com
bine
Impact onCombined Ratio
-2.1
-8.3
-2.6-6.6
-9 9 -9 8
-4.1
1
-6.7-9 5
-5-$10
-$5
$0
ior Y
r. R
ese
4
-2
0
ed Ratio (Po-9.9 -9.8 9.5
-14.6-16 -15-$20
-$15
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
10E
11E
Pri
-6
-4
oints)
1 1
Reserve Releases Will Expected to Taper Off in 2010 and Drop Significantly in 2011
116
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. Sources: Barclay’s Capital; A.M. Best.
Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1
.1 115.
9
114.
7
1.8
2 2 .0 2.3
4115.
7
4115
120
105.
6
107.
8
110.
107.
3
100.
1
8.3 10
0.9 10
5.1
101.
9 105.
9
1
107.
8 11
107.
4
108.
3
105.
3 109.
2
109.
2
110. 11
100.
8
6 0 100.
6
.4
105.
5
105.
7 109.
4
106.
9
108.
4
106.
4
105.
8
101.
6
105
110
115
1 98
92.4 95
.5
96. 6
96.0 1
93.9 97
.
90
95
100
80
85
92 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E
Calendar Year Accident Year
Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases
117
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. Sources: Barclay’s Capital; A.M. Best.
Number of Years with Underwriting Profits by Decade, 1920s–2000s
10
12Number of Years with Underwriting Profits
8
10
76
8
10
3
54
6
4
6
0 00
2
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003
118
* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.
Recorded in the 25 Years from 1979 Through 2003
Performance by Segment:Commercial/Personal Lines &Commercial/Personal Lines &
Reinsurance
119
Calendar Year Combined Ratios by Segment: 2008-2010P
110
Personal lines combined ratio is expected to improve in 2010 while commercial lines
and reinsurance deteriorate
101.0 101.2100.3
103.7
100.599 8
107.2
103.6
102104106108110 and reinsurance deteriorate
92.2
99.8
949698
100
9092
Personal Lines Commercial Lines US Reinsurance
2008 2009E 2010P
Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting
f l t d t th l d i l ft k t
120Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
performance related to the prolonged commercial soft market
Calendar vs. Accident Year Combined Ratios by Segment: 2008-2010P*
106 4108
CY commercial lines combined ratios are lower than AY due to reserve releases
98 6
101.3100.3102.4
106.4104.0
100102104106108
98.6
92949698
100
9092
Commercial Lines-Calendar Year Commercial Lines-Accident Year
2008 2009E 2010P
The ability of reserves releases to favorably impact calendar year results will diminish over time reserved redundancies fall
121
*Normalized to reflect average/typical level of catastrophe losses.Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
After-Tax Return on Surplus (ROE) by Segment: 2008-2010P
7 3% 7 1%8%
Personal lines ROEs should improve in 2010 and remain flat in commercial lines and
i5.3%
7.3%
5.2%
6.6% 7.1%
5.3%
3.9%4%5%6%7%8% reinsurance
1.7%
0%1%2%3%
-1.3%-2%-1%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Profitability will rise or stabilize across most p/c lines, barring a
122Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
y p , gfinancial crisis relapse or major catastrophic losses
Change in Policyholder Surplus by Segment: 2008-2010P
21 0%25%
After a steep decline in capacity during the crisis, most of that capacity was
restored in 2009. Virtually is expected t b t d i 2010
8.0% 7.0%
19.0%
5 0% 6.0%
21.0%
10%15%20%25% to be restored in 2010.
5.0%
10%-5%0%5%
-12.3%-12.1%-11.5%-15%-10%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Rapid growth in policyholder surplus to pre-crisis levels combined with ongoing slow growth or declines in premiums (esp. in
i l li ) i li b ild f it j
123Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
commercial lines) implies a build-up of excess capacity—a major factor in weak commercial lines and reinsurance pricing
Net Written Premium Growth by Segment: 2008-2010P
6%
Personal lines will return to growth in 2010 while commercial lines and reinsurance are
expected to continue to shrink
1.8%3.5%
0%2%4%6%
-1.1% -1.5%
-5.6%
-2.0%-4.0%
-0.7%
8%-6%-4%-2%
-7.9%-10%
-8%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Low catastrophe losses and ample
124Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
gcapacity are holding down reinsurance prices while higher insurer
retentions impact premiums
Change in Net Investment Income by Segment: 2008-2010P*
15%
Net investment income is expected to begin to recover in all segments in 2010
1.9%3.4% 1.9%
10.7%
0%
5%
10%
15%
-4.1%
13 4%
-0.8%
12 8%-15%
-10%
-5%
0%
-16.1%-13.4%-12.8%
-20%
-15%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Investment income consists primarily of interest on bonds and stock dividends. Both were hit hard during the financial crisis as the Fed slashed
interest rates to near zero and corporations cut dividends. A recovery in
125Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
investment asset values beginning in Q2 2009—which reduced realized capital losses—has helped offset some of the decrease in investment income.
