through the economic crisis &b d& beyond - iii...part 1 the “great recessiongreat...
TRANSCRIPT
Through the Economic Crisis & B d& Beyond:
How the P&C Insurance Industry Is Likely to Recover from Recent Economic & Financial TurmoilRecover from Recent Economic & Financial Turmoil
Philadelphia I-DayPhiladelphia PAPhiladelphia, PA
April 8, 2011Download at: www.iii.org/presentationsg p
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
Presentation Outline
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry P/C Profitability Overview & OutlookThe Elusive Market Turn: When, Why, How and IFThe Elusive Market Turn: When, Why, How and IF
Pricing: Up, Down or Sideways?Underwriting Trends: Drivers of Future Market Firming?Investments: New Investment Reality Not Reflected in PricingExpenses: Cyclical IncreaseLeverage/Capital Management: Excess Capacity and Squeezing it Out
M&A Activity in the P/C Insurance IndustryExternal Factors Influencing Profitability
T t S t R i O i d C f CTort System Review: Overview and Causes for ConcernInflation
Growth in the Aftermath of the Great RecessionCrisis-Driven Exposure Issues: Commercial Linesp
Global Issues Impacting P/C InsuranceCatastrophe Loss ReviewSocial Media Strategy
2
gyQ&A
Part 1The “Great Recession ”The Great Recession,
Economic Recovery and the P/C Insurance Industry
The Outlook for the EconomyThe Outlook for the Economy Has Brightened, But the Outlook
f P/C I I Mi d3
for P/C Insurance Is Mixed
Reasons for Optimism, Causes for Concern in the P/C
Insurance IndustryInsurance Industry
The Outlook for the EconomyThe Outlook for the Economy Has Brightened, But the Outlook
for P/C Insurance Is Mixed4
for P/C Insurance Is Mixed
Uncertainty, Risk and Fear Abound: Invasion of the Black Swans?
Japan, New Zealand, Haiti, Chile EarthquakesPolitical Upheaval in the Middle EastEchoes of the Financial CrisisEchoes of the Financial CrisisHousing CrisisSovereign Debt CrisesCurrency CrisesInflationRunaway Energy & Commodity PricesRunaway Energy & Commodity PricesEra of Fiscal AusterityReshuffling the Global Economic Deck Are “Black Swans”
everywhere orChina Becomes #2 Economy in the WorldNuclear FearsResurgent Terrorism Risk
everywhere or does it just seem
that way?
5
gManmade Disaster (e.g., Deepwater Horizon)Apocalypse 2012: End of the Mayan Calendar on Dec. 21 (11:11PM)
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry
Economic Recovery in US is Self-Sustaining and StrengtheningNo Double Dip or Second RecessionEconomy is more resilient than most pundits presume
Consumer Confidence is Gradually ImprovingConsumer Spending is Recovering GraduallyConsumer and Business Lending Are Expanding
S 2011Housing Market Remains Weak; Some Improvement Expected in Late 2011Inflation Rate Will Rise Will but Will Remain Contained
Runaway inflation is highly unlikely; Fed has things under controlDeflation threat has disappearedDeflation—threat has disappeared
Private Sector Hiring is Consistently Positive for 15 MonthsAcceleration in hiring later in 2011 compared to 2010No significant secondary spike in unemploymentg y p p y
Japan Threat to Global Economy OverstatedSovereign Debt, Muni Bond “Crises” OverblownCurrent Middle East Turmoil Poses Only Moderate Risk to US Economy
6
Interest Rates Are Rising but Remain Low by Historical StandardsStock and Bond Markets More Stable, Less VolatilePolitical Environment Is More Hospitable to Business Interests
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry
Era of Mass P/C Insurance Exposure Destruction Has EndedPersonal and commercial exposure growth is virtually certain in 2011But restoration of destroyed exposure will take 3-5 years in USy p y
Exposure Growth Returned in 2nd Half 2010, Will Accelerate in 2011P/C Industry Saw Growth in 2010 (+0.8%) for the First Time Since 2006Increasing Private Sector Hiring Will Drive Payrolls/WC ExposuresIncreasing Private Sector Hiring Will Drive Payrolls/WC Exposures
Wage growth is also positive and could modestly accelerate
Increase in Demand for Commercial Insurance Is in its Earliest Stages and Will Accelerate in 2011
Includes workers comp, commercial auto, marine, many liability coverages, D&OLaggards: Property, inland marine, aviationPersonal Lines: Auto leads, homeowners lags
Agent Commissions Should Begin to Rise in 2011
Demand, Capital Management Strategies Will Temper Overcapitalization
7
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry
Economic Recovery Is Not as Broad Based as Past RecoveriesHousing, Construction remain weak
Recovery Is UnevenyCertain states remain in recession and recoveries will lag: CA, FL, MI, NV
Credit Markets Are Not Completely Yet HealedWhile the financial sector has strengthened, hundreds more banks failures are possible
Consumers/Businesses Will Remain Cautious in their Borrowing/SpendingEnergy and Commodity Price Volatility Are Serious Economic Risks
Effects can be disruptive to a fragile recovery even without igniting overall inflationConcern over serial bubbles in various economic sectors on a global scale
Financial Markets, While Calm Now, Remain JitteryMarkets buy into “crisis du jour” mindset quickly; Another “Flash Crash” possibilityC rrenc risk is ele atedCurrency risk is elevated
Minor Muni Bond Default(s) Could Result in Irrational Market ResponsePotential for Botched Implementation of Dodd-Frank
Systemic risk definition may be too broad
8
Systemic risk definition may be too broadBanks will eventually find a way to screw up the economy—again
Strength of Admin/Congress Commitment to Pro-Business Policies Unclear
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry
Exposure Loss Was Extraordinary, Concentrated in Commercial LinesWill take years to restore lost capacityCapacity will not be restored in the same industrial or geographic sectorsPublic sector pain has a long way to go
Consumers Emerged from the Crisis Much More Cost ConsciousQuicker to shop/switch; Price elasticity of demand is higherHeightens retention challenge
Commercial Customers Remain Comfortable/Able Retaining More Risk“Leakage” remains a problem (ART, captives, self insurance, large ded. progs.)g p ( p g p g )
Strength of Recovery Insufficient to Absorb Excess Capital or Firm PricingP/C Insurance Industry Capacity as of 12/31/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis
The industry is overcapitalized by approximately $100 billionRecord capacity, depressed exposures (S>D) mean that generally soft market conditions will persist through 2011
There is No Catalyst for a Robust Hard Market at the Current Time
9
There is No Catalyst for a Robust Hard Market at the Current TimePricing Today Does Not Reflect New Investment Realties or Underlying Deterioration in Underwriting Performance Masked by Release of Prior-Year Reserves Source: Insurance Information Institute.
Summary of Japan Earthquake
The March 11 Quake is Just theThe March 11 Quake is Just the Most Recent of Several Large
Catastrophe Losses10
Catastrophe Losses
Location of March 11, 2011 Earthquake Near Sendai, Honshu, Japan
M it d 9 0 th k t k
March 11 Earthquake Factsas of 3/24/2011
Magnitude 9.0 earthquake struck Japan at 2:46PM local time (2:46AM Eastern) off the northeast cost of Honshu, 80 miles east of the city of Sendaithe city of Sendai
Quake is among the 5 strongest in recorded history and the strongest in the 140 years for which records t e 0 yea s o c eco dshave been kept in Japan
11,000+ fatalities
Economic loss: $100 $300 bnEconomic loss: $100 - $300 bn
Insured losses up to $35 bn
Significant tsunami damage was
LOCATION130 km (80 miles) E of Sendai, Honshu, Japan178 km (110 miles) E of Yamagata, Honshu, Japan
11Source: US Geological Service; Insurance Information Institute.
g grecorded in Japan; relatively minor damage on the U.S. West Coast
178 km (110 miles) ENE of Fukushima, Honshu, Japan373 km (231 miles) NE of TOKYO, Japan
Insured Japan Earthquake Loss Estimates*
(Insured Losses, $ Billions)
Eqecat $12 ‐ $25 bn
AIR Worldwide $25 - $35 bn
S
Economic losses are likely to total in the $200 billion range,
i l f ti f th
$ $5 $10 $15 $20 $25 $30 $35 $40
RMS meaning only a fraction of the loss is insured
$‐ $5 $10 $15 $20 $25 $30 $35 $40
12
*As of March 29, 2011. Figures do not include insured tsunami losses.Sources: AIR Worldwide, Eqecat; Insurance Information Institute.
Top 20 Nonlife Insurance Companies in Japan by DPW, 2008
Direct premiums written, 2008
Rank Companies JPY (millions)
U.S. ($ millions)
Marketshare
Cumulative Market Share
1 T ki & M i Ni hid $2 032 131 2 $19 660 9 24 0% 24 0%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%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%y , , %
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%
13
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.
Recent Major Catastrophe Losses
(Insured Losses, $US Billions)
$30 The March 2011 earthquake in Japan will $25.0
$20
$25
$30 q pbecome 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)
$10.0$8.0
$5.0$2 0$5
$10
$15)
$2.0$0.5$0
$5
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)*
2011
Insured Losses from Recent Major Catastrophe Events Exceed $50 Billion, an Estimated $48 Billion of that from Earthquakes
14
*Midpoint of AIR Worldwide estimated insured loss range of $15 billion to $35 billion as of March 13, 2011. Does not include tsunami losses.Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.
Nonlife Insurance Market Impacts of Japan Earthquake
Primary Insurance: Downgrades of Some Domestic Japanese InsurersSignificant Absorption of Loss by Japanese Government
Residential earthquake damageq gNuclear-related property and liability damage
Market Share of Foreign Primary Insurers in Japan is SmallNot a capital event for any non-Japanese primary insurer
Significant Impacts for Global ReinsurersProperty-Catastrophe covers on Commercial LinesBusiness InterruptionContingent Business Interruption
Currently an Earnings Event for Global ReinsurersNot a capital event: Global reinsurance markets entered 2011 with record capital
Cost of Property/Catastrophe Reinsurance Rising in Japan, New Zealand, AustraliaAustralia
Up for all; Magnitude of increase is sensitive to size of lossReinsurance Coverage Remains Available in Affected RegionsLittle (If Any) Impact of Cost of US Property-Cat Reinsurance
15
Little (If Any) Impact of Cost of US Property Cat ReinsuranceMarket remains well capitalized and competitiveElevated global cat activity could halt price declines for property/cat reinsurance
Catastrophic Loss –Catastrophe Losses Trends Are p
Trending Adversely
16
US Insured Catastrophe Losses
$100
.0$120$100 Billion CAT Year is
Coming Eventually($ Billions)
$61.
