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Catastrophes,the Credit Crunch,
and the Insurance Cycle Impacts & Implications
for the P/C Insurance Industry
Steven N. Weisbart, Ph.D., CLU, Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5540 Cell: (917) 494-5945 [email protected] www.iii.org
Casualty Actuaries of the Mid-Atlantic RegionSheraton University City Hotel
Philadelphia, PAJune 5, 2008
The Weakening Economy
andthe Credit Crunch
3.7%
0.8%
1.6%
2.5%
3.6%
3.1%2.9%
2.2%
1.4%
2.2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2
000
2
001
2
002
2
003
2
004
2
005
2
006
2007
2008
2009
Real Annual GDP Growth, 2000-2009F
Sources: US Department of Commerce, Blue Economic Indicators 4/08; Insurance Information Institute.
March 2001-November
2001 recession
Recession?
Blue bars are actual; Yellow bars are forecasts
3.5%3.6%
2.5%
3.1%2.8%
4.5%
1.2%
4.8%
2.4%
1.1%
0.6%
4.9%
0.6%0.9%
0.1%
2.1%1.9%2.0%
2.6%2.8%2.9%
2.1%
3.8%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
04:2
Q
04:3
Q
04:4
Q
05:1
Q
05:2
Q
05:3
Q
05:4
Q
06:1
Q
06:2
Q
06:3
Q
06:4
Q
07:1
Q
07:2
Q
07:3
Q
07:4
Q
08:1
Q
08:2
Q
08:3
Q
08:4
Q
09:1
Q
09:2
Q
09:3
Q
09:4
Q
Real Quarterly GDP Growth, 2005-2009F
Sources: US Department of Commerce; Blue Economic Indicators 4/08; Insurance Information Institute.
3 Major hurricanes
Red bars are actual, seasonally adjusted; Yellow bars are forecasts
Recession?
Case-Schiller Home Price Index Monthly: 20 City Composite (Jan 2000=100)
100
110
120
130
140
150
160
170
180
190
200
210
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Peak in July 2006 at 206.52. Home prices more than
doubled between January 2000 and July 2006
March 2008 index value was 172.16: home prices were 16.6%
below their July 2006 peak
Home prices are now about where they were in Oct 2004
Source: http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_052703.xls
New Private Housing Starts,1990-2014F (Millions of Units)
2.07
1.80
1.36
0.98
1.10
1.38 1.
45
1.54 1.56
1.51
1.48
1.35
1.46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.60
1.71
1.85
1.96
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F 09F 10F 11F 12F 13F 14F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 4/08 edition of BCEI; Insurance Info. Institute
I.I.I. estimate: 100,000 housing starts = $87.5 million in gross premium.
2008 vs. 2005 net premium loss is $954
million (I.I.I. est).
Housing Starts, Annual Data
329
346
349
343
332
336
309
1273
1359 14
99
1611
1716
1465
1046
161
67
0
300
600
900
1,200
1,500
1,800
2,100
2001 2002 2003 2004 2005 2006 2007 2008:Q1
units in multi-family buildings single family units
Source: US Census Bureau
Thousands of Units
The slump is in single-family housing. Starts of multi-family buildings have held at 310,000 to 350,000 units each year.
Quarterly Housing Starts
74
87
88 81 76
89
98 84 71
84
99 95 80
84
92 90 79
91
97 85 82
88 85 80 62
77
85 84 67
274
374 341 285
293
386
361 319 304
406
412 377 345
456
440.00
370.00
369.00
485.00
471
392
382
433 372
278 260
333 265
188 161
0
100
200
300
400
500
600
2001:Q
1
2001:Q
2
2001:Q
3
2001:Q
4
2002:Q
1
2002:Q
2
2002:Q
3
2002:Q
4
2003:Q
1
2003:Q
2
2003:Q
3
2003:Q
4
2004:Q
1
2004:Q
2
2004:Q
3
2004:Q
4
2005:Q
1
2005:Q
2
2005:Q
3
2005:Q
4
2006:Q
1
2006:Q
2
2006:Q
3
2006:Q
4
2007:Q
1
2007:Q
2
2007:Q
3
2007:Q
4
2008:Q
1
units in multi-family buildings single family units
Source: US Census Bureau
Thousands of Units
The slump is in single-family housing. Starts of multi-family buildings have held at 70,000 to 90,000 units each quarter.
