commercial p/c insurance industry update & outlook · 2018. 5. 21. · commercial p/c insurance...
TRANSCRIPT
Commercial P/C Insurance Industry Update & Outlook:
Trends, Challenges, and Trumponomics
Robert P. Hartwig, Ph.D., CPCUClinical Associate Professor of Finance, Risk Management & Insurance
Darla Moore School of Business ¨ University of South [email protected] ¨ 803.777.6782
Inland Marine Underwriters AssociationScottsdale, AZMay 21, 2018
2
P/C Insurance Industry Highlights
n P/C Insurers: Financially Strong Despite Record CATsw Pricing and capacity trends (primary and reinsurance)w CAT updatew Financial Market Overvieww Inland Marine Overview
n Strengthening Growth Opportunities in 2018w Drivers of Commercial Lines Growth: Price, Exposure
n The Economy and Impacts of “Trumponomics”
n InsurTech and Other Disruptors
n Solving the Industry’s “Talent Crisis”
3
P/C Insurance Industry Financial Overview
CATS, Non-CAT Underwriting Losses Impacted Insurer Balance Sheets
Industry Remains Strong
3
P/C Industry Net Income After Taxes1991–2017
n 2005 ROE= 9.6%n 2006 ROE = 12.7%n 2007 ROE = 10.9%n 2008 ROE = 0.1%n 2009 ROE = 5.0%n 2010 ROE = 6.6%n 2011 ROAS1 = 3.5%n 2012 ROAS1 = 5.9%n 2013 ROAS1 = 10.2%n 2014 ROAS1 = 8.4%n 2015 ROAS = 8.4%n 2016 ROAS = 6.2%n 2017 ROAS =5.0%
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2%ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; Sources: A.M. Best, ISO.
$14,178
$5,840
$19,316
$10,870 $20,598
$24,404 $36,819
$30,773
$21,865
$3,046
$30,029
$62,496
$3,043
$35,204
$19,456 $3
3,522
$63,784
$55,870
$56,826
$42,924
$36,123
$38,501
$20,559
$44,155
$65,777
-$6,970
$28,672
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Net income fell sharply in 2017
as high CAT losses took
their toll
$ Millions
-5%
0%
5%
10%
15%
20%
25%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2017
Profitability = P/C insurer ROEs. 2011-16 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, A.M. Best, USC RUM Center.
1977:19.0% 1987:17.3%
1997:11.6% 2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years10 Years
9 Years
ROEs in 2017 plunged to their lowest levels
since 2008.ROE
1975: 2.4%
2013 9.8%
2016 6.2%
2015: 8.4%
2017 5.0%
6
ROE: Property/Casualty Insurance by Major Event, 1987–2017E
*2017 Estimate based on actual ROAS through Q3 of 4.2% with USC Center for Risk and Uncertainty Management estimate for the full year.
Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; USC RUM Center.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*
P/C Profitability Is Influenced Both by
Cyclicality and Volatility
Hugo
Andrew, Iniki Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
Sandy
Low CATs
Harvey, Irma, Maria,
CA Wildfires
7
P/C Insurance Industry Combined Ratio, 2001–2017:Q3*
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.; 2017 (est.) based on actual 104.1 through Q3 (Q3 combined ratio alone was 110.7). Sources: A.M. Best, ISO (2014-2015); Figure for 2010-2013 is from A.M. Best P&C Review and Preview, Feb. 16, 2016.
95.7
99.3101.1
106.5
102.5
96.4 97.0 97.8100.7
104.1101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums Relatively
Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Sandy Impacts
Lower CAT
Losses
Best Combined Ratio Since 1949 (87.6)
Avg. CAT Losses,
More Reserve Releases
Cyclical Deterioration
Sharply higher CATs are driving
large underwriting losses and
pricing pressure
109.
411
0.2
118.
810
9.5 11
2.5
110.
210
7.6
104.
110
9.7
110.
2
102.
5 105.
491
.194
.510
4.4
100.
7 103.
8 107.
310
5.4
96.3
96.0
95.1
99.1
106.
2
102.
0
111.
1
112.
3
122.
3
90
95
100
105
110
115
120
125
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 1617E
Com
mer
cial
Lin
es C
ombi
ned
Rat
io
*2007-2012, 2017 figures exclude mortgage and financial guaranty segments. 17E = actual 9 mo. YTD figure of 106.2.Source: A.M. Best (1990-2016); ISO (2017E).
Commercial Lines Combined Ratio, 1990-2017F*
Commercial lines underwriting performance deteriorated
materially in 2017 as record CATs. diminishing prior year reserves,
rising loss cost trends and pricing pressure in some lines are
pushing combined ratios higher
8
9
Policyholder Surplus, 2006:Q4–2017:Q4
Sources: ISO, A.M .Best; Center for Risk and Uncertainty Management, University of South Carolina.
($ Billions)$487.1
$496.6
$512.8
$521.8
$478.5
$455.6
$437.1 $463.0 $490.8
$511.5 $540.7
$530.5
$544.8
$559.2
$559.1
$538.6
$550.3
$567.8
$583.5
$586.9
$607.7
$614.0
$624.4 $653.4
$671.6
$673.9
$675.2
$674.2
$673.7
$676.3 $700.9
$717.0 $752.5
$662.0
$570.7
$566.5
$505.0
$515.6
$517.9
$400
$450
$500
$550
$600
$650
$700
$750
$800
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
14:Q2
14:Q3
14:Q4
15:Q2
15:Q4
16:Q1
16:Q4
17:Q2
17:Q4
Financial Crisis
Surplus (Capacity) as of 12/31/17 reached a new
record of $752.5B despite heavy CAT losses
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 .
Drop due to near-record 2011 CAT losses
Capacity/Capital “shocks” typically do not on their own drive a sustained firming of
the pricing environment
Profitability & Politics
1010
How Is Profitability Affected by the President’s Political Party?
