the road ahead in texas challenges & opportunities in the p/c insurance industry for 2011 &...
TRANSCRIPT
The Road Ahead in TexasChallenges & Opportunities in the P/C Insurance Industry for 2011 & Beyond
48th Annual Joe Vincent Management SeminarAustin, TX
January 31, 2011
Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Presentation Outline
Insurance Industry Financial Overview & Outlook Profitability Premium Growth Capital & Capacity Underwriting Performance: Commercial & Personal Lines Financial/Investment Review & Outlook
Financial Strength Overview
Texas Overview: Growth and Profitability Analysis
Tort System Review: Overview and Causes for Concern
Exposure Analysis: Where Will Growth Come from in the Aftermath of the Great Recession?” Crisis-Driven Exposure Issues: Personal & Commercial Lines Growth in the Post-Crisis World
Catastrophe Loss Review
3
P/C Insurance Industry Financial Overview
Profit Recovery ContinuesEarly Stage Growth Begins
P/C Net Income After Taxes1991–2010:Q3 ($ 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
$2
6,7
00
$2
8,3
11
-$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:Q3
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:Q3 ROAS = 6.7%
P-C Industry 2010:Q3 profits were$26.7B vs.$16.4B in 2009:Q3,
due mainly to $4.4B in realized capital gains vs. -$9.6B in previous
realized capital losses
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS for 2010:Q3 and 4.6% for 2009. 2009:Q3 net income was $29.8 billion excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute
5
ROE: Property/Casualty Insurance,1987–2010E*
* Excludes Mortgage & Financial Guarantee in 2008 - 2010.Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E
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)
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2009 and 2010:Q3 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures 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
99.5 99.7101.0
7.7%7.3%
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:Q3*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
P/C Premium Growth Cycles
8
Cyclicality is Driven Primarily by the Industry’s Underwriting
Cycle, Not the Economy
9
-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 0910
F
Soft Market Persisted in 2010 but May Be Easing: Relief in 2011?
(Percent)1975-78 1984-87 2000-03
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 0.8% through 10:Q3 vs. -4.5% through 09:Q3
10
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%
-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
The long-awaited uptick:
mainly personal lines
11
Monthly Change* in Auto Insurance Prices, 1991–2010*
*Percentage change from same month in prior year; through December 2010; 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
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 be occurring
Dec. 2010 change fell
to 4.4% from 5.4%
in Nov.
12
Average Premium forHome Insurance Policies**
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.
$508$536
$593
$668
$822$791 $799 $807$804
$764
$729
$500
$550
$600
$650
$700
$750
$800
$850
$900
$950
00 01 02 03 04 05 06 07 08 09* 10*
Consumer efforts to economize (increased deductibles, more shopping, etc.) and
adverse exposure trends are depressing the average homeowners insurance premium
13
Average Commercial Rate Change,All Lines, (1Q:2004–3Q:2010)
-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
%
-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
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)
Market Remains Soft as Capital Restored and
Underwriting Losses Remain Modest
14
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q3
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Percentage Change (%)
Peak = 2001:Q4 +28.5%
Trough = 2007:Q3 -13.6%
Pricing Turned Negative in Early
2004 and Has Been Negative
Ever Since KRW Effect
Market has Been Soft for 6+ years and Remains Soft as Capital is Restored and
Underwriting Losses Remain Modest
17
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 2009E 2010P 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.
Capital/PolicyholderSurplus (US)
18
Total Surplus Exhibits Little Cyclicality, While Surplus Leverage
Ratios Influence Cycle
20
Policyholder Surplus, 2006:Q4–2010:Q3
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
$505.0$515.6$517.9
$420
$440
$460
$480
$500
$520
$540
$560
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
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%)
Surplus set a new record in 2010:Q3*
*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.
Investment Performance
27
Investments Cycles Also Influence P/C Insurer Profitability
Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q31
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.0 $39.5
$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:Q3In 2008, Investment Gains Fell by 50% Due to Lower Yields and
Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income
Investment Gains Recovered Significantly in 20101 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) 2009:Q3 gain was $29.3B
Investment gains in 2010 are on track to be their best since 2007
29
P/C Insurer Net Realized Capital Gains, 1990-2010:Q3
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.
