Download aifa030408 - Insurance Information Institute

Insurance Markets in a
Turbulent Economy
Trends & Challenges
Association of Insurance Financial Analysts
33rd Annual Conference
Naples, FL
March 4, 2008
Robert P. Hartwig, Ph.D., CPCU, President
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  Fax: (212) 732-1916  [email protected]  www.iii.org
Presentation Outline
• The Economic Storm
 What it Means for the Insurance Industry
•
•
•
•
•
•
Financial & Underwriting Performance
Ratings & Financial Strength
Premium Growth
Capacity
Investment Overview
Shifting Legal Liability & Tort Environment
Q&A
A STORMY
ECONOMIC
FORECAST
What a Weakening Economy
& Credit Crunch Mean for
the Insurance Industry
What’s Going On With the US
Economy Today?
Fundamental Factors Affecting US Economy in 2008
• Puncture of Two Bubbles: Credit and Housing
• Credit Crunch: Credit is the lifeblood of the US economy, but
some markets have effectively seized (at least to some degree)
 Problem originated with interest rates being left too low for too long in
the early 2000s
 Subprime mortgage market first part of credit bubble to burst; Spread
via securitization and amplified via leverage and concentration of risk
 As lenders tighten standards, credit issues have spread to prime
borrowers, commercial mortgages, munis, credit cards, student loans
• General Economic Impacts: Burst BubbleAsset Deflation
 Home price bubble is bursting: Loss of value in most valuable asset
impacts wealth via loss of home equity
 Negative “wealth effect” implies consumers (2/3 of spending) become
more cautious
 Business scale back as prospects diminish in classic economic slowdown
 Job growth stagnating (-17,000 in Jan. 2008, first decline since Aug. 2003)
Source: Insurance Information Institute.
Real GDP Growth*
2.7%
2.8%
2.9%
2.9%
09:2Q
09:3Q
09:4Q
2.3%
0.5%
08:1Q
1.1%
0.6%
07:4Q
1%
0.6%
0.8%
2%
09:1Q
4.9%
3.8%
2.9%
1.6%
3%
3.1%
3.6%
2.5%
4%
3.7%
5%
2.5%
Economic growth is
expected to slow
dramatically in the
year ahead
6%
08:4Q
08:3Q
08:2Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2003
2002
2001
2000
0%
*Yellow bars are Estimates/Forecasts.
Source: US Department of Commerce, Blue Economic Indicators 2/08; Insurance Information Institute.
Unemployment Rate,
(2007:Q1 to 2009:Q4F)
6.0%
5.5%
5.2%
5.3%
5.4%
5.3% 5.3%
5.2% 5.2%
5.0%
5.0%
4.8%
4.5% 4.5%
4.5%
4.0%
3.5%
4.6%
Rising unemployment rate
negative impacts workers
comp exposure and could
signal a temporary claim
frequency surge
3.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/08); Insurance Info. Inst.
Toward a New World
Economic Order
1. Credit Crunch (incl. Subprime) Issue Will Ultimately
Cost Hundreds of Billions Globally
•
Problem exacerbated by leveraged bets taken by some financial
institutions therefore its reach extends beyond simple defaults
2. Heavy Toll on Capital Base of Some Large Financial
Institutions Worldwide; US Bond Insurers
•
Cash infusions necessary; Sovereign Wealth Funds important source
3. Most Significant Economic Event in a Generation
•
US economy will recover, but will take 18-24 months
4. Shuffling of Global Economic Deck; Economic
Pecking Order Shifting
•
China, oil producing countries hold the upper hand
5. IOUs are Being Redeemed
•
Stakes in hard assets/institutions demanded
6. Good News: No Shortage of Available Capital
•
Central banks are (generally) making right decisions; Dollar sinks
Source: Insurance Information Institute
What’s Being Done to Fix the
Economy?Impacts on Insurers
Economic Fix
Fed Rate Cuts
Stimulus
Package
Housing
Bailout (?)
Regulatory/
Legislative
Action (?)
