After the Crisis: Challenges and Opportunities in the P-C Insurance Industry in the Aftermath of the “Great Recession” November 10, 2010 Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5520 Cell: 917.453.1885 [email protected]
After the Crisis: Challenges and Opportunities in the P-C Insurance Industry in the Aftermath of the “Great Recession” November 10, 2010 Robert P. Hartwig,
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After the Crisis: Challenges and Opportunities in the P-C Insurance
Industry in the Aftermath of the “Great Recession”
November 10, 2010
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Presentation Outline
Reasons for Optimism, Causes for Concern
Industry Financial Overview for 2010 and Outlook for 2011 & Beyond Profitability Premium Growth Capital & Capacity Financial Strength Underwriting Performance: Commercial & Personal Lines Financial/Investment Review & Outlook Catastrophe Loss Trends
P/C Growth Overview & Analysis: Price and Exposure Trends Economic Crisis and Exposure(Insurance Demand): Personal & Commercial Lines Pricing: Personal & Commercial Lines
Regulatory and Legislative Overview Financial Services Reform
Impacts of 2011 on P-C Insurance Industry
Tort System Concerns
Leading Challenges Facing the P/C Insurance Industry: 2011-2015
Q&A
3
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry Economic Recovery in US is Self-Sustaining: No Double Dip Recession
Pessimism “Bubble” Persists; Negative Economic News Amplified; Positive News is Discounted Financial market volatility will remain a reality
Era of Mass P/C Insurance Exposure Destruction Has Ended But restoration of destroyed exposure will take 3+ years in US
No Secondary Spike in Unemployment or Swoon in Payrolls/WC Exposure But job and wage growth remains sluggish
Exposure Growth Beginning in 2nd Half 2010, Accelerate in 2011
Increase in Demand for Commercial Insurance is in its Earliest Stages and Will Accelerate in 2011 Includes workers comp, commercial auto, marine, many liability coverages, D&O
Laggards: Property, inland marine, aviation
Personal Lines: Auto leads, homeowners lags
P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006
Investment Environment Is/Remains Much More Favorable Volatility, however, will persist and yields remain low
Both are critical issues in long-tailed commercial lines like WC, Med Mal, D&O
Source: Insurance Information Institute.
4
P/C Insurance Industry Capacity as of 6/30/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis As of 12/31/09 capacity was within 2% of pre-crisis high
Record Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist through 2010 and Potentially into 2011
There is No Catalyst for a Robust Hard Market at the Current Time High Global First Half 2010 CAT Losses Insufficient to Trigger Hard Market
Localized insurance and reinsurance impacts are occurring, especially earthquake coverage in Latin/South America, Offshore Energy Markets, European Wind Cover
Inflation Outlook for US and Major European Economies and Japan is Tame Will temper claims inflation Deflation is highly unlikely
Financial Strength & Ratings of Global (Re)Insurance Industries Remained Strong Throughout the Financial Crisis in Sharp Contrast With Banks
Insurers Avoided the Most Draconian Outcomes in Financial Services Reform Legislation
Tort Environment in US is Beginning to Deteriorate; No Tort Reform in US Major Transformation of US Economy Underway with Major Opportunities for Insurers
through 2020 in Health, Tech, Natural Resources, Ag., Energy
Source: Insurance Information Institute.
Reasons for Optimism, Causes for Concern in the P/C Insurance Industry
5
11 Industries for the Next 10 Years: Insurance Solutions Needed
Shipping (Rail, Marine)
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Technology (incl. Biotechnology)
Light Manufacturing
Export-Oriented Industries
6
I.
P/C Insurance Industry Financial Overview & Outlook for 2011
Recession, Recovery & Volatility
7
Profitability
Historically Volatile
P/C Net Income After Taxes1991–2010:H1 ($ 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
$3
,04
3
$1
6,5
31$2
8,3
11
-$6,970
$6
5,7
77
$4
4,1
55
$2
0,5
59
$3
8,5
01
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10:H1
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:H1 ROAS = 6.3%
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute
P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized
capital gains vs. -$11.1B in previous realized capital losses
9
ROE: P/C vs. All Industries1987–2009*
* Excludes Mortgage & Financial Guarantee in 2008 and 2009.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
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 and 2010:Q1 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.
97.5
100.6 100.1 100.7
92.6
99.5 100.1101.0
7.5%7.3%
9.6%
15.9%
14.3%
12.7%
4.4%
8.9%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009* 2010:H1*0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generated a 7% ROE in 2009,10% in 2005 and 16% in 1979
13
Return of Net Worth: 10-Year Average, 1999-2008*: All Lines
20.1
15.6
14.2
13.2
12.9
12.4
11.8
11.4
11.2
11.1
11.1
10.9
10.8
10.8
10.7
10.6
10.4
10.2
9.9
9.8
9.7
9.4
8.9
8.6
8.5
0
5
10
15
20
25
HI
DC
ME
AK
WY
UT RI
VT IA CT ID NC
MA
NM NH VA
CO
WA
SC
SD
KS
OR
MD NJ
NE
Pec
ent c
hang
e (%
)
*Latest available.
Source: 2009 NAIC Report on Profitability.
Top 25 States
Hawaii had the highest RNW in the US form 1999-2008
14
8.5
8.4
7.9
7.9
7.7
7.4
6.9
6.7
6.7
6.6
6.5
6.4
6.3
6.3
6.3
6.3
6.2
5.6
5.3
4.4
4.1
3.6
3.5
3.2
-13.8
-10
.2
-15
-10
-5
0
5
10
OH
CA IN WI
AZ
MO
MT IL
WV
GA
MN MI
AR
FL
PA
TN
KY
OK
NV
NY
DE
TX AL
ND
MS LA
Pe
ce
nt
ch
an
ge
(%
)
Sources: 2009 NAIC Report on Profitability.
Bottom 25 States
Return of Net Worth: 10-Year Average, 1999-2008: All Lines
Mississippi and Louisiana were the least profitable states
from 1999-2008 due to Hurricanes Katrina and Rita
Financial Strength & Ratings
15
Industry Has Weathered the Storms Well
P/C Insurer Impairments, 1969–20098
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
7 65
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
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)
17
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
9*
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08
19
Reasons for US P/C Insurer Impairments, 1969–2008
38.1%
14.3%8.1%
7.6%
7.9%
7.0%
9.1%
4.2%
3.7%
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009
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/Inadequate Pricing
Reinsurance Failure
Rapid GrowthAlleged Fraud
Catastrophe Losses
Affiliate Impairment
Investment Problems
Misc.
