Embed Size (px)
Citation preview
The Financial Crisis and the Future of the P/C Insurance
IndustryChallenges & Opportunities Amid
the Economic StormMarketScout Entrepreneurial Insurance Symposium
Dallas, TX
September 16, 2009Download at
www.iii.org/presentations/MarketScout091609.ppt
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org
2
Presentation Outline• The Economic Storm: Financial Crisis & Recession
• Exposure & Growth: Regional Analysis• Economic Trends: Commercial, Personal Implications• Key Threats and Issues Facing P/C Insurers Through 2015• Regulatory Reform• Financial Strength & Ratings
• Key Differences Between Insurer and Bank Performance During Crisis• Insurance Industry Financial Overview & Outlook
• Profitability• Premium Growth• Underwriting Performance: Commercial & Personal Lines• Financial Market Impacts• Merger & Acquisition Activity
• Capital & Capacity• Catastrophe Loss Trends
THE ECONOMIC STORM
What the Financial Crisis and Recession Mean for the
Industry’s Exposure Base,Growth and Investments
4
3.7%
0.8% 1.
6% 2.5%
3.6%
3.1%
2.9%
0.1%
4.8%
4.8%
-0.7
%
1.5%
-2.7
%
3.0%
2.4% 2.5% 2.7%
2.7% 2.9%
-1.0
%
-6.4%
-5.4%
-0.2%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
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
10:1
Q
10:2
Q
10:3
Q
10:4
Q
Real GDP Growth*
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 9/09; Insurance Information Institute.
Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but recovery is in sight
The Q1:2009 decline was the steepest since the
Q1:1982 drop of 6.4%
Personal and commercial lines
exposure base have been hit
hard and will be slow to come
back
5
State Economic Growth Varied Tremendously in 2008
Eastern US growing more slowly than Plains,
Mountains
6
Fastest Growing States in 2008: Plains, Mountain States Lead
7.3%
4.4%3.5%
2.9%2.0%2.1%2.5%
2.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
ND WY SD CO OK WV IA TX, MN,NM, WA
Natural resource and agricultural states have done
better than most others recently, helping insurance
exposure in those areas
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
7
Slowest Growing States in 2008: Recovery Will Lag in Some Areas
-0.1%
-0.4%-0.6%-0.6%
-1.5%-1.6%-1.6%-1.7%-2.0%
-0.9%-0.6%-0.6%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%KY CT AZ GA IN NV RI MI DE FL OH AK
Several of the slowest growing states have
severe structural problems that will
impede exposure growth
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
AZ, NV hit hard by the housing crash—
construction, contracting suffer
8
Length of U.S. Business Cycles, 1929-Present*
43
138 11 10 8 10 11
166
168 8
19
50
80
3745
39
24
106
36
58
12
92
120
73
0102030405060708090
100110120
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
Contraction Expansion Following
* Through June 2009 (likely the “official end” of recession) **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Duration (Months)
Month Recession Started
Average Duration**Recession = 10.4 Months
Expansion = 60.5 MonthsLength of
expansions greatly exceeds
contractions
9
Total Industrial Production,(2007:Q1 to 2010:Q4F)
1.5%3.2% 3.6%
0.3% 0.2%
-4.6%
-9.0%
-13.0%
-19.1%
-11.4%
4.1%3.8%4.1%4.1%2.1%
4.4%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
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
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/09); Insurance Info. Inst.
Industrial production began
to contracted sharply in late
2008 and plunged in Q1 2009
End of recession in late 2009, Obama stimulus program are expected to benefit industrial production and
therefore insurance exposure both directly and indirectly
Figures for 2010 revised upwards to
reflect expected impact of Obama stimulus program
and a gradual economic recovery
10
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
%-3
.8%
-4.4
%-3
.1%
-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
Real
NW
P G
row
th
-4%
-2%
0%
2%
4%
6%
8%
Rea
l GD
P G
row
th
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, 9/09; Insurance Information Inst.
$1,604
$218
$890
$0
$250
$500
$750
$1,000
$1,250
$1,500
$1,750
Banks Insurers Others
US Financial Institutions FacingHuge Losses from Financial Crisis*
*Estimate of financial sector writedowns, 2007-2010, as of April 2009. Includes loans and securities.Source: IMF Global Financial Stability Report, April 2009.
$ BillionsThe IMF estimates total US financial sector writedowns from soured assets will reach
$2.712 trillion, up 93% from $1.405 trillion from its Sept. 2008 estimate. Insurer losses
account for just 8% of the total.
$218B or 8% of estimated total (bank+insurer) losses will be
sustained by insurers
11
Labor Market Trends
Fast & Furious: Massive Job LossesSap the Economy & Personal &
Commercial Lines Exposure
13
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
January 2000 through August 2009
Unemployment will likely peak near 10 % during this cycle, impacting payroll
sensitive p/c and l/h exposures
Source: US Bureau of Labor Statistics; Insurance Information Institute.
August 2009 unemployment was 9.7%, up 0.3% from July but still near its
highest level since August 1983
Unemployment Rate:On the Rise
Average unemployment rate 2000-07 was 5.0%
Previous Peak: 6.3% in June 2003
Trough: 4.4% in March 2007
Jul-0
9
14
U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*
4.5%
4.5% 4.6% 4.
8% 4.9%
5.4%
6.1%
6.9%
8.1%
9.3% 9.
6% 9.9% 10
.0%
9.9%
9.7%
9.5%
4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%8.5%9.0%9.5%
10.0%10.5%11.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4
* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/09); Insurance Info. Inst.
Rising unemployment is eroding payrolls and
workers comp’s exposure base.
Unemployment is expected to peak above
10% in early 2010.
15
Monthly Change Employment*(Thousands)
-72-144-122
-160-137-161-128
-175
-321-380
-597-681
-741-681-652
-519
-303
-463
-276-216
-800
-700
-600
-500
-400
-300
-200
-100
0
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Job losses since the recession began in Dec. 2007 total 7.4 mill; 14.9 million people are now defined as unemployed.
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute
Monthly losses in Dec. – May were the largest in the post-
WW II period but pace of loss is diminishing
January 2008 through August 2009
16
% Change in Employment by Industry: All But Government/Health Down
-14.6%-12.2%
-4.1% -5.1%
2.2%
-4.2%
2.0%
-7.1%
-2.4%
-16%-14%-12%-10%
-8%-6%-4%-2%0%2%4%
Constructi
onMan
ufacturin
gReta
il
Financia
lInsu
rance
Transp
ortatio
nFed
Govt.
Health
All
The US economy lost 5.24 million jobs between July 2008 and July 2009
Source: US Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.t14.htm; Ins. Info. Institute.
PercentChange
Change in July 2009 vs. July 2008
Govt. and health are two
of the few areas of employment
growth
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*$0
$5
$10
$15
$20
$25
$30
$35
$40
$45Wage & SalaryDisbursementsWC NPW
*Average Wage and Salary data as of 7/1/2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Net Written Premiums7/90-3/91
Shaded areas indicate recessions
3/01-11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
12/07-?
Weakening wage and salary growth is
expected to cause a deceleration in workers comp
exposure growth
Unemployment Rates by State, July 2009: Highest 25 States*
10.6
10.6
10.4
10.3
10.2
9.7
9.2
9.0
9.1
8.89.
3
8.89.09.3
11.211
.9
10.7
10.7
11.0
11.011
.812.7
12.5
11.9
15.0
0
2
4
6
8
10
12
14
16
MI RI NV CA OR SC OH NC KY FL TN DC IN IL GA AL MS MO NJ AZ WA WV WI MA ID
Une
mpl
oym
ent R
ate
(%
*Provisional figures for July 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Unemployment in most Southwest states was below the
US rate of 9.7% in July
Nevada has one of the highest
unemployment rates in the US
6.9
6.8
6.8
6.5
6.5
6.5
8.6
8.38.48.5
8.1
7.8
7.8
7.4
7.48.
2
7.9
6.7
4.2
7.0
7.0
6.0
4.9
4.9
7.4
7.3
0
2
4
6
8
10
NY PA ME AK DE MN TX CT CO AR KS LA MD HI NM VA VT NH MT OK IA WY UT SD NE ND
Une
mpl
oym
ent R
ate
(%Unemployment Rates By State, July
2009: Lowest 25 States*
*Provisional figures for July 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
North Dakota had the lowest unemployment rate in the
US in July 2009 at 4.2% vs. 9.4% for the US
Unemployment in most Southwest states was below the
US rate of 9.7% in July
Inflation Trends Pressures Claim Cost
Severities via Medical and Tort Channels
21
Annual Inflation Rates(CPI-U, %), 1990-2010F
4.9 5.1
3.0 3.22.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
(0.5)
1.8
2.82.92.4
(1.0)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Sept. 10, 2009 (forecasts).
