The Financial Crisis and the Future of the P/C
Insurance IndustryChallenges & Opportunities Amid
the Economic Storm
State Insurance Trade Association Annual ConferenceCincinnati, OH
October 6, 2009
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
2
Presentation Outline
• The Economic Storm: Financial Crisis & Recession• Exposure & Growth: Regional Analysis
• Economic Trends: Commercial, Personal Implications• Key Threats and Issues Facing P/C Insurers Through 2015• Regulatory Reform• Financial Strength & Ratings
• Key Differences Between Insurer and Bank Performance During Crisis
• Insurance Industry Financial Overview & Outlook• Profitability
• Premium Growth
• Underwriting Performance: Commercial & Personal Lines
• Financial Market Impacts
• Merger & Acquisition Activity
• Capital & Capacity• Catastrophe Loss Trends
THE ECONOMIC STORM
What the Financial Crisis and Recession Mean for the Industry’s
Exposure Base, Growth and Investments
4
3.7
%
0.8
% 1.6
% 2.5
% 3.6
%
3.1
%
2.9
%
0.1
%
4.8
%
4.8
%
-0.7
%
1.5
%
-2.7
%
3.0
%
2.4
%
2.5
%
2.7
%
2.7
%
2.9
%
-0.7
%
-6.4%
-5.4%
-0.2%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2
000
2
001
2
002
2
003
2
004
2
005
2
006
07:1
Q
07:2
Q
07:3
Q
07:4
Q
08:1
Q
08:2
Q
08:3
Q
08:4
Q
09:1
Q
09:2
Q
09:3
Q
09:4
Q
10:1
Q
10:2
Q
10:3
Q
10:4
Q
Real GDP Growth*
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 9/09; Insurance Information Institute.
Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but recovery is in sight
The Q1:2009 decline was the steepest since the
Q1:1982 drop of 6.4%
Personal and commercial lines
exposure base have been hit
hard and will be slow to come
back
5
State Economic Growth Varied Tremendously in 2008
Eastern US growing more slowly than Plains,
Mountains
6
Labor Underutilization: Broader than Just
Unemployment
11.2%
16.4% 16.5% 16.3%17.0%16.8%
10%
11%
12%
13%
14%
15%
16%
17%
18%
Sep-08 May-09 Jun-09 Jul-09 Aug-09 Sep-09
Marginally attached and underemployed persons account for 17% of the labor
force in Sept. 2009. Unemployment rate alone was 9.8%. Underutilization shows
a broader impact on WC and other commercial exposures.
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are availableFor a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-marketrelated reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Percent % of Labor Force
7
Fastest Growing States in 2008: Plains, Mountain States Lead
7.3%
4.4%
3.5%2.9%
2.0%2.1%2.5%
2.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
ND WY SD CO OK WV IA TX, MN,NM, WA
Natural resource and agricultural states have done
better than most others recently, helping insurance
exposure in those areas
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
8
Slowest Growing States in 2008: Diversity of States Suffering
-0.1%
-0.4%-0.6%-0.6%
-1.5%-1.6%-1.6%
-1.7%
-2.0%
-0.9%
-0.6%-0.6%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%KY CT AZ GA IN NV RI MI DE FL OH AK
States in the North, South, East and West all represented among
hardest hit but for differing reasons
Source: US Bureau of Economic Analysis; Insurance Information Institute.
PercentReal State GDP Growth
9
Length of U.S. Business Cycles, 1929-Present*
43
138 11 10 8 10 11
166
168 8
19
50
80
3745
39
24
106
36
58
12
92
120
73
0
10
20
30
40
50
60
70
80
90
100
110
120
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
Contraction Expansion Following
* Through June 2009 (likely the “official end” of recession) **Post-WW II period through end of most recent expansion.
Sources: National Bureau of Economic Research; Insurance Information Institute.
Duration (Months)
Month Recession Started
Average Duration** Recession = 10.4 MonthsExpansion = 60.5 Months
Length of expansions
greatly exceeds
contractions
10
Total Industrial Production,(2007:Q1 to 2010:Q4F)
1.5%3.2% 3.6%
0.3% 0.2%
-4.6%
-9.0%
-13.0%
-19.1%
-11.4%
4.1%3.8%4.1%4.1%2.1%
4.4%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
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
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/09); Insurance Info. Inst.
