robert p. hartwig, ph.d., cpcu - iii · aegis 2014 policyholders’ conference us insurance mergers...

AEGIS 2014

POLICYHOLDERS’ CONFERENCE

AEGIS 2014


U N C E R T A I N T I M E S : E C O N O M I C & I N S U R A N C E I N D U S T R Y

O U T L O O K F O R 2 0 1 4 A N D B E Y O N D

Robert P. Hartwig, Ph.D., CPCU

President & Economist

Insurance Information Institute

AEGIS 2014


Property Casualty Insurance Industry:

Financial Update

2013 was a welcome respite from

near-record catastrophe activity

2014: too soon to tell

AEGIS 2014


P/C Industry Net Income after Taxes

2005 ROE*= 9.6%

2006 ROE = 12.7%

2007 ROE = 10.9%

2008 ROE = 0.1%

2009 ROE = 5.0%

2010 ROE = 6.6%

2011 ROAS1 = 3.5%

2012 ROAS1 = 5.9%

2013 ROAS1 = 10.3%

2014 ROAS1 = 8.4%

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$2

0,5

59

-$6,970

$3

,04

6

$3

0,0

29

$3

8,5

01

$4

4,1

55

$65,7

77

$6

2,4

96

$3

,04

3

$2

8,6

72

$3

5,2

04

$1

9,4

56 $

33

,52

2

$6

3,7

84

$1

3,6

54

-$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:Q

1

Net income rose strongly (+81.9%) in

2013 vs. 2012 on lower CATs, capital gains

$ Millions

2014 is off to a slower start

ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 8.2% ROAS through 2014:Q1, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

Sources: A.M. Best, ISO; Insurance Information Institute

1991 – 2014:Q1

AEGIS 2014


-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

Profitability Peaks & Troughs in the P/C Insurance Industry

1977: 19.0%1987: 17.3%

1997: 11.6% 2006: 12.7%

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

9 Years

History suggests next ROE peak

will be in 2016-2017

1975: 2.4%

2013 10.4%

2014:Q1 8.2%

1975 – 2014:Q1*ROE

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data.

Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.

Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

AEGIS 2014


P/C profitability is both by cyclicality and ordinary volatility

-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*

ROE: Property / Casualty Insurance by Major Event

Hugo

Andrew

Northridge

Lowest CAT losses in 15 years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial crisis*

Record tornado losses

Sandy

Low CATs

1987 – 2014:Q1Percent

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through Q1:2014.

Sources: ISO, Fortune; Insurance Information Institute.

AEGIS 2014


P/C Insurance Industry Combined Ratio

115.8

107.5

100.198.4

100.8

92.6

95.7

101.099.3

100.8

106.3

102.4

96.7 97.4

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

As recently as 2001, insurers paid out nearly $1.16 for every

$1 in earned premiums

Relatively low CAT losses,

reserve releases

Heavy use of reinsurance lowered

net losses

Relatively low CAT losses,

reserve releases

Avg. CAT losses, more

reserve releases

Higher CAT losses, shrinking reserve releases, toll of soft

market

Cyclical deterioration

Sandy impacts

Lower CAT losses

Best combined ratio since 1949 (87.6)

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014:Q1 = 97.3.

Sources: A.M. Best, ISO.

2001 – 2014:Q1*

AEGIS 2014


A 100 Combined Ratio Isn’t What It Once Was

* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:Q1 combined ratio including M&FG insurers is 97.3; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.

Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

Investment impact on ROEsCombined Ratio / ROE

97.5

100.6 100.1 100.8

92.7

95.7

101.299.5

101.0

106.5

102.4

96.7 97.4

14.3%15.9%

8.8%9.6%

12.7%

10.9%

4.3%

7.4% 7.9%

4.7%6.2% 9.8%

8.2%

0%

5%

10%

15%

20%

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:Q185

90

95

100

105

110

Combined Ratio ROE*

Lower CATs helped ROEs in 2013

A combined ratio of about 100 generates

an ROE of ~7.0% in 2012/13, ~7.5% ROE

in 2009/10, 10% in 2005 and 16% in 1979

Combined ratios must be lower in today’s depressed

investment environment to generate risk appropriate ROEs

AEGIS 2014


1975-78 1984-87 2000-03

-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

Net Premium Growth: Annual Change

1971 — 2014:Q1Percent

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.

