Insurance Industry Overview & Outlook Economic Challenges and Opportunities for 2013 and Beyond AFP Insurance Client Conference Miami, FL October 16, 2012 Download at www.iii.org/presentations 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]
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Insurance Industry Overview & Outlook
Economic Challenges and Opportunities for 2013 and Beyond
AFP Insurance Client ConferenceMiami, FL
October 16, 2012Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Reasons for Optimism, Causes for Concern in the Insurance
Industry
The Outlook for the Economy Is Still Cloudy, But the Outlook for
Insurance Could Improve
3
Reasons for Optimism, Causes for Concern in the Insurance Industry
Slow Economic Growth Will Persist through 2013 No Double Dip or Second Recession unless we go completely off the “Fiscal Cliff” Economy is more resilient than commonly presumed
Consumer Confidence Has Improved Consumer Spending is Recovering Gradually, Albeit Unevenly Consumer and Business Lending Are Expanding, Albeit Fitfully Housing Market Remains Weak but Has Bottomed Out
HousingConstruction will become a more important growth driver by mid-2013/2014 Private Sector Hiring is Consistently Positive for 33 Months
Acceleration in hiring is possible in 2013 compared to 2012 Government employment may be begin to turn positive
Interest Rates Remain Low (Fed to Keep Rates Lows Until mid-2015) Good for borrowers; Challenge for savers and institutional investors like insurers Major contributing factor to pension shortfalls
Inflation Is Up Marginally But Remains Under Control Stock and Bond Markets More Stable, Less Volatile Compared to 2008/09 Eurozone Recession/ China Slowdown Don’t Push US into Recession
Eurozone does not (completely) disintegrate; Greece could exit Political Uncertainty, Fiscal Cliff, Regulatory Uncertainty Loom Large in US
The Strength of the Global and US Economies Will Influence Insurer Growth Opportunities
4
Consumer Demand for Insurance Products Should Increase
4
5
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/12; Insurance Information Institute.
2.7
%0
.5%
3.6
%3
.0%
1.7
%-1
.8%
1.3
%-3
.7%
-5.3
%-0
.3%
1.4
%5
.0%
2.3
%2
.2%
2.6
%2
.4%
0.1
%2
.5%
1.3
%4
.1%
2.0
%1
.3%
1.7
%1
.8%
1.7
%2
.2%
2.6
%2
.8%
-8.9%
4.1
%1
.1%
1.8
%2
.5% 3.6
%3
.1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
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
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
Demand for 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%
2012 is expected to see slow growth lasting into 2013; Fed’s QE3 could
P/C Net Premium Growth: Annual Change, 1971—2012:H1
(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.
2012:H1 growth
was +3.6%
3 Decades of U.S. GDP vs. L/A Premiums:Fairly Strong Association
Note: 2011 premium data is premiums for 2011:Q3, annualizedSources: http://www.bea.gov/national/xls/gdplev.xls , NAIC Annual Statement data, via SNL Financial; I.I.I. calculations
Premiums, Billions
GDP, Billions
2001 Recession
2008-09 Recession
10
Real GDP Growth Forecasts: Major Economies: 2011 – 2013F
Sources: Blue Chip Economic Indicators (9/2012 issue); Insurance Information Institute.
1.7%
0.7% 1.
5%
3.1%
2.2%
-0.3
%
0.9%
7.8%
2.3%
2.1%
1.1%
0.3% 1.
1%
8.2%
1.4%
9.2%
-0.7%-0.5%-2%
0%
2%
4%
6%
8%
10%
US UK Euro Area Germany China Japan
2011 2012F 2013F
Growth Prospects Vary Widely by Region: Stabilizing in the US, Mild Recession in the Eurozone, A “Soft Landing” in China and India,
Reconstruction Stimulus in Japan and Modest Growth in America’s Largest Trading Partners—Canada and Mexico.
