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An Industry and Economy in Transition:
Overview and Outlook for US P/C Insurance Markets
New York Society of Securities AnalystsNew York, NY
March 19, 2012Download at www.iii.org/presentations
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
3
Economics 2012:
The World Is Changing2012 Is the First Year Since 2005 Where Economic Perceptions and Reality in the US Will Be Positive
Potentially Enormous Benefits for P/C Insurers
3
4
Economic Outlook for 2012
Economic Growth Will Accelerate Modestly in 2012/13, Beating Expectations No Double Dip Recession Economy remains more resilient than most pundits presume
Consumer Confidence Will Continue to Improve Consumer Spending/Investment Will Continue to Expand Consumer and Business Lending Continue to Expand Housing Market Remains Weak, but Some Improvement Expected in 2012 Inflation Remains Tame
Runaway inflation highly unlikely but energy spike possible; Fed has things under control Private Sector Hiring Remains Consistently Positive, Exceeds Expectations
Unemployment dips below 8% by year’s end Sovereign Debt, Euro Currency/Economy, Muni Bond “Crises” Overblown European Recession in Milder than Commonly Presumed Soft Landing in China Higher Oil Prices and Current Middle East Turmoil Pose Greater Risk to US Economy than in
2011 Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End Stock and Bond Markets More Stable, Less Volatile Political Environment Is More Hospitable to Business Interests Obama Wins Re-Election Based on Improving Economy
5
P/C Insurance Exposures Grow Robustly Personal and commercial exposure growth is certain in 2012; Strongest since 2004 But restoration of destroyed exposure will take until mid-decade
P/C Industry Growth in 2012 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional “hard market” emerges in 2012
Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, in some severity in key lines
Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures Wage growth is also positive and could modestly accelerate WC will prove to be tough to fix from an underwriting perspective
Increase in Demand for Commercial Insurance Will Accelerate in 2012 Includes workers comp, property, marine, many liability coverages Laggards: inland marine, aviation, commercial auto, surety Personal Lines: Auto leads, homeowners lags (though HO leads in NPW growth due to rates)
Investment Environment Is/Remains Much More Favorable Return of realized capital gains as a profit driver Interest rates remain low; Some upward pressured if economic strength surprises
Industry Capacity Hits a New Record by Year-End 2012 (Barring Mega-CAT)
Insurance Industry Predictions for 2012
The Strength of the Economy Will Influence P/C Insurer
Growth Opportunities
7
Growth Will Expand Insurable Exposures and Help Absorb Excess Capital
7
8
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/12; 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%
3.9
%3
.8%
2.5
%2
.3%
0.4
%1
.3%
1.8
% 3.0
%2
.1%
2.2
%2
.4%
2.6
%2
.5%
2.7
%2
.9%
3.0
%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
13
:1Q
13
:2Q
13
:3Q
13
: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%
2012 is expected to see a steady
acceleration in growth continuing into 2013
74
.4
73
.6
73
.6
72
.2
73
.6 76
67
.8
68
.9
68
.2
67
.7 71
.6 74
.5
74
.2 77
.5
67
.5 69
.8
74
.3
71
.5
63
.7
55
.7 59
.4 60
.9 64
.1
69
.9
75
.0
75
.3
40
45
50
55
60
65
70
75
80
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Consumer Sentiment Survey (1966 = 100)
January 2010 through February 2012
Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially in late 2011 and early 2012
Source: University of Michigan; Insurance Information Institute
Optimism among consumers is recovering, in part due to an
improving jobs outlook, after plunging amid the debt debate debacle and S&P downgrade
9
10
16.9
16.5
16.1
13.2
10.4
11.6 12
.7
14.0 14
.6
14.7 15
.1
15.4
15.5
15.4
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 09 10 11 12F 13F 14F 15F 16F 17F 18-22F
(Millions of Units)
Auto/Light Truck Sales, 1999-2022F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 2/12); Insurance Information Institute.
