Insuring Michigan’s FutureA Look at the Economic lmpact of

the Insurance Industry

Lansing, MIJanuary 25, 2011

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

Presentation Outline

Economic Importance of the Michigan Insurance Industry Property/Casualty, Life/Health Segments Contribution to State Economy Employment & Wages Taxes Paid

Insurance Financial Strength & Stability Performance During and After the “Great Recession” Consumer Benefits

Investment Strategy Conservative Strategies Stability Industry Role as an Institutional Investor

Regulatory and Legislative Issues Q&A

3

Direct Premiums Written, Michigan,Property/Casualty and Life/Health Insurance, 2000-2009 ($ Billions)

(1) Includes life insurance, annuities, deposit type contracts, and other considerations. Does not include accident and health.

Source: SNL Financial LC.

$1

5.3

$1

4.7

$1

4.2

$1

3.7

$1

3.9

$1

3.4 $1

4.8

$1

4.6

$1

5.5

$1

6.0

$1

6.0 $1

7.2

$1

7.2

$1

5.8

$1

1.9 $1

3.2 $

14

.9

$1

5.7

$1

6.1

$1

6.0

$5

$10

$15

$20

00 01 02 03 04 05 06 07 08 09

P/C L/H (1)

Michigan insurers (p/c, life, health) wrote $29.5 billion in premiums in 2009, up $3.7 billion or 14.3% from $25.8 billion in 2000,

generating $257.6 million in premium taxes.

4

Top 10 States: P/C Insurance Premiums Written, 2009

$34.9

$13.2 $11.9

$19.1

$36.4

$13.7$16.4

$20.5

$35.7

$55.4

$0

$10

$20

$30

$40

$50

$60

CA TX FL NY IL PA NJ MI GA NC

Sources: SNL Financial; Insurance Information Institute.

$ BillionsMichigan is the 8th biggest p/c premium generating state. It’s size makes it very important to property/casualty insurers,

generating $13.7 billion in direct premiums written in 2009, about 3% of the US total

5

Premium Taxes Paid by P/C, L/H Insurers Operating in Michigan, 2000-2009 ($Mill)

$219.5 $223.8 $223.2

$257.6

$191.9$200.8

$227.1 $231.1 $230.3

$249.5

$150

$175

$200

$225

$250

$275

00 01 02 03 04 05 06 07 08 09

Insurers operating in Michigan (no matter where they are domiciled) paid a record $257.6 million in premium taxes in 2009,

up $65.6 million or 34.2% from 2000.

Source: U.S. Department of Commerce, Bureau of the Census; Insurance Information Institute.

6

Cumulative Premium Taxes Paid by P/C, L/H Insurers Operating in Michigan, 2000-2009 ($Mill)

$1,551$1,775

$1,998

$2,256

$192$393

$620

$851$1,081

$1,331

$0

$500

$1,000

$1,500

$2,000

$2,500

00 01 02 03 04 05 06 07 08 09

Insurers operating in Michigan (no matter where they are domiciled) paid

a total of $2.256 billion in premium taxes from 2000 through 2009

Source: U.S. Department of Commerce, Bureau of the Census; Insurance Information Institute.

7

Percent Change in Michigan State Tax Receipts by Type, 2009 vs. 2008

15.4%

-0.4%

-17.1%

-9.4%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Personal IncomeTax

Corporate IncomeTax

Sales Tax InsurancePremium Taxes

Personal Income Tax Corporate Income Tax Sales Tax Insurance Premium Taxes

Premium taxes are an important and relatively stable source of state tax revenue, especially in difficult economic times

Most types of state tax receipts crashed during the recession contributing to the state’s fiscal crisis—

but premium tax receipts actually increased

Source: Rockefeller Institute; U.S. Department of Commerce, Bureau of the Census; Insurance Information Institute.

