Overview & Outlook for the Commercial P/C Insurance Industry: Challenges and Opportunities for 2013 & Beyond NAMIC Commercial Lines Seminar Chicago, IL February 25, 2013 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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Overview & Outlook for the Commercial P/C Insurance Industry:
Challenges and Opportunities for 2013 & Beyond
NAMIC Commercial Lines SeminarChicago, IL
February 25, 2013Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
The Strength of the Economy Will Influence P/C Insurer
Growth Opportunities
3
Growth Will Expand Insurer Exposure Base Across Most Lines
3
4
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/13; 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% 3
.1%
1.7
%2
.2%
2.6
%2
.8%
2.7
%2
.9%
2.9
%3
.0%
-0.1
%
-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
14
:1Q
14
:2Q
14
:3Q
14
: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
was severe
The Q4:2008 decline was the steepest since the Q1:1982
drop of 6.8%
2013 is expected to see initially slow
growth, then gradually accelerate throughout the year and into 2014
2012:Q4 GDP Number Was Not as Bad as the Headline Suggests
Sources: Washington Post, Jan. 30, 2013; BEA ;Insurance Information Institute. 5
GDP declined by 0.1% in Q4
The shrinkage in the economy was driven mostly by a decline in defense spending and a decumulation of inventory
State and local govt. are dragging on the economy as well
The private economy actually expanded by 1.2%
Federal defense spending and govt. spending in general
will drag on the economy
The Fiscal Cliff Was Just the Beginning: Budget Battles for Years to Come?
*P/C Insurance Joint Industry Forum press release (www.iii.org/press_releases), January 15, 2013.Source: Fix the Debt Coalition, January 18, 2013; Insurance Information Institute 6
The “Fiscal Cliff” was just the beginning
There are 10+ “Fiscal Speed Bumps” over the next 5 years, setting up a potentially extended period of fiscal uncertainty
Creates long-term uncertainty around federal spending, tax policy, entitlements
Insurable exposures impacted
Poll: 94% of P/C insurance executives think looming budget battlesIn Washington will hurt the economy.*
Federal Spending as a Share of State GDP: Vulnerability to Sequestration Varies
Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo; Insurance Information Institute. 7
8
Defense and Non-Defense Federal Spending as a Share of State GDP: Top 10 States*
14
.6
10
.5
9.8
9.8
9.8
8.0
7.0
5.9
5.3
5.2
10
.0
10
.0
10
.0
9.2
4.9
3.8
3.1
2.8
2.7
2.6
0
2
4
6
8
10
12
14
16
HI AK DC MD VA KY AL MO CT AZ DC MD VA NM ID WV TN AK MT SC
Sh
are
of
Sta
te G
DP
(%
)
Federal defense spending accounts for approximately 10%+ of
GDP in 5 states
*As of 2010.Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo Securities; Insurance Information Institute.
Defense Spending Non-Defense Spending
Federal non-defense spending accounts for 10%+ of GDP in 3 states
Sequestration Could Adversely Impact Commercial Insurance Exposures Directly at Defense Contractors and Indirectly in Impacted Communities
State-by-State Leading Indicatorsthrough 2013:Q1
Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 10
Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.
5,000
5,500
6,000
6,500
7,000
7,500
8,000
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
The “Great Recession” and housing bust destroyed 2.3 million constructions jobs
The Construction Sector Could Be a Growth Leader in 2013 and 2014 as the Housing Market and Private Investment Recover. Commercial Insurers Will Benefit.
Construction employment
troughed at 5.435 million in Jan.
2011, after a loss of 2.291 million jobs, a 29.7%
plunge from the April 2006 peak
15
Construction employment
peaked at 7.726 million in April 2006
(Thousands) Construction employment as of Jan. 2013 totaled 5.731 million, an
Outstanding Commercial Loan Volume Has Been Growing for Over Two Years and Is Now Nearly Back to Early Recession Levels. Bodes Very Well for the Creation of Current and Future Commercial Insurance Exposures
*Latest data as of 2/24/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.