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector.
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 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
2012 and beyond
11
(Millions of Units)
New Private Housing Starts, 1990-2022F
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
1 0.7
2 0.8
8
1.3
4
1.2
3
1.3
2
1.3
81
.42
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 11 12F13F14F15F16F17F 18-22F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 2/12); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. 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
The plunge and lack of recovery in homebuilding and in construction in general
is holding back payroll exposure growth
Job growth, improved credit
market conditions and demographics
will eventually boost home construction
58
.3
57
.1
60
.4
59
.6
57
.8
55
.3
55
.1
55
.2
55
.3 56
.9 58
.2
58
.5 60
.8
61
.4
59
.7
59
.7
54
.2 55
.8
51
.4 52
.5
52
.5
51
.8
52
.2 53
.1 54
.1
52
.4
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through February 2012
The manufacturing sector has been expanding and adding jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Optimism among manufacturers was
increasing in late 2011 and into early 2012
12
13
$200,000
$300,000
$400,000
$500,000
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Jan. 2012
*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to December 2011 was 30.2%. This growth leads to gains in many commercial exposures: WC, Commercial Auto,
Property and Various Liability Coverages
The value of Manufacturing Shipments in Dec. 2011 was up 30.2%
to $464B from its May 2009 trough. Dec. figure is only 4.5% below its previous record high in July 2008.
$ Millions
13
66%
68%
70%
72%
74%
76%
78%
80%
82%
Mar
01
Jun 0
1
Sep 0
1
Dec 0
1
Mar
02
Jun 0
2
Sep 0
2
Dec 0
2
Mar
03
Jun 0
3
Sep 0
3
Dec 0
3
Mar
04
Jun 0
4
Sep 0
4
Dec 0
4
Mar
05
Jun 0
5
Sep 0
5
Dec 0
5
Mar
06
Jun 0
6
Sep 0
6
Dec 0
6
Mar
07
Jun 0
7
Sep 0
7
Dec 0
7
Mar
08
Jun 0
8
Sep 0
8
Dec 0
8
Mar
09
Jun 0
9
Sep 0
9
Dec 0
9
Mar
10
Jun 1
0
Sep 1
0
Dec 1
0
Mar
11
Jun 1
1
Sep 1
1
Dec 1
1
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 15
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
“Full Capacity”
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
The US operated at 78.5% of industrial capacity in Jan. 2012, above the June 2009
low of 68.3% and close to its post-crisis peak
December 2007-June 2009 Recession
March 2001 through January 2012
15
50
.7 52
.7 54
.1
54
.6
54
.8
53
.5
53
.7
52
.8 53
.9
54
.6 56 5
7.1 5
9.4
59
.7
56
.3
54
.4
53
.3
53
.4
53
.8
52
.6
52
.6
52
.6
52
.6
53
.0
56
.8
57
.3
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through February 2012
Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.
Optimism among non-manufacturers was
stable in late 2011 and increased in early 2012
16
17
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
,837
56,2
8247
,806
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 10 11
Business Bankruptcy Filings,1980-2011
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more
than tripled during the financial crisis.
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
17
18
Private Sector Business Starts, 1993:Q2 – 2011:Q2*
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
119
219
219
320
1 204
202
210 21
220
921
6 220 22
322
022
021
022
121
220
421
820
920
720
719
919
1 193
172 17
616
918
417
5 179
188
200
183 18
7
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 09 10 11
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly* Data through June 30, 2011 are the latest available as of March 7, 2012; Seasonally adjusted.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
(Thousands)
Business starts were up 4.5% to 370,000 in the first half of 2011 vs. first half 2011.