11
Quiz Question #1
n Since 1950, under which presidential administration was the P/C insurance industry the most profitable?
A. Jimmy Carter B. Ronald Reagan
C. George W. Bush
D. Bill Clinton
15.10%8.93%
8.65%8.35%8.33%
8.20%7.98%
7.68%6.98%6.97%
5.43%5.03%
4.20%4.83%
4.68%4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
CarterReagan II
NixonClinton I
G.H.W. BushG.W. Bush II
Obama IIClinton IIReagan I
Nixon/FordTruman**
Eisenhower IEisenhower II
Trump*G.W. Bush I
Obama IJohnson
Kennedy/Johnson
*Trump administration based on 2017 only and figures is an estimate based on the first three quarters of the year.**Truman administration ROE of 6.97% based on 3 years only, 1950-52;.Source: Insurance Information Institute
OVERALL RECORD: 1950-2016*
Democrats 7.61%Republicans 7.75%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950-2017
13
Profitability and Growth in the Inland MarineClass of Business
14
Inland Marine:Direct Written Premium, 2003–2017E
$14.2$15.2 $14.5
$13.2 $13.1
$17.3$18.9
$20.5 $21.3$22.3
$15.8$14.1
$11.3$12.6
$11.9
$0
$5
$10
$15
$20
$25
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E
Sources: A.M. Best; Center for Risk and Uncertainty Management, University of South Carolina.
$ BillionsThe Inland Marine has
grown by about $9 billion or 70% since its 2010
crisis-era trough
15
Return on Net Worth, Countrywide, Direct:Inland Marine vs. All Lines, 2002-2016
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Inland Marine All Lines Combined
2005: KRW
Sandy
Inland Marine has consistently been one of the most profitable lines,despite occasionally heavy CAT losses (2017 impacts significant).
2012-2016 AverageInland Marine: 19.7%
All Lines: 7.6%
Sources: A.M. Best; Center for Risk and Uncertainty Management, University of South Carolina.
16
Growth Rate of Net Premiums Written, Countrywide, Inland Marine vs. All Lines
-10%
-5%
0%
5%
10%
15%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Inland Marine All Lines Combined
Deceleration in growth reflects overall industry
trend and a likely increase in cessions
The Great Recession” hit IM net premium written growth rate
harder than other lines…
Sources: A.M. Best; Center for Risk and Uncertainty Management, University of South Carolina.
17
Growth Rates: Inland Marine Net Premiums Written, Countrywide, vs. Nominal U.S. GDP
Sources: I.I.I. calculations, based on data from A. M. Best, Aggregates & Averages, various issues
-9%
-6%
-3%
0%
3%
6%
9%
12%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Inland Marine Nominal U.S. GDP
…but by 2011 was even again
The Great Recession” hit the IM net premium
written growth rate harder than other lines…
19
Inland MarineCombined Ratio, 1997–2016
37.7
36.3
35.1
36.1
34.3
31.6
29.3
31.0
30.6
28.8
31.1
30.6
35.0
32.0
32.0
31.7
29.7
33.4
32.8
32.9
57.7
60.4
66.6
56.5
65.7
52.1
51.4
51.3
59.1
48.4
48.3 62.5
54.2
54.0 65.0
64.2
53.9
49.8
50.9
50.9
0
25
50
75
100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Exp Ratio L & LAE
Inland Marine generally outperforms most other lines by a wide margin:Inland Marine: 87.3
Commercial Lines: 100.1Sources: A.M. Best; Center for Risk and Uncertainty Management, University of South Carolina.
20
Catastrophe Loss Update: Major Driver of Rate Pressure
2017 Was One of the Costliest Years Ever for US Insurers
Hurricanes Harvey, Irma and Maria, California Wildfires Exact a Huge Toll
20
21
$21 $35
$60
$30
$55
$137
$76
$46
$37
$38
$135
$55
$18
$52
$23 $28
$63
$136
$0
$20
$40
$60
$80
$100
$120
$140
$160
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*
Global Insured Catastrophe Losses, 2000 – 2017E
*EstimateSources: Swiss Re, RMS, Barclays Research.
2017 was one of the top 3 costliest years ever for
insurers on a global scale($ Billions, $ 2017)
21
22
Quiz Question #2
n Privately insured catastrophe losses in 2017 in the United States totaled approximately how much?
A. $50 billionB. $60 billion
C. $70 billion
D. $80 billion
23
$13.0
$11.3
$3.9$14.8
$11.9
$6.3
$35.8
$7.8 $1
6.8$34.7
$10.9
$7.7
$30.1
$11.8
$14.9
$34.6
$36.1
$13.1
$15.5
$15.2
$21.6
$79.0
$75.7
$14.4
$5.0 $8.2
$38.9
$9.1
$27.2
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*
U.S. Insured Catastrophe Losses, 1989 – 2017*
*Estimated. Stated in 2017 dollars. Excludes NFIP losses.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 ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Willis Re; Insurance Information Institute.
2017 was one of the costliest years ever for insured CAT losses in
the US($ Billions, $ 2015)
23
24
Top 10 US Catastrophe Losses of 2017,by Insured Loss
(Insured Losses, 2017 Dollars, $ Billions)*
$11.0
$15.9$18.0
$21.9
$1.9$1.6$1.5$1.4$1.3$1.0$0
$5
$10
$15
$20
$25
June Hailstorm March Storms FebruaryStorms
March Storms March Storms May ColoradoStorm
CaliforniaWildfires
HurricaneHarvey
Hurricane Irma Hurricane Maria
YTD insured CAT losses in the US totaled $72 billion by late
2017, the second costliest year on record, led by Hurricanes
Maria, Irma and HarveyNot all insured losses in 2017
were due to hurricanes.
More than $15B in other losses occurred from coast-to-coast.
*Estimates.Sources: PCS; Insurance Insider: http://www.insuranceinsider.com/-1270818/9.
