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Today’s Uncertain Economy: Implications for Public Entities and P/C Insurance April 10, 2013 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5540 Cell: 917.494.5945 [email protected] www.iii.org The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Will Expand the Insurer Exposure Base Across Most Lines 2 A Continued Weak Recovery is Forecast: Real GDP Growth, Yearly, 1970-2014F Real GDP Growth (%) The median forecast is for several more years of real yearly GDP growth under 3% -- weaker than after most recent recessions In recoveries, real yearly GDP growth is often 4% or more 7.5% 6.0% 4.5% 3.0% 1.5% 0.0% -1.5% 2014F 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 -4.5% 1970 -3.0% Forecasts from Blue Chip Economic Indicators, 3/2013 issue, median of range of 52 forecasts. Sources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls. 3 March 2013 Forecasts of Quarterly US Real GDP for 2013-14 Real GDP Growth Rate 4% 3.5% 3.6% 3% 2.9% 2.5% 2.7% 3.4% 2.6% 3.6% 3.7% 3.7% 2.8% 2.9% 3.0% 2.0% 2.1% 2.2% 2% 2.0% 1.6% 1% 1.7% 1.7% 10 Most Pessimistic If it lasts, the sequester will have greatest effect here 1.1% Median 10 Most Optimistic 0% 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4 Despite the sequester and other challenges to the U.S. economy, virtually every forecast in the Blue Chip universe in early March sees improvement ahead Sources: Blue Chip Economic Indicators (3/13); Insurance Information Institute 4 State-by-State Leading Indicators through 2013:Q2 Near-term growth forecasts vary widely by state. Strongest growth = dark green; weakest = beige Sources: Federal Reserve Bank of Philadelphia at www.philadelphiafed.org/index.cfm; Insurance Information Institute. Next release is April 4, 2013 5 State & Local Government Contribution to Change* in Real US GDP, Quarterly, 2009-2012 Real GDP Growth (%) Cutbacks by state and local governments have hampered the economy’s recovery from the recession 1.00% The drag on the economy from state & local governments is diminishing. 0.75% 0.50% 0.25% 0.00% -0.25% -0.50% 2012:Q4 2012:Q3 2012:Q2 2012:Q1 2011:Q4 2011:Q3 2011:Q2 2011:Q1 2010:Q4 2010:Q3 2010:Q2 2010:Q1 2009:Q4 2009:Q3 2009:Q2 2009:Q1 -0.75% *seasonally adjusted at annual rates Sources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.; I.I.I. 6 Y-o-Y Percentage Change in the Value of Public Construction Put in Place, by Segment, Feb. 2013* Growth (%) 30% Transportation and Power projects lead public sector construction 20.5% 16.3% 20% 10% 2.9% 2.4% 0% -1.7% -2.9% -10% -3.8% -9.9%-10.4%-12.3% -12.5%-12.9% -13.8% -20% Office Commercial Public Safety Amusement & Rec. Educational Health Care Water Supply Highway & Street Conservation & Develop. Transportation Power Residential Total Public Construction Sewage & Waste Disposal -22.2% -30% With strained state and local government budgets, public construction activity declined in many segments; will the sequester crimp 2013? *seasonally adjusted; data published April 1, 2013 Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute. 8 Labor Market Trends Steady Job Gains in the Private Sector Offset Steady Job Losses in the Public Sector 9 Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling January 2000 through Mar. 2013, Seasonally Adjusted (%) 18.5 "Headline" Unemployment Rate U-3 17.0 Unemployment + Underemployment Rate U-6 15.5 U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 13.8% in Mar. 2013 14.0 12.5 Unemployment “Headline” unemployment stood at 7.6% in Mar. 2013. 11.0 9.5 8.0 6.5 5.0 3.5 Nov. Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan 00 01 02 03 04 05 06 07 08 09 10 11 12 1312 The Federal Reserve’s target for ending “easy money” is 6.5% (assuming inflation remains within its 2% target). Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving. Source: US Bureau of Labor Statistics; Insurance Information Institute. 10 State Government Employment Monthly, 1990–2013* Millions 5.25 5.00 State government employment rises in recessions, shrinks after them(for a while) 4.75 Latest was 5.02 million, down 3.7% from peak (Aug 2008) 4.50 4.25 4.00 State government employment rises in recessions, shrinks after them (for a while) State government employment rises in recessions, shrinks after them (for a while) '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 *As of February 2013 (Jan 2013 and Feb 2013 are preliminary); 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. 