9
$
$60
$80
$1002010 CAT
Losses Were About
Average
2000s: A Decade of Disaster2000s: $193B (up 117%)
1990s: $89B
3 4 0.1
3
$26.
5
9 12.9 $2
7.5
2 7
$27.
1
0.6
13.6
5 $22.
9
5 $16.
9
$20
$40
$60 Average$8
.3
$7.4
$2.6 $1
0
$8.3
$4.6
$5.9 $1 $9.
$6.7 $10
$1
$1.1$7
.5
$2.7
$4.7
$5.5 $
$0
$20
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??
2010 CAT Losses Were Close to “Average” Figures Do Not Include an Estimate of Deepwater Horizon Loss
17
*First quarter 2011.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.
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2010E
810
Avg. CAT Loss Component of theCombined Ratio
Combined Ratio Points
8.8
5.9
4
8.1
6789
Combined Ratio by Decade
1960s: 1.04 1970s: 0.85
0 0
3.0
1 .35
3.3
2.8 3.
62.
9
5.4
3.3
3.3
2.7
5.0
2.6 3.
33.6
3456 1980s: 1.31
1990s: 3.39 2000s: 3.52
0.4 1.
20.
4 0.8 1.
30.
3 0.4 0.
7 1.5
1.0
0.4
0.4 0.
71.
81.
10.
6 1.4 2.
01.
3 2.0
0.5
0.5 0.7 1.
2 2.1 2.
1.0 1.
6
1.6
21.
6
2
0.9
0.1
1.1
1.1
0.8
0123
0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 E
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 I d Sh l i R t D d
18
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.
Increased Sharply in Recent Decades
Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2010)u be o e ts ( ua ota s 980 0 0)
There were a record 247 natural disaster events innatural disaster events in
the US in 2010
Num
ber
N
Geophysical ClimatologicalMeteorological (storm)Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Source: MR NatCatSERVICE 19
U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals)
Insured winter storm losses in 2010 are one of the top five in US history, totaling
$2 6 billi i 2010$2.6 billion in 2010
Source: Property Claims Service, MR NatCatSERVICE 20
U.S. Thunderstorm Loss Trends, 1980 – 2010 (Annual Totals)
Thunderstorm losses in 2010 totaled $9.5 billion, the
3rd highest ever3 highest ever
Average thunderstorm losses have now quintupled since
the early 1980s
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss
Source: Property Claims Service, MR NatCatSERVICE 21
U.S. Tornado Count, 2010
There were 1483 tornadoesThere were 1483 tornadoes in the US in 2010, slightly
above average
Source: NOAA 22
Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2010*($ Billions) Texas
$42.30 , 11% $36.68 ,
10%
Louisiana
$237.52 , $62.62 ,
17%Rest of US
62%Florida
Louisiana Accounted for 10% of All US Insured CAT Losses
23
* Adjusted to 2010 dollars.Source: PCS division of ISO; Insurance Information Institute.
from 1980-2010: $36.7B out of $237.5B
Top 12 Most Costly Disastersin US History(Insured Losses, 2009, $ Billions)
$45 1$50 Hurricane Katrina Remains By Far the $45.1
$30$35$40$45$50 Hurricane Katrina Remains, By Far, the
Most Expensive Insurance Event in US and World History
$11.3 $12.6$17.2
$22.2 $22.7
$8.5$8.1$6.6$6.2$5.2$4 2$10$15$20$25$
$5.2$4.2
$0$5
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)
(2001)
8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;
8 f th T 12 Di t Aff t d FL
24Sources: PCS; Insurance Information Institute inflation adjustments.
8 of the Top 12 Disasters Affected FL
Share of Losses Paid by Reinsurers for Major Catastrophic Events
70%
Reinsurance plays a very large role in claims payouts
associated with major60%
45%50%
60%
associated with major catastrophes
30%25%
45%
33%30%
40%
25%20%
10%
20%
30%
0%
10%
HurricaneHugo (1989)
HurricaneAndrew (1992)
Sept. 11Terrorist
2004Hurricane
2005Hurricane
2008 TexasHurricaneHugo (1989) Andrew (1992) Terrorist
Attack (2001)Hurricane
SeasonHurricane
SeasonHurricane
Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.
Total Value of Insured Coastal Exposure
(2007, $ Billions)
$2,458.6Florida
$635.5$772.8
$895.1$2,378.9
$ ,New York
TexasMassachusetts
New JerseyMore than $1.4
Trillion in i d t l
$224.4$191.9
$158.8$146 9
$479.9ConnecticutLouisiana
S. CarolinaVirginia
Maine
insured coastal exposure in
New England
I 2007 Fl id Still R k d th #1 M t$146.9$132.8
$92.5$85.6$60.6
MaineNorth Carolina
AlabamaGeorgia
Delaware
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$60.6$55.7$51.8$54.1
$14.9
DelawareNew Hampshire
MississippiRhode Island
Maryland
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
26Source: AIR Worldwide
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
US Residual Market Exposure to Loss
$900
Katrina, Rita, and Wilma
($ Billions)
$656.7
$771.9$696.4
$600
$700
$800
$900
4 Florida Hurricanes
$372.3$430.5 $419.5
$292.0$281 8$400
$500
$600Hurricane Andrew
$292.0$244.2$221.3
$281.8
$150.0
$54.7$100
$200
$300
$01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Resid al Market (FAIR & Beach/Windstorm) Plans Has S rged from
27Source: PIPSO; Insurance Information Institute
the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B in 1990 to $696.4B in 2008
P/C Insurance Industry Financial Overview
From Crisis to Recoveryy
28
P/C Insurance Industry Financial Overview
Profit Recovery ContinuesyEarly Stage Growth Begins
29
P/C Net Income After Taxes1991–2010E ($ Millions)
,496
65,7
77
$70 000
$80,000 2005 ROE*= 9.6%2006 ROE = 12.7%
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
9
$62,
3
$6
44,1
55
501
$50 000
$60,000
$70,000 2007 ROE = 10.9%2008 ROE = 0.3%2009 ROAS1 = 5.8%2010:Q3 ROAS = 6.7%
capital gains vs. -$9.6B in previous realized capital losses
8 316
,598
24,4
04 $36,
81
$30,
773
1,86
5
$30,
029
$34,
893
$28,
311
$ 4
,559
$38,
5
$30,000
$40,000
$50,000
$14,
178
$5,8
40
$19,
3
$10,
870 $20 $2 $21
3,04
6
3,04
3
$20
$10,000
$20,000
,
$
$3 $3
-$6,970-$10,000
$0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E
* 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
ROE: Property/Casualty Insurance,1987–2010E*
20%P/C Profitability Is Both by
Cyclicality and Ordinary Volatile K t i
(Percent)
15%
y y y Katrina, Rita, Wilma
%
10%
HugoSept. 11
0%
5%g
Andrew
Northridge
Lowest CAT Losses in 15 Years
4 Hurricanes
Fi i l
-5%87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E
Northridge Financial Crisis*
31
* Excludes Mortgage & Financial Guarantee in 2008 - 2010.Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3.
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE
15.9%110 18%
A combined ratio of about 100 generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
97.5100.6 100.1 100.7 99.5 99.7101.0
9 6%
5 9%14.3%
12.7%
100
105
12%
15%
92.6 7.7%7.3%
9.6%
8.9%90
95
6%
9%
4.4%
80
85
1978 1979 2003 2005 2006 2008* 2009* 2010 Q3*0%
3%
1978 1979 2003 2005 2006 2008* 2009* 2010:Q3*
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s Depressed
* 2009 and 2010:Q3 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty insurers
Source: Insurance Information Institute from A.M. Best and ISO data.
Investment Environment to Generate Risk Appropriate ROEs
UNDERWRITINGUNDERWRITING
Cyclicality is Driven Primarily y y yby the Industry’s Underwriting
Cycle, Not the Economy33
Cycle, Not the Economy
P/C Insurance Industry Combined Ratio, 2001–2010:Q3*
As Recently as 2001, Insurers Paid Out
Nearly $1 16 for Every
Relatively Low CAT L
Heavy Use of Reinsurance Lowered Net
Relatively Low CAT LNearly $1.16 for Every
$1 in Earned Premiums
Losses, Reserve Releases
Cyclical
Lowered Net Losses Losses,
Reserve Releases
115.8120
Best Combined
Ratio Since 1949 (87 6)
Cyc caDeterioration
Lower CAT Losses,
More Reserve R l
99 3 99.7101.0100.8100.1
107.5110 1949 (87.6) Releases
95.7
99.3 99.7
92.6
98.4
90
100
34
* 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.
902001 2002 2003 2004 2005 2006 2007 2008 2009 2010:Q3
Calendar Year Combined Ratios by Segment: 2008-2011F
Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate
102.4
106108
103.8104.5104106108110
98.9100 99.5
949698
100102
909294
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
35Sources: A.M. Best . Insurance Information Institute.
return to normal catastrophe activity along with deteriorating underwriting performance related to the prolonged commercial soft market
Underwriting Gain (Loss)1975–2010:Q3*
$35 Cumulative underwriting deficit f 1975 th h
($ Billions)
$5
$15
$25 from 1975 through 2009 is $445B
$25
-$15
-$5
-$45
-$35
-$25 The industry recorded a $6.2B underwriting
loss in 2010:Q3 compared to $3.2B in
2009:Q3
Large Underwriting Losses Are NOT Sustainable
-$5575 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
* Includes mortgage and financial guaranty insurers.Sources: A.M. Best, ISO; Insurance Information Institute.
in Current Investment Environment
Number of Years with Underwriting Profits by Decade, 1920s–2000s
10
12Number of Years with Underwriting Profits
8
10
76
8
10
3
54
6
4
6
0 00
2
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
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
37
* 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.
Recorded in the 25 Years from 1979 Through 2003
P/C Reserve Development, 1992–2011E
23.2$25
$30
$B)
6
8 Impac
Prior Yr. ReserveDevelopment ($B)
Prior year reserve releases totaled
$8.8 billion in the first half of 2010 up
11.7 13.79.9
7.3$
$10
$15
$20
e R
elea
se ($
2
4
6 ct on Com
b
Impact onCombined Ratio
first half of 2010, up from $7.1 billion in
the first half of 2009
2.3
-2.1 -2.6-6 6
-4.1
1
6 7 -5$10
-$5
$0
$5
rYr.