Sig. Change in Business
Critical Differences Between P/C Insurers and Banks
20
Superior Risk Management Model and Low Leverage Make a Big Difference
21
How P/C Insurance Industry Stability Has Benefitted Consumers
Bottom Line:
Insurance markets – unlike banking – are operating normally
The basic function of insurance – the orderly transfer of risk from client to insurer – continues uninterrupted
This means that insurers continue to: Pay claims (whereas 311 banks have gone under as of 11/5/10)
– The promise is being fulfilled
Renew existing policies (banks are reducing and eliminating lines of credit)
Write new policies (banks are turning away people and businesses who want or need to borrow)
Develop new products (banks are scaling back the products they offer) Compete intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute
Capital/PolicyholderSurplus (US)
25
Shrinkage, but Not Enoughto Trigger Hard Market
27
Policyholder Surplus, 2006:Q4–2010:Q2
Sources: ISO, A.M .Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$511.5
$540.7$530.5
$505.0$515.6$517.9
$420
$440
$460
$480
$500
$520
$540
$560
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
2007:Q3Previous Surplus Peak
Quarterly Surplus Changes Since 2009:Q1 Trough
09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-2.0%)
10:Q1: +$18.9B (+3.6%)10:Q2: -$10.2B (-1.9%)
Surplus set a new record in 2010:Q1*
*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business
30
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)
Merger & Acquisition
32
Barriers to Consolidation Will Diminish in 2010
33
U.S. P/C Insurance-RelatedM&A Activity, 1988–2009
$2$5
$19
$1 $0
$20
$0
$9
$35
$14$16
$4
$56
$31
$8$12
$2$3 $3 $5$6
$40
$0
$10
$20
$30
$40
$50
$60
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Tra
ns
ac
tio
n V
alu
e (
$ B
illio
n)
0
20
40
60
80
100
120
140
Nu
mb
er o
f Tra
ns
ac
tion
s
Transaction Values
Number of Transactions
Note: U.S. Company was the acquirer and/or target.
Source: Conning Research & Consulting.
2010: No Mega Deals So Far, Despite Record Capital, Slow Growth and Improved
Financial Market Conditions
$ Value of Deals Down 78% in 2009, Volume Up 7%
Investment Performance
34
Investments Are a PrincipleSource of Declining Profitability
Property/Casualty Insurance Industry Investment Gain: 1994–2010:H11
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.0
$25.8
$58.0
$51.9$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:H1In 2008, Investment Gains Fell by 50% Due to Lower Yields and
Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income
Investment Gains Are Recovering So Far in 20101 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) 2009:H1 gain was $12.5B
Investment gains in 2010 are on track to be their best since 2007
37
Treasury Yield Curves: Pre-Crisis (July 2007) vs. October 2010
0.14% 0.13% 0.18% 0.23% 0.38%
1.85%
2.54%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
1.18%
0.57%
3.87%3.52%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
October 2010 Yield Curve*Pre-Crisis (July 2007)
Treasury yield curve is near its most depressed level in at least 45 years. Investment
income is falling as a result.
The Fed’s Announced Intention to Pursue Additional Quantitative Easing Could Further Depress Rates in the 7 to 10-Year Maturity Range
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
QE2 Target
39
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Perso
nal L
ines
Pvt Pass
Aut
o
Pers P
rop
Comm
ercia
l
Comm
l Auto
Credit
Comm
Pro
p
Comm
Cas
Fidelity
/Sure
ty
War
rant
y
Surplu
s Line
s
Med
Mal
WC
Reinsu
ranc
e**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
41
Underwriting Trends – Financial Crisis Does Not
Directly Impact Underwriting Performance: Cycle, Catastrophes
Were 2008’s Drivers
42
P/C Insurance Industry Combined Ratio, 2001–2010:H1*
* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:H1=101.7 Sources: A.M. Best, ISO.
95.7
99.3 100.1101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010:H1
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
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Lower CAT
Losses, More
Reserve Releases
Underwriting Gain (Loss)1975–2010:H1*
* Includes mortgage and financial guarantee insurers.Sources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
The industry recorded a $5.1B underwriting
loss in 2010:H1 compared to $2.1B in
2009:H1
Cumulative underwriting deficit from 1975 through
2009 is $445B
($ Billions)
44
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 Are Continuing Strong in 2010 But Should Begin to Taper Off 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.
Prior year reserve releases totaled $8.8 billion in the
first half of 2010, up from $7.1 billion in
the first half of 2009
46
Number of Years with Underwriting Profits by Decade, 1920s–2000s
0 0
3
54
8
10
76
0
2
4
6
8
10
12
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.
Number of Years with Underwriting Profits
Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003
47
Fed Efforts to Stimulate Inflation Will Ultimately Pressure Claim
Cost Severities
Inflation Trends:
Benign Inflation Tempers Claim Severity
48
Annual Inflation Rates(CPI-U, %), 1990–2016F
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
1.6 1.52.0 2.2 2.2 2.2 2.2
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 10F 11F 12F 13F 14F 15F 16F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 (forecasts).
There is So Much Slack in the US Economy Inflation Should Not Be a Concern Through 2010-12 Despite Fed’s Quantitative Easing Efforts.
Deficits and Monetary Policy Remain Longer Run Concerns
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
49
WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests
Source: Bureau of Labor Statistics; Insurance Information Institute.
2.7%
1.8%
6.9%
3.0% 3.0%3.4%
3.1%3.4%
0%
2%
4%
6%
8%
Overall CPI "Core" CPI HospitalServices
Physicians'Services
DentalServices
PrescriptionDrugs
Medical CareCommodities
Medical CPI
(Percent increase Dec 08 to Dec 09)
Healthcare Costs Are a Major WC Insurance Cost Driver. They AreLikely to Increase Faster than the CPI for the Next Few Years, at Least
50
Excludes Food and Energy
Inpatient Services Rose 6.7%;
Outpatient Services Rose 7.4%
53
Performance by Segment:Commercial/Personal Lines
54
Calendar Year Combined Ratios by Segment: 2008-2012F
102.4
98.9
101.5
103.5
101.0
103.7102.0
104.2103.8104.5
90
92
94
96
98
100
102
104
106
Personal Lines Commercial Lines
2008 2009 2010P 2011F 2012F
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 remain stable in 2010 while commercial lines and reinsurance deteriorate
Sources: A.M. Best (historical); Insurance Information Institute forecasts for 2010 – 2012.
55
Net Written Premium Growth by Segment: 2008-2012F
-0.1%
-9.4%
2.9%
-2.5%
3.9%
1.0%
4.7%
2.5%
-4.0%
-0.7%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Personal Lines Commercial Lines
2008 2009 2010P 2011F 2012F
Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession
weigh on commercial lines.
