2011 hart wig texas

8/3/2019 2011 Hart Wig Texas

1/125

Is the World Becoming

P/C Insurance Industry in theInsurance Council of Texas Annual Symposium

,July 15, 2011

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org


2/125

Presentation Outline

Review of Recent Events What in the World is Going On?

Summar of P/C Financial Performance

Catastrophe Loss Developments & Trends

Global

US

Will the Market Turn? Four Necessary Criteria:

Underwriting Loss Trends

Capital/Capacity

Reinsurance Markets

Pricing Discipline

Texas Markets: Performance Overview Profitability and Growth

Other Contributing Factors to the Underwriting Cycle

Investment Environment

2

Tort/Casualty Environment Inflation

Economic Growth


3/125

What in the World Is

Going On?Is the World Becoming a

What Are the Implications for

3

Insurance and Risk Management?


4/125

Uncertainty, Risk and Fear Abound

Japan, New Zealand, Haiti, Chile Earthquakes Nuclear Fears

Record Tornado Floodin in the US TX Wildfires

Cyber Attacks

Resurgent Terrorism Risk (e.g., Bin Laden Killing)

Political U heaval in the Middle East

Echoes of the Financial Crisis

Housing Crisis

US Debt and Budget Crisis

Sovereign Debt & Currency Crises

Runaway Energy & Commodity Prices

Era of Fiscal Austerity Are Black Swans

4

China Becomes #2 Economy in the World

Manmade Disasters (e.g., Deepwater Horizon)

does it just seemthat way?


5/125

P/C Insurance IndustryFinancial Overview

Profit Recovery Will Be Setac y g s, ow

Interest Rates, Diminishing

5

Reserve Releases


6/125

P/C Net Income After Taxes19912011:Q1 ($ Millions)

,496

5,7

77$80,000 2005 ROE*= 9.6%

2006 ROE = 12.7%

P-C Industry 2011:Q1 profits weredown 12.2% to $7.8B vs. $8.9B in2010:Q1 as underwritin results

9

$62$

4,1

55

01

$60,000

, 2007 ROE = 10.9%

2008 ROE = 0.3%

2009 ROAS1 = 5.9%

2010 ROAS = 6.5%

deteriorated

316

,598 4,4

04 $

36,8

1

$3

0,7

73

,865

$30,0

29

$34,6

7

$28,6

72

$4

,559

$38,

$30,000

$40,000

, : = .

$14,1

7

$5,8

40

$19,

$10,8

70

$20 $

$2

,046

,043

$7,8

07

$20

$10,000

$20,000

$

-$6,970-$10,000

$0

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.5% ROAS for2011:Q1, 7.5% for 2010 and 7.4% for 2009.

Sources: A.M. Best, ISO, Insurance Information Institute


7/125

A 100 Combined Ratio Isnt What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

15.9%110 18%

A combined ratio of about 100generated ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

97.5

100.6 100.1 100.7 99.3100.8 102.2101.0

14.3%

12.7%

100

105

12%

15%

92.66.5%

7.5%7.4%

.

8.9%

90

95

6%

9%

4.4%

80

85

0%

3%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Todays Depressed

* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guarantyinsurers

Source: Insurance Information Institute from A.M. Best and ISO data.

Investment Environment to Generate Risk Appropriate ROEs


8/125

Profitability Peaks & Troughs in the P/CInsurance Industry, 1975 2011*

25%1977:19.0% 1987:17.3%

History suggests next ROEpeak will be in 2016-2017

ROE

20%1997:11.6%

2007:12.3%

2011:*

10%

10 Years.

5%

-5%

0%

1984: 1.8% 1992: 4.5% 2001: -1.2%1975: 2.4%

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

*

*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for Q1 data.Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.


9/125

Profitability and Growth inexas nsurance ar e s

Anal sis b Line and NearbState Comparisons

9


10/125

RNW All Lines: TX vs. U.S., 2000-2009

25%

(Percent)

10%

15%

0%

5%

P/C Insurer profitability inTX is hi hl variable and

-

-10%

-5% below that of the US overallover the past decade

US: 7.0%

-20%00 01 02 03 04 05 06 07 08 09

US All Lines TX All Lines

TX: 3.7%

10Sources: NAIC.


11/125

RNW PP Auto: TX vs. U.S., 2000-2009

25%Pvt. Passenger Auto

profitability in TX is has

15%

20%

US in recent years

5%

10%

-5%

0%Average 2000-2009

US: 7.2%

TX: 6.1%

-10%00 01 02 03 04 05 06 07 08 09

US PP Auto TX PP Auto

11Sources: NAIC.


12/125

RNW Comm. Auto: TX vs. U.S.,2000-2009

20%

(Percent)Commercial Auto

profitability in TX is

10%

15%genera y e ow e

average

5%

-5%

0% -

US: 8.5%

TX: 5.6%

-10%00 01 02 03 04 05 06 07 08 09

US Comm Auto TX Comm Auto

12Sources: NAIC.


13/125

RNW Comm. Multi-Peril: TX vs. U.S.,2000-2009

30%

(Percent) Hurricane Ike put a bigdent in CMP profitability

10%

20%

-

-10%

-40%

-30%

-

US: 8.0%

TX: 0.4%

-50%00 01 02 03 04 05 06 07 08 09

US Comm M-P TX Comm M-P

13Sources: NAIC.


14/125

RNW Homeowners: TX vs. U.S.,2000-2009

(Percent)Homeowners Profitability: Mold,

Hurricanes, Hail & Tornadoes

30%40%

ee ay ore

0%

10%

20%

-30%

-20%

-10%

Average 2000-2009

US: 4.7%

-60%

-50%

-40% TX: -2.3%

14Sources: NAIC.

US HO TX HO


15/125

RNW Workers Comp: TX vs. U.S.,2000-2009

20%

(Percent)Workers comp

profitability in TX has

15%

genera youtperformed the US

5%

10%

0%

-

US: 6.4%

TX: 9.2%

-5%00 01 02 03 04 05 06 07 08 09

US WComp TX WComp

15Sources: NAIC.


16/125

All Lines: 10-Year Average RNW TX &Nearby States

2000-2009

7.0%10.5% New Mexico

U.S.

Texas All Lines profitabilityis below the US and

6.0%

6.9% Arkansas

Oklahoma

-9.3%

3.7%Texas

Mississippi- .

-15% -10% -5% 0% 5% 10% 15%

Louisiana

Source: NAIC, Insurance Information Institute


17/125

PP Auto: 10-Year Average RNW TX &Nearby States

2000-2009


U.S.

7.6%

6.8% Arkansas

Oklahoma

4.7%

6.1%Texas

Mississippi

Texas PP Autoprofitability is belowthe US and regional

average.

0% 2% 4% 6% 8% 10% 12%

Louisiana



18/125

Top Ten Most Expensive And Least ExpensiveStates For Automobile Insurance, 2008 (1)

RankMost

expensive statesAverage

expenditure RankLeast

expensive statesAverage

expenditure

1 D.C. $1,126 1 North Dakota $503

2 Louisiana 1,105 2 Iowa 5193 New Jersey 1,081 3 South Dakota 520

4 Florida 1,055 4 Nebraska 547

5 New York 1,044 5 Idaho 562

6 Delaware 1,007 6 Kansas 576

7 Rhode Island 986 7 Wisconsin 5818 Nevada 970 8 North Carolina 595

9 Connecticut 950 9 Maine 600

10 Maryland 922 10 Indiana 612

Texas ranked 15th in 2008, with an average expenditure for autoinsurance of $854.

18

(1) Based on average automobile insurance expenditures.

Source: 2010 National Association of Insurance Commissioners.


19/125

Comm. Auto: 10-Year Average RNW TX &Nearby States

2000-2009

8.5%

11.1%New Mexico

U.S.

7.2%

6.1%Arkansas

Oklahoma

3.1%

-3.8%

5.6%Texas

Mississippi

Texas CommercialAuto profitability isbelow the US and

regional average

-5% 0% 5% 10% 15%

Louisiana



20/125

Comm. M-P: 10-Year Average RNW TX &Nearby States

2000-2009


U.S.