722,000 new business starts were recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new
business starts since 1993
Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 740,000**
18
19
12 Industries for the Next 10 Years: Insurance Solutions Needed
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light Manufacturing
Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking)
20
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
20
21
Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 8.3% in February 2012
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 14.9%
in Feb. 2012
January 2000 through February 2012, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving
21
Feb 12
186
7921
365
127
42 15-1
09-1
465
9723
-12
-85 -58
-161
-253 -230
-257
-347
-456
-547
-734 -6
67-8
06-7
07-7
44-6
49-3
34-4
52-2
97-2
15 -186
-262
75-8
316
62
229
51 6111
714
311
2 193
128 16
711
925
726
126
410
810
2 175
5221
613
9 178 23
4 285
233
144
(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan-
07F
eb-0
7M
ar-0
7A
pr-0
7M
ay-0
7Ju
n-07
Jul-0
7A
ug-0
7S
ep-0
7O
ct-0
7N
ov-0
7D
ec-0
7Ja
n-08
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-0
9Ju
n-09
Jul-0
9A
ug-0
9S
ep-0
9O
ct-0
9N
ov-0
9D
ec-0
9Ja
n-10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-1
1Ju
n-11
Jul-1
1A
ug-1
1S
ep-1
1O
ct-1
1N
ov-1
1D
ec-1
1Ja
n-12
Feb
-12
Monthly Change in Private Employment
January 2008 through February 2012* (Thousands)
Private Employers Added 4.046 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs
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
233,000 private sector jobs were created in
February
22
0.02
30.
011
-0.0
74-0
.132
-0.2
93-0
.546
-0.7
76-1
.033
-1.3
80-1
.836
-2.3
83-3
.117
-3.7
84-4
.590
-5.2
97-6
.041
-6.6
90-7
.024
-7.4
76-7
.773
-7.9
88-8
.174
-8.4
36-8
.361
-8.4
44-8
.428
-8.3
66-8
.222
-7.9
93-7
.942
-7.8
81-7
.764
-7.6
21-7
.509
-7.3
16-7
.188
-7.0
21-6
.902 -6.3
84-6
.120
-6.0
12-5
.910
-5.7
35-5
.683
-5.4
67-5
.328
-5.1
50-4
.916
-4.6
31-4
.396
-6.6
45
-10
-8
-6
-4
-2
0
2
Dec
-07
Jan-
08F
eb-0
8M
ar-0
8A
pr-0
8M
ay-
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-
Jun-
09Ju
l-09
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12F
eb-1
2
Mill
ion
sCumulative Change in Private Employment: Dec. 2007—Feb. 2012
December 2007 through February 2012* (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job losses peaked at 8.444 million
in December 2009
Cumulative job losses as of Feb. 2012 totaled
4.398 million
23
All of the jobs “lost” since President
Obama took office in Jan. 2009 have been
recouped
Private Employers Added 4.046 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
24
Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2011:Q4
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Billions
$5,500
$5,750
$6,000
$6,250
$6,500
$6,75005
:Q1
05:Q
2
05:Q
3
05:Q
4
06:Q
1
06:Q
2
06:Q
3
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
Peak was 2008:Q1 at $6.60 trillion
Latest (2011:Q4) was $6.71 trillion,
a new peak
Recent trough (2009:Q3) was $6.25 trillion, down
5.3% from prior peak
Growth rates in 2011Q2 over Q1: 0.6%
Q3 over Q2: 0.4% Q4 over Q3: 1.0%
Pace of payroll growth is
accelerating
24
29
P/C Insurance Industry Financial Overview
Profit Recovery Was Set Back in 2011 by High Catastrophe
Loss & Other Factors
29
P/C Net Income After Taxes1991–2011:Q3 ($ 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
$3
4,6
70
$7
,97
9
$2
8,6
72
-$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 11*
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 5.6% 2011:Q3 ROAS1 = 1.9%
P-C Industry 2011:Q3 profits were down 71% to $8.0B vs. 2010:Q3,
due primarily to high catastrophe losses and as non-cat
underwriting results deteriorated
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for 2011:Q3, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute 30
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2010 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011-12 combined ratios are A.M. Best estimate excl. M&FG insurers. Source: Insurance Information Institute from A.M. Best and ISO data.
