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Soft Markets andSoft Markets andHard Truths in the Property/Liability Insurance Industry
Alabama I-Day 2009University of Alabama Tuscaloosa, AL
Steven N Weisbart Ph D CLU Senior Vice President and Chief Economist
University of Alabama Tuscaloosa, ALOctober 7, 2009
Steven N. Weisbart, Ph.D., CLU, Senior Vice President and Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5540 ♦ Cell: (917) 494-5945 ♦ stevenw@iii.org ♦ www.iii.org
Presentation Outline
• Hard Truths about the U S EconomyHard Truths about the U.S. Economy• Soft Markets in the Property-Liability
I I d tInsurance Industry• Hard Truths in Property-Liability
Insurance Operations• Hard Truths About Property-LiabilityHard Truths About Property Liability
Investment Performance & Insuring CapacityCapacity
Q&A
Hard Tr thsHard Truthsaboutabout
the U S Economythe U.S. EconomyBeen Down So Long It Looks Like Up to Me
Length of U.S. Business Cycle Contractions 1945-Present*Contractions, 1945 Present
25 Current recession began in Dec. Duration (Months)
20
25 g2007 and is already the longest
since the Great Depression.
15
16 16
2210
811 10
810 11
68 8
0
5
0Feb.1945
Nov.1948
July 1953 Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan. 1980 Jul. 1981 Jul. 1990 Mar.2001
Dec.2007
* As of September 2009, inclusiveSources: National Bureau of Economic Research; Insurance Information Institute.
Month Recession Started
Length of U.S. Business Cycles, 1945-Present*1945 Present
120Contraction Expansion followingDuration (Months)
106
2
120
90100110120
92
73
60708090
2237
45
39 36
58
30405060
8 11 10 8 10 1116
616
8 8
223
24
3
120
102030
0Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul. 1981 Jul. 1990 Mar.2001
Dec.2007
* As of April 2009, inclusiveSources: National Bureau of Economic Research; Insurance Information Institute.
Month Recession Started
Real Quarterly GDP Changes (annualized),
2005:Q3-2010:Q4F Red bars are actual; Yellow
4%8%
Q QSpike due almost entirely to the weak dollar
(growing exports and slowing imports)
;bars are forecasts/estimates
3.1%
2.1%
5.4
4%
3.0%
%
3.2% 3.
6%
2.1%
5%
3.0%
2.4% 2.5% 2.7%
2.7% 2.9%
2%
4%
6%
2
1.4
0.1%
1.2% 2
1.5
0%.7%
2%
0%
2%
%
-1.0-0.
-2.7
%
6%
-4%
-2%
The Q1:2009 decline was th t t i th
-5.4
%
-6.4
%
-8%
-6%
5:3Q
5:4Q
6:1Q
6:2Q
6:3Q
6:4Q
7:1Q
7:2Q
7:3Q
7:4Q
8:1Q
8:2Q
8:3Q
8:Q
4
9:1Q
9:2Q
9:3Q
9:4Q
0:1Q
0:2Q
0:3Q
0:4Q
the steepest since the Q1:1982 drop of 6.4%
05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10
Sources: US Department of Commerce, Bureau of Economic Analysis (actual) at http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htmBlue Chip Economic Indicators 9/09 issue (forecasts).
EmploymentEmployment
U.S. Nonfarm Private Employment, Monthly Nov 2007 – August 2009Monthly, Nov 2007 August 2009
0 1 0 9 8 8 7 6138 5
Millions The U.S. economy lost about 6 million
Employment peak; recession starts
138.
0
138.
1
138.
0
137.
9
137.
8
137.
8
137.
7
137.
6
137.
6
137.
4
137.
0
136.
7
36.2
136 5137.0137.5138.0138.5 lost about 6 million
jobs in 12 months
13
135.
1
134.
3
.7134 5135.0135.5136.0136.5
1
133.
133.
0
132.
5
132.
2
1.7 4132.5
133.0133.5134.0134.5
1
131
131.
4
131.
