after the crisis: the global economics of the p/c insurance industry energy markets trends and...

After the Crisis: The Global Economics of the P/C Insurance IndustryEnergy Markets Trends and Challenges

Robert P. Hartwig, Ph.D., CPCU PresidentInsurance Information Institute

Presentation Outline

• After the Crisis: Europe’s Weak Economic Recovery– Exposure Impacts on the Insurance Industry and

Energy Concerns

• Post-Crisis: Trends in Energy Consumption, Generation and Carbon Emissions

– Changes in global and regional demand, supply for energy and insurance

– Focus on Europe

• Impact of the Global Financial Crisis on the Energy Business

• Insurer Financial Strength & Ratings– (Re) Insurers Weathered the Storm Well

Presentation Outline (cont.)

• P/C Insurance Industry Financial Performance– Profitability, Capital & Capacity

• Energy Insurance Market Review– Capacity, Rating, Exposure, Profitability, Reinsurance, ART

– The Financial Crisis: Global Energy Supply, Demand and Investment

• Catastrophe Losses– 2010 Already Producing Large Losses in Energy Sector

• Post-Crisis Changes to the Insurance Regulatory Environment– Systemic Risk Regulation

After the CrisisEurope’s Weak Recovery and Exposure Impactson the Insurance Industry and Energy Concerns

Real GDP by Market 2007-2011F

11

.9

3.0

2.0

2.02

.6

2.6

9.0

0.5

0.4

-1.2

1.0

0.5

8.6

-5.0

-2.4

-5.1

-4.9-4

.0

9.7

1.2

3.1

1.8

1.7

1.3

9.1

2.13

.0

1.51.9 2.0

-8%

-3%

2%

7%

12%

17%

Euro Area Germany Japan US UK China

2007 2008 2009 2010F 2011F

(% change from previous year)

Source: Blue Chip Economic Indicators, 3/10/10 edition.

Slow growth in GDP will constrain exposure growth on a global scale

Real GDP for Largest European Economiesand Euro Area, 2007-2011F

3.5

2.1

3.0

2.6

2.6

2.0

0.30.51.

0

0.5

-4.0

-2.2

-5.0

-4.9

-4.0

1.41.

7

1.21.

7

1.3 1.61.

92.1

2.0

1.9

-7%

-5%

-3%

-1%

1%

3%

5%

Euro Area Germany UK France Netherlands

2007 2008 2009 2010F 2011F

(% change from prior year)


All European economies are growing slowly

US Real GDP Growth*

3.3

3.3

3.2

2.9

3.0

2.72.9

2.8

5.9

2.2

-0.7

-6.4

-5.4

-2.7

1.5

-0.7

2.12.

73.13.

6

2.5

1.6

3.7

0.8

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

20

00

2

00

1

2

00

2

2

00

3

2

00

4

2

00

5

2

00

6

20

07

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

*Gold bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/10; Insurance Information Institute.

Recession began in December 2007. The economic impact affected energy demand on a global scale.

The steepest decline since

the 6.4% drop in Q1:1982

Length of US Recessions

43

13

811

13

810 11

16

6

16

8 8

18

0

5

10

15

20

25

30

35

40

45

50

Aug.1929

May1937

Feb.1945

Nov.1948

July1953

Aug.1957

Apr.1960

Dec.1969

Nov.1973

Jan.1980

Jul.1981

Jul.1990

Mar.2001

Dec.2007

* Estimated end date of recession was June 2009.Sources: National Bureau of Economic Research; Insurance Information Institute.

Current recession began in Dec. 2007 and is already the longest since 1981. If is now tied for the longest recession since the Great Depression.

1929-Present*

Mo

nth

s in

Du

rati

on

GDP Growth: Advanced and Emerging Economies vs. World

-4

-2

0

2

4

6

8

10

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Advanced economies Emerging and developing economies World

1970-2011F

Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Insurance Information Institute.

Emerging economies (led by China) are expected to

grow by 6.0% in 2010

Advanced economies will grow slowly in 2010,

dampening energy demand

World output is forecast to growby 3.9% in 2010, following a

-0.8% drop in 2009

Global Industrial Production Rebounds from a Tailspin, Raising Energy Demand

-30

-25

-20

-15

-10

-5

0

5

10

15

20

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Industrial Production

Annualized 3-Month Percent Change

Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Insurance Information Institute.