Res
erve
-2
0
ined Ratio (
-8.3 -6.6-9.9 -9.8
-6.7-9.5
-14.6-16 -15-$20
-$15
-$10
2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 E E
Prio
r
-6
-4
(Points)
92 9 94 9 9 9 9 9 0 0 02 0 0 4 0 0 0 0 0
10E
11E
Reserve Releases Are Remained Strong in 2010 But Should Begin to Taper Off in 2011
38
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.
Inflation-Adjusted Dollar Value of Claims Paid by P/C Insurers, 1925–2010E*
$400Since 1925, P/C insurers
have paid more than $12.6 trillion in claims to
$ Billions
$300
$350trillion in claims to
policyholders on an inflation-adjusted basis
$150
$200
$250
Claim payouts increased
$50
$100
$150 exponentially for decades, but
more erratically in the post-1980 era
On an inflation-adjusted basis, claims paid have fallen to 1990s
levels, reflecting improved underwriting results, exposure
loss during the “Great Recession”
$0
$50
925
930
935
940
945
950
955
960
965
970
975
980
985
990
995
000
005
10E
loss during the Great Recession and leakage to alternative markets
39
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Sources: Insurance Information Institute research and calculations from A.M. Best data.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2
201
Cumulative Value of Inflation-Adjusted Claims Paid by P/C Insurers, 1925–2010E*
$13 000$14,000
Adjusted for inflation, it took 36 years for the
industry to pay its first
$ Billions
3 years (2008)
$9 000$10,000$11,000$12,000$13,000 $1 trillion in claims in
the years since 1925. Today, the industry
pays $1 trillion in claims 4 years (2000)2 years (2002)
3 years (2005)3 years (2008)
$6,000$7,000$8,000$9,000 every 2 to 3 years after
adjusting for inflation.
4 years (1986)4 years (1990)
3 years (1993)3 years (1996)
$2 000$3,000$4,000$5,000
9 years (1970)
7 years (1977)5 years (1982)
4 years (1986)
$0$1,000$2,000
925
930
935
940
945
950
955
960
965
970
975
980
985
990
995
000
005
10E
36 years (1925 – 1961)
40
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Sources: Insurance Information Institute research and calculations from A.M. Best data.
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 *20
*20
201
Financial Strength & gUnderwriting
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
41
g, g g
P/C Insurer Impairments, 1969–2010E*
60 5860
70 8 of the 18 in 2009 were small Florida carriers. Total also
includes a few title insurers.
49 50 4855
541
49 504750
6034
9
36
3134
29 318 9
358 8
30
40
815
127
11 9 913 12
199
16 14 13
1612
18 19 1814 15 16 18
9
5
10
20
0
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
Th N b f I i t V i Si ifi tl O th P/C I
*2010 estimate.Source: A.M. Best Special Report “1969-2009 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
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009
115
120
1.8
2.0Combined Ratio after Div P/C Impairment Frequency
110
115
Rat
io
1.2
1.4
1.6
Impair
100
105
Com
bine
d
0.6
0.8
1.0
rment R
ate
90
95
0 0
0.2
0.4
0.6
2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969
90
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* 0.0
g
Impairment Rates Are Highly Correlated With Underwriting Performance
43Source: A.M. Best; Insurance Information Institute
p g y gand Reached Record Lows in 2007/08
Reasons for US P/C Insurer Impairments, 1969–2009
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
3.6%4 0%
Investment and Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Mi
Sig. Change in Business
4.0%8.8%
7.1%40 1%
Deficient Loss Reserves/Inadequate Pricing
Investment Problems
Misc.
7.8%
40.1% Inadequate Pricing
Affiliate Impairment
7.2%
7.8% 13.6%Catastrophe Losses
44Source: A.M. Best: 1969-2009 Impairment Review, Special Report, June 21, 2010
Rapid GrowthAlleged Fraud
Summary of A.M. Best’s P/C InsurerRatings Actions in 2010
P/C insurance is by design a resilient in business. The dual threat of financial disasters and
catastrophic losses are
Oth 311 18 5%Upgraded, 112 ,
Initial, 33 , 2.0%catastrophic losses are
anticipated in the industry’s risk management strategy.
Other, 311 , 18.5%pg , ,6.7%
Downgraded, 114 , 6.8%
Despite a continued difficult operating environment, 66% of
ratings actions in 2010 were affirmations; 6 7% were
Affirm, 1,108 , 66.0%
Source: A.M. Best. 45
affirmations; 6.7% were upgrades and 6.8% downgrades.
Performance by Segment:Commercial/Personal Lines &Commercial/Personal Lines &
Reinsurance
46
Homeowners Insurance Combined Ratio: 1990–2011P
8.4170
158
77
140
150
160
113.
0
117.
7
113.
6
01.0 10
9.4
108.
2
111.
4 121.
7
109.
3
.3 00.1
7
117.
0
105.
6
103.
5
9.0
118.
4
112.
7 121.
7
110
120
130
10 98
94.2 10
89.4 95
.7 1
99
80
90
100
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E11P
Homeowners Line Is Expected to Improve in 2011. Extreme Regional Variation Can Be Expected Due to Local Catastrophe
Loss ActivityLoss Activity
Sources: A.M. Best; Insurance Information Institute.
Private Passenger Auto Combined Ratio: 1993–2011P
9.5
9
115
101.
7
101.
3
101.
3
101.
0
109
107.
9
104.
2
.4 .3 100.
3
101.
3
9.0 .59.5 101.
1
103.
5
105
110
98.
94.3
95.1
95.5 98
. 1 99 98.99
90
95
100
80
85
90
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 Industrygg y
Sources: A.M. Best; Insurance Information Institute.
Commercial Multi-Peril Combined Ratio: 1995–2011P
0 8 5.0
2.4 .0130
119.
0
119.
8
08.5
125
116.
2
116.
1
.9 5.4
116.
8
113.
6
115.
3 122
115.
0
117.
0
08.0
0
113.
1
115.
0 121
110115120
1251
104
101.
9
105
95.1 97
.6
94.2
100.
7
97.3
0
97.7
93.8
.8
10
98.6 10
1.0
103.
0
95100105
110
89.0
83.8
89.
8085
9095
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 Modestlyis 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
9 8.1
7 2125
112.
1
112.
0
113.
0
115.
9
2.7 .0 4.0
118
115.
7
116.
2
110
115
120
102
95.2
92.9
92.1
92.4 94
.2 96.8 99
.5 102. 10
95
100
105
9
80
85
90
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11P
Commercial Auto Underwriting Performance is Expected to Deteriorate Modestly
Sources: A.M. Best; Insurance Information Institute.
Expected to Deteriorate Modestly
Inland Marine Combined Ratio: 1999–2011P
101.9105 0 9
92.8
100.2
93.2
89 3
94.5 94.5
89 995
100
83.8
79.5
89.3
80.882.5
89.9
80
85
90
77.3
70
75
80
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 LinesProfitable of All Lines
Sources: A.M. Best; Insurance Information Institute.
Workers Compensation Combined Ratio: 1994–2011P
.5.7130
110.
9
110.
0
07.0
7 5 .4 110.
5 117.
5 121
121
07.0
115.
3
118.
2
110115120
125
102.
0
97.0 10
0.0
101.
0 1 0
102.
7
98.4 10
3.5
104.10
95100105
110
8085
9095
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 TheyDeteriorating Markedly and the Worst They
Have Been in a DecadeSources: A.M. Best; Insurance Information Institute.
EXPENSESEXPENSES
Expense Ratios Are Highly Cyclical d C t ib t D t i tiand Contribute Deteriorating
Underwriting Performance
53
Underwriting Expense Ratio*All P/C Lines, 1994-2010E**
28.1%28.6%29%
26.3% 26.5% 26.3%
27.0%27.4%
27.6%
28.0%27.4%
27%
28%
25.9%26.1%6 3% 6 3%
25 5%
27.0%
25.3%
25%
26%
Underwriting expense ratios are up25.5%
25.0%24.5%24%
25% ratios are up significantly as
premiums fall faster than expenses during generally soft market
22%
23%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E
g yconditions
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 Ratio*:Personal vs. Commercial Lines, 1990-2010E**
32%Commercial lines expense ratios are
highly cyclical
28 2%
29.9%
30.5%30.6%
28.5% 29.1%
30.0%30.5%28.3%
27.4%29.3%
29.9%30%
highly cyclical
24 3%24.7%24 4% 24 3%
26.4%26.6%
27.7%28.2%
26.4%
26.4%26.2%25.0%25 6%
25.6% 25.6%26.4%
26.6%
25 0%
28.4%27.4%
27.8%
28.7%
26%
28%
24.3% 24.4% 24.3%
24.5%24.7%24.7%
24.6%24.4%23.4%23.7%
23.5%23.9%
25.6%24.8%
25.0%
22%
24%
20%
22%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 0E
Personal Lines Commercial Lines
10
*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.
Underwriting Expense Ratio*Personal Lines (Auto & Home), 1994-2010E**
31.1%30 8% 30 6%
32%
29.8%
28.5%29.3%
30.5%
29.6%
30.0%30.5%
28 4%
28.5%
30.8%30.8%
30.6% 30.3%
30.6%
29.4%
30%
24 5%24.7%25.0%25.2%25.1%
28.5%
24 3%
28.4%
27.7%
26%
28%
21.8%22.0%21.8%
23.5%
24.5%24.3%24.4%
23.6%
23.4%
23.2% 23.6%23.5%22%
24%Expenses ratios for both auto and home
22.7%
20%
22%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E
Auto Homeare up from their lows in 2003/04
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 figures are estimates.Source: A.M. Best; Insurance Information Institute.
Drivers of P/C PremiumDrivers of P/C Premium and Exposure
Factors Influencing GrowthFactors Influencing Growth and Claim Severities (Costs)
57
PREMIUM & PRICING TRENDSPREMIUM & PRICING TRENDS
Winds of Change or gMoving Sideways?
58
Soft Market Persisted in 2010 but May Be Easing: Relief in 2011?
25%
(Percent)1975-78 1984-87 2000-03
20%
25%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.
10%
15%
5%
10%
-5%
0%NWP was up 0.5% in 2010 (est.) with
forecast growth of 1.4% in 2011
59
5%
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
E11
F
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2010E
Private Passenger Auto
While homeowners insurance has grown faster than auto over the past decade, auto is
generally more profitable
14.5%
9 2%
15.3%
11%
13%
15% HomeownersAll Lines
Average 2000-2009A t 2 9
3 0%
9.2%
6.0%
2 2%
5.7%
5 0%5%
7%
9%Auto = 2.9
Home = 6.5%All Lines = 3.4%
3.0%
-0.9%0.9%
2.2%
0.5%
5.0%
-1%
1%
3%
-4.9%
-5%
-3%
00 01 02 03 04 05 06 07 08 09 10E
60Sources: A.M. Best; Insurance Information Institute.