Industrial production began
to contracted sharply in late
2008 and plunged in Q1 2009
End of recession in late 2009, Obama stimulus program are expected to benefit industrial production and
therefore insurance exposure both directly and indirectly
Figures for 2010 revised upwards to
reflect expected impact of Obama stimulus program
and a gradual economic recovery
11
5.2%
-0.9
%-7
.4%
-6.5
%-1
.5%
1.8%
4.3%
18.6
%20
.3%
5.8%
0.3%
-1.6
%-1
.0%
-1.8
%-1
.0%
3.1%
1.1%
0.8%
0.4%
0.6%
-0.4
%-0
.3%
1.6%
5.6%
13.7
%7.
7%1.
2%-2
.9% -0
.5%
-3.8
%-4
.4%
-3.1
%
-10%
-5%
0%
5%
10%
15%
20%
25%7
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
9
Rea
l N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Rea
l G
DP
Gro
wth
Real NWP Growth Real GDP
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 9/09; Insurance Information Inst.
$1,604
$218
$890
$0
$250
$500
$750
$1,000
$1,250
$1,500
$1,750
Banks Insurers Others
US Financial Institutions FacingHuge Losses from Financial Crisis*
*Estimate of financial sector writedowns, 2007-2010, as of April 2009. Includes loans and securities.Source: IMF Global Financial Stability Report, April 2009.
$ BillionsThe IMF estimates total US financial sector writedowns from soured assets will reach
$2.712 trillion, up 93% from $1.405 trillion from its Sept. 2008 estimate. Insurer losses
account for just 8% of the total.
$218B or 8% of estimated total (bank+insurer) losses will be
sustained by insurers
12
Labor Market Trends
Fast & Furious: Massive Job Losses Sap the Economy & Personal &
Commercial Lines Exposure
14
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
January 2000 through September 2009*
Unemployment will likely peak near 10 % during this cycle, impacting payroll
sensitive p/c and l/h exposures
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Sept. 2009 unemployment was 9.8%, up 0.3% from July but still near its
highest level since August 1983
Unemployment Rate:On the Rise
Average unemployment rate 2000-07 was 5.0%
Previous Peak: 6.3% in June 2003
Trough: 4.4% in March 2007
Sep
-09
15
U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*
4.5%
4.5% 4.6% 4.
8% 4.9%
5.4%
6.1%
6.9%
8.1%
9.3% 9.
6% 9.9% 10
.0%
9.9%
9.7%
9.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
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
* Blue bars are actual; Yellow bars are forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/09); Insurance Info. Inst.
Rising unemployment is eroding payrolls and
workers comp’s exposure base.
Unemployment is expected to peak above
10% in early 2010.
16
Monthly Change Employment*(Thousands)
-72-144-122
-160-137-161-128
-175
-321-380
-597
-681-741
-681-652
-519
-303
-463
-304
-201-263
-800
-700
-600
-500
-400
-300
-200
-100
0
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Job losses since the recession began in Dec. 2007 total 7.2 mill; 15.1 million people are now defined as unemployed.
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute
Monthly losses in Dec. – May were the largest in the post-WW II period
but pace of loss is diminishing
January 2008 through September 2009
17
% Change in Employment by Industry: All But Government/Health Down
-14.6%
-12.2%
-4.1%-5.1%
2.2%
-4.2%
2.0%
-7.1%
-2.4%
-16%-14%-12%-10%
-8%-6%-4%-2%0%2%4%
The US economy lost 5.24 million jobs between July 2008 and July 2009
Source: US Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.t14.htm; Ins. Info. Institute.
PercentChange
Change in July 2009 vs. July 2008
Govt. and health are two
of the few areas of employment
growth
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45Wage & SalaryDisbursementsWC NPW
*Average Wage and Salary data as of 7/1/2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Net Written Premiums
7/90-3/91
Shaded areas indicate recessions
3/01-11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
12/07-?
Weakening wage and salary growth is
expected to cause a deceleration in workers comp
exposure growth
Unemployment Rates by State, August 2009: Highest 25 States*
10.7
9.9
9.710
.0
10.2
10.4
9.2
9.1
9.1
8.99.
5
9.0
9.09.
5
11.112
.2
10.8
10.8
10.8
11.1
11.5
12.7
12.8
12.2
15.2
0
2
4
6
8
10
12
14
16
MI NV RI CA OR SC DC KY OH NC TN FL AL GA IL IN NJ MS MO WA AZ MA NY WV ID
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for August 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Unemployment in DC, OH, NC, TN, IL and IN was above the US average of 9.7%
in August 2009
6.8
6.8
6.6
6.6
6.56.