Global industrial production was down over 25% in early 2009,

adversely impacting energy demand, but growing at a 9% clip in late 2009

Industrial demand for energy was particularly hard hit

Inflation Rates for Largest European Economies and Euro Area, 2008-2011F

2.5

2.8

3.6

2.6

3.3

1.0

0.1

2.2

0.3

0.3

1.1

1.4

2.4

1.11

.3 1.41

.61.8

1.6

1.6

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Euro Area Germany UK France Netherlands

2008 2009 2010F 2011F

(% change from prior year)


Inflation is below 1.5% across Europe, reducing claim severity concerns

3-Month Interest Rates for Major Global Economies, 2008-2011F

1.4

2.0

0.7

0.3

0.7

0.2

1.3

2.1

0.6

1.8

0.4

4.0

1.2

0.4

1.2

1.7

4.4

2.5

0.5

2.6

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Euro Area Germany UK France US

2008 2009 2010F 2011F


Interest rates remain generally low, depressing insurer investment earnings and

putting more pressure on rates

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

-3.8

%

-3.3

0%-4.2-3.8

-0.5

-2.9

1.2

7.7

13

.7

5.6

1.6

-0.3

-0.4

0.6

0.40.81.1

3.1

-1.0

-1.8-1

.0

-1.6

0.3

5.8

20

.3

18

.6

4.3

1.8

-1.5

-6.5

-7.4

-0.9

5.2

-10%

-5%

0%

5%

10%

15%

20%

25%

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E-4%

-2%

0%

2%

4%

6%

8%

Real NWP Growth Real GDP

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 3/10; Insurance Information Institute.

P/C insurance industry’s growth is influenced modestly by

growth in the overall economy

Rea

l NW

P G

row

th

Rea

l GD

P G

row

th

Global Industrial Production and Exports: 2005 to 2009Annual Percentage Change of 3-Month Moving Average

Source: International Monetary Fund, January 2010; Insurance Information Institute.

Industrial production and global trade crashed extraordinarily during the financial crisis

Post-CrisisTrends in Energy Consumption, Generation and Carbon Emissions

World & European Primary Energy Consumption

347.7

462.1 472.4508.3

551.5595.7

637.3678.3

70 81.4 81.6 82.2 84.8 87.9 90 91.8

0

100

200

300

400

500

600

700

800

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

World Europe (OECD Countries)

Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

1990-2030P

Qu

adri

llio

n B

TU

s

Between 2006 and 2030, energyconsumption is projected to

increase by 1.1% annually in OECDEurope and 1.5% worldwide

Global energy consumption is expected to increase by 33.4% between 2010 and 2030 but by only 11.7% in OECD Europe

European Energy Consumption As a Shareof Global Consumption

70

81.4 81.6 82.284.8

87.990

91.8

13.5%14.1%14.8%15.4%

16.2%17.3%17.6%

20.1%

50

55

60

65

70

75

80

85

90

95

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

0%

5%

10%

15%

20%

25%

Europe (OECD Countries) OECD Europe Share of Global Energy Consumption

Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.

Europe’s share of global energy consumption is

projected to fall from 20.1%in 1990 to 16.2% in 2010

and 13.5% in 2030P

Eu

rop

ean

En

erg

y C

on

sum

pti

on

(O

EC

D C

ou

ntr

ies,

Qu

ad. B

tu)

OE

CD

Eu

rop

e S

har

e o

f G

lob

al

En

erg

y C

on

sum

pti

on

1990-2030P

Average Annual Change in Total Energy Consumption by Country/Region

3.2%

2.6% 2.5%

1.5% 1.4%1.2% 1.1%

0.9%

0.5% 0.5%

China Brazil India Canada S.Korea

Mexico Aust/NZ Russia US Europe(OECD)


2006-2030P

Ave

rag

e A

nn

ual

Ch

ang

e in

Co

nsu

mp

tio

n

(Qu

adri

llio

n B

TU

s)

Europe/US have the slowest growth rates for energy

consumption through 2030, growing at less than 1/6 the rate

in China and 1/5 that of India

European Share of Global Electricity Generation Capacity As a Share of Global Capacity

754838

925978

1039 1067

16.5%

17.4%17.8%

18.4%18.3%

18.8%

50

250

450

650

850

1050

1250

2006 2010P 2015P 2020P 2025P 2030P

15%

16%

17%

18%

19%

Europe (OECD Countries) OECD Europe Share of Installed Generating Capacity


1990-2030P

Europe’s share of globalenergy generation

capacity is projected tofall from 18.3% in 2010

and 16.5% in 2030

Eu

rop

ean

Ele

ctri

cal

Gen

erat

ion

Cap

acit

y (O

EC

D C

ou

ntr

ies

, G

igaw

atts

)

OE

CD

Eu

rop

e S

har

e o

f G

lob

al

Ele

ctri

city

Gen

era

tio

n C

apac

ity

Renewable Electricity Generation in OECD Europe by Fuel

Wind is by far the most important source of new

generation capacity in OECD

Europe (i.e., excludes Russia

and Eurasian countries)

2006-2030P

Sources: Energy Information Administration: International Energy Outlook 2009; Insurance Information Institute.

