Download PCI-040511 - Insurance Information Institute

Overview & Outlook for the
P/C Insurance Industry
Challenges and Opportunities for
2011 and Beyond
PCI Joint Underwriting and Marketing Seminar
Las Vegas, NV
April 5, 2011
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance 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 & Outlook
 The 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 Pricing
Expenses: Cyclical Increase
Leverage/Capital Management: Excess Capacity and Squeezing it Out
 M&A Activity in the P/C Insurance Industry
 External Factors Influencing Profitability
 Tort System Review: Overview and Causes for Concern
 Inflation
 Growth in the Aftermath of the Great Recession
 Crisis-Driven Exposure Issues: Commercial Lines




Global Issues Impacting P/C Insurance
Catastrophe Loss Review
Social Media Strategy
Q&A
2
Reasons for Optimism, Causes
for Concern in the P/C
Insurance Industry
The Outlook for the Economy
Has Brightened, But the Outlook
for P/C Insurance Is Mixed
3
Reasons for Optimism, Causes for
Concern in the P/C Insurance Industry
 Economic Recovery in US is Self-Sustaining and Strengthening
 No Double Dip or Second Recession
 Economy is more resilient than most pundits presume





Consumer Confidence is Gradually Improving
Consumer Spending is Recovering Gradually
Consumer and Business Lending Are Expanding
Housing Market Remains Weak, but Some Improvement Expected in 2011
Inflation Remains Tame
 Runaway inflation is highly unlikely; Fed has things under control
 Deflation—threat has disappeared
 Private Sector Hiring is Consistently Positive for 14 Months
 Acceleration in hiring later in 2011 compared to 2010
 No significant secondary spike in unemployment






Japan Threat to Global Economy Overstated
Sovereign Debt, Muni Bond “Crises” Overblown
Current Middle East Turmoil Poses Only Moderate Risk to US Economy
Interest Rates Are Rising but Remain Low by Historical Standards
Stock and Bond Markets More Stable, Less Volatile
Political Environment Is More Hospitable to Business Interests
4
Reasons for Optimism, Causes for
Concern in the P/C Insurance Industry
 Era of Mass P/C Insurance Exposure Destruction Has Ended
 Personal and commercial exposure growth is virtually certain in 2011
 But restoration of destroyed exposure will take 3-5 years in US
 Exposure Growth Returned in in 2nd Half 2010, Will Accelerate in 2011
 P/C Industry Saw Growth in 2010 (+0.8%) for the First Time Since 2006
 Increasing 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&O
 Laggards: Property, inland marine, aviation
 Personal Lines: Auto leads, homeowners lags
 Investment Environment Is/Remains Much More Favorable
 Return of realized capital gains as a profit driver
 Interest rates are low but are risingBoost to investment income
 Agent Commissions Should Begin to Rise in 2011
 Demand, Capital Management Strategies Will Temper Overcapitalization
5
Summary of Japan Earthquake
The March 11 Quake is Just the
Most Recent of Several Large
Catastrophe Losses
8
Location of March 11, 2011 Earthquake
Near Sendai, Honshu, Japan
March 11 Earthquake Facts
as 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 Sendai
 Quake is among the 5 strongest in
recorded history and the strongest
in the 140 years for which records
have been kept in Japan
 11,000+ fatalities
 Economic loss: $100 - $300 bn
LOCATION
130 km (80 miles) E of Sendai, Honshu, Japan
178 km (110 miles) E of Yamagata, Honshu, Japan
178 km (110 miles) ENE of Fukushima, Honshu, Japan
373 km (231 miles) NE of TOKYO, Japan
Source: US Geological Service; Insurance Information Institute.
 Insured losses up to $35 bn
 Significant tsunami damage was
recorded in Japan; relatively minor
damage on the U.S. West Coast
9
Insured Japan Earthquake Loss
Estimates*
(Insured Losses, $ Billions)
Eqecat
$12 - $25 bn
$25 - $35 bn
AIR Worldwide
Economic losses are likely to
total in the $200 billion range,
meaning only a fraction of the
loss is insured
RMS
$-
$5
$10
$15
*As of March 29, 2011. Figures do not include insured tsunami losses.
Sources: AIR Worldwide, Eqecat; Insurance Information Institute.
$20
$25
$30
$35
$40
10
Top 20 Nonlife Insurance Companies in
Japan by DPW, 2008
Direct premiums written,
2008
Rank
Source: © AXCO 2011.
Companies
1
Tokio & Marine Nichido
2
JPY
(millions)
U.S. ($
millions)
Market
share
Cumulative
Market Share
$2,032,131.2
$19,660.9
24.0%
24.0%
Sompo Japan
1,504,262.7
14,553.8
17.8
41.8%
3
Mitsui Sumitomo
1,455,161.8
14,078.7
17.2
59.0%
4
Aioi
897,182.6
8,680.3
10.6
69.6%
5
Nipponkoa
728,262.9
7,046.0
8.6
78.2%
6
Nisay Dowa
361,530.7
3,497.8
4.3
82.5%
7
Fuji
329,345.7
3,186.4
3.9
86.4%
8
AIU
253,522.8
2,452.8
3.0
89.4%
9
Kyoei
199,393.1
1,929.1
2.4
91.8%
10
Nisshin
149,735.8
1,448.7
1.8
93.6%
11
American Home
82,889.8
802.0
1.0
94.6%
12
Asahi
73,600.1
712.1
0.9
95.5%
13
Sony
60,868.3
588.9
0.7
96.2%
14
ACE
54,876.2
530.9
0.7
96.9%
15
Zurich
45,471.3
439.9
0.5
97.4%
16
SECOM
44,245.0
428.1
0.5
97.9%
17
Sumi Sei
33,594.0
325.0
0.4
98.3%
18
AXA
30,418.9
294.3
0.4
98.7%
19
Mitsui Direct
29,471.9
285.1
0.4
99.1%
20
Daido
15,690.4
151.8
0.2
99.3%
11
Recent Major Catastrophe Losses
(Insured Losses, $US Billions)
$30
$25
$20
The March 2011 earthquake in Japan will
become among the most expensive in world
history in terms of insured losses (current
leader is the 1994 Northridge earthquake with
$22.5B in insured losses in 2010 dollars)
$25.0
$15
$8.0
$10
$10.0
$5.0
$5
$0.5
$2.0
$0
Cyclone Yasi
(Australia) Feb
2011
Australia Floods
New Zealand
Chile Earthquake
New Zealand
Japan Earthquake
(Dec - Feb 2011) Quake (Sep 2010)
(Feb 2010)
Quake (Feb 2011)
(Mar 2011)*
Insured Losses from Recent Major Catastrophe Events Exceed
$50 Billion, an Estimated $48 Billion of that from Earthquakes
*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.
