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How to Live to Be 100 in the P/C Insurance Industry And What it Takes to Survive the Next 100. Insurance Information Institute May 6, 2014. Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 - PowerPoint PPT Presentation
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How to Live to Be 100 in the P/C Insurance Industry
And What it Takes to Survive the Next 100Insurance Information Institute
May 6, 2014
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
What Does it Take to Live to 100
in the Insurance Business?
Challenges and Opportunities
for the Next 100 Years
Q&A
3
Lessons from Nature: What Would Darwin Would Say?
Longevity in the Business World Has Parallels in the Natural World
On the Life Cycle of Businesses: Lessons from Nature Most Businesses, Like Living Species, Eventually Become Extinct
99.5% of all living species to ever exist on Earth are now extinct; The proportion is higher for business and extinctions occur over a much compressed timespan.
Changes in the natural environment (not external forces like humans) were responsible for almost all extinctions
This means that despite millions of years of evolution and adaptation, virtually every species eventually confronts a change in its environment to which it cannot adapt
It is the same in business
Business Cycle Gives Rise to “Creative Destruction”Mass extinctions in business are commonEconomy is constantly reinventing itselfNew industries and businesses spring from the ashes of the previous
generation, fill voids and occupy niches
5
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
40,0
7533
,212
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 12 13
Business Bankruptcy Filings,1980-2013
Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2013 bankruptcies totaled 33,212, down 17.1% from 2012—the fourth
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%
5
6
Number of Recessions Endured by P/C Insurers, by Number of Years in Operation
32
27
20
13
8
0
5
10
15
20
25
30
35
1-50 51-75 76-100 101-125 126-150
Sources: Insurance Information Institute research from National Bureau of Economic Research data.
Number of Recessions Since 1860
Centenarian Insurers Have Weathered Many Economic Storms
Number of Years in Operation
Insurers are true survivors—not just of natural catastrophes but
also economic ones
6
7
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 4/14; Insurance Information Institute
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
%-3
.8%
-4.4
%-3
.3% -0.7
%0.
1% 2.1% 3.1%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 11 12 13
Rea
l NW
P G
row
th
-4%
-2%
0%
2%
4%
6%
8%
Real G
DP G
rowth
Real NWP GrowthReal GDP
P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy
Real GDP Growth vs. Real P/C (%) Inflation-adjusted premium growth
was negative for 6 years in a row
before and during the Great
Recession
8
Lessons from History: What Types of Business Live a Very Long Time (500+ Years) and Why?
Longevity in the Business World Requires Focus, Long-Term Objectives
Number of Firms More than 500 Years Old, by Industry*
35
28
19
7 5 4 2 2 2 2 10
5
10
15
20
25
30
35
40
Brewery
Hotel
Restaurant
Wine
Pharmacy
Confectionary
Glass
Paper
Sake
Transport
Others
Total Number
Source: http://en.wikipedia.org/wiki/List_of_oldest_companies
The brewery industry
appears to have the greatest
longevity with 35 firms 500+
years old.
BENEATH THE SURFACE Most of these companies are:
1. Family Owned/Mutuality2. Highly focused on one
specific business3. Have some geographic
focus (product or client)
Characteristics of Firms That Stand the Test of Time
1. Business Model: Highly Focused Firms tend to remain true to core business Avoid businesses you don’t understand Some diversification is usually good, but leads to an exponential
increase in complexity and unforeseen interactions across units
2. Ownership Structure: There Exists Some Concept of Mutuality Some of the world’s oldest firms are family owned (artisans, craftsman) Others have some form of cooperative arrangement (agricultural) Such organizations also exhibit altruistic behavior, a proven survival trait
3. Communal Interest: A Concern for the Greater Common Good Perpetual of the species (i.e., the industry) is evident in behaviors Concept of mutuality extends beyond organization to communal interest A strong willingness to work for the common good
Characteristics of Firms That Stand the Test of Time (cont’d)
4. Growth: Tend to Grow Slowly As with living species, the longest lived businesses in the world tend to
grow only slowly, if at all
5. Size: Tend to Be Small Relative to Competition Size seems to matter when it comes to species longevity: smaller = longer Also true among living species (e.g., bacteria, insects)
6. Profitability: Healthy Margins Are Important, But Not Paramount Object of continuous profit maximization is not consistent with longevity A “will to survive” is still necessary Perpetuation/continuity is critical objective
12
The Centenarians: Who Lives to Be 100+ in the P/C Insurance World?