11 Local Government Employment Monthly, 1990–2013* Millions 15.0 14.5 14.0 Recession proof? Local government employment rose through this and the prior recession 13.5 13.0 Latest was 14.03 million, down 3.9% from peak (Jun 2009) 12.5 12.0 11.5 11.0 10.5 First significant drop in local government employment in over three decades (-4.2% in 1980-82) 10.0 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 *As of February 2013 (Jan 2013 and Feb 2013 are preliminary); 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. 12 Unemployment Rates Vary Widely by State and Region* 5.2% 9.4% 8.0% 7.3% 6.5% 5.8% 4.4% 9.3% 8.4% 8.1% 7.2% 6.6% 9.6% 9.4% 8.6% 8.6% 7.9% 7.8% 7.7% 7.3% 7.2% 7.2% 6.0% 5.6% 6% HI AK VT NH MA ME CT RI MD DE PA NY NJ VA LA AL AR WV FL TN KY GA SC 0% NC 3% MS Unemployment Rate (%) 9% New England Mid-Atlantic 6.5% Southeast 12% *Provisional figures for February 2013, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 13 Unemployment Rates Vary Widely by State and Region* (cont’d) Great Plains 6.7% 5.5% 5.5% 5.0% 4.4% 3.8% 3.3% 7.2% 7.0% 9.6% 8.4% 7.5% NV Great Lakes 9.5% 8.8% 8.7% 9.6% 7.2% 6.2% 5.6% 5.2% 4.9% CO Far West CA 5.0% 6% Mountain OK 7.9% 6.8% 6.4% 9% Southwest ND NE SD IA KS MN MO OH WI IN MI IL WA OR WY UT MT ID TX 0% NM 3% AZ Unemployment Rate (%) 12% *Provisional figures for February 2013, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute 14 The Aging Workforce 19 Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. 2012.3 2012.1 2011.3 2011.1 2010.3 2010.1 2009.3 2009.1 2008.3 2008.1 2007.3 2007.1 2006.3 2006.1 2005.3 Age 70-74 2005.1 2004.3 2004.1 2003.3 2003.1 Age 65-69 2002.3 1000 2002.1 1500 2001.3 2000 2001.1 2500 2000.3 (Thousands) 2000.1 3000 1999.3 3500 1999.1 4000 1998.3 4500 624 1027 2014 636 1022 2051 641 1026 2019 686 1069 2083 668 1037 2043 718 1129 2067 773 1094 2043 758 1090 2106 789 1115 2218 780 1139 2251 775 1142 2242 801 1181 2283 779 1215 2234 792 1160 2265 762 1182 2304 815 1177 2327 790 1135 2312 774 1162 2404 802 1138 2406 765 1141 2393 863 1177 2530 9261182 2498 811 1183 2473 919 1213 2559 9281193 2627 947 1244 2570 969 1250 2632 1039 1250 2627 974 1314 2562 1055 1375 2674 10181262 2859 1076 1314 2896 10571356 2723 10851385 2842 986 1397 2872 10851385 3127 10721367 2951 1171 1370 3079 11521452 3047 11331442 3218 11511407 3201 1210 1389 3330 12241530 3344 12581524 3351 1256 1430 3364 1143 1495 3396 1190 1580 3334 1206 1633 3426 11981505 3480 1166 1550 3505 1279 1498 3506 1243 1598 3547 1185 1564 3764 1267 1584 3775 1280 1682 3626 1302 1726 3833 1311 1719 4074 1301 4138 1284 1381 1779 1835 1842 4105 4213 500 1998.1 Number of Workers Age 65-69, 70-74, and 75+, Quarterly, 1998-2012 Age 75 & over There are now over 7.4 million senior workers. This is double the number in 1998. Over the next decade it will probably double again. This is the leading edge of the older half of the “baby boom” generation 2013.1 2012.3 2012.1 31.1% 32.2% 32.2% 32.5% 31.8% 31.8% 31.7% 2011.3 2010.3 2010.1 2009.3 2009.1 2008.3 2008.1 2007.3 27.9% 28.5% 28.7% 2006.3 2005.3 2005.1 2004.3 2004.1 2003.3 2003.1 2002.3 2002.1 2001.3 2001.1 2000.3 2000.1 1999.3 20% 1999.1 22% 1998.3 24% 22.1% 22.5% 22.3% 23.0% 22.8% 23.0% 22.9% 23.5% 24.4% 24.4% 24.3% 24.9% 24.4% 24.4% 24.8% 25.2% 25.2% 26.3% 26.5% 26.2% 26% 1998.1 28% The brown bars indicate recessions. 27.9% 27.2% 27.0% 27.4% 27.9% 27.3% 27.8% 27.6% 26.8% 27.6% 30% 2006.1 29.3% 29.5% 32% 2007.1 34% 30.8% 29.3% 30.1% 29.1% 30.3% 30.1% 30.9% 31.0% 30.7% 31.0% 31.4% 30.9% 31.2% 31.6% 31.3% 31.5% 31.4% 1 in 3 in this age group are working. Virtually none of them are “baby boomers” 2011.1 Labor Force participation rate 32.8% 32.3% Labor Force Participation Rate, Ages 65-69, Quarterly, 1998:Q1-2013:Q1 The switch from DB pension plans (with early-retirement incentives) to DC plans (with, in effect, later-retirement incentives) might be partly responsible for raising this rate. Not seasonally adjusted. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. 9% Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. The labor force participation rate for workers 70-74 grew by about 50% since 1998. Growth stalled during and after the Great Recession but has since resumed. 