fi i l c i i e ifinancial crisis, economic stst u us & t e ... · real gdp growth* 8 % 8 6% %...
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Fi i l C i i E iFinancial Crisis, Economic Stimulus & the Future of the St u us & t e utu e o t e
P/C Insurance Industry T d Ch ll & O t itiTrends, Challenges & Opportunities
NCCI Holdings Inc.NCCI Holdings Inc.Annual Issues Symposium
Orlando, FL
May 7, 2009
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ [email protected] ♦ www.iii.org
Presentation OutlinePresentation Outline• Financial Crisis & The Weakening Economy
L b M k T d E I li i f WC• Labor Market Trends: Exposure Implications for WC• Aftershock: P/C Insurance After the Financial Crisis• 10 Key Threats and Issues Facing P/C Insurers Through 2015y g g• Green Shoots: Signs of Recovery?• Economic Stimulus Package: Insurer Impacts• Financial Strength & Ratings• Financial Strength & Ratings• P/C Insurance Industry Overview & Outlook
• Profitability• Premium GrowthPremium Growth• Underwriting Performance• Financial Market Impacts
• Capital & Capacityp p y• Key Emerging Risks in Workers Comp
2
THE ECONOMIC STORMSTORM
What the Financial Crisis and Deep Recession Mean for the p f
P/C Insurance Industry
Real GDP Growth*
8% 8%6%
Real GDP GrowthRecession began in December 2007.
Economic toll of credit crunch, housing slump labor market contraction is growing
3.7%
% 1.6% 2.
5%
3.6%
3.1%
2.9%
4.8
4.8
9%
2.8%
% 1.6% 2.
3% 2.7% 2.9% 3.1%
2%
4%
slump, labor market contraction is growing
0.8% 1
0.1% 0.
9
.5%
0.4%
1
-0.2%0%
2%
-0.
-2.1
%
-4%
-2%
The Q4:2008 decline was the steepest since the
-5.1%
-6.3%-8%
-6%
0
1
2
3
4
5
6 Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q
pQ1:1982 drop of 6.4%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
07:2
07:3
07:4
08:1
08: 2
08:3
08:4
09:1
09: 2
09:3
09:4
10:1
10:2
10:3
10:4
*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/09; Insurance Information Institute.
4
GDP Growth: Advanced & Emerging Economies vs World
1970-2010F Emerging economies (led by China) are
Emerging Economies vs. World
8.0
10.0(led by China) are
expected to grow by 3.3% in 2009
The world economy is forecast to grow by 0.5% in 2009, but could shrink for the first time since WW II —by 1% to
2% according to the World Bank.
4.0
6.0g
0.0
2.0
A i i
-4.0
-2.0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Advanced economies will shrink by 1.9% in 2009
7 7 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook Update, Jan. 28, 2009; Ins. Info. Institute. 5
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
% 0.3%
25% 8%
Premium Growth: Modest AssociationP/C insurance industry’s growth i i fl d d tl b th
18.6
% 20
13.7
%
15%
20% 6%is influenced modestly by growth
in the overall economy
.2%
% 5.8%
5.6%
17.
7%10%
WP
Gro
wth
2%
4%
DP G
row
th
5.
1.8%
4.3% 5
0.3%
3.1%
1.1%
0.8%
0.4%
0.6%
% %1.
6%5
1.2%
%
0.2%
0%
5%
Real
NW
0%
Rea
l GD
-0.9
%% 5%
-1.5
%
-1.6
%-1
.0%
-1.8
%-1
.0%
-0.4
%-0
.3%
-2.9
% -0.5
%-3
.8%
-4.4
%-5% -2%
Real NWP Growth Real GDP
-7.4
%-6
.
-10%
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E
09F
-4%Real NWP Growth Real GDP
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 4/09; Insurance Information Inst.6
Length of US Recessions1929 P t*1929-Present*
50 Current recession began in DecMonths in Duration
43
404550 Current recession began in Dec.
2007 and is already the longest since 1981. It is now also the
longest recession since the Great “We will rebuild. We
will recover.”
253035
gDepression.--President Barack Obama
addressing a joint session of Congress
13
811 10
810 11
16 16
8 8
18
152025
February 24, 2009
8 86
8 8
05
10
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
* As of May 2009, inclusiveSources: National Bureau of Economic Research; Insurance Information Institute. 7
Length of U.S. Business Cycles 1929 Present*1929-Present*
120120
Contraction Expansion FollowingDuration (Months)
A erage D ration**
80
106
9290
100110120 Average Duration**
Recession = 10.4 MonthsExpansion = 60.5 Months
Length of expansions
greatly
50
80
58
73
60708090 g y
exceeds contractions
4350
3745
39
2436
30405060
138 11 10 8 10 11
166
168 8
1812
01020
MonthAug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
* As of May 2009, inclusive; **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Month Recession Started
8
Annual Inflation Rates(CPI U %) 1990 2010F(CPI-U, %), 1990-2010F
6.0Inflation peaked at 5.6% in August 2008 on
high energy and commodity crisis The4.9 5.1
3 8 3 84 0
5.0
6.0 high energy and commodity crisis. The recession and the collapse of the commodity bubble have produced temporary deflation.
3.0 3.22.6
1 9
3.3 3.4
2.5 2.3
3.0
3.8
2.8
3.8
2.82.92.43.0
4.0
1.51.9
1.31.6
1.0
2.0
(0 7)(1.0)
0.0
(0.7)(1.0)90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, April 10, 2009 (forecasts). 9
Total Industrial Production2007:Q1 to 2010:Q4F2007:Q1 to 2010:Q4F
Figures for 2010 revised upwards to reflect
1.5%3.2%3.6%
0.3%0.4%
2.7%3.3%3.7%4.0%
1.7%
0 0%
5.0%upwards to reflect expected impact of
Obama stimulus program
-3.4%
-0.6%
-5.0%
0.0%
I d t i lObama stimulus
program is
-8.8%
-5.5%
-10.0%
Industrial production began
to contract sharply during H2 2008 and
i t d t
program is expected to impact
industrial production and
-12.1%
-15.9%
-15.0%is expected to
shrink through most of 2009
therefore insurance exposure both directly and
indirectly-20.0%
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
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/09); Insurance Info. Inst.
indirectly
10
LABOR MARKET TRENDSTRENDS
Fast & Furious: Massive JobFast & Furious: Massive Job Losses Sap the Economy and
Workers Comp ExposureWorkers Comp Exposure
Unemployment Rate:On the Rise
January 2000 through March 2009
On the Rise
8.0
9.0 March 2009 unemployment jumped to 8.5%, exceeding the 6.3% peak during the previous
l d i i hi h l lPrevious Peak: 6 3% in
6 0
7.0cycle, and is now at it highest level
since Jan. 1984Previous Peak: 6.3% in
June 2003
5.0
6.0
U l t ill lik l k b t 9% d
Trough: 4.4% in March 2007
3.0
4.0
00 01 02 03 04 05 06 07 08
Unemployment will likely peak between 9% and 10 % during this cycle, impacting payroll
sensitive p/c and non-life exposuresAverage unemployment rate 2000-07 was 5.0%
09
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Mar
-0
12
U.S. Unemployment Rate2007 Q1 t 2010 Q4F*2007:Q1 to 2010:Q4F*
% 5% 6% 5% % %10.0%Rising unemployment will erode payrolls and
1%
8.8%
9.3% 9.
