overview & outlook for the p/c insurance industry financial and catastrophe loss update...
TRANSCRIPT
Overview & Outlook for the P/C Insurance Industry
Financial and Catastrophe Loss Update
Insurance Information Institute
June 22, 2011
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Catastrophic Loss –Catastrophe Losses Trends
Are Trending Adversely
Global Catastrophes Are Hitting Insurers Hard in 2011, but Remain
Manageable
3
SPRING 2011 TORNADO OUTBREAK
2011 Will Be Among the Most Deadly and Expensive for Tornadoes In History
Insured Loss Estimates from April 2011 Tornadoes*
$- $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
AIR Worldwide
RMS
Eqecat
$3.5 - $6.0 bn
$5 - $7 bn
$5 - 7 bn
4
*As of June 17, 2011. Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.
(Insured Losses, $ Billions)
The April tornadoes killed
more that 300 people and
caused as much as $7 billion in insured losses
Insured Loss Estimates from May 2011 (Joplin) Tornadoes*
$- $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
AIR Worldwide
RMS
Eqecat
$2 - $6 bn
$2 - $6 bn
$1 - $3 bn
5
*As of June 17, 2011. Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.
(Insured Losses, $ Billions)
The May tornadoes killed
more that 125 people and
caused as much as $6 billion in insured losses
6
Summary of Recent Tornado Activity
There Have Been 1,482 Tornadoes Through June 16 in the US
537 People Have Been Killed
The April 27 Tornado Outbreak Killed at Least 342 People
Now the 2nd deadliest outbreak in US history (747 killed in march 1925 event)
States impacted: AR, TN, LA, MS, GA and especially AL
Insured Losses Estimated at $3.5B to $7B
Economic Losses Likely in the $7 Bill to $14 Bill Range
The May 22 Tornado in Joplin, MO, Killed at Least 130 People
Largest number of deaths from a single tornado
Insured Losses Estimated at $1B to $6B
P/C Insurance Industry is Very Strong and Will Encounter No Difficulties in Paying these Claims
7
1,1
33
1,1
32 1
,29
7
1,1
73
1,0
82 1
,23
4
1,1
73
1,1
48
1,4
24
1,3
45
1,0
71 1,2
16
94
1
1,3
76
1,2
64
1,1
03
1,0
98
1,6
92
1,1
56 1,2
82
1,819
1,4
82
537
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P
Nu
mb
er
of
To
rna
do
es
0
100
200
300
400
500
600
Nu
mb
er o
f De
ath
s
Number of Tornadoes
Number of Deaths
*2011 is preliminary data through June 16.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.
Number of Tornadoes and Related Deaths, 1990 – 2011*
Tornadoes have already claimed more than 500 lives
There were already 1,482 tornadoes in the US by June 16
U.S. Tornado Count, 2005-2010
Source: NOAA 8
There were 1,483 tornadoes in the US in 2010, slightly
above average
2011 is shaping to be a deadlier
version of 2008
Location of Tornadoes in the US, January 1—June 16, 2011
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 9
1,482 tornadoes had killed more than 500 people through June 16, including at least 340 on April 26 mostly in the
Tuscaloosa area, and 130 in Joplin
on May 22
Location of Large Hail Reports in the US, January 1—June 16, 2011
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 10
There were 6,241 “Large Hail”
reports through June 16, causing extensive damage
to homes, businesses and
vehicles
Location of Wind Damage Reports in the US, January 1—June 16, 2011
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 11
There were 8,812 “Wind Damage” reports through
June 16, causing extensive damage
to homes and, businesses
Severe Weather Reports,January 1—June 16, 2011
12Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
There have been 16,535
severe weather reports through
June 16; including 1,482
tornadoes; 6,241 “Large Hail” reports
and 8,812 high wind events
Large Hail, 6,241 , 38%
Tornadoes, 1,482 , 9%
Wind Damage,
8,812 , 53%
Tornadoes accounted for just 9% of all Severe Weather
Reports through mid- June but more than
500 deaths
Number of Severe Weather Reports in US, by Type: January 1—June 16, 2011
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
14
US CATASTROPHE INSURED LOSS UPDATE
First Half 2011 CAT Losses Already Exceed All of 2010 and Could Become One of the Most
Expensive Years on Record
I.I.I./Munich Re First Half 2011 US & Global CAT Loss Webinar July 12 @ 11AM ET
15
$8
.3
$7
.4
$2
.6 $1
0.1
$8
.3
$4
.6
$2
6.5
$5
.9 $1
2.9 $
27
.5
$6
1.9
$9
.2
$6
.7
$2
7.1
$1
0.6
$1
3.6
$1
7.0
$1
00
.0
$7
.5
$2
.7
$4
.7
$2
2.9
$5
.5 $1
6.9
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??
US Insured Catastrophe Losses
*First half 2011 (est.) based on PCS actual figure of $16.6 billion through June 15.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.Sources: Property Claims Service/ISO; Insurance Information Institute.
First Half 2011 US CAT Losses Already Exceed Losses from All of 2010. Even Modest Hurricane Losses Will Make 2011 Among the
Most Expensive Ever for CATs
$100 Billion CAT Year is Coming Eventually
Record Tornado Losses Caused
H1 CAT Losses to Surge
($ Billions)
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
16
Top 12 (13?) Most Costly Disastersin U.S. History
(Insured Losses, 2010 Dollars, $ Billions)
*Losses will actually be broken down into several “events” as determined by PCS.Sources: PCS; Insurance Information Institute inflation adjustments.
$11.5 $12.8 $14.0$17.5
$22.6 $23.1
$45.8
$8.6$8.2$6.7$6.3$5.3$4.3
$0$5
$10$15$20$25
$30$35$40
$45$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
SpringTornadoes*
(2011)
Northridge(1994)
Andrew(1992)
9/11 Attack(2001)
Katrina(2005)
Taken as a single event, the Spring 2011 tornado season
would likely become 5th costliest event in US insurance history
17
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011:H1*
*Insurance Information Institute estimates for 2010 and 2011:H1Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3 0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6 3.
35.
0
3.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
E
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of the Combined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 4.15*
Combined Ratio Points
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2010)
Source: MR NatCatSERVICE 18
There were a record 247 natural disaster events in
the US in 2010
U.S. Thunderstorm Loss Trends, 1980 – 2010 (Annual Totals)
Source: Property Claims Service, MR NatCatSERVICE 19
Thunderstorm losses in 2010 totaled $9.5 billion, the
3rd highest ever
Average thunderstorm losses have now quintupled since
the early 1980s
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss
Source: Property Claims Service, MR NatCatSERVICE
U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals)
20
Insured winter storm losses in 2010 are one of the top five in US history, totaling
$2.6 billion in 2010
21
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–20091
0.1%
2.4%
3.3%5.2%
7.0%
7.4%
29.1%
45.4%
1.Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 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, $152.4
Fires (4), $8.0
Tornadoes (2), $97.8
Winter Storms, $25.0
Terrorism, $23.6
Geological Events, $17.6
Wind/Hail/Flood (3), $11.1
Other (5), $0.5
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
22
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–2011:H11
0.2%
2.4%
3.4%4.9%
6.6%
8.0%
31.8%
42.7%
1.Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 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, $160.5
Fires (4), $9.0
Tornadoes (2), $119.5
Winter Storms, $30.0
Terrorism, $24.9
Geological Events, $18.5
Wind/Hail/Flood (3), $12.7
Other (5), $0.6
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
23
Outlook for the 2011 Atlantic Hurricane Season
Above Average Activity, More Landfalls Expected
Outlook for 2011 Hurricane Season: 75% More Active Than Average
Average* 2005(Katrina Year)
2011F
Named Storms 9.6 28 16
Named Storm Days 49.1 115.5 80
Hurricanes 5.9 14 9
Hurricane Days 24.5 47.5 35
Intense Hurricanes 2.3 7 5
Intense Hurricane Days 5.0 7 10
Accumulated Cyclone Energy 96.1 NA 160
Net Tropical Cyclone Activity 100% 275% 175%
*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2011
Average* 2011F
Entire US Coast 52% 72%
US East Coast Including Florida Peninsula
31% 48%
Gulf Coast from FL Panhandle to Brownsville, TX
30% 47%
ALSO…Above-Average Major Hurricane
Landfall Risk in Caribbean for 2011 (61% vs. 42%)
*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.
26
P/C Insurance Industry Financial Overview
Profit Recovery ContinuesEarly Stage Growth Begins
P/C Net Income After Taxes1991–2011:Q1 ($ Millions)
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $
36
,81
9
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
4,6
70
$7
,80
7
$2
8,6
72
-$6,970
$6
5,7
77
$4
4,1
55
$2
0,5
59
$3
8,5
01
-$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*
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.9% 2010 ROAS = 6.5% 2011:Q1 ROAS = 5.6%
P-C Industry 2011:Q1 profits were down 12.2% to $7.8B vs. $8.9B in 2010:Q1, as underwriting results
deteriorated
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.5% ROAS for 2011:Q1, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute
28
ROE: Property/Casualty Insurance,1987–2011:Q1*
* Excludes Mortgage & Financial Guaranty insurers in 2008 - 2011.**2011 P/C figure is actual ROAS for Q1; Fortune 500 figures is III estimate.Sources: ISO, Fortune;
7.5
%
6.5
%
12
.7%
12
.2%
-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**
P/C Profitability Is Both by Cyclicality and Ordinary Volatile
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
29
ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2011*
* Return on average surplus in 2008-2011 excluding mortgage and financial guaranty insurers; 2011 ROE figure is for Q1.Source: The Geneva Association, Insurance Information Institute
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10* 11*
ROE Cost of Capital
-13
.2 p
ts +1
.7 p
ts
+2
.3 p
ts
-9.0
pts
-6.4
pts
-3.1
pts
The P/C Insurance Industry Fell WellShort of Its Cost of Capital in 2008 but
Narrowed the Gap in 2009 and 2010
US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from 1991 to 2002, but on Target or Better
2003-07, Fell Short in 2008-2011
The Cost of Capital is the Rate of Return Insurers Need to
Attract and Retain Capital to the Business
(Percent)
-2.9
pts
-3.8
pts
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.
