overview & outlook for the commercial p/c insurance industry: challenges and opportunities for...
TRANSCRIPT
Overview & Outlook for the Commercial P/C Insurance Industry:
Challenges and Opportunities for 2013 & Beyond
NAMIC Commercial Lines SeminarChicago, IL
February 25, 2013Download at www.iii.org/presentations
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
Economic Outlook & Exposure AnalysisExposure and premium growth depend critically on
growth trajectory for the economyP/C Industry Performance: Overview & Outlook
UnderwritingCatastrophe LossesPricingGrowthCapacity Investments
The Strength of the Economy Will Influence P/C Insurer
Growth Opportunities
3
Growth Will Expand Insurer Exposure Base Across Most Lines
3
4
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/13; 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
.3% 3
.1%
1.7
%2
.2%
2.6
%2
.8%
2.7
%2
.9%
2.9
%3
.0%
-0.1
%
-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
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2
00
2
2
00
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00
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:1Q
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:2Q
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:3Q
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:4Q
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:1Q
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:2Q
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:3Q
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:4Q
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:2Q
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:3Q
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:4Q
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:1Q
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:2Q
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:3Q
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:4Q
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:1Q
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:2Q
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:3Q
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:4Q
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:1Q
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:2Q
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:3Q
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:4Q
14
:1Q
14
:2Q
14
:3Q
14
: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
was severe
The Q4:2008 decline was the steepest since the Q1:1982
drop of 6.8%
2013 is expected to see initially slow
growth, then gradually accelerate throughout the year and into 2014
2012:Q4 GDP Number Was Not as Bad as the Headline Suggests
Sources: Washington Post, Jan. 30, 2013; BEA ;Insurance Information Institute. 5
GDP declined by 0.1% in Q4
The shrinkage in the economy was driven mostly by a decline in defense spending and a decumulation of inventory
State and local govt. are dragging on the economy as well
The private economy actually expanded by 1.2%
Federal defense spending and govt. spending in general
will drag on the economy
The Fiscal Cliff Was Just the Beginning: Budget Battles for Years to Come?
*P/C Insurance Joint Industry Forum press release (www.iii.org/press_releases), January 15, 2013.Source: Fix the Debt Coalition, January 18, 2013; Insurance Information Institute 6
The “Fiscal Cliff” was just the beginning
There are 10+ “Fiscal Speed Bumps” over the next 5 years, setting up a potentially extended period of fiscal uncertainty
Creates long-term uncertainty around federal spending, tax policy, entitlements
Insurable exposures impacted
Poll: 94% of P/C insurance executives think looming budget battlesIn Washington will hurt the economy.*
Cuts seem
certain
Possible shutdown
Federal Spending as a Share of State GDP: Vulnerability to Sequestration Varies
Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo; Insurance Information Institute. 7
8
Defense and Non-Defense Federal Spending as a Share of State GDP: Top 10 States*
14
.6
10
.5
9.8
9.8
9.8
8.0
7.0
5.9
5.3
5.2
10
.0
10
.0
10
.0
9.2
4.9
3.8
3.1
2.8
2.7
2.6
0
2
4
6
8
10
12
14
16
HI AK DC MD VA KY AL MO CT AZ DC MD VA NM ID WV TN AK MT SC
Sh
are
of
Sta
te G
DP
(%
)
Federal defense spending accounts for approximately 10%+ of
GDP in 5 states
*As of 2010.Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo Securities; Insurance Information Institute.
Defense Spending Non-Defense Spending
Federal non-defense spending accounts for 10%+ of GDP in 3 states
Sequestration Could Adversely Impact Commercial Insurance Exposures Directly at Defense Contractors and Indirectly in Impacted Communities
State-by-State Leading Indicatorsthrough 2013:Q1
Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 10
5 Fastest Growing StatesSouth Carolina 6.97%Michigan 4.32%West Virginia 3.59%Idaho 3.14%Georgia 3.04%
5 Slowest Growing StatesWyoming -1.09%
Delaware -0.24%North Dakota -0.19%Vermont 0.09%Minnesota 0.18%
Near-term growth forecasts vary widely by state
74
.47
3.6
73
.67
2.2
73
.6 76
67
.86
8.9
68
.26
7.7 7
1.6 74
.57
4.2 77
.56
7.5 69
.8 74
.37
1.5
63
.75
5.7 5
9.5
60
.9 64
.16
9.9
75
.07
5.3
76
.27
6.4 79
.37
3.2
72
.3 74
.38
2.6
82
.77
4.5
73
.8 76
.8
40
45
50
55
60
65
70
75
80
85
90
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
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0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
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Jun
-11
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g-1
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-11
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Jan
-12
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b-1
2
Ma
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Ap
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-12
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2
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-12
No
v-1
2
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2
Jan
-13
Fe
b-1
3
Consumer Sentiment Survey (1966 = 100)
January 2010 through February 2013
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 in 2012
Source: University of Michigan; Insurance Information Institute
Optimism among consumers rose in February despite tax hike, federal budget concerns
11
12
16.9
16.5
16.1
13.2
10.4
11.6
12.7
14.4 15
.2 15.8
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 12 13F 14F
(Millions of Units)
Auto/Light Truck Sales, 1999-2014F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/13); 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 2013-14 is
still far below 1999-2007 average of 17 million units, but a robust
recovery is well underway.
Job growth and improved credit market conditions will boost auto sales in
2013 and beyond
13
(Millions of Units)
New Private Housing Starts, 1990-2014F
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
8
0.9
9
1.2
01.3
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 12 13F 14F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/13); Insurance Information Institute.
Homeowners Insurers Are Starting to See Meaningful Exposure Growth for the First Time Since 2005. Commercial Insurers with Construction Risk
Exposure, Surety Also Benefit
New home starts plunged 72% from 2005-2009; A net
annual decline of 1.49 million units, lowest since records began
in 1959
Job growth, low inventories of existing homes, low mortgage
rates and demographics are stimulating new
home construction for the first time in years
14
Construction Employment,Jan. 2010—January 2013*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,58
15,
522
5,54
25,
554
5,52
75,
512
5,49
7 5,51
95,
499
5,50
15,
497
5,46
85,
435
5,47
85,
485
5,49
7 5,52
45,
530
5,54
75,
546 5,
583
5,57
65,
577 5,
612
5,62
95,
644
5,64
05,
636
5,61
55,
622
5,62
75,
630
5,63
35,
649 5,67
3 5,70
3 5,73
1
5,400
5,450
5,500
5,550
5,600
5,650
5,700
5,750
5,800
Jan-
10F
eb-1
0M
ar-1
0A
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ay-1
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Jul-1
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0S
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n-11
Feb
-11
Mar
-11
Apr
-11
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-11
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-11
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-11
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-11
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-11
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-12
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-12
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-12
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l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Construction employment growth accelerated in the second half of 2012. Stronger growth in this key
sector is possible in 2013.