Characteristics of An Exclusive Club of Insurers
13
100+ Year Old Insurers as a Share of All P/C Insurers
87.7%
12.3%
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; CDC
About 12% of P/C insurance companies (fewer than 1-in-8) today (2013) are 100+ years old. This is a surprisingly high percentage.
Insurers at Least 100 Years Old, 12.3%(287)
Insurers Less than 100 Years Old,
87.7%(1,979)
Odds of a Human Living to 100Born 1900: ~0.25% (1-in-400)
Born Today: ~2% (1-in-50)
14
Decade of Formation for P/C Insurers at Least 100 Years Old in 2014
39 10
22 20 16
60
37
65
38
77
1 0 0 0 4 20
10
20
30
40
5060
70
80
90
100
110
1750-59
1760-69
1770-79
1780-89
1790-99
1800-09
1810-19
1820-29
1830-39
1840-49
1850-59
1860-69
1870-79
1880-89
1890-99
1900-09
1910-19
Decade Of Formation
Source: insurance Information Institute analysis of National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
Of the Centenarian p/c insurers in existence today, 64% were formed since 1870. There was a post-Civil
war spike in formations in the 1870s and another in the 1890s. Another spike occurred in the 1910s after the financial crises of the 1900-1909 era and as workers
compensation systems were adopted.
As of Jan. 1, 2014 there were 296 P/C that were at least 100 years old.
77 insurers formed in the decade 1910-
1919 are still in existence; 32 were
formed between 1910 and 1914
15
100-Year-Old Insurers: Independent vs. Part of Group/Holding Company*
51.2% 48.8%
*As of 2010.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
The number of 100-year-old insurers that are independent vs. part of a more diversified group structure is split almost evenly.
Independent, 48.8%(140)
Part of Holding Company, 51.2%
(147)
16
100-year-old Insurers: Mutual vs. Stock vs. Reciprocal
62.4%
35.9%
1.4%0.3%
*As of 2010.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
The vast majority (62.4%) of 100-year-old insurers are mutual insurers, while stock insurers account for 35.9% of the total.
Mutual, 62.4%,(179)
Stock, 35.9%,(103)
Reciprocal, 1.4%,(4)
Other, 0.3%,(1)
17
Premium to Surplus Ratios, “Centenarians” vs. Overall P-C Industry, 1998, 2008 and 2013
$0.85
$0.95
$0.73$0.72 $0.69
$0.51
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$1.00
1998 2008 2013
"Centenarians" Overall P-C Industry
“Centenarians” are companies at least 100 years old with positive NWP in 2013. Sources: National Association of Insurance Commissioners’ Annual Statements, via Highline; I.I.I. calculations
NWP/Surplus
Premiums are a rough measure of risk accepted; surplus is funds beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater the
capacity to handle the risk it has accepted.
Insurers that are 100+ years old hold nearly $2 in
surplus for every $1 dollar in premium they write
18
Why Do Insurers Fail?
Leading Reasons Why Most Insurers Never Make it to 100
P/C Insurer Impairments, 1969–2012
Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
19
Impairments among P/C insurers remain infrequent
Since most failures are due to inadequate pricing, underreserving and
excessive growth (factors under management
control), the leading cause of death in the p/c insurance industry amounts to suicide
20
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2012
90
95
100
105
110
115
12069 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Com
bine
d R
atio
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Impairm
ent Rate
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2012 impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower than the 0.82% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
Five Deadliest Sins for P/C Insurance Companies OPERATIONAL ISSUES1. Underpricing/Underreserving (~43% of failures)
Leading cause of p/c insurer death according to A.M. Best
2. Excessive Growth (~13%) Too much growth too fast (organically or via M&A) can be fatal
3. Excessive Catastrophe Exposure (~7%) Too much underpriced exposure, too little reinsurance,
insufficient diversification
4. Investment Problems (~7%) Investments are too risky, too illiquid or insufficiently understood
5. Affiliate Problems (~8%) Non-core operations can cause problems for parent (e.g., AIG)
Source: I.I.I. research.
22
Reasons for US P/C Insurer Impairments, 1969–2012
Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute.
Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Deficient Loss Reserves/Inadequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems (Overstatement of Assets)
Misc.
Sig. Change in Business
23
Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2012
Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute..
Workers Comp and Pvt. Passenger Auto Account for More Than 40 Percent of the Impaired Insurers Since 2000
Workers Comp
Other
Pvt. Passenger Auto
HomeownersCommercial Multiperil
Commercial Auto Liability
Other Liability
Med Mal
Surety
Title
24
Mergers & Acquisitions
Waves of Consolidation Periodically Reduce the Number of Insurers
25
U.S. INSURANCE MERGERS AND ACQUISITIONS, All Sectors, 1989-2013 (1)
$7.1$6.9$8.6$5.0
$8.5$12.5
$27.0
$40.8
$56.2
$41.7
$55.7
$41.5
$9.7
$59.9
$14.9
$50.8
$43.0
$50.4
$31.4
$14.4
$46.5
$54.7
$43.2
$19.3
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Tran
sact
ion
valu
es
0
100
200
300
400
500
600
Num
ber of transactions
($ Billions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity recovered to pre-crisis levels but deal values dropped sharply
in 2013
$165.4
26
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 2002-2013 (1)
$486
$20,353
$425
$9,264
$35,221
$13,615$16,294
$3,507
$6,419
$12,458
$4,651 $4,397
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012
Tran
sact
ion
valu
es
0
10
20
30
40
50
60
70
80
90
Num
ber of transactions
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity in the P/C sector remains below
pre-crisis levels.
27
U.S. INSURANCE MERGERS AND ACQUISITIONS,LIFE/ANNUITY SECTOR, 2002-2013 (1)
$2,796
$18,533
$3,817
$21,865
$5,055$5,849
$382 $840
$23,848
$3,063
$6,083
$3,299
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Tran
sact
ion
valu
es
0
5
10
15
20
25
30
35
40
Num
ber of transactions
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
Life/Annuity sector M&A activity is highly volatile
28
Leadership Attributes Found in Insurers that Reach 100+ Years
Secrets of the Ancients
Leadership Attributes Inherent in Long-Lived Insurance Companies1. Management Acts as a Steward of the Enterprise
Objective is to pass a healthy firm safely and securely to the next generation of management and policyholders
2. Management Financial Incentives In line with the goal of providing the protection purchased There is typically no 3rd party (shareholders) to compensate
Objective if public company is to maximize profits CEO (total) comp is a smaller multiple relative to average employee
3. Nimble: Environment for Small Insurers Can & Does Change Not likely first to change, but adaptation occurs within reasonable timeframe
4. Customer Focus & Relationship Driven Customer is the #1 priority Committed to agency form of distribution, with 21st century enhancements
5. Regulation In favor of comprehensive but local regulation (contrast with banks)
What Do I Admire in an Insurer and Its Management?1. A Firm Whose Management’s Incentives are Strictly
Aligned With the Insurer’s Principal Stakeholders Customers, agents, employees, community These include financial and operational objectives
2. Management Is Knowledgeable Management of small, long-lived insurer is no less knowledgeable
about industry trends, opportunities and threats than larger competitors
3. Intuitive and Comprehensive Understanding of Enterprise Risk Management Much is made of ERM today, but long-lived insurers practiced it
well before it had a name
What Do I Admire in an Insurer and Its Management?4. CEO is Willing to Seek Advice and Counsel
No imperial CEOs; Self-aggrandizement is rare CEO is a listener and consensus builder
5. Commitment to Core Constituencies Customer is the #1 priority Committed to agency form of distribution, with 21st century enhancements
6. Lack of a “Wandering Eye” Disciplined enough to stick with the business you know, but also
adapting to changing business conditions and seizing opportunities as necessary
32
Challenges for the Next 100 Years
Staying Alive: The Decades Ahead
33
P/C (Re)Insurance Industry Financial Overview
2013: Best Year in the Post-Crisis Era
Performance Improved with Lower CATs, Strong Markets
33
P/C Net Income After Taxes1991–2013 ($ Millions)
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 6.1% 2013 ROAS1 = 10.3%
• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.8% ROAS in 2013, 6.3% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
$14,
178
$5,8
40
$19,
316
$10,
870 $20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$62,
496
$3,0
43