Texas CommercialMulti-Peril profitabilityis below the US and

11.0%

6.4% Arkansas

Oklahoma

reg ona average

-10.0%

0.4%Texas

Mississippi- .

-30% -20% -10% 0% 10% 20%

Louisiana



21/125

Homeowners: 10-Year Average RNW TX& Nearby States

2000-2009


U.S.

-1.6%

-6.9% Arkansas

Oklahoma

-29.0%

-2.3%Texas

Mississippi

Texas Homeownersprofitability is belowthe US and regional

average- .

-40% -30% -20% -10% 0% 10% 20%

Louisiana



22/125

Top Ten Most Expensive And Least ExpensiveStates For Homeowners Insurance, 2008 (1)

Texas ranked as the most expensive state for homeowners insurance in2008, with an average expenditure of $1,460.

Rankos

expensive statesverage

expenditure Rankeas

expensive statesverage

expenditure

1 Texas (3) $1,460 1 Idaho $387

2 Florida (4) 1,390 2 Utah 432

,

4 Oklahoma 1,048 4 Washington 471

5 Massachusetts 1,026 5 Wisconsin 503

6 New York 983 6 Delaware 535

onnec cu o

8 Mississippi 980 8 Maine 572

9 D.C. 926 9 Pennsylvania 586

10 Kansas 916 10 Kentucky 601

(1) States with the same premium receive the same rank.(2) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides all risks coverage (except those

specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.(3) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms.(4) Florida data excludes policies written by Citizen's Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly

comparable to other states.

22

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. TheNAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data.

Source: 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictlyprohibited without written permission of NAIC.


23/125

Workers Comp: 10-Year Average RNWTX & Nearby States

2000-2010

6.4%8.7% New Mexico

U.S.

3.7%

13.2% Arkansas

OklahomaTexas WorkersComp profitability is

9.5%

9.2%Texas

Mississippi

above the USaverage but similar

to the regionalaverage

.

0% 5% 10% 15%

Louisiana


All Li DWP G th TX U S


24/125

All Lines DWP Growth: TX vs. U.S.,2001-2010

0.5

%25%

(Percent)

2.0

%14.3

%

15

.7%

2

15%

20%

1

9.8

7.4

%

% .4%

7.9

%

6

.2%

.7% 9%

10%

2. 3

0.5

%

%

0.0

%

0.3

%1

.4 2.

%

0.7

0%

-2.1

-3.3

%-1.

-10%

-5%

24Source: SNL Financial.

US DWP: All Lines TX DWP: All Lines

C Li DWP G th TX U S


25/125

Comm. Lines DWP Growth: TX vs. U.S.,2001-2010

(Percent)

.0%

.2%

27

.2%

25%30%

15

.3 1

1

1.4

%

% 4%

1

9.2

%

10

.4%

%10%

15%

20%

4.

3. 3 5

.

0.2

%

%

0.1

%2

.3 4.1

0.0

%

9

%-

0%

5%

-1.

-7.3

% -2

.5

-7.4

%-0

.

-15%

-10%


US DWP: Comm. Lines TX DWP: Comm. Lines

P l Li DWP G th TX U S


26/125

Personal Lines DWP Growth: TX vs. U.S.,2001-2010

6.8

%20%

(Percent)

11

.1%

11

.3%

1

15%

8.2

%9

.2

5.4

%7.2

%

%5.

4%

.3%

10%

2.3

2.3

1.2

%

-0.1

%1

.1% 2

.5

1.3

%

0.5

% 2.4 3

.0

2.2

0%

-5%

US DWP: Personal Lines TX DWP: Personal Lines


P i t P A t DWP G th TX


27/125

Private Passenger Auto DWP Growth: TXvs. U.S., 2001-2010

20%

(Percent)

2 % 1

0.2%

9%

11.3% 1

3.6

%10%

15%

8.

7.

3

.6%

.6%

5% % 1

%1

.5%

7.

.4% 1.8

%

2.0%

6.3

3

.5%

1.4%

5%

0 0.

0.

-0.

.4%

0

.4%

-5%

0%

01 02 03 04 05 06 07 08 09 10

--

-10%



H MP DWP G th TX


28/125

Homeowners MP DWP Growth: TX vs.U.S., 2001-2010

5.7

%30%

(Percent)

2

20%

25%

%

14

.4%

13

.5%

11.1

%

11

.5%15%

8.3

7.3

7.4

4.2

%

%3

.9%

4.9

%6

.3%

%

2

.6%

3.5

% 5.3

%

3.5

% 6.0

%

3.6

%5%

10%

0.0.

0%

01 02 03 04 05 06 07 08 09 10




29/125

Catastro he LossDevelopments and Trends

2011 and 2010 Are Rewritinga as rop e oss anInsurance History

29

Global Catastrophe Loss Summary:


30/125

Global Catastrophe Loss Summary:First Half 2011

2011 Is Already (as of June 30) the HighestLoss Year on Record Globally

Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods

$260 Billion in EconomicLosses Globally

New record for the first six months, exceeding the previous record of $220B in 2005

Economy is more resilient than most pundits presume

$55 Billion in InsuredLosses Globally

More than double the first half 2010 amount

Over 4 times the 10-year average

$27 Billion in EconomicLosses in the US

Represents a 129% increase over the $11.8 billion amount through the first half of 2010

$17.3 Billion in InsuredLosses in the US Arising from 100 CAT Events

Represents a 162% increase over the $6.6 billion amount through the first half of 2010

30

Insured Loss Estimates for Selected Major


31/125

Insured Loss Estimates for Selected MajorCatastrophes in 2011

JapanEarthquake

AprilTornadoes

May(Joplin)

Tornadoes

Eqecat $22 to $39 $5 billion to $1 billion to

RMS$21 to 34

billion$3.5 to $6

billion$2 to $6billion

AIR on o$30 billion

on o$7 billion

obillion

31

US Second Quarter Insured Catastrophe


32/125

US Second Quarter Insured CatastropheLosses, 20002011

$ Billions

2011:Q2 CATlosses totaled

$15.09

$12

$14

$16Q2 CAT losses from 2000-2010

average $4.0 billion. 2011:Q2CAT losses were nearly 4 times

$15.09 billion andare the highest on

record

$7.11 $6.38$6.24$8

$10

.

$5.04

$2.30

$4.47

0.93

$2.33

$5.05

$2.79

$1.46$2

$4

$6

$02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

32Sources: ISO/PCS; Insurance Information Institute.

Results in 2011

Top 15 Most Costly World Insurance


33/125

Top 15 Most Costly World InsuranceLosses, 1970-2011*

(Insured Losses, 2010 Dollars, $ Billions)

$72.3$70$80

Three of the top 15 most

expensive catastrophes inworld histor have occurred in

23.1 $24.9

$35.0

$30

$40

$50 the past 18 months

$11.3 $14.0$14.9

. .

$10.0$9.3$9.0$8.0$8.0$7.8

$0

$10

$20

Winter Chile Hu o T hoonCharle New Rita Wilma Ivan Ike Northrid e WTC Andrew Ja an KatrinaStormDaria(1991)

Quake(2010)

(1989) Mirielle(1991)

(2004) ZealandQuake(2011)

(2005) (2005) (2004) (2008) (1994) TerrorAttack(2001)

(1992) Quake,Tsunami(2011)*

(2005)

33

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.

Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

Top 16 Most Costly World Insurance


34/125

Top 16 Most Costly World InsuranceLosses, 1970-2011*

(Insured Losses, 2010 Dollars, $ Billions)3 of the top 15 most

expensivecatastrophes in world

$72.3$70$80

Taken as a single event, the

Spring 2011 tornado seasonwould likely become the 9th

history have occurredin the past 18 months

$24.9

$35.0

$30

$40

$50costliest event in global

insurance history

$11.3 $14.0 $14.0$14.9

. . .

$10.0$9.3$9.0$8.0$8.0$7.8

$0

$10

$20

Storm

Daria

(1991)

Quake

(2010)

(1989) Mirielle

(1991)

(2004) Zealand

Quake

(2011)

(2005) Tornadoes

(2011)

(2005)

(2004)

(2008) (1994) Terror

Attack

(2001)

(1992) Quake,

Tsunami

(2011)*

(2005)

34

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.

Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

Worldwide Natural Disasters


35/125

Worldwide Natural Disasters,1980 2011*

600

Number of Events Already 355 eventsthrough the first 6

400

500

300

100

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

*2011 figure is through June 30.Source: MR NatCatSERVICE 35

(Storm) (Flood, massmovement)

(Extreme temperature,drought, forest fire)

(Earthquake, tsunami,volcanic eruption)

Worldwide Natural Disasters 1980 2011


36/125

Worldwide Natural Disasters 19802011,Overall and Insured Losses*

300

First Half 2011

Overall Losses: $265 Bill

250

Insured Losses: $60 Bill

$bn150

200

U

100

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

36

Overall losses (in 2011 values) Insured losses (in 2011 values)

*2011 figure is through June 30.Source: MR NatCatSERVICE 2011 Munich Re


37/125

NUCLEAR DISASTER

March 11 Quake/Tsunami Is Just the Most Recent of

evera arge o a a as rop e osses

37

Insured Japan Earthquake Loss


38/125

Insured Japan Earthquake LossEstimates*

(Insured Losses, $ Billions)

Eqecat $22

$39bn

RMS $21 - $34 bn

are likely to total in

the $200-$300

billion range,

AIRWorldwide $20 $35bn

fraction of the loss

is insured

TowersWatson $20 $45bn

38

*As of June 17, 2011. Towers Watson estimate includes $3.0 (low) to $4.9 billion (high) in life insurance losses. RMS estimateincludes insured life/health losses of $3 to $8 billion.

Sources: AIR Worldwide, Eqecat, RMS, Towers Perrin; Insurance Information Institute.

Recent Major Non-US Catastrophe


39/125

Recent Major Non-US CatastropheLosses

(Insured Losses, $US Billions)

The March 2011 earth uake in Ja an will$35.0

$25

$30

$35become among the most expensive in world

history in terms of insured losses (currentleader is the 1994 Northridge earthquake with$22.5B in insured losses in 2010 dollars

$10.0$8.0

$5.0$10

$15

$20

$2.0$0.5

$0

$5

Cyclone Yasi

(Australia) Feb

2011

Australia Floods

(Dec - Feb 2011)

New Zealand

Quake (Sep 2010)

Chile Earthquake

(Feb 2010)

New Zealand

Quake (Feb 2011)

Japan Earthquake

(Mar 2011)

Insured Losses from Recent Major Catastrophe Events Exceed$60 Billion, an Estimated $53 Billion of that from Earthquakes

39Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.

Nonlife (P/C) Insurance Market Impacts


40/125

Nonlife (P/C) Insurance Market Impactsof Japan Earthquake

No Direct Impact for US Domestic Primary Insurers BUT: $2 - $5 Billion in Assumed Loss from Foreign Catastrophes Will Wind Up on

the Books of US Insurers, Most with No Direct Exposure to Japan/Australia/NZ

Retrocessional market

Blanket property insurance covers Primary Insurance: Domestic Japanese Insurers Take Big Losses

Few US/Foreign Insurers Had Direct Exposure to Japanese P/C Market

Low single-digit market share for a small number of companies

Significant Absorption of Loss by Japanese Government Residential earthquake damage

Nuclear-related property and liability damage

Significant Impacts for Global Reinsurers Property-Catastrophe covers on Commercial Lines Business Interruption/Contingent Business Interruption

Supply Chain Disruption Concern (Now Waning)

Currently an Earnings Event for Global Reinsurers

Not a capital event: Global reinsurance markets entered 2011 with record capital

40

, ,

Up for all; Magnitude of increase is sensitive to size of loss

Impact on Cost of US Property-Cat Reinsurance is Possible/Likely

Market remains well capitalized and competitive


41/125

SPRING 2011 TORNADO OUTBREAK

2011 Will Be Among the Most Deadly andExpensive for Tornadoes In History

41

Insured Loss Estimates from April 2011


42/125

Insured Loss Estimates from April 2011Tornadoes*


Eqecat $5

7bn The April

tornadoes killed

RMS $3.5 - $6.0 bn

more that 300people and

caused as much

insured losses

AIRWor w e 5

7bn

42

*As of June 17, 2011.

Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.

Insured Loss Estimates from May 2011


43/125

Insured Loss Estimates from May 2011(Joplin) Tornadoes*


Eqecat $1

$3 bn The Maytornadoes killed

RMS $2 - $6 bn

more that 125people and

caused as much

insured losses

AIRWor w e $2 $6bn

43

*As of June 17, 2011.

Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.

S f R t T d A ti it


44/125

Summary of Recent Tornado Activity

There Have Been 1,585 Tornadoes Through June 30 in the US

537 People Have Been Killed

The April 27 Tornado Outbreak Killed at Least 342 People

Now the 2nd deadliest outbreak in US history (747 killed in march 1925 event)

States impacted: AR, TN, LA, MS, GA and especially AL

Insured Losses Estimated at $3.5B to $7B

The May 22 Tornado in Joplin, MO, Killed at Least 130 People

Insured Losses Estimated at $1B to $6B

P/C Insurance Industry is Very Strong and Will Encounter No

44

Difficulties in Paying these Claims

Number of Tornadoes and Related


45/125

Number of Tornadoes and RelatedDeaths, 1990 2011*

921,819 537

2,000 600Number of Tornadoes

Number of Deaths

Tornadoes have alreadyclaimed more than 500 lives

33

32 1

,297

173

2 1,2

34

173

48

1,4

24

1,3

45

,216 1

,37

6

1,2

64

3 8

1,

56 1

,282

1,5

8

1,400

1,600

,

does

400

500

Nu

1,1

1,1 1

,

1,0

8 1,

1,1

1,0

71

941

1,1

1,0 1

,

800

1,000

1,200

ero

fTorna

300

berofDeaThere were alread

400

600Num

100

200ths1,585 tornadoes in

the US by June 30

0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P

0

45

*2011 is preliminary data through June 30.

Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.

,

April 2011 Tornadoes in the Birmingham and Tuscaloosa Areas

Insurers Making a Difference in


46/125

Insurers Making a Difference inImpacted Communities

Destroyed home inTuscaloosa. Insurers

,claims totaling $2 billion

in the Tuscaloosa/Birmingham areas alone.

resentat on o a c ecto Tuscaloosa MayorWalt Maddox to theTuscaloosa Storm

Source: Insurance Information Institute 46

Recovery Fund


47/125

U.S. Tornado Count, 2005-2011*

There were 1,585 tornadoesTornadoin the US in 2010, slightly

above averageactivity was off

its record paceby mid-year

Deadly andcostly April/May spike

47Source: http://www.spc.noaa.gov/wcm/ *Through July 2.

Location of Tornadoes in the US


48/125

Location of Tornadoes in the US,January 1June 30, 2011

,killed 537 peoplethrough June 30,

including at least

mostly in theTuscaloosa area,and 130 in Joplin

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 48

Location of Large Hail Reports in the


49/125

Location of Large Hail Reports in theUS, January 1June 30, 2011

There were 7,176Large Hail

reports throughJune 30, causing

extensive damageto homes,

businesses and

vehicles


Location of Wind Damage Reports in


50/125

Location of Wind Damage Reports inthe US, January 1June 30, 2011

There were 11,283Wind Damage

reports through,

extensive damageto homes and,

businesses


Severe Weather Reports,


51/125

Severe Weather Reports,January 1June 30, 2011

There havebeen 20,044

severe weather

reports throughJune 30including 1,585

tornadoes;7,176 Large

Hail re ortsand 11,283 highwind events

51Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

Number of Severe Weather Reports in US,


52/125

p ,by Type: January 1June 30, 2011

Tornadoes

1,585 , 8%

,

7,176 , 36%Wind

,11,283 , 56%

Tornadoes accountedfor just 8% of allSevere WeatherReports throughune ut morethan 500 deaths

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#


53/125

US CATASTROPHE INSURED LOSS UPDATE

First Half 2011 CAT Losses Already Exceed All of

2010 and Could Become One of the MostExpensive Years on Record

53

US Insured Catastrophe Losses


54/125

US Insured Catastrophe Losses

100.0$120

$100 Billion CAT Year isComing Eventually

($ Billions)

$61.9$80

$100 Record TornadoLosses Caused

H1 CAT Losses toSurge

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

0.1 $

26.5

2.9 $

27.5

2 $

27.1

0.6 3.6 17

.3

$2

2.9

16.9

$40

60

$8.