Impacts on Insurers
•Reduces bond yields (65% - 80% of portfolio)
•Potentially contributes to inflation longer run
•Hope is that $168B plan boosts overall economic
activity and employment (by 500,000 jobs) and therefore
p/c personal and commercial exposures
•Contributes to already exploding budget deficits—
Washington may expand its search for people and
industries to tax
•Keeps more people in their homes and hopefully paying
HO insurance premiums
•Abandoned and neglected homes have demonstrably
worse loss performance
•Nothing solid proposed but in the wake of subprime
crisis and credit crunch, actions seem inevitable
•Will actions be directed primarily toward banks or
broadly affecting all financial institutions
Post-Crunch: Fundamental
Issues To Be Examined Globally
•
•
•
•
Adequacy of Risk Management, Control &
Supervision at Financial Institutions Worldwide
 Implications for ERM?
 Includes review of incentives
Effectiveness and Nature of Regulation
 What sort of oversite is optimal given recent experience?
 Credit problems arose under US and European (Basel)
regulatory regimes
 Will new regulations be globally consistent?
 Can overreactions be avoided?
 Capital adequacy & liquidity
Accounting Rules
 Problems arose under FAS, IAS
 Asset Valuation, including Mark-to-Market
 Structured Finance & Complex Derivatives
Ratings on Financial Instruments
 New approaches to reflect type of asset, nature of risk
Source: Insurance Information Institute
Insurance &
The Economy
Important but Somewhat
Muted Impacts
A Few Facts About the Relationship
Between Insurance & Economy
• Vast Majority of Insurance Business is Tied to Renewals
 Approximately 98+% of P/C business (units) is linked to renewals
 A very large share of p/c insurance premiums are statutorily or de facto
compulsory (e.g., WC, auto liability, surety, usually HO…)
 P/C insurers have marginal exposure impact due to economy
 Most life revenues and units are renewals, but some products (e.g.,
variable annuities are sensitive to market volatility)
 Life insurers who manage 401(k) assets seeing more loans and hardship
withdrawals;
• Insurers are Sensitive to Interest Rates
 About 2/3 of P/C invested assets and 75% if Life assets are fixed income
 Historically, yield on industry portfolios has tracked 10-year note closely
 All else equal, lower total investment gain implies greater emphasis on
underwriting
 Historically, industry’s best underwriting performances are rooted in
periods when interests rates were low and/or equity market performance
poor (1930s – 1950s, early 2000s gave rise to strong 2006/07)
Source: Insurance Information Institute.
5%
0%
-5%
-10%
6%
4%
5.2%
78
-0.9%
79
80-7.4%
81 -6.5%
-1.5%
82
1.8%
83
4.3%
84
85
86
5.8%
87
0.3%
88
-1.6%
89
-1.0%
90
-1.8%
91
-1.0%
92
3.1%
93
1.1%
94
0.8%
95
0.4%
96
0.6%
97
-0.4%
98
-0.3%
99
1.6%
00
5.6%
01
02
7.7%
03
1.2%
04
-2.9%
05
-0.5%
06
-2.9%
07
-2.7%
08F
Real NWP Growth
15%
10%
8%
Real NWP Growth
Real GDP
2%
Real GDP Growth
20%
P/C insurance industry’s growth
is influenced modestly by growth
in the overall economy
13.7%
25%
18.6%
20.3%
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
0%
-2%
-4%
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/08; Insurance Information Inst.
Summary of Economic Risks
and Implications for Insurers
Economic Concern
Credit Crunch/
Subprime Meltdown
Housing Slump
Lower Interest Rates
Stock Market Slump
General Economic
Slowdown/Recession
Risks to Insurers
•Some insurers have some asset risk
•D&O/E&O exposure for some insurers
•Client asset management liability for some
•Bond insurer problems; Muni credit quality
•Reduced exposure growth
•Deteriorating loss performance on neglected,
abandoned and foreclosed properties
•Lower investment income
•Decreased capital gains (which are usually
relied upon more heavily as a source of
earnings as underwriting results deteriorate)
•Reduced commercial lines exposure growth
•Surety slump
•Increased workers comp frequency
1.0
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 2008 vs. 2005 is
estimated at $920 million.