2
130.5131.0131.5132.0
130.0Nov07
Dec07
Jan08
Feb08
Mar08
Apr08
May08
June08
Jul08
Aug08
Sep08
Oct08
Nov08
Dec08
Jan09
Feb09
Mar09
Apr09
May09
Jun09
Jul09
Aug09
Seasonally adjusted. Source: US Bureau of Labor Statistics
Unemployment and UnderemploymentRates: Rocketing Up in 2008-9
18Traditional Unemployment Rate U-3Unemployment + Underemployment Rate U-6
January 2000 through August 2009, seasonally adjustedg p
Percent
14
1618 Unemployment + Underemployment Rate U-6
U-6 went from 9.2% in April 2008 to
16 8% in Aug 20099.7% Aug. 2009 unemployment rate (U-3) was the highest monthly rate since 1983.
1012
16.8% in Aug. 2009g yPeak rate in the last 30 years: 10.8% in
Nov-Dec 1982.
6
8
24
00 01 02 03 04 05 06 07 08 09
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U.S. Unemployment Rate ForecastsQuarterly 2009:Q3 to 2010:Q4Quarterly, 2009:Q3 to 2010:Q4
11.0%Unemployment is expected to
peak in late 2009:Q4 or 2010:Q1.
10 3% 10 3% 10 3%10.5%
11.0% p Q Q
9.8%
10.1%10.3% 10.3% 10.3%
10.2%
9 6%
9.9%10.0%
9.9%9.7%9.7% 9.7%
10.0%
9.6%9.5%9.5% 9.5%
9.1%9.0%
9.5%
8.8%
8.5%09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4
Rising unemployment will erode payrolls and workers comp’s exposure base.
10 most pessimistic consensus/midpoint 10 most optimistic
Sources: Blue Chip Economic Indicators (9/09); Insurance Info. Inst.
Has the Contraction Endedand Recovery Begun?and Recovery Begun?
Source: http://www.calculatedriskblog.com/
Will the Recession End Soon?Feb-Sep 2009 Initial Jobless Claims*Feb Sep 2009 Initial Jobless Claims
658659660
640643647650650658659
651648638
63263062632
640
660
620625
630627623
617618616607
600
620
585
567 571567573570
580
600
567560557
566 567
540
560
4 8 4 1 8 5 6 3 0 7 4 8 5 1 8 5 2 9
4-week moving avg (000)
Feb
14
Feb
21
Feb
2 8
Mar
7
Mar
14
Mar
21
Mar
28
Apr
4
Apr
11
Apr
18
Apr
25
May
2
May
9
May
16
May
23
May
30
Jun
6
Jun
13
Jun
20
Jun
27
Jul 4
Jul 1
1
Jul 1
8
Jul 2
5
Aug
1
Aug
8
Aug
15
Aug
22
Aug
29
Sep
5
*seasonally adjusted; state programs only Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
HousingHousing
High Ratio of Unsold-Homes Inventory to Sales Will Likely Keep Prices Falling
Inventory of unsold homes number of homes sold
to Sales Will Likely Keep Prices FallingMillions of Homes, Annual Rate
7.1
6.56
7
8y
# of house sales fell;inventory wasn’t the problem
# of house sales is rising but so is inventory
.0 7 8 6 9 9 8 4.1
6
5.7
4.9
4.49 4.71
4.55 4.66
4.72 4.89 5.
24
4
5
6
2.8 3.
5 4. 3.7
3.6 3.8
3.6 3. 3.9
3.8 44 4
2
3
0
1
05 06 07 08
n-09
b 09 r 09
r 09
y 09
n 09 l 09
Jan
Feb
Mar
Apr
May
Jun
Jul
Source: http://www.realtor.org/research/research/ehsdata
“Shadow” Inventory of Unsold Homes: It’s Worse Than You ThinkHomes: It s Worse Than You Think
• “About 1.8 million homes are currently in foreclosure and theyAbout 1.8 million homes are currently in foreclosure and they will continue to weigh on home prices for at least the rest of the year.”Zillo com’s latest Homeo ner Confidence S r e (p blished• Zillow.com’s latest Homeowner Confidence Survey (published August 18, 2009) asked homeowners how likely they would put their homes on the market if they saw signs of a turnaround in the next 12 months:the next 12 months:
Very likely, 8% (7.5 million homes)Likely, 9% (7.5 million homes)Likely, 9% (7.5 million homes)But Adam York, economist for Wells Fargo Securities, “contends that the amount of homes that have not yet been listed for sale could be around 4-5 millioncould be around 4-5 million.