25
Top 18 Most Costly Disastersin U.S. History—Katrina Still Ranks #1
(Insured Losses, 2017 Dollars, $ Billions)*
$9.3 $9.7 $11.7 $14.2$15.9 $18.0
$19.8 $21.9$25.3 $26.0 $27.1
$51.6
$8.3$7.9$7.5$7.1$6.0$5.9
$0
$10
$20
$30
$40
$50
$60
Jeanne(2004)
Frances(2004)
Rita (2005)
Tornadoes/T-
Storms (2011)
Tornadoes/T-
Storms (2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Harvey (2017)
Irma (2017)
Sandy(2012)
Maria (2017)
Northridge(1994)
9/11 (2001)
Andrew(1992)
Katrina(2005)
Harvey, Irma and Maria combined caused an
estimated $55B in privately insured losses in the US
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
15 of the 18 Most Expensive Insurance Events in US History Have Occurred Since 2004—3 of those in 2017
*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.
26
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1997–20161
0.2%2.0%7.0%
5.9%
6.7%
39.9%
38.2%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2016 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, $161.1
Fires (4), $8.4
Events Involving Tornadoes (2), $168.1
Winter Storms, $28.2
Terrorism, $25.0
Other Wind/Hail/Flood (3), $29.7
Other (5), $0.8
Wind losses, by far, cause the most
catastrophe losses, even if hurricanes/TS
are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1997-2016
totaled $421.2B, an average of $21.1B per year or $1.76B
per month
Winter storm losses were much above average in 2014/15 pushing
this share up
27
0
50
100
150
200
250
300
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18*
(Percent)
US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions
Post-Andrew surge
US Property Catastrophe Rate-on-Line Index: 1990 – 2018*
*As of January 1 each year. 2018 is a full-year estimate (Barclay’s Capital).Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/indices/regional-property-cat-rate-on-line-index.html
Post-9/11 Adjustment
Post Katrina, Rita, Wilma
period
Post-Ike adjustment
Adjustment following
record tornado losses in 2011 and Sandy in
2012
Near-Record CATs in 2017 will likely lead US reinsurance prices in
2018 to increase
INVESTMENTS: THE NEW REALITY
28
Investment Performance is a Key Driver of Insurer Profitability
The “Trump Bump” Has Lifted Stock Markets and Interest Rates
Will the Gains Help Insurers?28
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18*
*Through May 11, 2018.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html.
Tech Bubble Implosion
Financial Crisis
Annual Return
Energy Crisis
2016: +9.5%2017: 19.4%
2018 YTD: 2.5%
S&P 500 Index Returns, 1950 – 2018*
Fed Raises Rate
2018 marks the 9th year of the current bull market. Stock markets rose sharply following the 2016 election and continued to rise throughout 2017 and early 2018
Trump Bump: Sharp surge in stock post-election
30
P/C Insurer Net Realized Capital Gains/Losses, 1990-2017:Q4
*Figure is through Q4:2017Sources: A.M. Best, ISO; Insurance Information Institute.
$2.88
$4.81 $9.89
$9.82
$10.81 $18.02
$13.02
$16.21
$6.63
-$1.21
$6.61
$9.13
$9.70
$3.52 $8.92
-$7.90
$5.85
$7.04
$6.18 $11.37
$10.28
$9.38
$7.31 $15.10
-$19.81
$9.24
$6.00
$1.66
-$25-$20-$15-$10-$5$0$5$10$15$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*
Insurers posted net realized capital gains in 2010 - 2017 following two years of realized losses during the financial crisis. The bull market of 2017 helped
push gains to more than twice their 2016 level.
($ Billions)Realized capital gains in
2017 were fueled by the bull market: +$7.8B or 106%
Property/Casualty Insurance Industry Investment Income: 2000–2017
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.3 $46.4 $47.2 $46.6$49.0
$39.6
$49.5$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.7%) increase in 2015—
though 2016 experienced another decline. Up 7.6% in 2017.
1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute.
($ Billions) Investment earnings in 2017 were still ~10% below their
2007 pre-crisis peak
32
Policyholder Surplus, 2006:Q4–2017:Q4
Sources: ISO, A.M .Best; 2018 estimate from the Center for Risk and Uncertainty Management, University of South Carolina.
($ Billions)$487.1
$496.6
$512.8
$521.8
$478.5
$455.6
$437.1 $463.0 $490.8
$511.5 $540.7
$530.5
$544.8
$559.2
$559.1
$538.6
$550.3
$567.8
$583.5
$586.9
$607.7
$614.0
$624.4 $653.4
$671.6
$673.9
$675.2
$674.2
$673.7
$676.3 $700.9
$717.0 $752.5
$662.0
$570.7
$566.5
$505.0
$515.6
$517.9
$400
$450
$500
$550
$600
$650
$700
$750
$800
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
14:Q2
14:Q3
14:Q4
15:Q2
15:Q4
16:Q1
16:Q4
17:Q2
17:Q4
Financial Crisis
Surplus (Capacity) as of 12/31/17 reached a new
record of $752.5B despite heavy CAT losses
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 .
Drop due to near-record 2011 CAT losses
Capacity/Capital “shocks” typically do not on their own drive a sustained firming of
the pricing environment
33
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2018*
*Monthly, constant maturity, nominal rates, through Apr. 2018.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially
below 5% for more than a decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
Late 2016 “Trump Bump” in the
aftermath of the 2016 election—
shrank in 2017—but rates are
again on the rise
33
34
Treasury Yield Curves: Pre-Crisis (July 2007) vs. April 2016 and 2018
0.24% 0.30% 0.42% 0.62%0.86%
1.63% 1.82%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%
1.55%1.79% 1.98% 2.15%
2.50% 2.52% 2.70% 2.82% 2.87% 2.96% 3.07%
1.34%1.02%
2.62%2.22%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
May 2016 Yield CurvePre-Crisis (July 2007)Current (April 2018)
The Fed Began to Raise Rates in Dec. 2015 but Rate Remain Far Below Pre-Crisis Levels
Source: Federal Reserve Board of Governors: http://www.federalreserve.gov/releases/h15/data.htm; Univ. of South Carolina..