8

Unemployment Rates by State, December 2010:Highest 25 States*

9.5

9.59.7

9.5

9.6

9.6

9.3

9.19.3

8.89.

4

9.0

9.19.4

10.611

.5

9.810

.1

10.2

10.3

10.7

12.5

12.0

11.7

14.5

0

2

4

6

8

10

12

14

16

NV CA FL MI RI SC OR KY GA MS NC DC WV OH MO IN ID TN AZ WA IL NJ AL CT CO

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for December 2010, seasonally adjusted.

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

Michigan’s unemployment rate was 11.7%--the 4th highest in the country—in December 2010 compared to 9.4% for the US overall. This is down from more than 15% in 2009,

when it ranked 1st for many months.

9

6.7

6.4

6.3

5.8

6.8

6.87.

37.

4

4.44.6

5.5

7.07.2

3.8

6.4

8.1

8.2

7.5

7.57.

98.08.28.

5

8.5

8.38.

5

0

2

4

6

8

10

PA NM DE TX NY MA AK LA AR WI UT MD ME MT MN OK KS VA WY HI IA VT NH SD NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, December 2010: Lowest 25 States*

*Provisional figures for December 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In December, state and regional unemployment rates were little changed.

Some 31 states and DC reported unemployment rate decreases from a

year earlier, 16 states had increases and 3 had no change.

10

Gross State Product Attributable to Insurance Carriers in Michigan,* 2000-2008 ($ millions)

$7,661

$9,997

$11,789

$14,336$13,673

$14,518

$5,434 $5,931 $6,099

$7,317 $7,257 $7,147

$0

$5,000

$10,000

$15,000

97 98 99 00 01 02 03 04 05 06 07 08

The economic contribution of Michigan’s insurance industry totaled

$14.5 billion in 2008—increasing despite the financial crisis and

Michigan’s deep recession.

$ Billions

Michigan insurers (p/c, life, health) accounted for 3.8% of

state economic activity in 2008

*Includes “Insurance Carriers and Related Activities.”Source: U.S. Department of Commerce, Bureau of Economic Analysis; Insurance Information Institute.

11

Share of Michigan Gross State Product Attributable to Insurance Carriers,* 1997-2008

2.1%

2.7%

3.1%

3.8%3.5%

3.8%

1.9% 2.0% 1.9%2.2% 2.2%

2.0%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

97 98 99 00 01 02 03 04 05 06 07 08

The economic contribution of Michigan’s insurance industry has

doubled since 1997, increasing from 1.9% of state GDP to 3.8%

Michigan’s insurers are more vital to the state’s economy than they have ever been in

history

*Includes “Insurance Carriers and Related Activities.”Source: U.S. Department of Commerce, Bureau of Economic Analysis; Insurance Information Institute.

12

Growth in Michigan GDP vs. Insurance Component* of Economy, 1998–2008

0.1%2.8%

-1.5%

7.2%

30.5%

17.9%

21.6%

4.2%4.4%

6.4%

-1.4%

3.0%0.4%2.8%0.9%3.0%

4.3%

20.0%

9.1%

-4.6%

6.2%

-0.8%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

98 99 00 01 02 03 04 05 06 07 08

Change in Michigan GDP Change in Insurance Component of MI GDP*

Average 1998-2008MI GDP = 2.5 %

Insurance Share of GDP = 9.9%

Between 1998 and 2008, the insurance component of

Michigan’s economy grew nearly 4 times faster on average than the

state economy overall, exceeding state growth in 7 of 11 years

*Includes “Insurance Carriers and Related Activities.”Source: U.S. Department of Commerce, Bureau of Economic Analysis; Insurance Information Institute.