97.5
100.6 100.1 100.7
92.6
99.3100.8
102.2101.0
6.5%7.5%7.4%
9.6%
15.9%
14.3%
12.7%
4.4%
8.9%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009* 2010* 2011*0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
-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
*
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011*
*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is actual annualized ROAS for Q1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2007:12.3%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years10 Years
2011:6.5%*
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
RNW for Major P/C Lines,2000-2009 Average
19.1%
8.5% 8.0% 7.4% 7.0% 6.4%4.7% 4.7%
-3.9%
19.8%
12.2%
7.2%
-5%
0%
5%
10%
15%
20%
Fire InlandMarine
AllOther
CommAuto
CMP MedMal
PPAuto
AllLines
WC OtherLiab
HO Allied
Source: NAIC; Insurance Information Institute
10-year returns for some lines are excellent, though homeowners is a major
laggard, largely due to major catastrophes. WC returns are slipping.
PRICING TRENDS
33
Winds of Change or Moving Sideways?
34
-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*
Soft Market Persisted in 2010 but Growth Returned: More in 2011?
(Percent)1975-78 1984-87 2000-03
*2011 figure is an estimate based on Q1 data. Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
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.
NWP was up 0.9% in 2010
2011:Q1 growth was +3.5%; First Q1 growth since 2007
35
Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010
44
.8
25
.4
19
.8
17
.3
16
.6
14
.2
13
.9
12
.4
12
.3
11
.9
9.1
8.1
8.1
7.1
6.8
5.4
5.2
4.7
3.8
3.7
3.1
3.0
1.5
1.2
1.1
0
5
10
15
20
25
30
35
40
45
ND
SD LA
WY
OK
WV
KS IA TX
MT
NE
DE
MS
NM SC
DC
UT
AR
NC ID WA
AL
WI
AK
TN
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
North Dakota is the growth juggernaut of the P/C
insurance industry—too bad nobody lives there…
36
0.7
0.6
0.1
-0.1
-0.3
-0.5
-0.8
-1.4
-1.6
-1.7
-2.5
-2.8
-2.9
-3.4
-3.6
-4.1
-4.5
-4.7
-4.8
-5.7
-5.8
-8
-8.2
-8.3
-13
.5
-14
.2
-15
.5
-20
-15
-10
-5
0
5M
D
MO
KY IN NY
GA
MN
VA
US
PA
OR FL IL CT
VT
OH RI
CO
NJ HI
ME
NH
MA
AZ
NV MI
CA
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC; Insurance Information Institute.
Bottom 25 States
States with the poorest performing economies also produced the most negative net change in premiums of
the past 5 years
Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010
US Direct Premiums Written declined by 1.6% between 2005
and 2010
37
P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter
Sources: ISO, Insurance Information Institute.
Finally! Back-to-back quarters of net written premium growth(vs. the same quarter, prior year)
10.2
%15
.1%
16.8
%16
.7%
12.5
%10
.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
-4.6
%-4
.1%
-5.8
%-1
.6%
10.3
%10
.2% 13
.4%
6.6%
-1.6
%2.
1%0.
0%-1
.9%
0.5%
-1.8
%-0
.7%
-4.4
%-3
.7%
-5.3
%-5
.2%
-1.4
%-1
.3%
1.3% 2.
3%1.
3%3.
5%
-10%
-5%
0%
5%
10%
15%
20%
2002
:Q1
2002
:Q2
2002
:Q3
2002
:Q4
2003
:Q1
2003
:Q2
2003
:Q3
2003
:Q4
2004
:Q1
2004
:Q2
2004
:Q3
2004
:Q4
2005
:Q1
2005
:Q2
2005
:Q3
2005
:Q4
2006
:Q1
2006
:Q2
2006
:Q3
2006
:Q4
2007
:Q1
2007
:Q2
2007
:Q3
2007
:Q4
2008
:Q1
2008
:Q2
2008
:Q3
2008
:Q4
2009
:Q1
2009
:Q2
2009
:Q3
2009
:Q4
2010
:Q1
2010
:Q2
2010
:Q3
2010
:Q4
2011
:Q1
The long-awaited uptick. In 2011:Q1 occurring in
personal lines predominating cos.
(+3.8%) and commercial lines predominating cos.
(+3.5%)
P/C Net Written Premiums by Line:2008-2010P
Line of Business 2008 2009 2010P 2009-2010P
Change
Personal Auto $150.0B $156.6B $159.1B +1.6%
Homeowners $55.6 $56.9 $61.2 +7.6%
Other Liab (incl. Prod Liab) $42.0 $39.1 $38.2 -2.4%
Workers Compensation $33.8 $30.3 $29.9 -1.3%
Commercial Multi Peril $30.1 $28.5 $28.7 +0.8%
Commercial Auto $23.7 $21.8 $20.9 -4.3%
Fire & Allied Lines (incl EQ) $24.2 $23.4 $22.6 -3.4%
All Other Lines $67.7 $61.9 $61.6 -0.5%
Total P/C Industry $434.9B $418.4B $422.1B +0.9
Source: All lines except WC for 2008-09, A.M. Best; Worker Comp., NCCI; 2010P data, ISO; Private carriers only.
39
Net Written Premium Growth by Segment: 2008-2011F
-0.1%
-9.4%
2.8%
-2.0%
2.5%
0.3%
-3.1%
-0.1%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Personal Lines Commercial Lines
2008 2009 2010 2011F
Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession
weigh on commercial lines.
Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted
again in 2010 and but will stabilize in 2011
Sources: A.M. Best; Insurance Information Institute.
40
Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2010E
14.5%
3.0%
-0.9%0.9%
9.2%
6.0%
2.2%
5.7%
0.5%
-4.9%
15.3%
5.0%
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
13%
15%
00 01 02 03 04 05 06 07 08 09 10E
Private Passenger AutoHomeownersAll Lines
Sources: A.M. Best; Insurance Information Institute.
Average 2000-2009Auto = 2.9
Home = 6.5%All Lines = 3.4%
While homeowners insurance has grown faster than auto over the past decade, auto is
generally more profitable
41
Monthly Change* in Auto Insurance Prices, 1991–2011*
*Percentage change from same month in prior year; through May 2011; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-2%
0%
2%
4%
6%
8%
10%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Cyclical peaks in PP Auto tend to occur
approximately every 10 years (early 1990s, early
2000s and likely the early 2010s)
“Hard” markets tend to occur
during recessionary
periods
A pricing peak may have
occurred in 2010
May 2011 change
was 3.8%, down from
5.4% in Nov. 2010
42
Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2011)
-3.2
%
-5.9
%
-7.0
%
-9.4
%
-9.7
% -8.2
%
-4.6
%
-2.7
%
-3.0
%
-5.3
%
-9.6
%
-11
.3%
-11
.8%
-13
.3%
-12
.0%
-13
.5%
-12
.9% -1
1.0
%
-6.4
% -5.1
%
-4.9
%
-5.8
%
-5.6
%
-5.3
%
-6.4
% -5.2
%
-5.4
%
-2.9
%
-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
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Magnitude of Price Declines Shrank
During Crisis, Reflecting Shrinking
Capital, Reduced Investment Gains,
Deteriorating Underwriting
Performance, Higher Cat Losses and
Costlier Reinsurance
(Percent)
Q1 2011 decreases were the smallest
since 2006, perhaps signaling a market
firming
43
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q1
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Percentage Change (%)
Market has Been Soft for 7 years and Remains Soft as Capital Hits Record Levels;
But Is Softness Moderating?
Peak = 2001:Q4 +28.5%
Pricing Turned Negative in Early
2004 and Has Been Negative
Ever SinceKRW Effect: No Lasting Impact
Trough = 2007:Q3 -13.6%
44
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q1
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
1999:Q4 = 100
Pricing today is where is was in
Q3:2000 (pre-9/11)
Downward pricing pressure is most pronounced for
larger risks
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
45
Payroll Base* WC NWP
Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums
*Private employment; Shaded areas indicate recessions. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
29% of NPW has been eroded away by the soft market and weak economy
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)
*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).
-4.4%
-2.0%-1.1%
1.1%
3.7%4.6%
8.5%
3.5%
2.1%
-0.5%
-3.6%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 2007-2009
Recessions in the 1970s and 1980s saw smaller exposure impacts
because of continued wage inflation, a factor not present
during the 2007-2009 recession
The Dec. 2007 to mid-2009 recession
caused the largest impact on WC
exposure in 60 years
(Percent Change)
(All Post WWII Recessions)
Recession Dates (Beginning/Ending Years)
UNDERWRITING
47
Cyclicality is Driven Primarily by the Industry’s Underwriting
Cycle, Not the Economy
48
P/C Insurance Industry Combined Ratio, 2001–2011:Q1*
* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=103.3 Sources: A.M. Best, ISO.
95.7
99.3100.8
102.2101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Best Combined
Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned
Premiums
Relatively Low CAT Losses, Reserve Releases
Cyclical Deterioration
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
49
Calendar Year Combined Ratios by Segment: 2008-2011F
Sources: A.M. Best . Insurance Information Institute.
102.4
98.9100
106105
110
103.8104.5
90
95
100
105
110
115
Personal Lines Commercial Lines
2008 2009 2010P 2011F
Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting
performance related to the prolonged commercial soft market
Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate
Underwriting Gain (Loss)1975–2011*
* Includes mortgage and financial guaranty insurers in all years. 2011 figure is annualized based on actual Q1 underwriting losses of $4.463 billion.Sources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$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 1011*
The industry recorded a $10.4B underwriting loss in 2010 compared
to $3.0B in 2009
Cumulative underwriting deficit from 1975 through
2009 is $445B
($ Billions)Underwriting losses in 2011 will be much larger:
$17.9B based on
annualized Q1 data
51
Number of Years with Underwriting Profits by Decade, 1920s–2000s
0 0
3
54
8
10
76
0
2
4
6
8
10
12
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.
Number of Years with Underwriting Profits
Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003
52
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
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
E
11
E
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2011E
Reserve Releases Are Remained Strong in 2010 But Should Begin to Taper Off 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.