(Thousands)
15
Construction Employment, Jan. 2003–Jan. 2013
Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.
5,000
5,500
6,000
6,500
7,000
7,500
8,000
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
The “Great Recession” and housing bust destroyed 2.3 million constructions jobs
The Construction Sector Could Be a Growth Leader in 2013 and 2014 as the Housing Market and Private Investment Recover. Commercial Insurers Will Benefit.
Construction employment
troughed at 5.435 million in Jan.
2011, after a loss of 2.291 million jobs, a 29.7%
plunge from the April 2006 peak
15
Construction employment
peaked at 7.726 million in April 2006
(Thousands) Construction employment as of Jan. 2013 totaled 5.731 million, an
increase of 296,000 jobs or 5.4% from the
Jan. 2011 trough
16
Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2012:Q3*
$1.1
6
$1.1
8
$1.2
2
$1.4
4
$1.4
8
$1.4
9
$1.5
0
$1.4
9
$1.4
3
$1.3
7
$1.2
7
$1.2
1
$1.1
8
$1.1
7
$1.1
7
$1.1
8
$1.2
0
$1.2
4 $1.2
8 $1.3
5
$1.3
7 $1.4
2
$1.4
6
$1.1
3
$1.2
5 $1.3
0
$1.3
9
$1.0
$1.1
$1.2
$1.3
$1.4
$1.5
$1.6
06:Q
1
06:Q
3
07:Q
1
07:Q
3
08:Q
1
08:Q
3
09:Q
1
09:Q
3
10:Q
1
10:Q
3
11:Q
1
11:Q
3
12:Q
1
12:Q
3
Outstanding Commercial Loan Volume Has Been Growing for Over Two Years and Is Now Nearly Back to Early Recession Levels. Bodes Very Well for the Creation of Current and Future Commercial Insurance Exposures
*Latest data as of 2/24/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.
$Trillions
Commercial lending plunged by 21.2% ($330B) during the financial crisis and ensuing
period of tight credit
Commercial lending activity is nearly back to pre-crisis levels (+24.9% or $290B)
17
Value of Construction Put in Place, December 2012 vs. December 2011*
-5.6%
-17.3%
-5.3%
7.8%
15.0%
22.3%
1.2%
-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: -5.6%
Public sector construction activity remains depressed
18
Value of Private Construction Put in Place, by Segment, Dec. 2012 vs. Dec. 2011*
6.6%
-3.1%
16.6%
-10.2%
10.4%
-4.5%
13.7%
-0.2%
-7.8%
15.0%
23.6%
7.6%
21.2%25.2%
-15%-10%
-5%0%5%
10%15%20%25%30%
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 the Key Residential Construction Sector
Growth (%) Led by the Residential Construction, Lodging, Office, Transportation and Power industries, Private sector
construction activity is up across 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.
19
Value of Public Construction Put in Place, by Segment, Dec. 2012 vs. Dec. 2011*
4.1%
-6.4%-12.2%
-1.6%
15.6%
-4.6%
-13.8%
-2.9%-8.8%
-6.3%-5.6%
-17.3%
-5.3%
-21.4%
-29.9%-40%
-30%
-20%
-10%
0%
10%
20%
To
tal
Pu
bli
cC
on
stru
ctio
n
Res
iden
tial
To
tal
No
nre
sid
enti
al
Off
ice
Co
mm
erci
al
Hea
lth
Car
e
Ed
uca
tio
nal
Pu
bli
c S
afet
y
Am
use
men
t &
Rec
.
Tra
nsp
ort
atio
n
Po
wer
Hig
hw
ay &
Str
eet
Sew
age
&W
aste
Dis
po
sal
Wat
er S
up
ply
Co
nse
rvat
ion
&D
evel
op
.
Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2013.
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 many
segments, but is actually now up in some key segments
Transportation and Power projects lead public sector
construction
58
.35
7.1
60
.45
9.6
57
.85
5.3
55
.15
5.2
55
.3 56
.9 58
.25
8.5 6
0.8
61
.45
9.7
59
.75
4.2 55
.85
1.4 52
.55
2.5
51
.85
2.2 53
.1 54
.15
1.9 53
.35
4.1
52
.55
0.2
50
.55
0.7
51
.65
1.7
49
.95
0.2
53
.1
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-
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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
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-11
Jul-
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Au
g-1
1
Se
p-1
1
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-11
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v-1
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1
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-12
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b-1
2
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r-1
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Ap
r-1
2
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y-1
2
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-12
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12
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g-1
2
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p-1
2
Oct
-12
No
v-1
2
De
c-1
2
Jan
-13
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through January 2013
The manufacturing sector expanded for 33 of the 37 months from Jan. 2010 through Jan. 2013. 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 expanded in 3 of the past 4 months, but only
slightly. The recent trend is basically flat.
20
22
Manufacturing Growth for Selected Sectors, 2012 vs. 2011*
9.1%
2.5%
11.2%
2.0% 2.6%
4.9%
-1.5%
3.9% 4.3%4.3%
7.0% 7.0%
12.4%
3.8%
-4%-2%0%2%4%6%8%
10%12%14%
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 Insurable Exposures Including: WC, Commercial
Property, Commercial Auto and Many Liability Coverages
Growth (%)
Manufacturing of durable goods was especially
strong in 2012
*Seasonally adjusted; Date are YTD comparing data through December 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: +7.0% Non-Durables: +2.2%
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
Sep 1
2
Dec 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. 23
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 79.1% of industrial capacity in Jan. 2013, well above the June
2009 low of 68.3%
December 2007-June 2009 Recession
March 2001 through January 2013
23
24
Manufacturing Employment,Jan. 2010—January 2013*
11,4
6011
,460
11,4
6611
,497
11,5
3111
,539
11,5
5811
,548
11,5
5411
,555
11,5
7711
,590
11,6
2411
,662
11,6
8211
,707
11,7
1511
,724
11,7
4711
,760
11,7
6211
,770
11,7
6911
,797
11,8
4111
,870
11,9
1011
,920
11,9
2611
,935
11,9
5711
,943
11,9
2511
,931
11,9
3811
,946
11,9
50
11,000
11,200
11,400
11,600
11,800
12,000
12,200
12,400
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-10
Jul-1
0A
ug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-1
0Ja
n-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
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-11
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-11
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-11
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122/
30/2
Mar
-12
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-12
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Jun-
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l-12
Aug
-12
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Dec
-12
Jan-
13
Manufacturing employment is up by nearly 500,000 or 4.3% since Jan. 2010
—a surprising source of strength in the economy. Employment in the
sector is close to a multi-year high.