Sources: Julie Haviv, “’Shadow’ inventory lurks over U.S. housing recovery,” Reuters, at http://www.reuters.com/article/GCA-Housing/idUSTRE56U5YZ20090731 and http://zillow.mediaroom.com/index.php?s=173
High Inventory Means Millions Fewer Private Housing StartsFewer Private Housing Starts
.07
2 1
Measured by number of new units started, exposure growth for HO insurers is low.
Housing start data also affects commercial
Millions of Units
Housing
2.
1.80
62 .64
7 60 1.71
1.85 1.
96
1 71.81.92.02.1 Housing start data also affects commercial
insurers with construction risk exposure.g
bubble
Recession
1.361.
48
1.351.
46
1.29
209
1.47
1.6 1.
1.57 1.6
1 31.41.51.61.7
R i
0.90
80
1.2
1.01
1.1
0 91.01.11.21.3
I I I ti t h 100 000 d li i h i
Recession
0.58
0.8
0 50.60.70.80.9 I.I.I. estimate: each 100,000 decline in housing
starts “costs” home insurers $90 million in gross premium. Estimated premiumloss in
2008 vs. 2005: about $1 billion.
0.40.5
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F 09F 10FSources: US Department of Commerce; Blue Chip Economic Indicators (9/09); Insurance Information Inst.
The “Silver Lining”?I fl i Mi h BInflation Might Be
Relatively LowRelatively Low
After Recent Recessions,the Annual Inflation Rate Droppedthe Annual Inflation Rate Dropped
6% Average inflation rate, 1992-2007: 2.67% Post-Recession
4.9%5.1%
3.8% 3.8%4%
5%Recession Post-
Recession
3.0%3.2%
2.6%
1 9%
3.3%3.4%
2.5%2.3%
3.0% 2.8%
1 8%
2.8%2.9%2.4%3%
1.5%1.9%
1.3%1.8%
-0.5%1%
2%
0.5%
-1%
0%90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F
Sources: US Bureau of Labor Statistics (actual, blue bars); Blue Chip Economic Indicators, 9/09 issue, (forecasts, yellow bars)
Section Summary: Hard Truths About the U.S. Economy
• Continued high levels of unemployment/
y
g p yunderemployment
• Continued low levels consumer demand/• Continued low levels consumer demand/ business investment
Significant increase in the personal saving rate butSignificant increase in the personal saving rate, but virtually all used to pay down outstanding debtLow or no growth in insured exposuresLow- or no-growth in insured exposures
• Low levels of new borrowingAffects housing, autos, other consumer durables
S ft M k t i thSoft Markets in the Property/LiabilityProperty/Liability Insurance IndustryInsurance Industry
P i il D i bPrimarily Driven bythe Industry’s Underwriting Cycle,
N t th ENot the Economy
40 Years ofHard and Soft Markets
22%24%
S f1975-78 1984-87 2000-03Shaded areas
denote “hard I 2007 i
16%18%20%22% denote hard
market” periods In 2007 net written premiums fell, the first decline since
1943
10%12%14%16%
2%4%6%8%
-4%-2%0%2%
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
2007
2008
2009
:Q1
Sources: A.M. Best, ISO, Insurance Information Institute
Year-to-Year Change in Net Written Premium 2000-2009*Written Premium, 2000 2009
P/C insurers are Protracted i d f
15.3%experiencing their
slowest growth rates since 1943
period of negative or slow growth is possible due to soft
5 0%
8.4%10.0% Slow growth means
retention is critical
due to soft markets and
slow economy
5.0%3.9%
0.5%
4.2%
-1.0% -1.4%-3.5%
Sources: A.M. Best (historical through 2008; ISO for 2009. *first quarter 2009 only
3.5%2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*
Does National Economic Growth Affect Real P/C Premium Growth? Not Much
% 0.3%
25% 8%
Real P/C Premium Growth? Not Much
18.6
% 20
13.7
%
15%
20% 6%
.2%
% 5.8%
5.6%
17.
7%10%
WP
Gro
wth
2%
4%
DP
Gro
wth
5.
1.8%
4.3 % 5
0.3%
3.1%
1.1%
0.8%
0.4%
0.6%
% %1.
6%5
1.2%
%
1.7%
0%
5%
Real
NW
0%
Rea
l GD
-0.9
%% 5%
-1.5
%
-1.6
%-1
.0%
-1.8
%-1
.0%
-0.4
%-0
.3%
-2.9
% -0.5
%-3
.8%
-4.2
%-5% -2%
Real NWP Growth Real GDP
-7.4
%-6
.5-10%
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 08E
09F
-4%Real NWP Growth Real GDP
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/09; Insurance Information Inst.
