Personal Lines P-C Insurance Markets:
Challenges & Opportunities for 2011 & Beyond
AAA/CAA Insurance ConferenceSan Francisco, CA
March 8, 2011Download 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 [email protected] www.iii.org
2
Presentation Outline
Personal Lines Growth Overview Auto, Home: US and by State Average Premium/Expenditures
Personal Lines Growth Drivers Exposure, Pricing Factors
Personal Lines Profitability Analysis Cyclical Drivers in Personal Lines Growth Private Passenger Auto Performance Distribution Trends P/C Financial Overview & Outlook: The Role of Cyclicality
Profitability Premium Growth Capital, Capacity and Financial Strength Underwriting Performance Investment Performance
Financial Crisis, Recession & Recovery: P/C Insurer Impacts Catastrophe Losses Q&A
3
Personal Lines Growth Analysis
Growth Trajectories Differ Substantially by Line, by
State and Over Time
4
Distribution of Direct Premiums Written by Segment/Line, 2009
Sources: A.M. Best; Insurance Information Institute research.
Personal/Commercial lines split has been about 50/50 for many years; Personal Lines likely overtook Commercial Lines in 2010
Pvt. Passenger Auto is by far the largest line of insurance and is currently the most important source of industry profits
Billions of additional dollars in homeowners insurance premiums are written by state-run residual market plans
Distribution Facts
Commercial Lines$232.4B/51%
2009
Pvt. Pass Auto$163.2B/35%
Homeowners$65.4B/14%
5
Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2010E
14.5%
3.0%
-0.9%0.9%
9.2%
6.0%
2.2%
5.7%
0.5%
-4.9%
15.3%
5.0%
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
13%
15%
00 01 02 03 04 05 06 07 08 09 10E
Private Passenger AutoHomeownersAll Lines
Sources: A.M. Best; Insurance Information Institute.
Average 2000-2009Auto = 2.9
Home = 6.5%All Lines = 3.4%
While homeowners insurance has grown faster than auto over the past decade, auto is
generally more profitable
6
Private Passenger Auto InsuranceNet Written Premium, 2000–2010E
$151.2
$157.3$159.6 $160.2 $159.1 $159.8
$156.6$158.0
$119.7
$139.7
$128.0
$110
$120
$130
$140
$150
$160
$170
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
Sources: A.M. Best; Insurance Information Institute.
$ Billion
PP Auto premiums written rose by an estimated 3% in 2010 on stronger new
car sales after declining in recent years due to the weak economy impacting new vehicle sales, car choice, and increased price sensitivity among consumers. 2011
should provide further gains.
7
Auto Insurance Net Premiums Written, Canada, 2002-09
$16.82
$18.67
$22.90 $23.09$24.28
$25.34
$27.77
$29.06
$15
$20
$25
$30
2002 2003 2004 2005 2006 2007 2008 2009
Auto insurance premiums are a significantly larger part of total premium revenue in Canada compared to the U.S. Moreover, Auto NPW continued to
grow in Canada during the economic downturn but were flat/negative in the US
Sources: Best’s Aggregates & Averages, various years; Insurance Information Institute
$Canadian Growth Rate 2003: 11.0%2004: 22.7%2005: 0.8%2006: 5.2%2007: 4.4%2008: 9.6%2009: 4.6%
8
Commercial Auto InsuranceNet Written Premium, 2000–2010E
$25.4
$20.6
$23.7
$21.8
$26.7
$21.8
$25.5
$26.7$26.6
$24.6
$19.5
$18
$20
$22
$24
$26
$28
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
Sources: A.M. Best; Insurance Information Institute.
$ Billion
In contrast to flat PP Auto NPW, Commercial auto premiums are down 22.8% since 2006 due to
soft market conditions in commercial lines and negative
exposure trends
9
Percent Change in NPW: Pvt. Pass. Auto by State, 2004-2009
16.6
16.0
13.8
12.6
12.4
12.3
9.0
8.7
8.6
8.5
7.1
7.0
6.3
6.2
6.1
5.8
5.6
5.6
4.9
4.4
4.1
3.4
2.3
1.9
1.8
0
2
4
6
8
10
12
14
16
18
20
UT
NC TX NM NV
WY
WA ID LA SC
MT
OK HI
AZ
GA
OR AK
DE
MS
MD AL
TN VA
KS
DC
Pec
ent c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Utah was the fastest growing state between 2004 and 2009,
largely due to favorable demographics and a less
severe economic downturn
10
1.7
0.9
0.7
0.5
0.5
0.5
0.1
-1.4
-1.4
-1.6
-1.8
-2.5
-2.7
-3.3
-3.8
-5.2
-6.1
-6.3
-7.0
-7.2
-7.4
-8.3
-8.3
-9.6
-10.
9
-22.
0
-25
-20
-15
-10
-5
0
5
AR
ND IL
MO CA FL SD IA KY PA
CO W
I
WV
CT IN NE RI
NJ
VT
NY
OH
ME
NH
MN MI
MA
Pec
ent c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Massachusetts saw the biggest drop in premiums written, due in large part to recent reforms that
increased competition and lowered overall rate levels
Percent Change in NPW: Pvt. Pass. Auto by State, 2004-2009
Bottom 25 States
11
6.468
10.110
14.575
0
2
4
6
8
10
12
14
16
Under 18 18-64 65+
Increase in Population by Age Category, 2010 to 2020
(Millions)
Source: US Census Bureau
Over the next decade, the demand for personal lines
insurance will be driven by an increasingly older population
Claim Trends in Personal Lines Will Shift With Demographics; Insurers Must Adapt
12
Homeowners InsuranceNet Written Premium, 2000–2010E
$45.8
$49.5
$52.2$54.6 $54.9
$60.3
$56.9$55.7
$32.4
$40.0
$35.2
$30
$35
$40
$45
$50
$55
$60
$65
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
Sources: A.M. Best; Insurance Information Institute.
