Overview & Outlook for the Surety and P/C Insurance Industries for
2014 and BeyondTrends, Challenges & Opportunities
Association of General ContractorsSurety Bond & Construction Risk Management Conference
Naples, FLFebruary 3, 2014
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Presentation Outline
Surety Market Overview and Outlook Growth
– Public Sector Construction Issues Underwriting Performance Economic Drivers
P/C Insurance Industry Overview & Outlook Profitability Underwriting Catastrophe Loss Trends Growth Investment Market Impacts
4
Surety, Net Premiums Written, 1990-2013E, ($ millions)
$2,6
10$2
,749
$2,8
81$3
,252
$3,3
32$3
,060
$3,2
88$3
,394
$3,8
36$3
,840 $4
,417
$4,8
07$4
,922
$4,8
13$4
,823
$4,8
54$4
,694
$4,6
90
$2,4
58$2
,644
$2,9
62$2
,158
$2,3
56$2
,528
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
E
Note: 1990-1992 includes Financial Guaranty.
Source: A.M. Best; Insurance Information Institute estimate for 2013 based on 9-month data from SNL Financial.
Surety premium growth has been negative/flat ever since the “Great
Recession” began
5
Surety, Direct Premiums Written, Percent Change, 1990-2013E
8.1%
7.5%
12.0
%
9.2%
7.3%
3.2% 5.
4%4.
8%
12.9
%2.
5%-8
.2%
7.5%
3.2%
13.0
%
0.1%
15.0
%8.
8%
2.4%
-2.2
%0.
2% 0.6%
-3.3
% 0.0%
-27.
1%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
E
Surety premiums volume has historically been quite volatile,
reacting to due to influences from construction sector exposures as well as the P/C insurance industry
underwriting and pricing cycle
Source: A.M. Best; Insurance Information Institute estimate for 2013 based on 9-month data from SNL Financial.
6
Annual Change in Surety DWP vs. Nominal GDP, 1994-2013E
9.2%
7.3%
12.9
%
2.5%
7.5%
13.0
% 15.0
%
5.7% 5.6% 6.2% 7.0% 7.7%
4.5% 3.9%5.1%
6.4% 6.4% 5.8%4.8%
3.6%5.0% 4.1%
3.1%
0.0%
8.8%
2.4%
0.1%
3.2% 4.
8%
-8.2
%
3.2%
-2.2
%
-3.3
%
0.6%
0.2%
5.4%
6.0%5.1%
2.7% -1.6%
-10%
-5%
0%
5%
10%
15%
20%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
E
Surety: Change in Direct Premiums Written Nominal GDP: Annual Change
Annual changes in Surety premiums written are far more volatile than for GDP growth
Note: 1990-1992 includes Financial Guaranty.
Source: U.S. Department of Commerce; A.M. Best; Insurance Information Institute estimate for 2013 based on 9-month data from SNL Finl.
7
$314.9 $304.0$286.4 $279.0 $275.0
$216.1 $220.2$234.2
$255.4
$289.1$308.7
$0
$50
$100
$150
$200
$250
$300
$350
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*
($ Billions)
Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Continues to Contract As State/Local Governments
Grapple with Deficits and Federal Sequestration Takes Hold
Value of New Federal, State and Local Government Construction: 2003-2013*
*2013 figure is a seasonally adjusted annual rate as of November.Sources: US Department of Commerce; Insurance Information Institute.
Construction across all levels of government
peaked at $314.9B in 2009
Austerity Reigns Govt. construction is still shrinking, down $39.9B or
12.7% since 2009 peak
8
Public Sector Construction Activity, Dollar Value & Annual Change,1993-2013*
$127
.4
$130
.4
$140
.0
$146
.7
$153
.4
$154
.8 $169
.1 $181
.3 $201
.9 $213
.4
$216
.1
$220
.2 $234
.2 $255
.4
$289
.1 $308
.7
$314
.9
$304
.0
$286
.4
$279
.0
$275
.0
2.4%
7.4%
0.9%
9.2%
7.2%
11.4%
5.7%
-1.4%1.
