Property/CasualtyInsurance Industry
Overview & Outlook
PIWA Annual ConventionPearl River, New York September 24, 2009
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office phone: (212) 346-5540 Cell: (917) 494-5945 [email protected] www.iii.org
Presentation Outline
1. A Glance at the U.S. Economy
2. P/C Industry Financial Performance
3. Catastrophe Loss Management
4. Investments
5. Capital & Capacity
6. Q & A
A Glance atthe U.S. Economy
2009-10 Outlook:Time for a Rebound?
95
98
101
104
107
110
113
Mar 01
Jun 0
1
Sep 0
1
Dec 0
1
Mar 02
Jun 0
2
Sep 0
2
Dec 0
2
Mar 03
Jun 0
3
Sep 0
3
Dec 0
3
Mar 04
Jun 0
4
Sep 0
4
Dec 0
4
Mar 05
Jun 0
5
Sep 0
5
Dec 0
5
Mar 06
Jun 0
6
Sep 0
6
Dec 0
6
Mar 07
Jun 0
7
Sep 0
7
Dec 0
7
Mar 08
Jun 0
8
Sep 0
8
Dec 0
8
Mar 09
Jun 0
9
Total Industrial Production, monthly Mar 2001-July 2009 (Index 2002=100)*
Source: http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt. *seasonally adjusted4
Recession began December 2007
Nearing a bottom?
Index
Hurricane Katrina
March 2001-November 2001
recession
Near-Term Forecasts for QuarterlyIndustrial Production: A Wide Range
7.8%8.3%
7.2%6.7%
7.3% 6.9%
-3.1%
-0.2%
0.6%1.2%
1.8% 1.8%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
Avg of 10 MostOptimisticForecastsAvg of 10 MostPessimisticForecasts
Source: Blue Chip Economic Indicators (8/09)
Single vs. Multi-Family Housing Starts
329
346
349
343
332
336
309
126
1273
1359 14
99
1611
1716
1465
1046
622
429
282
0
300
600
900
1,200
1,500
1,800
2,100
2001 2002 2003 2004 2005 2006 2007 2008 2009*
units in multi-family buildings single family units
Not seasonally adjusted *average of first seven months of 2009, annualizedSource: US Census Bureau at http://www.census.gov/const/newresconst.pdf
Thousands of Units
The 2007-09 slump was mainly in single-family housing, but starts of multi-family units finally began dropping in late 2008 and continued in 2009.
2008 single family starts down 40%
vs. 2007
In the Near Term, Millions Fewer Private Housing Starts
2.07
1.80
1.36
0.90
0.57
0.79
1.48
1.351.
46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.60 1.
71
1.85
1.96
0.40.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F 09F 10F
Measured by number of new units started, exposure growth for HO insurers is low.
Housing start data also affects commercial insurers with construction risk exposure.
I.I.I. estimate: each 100,000 decline in housing starts “costs” home insurers $90
million in gross premium. Estimated premium loss in 2008 vs. 2005: about $1
billion.
Sources: US Department of Commerce; Blue Chip Economic Indicators (8/09); Insurance Information Inst.
Millions of Units
Housing bubble
Recession
Recession
2
4
6
8
10
12
14
16
18
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Traditional Unemployment Rate U-3Unemployment + Underemployment Rate U-6
January 2000 through July 2009, seasonally adjusted
U-6 went from 9.2% in April 2008 to
16.5% in June 2009
Source: US Bureau of Labor Statistics; Insurance Information Institute.
9.5% June 2009 unemployment rate (U-3) was the highest monthly rate since 1983. Peak rate in the last 30 years: 10.8% in
Nov-Dec 1982.
Unemployment and UnderemploymentRates: Rocketing Up in 2008-9
Percent
U.S. Unemployment Rate ForecastsQuarterly, 2009:Q3 to 2010:Q4
10.0%
10.4%10.6% 10.6%
10.5%10.4%
9.8%
10.1% 10.1%10.0%
9.9%
9.7%9.6%
9.9%9.8%
9.6%
9.2%
8.9%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4
10 most pessimistic consensus/midpoint 10 most optimistic
Sources: Blue Chip Economic Indicators (8/09); Insurance Info. Inst.
Unemployment is expected to peak in
late 2009 or first quarter of 2010.
Rising unemployment will erode payrolls and workers comp’s exposure base.
3.1%
2.1%
5.4%
1.4%
0.1%
3.0%
1.2%
3.2% 3.
