Catastrophes, the Credit Crisis & Insurance Cycle Impacts & Implications for the P/C Insurance Industry Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038 Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected]♦ www.iii.org Ole Miss Insurance Symposium University of Mississippi Oxford, MS March 26, 2008 Download: www.iii.org/media/presentations/MSoverview
206
Embed
Catastrophes, the Credit Crisis & Insurance Cycle...Catastrophes, the Credit Crisis & Insurance Cycle Impacts & Implications for the P/C Insurance Industry Robert P. Hartwig, Ph.D.,
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Catastrophes, the Credit Crisis & Insurance CycleImpacts & Implications for the
P/C Insurance Industry
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
• Credit Crisis & The Weakening EconomyInsurance Impacts & Implications
• Catastrophic RiskFocus on Mississippi
• Profitability & PerformanceOverview & Outlook
• Legal Liability & Tort EnvironmentWill the Pendulum Swing Against Insurer
• Regulatory and Legislative EnvironmentQ&A
A STORMY ECONOMIC FORECAST
What a Weakening Economy & Credit Crunch Mean for
the Insurance Industry
What’s Going On With the US and Global Economies Today?
Fundamental Factors Affecting Global Economy in 2008• Puncture of Two Bubbles: Credit and Housing in US
Burst Bubble Asset Price DeflationSubprime mortgage market was first part of credit bubble to burst
• Credit Crunch: Some credit markets have effectively seized• Global Contagion Effect: Securitization of asset back securities, derivatives
based on those securities amplified via leverage produced contagion effectMany financial institutions around the world found they are exposedMany hedge funds, banks caught holding CDOs, credit default swaps and other instruments against which they borrowed heavily (sometimes 10:1)Some face margin calls, distressed selling of every type of asset except Treasuries
• Global Economic Impacts: Global Economic SlowdownGDP growth in US down sharply, employment falling; Deceleration abroad too“Decoupling” theory was naïve Crashing dollar is symptom of irresponsible US fiscal policy, trade deficits. IOUs are being redeemed for hard assets or states in corporationsNew bubbles forming in commodities and currencies
Source: Insurance Information Institute.
3.7%
0.8%
1.6%
2.5%
3.6%
3.1%
2.9%
0.6%
3.8%
4.9%
0.1%
2.4%
2.2%
2.1%
2.7% 2.8% 2.9%
0.6%
0.5%
0%
1%
2%
3%
4%
5%
6%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
Q
07:2
Q
07:3
Q
07:4
Q
08:1
Q
08:2
Q
08:3
Q
08:4
Q
09:1
Q
09:2
Q
09:3
Q
09:4
Q
Real GDP Growth*
*Yellow bars are Estimates/Forecasts.Source: US Department of Commerce, Blue Economic Indicators 3/08; Insurance Information Institute.
Economic growth is expected to slow
dramatically in the year ahead
2.9%
2.6% 3.
0%
1.9%
3.0%
2.2%
2.0% 3.
0%
1.4% 2.
0%
10.1
%
1.8%
1.7%2.
6% 3.6%
1.9% 2.2%
9.3%
2.0% 2.
6%2.8%
4.8%
2.2% 2.
8% 2.8%
11.1
%
2.6%
11.3
%-1%
2%
4%
6%
8%
10%
12%
14%
Canada Mexico Japan U.K. China EuroZone U.S.
2006* 2007** 2008 2009
Percent Change in GDP By Country,2006-2009
* Best estimates available. **In most cases, actual data for 2007 GDP are not yet available. Where actual data not available, figures are consensus forecasts from Dec. 10., 2007 issue of Blue Chip Economic Indicators.Source: Blue Chip Economic Indicators, Feb. 10, 2008.
Economic growth is expected to slow globally in 2008, adversely impact global
exposure growth and slowing absorption of excess capital
US growth is among the
slowest in 2008
Toward a New WorldEconomic Order
Source: Insurance Information Institute
1. Credit Crunch (incl. Subprime) Issue Will Ultimately Cost Hundreds of Billions Globally (est. up to $600B)
• Problem exacerbated by leveraged bets taken by some financial institutions therefore its reach extends beyond simple defaults
2. Heavy Toll on Capital Base of Some Large Financial Institutions Worldwide (e.g., Bear Stearns)
• Cash infusions necessary; Sovereign Wealth Funds important source• Federal Reserve forced into playing a larger role; must improvise
3. Most Significant Economic Event in a Generation• US economy will recover, but will take 18-24 months
4. Shuffling of Global Economic Deck; Economic Pecking Order Shifting
• China, oil producing countries hold the upper hand5. IOUs are Being Redeemed
• Stakes in hard assets/institutions demanded6. Good News: No Shortage of Available Capital
• Central banks are (generally) making right decisions; Dollar sinks
What’s Being Done to Fix the Economy? Impacts on Insurers
•Fed on 3/14 (via J.P. Morgan) provided Bear with cash after what is effectively a “run on the bank”•“Too Big to Fail” doctrine is activated•Fed acting to prevent broader loss of confidence•3/17: J.P. Morgan buys Bear for $236 million ($2/share); Price increased to $10 on 3/24
Fed Bailout of Bear Stearns
•Fed will swap up to $200B in bank holdings of mortgage back securities for Treasuries up to 28 days; Improves bank finances
Fed Debt Swap
•Reduces bond yields (65% - 80% of portfolio)•Potentially contributes to inflation longer run
Fed Rate Cuts
Impacts on InsurersEconomic Fix
Source: Insurance Information Institute
What’s Being Done to Fix the Economy? Impacts on Insurers
(cont’d)
•Outline of actions only now beginning to emerge. Nothing is solid, but action is both necessary & inevitable•Will actions be directed primarily toward banks or broadly affecting all financial institutions?
Regulatory/ Legislative Action (?)
•Keeps more people in their homes and hopefully paying HO insurance premiums•Abandoned and neglected homes have demonstrably worse loss performance
HousingBailout (?)
