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The Global Economy, Rising Risk and Marine Insurance Markets Risk and Reward in a Troubled World San Francisco Board of Marine Underwriters San Francisco, CA April 21, 2016 Download at www.iii.org/presentations 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 Outlook: Property/Casualty & Economy Modest growth will continue in 2016 (~ 3.5% DPW in US) Exposure growth tied primarily to overall GDP growth/key sector drivers Rates remain flat to marginally negative for commercial lines in 2016 Reinsurance pricing under pressure—more so for property risks Underlying loss cost trends remain manageable Industry is very well capitalized on a global scale Continued pressure from alternative capital Anti-trade, nationalistic sentiments bad for marine ins. Sluggish growth abroad impacts trade flows Strong dollar has hurt US manufacturing, exports Commodity prices remain weak but have likely bottomed 2 Risk & Insurance U.S. and Global Perspective Marine Insurance Is Very Sensitive to the Global Economic and Political Environment 3 5 Major Categories for External Global Risks, Uncertainties and Fears: Insurance Solutions 1. Economic Risks 2. Geopolitical Risks 3. Environmental Risks 4. Technological Risks 5. Societal Risks While risks can be broadly categorized, none are mutually exclusive Source: Adapted from World Economic Forum, Global Risks 2014; Insurance Information Institute. 4 Multitude of Exogenous Factors Influence Growth, Performance & Cyclicality Tepid growth in US, Europe Weakness in China/Emerging Economies Political uncertainty in the US, Brazil, Argentina UK “Brexit” concern Low/Negative Interest Rates Resurgent Terrorism Risk: ISIS & Other Groups Cyber Attacks Sabre Rattling (e.g., US-China, Russia) Severe Natural Disaster LossesSupply Chain Nationalism International trade deals under siege (Over)Regulation: Systemic Risk? Strong dollar has impacted manufacturing Are “Black Swans” everywhere or does it just seem that way? 5 Top 5 Global Risks in Terms of Likelihood, 2007—2016: Insurance Can Help With Most In 2016, societal and environmental issues dominated frequency concerns Concerns Shift Considerably Over Short Spans of Time. 2016 Includes a Mix of Environmental Economic, Social and Environmental Risks Source: World Economic Forum, Global Risks 2016; Insurance Information Institute. 6 Top 5 Global Risks in Terms of Impact, 2007—2016: Insurance Can Help With Most In 2016, societal issues dominated severity concerns Concerns Over the Impacts of Societal Risks Remained High in 2016, but Economic, Environment and Geopolitical Risks Also Loom Large Source: World Economic Forum, Global Risks 2016; Insurance Information Institute. 7 Globalization: The Global Economy Creates and Transmits Cycles & Risks Globalization Is a Double Edged Sword— Creating Opportunity and Wealth But Potentially Creating and Amplifying Risk Emerging vs. “Advanced” Economies 8 GDP Growth: Advanced & Emerging Economies vs. World, 1970-2016F GDP Growth (%) 10.0 8.0 World output is forecast to grow by 3.4% in 2016 and 3.6% in 2017. The world economy shrank by 0.6% in 2009 amid the global financial crisis Emerging economy growth rates are expected to increase to 4.3% in 2016 and 4.7% in 2017 6.0 4.0 2.0 (2.0) (4.0) Advanced economies are expected to grow at a modest pace of 2.1% in 2016 and 2017. 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 11 12 13 14 15 16F 17F 0.0 Advanced economies Emerging and developing economies Source: International Monetary Fund, World Economic Outlook, Jan. 2016; Insurance Information Institute. World Real GDP Growth Forecasts: Major Economies: 2014 – 2017F The Eurozone remains weak but should improve 7.3% 6.9% 6.4% 6.3% Growth in China has slowed but outpaces the US and Europe US Euro Area UK 2014 Germany’s growth mirrors the Eurozone overall Germany Australia 2015F 2016F 2.4% 1.3% 1.8% 2.2% 0.6% 1.0% 0.7% -0.1% Growth in the UK is stronger than in the Eurozone 2.7% 2.3% 2.1% 2.4% 1.6% 1.5% 1.8% 1.8% 2.8% 2.4% 2.1% 2.2% 0.9% 1.5% 1.7% 1.8% “Brexit” impact will be negative 2.4% 2.4% 2.6% 2.6% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% US growth should accelerate in 2016 Japan Canada China 2017F Growth Prospects Vary Widely by Region; US and the UK Lead the Advanced Economies; Germany Leads in the Euro Area; China Has Slowed Sources: Blue Chip Economic Indicators (2/2016 issue); IMF ( Jan. 2016); Insurance Information Institute. 