98
$4.4
3
-$19
.81
$9.2
4
$6.0
0
$1.6
6
-$25-$20-$15-$10
-$5$0$5
$10$15$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910:Q3
Realized Capital Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE and Were a Major
Driver of Its Recovery in 2010
($ Billions)Capital losses have
turned to capital gains, aiding earnings
30
Treasury Yield Curves: Pre-Crisis (July 2007) vs. December 2010
0.09% 0.14% 0.19% 0.29%0.62%
2.66%
3.29%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
1.93%
0.99%
4.42%4.17%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
October 2010 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 as economy improves. Investment
income is falling as a result.
The Fed’s Announced Intention to Pursue Additional Quantitative Easing Could Further Depress Rates in the 7 to 10-Year Maturity Range
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
QE2 Target
31
-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
War
rant
y
Surplu
s Line
s
Med
Mal
WC
Reinsu
ranc
e**
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*
32*Net admitted assets. Sources: NAIC; Insurance Information Institute research.
Invested assets totaled $1.26 trillion
Generally, insurers invest conservatively, with over 2/3 of invested assets in bonds
Only 18% of invested assets were in common or preferred stock
Portfolio Factsas of 12/31/2009
68.8%
6.2%18.0%
7.0%
Bonds
Common & Preferred Stock
As of December 31, 2009
Cash & Short-term
Investments
Other
Distribution of P/C Insurance Industry’s Investment Portfolio
33
2011 Financial Overview About Half of the P/C Insurance Industry’s Bond Investments Are in Municipal Bonds
Sources: NAIC, via SNL Financial; Insurance Information Institute research.
Investments in “Political Subdivision [of states]” bonds were $102.5 billion
Investments in “States, Territories, & Possessions” bonds were $58.9 billion
Investments in “Special Revenue” bonds were $288.2 billion
All state, local, and special revenue bonds totaled 48.2% of bonds, about 35.7% of total invested assets
Bond Investment Factsas of 12/31/09
0.9%
2.0%15.5%
6.3%
11.0%
31.0%33.3%
U.S. Government
Special Revenue
As of December 31, 2009
States, Terr., etc.
Industrial
Foreign Govt
Political Subdivisions
2011 Financial Overview When P/C Insurers Invest in Higher Risk Bonds,It’s Corporates, Not Munis
Data are as of year-end 2009. Sources: SNL Financial; Insurance Information Institute.
The NAIC’s Securities Valuation Office puts bonds into one of 6 classes: class 1 has the lowest expected impairments; successively higher
numbered classes imply increasing impairment likelihood.
Financial Strength & Underwriting
35
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
P/C Insurer Impairments, 1969–20098
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
7 65
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
Source: A.M. Best; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
5 of the 11 are Florida companies (1 of these
5 is a title insurer)
38
Reasons for US P/C Insurer Impairments, 1969–2008
38.1%
14.3%8.1%
7.6%
7.9%
7.0%
9.1%
4.2%
3.7%
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009
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
Deficient Loss Reserves/Inadequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems
Misc.
Sig. Change in Business
39
Underwriting Trends – Financial Crisis Does Not
Directly Impact Underwriting Performance
40
P/C Insurance Industry Combined Ratio, 2001–2010:Q3*
* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2 Sources: A.M. Best, ISO.
95.7
99.3 99.7101.0
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:Q3
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
Lower CAT
Losses, More
Reserve Releases
43
Calendar Year Combined Ratios by Segment: 2008-2011F
Sources: A.M. Best . Insurance Information Institute.
102.4
98.9100
106
99.5
108
103.8104.5
9092949698
100102104106108110
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
44
Profitability and Growth in Texas P/C Insurance Markets
Analysis by Line and Nearby State Comparisons
45
RNW All Lines: TX vs. U.S., 2000-2009
Sources: NAIC.
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
00 01 02 03 04 05 06 07 08 09
US All Lines TX All Lines
P/C Insurer profitability in TX is highly variable and
below that of the US overall over the past decade
US: 7.0%
TX: 3.7%
(Percent)
46
RNW PP Auto: TX vs. U.S., 2000-2009
Sources: NAIC.