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The
recession and the collapse of the commodity bubble have produced temporary deflation.
There is so much slack in the US economy that inflation should not be a concern through 2010
-$2,000
-$1,500
-$1,000
-$500
$0
$50019
69
1975
1980
1985
1990
1995
2000
2005
2010
2015
2019
Fede
ral D
efic
it
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Def
icit
as %
of G
DP
Federal Deficit ($ Bill) % GDP
US Budget Deficit, 1969-2019F
Deficit expected to hit record $1.8 trillion in 2009 or 13% or GDP, a post-WW II high
Sources: Congressional Budget Office analysis of President’s budget, March 2009; Insurance Information Institute.
Concerns that deficit spending will drive up inflation. This would
harmful to insurance claim severity.
23
Top Concerns/Risks for Insurers if Inflation is Reignited
CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.
What are the potential impacts for insurers?What can/should insurers do to protect themselves from the risks of inflation?
KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION• Rising Claim Severities
Cost of claims settlement rises across the board (property and liability)• Rate Inadequacy
Rates inadequate due to low trend assumptions arising from use of historical data • Reserve Inadequacy
Reserves may develop adversely and become inadequate (deficient)• Burn Through on Retentions
Retentions, deductibles burned through more quickly• Reinsurance Penetration/Exhaustion
Higher costs risks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly
Source: Ins. Info. Inst.
State-by-State Infrastructure
Spending & Job GainsBigger States Get More, Should Benefit
Commercial Insurers Exposure
Infrastructure Stimulus Spending by State (Total = $38.1B)
State Allocation State Allocation State AllocationAL $603,871,807 LA $538,575,876 OK $535,407,908
AK $240,495,117 ME $174,285,111 OR $453,788,475
AZ $648,928,995 MD $704,863,248 PA $1,525,011,979
AR $405,531,459 MA $890,333,825 RI $192,902,023
CA $3,917,656,769 MI $1,150,282,308 SC $544,291,398
CO $538,669,174 MN $668,242,481 SD $213,511,174
CT $487,480,166 MS $415,257,720 TN $701,516,776
DE $158,666,838 MO $830,647,063 TX $2,803,249,599
DC $267,617,455 MT $246,599,815 UT $292,231,904
FL $1,794,913,566 NE $278,897,762 VT $150,666,577
GA $1,141,255,941 NV $270,010,945 VA $890,584,959
HI $199,866,172 NH $181,678,856 WA $739,283,923
ID $219,528,313 NJ $1,335,785,100 WV $290,479,108
IL $1,579,965,373 NM $299,589,086 WI $716,457,120
IN $836,483,568 NY $2,774,508,711 WY $186,111,170
IA $447,563,924 NC $909,397,136 U.S. Territories
$238,045,760
KS $413,837,382 ND $200,318,301
KY $521,153,404 OH $1,335,600,553 Total $38,101,898,173
Sources: USA Today, 2/17/09; House Transportation and Infrastructure Committee; the Associated Press.
Infrastructure Stimulus Spending By State: Top 25 States ($ Millions)
$890
.6$8
90.3
$836
.5$8
30.6
$739
.3$7
16.5
$704
.9$7
01.5
$668
.2$6
48.9
$603
.9$5
44.3
$538
.7$5
38.6
$1,3
35.8
$1,5
80.0
$909
.4$1
,141
.3$1
,150
.3$1
,335
.6
$1,5
25.0
$2,8
03.2
$2,7
74.5
$1,7
94.9
$3,9
17.7
$0$500
$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500
CA TX NY FL IL PA NJ OH MI GA NC VA MA IN MO WA WI MD TN MN AZ AL SC CO LA
Stim
ulus
Dol
lars
($ M
ill)
Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.
Infrastructure spending is in the stimulus package total $38.1B, allocated
largely by population size
Infrastructure Stimulus Spending By State: Bottom 25 States ($ Millions)
$278
.9$2
70.0
$267
.6$2
46.6
$240
.5$2
38.0
$219
.5$2
13.5
$200
.3$1
99.9
$192
.9$1
86.1
$181
.7$1
74.3
$158
.7$1
50.7
$413
.8
$447
.6
$290
.5$2
92.2
$299
.6$405
.5
$415
.3$521
.2$4
87.5
$453
.8$535
.4
$0
$100
$200
$300
$400
$500
$600
OK KY CT OR IA MS KS AR NM UT WV NE NV DC MT
AK
U.S.
Ter
r. ID SD ND HI RI WY NH ME DE VT
Stim
ulus
Dol
lars
($ M
ill)
Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.
Infrastructure spending is in the stimulus package total
$38.1B, allocated largely by population size
Expected Number of Jobs Gained or
Preserved by Stimulus Spending
Larger States = More JobsWorkers Comp Benefits
Estimated Job Effect of Stimulus: Jobs Created/Saved By State = 3.5 Mill Total
State Jobs Created State Jobs Created State Jobs CreatedAL 52,000 LA 50,000 OK 40,000
AK 8,000 ME 15,000 OR 44,000
AZ 70,000 MD 66,000 PA 143,000
AR 32,000 MA 79,000 RI 12,000
CA 396,000 MI 109,000 SC 50,000
CO 60,000 MN 66,000 SD 10,000
CT 41,000 MS 30,000 TN 71,000
DE 11,000 MO 69,000 TX 269,000
DC 12,000 MT 11,000 UT 32,000
FL 207,000 NE 23,000 VT 8,000
GA 107,000 NV 34,000 VA 93,000
HI 16,000 NH 16,000 WA 75,000
ID 17,000 NJ 100,000 WV 20,000
IL 148,000 NM 22,000 WI 70,000
IN 75,000 NY 215,000 WY 8,000
IA 37,000 NC 105,000
KS 33,000 ND 9,000
KY 48,000 OH 133,000 Total 3,467,000
Sources: http://www.recovery.gov/; Council of Economic Advisers; Insurance Information Institute.
Estimated Job Effect of Stimulus Spending By State: Top 25 States
93 79 75 75 71 70 70 69 66 66 60 52 50 50
13314
8
100
105
107
109
143
269
215
207
396
0
100
200
300
400
CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC
No.
of J
obs
Cre
ated
/Sav
ed b
y St
imul
u
Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.
The economic stimulus plan calls for the creation or preservation of 3.5 million jobs, allocated roughly
in proportion to the size of the state’s labor force.
(Thousands)
2220
17 16 16 1512 12 11 11 10 9 8 8 8
33
37
2330
3232
34
4441 40
48
0
10
20
30
40
50
KY OR CT OK IA NV KS AR UT MS NE NM WV ID HI NH ME DC RI DE MT SD ND AK VT WY
No.
of J
obs
Cre
ated
/Sav
ed b
y St
imul
uEstimated Job Effect of Stimulus
Spending By State: Bottom 25 States
(Thousands)
Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.
The economic stimulus plan calls for the creation or
preservation of 3.5 million jobs, allocated roughly in
proportion to the size of the state’s labor force
GREEN SHOOTS
Is the RecessionNearing an End?
33
Hopeful Signs That the EconomyWill Begin to Recover Soon
• Recession Appears to be Bottoming Out, Freefall Has Ended• Pace of GDP shrinkage is beginning to diminish• Pace of job losses is slowing• Major stock market indices well off record lows, anticipating recovery• Some signs of retail sales stabilization are evident
• Financial Sector is Stabilizing• Banks are reporting quarterly profits• Many banks expanding lending to credit worthy people & businesses
• Housing Sector Likely to Find Bottom Soon• Home are much more affordable (attracting buyers)• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)• Freefall in housing starts and existing home sales is ending in many areas
• Inflation & Energy Prices Are Under Control• Consumer & Business Debt Loads Are Shrinking Source: Ins. Info. Inst.
34
11 Industries for the Next 10 Years: Insurance Solutions Needed
GovernmentEducation
Health CareEnergy (Traditional)Alternative Energy
AgricultureNatural Resources
EnvironmentalTechnology
Light ManufacturingExport Oriented Industries
Crisis-Driven Exposure
ImplicationsHome, Auto, Exposure Growth Slows as Sales
Nosedive
36
New Private Housing Starts,1990-2010F (Millions of Units)
2.07
1.80
1.36
0.90
0.58
0.80
1.48
1.351.
46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.60 1.
71
1.85 1.
960.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
Exposure growth due to home construction forecast for HO insurers is dim for 2009
with some improvement in 2010.Impacts also for comml. insurers with
construction risk exposure
New home starts plunged 34%
from 2005-2007; Drop through 2009 is 72% (est.)—a net
annual decline of 1.49 million
units, lowest since record
began in 1959
I.I.I. estimates that each incremental 100,000 decline in housing starts costs
home insurers $87.5 million in new exposure (gross premium). The net
exposure loss in 2009 vs. 2005 is estimated at about $1.3 billion.