1.0%
1.5%
2.0%
2.5%
3.0%
1990
:Q1
1990
:Q4
1991
:Q3
1992
:Q2
1993
:Q1
1993
:Q4
1994
:Q3
1995
:Q2
1996
:Q1
1996
:Q4
1997
:Q3
1998
:Q2
1999
:Q1
1999
:Q4
2000
:Q3
2001
:Q2
2002
:Q1
2002
:Q4
2003
:Q3
2004
:Q2
2005
:Q1
2005
:Q4
2006
:Q3
2007
:Q2
2008
:Q1
Homeowner Vacancy Rates,Quarterly, 1990-2008:Q1
Source: U.S. Census Bureau, http://www.census.gov/hhes/www/housing/hvs/qtr108/q108tab1.html
March 2001-November 2001
recession
July 1990-March 1991
recession
Vacancy rates began rising in 2005:Q3
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
1990
:Q1
1990
:Q4
1991
:Q3
1992
:Q2
1993
:Q1
1993
:Q4
1994
:Q3
1995
:Q2
1996
:Q1
1996
:Q4
1997
:Q3
1998
:Q2
1999
:Q1
1999
:Q4
2000
:Q3
2001
:Q2
2002
:Q1
2002
:Q4
2003
:Q3
2004
:Q2
2005
:Q1
2005
:Q4
2006
:Q3
2007
:Q2
2008
:Q1
Rental Vacancy Rates,Quarterly, 1990-2008:Q1
Source: U.S. Census Bureau, http://www.census.gov/hhes/www/housing/hvs/qtr108/q108tab1.html
March 2001-November
2001 recession
July 1990-March 1991
recession
Vacancy rates began falling in 2004:Q2
16.816.916.9
16.6
17.1
17.5
17.8
17.4
16.5
16.1
15.3
15.7
16.416.6 16.7
16.9
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
99 00 01 02 03 04 05 06 07 08F 09F 10F 11F 12F 13F 14F
Weakening economy, credit crunch, high gas prices hurt auto sales
2008 vs. 2005: -8.3%
Falling auto sales will have a smaller effect on auto insurance
exposure growth than problems in the housing market will on home
insurers
Auto/Light Truck Sales,1999-2014F (Millions of Units)
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 3/08 edition of BCEI; Insurance Info. Institute
Do Increases in Gas Prices AffectAuto Collision Claim Frequency?
5.5
6.0
6.5
7.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Paid
Cla
im F
req
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Avg
Gas P
rice/G
al
Collision Claim Frequency Gas Prices
Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm); ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: Fourth Quarter 2007, published March 31, 2008 and earlier reports.
Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100
Do Changes in Miles Driven AffectAuto Collision Claim Frequency?
5.5
6.0
6.5
7.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Paid
Cla
im F
req
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/08martvt/08martvt.pdf; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: Fourth Quarter 2007, published March 31, 2008 and earlier reports.
Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100
Miles Driven vs. Gas Pricesin Recent Months
200,000
210,000
220,000
230,000
240,000
250,000
260,000
270,000
280,000
Jan Feb Mar April May June July Aug Sept Oct Nov Dec Jan Feb March
$2.00
$2.20
$2.40
$2.60
$2.80
$3.00
$3.20
$3.40
Miles Driven Gas Prices
Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm); Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08martvt/08martvt.pdf; .
Miles DrivenGas Price/ Gallon
2007 2008
Inflation Rate (CPI-U), % Changefrom Prior Quarter, Annualized
2.3%
3.8%
5.5%
3.3%3.8%
4.6%
2.7%
5.1%
4.1%
2.5%2.6%2.2%
2.6%2.3%2.3%2.3%
-2.0%
3.0%
5.1%
1.8%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
05:Q
1
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
Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Apr. 10, 2008; Ins. Info. Institute.
Inflation is up again. Medical cost inflation, important in WC, auto
liability and other casualty covers is running far ahead
of overall inflation.
US Unemployment Rate,(2007:Q1 to 2009:Q4F)
4.7%4.6%
4.7%4.5% 4.5% 4.5%
4.6%4.8%
4.9%
5.2%
5.4%5.5% 5.5%
5.6%5.5% 5.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
06:Q1 06:Q2 06:Q3 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
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/08); Insurance Info. Inst.
Higher unemployment rate reduces workers comp exposure; could signal a temporary claim frequency surge
Blue bars are actual; Yellow bars are forecasts
Implications forthe P/C Insurance Industry
5.2%
-0.9
%-7
.4%
-6.5
%-1
.5%
1.8%
4.3%
18.6
%20
.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%
13.7
%7.
7%1.
2%-2
.9% -0
.5%
-2.9
%-2
.7%
-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
08F
Rea
l N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Rea
l G
DP
Gro
wth
Real NWP Growth Real GDP
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth in
the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 4/08; I.I.I.
$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*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45Wage & SalaryDisbursementsWC NPW
*As of 7/1/07 (latest available).Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Net Written Premiums
7/90-3/91
Shaded areas indicate recessions
3/01-11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
Weakening wage and salary growth is
expected to cause a deceleration in workers comp
exposure growth
What’s Being Done to “Fix” the Economy?
“Fix” Effect on InsurersFed Rate Cuts
Might reduce yields on new bond investments, butMight also raise asset value of existing bonds (65-80% of portfolio)In the longer run, might contribute to inflation
$168 Billion Stimulus Package
Hope is that plan boosts overall economic activity and employment (by 500,000 jobs) and therefore might support p/c personal and commercial exposuresBut plan contributes to already-large federal budget deficits; Washington might hike taxes
Bear Stearns Bailout
No direct effect, but tighter regulation of banks and hedge funds seems likely.Will it be the stimulus for a financial regulatory structure that includes insurers, too?
