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AEGIS 2014POLICYHOLDERS’ CONFERENCEAEGIS 2014POLICYHOLDERS’ CONFERENCE
U N C E R T A I N T I M E S : E C O N O M I C & I N S U R A N C E I N D U S T R Y O U T L O O K F O R 2 0 1 4 A N D B E Y O N D
Robert P. Hartwig, Ph.D., CPCUPresident & EconomistInsurance Information Institute
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Property Casualty Insurance Industry:Financial Update
2013 was a welcome respite from near-record catastrophe activity
2014: too soon to tell
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P/C Industry Net Income after Taxes
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 =
10.3% 2014 ROAS1 = 8.4%
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14:Q
1
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$1
4,1
78
$5
,84
0 $1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04
$3
6,8
19
$3
0,7
73
$2
1,8
65
$2
0,5
59
-$6,970
$3
,04
6
$3
0,0
29
$3
8,5
01
$4
4,1
55
$6
5,7
77
$6
2,4
96
$3
,04
3
$2
8,6
72
$3
5,2
04
$1
9,4
56 $3
3,5
22
$6
3,7
84
$1
3,6
54
Net income rose strongly (+81.9%)
in 2013 vs. 2012 on lower CATs, capital
gains
$ Millions
2014 is off to
a slower start
ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 8.2% ROAS through 2014:Q1, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO; Insurance Information Institute
1991 – 2014:Q1
AEGIS 2014POLICYHOLDERS’ CONFERENCE
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14-5%
0%
5%
10%
15%
20%
25%
Profitability Peaks & Troughs in the P/C Insurance Industry
1977: 19.0%
1987: 17.3%
1997: 11.6%
2006: 12.7%
1984: 1.8%
1992: 4.5%
2001: -1.2%
10 Years9 Years
History suggests next ROE peak will be in 2016-2017
1975: 2.4%
2013 10.4%
2014:Q1 8.2%
1975 – 2014:Q1*ROE
10 Years
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
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P/C profitability is both by cyclicality and ordinary
volatility
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
-5%
0%
5%
10%
15%
20%
ROE: Property / Casualty Insurance by Major Event
Hugo
Andrew
Northridge
Lowest CAT losses
in 15 years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial crisis*
Record tornado losses
Sandy
Low CATs
1987 – 2014:Q1Percent
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through Q1:2014.
Sources: ISO, Fortune; Insurance Information Institute.
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P/C Insurance Industry Combined Ratio
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 201490
100
110
120115.8
107.5
100.198.4
100.8
92.6
95.7
101.099.3
100.8
106.3
102.4
96.7 97.4
As recently as 2001, insurers paid out nearly
$1.16 for every $1 in earned premiums
Relatively low CAT losses,
reserve releases
Heavy use of reinsurance
lowered net losses
Relatively low CAT losses, reserve releases
Avg. CAT losses, more
reserve releases
Higher CAT losses, shrinking reserve
releases, toll of soft market
Cyclical deteriorati
on
Sandy impacts
Lower CAT
losses
Best combined
ratio since 1949 (87.6)
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014:Q1 = 97.3. Sources: A.M. Best, ISO.
2001 – 2014:Q1*
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A 100 Combined Ratio Isn’t What It Once Was
* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:Q1 combined ratio including M&FG insurers is 97.3; 2013 = 96.1;
2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
Investment impact on ROEsCombined Ratio / ROE
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:Q185
90
95
100
105
110
0%
5%
10%
15%
20%
97.5
100.6 100.1 100.8
92.795.7
101.299.5
101.0
106.5
102.4
96.7 97.4
14.3%15.9%
8.8% 9.6%
12.7%10.9%
4.3%
7.4% 7.9%
4.7%6.2% 9.8%
8.2%
Combined Ratio ROE*
Lower CATs helped ROEs in
2013
A combined ratio of about 100 generates
an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10, 10% in
2005 and 16% in 1979
Combined ratios must be lower in today’s depressedinvestment environment to generate risk appropriate ROEs
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1975-78 1984-87 2000-03
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
-5%
0%
5%
10%
15%
20%
25%
Net Premium Growth: Annual Change1971 — 2014:Q1Percent
Net written premiums fell 0.7% in 2007 (first decline since 1943) by 2.0% in 2008, and
4.2% in 2009, the first 3-year decline since 1930-33.