Source: US Department of Commerce; Blue Chip Economic Indicators (9/09); Insurance Information Inst.
37
16.916.916.617.1
17.517.817.4
16.516.1
13.1
10.4
11.8
91011
1213141516
171819
99 00 01 02 03 04 05 06 07 08 09F 10F
Weak economy, credit crunch are hurting auto sales; Gas prices
have been a factor too.
New auto/light truck sales are expected to experience a net drop of 6.5 million units annually by 2009 compared with 2005, a decline of 37%
and the lowest level since the late 1960s
Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth
than problems in the housing market will on home insurers
Auto/Light Truck Sales,1999-2010F (Millions of Units)
Source: US Department of Commerce; Blue Chip Economic Indicators (9/09); Insurance Information Inst.
“Cash for Clunkers” should generate $225M - $375M in net new personal auto premiums
Key Threats Facing Insurers Amid
Financial CrisisChallenges for the
Next 5-8 Years
39
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
1. Erosion of CapitalLosses are larger and occurring more rapidly than is commonly understood or presumedSurplus down 16%=$85B since 9/30/07 peak; 12% ($80B ) in 2008P/C policyholder surplus could be even more by year-end 2009Some insurers propped up results by reserve releasesDecline in PHS of 1999-2002 was 15% over 3 years and was entirely made up and them some in 2003. Current decline is ~16%in 5 qtrs.During the opening years of the Great Depression (1929-1933) PHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35%. It took until 1939-40 before these key measures returned to their 1929 peaks.BOTTOM LINE: Capital and assets could fell much farther and faster than many believed possible. It will take years to return to the 2007 peaks (likely until 2011 with a hard market and 2013 without one)
40
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
2. Reloading Capital After “Capital Event”Continued asset price erosion coupled with major “capital event” could lead to shortage of capital among somecompaniesPossible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirementsP/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after major events (post-9/11, Katrina).
This assumption may be incorrect in the current environmentCost of capital is much higher today, reflecting both scarcity & riskImplications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh capital & generate internally. Already a reality for some life insurers.
41
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
3. Long-Term Reduction in Investment EarningsLow interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gainsPrice bubble in Treasury securities keeps yields lowMany insurers have not adjusted to this new investment paradigm of a sustained period of low investment gainsRegulators will not readily accept it; Many will reject itImplication 1: Industry must be prepared to operate in environment with investment earnings accounting for a smaller fraction of profitsImplication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.Lessons from the period 1920-1975 need to be relearned
42Source: Insurance Information Inst.
4. Regulatory Overreach Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)Danger is high as feds get their nose under the tentStatus Quo is viewed as unacceptable by allPushing for major change is not without significantrisk in the current highly charged political environmentInsurance & systemic riskDisunity within the insurance industryImpact of regulatory changes will be felt for decadesBottom Line: Regulatory outcome is uncertain and risk of adverse outcome is high
Important Issues & Threats Facing Insurers: 2009 – 2???
43Source: Insurance Information Inst.
5. Creeping Restrictions on UnderwritingAttacks on underwriting criteria such as credit, education, occupation, territory increasingIndustry will lose some battlesView that use of numerous criteria are discriminatory and create an adverse impact on certain populationsImpact will be to degrade the accuracy of rating systems to increase subsidiesPredictive modeling also at riskCurrent social and economic environment could accelerate these effortsDanger that bans could be codified at federal level during regulatory overhaulBottom Line: Industry must be prepared to defend existing and new criteria indefinitely
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
6. Exploitation of Insurance as a Wealth Redistribution Mechanism
There is a longstanding history of attempts to use insurance to advance wealth redistribution/economic agendas Urban subsidies; Coastal subsidies are old; Could be extended to workers comp in variety of waysInsurer focus on underwriting profitability (resulting in higher rates) coupled with poor economic conditions could raise profile of affordability issueCalls for “excess profits tax” on insurersIncreased government involvement in insurance (including ownership stakes) make this more likelyFederal regulation could impose such redistribution schemes Bottom Line: Expect efforts to address social and economic inequities through insurance
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
7. Creeping Socialization and Partial Nationalization of Insurance System
CAT risk is, on net, being socialized directly via state-run insurance and reinsurance mechanisms or via elaborate subsidy schemes involving assessments, premium tax credits, etc.Some (life) insurers seeking TARP moneyEfforts to expand flood program to include windHealth insurance may be substantively socializedTerrorism risk—already a major federal role backed by insurersEventually impacts for other lines such as personal auto, WC?Feds may open to more socialization of private insurance riskOwnership stakes in some insurers could be a slippery slopeStates like FL will lean heavily on Washington in the event of a mega-cat that threatens state financeBottom Line: Additional socialization likely. Can insurers/will insurers draw the line?
Important Issues & Threats Facing Insurers: 2009 -2015
46Source: Insurance Information Inst.
8. Emerging Tort ThreatNo tort reform (or protection of recent reforms) is forthcoming from the current Congress or AdministrationErosion of recent reforms is a certainty (already happening)Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liabilityTorts twice the overall rate of inflationInfluence personal and commercial lines, esp. auto liab.Historically extremely costly to p/c insurance industryLeads to reserve deficiency, rate pressureBottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012-2014
Important Issues & Threats Facing Insurers: 2009 -2015
Shifting Legal Liability & Tort
EnvironmentIs the Tort Pendulum
Swinging Against Insurers?
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$0
$50
$100
$150
$200
$250
$300
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
E
2010
E
Tor
t Sys
tem
Cos
ts
1.50%
1.75%
2.00%
2.25%
2.50%
Tor
t Cos
ts a
s % o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
Billions
*Excludes the tobacco settlement, medical malpractice
2009-2010 Growth in Tort Costs as % of GDP is due in part to shrinking GDP
Liability: Average Cost per $1,000 of Revenue* United States, 2001 to 2007
$1.2
5
$0.6
5
$0.6
7
$0.3
3
$0.1
7
$0.1
1
$0.2
3
$3.2
1
$1.5
6
$1.2
7
$0.8
6
$0.3
6
$0.1
8 $0.4
8
$2.4
9
$1.0
7
$1.0
6
$0.6
3
$0.2
3
$0.1
4
$0.3
2
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$0 - $200M $201M-$500M
$501M-$1B $1B-$5B $5B-$10B $10B+ All
2001 2004 2007
*Across entire liability program (full population)Source: Marsh, 2007 Limits of Liability Report
Liability insurance costs relative to the client’s revenues are down by 25% - 35% since 2004
Business Leaders Ranking of Liability Systems for 2008
Best States1. Delaware2. Nebraska3. Maine4. Indiana5. Utah6. Virginia7. Iowa8. Vermont9. Colorado10. Kansas
Worst States41. Texas42. Florida43. South Carolina44. California45. Hawaii46. Illinois47. Alabama48. Mississippi49. Louisiana50. West Virginia
Source: US Chamber of Commerce 2008 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2008CO, IN, KS, VA,
VT
Drop-OffsMN, NH, TN,
WI
NewlyNotorious
FL, SC
RisingAboveAR, AK
Midwest/West has mix of good and bad states
The Nation’s Judicial Hellholes (2008/2009)
Source: American Tort Reform Association; Insurance Information Institute
ALABAMAMacon and
Montgomery Counties
South Florida
ILLINOISCook County West Virginia
Watch ListRio Grande
Valley & Gulf Coast, TX
Madison County, IL
Baltimore, MDSt Louis (the city of), St Louis and
Jackson Counties, MO
Dishonorable Mentions
MA Supreme Judicial CourtMO Supreme
Court
NEVADAClark County (Las Vegas)
NEW JERSEYAtlantic County (Atlantic City)
CALIFORNIALos Angeles
County
FINANCIAL STRENGTH &
RATINGSIndustry Has Weathered
the Storms Well
53
P/C Insurer Impairments,1969-2008
815
127
11 934
913 12
199
16 14 1336
4931
3450 48
5560 58
4129
1612
3118 19
49 5047
3518
14 15
75
0
10
20
30
40
50
60
70
69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
The number of impairments varies significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
Source: A.M. Best; Insurance Information Institute
54
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2008
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 08
Com
bine
d R
atio
0.00.20.40.60.81.01.21.41.61.82.0
Impa
irmen
t Rat
e
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly
correlated with underwriting
performance and reached record lows in 2007/08
Source: A.M. Best; Insurance Information Institute
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and barely one-fourth the 0.82% average since 1969
Number of Impairments by State, 1969-2008
22 22 21 20 17 15 15 15 15 14 14 13 11 10 9 9 8 8 6 6 6 6 6 5 5 5 5 5 5 5 4 4 4 3 3 3 2 2 2 2 1 1 0
4166
22242533
63
9691
73
140
0
20
40
60
80
100
120
140
160
TX FL CA IL NY PA LA MO
OK
OH AZ IN NJ GA NE WI
DE MA
MD SC CO TN PR RI HI KY MI
NC WV AL DC UT VA WA IA KS MN
MS
MT
NM OR SD VI WY AR CT VT AK ME
NH NV GU ID ND
No.
of I
mpa
irmen
ts
TX, FL and CA have the largest number of impairments.
