the commercial p/c insurance industry in the aftermath of the “great recession” national...
TRANSCRIPT
The Commercial P/C Insurance Industry in the Aftermath of the
“Great Recession”National Association of Mutual Insurance Companies
Commercial Lines Underwriting Seminar February 23, 2010
Chicago, ILDownload at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
3
The Economic Storm
What the Financial Crisis and Recession Mean for the Industry’s
Exposure Base, Growth and Profitability
4
Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/10; Insurance Information Institute.
2.9
%
0.1
%
4.8
%
4.8
%
-0.2
%
-0.7
%
1.5
%
-2.7
%
-5.4
%
-6.4
%
-0.7
%
2.2
%
5.7
%
2.8
%
2.8
%
2.8
%
3.0
%
3.0
%
3.2
%
3.3
%
3.2
%
3.7
%
0.8
%
1.6
%
2.5
% 3.6
%
3.1
%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
Personal and Commercial Lines Exposure Base Have Been Hit Hardand Will Be Slow to Come Back
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
The Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4%
Economic growth up sharply in Q4:09 with rebuilding of inventories and stimulus.
More moderate growth expected in 2010/11
6
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/10; Insurance Information Institute
4.3
%1
8.6
%2
0.3
%5
.8%
0.3
%-1
.6%
-1.0
%-1
.8%
-1.0
%3
.1%
1.1
%0
.8%
0.4
%0
.6%
-0.4
%-0
.3%
1.6
% 5.6
%1
3.7
%7
.7%
1.2
%-2
.9%
-0.5
%-3
.8%
-4.4
%-3
.8%
-3.8
%
5.2
%-0
.9%
-7.4
%-6
.5% -1
.5%
1.8
%
-10%
-5%
0%
5%
10%
15%
20%
25%
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
E
Re
al N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Re
al G
DP
Gro
wth
Real NWP Growth Real GDP
P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy
Real GDP Growth vs. Real P/C (%)
7
Regional Differences Will Significantly Impact P/C Markets
Recovery in Some Areas Will Begin Years Ahead of Others
and Speed of Recovery Will Differ by Orders of Magnitude
8
State Economic Growth Varied Tremendously in 2008
US Bureau of Economic Analysis
Highest Quintile
Fourth Quintile
Third Quintile
Second Quintile
Lowest Quintile
Far West0.6
Rocky Mountain2.2
Southwest1.7
Plains2.0 Great Lakes
-0.4
New England1.0
Mideast1.3
Southeast0.0
US = 0.7
WA2.0
OR1.6
CA0.4
NV-0.6
ID0.0
MT1.8
WY4.4
UT1.4 CO
2.9
AZ-0.6 NM
2.0
TX2.0
OK2.7
KS2.2
NE1.3
SD3.5
ND7.3 MN
2.0
IA2.1
MO1.3
WI0.7
IL0.3
MI-1.5
IN-0.6
OH-0.7
NY1.6
PA1.1
NJ0.6
MD1.3
DE-1.6
DC3.0VA
1.3
WV2.5
KY-0.1
NC0.1
SC0.6
TN0.5
AR0.7
LA0.3
MS1.7
AL0.7
GA-0.6
FL-1.6
AK-2.0
HI0.7
ME1.4
NH1.8
VT1.7 MA
1.9
RI-0.9CT
-0.4
Mountain, Plains States Growing the Fastest
Percent Change in Real GDP by State, 2007–2008
9
Fastest Growing States in 2008:Plains, Mountain States Lead
2.1% 2.0%
7.3%
4.4%
3.5%2.9% 2.7% 2.5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
ND WY SD CO OK WV IA TX, MN,NM, WA
Source: US Bureau of Economic Analysis; Insurance Information Institute.
Real State GDP Growth (%)
Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas
10
Slowest Growing States in 2008: Diversity of States Suffering
Source: US Bureau of Economic Analysis; Insurance Information Institute.
States in the North, South, East and West All Represented Among Hardest Hit, But for Differing Reasons
Real State GDP Growth (%)
-0.9%
-1.5%-1.6% -1.6%
-1.7%
-2.0%
-0.1%
-0.4%-0.6% -0.6% -0.6% -0.6%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%KY CT AZ GA IN NV RI MI DE FL OH AK
11
Labor Market Trends
Fast & Furious:Massive Job Losses Sap the
Economy and Commercial/Personal Lines Exposure
13
Unemployment and UnderemploymentRates: Rocketing Up in 2008-09
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
10.1% Oct 2009 unemployment rate (U-3) was
the highest monthly rate since 1983.