1.65
1.62
1.58
1.54
1.17
1.35
1.80
1.36
1.60
1.57
1.47
New home starts
plunged 34% from
2005-2007; Drop
through 2008 trough is
51% (est.)—a net
annual decline of
1.05 million units
1.02
1.01
1.2
1.1
1.19
1.3
1.20
1.4
1.29
1.46
1.6
1.5
1.48
1.7
1.64
1.62
1.8
2.07
Impacts also for comml. insurers
with construction risk exposure
1.85
2.0
1.9
1.71
2.1
Exposure growth forecast for HO
insurers is dim for 2008/09
1.96
New Private Housing Starts,
1990-2013F (Millions of Units)
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F 08F 09F 10F 11F 12F 13F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from
2/08 edition of BCEF; Insurance Info. Institute
$1,641
$1,563
$1,438
$1,396
$1,370
$1,307
8%
7%
6%
5%
$1,000
Sharp dip in
business
investment in
2007/2008 will
slow commercial
exposure growth
$800
$600
$400
$200
4%
3%
2%
1%
Nonresidential Fixed Investment
% Change Nonresidential Fixed Investment
12F
11F
10F
09F
08F
07E
06
05
04
0%
03
$0
*Nonresidential fixed investment consists of structures, equipment and software.
Sources: US Bureau of Economic Analysis (Historical), Value Line (2/22/08) estimates/forecasts for 2008-2012.
% Change
$1,200
$1,226
$1,400
$1,144
$1,600
$1,082
Nonresidential Fixed Investment ($ Bill)
$1,800
$1,495
Nonresidential Fixed Investment,*
2003 – 2012F
Total Industrial Production,
(2007:Q1 to 2009:Q4F)
4.0%
3.5% 3.6%
Industrial production affects exposure
both directly and indirectly
3.0%
2.4%
2.7% 2.7% 2.6% 2.6%
1.8%
2.0%
1.1%
0.7%
1.0%
0.2%
0.0%
-1.0%
-1.0%
Industrial production shrank
during the final quarter of 2007 and
is expected to grow only very slowly
during the first half of 2008
-2.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/08); Insurance Info. Inst.
Employment Change by Industry
Dec. 2007 to Jan. 2008p
60,000
50,000
40,000
30,000
Employment fell by 17,000 in January,
the first decline since Aug. 2003.
Manufacturing and Construction are
always the hardest hit in an economic
slowdown, with each losing more than
150,000 jobs over the past 12 months.
47,000
19,000
20,000
11,000
10,000
0
(10,000)
(11,000)
(20,000)
(30,000)
(40,000)
(18,000)
(27,000) (28,000)
Construction
Manuf.
Retail Trade Professional Education & Leisure &
& Biz
Health
Hospitality
Services
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Government
Wage & Salary Disbursements
(Payroll Base) vs. Workers Comp
Net Written Premiums
Wage & Salary Disbursement (Private Employment) vs. WC NWP
$ Billions
$ Billions
7/90-3/91
$7,000
$6,000
3/01-11/01
Wage & Salary
Disbursements
WC NPW
$45
$40
$35
$5,000
$30
$4,000
$3,000
$2,000
Shaded areas indicate recessions
$1,000
Weakening wage
and salary
growth is
expected to cause
a deceleration in
workers comp
exposure growth
$25
$20
$15
$10
$5
$0
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
*As of 7/1/07 (latest available).
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
Inflation Rate (CPI-U, %),
1990 – 2009F
Inflation is Accelerating
6
5
4.9 5.1
 Inflation often amplified in casualty lines (e.g, WC)
Rising inflation can also lead to rate inadequacy
Adverse reserve development
4
3.0 3.2
3
2
3.8
3.3 3.4
3.0
2.9 2.8
2.6
2.4
2.5 2.3
1.9
1.5
4.3
2.9
2.2
2.3
1.3
1
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F
*12-month change Jan. 2008 vs. Jan. 2007; CPI rose at 6.8% pace N
Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Feb. 10, 2008; Ins. Info. Institute.
Favored Industry Groups for
Insurer Exposure Growth
Industry
Health Care
Alternative Energy
Agriculture &
Food Processing &
Manufacturing
Export Driven
Natural Resources
& Commodities
Sources: Insurance Information Institute
Rationale
•Economic NecessityRecession Resistant
•Demographics: aging/immigrationGrowth
•Solar, Wind, Bio-Fuels, Hydro & Other
•Consumer StapleRecession Resistant
•Grain and land prices high due to global demand,
weak dollar (exports)
•Ethanol/Bio-Fuel Source
•Acreage GrowingFarm Equipment, Transport
•Benefits many other industries
•Weak dollar, globalization persist; Cuba angle?