$Trillions
Commercial lending plunged by 21.2% ($330B) during the financial crisis and ensuing
period of tight credit
Commercial lending activity is nearly back to pre-crisis levels (+24.9% or $290B)
Manufacturing Growth for Selected Sectors, 2012 vs. 2011*
9.1%
2.5%
11.2%
2.0% 2.6%
4.9%
-1.5%
3.9% 4.3%4.3%
7.0% 7.0%
12.4%
3.8%
-4%-2%0%2%4%6%8%
10%12%14%
All
Ma
nu
fact
uri
ng
Du
rab
le M
fg.
Wo
od
Pro
du
cts
Pri
ma
ryM
eta
ls
Fa
bri
cate
dM
eta
ls
Ma
chin
ery
Ele
ctri
cal
Eq
uip
.
Tra
nsp
ort
atio
nE
qu
ip.
No
n-D
ura
ble
Mfg
.
Fo
od
Pro
du
cts
Pe
tro
leu
m &
Co
al
Ch
em
ica
l
Pla
stic
s &
Ru
bb
er
Te
xtile
Pro
du
cts
Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial
Property, Commercial Auto and Many Liability Coverages
Growth (%)
Manufacturing of durable goods was especially
strong in 2012
*Seasonally adjusted; Date are YTD comparing data through December 2012 to the same period in 2011.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
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 Q3:2012, filings were down 15.8% vs. Q3:2011
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But Are Recovering Slowly
* Annualized based on data through Jun. 30, 2012 (latest available as of Feb. 24, 2013); 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. In 2012, starts are likely to be up by about
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 28
Small business optimism has increased but took a big hit
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 LC.; Insurance Information Institute.
Top 25 States
A limited number of states showed strong growth over
the past 5 years
35
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 LC.; Insurance Information Institute.
36
Direct Premiums Written: Comm. LinesPercent Change by State, 2006-2011*
10
0.9
60
.8
38
.9
28
.9
27
.9
25
.6
14
.9
8.3
4.0
2.9
2.7
0.9
0.2
0.0
-0.5
-1.5
-2.5
-3.0
-6.3
-6.4
-6.6
-6.6
-6.7
-7.6
-7.8
-7.9
-20
0
20
40
60
80
100
120
ND
SD
MT IA NE
KS
OK
WY
MN
TX
AK WI
VT IN AR
LA
TN
DC IL
OH
MA
NM
MS
WA
NY
NC
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 12 states showed any commercial lines growth
2006 and 2011
37
Direct Premiums Written: Comm. LinesPercent Change by State, 2006-2011*
-7.9
-8.0
-8.1
-9.0
-10
.0
-10
.1
-10
.8
-11
.4
-11
.6
-12
.2
-12
.7
-12
.9
-13
.2
-13
.2
-13
.6
-14
.7
-15
.0
-16
.0
-16
.7
-19
.4
-19
.8
-19
.9
-23
.7
-24
.4
-26
.4
-33
.0
-40
-35
-30
-25
-20
-15
-10
-5
0
KY
PA
MO
US
ME
CT
SC AL
VA
GA ID
MD NJ RI
CO
UT
OR MI
DE
CA
NH HI
FL AZ
WV
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 LC.; Insurance Information Institute.
38
Direct Premiums Written: Workers’ CompPercent Change by State, 2006-2011*
32
1.6
16
0.5
13
.2
12
.7
10
.9
1.2
0.6
-1.5
-6.3
-6.9
-7.0
-10
.4
-10
.5
-11
.6
-13
.3
-13
.4
-14
.6
-14
.8
-15
.3
-16
.1
-16
.4
-17
.0
-17
.2
-18
.6
-19
.4
-19
.8
-50
0
50
100
150
200
250
300
350
ND
MT
SD IA
OK WI
NY
KS
WY IL CT
OH PA
NE
NJ
MN MI
ME IN MA
NC LA
NM VA RI
AL
Pe
ce
nt
ch
an
ge
(%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
39
Direct Premiums Written: Worker’s CompPercent Change by State, 2006-2011*
-19
.8
-19
.9
-21
.0
-22
.2
-22
.9
-23
.0
-23
.1
-23
.1
-23
.4
-23
.6
-25
.5
-25
.6
-26
.1
-28
.4
-29
.0
-29
.2
-29
.6
-29
.8
-36
.1
-40
.3
-43
.8
-44
.2
-45
.2
-46
.1
-49
.0
-52
.5-55
-50
-45
-40
-35
-30
-25
-20
-15
TN
MS
US
OR ID SC
AR
TX
GA
DC
MD
KY
VT
AK
MO
NH AZ
CA
CO
UT
WA
DE HI
NV
WV
FL
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
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
43
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
43
44
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
Jan13
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 7.9% in
Jan. 2013—lowest in 4 years.