Prior year reserve releases totaled $8.8
billion in the first half of 2010, up from
$7.1 billion in the first half of 2009
INVESTMENTS: THE NEW REALITY
53
Investment Performance is a Key Driver of Profitability
Does It Influence Underwriting or Cyclicality?
Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q11
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$52.9
$13.5
$58.0
$51.9$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:Q1
Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to
Fall by 50% in 2008
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains in 2010 were the best
since 2007
55
P/C Insurer Net Realized Capital Gains, 1990-2011:Q1
Sources: A.M. Best, ISO, Insurance Information Institute.
$2.8
8
$4.8
1 $9.8
9
$9.8
2
$10.
81 $18.
02
$13.
02
$16.
21
$6.6
3
-$1.
21
$6.6
1
$9.1
3
$9.7
0
$3.5
2 $8.9
2
-$7.
90
$5.6
9
$0.9
8
-$19
.81
$9.2
4
$6.0
0
$1.6
6
-$25-$20-$15-$10
-$5$0$5
$10$15$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11:Q1
Realized Capital Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE and Were a Major
Driver of Its Recovery in 2010
($ Billions)Capital losses have
turned to capital gains, aiding earnings
56
Treasury Yield Curves: Pre-Crisis (July 2007) vs. May 2011*
0.03% 0.05% 0.08% 0.19%0.55%
2.51%
3.15%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
1.83%
0.93%
4.28%3.99%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
May 2011 Yield Curve*Pre-Crisis (July 2007)
Treasury yield curve is near its most depressed level in at least 45 years, though longer yields rose in late 2010/early 2011 as
economy improved. Investment income is falling as a result.
The Fed’s Announced Intention to Pursue Additional Quantitative Easing Could Depress Rates in the 7 to 10-Year Maturity Range through
June*Average yields for week ending May 20.Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
QE2 Target
57
The Recession Changed the Distribution ofBond Maturities in P-C Investment Portfolios
28.2% 29.2% 29.8% 32.6% 36.4% 39.5%
34.4% 34.4% 34.2% 31.4% 29.0% 27.1%
13.8% 13.2% 13.0% 12.9% 11.9% 11.3%
7.6% 7.4% 8.0% 8.0% 7.1% 6.2%
16.0% 15.9% 14.9% 15.1% 15.6% 15.9%
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 2010
Less than 1 Year 1-5 Years 5-10 Years 10-20 Years Over 20 Years
Source: SNL Financial
Since the Recession Began, Insurers Increased the Percentage of Bonds With Maturities of 1-5 Years and Lowered the Percentage With Maturities Over 5 Years
58
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Perso
nal L
ines
Pvt Pass
Aut
o
Pers P
rop
Comm
ercia
l
Comm
l Auto
Credit
Comm
Pro
p
Comm
Cas
Fidelity
/Sure
ty
Warra
nty
Surplu
s Line
s
Med
Mal
WC
Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
Financial Strength & Underwriting
59
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
P/C Insurer Impairments, 1969–20108
15
12
71
19
34
91
31
21
99
16
14
13
36
49
31 3
45
04
85
56
05
84
12
91
61
23
11
8 19
49 50
47
35
18
14 15 16 18
11
5
0
10
20
30
40
50
60
70
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
00
01
02
03
04
05
06
07
08
09
10
Source: A.M. Best Special Report “1969-2010 Impairment Review,” June 21, 2010; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
8 of the 18 in 2009 were small Florida carriers. Total also
includes a few title insurers.
61
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2010
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
0
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2010 impairment rate was 0.35%, down from 0.65% in 2009 and near the record low of 0.17% in 2007; Rate is still less
than one-half the 0.81% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007
62
Reasons for US P/C Insurer Impairments, 1969–2010
3.6%4.0%
8.6%
7.3%
7.8%
7.1%
7.8%13.6%
40.3%
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Deficient Loss Reserves/Inadequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems (Overstatement of Assets)
Misc.
Sig. Change in Business
63
Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010
2.0%4.4%
4.8%
6.5%
6.9%
7.7%
8.1%
10.9%
22.2%
26.6%
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade
Workers Comp
Financial Guaranty
Pvt. Passenger Auto
Homeowners
Commercial Multiperil
Commercial Auto Liability
Other Liability
Med Mal
SuretyTitle
CAPITAL MANAGEMENT & LEVERAGE
64
Excess Capital is a Major Obstacle to a Market Turn;
Capital Management Decisions Will Impact Market Direction
Implied Excess (Deficit) Capital Assuming Premium/Surplus Ratio = 0.9:1
Excess/(Deficit) Capital (Policyholder Surplus)
($10.6)
($65.4)
($124.6)
($103.0)
($76.5)
($10.8)
$22.9
($32.7)
$81.9
$41.7
($49.2)
8.9%12.3%
-12.0%
6.2%
14.4%
21.6%
-8.8%
-5.1%
13.4%
8.2%
-1.5%
-150
-100
-50
0
50
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Capital Excess (Deficit) Annual Change in CapitalRecord Policyholder Surplus (Capital) Has Resulted Significant Excess Capital in the
P/C Insurance Sector As of Year End 2010. Deteriorating Underwriting Losses, Higher CAT Activity, More Modest Market Returns Will Likely Shrink Excess Capital in 2011.
Annual Change in Policyholder Surplus
2000-2002: Tech bubble bursts,
9/11, high underwriting losses erode capital base
2005: Katrina, Rita, Wilma produce record CAT losses
2006/07: Low CAT losses, strong underwriting results since 1940s
increase capital
2008: Financial crisis causes sharp drop in
capital
2009-10: End of financial crisis,
rising asset prices. modest
u/w losses push capital to record levels
Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has $74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
US Policyholder Surplus:1975–2011*
* As of 3/31/11.Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in
non-insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.77:$1 as of3/31/11, A Near Record Low (at Least in Recent History)**
Surplus as of 3/31/11 was a record $564.7B, up from $437.1B at the crisis trough at 3/31/09. Prior
peak was $521.8 as of 9/30/07. Surplus as of 3/31/11 was 8.2% above 2007 peak; Crisis trough was as of
3/31/0916.2% below 2007 peak.
67
Policyholder Surplus, 2006:Q4–2011:Q1
Sources: ISO, A.M .Best.
($ 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$556.9
$564.7
$505.0$515.6$517.9
$420
$440
$460
$480
$500
$520
$540
$560
$580
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
2007:Q3Previous Surplus Peak
Quarterly Surplus Changes Since 2007:Q3 Peak
09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)
10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)11:Q4: +$42.9B (+8.2%)
Surplus set a new record in 2011:Q1*
*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.
The Industry now has $1 of surplus for every $0.77 of
NPW—the strongest claims-paying status in its history.
68
Paid-in Capital, 2005–2010
Source: ISO; Insurance Information Institute.
($ Billions)
$14.4
$3.8 $3.2
$12.3
$4.9$6.6
$22.5
$0
$5
$10
$15
$20
$25
$30
2005 2006 2007 2008 2009 2010:Q3
Paid-in capital for insurance operations rose by $27.4B in 2010, the largest on record
dating back to 1959
In 2010 One Insurer’s Paid-in Capital Rose by $22.5Bas Part of an Investment in a Non-insurance Business
$27.4
69
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
* 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
3.3%
9.6%
6.9%
10.9%
6.2%
13.8%
16.2%
0%
3%
6%
9%
12%
15%
18%
6/30/1989Hurricane
Hugo
6/30/1992HurricaneAndrew
12/31/93NorthridgeEarthquake
6/30/01 Sept.11 Attacks
6/30/04Florida
Hurricanes
6/30/05Hurricane
Katrina
FinancialCrisis as of3/31/09**
The Financial Crisis at its Peak Ranks as the Largest
“Capital Event” Overthe Past 20+ Years
(Percent)
70
* 2010 NWP and Surplus figures are % changes as of Q3:10 vs Q3:09. Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets FollowWhen 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 09 10*
NWP % change Surplus % change
(Percent)
Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market
Surplus growth is now positive but premiums
continue to fall, a departure from the historical pattern
71
2.1
1.9
2.7
2.5
2.3
1.8
1.7
1.7
1.9
1.9
1.9
1.9
1.7
1.6
1.6
1.4
1.4
1.3
1.3
1.1
1.1
0.9
0.7
7
1.1
30
.94
0.8
60
.84
1.2
91
.17
1.0
70
.99
0.8
40
.91
0.7
60.9
50
.82
1.6
2.0
2.52.5
1.8
2.1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98 0
02
04
06
08
10
The Premium-to-Surplus Ratio in 2011:Q1 Implies that P/C Insurers Held $1 in Surplus Against Each $0.77 Written in Premiums. In 1974, Each $1
of Surplus Backed $2.70 in Premium.*2011 data are as of 3/31/11.Sources: Insurance Information Institute calculations from A.M. Best data.
Ratio of Net Premiums Writtento Policyholder Surplus, 1970-2011*
The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.76:1 in 2010. It has decreased as PHS grows
more quickly than NPW, with the effect of holding down profitability.
Record High P-S Ratio was 2.7:1
in 1974
Record Low P-S Ratio was 0.76:1 as of 12/31/10, rising
slightly to 0.77:1 as of 3/31/11
72
Performance by Segment:Commercial/Personal Lines &
Reinsurance
P/C Underwriting Results: 2008-2010P
Line of Business 2008 2009 2010P
Personal Auto 100.3 101.3 101
Homeowners 117.0 105.6 107
Other Liability (incl. Prod Liab) 95 105 110
Workers Compensation 101 110.5 115
Commercial Multi Peril 104 97 101
Commercial Auto 96.8 99.5 98
Fire & Allied Lines (incl. EQ) 99 80 83
All Other Lines 113 96 101
Total P/C Industry 104 101 102
Source: All lines except WC for 2008-09, A.M. Best; Worker Comp., NCCI; 2010P data, ISO. Private carriers only.
Commercial Multi-Peril Combined Ratio: 1995–2011P
11
9.0
11
9.8
10
8.5
12
5.0
11
6.2
11
6.1
10
4.9
10
1.9
10
5.4
95
.1 97
.6
94
.2
10
0.7
11
6.8
11
3.6
11
5.3
12
2.4
11
5.0
11
7.0
97
.3
89
.0
97
.7
93
.8
83
.8
89
.8
10
8.0
98
.6 10
1.0
10
3.0
11
3.1
11
5.0 1
21
.0
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E* 11P*
Commercial Multi-Peril Underwriting Performance is Expected to Deteriorate Modestly
*2010Eand 2011P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.