The Eurozone and UK are in
recession. Both should end by early
2013
China growth has slowed, but remains strong in an expected “soft landing”
scenario
Tepid US recovery
continues
Rebuilding acts as a
stimulus to Japanese economy
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
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
10
11
12
F1
3F
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook , Oct. 2012; Ins. Info. Institute.
Emerging economies (led by China) are expected to grow by 5.3% in 2012 and
5.6% in 2013.
GDP Growth: Advanced & Emerging Economies vs. World, 1970-2013F
Advanced economies are expected to grow at a sluggish pace of 1.3% in
2012 and 1.5% in 2013.
World output is forecast to grow by 3.3% in 2012 and 3.6% in 2013. The world economy shrank by 0.6% in
2009 amid the global financial crisis
GDP Growth (%)
12
Global Real (Inflation Adjusted) NonlifePremium Growth: 1980-2010
Source: Swiss Re, sigma, No. 2/2010.
Nonlife premium growth in emerging markets has
exceeded that of industrialized countries in
27 of the past 31 years, including the entirety of the
global financial crisis..
Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as
well as a lack of consistent cyclicality
Average: 1980-2010
Industrialized Countries: 3.8%
Emerging Markets: 9.2%
Overall Total: 4.2%
13
Nonlife Real Premium Growth in 2010
Source: Swiss Re, sigma, No. 2/2011.
Latin and South American markets performed
relatively well during and after the global financial crisis in terms of growth
There was also growth in the Middle East, East and South Asia as well as Australia and New
Zealand
Percent Change in Real GDPby State, 2011
Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute. 14
Growth varied considerably across states
but in total was weak in 2011
with US overall growth at just
1.7%
TX has been an economic
growth leader
74
.47
3.6
73
.67
2.2
73
.6 76
67
.86
8.9
68
.26
7.7 7
1.6 74
.5
74
.2 77
.5
67
.5 69
.8
74
.37
1.5
63
.75
5.7 5
9.5
60
.9 64
.16
9.9
75
.07
5.3
76
.27
6.4 7
9.3
73
.2
72
.3 74
.3 78
.3
40
45
50
55
60
65
70
75
80
85
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
Au
g-1
2
Se
p-1
2
Consumer Sentiment Survey (1966 = 100)
January 2010 through September 2012
Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially in late 2011 and early 2012
Source: University of Michigan; Insurance Information Institute
Optimism among consumers Increased in September, and is
well above year-ago levels; Suggests concern, but not fear on
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 10/12); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. 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
Low inventories of existing homes, and low mortgage rates and stimulating new home
construction for the first time in years
Job growth, improved credit
market conditions and demographics
will eventually boost home construction
18
Construction Employment,Jan. 2010—September 2012*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,59
35,
529 5,
552
5,55
95,
518
5,50
75,
491 5,
511
5,49
25,
499
5,48
85,
477
5,45
65,
489
5,49
65,
495
5,49
8
5,49
55,
508
5,49
85,
528
5,51
95,
520 5,
546 5,56
45,
563
5,54
95,
542
5,51
05,
514
5,51
75,
518
5,52
3
5,400
5,450
5,500
5,550
5,600
5,650
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-10
Jul-1
0A
ug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-1
0Ja
n-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
102
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Construction employment is still below where it was in
Jan. 2010. In a normal recovery, construction employment would be
growing robustly
(Thousands)
19
Value of Construction Put in Place, August 2012 vs. August 2011*
-3.5%
-27.7%
-2.7%
6.5%12.1%
17.8%
7.2%
-30%
-20%
-10%
0%
10%
20%
30%
TotalConstruction
Total PrivateConstruction
Residential--Private
Non-Residential--
Private
Total PublicConstruction
Residential-Public
Non-Residential--
Public
Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue
Growth (%)
Private sector construction activity is up in both the residential and nonresidential segments
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +12.1% Public: -3.5%
Public sector construction activity remains depressed
58
.35
7.1
60
.45
9.6
57
.85
5.3
55
.15
5.2
55
.3 56
.9 58
.25
8.5 6
0.8
61
.4
59
.75
9.7
54
.2 55
.8
51
.4 52
.5
52
.55
1.8
52
.2 53
.1 54
.15
2.4 53
.4 54
.8
53
.54
9.7
49
.84
9.6 5
1.5
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
Au
g-1
2
Se
p-1
2
ISM Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through September 2012
The manufacturing sector expanded for 35 of the 38 months from Jan. 2010 through Sept. 2012. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Manufacturing activity contracted in June for the first time in nearly 3
years, but a resumption of expansion began in September
20
21
$200,000
$300,000
$400,000
$500,000
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—August 2012
*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to Aug. 2012 was 31%. Manufacturing is an
energy intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages
ENERGY INTENSIVE
The value of Manufacturing Shipments in Aug. 2012 was up 31% to $477B from its June 2009 trough.
