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The Global Economy, Rising Risk and Insurance Markets
Risk and Reward in a Troubled World
Globex Partner Broker Conference
Miami, FL
October, 2016
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, Special Consultant Insurance Info. Inst.
Co-Director, Center for Risk and Uncertainty Mgmt. University of South Carolina
Cell: 917.453.1885 [email protected] www.iii.org
2
Outlook: Property/Casualty & Economy
Modest growth will continue in 2016 (~ 3% DPW in US)
Exposure growth tied primarily to overall GDP growth/key sector drivers
Rates remain flat to marginally negative for commercial lines in 2016
Reinsurance pricing under pressure—more so for property risks
Underlying loss cost trends remain manageable
Industry is very well capitalized on a global scale
Continued pressure from alternative capital
Anti-trade, nationalistic sentiments bad for marine ins.
Sluggish growth abroad impacts trade flows
Strong dollar has hurt US manufacturing, exports
Commodity prices remain weak but have likely bottomed
3
Risk & Insurance
U.S. and Global Perspective
Marine Insurance Is Very Sensitive to the Global Economic and Political
Environment
4
5 Major Categories for External Global Risks, Uncertainties and Fears: Insurance Solutions
1. Economic Risks
2. Geopolitical Risks
3. Environmental Risks
4. Technological Risks
5. Societal Risks
Source: Adapted from World Economic Forum, Global Risks 2014; Insurance Information Institute.
While risks can
be broadly
categorized,
none are
mutually
exclusive
5
Multitude of Exogenous Factors Influence Growth, Performance & Cyclicality
Tepid growth in US, Europe
Weakness in China/Emerging Economies
Political uncertainty in the US, Brazil, Argentina
UK “Brexit”
Low/Negative Interest Rates
Resurgent Terrorism Risk: ISIS & Other Groups
Cyber Attacks
Sabre Rattling (e.g., US-China, Russia)
Severe Natural Disaster LossesSupply Chain
Nationalism
International trade deals under siege
(Over)Regulation: Systemic Risk?
Strong dollar has impacted manufacturing
Are “Black Swans” everywhere or
does it just seem that way?
6
Top 5 Global Risks in Terms of Likelihood, 2007—2016: Insurance Can Help With Most
Source: World Economic Forum, Global Risks 2016; Insurance Information Institute.
Concerns Shift Considerably Over Short Spans of Time. 2016 Includes a Mix of Environmental Economic, Social and Environmental Risks
In 2016, societal
and environ-mental issues
dominated frequency concerns
7
Top 5 Global Risks in Terms of Impact,2007—2016: Insurance Can Help With Most
Source: World Economic Forum, Global Risks 2016; Insurance Information Institute.
Concerns Over the Impacts of Societal Risks Remained High in 2016, but Economic, Environment and Geopolitical Risks Also Loom Large
In 2016, societal issues
dominated severity
concerns
Globalization:The Global Economy Creates and Transmits Cycles & Risks
8
Globalization Is a Double Edged Sword—
Creating Opportunity and Wealth But
Potentially Creating and Amplifying Risk
8
Emerging vs. “Advanced” Economies
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
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
13
14
15
16
F1
7F
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook, Oct. 2016; Insurance Information Institute.
Emerging economy growth rates are expected
to increase to 4.2% in 2016 and 4.6% in 2017
GDP Growth: Advanced & Emerging Economies vs. World, 1970-2016F
Advanced economies are expected to grow at a modest pace of 1.6% in
2016 and 1.8% in 2017.
World output is forecast to grow by 3.1% in 2016 and 3.4% in 2017. The world economy shrank by 0.6% in
2009 amid the global financial crisis
GDP Growth (%)
10
Real GDP Growth Forecasts: Major Economies: 2014 – 2017F
Sources: Blue Chip Economic Indicators (10/2016 issue); IMF ( Oct. 2016); Insurance Information Institute.
2.4
%
0.9
%
3.1
%
1.6
%
2.7
%
-0.1
%
2.4
%
7.3
%
2.6
%
1.6
%
2.2
%
1.5
% 2.5
%
0.6
% 1.3
%
6.9
%
1.5
%
1.6
%
1.8
%
1.7
%
2.8
%
0.6
%
1.8
%
6.6
%
2.2
%
1.7
%
0.6
% 1.4
%
2.6
%
0.8
%
2.2
%
6.2
%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
US Euro Area UK Germany Australia Japan Canada China
2014 2015 2016F 2017F
Growth Prospects Vary Widely by Region; US and the UK Lead the Advanced Economies; Germany Leads in the Euro Area; China Has Slowed
The Eurozone remains weak
but should improve
Growth in China has slowed but outpaces the US and Europe
US growth should
acceleratein 2017
Germany’s growth mirrors the
Eurozone overall
“Brexit” impact will be negative
11
Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2015
Source: Swiss Re, sigma, No. 3/2016.
Market Life Non-Life Total
Advanced 2.5 2.6 2.5
Emerging 12.0 7.8 9.8
World 4.0 3.6 3.8
Real non-life premium
growth was stronger in the
US in 2015 than in most of
Europe
Life, $2.53 ,
55.6%
Non-Life,
$2.02 ,
44.4%
Life insurance accounted for nearly
56% of global premium volume in
2015 vs. 44% for Non-Life
Distribution of Global Insurance Premiums, 2015 ($ Trillions)
12
Total Premium Volume = $4.534 Trillion*
Source: Swiss Re, sigma, No. 3/2013; Insurance Information Institute.
13
2.8%
3.2% 3.3%
2.6%2.3%
2.8%
0%
1%
1%
2%
2%
3%
3%
4%
2012 2013 2014 2015 2016F 2017F
World Trade Volume Growth*,2012 – 2017F
World trade volume growth is expected to accelerate modestly in
2017 after dipping in 2015, 2016
*Goods and services.
Source: International Monetary Fund, World Economic Outlook, October 2016; Insurance Information Institute.
14
World Trade Volume: IMPORTS2010 – 2017F
2.4%3.9%
15.3%
8.8%
5.7% 5.7%
3.6%
-0.6%
2.3%
4.1%
11.5%
4.3%
1.1% 1.4%
3.4%4.2%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2010
2011
2012
2013
2014
2015
2016
F
2017
F20
1020
1120
1220
1320
1420
15
2016
F
2017
F
Growth (%)
Import growth in emerging economies outpaces
Advanced Economies has been hit hard
Advanced Economies Emerging Economies
Sources: IMF World Economic Outlook (October 2016 ); Insurance Information Institute.