12
Nonlife Insurance Market Impacts of
Japan Earthquake
 Primary Insurance: Downgrades of Some Domestic Japanese Insurers
 Significant Absorption of Loss by Japanese Government
 Residential earthquake damage
 Nuclear-related property and liability damage
 Market Share of Foreign Primary Insurers in Japan is Small
 Not a capital event for any non-Japanese primary insurer
 Significant Impacts for Global Reinsurers
 Property-Catastrophe covers on Commercial Lines
 Business Interruption
 Contingent Business Interruption
 Currently an Earnings Event for Global Reinsurers
 Not a capital event: Global reinsurance markets entered 2011 with record capital
 Cost of Property/Catastrophe Reinsurance Rising in Japan, New Zealand,
Australia
 Up for all; Magnitude of increase is sensitive to size of loss
 Reinsurance Coverage Remains Available in Affected Regions
 Little (If Any) Impact of Cost of US Property-Cat Reinsurance
 Market remains well capitalized and competitive
 Elevated global cat activity could halt price declines for property/cat reinsurance
13
P/C Insurance Industry
Financial Overview
Profit Recovery Continues
Early Stage Growth Begins
14
$28,311
$3,043
$34,893
$65,777
$44,155
$38,501
$30,029
$20,559
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$24,404
$50,000
$21,865
$60,000
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%
$30,773
$70,000






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
$36,819
$80,000
$62,496
P/C Net Income After Taxes
1991–2010E ($ Millions)
$0
-$10,000
-$6,970
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
* 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
09
10E
ROE: Property/Casualty Insurance,
1987–2010E*
(Percent)
P/C Profitability Is Both by
Cyclicality and Ordinary Volatile
20%
Katrina,
Rita, Wilma
15%
10%
Sept. 11
Hugo
5%
Andrew
0%
4 Hurricanes
Lowest CAT
Losses in
15 Years
Northridge
Financial
Crisis*
-5%
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
* Excludes Mortgage & Financial Guarantee in 2008 - 2010.
Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3.
04
05
06
07
08
09 10E
16
ROE vs. Equity Cost of Capital:
U.S. P/C Insurance:1991-2010:H1*
(Percent)
18%
16%
6%
4%
2%
0%
-9.0 pts
-13.2 pts
8%
+1.7 pts
10%
-3.2 pts
12%
-6.4 pts
+2.3 pts
14%
-2.7 pts
The P/C Insurance Industry Fell Well
Short of Its Cost of Capital in 2008 but
Narrowed the Gap in 2009 and 2010
The Cost of Capital is
the Rate of Return
Insurers Need to
Attract and Retain
Capital to the Business
US P/C Insurers Missed Their Cost of
Capital by an Average 6.7 Points from 1991
to 2002, but on Target or Better 2003-07,
Fell Short in 2008-2010
-2%
91
92
93
94
95
96
97
98
99
ROE
00
01
02
03
04
05
06
07 08* 09* 10*
Cost of Capital
* Return on average surplus in 2008-2010 excluding mortgage and financial guaranty insurers.
Source: The Geneva Association, Insurance Information Institute
17
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
A combined ratio of about 100
generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Combined Ratio / ROE
110
105
15.9%
14.3%
100.6
100
100.1
97.5
100.7
12.7%
15%
101.0
99.5
99.7
7.3%
7.7%
9.6%
95
18%
92.6
12%
9%
8.9%
6%
90
4.4%
85
3%
0%
80
1978
1979
2003
2005
Combined Ratio
2006
2008*
2009*
2010:Q3*
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 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.
RNW for Major P/C Lines,
2000-2009 Average
20%
10-year returns for some lines are
excellent, though homeowners is a major
laggard, largely due to major
catastrophes. WC returns are slipping.
19.8%19.1%
15%
12.2%
10%
8.5% 8.0%
7.4%
7.2% 7.0%
6.4%
4.7% 4.7%
5%
0%
-5%
-3.9%
Fire
Inland
All Comm CMP
Marine Other Auto
Source: NAIC; Insurance Information Institute
Med
Mal
PP
Auto
All
Lines
WC
Other
Liab
HO
Allied
The Elusive Market Turn
When, Why, How and
IF
20
PREMIUM TRENDS
Winds of Change or
Moving Sideways?
21
Soft Market Persisted in 2010 but May
Be Easing: Relief in 2011?
(Percent)
1975-78
1984-87
2000-03
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.
20%
15%
10%
5%
0%
NWP was up 0.5% in 2010 (est.) with
forecast growth of 1.4% in 2011
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
10E
11F
-5%
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
22
Auto & Home vs. All Lines, Net Written
Premium Growth, 2000–2010E
While homeowners insurance has grown faster
than auto over the past decade, auto is
generally more profitable
15.3%
15%
Private Passenger Auto
Homeowners
All Lines
14.5%
13%
11%
Average 2000-2009
Auto = 2.9
Home = 6.5%
All Lines = 3.4%
9.2%
9%
7%
5.7%
6.0%
5%
3%
5.0%
1%
2.2% 3.0%
0.9%
-0.9%
0.5%
-1%
-3%
-4.9%
-5%
00
01
02
03
Sources: A.M. Best; Insurance Information Institute.
04
05
06
07
08
09
10E
23
5%
0%
-5%
-10%
Sources: ISO, Insurance Information Institute.
2010:Q4
2010:Q3
2010:Q2
2010:Q1
2009:Q4
2009:Q3
2009:Q2
2009:Q1
2008:Q4
2008:Q3
2008:Q2
2008:Q1
2007:Q4
2007:Q3
2007:Q2
2007:Q1
2006:Q4
2006:Q3
2006:Q2
2006:Q1
2005:Q1
-1.8%
-0.7%
-4.4%
-3.7%
-5.3%
-5.2%
-1.4%
-1.3%
-1.9%
-1.6%
-4.6%
2005:Q2
-4.1%
2005:Q3 -5.8%
2005:Q4
-1.6%
2004:Q4
2004:Q3
2004:Q2
2004:Q1
2003:Q4
2003:Q3
2003:Q2
2003:Q1
2002:Q4
2002:Q3
1.3%
2.3%
3.0%
0.5%
2.1%
0.0%
10.3%
10.2%
13.4%
6.6%
15.1%
16.8%
16.7%
12.5%
10.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
10%
2002:Q2
15%
10.2%
20%
2002:Q1
P/C Net Premiums Written: % Change,
Quarter vs. Year-Prior Quarter
The longawaited uptick:
mainly
personal lines
Finally! Back-to-back quarters of net written premium growth
(vs. the same quarter, prior year)
24
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 2011
4%
2.8%
2.5%
2%
0.3%
0%
-2%
-0.1%
-0.1%
-4%
-2.0%
-3.1%
-6%
-8%
-10%
-9.4%
-12%
Personal Lines
2008
Commercial Lines
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.
Sources: A.M. Best; Insurance Information Institute.