June figure is only 1.7% below its previous record high in July 2008.
$ Millions
21
50
.7 52
.7 54
.15
4.6
54
.85
3.5
53
.75
2.8 53
.95
4.6 56 5
7.1 5
9.4
59
.7
56
.35
4.4
53
.35
3.4
53
.85
2.6
52
.65
2.6
52
.65
3.0
56
.85
7.3
56
.05
3.5
53
.75
2.1
52
.6 53
.7 55
.1
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
Au
g-1
2
Se
p-1
2
ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through September 2012
Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.
Optimism among non-manufacturers was stable in late 2011 and remained
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more
than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1:2011
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly* Data through Dec. 31, 2011 are the latest available as of Oct. 3, 2012; Seasonally adjusted. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
(Thousands)
Business starts were up 2.2% to 748,000 in 2011 vs. 2010. 742,000 new business
starts were recorded in 2010, up 6.0% from 700,000 in 2009, which was the slowest year for new business starts since 1993
Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000*
24
NFIB Small Business Optimism Index
January 1985 through September 2012
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 25
Small business optimism has increased but is still only at
the level it was when the Financial Crisis began
26
12 Industries for the Next 10 Years: Insurance Solutions Needed
Employment in the Healthcare industry increased by 9.8%-- a
gain of 1.3 million jobs between Dec. 2007 (start of the
recession) and Sept. 2012
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands)
The increase in healthcare employment has driven workers comp payroll
exposures up faster than almost any other industry
28
Oil & Gas Extraction Employment,Jan. 2010—August 2012*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156
157
157
158 159
158
158 16
0
160 16
2
161
161 16
3 164 16
7 170 17
1 173 17
5 177 18
0 183
183 18
6 188 19
0 192
193
194 19
5 196 197
150
155
160
165
170
175
180
185
190
195
200
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
2/30
/210
2
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Oil and gas extraction employment is up 26.3% since Jan. 2010 as the energy sector booms. Domestic
energy production is essential to any robust economic recovery in the US.
(Thousands)
29
P/C Growth Analysis by State: 2006 - 2011
Premium Growth Rates Vary Tremendously by State
29
30
Direct Premiums Written: Total P/CPercent Change by State, 2006-2011
71
.5
41
.8
26
.4
22
.8
22
.6
20
.8
18
.2
11
.8
10
.5
6.6
6.3
6.1
5.8
4.9
4.7
4.2
3.9
2.4
2.2
2.1
2.1
2.1
0.9
0.9
0.7
0.4
0
10
20
30
40
50
60
70
80
ND
SD
MT IA NE
KS
OK
WY
TX
MN LA
AR WI
TN IN AK
DE
NM
NC
KY
SC
WA
DC
MO VT
MS
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial, LLC.; Insurance Information Institute.