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 14.4%
in Jan. 2013
January 2000 through Jan. 2013, 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
44
22
75
41
68
50
12
36
61
-79
24 6
8 74
51
2-1
14
-10
5-2
22
-21
9-2
03
-26
7-2
69
-42
9-4
84
-78
6 -70
1-8
21
-69
2-8
12
-82
1-2
88
-44
2-2
82 -2
22 -1
62
-23
3-3
4-1
67
-17
-26
17
01
02
94 10
31
29
11
3 18
81
54
11
48
02
43
22
3 30
31
83
17
72
06
12
92
56
17
41
97 24
9 32
32
65
20
81
20 15
27
81
77
13
11
18
21
7 25
62
02
16
6
11
1(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan
-07
Fe
b-0
7M
ar-
07
Ap
r-0
7M
ay-
07
Jun
-07
Jul-
07
Au
g-0
7S
ep
-07
Oct
-07
No
v-0
7D
ec-
07
Jan
-08
Fe
b-0
8M
ar-
08
Ap
r-0
8M
ay-
08
Jun
-08
Jul-
08
Au
g-0
8S
ep
-08
Oct
-08
No
v-0
8D
ec-
08
Jan
-09
Fe
b-0
9M
ar-
09
Ap
r-0
9M
ay-
09
Jun
-09
Jul-
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-
10
Au
g-1
0S
ep
-10
Oct
-10
No
v-1
0D
ec-
10
Jan
-11
Fe
b-1
1M
ar-
11
Ap
r-1
1M
ay-
11
Jun
-11
Jul-
11
Au
g-1
1S
ep
-11
Oct
-11
No
v-1
1D
ec-
11
Jan
-12
Fe
b-1
2M
ar-
12
Ap
r-1
2M
ay-
12
Jun
-12
Jul-
12
Au
g-1
2S
ep
-12
Oct
-12
No
v-1
2D
ec-
12
Jan
-13
Monthly Change in Private Employment
January 2008 through Jan. 2013 (Thousands)
Private Employers Added 6.07million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 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
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
166,000 private sector jobs were
created in January
45
Jobs Created2012: 2.247 Mill2011: 2.420 Mill2010: 1.235 Mill
sCumulative Change in Private Sector Employment: Jan. 2010—Jan. 2013
January 2010 through January 2013* (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job gains through Jan. 2013 totaled 6.08 million
47
Job gains and pay increases have added more than $600 billion to payrolls
since Jan. 2010
Private Employers Added 6.07million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Unemployment Rates by State, December 2012:Highest 25 States*
10
.2
10
.2
9.8
9.6
9.2
8.9
8.7
8.6
8.6
8.6
8.5
8.4
8.4
8.2
8.2
8.1
8.0
7.9
7.9
7.8
7.6
7.6
7.6
7.5
7.3
7.1
0
2
4
6
8
10
12
14
NV RI CA NJ NC MI IL CT GA MS DC OR SC IN NY KY FL AZ PA US CO TN WA WV ME AL
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for December 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In December, 22 states reported over-the-month unemployment rate
decreases, 16 states and the District of Columbia had increases, and 12 states
had no change.