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

World Crude Oil Prices: 1997- March 2010

*All countries spot market price weighted by estimated export volume. Source: Energy Information Administration; http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm

Crude oil prices peaked at $145.29 in July 2008,

fell 75% to $34.57 in Jan. 2009, but are rising again

to over $78/bbl inmid-March 2010

Jan. 1998 $15.21

PEAKJul. 2008 $145.29

TROUGHJan. 2009

$34.57

RECENT12 Mar.

2010 $78.25

Do

llars

Per

Bar

rel*

Global Net Electricity Generation is Growing Faster than Consumption

• Electricity generation is growing faster than total energy consumption

• This suggeststhat there is a net substitution away from other energy sources to electricity

• Implies a bright future for utilities

• Requires significant insurance capacity

Sources: Energy Information Administration: International Energy Outlook 2009; Insurance Information Institute.

Average Annual Change in ElectricityGenerating Capacity by Country/Region

4.6%

3.3%

3.0%

2.1% 2.1%1.9% 1.9%

1.5% 1.4% 1.3% 1.3%

0.9%

China India Brazil Africa MiddleEast

Mexico S.Korea

Europe(OECD)

Canada Russia Aust/NZ US


2006-2030P

Ave

rag

e A

nn

ual

Ch

ang

e in

Gen

erat

ing

Cap

acit

y(G

igaw

atts

)

Electricity generation capacity will grow faster than

consumption in Europe, suggesting a net substitution to

electricity as a primary energy

source

World & European Carbon Dioxide Emissions

21

,48

8

28

,29

6

29

,02

8

30

,96

7

33

,11

1

35

,42

8

37

,87

9

41

49

44

24

44

29

43

35

43

68

44

50

44

89

45

19

40

,38

5

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1990 2005 2006 2010P 2015P 2020P 2025P 2030P



1990-2030P

Mill

ion

s o

f M

etri

c T

on

s

Between 2006 and 2030, CO2 emissions are projected to increase by 0.1% annually in OECD Europe

and 1.4% worldwide

Global CO2 emissions are expected to increase by 30.4% between 2010 and 2030 but by only 4.3% in

OECD Europe

European Carbon Dioxide Emissions As a Share of Global Emissions

4,149

4,424 4,429

4,3354,368

4,4504,489

4,519

11.2%11.9%12.6%13.2%

14.0%15.3%15.6%

19.3%

3,900

4,000

4,100

4,200

4,300

4,400

4,500

4,600

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

0%

5%

10%

15%

20%

25%



Europe’s share of global carbon emissions is projected to fall

from 19.3% in 1990 to 14.0% in 2010 and 11.2% in 2030P

1990-2030P

Eu

rop

ean

CO

2 E

mis

sio

ns

(OE

CD

Co

un

trie

s, M

ill. M

etri

c T

on

s)

OE

CD

Eu

rop

e S

har

e o

f G

lob

al C

O2

Em

issi

on

s

Average Annual Change in Carbon Dioxide Emissions by Country/Region

2.8%2.5%

2.1%1.9%

1.5%

1.2%1.1%

0.8%0.6% 0.6%

0.3%0.1%

China Brazil India MiddleEast

Africa S.Korea

Mexico Canada Aust/NZ Russia US Europe(OECD)


2006-2030P

Mill

ion

s o

f M

etri

c T

on

s Europe has the slowest growth rates for CO2

emissions, growing at about1/30th the rate in China

World & European Nuclear Energy Consumption

1,9

09

2,6

39

2,6

60

2,7

61

3,0

45

3,3

85

3,6

46

74

3 93

2

92

9

92

2

91

5

90

5

89

6

90

2

3,8

44

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1990 2005 2006 2010P 2015P 2020P 2025P 2030P



1990-2030P

Bill

ion

Kilo

wat

t H

ou

rs

Between 2006 and 2030, nuclear energy consumption is projected to

decrease by 0.1% annuallyin OECD Europe and increase

1.5% worldwide

Global nuclear energy consumption is expected to

increase by 39.2% between 2010 and 2030 but fall by 2.2% in OECD

Europe

European Nuclear Energy Consumption As a Share of Global Consumption

743

932 929 922 915 905 896 902

23.5%24.6%26.7%

30.0%33.4%

34.9%35.3%

38.9%

600

650

700

750

800

850

900

950

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%



Europe’s share of global energy consumption is

projected to fall from 38.9% in 1990 to 33.4% in 2010 and

23.5% in 2030P

1990-2030P

Eu

rop

ean

Nu

clea

r en

erg

y C

on

sum

pti

on

(OE

CD

Co

un

trie

s, B

ill. K

wh

)

OE

CD

Eu

rop

e S

har

e o

f G

lob

al N

ucl

ear

En

erg

y C

on

sum

pti

on

Average Annual Change in Nuclear Energy Consumption by Country/Region

9.9%8.9%

3.5% 3.2%2.3% 2.0%

1.5% 1.2% 1.1% 0.8% 0.6% 0.6%

-0.1%

India China Russia Africa S.Korea

Brazil Canada Japan Mexico Canada Russia US Europe*

*OECD Countries.