Even When the Payroll Base is Rising, Soft Markets Reduce Workers Comp PremiumsMarkets Reduce Workers Comp Premiums
7/90 3/91 3/01 11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
12/07 ?
$6,000
$7,000
$35
$40
$45Wage & Salary DisbursementsWC NPW
7/90-3/91 3/01-11/01 12/07-?
$4,000
$5,000
$25
$30
$35
Weakening wage
$2,000
$3,000
$10
$15
$20Weakening wage
and salary growth is
expected to cause a deceleration in
$0
$1,000
$0
$5
$10Shaded areas indicate recessions a deceleration in workers comp
exposure growth
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08**9-month data for 2008Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
H d T th i thHard Truths in the Property/LiabilityProperty/Liability
Insurance OperationsInsurance OperationsP i il D i bPrimarily Driven by
the Industry’s Underwriting Cycle,N t th ENot the Economy
The P/C Industry’s Combined Ratio Seems Headed Up Again
120
Seems Headed Up, AgainThe industry’s combined ratio appears to be on a “cyclical upturn”
dating to 2006. In 2008, even excluding net CAT losses (which added Combined Ratio
15.8115
120g , g (
3.4 points to the combined ratio vs. 2007) and M&FG losses (another 4.1 points vs. 2007), the 2008 ratio would have been 97.6.
09:Q1 combined ratio was11
07.4
1105
11009:Q1 combined ratio was 98.4 excl. M&FG vs. 96.8
in 08:Q1
10
100.
1
8.3 100.
7
102.
0105.
1
100
1 98
92.4 95
.5
90
95
852001 2002 2003 2004 2005 2006 2007 2008 2009:Q1E
Sources: A.M. Best, ISO; III preliminary estimates.
Medical Cost Inflation is One of the Most Serious Long-term Challenges Facing
Casualty WC and Health InsurersCasualty, WC, and Health Insurers
Since 1982-84, (index =100) the cost of
320
380
100
medical care has nearly quadupled (to 375), while the overall cost of living
merely doubled (to 215)
260
e (1
982-
84=1
140
200
Inde
x V
alue
80
140
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 9*
I
All Items Medical Care
8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 09
Source: Department of Labor (Bureau of Labor Statistics); not seasonally adjustedhttp://www.bls.gov/news.release/pdf/cpi.pdf *through July 2009
WC Medical Severity Rising Far Faster than Medical CPI
13 6%15%
Faster than Medical CPI
10 1% 10.6%
13.6%
12%
7.4%
10.1%
8.3%7.3% 7.6%
9.2%
7.2%
8.6%9%
5.1%6.2% 6.0%
6%
4.5%3.5%
2.8% 3.2% 3.5%4.1% 4.6% 4.7%
4.0% 4.4% 4.2% 4.0% 4.4%3%
Change in Medical CPICh M d C t L t Ti Cl i0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Change Med Cost per Lost Time Claim
Sources: Med CPI from I.I.I. Inflation Watch; WC med severity from NCCI based on NCCI states.
Since 2003, Tort System Cost Growth Has Moderated but Could Spike AgainHas Moderated but Could Spike Again
15% Rate of Tort System Cost Growth CPI
9%
12%
%
6%
9%
0%
3%
-6%
-3%
2001 2002 2003 2004 2005 2006 2007 2008
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; Insurance Info. Inst.
Catastrophic Losses*: Was 2005an Outlier or a Harbinger?an Outlier or a Harbinger?
$61 9$70
$ Billions Is $25 billion the new level of expected $61.9
$50
$60level of expected
yearly CAT losses?Before 2001, CAT
losses a eraged abo t
$22 9$26.5 $27.5 $26.0$30
$40losses averaged about $8-10 billion per year.
$7.5$2 7$4.7
$22.9
$5.5
$16.9
$8.3$7.4$2 6
$10.1$8.3$4.6 $5.9
$12.9$6.7 $6.9$9.2
$10
$20
$2.7$4.7 $2.6 $4.6
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809
**0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **2009:1HNote: 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
30
A Million More Florida Resident Households in the Next Decade?
8.2 8.
3 8.5
8.5
Households in the Next Decade?Millions of Households
The State of Florida
7.4 7.5
7.5 7.5 7.6 7.6 7.
7 7.9 8.
