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Overview & Outlook for the
P-C Insurance Industry
Challenges & Opportunities
January, 2011
Reasons for Optimism, Causes for
Concern in the P/C Insurance Industry
 Economic Recovery in US is Self-Sustaining: No Double Dip Recession
 Pessimism “Bubble” Persists; Negative Economic News Amplified; Positive
News is Discounted
 Financial market volatility will remain a reality
 Era of Mass P/C Insurance Exposure Destruction Has Ended
 But restoration of destroyed exposure will take 3+ years in US
 No Secondary Spike in Unemployment or Swoon in Payrolls/WC Exposure
 But job and wage growth remains sluggish
 Exposure Growth Will Begin in 2nd Half 2010, Accelerate in 2011
 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
 P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006
 Investment Environment Is/Remains Much More Favorable
 Volatility, however, will persist and yields remain low
 Both are critical issues in long-tailed commercial lines like WC, Med Mal, D&O
Source: Insurance Information Institute.
2
Reasons for Optimism, Causes for
Concern in the P/C Insurance Industry
 P/C Insurance Industry Capacity as of 6/30/10 Is at Record Levels and Has
Recovered 100%+ of the Capital Lost During the Financial Crisis
 As of 12/31/09 capacity was within 2% of pre-crisis high
 Record Capacity, Depressed Exposures Mean that Generally Soft Market
Conditions Will Persist through 2010 and Potentially into 2011
 There is No Catalyst for a Robust Hard Market at the Current Time
 High Global First Half 2010 CAT Losses Insufficient to Trigger Hard Market
 Localized insurance and reinsurance impacts are occurring, especially earthquake
coverage in Latin/South America, Offshore Energy Markets, European Wind Cover
 Inflation Outlook for US and Major European Economies and Japan is Tame
 Will temper claims inflation
 Deflation is highly unlikely
 Financial Strength & Ratings of Global (Re)Insurance Industries Remained
Strong Throughout the Financial Crisis in Sharp Contrast With Banks
 Insurers Avoided the Most Draconian Outcomes in Financial Services
Reform Legislation
 Tort Environment in US is Beginning to Deteriorate; No Tort Reform in US
 Major Transformation of US Economy Underway with Major Opportunities
for Insurers through 2020 in Health, Tech, Natural Resources, Energy
Source: Insurance Information Institute.
3
Profitability
Historically Volatile
4
$65,777
$16,531
$3,043
$28,311
$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
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.3%
2009 ROAS1 = 5.8%
2010:H1 ROAS = 6.3%
P-C Industry 2010:H1 profits rose
$10.6B from $6.0B in 2009:H1,
due mainly to $2.2B in realized
capital gains vs. -$11.1B in
previous realized capital losses
$36,819
$70,000