$35,
204
$19,
456
$35,
074
$63,
784
$28,
672
-$6,970
$65,
777
$44,
155
$20,
559
$38,
501
-$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 12 13
2013 ROAS was 10.3%
Net income in 2013 was up substantially
(+81.9%) from 2012
-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 12 13
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013*
*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.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
2011: 4.7%
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2013: 9.8 %
36
ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2013E*
* Excludes Mortgage & Financial Guarantee in 2008 – 2013. 2013 Fortune 500 figure is I.I.I. estimate. 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 10 11 12 13E
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)
Record Tornado Losses
Sandy
Low CATs
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE
* 2008 -2013 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2013 combined ratio including M&FG insurers is 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
97.5100.6 100.1 100.8
92.7
101.299.5
101.0
96.7
102.4
106.5
95.7
14.3%15.9%
12.7%10.9%
7.4% 7.9%
4.7%6.2%9.6%8.8%
4.3%
9.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 20130%
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 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Lower CATs helped ROEs
in 2013
RNW for Major P/C Lines,2003-2012 Average
18.9%
12.1%9.8% 9.0%
7.6% 7.1% 7.1%6.0%
1.1%
26.5%
13.3%
7.9%
0%
5%
10%
15%
20%
25%
30%
Fire InlandMarine
AllOther
MedMal
CommAuto
CMP AllLines
PPAuto
WC OtherLiab
HO Allied
Source: NAIC; Insurance Information Institute
10-year returns for some lines are excellent, though homeowners is a major
laggard, largely due to major catastrophes. WC returns slipped.
39
RNW All Lines by State, 2003-2012 Average:Highest 25 States
21.0
17.7
15.1
14.8
13.4
13.3
13.1
12.6
12.0
11.7
11.4
11.4
11.4
11.1
11.0
11.0
11.0
10.9
10.9
10.7
10.7
10.5
10.3
10.3
9.9
9.4
02468
1012141618202224
HI AK ND ME WY UT VT ID WA NH IA NE SC DC MA OR VA NC RI CA CT OH NM SD WV MT
Source: NAIC.
The most profitable states over the past decade are
widely distributed geographically, though none
are in the Gulf region
40
9.2
9.1
8.9
8.9
8.6
8.5
8.3
8.1
7.9
7.7
7.7
7.6
7.4
6.5
6.5
6.1
6.1
5.5
5.2
4.9
4.9
4.2
3.2
2.0
-6.5
-9.4
-14-12-10-8-6-4-202468
10
KS MD CO WI FL MN TX IN US AR PA IL AZ MO NV KY NJ GA NY MI TN DE OK AL MS LA
RNW All Lines by State, 2003-2012 Average: Lowest 25 States
Source: NAIC.
Some of the least profitable states over the past decade were hit hard
by catastrophes
P/C UNDERWRITING
41
Underwriting Losses in 2013 Much Improved After High
Catastrophe Losses in 2011/1241
42
P/C Insurance Industry Combined Ratio, 2001–2013*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1. Sources: A.M. Best, ISO.
95.7
99.3100.8
106.3
102.4
96.7
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 2012 2013
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
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
Cyclical Deterioration
Sandy Impacts
Lower CAT
Losses
43
Number of Years with Underwriting Profits by Decade, 1920s–2010s
0 0
32
54
8
10
76
0
2
4
6
8
10
12
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**
* 2009 combined ratio excl. mort. and finl. guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit.**Data for the 2010s is for the period 2010 through 2013.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.
Number of Years with Underwriting Profits
Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003
43
Underwriting Gain (Loss)1975–2013*
* Includes mortgage and financial guaranty insurers in all years.Sources: 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 10 11 12 13
Cumulative underwriting deficit from 1975 through
2012 is $510B
($ Billions) Underwriting profit in 2013
totaled $15.5B
High cat losses in 2011 led to the highest
underwriting loss since 2002
PRICING, PREMIUM GROWTH & CYCLES
47
Surviving the to the Century Mark Means Surviving the
Underwriting Cycle
48
-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 13 14
Net Premium Growth: Annual Change, 1971—2014F(Percent)
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
2014F: 4.0%2013: 4.6%
2012: +4.3%
49
Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2013)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
% -8.2
%-4
.6% -2.7
%-3
.0%
-5.3
%-9
.6%
-11.
3%-1
1.8%
-13.
3%-1
2.0%
-13.
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%
2.7% 4.