Peak rate in the last 30 years: 10.8% in Nov -
Dec 1982
Stood at 9.7% as of Jan. 2010
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 9.2% in April
2008 to 17.4% in Oct . 2009.
Stood at 16.5% as of Jan. 2010
January 2000 through January 2010, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
16
Unemployment Rates by State, December 2009: Highest 25 States*
10.9
10.3
10.110
.6
10.7
10.9
9.5
9.19.4
9.09.
6
9.0
9.19.
9
11.812
.4
11.0
11.0
11.1
11.212
.113.0
12.9
12.6
14.6
0
2
4
6
8
10
12
14
16
MI NV RI SC CA DC FL NC IL OR AL OH TN KY MS GA NJ IN MO WA MA ID AZ WV NY
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for December 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are
doing much better than others.
17
6.9
6.9
6.7
6.6
6.66.
97.5
7.5
4.7
4.7
6.67.
07.4
4.4
6.7
8.38.
7
7.5
7.57.78.
3
8.38.
9
8.9
8.89.0
0
2
4
6
8
10
DE PA CT AK WI TX ME NM AR CO LA MD WY MN NH HI VA VT MT UT OK IA KS SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, December 2009: Lowest 25 States*
*Provisional figures for December 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
The unemployment rate has been rising across the country (up in 43 out of 50 states in Dec.), but some states are
doing much better than others.
18
US Unemployment Rate
4.5
%
4.5
%
4.6
%
4.8
%
4.9
% 5.4
% 6.1
%
6.9
%
8.1
%
9.3
%
9.6
% 10
.0%
10
.2%
10
.0%
9.9
%
9.5
%
9.3
%
9.1
%
8.9
%
9.7
%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
Rising unemployment is eroding payrolls
and workers comp’s exposure base.
Unemployment is expected to peak above
10% in early 2010.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/10); Insurance Information Institute
2007:Q1 to 2011:Q4F*
19
Monthly Change Employment*-7
2
-14
4
-12
2
-16
0
-13
7
-16
1
-12
8
-17
5
-32
1
-38
0
-59
7
-68
1
-77
9
-72
6
-75
3
-58
2
-34
7
-50
4
-34
4 -21
1
-22
5
-22
4
64
-15
0
-20
-900
-800
-700
-600
-500
-400-300
-200
-100
0
100
200
Jan
08
Fe
b 0
8
Ma
r 0
8
Ap
r 0
8
Ma
y 0
8
Jun
08
Jul 0
8
Au
g 0
8
Se
p 0
8
Oct
08
No
v 0
8
De
c 0
8
Jan
09
Fe
b 0
9
Ma
r 0
9
Ap
r 0
9
Ma
y 0
9
Jun
09
Jul 0
9
Au
g 0
9
Se
p 0
9
Oct
09
No
v 0
9
De
c 0
9
De
c 0
9
Monthly Losses in Dec–May Were the Largest in the Post-WW II Period but
Pace of Loss is Diminishing
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Job Losses Since the Recession Began in Dec. 2007 Total 8.4 Million; 14.8 Million People are Now Defined as Unemployed
January 2008 through January 2010 (Thousands)
December’s loss of 20,000 jobs was a
disappointment, but labor market recoveries
are often erratic.
21
US Nonfarm Private Employment1
38
.0
13
8.1
13
8.0
13
7.9
13
7.8
13
7.8
13
7.7
13
7.6
13
7.6
13
7.4
13
7.0
13
6.7
13
6.2
13
5.1
13
3.5
13
2.8
13
2.1
13
1.5
13
1.1
13
0.6
13
0.3
13
0.1
12
9.9
12
9.6
12
9.7
12
9.5
12
9.5
129130131132133134135136137138139
No
v 0
7
De
c 0
7
Jan
08
Fe
b 0
8
Ma
r 0
8
Ap
r 0
8
Ma
y 0
8
Jun
e 0
8
Jul 0
8
Au
g 0
8
Se
p 0
8
Oct
08
No
v 0
8
De
c 0
8
Jan
09
Fe
b 0
9
Ma
r 0
9
Ap
r 0
9
Ma
y 0
9
Jun
09
Jul 0
9
Au
g 0
9
Se
p 0
9
Oct
09
No
v 0
9
De
c 0
9
Jan
10
Monthly, Nov 07 – Jan 10 (Millions)
The US Economy Lost About 8.4 Million Jobs in
Just Over 2 Years
Employment Peak; Recession Starts
Seasonally adjusted. Source: US Bureau of Labor Statistics
23
Unemployment and Educational Attainment: More Education = Less Unemployment
17.6%
11.5%10.0%
7.3%
5.1%
14.4%
9.3%7.5%
5.7%4.1%
0%2%
4%6%8%
10%
12%14%16%
18%20%
Less than HSDiploma
HS Graduate Some College, No Degree
Associate Degree Bachelor'sDegree or Higher
Jan. 2009 Unemployment Rate
Jan. 2010 Unemployment Rate
Source: US Bureau of Labor Statistics accessed at ftp://ftp.bls.gov/pub/suppl/empsit.cpseea17.txt .