2014:Q1:3.6%2013: 4.6%2012: +4.3%
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
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Average Commercial Rate Change, All Lines,1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13
2Q
13
3Q
13
4Q
13
1Q
14
-16%
-11%
-6%
-1%
4%
9%
-0.1
%
-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%
-6.4
%
-5.1
%
-4.9
%
-5.8
%
-5.6
%
-5.3
%
-6.4
%
-5.2
%
-5.4
% -2.9
%-0
.1%
0.9
% 2.7
% 4.4
%
4.3
%
3.9
%
5.0
%
5.2
%
4.3
%
3.4
%
2.1
%
1.5
%
KRW effect
Pricing as of Q1:2014 was positive for the 11th consecutive quarter
Q2 2011 marked the last
of 30th consecutive quarter of price
declines
1Q:2004 – 1Q:2014Percent
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Insurance Information Institute
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Change in Commercial Rate Renewals, by Line
Com-mercial Property
Business Interrup-
tion
Surety General Liability
Umbrella Construc-tion
Com-mercial
Auto
Workers Comp
EPL D&O0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0.0%
0.7% 0.9%1.5% 1.7%
2.0%
3.3%
4.1%
4.9%5.2%
D&O increases are large than any other line, followed by EPL and Workers Comp
2014:Q1Percentage Change (%)
Major commercial lines renewed generally upward in Q4:2014 for the 11th consecutive quarter; D&O, employment practices and workers comp leading the way; lower cat
losses and falling reinsurance prices have pressured property coverages lower; low interest rates still exert upward
rate pressureNote: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
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Change in Commercial Rate Renewals, by Account Size
KRW : no lasting impact
Pricing turned negative in early
2004 and remained that
way for 7 ½ years
Peak = 2001:Q4 +28.5%
Pricing turned positive in Q3:2011, the first increase in nearly 8 years; Q1:2014
renewals were up 1.5%; some insurers posted
stronger numbers.
Trough = 2007:Q3 -13.6%
1999:Q4 – 2014:Q1Percentage Change (%)
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
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Cumulative Quarterly Commercial Rate Changes, by Account Size1999:Q4 – 2014:Q1
1999:Q4 = 100
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Despite 11 consecutive quarters
of gains (Q1:2014 = +1.5%), pricing today is where is was in
mid-2001 (around 9/11), suggesting additional rate need going forward, esp. in light of record low interest
rates
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Policyholder Surplus
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
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
14
:Q1$400
$450
$500
$550
$600
$650
$700
$4
87
.1
$4
96
.6
$5
12
.8
$5
21
.8
$5
17
.9
$5
15
.6
$5
05
.0
$4
78
.5
$4
55
.6
$4
37
.1
$4
63
.0
$4
90
.8
$5
11
.5
$5
40
.7
$5
30
.5
$5
44
.8
$5
59
.2
$5
66
.5
$5
59
.1
$5
38
.6
$5
50
.3
$5
70
.7
$5
67
.8
$5
83
.5
$5
86
.9
$6
07
.7
$6
14
.0
$6
24
.4
$6
53
.3
$6
62
.02007:Q3Pre-crisis peak
Surplus as of 3/31/14 stood at a record high
$662.0B
2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business
The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history
Drop due to near-record 2011 CAT
losses
The P/C insurance industry entered 2014
in very strong financial conditionSources: ISO, A.M .Best.
2006:Q4 – 2014:Q1$ Billions
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US Insurance Mergers and Acquisitions, P/C Sector
(1) Includes transactions where a U.S. company was the acquirer and/or the target.Source: Conning proprietary database.
2002 – 2013 (1)$ Millions
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
0102030405060708090
$486
$20,353
$425
$9,264
$35,221
$13,615$16,294
3507.0$6,419
$12,458
$4,651 $4,397
Transaction value
M&A activity in the P/C sector remains below pre-
crisis levels
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U.S. Insured Catastrophe Loss Update
2013 was a welcome respite from the high catastrophe losses in recent years
…but 2014 was the 5th costliest winter on record
in the US
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U.S. Insured Catastrophe Losses
89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14*
$0$10$20$30$40$50$60$70$80
$1
4.2
$4
.9
$8
.1
$3
8.3
$8
.9
$2
6.8
$1
2.8
$1
1.1
$3
.8
$1
4.5
$1
1.7
$6
.2
$3
5.2
$7
.7 $1
6.5
$3
4.2
$7
4.5
$1
0.7
$7
.6
$2
9.6
$1
1.6
$1
4.6
$3
4.1
$3
5.5
$1
2.9
$9
.5
$9.1 billion in insured CAT losses through
June 30
$ Billions, $ 2013
*Through 6/30/14.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
2013 was a welcome respite from 2012, the 3rd costliest year
for insured disaster losses in US history. Longer-term trend is for more—not fewer—costly events
2012 was the 3rd most expensive year ever for insured CAT
losses
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Combined Ratio Points Associated with Catastrophe Losses
19
60
19
61
19
62
19
63
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
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
20
10
20
11
20
12
20
13
E
0
2
4
6
8
10
0.8 1.1
1.1
0.1
0.9
3.6
0.4
1.2
0.4 0
.8 1.3
0.3 0.4 0.7
1.5
10
.40
.4 0.7
1.8
1.1
0.61
.4 21
.3 20
.50
.5 0.7
3
1.2
2.1
8.8
2.3
5.9
3.3
2.8
13
.62
.91
.65
.41
.63
.33
.38
.12
.71
.65
2.6
3.4
8.7 8.9
3.4
The catastrophe loss component of private insurer losses has increased sharply in recent decades
Catastrophe losses as a share of all losses
reached a record high in 2012
*2010s represent 2010-2013.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.