2013.1 2012.3 2012.1 2011.3 2011.1 2010.3 2010.1 2009.3 2009.1 2008.3 2008.1 2007.3 2007.1 2006.3 2006.1 2005.3 2005.1 2004.3 2004.1 2003.3 2003.1 2002.3 2002.1 2001.3 2001.1 2000.3 2000.1 1999.3 1999.1 15% 1998.3 Labor Force participation rate 21% 12.5% 12.2% 12.4% 12.9% 12.4% 13.6% 13.1% 13.1% 13.3% 13.5% 13.6% 13.8% 14.4% 13.7% 14.2% 14.2% 13.8% 14.2% 14.0% 14.0% 14.4% 14.4% 14.6% 14.9% 14.9% 15.4% 15.6% 15.3% 16.4% 17.0% 15.8% 16.2% 16.7% 16.9% 17.2% 17.0% 16.7% 16.8% 18.0% 17.5% 17.3% 16.9% 18.6% 18.2% 17.7% 17.9% 18.9% 19.2% 18.0% 18.1% 17.4% 18.4% 18.0% 18.4% 19.3% 19.5% 19.2% 19.1% 19.9% 19.6% 18.8% 18% 1998.1 Labor Force Participation Rate, Ages 70-74, Quarterly, 1998:Q1-2013:Q1 Nearly 1 in 5 in this age group is working. 15 years ago it was 1 in 8. 12% Labor Force Participation Rate, Ages 70-74, Quarterly, 1998:Q1-2013:Q1 Labor Force participation rate men women 26% 24% 22% 20% 18% 16% 14% 12% The labor force participation rate for men 70-74 grew by about 50% since 1998, but for women 70-74 it nearly doubled (from about 9% to about 15.5%). Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. 2013.1 2012.3 2012.1 2011.3 2011.1 2010.3 2010.1 2009.3 2009.1 2008.3 2008.1 2007.3 2007.1 2006.3 2006.1 2005.3 2005.1 2004.3 2004.1 2003.3 2003.1 2002.3 2002.1 2001.3 2001.1 2000.3 2000.1 1999.3 1999.1 1998.3 8% 1998.1 10% 5% 4.5% 4.6% 4.6% 5.0% 4.8% 5.1% 5.4% 5.2% 5.4% 5.3% 5.2% 5.3% 5.2% 5.2% 5.1% 5.4% 5.1% 5.1% 5.2% 5.0% 5.5% 5.9% 5.8% 5.8% 5.9% 6.0% 6.1% 6.5% 6.1% 6.6% 6.3% 6.7% 6.4% 6.6% 6.0% 6.5% 6.5% 7.1% 7.0% 6.9% 6.9% 7.2% 7.4% 7.6% 7.6% 7.0% 7.2% 7.3% 7.3% 6.9% 7.7% 7.5% 7.1% 7.5% 7.6% 7.7% 7.6% 7.6% 7.4% 7.8% 7% 1998.1 1998.2 1998.3 1998.4 1999.1 1999.2 1999.3 1999.4 2000.1 2000.2 2000.3 2000.4 2001.1 2001.2 2001.3 2001.4 2002.1 2002.2 2002.3 2002.4 2003.1 2003.2 2003.3 2003.4 2004.1 2004.2 2004.3 2004.4 2005.1 2005.2 2005.3 2005.4 2006.1 2006.2 2006.3 2006.4 2007.1 2007.2 2007.3 2007.4 2008.1 2008.2 2008.3 2008.4 2009.1 2009.2 2009.3 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 2011.3 2011.4 2012.1 2012.2 2012.3 2012.4 2013.1 Labor Force participation rate 9% The labor force participation rate for workers 75 and over will probably hit 10% soon. This is close to what the rate was for the 70-74 group a decade ago. In the last 14 years, the labor force participation rate for workers 75 and over grew from 4.5% to 8.6%. So 91.4% of these people are retired. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. 8.6% Labor Force Participation Rate, Quarterly Ages 75 and over, 1998-2013:Q1 3% Labor Force Participation Rate, Quarterly Ages 75 and over, 1998-2013:Q1 Labor Force participation rate 13% men women 12% 11% 10% 9% 8% 7% 6% 5% 4% 2% 1998.1 1998.2 1998.3 1998.4 1999.1 1999.2 1999.3 1999.4 2000.1 2000.2 2000.3 2000.4 2001.1 2001.2 2001.3 2001.4 2002.1 2002.2 2002.3 2002.4 2003.1 2003.2 2003.3 2003.4 2004.1 2004.2 2004.3 2004.4 2005.1 2005.2 2005.3 2005.4 2006.1 2006.2 2006.3 2006.4 2007.1 2007.2 2007.3 2007.4 2008.1 2008.2 2008.3 2008.4 2009.1 2009.2 2009.3 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 2011.3 2011.4 2012.1 2012.2 2012.3 2012.4 2013.1 3% In the last 15 years, the labor force participation rate for men 75 and over grew from 6.9% to 12.6% and for women doubled (from 2.9% to 5.8%). Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute. Fatal Work Injury Rate per 100,000 full-time-equivalent workers No improvement in fatal work injury rate for this age group 14 10 8 The fatality rate for workers 65 and older was 5 times that of workers age 25-34. The workplace of the future will have to be completely redesigned to accommodate the surge in older workers. 20-24 25-34 4.2 4.1 3.7 3.6 3.6 3.3 3.1 2.7 2.4 2.7 18-19 3.7 3.4 3.2 3.0 2.9 2.7 3.0 2.6 2.4 2.2 4 2.8 2.6 2.4 2.5 2.8 6 2006 2007 2008 2009 2010 5.0 4.6 4.5 4.3 4.7 12 11.2 10.2 12.2 12.1 11.9 Fatal Work Injury Rates Improved Slightly Since 2006 but Still Climb Sharply With Age 2 0 35-44 45-54 Source: US Bureau of Labor Statistics, at http://www.bls.gov/iif/oshcfoi1.htm/#2010 55-64 65+ 26 Older Workers Lose More Days from Work Due to Injury or Illness Median Days Away From Work 16 14 Oldest baby boomer is age 67 (in 2013) Youngest baby boomer is age 49 (in 2013) 2008 2009 2010 2011 14 12 12 10 9 9 10 8 11 12 12 13 15 15 14 13 10 9 8 6 6 6 6 6 5 5 5 5 4 2 0 20-24 25-34 35-44 45-54 55-64 65+ Median lost time of workers age 65+ is 2-3X that of workers age 25-34. These numbers are pretty stable—they haven’t changed much since 2008. Source: US Bureau of Labor Statistics, Nonfatal Occupational Injuries and Illnesses Requiring Days Away From Work, 2011 (Table 10), released November 8, 2012. 