Investment Yield by Segment: 2008-2010P*
5 0%
Investment yields are shrinking across all segments—down 10 to 100 bases points since 2008
3 5%3.7%
3.9%3.6%
3.8%3.9%
4.6%
3.8%4.0%
4.5%
5.0%
3.5%3.3%
2.5%
3.0%
3.5%
2.0%Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
The Fed slashed interest rates in 2008 and has kept them low since, eroding the yield on all types of bonds especially US Treasury securities Yields will
126Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
the yield on all types of bonds, especially US Treasury securities. Yields will not recover until the Fed begins monetary policy tightening.
Homeowners Insurance Combined Ratio: 1990–2010P
8.4170
158
77
140
150
160
113.
0
117.
7
113.
6
01.0 10
9.4
108.
2
111.
4 121.
7
109.
3
.3 00.1
7
117.
0
105.
5
105.
0118.
4
112.
7 121.
7
110
120
130
10 98
94.2 10
89.4 95
.7
80
90
100
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Homeowners Line Is Expected to Be Marginally Profitable Overall in 2010, but in Many States Could Be Quite Profitable. Volatility Due to
Catastrophe Losses Will PersistCatastrophe Losses Will Persist
Sources: A.M. Best; Insurance Information Institute.
Private Passenger Auto Combined Ratio: 1993–2010P
9.5
9
115
101.
7
101.
3
101.
3
101.
0
109
107.
9
104.
2
.4 .3 100.
3
9.3 .59.5 101.
1
103.
5
105
110
98.
94.3
95.1
95.5 98
. 1 99 98.99
90
95
100
80
85
90
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industrygg y
Sources: A.M. Best; Insurance Information Institute.
Commercial Multi-Peril Combined Ratio: 1995–2010P
0 8 5.0
2.4 .0130
119.
0
119.
8
08.5
125
116.
2
116.
1
.9 5.4
116.
8
113.
6
115.
3 122
115.
0
117.
0
08.011
3.1
115.
0 121
110115120
1251
104
101.
9
105
95.1 97
.6100.
7
97.3
0
97.7
93.8
.8
10
97.0 99
.5
95100105
110
89.0
83.8
89.
8085
9095
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E* 10P*
Commercial Multi-Peril is Expected to Continue to Perform Reasonably WellPerform Reasonably Well
*2009E and 2010P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.
Commercial Auto Combined Ratio: 1993–2010P
9 8.1
7 2125
112.
1
112.
0
113.
0
115.
9
2.7
118
115.
7
116.
2
110
115
120
102
95.2
92.9
92.1
92.4 94
.2 96.8
97.0 98
.5
95
100
105
9
80
85
90
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Commercial Auto is Expected to Remain Reasonably Profitable in 2010Profitable in 2010
Sources: A.M. Best; Insurance Information Institute.
Inland Marine Combined Ratio: 1999–2010P
101.9105 0 9
92.8
100.2
93.289 9
95
100
83.8
79.5
86.088.5
80.882.5
89.9
80
85
90
77.3
70
75
80
99 00 01 02 03 04 05 06 07 08 09E 10P
Inland Marine is Expected to Remain Among the Most Profitable of All LinesProfitable of All Lines
Sources: A.M. Best; Insurance Information Institute.
Workers Compensation Combined Ratio: 1994–2010P
121.73 8.2125
.0 0
110.
9
110.
0
107.
0
2.7 3.5
04.3 10
9.0
112.
0
107.
0
115.
3
118
110
115
120
102.
97.0 10
0.0
101.
0
102
98.4 10
3
10
95
100
105
80
85
90
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Workers Comp Underwriting Results Are Deteriorating MarkedlyDeteriorating Markedly
Sources: A.M. Best; Insurance Information Institute.