6%
2.1%
1.5%
-5.4
%
-6.4
%
-1.0
%
2.2%
2.3% 2.5% 2.8%
2.8%
2.9%
-0.7
%
-2.7
%-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
05:3
Q
05:4
Q
06:1
Q
06:2
Q
06:3
Q
06:4
Q
07:1
Q
07:2
Q
07:3
Q
07:4
Q
08:1
Q
08:2
Q
08:3
Q
08:Q
4
09:1
Q
09:2
Q
09:3
Q
09:4
Q
10:1
Q
10:2
Q
10:3
Q
10:4
Q
Real Quarterly GDP Changes (annualized),
2005:Q3-2010:Q4F
Sources: US Department of Commerce, Bureau of Economic Analysis (actual) at http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm Blue Chip Economic Indicators 8/09 issue (forecasts).
Spike due almost entirely to the weak dollar (growing exports and slowing imports)
Red bars are actual; Yellowbars are forecasts/estimates
The Q1:2009 decline was the steepest since the
Q1:1982 drop of 6.4%
P/C IndustryFinancial Performance
2009 Outlook is Dim
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
:Q1
Sources: A.M. Best, ISO, Insurance Information Institute
40 Years ofHard and Soft Markets
1975-78 1984-87 2000-03Shaded areas denote “hard
market” periods In 2007 net written premiums fell, the first decline since
1943
Year-to-Year Change in Net Written Premium, 2000-2009*
Sources: A.M. Best (historical through 2008; ISO for 2009. *first quarter 2009 only
5.0%
8.4%
15.3%
10.0%
3.9%
0.5%
4.2%
-1.0% -1.4%-3.5%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*
P/C insurers are experiencing their slowest growth rates since 1943
Soft markets and slow economy => continued negative or slow growth
P/C Net Income After Taxes1991-2009:Q1*
$14.
2
$5.8
$19.
3
$10.
9 $20.
6
$24.
4
$36.
8
$30.
8
$21.
9
$3.0
$30.
0
$62.
5
$2.4
-$1.
3
-$7.0
$63.
7
$44.
2
$20.
6
$38.
5
-$10
$0
$10
$20
$30
$40
$50
$60
$70
$80
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
*2009:Q1 Sources: A.M. Best, ISO, Insurance Information Inst.
2008 industry profits dropped 96.2% vs. 2007
Billions
-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 0608
F09
F
1975: 2.4%
1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years10 Years
9 Years
Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2%.Sources: ISO; A.M. Best (2009F); Insurance Information Institute.
2008: 0.5%
P/C Insurance Industry ROEs,1975 – 2009F*
2009F: 7.4%
15
115.
8
107.
4
100.
1
98.3 10
0.7
92.4
102.
0105.
1
95.5
85
90
95
100
105
110
115
120
2001 2002 2003 2004 2005 2006 2007 2008 2009:Q1E
P/C Insurance Industry Combined Ratio, 2001-
2009:Q1E
Sources: A.M. Best, ISO; III preliminary estimates.
The industry’s combined ratio appears to be on a “cyclical upturn” dating to 2006. In 2008, even excluding net CAT losses (which
added 3.4 points to the combined ratio vs. 2007) and M&FG losses (another 4.1 points vs. 2007), the 2008 ratio would have been 97.6.
Combined Ratio
09:Q1 combined ratio was 98.4 excl. M&FG vs. 96.8
in 08:Q1
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
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:Q
1*
Underwriting Gain/(Loss)1975-2009:Q1
Sources: A.M. Best; ISO; Insurance Information Institute
Billions In the past 34 years, only twice has the p-c insurance industry earned an underwriting profit of over $1.7
billion. In contrast, in that span it’s had underwriting losses of $20 billion or more in 14 years.
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E08E09F
Commercial Lines Personal Lines
Sources: A.M. Best; Insurance Information Institute *after dividends to policyholders.
Results benefited from favorable loss cost
trends, improved tort environment, low CAT
losses, WC reforms, and reserve releases
Personal, Commercial Lines Combined Ratios* Varied Widely Since 1993
Catastrophe Losses
2008 Insured Catastrophe Loss Distribution by Category
Commercial, $6.80 , 27%
Personal*, $16.13 , 64%
Vehicle**, $2.27 , 9%
2008 CAT Facts
•The $25.2 billion in insured losses was the 4th highest ever, behind only, 2005, 2004 and 2001
•There were 37 designated catastrophes in 2008, the highest since 1998 (also 37)
•Commercial losses accounted for 27% of insured losses but just 9% of claims
*Includes homeowers, condominium and rental policies.**Includes commercial and private passenger vehiclesSource: PCS; Insurance Information Institute research.
$ Billions
20
Catastrophic Losses*: Was 2005an Outlier or a Harbinger?