2014:Q1: 3.6%2013: 4.6%2012: +4.3%

Shaded areas denote “hard market” periods

Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

AEGIS 2014


Average Commercial Rate Change, All Lines,

-0.1

%

-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

%

-0.1

% 0.9

% 2.7

% 4.4

%

4.3

%

3.9

%

5.0

%

5.2

%

4.3

%

3.4

%

2.1

%

1.5

%

-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

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

KRW effect

Pricing as of Q1:2014 was positive for the 11th consecutive quarter

Q2 2011 marked the last of 30th consecutive quarter

of price declines

1Q:2004 – 1Q:2014Percent

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

AEGIS 2014


Change in Commercial Rate Renewals, by Line

0.0%

0.7% 0.9%

1.5% 1.7%2.0%

3.3%

4.1%

4.9%5.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

CommercialProperty

BusinessInterruption

Surety GeneralLiability

Umbrella Construction CommercialAuto

WorkersComp

EPL D&O

D&O increases are large than any other line, followed by EPL and Workers Comp

2014:Q1Percentage Change (%)

Major commercial lines renewed generally upward in Q4:2014 for the 11th consecutive quarter; D&O, employment practices and workers comp leading the way; lower cat losses and falling reinsurance prices have pressured property coverages lower; low interest rates still exert upward rate pressure


Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

AEGIS 2014


Change in Commercial Rate Renewals, by Account Size

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; Q1:2014 renewals were up 1.5%; some insurers

posted stronger numbers.

Trough = 2007:Q3 -13.6%

1999:Q4 – 2014:Q1Percentage Change (%)


Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

AEGIS 2014


Cumulative Quarterly Commercial Rate Changes, by Account Size

1999:Q4 – 2014:Q11999:Q4 = 100


Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

Despite 11 consecutive quartersof gains (Q1:2014 = +1.5%), pricing today is where is was in mid-2001

(around 9/11), suggesting additional rate need going forward, esp. in light

of record low interest rates

AEGIS 2014


Policyholder Surplus

$4

87

.1

$4

96

.6

$5

12

.8

$5

21

.8

$5

17

.9

$5

15

.6

$5

05

.0

$4

78

.5

$4

55

.6

$4

37

.1

$4

63

.0

$4

90

.8

$5

11

.5

$5

40

.7

$5

30

.5

$5

44

.8

$5

59

.2

$5

66

.5

$5

59

.1

$538.6

$550.3

$5

70

.7

$5

67

.8

$5

83

.5

$5

86

.9

$6

07

.7

$6

14

.0

$6

24

.4

$6

53

.3

$6

62

.0

$400

$450

$500

$550

$600

$650

$700

06

:Q4

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09:Q

1

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

2007:Q3Pre-crisis peak

Surplus as of 3/31/14 stood at a record high $662.0B

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

The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2014in very strong financial condition

Sources: ISO, A.M .Best.

2006:Q4 – 2014:Q1$ Billions

AEGIS 2014


US Insurance Mergers and Acquisitions, P/C Sector

(1) Includes transactions where a U.S. company was the acquirer and/or the target.

Source: Conning proprietary database.

2002 – 2013 (1)$ Millions

$486

$20,353

$425

$9,264

$35,221

$13,615$16,294

3507.0

$6,419

$12,458

$4,651 $4,397

0

10

20

30

40

50

60

70

80

90

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Transaction value Number of transactions

M&A activity in the P/C sector remains below pre-crisis levels

AEGIS 2014


U.S. Insured Catastrophe Loss Update

2013 was a welcome respite from the high

catastrophe losses in recent years

…but 2014 was the 5th costliest winter on record

in the US

AEGIS 2014


U.S. Insured Catastrophe Losses

$1

4.2

$4

.9 $8

.1

$3

8.3

$8

.9

$2

6.8

$1

2.8

$11

.1

$3

.8

$1

4.5

$11

.7

$6

.2

$3

5.2

$7

.7

$1

6.5

$3

4.2

$7

4.5

$1

0.7

$7

.6

$2

9.6

$11

.6

$1

4.6

$3

4.1

$3

5.5

$1

2.9

$9

.5

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14*

$9.1 billion in insured CAT losses through June 30

$ Billions, $ 2013

*Through 6/30/14.

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.

2013 was a welcome respite from 2012, the 3rd costliest year for insured disaster losses in US history. Longer-term trend

is for more—not fewer—costly events

2012 was the 3rd most expensive year ever for

insured CAT losses

AEGIS 2014


Combined Ratio Points Associated with Catastrophe Losses0

.8 1.1

1.1

0.1

0.9

3.6

0.4

1.2

0.4 0

.8 1.3

0.3 0.4 0.7

1.5

1

0.4

0.4 0.7

1.8

1.1

0.6

1.4

2

1.3

2

0.5

0.5 0.7

3

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5

2.6

3.4

8.7 8.9

3.4

0

2

4

6

8

10

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013E

The catastrophe loss component of private insurer losses has increased sharply in recent decades

Catastrophe losses as a share of all losses reached

a record high in 2012

*2010s represent 2010-2013.