97.2
7.2
4.9
5.0
6.0
7.1
7.1
4.3
6.8
8.0
8.1
7.37.57.
88.0
8.18.
6
8.6
8.38.
8
0
2
4
6
8
10
WI PA ME AK DE CT MN TX LA NM CO HI MD AR KS NH IA OK VT MT WY VA UT NE SD ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates By State, August 2009: Lowest 25 States*
*Provisional figures for August 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
North Dakota had the lowest unemployment rate in the US in August 2009 at 4.4%
vs. 9.7% for the US
Inflation Trends Pressures Claim Cost
Severities via Medical and Tort Channels
22
Annual Inflation Rates(CPI-U, %), 1990-2010F
4.9 5.1
3.0 3.2
2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
3.8
(0.5)
1.8
2.82.92.4
(1.0)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Sept. 10, 2009 (forecasts).
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The
recession and the collapse of the commodity bubble have produced temporary deflation.
There is so much slack in the US economy that inflation should not be a concern through 2010
-$2,000
-$1,500
-$1,000
-$500
$0
$5001
96
9
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
20
19
Fed
eral
Def
icit
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Def
icit
as
% o
f G
DP
Federal Deficit ($ Bill) % GDP
US Budget Deficit, 1969-2019F
Deficit expected to hit record $1.8 trillion in 2009 or 13% or GDP, a post-WW II high
Sources: Congressional Budget Office analysis of President’s budget, March 2009; Insurance Information Institute.
Concerns that deficit spending will drive up inflation. This would
harmful to insurance claim severity.
24
Top Concerns/Risks for Insurers if Inflation is Reignited
CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary. What are the potential impacts for insurers? What can/should insurers do to protect themselves from the risks of inflation?
KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION• Rising Claim Severities
Cost of claims settlement rises across the board (property and liability)• Rate Inadequacy
Rates inadequate due to low trend assumptions arising from use of historical data • Reserve Inadequacy
Reserves may develop adversely and become inadequate (deficient)• Burn Through on Retentions
Retentions, deductibles burned through more quickly• Reinsurance Penetration/Exhaustion
Higher costsrisks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly
Source: Ins. Info. Inst.
GREEN SHOOTS
Is the Recession Nearing an End?
34
Hopeful Signs That the EconomyWill Begin to Recover Soon
• Recession Appears to be Bottoming Out, Freefall Has Ended• Pace of GDP shrinkage is beginning to diminish
• Pace of job losses is slowing
• Major stock market indices well off record lows, anticipating recovery
• Some signs of retail sales stabilization are evident
• Financial Sector is Stabilizing• Banks are reporting quarterly profits
• Many banks expanding lending to credit worthy people & businesses
• Housing Sector Likely to Find Bottom Soon• Home are much more affordable (attracting buyers)
• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)
• Freefall in housing starts and existing home sales is ending in many areas
• Inflation & Energy Prices Are Under Control
• Consumer & Business Debt Loads Are Shrinking
Source: Ins. Info. Inst.
35
11 Industries for the Next 10 Years: Insurance Solutions Needed
GovernmentEducation
Health CareEnergy (Traditional)Alternative Energy
AgricultureNatural Resources
EnvironmentalTechnology
Light ManufacturingExport Oriented Industries
Crisis-Driven Exposure
ImplicationsHome, Auto, Exposure Growth Slows as Sales
Nosedive
37
New Private Housing Starts,1990-2010F (Millions of Units)
2.07
1.80
1.36
0.90
0.58
0.80
1.48
1.351.
46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.60 1.
71
1.85 1.
960.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
Exposure growth due to home construction forecast for HO insurers is dim for 2009
with some improvement in 2010.
Impacts also for comml. insurers with construction risk exposure
New home starts plunged 34%
from 2005-2007; Drop through 2009 is 72% (est.)—a net
annual decline of 1.49 million
units, lowest since record
began in 1959
I.I.I. estimates that each incremental 100,000 decline in housing starts costs
home insurers $87.5 million in new exposure (gross premium). The net
exposure loss in 2009 vs. 2005 is estimated at about $1.3 billion.
Source: US Department of Commerce; Blue Chip Economic Indicators (9/09); Insurance Information Inst.
38
16.916.916.6
17.117.5
17.817.4
16.516.1
13.1
10.4
11.8
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09F 10F
Weak economy, credit crunch are hurting auto sales; Gas prices
have been a factor too.
New auto/light truck sales are expected to experience a net drop of 6.5 million units annually by 2009 compared with 2005, a decline of 37%
and the lowest level since the late 1960s
Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth
than problems in the housing market will on home insurers
Auto/Light Truck Sales,1999-2010F (Millions of Units)
Source: US Department of Commerce; Blue Chip Economic Indicators (9/09); Insurance Information Inst.
“Cash for Clunkers” should generate $225M - $375M in net new personal auto premiums
Key Threats Facing Insurers Amid
Financial Crisis
Challenges for theNext 5-8 Years
40
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
1. Erosion of Capital Losses are larger and occurring more rapidly than is commonly
understood or presumed Max surplus loss at 3/31/09 was 16%=$85B from 9/30/07 peak P/C policyholder surplus could have been much larger Some insurers propped up results by reserve releases Decline in PHS of 1999-2002 was 15% over 3 years and was
entirely made up and them some in 2003. Current decline was ~16% in 5 qtrs.
During the opening years of the Great Depression (1929-1933) PHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35%. It took until 1939-40 before these key measures returned to their 1929 peaks.
BOTTOM LINE: Capital and assets could have fallen farther and faster than many believed possible. It will take years to return to the 2007 peaks—likely late 2011/12 (without market relapse).
41
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
2. Reloading Capital After “Capital Event” Continued asset price erosion coupled with major “capital
event” would have lead to shortage of capital among some companies
Possible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirements
P/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after major events (post-9/11, Katrina). This assumption may be incorrect in the current environment
Cost of capital is much higher today (relative “risk-free” rates), reflecting both scarcity & risk
Implications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh capital & generate internally. Already a reality for some life insurers.
42
Important Issues & Threats Facing Insurers: 2009 - 2015
Source: Insurance Information Inst.
3. Long-Term Reduction in Investment Earnings Low interest rates, risk aversion toward equities and many
categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gains
Fed actions in Treasury markets keep yields low Many insurers have not adjusted to this new investment
paradigm of a sustained period of low investment gains Regulators will not readily accept it; Many will reject it Implication 1: Industry must be prepared to operate in
environment with investment earnings accounting for a smaller fraction of profits
Implication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.
Lessons from the period 1920-1975 need to be relearned
43Source: Insurance Information Inst.
4. Regulatory Overreach Principle danger is that P/C insurers get swept into
vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)
Danger is high as feds get their nose under the tent Status Quo is viewed as unacceptable by all Pushing for major change is not without significant
risk in the current highly charged political environment
Insurance & systemic risk Disunity within the insurance industry Impact of regulatory changes will be felt for decades Bottom Line: Regulatory outcome is uncertain and
risk of adverse outcome exists
Important Issues & Threats Facing Insurers: 2009 – 2???
44Source: Insurance Information Inst.
5. Creeping Restrictions on Underwriting Attacks on underwriting criteria such as credit,
education, occupation, territory increasing Industry will lose some battles View that use of numerous criteria are discriminatory
and create an adverse impact on certain populations Impact will be to degrade the accuracy of rating systems
to increase subsidies Predictive modeling also at risk Current social and economic environment could
accelerate these efforts Danger that bans could be codified at federal level
during regulatory overhaul Bottom Line: Industry must be prepared to defend
existing and new criteria indefinitely
Important Issues & Threats Facing Insurers: 2009 - 2015
47Source: Insurance Information Inst.
8. Emerging Tort Threat No tort reform (or protection of recent reforms) is
forthcoming from the current Congress or Administration
Erosion of recent reforms is a certainty (already happening)
Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability
Torts twice the overall rate of inflation Influence personal and commercial lines, esp. auto liab. Historically extremely costly to p/c insurance industry Leads to reserve deficiency, rate pressure Bottom Line: Tort “crisis” is on the horizon and will be
recognized as such by 2012-2014
Important Issues & Threats Facing Insurers: 2009 -2015
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical
$0
$50
$100
$150
$200
$250
$300
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
E
20
10
E
Tor
t S
yste
m C
osts
1.50%
1.75%
2.00%
2.25%
2.50%
Tor
t C
osts
as
% o
f G
DP
Tort Sytem Costs Tort Costs as % of GDP
Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
Billions
*Excludes the tobacco settlement, medical malpractice
2009-2010 Growth in Tort Costs as % of GDP is due in part to shrinking GDP
Business Leaders Ranking of Liability Systems for 2008
Best States1. Delaware2. Nebraska3. Maine4. Indiana5. Utah6. Virginia7. Iowa8. Vermont9. Colorado10. Kansas
Worst States41. Texas42. Florida43. South Carolina44. California45. Hawaii46. Illinois47. Alabama48. Mississippi49. Louisiana50. West Virginia
Source: US Chamber of Commerce 2008 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2008
CO, IN, KS, VA, VT
Drop-Offs
MN, NH, TN, WI
Newly Notorious
FL, SC
Rising Above
AR, AK
Midwest/West has mix of good and bad states
The Nation’s Judicial Hellholes (2008/2009)
Source: American Tort Reform Association; Insurance Information Institute
ALABAMA
Macon and Montgomery
Counties
South Florida
ILLINOIS
Cook County West Virginia
Watch ListRio Grande
Valley & Gulf Coast, TX
Madison County, IL
Baltimore, MD
St Louis (the city of), St Louis and
Jackson Counties, MO
Dishonorable Mentions
MA Supreme Judicial CourtMO Supreme
Court
NEVADA
Clark County (Las Vegas)
NEW JERSEY
Atlantic County (Atlantic City)
CALIFORNIA
Los Angeles County
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well
54
P/C Insurer Impairments,1969-2008
815
12
711
934
913
12
19
916
14
13
36
49
31 3
450
48
55
60
58
41
29
16
12
31
18 19
49 50
47
35
18
14 15
75
0
10
20
30
40
50
60
70
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
The number of impairments varies significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
Source: A.M. Best; Insurance Information Institute
55
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2008
90
95
100
105
110
115
120
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
Co
mb
ined
Rat
io
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
ent R
ate
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly
correlated with underwriting
performance and reached record lows in 2007/08
Source: A.M. Best; Insurance Information Institute
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and barely one-fourth the 0.82% average since 1969
59
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*
Under Review, 63 , 4.3%
Upgraded, 59 , 4.0%
Initial, 41 , 2.8%
Other, 59 , 4.0%
Affirm, 1,183 , 81.0%
Downgraded, 55 , 3.8%
*Through December 19.Source: A.M. Best.
59
Despite financial market turmoil, high cat losses and a soft market in 2008, 81% of ratings actions by A.M. Best
were affirmations; just 3.8% were downgrades
and 4.0% upgrades
P/C insurance is by design a resilient in business. The dual threat of financial
disasters and catastrophic losses are
anticipated in the industry’s risk
management strategy.
61
Reasons for US P/C Insurer Impairments, 1969-2008
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient loss reserves and inadequate
pricing are the leading cause of
insurer impairments,
underscoring the importance of
discipline. Investment
catastrophe losses play a much smaller role.
Reinsurance Failure3.7%
Rapid Growth14.3%
Misc.9.1%
Affiliate Impairment
7.9%
Sig. Change in Business
4.2%
Deficient Loss
Reserves/In-adequate Pricing38.1%
Investment Problems
7.0%
Alleged Fraud8.1%
Catastrophe Losses7.6%
Critical Differences Between P/C
Insurers and BanksSuperior Risk Management Model
& Low Leverage Makea Big Difference
63
How Insurance Industry Stability Has Benefitted Consumers
BOTTOM LINE:• Insurance Markets—Unlike Banking—Are Operating
Normally• The Basic Function of Insurance—the Orderly Transfer
of Risk from Client to Insurer—Continues Uninterrupted• This Means that Insurers Continue to:
Pay claims (whereas 120 banks have gone under as of 9/25/09) The Promise is Being Fulfilled
Renew existing policies (banks are reducing and eliminating lines of credit) Write new policies (banks are turning away people and businesses who
want or need to borrow) Develop new products (banks are scaling back the products they offer) Compete Intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute63
64
• Emphasis on Underwriting Matching of risk to price (via experience and modeling) Limiting of potential loss exposure Some banks sought to maximize volume and fees and disregarded risk
• Strong Relationship Between Underwriting and Risk Bearing Insurers always maintain a stake in the business they underwrite, keeping “skin in the game”
at all times Banks and investment banks package up and securitize, severing the link between risk
underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101
• Low Leverage Insurers do not rely on borrowed money to underwrite insurance or pay claimsThere is no
credit or liquidity crisis in the insurance industry• Conservative Investment Philosophy
High quality portfolio that is relatively less volatile and more liquid• Comprehensive Regulation of Insurance Operations
The business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives—CDS’s)
• Greater Transparency Insurance companies are an open book to regulators and the public
Source: Insurance Information Institute64
Reasons Why P/C Insurers Have Fewer Problems Than Banks:
A Superior Risk Management Model
Regulatory Reform
Obama Administration’s Plan for Reforming Financial
Services Industry Regulation Will Impact Insurers
Status: Stalled in Congress
66
REGULATORY REFORM: 2009 AND BEYOND
67
Rating of Auto/Home Insurance Regulatory & Operating Environment*
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WVVA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI
MDDE
AL
VT
NY
**DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
GRADE 2009 2008A 4 7
B 10 25 C 17 10D 12 5F 6 4
*Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env., regulatory clarity, credit scores, auto market entry/exit, territorial restrictions, political oversight.
**Information not available.
= A
= B
= C
= D
= F
Source: Heartland Institute, May 2009
http://www.heartland.org/custom/semod_policybot/pdf/25091.pdf
Study suggest the insurance regulatory and operating
environments deteriorated in 2009 for auto and home insurance
70
Obama Regulatory Reform Proposal: Plan Components
I. Office of National Insurance (ONI) Duties
1. Monitor “all aspects of the insurance industry”
2. Gather information
3. Identify the emergence of any problems or gaps in regulation that could contribute to a future crisis
4. Recommend to the Federal Reserve insurance companies it believes should be supervised as Tier 1 FHCs
5. Administer the Terrorism Risk Insurance Program
6. Authority to enter into international agreements and increase international cooperation on insurance regulation
Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.
71
II. Systemic Risk Oversight & Resolution Authority Federal Reserve given authority to oversee systemic risk
of large federal holding companies (Tier 1 FHCs) Insurers are explicitly included among the types of entities that could be
found to be a Tier 1 FHC
ONI given authority to “recommend to the Federal Reserve any insurance companies that the ONI believes should be supervised as Tier 1 FHC.”
Proposal also recommends “creation of a resolution regime to avoid disorderly resolution of failing bank holding companies, including Tier 1 FHCs “…in situations where the stability of the financial system is at risk.” Directly affects insurers in 2 ways: Resolution authority may extend to an insurer within the BHC structure if
the BHC is failing
If systemically important insurer is failing (as identified by ONI as Tier 1 FHC) resolution authority may apply
Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.
Obama Regulatory Reform Proposal: Plan Components (cont’d)
P/C INSURANCE FINANCIAL
PERFORMANCE
A Resilient Industry in Challenging Times
Profitability
Historically Volatile
75
P/C Net Income After Taxes1991-2009:H1 ($ Millions)*
$14,
178
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$62,
496
$2,3
79
$5,7
57
-$6,970
$65,
777
$44,
155
$20,
559 $3
8,50
1
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,00091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09:H
1
*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 4.5% ROAS for 2008 and 2.2%. 2009:Q1 net income was $10.0 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.
2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:H1 ROAS = 2.5%*
Insurer profits peaked in 2006 and 2007, but fell 96.2% during the economic
crisis in 2008
75
76
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:H1
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2009: H1*
*Excludes Mortgage & Financial Guarantee in 2008 and 2009Sources: ISO, Fortune; Insurance Information Institute.
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical and volatile
Financial Crisis*
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09Q1*
ROE Cost of Capital
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2009:H1*
*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, but
falling well short in 2008/09
-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
-7.1
pts
78
-6.0
pts
79
97.5
100.6 100.1 100.7
92.6
99.5101.0
8.9%4.2%
12.7%
14.3% 15.9%
9.6%
4.5%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009:H1*
Co
mb
ined
Ratio
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Retr
un
on
Eq
uity*
Combined Ratio ROE*
* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios must me must lower in today’s depressed
investment environment to generate risk
appropriate ROEs
Advertising Trends
Advertising Expenditures by P/C Insurance Industry, 1999-2008
$ Billions
$1.736 $1.737 $1.803 $1.708
$3.426
$4.102$4.354
$2.975
$2.111$1.882
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
99 00 01 02 03 04 05 06 07 08
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers was at a
record high in 2008, signaling strong
competition despite the recession.
P/C Premium Growth
Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy
83
-6%
-4%-2%
0%
2%4%
6%
8%10%
12%
14%16%
18%
20%22%
24%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
09:H
1
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Strength of Recent Hard Marketsby NWP Growth
1975-78 1984-87 2000-03
83
Net written premiums fell 1.0%
in 2007 (first decline since 1943)
by 1.4% in 2008, and 4.2% in H1 2009, the first 3-
year decline since 1930-33
Shaded areas denote “hard
market” periods
84
$651 $6
68 $691 $7
05
$703
$685
$690 $7
26
$786
$875
$830
$841
$817
$820$8
42
$831
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05 05 07* 08* 09*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Countrywide auto insurance expenditures increased 2.6% in 2008 and are rising at a
4% pace in 2009
85
0.8
%0
.8%
0.5
%0
.4%
0.3
%0
.3%
0.5
%0
.6%
0.5
%0
.1% 0.5
% 0.9
%1
.1%
1.3
% 1.7
%2
.6%
2.6
%2
.7% 3.0
%3
.1% 3.4
% 3.7
% 4.0
%4
.0% 4.3
%4
.4% 4.7
%4
.4% 4.7
%4
.6%
0.2
%
0%
1%
2%
3%
4%
5%
6%
Ja
n-0
7F
eb
-07
Ma
r-0
7A
pr-
07
Ma
y-0
7J
un
-07
Ju
l-0
7A
ug
-S
ep
-07
Oc
t-0
7N
ov
-07
De
c-0
7J
an
-08
Fe
b-0
8M
ar-
08
Ap
r-0
8M
ay
-08
Ju
n-0
8J
ul-
08
Au
g-
Se
p-0
8O
ct-
08
No
v-0
8D
ec
-08
Ja
n-0
9F
eb
-09
Ma
r-0
9A
pr-
09
Ma
y-0
9J
un
-09
Ju
l-0
9
Monthly Change in Auto Insurance Prices*
*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
Auto insurance prices seem to
have leveled off in recent months
86
$508 $5
36
$593
$668
$729 $7
64 $804
$807
$820
$841
$500
$550
$600
$650
$700
$750
$800
$850
$900
$950
00 01 02 03 04 05 06 07* 08* 09*
Average Premium for Home Insurance Policies**
*Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Countrywide auto insurance expenditures increased 1.6% in 2008 and are increasing at 2.6% annual rate in 2009
87
Average Commercial Rate Change,All Lines, (1Q:2004 – 2Q:2009)
-3.2
%
-5.9
%
-7.0
%
-9.4
%
-9.7
% -8.2
%
-4.6
% -2.7
%
-3.0
%
-5.3
%
-9.6
%
-11.
3%
-11.
8%
-13.
3% -12.
0%
-13.
5%
-12.
9% -11.
0%
-6.0
% -5.0
%
-5.0
%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
-0.1
% Magnitude of price declines is now
shrinking. Reflects shrinking capital,
reduced investment gains, deteriorating
underwriting performance, higher cat losses and costlier
reinsurance
Merger & Acquisition
Barriers to Consolidation Will Diminish in 2009/10
89
P/C Insurance-Related M&A Activity, 1988-2008
$2,4
35
$5,1
00
$19,
118
$40,
032
$1,2
49
$486
$20,
353
$425
$9,2
64$3
5,22
1
$13,
615
$16,
294
$55,825
$30,
873
$8,0
59
$11,
534
$1,8
82
$3,4
50$2
,780
$5,1
37
$5,6
38
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Tran
sact
ion
Val
ue ($
Mill
)
0
20
40
60
80
100
120
140
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
.
Source: Conning Research & Consulting.
2009 off to a stronger start with AIG unit sales and
Bermuda consolidation
$ Value of deal up 20% in 2009,
volume down 12%
Distribution Sector: Insurance-Related M&A Activity, 1988-2008
$542
$446
$5,8
12
$1,9
34
$7
$1,633
$2,7
20
$689
$60 $212 $9
44
$15,205
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
96 97 99 00 01 02 03 04 05 06 07 08
Tran
sact
ion
Val
ue ($
Mill
)
0
50
100
150
200
250
300
350
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
Source: Conning Research & Consulting.
Consolidation within the distribution sector
remains elevated
Capital/Policyholder Surplus (US)
Shrinkage, but
Capital is Within Historic Norms
93
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
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 0809*
U.S. Policyholder Surplus: 1975-2009:H1*
Source: A.M. Best, ISO, Insurance Information Institute. *As of 6/30/09
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Actual capacity as of 6/30/09 was $463.0B, up from $437.1B as of 3/31/09 Recent peak was $521.8 as of
9/30/07. Surplus as of 6/30/09 is 11.2% below 2007 peak; Crisis trough was as of 3/31/0916.2% below 2007 peak
The premium-to-surplus ratio stood at $0.92:$1 as of
6/30/09, up from near record low of $0.85:$1 at
year-end 2007
93
94
Policyholder Surplus, 2006:Q4 – 2009:H1
$ Billions
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$505.0$515.6
$517.9
$380
$400
$420
$440
$460
$480
$500
$520
$540
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2
Source: ISO, AM Best.