$ Billions
Homeowners insurance NWP continues to rise (up 86.1% 2000-2010E) despite very
little unit growth in recent years. Reasons include rate increases, especially in coastal
zones, ITV endorsements (e.g., “inflation guards”), and inelastic demand
13
Average Premiums For Home InsuranceBy State, 2008 (1)
$1
,46
0
$1
,39
0
$1
,15
5
$1
,04
8
$1
,02
6
$9
83
$9
80
$9
80
$9
26
$9
16
$9
11
$8
97
$8
62
$8
56
$8
45
$8
45
$8
42
$8
14
$8
08
$7
91
$7
89
$7
88
$7
88
$7
49
$7
21
$7
15
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600T
X (
2)
FL
(3) LA
OK
MA
NY
CT
MS
DC
KS
CA
(4) RI
HI
AK
AL
MN
CO
NE
ND
US
SC
AR
MO
GA
MT MI
(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. (2) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms. (3) Florida data exclude policies written by Citizens Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly of incomparable with other states. (4) California data were provided by the California Department of Insurance.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.
Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.
14
Average Premiums For Home InsuranceBy State, 2008 (1) (con’t)
$7
03
$6
92
$6
92
$6
91
$6
83
$6
76
$6
58
$6
50
$6
47
$6
38
$6
37
$6
28
$6
28
$6
12
$6
09
$6
04
$6
01
$5
86
$5
72
$5
65
$5
35
$5
03
$4
71
$4
39
$4
32
$3
87
$0
$200
$400
$600
$800
NM NV
TN NJ
NC
WY IN VT
NH
WV
MD AZ IL IA S
D VA
KY
PA
ME
OH
DE WI
WA
OR
UT ID
(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.
Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.
15
Personal Lines Growth Drivers
Rate is Presently a Bigger Driver than Exposure
16
Private Passenger Auto
Economy, Employment Are Main Drivers
Gas Prices: Big Wild Card
17
Monthly Change* in Auto Insurance Prices, January 1991–January 2011*
*Percentage change from same month in prior year; through January 2011; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-2%
0%
2%
4%
6%
8%
10%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Cyclical peaks in PP Auto tend to occur
approximately every 10 years (early 1990s, early
2000s and likely the early 2010s)
“Hard” markets tend to occur
during recessionary
periods
A pricing peak may be occurring
Jan. 2011 change fell
to 4.2% from 4.4%
in Dec.
19
Average Expenditures on Auto Insurance
$651$668
$691$705
$726
$786
$830$842
$831$816
$795 $789$806
$824
$690$685$703
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* 10*
Countrywide Auto Insurance Expenditures Decreased0.8% in 2008 and Increased 2.2% in 2009 (est.) and 2010 (est.)
* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.
The average expenditure on auto insurance is lower today than it was in 2004
20
Average Expenditures For Auto InsuranceBy State, 2008
$1
,12
6
$1
,10
5
$1
,08
1
$1
,05
5
$1
,04
4
$1
,00
7
$9
86
$9
70
$9
50
$9
22
$9
07
$9
04
$9
03
$8
58
$8
54
$8
40
$8
17
$8
16
$8
08
$7
89
$7
76
$7
65
$7
51
$7
29
$7
28
$7
27
$0
$200
$400
$600
$800
$1,000
$1,200
DC LA
NJ
FL
NY
DE RI
NV
CT
MD MI
AK
MA AZ
TX
WA
PA HI
WV
US
CA
GA
SC
CO
NM
NH
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.
Source: © 2010 National Association of Insurance Commissioners.
21
Average Expenditures For Auto InsuranceBy State, 2008 (con’t)
$7
27
$7
20
$7
09
$6
99
$6
98
$6
67
$6
67
$6
63
$6
63
$6
57
$6
54
$6
53
$6
53
$6
41
$6
32
$6
17
$6
12
$6
00
$5
95
$5
81
$5
76
$5
62
$5
47
$5
20
$5
19
$5
03
$0
$200
$400
$600
$800
OR IL UT
KY
MN
MT AL
OK VA
MO
MS
VT
AR
TN
WY
OH IN ME
NC WI
KS ID NE
SD IA
ND
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.
Source: © 2010 National Association of Insurance Commissioners.
22
16.9
16.5
16.1
13.2
10.4
11.6
13.1 13
.9 14.7 15
.1
15.0 15
.5
16.9
16.617
.117.5
17.8
17.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F 16F
(Millions of Units)
Auto/Light Truck Sales, 1999-2016F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 2/11); Insurance Information Institute.
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales in 2011
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2011-12 is
still far below 1999-2007 average of 17 million units, but a recovery is underway.
Job growth and improved credit market conditions will boost auto sales in
2011 and beyond
24
Number of Registered Passenger Vehicles in the US, 2000-2008
Sources: US Federal Highway Administration, Bureau of Transportation Statistics; Barclays Capital; Insurance Information Institute.
The Number of Registered Passenger Vehicles Declined in 2009 for the First Time in Many Years Could Rise in 2011/2012
Growth in vehicle registrations could reach 1% in 2011
and 2012
25
“Light-Duty” Vehicle Registrations in Canada*, 1999-2008
16.5416.83
17.06
17.5417.76
17.9218.12
18.74
19.20
19.61
15
16
17
18
19
20
99 00 01 02 03 04 05 06 07 08
The number of light-duty vehicles grew every year during the past decade, including recession years. In the US, where registration were flat or fell.