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.

1960 – 2013*Combined Ratio Points

Avg. CAT loss component of the combined ratio by decade

1960s: 1.04 1990s: 3.39

1970s: 0.85 2000s: 3.52

1980s: 1.31 2010s: 6.1E*

AEGIS 2014


Top 16 Most Costly Disasters in US History, Insured Losses

$4

.5

$5

.6

$5

.7

$6

.8

$7

.2

$7

.6

$7

.9

$8

.8

$9

.3

$11

.2

$13.6 $1

9.0 $2

4.2

$2

4.9

$2

5.9

$4

9.4

$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)

Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.

Hurricane Irene became the 12th most expensive hurricane in US history in 2011

2013 Dollars$ Billions

12 of the 16 most expensive events in US history have occurred over the past decade

Hurricane Sandy became the 5th

costliest event in US insurance history

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

AEGIS 2014


Top 10 States for Insured Catastrophe Losses

$1,995

$1,509

$1,190

$909 $907 $805 $773 $762

$677 $593

$0

$400

$800

$1,200

$1,600

$2,000

Oklahoma Texas Illinois Minnesota Colorado Mississippi Nebraska Georgia Indiana Louisiana

Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.

2013$ Millions

Oklahoma led the country in insured CAT losses in 2013

due largely to severe tornado activity

AEGIS 2014


Top 5 States by Insured Catastrophe Losses in 2012*

$9,756

$6,369

$2,318

$1,511 $1,440

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

New York New Jersey Texas Kentucky Colorado

*Includes catastrophe losses of at least $25 million.

Sources: PCS unit of ISO; Insurance Information Institute.

2012$ Billions

NY and NJ let the US in CAT losses in 2012 due Sandy

AEGIS 2014


Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss

41.1%

36.0%

6.4%

6.4%

4.8%3.8%1.4%

0.1%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 dollars.

2. Excludes snow.

3. Does not include NFIP flood losses

4. Includes wildland fires

5. 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, $159.1

Fires (4), $5.5

Events Involving Tornadoes (2),

$139.3

Winter Storms, $24.7

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.6 Other (5), $0.2

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 1993-2012 totaled $386.7B, an average of $19.3B per year or $1.6B per month

1994 – 20131

AEGIS 2014


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

22

19

81

6

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 128 natural disaster events in 2013

1980 – 2013Number of Events (Annual Totals 1980 – 2013)

Source: MR NatCatSERVICE

AEGIS 2014


Losses Due to Natural Disasters in the US

50

100

150

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

2013 CAT lossesOverall : $21.8BInsured: $12.8B

Indicates a great deal of losses are uninsured

(~40%-50% in the US) = growth opportunity

2013 losses were far below 2011 and 2012 and were

44% lower than the average from 2000-2012

1980 – 2013 (Overall and Insured Losses)2013 Dollars, $ Billions


Overall losses (in 2012 values) Insured losses (in 2013 values)

AEGIS 2014


As of December 31, 2013Number

of Events FatalitiesEstimated OverallLosses (US $m)

Estimated Insured Losses (US $m)

Severe Thunderstorm 69 110 16,341 10,274

Winter Storm 11 43 2,935 1,895

Flood 19 23 1,929 240

Earthquake & Geophysical 6 1 Minor Minor

Tropical Cyclone 1 1 Minor Minor

Wildfire, Heat, & Drought 22 29 620 385

Totals 128 207 21,825 12,794

Natural Disaster Losses in the United States, by Type, 2013

Source: Munich Re NatCatSERVICE

AEGIS 2014


Top 16 Most Costly World Insurance Losses, 1970 – 2013*

$7.9 $8.2 $8.7 $8.8 $9.3$9.7

$11.2$13.6 $13.6 $13.6

$19.0

$24.2 $24.9$25.9

$39.1

$49.4

$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)

WTCTerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)**

Katrina(2005)

*Figures do not include federally insured flood losses.

Sources: Munich Re; Swiss Re; Insurance Information Institute research.