April 2016
April 2018
Pre-Crisis
35
Interest Rate Forecasts: 2018 – 2024
2.9% 3.0%
3.4% 3.5% 3.6% 3.7% 3.7% 3.7%
1.9%
2.6% 2.7% 2.8% 2.9% 2.9%
0%
1%
2%
3%
4%
18F 19F 20F 21F 22F 23F 24F 18F 19F 20F 21F 22F 23F 24F
A full normalization of interest rates is unlikely until the early 2020s, approximately 15 years after the onset of the financial crisis.
Yield (%)
Sources: Blue Chip Economic Indicators (5/18 for 2018 and 2019; for 2018-2024 3/18 issue); Univ. of South Carolina.
3-Month Treasury 10-Year Treasury
The end of the Fed’s QE program in 2014 and a
stronger economy have yet to push longer-term
yields much higher
Net Investment Yield on Property/ Casualty Insurance Invested Assets, 2007–2017*
4.4
4.0
4.6 4.5
3.7 3.83.7
3.43.7
3.2 3.1 3.1
4.6
4.23.9
2.5
3.0
3.5
4.0
4.5
5.0
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 have pushed up some yields, albeit quite modestly. Shrinking of Fed’s balance sheet should help too in 2018
and beyond.Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017 figure is from ISO.
(Percent)
Investment yield in 2017 was down about 150 BP
from pre-crisis levels
P/C Insurer Investment Yields:Lowest in Half a Century
0
1
2
3
4
5
6
7
8
9
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Yield on average cash and investment assets,%
Average yields in 2016-2017 dropped to 3.1%, their lowest
level since the mid-1960s
% Change
38
Federal Funds Rate: Jan. 2006 – Apr. 2018
Note: Recessions indicated by gray shaded columns.Source: Board of Governors, Federal Reserve; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
0
1
2
3
4
5
6
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
The Fed’s aggressive rate cutting ushered in what will be at least 15
years of depressed investment earnings for the P/C insurance
industry
The Fed’s glacial pace of interest rate normalization
suggests P/C will be lucky to see pre-crisis
level interest rates until the early 2020s
Federal Funds Rate (%)
Pre-Crisis: 5.25%
Post-Crisis: Near 0% for 8
years
Today: 1.75%
39
High Quality 10-Yr. Corporate Bond Yields: Jan. 2006 – Mar. 2018
Note: Recessions indicated by gray shaded columns.Source: Board of Governors, Federal Reserve; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
0
1
2
3
4
5
6
7
8
9
10
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Insurers invest heavily in
intermediate term, high quality corporate
bonds—but yields have remained stubbornly low
10-Yr. Corporate Yield (%)
Pre-Crisis: 5.5% - 6.0% Post-Crisis:
3%-4% Today: 4.0%
40
Yield Spread Between 10- and 2-Yr. Treasury, May 2013 – April 2018
Note: Recessions indicated by gray shaded columns.Source: Federal Reserve Bank of St. Louis. FRED Economic Data; Center for Risk and Uncertainty Management, University of South Carolina.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
'13 '14 '15 '16 '17
The narrowing of the spread between long
and short-term investments is not
helpful to P/C insurers, especially in long-tail lines like WC
Yield Spread (% Points)
Recent High: 260 Basis Pts.
Today: <0.50 Basis Pts.
Also concern that a shrinking yield spread
suggests little confidence in the strength of the
economy in the years ahead
41
Annual Inflation Rates, (CPI-U, %),1990–2019F
2.82.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.11.5 1.6
0.1
1.3
2.12.5
2.2
2.92.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18F19F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 5/18 (forecasts).
Less slack in the U.S. economy, rising energy prices and looming budget deficits suggest additional inflationary
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Inflationary expectations are
up on expectations of
stronger economic
growth, higher energy costs,
deficit spending
42
U.S. Budget Deficit in Dollars and as a Share of GDP, 2005-2028F
$318
$248
$161
$459
$1,294
$1,300
$1,087
$680
$485
$439
$585 $665
$804
$981 $1,008 $1,123 $1,276
$1,273
$1,244 $1,352
$1,320
$1,316
$1,526
$1,413
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Bud
get D
efic
it
0
2
4
6
8
10
12
As %
of GD
P
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
Soaring budget deficits will pressure credit
markets and could put additional pressure on
interest rates
The budget deficit—at 3.5% of GDP today, will soon reach 5%
0
20
40
60
80
100
120
90 92 94 96 98 00 02 04 06 08 10 12 14 16
US National Debt as a Share of GDP, 1995 - 2017
Source: Congressional Budget Office.
The national debt now exceeds GDP for the first time since WW II. This will
likely pressure interest rates as the size of federal debt
issuances rises.
103.7%
53.5%
44
P/C Insurance Growth Overview and Outlook
Drivers of Growth in 2018
Economic Growth Fuels Exposure & Record CAT Losses Are Pressuring Rates
Price Competition Remains Rational
44
45
-5%
0%
5%
10%
15%
20%
25%
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Net Premium Growth (All P/C Lines): Annual Change, 1971—2018F(Percent)
1975-78 1984-87 2000-03
*Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014-17).
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.