*Includes passenger autos, passenger vans, and light trucks and vans (less than 4,500 kg)Sources: http://www.tc.gc.ca/eng/roadsafety/tp-tp3322-2008-1144.htm Insurance Information Institute
MillionsExposure Growth Rate
2000: 1.8%2001: 1.4%2002: 2.8%2003: 1.3%2004: 0.9%2005: 1.1%2006: 3.4%2007: 2.5%2008: 2.1%
Do Changes in Miles Driven AffectAuto Collision Claim Frequency?
7.00
6.81
6.59
6.80 6.78
6.91
6.65
6.32
6.025.94
5.71
5.85
5.705.62
5.58
5.5
6.0
6.5
7.0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*
Pa
id C
laim
Fre
q
2400
2500
2600
2700
2800
2900
3000
3100
Bil
lio
ns
of
Mil
es D
rive
n
Collision Claim FrequencyBillions of Vehicle Miles
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 3rd Qtr. 2010, published Jan. 7, 2011 and earlier reports. *2010 ISO figure is for 12 months ending 9/30/2010; FHA data is for 12 months ending Oct. 2010.
Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100
People are beginning to drive more (+0.6% YTD),
and frequency drop is flattening
27
Will Skyrocketing Gas Prices Hurt Auto Insurers?
Here We Go Again!
28
Monthly Retail Price of Gasoline, January 1990–February 2011*
*Week ending Feb. 28.Note: Recessions indicated by gray shaded columns.Sources: Energy Information Administration; Insurance Information Institute.
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Current Middle East tensions, strengthening
demand threaten to push gas beyond the $4 per
gallon level by late Spring
Gas prices tend to eventually fall
during recessions
Record retail price: $4.14/gal in
July 2008
Gas prices hit .
$3.44/gal in the last week of
February
U.S. City Average
Miles Driven and Annual Percent Change: 1986-2010
1,83
8.2
1,92
4.3
2,02
5.6
2,10
7.0
2,14
7.5
2,17
2.2
2,24
7.2
2,29
6.7
2,35
7.6
2,42
2.8
2,48
2.2
2,56
0.4
2,62
5.4
2,67
9.5
2,74
6.9
2,79
5.5
2,85
5.3
2,88
9.7
2,96
4.2
2,98
9.4
3,01
4.3
3,02
9.8
2,97
3.5
2,97
9.2
2,99
9.6
1,000
1,500
2,000
2,500
3,000
3,500
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
Bil
lio
ns
of
Mil
es
Dri
ve
n
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
% C
ha
ng
e i
n M
ile
s D
riv
en
Billions of Vehicle MilesPercent Change
Sources: Federal Highway Administration; Insurance Information Institute.
In 2008, miles driven dropped for the first time in decades (-1.9%), but were up 0.7% to almost 3 trillion miles in 2010
Higher gas prices will slow the increase in miles driven, with
mixed impacts on private passenger auto (less exposure
attributable to mileage, but perhaps tempering claim frequency)
Source: ISO, US DOT.
Oct. 17, 1973: Arab
oil embargo begins
Frequency Impacts
Collision: -7.7%PD: -9.5%BI: -13.3%
March 17, 1974: Arab oil states announce
end to embargo
Driving StatsGas prices rose 35-40%Miles driven fell 6.7% in
1974
Frequency began to rebound almost
immediately after the embargo
ended
Auto Insurance: Claim Frequency Impacts of Energy Crisis/Recession of 1973/74
32
Homeowners
Glut of Existing Homes, Foreclosures, Weak
Demographics Mean Unit Growth Will Remain Slow
33
(Millions of Units)
New Private Housing Starts, 1990-2016F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
1
0.5
5
0.5
9
0.6
7
0.8
9
1.2
0 1.3
3 1.4
3
1.5
0
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 2/11); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until 2012. Also Affects Commercial Insurers with Construction Risk Exposure, Surety
New home starts plunged
72% from 2005-2009; A
net annual decline of 1.49 million units, lowest since
records began in 1959
I.I.I. estimates that each incremental 100,000 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 billion
Job growth, improved credit
market conditions and demographics
will eventually boost home construction
Average Square Footage of Completed New Homes in U.S., 1973-2010*
1,66
01,
695
1,64
51,
700
1,72
01,
755
1,76
01,
740
1,72
01,
710
1,72
51,
780
1,78
51,
825 1,90
5 1,99
52,
035
2,08
02,
075
2,09
52,
095
2,10
02,
095
2,12
02,
150
2,19
02,
223
2,26
62,
324
2,32
02,
330
2,34
9 2,43
42,
469
2,52
12,
519
2,43
82,
374
1,500
1,700
1,900
2,100
2,300
2,500
2,700
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
*2010 figure is weighted average square feet of completed homes in first three quarters of 2010Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.
Square Ft
The trend toward building larger homes reversed in 2009 and 2010, affecting exposure growth beyond the decline in number of units built
The average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions
34
The average size of completed new homes fell by 147 square feet (5.75%) from 2008-2010. This is the largest recession-based drop in nearly four decades.
36
State Population Growth Rate Projections, 2010-2020*
*based on 2000 census. Source: http://www.census.gov/population/www/projections/projectionsagesex.html Table 7
The Mountain West region is projected to grow the most from now to 2020 (up 17.6%), followed by the South Atlantic (up 14.5%) and Pacific (up 11.2%).The Mid-Atlantic is projected to be the slowest-growing region (up 1.9%).
28.3
%
27.4
%
21.6
%
16.2
%
15.2
%
14.8
%
14.6
%
14.5
%
13.6
%
13.1
%
12.4
%
11.3
%
8.7%
2.5%
2.5%
2.3%
2.1%
2.0%
1.9%
1.6%
0.7%
0.6%
0.4%
-1.0
%
-1.5
%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
NV AZ FL
TX
UT ID NC
DE
WA
GA
OR
VA
US IL
MS LA WY
SD NE
PA NY
OH IA
ND
WV
Projected Population Growth
Highest Growth Rate States
Lowest Growth Rate States
U.S. overall: +8.7%
37
Average Premium forHome Insurance Policies**
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.