97.5
100.6 100.1 100.8
92.7
101.099.3
100.8102.0
107.5
95.7
6.1%
3.9%
7.5%7.4%4.4%
9.6%
15.9%
14.3%
12.7% 10.9%
8.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011E 2012F0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
31
-5%
0%
5%
10%
15%
20%
25%
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
11
*1
2
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012F*
*Profitability = P/C insurer ROEs. 2011-12 figures are A.M. Best estimates. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
2012F: 6.1%*
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2011E: 3.9%
32
33
ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2011*
* Excludes Mortgage & Financial Guarantee in 2008 - 2011.Sources: ISO, Fortune; A.M. Best (2011 P/C ROE); Insurance Information Institute (2011 Fortune 500 est.)
-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 10 11E
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Global Catastrophe Loss Developments and Trends
40
2011 Rewrote Catastrophe Loss and Insurance History
But Will Losses Turn the Market?
40
Geophysical events(earthquake, tsunami, volcanic activity)
Meteorological events (storm)
Hydrological events(flood, mass movement)
Selection of significant loss events (see table)
Natural catastrophes
Earthquake, tsunami Japan, 11 March
EarthquakeNew Zealand, 22 Feb.
Cyclone Yasi Australia, 2–7 Feb.
Landslides, flash floodsBrazil, 12/16 Jan.
Floods, flash floods Australia, Dec. 2010–Jan. 2011
Severe storms, tornadoesUSA, 22–28 April
Severe storms, tornadoesUSA, 20–27 May
WildfiresUSA, April/Sept.
EarthquakeNew Zealand, 13 June
FloodsUSA, April–May
Climatological events(extreme temperature, drought, wildfire)
Number of Events: 820Number of Events: 820
DroughtUSA, Oct. 2010– ongoing
Hurricane IreneUSA, Caribbean22 Aug.–2 Sept.
WildfiresCanada, 14–22 May
DroughtSomaliaOct. 2010–Sept. 2011
FloodsPakistanAug.–Sept.
FloodsThailandAug.–Nov.
Earthquake Turkey23 Oct.
Flash floods, floodsItaly, France, Spain4–9 Nov.
Floods, landslidesGuatemala, El Salvador11–19 Oct.
Tropical Storm WashiPhilippines, 16–18 Dec.
Winter Storm JoachimFrance, Switzerland, Germany, 15–17 Dec.
42Source: MR NatCatSERVICE
Natural Loss Events, 2011
World Map
48
Top 16 Most Costly World Insurance Losses, 1970-2011**
(Insured Losses, 2011 Dollars, $ Billions)
*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.**Figures do not include federally insured flood losses.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.
$11.9$13.0 $13.0$13.1
$19.1$21.3
$24.0$25.0
$37.5
$47.6
$7.7 $8.1 $8.3 $8.5 $9.3 $9.7
$0$5
$10$15$20$25$30$35$40$45$50
Hugo (1989)
WinterStormDaria(1991)
ChileQuake(2010)
Ivan (2004)
TyphoonMirielle(1991)
Charley(2004)
Wilma(2005)
ThailandFloods(2011)
NewZealandQuake(2011)
Ike (2008)
Northridge(1994)
SpringTornadoes/
Storms(2011)
WTC TerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)*
Katrina(2005)
5 of the top 14 most expensive
catastrophes in world history have occurred within the past 2 years
Taken as a single event, the Spring 2011 tornado and
thunderstorm season would likely become the 5th
costliest event in global insurance history
51
U.S. Insured Catastrophe Loss Update
2011 Was One of the Most Expensive Years on Record
51
52
Top 14 Most Costly Disastersin U.S. History
(Insured Losses, 2011 Dollars, $ Billions)
*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.Sources: PCS; Insurance Information Institute inflation adjustments.
