the dawning of a new decade: p/c insurance overview

82
The Dawning of a New Decade: P/C Insurance Overview & Outlook 2020 & Beyond Robert P. Hartwig, Ph.D., CPCU Clinical Associate Professor of Finance, Risk Management & Insurance Darla Moore School of Business ¨ University of South Carolina [email protected] ¨ 803.777.6782 Marco Island, FL January 14, 2020

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Page 1: The Dawning of a New Decade: P/C Insurance Overview

The Dawning of a New Decade:P/C Insurance Overview & Outlook

2020 & Beyond

Robert P. Hartwig, Ph.D., CPCUClinical Associate Professor of Finance, Risk Management & Insurance

Darla Moore School of Business ¨ University of South [email protected] ¨ 803.777.6782

Marco Island, FLJanuary 14, 2020

Page 2: The Dawning of a New Decade: P/C Insurance Overview

2

P/C Insurance Industry Financial Overview

CATS, Non-CAT Underwriting Losses Impacted Insurer Balance Sheets

Industry Remains Strong

2

Page 3: The Dawning of a New Decade: P/C Insurance Overview

P/C Industry Net Income After Taxes, 1991–2019F*n 2005 ROE= 9.6%n 2006 ROE = 12.7%n 2007 ROE = 10.9%n 2008 ROE = 0.1%n 2009 ROE = 5.0%n 2010 ROE = 6.6%n 2011 ROAS1 = 3.5%n 2012 ROAS1 = 5.9%n 2013 ROAS1 = 10.2%n 2014 ROAS1 = 8.4%n 2015 ROAS = 8.4%n 2016 ROAS = 6.2%n 2017 ROAS =5.0%n 2018 ROAS = 8.0%n 2019: ROAS = 8.5%

*2019 estimate based on annualized actual 1H:19 figure of $32.787B. ROE figures are GAAP; 1Return on avg. surplus. Excludes Mortgage & Financial Guaranty insurers for years (2009-2014). Sources: A.M. Best, ISO.

$14,178

$5,840$19,316

$10,870 $20,598

$24,404 $36,819

$30,773

$21,865

$3,046

$30,029

$62,496

$3,043

$35,204

$19,456 $3

3,522

$63,784

$55,870

$56,826

$42,924

$36,813

$59,994

$65,574

$38,501

$20,559

$44,155

$65,777

-$6,970

$28,672

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19*

Net income is up sharply in

2018/19 due to lower CATs

and the TCJA

$ Millions

Page 4: The Dawning of a New Decade: P/C Insurance Overview

-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 12 13 14 15 16 17 1819H1

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2019E

Profitability = P/C insurer ROEs. 2011-18 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, A.M. Best, USC RUM Center.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years10 Years

9 Years

ROEs in 2017 plunged to their lowest levels since 2008 but

rebounded in 2018 due to lower CATs and the TCJA.

ROE

1975: 2.4%

2013 9.8%

2017 5.0%

2015: 8.4%

2019E 8.5%

2018 8.0%

Page 5: The Dawning of a New Decade: P/C Insurance Overview

ROE: Property/Casualty Insurance by Major Event, 1987–2019E

5

*Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; A.M. Best (2018E-2019F); USC RUM Center.

-5%

0%

5%

10%

15%

20%

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 14 15 16 17 1819H1

P/C Profitability Is Influenced Both by

Cyclicality and Volatility

Hugo

Andrew, Iniki

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Harvey, Irma, Maria,

CA Wildfires

2019E 8.5%

Page 6: The Dawning of a New Decade: P/C Insurance Overview

-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 12 13 14 15 16 17 18 19E

P/C Insurance ROE vs. Fortune 500, 1975–2019E*

*2018 Fortune 500 figure is an estimate.Profitability = P/C insurer ROEs. 2011-18 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, Fortune.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

ROE

1975: 2.4%

2013 9.8%

2017 5.0%

2019E 8.5%

Average: 1975-2018 Fortune 500: 13.3%P/C Insurance: 9.0%

2019E* 15.0%

Page 7: The Dawning of a New Decade: P/C Insurance Overview

P/C Insurance Industry Combined Ratio, 2001–2019E*

7

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. **Actual through H1 2019 was 97.3Sources: A.M. Best, ISO (2014-2019).

95.7

99.3101.1

106.5

102.5

96.4 97.097.8

100.798.0

103.7

99.2101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19**

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

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

Cyclical Deterioration

Sharply higher CATs are driving

large underwriting losses and

pricing pressure

2019 Combined Ratio Est.98.0

Page 8: The Dawning of a New Decade: P/C Insurance Overview

8

Policyholder Surplus (Capacity), 2006:Q4–2019:Q4E

Sources: ISO, A.M .Best; 2019E from Center for Risk and Uncertainty Management, University of South Carolina, based on actual $802.2B through 6/3019.

($ Billions)

$487.1

$496.6

$512.8

$521.8

$478.5

$455.6

$437.1$463.0 $490.8

$511.5 $540.7

$530.5

$544.8

$559.2

$559.1

$538.6

$550.3

$567.8

$583.5

$586.9

$607.7

$614.0

$624.4 $653.4

$671.6

$673.9

$675.2

$674.2

$673.7

$676.3

$700.9

$717.0 $750.7 $781.5

$742.1 $779.5

$802.2

$817.5

$662.0

$570.7

$566.5

$505.0

$515.6

$517.9

$400$450$500$550$600$650$700$750$800$850

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

12:Q4

13:Q1

13:Q2

13:Q3

13:Q4

14:Q1

14:Q2

14:Q3

14:Q4

15:Q2

15:Q4

16:Q1

16:Q4

17:Q2

17:Q4

18:Q3

18:Q4

19:Q1

19:Q2

19:Q4E

Financial Crisis

Surplus (Capacity) reached record highs throughout 2019

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business.

Drop due to near-record 2011 CAT losses

The abundance of capacity/Capital will temper the amplitude of hardening in

most markets

A sharp recovery in asset prices pushed surplus to a new record

high in 2019, surpassing $800B for the first time ever

Page 9: The Dawning of a New Decade: P/C Insurance Overview

Net Written Premium Growth (All P/C Lines): 2006-2019F

Sources: A.M. Best (2006-2013, 2019F), ISO (2014-19:H1).

3.8%

0.0%

-0.4%

-4.5%

0.8%

3.2%4.2% 4.3% 4.2% 3.9% 4.1%

2.8%

4.6%

10.8%

3.0%

1.0%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

06 07 08 09 10 11 12 12 13 14 15 16 17 18 19F 19:H1

Total Net Written Premiums Show a Return to Trend for 2019. Sharp Increase in 2018 and Decline in 2019 Reflect Impacts from the Tax Cut and Jobs Act of 2017

Page 10: The Dawning of a New Decade: P/C Insurance Overview

Net Premium Growth (All P/C Lines): Annual Change, 1971—2019F

10

-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 13 14 15 16 17 18 19F

(Percent)1975-78 1984-87 2000-03

*Figure is actual 2018:9M vs. 2017:9M change adjusted for affects of the TCJA of 2017. Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013, 2020F), ISO (2014-19); Risk & Uncertainty Management Center, Univ. of South Carolina estimate for 2019.