$508$536
$593
$668
$822$791 $799 $807$804
$764
$729
$500
$550
$600
$650
$700
$750
$800
$850
$900
$950
00 01 02 03 04 05 06 07 08 09* 10*
Consumer efforts to economize (increased deductibles, more shopping, etc.) and
adverse exposure trends are depressing the average homeowners insurance premium
38
70.6
52.7
42.7
41.9
41.1
41.0
38.9
37.8
37.6
36.9
36.7
35.0
35.0
34.5
33.8
32.8
32.6
31.6
31.1
30.0
29.7
29.5
28.0
27.8
27.7
05
1015202530354045505560657075
HI
LA SC RI
NM ID DE
MS FL AL
GA
CT
NC
MA
UT
NY NJ
AR
WY
MT
MO
NH
ME VA
ND
Pec
ent c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Hawaii was the fastest growing state between
2004 and 2009
Percent Change in NPW: Homeowners, by State, 2004-2009
Top 25 States
39
26.7
26.6
24.9
24.7
24.5
24.2
23.7
23.2
23.1
22.6
22.2
22.1
22.0
20.6
19.8
19.7
19.6
19.5
19.2
19.2
18.4
16.8
16.5
12.4
11.2
0.2
0
5
10
15
20
25
30
KY
TN WA
DC VT
TX KS
NV
MN AK
MD
OK
OR
SD IA NE
CO
OH IL W
I
PA IN AZ
WV
CA MI
Pec
ent c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Michigan was the slowest growing state
between 2004 and 2009
Percent Change in NPW: Homeowners, by State, 2004-2009
Bottom 25 States
40
US Residual Market Exposure to Loss: Can Drain Private Insurer Premium
$372.3$430.5 $419.5
$656.7
$771.9
$696.4$703.0
$292.0$244.2$221.3
$281.8
$150.0
$54.7
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: PIPSO; Insurance Information Institute
Hurricane Andrew
4 Florida Hurricanes
Katrina, Rita, and Wilma
In the 20-year Period From 1990 and 2009, Total Exposure to Loss in the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B
in 1990 to $703.0B in 2008
($ Billions)
41
Advertising Spending Trends
After and Unprecedented and Rapid Increase, Ad
Expenditures are Flattening Out
42
Advertising Expenditures by P/C Insurance Industry, 1999-2009
$2.97
$3.44
$4.12$4.35
$4.15
$2.34
$1.88$1.69$1.64$1.71$1.69
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
99 00 01 02 03 04 05 06 07 08 09
Source: SNL Financial LC.
($ Billions)
Ad spending by p/c insurers increased by 170% ($2.74 bill) from 2001 to 2008 before
easing slightly in 2009. The upward trend could
well resume as the economy improves and
direct writers seek growth and big insurers seek to maintain share.
Private Passenger Auto Accounts for the Largest Share of Advertising Expenditures. One Company Accounts for 1/6 of Total P/C Ad Spending.
43
Advertising Expenditures as a Percent of P/C Insurance Industry NPW, 1999-2009
0.70%0.77%
0.92%0.99% 0.98%
0.59% 0.58%0.51%
0.46% 0.46%0.55%
0.00%
0.25%
0.50%
0.75%
1.00%
99 00 01 02 03 04 05 06 07 08 09
Source: SNL Financial LC.
From 2003-2008 advertising as a percent
of NPW more than doubled (up 115.2%)
In dollar terms, ad spending increased in every year from 2002 to 2008.The percentage drops in 2002-03 (vs. 2001) are explained by the rapid growth in premiums in the 2002-03 “hard market” that outpaced dollar
growth in ad spending.
44
Personal Lines Profitability Analysis
Significant Variability Over Time and Across States
45
Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2009*
*Latest available.**Excluding 1992, the Hurricane Andrew, produces a homeowners RNW of 3.3%.Sources: NAIC.
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
US All Lines US Home US PP Auto(Percent)
Average RNW: 1990-2009*
All P-C Lines: 8.0% PP Auto: 9.1% Homeowners: 0.4%**
Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole. Homeowners Volatility is Associated Primarily With Coastal Exposure Issues
Hurricane Andrew
46
Return on Net Worth: All P-C Lines vs. Pvt. Pass. Auto, 1990-2009*
*Latest available.Sources: NAIC.
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
US All Lines US PP Auto(Percent)
Average RNW: 1990-2009*
All P-C Lines: 8.0% PP Auto: 9.1
Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13 of the 20 Years from 1990-2009 (Inclusive)
47
Return on Net Worth: Pvt. Pass. Auto vs. Homeowners, 1990-2009* (excl. 1992)
-10%
-5%
0%
5%
10%
15%
20%
25%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
US Home US PP Auto(Percent)
Average RNW: 1990-2009*
Homeowners: 3.3%** PP Auto: 9.1
Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13 of the 20 Years from 1990-2009 (Inclusive)
*Latest available.**Excluding 1992, the year of Hurricane Andrew. Including 1992 produces a homeowners RNW of 0.4%.Sources: NAIC.