-10%
-5%
0%
5%
10%
15%
20%
25%
00 01 02 03 04 05 06 07 08 09
US PP Auto TX PP Auto
Pvt. Passenger Auto profitability in TX is has
been somewhat below the US in recent years
Average 2000-2009
US: 7.2%
TX: 6.1%
47
RNW Comm. Auto: TX vs. U.S.,2000-2009
Sources: NAIC.
-10%
-5%
0%
5%
10%
15%
20%
00 01 02 03 04 05 06 07 08 09
US Comm Auto TX Comm Auto
(Percent)Commercial Auto
profitability in TX is generally below the US
average
Average 2000-2009
US: 8.5%
TX: 5.6%
48
RNW Comm. Multi-Peril: TX vs. U.S.,2000-2009
Sources: NAIC.
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
00 01 02 03 04 05 06 07 08 09
US Comm M-P TX Comm M-P
(Percent)Hurricane Ike put a big
dent in CMP profitability in 2008
Average 2000-2009
US: 8.0%
TX: 0.4%
49
RNW Homeowners: TX vs. U.S.,2000-2009
Sources: NAIC.
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
00 01 02 03 04 05 06 07 08 09
US HO TX HO
(Percent)Homeowners Profitability: Mold,
Hurricanes, Hail & Tornadoes
(Need I Say More?)
Average 2000-2009
US: 4.7%
TX: -2.3%
50
RNW Workers Comp: TX vs. U.S.,2000-2009
Sources: NAIC.
-5%
0%
5%
10%
15%
20%
00 01 02 03 04 05 06 07 08 09
US WComp TX WComp
(Percent)Workers comp
profitability in TX has generally
outperformed the US
Average 2000-2009
US: 6.4%
TX: 9.2%
All Lines: 10-Year Average RNW TX & Nearby States
-9.3%
6.0%
6.9%
7.0%
10.5%
-13.0%
3.7%
-15% -10% -5% 0% 5% 10% 15%
New Mexico
U.S.
Arkansas
Oklahoma
Texas
Mississippi
Louisiana
Source: NAIC, Insurance Information Institute
2000-2009
Texas All Lines profitability is below the US and
regional average
PP Auto: 10-Year Average RNW TX & Nearby States
4.7%
7.6%
6.8%
7.2%
11.1%
0.8%
6.1%
0% 2% 4% 6% 8% 10% 12%
New Mexico
U.S.
Arkansas
Oklahoma
Texas
Mississippi
Louisiana
Source: NAIC, Insurance Information Institute
2000-2009
Texas PP Auto profitability is below the US and regional
average
53
Top Ten Most Expensive And Least Expensive States For Automobile Insurance, 2008 (1)
RankMost
expensive statesAverage
expenditure RankLeast
expensive statesAverage
expenditure1 D.C. $1,126 1 North Dakota $503
2 Louisiana 1,105 2 Iowa 519
3 New Jersey 1,081 3 South Dakota 520
4 Florida 1,055 4 Nebraska 547
5 New York 1,044 5 Idaho 562
6 Delaware 1,007 6 Kansas 576
7 Rhode Island 986 7 Wisconsin 581
8 Nevada 970 8 North Carolina 595
9 Connecticut 950 9 Maine 600
10 Maryland 922 10 Indiana 612
(1) Based on average automobile insurance expenditures.
Source: © 2010 National Association of Insurance Commissioners.
Texas ranked 15th in 2008, with an average expenditure for auto insurance of $854.
Comm. Auto: 10-Year Average RNW TX & Nearby States
3.1%
7.2%
6.1%
8.5%
11.1%
-3.8%
5.6%
-5% 0% 5% 10% 15%
New Mexico
U.S.
Arkansas
Oklahoma
Texas
Mississippi
Louisiana
Source: NAIC, Insurance Information Institute
2000-2009
Texas Commercial Auto profitability is below the US and regional average
Comm. M-P: 10-Year Average RNW TX & Nearby States
-10.0%
11.0%
6.4%
8.0%
13.3%
-20.2%
0.4%
-30% -20% -10% 0% 10% 20%
New Mexico
U.S.
Arkansas
Oklahoma
Texas
Mississippi
Louisiana
Source: NAIC, Insurance Information Institute
2000-2009
Texas Commercial Multi-Peril profitability
is below the US and regional average
Homeowners: 10-Year Average RNW TX & Nearby States
-29.0%
-1.6%
-6.9%
4.7%
12.0%
-32.4%
-2.3%
-40% -30% -20% -10% 0% 10% 20%
New Mexico
U.S.