3%
-5.8
%
13.2%
$100
$150
$200
$250
$300
$350
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*
Valu
e of
Pub
lic C
onst
ruct
ion
Put i
n Pl
ace
-10%
-5%
0%
5%
10%
15%
Annual C
hange (%)
Value of Public Construction Annual Change
($ Billions)
Public construction could turn positive in 2014 for the first
time since 2009
2001 recession
*November 2013 figure, seasonally adjusted annual rate.Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
“Great” Recession impact intensified after
stimulus dollars dried up
Public sector construction activity declined for the 4th consecutive year in 2013,
down 12.7% or $39.9B since its 2009 peak
9
Public Sector Construction Spending vs. Surety Premium Growth, 1993-2013*
$127
.4
$130
.4
$140
.0
$146
.7
$153
.4
$154
.8 $169
.1 $181
.3 $201
.9 $213
.4
$216
.1
$220
.2 $234
.2 $255
.4
$289
.1 $308
.7
$314
.9
$304
.0
$286
.4
$279
.0
$275
.0
9.2%
7.3%
3.2%4.8%
12.9%
-8.2%
3.2%
13.0%
0.1%
8.8%
2.4%
-2.2%
0.6%
-3.3%
0.2%
15.0%
7.5%
2.5%
5.4%
$100
$150
$200
$250
$300
$350
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*
Valu
e of
Pub
lic C
onst
ruct
ion
Put i
n Pl
ace
-10%
-5%
0%
5%
10%
15%
20%
Annual C
hange in Surety DW
P (%)
Value of Public Construction Annual Change in Surety DWP
($ Billions)
Surety DWP has been falling along with
public construction spending
2001 recession
*November 2013 figure, seasonally adjusted annual rate.Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
“Great Recession”
11
Surety Combined Ratio, 1990-2012*
84.1
82.7
84.2
83.8
86.7
122.
7
117.
0
122.
0
119.
5
101.
8
81.6
70.4
66.6 79
.5
70.5
72.7 76.887
.0
75.9 83
.8
84.7 91
.5
88.2
0
20
40
60
80
100
120
140
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
*Net basis.Note: 1990-1992 includes Financial Guaranty.
Source: A.M. Best; Insurance Information Institute.
Underwriting performance in the surety line has been
strong since 2006
CONSTRUCTION INDUSTRY: MAJOR DRIVER OF SURETY
EXPOSURE
12
The Construction Sector Is Critical to the Economy, the P/C Insurance Industry & the
Surety Exposures12
13
Value of New Private Construction: Residential & Nonresidential, 2003-2013*
Billions of Dollars
$0$100$200$300$400$500$600$700$800$900
$1,000
03 04 05 06 07 08 09 10 11 12 13*
Non ResidentialResidential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$15.0
$613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2013: Value of new pvt. construction hits $659.4B, up
32% from the 2010 trough but still
28% below 2006 peak
13
$261.8
$238.8
$332.1
$290.8
*2013 figure is a seasonally adjusted annual rate as of November.Sources: US Department of Commerce; Insurance Information Institute.
14
Value of Construction Put in Place, November 2013 vs. November 2012*
-0.2%
-13.4%
0.1%
5.9%8.6%
16.6%
1.0%
-15%
-10%
-5%
0%
5%
10%
15%
20%
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 now up in the
residential and nonresidential segments
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +8.6% Public: -0.2%
Public sector construction activity remains depressed
15
Value of Private Construction Put in Place, by Segment, Nov. 2013 vs. Nov. 2012*
20.7%
3.0% 6.7%
-5.8%
18.3%
-10.5%
-24.2%
15.6%12.1%8.6%16.6%
1.0%
32.7%
11.5%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Tota
l Priv
ate
Cons
truct
ion
Resi
dent
ial
Tota
lNo
nres
iden
tial
Lodg
ing
Offi
ce
Com
mer
cial
Heal
th C
are
Educ
atio
nal
Relig
ious
Amus
emen
t &Re
c.
Tran
spor
tatio
n
Com
mun
icat
ion
Pow
er
Man
ufac
turin
g
Private Construction Activity is Up in Most Segments, Including the Key Residential Construction Sector; Bodes Well for Early 2014
Growth (%) Led by the Residential Construction, Lodging, Power and Transportation segments, Private
sector construction activity is rising after plunging during the “Great Recession.”
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
16
Value of Public Construction Put in Place, by Segment, Nov. 2013 vs. Nov. 2012*
-9.1%
0.0% 1.0% 1.0%5.2% 4.6%
-4.6%
0.1%
-0.1%-2.2%-0.2%
-13.4%
0.1%
-12.9%
-27.7%-30%-25%-20%-15%-10%
-5%0%5%
10%
Tota
l Pub
licCo
nstru
ctio
n
Resi
dent
ial
Tota
lNo
nres
iden
tial
Offi
ce
Com
mer
cial
Heal
th C
are
Educ
atio
nal
Publ
ic S
afet
y
Amus
emen
t &Re
c.
Tran
spor
tatio
n
Pow
er
High
way
&St
reet
Sew
age
&W
aste
Dis
posa
l
Wat
er S
uppl
y
Cons
erva
tion
&De
velo
p.
Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2014.
Growth (%)
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Public sector construction activity is down substantially in most segments, a situation that will likely persist, dragging
on public entity risk exposures
Transportation and Power projects lead
public sector construction
17
5.2%
5.5%
3.1% 3.6%
2.6% 5.
4%2.
8%-4
.0%
-12.
2%-1
6.3%
-11.
0%-3
.1%
3.3%
1.9%
5.3% 8.
1% 10.2
%11
.3%
5.0%
3.0% 4.0%
4.1%
2.9% 5.
3%8.
6% 9.0%
6.1%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%20
07:Q
1
2007
:Q2
2007
:Q3
2007
:Q4
2008
:Q1
2008
:Q2
2008
:Q3
2008
:Q4
2009
:Q1
2009
:Q2
2009
:Q3
2009
:Q4
2010
:Q1
2010
:Q2
2010
:Q3
2010
:Q4
2011
:Q1
2011
:Q2
2011
:Q3
2011
:Q4
2012
:Q1
2012
:Q2
2012
:Q3
2012
:Q4
2013
:Q1
2013
:Q2
2013
:Q3
*versus same quarter in prior yearSources: The Nelson A. Rockefeller Institute of Government, Special State Revenue Report, No. 94, published December 19, 2013, Table 1 (citing data from the U.S. Census Bureau); I.I.I.
Quarterly Change* in State Income and Sales Tax Revenues, 2007:Q1 – 2013:Q3
Recession
Consistently-growing tax revenues mean public-sector finances are likely to improve.
Public entity exposures including surety are likely to grow as a result after many
years of decline.
18
Net Change in Government Employment: Jan. 2010—Dec. 2013*
-631
-424
-100 -107
-700
-600
-500
-400
-300
-200
-100
0
Total Local State Federal
(Thousands)
Local government employment shrank by 424,000 from Jan.
2010 through Dec. 2013, accounting for 67% of all government job losses,
negatively impacting WC exposures for those cities and counties that insure privately
*Cumulative change from prior month; Base employment date is Dec. 2009.Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
State government employment fell by 1.9% since the end of 2009 but is
recovering while Federal employment is down by 3.8% and deteriorating
21
12 Industries for the Next 10 Years: Some Exposure Growth Leaders
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light & Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking, Pipelines)
22
P/C Insurance Industry Financial Overview
2013: Best Year in the Post-Crisis Era
Performance Improved with Lower CATs, Strong Markets
22
P/C Net Income After Taxes1991–2013:Q3 ($ Millions)
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 ROAS1 = 5.9% 2013:9M ROAS1 = 9.5%
• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.9% ROAS through 2013:Q3, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
$14,
178
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$62,
496
$3,0
43
$35,
204
$19,
456 $3
3,52
2
$43,
029
$28,
672
-$6,970
$65,
777
$44,
155
$20,
559
$38,
501
-$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 13:9M
2013:9M ROAS
was 9.5%
Net income is up substantially
(+54.7%) from 2012:Q3 $27.8B
24
P/C Insurance Industry Combined Ratio, 2001–2013:Q3*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013:Q3 = 95.8. Sources: A.M. Best, ISO.
95.799.3
100.8
106.3
102.4
96.6
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120Best
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
Sandy Impacts
Lower CAT
Losses
25
$12.
6
$11.
0$3
.8$1
4.3
$11.
6$6
.1
$34.
7$7
.6 $16.
3$3
3.7
$73.
4
$10.
5$7
.5
$29.
2$1
1.5
$14.
4$3
3.6
$35.
0$1
2.8
$14.
0
$4.8 $8
.0
$37.
8$8
.8
$26.
4
$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 13*
U.S. Insured Catastrophe Losses
*Through 12/31/13.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 ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Well
Below 2011 and 2012 YTD Totals.
2012 was the third most expensive year ever for insured CAT
losses
Record tornado losses caused
2011 CAT losses to surge
($ Billions, $ 2012)
25
-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 1213
:Q3
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:Q3*
*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.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
2012: 5.9%
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2013:Q3 8.9%
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE
* 2008 -2013 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2013:9M combined ratio including M&FG insurers is 95.8; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
97.5100.6 100.1 100.8
92.7
101.299.5
101.0
96.6
102.4
106.5
95.7
14.3%15.9%
12.7%10.9%
7.4% 7.9%
4.7%6.2%9.6%8.8%
4.3%
8.9%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013:9M0%
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 ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Lower CATs are improved ROEs
in 2013
28
-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 1213
:9M
Net Premium Growth: Annual Change, 1971—2013:Q3(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.
