the insurance cycle and credit crunch: impacts & implications for the us & ohio insurance...
Post on 25-Dec-2015
215 Views
Preview:
TRANSCRIPT
The Insurance Cycle and Credit Crunch: Impacts & Implications for the US & Ohio Insurance Markets
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org www.iii.org
Central Ohio Insurance Education DayColumbus, OH
April 2, 2008
Presentation Outline
• Weakening Economy: Insurance Impacts & Implications Implications of Treasury “Blueprint” for insurers
• Profitability• Underwriting Trends• Premium Growth• Rising Expenses• Capacity• Investment Overview• Catastrophic Loss• Shifting Legal Liability & Tort Environment• Regulatory and Legislative 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 and Global Economies Today?
Fundamental Factors Affecting Global Economy in 2008• Puncture of Two Bubbles: Credit and Housing in US
Burst BubbleAsset Price Deflation Subprime mortgage market was first part of credit bubble to burst
• Credit Crunch: Some credit markets have effectively seized• Global Contagion Effect: Securitization of asset back securities, derivatives based
on those securities amplified via leverage produced contagion effect Many financial institutions around the world found they are exposed Many hedge funds, banks caught holding CDOs, credit default swaps and other
instruments against which they borrowed heavily (sometimes 10:1) Some face margin calls, distressed selling of every type of asset except Treasuries
• Global Economic Impacts: Global Economic Slowdown GDP growth in US down sharply, employment falling; Deceleration abroad too “Decoupling” theory was naïve Crashing dollar is symptom of irresponsible US fiscal policy, trade deficits. IOUs are
being redeemed for hard assets or states in corporations New bubbles forming in commodities and currencies
Source: Insurance Information Institute.
3.7
%
0.8
%
1.6
%
2.5
%
3.6
%
3.1
%
2.9
%
0.6
%
3.8
%
4.9
%
0.1
%
2.4
%
2.2
%
2.1
% 2.7
%
2.8
%
2.9
%
0.6
%
0.5
%
0%
1%
2%
3%
4%
5%
6%
2
000
2
001
2
002
2
003
2
004
2
005
2
006
07:1
Q
07:2
Q
07:3
Q
07:4
Q
08:1
Q
08:2
Q
08:3
Q
08:4
Q
09:1
Q
09:2
Q
09:3
Q
09:4
Q
Real GDP Growth*
*Yellow bars are Estimates/Forecasts.Source: US Department of Commerce, Blue Economic Indicators 3/08; Insurance Information Institute.
Economic growth is expected to slow
dramatically in the year ahead
2.9%
2.6% 3.
0%
1.9%
3.0%
2.2%
2.0%
3.0%
1.4% 2.
0%
10.1
%
1.8%
1.7%2.
6%
3.6%
1.9% 2.2%
9.3%
2.0% 2.
6%2.8%
4.8%
2.2% 2.
8%
2.8%
11.1
%
2.6%
11.3
%-1%
2%
4%
6%
8%
10%
12%
14%
Canada Mexico Japan U.K. China EuroZone U.S.
2006* 2007** 2008 2009
Percent Change in GDP By Country,2006-2009
* Best estimates available. **In most cases, actual data for 2007 GDP are not yet available. Where actual data not available, figures are consensus forecasts from Dec. 10., 2007 issue of Blue Chip Economic Indicators.
Source: Blue Chip Economic Indicators, Feb. 10, 2008.
Economic growth is expected to slow globally in 2008, adversely impact global
exposure growth and slowing absorption of excess capital
US growth is among the
slowest in 2008
Toward a New WorldEconomic Order
Source: Insurance Information Institute
1. Credit Crunch (incl. Subprime) Issue Will Ultimately Cost Hundreds of Billions Globally (est. up to $600B)
• 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 (e.g., Bear Stearns)
• Cash infusions necessary; Sovereign Wealth Funds important source• Federal Reserve forced into playing a larger role; must improvise
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 hand5. IOUs are Being Redeemed
• Stakes in hard assets/institutions demanded6. Good News: No Shortage of Available Capital
• Central banks are (generally) making right decisions; Dollar sinks
What’s Being Done to Fix the Economy?Impacts on Insurers
Economic Fix Impacts on Insurers
Fed Rate Cuts
•Reduces bond yields (65% - 80% of portfolio)•Potentially contributes to inflation longer run
Fed Debt Swap
•Fed will swap up to $200B in bank holdings of mortgage back securities for Treasuries up to 28 days; Improves bank finances
Fed Bailout of Bear Stearns
•Fed on 3/14 (via J.P. Morgan) provided Bear with cash after what is effectively a “run on the bank”•“Too Big to Fail” doctrine is activated•Fed acting to prevent broader loss of confidence•3/17: J.P. Morgan buys Bear for $236 million ($2/share); Price increased to $10 on 3/24
Source: Insurance Information Institute
What’s Being Done to Fix the Economy?Impacts on Insurers
(cont’d)
Economic Fix Impacts on Insurers
Stimulus Package
•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
HousingBailout (?)
•Keeps more people in their homes and hopefully paying HO insurance premiums•Abandoned and neglected homes have demonstrably worse loss performance
Regulatory/ Legislative Action (?)
•Treasury March 31 “Blueprint” affects all financial firms•For insurers, major recommendation is established of Optional Federal Charter under Office of National Insurance within Treasury
Source: Insurance Information Institute
Post-Crunch: Fundamental Issues To Be Examined Globally
Source: Insurance Information Institute
• Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwide Colossal failure of risk management (and regulation) 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 II) 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
Elements of Credit Market Reform Currently Being Considered
Reform Rationale
Increased Disclosure/ Transparency
•Require issuers of mortgage-backed securities to disclose more about the “level and scope of due diligence”•More details on actual underlying assets of the security•Disclose if “issuers had shopped for ratings” and why•Require ratings firms to differentiate between ratings on complex structured products and conventional products•Ratings firms must disclose conflicts of interest and provide greater scrutiny of firms that originate loans
Enhanced Awareness of Risk
•Multi-national effort to require enhanced and tested risk management policies for large financial institutions
Stronger Risk Management
•Require financial institutions to implement stronger risk controls
Increased Capital •Revisit latest bank capital requirements (Basel II) to ensure banks have sufficient capital/liquidity for risks assumed
Stronger Regulatory Policies
•Strengthen state and federal oversight of mortgage lenders•Nationwide licensing of mortgage brokers S
ourc
e: W
all S
tree
t Jou
rnal
, 3/1
5/07
Summary of Treasury “Blueprint”for
Financial Services Modernization
Impacts on Insurers
Treasury Regulatory Recommendations Affecting Insurers
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
• Establishment of an Optional Federal Charter (OFC) Would provide system for federal chartering, licensing,
regulation and supervision of insurers, reinsurer and producers (agents & brokers)
OFC insurers would still be subject to state taxes, provisions for compulsory coverage, residual market and guarantee funds
OFC would specify specific lines covered by charter; Separate charters needed for P/C and Life
• OFC Would Incorporate Several Regulatory Concepts Ensure safety and soundness Enhance competition in national and international markets Increase efficiency through elimination of price controls,
promote more rapid technological change, encourage product innovation, reduce regulatory costs and provide consumer protection
Treasury Regulatory Recommendations Affecting Insurers (cont’d)
• Establishment of Office of National Insurance (ONI) Department within Treasury to regulate insurance pursuant to OFC Headed by Commissioner of National Insurance Commissioner has regulatory, supervisory, enforcement and
rehabilitative powers to oversee organization, incorporation, operation, regulation of national insurers and national agencies
• Establishment of Office of Insurance Oversight (OIO) Department within Treasury to handle issues needing immediate
attention such “reinsurance collateral”; [Recognizes that OFC debate is “difficult and ongoing”]
OIO could focus immediately on “key areas of federal interest in the insurance sector”
OIO would be the lead regulatory voice on international regulatory policy Would have authority to ensure states achieved uniform implementation
of declared US international insurance policy goals OIO would also serve as advisor to Treasury Secretary on major
domestic and international policy issues Ultimately incorporated into OFC framework
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
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.
5.2%
-0.9
%-7
.4%
-6.5
%-1
.5%
1.8%
4.3%
18.6
%20
.3%
5.8%
0.3%
-1.6
%-1
.0%
-1.8
%-1
.0%
3.1%
1.1%
0.8%
0.4%
0.6%
-0.4
%-0
.3%
1.6%
5.6%
13.7
%7.
7%1.