Insured Losses, 2013 Dollars$ Billions 5 of the top 14 most expensive catastrophes

in world history have occurred within the most recent 4 years (2010-2013)

Hurricane Sandy is now the 6th costliest event in global insurance history

2012 insured CAT losses totaled $60B; economic losses totaled $140B,

according to Swiss Re

AEGIS 2014


Meteorological events (storm)

880

Loss

events

EarthquakeChina, 20 April

Severe storms, tornadoesUSA, 18–22 May

FloodsIndia, 14–30 June

HailstormsGermany, 27–28 July

Winter Storm Christian (St. Jude)Europe, 27–30 October

Typhoon HaiyanPhilippines, 8–12 November

Severe storms, tornadoesUSA, 28–31 May

Hurricanes Ingrid & ManuelMexico, 12–19 September

FloodsCanada, 19–24 June

FloodsEurope, 30 May–19 June

Heat waveIndia, April–June

Typhoon FitowChina, Japan, 5–9 October

Earthquake (series)Pakistan, 24–28 September

FloodsAustralia, 21–31 January

Meteorite impactRussian Federation, 15 February

Flash floodsCanada, 8–9 July

FloodsUSA, 9–16 September

Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014.

Natural Loss Events

Full year 2013

World Map

Geophysical events(earthquake, tsunami, volcanic activity)

Hydrological events(flood, mass movement)

Meteorological events (storm)

Selection of significant Natural catastrophes

Natural catastrophes

Climatological events(extreme temperature, drought, wildfire)

Extraterrestrial events(Meteorite impact)

AEGIS 2014


Nu

mb

er

Natural Disasters Worldwide

200

400

600

800

1 000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 880 natural disaster events globally in 2013 compared to 905 in 2012

1980 – 2013

Geophysical (earthquake, tsunami, volcanic activity) Climatological (temperature extremes, drought, wildfire)Meteorological (storm) Hydrological (flood, mass movement)


Number of Events

AEGIS 2014


1980 – 2013 (Overall and Insured Losses)2013 Dollars, $ Billions



Losses Due to Natural Disasters Worldwide

100

200

300

400

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

US$ bn

10-Yr. avg. lossesOverall: $184BInsured: $56B

2013 lossesOverall: $125B Insured: $34B

There is a clear upward trend in both insured

and overall losses over the past 30+ years

AEGIS 2014


US Thunderstorm Insured Loss Trends

Thunderstorm losses in 2013 totaled $10.3 billion, the 6th highest on record

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. 2008-2013 are the most expensive years on record.

1980 – 2013

Source: Property Claims Service, and MR NatCatSERVICE

AEGIS 2014


Convective Loss Events in the US

20

40

60

80

100

120

140

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Convective events are those caused by straight-

line winds, tornadoes, hail, heavy precipitation, flash

floods and lightning

The frequency of convective events has rising tremendously

over the past 30+ years

1980 – 2013Number of Events

Source: Geo Risks Research, NatCatSERVICE.

AEGIS 2014



Convective Loss Events in the US

10

20

30

40

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Convective events are those caused by straight-line winds,

tornadoes, hail, heavy precipitation, flash floods

and lightning

The insured and total economic cost of convective events

has rising tremendously over the past 30+ years

1980 – 2012 and first half 2013 (overall and insured losses) $ Billions US

Analysis contains: straight-line winds, tornadoes, hail, heavy precipitation, flash floods, lightning.

Source: Geo Risks Research, NatCatSERVICE.

AEGIS 2014


Insured Homeowners Losses Due to Lightning

$735.5

$819.6

$882.2

$942.4

$1,065.5

$798.0

$1,033.5

$952.5 $969.0

$673.5

$500

$600

$700

$800

$900

$1,000

$1,100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Insurance Information Institute.

2004 – 2013$ Millions

The increased number and value of expensive electronic devices in homes has pushed total lightning claim costs to about $1 billion in many years even as the number of lightning claims falls

Lightning claims cost insurers an estimated $673.5 million in 2013, down from previous years

as drought and fewer convective events reduced strikes

AEGIS 2014


Outlook for the 2014 Atlantic Hurricane Season

Hurricanes and tropical storms drive some

of the largest losses utilities expect each year

AEGIS 2014


Top 12 Most Costly Hurricanes in US History

$4.5 $5.6 $5.7$6.8 $7.9

$8.8 $9.3$11.2

$13.6

$19.0

$25.9

$49.4

$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)

Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.