27 Older Workers Are Much More Likely to Break a Bone Incidence Rate* (2011) Fractures Multiple Traumatic Injuries 18 15.3 16 13.4 14 12 9.9 10 8 7.8 6.7 7.4 6 4 6.4 5.9 4.0 4.3 3.1 3.7 20-24 25-34 35-44 45-54 2 0 55-64 65+ *per 10,000 full-time-equivalent workers Source: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14 29 Older Workers Are More Likely to Slip When Walking, but Less Likely to Overexert Themselves Floors, Walkways, etc. 10 22.3 12.8 17.0 11.4 10.5 10.9 9.9 20 12.7 30 23.8 40 30.6 34.7 37.7 50 39.6 44.3 49.6 Incidence rate for injury caused by vehicles is about the same for all age groups Overexertion 10.2 60 Vehicles 35.1 Source/Nature of Injury: 12.1 Incidence Rate (2011) 0 20-24 25-34 35-44 45-54 55-64 65+ Source: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14 30 Investments: The New Reality Investment Performance is a Key Driver of Profitability 31 Insurers Have Not Yet Fully Adapted to a Persistently Low Interest Rate Environment They Didn’t Expect Rates to be Pushed to Such Low Levels Pushed Down so Rapidly Held to Such Low Levels for So Long Suppressed via Unprecedented Aggressiveness of the Federal Reserve Ability to Release Prior Reserves Eased Urgency OFFSETTING FACTORS Capitalization Still Solid Emergence of Sophisticated Price Monitoring and Underwriting Tools 32 U.S. 10-Year Treasury Note Yields: A Long Downward Trend, 1990–2013 9% 8% Yields on 10-Year U.S. Treasury Notes recently plunged to all time record lows 7% 6% 5% 4% 3% 2% Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade. 1% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come. Note: Recessions indicated by gray shaded columns. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes. 33 Distribution of Bond Maturities, P/C Insurance Industry, 2003-2011 2011 15.2% 41.4% 2010 16.3% 39.5% 2009 16.2% 2008 15.7% 2007 15.2% 30.0% 2006 16.0% 2005 36.2% 10.3% 6.3% 26.7% 28.7% 11.7% 7.3% 8.1% 33.8% 12.9% 8.1% 29.5% 34.1% 13.1% 7.4% 16.0% 28.8% 34.1% 13.6% 7.6% 2004 15.4% 29.2% 2003 14.4% 29.8% 20% 31.2% 11.1% 6.4% 12.7% 0% 32.4% 26.8% 32.5% 31.3% 40% 60% 15.4% 15.4% 80% Under 1 year 1-5 years 5-10 years 10-20 years over 20 years 7.6% 9.2% 100% The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds (from 24.6% in 2003 to 16.9% in 2011) and then trimmed bonds in the 5-10-year category. Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in investment income along with lower yields. Sources: A.M. Best; Insurance Information Institute. 34 Property/Casualty Insurance Industry Investment Gain: 1994–2012F1 ($ Billions) $70 $64.0 $58.0 $60 $52.3 $55.7 $51.9 $53.4 $56.2 $50.8 10 11 12F $48.9 $47.2 $50 $59.4 $56.9 $45.3 $44.4 $42.8 $40 $35.4 $39.2 $36.0 $31.7 $30 $20 Investment gains in 2012 are running approximately 20% below their pre-crisis peak $10 $0 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 In 2012 (1st three quarters) both investment income and realized capital gains were lower than in the comparable period in 2011. And because the Federal Reserve Board aims to keep interest rates exceptionally low through mid-2015, maturing bonds will be re-invested at even lower rates. 1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. *2005 figure includes special one-time dividend of $3.2B; 2012F figure is I.I.I. estimate based on annualized actual 2012:Q3 result of $38.089B. Sources: ISO; Insurance Information Institute. A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE 15.9% 110 A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979 106.4 14.3% 12.7% 105 100.6 100 100.1 101.0 100.8 99.3 95.7 95 7.4% 92.7 8.8% 15% 10.9% 9.6% 97.5 18% 101.1 100.9 7.6% 12% 9% 6.2% 4.4% 4.6% 90 6% Year Ago 85 3% 2011:H1 = 109.4, 2.3% ROE 0% 80 1978 1979 2003 2005 2006 2007 Combined Ratio 2008 2009 2010 2011 2012:H1 ROE* Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs * 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:H1 combined ratio including M&FG insurers is 102.2, ROAS = 5.9%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data. P/C Insurance Industry Financial Overview Profit Recovery Was Set Back in 2011 and 2012 by High Catastrophe Losses & Other Factors 38 20% 5% -5% -10% Most recent “hard market” Sources: ISO; Insurance Information Institute. 1.3% 2.3% 1.7% 3.5% 1.6% 3.2% 3.8% 3.1% 4.2% 5.1% 0.5% 2.1% 0.0% 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% 10.2% 15% 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 -4.6% 2005:Q2 -4.1% 2005:Q3 -5.8% 2005:Q4 -1.6% 2006:Q1 2006:Q2 2006:Q3 2006:Q4 2007:Q1 -1.6% 2007:Q2 2007:Q3 2007:Q4 -1.9% 2008:Q1 2008:Q2 -1.8% 2008:Q3 -0.7% 2008:Q4 -4.4% 2009:Q1 -3.7% 2009:Q2 -5.3% 2009:Q3 -5.2% 2009:Q4 -1.4% 2010:Q1 -1.3% 2010:Q2 2010:Q3 2010:Q4 2011:Q1 2011:Q2 2011:Q3 2011:Q4 2012:Q1 2012:Q2 2012:Q3 P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter, 2002–2012 This upward trend is likely to continue as the economy’s recovery strengthens Finally! A sustained period (10 quarters) of growth in net premiums written (vs. same quarter, prior year), and strengthening. 39 Commercial Lines Direct Premiums Written: Pct. Change by State, 2006-2011* NC -7.9 NY -7.8 WA -7.6 MS -6.7 NM -6.6 MA -6.6 OH -6.4 IL -6.3 -2.5 0.0 IN TN 0.2 VT -1.5 0.9 WI LA 2.7 AK -0.5 2.9 TX WY OK MT SD -20 ND 0 AR 4.0 25.6 KS MN 27.9 NE 20 8.3 28.9 40 IA 38.9 60 14.9 80 Only 13 states showed any direct written premium growth in commercial lines from 2006 to 2011 60.8 Pecent change (%) 100 Top 25 States 100.9 120 Sources: SNL Financial LC.; Insurance Information Institute. 42 Direct Premiums Written: Comm. Lines Percent Change by State, 2006-2011* Bottom 25 States 0 -24.4 AZ WV -40 US -35 NV -33.0 -30 -26.4 -23.7 -19.9 HI FL -19.8 NH -13.6 CO -19.4 -13.2 RI -25 CA -13.2 NJ -16.7 -12.9 MD DE -12.7 ID -16.0 -12.2 GA MI -11.6 VA -15.0 -11.4 AL OR -10.8 SC -14.7 -10.1 CT -20 UT -10.0 -8.1 MO -15 ME -8.0 PA -9.0 -7.9 -10 KY Pecent change (%) -5 States with the poorest performing economies also produced the most negative net change in premiums of the past 5 years Sources: SNL Financial LC.; Insurance Information Institute. 43 Underwriting Gain (Loss) 1975–2012:Q3** ($ Billions) $35 $25 In historical context, 2006-07 underwriting results were an anomaly Net underwriting losses in 1st 3 qtrs of 2012 totaled $6.7B $15 $5 -$5 -$15 -$25 -$35 -$45 Cumulative underwriting loss since 1975? $500B, averaging $13.2B/year. -$55 High cat losses in 2011 led to the worst underwriting year since 2002 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Average yearly underwriting loss in the 2008-2011 low-interest-rate environment? $17.8B. With interest rates this low, large persistent underwriting losses are not a recipe for success. *Includes mortgage and financial guaranty insurers in all years. **through first three quarters of 2012 Sources: A.M. Best; ISO; Insurance Information Institute. P/C Insurance Industry Combined Ratio, 2001–2012:Q3* Heavy Use of Reinsurance Lowered Net Losses As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Relatively Low CAT Losses, Reserve Releases Relatively Low CAT Losses, Reserve Releases 120 115.8 110 Best Combined Ratio Since 1949 (87.6) 107.5 Cyclical Deterioration Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Avg. CAT Losses, More Reserve Releases 106.4 101.0 100.8 100.1 99.3 98.4 100 100.8 Lower CAT Losses Before Sandy 100.0 95.7 92.6 90 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012:Q3 * Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q3=100.9. Sources: A.M. Best; ISO. 46 Commercial Lines Combined Ratio, 1990-2013F* Commercial Lines Combined Ratio 125 122.3 118.8 120 115 110 Commercial lines underwriting performance in 2012 was the worst since 2002 due to heavy impact from Sandy 112.5 110.2 109.4 112.3 111.1 109.7 110.2 109.5 110.2 109.0 107.6 106.7 105.4 104.2 104.1 105 102.5 102.0 102.9 102.1 100 98.9 95 93.6 90 13F 12F 11 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 90 91.1 *2007-2013F figures exclude mortgage and financial guaranty segments. Sources: A.M. Best; Insurance Information Institute 47 101.2 102.7 103.6 01 02 105 107.1 00 110 104.6 97 116.2 96 115.7 95 115.9 113.0 115 112.0 120 112.1 125 118.1 Commercial Auto Combined Ratio: 1993–2014F 05 06 98.0 99.4 96.8 04 94.3 92.4 90 92.1 95.2 95 92.9 100 85 98 99 03 07 08 09 10 11 12F 13F 14F Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends Sources: A.M. Best (1990-2013F);Conning (2014F); Insurance Information Institute. 