25
Monthly Change* in Auto Insurance
Prices, 1991–2011*
10%
8%
Cyclical peaks in PP
Auto tend to occur
approximately every 10
years (early 1990s, early
2000s and likely the
early 2010s)
6%
A pricing peak
may be occurring
4%
2%
0%
“Hard” markets
tend to occur
during
recessionary
periods
Feb. 2011
change
was 4.2%,
down from
5.4% in
Nov. 2010
-2%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
*Percentage change from same month in prior year; through February 2011; seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
26
Average Premium for
Home Insurance Policies**
Consumer efforts to economize (increased
deductibles, more shopping, etc.) and
adverse exposure trends are depressing the
average homeowners insurance premium
$950
$900
$850
$804
$800
$822
$791
$799
$807
08
09*
10*
$764
$729
$750
$700
$668
$650
$593
$600
$550
$536
$508
$500
00
01
02
03
04
05
06
07
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.
Source: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.
27
Average Commercial Rate Change,
All Lines, (1Q:2004–3Q:2010)
3Q10
-5.2%
1Q10
-5.3%
2Q10
4Q09
-5.6%
-6.4%
3Q09
-5.8%
2Q09
-4.9%
1Q09
-5.1%
-6.4%
-11.0%
-12.9%
-13.5%
-12.0%
-13.3%
-11.8%
-11.3%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
-5.3%
-3.0%
-2.7%
-4.6%
KRW Effect
-16%
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
-14%
Magnitude of Price
Declines Shrank
During Crisis,
Reflecting Shrinking
Capital, Reduced
Investment Gains,
Deteriorating
Underwriting
Performance, Higher
Cat Losses and
Costlier Reinsurance
-9.6%
-12%
-8.2%
-10%
-9.7%
-8%
-9.4%
-6%
-7.0%
-4%
-5.9%
-2%
-3.2%
0%
-0.1%
1Q04
(Percent)
Market Remains
Soft as Capital
Restored and
Underwriting Losses
Remain Modest
28
Change in Commercial Rate Renewals,
by Account Size: 1999:Q4 to 2010:Q3
Percentage Change (%)
Peak = 2001:Q4
+28.5%
Pricing Turned
Negative in Early
2004 and Has
Been Negative
Ever Since
Market has Been Soft for
6+ years and Remains Soft
as Capital is Restored and
Underwriting Losses
Remain Modest
KRW
Effect
Trough = 2007:Q3
-13.6%
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
29
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 risks
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
30
UNDERWRITING
Cyclicality is Driven Primarily
by the Industry’s Underwriting
Cycle, Not the Economy
32
P/C Insurance Industry
Combined Ratio, 2001–2010:Q3*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
Cyclical
Deterioration
120
115.8
110
Lower CAT
Losses,
More
Reserve
Releases
Best
Combined
Ratio Since
1949 (87.6)
107.5
100.1
100
101.0
100.8
98.4
99.3
99.7
2009
2010:Q3
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2
Sources: A.M. Best, ISO.
33
Calendar Year Combined Ratios
by Segment: 2008-2011F
Personal lines combined ratio is expected to remain stable in
2010 while commercial lines and reinsurance deteriorate
110
108
106
104
102
100
98
96
94
92
90
108
106
104.5
103.8
102.4
100
99.5
98.9
Personal Lines
Commercial Lines
2008
2009
2010P
2011F
Overall deterioration in 2011 underwriting performance is due to expected
return to normal catastrophe activity along with deteriorating underwriting
performance related to the prolonged commercial soft market
Sources: A.M. Best . Insurance Information Institute.
34
Underwriting Gain (Loss)
1975–2010:Q3*
($ Billions)
$35
$25
Cumulative
underwriting deficit
from 1975 through
2009 is $445B
$15
$5
-$5
-$15
-$25
The industry recorded
a $6.2B underwriting
loss in 2010:Q3
compared to $3.2B in
2009:Q3
-$35
-$45
-$55
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
Large Underwriting Losses Are NOT Sustainable
in Current Investment Environment
* Includes mortgage and financial guaranty insurers.
Sources: A.M. Best, ISO; Insurance Information Institute.
Number of Years with Underwriting
Profits by Decade, 1920s–2000s
Number of Years with Underwriting Profits
12
10
10
8
8
7
6
6
5
4
4
3
2
0
0
1980s
1990s
0
1920s
1930s
1940s
1950s
1960s
1970s
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
* 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.
36
P/C Reserve Development, 1992–2011E
$25
$20
Impact on
Combined Ratio
(Points)
$15
$10
$5
23.2
13.7
11.7
2.3
9.9
7.3
1
-2.1
-$10
-2.6
-4.1
-6.6
-8.3
-5
-6.7
-9.5
-9.9 -9.8
-$15
-2
-6
11E
10E
09
07
06
05
04
03
02
01
00
99
98
97
96
95
94
-$20
93
4
-4
-14.6-16 -15
92
6
0
$0
-$5
8
2
08
Prior Yr. Reserve Release ($B)
Prior Yr. Reserve
Development ($B)
Impact on Combined Ratio (Points)
$30
Prior year reserve
releases totaled
$8.8 billion in the
first half of 2010, up
from $7.1 billion in
the first half of 2009
Reserve Releases Are Remained Strong in
2010 But Should Begin to Taper Off in 2011
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this
transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes
development from financial guaranty and mortgage insurance.
Sources: Barclay’s Capital; A.M. Best.
37
Inflation-Adjusted Dollar Value of Claims
Paid by P/C Insurers, 1925–2010E*
$ Billions
$400
$350
$300
Since 1925, P/C insurers
have paid more than $12.6
trillion in claims to
policyholders on an
inflation-adjusted basis
$250
$200
Claim payouts
increased
exponentially for
decades, but
more erratically in
the post-1980 era
$150
$100
On an inflation-adjusted basis,
claims paid have fallen to 1990s
levels, reflecting improved
underwriting results, exposure
loss during the “Great Recession”
and leakage to alternative markets
$50
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
$0
39
Cumulative Value of Inflation-Adjusted
Claims Paid by P/C Insurers, 1925–2010E*
Adjusted for inflation, it
took 36 years for the
industry to pay its first
$1 trillion in claims in
the years since 1925.
Today, the industry
pays $1 trillion in claims
every 2 to 3 years after
adjusting for inflation.
$ Billions
$14,000
$13,000
$12,000
$11,000
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
3 years (2008)
3 years (2005)
2 years (2002)
4 years (2000)
3 years (1996)
3 years (1993)
4 years (1990)
4 years (1986)
5 years (1982)
7 years (1977)
9 years (1970)
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
*2005
*2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
36 years (1925 – 1961)
40
$12.5 Trillion of Paid Claims and Someone
Still Writes a Book With This Title?
This book by a Rutgers
University law professor asserts
that insurers do everything
possible to avoid paying
legitimate claims.
I debated the thesis of Prof.