1960 – 2013*Combined Ratio Points
Avg. CAT loss component of
the combined ratio by decade
1960s: 1.04 1990s: 3.39
1970s: 0.85 2000s: 3.52
1980s: 1.31 2010s: 6.1E*
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Top 16 Most Costly Disasters in US History, Insured Losses
Irene (2011)
Jeanne (2004)
Frances (2004)
Rita (2005)
Tornadoes / T-Storms (2011)
Tornadoes / T-Storms (2011)
Hugo (1989)
Ivan (2004)
Charley (2004)
Wilma (2005)
Ike (2008)
Sandy* (2012)
Northridge (1994)
9/11 Attack (2001)
Andrew (1992)
Katrina (2005)
$0
$10
$20
$30
$40
$50
$60$
4.5
$5
.6
$5
.7
$6
.8
$7
.2
$7
.6
$7
.9
$8
.8
$9
.3
$1
1.2
$1
3.6 $1
9.0
$2
4.2
$2
4.9
$2
5.9
$4
9.4
Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.
Hurricane Irene became the 12th most expensive hurricane in US history in
2011
2013 Dollars$ Billions
12 of the 16 most expensive events in US history have occurred over the
past decade
Hurricane Sandy became the 5th costliest event in US insurance
history
Includes Tuscaloosa, AL, tornado
Includes Joplin, MO,
tornado
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Top 10 States for Insured Catastrophe Losses
Ok-la-
homa
Texas Illinois Min-ne-sota
Colorado Mis-sis-
sippi
Ne-braska
Georgia Indiana Loui-siana
$0
$400
$800
$1,200
$1,600
$2,000 $1,995
$1,509
$1,190
$909 $907 $805 $773 $762
$677 $593
Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.
2013$ Millions
Oklahoma led the country in insured CAT losses in 2013
due largely to severe tornado activity
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Top 5 States by Insured Catastrophe Losses in 2012*
New York New Jersey Texas Kentucky Colorado$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$9,756
$6,369
$2,318 $1,511 $1,440
*Includes catastrophe losses of at least $25 million.Sources: PCS unit of ISO; Insurance Information Institute.
2012$ Billions
NY and NJ let the US in CAT losses
in 2012 due Sandy
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss
41.1%
36.0%
6.4%
6.4%
4.8%
3.8%1.4% 0.1%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 dollars.
2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and
non-property losses such as those covered by workers compensation.
Source: ISO’s Property Claim Services Unit.
Hurricanes & Tropical Storms, $159.1
Fires (4), $5.5
Events Involving Tornadoes (2), $139.3
Winter Storms, $24.7
Terrorism, $24.8
Geological Events, $18.4
Wind/Hail/Flood (3), $14.6
Other (5), $0.2
Wind losses are by far cause the most
catastrophe losses, even if hurricanes / TS
are excluded
Tornado share of CAT losses is rising
Insured cat losses from 1993-2012 totaled
$386.7B, an average of $19.3B per year or $1.6B per month
1994 – 20131
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Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)Hydrological (flood, mass movement)
Natural Disasters in the United States
22
19
81
6
50
100
150
200
250
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 128 natural disaster events in 2013
1980 – 2013Number of Events (Annual Totals 1980 – 2013)
Source: MR NatCatSERVICE
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Losses Due to Natural Disasters in the US
50
100
150
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
2013 CAT losses
Overall : $21.8B
Insured: $12.8B
Indicates a great deal of losses are
uninsured (~40%-50% in the US) = growth
opportunity
2013 losses were far below 2011 and 2012
and were 44% lower than the
average from 2000-2012
1980 – 2013 (Overall and Insured Losses)2013 Dollars, $ Billions
Source: MR NatCatSERVICE
Overall losses (in 2012 values)
Insured losses (in 2013 values)
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As of December 31, 2013
Number of Events Fatalities
Estimated Overall
Losses (US $m)Estimated Insured
Losses (US $m)
Severe Thunderstorm 69 110 16,341 10,274
Winter Storm 11 43 2,935 1,895
Flood 19 23 1,929 240
Earthquake & Geophysical 6 1 Minor Minor
Tropical Cyclone 1 1 Minor Minor
Wildfire, Heat, & Drought 22 29 620 385
Totals 128 207 21,825 12,794
Natural Disaster Losses in the United States, by Type, 2013
Source: Munich Re NatCatSERVICE
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Top 16 Most Costly World Insurance Losses, 1970 – 2013*
Hugo (1989)
Winter Storm Daria
(1991)
Chile Quake (2010)
Ivan (2004)
Charley (2004)
Typhoon Mirielle (1991)
Wilma (2005)
Thailand Floods (2011)
New Zea-land
Quake (2011)
Ike (2008)
Sandy (2012)
Northridge
(1994)
WTC Terror Attack (2001)
Andrew (1992)
Japan Quake,
Tsunami (2011)**
Katrina (2005)
$0
$10
$20
$30
$40
$50
$60
$7.9 $8.2 $8.7 $8.8 $9.3 $9.7 $11.2$13.6 $13.6 $13.6
$19.0
$24.2 $24.9 $25.9
$39.1
$49.4
*Figures do not include federally insured flood losses.Sources: Munich Re; Swiss Re; Insurance Information Institute research.