2018F: 4.5%2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2
2013: 4.4%2012: +4.2%
Outlook2017E: 4.1%2018F: 4.5%
Y-o-Y Growth Rates, Direct Premiums Written, Commercial vs. Personal Lines,
2012:Q4 - 2017:Q3
0%
1%
2%
3%
4%
5%
6%
7%
12:Q
1
12:Q
212
:Q3
12:Q
4
13:Q
113
:Q2
13:Q
3
13:Q
414
:Q1
14:Q
2
14:Q
3
14:Q
415
:Q1
15:Q
2
15:Q
315
:Q4
16:Q
1
16:Q
216
:Q3
16:Q
4
17:Q
117
:Q2
17:Q
3
Personal LinesCommercial Lines
Sources: NAIC, via SNL Financial; ISO; Insurance Information Institute calculations.
Since 2014, personal lines Direct Premiums Written have generally grown faster than commercial lines DPW, and that growth has been less volatile.
Personal Lines growth is more
than 3 times that of
Commercial Lines
47
Growth in Net Written Premium: Personal vs. Commercial, 2015 – 2017
6.0%
3.1%
1.5%
2.7%
6.7%
2.6%3.3%
4.6%5.3%
3.3%
1.5%
3.5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Personal Lines Predominating
Diversified Commercial LinesPredominating
All Insurers
2015 2016 2017
Annual Change in NWP
The divergence in growth between personal and commercial lines is large and has been expanding rapidly
Source: ISO.
Commercial lines growth has been exceedingly weak
but may be improving
2016: Components of Commercial DWP Growth
EXPOSURE, 4.1%
RATE, -1.0%
DWP, 3.1%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Commercial Market
EXPOSURE RATE DWP
n Direct Written Premium (DWP) in US lines covered by ISO MarketStance grew 3.1 percent in 2016
n Soft market conditions counteracted moderate 4.1 percent exposure growth
n Anecdotal evidence: insureds spent rate reductions on new/broader coverages (CIAB, 2017).
Source: Verisk Insurance Solutions.
49
M&A Trends
Consolidation Among P&C (Re)Insurers and Within
Distribution Channels Will Likely Continue at a Modest Pace
50
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2017 (1)
$5,100
$11,534
$8,059
$30,873
$19,118
$40,032
$1,249
$486
$20,353
$425
$9,264
$35,221
$13,615
$16,294
$3,507 $6,419
$12,458
$4,685
$4,393
$6,723
$39,970
$10,665
$8,063
$55,825
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Tran
sact
ion
valu
es
0
20
40
60
80
100
120
140
Num
ber of transactions
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity in the P/C sector in 2015 totaled $40B, its highest level
since 2000, but fell sharply in 2016/17 in
dollar terms
Major 2018 Deal:AIG/Validus: $5.56B
Axa/XL: $15.3B
51
Commercial Lines Growth, Underwriting Performance
& Pricing Cyclicality
Pricing Pressures Are Intense but Rational
51
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17E
Economic Shocks, Inflation:
1976: 22.2%Tort Crisis
1986: 30.5%
Post-9/112002: 22.4%
Great Recession:2009: -9.0%
ROE
2017: +1.8%
Commercial Lines NPW Premium Growth:1975 – 2017E
Recessions:1982: 1.1%
Commercial lines is prone to far more cyclical volatility that
personal lines.
1988-2000: Period of
inter-cycle stability
Commercial lines premium
growth has been sluggish
for years, reflecting weak
pricing environment.
Large underwriting losses will necessarily
pressure rates upward in 2018
Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute. 2017 estimate: Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.
Post-Hurricane Andrew Bump:
1993: 6.3%
Post Katrina Bump:
2006: 7.7%
2016: -1.5%
53
CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2017:Q4*, 2018F
-0.1%
0.9% 2.7% 4.4%
4.3%
3.9% 5.0% 5.2%
4.3%
3.4%
2.1%
1.5%
-0.5%
0.1%
-0.7%
-2.3%
-3.3%
-3.1%
-2.8%
-3.7%
-3.9%
-3.2%
-3.3%
-2.5%
-2.8% -1.3%
0.3% 1.0%
-2.9%
-16%
-11%
-6%
-1%
4%
9%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
2018F
*Latest available.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; Center for Risk and Uncertainty Management, Univ. of South Carolina.
First Increase in 13 QuartersCommercial programs have generally
renewed downwards since late 2014, but will likely move to positive renewals in 2018, just
as they did following large CAT losses in 2011-2012
(Percent)
Renewals turned positive in late 2011
in the wake of record tornado
losses and Hurricane Sandy
2017’s poor results may exert enough
pressure on markets to push overall rates
up by +1% in 2018
54
Change in Commercial Rate Renewals, by Line: 2017:Q4
Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.
Percentage Change (%)
0.4% 0.6%
2.4%
7.3%
-2.0%
0.0% 0.1% 0.1% 0.1% 0.4%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Workers
Comp
Cyber
General
Liability
Surety
Business
Interruption
Construction
D&O
Umbrella
Commercial
Property
Commercial
Auto
Commercial Property, Business Interruption
will need to reflect record CAT losses and
pressure from reinsurance markets
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Commercial Auto was only major line with materially positive renewals in 2017
Commercial Auto Combined Ratio: 1993–2017
112.1
112.0
113.0
115.9
102.7
95.2
92.9
92.1
92.4 94.1 96.8 99.1
97.8
103.4
106.8
106.7
103.3 108.8
110.4
111.011
8.1
115.7
116.2
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E
Commercial Auto Results Are Challenged as Rate Gains Have Yet to Fully Offset Adverse Frequency and Severity Trends
55Sources: A.M. Best (1990-2016); Center for Risk and Uncertainty Management, University of South Carolina (2017E).
Workers Compensation Combined Ratio: 1994–2017P
102.0
97.0 100.0
101.0
112.6
108.6
105.1
102.7
98.5 10
3.5
104.5 110.6 115.0
115.0
109.0
102.0
100.0
94.0
94.0
89.0
121.7
107.0115.3
118.2
80859095100105110115120125130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17p
Workers Comp Is an Example of a Line that Was Recently Restored to Health Through the Return
of Rate AdequacySources: A.M. Best (1994-2009); NCCI (2010-2017P) and are for private carriers only.. 56
WC results have improved markedly
since 2011
THE ECONOMY
57
The Strength of the Economy Will Greatly Influence Growth in Insurers’ Exposure
Base Across Most Lines
How Is “Trumponomics” Impactingthe Industry?