2%-2
.9% -0
.5%
-2.9
%-2
.7%
-10%
-5%
0%
5%
10%
15%
20%
25%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
Rea
l N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Rea
l G
DP
Gro
wth
Real NWP Growth Real GDP
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
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 (Re) Insurers
Economic Concern Risks to Insurers
Subprime Meltdown/ Credit Crunch
•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
Housing Slump •Reduced exposure growth•Deteriorating loss performance on neglected, abandoned and foreclosed properties
Lower Interest Rates •Lower investment income
Stock Market Slump •Decreased capital gains (which are usually relied upon more heavily as a source of earnings as underwriting results deteriorate)
General Economic Slowdown/Recession
•Reduced commercial lines exposure growth•Surety slump•Increased workers comp frequency
New Private Housing Starts,1990-2014F (Millions of Units)
2.07
1.80
1.36
0.98
1.11
1.38 1.
45
1.54 1.56
1.51
1.48
1.35
1.46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.60
1.71
1.85
1.96
0.91.01.11.21.31.41.51.61.71.81.92.02.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F09F10F11F12F13F14F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 3/08 edition of BCEF; Insurance Info. Institute
Exposure growth forecast for HO insurers is dim for 2008/09
Impacts also for comml. insurers with construction risk exposure
New home starts plunged 34% from 2005-2007;
Drop through 2008 trough is 53% (est.)—a net annual decline of
1.09 million units
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 $954 million.
16.816.916.9
16.6
17.1
17.5
17.8
17.4
16.5
16.1
15.5
15.8
16.416.6 16.7
16.9
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
99 00 01 02 03 04 05 06 07F 08F 09F 10F 11F 12F 13F 14F
Weakening economy, credit crunch and high gas prices are hurting
auto sales
New auto/light trick sales are expected to experience a net
drop of 1.4 million units annually by 2008 compared with 2005, a decline of 8.3%
Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth
than problems in the housing market will on home insurers
Auto/Light Truck Sales,1999-2014F (Millions of Units)
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 3/08 edition of BCEF; Insurance Info. Institute
$1,0
82
$1,1
44
$1,2
26
$1,3
07
$1,3
70
$1,3
96
$1,4
38
$1,4
95
$1,5
63
$1,6
41
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,80003
04
05
06
07E
08F
09F
10F
11F
12F
0%
1%
2%
3%
4%
5%
6%
7%
8%
% C
han
ge
Nonresidential Fixed Investment% Change Nonresidential Fixed Investment
Nonresidential Fixed Investment,* 2003 – 2012F
Sharp dip in business
investment growth in 2007/2008 will slow commercial exposure growth
*Nonresidential fixed investment consists of structures, equipment and software.
Sources: US Bureau of Economic Analysis (Historical), Value Line (2/22/08) estimates/forecasts for 2008-2012.
Non
resi
den
tial F
ixed
In
vest
men
t ($
Bill
)
Total Industrial Production,(2007:Q1 to 2009:Q4F)
1.1%
3.5% 3.6%
-1.0%
0.5% 0.3%
1.6%
2.4% 2.5% 2.6% 2.7%2.9%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/08); Insurance Info. Inst.
Industrial production shrank during the final quarter of 2007 and is expected to grow only very slowly
during the first half of 2008
Industrial production affects exposure both directly and indirectly
Employment Change by Industry
(39,000)
(52,000)
(34,000)
(20,000)
30,00021,000
38,000
(60,000)
(50,000)
(40,000)
(30,000)
(20,000)
(10,000)
0
10,000
20,000
30,000
40,000
50,000
Construction Manuf. Retail Trade Professional& Biz
Services
Education &Health
Leisure &Hospitality
Government
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Employment fell by 63,000 in February, the biggest decline in 5
years. Manufacturing and Construction are always the hardest hit
in an economic slowdown, with each losing several hundred thousand jobs
over the past 12 months.
Jan. 2008 to Feb. 2008p
22 2318
22
-1
-14
85
22
-4
14
-7-2
-14-18
7
-5
14
-19-18
-11
-23
-8
-16-12
-30
-20
-10
0
10
20
30
Jan
-06
Ap
r-0
6
Jul-
06
Oct
-06
Jan
-07
Ap
r-0
7
Jul-
07
Oct
-07
Jan
-08
Fe
b-0
8
Source: Bureau of Labor Statistics; Insurance Information Institute.
Ch
ange
in
Em
plo
ymen
t (T
hou
san
ds)
Financial sector employment turned consistently negative shortly after the credit crunch began during the 3rd quarter of 2007
Monthly Change in Financial Activities Employment, Jan. 2006-Feb. 2008,
(Thousands)
99,000 jobs lost since July 2007
US Unemployment Rate,(2007:Q1 to 2009:Q4F)
4.5% 4.5% 4.6%4.8%
5.0%5.2%
5.4% 5.5% 5.5% 5.5% 5.4% 5.4%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
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 (3/08); Insurance Info. Inst.
Rising unemployment rate negative impacts workers comp exposure and could signal a temporary claim
frequency surge
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45Wage & SalaryDisbursementsWC NPW
*As of 7/1/07 (latest available).Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Net Written Premiums
7/90-3/91
Shaded areas indicate recessions
3/01-11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
Weakening wage and salary growth is
expected to cause a deceleration in workers comp
exposure growth
Inflation Rate (CPI-U, %),1990 – 2009F
4.9 5.1
3.0 3.2
2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.2
4.0
3.4
2.42.82.9
2.4
0
1
2
3
4
5
6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F09F
*12-month change Feb. 2008 vs. Feb. 2007; Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Mar. 10, 2008; Ins. Info. Institute.
Inflation was just 2.2% in 2007 but is accelerating. Medical cost inflation, important in WC, auto liability
and other casualty covers is running far ahead of inflation. Rising inflation can also lead to rate inadequacy and adverse reserve development
Favored Industry Groups for Insurer Exposure Growth
Industry Rationale
Health Care •Economic NecessityRecession Resistant•Demographics: aging/immigrationGrowth
Energy (incl. Alt.) •Fossil, Solar, Wind, Bio-Fuels, Hydro & Other
Agriculture & Food Processing & Manufacturing
•Consumer StapleRecession Resistant•Grain and land prices high due to global demand, weak dollar (exports)•Acreage GrowingFarm Equipment, Transport•Benefits many other industries
Export Driven •Weak dollar, globalization persist; Cuba angle?
Natural Resources & Commodities
•Strong global demand, •Supplies remain tight…but beware of bubbles•Significant investments in R&D, plant & equip required
Sources: Insurance Information Institute
D&O/E&O
Turbulent Markets, Bankruptcies Can Give
Rise to Suits
Shareholder Class Action Lawsuits*
*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through March 31.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute
164202
163
231188
111
173
242210215
497
267226237
182
118
176
54
0
100
200
300
400
500
600
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
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
Includes 44 suits related to subprime in 2007/08
A credit crunch creating a “contagion” effect resulting
in significant financial distress and bankruptcies in
other sectors could breed more securities litigation
Origin of D&O Claims for Public Companies, 2006
Customers & Clients, 4%Competitors,
6%
Employees, 25%
Government, 2%
Other 3rd Party, 22%
Shareholders, 40%
40% of D&O suits originate
with shareholders
Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.
PROFITABILITY
Profits in 2006/07 ReachedTheir Cyclical Peak;
By No Reasonable Standard Can Profits Be Deemed Excessive
P/C Net Income After Taxes1991-2008F ($ Millions)*$1
4,17
8
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$59,
200
$46,
300
-$6,970
$63,
695
$44,
155
$20,
559
$38,
501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07E
08F
*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.
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%**
Insurer profits peaked in 2006
-5%
0%
5%
10%
15%
20%
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2008E
*2007 is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical, volatile and vulnerable
Personal/Commercial Lines & Reinsurance ROEs, 2006-2008F*
14.0%
16.8%
12.3%
9.4%
13.2%
6.3%
9.8% 10.7%9.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Personal Commercial Reinsurance
2006 2007E 2008F
Sources: A.M. Best Review & Preview (historical and forecast).
ROEs are declining as underwriting
results deteriorate
-5%
0%
5%
10%
15%
20%
25%
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 0607
E08
F
Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008F*
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006:12.2%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
*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
Factors that Will Influence theLength and Depth of the Cycle
• Capacity: Rapid surplus growth in recent years has left the industry with between $85 billion and $100 billion in excess capital, according to analysts All else equal, rising capital leads to greater price competition and a liberalization of
terms and conditions
• Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which could extend the depth and length of the cycle Looming reserve deficiencies are not hanging over insurers they way they did during
the last soft market in the late 1990s Many companies have been releasing redundant reserves, which allows them to boost
net income even as underwriting results deteriorate Reserve releases will diminish in 2008; Even more so in 2009
• Investment Gains: 2007 was the 5th consecutive up year on Wall Street. With sharp declines in stock prices and falling interest rates, portfolio yields are certain to fallContributes to discipline Realized capital gains are already rising as underwriting profits shrink, but like
redundant reserves, realized capital gains are a finite resource A sustained equity market decline (and potentially a drop in bond prices at some
point) could reduce policyholder surplus
Source: Insurance Information Institute.