Unemployment Rate (%), January 2009 vs. January 2010
A Higher (Record) Proportion of WC Exposure Base is Associated With Employment of Women
24
Unemployment Rate by Gender: The “Mancession” Can Impact Exposure Too
15.3%
9.0% 8.7%
5.8%4.9%
18.9%
13.4%
11.0%9.2%
5.3%
0%2%
4%6%8%
10%
12%14%16%
18%20%
Less than HSDiploma
HS Graduate Some College, No Degree
Associate Degree Bachelor'sDegree or Higher
Men Women
Source: US Bureau of Labor Statistics accessed at ftp://ftp.bls.gov/pub/suppl/empsit.cpseea17.txt .
Unemployment Rate (%), January 2010
Higher Male Unemployment Rate Has Had a Significant Impact on WC and Specialty Personal Lines (e.g., watercraft, RVs, campers, motorcycles,
snowmobiles, etc.)
25
Wage & Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums
* Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessionsSource: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books
Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums
7/90-3/91 3/01-11/01 12/07-?
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Wage & SalaryDisbursements
WC NPW
Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)
*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).
-4.4%
-2.0%-1.1%
1.1%
3.7%4.6%
8.5%
3.5%
2.1%
-0.5%
-3.6%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 2007-2009
Recessions in the 1970s and 1980s saw smaller exposure impacts
because of continued wage inflation, a factor not present
during the 2007-2009 recession
The Dec. 2007 to mid-2009 recession
caused the largest impact on WC
exposure in 60 years
(Percent Change)
(All Post WWII Recessions)
Recession Dates (Beginning/Ending Years)
27
Frequency: 1926–2008A Long-Term Drift Downward
Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research
Manufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
0
5
10
15
20
25
30
'26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07
30
When Might All of the Lost JobsBe Regained? 2016?
Source: Wall Street Journal, October 9, 2009, p. A3
Crisis-Driven Exposure Drivers
31
Economic Obstaclesto Growth in P/C Insurance
32
(Millions of Units)
New Private Housing Starts, 1990-2011F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
0
0.5
6 0.7
1
0.9
6
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/10); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners InsurersDue to Weak Home Construction Forecast for 2010-2011.
Also Affects Commercial Insurers with Construction Risk Exposure, Surety
New home starts plunged 34% from 2005-2007; drop through 2009 is 72% (est.); A net annual decline of 1.49 million units,
lowest since records began
in 1959
I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers
$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is
estimated at about $1.3 billion
Average Square Footage of Completed New Homes in U.S., 1973-2010:Q4
1,66
01,
695
1,64
51,
700
1,72
01,
755
1,76
01,
740
1,72
01,
710
1,72
51,
780
1,78
51,
825 1,90
5 1,99
52,
035
2,08
02,
075
2,09
52,
095
2,10
02,
095
2,12
02,
150
2,19
02,
223
2,26
62,
324
2,32
02,
330
2,34
9 2,43
42,
469
2,52
12,
519
2,56
12,
492
2,32
72,41
7
1,500
1,700
1,900
2,100
2,300
2,500
2,700
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 0809
:Q1
09:Q
209
:Q3
09:Q
4
Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.
Square FtThe trend to building larger homes
reversed in 2008-09, impacting exposure growth beyond the
absolute decline in units
Average size of completed new homes often falls in recessions
(yellow bars), but historically bounces back in expansions
33
35
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
53 71,5
4970
,643
62,3
0452
,374
51,9
5953
,549
54,0
2744
,367
37,8
8435
,472
40,0
9938
,540
35,0
3734
,317
39,2
0119
,695 28
,322
43,5
4660
,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Business Bankruptcy Filings,1980-2009*
*2009 is annualized estimate based on actual business bankruptcies in first three quarters of 2009Source: American Bankruptcy Institute,http://www.abiworld.org/AM/Template.cfm?Section=Business_Bankruptcy_Filings1&Template=/TaggedPage/TaggedPageDisplay.cfm&TPLID=59&ContentID=36301.