$9.0$11.9 $13.1
$19.1$21.3
$24.0 $25.0
$47.6
$8.5$7.7$6.5$5.5$4.4$4.3
$0$5
$10$15$20$25$30$35$40$45$50
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Northridge(1994)
SpringTornadoes& Storms*
(2011)
9/11Attack(2001)
Andrew(1992)
Katrina(2005)
Taken as a single event, the Spring 2011 tornado and storm season are
is the 4th costliest event in US insurance history
Hurricane Irene became the 11th most expense
hurricane in US history
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 – 2011Number of Events (Annual Totals 1980 – 2011)
Source: MR NatCatSERVICE 53
37
8
51
2
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
There were 117 natural disaster events in 2011
55
$1
2.3
$1
0.7
$3
.7 $1
4.0
$1
1.3
$6
.0
$3
3.9
$7
.4 $1
5.9 $
32
.9
$7
1.7
$1
0.3
$7
.3
$2
8.5
$1
1.2
$1
4.1
$3
2.6
$1
00
.0
$1
3.7
$4
.7
$7
.8
$3
6.9
$8
.6
$2
5.8
$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 11*20??
US Insured Catastrophe Losses
*PCS estimate through Sept. 30, 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation Adjusted Basis
$100 Billion CAT Year is Coming Eventually
Record Tornado Losses Caused
2011 CAT Losses to Surge
($ Billions, 2011 Dollars)
55
$500
$530
$830
$975
$980
$1,000
$1,200
$1,400
$1,510
$2,000
$5,000
$6,900
$7,300
$840
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000
Flooding, April*
Wildfire, Sep. 4-19
Thunderstorms, Apr. 19-20
Thunderstorms, Aug. 18-19
Winter Storm, Jan. 31-Feb. 3
Thunderstorms, Jul. 10-14
Texas Drought, 2011*
Thunderstorms, Jun. 16-22
Thunderstorms, Apr. 14-16
Thunderstorms, Apr. 8-11
Thunderstorms, Apr. 3-5
Hurricane Irene, Aug. 26-28**
Thunderstorms, May 20-27
Thunderstorms, Apr. 22-26
**Includes $700 million in flood losses insured through the National Flood Insurance Program.Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute.
2011’s Most Expensive Catastrophes, Insured Losses
Includes $1.65B in AL, mostly in the Tuscaloosa
and Birmingham
areas
Includes approximately $2B in losses
for May 22 Joplin tornado
57
58
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011*
*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.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
4.4
9.0
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
2010
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 2010s: 6.70*
Combined Ratio Points
U.S. Thunderstorm Loss Trends, 1980 – 2011
59Source: Property Claims Service, MR NatCatSERVICE
Average thunderstorm
losses are up more than 5 fold since the early 1980s
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss. 2008-2011 are the most expensive
years on record.
Thunderstorm losses in 2011 totaled a record
$25.8 billion
69
SPRING 2012 TORNADO & SEVERE STORM OUTBREAK
2012 Is Off to a Worrisome Start, But a Repeat of 2011 Is Unlikely
69
70
1,1
33
1,1
32 1
,29
7
1,1
73
1,0
82 1,2
34
1,1
73
1,1
48
1,4
24
1,3
45
1,0
71 1,2
16
94
1
1,3
76
1,2
64
1,1
03
1,0
98
1,6
92
1,1
46 1,2
82
31
2
1,819
1,7
09
550
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011P12*
Nu
mb
er
of
To
rna
do
es
0
100
200
300
400
500
600
Nu
mb
er o
f De
ath
s
Number of Tornadoes
Number of Deaths
*Through March 13, 2012.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html
Number of Tornadoes and Related Deaths, 1990 – 2012*
Tornadoes claimed 550 lives in 2011, the most since 1925
There were 1,709 tornadoes recorded
in the US in 2011
2012 Tornado Losses Is Off to a Ominous Beginning. First Half 2011 Insured Losses from Tornadoes and Thunderstorms Topped $21B.