4%4.
3%3.
9% 5.0%
5.2%
4.3%
3.4%
2.1%
-0.1
% 0.9%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Pricing as of Q4:2013 was positive for the 10th consecutive
quarter. Gains are likely to continue into 2014.
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
50
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q3
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Percentage Change (%)Peak = 2001:Q4
+28.5%
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
Pricing turned positive in Q3:2011, the first increase in
nearly 8 years; Q3:2013 renewals were up 3.4%. Some insurers posted
stronger numbers.
Trough = 2007:Q3 -13.6%
KRW : No Lasting Impact
52
Monthly Change* in Auto Insurance Prices, 1991–2014*
*Percentage change from same month in prior year; through March 2014; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-2%
0%
2%
4%
6%
8%
10%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Cyclical peaks in PP Auto tend to occur roughly every 10 years (early
1990s, early 2000s and likely the early 2010s)
“Hard” markets tend to occur
during recessionary
periods
Pricing peak occurred in late
2010 at 5.3%, falling to 2.8% by Mar. 2012
The Mar. 2014 reading of 3.6% is down from 4.8%
a year earlier
53
Homeowners InsuranceNet Written Premium, 2000–2015F
$45.8$49.5
$52.2$54.8 $55.2
$61.1$63.5
$66.8$70.4
$74.0$77.9
$57.5$56.2
$32.4
$40.0
$35.2
$30
$35
$40
$45
$50
$55
$60
$65
$70
$75
$80
00 01 02 03 04 05 06 07 08 09 10 11 12 13P 14F 15F
Sources: A.M. Best; Insurance Information Institute.
$ Billions Homeowners insurance NWP continues to rise (up 128% 2000-2013) despite very little unit
growth during the real estate crash. Reasons include rate increases, especially in coastal
zones, ITV endorsements (e.g., “inflation guards”), and inelastic demand
INVESTMENTS: THE NEW REALITY
54
Investment Performance is a Key Driver of Profitability
A Century of Survival: Investment Environment Varies Wildly Over the
Span of 100 Years54
Property/Casualty Insurance Industry Investment Income: 2000–20131
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.4
$39.6
$49.5$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Investment Income Fell in 2012 and 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing
1 Investment gains consist primarily of interest and stock dividends...Sources: ISO; Insurance Information Institute.
($ Billions)
Investment earnings are running below their 2007
pre-crisis peak
58
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Persona
l Line
s
Pvt Pass
Auto
Pers P
rop
Commerc
ial
Comml A
uto
Credit
Comm P
rop
Comm C
as
Fidelity
/Sure
ty
Warra
nty
Surplus
Line
s
Med M
al
WC
Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
58
59
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*
*Monthly, constant maturity, nominal rates, through March 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
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 '09 '10 '11 '12 '13 '14
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
U.S. Treasury yields plunged to historic lows in
2013. Only longer-term yields have rebounded.
59
SURPLUS/CAPITAL/CAPACITY
61
2013 Recorded Yet Another Record High in the Primary and Reinsurance Sectors
61
62
Policyholder Surplus, 2006:Q4–2013:Q4
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$559.2 $559.1
$538.6$550.3
$567.8$583.5$586.9
$607.7$614.0$624.4
$653.3
$570.7$566.5
$505.0$515.6$517.9
$400
$450
$500
$550
$600
$650
$700
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
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
2007:Q3Pre-Crisis Peak
Surplus as of 12/31/13 stood at a record high $653.3B
2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .
The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2014in very strong financial condition.
Global Reinsurance Capital (Traditional and Alternative), 2007 - 2013
Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.
Total reinsurance capital reached a record $540B in 2013, up 58.8% from 2008. Of that, $50B (9.3%) is alternative capacity, up 163% from
$19B since 2008
Reinsurance Pricing: Rate-on-Line Index by Region, 1990 – 2014*
*As of Jan. 1.Source: Guy Carpenter
Lower CATs and a flood of new
capital has pushed reinsurance pricing
down in most regions, including
the US
Shifting Legal Liability & Tort Environment
67
Could the Tort Pendulum Once AgainSwing Against Insurers?