P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter
5.1% 16
.8%
16.7
%% %
20%
The long-awaited uptick:
mainly personal lines
10.2
%1 5
12.5
%10
.1%
9.7%
7.8%
7.2%
6% 5%
10.3
%10
.2% 13
.4.6
%10%
15%
75.
62.
9%5.
5 6
2.1%
0.0% 0.5% 1.
3% 2.3% 3.0%
0%
5%
-4.6
%-4
.1%
-5.8
%-1
.6%
-1.6
%
-1.9
%
-1.8
%-0
.7%
-4.4
%-3
.7%
-5.3
%-5
.2%
-1.4
%-1
.3%
-10%
-5%
Finally! Back to back quarters of net written premium growth
--10%
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
61Sources: ISO, Insurance Information Institute.
Finally! Back-to-back quarters of net written premium growth(vs. the same quarter, prior year)
Net Written Premium Growth by Segment: 2008-2011F
Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted
again in 2010 and but will stabilize in 20112.8% 2.5%
0.3%0%2%4%
g
-0.1%-2.0%
-3.1%
-0.1%
-6%-4%-2%
-9.4%-12%-10%
-8%
Personal Lines Commercial Lines
2008 2009E 2010P 2011F
Rate and exposure are more favorable in personal lines, whereas a l d ft k t d l i h f th i
62
prolonged soft market and sluggish recovery from the recession weigh on commercial lines.
Sources: A.M. Best; Insurance Information Institute.
Monthly Change* in Auto Insurance Prices, 1991–2011*,
10%Cyclical peaks in PP Auto tend to occur
approximately every 10
8%
pp y yyears (early 1990s, early
2000s and likely the early 2010s)
4%
6% A pricing peak may be occurring
2% “Hard” markets tend to occur
during
Feb. 2011 change
was 4.2%, down from
5.4% in
-2%
0%g
recessionary periods
Nov. 2010
63
*Percentage change from same month in prior year; through February 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.
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Average Premium forHome Insurance Policies**
$950
Consumer efforts to economize (increased deductibles, more shopping, etc.) and
adverse exposure trends are depressing the average homeowners insurance premium
$822$791 $799 $807$804
$764$800
$850
$900
$668
$764$729
$6 0
$700
$750
$
$508$536
$593
$550
$600
$650
$508$500
00 01 02 03 04 05 06 07 08 09* 10*
64
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.
Average Commercial Rate Change,All Lines, (1Q:2004–3Q:2010)
Q04
Q04
Q04
Q04
Q05
Q05
Q05
Q05
Q06
Q06
Q06
Q06
Q07
Q07
Q07
Q07
Q08
Q08
Q08
Q08
Q09
Q09
Q09
Q09
Q10
Q10
Q10
(Percent)-0
.1%
-2%
0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Magnitude of Price Declines Shrank
During Crisis,
-3.2
%% -4
.6%
-2.7
%-3
.0%
3% .1%
4.9% % 6% 3% .2%-6%
-4%
During Crisis, Reflecting Shrinking
Capital, Reduced Investment Gains,
Deteriorating Underwriting
-5.9
%-7
.0%
4% 7%-8
.2%
-
-5.
6%
-6.4
% -5 -4-5
.8%
-5.6 -5.
-6.4
% -5.
-10%
-8%
gPerformance, Higher
Cat Losses and Costlier Reinsurance
-9.
-9.7
-9.6
-11.
3%-1
1.8%
.3% -12.
0%5% 2.
9% -11.
0%
-14%
-12%
KRW Eff t
Market Remains Soft as Capital
65
-13
-13. -1
2-16%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effectp
Restored and Underwriting Losses
Remain Modest
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q3Percentage Change (%)
Peak = 2001:Q4 +28.5%
Market has Been Soft for 6+ years and Remains Soft as Capital is Restored and
Pricing Turned
as Capital is Restored and Underwriting Losses
Remain Modest
Pricing Turned Negative in Early
2004 and Has Been Negative
Ever Since KRW Effect
Trough = 2007:Q3 -13.6%
66Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q3
1999:Q4 = 100
Pricing today is where is was in
Q3:2000 (pre-9/11)
Downward pricing pressure is most pronounced for
larger riskslarger risks
67Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Change in Commercial Rate Renewals, by Line: 2010:Q3Percentage Change (%)
n
All Com
mercial
GL Comml P
ropCom
ml Auto
Umbrella
Constr
uctio
nD&O
Bus. In
terrup
tion
EPL
Surety
0.3%
-1.0%
0.0%
1.0%
-3.7%-2.8% -2.7%
4 4% 4 2%-4.0%
-3.0%
-2.0%
Most Major Commercial Lines Renewed Down in Q3:2010 at a Pace
-5.2% -5.6% -5.3%-4.7% -4.4% -4.2%
-6.0%
-5.0%
68Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
jSimilar to that of a Year Earlier
ECONOMIC IMPACTS ONECONOMIC IMPACTS ON EXPOSURE GROWTH
The Great Recession Took a Heavy Toll, Restoration of Exposure Will Take Years
69
Exposure Will Take Years
US Real GDP Growth*
0% %% %6%
Real GDP Growth (%) The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2.7%
0.9%
3.2%
2.3% 2.9%
0.6% 1.
6%5.
03.
7%1.
7% 2.6% 2.8% 3.
4%3.
4%3.
4%3.
4%3.
1%3.
2%3.
2%3.
3%4.1 %
1.1% 1.
8% 2.5% 3.
6 %3.
1%
2%
4%
6%
-0.7
%
%
-0.7
%
-4%
-2%
0%
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump,Economic growth projections
for 2011 have been revised
-4.0
%-6
.8% -4
.9%
-8%
-6%
0 2
3
4
5
6 Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
upward. This is a major positive for insurance demand
and exposure growth.
20
00
20
01
20
0 2
20
03
20
04
20
05
20
06
07:1
07: 2
07:3
07:4
08:1
08: 2
08:3
08:4
09:1
09: 2
09:3
09:4
10:1
10: 2
10:3
10:4
11:1
11: 2
11:3
11:4
12:1
12: 2
12:3
12:4
Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions but the Benefits of Even Slow Growth Will Compound and
70
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/11; Insurance Information Institute.
Conditions, but the Benefits of Even Slow Growth Will Compound and Gradually Benefit the Economy Broadly
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
% 3%25% 8%R l NWP G th R l GDP
Real GDP Growth vs. Real P/C (%)
18.6
%20
.3
13.7
%%
15%
20%
25%
owth
4%
6%
8%
Real
Real NWP Growth Real GDP
4.3% 5.
8%0.
3% 3.1%
1.1%
0.8%
0.4%
0.6% 1.6%
5.6% 7.
7%1.
2%
5.2%
1.8%
0%
5%
10%
eal N
WP
Gro
0%
2%
l GD
P Grow
-1.6
%-1
.0%
-1.8
%-1
.0%
-0.4
%-0
.3%
-2.9
% -0.5
%-3
.8%
-4.4
%-3
.3% -0.8
%-0
.8%
-0.9
%.4
%6.
5%-1
.5%
-10%
-5%
0%Re
-4%
-2%
wth
-7 -6
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
E11
F
P/C I I d t ’ G th i I fl d M d tl
71Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 3/11; Insurance Information Institute
P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy
2011 Financial Overview State Economic Growth Varied in 2009
Mountain, Plains states still growing the fastest
72
Some Southeast states growing well, but others
among the weakest
Direct Premiums Written: All Lines Percent Change by State, 2004-2009
Top 25 StatesNorth Dakota is the growth
42.9
354045
North Dakota is the growth juggernaut of the P/C
insurance industry—too bad nobody lives there…
23.8
22.0
8
253035
hang
e (%
)
2
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
.9101520
Pece
nt c
h
7.
5.8
5.5
5.1
5.0
4.6
05
10
ND LA SD WY
MT
UT
OK DE IA M MS
WV
SC DC TX NE
KS
NC ID AL
FL WA
GA
AR HI
73
N L S W M U O D N M W S D T N K N I A F W G A H
Sources: SNL Financial LC.; Insurance Information Institute.
Direct Premiums Written: All Lines Percent Change by State, 2004-2009
4.5
4.2
2.6
2.5
2.4
2.0
0.9
0.7
0.6 .5 0 .1
5Bottom 25 States
0 0 0 0 0.0
-0.
-2.8
-3.1
-3.5
-3.7
2
-0.5
-1.2
-1.6
-1.8
-2.4
-5
0
nge
(%)
-
-5.2
-8.2
-9.2-10
Pece
nt c
han
States with the poorest performing economies also produced the most negative
t h i i f
-14.
8
-15.
2
-20
-15
P net change in premiums of the past 5 years
20
AK 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
Over the 5 years from 2004 2009 15 states saw premiums shrink
74Sources: SNL Financial LC; Insurance Information Institute.
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%
11 Industries for the Next 10 Years: Insurance Solutions Needed
Health Sciences
Health Care
Health Sciences
Energy (Traditional)
Alternative EnergyAlternative Energy
Agriculture
Natural Resources
Environmental
Technology (incl. Biotechnology)
Light Manufacturing
Export-Oriented Industries
75
Shipping (Rail, Marine)
Auto/Light Truck Sales, 1999-2016F
.57.8419
(Millions of Units) 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 f 17 illi it b t
16.9
16.5
16.1
4.7 5.
1
5.0 15
.5
16.9
16.617
.117.
1717.
161718 of 17 million units, but a
recovery is underway.
13.2
.6
13.2 14
.0 14 1 1
131415
10.4
11
101112 Job growth and improved
credit market conditions will boost auto sales in
2011 and beyond
999 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F 16F
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point,
76Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 3/11); Insurance Information Institute.
g ,but High Unemployment, Tight Credit Are Still Restraining Sales in 2011
New Private Housing Starts, 1990-2016F
(Millions of Units)
1 1.85 1.
96 2.07
801 9
2.1
New home starts plunged
72% from 2005-2009; A
t l
1.48
1.47 1.
62 1.64
1.57 1.60 1.
71 1 1.1.
36
0 1.33 1.
43 1.50
1.351.
46.2
909
1.5
1.7
1.9 net annual decline of 1.49 million units, lowest since
records began in 1959
0.91
6 0.86
1.20 11
1.2
1.01
1.1
0.9
1.1
1.3in 1959
I I I estimates that each incremental 100 000
0.55 0.59 0.