Feinman’s book and refuting his
allegations in a debate in New
Orleans on March 24.
41
INVESTMENTS:
THE NEW REALITY
Investment Performance is a
Key Driver of Profitability
Does It Influence
Underwriting or Cyclicality?
42
Property/Casualty Insurance Industry
Investment Gain: 1994–2010:Q31
2009:Q3
gain was
$29.3B
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$40
$55.7
$51.9
$48.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$39.0 $39.5
$36.0
$35.4
$31.7
$30
Investment gains in
2010 are on track to be
their best since 2007
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09 10:Q3
In 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 2010
1
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
* 2005 figure includes special one-time dividend of $3.2B.
Sources: ISO; Insurance Information Institute.
$4.43
$8.92
$3.52
$9.70
$9.13
-$19.81
-$7.98
-$1.21
$6.61
Capital losses have
turned to capital gains,
aiding earnings
$6.63
$16.21
$13.02
$10.81
$9.24
$6.00
$1.66
$9.82
$9.89
$4.81
$20
$15
$10
$5
$0
-$5
-$10
-$15
-$20
-$25
$2.88
($ Billions)
$18.02
P/C Insurer Net Realized
Capital Gains, 1990-2010:Q3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10: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
Sources: A.M. Best, ISO, Insurance Information Institute.
44
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. February 2011
6%
5%
4.82%
4.96%
5.04%
4.96%
4.82%
4.82%
4.88%
5.00%
4.93%
5.00%
4.42%
4%
3%
Treasury yield curve is near its
most depressed level in at least
45 years, though longer yields
rose in late 2010/early 2011 as
economy improved. Investment
income is falling as a result.
5.19%
4.65%
3.58%
2.96%
2.26%
QE2 Target
2%
1.28%
0.77%
1%
0.11%
0.13%
0.17%
0.29%
1M
3M
6M
1Y
February 2011 Yield Curve*
Pre-Crisis (July 2007)
0%
2Y
3Y
5Y
7Y
10Y
20Y
30Y
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.
45
Reduction in Combined Ratio Necessary to Offset
1% Decline in Investment Yield to Maintain
Constant ROE, by Line*
s
ne
i
L
-5.7%
-5.2%
-4.3%
-3.7%
-3.3%
-3.3%
-3.1%
-2.1%
-1.9%
-3.6%
-2.0%
-1.8%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-1.8%
s
ty
l
e
e
o
p
t
r
a
s
n
i
a
ro
p
l
Li
y
rc
Su
Au
s
o
t
P
C
a
/
al
r
e
l
s
s
n
y
n
t
a
t
P
u
M
m
m
m
m
li
P
di
so
s
pl
rra
d
e
m
m
m
m
r
r
r
t
e
C
a
e
d
o
o
r
o
o
Pe
Pv
Pe
C
C
C
C
C
Fi
W
Su
M
W
to
u
A
R
a
ur
s
n
ei
**
e
nc
-7.3%
Lower Investment Earnings Place a Greater Burden on
Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums
**US domestic reinsurance only
Source: A.M. Best; Insurance Information Institute.
46
Distribution of P/C Insurance Industry’s
Investment Portfolio
Portfolio Facts
as of 12/31/2009
As of December 31, 2009
 Invested assets
totaled $1.26 trillion
68.8%
Bonds
 Generally, insurers
invest conservatively,
with over 2/3 of
invested assets in
bonds
 Only 18% of invested
assets were in
common or preferred
stock
*Net admitted assets.
Common &
Other 7.0% Preferred
6.2% Cash & Stock
18.0%
Short-term
Investments
Sources: NAIC; Insurance Information Institute research.
47
2011 Financial Overview
About Half of the P/C Insurance Industry’s Bond
Investments Are in Municipal Bonds
Bond Investment Facts
as of 12/31/09
As of December 31, 2009
 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
31.0%
Special
Revenue
Political
Subdivisions
11.0%
33.3%
Industrial
U.S.
Government
0.9%
15.5%
6.3% 2.0%
States, Terr., Foreign Govt
etc.
Sources: NAIC, via SNL Financial; Insurance Information Institute research.
48
2011 Financial Overview
When P/C Insurers Invest in Higher Risk Bonds,
It’s Corporates, Not Munis
Subdivisions of
States
0.1%
97.4%
2.5%
0.1%
States
92.5%
7.4%
Industrial
72.8%
0%
20%
40%
20.4%
60%
80%
Class 1
Class 2
Classes 3-6
6.8%
100%
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.
Data are as of year-end 2009.
Sources: SNL Financial; Insurance Information Institute.
Financial Strength &
Underwriting
Cyclical Pattern is P-C Impairment
History is Directly Tied to
Underwriting, Reserving & Pricing
54
P/C Insurer Impairments, 1969–2010E*
8 of the 18 in 2009 were small
Florida carriers. Total also
includes a few title insurers.
0
5
9
16
18
18
19
12
18
14
15
35
31
29
16
9
13
12
9
9
11
7
8
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
10
15
12
20
16
14
13
19
30
31
34
34
40
36
41
50
49
50
47
49
50
48
55
60
60
58
70
The Number of Impairments Varies Significantly Over the P/C Insurance
Cycle, With Peaks Occurring Well into Hard Markets
*2010 estimate.
Source: A.M. Best Special Report “1969-2009 Impairment Review,” June 21, 2010; Insurance Information Institute.
P/C Insurer Impairment Frequency vs.
Combined Ratio, 1969-2009
120
Combined Ratio after Div
P/C Impairment Frequency
2.0
1.8
1.6
1.4
110
1.2
105
1.0
0.8
100
90
0.4
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
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*
95
0.6
Impairment Rate
Combined Ratio
115
0.2
0.0
Impairment Rates Are Highly Correlated With Underwriting Performance
and Reached Record Lows in 2007/08
Source: A.M. Best; Insurance Information Institute
56
Reasons for US P/C Insurer
Impairments, 1969–2009
Historically, Deficient Loss Reserves and Inadequate Pricing Are
By Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.6%
4.0%
Misc.
8.8%
Investment
Problems
7.1%
40.1%
Affiliate Impairment
Deficient Loss Reserves/
Inadequate Pricing
7.8%
7.2%
Catastrophe Losses
7.8%
Alleged Fraud
13.6%
Rapid Growth
Source: A.M. Best: 1969-2009 Impairment Review, Special Report, June 21, 2010
57
Performance by Segment:
Commercial/Personal Lines &
Reinsurance
59
158.4
Homeowners Insurance Combined
Ratio: 1990–2011P
170
160
99.0
103.5
105.6
117.0
95.7
100.1
121.7
111.4
108.2
109.3
94.2
89.4
90
98.3
100
109.4
118.4
112.7
101.0
110
113.6
120
117.7
130
113.0
140
121.7
150
80
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11P
Homeowners Line Is Expected to Improve in 2011. Extreme
Regional Variation Can Be Expected Due to Local Catastrophe
Loss Activity
Sources: A.M. Best; Insurance Information Institute.