•Strong global demand,
•Supplies remain tight…but beware of bubbles
•Significant investments in R&D, plant & equip
required
Shareholder Class
Action Lawsuits*
600
500
400
A credit crunch creating a
“contagion” effect resulting
in significant financial
distress and bankruptcies in
other sectors could breed
more securities litigation
300
202
200 164 163
242
231
188
173
497
Pace of suits is up due in
part to subprime issues,
housing collapse and
market volatility.
Defendants include banks,
investment banks,
builders, lenders, bond
and mortgage insurers
267
210215
226237
182
118
111
100
176
Includes 44 suits related
to subprime in 2007/08
24
0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through February 29.
Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute
Origin of D&O Claims for
Public Companies, 2006
40% of D&O
suits originate
with shareholders
Competitors,
6%
Customers &
Clients, 4%
Shareholders,
40%
Employees,
25%
Government,
2%
Other 3rd
Party, 22%
Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.
PROFITABILITY &
PERFORMANCE
Profits in 2006/07 Reached
Their Cyclical Peak
$46,300
$63,695
$44,155
$38,501
$30,029
$20,559
$30,773
$21,865
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
Insurer profits
peaked in 2006
$36,819
$50,000
$24,404
$60,000
$20,598
$70,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 9.6%
2006 ROE = 12.2%
2007E ROAS1 = 13.1%**
$59,200
P/C Net Income After Taxes
1991-2008F ($ Millions)*
*ROE figures are GAAP; 1Return on avg. surplus. **Return on Average Surplus; Actual 9-month 2007
result.
Sources: A.M. Best, ISO, Insurance Information Inst.
08F
07E
06
05
04
03
01
-$6,970
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
ROE: P/C vs. All Industries
1987–2008E
20%
P/C profitability is cyclical, volatile and vulnerable
15%
10%
Sept. 11
5%
US P/C Insurers
All US Industries
*2007 is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
07
F
08
F
06
04
03
02
01
00
99
98
4 Hurricanes
97
96
93
92
91
90
89
88
95
Northridge
-5%
05
Andrew
87
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
94
0%
Hugo
Profitability Peaks & Troughs in the
P/C Insurance Industry,1975 – 2008F*
25%
1977:19.0%
1987:17.3%
2006:12.2%
20%
1997:11.6%
15%
10%
5%
0%
1975: 2.4%
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
07E
08F
-5%
*GAAP ROE for all years except 2007 which is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is
I.I.I. estimate.
Source: Insurance Information Institute; Fortune
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2007E
18%
The p/c insurance industry achieved its cost of
capital in 2005/6 for the first time in many years
16%
12%
4%
2%
0%
-2%
-4%
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
91
92
93
94
95
96
97
98
99
Source: The Geneva Association, Ins. Information Inst.
-0.1 pts
6%
+0.2 pts
-13.2 pts
8%
-9.0 pts
10%
+3.1 pts
+1.7 pts
14%
00
01
02
ROE
03
04
05
06 07E
Cost of Capital
P/C, L/H Stocks: Ahead of the
S&P 500 Index in 2008
Total YTD Returns Through February 29, 2008
P/C insurance stocks not
affected as much as the overall
market by credit, subprime
concerns
Mortgage & Financial
Guarantee insurers were -18.90%
down 69% in 2008
S&P 500
-9.38%
All Insurers
-11.49%
-5.08%
P/C
-9.59%
Life/Health
Multiline
-9.68%
Reinsurance
-36.25%
Mortgage*
-11.76%
-40.0%
-30.0%
-20.0%
Brokers
-10.0%
*Includes Financial Guarantee.
Source: SNL Securities, Standard & Poor’s, Insurance Information Inst.
0.0%
FINANCIAL
STRENGTH &
RATINGS
Financially Fit
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2007E
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
2
1.8
1.6
110
1.4
1.2
105
1
100
0.8
0.6
95
0.4
0.2
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
07E
90
2006 impairment rate was 0.43%, or 1-in-233
companies, half the 0.86% average since 1969;
2007 will be lower; Record is 0.24% in 1972
Source: A.M. Best; Insurance Information Institute
0
Impairment Rate
120
Impairment rates
are highly
correlated
underwriting
performance and
could reach nearrecord low in 2007
Reasons for US P/C Insurer
Impairments, 1969-2005
2003-2005
Affiliate
Problems
8.6%
Catastrophe
Losses
8.6%
1969-2005
Deficient
Loss
Reserves/Inadequate
Pricing
62.8%
Deficient
Loss
Reserves/Inadequate
Pricing
38.2%
Investment
Problems*
7.3%
Alleged
Fraud
11.4%
Rapid
Growth
8.6%
Reinsurance
Sig. Change
Failure
in Business
3.5%
4.6%
Misc.