68
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
Tort
Syst
em C
osts
1.50%
1.75%
2.00%
2.25%
2.50%
Tort Costs as %
of GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ 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
Business Leaders Ranking of Liability Systems in 2012
Best States1. Delaware
2. Nebraska
3. Wyoming
4. Minnesota
5. Kansas
6. Idaho
7. Virginia
8. North Dakota
9. Utah
10. Iowa
Worst States41. Florida
42. Oklahoma
43. Alabama
44. New Mexico
45. Montana
46. Illinois
47. California
48. Mississippi
49. Louisiana
50. West Virginia
Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2012 Wyoming Minnesota Kansas Idaho
Drop-offs
Indiana Colorado Massachusetts South Dakota
Newly Notorious
Oklahoma
Rising Above
Arkansas
69
70
The Nation’s Judicial Hellholes: 2012/2013
Source: American Tort Reform Association; Insurance Information Institute
West VirginiaIllinoisMadison County
New YorkAlbany and
NYC
Watch List Philadelphia,
Pennsylvania South Florida Cook County, Illinois New Jersey Nevada Louisiana
Dishonorable Mention
MO Supreme Court WA Supreme Court
California
MarylandBaltimore
71
U.S. Insured Catastrophe Loss Update
2013 Was a Welcome Respite from the High Catastrophe Losses in Recent Years
2014 Winter Storm Losses Manageable
71
72
$12.
6
$11.
0$3
.8$1
4.3
$11.
6$6
.1
$34.
7$7
.6 $16.
3$3
3.7
$73.
4
$10.
5$7
.5
$29.
2$1
1.5
$14.
4$3
3.6
$35.
0$1
2.9
$14.
0
$4.8 $8
.0
$37.
8$8
.8
$26.
4
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*
U.S. Insured Catastrophe Losses
*Through 12/31/13.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 ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Well
Below 2011 and 2012 YTD Totals.
2012 was the third most expensive year ever for insured CAT
losses
Record tornado losses caused
2011 CAT losses to surge
($ Billions, $ 2012)
72
73
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013*
*2010s represent 2010-2013.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 (1960-2011); A.M. Best (2012E) Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3 0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
3.4
8.7 8.9
3.43.6
0.9
0.1
1.1
1.1
0.8
0123456789
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
2012
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: 6.1E*
Combined Ratio Points Catastrophe losses as a share of all losses reached
a record high in 2012
75
Top 10 States for InsuredCatastrophe Losses, 2013
$1,995
$1,509
$1,190
$909 $907$805 $773 $762
$677$593
0200400600800
1,0001,2001,4001,6001,8002,000
Oklahoma
Texas
Illinois
Minnesota
Colorado
Mississ
ippi
Nebras
ka
Georg
ia
Indiana
Louisiana
Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.
$ Millions
Oklahoma let the country in insured CAT losses in 2013
76
$9,756
$6,369
$2,318$1,511 $1,440
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
New York New Jersey Texas Kentucky Colorado
*Includes catastrophe losses of at least $25 million.Sources: PCS unit of ISO; Insurance Information Institute.
Top 5 States by Insured Catastrophe Losses in 2012*
NY and NJ let the US in CAT losses in 2012 due Sandy
(2012, $ Billions)
77
$6,558$10,994
$44,563
$57,277
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Homeowners* Vehicle Commercial NFIP Flood**
Commercial (i.e., business claims) are more expensive
because the value of property is often higher as well as the impact of insured business
interruption losses
*Includes rental and condo policies (excludes NFIP flood). **As of Oct. 31, 2013.Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of March 2013; Insurance Information Institute.
Hurricane Sandy: Average Claim Payment by Type of Claim
The average insured flood loss was nearly 9 times larger than the average non-flood insured loss
(mostly wind)
Post-Sandy, the I.I.I. worked very hard to make help media, consumers and regulators understand the distinction between a flood claim and a
standard homeowners claim. NFIP is $24B in debt.
Insurers Making a Difference in Impacted Communities
Source: Insurance Information Institute 78
Destroyed home in Tuscaloosa. Insurers will pay some 165,000 claims totaling $2 billion in the Tuscaloosa/
Birmingham areas alone.
Presentation of a check to Tuscaloosa Mayor Walt
Maddox to the Tuscaloosa Storm Recovery Fund
Presentation of a check to Moore, OK,
Public School Relief Fund
80
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1993–20121
0.1%
1.7%
3.8%4.7%
6.3%
7.1%
36.0%
40.4%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.