11 Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2014 Real nonlife premium growth was stronger in the US in 2014 than in most of Europe Market Life Non-Life Total Advanced 3.8 1.8 2.9 Emerging 6.9 8.0 7.4 World 4.3 2.9 3.7 Source: Swiss Re, sigma, No. 4/2015. 12 World Trade Volume Growth*, 2012 – 2017F World trade volume growth is expected to accelerate modestly by 2017 after dipping in 2015, 2016 3.8% 4% 3.2% 4% 3% 3.3% 2.8% 3.1% 2.8% 3% 2% 2% 1% 1% 0% 2012 2013 2014 2015 2016F *Goods and services. Source: International Monetary Fund, World Economic Outlook, April 2016; Insurance Information Institute. 2017F 13 World Trade Volume: IMPORTS 2010 – 2017F Growth (%) Emerging Economies Advanced Economies 18% 16% Import growth in Advanced Economies is expected to decelerate in 2016 14% 12% 11.5% 8.8% 10% 8% 6% Import growth in emerging economies outpaces Advanced Economies has been hit hard 15.3% 5.7% 5.7% 4.3% 3.4% 4% 4.3% 3.4% 4.1% 3.6% 1.1% 1.4% 2% 3.0% 3.7% 0.5% Sources: IMF World Economic Outlook (April 2016 ); Insurance Information Institute. 20 16 F 20 17 F 20 15 20 14 20 13 20 12 20 11 20 10 20 16 F 20 17 F 20 15 20 14 20 13 20 12 20 11 20 10 0% 14 World Trade Volume: EXPORTS 2010 – 2017F Growth (%) Emerging Economies Advanced Economies 16% 14% Export growth in advanced economies is expected to decelerate in 2016 before accelerating in 2017 12.2% 12% 10% 8% 6% Export growth in emerging economies has struggled but should improve in 2016-17 14.7% 6.7% 5.3% 4.2% 4% 3.4% 2.1% 2.3% 2.5% 4.2% 4.4% 3.5% 3.8% 3.9% 2.9% 1.7% 2% Sources: IMF World Economic Outlook (April 2016); Insurance Information Institute. 20 16 F 20 17 F 20 15 20 14 20 13 20 12 20 11 20 10 20 16 F 20 17 F 20 15 20 14 20 13 20 12 20 11 20 10 0% 15 World Trade is an Increasingly Important Part of Global Economic Output Two decades ago, world trade powered just 20 percent of global economic activity—now it’s 30 percent but has struggled recently Sources: World Trade Organization data through 2014 from International Trade Statistics 2015; Insurance Information Institute 16 Ocean Marine Overview Underwriting is Historically Volatile But Improved in Recent Years 18 U.S. Ocean Marine Combined Ratio: 2004–2014 Ocean Marine results have improved markedly in 2013 and 2014 95 98.0 93.5 109.3 91.0 100 97.2 105 98.7 110 100.8 115 96.4 120 103.6 125 113.7 118.4 130 90 85 80 04 05 06 07 08 09 10 11 12 13 14 Ocean Marine Results Have Been Quite Volatile Over the Past Decade, with the Combined Ratio Ranging by More than 20 Points Sources: A.M. Best; Insurance Information Institute. 19 Ocean Marine vs. Commercial Lines Combined Ratio: 1989–2014 90 103.6 104.2 98.9 96.4 102.4 100.8 107.9 109.3 103.5 98.0 94.8 93.5 94.3 91.0 113.7 93.6 98.7 110.2 104.1 102.0 97.2 102.5 118.4 122.3 119.4 118.8 107.6 102.0 104.1 110.4 109.7 115.5 112.3 107.2 111.1 102.2 110.2 105.4 91.1 95 100.0 100 89.6 105 92.4 110 All Commercial Lines 109.5 109.5 107.9 112.5 115 110.2 120 97.3 125 114.2 108.7 118.2 109.4 Ocean Marine Average: 1989-2014 Ocean Marine: 104.3 All Commercial Lines: 106.0 85 80 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Ocean Marine has marginally outperformed Commercial Lines overall over the period from 1989 – 2014 Sources: A.M. Best; Insurance Information Institute. 20 U.S. Ocean Marine Direct Written Premiums: 2004–2014 $ Billions Ocean Marine premium volume has been volatile $4.2 $4.0 $3.8 3.73 3.78 4.10 4.01 3.96 3.93 13 14 3.80 3.63 $3.6 3.57 3.38 $3.4 3.20 $3.2 $3.0 04 05 06 07 08 09 10 11 12 Ocean Marine Premium Volume Fell During the Global Financial Crisis, Increased but Is Now Falling Again Sources: A.M. Best; Insurance Information Institute. 21 Global Insurance Premium Growth Trends Growth Is Uneven Across Regions and Market Segments 22 Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2014 Real nonlife premium growth was stronger in the US in 2014 than in most of Europe Market Life Non-Life Total Advanced 3.8 1.8 2.9 Emerging 6.9 8.0 7.4 World 4.3 2.9 3.7 Source: Swiss Re, sigma, No. 4/2015. 