Factors that Will Influence the Length and Depth of the Cycle (cont’d)
• Sarbanes-Oxley: Presumably SOX will lead to better and more conservative management of company finances, including rapid recognition of deficient or redundant reserves With more “eyes” on the industry, the theory is that cyclical swings should shrink
• Ratings Agencies: Focus on Cycle Management; Quicker to downgrade Ratings agencies more concerned with successful cycle management strategy Many insurers have already had ratings “haircut” over the last several years they
way they did during the last soft market in the late 1990s; Less of a margin today
• Finite Reinsurance: Had smoothing effect on earnings; Finite market is gone• Information Systems: Management has more and better tools that allow
faster adjustments to price, underwriting and changing market conditions than it had during previous soft markets
• Analysts/Investors: Less fixated on growth, more on ROE through soft mkt. Management has backing of investors of Wall Street to remain disciplined
Source: Insurance Information Institute.
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E
ROE Cost of Capital
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2007E
Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years
-13.
2 p
ts
+0.
2 p
ts
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
-0.1
pts
+1.
7 p
ts
-9.0
pts
The cost of capital is the rate of return
insurers need to attract and retain
capital to the business
+3.
1 p
ts
P/C, L/H Stocks: Ahead of the S&P 500 Index in 2008
-15.04%
-50.57%
-15.77%
-23.75%
-8.61%
-8.06%
-17.75%
-10.54%
-60.0% -50.0% -40.0% -30.0% -20.0% -10.0% 0.0%
S&P 500
All Insurers
P/C
Life/Health
Multiline
Reinsurance
Mortgage*
Brokers
*Includes Financial Guarantee.Source: SNL Securities, Standard & Poor’s, Insurance Information Inst.
Total YTD Returns Through March 28, 2008
P/C insurance stocks not affected as much as the overall
market by credit, subprime concerns
Mortgage & Financial Guarantee insurers were
down 69% in 2008
Top Industries by ROE: P/C Insurers Still Underperformed in 2006*
30.7%30.3%
26.4%24.6%
24.2%22.6%
21.8%21.5%
20.9%20.9%
20.5%19.6%19.4%19.1%
14.9%15.4%
31.8%
0% 5% 10% 15% 20% 25% 30% 35%
Oil & Gas Equip., ServicesPetroleum Refining
MetalsFood Services
Household & Pers. ProductsPharmaceuticals
Industrial & Farm EquipmentMining & Crude Oil Prod.
Aerospace & DefenseChemicalsSecurities
Food Consumer Prod.Medical Prod. & Equip.
Specialty RetailersHomebuilders
P/C Insurers (Stock)All Industries: 500 Median
*Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors.Source: Fortune, April 30, 2007 edition; Insurance Information Institute
P/C insurer profitability in 2006 ranked 30th out of 50
industry groups despite renewed
profitabilityP/C insurers
underperformed the All Industry median for the 19th consecutive
year
Advertising Expenditures by P/C Insurance Industry, 1999-2007E
$ Billions
$1.736 $1.737 $1.803 $1.708
$3.695
$4.323
$2.975
$2.111$1.882
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
99 00 01 02 03 04 05 06 07ESource: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers is at a record high, signaling
increased competition
OHIO P/C INSURANCE MARKETS
Often, but Not Always Outperforming the US
-3%
0%
3%
6%
9%
12%
15%
18%
21%
91 92 93 94 95 97 98 99 00 01 02 03 04 05 06*
US P/C Insurers Ohio
In Most Years, P/C ROE From All Lines in OH Topped US All-Lines
ROE
Sources: Insurance Information Institute; NAIC. *Latest available.
OH Private Passenger Auto ROEs Also Top US ROEs
Source: NAIC, Insurance Information Institute
11.4% 11.6%12.1%
10.1%
13.3%
11.0%12.1%
8.5%
11.3%
9.0%
6.2%
9.9%
13.1%
15.4%16.6%
2.2%
12.4%
4.1%
9.4%
2.0%
7.7%
10.8%11.5%
5.9%8.4%
16.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
US
Ohio
Averages: 1997 to 2006US PPA Insurance = +8.4%
Ohio PPA Insurance = +11.1%
PP AUTO: 10-yr Avg. Return on Equity, Ohio & Nearby States
5.6%
9.1%
10.0%
2.3%
8.4%
9.6%
11.1%
9.9%
0% 2% 4% 6% 8% 10% 12%
Ohio
Indiana
US
Michigan
Wisconsin
Illinois
Iowa
Kentucky
Source: NAIC, Insurance Information Institute
1997-2006
…But the Profit Story Is Different for Homeowners Insurance
Source: NAIC, Insurance Information Institute
-1.7%
3.6%
12.4%
5.4%3.8%
18.5%
7.8%
3.6%
-1.9%-5.2%
-13.9%
-9.0%-6.6%
7.6%3.7%
-4.2%-2.8%
1.4%
9.7%
-7.2%
5.4%
-9.3%
-3.4%
26.0%
3.0%
8.6%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
US
Ohio
Averages: 1997 to 2006US HO Insurance = 5.0%
Ohio HO Insurance = 1.2%
HOME: 10yr Avg Return on Equity, Ohio & Nearby States
-6.0%
-3.9%
-0.8%
3.0%
-2.7%
-5.2%
5.0%
1.2%
-10% -5% 0% 5% 10%
Ohio
US
Indiana
Michigan
Wisconsin
Illinois
Iowa
Kentucky
Source: NAIC, Insurance Information Institute
1997-2006
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well, But Cycle May Takes Its Toll
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E
90
95
100
105
110
115
120
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
07
E
Co
mb
ine
d R
ati
o
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Imp
air
me
nt
Ra
te
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly correlated
underwriting performance and could reach near-record low in 2007
Source: A.M. Best; Insurance Information Institute
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
Reasons for US P/C Insurer Impairments, 1969-2005
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Catastrophe Losses8.6%
Alleged Fraud11.4%
Deficient Loss
Reserves/In-adequate Pricing62.8%
Affiliate Problems
8.6%
Rapid Growth
8.6%
2003-2005 1969-2005
Deficient reserves,
CAT losses are more important factors in
recent years
Reinsurance Failure3.5%
Rapid Growth16.5%
Misc.9.2%
Affiliate Problems
5.6%
Sig. Change in Business
4.6%
Deficient Loss
Reserves/In-adequate Pricing38.2%
Investment Problems*
7.3%
Alleged Fraud8.6%
Catastrophe Losses6.5%
Cumulative Average Impairment Rates by Best Financial Strength Rating*
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment
D
C/C-
C++/C+
B/B-
B++/B+
A/A-
A++/A+
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
Insurers with strong ratings are far less likely to become impaired over
long periods of time. Especially important in long-tailed lines.
*US P/C and L/H companies, 1977-2002
UNDERWRITINGTRENDS
Extremely Strong 2006/07;Relying on Momentum &
Discipline for 2008
90
95
100
105
110
115
120
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
*0
8F
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000s: 101.8*
Sources: A.M. Best; ISO, III *Full year 2007/08 estimates from III 2008 Earlybird Survey.
P/C Insurance Combined Ratio, 1970-2008F*
115.8
107.4
100.198.3
100.7
92.5
97.3
93.8
90
100
110
120
01 02 03 04 05 06 07F 08F
P/C Insurance Combined Ratio, 2001-2008F
Sources: A.M. Best; ISO, III. *III estimates for 2007/8.
2005 figure benefited from heavy use of reinsurance which lowered net losses
2006 produced the best underwriting result
since the 87.6 combined ratio in 1949
As recently as 2001, insurers were paying out nearly $1.16 for
every dollar they earned in premiums
2007/8 deterioration due primarily to falling rates, but results still strong assuming
normal CAT activity
87.6
91.2
92.1 92.3 92.4 92.593.1 93.1 93.3
93.8
93.0
85
86
87
88
89
90
91
92
93
94
95
1949 1948 1943 1937 1935 2006 1950 1939 1953 1936 2007E
Ten Lowest P/C Insurance Combined Ratios Since 1920 vs. 2007E
Sources: Insurance Information Institute research from A.M. Best data. *2007: III Earlybird survey.
2007 was one of the Top 12
best since 1920
The industry’s best underwriting years are associated with
periods of low interest rates
The 2006 combined ratio of 92.5 was the best since the 87.6 combined in 1949
-55-50-45-40-35-30-25-20-15-10-505
101520253035
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
E0
8F
Source: A.M. Best, Insurance Information Institute *Actual 2007:9M underwriting profit = $18.146B
$ B
illi
ons
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.