Insured Losses, 2013 Dollars$ Billions
5 of the top 14 most expensive catastrophes
in world history have occurred within the most recent 4 years (2010-
2013)
Hurricane Sandy is now the 6th costliest event in global insurance
history
2012 insured CAT losses totaled $60B; economic losses totaled $140B, according to Swiss Re
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Meteorological events (storm)
880Loss event
s
EarthquakeChina, 20 April
Severe storms, tornadoesUSA, 18–22 May
FloodsIndia, 14–30 June
HailstormsGermany, 27–28 July
Winter Storm Christian (St. Jude)Europe, 27–30 October
Typhoon HaiyanPhilippines, 8–12 November
Severe storms, tornadoesUSA, 28–31 May
Hurricanes Ingrid & ManuelMexico, 12–19 September
FloodsCanada, 19–24 June
FloodsEurope, 30 May–19 June
Heat waveIndia, April–June
Typhoon FitowChina, Japan, 5–9 October
Earthquake (series)Pakistan, 24–28 September
FloodsAustralia, 21–31 January
Meteorite impactRussian Federation, 15 FebruaryFlash floods
Canada, 8–9 July
FloodsUSA, 9–16 September
Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014.
Natural Loss EventsFull year 2013World Map
Geophysical events(earthquake, tsunami, volcanic activity)
Hydrological events(flood, mass movement)
Meteorological events (storm)
Selection of significant Natural catastrophes
Natural catastrophes
Climatological events(extreme temperature, drought, wildfire)Extraterrestrial events(Meteorite impact)
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Nu
mb
er
Natural Disasters Worldwide
200
400
600
800
1 000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 880 natural disaster events globally in 2013 compared
to 905 in 2012
1980 – 2013
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)Hydrological (flood, mass movement)
Source: MR NatCatSERVICE
Number of Events
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1980 – 2013 (Overall and Insured Losses)2013 Dollars, $ Billions
Source: MR NatCatSERVICE
Overall losses (in 2012 values)
Insured losses (in 2013 values)
Losses Due to Natural Disasters Worldwide
100
200
300
400
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
US$ bn
10-Yr. avg. lossesOverall:$184BInsured:$56B
2013 lossesOverall: $125B
Insured: $34BThere is a clear
upward trend in both insured
and overall losses over
the past 30+ years
AEGIS 2014POLICYHOLDERS’ CONFERENCE
US Thunderstorm Insured Loss Trends
Thunderstorm losses in 2013 totaled
$10.3 billion, the 6th highest on record
Average thunderstorm losses are up 7 fold
since the early 1980s. The 5-year running average loss is up
sharply
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss. 2008-2013
are the most expensive years on record.
1980 – 2013
Source: Property Claims Service, and MR NatCatSERVICE
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Convective Loss Events in the US
20
40
60
80
100
120
140
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Convective events are those caused by
straight-line winds, tornadoes, hail, heavy
precipitation, flash floods and lightning
The frequency of convective events has
rising tremendously over the past 30+ years
1980 – 2013Number of Events
Source: Geo Risks Research, NatCatSERVICE.
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Overall losses (in 2012 values)
Insured losses (in 2013 values)
Convective Loss Events in the US
10
20
30
40
50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Convective events are those caused by straight-line winds,
tornadoes, hail, heavy precipitation,
flash floods and lightning
The insured and total economic cost of
convective events has rising tremendously
over the past 30+ years
1980 – 2012 and first half 2013 (overall and insured losses) $ Billions US
Analysis contains: straight-line winds, tornadoes, hail, heavy precipitation, flash floods, lightning.Source: Geo Risks Research, NatCatSERVICE.
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Insured Homeowners Losses Due to Lightning
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$500
$600
$700
$800
$900
$1,000
$1,100
$735.5
$819.6
$882.2
$942.4
$1,065.5
$798.0
$1,033.5
$952.5 $969.0
$673.5
Source: Insurance Information Institute.