Import growth in Advanced Economies is expected to decelerate in 2016 before
rising in 2017
15
World Trade Volume: EXPORTS2010 – 2017F
1.8%
3.5%
14.7%
6.7%
4.2% 4.4%
2.9%
1.3%
2.9%3.6%
12.2%
5.3%
2.1% 2.3%
4.2%3.6%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2010
2011
2012
2013
2014
2015
2016
F
2017
F20
1020
1120
1220
1320
1420
15
2016
F
2017
F
Growth (%)
Export growth in emerging economies has
struggled but should improve in 2016-17
Advanced Economies Emerging Economies
Sources: IMF World Economic Outlook (October 2016); Insurance Information Institute.
Export growth in advanced economies is expected to decelerate in 2016 before
accelerating in 2017
16Sources: The World Bank: http://data.worldbank.org/indicator/NE.TRD.GNFS.ZS accesses 10/13/16; Insurance Information Institute
World Trade is an Increasingly Important
Part of Global Economic Output
Global trade, which has expanded from 25% of GDP in the mid-1960s to more
than 60%, is in decline
Trade as a % of Global GDP
Ocean Marine Overview
17
Underwriting is Historically Volatile But
Improved in Recent Years
17
U.S. Ocean Marine Combined Ratio: 2004–2015
97
.2
11
8.4
98
.7
11
3.7
10
9.3
98
.0
93
.5
95
.0
10
0.8
10
3.6
91
.0
96
.480
85
90
95
100
105
110
115
120
125
130
04 05 06 07 08 09 10 11 12 13 14 15
Ocean Marine Results Have Been Quite Volatile Over the Past Decade, with the Combined Ratio Ranging by More
than 20 PointsSources: A.M. Best; Insurance Information Institute.
18
Ocean Marine results have improved markedly
since 2012
Ocean Marine vs. Commercial Lines Combined Ratio: 1989–2015
11
4.2 11
8.2
97
.3
11
9.4
89
.6
10
2.0
11
0.4 1
15
.5
10
7.2
10
2.2
10
0.0 10
4.1
97
.2
11
8.4
98
.7
11
3.7
10
3.6
91
.0
96
.4
10
0.8
10
9.3
98
.0
93
.5
95
.0
10
8.7
10
9.4
11
0.2
11
8.8
10
9.5
11
2.5
11
0.2
10
7.6
10
4.1
10
9.7
11
2.3
11
1.1
12
2.3
11
0.2
10
2.0
10
2.5
10
5.4
91
.1 93
.6
10
4.2
98
.9 10
2.4 1
07
.9
10
3.5
94
.8
94
.3
93
.7
10
9.5
10
7.9
92
.4
80
85
90
95
100
105
110
115
120
125
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 15
Ocean Marine All Commercial Lines
Ocean Marine has marginally outperformed Commercial Lines overall over the period from 1989 – 2015
Sources: A.M. Best; Insurance Information Institute.19
Average: 1989-2014
Ocean Marine: 103.9
All Commercial Lines: 105.6
U.S. Ocean Marine Direct Written Premiums: 2004–2015
3.20
3.38
3.733.78
4.013.96 3.93
3.75
4.10
3.80
3.633.57
$3.0
$3.2
$3.4
$3.6
$3.8
$4.0
$4.2
04 05 06 07 08 09 10 11 12 13 14 15
Ocean Marine Premium Volume Fell During the Global Financial Crisis, Increased but Is Now Falling Again
Sources: A.M. Best; Insurance Information Institute.20
Ocean Marine premium volume has
been volatile
$ Billions
Global Insurance Premium Growth Trends
21
Growth Is Uneven Across Regions
and Market Segments
21
Life, $2.53 ,
55.6%
Non-Life,
$2.02 ,
44.4%
Life insurance accounted for nearly
56% of global premium volume in
2015 vs. 44% for Non-Life
Distribution of Global Insurance Premiums, 2015 ($ Trillions)
22
Total Premium Volume = $4.534 Trillion*
Source: Swiss Re, sigma, No. 3/2013; Insurance Information Institute.
23
Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2015
Source: Swiss Re, sigma, No. 3/2016.
Market Life Non-Life Total
Advanced 2.5 2.6 2.5
Emerging 12.0 7.8 9.8
World 4.0 3.6 3.8
Real non-life premium
growth was stronger in the
US in 2015 than in most of
Europe
24
Global Real (Inflation Adjusted) Premium Growth: 1980-2013
Source: Swiss Re, sigma, No. 3/2014.
Emerging market growth has exceeded that of
industrialized countries in 30 of the past 34 years,
including the entirety of the global financial crisis and
subsequent recovery
Premium growth is very erratic in part to inflation volatility in emerging markets as well as a lack of
consistent cyclicality
25
The Unfortunate Nexus: Opportunity, Risk & Instability
Most of the Global Economy’s Future Gains Will be Fraught with Much
Greater Risk and Uncertainty than in the Past
26Source: Aon PLC; Insurance Information Institute.
Terrorism remains a greater concern in the Middle East,
Africa and South Asia
Latin and South America have modest
terrorist threats though Brazil is elevated
Political Risk: Greatest Opportunities Often in Risky Nations
As of 2015:Q4
27Source: Aon PLC; Insurance Information Institute.
The fastest growing markets are generally also
among the politically riskiest, including East and
South Asia and Africa
Latin and South America also present insurers with growth
opportunities but political instability has
increased markedly
Problems in the Ukraine will
intensify political risk in several former
Soviet republics
Terrorism Risk: Greatest Opportunities Are Often in Risky Nations
As of 2015:Q4
28
Country Shares of World Merchandise Exports
Source: World Trade Organization accessed 4/30/14 at: http://www.wto.org/english/res_e/statis_e/statis_e.htm ; Insurance
Information Institute.
The US, China, Japan and Western Europe lead the world in merchandise exports
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: $43.7B***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.
**$32.5 billion in 2001 dollars.
Source: Insurance Information Institute.
Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2015)
($ Billions)
30
P/C (Re)Insurance Industry Financial Overview
The Past Few Years Have Been Very Similar and Reasonably
Good
30
31
Commercial Lines Outlook: 2017
Flat to modest deceleration in premium growth in 2017
Rate environment suggests flat-to-slightly negative renewals in 2017
Economic growth continues at a very modest pace but unevenly across industries and regions; Nearly full employment and tighter labor market conditions are pluses and should drive new exposures
Service sector is a positives but manufacturing, energy, commodities, trade, agriculture all face headwinds
Loss costs driven by modest frequency and severity trends, but helped by reserve releases, modest cats
Property cat reinsurance costs continue to fall
Investment income still under pressure from low yields
P/C Industry Net Income After Taxes1991–2016:Q2 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 = 5.9%
2013 ROAS1 = 10.2%
2014 ROAS1 = 8.4%
2015 ROAS = 8.4%
2016:H1 ROAS = 6.4%*
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; 2015E is annualized figure based actual figure through Q3 of $44.0
Sources: A.M. Best, ISO; Insurance Information Institute
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $3
6,8
19
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
5,2
04
$1
9,4
56 $
33
,52
2
$6
3,7
84
$5
5,8
70
$5
6,6
22
$2
1,6
85
$3
8,5
01
$2
0,5
59
$4
4,1
55
$6
5,7
77
-$6,970
$2
8,6
72
-$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
14
15
16:Q
1
Net income in Q2:2016 on an
annualized basis was on track to fall
short of full-year 2015
$ Millions
-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
14
15
16
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2016:H1
*Profitability = P/C insurer ROEs. 2011-15 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude
mortgage and financial guaranty insurers.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning
1977:19.0%1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
9 Years
History suggests next ROE
peak will be in 2016-2017
ROE
1975: 2.4%
2013 9.8%
2016:H1 6.4%
2015: 8.4%
34
ROE: Property/Casualty Insurance by Major Event, 1987–2016:H1
* Through 2016:H1. Excludes Mortgage & Financial Guarantee in 2008 – 2014. 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 13 14 15 16*
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew, Iniki
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
Sandy
Low CATs
Modestly higher CATs
-5%
0%
5%
10%
15%
20%
25%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
1950 - 1970
Low
Volatility
P/C Insurance Industry ROE: Magnitude of Cyclicality, Volatility Changes Over Time, 1950-2015
.
Source: Insurance Information Institute
1971 - 1992
Extreme
Volatility
1993 - 2008
Moderate
Volatility
2009 - Present
Modest
Volatility
36
P/C Insurance Industry Combined Ratio, 2001–2016:Q2*
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.
Sources: A.M. Best, ISO (2014-2015); Figure for 2010-2013 is from A.M. Best P&C Review and Preview, Feb. 16, 2016.
95.7
99.3101.1
106.5
102.5
96.4 97.0 97.899.8
101.0
92.6
100.8
98.4100.1
107.5
115.8
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16:Q2
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums Relatively
Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Sandy Impacts
Lower CAT
Losses
Best Combined Ratio Since 1949 (87.6)
Avg. CAT Losses,
More Reserve Releases
3 Consecutive Years of U/W Profits: First Time Since
1971-73Cyclical Deterioration
Elevated CATs
37
Number of Years with Underwriting Profits by Decade, 1920s–2010s
0 0
3 3
5
4
8
10
7
6
0
2
4
6
8
10
12
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**
* 2009 combined ratio excl. mort. and finl. guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit.
**Data for the 2010s is for the period 2010 through 2015.
Note: Data for 1920–1934 based on stock companies only.
Sources: Insurance Information Institute research from A.M. Best Data.
Number of Years with Underwriting Profits
Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003
37
Source: A.M. Best; Barclays research for estimates.
Reserve Change
P/C Insurance Loss Reserve Development, 1992 – 2017E*
Reserve releases are expected to gradually taper off slowly, but
will continue to benefit the bottom line and combined ratio
through at least 2017
39
Policyholder Surplus, 2006:Q4–2016:Q2
Sources: ISO, A.M .Best.
($ 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 $
653.4
$671.6
$673.9
$675.2
$672.4
$673.7
$676.3
$680.6
$662.0
$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
14:Q
1
14:Q
2
14:Q
3
14:Q
4
15:Q
2
15:Q
4
16:Q
1
16:Q
2
2007:Q3Pre-Crisis Peak
Surplus as of 6/30/16 stood at a record high $680.64B
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 $0.76 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 2016in very strong financial condition.
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
$650
$700
$750
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
US Policyholder Surplus:1975–2016*
* As of 6/3016.
Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in non-
insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.76:$1 as of12/31/15, a Near Record Low (at Least in Recent History)
Surplus as of 6/30/16 was a record $680.6, up 1.0% from $673.7 of 12/31/15, and up 55.7% ($243.5B) from
the crisis trough of $437.1B at 3/31/09
41
RNW All Lines, 2005-2014 Average:Highest 25 States
19
.9
19
.0
14
.0
13
.3
13
.2
13
.0
11
.9
11
.7
11
.7
11
.5
11
.3
11
.1
11
.0
10
.9
10
.8
10
.6
10
.6
10
.5
10
.3
10
.0
9.9
9.6
8.9
8.9
8.8
8.3
0
2
4
6
8
10
12
14
16
18
20
22
HI AK VT ME ND FL WY NH VA ID UT NC WA MA SC OH WV OR DC CA RI CT MD NM SD MT
The most profitable states over the past decade are
widely distributed geographically, though none
are in the Gulf region
Source: NAIC; Insurance Information Institute.
Profitability Benchmark: All P/C
US: 7.7%
(Percent)
42
7.8
7.8
7.7
7.5
7.5
7.4
7.3
7.3
7.1
7.1
7.0
6.9
6.8
6.5
6.3
6.2
6.1
5.5
5.1
5.1
4.7
4.1
3.4
1.7
-7.4
-9.4
-11
-9
-7
-5
-3
-1
1
3
5
7
9
PA WI US IL TX IA KS MN AR NE IN CO AZ KY MO TN NV NJ GA NY DE AL MI OK MS LA
RNW All Lines, 2005-2014 Average:
Lowest 25 States
Source: NAIC; Insurance Information Institute.
Some of the least profitable states over the past decade
were hit hard by catastrophes
(Percent)
43
-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
15
16
Net Premium Growth (All P/C Lines): Annual Change, 1971—2016:Q2
(Percent)
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014-16).