Catastrophic Loss –Catastrophe Losses Trends Are p
Trending Adversely
133
Natural Catastrophes: Jan – Mar 2010Worldmap
4
53
1
6
12The 12 Jan. Haiti
quake killed 225,500 people, caused $8B+ in economic damage, but little in the way of
insured losses
7
8
Chilean earthquake (mag. 8.8) on 27 Feb. produced at least $4 billion in insured losses, $20
billion in economic losses. MostSevere winter weather in the
Eastern US produced insured
Winter Storm Xynthia produced at least $2B in insured
insured losses
Geophysical events(earthquake, tsunami, volcanic activity)
Hydrological events(flood, mass movement)
Global natural catastrophes
billion in economic losses. Most costly insurance event in 2010
plosses of produced at least
$1B in insured losses and $2B in economic losses
least $2B in insured losses and $4B in economic losses
Meteorological events (storm)
Climatological events(extreme temperature, drought, wildfire)
Selection of significant natural catastrophes (see table)
© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 29 March 2010
Natural Catastrophes: January – March 2010Selection of Significant Events
No. Period Event Affected Area
Overall losses*
Insuredlosses* Fatal-
ities*S$US$ m, original values
1 7–12 January Winter damage, cold wave
United States: Midwest (MO, IA); South (AR, LA, OK, TX); Southeast (FL, AL, GA, MS, NC, SC, TN)
800 160 5
2 12 January Earthquake Haiti: South (esp. Port-au-Prince) >8,000 222,500
3 18–22 January Severe storms United States: Southwest (CA, AZ, UT) 180 120 203 18 22 January Severe storms United States: Southwest (CA, AZ, UT) 180 120 20
4 4–6 February Winter storm, blizzards United States: Northeast (DC, DE, MD, NJ, PA); Southeast (NC, VA, WV)
180 135 2
5 9–14 February Winter storm, blizzards, winter damage
United States. Canada 800 560
6 26–28 February Winter storm Xynthia, Belgium. France. Germany. Netherlands. Portugal. 4,500 >2,000 636 26 28 February Winter storm Xynthia, storm surge
Belgium. France. Germany. Netherlands. Portugal. Spain. Switzerland. United Kingdom
4,500 >2,000 63
7 27 February Earthquake, tsunami Chile: Central; South >20,000 >4,000 507
8 6–7 March Hailstorm, severestorms
Australia: Southeast (Victoria) 1,200 780
*Preliminary figures
First Quarter 2010 Insured Major Catastrophe Losses Were Among the Highest on Record for Q1, Totaling at least $7.755 Billion. Economic
L T t l t L t $35 66 M th 223 000 P l W Kill d i
© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 29 March 2010
Losses Total at Least $35.66. More than 223,000 People Were Killed in These Events.
Gulf Coast Near Deepwater Horizon Site
On April 20, 2010, an explosion and p
fire occurred on the offshore drilling rig Deepwater Horizon,
which had been drilling an g
exploratory well in approx. 5,000 ft of water in the Gulf of Mexico, 52 miles SE
of Venice, Louisiana.
The platform subsequently sank,
with 11 crewmemberscrewmembers
presumed dead, and the
uncompleted well leaking oil.
Sources: Energy Information Administration
Announced Deepwater Horizon Insured Losses
$600.0$600
$700
Insured losses are well-syndicated
(Millions)
$400
$500
$600 Insured losses are well syndicated and spread across a broad range of
global insurers and reinsurers.
$200
.0
$100
.0
70.0
3.0
5.0
0.0 .0 .0 .0 .0 .0 0 0 0 0.0$100
$200
$300
$ $7 $5 $45
$40
$30
$25
$25
$20.
$20.
$15.
$15.
$15.
$13.
$8.0
$7.5
$5.0
$20.
$0
$100
oyd's
*ss
Re
Re** erRe
Re***
usRe
Catlin
apita
lau
cer
shire AIG
st Re
er Re
icRe
Amlinox
****
apita
lAXISele
rsrkl
ey
*Lloyd’s estimates net loss to the market of $300 million to $600 million. Includes estimate across all Lloyd’s syndicates. Those syndicates that
Lloy
SwissMun
ich R
Partne
Hanov
er Re
Validu
s CaXL C
apCha
uLa
ncas
AEve
rest
Montpe
lier
Transa
tlanti
c AmHisc
oxArch
Cap A
Trave
W.R. B
erk
137
y y y yhave reported losses individually are also shown in this chart and included in the Lloyd’s total.**Munich Re expects low triple digit million euro loss***Hanover Re expects a Eur40 million loss ****Hiscox expects net claims of below GBP10 million ($14.8 million)Source: Insurance Information Institute (I.I.I.); Company disclosures, SNL Financial Citi research note 05/04/10; Barclays Capital research note 05/10/10
US Insured Catastrophe Losses
$100
.0$120
$100 Billion CAT Year is Coming Eventually($ Billions)
2000 A D d f Di t
$61.