Commercial Auto Combined Ratio: 1993–2011P
11
2.1
11
2.0
11
3.0
11
5.9
10
2.7
95
.2
92
.9
92
.1
92
.4 94
.2 96
.8 99
.5
98
.0 10
0.0
11
8.1
11
5.7
11
6.2
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 10E 11P
Sources: A.M. Best; Insurance Information Institute.
Commercial Auto Underwriting Performance is Expected to Deteriorate Modestly
Inland Marine Combined Ratio: 1999–2011P
101.9
92.8
100.2
83.8
77.379.5
93.2
89.3
94.5 94.5
80.882.5
89.9
70
75
80
85
90
95
100
105
99 00 01 02 03 04 05 06 07 08 09 10E 11P
Inland Marine is Expected to Remain Among the Most Profitable of All Lines
Sources: A.M. Best; Insurance Information Institute.
Workers Compensation Combined Ratio: 1994–2011P
10
2.0
97
.0 10
0.0
10
1.0
11
0.9
11
0.0
10
7.0
10
2.7
98
.4 10
3.5
10
1.0
11
0.5 11
5.0
11
7.512
1.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11P
Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They
Have Been in a DecadeSources: A.M. Best (1994-2009); NCCI (2010E); Insurance Information Institute (2011P).
Homeowners Insurance Combined Ratio: 1990–2011P
11
3.0
11
7.7
15
8.4
11
3.6
10
1.0 10
9.4
10
8.2
11
1.4 1
21
.7
10
9.3
98
.3
94
.2 10
0.1
89
.4 95
.7
11
7.0
10
5.6
10
7.0 11
4.0
11
8.4
11
2.7 12
1.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E11P
Homeowners Line Could Deteriorate in 2011 Due to Large Q2 Cat Losses. Extreme Regional Variation Can Be Expected
Due to Local Catastrophe Loss Activity
Sources: A.M. Best (1990-2010P); Insurance Information Institute (2011F).
Private Passenger Auto Combined Ratio: 1993–2011P
10
1.7
10
1.3
10
1.3
10
1.0
10
9.5
10
7.9
10
4.2
98
.4
94
.3
95
.1
95
.5 98
.3 10
0.3
10
1.3
10
1.0
98
.5
99
.5 10
1.1
10
3.5
80
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11P
Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best; Insurance Information Institute.
Workers Compensation Operating Environment
80
Payroll Exposure Growth is Returning, But Underwriting Must Improve to Capitalize on this Long-Awaited
Opportunity
Workers Compensation Premium Continues Its Sharp DeclineNet Written Premium
$ Billions
Calendar Yearp Preliminary
Source: 1990–2009 Private Carriers, Best's Aggregates & Averages; 2010p, NCCI1996–2010p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements
State Funds available for 1996 and subsequent
82
Workers Compensation Net Premiums Written and Annual Growth Rates: 1970-2010P
$3.5
$41.
8
$30.
5
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
WC
Ne
t P
rem
ium
s W
ritt
en
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
An
nu
al %
Ch
an
ge
in W
C N
PW
WC Net Premiums Written
Annual % Change in NPW
($ Billions)
Sources: A.M. Best (1973-2009); Insurance Information Institute calculations and estimates for 2010.
WC premium growth hit a 40+ year low in
2009 at -13%. Improving labor
markets began to help in 2010/11.
Workers Comp Rate Changes,2008:Q4 – 2011:Q1
Source: Council of Insurance Agents and Brokers; Information Institute.
-5.5%
-4.6%
-4.0%
-4.6%
-3.7%-3.9%
-5.4%
-3.7%-3.4%
-1.6%
-6%
-5%
-4%
-3%
-2%
-1%
0%
08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1
The Q1 2011 WC rate change was the smallest decrease in many years
(Percent Change)
Average Approved BureauRates/Loss Costs
12.1
7.4
10.0
2.9
-6.4
-3.2
-6.0
-8.0
-5.4
-2.6
3.5
1.2
4.9
6.6
-6.0-5.1
-5.7-6.6
-3.1-2.0
-1.1
0.2
-10
-5
0
5
10
15
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
Percent
Calendar Year* States approved through 4/23/2010Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organization
Cumulative1990–1993
+36.3%
Cumulative 2000–2003
+17.1%
Cumulative 2004–2011
-26.2%
Cumulative 1994–1999
-27.8%
*States approved through 4/8/11.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.
History of Average WC Bureau Rate/Loss Cost Level Changes
Average Approved BureauRates/Loss Costs
85
Calendar Year
Percent
Cumulative 2000–2010–13.6% All States–10.4% All States Excl. CA
* States approved through 4/8/2011Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organization
Source: NCCI
All States vs. All States Excluding California
Current NCCI Voluntary MarketFiled Rate/Loss Cost ChangesExcludes Law-Only Filings
86
Ratio
States filed through 4/15/2011
•IN and NC filed in cooperation with state rating bureauSource: NCCI
Impact of Discounting on Workers Compensation Premium
87
Policy Yearp PreliminaryDividend ratios are based on calendar year statisticsNCCI benchmark level does not include an underwriting contingency provisionBased on data through 12/31/2010 for the states where NCCI provides ratemaking servicesSource: NCCI
Percent NCCI States—Private Carriers
88
Final Premium vs. Estimated Premium by Policy Effective Quarter: 2006:Q1 – 2009:Q3
Note: WC Statistical Plan audited premium compared to policy-estimated premium. Based on states where NCCI provides ratemaking services, including state funds; excludes high deductible policies and mid-term cancellations.Source: NCCI
6.0%
5.1%4.7%
4.3%
2.4% 2.3%
1.1%
-1.3%
-3.4%
-4.6%-3.8% -3.6%
-2.6%
4.6%
7.1%
-6%
-4%
-2%
0%
2%
4%
6%
8%
06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3
The recession led to negative premium audit adjustments
Recession
89
Comparison of State WC rates
Source: Oregon Workers’ Compensation Premium Rate Ranking 2008. Rates weighted by Oregon’s distribution of exposures by classification
WC rates, on average, do not appear to be significantly higher or lower in states with workers comp state funds
California’s WC rates are about average
Workers Compensation Combined Ratio: 1973–2012P
96
.8 99
.91
01
.1 10
4.2
10
3.6
99
.49
6.4
10
1.4
10
2.8
10
3.9
11
2.5
12
1.9
11
8.8
12
1.1
11
7.6
11
8.4
11
8.2
11
7.4 12
2.6
12
1.5
10
9.1
10
2.0
97
.0 10
0.0
10
1.0
10
7.0
11
5.3 11
8.2
12
1.7
11
0.9
11
0.0
10
7.0
10
2.7
98
.41
03
.51
04
.31
09
.8 11
5.0
11
7.0
11
9.0
80
85
90
95
100
105
110
115
120
125
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
P1
1P
12
P
Workers Comp Underwriting Results Are Deteriorating Markedly
Sources: A.M. Best; Insurance Information Institute. 2010 is NCCI figure for private carriers.
Workers CompensationInvestment Returns
91
Percent
Calendar Yearp=Preliminary
Source: 1990–2009, Annual Statement Data; 2010p, NCCIInvestment Gain on Insurance Transactions includes Other Income•Adjusted to include realized capital gains to be consistent with 1992 and afterSource: NCCI
Average (1990–2009): 14.6%
Investment Gain on Insurance Transactions-to-Premium RatioPrivate Carriers
Calendar Year
Workers Compensation ResultsModest Operating Loss
92
Percent
Calendar Yearp Preliminary
Source: 1990–2009, Annual Statement Data; 2010p, NCCIOperating Gain Equals 1.00 minus (Combined Ratio Less Investment Gain on Insurance Transactions and Other Income)•Adjusted to include realized capital gains to be consistent with 1992 and afterSource: NCCI
Average (1990–2009): 6.3%
Pre-Tax Operating Gain RatioPrivate Carriers
93
WC Combined Ratio Necessary to Achieve Cost of Capital
Assumptions: 3.8% Pre-Tax Investment Yield; 2.8% Post-Tax Investment Yield; WC R/S ratio = 2.07;Based on NCCI’s 2011 Internal Rate of Return ModelSource: NCCI.
104
10199
9795
9392
9089
8887
75
80
85
90
95
100
105
110
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
WC combined ratios need to improve substantially (115 in 2010) in order generate a risk
appropriate rate of return.
(Percent)
$ Billions
Calendar Year
2
5
10
15
1820
21
18
15
12
6
910
9
42
0
5
10
15
20
25
30
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009
2010 Tabular Discount Is $5.5 Billion
Considers all reserve discounts as deficienciesLoss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selectionsSource: NCCI analysis
WC Loss and LAE Reserve Deficiency: Private Carriers
Calendar Year Reserve Deficiency Increased in 2010
Workers Compensation Medical & Indemnity Claim Cost Trends
95
Rising Medical Costs Exert Pressure While Indemnity Costs Fell
$8
.2
$8
.9
$9
.4
$1
0.1
$1
1.1
$1
2.0
$1
3.3
$1
4.2
$1
6.2
$1
7.6
$1
8.9
$2
0.0
$2
1.8
$2
3.1
$2
4.5
$2
5.7
$2
7.1
$2
7.7
$8
.4
$8
.2
$5
$10
$15
$20
$25
$30
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10p
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2009: +6.6%
Accident Year
MedicalClaim Cost ($000s)
2010p: Preliminary based on data valued as of 12/31/20101991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Cumulative Change = 238%(1991-2010p)
Workers Comp Medical Claim Costs Continue to Rise
+2.0%+5.4%
+5.0%+6.1%
+6.1%+9.1%
+5.4%+7.7%
+8.8%+13.5%
+7.3%+10.6%
+8.3%+10.1%
+7.4%+5.1%+9.0%
-2.1%+1.3%+6.8%
Average Medical Cost per Lost-Time Claim
Does smaller pace of increase suggest that small
med-only claims are becoming lost-time claims?