Personal lines will show growth in 2010 while commercial lines is expected to continue to shrink
Sources: A.M. Best (historical); Insurance Information Institute forecasts (2010 - 2012).
Homeowners Insurance Combined Ratio: 1990–2012F
11
3.0
11
7.7
15
8.4
11
3.6
10
1.0 10
9.4
10
8.2
11
1.4 1
21
.7
10
9.3
98
.3
94
.2 10
0.3
88
.9 95
.6
11
6.8
10
5.5
11
0.9
11
1.5
11
2.011
8.4
11
2.7 12
1.7
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 10F11F12F
Homeowners Line Is Expected to Be Less Profitable Overall in 2010 Due Largely to Higher Catastrophe Losses. Volatility Due to
Catastrophe Losses Will Persist.
Sources: A.M. Best (history); Conning (forecasts); Insurance Information Institute.
Private Passenger Auto Combined Ratio: 1993–2012F
10
1.7
10
1.3
10
1.3
10
1.0
10
9.5
10
7.9
10
4.2
98
.4
94
.3
95
.1
95
.5 98
.3 10
0.2
10
1.3
98
.5
96
.9
95
.7
99
.5 10
1.1
10
3.5
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 10F 11F 12F
Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best (history); Conning (forecasts); Insurance Information Institute.
Commercial Multi-Peril Combined Ratio: 1995–2012F*
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 1
22
.4
11
5.0
11
7.0
97
.3
89
.0
97
.7
93
.8
83
.8
89
.8
10
8.0
97
.0 10
3.0
10
4.6
10
3.6
11
3.1
11
5.0 12
1.0
80
85
9095
100
105
110
115120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E* 10F* 11F* 12F*
CMP-Liability CMP-Non-Liability
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 (history); Conning (forecasts) Insurance Information Institute.
General Liability Combined Ratio: 2008–2012F
96.8
106.0108.1 108.9
105.6
80
85
90
95
100
105
110
115
08 09E 10F 11F 12F
General Liability is Expected to Deteriorate if Loss Frequency and Severity Trends Deteriorate 2010-2012
Sources: A.M. Best (history); Conning (forecasts); Insurance Information Institute.
Commercial Auto Combined Ratio: 1993–2012F
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
98
.1
10
3.5
10
4.5
10
1.8
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 10F 11F 12F
Commercial Auto is Expected to Deteriorate if Loss Frequency and Severity Trends Deteriorate 2010-2012
Sources: A.M. Best (history); Conning (forecasts); Insurance Information Institute.
Workers Compensation Combined Ratio: 1994–2012F
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
.8 11
6.0
11
7.0
11
7.0121.7
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 10F 11F 12F
Workers Comp Underwriting Results Are Deteriorating Markedly
Sources: A.M. Best (history); Conning (forecasts); Insurance Information Institute.
66
Claim Trends in Auto Insurance
Rising Costs Held in Check by Falling Frequency:
Can That Pattern Be Sustained?
67
Bodily Injury: Severity Trend Moderating, Frequency Decline Continues
-5.4%
-3.8%-5.0%
-3.1% -3.2%-2.2%
2.9%
4.7%5.9% 6.1%
2.1%1.2%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009 2010*
Severity Frequency
*For 2010, data are for the 4 quarters ending with 2010:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2010*
Cost Pressures Will Increase if BI Severity Increases Outpace Declines in Frequency
68
Property Damage Liability: Frequency and Severity Trends Nearly Offset in 2009/10
-1.6%
-3.5%
0.8%
-3.4%
0.3% 0.3%
2.9%3.6%
2.1%1.4%
-0.3% -0.4%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
2005 2006 2007 2008 2009 2010*
Severity Frequency
Annual Change, 2005 through 2010*
Stable Severity/Frequency Trends Keeping PD Costs in Check, But Are These Trends Sustainable?
*For 2010, data are for the 4 quarters ending with 2010:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
69
No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse*
-4.8%-5.7%
-2.7%
-6.9%
5.9%6.6%
4.7%
2.4%
6.3% 6.4% 6.5%5.2%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2005 2006 2007 2008 2009 2010*
Severity Frequency
*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT; 2010 data are for the 4 quarters ending 2010:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
Annual Change, 2005 through 2010*
Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ
70
Collision Coverage: Frequency and Severity Trends Have Been Favorable
-1.8%
-3.5%
2.3%
-2.4%-1.6% -1.4%
3.9%3.1%
0.7% 0.4%
-2.3%-1.6%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
2005 2006 2007 2008 2009 2010*
Severity Frequency
Annual Change, 2005 through 2010*
The Recession, High Fuel Prices Have Helped Push Down Frequency and Temper Severity, But this Trend Will Likely Be
Reversed Based on Evidence from Past Recoveries*For 2010, data are for the 4 quarters ending with 2010:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
71
Comprehensive Coverage: Recent Severity Trends Favorable, Frequency is Up in 2010
-3.1%
-9.8%-6.6%
1.6% 1.5%
6.6%
15.5%
-1.4% -1.4%
13.0%
-8.2%-10.3%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2005 2006 2007 2008 2009 2010*
Severity Frequency
Annual Change, 2005 through 2010*
Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper
Severity, But This Factors Will Weaken as Economy Recovers*For 2010, data are for the 4 quarters ending with 2010:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
Workers Compensation Operating Environment
72
The Weak Economy and Soft Market Have Made the Workers Comp Operating
Increasingly Challenging
Workers Compensation Premium Continues Its Sharp DeclineNet Written Premium
$ Billions
Calendar Yearp Preliminary
Source: 1990–2008 Private Carriers, Best's Aggregates & Averages; 2009p, NCCI1996–2009p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements
State Funds available for 1996 and subsequent
Workers Compensation Medical & Indemnity Claim Cost Trends
80
Rising Medical Costs Exert Pressure While Indemnity Costs Rise Well Ahead of
Wage Inflation
$8.5 $8.6 $8.4$9.2 $9.6$10.3
$11.4$12.3
$13.6$14.6
$16.6$18.0
$19.2$20.3
$21.9$23.0
$24.3$25.9
$27.2
$5
$10
$15
$20
$25
$30
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09p
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2009: +6.6%
Accident Year
MedicalClaim Cost ($000s)
2009p: Preliminary based on data valued as of 12/31/20091991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Cumulative Change = 224%(1993-2009p)
Workers Comp Medical Claim Costs Continue to Rise
4.5%
3.5%2.8%
3.2% 3.5%4.1%
4.6% 4.7%4.0%
4.4% 4.2% 4.0%4.4%
3.7% 3.4%
5.1%
7.4%
10.1%
8.3%
10.6%
7.3%
13.5%
8.8%
7.3%
5.6%
7.4%
5.4% 5.4%
6.7%
5.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Change in Medical CPI
Change Med Cost per Lost Time Claim
WC Medical Severity Risingat Twice the Medical CPI Rate
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average annual increase in WC medical severity form 1995 through 2009 was nearly twice the medical CPI (7.6% vs.
