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The Insurance Cycle, Financial Crisis &
Catastrophes Impacts and Implications for the
Texas P/C Insurance Markets
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 [email protected] www.iii.org
Insurance Council of Texas Annual SymposiumAustin, TX
July 23, 2009Download at www.iii.org/presentations/ICT-TX072309/
2
Presentation Outline
• The Economic Storm: Financial Crisis & Recession: US• Texas: Somewhat Less of an Economic Mess• Economic Trends: Personal, Commercial Exposure 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
• P/C Insurance Industry Overview & Outlook: US & Texas• Profitability
• Premium Growth
• Underwriting Performance
• Financial Market Impacts
• Merger & Acquisition Activity
• Capital & Capacity• Catastrophe Loss Trends: US & Texas
THE ECONOMIC STORM
What the Financial Crisis and Recession Mean for the Industry’s
Exposure Base and Growth
4
3.7
%
0.8
% 1.6
% 2.5
% 3.6
%
3.1
%
2.9
%
0.1
%
4.8
%
4.8
%
0.9
%
2.8
%
-0.5
%
1.0
% 1.9
%
2.3
%
2.8
%
2.8
%
3.0
%
-1.8
%
-5.5%-6.3%
-0.2%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2
000
2
001
2
002
2
003
2
004
2
005
2
006
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 7/09; 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 Q4:2008 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
Length of U.S. Business Cycles, 1929-Present*
43
138 11 10 8 10 11
166
168 8
20
50
80
3745
39
24
106
36
58
12
92
120
73
0
10
20
30
40
50
60
70
80
90
100
110
120
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
* As of July 2009, inclusive; **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 MonthsExpansion = 60.5 Months
Length of expansions
greatly exceeds
contractions
6
Total Industrial Production,(2007:Q1 to 2010:Q4F)
1.5%3.2%3.6%
0.3%0.2%
-4.6%
-9.0%
-13.0%
-19.0%
-10.5%
3.3%3.7%4.0%4.1%
-0.4%
2.7%
-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 (7/09); 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
7
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%
-3.0
%
-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
Rea
l N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Rea
l G
DP
Gro
wth
Real NWP Growth Real GDP
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 7/09; Insurance Information Inst.
Inflation Trends Pressures Claim Cost
Severities via Medical and Tort Channels
9
Annual Inflation Rates(CPI-U, %), 1990-2010F
4.9 5.1
3.0 3.2
2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
(0.6)
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, July 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.
10
Comparative 2008 Inflation Statistics Important to Insurers ( %)
3.8 3.7
2.71.8
4.0
7.4
0
1
2
3
4
5
6
7
8
CPI-U Core CPI* TotalMedical
Care
PhysicianServices
HospitalServices
LegalServices
Infl
atio
n R
ate
(%)
*Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs.Source: US Bureau of Labor Statistics; Insurance Information Institute.
CPI and “Core” CPI are not representative of
many of the costs insurers face Medical/Legal costs typically
run well ahead of inflation
11
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 costsrisks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly
Source: Ins. Info. Inst.
Labor Market Trends
Fast & Furious: Massive Job Losses Sap the Economy Workers Comp &
Other Commercial 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 June 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.
June 2009 unemployment jumped to 9.5%, and is now at it 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
Jun
-09
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%
9.8% 10
.0%
10.1
%
10.0
%
9.9%
9.7%
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 forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/09); 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
-322
-467
-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
Job losses since the recession began in Dec. 2007 total 7.2 mill; 14.7 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 June 2009
The Texas EconomyLess of Mess in Texas & in Much Better Shape the US Overall, But
Weakness is Spreading
Less Severe Impacts on P/C Insurer Exposure Growth
17
The Texas Economy Grew Faster than Most States in 2008
The TX economy grew by 2% in 2008 compared
to 0.7% for the US
18
Fastest Growing States in 2008: TX is a Growth Leader
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
The TX economy expanded by 2.0% in
2008 compared to 0.7% for the US: good for insurers in the state
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
Texas was in a 4-way tie as the
8th-fastest growing state
in 2008
19
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
Ja
n-0
9
January 2000 through June 2009
Source: US Bureau of Labor Statistics; Insurance Information Institute.