2006-2030P

Bill

ion

s o

f K

ilow

att

Ho

urs

Europe is the only region with net negative nuclear energy

consumption

World Net Effective Electric Power Generation

11.312.6

14.6

18.0

20.623.2

26.0

28.9

31.8

0

5

10

15

20

25

30

35

1990 1995 2000 2006 2010 2015 2020 2025 2030


1990-2030 (est.)

Tri

llio

ns

of

Kilo

wat

t H

ou

rs

Global electric power generation was dampened

about 3% by the global financial crisis, but will still grow at 2.9%

per year through 2030 compared to 1.9% for total

energy consumption

Electricity Supply Infrastructure: Despite Crisis, Huge Investments Needed along with Insurance

$1,351

$1,876

$809

$377

$1,913

$799 $783 $744

$258

$609

Europe NorthAmerica

Pacific Russia China E. Asia S. Asia LatinAmerica

MiddleEast

Africa

Source: International Atomic Energy Agency, World Outlook for Electricity Investment.

2001-2030 (est.)

$ B

illio

ns

Investments in electricitysupply infrastructure

globally are expected tototal $9.841 trillion

between 2001 and 2030

European investment could total $1.351 trillion

World Energy Supply Infrastructure Investment by Category

Source: International Atomic Energy Agency, World Outlook for Electricity Investment.

Generation-New$4,08042%

Generation-Refurbished$4394%

Transmission$1,56816%

Distribution$3,75538%

2001-2030PGeneration will

account for 46% or $4.5 trillion of all

investment through 2030 to meet rising demand. Financial

crisis had no significant impact on

long-term global energy demand and the need to develop

supply infrastructure

$ Billions

World Electricity Generation by Fuel

0.9

2.73.4 3.6

7.4

0.9

3.8

6.7 6.8

13.6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Liquids Nuclear Renewables Natural Gas Coal

2006 2010 2015 2020 2025 2030

The sharp increase in generation and the

changing composition of fuel source will influence

insurance demand and the nature of products sold


Tri

llio

ns

of

Kilo

wat

t H

ou

rs

2006-2030F

World Electricity Generation by Fuel Source Share

Source: Insurance Information Institute from data reported in US Department of Energy Report #:DOE/EIA-0484 (Sept. 2008).

Renewables18%

Natural Gas20%

Coal41%

Liquids 6%

2005 vs. 2030F

2030

Nuclear15%

2005

Renewables15%

Natural Gas25%

Coal47%

Liquid 2%

Nuclear11%

Surprisingly, coal as asource of electricity

generation is expected torise through 2030. CO2,

pollution issues?

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2005 2010 2015 2020 2025 2030

Liquids Coal Natural Gas Renewables Nuclear

3.303.70

3.974.21

4.444.67

European Electricity Generation, by Fuel

Source: US Department of Energy Report #:DOE/EIA-0484 (Sept. 2008); Insurance Information Institute.

2005-2030F

Tri

llio

ns

of

Kilo

wat

t H

ou

rs

Gas and renewables grow, coal shrinks, implying

different insurance needs in Europe

Electricity Consumption in the United States*

1.52.0

-3.9

-1.6

2.8

0.2

2.8

1.20.8

2.1

-0.7

2.8

1.7

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010P 2011P

*Change based on billions of kilowatthours used per day. Source: Energy Information Administration, Short-Term Energy Outlook, March 2010, Insurance Information Institute.

1999-2011P

Electricity consumption in the US was hit severely due to the

deep recession but is now rebounding modestly

US Total Electricity Consumption

Recession had a

significant but in the long-run

minor impact on electricity consumption

Modest growth in

consumption is projected

for both 2010 and 2011

1999-2011P

Source: Energy Information Administration, Short-Term Energy Outlook, March 2010, Insurance Information Institute.

Severe Recession Depressed US Energy Demand

-1.7-1.7

-6.4

-1.3

-2.2

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Oil Natural Gas Electricity(Industrial)

Electricity (All) Coal forElectricity

Sources: Energy Information Administration based on Short-Term Energy Outlook, March 2009 and March 2010.