13

Employee Compensation at Michigan Insurance Carriers, 2000-2009 ($ Millions)*

$4,162 $4,149

$4,308$4,204

$3,195

$3,355

$3,579

$3,776$3,867

$4,050

$3,000

$3,250

$3,500

$3,750

$4,000

$4,250

$4,500

00 01 02 03 04 05 06 07 08 09

Compensation paid insurance industry employees in Michigan

increased by $1 billion between 2000 and 2009 to $4.2 billion, providing a

much needed lift to the state’s economy and taxrolls

*Includes “Insurance Carriers and Related Activities.”Source: U.S. Department of Commerce, Regional Economic Info. System, Bureau of Economic Analysis; Insurance Information Institute.

14

Insurance Carrier Employment in Michigan, 2000-2009 ($ millions)

76,17575,672

74,932

72,62872,087

73,681

76,359

77,516

75,842 75,795

70,000

71,000

72,000

73,000

74,000

75,000

76,000

77,000

78,000

00 01 02 03 04 05 06 07 08 09

*Includes “Insurance Carriers and Related Activities.”Source: U.S. Department of Commerce, Regional Economic Info. System, Bureau of Economic Analysis; Insurance Information Institute.

Insurance carriers have employed at least 72,000 people since 2000,

generating more than $4 billion in annual payrolls in 2009

15

Michigan Domiciled Insurance CompaniesProperty/Casualty and Life/Health Insurance, 2000-2009

Source: Insurance Department Resources Report, published by the National Association of Insurance Commissioners. Reprinted with permission. Further reprint or redistribution strictly prohibited without written permission of NAIC.

1924

30

7065

75

0

10

20

30

40

50

60

70

80

2000 2004 2009

P/C L/H

89 89 95

95 p/c and life/health insurers were domiciled in Michigan in

2009, up from 89 in 2000

16

Top 20 Property/Casualty Companies Domiciled in Michigan, 2009

Rank Company Group Direct premiums written ($000)

1 Auto-Owners Insurance Co. Auto-Owners Insurance Co. $2,014,858

2 Foremost Ins Co. Grand Rapids Zurich Financial Services Ltd 1,035,609

3 Home-Owners Insurance Co. Auto-Owners Insurance Co. 926,872

4 Citizens Insurance Co. of Am Hanover Insurance Group Inc. 923,381

5 Auto Club Group Insurance Co. Auto Club Insurance Assoc Group 659,445

6 MemberSelect Insurance Co. Auto Club Insurance Assoc Group 541,290

7 Frankenmuth Mutual Ins Co. Frankenmuth Mutual Insurance Co. 405,136

8 Star Insurance Co. Meadowbrook Insurance Group 390,542

9 Accident Fund Ins Co. of Am Accident Fund Group 359,413

10 Progressive Michigan Ins Co. Progressive Corp. 354,396

11 Farm Bureau Genl Ins Co. of MI Michigan Farm Bureau 335,782

12 MIC P&C Insurance Corp. GMAC Insurance Group 309,315

13 Hastings Mutual Insurance Co. 308,421

14 Amerisure Mutual Insurance Co. Amerisure Mutual Insurance Co. 292,257

15 Auto Club Insurance Assn. Auto Club Insurance Assoc Group 281,705

16 Amerisure Insurance Co. Amerisure Mutual Insurance Co. 238,642

17 Motors Insurance Corp. GMAC Insurance Group 223,266

18 MEEMIC Insurance Co. Auto Club Insurance Assoc Group 178,246

19 Southern-Owners Insurance Co. Auto-Owners Insurance Co. 164,175

20 Progressive Marathon Ins Co. Progressive Corp. 161,995

(1) Based on premiums on all states.

Source: SNL Financial LC.

17

Top Ten Life/Health Companies Domiciled in Michigan, 2009

Rank (1) Companies Direct premiums written

($000)

1 Jackson National Life Insurance Co. $13,419,931

2 John Hancock Life Insurance Co. 12,933,691

3 Sun Life Assurance Co. of Canada 2,600,058

4 Auto-Owners Life Insurance Co. 429,526

5 American Community Mutual Insurance Co. 363,840

6 Household Life Insurance Co. 207,113

7 Farm Bureau Life Insurance Co. of Michigan 167,326

8 Priority Health Insurance Co. 130,426

9 Alliance Health & Life Insurance Co. 121,589

10 AAA Life Insurance Co. 105,366

(1) Based on premiums on all states.

