Overview & Outlook for the P/C Insurance Industry:
2012 and BeyondMarketScout Entrepreneurial Insurance Symposium
Dallas, TXSeptember 12, 2012
Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
3
Economics 2012:
The World Is Changing2012 Is the First Year Since 2005 Where Economic Perceptions and Reality in the US Will Be Positive
Potentially Significant Benefits for P/C Insurers
3
The Strength of the Economy Will Influence P/C Insurer
Growth Opportunities
6
Growth Will Expand Workers Comp Payroll Exposure Base
6
America’s Manufacturing Renaissance?Construction Activity Still Depressed?
7
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/12; Insurance Information Institute.
2.7
%0
.5%
3.6
%3
.0%
1.7
%-1
.8%
1.3
%-3
.7%
-5.3
%-0
.3%
1.4
%5
.0%
2.3
%2
.2%
2.6
%2
.4%
0.1
%2
.5%
1.3
%4
.1%
2.0
%1
.7%
1.7
%1
.9%
1.8
%2
.4%
2.7
%2
.9%
-8.9%
4.1
%1
.1%
1.8
%2
.5% 3.6
%3
.1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit crunch, housing
slump, labor market contraction has been
severe but modest recovery is underway
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2012 is expected to see slow and choppy growth
before accelerating modestly in 2013
Percent Change in Real GDPby State, 2011
Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute. 8
Growth varied considerably across states
but in total was weak in 2011
with US overall growth at just
1.7%
TX has been an economic
growth leader
74
.4
73
.6
73
.6
72
.2
73
.6 76
67
.8
68
.9
68
.2
67
.7 71
.6 74
.5
74
.2 77
.5
67
.5 69
.8
74
.3
71
.5
63
.7
55
.7 59
.4
60
.9 64
.1
69
.9
75
.0
75
.3
76
.2
76
.4 79
.3
73
.2
72
.3
73
.6
40
45
50
55
60
65
70
75
80
85
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
Au
g-1
2
Consumer Sentiment Survey (1966 = 100)
January 2010 through August 2012
Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially in late 2011 and early 2012
Source: University of Michigan; Insurance Information Institute
Optimism among consumers Increased in August, and is well above year-ago levels; Suggests concern, but not fear on the part
of consumers.
9
10
16.9
16.5
16.1
13.2
10.4
11.6 12
.7
14.3 14
.7
14.7 15
.1
15.4
15.5
15.4
16.9
16.617
.117.5
17.8
17.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 18-22F
(Millions of Units)
Auto/Light Truck Sales, 1999-2022F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); Insurance Information Institute.
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector.
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is
still far below 1999-2007 average of 17 million units, but a recovery is underway.
Job growth and improved credit market conditions will boost auto sales in
2012 and beyond
12
(Millions of Units)
New Private Housing Starts, 1990-2022F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
1
0.5
5
0.5
9
0.6
1 0.7
5 0.8
9
1.3
4
1.2
3
1.3
2
1.3
81
.42
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F 18-22F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety
New home starts plunged
72% from 2005-2009; A
net annual decline of 1.49 million units, lowest since
records began in 1959
The plunge and lack of recovery in homebuilding and in construction in general
is holding back payroll exposure growth
Job growth, improved credit
market conditions and demographics
will eventually boost home construction
13
Construction Employment,Jan. 2010—August 2012*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,59
3
5,52
9 5,55
25,
559
5,51
8
5,50
7
5,49
1 5,51
1
5,49
2
5,49
9
5,48
8
5,47
75,
456
5,48
9
5,49
6
5,49
5
5,49
85,
495
5,50
8
5,49
8
5,52
85,
519
5,52
0 5,54
6 5,56
4
5,56
35,
549
5,54
2
5,51
0
5,51
45,
514
5,51
5
5,400
5,450
5,500
5,550
5,600
5,650
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
2/30
/210
2
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Construction employment is still below where it was in
Jan. 2010. In a normal recovery, construction employment would be
growing robustly
(Thousands)
14
Oil & Gas Extraction Employment,Jan. 2010—August 2012*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156
157
157
158 159
158
158 16
0
160 16
2
161
161 16
3 164 16
7 170 17
1 173 17
5 177 18
0 183
183 18
6 188 19
0 192
193
194 19
5 196 197
150
155
160
165
170
175
180
185
190
195
200
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
2/30
/210
2
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Oil and gas extraction employment is up 26.3% since Jan. 2010 as the energy sector booms. Domestic
energy production is essential to any robust economic recovery in the US.