Underwriting Gain (Loss)1975-2008F*
$1
0.8 $
22
.8 $3
3.4
$3
6.9
$1
8.9
($5.0)($6.0)($5.3)
$0.4
($7.0)
8.9
-1.1-1.3-1.6
4.5
-1.20.1
3.5
8.6
6.5
($10)
($5)
$0
$5
$10
$15
$20
$25
$30
$35
$40
00 01 02 03 04 05 06 07F 08F 09F
Re
se
rve
De
ve
lop
me
nt
($B
)
(3)(2)(1)012345678910
Co
mb
ine
d R
ati
o P
oin
ts
PY Reserve DevelopmentCombined Ratio Points
Impact of Reserve Changes on Combined Ratio
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
Reserve adequacy has
improved substantially
Cumulative Prior Year Reserve Development by Line (As of 12/31/06)
-$1,
886 -$
1,17
4
-$1,
116
-$77
9
-$47
5
-$41
3
-$25
4
-$10
0
-$10
0
-$96
-$53
-$48
$366
$1,176$1,172
-$3,006-$3,500
-$3,000
-$2,500
-$2,000
-$1,500
-$1,000
-$500
$0
$500
$1,000
$1,500
PPA Liab
ility
PPA PD
Home
Med
Mal
Special
ty P
rop
Comm
. Auto
Prod. L
iabili
ty
Finl.
Guaran
ty
Inte
rnat
ional
Other
Special
ty L
iab.
Wor
ker's
Comp
Fideli
ty/S
urety
Comm
ercia
l Mul
ti
Other
Liab
ility
Reinsu
rance
$ B
illi
ons
Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.
Reserve redundancies in most lines have resulted
in releases in recent years
Release
Strengthening
PERSONAL LINES
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
98.4
94.3 96
.4
94.3 95
.6 98.6
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08FSource: A.M. Best; Insurance Information Institute.
Recent strong results attributable favorable frequency
trends and low CAT activity
Personal LinesCombined Ratio, 1993-2007E
101.7101.3 101.0
99.5
101.1
103.5
109.5
107.9
104.2
98.4
94.395.1 95.5
97.5
99.5
101.3
90
95
100
105
110
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08F
Private Passenger Auto (PPA) Combined Ratio
Average Combined Ratio for 1993 to 2006:
101.0
Sources: A.M. Best (historical and forecasts)
PPA is the profit juggernaut of the
p/c insurance industry today
Auto insurers have shown significant
improvement in PPA underwriting
performance since mid-2002, but results
are deteriorating.
-4%
-2%
0%
2%
4%
6%
8%
10%
00
:Q1
00
:Q2
00
:Q3
00
:Q4
01
:Q1
01
:Q2
01
:Q3
01
:Q4
02
:Q1
02
:Q2
02
:Q3
02
:Q4
03
:Q1
03
:Q2
03
:Q3
03
:Q4
04
:Q1
04
:Q2
04
:Q3
04
:Q4
05
:Q1
05
:Q2
05
:Q3
05
:Q4
06
:Q1
06
:Q2
06
:Q3
06
:Q4
07
:Q1
07
:Q2
07
:Q3
07
:Q4
Auto Insurance Component of CPI Personal Auto-PD Pure Premium
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
Pure Premium Spread: Personal Auto PD Liability, 2000-2007:Q4
Margin necessary to maintain PPA
profitability
2000 PPA Combined=110
Inversion of pure premium spread is a
warning sign that price and costs are out of sync
2006 PPA Combined=95.5
-2.2%
-5.3%
-4.0%-3.3%
-0.9%
-2.6%
-5.4%
-3.8%
-5.0%
3.0%3.6% 3.8% 3.4%
2.8%
4.8%
6.0%
-0.3%
4.7%
-6%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03 04 05 06 07
Frequency Severity
Bodily Injury: Severity Trend Running Ahead of Frequency
Source: ISO Fast Track data.
Medical inflation
is a powerful
cost driver
0.8%
-1.5%
0.3%
-2.0% -2.3% -2.1% -1.9%
-3.8%
0.6%
3.9%3.3%
2.8%
0.5%
2.8%3.7%
2.1%
4.3%
6.2%
-6%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03 04 05 06 07
Frequency Severity
PD Liability: Frequency Trend No Longer Offsets Severity
Fewer accidents, but more damage when they occur:
Higher Deductibles?
Source: ISO Fast Track data.
-1.6%
1.1%
-1.1%
0.0%
-0.6%
-7.2%-5.4% -5.1%
-4.0%
3.2%
6.5%
-4.0%
0.5%
4.8%6.1%
2.3%
6.3%
16.1%
-10%
-5%
0%
5%
10%
15%
20%
99 00 01 02 03 04 05 06 07
Frequency Severity
PIP: Severity Trend Now Offsets Smaller Claim Frequency Decline
Fraud caused problems from
1999-2001
Is No-Fault living on borrowed time?
*Average of 4 quarters ending with 3rd quarter 2007.Source: ISO Fast Track data.
2.6%
-0.4%
1.9%
-3.8%
-5.1%-4.6%
-1.7%
-3.7%
2.3%
3.7% 3.7%
1.5%
3.8%3.1%
0.1%
3.0%4.1%
6.8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03 04 05 06 07
Frequency Severity
Collision: Frequency and Severity Claim Trend Adverse
Source: ISO Fast Track data.
-1.7
%
-2.6
%
3.3%
-5.7
% -2.1
%
-8.0
%
-3.1
%
-9.8
% -6.5
%
-6.9
%
14.9
%
-1.3
%
-1.4
%
-4.1
%
-2.4
%
3.3%
-4.7
%
8.9%
-15%
-10%
-5%
0%
5%
10%
15%
20%
99 00 01 02 03 04 05 06 07*
Frequency Severity
Comprehensive: Favorable Frequency and Severity Trends
Weather related claims from Hurricanes Katrina,
Rita & Wilma: 681,900 claims valued $3.29 billion
Source: ISO Fast Track data.
Homeowners Insurance
117.7
158.4
113.6118.4
112.7
121.7
101.0
108.2111.4
121.7
109.3
98.394.2
100.1
91.795.5
99.5
113.0109.4
85
95
105
115
125
135
145
155
165
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08F
Homeowners Insurance Combined Ratio
Average 1990 to 2006= 111.8
Insurers have paid out an average of $1.12 in losses for every dollar earned
in premiums over the past 17 years
Sources: A.M. Best (historical and forecasts)
COMMERCIAL LINES
Commercial AutoCommercial Multi-Peril
Workers Comp
110.
3
110.
2
107.
6
103.
9
109.
7
112.
3
111.
1
122.
3
110.
2
102.
5
105.
4
91.2 94
.0 97.5
102.
0
112.
5
85
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08F
Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases
Commercial coverages have exhibited significant
variability over time.
Commercial Lines Combined Ratio, 1993-2008F
Outside CAT-affected lines, commercial insurance is
doing fairly well. Caution is required in underwriting
long-tail commercial lines.
Sources: A.M. Best (historical and forecasts)
COMMERCIAL MULTI-PERIL & COMMERCIAL
AUTO
112.
1
112
113 11
5.9 12
0.5
120.
1
106.
6
99.4
96.6
93.4
94
96.7
102.
2 105.
6 108.
9 112.
1
105.
9
101.
6
93.8
84.5
82.8
88.3
87.7
94.5 98
122.5
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07E* 08F*
Comm Auto Liab Comm Auto PD
Commercial Auto Liability& PD Combined Ratios
Average Combined: Liability = 108.8
PD = 97.5
Commercial Auto has improved dramatically
Sources: A.M. Best (historical and forecasts) *Includes both liability and property damage.
119.0
119.8
108.5
125.0
113.1
115.0
121.0
116.2
116.1
104.9
101.9 105.5
100.7
116.8
113.6
115.3
122.4
115.0
117.0
97.3
89.0
97.7
93.8
83.6
93.5
98.0
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07E* 08F*
CMP-Liability
CMP-Non-Liability
Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)
Liab. Combined 1995 to 2004 = 113.8
Non-Liab. Combined = 105.2
CMP- has improved recently
Sources: A.M. Best (historical and forecasts) *Includes both liability and property damage.
WORKERS COMPENSATION
OPERATING ENVIRONMENT
Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers
101
97
111
110
107
103
95
101 10
6
119
131
140
135
123
88 87 87
101.
5
98.5
100
101 10
7 115 11
8 122
97
104
96
80
90
100
110
120
130
140
94 95 96 97 98 99 00 01 02 03 04 05 06p 07E 08F
Calendar Year Accident Year
Percent
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2006 and developed to ultimateSource: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI Annual Statement Analysis.