48
18.2
14.0
13.8
13.3
12.9
11.9
11.6
11.3
11.2
11.1
11.0
10.8
10.6
10.4
10.4
10.3
10.3
10.2
10.2
9.0
8.9
8.9
8.8
8.7
8.5
0
2
4
6
8
10
12
14
16
18
20
HI VT ME DC ID NH SD MN OH NM CT RI KS IA WY ND VA AZ OR AL CA WI UT IN CO
RN
W P
PA
Sources: NAIC * latest available
Hawaii was the most profitable state for auto insurers from 2000-2009
Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2000-2009*)
Top 25 States(Percent)
49
8.5
8.3
8.1
7.9
7.8
7.7
7.7
7.6
7.6
7.3
7.2
7.2
7.1
7.0
7.0
6.8
6.7
6.7
6.4
6.1
5.5
4.9
4.7
3.6
2.9
0.8
-0.6
-0.4
-10123456789
10
NY
NE
WA
SC
AK
MD
TN IL
OK
GA
US
NJ
MO
MA
MT
AR
NC PA
WV
TX
KY
DE
MS
NV
FL
LA MI
MI
RN
W A
uto
Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2000-2009*)
*Latest avaiiable.Sources: NAIC
Michigan was the least profitable state for auto insurers from 2000-2009 (-0.6%
RNW), dragged down by rampant no-fault fraud and abuse and the Michigan
Catastrophic Claims Association.
(Percent) Bottom 25 States
50
45.0
20.8
20.1
20.0
18.7
18.6
18.5
17.4
17.2
15.7
15.5
15.2
14.7
14.4
14.3
13.9
13.7
13.5
12.0
11.9
11.9
11.214
.018.019
.0
0
5
10
15
20
25
30
35
40
45
50
HI SC RI DC CT AK UT NY NV MA DE AZ OR NC CA MT WY PA WA NJ CO NM ME VT ID
RN
W H
O
Sources: NAIC
Return on Net Worth: Homeowners Insurance, 10-Year Average (2000-2009*)
Hawaii was the most profitable state for home insurers from 2000-2009 due to the absence
of hurricanes during this period
(Percent) Top 25 States
51
9.3
5.3
5.1
4.7
4.3
2.2
1.6
0.5
-32.4
0.4
-1.6
-2.3
-3.7
-29
.0
-14
.4
-11
.8
-10
.8-8.6
-7.9
-7.1-6.9
-6.7-5.5-4.9
1.0
8.0
-35
-30
-25
-20
-15
-10
-5
0
5
10
VA MD NH WV MI US KS SD IL IA FL WI OK TX OH TN IN NE AR GA AL KY ND MO MN MS LA
RN
W H
O
Sources: NAIC
Hurricanes Katrina and Rita made Louisiana and Mississippi the least profitable states for home insurers
from 2000-2009
Bottom 25 States(Percent)
Return on Net Worth: Homeowners Insurance, 10-Year Average (2000-2009*)
56
Claim Trends in Auto Insurance
Rising Costs Held in Check by Falling Frequency:
Can That Pattern Be Sustained?
57
Bodily Injury: Severity Trend Moderating, Frequency Decline Continues
-5.4%
-3.8%-5.0%
-3.1% -3.2%
-1.1%
2.9%
4.7%5.9% 6.1%
2.2% 1.7%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009 2010*
Severity Frequency
*For 2010, data are for the 4 quarters ending with 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2010*
Cost Pressures Will Increase if BI Severity Increases Outpace Declines in Frequency
58
Property Damage Liability: Frequency and Severity Nearly Flat in 2009/10
-1.6%
-3.5%
0.8%
-3.4%
0.6%0.3%
2.9%3.6%
2.1% 2.0%
-0.3%
0.4%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
2005 2006 2007 2008 2009 2010*
Severity Frequency
Annual Change, 2005 through 2010*
Stable Severity/Frequency Trends Keeping PD Costs in Check, But Are These Trends Sustainable?
*For 2010, data are for the 4 quarters ending with 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute
59
Collision Coverage: Frequency and Severity Trends Have Been Favorable
-1.8%
-3.6%
2.5%
-2.6%
-1.2%-0.7%
3.9%3.1%
0.0%0.5%
-2.3%
-0.7%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
2005 2006 2007 2008 2009 2010*
Severity Frequency
Annual Change, 2005 through 2010*
The Recession, High Fuel Prices Have Helped Push Down Frequency and Temper Severity, But this Trend Will Likely Be
Reversed Based on Evidence from Past Recoveries*For 2010, data are for the 4 quarters ending with 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute
60
Comprehensive Coverage: Recent Severity Trends Favorable, Frequency is Up in 2010
-3.1%
-9.8%-6.6%
1.7% 1.5%
7.8%
15.5%
-1.4% -1.4%
12.8%
-8.2%-10.7%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2005 2006 2007 2008 2009 2010*
Severity Frequency
Annual Change, 2005 through 2010*
Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper
Severity, But This Factors Will Weaken as Economy Recovers*For 2010, data are for the 4 quarters ending with 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute
61
No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse*
-4.8%-5.7%
-2.7%
-6.9%
5.9% 6.4%
4.7%
2.4%
6.3% 6.4% 6.4%5.7%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009 2010*
Severity Frequency
*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT; 2010 data are for the 4 quarters ending 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2010*
Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ
62
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
$40,000
Michigan New Jersey New York Florida
2004 2010*
The no-fault systems in MI, NJ, NY and FL are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers
+47.1%
+36.6%
+49.5% +17.6%**
63
Florida’s No-Fault Fraud Tax: Estimated Aggregate Annual Cost, 2009-2011F ($ Millions)
$945.8
$548.9
$303.8
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2009 2010E 2011F
Fra
ud
Ta
x (
$ M
illio
ns
)
*2010 estimate is based on data through Q3:2010. 2011 forecast is based on an assumed increase in pure premium of 25% (pure premium increased 27% in the 4 quarters ending with 2010:Q3). Estimates assume 11.288 million insured vehicles in FL in 2009-2011 (11.288 million is 2008 actual figure from AIPSO).Source: Insurance Information Institute calculations and research from ISO/PCI and AIPSO data.
The total fraud tax levied on Florida
vehicle owners was and estimated $549
million in 2010.