5
9.6
9.5
9.4%
9.3%
8 5%
9.0%9.5%
10.0% will erode payrolls and workers comp’s exposure base.
Unemployment is
6.9%
8.1
7 0%7.5%8.0%8.5% Unemployment is
expected to peak near 10% in early 2010.
% 5.4%
6.1%
66.0%6.5%7.0%
4.5%
4.5% 4.6% 4.
8% 4.9%
5
4.5%5.0%5.5%
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:Q4 10:Q1 10:Q2 10:Q3 10:Q4
* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/09); Insurance Info. Inst.
13
Monthly Change Employment*(Th d )(Thousands)
0January 2008 through March 2009
-72-144 -122
-160 -137 -161 -128-175-200
-100
160 161 -175
-321380
-400
-300 Job losses since the recession began in Dec. 2007 total 5.133
million; 13.2 million people are -380
597-600
-500million; 13.2 million people are
now defined as unemployed.
-597-681
-741-651 -663
-800
-700
J 08 F b 08 M 08 A 08 M J 08 J l 08 A 08 S 08 O t 08 N 08 D 08 J 09 F b 09 M 09
Monthly losses in Dec. – Mar. were the largest in the post-WW II period
Jan-08 Feb-08 Mar-08 Apr-08 May-08
Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute 14
Years With Job Losses: 1939-2009*(Thousands)(Thousands)
0
857
-545 -540 -462 -450 -432 -378 -371 -297-52
-1 000
-500
-1,512
-886 -857
-1,500
-1,000
The US has seen net job Losses through March
-2,128-2055-1,762
-2,500
-2,000 losses in only 16 of the 70 years since
1939
g2009 already rank the year as the 6th worst in
the post WW II era
-3,078
-2,750
-3,500
-3,00019392008’s job losses even
exceeded those in 1945, at the conclusion of WW II
2008 1945 1982 2009* 2001 1949 1944 1991 1957 2002 1953 1970 1960 1974 1954 1958 1981
*Through March 2009.Source: Insurance Information Institute research fromUS Bureau of Labor Statistics data: http://www.bls.gov/ces/home.htm.
15
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net
Written PremiumsWritten Premiums
7/90 3/91 3/01 11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
12/07 ?
$6,000
$7,000
$35
$40
$45Wage & SalaryDisbursementsWC NPW
7/90-3/91 3/01-11/01 12/07-?
$4,000
$5,000
$25
$30
$35
Weakening wage
$2,000
$3,000
$10
$15
$20Weakening wage
and salary growth is
expected to cause a deceleration in
$0
$1,000
$0
$5
$10Shaded areas indicate recessions a deceleration in workers comp
exposure growth
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08**Wage and Salary data though October 2008.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
16
State Construction Employment Dec 2007 Dec 2008Dec. 2007 - Dec. 2008
SD
NDMT
ID
OR
WA
MNME
WINY
VTNH
MA
NV
CA
UT
WY
NE
CO
IA
IL
KS
OH
MI
IN
MO
PA
RI
VAWV
CT
NJ
DE Construction
OK
LA
AZNM
MO
AR
KY
TN
MS AL
SC
NC
GA
MD
DCemployment declined in
47 of 50 iTX
LA
FL
AK
HI
AK states in 2008
170% to 4% -0.1% to -8.5% -8.8% to -22% 17
Sources: Associated General Contractors of America from Bureau of Labor Statistics; Insurance Information Institute.
New Private Housing Starts,1990-2010F (Millions of Units)1990 2010F (Millions of Units)
Exposure growth forecast for HO insurers is dim for 2009 with some
New home starts plunged 34%
from 2005 2007;
2.07
801.85 1.
96
1 92.02.1
improvement in 2010.Impacts also for comml. insurers with
construction risk exposure
from 2005-2007; Drop through 2009 is 73% (est.)—a net
annual decline of 1 51 million1.
361.48
351.46 1.47
1.62 1.64
1.57 1.60 1.
71
1
1.51.61.71.81.9 1.51 million
units, lowest since record
began in 1959
1.3
0
1.3
1.29
1.20
1.01
1.19
1.11.21.31.41.5
0.90
.56
0.78
1
0 60.70.80.91.0 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 2009 vs. 2005 is 0
0.50.6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
pestimated at about $1.3 billion.
Source: US Department of Commerce; Blue Chip Economic Indicators (4/09); Insurance Information Inst.18
AFTERSHOCK
What Will the P/C InsuranceWhat Will the P/C Insurance Industry Look Like After the
Crisis?Crisis?
Six Key Differences
Six Key Differences: P/C Insurance in the Post Financial Catastrophe Worldthe Post-Financial Catastrophe World
1. The P/C Insurance Industry Will Be Smaller: The Industry Will Have Shrunk by About 3% in Dollar Terms and by 8%Will Have Shrunk by About 3% in Dollar Terms and by 8% on an Inflation Adjusted Basis, 2007-09
Falling prices, weak exposure growth, increasing government intervention in private (re)insurance markets, large retentions and alternative forms of risk transfer have siphoned away premiumalternative forms of risk transfer have siphoned away premiumThere will be fewer competitors after a mini consolidation wave
2. P/C Industry Will Emerge With Its Risk Mgmt. Model More y g gIntact than Most other Financial Service Segments
Benefits of risk-based underwriting, pricing and low leverage clear
3 Th Will B F d l R l ti f I N i3. There Will Be Federal Regulation of Insurers: Now in Waning Months of Pure State-Based Regulation
Federal regulation of “systemically important” firms seems certainSolvency and Rates regulation, Consumer Protection may be shared
Source: Insurance Info. Inst.
Solvency and Rates regulation, Consumer Protection may be sharedDual regulation likely; federal/state regulatory conflicts are likelyWith the federal nose under the tent, anything is possible
20
Six Key Differences: P/C Insurance in the Post Financial Catastrophe World
4. Investment Earnings Will Shrink Dramatically for an Extended Period of Time: Federal Reserve Policy Shrinking
Post-Financial Catastrophe World
Extended Period of Time: Federal Reserve Policy, Shrinking Dividends, Aversion to Stocks
Trajectory toward lower investment earnings is being locked in
5. Back to Basics: Insurers Return to Underwriting Roots: Extended Period of Low Investment Exerts Pressure to Generate Underwriting Profits Since 1960sGenerate Underwriting Profits Since 1960s
Chastened and “derisked” but facing the same (or higher) expected losses, insurers must work harder to match risk to price
6. P/C Insurers: Profitable Before, During & After Crisis:Resiliency Once Again Proven
Directly the result of industry’s risk management practices
Source: Insurance Information Inst.21
Possible Regulatory Scenarios for P/C Insurers as of Year End 2009P/C Insurers as of Year-End 2009
• Status Quo: P/C Insurers Remain Entirely Under Regulatory Supervision of the StatesSupervision of the States
Unlikely, but some segments of the industry might welcome this outcome above all others
• Federal Regulation: Everything is Regulated by FedsUnlikely that states will be left totally in the cold
• Optional Federal Charter (OFC): Insurers Could Choose Between Federal and State Regulation
U lik l t b i l t d i i d f t l bUnlikely to be implemented as envisioned for past several years by OFC supporters
• Dual Regulation: Federal Regulation Layer Above StateFeds assume solvency regulation, states retain rate/form regulationy g , g
• Hybrid Regulation: Feds Assume Regulation of Large Insurers at the Holding Company Level
• Systemic Risk Regulator: Feds Focus on Regulation of
Source: Insurance Information Inst.