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands)
50
.7 52
.7 54
.15
4.6
54
.85
3.5
53
.75
2.8 53
.95
4.6 56 5
7.1 5
9.4
59
.75
6.3
54
.45
3.3
53
.45
3.8
52
.65
2.6
52
.65
2.6
53
.05
6.8
56
.15
5.0
53
.75
4.1
52
.75
2.9 54
.3 55
.25
4.8
54
.85
5.7
55
.2
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
Se
p-1
2
Oct
-12
No
v-1
2
De
c-1
2
Jan
-13
ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through January 2013
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 is stable
and remains expansionary in 2013
25
26
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
0630
,620
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
:Q3
Business Bankruptcy Filings,1980-2012:Q3
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 Q3:2012, filings were down 15.8% vs. Q3:2011
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
26
27
Private Sector Business Starts, 1993:Q2 – 2012:Q2*
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
1
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
209
207
207
199
191 19
317
2 176
169
184
175 17
918
820
018
3 187 19
119
719
319
1
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 12
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But Are Recovering Slowly
* Annualized based on data through Jun. 30, 2012 (latest available as of Feb. 24, 2013); Seasonally adjusted. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
(Thousands)
Business starts were up 2.2% to 748,000 in 2011 vs. 2010. In 2012, starts are likely to be up by about
2.7% over 2011 levels.
Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000 2012: 768,000*
27
NFIB Small Business Optimism Index
January 1985 through January 2013
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 28
Small business optimism has increased but took a big hit
over fiscal fears
29
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)
30
Oil & Gas Extraction Employment,Jan. 2010—January 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.
6 169.
317
0.1
171.
017
2.5
173.
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
2.2
193.
7
150
155
160
165
170
175
180
185
190
195
200
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-10
Jul-1
0A
ug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-1
0Ja
n-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
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Oil and gas extraction employment is up 23.4%
since Jan. 2010 as the energy sector booms.
Domestic energy production is essential to
any robust economic recovery in the US.
(Thousands)
33
Growth Analysis by State and Business Segment
Premium Growth Rates Vary Tremendously by State
33
34
Direct Premiums Written: Total P/CPercent Change by State, 2006-2011*
71
.5
41
.8
26
.4
22
.8
22
.6
20
.8
18
.2
11
.8
10
.5
6.6
6.3
6.1
5.8
4.9
4.7
4.2
3.9
2.4
2.2
2.1
2.1
2.1
0.9
0.9
0.7
0.4
0
10
20
30
40
50
60
70
80
ND
SD
MT IA NE
KS
OK
WY
TX
MN LA
AR WI
TN IN AK
DE
NM
NC
KY
SC
WA
DC
MO VT
MS
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
A limited number of states showed strong growth over
the past 5 years
35
Direct Premiums Written: Total P/CPercent Change by State, 2006-2011*
0.4
-0.6
-0.8
-0.8
-1.1
-1.3
-1.4
-1.6
-1.9
-2.0
-2.5
-3.1
-3.2
-3.5
-4.1
-4.4
-5.2
-5.8
-6.0
-10
.3
-10
.5
-10
.8
-11
.7
-12
.0
-13
.5
-19
.2
-25
-20
-15
-10
-5
0
5
AL
OH IL VA
NY
UT
US
GA
CT
PA
NJ
CO
MD
MA ID OR RI
ME MI
HI
NH
WV
FL
CA AZ
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
States with the poorest performing economies also produced the most negative net change in premiums of
the past 5 years
Sources: SNL Financial LC.; Insurance Information Institute.
36
Direct Premiums Written: Comm. LinesPercent Change by State, 2006-2011*
10
0.9
60
.8
38
.9
28
.9
27
.9
25
.6
14
.9
8.3
4.0
2.9
2.7
0.9
0.2
0.0
-0.5
-1.5
-2.5
-3.0
-6.3
-6.4
-6.6
-6.6
-6.7
-7.6
-7.8
-7.9
-20
0
20
40
60
80
100
120
ND
SD
MT IA NE
KS
OK
WY
MN
TX
AK WI
VT IN AR
LA
TN
DC IL
OH
MA
NM
MS
WA
NY
NC
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 12 states showed any commercial lines growth
2006 and 2011
37
Direct Premiums Written: Comm. LinesPercent Change by State, 2006-2011*
-7.9
-8.0
-8.1
-9.0
-10
.0
-10
.1
-10
.8
-11
.4
-11
.6
-12
.2
-12
.7
-12
.9
-13
.2
-13
.2
-13
.6
-14
.7
-15
.0
-16
.0
-16
.7
-19
.4
-19
.8
-19
.9
-23
.7
-24
.4
-26
.4
-33
.0
-40
-35
-30
-25
-20
-15
-10
-5
0
KY
PA
MO
US
ME
CT
SC AL
VA
GA ID
MD NJ RI
CO
UT
OR MI
DE
CA
NH HI
FL AZ
WV
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
States with the poorest performing economies also produced the most negative net change in premiums of
the past 5 years
Sources: SNL Financial LC.; Insurance Information Institute.
38
Direct Premiums Written: Workers’ CompPercent Change by State, 2006-2011*
32
1.6
16
0.5
13
.2
12
.7
10
.9
1.2
0.6
-1.5
-6.3
-6.9
-7.0
-10
.4
-10
.5
-11
.6
-13
.3
-13
.4
-14
.6
-14
.8
-15
.3
-16
.1
-16
.4
-17
.0
-17
.2
-18
.6
-19
.4
-19
.8
-50
0
50
100
150
200
250
300
350
ND
MT
SD IA
OK WI
NY
KS
WY IL CT
OH PA
NE
NJ
MN MI
ME IN MA
NC LA
NM VA RI
AL
Pe
ce
nt
ch
an
ge
(%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
39
Direct Premiums Written: Worker’s CompPercent Change by State, 2006-2011*
-19
.8
-19
.9
-21
.0
-22
.2
-22
.9
-23
.0
-23
.1
-23
.1
-23
.4
-23
.6
-25
.5
-25
.6
-26
.1
-28
.4
-29
.0
-29
.2
-29
.6
-29
.8
-36
.1
-40
.3
-43
.8
-44
.2
-45
.2
-46
.1
-49
.0
-52
.5-55
-50
-45
-40
-35
-30
-25
-20
-15
TN
MS
US
OR ID SC
AR
TX
GA
DC
MD
KY
VT
AK
MO
NH AZ
CA
CO
UT
WA
DE HI
NV
WV
FL
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
States with the poorest performing economies also produced the most negative net change in premiums of
the past 5 years
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
43
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
43
44
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
Jan13
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 7.9% in
Jan. 2013—lowest in 4 years.