Change 2009 vs. 2008

Per

cen

tag

e C

han

ge

in C

on

sum

pti

on

Industrial consumption of electricity has

experienced the most severe declines

US Energy Expenditures As a % of GDP Have Been Hurt by Recession

0%

2%

4%

6%

8%

10%

12%

14%

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 10F11F

Industrial Production

Source: Energy Information Administration, Short-Term Energy Outlook, March 2010; Insurance Information Institute.

The energy price bubble pushed energy expenditures to 9.9% of GDP in 2008. The bursting of the bubble and recession pushed expenditures down to 7.0% of GDP

in 2009, rising to about 8% in 2010 and 2011.

Energy demand is recoveringfrom the global recession and2008 energy price spike, but

remains below pre-crisis levels

Per

cen

tag

e o

f G

DP

Impact of the Global Financial Crisis on Energy Business

Global Financial Crisis Will Have Little Long-Term Impact on Consumption or Generation

• The net impact of the financial crisis was to reduce projected 2030 global capacity and consumption by 2 to 3% from levels projected pre-crisis

• The long-term impact is therefore negligible, though there were some significant short- and intermediate term impacts, particularly for industrial energy consumption

• Fossil fuel price volatility exacerbated the crisis

• The trends toward renewable energy sources will continue with little disruption

• The crisis, along with dissatisfaction over rising tax burdens in the US, have significantly reduced the chances of a comprehensive cap and trade systemin the US

• Relative weakness of US and European recoveries will accelerate shift in consumption and generation shares in Asia

Financial Crisis: Energy’s Lessons

Financial Strength & RatingsThe Global Insurance Industry Has Weathered the Economic Storm Well

P/C Insurer Impairment Frequency vs. Combined Ratio

90

95

100

105

110

115

120

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 09*0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Combined Ratio after Div P/C Impairment Frequency*Combined ratio of 101.7 is through Q3:09; 0.36% 2009 impairment rate is III estimate based on preliminary A.M. Best data.Source: A.M. Best; Insurance Information Institute.

2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in

2007; Rate is still less than one-half the 0.79% average since 1969

Impairment rates arehighly correlated with

underwritingperformance and

reached record lows in2007/08

Co

mb

ined

Rat

io

Imp

airm

ent

Rat

e

1969-2009P

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009

Source: A.M. Best.

Upgraded – 59, 3.2%

Initial – 44, 2.4%

Under Review – 69, 3.8%

Other – 216, 11.9%

P/C insurance is by design aresilient business. The dualthreat of financial disastersand catastrophic losses are

anticipated in the industry’s riskmanagement strategy

Despite financial market turmoil and a soft market

in 2009, 76% of ratings actions by A.M. Best were affirmations;

just 2.9% were downgrades and 3.2%

were upgrades

Downgraded – 53, 2.9%

Affirm – 1,375, 75.7%

Reasons for US P/C Insurer Impairments

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008.

Investment Problems 7.0%

Misc. 9.1%

Significant Change in Business 4.2%

Reinsurance Failure 3.7%

1969-2008

Affiliate Impairment 7.9%

Deficient Loss Reserves/Inadequate Pricing

38.1%

Deficient loss reserves and inadequate pricing are the leading causeof insurer impairments, underscoring the importance of discipline.

Investment catastrophe losses play a much smaller role.

Catastrophe Losses 7.6% Alleged Fraud 8.1%

Rapid Growth 14.3%

P/C Insurance Financial PerformanceA Resilient Industry in Challenging Times

ProfitabilityHistorically Volatile

P/C Net Income after Taxes

14

,17

8

5,8

40

19

,31

6

10

,87

0 20

,59

8

24

,40

4

36

,81

9

30

,77

3

21

,86

5

20

,55

9

3,0

46

30

,02

9 38

,50

1

44

,15

5

65

,77

7

62

,49

6

2,3

79

30

,60

0

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 09P

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 4.5% ROAS for 2008 and 5.9% for the first 9 months of 2009. 2009:Q3 net income was $20.5 billion excluding M&FG. Sources: A.M. Best, ISO, Insurance Information Institute.

1991-2009P

$ M

illio

ns

2005 ROE*= 9.4% 2006 ROE = 12.2% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009:Q3 ROAS1 = 4.5%

P/C industry profits for full-year 2009 were up sharply from 2008, but are still well below

pre-crisis levels

-$6,970

ROE: P/C vs. All Industries 1987–2009:Q3*

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09:Q3

US P/C Insurers All US Industries

P/C profitability iscyclical and volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009 through Q3. Sources: ISO, Fortune; Insurance Information Institute.

Per

cen

t

A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s at Now

97.5

100.6 100.1 100.7

92.6

99.5101.0

5.9%

9.6%

15.9%

14.3%

12.7%

4.5%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009:Q30%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined ratios must be lower in today’sdepressed investment environment to generate

risk appropriate ROEs

Combined ratio of about 100generated a 16% ROE in 1979, 10% in 2005 and 6% in 2009

*2009 figure is return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.