Summary of Economic Risks and Implications for (Re) Insurers
Economic Concern Risks to Insurers
Subprime Meltdown/ Credit Crunch
•Some insurers have some asset risk•D&O/E&O exposure for some insurers•Client asset management liability for some•Bond insurer problems; Muni credit quality
Housing Slump •Reduced exposure growth•Deteriorating loss performance on neglected, abandoned and foreclosed properties
Lower Interest Rates •Lower investment income
Stock Market Slump •Decreased capital gains (often relied upon more heavily as a source of earnings as underwriting results deteriorate)
General Economic Slowdown/Recession
•Reduced commercial lines exposure growth•Surety slump•Increased workers comp frequency
Post-Crunch:Four Fundamental IssuesTo Be Examined Globally
Post-Crunch: Fundamental Issues To Be Examined Globally
Source: Insurance Information Institute
• Effectiveness and Nature of Regulation What sort of oversight is optimal given recent
experience? Credit problems arose under both US and
European (Basel II) regulatory regimes Will new regulations be globally consistent? Can overreactions be avoided? Capital adequacy & liquidity
• Ratings on Financial Instruments New approaches to reflect type of asset, nature of
risk
2 More Fundamental IssuesTo Be Examined Globally
Source: Insurance Information Institute
• Adequacy of Risk Management at Financial Institutions Worldwide Colossal failure of risk management (and
regulation) Implications for ERM? Includes review of incentives
• Accounting Rules Problems arose under FAS, IAS Asset Valuation, including Mark-to-Market Structured Finance & Complex Derivatives
Legal Aspectsof the Credit Crunch
Turbulent MarketsGive Rise to Lawsuits
Shareholder Class Action Lawsuits*
*Securities fraud suits filed in U.S. federal courts. Not included above are 313 suits (all but 1 filed in 2001) relating to IPO allocations.
Source: Stanford University School of Law (http://securities.stanford.edu
164
202
163
231
188
111
173
242
210 215
185
266
226237
182
118
177
87
0
100
200
300
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
Defendants include banks, investment banks, builders, lenders, bond and mortgage insurers
Count is current as
of May 30.
Suits filed/year
Origin of D&O Claims for Public Companies, 2006
Customers & Clients, 4%Competitors,
6%
Employees, 25%
Government, 2%
Other 3rd Party, 22%
Shareholders, 40%
40% of D&O suits originate
with shareholders
Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.
Catastrophic Losses
$66$62
$160
$66$70
$39$40$48
$36
$52
$68
$84
$49
$117
$0
$20
$40
$60
$80
$100
$120
$140
$160
1899
1903
1907
1911
1915
1919
1923
1927
1931
1935
1939
1943
1947
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
$ B
illio
ns
Chart shows effects of hurricanes but not other causes of catastrophic
levels of property loss.
Sources: Source: Roger Pielke et al, “Normalized Hurricane Damage in the United States: 1900-2005,” Natural Hazards Review, Vol. 9, No. 1 (February 1, 2008), pp. 29-41; Bonnie Cavanaugh, “A Century of Aftershocks,” Best’s Review, April 2006, pp. 24-31.
On Average, the U.S. has a $35B+ (Direct EconomicLosses, 2005 $) Catastrophic Year Every 8 Years
27 Years
32
$20$24 $26
$33 $33 $34 $35$41 $42
$80
$0$10$20$30$40$50$60$70$80$90
$ B
illi
ons
With continued coastal development, $35B+ storms will be more common.
Source: AIR Worldwide **ISO/PCS estimate as of June 8, 2006
Largest Insured Losses (Adjusted to 2005 Exposure Levels) from 10 Hurricanes
$9 $11 $11 $12 $16$25 $27
$38
$88
$108
$0
$20
$40
$60
$80
$100
$120
$ B
illi
ons
With development along major fault lines,
the threat of $30B+ quakes looms large
Source: AIR Worldwide
3 of the Top 10 are not West Coast events
Insured Losses (adjusted to 2005 exposure levels) from 10 Most Damaging US Earthquakes
Number of Tornadoes, 1985 – 2007
1071
1216
941
1376
1819
1264
1106
109311
32
1133
856
702
65676
5
684
1297
1173
1082
1234
1173
1148
1424
1345
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1985 86 87 88 89
1990 91 92 93 94
1995 96 97 98 99
2000 01 02 03 04
2005 06 07
Sources: US Dept. of Commerce, Storm Prediction Center, National Weather Service,at http://www.spc.noaa.gov/climo/torn/monthlytornstats.pdf
There are usually more than 1,000 confirmed tornadoes each year in the US. They accounted for about 25% of catastrophe losses since 1985.
Top Five Catastrophic Wildland Fires In California, 1970-2007*
$0.5
$0.5
$1.1
$1.2
$1.6
$2.5
$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0
Oct. 27-28, 1993: Orange Co., CA
Nov. 2-3, 1993: Los Angeles Co., CA
Oct. 25-Nov. 3, 2003 San Bernardino County, CA, "Old"
Oct. 25-Nov. 4, 2003: San Diego Co., CA, "Cedar"
Oct. 2007: Southern CA Fires*
Oct. 20-21, 1991: Oakland, Alameda Cos., CA
*Estimated insured losses. Adjusted to 2006 dollars by the Insurance Information Institute. 2007 fire losses are stated in 2007 dollars.Source: ISO's Property Claim Services Unit; Insurance Information Institute.