(Thousands)
15
Value of Construction Put in Place, June 2012 vs. July 2011*
-7.0%
-19.4%
-0.2%
9.3%
15.0%19.0%
11.7%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
TotalConstruction
Total PrivateConstruction
Residential--Private
Non-Residential--
Private
Total PublicConstruction
Residential-Public
Non-Residential--
Public
Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue
Growth (%)
Private sector construction activity is up in both the residential and nonresidential segments
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +15.0% Public: -0.7%
Public sector construction activity remains depressed
16
Value of Private Construction Put in Place, by Segment, June 2012 vs. July 2011*
2.8% 3.4%
20.3%
-7.2%-10.1%
17.9%
-4.6%
20.6%17.4%15.0%
19.0%
11.7%
35.7%
10.2%
-20%
-10%
0%
10%
20%
30%
40%
To
tal
Pri
vate
Co
nst
ruct
ion
Res
iden
tial
To
tal
No
nre
sid
enti
al
Lo
dg
ing
Off
ice
Co
mm
erci
al
Hea
lth
Car
e
Ed
uca
tio
nal
Rel
igio
us
Am
use
men
t &
Rec
.
Tra
nsp
ort
atio
n
Co
mm
un
icat
ion
Po
wer
Man
ufa
ctu
rin
g
Private Construction Activity is Up in Most Segments, Including Residential Construction but Led by Power
Growth (%) Led by the Lodging and Power industries, Private sector construction activity is up by double digits in many
segments after plunging during the “Great Recession”
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
58
.3
57
.1
60
.4
59
.6
57
.8
55
.3
55
.1
55
.2
55
.3 56
.9 58
.2
58
.5 60
.8
61
.4
59
.7
59
.7
54
.2 55
.8
51
.4 52
.5
52
.5
51
.8
52
.2 53
.1 54
.1
52
.4 53
.4 54
.8
53
.5
49
.7
49
.8
49
.6
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
Au
g-1
2
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through August 2012
The manufacturing sector expanded for 34 consecutive months until June 2012 and added jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Manufacturing activity contracted in June for the first time in nearly 3
years, but a resumption of expansion is possible
18
19
$200,000
$300,000
$400,000
$500,000
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—July 2012
*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to July 2012 was 35%. Manufacturing is an
energy intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages
ENERGY INTENSIVE
The value of Manufacturing Shipments in July 2012 was up 32% to $479B from its June 2009 trough.
June figure is only 1.3% below its previous record high in July 2008.
$ Millions
19
20
Manufacturing Growth for Selected Sectors, 2012 vs. 2011*
11.4%
3.9%
11.6%
2.4% 3.4% 3.9%
-0.5%
5.9% 5.0%5.3%8.8%
6.7%
19.2%
6.1%
-5%
0%
5%
10%
15%
20%
25%
All
Ma
nu
fact
uri
ng
Du
rab
le M
fg.
Wo
od
Pro
du
cts
Pri
ma
ryM
eta
ls
Fa
bri
cate
dM
eta
ls
Ma
chin
ery
Ele
ctri
cal
Eq
uip
.
Tra
nsp
ort
atio
nE
qu
ip.
No
n-D
ura
ble
Mfg
.
Fo
od
Pro
du
cts
Pe
tro
leu
m &
Co
al
Ch
em
ica
l
Pla
stic
s &
Ru
bb
er
Te
xtile
Pro
du
cts
Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Energy Demand and Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages
Growth (%)
Manufacturing of durable goods has been
especially strong in 2012
*Seasonally adjusted; Date are YTD comparing data through July 2012 to the same period in 2011.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Durables: +8.8% Non-Durables: +2.4%
66%
68%
70%
72%
74%
76%
78%
80%
82%
Mar
01
Jun 0
1
Sep 0
1
Dec 0
1
Mar
02
Jun 0
2
Sep 0
2
Dec 0
2
Mar
03
Jun 0
3
Sep 0
3
Dec 0
3
Mar
04
Jun 0
4
Sep 0
4
Dec 0
4
Mar
05
Jun 0
5
Sep 0
5
Dec 0
5
Mar
06
Jun 0
6
Sep 0
6
Dec 0
6
Mar
07
Jun 0
7
Sep 0
7
Dec 0
7
Mar
08
Jun 0
8
Sep 0
8
Dec 0
8
Mar
09
Jun 0
9
Sep 0
9
Dec 0
9
Mar
10
Jun 1
0
Sep 1
0
Dec 1
0
Mar
11
Jun 1
1
Sep 1
1
Dec 1
1
Mar
12
Jun 1
2
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 21
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
“Full Capacity”
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
The US operated at 79.3% of industrial capacity in July
2012, above the June 2009 low of 68.3% and tied for the
highest level since April 2008
December 2007-June 2009 Recession
March 2001 through July 2012
21
22
Manufacturing Employment,Jan. 2010—August 2012*
11,4
5811
,462
11,4
7011
,502
11,5
3611
,546
11,5
6611
,549
11,5
5111
,551
11,5
60
11,5
7511
,627
11,6
6411
,690
11,7
1811
,726
11,7
38
11,7
6811
,771
11,7
6811
,777
11,7
8011
,808
11,8
6011
,890
11,9
32
11,9
4211
,955
11,9
6211
,985
11,9
70
11,000
11,200
11,400
11,600
11,800
12,000
12,200
12,400
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0A
ug-1
0
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
102
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Manufacturing employment is up by more than 500,000 or 4.6% since Jan. 2010—a
surprising source of strength in the economy
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands)
50
.7 52
.7 54
.1
54
.6
54
.8
53
.5
53
.7
52
.8 53
.9
54
.6 56 5
7.1 5
9.4
59
.7
56
.3
54
.4
53
.3
53
.4
53
.8
52
.6
52
.6
52
.6
52
.6
53
.0
56
.8
57
.3
56
.0
53
.5
53
.7
52
.1
52
.6 53
.7
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
Au
g-1
2
ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through August 2012
Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.