3.9%). New healthcare reform legislation is unlikely to have any
impact on the gap.
WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests
Source: Bureau of Labor Statistics; Insurance Information Institute.
2.7%
1.8%
6.9%
3.0% 3.0%3.4%
3.1%3.4%
0%
2%
4%
6%
8%
Overall CPI "Core" CPI HospitalServices
Physicians'Services
DentalServices
PrescriptionDrugs
Medical CareCommodities
Medical CPI
(Percent increase Dec 08 to Dec 09)
Healthcare Costs Are a Major WC Insurance Cost Driver. They AreLikely to Increase Faster than the CPI for the Next Few Years, at Least
83
Excludes Food and Energy
Inpatient Services Rose 6.7%;
Outpatient Services Rose 7.4%
84
Workers Compensation Lost-Time Claim Frequency Continues to Decline*
-4.4
%
0.3
%
-6.5
%
-4.5
%
0.5
%
-3.9
%
-2.3
%
-4.5
%
-6.9
%
-4.5
%
-4.1
%
-3.7
%
-6.6
%
-6.2
%
-3.0
%
-3.4
%
-4.0
%
-9.2
%
-4.2
%
-10%
-8%
-6%
-4%
-2%
0%
2%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09P
(Percent) Lost-Time Claims
Claim frequency fell in 4.0% in 2009, in part due to the recession
Cumulative Change of -54.7%
(1991 – 2008)
2009p: Preliminary based on data valued as of 12/31/2009; *Frequency is defined as the number of lost-time claims per 100,000 workers.1991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds; Excludes the effects of deductible policies
92
Catastrophic Loss –Catastrophe Losses Trends Are
Trending Adversely
93
$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
7.1
$1
0.6
$7
.9
$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 10*20??
US Insured Catastrophe Losses
*Through June 30, 2010.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; Munich Re; Insurance Information Institute.
2010 CAT Losses Are Running Below 2009, So Far Figures Do Not Include an Estimate of Deepwater Horizon Loss
$100 Billion CAT Year is Coming Eventually
First Half 2010 CAT
Losses Were Down 19% or $1.4B from
first half 2009
($ Billions)
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
94
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2009
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; Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3 0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
3.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of the Combined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39
2000s: 3.52
Combined Ratio Points
50
100
150
200
250
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
First Half 201095 Events
Number of events in first half of 2010 is close to the annual totals from five of past ten years.
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)
Source: MR NatCatSERVICE 97© 2010 Munich Re
Thunderstorm losses have quadrupled since 1980.
First Half 2010 $3.0 Bn
U.S. Thunderstorm Loss TrendsAnnual Totals 1980 – 2009 vs. First Half 2010
Source: Property Claims Service, MR NatCatSERVICE 98© 2010 Munich Re
Source: Property Claims Service, MR NatCatSERVICE 99© 2010 Munich Re
Average annual winter storm losses have increased over 50% since 1980.
First Half 2010 $2.4 Bn
U.S. Winter Storm Loss TrendsAnnual totals 1980 – 2009 vs. First Half 2010
Severe winter storms in early 2010 caused major
damage to energy infrastructure
101
Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*
($ Billions)
* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
Texas Accounted for 10% of All US Insured CAT Losses from 1980-2008: $57.1B out of $297.9B
$176 , 60%
$57.10 , 19%
$31.20 , 10%
$33.60 , 11%
Florida
Texas
Louisiana
Rest of US
102
Top 12 Most Costly Disastersin US History
(Insured Losses, 2009, $ Billions)
Sources: PCS; Insurance Information Institute inflation adjustments.
$11.3 $12.5
$18.2$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)
Ike (2008)
Northridge(1994)
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
Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US
and World History
104
Total Value of Insured Coastal Exposure
(2007, $ Billions)
Source: AIR Worldwide
$224.4$191.9
$158.8$146.9$132.8
$92.5$85.6$60.6$55.7$51.8$54.1
$14.9
$479.9$635.5
$772.8$895.1
$2,378.9$2,458.6
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with
$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B
in insured coastal exposure
The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004
105
US Residual Market Exposure to Loss
$372.3$430.5 $419.5
$656.7
$771.9
$696.4$703.0
$292.0$244.2$221.3
$281.8
$150.0
$54.7
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: PIPSO; Insurance Information Institute
Hurricane Andrew
4 Florida Hurricanes
Katrina, Rita, and Wilma
In the 19-year Period Between 1990 and 2009, Total Exposure to Loss in the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from
$54.7B in 1990 to $703.0B in 2009
($ Billions)
II. Exposure Trends and Growth:
Overview & Analysis
106
Soft Market and Reduced Demand Due to Recession Have Challenged Growth for Years
Winds of Change for 2011 and Beyond?
P/C Premium Growth Primarily Driven by the
Industry’s Underwriting Cycle, Not the Economy
107
Personal and Commercial Lines Pricing Trends
108
-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
10F
Soft Market Appears to Persist in 2010 but May Be Easing: Relief in 2011?
(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.