Insured Losses (Billions 2006 $)
Global Insured Catastrophe Lossesby Region, Excluding U.S.,2001-2007
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
2001 2002 2003 2004 2005 2006 2007
Seas/SpaceAfricaOceania/AustraliaSouth AmericaAsiaEurope
Sources: Insurance Information Institute compiled from Swiss Re sigma issues.
Don’t Overlook the Catastrophes that Didn’t Happen (or Haven’t Yet)
• In 2007 two Category 5 storms struck the Gulf of Mexico
Luckily for the U.S., neither made landfall here
Unluckily for Mexico, both made landfall there.
• Stephen Flynn’s The Edge of Disaster
• Nassim Taleb’s Fooled by Randomness and The Black Swan
U.S. Insured Catastrophe Losses*$7
.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$6.5
$100
.0
$61.
9
$9.2
$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
20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2004 and 2005 remind us that it’s possible to suffer damage from more than one hurricane and/or other catastrophe in a
year. 2007 (in Mexico) reminds us that it’s possible to have two
CAT-5 storms in one year.
Is a $100 Billion CAT year coming
soon?
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2%
Tornadoes, $77.3 , 26.0%
All Tropical Cyclones, $137.7 ,
46.3%
Civil Disorders, $1.1 , 0.4%
Utility Disruption, $0.2 , 0.1%
Water Damage, $0.4 , 0.1%Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 , 6.4%
Winter Storms, $23.1 , 7.8%
Terrorism, $22.3 , 7.5%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Insured disaster losses totaled $297.3 billion from
1987-2006 (in 2006 dollars). Wildfires accounted for
approximately $6.6 billion of these—2.2% of the total.
The 2008 Hurricane Season:
Is a Bad Year in the Forecast?
Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade
4
10 106
65
4
6
88
5
8
6
9
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s
*Figure for 2000s is extrapolated based on data for 2000-2007 (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)).Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
Mid 1920s – mid-1960s:
AMO Warm Phase
Mid-1990s – 2030s?
AMO Warm Phase
Already as many major storms in 2000-2007 as in all of the 1990s
Atlantic Sea Surface Temperatures, 1948-2007
Source: AIR web site, http://www.air-worldwide.com/_public/html/air_currentsitem.asp?ID=1364
Outlook for 2008 Hurricane Season: 60% Worse Than Average
Average* 2005 2008F
Named Storms 9.6 28 15Named Storm Days 49.1 115.5 80
Hurricanes 5.9 14 8Hurricane Days 24.5 47.5 40Intense Hurricanes 2.3 7 4
Intense Hurricane Days 5 7 9
Accumulated Cyclone Energy 96.2 248 150
Net Tropical Cyclone Activity 100% 275% 160%*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 9, 2008.
Major Hurricanes Might FormBut Not Make Landfall
• From Hurricane Irene in 1999 to Hurricane Lili in 2002, 21 consecutive hurricanes developed in the Atlantic basin without a single U.S. landfall.
• “This is how nature sometimes works.”From 1966 to 2003, of 79 major (3-4-5) hurricanes, 19
(24%) made landfall.During 2004-5, 7 of 13 (54%) major hurricanes made
landfallDuring 2006-7, 0 of 4 (0%) major hurricanes made landfall
Source: Philip Klotzbach and William Gray, “Extended Range Forecast of Atlantic Seasonal Hurricane Activity and U.S. Landfall Strike Probability for 2008,” Department of Atmospheric Science, Colorado State University, April 9, 2008, p. 27.
Catastrophe Litigation
P/C Insurers Have Won Virtually Every Major Post-Katrina Case
• Most cases centered on validity of flood exclusion and various wind vs. water theories
• The victories in court came at a high public relations cost Post-Katrina litigation was dragged out over a 2+-year period
accounting for the vast majority of negative press in the first 16 months after the storm
While the industry was successful at explaining the rationale for pursuing most cases, it struggled with the classic David vs. Goliath story
• The hostile stories feed “Insurance Hoax” genre of stories View that insurers systematically deny, delay and lowball Bad Faith litigation might be wave of future (e.g., LA AG suit)
• FL significantly added to negative press in 2007• Exacerbated by hundreds of thousands of nonrenewals
Flood Insurance
People Buy It After a Flood…but Just for a Year or Two
Number of New NFIP Flood Policies in the Gulf States Since Katrina*
11,531
272,338
111,984
34,683
187,799
0
50,000
100,000
150,000
200,000
250,000
300,000
Alabama Florida Louisiana Mississippi Texas
*Change from July 2005 through August 2007.Sources: NFIP ; Insurance Information Institute.
The number of flood insurance policies sold
in the Gulf states in the 2 years following Katrina increased by
618,335 or 21.6%
Percent Growth of NFIP Flood Policies in Gulf States Since Katrina*
26.69%
14.15%
29.04%
80.24%
40.54%
21.62%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Alabama Florida Louisiana Mississippi Texas Total GulfStates
*Change from July 2005 through August 2007.Sources: NFIP ; Insurance Information Institute.
The number of flood insurance policies sold in the Gulf
states in the 2 years following Katrina
increased by 21.6%
Percentage of NFIP Flood Policies Issued Since Katrina That Are Not Renewed*
23%
32%
17%19%
25%
8.6%
0%
5%
10%
15%
20%
25%
30%
35%
Alabama Florida Louisiana Mississippi Texas US***Policies issued since July 2005 as of August 2007. **US figure is nonrenewal rate for all policies in force, average over 12 month period ending August 2007.Sources: NFIP ; Insurance Information Institute.