•Hope is that $168B plan boosts overall economic activity and employment (by 500,000 jobs) and therefore p/c personal and commercial exposures•Contributes to already exploding budget deficits—Washington may expand its search for people and industries to tax
Stimulus Package
Impacts on InsurersEconomic Fix
Source: Insurance Information Institute
Post-Crunch: Fundamental Issues To Be Examined Globally
Source: Insurance Information Institute
• Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwide
Colossal failure of risk management (and regulation)Implications for ERM?Includes review of incentives
• Effectiveness and Nature of RegulationWhat sort of oversite is optimal given recent experience?Credit problems arose under US and European (Basel II) regulatory regimesWill new regulations be globally consistent? Can overreactions be avoided?Capital adequacy & liquidity
• Accounting RulesProblems arose under FAS, IASAsset Valuation, including Mark-to-MarketStructured Finance & Complex Derivatives
• Ratings on Financial InstrumentsNew approaches to reflect type of asset, nature of risk
Elements of Credit Market Reform Currently Being Considered
•Multi-national effort to require enhanced and tested risk management policies for large financial institutions
Enhanced Awareness of Risk
•Strengthen state and federal oversight of mortgage lenders•Nationwide licensing of mortgage brokers
Stronger Regulatory Policies
•Revisit latest bank capital requirements (Basel II) to ensure banks have sufficient capital/liquidity for risks assumed
Increased Capital
•Require financial institutions to implement stronger risk controls
Stronger Risk Management
•Require issuers of mortgage-backed securities to disclose more about the “level and scope of due diligence”•More details on actual underlying assets of the security•Disclose if “issuers had shopped for ratings” and why•Require ratings firms to differentiate between ratings on complex structured products and conventional products•Ratings firms must disclose conflicts of interest and provide greater scrutiny of firms that originate loans
Increased Disclosure/ Transparency
RationaleReform
Sour
ce: W
all S
treet
Jour
nal,
3/15
/07
Insurance &The Economy
Important But Somewhat Muted Impacts
A Few Facts About the Relationship Between Insurance & Economy
• Vast Majority of Insurance Business is Tied to RenewalsApproximately 98+% of P/C business (units) is linked to renewalsA very large share of p/c insurance premiums are statutorily or de facto compulsory (e.g., WC, auto liability, surety, usually HO…)P/C insurers have marginal exposure impact due to economyMost life revenues and units are renewals, but some products (e.g., variable annuities are sensitive to market volatility)Life insurers who manage 401(k) assets seeing more loans and hardship withdrawals;
• Insurers are Sensitive to Interest RatesAbout 2/3 of P/C invested assets and 75% if Life assets are fixed incomeHistorically, yield on industry portfolios has tracked 10-year note closelyAll else equal, lower total investment gain implies greater emphasis on underwritingHistorically, industry’s best underwriting performances are rooted in periods when interests rates were low and/or equity market performance poor (1930s – 1950s, early 2000s gave rise to strong 2006/07)
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/08; Insurance Information Inst.
Summary of Economic Risks and Implications for (Re) Insurers
•Reduced commercial lines exposure growth•Surety slump•Increased workers comp frequency
General Economic Slowdown/Recession
•Decreased capital gains (which are usually relied upon more heavily as a source of earnings as underwriting results deteriorate)
Stock Market Slump
•Lower investment income Lower Interest Rates
•Reduced exposure growth•Deteriorating loss performance on neglected, abandoned and foreclosed properties
Housing Slump
•Some insurers have some asset risk•D&O/E&O exposure for some insurers•Client asset management liability for some•Bond insurer problems; Muni credit quality
Subprime Meltdown/ Credit Crunch
Risks to InsurersEconomic Concern
New Private Housing Starts,1990-2014F (Millions of Units)
investment growth in 2007/2008 will slow commercial exposure growth
*Nonresidential fixed investment consists of structures, equipment and software.Sources: US Bureau of Economic Analysis (Historical), Value Line (2/22/08) estimates/forecasts for 2008-2012.
Non
resi
dent
ial F
ixed
Inve
stm
ent (
$ B
ill)
Total Industrial Production,(2007:Q1 to 2009:Q4F)
1.1%
3.5% 3.6%
-1.0%
0.5% 0.3%
1.6%
2.4% 2.5% 2.6% 2.7% 2.9%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/08); Insurance Info. Inst.
Industrial production shrank during the final quarter of 2007 and is expected to grow only very slowly
during the first half of 2008
Industrial production affects exposure both directly and indirectly
Employment Change by Industry
(39,000)(52,000)
(34,000)(20,000)
30,00021,000
38,000
(60,000)(50,000)(40,000)(30,000)(20,000)(10,000)
010,00020,00030,00040,00050,000
Construction Manuf. Retail Trade Professional& Biz
Services
Education &Health
Leisure &Hospitality
Government
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Employment fell by 63,000 in February, the biggest decline in 5
years. Manufacturing and Construction are always the hardest hit in an economic slowdown, with
each losing several hundred thousand jobs over the past 12 months.
*As of 7/1/07 (latest available).Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
•Strong global demand, •Supplies remain tight…but beware of bubbles•Significant investments in R&D, plant & equip required
Natural Resources & Commodities
•Weak dollar, globalization persist; Cuba angle?Export Driven
•Consumer Staple Recession Resistant•Grain and land prices high due to global demand, weak dollar (exports)•Acreage Growing Farm Equipment, Transport•Benefits many other industries
*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through March 25.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2006/07 were welcome respites. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
States With Largest Insured Catastrophe Losses in 2007
$ Millions
$1,230
$747 $677
$320$223 $202 $200 $200$262$270$272
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
CA MN TX GA IL OK KS MO NY CO ALSource: PCS/ISO; Insurance Information Institute.
2007 CAT STATS•1.18 million CAT claims across 41 states arising•23 catastrophic events
Distribution of 2007 US CAT Losses, by Type and Insured Loss
Oct. 9-10, 1982 Los Angeles, Ventura, Orange Cos., CA
Nov. 16-17, 1980 Bradbury, Pacific Palisades, Malibu, Sunland,Carbon Canyon, Lake Elsinore, CA
Oct. 23-25, 1978 Los Angeles, Ventura Cos., CA
May 17-20, 1985 Florida
Jul. 26-27, 1977 Santa Barbara, Montecito, CA
Nov. 24-30, 1980 Los Angeles, San Bernardino, Orange,Riverside, San Diego Cos., CA
Sep. 22-30, 1970 Oakland-Berkeley Hills, CA
Jun. 23-28, 2002 Rodeo-Chediski Complex, AZ
July 2007: Lake Tahoe, CA**
May 10-16, 2000 Cerro Grande, NM
Jun. 27-Jul. 2, 1990 Santa Barbara County, CA
Oct. 27-28, 1993 Orange Co., CA
Nov. 2-3, 1993 Los Angeles Co., CA
Oct. 2007: Southern CA Fires*
Oct. 2003: Southern CA Fires
Oct. 20-21, 1991: Oakland, Alameda Cos., CA
Insured Losses (Millions 2007 $)
Top Catastrophic Wildland Fires In The United States, 1970-2007
Fourteen of the top 17
catastrophic wildfires since
1970 occurred in California
*Estimate from CA Insurance Dept., Jan. 10, 2008. Source: ISO's Property Claim Services Unit; California Department of Insurance; Insurance Information Institute.