57
58
Trumponomics: The Essential Elements
n5 Elements wTax ReformwDeregulationw Infrastructure InvestmentwHealthcare wFair Tradew Immigration
Reform/Enforcement
n Most of these have direct impacts for insurers
Awakening America’s“Animal Spirits”
5959
Economic Policy and the Insurance Industry
Consumer and Business Confidence Are Key
60
Animal Spirits: Unleashed from the Oval Office?
Source: https://twitter.com/realDonaldTrump
61
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 5/18; Center for Risk and Uncertainty Management, Univ. of South Carolina.
2.7%
1.8%
-1.8%
1.3%
-3.7%
-5.3%
-0.3%
5.0%
2.3%
2.2% 2.6%
2.4%
0.1%
2.5%
1.3%
4.1%
2.0%
1.3%3.1%
0.4%2.7%
1.8%3.5%
-0.9%
4.6%
4.3%
2.1%
2.0% 2.6%
2.0%
0.9%
0.8% 1.4%3.5%
2.1%
1.2%3.1%
3.2%
2.9%
2.3% 3.2%
3.0%
2.8%
2.5%
2.5%
2.2%
2.0%
-8.9%
4.5%
1.4%
4.1%
1.1% 1.8% 2.5% 3.6%
3.1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
08:1
Q08
:2Q
08:3
Q08
:4Q
09:1
Q09
:2Q
09:3
Q09
:4Q
10:1
Q10
:2Q
10:3
Q10
:4Q
11:1
Q11
:2Q
11:3
Q11
:4Q
12:1
Q12
:2Q
12:3
Q12
:4Q
13:1
Q13
:2Q
13:3
Q13
:4Q
14:1
Q14
:2Q
14:3
Q14
:4Q
15:1
Q15
:2Q
15:3
Q15
:4Q
16:1
Q16
:2Q
16:3
Q16
:4Q
17:1
Q17
:2Q
17:3
Q17
:4Q
18:1
Q18
:2Q
18:3
Q18
:4Q
19:1
Q19
:2Q
19:3
Q19
:4Q
Demand for Insurance Should Increase in 2018-19 as GDP Growth Continues at a Steady and Perhaps Accelerating Pace and Gradually
Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in Dec, 2007
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2018 GDP forecasts were revised upwards by ~0.4%
due to tax reform, but effects wane in 2019
First consecutive
quarters of 3%+ GDP growth since 2014
The Economy Drives P/C InsuranceIndustry Premiums: 2006:Q1 – 2017:Q2Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change
Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; I.I.I.
-6%
-3%
0%
3%
6%
9%
12%
2006:Q1
2006:Q3
2007:Q1
2007:Q3
2008:Q1
2008:Q3
2009:Q1
2009:Q3
2010:Q1
2010:Q3
2011:Q1
2011:Q3
2012:Q1
2012:Q3
2013:Q1
2013:Q3
2014:Q1
2014:Q3
2015:Q1
2015:Q3
2016:Q1
2016:Q3
2017:Q1
DWP y-o-y change y-o-y nominal GDP growth
Direct Written Premiums track Nominal GDP—not quarter by quarter but overall fairly well.
63
Consumer Confidence Index:Jan. 1987 – Apr. 2018
Source: The Conference Board; Wells Fargo Research.
Outlook: Consumers are optimistic about the future, which is consistent with expectations for stronger economic growth (consumers account for nearly 70% of all spending in the economy). Should positively influence
growth of insurable exposures.
The Conference Board’s Consumer Confidence Index stood at 128.7 in April, close to its
post-recession high
64
NFIB Small Business Optimism Index:Jan. 1988 – March 2018
Source: National Federal of Independent Business; Wells Fargo Research.
Outlook: Small businesses are much more optimistic about the future
The NFIB’s Index of Small Business Optimism remains
close to its cyclical high. Tax reform, reduced regulations and strong sales will drive investment,
hiring and exposures
Business Investment Is a Potent Driver of Property Insurance Premium Growth*
*Commercial property direct premiums written (fire, allied lines, CMP, inland marine, burglary and theft); business fixed investment (structures, equipment, and software).Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: https://fred.stlouisfed.org/series/PNFI#0; National Bureau of Economic Research (recession dates); Insurance Information Institute.
-20%
-10%
0%
10%
20%
30%
07:Q2 08:Q2 09:Q2 10:Q2 11:Q2 12:Q2 13:Q2 14:Q2 15:Q2 16:Q2 17:Q2
Recession
% change, property ins premiums
% change, fixed investment
4.9%
Tax reform allows for full and immediate expensing of short-lived capital assets. This should stimulate investment and
increase commercial exposures.
% change from same quarter, prior year
{ Business fixed investment is forecast to grow at 5%–6% in 2017:2H and at 4.5%–5.5% in 2018.
{ Investment in equipment and software is expected to grow but investment in structures is expected to shrink.
66
US Unemployment Rate Forecast4.5%
4.5% 4.6% 4.8% 4.9% 5.4% 6.1%6.9%
8.1%
9.3% 9.6% 10.0%
9.7%
9.6%
9.6%
8.9% 9.1%
9.1%
8.7%
8.3%
8.2%
8.0%
7.8%
7.7%
7.6%
7.3%
7.0%
6.6%
6.2%
6.1%
5.7%
5.6%
5.4%
5.2%
5.0%
4.9%
4.9%
4.9%
4.7%
4.7%
4.4%
4.3%
4.1%
4.1%
4.0%
3.9%
3.7%
3.7%
3.6%
3.6%
3.6%
9.6%
4%
5%
6%
7%
8%
9%
10%
11%
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
12:Q1
12:Q2
12:Q3
12:Q4
13:Q1
13:Q2
13:Q3
13:Q4
14:Q1
14:Q2
14:Q3
14:Q4
15:Q1
15:Q2
15:Q3
15:Q4
16:Q1
16:Q2
16:Q3
16:Q4
17:Q1
17:Q2
17:Q3
17:Q4
18:Q1
18:Q2
18:Q3
18:Q4
19:Q1
19:Q2
19:Q3
19:Q4
Rising unemployment eroded payrolls
and WC’s exposure base.