4.5%
3.5%2.8%
3.2% 3.5%4.1%
4.6% 4.7%4.0%
4.4% 4.2% 4.0%4.4%
3.7%3.2% 3.4%
5.1%
7.4%
10.1%10.6%
13.5%
5.4%
9.1%
6.1%
5.0%5.4%
2.0%
6.1%
8.8%
7.7%
7.3%
8.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1997 1999 2001 2003 2005 2007 2009
Change in Medical CPI
Change Med Cost per Lost Time Claim
WC Medical Severity Generally Outpaces the Medical CPI Rate—Not in 2010
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average annual increase in WC medical severity form 1995 through 2009 was nearly twice the medical CPI (7.6% vs. 3.9%). But in 2010, WC med severity figure plunged. Are small (low severity) med-only claims
becoming lost-time claims?
98
Annual Inflation Rates, (CPI-U, %),1990–2014F
2.8 2.6
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
3.0
2.2 2.1 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 11F 12F 13F 14F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/11 and 5/11 (forecasts).
The slack in the U.S. economy suggests that inflation should not heat upbefore 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns
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
Higher energy, commodity and food prices are pushing up inflation in 2011, but not longer turn
inflationary expectations.
P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests
Source: Bureau of Labor Statistics; Insurance Information Institute.
1.6%1.0%
3.4%
8.8%
6.1%
3.3%
4.3%
3.1%
0%
3%
6%
9%
Overall CPI "Core" CPI Medical CPI InpatientHospitalServices
OutpatientHospitalServices
Physicians'Services
PrescriptionDrugs
Medical CareCommodities
Price Changes in 2010
Healthcare costs are a major claim cost driver in WC. They are likely to grow faster than the CPI in most years.
99
Excludes Food and Energy
Inpatient Services Rose 8.8%;
Outpatient Services Rose 6.1%
100
Workers Compensation Lost-Time Claim Frequency Increased in 2010*
-4.4
%
0.3
%
-6.5
%
-4.5
%
0.5
%
-3.9
%
-2.3
%
-4.5
%
-6.9
%
-4.5
%
-4.1
%
-3.7
%
-6.6
%
-4.5
%
-2.1
%
-4.1
%
-5.5
%
3.0%-9
.2%
-4.2
%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10p
(Percent) Lost-Time Claims
Claim frequency increased by 3% in
2010. Improving economy played a role.
Cumulative Change of -56.4%
(1991 – 2009)
2010p: Preliminary based on data valued as of 12/31/2010; *Frequency is defined as the number of lost-time claims per 100,000 workers.1991-2009: Based on data through 12/31/2009, developed to ultimate 2010 figure is adjusted by NCCI. Unadjusted figure is +9%.Based on the states where NCCI provides ratemaking services including state funds; Excludes the effects of deductible policies
101
Frequency: 1926–2008A Long-Term Drift Downward
Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research
Manufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
0
5
10
15
20
25
30
'26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07
Indemnity Claim Cost Trends
102
Indemnity Costs Moderated in 2010
$1
0.0
$9
.7
$9
.4
$9
.9
$1
0.1
$1
0.7
$1
1.5
$1
2.5
$1
3.8
$1
5.2
$1
6.6
$1
7.1
$1
7.9
$2
2.8
$2
3.0
$2
2.3
$2
0.8
$1
9.9
$1
8.2
$1
8.8
+5.9%
+1.0%-3.1%-2.8%+4.9%+1.7%+5.9%
+7.7%+9.0%
+10.1%
+10.1%
+9.2%+3.1%+4.6%+1.6%
+3.4%+5.6%
5
7
9
11
13
15
17
19
21
23
25
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p
IndemnityClaim Cost ($ 000s)
Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2009:+4.1%
2010p: Preliminary based on data valued as of 12/31/20101991–2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Accident Year
-3%
Workers Comp Indemnity Claim Costs Decline in 2010
+8.2%+0.8%
Claiming behavior has changed significantly. Large numbers of lost time,
low severity claims have entered the system—claims that previously were medical only, driving down average
indemnity costs per claim.
Average Indemnity Cost per Lost-Time Claim
4.2%
5.2%5.6%
4.7%
6.3%
2.3%
1.1%
2.7%
4.3%4.7% 4.6%
2.3%
5.9%
7.7%
9.0%
10.1%
4.6%
3.4%
5.6% 5.9%
8.2%
2.0%
-0.6%
3.5%
3.6%
0.8%
-3.0%
1.6%1.7%
10.1%
9.2%
3.1%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
1995 1997 1999 2001 2003 2005 2007 2009
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation, 1995 -2010p
2010p: Preliminary based on data valued as of 12/31/2010; 1991-2009: Based on data through 12/31/2009, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI
WC indemnity severity fell in 2010 even
though wages rose
Annual Change 1991–1993:+1.9%Annual Change 1994–2001:+8.9%Annual Change 2002–2009:+6.7%
105
Potential Impacts of Japan Quake & Other Major CATs on
P/C (Re)Insurance Markets
Impacts Could Be Felt Well Beyond Japan
106
Location of March 11, 2011 Earthquake Near Sendai, Honshu, Japan
Source: US Geological Service; Insurance Information Institute.
Magnitude 9.0 earthquake struck Japan at 2:46PM local time (2:46AM Eastern) off northeast coast of Honshu, 80 miles east of Sendai
Quake is among the 5 strongest in recorded history and the strongest in the 140 years for which records have been kept in Japan
12,000+ fatalities
Economic loss: $100 - $300 bn
Insured losses up to $45 bn
Fukushima Nuclear Plant threat level raised to Category 7 on April 11 (highest, same as Chernobyl)
Significant tsunami damage was recorded in Japan; relatively minor damage on the U.S. West Coast
March 11 Earthquake Factsas of 3/24/2011
LOCATION130 km (80 miles) E of Sendai, Honshu, Japan178 km (110 miles) E of Yamagata, Honshu, Japan178 km (110 miles) ENE of Fukushima, Honshu, Japan373 km (231 miles) NE of TOKYO, Japan
Insured Japan Earthquake Loss Estimates*
$- $5 $10 $15 $20 $25 $30 $35 $40 $45 $50
Towers Watson
AIR Worldwide
RMS
Eqecat
$21 - $34 bn
$20 - $45 bn
$12 - $25 bn
$25 - $35 bn
107
*As of April 21, 2011. Towers Watson estimate includes $3.0 (low) to $4.9 billion (high) in life insurance losses. RMS estimate includes insured life/health losses of $3 to $8 billion.Sources: AIR Worldwide, Eqecat, RMS, Towers Perrin; Insurance Information Institute.
(Insured Losses, $ Billions)
Economic losses are likely to total in the $200-$300 billion
range, meaning only a fraction of the loss is insured
108
Top 20 Nonlife Insurance Companies in Japan by DPW, 2008
Direct premiums written, 2008
Rank Companies JPY (millions)
U.S. ($ millions)
Marketshare
Cumulative Market Share
1 Tokio & Marine Nichido $2,032,131.2 $19,660.9 24.0% 24.0%
2 Sompo Japan 1,504,262.7 14,553.8 17.8 41.8%
3 Mitsui Sumitomo 1,455,161.8 14,078.7 17.2 59.0%
4 Aioi 897,182.6 8,680.3 10.6 69.6%
5 Nipponkoa 728,262.9 7,046.0 8.6 78.2%
6 Nisay Dowa 361,530.7 3,497.8 4.3 82.5%
7 Fuji 329,345.7 3,186.4 3.9 86.4%
8 AIU 253,522.8 2,452.8 3.0 89.4%
9 Kyoei 199,393.1 1,929.1 2.4 91.8%
10 Nisshin 149,735.8 1,448.7 1.8 93.6%
11 American Home 82,889.8 802.0 1.0 94.6%
12 Asahi 73,600.1 712.1 0.9 95.5%
13 Sony 60,868.3 588.9 0.7 96.2%
14 ACE 54,876.2 530.9 0.7 96.9%
15 Zurich 45,471.3 439.9 0.5 97.4%
16 SECOM 44,245.0 428.1 0.5 97.9%
17 Sumi Sei 33,594.0 325.0 0.4 98.3%
18 AXA 30,418.9 294.3 0.4 98.7%
19 Mitsui Direct 29,471.9 285.1 0.4 99.1%
20 Daido 15,690.4 151.8 0.2 99.3%
Source: © AXCO 2011.
109
Recent Major Catastrophe Losses
(Insured Losses, $US Billions)
Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.
$35.0
$10.0$8.0
$5.0$2.0$0.5
$0
$5
$10
$15
$20
$25
$30
$35
$40
Cyclone Yasi(Australia) Feb
2011
Australia Floods(Dec - Feb 2011)
New ZealandQuake (Sep 2010)
Chile Earthquake(Feb 2010)
New ZealandQuake (Feb 2011)
Japan Earthquake(Mar 2011)
Insured Losses from Recent Major Catastrophe Events Exceed $60 Billion, an Estimated $57 Billion of that from Earthquakes
The March 2011 earthquake in Japan will become among the most expensive in world history in terms of insured losses (current
leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars)
110
Nonlife (P/C) Insurance Market Impacts of Japan Earthquake No Direct Impact for US Domestic Primary Insurers BUT: $2 - $5 Billion in Assumed Loss from Foreign Catastrophes Will Wind Up on the Books of US
Insurers, Most with No Direct Exposure to Japan/Australia/NZ US reinsurers Retrocessional market Blanket property insurance covers
Primary Insurance: Domestic Japanese Insurers Take Big Losses Few US/Foreign Insurers Had Direct Exposure to Japanese P/C Market
Low single-digit market share for a small number of companies Not a capital event for any non-Japanese primary insurer
Significant Absorption of Loss by Japanese Government Residential earthquake damage Nuclear-related property and liability damage
Significant Impacts for Global Reinsurers Property-Catastrophe covers on Commercial Lines Business Interruption/Contingent Business Interruption
Currently an Earnings Event for Global Reinsurers Not a capital event: Global reinsurance markets entered 2011 with record capital
Cost of Property/Cat Reinsurance Rising in Japan, New Zealand, Australia Up for all; Magnitude of increase is sensitive to size of loss
Impact on Cost of US Property-Cat Reinsurance is Possible/Likely Market remains well capitalized and competitive
Percentage of California Homeowners with Earthquake Insurance, 1994-2010*
32.9% 33.2%
19.5%17.4%
14.6%13.3% 13.8%
12.0% 12.0%
15.8%15.7%16.8%
0%
5%
10%
15%
20%
25%
30%
35%
94 96 97 98 99 00 01 02 03 04 06** 10**
*Includes CEA policies beginning in 1996. **2006/10 estimates from Insurance Information Network of CA.Source: California Department of Insurance; Insurance Information Institute.