66
0 3
0.5
0.7I.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 construction0.3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F
Little Exposure Growth Likely for Homeowners Insurers Until 2013.
home construction
77Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 3/11); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until 2013. Also Affects Commercial Insurers with Construction Risk Exposure, Surety
2011 Financial Overview Average Square Footage of Completed New Homes in U.S., 1973-2010*,
4 69 2,52
12,
519
8
2,700Square Ft The average size of completed new
homes often falls in recessions (yellow bars), but historically bounces back in expansions
5 5 0 5 0 50 ,190
2,22
32,
266
2,32
42,
320
2,33
02,
349 2,43
42,
4 2 22,
432,
374
2,300
2,500p
0 5 25 1,90
5 1,99
52,
035
2,08
02,
075
2,09
52,
095
2,10
02,
095
2,12 2,
1 2, 2
1 900
2,100
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,
82
1,700
1,900
The trend toward building larger homes reversed in 2009 and 2010 affecting exposure growth
1,500
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
in 2009 and 2010, affecting exposure growth beyond the decline in number of units built
The average size of completed new homes fell by 145 square feet (5 75%) from
*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.
78
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
2011 Financial Overview Value* of Construction Put In Place
$1,200
Nonresidential Public Residential Nonresidential PrivateBillionsTotal Construction Spending (Annual Rate)D b 2007 $1 109 0B
$402
.0
413.
907
.089
.392
.0 2.6
1.5
8.4
2.6
2.8
2.6
7.2 4.8
5.6
3.2
6.4 1 1 6 3 3 3 4 1
$900
$ ,December 2007: $1,109.0BNovember 2010: $ 810.2 B
$410
.3
$321
.830
5.5
293.
727
7.3
265.
926
0.3
249.
124
5.3
247.
025
7.4
251.
628
0.1
273.
226
6.2
269.
238
.925
8.3
273.
726
9.6
268.
524
7.7
233.
223
6.2
245.
024
6.8
$ 4 $4 $38
$39
$40
$40
$39
$38 2
$372
$372
$347
$33
$32 5
$323
$316
$275
.9$2
75.1
$274
.$2
70.
$269
.$2
52. 3
$253
.3$2
58. 3
$256
.4$2
56.1
$600
$289
.5
$308
.9$2
99.6
$294
.2$2
97.8
$301
.3$3
09.6
$310
.8$3
17.3
$314
.8$3
11.9
$311
.7$3
09.0
$301
.9$3
00.3
$298
.6$2
82.4
$290
.7$2
95.3
$294
.6$2
98.2
$298
.7$3
04.9
$306
.6$3
05.4
$307
.4
$ $ $ 2 $2 $2 $2 $2 $2 $2 $2 $2 $ $ 2 $2 $2 $23
$2 $2 $2 $2 $2 $2 $2 $2 $2
$0
$300
Since the recession started, private residential and nonresidential
$0
Dec '07
Nov '08
Dec '08
Jan '09
Feb '09Mar '0
9Apr '0
9May '0
9Ju
n '09Ju
l '09
Aug '09
Sep '09
Oct '09
Nov '09
Dec '09
Jan '10
Feb '10Mar '1
0Apr '1
0May '1
0Ju
n '10Ju
l '10
Aug '10
Sep '10
Oct '10
Nov '10
79*Seasonally adjusted annual rate Source: http://www.census.gov/const/C30/release.pdf
Since the recession started, private residential and nonresidential construction together are down $300 billion (annual rate), a drop of 38%. This affects property, surety, and other construction-related exposures
2011 Financial Overview Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums
Wage and Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)
Workers Comp Net Written Premiums
7/90-3/91 3/01-11/01
$6,000
$7,000
$50
$6012/07-6/09
$3,000
$4,000
$5,000
$30
$40
$1,000
$2,000
,
$10
$20Wage & 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
Weakening payrolls have eroded $2B+ in workers comp premiums; nearly 29% of NPW has been eroded away by the soft market and weak economy
$0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*
$0
80
* 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
29% of NPW has been eroded away by the soft market and weak economy
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
82%
Percent of Industrial Capacity
H i
“Full Capacity” The US operated at 76.3% of industrial
capacity in Feb. 2011, above the June 2009
low of 68.3%
78%
80%Hurricane
Katrina
74%
76%
The closer the economy is
70%
72%
M h 2001
yto operating at “full
capacity,” the greater the inflationary pressure
66%
68%
70% March 2001-November 2001
recession December 2007-
June 2009 Recession66%
Mar
01
Jun
01
Sep
01
Dec
01
Mar
02
Jun
02
Sep
02
Dec
02
Mar
03
Jun
03
Sep
03
Dec
03
Mar
04
Jun
04
Sep
04
Dec
04
Mar
05
Jun
05
Sep
05
Dec
05
Mar
06
Jun
06
Sep
06
Dec
06
Mar
07
Jun
07
Sep
07
Dec
07
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
Jun
10
Sep
10
Dec
10
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 81
Business Bankruptcy Filings,1980-2010:Q3
00 4 277
81,2
3582
,446
3 549
43
90,000
% Change Surrounding Recessions
1980-82 58.6%1980-87 88 7%
694
8,12
569
,30
62,4
3664
,00 4
71,2
63,8
5363
,235
64,8
5 371
,570
,662
,304
52,3
7451
,959
53,5
4954
,027
367
4 99 0 1 546 60
,837
1660,000
70,000
80,0001980 87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
43,6 48
5 5
44,3
37,8
8435
,472
40,0
938
,540
35,0
3734
,317
39,2
0,6
95 28,3
22 43,5
43,0
30,000
40,000
50,000
19
0
10,000
20,000 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
0
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
Significant Exposure Implications for All Commercial Lines
82
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information Institute
g p p
Private Sector Business Starts,1993:Q2 – 2010:Q2*
6 220 22
322
022
022
1
18220
230
(Thousands) Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697 000
4 199 20
420
295 96 96
206
206
201
198
206
206
203
211
205
212
200 20
520
420
497
203 20
920
1
320
1 204
202
210 21
220
921
6 2 2 221
0 212
204
2120
920
720
719
93
203
200
210
220 2009: 697,000 2010:H1: 344,000
175
186
7418
018
6 192
188
187 18
918
6 190 19
419
1 19 19 19
192 1
192
192
193
191 19
32 17
618
42 2180
190
200
344 000 new business starts were1 17 172
169 17
217
2
160
170
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.
15093 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,
83
y ,Holding Back Most Types of Commercial Insurance Exposure
* Data through June 30, 2010 are the latest available as of March 10, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
2011 Financial Overview Weekly Percentage Change in Commercial and Industrial Loans by Large U.S. Banks, 2004-2010 y g ,
2.5%3.0%3.5%
Increasing lendingIncreasing
lending again?
1.0%1.5%2.0%
-0.5%0.0%0.5%
-2.0%-1.5%-1.0%
4 4 4 3 2 3 3 2 1 2 2 1 0 1 1 0 9 9 9 8 7 8 8 7 6 7 7 6
Decreasing lending
2004
-01-
120
04-0
4-1
2004
-07-
120
04-1
0-1
2005
-01-
120
05-0
4-1
2005
-07-
120
05-1
0-1
2006
-01-
120
06-0
4-1
2006
-07-
120
06-1
0-1
2007
-01-
120
07-0
4-1
2007
-07-
120
07-1
0-1
2008
-01-
020
08-0
4-0
2008
-07-
020
08-1
0-0
2009
-01-
020
09-0
4-0
2009
-07-
020
09-1
0-0
2010
-01-
020
10-0
4-0
2010
-07-
020
10-1
0-0
Lending peak: $827.3 billion at mid-October 2008;
84
Note: Recession indicated by gray shaded column.Sources http://research.stlouisfed.org/fred2/series/CIBOARD/downloaddata?cid=100 ; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Lending peak: $827.3 billion at mid October 2008;Trough $600.5 billion at mid-October 2010; Latest (12/20/2010) $619.9 billion
InflationInflation
Is it a Threat to Claim Cost SSeverities?
85
Annual Inflation Rates, (CPI-U, %),1990–2014FAnnual 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-
3.8 3.8
5.14.9
4 0
5.0
6.0 commodity bubble have reduced near-term inflationary pressures
2.8 2.6
1 51.9
3.3 3.4
2.5 2.3
3.0
3.8
2.8
3.8
1.62.2 2.1 2.2 2.2
2.92.4
3.23.0
2.0
3.0
4.0
1.5 1.31.6
0.0
1.0
2.0
-0.4-1.090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F
The slack in the U.S. economy suggests that inflation should not heat up
86Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 3/11 (forecasts).
before 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns
P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests
8.8%9%
Price Changes in 2010
6 1%6% Excludes F d d
3 4%
6.1%
4.3%
3%
Food and Energy
1.6%1 0%
3.4% 3.3% 3.1%3%
1.0%0%
Overall CPI "Core" CPI Medical CPI InpatientHospitalServices
OutpatientHospitalServices
Physicians'Services
PrescriptionDrugs
Medical CareCommodities
Source: Bureau of Labor Statistics; Insurance Information Institute.
Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least
87
Labor Market TrendsLabor Market Trends
Massive Job Losses Sapped the Economy and Commercial/PersonalEconomy and Commercial/Personal
Lines Exposure, But Trend is Improving
88
Improving
Unemployment and Underemployment Rates: Falling Faster in 2011?
16
18 Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6U-6 went from 8.0% in March
2007 to 17.5% in O 2009
January 2000 through March 2011, Seasonally Adjusted (%)
12
14
Unemployment
October 2009; Stood at 15.7% in March 2011
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
8
10
Unemployment rate fell to 8.8%
in MarchUnemployment peaked at 10.1% i O t b 2009
4
6
in October 2009, highest monthly rate since 1983.Peak rate in the last 30 years:M
2
4
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
last 30 years: 10.8% in
November -December 1982
Mar 11
89
00 01 02 03 04 05 06 07 08 09 10 11
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure
Monthly Change in Private Employment86 21
3
7 241
7 3 93 8 67 240
230
4
400January 2008 through March 2011* (Thousands)
Private employers added jobs in every month in 2010 for a total of
179
265
127
42 1509
-14
65 9723
-12
85 -58
75-8
316 62 51 61
117
143
112 1
128 16
94
144
(200)
0
200y1.435 million for the year
-10 -
-161
-253 -230
-257
-347
-456
7
-334
-452
-297 -2
15 -186
-262
-
(600)
(400)
(200)
Monthly Losses in 230,000 private sector jobs --5
47-7
34 -667
-806 -7
07-7
44 -649
-
(1,000)
(800)
(600) Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period
jwere created in March
(1,000)
Jan-
07Fe
b-07
Mar
-07
Apr
-07
May
-07
Jun-
07Ju
l-07
Aug
-07
Sep
-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08Fe
b-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09Fe
b-09
Mar
-09
Apr
-09
May
-09
Jun-
09Ju
l-09
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Private Employers Added 1.999 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 Change Employment*
3 432600
January 2008 through March 2011* (Thousands)
The job gain and loss figures in 2010 were l di t t d b th hi i d t i ti f
64 14 3920
8 313 4
-1
210
93 152
6819
421
6
0
200
400 severely distorted by the hiring and termination of temporary Census workers. In 2010, 1.178 million
nonfarm jobs were created.