Flood policy nonrenewal rates in Gulf states are surprisingly high
What Could Happenin the
Mid-Atlantic States?
Source: AIR Worldwide
Insured Losses: $110BEconomic Losses: $200B+
$70
$30
$5 $4 $1$0
$20
$40
$60
$80
NY NJ PA CT Other
Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm
Total Insured Property Losses =
$110B, nearly 3 times that of
Hurricane Katrina
Distribution of Insured Property Losses,
by State, ($ Billions)
How Much DamageCan a Mid-Atlantic Hurricane
Do?
Once Upon a Time …
“There is a detailed record of major destruction by landfalling hurricanes [in the NJ-NY-NE region] in 1635, 1815, 1821, and 1938.”
“A hurricane hitting the North does the same damage as a hit by the next higher Safir-Simpson category hurricane in the South.
• The nature of northern hurricanes, and the changes they undergo as they move northward, also amplify damage.
• Their radius of maximum winds increase 2-3 times over southern hurricanes. This changes increases storm surge damage along the coasts as well as the areal extent of wind damage inland.”
Source: Nicholas Coch, “The Unique Damage Potential of Northern Hurricanes,” at http://gsa.confex.com/gsa/2006AM/finalprogram/abstract_108209.htm
The Flood Risk inthe Mid-Atlantic States:
Few who live along theNew Jersey Coast
Have Flood Insurance
Flood Insurance Penetration Rates:Top 25 Counties/Parishes in the US*
81.5%80.0%
78.7%77.1%
74.1%69.6%
68.4%68.1%
66.7%65.9%65.5%
62.4%59.0%
56.2%51.6%
49.6%48.0%
46.3%44.4%
42.8%42.8%
42.0%41.9%
40.1%
84.0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
JEFFERSON/LAWALTON/FL
BROWARD/FLCOLLIER/FL
LEE/FLGALVESTON/TX
GLYNN/GAST. BERNARD/LAMIAMI-DADE/FL
ORLEANS/LACARTERET/NC
ST. CHARLES/LAST. JOHNS/FL
CHARLOTTE/FLST. TAMMANY/LA
HORRY/SCINDIAN RIVER/FL
BAY/FLBRUNSWICK/NC
NASSAU/FLBERKELEY/SCPINELLAS/FL
BRAZORIA/TXCHATHAM/GA
TERREBONNE/LA
FL: 11 countiesLA: 6 parishes TX: 2 counties GA: 2 counties NC: 2 counties SC: 2 counties MS: 0 counties AL: 0 counties
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
Flood Insurance Penetration Rates: Counties/Parishes Ranked 26-50*
39.7%39.2%39.1%38.7%
37.2%36.5%36.2%
34.2%33.0%
32.1%30.6%
28.3%27.6%27.0%26.8%26.4%26.1%
25.4%25.3%25.2%
23.4%23.3%
22.1%21.7%
39.8%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
BALDWIN/ALSARASOTA/FL
PALM BEACH/FLCHARLESTON/SC
MANATEE/FLMARTIN/FL
ATLANTIC/NJLAFOURCHE/LA
OKALOOSA/FLGEORGETOWN/SC
FLAGLER/FLMAUI/HI
LIVINGSTON/LABREVARD/FL
SUSSEX/DEVOLUSIA/FL
ST. LUCIE/FLJEFFERSON/TX
HAMPTON CITY/VAOCEAN/NJ
HARRIS/TXPASCO/FL
BOSSIER/LANEW HANOVER/NC
BRONX/NY
FL: 10 counties LA: 3 parishes TX: 2 counties SC: 2 counties NJ: 2 counties AL: 1 county
MS: 0 counties CT: 0 counties
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
Where is Cape May county?
Flood Insurance Penetration Rates:Counties/Parishes Ranked 51-75*
20.9%20.1%
19.1%18.3%17.8%17.7%17.5%16.7%16.3%15.8%15.6%15.4%
14.5%14.0%13.3%12.9%12.6%11.7%11.6%11.3%
10.2%9.3%9.1%8.5%
21.6%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
CAMERON/TXFORT BEND/TX
SANTA ROSA/MSHARRISON/MSJACKSON/MS
NORFOLK CITY/VAHILLSBOROUGH/FL
LAFAYETTE/LAEAST BATON ROUGE/LA
VIRGINIA BEACHESCAMBIA/FLHONOLULU/HI
SACRAMENTO/CACALCASIEU/LA
MONTGOMERY/TXCITRUS/FL
MERCED/CACHESAPEAKE,
OSCEOLA/FLHUDSON/NJ
DUVAL/FLBARNSTABLE/MA
MARIN/CATULARE/CA
MONMOUTH/NJ
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
Where are Cape May
and Middlesex counties?
Total $ NFIP Claim Paymentsby State (Top 10) 1/1/1978 – 3/31/2008
$ Millions$15,454
$3,453$2,971 $2,795
$736 $791 $478 $445$752$846$921
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
LA FL TX MS AL NJ NC PA NY CA VA
Source: http://bsa.nfipstat.com/reports/1040.htm, visited 5/30/2008
Until 2005 Texas ranked 1st in terms of total flood
claims payments.