48 Commercial Multi-Peril Combined Ratio: 1995–2013F CMP-Liability CMP-Non-Liability 130 120 110 100 90 80 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F Commercial Multi-Peril Underwriting Performance is Expected to Improve in 2013 Assuming Normal Catastrophe Loss Activity *2012-2013 figures are A.M. Best estimate/forecast for the combined liability and non-liability components. Sources: A.M. Best; Insurance Information Institute. 49 General Liability Combined Ratio: 2005–2014F 115 112.9 110.8 110 107.1 105 103.3 103.7 13F 14F 100.7 100 99.6 99.0 95 95.1 94.2 90 05 06 07 08 09 10 11 12F Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years Source: Conning Research and Consulting. 50 Inland Marine Combined Ratio: 1999–2014F 105 101.9 100.2 100 97.7 97.7 95 93.3 92.8 90 89.9 89.7 89.7 89.3 85 86.2 83.8 80 82.5 80.8 79.5 77.3 75 99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F Inland Marine is Expected to Remain Among the Most Profitable of All Lines Sources: A.M. Best (1999-2011); Insurance Information Institute (2012F); Conning (2013F-2014F) 51 Surety Bonds Combined Ratio, 2002–2011 125 116.9 122.0 119.5 101.8 100 81.6 75 79.5 70.4 66.6 70.5 72.5 2010 2011 50 2002 2003 2004 2005 Source: A.M. Best Aggregates & Averages, 2012, p. 376. 2006 2007 2008 2009 52 Workers Compensation Combined Ratio: 1994–2014F 90 111.0 115.0 117.3 116.9 116.8 110.6 104.5 103.5 98.5 102.7 105.1 108.6 121.7 112.6 107.0 97.0 100 101.0 100.0 110 102.0 120 118.2 115.3 130 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F Workers Comp underwriting results are expected to begin improving in 2013. They deteriorated markedly since 2007 and in 2012 are estimated to have hit their worst level in a decade. Sources: A.M. Best (1994-2013F); Insurance Information Institute (2014F). 53 $26,981 $19,150 $3,043 $28,672 $35,204 $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 $21,865 $50,000 $30,773 $60,000 Through the first three quarters of 2012, P/C Industry profits were up 222% from the comparable period in 2011, mainly due to lower CAT losses in 2012:Q2 and Q3 $36,819 $70,000 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012:Q3 ROAS1 = 6.3% $24,404 $80,000 $62,496 P/C Net Income After Taxes 1991–2012:Q3 ($ Millions) $0 -$10,000 -$6,970 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 * ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for 2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. Sources: A.M. Best; ISO; Insurance Information Institute. 11 12:Q3 Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q3* ROE 25% 1977:19.0% History suggests next ROE peak will be in 2016-2017 1987:17.3% 20% 2006:12.7% 1997:11.6% 15% 9 Years 2012:Q3: 6.3% 10% 5% 2011: 4.6%* 0% 1984: 1.8% 1992: 4.5% 2001: -1.2% 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11* 12: -5% 1975: 2.4% *Profitability = P/C insurer ROEs. 2012 is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:H1 ROAS = 5.9% including M&FG. Sources: Insurance Information Institute; NAIC; ISO; A.M. Best. Policyholder Surplus, 2006:Q4–2012:Q3 ($ Billions) Drop due to near-record 2011 CAT losses $600 The industry now has $1 of surplus for every $0.80 of NPW, the strongest claims-paying status in its history $575 $500 $566.5 $559.2 $570.7 $559.1 $550.3 $538.6 $544.8 $550 $525 $583.5 $540.7 $530.5 $521.8$517.9 $515.6 $512.8 $505.0 $496.6 $487.1 $478.5 $475 $511.5 $490.8 $463.0 $455.6 $450 Surplus as of 9/30/12 was a new peak $437.1 12:Q3 12:Q1 11:Q4 11:Q3 11:Q2 11:Q1 10:Q4 10:Q3 10:Q2 10:Q1 09:Q4 09:Q3 09:Q2 09:Q1 08:Q4 08:Q3 08:Q2 08:Q1 07:Q4 07:Q3 07:Q2 07:Q1 06:Q4 $425 Sources: ISO; A.M .Best. 59 Inflation and Claims Trends 60 Prices for Hospital Services: 12-Month Change,* 1998–2013 Recession Outpatient Services Inpatient Services 14% 12% 10% 8% 6% 4% 2% 0% '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Cyclical peaks in PP Auto tend to occur approximately every 10 years (early 1990s, early 2000s, and possibly the early 2010s) *Percentage change from same month in prior year; through January 2013; seasonally adjusted Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute. 61 Forces that Drive Car Repair Costs: 12-Month Change,* 2001–2013 Recession Auto repair Auto body work 14% 12% 10% 8% 6% 4% 2% 0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Cyclical peaks in PP Auto tend to occur approximately every 10 years (early 1990s, early 2000s, and possibly the early 2010s) *Percentage change from same month in prior year; through January 2013; seasonally adjusted Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute. 62 Catastrophes 63 Natural Disasters in the United States, 1980 – 2012 Number of Events (Annual Totals 1980 – 2012) There were 184 natural disaster events in the US in 2012 300 There were over 150 natural disaster events in the US every year since 2006. That hadn’t happened in any year before. 250 Number 200 150 100 41 19 50 121 3 1980 1982 1984 1986 1988 Geophysical (earthquake, tsunami, volcanic activity) Source: MR NatCatSERVICE 1990 1992 1994 1996 1998 2000 Meteorological (storm) Hydrological (flood, mass movement) 2002 2004 2006 2008 2010 2012 Climatological (temperature extremes, drought, wildfire) 64 US Insured Catastrophe Losses $7.5 $10.5 $37.0 $29.2 $33.7 $16.3 $7.6 $6.1 $11.6 $14.3 $3.8 $11.0 $12.6 $8.8 $10 $8.0 $20 $4.8 $30 $14.0 $40 $26.4 $37.8 $50 $34.7 $60 $33.1 $70 2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October $14.4 $80 $11.5 $73.4 ($ Billions, 2012 Dollars) $0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12* US CAT Losses in 2012 Will Likely Become the 2nd or 3rd Highest in US History on An Inflation-Adjusted Basis (Pvt Insured). 2011 Losses Were the 5th Highest Record Tornado Losses Caused 2011 CAT Losses to Surge *As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. 65 65 The Dozen Most Costly Hurricanes in U.S. History Insured Losses, 2012 Dollars, $ Billions Sandy will likely become the 3rd costliest hurricane in US insurance history $60 $50 $40 $30 Irene became the 12th most expensive hurricane in US history $48.7 $25.6 $20.0 $20 $10 $5.6 $6.7 $7.8 $8.7 $9.2 $4.4 $5.6 Irene (2011) Jeanne (2004) Frances (2004) Rita (2005) Hugo (1989) Ivan (2004) Charley (2004) $11.1 $13.4 $0 Wilma (2005) Ike (2008) Sandy* (2012) Andrew (1992) Katrina (2005) 10 of the 12 most costly hurricanes in insurance history occurred in the past 9 years (2004—2012) *Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B. Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI. 66 If They Hit Today, the Dozen Costliest (to Insurers) Hurricanes in U.S. History Insured Losses, 2012 Dollars, $ Billions $140 $120 $100 Storms that hit long ago had less property and businesses to damage, so simply adjusting their actual claims for inflation doesn’t capture their destructive power. Karen Clark’s analysis aims to overcome that. $80 $125 $65 $60 $35 $40 $20 $20 $20 Sandy* (2012) Betsy (1965) Hazel (1954) $40 $40 Katrina (2005) Galveston (1915) $50 $50 $50 Andrew (1992) southFlorida (1947) Galveston (1900) $25 $20 $0 Donna (1960) New England (1938) midFlorida (1928) Miami (1926) When you adjust for the damage prior storms could have done if they occurred today, Hurricane Katrina slips to a tie for 6th among the most devastating storms. *Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B. Sources: Karen Clark & Company, Historical Hurricanes that Would Cause $10 Billion or More of Insured LossesToday, August 2012; I.I.I. 67 Superstorm Sandy: Number of Claims by Type* Commercial , 167,500 , 12% Auto, 230,500 , 17% Sandy is a high frequency, (relatively low) severity event (avg. severity <50% Katrina) Hurricane Sandy resulted in an estimated 1.4 million privately insured claims resulting in an estimated $15 to $25 billion in insured losses. Hurricane Katrina produced 1.74 million claims and $47.6B in losses (in 2011 $) Homeowner , 982,000 , 71% *PCS claim count estimate as of 11/26/12. Loss estimate represents high and low end estimates by risk modelers RMS, Eqecat and AIR. PCS estimate of insured losses as of 11/26/12 $11 billion. All figures exclude losses paid by the NFIP. Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute. 68 Long Island (NY) Flood-Damaged Structures with & w/o Flood Insurance Only 37.5% of flood damaged buildings in Nassau County were insured for flood, 62.5% uninsured Number of buildings 80,000 $15.0 74,736 70,000 60,000 43,106 27.6% of flood damaged buildings in Suffolk County were insured for flood, 73.4% uninsured 50,000 Insured Uninsured 40,000 30,000 20,000 20,798 52,428 10,000 5,747 $2.2 15,051 0 Nassau Suffolk The Maximum FEMA Grant is $31,900. The Average Grant Award to Homeowners and Renters on Long Island is About $7,300 Source: Newsday, 1/14/13 from FEMA and Small Business Administration. 