2004 – 2013$ Millions
The increased number and value of expensive electronic devices in homes has pushed total lightning claim costs to about $1 billion in many years even as the number of
lightning claims falls
Lightning claims cost insurers an estimated $673.5 million
in 2013, down from previous years as drought and fewer convective events reduced
strikes
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Outlook for the 2014 Atlantic Hurricane Season
Hurricanes and tropical storms drive some of the largest losses utilities expect each year
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Top 12 Most Costly Hurricanes in US History
Irene (2011)
Jeanne (2004)
Frances (2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley (2004)
Wilma (2005)
Ike (2008)
Sandy (2012)
Andrew (1992)
Katrina (2005)
$0
$10
$20
$30
$40
$50
$60
$4.5 $5.6 $5.7 $6.8 $7.9 $8.8 $9.3$11.2
$13.6
$19.0
$25.9
$49.4
Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.
Insured losses, 2013 dollars$ Billions
10 of the 12 most costly hurricanes in insurance history occurred over the past 10
years (2004—2013)Hurricane Sandy is the 3rd costliest hurricane in US
insurance history
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Outlook for 2014 Hurricane Season
Median*2005
(Katrina Year) 2014F
Named Storms 12.0 28 10
Named Storm Days 60.1 115.5 40
Hurricanes 6.5 14 4
Hurricane Days 21.3 47.5 15
Major Hurricanes 2.0 7 1
Major Hurricane Days 3.9 7 3
Accumulated Cyclone Energy 92.0 NA 65
Net Tropical Cyclone Activity 103% 275% 70%
30% less active than typical year
*Over the period 1981-2010.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.
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Probability of Major Hurricane Landfall (CAT 3, 4, 5)
Average* 2014F
Entire US Coast 52% 40%
US East Coast Including Florida Peninsula 31% 22%
Gulf Coast from FL Panhandle to Brownsville, TX 30% 23%
Also…above-average major hurricanelandfall risk in caribbean for 2011 (32% vs. 42%)
*Average over the past century.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.
2014
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Selected Large Outages Associated with Tropical Systems
Connecticut: Sandy (2012)Texas: Rita (2005)
New Jersey: Irene (2011)Katrina: Katrina (2005)New York: Irene (2011)
Mississippi: Katrina (2005)Alabama: Ike (2008)
Pennsylvania: Sandy (2012)Florida: Charley (2004)
New York: Sandy (2012)Texas: Ike (2008)
New Jersey: Sandy (2012)Florida: Wilma (2005)
Florida: Frances (2004)
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.000.63
0.78
0.81
0.91
0.94
1.00
1.07
1.27
1.6
2.1
2.47
2.62
3.25
3.5
Hurricanes and tropical storms have produced
significant losses for insurers in recent years, including
with Sandy in 2012
By StateMillions of Customers
Sources: US Dept. of Energy, Vertyx, AP analysis; Insurance Information Institute.
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Fire & Ice
Increasingly extreme weather has proven costly to utilities and insurers alike
The “polar vortex” and wildfire
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Winter 2014This winter’s “Polar Vortex” allowed frigid air to stream
southward into the Eastern US and
Canada. Minimum temperatures
in some locations were the coldest
in 20 years. Cold, snow and ice led to several significant
frozen precipitation and freezing events, reaching as
far south as the Gulf Coast and North
FloridaEnergy demand skyrocketed,
created stress on the grid and caused natural gas prices to
skyrocket
The “polar vortex”
Source: NASA; Munich Re.
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Insured losses from
severe winter events
totaled $2.4 billion in
2014.
1 000
2 000
3 000
4 000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
5-year running average
Winter Storm and Winter Damage Events in the US and CanadaInsured Losses (Millions, $ 2014)
Sources: Munich Re NatCatSERVICE; Insurance Information Institute.
Insured winter storm and damage losses in the US and Canada totaled $2.4 billion this year,
making 2014 the 5th costliest winter since 1980. Economic losses totaled $3.4 billion.
Three of the four most costly years ever for insured losses from winter storms and damage
occurred inthe 1990s, led by the “Storm of the Century”
in 1993.
1980 – 2014*
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Number of Acres Burned in Wildfires
Acreage burned was at near-record
levels in 2011-2012
Source: National Interagency Fire Center
1980 – 2013
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Wildland Fire Outlook for the Western US Is Grave
Much of the West and Northwest US is at an elevated risk for wildfire
due to prolonged drought and high
temperatures
Source: National Interagency Fire Center
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Cyber Risk
Cyber risk is a rapidly emerging exposure for businesses large and small in every industryNEW III white paper available at: www.iii.org
AEGIS 2014POLICYHOLDERS’ CONFERENCE
2005 2006 2007 2008 2009 2010 2011 2012 2013*100
200
300
400
500
600
700
0
40
80
120
160
200
240
157
321
446
656
498
662
419447
619
66.9
19.1
127.7
35.7
222.5
16.2 22.9 17.3
87.9
# Data Breaches # Records Exposed (Millions)
Data Breaches 2005-2013
* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.
