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After the Crisis: The P/C Insurance Industry
in the Aftermath of the “Great Recession”
New York Society of Insurance AnalystsFebruary 8, 2010
New York, NY
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 [email protected] www.iii.org
2
Presentation Outline
The Economic Storm: Financial Crisis & Recession Exposure, Growth & Profitability
Key Threats and Issues Facing P/C Insurers Through 2015
Regulatory Reform
Financial Strength & Ratings Key Differences Between Insurer and Bank Performance During Crisis
Insurance Industry Financial Overview & Outlook Profitability Premium Growth Underwriting Performance: Commercial & Personal Lines Financial Market Impacts Merger & Acquisition Activity
Capital & Capacity
Catastrophe Loss Trends
Q&A
3
The Economic Storm
What the Financial Crisis and Recession Mean for the Industry’s
Exposure Base, Growth, Profitability and Investments
4
Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 1/10; Insurance Information Institute.
2.9
%
0.1
%
4.8
%
4.8
%
-0.2
%
-0.7
%
1.5
%
-2.7
%
-5.4
%
-6.4
%
-0.7
%
2.2
%
5.7
%
2.9
%
2.8
%
2.9
%
3.0
%
2.9
%
3.3
%
3.2
%
3.2
%
3.7
%
0.8
%
1.6
%
2.5
% 3.6
%
3.1
%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
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
Personal and Commercial Lines Exposure Base Have Been Hit Hardand Will Be Slow to Come Back
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 Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4%
Economic growth up sharply in Q4:09 with rebuilding of inventories and stimulus.
More moderate growth expected in 2010/11
5
Length of US Business Cycles,1929–Present*
10 1116
6
168 8
19
50
80
3745
39
24
106
36
58
12
92
120
73
43
138 11 10 8
0
10
20
30
40
50
60
70
80
90
100
110
120
Aug1929
May1937
Feb1945
Nov1948
Jul1953
Aug1957
Apr1960
Dec1969
Nov1973
Jan1980
Jul1981
Jul1990
Mar2001
Dec2007
Month Recession Started
Contraction Expansion Following
* Through June 2009 (likely the “official end” of recession) ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Average Duration**Recession = 10.4 MosExpansion = 60.5 Mos
Length of Expansions Greatly Exceeds
Contractions
Duration (Months)
6
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 1/10; 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
%-4
.1%
-4.1
%
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 (%)
7
Regional Differences Will Significantly Impact P/C Markets
Recovery in Some Areas Will Begin Years Ahead of Others
and Speed of Recovery Will Differ by Orders of Magnitude
8
State Economic Growth Varied Tremendously in 2008
US Bureau of Economic Analysis
Highest Quintile
Fourth Quintile
Third Quintile
Second Quintile
Lowest Quintile
Far West0.6
Rocky Mountain2.2
Southwest1.7
Plains2.0 Great Lakes
-0.4
New England1.0
Mideast1.3
Southeast0.0
US = 0.7
WA2.0
OR1.6
CA0.4
NV-0.6
ID0.0
MT1.8
WY4.4
UT1.4 CO
2.9
AZ-0.6 NM
2.0
TX2.0
OK2.7
KS2.2
NE1.3
SD3.5
ND7.3 MN
2.0
IA2.1
MO1.3
WI0.7
IL0.3
MI-1.5
IN-0.6
OH-0.7
NY1.6
PA1.1
NJ0.6
MD1.3
DE-1.6
DC3.0VA
1.3
WV2.5
KY-0.1
NC0.1
SC0.6
TN0.5
AR0.7
LA0.3
MS1.7
AL0.7
GA-0.6
FL-1.6
AK-2.0
HI0.7
ME1.4
NH1.8
VT1.7 MA
1.9
RI-0.9CT
-0.4
Mountain, Plains States Growing the Fastest
Percent Change in Real GDP by State, 2007–2008
9
Fastest Growing States in 2008:Plains, Mountain States Lead
2.1% 2.0%
7.3%
4.4%
3.5%2.9% 2.7% 2.5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
ND WY SD CO OK WV IA TX, MN,NM, WA
Source: US Bureau of Economic Analysis; Insurance Information Institute.