Optimism among non-manufacturers was stable in late 2011 and remained
expansionary in 2012
23
24
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
5371
,549
70,6
4362
,304
52,3
7451
,959
53,5
4954
,027
44,3
6737
,884
35,4
7240
,099
38,5
4035
,037
34,3
1739
,201
19,6
95 28,3
2243
,546
60,8
3756
,282
47,8
0610
,998
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112
:Q1
Business Bankruptcy Filings,1980-2012: Q1
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more
than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1:2011
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
24
25
Private Sector Business Starts, 1993:Q2 – 2011:Q3*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
920
119
219
219
320
1 204
202
210 21
220
921
6 220 22
322
022
021
022
121
220
421
820
920
720
719
919
1 193
172 17
616
918
417
5 179
188
200
183 18
7 191
203
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly* Data through June 30, 2011 are the latest available as of Sept. 12, 2012; Seasonally adjusted. **Annualized based on data through Q3:2011.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
(Thousands)
Business starts were up 3.5% to 561,000 in the first 9 months of 2011 vs. first 9
months of 2011. 722,000 new business starts were recorded in 2010, up 3.6% from
697,000 in 2009, which was the slowest year for new business starts since 1993
Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 748,000**
25
27
12 Industries for the Next 10 Years: Insurance Solutions Needed
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light Manufacturing
Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking)
28
Presidential Politics & the P/C Insurance Industry
How Is Profitability Affected by the President’s Political Party?
28
15.10%
9.40%
8.93%
8.65%
8.35%
7.98%
7.68%
6.98%
6.97%
6.65%
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
Obama
Eisenhower I
Eisenhower II
G.W. Bush I
Johnson
Kennedy/Johnson
*Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments.Estimated ROE for 2012 = 7.0%. Source: Insurance Information Institute
OVERALL RECORD: 1950-2012*
Democrats 7.67%Republicans 7.97%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950- 2012*
-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
06
08
10
12
E
BLUE = Democratic President RED = Republican President
Tru
man Nixon/Ford
Ken
ned
y/
Joh
nso
n
Eis
enh
ow
er
Car
ter
Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2012*
*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0%Source: Insurance Information Institute
Ob
ama
31
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
31
32
Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 8.1% in
Aug. 2012
Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.
Peak rate in the last 30 years:
10.8% in November -
December 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 14.7%
in Aug. 2012
January 2000 through August 2012, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving
32
Aug 12
186
7921
365
127
42 15-1
09-1
465
9723
-12
-85 -58
-161
-253 -230
-257
-347
-456
-547
-734 -6
67-8
06-7
07-7
44-6
49-3
34-4
52-2
97-2
15 -186
-262
75-8
316
62
229
51 6111
714
311
2 193
128 16
711
925
726
126
410
810
2 175
5221
613
9 178 23
4 277
254
147
8511
663
162
10314
4
(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan-
07F
eb-0
7M
ar-0
7A
pr-0
7M
ay-0
7Ju
n-07
Jul-0
7A
ug-0
7S
ep-0
7O
ct-0
7N
ov-0
7D
ec-0
7Ja
n-08
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-0
9Ju
n-09
Jul-0
9A
ug-0
9S
ep-0
9O
ct-0
9N
ov-0
9D
ec-0
9Ja
n-10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-1
1Ju
n-11
Jul-1
1A
ug-1
1S
ep-1
1O
ct-1
1N
ov-1
1D
ec-1
1Ja
n-12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Monthly Change in Private Employment
January 2008 through August 2012 (Thousands)
Private Employers Added 4.65 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
103,000 private sector jobs were created in
August
33
0.02
30.