Co

mb

ined

Rat

io /

RO

E

P/C Premium Growth Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy

-10%

-5%

0%

5%

10%

15%

20%

25%71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Strength of Recent Hard Markets by NWP Growth

1975-78 1984-87 2000-03

Shaded areas denote “hard market” periods. Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Per

cen

t

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 during the Great Depression. Expected decline of 1.6%

in 2010.

Average Commercial Rate Change, All Lines

-6.0

-5.8-4

.9

-5.1

-6.4

-11

.0

-12

.9

-13

.5-12

.0

-13

.3-11

.8

-11

.3

-9.6

-5.3

-3.0-2.7

-4.6

-8.2

-9.7

-9.4

-7.0-5

.9

-3.2

-0.1

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

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

KRW Effect

Magnitude of price declines shrank during

crisis, reflecting shrinking capital,

reduced investment gains, deteriorating

underwriting performance, higher cat

losses and costlier reinsurance

Market remains soft as capital restored and underwriting

losses fall

(1Q:2004-4Q:2009)

Per

cen

t

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

Change in Commercial Rate Renewals

Most major commercial linesrenewed down in Q4:2009 byroughly the same margin as

a year earlier

0.2

-1.9-2.3

-3.7-3.9

-5.6-6.0 -5.8

-5.0-4.6

-4.0

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%


Per

cen

tag

e C

han

ge

(%)

By Line: 2009:Q4

Change in Commercial Rate Renewals

Market has been soft for 6 years

and remains soft as capital is restored and underwriting

losses fall

KRW Effect

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%


Per

cen

tag

e C

han

ge

(%)

By Account Size: 1999:Q4 to 2009:Q4

By Account Size: 1999:Q4 to 2009:Q4Cumulative Quarterly Commercial Rate Changes

Pricing today is where it was in

Q2:2001 (pre-9/11)


1999

:Q4=

100

Capital/Policyholder Surplus (US)Shrinkage, but Not Enough to Trigger Hard Market

Policyholder Surplus

487.1496.6

512.8521.8

478.5

457.3

437.1

463.0

490.8

511.5505.0515.6517.9

$380$400$420$440$460$480$500$520$540

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4P

Pre-crisis peak. Capacity peaked at $521.8 as of 9/30/07.

Capacity as of 12/31/09 was just 0.5% below the 2007 peak and will

likely set a new record in 2010.

Capacity has recovered and is now within 2% of its pre-crisis peak.

Declines Since 2007:Q3 Peak

08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$64.5B (-12.4%)09:Q1: -$84.7B (-16.2%)

09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-1.9%)

Source: ISO, AM Best.

$ B

illio

ns

2006:Q4–2009:Q4P

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

16.2

13.8

6.2

10.9

6.9

9.6

3.3

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01Sept. 11Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

The financial crisis at its peakranks as the largest “capital

event” over the past 20+ years

* 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.

Per

cen

t

Historically, Hard Markets Follow When Surplus “Growth” Is Negative*

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

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 09E10P

NWP % change Surplus % change

Sharp decline in capacityis a necessary but notsufficient condition for

a true hard market

Surplus growth is now positive but premiums

continue to fall, a departure from the historical pattern

* 2009 NWP and Surplus figures are % changes as of Q4:09P vs Q4:08. Sources: A.M. Best, ISO, Insurance Information Institute.

Per

cen

t

Investment PerformanceInvestments Are a Principle Source of Declining Profitability

Property/Casualty Insurance Industry Investment Gain

35.4

42.847.2

52.3

44.4

36.0

45.348.9

59.455.7

64.0

31.435.1

58.0

51.956.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09P

Investment gains fell by 51% in 2008 due to lower yields andpoor equity market conditions. In 2009, the return of realized capital

losses helped offset lower investment income

1Investment 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.

$ B

illio

ns

1994–2009P1

-7.3

-5.7-5.2

-4.3-3.7

-3.3-3.3-3.1

-1.8 -1.8 -2.0

-3.6

-1.9 -2.1

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

Reduction in Combined Ratio Necessaryto Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

Lower investment earnings place a greater burden on underwriting

and pricing discipline

*Based on 2008 Invested Assets and Earned Premiums. **US domestic reinsurance only. Source: A.M. Best; Insurance Information Institute.

Underwriting TrendsFinancial Crisis Does Not Directly Impact Underwriting Performance: Cycle, Catastrophes Were 2009’s Drivers

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

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04

05

06

07

08

09

10

E

11

E

-6

-4

-2

0

2

4

6

8

Prior Yr. Reserve Development ($B) Impact on Combined Ratio (Points)

P/C Reserve Development

Reserve releases areexpected to taper off

in 2010 and dropsignificantly in 2011

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.