By number of breaches and records exposed# Data Breaches/Millions of Records Exposed
The total number of data breaches (+38%) and number of records exposed (+408%) in 2013 soared
Millions
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43%
36%
17%
4%
External Cyber Crime Costs
Other costs* 0%Business disruption
*Other costs include direct and indirect costs that could not be allocated to a main external cost categorySource: 2013 Cost of Cyber Crime: United States, Ponemon Institute.
Information loss (43%) and business disruption or lost productivity (36%) account for
the majority of external costs due to cyber crime.
Equipment Damages
Business Disruption
Revenue loss
Information loss
Fiscal Year 2013
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34.4%
43.8%
9.0%
9.1% 3.7%
2013 Data Breaches By Business Category
Other costs* 0%Business disruption
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/2013/UpdatedITRCBreachStatsReport.pdf
The majority of the 614 data breaches in 2013 affected business and medical/healthcare
organizations (Govt./Military breaches fell)
Banking/Credit/Financial, 23 (3.7%)
Educational, 55 (9.0%)
Govt/Military, 56 (9.1%)
Business, 211 (34.4%)
By number of breaches
Medical/Healthcare, 269 (43.8%)
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42%
29%
30%
Main Causes of Data Breach Globally
Other costs* 0%Business disruption
*The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection.Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014
Human error
Malicious or criminal attack*
System glitch
Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30 percent
concern a negligent employee or contractor (human factor).
AEGIS 2014POLICYHOLDERS’ CONFERENCE
21%
21%
13%
11%
9%
8%
7%
5%5%
The Most Costly Cyber Crimes
Other costs* 0%Business disruption
Source: 2013 Cost of Cyber Crime: United States, Ponemon Institute.
Malicious insiders
Malicious code
Phishing + social
engineering
Denial of service, malicious code and web-based attacks account for more than 55 percent
of all cyber costs per U.S. organization on an annual basis.
Fiscal year 2013
Denial of service
Web-based attacks
Stolen devices
Malware
Viruses, Worms, Trojans
Botnets
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Top 10 Global Business Risks for 2014
Quality deficiencies, serial defects
Theft, fraud, corruption
Cyber crime, IT failures, espionage
Intensified competition
Loss of reputation or brand value (e.g. from social media)
Market stagnation or decline
Changes in legislation and regulation
Fire, explosion
Natural catastrophes
Business interruption, supply chain risk
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
10%
10%
12%
14%
15%
19%
21%
24%
33%
43%
Cyber and reputational challenges are the most significant movers in this year’s Risk Barometer rankings. Cyber moved into the top 10 global business risks for the
first time.
Source: Allianz Risk Barometer on Business Risks 2014
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Perception is that the Risk of Cybercrime Is Increasing
Source: 2014 Global Economic Crime Survey, PWC.
Decreased
Remained the same
Increased
4%
57%
39%
4%
47%
48%
2014 Global 2011Global
The perception of the risk of cybercrime is increasing at a faster pace than reported actual occurrences. In 2014, some 48% of respondents
said their perception of the risk of cybercrime increased, up from 39% in 2011.
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Cybercrime Costs Are Higher for U.S. Companies Compared to Global Average
Source: 2014 Global Economic Crime Survey, PWC.
Lost $50,000 to $1 million
Lost $1 million or more
8%
3%
19%
7%
2014 USA 2014Global
US organizations are more at risk of suffering financial losses in excess of $1 million due to cybercrime.
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Increase in Purchase of Cyber Insurance among US Companies
Source: Benchmarking Trends: Interest in Cyber Insurance Continues to Climb, Marsh Risk Management Research Briefing, April 2014
All Other
Health Care
Communications, Media & Technology
Professional Services
Education
Retail/Wholesale
Financial Institutions
All Industries
37%
11%
11%
13%
14%
19%
29%
21%
Interest in cyber insurance continues to climb. The number of companies purchasing cyber insurance increased 21 percent from 2012 to 2013.
2013
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Investments: The New Reality
Investment performance is a key driver of profitabilityDepressed yields are still pressuring pricing
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Property / Casualty Insurance Industry Investment Income
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
$30
$40
$50
$60
$38.9$37.1 $36.7
$38.7 $39.6
$49.5$52.3
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.4$45.8
1 Investment gains consist primarily of interest and stock dividends. *2014 investment income is estimated Q1, annualized.Sources: ISO; Insurance Information Institute..
2000 – 20141
$ Billions
Due to persistently low interest rates, investment income fell in 2012 and in 2013 and is falling again in 2014.