Real State GDP Growth (%)
Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas
10
Slowest Growing States in 2008: Diversity of States Suffering
Source: 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
Real State GDP Growth (%)
-0.9%
-1.5%-1.6% -1.6%
-1.7%
-2.0%
-0.1%
-0.4%-0.6% -0.6% -0.6% -0.6%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%KY CT AZ GA IN NV RI MI DE FL OH AK
11
Labor Market Trends
Fast & Furious:Massive Job Losses Sap the
Economy and Commercial/Personal Lines Exposure
13
Unemployment and UnderemploymentRates: Rocketing Up in 2008-09
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
10.1% Oct 2009 unemployment rate (U-3) was
the highest monthly rate since 1983.
Peak rate in the last 30 years: 10.8% in Nov -
Dec 1982
Stood at 9.7% as of Jan. 2010
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 9.2% in April
2008 to 17.4% in Oct . 2009.
Stood at 16.5% as of Jan. 2010
January 2000 through January 2010, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
16
Unemployment Rates by State, December 2009: Highest 25 States*
10.9
10.3
10.110
.6
10.7
10.9
9.5
9.19.4
9.09.
6
9.0
9.19.
9
11.812
.4
11.0
11.0
11.1
11.212
.113.0
12.9
12.6
14.6
0
2
4
6
8
10
12
14
16
MI NV RI SC CA DC FL NC IL OR AL OH TN KY MS GA NJ IN MO WA MA ID AZ WV NY
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for December 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are
doing much better than others.
17
6.9
6.9
6.7
6.6
6.66.
97.5
7.5
4.7
4.7
6.67.
07.4
4.4
6.7
8.38.
7
7.5
7.57.78.
3
8.38.
9
8.9
8.89.0
0
2
4
6
8
10
DE PA CT AK WI TX ME NM AR CO LA MD WY MN NH HI VA VT MT UT OK IA KS SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, December 2009: Lowest 25 States*
*Provisional figures for December 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are
doing much better than others.
18
US Unemployment Rate
4.5
%
4.5
%
4.6
%
4.8
%
4.9
% 5.4
% 6.1
%
6.9
%
8.1
%
9.3
%
9.6
% 10
.0%
10
.2%
10
.1%
9.9
%
9.6
%
9.4
%
9.1
%
8.9
%
9.8
%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
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
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
Rising unemployment is eroding payrolls
and workers comp’s exposure base.
Unemployment is expected to peak above
10% in early 2010.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1/10); Insurance Information Institute
2007:Q1 to 2011:Q4F*
23
Wage & Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums
* Average Wage and Salary data as of 7/1/2009. 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
Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums
7/90-3/91 3/01-11/01 12/07-?
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Wage & SalaryDisbursements
WC NPW
Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)
*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).
-4.4%
-2.0%-1.1%
1.1%
3.7%4.6%
8.5%
3.5%
2.1%
-0.5%
-3.6%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 2007-2009
Recessions in the 1970s and 1980s saw smaller exposure impacts
because of continued wage inflation, a factor not present
during the 2007-2009 recession
The Dec. 2007 to mid-2009 recession
caused the largest impact on WC
exposure in 60 years
(Percent Change)
(All Post WWII Recessions)
Recession Dates (Beginning/Ending Years)
25
Frequency: 1926–2008A Long-Term Drift Downward
Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research
Manufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
0
5
10
15
20
25
30
'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
28
When Might All of the Lost JobsBe Regained? 2016?
Source: Wall Street Journal, October 9, 2009, p. A3
Crisis-Driven Exposure Drivers
29
Economic Obstaclesto Growth in P/C Insurance
30
(Millions of Units)
New Private Housing Starts, 1990-2011F
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
0
0.5
6 0.7
3
0.9
8
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 09E10F11F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (1/10); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners InsurersDue to Weak Home Construction Forecast for 2010-2011.
Also Affects Commercial Insurers with Construction Risk Exposure, Surety
New home starts plunged 34% from 2005-2007; drop through 2009 is 72% (est.); 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
31
16.9
16.5
16.1
13.1
10.3
12.0
13.4
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 09E 10F 11F
(Millions of Units)
Auto/Light Truck Sales, 1999-2011F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (1/10); Insurance Information Institute.