24 The Unfortunate Nexus: Opportunity, Risk & Instability Most of the Global Economy’s Future Gains Will be Fraught with Much Greater Risk and Uncertainty than in the Past 30 Political Risk: Greatest Opportunities Often in Risky Nations As of 2015:Q4 Latin and South America have modest terrorist threats though Brazil is elevated Source: Aon PLC; Insurance Information Institute. Terrorism remains a greater concern in the Middle East, Africa and South Asia 31 Terrorism Risk: Greatest Opportunities Are Often in Risky Nations As of 2015:Q4 Latin and South America also present insurers with growth opportunities but political instability has increased markedly Source: Aon PLC; Insurance Information Institute. Problems in the Ukraine will intensify political risk in several former Soviet republics The fastest growing markets are generally also among the politically riskiest, including East and South Asia and Africa 32 Country Shares of World Merchandise Exports The US, China, Japan and Western Europe lead the world in merchandise exports Source: World Trade Organization accessed 4/30/14 at: http://www.wto.org/english/res_e/statis_e/statis_e.htm ; Insurance Information Institute. 33 P/C (Re)Insurance Industry Financial Overview 2015 Was a Reasonably Good Year and Very Similar to 2014 35 $55,870 $56,622 14 15E $63,784 $33,522 $19,456 $3,043 $28,672 $35,204 $62,496 Net income in 2015 was on par with 2014; ROE unchanged at 8.4% $44,155 $38,501 $30,029 $20,559 $21,865 $30,773 $20,598 $10,870 $3,046 $10,000 $19,316 $20,000 $5,840 $30,000 $14,178 $40,000 $36,819 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 ROAS1 = 5.9% 2013 ROAS1 = 10.2% 2014 ROAS1 = 8.4% 2015 ROAS = 8.4% $24,404 $ Millions $80,000 $70,000 $60,000 $50,000 $65,777 P/C Industry Net Income After Taxes 1991–2015 $0 13 12 11 10 09 08 07 06 05 04 03 02 01 99 98 97 96 95 94 93 92 91 00 -$6,970 -$10,000 •ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; 2015E is annualized figure based actual figure through Q3 of $44.0 Sources: A.M. Best, ISO; Insurance Information Institute ROE: Property/Casualty Insurance by Major Event, 1987–2015 (Percent) P/C Profitability Is Both by Cyclicality and Ordinary Volatility 20% Modestly higher CATs Katrina, Rita, Wilma Low CATs 15% 10% Sept. 11 5% 0% Hugo Andrew, Iniki Lowest CAT Losses in 15 Years Northridge 4 Hurricanes Financial Crisis* Sandy Record Tornado Losses -5% 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 13 14 15 * Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; Insurance Information Institute. 39 P/C Insurance Industry Combined Ratio, 2001–2015* 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 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 Sandy Impacts Lower CAT Losses 106.5 102.5 101.1 99.3 98.4 100 Avg. CAT Losses, More Reserve Releases 101.0 100.8 100.1 Relatively Low CAT Losses, Reserve Releases 96.4 95.7 97.4 97.8 92.6 90 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 * Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0. Sources: A.M. Best, ISO; Figure for 2010-2014 is from A.M. Best P&C Review and Preview, Feb. 16, 2016. 40 Number of Years with Underwriting Profits by Decade, 1920s–2010s Number of Years with Underwriting Profits 12 10 10 8 8 7 6 6 5 4 4 3 3 2000s* 2010s** 2 0 0 1980s 1990s 0 1920s 1930s 1940s 1950s 1960s 1970s 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 * 2009 combined ratio excl. mort. and finl. guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit. **Data for the 2010s is for the period 2010 through 2015. Note: Data for 1920–1934 based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data. 41 P/C Insurance Loss Reserve Development, 1992 – 2017E* Reserve Change Source: A.M. Best; Barclays research for estimates. Reserve releases are expected to gradually taper off slowly, but will continue to benefit the bottom line and combined ratio through at least 2017 $675.2 $672.4 $673.7 15:Q2 15:Q4 $673.9 $671.6 14:Q4 $624.4 $614.0 $586.9 $583.5 $567.8 $570.7 $550.3 $538.6 $559.1 $544.8 $530.5 $540.7 $511.5 $490.8 14:Q3 14:Q2 14:Q1 13:Q4 13:Q3 13:Q2 12:Q4 12:Q3 12:Q2 12:Q1 11:Q4 11:Q3 11:Q2 11:Q1 10:Q4 10:Q3 10:Q2 10:Q1 09:Q4 Surplus as of 12/31/15 stood at a near-record high $673.7B 09:Q3 $437.1 $463.0 09:Q2 08:Q4 08:Q3 08:Q2 08:Q1 07:Q4 07:Q3 07:Q2 07:Q1 $400 06:Q4 $450 09:Q1 $455.6 $478.5 $505.0 $515.6 $517.9 $521.8 $496.6 $500 $487.1 $550 $512.8 $600 $559.2 $566.5 $650 13:Q1 $700 $607.7 Drop due to near-record 2011 CAT losses 2007:Q3 Pre-Crisis Peak $662.0 ($ Billions) $653.4 Policyholder Surplus, 2006:Q4–2015:Q4 The industry now has $1 of surplus for every $0.76 of NPW, close to the strongest claims-paying status in its history. 