Catastrophe risk plays a big role. Other factors influencing
impairments include the political environment and business mix
Source: A.M. Best; Insurance Information Institute
More TX insurers have become impaired over the past 40 years
than in any other state
Frequency of Impairments by State, 1969-2008
1.34
1.29
1.29
1.29
1.25
1.25
1.23
1.04
0.98
0.98
0.97
0.92
0.92
0.91
0.90
0.89
0.89
0.83
0.78
0.75
0.72
0.70
0.68
0.60
0.58
0.55
0.49
0.46
0.41
0.36
0.36
0.35
0.35
0.25
0.22
0.21
0.21
0.16
0.13
0.13
0.08
0.06
0.00
1.58
2.10
1.35
1.411.
531.571.
63
3.36
3.02
2.90
3.48
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
WY LA FL VI MT
CA WV AZ TX PR UT RI GA HI DC NM SC OK
MO
CO
MS NE NV GU
MD NJ TN KY OR IL NY PA AK MA
WA IN AL DE VA OH AR KS NC MI ID M
ESD W
INH IA CT M
N VT ND
Impa
irmen
t Fre
quen
cy (%
)
WY, LA, FL have the highest impairment rates
in the country
(Impairments per 100 Insurers Domiciled in State)
Source: A.M. Best; Insurance Information Institute
National average = 0.82%
TX has the 9th highest impairment rate = 1.53%
P/C Impairment Frequency vs. Catastrophe Points in Combined Ratio, 1977-2008
0
2
4
6
8
10
12
14
16
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
Cat
astro
phe
Poin
ts o
n C
ombi
ned
Rat
io
0.00.20.40.60.81.01.21.41.61.82.0
Impa
irmen
t Rat
e
Catastrophe Points in Combined RatioP/C Impairment Frequency
Impairment rates are highly
correlated with underwriting
performance and reached record lows in 2007/08
Source: A.M. Best, PCS; Insurance Information Institute
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and barely one-fourth the 0.82% average since 1969
58
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*
Under Review, 63 , 4.3%
Upgraded, 59 , 4.0%
Initial, 41 , 2.8%
Other, 59 , 4.0%
Affirm, 1,183 , 81.0%
Downgraded, 55 , 3.8%
*Through December 19.Source: A.M. Best.
58
Despite financial market turmoil, high cat losses
and a soft market in 2008, 81% of ratings actions by A.M. Best
were affirmations; just 3.8% were downgrades
and 4.0% upgrades
P/C insurance is by design a resilient in business. The dual threat of financial
disasters and catastrophic losses are
anticipated in the industry’s risk
management strategy.
59
Historical Ratings Distribution,US P/C Insurers, 2008 vs. 2005 and 2000
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.
A/A-48.4%
D0.2%C++/C+
1.9%
E/F2.3% A++/A+
11.5%
C/C-0.6%
B++/B+28.3%
B/B-6.9%
2008 2005
P/C insurer financial strength has improved since 2005 despite financial crisis
A/A-52.3%
A++/A+9.2%
B++/B+26.4%
Vulnerable*12.1%
A/A-60.0%
A++/A+10.8%
B++/B+21.3%
Vulnerable*7.9%
2000A++/A+ and A/A- gains
60
Reasons for US P/C Insurer Impairments, 1969-2008
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient loss reserves and inadequate
pricing are the leading cause of
insurer impairments,
underscoring the importance of
discipline. Investment
catastrophe losses play a much smaller role.
Reinsurance Failure3.7%
Rapid Growth14.3%
Misc.9.1%
Affiliate Impairment
7.9%
Sig. Change in Business
4.2%
Deficient Loss
Reserves/In-adequate Pricing38.1%
Investment Problems
7.0%
Alleged Fraud8.1%
Catastrophe Losses7.6%
Critical Differences Between P/C
Insurers and BanksSuperior Risk Management Model
& Low Leverage Makea Big Difference
62
How Insurance Industry Stability Has Benefitted Consumers
BOTTOM LINE:• Insurance Markets—Unlike Banking—Are Operating
Normally• The Basic Function of Insurance—the Orderly Transfer
of Risk from Client to Insurer—Continues Uninterrupted• This Means that Insurers Continue to:
Pay claims (whereas 117 banks have gone under as of 9/11/09)The Promise is Being Fulfilled
Renew existing policies (banks are reducing and eliminating lines of credit)Write new policies (banks are turning away people and businesses who want or need to borrow)Develop new products (banks are scaling back the products they offer)Compete Intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute62
63
• Emphasis on UnderwritingMatching of risk to price (via experience and modeling)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk
• Strong Relationship Between Underwriting and Risk BearingInsurers always maintain a stake in the business they underwrite, keeping “skin in the game”at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101
• Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry
• Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid
• Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives—CDS’s)
• Greater TransparencyInsurance companies are an open book to regulators and the public
Source: Insurance Information Institute63
Reasons Why P/C Insurers Have Fewer Problems Than Banks:
A Superior Risk Management Model
Regulatory Reform Obama Administration’s Plan
for Reforming Financial Services Industry Regulation
Will Impact InsurersStatus: Stalled in Congress
65
REGULATORY REFORM:2009 AND BEYOND
66
Rating of Auto/Home Insurance Regulatory & Operating Environment*
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WVVA
NC
LATX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJRI
MDDE
AL
VT
NY
**DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SD WI
INOH
MT
CA
NVUT
WY
CO
AK
GRADE 2009 2008A 4 7B 10 25C 17 10D 12 5F 6 4
*Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env., regulatory clarity, credit scores, auto market entry/exit, territorial restrictions, political oversight.
**Information not available.
= A
= B
= C
= D
= F
Source: Heartland Institute, May 2009http://www.heartland.org/custom/semod_policybot/pdf/25091.pdf
Study suggest the insurance regulatory and operating
environments deteriorated in 2009 for auto and home insurance
67
CONSUMER POLL: 2009 I.I.I. PULSE SURVEY
Source: Insurance Information Institute, 2009 Pulse Survey, May 2009.
The average American has little to no understanding of
insurance regulation: 1/3 believe the
industry is regulated by the federal
government and nearly 20% believe it
is unregulatedBarely 1/3 of Americans know that insurance is regulated by the states. There is a popular
notion that the industry is unregulated.
68
CONSUMER POLL: 2009 I.I.I. PULSE SURVEY
Source: Insurance Information Institute, 2009 Pulse Survey, May 2009.
Americans are split on who they believe should regulate the insurance industry.
More than 20% believe the industry should be regulated
by both the state andfederal government.
69
Obama Regulatory Reform Proposal:Plan Components
I. Office of National Insurance (ONI) Duties1. Monitor “all aspects of the insurance industry”2. Gather information3. Identify the emergence of any problems or gaps in
regulation that could contribute to a future crisis4. Recommend to the Federal Reserve insurance companies
it believes should be supervised as Tier 1 FHCs5. Administer the Terrorism Risk Insurance Program6. Authority to enter into international agreements and
increase international cooperation on insurance regulation
Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.
70
II. Systemic Risk Oversight & Resolution AuthorityFederal Reserve given authority to oversee systemic risk of large federal holding companies (Tier 1 FHCs)
Insurers are explicitly included among the types of entities that could be found to be a Tier 1 FHC
ONI given authority to “recommend to the Federal Reserve any insurance companies that the ONI believes should be supervised as Tier 1 FHC.”
Proposal also recommends “creation of a resolution regime to avoid disorderly resolution of failing bank holding companies, including Tier 1 FHCs “…in situations where the stability of the financial system is at risk.” Directly affects insurers in 2 ways:
Resolution authority may extend to an insurer within the BHC structure if the BHC is failing
If systemically important insurer is failing (as identified by ONI as Tier 1 FHC) resolution authority may apply
Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.
Obama Regulatory Reform Proposal:Plan Components (cont’d)
71
III. Consumer Financial Protection Agency (CFPA)Recommendation that “CFPA should have broad jurisdiction to protect consumers in consumer financial products and services such as credit, savings and payment products.”