NWP was flat with 0.0% growth in 10:H1 vs. -4.4% in 09:H1
109
Direct Premiums Written: All LinesPercent change by State, 2004-2009
42
.9
23
.8
22
.0
18
.8
17
.2
15
.4
14
.8
14
.2
14
.1
14
.0
13
.5
13
.0
13
.0
12
.9
12
.8
12
.3
12
.2
11
.5
10
.7
7.9
5.8
5.5
5.1
5.0
4.6
0
5
10
15
20
25
30
35
40
45
ND LA
SD
WY
MT
UT
OK
DE IA
NM
MS
WV
SC
DC
TX
NE
KS
NC ID AL
FL
WA
GA
AR HI
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
North Dakota is the growth juggernaut of the p/c
insurance industry—too bad nobody lives there…
110
4.5
4.2
2.6
2.5
2.4
2.0
0.9
0.7
0.6
0.5
0.0
-0.1
-2.8
-3.1
-3.5
-3.7
-5.2
-8.2
-9.2
-14
.8
-15
.2
-0.5
-1.2
-1.6
-1.8
-2.4
-20
-15
-10
-5
0
5
AK
VA
TN
KY
MD
MO AZ
OR WI
NV
NY IN PA
MN
VT
CO
CT RI
NJ IL
ME
OH
NH
MA MI
CA
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Bottom 25 States
Direct Premiums Written: All LinesPercent change by State, 2004-2009
States with the poorest performing economies also produced the most negative net change in premiums of
the past 5 years
111
Direct Premiums Written: Commercial Lines Percent Change by State, 2004-2009
65.0
33.0
32.2
29.7
22.2
21.0
20.6
20.6
20.2
15.1
13.6
13.1
11.5
8.8
8.7
8.0
7.2
6.7
6.2
5.8
2.6
2.1
1.6
1.2
0.3
05
10152025303540455055606570
ND
SD
WV LA MT
OK
WY
NE IA KS
DC
MS
UT
NM TX SC
NY
CO FL ID AK
NC AL
AR
MO
Pec
ent c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
North Dakota led the way—by far—with a 65% increase
in premiums written over the past 5 years
27 states and DC had positive premium growth
over the past 5 years
112
0.0
-0.1
-0.1
-3.1
-3.8
-4.0
-4.4
-4.4
-6.2
-8.5
-9.7
-10
.2
-22
.7
-16
.0
-12
.6-10
.6
-10
.4-8.3
-2.3
-2.2
-1.9
-6.5
-6.9
-7.1
-7.3
-7.8
-30
-25
-20
-15
-10
-5
0
5
KY WI
VA
MN
WA IN GA
PA
TN VT
MD NJ
CA HI
ME
OR IL AZ
MA
CT
OH
DE RI
NV
NH MI
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Direct Premiums Written: Commercial Lines Percent Change by State, 2004-2009
Bottom 25 States
23 states had negative commercial premium growth
over the past 5 years
113
Monthly Change in Auto Insurance Prices, 2005-2010*
(Percent Changefrom same month,prior year)
* Through September 2010. Data are percentage change from same month in prior year, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute
3.4%
3.3%
3.0%
2.9%
2.4%
2.2%
2.0%
1.9%
1.3%
0.6% 0.
9%0.
5%0.
2% 0.4%
0.4% 0.5%
0.3%
0.2%
0.2%
1.0%
1.6%
1.1%
0.8%
0.7% 0.8%
0.6%
0.4%
-0.2
%0.
3% 0.6%
0.6%
0.4%
0.1% 0.2% 0.
5%0.
9% 1.1% 1.
4% 1.7%
2.6%
2.6% 2.7% 3.
0% 3.1% 3.
4%3.
8% 4.0%
4.0% 4.
3% 4.4% 4.
6%4.
6% 4.7%
4.6%
4.6%
4.6%
4.6%
4.6% 4.7%
4.7% 4.
9%5.
3%5.
3%5.
3%5.
1% 5.3%
5.1%
5.1%
0.9%
-1%
0%
1%
2%
3%
4%
5%
6%
Jan
05F
eb 0
5M
ar 0
5A
pr 0
5M
ay 0
5Ju
n 05
Jul 0
5A
ug 0
5S
ep 0
5O
ct 0
5N
ov 0
5D
ec 0
5Ja
n 06
Feb
06
Mar
06
Apr
06
May
06
Jun
06Ju
l 06
Aug
06
Sep
06
Oct
06
Nov
06
Dec
06
Jan
07F
eb 0
7M
ar 0
7A
pr 0
7M
ay 0
7Ju
n 07
Jul 0
7A
ug 0
7S
ep 0
7O
ct 0
7N
ov 0
7D
ec 0
7Ja
n 08
Feb
08
Mar
08
Apr
08
May
08
Jun
08
Jul 0
8A
ug 0
8S
ep 0
8O
ct 0
8N
ov 0
8D
ec 0
8Ja
n 09
Feb
09
Mar
09
Apr
09
May
09
Jun
09Ju
l 09
Aug
09
Sep
09
Oct
09
Nov
09
Dec
09
Jan
10F
eb 1
0M
ar 1
0A
pr 1
0M
ay 1
0Ju
n 10
Jul 1
0A
ug 1
0S
ep 1
0
Auto Insurance Price Increases Have Averaged About 5% in 2010 over 2009, After
Averaging About 4.5% in 2009 over 2008. PPA currently exhibits the strongest pricing
trend of any major p/c line.
PPA Auto, like most p/c lines, exhibits strong cyclicality in pricing. Prices rose from 2000 to late 2005, were flat/falling in 2006 and 2007 before beginning to
rise gain in 2008.
Underwriting performance remained strong even
when prices were flat or falling due to
improvements in underlying frequency and
severity trends
114
Monthly Change* in Auto Insurance Prices, 1991–2010*
*Percentage change from same month in prior year; through September 2010; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-2%
0%
2%
4%
6%
8%
10%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Cyclical peaks in PP Auto tend to occur
approximately every 10 years (early 1990s, early
2000s and likely the early 2010s)
“Hard” markets tend to occur
during recessionary
periods
115
Average Expenditures on Auto Insurance
$651$668
$691$705
$726
$786
$830$842
$831$816
$795$816
$844
$878
$690$685$703
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10*
Countrywide Auto Insurance Expenditures Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)
* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
116
Average Expenditures For Auto InsuranceBy State, 2007
$1
,14
0
$1
,10
4
$1
,09
6
$1
,04
7
$1
,04
3
$1
,01
7
$1
,01
2
$1
,00
0
$9
81
$9
64
$9
28
$9
23
$9
22
$8
73
$8
41
$8
37
$8
20
$8
19
$8
08
$8
00
$7
95
$7
82
$7
62
$7
50
$7
38
$7
30
$0
$200
$400
$600
$800
$1,000
$1,200
DC NJ
LA
NY FL RI
DE
NV
MA
CT MI
AK
MD AZ
WA HI
PA
WV
TX
CA
US
GA
SC
NH
CO
NM
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.
Source: © 2009 National Association of Insurance Commissioners.
117
Average Expenditures For Auto InsuranceBy State, 2007 (con’t)
$723
$723
$721
$720
$697
$684
$680
$666
$662
$661
$660
$658
$649
$646
$631
$628
$618
$611
$591
$582
$568
$564
$554
$534
$518
$512
$0
$200
$400
$600
$800
IL
OR
MN
KY
UT AL
MS
MT VT VA
AR
MO TN OK
WY
OH IN ME
NC W
I
KS ID NE
SD IA
ND
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.
Source: © 2009 National Association of Insurance Commissioners.
118
Average Premium forHome Insurance Policies**
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.