The vast majority of California homeowners forego earthquake
coverage and play Russian Roulette with their most valuable asset
112
% of Residences in MO Quake-Prone Areas with Earthquake Coverage, 2009 vs. 2002
Sources: Missouri Department of Insurance news release, Feb. 11, 2011; Insurance Information Institute.
69
%
63
%
36
%
63
%
37
% 45
%
43
%
32
%
55
%
49
%
48
%
73
%
54
%
56
%
51
%
51
%
0%
10%
20%
30%
40%
50%
60%
70%
80%
St. LouisCity
St. LouisCounty
Dunklin Mississippi NewMadrid
Pemiscot Scott Stoddard
2002 2009
Residential Take-Up Rates in Missouri Quake-Prone Counties Have Fallen Significantly in Recent Years, but Compare Favorably to California (12%)
Between 32% and 63% of MO homeowners buy quake coverage in
vulnerable areas compared to 12% of CA homeowners and about 50% in Japan.
113
Estimated Insured Losses for the Top 10 Historical Earthquakes Based on Current Exposures (1) ($ Billion)
(1) Modeled loss to property, contents, and business interruption and additional living expenses for residential, mobile home, commercial and auto exposures as of December 31, 2008. Losses include demand surge and fire following earthquake. Policy conditions and earthquake insurance take up rates are based on estimates by state insurance departments and client claims data.
Source: AIR Worldwide Corporation.
Rank Date Location MagnitudeInsured loss
(current exposures)
1 Feb. 7, 1812 New Madrid, MO 7.7 $100
2 Apr. 18, 1906 San Francisco, CA 7.8 96
3 Aug. 31, 1886 Charleston, SC 7.3 37
4 Jun. 1, 1838 San Francisco, CA 7.4 27
5 Jan. 17, 1994 Northridge, CA 6.7 21
6 Oct. 21, 1868 Hayward, CA 7.0 21
7 Jan. 9, 1857 Fort Tejon, CA 7.9 8
8 Oct. 17, 1989 Loma Prieta, CA 6.3 6
9 Mar. 10, 1933 Long Beach, CA 6.4 5
10 Jul. 1, 1911 Calaveras, CA 6.4 4
EXPENSES
114
Expense Ratios Are Highly Cyclical and Contribute Deteriorating Underwriting Performance
Underwriting Expense Ratio*All P/C Lines, 1994-2010E**
25.9%26.1%
26.3%26.5%
26.3%
27.0%
27.4%
28.1%
28.6%
25.5%
25.0%
24.5%
27.0%
25.3%
27.6%
28.0%27.4%
22%
23%
24%
25%
26%
27%
28%
29%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E
*Ratio of expenses incurred to net premiums written.**2010 figure based on data through 2010:Q3.Source: A.M. Best; Insurance Information Institute.
Underwriting expense ratios are up
significantly as premiums fall faster
than expenses during generally soft market
conditions
Underwriting Expense Ratio*:Personal vs. Commercial Lines, 1990-2010E**
24.3%24.7%
24.4% 24.3%
26.4%26.6%
27.7%28.2%
29.9%
24.5%
26.4%
26.4%26.2%
24.7%24.7%24.6%24.4%
23.4%23.7%
23.5%
25.0%
23.9%
25.6%
25.6%
24.8%
30.5%30.6%
25.6%
28.5%
26.4%
26.6%
25.0%
29.1%
30.0%30.5%
28.4%
28.3%27.4%
27.8%
28.7%
29.3%
29.9%
20%
22%
24%
26%
28%
30%
32%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
E
Personal Lines Commercial Lines
*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.
Commercial lines expense ratios are
highly cyclical
Underwriting Expense Ratio*Personal Lines (Auto & Home), 1994-2010E**
21.8%22.0%21.8%
23.5%
24.5%24.7%25.0%25.2%25.1%
29.8%
28.5%
29.3%
30.5%
24.3%24.4%
23.6%
23.4%
22.7%
23.2% 23.6%23.5%
29.6%
30.0%30.5%
28.4%
27.7%
28.5%
30.8%31.1%
30.8%
30.6% 30.3%
30.6%
29.4%
20%
22%
24%
26%
28%
30%
32%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E
Auto Home
*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.
Expenses ratios for both auto and home
are up from their lows in 2003/04
Merger & Acquisition
118
Capital Cycles Can Drive Consolidation
2010: U.S. Insurance M&A Bounces Back (All Segments)
U.S. activity rebounded from lows recorded in 2009. M&A also made a comeback worldwide, with global activity rising 20%.
Sources: Conning Research Consulting; Insurance Information Institute.
436 transactions, up 36%
436 transactions, up 36%
Type of acquisition is shifting
There were 16 mutual targets in 2008-2010, up from 10 in the three prior years.
Sources: SNL Financial; Insurance Information Institute.
121
# of Mergers & Acquisitions, Worldwide:Will Reg Reform Stifle or Boost Activity?
92
68
83
65
69
26
40
27
32
9
42
2
25
03
50
92
11
1
70
12
2
16
81
39
15
81
57
0 100 200 300 400 500 600 700 800
2007
2008
2009
2010
Property-Casualty Life-Annuity Health/Managed Care Distribution Services
Sources: Conning Research; Insurance Information Institute.
Number of Transactions
122
$ Value of Mergers & Acquisitions, Worldwide: Will Reg Reform Stifle or Boost Activity?
$5
1.8
$5
.5
$2
4.4
$4
5.1
$1
3.8
$2
.3
$5
.8
$1
.2
$1
5.3
$9
.8$
0.8
$2
.4
$6
.9
$7
.6$
9.4
$1
3.9
$5
0.6
$3
0.3
$1
5.0
$1
6.5
$0 $35 $70 $105 $140
2007
2008
2009
2010
Property-Casualty Life-Annuity Health/Managed Care Distribution Services
Sources: Conning Research; Insurance Information Institute.
$ Billions
Shifting Legal Liability & Tort Environment
123
Is the Tort PendulumSwinging Against Insurers?
124
Important Issues & Threats Facing Insurers: 2011–2015
Source: Insurance Information Institute
Bottom Line: Tort “crisis” is less likely from rapid deterioration in the tort system overall, but costs still remain entrenched in the system
No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration
Erosion of recent reforms has already occurred
Legislative initiatives in 2009/10 were tort friendly; 2011 less so
New Congress will have tempering effect on what could have been tort disaster
Torts cost typically rise at twice the overall rate of inflation
Influence personal and commercial lines, esp. auto liability
Historically extremely costly to p/c insurance industry
Leads to reserve deficiency, rate pressure
Emerging Tort Threat
Cost of US Tort System ($ Billions)$1
29
$130 $1
41
$144
$148 $1
59
$156
$156 $1
67
$169 $1
80 $205 $2
33 $246 $2
60
$261
$247
$252
$255
$248 $2
70
$259 $2
70
$0
$50
$100
$150
$200
$250
$300
90 92 94 96 98 00 02 04 06 08
10E
12E
* Restated in 2009 dollars, based on CPI.Source: Towers Watson, 2010 Update on US Tort Cost Trends.
Per capita “tort tax” was $808 in 2009, up from $793 in 2000*
Tort costs consumed 1.74% of GDP in 2009, down from 2.21% in 2003
126
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10E 12E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A
Tort Costs Have Remained High but Relatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as
the Economy Expands
Business Leaders Ranking of Liability Systems in 2010
Best States
1. Delaware
2. North Dakota
3. Nebraska
4. Indiana
5. Iowa
6. Virginia
7. Utah
8. Colorado
9. Massachusetts
10. South Dakota
Worst States
41. New Mexico
42. Florida
43. Montana
44. Arkansas
45. Illinois
46. California
47. Alabama
48. Mississippi
49. Louisiana
50. West Virginia
Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2010
North Dakota Massachusetts South Dakota
Drop-offs
Maine Vermont Kansas
Newly Notorious
New Mexico Montana Arkansas
Rising Above
Texas South Carolina Hawaii
Midwest/West has mix of good and bad states.
128
The Nation’s Judicial Hellholes: 2010
Source: American Tort Reform Association; Insurance Information Institute
South Florida
West VirginiaIllinoisCook County
NevadaClark County
Watch List
Madison County, IL Atlantic County, NJ St. Landry Parish,
LA District of Columbia NYC and Albany,
NY St. Clair County, ILDishonorable
Mention
MI Supreme Court City of St. Louis CO Supreme Court
CaliforniaLos Angeles
and Humboldt Counties
Philadelphia
Inflation
129
Is it a Threat to Claim Cost Severities
130
Annual Inflation Rates, (CPI-U, %),1990–2014F
2.8 2.6
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
3.0
2.2 2.1 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 11F 12F 13F 14F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/11 and 6/11 (forecasts).
The slack in the U.S. economy suggests that inflation should not heat upbefore 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns
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
Higher energy, commodity and food prices are pushing up inflation in 2011, but not longer turn
inflationary expectations.
P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests
Source: Bureau of Labor Statistics; Insurance Information Institute.