y g gSystemic Risk Points in Financial Services Sector
What are these points for insurers? P/C vs. Life?22
TEN KEY THREATS FACING INSURERS AMIDFACING INSURERS AMID
FINANCIAL CRISISFINANCIAL CRISISChallenges for theChallenges for the
Next 5-8 Years
Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009- 2015
1. Erosion of CapitalL l d i idl th i lLosses are larger and occurring more rapidly than is commonly understood or presumedSurplus down 13%=$66B since 9/30/07 peak; 12% ($80B ) in 2008P/C policyholder surplus could be even more by year-end 2009P/C policyholder surplus could be even more by year-end 2009Some insurers propped up results by reserve releasesDecline in PHS of 1999-2002 was 15% over 3 years and was entirely made up and them some in 2003. Current decline is ~13% y pin 5 qtrs.During the opening years of the Great Depression (1929-1933) PHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35% It took until 1939-40 before these key measures returned to35%. It took until 1939-40 before these key measures returned to their 1929 peaks.BOTTOM LINE: Capital and assets could fall much farther and faster than many believe. It will take years to return to the 2007
Source: Insurance Information Inst.
peaks (likely until 2011 with a sharp hard market and 2015 without one).
24
Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015
2. Reloading Capital After “Capital Event”Continued asset price erosion coupled with major “capital event” could lead to shortage of capital among some companiesPossible Consequences: Insolvencies, forced mergers, calls for govt aid requests to relax capital requirementsgovt. aid, requests to relax capital requirementsP/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after major events (post-9/11, Katrina). )
This assumption may be incorrect in the current environmentCost of capital is much higher today, reflecting both scarcity & riskI li ti P/C ( )i d t t t it l t d dImplications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh capital & generate internally. Already a reality for some life insurers.
Source: Insurance Information Inst. 25
Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015
3. Long-Term Loss of Investment ReturnL i t t t i k i t d iti dLow interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gainsPrice bubble in Treasury securities keeps yields lowPrice bubble in Treasury securities keeps yields lowMany insurers have not adjusted to this new investment paradigm of a sustained period of low investment gainsRegulators will not readily accept it; Many will reject itImplication 1: Industry must be prepared to operate in environment with investment earnings accounting for a smaller fraction of profitsImplication 2: Implies underwriting discipline of a magnitudeImplication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.Lessons from the period 1920-1975 need to be relearned
Source: Insurance Information Inst. 26
Important Issues & Threats Facing Insurers: 2009 2015
4. Economic Collapse L t d li i i d t th t i il t th 1930
Facing Insurers: 2009 - 2015
Long-term decline in industry growth prospects similar to the 1930sCollapse does not imply inability to remain profitableIndustry in 1930s shrank but became profitableSome insurers will not survive due to combination of poorSome insurers will not survive due to combination of poor investment environment, operating underwriting challenges and capital depletionPolicyholder and claimant behavior will change; Need Mitigation StrategiesStrategies• Claim malingering• Cost shifting from healthcare into WC• Insurance fraud will increase (premium evasion, classification)su ce ud w c e se (p e u ev s o , c ss c o )
Bottom Line: Industry can survive deep and prolonged economic downturn, but not without casualties
Source: Insurance Information Inst. 27
Important Issues & Threats Facing Insurers: 2009 2???
5. Regulatory Overreach
Facing Insurers: 2009 – 2???
5. Regulatory Overreach Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual R l i )Regulation)Danger is high as feds get their nose under the tentStatus Quo is viewed as unacceptable by allPushing for major change is not without significant riskPushing for major change is not without significant risk in the current highly charged political environmentInsurance & systemic riskDisunity within the insurance industrysu ty w t t e su a ce dust yImpact of regulatory changes will be felt for decadesBottom Line: Regulatory outcome is uncertain and risk of adverse outcome is high
Source: Insurance Information Inst. 28
Important Issues & Threats Facing Insurers: 2009 2015
6. Creeping Restrictions on Underwriting
Facing Insurers: 2009 - 2015
Attacks on underwriting criteria such as credit, education, occupation, territory increasingIndustry will lose some battlesVie that se of n mero s criteria are discriminator andView that use of numerous criteria are discriminatory and create an adverse impact on certain populationsImpact will be to degrade the accuracy of rating systems to increase subsidiesPredictive modeling also at riskCurrent social and economic environment could accelerate these effortsD h b ld b difi d f d l l l d iDanger that bans could be codified at federal level during regulatory overhaulBottom Line: Industry must be prepared to defend existing and new criteria indefinitely
Source: Insurance Information Inst.
and new criteria indefinitely
29
Important Issues & Threats Facing Insurers: 2009 2015
7. Exploitation of Insurance as a Wealth Redistribution Mechanism
Facing Insurers: 2009 - 2015
Redistribution MechanismThere is a longstanding history of attempts to use insurance to advance wealth redistribution/economic agendas Urban subsidies; Coastal subsidies are old; Could beUrban subsidies; Coastal subsidies are old; Could be extended to workers comp in variety of waysInsurer focus on underwriting profitability (resulting in higher rates) coupled with poor economic conditions could
i fil f ff d bilit iraise profile of affordability issueCalls for “excess profits tax” on insurersIncreased government involvement in insurance (including ownership stakes) make this more likelyownership stakes) make this more likelyFederal regulation could impose such redistribution schemes Bottom Line: Expect efforts to address social and economic
Source: Insurance Information Inst.
pinequities through insurance
30
Important Issues & Threats Facing P/C Insurers: 2009 2015
8. Mega-Catastrophe Losses
Facing P/C Insurers: 2009 - 2015g p
$100B CAT year is not improbable over the next 5-7 yearSeverity trend remains upwardFrequency trends highly variable but more prone to spikesFINANCING: Unclear if sufficient capital exists to finance mega-cats in current capital constrained environmentConcern over reinsurance capacity and pricingAlternative sources of CAT financing have dried upAlternative sources of CAT financing have dried upSome regulators will continue to suppress ratesResidual markets shares remain highLoss of volume for private insurers in key states (e.g., FL)Loss of volume for private insurers in key states (e.g., FL)Serves as entry point for socialization of insuranceBottom Line: Capacity to finance mega-cats is diminished. Government may fill the void, sometimes with the i d t ’ t ti i it f itiindustry’s support; sometimes in spite of opposition
31
Important Issues & Threats Facing Insurers: 2009 2015
9. Creeping Socialization and Partial Nationalization of Insurance System
Facing Insurers: 2009 -2015
of Insurance SystemCAT risk is, on net, being socialized directly via state-run insurance and reinsurance mechanisms or via elaborate subsidy schemes involving assessments, premium tax credits, etc.g , p ,Some (life) insurers seeking TARP moneyEfforts to expand flood program to include windHealth insurance may be substantively socializedT i i k l d j f d l l b k d b iTerrorism risk—already a major federal role backed by insurersEventually impacts for other lines such as personal auto, WC?Feds may open to more socialization of private insurance riskOwnership stakes in some insurers could be a slippery slopeOwnership stakes in some insurers could be a slippery slopeStates like FL will lean heavily on Washington in the event of a mega-cat that threatens state financeBottom Line: Additional socialization likely. Can insurers/will i d th li ?
Source: Insurance Information Inst.
insurers draw the line?