Hurricanes & Tropical Storms, $158.2
Fires (4), $6.5
Tornadoes (2), $140.9
Winter Storms, $27.8
Terrorism, $24.8
Geological Events, $18.4
Wind/Hail/Flood (3), $14.9
Other (5), $0.2
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1993-2012
totaled $391.7B, an average of $19.6B per year or $1.6B
per month
81
Top 16 Most Costly Disastersin U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
$7.8 $8.7 $9.2 $11.1 $13.4$18.8
$23.9 $24.6$25.6
$48.7
$7.5$7.1$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne(2004)
Frances(2004)
Rita (2005)
Tornadoes/T-Storms
(2011)
Tornadoes/T-Storms
(2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Northridge(1994)
9/11 Attack(2001)
Andrew(1992)
Katrina(2005)
Hurricane Sandy became the 5th
costliest event in US insurance history
Hurricane Irene became the 12th most expense hurricane
in US history in 2011
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have
Occurred Over the Past Decade*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
83Sources: Munich Re NatCatSERVICE; Insurance Information Institute.
Winter Storm and Winter Damage Events in the US and Canada, 1980-2013 (2013 US$)
Three of the four most costly years ever for insured losses from
winter storms and damage occurred in the 1990s, led by the “Storm of the Century” in 1993.
Insured losses from
severe winter events
totaled $2 billion in
2013.
Insured winter storm and damage losses in Jan. 2014 already totaled $1.5 billion. Continued severe weather since then makes it likely that
2014 will become one of the top 5 costliest winters since 1980.
Insured Losses (Millions, $ 2013)
5-year running average
U.S. Thunderstorm Insured Loss Trends, 1980 – 2013
84Source: Property Claims Service, and MR NatCatSERVICE
Thunderstorm losses in 2013 totaled $10.3 billion, the 6th
highest on record
Average thunderstorm
losses are up 7 fold since the early
1980s. The 5-year running average
loss is up sharply
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss. 2008-2013 are the most expensive
years on record.
Terrorism Update
85
A Challenge Through Which the Industry Has Persevered
Download III’s Terrorism Insurance Report at: http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2014.html
85
Life$1.2 (3%)
Aviation Liability
$4.3 (11%)
Other Liability
$4.9 (12%)
Biz Interruption $13.5 (33%)
Property -WTC 1 & 2*$4.4 (11%) Property -
Other$7.4 (19%)
Aviation Hull$0.6 (2%)
Event Cancellation
$1.2 (3%)Workers Comp
$2.2 (6%)
Total Insured Losses Estimate: $42.9B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.**$32.5 billion in 2001 dollars.Source: Insurance Information Institute.
Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2013)
($ Billions)
87
Terrorism Risk Insurance Program Testified before House Financial Services Nov. 2013 Testified before Senate Banking Cmte. in Sept. 2013 Provided testimony at NYC hearing in June 2013 Provided Capitol Hill Joint House/Senate Staff Briefing in
April 2014 I.I.I. Published Several Updates to its Study on Terrorism
Risk and Insurance Working with Trades, Congressional Staff, GAO & Others
Senate Banking Committee, 9/25/13House Financial Services Subcommittee, 11/13/13
CAT OF THE FUTURE?CYBER RISK
90
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large
and Small in Every IndustryNEW III White Paper:
http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf
90
Data Breaches 2005-2013, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed
* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.
157
321
446
656
498
419447
619662
87.9
17.322.9
35.7
19.1
66.9
222.5
16.2
127.7
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012 2013*020406080100120140160180200220
# Data Breaches # Records Exposed (Millions)
The Total Number of Data Breaches (+38%) and Number of Records Exposed (+408%) in 2013 Soared
Millions
The Strength of the Economy Will Influence P/C Insurer
Growth Opportunities
92
Growth Will Expand Insurer Exposure Base Across Most Lines
92
93
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/14; Insurance Information Institute.
2.7%
0.5%
3.6%
3.0%
1.7%
-1.8
%1.
3%-3
.7%
-5.3
%-0
.3%
1.4%
5.0%
2.3%
2.2% 2.6%
2.4%
0.1%
2.5%
1.3%
4.1%
2.0%
1.3%
3.1%
1.1% 2.
5%4.
1%2.
4%0.
1%3.
0%3.
0%3.
1%3.
0%3.
0%3.
0%2.