Source: SNL Financial LC.

18

Top 15 States: P/C Insurer Municipal Bond Holdings, 2009

$17.5

$9.0 $8.9 $8.8 $8.7 $8.2$9.4 $9.1

$14.3

$26.2

$10.0$10.7

$15.4

$20.2

$35.3

$0

$5

$10

$15

$20

$25

$30

$35

$40

TX CA NY IL FL WA OH MA AZ PA GA IN MI NJ VA

Sources: SNL Financial; Insurance Information Institute.

$ Billions P/C insurers are the largest single institutional investor in the muni bond market, financing

thousands of projects across the US, including Michigan. In 2009, P/C insurers held $8.8 billion

in muni bonds issued in Michigan, ranking it 13th largest holding among the 50 states

Financial Strength of Insurers is Key to Their Success, Benefiting Consumers

20

Insurers Performed Better than Any Other Financial Services Segment

During the “Great Recession”

P/C Insurer Impairments, 1969–20098

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15

7 65

0

10

20

30

40

50

60

70

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

Source: A.M. Best; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

5 of the 11 are Florida companies (1 of these

5 is a title insurer)

Six Michigan banks failed between 2007 and Jan. 2011 due to

the financial crisis, but not a single insurer

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

US Policyholder Surplus:1975–2010*

* As of 9/30/10.Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

($ Billions)

Surplus as of 9/30/10 was a record $544.8 billion, implying

unprecedented financial strength

24

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 client to insurer – continues uninterrupted

This means that insurers continue to: Pay claims (whereas 232 banks have gone under as of 1/21/11)

– The promise is being fulfilled

Renew existing policies (banks are reducing and eliminating lines of credit)

Write 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)

Source: Insurance Information Institute

Conservative Investments: Another Key to Insurer Stability

25

Conservative Investment Strategies Means that Insurers’ Investment

Performance Remained Relatively Strong During the Crisis

Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q31

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.0 $39.5

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:Q3In 2008, Investment Gains Fell by 50% Due to Lower Yields and

Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income

Investment Gains Recovered Significantly in 20101 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.

($ Billions) 2009:Q3 gain was $29.3B

Investment gains in 2010 are on track to be their best since 2007

27

Treasury Yield Curves: Pre-Crisis (July 2007) vs. December 2010

0.09% 0.14% 0.19% 0.29%0.62%

2.66%

3.29%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

1.93%

0.99%

4.42%4.17%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

October 2010 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve is near its most depressed level in at least 45 years,

though longer yields rose in late 2010 as economy improves. Investment

income is falling as a result.

The Fed’s Announced Intention to Pursue Additional Quantitative Easing Could Further Depress Rates in the 7 to 10-Year Maturity Range

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

QE2 Target

28*Net admitted assets. Sources: NAIC; Insurance Information Institute research.

Invested assets totaled $1.26 trillion

Generally, insurers invest conservatively, with over 2/3 of invested assets in bonds

Only 18% of invested assets were in common or preferred stock

Portfolio Factsas of 12/31/2009

68.8%

6.2%18.0%

7.0%

Bonds

Common & Preferred Stock

As of December 31, 2009

Cash & Short-term

Investments

Other

Distribution of P/C Insurance Industry’s Investment Portfolio

29

2011 Financial Overview About Half of the P/C Insurance Industry’s Bond Investments Are in Municipal Bonds

Sources: NAIC, via SNL Financial; Insurance Information Institute research.