-72
-144 -122
-160 -137
-161 -128
-175
-321
-380
7 28 -387
15-3
46 -212
-225
-224 -1
09
-175
-66 -41
-600
-400
-200
216,000 f j b
-597
-681
-779 -726
-753
-52
-51
-1,000
-800
600
8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
nonfarm jobs were created
in March
Jan
08Fe
b 08
Mar
08
Apr
08
May
08
Jun
08Ju
l 08
Aug
08
Sep
08
Oct
08
Nov
08
Dec
08
Jan
09Fe
b 09
Mar
09
Apr
09
May
09
Jun
09Ju
l 09
Aug
09
Sep
09
Oct
09
Nov
09
Dec
09
Jan
10Fe
b 10
Mar
10
Apr
10
May
10
Jun
10Ju
l 10
Aug
10
Sep
10
Oct
10
Nov
10
Dec
10
Jan
11Fe
b 11
Mar
11
Job Losses Since the Recession Began in Dec. 2007 Peaked at 8 4 Mill i D 09 St d t 6 2 Milli Th h M h 2011
91
*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
8.4 Mill in Dec. 09; Stands at 6.2 Million Through March 2011; 13.5 Million People are Now Defined as Unemployed
US Unemployment Rate
0%11.0%Rising
unemployment
2007:Q1 to 2012:Q4F*
%9.
3% 9.6% 10
.09.
7%9.
6%9.
6%
9.2%
9.1%
8.9%
8.8%
8.6% .5%
3% %
9.6%
9.0%
10.0%
p yeroded payrolls
and workers comp’s exposure base.Unemployment
% 6.9%
8.1% 8 8 8.3
8.1%
7.0%
8.0%
p ypeaked at 10% in
late 2009.
Unemployment
5% 5% .6%
4.8% 4.9% 5.
4%6.
1%
5.0%
6.0%
forecasts remain stubbornly high
through 2011, but still imply millions of new
jobs will created.
4. 4. 4
4.0%
5.0%
7:Q
1
7:Q
2
7:Q
3
7:Q
4
8:Q
1
8:Q
2
8:Q
3
8:Q
4
9:Q
1
9:Q
2
9:Q
3
9:Q
4
0:Q
1
0:Q
2
0:Q
3
0:Q
4
1:Q
1
1:Q
2
1:Q
3
1:Q
4
2:Q
1
2:Q
2
2:Q
3
2:Q
4
92
07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/11); Insurance Information Institute
US Unemployment Rate Forecasts
11.0% 10 Most PessimisticC /Mid i t
Quarterly, 2011:Q1 to 2012:Q4
9 3%9.5% 9.4%
9.6%10.0%
10.5%Consensus/Midpoint10 Most Optimistic
9.2% 9.1%8.9% 8.8%
8.80%8 60%
9.3%9.4%
9.00%
9.50%9.40%
9.20%
8 6%8.9%
9.1%9.3%
8.5%
9.0%
9.5%
8.60% 8.50%8.30%
8.5%8.2%
8.0%7.7%
8.6%
7.5%
8.0%Unemployment will remain high even under
the most optimistic of scenarios, but forecasts are being revised downwards
7.0%11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4
Stubbornly High Unemployment Will Slow the Recovery of the
93Sources: Blue Chip Economic Indicators (2/11); Insurance Information Institute
Stubbornly High Unemployment Will Slow the Recovery of theWorkers Comp Exposure Base
Unemployment Rates by State, February 2011:Highest 25 States*
16In February, 27 states and the District of
Columbia had over-the-month
13.6
12.2
1.5 .212
14
16
%)
Columbia had over-the-month unemployment rate decreases, 7 had
increases, and 16 had no change.
1 1110
.410
.410
.210
.210
.210
.29.
79.
79.
69.
69.
59.
49.
49.
39.
39.
29.
29.
19.
08.
98.
98.
8
8
10
12
ent R
ate
(%
6
8
empl
oym
e
23 states + DC had l t t b
2
4Une unemployment rates above
the US average in Feb. 2011, 17 states were below.
94
0NV CA FL RI KY MI GA MS OR SC ID NC AZ TN DC MO WV AL CO NJ OH WA CT IL US IN
*Provisional figures for February 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Unemployment Rates By State, February 2011: Lowest 25 States*
10In February, 27 states and the District of
Columbia had over-the-month
8.7
8.5
8.2
8.2
8.2
8.0
7.9
7.8
7.7
7.6
7.5
7.4
7.4 18
10
%)
unemployment rate decreases, 7 had increases, and 16 had no change.
7 7 7. 6.8
6.7
6.5
6.4
6.3
6.2
6.1
5.6
5.4
4.8
6
ent R
ate
(%
44.
33.
74
empl
oym
e
0
2Une
95
0NM DE MA NY TX PA LA AR UT AK ME MT WI MD KS MN OK VA HI WY IA VT NH SD NE ND
*Provisional figures for February 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Labor Underutilization: Broader than Just Unemployment
17 0%17.5%17.2%17.3%
%17 1% 17 1%17 0%17 0%18%
% of Labor Force
16.4%16.5%16.3%16.8%17.0% 17.2%
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%
14%15%16%17%
11.2%11%12%13%14%
10%
Sep 08
May 09
Jun 0
9Ju
l 09
Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 1
0Feb
10Mar
10Apr
10May
10Ju
n 10
Jul 1
0Aug
10Sep
10Oct
10Nov
10Dec
10Ja
n 11
Feb 11
Jan 1
1
M i ll Att h d d U l d P A t f 15 7% f thMarginally Attached and Unemployed Persons Account for 15.7% of the Labor Force in March 2011 (1 Out Every 6.4 People). Unemployment
Rate Alone was 8.8%. Underutilization Shows a Broader Impact on WC and Other Commercial Exposures
96
NOTE: 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.
US Nonfarm Private Employment
Monthly, Nov 2007 – January 2011 (Millions)
The US Economy Lost About Employment Peak;
38.0
38.1
38.0
37.9
37.8
37.8
37.7
37.6
37.6
7.4
.0 7139
y8.4 Million Jobs in the Two
Years from Dec. 07 – Dec. 09.As employment expands,
workers comp will be among the first lines to see exposure gains
Recession Starts
13 13 13 13 13 13 13 13 13 137
137
136.
713
6.2
135.
13.
58135
136137138
first lines to see exposure gains
1313
2.8
132.
113
1.5
131.
213
0.6
130.
330
.129
.929
.629
.79.
69.
39.
2 9.4
29.7
130.
230
.029
.929
.929
.830
.013
0.1
130.
213
0.3
131132133134
1 1 12 12 12 12 129
129
129
12 1 1 12 12 12 1 1 1 1
129130
ov 0
7ec
07
an 0
8eb
08
Mar
08
Apr
08
ay 0
8Ju
neJu
l 08
ug 0
8ep
08
Oct
08
ov 0
8ec
08
an 0
9eb
09
Mar
09
Apr
09
ay 0
9un
09
Jul 0
9ug
09
ep 0
9O
ct 0
9ov
09
ec 0
9an
10
eb 1
0M
ar 1
0A
pr 1
0ay
10
un 1
0Ju
l 10
ug 1
0ep
10
Oct
10
ov 1
0ec
10
an 1
1
97
N De Ja Fe M A M J Au
Se O N De Ja Fe M A M J J Au
Se O N De Ja Fe M A M J J Au
Se O N De Ja
Seasonally adjusted. Source: US Bureau of Labor Statistics
Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)y ( p p )
8.5%10% Recessions in the 1970s and 1980s saw smaller exposure impacts
because of continued wage
The Dec. 2007 to mid-2009 recession
caused the largest
(Percent Change)
(All Post WWII Recessions)
3.7%4.6%
3.5%4%
6%
8% because of continued wage inflation, a factor not present
during the 2007-2009 recession
caused the largest impact on WC
exposure in 60 years
1 1%
1.1%2.1%
-0.5%2%
0%
2%
-4.4%
-2.0%-1.1%
-3.6%-6%
-4%
-2%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 2007-2009
Recession Dates (Beginning/Ending Years)
*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).
Frequency: 1926–2008A Long-Term Drift DownwardManufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
25
30
15
20
10
15
0
5
99
Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research
'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
R l CRegulatory Concerns
Very High State Regulator Turnover in 2011Turnover in 2011
Federal Insurance Office—
100
A New Unknown
Turnover Among Insurance Regulators is Very High in 2011
At least 22 new state insurance
commissioners will take office in 2011take office in 2011, implying a steep collective learn
curve and the need f i ifi t
101
for a significant educational effort
2010 Property and Casualty InsuranceReport Card
ME
NH
ND
MN
WA
AL
VTMT
AK
B-B-
B
C -
AB
F NH
MA
CT
PA
NE
MN
MI
IL
IA
IDOR
NJRI C
DE
NY
MD
SD WI
INOH
NV
WY
= A= B= C= D
A-
B-
B
B-B-
B-
B- C-A
B+B+
BB
C+
C+
C
D+F
WVVA
NC
OK
IL
AZSC
TN
ARNM
KYMOKS
IN
CA
NV
UTCO
D= F= NG
A- A-
B-B-
B
B-
B-
B-C-
C-
D-D-
AB
B
C+
D+D+D
Source: James Madison Institute, February 2008.
LATX
HI GAAL
FL
MS
NM
B- B-B-C-
C-A B+ BNG
NGN t G d d Di t i t f C l bi
Source: Heartland Institute, May 2010
D FNot Graded: District of ColumbiaMississippiLouisiana
Financial Services Reform: Impact on Insurers
Resolution Authority/Systemic Risk: Regulators may seize and break-up troubled financial firms whose collapse might cause widespread damage (i.e., systemically important companies)
R l ld f i h h $ 0B iRegulator would recoup fees with more than $50B in assetsSets up liquidation procedure run by FDICEstablishes 10-member oversight council to monitor and address risks to financial stabilityEliminates Office of Thrift Supervision
Volcker Rule: Largely bars largest firms largest investment firms from trading with their own funds
Exempts insurers asset managers and trust/custody banks though Fed couldExempts insurers, asset managers and trust/custody banks, though Fed could impose Volcker Rule and capital standards on individual firms if warranted
Derivatives: Requires routine derivatives to be traded on exchanges and routed through clearinghouses
Imposes capital margin reporting and record keeping and business conductImposes capital, margin, reporting and record keeping and business conduct rules on firms that deal in derivatives
Consumer Financial Protection Bureau: To be housed within FedWill it be limited to banks/creditors, but concern that it could morph
F d l I Offi T b t bli h d ithi T t it
103
Federal Insurance Office: To be established within Treasury to monitor and gather information in the insurance industry
IL Insurance Director Michael McGraith will be FIO’s first directorSource: Insurance Information Institute.