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.
2016 Q2: 3.0%
2015: 3.4%
2014: 4.2
2013: 4.4%
2012: +4.2%
Outlook
2016F: 3.0%
2017F: 2.9%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
26
28
30
32
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998.
Source: A.M. Best; Insurance Information Institute.
Economic Shocks,
Inflation:
1976: 22.0%
Tort Crisis
1985/86: 22.2%
Post-9/11
2002:15.3%
Twin
Recessions;
Interest Rate
Hikes
1987: 3.7% Great
Recession:
2010: -4.9%
ROE
2015 3.4%
NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2015
Great Depression
1932: -15.9% max drop
Post WW II Peak:
1947: 26.2%
Start of WW II
1941: 15.8%
1950-70: Extended period of stability in growth and
profitability. Low interest rates, low inflation, “Bureau” rate regulation all played a role
1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic
volatility, high interest rates, tort environment all played roles
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15E
Economic Shocks,
Inflation:
1976: 22.2%Tort Crisis
1986: 30.5%
Post-9/11
2002: 22.4%
Great
Recession:
2009: -9.0%
ROE
2015E 3.3%
Commercial Lines NPW Premium Growth:1975 – 2015E
Recessions:
1982: 1.1%
Commercial lines is prone to more cyclical volatility that personal
lines. Recently, growth has stabilized in the 4% to 5% range.
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
Note: Data include state funds beginning in 1998.
Source: A.M. Best; Insurance Information Institute.
Post-Hurricane
Andrew Bump:
1993: 6.3%
Post Katrina
Bump:
2006: 7.7%
46
Direct Premiums Written: Total P/CPercent Change by State, 2007-2014
70
.7
36
.7
36
.2
30
.3
29
.4
26
.8
24
.7
23
.7
21
.6
20
.7
19
.2
19
.2
18
.6
18
.1
18
.0
17
.0
15
.2
15
.1
15
.0
14
.9
14
.8
14
.7
14
.4
14
.2
13
.8
13
.5
0
10
20
30
40
50
60
70
80
ND
OK
SD
TX
NE
KS IA VT
WY
CO
MN IN MI
TN
AR
WI
GA
SC
NJ
OH
AK
KY
VA
LA
CT
MT
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 StatesNorth Dakota was the country’s growth leader over the past 7 years with premiums written
expanding by 70.7%, fueled by the state’s energy boom
Growth Benchmarks: Total P/C
US: 13.0%
47
Direct Premiums Written: Total P/CPercent Change by State, 2007-2014
13
.4
13
.1
13
.1
13
.0
13
.0
12
.9
12
.4
12
.2
11
.7
11
.0
10
.5
9.4
9.4
9.2
9.1
8.2
6.3
6.0
4.7
2.2
1.3
-0.8
-1.6
-4.3
-7.3
-12
.9
-15
-10
-5
0
5
10
15
MO
NY
UT
US
NM
MS
MA
AL
NC
MD
WA RI
NH IL PA ID
ME
CA
OR FL
AZ
DC HI
WV
NV
DE
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
Growth was negative in 4 states and DC between
2007 and 2014
48
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014
80
.4
36
.8
33
.3
29
.4
24
.8
22
.5
21
.0
20
.6
15
.2
14
.6
13
.9
11
.8
10
.3
8.7
8.5
8.4
8.0
7.9
7.6
7.1
6.6
5.9
5.9
5.8
5.4
4.5
0
10
20
30
40
50
60
70
80
90
ND
SD
VT
OK
NE IA
KS
TX
WY
AK IN
MN WI
MA
AR
CT
NY
NJ
CO
NM
OH LA
US
MS
NH
MO
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LLC.; Insurance Information Institute.
Top 25 States
43 states showed commercial lines growth from 2007
through 2014
Growth Benchmarks: Commercial
US: 5.9%
49
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014
4.5
4.4
4.2
4.1
3.9
3.8
3.7
3.3
3.3
3.2
3.1
2.8
2.8
2.2
2.1
1.4
0.9
-1.3
-3.2
-5.3
-6.5
-6.9
-9.2
-10
.7
-19
.9
-22
.2
-25
-20
-15
-10
-5
0
5
10
MI
TN
MD
MT
CA RI
WA
GA
PA
UT IL
KY
VA
NC
ME
SC ID AL
DC HI
FL
OR AZ
DE
NV
WV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
Nearly half the states have yet to see commercial lines premium
volume return to pre-crisis levels
50
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2016:Q1
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 (%)
Trough = 2007:Q3 -13.6%
KRW : No Lasting Impact
Pricing turned positive in Q3:2011, the first inrease in
nearly 8 years; Q1:2015 renewals were down 2.8%;
Some insurers posted stronger numbers.
Peak = 2001:Q4 +28.5%
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
51
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2016:Q1
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.
1999:Q4 = 100
Pricing for smaller accounts has been
more stable than for larger accounts
52
CIAB: Average Commercial Rate Change, All Lines, (1Q:2004–2Q:2016)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
% -8.2
%-4
.6% -2
.7%
-3.0
%-5
.3%
-9.6
%-1
1.3
%-1
1.8
%-1
3.3
%-1
2.0
%-1
3.5
%-1
2.9
%-1
1.0
%-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
%1
.5%
-0.5
%0
.1%
-0.7
%-2
.3%
-3.3
%-3
.1%
-2.8
%-3
.7%
-3.9
%
-0.1
%0
.9%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1Q
16
2Q
16
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 Q2:2016 remained somewhat negative
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
53
Change in Commercial Rate Renewals, by Line: 2016:Q2
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewals Were Mixed to Down in Q2:2016; EPL and Commercial Auto Saw Gains
Percentage Change (%)
-0.4% -0.3%
0.8%
2.4%
-6.0%
-4.3%-3.6%
-3.0% -2.8% -2.5%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
Co
mm
erc
ial
Pro
pe
rty
Wo
rke
rs
Co
mp
Ge
ne
ral
Lia
b
Bu
sin
ess
Inte
rru
ptio
n
Um
bre
lla
Co
nstr
uctio
n
Su
rety
D&
O
EP
L
Co
mm
erc
ial
Au
to
Commercial Auto rate increases are larger than any other line, followed
by EPL
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
INVESTMENTS: THE NEW REALITY
54
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
54
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
16*
*Through Oct. 12 2016.
Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html Ins. Info. Inst.
Tech Bubble
Implosion
Financial
Crisis
Annual Return
Energy Crisis
2016*:
+6.5%
S&P 500 Index Returns, 1950 – 2016*
Fed Raises Rate
Stock market is off to its worst start ever but volatility is endemic to stock markets—and may
be increasing—but there is no persistent downward trend over long periods of time
Property/Casualty Insurance Industry Investment Income: 2000–2016:Q21
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.3$46.4
$47.1
$44.1
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16*
Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.9%) increase in 2015—
another drop in 2016 seems likely.
1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute.
($ Billions) Investment earnings are still 19% below their
2007 pre-crisis peak
*Annualized figure based on actual Q2:2016 net investment income earned of $22.067B.
57
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2016*
*Monthly, constant maturity, nominal rates, through August 2016.
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 '15 '16
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially
below 5% for more than a 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.
Despite the Fed’s December 2015 rate hike, yields
remain low though short-
term yields have seen some gains;
Yield curve is flattening.
57
Distribution of Invested Assets: P/C Insurance Industry, 2013
Stocks, 22%
Bonds, 62%
All Other, 10%
Cash, Cash Equiv. &
ST Investments, 6%
Source: Insurance Information Institute Fact Book 2015, A.M. Best.
Total Invested Assets = $1.5
Trillion
$ Billions
Net Investment Yield on Property/ Casualty Insurance Invested Assets, 2007–2016P*
4.5
4.2
4.0
3.8
3.4
3.6
3.1
3.73.8
3.6
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
07 08 09 10 11 12 13 14 15E 16P
The yield on invested assets remains low relative to pre-crisis yields. The Fed’s plan to raise interest rates in late 2015 has pushed up some yields, albeit quite modestly.
Sources: A.M. Best; 2015E-2016P figures from A.M. Best P/C Review and Preview, Feb. 2016; Insurance Information Institute
(Percent) Estimated book yield in 2016 is down about 140
BP from pre-crisis levels
60
Interest Rate Forecasts: 2016 – 2021F
2.7% 2.7%
2.2%
1.7%
2.1%
2.8%
3.1%
3.4%3.6%
3.5%
0.1%0.3%
0.8%
1.7%
2.2%
2.5%
0%
1%
2%
3%
4%
15 16F 17F 18F 19F 20F 21F 22F 15 16F 17F 18F 19F 20F 21F 22F
A full normalization of interest rates is unlikely until 2019, more than a decade after the onset of the financial crisis.
Yield (%)
Sources: Blue Chip Economic Indicators (10/16 for 2016 and 2017; for 2018-2021 10/16 issue); Insurance Info. Institute.
3-Month Treasury 10-Year Treasury
10-year yields are actually down
in 2016
61
Annual Inflation Rates, (CPI-U, %),1990–2017F
2.82.6
1.51.9
3.3 3.4
1.3
2.52.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.1
1.5 1.6
0.1
1.3
2.3
2.9
2.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16F17F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 4/16 (forecasts).
Slack in the U.S. economy and falling energy prices suggests that inflationary pressures should remain subdued for an extended
period of times
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Inflationary expectations have slipped
(due in part to falling energy
costs) allowing the Fed to
maintain low interest rates
62
P/C Insurer Net Realized Capital Gains/Losses, 1990-2016:Q2
*Annualized based on actual of $4.438B through Q2 2016Sources: A.M. Best, ISO; Insurance Information Institute.
$2
.88
$4
.81
$9
.89
$9
.82
$1
0.8
1 $1
8.0
2
$1
3.0
2
$1
6.2
1
$6
.63
-$1
.21
$6
.61
$9
.13
$9
.70
$3
.52 $8
.92
-$7
.90
$5
.85
$7
.04
$6
.18
$1
1.3
7
$1
0.2
8
$9
.41
$8
.88
-$1
9.8
1
$9
.24
$6
.00
$1
.66
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16*
Insurers Posted Net Realized Capital Gains in 2010 - 2015 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE.
($ Billions) Realized capital gains are down from their 2013 peak
Property/Casualty Insurance Industry Investment Gain: 1994–2016:Q21
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$53.4$56.2
$54.2
$58.7$56.6
$53.0
$56.6
$58.0
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13 14 15* 16*
Total Investment Gains Were Flat in 2015 as Investment Income Rose Marginally and Realized Capital Gains Fell Slightly
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2016 figure is annualized based on actual Q2 2016 figure of $26.505B.Sources: ISO, SNL; Insurance Information Institute.
($ Billions)
Investment gains in 2015 were unchanged from 2014; 2016 is
running slightly behind 2015 and 17% below the pre-crisis peak
64
-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%
Per
sona
l Lin
es
Pvt P
ass
Aut
o
Per
s Pro
p
Com
mer
cial
Com
ml A
uto
Cre
dit
Com
m P
rop
Com
m C
as
Fidel
ity/S
uret
y
War
rant
y
Sur
plus
Lin
es
Med
Mal
WC
Rei
nsur
ance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums
**US domestic reinsurance only
Source: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
64
Profitability & Politics
6565
How Is Profitability Affected by the President’s Political Party?
15.10%
8.93%
8.93%
8.65%
8.35%
8.33%
7.98%
7.68%
6.98%
6.97%
5.43%
5.03%
4.83%
4.68%
4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
Obama II
Nixon
Clinton I
G.H.W. Bush
G.W. Bush II
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
Eisenhower II
G.W. Bush I
Obama I
Johnson
Kennedy/Johnson
*Truman administration ROE of 6.97% based on 3 years only, 1950-52;.
Source: Insurance Information Institute
OVERALL RECORD: 1950-2015*
Democrats 7.72%Republicans 7.85%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950-2015*
-5%
0%
5%
10%
15%
20%
25%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
BLUE = Democratic President RED = Republican President
Tru
ma
n Nixon/Ford
Ke
nn
ed
y/
Jo
hn
so
n
Eis
en
ho
wer
Ca
rte
r
Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2015
Obama
.
Source: Insurance Information Institute
68
Trump vs. Clinton:Issues that Matter to P/C Insurers
Issue Trump Clinton
Economy Supply Side-Like Philosophy:Lower taxesFaster real GDP
growth; Deficits likely grow as tax cuts are combined with targeted increased spending on Homeland Security, Defense, etc.
