premiums growth in p/c npw highly cyclical
Post on 01-Jan-2016
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-10%
-5%
0%
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15%
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25%
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Current $ Real $
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
PREMIUMSGrowth in P/C NPW Highly Cyclical
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1985-87: 14.5%
2001-03F: 8.8%
1975-78 1985-87 2001-03
*2003 figure is estimate on first half result.
2
CAPACITYExcess Liability Market Capacity is
Cyclical, Like Other Segments
Source: Marsh, 2003 Limits of Liability Report, III
$1.425$1.575
$1.710
$2.045$1.941$2.011
$1.721
$1.405$1.334
$1.432
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Bil
lio
ns Capacity has dropped 30% since peaking in 2000
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105
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120
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PERFORMANCEP/C Industry Combined Ratio
Highly Cyclical2001 = 115.7
2002 = 107.2
2003First Half = 99.8
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.7
2000s: 111.0
Sources: A.M. Best; ISO, III *Based on First Half 2003 results.
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Interest Rates and Underwriting Profits
Assumptions:No risk, no inflation, no expense loadingReal rate is 1.25%Policy pays off $100 one year from now
Premium= $100/1.0125 = $98.77
Underwriting profit= $98.77-100 = -$1.23
Underwriting profit ratio = -.012
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Interest Rates and Underwriting Profits
Assumptions:Same but now 3% inflation
Loss= $100*1.03 = $103
Discount rate = 1.0125*1.03=1.043
Premium= $103/1.043 = $98.77
Underwriting profit= $98.77-103 = -$4.23
Underwriting profit ratio = -.043
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-5%
0%
5%
10%
15%
20%
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*
*First Half 2003Source: Insurance Information Institute; ISO, III
PROFITSP/C ROE Volatile but is it
Still Cyclical?
7
$ Billions, Calendar Year Basis
$2.3 $2.2 $1.2
($8.5)
($1.5)
($7.5)($6.7)($10.0)
$22.7
$0.3
($3.7)($0.3)
$9.9
($15)
($10)
($5)
$0
$5
$10
$15
$20
$25
90 91 92 93 94 95 96 97 98 99 00 01 02
RESERVE DEVELOPMENT:Why is Reserve
Development Cyclical?
*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, III
Adverse reserve development of about $23 billion accounted for most of the
industry’s 2002 underwriting loss and “ate” much of the industry’s $37 billion
increase in earned premiums
8
PERFORMANCELine-Specific Cyclicality (WC)
Source: A.M. Best, NCCI, III
*Includes dividends to policyholdersAccident year is developed to ultimate as 12/31/02;Note: CY figures from AM Best; AY figures from NCCI
Workers CompensationCalendar Year vs. Ultimate Accident Year
Countrywide—Private Carrier*
123 122
109
101
97100
122
110
121
102
107
121
129
137
125
107
101
108
115117 118
9795
100
112
133
90
95
100
105
110
115
120
125
130
135
140
90 91 92 93 94 95 96 97 98 99 00 01 02
Pe
rce
nt Calendar YearAccident Year
2.9 pts due to 9/11
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INSOLVENCIESP/C Company Insolvency Rates
are Cyclical
Source: A.M. Best; Insurance Information Institute
1.20%
0.58%
0.21%0.28%
0.79%
0.60%
0.23%
1.02% 1.03%
1.33%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
•Insurer insolvencies are increasing•10-yr industry failure rate: 0.72%
•Failure rating for B+ or better rating: 0.49%•Failure rate for D through B rating: 1.29%
383030
10-yr Failure Rate
= 0.72%
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RATINGSAre P/C Insurer Ratings Cyclical?
-30
-25
-20
-15
-10
-5
0
5
10
1998 1999 2000 2001 2002
Upgrades / Downgrades: North America
Source: Moody’s, III
11
$0
$50
$100
$150
$200
$250
$300
$350
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 0203*
CAPITALP/C PHS Exhibiting Cyclicality
Source: A.M. Best, Insurance Information Institute, III *First Half
$ B
illi
ons
Surplus (capacity) peaked at $336.3 Billion in mid-1999 and fell by 15.5% ($52 billion) to $284.3 billion at year-end 2002 (a trough?)
•Surplus during the first half of 2003 rose by $28.2B or 9.9% to $312.5B
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
$47 Billion
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Non-Life Betas by Country, 1978-1998
0.75
0.85
0.95
1.05
1.15
1.25
1.35
1.45
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US UK Switzerland France Germany
INTERNATIONALCyclicality Exists Internationally in
Investor Perceptions
Source: Kielholz, Walter, “The Cost of Capital for Insurance Companies,” The Geneva Papers on Economic Activity, v 25, no. 1, January 2000, III
13
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%
11
% 13
%
16
%
19
%
22
%
28
%
31
%
31
%
28
% 30
% 32
% 33
%
28
% 29
% 30
% 32
%
30
%
27
%
25
%
28
%
22
%
18
%
18
%
17
%
10%
15%
20%
25%
30%
35%
Ju
l-0
1
Au
g-0
1
Sep
-01
Oct
-01
No
v-0
1
Dec
-01
Ja
n-0
2
Feb
-02
Ma
r-0
2
Ap
r-0
2
Ma
y-0
2
Ju
n-0
2
Ju
l-0
2
Au
g-0
2
Sep
-02
Oct
-02
No
v-0
2
Dec
-02
Ja
n-0
3
Feb
-03
Ma
r-0
3
Ap
r-0
3
Ma
y-0
3
Ju
n-0
3
Ju
l-0
3
Source: MarketScout.com, III
PRICINGCommercial Premium Rate Changes Highly Cyclical
Pricing cycle appears to be alive and well
Is moderation due to realization of performance and profit goals, increasing capacity/capital, or market share strategies?
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