011
-0.0
74-0
.132
-0.2
93-0
.546
-0.7
76-1
.033
-1.3
80-1
.836
-2.3
83-3
.117
-3.7
84-4
.590
-5.2
97-6
.041
-6.6
90-7
.024
-7.4
76-7
.773
-7.9
88-8
.174
-8.4
36-8
.361
-8.4
44-8
.428
-8.3
66-8
.222
-7.9
93-7
.942
-7.8
81-7
.764
-7.6
21-7
.509
-7.3
16-7
.188
-7.0
21-6
.902 -6.3
84-6
.120
-6.0
12-5
.910
-5.7
35-5
.683
-5.4
67-5
.328
-5.1
50-4
.916
-4.6
39-4
.385
-4.2
38-4
.153
-4.0
37-3
.974
-3.8
12-3
.709
-6.6
45
-10
-8
-6
-4
-2
0
2
Dec
-07
Jan-
08F
eb-0
8M
ar-0
8A
pr-0
8M
ay-
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-
Jun-
09Ju
l-09
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12F
eb-1
2M
ar-1
2A
pr-1
2M
ay-
Jun-
12Ju
l-12
Aug
-12
Mill
ion
sCumulative Change in Private Employment: Dec. 2007—August 2012
December 2007 through August 2012 (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job losses peaked at 8.444 million
in December 2009
Cumulative job losses as of June 2012 totaled
3.709 million
34
All of the jobs “lost” since
President Obama took office in Jan.
2009 have been recouped
Private Employers Added 4.74 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
0
-8
40
86
518
259
109
-70
-212 -188
-201
-221
-230
-267
-282
-295
-349
-367
-446 -4
13
-427
-454
-475
-486
-488
-483
-487
-504
-533
-551
-572
-579
-700
-500
-300
-100
100
300
500
700
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Cumulative Change in Government Employment: Jan. 2010—August 2012
January 2010 through August 2012* (Millions)
Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
Cumulative job losses through Aug. 2012 totaled 579,000
36
Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the
Financial Crisis, Causing Them to Reduce Staff
Government at all levels has shed more than a half
million jobs since Jan. 2010 even as private employers created 4.74 million jobs.
Temporary Census hiring distorted 2010
figures
38
Unemployment Rates by State, July 2012:Highest 25 States*
12
.0
10
.8
10
.7
9.8
9.6
9.6
9.3
9.1
9.1
9.0
8.9
8.9
8.8
8.7
8.5
8.5
8.4
8.3
8.3
8.3
8.3
8.3
8.2
7.9
7.7
7.6
0
2
4
6
8
10
12
14
NV RI CA NJ NC SC GA MS NY MI DC IL FL OR CT WA TN AL AZ CO KY US IN PA AK LA
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for July 2012, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In July, 44 states reported over-the-month unemployment rate increases, 2 states and the District of Columbia had decreases, and 4 states had no change.
39
7.6
7.5
7.4
7.3
7.3
7.2
7.2
7.2
7.0
6.8
6.6
6.4
6.4
6.3
6.1
6.0
5.9
5.8
5.6
5.4
5.3
5.0
4.9
4.4
4.0
3.0
0
2
4
6
8
ME ID WV AR WI MO OH TX MD DE NM HI MT KS MA UT VA MN WY NH IA VT OK SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates by State, July 2012: Lowest 25 States*
*Provisional figures for July 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In July, 44 states reported over-the-month unemployment rate increases, 2 states and the District of Columbia had
decreases, and 4 states had no change.
40
US Unemployment Rate Forecast
4.5
%
4.5
%
4.6
%
4.8
%
4.9
% 5.4
% 6.1
%
6.9
%
8.1
%
9.3
%
9.6
% 10
.0%
9.7
%
9.6
%
9.6
%
8.9
%
9.1
%
9.1
%
8.7
%
8.3
%
8.2
%
8.2
%
8.1
%
8.0
%
8.0
%
7.9
%
7.7
%
9.6
%4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
Rising unemployment eroded payrolls
and workers comp’s
exposure base.
Unemployment peaked at 10% in
late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/12 edition); Insurance Information Institute.
2007:Q1 to 2013:Q4F*
Unemployment forecasts have been revised slightly
upwards for 2012 and 2013. Optimistic scenarios put the
unemployment as low as 8.0% by Q4 of this year.
Jobless figures have been revised
slightly upwards for 2012/13
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
43
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2012E
*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is I.I.I. estimate based YTD 2012 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
+9% in 2012E
70
P/C Insurance Industry Financial Overview
Profit Recovery Was Set Back in 2011 by High Catastrophe
Loss & Other Factors
70
P/C Net Income After Taxes1991–2012:Q1 ($ Millions)
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $
36
,81
9
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
5,2
04
$1
9,1
50
$1
0,1
41
$2
8,6
72
-$6,970
$6
5,7
77
$4
4,1
55
$2
0,5
59
$3
8,5
01
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12:Q1
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012:Q1 ROAS1 = 7.2%
P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due primarily to lower catastrophe losses
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio including M&FG insurers is 99.0, ROAS = 7.2%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.