Total Number of NFIP Claimsby State (Top 10) 1/1/1978 – 3/31/2008
301,
297
142,
895
146,
309
44,4
35
28,4
05
64,4
45
44,1
25
44,2
88
61,0
53
29,4
65
24,2
97
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
LA FL TX MS AL NJ NC PA NY CA VA
Closed Open Closed W/O Payment
Source: http://bsa.nfipstat.com/reports/1040.htm, visited 5/30/2008
Who Should Payfor the Risk of
Hurricane/Flood Damage?
28% 33% 32%
22%
30% 31%
0%
10%
20%
30%
40%
50%
60%
70%
Coastal Counties Interior Counties Noncoastal States
Very unfair Somewhat Unfair
Source: Insurance Research Council
63% of Non-coastal Policyowners Say PremiumSubsidies for Coastal Property Owners are Unfair
Coastal States
63%63%
50%
22%34% 31%
29%
25% 30%
0%
10%
20%
30%
40%
50%
60%
70%
Coastal Counties Interior Counties Noncoastal States
Somewhat Unfair
Very unfair
Source: Insurance Research Council
Most Non-coastal Policyowners Say TaxpayerSubsidies for Coastal Property Owners are Unfair
Coastal States
51%
59% 61%
My Financial House
Personal Finance
Software is popular as well
My Financial House software
helps you organize and assess your
current financial situation
The InsuranceCycle:
Will the CycleBe Unbroken?
Profitability:Did Profits Reach
a Cyclical Peak in 2006/07?
By No Reasonable Standard Can Profits Be Deemed Excessive
-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 0607
E08
F
Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008F*
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006:12.2%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
*GAAP ROE for all years except 2007 which is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune
-3%
0%
3%
6%
9%
12%
15%
18%
21%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
US P/C Insurers All US Industries
ROE: U.S. P/C Insurance Industry vs. Fortune 500
Sources: Insurance Information Institute; Fortune
AndrewNorthridge
Hugo
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
1987:17.3%1997:11.6% 2007:14.0%
Top Industries by ROE: P/C Insurers Underperformed Again in 2007
26.3%26.1%
24.9%23.9%
23.0%22.0%21.8%
20.6%20.4%20.4%20.3%20.0%
19.0%13.5%
11.0%10.7%
-1.2%
56.0%
-10% 0% 10% 20% 30% 40% 50% 60%
Household and Personal ProductsPetroleum Refining
Hotels, CasinosOil & Gas Equipment
Food ServicesMetals
Food Consumer ProductsNetwork, Communications Equip
Aerospace/DefenseMedical Products
ElectronicsPharmaceuticalsIndustrial Equip
Health Care InsuranceP/C Insurers (Stock)L/H Insurers (Stock)Commercial Banks
Div. Financials
Source: Fortune magazine
ROE of publicly-held P/C insurers in 2007 ranked 31st out of 50
industry groups despite near-peak profitability
…
but the P/C industry outperformed most
other financial industries in 2007
Personal/Commercial Lines & Reinsurance ROEs, 2006-2008F*
14.0%
16.8%
12.3%
9.4%
13.2%
6.3%
9.8% 10.7%9.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Personal Commercial Reinsurance
2006 2007E 2008F
Sources: A.M. Best Review & Preview (historical and forecast).
ROEs are declining as underwriting results
deteriorate
Can AnythingChange the Profit Cycle?
4 Factors That Could Affectthe Length and Depth of the Cycle
Factors that Could Affect theLength and Depth of the Cycle
Capacity: Rapid surplus growth in recent years has left the industry with between $85 billion and $100 billion in excess capital, according to analysts
All else equal, rising capital leads to greater price competition and a liberalization of terms and conditions
Investment Gains: 2007 was the 5th consecutive up year on Wall Street. With declines in stock prices and falling interest rates, portfolio yields are certain to fall
Smaller realized capital gains A sustained equity market decline (and potentially a drop
in bond values) could reduce policyholder surplus
Factors that Could Affect theLength and Depth of the Cycle
Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which could extend the depth and length of the cycle
Many companies have been releasing “redundant” reserves, which allows them to boost net income even as underwriting results deteriorate
But reserve releases will diminish in 2008; Even more so in 2009
Information Systems: Management has more and better tools that allow faster adjustments to price, underwriting and changing market conditions than it had during previous soft markets
Source: Insurance Information Institute.
UnderwritingTrends
90
95
100
105
110
115
120
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
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000s: 102.6*
*2000-2007 Sources: A.M. Best; ISO, III
U.S. P/C Insurance Industry Combined Ratio, 1970-2007
115.8
107.4
100.198.3
100.7
92.5
95.6
90
100
110
120
2001 02 03 04 05 06 2007
P/C Insurance Combined Ratio, 2001-2007
Sources: A.M. Best; ISO, III.