$24,404
$80,000
$62,496
P/C Net Income After Taxes
1991–2010:H1 ($ 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 7.5% ROAS for
2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG.
Sources: A.M. Best, ISO, Insurance Information Institute
09 10:H1
ROE: P/C vs. All Industries
1987–2009*
(Percent)
P/C Profitability Is
Cyclical and Volatile
20%
Katrina,
Rita, Wilma
15%
10%
Sept. 11
Hugo
5%
4 Hurricanes
Lowest CAT
Losses in
15 Years
Andrew
0%
Northridge
Financial
Crisis*
-5%
87
88
89
90
91
92
93
94
95
96
97
US P/C Insurers
* Excludes Mortgage & Financial Guarantee in 2008 and 2009.
Sources: ISO, Fortune; Insurance Information Institute.
98
99
00
01
02
03
04
05
06
07
08
09
All US Industries
6
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%
-2.9 pts
The P/C Insurance Industry 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
7
A 100 Combined Ratio Isn’t What It
Once Was: 90-95 Is Where It’s At Now
A combined ratio of about 100
generated a 7% ROE in 2009,
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
100.1
7.3%
7.5%
12%
9.6%
95
18%
92.6
9%
8.9%
6%
90
4.4%
85
3%
0%
80
1978
1979
2003
2005
Combined Ratio
2006
2008*
2009*
2010:H1*
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2009 and 2010:Q1 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.
How P/C Insurance Industry Stability
Has Benefitted Consumers
Bottom Line:
 Insurance markets – unlike banking – are operating normally
 The basic function of insurance – the orderly transfer of risk from
client to insurer – continues uninterrupted
 This means that insurers continue to:
 Pay claims (whereas 286 banks have gone under as of 9/3/10)
– The promise is being fulfilled
 Renew existing policies (banks are reducing and eliminating lines
of credit)
 Write new policies (banks are turning away people and businesses who
want or need to borrow)
 Develop new products (banks are scaling back the products they offer)
 Compete intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute
11
Shifting Legal Liability &
Tort Environment
Is the Tort Pendulum
Swinging Against Insurers?
14
Important Issues & Threats
Facing Insurers: 2010–2015
Emerging Tort Threat
 No tort reform (or protection of recent reforms) is forthcoming from the
current Congress or Administration
 Erosion of recent reforms is a certainty (already happening)
 Innumerable legislative initiatives will create opportunities to undermine
existing reforms and develop new theories and channels of liability
 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 on the horizon and will be
recognized as such by 2012–2014
Source: Insurance Information Institute
15
Trial Bar Priorities
 Reverse U.S.
Supreme
Court
decisions on
pleadings
 Eliminate
pre-dispute
arbitration
 Erode federal
preemption
 Expand
securities
litigation
Source: Institute for Legal Reform.
 Confirm pro Pass Foreign
trial lawyer
Manufactures
judges –
Legal
“Federalize
Accountability
Madison
Act
County”
 Grant
 Roll back
enforcement
existing
authorities to
legal reforms
state AGs
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%
2009–2010 Growth in Tort
Costs as % of GDP is Due in
Part to Shrinking GDP
$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 08E 10E
* Excludes the tobacco settlement, medical malpractice
Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates
for 2009 and 2010
19
Business Leaders Ranking of Liability
Systems in 2009*

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 2009
 North Dakota
 Massachusetts
 South Dakota
Drop-offs
 Maine
 Vermont
 Kansas
Midwest/West has mix of
good and bad states.
Newly Notorious
 New Mexico
 Montana
 Arkansas
Rising Above
50. West Virginia
Source: US Chamber of Commerce 2009 State Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes: 2010
Illinois
Watch List
Cook County






West Virginia
New York City
California
Alabama
Madison County, IL
Jefferson County, MS
Texas Gulf Coast
Rio Grande Valley, TX
Dishonorable
Mention





AR Supreme Court
MN Supreme Court
ND Supreme Court
PA Governor
MA Supreme
Judicial Court
 Sacramento County
New Jersey
Atlantic County
(Atlantic City)
New Mexico
Appellate
Courts
Source: American Tort Reform Association; Insurance Information Institute
South Florida
21
Financial Strength & Ratings
Industry Has Weathered
the Storms Well
27
Reasons for US P/C Insurer
Impairments, 1969–2008
Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause
of Insurer Impairments, Underscoring the Importance of Discipline.
Investment Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.7%
4.2%
Misc.
9.1%
Investment
Problems
Affiliate Impairment
7.0%
38.1%
Deficient Loss Reserves/
In-adequate Pricing
7.9%
7.6%
Catastrophe Losses
8.1%
Alleged Fraud
14.3%
Rapid Growth
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009
29
P/C Premium Growth
Primarily Driven by the
Industry’s Underwriting Cycle,
Not the Economy
30
Soft Market Appears to Persist in 2010
but May Be Easing: Relief in 2011?
(Percent)
25%
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 3-Year Decline Since 1930-33.
20%
15%
10%
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
10F
-5%
NWP was flat with 0.0% growth
in 10:H1 vs. -4.4% in 09:H1
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
31
Average Expenditures on Auto Insurance
$950
$900
$878
$850
$830
$842
$831
$844
$816
$795
$786
$800
$750
$816
$726
$691
$700
$651
$705 $703
$668
$685 $690
$650
$600
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08*
09*
10*
Countrywide Auto Insurance Expenditures Increased
2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)
* Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
32
Average Premium for
Home Insurance Policies**
$950
$879
$900
$850
$804
$800
$822
$835
$854
$764
$729
$750
$700
$668
$650
$593
$600
$550
$536
$508
$500
00
01
02
03
04
05
06
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.
Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
07
08*
09*
10*
34
Average Commercial Rate Change,
All Lines, (1Q:2004–2Q:2010)
1Q10
-5.3%
2Q10
4Q09
-5.6%
-6.4%
3Q09
2Q09
-4.9%
-5.8%
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
35