1.6%1.0%
3.4%
8.8%
6.1%
3.3%
4.3%
3.1%
0%
3%
6%
9%
Overall CPI "Core" CPI Medical CPI InpatientHospitalServices
OutpatientHospitalServices
Physicians'Services
PrescriptionDrugs
Medical CareCommodities
Price Changes in 2010
Healthcare costs are a major liability, med pay, PIP and WC claim cost driver. They are likely to grow faster than the CPI for the next few years, at least
131
Excludes Food and Energy
Medical Cost Inflation Has Outpaced Overall Inflation for 30 Years
80
140
200
260
320
380
440
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
Inde
x V
alue
(198
2-84
=100
)
All Items Medical Care
Source: Department of Labor (Bureau of Labor Statistics); not seasonally adjustedhttp://www.bls.gov/news.release/pdf/cpi.pdf
Since 1982-84 (index =100), the cost of medical care has nearly quadrupled, while the overall cost of living merely doubled
Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years
719.8
1589.8
0
300
600
900
1200
1500
1800
61 66 71 76 81 86 91 96 01 06 11*
Inde
x V
alue
(196
1=10
0)
All ItemsMedical Care
*Based on change from Feb. 2011 to Feb. 2010 (latest available) Source: Department of Labor (Bureau of Labor Statistics)
A claim that cost $1,000 in 1961 would cost nearly $16,000 based on
medical cost inflation trends over the past 50 years.
National Health ExpendituresPer Capita, 1960-2019P*
$4,5
23
$4,7
90
$5,1
48
$5,5
60
$5,9
67
$6,3
28
$6,7
01
$7,0
71
$7,4
23
$7,6
81
$8,0
50
$8,3
89
$8,6
66
$9,0
40
$9,5
05
$10,
288
$10,
929
$11
,625
$12,
282
$12,
941
$13,
653
$356
$2,8
13
$1,1
00
$148
$3,4
69
$4,1
04
$4,2
97
$0
$3,000
$6,000
$9,000
$12,000
$15,000
60
70
80
90
93
97
98
99
00
01
02
03
04
05
06
07
08
09
P
10
P
11
P
12
P
13
P
14
P
15
P
16
P
17
P
18
P
19
P
*”The health spending projections were based on the 2008 version of the National Health Expenditures released in January 2010,updated to take into account the impact of health reform and other relevant legislation and regulatory changes.”Sources: Centers for Medicare & Medicaid Services, Office of the Actuary, September 2010 projections, at http://www.cms.gov/NationalHealthExpendData/downloads/NHEProjections2009to2019.pdf ; Insurance Information Institute.
Growth in health care expenses outstrips population growth, so per capita health care costs keep rising
National Health Expenditures* andHealth Expenditures as a Percent of GDP
$2
8
$1
,98
3
$2
,11
3
$2
,24
0
$2
,33
9
$2
,47
3
$2
,60
0
$2
,71
0
$2
,85
2
$3
,02
5
$3
,30
2
$3
,53
8
$3
,79
6
$4
,04
5
$4
,29
8
$4
,57
2
$1
,60
3
$1
,73
5
$2
53 $
71
4
$1
,35
4
$7
5
$1
,19
1 $1
,85
5
$1
,47
0
$1
,12
5$
91
3 $1
,26
6
5.2
%
7.2
%
9.1
%
13
.7%
14
.5%
15
.3%
15
.6%
15
.7%
19
.6%
16
.2%
15
.9%
15
.8%
19
.3%
19
.0%
18
.7%
17
.3%
17
.5%
17
.4%
17
.2%
17
.3%
17
.9%
18
.2%
12
.3%
13
.6%
13
.8% 1
5.8
%
13
.6%
13
.7%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,00060 70 80 90 93 97 98 99 00 01 02 03 04 05 06 07 08
09P
10P
11P
12P
13P
14P
15P
16P
17P
18P
19P
Nat
ion
al H
ealt
h E
xps
5%
10%
15%
20%
25%
Nat
ion
al H
ealt
h E
xp. a
s %
of
GD
P
National Health Expenditures National Health Expenditures as % of GDP
Health care expenditures consumed an estimated 17.3% of GDPin 2009; this is projected to rise to 19.6% in 2019
*”The health spending projections were based on the 2008 version of the National Health Expenditures released in January 2010,updated to take into account the impact of health reform and other relevant legislation and regulatory changes.”Sources: Centers for Medicare & Medicaid Services, Office of the Actuary, September 2010 projections, at http://www.cms.gov/NationalHealthExpendData/downloads/NHEProjections2009to2019.pdf ; Insurance Information Institute.
$Billions
Financial Services Reform
136
Insurers Not as Impacted as Banks, But Dodd-Frank
Implementation Has Been a Concern for Insurers
137
Financial Services Reform:What does it mean for insurers?
Systemic Risk and Resolution Authority
Creates the Financial Stability Oversight Council and the Office of Financial Research
Regulator representative is MO Insurance Commissioner Huff
No industry representative has been appointed yet
Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurers
Concern some insurers may be labeled as systemically risky based on size alone
Federal Insurance Office (FIO)
Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury, headed by a Director appointed by the Secretary of Treasury
FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis
IL Insurance Director Michael McGraith will become first FIO Director on June 1
Creation of Federal Advisory Committee on Insurance to Advise FIO
CONCERN: FIO morphs into quasi/shadow or actual regulator
The Dodd Frank Wall Street Reform and Consumer Protection Act
Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WV
VA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJRI C
DE
AL
VT
NY
MD
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
= A= B= C= D= F= NG
Source: Heartland Institute, May 2010
A- A-
A-
B-
B-
B-
B-
B-
B-B-
B-B-
B-
B-
B-
B-
B- C-
C-
C-
C -
C-
D-D-
A
A
A
A
B+
B+
B+
B
B
B
B
B
B
C+
C+
C
D+
D+D+
D
NG
NG
D F
F
2010 Property and Casualty InsuranceReport Card
Not Graded: District of ColumbiaMississippiLouisiana
Economic Issues for the Next 3-5 Years
139
P/C Insurance Industry Growth in the Wake of the “Great Recession”
140
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 6/11; Insurance Information Institute.
2.7
%
0.9
%
3.2
%
2.3
%
2.9
%
-0.7
%
0.6
%
-4.0
%
-6.8
% -4.9
%
-0.7
%
1.6
%
5.0
%
3.7
%
1.7
%
2.6
%
3.1
%
1.8
%
2.6
%
3.3
%
3.4
%
3.0
%
3.0
%
3.2
%3
.2%
4.1
%
1.1
%
1.8
%
2.5
% 3.6
%
3.1
%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
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
12
:1Q
12
:2Q
12
:3Q
12
:4Q
Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2011 got off to a sluggish start, but growth is expected
to accelerate in the remainder of the year. This is a major
positive for insurance demand and exposure growth.
2011 Financial Overview State Economic Growth Varied in 2010
141
Some Southeast states growing well, but others
among the weakest
Hard hit Midwest and Northeast states finally
entering recovery in 2010
142
(Millions of Units)
New Private Housing Starts, 1990-2016F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
1
0.5
5
0.5
9
0.6
0 0.7
9
1.2
0 1.3
3 1.4
3
1.5
0
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
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 11F12F13F14F15F16F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 6/11); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until 2013. Also Affects Commercial Insurers with Construction Risk Exposure, Surety
New home starts plunged
72% from 2005-2009; A
net annual decline of 1.49 million units, lowest since
records began in 1959
The plunge and lack of recovery in homebuilding and in construction in general is
holding back payroll exposure growthJob growth,
improved credit market conditions and demographics
will eventually boost home construction
143
16.9
16.5
16.1
13.2
10.4
11.6
13.1 14
.1 14.7 15
.1
15.0 15
.5
16.9
16.617
.117.5
17.8
17.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F 16F
(Millions of Units)
Auto/Light Truck Sales, 1999-2016F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 6/11); Insurance Information Institute.
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point. It is Too Soon to Assess the Impact of Higher Gas Prices.
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2011-12 is
still far below 1999-2007 average of 17 million units, but a recovery is underway.
Job growth and improved credit market conditions will boost auto sales in
2011 and beyond
66%
68%
70%
72%
74%
76%
78%
80%
82%
Ma
r 0
1
Ju
n 0
1
Se
p 0
1
De
c 0
1
Ma
r 0
2
Ju
n 0
2
Se
p 0
2
De
c 0
2
Ma
r 0
3
Ju
n 0
3
Se
p 0
3
De
c 0
3
Ma
r 0
4
Ju
n 0
4
Se
p 0
4
De
c 0
4
Ma
r 0
5
Ju
n 0
5
Se
p 0
5
De
c 0
5
Ma
r 0
6
Ju
n 0
6
Se
p 0
6
De
c 0
6
Ma
r 0
7
Ju
n 0
7
Se
p 0
7
De
c 0
7
Ma
r 0
8
Ju
n 0
8
Se
p 0
8
De
c 0
8
Ma
r 0
9
Ju
n 0
9
Se
p 0
9
De
c 0
9
Ma
r 1
0
Ju
n 1
0
Se
p 1
0
De
c 1
0
Ma
r 1
1
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 144
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
“Full Capacity”
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
The US operated at 76.9% of industrial
capacity in Apr. 2011, above the June 2009
low of 68.3%
December 2007-June 2009 Recession
145
7.67 7.70 7.75 7.79
7.78 7.80 7.
86 7.92
7.92
7.94 7.97 8.02
8.03
8.04 8.
12 8.19
8.20 8.25 8.
34 8.39 8.41 8.45 8.
54 8.62
8.57 8.
65 8.72 8.
788.
74 8.77 8.81 8.84
8.67
8.69 8.73 8.75
8.64 8.68 8.
75
7.50
7.75
8.00
8.25
8.50
8.75
9.00
2001
:Q1
2001
:Q2
2001
:Q3
2001
:Q4
2002
:Q1
2002
:Q2
2002
:Q3
2002
:Q4
2003
:Q1
2003
:Q2
2003
:Q3
2003
:Q4
2004
:Q1
2004
:Q2
2004
:Q3
2004
:Q4
2005
:Q1
2005
:Q2
2005
:Q3
2005
:Q4
2006
:Q1
2006
:Q2
2006
:Q3
2006
:Q4
2007
:Q1
2007
:Q2
2007
:Q3
2007
:Q4
2008
:Q1
2008
:Q2
2008
:Q3
2008
:Q4
2009
:Q1
2009
:Q2
2009
:Q3
2009
:Q4
2010
:Q1
2010
:Q2
2010
:Q3
Number of Private Business Establishments, 2001:Q1-2010:Q3
Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute
In 2009:Q1 a net of 165,000 businesses disappeared.By 2010:Q3 73,000 new ones appeared,
returning us to the level first attained three years before, in 2007:Q3.