US: 9.5% in June 2009
Unemployment Rate: Texas is Doing Much Better Than US
Jun
-09
Texas: 7.5% in June 2009
TX had higher unemployment than the US from 2000 through 2006 ( 5.5% vs. 5.1%) but has been lower
since 2007 ( 5.1% in TX vs. 5.9% for US)
Unemployment Rates by State, June 2009: Highest 25 States*
10.7
10.6
10.3
10.1
10.1
9.3
9.2
9.0
9.0
8.69.
2
8.7
8.79.
3
11.112
.0
10.8
10.9
10.9
11.011
.612.4
12.2
12.1
15.2
0
2
4
6
8
10
12
14
16
MI RI OR SC NV CA OH NC DC KY TN IN FL IL AL GA MO WA NJ WV MS WI AZ NY MA
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for June 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
The unemployment rate has been rising across the country, but some states are
doing much better than others.
7.2
7.2
6.8
6.8
6.8
6.3
6.2
5.9
5.05.15.
7
7.07.1
4.2
6.4
8.08.
4
7.3
7.47.5
7.68.
38.4
8.4
8.48.5
0
2
4
6
8
10
ME AK MN DE ID PA CT CO TX HI MD AR VA VT KS LA NH NM MT OK IA WY UT SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, June 2009: Lowest 25 States*
*Provisional figures for June 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Texas had the 18th lowest unemployment rate in the
US in June 2009 at 7.5% vs. 9.5% for the US
22
Unemployment in Texas is High for the Region, but Low vs. US
7.57.2
6.8 6.8
9.5
6.3
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
TX AR LA NM OK US
Unemployment in TX is the highest in the region,
it still compares favorably to the US
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Percent
23
Unemployment in Largest Texas Cities but Below US in All
3.9 4.3 4.6
5.7 5.56.1
6.67.1
8.3
6.9
5.8
7.1
9.4
4.74.1
4.4
0
1
2
3
4
5
6
7
8
9
10
Austin CorpusCristi
Dallas-Ft.Worth
El Paso Houston SanAntonio
Texas--State
US
Unemployment is up in all Texas metro areas, but less so than in the US overall
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Percent
GREEN SHOOTS
Is the Recession Nearing an End?
25
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.
26
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, Contractor, Auto, Exposure Growth Slows
as Sales Nosedive
28
New Private Housing Starts,1990-2010F (Millions of Units)
2.07
1.80
1.36
0.90
0.55
0.76
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 73% (est.)—a net
annual decline of 1.52 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 (7/09); Insurance Information Inst.
29
16.916.916.6
17.117.5
17.817.4
16.516.1
13.1
10.1
11.7
9
10
11
12
13
14
15
16
17
18
19
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 6.7 million units annually by 2009 compared
with 2005, a decline of 40.3% 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 (7/09); Insurance Information Inst.
“Cash for Clunkers” or Car Allowance Rebate
System (CARS)Program to Increase Fuel
Efficiency and Stimulate Auto Sales Will Help Auto Insurers Too
31
Car Allowance Rebate System: How it Works
• President Obama in June 2009 signed into law the Car Allowance Rebate System (CARS) also knows as “Cash for Clunkers”
• Administered by the National Highway Traffic Safety Admin. (NHTSA), the program helps people purchase a new, more fuel efficient vehicle when trading in a less fuel efficient vehicle
• Program allocates $1 billion toward purchases between July 1 and Nov. 1, 2009 or until funds are exhausted (final rule July 24)
• Sense is that program will prove to be very popular and may be extended
• People can get between $3,500 and $4,500 per vehicle, depending on fuel efficiency of new vehicle vs. old vehicle
• Auto insurers should be able to generate between $75 - $125 million in net new auto premiums as people trade up and buy full coverage*
*III estimate based on 250,000 cars purchased via CARS program generating $300-$500 additional premium per vehicle.Source: www.CARS.gov; NHSTA; Insurance Information Institute.
32
Car Allowance Rebate System: How it Works
Source: www.CARS.gov; NHSTA; Insurance Information Institute.