32
Important Issues & Threats Facing Insurers: 2009 2015
10. Emerging Tort Threat
Facing Insurers: 2009 -2015g g
No tort reform (or protection of recent reforms) is forthcoming from the current Congress or AdministrationErosion of recent reforms is a certainty (already happening)I bl l i l ti i iti ti ill t t iti tInnumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liabilityTorts twice the overall rate of inflationTorts twice the overall rate of inflationInfluence personal and commercial lines, esp. auto liab.Historically extremely costly to p/c insurance industryLeads to reserve deficiency, rate pressurey pBottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012-2014
Source: Insurance Information Inst. 33
GREEN SHOOTSGREEN SHOOTS
Is the RecessionIs the RecessionNearing an End?
Hopeful Signs That the EconomyWill Begin to Recover SoonWill Begin to Recover Soon
• Recession Appears to be Bottoming Out, Freefall Has Ended• Pace of GDP shrinkage is beginning to diminish• Pace of GDP shrinkage is beginning to diminish• Pace of job losses is leveling off• Major stock market indices well off recent lows, anticipating recovery• Some signs of retail sales stabilization are evidentSome signs of retail sales stabilization are evident
• Financial Sector is Stabilizing• Banks are reporting quarterly profits• Many banks expanding lending to credit worthy people & businessesy p g g y p p
• Housing Sector Likely to Find Bottom Soon• Home are much more affordable (attracting buyers)• Mortgage rates are at multi-decade lows (attracting buyers)• Freefall in housing starts and existing home sales is ending
• Inflation & Energy Prices Are Under Control• Consumer & Business Debt Loads Are Shrinking
Source: Insurance Information Inst. 35
THE $787 BILLION ECONOMICECONOMIC STIMULUSSTIMULUS
Sectoral Impacts & ImplicationsSectoral Impacts & Implications for P/C Insurance
Summary of Short-Run Impacts of Stimulus Package on P/C InsuranceStimulus Package on P/C Insurance
• No Stimulus Provisions Specifically Address P/C Insurance• Spending Aid and Tax Reductions benefit other industries state and• Spending, Aid and Tax Reductions benefit other industries, state and
local governments, as well as individual and some corporate taxpayers • Stimulus Package is Unlikely to Increase Net Premiums Written
by More Than 1% or Approx. $4.5 Bill. by Year-End 2010 y pp $ y• “Direct” Impact to P/C Insurers Results Primarily from
Increased Demand for Commercial Insurance• Primarily the result of increased infrastructure spending and the resulting need y p g g
to insure workers, property and protect against liability risks• Because the primary objective of the stimulus is employment related, workers
compensation will be the p/c line that benefits the most• Assuming the target of 3.5 million jobs created or preserved is achieved, private g g j p , p
workers comp NPW (new and preserved) could amount to as much as $1.1 billion• Other commercial lines to benefit: surety, commercial auto, inland marine
• Other “Direct” P/C Demand Benefits Will Be MinimalT i i idi i ti t b d h d l t th• Tax provisions providing incentives to buy cars and homes and accelerate the depreciation of equipment will have little net impact on exposure
• Some additional premium may be generated as older cars and equipment are replaced with new and more valuable (and therefore more expensive to insure)37
Economic Stimulus Package: Where the $787B Goesthe $787B Goes
$ BillionsObjective is to create or
Protecting the
Health Care, $59 , 7% Education & Training, $53 , 7%
Energy, $43 , 5%
preserve 3.5 million jobs
Infrastructure & Science,
Protecting the Vulnerable, $81 , 10%
Other, 8, 1%
$111 , 14%
Tax relief and aid to state and local
t t f Tax Relief, $288 , 38%government account for 56% of stimulus. Actual
spending accounts for only about 25%
State & Local Fiscal Relief, $144 , 18%
only about 25%
Source: http://www.recovery.gov/ accessed 2/18/09; Insurance Information Institute.38
Economic Stimulus Package: $143.4 in Construction Spendingin Construction Spending
Energy & Technology,($ Billions)
Workforce Development
Energy & Technology, 29.8, 20% School Building, 9.2, 6%
Other, 0.2, 0%
& Safety, 4.3, 3%Other, 8.0, 5%
Building Infrastructure, 29.6, 20%
, ,
There is approximately $140B in new construction spending in the stimulus Transportation
Infrastructure, 49.3, 32%
spending in the stimulus package, about 1/3 of it for
transportation.
Water & Environmental Infrastructure, 21.4, 14%
Source: Associated General Contractors at http://www.agc.org/cs/rebuild_americas_future (2/18/09); Insurance Info. Inst..39
STATE-BY-STATE INFRASTRUCTUREINFRASTRUCTURE EMPLOYMENT &
SPENDING IMPACTSSPENDING IMPACTS
Bigger States Get More, ShouldBenefit WC Insurers the Most
Infrastructure Stimulus Spending By State: Top 25 States ($ Millions)State: Top 25 States ($ Millions)
7 Infrastructure spending is in the3.
2 5
$3,9
17.7
$4,000$4,500
Infrastructure spending is in the stimulus package total $38.1B, allocated largely by population
size. CA will get $3.9B—the0 0
$2,8
03$2
,774
.54.
9
$2 500$3,000$3,500
ars
($ M
ill) size. CA will get $3.9B the
highest amount of any state
0.6
0.3 .5 .6 3 5 9 5 2 9$1,3
35.8
$1,5
80. 0
9.4
,141
.3,1
50.3
$1,3
35.6
$1,5
25.0
$1,7
94
$1,500$2,000$2,500
mul
us D
olla
$890
$890
$836
$830
$739
.$7
16. 5
$704
.9$7
01.5
$668
.2$6
48.9
$603
.9$5
44.3
$538
.7$5
38.6
$
$909$1
,$1
$
$500$1,000$1,500
Stim
$0CA TX NY FL IL PA NJ OH MI GA NC VA MA IN MO WA WI MD TN MN AZ AL SC CO LA
Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.41
Estimated Job Effect of Stimulus Spending By State: Top 25 StatesSpending By State: Top 25 States
6
(Thousands)39
6
400
Stim
ulu The economic stimulus plan calls for the creation or
preservation of 3.5 million jobs, allocated roughly in proportion to the size of the state’s labor force.