51
7.1
6.9
6.7
6.7
6.7
6.6
6.6
6.6
6.6
6.4
6.1
5.7
5.7
5.5
5.5
5.5
5.4
5.2
5.2
5.1
5.1
4.9
4.9
4.4
3.7
3.2
0
2
4
6
8
AR DE MA MO OH AK ID MD WI NM TX MT NH LA MN VA KS HI UT OK VT IA WY SD NE ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates by State, December 2012: Lowest 25 States*
*Provisional figures for December 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In December, 22 states reported over-the-month unemployment rate
decreases, 16 states and the District of Columbia had increases, and 12 states
had no change.
52
US Unemployment Rate Forecast
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
.6%
9.6
%
8.9
%9
.1%
9.1
%8
.7%
8.3
%8
.2%
8.0
%7
.8%
7.8
%7
.7%
7.6
%7
.5%
7.4
%7
.3%
7.1
%7
.0%
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
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
14
:Q1
14
:Q2
14
:Q3
14
:Q4
Rising unemployment
eroded payrolls
and workers comp’s
exposure base.
Unemployment peaked at 10%
in late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/13 edition); Insurance Information Institute.
2007:Q1 to 2014:Q4F*
Unemployment forecasts have been revised slightly
downwards. Optimistic scenarios put the
unemployment as low as 7.0% by Q4 of next year.
Jobless figures have been revised
slightly downwards for 2013/14
54
Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2012:Q3
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Billions
$5,500
$5,750
$6,000
$6,250
$6,500
$6,750
$7,00005
:Q1
05:Q
2
05:Q
3
05:Q
4
06:Q
1
06:Q
2
06:Q
3
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
Prior Peak was 2008:Q1 at $6.60 trillion
Latest (2012:Q2) was $6.88 trillion, a new peak--$663B
above 2009 trough
Recent trough (2009:Q3) was $6.25 trillion, down
5.3% from prior peak
Growth rates in 2012Q1:12 over Q4:11: 1.8%Q2 over Q1: 1.4%
Payroll vs. Workers Comp Net Written Premiums, 1990-2012E
*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is I.I.I. estimate based YTD 2012 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
P-C Industry 2012:Q3 profits were up 222% from 2011:Q3, due primarily to lower catastrophe losses
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.6% ROAS through 2012:Q3, 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:Q3 combined ratio including M&FG insurers is 100.9, ROAS = 6.3%; 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 ~6.6% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Year Ago
2011:Q3 = 108.1, 3.1% 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:Q3*
*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:Q3 ROAS = 6.2% 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:Q3: 6.6%
61
ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2012*
* Return on average surplus in 2008-2012 excluding mortgage and financial guaranty insurers. 2012 figures are III estimates.Source: The Geneva Association, Insurance Information Institute
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss. 2008-2012 are the most expensive
years on record.
Thunderstorm losses in 2012 totaled $14.9 billion, the 2nd
highest on record
69
Top 16 Most Costly Disastersin U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
$7.8 $8.7 $9.2 $11.1$13.4
$20.0$23.9 $24.6$25.6
$48.7
$7.5$7.1$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne(2004)
Frances(2004)
Rita (2005)
Tornadoes/T-Storms
(2011)
Tornadoes/T-Storms
(2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Northridge(1994)
9/11 Attack(2001)
Andrew(1992)
Katrina(2005)
Hurricane Sandy could become the 4th or 5th costliest event in US
insurance history
Hurricane Irene became the 12th most expense hurricane
in US history in 2011
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have
Occurred Over the Past Decade
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
*As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy.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 ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
US CAT Losses in 2012 Will Likely Become the 2nd or 3rd Highest in US History on An Inflation-Adjusted
Basis (Pvt Insured). 2011 Losses Were the 5th Highest
2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October
Record Tornado Losses Caused
2011 CAT Losses to Surge
($ Billions, 2012 Dollars)
70
71
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*
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 (1960-2011); A.M. Best (2012E) 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
3.4
8.7 9.