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 14.4%
in Jan. 2013
January 2000 through Jan. 2013, 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
44
22
75
41
68
50
12
36
61
-79
24 6
8 74
51
2-1
14
-10
5-2
22
-21
9-2
03
-26
7-2
69
-42
9-4
84
-78
6 -70
1-8
21
-69
2-8
12
-82
1-2
88
-44
2-2
82 -2
22 -1
62
-23
3-3
4-1
67
-17
-26
17
01
02
94 10
31
29
11
3 18
81
54
11
48
02
43
22
3 30
31
83
17
72
06
12
92
56
17
41
97 24
9 32
32
65
20
81
20 15
27
81
77
13
11
18
21
7 25
62
02
16
6
11
1(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan
-07
Fe
b-0
7M
ar-
07
Ap
r-0
7M
ay-
07
Jun
-07
Jul-
07
Au
g-0
7S
ep
-07
Oct
-07
No
v-0
7D
ec-
07
Jan
-08
Fe
b-0
8M
ar-
08
Ap
r-0
8M
ay-
08
Jun
-08
Jul-
08
Au
g-0
8S
ep
-08
Oct
-08
No
v-0
8D
ec-
08
Jan
-09
Fe
b-0
9M
ar-
09
Ap
r-0
9M
ay-
09
Jun
-09
Jul-
09
Au
g-0
9S
ep
-09
Oct
-09
No
v-0
9D
ec-
09
Jan
-10
Fe
b-1
0M
ar-
10
Ap
r-1
0M
ay-
10
Jun
-10
Jul-
10
Au
g-1
0S
ep
-10
Oct
-10
No
v-1
0D
ec-
10
Jan
-11
Fe
b-1
1M
ar-
11
Ap
r-1
1M
ay-
11
Jun
-11
Jul-
11
Au
g-1
1S
ep
-11
Oct
-11
No
v-1
1D
ec-
11
Jan
-12
Fe
b-1
2M
ar-
12
Ap
r-1
2M
ay-
12
Jun
-12
Jul-
12
Au
g-1
2S
ep
-12
Oct
-12
No
v-1
2D
ec-
12
Jan
-13
Monthly Change in Private Employment
January 2008 through Jan. 2013 (Thousands)
Private Employers Added 6.07million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 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
166,000 private sector jobs were
created in January
45
Jobs Created2012: 2.247 Mill2011: 2.420 Mill2010: 1.235 Mill
-0.0
17
-0.0
43
0.06
8
0.23
8
0.34
0
0.43
4
0.53
7
0.66
6
0.77
9
0.96
7
1.12
1
1.23
5
1.31
5
1.55
8
1.78
1
2.08
4
2.26
7
2.44
4
2.65
0
2.77
9
3.03
5
3.20
9
3.40
6
3.65
5
3.97
8
4.24
3
4.45
1
4.57
1
4.72
3
4.80
1
4.97
8
5.10
9
5.22
7
5.44
4
5.70
0
5.90
2
6.06
8
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
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
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Mill
ion
sCumulative Change in Private Sector Employment: Jan. 2010—Jan. 2013
January 2010 through January 2013* (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job gains through Jan. 2013 totaled 6.08 million
47
Job gains and pay increases have added more than $600 billion to payrolls
since Jan. 2010
Private Employers Added 6.07million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 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
-533 -4
75
-465
-521
-531
-544
-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
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Cumulative Change in Government Employment: Jan. 2010—Dec. 2012
January 2010 through Dec. 2012* (Millions)
Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
Cumulative job losses through Dec. 2012 totaled 544,000
48
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 half a million jobs since Jan. 2010 even as
private employers created 5.42 million jobs, though
losses may now be ending.
Temporary Census hiring distorted 2010
figures
50
Unemployment Rates by State, December 2012:Highest 25 States*
10
.2
10
.2
9.8
9.6
9.2
8.9
8.7
8.6
8.6
8.6
8.5
8.4
8.4
8.2
8.2
8.1
8.0
7.9
7.9
7.8
7.6
7.6
7.6
7.5
7.3
7.1
0
2
4
6
8
10
12
14
NV RI CA NJ NC MI IL CT GA MS DC OR SC IN NY KY FL AZ PA US CO TN WA WV ME AL
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for December 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In December, 22 states reported over-the-month unemployment rate
decreases, 16 states and the District of Columbia had increases, and 12 states
had no change.
51
7.1
6.9
6.7
6.7
6.7
6.6
6.6
6.6
6.6
6.4
6.1
5.7
5.7
5.5
5.5
5.5
5.4
5.2
5.2
5.1
5.1
4.9
4.9
4.4
3.7
3.2
0
2
4
6
8
AR DE MA MO OH AK ID MD WI NM TX MT NH LA MN VA KS HI UT OK VT IA WY SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates by State, December 2012: Lowest 25 States*
*Provisional figures for December 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In December, 22 states reported over-the-month unemployment rate
decreases, 16 states and the District of Columbia had increases, and 12 states
had no change.
52
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%
8.0
%7
.8%
7.8
%7
.7%
7.6
%7
.5%
7.4
%7
.3%
7.1
%7
.0%
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
14
:Q1
14
:Q2
14
:Q3
14
: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 (2/13 edition); Insurance Information Institute.
2007:Q1 to 2014:Q4F*
Unemployment forecasts have been revised slightly
downwards. Optimistic scenarios put the
unemployment as low as 7.0% by Q4 of next year.