269
215
207
300
Save
d by
S p pCA is expected to see 396,000 jobs created or
preserved.13
3148
00050709
143
2 2
200
Cre
ated
/S
93 79 75 75 71 70 70 69 66 66 60 52 50 50
1010101
100
o. o
f Job
s
0CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC
No
Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.42
Stimulus: Reading The Economic Tea Leaves for the Next 4 to 8 YearsTea Leaves for the Next 4 to 8 Years
• Growing Role of Government: 2009 Stimulus Package and Other Likely Spending Initiatives Guarantee thatOther Likely Spending Initiatives Guarantee that Government Will Play a Much Larger Role Than at Any Other Time in Recent History
Every industry, including insurance, will and must attempt to maximize direct and indirect benefits from this paradigm shift
• Obama Administration Priorities: Stimulus Package Acts as “Economic Tea Leaf” on the Administration’s Fiscal Priorities for the Next Several Yearsfor the Next Several Years
• These Include:Alternative EnergyHealth CareHealth CareEducationAging/New InfrastructureAid to States
Sti l i O l O L f th St l
Source: Insurance Information Institute
• Stimulus is Only One Leg of the Stool(1) Stimulus; (2) Housing, and (3) Financial Services Reform
43
FINANCIAL S G &STRENGTH &
RATINGSRATINGSI d t H W th d thIndustry Has Weathered the
Storms Well
P/C Insurer Impairments,1969 20081969-2008
The number of impairments varies i ifi tl th / i l
60 860
70
significantly over the p/c insurance cycle, with peaks occurring well into hard markets
649 50 48
556 58
41
49 5047
40
50
60
34
19
36
3134
29 318 19
35820
30
40
815
127
11 9 913 12
19
16 14 13
1612
1 1 114 15
75
0
10
20
0
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
Source: A.M. Best; Insurance Information Institute45
P/C Insurer Impairment Frequency vs Combined Ratio 1969 2008vs. Combined Ratio, 1969-2008
Combined Ratio after DivP/C I i t F
Impairment rates are highly
115
1201.82.0
P/C Impairment Frequencye g ycorrelated with underwriting
performance and reached record lows in 2007/08
110
115
Rat
io
1.21.41.6
t Rat
e
lows in 2007/08
100
105
Com
bine
d
0 60.81.0
Impa
irmen
950.20.40.6
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and
90
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
0.0
Source: A.M. Best; Insurance Information Institute
barely one-fourth the 0.82% average since 1969
46
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*Ratings Actions in 2008*
P/C insurance is by design a resilient in
Upgraded, 59 , 4.0%
Initial, 41 , 2.8%Downgraded, 55 , 3 8%
design a resilient in business. The dual threat of financial
disasters and catastrophic losses are Under Review, 63 ,
4.3%
O h 59 4 0%
3.8%catastrophic losses are anticipated in the
industry’s risk management strategy.
Other, 59 , 4.0%
Despite financial market turmoil, high cat losses
and a soft market inand a soft market in 2008, 81% of ratings actions by A.M. Best
were affirmations; just 3.8% were downgrades
Affirm, 1,183 , 81.0%*Through December 19.Source: A.M. Best.
47
3.8% were downgrades and 4.0% upgrades
47
Historical Ratings Distribution,US P/C Insurers 2008 vs 2005 and 2000US P/C Insurers, 2008 vs. 2005 and 2000
2008 2005 2000A++/A+ and
D0.2%C++/C+
1.9%
E/F2.3% A++/A+
11 5%
C/C-0.6%
A++/A+9.2%
Vulnerable*
A++/A+10.8%Vulnerable*
A++/A+ and A/A- gains
.9% 11.5%B/B-6.9%
Vulnerable12.1%
B++/B+21.3%
7.9%
A/A-
B++/B+28.3%
A/A-52 3%
B++/B+26.4%
A/A48.4%
P/C insurer financial strength has improved since 2005 despite
52.3%A/A-
60.0%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.
p pfinancial crisis
48
Reasons for US P/C Insurer Impairments 1969 2008Impairments, 1969-2008
Reinsurance Sig. Change Deficient
Deficient loss reserves and inadequate i i th
Failure3.7%
Misc.9.1%
Sig. Change in Business
4.2%
Loss Reserves/In-
adequate Pricing38 1% pricing are the
leading cause of insurer
impairments
38.1%
Investment Problems
7 0% impairments, underscoring the
importance of discipline. Affiliate
Impairment
7.0%
pInvestment
catastrophe losses play a much
ll lRapid
Impairment7.9%
All d F d
Catastrophe Losses
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
smaller role.Growth14.3%
Alleged Fraud8.1%
Losses7.6%
49
Critical DifferencesCritical Differences Between P/C Insurers
and BanksSuperior Risk Management Model
& L L M k& Low Leverage Makea Big Difference
How Insurance Industry StabilityHas Benefitted ConsumersHas Benefitted Consumers
BOTTOM LINE:I M k U lik B ki A O i• Insurance Markets—Unlike Banking—Are Operating Normally
• The Basic Function of Insurance—the Orderly TransferThe Basic Function of Insurance the Orderly Transfer of Risk from Client to Insurer—Continues Uninterrupted
• This Means that Insurers Continue to:P l i ( h 50 b k h d f 4/17)Pay claims (whereas 50 banks have gone under as of 4/17)
The Promise is Being FulfilledRenew existing policies (banks are reducing and eliminating li f dit)lines of credit)Write new policies (banks are turning away people who want or need to borrow)Develop new products (banks are scaling back the products they offer)
Source: Insurance Information Institute5151
Reasons Why P/C Insurers Have Fewer Problems Than Banks:
A S i Ri k M M d l• Emphasis on Underwriting
Matching of risk to price (via experience and modeling)
A Superior Risk Management Modelg p ( p g)
Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk
• Strong Relationship Between Underwriting and Risk BearingInsurers always maintain a stake in the business they underwrite keeping “skin in the game”Insurers always maintain a stake in the business they underwrite, keeping skin in the game at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101
• Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry
• Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid
• Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge y g y p g g ( g gfunds, private equity, complex securitized instruments, credit derivatives—CDS’s)
• Greater TransparencyInsurance companies are an open book to regulators and the public
Source: Insurance Information Institute5252
US Bank Failures:* 1995 2009**1995-2009**
30Through April 17, 2009
25 2525
30 Bank failures are up sharply. 46 banks (but no p/c or life
insurers) failed in 2008/09 due to h fi i l i i i l di h
15
20 Remarkably, as recently as 2005 and 2006, no
banks failed—the first time this had happened in
the financial crisis, including the largest in history—Washington
Mutual with $307B in assets.
86
8 74
11
4
10
time this had happened in FDIC history (dating
back to 1934)
13 4 3 4
0 03
0
5
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09**95 96 97 98 99 00 01 02 03 04 05 06 07 08 09**
*Includes all commercial banking and savings institutions. **Through April 17.Source: FDIC: http://www.fdic.gov/bank/historical/bank/index.html; Insurance Info. Institute 53
Top 10 P/C Insolvencies, Based Upon Guaranty Fund Payments*Upon Guaranty Fund Payments
$2,265.8$2,500 $ Millions
$1 500
$2,000
$ MillionsThe 2001 bankruptcy of Reliance Insurance was the largest ever$1,272.7
$1,049.7$843.4
$699.4$
$1,000
$1,500 was the largest ever among p/c insurers
$566.5 $555.8 $543.1 $531.6 $516.8
$0
$500
$0
Relian
ce Ins
uranc
e
Legion
Insur
ance
iforni
a Com
pensa
tion I
ns.Fr
emon
t Ind
emnit
y Ins
.
PHIC
O Ins.
Transit
Casu
alty I
ns.
Supe
rior N
ation
al Ins
.ica
n Mutu
al Liab
ility I
ns.M
idlan
d Insu
rance
South
ern Fa
mily In
s.
Califo F
Americ
* Disclaimer: This is not a complete picture. If anything the numbers are understated as some states have not reported in certain years.
Source: National Conference of Insurance Guaranty Funds, as of September 17, 2008. 54
P/C INSURANCE FINANCIALFINANCIAL
PERFORMANCEPERFORMANCE
A Resilient Industry in Challenging TimesChallenging Times
ProfitabilityProfitability
Historically Volatile
P/C Net Income After Taxes1991 2008F ($ Millions)*1991-2008F ($ Millions)*
,496
,777
$70 000
2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE 8 9%
Insurer profits peaked in 2006 and
819
$62,
$65,
44,1
55
501$50,000
$60,000
$70,000 2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.4%
peaked in 2006 and 2007, but fell 96.2% during the economic
crisis in 2008
78 9,31
6
0 20,5
98
$24,
404 $3
6,8
$30,
773
21,8
65 $30,
029 $4
0,55
9
$38,
5
$30,000
$40,000
$ ,2008 ROAS = 0.5%*
$14,
1
$5,8
40
$19
$10,
870
$2 $2
$3,0
46
$2,4
96
$2
$10,000
$20,000
-$6,970-$10,000
$0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 8F0
*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guarantee insurers yields a 4.2% ROAS for 2008.Sources: A.M. Best, ISO, Insurance Information Inst.