Important Program Features• Car must be less than 25
years old• Only purchase or lease of
new vehicles qualify• Trade-in must get 18mpg or
less• Trade-in must have been
registered and continuously insured for the past year
• No voucher needed; dealer will apply credit at purchase
• Trade-in must be scrapped; Get scrap value
Key Threats Facing Insurers Amid
Financial Crisis
Challenges for theNext 5-8 Years
34
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
1. Erosion of Capital Losses are larger and occurring more rapidly than is commonly
understood or presumed Surplus down 13%=$66B since 9/30/07 peak; 12% ($80B ) in 2008 P/C policyholder surplus could be even more by year-end 2009 Some insurers propped up results by reserve releases Decline in PHS of 1999-2002 was 15% over 3 years and was
entirely made up and them some in 2003. Current decline is ~13% 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 fall much farther and faster than many believe. It will take years to return to the 2007 peaks (likely until 2011 with a sharp hard market and 2015 without one)
35
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 some companies
Possible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirements
P/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 environment
Cost of capital is much higher today, reflecting both scarcity & risk
Implications: 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.
36
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
3. Long-Term Reduction in Investment Earnings Low interest rates, risk aversion toward equities and many
categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gains
Price bubble in Treasury securities keeps yields low Many insurers have not adjusted to this new investment
paradigm of a sustained period of low investment gains Regulators will not readily accept it; Many will reject it Implication 1: Industry must be prepared to operate in
environment with investment earnings accounting for a smaller fraction of profits
Implication 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
37Source: 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 tent Status Quo is viewed as unacceptable by all Pushing for major change is not without significant
risk in the current highly charged political environment
Insurance & systemic risk Disunity within the insurance industry Impact of regulatory changes will be felt for decades Bottom Line: Regulatory outcome is uncertain and
risk of adverse outcome is high
Important Issues & Threats Facing Insurers: 2009 – 2???
38Source: Insurance Information Inst.
5. Creeping Restrictions on Underwriting Attacks on underwriting criteria such as credit,
education, occupation, territory increasing Industry will lose some battles View that use of numerous criteria are discriminatory
and create an adverse impact on certain populations Impact will be to degrade the accuracy of rating systems
to increase subsidies Predictive modeling also at risk Current social and economic environment could
accelerate these efforts Danger that bans could be codified at federal level
during regulatory overhaul Bottom Line: Industry must be prepared to defend
existing and new criteria indefinitely
Important Issues & Threats Facing Insurers: 2009 - 2015
39Source: Insurance Information Inst.
6. Emerging Tort Threat No tort reform (or protection of recent reforms) is
forthcoming from the current Congress or Administration
Erosion 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 liability
Torts twice the overall rate of inflation Influence personal and commercial lines, esp. auto liab. Historically extremely costly to p/c insurance industry Leads to reserve deficiency, rate pressure Bottom Line: Tort “crisis” is on the horizon and will be
recognized as such by 2012-2014
Important Issues & Threats Facing Insurers: 2009 -2015
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well
41
P/C Insurer Impairments,1969-2008
815
12
711
934
913
12
19
916
14
13
36
49
31 3
450
48
55
60
58
41
29
16
12
31
18 19
49 50
47
35
18
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
42
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
Co
mb
ined
Rat
io
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
ent R
ate
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 ME
SD WI
NH IA CT
MN 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
astr
op
he
Po
ints
on
Co
mb
ined
Rat
io
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
ent R
ate
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
46
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.
46
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.
47
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
48
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
50
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 82 banks have gone under as of 7/17/09) The Promise is Being Fulfilled
Renew existing policies (banks are reducing and eliminating lines of credit)
Write new policies (banks are turning away people who want or need to borrow)
Develop new products (banks are scaling back the products they offer)
Source: Insurance Information Institute50
51
• Emphasis on Underwriting Matching of risk to price (via experience and modeling) Limiting of potential loss exposure Some banks sought to maximize volume and fees and disregarded risk
• Strong Relationship Between Underwriting and Risk Bearing Insurers always maintain a stake in the business they underwrite, keeping “skin in the game”
at all times Banks 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 Leverage Insurers do not rely on borrowed money to underwrite insurance or pay claimsThere is no
credit or liquidity crisis in the insurance industry• Conservative Investment Philosophy
High quality portfolio that is relatively less volatile and more liquid• Comprehensive Regulation of Insurance Operations
The 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 Transparency Insurance companies are an open book to regulators and the public
Source: Insurance Information Institute51
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 Insurers
53
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.