Jobless figures have been revised
slightly downwards for 2013/14
54
Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2012:Q3
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Billions
$5,500
$5,750
$6,000
$6,250
$6,500
$6,750
$7,00005
:Q1
05:Q
2
05:Q
3
05:Q
4
06:Q
1
06:Q
2
06:Q
3
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
Prior Peak was 2008:Q1 at $6.60 trillion
Latest (2012:Q2) was $6.88 trillion, a new peak--$663B
above 2009 trough
Recent trough (2009:Q3) was $6.25 trillion, down
5.3% from prior peak
Growth rates in 2012Q1:12 over Q4:11: 1.8%Q2 over Q1: 1.4%
Q3 over Q2: 0.3%
Pace of payroll growth is slowing
in 2012
54
$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
55
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 $47.8B
in 2005
+9% in 2012E
57
P/C Insurance Industry Financial Overview
Profit Recovery in 2012 After High CAT Losses; Ultimate
Impact of Sandy Still Unclear
57
P/C Net Income After Taxes1991–2012:Q3 ($ 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
$2
6,9
81
$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:Q3
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:Q3 ROAS1 = 6.3%
P-C Industry 2012:Q3 profits were up 222% from 2011:Q3, due primarily to lower catastrophe losses
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.6% ROAS through 2012:Q3, 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:Q3 combined ratio including M&FG insurers is 100.9, ROAS = 6.3%; 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
100.9 100.0
106.4
95.7
6.6%
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 2012:9M0%
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 ~6.6% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Year Ago
2011:Q3 = 108.1, 3.1% 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:Q3*
*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:Q3 ROAS = 6.2% 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:Q3: 6.6%
61
ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2012*
* Return on average surplus in 2008-2012 excluding mortgage and financial guaranty insurers. 2012 figures are III estimates.Source: The Geneva Association, Insurance Information Institute
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10* 11* 12*
ROE Cost of Capital
-13
.2 p
ts +1
.7 p
ts
+2
.3 p
ts
-9.0
pts
-6.4
pts
-3.2
pts
The P/C Insurance Industry Fell WellShort of Its Cost of Capital Every Year Since 2008
US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from 1991 to 2002, but on Target or Better
2003-07, Fell Short in 2008-2012
The Cost of Capital is the Rate of Return Insurers Need to
Attract and Retain Capital to the Business
(Percent)
-2.4
pts
-7.3
pts
-6.9
pts
62
U.S. Insured Catastrophe Loss Update
2012 Catastrophe Losses Were Close to “Average” Until Sandy Hit
2011 Was the 5th Most Expensive Year on Record
62
63
2012 Catastrophe Summary
Catastrophe Communications: US & GlobalU.S. Focus: ~$37-$42B = 2nd Most Costliest Year Ever for
Insured Catastrophe Loss (Behind 2005) Economic Losses = $101B Crop = Additional ~$16B ($7B-$8B privately insured) NFIP Flood = Additional $9B+ Flood losses/NFIP/FEMA has been the #1 communications
“issue” in the wake of SandyGlobal Focus: $65B in Insured LossesWell Below $105B in
2011 but Above 10-Yr. Avg. of $50B Cats abroad did not drive media cycle in 2012, save
ongoing Fukishima issues; Climate change Market Consequences: Primary & Reinsurance
Impacts on price, availability
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 – 2012Number of Events (Annual Totals 1980 – 2012)
Source: MR NatCatSERVICE 66
41
19
121
3
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 184 natural disaster events in the
US in 2012
U.S. Thunderstorm Loss Trends, 1980 – 2012
68Source: Property Claims Service, MR NatCatSERVICE
Average thunderstorm
losses are up 7 fold since the early
1980s. The 5- year running average
loss is up sharply.
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 totaled $14.9 billion, the 2nd
highest on record
69
Top 16 Most Costly Disastersin U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
$7.8 $8.7 $9.2 $11.1$13.4
$20.0$23.9 $24.6$25.6
$48.7
$7.5$7.1$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne(2004)
Frances(2004)
Rita (2005)
Tornadoes/T-Storms
(2011)
Tornadoes/T-Storms
(2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Northridge(1994)
9/11 Attack(2001)
Andrew(1992)
Katrina(2005)
Hurricane Sandy could become the 4th or 5th costliest event in US
insurance history
Hurricane Irene became the 12th most expense hurricane
in US history in 2011
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have
Occurred Over the Past Decade
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
70
$1
2.6
$1
1.0
$3
.8
$1
4.3
$1
1.6
$6
.1
$3
4.7
$7
.6
$1
6.3
$3
3.7
$7
3.4
$1
0.5
$7
.5
$2
9.2
$1
1.5
$1
4.4
$3
3.1
$3
7.0
$1
4.0
$4
.8
$8
.0
$3
7.8
$8
.8
$2
6.4
$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*
US Insured Catastrophe Losses
*As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy.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 ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
US CAT Losses in 2012 Will Likely Become the 2nd or 3rd Highest in US History on An Inflation-Adjusted
Basis (Pvt Insured). 2011 Losses Were the 5th Highest
2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October
Record Tornado Losses Caused
2011 CAT Losses to Surge
($ Billions, 2012 Dollars)
70
71
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*
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 (1960-2011); A.M. Best (2012E) 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
3.4
8.7 9.
4
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
2012
E
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: 7.20*
Combined Ratio Points Catastrophe losses as a share of all losses reached
a record high in 2012
74
Top 16 Most Costly World Insurance Losses, 1970-2012*
(Insured Losses, 2012 Dollars, $ Billions)
*Figures do not include federally insured flood losses.**Estimate based on PCS value of $18.75B as of 1/18/13 and assumption of upward development based on catastrophe modeler estimates ranging as high as $25B.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.
$11.1$13.4 $13.4$13.4
$20.0$23.9 $24.6$25.6
$38.6
$48.7
$7.8 $8.1 $8.5 $8.7 $9.2 $9.6
$0
$10
$20
$30
$40
$50
$60
Hugo (1989)
WinterStormDaria(1991)
ChileQuake(2010)
Ivan (2004)
Charley(2004)
TyphoonMirielle(1991)
Wilma(2005)
ThailandFloods(2011)
NewZealandQuake(2011)
Ike (2008)
Sandy(2012)**
Northridge(1994)
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 3 years
Hurricane Sandy could become the 6th costliest event
in global insurance history
2012 insured CAT Losses totaled $60B; Economic losses totaled $140B, according to Swiss Re
76
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–20111
0.4%
1.6%
3.8%4.7%
6.3%
7.3%
33.9%
42.0%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.
Hurricanes & Tropical Storms, $161.3
Fires (4), $6.0
Tornadoes (2), $130.2
Winter Storms, $28.2
Terrorism, $24.4
Geological Events, $18.2
Wind/Hail/Flood (3), $14.8
Other (5), $1.4
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1992-2011
totaled $384.3B, an average of $19.2B per year or $1.6B
per month
77
Federal Disaster Declarations Patterns:
1953-2012
77
Despite 11 Sandy Declarations, Fewer Disasters Were Declared in 2012 than the Record Number of
Declarations in 2010 and 2011
Number of Federal Disaster Declarations, 1953-2013*
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
94
75
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
13
*Through Feb. 24, 2013.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. Hurricane Sandy Produced 13 Declarations in 2012/13.
The number of federal disaster declarations set a
new record in 2011, with 99, shattering 2010’s record 81
declarations.
There have been 2,101 federal disaster
declarations since 1953. The average
number of declarations per year is 35 from
1953-2012, though that few haven’t been
recorded since 1995.