Appears that Administration does not intend that the CFPA have jurisdiction over the insurance industry products or market practices
At the same time, there is no language that expressly excludes insurance from the scope of the CFPA’s authority
CFPA proposal contains numerous references specific to credit and savings products but none to insurance. However, the Administration clearly anticipates that CFPA would have broad powers with the scope of the agency’s agenda defined by several “Principles for Action,”which clearly could apply to insurance regulation:
Transparency: Disclosures and communications with clients should be “reasonable”
Simplicity: Standards for simplified products, straightforward pricing
Fairness: Restrictions on products if benefits outweigh costsSource: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009; “Obama .Proposal Would Create Office of National Insurance But is Unclear on Federal Chartering,” Dewey & LeBoeuf, Client Alert, June 17, 2009.
Obama Regulatory Reform Proposal:Plan Components (cont’d)
P/C INSURANCE FINANCIAL
PERFORMANCEA Resilient Industry in
Challenging Times
Profitability
Historically Volatile
74
P/C Net Income After Taxes1991-2009:Q1 ($ Millions)*
$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
$2,3
79
-$1,
309
-$6,970
$65,
777
$44,
155
$20,
559 $3
8,50
1
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,00091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F
09:Q
1
*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guarantee insurers yields an 4.2% ROAS for 2008 and 2.2%. 2009:Q1 net income was $2.4 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.
2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:Q1 ROAS = -
1.2%*
Insurer profits peaked in 2006 and 2007, but fell 96.2% during the economic
crisis in 2008
74
75
-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 0809:Q1
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2009: Q1*
*Excludes Mortgage & Financial Guarantee in 2008 and 2009Sources: ISO, Fortune; Insurance Information Institute.
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical and volatile
Financial Crisis*
76
-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 0809
Q1
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 Years10 Years
9 Years
Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2% and 2.2 in Q1 2009.Sources: ISO; A.M. Best; Insurance Information Institute.
2008: 0.5%
P/C Insurance Industry ROEs,1975 – 2009:Q1*
09:Q1: -1.2%
76
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09Q1*
ROE Cost of Capital
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2009:Q1*
*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry fell well short of is cost of capital in 2008
-13.
2 pt
s
US P/C insurers missed their cost of capital by an average 6.7 points from
1991 to 2002, but on target or better 2003-07, but
falling well short in 2008/09
-1.7
pts
+2.3
pts
-9.0
pts
The cost of capitalis the rate of return
insurers need to attract and retain
capital to the business
-7.1
pts
77
-8.4
pts
78
97.5
100.6 100.1 100.7
92.6
98.4101.0
8.9%4.2%
12.7%
14.3% 15.9%
9.6%
2.2%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009:Q1*
Com
bine
d R
atio
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Ret
run
on E
quity
*
Combined Ratio ROE*
* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios must me must lower in today’s depressed
investment environment to generate risk
appropriate ROEs
Advertising Trends
Advertising Expenditures by P/C Insurance Industry, 1999-2008
$ Billions
$1.736 $1.737 $1.803 $1.708
$3.426
$4.102$4.354
$2.975
$2.111$1.882
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
99 00 01 02 03 04 05 06 07 08
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers was at a
record high in 2008, signaling strong
competition despite the recession.
Auto Insurance Quotes and Policies Issued Online, 2004-2007 (Millions)
18.7
24.4
28.1
32.4
0.7
1.0
1.6
2.1
0
5
10
15
20
25
30
35
2004 2005 2006 2007
Quo
tes
Subm
itted
Onl
ine
0.0
0.5
1.0
1.5
2.0
2.5
Polic
ies
Issu
ed O
nlin
e
Quotes Submitted OnlinePolicies Issued Online
Online quotes increased by 73% from
2004 to 2007 but policies issues tripled
Source: comScore Online Auto Insurance Report, April 2008 from Conning, “Property-Casualty Insurance Distribution: Focusing the Value Proposition, Embracing Change, “ (2009); Insurance Information Institute
82
Annual Online Quotes Submitted: Insurers vs. Aggregators:2006:Q3-2007:Q4
67
10
8
45
0 0
3
0
2
4
6
8
10
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
While insurers’ share of quotes appears to be growing, the pool of online quotes
is rising rapidly and some insurer growth is due to aggregator referrals
82Source: comScore Online Auto Insurance Report, April 2008 from Conning, “Property-Casualty Insurance Distribution: Focusing the Value Proposition, Embracing Change, “ (2009); Insurance Information Institute
Aggregators
Insurers
P/C Premium Growth
Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy
84
-4%-2%0%2%4%6%8%
10%12%14%16%18%20%22%24%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
09:Q
1
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Strength of Recent Hard Marketsby NWP Growth
1975-78 1984-87 2000-03
84
Net written premiums fell 1.0%
in 2007 (first decline since 1943) by 1.4% in 2008, and 3.6% in Q1 2009, the first 3-
year declines since 1930-33
Shaded areas denote “hard
market” periods
85
$651 $6
68 $691 $7
05
$703
$685
$690 $7
26
$786
$875
$830 $841
$817
$820$8
42
$831
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05 05 07* 08* 09*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Countrywide auto insurance expenditures increased 2.6% in 2008 and are rising at a
4% pace in 2009
86
0.8%
0.8%
0.5%
0.4%
0.3%
0.3% 0.
5% 0.6%
0.5%
0.1% 0.
5% 0.9% 1.
1% 1.3% 1.
7%2.
6%2.
6% 2.7% 3.
0% 3.1% 3.
4% 3.7% 4.
0%4.
0% 4.3% 4.4% 4.
7%4.
4% 4.7%
4.6%
0.2%
0%
1%
2%
3%
4%
5%
6%
Jan-
07Fe
b-07
Mar
-07
Apr
-07
May
-07
Jun-
07Ju
l-07
Aug
-Se
p-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08Fe
b-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-Se
p-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09Fe
b-09
Mar
-09
Apr
-09
May
-09
Jun-
09Ju
l-09
Monthly Change in Auto Insurance Prices*
*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
Auto insurance prices seem to
have leveled off in recent months
87
$508 $5
36 $593
$668
$729 $7
64 $804
$807 $820 $841
$500$550$600$650$700$750$800$850$900$950
00 01 02 03 04 05 06 07* 08* 09*
Average Premium forHome Insurance Policies**
*Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Countrywide auto insurance expenditures increased 1.6% in 2008 and are increasing at 2.6% annual rate in 2009
88
Average Commercial Rate Change,All Lines, (1Q:2004 – 2Q:2009)
-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%
-11.
8%-1
3.3% -1
2.0%
-13.
5%-1
2.9% -1
1.0%
-6.0
% -5.0
%-5
.0%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%1Q
042Q
043Q
044Q
041Q
052Q
053Q
054Q
051Q
062Q
063Q
064Q
061Q
072Q
073Q
074Q
071Q
082Q
083Q
084Q
081Q
092Q
09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
-0.1
% Magnitude of price declines is now
shrinking. Reflects shrinking capital,
reduced investment gains, deteriorating
underwriting performance, higher cat losses and costlier
reinsurance
Merger & Acquisition
Barriers to Consolidation Will Diminish in 2009/10
90
P/C Insurance-Related M&A Activity, 1988-2008
$2,4
35
$5,1
00
$19,
118
$40,
032
$1,2
49$4
86$2
0,35
3$4
25$9
,264
$35,
221
$13,
615
$16,
294
$55,825
$30,
873
$8,0
59$1
1,53
4
$1,8
82
$3,4
50$2
,780
$5,1
37
$5,6
38
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Tran
sact
ion
Valu
e ($
Mill
)
0
20
40
60
80
100
120
140
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
.Source: Conning Research & Consulting.
2009 off to a stronger start with AIG unit sales and
Bermuda consolidation
$ Value of deal up 20% in 2009,
volume down 12%
Distribution Sector: Insurance-Related M&A Activity, 1988-2008
$542
$446
$5,8
12
$1,9
34
$7
$1,633
$2,7
20
$689
$60 $212 $9
44
$15,205
$0
$2,000$4,000
$6,000$8,000
$10,000
$12,000$14,000
$16,000
96 97 99 00 01 02 03 04 05 06 07 08
Tran
sact
ion
Valu
e ($
Mill
)
0
50
100
150
200
250
300
350
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
Source: Conning Research & Consulting.