54
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 and federal government.
55
REGULATORY REFORM: 2009 AND BEYOND
56
Obama Regulatory Reform Proposal: Plan Components
I. Office of National Insurance (ONI) Duties
1. Monitor “all aspects of the insurance industry”
2. Gather information
3. Identify the emergence of any problems or gaps in regulation that could contribute to a future crisis
4. Recommend to the Federal Reserve insurance companies it believes should be supervised as Tier 1 FHCs
5. Administer the Terrorism Risk Insurance Program
6. 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.
57
II. Systemic Risk Oversight & Resolution Authority Federal 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)
58
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)
59
IV. Other Provisions Potentially Affecting Insurers Creation of Financial Services Oversight Council (FSOC)
ONI is not included among Council’s membership
Strengthen Capital and Other Prudential Standards for All Banks, Bank Holding Companies and Tier 1 Financial Holding Companies
Require Hedge Funds and Other Private Pools of Capital to Register Alternative sources of capital have played a more important role in the wake of
major catastrophes such as 9/11 and Hurricane Katrina
Institute Regulation of All OTC Derivatives, Including CDS’s International:
Strengthen Intl. Capital Framework & Improve Oversight of Global Financial Markets
Enhance Supervision of Internationally Active Financial Services Firms
Determine appropriate Tier 1 FHC definition for foreign financial firms
Improve Accounting Standards Tighten Oversight of Credit Rating Agencies
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)
60
Rating of Auto/Home Insurance Regulatory & Operating Environment*
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WVVA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI
MDDE
AL
VT
NY
**DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
GRADE 2009 2008A 4 7
B 10 25 C 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 2009
http://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
P/C INSURANCE FINANCIAL
PERFORMANCE
A Resilient Industry in Challenging Times
Profitability
Historically Volatile
63
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
$80,000
91 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
63
64
-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
Excludes Mortgage & Financial Guarantee Insurers
65
-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%
65
66
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*
Co
mb
ine
d R
ati
o
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Re
tru
n o
n E
qu
ity
*
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
68
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.
P/C Premium Growth
Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy
70
-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
70
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
Year-to-Year Change in Net Written Premium, 2000-
2009:Q1
Source: A.M. Best, ISO; Insurance Information Institute.
5.0%
8.4%
15.3%
10.0%
3.9%
0.5%
4.2%
-1.0% -1.4%-3.6%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009:Q1
P/C insurers are experiencing their
slowest growth rates since 1930-33
Slow growth means retention is critical
Protracted period of
negative or slow growth is due to soft markets and
slow economy
71
72
$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
73
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%
0.2%
0%
1%
2%
3%
4%
5%
6%
Jan
-07
Feb
-07
Mar-
07
Ap
r-07
May-0
7Ju
n-0
7
Ju
l-07
Au
g-
Sep
-07
Oct-
07
No
v-0
7D
ec-0
7Jan
-08
Feb
-08
Mar-
08
Ap
r-08
May-0
8
Ju
n-0
8Ju
l-08
Au
g-
Sep
-08
Oct-
08
No
v-0
8D
ec-0
8
Jan
-09
Feb
-09
Mar-
09
Ap
r-09
May-0
9Ju
n-0
9
Monthly Change in Auto Insurance Prices*
*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
Auto insurance prices have clearly
begun to rise in recent months
74
$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 for Home 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
75
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
%
-11.
3%
-11.
8%
-13.
3% -12.
0%
-13.
5%
-12.
9% -11.
0%
-6.0
% -5.0
%
-5.0
%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
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
PROFITS IN TEXAS:
Sometimes a Laggard, Ike Sets TX
Further Behind
100
200
300
400
500
600
700
800
900
1000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
All US Industries P/C Insurance Texas
Profitability Index: Texas vs. US P/C vs. All Industries, 1990=100
*Assumes a TX RNW of -15% in 2008.Source: Insurance Information Institute; NAIC, Fortune
How much would an investment of $100 made in
1990 be worth today?
Fortune 500: $914
P/C Insurance US: $369
P/C Insurance TX: $288
The Fortune 500 outperformed insurers’ return in the TX P/C insurance market by
350% from 1990-2008E, given expected poor results of 2008.
217%
28%
1985-2007
20%
40%
60%
80%
100%
120%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
US Texas
Homeowners Direct Loss Ratios: TX vs. US
Source: NAIC; Insurance Information Institute. *Official 2008 figures unavailable, but Hurricane Ike assures TX performed worse that the US overall.
Loss Ratios in Texas were worse than the US 12 out
of 24 years *
Averages: 1985-2007
TX: 69.9%
US: 68.2%
ROE for Homeowners Insurance in Texas, 1992 – 2008E
-38.8%
14.7%10.2%
38.1%
13.1%
31.3%
-40.0%-42.4% -41.9%
-6.0%
6.2%
-23.5%
20.7%19.4%
-10.9%
11.9%
28.2%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1992 1994 1996 1998 2000 2002 2004 2006 2008E
Source: NAIC; Insurance Information Institute.
Average ROE in TX 1992 through 2007 was 1.9%; -0.6% through 2008E
Texas will need to provide insurers with high rates of return in
some years to offset huge losses in others
The avg. return on TX homeowners
insurance is now in the red over the past 18 years. Return is lower than risk free Treasury securities.
TEXAS:
A GROWTH & PROFIT COMPARISON
-5%
0%
5%
10%
15%
20%
25%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Texas US
Growth in Direct Written Premiums: TX and US
Source: A.M. Best, Insurance Information Institute
Despite all the rhetoric, premiums collected by insurers have actually
risen slightly more in TX on an average annual basis than the nation overall between 1985 and 2007: 7.7%
in TX vs. 6.3% for the US
TX premium growth is well above US average in recent
years
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
US P/C Insurers All US Industries Texas
ROE: US & TX P/C vs. All Industries, 1992–2008E
Source: Insurance Information Institute; NAIC, Fortune; I.I.I. estimate of -15% in 2008 influenced primarily by Hurricane Ike losses.
Historically, profitability in Texas has seriously lagged
the p/c insurance industry in general and the Fortune 500
28.1
pts
1.7
pts
Average ROE Comparison Shows Texas is Profit Laggard, 1992 – 2008*
4.8%
7.7%
13.3%
5.4%
0%
2%
4%
6%
8%
10%
12%
14%
Texas US P/C Fortune 500 10-YearTreasury*2008 return for TX of -15% is I.I.I. estimate.
Source: Insurance Information Institute from NAIC, Fortune and Federal Reserve data.
Despite occasional good years, improvements is
TX appear to be unsustainable
TX is below even a risk-free return on
Treasury securities.
HINT: TX is not a risk free investment
for insurers
ROE for Personal Lines in Texas1992 - 2007
5.3% 9.
1% 14.4
%
8.8%
-5.0
%
4.8% 8.
2%
18.8
%
12.7
%
12.6
%
5.6%
-38.
8%
14.7
%
10.2
%
38.1
%
13.1
%
31.3
%
28.2
%
14.1
%
6.7%
5.1%
-3.1
%
5.9%
-41.9%-42.4%
11.9
%
-10.
9%
19.4
%
20.7
%
-23.
5%
6.2%
-6.0
%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Personal Auto
Homeowners
Source: NAIC
16-Year Average: 92-07Auto: +8.7%Home: 1.9%
Despite recent improvements, TX is a very risky long-
run proposition
ROE for Major Commercial Lines in TX, 1992 - 2007
20.0
% 24.4
% 32.1
%
15.4
%
10.1
%
8.5%
7.7%
-3.3
%
3.0%
17.7
%
12.9
%
13.0
%
11.5
%
-15.
6%
6.1%
2.1%
-9.8
%
14.4
%
-1.2
%
16.4
%
18.2
%
9.8%
2.5%
6.2%
3.0%
6.4%
4.9%
-12.
7%
-18.
7%
9.3% 11
.8%
-6.1
%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Workers Comp
Commercial Multi-Peril
Source: NAIC
Profits in TX are highly
volatile
Merger & Acquisition
Barriers to Consolidation Will Diminish in 2009/10
87
P/C Insurance-Related M&A Activity, 1988-2008
$2,4
35
$5,1
00
$19,
118
$40,
032
$1,2
49
$486
$20,
353
$425
$9,2
64$3
5,22
1
$13,
615
$16,
294
$55,825
$30,
873
$8,0
59
$11,
534
$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
$60,000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Tran
sact
ion
Val
ue ($
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%
88
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
$16,000
96 97 99 00 01 02 03 04 05 06 07 08
Tran
sact
ion
Val
ue ($
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
89
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
Shrinkage, but Capital is Within Historic Norms
91
$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:Q1*
Source: A.M. Best, ISO, Insurance Information Institute. *As of 3/31/09
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Actual capacity as of 3/31/09 was $437.1, down 4.2% from 12/31/08 at $455.6B, but still 53% above its 2002 trough. Recent peak was $521.8 as of 9/30/07. Surplus
as of 3/31/09 is 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
91
92
Policyholder Surplus, 2006:Q4 – 2009:Q1
$ Billions
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$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
Source: ISO.
Declines Since 2007:Q3 Peak
08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%)
08:Q4: -$66.2 (-12.9%) 09:Q1: -$84.7B (-16.2%)
Capacity peaked at $521.8 as of 9/30/07
92
93
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
6/3
0/1
98
9H
urr
ica
ne
Hu
go
6/3
0/1
99
2H
urr
ica
ne
An
dre
w
12
/31
/93
No
rth
rid
ge
Ea
rth
qu
ak
e
6/3
0/0
1S
ep
t. 1
1A
tta
ck
s
6/3
0/0
4F
lori
da
Hu
rric
an
es
6/3
0/0
5H
urr
ica
ne
Ka
trin
a
6/3
0/0
7F
ina
nc
ial
Cri
sis
As
of
3/3
1/0
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
94
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.
95
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%
6/3
0/1
98
9H
urr
ica
ne
Hu
go
6/3
0/1
99
2H
urr
ica
ne
An
dre
w
12
/31
/93
No
rth
rid
ge
Ea
rth
qu
ak
e
6/3
0/0
1S
ep
t. 1
1A
tta
ck
s
6/3
0/0
4F
lori
da
Hu
rric
an
es
6/3
0/0
5H
urr
ica
ne
Ka
trin
a
Fin
an
cia
lC
ris
is a
s o
f3
/31
/09
**
*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
96
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
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
98
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
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.
98
99
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
99
100100
0.14% 0.18% 0.30%0.50%
0.93%
1.39%
2.13%
2.81%
3.29%
4.22% 4.23%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Current Yield Curve*Pre-Crisis (July 2007)
Treasury Yield Curves: Pre-Crisis vs. Current*
*May 2009.Sources: Federal Reserve; 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
102
115.8
107.5
100.198.4
100.8
92.6
98.4
101.0
95.7
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009:Q1*
P/C Insurance Industry Combined Ratio, 2001-2009:Q1*
*Excludes Mortgage & Financial Guarantee insurers in 2008/09. Including M&FG, 2008=105.1, 2009=102.2 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
102
2005 ratio benefited from heavy use of reinsurance which lowered net losses
103
-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
08
09
:Q1
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers
$ B
illi
ons
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:Q1*
$19.8 Bill underwriting loss in 2008
incl. mort. & FG insurers, -2.5B in Q1:09
103
104
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.
104
105
117.7
158.4
113.6118.4
112.7
121.7
101.0
108.2111.4
121.7
109.3
98.394.2
100.1
89.4
95.7
116.5
98
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 08E 09F
Homeowners Insurance Combined Ratio
Average 1990 to 2008E= 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 and forecasts)
106
States With Problem Chinese Drywall Reports*
* First report was received 12/22/08.Source: US Consumer Product Safety Commission, http://www.cpsc.gov/info/drywall/where.html accessed 7/16/09.
106
As of July 16, 2009, the Consumer Product Safety Commission
had received 608 reports of defective
Chinese drywall from 21 states plus DC, 77%
of those from FL
Most problems have arisen in hotter, more
humid climates such as FL and LA
107
Number and Percentage of Problem Chinese Drywall Reports by State*
Other States, 34 , 6.0%
Virginia, 22 , 3.9%
Alabama, 7 , 1.2%
Florida, 438 , 77.1%
Louisiana, 67 , 11.8%
* First report was received 12/22/08.Source: US Consumer Product Safety Commission, http://www.cpsc.gov/info/drywall/where.html accessed 7/16/09.
107
The vast majority of problem Chinese drywall
was used in FL in the wake of the 2004/2005
hurricanes
Coverage for defective drywall is excluded under a standard
homeowners insurance policy (construction defect and pollution exclusions apply and there is no covered
cause of loss)
108
101.7101.3 101.0
99.5
101.1
103.5
109.5
107.9
104.2
98.4
94.495.1 95.5
98.3 98.597.5
101.3
90
95
100
105
110
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F
Private Passenger Auto (PPA) Combined Ratio
Average Combined Ratio for 1993 to 2006:
100.7
Sources: A.M. Best (historical and forecasts)
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.
109
110.
3
110.
2
107.
6
103.
9
109.
7
112.
3
111.
1
122.
3
110.
2
102.
5
105.
4
91.1
95.1
106.
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 08E 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 may account for up to 4 points on the commercial
combined ratio in 2008
Sources: A.M. Best (historical and forecasts)
Catastrophic Loss
Catastrophe Losses Trends Are Trending Adversely
Global Number of Catastrophic Events, 1970–2008
0
50
100
150
200
250
300
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
Natural catastrophes Man-made disasters
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 2/2009.
The number of natural and man-made
catastrophes has been increasing on a global
scale for 20 years
Record 258 man-made CATs &
record 152 natural CATs in 2005
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%
113
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$2
.7$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 March 31 = $2.66 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
113
2009 cat losses were down 25% in Q1 from $3.545 in Q1 2008
114
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
115
Number of PCS Catastrophe Events, 1998-2008*
$ Billions
37
27
24
20
24
33
23
37
2221
25
15
20
25
30
35
40
98 99 00 01 02 03 04 05 06 07 08*PCS defines a catastrophe as an even that caused at least $25 million in insured property damage andaffects and significant number of policyholders and insurers.Source: PCS; Insurance Information Institute
The number of catastrophe events
reached a 10-year high in 2008
116
Top 12 Most Costly Disasters in US History, (Insured Losses, $2007)
$4.0 $5.0 $6.0 $7.0 $7.8 $8.2$10.7 $10.9 $10.9
$22.0 $22.9
$43.6
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Ike(2008)*
Wilma(2005)
Northridge(1994)
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
$ B
illi
ons
*PCS estimate as of 12/15/08.Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.
9 of the 12 most expensive disasters in US history
have occurred since 2004
In 2008, Ike became the 6th most expensive insurance event and 4th most
expensive hurricane in US history
116
117
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)
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
illi
ons
*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
The 2009 Hurricane Season:
Preview to Disaster?
Outlook for 2009 Hurricane Season
Average* 2005 2009F
Named Storms 9.6 26 11
Named Storm Days 49.1 115.5 50
Hurricanes 5.9 14 5
Hurricane Days 24.5 47.5 20
Intense Hurricanes 2.3 7 2
Intense Hurricane Days 5 7 4
Net Tropical Cyclone Activity 100% 275% 90%
*Average over the period 1950-2000.Source: Dr. Phil Klotzbach and Dr. William Gray, Colorado State University, June 2, 2009.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2009
NOAA CSU
2005 Actual
Number Named Storms 9-14 11 28
Number of Hurricanes 4-7 5 15
Number of Major Hurricanes (Category 3+) 1-3 2 7
Source: Dr. Phil Klotzbach and Dr. William Gray, Colorado State University, June 2, 2009; NOAA (May 2009).