2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business . Sources: ISO, A.M .Best. The P/C insurance industry entered 2016 in very strong financial condition. 43 US Policyholder Surplus: 1975–2015* ($ Billions) $750 $700 $650 $600 $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Surplus as of 12/31/15 was a near-record $673.7, down 0.2% from $675.2 of 12/31/14, and up 54.1% ($236.6B) from the crisis trough of $437.1B at 3/31/09 “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in noninsurance organizations 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 The Premium-to-Surplus Ratio Stood at $0.76:$1 as of 12/31/15, a Near Record Low (at Least in Recent History) * As of 12/31/15. Source: A.M. Best, ISO, Insurance Information Institute. Net Premium Growth (All P/C Lines): Annual Change, 1971—2015 (Percent) 1975-78 1984-87 2000-03 Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3Year Decline Since 1930-33. 25% 20% 15% 10% Outlook 2015: 3.4% 2016F: 3.9% 2014: 4.2% 2017F: 3.8% 2013: 4.4% 2012: +4.2% 5% 0% 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15* -5% Shaded areas denote “hard market” periods Sources: A.M. Best (1971-2013), ISO (2014-15). 47 NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2015 ROE Post WW II Peak: 1947: 26.2% 30% 25% 20% Start of WW II 1941: 15.8% 1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic volatility, high interest rates, tort environment all played roles Economic Shocks, Inflation: 1976: 22.0% Tort Crisis 1985/86: 22.2% 1988-2000: Period of inter-cycle stability 15% 10% Post-9/11 2002:15.3% 2015 3.4% 5% -5% -10% -15% -20% 1950-70: Extended period of stability in growth and profitability. Low interest rates, low inflation, “Bureau” rate regulation all played a role Twin Recessions; Interest Rate Hikes 1987: 3.7% Great Depression 1932: -15.9% max drop 201020XX? Postrecession period of stable growth? Great Recession: 2010: -4.9% 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 0% Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute. Direct Premiums Written: Comm. Lines Percent Change by State, 2007-2014 90 Growth Benchmarks: Commercial 43 states showed commercial lines growth from 2007 through 2014 70 60 US: 5.9% 11.8 10.3 8.7 8.5 8.4 8.0 7.9 7.6 7.1 6.6 5.9 5.9 5.8 5.4 4.5 WI MA AR CT NY NJ CO NM OH LA US MS NH MO 13.9 IN MN 14.6 AK 20.6 TX 15.2 21.0 KS 20 WY 22.5 IA 24.8 30 29.4 40 33.3 50 36.8 Pecent change (%) 80 80.4 Top 25 States NE OK VT SD 0 ND 10 Sources: SNL Financial LLC.; Insurance Information Institute. 51 Direct Premiums Written: Comm. Lines Percent Change by State, 2007-2014 Bottom 25 States Nearly half the states have yet to see commercial lines premium volume return to pre-crisis levels 4.5 4.4 4.2 4.1 3.9 3.8 3.7 3.3 3.3 3.2 3.1 2.8 2.8 2.2 2.1 1.4 0.9 TN MD MT CA RI WA GA PA UT IL KY VA NC ME SC ID -15 -10.7 -6.9 OR -9.2 -6.5 -10 FL -5.3 -5 -3.2 0 -1.3 -22.2 WV DE AZ HI DC AL -25 -19.9 -20 NV Pecent change (%) 5 MI 10 Sources: SNL Financial LLC.; Insurance Information Institute. 52 Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2015:Q4 Percentage Change (%) Peak = 2001:Q4 +28.5% Pricing Turned Negative in Early 2004 and Remained that way for 7 ½ years Pricing turned positive in Q3:2011, the first increase in nearly 8 years; Q4:2015 renewals were down 2.8%; Some insurers posted stronger numbers. KRW : No Lasting Impact Trough = 2007:Q3 -13.6% Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. 53 CIAB: Average Commercial Rate Change, All Lines, (1Q:2004–4Q:2015) -11% -16% 0.1% -0.7% -2.3% -3.3% -3.1% -2.8% -6% -3.2% -5.9% -7.0% -9.4% -9.7% -8.2% -4.6% -2.7% -3.0% -5.3% -9.6% -11.3% -11.8% -13.3% -12.0% -13.5% -12.9% -11.0% -6.4% -5.1% -4.9% -5.8% -5.6% -5.3% -6.4% -5.2% -5.4% -2.9% -0.1% -1% -0.1% 4% Q2 2011 marked the last of 30th consecutive quarter of price declines -0.5% 9% 0.9% 2.7% 4.4% 4.3% 3.9% 5.0% 5.2% 4.3% 3.4% 2.1% 1.5% (Percent) Pricing as of Q4:2015 remained somewhat negative 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 3Q15 KRW Effect Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Source: Council of Insurance Agents & Brokers; Insurance Information Institute 57 Change in Commercial Rate Renewals, by Line: 2015:Q4 3.0% 2.7% 2.0% 1.6% 1.9% D&O 4.0% Commercial Auto rate increases are larger than any other line, followed by D&O and EPL EPL Percentage Change (%) 1.0% 0.0% -0.1% -1.0% -1.3% Commercial Auto Surety Construction -2.8% -2.2% Business Interruption -3.4% General Liability -3.5% Commercial Property -4.0% -2.6% Workers Comp -3.0% Umbrella -2.0% Major Commercial Lines Renewals Were Mixed to Down in Q4:2015; EPL, D&O and Commercial Auto Saw Gains Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially. Source: Council of Insurance Agents and Brokers; Insurance Information Institute. 