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1987-2006¹Fire, $6.6 , 2.2%
Tornadoes, $77.3 , 26.0%
All Tropical Cyclones, $137.7 ,
46.3%
Civil Disorders, $1.1 , 0.4%
Utility Disruption, $0.2 , 0.1%
Water Damage, $0.4 , 0.1%Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 , 6.4%
Winter Storms, $23.1 , 7.8%
Terrorism, $22.3 , 7.5%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Insured disaster losses totaled $297.3 billion from
1987-2006 (in 2006 dollars). Wildfires accounted for
approximately $6.6 billion of these—2.2% of the total.
Global Insured Catastrophe Losses by Region, 2001-2007
Notes: 2001-03 figures for N. America include US only. 2001 figure includes only property losses from 9/11. Source: Insurance Information Institute compiled from Swiss Re sigma issues.
North America accounted for 70% of global
catastrophe losses 2001-2007
$ Billions
HURRICANE KATRINA
A Review of Mississippi Insured Losses
Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)
$3.5 $3.8 $4.8 $5.0 $6.6 $7.4 $7.7$10.3
$21.6
$41.1
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Georges(1998)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Andrew(1992)
Katrina(2005)
$ B
illio
ns
Sources: ISO/PCS; Insurance Information Institute.
Seven of the 10 most expensive hurricanes in US history
occurred in the 14 months from Aug. 2004 – Oct. 2005:
Insured Loss & Claim Count for Major Storms of 2005*
$1.1
$41.1
$10.3$5.0
104383
1,047
1,744
$0$5
$10$15$20$25$30$35$40$45
Dennis Rita Wilma KatrinaSize of Industry Loss ($ Billions)
Insu
red
Loss
($ B
illio
ns
02004006008001,0001,2001,4001,6001,8002,000
Cla
ims
(thou
sand
s)
Insured Loss Claims
*Property and business interruption losses only. Excludes offshore energy & marine losses.Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.
Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3
million claims
Hurricane Katrina Claim Status on Storm’s 1st Anniversary*
In Process, 3%
Mediation/ Litigation, 2%
Settled, 95%
95% of the 1.2 million
homeowners insurance claims in Louisiana & Mississippi are
settled, with just 2% in dispute
*Hurricane Katrina made its north Gulf coast landfall August 29, 2005.Source: Insurance Information Institute survey, August 2006.
Hurricane Katrina Claim Status on Storm’s 2nd Anniversary*
Unsettled**, 1%
Settled, 99%
99% of the 1.2 million homeowners insurance claims in
Louisiana & Mississippi were settled as of the storm’s second
anniversary in 2007
*Hurricane Katrina made its north Gulf coast landfall August 29, 2005.**Unsettled implies that the claim is in the process of settlement, involved in mediation or litigated.Source: Insurance Information Institute survey, August 2007.
Hurricane Katrina Insured Loss Distribution by State ($ Millions)*
Mississippi, $13,605 , 33.5%
Louisiana, $25,275 , 62.3%
Tennessee, $59.0 , 0.1%Florida, $572.0 , 1.4%
Georgia, $36.0 , 0.1%Alabama, $1,032 ,
2.5%
*As of June 8, 2006Source: PCS division of ISO.
Mississippi accounted for 33.5% of the insured losses
paid and 29.5% of the claims filed
Total Insured Losses =
$40.579 Billion
Hurricane Katrina Claim Count Distribution by State*
Mississippi, 515,000 , 29.5%
Tennessee, 15,000 , 0.9%
Louisiana, 975,000 , 55.9%
Florida, 122,000 , 7.0%
Georgia, 7,800 , 0.4%
Alabama, 109,000 , 6.3%
*As of June 8, 2006Source: PCS division of ISO.
Total # Claims = 1,743,800
MS accounted for 33.5% of the insured losses
paid and 29.5% of the claims filed
Hurricane Katrina Loss Distribution by Line ($ Millions)*
Homeowners, $17,564.0 , 43%
Commercial Property & BI, $20,847.0 , 52%
Vehicle, $2,168.0 , 5%
Total insured losses are
estimated at $40.579 billion
from 1.7438 million claims. Excludes $2-
$3B in offshore energy losses
*As of June 8, 2006Source: PCS division of ISO.
Katrina had a disproportionate impact on businesses, decimating the economy
and making recovery more difficult
Mississippi: Katrina Loss Distribution by Line ($ Millions)*
Homeowners, $5,475.0 , 40%
Commercial Property & BI, $7,500.0 , 55%
Vehicle, $630.0 , 5%
Mississippi insured losses
are estimated at $13.6 billion from 515,000
claims. Excludes $2-
$3B in offshore energy losses
*As of June 8, 2006Source: PCS division of ISO.
Mississippi: Katrina Claim Count Distribution by Line*
Homeowners, 355,000 , 69%
Commercial Property & BI, 55,000 , 11%
Vehicle, 105,000 , 20%
*As of June 8, 2006Source: PCS division of ISO.
Commercial (business) claims
accounted for 11% of the claims filed but 55% of
the insured losses. Homeowners
claims accounted for 69% of claims and 40% of losses.
$6,000$15,422
$136,363
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
Vehicle Home Commercial
MS: Average Cost per Claim by Type of Claim*
*As of June 8, 2006Source: PCS division of ISO.
Commercial (business) claims were 9-10 times more expensive
than homeowners claims on average for Hurricane Katrina,
but accounted for just 11% of the total number of claims
$2,879 $2,917 $2,889 $2,894$3,159 $3,046 $3,121
$3,702
$4,281
16.8%
1.3%0.2%
9.2%
-3.6%
2.5%
18.6%
15.6%
-1.0%
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
98 99 00 01 02 03 04 05 06
Valu
e of
Con
stru
ctio
n G
DP
-5%
0%
5%
10%
15%
20%
Gro
wth
in C
onst
ruct
ion
GDP
Value of Construction GDP% Growth in Construction GDP
Growth in Mississippi Construction Component of GDP Pre/Post-Katrina
Insurance dollars helped construction
spending surge in MS
Sources: US Bureau of Economic Analysis; Insurance Information Inst.