Insurance Information Institute Online:
www iii orgwww.iii.org
Thank you for your timed tt ti !and your attention!
Twitter: twitter.com/bob_hartwig_ g
INVESTMENTS:INVESTMENTS: THE NEW REALITY
Investment Performance is a Key Driver of ProfitabilityKey Driver of Profitability
Does It Influence U d iti C li lit ?
105
Underwriting or Cyclicality?
Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q31
$64.0$70
($ Billions) 2009:Q3 gain was $29.3B
$42.8$47.2
$52.3
$44.4 $45.3$48.9
$59.4$55.7
$39 0 $39 5
$58.0$51.9
$56.9
$50
$60
$35.4 $36.0$31.7
$39.0 $39.5
$20
$30
$40
Investment gains in
$0
$10
$20 Investment gains in 2010 are on track to be their best since 2007
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 p g
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.
P/C Insurer Net Realized Capital Gains, 1990-2010:Q3
9 2 81 $18.
023.
02 16.2
1
3 04$20
($ Billions) Capital losses have turned to capital gains,
aiding earnings
$2.8
8$4
.81 $9
.89
$9.8
2
$10. $
$13 $
$6.6
3
$6.6
1$9
.13
$9.7
0$3
.52 $8
.92
$4.4
3
$9.2
4$6
.00
$1.6
6$5
$10$15$20
-$1.
21
7.98
-$15-$10
-$5$0
-$7
$19.
81-$25-$20-$15
-$
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
107Sources: A.M. Best, ISO, Insurance Information Institute.
of 2008/2009’s Large Drop in Profits and ROE and Were a Major Driver of Its Recovery in 2010
Treasury Yield Curves: Pre-Crisis (July 2007) vs. February 2011
4 82% 4.96% 5.04% 4.96% 4 82% 4 82% 4 88% 5.00% 4 93% 5.00% 5.19%6%
3.58%
4.82% 4.96% 4.96% 4.82% 4.82% 4.88% 4.93%4.65%
4.42%
4%
5%
Treasury yield curve is near its most depressed level in at least
2.96%
2.26%
2%
3%45 years, though longer yields rose in late 2010/early 2011 as
economy improved. Investment income is falling as a result. QE2 Target
0.11% 0.13% 0.17% 0.29%0.77%
1.28%
1%
2%
February 2011 Yield Curve*0.11% 0.13%0%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Pre-Crisis (July 2007)
The Fed’s Announced Intention to Pursue Additional Quantitative Easing
108
The Fed s Announced Intention to Pursue Additional Quantitative Easing Could Depress Rates in the 7 to 10-Year Maturity Range through June
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
l Lines
s Autop cia
lAuto
PropCas Suret
yy Lin
esl ance
**
y
Persona
l L
Pvt Pas
s A
Pers Prop
Commerc
i
Comml A
u
Credit
Comm Pro
Comm C
a
Fidelity
/Su
Warranty
Surplus L
i
Med M
al
WC Reinsu
ran
.8%
.8%
.0% .9%
.1%
%
-3%-2%-1%0%
-1 -1 -2.
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
5.7%
-1 -2.
-3.1
%
-7%-6%-5%-4%
-5 -7.3%-8%
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
109
Underwriting and Pricing Discipline*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Distribution of P/C Insurance Industry’s Investment Portfolio
Portfolio Factsas of 12/31/2009
As of December 31, 2009
Invested assets totaled $1.26 trillion
Generally, insurers
68.8%
Bondsy,
invest conservatively, with over 2/3 of invested assets in bondsbonds
Only 18% of invested assets were in common or preferred 7 0%
Common & PreferredOtherp
stock 6.2% 18.0%
7.0% Preferred StockCash &
Short-term Investments
110*Net admitted assets. Sources: NAIC; Insurance Information Institute research.
2011 Financial Overview About Half of the P/C Insurance Industry’s Bond Investments Are in Municipal Bondsest e ts e u c pa o ds
Investments in “Political
Bond Investment Factsas of 12/31/09 As of December 31, 2009
Investments in Political Subdivision [of states]” bonds were $102.5 billion
Investments in “States 31 0%Investments in States, Territories, & Possessions” bonds were $58.9 billion
Investments in “Special
31.0%33.3%Special
Revenue Industrial
Investments in Special Revenue” bonds were $288.2 billion
All state, local, and special 0 9%U.S. G t
Political Subdivisions, , p
revenue bonds totaled 48.2% of bonds, about 35.7% of total invested assets
0.9%
2.0%15.5%
6.3%
11.0% Government
States Terr F i G t
111Sources: NAIC, via SNL Financial; Insurance Information Institute research.
States, Terr., etc. Foreign Govt
Municipal Bonds: Recent Issues
Most Government Entities Are Under Financial DistressPlunging tax receipts, higher outlays, pension obligations
Analyst Meredith Whitney in Dec. 2010 Said (on 60 Minutes) that a “Spate” of 50-100 Sizeable Defaults Totaling “Hundreds of Billions of Dollars
Few other analysts believe such and outcome is likely, though most acknowledge that some are likely
The 3 Major Ratings Agencies Report Cumulative Muni BondThe 3 Major Ratings Agencies Report Cumulative Muni Bond Default Rates Ranging from 0.04% to 0.29% from 2000-2009
These figures indicate that muni defaults are very rareLonger term review corroborates rarity of such defaultsLonger-term review corroborates rarity of such defaultsEven in the event of default municipalities often (eventually) make good on the debt
112
Municipalities Have Many Tools to Meet Obligations
Revenues to State and Local Governments Are Starting to Recover
2011 Financial Overview When P/C Insurers Invest in Higher Risk Bonds,It’s Corporates, Not Munisp ,
97 4% 2 5%
0.1%SubdiviSt a
97.4% 2.5%
0.1%
sions of ates
92.5% 7.4%
0.1%
States
Class 1Class 2Classes 3-6
72.8% 20.4% 6.8%
Industri
0% 20% 40% 60% 80% 100%
ial
Th NAIC’ S iti V l ti Offi t b d i t f 6 l
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.
MUNICIPAL BOND CONCERNSMUNICIPAL BOND CONCERNS
Collapse of Muni Bond Market is Hi hl U lik lHighly Unlikely
114
Chapter 9 Bankruptcy Filings:1980-2010:Q3
18
6
18
20 There was a notable spike in municipal bankruptcy filings in 2009, the highest
level since 1994 (year of Orange County
13
1412
16
11 11
1212
14
16bankruptcy), but activity appears to
have tapered off in 2010.8
7
10 108
10
18
76
71
66
8
10
12
34 4
3
5
35 5
4
5
0
2
4
6
0
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*
Chapter 9 bankruptcy allows for the reorganization of “municipalities,” which include cities, towns, villages, counties, taxing districts, municipal
utilities and school districts.*Through Q3 2010.Note: Chapter 9 bankruptcy allows for the reorganization of Source: American Bankruptcy Institute; Insurance Information Institute.
Muni Bond Issuance: 2000 – 2011*
Muni issuance is was down in early 2011 after the end of a
special federal program in 2010special federal program in 2010 and amid the fiscal problems of many states and municipalities
116
*Through March 4, 2011Source: Thompson Reuters; Wall Street Journal; Insurance Information Institute.
CAPITAL MANAGEMENT & LEVERAGE
Excess Capital is a Major Obstacle t M k t Tto a Market Turn;
Capital Management Decisions Will
117
Impact Market Direction
US Policyholder Surplus:1975–2010*
$600
($ Billions)
Surplus as of 6/30/10 was a near-record $530.5B, up from $437 1B at the crisis trough at 3/31/09
$400$450$500$550 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 6/30/10 is now 1.7% above 2007 peak; Crisis trough
was as of 3/31/09 16.2% below 2007 peak.
$250$300$350$400
“Surplus” is a measure of
$50$100$150$200 underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in
non-insurance organizations
$0$50
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
organizations
The Premium-to-Surplus Ratio Stood at $0.80:$1 as of
* As of 6/30/10; **Calculated using annualized net premiums written based on H1 2010 data.Source: A.M. Best, ISO, Insurance Information Institute.
The Premium to Surplus Ratio Stood at $0.80:$1 as of6/30/10, A Record Low (at Least in Recent History)**
Policyholder Surplus, 2006:Q4–2010:Q3
($ Billions)
$544 8$560
2007:Q3Previous Surplus Peak Surplus set a new
record in 2010:Q3*
$496 6
$512.8$521.8
$511.5
$540.7$530.5
$544.8
$505.0$515.6$517.9
$500
$520
$540
$487.1$496.6
$478.5
$455.6$463.0
$490.8
$460
$480
$500
The Industry now has $1 of surplus for every $0.77 of
NPW—the strongest claims-$437.1
$420
$440
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
NPW the strongest claimspaying status in its history.
Quarterly Surplus Changes Since 2007:Q3 Peak
09:Q1: -$84.7B (-16.2%)09:Q2: -$58.8B (-11.2%)
10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)
*Includes $22.5B of paid-in capital from a holding company parent for one
’
119Sources: ISO, A.M .Best.
09:Q2: $58.8B ( 11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)
10:Q2: $8.7B ( 1.7%)10:Q3: +$23.0B (+4.4%)
insurer’s investment in a non-insurance business in early 2010.
Paid-in Capital, 2005–2010:Q3($ Billions)
$22 5$25
Paid-in capital for insurance ti i 2009 H1
$23.8
$22.5
$15
$20operations in 2009:H1 was $2.3B. In 2010:H1 it was a
record $23.8B
$14 4$10
$15
$14.4
$3.8 $3.2
$12.3
$1.3$6.5$0
$5
$02005 2006 2007 2008 2009 2010:Q3
I 2010 Q3 O I ’ P id i C it l R b $22 5B
120Source: ISO.