9%
0.4%
-8.9%
4.1%
1.1% 1.
8% 2.5% 3.
6%3.
1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
Q07
:2Q
07:3
Q07
:4Q
08:1
Q08
:2Q
08:3
Q08
:4Q
09:1
Q09
:2Q
09:3
Q09
:4Q
10:1
Q10
:2Q
10:3
Q10
:4Q
11:1
Q11
:2Q
11:3
Q11
:4Q
12:1
Q12
:2Q
12:3
Q12
:4Q
13:1
Q13
:2Q
13:3
Q13
:4Q
14:1
Q14
:2Q
14:3
Q14
:4Q
15:1
Q15
:2Q
15:3
Q15
:4Q
Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor
market contraction was severe
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
The remainder of 2014 into 2015 are expected
to see a modest acceleration in growth
94
Unemployment and Underemployment Rates: Still Too High, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Jan14
"Headline" Unemployment Rate U-3
Unemployment + Underemployment RateU-6
“Headline” unemployment
was 6.3% in April 2014. 4% to 6% is
“normal.”
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 12.3%
in Apr. 2014.8% to 10% is
“normal.”
January 2000 through April 2014, Seasonally Adjusted (%)
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving.
94
95
16.9
16.5
16.1
13.2
10.4
11.6
12.7
14.4
15.5 16
.0 16.4
16.2
16.2
16.2
16.216
.9
16.617
.117.517.8
17.4
910
11121314
151617
1819
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F15F 16F17F18F 19F
(Millions of Units)
Auto/Light Truck Sales, 1999-2019F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/14 and 3/13); 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 Along
With Workers Comp Exposures
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2014-15 is
still below 1999-2007 average of 17 million units, but a robust recovery is well underway.
Job growth and improved credit market conditions will boost auto sales in
2014 and beyond
Truck purchases by contractors are especially strong
96
(Millions of Units)
New Private Housing Starts, 1990-2019F
1.48
1.47 1.
62 1.64
1.57 1.60 1.
71 1.85 1.
96 2.07
1.80
1.36
0.91
0.55 0.59 0.61
0.78 0.
92 1.08
1.31 1.
44 1.50
1.51
1.50
1.351.
461.
291.
201.
011.
19
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 12 13 14F15F16F17F18F19F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/14 and 3/13); Insurance Information Institute.
Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk
Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure
New home starts plunged 72% from 2005-2009; A net
annual decline of 1.49 million units, lowest since records began
in 1959
Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction
for several more years
97
Value of New Private Construction: Residential & Nonresidential, 2003-2013*
Billions of Dollars
$0$100$200$300$400$500$600$700$800$900
$1,000
03 04 05 06 07 08 09 10 11 12 13*
Non ResidentialResidential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$15.0
$613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2013: Value of new pvt. construction hits $667.5B, up
33% from the 2010 trough but still
27% below 2006 peak
97
$261.8
$238.8
$311.5
$356.0
*2013 figure is a seasonally adjusted annual rate as of December.Sources: US Department of Commerce; Insurance Information Institute.
98
$200,000
$300,000
$400,000
$500,000
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Mar. 2014
*seasonally adjusted; Data published May 2, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments in Mar. 2014 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial
exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.
$ Millions
98
The value of Manufacturing Shipments in Mar. 2014 was $494.9B—a new record high.
99
Oil & Gas Extraction Employment,Jan. 2010—March 2014*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.
415
6.4
156.
715
7.6
158.
715
7.8
158.
015
9.5
160.
016
1.5
161.
216
1.2
163.
116
4.4
166.
616
9.3
170.
117
1.0
172.
517
3.6
176.
317
8.2
178.
518
0.9
181.
918
3.1
184.
818
5.2
185.
718
6.8
187.
618
8.0
188.
018
8.2
190.
019
1.7
191.
919
3.4
192.
419
2.6
193.
119
3.3
195.
019
6.5
199.
720
0.6
203.
020
4.1
205.
320
7.7
208.
1
150
160
170
180
190
200
210
220
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13Fe
b-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14Fe
b-14
Mar
-14
Oil and gas extraction employment is up 33.1% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in
the US.
(Thousands) Highest since Aug.
1986
100
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, Pipelines)
www.iii.orgThank you for your time
and your attention!Twitter: twitter.com/bob_Hartwig
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