$7.5$2.7$4.7
$22.9
$5.5
$16.9
$8.3$7.4$2.6
$10.1$8.3$4.6
$26.5
$5.9
$12.9
$27.5
$6.7
$26.0
$61.9
$9.2
$0
$10
$20
$30
$40
$50
$60
$70
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
21
Is $25 billion the new level of expected
yearly CAT losses?Before 2001, CAT
losses averaged about $8-10 billion per year.
5.1 5.
3 5.4 5.
5 5.6 5.
7 5.8 5.
9 6.0 6.
2 6.3 6.
5 6.6 6.
8 7.0 7.
1
7.3 7.
4 7.5
7.5 7.5
7.6 7.6 7.
7 7.9 8.
0 8.1 8.
2 8.3 8.
5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09F
10F
11F
12F
13F
14F
15F
16F
17F
18F
19F
Source: http://edr.state.fl.us/conferences/population/demographic.htm
Data are from Feb. 18, 2009 Florida Demographic Estimating conference
A Million More Florida Resident Households in the Next Decade?
Millions of Households
The State of Florida now (Feb 09) forecasts nearly 1 million more
households by 2019 (up almost 13%). There will be more businesses, too.
Hurricane Andrew
Hurricane Wilma
August Forecast for the 2009 Hurricane Season: 10 Named Storms
Average,1950-2000
2005 2009F
Net Tropical Cyclone Activity 100% 275% 85%Named Storms 9.6 28 10Hurricanes 5.9 14 4
Intense Hurricanes 2.3 7 2
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, August 4, 2009.
23
Major (Category 3, 4, 5) Hurricanes Striking the US by Decade
3 10 10
76
5
4
6
88
5
8
6
9
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s
*Figure for 2000s is extrapolated based on data for 2000-2008 (7 major storms: Charley, Ivan, Jeanne (2004), Katrina, Rita, Wilma (2005), Ike (2008)).Sources: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.; I.I.I.
Mid 1920s – mid-1960s:AMO Warm Phase
Mid-1990s – 2030s?AMO Warm Phase
Colorado State team forecasts 3
more intense hurricanes in
2009
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1988-2007¹
Fire, $8.1 , 2.6%
Tornadoes, $82.4 , 26.5%
All Tropical Cyclones, $141.6 ,
45.6%
Other, $1.7 , 0.5%Wind/Hail/Flood,
$9.9 , 3.2%
Earthquakes, $19.5 , 6.3%
Winter Storms, $24.4 , 7.9%
Terrorism, $22.9 , 7.4%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Number of Tornadoes in Each Calendar Quarter, 2005–2009:Q2
209
504
235
160
244
543
193
112
360
944
305
81
157
617
118
394
571
105
0
100
200
300
400
500
600
700
800
900
1,000
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
2005 20062007 20082009
Sources: US Dept. of Commerce, Storm Prediction Center, National Weather Service,at http://www.spc.noaa.gov/climo/torn/monthlytornstats.pdf 2009:Q2 is I.I.I. estimate
The first two quarters of 2009 were more
typical of prior years than 2008.
Investments
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
09F
P-C Inv Income/Inv Assets 10-Year Treasury Note
P/C Investment Income as a % of Invested Assets Follows 10-Year U.S. T-Note
Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.
Investment yield historically tracks 10-
year Treasury note quite closely
P/C Industry Investment Income*, 1994-2008
$33.
7 $36.
8
$38.
0 $41.
5
$37.
1
$36.
7
$38.
7
$39.
6
$49.
5 $52.
3 $54.
6
$51.
2
$51.
4
$40.
8
$38.
6
$39.
9
$25
$30
$35
$40
$45
$50
$551994
95
96
97
98
99
2000
01
02
03
04
2005** 06
07
08
09**
*
Bill
ion
s
*Primarily interest and stock dividends. ** Investment income (excluding one-time dividend) jumped in 2005 as insurers that had accumulated cash captured rising bond interest rates. Also, 2005 figure includes special one-time dividend of $3.2B. ***2009 figure is Q1 actual, annualizedSources: ISO; Insurance Information Institute.
Investment income might moderate further if rates for new bond
investments stay low and/or if insurers shift to shorter-maturity bonds and
more US government notes.
Investment income CAGR 1994-2007 was just 3.8%.
P/C Industry Net Realized Capital Gains and Losses, 1990-2009:Q1
$2.88$4.81
$9.89
$1.66
$6.00
$9.24$10.81
$13.02
$16.21
$6.63
-$1.21
$6.61$8.97
-$19.80
-$0.41
$18.02
$3.52
$9.70$9.13$9.82
-$24
-$20
-$16
-$12
-$8
-$4
$0
$4
$8
$12
$16
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09:Q
1
Sources: A.M. Best, ISO, Insurance Information Institute.