In 2010:Q3 One Insurer’s Paid-in Capital Rose by $22.5Bas Part of an Investment in a Non-insurance Business
Global Reinsurance Capacity Shrankin 2008, Mostly Due to Investments
Global Reinsurance Capacity Source of Decline in 2008
$360$350
$350
$370 RealizedCapitalLosses
$310
$33031%
$300
$290
$310 55% 14%
Change inUnrealizedCapital Losses
Hurricanes
$2702007 2008 2009E
Global Reinsurance Capacity
Capital Losses
121Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute estimate for 2009.
Global Reinsurance CapacityFell by an Estimated 17% in 2008
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
18%
The Financial Crisis at its Peak Ranks as the Largest
“Capital Event” Over
(Percent)
13.8%
16.2%
15%
18% pthe Past 20+ Years
9.6%
6.9%
10.9%
6 2%
9%
12%
3.3%
6.2%
3%
6%
0%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**
122
* 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
Hugo Andrew Earthquake Hurricanes Katrina 3/31/09**
Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*
30%
(Percent)Surplus growth is now positive but premiums
continue to fall, a departure from the historical pattern
15%
20%
25%p
0%
5%
10%
15%
-10%
-5%
0%
-15%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
Sharp Decline in Capacity is a Necessary but
123
* 2010 NWP and Surplus figures are % changes as of Q3:10 vs Q3:09. Sources: A.M. Best, ISO, Insurance Information Institute
Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market
Ratio of Net Premiums Writtento Policyholder Surplus, 1970-2010*
2.7
2.52.52.5
3.0 The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.79:1 in 2010. It has decreased as PHS grows
Record High P-S Ratio was 2.7:1
in 1974
2.1
1.9
22.
3
1.8
1.7
1.7
1.9
1.9
1.9
1.9
1.7
6 6
2.0 2.1
2.0
2.5 more quickly than NPW, with the effect of holding down profitability.
1 1 11.
61.
61.
41.
41.
31.
31.
11.
10.
9
1.13
0.94
0.86.84
1.29
1.17
1.07
0.99
.84
0.91
790.95
.82
1.6 1.
8
1 0
1.5
0 00 0 0.70.
0.5
1.0
Record Low P-S Ratio was 2.7:1
in 2010*0.0
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 2010 Implies that P/C Insurers Held $1 in Surplus Against Each $0 79 Written in Premiums In 1974 Each $1 of
124
in Surplus Against Each $0.79 Written in Premiums. In 1974, Each $1 of Surplus Backed $2.70 in Premium.
*2010 data are is estimated using annualized NWP data through 2010:Q3.Sources: Insurance Information Institute calculations from A.M. Best data.
Merger & AcquisitionMerger & Acquisition
Capital Cycles Can Drive Consolidation
125
2010: U.S. Insurance M&A Bounces Back (All Segments)
500
600
160
180 436 transactions, up 36%
400
100
120
140
nsa
ctio
ns
n V
olu
me
200
300
60
80
No.
of
Tran
Tran
sact
ion
$46.5B in volume, up 224%
0
100
-
20
40
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Transaction Volume (left scale) No. of Transactions (right scale)
U.S. activity rebounded from lows recorded in 2009. M&A also made aU.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.
U.S. P/C Insurance-RelatedM&A Activity, 1988–2010E*
$60 140Transaction Value Number of Transactions
($ Billions)
$40
$50
alue
100
120
Num
be
$20
$30
rans
actio
n Va
60
80
er of Transact
$10
$20Tr
20
40
tions
$088 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910E
0
$ Value of Deals Down 78% 2010: No Mega Deals, Despite Record Capital Slo Gro th and Impro ed
127
Note: U.S. Company was the acquirer and/or target.Source: Conning Research & Consulting. *2010E is derived from A.M. Best data for p/c insurers only (excludes brokers/agencies)
$in 2009, Volume Up 7% Capital, Slow Growth and Improved
Financial Market Conditions
U.S. P/C M&A Activity Rising, Volume Bouncing Back
120
140
50
60
edns)
63 deals in
80
100
30
40
Dea
ls A
nn
ou
nc
olu
me
($ b
illio
n 63 deals in 2009, vs. 59
in 20082010
volume to $6.5B (est),
40
60
10
20
Nu
mb
er o
f D
Tota
l Dea
l Vo from $3.5B
0
20
0
10
After a severe drop due to the capital crunch, M&A volume began to rebound i 2010 L l i b l 1998 2000 d 2006 k
Transaction Values (left scale) No. of Transactions (right scale)
128
Sources: Conning Research & Consulting through 2009; 2010 vol. est. from A.M. Best (2010 deal count N/A); Insurance Information Institute.
in 2010. Levels remain below 1998-2000 and 2006 peaks.
2009: More M&A activity outside U.S.
16.3 9516.0
18.0
U.S. P/C
95 9516.0
18.0
Non-U.S. P/C
75
85
10 0
12.0
14.0
eals
illio
ns)
14.0
11.5 80
75
85
10 0
12.0
14.0
eals
illio
ns)
5963
45
55
65
6.0
8.0
10.0
No.
of
De
Vol
um
e ($
b
45
55
65
6.0
8.0
10.0
No.
of
De
Vol
um
e ($
b
3.5
25
35
45
-
2.0
4.0
V
25
35
45
-
2.0
4.0
V2008 2009 2008 2009
Non-U.S. activity exceeded U.S. activity in number and volume. Non-U.S. l f ll b h l i U Svolume fell, but not as sharply as in U.S.
Sources: Conning Research Consulting; Insurance Information Institute.
2009: Five Largest U.S. Deals
Buyer Target Value (millions)
Motivation
Zurich Financial Services AG
21st Century Insurance Group
$1.900 AIG asset sale
Fairfax Financial Holdings Odyssey Re Holding Corp. 960 Topping off ownership
Medical Professional Fincor Holdings, Inc. 237 ConsolidationMedical Professional Mutual Insurance Co.
Fincor Holdings, Inc. 237 Consolidation
Tower Group, Inc. Specialty Underwriters Alliance, Inc.
107 Geographic expansion/Diversification of operations
Emerging Capital Partners
Nouvelle SocieteInterafricaine d’AssuranceParticipatiion S.A. (Cote d’Ivoire)
48 Investment in Africa’s financial sector
Only one deal exceeded $1 Billion in 2009, vs. two in 2008 that exceeded $4 billion apiece (Liberty buying Safeco and Tokio’s acquisition of Philadelphiabillion apiece (Liberty buying Safeco and Tokio s acquisition of Philadelphia
Insurance Cos.)
Sources: Conning Research Consulting; Insurance Information Institute.
2009: Five Largest Non-U.S. Deals
Buyer Target Value (millions)
Motivation
Banque Nationale de Paris Paribas Assurance (France)
Fortis Insurance Belgium (Belgium)
1,861 Fortis Bank forced to sell insurance assets
Partner Re Ltd. (Bermuda)
Paris Re Holdings Ltd (Switzerland)
1,716 Consolidation( uda) ( a d)
Validus Holdings, Ltd. (Bermuda)
IPC Holdings Ltd. (Bermuda)
1,650 Consolidation
Polish State (Poland) PZU S.A. (Poland) 1,200 Privatization of state assets
Porto Seguro S.A. (Brazil)
Seguros de Automovel eResidencia S.A (Brazil)
855 Consolidation and access to bank clients
One significant deal had no announced value – combination of Mitsui Sumitomo, Aioi Insurance and Nissay Dowa General in Japan. They merged
f i f l i h i ki J kfor economies of scale in shrinking Japanese market.
Sources: Conning Research Consulting; Insurance Information Institute.
Major U.S. P/C Deals in 2010To
2010: Ten Largest U.S. DealsMerger & Acquisition Approximate Value ($
millions)Max Capital/Harbor Point 3,500Max Capital/Harbor Point 3,500
Fairfax Financial/Zenith National 1,300
Ace Ltd./Rain and Hail Insurance Services 1,100
QBE/NAU 565QBE/NAU 565
Doctors Co./American Physicians Capital 386
Fairfax Financial/General Fidelity Insurance 328
Fairfax Financial/First Mercury Financial 294
QBE/RenaissanceRe U.S. operations 275
Southwest Insurance Partners/Lightyear Capital 250
ProSight Specialty Insurance/NYMAGIC 230
Mergers were a way to expand in preferred markets amid the slow growth post-recession Acquirers generally had abundant capital Terms and
Sources: A.M. Best; Insurance Information Institute.
post-recession. Acquirers generally had abundant capital. Terms and conditions for financing were advantageous.
Valuations may have bottomed out
2.43 2.50
3.00
2010 –lowest since
1.79 1.74 1.58 1.59
2.03
1.77
1.51 1 31 1.50
2.00
Boo
k V
alu
e 2002
1.10
0.82
1.23
1.01
1.31
0.99 1.06
0 50
1.00
1.50
Pri
ce t
o B
-
0.50
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 to date
So far this year, 10 deals have been announced, worth nearly $2 billion.
Sources: SNL Financial; Insurance Information Institute.
Buyers are consistently more profitable than targets, rest of industry
10.0%
15.0%
20.0%
ear)
-5.0%
0.0%
5.0%
10.0%
Equ
ity
(pri
or
y
-20.0%
-15.0%
-10.0%
Ret
urn
on
E
2005 2006 2007 2008 2009 2010 2011 to dateBuyers 14.7% 11.0% 16.2% 12.0% 8.0% 8.2% 10.5%Targets 2.6% -20.7% 11.6% 12.1% 6.0% 1.7% 2.8%US P/C Industry 9.4% 9.6% 12.2% 12.3% 4.4% 7.3% 7.7%
-25.0%
The year before merger, eventual targets have earnings that lag industry average. Buyers’ earnings are higher than the industry.
/ y 9.4% 9.6% 12.2% 12.3% 4.4% 7.3% 7.7%
Sources: SNL Financial; Insurance Information Institute.
Firms on both sides of merger have higher expense ratios than industry
33.2% 33.8%
30 0%
35.0%
40.0%
20
10
26.6%
20.0%
25.0%
30.0%
atio
20
05
-
10.0%
15.0%
xpen
se R
a
0.0%
5.0%
Buyers Targets All US P/C
Ex
M&A targets have slightly higher expense ratios than buyers. Both run higher expense ratios than the industry overall.
Sources: SNL Financial; Insurance Information Institute.
Type of acquisition is shifting
Mutual8% Other
2005 to 2007Mutual12%
2008 to 2010
8% Other3% Other
5%
Stock
Stock89%
Stock83%
Th 16 t l t t i 2008 2010 f 10 i th th iThere were 16 mutual targets in 2008-2010, up from 10 in the three prior years.
Sources: SNL Financial; Insurance Information Institute.
Insurance Information Institute Online:
www iii orgwww.iii.org
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