Pri

or

Yr.

Res

erve

Rel

ease

($B

)Im

pact o

n C

om

bin

ed R

atio (P

oin

ts)

1992–2011E

Calendar Year vs. Accident Year P/C Combined Ratio

105.

6

107.

8

110.

1

115.

9

107.

3

100.

1

98.3 10

0.9

92.4

95.5

105.

1

101.

9 105.

9

114.

7

107.

8 111.

8

107.

4

108.

3

105.

3 109.

2

109.

2

110.

0

112.

3

100.

8

96.6

96.0

100.

6

93.9

97.4

105.

5

105.

7 109.

4

115.

7

106.

9

108.

4

106.

4

105.

8

101.

6

80

85

90

95

100

105

110

115

120

92 94 96 98 00 02 04 06 08 10ECalendar Year Accident Year

Accident year results show a more significant deteriorationin underwriting performance. Calendar year results are

helped by reserve releases

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.

1992–2010E1

Energy Insurance Market ReviewGlobal Energy Business Rebounding as Financial Crisis Eases; Other Factors Matter Too

Key Trends

• Capacity

• Exposure

• Profitability

• Reinsurance

• Alternative Risk Transfer

Global Energy Insurance Markets: Key Trends

• Aggregate commercial property/casualty (nonlife) capacity is now just below its 2007 Q3 peak after falling sharply in 2008 and is expected to set a new record in 2010

• Capital providers remain attracted to the energy sector despite potential losses because of the profitable underwriting results posted by many P/C insurers in 2009

• Abundance of capital and lack of major catastrophe losses are driving down prices and increasing competition

• 2010 global capacity for upstream energy at 10-year high. Capacity for downstream risks also back up to 2000 levels

Source: Willis Energy Market Review: March 2010.

Insurance Capacity

Upstream Operating Underwriting Capacities, 2000-2010 (Excl. GOM)Capacity at Ten Year High


Downstream Operating Underwriting Capacities, 2000-2010 (Excl. GOM)Capacity


Upstream Capacities and Average Rating Levels, 1993-2010 (Excl. GOM)How Far are Rating Levels Set to Fall?


Onshore Capacities and Average Rating Levels, 1993-2010 (Excl. GOM)Rating Levels


International Liability Market Capacity,2001-2010



• Global energy demand rebounding as financial crisis eases. Energy insurers’ exposure and therefore premium income levels can only benefit from upturn in energy industry activity and recovery of worldwide oil prices.

• BUT, capital providers’ willingness to invest fresh capital in insurance industry has boosted capacity to 10-year high, creating soft market conditions

• Upswing in project activity begins to get underway following oil price recovery

• BOTTOM LINE IN 2010: Renewed confidence in the economic recovery boosts demand and supply for energy and energy assets

– Global energy demand will continue to rebound

– Rise in fuel prices signals new sources of premium income, but could also signal potential increase in frequency and severity of losses

– Long-term partnerships and risk quality key as insurance industry continues to meet demands of buyers in increasingly competitive market

Insured Exposure

Source: Willis Energy Market Review March 2010; Insurance Information Institute.


• Loss of investment return necessarily increases pressure on (re)insurers to generate underwriting profits in soft market

• Lack of major catastrophes and relatively benign claims environment (for now) reduces insurers’ reliance on decreasing investment returns for profits

• Many insurers struggling to obtain premium growth in face of global recession and softening market

• Insurers will be forced to compete more fiercely for premium income and market share in future


Profitability

Energy Losses vs. Global Energy Premium Income 1990-2009*

Source: Willis Energy Loss Database (figures include both insured and uninsured losses*Figures include both insured and uninsured lossesSource: Willis Energy Market Review: March 2010.

Reinsurance Market Trends

• Over the preceding 12 months when many other markets were in turmoil the global reinsurance industry continued to meet its clients requirements

• By and large reinsurers have maintained a responsible underwriting attitude over the January 1 renewal season

• January 1 renewals saw a softening in reinsurance pricing due to a profitable 2009 underwriting year and a recovery from 2008 lossesfollowing the global investment market recovery in 2009

• Primary insurers struggling to obtain premium growth put pressure on their expense ratios and reinsurance cost budgets

• Cat bond market recovering helped by convergence in pricing between traditional reinsurance and cat bonds

• Reinsurers’ ability to continue to provide clients with long-term capital security


Global Reinsurance Capacity Shrank in 2008, Mostly Recouped in 2009

Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.