Unemployment peaked at 10% in late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (5/18 edition); Insurance Information Institute.
2007:Q1 to 2019:Q4F*
Unemployment forecasts have been revised modestly downwards. Optimistic
scenarios put the unemployment as low as 3.6 by Q4 2018.
Jobless figures have been revised
downwards for 2018/19
The Apr. 2018 unemployment rate was 3.9%, an 18-year low
67
Help Wanted! Number of Job Openings, Jan. 2003—Feb. 2018*
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
Job openings plunged to 2.2
million, 48%, from 4.2 mill in 2005
Today, there are 6.1 million job openings, up
175% since 2009
(000)
-48% +175%
68
Take This Job And…Number of Quits, Jan. 2003—Feb. 2018*
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
The number of workers quitting
their jobs tumbled 1.7 million during
the recession, down 46%, from 3.1
mill in 2006
In 2018, approximately 3.2 million people will quit their jobs, up 92% since 2010
(000)
-46%
+92%
69
Number of Unemployed Persons per Job Opening, Feb. 2003—Feb. 2018*
*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.
0
1
2
3
4
5
6
7
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18
At the height of the recession,
there were nearly 7 job seekers for
every one opening
Today, there is just 1.1 job seeker
for every one opening
Unemployed Persons per Job Opening
Take This Job And…Quit Rate, 2005–2018*
2.1% 2.2% 2.1%1.9%
1.6% 1.7% 1.8% 1.9%2.1% 2.2% 2.3%
1.4% 1.4% 1.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
05 06 07 08 09 10 11 12 13 14 15 16 17 18*
Improving labor market conditions are emboldening workers
to quit their jobs—presumably for higher wages
*Annual figures calculated from month seasonally adjusted data. 2018 figure through March.Sources: US Bureau of Labor Statistics JOLTS Survey at https://www.bls.gov/jlt/ ; Risk and Uncertainty Management Center, Univ. of South Carolina.
Quit Rate
Approximately 2.3% of workers have or
will quit their jobs in 2017 and 2018—the
highest proportion in the post crisis era
71
(Millions of Units)
New Private Housing Starts, 1990-2023F
1.48
1.47 1.62 1.64
1.57 1.60 1.71 1.85 1.96 2.07
1.80
1.36
0.91
0.55 0.59 0.610.78 0.92 1.00 1.11 1.17 1.20 1.31 1.35 1.40 1.43 1.45 1.48
1.351.46
1.29
1.20
1.011.19
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18F19F20F21F22F23F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/18 for 2018-19; 10/17 for 2019-23F; Insurance Information Institute.
Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk
Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure
New home starts plunged 72% from 2005-2009; A net
annual decline of 1.49 million units, lowest since records began
in 1959
Job growth, low inventories of existing homes, still-low mortgage
rates and demographics should continue to stimulate new home
construction for several more years
72
Construction Spending:Jan. 2000 – Mar. 2018 ($ Bill)
Source: US Dept. of Commerce; Wells Fargo Securities.
Private (but not public)
construction spending remains relatively
strong. Public construction
spending could benefit from a
boost in infrastructure
investment
73
Impacts of Tax Reform on the P/C Insurance Industry
The Tax Cuts and Jobs Act of 2017
Lower Corporate Tax Rate Benefits All Insurer, but Not Equally
73
74
Tax Reform Implications for P/C Insurers and ReinsurersnReduction of Corporate Tax Rate from 35% to 21%...
nAll Insurers Benefit…But Not EquallywCompanies generating most of their profits from underwriting
income previously taxed at 35% benefit the mostwCompanies generating proportionately more of their Net
Investment Income from (taxable) Corporate Bonds benefit more than companies with heavier muni holdings– In P/C industry, insurers with underwriting losses tend to hold
proportionately more in corporates
wBase Erosion and Anti-Abuse Tax (BEAT): Leveling the Playing Field– Domestic (re)insurers previously taxed at 35% will benefit
relative to (re)insurers domiciled in Bermuda, etc.– Diminished advantage for foreign-owned insurers that cede premium
offshore
75
Impact of Tax Cuts and Jobs Act on US P/C Publicly-Traded Insurers: Deferred Tax Assets and Liabilities
Source: A.M. Best, Financial Review, April 13, 2018.
The reduction in corporate tax rates under the TCJA of 2017 reduced the value of DTAs by 39.5% for public
P/C insurers
Infrastructure Initiatives
7676
Commercial Insurance Will Be a Primary Beneficiary of Any
Major Infrastructure Initiatives
77
Trump Administration: Likely Issues Impacting Insurers n Infrastructure Spending
w Insurance industry could benefit from stepped-up infrastructure spending as promised by Trump
wBut 2017 Tax Cuts and Jobs Act means little fiscal room for infrastructure initiatives
wPrivatization of government infrastructure could provide growth opportunity for commercial insurers
w If infrastructure spending materializes, will benefit all major commercial lines:– WC– Commercial Property & Liab.– Surety– Commercial Auto
The White House Infrastructure Initiative: President Trump’s Plan by the Numbers
$200
$1,500
$0
$250
$500
$750
$1,000
$1,250
$1,500
$1,750
Federal Infrastructure Investment Over 10Years
Total Economic Impact Over 10 Years
The President’s plan calls for $200 billion in federal
infrastructure investments over the next 10 years
Sources: The White House, 2018 Budget: Infrastructure Initiate accessed at:https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/fact_sheets/2018%20Budget%20Fact%20Sheet_Infrastructure%20Initiative.pdf ; Risk and Uncertainty Management Center, Univ. of South Carolina.