97.5
100.6 100.1 100.8
92.7
101.099.3
100.9
97.6
106.4
95.78.2%
4.6%
7.6%7.4%4.4%
9.6%
15.9%
14.3%
12.7% 10.9%
8.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012:Q10%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Year Ago
2011:Q1 = 102.2, 6.1% ROE
-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
06
07
08
09
10
11
*1
2:
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q1*
*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
2011:4.6%*
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2012:Q8.2%
96
Top 16 Most Costly World Insurance Losses, 1970-2011**
(Insured Losses, 2011 Dollars, $ Billions)
*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.**Figures do not include federally insured flood losses.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.
$11.9$13.0 $13.0$13.1
$19.1$21.3
$24.0$25.0
$37.5
$47.6
$7.7 $8.1 $8.3 $8.5 $9.3 $9.7
$0$5
$10$15$20$25$30$35$40$45$50
Hugo (1989)
WinterStormDaria(1991)
ChileQuake(2010)
Ivan (2004)
TyphoonMirielle(1991)
Charley(2004)
Wilma(2005)
ThailandFloods(2011)
NewZealandQuake(2011)
Ike (2008)
Northridge(1994)
SpringTornadoes/
Storms(2011)
WTC TerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)*
Katrina(2005)
5 of the top 14 most expensive
catastrophes in world history have occurred within the past 2 years
Taken as a single event, the Spring 2011 tornado and
thunderstorm season would likely become the 5th
costliest event in global insurance history
99
U.S. Insured Catastrophe Loss Update
2012 Catastrophe Losses Were Close to “Average” in the First Half of 2012
2011 Was the 5th Most Expensive Year on Record
99
100
US Catastrophe Loss Summary: First Half 2012 $9.3 Billion in Insured Losses in the US Arising from 90 CAT Events
Down 62% from $24.4B in 2011:H1; Loss is close to long-term average
Represents 80%+ of global total
Mild winter helped keep first half losses down
Thunderstorm (includes tornado, hail and wind damage) accounted for $8.8B or 95% of first half insured losses and represent the 3rd most expensive spring t-storm season ever
$14.6 Billion in Economic Losses in the US Down from approximately $75B in 2011:H1
Mild Winter Helped Keep First Half Insured Losses Down Lack of heavy precipitation limited spring flood but exacerbated drought conditions
Severe Droughts Now Impacting Central and Southwest Parts of US Two major wildfires in Colorado in June caused record $500 mill damage in the state
Largest wildfire in New Mexico history occurred in May
Insured crop losses could be high in 2012
Active Early Hurricane Season Tropical Storms Beryl and Debby caused minor wind damage and extensive flooding in FL
Source: Munich Re; Insurance Information Institute.
Natural Disaster Losses in the United States: First Half 2012
101Source: MR NatCatSERVICE
102
Top 14 Most Costly Disastersin U.S. History
(Insured Losses, 2011 Dollars, $ Billions)
*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.Sources: PCS; Insurance Information Institute inflation adjustments.
$9.0$11.9 $13.1
$19.1$21.3
$24.0 $25.0
$47.6
$8.5$7.7$6.5$5.5$4.4$4.3
$0$5
$10$15$20$25$30$35$40$45$50
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Northridge(1994)
SpringTornadoes& Storms*
(2011)
9/11Attack(2001)
Andrew(1992)
Katrina(2005)
Taken as a single event, the Spring 2011 tornado and storm season are
is the 4th costliest event in US insurance history
Hurricane Irene became the 11th most expense
hurricane in US history
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2012:H1Number of Events (Annual Totals 1980 – 2011 and First Half 2012)
Source: MR NatCatSERVICE 103
22
6
61
1
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 90 natural disaster events in the first
half of 2012
105
$1
2.3
$1
0.7
$3
.7
$1
4.0
$1
1.3
$6
.0
$3
3.9
$7
.4 $1
5.9
$3
2.9
$7
1.7
$1
0.3
$7
.3
$2
8.5
$1
1.2
$1
4.1
$3
2.3
$9
.3$1
3.7
$4
.7
$7
.8
$3
6.9
$8
.6
$2
5.8
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
US Insured Catastrophe Losses
*Munich Re figure for H1 2012.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation-Adjusted Basis
H1 2012 CAT losses were down $15.1B or 62% from
$24.4B in H1 2011
Record Tornado Losses Caused
2011 CAT Losses to Surge
($ Billions, 2011 Dollars)
105
$500
$530
$830
$975
$980
$1,000
$1,200
$1,400
$1,510
$2,000
$5,000
$6,900
$7,300
$840
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000
Flooding, April*
Wildfire, Sep. 4-19
Thunderstorms, Apr. 19-20
Thunderstorms, Aug. 18-19
Winter Storm, Jan. 31-Feb. 3
Thunderstorms, Jul. 10-14
Texas Drought, 2011*
Thunderstorms, Jun. 16-22
Thunderstorms, Apr. 14-16
Thunderstorms, Apr. 8-11
Thunderstorms, Apr. 3-5
Hurricane Irene, Aug. 26-28**
Thunderstorms, May 20-27
Thunderstorms, Apr. 22-26
**Includes $700 million in flood losses insured through the National Flood Insurance Program.Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute.