58 INVESTMENTS: THE NEW REALITY Investment Performance is a Key Driver of Profitability Depressed Yields Will Necessarily Influence Underwriting & Pricing 59 Property/Casualty Insurance Industry Investment Income: 2000–2015E1 Investment earnings are still below their 2007 pre-crisis peak ($ Billions) $60 $54.6 $52.3 $50 $40 $51.2 $49.5 $49.2 $47.1 $47.6 $38.9 $38.7 $48.0 $47.3 $46.2 $46.5 $39.6 $37.1 $36.7 $30 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014. 1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute. *2015 figure is estimated based on annualized data through Q3. U.S. Treasury Security Yields: A Long Downward Trend, 1990–2016* 9% Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for more than a decade. 8% 7% 6% Despite the Fed’s December 2015 rate hike, yield remain low though shortterm yields have seen some gains 5% 4% 3% 2% 1% Recession 2-Yr Yield 10-Yr Yield 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 '14 '15 '16 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. *Monthly, constant maturity, nominal rates, through March 2016. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute. 62 Net Investment Yield on Property/ Casualty Insurance Invested Assets, 2007–2016P* (Percent) 4.6 Estimated book yield in 2016 is down about 140 BP from pre-crisis levels 4.5 4.4 4.2 4.2 4.0 4.0 3.8 3.8 3.7 3.8 3.6 3.6 3.6 3.4 3.4 3.1 3.2 3.0 07 08 09 10 11 12 13 14 15E 16P The yield on invested assets remains low relative to pre-crisis yields. The Fed’s plan to raise interest rates in late 2015 has pushed up some yields, albeit quite modestly. Sources: A.M. Best; 2015E-2016P figures from A.M. Best P/C Review and Preview, Feb. 2016; Insurance Information Institute Interest Rate Forecasts: 2016 – 2021 Yield (%) 3-Month Treasury 10-Year Treasury 5% 4% 3.7% 3.8% 3.9% 3.4% 3% 2.7% 2.9% 3.0% 2.3% 2.8% 2.2% 2.1% 2% The end of the Fed’s QE program in 2014 and a stronger economy have yet to push longer-term yields much higher 1.3% 1% 0.5% 0.1% 0% 15F 16F 17F 18F 19F 20F 21F 15F 16F 17F 18F 19F 20F 21F A full normalization of interest rates is unlikely until 2019, more than a decade after the onset of the financial crisis. Sources: Blue Chip Economic Indicators (4/16 for 2016 and 2017; for 2018-2021 3/16 issue); Insurance Info. Institute. 67 Profitability & Politics How Is Profitability Affected by the President’s Political Party? 72 P/C Insurance Industry ROE by Presidential Administration, 1950-2015* 16.43% Carter Reagan II Obama II Nixon Clinton I G.H.W. Bush G.W. Bush II Clinton II Reagan I Nixon/Ford Truman Eisenhower I Eisenhower II G.W. Bush I Obama I Johnson Kennedy/Johnson 15.10% 8.93% 8.93% 8.65% OVERALL RECORD: 1950-2015* Democrats 7.72% Republicans 7.85% 8.35% 8.33% 7.98% 7.68% 6.98% 6.97% 5.43% 5.03% 4.83% 4.68% 4.43% Party of President has marginal bearing on profitability of P/C insurance industry 3.55% 0% 2% 4% 6% *Truman administration ROE of 6.97% based on 3 years only, 1950-52;. Source: Insurance Information Institute 8% 10% 12% 14% 16% 18% Trump vs. Clinton: Issues that Matter to P/C Insurers Issue Trump Clinton Economy Supply Side-Like Philosophy: Lower taxesFaster real GDP growth; Deficits likely grow as tax cuts are combined with targeted increased spending on Homeland Security, Defense, etc. Keynesian Philosophy: More government spending on infrastructure, education, social services; Deficits likely increase as tax increases likely difficult to pass Interest Rates May trend higher with larger deficits; Shift from monetary policy to fiscal focus (tax cuts, government spending) Status quo at the Fed; Net impact on interest rates unclear Taxes Favors lower tax rates for corporate and personal income tax rates; Tax code overhaul? Unlikely to reduce taxes or embark on major overhaul of tax code International Trade Protectionist Tendencies Has criticized Trans-Pacific Partnership but is a realist on international matters Tort System Doesn’t like trial lawyers but seems to like filing lawsuits Status Quo 75 GLOBAL M&A UPDATE: A PATH TO GROWTH? Are Capital Accumulation, Drive for Growth and Scale Stimulating M&A Activity? 