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.

2019F:3.0%2018E: 10.8%

2017: 4.6%2016: 2.7%2015: 3.5%2014: 4.2

2013: 4.4%2012: +4.2%

Outlook2019F: 3.0%2020F: 3.8%

Page 11: The Dawning of a New Decade: P/C Insurance Overview

Growth in Net Written Premium: Personal vs. Commercial, 2015 – 2018*

11

5.7%

3.1%

-1.4%

2.7%

6.6%

2.7%1.8%

4.1%

6.7%5.8%

4.8%5.8%

3.5%

1.5%

3.3%

5.3%

-2%-1%0%1%2%3%4%5%6%7%8%

Personal Lines Predominating

Diversified Commercial LinesPredominating**

All Insurers

2015 2016 2017 2018*

Annual Change in NWP

The divergence in growth between personal and commercial lines is large but may be narrowing

*2018 is an estimate based on actual data through Q4:2018. Commercial lines figure has been adjusted from actual value of 19.3% to account for distortionary affects from the TCJA 2017, which impacted reinsurance utilization, largely in the commercial segment.

Source: ISO. University of South Carolina Risk and Uncertainty Management Center.

Personal lines growth has been

much stronger than commercial lines

Page 12: The Dawning of a New Decade: P/C Insurance Overview

Commercial Lines Combined Ratio, 1990-2019F*

109.

411

0.2

118.

810

9.5 11

2.5

110.

210

7.6

104.

110

9.7

110.

2

102.

5 105.

491

.194

.510

4.4

100.

7 103.

8 107.

310

5.4

96.3

96.0

95.2

99.0

102.

197

.697

.5

102.

0

111.

1

112.

3

122.

3

90

95

100

105

110

115

120

125

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

14

Commercial lines underwriting performance improved

materially in 2018/19 in the wake of record CATs in 2017

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2018). Risk and Uncertainty Management Center, Univ. of South Carolina (2019F).

Page 13: The Dawning of a New Decade: P/C Insurance Overview

Personal Lines Combined Ratio, 2005-2019F*

96.4

91.1

97.6

104.

5

102.

5

102.

6

107.

7

102.

7

98.4

103.

9

98.399

.3100.

9

99.5

102.

6

90

95

100

105

110

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

15

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2018). Risk and Uncertainty Management Center, Univ. of South Carolina (2019F).

Personal lines underwriting performance deteriorated from 2014-2017 as record

CATs and rising loss cost trends took their toll. Little improvement in 2018, but more

in 2019 assuming “normal” cat activity

Page 14: The Dawning of a New Decade: P/C Insurance Overview

16

Private Passenger Auto Frequency & Severity Trends in the US

Severity Trends Are Adverse, Not Offset by Declining Frequency

Page 15: The Dawning of a New Decade: P/C Insurance Overview

Private Passenger Auto Combined Ratio: 1993–2019E

101.7

101.3

101.3

101.0

109.5

107.9

104.2

98.4

94.3 95.1

95.5 98.3 100.2

101.3

101.0

102.0

102.1

101.6

102.3

104.6

106.3

102.6

97.7

97.099.5 101.1

103.5

80

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19E

Private Passenger Auto Underwriting Performance Is Showing the Strains of Rising Frequency (and Severity) Trends in Many States

17Sources: A.M. Best (1990-2018); USC RUM Center (2019E).

Page 16: The Dawning of a New Decade: P/C Insurance Overview

18

Bodily Injury: Severity Trend Is Up, Frequency Decline Returning?

2.1% 1.7%3.6%

1.8%

4.4%5.6%

7.7%

2.9%

6.4%

-5.4%-3.8% -4.0% -4.2%

-2.2%

0.0%

-1.1%

3.4%

0.0%

-2.2% -2.2% -2.2%

3.0%2.0%

5.9%5.7%4.7%

2.9%1.1%

0.0% 0.0%

-8%-6%-4%-2%0%2%4%6%8%10%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019*

Severity Frequency

Annual Change, 2005 through 2019:Q3*

BI Severity Trend is a Major Cost Driver

*2019 figure is for the 4 quarters ending 2019:Q3.Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Page 17: The Dawning of a New Decade: P/C Insurance Overview

19

Property Damage Liability: Severity Up and Frequency Down

1.8% 1.9%

4.1% 3.5%

6.3% 6.0%

3.9% 4.6% 5.2%

-1.6%

-3.5% -3.4%

0.6% 0.6%

-0.3%

1.4% 1.4% 1.1%

-1.7%

-3.9% -3.8%

2.9% 3.6%2.0% 2.0%

-0.4%

0.4%0.9% 1.2%0.3%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019*

Severity Frequency

Annual Change, 2005 through 2019*

Severity/Frequency Trends Have Been Volatile, But Rising Severity since 2011 Is a Concern

*2019 figure is for the 4 quarters ending 2019:Q3.Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Page 18: The Dawning of a New Decade: P/C Insurance Overview

20

Comprehensive Coverage: Frequency and Severity Trends Are Volatile

15.4% 15.3%

-14.6%

6.5%

-1.3%

21.3%

8.6%

-9.4%-9.8%-6.3%

1.3%5.8%

-8.9%-5.6%

2.1%

-0.6% -2.1%

3.0%

15.5%

-1.4% -1.5%

12.6%

-8.1%-5.9%

3.0%

-2.1%

3.5%

-3.1%

1.8%6.2%

-20%-15%-10%-5%0%5%10%15%20%25%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019*

Severity Frequency

Annual Change, 2005 through 2019*

Weather Creates Volatility for Comprehensive Coverage. Comprehensive Losses Are Up Modestly in 2019 after Falling in 2018 Following Severe

Losses Due Largely to Hurricanes Harvey, Irma and Maria in 2017

Severe weather is a principal cause of the spikes in both

frequency and severity

*2019 figure is for the 4 quarters ending 2019:Q3.Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Page 19: The Dawning of a New Decade: P/C Insurance Overview

21

Collision Loss Ratio Trending Upward:Pvt. Passenger Auto, US, 2012 – 2019*

68.9% 69.5%69.4%

73.8%75.2%

77.0% 77.4%

70.7%

50%

55%

60%

65%

70%

75%

80%

2012 2013 2014 2015 2016 2017 2018 2019*

US

Loss Ratio

Collision Loss Ratios in Are Up Slightly in 2019

Collision loss ratio is up 0.6 points from 2018 but

still down 7.9 points since the 2016 peak

*2019 data are for the 4 quarters ending Sept. 30, 2019.Source: ISO/PCI Fast Track data; Insurance Information Institute