U.S. Tornado Count, 2005-2012*
71
*Through March 17, 2012.Source: http://www.spc.noaa.gov/wcm/
2012 count is running
ahead of 2011
There were 1,897 tornadoes in the US in 2011 far above
average, but well below 2008’srecord
The BIG Question:When Will the Market Turn?
78
Are Catastrophes and Other Factors Pressuring Insurance Markets?
78
79
Criteria Necessary for a “Market Turn”:All Four Criteria Must Be Met
Criteria Status Comments
Sustained Period of
Large Underwriting
LossesEarly Stage,
Inevitable
•Apart from 2011 CAT losses, overall p/c underwriting losses remain modest•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at onset of last hard market)•Prior-year reserve releases continue to reduce u/w losses, boost ROEs, though more modestly
Material Decline in Surplus/ Capacity
Entered 2011 At Record
High; Since Fallen
•Surplus hit a record $565B as of 3/31/11•Fell by 4.6% through 9/30/11 (latest available)•Little excess capacity remains in reinsurance markets•Weak growth in demand for insurance is insufficient to absorb much excess capacity
Tight Reinsurance
MarketSomewhat in
Place
•Much of the global “excess capacity” was eroded by cats•Higher prices in Asia/Pacific•Modestly higher pricing for US risks
Renewed Underwriting
& Pricing Discipline
Some Firming esp. in
Property, WC
•Commercial lines pricing trends have turned from negative to flat or up in some lines (property, WC); Casualty is flat.•Competition remains intense as many seek to maintain market share
Sources: Barclays Capital; Insurance Information Institute.
1. UNDERWRITING
81
Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?
81
82
P/C Insurance Industry Combined Ratio, 2001–2011:Q3*
* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9 Sources: A.M. Best, ISO.
95.7
99.3100.8
108.2
101.0
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 2011*
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
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Underwriting Gain (Loss)1975–2011*
* Includes mortgage and financial guaranty insurers in all yearsSources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
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 1011*
Cumulative underwriting deficit from 1975 through
2010 is $455B
($ Billions)Underwriting losses in
2011 at $34.9
through Q3 will be
largest since 2001
83
85
2
(2)
(8)
(3)
(7)(10) (10)
(4)
(0)
11
24
15
119
(5)
(9)
(14)
(10) (11)(7)
(5)(2)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
E
12
F
13
F
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
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, 1992–2013F
Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to
Further Diminish in 2012 and 2103Note: 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: Barclays Capital; A.M. Best.
Prior year reserve releases totaled $8.8
billion in the first half of 2010, up from
$7.1 billion in the first half of 2009
93
Performance by Segment:Personal Lines
93
Homeowners Insurance Combined Ratio: 1990–2012F
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
.2
94
.4 10
0.3
88
.9 95
.6
11
6.8
10
5.7
10
6.7
12
3.7
10
5.0
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 10 11E12F
Homeowners Line Could Deteriorate in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected Due to
Local Catastrophe Loss Activity
Sources: A.M. Best (1990-2012E); Insurance Information Institute. 95
Private Passenger Auto Combined Ratio: 1993–2012P
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
0.2
10
1.3
10
1.0
10
0.8
10
0.3
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 10 11E 12F
Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best (1990-2012F); Insurance Information Institute. 96
104
Performance by Segment:Commercial Lines
104
109.4110.2
118.8
109.5
112.5
110.2
107.6
104.1
109.7 110.2
102.5
105.4
91.2
94.8
101.299.5
101.0
107.5
102.0102.0
111.1112.3
122.3
90
95
100
105
110
115
120
125
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
P
12
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute
Commercial Lines Combined Ratio, 1990-2012F*
Commercial lines underwriting
performance in 2011 was the worst since 2002
106
Workers Compensation Combined Ratio: 1994–2012F
10
2.0
97
.0 10
0.0
10
1.0
11
0.9
11
0.0
10
7.0
10
2.7
98
.4
10
3.6
10
4.4 1
10
.6 11
6.8
11
8.5
12
0.5
12
1.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F
Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They
Have Been in a DecadeSources: A.M. Best ; Insurance Information Institute. 112
2. SURPLUS/CAPITAL/CAPACITY
123
Have Large Global Losses Reduced Capacity in the Industry, Setting
the Stage for a Market Turn?