47 federal disasters were declared in 2012
78
79
Federal Disasters Declarations by State, 1953 – 2013: Highest 25 States*
86
78
72
66
65
60
57
56
54
53
52
51
51
50
48
48
48
48
47
47
47
46
42
40
39
0
10
20
30
40
50
60
70
80
90
100
TX CA OK NY FL LA AL KY AR MO MS IL TN WV IA MN KS PA NE VA OH WA ND NC IN
Dis
as
ter
De
cla
rati
on
s
Over the past 60 years, Texas has had the highest
number of Federal Disaster
Declarations
*Through Feb. 24, 2012. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
80
Federal Disasters Declarations by State, 1953 – 2013: Lowest 25 States*
39
39
38
36
36
35
34
30
28
28
26
26
25
24
24
24
23
22
18
17
17
15
15
13
11
10
9
0
10
20
30
40
50
ME SD AK GA WI NJ VT NH OR MA PR HI MI AZ MD NM ID MT CT NV CO DE SC DC UT RI WY
Dis
as
ter
De
cla
rati
on
s
Over the past 60 years, Wyoming and Rhode Island had the fewest
number of Federal Disaster Declarations
*Through Feb. 24, 2013. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
Life$1.2 (3%)
Aviation Liability
$4.3 (11%)
Other Liability
$4.9 (12%)
Biz Interruption $13.5 (33%)
Property -WTC 1 & 2*$4.4 (11%) Property -
Other$7.4 (19%)
Aviation Hull$0.6 (2%)
Event Cancellation
$1.2 (3%)Workers Comp
$2.2 (6%)
Total Insured Losses Estimate: $40.0B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.
**$32.5 billion in 2001 dollars.
Source: Insurance Information Institute.
Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2011)
($ Billions)
Hurricane Sandy Summary
82
Sandy Will Become One of the Most Expensive Events in Global Insurance History, But Insurance
Opportunities Await82
83
Top 12 Most Costly Hurricanesin U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
$9.2 $11.1$13.4
$20.0
$25.6
$48.7
$8.7$7.8$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Andrew(1992)
Katrina(2005)
Hurricane Sandy could become the 3rd costliest
hurricane in US insurance history
Hurricane Irene became the 12th most expensive hurricane in US history in 2011
10 of the 12 most costly hurricanes in insurance history occurred over the past 9 years (2004—2012)
Hurricane Sandy: Claim Payments to Policyholders, by State
$9,600
$6,300
$700 $500 $410 $295 $292 $210 $103 $84 $57 $55 $37 $36 $13$58$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
NY NJ PA CT MD VA OH MA RI DE WV NC NH DC ME VT
Insurers Will Pay at Least $18.75 Billion to 1.52 Million Policyholders Across 15 States and DC in the Wake of Hurricane Sandy
84
At $9.6B and $6.6B, respectively, NY and NJ suffered, by far, the largest losses
from Hurricane Sandy
TOTAL = $18.75 BILLION($ Thousands)
Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .
Auto, 250,500 ,
16%
Commercial, 202,500 ,
13%
Homeowner, 1,067,000 ,
71%
Hurricane Sandy resulted in an
estimated 1.52 million privately insured
claims resulting in an estimated $18.75 to
$25 billion in insured losses. Hurricane
Katrina produced 1.74 million claims and
$48.7B in losses (in 2012 $)
Hurricane Sandy: Number of Claims by Type*
*PCS claim count estimate s as of 1/18/13. Loss estimate represents PCS total ($18.75B) and upper end of range estimates by risk modelers RMS, Eqecat and AIR. All figures exclude losses paid by the NFIP.Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute. 85
Sandy is a high HO frequency, (relatively
low) severity event (avg. severity <50% Katrina)
Total Claims = 1.52 Million*
Auto, $2,729 , 15%
Commercial, $9,024 ,
48%
Homeowner, $6,997 ,
37%
Although Commercial Lines accounted for
only 13% of total claims, they account for 48% of all claim
dollars paid. In most hurricanes,
Commercial Lines accounts for about
1/3 of insured losses.
Hurricane Sandy: Insured Loss byClaim Type* ($ Millions)
*PCS insured loss estimates as of 1/18/13. Catastrophe modeler estimates range up to $25 billion. All figures exclude losses paid by the NFIP.Source: PCS; Insurance Information Institute. 86
Total Claim Value = $18.75 Billion*
Hurricane Sandy: Average Claim Payment by Type of Claim
$6,558$10,894
$44,563
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
Home* Vehicle Commercial
Commercial (Business) Claims Were Nearly Seven Times More Expensive than Homeowners Claims; Vehicle Claims Were Unusually Expensive
Due t o Extensive Flooding
91
Commercial (i.e., business claims) are far more expensive
because the value of property is often higher as well as the impact of insured business
interruption losses
*Includes rental and condo policies.Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .
The BIG Question:Where Is the Market Heading?
105
Catastrophes and Other Factors Are Pressuring Insurance Markets
105
New Factor: Record Low Interest Rates Are Contributing to
Underwriting and Pricing Pressures
106
Historical Criteria for a “Market Turn”:Low Interest Rates Add New Pressure
Criteria Status Comments
Sustained Period of
Large Underwriting
Losses
Large CAT Losses in 2011/12
Pushed Up Combineds
• CAT Losses contributing to higher underwriting losses• Apart from 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= 101.1 in H1:2012 (ex-M&FG)
• Prior-year reserve releases continue to reduce u/w losses, boost ROEs, though more modestly
Material Decline in Surplus/ Capacity
Small Decline Due to 2011 Cats; Could drop in 2012
• Fell 1.6% in 2011 due to CATs• Surplus reached record as of 9/30/12 record $583.5B• Likely drop as of 12/31/12 due to Sandy impact• Modest growth in demand for insurance should begin to
absorb some capacity
Tight Reinsurance
MarketSomewhat in
Place
• Ample capacity• Market is generally flat except up for cat-impacted
accounts• Lower prices in Europe
Renewed Underwriting
& Pricing Discipline
Firming Broad, Sustained,esp. in Property, WC
• Commercial lines pricing is consistently and uniformly across all major lines, esp. Property & WC;
• Markets remain competitive in most segments Sources: Barclays Capital; Insurance Information Institute.
INVESTMENTS: THE NEW REALITY
107
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
107
Property/Casualty Insurance Industry Investment Income: 2000–2012E1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.0
$46.8
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12E
Investment Income Fell in 2012 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing
1 Investment gains consist primarily of interest and stock dividends.*2012F is based on annualized 9M:2012 actual figure of $35.131B.Sources: ISO; Insurance Information Institute.