69 Residential NFIP Flood Take-Up Rates in NY, CT (2010) & Sandy Storm Surge Flood coverage penetration rates were extremely low in many very vulnerable areas of NY and CT, with take-up rates far below 50% in many areas Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute. 70 TERRORISM RISK The Countdown to TRIA Expiration Begins Reauthorization Faces an Uphill Battle in Congress 71 I.I.I. Congressional Testimony on the Future of the Terrorism Risk Insurance Program Issue: Act expires 12/31/14. Insurers still generally regard large-scale terror attacks as fundamentally uninsurable I.I.I. Input: Testified at first hearing on the issue in DC (on 9/11/12) on trends in terrorist activity in the US and abroad, difficulties in underwriting terror risk; Noted that bin Laden may be dead but war on terror is far from over Status: New House FS Committee Chair Jeb Hensarling has opposed TRIA in the past; Obama Administration does not seem to support extension; Little institutional memory on insurance subcommittee Media: Virtually no media coverage yet apart form trade press; WSJ will likely editorialize against it. Objective: Work with trades, risk management community and others to help build support 72 Loss Distribution by Type of Insurance from Sept. 11 Terrorist Attack ($ 2011) ($ Billions) Other Liability $4.9 (12%) Property Life WTC 1 & 2* $1.2 (3%) $4.4 (11%) Aviation Liability $4.3 (11%) Event Cancellation $1.2 (3%) Aviation Hull $0.6 (2%) Workers Comp $2.2 (6%) Property Other $7.4 (19%) Biz Interruption $13.5 (33%) Total Insured Losses Estimate: $40.0B** *Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements. **$32.5 billion in 2001 dollars. Source: Insurance Information Institute. Terrorism Violates Traditional Requirements for Insurability Requirement Definition Violation Estimable Frequency Insurance requires large number of observations to develop predictive ratemaking models (an actuarial concept known as credibility) Very few data points Terror modeling still in infancy, untested. Inconsistent assessment of threat Estimable Severity Maximum possible/ probable loss must be at least estimable in order to minimize “risk of ruin” (insurer cannot run an unreasonable risk of insolvency though assumption of the risk) Potential loss is virtually unbounded. Losses can easily exceed insurer capital resources for paying claims. Extreme risk in workers compensation and statute forbids exclusions. Source: Insurance Information Institute Terrorism Violates Traditional Requirements for Insurability (cont’d) Requirement Definition Violation be able to Losses likely highly Diversifiable Must spread/distribute risk concentrated geographically or Risk across large number of by industry (e.g., WTC, power Random Loss Distribution/ Fortuity Source: Insurance Information Institute risks “Law of Large Numbers” helps makes losses manageable and less volatile Probability of loss occurring must be purely random and fortuitous Events are individually unpredictable in terms of time, location and magnitude plants) Terrorism attacks are planned, coordinated and deliberate acts of destruction Dynamic target shifting from “hardened targets” to “soft targets” Terrorist adjust tactics to circumvent new security measures Actions of US and foreign govts. may affect likelihood, nature and timing of attack Key Takaways 76 Takeaways: Insurance Industry Predictions for 2013 P/C Insurance Exposures Will Grow With the U.S. Economy Personal and commercial exposure growth is likely in 2013 – But restoration of destroyed exposure will take until mid-decade Wage growth is also positive and could modestly accelerate P/C Industry Growth in 2013 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional “hard market” emerges in 2013 Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, severity in some key lines But WC will be tough to fix Industry Capacity Hits a New Record by Year-End 2013 (Barring Meg-CAT) Investment Environment Is/Remains Challenging Interest rates remain low 77 Insurance Information Institute www.iii.org Thank you for your time and your attention!