Car & Truck Sales Will Begin to Recover but Weak Economy, Credit Woes Are Still Restraining Sales; Gas Prices Could Remain a Factor Too
New auto/light truck sales fell by 6 million units in
2009 vs. 2007, to the lowest level since the late 1960s. Forecast for 2010
is up 1.5 million units
Sharply lower auto sales will have a smaller effect on auto insurance
exposure level than problems in the housing market will on home insurers
“Cash for Clunkers” generated about $300M in net new personal auto premiums
32
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
53 71,5
4970
,643
62,3
0452
,374
51,9
5953
,549
54,0
2744
,367
37,8
8435
,472
40,0
9938
,540
35,0
3734
,317
39,2
0119
,695 28
,322
43,5
4660
,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
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
Business Bankruptcy Filings,1980-2009*
*2009 is annualized estimate based on actual business bankruptcies in first three quarters of 2009Source: American Bankruptcy Institute,http://www.abiworld.org/AM/Template.cfm?Section=Business_Bankruptcy_Filings1&Template=/TaggedPage/TaggedPageDisplay.cfm&TPLID=59&ContentID=36301.
Significant Implications for Bond & Surety Lines
There were 45,510 business bankruptcies during the first three quarters of 2009, up 52% from 2008:Q3 and
on track for about 60,000 for all of 2009, the most since 1993. Current recession will generate 200%+ surge
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 204.2%*
34
Private Sector Business Starts,1993:Q2 – 2009:Q1*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
920
1
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
209
207
199
191 19
317
1
203
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Business Starts Are Down 18% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure
*Latest available as of Jan. 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
(Thousands)
171,000 businesses started in 2009:Q1, the lowest level
since 1993
42
Green Shoots
The Recession May Have Ended, but Is it
Self-Sustaining?
43
Hopeful Signs That the Economic Recovery is Underway
Recession appears to have bottomed out, freefall has ended GDP shrinkage has ended; Economy is expanding Pace of job losses is slowing, despite setbacks Major stock market indices well off record lows, anticipating recovery Some signs of retail sales stabilization are evident
Financial sector is stabilizing Banks are reporting quarterly profits Many banks expanding lending to very credit worthy people
and businesses
Housing sector seems to be bottoming out Home are much more affordable (attracting buyers) Mortgage rates are still low relative to pre-crisis levels (attracting buyers) Freefall in housing starts and existing home sales is ending in
many areas
Inflation and energy prices are under control
Consumer and business debt loads are shrinking
Source: Insurance Information Institute.
44
11 Industries for the Next 10 Years: Insurance Solutions Needed
Government
Education
Health Care
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Technology
Light Manufacturing
Export-Oriented Industries
45
Mounting Pressure on Claim Cost Severities?
Inflation Trends:Concerns Over Stimulus Spending
and Monetary Policy
46
Annual Inflation Rates(CPI-U, %), 1990–2011F
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
2.1 2.0
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 10F11F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Jan. 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
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 inflationary pressures
52
Key Threats Facing Insurers Amid Financial Crisis
Challenges for theNext 5-8 Years
54
Important Issues & Threats Facing Insurers: 2010–2015
Continued asset price erosion coupled with major “capital event” would have lead to shortage of capital among some companies
Possible Consequences: Insolvencies, forced mergers, calls for gov't aid, requests to relax capital requirements
P/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after major events (post-9/11, Katrina)
This assumption was incorrect during and immediately after the crisis Cost of capital can rise sharply (relative “risk-free” rates), reflecting both
scarcity, increasing volatility and heightened investor risk aversion
2 Reloading Capital After “Capital Event”
Source: Insurance Information Institute.
Implications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh capital and generate internally.
Was a reality for some life insurers.
55
Important Issues & Threats Facing Insurers: 2010–2015
Low interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gains
Fed actions in Treasury markets keep yields low
Many insurers have not adjusted to this new investment paradigm of a sustained period of low investment gains
Regulators will not readily accept it; many will reject it
Implication 1: Industry must be prepared to operate in environment with investment earnings accounting for a smaller fraction of profits
Implication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.
Lessons from the period 1920–1975 need to be relearned
3 Long-Term Reduction in Investment Earnings
Source: Insurance Information Institute.
56
Important Issues & Threats Facing Insurers: 2010–2???
Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)
Systemic Risk Regulator Is any insurer systemically important?
Federal Insurance Office Creation Within Treasury? Eventual “mission creep”?; Activist director?