Keynesian Philosophy: More government spending on infrastructure, education, social services; Deficits likely increase as tax increases likely difficult to pass
Interest Rates May trend higher with larger deficits; Shift from monetary policy to fiscal focus (tax cuts, government spending)
Status quo at the Fed; Net impact on interest rates unclear
Taxes Favors lower tax rates for corporate and personal income tax rates; Tax code overhaul?
Unlikely to reduce taxes or embark on major overhaul of tax code
International Trade
Protectionist Tendencies Has criticized Trans-PacificPartnership but is a realist on international matters
Tort System Doesn’t like trial lawyers butseems to like filing lawsuits
Status Quo
GLOBAL M&A UPDATE:A PATH TO GROWTH?
69
Are Capital Accumulation, Drive for Growth and Scale Stimulating
M&A Activity?
69
70
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2015 (1)
$5,1
00
$11,5
34
$8,0
59
$30,8
73
$19,1
18
$40,0
32
$1,2
49
$486
$20,3
53
$425
$9,2
64
$35,2
21
$13,6
15
$16,2
94
$3,5
07
$6,4
19 $
12,4
58
$4,6
51
$4,3
97
$6,7
23
$39,6
07
$55,825
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Tra
ns
ac
tio
n v
alu
es
0
20
40
60
80
100
120
140
Nu
mb
er o
f tran
sa
ctio
ns
($ 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 in
2015 totaled $39.6B, its highest
level since 2000
71
Global M&A Activity Tends to Follow Equity Market Performance
.Source: Thomson Reuters, Capital IQ as of Oct. 2015 and IMF from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation “Facts vs. Sentiment: Deals in the Insurance Sector,” by Aviva CEO Mark Wilson.
The number and volume of
insurance M&A deals was up
globally in 2015
72
Huge Shift from Domestic M&A Activity to Cross-Border
.Source: Thomson Reuters as of Oct. 2015 from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation “Facts vs. Sentiment: Deals in the Insurance Sector,” by Aviva CEO Mark Wilson.
The share of M&A deal volume that was cross-border
more than doubled in 2015
73
M&A Activity Has Shifted Away from Europe and Towards Asia and N. America
.Source: Thomson Reuters as of Oct. 2015 from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation “Facts vs. Sentiment: Deals in the Insurance Sector,” by Aviva CEO Mark Wilson.
Asian, N. American deal volumes were up
sharply in 2015
74
M&A: Deal Rationale by Dollar Amount
.Source: SNL Financial and WCMA estimates from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation “What is the Logic Behind Consolidation? And Does It Create Value? A View from Outside,” by Brian Shea, Head of Willis Capital Markets & Advisory Europe (WCMA).
Scale drives most deals (excluding
health sector)
75
Some Key Drivers in the US Economy
Economic Factors Driving Exposure Growth and Insurer Performance
75
76
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 10/16; Insurance Information Institute.
2.7
%1.8
%-1
.8%
1.3
%-3
.7%
-5.3
%-0
.3%
5.0
%2.3
%2.2
%2.6
%2.4
%0.1
%2.5
%1.3
%4.1
%2.0
%1.3
% 3.1
%0.4
%2.7
%1.8
% 3.5
%-0
.9%
4.6
%4.3
%2.1
%2.0
%2.6
%2.0
%0.9
%0.8
%1.4
% 2.7
%2.3
%2.2
%2.3
%2.2
%2.1
%
-8.9%
4.5
%
1.4%
4.1
%1.1
%1.8
%2.5
% 3.6
%3.1
%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
2
00
7
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
14
:1Q
14
:2Q
14
:3Q
14
:4Q
15
:1Q
15
:2Q
15
:3Q
15
:4Q
16
:1Q
16
:2Q
16
:3Q
16
:4Q
17
:1Q
17
:2Q
17
:3Q
17
:4Q
GDP Growth Is Expected to Continue at a Steady, Albeit Moderate Pace that Gradually Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in Dec, 2007
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
Q1 2014/15 GDP data were hit hard by this year’s “Polar Vortex”
and harsh winter
77
US Unemployment Rate Forecast4
.5%
4.5
%4
.6%
4.8
%4
.9% 5.4
% 6.1
%6
.9%
8.1
%9
.3%
9.6
% 10
.0%
9.7
%9
.6%
9.6
%
8.9
%9
.1%
9.1
%8
.7%
8.3
%8
.2%
8.0
%7
.8%
7.7
%7
.6%
7.3
%7
.0%
6.6
%6
.2%
6.1
%5
.7%
5.6
%5
.4%
5.2
%5
.0%
4.9
%4
.9%
4.9
%4
.8%
4.7
%4
.6%
4.6
%4
.5%
9.6
%
4%
5%
6%
7%
8%
9%
10%
11%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
14
:Q1
14
:Q2
14
:Q3
14
:Q4
15
:Q1
15
:Q2
15
:Q3
15
:Q4
16
:Q1
16
:Q2
16
:Q3
16
:Q4
17
:Q1
17
:Q2
17
:Q3
17
:Q4
Rising unemployment eroded payrolls
and WC’s exposure base.
Unemployment peaked at 10% in late 2009.
* = actual; = forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/16 edition); Insurance Information Institute.
2007:Q1 to 2017:Q4F*
Unemployment forecasts have been revised modestly
downwards. Optimistic scenarios put the
unemployment as low as 4.3% by Q4 of 2017.
Jobless figures have been revised
downwards for 2016
78
9.0%
3.5%
6.0%
2.1%
-0.5%
2.7%
3.4% 3.4% 3.2% 3.1% 3.1%
-2%
0%
2%
4%
6%
8%
10%
2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F
Continued Business Investment WillSpur Commercial Exposure Growth
Business investment was a major drag on the economy in 2016 and adversely impacts commercial property and liability insurance exposures.
Growth should begin a modest recovery in 2017.
Sources: Blue Chip Economic Indicators, 10/2016 (history and forecasts for 2016 and 2017, 10/2016 for forecasts for 2018-2022;
Insurance Information Institute.
The level and direction of interest rates is likely to
affect these growth rates.
79
Annual Inflation Rates, (CPI-U, %),1990–2017F
2.82.6
1.51.9
3.3 3.4
1.3
2.52.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.1
1.5 1.6
0.1
1.2
2.3
2.9
2.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16F17F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/16 (forecasts).
Slack in the U.S. economy and falling energy prices suggests that inflationary pressures should remain subdued for an extended
period of times
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Inflationary expectations
remain muted, allowing the Fed to maintain low interest rates
without concern of inflation
Bank of Canada, Commodity price indices, weekly data, (indexed to Jan 2000=100)
Note: Total index includes energy, metals & minerals, agriculture, forestry and fish.
Upside for most advanced economies, but a downside for commodity exporters
Source: Datastream from IUMI Hamburg 2016 presentation by Doug Harrell, Aspen Insurance.
Commodity Prices In Early 2016 Plunged to Lowest Levels Since 2000
Energy and other commodity prices
tumbled
MANUFACTURING SECTOR OVERVIEW & OUTLOOK
81
The U.S. Manufacturing Sector Is Being Buffeted by a High Dollar,
Weak Export Markets and Plunging Oil Prices
81
58.3
57.1
60.4
59.6
57.8
55.3
55.1
55.2
55.3 5
6.9 5
8.2
58.5
60.8
61.4
59.7
59.7
54.2 5
5.8
51.4 52.5
52.5
51.8
52.2 53.1 54.1
51.9 5
3.3 54.1
52.5
50.2
50.5
50.7 51.6
51.7
49.9
50.2
53.1 54.2
50.7
49.0
50.9
55.4
55.7
56.2
56.4 57.0
56.5
51.3
53.2
53.7 5
4.9
55.4
55.3
57.1
59.0
56.6
59.0
58.7
55.5
53.5
52.9
51.5
51.5 5
2.8 53.5
52.7
51.1
50.2
49.4
48.4
48.0
48.2 4
9.5
51.8
50.8
51.3
53.2
52.6
49.4
51.5
51.3
40
45
50
55
60
65
Jan-1
0F
eb-1
0M
ar-
10
Apr-
10
May-1
0Jun-1
0Jul-10
Aug-1
0S
ep-1
0O
ct-
10
Nov-1
0D
ec-
Jan-1
1F
eb-1
1M
ar-
11
Apr-
11
May-1
1Jun-1
1Jul-11
Aug-1
1S
ep-1
1O
ct-
11
Nov-1
1D
ec-
Jan-1
2F
eb-1
2M
ar-
12
Apr-
12
May-1
2Jun-1
2Jul-12
Aug-1
2S
ep-1
2O
ct-
12
Nov-1
2D
ec-
Jan-1
3F
eb-1
3M
ar-
13
Apr-
13
May-1
3Jun-1
3Jul-13
Aug-1
3S
ep-1
3O
ct-
13
Nov-1
3D
ec-
Jan-1
4F
eb-1
4M
ar-
14
Apr-
14
May-1
4Jun-1
4Jul-14
Aug-1
4S
ep-1
4O
ct-
14
Nov-1
4D
ec-
Jan-1
5F
eb-1
5M
ar-
15
Apr-
15
May-1
5Jun-1
5Jul-15
Aug-1
5S
ep-1
5O
ct-
15
Nov-1
5D
ec-
Jan-1
6F
eb-1
6M
ar-
16
Apr-
16
May-1
6Jun-1
6Jul-16
Aug-1
6S
ep-1
6
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through September 2016
The manufacturing sector expanded for 68 of the 72 months from Jan. 2010 through Dec. 2015. The Manufacturing then weakened due to weakness
abroad, the strong dollar and a collapse in oil prices
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Manufacturing began to contract in late 2015 and
is experiencing only tepid growth
82
83
$200,000
$300,000
$400,000
$500,000
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
12-Jan
13-Jan
14-Jan
15-Jan
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—December 2015
* Seasonally adjusted; Data published Feb. 4, 2016.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments in Nov. 2014 exceeded the pre-crisis (July 2008) peak but has declined in recent months. Weakness abroad, falling energy prices and a strong dollar are hurting the sector, especially exports. Manufacturing growth leads to gains in many commercial
exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.
$ Millions
83
The value of Manufacturing Shipments in Dec. 2015 was
$467.0B—down 8% from the July 2014 record high of $508.1B
84
Manufacturing Growth for Selected Sectors, 2015 vs. 2014*
-2.3%-2.1%
3.4%8.0%
-9.6%
-1.3%
-32.2%
-2.3%-2.3%
2.6%
-4.2%
1.8%
-0.6%
-9.5%
-0.6%
-35%
-30%
-25%
-20%
-15%
-10%-5%
0%
5%
10%
15%
All
Ma
nu
factu
rin
g
Du
rab
le M
fg.
Wo
od
Pro
du
cts
Pri
ma
ry
Me
tals
Fa
bri
ca
ted
Me
tals
Ma
ch
ine
ry
Ele
ctr
ica
l
Eq
uip
.
Co
mp
ute
rs &
Ele
ctr
on
ics
Tra
nsp
ort
atio
n
Eq
uip
.
No
n-D
ura
ble
Mfg
.
Fo
od
Pro
du
cts
Pe
tro
leu
m &
Co
al
Ch
em
ica
l
Pla
stics &
Ru
bb
er
Te
xtile
Pro
du
cts
Manufacturing Is Contracting Across a Number of Sectors, Especially Petroleum. Adverse Exposure Impacts Are Likely for: WC, Commercial
Property, Commercial Auto and Certain Liability Coverages
Growth (%)
Manufacturing of non-durable goods is weaker
than for durables
*Seasonally adjusted; Date are YTD comparing data through November 2015 to the same period in 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Durables: +1.8% Non-Durables: -9.6%
85
CYBER RISK AND INSURANCE
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and
Small in Every Industry
Data Breaches 2005-2015, by Number of Breaches and Records Exposed
# Data Breaches/Millions of Records Exposed
Source: Identity Theft Resource Center (updated as of Jan. 6, 2016);http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf
157
321
446
656
498
419
470
614
781783
662169.1
85.692.0
17.522.9
35.7
19.1
66.9
222.5
16.2
127.7
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0
20
40
60
80
100
120
140
160
180
200
220
# Data Breaches # Records Exposed (Millions)
The 781 reported data breaches in 2015 was virtually unchanged form the record 783 reported in 2014. The number of exposed records
soared to 169.1 million, and increase of 97.5%.