Significant Implications for all Commercial Lines
There were 45,510 business bankruptcies during the first three quarters of 2009, up 52% from 2008:Q3 and
on track for about 60,000 for all of 2009, the most since 1993. Current recession will generate 200%+ surge
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 204.2%*
37
Private Sector Business Starts,1993:Q2 – 2009:Q1*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
920
1
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
209
207
199
191 19
317
1
203
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Business Starts Are Down 18% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure
*Latest available as of Jan. 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
(Thousands)
171,000 businesses started in 2009:Q1, the lowest level
since 1993
38
Total Industrial Production
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/10); Insurance Information Institute
-9.0%
-13.0%
-19.0%
-10.4%
6.9% 7.0%5.3% 4.7% 4.5% 4.5% 4.2% 4.1% 4.2% 3.8%
1.5%3.2% 3.6%
0.3% 0.2%
-4.6%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
End of Recession in mid-2009, Stimulus Program Are Benefiting Industrial Production and Therefore Insurance Exposure Both
Directly and Indirectly, Albeit Very Modestly
2007:Q1 to 2011:Q4F (%)
Industrial Production is Aided by a Rebuild of Inventories, Gradual Economic Recovery
and Stimulus Program (Q2:09 through 2010)
Industrial Production Began to Contract Sharply in Late 2008 and Plunged
in 2009:Q1
40
Year-Over-Year Change in Quarterly USState Tax Revenues, Inflation Adjusted
Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/pdf/government_finance/state_revenue_report/2010-01-07-SRR_78.pdf
2.4
%4
.7%
5.6
% 9.9
%9
.5%
4.4
%1
.8%
0.4
%-1
.3%
-1.7
%-3
.0%
-7.6
%-1
0.7
%0
.0%
1.6
%-0
.6%
0.1
% 4.0
%4
.7%
5.7
% 8.2
%3
.4% 6.0
%7
.0%
12
.4%
6.6
%4
.2%
3.7
% 6.3
%2
.6%
1.3
%1
.9%
2.3
%0
.4%
0.8
%0
.4% 3.0
%0
.2%
-5.8
%
-10
.9%
-17
.6%
-13
.3%
2.4
%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1Q
99
3Q
99
1Q
00
3Q
00
1Q
01
3Q
01
1Q
02
3Q
02
1Q
03
3Q
03
1Q
04
3Q
04
1Q
05
3Q
05
1Q
06
3Q
06
1Q
07
3Q
07
1Q
08
3Q
08
1Q
09
3Q
09
States Revenues Were Down 10.9% in Q3 2009, the Second Consecutive Quarter of Record Revenue Decline. This Will Impact Public Infrastructure
Spending Significantly.
Nationwide, state-tax collections for fiscal year 2009 declined by a record
$63 billion, or 8.2 percent from the previous year. That loss is roughly twice the amount states gained in fiscal relief
from the federal stimulus package
45
Green Shoots
The Recession May Have Ended, but Is it
Self-Sustaining?
46
Hopeful Signs That the Economic Recovery is Underway
Recession appears to have bottomed out, freefall has ended GDP shrinkage has ended; Economy is expanding Pace of job losses is slowing, despite setbacks Major stock market indices well off record lows, anticipating recovery Some signs of retail sales stabilization are evident
Financial sector is stabilizing Banks are reporting quarterly profits Many banks expanding lending to very credit worthy people
and businesses
Housing sector seems to be bottoming out Home are much more affordable (attracting buyers) Mortgage rates are still low relative to pre-crisis levels (attracting buyers) Freefall in housing starts and existing home sales is ending in
many areas
Inflation and energy prices are under control
Consumer and business debt loads are shrinking
Source: Insurance Information Institute.
47
11 Industries for the Next 10 Years: Insurance Solutions Needed
Government
Education
Health Care
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Technology
Light Manufacturing
Export-Oriented Industries
48
Mounting Pressure on Claim Cost Severities?
Inflation Trends:Concerns Over Stimulus Spending
and Monetary Policy
49
Annual Inflation Rates(CPI-U, %), 1990–2011F
2.8 2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
-0.4
2.2 2.0
2.92.4
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 10F11F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Feb. 10, 2010 (forecasts).