Insured losses, 2013 dollars$ Billions

10 of the 12 most costly hurricanes in insurance history occurred over the past 10 years (2004—2013)

Hurricane Sandy is the 3rd costliest hurricane in US insurance history

AEGIS 2014


Outlook for 2014 Hurricane Season

Median*2005

(Katrina Year) 2014F

Named Storms 12.0 28 10

Named Storm Days 60.1 115.5 40

Hurricanes 6.5 14 4

Hurricane Days 21.3 47.5 15

Major Hurricanes 2.0 7 1

Major Hurricane Days 3.9 7 3

Accumulated Cyclone Energy 92.0 NA 65

Net Tropical Cyclone Activity 103% 275% 70%

30% less active than typical year

*Over the period 1981-2010.

Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.

AEGIS 2014


Probability of Major Hurricane Landfall (CAT 3, 4, 5)

Average* 2014F

Entire US Coast 52% 40%

US East Coast Including Florida Peninsula 31% 22%

Gulf Coast from FL Panhandle to Brownsville, TX 30% 23%

Also…above-average major hurricane

landfall risk in caribbean for 2011 (32% vs. 42%)

*Average over the past century.

Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.

2014

AEGIS 2014


Selected Large Outages Associated with Tropical Systems

0.63

0.78

0.81

0.91

0.94

1.00

1.07

1.27

1.6

2.1

2.47

2.62

3.25

3.5

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Connecticut: Sandy (2012)

Texas: Rita (2005)

New Jersey: Irene (2011)

Katrina: Katrina (2005)

New York: Irene (2011)

Mississippi: Katrina (2005)

Alabama: Ike (2008)

Pennsylvania: Sandy (2012)

Florida: Charley (2004)

New York: Sandy (2012)

Texas: Ike (2008)

New Jersey: Sandy (2012)

Florida: Wilma (2005)

Florida: Frances (2004)

Hurricanes and tropical storms

have produced significant losses

for insurers in recent years,

including with Sandy in 2012

By StateMillions of Customers

Sources: US Dept. of Energy, Vertyx, AP analysis; Insurance Information Institute.

AEGIS 2014


Fire & Ice

Increasingly extreme weather has proven costly

to utilities and insurers alike

The “polar vortex” and wildfire

AEGIS 2014


Winter 2014

This winter’s “Polar Vortex” allowed frigid air to stream southward

into the Eastern US and Canada. Minimum temperatures

in some locations were the coldest in 20 years. Cold, snow and

ice led to several significant frozen precipitation and freezing events,

reaching as far south as the Gulf Coast and North Florida

Energy demand skyrocketed, created stress on the grid and caused natural gas prices to skyrocket

The “polar vortex”

Source: NASA; Munich Re.

AEGIS 2014


Insured losses from severe

winter events totaled $2.4

billion in 2014.

1 000

2 000

3 000

4 000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

5-year running average

Winter Storm and Winter Damage Events in the US and Canada

Insured Losses (Millions, $ 2014)

Sources: Munich Re NatCatSERVICE; Insurance Information Institute.

Insured winter storm and damage losses in the US and Canada totaled $2.4 billion this year,

making 2014 the 5th costliest winter since 1980. Economic losses totaled $3.4 billion.

Three of the four most costly years ever for insured losses from winter storms and damage occurred in

the 1990s, led by the “Storm of the Century” in 1993.

1980 – 2014*

http://www.spc.noaa.gov/wcm/torngraph-big.pnghttp://www.spc.noaa.gov/wcm/torngraph-big.pnghttp://www.spc.noaa.gov/wcm/torngraph-big.pnghttp://www.spc.noaa.gov/wcm/torngraph-big.pnghttp://www.spc.noaa.gov/wcm/torngraph-big.pnghttp://www.spc.noaa.gov/wcm/torngraph-big.png

AEGIS 2014


Number of Acres Burned in Wildfires

Acreage burned was at near-record levels

in 2011-2012

Source: National Interagency Fire Center

1980 – 2013

AEGIS 2014


Wildland Fire Outlook for the Western US Is Grave

Much of the West and Northwest US is at an

elevated risk for wildfire due to

prolonged drought and high temperatures

Source: National Interagency Fire Center

AEGIS 2014


Cyber Risk

Cyber risk is a rapidly emerging

exposure for businesses large

and small in every industry

NEW III white paper available at: www.iii.org

http://www.iii.org/

AEGIS 2014


157

321

446

656

498

662

419447

619

66.9

19.1

127.7

35.7

222.5

16.2 22.9 17.3

87.9

0

40

80

120

160

200

240

2005 2006 2007 2008 2009 2010 2011 2012 2013*

100

200

300

400

500

600

700

# Data Breaches # Records Exposed (Millions)

Data Breaches 2005-2013

*2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.