4
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
2010
2012
E
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Combined Ratio Points Catastrophe losses as a share of all losses reached
a record high in 2012
74
Top 16 Most Costly World Insurance Losses, 1970-2012*
(Insured Losses, 2012 Dollars, $ Billions)
*Figures do not include federally insured flood losses.**Estimate based on PCS value of $18.75B as of 1/18/13 and assumption of upward development based on catastrophe modeler estimates ranging as high as $25B.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.
$11.1$13.4 $13.4$13.4
$20.0$23.9 $24.6$25.6
$38.6
$48.7
$7.8 $8.1 $8.5 $8.7 $9.2 $9.6
$0
$10
$20
$30
$40
$50
$60
Hugo (1989)
WinterStormDaria(1991)
ChileQuake(2010)
Ivan (2004)
Charley(2004)
TyphoonMirielle(1991)
Wilma(2005)
ThailandFloods(2011)
NewZealandQuake(2011)
Ike (2008)
Sandy(2012)**
Northridge(1994)
WTC TerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)**
Katrina(2005)
5 of the top 14 most expensive
catastrophes in world history have occurred within the past 3 years
Hurricane Sandy could become the 6th costliest event
in global insurance history
2012 insured CAT Losses totaled $60B; Economic losses totaled $140B, according to Swiss Re
76
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–20111
0.4%
1.6%
3.8%4.7%
6.3%
7.3%
33.9%
42.0%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.
Hurricanes & Tropical Storms, $161.3
Fires (4), $6.0
Tornadoes (2), $130.2
Winter Storms, $28.2
Terrorism, $24.4
Geological Events, $18.2
Wind/Hail/Flood (3), $14.8
Other (5), $1.4
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1992-2011
totaled $384.3B, an average of $19.2B per year or $1.6B
per month
77
Federal Disaster Declarations Patterns:
1953-2012
77
Despite 11 Sandy Declarations, Fewer Disasters Were Declared in 2012 than the Record Number of
Declarations in 2010 and 2011
Number of Federal Disaster Declarations, 1953-2013*
13 1
7 18
16
16
7 71
21
22
22
0 25
25
11
11
19
29
17
17
48
46
46
38
30
22 2
54
22
31
52
42
13
42
7 28
23
11
31
38
45
32 3
63
27
54
46
55
04
54
5 49
56
69
48 5
26
37
55
98
19
94
75
43
0
20
40
60
80
100
120
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
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
10
11
12
13
*Through Feb. 24, 2013.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011. Hurricane Sandy Produced 13 Declarations in 2012/13.
The number of federal disaster declarations set a
new record in 2011, with 99, shattering 2010’s record 81
Federal Disasters Declarations by State, 1953 – 2013: Highest 25 States*
86
78
72
66
65
60
57
56
54
53
52
51
51
50
48
48
48
48
47
47
47
46
42
40
39
0
10
20
30
40
50
60
70
80
90
100
TX CA OK NY FL LA AL KY AR MO MS IL TN WV IA MN KS PA NE VA OH WA ND NC IN
Dis
as
ter
De
cla
rati
on
s
Over the past 60 years, Texas has had the highest
number of Federal Disaster
Declarations
*Through Feb. 24, 2012. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
Federal Disasters Declarations by State, 1953 – 2013: Lowest 25 States*
39
39
38
36
36
35
34
30
28
28
26
26
25
24
24
24
23
22
18
17
17
15
15
13
11
10
9
0
10
20
30
40
50
ME SD AK GA WI NJ VT NH OR MA PR HI MI AZ MD NM ID MT CT NV CO DE SC DC UT RI WY
Dis
as
ter
De
cla
rati
on
s
Over the past 60 years, Wyoming and Rhode Island had the fewest
number of Federal Disaster Declarations
*Through Feb. 24, 2013. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
Total Insured Losses Estimate: $40.0B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.
**$32.5 billion in 2001 dollars.
Source: Insurance Information Institute.
Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2011)
($ Billions)
Hurricane Sandy Summary
82
Sandy Will Become One of the Most Expensive Events in Global Insurance History, But Insurance
Opportunities Await82
83
Top 12 Most Costly Hurricanesin U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
$9.2 $11.1$13.4
$20.0
$25.6
$48.7
$8.7$7.8$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Andrew(1992)
Katrina(2005)
Hurricane Sandy could become the 3rd costliest
hurricane in US insurance history
Hurricane Irene became the 12th most expensive hurricane in US history in 2011
10 of the 12 most costly hurricanes in insurance history occurred over the past 9 years (2004—2012)
Hurricane Sandy: Claim Payments to Policyholders, by State
Insurers Will Pay at Least $18.75 Billion to 1.52 Million Policyholders Across 15 States and DC in the Wake of Hurricane Sandy
84
At $9.6B and $6.6B, respectively, NY and NJ suffered, by far, the largest losses
from Hurricane Sandy
TOTAL = $18.75 BILLION($ Thousands)
Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .
Auto, 250,500 ,
16%
Commercial, 202,500 ,
13%
Homeowner, 1,067,000 ,
71%
Hurricane Sandy resulted in an
estimated 1.52 million privately insured
claims resulting in an estimated $18.75 to
$25 billion in insured losses. Hurricane
Katrina produced 1.74 million claims and
$48.7B in losses (in 2012 $)
Hurricane Sandy: Number of Claims by Type*
*PCS claim count estimate s as of 1/18/13. Loss estimate represents PCS total ($18.75B) and upper end of range estimates by risk modelers RMS, Eqecat and AIR. All figures exclude losses paid by the NFIP.Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute. 85
Sandy is a high HO frequency, (relatively
low) severity event (avg. severity <50% Katrina)
Total Claims = 1.52 Million*
Auto, $2,729 , 15%
Commercial, $9,024 ,
48%
Homeowner, $6,997 ,
37%
Although Commercial Lines accounted for
only 13% of total claims, they account for 48% of all claim
dollars paid. In most hurricanes,
Commercial Lines accounts for about
1/3 of insured losses.
Hurricane Sandy: Insured Loss byClaim Type* ($ Millions)
*PCS insured loss estimates as of 1/18/13. Catastrophe modeler estimates range up to $25 billion. All figures exclude losses paid by the NFIP.Source: PCS; Insurance Information Institute. 86
Total Claim Value = $18.75 Billion*
Hurricane Sandy: Average Claim Payment by Type of Claim
$6,558$10,894
$44,563
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
Home* Vehicle Commercial
Commercial (Business) Claims Were Nearly Seven Times More Expensive than Homeowners Claims; Vehicle Claims Were Unusually Expensive
Due t o Extensive Flooding
91
Commercial (i.e., business claims) are far more expensive
because the value of property is often higher as well as the impact of insured business
interruption losses
*Includes rental and condo policies.Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .
The BIG Question:Where Is the Market Heading?
105
Catastrophes and Other Factors Are Pressuring Insurance Markets
105
New Factor: Record Low Interest Rates Are Contributing to
Underwriting and Pricing Pressures
106
Historical Criteria for a “Market Turn”:Low Interest Rates Add New Pressure
Criteria Status Comments
Sustained Period of
Large Underwriting
Losses
Large CAT Losses in 2011/12
Pushed Up Combineds
• CAT Losses contributing to higher underwriting losses• Apart from CAT losses, overall p/c underwriting losses
remain modest• Combined ratios (ex-CATs) still in low 100s (vs. 110+ at
onset of last hard market); CR= 101.1 in H1:2012 (ex-M&FG)
• Prior-year reserve releases continue to reduce u/w losses, boost ROEs, though more modestly
Material Decline in Surplus/ Capacity
Small Decline Due to 2011 Cats; Could drop in 2012
• Fell 1.6% in 2011 due to CATs• Surplus reached record as of 9/30/12 record $583.5B• Likely drop as of 12/31/12 due to Sandy impact• Modest growth in demand for insurance should begin to
absorb some capacity
Tight Reinsurance
MarketSomewhat in
Place
• Ample capacity• Market is generally flat except up for cat-impacted
accounts• Lower prices in Europe
Renewed Underwriting
& Pricing Discipline
Firming Broad, Sustained,esp. in Property, WC
• Commercial lines pricing is consistently and uniformly across all major lines, esp. Property & WC;
• Markets remain competitive in most segments Sources: Barclays Capital; Insurance Information Institute.