Consolidation within the distribution sector
remains elevated
Distribution Sector M&A Activity, 2008 vs. 2006
Source: Conning Research & Consulting
Title2%
Insurer Buying
Distributor12%
PE Buying Agency
4% Agency Buying Agency
67%
Other2%
Bank Buying Agency
13%
2008 2006
Title4%
Insurer Buying
Distributor7%
Agency Buying Agency
62%
Other2%
Bank Buying Agency
25%
Number of bank acquisitions is falling; More private equity
interest
Capital/Policyholder Surplus (US)
Shrinkage, but Capital is WithinHistoric Norms
94
$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 0809*
U.S. Policyholder Surplus: 1975-2009:H1*
Source: A.M. Best, ISO, Insurance Information Institute. *As of 6/30/09
$ B
illio
ns
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Actual capacity as of 6/30/09 was $471B, up from $437.1B as of 3/31/09 Recent peak was $521.8 as of
9/30/07. Surplus as of 6/30/09 is 9.8% below 2007 peak; Crisis trough was as of 3/31/09 16.2% below 2007 peak
The premium-to-surplus ratio stood at $1.03:$1 as of
3/31/09, up from near record low of $0.85:$1 at
year-end 2007
94
95
Policyholder Surplus, 2006:Q4 – 2009:H1
$ Billions
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$471.0
$505.0$515.6
$517.9
$380
$400
$420
$440
$460
$480
$500
$520
$540
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2
Source: ISO, AM Best.
Declines Since 2007:Q3 Peak08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%) 09:Q1: -$84.7B (-16.2%) 09:Q2: -$50.8B (-9.7%)
Capacity peaked at $521.8 as of 9/30/07
95
96
Premium-to-Surplus Ratios Before Major Capital Events*
$1.65
$1.42 $1.40
$1.03 $1.03$0.88
$1.05$1.15
$0.5$0.7$0.9$1.1$1.3$1.5$1.7$1.9
6/30
/198
9H
urric
ane
Hug
o
6/30
/199
2H
urric
ane
And
rew
12/3
1/93
Nor
thrid
geEa
rthq
uake
6/30
/01
Sept
. 11
Atta
cks
6/30
/04
Flor
ida
Hur
rican
es
6/30
/05
Hur
rican
eK
atrin
a
6/30
/07
Fina
ncia
lC
risis
As
of3/
31/0
9**
*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.
P/C insurance industry was better capitalized going into the
financial crisis than before any “capital event” in recent history
0.8
1.0
1.2
1.4
1.6
1.8
2.0
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*
U.S. P/C Industry Premiums-to-Surplus Ratio: 1985-2009:Q1
Sources: A.M. Best, ISO, Insurance Information Institute *As of 3/31/09.
19980.84:1–the lowest
(strongest) P:S ratio in recent history.
Premiums measure 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 industry’s capacity to handle the risk it has accepted.
1.03:1 as of
3/31/09
P/C insurers remain well capitalized despite recent erosion of capital. 50-year average = 1.52.
98
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
3.3%
9.6%6.9%
10.9%
16.2%13.8%
6.2%
0%2%4%6%8%
10%12%14%16%18%
6/30
/198
9H
urric
ane
Hug
o
6/30
/199
2H
urric
ane
And
rew
12/3
1/93
Nor
thrid
geEa
rthq
uake
6/30
/01
Sept
. 11
Atta
cks
6/30
/04
Flor
ida
Hur
rican
es
6/30
/05
Hur
rican
eK
atrin
a
Fina
ncia
lC
risis
as
of3/
31/0
9**
*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.
The financial crisis now ranks as the largest
“capital event” over the past 20+ years
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
NWP % changeSurplus % change
*2009 NWP and Surplus figures are % changes for Q1:09 vs Q1:08Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets Follow When Surplus “Growth” is Negative*
Sharp decline in capacity is a necessary but not sufficient
condition for a true hard market
Investment Performance
Investments are the Principle Source of Declining
Profitability
Distribution of P/C Insurance Industry’s Investment Portfolio
Cash & Short-Term Investments
7.2%
Common Stock17.9%
Bonds66.7%
Preferred Stock1.5%
Real Estate0.8%
Other5.9%
Portfolio Facts•Invested assets totaled $1.3 trillion as of 12/31/07•Insurers are generally conservatively invested, with 2/3 of assets invested in bonds as of 12/31/07•Only about 18% of assets were invested in common stock as of 12/31/07•Even the most conservative of portfolios was hit hard in 2008
Source: NAIC; Insurance Information Institute research;.
As of December 31, 2007
101
102
Property/Casualty Insurance Industry Investment Gain:1994- 2009:Q11
$ Billions
$35.4$42.8
$47.2$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.4
$3.7
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08
09:Q
1
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B.
Sources: ISO; Insurance Information Institute.
Investment gains fell by 51% in 2008 due to lower yields, poor equity market
conditions. Falling again in 2009.
102
103
P/C Insurer Net Realized Capital Gains, 1990-2009:Q1
$2.88$4.81
$9.89
$1.66
$6.00
$9.24$10.81
$13.02
$16.21
$6.63
-$1.21
$6.61$8.92
-$7.99
-$19.80
$18.02
$3.52
$9.70$9.13$9.82
-$20-$18-$16-$14-$12-$10-$8-$6-$4-$2$0$2$4$6$8
$10$12$14$16$18$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09Q
1
Sources: A.M. Best, ISO, Insurance Information Institute.
Realized capital losses hit a record $19.8 billion in 2008 due to financial market turmoil, a $27.7 billion swing from 2007, followed by an $8.0B drop in Q1 2009. This is a primary cause of 2008/2009’s large drop in profits and ROE.
$ Billions
103
104
0.15% 0.18% 0.30% 0.48%1.02%
1.55%
2.46%
3.14%3.56%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%
4.41%4.38%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
July 2009 Yield CurvePre-Crisis (July 2007)
Treasury Yield Curves: Pre-Crisis (July 2007) vs. July 2009
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Stock dividend cuts will further pressure investment income
Treasury Yield Curve is at its most depressed level in at least 45 years. Investment income will fall as a result.
Underwriting Trends
Financial Crisis Does Not Directly Impact Underwriting
Performance: Cycle, Catastrophes Were 2008’s Drivers
106
115.8
107.5
100.198.4
100.8
92.6
100.3101.0
95.7
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009:H1*
P/C Insurance Industry Combined Ratio, 2001-2009:H1*
*Excludes Mortgage & Financial Guarantee insurers in 2008. Including M&FG, 2008=105.1, 2009=104.2 Sources: A.M. Best, ISO.
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
106
2005 ratio benefited from heavy use of reinsurance which lowered net losses
107
-55-50-45-40-35-30-25-20-15-10-505
101520253035
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809
:Q1
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers
$ B
illio
ns
Insurers earned a record underwriting profit of $31.7B in 2006 and $19.3B in 2007, the largest ever but only the 2nd
and 3rd since 1978. Cumulative underwriting deficit from 1975 through 2008 is $442B.
Underwriting Gain (Loss)1975-2009:H1*
$19.8 Bill underwriting loss in 2008
incl. mort. & FG insurers, -0.75B in H1:09
107
Large underwriting losses are NOT
sustainable in current investment environment
108
Number of Years With Underwriting Profits by Decade, 1920s –2000s
67
10
8
45
0 0
3
0
2
4
6
8
10
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.
Number of Years with Underwriting ProfitsUnderwriting 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.
108
Personal Lines
Auto (~75% of Market)Home (~25%)
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
98.4
94.3 96
.4
93.9
97.6
103.
3
97.6
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09FSource: A.M. Best (historical and forecast).
Deterioration in 2008 due primarily to above average
CAT activity
Personal LinesCombined Ratio, 1993-2008
2008 deterioration due to price
competition and higher CAT
losses. Trends reverse in 2009.
111
117.7
158.4
113.6118.4
112.7
121.7
101.0
108.2111.4
121.7
109.3
98.294.4
100.3
88.995.6
116.9
99
113.0109.4
85
95
105
115
125
135
145
155
165
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
Homeowners Insurance Combined Ratio
Average 1990 to 2008= 111.1
Insurers have paid out an average of $1.11in losses for every dollar earned in premiums over the past 17 years
Sources: A.M. Best (historical ); III forecast for 2009.
112
101.7101.3 101.0
99.5
101.1
103.5
109.5
107.9
104.2
98.4
94.395.1 95.5
98.3
100.299.5
101.3
90
95
100
105
110
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
Private Passenger Auto (PPA) Combined Ratio
Average Combined Ratio for 1993 to 2008 =100.8
Sources: A.M. Best (historical); III forecast for 2009.
PPA is the profit juggernaut of the
p/c insurance industry today
Auto insurers have shown significant
improvement in PPA underwriting
performance since mid-2002, but results
are deteriorating.
Commercial Lines
114
110.
3
110.
2
107.
6
103.
9 109.
7
112.
3
111.
1
122.
3
110.
2
102.
5 105.
4
91.1 93
.6
103.
5
105.
1
102.
0
112.
5
85
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
2006/07 benefited from favorable loss cost trends, improved tort environment, low CAT
losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and
mortgage and financial guarantee segments have big influence. 2009 is transition year.