Includes dividends to policyholders *2007/2008 figures are A.M. Best estimates/forecasts.
Workers Comp Combined Ratios, 1994-2008F*
Lost-Time Claims
-4.2 -4.4
-6.9
-4.5 -4.1 -3.9
-6.8
-9.2
0.3
-6.5
-4.5
0.5
-3.9
-2.3
-4.5
-6.6
-10
-8
-6
-4
-2
0
2
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
Cumulative Change of –52.1%since 1991 means that lost work
time claims have been cut by more than half
Accident Year
Percent Change
Workers Comp Lost-TimeClaim Frequency (% Change)
2003p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI
4.5%3.6%
2.8% 3.2% 3.5%4.1%
4.6% 4.7%4.0% 4.4% 4.2% 4.0%
5.1%
7.4%
10.1%
8.3%
10.6%
8.2%
14.0%
7.4%
9.0%
6.8%
11.7%
7.5%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Change in Medical CPIChange Med Cost per Lost Time Claim
WC Medical Severity Rising Far Faster than Medical CPI
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
3.5
pts
WC medical severity rose more than twice as fast as the medical CPI (8.8% vs. 4.0%)
from 1995 through 2006
Med Costs Share of Total Costs is Increasing Steadily
Indemnity55%
Medical45%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity52%
Medical48%
Indemnity41%
Medical59%1986
1996
2006p
PREMIUM GROWTH
At a Virtual Standstillin 2007/08
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
F2
00
8F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2007 figure is actual 9-month figure.
Post-Katrina period resembles
1993-97 (post-Andrew)
2008: Projected -0.3% premium growth would be the first decline since 1943
Growth in Net Written Premium, 2000-2007E
*2007 figure based on actual 9-month results.Source: A.M. Best; Forecasts from the Insurance Information Institute.
5.0%
8.4%
15.3%
10.0%
3.9%
0.5%
2.7%
0.0%
2000 2001 2002 2003 2004 2005 2006 2007*
P/C insurers are experiencing their slowest growth rates since 1943…
but underwriting results are expected to remain relatively healthy
Personal/Commercial Lines & Reinsurance NPW Growth, 2006-2008F
2.0% 3.5%
28.1%
-0.1%
-1.5%
1.4%
-2.3%
-8.5%-5.0%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Personal Commercial Reinsurance
2006 2007E 2008F
Sources: A.M. Best Review & Preview (historical and forecast).
Net written premium growth is expected to be slower for commercial insurers and reinsurers
0%
10%
20%
30%
40%
50%
60%
70%
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Direct Independent Agents
All P/C Lines Distribution Channels, Direct vs. Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained in recent
years. Direct channels include exclusive agency companies, direct marketers and
direct sales (e.g., internet)
0%
10%
20%
30%
40%
50%
60%
70%
80%
72 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Direct Independent Agents
Personal Lines Distribution Channels, Direct vs. Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
Independent agents have lost significant personal lines market
share since the early 1970s, but the trend has slowed or even ended.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
72 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Direct Independent Agents
Commercial P/C Distribution Channels, Direct vs. Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
Independent agents have seen only modest erosion in commercial lines
market share in recent decades
Premium Growth in Ohio
Slower than the US
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
93 94 95 96 97 98 99 0 01 02 03 04 05 06
Ohio US
Year-to-Year Growth in Direct Written Premiums: Ohio and US
Source: Insurance Information Institute; NAIC.
Decline in premiums in OH was marginal (-0.72%) in 2004-5 while US was up 2.5%
WEAK PRICING
Under Pressure in 2007/08, Especially Commercial Lines
$651 $6
68 $691 $7
05
$703
$685
$690 $7
24
$780 $8
23 $851
$847
$838
$847
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide auto insurance expenditures
are expected to fall 0.5% in 2007, the first drop
since 1999
Lower underlying frequency and modest
severity are keeping auto insurance costs in check
$418$440 $455
$481$488 $508$536
$593
$668
$729
$868
$787$835
$400$450$500$550$600$650$700$750$800$850$900
95 96 97 98 99 00 01 02 03 04 05* 06* 07*
Average Expenditures on Homeowners Insurance**
*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute
Countrywide home insurance expenditures rose an estimated
4% in 2006
Homeowners in non-CAT zones have seen smaller increases than
those in CAT zones
Homeowners Insurance Expenditures as a % of Median Existing Home
Prices, 1995-2008F
$1
17
,00
0
$1
29
,00
0
$1
36
,00
0
$1
67
,60
0
$1
80
,20
0
$2
19
,00
0
$2
21
,90
0
$2
22
,70
0
$1
41
,20
0
$1
47
,30
0
$1
95
,20
0
$2
18
,80
0
$1
56
,60
0
$1
22
,60
0
0.3
57
%
0.3
59
%
0.3
53
%
0.3
46
%
0.3
73
%
0.3
59
%
0.3
98
%
0.3
97
%
0.3
54
%
0.3
45
%
0.3
76
%
0.3
71
%
0.3
42
%0.3
54
%
($25,000)
$25,000
$75,000
$125,000
$175,000
$225,000
$275,000
95 96 97 98 99 00 01 02 03 04 05 06E 07F 08F
Med
ian
Exi
stin
g H
ome
Pri
ce
0.31%
0.32%
0.33%
0.34%
0.35%
0.36%
0.37%
0.38%
0.39%
0.40%
0.41%
HO
In
s. E
xpen
d. A
s %
Hom
e P
rice
Median Existing Home Price Homeowners Insurance Expenditure as % Home Price
Record catastrophe losses and declining home prices are pushing HO insurance expenditures as a
% of median home price up
Source: National Association of Realtors, NAIC; Insurance Info. Institute calculations and HO expenditure estimates/forecasts for years 2005-2008.
Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2007)
-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%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases diminished greatly after Katrina but have grown again
KRW Effect
-0.1
%
Cumulative Commercial Rate Change by Line: 4Q99 – 4Q07
Source: Council of Insurance Agents & Brokers
Commercial account pricing has been trending down for 3+ years and is now on par with prices in late 2001, early 2002
Average Commercial Rate Changes by Line: 4Q99 – 4Q07
Source: Council of Insurance Agents & Brokers
Commercial account pricing has been trending down for 3+ years and is now on par with prices in late 2001, early 2002
Post-Katrina bump was short-lived
Rate Changes by Line,4th Qtr. 2005
-1.0% -0.9%
-4.6% -4.7%
-2.0%
-2.7%
-0.4%
-4.6%
0.2%
-4.2%
-3.0%
-5%
-4%
-3%
-2%
-1%
0%
1%
Comm Prop BizInterruption
Comm Auto WC GL Umbrella EPL D&O Surety Const. ALL Lines
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Strong tightening in 05Q4—the Katrina effect
Rate Changes by Line,4th Qtr. 2007
-13.0%
-8.9%
-11.9%-13.0%
-11.9%
-7.6%
-9.3%
-12.2%
-1.7%
-11.0%
-6.1%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
Comm Prop BizInterruption
Comm Auto WC GL Umbrella EPL D&O Surety Const. ALL Lines
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
All lines but Surety are strongly negative
RISING EXPENSES
Expense Ratios Will Rise as Premium Growth Slows
Personal vs. Commercial Lines Underwriting Expense Ratio*
23.4%24.3%
25.0%27.1%
24.4%
24.5%24.8%25.6%
24.6%
25.6%24.7%
26.1%26.6%
27.5%
30.8%
27.0%
26.3%26.4%25.6%
30.0%
31.1%
29.4%
29.9%29.1%
26.6%
25.0%
20%
22%
24%
26%
28%
30%
32%
96 97 98 99 00 01 02 03 04 05 06 07E 08F
Personal Commercial
*Ratio of expenses incurred to net premiums written.Source: A.M. Best; Insurance Information Institute
Expenses ratios will likely rise as premium growth slows
CAPACITY/SURPLUS
Accumulation of Capital/ Surplus Depresses ROEs
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
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 0607*
U.S. Policyholder Surplus: 1975-2007*
Source: A.M. Best, ISO, Insurance Information Institute. *As of September 30, 2007
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
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.