INVESTMENTS: THE NEW REALITY
107
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
107
Property/Casualty Insurance Industry Investment Income: 2000–2012E1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.0
$46.8
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12E
Investment Income Fell in 2012 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing
1 Investment gains consist primarily of interest and stock dividends.*2012F is based on annualized 9M:2012 actual figure of $35.131B.Sources: ISO; Insurance Information Institute.
($ Billions)
Investment earnings in 2012 were running 14% below their 2007 pre-crisis peak
Property/Casualty Insurance Industry Investment Gain: 1994–2012F1
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 9M:2012 result of
$38.089B.Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains in 2012 are running approximately 20% below their pre-crisis peak
110
P/C Insurer Net Realized Capital Gains/Losses, 1990-2012:Q3
Sources: A.M. Best, ISO, Insurance Information Institute.
Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE
($ Billions)Realized capital gains
through 2012:9M are down 46% from $5.53B in 2011:9M
111
U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2013*
*Monthly, through Jan. 2013. 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
rose 48bp from its all time record lows to 1.91% in Jan. 2013
Combined Ratios by Predominant Business Segment, 2012:9 Mos. vs. 2011:9 Mos.*
*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute
109.4108.0
105.4
112.0
100.0 99.498.6
102.7
96
98
100
102
104
106
108
110
112
114
All Lines Personal LinesPredominating
Commercial LinesPredominating
Diversified Insurers
2011:9M 2012:9M
(Percent)
The combined ratios for both personal and commercial lines
improved substantially through 2012:Q3, prior
to Hurricane Sandy
119
2
(2)
(8)
(3)
(7)(10) (10)
(4)
(0)
11
24
15
119
(5)
(9)
(14)
(10) (11)(7)
(5)(2)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
E
12
F
13
F
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
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, 1992–2013F
Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to
Further Diminish in 2012 and 2103Note: 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: Barclays 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
Financial Strength & Underwriting
121
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
121
123
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011
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
91
01
1
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
2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
125
Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010
2.0%4.4%
4.8%
6.5%
6.9%
7.7%
8.1%
10.9%
22.2%
26.6%
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade
Workers Comp
Financial Guaranty
Pvt. Passenger Auto
Homeowners
Commercial Multiperil
Commercial Auto Liability
Other Liability
Med Mal
SuretyTitle
127
Performance by Segment
127
109.4110.2
118.8
109.5
112.5
110.2
107.6
104.1
109.7 110.2
102.5
105.4
91.1
93.6
104.2
98.9
102.1
106.7
109.0
102.9102.0
111.1112.3
122.3
90
95
100
105
110
115
120
125
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
F
13
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2013F figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute
Commercial Multi-Peril Underwriting Performance is Expected to Improve in 2013 Assuming Normal
Catastrophe Loss Activity
*2012-2013 figures are A.M. Best estimate/forecast for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute. 130
General Liability Combined Ratio: 2005–2014F
112.
9
95.1 99
.0
94.2
100.
7
103.
3
103.
7107.
1 110.
8
99.6
80
85
90
95
100
105
110
115
05 06 07 08 09 10 11 12F 13F 14F
Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years
Workers Comp Results Should Begin to Improve in 2013. Underwriting Results Deteriorated Markedly from 2007-2012 and Were the Worst They Had Been in a Decade.
Sources: A.M. Best (1994-2013F); Insurance Information Institute (2014F). 136
Workers Compensation Medical SeverityModerate Increase in 2011
Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)
2011p: Preliminary based on data valued as of 12/31/20111991-2010: Based on data through 12/31/2010, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes high deductible policies
*States approved through 7/31/12.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.
History of Average WC Bureau Rate/Loss Cost Level Changes
Approve rates/loss costs are seeing their
first significant increase since 2003
Workers Comp Rate Changes,2008:Q4 – 2012:Q4
Source: Council of Insurance Agents and Brokers; Information Institute.