09 10E 11P
98.5
08
99.0
06
101.3
05
100.3
95.5
04
98.3
95.1
95
94.3
96
98.4
95
104.2
101.0
94
101.1
101.3
93
100
99.5
101.3
105
101.7
110
103.5
109.5
115
107.9
Private Passenger Auto Combined
Ratio: 1993–2011P
90
85
80
97
98
99
00
01
02
03
07
Private Passenger Auto Accounts for 34% of Industry Premiums and
Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best; Insurance Information Institute.
85
103.0
101.0
94.2
98.6
97.6
95.1
89.8
105.4
83.8
90
93.8
89.0
95
101.9
97.7
100
108.0
116.1
116.2
121.0
117.0
115.0
115.0
122.4
113.1
104.9
105
97.3
110
100.7
115
125.0
115.3
120
119.0
125
119.8
116.8
130
108.5
113.6
Commercial Multi-Peril Combined Ratio:
1995–2011P
80
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09 10E* 11P*
Commercial Multi-Peril Underwriting Performance
is Expected to Deteriorate Modestly
*2010Eand 2011P figures are for the combined liability and non-liability components.
Sources: A.M. Best; Insurance Information Institute.
05
06
96.8
92.4
04
94.2
92.1
95.2
95
92.9
102.7
100
104.0
01
105
102.0
00
110
99.5
97
116.2
96
115.7
95
118.1
113.0
115
112.0
120
112.1
125
115.9
Commercial Auto Combined Ratio:
1993–2011P
90
85
80
98
99
02
03
07
08
09
Commercial Auto Underwriting Performance is
Expected to Deteriorate Modestly
Sources: A.M. Best; Insurance Information Institute.
10E 11P
104.4
07
08
121.5
117.5
110.5
103.5
03
98.4
02
102.7
97
107.0
96
110.0
101.0
100
100.0
105
97.0
110
102.0
115
107.0
120
110.9
115.3
125
118.2
130
121.7
Workers Compensation Combined
Ratio: 1994–2011P
95
90
85
80
94
95
98
99
00
01
04
05
06
09 10E 11P
Workers Comp Underwriting Results Are
Deteriorating Markedly and the Worst They
Have Been in a Decade
Sources: A.M. Best; Insurance Information Institute.
EXPENSES
Expense Ratios Are Highly Cyclical
and Contribute Deteriorating
Underwriting Performance
66
Underwriting Expense Ratio*
All P/C Lines, 1994-2010E**
28.6%
29%
28.1%
28.0%
28%
27.4%
27.4%
27.0%
27.6%
27%
25.9%
26.1%
26.5%
26.3%
26.3%
27.0%
26%
25.3%
25%
25.5%
25.0%
24.5%
24%
23%
Underwriting expense
ratios are up
significantly as
premiums fall faster
than expenses during
generally soft market
conditions
22%
94
95
96
97
98
99
00
*Ratio of expenses incurred to net premiums written.
**2010 figure based on data through 2010:Q3.
Source: A.M. Best; Insurance Information Institute.
01
02
03
04
05
06
07
08
09 10E
Underwriting Expense Ratio*:
Personal vs. Commercial Lines, 1990-2010E**
Commercial lines
expense ratios are
highly cyclical
32%
30.6%
30.5%
29.9%
30%
30.0%
30.5%
28.5% 28.3%
27.4%
28%
29.9%
29.1%
29.3%
28.2%
27.7%
28.4% 28.7%
26.6%
27.8%
26.6% 25.6%
25.6%
26%
25.0%
24.3%
25.6%
24.7%
24.4%
24.3%
23.7%23.4%
24%
26.4%
26.4%
26.4%
26.2%
26.4%
25.0%
24.8%
24.7% 24.7%
24.5% 24.4% 24.6%
23.9%
23.5%
22%
Personal Lines
Commercial Lines
*Ratio of expenses incurred to net premiums written.
**2010 figures are estimates.
Source: A.M. Best; Insurance Information Institute.
10E
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
20%
Underwriting Expense Ratio*
Personal Lines (Auto & Home), 1994-2010E**
32%
31.1%
30.8%
30%
30.6%
30.6%
30.8%
29.8%
30.5%
30.5% 30.0%
30.3%
29.3%
28.5%
29.4%
28.5%
29.6%
28.4%
28%
27.7%
26%
24.5% 24.7%
24.3%
24.4%
25.0% 25.2% 25.1%
23.5% 23.4%
24%
21.8% 22.0% 21.8%
22%
23.6%
23.2%
23.6%
Expenses ratios for
both auto and home
are up from their
lows in 2003/04
23.5%
22.7%
Auto
Home
20%
94
95
96
97
98
99
00
01
*Ratio of expenses incurred to net premiums written.
**2010 figures are estimates.
Source: A.M. Best; Insurance Information Institute.
02
03
04
05
06
07
08
09 10E
CAPITAL MANAGEMENT &
LEVERAGE
Excess Capital is a Major Obstacle
to a Market Turn;
Capital Management Decisions Will
Impact Market Direction
70
Policyholder Surplus,
2006:Q4–2010:Q3
($ Billions)
2007:Q3
Previous Surplus Peak
Surplus set a new
record in 2010:Q3*
$560
$544.8
$540.7
$540
$530.5
$512.8
$520
$460
$440
$515.6
$511.5
$505.0
$500 $487.1
$480
$521.8 $517.9
$496.6
$490.8
$478.5
The Industry now has $1 of
surplus for every $0.77 of
NPW—the strongest claimspaying status in its history.
$463.0
$455.6
$437.1
$420
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
Quarterly Surplus Changes Since 2007:Q3 Peak
*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.
Sources: ISO, A.M .Best.
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%)
72
Ratio of Net Premiums Written
to Policyholder Surplus, 1970-2010*
Record High P-S
Ratio was 2.7:1
in 1974
1.4
1.4
1.3
1.3
1.1
1.1
1.6
1.5
1.8
1.7
1.7
1.9
1.9
1.9
1.9
1.7
1.6
1.6
2.1
1.8
2.0
2.0
1.9
2.1
2.3
2.5
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
more quickly than NPW, with the effect of
holding down profitability.
1.0
0.9
0.84
0.86
0.94
1.13
1.29
1.17
1.07
0.99
0.91
0.84
0.95
0.82
0.79
2.7
2.5
2.5
2.5
3.0
10*
08
06
04
02
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
0.0
0
Record Low P-S
Ratio was 2.7:1
in 2010*
0.5
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
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.