Arkansas
Oklahoma
Texas
Mississippi
Louisiana
Source: NAIC, Insurance Information Institute
2000-2009
Texas Homeowners profitability is below the US and regional
average
57
Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2008 (1)
RankMost
expensive statesAverage
expenditure RankLeast
expensive statesAverage
expenditure1 Texas (3) $1,460 1 Idaho $387
2 Florida (4) 1,390 2 Utah 432
3 Louisiana 1,155 3 Oregon 439
4 Oklahoma 1,048 4 Washington 471
5 Massachusetts 1,026 5 Wisconsin 503
6 New York 983 6 Delaware 535
7 Connecticut 980 7 Ohio 565
8 Mississippi 980 8 Maine 572
9 D.C. 926 9 Pennsylvania 586
10 Kansas 916 10 Kentucky 601
(1) States with the same premium receive the same rank.(2) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those
specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.(3) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms.(4) Florida data excludes policies written by Citizen's Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly
comparable to other states.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data.
Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.
Texas ranked as the most expensive state for homeowners insurance in 2008, with an average expenditure of $1,460.
Workers Comp: 10-Year Average RNW TX & Nearby States
9.5%
3.7%
13.2%
6.4%
8.7%
9.9%
9.2%
0% 5% 10% 15%
New Mexico
U.S.
Arkansas
Oklahoma
Texas
Mississippi
Louisiana
Source: NAIC, Insurance Information Institute
2000-2010
Texas Workers Comp profitability is
above the US average but similar
to the regional average
59
All Lines DWP Growth: TX vs. U.S., 2000-2009
Source: SNL Financial.
4.6
%
12
.0% 14
.3%
9.8
%
7.4
%
2.2
%
3.4
%
0.5
%
-2.1
%
5.2
%
15
.7%
20
.5%
7.9
%
0.3
%
1.4
%
6.2
%
3.7
%
2.7
%
-1.6
%
-3.3
%
-5%
0%
5%
10%
15%
20%
25%
00 01 02 03 04 05 06 07 08 09
US DWP: All Lines TX DWP: All Lines
Texas DWP growth is generally higher than
for the US overall.
Average: 2000-2009
US: 4.9%
TX: 6.2%
(Percent)
60
Comm. Lines DWP Growth: TX vs. U.S., 2000-2009
Source: SNL Financial.
6.3
%
15
.3% 19
.0%
11
.4%
4.5
%
3.3
% 5.4
%
0.2
%
-1.2
%
-9.3
%
7.6
%
19
.2%
27
.2%
9.2
%
0.1
% 2.3
%
10
.4%
4.1
%
0.0
%
-7.4
%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
00 01 02 03 04 05 06 07 08 09
US DWP: Comm. Lines TX DWP: Comm. Lines
(Percent) Texas Commercial Lines DWP growth is generally higher than
for the US overall.
Average: 2000-2009
US: 5.5%
TX: 7.3%
61
Personal Lines DWP Growth: TX vs. U.S., 2000-2009
Source: SNL Financial.
2.8
%
8.2
%
11
.1%
9.2
%
5.3
%
2.2
%
2.3
%
1.2
%
0.0
% 1.1
%
3.1
%
11
.3%
16
.8%
7.2
%
0.8
%
0.7
% 2.4
%
2.9
%
5.5
%
4.3
%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
00 01 02 03 04 05 06 07 08 09
US DWP: Personal Lines TX DWP: Personal Lines
(Percent) Texas Commercial Lines DWP growth is generally higher than
for the US overall.
Average: 2000-2009
US: 4.3%
TX: 5.5%
Shifting Legal Liability & Tort Environment
62
Is the Tort PendulumSwinging Against Insurers?
Cost of US Tort System ($ 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
67
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.
69
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 & Albany, NY St. Clair County, IL
Dishonorable Mention
MI Supreme Court City of St. Louis CO Supreme Court
CaliforniaLos Angeles
and Humboldt Counties
Philadelphia
Average Jury Awards 1999 - 2008
$725$747 $756
$800 $799
$1,018 $1,022
$950
$1,077$1,046
$500
$600
$700
$800
$900
$1,000
$1,100
$1,200
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Jury Verdict Research; Insurance Information Institute.