Commercial coverages have exhibited significant
variability over time
Commercial Lines Combined Ratio, 1993-2009F
Mortgage and financial guarantee account for about 3-4
points on the commercial combined ratio in 2008/09
Sources: A.M. Best (historical and forecasts)
119.
0
119.
8
108.
5
125.
0
113.
1
115.
0 121.
0
116.
2
116.
1
104.
9
101.
9 105.
4
95.1 97
.6100.
7
116.
8
113.
6
115.
3
122.
4
115.
0
117.
0
97.3
89.0
97. 7
93.8
83.8
89.8
108.
0
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07 08
CMP-LiabilityCMP-Non-Liability
Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)
CMP- improved in recent years but
deteriorated in 2008
Sources: A.M. Best.
112.
1
112 11
3
115.
9 118.
1
115.
7
116.
2
102.
7
95.2
92.9
92.1
92.4 94
.2
96.8
101.
5
90
95
100
105
110
115
120
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
Commercial Auto Combined Ratio (1995-2008)
Average
1995 to 2008 = 105.0
CMP improved dramatically from 2001 to 2006, but has since
experienced deteriorating results due primarily to soft market
conditions
Sources: A.M. Best *Includes both liability and property damage.
101.9
92.8
100.2
83.880.8 82.5
89.9
77.379.5
93.2
50
60
70
80
90
100
110
99 00 01 02 03 04 05 06 07 08
Inland Marine Combined Ratio (2004-2008)
Average
1999 to 2008 = 88.2
Inland Marine is consistently among the most profitable of
all commercial lines. The line will benefit from
infrastructure spending in the $787B stimulus package
Sources: A.M. Best (historical and forecasts)
118
10297
111 110107
103
93
101 101106
100 101
107
115118
122
80859095
100105110115120125
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008P 2009F
Percent
Workers Comp Combined Ratios, (Calendar Year, Private Carriers) 1994-2009F
WC insurers lopped 30 points off the combined
ratio in just 5 years, but soft market is now taking a toll
p Preliminary. Sources: Calendar Years 1994-2008p, A.M. Best Aggregates & Averages; Calendar Year 2009F is I.I.I. estimates for private carriers based A.M. Best Review and Preview 2009; NCCIIncludes dividends to policyholders
WC Premium Growth &
Approved Rate/Loss Cost Trends
31.0 31.3 29.8 30.5 29.1 26.3 25.2 24.2 23.3 22.3 25.0 26.1 29.3 31.134.7 34.0
37.737.8 38.7
31.0 31.3 29.8 30.5 29.126.3
28.2 26.9 25.9 25.028.5
32.0
37.5
42.0
46.244.2
39.3
47.5 46.3
0.0
10.0
20.0
30.0
40.0
50.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20072008p
State Funds ($ B)Private Carriers ($ B)
Total Workers Compensation Premium Declined Again in 2008
Net Written Premium
Calendar Year
$ Billions
p Preliminary
Source: 1990–2007 Private Carriers, A.M. Best Aggregates & Averages; 2008p, NCCI1996–2008p State Funds: AZ, CA, CO, HI, ID, KY, LA, MO, MT, NM, OR, RI, TX, UT Annual StatementsState Funds available for 1996 and subsequent
* States approved through 4/17/2009Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization
History of Average WC Bureau Rate/Loss Cost Level Changes
12.1
7.4
10.0
2.9 3.5
1.2
4.96.6
-1.7
-6.6
-3.1
-6.0
-2.6
-5.4
-8.0
-6.0
-3.2
-6.4-5.1
-5.7
-10
-5
0
5
10
15
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* 2009*
Cumulative1990-1993
+36.3%
Cumulative 1994-1999-27.8%
Percent
Cumulative 2000-2003+17.1%
Cumulative 2004-2009-25.2%
Calendar Year
-7.1 -7.4 -7.1-8.5
-10.5
-14.6-17.7
-22.6
-19.2
-14.3
-4.0
-6.8-4.6
-1.7
-23.2
2.1 0.7
-2.2
-25
-20
-15
-10
-5
0
5
10
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008pRate/Loss Cost Departure Schedule Rating Dividends
Percent
Impact of Discounting onWorkers Compensation Premium
NCCI States—Private Carriers
p PreliminaryNCCI benchmark level does not include an underwriting contingency provisionDividend ratios are based on calendar year statisticsBased on data through 12/31/2008 for the states where NCCI provides ratemaking servicesSource: NCCI
Policy Year
Workers Compensation
Review:Underwriting and
Operating Performance
10297
111 110107
103
93
101 101100 101
107
115118
122
80859095
100105110115120125
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008p
Percent
p Preliminary. Sources: Calendar Years 1994-2007, A.M. Best Aggregates & Averages; Calendar Year 2008p NCCIIncludes dividends to policyholders
Workers Comp Combined Ratios, (Calendar Year, Private Carriers) 1994-2008p
WC insurers lopped 29 points off the combined ratio in just 5 years, but soft market is taking toll
117123 121
109102 97 100 101
107115 118 122
111 110 107101101
93103
0
20
40
60
80
100
120
140
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008p
Loss LAE Underwriting Expense Dividends
WC Calendar Year Combined Ratio—On the Rise Again?
Private CarriersPercent
P = Preliminary
Source: 1990–2007, Best's Aggregates & Averages; 2008p, NCCI
1.9% Due to September 11
Calendar Year
Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers
101
97
111
110
107
103
93
101 10
6
119
133
143
137
124
88 87 85
96
100
101.
0
101.
0
100
101 10
7 115 11
8 122
97
106
97
80
90
100
110
120
130
140
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08p
Calendar Year Accident Year
Percent
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2008 and developed to ultimateSource: Calendar Years 1994-2007, A.M. Best Aggregates & Averages; Calendar Year 2008p and Accident Years 1994-2008p based on NCCI Annual Statement Analysis.Includes dividends to policyholders *2008p figure from NCCI.
Workers Comp Combined Ratios, 1994-2008p*
2008 CY combined ratio flat, AY up 4 points
$ Billions
Calendar Year
2
5
10
15
1820 21
18
15
12
6
9
42
0
5
10
15
20
25
30
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
2008 Tabular Discount Is $5.2 Billion
Considers all reserve discounts as deficienciesLoss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selectionsSource: NCCI analysis
Calendar Year Reserve Deficiency Increased in 2008
WC Loss and LAE Reserve Deficiency: Private Carriers
12.0
1.3 0.9
8.4 9.0
-0.1
17.0
-4.2
-8.6 -7.8
-3.2
7.5
12.7
19.717.9
19.8
13.9
5.2 4.4
-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 08pCalendar Year
Percent
Workers Comp Pre-Tax Operating Gain Ratio: Strong But Slipping?
*Adjusted to include realized capital gains to be consistent with 1992 and after.Sources: 1990-2006, Best’s Aggregates and Averages; 2007p, NCCI
Workers CompCost Drivers
Medical/Indemnity Frequency & Severity
Trends
Workers Compensation Medical Claim Trends
$8.5 $8.6 $8.4 $9.2 $9.6$10.3$11.4$12.3
$13.6$14.6
$16.6$18.0
$19.2$20.3
$21.8$23.1
$24.5$26.0
$5
$10
$15
$20
$25
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08p
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2007: +6.7%
Accident Year
MedicalClaim Cost ($000s)
2008p: Preliminary based on data valued as of 12/31/20081991-2007: Based on data through 12/31/2007, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Workers Comp Medical Claims Costs Continue to Climb
Cumulative Change = 210%(1993-2008p)
4.5%3.5%
2.8% 3.2% 3.5%4.1% 4.6% 4.7%
4.0% 4.4% 4.2% 4.0% 4.4%3.7%
5.1%
7.4%
10.1%
8.3%
10.6%
7.3%
13.6%
7.6% 7.2%6.2%
9.2%8.6%
5.8% 6.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Change in Medical CPIChange Med Cost per Lost Time Claim
WC Medical Severity Rising at Double the Medical CPI Rate
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average annual increase in WC medical severity from
1995 through 2008 was more than twice the medical CPI
rate (8.1% vs. 4.0%)
Med Costs Share of Total Costs is Increasing Steadily
Indemnity54%
Medical46%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity47% Medical
53%
Indemnity42%
Medical58%1988
1998
2008p
WC Med Cost Will Equal 70% of Total by 2018 if Trends Hold
Source: Insurance Information Institute.
Indemnity30%
Medical70%
2018 Estimate
This trend will likely be supported
by the increased labor force
participation of workers age 55 and
older.