$508$536
$593
$668
$822 $835$854
$879
$804
$764
$729
$500
$550
$600
$650
$700
$750
$800
$850
$900
$950
00 01 02 03 04 05 06 07 08* 09* 10*
119
70.6
52.7
42.7
41.9
41.1
41.0
38.9
37.8
37.6
36.9
36.7
35.0
35.0
34.5
33.8
32.8
32.6
31.6
31.1
30.0
29.7
29.5
28.0
27.8
27.7
05
1015202530354045505560657075
HI
LA SC RI
NM ID DE
MS FL AL
GA
CT
NC
MA
UT
NY NJ
AR
WY
MT
MO
NH
ME VA
ND
Pec
ent c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Hawaii was the fastest growing state between
2004 and 2009
Percent Change in NPW: Homeowners, by State, 2004-2009
Top 25 States
120
26.7
26.6
24.9
24.7
24.5
24.2
23.7
23.2
23.1
22.6
22.2
22.1
22.0
20.6
19.8
19.7
19.6
19.5
19.2
19.2
18.4
16.8
16.5
12.4
11.2
0.2
0
5
10
15
20
25
30
KY
TN WA
DC VT
TX KS
NV
MN AK
MD
OK
OR
SD IA NE
CO
OH IL W
I
PA IN AZ
WV
CA MI
Pec
ent c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Michigan was the slowest growing state
between 2004 and 2009
Percent Change in NPW: Homeowners, by State, 2004-2009
Bottom 25 States
121
Average Commercial Rate Change,All Lines, (1Q:2004–3Q:2010)
-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
%
-5.6
%
-5.3
%
-6.4
% -5.2
%
-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
1Q
10
2Q
10
3Q
10
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 Remain Modest
123
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q2
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Percentage Change (%)
Market has Been Soft for 6 years and Remains Soft as Capital is Restored and
Underwriting Losses Remain Modest
Trough = 2007:Q3 -13.6%
KRW Effect
Pricing Turned Negative in Early
2004 and Has Been Negative
Ever Since
Peak = 2001:Q4 +28.5%
Crisis-Driven Exposure Drivers
125
Economic Obstaclesto Growth in P/C Insurance Will
Slowly Be Cleared Away
126
16.9
16.5
16.1
13.1
10.3
11.4
12.6
14.0 14
.7 15.1
15.0 15
.5
16.9
16.617
.117.5
17.8
17.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10F 11F 12F 13F 14F 15F 16F
(Millions of Units)
Auto/Light Truck Sales, 1999-2016F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10); Insurance Information Institute.
Car/Light Truck Sales Will Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales in 2010
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2010-11 is
still far below 1999-2007 average of 17 million units, but a recovery is underway.
Job growth and improved credit market conditions will boost auto sales in
2011 and beyond
127
Number of Registered Passenger Vehicles in the US, 2000-2008
133.
6
137.
6
135.
9
135.
7
136.
4
136.
6
135.
4 135.
9
137.
1
133
134
134
135
135
136
136
137
137
138
138
2000 2001 2002 2003 2004 2005 2006 2007 2008
($ m
illio
ns
)
Sources: US Federal Highway Administration, Bureau of Transportation Statistics; Insurance Information Institute.
The Number of Registered Passenger Vehicles Has Remain Basically Flat Since 2001
129
(Millions of Units)
New Private Housing Starts, 1990-2016F
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
0.6
0 0.7
6
1.0
2 1.2
0 1.3
3 1.4
3
1.5
0
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 10F11F12F13F14F15F16F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until 2012. Also Affects Commercial Insurers with Construction Risk Exposure, Surety
New home starts plunged
72% from 2005-2009; 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
Job growth, improved credit
market conditions and demographics
will eventually boost home construction
Average Square Footage of Completed New Homes in U.S., 1973-2010:Q2
1,6
60
1,6
95
1,6
45
1,7
00
1,7
20
1,7
55
1,7
60
1,7
40
1,7
20
1,7
10
1,7
25
1,7
80
1,7
85
1,8
25
1,9
05 1,9
95
2,0
35
2,0
80
2,0
75
2,0
95
2,0
95
2,1
00
2,0
95
2,1
20
2,1
50
2,1
90
2,2
23
2,2
66
2,3
24
2,3
20
2,3
30
2,3
49 2,4
62
2,4
92
2,5
09
2,4
63
2,3
67
2,3
62
2,3
98
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
08
09
10
:Q1
10
:Q2
Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.
Square Ft
The trend to building larger homes reversed in 2008, affecting exposure
growth beyond the decline in number of units built. Trend may now be reversing.
Average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions
130
131
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
5371
,549
70,6
4362
,304
52,3
7451
,959
53,5
4954
,027
44,3
6737
,884
35,4
7240
,099
38,5
4035
,037
34,3
1739
,201
19,6
95 28,3
2243
,546
60,8
3729
,059
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 0910
:H1
Business Bankruptcy Filings,1980-2010:H1
Source: American Bankruptcy Institute; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines. There Are Some Preliminary Indications that Business
Bankruptcies Are Beginning to Decline.
There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:H1
bankruptcies totaled 29,059, down 4% from H1:2009, but still very high by historical standards.
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*
132
Private Sector Business Starts,1993:Q2 – 2009:Q4*
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
117
716
918
0
203
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure
*Latest available as of September 12, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
(Thousands)
180,000 businesses started in 2009:Q4, the best quarter in 2009. 2009 was the slowest year for new
business starts since 1993.
66%
68%
70%
72%
74%
76%
78%
80%
82%
Ma
r 0
1
Ju
n 0
1
Se
p 0
1
De
c 0
1
Ma
r 0
2
Ju
n 0
2
Se
p 0
2
De
c 0
2
Ma
r 0
3
Ju
n 0
3
Se
p 0
3
De
c 0
3
Ma
r 0
4
Ju
n 0
4
Se
p 0
4
De
c 0
4
Ma
r 0
5
Ju
n 0
5
Se
p 0
5
De
c 0
5
Ma
r 0
6
Ju
n 0
6
Se
p 0
6
De
c 0
6
Ma
r 0
7
Ju
n 0
7
Se
p 0
7
De
c 0
7
Ma
r 0
8
Ju
n 0
8
Se
p 0
8
De
c 0
8
Ma
r 0
9
Ju
n 0
9
Se
p 0
9
De
c 0
9
Ma
r 1
0
Ju
n 1
0
Se
p 1
0
Recovery in Capacity Utilization is a Positive Sign for Insurance Exposure
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 134
Percent of Capacity Utilized (Manufacturing, Mining, Utilities)
Hurricane Katrina
March 2001-November 2001
recession
“Full Capacity”
The closer the economy is to operating at “full
capacity,” the greater the demand for insurance
Manufacturing capacity stood at
74.7% in Sept. 2010, above the June 2009 low of 68.2% but well below the pre-crisis
peak of 80%+
Recession began December 2007
136
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/.