Investments in “Political Subdivision [of states]” bonds were $102.5 billion

Investments in “States, Territories, & Possessions” bonds were $58.9 billion

Investments in “Special Revenue” bonds were $288.2 billion

All state, local, and special revenue bonds totaled 48.2% of bonds, about 35.7% of total invested assets

Bond Investment Factsas of 12/31/09

0.9%

2.0%15.5%

6.3%

11.0%

31.0%33.3%

U.S. Government

Special Revenue

As of December 31, 2009

States, Terr., etc.

Industrial

Foreign Govt

Political Subdivisions

2011 Financial Overview When P/C Insurers Invest in Higher Risk Bonds,It’s Corporates, Not Munis

Data are as of year-end 2009. Sources: SNL Financial; Insurance Information Institute.

The NAIC’s Securities Valuation Office puts bonds into one of 6 classes: class 1 has the lowest expected impairments; successively higher

numbered classes imply increasing impairment likelihood.

Insurance Regulatory Environment in Michigan

31

Michigan’s Insurance Markets Have Had Some Problems in

Recent Years

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WV

VA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI C

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

= A= B= C= D= F= NG

Source: Heartland Institute, May 2010

A- A-

A-

B-

B-

B-

B-

B-

B-B-

B-B-

B-

B-

B-

B-

B- C-

C-

C-

C -

C-

D-D-

A

A

A

A

B+

B+

B+

B

B

B

B

B

B

C+

C+

C

D+

D+D+

D

NG

NG

D F

F

2010 Property and Casualty InsuranceReport Card

Not Graded: District of ColumbiaMississippiLouisiana

Legislative Action is Required to Bring Michigan’s Auto No-Fault

Crisis Under Control

34

Rampant Fraud & Abuse, Motivated by Michigan’s Unlimited No-Fault

Benefit and Lack of Costs Controls, Are Driving Costs Upward

35

Average No-Fault Claim Severity, 2010:Q3

$1

6,3

31

$8

,64

7

$8

,09

6

$5

,39

4

$5

,06

1

$4

,27

7

$3

,66

4

$3

,38

5

$3

,22

1

$3

,21

4

$3

,22

6

$2

,72

2

$2

,61

7

$2

,17

9

$1

,89

1

$3

6,4

63

$7

,64

3

$7

,36

4

$5

,39

5

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

MI NJ NY FL DE MN DC ND HI PA OR WA KY TX KS MD SC UT MA

Several States Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.

Source: ISO/PCI Fast Track data; Insurance Information Institute.

MI, NJ, NY and FL currently are the largest states that have the most severe

problems in their no-fault system

Michigan has by far the highest auto no-fault average claim cost (severity) in the US

36

Increase in No-Fault Claim Severity: 2004-2010*

*2009 figure is for the 4 quarters ending 2010:Q3.**Since 2006 the increase in Florida was 23.7% (average severity that year was $6,344). Sources: Insurance Information Institute research from ISO/PCI Fast Track data.

$35,865

$16,573

$8,776 $7,847$6,674$5,871

$12,136

$24,385

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Michigan New Jersey New York Florida

2004 2010*

Michigan’s average no-fault claim cost is up nearly 50% since 2004

+47.1%

+36.6%

+49.5% +17.6%**

37

Summary

Michigan’s Insurance Markets Are Large and Important to P/C and L/H Insurers Alike

Insurers Are an Increasingly Important to Michigan’s Economy, Now Accounting for Nearly 4% of Economic Activity in the State

Insurance is a Stable Industry

More Than 72,000 People Are Employed Generating More that $4 Billion in Annual Payrolls

Premiums Tax Receipts Totaled $2.3 Billion from 2000 – 2009 and Were Proved to Be a Much More Stable Revenue Stream than Many Other State Revenue Sources During the Great Recession

Insurer Operations Continued Uninterrupted During the Financial Crisis

Insurers Emerged from the Crisis Strong with P/C Insurers Enjoying Record Capital Strength

Michigan is Need of Some Regulatory and Legislative Reform Related to its No-Fault Auto Insurance System

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