Indemnity ClaimCost Trends
$10.0
$9.7
$9.4
$9.9
$10.1
$10.7
$11.5
$12.5
$13.8
$15.2
$16.6
$17.1
$17.9
$21.2
$20.2
$19.5
$18.1
$18.6
+3.4%
+1.0% -3.1% -2.8% +4.9%+1.7%+5.9%+7.7%
+9.0%+10.1%
+10.1%+8.9%+2.3%
+4.5%+1.1%+3.0%+4.8%
5
7
9
11
13
15
17
19
21
23
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008p
IndemnityClaim Cost ($ 000s)
Annual Change 1991–1993: -1.7%Annual Change 1994–2001: +7.3%Annual Change 2002–2007: +3.4%
2008p: Preliminary based on data valued as of 12/31/20081991–2007: Based on data through 12/31/2007, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Workers Compensation IndemnityClaim Costs Continue to Grow
Lost-Time Claims
Accident Year
+5.0
3.0%
4.3%5.0%
4.4%5.2%
4.4%
2.4% 2.0% 2.4% 2.8%3.4% 3.3% 3.7%
5.9%
7.7%
9.0%
10.1%
4.4%
1.3%
3.0%
4.8%
3.4%
5.0%
3.0% 3.1%
9.2%10.1%
1.7%
0%
2%
4%
6%
8%
10%
12%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation
2008p: Preliminary based on data valued as of 12/31/2007; 1991-2007: Based on data through 12/31/2006, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI
WC indemnity severity is once again outpacing
wage inflation
Residual Market Overview
9
1618 17
2224
2629 28
24
17
11
8
4 3 3
13
68
1012
5
1113
0
5
10
15
20
25
30
198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008p
Percent
Calendar Yearp Preliminary•NCCI Plan states plus DE, IN, MA, MI, NJ, NCSource: NCCI
WC Residual Market Shares Continue to Decline
Workers Compensation Insurance Plan States* Premium as a Percentage of Direct Written Premium
178
166 170 167160
143
128
112103
97 95100 103
117 117 119
108114
108115114
107 110 112
80
100
120
140
160
180
200
198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008*
Percent
Policy Year
WC Residual Market Combined Ratios
NCCI-Serviced Workers Compensation Residual Market Poolsas of December 31, 2008
* Incomplete Policy Year Projected to UltimateSource: NCCI
Investment Performance
13.0
18.116.7
14.4
16.8 17.6
20.421.3 20.5
19.5
10.7 10.4 11.214.0 14.0
1210.0
10.9
0
5
10
15
20
25
1990*1991* 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20062007p
Workers Compensation InvestmentReturns Remain Below Historical Average
Investment Gain on Insurance Transactions-to-Premium RatioPrivate CarriersPercent
p Preliminary* Adjusted to include realized capital gains to be consistent with 1992 and after Investment Gain on Insurance Transactions includes Other IncomeSource: 1990–2006, Best's Aggregates & Averages; 2007p, NCCI
Calendar Year
Average (1990–2006): 15.3%
Catastrophic Loss Catastrophe Losses Trends
Are Trending Adversely
144
U.S. Insured Catastrophe Losses$7
.5$2
.7$4
.7$2
2.9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5$5
.9 $12.
9 $27.
5
$6.7
$26.
0$6
.9$1
00.0
$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 08 09*
20??
*Based on PCS data through June 30 = $6.9 billion.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
$ Billions2008 CAT losses exceeded
2006/07 combined. 2005 was by far the worst year ever for
insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming
eventually
144
2009 cat losses were down 43% in H1 from $10.3B in H1 2008
Insured Property Catastrophe Losses as % Net Premiums Earned, 1984–2008
0%
2%
4%
6%
8%
10%
12%
14%
16%
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
US
US average: 1984-2008
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
US CAT losses were a record 14.4% of
net premiums earned in 2005 and
were 4 times the 1984-2008 average
of 3.6%
146
States With Highest Insured Catastrophe Losses in 2008
$ Billions
$10.2
$2.2 $1.6 $1.3 $1.0
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
Texas California Minnesota Ohio Georgia
Source: PCS; Insurance Information Institute.
In 2008, insurers paid $26 billion to 3.9 million victims of 37 major
natural catastrophes across 40 states. 64% of the payouts (in $ terms) went
to homeowners, 27% to business owners and 9% to vehicle owners
Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2008)
$4.2 $5.2 $6.2 $7.3 $8.1 $8.5$11.3 $12.5
$23.8
$45.3
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Jeanne(2004)
Frances(2004)
Rita (2005) Hugo (1989) Ivan (2004) Charley(2004)
Wilma (2005) Ike (2008)* Andrew(1992)
Katrina(2005)
$ B
illio
ns
*PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.
8 of the 10 most expensive hurricanes in US history have occurred since 2004
In 2008, Ike became the 4th most expensive insurance event and 3rd most
expensive hurricane in US history arising from about 1.35 mill claims
147
Top 12 Most Costly Disasters in US History, (Insured Losses, $2008)
$4.2 $5.2 $6.2 $7.3 $8.1 $8.5$11.3 $11.3 $12.5
$22.8 $23.8
$45.3
$0$5
$10$15$20$25$30$35$40$45$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Northridge(1994)
Ike(2008)*
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
$ B
illio
ns
*PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.
8 of the 12 most expensive disasters in US history
have occurred since 2004
In 2008, Ike became the 4th most expensive insurance event and 3rd most
expensive hurricane in US history arising from about 1.35 mill claims
148
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide 149
Total Value of Insured Coastal Exposure (2007, $ Billions)
$2,378.9$895.1
$772.8$635.5
$479.9$224.4
$191.9$158.8$146.9$132.8
$92.5$85.6
$60.6$55.7$51.8$54.1
$14.9
$2,458.6
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
In 2007, Florida still ranked as the #1 most exposed state to hurricane loss,
with $2.459 trillion exposure, an increase of $522B or 27% from $1.937
trillion in 2004.The insured value of all coastal
property was $8.9 trillion in 2007, up 24% from $7.2 trillion in 2004.
$522B increase since 2004, up 27%
150
151
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1988-2007¹
Fire, $8.1 , 2.6%
Tornadoes, $82.4 , 26.5%
All Tropical Cyclones, $141.6 ,
45.6%
Civil Disorders, $1.1 , 0.4%
Utility Disruption, $0.2 , 0.1%
Water Damage, $0.4 , 0.1%Wind/Hail/Flood,
$9.9 , 3.2%
Earthquakes, $19.5 , 6.3%
Winter Storms, $24.4 , 7.9%
Terrorism, $22.9 , 7.4%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 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 $310.5 billion from 1988-2007 (in 2007 dollars)
Distribution of US Insured CAT Losses: TX, FL, LA vs US, 1980-2008*
Rest of US, $176, 60%
Louisiana, $33.6, 11%
Texas, $31.2,10%
Florida, $57.1,19%
Florida accounted for 19% of all US insured CAT losses from 1980-2008:
$57.1B out of $297.9B
*All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
$ Billions of Dollars
Top 10 Major Disaster Declaration Totals By State: 1953- 2009*
8374
63 6257 55 51 50 49 49 48 46 44 43 42
0
10
20
30
40
50
60
70
80
90
TX CA FL OK NY LA AL KY AR MO IL MS OH WA MN,PA,WV
Total Number
*Through July 2, 2009.Source: Federal Emergency Management Agency (FEMA)
ucky and Ohio are among the states with the most disaster
between 1953-2009*
Government Aid After Major Disasters (Billions)*
$137.1
$48.4
$22.8 $19.5 $17.1 $16.5
$0
$20
$40
$60
$80
$100
$120
$140
$160
Hurricane Katrina(2005)*
Sept. 11 TerroristAttack (2001)
Hurricane Ike(2008)
Hurricane Andrew(1992)
NorthridgeEarthquake (1994)
HurricanesCharley, Frances,
Ivan & Jeanne(2004)
$ B
illio
ns
*Adjusted to 2008 dollars by the Insurance Information Institute.Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05; Houston Chronicle, 09/24/08 for Ike.
Hurricane Katrina aid will dwarf aid following all
other disasters. Congress may authorize $150-$200 billion ultimately (about $400,000 for each of the
500,000 displaced families). Is the incentive to buy
insurance and insure to value diminished?
The federal government poured an estimated
$22.8B into areas affected by Hurricane Ike
Summary• P/C Insurance Industry Has Weathered the
Financial Crisis Better Than Most Financial Services Segments
• Lingering Effects of Soft Market and Weak Economy Have Kept Commercial Premium Growth in Negative Territory
• Recovery of Economy in 2010 Should Begin to Help Commercial Insurers Realize Exposure Growth
Growth trajectory likely to be slow and uneven across states
• Investment Performance Should Improve Modestly, but Disciplined Underwriting Gains in Importance
• Industry Can Be Profitable in Period of Slow Growth
156
Insurance Information Institute On-Line
THANK YOU FOR YOUR TIME AND
YOUR ATTENTION!
Download at www.iii.org/presentations/MarketScout091609.ppt
156