Mississippi Windstorm Plan:Exposure to Loss ($ Mill)
Source: PIPSO; Insurance Information Institute
$5,3
69.5
$1,8
73.0
$1,6
31.8
$1,3
44.3
$1,1
21.7
$848
.6
$864
.9
$917
.9
$637
.1
$352
.9
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006
Total exposure to loss in the Mississippi Windstorm Underwriting Association (MWUA) jumped to $5.4 billion in 2006 from $1.9 billion in 2005, an increase of 187%.The total number of policies in the Plan more than doubled between 2005 and 2006.
Louisiana: Katrina Loss Distribution by Line ($ Millions)*
Homeowners, $10,875.0 , 43%
Commercial Property & BI, $13,000.0 , 51%
Vehicle, $1,400.0 , 6%
Louisiana insured losses
are estimated at $25.275 billion from 975,000
claims. Excludes $2-
$3B in offshore energy losses
*As of June 8, 2006Source: PCS division of ISO.
Hurricane Rita Claim Count Distribution by State*
Texas, 171,000 , 44.6%
Tennessee, 3,500 , 0.9%
Louisiana, 185,000 , 48.3%
Arkansas, 5,500 , 1.4%Florida, 6,000 , 1.6%
Alabama, 5,000 , 1.3%
Mississippi, 7,000 , 1.8%
*As of June 8, 2006Source: PCS division of ISO.
Mississippi accounted for 1.8% of the
insured losses on 7,000 claims.
Excludes offshore energy losses of $2-3B
Total # Claims = 383,000
Hurricane Rita Loss Distribution, by Line ($ Millions)*
Homeowners, $2,974.2 , 59%
Commercial Property & BI, $1,861.2 , 37%
Vehicles, $211.0 , 4%Total insured
losses are estimated at $5.0
billion (excl. offshore energy of $2-$3B) from 383,000 claims.
*As of June 8, 2006Source: PCS division of ISO.
Louisiana: Rita Loss Distribution, by Line ($ Millions)*
Homeowners, $1,795.0 , 62%
Commercial Property & BI, $1,000.0 , 34%
Vehicles, $117.5 , 4%Total insured
losses are estimated at
$2.9125 billion from 185,000
claims.
*As of June 8, 2006Source: PCS division of ISO.
Katrina’s Path of Destruction Through the Offshore Energy Industry
Source: “Hurricane Katrina: Profile of a Super Cat,” RMS, October 2005.
Katrina (& Rita) tore through
offshore facilities
Insured Offshore Energy Losses for Recent Major Gulf Storms
$2.0$2.25
$3.0
$0.0
$1.0
$2.0
$3.0
$4.0
Katrina (2005) Ivan (2004)* Rita (2005)
$ B
illio
ns
Hurricanes Katrina, Rita and Ivan cost energy
insurers at least $7 billion
Sources: Insurance Information Institute research estimates. *Midpoint of estimated range for $2.0 to $2.5 billion)
HURRICANES: INSURED LOSS
POTENTIAL
Katrina:Just the Beginning?
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
Mississippi had $45 billion in insured coastal property
exposure in 2004 compared to $209 billion in Louisiana and nearly $2 trillion in Florida
Value of Insured Residential Coastal Exposure (2004, $ Billions)
$512.1$306.6$302.2
$247.4$205.5
$88.0$65.1$64.5$60.0$60.0
$36.5$29.7$26.6$25.9$24.8$20.9
$5.4
$942.5
$0 $200 $400 $600 $800 $1,000
FloridaNew York
MassachusettsTexas
New JerseyConnecticut
LouisianaS. Carolina
MaineVirginia
North CarolinaAlabamaGeorgia
DelawareRhode Island
NewMississippiMaryland
Source: AIR
Mississippi had $21 billion in insured residential
coastal property exposure in 2004 (47% of all MS
coastal exposure)
Value of Insured Commercial Coastal Exposure (2004, $ Billions)
*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.
Landfall Probabilities for 2008 Hurricane Season: Above Average
Above Average
NACaribbean
36%30%Gulf Coast from Florida Panhandle to Brownsville
37%31%US East Coast Including Florida Peninsula
60%52%Entire US East & Gulf Coasts
2008FAverage*
*Average over the past century.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.
Mississippi Insurance Market
Overview
Mississippi InsuranceMarket Facts
• MS P/C insurance premium volume in 2005 was $3.76 billion, or 0.8% of the US total of $478.5 billion
LA Homeowners insurance premium volume in 2005 was $580 million, or 1.0% of the US total of $57.5 bill.
• Insured Katrina & Rita homeowners losses of $5.5 billion in MS were more than 9 times the 2005 homeowners premiums of $580 million
• The 2005 hurricane losses in MS homeowners insurance wiped out 17 years of premium and every dollar of profit ever made in the history of the state in this line
Source: Insurance Information Inst. from National Underwriter Highline annual statement database; PCS.
Mississippi & Louisiana Market Shares, All Lines & Homeowners
Louisiana$7.70 1.6%
All Other States
$467.01 97.6%
Mississippi$3.76 0.8%
ALL LINES ($ Billions)
HOMEOWNERS ($ Millions)
Source: Insurance Information Institute from National Underwriter Highline annual statement database.
Louisiana$1,008.54
1.8%
All Other States
$55,899.48 97.2%
Mississippi$580.00 1.0%
MS accounts for less than 1% of the US insurance market but 34% of 2005 hurricane losses
$764
$455
$1,372
$855
$611
$1,083
$558
$939
$419
$847
$666
$1,144
$400$500$600$700$800$900
$1,000$1,100$1,200$1,300$1,400$1,500
2005 1997
US Texas Florida Mississippi Alabama Louisiana
Average Expenditures on Home Insurance, 2005 vs. 1997
Source: NAIC, Insurance Information Institute
+67.
9%
+60.
5%
+71.
8%
+68.
3%
+102
.1%
+71.