Premium-to-surplus ratio neared a record
low of $0.84:$1 at year end 2007, suggesting
excess capital
Capacity exceeded a half trillion dollars for the first time during
the 2nd quarter of 2007
Annual Catastrophe Bond Transactions Volume, 1997-2007
$1,729.8
$966.9
$7,329.6
$4,693.4
$1,991.1
$1,142.8$1,219.5$846.1$984.8$1,139.0
$633.0
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
97 98 99 00 01 02 03 04 05 06 07
Ris
k C
apita
l Iss
ues
($ M
ill)
0
5
10
15
20
25
30
35
Nu
mb
er o
f Iss
uan
ces
Risk Capital Issued Number of Issuances
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
Catastrophe bond issuance has soared in the wake of Hurricanes
Katrina and the hurricane seasons of 2004/2005, despite two
quiet CAT years
P/C Insurer Share Repurchases,1987- Through Q3 2007 ($ Millions)
$564
.0
$646
.9
$311
.0
$952
.4
$418
.1
$566
.8
$310
.1
$658
.8
$769
.2
$4,5
86.5
$5,2
66.0
$763
.7
$5,2
42.3
$4,3
70.0 $7,0
94.1
$17,412.7
$4,4
97.5
$1,5
39.9
$2,7
64.2
$2,3
85.6
$4,2
97.3
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07Q
3
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
First 9-months 2007 share buybacks are already
133% of the 2006 record
Reasons Behind Capital Build-Up & Repurchase Surge
•Strong underwriting results
•Moderate catastrophe losses
•Reasonable investment performance
•Lack of strategic alternatives (M&A, large-scale expansion)
Returning capital owners (shareholders) is one of the
few options available
2007 repurchases to date equate to 4.4% of industry surplus, the highest in 20 years
MERGER & ACQUISITION
Catalysts for P/C Consolidation Growing
in 2008
P/C Insurance-Related M&A Activity, 1988-2006
$2,4
35
$5,1
00
$19,
118
$40,
032
$1,2
49
$486
$20,
353
$425
$9,2
64
$35,
221
$55,825
$30,
873
$8,0
59
$11,
534
$1,8
82
$3,4
50
$2,7
80
$5,1
37
$5,6
38
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Tran
sact
ion
Val
ue ($
Mill
)
0
20
40
60
80
100
120
140
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
Source: Conning Research & Consulting.
M&A activity began to accelerate during the second
half of 2007
No model for successful
consolidation has emerged
Distribution Sector: Insurance-Related M&A Activity, 1988-2006
$542
$446
$1,9
34
$7$1,633
$2,7
20
$689
$60 $2
12
$944
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
96 97 99 00 01 02 03 04 05 06
Tran
sact
ion
Val
ue ($
Mill
)
0
50
100
150
200
250
300
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
Source: Conning Research & Consulting.
No extraordinary trends evident
Distribution Sector M&A Activity, 2005 vs. 2006
Source: Conning Research & Consulting
Title9%Insurer
Buying Distributor
7%
Agency Buying Agency
51%
Other4%
Bank Buying Agency
29%
2005 2006
Title4%
Insurer Buying
Distributor7%
Agency Buying Agency
62%
Other2%
Bank Buying Agency
25%
Number of bank
acquisitions is falling
years
Motivating Factors for Increased P/C Insurer Consolidation
Motivating Factors for P/C M&As• Slow Growth: Growth is at its lowest levels since the late 1990s
NWP growth was 0% in 2007; Appears similarly flat in 2008 Prices are falling or flat in most non-coastal markets
• Accumulation of Capital: Excess capital depresses ROEs Policyholder Surplus up 6-7%% in 2007 and up 80% since 2002 Insurers hard pressed to maintain earnings momentum Options: Share Buybacks, Boost Dividends, Invest in Operation, Acquire Option B: Engage in destructive price war and destroy capital
• Reserve Adequacy: No longer a drag on earnings Favorable development in recent years offsets pre-2002 adverse develop.
• Favorable Fundamentals/Drop-Off in CAT Activity Underlying claims inflation (frequency and severity trends) are benign Lower CAT activity took some pressure of capital base
Source: Insurance Information Institute.
INVESTMENT OVERVIEW
More Pain, Little Gain
Property/Casualty Insurance Industry Investment Gain1
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$63.6
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05* 06
07**
1Investment 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. **Annualized 9-month result of $47.718B.Sources: ISO; Insurance Information Institute.
Investment rose in 2007 but are just 9.8% higher than what they were
nearly a decade earlier in 1998
2%
3%
4%
5%
6%
7%
8%
9%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
P-C Inv Income/Inv Assets 10-Year Treasury Note
P/C Investment Income as a % of Invested Assets Follows 10-Year US T-Note
*As of January 2008 month-end.Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.
Investment yield historically tracks 10-year Treasury note quite closely
CATASTROPHICLOSS
What Will 2008 Bring?
Most of US Population & Property Has Major CAT Exposure
Is Anyplace
Safe?
U.S. Insured Catastrophe Losses*$7
.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$6.5
$100
.0
$61.
9
$9.2
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
20??
*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
$ Billions
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.
$100 Billion CAT year is coming soon
States With Largest Insured Catastrophe Losses in 2007
$ Millions
$1,230
$747$677
$320$223 $202 $200 $200
$262$270$272
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
CA MN TX GA IL OK KS MO NY CO ALSource: PCS/ISO; Insurance Information Institute.
2007 CAT STATS
•1.18 million CAT claims across 41 states arising
•23 catastrophic events
Distribution of 2007 US CAT Losses, by Type and Insured Loss
Personal, $4.4 , 68%
Commercial, $1.3 , 20%
Vehicle, $0.8 , 12%Personal (home, condo, rental, contents etc.)
accounted for 68% of all US insured
CAT losses paid in 2007. CAT claim
count was 1.18 million.
Source: PCS division of ISO.
$ Billions
Distribution of 2007 US CAT Losses, by Type and Claim Count
Personal, 721 , 61%
Commercial, 144 , 12% Vehicle, 315 , 27%
Personal (home, condo, rental, contents etc.) accounted for 61% of all US insured CAT
claims in 2007, but 68% of loss
dollars paid.Source: PCS division of ISO.
Thousands of Claims
$14.3
$34.4
$40.2
$47.7
$63.6
$68.4
$108.3
$132.6
$138.4
$154.4
$168.7
$420.7
$502.5
$538.4
$2,260.0
$2,294.4
$2,589.3
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
Sep. 12-18, 1979 Hollywood Hills, CA
Oct. 9-10, 1982 Los Angeles, Ventura, Orange Cos., CA
Nov. 16-17, 1980 Bradbury, Pacific Palisades, Malibu, Sunland,Carbon Canyon, Lake Elsinore, CA
Oct. 23-25, 1978 Los Angeles, Ventura Cos., CA
May 17-20, 1985 Florida
Jul. 26-27, 1977 Santa Barbara, Montecito, CA
Nov. 24-30, 1980 Los Angeles, San Bernardino, Orange,Riverside, San Diego Cos., CA
Sep. 22-30, 1970 Oakland-Berkeley Hills, CA
Jun. 23-28, 2002 Rodeo-Chediski Complex, AZ
July 2007: Lake Tahoe, CA**
May 10-16, 2000 Cerro Grande, NM
Jun. 27-Jul. 2, 1990 Santa Barbara County, CA
Oct. 27-28, 1993 Orange Co., CA
Nov. 2-3, 1993 Los Angeles Co., CA
Oct. 2007: Southern CA Fires*
Oct. 2003: Southern CA Fires
Oct. 20-21, 1991: Oakland, Alameda Cos., CA
Insured Losses (Millions 2007 $)
Top Catastrophic Wildland Fires In The United States, 1970-2007
Fourteen of the top 17
catastrophic wildfires since
1970 occurred in California
*Estimate from CA Insurance Dept., Jan. 10, 2008. Source: ISO's Property Claim Services Unit; California Department of Insurance; Insurance Information Institute.
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2%
Tornadoes, $77.3 , 26.0%
All Tropical Cyclones, $137.7 ,
46.3%
Civil Disorders, $1.1 , 0.4%
Utility Disruption, $0.2 , 0.1%
Water Damage, $0.4 , 0.1%Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 , 6.4%
Winter Storms, $23.1 , 7.8%
Terrorism, $22.3 , 7.5%
Source: Insurance Services Office (ISO)..
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.
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.
Global Insured Catastrophe Losses by Region, 2001-2007
0
10
20
30
40
50
60
70
80
90
2001 2002 2003 2004 2005 2006 2007
Seas/SpaceAfricaOceania/AustraliaSouth AmericaAsiaEuropeNorth America*
Notes: 2001-03 figures for N. America include US only. 2001 figure includes only property losses from 9/11. Source: Insurance Information Institute compiled from Swiss Re sigma issues.
North America accounted for 70% of global
catastrophe losses 2001-2007
$ Billions
The 2008 Hurricane Season:
Preview to Disaster?