($ Billions)
Investment earnings in 2012 were running 14% below their 2007 pre-crisis peak
Property/Casualty Insurance Industry Investment Gain: 1994–2012F1
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.2
$53.4$56.2
$50.8
$58.0
$51.9$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12F
Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower Realized Investment Gains; The Financial
Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2012F figure is III estimate based on annualized actual 9M:2012 result of
$38.089B.Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains in 2012 are running approximately 20% below their pre-crisis peak
110
P/C Insurer Net Realized Capital Gains/Losses, 1990-2012:Q3
Sources: A.M. Best, ISO, Insurance Information Institute.
$2.8
8
$4.8
1 $9.8
9
$9.8
2
$10.
81 $18.
02
$13.
02
$16.
21
$6.6
3
-$1.
21
$6.6
1
$9.1
3
$9.7
0
$3.5
2 $8.9
2
-$7.
90
$5.8
5
$7.1
9
$2.9
6
-$19
.81
$9.2
4
$6.0
0
$1.6
6
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112:9M
Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE
($ Billions)Realized capital gains
through 2012:9M are down 46% from $5.53B in 2011:9M
111
U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2013*
*Monthly, through Jan. 2013. 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 '13
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
rose 48bp from its all time record lows to 1.91% in Jan. 2013
111
114
-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*
114
1. UNDERWRITING
115
Underwriting Losses in 2011 and 2012 Are Elevated by High
Catastrophe Losses
115
116
P/C Insurance Industry Combined Ratio, 2001–2012*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q3=100.0. Sources: A.M. Best, ISO.
95.7
99.3100.8
106.4 106.0
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* 2012E
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
High CAT
Losses Due to Sandy
Underwriting Gain (Loss)1975–2012:Q3*
* 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 12
Cumulative underwriting deficit from 1975 through
2011 is $479B
($ Billions) Underwriting losses
through 2012:Q3
totaled $6.7B
High cat losses in 2011 led to the highest
underwriting loss since 2002
118
Combined Ratios by Predominant Business Segment, 2012:9 Mos. vs. 2011:9 Mos.*
*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute
109.4108.0
105.4
112.0
100.0 99.498.6
102.7
96
98
100
102
104
106
108
110
112
114
All Lines Personal LinesPredominating
Commercial LinesPredominating
Diversified Insurers
2011:9M 2012:9M
(Percent)
The combined ratios for both personal and commercial lines
improved substantially through 2012:Q3, prior
to Hurricane Sandy
119
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
121
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
121
123
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
01
1
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
125
Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010
2.0%4.4%
4.8%
6.5%
6.9%
7.7%
8.1%
10.9%
22.2%
26.6%
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade
Workers Comp
Financial Guaranty
Pvt. Passenger Auto
Homeowners
Commercial Multiperil
Commercial Auto Liability
Other Liability
Med Mal
SuretyTitle
127
Performance by Segment
127
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
106.7
109.0
102.9102.0
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
13
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2013F figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute
Commercial Lines Combined Ratio, 1990-2013F*
Commercial lines underwriting
performance in 2012 was the worst since 2002 due
to heavy impact from Sandy
128
Commercial Auto Combined Ratio: 1993–2014F
11
2.1
11
2.0
11
3.0
11
5.9
10
2.7
95
.2
92
.9
92
.1
92
.4 94
.3 96
.8 99
.4
98
.0
10
4.6
10
7.1
10
3.6
10
1.2
11
8.1
11
5.7
11
6.2
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F
Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends
129Sources: A.M. Best (1990-2013F);Conning (2014F); Insurance Information Institute.
Commercial Multi-Peril Combined Ratio: 1995–2013F
119.
0
119.
8
108.
5
125.
0
116.
2
116.
1
104.
9
101.
9
105.
5
95.4 97
.6
94.2 96
.1 102.
0
100.
7
116.
8
113.
6
115.
3 122.
4
115.
0
117.
0
97.3
89.0
97.7
93.8
83.8
89.8
108.
4
98.7 10
2.5
120.
5
116.
6
102.
6
113.
1
115.
0 121.
0
80
85
90
95
100105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F
CMP-Liability CMP-Non-Liability
Commercial Multi-Peril Underwriting Performance is Expected to Improve in 2013 Assuming Normal
Catastrophe Loss Activity
*2012-2013 figures are A.M. Best estimate/forecast for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute. 130
General Liability Combined Ratio: 2005–2014F
112.
9
95.1 99
.0
94.2
100.
7
103.
3
103.
7107.
1 110.
8
99.6
80
85
90
95
100
105
110
115
05 06 07 08 09 10 11 12F 13F 14F
Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years
Source: Conning Research and Consulting. 131
Inland Marine Combined Ratio: 1999–2014F
101.9
92.8
100.2
83.8
77.379.5
93.3
89.3
86.2
97.7 97.7
89.7 89.7
80.882.5
89.9
70
75
80
85
90
95
100
105
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F
Inland Marine is Expected to Remain Among the Most Profitable of All Lines
Sources: A.M. Best (1999-2011); Insurance Information Institute (2012F); Conning (2013F-2014F) 132
Other & Products Liability Combined Ratio: 1991–2013F
11
0.3
10
9.1
11
2.0
12
2.6
12
4.4
11
1.8
11
4.4
11
2.1
96
.3 99
.0
95
.1
10
5.4
10
9.8
10
0.5
10
3.6
10
6.3
12
5.51
32
.8
13
3.2
11
4.5
143.6
12
3.5
11
0.6
80
90
100
110
120
130
140
150
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E13F
Liability Lines Have Performed Better in the Post-Tort Reform Era (~2005), but There Has
Been Some Deterioration in Recent YearsSources: A.M. Best ; Insurance Information Institute. 133
Workers Compensation Combined Ratio: 1994–2014F
102.
0
97.0 10
0.0
101.
0
112.
6
108.
6
105.
1
102.
7
98.5
103.
5
104.
5 110.
6 116.
8
116.
9
117.
3
115.
0
111.
0
121.
7
107.
0
115.
3
118.
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 11 12E 13F 14F
Workers Comp Results Should Begin to Improve in 2013. Underwriting Results Deteriorated Markedly from 2007-2012 and Were the Worst They Had Been in a Decade.
Sources: A.M. Best (1994-2013F); Insurance Information Institute (2014F). 136
Workers Compensation Medical SeverityModerate Increase in 2011
137
Accident Year
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%
Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)
2011p: Preliminary based on data valued as of 12/31/20111991-2010: Based on data through 12/31/2010, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes high deductible policies
Cumulative Change = 245%(1991-2011p)
Average Approved BureauRates/Loss Costs
12.1
7.4
10.0
2.9
-6.4
-3.2
-6.0
-8.0
-5.4
-2.6
3.5
1.2
4.9
6.6
-6.0-5.1
-5.7-6.6
-3.1-2.0
-0.7
0.4
7.8
-10
-5
0
5
10
15
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
Percent
Calendar Year
Cumulative1990–1993
+36.3%
Cumulative 2000–2003
+17.1%
Cumulative 2004–2011
-25.6%
Cumulative 1994–1999
-27.8%
*States approved through 7/31/12.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.