Sum of Top 10 Jury Awards, 2004-2010
$5,159
$2,954
$815$616
$1,344$1,511 $1,568
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2004 2005 2006 2007 2008 2009 2010
Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009, and 2010.
The sum of the largest jury awards was up
slightly in 2010
2010 Top Ten Jury Verdicts
Source: Lawyers USA, January 18, 2011.
Value Issue State
$505.1 Million Products Liability Nevada
$208.8 Million Personal Injury (Asbestos/Mesothelioma case) California
$152 Million Wrongful Death (Tobacco verdict) Massachusetts
$132.5 Million Personal Injury (Ford rollover retrial) Mississippi
$124.5 Million Personal Injury (Passenger van rollover case) Texas
$103 Million Legal Malpractice/Breach of Fiduciary Duty Mississippi
$90.8 Million Products Liability, Wrongful Death (Tobacco verdict) Florida
$89 Million Personal Injury, Products Liability Pennsylvania
$82.5 Million Wrongful Death Texas
$80 Million Wrongful Death (Tobacco verdict) Florida
2009 Top Ten Jury Verdicts
Source: Lawyers USA, January 15, 2010.
Value Issue State
$370 Million Defamation California
$330 Million Personal Injury (Drunk driving case) Florida
$300 Million Personal Injury (Tobacco verdict) Florida
$89 Million Personal Injury (Drunk driving case) Missouri
$78.75 Million Personal Injury (Prempro) New Jersey
$77.4 Million Medical Malpractice New York
$71 Million Conversion and Breach of Fiduciary Duty Texas
$70 Million Workers Comp Case Texas
$65 Million Personal Injury Florida
$60 Million Medical Malpractice New York
2008 Top Ten Jury Verdicts
Source: Lawyers USA, January 13, 2009.
Value Issue State
$388 Million Fraud, Intentional Infliction of Emotional Distress
Nevada
$316 Million Breach of Contract Georgia
$188 Million Defamation New York
$85 Million Premises Liability Pennsylvania
$84 Million Negligence, Personal Injury Texas
$66 Million Breach of Fiduciary Duty Oklahoma
$60 Million Insurance Bad Faith Nevada
$55 Million Negligence California
$54 Million Wrongful Death Georgia
$48 Million Negligence Indiana
Where Will the Exposure Growth Come From?
85
Personal LinesCommercial Lines
86
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 1/11; 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
%
3.2
%
3.2
%
3.3
%
3.3
%
3.5
%
3.1
%
3.2
%
3.2
%3
.3%
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%
Economic growth projections for 2011 have been revised
upward. This is a major positive for insurance demand
and exposure growth.
87
Real GDP Growth: US vs. TX, 1998-2009
6.3%
4.4% 4.2%
2.6% 2.4%
0.3%
4.8%4.4%
4.8%4.2%
1.3%1.7%
2.1%
3.4%2.8% 2.7%
2.1%
0.1%
-1.5%
4.6%
0.5%0.2%
5.5%
-2.1%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
TexasUS
Real economic growth in Texas outpaced the US from 1998-2009. The average rate of real economic growth was 2.9% in Texas and 2.3% in the US
Pursue Additional Quantitative Easing Could Further Depress Rates in the 7 to 10-Year Maturity Range
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
2011 Financial Overview State Economic Growth Varied in 2009
89
Mountain, Plains states still growing the fastest
Some Southeast states growing well, but others
among the weakest
90
Direct Premiums Written: All Lines Percent Change by State, 2004-2009
42
.9
23
.8
22
.0
18
.8
17
.2
15
.4
14
.8
14
.2
14
.1
14
.0
13
.5
13
.0
13
.0
12
.9
12
.8
12
.3
12
.2
11
.5
10
.7
7.9
5.8
5.5
5.1
5.0
4.6
0
5
10
15
20
25
30
35
40
45
ND LA
SD
WY
MT
UT
OK
DE IA
NM
MS
WV
SC
DC
TX
NE
KS
NC ID AL
FL
WA
GA
AR HI
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…
Texas was the 15th fastest growing state for P/C
insurers from 2004-2009 and one of the few large states to see any growth
91
4.5
4.2
2.6
2.5
2.4
2.0
0.9
0.7
0.6
0.5
0.0
-0.1
-2.8
-3.1
-3.5
-3.7
-5.2
-8.2
-9.2
-14
.8
-15
.2
-0.5
-1.2
-1.6
-1.8
-2.4
-20
-15
-10
-5
0
5A
K
VA
TN
KY
MD
MO AZ
OR WI
NV
NY IN PA
MN
VT
CO
CT RI
NJ IL
ME
OH
NH
MA 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
Over the 5 years from 2004-2009, 15 states saw premiums shrink,one had no growth, and 4 others grew premiums by less than 1%
Direct Premiums Written: All Lines Percent Change by State, 2004-2009
92
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 1.7 1.92.2 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 10F 11F 12F 13F 14F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 1/11 (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 have reduced near-
