the P/C Insurance Industry Challenges Amid the Global Economic Storm Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 [email protected]www.iii.org Informational Hearing of the Connecticut Insurance and Real Estate Committee Hartford, CT January 6, 2009
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Financial Crisis and the State of the P/C Insurance Industry Challenges Amid the Global Economic Storm Robert P. Hartwig, Ph.D., CPCU, President Insurance.
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Financial Crisis and the State of the P/C
Insurance Industry Challenges Amid the
Global Economic Storm
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038
Normally• The Basic Function of Insurance—the Orderly Transfer
of Risk from Client to Insurer—C ontinues Uninterrupted• This Means that Insurers Continue to:
Pay claims (whereas 25 banks have gone under) Renew existing policies (banks are reducing and eliminating
lines of credit) Write new policies (banks are turning away people who want
or need to borrow) Develop new products (banks are scaling back the products
they offer)
Source: Insurance Information Institute5
Leverage Ratios for InvestmentBanks and Traditional Banks*
33.0
24.3
23.3
21.5
15.4
13.3
12.4
10.8
10.5
44.0
0 10 20 30 40 50
Merrill Lynch
Morgan Stanley
Goldman Sachs
Lehman Brothers
Fannie Mae
Citibank
JP Morgan Chase
Wells Fargo
Wachovia
Bank of America
*Based on data for last quarter reported (May or June 2008).Source: “The Perils of Leverage,” North Coast Investment Research, Sept. 15, 2008
Investment bank leverage ratios were extremely high.
Lehman filed for bankruptcy 9/15/08
Merrill merged with JP Morgan Chase
Goldman and Morgan converted to bank holding companies
6
How Does Leverage Work?
• Example of Non-Leveraged Transaction Buy 1 share of stock for $100 Price of share rises to $110 RETURN = $10 or 10%
• Leveraged Transaction Invest $10 and borrow $90 Stock rises to $110 RETURN = $10 or 100% (less borrowing costs)
• This Pleasant Arithmetic Works Equally Unpleasantly in the Opposite Direction
• Declining asset values, seizing of credit markets made such borrowing impossible and the operating model of investment banks nonviable
Source: Insurance Information Institute.
Investment banks and others juiced their returns
by making big, bad bets with (mostly) borrowed
money on mortgage securities
7
The Financial Crisis in PerspectiveBank vs. Insurer Impacts
$600
$106
$780
$205
$0
$100
$200
$300
$400
$500
$600
$700
$800
Banks Insurers
Losses as of Sept 2008
Total expected losses
Financial Institutions Globally FacingHuge Losses from the Credit Crunch*
*Global losses since the beginning of 2007.Source: IMF Global Financial Stability Report, October 2008, IIF, Bloomberg, cited in a presentation by Thomas Hess (Chief Economist, Swiss Re) October 23, 2008, accessed via Geneva Association web site.
Billions
The IMF estimates total “credit- turmoil-related” losses will
eventually amount to $1.4 trillion
$205B or 20.8% of estimated total (bank+insurer) losses will be
Source: FDIC; Insurance Information Institute research.
Resurgent bank failures (25 in 2008) are
symptomatic of weakness in the financial system. FDIC says many more
may failFailure of IndyMac was the 4th largest in
history
Sept. 25 failure of Washington
Mutual was bar far the largest in
US history. Sold to JP Morgan Chase by govt. for $1.9B
plus WaMu’s loans and deposits
10
US Bank Failures:* 1995-2008
86
13
8 7
4
11
3 4
0 0
3
25
0
5
10
15
20
25
30
95 96 97 98 99 00 01 02 03 04 05 06 07 08*
Through December 31, 2008
Remarkably, as recently as 2005 and 2006, no banks
failed—the first time this had happened in FDIC history
(dating back to 1934)
*Includes all commercial banking and savings institutions. Source: FDIC: http://www.fdic.gov/bank/historical/bank/index.html; Insurance Info. Institute
Bank failures are up sharply. 25 banks (but no p/c or life
insurers) failed in 2008 due to the financial crisis, including the largest in history—Washington Mutual with $307B in assets.
11
US Bank Failures:* 1934-2008**
0
100
200
300
400
500
600
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
Through December 31, 2008
Great Depression
355 failures between 1934 and 1940*
Savings & Loan Crisis
2808 depository institutions failed between 1982 and 1992;
*Includes all commercial banking and savings institutions.**Data begin in 1934, the year the FDIC was established.Source: FDIC: http://www.fdic.gov/bank/historical/bank/index.html; Insurance Info. Institute
The S&L bailout cost taxpayers as much as
$160 billion. The current bailout could cost the government
much more.
Current Financial Crisis
25 banks (but no p/c or life insurers) have failed so far in
2008
12
Top 10 P/C Insolvencies, Based Upon Guaranty Fund Payments*
$2,265.8
$1,272.7
$1,049.7$843.4
$699.4$566.5 $555.8 $543.1 $531.6 $516.8
$0
$500
$1,000
$1,500
$2,000
$2,500
* Disclaimer: This is not a complete picture. If anything the numbers are understated as some states have not reported in certain years.
Source: National Conference of Insurance Guaranty Funds, as of September 17, 2008.
$ MillionsThe 2001 bankruptcy of Reliance Insurance was the largest ever among p/c insurers
13
Top 10 Life Insolvencies, Based On GuarantyFund Payments and Net Estimated Costs*
*ROE figures are GAAP; 1Return on avg. surplus. 2008 numbers are annualized based on 9-mos. Actual of $4.066 billion.Sources: A.M. Best, ISO, Insurance Information Inst.
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2008:Q3
*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry fell well short of is cost of capital in 2008
-13.
2 p
ts
US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on
target or better 2003-07
-1.7
pts
+2.
3 p
ts
-9.0
pts
The cost of capital is the rate of return
insurers need to attract and retain
capital to the business
-9.7
pts
23
Investment Performance
Investments are the Principle Source of Declining
Profitability
Distribution of P/C Insurance Industry’s Investment Portfolio
Cash & Short-Term Investments
7.2%
Common Stock17.9%
Bonds66.7%
Preferred Stock1.5%
Real Estate0.8%
Other5.9%
Portfolio Facts
•Invested assets totaled $1.3 trillion as of 12/31/07
•Insurers are generally conservatively invested, with 2/3 of assets invested in bonds as of 12/31/07
•Only about 18% of assets were invested in common stock as of 12/31/07
•Even the most conservative of portfolios was hit hard in 2008
Source: NAIC; Insurance Information Institute research;.
As of December 31, 2007
25
Property/Casualty Insurance Industry Investment Gain:1994- 2008:Q3 1
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$63.6
$28.3
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
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.Sources: ISO; Insurance Information Institute.
Investment gains are off sharply in 2008 due to lower yields and poor equity market conditions.
26
P/C Insurer Net Realized Capital Gains, 1990-2008:Q3
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.**Based on PCS data through Sept. 30. PCS $2.1B loss of for Gustav. $10.655B for Ike of 12/05/08.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
$ Billions2008 CAT losses already exceed 2006/07 combined. 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
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Top 12 Most Costly Disasters in US History, (Insured Losses, $2007)
$4.0 $5.0 $6.0 $7.0 $7.8 $8.2$10.7 $10.9 $10.9
$22.0 $22.9
$43.6
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Ike(2008)*
Wilma(2005)
Northridge(2004)
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
$ B
illi
ons
*PCS estimate as of 12/15/08.Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.
9 of the 12 most expensive disasters in US history
have occurred since 2004
In 2008, Ike became the 6th most expensive insurance event and 4th most