9
$
$80
$100 2009 CAT Losses
Were Down 61% from
2008
2000s: A Decade of Disaster2000s: $193B (up 117%)
1990s: $89B
3 4 0.1
3
$26.
5
2.9 $2
7.5
$
2
$27.
1
0.6
5 $22.
9
16.9
$40
$60$8
.3
$7.4
$2.6 $1
0
$8.3
$4.6
$5.9 $1 $9. 2
$6.7 $10
$7.5
$2.7
$4.7
$5.5 $
$0
$20
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 20??
2009 CAT Losses Were Less than Half of 2008. 2005 Was by Far the Worst Year Ever for Insured Catastrophe
Losses in the Decade of the 2000s Were More than Double the 1990s, But the Worst Has Yet to Come
138
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Insurance Information Institute.
But the Worst Has Yet to Come
Global Natural Catastrophes 1980–2009Overall and insured losses with trend
300MEGATREND
Global natural catastrophe loss trends are ominous and
200
250loss trends are ominous and
portend an even more disastrous decade ahead. Terrorism and other man-
made disasters could
150US$
bn
made disasters could exacerbate the trend.
50
100
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Overall losses (in 2009 values) Insured losses (in 2009 values)Overall losses (in 2009 values) Insured losses (in 2009 values)
Trend insured lossesTrend overall losses
Source: Munich Re NatCatSERVICE; Insurance Information Institute.
U.S. Significant Natural Catastrophes, 1950 – 2009Number of Events ($1+ Bill economic loss and/or 50+ fatalities)
There were 7 Significant Natural Catastrophes in
Sthe United States in 2009
Sources: MR NatCatSERVICE
Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*($ Billions)
$
Texas
$31.20 , 10%
$33.60 , 11%
Louisiana
$176 , 60% $57 10
Rest of US60% $57.10 ,
19%Florida
Florida Accounted for 19% of All US Insured CAT Losses
141
* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
from 1980-2008: $57.1B out of $297.9B
Top 12 Most Costly Disastersin US History(Insured Losses, 2009, $ Billions)
$45 3$50 Hurricane Katrina Remains, By Far, the
$23 8
$45.3
$30$35$40$45$50 Hurricane Katrina Remains, By Far, the
Most Expensive Insurance Event in US and World History
$11.3 $12.5$18.2
$22.8 $23.8
$8.5$8.1$7.3$6.2$5.2$4 2$10$15$20$25$
$5.2$4.2
$0$5
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Northridge(1994)
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
(2001)
8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;
8 f th T 12 Di t Aff t d FL
142Sources: PCS; Insurance Information Institute inflation adjustments.
8 of the Top 12 Disasters Affected FL
Total Value of Insured Coastal Exposure
(2007, $ Billions)
$2,458.6Florida
$635.5$772.8
$895.1$2,378.9
$2,458.6FloridaNew York
TexasMassachusetts
New Jersey $522B Increase$224.4
$191.9$158.8$146 9
$479.9ConnecticutLouisiana
S. CarolinaVirginia
M i
$522B Increase Since 2004,
Up 27%
$146.9$132.8
$92.5$85.6$60 6
MaineNorth Carolina
AlabamaGeorgia
Delaware
In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with
$2.459 Trillion Exposure, an Increase of $522B or 27% from $1.937 Trillion in 2004$60.6
$55.7$51.8$54.1
$14.9
DelawareNew Hampshire
MississippiRhode Island
Maryland
The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004
143Source: AIR Worldwide
$
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
y
US Residual Market Exposure to Loss
$900
Katrina, Rita, and Wilma
($ Billions)
$656.7
$771.9$696.4
$600
$700
$800
$900
4 Florida Hurricanes
$372.3$430.5 $419.5
$292.0$281 8$400
$500
$600Hurricane Andrew
$292.0$244.2$221.3
$281.8
$150.0
$54.7$100
$200
$300
$01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Resid al Market (FAIR & Beach/Windstorm) Plans Has S rged from
144Source: PIPSO; Insurance Information Institute
the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B in 1990 to $696.4B in 2008
Insurance Information Institute Online:
www iii orgwww.iii.org
Thank you for your timed tt ti !and your attention!
Twitter: twitter.com/bob_hartwig_ g
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