Top 25 States
A limited number of states showed strong growth over
the past 5 years
31
Direct Premiums Written: Total P/CPercent Change by State, 2006-2011
0.4
-0.6
-0.8
-0.8
-1.1
-1.3
-1.4
-1.6
-1.9
-2.0
-2.5
-3.1
-3.2
-3.5
-4.1
-4.4
-5.2
-5.8
-6.0
-10
.3
-10
.5
-10
.8
-11
.7
-12
.0
-13
.5
-19
.2
-25
-20
-15
-10
-5
0
5
AL
OH IL VA
NY
UT
US
GA
CT
PA
NJ
CO
MD
MA ID OR RI
ME MI
HI
NH
WV
FL
CA AZ
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
States with the poorest performing economies also produced the most negative net change in premiums of
the past 5 years
Sources: SNL Financial, LLC.; Insurance Information Institute.
32
Presidential Politics & the P/C Insurance Industry
How Is Profitability Affected by the President’s Political Party?
32
15.10%
9.40%
8.93%
8.65%
8.35%
7.98%
7.68%
6.98%
6.97%
6.65%
5.43%
5.03%
4.83%
4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
G.W. Bush II
Nixon
Clinton I
G.H.W. Bush
Clinton II
Reagan I
Nixon/Ford
Truman
Obama
Eisenhower I
Eisenhower II
G.W. Bush I
Johnson
Kennedy/Johnson
*Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments.Estimated ROE for 2012 = 7.0%. Source: Insurance Information Institute
OVERALL RECORD: 1950-2012*
Democrats 7.67%Republicans 7.97%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950- 2012*
-5%
0%
5%
10%
15%
20%
25%
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
10
12
E
BLUE = Democratic President RED = Republican President
Tru
man Nixon/Ford
Ken
ned
y/
Joh
nso
n
Eis
enh
ow
er
Car
ter
Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2012*
*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0%Source: Insurance Information Institute
Ob
ama
35
Labor Market Trends
Massive Job Losses Sapped P/C Life Exposures, But Trends Are
Improving
35
36
Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 7.8% in
Aug. 2012
Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.
Peak rate in the last 30 years:
10.8% in November -
December 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 14.7%
in Aug. 2012
January 2000 through Sept. 2012, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving
36
Sep. 12
186
7921
365
127
42 15-1
09-1
465
9723
-12
-85 -58
-161
-253 -230
-257
-347
-456
-547
-734 -6
67-8
06-7
07-7
44-6
49-3
34-4
52-2
97-2
15 -186
-262
75-8
316
62
229
51 6111
714
311
2 193
128 16
711
925
726
126
410
810
2 175
5221
613
9 178 23
4 277
254
147
8511
663
163
97 10414
4
(1,000)
(800)
(600)
(400)
(200)
0
200
400
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-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-0
9Ju
n-09
Jul-0
9A
ug-0
9S
ep-0
9O
ct-0
9N
ov-0
9D
ec-0
9Ja
n-10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-1
1Ju
n-11
Jul-1
1A
ug-1
1S
ep-1
1O
ct-1
1N
ov-1
1D
ec-1
1Ja
n-12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Monthly Change in Private Employment
January 2008 through Sept. 2012 (Thousands)
Private Employers Added 4.83 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
P-C Industry 2012:H1 profits were up 245% from 2011:H1, due primarily to lower catastrophe losses
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for 2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:H1 combined ratio including M&FG insurers is 102.2, ROAS = 5.9%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Year Ago
2011:H1 = 109.4, 2.3% ROE
-5%
0%
5%
10%
15%
20%
25%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
*1
2:
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:H1*
*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:H1 ROAS = 5.9% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
2011:4.6%*
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2012:H1: 6.2%
46
ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2012:H1*
* Excludes Mortgage & Financial Guarantee in 2008 – 2012. 2012 Fortune 500 figure is III estimate.Sources: ISO, Fortune; Insurance Information Institute.
Overall Life/Annuity premiums in 2011 ($623.9B) nearly equaled the 2008 prior peak ($625.2B). 2011 annuity premiums hit a new peak in 2011 ($327.0B) but life insurance
premiums of $122.8B are significantly off the 2008 peak of $142.8B.