77
Merger & Acquisition
Capital Cycles Can
Drive Consolidation
78
U.S. P/C M&A Activity Rising, Volume
Bouncing Back
140
120
50
40
2010
volume to
$6.5B (est),
from $3.5B
30
63 deals in
2009, vs. 59
in 2008
100
80
60
20
40
10
Number of Deals Announced
Total Deal Volume ($ billions)
60
20
0
0
Transaction Values (left scale)
No. of Transactions (right scale)
After a severe drop due to the capital crunch, M&A volume began to rebound
in 2010. Levels remain below 1998-2000 and 2006 peaks.
Sources: Conning Research & Consulting through 2009; 2010 vol. est. from A.M. Best (2010 deal count N/A); Insurance Information
Institute.
81
Buyers are consistently more profitable
than targets, rest of industry
20.0%
Return on Equity (prior year)
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
2005
2006
2007
2008
2009
2010
2011 to date
Buyers
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%
The year before merger, eventual targets have earnings that lag industry
average. Buyers’ earnings are higher than the industry.
Sources: SNL Financial; Insurance Information Institute.
Type of acquisition is shifting
2008 to 2010
2005 to 2007
Mutual
8%
Mutual
12%
Other
3%
Stock
89%
Other
5%
Stock
83%
There were 16 mutual targets in 2008-2010, up from 10 in the three prior years.
Sources: SNL Financial; Insurance Information Institute.
Shifting Legal Liability &
Tort Environment
Is the Tort Pendulum
Swinging Against Insurers?
94
Important Issues & Threats
Facing Insurers: 2011–2015
Emerging Tort Threat
 No tort reform (or protection of recent reforms) is forthcoming from the current
Congress or Administration
 Erosion of recent reforms has already occurred
 Legislative initiatives in 2009/10 were tort friendly
 New Congress will have tempering effect on what could have been tort
disaster
 Torts twice the overall rate of inflation
 Influence personal and commercial lines, esp. auto liability
 Historically extremely costly to p/c insurance industry
 Leads to reserve deficiency, rate pressure
Bottom Line: Tort “crisis” is less likely from rapid deterioration in the tort
system overall, but costs still remain entrenched in the system
Source: Insurance Information Institute
95
Over the Last Three Decades, Total Tort Costs
as a % of GDP Appear Somewhat Cyclical
($ Billions)
$300
Tort Sytem Costs
2.50%
Tort Costs as % of GDP
$250
Tort System Costs
$200
$150
2.00%
$100
1.75%
Tort Costs Have Remained High but
Relatively Stable Since the mid-2000s.
As a Share of GDP they Should Fall as
the Economy Expands
$50
$0
Tort Costs as % of GDP
2.25%
1.50%
80 82 84
86 88 90 92 94
96 98 00 02 04 06
Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A
08 10E 12E
97
Business Leaders Ranking of Liability
Systems in 2010

Worst States
41.
New Mexico
42.
Florida
Nebraska
43.
Montana
4.
Indiana
44.
Arkansas
5.
Iowa
45.
Illinois
6.
Virginia
46.
California
 Texas
47.
Alabama
 South Carolina
 Hawaii
48.
Mississippi
49.
Louisiana

Best States
1.
Delaware
2.
North Dakota
3.
7.
Utah
8.
Colorado
9.
Massachusetts
10.
South Dakota
New in 2010
 North Dakota
 Massachusetts
 South Dakota
Drop-offs
 Maine
 Vermont
 Kansas
Midwest/West has mix of
good and bad states.
50. West Virginia
Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.
Newly Notorious
 New Mexico
 Montana
 Arkansas
Rising Above
The Nation’s Judicial Hellholes: 2010
Illinois
Watch List
 Madison County, IL
 Atlantic County, NJ
 St. Landry Parish,
LA
 District of Columbia
 NYC and Albany,
NY
 St. Clair County, IL
Cook County
West Virginia
Philadelphia
California
Los Angeles
and Humboldt
Counties
Dishonorable
Mention
 MI Supreme Court
 City of St. Louis
 CO Supreme Court
Nevada
Clark County
South Florida
Source: American Tort Reform Association; Insurance Information Institute
101
2010 Top Ten Jury Verdicts
Value
Issue
State
$505.1 Million Products Liability
Nevada
$208.8 Million Personal Injury (Asbestos/Mesothelioma case)
California
$152 Million
Massachusetts
Wrongful Death (Tobacco verdict)
$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
Source: Lawyers USA, January 18, 2011.
How the Risk Dollar is Spent (2009)
Total liability costs account for about 30% of the risk dollar
Firms w/Revenues > $1 Billion
Firms w/Revenues < $1 Billion
Other Costs,
17%
Property
Premiums,
9%
Retained
Property
Losses, 1%
Other Costs,
14%
Liability
Premiums,
11%
Admin Costs,
10%
Liability
Retained
Losses, 10%
Premiums,
11%
Retained
Liability
Losses, 10%
Prof. Liability
Costs, 3%
Prof. Liability
Costs, 7%
Retained WC
Losses, 12%
Admin Costs,
10%
Property
Premiums, 9%
Retained
Property
Losses, 1%Liability
WC Costs,
16%
Total Mgmt.
Liab., 4%
Source: 2010 RIMS Benchmark Survey; Insurance Information Institute
Retained WC
Losses, 19%
Total Mgmt.
Liab., 5%
WC Costs,
21%
Inflation
Is it a Threat to Claim Cost
Severities
116
Annual Inflation Rates, (CPI-U, %),
1990–2014F
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 nearterm inflationary pressures
6.0
5.0
4.9
5.1
3.8
4.0
3.0
3.0
2.0
3.3 3.4
3.2
2.9 2.8
2.4
3.0
2.6
2.5
3.8
2.8
2.3
2.2 2.1 2.2 2.2
1.9
1.5
1.6
1.3
1.0
0.0
-0.4
-1.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F
The slack in the U.S. economy suggests that inflation should not heat up
before 2012, but other forces (commodity prices, inflation in countries from
which we import, etc.), plus U.S. debt burden, remain longer-run concerns
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 3/11 (forecasts).
117
P/C Insurance Claim Cost Drivers Grow
Faster than even the Medical CPI Suggests
Price Changes
in 2010
9%
8.8%
6%
Excludes
Food and
Energy
6.1%
4.3%
3%
3.4%
3.3%
3.1%
1.6%
1.0%
0%
Overall CPI
"Core" CPI Medical CPI
Inpatient
Hospital
Services
Outpatient
Hospital
Services
Physicians' Prescription Medical Care
Services
Drugs
Commodities
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
Source: Bureau of Labor Statistics; Insurance Information Institute.
118
Economic Issues for the
Next 3-5 Years
Growth in the Wake
of the “Great Recession”
119
2%
0.6%
4%
1.1%
1.8%
2.5%
3.6%
3.1%
2.7%
0.9%
3.2%
2.3%
2.9%
4.1%
6%
1.6%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
Real GDP Growth (%)
5.0%
3.7%
1.7%
2.6%
2.8%
3.4%
3.4%
3.4%
3.4%
3.1%
3.2%
3.2%
3.3%
US Real GDP Growth*
-0.7%
12:4Q
12:3Q
12:2Q
12:1Q
11:4Q
11:3Q
11:2Q
11:1Q
10:4Q
10:3Q
10:1Q
09:4Q
09:3Q
09:2Q
10:2Q
Economic growth projections
for 2011 have been revised
upward. This is a major
positive for insurance demand
and exposure growth.