0 8.1 8
7 5
8.0
The State of Florida now (Feb 09) forecasts nearly 1 million more
households by 2019 (up
Hurricane Wilma
5 6.6 6.
8 7.0 7.
1 7.3 7
7.0
7.5 y ( palmost 13%). There will be more businesses, too.
7 5.8 5.
9 6.0 6.
2 6.3 6.
5 6
6.0
6.5 Hurricane Andrew
5.1 5.
3 5.4 5.
5 5.6 5.
5 0
5.5
5.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
10F
11F
12F
13F
14F
15F
16F
17F
18F
19F
Source: http://edr.state.fl.us/conferences/population/demographic.htmData are from Feb. 18, 2009 Florida Demographic Estimating conference
High Population Growth in Coastal Alabama Puts More Insured Value at Risk
Source: South Alabama Regional Planning g gCommission, “Coastal Alabama River Basin Management Plan”, January 2004.
High Population Growth Forecast for Coastal Areas in Baldwin County, AL, 2000-2030y
High population growth in coastal g
Alabama puts more insured value
at risk
Source: South Alabama Regional Planning Commission, “Coastal Alabama River Basin Management Plan”, January 2004.
High Mobile County Population Growth Forecast 2000-2030 is Near but Not Directly on the Coasty
Source: South Alabama Regional Planning Commission, “Coastal Alabama River Basin M t Pl ” J 2004Management Plan”, January 2004.
Major (Category 3, 4, 5) Hurricanes Striking the US by DecadeStriking the US by Decade
Mid 1920s – mid-1960s: Mid-1990s – 2030s?AMO W PhColorado State
3 10 1089
AMO Warm Phase AMO Warm Phaseteam forecasts 3 more intense hurricanes in
20093 10 10
76
56
88
5
8
65
45
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s*Figure for 2000s is extrapolated based on data for 2000-2008 (7 major storms: Charley, Ivan, Jeanne (2004), Katrina, Rita, Wilma (2005), Ike (2008)).Sources: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.; I.I.I.
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1987 2006¹1987-2006¹Fire, $6.6 , 2.2% Civil Disorders, $1.1
, 0.4% Water Damage, $0.4
T d $77 3
,
Utility Disruption, $0.2 , 0.1%
g , $, 0.1%Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 , 6.4%
Tornadoes, $77.3 , 26.0%Winter Storms,
$23.1 , 7.8%
Terrorism, $22.3 , 7.5%
Insured disaster losses totaled $297.3 billion from 1987-2006 (in 2006 dollars). Hurricanes
d t d t d fAll 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.
and tornadoes accounted for approximately 75% of these.
Source: Insurance Services Office (ISO)..
p g p p yCatastrophe 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.
Number of Tornadoes in Each Calendar Quarter 2005–2009:Q2Calendar Quarter, 2005 2009:Q2
9441,000 2005 20062007 2008 The first two quarters
700
800
9002007 20082009
The first two quarters of 2009 were more
typical of prior years than 2008.
504543
617
394
571
500
600
700
209 235160
244193
360305
157
394
200
300
400
160112 81
157118105
0
100
200
1st Qtr 2nd Qtr 3rd Qtr 4th QtrSources: US Dept. of Commerce, Storm Prediction Center, National Weather Service,at http://www.spc.noaa.gov/climo/torn/monthlytornstats.pdf 2009:Q2 is I.I.I. estimate
Underwriting Expense Ratios LikelyWill Rise as Premium Growth LagsWill Rise as Premium Growth Lags
31 1%32%Personal Commercial 2009:Q1 blended
30.8% 30.0%
31.1%
29.4%29 9%
30%
32% Qratio was 29.1%
27.7%28.3%
26 3%26.4%2 6%
29.9%29.1%
26.6%28%
24.3%25.0% 26.2%
24.5%24.8%25.6%25.6%26.1%25.9%
26.3%26.4%25.6%%
25.0%26%
23.4%24.4% 24.6%
24.7%
22%
24%
22%96 97 98 99 00 01 02 03 04 05 06 07 08
*Ratio of expenses incurred to net premiums written.Sources: A.M. Best; ISO; Insurance Information Institute
Section Summary: Hard Truths about P-L Insurance Operations
• The financial crisis/great recession didn’t directly
p
g yaffect P-L underwriting performance; the underwriting cycle and catastrophes were 2008’s drivers
• Premium levels will likely continue to be soft, driven by low exposure growth, low inflation
• The potential for significant catastrophe losses p g premains high