Outlook for 2008 Hurricane Season: 25% Worse Than Average
Average* 2005 2008F
Named Storms 9.6 28 13Named Storm Days 49.1 115.5 60
Hurricanes 5.9 14 7Hurricane Days 24.5 47.5 30Intense Hurricanes 2.3 7 3
Intense Hurricane Days 5 7 6
Accumulated Cyclone Energy 96.2 NA 115
Net Tropical Cyclone Activity 100% 275% 125%*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
Average* 2008F
Entire US East & Gulf Coasts 52% 60%US East Coast Including Florida Peninsula
31% 37%
Gulf Coast from Florida Panhandle to Brownsville
30% 36%
Caribbean NA Above Average
*Average over the past century.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.
REINSURANCE MARKETS
Reinsurance Prices are Falling in Non-Coastal Zones, Casualty Lines
Share of Losses Paid by Reinsurers, by Disaster*
30%25%
60%
20%
45%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane Hugo(1989)
Hurricane Andrew(1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly
important role in the financing of mega-CATs; Reins. Costs
are skyrocketing
US Reinsurer Net Income& ROE, 1985-2007*
$1.9
4
$2.0
3
$1.9
5 $3.7
1
$4.5
3
$5.4
3
$1.4
7
$1.9
9
$1.3
1 $3.1
7
$3.4
1
$2.5
1
$9.6
8
$7.9
6
($2.98)
$0.1
2
$1.9
5
$1.3
8
$1.2
2
$1.8
7
$1.1
7 $2.5
2$1
.79
($4)
($2)
$0
$2
$4
$6
$8
$10
$12
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
Net
Inco
me
($ B
ill)
-10%
-5%
0%
5%
10%
15%
20%
RO
E
Net Income ROE
Source: Reinsurance Association of America. *2007 ROE figure is III estimate based return on average 2007 surplus.
Reinsurer profitability rebounded post-Katrina
but is now falling
Regional Distribution of Reinsurers by NWP, 2006
Other11%
U.K.6%
Switzerland12%
Ireland2%
Japan6%
Germany25%
France3%
Bermuda10%
U.S.25%
Source: Standard & Poor’s, Global Reinsurance Highlights, 2007 Edition
International reinsurers from
Germany, Switzerland and
France account for 40 percent of global reinsurance volume.
Bermuda is a growing market, with a 10 percent
share. Lloyd’s and London-based
reinsurers account for 6 percent of the
world market.
Eight countries account for 89 percent of global reinsurance volume.
Reinsurer Market Share Comparison: 1990 vs. 2006
U.S. Reinsurer
64.7%
Offshore Reinsurer
35.3%
1990 2006
Sources: Reinsurance Association of America; Insurance Information Institute.
U.S. Reinsurer
46.9%
Offshore Reinsurer
53.1%
U.S. Reinsurer market share fell precipitously between 1990 and 2006
Shifting Legal Liability & Tort
Environment
Is the Tort PendulumSwinging Against Insurers?
Bad Year for Tort Kingpins*(Continued)
“King of Class Actions” Bill Lerach•Former partner in class action firm Milberg Weiss•Admitted felon. Guilty of paying 3 plaintiffs $11.4 million in 150+ cases over 25 years & lying about it repeatedly to courts•Will serves 1-2 years in prison and forfeit $7.75 million; $250,000 fine
“King of Torts” Dickie Scruggs•Won billions in tobacco, asbestos and Katrina litigation•Pleaded guilty for attempting to offer a judge $40,000 bribe to resolve attorney fee allocation from Katrina litigation in his firm’s favor. His son/othersguilty on related charges•Could get 5 years in prison, $250,000 fine
Sou
rce:
San
Die
go U
nion
Tri
bune
, 9/1
9/07
Sou
rce:
Wal
l Str
eet J
ourn
al, 3
/15/
07
Bad Year for Tort Kingpins*(Continued)
“King of Class Actions” Melvyn Weiss•Former partner in class action firm Milberg Weiss; Earned $251 million in legal fees•Pled guilty to federal charges of racketeering and conspiracy for paying kickbacks to professional plaintiffs•Will serve 18-33 months in prison, pay $9.75 million in restitution; $250,000 fine
Sou
rce:
Wal
l Str
eet J
ourn
al, 3
/24/
07
$17.0$49.6 $58.7
$85.6$17.1
$51.0$70.9
$85.6
$5.2
$20.4
$30.0
$45.5
$0
$50
$100
$150
$200
$250
1980 1990 2000 2006
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.3 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
Total = $121.0 Billion
Total = $159.6 Billion
Total = $216.7 Billion
Personal, Commercial & Self (Un) Insured Tort Costs*
Growth in Cost of U.S. Tort System,1951-2009F
Source: Tillinghast-Towers Perrin.
9.8%
11.9%
3.2%
13.8%
5.6% 5.7%
0.4%
-5.4%
2.4%
4.7%
11.6% 11.8%13.7%
-10%
-5%
0%
5%
10%
15%
1951-60
1961-70
1971-80
1981-90
1991-2000
2001 2002 2003 2004 2005 2006 2007E 2008E
Tort costs moderated beginning in 2003 as many improvements in the tort system began to bear fruit
Asbestos-related and other costs drove tort growth sharply upward in 2001 and 2002
2001-2005: 7.8%
2006-2009F: 1.6%
Cost of US Tort System ($ Billions)
$129
$130 $1
41
$144
$148 $1
59
$156
$156 $1
67
$169 $1
80 $205
$233 $2
46 $260
$261
$247
$253 $2
65 $277
$0
$50
$100
$150
$200
$250
$300
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07E
08E
09E
Tort costs consumed 1.87% of GDP in 2006, down from 2.24% in 2003
Per capita “tort tax” was $825 in 2006, up from $680 in 2000
Reducing tort costs relative to GDP by just 0.25% (to 1.84%) would produce an
economic stimulus of $31.1B
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
Tort System Costs, 1950-2009E
$1.8 $5.4 $7.9$13.9$20.0
$83.7
$130.2
$179.2
$246.0$265
$277
$158.5
$247.0
$42.7
$3.4
0.62%
0.82%
1.03%
1.34%1.22%
1.98%2.14%
1.82% 1.83%1.83%
1.87%
2.24%2.24%
1.53%
1.11%
$0
$50
$100
$150
$200
$250
$300
50 55 60 65 70 75 80 85 90 95 00 03 06 08E 09E
Tor
t S
yste
m C
osts
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Tor
t C
osts
as
% o
f G
DP
Tort Sytem Costs Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP
After a period of rapid escalation,
tort system costs as a % of GDP are
now falling
Tort System Costs and Tort Costs as a Share of GDP, 2000-2009F
$179
$233$246
$265
$253
$260
$261
$277
$247
$205
1.82%2.03%
2.22% 2.23%
1.83%1.84%
2.10%
1.83%1.87%
2.24%
$100
$120
$140
$160
$180
$200
$220
$240
$260
$280
$300
00 01 02 03 04 05 06 07E 08E 09E
Tor
t S
yste
m C
osts
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Tor
t C
osts
as
% o
f G
DP
Tort Sytem Costs Tort Costs as % of GDP
After a period of rapid escalation, tort system costs as % of GDP are now falling
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
The Nation’s Judicial Hellholes (2007)
Source: American Tort Reform Association; Insurance Information Institute
TEXAS
Rio Grande Valley and Gulf Coast
South Florida
ILLINOIS
Cook County West Virginia
Some improvement in “Judicial
Hellholes” in 2007
Watch ListMadison County, ILSt. Clair County, IL
Northern New Mexico
Hillsborough County, FLDelawareCalifornia
Dishonorable Mentions
District of ColumbiaMO Supreme Court
MI LegislatureGA Supreme Court
Oklahoma
NEVADA
Clark County (Las Vegas)
NEW JERSEY
Atlantic County (Atlantic City)
Business Leaders Ranking of Liability Systems for 2007
Best States1. Delaware2. Minnesota3. Nebraska4. Iowa5. Maine6. New Hampshire7. Tennessee8. Indiana9. Utah10. Wisconsin
Worst States41. Arkansas42. Hawaii43. Alaska44. Texas45. California46. Illinois47. Alabama48. Louisiana49. Mississippi50. West Virginia
Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2007
ME, NH, TN, UT, WI
Drop-Offs
ND, VA, SD, WY, ID
Newly Notorious
AK
Rising Above
FL
Midwest/West has mix of good and bad states
Sum of Top 10 Jury Awards, 2004-2007
$ Millions
$615.0$815.0
$2,953.7
$5,158.8
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2004 2005 2006 2007
Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.
Total of Top 10 awards in 2007 was 25% lower than in 2006
Number of Top 10 Jury Awards, 1995 - 2007
22 2220
17
8 75 4 3 2 2 2 2 1 1 1
6
0
5
10
15
20
25
TX, NY and CA lead the U.S. in jumbo-size jury awards
Source: LawyersWeekly USA,, January 22, 2008. *All against Iran for terrorist activity
Total Top 10 Verdicts, 1995 through 2006
Source: Lawyers USA, 2007
2007 Top Ten Verdicts
Source: LawyersWeekly USA, January 22, 2008.