76 U.S. INSURANCE MERGERS AND ACQUISITIONS, P/C SECTOR, 1994-2015E (1) $32,000 $12,458 $6,723 $4,397 40 $4,651 $9,264 $425 $486 $1,249 80 60 $6,419 $20,353 $19,118 $8,059 $10,000 $5,100 $20,000 $11,534 $30,000 120 100 $3,507 $40,032 $30,873 $40,000 140 $0 Number of transactions Transaction values $50,000 M&A activity in the P/C sector was up sharply in 2015 $16,294 $55,825 $13,615 $60,000 M&A activity in 2015 will likely reach its highest level since 1998. Globally, across all sectors, M&A activity exceeded $200B $35,221 ($ Millions) 20 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E (1) Includes transactions where a U.S. company was the acquirer and/or the target. Source: Conning proprietary database; 2015 I.I.I. estimate. 77 Huge Shift from Domestic M&A Activity to Cross-Border The share of M&A deal volume that was cross-border more than doubled in 2015 .Source: Thomson Reuters as of Oct. 2015 from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation “Facts vs. Sentiment: Deals in the Insurance Sector,” by Aviva CEO Mark Wilson. 79 M&A Activity Has Shifted Away from Europe and Towards Asia and N. America Asian, N. American deal volumes were up sharply in 2015 .Source: Thomson Reuters as of Oct. 2015 from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation “Facts vs. Sentiment: Deals in the Insurance Sector,” by Aviva CEO Mark Wilson. 80 M&A: Deal Rationale by Dollar Amount Scale drives most deals (excluding health sector) Source: SNL Financial and WCMA estimates from Geneva Association Newsletter Insurance and Finance, Jan. . 2016, presentation “What is the Logic Behind Consolidation? And Does It Create Value? A View from Outside,” by Brian Shea, Head of Willis Capital Markets & Advisory Europe (WCMA). 81 Some Key Drivers in the US Economy Economic Factors Driving Exposure Growth and Insurer Performance 82 US Real GDP Growth* Q4:2008 decline was Real GDP Growth (%) The the steepest since the -7% -0.3% Q1 2014/15 GDP data were hit hard by this year’s “Polar Vortex” and harsh winter -8.9% 2000 2001 2002 2003 2004 2005 2006 2007 08:1Q 08:2Q 08:3Q 08:4Q 09:1Q 09:2Q 09:3Q 09:4Q 10:1Q 10:2Q 10:3Q 10:4Q 11:1Q 11:2Q 11:3Q 11:4Q 12:1Q 12:2Q 12:3Q 12:4Q 13:1Q 13:2Q 13:3Q 13:4Q 14:1Q 14:2Q 14:3Q 14:4Q 15:1Q 15:2Q 15:3Q 15:4Q 16:1Q 16:2Q 16:3Q 16:4Q 17:1Q 17:2Q 17:3Q 17:4Q -9% -5.3% -5% Recession began in Dec, 2007 -3.7% -3% -1.8% -1% 4.6% 4.3% 2.1% 0.6% 3.9% 2.0% 1.4% 2.0% 2.4% 2.4% 2.4% 2.2% 2.4% 2.2% 2.2% 1% -0.9% 5.0% 1.4% 2.3% 2.2% 2.6% 2.4% 0.1% 2.5% 1.3% 4.1% 2.0% 1.3% 3.1% 0.4% 2.7% 1.8% 4.5% 3.5% 3% 1.3% 5% 1.1% 1.8% 2.5% 3.6% 3.1% 2.7% 1.8% 7% 4.1% Q1:1982 drop of 6.8% Demand for Insurance Should Increase in 2016 as GDP Growth Continues at a Steady, Albeit Moderate Pace and Gradually Benefits the Economy Broadly * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 3/16; Insurance Information Institute. 83 US Unemployment Rate Forecast Rising unemployment eroded payrolls and WC’s exposure base. 11% Unemployment peaked at 10% in late 2009. 10% 6% 5% 4.5% 4.5% 4.6% 4.8% 4.9% 5.4% 6.1% 6.9% 7% 8.1% 9% 8% 9.3% 9.6% 10.0% 9.7% 9.6% 9.6% 9.6% 8.9% 9.1% 9.1% 8.7% 8.3% 8.2% 8.0% 7.8% 7.7% 7.6% 7.3% 7.0% 6.6% 6.2% 6.1% 5.7% 5.6% 5.4% 5.2% 5.0% 4.9% 4.8% 4.7% 4.6% 4.6% 4.5% 4.5% 4.5% 2007:Q1 to 2017:Q4F* Jobless figures have been revised downwards for 2016 Unemployment forecasts have been revised modestly downwards. Optimistic scenarios put the unemployment as low as 4.3% by Q4 of 2016. 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4 15:Q1 15:Q2 15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4 17:Q1 17:Q2 17:Q3 17:Q4 4% * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/16 edition); Insurance Information Institute. 84 Continued Business Investment Will Spur Commercial Exposure Growth 10% 9.0% 9% The level and direction of interest rates is likely to affect these growth rates. 