8%
$455 $481
$487
$508 $536 $5
93 $668 $7
29
$1074$975
$840$758$721$714$692$666
$400$500$600$700$800$900
$1,000$1,100$1,200
97 98 99 00 01 02 03 04*
US Louisiana
Average Expenditures on HO Insurance, LA vs. U.S., 1997-2004*
*Latest available from NAIC.Source: NAIC, Insurance Information Institute
*2007 is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical, volatile and vulnerable
-10%
-5%
0%
5%
10%
15%
20%
25%
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
F20
08F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2007 figure is actual 9-month figure.
Post-Katrina period resembles
1993-97 (post-Andrew)
2008: Projected -0.3% premium growth would be the first decline since 1943
REINSURANCE MARKETS
Reinsurance Prices are Falling in Non-Coastal Zones, Casualty Lines
Share of Losses Paid by Reinsurers, by Disaster*
30%25%
60%
20%
45%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane Hugo(1989)
Hurricane Andrew(1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly
important role in the financing of mega-CATs; Reins. Costs
*As of 12/8/06, 98.7% of all Katrina claims had been closed. Paid amounts displayed are for closed claims only.Source: National Flood Insurance Program as of December 8, 2006; Insurance Information Institute.
85% of the $18.3 billion in NFIP flood losses
paid from Katrina were in Louisiana. MS
accounted for 13%.
Total Claim Payments by State (Top 11) Jan 1, 1978 - Feb. 2006
$ Millions
$3,2
28.8
$2,7
75.0
$2,5
54.6
$600
.0
$426
.0
$425
.5
$423
.2
$14,309.1
$655
.2
$721
.2
$851
.6
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
LA FL TX MS AL NC NJ PA NY SC CA
Source: FEMA, National Flood Insurance Program (NFIP)
Louisiana and Mississippi rank 1st and 4th respectively
in terms of total claims payments (up from 3rd and 11th pre-Katrina). Florida ranks 2nd and Texas 3rd.
Flood Insurance Penetration Rates:Top 25 Counties/Parishes in US*
81.5%80.0%
78.7%77.1%
74.1%69.6%
68.4%68.1%
66.7%65.9%65.5%
62.4%59.0%
56.2%51.6%
49.6%48.0%
46.3%44.4%
42.8%42.8%42.0%41.9%
40.1%
84.0%
0% 20% 40% 60% 80% 100%
JEFFERSON/LAWALTON/FL
BROWARD/FLCOLLIER/FL
LEE/FLGALVESTON/TX
GLYNN/GAST. BERNARD/LAMIAMI-DADE/FL
ORLEANS/LACARTERET/NC
ST. CHARLES/LAST. JOHNS/FL
CHARLOTTE/FLST. TAMMANY/LA
HORRY/SCINDIAN RIVER/FL
BAY/FLBRUNSWICK/NC
NASSAU/FLBERKELEY/SC
PINELLAS/FLBRAZORIA/TXCHATHAM/GA
TERREBONNE/LA
LA parishes have among the highest
flood coverage penetration rates
in the US (12 of the top 75)
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
MS coastal counties
rank abysmally
low
Barnstable is only county in all of New England among Top 75
Flood Insurance
Analysis of Flood Policy Purchase and Lapse Rates Since Katrina in Florida
NFIP Flood Policy Growth in Gulf States Since Katrina*
26.69%
14.15%
29.04%
80.24%
40.54%
21.62%
0%
10%
20%30%
40%
50%
60%70%
80%
90%
Alabama Florida Louisiana Mississippi Texas Total GulfStates*Change from July 2005 through August 2007.
Sources: NFIP ; Insurance Information Institute.
The number of flood insurance policies sold in the Gulf
states in the 2 years following Katrina
increased by 21.6%
Percentage of NFIP Flood Policies Issued Since Katrina That Are Not Renewed*
23%
32%
17%19%
25%
8.6%
0%
5%
10%
15%
20%
25%
30%
35%
Alabama Florida Louisiana Mississippi Texas US***Policies issued since July 2005 as of August 2007. **US figure is nonrenewal rate for all policies in force, average over 12 month period ending August 2007.Sources: NFIP ; Insurance Information Institute.
Flood policy nonrenewal rates in Gulf states are surprisingly high
28%
61%
22%
60%
49%
1%1%3%
0.6% 0.4%0%
10%
20%
30%
40%
50%
60%
70%
Northeast South Midwest West Overall US
In SFHA*Out of SFHA
NFIP Flood PolicyPenetration Rates, by Region
*Special Flood Hazard Areas.Source: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.
Flood is more commonly
purchased in the South, but
many still forego coverage
16%
56%
66%
0%
10%
20%
30%
40%
50%
60%
70%
Under 500 501 - 5,000 More Than 5000
Proportion of Homes Buying Flood Insurance by No. of Homes in SFHA*
Communities with few SFHAs are the most likely to not
buy flood insurance
*Special Flood Hazard Areas.Source: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.
Factors Influencing NFIP Flood Penetration Rates
• Price• Change in Price• Number of Homes in a Community’s Special Flood
Hazard Area (SFHA)Mandatory purchase requirements less vigorously enforced in communities with fewer structures in SFHAsQuestions about enthusiasm in selling or knowledge of agents regarding program
• Coastal Flooding PotentialPenetration rate much higher for coastal communities subject to flooding versus those that are not (63% vs. 35%)
• Mandatory Purchase RequirementSource: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.
Reasons Why People BuyFlood Insurance
Mortgage Lender Requirement, 27%
Not Near Water, But Don't Want to Take
Chances, 29%
Agent/Broker Recommendation,
20%
House Near Body of Water, 24%
Source: Poll of 700 conducted by Opinion Research Corporation by Chubb Group of Insurance Companies, summarized in March 2006 press release “Katrina Doesn’t Motivate Many Homeowners to Protect Their Investment.”
Risk aversion and compulsion are the two most important
Ole Miss Insurance SymposiumUniversity of Mississippi
Oxford, MS
March 26, 2008
PROFITABILITYProfits in 2006/07 Reached
Their Cyclical Peak;
By No Reasonable Standard Can Profits Be Deemed Excessive
P/C Net Income After Taxes1991-2008F ($ Millions)*$1
4,17
8
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$59,
200
$46,
300
-$6,970
$63,
695
$44,
155
$20,
559
$38,
501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07E
08F
*ROE figures are GAAP; 1Return on avg. surplus. **Return on Average Surplus; Actual 9-month 2007 result.Sources: A.M. Best, ISO, Insurance Information Inst.
Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008F*
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006:12.2%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
*GAAP ROE for all years except 2007 which is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune
Factors that Will Influence theLength and Depth of the Cycle
• Capacity: Rapid surplus growth in recent years has left the industry with between $85 billion and $100 billion in excess capital, according to analysts
All else equal, rising capital leads to greater price competition and a liberalization of terms and conditions
• Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which could extend the depth and length of the cycle
Looming reserve deficiencies are not hanging over insurers they way they did during the last soft market in the late 1990sMany companies have been releasing redundant reserves, which allows them to boost net income even as underwriting results deteriorateReserve releases will diminish in 2008; Even more so in 2009
• Investment Gains: 2007 was the 5th consecutive up year on Wall Street. With sharp declines in stock prices and falling interest rates, portfolio yields are certain to fall Contributes to discipline
Realized capital gains are already rising as underwriting profits shrink, but like redundant reserves, realized capital gains are a finite resourceA sustained equity market decline (and potentially a drop in bond prices at some point) could reduce policyholder surplus
Source: Insurance Information Institute.
Factors that Will Influence the Length and Depth of the Cycle (cont’d)
• Sarbanes-Oxley: Presumably SOX will lead to better and more conservative management of company finances, including rapid recognition of deficient or redundant reserves
With more “eyes” on the industry, the theory is that cyclical swings should shrink• Ratings Agencies: Focus on Cycle Management; Quicker to downgrade
Ratings agencies more concerned with successful cycle management strategyMany insurers have already had ratings “haircut” over the last several years they way they did during the last soft market in the late 1990s; Less of a margin today
• Finite Reinsurance: Had smoothing effect on earnings; Finite market is gone• Information Systems: Management has more and better tools that allow
faster adjustments to price, underwriting and changing market conditions than it had during previous soft markets
• Analysts/Investors: Less fixated on growth, more on ROE through soft mkt.Management has backing of investors of Wall Street to remain disciplined
*Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors.Source: Fortune, April 30, 2007 edition; Insurance Information Institute
P/C insurer profitability in 2006 ranked 30th out of 50
industry groups despite renewed
profitabilityP/C insurers
underperformed the All Industry median for the 19th consecutive
year
Advertising Expenditures by P/C Insurance Industry, 1999-2007E
$ Billions
$1.736 $1.737 $1.803 $1.708
$3.695
$4.323
$2.975
$2.111$1.882
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
99 00 01 02 03 04 05 06 07ESource: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers is at a record high, signaling
increased competition
FINANCIAL STRENGTH &
RATINGSIndustry Has Weathered
the Storms Well, But Cycle May Takes Its Toll
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E
Insurers have paid out an average of $1.12 in losses for every dollar earned
in premiums over the past 17 years
Sources: A.M. Best (historical and forecasts)
COMMERCIAL LINES
Commercial AutoCommercial Multi-Peril
Workers Comp
110.
3
110.
2
107.
6
103.
9 109.
7
112.
3
111.
1
122.
3
110.
2
102.
5 105.
4
91.2 94
.0 97.5
102.
0
112.
5
85
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08F
Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases
Commercial coverages have exhibited significant
variability over time.
Commercial Lines Combined Ratio, 1993-2008F
Outside CAT-affected lines, commercial
insurance is doing fairly well. Caution is required in
underwriting long-tail commercial lines.
Sources: A.M. Best (historical and forecasts)
COMMERCIAL MULTI-PERIL & COMMERCIAL
AUTO
112.
1
112 113 11
5.9 12
0.5
120.
1
106.
6
99.4
96.6
93.4
94
96.7
102.
2 105.
6 108.
9 112.
1
105.
9
101.
6
93.8
84.5
82.8
88.3
87.7
94.5 98
122.5
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07E* 08F*
Comm Auto Liab Comm Auto PD
Commercial Auto Liability& PD Combined Ratios
Average Combined: Liability = 108.8
PD = 97.5
Commercial Auto has improved dramatically
Sources: A.M. Best (historical and forecasts) *Includes both liability and property damage.
119.
0
119.
8
108.
5
125.
0
113.
1
115.
0 121.
0
116.
2
116.
1
104.
9
101.
9 105.
5
100.
7
116.
8
113.
6
115.
3
122.
4
115.
0
117.
0
97.3
89.0
97.7
93.8
83.6
93.5
98.0
80
85
90
95
100
105
110
115
120
125
130
95 96 97 98 99 00 01 02 03 04 05 06 07E* 08F*
CMP-LiabilityCMP-Non-Liability
Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)
Liab. Combined 1995 to 2004 = 113.8
Non-Liab. Combined = 105.2
CMP- has improved recently
Sources: A.M. Best (historical and forecasts) *Includes both liability and property damage.
WORKERS COMPENSATION
OPERATING ENVIRONMENT
Workers Comp Calendar Year – Private Carriers
101
97
111
110
107
103
95
101.
5
98.5
100
101 10
7 115 11
8 122
80
90
100
110
120
130
140
94 95 96 97 98 99 00 01 02 03 04 05 06p 07E 08F
Calendar Year
Percent
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2006 and developed to ultimateSource: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders *2007/2008 figures are A.M. Best estimates/forecasts.
Workers Comp Combined Ratios, 1994-2008F*
Lost-Time Claims
-4.2 -4.4
-6.9
-4.5 -4.1 -3.9
-6.8
-9.2
0.3
-6.5
-4.5
0.5
-3.9
-2.3
-4.5
-6.6
-10
-8
-6
-4
-2
0
2
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
Cumulative Change of –52.1%since 1991 means that lost work
time claims have been cut by more than half
Accident Year
Percent Change
Workers Comp Lost-TimeClaim Frequency (% Change)
2003p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI
*Beginning of the year.Source: Lloyd’s Members’ Services Unit.
The capacity of the Lloyd’s market rose significantly during the period 2001 to 2004. In 2005, capacity reduced but increased again in 2006 and 2007 due to the impact of the U.S. hurricane season. Capacity reduced to £15.95 billion ($32 billion) in 2008.
U.S. Domiciled Captives- Net Premiums Written ($ Millions)
$8.4
$9.0
$9.3
$9.9
$10.2
$8.0
$8.5
$9.0
$9.5
$10.0
$10.5
2002 2003 2004 2005 2006
$ M
illio
ns
Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review
Following a five-year period of rapid growth, U.S. captive insurers saw net premiums written increase by just 2.7 percent in 2006, after 6.2 percent growth in 2005.