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
%3
.2% 5.5
%3
.1%
3.6
%2
.6% 5.4
%2
.8%
-3.9
%
-10
.9%
-4.1
%2
.5%
2.2
%
-16
.4%-11
.6%
2.4
%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1Q
99
2Q
99
3Q
99
4Q
99
1Q
00
2Q
00
3Q
00
4Q
00
1Q
01
2Q
01
3Q
01
4Q
01
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
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
States Revenues Were Up 2.2% in Q2 2010, the 2nd Consecutive Quarter of Revenue Increase. Public Infrastructure Spending is Still Likely to Remain
Depressed, Dampening Related Insurance Exposures and Demand.
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. Receipts now beginning to recover.
State tax revenues are beginning a slow recovery in 2010
139
The Economic Storm
What the Financial Crisis and Recession Mean for the Industry’s
Exposure Base, Growth and Profitability
140
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/10; Insurance Information Institute.
2.7
%
0.9
%
3.2
%
2.3
%
2.9
%
-0.7
%
0.6
%
-4.0
%
-6.8
% -4.9
%
-0.7
%
1.6
%
5.0
%
3.7
%
1.7
%
2.0
%
2.3
%
2.5
%
2.7
%
3.0
%
3.2
%
4.1
%
1.1
%
1.8
%
2.5
% 3.6
%
3.1
%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
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
Demand Commercial Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will
Compound and Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
Economic growth up sharply in late 2009 with rebuilding
of inventories and stimulus. More moderate growth
expected in 2010/11 but no “double dip”
142
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/10; 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
.3%
-1.6
%
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 (%)
143
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
144
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
145
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
146
Slowest Growing States in 2008: Diversity of States Suffering
Source: US Bureau of Economic Analysis; Insurance Information Institute.
States in the North, South, East, Midwest 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
147
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
148
Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilized in 2010
2
4
6
8
10
12
14
16
18
Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Oct.10
Unemployment rate was 9.6% in
October
Unemployment peaked at 10.1%
in Oct. 2009, highest monthly rate since 1983.
Peak rate in the last 30 years: 10.8% in Nov -
Dec 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in Oct 2009; Stood at 17.0% in Sep.
2010
January 2000 through October 2010, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
149
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%
9.7
%
9.7
%
9.6
%
9.6
%
9.4
%
9.3
%
9.1
%9.6
%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
Rising unemployment eroded payrolls
and workers comp’s exposure base.
Unemployment likely peaked at 10% in late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/10); Insurance Information Institute
2007:Q1 to 2011:Q4F*
Unemployment forecasts remain stubbornly high
through 2011
151
Unemployment Rates by State, August 2010:Highest 25 States*
9.7
9.610
.0
9.79.9
10.0
9.2
9.1
9.2
8.89.
3
8.9
8.99.
610.611
.7
10.0
10.1
10.1
10.211
.0
13.1
12.4
11.8
14.4
0
2
4
6
8
10
12
14
16
NV MI CA RI FL SC OR IN OH IL MS KY GA DC NC AZ TN NJ MO PA AL CT WA ID WV
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for August 2010, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In August, state and regional unemployment rates were little changed.
Some 26 states and DC reported unemployment rate decreases from a
year earlier, 21 states had increases and 3 had no change.
152
6.8
6.6
6.4
6.0
7.0
7.07.
47.
4
4.5
4.6
5.7
7.07.
3
3.7
6.8
8.08.3
7.5
7.6
7.77.98.
28.4
8.3
8.38.
8
0
2
4
6
8
10
MA DE TX NY NM CO ME WI AK LA AR UT MT MD VA OK MN WY IA KS HI VT NH NE SD ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, August 2010: Lowest 25 States*
*Provisional figures for August 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In August, state and regional unemployment rates were little changed.
Some 26 states and DC reported unemployment rate decreases from a
year earlier, 21 states had increases and 3 had no change.
154
Monthly Change Employment*-7
2-1
44
-12
2-1
60
-13
7-1
61
-12
8-1
75
-32
1-3
80
-59
7-6
81
-77
9-7
26
-75
3-5
28 -3
87
-51
5 -34
6 -21
2-2
25
-22
46
4-1
09
14 39
20
8 31
3 43
2-1
75 -6
6-1
-41
15
1
-1,000
-800
-600
-400
-200
0
200
400
600
Jan
08
Fe
b 0
8M
ar
08
Ap
r 0
8M
ay
08
Jun
08
Jul 0
8A
ug
08
Se
p 0
8O
ct 0
8N
ov
08
De
c 0
8Ja
n 0
9F
eb
09
Ma
r 0
9A
pr
09
Ma
y 0
9Ju
n 0
9Ju
l 09
Au
g 0
9S
ep
09
Oct
09
No
v 0
9D
ec
09
Jan
10
Fe
b 1
0M
ar
10
Ap
r 1
0M
ay
10
Jun
10
Jul 1
0A
ug
10
Se
p 1
0S
ep
10
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
*Estimate based on Reuters poll of economists.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 Peaked at 8.4 Mill in Dec. 09; Stands at 7.5 Million Through October 2010;
14.8 Million People are Now Defined as Unemployed
January 2008 through October 2010* (Thousands)
The job gain and loss figures in 2010 are severely distorted by the hiring and termination of
temporary Census workers. So far in 2010, 874,000 nonfarm jobs have been created.
151,000 jobs were created in October and losses in
Sept. and Aug. were revised sharply downward
155
Change in Employment Level for Select Industries, Oct. 2010 vs. Sept. 2010
-1.0
46.0
34.0
-5.0
24.4
-1.0
-0.1
27.9
-3.0
5.07.0
-10
0
10
20
30
40
50
Min
ing
&L
og
gin
g
Co
nst
ruct
ion
Ma
nu
fact
urin
g
Re
tail
Tra
de
Tra
nsp
ort
atio
n
Info
rma
tion
Fin
an
cia
l
Pro
f.B
usi
ne
ssS
erv
.
He
alth
Ca
re
Le
isu
re &
Ho
sp.
Fo
od
Se
rvic
e&
Drin
kin
gP
lace
s
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery
Change in Thousands
Health, Leisure, Professional Business Services and Retail Trade
are the job growth leaders today.
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)
III.Regulation, Legislation and the 2010 Midterm Election Results:
Impacts on P/C Insurer Profitability & Performance
163
Significant Impacts Are Guaranteed
164
The 2010 Midterm Elections:What do the results mean for insurers?