Consumer Financial Protection Agency Will it be limited to banks/creditors
Federal Trade Commission: All Lines Study Authority? McCarran-Ferguson Rollback
Will it be limited to Health/Med Mal lines? OFC/State Regulation Debate Lingers Taxation/Offshore Domiciles
4 Regulatory Overreach
Bottom Line: Regulatory Outcome is Uncertain and Risk of Adverse Outcome Exists. Ultimate Regulation Structure Will Be in Place for Decades
Source: Insurance Information Institute.
61
Important Issues & Threats Facing Insurers: 2010–2015
Source: Insurance Information Institute
Bottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012–2014
No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration
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
Torts twice the overall rate of inflation
Influence personal and commercial lines, esp. auto liability
Historically extremely costly to p/c insurance industry
Leads to reserve deficiency, rate pressure
5 Emerging Tort Threat
62
Terrorism: Insurance Concerns Resurface
Reasons Why Concerns Are Mounting in 2010
Perception of U.S. vulnerability is rising Thwarted Christmas Day attack by “underwear bomber”
And new bin Laden tape claiming al Qaeda is responsible Increased anti-terror efforts, including full-body scans Effort by government to appear more vigilant, prepared Trials of Guantanamo 9/11 suspects in Manhattan Court
NYC says it will need $200+ million each year for security Rise of groups such al Qaeda in the Arabian Peninsula U.S. military surge in Afghanistan operations Most buyers, producers have not thought about coverage
issues recently U.K. in January Raised Terror Alert Status to 2nd Highest Level
Shifting Legal Liability & Tort Environment
63
Is the Tort PendulumSwinging Against Insurers?
64
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
* 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
2009–2010 Growth in Tort Costs as % of GDP is Due in
Part to Shrinking GDP
66
The Nation’s Judicial Hellholes: 2010
Source: American Tort Reform Association; Insurance Information Institute
South Florida
West VirginiaIllinoisCook County
New MexicoAppellate
Courts
Watch List
California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley,
TX
Dishonorable Mention
AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme
Judicial Court Sacramento County
New JerseyAtlantic County (Atlantic City)
New York City
Financial Strength & Ratings
67
Industry Has Weathered the Storms Well
P/C Insurer Impairments, 1969–2009p8
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
71
1
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
p
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)
69
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009p
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
9*
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
*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
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
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08
70
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009
3.8%
2.9%3.2%
2.4%
11.9%75.7%
.Source: A.M. Best.
P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses
Are Anticipated in the Industry’s Risk Management Strategy
Despite financial market turmoil and a soft market
in 2009, 76% of ratings actions by A.M. Best were affirmations;
just 2.9% were downgrades and 3.2%
were upgrades
Affirm – 1,375
Downgraded – 53
Upgraded – 59Initial – 44
Under Review – 69
Other – 216
72
Reasons for US P/C Insurer Impairments, 1969–2008
3.7%4.2%
9.1%
7.0%
7.9%
7.6%
8.1% 14.3%
38.1%
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 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
Deficient Loss Reserves/In-adequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems
Misc.
Sig. Change in Business
P/C Insurance Financial Performance
76
A Resilient Industry in Challenging Times
P/C Net Income After Taxes1991–2009: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 $3
6,8
19
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$2
,37
9
$1
6,1
64
-$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:Q3
2005 ROE*= 9.4% 2006 ROE = 12.2% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009:Q3 ROAS1 = 4.5%
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 4.5% ROAS for 2008 and 5.9% for the first 9 months of 2009. 2009:Q3 net income was $20.5 billion excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute
P-C Industry profits for full-year 2009 appear headed for 1991’s level, after adjusting
for inflation
79
ROE: P/C vs. AllIndustries1987–2009:Q3*
* Excludes Mortgage & Financial Guarantee in 2008 and 2009 through Q3.Sources: ISO, Fortune; Insurance Information Institute.