Page 20: The Dawning of a New Decade: P/C Insurance Overview

22

Collision Coverage: Severity Trends Are a Concern*

2.8%

1.3%

4.2%

1.4%

5.7% 5.2%

-0.1%

4.8% 5.0%

-1.8%

-3.6%

2.5%

-2.4%-1.8%

4.4%

1.4% 1.0%

-1.5% -1.8%

3.9%3.1%

0.1% 0.5%

-2.3%

-0.1%

0.0%

-1.4%-0.5%

0.9%

2.3%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Severity Frequency

Annual Change, 2005 through 2019*

The Recession, High Fuel Prices Helped Temper Frequency and Severity, But that Trend Clearly Reversed, Consistent with

Experience from Past Recoveries, though Frequency is Subdued*2019 figure is for the 4 quarters ending 2019:Q3.Source: ISO/PCI Fast Track data; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Page 21: The Dawning of a New Decade: P/C Insurance Overview

23

Traumatic Brain Injury Trends: On the Rise

TBI claims are an important contributor to adverse BI

severity trends in personal and commercial auto

Page 22: The Dawning of a New Decade: P/C Insurance Overview

24

Commercial Auto Liability:(Direct L/R Avg. 2017/18 – Direct L/R 2014/14)

Source: S&P Global, Assured Research; Center for Risk and Uncertainty Management, Univ. of South Carolina.

39 out of the 50 states experiences a deterioration in

their Commercial Auto Liability loss ration in recent

years—11 of them with deteriorations of 10+ points

Median Deterioration

= 5 pts

Page 23: The Dawning of a New Decade: P/C Insurance Overview

25

Commercial Auto Physical Damage:(Direct L/R Avg. 2017/18 – Direct L/R 2014/14)

Source: S&P Global, Assured Research; Center for Risk and Uncertainty Management, Univ. of South Carolina.

PD loss ratio for Commercial Auto was

approximately unchanged for the most

recent period

Page 24: The Dawning of a New Decade: P/C Insurance Overview

26

Workers Compensation Operating Environment

26

Workers Comp Results Have Improved Substantially in Recent YearsCan Gains Be Maintained?

Page 25: The Dawning of a New Decade: P/C Insurance Overview

Workers Compensation Combined Ratio: 1994–2018P

27

102.0

97.0 100.0

101.0

112.6

108.6

105.1

102.7

98.5 10

3.5

104.5 110.6 115.0

115.0

109.0

102.0

100.0

94.0

94.0

89.0

84.0

121.7

107.0115.3

118.2

80859095100105110115120125130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

Workers Comp Is an Example of a Line that Was Recently Restored to Health Through the Return of Rate Adequacy as

Well as Declining Claim FrequencySources: A.M. Best (1994-2009); NCCI (2010-2018P) and are for private carriers only..

WC results have improved markedly since 2011. The 2018 combined ratio is the

best in at least 80 years

Page 26: The Dawning of a New Decade: P/C Insurance Overview

Workers Compensation Lost-Time Claim Frequency Declined Again in 2018

29

0.3

-6.5

-4.5

0.5

-3.9-2.3

-4.5

-6.9

-4.5 -4.1 -3.7

-6.6

-4.5

-2.2

-4.3 -4.9

10.6

-3.9

-5.8

-4.0-3

-5.1-6.2

-4.8

-1.0

3.6

-0.9

-10-8-6-4-202468

1012

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

IndicatedAdjusted*

Percent

Accident Year*Adjustments primarily due to significant audit activity.2017p: Preliminary based on data valued as of 12/31/2017.Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible policies; 1994-2017: Based on data through 12/31/17. Data for all states where NCCI provides ratemaking services, excluding WV.Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level

Average Annual Change = –3.5%(1994–2016)

Page 27: The Dawning of a New Decade: P/C Insurance Overview

$9.8$9.5$9.2$9.7$9.7$10.3$11.5$12.5$13.6$14.9$16.4$16.9$17.5

$22.1$22.2

$21.8$21.6

$22.6$22.8$22.9$23.9$24.6

$22.3$18.1$17.6

$19.1$20.8

$21.6

-0.9%

-2.7%

+0.5%

+8.3%

+0.9%

+5.5%

+2.8%

+0.6%

+3.6%

+3.0%

+10.1%

+9.6%

+8.8%

+8.7%

+11.7%

+5.9%

+1.7%

+4.9%

-2.8%

-3.1%

+1.0%

+6.8%

5

7

9

11

13

15

17

19

21

23

25

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

IndemnityClaim Cost ($ 000s)

Accident Year

Workers Comp Indemnity Claim Costs: Sharper Increase in 2018

Average indemnity costs per claim were up 3% in

2018 to $24,600

Average Indemnity Cost per Lost-Time Claim

+3%

+4.4

%

Cumulative Change = 151%(1991-2018p)

2018p: Preliminary based on data valued as of 12/31/2018.1991-2017: Based on data through 12/31/2017, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

+0.4

%

+1.3

%+3

.2%

Page 28: The Dawning of a New Decade: P/C Insurance Overview

$8.1$8.2$8.1$8.8$8.9$9.6$10.9$11.8$13.0$13.9$15.7$17.0$18.3

$24.2$25.2

$25.8$26.0

$27.4$27.2$27.6$28.7$28.9

$26.5$20.5$19.2

$21.7$22.9

$25.2

0.04

0.04

+3.7

+1.9

+0.8%

-0.2%

+4.2%

+5.6% +2.4%

+5.5%

+7.0%

+4.7%

+8.1%

+7.9%

+13.6%

+6.7%

+10.2%

+8.3%

+10.1%

+7.4%

+5.1%

+9.0%

+2.1%

+1.3%

+6.8%

+5.8%

0

5

10

15

20

25

30

35

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

MedicalClaim Cost ($ 000s)

Accident Year

Workers Comp Medical Claim Costs: Pace of Increase Decelerated in 2018

Average indemnity costs per claim were up just 1% in 2018 to $28,900, following a sharp 4.1% increase in 2017

Average Medical Cost per Lost-Time Claim

+1%

+4.1

%

Cumulative Change = 257%(1991-2018p)

2018p: Preliminary based on data valued as of 12/31/2018.1991-2017: Based on data through 12/31/2017, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

-1.0

%

+1.5

%

Page 29: The Dawning of a New Decade: P/C Insurance Overview

INVESTMENTS: THE NEW REALITY

Investment Performance Is a Key Driver of Insurer Profitability

Page 30: The Dawning of a New Decade: P/C Insurance Overview

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20*

,*Through Jan. 10, 2020.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina

Tech Bubble Implosion

Financial Crisis

Annual Return

Energy Crisis

2019: +28.9%*2018: -6.2%

S&P 500 Index Returns, 1950–2020*

Fed Raises Rates

The S&P 500 was up 28.9% in 2019, the best year since 2013, following a decline of 6.2% in 2018. Trade, geopolitical tensions and election year

uncertainty will drive volatility in 2020.

Page 31: The Dawning of a New Decade: P/C Insurance Overview

Property/Casualty Insurance Industry Investment Income: 2000–2019E

$38.9$37.1$36.7

$38.7

$54.6

$51.2

$47.1$47.6$49.2

$48.0$47.3$46.4$47.2$46.6$48.9

$55.3$52.6

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* 19F

Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.7%) increase in 2015—though 2016 experienced

another decline. Gains in 2018-19 are overstated due to the TCJA 2017.*2018-19 figures are distorted by provisions of the TCJA of 2017.**Estimate based on annualized H1 actual figure of $13.158B. Figure is likely also distorted by the TCJA of 2017.1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.

($ Billions)

Investment income is slowly recovering. 2018/19 figures

overstate improvement due to provision of the TCJA 2017

Page 32: The Dawning of a New Decade: P/C Insurance Overview

Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2020F*

4.4

4.0

4.6 4.5

3.7 3.83.7

3.43.7

3.2 3.1 3.1 3.2 3.2 3.2

4.6

4.23.9

2.5

3.0

3.5

4.0

4.5

5.0

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19E 20F

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 through 2018 halted the slide in

yields, but rate cuts in 2019 will preclude future gains

Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017-19 figures are from ISO. 2020F is from the Risk and Uncertainty Management Center, Univ. of South Carolina.

(Percent) Investment yields remained depressed--

down about 140 BP from pre-crisis levels.

Page 33: The Dawning of a New Decade: P/C Insurance Overview

Interest Rate Forecasts: 2018–2021F

2.0% 2.2% 2.3%2.0% 2.0%

1.6% 1.7%

2.9%

0%

1%

2%

3%

4%

18 19 20F 21F 18 19 20F 21F

A full normalization of interest rates is unlikely until the mid-2020s, if that, nearly 20 years after the onset of the financial crisis.

Yield (%)

Sources: Federal Reserve; Wells Fargo Securities (2020-21F); University of South Carolina.

3-Month Treasury 10-Year TreasuryThe Fed’s pause in

rate hikes, its decision to

maintain large bond holdings and a weaker global economy are suppressing

interest rates—again. Significant political pressure

from President Trump could be a

factor as well.

Page 34: The Dawning of a New Decade: P/C Insurance Overview

Annual Inflation Rates, (CPI-U, %),1990–2020F

2.8 2.6

1.51.9

3.33.4

1.3

2.52.3

3.0

3.8

2.8

3.8

-0.4

1.6

3.2

2.11.51.6

0.1

1.3

2.12.42.3

2.62.9

2.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19E20F

Sources: US Bureau of Labor Statistics; Well Fargo Securities, 12/19 (forecasts).

Inflation remains remarkably tame despite a tight US labor market, modest economic growth, rising energy prices, tariff-induced price increases and a

rapidly rising federal budget deficit.

Annual Inflation Rates (%)

Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the

commodity bubble reduced inflationary pressures in 2009/10

Inflationary expectations are

consistent with the Fed’s 2% target, but trade wars or

geopolitical threats could

increase inflationary

pressure

Trade War Alert

A sustained trade war with China could

increase inflation by 0.1 to 0.4 points as

price increases are

passed through to consumers

Page 35: The Dawning of a New Decade: P/C Insurance Overview

THE ECONOMY

The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure

Base Across Most Lines

The Links Between the Economy and the P/C Insurance Industry Are Strengthening

Page 36: The Dawning of a New Decade: P/C Insurance Overview

Length of US Business Cycles, 1929-Present*

43

13 8 11 10 8 10 11 166

168 8

19

50

80

3745

39

24

106

36

58

12

92

120

73

127

0102030405060708090

100110120130

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

ContractionExpansion Following

Duration (Months)

Month Recession Started

Average Duration*Recession = 13.4 MonthsExpansion = 63.8 Months

* As of Jan. 2020, inclusiveSources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.

The current economic

expansion (as of Jan. 2020)

is now the longest in US history (began

July 2009)

Page 37: The Dawning of a New Decade: P/C Insurance Overview

US Real GDP Growth*

* Estimates/Forecasts from Wells Fargo Securities.Source: US Department of Commerce, Wells Fargo Securities 12/19; Center for Risk and Uncertainty Management, University of South Carolina.

2.7%

1.8%

-1.3%

-2.8%

2.5%

2.2% 2.7%

4.5%

0.8% 1.4%3.5%

2.1%

1.2%3.1% 3.2%

2.9%

2.5% 3.5%

2.9%

1.1%3.1%

2.2%

1.5%

1.4% 2.5%

2.1% 2.3%

2.1% 2.2% 2.4%

2.4%

1.6% 2.1%

1.8%

4.1%

1.1% 1.8% 2.5% 3.6%

3.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

2000

2001

2002

2003

2004

2005

2006

2007

20

0820

0920

1020

1120

1220

1320

1420

1516

:1Q

16:2

Q16

:3Q

16:4

Q17

:1Q

17:2

Q17

:3Q

17:4

Q18

:1Q

18:2

Q18

:3Q

18:4

Q19

:1Q

19:2

Q19

:3Q

19:4

Q20

:1Q

20:2

Q20

:3Q

20:4

Q21

:1Q

21:2

Q21

:3Q

21:4

Q

Demand for Insurance Should Increase in 2019 as GDP Growth Continues at a Steady Pace and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

“Great Recession”

began in Dec. 2007

Financial Crisis

2018 GDP benefited from tax reform, but effects

wane in 2019-2020

Tax cuts help jolt growth from early 2018 to Q1 2019, but effects eventually waned.

Trade war, weaker global growth are adversely affecting US GDP growth in

2019/20.

Page 38: The Dawning of a New Decade: P/C Insurance Overview

The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2019:Q2

Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; ISO; I.I.I.; Risk and Uncertainty Management Center, University of South Carolina.

-6%

-4%

-2%

0%

2%

4%

6%

8%

2008:Q1

2008:Q3

2009:Q1

2009:Q3

2010:Q1

2010:Q3

2011:Q1

2011:Q3

2012:Q1

2012:Q3

2013:Q1

2013:Q3

2014:Q1

2014:Q3

2015:Q1

2015:Q3

2016:Q1

2016:Q3

2017:Q1

2017:Q3

2018:Q1

2018:Q3

2019:Q1

DWP y-o-y change y-o-y nominal GDP growth

DWP and GDP growth both appear to be decelerating

through H1 2019

Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably

linked to economic performance.

Page 39: The Dawning of a New Decade: P/C Insurance Overview

Consumer Confidence Index: Jan. 1987– Dec. 2019

Source: The Conference Board; Wells Fargo Research.

Outlook: Consumer confidence was shaken by financial volatility in late 2018/early 2019—but rebounded quickly. Consumers remain optimistic about the future, which is consistent with expectations for stronger economic growth (consumers account for nearly 70% of all

spending in the economy). Should positively influence growth of insurable exposures. Mounting trade tensions are a major threat to consumer confidence.

Consumer Confidence Index remains strong but has generally dropped in recent months. Mounting

trade tensions have taken a toll on expectations

Extremely strong labor market conditions are

buoying consumer confidence related to

their Present Situation

Consumer Expectations have been adversely

impacted by trade turmoil, home price affordability

Page 40: The Dawning of a New Decade: P/C Insurance Overview

NFIB Small Business Optimism Index:Jan. 1988–Nov. 2019

Source: National Federal of Independent Business; Wells Fargo Research.

Outlook: Small businesses are cautiously optimistic about the future

Trade wars and associated uncertainty introduced significant uncertainty in to the

markets in 2019

Small Business Optimism weakened in 2019 on fears of greater economic uncertainty (esp. trade war fears). Tax reform, reduced

regulations and strong sales have driven

investment, hiring and exposures.

Page 41: The Dawning of a New Decade: P/C Insurance Overview

NFIB Small Business Capital Spending and Expansion Plans: Jan. 1988–Nov. 2019

Source: National Federal of Independent Business; Wells Fargo Research.

Small businesses are scaling back on capital spending and hiring plans

Page 42: The Dawning of a New Decade: P/C Insurance Overview

New Private Housing Starts, 1990-2025F

1.48

1.47 1.62 1.64

1.57 1.60 1.71 1.85 1.96 2.07

1.80

1.36

0.91

0.55 0.59 0.610.78 0.92 1.00 1.11 1.17 1.20 1.25 1.26 1.29 1.31 1.37 1.41 1.45

1.45

1.351.46

1.29

1.20

1.011.19

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 13 14 15 16 17 18 19 20F21F22F23F24F25F

Source: U.S. Department of Commerce; Wells Fargo Securities (12/19 for 2020-21F), Blue Chip Economic Indicators (3/19 for 2022-25F); University. of South Carolina, Center for Risk and Uncertainty Management..

Insurers Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk

Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

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, and demographics should continue to stimulate new

home construction, but higher mortgage rates and a slowing

economy will slow the pace of growth

(Millions of Units)

Page 43: The Dawning of a New Decade: P/C Insurance Overview

Homeowners InsuranceNet Written Premium, 2000–2019F

53

$45.8$49.5

$52.2$54.8$55.2

$61.1$63.5

$66.9$71.9

$77.0$79.9$81.2

$82.8$88.2$90.5

$57.5$56.2

$32.4

$40.0

$35.2

$30$35$40$45$50$55$60$65$70$75$80$85$90$95$100

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F

Sources: A.M. Best; USC RUM Center.

$ Billions Homeowners insurance NWP continues to rise (up 179% 2000-2019E). Reasons include rate robust

residential real estate construction in some regions, rate increases (especially in coastal zones, CA), ITV

endorsements (e.g., “inflation guards”)

The Homeowners line will generate about $2B

in new premiums annually through 2019

Page 44: The Dawning of a New Decade: P/C Insurance Overview

Auto/Light Truck Sales, 1999-2023F

55

16.9

16.5

16.1

13.2

10.411.612.7

14.4 15

.5 16.4 17

.417.5

17.1

17.2

16.9

16.4

16.4

16.2

16.4

16.5

16.7

16.7

16.9

16.617.117.517.8

17.4

910111213141516171819

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20F 21F22F22F 23F24F25F

(Millions of Units)

New auto/light truck sales fell to the

lowest level since the late 1960s.

Job growth and improved credit market conditions boosted auto

sales to near record levels by 2015/16

Truck, SUV purchases remain strong as smaller car sales slump

Yearly car/light truck sales are slowing slightly, as demand tapers. But shifting consumer preferences for more expensive trucks, SUVs and crossovers will

contirbue continued exposure growth. PP Auto premium might grow by 3.5% - 5%.Source: U.S. Department of Commerce; Well Fargo Securities (12/19 for 2020-21F); Blue Chip Economic Indicators (3/19 for 2022-25F); Univ. of South Carolina, Center for Risk and Uncertainty Management.

Page 45: The Dawning of a New Decade: P/C Insurance Overview

US Unemployment Rate Forecast: 2007:Q1–2020:Q44.5%

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%

7.7%

7.6%

7.3%

7.0%

6.6%

6.2%

6.1%

5.7%

5.6%

5.4%

5.2%

5.0%

4.9%

4.9%

4.9%

4.7%

4.7%

4.4%

4.3%

4.1%

4.1%

3.9%

3.8%

3.8% 3.9%

3.6%

3.6%

3.5% 3.6%

3.5% 3.6%

3.6%

9.6%

3%

4%

5%

6%

7%

8%

9%

10%

11%

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

15:Q1

15:Q2

15:Q3

15:Q4

16:Q1

16:Q2

16:Q3

16:Q4

17:Q1

17:Q2

17:Q3

17:Q4

18:Q1

18:Q2

18:Q3

18:Q4

19:Q1

19:Q2

19:Q3

19:Q4

20:Q1

20:Q2

20:Q3

20:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Wells Fargo Securities (12/19 edition); Risk and Uncertainty Management Center, University of South Carolina.

The unemployment rate is expected to remain

below 4% through 2021 but trade war could change this outlook.

At 3.5%, the unemployment

rate is at its lowest reading

in 50 years.

Page 46: The Dawning of a New Decade: P/C Insurance Overview

63

Catastrophe Loss Update: Major Driver of Rate Pressure

CAT Losses for the Decade Just Ended Were Up Materially—Costliest Ever

Primary, Reinsurance and Retro MarketsAll Impacted

63

Page 47: The Dawning of a New Decade: P/C Insurance Overview

U.S. Inflation-Adjusted Cat Losses

*2018: Inflation-adjusted estimate, subject to change. 2010s is average of 2010 to 2018.

Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.

4037

79

104

50

1980s:$5 B

1990s: $15 B

2000s: $25 B2010s: $35 B

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

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 14 15 16 17 18*

Bill

ion

s, 2

01

8 $

Average forDecade Hurricane

Andrew WTC

Katrina, Rita, Wilma

2017 – Worst year of the decade and EVER for U.S. Insured Catastrophe Losses. Average Insured Loss per Year for 1980-2018 is $19.3 B.

Harvey, Irma, Maria

Page 48: The Dawning of a New Decade: P/C Insurance Overview

US Insured Catastrophe Losses by Decade: 1980s – 2010s*

65

$15

$25

$35

$5

$33

$19

$9

$2$0

$5

$10

$15

$20

$25

$30

$35

$40

1980s 1990s 2000s 2010s 1980s 1990s 2000s 2010s

Serious efforts to mitigate against climate risk must be led by government at all levels. Requires enormous long-term infrastructure

investments that funded primarily through debt

($ Bill)

*2010s figures is the average of the years 2010-2018.Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.

Not Inflation Adjusted Inflation-Adjusted

Inflation-adjusted

insured CAT losses are

rising by $10 billion each

decade

Page 49: The Dawning of a New Decade: P/C Insurance Overview

Top 20 Most Costly Disastersin U.S. History—Katrina Still Ranks #1

67

(Insured Losses, 2017 Dollars, $ Billions)*

$9.3 $9.7 $10.0$11.7$14.2$14.2$15.9

$18.0$19.8$21.9

$25.3$26.0$27.1

$51.6

$5.9 $6.0 $7.1 $7.5 $7.9 $8.3

$0

$10

$20

$30

$40

$50

$60

Jeanne(2004)

Frances(2004)

Rita (2005)

Torn./T-Storms (2011)

Torn./T-Storms (2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Michael(2018)

Wilma(2005)

Camp Fire(2018)

Ike (2008)

Harvey (2017)

Irma (2017)

Sandy(2012)

Maria (2017)

Northridge(1994)

9/11 (2001)

Andrew(1992)

Katrina(2005)

8 of the top 20 mostly costly insured events in US history occurred during the 2010s

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

17 of the 20 Most Expensive Insurance Events in US History Have Occurred Since 2004

*Estimated.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.

Page 50: The Dawning of a New Decade: P/C Insurance Overview

Homeowners Insurance Combined Ratio: 1990–2019F

68

113.0

117.7

158.4

113.6

101.0 109.4

108.2

111.4 121.7

109.3

98.2

94.4 100.3

89.0 95.6

116.6

105.8

106.9122.3

104.1

90.4

92.4

91.8

93.2107.2

103.9

98.0

118.4

112.7 121.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19E

1

Homeowners Performance Improved in 2019, Following the Cat-Impacted Years of 2017 and 2018

Hurricane Ike

Hurricane SandyRecord

tornado activity

Hurricane Andrew

Sources: A.M. Best (1990-2018F); USC RUM Center for 2019E.

Hurricanes Harvey,

Irma, Maria, CA Wildfires

CA Wildfires,

Hurricanes Michael, Florence

Page 51: The Dawning of a New Decade: P/C Insurance Overview

71

0

50

100

150

200

250

300

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 1920E

(Percent)

US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions

Post-Andrew surge

US Property Catastrophe Rate-on-Line Index: 1990 – 2020E*

*As of January 1 each year.Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/us-property-cat-rate-on-line-index

Post-9/11 Adjustment

Post Katrina, Rita, Wilma

period

Post-Ike adjustment Adjustment

following record tornado losses in 2011 and Sandy in

2012

Record CATs in 2017 and high CAT losses in 2018 pressured US

reinsurance prices in recent years (+3.3% in 2019, +6.4% in 2018,

+4.0% in 2020E)

2020 Global RoL+5%

Page 52: The Dawning of a New Decade: P/C Insurance Overview

Non-Marine Retrocessional CAT Excess-of-Loss Index, 1992 – 2020*

*Risk adjusted.Source: Hyperion X via Artemis.bm accesses 1/12/20 at: https://www.artemis.bm/news/retrocession-rates-up-as-much-as-40-in-january-renewals-hyperion-x/

Index: 1992 = 100Average XoL

Rate on Line up ~ 20% in 2020. Factors driving

increase include reduced

availability of capital, ILS

losses, trapped collateral

Page 53: The Dawning of a New Decade: P/C Insurance Overview

73

Commercial Lines Pricing & Cyclicality

Pricing Pressures Are Intense but Rational

73

Page 54: The Dawning of a New Decade: P/C Insurance Overview

Commercial Lines Combined Ratio, 1990-2019F*

109.

411

0.2

118.

810

9.5 11

2.5

110.

210

7.6

104.

110

9.7

110.

2

102.

5 105.

491

.194

.510

4.4

100.

7 103.

8 107.

310

5.4

96.3

96.0

95.2

99.0

102.

197

.697

.5

102.

0

111.

1

112.

3

122.

3

90

95

100

105

110

115

120

125

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

74

Commercial lines underwriting performance improved

materially in 2018/19 in the wake of record CATs in 2017

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2018). Risk and Uncertainty Management Center, Univ. of South Carolina (2019F).

Page 55: The Dawning of a New Decade: P/C Insurance Overview

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19F

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%

Post-9/112002: 22.4%

Great Recession:2009: -9.0%

ROE

2019E: +3.1%

Commercial Lines NPW Premium Growth:1975 – 2019F

Recessions:1982: 1.1%

Commercial lines is prone to far more cyclical volatility that

personal lines.

1988-2000: Period of

inter-cycle stability

Commercial lines premium

growth has been sluggish

for years, reflecting weak

pricing environment.

Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute; Univ. of South Carolina Center for Risk and Uncertainty Management, ISO.

Post-Hurricane Andrew Bump:

1993: 6.3%

Post Katrina Bump:

2006: 7.7%

2016: -1.1%

2018: +14.4%

Page 56: The Dawning of a New Decade: P/C Insurance Overview

CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2019:Q3*

76

-0.1% 0.9% 2.7

% 4.4%

4.3%

3.9% 5.0%

5.2%

4.3%

3.4%

2.1%

1.5%

-0.5%

0.1%

-0.7%

-2.3%

-3.3%

-3.1% -2.8%

-3.7%

-3.9% -3.2%

-3.3% -2.5%

-2.8% -1.3%

0.3% 1.7% 2.4% 3.5% 5.2% 6.2%

-2.9%

1.6%

1.5%

-16%

-11%

-6%

-1%

4%

9%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

2Q19

*Latest available.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; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Largest increase since 2003 for some accounts

(Percent)

Renewals turned positive in late 2011

in the wake of record tornado

losses and Hurricane Sandy

Poor results in 2017/18 seem to have exerted enough

pressure on markets to push overall rates up by +6.2% as

of Q3 2019

Page 57: The Dawning of a New Decade: P/C Insurance Overview

Change in Commercial Rate Renewals, by Line: 2019:Q3

77Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

3.2% 3.3% 3.7% 4.4% 4.6% 5.0%

8.8% 9.1% 9.8%

-2.3%

0.6% 0.8% 1.4% 1.7% 2.3%

-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

10.0%12.0%

Wor

kers

Com

p

Sur

ety

Terro

rism

Cyb

er

Bro

ker E

&O

Mar

ine

EP

L

Floo

d

Bus

ines

sIn

terru

ptio

n

Con

stru

ctio

n

Gen

eral

Liab

ility

D&

O

Com

mer

cial

Pro

perty

Com

mer

cial

Aut

o

Um

brel

la

Commercial Property, Business Interruption,

Flood are reflecting record CAT losses and

pressure from reinsurance markets

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Umbrella now leads all major commercial lines in terms of rate gains, exceeding Commercial Auto and CP for

the first time in Q3 2019

Page 58: The Dawning of a New Decade: P/C Insurance Overview

Change in Commercial Auto Rate Renewals:2011:Q1 to 2019:Q3

78Source: Council of Insurance Agents and Brokers; Barclay’s Capital.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Perc

enta

ge C

hang

e (%

)

Commercial Auto rate gains continued to

accelerate into late 2019

Page 59: The Dawning of a New Decade: P/C Insurance Overview

Commercial Auto Combined Ratio: 1993–2019E

79

112.1

112.0

113.0

115.9

102.7

95.2

92.9

92.1

92.4 94.1 96.8 99.1

97.8103.4 106.8

106.7

103.3 108.8

110.5

111.1

108.0

106.0

118.1

115.7

116.2

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 12 13 14 15 16 17 18 19E

Commercial Auto Results Are Challenged as Rate Gains Have Yet to Fully Offset Adverse Frequency and Severity Trends

Sources: A.M. Best (1990-2018); Center for Risk and Uncertainty Management, University of South Carolina (2019E).

Page 60: The Dawning of a New Decade: P/C Insurance Overview

Change in Commercial Property Rate Renewals:2011:Q1 to 2019:Q3

80Source: Council of Insurance Agents and Brokers; Barclay’s Capital.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Perc

enta

ge C

hang

e (%

)

Commercial Property rate gains continued to accelerate into late 2019

Page 61: The Dawning of a New Decade: P/C Insurance Overview

Workers Compensation Combined Ratio: 1994–2018P

81

102.0

97.0 100.0

101.0

112.6

108.6

105.1

102.7

98.5 10

3.5

104.5 110.6 115.0

115.0

109.0

102.0

100.0

94.0

94.0

89.0

84.0

121.7

107.0115.3

118.2

80859095100105110115120125130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

Workers Comp Is an Example of a Line that Was Recently Restored to Health Through the Return of Rate Adequacy as

Well as Declining Claim FrequencySources: A.M. Best (1994-2009); NCCI (2010-2018P) and are for private carriers only..

WC results have improved markedly since 2011. The 2018 combined ratio is the

best in at least 80 years

Page 62: The Dawning of a New Decade: P/C Insurance Overview

Change in Workers Comp Renewals:2011:Q1 to 2019:Q3

82Source: Council of Insurance Agents and Brokers; Barclay’s Capital.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Perc

enta

ge C

hang

e (%

)

Workers Comp rates continue to fall, consistent with

strong underwriting performance

Page 63: The Dawning of a New Decade: P/C Insurance Overview

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2019:Q3

83Source: Council of Insurance Agents and Brokers; Barclay’s Capital. University of South Carolina, Risk and Uncertainty Management Center .Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Perc

enta

ge C

hang

e (%

)

KRW Effects

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

Pricing turns positive in early

2018, after falling for the past 3 ½ years

2019:Q3: +6.2%

Trough = 2007:Q3 -13.6%

Page 64: The Dawning of a New Decade: P/C Insurance Overview

88

Tort Environment: The Return of Social Inflation?

88

Tort Costs Are Under Pressure from a Variety of Different Factors

Page 65: The Dawning of a New Decade: P/C Insurance Overview

The Nation’s Judicial Hellholes: 2019 – 2020

89Source: American Tort Reform Association; Risk and Uncertainty Management Center, Univ. of South Carolina.

Florida

IllinoisCook, Madison

& St. Clair Counties

Louisiana

Watch Listn CO Supreme Courtn Floridan MD General Assem.n MT Supreme Courtn PA Supreme Courtn WV Supreme Ct.

Dishonorable Mention

n AK Supreme Courtn KS Supreme Courtn OR Supreme Court

Minnesota Supreme Ct./Twin

Cities

NYC

St. LouisPhiladelphia

Court of Common Pleas

New Jersey Legislature

Oklahoma

California

Page 66: The Dawning of a New Decade: P/C Insurance Overview

Multi-District Litigation (MDL), Current Cases, as of Oct. 2019

Source: Judicial Panel on Multidistrict Litigation from Assured Research,12/19; Risk and Uncertainty Management Center, Univ. of South Carolina.

65 out of the 195 current MDL are

related to Products Liability, with

antitrust coming second at 48 (25%)

ExamplesRoundup (Monsanto)Talcum Powder (J&J)Opiates (Purdue, etc.)

Deepwater Horizon (BP)Diesel Deception (VW)

Page 67: The Dawning of a New Decade: P/C Insurance Overview

Average Jury Awards, 1999 – 2017 (latest available)

$725 $747 $756$800 $799

$1,018$1,022$950

$1,077$1,046

$654

$806

$1,098$1,010$1,042

$1,132

$1,355

$1,847

$500

$700

$900

$1,100

$1,300

$1,500

$1,700

$1,900

$2,100

1999 2001 2003 2005 2007 2010 2012 2014 2016

Source: Jury Verdict Research; Risk and Uncertainty Management Center, Univ. of South Carolina.

The average jury award reached an all-time record high in 2017.

Median Award = $50,000 (also a record)

Page 68: The Dawning of a New Decade: P/C Insurance Overview

Average Jury Awards, 1999 - 2017

Source: Thompson Reuters, Current Award Trends in Personal Injury (58th ed.); Ins. Info, Inst.; Risk and Uncertainty Management Center, Univ. of South Carolina.

Products Liability, Business Negligence and Med Mal generate

the largest awards

Page 69: The Dawning of a New Decade: P/C Insurance Overview

Defense Costs and Cost Containment Expense as a Percent of Incurred Losses ($000), 2016 - 2018

Note: Figures are net of reinsurance and exclude state funds.Source: NAIC sourced from S&P Global Markets; Ins. Info, Inst.; Risk and Uncertainty Management Center, Univ. of South Carolina.

Personal Auto has seen the sharpest increase in

recent years

Page 70: The Dawning of a New Decade: P/C Insurance Overview

Shareholder Class Action Lawsuits*

Source: Stanford University School of Law (securities.stanford.edu); Risk and Uncertainty Management Center, Univ. of South Carolina.

164 202

163231

188

111173241

209 216

498

266

227 238

182

119 17

6 222

168

175 188

151 165

168 208271

412

402

404

0

100

200

300

400

500

600

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Shareholder litigation is surging, in part due to suits associated with M&A activity. Major

implications for D&O coverage.