2013:9M = 4.2%
2012 growth was +4.3%
29
Direct Premiums Written: Total P/CPercent Change by State, 2007-2012*
58.4
25.4
24.5
21.0
19.2
17.6
16.3
13.2
13.2
12.4
9.9
9.2
9.2
8.5
8.0
6.2
5.8
5.2
4.5
4.4
4.3
4.3
4.2
4.0
3.8
3.6
0
10
20
30
40
50
60
70
ND SD OK NE IA KS VT AK
TX WY
MN AR
TN IN WI
KY
MT
OH LA VA NJ MI
SC CO
MO
NM
Pece
nt c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
North Dakota was the country’s growth leader over the past 5 years with premiums written
expanding by 58.4%
30
Oil & Gas Extraction Employment,Jan. 2010—Dec. 2013*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.
415
6.4
156.
715
7.6
158.
715
7.8
158.
015
9.5
160.
016
1.5
161.
216
1.2
163.
116
4.4
166.
616
9.3
170.
117
1.0
172.
517
3.6
176.
317
8.2
178.
518
0.9
181.
918
3.1
184.
818
5.2
185.
718
6.8
187.
618
8.0
188.
018
8.2
190.
019
1.7
191.
919
3.4
192.
419
2.6
193.
119
3.3
195.
019
6.5
197.
419
9.1
200.
120
1.9
150
160
170
180
190
200
210
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-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
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13Fe
b-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Oil and gas extraction employment is up 29.1% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in
the US.
(Thousands) Highest since Nov.
1986
31
Direct Premiums Written: Total P/CPercent Change by State, 2007-2012*
3.6
3.1
3.0
2.9
2.7
2.2
2.1
2.1
2.0
1.8
1.1
0.0
-0.1
-0.3
-0.7
-0.9
-2.8
-5.6
-6.0
-7.2
-7.2
-9.3
-10.
1
-11.
2
-12.
5
-17.
3
-20
-15
-10
-5
0
5
CT
MS
NC AL
MD PA U
.S.
MA IL WA
GA
UT
NH RI
ID ME
NY FL CA
DC
WV HI
AZ
OR DE NV
Pece
nt c
hang
e (%
)
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
Growth was negative in 13 states and DC between
2007 and 2012
32
Change in Commercial Rate Renewals, by Line: 2013:Q3
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewed Uniformly Upward in Q3:2013 for the 9th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat
Losses and Low Interest Rates Provide Momentum Going Forward
Percentage Change (%)
3.5%
4.7%5.4%
5.8%
1.0%
2.9% 2.7% 2.9% 2.9%3.3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Sur
ety
Con
stru
ctio
n
Bus
ines
sIn
terru
ptio
n
Um
brel
la
Gen
eral
Liab
ility
Com
mer
cial
Aut
o
Com
mer
cial
Pro
perty D&
O
EP
L
Wor
kers
Com
p
Survey: Surety rate gains are slower than
in other major commercial lines
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
33
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q2
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Percentage Change (%)
Pricing turned positive in Q3:2011, the first increase in
nearly 8 years; Q2:2013 renewals were up 4.3%. Some insurers posted
stronger numbers.Pricing Turned
Negative in Early 2004 and
Remained that way for 7 ½ years
Peak = 2001:Q4 +28.5%
Trough = 2007:Q3 -13.6%
KRW : No Lasting Impact
34
Policyholder Surplus, 2006:Q4–2013:Q3
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
$567.8$583.5$586.9
$607.7$614.0$624.4
$570.7$566.5
$505.0$515.6$517.9
$400
$450
$500
$550
$600
$650
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
2007:Q3Pre-Crisis Peak
Surplus as of 9/30/13 stood at a record high $624.4B
2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .
The industry now has $1 of surplus for every $0.78 of NPW,close to the strongest claims-paying status in its history.
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2014in very strong financial condition.
INVESTMENTS: THE NEW REALITY
35
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
35
36
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2013*
*Monthly, constant maturity, nominal rates, through December 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
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 '13
Recession2-Yr Yield10-Yr Yield
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.
U.S. Treasury security yields
recently plunged to record lows
36
Property/Casualty Insurance Industry Investment Income: 2000–2013*1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$47.7$45.8
$39.6
$49.5$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13*
Investment Income Fell in 2012 and is Falling in 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing
1 Investment gains consist primarily of interest and stock dividends..*Estimate based on annualized actual 9M:2013 investment income of $34.338B.Sources: ISO; Insurance Information Institute.
($ Billions)
Investment earnings are running below their 2007
pre-crisis peak
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38