-4.9%
09:1Q
08:4Q-6.8%
-4.0%
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2000
-8%
2003
-6%
2002
-4%
Recession began in Dec.
2007. Economic toll of credit
crunch, housing slump,
labor market contraction has
been severe but modest
recovery is underway
2001
-2%
-0.7%
0%
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
*
Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 3/11; Insurance Information Institute.
120
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
18.6%
20.3%
Real GDP Growth vs. Real P/C (%)
4%
7.7%
2%
1.2%
1.6%
5.6%
6%
0%
-2.9%
-0.5%
-3.8%
-4.4%
-3.3%
-0.8%
-0.8%
-1.6%
-1.0%
-1.8%
-1.0%
8%
-2%
-4%
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
10E
11F
-10%
-7.4%
-6.5%
-1.5%
-5%
-0.9%
0%
-0.4%
-0.3%
3.1%
1.1%
0.8%
0.4%
0.6%
0.3%
5%
5.8%
1.8%
4.3%
5.2%
15%
10%
Real GDP
Real GDP Growth
Real NWP Growth
20%
Real NWP Growth
13.7%
25%
P/C Insurance Industry’s Growth is Influenced Modestly
by Growth in the Overall Economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 3/11; Insurance Information Institute
121
2011 Financial Overview
State Economic Growth Varied in 2009
Mountain, Plains states
still growing the fastest
Some Southeast states
growing well, but others
among the weakest
122
Direct Premiums Written: All Lines
Percent Change by State, 2004-2009
Top 25 States
42.9
45
North Dakota is the growth
juggernaut of the P/C
insurance industry—too
bad nobody lives there…
12.2
11.5
10.7
KS
NC
ID
4.6
12.3
NE
HI
12.8
TX
5.0
12.9
DC
AR
13.0
SC
5.1
13.0
WV
GA
13.5
MS
5.5
14.0
NM
WA
14.1
IA
5.8
14.2
DE
10
FL
14.8
OK
7.9
15.4
15
UT
20
17.2
25
18.8
30
22.0
35
23.8
Pecent change (%)
40
AL
MT
WY
SD
LA
0
ND
5
Sources: SNL Financial LC.; Insurance Information Institute.
123
-15.2
CA
-8.2
NH
OH
-14.8
-3.7
ME
MI
-3.5
IL
-9.2
-3.1
NJ
MA
-2.8
RI
CO
-5.2
-2.4
CT
-1.8
-1.6
VT
MN
PA
IN
NY
NV
WI
OR
AZ
MD
KY
TN
VA
-15
MO
States with the poorest
performing economies also
produced the most negative
net change in premiums of
the past 5 years
-10
-20
-1.2
-0.5
-0.1
-5
AK
Pecent change (%)
0
0.0
0.5
0.6
0.7
0.9
2.0
2.4
2.5
Bottom 25 States
2.6
4.2
5
4.5
Direct Premiums Written: All Lines
Percent Change by State, 2004-2009
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%
Sources: SNL Financial LC; Insurance Information Institute.
124
11 Industries for the Next 10 Years:
Insurance Solutions Needed
Health Care
Health Sciences
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Technology (incl. Biotechnology)
Light Manufacturing
Export-Oriented Industries
Shipping (Rail, Marine)
125
0.9
0.7
0.5
0.3
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 $1.3 billion
0.55
0.59
0.66
1.1
0.91
1.20
1.33
1.43
1.50
1.3
1.20
1.29
1.5
1.19
1.01
1.7
New home
starts plunged
72% from
2005-2009; A
net annual
decline of 1.49
million units,
lowest since
records began
in 1959
0.86
1.9
1.46
1.35
1.48
1.47
1.62
1.64
1.57
1.60
1.71
2.1
1.36
(Millions of Units)
1.85
1.96
2.07
1.80
New Private Housing Starts, 1990-2016F
Job growth,
improved credit
market conditions
and demographics
will eventually boost
home construction
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F
Little Exposure Growth Likely for Homeowners Insurers Until 2013.
Also Affects Commercial Insurers with Construction Risk Exposure, Surety
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 3/11); Insurance Information Institute.
127
2011 Financial Overview
Wage and Salary Disbursements (Payroll Base) vs.
Workers Comp Net Written Premiums
Wage and Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)
7/90-3/91
3/01-11/01
12/07-6/09
$7,000
$60
$6,000
$50
$5,000
$40
$4,000
$30
$3,000
$2,000
Wage & Salary
Disbursements
$1,000
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
$0
$20
$10
$0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*
Weakening payrolls have eroded $2B+ in workers comp premiums; nearly
29% of NPW has been eroded away by the soft market and weak economy
* 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
130
Recovery in Capacity Utilization is a
Positive Sign for Commercial Exposures
“Full Capacity”
Percent of
Industrial Capacity
The US operated at
75.2% of industrial
capacity in November
2010, above the June
2009 low of 68.3%
82%
Hurricane
Katrina
80%
78%
76%
The closer the economy is
to operating at “full
capacity,” the greater the
inflationary pressure
74%
72%
70%
March 2001November 2001
recession
68%
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
131
Sep 10
Jun 10
Mar 10
Dec 09
Sep 09
Jun 09
Mar 09
Dec 08
Sep 08
Jun 08
Mar 08
Dec 07
Sep 07
Jun 07
Mar 07
Dec 06
Jun 06
Sep 06
Mar 06
Dec 05
Sep 05
Jun 05
Mar 05
Dec 04
Jun 04
Sep 04
Mar 04
Dec 03
Sep 03
Jun 03
Mar 03
Dec 02
Sep 02
Jun 02
Mar 02
Dec 01
Sep 01
Jun 01
Mar 01
66%
December 2007June 2009 Recession
Business Bankruptcy Filings,
1980-2010:Q3
90,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1980-82
1980-87
1990-91
2000-01
2006-09
58.6%
88.7%
10.3%
13.0%
208.9%*
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
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
10:3Q
70,000
43,694
48,125
80,000
69,300
62,436
64,004
71,277
81,235
82,446
63,853
63,235
64,853
71,549
70,643
62,304
52,374
51,959
53,549
54,027
44,367
37,884
35,472
40,099
38,540
35,037
34,317
39,201
19,695
28,322
43,546
60,837
43,016
% Change Surrounding
Recessions
Significant Exposure Implications for All Commercial Lines
Sources: American Bankruptcy Institute at
http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ;
Insurance Information Institute
132
Private Sector Business Starts,
1993:Q2 – 2010:Q2*
192
188
187
189
186
190
194
191
199
204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200
205
204
204
197
203
209
201
203
192
192
193
201
204
202
210
212
209
216
220
223
220
220
210
221
212
204
218
209
207
207
199
191
193
230
220
210
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.