9.2%
Deficient
reserves,
CAT losses
are more
important
factors in
recent years
Affiliate
Problems
5.6%
Catastrophe
Losses
6.5%
Alleged
Fraud
8.6%
Rapid
Growth
16.5%
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Cumulative Average Impairment Rates by
Best Financial Strength Rating*
60%
50%
Insurers with strong ratings are far
less likely to become impaired over
long periods of time. Especially
important in long-tailed lines.
D
C/C-
40%
C++/C+
30%
B/BB++/B+
20%
A/A-
10%
A++/A+
0%
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15
Average Years to Impairment
*US P/C and L/H companies, 1977-2002
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
UNDERWRITING
TRENDS
Extremely Strong 2006/07
P/C Insurance Combined Ratio,
1970-2008F*
Combined Ratios
120
115
110
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000s: 101.8*
105
100
95
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*
08F
90
Sources: A.M. Best; ISO, III
*2007 is actual 9-month result; 2008F from A.M. Best.
P/C Insurance Combined Ratio,
2001-2008F
120
115.8
110
As recently as 2001,
insurers were paying
out nearly $1.16 for
every dollar they
earned in premiums
107.4
2006 produced the best
underwriting result
since the 87.6 combined
ratio in 1949
100.7
100.1
100
2007/8 deterioration due
primarily to falling rates, but
results still strong assuming
normal CAT activity
98.6
98.3
2005 figure benefited from
heavy use of reinsurance
which lowered net losses
92.4
93.8
90
01
02
03
04
05
06
Sources: A.M. Best; ISO, III. *2007 is actual 2007 9-monoth result; 2008 is from A.M. Best.
07F
08F
Ten Lowest P/C Insurance Combined
Ratios Since 1920 vs. 2007E
95
94
92.4 92.5
92.1 92.3
93
92
91.2
91
93.3
93.0 93.1 93.1
93.8
2007 was one
of the Top 12
best since 1920
90
The industry’s best
underwriting years
are associated with
periods of low
interest rates
89
88
87.6
The 2006 combined
ratio of 92.5 was the
best since the 87.6
combined in 1949
1949
1948
87
86
85
1943
1937
1935
2006
1950
1939
1953
1936
2007E
Sources: Insurance Information Institute research from A.M. Best data. *2007: Actual 9-mo. result.
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
Insurers earned a record underwriting profit of
$31.7 billion in 2006, the largest ever but only the
second since 1978. Expected gain for 2007 is
approximately $20 billion. Cumulative underwriting
deficit since 1975 is $421 billion.
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
07E
08F
$ Billions
Underwriting Gain (Loss)
1975-2008F*
Source: A.M. Best. *Actual 2007:9M underwriting profit = $18.146B
Commercial Lines Combined
Ratio, 1993-2008F
04
90
91.2
Recent results benefited from
favorable loss cost trends, improved
tort environment, low CAT losses,
WC reforms and reserve releases
95
97.5
102.5
03
100
94.0
111.1
112.3
109.7
110.2
102.0
105
103.9
107.6
110
110.2
112.5
115
110.3
120
105.4
125
Outside CAT-affected lines,
commercial insurance is
doing fairly well. Caution is
required in underwriting
long-tail commercial lines.
122.3
Commercial coverages
have exhibited significant
variability over time.
85
93
94
95
96
97
Sources: A.M. Best (historical and forecasts)
98
99
00
01
02
05
06 07E 08F
90
98.6
95.6
94.3
96.4
105.3
104.5
Recent strong results
attributable favorable frequency
trends and low CAT activity
94.3
95
98.4
100
102.7
99.8
104.9
103.5
104.5
105
103.9
110
109.9
115
110.9
Personal Lines
Combined Ratio, 1993-2007E
85
93
94
95
96
97
98
99
Source: A.M. Best; Insurance Information Institute.
00
01
02
03
04
05
06 07E 08F
CATASTROPHIC
LOSS
What Will 2008 Bring?