2011’s Most Expensive Catastrophes, Insured Losses
The Midwest was hard hit by catastrophes in 2011, especially thunderstorms,
including tornadoes, hail and high winds
U.S. Thunderstorm Loss Trends, 1980 – 2012:H1
107Source: Property Claims Service, MR NatCatSERVICE
Average thunderstorm
losses are up more than 5 fold since the early 1980s.
2012 will likely be among the top 5 years on record.
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss. 2008-2012 are the most expensive
years on record.
Thunderstorm losses in 2012:H1 totaled $8.8 billion, the 3rd highest
first half on record
*Through June 30.Source: National Forest Service, MR NatCatSERVICE
U.S. Acreage Burned by Wildfires, 1980 – 2012*
108
1.7 millions acres were burned by wildfires in the first half of 2012.
Most of the insured losses were in CO totaling close to $500 mill.
109
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011*
*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3 0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
4.4
8.0
3.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of the Combined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.20*
Combined Ratio Points
113
Federal Disaster Declarations Patterns:
1953-2012
113
Records Were Set for Federal Disaster Declarations in 2010 and
2011—Most Declarations Were Unrelated to Tropical Activity
Number of Federal Disaster Declarations, 1953-2012*
13 1
7 18
16
16
7 71
21
22
22
0 25
25
11
11
19
29
17
17
48
46
46
38
30
22 2
54
22
31
52
42
13
42
7 28
23
11
31
38
45
32 3
63
27
54
46
55
04
54
5 49
56
69
48 5
26
37
55
98
19
93
1
43
0
20
40
60
80
100
120
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
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
08
09
10
11
12
*Through Sept. 11, 2012.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011
The number of federal disaster declarations set a
new record in 2011, with 99, shattering 2010’s record 81
declarations.
There have been 2,068 federal disaster
declarations since 1953. The average
number of declarations per year is 34 from
1953-2010, though that few haven’t been
recorded since 1995.
31 federal disasters were declared through
Sept. 11, 2012
114
115
Federal Disasters Declarations by State, 1953 – 2012: Highest 25 States*
86
78
72
65
64
59
56
56
53
53
51
51
51
49
48
48
48
47
47
46
46
45
42
40
39
0
10
20
30
40
50
60
70
80
90
100
TX CA OK NY FL LA AL KY AR MO IL TN MS WV IA MN KS NE PA VA OH WA ND NC IN
Dis
as
ter
De
cla
rati
on
s
Over the past nearly 60 years,
Texas has had the highest number of Federal Disaster
Declarations
*Through Sept. 11, 2012. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
116
Federal Disasters Declarations by State, 1953 – 2012: Lowest 25 States*
39
39
37
36
36
34
34
29
28
27
26
26
25
24
24
23
23
22
17
17
17
15
14
12
10
9 9
0
10
20
30
40
50
ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC UT RI WY
Dis
as
ter
De
cla
rati
on
s
*Through Sept. 11, 2012. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
Over the past nearly 60 years, Utah and Rhode Island had the fewest
number of Federal Disaster Declarations
117
SPRING 2012 TORNADO & SEVERE STORM OUTBREAK
2012 Got Off to a Worrisome Start, But Is No Repeat of 2011
117
118
1,1
33
1,1
32 1
,29
7
1,1
73
1,0
82 1,2
34
1,1
73
1,1
48
1,4
24
1,3
45
1,0
71 1,2
16
94
1
1,3
76
1,2
64
1,1
03
1,0
98
1,6
92
1,1
46 1,2
82
97
2
1,819
1,6
91
553
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
Nu
mb
er
of
To
rna
do
es
0
100
200
300
400
500
600
Nu
mb
er o
f De
ath
s
Number of Tornadoes
Number of Deaths
*Through Sept.10, 2012.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html
Number of Tornadoes and Related Deaths, 1990 – 2012*
Tornadoes claimed 553 lives in 2011, the most since 1925
972 tornadoes have been recorded so far
this year*
2012 Tornado Losses Got Off to an Ominous Beginning, but Slowed. First Half 2012 Insured Losses from Tornadoes and Thunderstorms Totaled $8.8B.
U.S. Tornado Count, 2005-2012*
119
*Through Sept. 10, 2012.Source: http://www.spc.noaa.gov/wcm/
There were 1,897 tornadoes in the US in 2011 far above
average, but well below 2008’s record
2012 count is running well behind 2011
The BIG Question:When Will the Market Turn?