term inflationary pressures
94
(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
0
0.5
6
0.5
9
0.6
8
0.8
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 10F11F12F13F14F15F16F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (1/11); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until 2012. 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
I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers
$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is
estimated at about $1.3 billion
Job growth, improved credit
market conditions and demographics
will eventually boost home construction
2011 Financial Overview Average Square Footage of Completed New Homes in U.S., 1973-2010*
1,66
01,
695
1,64
51,
700
1,72
01,
755
1,76
01,
740
1,72
01,
710
1,72
51,
780
1,78
51,
825 1,90
5 1,99
52,
035
2,08
02,
075
2,09
52,
095
2,10
02,
095
2,12
02,
150
2,19
02,
223
2,26
62,
324
2,32
02,
330
2,34
9 2,43
42,
469
2,52
12,
519
2,43
82,
374
1,500
1,700
1,900
2,100
2,300
2,500
2,700
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
*2010 figure is weighted average square feet of completed homes in first three quarters of 2010Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.
Square Ft
The trend toward building larger homes reversed in 2009 and 2010, affecting exposure growth beyond the decline in number of units built
The average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions
95
The average size of completed new homes fell by 145 square feet (5.75%) from 2008-2010, the largest recession-based drop in nearly four decades
97
Wage and Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)
2011 Financial Overview Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums
* Average Wage and Salary data as of 7/1/2010. Shaded areas indicate recessions. **Estimated “official” end of recession June 2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books
Weakening payrolls have eroded $2B+ in workers comp premiums; nearly 29% of NPW has been eroded away by the soft market and weak economy
7/90-3/91 3/01-11/01
$0
$1,000
$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*
$0
$10
$20
$30
$40
$50
$60
Wage & SalaryDisbursements
WC NPW
WC net premiums written were down $13.7B or 28.7%
to $34.1B in 2009 after peaking at $47.8B in 2005
12/07-6/09
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
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. 98
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 75.2% of industrial
capacity in November 2010, above the June
2009 low of 68.3%
December 2007-June 2009 Recession
99
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
5371
,549
70,6
4362
,304
52,3
7451
,959
53,5
4954
,027
44,3
6737
,884
35,4
7240
,099
38,5
4035
,037
34,3
1739
,201
19,6
95 28,3
2243
,546
60,8
3743
,016
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 0910
:3Q
Business Bankruptcy Filings,1980-2010:Q3
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
There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:Q3
bankruptcies totaled 29,059, down 5.5% from 2009:Q3
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
100
Private Sector Business Starts, 1993:Q2 – 2010:Q1*
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
199
191 19
317
117
716
918
417
2
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
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure
* Latest available as of December 29, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
(Thousands)
180,000 businesses started in 2009:Q4, the best quarter in 2009. 2009 was the slowest year for new
business starts since 1993.
Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000
Financial Strength & Ratings
102
Industry Has Weathered the Storms Well
P/C Insurer Impairments, 1969–20098
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
7 65
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
Source: A.M. Best; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
5 of the 11 are Florida companies (1 of these
5 is a title insurer)
106
Reasons for US P/C Insurer Impairments, 1969–2008
38.1%
14.3%8.1%
7.6%
7.9%
7.0%
9.1%
4.2%
3.7%
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009
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
Deficient Loss Reserves/In-adequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems
Misc.