U.S. Insured Catastrophe Losses*
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
95
96
97
98
99
00
01
02
$100.0
$6.5
$5.5
$16.9
$9.2
$61.9
$4.7
91
92
93
94
$5.9
$7.5
$2.7
$20
89
90
$40
$26.5
$60
$22.9
$80
2006/07 were welcome
respites. 2005 was by far the
worst year ever for insured
catastrophe losses in the US,
but the worst has yet to come.
$12.9
$27.5
$120
$100
$100 Billion
CAT year is
coming soon
$ Billions
07
20??
03
04
05
06
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
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.
Source: Property Claims Service/ISO; Insurance Information Institute
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2%
Civil Disorders, $1.1
, 0.4%
Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 ,
6.4%
Winter Storms,
$23.1 , 7.8%
Terrorism, $22.3 ,
7.5%
Water Damage, $0.4
, 0.1%
Utility Disruption,
$0.2 , 0.1%
Tornadoes, $77.3 ,
26.0%
Insured disaster losses
totaled $297.3 billion from
1987-2006 (in 2006 dollars).
Wildfires accounted for
approximately $6.6 billion of
these—2.2% of the total.
All Tropical
Cyclones, $137.7 ,
46.3%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars.
Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.
2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions
and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
Annual Catastrophe Bond
Transactions Volume, 1997-2007
Risk Capital Issues ($ Mill)
$8,000
Number of Issuances
Catastrophe bond issuance has
soared in the wake of Hurricanes
Katrina and the hurricane
seasons of 2004/2005, despite two
quiet CAT years
$7,000
$6,000
$5,000
$7,329.6
35
30
25
$4,693.4
20
$4,000
15
$3,000
$1,000
$633.0
$846.1$984.8
$1,139.0
$1,219.5
$966.9
10
$1,991.1
$1,729.8
$2,000
$1,142.8
5
$0
0
97
98
99
00
01
02
03
04
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
05
06
07
Number of Issuances
Risk Capital Issued
The 2008 Hurricane
Season:
Less Activity Predicted
Outlook for 2008 Hurricane
Season: 25% Worse Than Average
Average*
2005
2008F
9.6
49.1
5.9
24.5
2.3
28
115.5
14
47.5
7
13
60
7
30
3
5
7
6
Accumulated Cyclone Energy
96.2
NA
115
Net Tropical Cyclone Activity
100%
275%
125%
Named Storms
Named Storm Days
Hurricanes
Hurricane Days
Intense Hurricanes
Intense Hurricane Days
*Average over the period 1950-2000.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.
Landfall Probabilities for 2008
Hurricane Season: Above Average
Entire US East Coast
US East Coast Including
Florida Peninsula
Gulf Coast from Florida
Panhandle to Brownsville
Caribbean
Average*
2008F
52%
31%
60%
37%
30%
36%
NA
Above
Average
*Average over the past century.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.
PREMIUM
GROWTH
At a Virtual Standstill
in 2007/08
Strength of Recent Hard Markets
by NWP Growth*
25%
1975-78
1984-87
2001-04
Post-Katrina period
resembles 1993-97
(post-Andrew)
20%
15%
10%
5%
0%
-5%
2007/2008: Premium growth of 0% or less
would be slowest since a decline in 1943
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007F
2008F
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2007 figure is actual 9-month figure.
Cost of Risk vs. Commercial
Lines Combined Ratio
$8.42
110.2
$11
$9
$7
105.4
102.5
102.0
$5
$3
95
$1
90.5
90
($1)
90
91
92
93
94
95
96
97
98
99
00
01
02
03
Source: RIMS, A.M. Best 2007 Aggregates & Averages; Insurance Information Institute
04
05
06
Cost of Risk/$1000 Revenue
$11.94
$13.15
$13.91
$13.50
$13
$4.83
$5.20
$5.25
104.1
$6.49
$7.30
107.6
$7.70
$11.95
112.3
111.1
109.7
$5.70
100
$8.30
105
110.2
109.4
$6.40
110
112.5
110.2
109.5
$5.71
115
$15
122.3
Commercial
Combined Ratio
Cost of Risk
118.8
120
$6.10
Commercial Lines Combined Ratio
125
CAPACITY/
SURPLUS
Accumulation Continues
U.S. Policyholder Surplus:
1975-2007*
$550
$500
$450
Capacity as of 9/30/07 was $521.8B,
5.3% above year-end 2006, 80%
above its 2002 trough and 54%
above its 1999 peak.