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2009
Average* 2009F
Entire US Coast 52% 48%
US East Coast Including Florida Peninsula
31% 28%
Gulf Coast from FL Panhandle to Brownsville, TX
30% 28%
ALSO…Slightly Below-Average Major Hurricane
Landfall Risk in Caribbean for 2009
*Average over past century.
Source: Dr. Phil Klotzbach and Dr. William Gray, Colorado State University, June 2, 2009.
TEXASCatastrophe Loss
Overview
Everything’s Bigger in TX—Including the CAT Losses
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)
From 1953-2009*, Texas leads the country in major
disaster declarations
TEXAS: Insured Catastrophe Losses,1980-2008* ($2008, in Millions)
$398
$601
$426
$2,0
64$3
65$4
74$4
01$2
13$5
19
$361
$569
$1,8
94
$485
$194
$382
$663 $1
,489
$3,2
34$7
51$1
,731
$386
$3,1
42$7
34$2
80$1
0,86
9
$3,1
60$1
,194
$1,4
70
$661
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,00080 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
Mill
ion
s
*Losses stated in 2008.Sources: ISO/PCS; Insurance Information Institute
Texas has experienced billion dollar-plus
CAT losses in 10 of the past 29 years
Average Annual CAT Losses: $1.35 billion*
TEXAS: Windpool Direct Liability In-Force,1971-2009: Q1*
$0
.3$
0.7
$1
.0$
1.1
$1
.2$
1.4
$1
.6$
1.6
$1
.8$
1.9
$2
.1$
2.3
$2
.2$
3.2
$4
.1$
4.5
$4
.4$
4.3
$4
.2$
4.2
$4
.3$
5.2
$6
.5$
7.6
$8
.8$
10
.0$
10
.9$
11.6
$1
2.0
$1
2.1
$1
3.2
$1
6.0
$1
8.8
$2
0.8
$2
3.3
$3
8.3 $
43
.5 $4
9.1
$5
5.9
$5
8.6
$5
9.6
$5
9.8
$6
2.2
$5
8.6 $6
2.2
$0
$10
$20
$30
$40
$50
$60
$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
3/3
1/0
76
/30
/07
9/3
0/0
71
2/3
1/0
3/3
1/0
86
/30
/08
9/3
0/0
81
2/3
1/0
3/3
1/0
9
*As of Dec. 31 for annual figures.Sources: Texas Windstorm Insurance Association; Insurance Information Institute
Texas windpool liability has mushroomed 231% from $18.8B as of 12/31/03 to
$62.2B as of 3/31/09, coinciding with the increase
in hurricane activity that began in 2004
Exposure figures have
recently leveled out
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%
Texas accounted for 10% of all US insured CAT losses from 1980-2008:
$31.2B out of $297.9B
*All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
$ Billions of Dollars
2008 Was A Relatively ActiveHurricane Season
Source: WeatherUnderground.com
2008 saw a total of 16 hurricanes and tropical
storms, including Hurricane Ike -- the fourth costliest
hurricane in U.S. history with an estimated $10.7 billion in
insured losses.
2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season
Source: WeatherUnderground.com, January 18, 2006.
All 21 names were used for the first time ever, so
Greek letters were used for the
final storms
2005 set a new record for the number of hurricanes &
tropical storms at 28, breaking the old record set in 1933.
Tropical Cyclone Activity in 1933 Held the Record Before 2005
Source: WeatherUnderground.com, accessed November 2, 2005.
Even though 1933 was the 2nd busiest year for
hurricanes, TX & north Gulf (future offshore oil
zone) coast little affected
Historical Hurricane Strikes in Aransas County, TX, 1900-2007
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Historical Hurricane Strikes in Brazoria County, TX, 1900-2007
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Historical Hurricane Strikes in Galveston County, TX, 1900-2007
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Historical Hurricane Strikes in Harris County, TX, 1900-2007
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Historical Hurricane Strikes in Jefferson County, TX, 1900-2007
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
136
Insurance Information Institute On-Line
THANK YOU FOR YOUR TIME AND
YOUR ATTENTION!
136
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