• Expense ratios will likely grow unless expenses p y g pcan be reduced
Hard Truths aboutHard Truths about Property/Liability p y y
Investment Performance and Insuring Capacity
Asset Allocation of P/C Insurance Industry’s Cash & Invested AssetsIndustry s Cash & Invested Assets
As of September 30, 2008
Common Stock
Bonds66.7%
C h & Sh
16.3%
Portfolio Facts•Invested assets Cash & Short-
Term Investments7.6%
•Invested assets totaled $1.26 trillion as of 9/30/08All ti Preferred Stock
1.2%•Allocations were virtually unchanged from 12/31/07
Other8.2%
Source: SNL Financial LC 41
Bond Yields Tend to Follow Inflation, but the Relationship is a Loose Onebut the Relationship is a Loose One
10%CPI-U % Change U.S. Treasury 10-Year Note Yield
8%
10%ForecastJuly 1990-
March 1991 recession
March 2001-November 2001
recession
6%
2%
4%
0%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
10F
-2%
0
Sources: US Bureau of Labor Statistics (history); Blue Chip Economic Indicators, 8/09 (forecasts)
P/C Investment Income as a % of Invested Assets Follows 10 Year U S T Note
9%
P-C Inv Income/Inv Assets 10-Year Treasury Note
Assets Follows 10-Year U.S. T-Note
8%
9% OMB forecasts that T-note yields won’t exceed 5.2% for the next decade. If
recent history holds, P-C net investment yield will be somewhat lower.
6%
7%
4%
5%
2%
3%
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 F F F F F F
Investment yield historically tracks 10-year Treasury note quite closely
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
10F
11F
12F
13F
14F
Sources: history: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.Forecasts: Office of Management and Budget, Mid-Session Review, Fiscal Year 2010.
P/C Industry Investment Income* 1994 2008Income*, 1994-2008
3 54.6
$55 Investment income might moderate further if rates for new bond
$49.
5 $52.
3 $5
$51.
2
$51.
4
$45
$50further if rates for new bond
investments stay low and/or if insurers shift to shorter-maturity bonds and
more US government notes.
6.8 38.0 $4
1.5
7.1
6.7
$38.
7
$39.
6
$40.
8
$38.
6
$39.
9
$35
$40
Bill
ions
$33.
7 $36 $3 $3 $36 $$
$30
$35
Investment income CAGR 1994-2007 was just 3.8%.
$25
1994 95 96 97 98 99
2000 01 02 03 04
2005
** 06 07 08
09**
*
*Primarily interest and stock dividends ** Investment income (excluding one time dividend) jumped inPrimarily interest and stock dividends. Investment income (excluding one-time dividend) jumped in 2005 as insurers that had accumulated cash captured rising bond interest rates. Also, 2005 figure includes special one-time dividend of $3.2B. ***2009 figure is Q1 actual, annualizedSources: ISO; Insurance Information Institute.
P/C Industry Net Realized Capital Gains and Losses 1990 2009:Q1Gains and Losses, 1990-2009:Q1
$16.21$18.02
$
$20$ Billions
$4 81
$9.89
$6.00$9.24
$10.81$13.02
$6.63 $6.61$8.97$9.70$9.13$9.82
$8
$12
$16
$2.88$4.81
$1.66
-$1 21 -$0.41
$3.52
$4
$0
$4
$1.21
-$12
-$8
-$4
Nearly $9 billion in realized it l i i 2007 b t
-$19.80-$24
-$20
-$16 capital gains in 2007, but$-19.7 billion in 2008.
-$24
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09:Q
1
Sources: A.M. Best, ISO, Insurance Information Institute.
Policyholder Surplus by Quarter,2006:Q4 – 2009:Q12006:Q4 2009:Q1
Billions$525
6 512.
8
$521
.8
5.0515.
6
$517
.9
$500
$525
$487
.1
$496
. 6 $5
78.5
$505$5$
$475
$
$47
$455
.6
1
$450
D li Si 2007 Q3 P k $
$437
.1
$400
$425 Decline Since 2007:Q3 Peak
2009Q1: -$84.7B (-16.2%)$400
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1Source: ISO
U.S. P/C Industry Premiums-to-Surplus Ratio: 1985-2009:Q1
2.0
Surplus Ratio: 1985 2009:Q1Premiums are a rough measure of risk accepted; surplus is funds beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the
Ratio at year-end
1.8
larger surplus is in relation to premiums the lower the ratio of premiums to surplus—the greater the industry’s
capacity to handle the risk it has accepted.