$7.

$2.6 $

1$8.

$4.6

$5. $

$9.

$6.

$1 $

$7.

$2.7

$4.7

$5.

$089 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??

First Half 2011 US CAT Losses Already Exceed Losses from All of2010. Even Modest Hurricane Losses Will Make 2011 Among the

Most Expensive Ever for CATs

54

*First half 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personalproperty claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.

Sources: Property Claims Service/ISO; Insurance Information Institute.

Natural Disaster Losses in the


55/125

Natural Disaster Losses in theUnited States: First 6 Months 2011

As of July 6, 2011

Number of

Events Fatalities

Estimated Overall

Losses (US $m)

Estimated Insured

Losses (US $m)

Severe

Thunderstorm43 593 23,573 16,350

Winter Storm 8 15 1,900 1,425

Flood 8 15 2,100 in progress

Earthquake 2 1 105 in progress

Tropical Cyclone 0 0 0 0

55Source: MR NatCatSERVICE

Top 12 (13?) Most Costly Disasters


56/125

p ( ) yin U.S. History

(Insured Losses, 2010 Dollars, $ Billions)

$45.8

$40

$45

$50Taken as a single event, the

Spring 2011 tornado seasonwould likel become 5th costliest

$17.5

$22.6 $23.1

20$25

$30

$35 event in US insurance history

$11.5 $12.8$14.0

$8.6$8.2$6.7$6.3$5.3$4.3$5

$10

$15

Jeanne(2004)

Frances(2004)

Rita(2005)

Hugo(1989)

Ivan(2004)

Charley(2004)

Wilma(2005)

Ike(2008)

SpringTornadoes*

(2011)

Northridge(1994)

Andrew(1992)

9/11 Attack(2001)

Katrina(2005)

56

*Losses will actually be broken down into several events as determined by PCS.

Sources: PCS; Insurance Information Institute inflation adjustments.

Combined Ratio Points Associated with


57/125

Catastrophe Losses: 1960 2011:H1*

10

Avg. CAT LossComponent of theCombined Ratio

Combined Ratio Points

8.

.9

8.1

78

9

1960s: 1.041970s: 0.851980s: 1.31

3.0

.33

.3

2.8

3.6

2.9

5.

3

.3

3

.3

2.7

5.0

.6 3

.3

5.0

3.6

4

5

6 1990s: 3.392000s: 3.522010s: 4.15*

0.4

1.2

0.4 0

.8 1.3

0.30

.40.7

1.5

1.0

0.40

.40.7

1.8

1.1

0.6

1.4

2.

1.3

2.

0.50

.50.7 1

.22

. 2

1.0

1.6

1.6

1.6

0.9

0.1

1.1

1.1

0.8

0

1

2

196

196

196

196

196

197

197

197

197

197

198

198

198

198

198

199

199

199

199

199

200

200

200

200

200

2010

The Catastrophe Loss Component of Private Insurer Losses Has

57

*Insurance Information Institute estimates for 2010 and 2011:H1

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted forlosses ultimately paid by foreign insurers and reinsurers.

Source: ISO; Insurance Information Institute.

Natural Disasters in the United States,1980 2011*


58/125

1980 2011*Number of Events Annual Totals 1980 2010 and First Half 2011

300

200

250

disaster events in the first

half of 2011

Number

150

50

10037

8

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

51

2

eop ys ca

(earthquake, tsunami,volcanic activity)

(temperature extremes,drought, wildfire)

Hydrological(flood, mass movement)

*Through June 30.Source: MR NatCatSERVICE 58

U.S. Thunderstorm Loss Trends,


59/125

U S u de sto oss e ds,1980 2011*

Thunderstorm losses in the first halfof 2011 totaled $16.4 billion, a new

annual record through just 6 months

Hurricanes get all the headlines,but thunderstorms are consistent

Average thunderstorm

.2008-2011 are the most expensive

years on record.

than 8 fold since the

early 1980s

59

*Through June 30, 2011.Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends,


60/125

,1980 2010 (Annual Totals) vs. First Half 2011

Insured winter storm lossesin 2011 totaled $1.4 billion

.

Source: Property Claims Service, MR NatCatSERVICE 60

U.S. Acreage Burned by Wildfires,


61/125

g y1980 2010 (Annual Totals) vs. First Half 2011

2011 could be a severe year

burned through June 30

already exceed all of 2010.

Source: National Forest Service, MR NatCatSERVICE 61


62/125

Notable Wildfires in 2011

April JuneApril June

Texas: Over 3 million

acres burned in westTexas from 12 major

Texas: Over 3 million

acres burned in westTexas from 12 majorseats of fire. Over 200homes and businesses

destroyed, $50 million

seats of fire. Over 200homes and businesses

destroyed, $50 millioninsured loss.

Arizona and New Mexico:

insured loss.

Arizona and New Mexico:Wallow fire largest in AZhistory at 538,000 acres,Las Conchas fire near Los

Wallow fire largest in AZhistory at 538,000 acres,Las Conchas fire near Los

Alamos, 30 buildingsdestroyed.Alamos, 30 buildingsdestroyed.Source: NASA

62Source: Munich Re.

Inflation Adjusted U.S. Catastrophe


63/125

Losses by Cause of Loss, 19902011:H11

2.4%

Fires (4), $9.0

Geological Events, $18.5

Wind/Hail/Flood (3), $12.7Other (5), $0.6

0.2%3.4%4.9%

6.6%

Terrorism, $24.9

8.0%42.7%

Hurricanes & Tropical Storms,$160.5

Winter Storms, $30.0

Tornado share of

31.8%

Wind losses are byfar cause the mostcatastrophe losses,

osses srising

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.

orna oes , . even urr canesare excluded.

63

. xc u es snow.

3. Does not include NFIP flood losses4. Includes wildland fires

5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.

Source: ISOs Property Claim Services Unit.

Number of Federal Disaster


64/125

Declarations, 1953-2011*

5 81

80

90 The number of federaldisaster declarations is ontrack to set a new record in

There have been 1,998federal disaster

declarations since

65

0 9

56

69

52

63

5960

702011, with 48 declarations

through July 1.

.number of declarations

per year is 34 from1953-2010, though that

few havent been

5 5 29

446

46

38

30

5

42

4

34

2728 3

1

38

45

32

36

32

44 4

545 4 4 4

43

30

40

50 .

13

171

816

16

7 7

12

12

22

20

11

11

19

17

17

22 2

15

22 1 2

11

10

20

05354555657585960616263646566676869707172737475767778798081828384858687888990919293949596979899000102030405060708091011*

The Number of Federal Disaster Declarations Is Risin

*Through July 1, 2011.

Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ;Insurance Information Institute.

Federal Disasters Declarations by State,


65/125

y ,1953 June 30, 2011: Highest 25 States

Over the pastnearly half

85

78

80

90

,has led the US in

Federal DisasterDeclarations

7

63

63

56

5

5

5

4

52 52 51 0 9

60

70

cla

ration

4 4 4 45

45

44

44

44

42

42

39

39

30

40

sasterDe

10

20Di

65

0 TX CA OK FL NY LA AL KY AR MO IL MS TN MN IA WV KS NE OH PA WA ND VA IN NC

Source: FEMA.

Federal Disasters Declarations by State,


66/125

y1953 June 30, 2011: Lowest 25 States

39

38

640

3 3 3

30

29

2

7

25

25

25

25 4

30

cla

ration

223

23

20

20

17

16

15

15

3

20

sasterDe

9 8 8 810

Di

66

0 SD M E GA AK WI VT NJ OR HI MA M I NH AZ ID NM MD MT NV CO C T SC DE DC RI UT WY

Source: FEMA.