5757
P/C Insurance Industry ROEs1975 2009F*
25%1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2%
1975 –2009F*
20%
25%
10%
15%
2009F 7 4%
0%
5%2008: 0.5%
2009F: 7.4%
-5%
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 08F
09F
1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2%
Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2%.Sources: ISO; A.M. Best (2009F); Insurance Information Institute. 5858
A 100 Combined Ratio Isn’t What it U d t B 95 i Wh It’ At
110 18%
Used to Be: 95 is Where It s At
100 6 100 7 101 0
14.3% 15.9%105
110
16%
18%Combined Ratio ROE*
97.5
100.6 100.1 100.7 101.0
12.7%
95
100
ned
Rat
io
12%
14%
on E
quity
*
92.6
8 9%
9.6%90
95
Com
bin
8%
10%
Ret
run
oCombined ratios must be much lower in today’s depressed
investment 8.9%
4.2%
80
85
4%
6%environment to generate risk
appropriate ROEs80
1978 1979 2003 2005 2006 2008*4%
* 2008 figure is return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.
59
Presidential Politics & P/C Insurance
How is Profitability Affected by the President’s Political Party?President s Political Party?
P/C Insurance Industry ROE byP id ti l Ad i i t ti 1950 2008*
15 10%16.43%Carter
Reagan II
Presidential Administration,1950-2008*
15.10%8.93%
8.65%8.65%
Reagan IINixon
G.W. Bush IIClinton I
OVERALL RECORD: 1950 2008*%
8.35%7.98%
7.68%
G.H.W. BushClinton IIReagan I
1950-2008*Democrats 8.00%
6.98%6.97%
5.43%5 03%
Nixon/FordTruman
Eisenhower IEisenhower II
Republicans 7.89%
Party of President has marginal bearing on5.03%
4.83%4.43%
3.55%
Eisenhower IIG.W. Bush I
JohnsonKennedy/Johnson
marginal bearing on profitability of P/C insurance industry
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
y
*Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute 61
P/C Premium Growth
Primarily Driven by the Industry’sPrimarily Driven by the Industry s Underwriting Cycle, Not the
EconomyEconomy
Strength of Recent Hard Marketsby NWP Growth
24%
by NWP Growth1975-78 1984-87 2000-03Shaded areas
denote “hard
18%20%22% denote hard
market” periods
Net written premiums fell 1 0%
12%14%16% premiums fell 1.0%
in 2007 (first decline since 1943)
and by 1.4% in 2008, the first back-
4%6%8%
10% 2008, the first backto-back decline
since 1930-33
2%0%2%4%
-2%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
F
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute6363
Year-to-Year Change in Net Written Premium 2000 2009F*Premium, 2000-2009F*
P/C insurers are Protracted i d f15.3%
10 0%
experiencing their slowest growth rates
since 1930-33
period of negative or slow growth is possible due to soft
5 0%
8.4%10.0%
Slow growth means retention is critical
due to soft markets and
slow economy
5.0%3.9%
0.5%
4.2%
0.9%
-1.0% -1.4%
*2008 figure is from ISO. Excluding Mortgage & Financial Guarantee insurers = -1.5%.Source: A.M. Best (historical and forecast)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F
6464
Capital/Policyholder SurplusPolicyholder Surplus
Shrinkage, but Capital is Withi Hi t i NWithin Historic Norms
U.S. Policyholder Surplus: 1975 2008*
$550
1975-2008*Actual capacity as of 12/31/08 was $455.6, down 12.0%
$400
$450
$500 from 12/31/07 at $517.9B, but still 60% above its 2002 trough. Recent peak was $521.8 as of 9/30/07. Surplus
as of 12/31/08 is 12.7% below 2007 peak.
$300
$350
$400
$ B
illio
ns The premium-to-surplus ratio stood at $0.95:$1 at
2008 f
$150
$200
$250
$
“Surplus” is a measure of underwriting capacity It is
year end 2008, up from near record low of $0.85:$1
at year-end 2007
$50
$100
$150 underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
y
$075 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
Source: A.M. Best, ISO, Insurance Information Institute. *As of 12/31/086666
Policyholder Surplus, 2006:Q4 – 2008:Q42006:Q4 2008:Q4
$ BillionsCapacity peaked at $ Billions
$512 8$521.8
$515.6$517.9$520
$540$521.8 as of 9/30/07
$487.1$496.6
$512.8
$478 5
$505.0$500
$520
$478.5
$455.6$460
$480 Declines Since 2007:Q3 PeakQ2: -$16.6B (-3.2%)
$420
$440 Q3: -$43.3B (-8.3%) Q4: -$66.2 (-12.0%)
$06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4
Source: ISO.6767
Premium-to-Surplus Ratios Before Major Capital Events*Major Capital Events*
P/C insurance industry was better it li d i i t th
$1.65
$1.42 $1 40$1 5$1.7$1.9 capitalized going into the
financial crisis than before any “capital event” in recent history
$1.42 $1.40
$1.03 $0.95$0 88$1.05
$1.15$1.1$1.3$1.5
$0.88
$0 5$0.7$0.9
$0.5
/30/
1989
Hur
rican
eH
ugo
/30/
1992
Hur
rican
eA
ndre
w
2/31
/93
orth
ridge
rthq
uake
6/30
/01
Sept
. 11
Atta
cks
6/30
/04
Flor
ida
urric
anes
6/30
/05
Hur
rican
eK
atrin
a
6/30
/07
Fina
ncia
lC
risis
As
of2/
31/0
8**
6/ H 6/ H A 12 No
Ear 6 F
Hu H F 12
*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.
68
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*Largest Capital Events Since 1989*
The financial crisis now ranks as the 2nd largest
10.9%12.9%13.8%
12%14%16%
ranks as the 2 largest “capital event” over the
past 20+ years
9.6%
6.9% 6.2%6%8%
10%12%
3.3%
0%2%4%6%
0%
/30/
1989
Hur
rican
eH
ugo
/30/
1992
Hur
rican
eA
ndre
w
2/31
/93
orth
ridge
rthq
uake
6/30
/01
Sept
. 11
Atta
cks
6/30
/04
Flor
ida
urric
anes
6/30
/05
Hur
rican
eK
atrin
a
inan
cial
sis
as o
f2/
31/0
8**
6/ H 6/ H A 12 No
Ear 6 F
Hu H Fi Cris 12
*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.