Largest Sovereign Wealth Funds($ Billions, as of September 2007)
$341
$330
$300
$250
$200
$159
$50
$43
$40
$38
$875
$0 $200 $400 $600 $800 $1,000
United Arab Emirates
Norway
Singapore (GIC)
Saudi Arabia
Kuwait
China
Singapore (Tamasek)
Libya
Algeria
Qatar
US (Alaska)
Source: Morgan Stanley; Council of Foreign Relations http://www.cfr.org/publication/15251/#2;Insurance Information Institute
Abu Dhabi Investment Authority
controls some $875 billion in assets
Though not major investors in the insurance industry, SWFs held
nearly $3 trillion in assets, double the $1.5 trillion of hedge funds but a
fraction of the $53 trillion held by institutional investors like hedge
M&A activity began to accelerate during the second
half of 2007
No model for successful
consolidation has emerged
Distribution Sector: Insurance-Related M&A Activity, 1988-2006
$542
$446
$1,9
34
$7$1,633
$2,7
20
$689
$60 $2
12
$944
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
96 97 99 00 01 02 03 04 05 06
Tran
sact
ion
Valu
e ($
Mill
)
0
50
100
150
200
250
300
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
Source: Conning Research & Consulting.
No extraordinary trends evident
Distribution Sector M&A Activity, 2005 vs. 2006
Source: Conning Research & Consulting
Title9%Insurer
Buying Distributor
7%
Agency Buying Agency
51%
Other4%
Bank Buying Agency
29%
2005 2006
Title4%
Insurer Buying
Distributor7%
Agency Buying Agency
62%
Other2%
Bank Buying Agency
25%
Number of bank
acquisitions is falling
years
Motivating Factors for Increased P/C Insurer Consolidation
Motivating Factors for P/C M&As• Slow Growth: Growth is at its lowest levels since the late 1990s
NWP growth was 0% in 2007; Appears similarly flat in 2008Prices are falling or flat in most non-coastal markets
• Accumulation of Capital: Excess capital depresses ROEsPolicyholder Surplus up 6-7%% in 2007 and up 80% since 2002Insurers hard pressed to maintain earnings momentum Options: Share Buybacks, Boost Dividends, Invest in Operation, AcquireOption B: Engage in destructive price war and destroy capital
• Reserve Adequacy: No longer a drag on earningsFavorable development in recent years offsets pre-2002 adverse develop.
• Favorable Fundamentals/Drop-Off in CAT ActivityUnderlying claims inflation (frequency and severity trends) are benign
Lower CAT activity took some pressure of capital baseSource: Insurance Information Institute.
INVESTMENT OVERVIEW
More Pain, Little Gain
Property/Casualty Insurance Industry Investment Gain1
$ Billions
$35.4$42.8
$47.2$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$63.6$56.9
$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05* 06 07**
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B. **Annualized 9-month result of $47.718B.
Sources: ISO; Insurance Information Institute.
Investment rose in 2007 but are just 9.8% higher than what they were
“King of Class Actions” Bill Lerach•Former partner in class action firm Milberg Weiss•Admitted felon. Guilty of paying 3 plaintiffs $11.4 million in 150+ cases over 25 years & lying about it repeatedly to courts•Will serves 1-2 years in prison and forfeit $7.75 million; $250,000 fine
“King of Torts” Dickie Scruggs•Won billions in tobacco, asbestos and Katrina litigation•Pleaded guilty for attempting to offer a judge $40,000 bribe to resolve attorney fee allocation from Katrina litigation in his firm’s favor. His son/others guilty on related charges•Could get 5 years in prison, $250,000 fine
Sour
ce: S
an D
iego
Uni
on T
ribun
e, 9
/19/
07So
urce
: Wal
l Stre
et Jo
urna
l, 3/
15/0
7
Bad Year for Tort Kingpins*(Continued)
“King of Class Actions” Melvyn Weiss•Former partner in class action firm Milberg Weiss; Earned $251 million in legal fees•Pled guilty to federal charges of racketeering and conspiracy for paying kickbacks to professional plaintiffs•Will serve 18-33 months in prison, pay $9.75 million in restitution; $250,000 fine
Sour
ce: W
all S
treet
Jour
nal,
3/24
/07
Abuse of the tort system is a primary determinant of the price
and availability of insurance
$17.0$49.6 $58.7
$85.6$17.1
$51.0$70.9
$85.6
$5.2
$20.4
$30.0
$45.5
$0
$50
$100
$150
$200
$250
1980 1990 2000 2006
Commercial Lines Personal Lines Self (Un)Insured
Bill
ions
Total = $39.3 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2007ME, NH, TN,
UT, WI
Drop-OffsND, VA, SD,
WY, ID
NewlyNotorious
AK
RisingAbove
FL
Midwest/West has mix of good and bad states
Sum of Top 10 Jury Awards, 2004-2007
$ Millions
$615.0$815.0
$2,953.7
$5,158.8
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2004 2005 2006 2007Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.
Total of Top 10 awards in 2007 was 25% lower than in 2006
Number of Top 10 Jury Awards, 1995 - 2007
22 2220
17
8 75 4 3 2 2 2 2 1 1 1
6
0
5
10
15
20
25
TX NY CA FL
MO
DC* AL GA IL TN LA MD OR SC NM NV NJ
TX, NY and CA lead the U.S. in jumbo-size jury awards
Source: LawyersWeekly USA,, January 22, 2008. *All against Iran for terrorist activity
Total Top 10 Verdicts, 1995 through 2006
Source: Lawyers USA, 2007
2007 Top Ten Verdicts
Source: LawyersWeekly USA, January 22, 2008.
FloridaAuto Crash, Death$45 Million
New JerseyVioxx$47.5 Million
NevadaPrempro$47.6 Million
AlabamaProduct Liability, Death$50 Million
FloridaDUI Crash$50 Million
New MexicoNursing Home, Death$54 Million
FloridaPrivate Air Crash$54 Million
CaliforniaProduct Liability, Death$55.2 Million
FloridaPremises Liability, Death$102.7 Million
New YorkMedical Malpractice$109 Million
StateIssueValue
2006 Top Ten Verdicts
Source: LawyersWeekly USA, 2007.