Life/Annuity/A&H Direct Premiums by Market, 2011
Source: NAIC Annual Statement data, from SNL Financial; I.I.I. calculations
Individual Life Insurance & AnnuityPremiums Generally Track DPl
*DPI is 2012:Q2 estimate, published Sept. 28, 2012
Sources: www.bea.gov and SNL Financial; I.I.I. calculations
DPI ($ Trillion)
Individual Life Insurance & Annuity Premiums ($ Billion)
Individual Life Insurance & Annuity premiums dropped
31% in 2009 vs. 2008,although DPI rose by 1%
Group Insurance Premiums (line)Track Nonfarm Employment (bars)
*2012 is preliminary August 2012; Data are not seasonally adjusted Sources: NAIC Annual Statements, via SNL Financial; http://www.bls.gov/ces/
Variable sales dropped after the stock market plunge in 2000 but recovered by 2004. 2007 was a record year. 2009 variable sales vs. 2007 dropped by 30.4%.
In inflation-adjusted terms, total sales since 2003 are essentially flat.
Ordinary Life InsuranceLapse Rates, 1996-2010
Sources: NAIC Annual Statements, p. 25 line 15 (lapses) and average of lines 1 and 21, from SNL Financial; I.I.I. calculations
Was the 2002 spike in lapse rates
related to the 2001 recession?
2008-09 recession
Yearly Percent Change in Applicationsfor Individual U.S. Life Insurance Policies
*for 2012, Sept 2012 vs. Sept 2011 Source: MIB Life Index, monthly releases
Since 2007, the age-60-and-over is the only group consistently increasing life insurance applications. And even in 2005-06, the drop-off in applications was smaller for the 60+ group vs. younger ones.
Ages
INVESTMENTS: THE NEW REALITY
65
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence
Underwriting & Pricing 65
66
Insurers Have Not Yet Fully Adapted to a Persistently Low Interest Rate Environment
No Expectation that Rates Would Be:Pushed to Such Low Levels
Pushed Down so Rapidly
Held to Such Low Levels for So Long
Suppressed via Unprecedented Aggressiveness of the Federal Reserve– Use of traditional and unconventional tools (QE)– Unconventional ’s policies couldn’t be anticipated, esp. QE1, 2, and 3 (QE 4 Ever???)
Competitive PressureProtracted Soft MarketAbility to Release Prior Reserves Eased UrgencyRealization of Capital Gains
OFFSETTING FACTORSCapitalization Still SolidEmergence of Sophisticated Price Monitoring and Underwriting Tools
Property/Casualty Insurance Industry Investment Income: 2000–2012F1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.0
$47.4
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12F
Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates
1 Investment gains consist primarily of interest and stock dividends.*2012F is based on annualized H1:2012 actual figure of $23.718B.Sources: ISO; Conning Research & Consulting; Insurance Information Institute.
($ Billions)
Investment earnings in 2012 are running 13% below their
2007 pre-crisis peak
68
P/C Insurer Net Realized Capital Gains/Losses, 1990-2012:H1
Sources: A.M. Best, ISO, Insurance Information Institute.
Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower Realized Investment Gains; The Financial
Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2012F figure is III estimate based on annualized actual H1:2012 result of
$25.424B.Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains in 2012 are running approximately 20% below their pre-crisis peak
70
U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*
*Monthly, through Sept. 2012. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
Yields on 10-Year U.S. Treasury Notes recently
plunged to all time record lows
70
71
Treasury Yield Curves: Pre-Crisis (July 2007) vs. Sept. 2012
*PCS figure for H1 2012 (stated in 2012 dollars).Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation-Adjusted Basis
H1 2012 CAT losses were down $11.9B or 49% from
$24.4B in H1 2011
Record Tornado Losses Caused
2011 CAT Losses to Surge
($ Billions, 2011 Dollars)
74
UNDERWRITING
75
Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?
75
76
P/C Insurance Industry Combined Ratio, 2001–2012:H1*