There is So Much Slack in the US Economy That Inflation Should Not Be a Concern Through 2010/11, but Depreciation of Dollar is Concern Longer Run
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 have reduced inflationary pressures
P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests
Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.
-0.4%
2.7% 3.0% 3.1%3.8%
4.3%
5.5%6.2%
-2%
0%
2%
4%
6%
8%
OverallCPI
LegalServices
US TortCosts
MedicalCare
MotorVehicleBodyWork
BodilyInjury
Severity
WC MedSeverity
No-FaultClaim
Severity
(Percent)
Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely
50
Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E*
0%
2%
4%
6%
8%
10%
12%
14%
1961-70 1971-80 1981-90 1991-2000 2001-09E
Tort Costs Medical Costs CPI
* CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast.
Tort system is an inflation amplifier
Avg. Ann. Change: 1961-2009E*
Tort costs: +8.4%Med costs: +5.9%
Overall inflation: +4.2%
Source: U.S. Bureau of Labor Statistics; Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; I.I.I.
Tort costs move with inflation but at twice the rate of inflation
Are there healthcare reform spillover effects?
53
Key Threats Facing Insurers Amid Financial Crisis
Challenges for theNext 5-8 Years
56
Important Issues & Threats Facing Insurers: 2010–2015
Low interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gains
Fed actions in Treasury markets keep yields low
Many insurers have not adjusted to this new investment paradigm of a sustained period of low investment gains
Regulators will not readily accept it; many will reject it
Implication 1: Industry must be prepared to operate in environment with investment earnings accounting for a smaller fraction of profits
Implication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.
Lessons from the period 1920–1975 need to be relearned
3 Long-Term Reduction in Investment Earnings
Source: Insurance Information Institute.
57
Important Issues & Threats Facing Insurers: 2010–2???
Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)
Systemic Risk Regulator (Too Big To Fail) Is any insurer systemically important?
Federal Insurance Office Creation Within Treasury? Eventual “mission creep”?; Activist director?
Consumer Financial Protection Agency Will it be limited to banks/creditors
Federal Trade Commission: All Lines Study Authority? McCarran-Ferguson Rollback
Will it be limited to Health/Med Mal lines? OFC/State Regulation Debate Lingers Taxation/Offshore Domiciles
4 Regulatory Overreach
Bottom Line: Regulatory Outcome is Uncertain and Risk of Adverse Outcome Exists. Ultimate Regulation Structure Will Be in Place for Decades
Source: Insurance Information Institute.
62
Important Issues & Threats Facing Insurers: 2010–2015
Source: Insurance Information Institute
Bottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012–2014
No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration
Erosion of recent reforms is a certainty (already happening)
Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability
Torts twice the overall rate of inflation
Influence personal and commercial lines, esp. auto liability
Historically extremely costly to p/c insurance industry
Leads to reserve deficiency, rate pressure
5 Emerging Tort Threat
63
Terrorism: Insurance Concerns Resurface
Reasons Why Concerns Are Mounting in 2010
Perception of U.S. vulnerability is rising Thwarted Christmas Day attack by “underwear bomber”
And new bin Laden tape claiming al Qaeda is responsible Increased anti-terror efforts, including full-body scans Effort by government to appear more vigilant, prepared Trials of Guantanamo 9/11 suspects in Manhattan Court
NYC says it will need $200+ million each year for security Obama Administrations Intent to Reduce Support for TRIA Rise of groups such al Qaeda in the Arabian Peninsula U.S. military surge in Afghanistan operations Most buyers, producers have not thought about coverage
issues recently U.K. in January Raised Terror Alert Status to 2nd Highest Level
Shifting Legal Liability & Tort Environment
64
Is the Tort PendulumSwinging Against Insurers?
65
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
2009–2010 Growth in Tort Costs as % of GDP is Due in
Part to Shrinking GDP
66
The Nation’s Judicial Hellholes: 2010
Source: American Tort Reform Association; Insurance Information Institute
South Florida
West VirginiaIllinoisCook County
New MexicoAppellate
Courts
Watch List
California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley,
TX
Dishonorable Mention
AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme
Judicial Court Sacramento County
New JerseyAtlantic County (Atlantic City)
New York City
Financial Strength & Ratings
67
Industry Has Weathered the Storms Well
P/C Insurer Impairments, 1969–2009p8
15
12
71
19
34
91
31
21
99
16
14
13
36
49
31 3
45
04
85
56
05
84
12
91
61
23
11
8 19
49 50
47
35
18
14 15
71
1
5
0
10
20
30
40
50
60
70
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
p
Source: A.M. Best; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
5 of the 11 are Florida companies (1 of these
5 is a title insurer)
70
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009
3.8%
2.9%3.2%
2.4%
11.9%75.7%
.Source: A.M. Best.