Nearly $9 billion in realized capital gains in 2007, but
$-19.7 billion in 2008.
$ Billions
Capital & Capacity
Policyholder Surplus by Quarter,2006:Q4 – 2009:Q1
Billions$4
87.1
$496
.6 $512
.8
$521
.8
$478
.5
$455
.6
$437
.1
$505
.0
$515
.6
$517
.9
$400
$425
$450
$475
$500
$525
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1
Source: ISO
Decline Since 2007:Q3 Peak
2009Q1: -$84.7B (-16.2%)
0.8
1.0
1.2
1.4
1.6
1.8
2.0
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:Q1
U.S. P/C Industry Premiums-to-Surplus Ratio: 1985-2009:Q1
Sources: A.M. Best, ISO, Insurance Information Institute.
19980.85:1–the lowest
(strongest) P:S ratio in recent history.
Premiums are a rough measure of risk accepted; surplus is funds beyond reserves to pay unexpected
losses. The larger surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater
the industry’s capacity to handle the risk it has accepted.
1.03:1 as of
3/31/09
Ratio at year-end
Largest Capital Events asa Percent of Surplus, 1989-present
3.3%
9.6%
6.9%
10.9%
16.2%
13.8%
6.2%
0%
3%
6%
9%
12%
15%
18%
6/3
0/1
989
Hu
rric
an
eH
ug
o
6/3
0/1
992
Hu
rric
an
eA
nd
rew
12/3
1/9
3N
ort
hri
dg
eE
art
hq
uake
6/3
0/0
1S
ep
t. 1
1A
ttacks
6/3
0/0
4F
lori
da
Hu
rric
an
es
6/3
0/0
5H
urr
ican
eK
atr
ina
Fin
an
cia
lC
risis
as o
f3/3
1/0
9**
Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. Sources: PCS; Insurance Information Institute.
The financial crisis now ranks as the largest “capital event”
over the past 20+ years
Premium-to-Surplus Ratios Before Major Capital Events*
$1.65
$1.42 $1.40
$1.03 $1.03$0.88
$1.05$1.15
$0.5
$0.7
$0.9
$1.1
$1.3
$1.5
$1.7
$1.9
6/3
0/1
989
Hu
rric
an
eH
ug
o
6/3
0/1
992
Hu
rric
an
eA
nd
rew
12/3
1/9
3N
ort
hri
dg
eE
art
hq
uake
6/3
0/0
1S
ep
t. 1
1A
ttacks
6/3
0/0
4F
lori
da
Hu
rric
an
es
6/3
0/0
5H
urr
ican
eK
atr
ina
6/3
0/0
7F
inan
cia
lC
risis
As o
f3/3
1/0
9**
*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.
P/C insurance industry was better capitalized going into the
financial crisis than before any “capital event” in recent history
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
NWP % change Surplus % change
Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets Follow When Surplus “Growth” is Negative
In 2008, A.M. Best Affirmed or Upgraded 88% of P/C Insurers*
Upgraded, 59 , 4.2%
Other, 59 , 4.2%
Affirm, 1,183 , 83.4%
Downgraded, 55 , 3.9%
Under Review, 63 , 4.4%
*Through December 19.Source: A.M. Best.
37
In 2008, despite financial market turmoil, high cat losses and a soft
market, A.M. Best lowered ratings on just 3.9% of P-C insurers. It placed
another 4.4% under review
Reasons for US P/C Insurer Impairments, 1969-2008
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient loss reserves and inadequate
pricing are the leading cause of
insurer impairments,
underscoring the importance of
discipline. Investment
catastrophe losses play a much smaller role.
Reinsurance Failure3.7%
Rapid Growth14.3%
Misc.9.1%
Affiliate Impairment
7.9%
Sig. Change in Business
4.2%
Deficient Loss
Reserves/In-adequate Pricing38.1%
Investment Problems
7.0%
Alleged Fraud8.1%
Catastrophe Losses7.6%
Summary
• The slumping economy has affected P/C exposure growth but this might begin reversing soon
• Combined ratios seem headed up, continuing a recent trend
• Likely continued low investment returns are probably insufficient to overcome a continued soft marketClear need to remain underwriting focused
• A growing CAT threat continues
• The industry has had a major capital shock but is still in fairly strong shape
Insurance Information Institute On-Line
If you would like a copy of this presentation, please give me your business card with e-mail address