1 4
1.61.03:1 as
of 3/31/09
1.2
1.4
19980.85:1–the lowest
3/31/09
1.0
0.85:1 the lowest (strongest) P:S ratio
in recent history.
0.885 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:Q1
Sources: A.M. Best, ISO, Insurance Information Institute.
Largest Capital Events asa Percent of Surplus 1989 presenta Percent of Surplus, 1989-present
18%The financial crisis now ranks as the largest “capital event”
10 9%
16.2%13.8%
12%
15%
18% as the largest capital event over the past 20+ years
9.6%6.9%
10.9%
6.2%6%
9%
12%
3.3%
0%
3%
6%
0%
/30/
1989
urric
ane
Hug
o
/30/
1992
urric
ane
And
rew
2/31
/93
rthr
idge
thqu
ake
6/30
/01
Sept
. 11
Atta
cks
/30/
04Fl
orid
arr
ican
es
6/30
/05
urric
ane
Kat
rina
nanc
ial
sis
as o
f31
/09*
*
6/ Hu 6/ Hu A 12 N
orEa
rt S A 6/ FH
ur 6 Hu K
Fin
Cris 3/
3
Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. Sources: PCS; Insurance Information Institute.
Premium-to-Surplus Ratios Before Major Capital Events*Before Major Capital Events
P/C insurance industry was better it li d i i t th
$1.65
$1.42 $1 40$1 5$1.7$1.9 capitalized going into the
financial crisis than before any “capital event” in recent history
$1.42 $1.40
$1.03 $1.03$0 88
$1.05$1.15
$1.1$1.3$1.5
$0.88
$0 5$0.7$0.9
$0.5
/30/
1989
Hur
rican
eH
ugo
/30/
1992
Hur
rican
eA
ndre
w
2/31
/93
orth
ridge
rthq
uake
6/30
/01
Sept
. 11
Atta
cks
6/30
/04
Flor
ida
urric
anes
6/30
/05
Hur
rican
eK
atrin
a
6/30
/07
Fina
ncia
lC
risis
As
of3/
31/0
9**
6/ H 6/ H A 12 No
Ear 6 F
Hu H F 3
*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.
In 2008, A.M. Best Affirmed or Upgraded 88% of P/C Insurers*Upgraded 88% of P/C Insurers
In 2008, despite fi i l k t
Upgraded, 59 , 4.2%financial market turmoil, high cat losses and a soft
market A M BestDowngraded, 55 ,
3.9%
market, A.M. Best lowered ratings on just 3.9% of P-C insurers. It placed another 4.4%
Under Review, 63 ,4.4%
punder review
Other, 59 , 4.2%
Affirm, 1,183 , 83.4%, , ,
*Through December 19.Source: A.M. Best.
50
Reasons for US P/C Insurer Impairments 1969 2008Impairments, 1969-2008
Reinsurance Sig. Change Deficient
Deficient loss reserves and inadequate i i th
Failure3.7%
Misc.9.1%
Sig. Change in Business
4.2%
Loss Reserves/In-
adequate Pricing38 1% pricing are the
leading cause of insurer
impairments
38.1%
Investment Problems
7 0% impairments, underscoring the
importance of discipline. Affiliate
Impairment
7.0%
pInvestment
catastrophe losses play a much
ll lRapid
Impairment7.9%
All d F d
Catastrophe Losses
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
smaller role.Growth14.3%
Alleged Fraud8.1%
Losses7.6%
P/C Insurance Industry ROEs,1975 – 2009F*
25%1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2%
20%
25%
10%
15%
0%
5%2008: 0.3%
-5%
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 08
1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2%
Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2%.Sources: ISO; A.M. Best (2009F); Insurance Information Institute. 52
Section Summary: Hard Truths about P-L Investments & Capacity
• Even though the industry has had its largest
p y
g y g“capital event,” it is still well positioned to conduct business as usual
• Yields on bonds are expected to continued at low levelslow levels
Nearly a decade of investing at these levels means they’re “baked in” to investment performance for athey re baked in to investment performance for a long time
Insurance Information Institute On LineInstitute On-Line
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