Millions
No net growth in number of businesses since 2007
146
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
53 71,5
4970
,643
62,3
0452
,374
51,9
5953
,549
54,0
2744
,367
37,8
8435
,472
40,0
9938
,540
35,0
3734
,317
39,2
0119
,695 28
,322
43,5
4660
,837
56,2
82
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
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
Business Bankruptcy Filings,1980-2010
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2010 bankruptcies totaled 56,282, down 7.5% from 60,837 in 2009—which were up 40% from 2008 and the most since
1993.
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
147
Private Sector Business Starts, 1993:Q2 – 2010:Q3*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
920
1
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
209
207
207
199
191 19
317
2 176
169
184
172
172
182
203
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure
* Data through September 30, 2010 are the latest available as of May 3, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
(Thousands)
344,000 new business starts were recorded through the first half of 2010, which was likely the slowest year for
new business starts since 1993.
Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010:Q3 526,000
148
11 Industries for the Next 10 Years: Insurance Solutions Needed
Shipping (Rail, Marine, Trucking)
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Technology (incl. Biotechnology)
Light Manufacturing
Export-Oriented Industries
Many industries are
poised for growth, but
many insurers do not write in
these economic segments
149
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
150
Unemployment and Underemployment Rates: Falling in 2011
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment rate rose to 9.1%
in May
Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.
Peak rate in the last 30 years:
10.8% in November -
December 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 16.0%
in May 2011
January 2000 through May 2011, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure
May 11
18
67
92
13
65 1
27
42
15
-10
9-1
46
5 97
23
-12
-85 -58
-16
1-2
53
-23
0-2
57
-34
7-4
56
-54
7-7
34 -66
7-8
06 -7
07
-74
4 -64
9-3
34
-45
2-2
97 -2
15
-18
6-2
62
75
-83
16 6
2
22
95
1 61 1
17
14
31
12 1
93
12
8 16
79
42
61
21
92
51
831
44
(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan
-07
Fe
b-0
7M
ar-
07
Ap
r-0
7M
ay-
07
Jun
-07
Jul-
07
Au
g-0
7S
ep
-07
Oct
-07
No
v-0
7D
ec-
07
Jan
-08
Fe
b-0
8M
ar-
08
Ap
r-0
8M
ay-
08
Jun
-08
Jul-
08
Au
g-0
8S
ep
-08
Oct
-08
No
v-0
8D
ec-
08
Jan
-09
Fe
b-0
9M
ar-
09
Ap
r-0
9M
ay-
09
Jun
-09
Jul-
09
Au
g-0
9S
ep
-09
Oct
-09
No
v-0
9D
ec-
09
Jan
-10
Fe
b-1
0M
ar-
10
Ap
r-1
0M
ay-
10
Jun
-10
Jul-
10
Au
g-1
0S
ep
-10
Oct
-10
No
v-1
0D
ec-
10
Jan
-11
Fe
b-1
1M
ar-
11
Ap
r-1
1M
ay-
11
Monthly Change in Private Employment
January 2008 through May 2011* (Thousands)
Private Employers Added 2.323 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (Local
Govt. Employment is Down 416,000 Since Sept. 2008 Peak)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
Private employers added jobs in every month in 2010 for a total of
1.435 million for the year
83,000 private sector jobs were created in April
152
Monthly Change Employment*-7
2-1
44
-12
2-1
60
-13
7-1
61
-12
8-1
75
-32
1-3
80
-59
7-6
81
-77
9-7
26
-75
3-5
28 -3
87
-51
5 -34
6 -21
2-2
25
-22
46
4-1
09
14 39
20
8 31
3 43
2-1
75 -6
6-1
-41
21
09
3 15
26
82
35
22
12
44
-1,000
-800
-600
-400
-200
0
200
400
600
Ja
n 0
8F
eb
08
Ma
r 0
8A
pr
08
Ma
y 0
8Ju
n 0
8Ju
l 08
Au
g 0
8S
ep
08
Oct 0
8N
ov 0
8D
ec 0
8Ja
n 0
9F
eb
09
Ma
r 0
9A
pr
09
Ma
y 0
9Ju
n 0
9Ju
l 09
Au
g 0
9S
ep
09
Oct 0
9N
ov 0
9D
ec 0
9Ja
n 1
0F
eb
10
Ma
r 1
0A
pr
10
Ma
y 1
0Ju
n 1
0Ju
l 10
Au
g 1
0S
ep
10
Oct 1
0N
ov 1
0D
ec 1
0Ja
n 1
1F
eb
11
Ma
r 1
1A
pr
11
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Job Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; Stands at 6.2 Million Through March 2011;
13.5 Million People are Now Defined as Unemployed
January 2008 through April 2011* (Thousands)
The job gain and loss figures in 2010 were severely distorted by the hiring and termination of temporary Census workers. In 2010, 1.178 million
nonfarm jobs were created.
216,000 nonfarm jobs were created
in March
153
Unemployment Rates by State, April 2011:Highest 25 States*
12.5
11.9
10.9
10.8
10.4
10.2
10.0
9.9
9.8
9.7
9.6
9.6
9.6
9.6
9.3
9.3
9.3
9.1
9.1
9.0
8.9
8.8
8.8
8.7
8.6
8.2
0
2
4
6
8
10
12
14
NV CA RI FL MS MI KY GA SC NC DC ID OR TN AL AZ NJ CT WA US MO CO WV IL OH DE
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for April 2011, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In April, 39 states reported over-the-month unemployment rate decreases, 3 states and the District of Columbia had
increases, and 8 had no change.
18 states + DC had unemployment rates above the US average in Apr. 2011,
32 states were below.
154
8.2
8.1
8.0
7.9
7.8
7.7
7.6
7.6
7.5
7.4
7.3
7.3
7.3
6.8
6.7
6.5
6.1
6.1
6.0
6.0
5.6
5.3
4.9
4.9
4.2
3.3
0
2
4
6
8
10
IN LA TX NY MA AR ME NM PA UT AK MT WI MD KS MN HI VA IA WY OK VT NH SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, April 2011: Lowest 25 States*
*Provisional figures for April 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In April, 39 states reported over-the-month unemployment rate decreases, 3 states and the District of Columbia had
increases, and 8 had no change.
155
Labor Underutilization: Broader than Just Unemployment
11
.2%
16
.4%
16
.5%
16
.3%
16
.8%
17
.0%
17
.5%
17
.2%
17
.3%
16
.5%
16
.8%
16
.9%
17
.1%
16
.6%
16
.5%
16
.5%
16
.7%
17
.1%
17
.0%
17
.0%
16
.7%
16
.1%
15
.9%
15
.7%
15
.9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
Sep08
May09
Jun09
Jul09
Aug09
Sep09
Oct09
Nov09
Dec09
Jan10
Feb10
Mar10
Apr10
May10
Jun10
Jul10
Aug10
Sep10
Oct10
Nov10
Dec10
Jan11
Feb11
Mar11
Apr11
% of Labor Force
Marginally Attached and Unemployed Persons Account for 15.9% of the Labor Force in April 2011 (1 Out Every 6.4 People). Unemployment Rate Alone was 8.8%. Underutilization Shows a Broader Impact on WC and
Other Commercial ExposuresNOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Source: US Bureau of Labor Statistics; Insurance Information Institute.
156
US Unemployment Rate
4.5
%
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
%
8.9
%
8.7
%
8.6
%
8.4
%
8.3
%
8.1
%
8.0
%
9.6
%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
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
Rising unemployment eroded payrolls
and workers comp’s
exposure base.
Unemployment peaked at 10% in
late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/11); Insurance Information Institute
2007:Q1 to 2012:Q4F*
Unemployment forecasts remain stubbornly high
through 2011, but still imply millions of new
jobs will created.
Jobless figures have been revised
downwards for 2011/12
Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)
*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).
-4.4%
-2.0%-1.1%
1.1%
3.7%4.6%
8.5%
3.5%
2.1%
-0.5%
-3.6%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 2007-2009
Recessions in the 1970s and 1980s saw smaller exposure impacts
because of continued wage inflation, a factor not present
during the 2007-2009 recession
The Dec. 2007 to mid-2009 recession
caused the largest impact on WC
exposure in 60 years
(Percent Change)
(All Post WWII Recessions)
Recession Dates (Beginning/Ending Years)
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
158
Payroll Base* WC NWP
Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums
*Private employment; Shaded areas indicate recessions. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
29% of NPW has been eroded away by the soft market and weak economy
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
159
Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*
34
.4
23
.1
14
.2
10
.2
9.0
4.6
1.4
-3.7
-7.3
-9.3
-10
.0
-10
.3
-10
.9
-10
.9
-13
.0
-14
.7
-15
.3
-15
.9
-16
.9
-17
.8
-19
.8
-21
.4
-21
.7
-35-30-25-20-15-10-505
10152025303540
OK
MT ID LA
SD IA KS
NY WI
PA
MS IL
NM NJ
NE
MD
NC AL
CT VA
SC
AR
MN
Pe
ce
nt
ch
an
ge
(%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States5
,80
7.1
Only 9 (small) states showed growth in workers
comp premium volume between 2005 and 2010
160
Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*
-22
.6
-23
.7
-24
.2
-25
.0
-25
.2
-25
.2
-25
.3
-26
.8
-26
.9
-28
.1
-28
.3
-28
.7
-29
.0
-30
.1
-32
.5
-32
.6
-33
.8
-34
.7
-36
.1
-42
.7
-45
.4
-50
.7
-51
.2
-57
.7
-70
-60
-50
-40
-30
-20
-10
0
AZ
ME
GA
KY IN NH
OR
DC
MA
TN VT
US
TX
AK
MO MI
UT RI
CO
DE
NV HI
CA
FL
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
States with the poorest performing economies also produced the most negative net change in premiums of
the past 5 years
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
Workers Comp DPW plunged 28.7% from
between 2005 and 2010
www.iii.org
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwig
Insurance Information Institute Online: