Industry OverviewIndustry Overview
Moderator: Moderator: Matthew Dolan, PresidentMatthew Dolan, PresidentOneBeacon Professional PartnersOneBeacon Professional Partners
Panelists: Panelists: Paul F. Sherbine, Managing DirectorPaul F. Sherbine, Managing DirectorMarsh Inc.Marsh Inc.
James D. Hurley, PrincipalJames D. Hurley, PrincipalTillinghast, Towers PerrinTillinghast, Towers Perrin
Daryl Douglas, Hospital Claims ManagerDaryl Douglas, Hospital Claims ManagerEmployers Reinsurance CorporationEmployers Reinsurance Corporation
2003 U.S Insurance2003 U.S InsuranceIndustry ResultsIndustry Results
Its About Time!Its About Time!
Paul F. SherbinePaul F. Sherbine
March 30, 2004March 30, 2004
What has the industry done since What has the industry done since 9/11? 9/11?
Raised CapitalRaised CapitalRaised RatesRaised RatesRaised Loss ReservesRaised Loss ReservesRaised Questions About its ViabilityRaised Questions About its Viability
Net Result 2002* vs. 2001Net Result 2002* vs. 2001An improvement, but...An improvement, but...
Net Underwriting LossNet Underwriting Loss $26 billion $26 billion $53 billion$53 billionNet Income After TaxesNet Income After Taxes $11 billion $11 billion -$7billion-$7billionNet Unrealized Capital LossesNet Unrealized Capital Losses $18 billion $18 billion $18 billion$18 billionPolicyholders’ Surplus Decline**Policyholders’ Surplus Decline** $ 5 billion $ 5 billion $27 billion$27 billionCombined RatioCombined Ratio 106%106% 116%116%– Commercial Lines Commercial Lines 108% 108% 117%117%– U.S. ReinsurersU.S. Reinsurers 123% 123% 146%146%– Personal LinesPersonal Lines 105% 105% 112%112%
** Includes $9.5 billion ($11 billion) in new capital invested into the industry** Includes $9.5 billion ($11 billion) in new capital invested into the industry
2002 2001
Eventually Something Had to Give Eventually Something Had to Give BecauseBecause
Twenty seven months of price increasesTwenty seven months of price increasesInvestment market ralliedInvestment market ralliedCatastrophe losses lowCatastrophe losses lowNew capital In New capital In Bad capital outBad capital outEnd game for 2003 is...End game for 2003 is...
Year end Results 2003 vs. 2002Year end Results 2003 vs. 2002BIG DIFFERENCEBIG DIFFERENCE
Net Underwriting LossNet Underwriting Loss $9.6 billion $9.6 billion $32 billion$32 billionNet Income After TaxesNet Income After Taxes $31 billion $31 billion $9 billion$9 billionNet Unrealized Capital GainsNet Unrealized Capital Gains $13 billion $13 billion -$24 billion-$24 billionPolicyholders’ Surplus Change**Policyholders’ Surplus Change** $39.6 billion $39.6 billion -$4.2 billion-$4.2 billionCombined Ratio Combined Ratio 101.1101.1 107.4%107.4%– Commercial Lines Commercial Lines 104% 104% 108%108%– U.S. ReinsurersU.S. Reinsurers 98% 98% 123%123%– Personal LinesPersonal Lines 99% 99% 105%105%
** ** Includes $8 billion ($18.7 billion) in new capital invested into the industryIncludes $8 billion ($18.7 billion) in new capital invested into the industry
2003 2002
Major Points on 2003 ResultsMajor Points on 2003 Results
Net Income of $31 billion despite nearly $17 billion in loss Net Income of $31 billion despite nearly $17 billion in loss reserve strengtheningreserve strengtheningCombined ratio of 101% is after 3.2 points for cat losses Combined ratio of 101% is after 3.2 points for cat losses and 2.1 points for A&E reserve additionsand 2.1 points for A&E reserve additionsRate increases of 2003 will not show up until 2004 Rate increases of 2003 will not show up until 2004 resultsresultsInvestment yield climate still bad with no end in sightInvestment yield climate still bad with no end in sightUnderwriting results something to write home about for Underwriting results something to write home about for the first time since the eightiesthe first time since the eighties
U.S. P&C Policyholders’ SurplusU.S. P&C Policyholders’ Surplus($ in billions)($ in billions)
94 104 118134 138
159 163182 193
230256
308333 334
317290 285
331
050
100150200250300350400
U.S. P&C Combined RatiosU.S. P&C Combined Ratios
70%80%90%
100%110%120%130%140%150%160%
2001 2002 2003
A Look BackA Look BackSurplus Increase, 2003 ($ in billions)Surplus Increase, 2003 ($ in billions)
Beginning surplus, 2002Beginning surplus, 2002Underwriting gain/lossUnderwriting gain/lossInvestment incomeInvestment incomeRealized GainsRealized GainsOtherOtherOperating gain/lossOperating gain/lossUnrealized gain/loss Unrealized gain/loss TaxesTaxes
DividendsDividendsNew CapitalNew Capital
Surplus ChangeSurplus ChangeEnding surplus, 2003Ending surplus, 2003
$291.9(9.6)42.36.5(.5) 32.213.1 (8.3)(10.9)839.6$330.8
Despite 2003 healthy returnsDespite 2003 healthy returnsHistorical industry returns on equity Historical industry returns on equity
remain poorremain poor
Source: ISO, Goldman Sachs Research Estimates
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003E
(Ret
urn
on a
vera
ge e
quity
)
ROAE (ex. realized gain/losses) ROAE (incl. realized gain/losses) S&P 500
Despite Historically Poor Returns Despite Historically Poor Returns Insurance Remains a Magnet For Insurance Remains a Magnet For
New Capital. Why?New Capital. Why?
Alternative investment vehicles available post 2001 not Alternative investment vehicles available post 2001 not appealingappealingVenture capital firms are big player in 2001 and later following Venture capital firms are big player in 2001 and later following success of KKR and others in late 1990’ssuccess of KKR and others in late 1990’sEase of entrance and exit-There’s a sucker born every minute!Ease of entrance and exit-There’s a sucker born every minute!Results of Bermuda companies in this marketplace are Results of Bermuda companies in this marketplace are excellent just like in 1994excellent just like in 1994Consequently;Consequently;$15 billion invested in 2002 in US and Bermuda insurers$15 billion invested in 2002 in US and Bermuda insurers$14.7 billion invested in 2003 in US and Bermuda insurers$14.7 billion invested in 2003 in US and Bermuda insurers
New Insurers, Capitalization and New Insurers, Capitalization and Major Investors 2002 and 2003Major Investors 2002 and 2003
Arch Re-$1 Billion-Warburg Arch Re-$1 Billion-Warburg Pincus-$500 Million,Hellman & Pincus-$500 Million,Hellman & Friedman-$250 Million, Arch Friedman-$250 Million, Arch Capital $250 millionCapital $250 millionAWAC-$1.5 Billion AIG-$291 AWAC-$1.5 Billion AIG-$291 million,Chubb-$250 million,Chubb-$250 million,Goldman Sachs-$250 million,Goldman Sachs-$250 millionmillionAXIS Specialty-$1.65 billion-AXIS Specialty-$1.65 billion-Trident(MMC Capital)-$250 Trident(MMC Capital)-$250 million,MMC- $100 million,J.P. million,MMC- $100 million,J.P. Morgan-$200 million,T.H.Lee Morgan-$200 million,T.H.Lee Prtnrs-$200 million,Blackstone Prtnrs-$200 million,Blackstone Grp-$200 million,CSFB-$200 Grp-$200 million,CSFB-$200 millionmillion
Da Vinci Re-$500 million-State Da Vinci Re-$500 million-State Farm-$200 million,Ren Re-$100 Farm-$200 million,Ren Re-$100 millionmillionEndurance Specialty-$1.2 Endurance Specialty-$1.2 Billion-Aon-$200 million,Zurich-Billion-Aon-$200 million,Zurich-$200 million$200 millionGoshawk Re-$100 million-Goshawk Re-$100 million-Goshawk Ins HoldingsGoshawk Ins HoldingsMontpelier Re-$1 billion-White Montpelier Re-$1 billion-White Mountains-$200 million Mountains-$200 million Olympus Re-$500 million-Olympus Re-$500 million-Leucadia National,Gilbert Global Leucadia National,Gilbert Global Equity Prtnrs,Franklin Mutual Equity Prtnrs,Franklin Mutual AdvisorsAdvisorsQuanta-$500 millionQuanta-$500 million
Established Insurers Also Added Capital Established Insurers Also Added Capital to Replace Losses and Increase Capacityto Replace Losses and Increase Capacity
ACE-$1.1 Billion- ACE-$1.1 Billion- AIG-$1 BillionAIG-$1 BillionAlea-$150 Million- KKR Alea-$150 Million- KKR InvestmentInvestmentAmerican Re-$1 BillionAmerican Re-$1 BillionAVIVA-$1.43 BillionAVIVA-$1.43 BillionChubb-$600 MillionChubb-$600 MillionCNA-$1.4 BillionCNA-$1.4 BillionEverest Re-$575 MillionEverest Re-$575 MillionFairfax Fin’l -$150 Million-Fairfax Fin’l -$150 Million-Private PlacementPrivate PlacementHannover Re- $700 MillionHannover Re- $700 MillionHartford-$2.4 BillionHartford-$2.4 BillionIPC Re-$547 MillionIPC Re-$547 Million
Markel-$220 MillionMarkel-$220 MillionPartner Re-$400 MillionPartner Re-$400 MillionPMA-$158 MillionPMA-$158 MillionPX Re-$150 MillionPX Re-$150 MillionQBE- $323 MillionQBE- $323 MillionRen Re-$233 MillionRen Re-$233 MillionSCOR - $1.4 BillionSCOR - $1.4 BillionSwiss Re- $3.3 BillionSwiss Re- $3.3 BillionW.R. Berkley-$175 MillionW.R. Berkley-$175 MillionXL- $1.5 BillionXL- $1.5 BillionWhite Mountain- $1 BillionWhite Mountain- $1 Billion
New Capital, Both for New Ventures And New Capital, Both for New Ventures And Existing Insurers was Substantial But...Existing Insurers was Substantial But...
Capital Lost Since 1999 is $49 Billion In US Alone Capital Lost Since 1999 is $49 Billion In US Alone Capital Lost Since 2000 is $32 Billion In US AloneCapital Lost Since 2000 is $32 Billion In US Alone2003 results takes capital back to about 1998 levels2003 results takes capital back to about 1998 levelsHard market leveling off despite many tough issues facing the Hard market leveling off despite many tough issues facing the industry including:industry including:Loss Reserve Strengthening for Recent Losses and Old A&E Loss Reserve Strengthening for Recent Losses and Old A&E Issues Issues Other Legacy Issues Other Legacy Issues Investment portfolio problemsInvestment portfolio problemsRatings still fallRatings still fall
Rating Changes Since 9-11Rating Changes Since 9-11(Through 02/29/04)(Through 02/29/04)
Major insurer groups used by Marsh which maintained their Major insurer groups used by Marsh which maintained their rating by all rating agenciesrating by all rating agencies– ACE, AIG, Berkshire Hathaway, FM, Old Republic ACE, AIG, Berkshire Hathaway, FM, Old Republic
Major group upgradesMajor group upgrades– A.M. Best: 4A.M. Best: 4– Standard & Poor’s: 4Standard & Poor’s: 4
Major group downgradesMajor group downgrades– A.M. Best: 30A.M. Best: 30– Standard & Poor’s: 40Standard & Poor’s: 40
2004- Negative outlook2004- Negative outlook
Major Reserve Additions 2003Major Reserve Additions 2003
Chubb-$625 MillionChubb-$625 MillionCNA- $2.3 billionCNA- $2.3 billionEmployers Re-$540 Employers Re-$540 millionmillionEquitas -$666 millionEquitas -$666 millionGulf-$252 millionGulf-$252 millionHartford- $2.6 billionHartford- $2.6 billion
Liberty-$331 millionLiberty-$331 millionPMA- $160 millionPMA- $160 millionRoyal Sun Alliance-$1 Royal Sun Alliance-$1 billionbillionSCOR-$421 millionSCOR-$421 millionSt Paul-$350 millionSt Paul-$350 millionXL-$694 million XL-$694 million
Current Operating EnvironmentCurrent Operating EnvironmentEstimated reserve deficienciesEstimated reserve deficienciesStandard & Poors - $60 billion -Excluding asbestos Standard & Poors - $60 billion -Excluding asbestos A.M. Best - $65 billion at year end 2003 with $36.6 billion for A&E A.M. Best - $65 billion at year end 2003 with $36.6 billion for A&E and $24 billion for Commercial lines businessand $24 billion for Commercial lines businessFitch- $45-$77 Billion under reserved at year end 2002 includes $9 Fitch- $45-$77 Billion under reserved at year end 2002 includes $9 billion to $29 billion in asbestosbillion to $29 billion in asbestosMoody’s-$30 billion as of September 2003Moody’s-$30 billion as of September 200390% of these deficiencies are in commercial lines and reinsurance90% of these deficiencies are in commercial lines and reinsuranceEstimated 2003 PHS of commercial insurers and reinsurers: $180 Estimated 2003 PHS of commercial insurers and reinsurers: $180 billionbillionDespite good year in 2003 old problems will not go away.Not the Despite good year in 2003 old problems will not go away.Not the time to fight for market sharetime to fight for market share
What is a buyer to do in 2004?What is a buyer to do in 2004?
Another cycle like the last one will kill a lot more Another cycle like the last one will kill a lot more companies-Solvency matterscompanies-Solvency mattersLegacy issues will not go away.New ones will emerge. Legacy issues will not go away.New ones will emerge. Which companies are best suited to survive these Which companies are best suited to survive these issues?issues?New companies have no legacy issues but do have New companies have no legacy issues but do have ownership issues. What are the venture capital firms exit ownership issues. What are the venture capital firms exit strategy?Pick your partners well.strategy?Pick your partners well.Follow your markets carefully- Use Marsh’s My Insurer Follow your markets carefully- Use Marsh’s My Insurer MonitorMonitor
Medical MalpracticeMedical Malpractice
Financial OverviewFinancial Overview
James D. HurleyJames D. Hurley
Industry Medical Malpractice Ratios
0%20%40%60%80%
100%120%140%160%180%
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Loss & LAE
21
Medical Malpractice - Financial Medical Malpractice - Financial OverviewOverview
Source: Best’s Aggregates and Averages
22
Medical Malpractice - Financial Medical Malpractice - Financial OverviewOverview
33.7%
26.3%
7.5%
-6.2%
-19.4% -17.1%
-25%-20%-15%-10%-5%0%5%
10%15%20%25%30%35%
1997 1998 1999 2000 2001 2002
One Year Loss Reserve Development To Premium
23
Medical Malpractice - Financial Medical Malpractice - Financial OverviewOverview
Industry Medical Malpractice Ratios
0%20%40%60%80%
100%120%140%160%180%
Loss & LAE U/W Expense Dividend
Source: Best’s Aggregates and Averages
24
Medical Malpractice - Financial Medical Malpractice - Financial OverviewOverview
Industry Medical Malpractice Ratios
0%20%40%60%80%
100%120%140%160%180%
Loss & LAE U/W Expense Dividend Combined
Source: Best’s Aggregates and Averages
25
Medical Malpractice - Financial Medical Malpractice - Financial OverviewOverview
Industry Medical Malpractice Ratios
0%20%40%60%80%
100%120%140%160%180%
Combined Investment Gain
Source: Best’s Aggregates and Averages
Source: Best’s Aggregates and Averages
26
Medical Malpractice - Financial Medical Malpractice - Financial OverviewOverview
Industry Medical Malpractice Ratios
0%20%40%60%80%
100%120%140%160%180%
Combined Investment Gain Operating
Medical Malpractice – Financial Medical Malpractice – Financial OverviewOverview
OBSERVATIONSOBSERVATIONSRatiosRatios– CombinedCombined – improve to sub 130%– improve to sub 130%– Operating Operating – improve to sub 110%– improve to sub 110%TrendsTrends– FrequencyFrequency– SeveritySeverity
Medical Malpractice – Financial Medical Malpractice – Financial OverviewOverview
OBSERVATIONS (cont’d)OBSERVATIONS (cont’d)Investment IncomeInvestment Income– 2003 helps, but...2003 helps, but...– Interest rates still lowInterest rates still low– Impact growsImpact growsRatesRates– Still up, but slowedStill up, but slowed
Medical Malpractice Claims Medical Malpractice Claims Trends – A View From the Trends – A View From the
TrenchesTrenches
Daryl DouglasDaryl DouglasMarch 30, 2004March 30, 2004
•Good News
•Tort Reform Successes
•Public Awareness of Med Mal Crisis
•Bad News – Severity is Still Rising
•National and Regional Loss Data
•Trend Drivers
•What Can We Do?
Discussion Discussion
•Texas – Meaningful reforms likely to be upheld – for now
•OH (caps, j/s), FL (caps), PA, AR– also enacted reform
•Many others considering reforms
•NJ, OK, W.VA, IL, WA, NC, KY, AZ, MD
•Campbell v. State Farm – limits punitive awards
•Ohio – docs suing plaintiffs for frivolous lawsuits
•Debates are raising public’s awareness of crisis
Tort Reform Successes and Legal Victories
Importance of the ProblemImportance of the Problem
In Jan 03, three-quarters In Jan 03, three-quarters (74%) said the issue of med (74%) said the issue of med malpractice insurance was malpractice insurance was at least a major problemat least a major problem
Source: Gallup Poll – Jan 22, 2003
56%
22%
2%
18%2%
Major ProblemMinor ProblemNo OpinionCrisisNo Problem
Support for Limiting Jury AwardsSupport for Limiting Jury Awards
Nearly three-quarters (72%) Nearly three-quarters (72%) of the public say they would of the public say they would favor putting limits on favor putting limits on amount patients can recover amount patients can recover for emotional pain and for emotional pain and suffering.suffering.
Source: Jan 2003 Kaiser Family Foundation Health Poll Report
72
25
3
FavorOpposeNo Opinion
Despite Some In-Roads with Tort Reform and Legal Opinions, Severity and Loss Costs Are Still Rising in Claims against
•Doctors
•Hospitals
•Nursing Home Cases
The Bad News
Physician Professional LiabilityPhysician Professional LiabilityHistorical Loss Costs Per Class One Physician
Limited to $2 Million per Occurrence
Source: Aon Risk Services – 2003 Benchmark Analysis
– Based on the annual physician liability loss costs for years 1995 through 2002, Based on the annual physician liability loss costs for years 1995 through 2002, the annual loss cost trend rate is 9.7%.the annual loss cost trend rate is 9.7%.
– Projected loss costs for 2003 and 2004 are $12,230 and $13,600, respectively.Projected loss costs for 2003 and 2004 are $12,230 and $13,600, respectively.