History of Average WC Bureau Rate/Loss Cost Level Changes
Approve rates/loss costs are seeing their
first significant increase since 2003
Workers Comp Rate Changes,2008:Q4 – 2012:Q4
Source: Council of Insurance Agents and Brokers; Information Institute.
-5.5%-4.6%
-4.0%-4.6%
-3.7%-3.9%
-5.4%
-3.7%-3.4%
-1.6%
2.6%
4.1%
7.5% 7.4%8.3% 8.1%
9.0%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4
WC rate changes have been positive for 7
consecutive quarters, longer than any other
commercial line
(Percent Change)
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
2. SURPLUS/CAPITAL/CAPACITY
146
How Will Large Catastrophe Losses Impact Capacity?
146
148
Policyholder Surplus, 2006:Q4–2012:Q3
Sources: ISO, A.M .Best.
($ 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
$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 12:Q2 12:Q3
2007:Q3Pre-Crisis Peak
Surplus as of 9/30/12 was up $12.8B or 2.2% from the
previous record high of $570.7B set as of 3/31/12.
*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
The P/C Insurance Industry Both Entered and Emerged from the 2012 Hurricane
Season Very Strong Financially. There is No Insurance Industry “Fiscal Cliff”
149
3. REINSURANCE MARKET CONDITIONS
Record Global Catastrophes Activity is
Pressuring Pricing
149
151
Regional Property Catastrophe Rate on Line Index, 1990—2013 (as of January 1)
Sources: Guy Carpenter; Insurance Information Institute.
Property-Cat reinsurance pricing was up in the US as
of 1/1/13 but was down in Europe/UK
4. RENEWED PRICING DISCIPLINE
152
Evidence of a Broad and Sustained Shift in Pricing
152
154
-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
Net Premium Growth: Annual Change, 1971—2012: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.
2012:Q3 growth
was +4.2%
155
P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter
Sources: ISO, Insurance Information Institute.
Sustained Growth in Written Premiums(vs. the same quarter, prior year) Will Continue into 2013
10.2
%15
.1%
16.8
%16
.7%
12.5
%10
.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
-4.6
%-4
.1%
-5.8
%-1
.6%
10.3
%10
.2% 13
.4%
6.6%
-1.6
%2.
1%0.
0%-1
.9%
0.5%
-1.8
%-0
.7%
-4.4
%-3
.7%
-5.3
%-5
.2%
-1.4
%-1
.3%
1.3% 2.
3%1.
7% 3.5%
1.6%
4.1%
3.8%
3.1% 4.
2% 5.1%
-10%
-5%
0%
5%
10%
15%
20%
2002
:Q1
2002
:Q2
2002
:Q3
2002
:Q4
2003
:Q1
2003
:Q2
2003
:Q3
2003
:Q4
2004
:Q1
2004
:Q2
2004
:Q3
2004
:Q4
2005
:Q1
2005
:Q2
2005
:Q3
2005
:Q4
2006
:Q1
2006
:Q2
2006
:Q3
2006
:Q4
2007
:Q1
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
Premium growth in Q3 2012 was up 5.1% over Q3 2011, the strongest growth since Q4 2006
156
Growth in Net Written Premium by Segment, 2012:9 Mos. vs. 2011:9 Mos.*
*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute
3.2% 3.2%
4.0%
2.4%
4.2%
3.3%
6.1%
3.8%
0%
1%
2%
3%
4%
5%
6%
7%
All Lines Personal LinesPredominating
Commercial LinesPredominating
Diversified Insurers
2011: 9 Mos. 2012: 9 Mos.
(Percent)
157
Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2012)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
%-8
.2%
-4.6
% -2.7
%-3
.0%
-5.3
%-9
.6%
-11
.3%
-11
.8%
-13
.3%
-12
.0%
-13
.5%
-12
.9%
-11
.0%
-6.4
%-5
.1%
-4.9
%-5
.8%
-5.6
%-5
.3%
-6.4
%-5
.2%
-5.4
% -2.9
%
2.7
% 4.4
%4
.3%
3.9
%5
.0%
-0.1
% 0.9
%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Pricing as of Q4:2012 was positive for the 6th consecutive
quarter. Gains are likely to continue through 2013.
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
158
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2012:Q4
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 (%)
Trough = 2007:Q3 -13.6%
KRW : No Lasting Impact
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
Peak = 2001:Q4 +28.5%
Pricing turned positive in Q3:2011, the first increase in
nearly 8 years; Q4:2012 renewals were up 5.0%, the largest increase since late
2003; Some insurers posted stronger numbers.
159
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2012:Q4
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
1999:Q4 = 100
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Despite 6 consecutive quarters of gains (Q4:2012 = 5.0%),
pricing today is where is was in mid-2001 (pre-9/11), suggesting
additional rate need going forward, esp. in light of record
low interest rates
162
Change in Commercial Rate Renewals, by Line: 2012:Q4
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewed Uniformly Upward in Q4:2012 for the Sixth Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat
Losses and Low Interest Rates Provide Momentum Going Forward
Percentage Change (%)
4.4% 4.4%4.9%
5.7%
9.0%
1.3%
3.2% 3.3% 3.4% 3.5% 3.4%
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%
10.0%
Su
rety
Bu
sin
ess
Inte
rru
ptio
n
Ge
ne
ral
Lia
bili
ty
Co
mm
erc
ial
Au
to
Um
bre
lla
Co
mm
erc
ial
Au
to EP
L
Co
nst
ruct
ion
D&
O
Co
mm
erc
ial
Pro
pe
rty
Wo
rke
rsC
om
p
Workers Comp rate increases are large than any other line, followed
by Property lines
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Shifting Legal Liability & Tort Environment
164
Is the Tort PendulumSwinging Against Insurers?
164
165
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
Business Leaders Ranking of Liability Systems in 2012
Best States
1. Delaware
2. Nebraska
3. Wyoming
4. Minnesota
5. Kansas
6. Idaho
7. Virginia
8. North Dakota
9. Utah
10. Iowa
Worst States
41. Florida
42. Oklahoma
43. Alabama
44. New Mexico
45. Montana
46. Illinois
47. California
48. Mississippi
49. Louisiana
50. West Virginia
Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2012
Wyoming Minnesota Kansas Idaho
Drop-offs
Indiana Colorado Massachusetts South Dakota
Newly Notorious
Oklahoma
Rising Above
Arkansas
168
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170