170
160
184
172
176
169
180
186
174
175
180
186
200
190
Business Starts
2006: 872,000
2007: 843,000
2008: 790,000
2009: 697,000
2010:H1: 344,000
172
172
(Thousands)
150
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
Business Starts Were Down Nearly 20% in the Recession,
Holding Back Most Types of Commercial Insurance Exposure
* Data through June 30, 2010 are the latest available as of March 10, 2011; Seasonally adjusted
Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
133
Labor Market Trends
Massive Job Losses Sapped the
Economy and Commercial/Personal
Lines Exposure, But Trend is
Improving
135
Unemployment and Underemployment
Rates: Falling Faster in 2011?
January 2000 through March 2011, Seasonally Adjusted (%)
18
Traditional Unemployment Rate U-3
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 15.7%
in March 2011
Unemployment + Underemployment Rate U-6
16
Recession
ended in
November
2001
14
12
Unemployment
kept rising for
19 more
months
Recession
began in
December
2007
Unemployment
rate fell to 8.8%
in March
10
Unemployment
peaked at 10.1%
in October 2009,
highest monthly
rate since 1983.
8
6
4
Mar
11
2
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Peak rate in the
last 30 years:
10.8% in
November December 1982
Jan
11
Stubbornly high unemployment and underemployment
will constrain payroll growth, which directly affects WC exposure
Source: US Bureau of Labor Statistics; Insurance Information Institute.
136
Monthly Change in Private Employment
(800)
(1,000)
51
61
117
143
112
193
128
167
94
240
230
16
62
75
-83
-109
Monthly Losses in
Dec. 08–Mar. 09 Were
the Largest in the
Post-WW II Period
-334
-452
-297
-215
-186
-262
(600)
-734
-667
-806
-707
-744
-649
(400)
230,000 private sector jobs
were created in March
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
(200)
-14
0
Private employers added jobs in
every month in 2010 for a total of
1.435 million for the year
-12
-85
-58
-161
-253
-230
-257
-347
-456
-547
65
97
23
213
65
127
42
15
79
200
186
400
144
241
January 2008 through March 2011* (Thousands)
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
Unemployment Rates by State, February 2011:
Highest 25 States*
8.8
8.9
8.9
9.0
9.1
9.2
9.2
9.3
9.3
9.4
9.4
9.5
9.6
9.7
10.2
10.2
10.2
10.2
10.4
11.2
10.4
9.7
10
11.5
12
12.2
Unemployment Rate (%)
14
13.6
16
9.6
In February, 27 states and the District of
Columbia had over-the-month
unemployment rate decreases, 7 had
increases, and 16 had no change.
8
6
4
23 states + DC had
unemployment rates above
the US average in Feb. 2011,
17 states were below.
2
0
NV 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.
141
Unemployment Rates By State, February 2011:
Lowest 25 States*
6.3
6.4
6.5
6.7
6.8
6.2
5.6
5.4
4.8
4.3
3.7
4
6.1
6
7.4
7.4
7.5
7.6
7.7
7.8
8.2
8.2
8.2
8.5
7.9
8
8.0
Unemployment Rate (%)
8.7
10
7.1
In February, 27 states and the District of
Columbia had over-the-month
unemployment rate decreases, 7 had
increases, and 16 had no change.
2
0
NM 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.
142
Catastrophic Loss –
Catastrophe Losses Trends Are
Trending Adversely
147
US Insured Catastrophe Losses
$1.1
$9.2
$27.1
$27.5
$12.9
$5.9
$26.5
$4.6
$8.3
$10.1
$2.6
$7.4
$8.3
$16.9
$4.7
$2.7
$20
$7.5
$40
$5.5
$22.9
$60
$13.6
$80
2010 CAT
Losses Were
About
Average
$61.9
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
$10.6
$100
$6.7
$120
$100.0
$100 Billion CAT Year is
Coming Eventually
($ Billions)
$0
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
*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.
148
Combined Ratio Points Associated with
Catastrophe Losses: 1960 – 2010E
Combined Ratio Points
8.1
8.8
2.6
3.3
2010E
1.6
2.7
2008
2002
2006
1.6
2004
1.6
2000
3.3
3.3
3.6
2.9
1.0
1998
1996
1994
5.0
5.4
5.9
3.3
2.8
2.3
2.1
1990
1992
1.2
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1.2
0.4
0.8
1.3
0.3
0.4
0.7
1.5
1.0
0.4
0.4
0.7
1.8
1.1
0.6
1.4
2.0
1.3
2.0
0.5
0.5
0.7
1968
0.4
1966
1962
1964
3.0
3.6
1960s: 1.04
1970s: 0.85
1980s: 1.31
1990s: 3.39
2000s: 3.52
0.8
1.1
1.1
0.1
0.9
1960
10
9
8
7
6
5
4
3
2
1
0
Avg. CAT Loss
Component of the
Combined Ratio
by Decade
The Catastrophe Loss Component of Private Insurer Losses Has
Increased Sharply in Recent Decades
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.
149
U.S. Thunderstorm Loss Trends
Annual Totals 1980 – 2009 vs. First Half 2010
Thunderstorm losses have quadrupled since 1980.
First Half 2010
$3.0 Bn
Source: Property Claims Service, MR NatCatSERVICE
© 2010 Munich Re
151
U.S. Winter Storm Loss Trends
Annual totals 1980 – 2009 vs. First Half 2010
Average annual winter storm losses have increased over 50% since 1980.
Severe winter storms in
early 2010 caused major
damage to energy
infrastructure
First Half 2010
$2.4 Bn
Source: Property Claims Service, MR NatCatSERVICE
© 2010 Munich Re
152
Total Value of Insured Coastal Exposure
(2007, $ Billions)
Florida
$2,458.6
New York
$2,378.9
$895.1
Texas
More than $1.4
Massachusetts
$772.8
Trillion in
New Jersey
$635.5
insured coastal
Connecticut
$479.9
Louisiana
$224.4
exposure in
S. Carolina
$191.9
New England
Virginia
$158.8
Maine
$146.9
In 2007, Florida Still Ranked as the #1 Most
North Carolina
$132.8
Exposed State to Hurricane Loss, with
$92.5
Alabama
$2.459 Trillion Exposure, but Texas is very exposed
Georgia
$85.6
too, and ranked #3 with $895B
Delaware
$60.6
in insured coastal exposure
New Hampshire $55.7
Mississippi $51.8
The Insured Value of All Coastal Property Was $8.9
Rhode Island $54.1
Trillion in 2007, Up 24% from $7.2 Trillion in 2004
Maryland $14.9
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
$3,000
156
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www.iii.org
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