2005 figure benefited from heavy use of reinsurance which lowered net losses
The best combined ratio
since 1949
As recently as 2001, insurers paid out nearly $1.16 for
every $1 in earned premiums
2007 deterioration due mainly to falling rates, “normal” CAT activity
$1
0.8 $
22
.8 $3
3.4
$3
6.9
$1
8.9
($5.0)($6.0)($5.3)
$0.4
($7.0)
8.9
-1.1-1.3-1.6
4.5
-1.20.1
3.5
8.6
6.5
($10)
($5)
$0
$5
$10
$15
$20
$25
$30
$35
$40
00 01 02 03 04 05 06 07F 08F 09F
Re
se
rve
De
ve
lop
me
nt
($B
)
(3)(2)(1)012345678910
Co
mb
ine
d R
ati
o P
oin
ts
PY Reserve DevelopmentCombined Ratio Points
Impact of Reserve Changes on Combined Ratio
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
Reserve adequacy has
improved substantially
Premium Growth
At a Virtual Standstillin 2007/08
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Three “Hard Markets” in the Last 40 Years
1975-78 1984-87 2001-04
Post-Katrina period resembles 1993-97
(post-Andrew)
2007: -0.6% premium growth is the first decline since 1943
Growth in Net Written Premium, 2000-2007E
*2007 figure based on actual 9-month results.Source: A.M. Best; Forecasts from the Insurance Information Institute.
5.0%
8.4%
15.3%
10.0%
3.9%
0.5%
2.7%
0.0%
2000 2001 2002 2003 2004 2005 2006 2007*
P/C insurers are experiencing their slowest growth rates since 1943…
but underwriting results are expected to remain relatively healthy
Personal/Commercial Lines & Reinsurance NPW Growth, 2006-2008F
2.0% 3.5%
28.1%
-0.1%
-1.5%
1.4%
-2.3%
-8.5%-5.0%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Personal Commercial Reinsurance
2006 2007E 2008F
Sources: A.M. Best Review & Preview (historical and forecast).
Net written premium growth is expected to be slower for commercial insurers and reinsurers
Rates Under Pressurein 2007/08,
Especially Commercial Lines
$651 $6
68 $691 $7
05
$703
$685
$690
$724
$780
$823 $8
51
$847
$838
$847
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05 06 07
Lower Underlying Frequency, Modest Severity, Check Auto Insurance Costs
Sources: NAIC, Insurance Information Institute
Across the U.S., auto insurance expenditures are expected to fall 0.5%
in 2007, the first drop since 1999
$418$440 $455
$481 $488$508
$536
$593
$668
$729
$868
$787$835
$400
$450
$500
$550
$600
$650
$700
$750
$800
$850
$900
95 96 97 98 99 00 01 02 03 04 05 06 07
Across the U.S., Home Insurance Costs* Rose 4% in 2007
*Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute
Homeowners in non-CAT zones have seen smaller increases than
those in CAT zones
Average Quarterly Commercial Rate Change, All Lines, (1Q:2004 – 1Q:2008)
-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%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Commercial account pricing is now on par
with prices in late 2001, early 2002
KRW Effect
-0.1
%
Rising Epenses
Expense Ratios Will Rise as Premium Growth Slows
23.4%
24.3%25.0%
27.1%
24.4%
24.5%24.8%25.6%
24.6%
25.6%
24.7%
26.1%26.6%
27.5%
30.8%
27.0%
26.3%26.4%25.6%
30.0%
31.1%
29.4%
29.9%29.1%
26.6%
25.0%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
96 97 98 99 00 01 02 03 04 05 06 07E 08F
Personal Commercial
*Ratio of expenses incurred to net premiums written.Source: A.M. Best; Insurance Information Institute
Advertising Expenditures by P/C Insurance Industry, 1999-2007E
$ Billions
$1.7 $1.7 $1.8 $1.7
$3.7
$4.3
$3.0
$2.1$1.9
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
99 00 01 02 03 04 05 06 07E
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers is at a record high, signaling
increased competition
32
10
13
11
32
0 0 011
4
0
5
10
15
601-700
701-800
801-900
901-1000
1001-1100
1101-1200
1201-1300
1301-1400
1401-1500
1501-1600
1601-1700
1701-1800
1801+
HHI
Nu
mb
er o
f S
tate
sPP Auto Insurance 2005 Market Concentration, by HHI, by State
Sources: J. Robert Hunter, State Automobile Insurance Regulation, Consumer Federation of America, April 2008, pp. 19-20; I.I.I. calculations.
Green bars = Unconcentrated marketsGray bars = Moderately concentrated markets
Concentrated markets
The P/C Industry’sFinancial Strength
and Capacity
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
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
U.S. P-C Insurers’ Policyholder Surplus: 1975-2007
Sources: A.M. Best, ISO, Insurance Information Institute.
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Surplus exceeded a half trillion dollars for the first time during
the 2nd quarter of 2007.
At year end 2007, P/C insurers held $1.17 in surplus for every $1 of
NWP.
In General, the Industry Has Grown Its Capacityto Accept Risk (but that capacity can also shrink)
$1.0
6
$0.9
0
$0.7
8
$0.8
6
$0.9
3
$1.0
1 $1.1
0
$1.1
7
$0.7
1
$0.6
4
$0.6
4
$0.5
8
$0.5
4
$0.5
3
$0.5
2
$0.7
2
$0.7
5
$0.7
7 $0.8
9
$0.9
5 $1.1
2
$1.1
8
$1.1
7
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
1985 86 87 88 89
1990 91 92 93 94
1995 96 97 98 99
2000 01 02 03 04
2005 06 07
Sources: NAIC Annual Statement data, via HighlineData; Ins. Info. Inst.