Investment earnings are still 16% below their 2007 pre-crisis peak
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Property / Casualty Insurance Industry Investment Income
19901990199019901990199019901990199019901990199019911991199119911991199119911991199119911991199119921992199219921992199219921992199219921992199219931993199319931993199319931993199319931993199319941994199419941994199419941994199419941994199419951995199519951995199519951995199519951995199519961996199619961996199619961996199619961996199619971997199719971997199719971997199719971997199719981998199819981998199819981998199819981998199819991999199919991999199919991999199919991999199920002000200020002000200020002000200020002000200020012001200120012001200120012001200120012001200120022002200220022002200220022002200220022002200220032003200320032003200320032003200320032003200320042004200420042004200420042004200420042004200420052005200520052005200520052005200520052005200520062006200620062006200620062006200620062006200620072007200720072007200720072007200720072007200720082008200820082008200820082008200820082008200820092/29/2009200820092009200920092009200920092009200920102010201020102010201020102010201020102010201020112011201120112011201120112011201120112011201120122/30/20122012201220122012201220122012201220122012201320132013201320136/31/2013201320139/31/2013201311/31/2013201320142/31/201420144/31/201420146/31/20140%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Recession2-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below
5% for a full decade.
U.S. Treasury yields plunged to historic
lows in 2013. Longer-term yields have rebounded a bit.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for
years to come. *Monthly, constant maturity, nominal rates, through June 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
1990 – 20141
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Energy Sector: Industry Future is Bright
US is becoming an energy powerhouse; will fuel P&C exposures
Need infrastructure investment
AEGIS 2014POLICYHOLDERS’ CONFERENCE
00 01 02 03 04 05 06 07 08 09 10 11 12 13$10
$12
$14
$16
$18
$20
$22
$24
$26
$28
$20.2 $20.6$19.9 $20.0 $19.5
$18.9 $19.4$20.2
$21.1 $21.6$22.4
$24.0$25.3 $25.6
U.S. Natural Gas Production
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
2000 – 2013Trillions of Cubic Ft. per Year
The U.S. is already the world’s largest natural gas producer—recently overtaking Russia. This is a potent driver of
commercial insurance exposures
AEGIS 2014POLICYHOLDERS’ CONFERENCE
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F0
2
4
6
8
10
5.19 5.09 5.08 55.35 5.47 5.65
6.49
7.44
8.37
9.13
U.S. Crude Oil Production
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
2005 – 2015PMillions of Barrels per Day Crude oil production in the U.S. is expected to increase by
82.6% from 2008 through 2015—and could overtake Saudi Arabia as the world’s largest oil producer
AEGIS 2014POLICYHOLDERS’ CONFERENCE
1/1
0
3/1
0
5/1
0
7/1
0
9/1
0
11/1
0
1/1
1
3/1
1
5/1
1
7/1
1
9/1
1
11/1
1
1/1
2
3/1
2
5/1
2
7/1
2
9/1
2
11/1
2
1/1
3
3/1
3
5/1
3
7/1
3
9/1
3
11/1
3
1/1
4
3/1
4
5/1
4
150
160
170
180
190
200
210
220
15
6.4
15
6.4
15
6.7
15
7.6
15
8.7
15
7.8
15
81
59
.51
60
16
1.5
16
1.2
16
1.2
16
3.1
16
4.4
16
6.6
16
9.3
17
0.1
17
11
72
.51
73
.61
76
.31
78
.21
78
.51
80
.91
81
.91
83
.11
84
.81
85
.21
85
.71
86
.81
87
.61
88
18
81
88
.21
90
19
1.7
19
1.9
19
3.4
19
2.4
19
2.6
19
3.1
19
3.3
19
51
96
.51
99
.72
00
.62
03
20
4.1
20
5.3
20
7.8
20
7.5
20
7.9
21
0.2
21
1.5
Oil & Gas Extraction Employment
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
Jan 2010 – June 2014*Thousands Oil and gas extraction employment is up 35.2% since Jan. 2010 as the
energy sector booms. Domestic energy production is essential to any robust economic recovery in the US.
Highest since Aug.
1986
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Power Sector Supply, Demand and Investment
Substantial energy infrastructure investments are necessary for decades to come—along with insurance solutions
AEGIS 2014POLICYHOLDERS’ CONFERENCE
1990 2000 2010 2020P 2030P 2040P0
100
200
300
400
500
600
700
800
900
354.8406
523.9
629.8
729.2
819.6
World Primary Energy Consumption
Source: Energy Information Administration, 2013 International Energy Outlook, Insurance Information Institute.
1990 – 2040PQuadrillion BTUs
Between 2010 and 2040, energy consumption in projected to increase by 56.4% worldwide
Growth in worldwide energy consumption will create more risk and vulnerabilities (natural and manmade); Innovations in risk
management and insurance are needed.
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3%
45%
27%
25%
Cumulative Projected Investment in Global Energy Infrastructure
Other costs* 0%Business disruption
Source: International Energy Agency, World Energy Outlook 2011.