P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses
Are Anticipated in the Industry’s Risk Management Strategy
Despite financial market turmoil and a soft market
in 2009, 76% of ratings actions by A.M. Best were affirmations;
just 2.9% were downgrades and 3.2%
were upgrades
Affirm – 1,375
Downgraded – 53
Upgraded – 59Initial – 44
Under Review – 69
Other – 216
72
Reasons for US P/C Insurer Impairments, 1969–2008
3.7%4.2%
9.1%
7.0%
7.9%
7.6%
8.1% 14.3%
38.1%
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.
Investment Catastrophe Losses Play a Much Smaller Role
Deficient Loss Reserves/In-adequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems
Misc.
Sig. Change in Business
P/C Insurance Financial Performance
76
A Resilient Industry in Challenging Times
P/C Net Income After Taxes1991–2009P ($ Millions)
$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
$3
,04
6
$3
0,0
29
$6
2,4
96
$2
,37
9
$3
0,6
00
-$6,970
$6
5,7
77
$4
4,1
55
$2
0,5
59
$3
8,5
01
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09P
2005 ROE*= 9.4% 2006 ROE = 12.2% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009:Q3 ROAS1 = 4.5%
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 4.5% ROAS for 2008 and 5.9% for the first 9 months of 2009. 2009:Q3 net income was $20.5 billion excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute
P-C Industry profits for full-year 2009 were up sharply from 2008, but are still well
below pre-crisis levels
79
ROE: P/C vs. AllIndustries1987–2009:Q3*
* Excludes Mortgage & Financial Guarantee in 2008 and 2009 through Q3.Sources: ISO, Fortune; Insurance Information Institute.
-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:Q3
US P/C Insurers All US Industries
P/C Profitability isCyclical and Volatile
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 is Where It’s At Now
Combined Ratio / ROE
* 2009 figure is return on average statutory surplus. 2008 and 2009 figures exclude mortgage and financial guarantee insurersSource: Insurance Information Institute from A.M. Best and ISO data
97.5
100.6 100.1 100.7
92.6
99.5101.0
5.9%
9.6%
15.9%
14.3%
12.7%
4.5%
8.9%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009:Q30%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
Combined ratio of about 100 generated a 6% ROE in 2009, 10%
in 2005 and16% in 1979
P/C Premium Growth Primarily Driven by the
Industry’s Underwriting Cycle, Not the Economy
82
83
-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 0910
F
Strength of Recent HardMarkets by NWP Growth
(Percent)1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33
During the Great Depression. Expected decline of 1.6% in 2010.
84
Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2009)
-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% -1
1.0
%
-6.4
% -5.1
%
-4.9
%
-5.8
%
-6.0
%
-0.1
%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
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
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Magnitude of Price Declines Shrank
During Crisis, Reflecting Shrinking
Capital, Reduced Investment Gains,
Deteriorating Underwriting
Performance, Higher Cat Losses and
Costlier Reinsurance
(Percent)
Market Remains Soft as Capital Restored and Underwriting Losses Fall
Capital/PolicyholderSurplus (US)
87
Shrinkage, but Not Enoughto Trigger Hard Market
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09*
US Policyholder Surplus:1975–2009:Q3*
* As of 9/30/09Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in
non-insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.87:$1 as of9/30/09, Up from Near Record Low of $0.85:$1 at Year-End 2007
Surplus as of 9/30/09 was $490.8B, up from $437.1B as of 3/31/09. Recent peak was $521.8 as of 9/30/07. Surplus as of 9/30/09 is now only 5.9% below 2007 peak; Crisis trough was as of
3/31/0916.2% below 2007 peak.