0
200
400
600
800
91 92 93 94 95 96 97 98 99 00 01 020
10
20
30
40
# Pa
ymen
ts
Source: National Practitioners Data Bank Public Use Files; AON HealthLine Special Edition 2003
Cla im
s P er 1,0 00 Ho spi tal B
e ds
Claims Per 1K Hospital Beds
Payments
More than 800 paymentsover $1MM in 2002
Hospital Severity Takes Major Up-TickHospital Severity Takes Major Up-Tick
•Florida (Palm Beach) – 63mm verdict in forceps delivery case (1/04)
•Wash D.C. – 50mm verdict in nicked sphincter (8/03)
•New York – 48mm settlement of impaired infant case (03)
•Detroit – 35mm verdict for paralysis (2/04)
•Chicago – 35mm settlement impaired infant case (2/04)
•Texas (Dallas) – 31mm verdict impaired infant (7.7mm punitives) (11/03)
•Chicago – 30mm wrongful death (2/04)
•Philadelphia – 20mm (abdominal pain) and 15mm (bad ankle) verdicts (2/04)
•Ohio – 6.7mm verdict in wrongful death case
Sample Large Losses (03-04)
Long Term Care TrendsLong Term Care Trends
Source: Aon Risk Services - Long Term Care General Liability and Professional Liability Actuarial Analysis
Note: Conclusions are based on actuarial analysis of long term care industry data available to Aon. This data set represents 26% of the U.S. market.
Countrywide Loss Cost Per Occupied Bed
Cost per occupied bed of GL/PL losses increasing at annual rate of 24% a year
Loss
0
1000
2000
3000
4000
91 92 93 94 95 96 97 98 99 00 01 02
Loss
Long Term Care TrendsLong Term Care Trends
Source: Aon Risk Services - Long Term Care General Liability and Professional Liability Actuarial Analysis
Note: Conclusions are based on actuarial analysis of long term care industry data available to Aon. This data set represents 26% of the U.S. market.
Countrywide Severity of Claim
Average size of claim increasing in recent years at annual rate of 9%
Current claim sizes are triple the average size at beginning of 90’s
Loss
0
50
100
150
200
250
91 92 93 94 95 96 97 98 99 00 01 02
Loss
•Expanding reach of best plaintiffs’ counsel
•Illinois, Pennsylvania, Maryland, Ohio
•Plaintiffs more effective and creative
•Difficulty settling cases – “pigs at a trough”
•Jury Selection - pro-tort reform jurors identified
•Creative attacks around reform
•Negligent Credentialing (TX); Multiple caps (MO)
•Doctors cutting deals with plaintiffs
•Other issues – Aggregate erosion; Bankruptcies
Trend Drivers – Why is Severity Still on the Rise?
Impact of Malpractice LawsuitsImpact of Malpractice Lawsuits
In 2002, over half the public In 2002, over half the public (54%) thought that having (54%) thought that having more malpractice lawsuits more malpractice lawsuits would be at least somewhat would be at least somewhat effective in reducing effective in reducing preventable medical errorspreventable medical errors
Source: Jan 2003 Kaiser Family Foundation Health Poll Report
31
2517
5
23
SomewhatEffectiveNot VeryEffectiveNot at AllEffectiveDon't Know
Very Effective
Personal Experience With Medical Personal Experience With Medical ErrorsErrors
In 2002, 42% reported that In 2002, 42% reported that they have been personally they have been personally involved in a situation where involved in a situation where a preventable medical error a preventable medical error was made in their own care was made in their own care of that of a family memberof that of a family member
Source: Harvard School of Public Health/Kaiser Family Foundation. Survey conducted April-July 2002
42
57
1
YesNoDon't Know
•Support Tort Reform Efforts at State Level
•Use Texas Model – need caps, annuity, J & S
•Hire Best Defense Lawyers
•Aggressively Defend Cases – jury research
•Consider Arbitration Provisions and Mediation
•Hire Experienced and Skilled Claims Consultants
•Do not outsource
•Increase Claims Input on Front End Underwriting
What Can We Do – From a Legal/Claims Perspective?