Hurricanes14%

RealizedCapitalLosses

31%

Change inUnrealized

CapitalLosses

55%

360

300

340

270

280

290

300

310

320

330

340

350

360

370

2007 2008 2009P

Global Reinsurance Capacity

Global reinsurance

capacity fell by an estimated

17% in 2008, but rebounded on investments

and light cats losses in 2009

Source of Decline

$ B

illio

ns

Catastrophe Bonds: Risk Capital Issuance

633846 985 1,139 967

1,220

1,730

1,143

1,991

4,693

6,996

2,686

3,392

0

1000

2000

3000

4000

5000

6000

7000

8000

97 98 99 00 01 02 03 04 05 06 07 08 09

Source: Guy Carpenter; Insurance Information Institute.

Catastrophe bond risk capital issuance plunged by 62% when credit market turmoil spread in 2008 but was up 26% in 2009 as

markets improved

$ M

illio

ns

Catastrophe LossesAdverse Trends in Catastrophe Losses

50

100

150

200

250

300

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

Global Natural Catastrophes 1980-2009

MEGATRENDGlobal natural catastrophe

loss trends are ominous and portend an even more

disastrous decade ahead. Terrorism and other man-

ade disasters couldexacerbate the trend.

Overall and insured losses with trend

Source: Munich Re NatCatSERVICE; Insurance Information Institute.

US

$ B

illio

ns

Overall losses (in 2009 values) Insured losses (in 2009 values)

Trend overall losses Trend insured losses

Natural Catastrophes 2009-Jan 2010

Fast growing India is

exposed to many large-scale natural catastrophes, though still

a “small” insurance

market

China is also exposed to many large-scale natural catastrophes, but still has relatively low

levels of insurance

penetration

2009: Catastrophe losses were relatively lightdue to the lack of hurricane activity

Longer-run: An increasing share of insuredcatastrophe losses will come from the

developing world, especially China, India

Worldmap


Natural Catastrophes: Jan-Mar 2010

Winter Storm Xynthia

produced at least $2B in

insured losses and $4B in economic

losses, including damage to

energy infrastructure

Chilean earthquake (mag.

8.8) on 27 Feb. produced at least

$4 billion in insured losses,

$20 billion in economic losses, including damage

to energy infrastructure

Severe winter weather in the

Eastern US produced at least

$1B in insured losses and $2B in economic losses, including damage

to energy infrastructure


Worldmap

The Costliest Catastrophes So Far in 2010 Impacted the Energy Business and Its Insurers Significantly

*Period from 1 January through 31 March 2010. Source: 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE.

Post-Crisis Changes to the Insurance Regulatory EnvironmentRegulators Are Threatening to Impose Regulations Appropriate for Banks on (Re)Insurers

Systemic Risk: Oversight & Resolution Authority

Issues Related to Systemic Risk & Resolution Authority• US federal authority created to oversee systemic risk of large

financial holding companies (e.g., Federal Reserve or other existing/new agency) [a.k.a. TOO BIG TOO FAIL]

– P/C insurers are working to “carve out” an exception to systemic risk oversight (arguing they were not the source/cause of problems)

– Without such an exception, P/C insurers could be subject to assessments (e.g., Financial Responsibility Tax) for failed non-insurance financial institutions or could be forced to repay funds provided for government assistance to firms due to problems outside of their P/C insurance operations

• European regulators seem to believe large (re)insurers should be included under the definition of systemically important firms

Source: Insurance Information Institute.


How Current Systemic Risk Proposal Could Affect Insurers• Bank holding companies with more than $50 billion in assets would be

subject to an assessment (Financial Responsibility Tax) in order to build a $50 billion fund to wind down (resolve) large, insolvent financial institutions

– This first group could include some insurers that own banks

• If the $50 billion resolution fund is exhausted, then other non-bank financial institutions (including insurers, even those without banks) with more that $50 billion in consolidated assets would be assessed to make up any shortfall

• Bottom Line: P/C insurers do not object to the concept of systemic risk, but feel that the focus on size alone is inappropriate given the roots of the financial crisis and the fact that P/C insurers were not the cause

Source: Insurance Information Institute.


Rational for Excluding P/C Insurers from Systemic Regulation

• The insurance business model (encompassing both insurers and reinsurers) has specific features that make it a source of stability within the financial system

– Up-front premiums provide strong operating cash flow

– Insurance policies generally represent longer-term liabilities with little or no ability for the policyholder to demand immediate payments (no “run” on insurers)

– The few insurers that experienced serious problems were impacted not by their insurance business but by quasi-banking activities. This includes AIG and “monoline” insurers that provided financial guarantees and engaged in CDS writing and trading

Source: Geneva Association, Systemic Risk in Insurance, March 2010.

Thank you for your time and your attention!

Insurance Information Institute Online:

www.iii.org

Twitter: twitter.com/bob_hartwig

after the crisis: the global economics of the p/c insurance industry energy markets trends and...

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