IPO FlopsCyber

Increase in M&A

Page 71: The Dawning of a New Decade: P/C Insurance Overview

95

Talent Wars

Can the Insurance Industry Win the War for Talent?

Insurance is Not the Only Industry that is Interested in Hiring New Talent, Especially those with

Data/Analytics Skills

95

Page 72: The Dawning of a New Decade: P/C Insurance Overview

Can Insurers “Win” the War on Talent?n Hiring Needs: The industry has a stated need of hiring

some 400,000 people over the next several years

n Job Market is Tight: Insurers are doing a better job focusing their efforts—which need to be concerted

n Inclusive Approach: The industry’s approach has been to suggest that virtually everyone, from any background can build a rewarding career in the insurance industry

n So Far, So Good: To date, the industry’s diligence and efforts seem to be meeting with successw Insurers seem generally to be successful in their overall

recruiting efforts

n But What Really Works? A few key insights

Page 73: The Dawning of a New Decade: P/C Insurance Overview

Dr. Bob’s Top 5 “Do’s” for Recruiting RMI Talent1. Articulate a Career Path (at First Contact w/Student)

w Students want to see opportunities for career advancement and that you’re planning to make an investment in them

w Suggestion: Include an experienced employee on recruiting trips (5-15 years of experience, though not necessarily all with the recruiting company), not just HR people. Students can identify better with these individuals and experienced employees can share their personal experiences and career paths. Students love this.

2. Get an Early Startw With the unemployment rate hovering around 3.5% (<2.5% for college grads), the

best students are getting jobs sooner and sooner. Top students now have multiple strong offers in September of their senior year. By December, the “cream of the crop” has been recruited.

w Get into classrooms! Career fairs can be a zoo. Getting into the classroom, usually when students are juniors and first-semester seniors can be very effective for recruitment of new grads as well as interns. Social media is helpful too.

Page 74: The Dawning of a New Decade: P/C Insurance Overview

Dr. Bob’s Top 5 “Do’s” for Recruiting RMI Talent3. Institute a Formal Training Program for New Hires

wStudents want to hit the ground running and a formal training program after hiring is one of the best ways to quickly acclimate new hires to their new work environment while also making them feel welcome and comfortable with their new duties a co-workers

4. Institute an Internship ProgramwMany employers today have internship programs, but not all. An internship

program—even if very small—gives you a leg up on recruiting and many of the top students accept positions with a company for whom they interned.

Page 75: The Dawning of a New Decade: P/C Insurance Overview

Dr. Bob’s Top 5 “Do’s” for Recruiting RMI Talent

5. Support RMI Education—Consistently wStudents who major in RMI are already indicating an interest in an RMI careerwSupport RMI programs and education through scholarships, internships,

targeted contributions to a university’s RMI program, executive visits to classrooms, participation by industry executives in courses taught partly by faculty and partly by the executive (e.g., one week). A larger step would include endowing a faculty chair or professorship dedicated to the study of RMI, which would then bear the name of that company.

wGet to know a professor or two! Nobody knows these students better. This will give you an edge in recruiting new hires and interns. This relationship can also help you get into classrooms when students are making key decisions related to careers and employers.

Page 76: The Dawning of a New Decade: P/C Insurance Overview

1. Don’t Fail to Recognize that Students Will Hedge Their Bets with RMI-Industry RecruiterswYou’re not recruiting in a vacuum. Most business school students double

major and will have had two internships. In today’s tight job market, understand that you’re not just in competition with other insurers and brokers, you’re in competition with banks, investment banks, accounting and consulting firms, pension funds, investment advisory firms, real estate management firms and increasingly technology firm—and many more

Dr. Bob’s Top 3 “Don’ts” for RMI Talent Recruiting

Page 77: The Dawning of a New Decade: P/C Insurance Overview

2. Don’t Pigeon Hole Studentsw Limiting entry level hires to a claims and underwriting track is costing you quality

talent. Consider more direct hiring into Accounting, Finance, Marketing, Data Analytics and other functions. Exposing students to the core underwriting and claims functions is critical to learning the business, but if the student’s major (or second major or minor) was in another discipline, the attraction of a competing offer from a bank, investment firm, accounting firm or consulting firm may be too much to resist. Help them apply and channel their skills, talents and interests while also training them in the “art” of insurance.

3. Don’t Be ParochialwAn astounding number of insurers—even large ones—don’t look too far beyond

their headquarters or primary bases of operation for talent. This is true both for internships and entry level positions. There is sometimes a bias to recruit at local universities (perhaps because it is easier and less expensive to do so) which can lead (inadvertently) to a bias against hiring quality talent from other institutions. Sometimes also a bias to hire from same school managers attended.

Dr. Bob’s Top 3 “Don’ts” for RMI Talent Recruiting

Page 78: The Dawning of a New Decade: P/C Insurance Overview

1. P/C Insurers (Multi-Line, Commercial, Specialty, Personal Lines, Lloyd’s Syndicates)

2. Banks & Lending Institutions (National/Rgnl. Banks, Ford Mtr. CreditàCredit Risk Functions)

3. Brokers (National, Regional, Specialty, Wholesale)

4. Life/Health/Disability/A&H Insurers

5. Consulting Firms (E&Y, PwC, Deloitte, Bain, etc.àfinancial services/tech risk)

6. Wealth Management Firms

7. Real Estate Management Firms (e.g., Cushman & Wakefield)

8. Government & Defense Contractors (e.g., Boeing, Northrup-Grumman)

9. Logistics Firms (e.g., UPS)

10. Tech Firms (e.g., IBM, Amazon, Start-ups)

n Biggest Problem Area: Independent/Captive Agencies

Who’s Hiring the Most RMI Grads (Includes Double Majors)

Page 79: The Dawning of a New Decade: P/C Insurance Overview

Can Insurers Win the War for Talent?

Source: Business Insurance, 2017 Risk Management and Insurance Schools Ranking and Directory,

The number of RMI

majors is up sharply

Overall employment

is up too

Page 80: The Dawning of a New Decade: P/C Insurance Overview

104

Number of RMI Majors at USC,by Academic Year

366350

292

0

50

100

150

200

250

300

350

400

2016-17 2017-18 2018-19

USC’s RMI program has experienced significant growth in recent years,

becoming the 3rd largest program in the US, according to Business Insurance

Academic Year

Page 81: The Dawning of a New Decade: P/C Insurance Overview

105

Enrollment in USC’s Intro to RMI Course

405350

282258

050100150200

250300350400450

2015-16 2016-17 2017-18 2018-19

Enrollment in USC’s Introduction to Risk Management & Insurance course is at a record

high—up 57% over the past 3 years. This reflects growth in the number of RMI majors, increased awareness of the importance of RM across all

business disciplines and increased employment, internship and scholarship opportunities

Academic Year

Page 82: The Dawning of a New Decade: P/C Insurance Overview

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email me at [email protected]

106