Sig. Change in Business
121
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
122
2011 Financial Overview Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilized in 2010
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Dec.10
Unemployment rate fell to 9.4%
in December
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 16.7%
in December 2010
January 2000 through December 2010, 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
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
24
15
1 61 1
17
14
31
12 1
93
79 1
1315
8
(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
Monthly Change in Private Employment
January 2008 through December 2010* (Thousands)
Private Employers Added 1.346 million Jobs in 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008
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
1.346 million for the year
113,000 private sector jobs were created in
December
125
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
%
9.6
%
9.5
%
9.3
%
9.1
%
8.9
%
8.7
%
8.6
%
8.4
%
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 likely peaked at 10%
in late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1/11); Insurance Information Institute
2007:Q1 to 2012:Q4F*
Unemployment forecasts remain stubbornly high
through 2011, but still imply millions of new
jobs will created.
127
Unemployment Rates by State, December 2010:Highest 25 States*
8.89.
59.
59.7
9.5
9.6
9.6
9.3
9.1
9.3
8.89.
4
9.0
9.19.4
10.611
.5
9.810
.110
.2
10.3
10.7
12.5
12.0
11.7
14.5
0
2
4
6
8
10
12
14
16
NV CA FL MI RI SC OR KY GA MS NC DC WV OH MO IN ID US TN AZ WA IL NJ AL CT CO
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for December 2010, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In December, 31 states and DC reported unemployment rate decreases from a
year earlier, 16 states had increases and 3 had no change.
16 states + DC had unemployment rates above
the US average in Dec. 2010, 34 states were below.
128
6.7
6.4
6.3
5.8
6.8
6.87.
37.
4
4.44.6
5.5
7.07.2
3.8
6.4
8.1
8.2
7.5
7.57.
98.08.28.
5
8.5
8.38.
5
0
2
4
6
8
10
PA NM DE TX NY MA AK LA AR WI UT MD ME MT MN OK KS VA WY HI IA VT NH SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, December 2010: Lowest 25 States*
*Provisional figures for December 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In December, state and regional unemployment rates were little changed.
Some 31 states and DC reported unemployment rate decreases from a
year earlier, 16 states had increases and 3 had no change.
Unemployment in Texas has been well below that of the US
during and after the recession—contributing its relatively strong
p/c exposure performance
143
Catastrophic Loss –Catastrophe Losses Trends Are
Trending Adversely
144
$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
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*20??
US Insured Catastrophe Losses
*Estimate from Munich Re.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; Munich Re; Insurance Information Institute.
2010 CAT Losses Were Close to “Average” Figures Do Not Include an Estimate of Deepwater Horizon Loss
$100 Billion CAT Year is Coming Eventually
First Half 2010 CAT
Losses Were Down 19% or $1.4B from
first half 2009
($ Billions)
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
145
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2010E
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute estimate for 2010.
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.
33.6
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
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 146
There were a record 247 natural disaster events in
the US in 2010
For the second year in a row, insured losses due to
weather perils in the U.S. in 2010 were the highest on
record for a year without a hurricane landfall.
Insured Losses Due to Weather Perils in the U.S.: 1980 – 2010
Sources: MR NatCatSERVICE, Property Claims Services 147© 2011 Munich Re
(Tropical Cyclone, Thunderstorm, and Winter Storm only)
U.S. Thunderstorm Loss Trends, 1980 – 2010 (Annual Totals)
Source: Property Claims Service, MR NatCatSERVICE 155
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
158
Top 12 Most Costly Disastersin US History
(Insured Losses, 2009, $ Billions)
Sources: PCS; Insurance Information Institute inflation adjustments.
$11.3 $12.6$17.2
$22.2 $22.7
$45.1
$8.5$8.1$6.6$6.2$5.2$4.2
$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)
Northridge(1994)
Andrew(1992)
9/11Attacks(2001)
Katrina(2005)
8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;
8 of the Top 12 Disasters Affected FL
Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US
and World History
160
Total Value of Insured Coastal Exposure
(2007, $ Billions)
Source: AIR Worldwide
$224.4$191.9
$158.8$146.9$132.8
$92.5$85.6$60.6$55.7$51.8$54.1
$14.9
$479.9$635.5
$772.8$895.1
$2,378.9$2,458.6
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
$895B Insured Coastal
Exposure in Texas in 2007
In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with
$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B
in insured coastal exposure
The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004
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