123
125
Policyholder Surplus, 2006:Q4–2011: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
$556.9 $559.1
$538.6
$564.7
$505.0$515.6$517.9
$420
$440
$460
$480
$500
$520
$540
$560
$580
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 10:Q4 11:Q1 11:Q2 11:Q3
2007:Q3Previous Surplus Peak
Quarterly Surplus Changes Since 2011:Q1 Peak
11:Q2: -$5.6B (-1.0%)
11:Q3: -$26.1B (-4.6%)
Surplus as of 9/30/11 was down 4.6% below its all
time record high of $564.7B set as of 3/31/11. Further
declines are possible.
*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 $0.83 of NPW, close to the strongest claims-
paying status in its history.
A.M. Best is predicting year-end 2011 surplus was down just 1.7%
and that surplus will increase sharply by 8.4% in 2012
125
127
$1
2,1
30
.5
$3
9,5
07
.0
$1
8,1
42
.5
$1
0,6
46
.5
$9
84
.0
$4
18
.7
$2
2,0
29
.6
$5
86
.3
$1
0,3
89
.9
$4
,75
7.7
$1
7,3
46
.9
$1
6,1
14
.4
$5
,55
2.5
$6
,97
4.1
$8
,86
9.7
74
87
66
48 47
24
53
69
51
5656
5552
42
40
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
(Va
lue
of
De
als
$ M
ill)
0
10
20
30
40
50
60
70
80
90
100
Nu
mb
er o
f De
als
Value of Deals $ Mill)
Number of Deals
*2011 data are through December 1.Source: SNL Securities; Insurance Information Institute.
M&A Activity in the US P/C Insurance Industry, 1997-2011*
P/C M&A activity in 2011 is up 60% since 2008, its highest level (in $ terms) since 2008
M&A Activity in the P/C Insurance Industry Remains Well Below its 1990s Peak
131
3. REINSURANCE MARKET CONDITIONS
Record Global Catastrophes Activity is
Pressuring Pricing
131
132
Global Property Catastrophe Rate on Line Index, 1990—2012 (as of Jan. 1)
15%
-3%
-13%
-8%
-20% -18% -1
1%
3%
14%
-11%
-6%
-9%
-16%
10%
-12%
-3%
8%
14%
76%
68%
25%
20%
0%
115
141
230
200184
147
123
152
255
233
195
235
184
199
133111
105
237
100
154
173
145
190
-40%
-20%
0%
20%
40%
60%
80%
100%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Ye
ar
Ov
er
Ye
ar
% C
ha
ng
e in
RO
L
0
50
100
150
200
250
300
Cu
mu
lativ
e R
ate
on
Lin
e (1
99
0=
10
0)
Year Over Year % Change
Cumulative Rate on Line Index
Sources: Guy Carpenter; Insurance Information Institute.
Property-Cat reinsurance pricing is up about 8% as of 1/1/12—modest relative
to the level CAT losses
Source: Guy Carpenter, GC Capital Ideas.com, February 28, 2012.
Historical Capital Levels of Guy Carpenter Reinsurance Composite, 1998—3Q11
133
Most excess reinsurance capacity was
removed from the market in 2011, but
there does not appear to be a
shortage, leading to modest increases in
2012 reinsurance renewals except in areas hit hard by
CATs.
4. RENEWED PRICING DISCIPLINE
135
Is There Evidence of a Broad and Sustained Shift in Pricing?
135
136
-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 09 10 11*
12
Soft Market Persisted into Early 2011 but Growth Returned: More in 2012?