Premiums measure risk accepted; surplus is funds beyond reserves to pay unexpected losses. The higher
the ratio of surplus to premiums, the greater the industry’s capacity to handle the risk it has accepted.
Capacity: “Surplus” dollars per NWP dollar
Annual Catastrophe Bond Transactions Volume, 1997-2007
$1,729.8
$966.9
$7,329.6
$4,693.4
$1,991.1
$1,142.8$1,219.5$846.1$984.8$1,139.0
$633.0
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
97 98 99 00 01 02 03 04 05 06 07
Ris
k C
apita
l Iss
ues
($ M
ill)
0
5
10
15
20
25
30
35
Nu
mb
er o
f Iss
uan
ces
Risk Capital Issued Number of Issuances
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
Catastrophe bond issuance has soared in the wake of Hurricanes
Katrina and the hurricane seasons of 2004/2005, despite two
quiet CAT years
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E
90
95
100
105
110
115
120
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
E
Co
mb
ine
d R
ati
o
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Imp
air
me
nt
Ra
te
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly correlated with underwriting performance and could reach near-
record low in 2007
Source: A.M. Best; Insurance Information Institute
2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969;
2007 will be lower; Record is 0.24% in 1972
Reasons for US P/C Insurer Impairments, 1969-2005
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Catastrophe Losses8.6%
Alleged Fraud11.4%
Deficient Loss
Reserves/In-adequate Pricing62.8%
Affiliate Problems
8.6%
Rapid Growth
8.6%
2003-2005 1969-2005
Deficient reserves, CAT
losses are more
important factors in
recent years
Reinsurance Failure3.5%
Rapid Growth16.5%
Misc.9.2%
Affiliate Problems
5.6%
Sig. Change in Business
4.6%
Deficient Loss
Reserves/In-adequate Pricing38.2%
Investment Problems*
7.3%
Alleged Fraud8.6%
Catastrophe Losses6.5%
Investment Overview
Not Much to Look Forward To
2%
3%
4%
5%
6%
7%
8%
9%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
P-C Inv Income/Inv Assets 10-Year Treasury Note
P/C Investment Income as a % of Invested Assets Follows 10-Year US T-Note
*As of May 30, 2008.Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.
Investment yield historically tracks 10-year Treasury note quite closely
Property/Casualty Industry Investment Income*, 1994-2007
$33.
7
$36.
8
$38.
0
$41.
5
$37.
1
$36.
7
$38.
7
$39.
6 $49.
5
$52.
3
$54.
6
$40.
8
$38.
6
$39.
9
$20
$30
$40
$50
$60
1994 95 96 97 98 99 2000 01 02 03 04 05 06 2007
Bill
ion
s
*Primarily interest and stock dividends.2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute.
US P/C Industry Net Realized Capital Gains, 1990-2007
$2,880
$4,806
$9,893
$1,664
$5,997
$9,244
$10,808
$13,016
$16,205
$6,631
-$1,214
$6,610
$8,971
$18,019
$3,524
$9,701$9,125
$9,818
-$2,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Sources: A.M. Best, ISO, Insurance Information Institute.
Realized capital gains exceeded $9 billion in 2004/5 but fell sharply in 2006 despite a strong stock market. Nearly $9 billion again in 2007.
$ Millions
Bonus:Presidential Politics and P/C Insurance Industry
Profitability
Political Quiz
• Does the P/C insurance industry perform better (as measured by ROE) under Republican or Democratic administrations?
• Under which President did the P/C insurance industry realize its highest ROE (average over 4 years)?
• Under which President did the P/C insurance industry realize its lowest ROE (average over 4 years)?
P/C Insurance Industry ROE byPresidential Administration,1950-2008*
15.10%10.45%
8.93%8.65%
8.35%7.98%
7.68%6.98%6.97%
5.43%5.03%
4.83%4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
G.W. Bush II
Nixon
Clinton I
G.H.W. Bush
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
Eisenhower II
G.W. Bush I
Johnson
Kennedy/Johnson
*ROE for 2007/8 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute
OVERALL RECORD: 1950-2008*
Republicans 8.92%
Democrats 8.00%
Party of President has marginal bearing on profitability of P/C
insurance industry
-5%
0%
5%
10%
15%
20%
25%
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 0608
E
P/C Insurance Industry ROE by Presidential Party Affiliation,
1950–2008EBLUE = Democratic President RED = Republican President
Source: Insurance Information Institute
Tru
man
Nixon/FordKennedy/ Johnson
Eisenhower Carter Reagan/Bush Clinton Bush
Summary
• Results were excellent in 2006/07; Overall profitability reached its highest level (est. 13-14%) since 1988
• Underwriting results were aided by lack of CATs & favorable underlying loss trends, including tort system improvementsBut forecast for 2008 is for worse-than-average hurricane
season • Premium growth rates are slowing to their levels since
WW II; Commercial lines lead decreases• Investment returns insufficient to support deep soft
market in terms of price, terms & conditions as in 1990s
Insurance Information Institute On-Line
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