+80.7%
+72.3%
If nothing is done to address Florida’s runaway no-fault fraud problem, the
aggregate fraud tax on Florida vehicle owners
could rise to $946 in 2011
No-Fault Fraud is Costing Honest Florida Drivers Hundreds of Millions of Dollars
64
New York State No-Fault Claim Severity, 1997–2009:Q4
Sources: ISO/PCI Fast Track data; Insurance Information Institute.
$5,6
75 $6,0
63$6
,699
$8,3
47$8
,327
$7,8
88$7
,507
$8,2
34$9
,235
$8,7
27$8
,577
$7,7
73$7
,311
$6,9
58$6
,870
$6,1
56$6
,052
$5,8
20$5
,991
$5,6
15$6
,094
$5,9
14 $6,2
50$6
,269 $6
,530
$6,6
06$7
,063 $7
,323
$7,3
78$7
,297 $7
,670
$7,7
40$8
,443
$8,1
77 $8,5
07$8
,025
$8,5
62$8
,748
$8,6
90$8
,862
$5,000
$5,500
$6,000
$6,500
$7,000
$7,500
$8,000
$8,500
$9,000
$9,500
1997
1999
1:01
1:03
2:01
2:03
3:01
3:03
4:01
4:03
5:01
5:03
6:01
6:03
7:01
7:03
8:01
8:03
9:01
9:03
No
-Fa
ult
Cla
im S
ev
eri
ty
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
No
-Fa
ult C
laim
Fre
qu
en
cy
Avg. Claim Severity
Frequency
About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse
No-Fault Claim Severity
Avg. Claim Severity is at its 2nd Highest Level
in History = $8,862
Avg. Claim Severity Rose 63% in 5 years
after 1997 Presbyterian
Decision
Avg. Claim Severity is up 58% since 2004:Q4
65
Distribution Trends
Distribution by Channel Type Continues to Evolve
67
Personal Lines Distribution Channels, Direct vs. Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
0%
10%
20%
30%
40%
50%
60%
70%
80%
72 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Direct Independent Agents
Independent agents have lost significant personal lines market share since the early 1970s. Although the trend has slowed, it may be
accelerating again.
69
P/C Insurance Industry Financial Overview
Profit Recovery ContinuesEarly Stage Growth Begins
P/C Net Income After Taxes1991–2010:Q3 ($ Millions)
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $
36
,81
9
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$2
6,7
00
$2
8,3
11
-$6,970
$6
5,7
77
$4
4,1
55
$2
0,5
59
$3
8,5
01
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10:Q3
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:Q3 ROAS = 6.7%
P-C Industry 2010:Q3 profits were$26.7B vs.$16.4B in 2009:Q3,
due mainly to $4.4B in realized capital gains vs. -$9.6B in previous
realized capital losses
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS for 2010:Q3 and 4.6% for 2009. 2009:Q3 net income was $29.8 billion excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute
71
ROE: Property/Casualty Insurance,1987–2010E*
* Excludes Mortgage & Financial Guarantee in 2008 - 2010.Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E
P/C Profitability Is Both by Cyclicality and Volatile
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
P/C Premium Growth Cycles
75
Cyclicality is Driven Primarily by the Industry’s Underwriting
Cycle, Not the Economy
76
-5%
0%
5%
10%
15%
20%
25%
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 0910
E11
F
Soft Market Persisted in 2010 but May Be Easing: Relief in 2011?
(Percent)1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
NWP was up 0.5% in 2010 (est.) with forecast growth of 1.4% in 2011
77
Premiums Written, Net vs. Direct, Canada, 2002-09
$29.08
$32.64
$34.40 $34.50
$37.23
$38.72$38.07
$40.33
$31.51
$35.71$36.34 $36.66
$39.49
$41.04$41.65
$42.81
$25
$30
$35
$40
$45
2002 2003 2004 2005 2006 2007 2008 2009
Net Premiums Direct Premiums
Unlike the situation in the U.S. (where premiums written dropped year-over-year for three straight years (2007-09), in Canada direct premiums written grew every year and net premiums written dropped only once (2008) in the current decade.
Sources: Best’s Aggregates & Averages, various years; Insurance Information Institute
$Canadian
Capital/PolicyholderSurplus (US)
78
Total Surplus Exhibits Little Cyclicality, While Surplus Leverage
Ratios Influence Cycle
80
Policyholder Surplus, 2006:Q4–2010:Q3
Sources: ISO, A.M .Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$511.5
$540.7$530.5
$544.8
$505.0$515.6$517.9
$420
$440
$460
$480
$500
$520
$540
$560
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3
2007:Q3Previous Surplus Peak
Quarterly Surplus Changes Since 2007:Q3 Peak
09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)
10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)
Surplus set a new record in 2010:Q3*
*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.
The Industry now has $1 of surplus for every $0.77 of
NPW—the strongest claims-paying status in its history.
Investment Performance
87
Investments Cycles Also Influence P/C Insurer Profitability
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
91
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Perso
nal L
ines
Pvt Pass
Aut
o
Pers P
rop
Comm
ercia
l
Comm
l Auto
Credit
Comm
Pro
p
Comm
Cas
Fidelity
/Sure
ty
War
rant
y
Surplu
s Line
s
Med
Mal
WC
Reinsu
ranc
e**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
EXPENSES
95
Expense Ratios Are Highly Cyclical and Contribute Deteriorating Underwriting Performance
Underwriting Expense Ratio*Personal Lines (Auto & Home), 1994-2010E**
21.8%22.0%21.8%
23.5%
24.5%24.7%25.0%25.2%25.1%
29.8%
28.5%
29.3%
30.5%
24.3%24.4%
23.6%
23.4%
22.7%
23.2%23.6%23.5%
29.6%
30.0%30.5%
28.4%
27.7%
28.5%
30.8%31.1%
30.8%
30.6% 30.3%
30.6%
29.4%
20%
22%
24%
26%
28%
30%
32%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E
Auto Home
*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.