69
Historically, Hard Markets Follow When Surplus “Growth” is Negative
30%
NWP % changeSurplus % change
When Surplus Growth is NegativeSharp decline in capacity is a necessary but not sufficient
20%
25%
30% Surplus % change necessary but not sufficient condition for a true hard market
10%
15%
5%
0%
5%
-15%
-10%
-5%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Sources: A.M. Best, ISO, Insurance Information Institute 70
New Funds Contributing to US Policyholder Surplus 2005-2008Policyholder Surplus, 2005 2008
$ Billions$14.4
$11 2$14.0
$16.0 New funds entering the p/c insurance industry is $11.2
$8 0
$10.0
$12.0p/c insurance industry is up in 2008, but swamped by amount eroded away
$3.8 $3.2$4.0
$6.0
$8.0
$0.0
$2.0
05 06 07 08*
*Through Q4 2009 (latest available).Source: ISO; Insurance Information Institute
71
I t tInvestment PerformancePerformance
Investments are the Principle Sourcef D li i P fit bilitof Declining Profitability
Distribution of P/C Insurance Industry’s Investment PortfolioIndustry s Investment Portfolio
P tf li F tAs of December 31, 2007
Common Stock
Bonds66.7%
Portfolio Facts•Invested assets totaled $1.3 trillion as of 12/31/07
Common Stock17.9%•Insurers are generally
conservatively invested, with 2/3 of assets invested in bonds as of
Cash & Short-Term Investments
7.2%
12/31/07•Only about 18% of assets were invested in common stock as of
P f d St k
Real Estate0.8%
Other
common stock as of 12/31/07•Even the most conservative of portfolios was hit hard in 2008 Preferred Stock
1.5%Other5.9%
was hit hard in 2008
Source: NAIC; Insurance Information Institute research 73
Property/Casualty Insurance Industry Investment Gain:1994 20081Investment Gain:1994-20081
$ Billions$64 0
$42 8$47.2
$52.3
$44.4 $45.3$48.9
$59.4$55.7
$64.0$56.9
$51.9
$57.9
$50
$60
$35.4$42.8 $44.4
$36.0
$
$31.4$30
$40
Investment gains fell by 51% in
$10
$20Investment gains fell by 51% in 2008 due to lower yields, poor
equity market conditions$0
94 95 96 97 98 99 00 01 02 03 04 05* 06 07
08:Q
3
q y
081Investment 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.Sources: ISO; Insurance Information Institute. 7474
P/C Insurer Net Realized C it l G i 1990 2008Capital Gains, 1990-2008
$16.21$18.02
$18$20 $ Billions
$9.89
$6 00
$9.24$10.81
$13.02
$6 63 $6 61$8.92$9.70$9.13$9.82
$8$10$12$14$16
$2.88$4.81
$1.66
$6.00 $6.63 $6.61
$3.52
$0$2$4$6$8
-$1.21
-$8-$6-$4-$2$0
Realized capital losses hit a record $19 8 billion in 2008 due to financial
$18-$16-$14-$12-$10 $19.8 billion in 2008 due to financial
market turmoil, a $27.7 billion swing from 2007. This is the primary cause of 2008’s large drop in profits and ROE.
-$19.80-$20-$18
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Sources: A.M. Best, ISO, Insurance Information Institute.
g p p
7575
Treasury Yield Curves: Pre Crisis vs Current*
4 96% 5 04% 4 96% 5 00% 5 00% 5.19%6%
Pre-Crisis vs. Current*
3.78% 3 64%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%
4%
5%
Treasury Yield Curve is at its most
2.42%2.82%
3.78% 3.64%
3%
4% depressed level in at least 45 years. Investment income will fall
significantly as a result.
0 93%1.31%
1.82%
2.42%
2% Stock dividend cuts will further pressure
investment income
0.10% 0.22% 0.43% 0.64%0.93%
0%
1%Current Yield Curve*Pre-Crisis (July 2007)
investment income
76
0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
*March 2009.Sources: Federal Reserve; Insurance Information Institute.
Underwriting Trendsg
Financial Crisis Does Not Directly Impact Underwriting Performance:Impact Underwriting Performance:
Cycle, Catastrophes Were 2008’s Drivers2008 s Drivers
P/C Insurance Industry Combined Ratio 2001 2009E
120
Ratio, 2001-2009EAs recently as 2001, insurers
paid out nearly $1.16 for every Relatively low CAT
Including Mortgage
115.8 $1 in earned premiums low CAT losses, reserve releases
Mortgage & Fin.
Guarantee insurers
2005 ratio benefited from heavy use of reinsurance
hi h l d t l107.5
105.1
110Best combined ratio since 1949
(87 6)
Cyclical Deterioration
which lowered net losses
100.198.4
100.8 101101.0100
(87.6)
92.6
95.7
902001 2002 2003 2004 2005 2006 2007 2008 2008* 2009F
*Includes Mortgage & Financial Guarantee insurers. Sources: A.M. Best.7878
U S Insured Catastrophe Losses*U.S. Insured Catastrophe Losses*
0.0
$120$ Billions
2008 CAT losses exceeded 2006/07$100 Billion CAT year is
$100
.9
$100
$120 2008 CAT losses exceeded 2006/07 combined. 2005 was by far the worst
year ever for insured catastrophe losses in the US, but the worst has yet
t
CAT year is coming soon
5 5 0
$61.
$60
$80 to come.
$7.5
2.7 4.7
$22.
95.
5 $16.
9$8
.3$7
.42.
6 $10.
1$8
.34.
6$2
6.5
5.9 $12.
9 $27.
5
$6.7
$26.
0
$9.2$20
$40
$ $2 $4 $5 $ $ $2$ $ $4 $ $$
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0708
**20
??
*Excludes $4B $6b offshore energy losses from Hurricanes Katrina & Rita 0 2Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.**Based on PCS data through Dec. 31. PCS $2.1B loss of for Gustav. $10.655B for Ike of 12/05/08.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 79
Underwriting Gain (Loss)1975 2008*
3035 Insurers earned a record underwriting profit of $31.7B in
2006 d $19 3B i 2007 h l b l h 2 d
1975-2008*
1015202530 2006 and $19.3B in 2007, the largest ever but only the 2nd
and 3rd since 1978. Cumulative underwriting deficit from 1975 through 2008 is $442B.
-10-505
10
$ B
illio
ns
-30-25-20-15-10$
$19.799 Bill
-50-45-40-3530 $
underwriting loss in 2008
incl. mort. & FG insurers
-55
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
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers
G su e s
8080
Number of Years With Underwriting P fit b D d 1920 2000Profits by Decade, 1920s -2000s
Number of Years with Underwriting ProfitsU d i i fi10
88
10Underwriting profits were common before the 1980s (40 of the 60 years
before 1980 had combined ratios below 100)—but then they vanished. N i l d i i fi
67
56
8 Not a single underwriting profit was recorded in the 25 years from 1979
through 2003.
45
34
0 00
2
01920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.
81
COMMERCIAL LINESCOMMERCIAL LINES
Commercial Lines Combined R ti 1993 2009F
3
Commercial coverages have exhibited significant
Ratio, 1993-2009FMortgage and financial
guarantee may account for up to
3
122.
3
5
120
125have exhibited significant
variability over time.gu ee y ccou o up o
4 points on the commercial combined ratio in 2008
110.
3
110.
2
107.
6
3.9 10
9.7
112.
3
111.
1
110.
2
5 05.4
106.
5
05.1
0
112.
5
110
11510
3
102.
5 10
5.1
1 10
102.
0
100
105
2006/07 benefited from favorable loss cost trends improved tort environment low CAT
91.1 95
90
95trends, improved tort environment, low CAT
losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and
mortgage and financial guarantee segments have big influence 2009 is transition year
85
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F
have big influence. 2009 is transition year.
Sources: A.M. Best (historical and forecasts)83
Average Commercial Rate ChangeAll Lines (1Q:2004 1Q:2009)All Lines (1Q:2004 -1Q:2009)
0%% Magnitude of price
3.2%
% -2.7
%3.