8% 7% 6.2% 6% 5% 4.4% 3.9% 4% 3.0% 2.9% 3% 3.9% 2.6% 2% 1% 0% 2012 2013 2014 2015 2016F 2017F 2018F 2019F Continued business investment will be a potent driver of commercial property and liability insurance exposures. It should drive employment and WC payroll exposures as well (with a lag). Sources: Blue Chip Economic Indicators, 2/2016 (history and forecasts for 2016 and 2017, 10/2015 for forecasts for 2018 and 2019; Insurance Information Institute. 85 Annual Inflation Rates, (CPI-U, %), 1990–2017F Annual Inflation Rates (%) 6.0 5.0 4.9 5.1 3.8 4.0 3.0 3.0 2.0 Inflationary expectations have slipped (due in part to falling energy costs) allowing the Fed to maintain low interest rates Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble reduced inflationary pressures in 2009/10 3.3 3.4 3.2 2.9 2.8 2.4 3.0 2.6 2.5 3.8 3.2 2.8 2.3 1.5 2.3 2.1 1.9 1.6 1.3 1.5 1.6 1.3 1.0 0.1 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 11 12 13 14 15 16F17F Slack in the U.S. economy and falling energy prices suggests that inflationary pressures should remain subdued for an extended period of times Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 4/16 (forecasts). 86 Commodity Prices Have Plunged to Lowest Levels Since 2000 Bank of Canada, Commodity price indices, weekly data, (indexed to Jan 2000=100) Energy and other commodity prices have tumbled Note: Total index includes energy, metals & minerals, agriculture, forestry and fish. Upside for most advanced economies, but a downside for commodity exporters Source: Datastream from IUMI Hamburg 2016 presentation by Doug Harrell, Aspen Insurance. MANUFACTURING SECTOR OVERVIEW & OUTLOOK The U.S. Manufacturing Sector Is Being Buffeted by a High Dollar, Weak Export Markets and Plunging Oil Prices 88 45 40 60.4 59.6 57.8 58.3 57.1 54.2 55.8 60.8 61.4 59.7 59.7 51.4 52.5 52.5 51.8 52.2 53.1 54.1 51.9 53.3 54.1 52.5 50.2 50.5 50.7 51.6 51.7 49.9 50.2 53.1 54.2 51.3 50.7 49.0 50.9 55.4 55.7 56.2 56.4 57.0 56.5 51.3 53.2 53.7 54.9 55.4 55.3 57.1 59.0 56.6 59.0 58.7 55.5 53.5 52.9 51.5 51.5 52.8 53.5 52.7 51.1 50.2 50.1 48.6 48.2 50 55.3 55.1 55.2 55.3 56.9 58.2 58.5 55 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 DecJan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 DecJan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 DecJan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 DecJan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 DecJan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec- 60 ISM Manufacturing Index (Values > 50 Indicate Expansion) January 2010 through December 2015 65 Manufacturing began to contract in late 2015 The manufacturing sector expanded for 68 of the 72 months from Jan. 2010 through Dec. 2015. Manufacturing sector now appears to be in contraction due to weakness abroad, strong dollar and collapse in oil prices Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute. 89 Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—December 2015 $ Millions $500,000 The value of Manufacturing Shipments in Dec. 2015 was $467.0B—down 8% from the July 2014 record high of $508.1B $400,000 $300,000 Ja n9 Ja 2 n9 Ja 3 n9 Ja 4 n9 Ja 5 n9 Ja 6 n9 Ja 7 n9 Ja 8 n9 Ja 9 n0 Ja 0 n 0 Ja 1 n 0 Ja 2 n 0 Ja 3 n 0 Ja 4 n 0 Ja 5 n 0 Ja 6 n 0 Ja 7 n 0 Ja 8 n 0 Ja 9 n 1 Ja 0 n 1 12 1 -J a 13 n -J a 14 n -J a 15 n -J an $200,000 Monthly shipments in Nov. 2014 exceeded the pre-crisis (July 2008) peak but has declined in recent months. Weakness abroad, falling energy prices and a strong dollar are hurting the sector, especially exports. Manufacturing growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages. * Seasonally adjusted; Data published Feb. 4, 2016. Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 90 Manufacturing Growth for Selected Sectors, 2015 vs. 2014* Growth (%) Non-Durables: -9.6% Durables: +1.8% 8.0% 3.4% 1.8% -0.6% 2.6% -0.6%-2.3%-2.1% -1.3% -9.5% -2.3%-2.3% -9.6% Manufacturing of nondurable goods is weaker than for durables Textile Products Plastics & Rubber Chemical Petroleum & Coal Food Products Non-Durable Mfg. Transportation Equip. Computers & Electronics Electrical Equip. Machinery Fabricated Metals Primary Metals Wood Products -32.2% Durable Mfg. All Manufacturing 15% 10% 5% 0% -5% -10% -4.2% -15% -20% -25% -30% -35% Manufacturing Is Contracting Across a Number of Sectors, Especially Petroleum. Adverse Exposure Impacts Are Likely for: WC, Commercial Property, Commercial Auto and Certain Liability Coverages *Seasonally adjusted; Date are YTD comparing data through November 2015 to the same period in 2014. Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 91 CYBER RISK AND INSURANCE Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and Small in Every Industry 92 Data Breaches 2005-2015, by Number of Breaches and Records Exposed # Data Breaches/Millions of Records Exposed Millions 222.5 800 700 783 169.1 614 600 180 160 498 500 140 470 127.7 446 419 92.0 400 66.9 120 85.6 100 321 80 300 200 220 200 662 656 781 35.7 157 60 16.2 22.9 19.1 40 17.5 20 100 0 2005 2006 2007 2008 2009 2010 # Data Breaches 2011 2012 2013 2014 2015 # Records Exposed (Millions) The 781 reported data breaches in 2015 was virtually unchanged form the record 783 reported in 2014. The number of exposed records soared to 169.1 million, and increase of 97.5%. Source: Identity Theft Resource Center (updated as of Jan. 6, 2016); http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf Data/Privacy Breach: Many Potential Costs Can Be Insured Costs of notifying regulatory authorities Regulatory fines at home & abroad Costs of notifying affecting individuals Data Breach Event Forensic costs to discover cause Defense and settlement costs Lost customers and damaged reputation Cyber extortion payments Business Income Loss 94 Estimated Cyber Insurance Premiums Written, 2014 – 2020F Cyber insurance premiums written could more than triple to $7.5 billion by 2020 $ Billions $8 $7.5 $7 $6 I.I.I.’s Cyber Risk paper issued Oct. 2015 $5 $4 $3 $2 $1.5 $2.0 $1 $0 2014 2015E Source: Advisen (2014 est.); PwC (2015, 2020); Insurance Information Institute. 2020F 95 Insured Catastrophe Losses 2013/14 and YTD 2015 Experienced Below Average CAT Activity After Very High CAT Losses in 2011/12 2016: Cat Activity Rising 96 U.S. Insured Catastrophe Losses ($ Billions, $ 2015) $80 $75.7 2012 was the 3rd most expensive year ever for insured CAT losses $70 $15.0 $15.5 $13.1 $36.1 $34.6 $14.9 $11.8 $30.1 $7.7 $10.9 $16.8 $7.8 $34.7 $35.8 $6.3 $11.9 $14.8 $11.3 $13.0 $3.9 $10 $8.2 $20 $5.0 $30 $14.4 $40 $9.1 $50 $27.2 $38.9 $60 $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 13 14 15* 2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for more—not fewer—Costly Events $15B in insured CAT losses though 12/31/15 (est.) *Estimate hrough 12/31/15 in 2015 dollars. 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. 97 97 Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1995–20141 Wind/Hail/Flood (3), $21.4 Winter storm losses were much above average in 2014/15 are will push this share up Fires (4), $6.0 Other (5), $0.2 Geological Events, $0.5 Terrorism, $24.5 1.5% 5.4% 0.1% 0.1% 6.2% Winter Storms, $26.9 6.8% Insured cat losses from 1995-2014 totaled $395.6B, an average of $19.8B per year or $1.65B per month 40.7% Tornado share of CAT losses is rising Events Involving Tornadoes (2), $154.9 Hurricanes & Tropical Storms, $161.2 39.2% Wind losses are by far cause the most catastrophe losses, even if hurricanes/TS are excluded. 1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2014 dollars. 2. Excludes snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO’s Property Claim Services Unit. 99 Top 16 Most Costly Disasters in U.S. History—Katrina Still Ranks #1 (Insured Losses, 2014 Dollars, $ Billions) Storm Sandy in 2012 was the last mega-CAT to hit the US; Northridge still ranks as the 4th costliest disaster of all time $60 $50 $50.2 $40 $30 Includes Tuscaloosa, AL, tornado Includes Joplin, MO, tornado $24.6 $25.3 $26.4 $19.3 $20 $10 $0 $9.4 $11.4 $9.0 $8.1 $7.7 $7.3 $6.9 $4.6 $5.7 $5.8 Irene (2011) Jeanne (2004) Frances (2004) Rita Tornadoes/Tornadoes/ Hugo (2005) T-Storms T-Storms (1989) (2011) (2011) Ivan (2004) Charley (2004) Wilma (2005) $13.8 Ike (2008) Sandy* Northridge9/11 Attack Andrew (2012) (1994) (2001) (1992) Katrina (2005) 12 of the 16 Most Expensive Events in US History Have Occurred Since 2004 Sources: PCS; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI. 100 US Property CAT Rate on Line Index & Global Reinsurance ROE US Property CAT ROL Global Reinsurance ROE Record traditional capacity, alternative capital and low CAT activity have pressured reinsurance prices; ROEs are own only very modestly Source: Barclays PLC from Guy Carpenter; Insurance Information Institute. 102 Insurance Information Institute Online: www.iii.org Thank you for your time and your attention! Twitter: twitter.com/bob_Hartwig Download at www.iii.org/presentations 108