90
Policyholder Surplus, 2006:Q4–2009:Q4P
Source: ISO, AM Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$519.3$505.0
$515.6$517.9
$380
$400
$420
$440
$460
$480
$500
$520
$540
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:Q4P
Capacity Peaked at $521.8 as of 9/30/07
Declines Since 2007:Q3 Peak
08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%)09:Q1: -$84.7B (-16.2%)
09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$2.5B (-0.5%)
Capacity as of 12/31/09 was just 0.5% below the 2007 peak and will likely set a new record in 2010
91
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute
3.3%
9.6%
6.9%
10.9%
6.2%
13.8%
16.2%
0%
3%
6%
9%
12%
15%
18%
6/30/1989Hurricane
Hugo
6/30/1992HurricaneAndrew
12/31/93NorthridgeEarthquake
6/30/01 Sept.11 Attacks
6/30/04Florida
Hurricanes
6/30/05Hurricane
Katrina
FinancialCrisis as of3/31/09**
The Financial Crisis at its Peak Ranks as the Largest
“Capital Event” Overthe Past 20+ Years
(Percent)
Investment Performance
93
Investments Are a PrincipleSource of Declining Profitability
Property/Casualty Insurance Industry Investment Gain: 1994–2009P1
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.4$35.1
$58.0
$51.9$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09P
Investment Gains Fell by 51% In 2008 Due to Lower Yields,Poor Equity Market Conditions. In 2009, the Return of Realized Capital
Losses Helped Offset Lower Investment Income
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
($ Billions)
99
Underwriting Trends – Financial Crisis Does Not
Directly Impact Underwriting Performance: Cycle, Catastrophes
Were 2008’s Drivers
100
P/C Insurance Industry Combined Ratio, 2001–2009:Q3*
* Excludes Mortgage & Financial Guaranty insurers in 2008. Including M&FG, 2008=105.1, 2009=100.7 Sources: A.M. Best, ISO.
95.7
99.5101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009:Q3*
Best Combined
Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned
Premiums
Relatively Low CAT Losses, Reserve Releases
Cyclical Deterioration
2005 Ratio Benefited from Heavy Use of Reinsurance
Which Lowered Net Losses
Commercial Multi-Peril Combined Ratio: 1995–2010P
11
9.0
11
9.8
10
8.5
12
5.0
11
6.2
11
6.1
10
4.9
10
1.9
10
5.4
95
.1 97
.610
0.7
11
6.8
11
3.6
11
5.3
12
2.4
11
5.0
11
7.0
97
.3
89
.0
97
.7
93
.8
83
.8
89
.8
10
8.0
97
.0 99
.5
11
3.1
11
5.0 1
21
.0
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E* 10P*
Commercial Multi-Peril is Expected to Continue to Perform Reasonably Well
*2009E and 2010P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.
Commercial Auto Combined Ratio: 1993–2010P
11
2.1
11
2.0
11
3.0
11
5.9
10
2.7
95
.2
92
.9
92
.1
92
.4 94
.2 96
.8
97
.0
98
.5
11
8.1
11
5.7
11
6.2
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Commercial Auto is Expected to Remain Reasonably Profitable in 2010
Sources: A.M. Best; Insurance Information Institute.
Inland Marine Combined Ratio: 1999–2010P
101.9
92.8
100.2
83.8
77.379.5
93.2
86.088.5
80.882.5
89.9
70
75
80
85
90
95
100
105
99 00 01 02 03 04 05 06 07 08 09E 10P
Inland Marine is Expected to Remain Among the Most Profitable of All Lines
Sources: A.M. Best; Insurance Information Institute.
Workers Compensation Combined Ratio: 1994–2010P
10
2.0
97
.0 10
0.0
10
1.0
11
0.9
11
0.0
10
7.0
10
2.7
98
.4
10
3.5
10
4.3 1
09
.0
11
2.0
121.7
10
7.0
11
5.3
11
8.2
80
85
90
95
100
105
110
115
120
125
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E 10P
Workers Comp Underwriting Results Are Deteriorating Markedly
Sources: A.M. Best; Insurance Information Institute.
107
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance only.Source: A.M. Best; Insurance Information Institute.
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
-3.1%-3.3%-3.3%-3.7%
-4.3%
-5.2%-5.7%
-7.3%
-1.8%-1.8%-2.0%
-3.6%
-1.9%-2.1%
-8.0%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
108
2.3
-2.1
-8.3
-2.6-6.6
-9.9 -9.8
-4.1
1
11.7
23.2
13.79.9
7.3
-6.7-9.5
-14.6-16 -15
-5
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
E
11
E
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2011E
Reserve Releases Will Expected to Taper Off in 2010 and Drop Significantly in 2011
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.
109
Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.