Catastrophe Financing
Supporters of Homeowners Defense Act (e.g., Rep. Neil, D-FL) defeated (HR 2555); Act proposed a larger role for the federal govt. in financing natural catastrophe losses
Rep. Gene Taylor (D-MS) defeated: He supported the Multi-Peril Insurance Act (HR 1264) which would have added wind to the NFIP
Unclear if flood program once again winds up in limbo
Health Care Reform (Obamacare)
Promises to “repeal and replace” aren’t credible (Senate and White House still Democratically controlled); Object is to starve implementation via low/no funding
Obamacare and Boehnercare will do little to control the trajectory of costs
Impacts on benefits business
Republicans need plan to deal with entitlement (Medicare) to cut budget
Dodd-Frank
Likely few major and provisions impact insurers the most (e.g., creation of FIO) unlikely to be affected
Source: Insurance Information Institute research.
165
The 2010 Midterm Elections:What do the results mean for insurers?
Tort Reform
Tort was not a major issue in the 2010 campaign, but the new House can be expected to receptive to the idea of federal tort reform, unlike prior Congresses since 2006
Fewer new pieces of legislation likely to spawn tort actions (e.g., climate change)
State legislatures and governorships more receptive to tort reforms
Taxes/Fiscal Policy
Odds of an across-the-board continuation of Bush tax cuts more likely; Benefits small business and high net worth individuals and their insurers.
Immediate expensing of new investment in 2011?? Good for p/c exposures.
Regulatory/Business Policy
More pro-business stance
Should help stimulate commercial exposures (WC payrolls, property & liability)
Ohio monopolistic state fundMove to competitive structure?
T
Source: Insurance Information Institute research.
Financial Services Reform
169
Insurers Are Impacted, But Not Significantly
170
Financial Services Reform:What does it mean for insurers?
Systemic Risk and Resolution Authority
Creates the Financial Stability Oversight Council and the Office of Financial Research
Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurers
Federal Insurance Office (FIO)
Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury, headed by a Director appointed by the Secretary of Treasury
FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis
CONCERN: FIO morphs into quasi/shadow or actual regulator
Surplus Lines/Reinsurance
Title V of the Dodd-Frank bill includes, as a separate subtitle, the Nonadmitted and Reinsurance Reform Act (NRRA), which eliminates regulatory inefficiencies associated with surplus lines insurance and reinsurance
The Dodd Frank Wall Street Reform and Consumer Protection Act
Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WV
VA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJRI C
DE
AL
VT
NY
MD
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
= A= B= C= D= F= NG
Source: Heartland Institute, May 2010
A- A-
A-
B-
B-
B-
B-
B-
B-B-
B-B-
B-
B-
B-
B-
B- C-
C-
C-
C -
C-
D-D-
A
A
A
A
B+
B+
B+
B
B
B
B
B
B
C+
C+
C
D+
D+D+
D
NG
NG
D F
F
2010 Property and Casualty InsuranceReport Card
Not Graded: District of ColumbiaMississippiLouisiana
181
Insurance Scoring: A Perennial Problem for Insurers
Source: PCI.
Bills adverse to insurers’ use of credit-based insurance scores have been introduced or
proposed in 27 states this year
182
Auto Claims Issues: A Perennial Problem for Insurers
Source: PCI.
Adverse claims bills introduced or proposed in 18 states this year
Shifting Legal Liability & Tort Environment
183
Is the Tort PendulumSwinging Against Insurers?
188
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
Business Leaders Ranking of Liability Systems in 2009*
Best States
1. Delaware
2. North Dakota
3. Nebraska
4. Indiana
5. Iowa
6. Virginia
7. Utah
8. Colorado
9. Massachusetts
10. South Dakota
Worst States
41. New Mexico
42. Florida
43. Montana
44. Arkansas
45. Illinois
46. California
47. Alabama
48. Mississippi
49. Louisiana
50. West Virginia
Source: US Chamber of Commerce 2009 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2009
North Dakota Massachusetts South Dakota
Drop-offs
Maine Vermont Kansas
Newly Notorious
New Mexico Montana Arkansas
Rising Above
Texas South Carolina Hawaii
Midwest/West has mix of good and bad states.
190
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
2009 Top Ten Jury Verdicts
Source: Lawyers USA, January 15, 2010.
Value Issue State
$370 Million Defamation California
$330 Million Personal Injury (Drunk driving case) Florida
$300 Million Personal Injury (Tobacco verdict) Florida
$89 Million Personal Injury (Drunk driving case) Missouri
$78.75 Million Personal Injury (Prempro) New Jersey
$77.4 Million Medical Malpractice New York
$71 Million Conversion and Breach of Fiduciary Duty Texas
$70 Million Workers Comp Case Texas
$65 Million Personal Injury Florida
$60 Million Medical Malpractice New York
IV. Leading Challenges Facing the
P/C Insurance Industry 2011-2015
204
Surviving is HardThriving is Harder
205
Important Issues & Threats Facing Insurers: 2011–2015
Source: Insurance Information Institute
1. Establishing Adequate Reserves and Prices
Failure to do so is the leading cause of death of p/c insurers
2. Rationalize Pricing with the New Investment Reality
Insurers must generate risk-appropriate rates of return and achieve their cost of capital in order to maintain the ability to attract/retain capital
3. Structure Business to Seize Growth Opportunities in the Post-Crisis World
Need to have products, expertise for the growing industries of the 2010s
4. Fend Off Regulatory and Legislative Attacks
Federal fireworks may be over for now, but scores of anti-insurer bills/regulatory proposals will be considered each year across the US
5. Adapt to Evolving Distribution Model: Channel Fusion
Value added of the IA channel is affirmed and enhanced
Operational Challenges
206
Distribution Trends
Distribution by Channel Type Continues to Evolve
207
All P/C Lines Distribution Channels, Direct vs. Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
0%
10%
20%
30%
40%
50%
60%
70%
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
Direct Independent Agents
Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained or held
generally steady in recent years. Direct channels include exclusive agency companies, direct
marketers and direct sales (e.g., internet)
208
Personal Lines Distribution Channels, Direct vs. Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
0%
10%
20%
30%
40%
50%
60%
70%
80%
72 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
Direct Independent Agents
The greatest challenge to independent agents remains personal lines, especially
private passenger auto
209
Commercial P/C Distribution Channels, Direct vs. Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
72 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
Direct Independent Agents
Independent agents have seen only modest erosion in commercial lines
market share in recent decades
211
U.S. Employment in Insurance Agencies & Brokerages: 1990–2010*
Thousands
500
550
600
650
700
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of August 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
As of August 2010, employment at insurance agencies and
brokerages was down by 48,700 or 7.2% to 630,900 since the
recession began in Dec. 2007 (compared to overall US
employment decline of 7.2%)
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