(Percent)1975-78 1984-87 2000-03
*2011 and 2012 figures are A.M. Best EstimatesShaded 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 3.5% (est.) in
20112012
expected growth is
3.8%
138
Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2011)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
% -8.2
%-4
.6% -2
.7%
-3.0
%-5
.3%
-9.6
%-1
1.3
%-1
1.8
%-1
3.3
%-1
2.0
%-1
3.5
%-1
2.9
% -11
.0%
-6.4
% -5.1
%-4
.9%
-5.8
%-5
.6%
-5.3
%-6
.4% -5.2
%-5
.4%
-2.9
%
2.8
%
-0.1
% 0.9
%
-0.1
%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
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
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute
KRW Effect
Pricing as of Q3:2011 was positive for the first time
since 2003. Slightly stronger gains in Q4.
(Percent)
Q2 2011 marked the 30th consecutive quarter of price
declines
142
Change in Commercial Rate Renewals, by Line: 2011:Q4
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewed Uniformly Upward in Q4:2011 for Only the Second Time Since 2003; Property Lines
& Workers Comp Leading the Way
Percentage Change (%)
2.7% 3.0%
5.7%
7.5%
0.8%
2.0% 2.0% 2.1% 2.2% 2.3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Su
rety
EP
L
Co
mm
l Au
to
D&
O
Ge
ne
ral
Lia
bili
ty
Um
bre
lla
Co
nst
ruct
ion
Bu
s.In
terr
up
tion
Co
mm
erc
ial
Pro
pe
rty
Wo
rke
rsC
om
p
Property lines are showing larger increases than
casualty lines, with the exception of workers
compensation
INVESTMENTS: THE NEW REALITY
152
Investment Performance is a Key Driver of Profitability
Does It Influence Underwriting or Cyclicality?
152
Property/Casualty Insurance Industry Investment Income: 2000–2013F1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.2 $46.3 $45.5 $46.4
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11E* 12F 13F
Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates
1 Investment gains consist primarily of interest and stock dividends.*2011E figure is annualized based on actual investment income through 2011:Q3; 2012F-201F based on Conning projections.Sources: ISO; Conning Research & Consulting; Insurance Information Institute.
($ Billions)
Investment earnings in 2011 are estimated to be about 15% below their 2007 pre-crisis peak
Property/Casualty Insurance Industry Investment Gain: 1994–2011E1
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$52.9$56.0$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 11E*
Investment Gains in 2011 Were Surprisingly Robust. Investment Gains Recovered Significantly Due to Realized Investment Gains; The Financial
Crisis Caused Investment Gains to Fall by 50% in 2008
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; 2011 figure is annualized based 2011:Q3 actual of $42.0B.Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains through Q3:2011 were $2.1B above the
same period in 2010—a surprise given falling rates
and flat stock markets
155
156
P/C Insurer Net Realized Capital Gains/Losses, 1990-2011E
*2011 is an estimate based on annualized actual 2011 9-month figure of $5.5B.Sources: A.M. Best, ISO, Insurance Information Institute.
$2.8
8
$4.8
1 $9.8
9
$9.8
2
$10.
81 $18.
02
$13.
02
$16.
21
$6.6
3
-$1.
21
$6.6
1
$9.1
3
$9.7
0
$3.5
2 $8.9
2
-$7.
98
-$5.
70
$7.3
0
-$19
.81
$9.2
4
$6.0
0
$1.6
6
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E*
Insurers Posted Net Realized Capital Gains in 2011 for the First Time Since 2007. Realized Capital Losses Were the Primary Cause
of 2008/2009’s Large Drop in Profits and ROE
($ Billions)$11.2B positive swing
156
Shifting Legal Liability & Tort Environment
161
Is the Tort PendulumSwinging Against Insurers?
161
162
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
Tort costs in dollar terms have remained high but relatively stable
since the mid-2000s., but are down substantially as a share of GDP
Deepwater Horizon Spike
in 2010
1.68% of GDP in 2013
2.21% of GDP in 2003
= pre-tort reform peak
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172