10
5.6
10
7.8
11
0.1 1
15
.9
10
7.3
10
0.1
98
.3 10
0.9
92
.4 95
.5
10
5.1
10
1.9 10
5.9
11
5.7
10
6.9
10
8.4
10
6.4
10
5.8
10
1.6 10
5.6
10
7.8
11
0.0
11
2.3
10
0.8
96
.6
96
.0
10
0.6
93
.9 97
.4
10
5.5
10
5.7 10
9.4
11
5.7
10
6.9
10
8.4
10
6.4
10
5.8
10
1.6
80
85
90
95
100
105
110
115
120
92 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E
Calendar Year Accident Year
Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases
112
Performance by Segment:Commercial/Personal Lines &
Reinsurance
113
Calendar Year Combined Ratios by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
101.0 101.2
92.2
100.3
103.7
100.599.8
107.2
103.6
9092949698
100102104106108110
Personal Lines Commercial Lines US Reinsurance
2008 2009E 2010P
Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting
performance related to the prolonged commercial soft market
Personal lines combined ratio is expected to improve in 2010 while commercial lines
and reinsurance deteriorate
115
After-Tax Return on Surplus (ROE) by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
5.3%
7.3%
5.2%
6.6%7.1%
5.3%
3.9%
-1.3%
1.7%
-2%-1%0%1%2%3%4%5%6%7%8%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Profitability will rise or stabilize across most p/c lines, barring a financial crisis relapse or major catastrophic losses
Personal lines ROEs should improve in 2010 and remain flat in commercial lines and
reinsurance
117
Net Written Premium Growth by Segment: 2008-2010P
Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.
-1.1%
-7.9%
-1.5%
1.8%
-5.6%
-2.0%
3.5%
-4.0%
-0.7%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Personal Lines Commercial Lines Reinsurance
2008 2009E 2010P
Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Low catastrophe losses and ample
capacity are holding down reinsurance prices while higher insurer retentions impact premiums
Personal lines will return to growth in 2010 while commercial lines and reinsurance are
expected to continue to shrink
120
Catastrophic Loss –Catastrophe Losses Trends Are
Trending Adversely
121
$8
.3
$7
.4
$2
.6 $1
0.1
$8
.3
$4
.6
$2
6.5
$5
.9 $1
2.9 $
27
.5
$6
1.9
$9
.2
$6
.7
$2
6.0
$1
0.6
$1
00
.0
$7
.5
$2
.7
$4
.7
$2
2.9
$5
.5 $1
6.9
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*20??
US Insured Catastrophe Losses
* 2009 figure is Munich Re estimate.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Insurance Information Institute.
2009 CAT Losses Were Less than Half of 2008. 2005 Was by Far the Worst Year Ever for Insured Catastrophe
Losses in the Decade of the 2000s Were More than Double the 1990s, But the Worst Has Yet to Come
$100 Billion CAT Year is Coming Eventually
2009 CAT Losses
Were Down 48% though
Q3 from $21.1B 2008
($ Billions)
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
122
$2,458.0
$1,319.0
$821.9 $776.9$604.5
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Texas Colorado Georgia Kentucky Oklahomo
States with Highest Insured Catastrophe Losses in 2009
($ Millions)
US insured catastrophe
losses totaled $10.57 billion
from 28 events in 2009, down from
$26 billion in 2008.
*As of February 22, 2010.Source: PCS/ISO
Texas led the US with $2.458 billion in catastrophe losses
in 2009 even with no hurricanes hitting the state. Texas also led the US with
$10.2 billion in insured in 2008 due largely to Hurricane Ike.
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Global Natural Catastrophes 1980–2009Overall and insured losses with trend
US
$bn
Overall losses (in 2009 values) Insured losses (in 2009 values)
Trend insured lossesTrend overall losses
Source: Munich Re NatCatSERVICE; Insurance Information Institute.
MEGATREND
Global natural catastrophe loss trends are ominous and
portend an even more disastrous decade ahead. Terrorism and other man-
made disasters could exacerbate the trend.
130
Top 12 Most Costly Disastersin US History
(Insured Losses, 2008, $ Billions)
* PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.
$11.3 $11.3 $12.5
$22.8 $23.8
$45.3
$8.5$8.1$7.3$6.2$5.2$4.2
$0$5
$10$15$20$25$30$35$40$45$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Northridge(1994)
Ike(2008)*
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;
8 of the Top 12 Disasters Affected FL
In 2008, Ike Became the 4th Most Expensive Insurance Event and 3rd Most Expensive
Hurricane in US History Arising from About 1.35MM Claims
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