Value Issue State
$109 Million Medical Malpractice New York
$102.7 Million Premises Liability, Death Florida
$55.2 Million Product Liability, Death California
$54 Million Private Air Crash Florida
$54 Million Nursing Home, Death New Mexico
$50 Million DUI Crash Florida
$50 Million Product Liability, Death Alabama
$47.6 Million Prempro Nevada
$47.5 Million Vioxx New Jersey
$45 Million Auto Crash, Death Florida
2006 Top Ten Verdicts
Source: LawyersWeekly USA, 2007.
Value Issue State
$216.7 Million Medical Malpractice Florida
$160 Million Nursing Home Negligence Texas
$106 Million Wrongful Death California
$61 Million Workplace Harassment California
$51 Million Vioxx Louisiana
$47.5 Million Death of Prisoner Texas
$46 Million Auto Accident Missouri
$44.2 Million Business Dispute Florida
$44 Million Police Brutality Maryland
$38.5 Million Product Liability Texas
INFLUENCE OF TORT ENVIRONMENT AND LEGAL
LIABILITY TRENDS ON PRICING AND AVAILABILITY
Excess Liability Market Capacity – North America
Source: Marsh, 2007 Limits of Liability Report
$1.660$1.645
$1.570$1.535$1.425
$1.575
$1.710
$2.045
$1.941$2.011
$1.721
$1.405$1.334
$1.432
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
$2.2
$2.4
$2.6
$2.8
94 95 96 97 98 99 00 01 02 03 04 05 06 07
Bil
lio
ns
Capacity is up 16.5% since its 2003 trough
Liability: Average Cost per $1,000 of Revenue* United States, 2001 to 2007
$1.2
5
$0.6
5
$0.6
7
$0.3
3
$0.1
7
$0.1
1
$0.2
3
$3.2
1
$1.5
6
$1.2
7
$0.8
6
$0.3
6
$0.1
8 $0.4
8
$2.4
9
$1.0
7
$1.0
6
$0.6
3
$0.2
3
$0.1
4
$0.3
2
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$0 - $200M $201M-$500M
$501M-$1B $1B-$5B $5B-$10B $10B+ All
2001 2004 2007
*Across entire liability program (full population)
Source: Marsh, 2007 Limits of Liability Report
Liability insurance costs relative to the client’s revenues are down by 25% - 35% since 2004
31.3
%
22.0
% 37.5
%
20.8
%
46.7
%
40.8
%
37.5
%
24.9
%
11.2
%
10.1
%
39.7
% 53.8
%
40.5
%
22.6
%
11.3
%
10.0
%
42.2
%
70.0
%
48.0
%
28.3
%
10.0
%
11.1
%
36.7
% 56.6
%
27.1
%
10.1
%
11.0
%
31.7
% 51.6
%
29.2
%
19.0
%
5.5%10
.4%
8.4%9.
9%
134.5%
0%
20%
40%
60%
80%
100%
120%
140%
160%
CommercialMultiperil**
ProductsLiability
MedicalMalpractice
GeneralLiability
Comm. Auto Liability
WorkersComp
2001 2002 2003 2004 2005 2006
Defense Costs and Cost Containment Expenses as % of Incurred Losses*
* Net of reinsurance; excludes state funds. **Liability portion onlySource: Insurance Information Institute 2008 Fact Book from NAIC Statement Database.
Defense costs as a percentage of incurred
losses are flat or tracking upward
Average Total Liability Limits Purchased by All U.S. Firms*
*Includes underlying primary limits
Source: Limits of Liability 2007, Marsh, Inc.
$77.9
$85.8$83.2
$85.9$88.7
$99.1
$105.0$101.8
$95.7
$87
$77$75
$66 $66
$50
$60
$70
$80
$90
$100
$110
94 95 96 97 98 99 00 01 02 03 04 05 06 07
Limits purchased fell by 37.1% between 2000 and 2007.
Price/capacity are issues.
$ Millions
Average Underlying Limits – U.S. (Attachment Points)
*Source: Marsh, 2007 and 2006 Limits of Liability Report
$ Millions$2.2
$2.1
$1.8 $1.8
$2.0$1.9$1.9
$1.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
$2.2
$2.4
2000 2001 2002 2003 2004 2005 2006 2007
Average Jury Awards1994 vs. 2001 and 2005
419
187
333 1,
185
1,14
0
1,74
4
948
245 63
6
2,50
1 3,28
9
1,39
4
407
541
6,27
3
3,83
0
8,11
86,
358
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
Overall VehicularLiability
PremisesLiability
WrongfulDeath*
MedicalMalpractice
ProductsLiability
($00
0)
1994 2001 2005
*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.
The average jury award continued to rise through 2005
Trends in Million Dollar Verdicts*4%
10%
8%
23%
22%
36%
48%
4%
8%
12%
31% 37
%
49%
59%
13%
14%
29%
51%
62%
5%
17%
13%
32%
41%
55%
64%
4%
39%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VehicularLiability
PersonalNegligence
PremisesLiability
BusinessNegligence
GovernmentNegligence
MedicalMalpractice
ProductsLiability
1996-1998 1999-2001 2002-2003 2004-2005
*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.
Across all liability types, million dollar-plus awards rose from 10% of all awards from 1996-98 to 17% in 2004-05.
REGULATORY & LEGISLATIVE
ENVIRONMENT
Isolated Improvements, Mounting Zealoutry
Legal, Legislative &Regulatory Issues
• Florida “Seeing the Light”: State finally recognizing that it is overexposed with its 2007 legislation having failed to deliver on political promises made Size of FL Hurricane Catastrophe Fund may be scaled back Private reinsurance sector role may expand Citizens actuary: extending rate freeze through 2010 unwise; 44% increase not excessive
• Massachusetts Auto: Reforms have led to more competition, lower rates• Optional Federal Chartering: Recommended in Treasury plan; Still divisive issue• Tax Issue: Treatment of locales like Bermuda; Effort to “level the playing field”• National CAT Plan: Hearing in February and in 2007, but no current catalyst• Flood Reform: Likely to happen, but MS Rep. Gene Taylor unsuccessful pushing for
NFIP to cover wind. Sen. Clinton supports idea.• McCarran-Ferguson: Even though Trent Lott is gone, some may still push for scaling
back of M-F• Profusion of Quasi-Regulators: AGs, Governors, Congressional representatives
• Bad Faith Legislation: Attempts by trial lawyers and legislative allies to open new tort channels (WA referendum, Florida SB 2862)
Source: III
PRESIDENTIAL POLITICS & P/C PROFITABILITY
Political Quiz
• Does the P/C insurance industry perform better (as measured by ROE) under Republican or Democratic administrations?
• Under which President did the industry realize its highest ROE (average over 4 years)?
• Under which President did the industry realize its lowest ROE (average over 4 years)?
P/C Insurance Industry ROE byPresidential Administration,1950-2008*
15.10%10.45%
8.93%8.65%
8.35%7.98%
7.68%6.98%6.97%
5.43%5.03%
4.83%4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
G.W. Bush II
Nixon
Clinton I
G.H.W. Bush
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
Eisenhower II
G.W. Bush I
Johnson
Kennedy/Johnson
*ROE for 2007/8 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute
OVERALL RECORD: 1950-2008*
Republicans 8.92%
Democrats 8.00%
Party of President has marginal bearing on profitability of P/C insurance industry
-5%
0%
5%
10%
15%
20%
25%
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 0608
E
P/C Insurance Industry ROE by Presidential Party Affiliation,
1950–2008EBLUE = Democratic President RED = Republican President
Source: Insurance Information Institute
Tru
man
Nixon/FordKennedy/ Johnson
Eisenhower Carter Reagan/Bush Clinton Bush
Summary• Results were excellent in 2006/07; Overall profitability reached its highest
level (est. 13-14%) since 1988 Strong 2007 but ROEs slipping; Momentum for 2008
• Underwriting results were aided by lack of CATs & favorable underlying loss trends, including tort system improvements
• Property cat reinsurance markets past peak & more competitive• Premium growth rates are slowing to their levels since WW II;
Commercial leads decreases. Firming in personal lines?• Rising investment returns insufficient to support deep soft market in terms
of price, terms & conditions as in 1990s• How/where to deploy/redeploy capital??• Major Challenges:
Slow Growth Environment Ahead; Cyclical & EconomicMaintaining price/underwriting disciplineManaging variability/volatility of resultsManaging regulatory/legislative activism
Insurance Information Institute On-Line
If you would like a copy of this presentation, please give me your business card with e-mail address
top related