$400
$ Billions
$350
$300
$250
$200
Premium-to-surplus
ratio neared a record
low of $0.84:$1 at year
end 2007, suggesting
excess capital
$150
$100
$50
Capacity exceeded a
half trillion dollars for
the first time during
the 2nd quarter of 2007
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
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*
Source: A.M. Best, ISO, Insurance Information Institute.
*As of September 30, 2007
P/C Industry Premium-to-Surplus
Ratio, 1985-2007:Q3
Private Carriers
$ Billions
P:S Ratio
At 0.86:1 as of 9/30/07, now
approaching all-time record
premium-to-surplus ratio of
0.84:1 in 1998
600
1.92:1
$521.8B
500
2.5
2.0
400
$450 B
300
1.0
$145 B
Low P:S Ratio
0.84:1 in 1998
100
NWP
0.86:1
P:S Ratio
Q
3
07
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
0.0
89
88
87
85
86
$76 B
0
Surplus
0.5
06
200
1.5
Calendar Year
Q3 = First 3 quarters as of 9/30/07
Source:
Insurance Information Institute; 1985–2006, A.M. Best Aggregates & Averages;; 2007 ISO
P/C Insurer Share Repurchases,
1987- Through Q3:2007 ($ Mill)
Reasons Behind Capital BuildUp & Repurchase Surge
•Strong underwriting results
•Moderate catastrophe losses
$566.8
$310.1
$658.8
$769.2
92
93
94
95
$7,094.1
$5,242.3
$763.7
$418.1
91
$311.0
89
$952.4
$646.9
88
90
$564.0
$2,000
87
$6,000
$1,539.9
$8,000
$2,764.2
Returning capital owners
(shareholders) is one of the
few options available
$10,000
$4,297.3
$12,000
$5,266.0
$14,000
2007 repurchases to
date equate to 4.4% of
industry surplus, the
highest in 20 years
$4,586.5
•Reasonable investment
performance
•Lack of strategic alternatives
(M&A, large-scale expansion)
$16,000
$17,412.7
$2,385.6
$4,497.5
$18,000
$4,370.0
$20,000
$4,000
First 9-months 2007 share
buybacks are already
133% of the 2006 record
06
05
04
03
02
01
07Q3
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
00
99
98
97
96
$0
INVESTMENT
OVERVIEW
More Pain,
Little Gain
Property/Casualty Insurance
Industry Investment Gain1
$ Billions
$57.9
$60
$52.3
$56.9
$51.9
$47.2
$50
$59.4
$44.4
$42.8
$55.7
$48.9
$36.0
$40 $35.4
$30
$45.3
$61.9
Investment rose in 2007 but are
marginally higher than what they
were nearly a decade earlier in 1998
$20
$10
1Investment
07
**
06
05
*
04
03
02
01
00
99
98
97
96
95
94
$0
gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.
*2005 figure includes special one-time dividend of $3.2B. **A.M. Best estimate
Sources: ISO; Insurance Information Institute.
Investment Gain on Funds &
Other Income, 1997-2006
12.0%
11.0%
10.9%
10.6%
10.0%
10.3%
9.4%
8.9%
9.0%
Invest gains have
been trending
generally downward
over the past decade
8.0%
7.1% 7.1%
7.0%
6.4% 6.3% 6.4%
6.0%
5.0%
4.0%
3.0%
97
98
99
Sources: A.M. Best; Insurance Info. Inst.
00
01
02
03
04
05
06
$8,204
$3,359
$13,016
$9,701
$9,125
$6,610
$6,631
$9,244
$5,997
Realized capital gains
rebounded strongly in 2004/5
but fell sharply in 2006
despite strong stock market
as insurers “banked” their
gains. Rising again in 2007.
$1,664
$4,806
$5,000
$2,880
$10,000
$9,818
$9,893
$15,000
$18,019
$10,808
$20,000
Realized capital gains
rose during the last soft
market as they are
now, as underwriting
results deteriorate
$16,205
US P/C Net Realized Capital Gains,
1990-2007:9 Months ($ Millions)
-$1,214
$0
-$5,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
Sources: A.M. Best, ISO, Insurance Information Institute.
*As of September 30, 2007.