131
Catastrophes and Other Factors Are Pressuring Insurance Markets
131
New Factor: Record Low Interest Rates Are Contributing to
Underwriting and Pricing Pressures
132
Historical Criteria for a “Market Turn”:Low Interest Rates Add New Pressure
Criteria Status Comments
Sustained Period of
Large Underwriting
Losses
Large in 2011, Breakeven in
2012; Will Likely Grow
•Apart from 2011 CAT losses, overall p/c underwriting losses remain modest•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at onset of last hard market); CR= 97.6 in Q1:2012 (ex-M&FG)•Prior-year reserve releases continue to reduce u/w losses, boost ROEs, though more modestly
Material Decline in Surplus/ Capacity
Only Small Decline Due to
2011 Cats; Record Highs
in 2012
•Surplus hit a record $570.7B as of 3/31/12•Fell just 1.6% in 2011 due to CATs•Will likely see new records later in 2012•Little excess capacity remains in reinsurance markets•Modest growth in demand for insurance is insufficient to absorb much excess capacity
Tight Reinsurance
MarketSomewhat in
Place
•Much of the global “excess capacity” was eroded by cats•Higher prices in Asia/Pacific•Modestly higher pricing for US risks
Renewed Underwriting
& Pricing Discipline
Firming Broad, Sustained,esp. in Property, WC
•Commercial lines pricing trends have turned from negative to flat and now positive, esp. Property & WC; •Competition remains intense as many seek to maintain market share
Sources: Barclays Capital; Insurance Information Institute.
INVESTMENTS: THE NEW REALITY
133
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence
Underwriting & Pricing 133
134
Insurers Have Not Yet Fully Adapted to a Persistently Low Interest Rate Environment
No Expectation that Rates Would Be:Pushed to Such Low Levels
Pushed Down so Rapidly
Held to Such Low Levels for So Long
Suppressed via Unprecedented Aggressiveness of the Federal Reserve– Use of traditional and unconventional tools (QE)– Unconventional ’s policies couldn’t be anticipated, esp. QE1, 2 (3?)
Competitive PressureProtracted Soft MarketAbility to Release Prior Reserves Eases UrgencyRealization of Capital Gains
OFFSETTING FACTORSCapitalization Still SolidEmergence of Sophisticated Price Monitoring and Underwriting Tools
Property/Casualty Insurance Industry Investment Income: 2000–2012F1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.0
$46.6
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12F
Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates
1 Investment gains consist primarily of interest and stock dividends.*2012F is based on annualized Q1:2012 actual figure of $11.656B.Sources: ISO; Conning Research & Consulting; Insurance Information Institute.
($ Billions)
Investment earnings in 2011 were 10.3% below
their 2007 pre-crisis peak
138
U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*
*Monthly, through Aug. 2012 (Aug. figure is for week ending 8/17). Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.
1%
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 '09 '10 '11 '12
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
Yields on 10-Year U.S. Treasury Notes recently
plunged to all time record lows
138
140
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Perso
nal L
ines
Pvt Pass
Aut
o
Pers P
rop
Comm
ercia
l
Comm
l Auto
Credit
Comm
Pro
p
Comm
Cas
Fidelity
/Sure
ty
Warra
nty
Surplu
s Line
s
Med
Mal
WC
Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
140
1. UNDERWRITING
141
Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?
141
142
P/C Insurance Industry Combined Ratio, 2001–2012:Q1*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q1=99.0. Sources: A.M. Best, ISO.
95.7
99.3100.8
106.4
97.6
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012:Q1
Best Combined
Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned
Premiums
Relatively Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Lower CAT
Losses
Underwriting Gain (Loss)1975–2012:Q1*
* Includes mortgage and financial guaranty insurers in all years.Sources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 11
Cumulative underwriting deficit from 1975 through
2011 is $479B
($ Billions) Underwriting losses in
2011 totaled $36.5B, the
largest since 2001
145
2
(2)
(8)
(3)
(7)(10) (10)
(4)
(0)
11
24
15
119
(5)
(9)
(14)
(10) (11)(7)
(5)(2)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
E
12
F
13
F
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2013F
Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to
Further Diminish in 2012 and 2103Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best.
Prior year reserve releases totaled $8.8
billion in the first half of 2010, up from
$7.1 billion in the first half of 2009
Financial Strength & Underwriting
148
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
148
P/C Insurer Impairments, 1969–20118
15
12
71
19
34
91
31
21
99
16
14
13
36
49
31 3
45
04
85
56
05
84
12
91
61
23
11
8 19
49 50
47
35
18
14 15 16 1
9 21
34
5
0
10
20
30
40
50
60
70
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
08
09
10
11
Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
3 small insurers in Missouri did encounter
problems in 2011 following the May
tornado in Joplin. They were absorbed by a
larger insurer and all claims were paid.