Millions
Data/Privacy Breach:Many Potential Costs Can Be Insured
Data Breach Event
Costs of notifying affecting
individuals Defense and settlement
costs
Lost customers and damaged
reputation
Cyber extortion payments
Business Income Loss
Regulatory fines at home & abroad
Costs of notifying
regulatory authorities
Forensic costs to discover
cause
87
88
$1.5$2.0
$7.5
$0
$1
$2
$3
$4
$5
$6
$7
$8
2014 2015E 2020F
Estimated Cyber Insurance Premiums Written, 2014 – 2020F
Cyber insurance premiums written could more than
triple to $7.5 billion by 2020
Source: Advisen (2014 est.); PwC (2015, 2020); Insurance Information Institute.
$ Billions
I.I.I.’s Cyber Risk paper issued
Oct. 2015
89
Insured Catastrophe Losses
2013-2015 Experienced Below Average
CAT Activity After Very High CAT Losses in
2011/12
2016 Is On Track to Surpass Recent Years
89
90
$1
3.0
$1
1.3
$3
.9
$1
4.8
$1
1.9
$6
.3
$3
5.8
$7
.8
$1
6.8
$3
4.7
$1
0.9
$7
.7
$3
0.1
$1
1.8
$1
4.9
$3
4.6
$3
6.1
$1
3.1
$1
5.5
$1
5.2
$1
1.0
$75.7
$1
4.4
$5
.0 $8
.2
$3
8.9
$9
.1
$2
7.2
$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 14 15 16*
U.S. Insured Catastrophe Losses
*Through 6/30/16. 2016 figure stated in 2016 dollars.
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.
2013/14/15 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster
Losses in US History. 2016 Is Off to a Costlier Start.
2012 was the 3rd most expensive year ever for
insured CAT losses
$11.0B in insured CAT losses though
6/30/16
($ Billions, $ 2015)
90
91
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2016F*
*2010s represent 2010-2015.
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 (1960-2009); A.M. Best (2010-16E) Insurance Information Institute.
0.4
1.2
0.4 0
.8 1.3
0.3
0.4 0.7
1.5
1.0
0.4
0.4 0.7
1.8
1.1
0.6
1.4 2
.01
.32
.00
.50
.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
4.6
9.6
8.0
3.5 4
.03
.14
.7
3.6
0.9
0.1
1.1
1.1
0.8
0
2
4
6
8
10
12
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
F
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of theCombined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 5.47*
Combined Ratio Points Catastrophe losses as a share of all
losses reached a record high in 2011
92
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1996–20151
0.2%1.8%
4.9%
6.1%
7.5%
40.2%
39.2%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2015 dollars.
2. Excludes snow.
3. Does not include NFIP flood losses
4. Includes wildland fires
5. 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, $158.6
Fires (4), $7.3
Events Involving Tornadoes (2), $158.6
Winter Storms, $30.4
Terrorism, $24.6
Other Wind/Hail/Flood (3), $19.9
Other (5), $0.8
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 1996-2015
totaled $404.1B, an average of $20.2B per year or $1.68B
per month
Winter storm losses were much above average in 2014/15 pushing
this share up
93
$1
3.0
$1
1.3
$3
.9
$1
4.8
$1
1.9
$6
.3
$3
5.8
$7
.8
$1
6.8
$3
4.7
$1
0.9
$7
.7
$3
0.1
$1
1.8
$1
4.9
$3
4.6
$3
6.1
$1
3.1
$1
5.5
$1
5.0
$75.7
$1
4.4
$5
.0 $8
.2
$3
8.9
$9
.1
$2
7.2
$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 14 15*
U.S. Insured Catastrophe Losses
*Estimate hrough 12/31/15 in 2015 dollars.
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.
2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for
more—not fewer—Costly Events
2012 was the 3rd most expensive year ever for
insured CAT losses
$15B in insured CAT losses though
12/31/15 (est.)
($ Billions, $ 2015)
93
94
Top 16 Most Costly Disastersin U.S. History—Katrina Still Ranks #1
(Insured Losses, 2014 Dollars, $ Billions)
$8.1 $9.0 $9.4 $11.4$13.8
$19.3
$24.6 $25.3$26.4
$50.2
$7.7$7.3$6.9$5.8$5.7$4.6
$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)
Storm Sandy in 2012 was the last mega-CAT to hit the US; Northridge still
ranks as the 4th costliest disaster of all time
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have Occurred Since 2004
Sources: PCS; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI.
Regional Property Catastrophe ROL Index: 1990 – 2016
95
Record traditional capacity, alternative capital and low CAT activity have pressured reinsurance prices; ROEs are down only very modestly
Source: Guy Carpenter; Insurance Information Institute.
96
Alternative Capital
96
New Investors Continue to Change the Reinsurance Landscape
Global Reinsurance Capital (Traditional and Alternative), 2006 - 2014
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
Total reinsurance capital reached a record $570B in 2013, up 68% from
2008.
But alternative capacity has grown 210% since 2008, to $50B. It has more than doubled in the past three years.
Alternative Capital as a Percentage of Traditional Global Reinsurance Capital
2014 data is as of June 30, 2014.
Source: Aon Benfield Analytics; Insurance Information Institute.
4.6%
5.7% 5.9% 5.8%5.4%
6.5%
8.4%
10.2%
11.5%
0%
2%
4%
6%
8%
10%
12%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010.
Catastrophe Bond Issuance and Outstanding: 1997-2015
948.2
874.2
1,062.5
1,142.0
966.9
989.5
1,988.2
1,142.8
1,499.0
4,614.7
7,187.0
3,009.9
3,396.0
4,599.9
4,107.1
5,855.3
7,083.0
8,026.7
7,898.2
4,289.0
5,085.0
7,677.0
13,416.4
12,538.6
12,508.2
12,195.7
12,342.8
14,839.3
18,576.9
22,867.8
25,960.5
0
5,000
10,000
15,000
20,000
25,000
30,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
New Issuance Outstanding
99
Risk Capital Amount ($ Millions)
Cat Bond Issuance Declined Slightly in 2015 from 2014’s Record Pace. Lower Yields on Bonds Explain Some of the Contraction.
Source: Guy Carpenter, Artemis accessed at http://www.artemis.bm/deal_directory/cat_bonds_ils_issued_outstanding.html .
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Thank you for your timeand your attention!
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Insurance Information Institute Online:
100