67/125

The BIG Question:When Will the Market Turn?

Insurance Cycle Dynamics

67

Criteria Necessary for a Market Turn:C


68/125

All Four Criteria Must Be Met

Criteria Status Comments

Sustained Apart from Q2:2011, overall p/c underwriting losses remain

Period ofLarge

UnderwritingLosses

Not Yet

mo esCombined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at

onset of last hard market)Prior-year reserve releases continue reduce u/w losses,

oos s

Material

Decline in

Surplus hit a record $565B as of 3/31/11Analysts est. excess surplus of $75-$100B

Some excess capacity may still remain in reinsurance

Capacity

At/Near

Record High

mar e sWeak growth in demand for insurance is insufficient toabsorb much excess capacity

Tighte nsurance

MarketSomewhat in

PlaceHigher prices in Asia/PacificModestly improved pricing for US risks

Renewed Commercial lines pricing trends remain negative

68

& PricingDiscipline Not BroadlyEvident

market shareTerms & conditionsno broad tightening

Sources: Barclays Capital; Insurance Information Institute.

Do the Property Catastrophe Events of20 I C l M k ?


69/125

2011 Impact Casualty Markets?

Unlikely that Record 2011 Property CAT Loss Will Impact CasualtyMarkets in Any Material Way

Events so far in 2011 are earnings events, rather than capital events

Natural Catastrophe and Casualty Risks Are Largely Uncorrelated

Risks are different

Geographically, mostly distinct primary carriers: Japan-Australia-NZ-US

Casualty markets generally dont influence property markets

Property and Casualty Risks Are Largely Siloed

. Casualty Markets Have Their Own Issues

Tort environment

69

Inflation

Public policy


70/125

.

Have Underwriting LossesBeen Large Enough for Long

70

P/C Insurance IndustryC bi d R ti 2001 2011 H1*


71/125

Combined Ratio, 20012011:H1*

As Recently as 2001,Insurers Paid Out

RelativelyLow CAT

Heavy Use ofReinsurance

RelativelyLow CAT

HigherCAT

Losses,Shrinking

.$1 in EarnedPremiums

osses,ReserveReleases

Losses

osses,ReserveReleases

ReserveReleases,

Toll of SoftMarket

115.8

120

BestCombined

Ratio Since

CyclicalDeterioration

vg.Losses,

MoreReserve

Releases

100.8

107.5

101.0100.8100.1

107.5110.

95.7

.

92.6

98.4100

71

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.1

Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-M&FG was 102.2).

90

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Underwriting Gain (Loss)1975 2011*


72/125

19752011*

$35 Cumulativeunderwriting deficit

($ Billions) Underwritinglosses in2011 will be

much larger:

$5$15

$25 rom roug2009 is $445B

.based on

annualizedQ1 data

-$15

-$5

-$45

-$35

-

The industry recordeda $10.4B underwritingloss in 2010 compared

Large Underwriting Losses Are NOTSustainable

-$55

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 1011*

.

* Includes mortgage and financial guaranty insurers in all years. 2011 figure is annualized based on actual Q1underwriting losses of $4.463 billion.

Sources: A.M. Best, ISO; Insurance Information Institute.

in Current Investment Environment

Number of Years with UnderwritingP fit b D d 1920 2010


73/125

Profits by Decade, 1920s2010s

12Number of Years with Underwriting Profits

8

7

6

8

10

3

5

44

6

0 0 00

2

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**

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

73

* 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s

total to 4 years with an underwriting profit.**Data for the 2010s includes 2010 and 2011.

Note: Data for 19201934 based on stock companies only.

Sources: Insurance Information Institute research from A.M. Best Data.

P/C Reserve Development, 19922011E


74/125

P/C Reserve Development, 1992 2011E

23.2$25

$30

B)

8 Impa

Prior Yr. ReserveDevelopment ($B)

Prior year reservereleases totaled $8.8

billion in the first

11.7

13.7

9.97.3$10

$15

$20

Rele

ase(

2

4

ton

Comb

Impact onCombined Ratio

,$7.1 billion in thefirst half of 2009

2.3

-2.1 -2.6-

-4.1

1

-5-$5

$0

$5

Yr.

Reserv

-2

0

inedRa

tio(

-8.3.

-9.9 -9.8- .

-9.5

-14.6-16 -15-$20

-$15

-

2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 E E

Prior

-6

-4

Points)

9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 010

11

Reserve Releases Are Remained Strong in2010 But Should Begin to Taper Off in 2011

74

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including thistransaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludesdevelopment from financial guaranty and mortgage insurance.

Sources: Barclays Capital; A.M. Best.


75/125

.

Have Large Global Losses Reduced

apac y n e n us ry, e ngthe Stage for a Market Turn?

75

US Policyholder Surplus:1975 2011*


76/125

19752011*

$600

($ Billions)

Surplus as of 3/31/11 was a record $564.7B, up

$450

$500

$550. .

peak was $521.8 as of 9/30/07. Surplus as of 3/31/11was 8.2% above 2007 peak; Crisis trough was as of

3/31/0916.2% below 2007 peak.

$250

$300

$350

Surplus is a measure of

$100

$150

$200 underwriting capacity. It isanalogous to Owners

Equity or Net Worth innon-insurance

$0

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11*

- -

* As of 3/31/11.

Source: A.M. Best, ISO, Insurance Information Institute.

.

3/31/11, A Near Record Low (at Least in Recent History)**

Policyholder Surplus,2006 Q4 2011 Q1


77/125

2006:Q42011:Q1

($ Billions)

$580

2007:Q3Previous Surplus Peak Surplus set a newrecord in 2011:Q1*

$512.8$521.8

$511.5

$540.7

$530.5

$544.8

$556.9.

$515.6$517.9$520

$540

$560

$487.1$496.6

$478.5

$455.6 $463.0

$490.8

.

$480

$500

The Industry now has $1 ofsurplus for every $0.77 of

$437.1

$420

$440

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1

t e strongest c a ms-paying status in its history.

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%)

- -

10:Q1: +$18.9B (+3.6%)

10:Q2: + 8.7B +1.7%

*Includes $22.5B of paid-incapital from a holdingcompany parent for one

77Sources: ISO, A.M .Best.

09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)

11:Q4: +$42.9B (+8.2%)

insurers investment in a

non-insurance business inearly 2010.

Implied Excess (Deficit) CapitalAss ming Premi m/S rpl s Ratio 0 9 1


78/125

Assuming Premium/Surplus Ratio = 0.9:1

Excess/(Deficit) Capital (Policyholder Surplus)

$81.921.6%100 25%

Annual Change inPolicyholder Surplus2000-2002: Techbubble bursts,

2006/07: Low CAT losses,strong underwritingresults since 1940s

2009-10: End of

financial crisis,rising asset

prices. modestu/w losses

$22.9

$41.714.4%13.4%5015%

20%9/11, high

underwritinglosses erode

capital base

ncrease cap a pus cap a orecord levels

($10.6) ($10.8)($32.7)

($49.2)

8.9%12.3%

6.2%

-5.1%

8.2%

-50

0

0%

5%

2008: Financial($65.4)

($124.6)

($103.0)

($76.5)

-12.0%-8.8%

-1.5%

-150

-100

-15%

-10%

-5%

2005: Katrina, Rita, Wilmaproduce record CAT losses

crisis causessharp drop in

capital

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Capital Excess (Deficit) Annual Change in Capital

Record Policyholder Surplus (Capital) Has Resulted Significant Excess Capital in the. ,

CAT Activity, More Modest Market Returns Will Likely Shrink Excess Capital in 2011.Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has

$74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written

M&A Activity Globally Among P/C InsurersR i S bd d Littl C it L i


79/125

Remains Subdued: Little Capacity Leaving

.1 .2. 4 .9.5

Property-Casualty Life-Annuity Health/Managed Care Distribution Services

4

$4 $

1$2

$1

0

$1

$24

$5.

$0.

$9.

$152009

$5.5

$2.3

$9.8

$7.6

$30.