-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:Q3
US P/C Insurers All US Industries
P/C Profitability isCyclical and Volatile
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
80
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2009:Q3*
* Excludes mortgage and financial guarantee insurersSource: The Geneva Association, Insurance Information Institute
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*09Q3*
ROE Cost of Capital
-13
.2 p
ts
-1.7
pts
+2
.3 p
ts
-9.0
pts
-7.1
pts
-4.6
pts
The P/C Insurance Industry Fell WellShort of Its Cost of Capital in 2008/09
US P/C Insurers Missed Their Cost of 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
The Cost of Capital is the Rate of Return Insurers Need to
Attract and Retain Capital to the Business
(Percent)
A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 is Where It’s At Now
Combined Ratio / ROE
* 2009 figure is return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guarantee insurersSource: Insurance Information Institute from A.M. Best and ISO data
97.5
100.6 100.1 100.7
92.6
99.5101.0
5.9%
9.6%
15.9%
14.3%
12.7%
4.5%
8.9%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009:Q30%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
Combined ratio of about 100 generated a 6% ROE in 2009, 10%
in 2005 and16% in 1979
P/C Premium Growth Primarily Driven by the
Industry’s Underwriting Cycle, Not the Economy
82
83
-10%
-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 0809
E10
F
Strength of Recent HardMarkets by NWP Growth
(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 1.0% in 2007 (First Decline Since 1943) by 1.4% in 2008, and 4.5%
through 2009:Q3, the First 3-Year Decline Since 1930-33 During the Great Depression.
Expected decline of 2.5% - 3.0% in 2010.
85
Monthly Change in Auto Insurance Prices*
(Percent)
* Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
0.8
%0
.8%
0.5
%0
.4%
0.3
%0
.3%
0.5
%0
.6%
0.5
%0
.1% 0.5
% 0.9
%1
.1%
1.3
% 1.7
%2
.6%
2.6
%2
.7% 3.0
%3
.1% 3.4
% 3.7
% 4.0
%4
.0% 4.3
%4
.4% 4.7
%4
.4% 4.7
%4
.6%
4.7
%4
.5%
4.6
%4
.5%
0.2
%
0%
1%
2%
3%
4%
5%
6%
Jan
07
Fe
b 0
7M
ar
07
Ap
r 0
7M
ay
07
Jun
07
Jul 0
7A
ug
07
Se
p 0
7O
ct 0
7N
ov
07
De
c 0
7Ja
n 0
8F
eb
08
Ma
r 0
8A
pr
08
Ma
y 0
8Ju
n 0
8Ju
l 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 0
9A
ug
09
Se
p 0
9O
ct 0
9N
ov
09
Auto Insurance Price Increases Seem to Have Leveled Off in Recent Months at About a 4.5% Annual Rate
87
Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2009)
-3.2
%
-5.9
%
-7.0
%
-9.4
%
-9.7
% -8.2
%
-4.6
%
-2.7
%
-3.0
%
-5.3
%
-9.6
%
-11
.3%
-11
.8%
-13
.3%
-12
.0%
-13
.5%
-12
.9% -1
1.0
%
-6.4
% -5.1
%
-4.9
%
-5.8
%
-6.0
%
-0.1
%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Magnitude of Price Declines Shrank
During Crisis, Reflecting Shrinking
Capital, Reduced Investment Gains,
Deteriorating Underwriting
Performance, Higher Cat Losses and
Costlier Reinsurance
(Percent)
Market Remains Soft as Capital Restored and Underwriting Losses Fall
Capital/PolicyholderSurplus (US)
90
Shrinkage, but Not Enoughto Trigger Hard Market
93
Policyholder Surplus, 2006:Q4–2009:Q3
Source: ISO, AM Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8$505.0
$515.6$517.9
$380
$400
$420
$440
$460
$480
$500
$520
$540
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3
Capacity Peaked at $521.8 as of 9/30/07
Declines Since 2007:Q3 Peak
08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%)
09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)
Capacity as of 9/30/09 was just 5.9% below the 2007 peak and will likely set a new record in 2010
94
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
* 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
3.3%
9.6%
6.9%
10.9%
6.2%
13.8%
16.2%
0%
3%
6%
9%
12%
15%
18%
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**
The Financial Crisis at its Peak Ranks as the Largest
“Capital Event” Overthe Past 20+ Years
(Percent)
95
* 2009 NWP and Surplus figures are YTD % changes as of Q3:09 vs Q3:08Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
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
NWP % change Surplus % change
(Percent)
Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market
Surplus growth is now positive but premiums
continue to fall, a departure from the historical pattern
Investment Performance
96
Investments Are a PrincipleSource of Declining Profitability
Property/Casualty Insurance Industry Investment Gain: 1994–2009:Q31
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.4$26.2
$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:Q3
Investment Gains Fell by 51% In 2008 Due to Lower Yields,Poor Equity Market Conditions. Through Three Quarters in 2009,
Write-downs Were Offset by Unrealized Capital Gains
1 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)
102
Underwriting Trends – Financial Crisis Does Not
Directly Impact Underwriting Performance: Cycle, Catastrophes
Were 2008’s Drivers
103
P/C Insurance Industry Combined Ratio, 2001–2009:Q3*
* Excludes Mortgage & Financial Guaranty insurers in 2008. Including M&FG, 2008=105.1, 2009=100.7 Sources: A.M. Best, ISO.