Projected energy infrastructure investment through 2035 total $38 trillion; Implies substantial incurrence of risk.
2011 – 2035 ($ Trillion)Coal, $1.1, (3%)
Biofuels, $0.3, (1%)
Power, $16.9, (44%)
Oil, $10.1, (27%)
Natural Gas, $9.5, (25%)
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U.S. Electricity Generation by Fuel
Other costs* 0%Business disruption
1990 – 2040F (Trillions of Kilowatt Hours)
Natural gas share of fossil fired generation will grow rapidly (more
investment needed). Coal fired generation will remain flat but its share will fall due to abundant
gas and EPA carbon regulations
Source: US Energy Information Administration, 2014 Annual Energy Outlook Early Release Overview; Insurance Information Institute.
AEGIS 2014POLICYHOLDERS’ CONFERENCE
2010 2015 2020 2025 2030 2035 20400
1000
2000
3000
4000
5000
1799 1598 1606 1641 1652 1640 1635
3217 15 16 15 15 16
776 894 1020 1118 1256 1374 1471
807 774 779 779 782 786 811390 534 630 625 660 644 735
Coal Petroleum Natural Gas Nuclear Renewable Other
US Electric Power Generation by Fuel Source
Source: US Energy Information Administration, Annual Energy Outlook 2014, Appendix A7.
2010 – 2040FBillions of Kilowatt Hours
Demand for electricity is expected to grow at an 0.8% annual rate through 2040. Renewables and natural gas will account for an increasing share of
fuel source
3,806 3,8194,025 4,217 4,370 4,508 4,675
AEGIS 2014POLICYHOLDERS’ CONFERENCE
US Electric Power Generation by Fuel Source
Overall Renewable Natural Gas Coal Nuclear Petroleum-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
0.8%
1.7%1.4%
0.4%0.2%
-0.5%
Source: US Energy Information Administration, Annual Energy Outlook 2014; Insurance Information Institute.
2012 – 2040F (Billion kWh)Annual Growth Rate (%)
Overall power generation capacity will growth at just 0.8% through 2040, mostly from natural gas
Growth in renewable capacity is projected to be the fastest but is probably also the most uncertain
Natural gas generation will account for the majority of
new capacity
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U.S. Private Power Construction
*Through April 2014.Source: US Dept. of Commerce; Energy Information Administration, Wells Fargo Securities (June 6, 2014 research report).
2000 – 2014* (% Change, 3-Month Moving Avg.)
Power construction accounts for a large
share of all construction activity. The recent
slowdown was in part due to the expiration of
renewable production tax credits. Going forward,
about 75% of new capacity will be for gas
fired plants
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Value of Power Sector Construction
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*$0
$20
$40
$60
$80
$100
$120
$23.6$21.0$22.0$17.4$16.4$21.7$22.0
$29.3$31.5$36.8
$41.5$35.4$38.4$42.2
$66.1
$81.1$88.9
$77.9$75.2
$97.4$90.6
$107.4
*seasonally adjusted at annualized rates through May 2014 (latest available).Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
1993 – 2014*$ Billions
The Value of Power Construction in the US Is Rising
Power construction can be erratic but now seems to be headed for a record $100+ billion
in 2014 (based on data through May)
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Investment in US Power Plants
Tota
l
Coal
Gas
Oil
Nucl
ear
Bio
energ
y
Hydro
Win
d O
nsh
ore
Win
d O
ffsh
ore
Sola
r PV
Oth
er*
$0
$400
$800
$1,200$1,234.0
$185.0 $183.0$4.0
$90.0 $143.0$57.0
$219.0$72.0
$212.0$67.0
*Includes geothermal, concentrating solar power and marine.Sources: International Energy Agency, 2014 World Energy Investment Outlook, Table 3.2; Insurance Information Institute.
2004 – 2013$ Billions of 2012
An estimated $1.234 trillion will be invested in power plants through 2035
An estimated $1.234 trillion will be invested in power plants in the US through
2035 – 12.9% of the $9.553 trillion forecast globally
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Investment in US Transmission & Distribution Infrastructure
Tota
l
New
Dem
and
Renew
able
s
Refu
rbis
h..
.
Tota
l
New
Dem
and
Renew
able
s
Refu
rbis
h..
.$0$100$200$300$400$500$600
$254.0
$98.0$19.0
$138.0
$564.0
$183.0
$16.0
$365.0
Sources: International Energy Agency, 2014 World Energy Investment Outlook, Table 3.3; Insurance Information Institute.
2014 – 2035F$ Billions of 2012
An estimated $819 billion will be invested in transmission and distribution infrastructure through 2035
Transmission Distribution
AEGIS 2014POLICYHOLDERS’ CONFERENCE
www.iii.org
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