2008

$51.8

$13.8

$15.3

$6.9

$50.6

2007

79

$0 $35 $70 $105 $140

Sources: Conning Research; Insurance Information Institute.

$ Billions

Paid-in Capital, 20052010


80/125

p ,

($ Billions)

$30Paid-in capital for insurance

$27.4

$22.5

$20

$25operations rose by 27.4B

in 2010, the largest on

record dating back to 1959

$10

$15

$14.4

$3.8 $3.2

$12.3

$4.9$6.6$5

2005 2006 2007 2008 2009 2010:Q3

In 2010 One Insurers Paid-in Capital Rose by $22.5B

80Source: ISO; Insurance Information Institute.

as Part of an Investment in a Non-insurance Business

Ratio of Insured Loss to Surplus forLargest Capital Events Since 1989*


81/125

Largest Capital Events Since 1989*

The Financial Crisis at itsPeak Ranks as the Largest

Ca ital Event Over

(Percent)

13.8%

16.2%

15%

the Past 20+ Years

9.6%

6.9%

10.9%

9%

12%

3.3%

.

3%

6%

0%

6/30/1989

Hurricane

6/30/1992

Hurricane

12/31/93

Northridge

6/30/01 Sept.

11 Attacks

6/30/04

Florida

6/30/05

Hurricane

Financial

Crisis as of

**

81

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event

** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%

Source: PCS; Insurance Information Institute

Historically, Hard Markets FollowWhen Surplus Growth is Negative*


82/125

When Surplus Growth is Negative*

30%

(Percent) Surplus growth still exceedspremium growth, suggesting anongoing build-up of capacity in

15%

20%

25%ear y

5%

10%

-10%

-5%

- 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

NWP % change Surplus % change

82

* 2011 NWP and Surplus figures are % changes as of Q1:11 vs. Q1:10.

Sources: A.M. Best, ISO, Insurance Information Institute

Not Sufficient Condition for a True Hard Market

Ratio of Net Premiums Writtento Policyholder Surplus 1970-2011*


83/125

to Policyholder Surplus, 1970 2011

2.7

.52.52

.5

3.0 The premium-to-surplus ratio (a measureof leverage) hit a record low at just 0.76:1in 2010. It has decreased as PHS grows

Record High P-SRatio was 2.7:1

in 1974

2.1

1.9

2.3

1.8

.7 .71.9

1.9

1.9

1.9

.7

2

.0 2.1

2.0

2.5 more quickly than NPW, with the effect ofholding down profitability.

1 1 11.

1.

1.4

1.4

1.3

1.3

1.1

1.1

.9 7

1.1

3

0.94

8684

1.2

9

1.1

7

1

.07

0.9

9

84.91 0.95

2

1.6

1.8

1.5

0.700

.0.

0.70

.

0.5

.

Record Low P-S Ratio was0.76:1 as of 12/31/10, rising

0.0

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98 0

02

04

06

08

10

The Premium-to-Surplus Ratio in 2011:Q1 Implies that P/C Insurers Held

.

83

. . ,

of Surplus Backed $2.70 in Premium.*2011 data are as of 3/31/11.

Sources: Insurance Information Institute calculations from A.M. Best data.


84/125

3. REINSURANCE MARKETCONDITIONS

as ecor o aCatastrophes Activity

Erased Enough CapacityT rn M rk ?

84

Significant Market Losses, 1985-2011*


85/125

90

$100

$70

$80Reinsurers share of major

market losses wasexceptionally high in 2010

and earl 2011

REINSURANCEPRICING TRENDS

Property/CATreinsurance rices

$40

$50

$60

Billions

are up substantially inAsia/Pacific markets

US pricing is up 10-

15%, but ex-Florida

$10

$20

$30

$0

1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1998 1999 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011

Source: Holborn; RAA.

* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.

Significant Market Losses by Event,1985-2011*


86/125

1985 2011

Reinsurers areLosses are putting pressure on propertycat reinsurance prices in affected

regions. The impact for US property

share of recentcatastrophe losses

.

Source: Holborn, RAA. *2011 events as of March 31 are preliminary and may change as loss estimates are refined further.


87/125

Outlook for the 2011 AtlanticHurricane Season

Activity Produces Costly

an a s, e nsuranceMarkets Could Harden

87

Significantly

Outlook for 2011 Hurricane Season:75% More Active Than Average


88/125

75% MoreActive Than Average

Average* 2005Katrina Year

2011F

Named Storms 9.6 28 16

Named Storm Days 49.1 115.5 80

Hurricanes 5.9 14 9

Hurricane Days 24.5 47.5 35Intense Hurricanes 2.3 7 5

Intense Hurricane Days 5.0 7 10

Accumulated Cyclone Energy 96.1 NA 160

Net Tro ical C clone Activit 100% 275% 175%

*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.

Probability of Major Hurricane Landfall(CAT 3 4 5) in 2011


89/125

(CAT 3, 4, 5) in 2011

*

Entire US Coast 52% 72%

US East Coast Including

Florida Peninsula

31% 48%

Gulf Coast from FLPanhandle to Brownsville, TX

30% 47%

ALSOAbove Average Major Hurricane

Landfall Risk in Caribbean for 2011 (61% vs. 42%)

*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.


90/125

US Property Residual Markets

Most States Fail to Address

Catastrophic Coastal Loss

90

U.S. Residual Market Exposure to Loss($ Billions)


91/125

($ Billions)

$757.9$771.9$800

$900($ Billions)Katrina,Rita and

$656.7$696.4

.

$600

$7004 Florida

Hurricanes

ma

$281.8

$430.5

$372.3

$292.0

$419.5

$300

$400

$500

HurricaneAndrew

$54.7

$150.0

.$221.3

$100

$200

$0

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

In the 21-year period between 1990 and 2010, total exposure to loss in the

91Source: PIPSO; Insurance Information Institute (I.I.I.); http://www.iii.org/pr/last-resort-2010.

.

billion in 1990 to $757.9 billion in 2010.

U.S. Residual Market: Total Policies In-Force(1990-2010) (000)


92/125

(1990 2010) (000)

2,841.42,780.6

2,840.43,000(000)

4 Florida

Katrina, Ritaand Wilma

2,479.4

, .

2,209.32,203.9

2,000

2,500Hurricanes

, .

1,458.1

1,196.5

1,741.7

1,319.7

1,642.3

1,500

HurricaneAndrew

931.6

500

1,000

01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-

Source: PIPSO; Insurance Information Institute; http://www.iii.org/pr/last-resort-2010.

,

in-force in the residual market (FAIR & Beach/Windstorm) Plans has morethan tripled.

92

Texas Windstorm Insurance Association (TWIA):Exposure to Loss (Building & Contents Only) ($ Billions)


93/125

posu e to oss ( u d g & Co te ts O y) ($ o s)

$80

TWIAs exposure to loss for building &contents has surged by more than 400

$67.8$67.4$64.4

$58.6$58.6$60

$70

.billion in 2000 to $67.8 billion in 2011.

$38.3$40

$50

$23.3$20.8$18.8

$16.0$13.2$12.1

$10

$20

$02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 May

31-

Source: TWIA at 05/31/11, Texas Department of Insurance, Southwestern Insurance Information Services (SIIS)

Texas Windstorm Insurance Association (TWIA)Total Exposure to Loss (Millions of Dollars)


94/125

p ( )

By May 31, 2011, TWIAs total exposure

$67,765.8$70,000

$80,000 had surged to $74.4 billion.

$40,000

$50,000

,

$20,000

$30,000

$6,613.3

$0

$10,000

Buildin & Contents ALE/Business Income

Source: TWIA at 05/31/11, Texas Department of Insurance

Texas Windstorm Insurance Association (TWIA)New Financial Structure


95/125

ew nanc ngstructure made availableup to $2.5 billion to fund

losses via three post-event bondin la ers.The new structure

eliminated the unlimitedassessment on TWIAmember insurers and

oes not ca or topurchase reinsurance.

Source: Southwestern Insurance Information Institute (SIIS)


96/125

DISCIPLINE

Is There Evidence of a Broadand Sustained Shift in Pricing?

96

Soft Market Persisted in 2010 butGrowth Returned: More in 2011?