0%-4%
-2%
-0.1
% Magnitude of price declines is now
shrinking. Reflects shrinking capital,
reduced investment i d t i ti-3
-5.9
%7.
0%
%-4
.6% - -3
-5.3
%
-6.0
% -5.0
%
-8%
-6%gains, deteriorating
underwriting performance, higher cat losses and costlier
reinsurance-7-9
.4%
-9.7
% -8.2
%
-9.6
%.3
%8% 0% %1.
0%-12%
-10%reinsurance
-11
-11.
8-1
3.3% -1
2.0
-13.
5%-1
2.9 % -1
1
-16%
-14%
4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9
KRW Effect
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute 84
EMERGING TRENDSEMERGING TRENDS & CHALLENGES IN WORKERS COMP
#1#1Emerging (Mega) TrendEmerging (Mega) Trend
Th Ob it E id iThe Obesity Epidemic
In Every State (except Colorado), Over 20% of the Adult Population is Obese20% of the Adult Population is Obese
87Source: Centers for Disease Control and Prevention, Behavioral Risk Factor Surveillance System www.cdc.gov/Features/dsObesity
The Most Obese Workers File Twice as ManyWC Claims as Healthy Weight WorkersWC Claims as Healthy-Weight Workers
The most obese have 13 ti l t kd
183.6310.80 11.65
160180200
0 FT
Es
12
14
Es
times more lost workdays than healthy weight workers
75 21
117.61
5.53 5.807.05
8.81
100120140
ays p
er 1
00
6
8
10
er 1
00 F
TE
40.9760.17
75.21
14 19406080
st W
orkd
a
2
4
6
Cla
ims p
14.19
020
BMI <18.5(Underweight)
18.5-24.9(Healthy
25-29.9(Overweight)
30-34.9 (ObeseClass I)
35-39.9 (ObeseClass II)
40+ (ObeseClass III)
Los
0
2
88
( g ) ( yWeight)
( g ) ) ) )
Lost Workdays Claims
Source: Ostbye, T., et al, “Obesity and Workers Compensation,” Archives of Internal Medicine, April 23, 2007.
WC Medical Claims Costs are 6.8x Higher for the Most Obese WorkersHigher for the Most Obese Workers
Indemnity costs are 11 times hi h f th t b
51,0
91$5
9,17
8
$60,000
$70,000higher for the most obese workers than for healthy-
weight workers.
1 $34,
293
$
373
633$40,000
$50,000
109
$13,
338
$19,
661
24 396
$13,
569
503
$23,
3
$23,
6
$20,000
$30,000
$7,1 $
$3,9
2
$5,3 $
$7,5
$0
$10,000
BMI <18 5 18 5-24 9 25-29 9 30-34 9 (Obese 35-39 9 (Obese 40+ (Obese
89
BMI <18.5(Underweight)
18.5 24.9(Healthy Weight)
25 29.9(Overweight)
30 34.9 (ObeseClass I)
35 39.9 (ObeseClass II)
40+ (ObeseClass II)
Medical Claims Costs Indemnity Claims Costs
Source: Ostbye, T., et al, “Obesity and Workers Compensation,” Archives of Internal Medicine, April 23, 2007.
#2#2E i (M )T dEmerging (Mega)Trend
The Aging Workforce
U.S. Workforce is Aging: Significant Implications for Workers Comp
42
Implications for Workers Comp
M di A f U S W k40.539.0
38 039.4
40.6 40.7
40
42 Median Age of U.S. WorkerOlder and less
healthy workforce
35.834 3
35.236.6
38.0
36
38
34.3
32
34The median age of US workers as the Baby Boomer begin
to retire is about 41 years Immigration will hold this
30
32
1962 1970 1975 1980 1985 1990 1995 2000 2005 2008
to retire is about 41 years. Immigration will hold this number down and may even lower the figure.
91Source: US Bureau of Labor Statistics, 2004.
Year
Fatal Work Injury RatesClimb Sharply With AgeClimb Sharply With Age
The fatality rate for workers 65 and olderFatal Work Injuries per 100,000
11.212
The fatality rate for workers 65 and older is triple that of workers age 35-44. The workplace of the future will have to be completely redesigned to accommodate
per 100,000 Workers (2006)
8
10completely redesigned to accommodate
the surge in older workers.
5.04.23.73.32 84
6
3 32.72.8
0.92
4
92
016-17 18-19 20-24 25-34 35-44 45-54 55-64 65+
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
Older Workers Have More Lost Time from Work Due to Injury or Illnessfrom Work Due to Injury or Illness
Median Days Away F W k (2005)
Age 65+ workers median l t ti i 50% t
121112
14
There will be more lost
From Work (2005) lost time is 50% greater than workers age 35-44
10
88
10
There will be more lost time as the workforce ages
in the future
6
444
6
0
2
93
0
16-19 20-24 25-34 35-44 45-54 55-64 65+
Source: US Bureau of Labor Statistics, US Department of Labor
#3#3E i (M ) T dEmerging (Mega) Trend
Distracting Driving/ Equipment OperationOperation
Four Most Frequent Work-Related Fatal Events 1992 2006
1 3431 3461 3461,393
1,4421 3651,4091,3731 353
1,3981,4371 356
1,4961600
Fatal Events, 1992-2006
1 0741 080
1,2421,3431,3461,346 1,365 1,3731,353 1,356
1,2491,158
1200
1400
Highway incidents are the leading cause of occupational death and are
d d t i b t
810 822 827 814
1,0741,0801,036
927860
1,0441000
down due to recession, but distracted driving will likely become
more of a problem
618665 651 691 734
810719 696
822770
827 814
643559 567 540 542
721706
716 609677651
714600
800
540 542600 632
677
400
600
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Falls Homicides Highway Incidents
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.95
Distracted Driving/Equipment Operation is a Growing in General
d Th f f WC Tand Therefore for WC TooQ. Do you ever do other tasks Q. Have you ever been hit like talk on cell phones, eat or
drink while driving? Nearly 3/4 of
or nearly hit by someone talking on a cell phone?
Don't Know
No27.6%
Nearly 3/4 of drivers
admitted to distracted
ow1.5%
driving. Also occurs in
occupational No
53.1%
Yes45.4%
Yes72.4%
settings
Nearly half Distracted driving and equipment operation while
Source: Nationwide Insurance, 2008 Driving While Distracted Survey; Insurance Information Institute.
have been hit or nearly hit
working is a major and rapidly growing problem but is largely unquantified
96
Who’s Driving While Distracted? Everyone!Everyone!
Examples of Occupational Median Days Away F W k (2005)
80.3%78.4%80%
85%
Examples of Occupational Settings Involving Actual
Distraction IncidientsTaxi Drivers
From Work (2005)
70%
75%Truck Drivers
Crane OperatorsFarm Equipment
65.3%
59.8%60%
65%Landscaping Equipment
Heavy Equipment OperatorsPaving Equipment
50%
55%
60% Paving EquipmentWatercraft & Aircraft
Fork LiftT i /M T i
97
50%Teens (16-17) Gen Y (18-30) Gen X (31-44) Boomers (45-61)
Trains/Mass Transit
Source: Nationwide Insurance, 2008 Driving While Distracted Survey; Insurance Information Institute.
#4#4Emerging (Mega) TrendEmerging (Mega) Trend
Non-EnglishSpeaking Workers
Insurance Information Institute O LiOn-Line
THANK YOU FOR YOUR TIME AND
YOUR ATTENTION!
99