Expenses ratios for both auto and home
are up from their lows in 2003/04
Financial Strength & Underwriting
99
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
P/C Insurer Impairments, 1969–2010E8
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 69
5
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
10
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
There have been very few p/c failures in recent years, mostly title insurers and small Florida
property insurers
102
Reasons for US P/C Insurer Impairments, 1969–2009
3.6%4.0%
8.8%
7.1%
7.8%
7.2%
7.8% 13.6%
40.1%
Source: A.M. Best: 1969-2009 Impairment Review, Special Report, June 21, 2010
Deficient loss reserves and inadequate pricing are the leading cause of insurer impairments, underscoring the effect of an inflation spurt.
Deficient Loss Reserves/Inadequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems
Misc.
Sig. Change in Business
103
Personal Lines Underwriting Trends:
Cycle, Catastrophes Are the Typical Drivers of Performance
104
P/C Insurance Industry Combined Ratio, 2001–2010:Q3*
* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2 Sources: A.M. Best, ISO.
95.7
99.3 99.7101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010:Q3
Best Combined
Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned
Premiums
Relatively Low CAT Losses, Reserve Releases
Cyclical Deterioration
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Lower CAT
Losses, More
Reserve Releases
105
Calendar Year Combined Ratios by Segment: 2008-2011F
Sources: A.M. Best . Insurance Information Institute.
102.4
98.9100
106
99.5
108
103.8104.5
9092949698
100102104106108110
Personal Lines Commercial Lines
2008 2009 2010P 2011F
Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting
performance related to the prolonged commercial soft market
Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate
106
Net Written Premium Growth by Segment: 2008-2011F
-0.1%
-9.4%
2.8%
-2.0%
2.5%
0.3%
-3.1%
-0.1%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Personal Lines Commercial Lines
2008 2009E 2010P 2011F
Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession
weigh on commercial lines.
Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted
again in 2010 and but will stabilize in 2011
Sources: A.M. Best; Insurance Information Institute.
Private Passenger Auto Combined Ratio: 1993–2011P
10
1.7
10
1.3
10
1.3
10
1.0
10
9.5
10
7.9
10
4.2
98
.4
94
.3
95
.1
95
.5 98
.3 10
0.3
10
1.3
99
.0
98
.5
99
.5 10
1.1
10
3.5
80
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11P
Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best; Insurance Information Institute.
Homeowners Insurance Combined Ratio: 1990–2011P
11
3.0
11
7.7
15
8.4
11
3.6
10
1.0 10
9.4
10
8.2
11
1.4 1
21
.7
10
9.3
98
.3
94
.2 10
0.1
89
.4 95
.7
11
7.0
10
5.6
10
3.5
99
.0
11
8.4
11
2.7 12
1.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E11P
Homeowners Line Is Expected to Improve in 2011. Extreme Regional Variation Can Be Expected Due to Local Catastrophe
Loss Activity
Sources: A.M. Best; Insurance Information Institute.
Economic Issues for the Next 3-5 Years
109
Growth in the Wakeof the “Great Recession”
110
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/11; Insurance Information Institute.
2.7
%
0.9
%
3.2
%
2.3
%
2.9
%
-0.7
%
0.6
%
-4.0
%
-6.8
% -4.9
%
-0.7
%
1.6
%
5.0
%
3.7
%
1.7
%
2.6
%
3.2
%
3.5
%
3.4
%
3.5
%
3.5
%
3.1
%
3.2
%
3.2
%3
.3%
4.1
%
1.1
%
1.8
%
2.5
% 3.6
%
3.1
%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
Economic growth projections for 2011 have been revised
upward. This is a major positive for insurance demand
and exposure growth.
111
Canadian Real GDP Annual Change,2000-2010
Forecasts from Blue Chip Economic Indicators, 2/2011 issue.Sources: World Bank, World Development Indicators, I.I.I. calculations; Blue Chip
5.2%
1.8%
2.9%
1.9%
5.4%
3.0% 2.8%2.2%
0.5%
-2.5%
3.1%2.6% 2.9%
-3%
0%
3%
6%
Real GDP Growth Economic growth rates
in Canada are expected to be slightly below the
US in 2011-2012
2011 Financial Overview State Economic Growth Varied in 2009
113
Mountain, Plains states still growing the fastest
Some Southeast states growing well, but others
among the weakest
114
The Economic Storm
What the Financial Crisis and Recession Mean for the Industry’s
Exposure Base, Growth and Profitability
115
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/10; Insurance Information Institute.
2.7
%
0.9
%
3.2
%
2.3
%
2.9
%
-0.7
%
0.6
%
-4.0
%
-6.8
% -4.9
%
-0.7
%
1.6
%
5.0
%
3.7
%
1.7
%
2.0
%
2.3
%
2.5
%
2.7
%
3.0
%
3.2
%
4.1
%
1.1
%
1.8
%
2.5
% 3.6
%
3.1
%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
Demand Commercial Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will
Compound and Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
Economic growth up sharply in late 2009 with rebuilding
of inventories and stimulus. More moderate growth
expected in 2010/11 but no “double dip”
116
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/10; Insurance Information Institute
4.3
%1
8.6
%2
0.3
%5
.8%
0.3
%-1
.6%
-1.0
%-1
.8%
-1.0
%3
.1%
1.1
%0
.8%
0.4
%0
.6%
-0.4
%-0
.3%
1.6
% 5.6
%1
3.7
%7
.7%
1.2
%-2
.9%
-0.5
%-3
.8%
-4.4
%-3
.3%
-1.6
%
5.2
%-0
.9%
-7.4
%-6
.5% -1
.5%
1.8
%
-10%
-5%
0%
5%
10%
15%
20%
25%
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
E
Re
al N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Re
al G
DP
Gro
wth
Real NWP Growth Real GDP
P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy
Real GDP Growth vs. Real P/C (%)
117
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
118
Unemployment and Underemployment Rates: Falling Faster in 2011?