97/125

Growth Returned: More in 2011?

(Percent)1975-78 1984-87 2000-03

20%

Net Written Premiums Fell0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008,and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

15% 2011:Q1growth was+3.5%; First

Q1 growth

5%

-

0%

NWP was up0.9% in 2010

97

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

1

1*

*2011 figure is an estimate based on Q1 data.Shaded areas denote hard market periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

P/C Net Premiums Written: % Change,Quarter vs. Year-Prior Quarter


98/125

Quarter vs. Year Prior Quarter

.1%

16

.8%

16

.7%

%

20%The long-awaited uptick. In2011:Q1 occurring in

personal linespredominating cos. (+3.8%)

10

.2%

1

12

.5

10

.1%

9.7%

7.8

%

.2%

% %

10

.3%

10

.2% 1

3.4

.6%10%

15%and commercial lines

predominating cos. (+3.5%)

5.

2.9

% 5. 6

2.1

%

0.0

%

0.5

%1

.3%

2.3

%

1.3

% 3.5

%

0%

5%

-4.6

%

-4.1

%

5.8

%-1

.6%

-1.6

%

-1.9

%

-1.8

%

-0.7

%

-4.4

%

-3.7

%

-5.3

%

-5.2

%-1

.4%

-1.3

%

-

-5%

2002:Q

1

2002:Q

2

2002:Q

3

2002:Q

4

2003:Q

1

2003:Q

2

2003:Q

3

2003:Q

4

2004:Q

1

2004:Q

2

2004:Q

3

2004:Q

4

2005:Q

1

2005:Q

2

2005:Q

3

2005:Q

4

2006:Q

1

2006:Q

2

2006:Q

3

2006:Q

4

2007:Q

1

2007:Q

2

2007:Q

3

2007:Q

4

2008:Q

1

2008:Q

2

2008:Q

3

2008:Q

4

2009:Q

1

2009:Q

2

2009:Q

3

2009:Q

4

2010:Q

1

2010:Q

2

2010:Q

3

2010:Q

4

2011:Q

1

98Sources: ISO, Insurance Information Institute.

na y ac - o- ac quar ers o ne wr en prem um grow

(vs. the same quarter, prior year)

Average Commercial Rate Change,All Lines, (1Q:20041Q:2011)


99/125

All Lines, (1Q:2004 1Q:2011)

04

04

04

04

05

05

05

05

06

06

06

06

07

07

07

07

08

08

08

08

09

09

09

09

10

10

10

10

11

(Percent)

-0.1%

-2%

0% 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

Magnitude of PriceDeclines ShrankDurin Crisis

-3.2

%

4.6%

-2.7

%

-3.0

%

3% .1% .9

%

% % 3% .2% %

-2.9

%

-6%

-4%

Reflecting Shrinking

Capital, ReducedInvestment Gains,

DeterioratingUnderwritin

-5.9

-7.0

%

4%% -

8.2

%

-5.

%

-6.4

% -5 -

-5.8

-5.

-5.

-6.4

% -5 -5.

-10%

-8%Performance, Higher

Cat Losses andCostlier Reinsurance

-9.

-9. -9.

-11

.3%

-11

.8%

.3%

-12

.0%

5%

2.9

% -11

.0%

-14%

-12% Q1 2011 decreaseswere the smallest

since 2006, perhapssignaling a market

99

-13

-13

.-1

-16%

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

ec

Change in Commercial Rate Renewals,by Account Size: 1999:Q4 to 2011:Q1


100/125

by Account Size: 1999:Q4 to 2011:Q1Percentage Change (%)

Market has Been Soft for 7years and Remains Soft as

Peak = 2001:Q4+28.5%

But Is Softness

Moderating?

Pricin TurnedNegative in Early

2004 and HasBeen Negative

Ever SinceKRW Effect: No

Lasting Impact

Trough = 2007:Q3-13.6%

100Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Cumulative Qtrly. Commercial Rate Changes,by Account Size: 1999:Q4 to 2011:Q1


101/125

y

1999:Q4 = 100

Pricing today iswhere is was in

Q3:2000 (pre-9/11)

Downward pricingpressure is mostpronounced for

101Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Monthly Change* in Auto InsurancePrices 19912011*


102/125

Prices 19912011

10%Cyclical peaks in PPAuto tend to occur

a roximatel ever 10

8%years (early 1990s, early

2000s and likely the

early 2010s)

4%

6% may have

occurred in 2010

2% Hard marketstend to occur

durin

May 2011change

was 3.8%,down from

5.4% in

-2%

0% recessionaryperiods

Nov. 2010

102

*Percentage change from same month in prior year; through May 2011; seasonally adjusted

Note: Recessions indicated by gray shaded columns.

Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11


103/125

Other Cycle-InfluencingFactors

Could Other Factors Act asa Catalyst to Turn the

103


104/125

THE NEW REALITY

Investment Performance is a

Does It Influence

104

n erwr t ng or yc ca ty

Property/Casualty Insurance IndustryInvestment Gain: 19942011:Q11


105/125

$64.0$70

($ Billions)

$42.8$47.2

$52.3

$44.4 $45.3$48.9

$59.4$55.7

$52.9

$58.0

$51.9

$56.9

$50

$60

$35.4 $36.0$31.7

.

$30

$40

$13.5

$0

$10

2010 were the best

since 2007

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:Q1

Investment Gains Recovered Significantly in 2010 Due to RealizedInvestment Gains; The Financial Crisis Caused Investment Gains to

Fall by 50% in 2008

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.Sources: ISO; Insurance Information Institute.

Treasury Yield Curves:Pre-Crisis (July 2007) vs. June 2011*


106/125

( y )

4.96% 5.04% 4.96% 5.00% 5.00%5.19%

6%

. . . . .

4.23%

3.91%4%

5%

Treasury yield curve remains

2.29%

3.00%

3%

in at least 45 years.

Investment income is falling

as a result. Fed is unlikely to QE2 Target

0.18%0.41%

.

0.71%1%

June 2011 Yield Curve*

.

. ..

0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Pre-Crisis (July 2007)

106

Rates Up Substantially Given Ongoing Economic Weakness*Average of daily rates.

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset1% Decline in Investment Yield to MaintainConstant ROE, by Line*


107/125

Constant ROE, by Line

ines

uto ial to op s rety

nes

ce**

Perso

na

PvtP

ass

PersPr

o

Comm

er

Comm

l

Credit

Comm

P

Comm

C

Fidelity/

Warr

ant

Surpl

us

MedM

a

WC

Reins

ura

.8%

.8%

.0% .9%

1%-3%

-2%

-1%

0%

-1 -1 -2

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

.7%

-1 -2.

-3.1

-7%

-6%

-5%

-4%

- -7.3%-8%

Lower Investment Earnings Place a Greater Burden on

107

*Based on 2008 Invested Assets and Earned Premiums

**US domestic reinsurance only

Source: A.M. Best; Insurance Information Institute.


108/125

Shiftin Le al Liabilit &Tort Environment

Is the Tort Pendulumwinging Against Insurers?

108

Over the Last Three Decades, Total Tort Costsas a % of GDP Appear Somewhat Cyclical


109/125

$300 2.50%Tort S tem Costs Tort Costs as % of GDP

($ Billions)

$250

2.25%To

$150

$200

te

mC

osts

2.00%

rtCosts

as

$100TortSy

1.75%

%ofGDP

Tort Costs Have Remained Hi h but

$0

$50

1.50%

Relatively Stable Since the mid-2000s.As a Share of GDP they Should Fall as

the Economy Expands

109

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A

Business Leaders Ranking of LiabilitySystems in 2010


110/125

y

Best States Worst StatesNew in 2010

.

2. North Dakota

.

42. Florida

43. Montana

North Dakota

Massachusetts

South Dakota

ew y o or ous

New Mexico Montana.

4. Indiana

5. Iowa

44. Arkansas

45. IllinoisDrop-offs

Arkansas

Rising Above

6. Virginia

7. Utah

46. California

47. Alabama

Maine

Vermont

Kansas

Texas South Carolina

Hawaii

8. Colorado

9. Massachusetts

48. Mississippi

49. LouisianaMidwest/West has mix of

10. South Dakota 50. West Virginia

Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.

good and bad states.