$ Billions
Getting to a total economic impact of $1.5 trillion
requires enormous co-investments from the states
Composition of Infrastructure Spending Under President Trump’s Plan (April 2018)
5.0%10.0%
10.0%
25.0%
50.0%
$100B: Infrastructure
Incentive Grants
The Trump Administration
proposes to make $200 billion in infrastructure
investments over 10 years, producing a total
economic benefit of $1.5 trillion over the
next decade
Bonds account for
more than 60% of P/C insurer
assets
$50B: Rural Formula
Funds
Sources: The White House, 2018 Budget: Infrastructure Initiate accessed at:https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/fact_sheets/2018%20Budget%20Fact%20Sheet_Infrastructure%20Initiative.pdf ; Risk and Uncertainty Management Center, Univ. of South Carolina.
$20B: “Transformative Project Fund”
$20B: Infrastructure
Financing Programs
$10B: Federal Capital Revolving Fund
80
Type of Infrastructure Targetedn Infrastructure Spending: Eligible Types of Spending
wSurface transportation (roads, bridges, etc.)
wAirports, Rail, Ports and Waterways
wWater resources (hydro power, drinking water, waste)
wBrownfield remediation/Superfund siteswBroadband
wWorker education and training
nMajor Challenge: Funding at Federal & State Levelsw Deficit consequences of Tax Cuts and Jobs Act limit
appetite for additional federal spendingw States need to participate financially but finances are tight
US Trade Policy
8181
How Will the WC Insurance Industry Be Impacted by
Trade Disputes?
82
Trade Actions and Workers CompensationnMajor Trade Actions Announced so Far
wApril 3: $50B in tariffs announced on some 1,300 products produced in China
wMarch 8: Steel and Aluminum– 25% tariff on foreign steel– 10% tariff on imported aluminum
nPotential Impacts: Job and Income Losses Could Be Severe if Targeted Countries Retaliatew Hundreds of thousands of jobs would be lost across many
industries
w WC premium shrinkage would be measured in the billions as hundreds of billions in wages and salaries would be at risk
65%62%
59%58%
57%48%
47%41%
35%30%30%30%
29%27%27%
22%22%22%
21%
67%
0% 10% 20% 30% 40% 50% 60% 70% 80%
AircraftElectrical Equip.Fabricated Metal
Plastics & RubberMachinery
Computer & Elec.Chemical Products
Primary MetalsDefense
Misc. Mfg.Motor Veh. & Parts
TextilesFurniture
Mining SupportConstruction
PipelinesWaste Mgmt.
MiningPrinting
Paper
*Trump administration based on 2017 only and figures is an estimate based on the first three quarters of the year.**Truman administration ROE of 6.97% based on 3 years only, 1950-52;.Source: Wells Fargo Securities, Could Tariffs Gum Up Industry Supply Chains?, April 12, 2018.
Trade disputes can lead to job losses and adversely impact key WC exposure sources
Dollar Share of Inputs Potentially Impacted by Chinese Tariffs
Example: 67% of the value of US-
produced aircraft is
vulnerable to announced
tariffs
Impacts on Employment and Income from Aluminum Tariffs: 7% and 30% Tariff Scenarios
22,600
99,800
020,00040,00060,00080,000100,000120,000
7% 30%
Sources: NERA, Impacts of Potential Aluminum Tariffs on the U.S. Economy, June 2017.
Average Annual Job Losses
There is no question that tariffs in the aluminum and steel industry will kill jobs in industries that use these inputs, harming workers
comp payroll exposures. The damage will be far worse when foreign countries introduce retaliatory tariffs of their own.
$22.0
$96.3
020406080100120
7% 30%
Cumulative Personal Income (Wage/Salary) Loss
($ Billions)
85
INSURANCE TECHNOLOGY:FIN TECH ZEROES IN
Number and Value of Deals Is Increasing
An Industry that Has Always Been Accepting of Change and Innovation
InsurTech Annual Financing,2011 – 2016
Value of Deals ($ Millions)
Source: CB Insights at https://www.cbinsights.com/blog/2016-insurance-tech-funding/
$140$350 $270
$870
$2,670
$1,690
91
4628
122
173
63
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2011 2012 2013 2014 2015 2016 020406080100120140160180200220
Value of Deals Number of Deals
No. of Deals
Insurance tech deals reached a new record in 2016 but funding was higher in 2015
2 out of every 3 InsurTech deals in 2016 was at the early stage!
87
InsurTechs Are Focusing on Distribution and Pricing
Source: Panorama by McKinsey, “Insurance Beyond Digital: The Rise of Ecosystems and Platforms,” Jan. 2018.
InsurTech firms across all insurance
segments tend to focus on
Distribution. It is telling that very few InsurTech firms are actually insurers.
88
Talent Wars
Can the Insurance Industry Win the War for Talent?
Insurance is Not the Only Industry that is Interested in Hiring New Talent, Especially those with
Data/Analytics Skills
88
Can Insurers “Win” the War on Talent?n Hiring Needs: The industry has a stated need of hiring
some 400,000 people over the next several years
n Inclusive Approach: The industry’s approach has been to suggest that virtually everyone, from any background can build a rewarding career in the insurance industry
n So Far, So Good: To date, the industry’s diligence and efforts seems to be meeting with successw Insurers seem generally to be successful in their overall
recruiting efforts
Can Insurers Win the War for Talent?
Source: Business Insurance, 2017 Risk Management and Insurance Schools Ranking and Directory,
The number of RMI
majors is up sharply
Overall employment
is up too
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email me at [email protected]
91