95.7
99.5101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009: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
2005 Ratio Benefited from Heavy Use of Reinsurance
Which Lowered Net Losses
104
2.3
-2.1
-8.3
-2.6-6.6
-9.9 -9.8
-4.1
1
11.7
23.2
13.79.9
7.3
-6.7-9.5
-14.6-16 -15
-5
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
E
11
E
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2011E
Reserve Releases Will Expected to Taper Off in 2010 and Drop Significantly in 2011
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.
105
Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1
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.
10
5.6
10
7.8
11
0.1 1
15
.9
10
7.3
10
0.1
98
.3 10
0.9
92
.4 95
.5
10
5.1
10
1.9 10
5.9
11
5.7
10
6.9
10
8.4
10
6.4
10
5.8
10
1.6 10
5.6
10
7.8
11
0.0
11
2.3
10
0.8
96
.6
96
.0
10
0.6
93
.9 97
.4
10
5.5
10
5.7 10
9.4
11
5.7
10
6.9
10
8.4
10
6.4
10
5.8
10
1.6
80
85
90
95
100
105
110
115
120
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
108
Performance by Segment:Commercial/Personal Lines &
Reinsurance
109
Calendar Year Combined Ratios by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
101.0 101.2
92.2
100.3
103.7
100.599.8
107.2
103.6
9092949698
100102104106108110
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Overall deterioration in 2010 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 improve in 2010 while commercial lines
and reinsurance deteriorate
111
After-Tax Return on Surplus (ROE) by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
5.3%
7.3%
5.2%
6.6%7.1%
5.3%
3.9%
-1.3%
1.7%
-2%-1%0%1%2%3%4%5%6%7%8%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Profitability will rise or stabilize across most p/c lines, barring a financial crisis relapse or major catastrophic losses
Personal lines ROEs should improve in 2010 and remain flat in commercial lines and
reinsurance
113
Net Written Premium Growth by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
-1.1%
-7.9%
-1.5%
1.8%
-5.6%
-2.0%
3.5%
-4.0%
-0.7%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
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
capacity are holding down reinsurance prices while higher insurer retentions impact premiums
Personal lines will return to growth in 2010 while commercial lines and reinsurance are
expected to continue to shrink
116
Catastrophic Loss –Catastrophe Losses Trends Are
Trending Adversely
117
$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
6.0
$1
1.1
$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*20??
US Insured Catastrophe Losses
* 2009 figure is Munich Re estimate.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.
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
$100 Billion CAT Year is Coming Eventually
2009 CAT Losses
Were Down 48% though
Q3 from $21.1B 2008
($ Billions)
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Global Natural Catastrophes 1980–2009Overall and insured losses with trend
US
$bn
Overall losses (in 2009 values) Insured losses (in 2009 values)
Trend insured lossesTrend overall losses
Source: Munich Re NatCatSERVICE; Insurance Information Institute.
MEGATREND
Global natural catastrophe loss trends are ominous and
portend an even more disastrous decade ahead. Terrorism and other man-
made disasters could exacerbate the trend.
125
Top 12 Most Costly Disastersin US History
(Insured Losses, 2008, $ Billions)
* PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.
$11.3 $11.3 $12.5
$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)
Northridge(1994)
Ike(2008)*
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
In 2008, Ike Became the 4th Most Expensive Insurance Event and 3rd Most Expensive
Hurricane in US History Arising from About 1.35MM Claims
126
Total Value of Insured Coastal Exposure
(2007, $ Billions)
Source: AIR Worldwide
$224.4$191.9
$158.8$146.9$132.8
$92.5$85.6$60.6$55.7$51.8$54.1
$14.9
$479.9$635.5
$772.8$895.1
$2,378.9$2,458.6
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
$522B Increase Since 2004,
Up 27%
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
The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004
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