149
154
Performance by Segment
154
Private Passenger Auto Combined Ratio: 1993–2012P
10
1.7
10
1.3
10
1.3
10
1.0
10
9.5
10
7.9
10
4.2
98
.4
94
.3
95
.1
95
.5 98
.3 10
0.2
10
1.3
10
1.0
10
2.0
10
0.3
99
.5 10
1.1
10
3.5
80
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E 12F
Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best (1990-2012F); Insurance Information Institute. 156
Homeowners Insurance Combined Ratio: 1990–2012F
11
3.0
11
7.7
15
8.4
11
3.6
10
1.0 10
9.4
10
8.2
11
1.4 1
21
.7
10
9.3
98
.2
94
.4 10
0.3
89
.0 95
.6
11
6.6
10
5.8
10
6.9
12
2.4
10
5.0
11
8.4
11
2.7 12
1.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E12F
Homeowners Performance Deteriorated in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected
Due to Local Catastrophe Loss Activity
Sources: A.M. Best (1990-2012E); Insurance Information Institute. 157
109.4110.2
118.8
109.5
112.5
110.2
107.6
104.1
109.7 110.2
102.5
105.4
91.1
93.6
104.2
98.9
102.1
108.0
102.0102.0
111.1112.3
122.3
90
95
100
105
110
115
120
125
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute
Commercial Lines Combined Ratio, 1990-2012F*
Commercial lines underwriting
performance in 2011 was the worst since 2002
160
Workers Compensation Combined Ratio: 1994–2012F
10
2.0
97
.0 10
0.0
10
1.0
11
2.6
10
8.6
10
5.1
10
2.7
98
.5 10
3.6
10
4.6 1
10
.4 11
6.6
11
7.1
11
6.01
21
.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F
Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They
Have Been in a DecadeSources: A.M. Best; Insurance Information Institute. 167
2. SURPLUS/CAPITAL/CAPACITY
178
Have Large Global Losses Reduced Capacity in the Industry, Setting
the Stage for a Market Turn?
178
180
Policyholder Surplus, 2006:Q4–2012:Q1
Sources: ISO, A.M .Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$511.5
$540.7$530.5
$544.8
$559.2 $559.1
$538.6
$550.3
$570.7$566.5
$505.0$515.6$517.9
$420
$440
$460
$480
$500
$520
$540
$560
$580
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1
2011:Q1Previous Surplus Peak
Quarterly Surplus Changes Since 2011:Q1 Peak
11:Q2: -$7.4B (-1.0%)11:Q3: -$27.9B (-4.6%)11:Q4: -$16.2B (-2.5%)12:Q1: +$3.2B (+0.7%)
Surplus as of 3/31/12 hit an all time record high of $570.7B, 0.7% or $3.2B
above the previous record set as of 3/31/11.
*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.
The Industry now has $1 of surplus for every $0.80 of NPW, close to the strongest claims-
paying status in its history.
Drop due to near-record 2011 CAT losses
187
3. REINSURANCE MARKET CONDITIONS
Record Global Catastrophes Activity is
Pressuring Pricing
187
189
Global Property Catastrophe Rate on Line Index, 1990—2012 (as of July 1)
15%
-3%
-13%
-8%
-20% -18% -1
1%
3%
14%
-11%
-6%
-9%
-16%
10%
-12%
-3%
7%
14%
76%
68%
25%
20%
0%
115
141
230
200184
147
121
152
255
233
195
215
184
196
133111
108
237
100
154
173
145
190
-40%
-20%
0%
20%
40%
60%
80%
100%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Ye
ar
Ov
er
Ye
ar
% C
ha
ng
e in
RO
L
0
50
100
150
200
250
300
Cu
mu
lativ
e R
ate
on
Lin
e (1
99
0=
10
0)
Year Over Year % Change
Cumulative Rate on Line Index
Sources: Guy Carpenter; Insurance Information Institute.
Property-Cat reinsurance pricing is up about 7% as of
7/1/12 but much more over the past 7-12 years—a cost that
must be reflected in LPI rates
4. RENEWED PRICING DISCIPLINE
191
Is There Evidence of a Broad and Sustained Shift in Pricing?
191
193
-5%
0%
5%
10%
15%
20%
25%
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Premium Growth Is Up Modestly: More in 2012?
(Percent)1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
2012:Q1 growth
was +3.1%
199
Monthly Average P&C Rate Change, 2001—Aug. 2012
Source: MarketScout Corporation.
-20%
-10%
0%
10%
20%
30%
40%
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
P/C pricing was up 5% in August 2012
200
Change in Commercial Rate Renewals, by Line: August 2012
Major Commercial Lines Are Renewed Upward in Aug. 2012
Percentage Change (%)
Source: MarketScout Corporation.
WC, Commercial Prop. and GL rate increases
lead the way
Shifting Legal Liability & Tort Environment
221
Is the Tort PendulumSwinging Against Insurers?
221
222
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
Tort costs in dollar terms have remained high but relatively stable
since the mid-2000s., but are down substantially as a share of GDP
Deepwater Horizon Spike
in 2010
1.68% of GDP in 2013
2.21% of GDP in 2003
= pre-tort reform peak
www.iii.org
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentations
Insurance Information Institute Online:
232