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment rate fell to 8.9%
in February
Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.
Peak rate in the last 30 years:
10.8% in November -
December 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 15.9%
in February 2011
January 2000 through February 2011, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure
Feb 11
119
Unemployment Rate in Canada
7.6
5.9
7.8
8.7
5
6
7
8
9
Jan08
Apr08
Jul08
Oct08
Jan09
Apr09
Jul09
Oct09
Jan10
Apr10
Jul10
Oct10
Jan11
Source: www.tradingeconomics.com
January 2008 throughJanuary 2011 (%)
Unemployment peaked at 8.7% in Canada in Aug.
2009. US peak was 10.1% in Oct. 2009
Current unemployment rate in Canada is between 7.5%
and 8.0% compared to about 9% in the US
Canada’s unemployment
problem has been less severe
than the US
18
67
92
13
65 1
27
42
15
-10
9-1
46
5 97
23
-12
-85 -58
-16
1-2
53
-23
0-2
57
-34
7-4
56
-54
7-7
34 -66
7-8
06 -7
07
-74
4 -64
9-3
34
-45
2-2
97 -2
15
-18
6-2
62
75
-83
16 6
2
24
15
1 61 1
17
14
31
12 1
93
12
8 16
76
82
22
15
8
(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan
-07
Fe
b-0
7M
ar-
07
Ap
r-0
7M
ay-
07
Jun
-07
Jul-
07
Au
g-0
7S
ep
-07
Oct
-07
No
v-0
7D
ec-
07
Jan
-08
Fe
b-0
8M
ar-
08
Ap
r-0
8M
ay-
08
Jun
-08
Jul-
08
Au
g-0
8S
ep
-08
Oct
-08
No
v-0
8D
ec-
08
Jan
-09
Fe
b-0
9M
ar-
09
Ap
r-0
9M
ay-
09
Jun
-09
Jul-
09
Au
g-0
9S
ep
-09
Oct
-09
No
v-0
9D
ec-
09
Jan
-10
Fe
b-1
0M
ar-
10
Ap
r-1
0M
ay-
10
Jun
-10
Jul-
10
Au
g-1
0S
ep
-10
Oct
-10
No
v-1
0D
ec-
10
Jan
-11
Fe
b-1
1
Monthly Change in Private Employment
January 2008 through February 2011* (Thousands)
Private Employers Added 1.739 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
Private employers added jobs in every month in 2010 for a total of
1.449 million for the year
222,000 private sector jobs were created in
February
Inflation
125
Is it a Threat to Claim Cost Severities
126
Annual Inflation Rates, (CPI-U, %),1990–2014F
2.8 2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
-0.4
1.61.9 2.0 2.2 2.2
2.92.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 2/11 (forecasts).
The slack in the U.S. economy suggests that inflation should not heat upbefore 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns
Annual 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 near-
term inflationary pressures
P/C Personal Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests
Source: Bureau of Labor Statistics; Insurance Information Institute.
1.6%1.0%
8.8%
6.1%
3.3%
4.3%
3.1%3.6%
3.3%
4.3%
0%
3%
6%
9%
Overall CPI "Core" CPI InpatientHospitalServices
OutpatientHospitalServices
Physicians'Services
PrescriptionDrugs
Medical CareCommodities
LegalServices
Motor VehicleParts &
Equipment
ResidentialMaint. &Repair
Price Changes in 2010
Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least
127
Excludes Food and Energy
128
Catastrophic Loss –Catastrophe Losses Trends Are
Trending Adversely
129
$8
.3
$7
.4
$2
.6 $1
0.1
$8
.3
$4
.6
$2
6.5
$5
.9 $1
2.9 $
27
.5
$6
1.9
$9
.2
$6
.7
$2
7.1
$1
0.6
$7
.9
$1
00
.0
$7
.5
$2
.7
$4
.7
$2
2.9
$5
.5 $1
6.9
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*20??
US Insured Catastrophe Losses
*Through June 30, 2010.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; Munich Re; Insurance Information Institute.
2010 CAT Losses Are Running Below 2009, So Far Figures Do Not Include an Estimate of Deepwater Horizon Loss
$100 Billion CAT Year is Coming Eventually
First Half 2010 CAT
Losses Were Down 19% or $1.4B from
first half 2009
($ Billions)
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
130
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2009
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3 0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
3.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of the Combined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39
2000s: 3.52
Combined Ratio Points
50
100
150
200
250
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
First Half 201095 Events
Number of events in first half of 2010 is close to the annual totals from five of past ten years.
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)
Source: MR NatCatSERVICE 131© 2010 Munich Re
Thunderstorm losses have quadrupled since 1980.
First Half 2010 $3.0 Bn
U.S. Thunderstorm Loss TrendsAnnual Totals 1980 – 2009 vs. First Half 2010
Source: Property Claims Service, MR NatCatSERVICE 135© 2010 Munich Re
Source: Property Claims Service, MR NatCatSERVICE 136© 2010 Munich Re
Average annual winter storm losses have increased over 50% since 1980.
First Half 2010 $2.4 Bn
U.S. Winter Storm Loss TrendsAnnual totals 1980 – 2009 vs. First Half 2010
Severe winter storms in early 2010 caused major
damage to energy infrastructure
138
Top 12 Most Costly Disastersin US History
(Insured Losses, 2009, $ Billions)
Sources: PCS; Insurance Information Institute inflation adjustments.
$11.3 $12.5
$18.2$22.8 $23.8
$45.3
$8.5$8.1$7.3$6.2$5.2$4.2
$0$5
$10$15$20$25$30$35$40$45$50
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)
8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;
8 of the Top 12 Disasters Affected FL
Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US
and World History
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