Source: Identity Theft Resource Center.

By number of breaches and records exposed# Data Breaches/Millions of Records Exposed

The total number of data breaches (+38%) and number of records

exposed (+408%) in 2013 soared

Millions

AEGIS 2014


43%

36%

17%

4%

External Cyber Crime Costs

Other costs* 0%Business disruption

*Other costs include direct and indirect costs that could not be allocated to a main external cost category

Source: 2013 Cost of Cyber Crime: United States, Ponemon Institute.

Information loss (43%) and business disruption or lost productivity (36%) account for the majority of external costs due to cyber crime.

Equipment Damages

Business Disruption

Revenue loss

Information loss

Fiscal Year 2013

AEGIS 2014


34.4%

43.8%

9.0%

9.1%

3.7%

2013 Data Breaches By Business Category


Source: Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/2013/UpdatedITRCBreachStatsReport.pdf

The majority of the 614 data breaches in 2013 affected business and medical/healthcareorganizations (Govt./Military breaches fell)

Banking/Credit/Financial, 23 (3.7%)

Educational, 55 (9.0%)

Govt/Military, 56 (9.1%)

Business, 211 (34.4%)

By number of breaches

Medical/Healthcare, 269 (43.8%)

AEGIS 2014


41%

29%

30%

Main Causes of Data Breach Globally


*The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection.

Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014

Human error

Malicious or criminal attack*

System glitch

Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30 percent concern

a negligent employee or contractor (human factor).

AEGIS 2014


21%

21%

13%

11%

9%

8%

7%

5%5%

The Most Costly Cyber Crimes


Source: 2013 Cost of Cyber Crime: United States, Ponemon Institute.

Malicious insiders

Malicious code

Phishing + social engineering

Denial of service, malicious code and web-based attacks account for more than 55 percent of all cyber costs per U.S. organization on an annual basis.

Fiscal year 2013

Denial of service

Web-based attacks

Stolen devices

Malware

Viruses, Worms, TrojansBotnets

AEGIS 2014


Top 10 Global Business Risks for 2014

10%

10%

12%

14%

15%

19%

21%

24%

33%

43%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Quality deficiencies, serial defects

Theft, fraud, corruption

Cyber crime, IT failures, espionage

Intensified competition

Loss of reputation or brand value (e.g. from social…

Market stagnation or decline

Changes in legislation and regulation

Fire, explosion

Natural catastrophes

Business interruption, supply chain risk

Cyber and reputational challenges are the most significant movers in this year’s Risk Barometer rankings. Cyber moved into the top 10 global business risks for the first time.

Source: Allianz Risk Barometer on Business Risks 2014

AEGIS 2014


Perception is that the Risk of Cybercrime Is Increasing

Source: 2014 Global Economic Crime Survey, PWC.

4%

57%

39%

4%

47%

48%

Decreased

Remained the same

Increased

2014 Global 2011Global

The perception of the risk of cybercrime is increasing at a faster pace than reported actual occurrences. In 2014, some 48% of respondents

said their perception of the risk of cybercrime increased, up from 39% in 2011.

AEGIS 2014


Cybercrime Costs Are Higher for U.S. Companies Compared

to Global Average

Source: 2014 Global Economic Crime Survey, PWC.

8%

3%

19%

7%

Lost $50,000 to $1 million

Lost $1 million or more

2014 USA 2014Global

US organizations are more at risk of suffering financial losses in excess of $1 million due to cybercrime.

AEGIS 2014


Increase in Purchase of Cyber Insurance among US Companies

Source: Benchmarking Trends: Interest in Cyber Insurance Continues to Climb, Marsh Risk Management Research Briefing, April 2014

37%

11%

11%

13%

14%

19%

29%

21%

All Other

Health Care

Communications, Media…

Professional Services

Education

Retail/Wholesale

Financial Institutions

All Industries

Interest in cyber insurance continues to climb. The number of companies purchasing cyber insurance increased 21 percent from 2012 to 2013.

2013

AEGIS 2014


Investments: The New Reality

Investment performance is a key driver of profitability

Depressed yields are still pressuring pricing

AEGIS 2014


Property / Casualty Insurance Industry Investment Income

$38.9$37.1 $36.7

$38.7 $39.6

$49.5

$52.3$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4$45.8

$30

$40

$50

$60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

1 Investment gains consist primarily of interest and stock dividends. *2014 investment income is estimated Q1, annualized.

Sources: ISO; Insurance Information Institute..