The Nations Judicial Hellholes: 2010


111/125

West VirginiaIllinoisCook County

Watch List

Madison County, IL

Philadelphia

Atlantic County, NJ

St. Landry Parish,

LA District of Columbia

California

NYC and Albany,NY

St. Clair County, IL

Dishonorable

and HumboldtCounties

MI Supreme Court

City of St. Louis

CO Su reme Court

Nevada

Clark County

111Source: American Tort Reform Association; Insurance Information Institute

South Florida

Avg. Jury Awards 1999 vs. 2003 and 2008


112/125

$7,000

4,8

38

64

$4,8

85

$

5,4

46

$6,000

38 2,

887

$4,1

$3,4

99

$3,7

17

$3,7

22

$4,000

,1999 2003 2008

4 9

$2,3

99 0

11,0

46

49

$2,000

$3,000

$6

$201

$58$7

$208 $$

$327 $8

$0

$1,000

liability liability death* malpractice liability*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.

Sum of Top 10 Jury Awards 2004-2010


113/125

$6,000

$5,159

$5,000

$2,9543 000

$4,000

$1,344$1,511 $1,568

$2,000

$815$616$1,000

2004 2005 2006 2007 2008 2009 2010

Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009, and 2010.


114/125

Is it a Threat to Claim Cost

everities

114

Annual Inflation Rates, (CPI-U, %),19902014F


115/125

AnnualInflationRates (%)

Inflation peaked at 5.6% in August 2008on high energy and commodity crisis.The recession and the collapse of the

Higher energy,commodity and foodprices are pushing

5.14.9

5.0

6.0 commo ty u e re uce n at onarypressures in 2009/10

,but not longer turn

inflationary

expectations.

2.82.6

1.9

3.3 3.4

2.52.3

3.02.8

3.0

2.2 2.1 2.2

2.9

2.4

3.23.0

2.0

3.0

.

.1.3

0.0

1.0

-0.4-1.090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F

The slack in the U.S. economy suggests that inflation should not heat up

115Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/11 and 6/11 (forecasts).

before 2012, but other forces (commodity prices, inflation in countries from

which we import, etc.), plus U.S. debt burden, remain longer-run concerns

Medical Cost Inflation Has OutpacedOverall Inflation Over 50 Years


116/125

1589.81800

All Items

Medical Care

1500

100) A claim that cost $1,000 in 1961

would cost nearl 16 000 based on

719.8900

1200

lu

e(1961=

medical cost inflation trends over the

past 50 years.

600

IndexV

0 1 6 1 6 1 6 1 6 1 6 1

*

1

*Based on change from Feb. 2011 to Feb. 2010 (latest available)Source: Department of Labor (Bureau of Labor Statistics)


117/125

Regulatory Environment& Financial Services Reform

Insurers Not as Impacted as

, -Implementation Has Been a

117

Financial Services Reform:What does it mean for insurers?


118/125

Systemic Risk and Resolution AuthorityThe Dodd Frank Wall Street Reform and Consumer Protection Act

Creates the Financial Stability Oversight Council and the Office of Financial Research

Regulator representative is MO Insurance Commissioner Huff

No industry representative has been appointed yet

Imposes heightened federal regulation on large bank holding companies and

systemically risky nonbank financial companies, including insurers

Concern some insurers may be labeled as systemically risky based on size alone Federal Insurance Office (FIO)

Establishes the FIO (while maintaining state regulation of insurance) within the

Department of Treasury, headed by a Director appointed by the Secretary of Treasury

FIO will have authority to monitor the insurance industry, identify regulatory gaps thatcould contribute to systemic crisis

IL Insurance Director Michael McGraith will become first FIO Director on June 1

118

Creation of Federal Advisory Committee on Insurance to Advise FIO

CONCERN: FIO morphs into quasi/shadow or actual regulatorSource: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summaryby Dewey & LeBoeuf LLP

2010 Property and Casualty InsuranceReport Card


119/125

ME

ND

WA

AL

VTMT

AK

C-

D

A+

A

MA

CT

PA

NE

MN

MI

IA

IDOR

NJ

RI B

DE

NY

MD

SDWI

OH

WY

=A=B=C=

B+

B

B+C-

B-D-

B+

A+B

B

C+

-

C+

C

FD-

WV

VA

NC

OKAZ

SC

TN

AR

KYMOKS

CA

UT

CO

=F=NG B B+

D

B- C+

-

C-

B

-

C-C+

B+A

B-D+F

D+

Source:JamesMadisonInstitute,February2008.LA

TX

HIGAAL

FL

MSC- +F B+ C- C+B

C+

Source:HeartlandInstitute, May2011

F Fot r a e : str cto o um a


120/125

The Strength of the Economy

Growth OpportunitiesGrowth Would Also Hel Absorb

Excess Capital

120

US Real GDP Growth*


121/125

%

Real GDP Growth (%) The Q4:2008 decline wasthe steepest since theQ1:1982 drop of 6.8%

2.7

%

0.9

%3

.2%

2.3

%2

.9%

0.6% 1.

6%

5.

3.7

1.

7%

2.6

%3

.1%

1.9

%

2

.0% 3

.2%

3.2

%

2

.2%

2

.1%

2.3

%

2

.2%

4.1

1.1

%

1.8

%2

.5%3

.6

3.1

%

2%

4%

-0.7

%

-0.7

%

-4%

-2%

0%

Recession began in Dec.2007. Economic toll of credit

2011 got off to a sluggish

start, but growth is expected

-4.0

-6.8

% -4

.9%

-8%

-6%

Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

labor market contraction has

been severe but modestrecovery is underway

of the year. This is a major

positive for insurance demandand exposure growth.

200

200

1

200

200

200

200

200 0

7:1

07:

07:

07:

08:1

08:

08:

08:

09:1

09:

09:

09:

10:1

10:

10:

10:

11:1

11:

11:

11:

12:1

12:

12:

12:

Demand for Insurance Continues To Be Impacted by Sluggish Economic

121

* Estimates/Forecasts from Blue Chip Economic Indicators.

Source: US Department of Commerce, Blue Economic Indicators 7/11; Insurance Information Institute.

,

Gradually Benefit the Economy Broadly

2011 Financial OverviewState Economic Growth Varied in 2010


122/125

Hard hit Midwest andNortheast states finallyentering recovery in 2010

122

Texas had one of the stronger

economies in 2010 and hasgenerally outperformed during

the economic downturn

Unemployment Rates by State, May 2011:Highest 25 States*


123/125

In May, 24 states reported over-the-month unemployment rate

12.1

11.7

10.9

10.6

10.3

10.3

0.0

8 8 812)

decreases, 13 states and theDistrict of Columbia had

increases, and 13 had no change.

1 9.

9.

9.

9.

9.

9.

9.4

9.4

9.3

9.1

9.1

9.1

8.9

8.9

8.7

8.6

8.6

8.2

8

10

n

tRate(

6

mploym

2

Un

123

0NV CA RI FL MI MS SC DC GA KY NC TN AL ID NJ OR AZ CT WA IL MO CO OH WV IN

*Provisional figures for May 2011, seasonally adjusted.

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Unemployment Rates By State, May 2011:Lowest 25 States*


124/125

In May, 24 states reported over-the-month unemployment rate

8

.2

8.0

8.0

7.9 7.8

7.7

7.6

.4 .4 .4 .3 .38)

,of Columbia had increases, and 13

had no change.

6.

6.8

6.6

6.6

6.0

6.0

6.0

6.0

5.4

5.3

.8 .8

6

n

tRate(

4.1

3.24

employm The unemployment

rate in Texas was 8.0%in May, below the 9.0%

2Un

124

LA DE T X NY AR ME MA AK PA WI MT UT N M MD K S MN HI IA VA WY VT OK NH SD NE N D

*Provisional figures for May 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.


125/125

Insurance Information Institute Online:

. .

Thank you for your time

an your a en on Twitter: twitter.com/bob hartwi

2011 hart wig texas

Documents