TexasProduct Liability$38.5 Million
MarylandPolice Brutality$44 Million
FloridaBusiness Dispute$44.2 Million
MissouriAuto Accident$46 Million
TexasDeath of Prisoner$47.5 Million
LouisianaVioxx$51 Million
CaliforniaWorkplace Harassment$61 Million
CaliforniaWrongful Death$106 Million
TexasNursing Home Negligence$160 Million
FloridaMedical Malpractice$216.7 Million
StateIssueValue
INFLUENCE OF TORT ENVIRONMENT AND LEGAL
LIABILITY TRENDS ON PRICING AND AVAILABILITY
Excess Liability Market Capacity –North America
Source: Marsh, 2007 Limits of Liability Report
$1.660$1.645
$1.570$1.535$1.425
$1.575$1.710
$2.045$1.941
$2.011
$1.721
$1.405$1.334
$1.432
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
$2.2
$2.4
$2.6
$2.8
94 95 96 97 98 99 00 01 02 03 04 05 06 07
Bill
ions
Capacity is up 16.5% since its 2003 trough
Liability: Average Cost per $1,000 of Revenue* United States, 2001 to 2007
$1.2
5
$0.6
5
$0.6
7
$0.3
3
$0.1
7
$0.1
1
$0.2
3
$3.2
1
$1.5
6
$1.2
7
$0.8
6
$0.3
6
$0.1
8 $0.4
8
$2.4
9
$1.0
7
$1.0
6
$0.6
3
$0.2
3
$0.1
4
$0.3
2
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$0 - $200M $201M-$500M
$501M-$1B $1B-$5B $5B-$10B $10B+ All
2001 2004 2007
*Across entire liability program (full population)Source: Marsh, 2007 Limits of Liability Report
Liability insurance costs relative to the client’s revenues are down by 25% - 35% since 2004
31.3
%
22.0
% 37.5
%
20.8
%
46.7
%
40.8
%
37.5
%
24.9
%
11.2
%
10.1
%
39.7
% 53.8
%
40.5
%
22.6
%
11.3
%
10.0
%
42.2
%
70.0
%
48.0
%
28.3
%
10.0
%
11.1
%
36.7
% 56.6
%
27.1
%
10.1
%
11.0
%31.7
% 51.6
%
29.2
%
19.0
%
5.5%10
.4%
8.4%9.
9%
134.5%
0%
20%
40%
60%
80%
100%
120%
140%
160%
CommercialMultiperil**
ProductsLiability
MedicalMalpractice
GeneralLiability
Comm. Auto Liability
WorkersComp
2001 2002 2003 2004 2005 2006
Defense Costs and Cost Containment Expenses as % of Incurred Losses*
* Net of reinsurance; excludes state funds. **Liability portion onlySource: Insurance Information Institute 2008 Fact Book from NAIC Statement Database.
Defense costs as a percentage of incurred
losses are flat or tracking upward
Average Total Liability Limits Purchased by All U.S. Firms*
*Includes underlying primary limits
Source: Limits of Liability 2007, Marsh, Inc.
$77.9
$85.8$83.2
$85.9$88.7
$99.1
$105.0$101.8
$95.7
$87
$77 $75
$66 $66
$50
$60
$70
$80
$90
$100
$110
94 95 96 97 98 99 00 01 02 03 04 05 06 07
Limits purchased fell by 37.1% between 2000 and 2007.
Price/capacity are issues.
$ Millions
Average Underlying Limits – U.S. (Attachment Points)
*Source: Marsh, 2007 and 2006 Limits of Liability Report
*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.
The average jury award continued to rise through 2005
Trends in Million Dollar Verdicts*4%
10%
8%
23%
22%
36%
48%
4%
8%
12%
31% 37
%
49%
59%
13%
14%
29%
51%
62%
5%
17%
13%
32%
41%
55%
64%
4%
39%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VehicularLiability
PersonalNegligence
PremisesLiability
BusinessNegligence
GovernmentNegligence
MedicalMalpractice
ProductsLiability
1996-1998 1999-2001 2002-2003 2004-2005
*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.
Across all liability types, million dollar-plus awards rose from 10% of all awards from 1996-98 to 17% in 2004-05.
REGULATORY & LEGISLATIVE
ENVIRONMENT
Isolated Improvements, Mounting Zealoutry
Legal, Legislative &Regulatory Issues
• Florida “Seeing the Light”: State finally recognizing that it is overexposed with its 2007 legislation having failed to deliver on political promises made
Size of FL Hurricane Catastrophe Fund may be scaled backPrivate reinsurance sector role may expandCitizens actuary: extending rate freeze through 2010 unwise; 44% increase not excessive
• Massachusetts Auto: Reforms have led to more competition, lower rates• Optional Federal Chartering: Still division of opinion on issue• Tax Issue: Treatment of locales like Bermuda; Effort to “level the playing field”• National CAT Plan: Hearing in February and in 2007, but no current catalyst• Flood Reform: Likely to happen, but MS Rep. Gene Taylor still pushing for NFIP
to cover wind. Sen. Clinton supports idea.• McCarran-Ferguson: Even though Trent Lott is gone, some may still push for
scaling back of M-F• Profusion of Quasi-Regulators: AGs, Governors, Congressional representatives
AGs hiring private attorneys on contingency fee basis is dangerous policy• Bad Faith Legislation: Attempts by trial lawyers and legislative allies to
open new tort channels (WA referendum, Florida SB 2862)Source: III
PRESIDENTIAL POLITICS & P/C PROFITABILITY
Political Quiz
• Does the P/C insurance industry perform better (as measured by ROE) under Republican or Democratic administrations?
• Under which President did the P/C insurance industry realize its highest ROE (average over 4 years)?
• Under which President did the P/C insurance industry realize its lowest ROE (average over 4 years)?
P/C Insurance Industry ROE byPresidential Administration,1950-2008*
15.10%10.45%
8.93%8.65%
8.35%7.98%
7.68%6.98%6.97%
5.43%5.03%
4.83%4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
CarterReagan II
G.W. Bush IINixon
Clinton IG.H.W. Bush
Clinton IIReagan I
Nixon/FordTruman
Eisenhower IEisenhower II
G.W. Bush IJohnson
Kennedy/Johnson
*ROE for 2007/8 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute
OVERALL RECORD: 1950-2008*
Republicans 8.92%
Democrats 8.00%
Party of President has marginal bearing on profitability of P/C insurance industry