2000 – 20141

$ Billions

Due to persistently low interest rates, investment income fell in 2012 and in 2013 and is falling again in 2014.

Investment earnings are still 16% below their 2007 pre-crisis peak

AEGIS 2014


Property / Casualty Insurance Industry Investment Income

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Recession

2-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below

5% for a full decade.

U.S. Treasury yields plunged to historic

lows in 2013. Longer-term yields have rebounded a bit.

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.

*Monthly, constant maturity, nominal rates, through June 2014.

Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

1990 – 20141

AEGIS 2014


Energy Sector: Industry Future is Bright

US is becoming an energy powerhouse; will fuel P&C

exposures

Need infrastructure investment

AEGIS 2014


$20.2 $20.6 $19.9 $20.0 $19.5$18.9

$19.4$20.2

$21.1$21.6

$22.4

$24.0

$25.3 $25.6

$10

$12

$14

$16

$18

$20

$22

$24

$26

$28

00 01 02 03 04 05 06 07 08 09 10 11 12 13

U.S. Natural Gas Production

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

2000 – 2013Trillions of Cubic Ft. per Year The U.S. is already the world’s largest natural gas

producer—recently overtaking Russia. This is a potent driver of commercial insurance exposures

AEGIS 2014


5.19 5.09 5.08 55.35 5.47

5.65

6.49

7.44

8.37

9.13

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

U.S. Crude Oil Production

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

2005 – 2015PMillions of Barrels per Day Crude oil production in the U.S. is expected to increase by

82.6% from 2008 through 2015—and could overtake Saudi Arabia as the world’s largest oil producer

AEGIS 2014


15

6.4

15

6.4

15

6.7

15

7.6

15

8.7

15

7.8

15

8

15

9.5

16

0

16

1.5

16

1.2

16

1.2

16

3.1

16

4.4

16

6.6

16

9.3

17

0.1

17

1172.5

17

3.6

17

6.3

17

8.2

17

8.5

18

0.9

18

1.9

18

3.1

18

4.8

18

5.2

18

5.7

18

6.8

18

7.6

18

8

18

8

18

8.2

19

0

19

1.7

19

1.9

19

3.4

19

2.4

19

2.6

193.1

19

3.3

19

5

19

6.5

19

9.7

20

0.6

20

3

20

4.1

20

5.3

20

7.8

20

7.5

20

7.9

21

0.2

211.5

150

160

170

180

190

200

210

220

1/1

02

/10

3/1

04

/10

5/1

06

/10

7/1

08

/10

9/1

010/1

011/1

012/1

01

/11

2/1

13

/11

4/1

15/1

16

/11

7/1

18

/11

9/1

110/1

111/1

112/1

11

/12

2/1

23

/12

4/1

25

/12

6/1

27

/12

8/1

29

/12

10/1

211/1

212/1

21

/13

2/1

33/1

34

/13

5/1

36

/13

7/1

38

/13

9/1

310/1

311/1

312/1

31

/14

2/1

43

/14

4/1

45

/14

6/1

4

Oil & Gas Extraction Employment

*Seasonally adjusted

Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

Jan 2010 – June 2014*Thousands Oil and gas extraction employment is up 35.2% since Jan. 2010 as the

energy sector booms. Domestic energy production is essential to any robust economic recovery in the US.

Highest since Aug. 1986

AEGIS 2014


Power Sector Supply, Demand and Investment

Substantial energy infrastructure investments are

necessary for decades to come—along with insurance

solutions

AEGIS 2014


354.8406

523.9

629.8

729.2

819.6

0

100

200

300

400

500

600

700

800

900

1990 2000 2010 2020P 2030P 2040P

World Primary Energy Consumption

Source: Energy Information Administration, 2013 International Energy Outlook, Insurance Information Institute.

1990 – 2040PQuadrillion BTUs

Between 2010 and 2040, energy consumption in projected to increase by 56.4% worldwide

Growth in worldwide energy consumption will create more risk and vulnerabilities (natural and manmade); Innovations in risk

management and insurance are needed.

AEGIS 2014


3%

44%

27%

25%

Cumulative Projected Investment in Global Energy Infrastructure


Source: International Energy Agency, World Energy Outlook 2011.

Projected energy infrastructure investment through 2035 total $38 trillion; Implies substantial incurrence of risk.

2011 – 2035 ($ Trillion)Coal, $1.1, (3%)

Biofuels, $0.3, (1%)

Power, $16.9, (44%)

Oil, $10.1, (27%)

Natural Gas, $9.5, (25%)

AEGIS 2014


U.S. Electricity Generation by Fuel


1990 – 2040F (Trillions of Kilowatt Hours)

Natural gas share of fossil fired generation will grow rapidly (more

investment needed). Coal fired generation will remain flat but its share will fall due to abundant

gas and EPA carbon regulations

Source: US Energy Information Administration, 2014 Annual Energy Outlook Early Release Overview; Insurance Information Institute.

AEGIS 2014


1799 1598 1606 1641 1652 1640 1635

3217 15 16 15 15 16

776894 1020 1118

1256 1374 1471

807 774 779779 782

786 811390 534

630 625660 644

735

0500

100015002000250030003500400045005000

2010 2015 2020 2025 2030 2035 2040

Coal Petroleum Natural Gas Nuclear Renewable Other

US Electric Power Generation by Fuel Source

Source: US Energy Information Administration, Annual Energy Outlook 2014, Appendix A7.

2010 – 2040FBillions of Kilowatt Hours

Demand for electricity is expected to grow at an 0.8% annual rate through 2040. Renewables and natural gas will account for an increasing share of fuel source

3,806 3,8194,025 4,217

4,370 4,5084,675

AEGIS 2014


US Electric Power Generation by Fuel Source

0.8%

1.7%

1.4%

0.4%0.2%

-0.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

Overall Renewable Natural Gas Coal Nuclear Petroleum

Source: US Energy Information Administration, Annual Energy Outlook 2014; Insurance Information Institute.

2012 – 2040F (Billion kWh)Annual Growth Rate (%)

Overall power generation capacity will growth at just 0.8% through 2040, mostly from natural gas

Growth in renewable capacity is projected to be the fastest but is probably also the most uncertain

Natural gas generation will account for the majority of

new capacity

AEGIS 2014


U.S. Private Power Construction

*Through April 2014.

Source: US Dept. of Commerce; Energy Information Administration, Wells Fargo Securities (June 6, 2014 research report).

2000 – 2014* (% Change, 3-Month Moving Avg.)

Power construction accounts for a large

share of all construction activity. The recent

slowdown was in part due to the expiration of

renewable production tax credits. Going forward,

about 75% of new capacity will be for gas

fired plants

AEGIS 2014


Value of Power Sector Construction

$23.6 $21.0 $22.0 $17.4 $16.4$21.7 $22.0

$29.3 $31.5$36.8

$41.5$35.4 $38.4

$42.2

$66.1

$81.1$88.9

$77.9 $75.2

$97.4$90.6

$107.4

$0

$20

$40

$60

$80

$100

$120

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

*seasonally adjusted at annualized rates through May 2014 (latest available).Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

1993 – 2014*$ Billions

The Value of Power Construction in the US Is Rising

Power construction can be erratic but now seems to be headed for a record $100+ billion

in 2014 (based on data through May)

AEGIS 2014


Investment in US Power Plants

$1,234.0

$185.0 $183.0

$4.0$90.0 $143.0 $57.0

$219.0$72.0

$212.0$67.0

$0$200$400$600$800

$1,000$1,200$1,400

Tota

l

Coal

Gas

Oil

Nucle

ar

Bio

en

erg

y

Hydro

Win

d O

nshore

Win

d O

ffsh

ore

Sola

r P

V

Oth

er*

*Includes geothermal, concentrating solar power and marine.

Sources: International Energy Agency, 2014 World Energy Investment Outlook, Table 3.2; Insurance Information Institute.

2004 – 2013$ Billions of 2012

An estimated $1.234 trillion will be invested in power plants through 2035

An estimated $1.234 trillion will

be invested in power plants in the

US through 2035 – 12.9% of the

$9.553 trillion forecast globally

AEGIS 2014


Investment in US Transmission & Distribution Infrastructure

$254.0

$98.0

$19.0

$138.0

$564.0

$183.0

$16.0

$365.0

$0

$100

$200

$300

$400

$500

$600T

ota

l

New

De

ma

nd

Rene

wab

les

Refu

rbis

hm

en

t

Tota

l

New

De

ma

nd

Rene

wab

les

Refu

rbis

hm

en

t

Sources: International Energy Agency, 2014 World Energy Investment Outlook, Table 3.3; Insurance Information Institute.

2014 – 2035F$ Billions of 2012

An estimated $819 billion will be invested in transmission and distribution infrastructure through 2035

Transmission Distribution

AEGIS 2014


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Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

robert p. hartwig, ph.d., cpcu - iii · aegis 2014 policyholders’ conference us insurance mergers...

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