The “Fed” is Now Aggressively
Pushing the “Fed Funds” Rate Down
6%
5%
The Fed has cut rates by 2.25
points since Aug. 2007. More
cuts likely by end of March
4%
3%
2%
1%
Cuts in the “Fed Funds” rate—for
very short-term loans—has so far not
brought down longer-term yields as
inflationary expectations build
11/04
12/04
1/05
2/05
3/05
4/05
5/05
6/05
7/05
8/05
9/05
10/05
11/05
12/05
1/06
2/06
3/06
4/06
5/06
6/06
7/06
8/06
9/06
10/06
11/06
12/06
01/07
02/07
03/07
04/07
5/07
6/07
7/07
8/07
9/07
10/07
11/07
12/07
1/08
2/08
0%
Source: Federal Reserve Bank of New York.
Yield Curves for Last Week of
February 2008, 2007, 1978*
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1978: Stagflation
yield curve built in
LT inflationary
expectations. Are
they building again?
Feb. 1978
Feb. 2007
Feb. 2008
2007: Pre-credit crunch
flat/inverted yield curve
2008: Fed action pushed ST
yields down, LT little changed
and reflect inflation fears
1m
3m
6m
1y
2y
3y
5y
7y
10y 20y 30y
*Constant maturities for last week of February each year. No data for 1m, 3m or 6m available for 1978. 20-yr 1978
figures is III interpolated value.
Sources: Federal Reserve; Insurance Information Institute.
Shifting Legal
Liability & Tort
Environment
Will the Pendulum Swing
Against Insurers?
Personal, Commercial &
Self (Un) Insured Tort Costs*
$250
Commercial Lines
Personal Lines
Self (Un)Insured
Total = $216.7 Billion
Billions
$200
$45.5
Total = $159.6 Billion
$150
Total = $121.0 Billion
$30.0
$85.6
$20.4
$100
$70.9
Total = $39.3 Billion
$51.0
$50
$0
$85.6
$5.2
$17.1
$17.0
$49.6
$58.7
1980
1990
2000
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
2006
$300
Tort System Costs
$250
$200
$150
$100
$50
After a period of
rapid escalation,
tort system costs as
a % of GDP are
now falling
2.24%
$277
2.24%
$265
2.14%
$246.0
1.98%
$247.0
1.82%
1.83%
1.83%
1.53%
1.87%
$179.2
1.34%
$158.5
1.22%
1.11%
$130.2
1.03%
0.82%
$83.7
0.62%
2.5%
$42.7
$13.9$20.0
$7.9
$5.4
$1.8 $3.4
0.5%
$0
2.0%
1.5%
1.0%
0.0%
50
55
60
65
70
75
80
Tort Sytem Costs
85
90
95
00
03
06 08E 09E
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP
Tort Costs as % of GDP
Tort System Costs, 1950-2009E
The Nation’s Judicial
Hellholes (2007)
Watch List
Madison County, IL
St. Clair County, IL
Northern New
Mexico
Hillsborough
County, FL
Delaware
California
Some improvement
in “Judicial
Hellholes” in 2007
NEVADA
Clark County
(Las Vegas)
ILLINOIS
Cook County
NEW JERSEY
Atlantic County
(Atlantic City)
West Virginia
Dishonorable
Mentions
District of Columbia
MO Supreme Court
MI Legislature
GA Supreme Court
Oklahoma
TEXAS
Rio Grande
Valley and
Gulf Coast
Source: American Tort Reform Association; Insurance Information Institute
South Florida
Sum of Top 10 Jury Awards
$6,000
$ Millions
$5,158.8
$5,000
$4,000
$2,953.7
$3,000
Total of Top 10
awards in 2007
was 25% lower
than in 2006
$2,000
$1,000
$815.0
$615.0
2006
2007
$0
2004
2005
Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.
Excess Liability Market Capacity –
North America
Billions
Capacity is up 16.5% since its 2003 trough
$2.8
$2.045
$2.011
$1.941
$2.6
$2.4
$1.721
$2.2
$2.0
$1.660
$1.645
$1.535$1.570
$1.710
$1.575
$1.425
$1.432
$1.405
$1.334
$1.8
$1.6
$1.4
$1.2
$1.0
94
95
96
97
Source: Marsh, 2007 Limits of Liability Report
98
99
00
01
02
03
04
05
06
07
Insurance Information
Institute On-Line
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