Declines Since 2007:Q3 Peak
08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%) 09:Q1: -$84.7B (-16.2%)
09:Q2: -$58.8B (-11.2%)
Capacity peaked at $521.8 as of 9/30/07
94
95
Premium-to-Surplus Ratios Before Major Capital Events*
$1.65
$1.42 $1.40
$1.03 $1.03$0.92$0.88
$1.05$1.15
$0.5
$0.7
$0.9
$1.1
$1.3
$1.5
$1.7
$1.9
6/3
0/1
989
Hu
rric
an
eH
ug
o
6/3
0/1
992
Hu
rric
an
eA
nd
rew
12/3
1/9
3N
ort
hri
dg
eE
art
hq
uake
6/3
0/0
1S
ep
t. 1
1A
ttacks
6/3
0/0
4F
lori
da
Hu
rric
an
es
6/3
0/0
5H
urr
ican
eK
atr
ina
6/3
0/0
7F
inan
cia
lC
risis
As o
f3/3
1/0
9**
As o
f6/3
0/0
9**
*
*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Ratio at point of maximum capital erosion; ***Latest availableSource: PCS; Insurance Information Institute.
P/C insurance industry was better capitalized going into the
financial crisis than before any “capital event” in recent history
97
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
3.3%
9.6%
6.9%
10.9%
16.2%
13.8%
6.2%
0%2%4%6%8%
10%12%14%16%18%
6/3
0/1
98
9H
urr
ica
ne
Hu
go
6/3
0/1
99
2H
urr
ica
ne
An
dre
w
12
/31
/93
No
rth
rid
ge
Ea
rth
qu
ak
e
6/3
0/0
1S
ep
t. 1
1A
tta
ck
s
6/3
0/0
4F
lori
da
Hu
rric
an
es
6/3
0/0
5H
urr
ica
ne
Ka
trin
a
Fin
an
cia
lC
ris
is a
s o
f3
/31
/09
**
*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Date of maximum capital erosion; As of 6/30/09 (latest available) ratio = 11.2%.Source: PCS; Insurance Information Institute.
The financial crisis now ranks as the largest
“capital event” over the past 20+ years
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
NWP % changeSurplus % change
*2009 NWP and Surplus figures are % changes for H1:09 vs H1:08Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets Follow When Surplus “Growth” is Negative*
Sharp decline in capacity is a necessary but not sufficient
condition for a true hard market
Investment Performance
Investments are the Principle Source of Declining
Profitability
100
Property/Casualty Insurance Industry Investment Gain:1994- 2009:H11
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.4
$12.4
$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 fell by 51% in 2008 due to lower yields, poor equity market
conditions. Falling again in 2009.
100
101
P/C Insurer Net Realized Capital Gains, 1990-2009:Q1
$2.88$4.81
$9.89
$1.66
$6.00
$9.24$10.81
$13.02
$16.21
$6.63
-$1.21
$6.61$8.92
-$11.17
-$19.80
$18.02
$3.52
$9.70$9.13$9.82
-$20-$18-$16-$14-$12-$10-$8-$6-$4-$2$0$2$4$6$8
$10$12$14$16$18$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09H
1
Sources: A.M. Best, ISO, Insurance Information Institute.
Realized capital losses hit a record $19.8 billion in 2008 due to financial market turmoil, a $27.7 billion swing from 2007, followed by an $11.2B
drop in H1 2009. This is a primary cause of 2008/2009’s large drop in profits and ROE.
$ Billions
101
102
0.15% 0.18% 0.30% 0.48%
1.02%
1.55%
2.46%
3.14%3.56%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%
4.41%4.38%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
July 2009 Yield CurvePre-Crisis (July 2007)
Treasury Yield Curves: Pre-Crisis (July 2007) vs. July 2009
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Stock dividend cuts will further pressure investment income
Treasury Yield Curve is at its most depressed level in at least 45 years. Investment income will fall as a result.
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
103
Distribution of P/C Insurance Industry’s Investment Portfolio
Cash & Short-Term Investments
8.0%
Common Stock14.8%
Bonds68.4%
Preferred Stock1.8%
Real Estate0.9%
Other6.2%
Portfolio Facts
•Invested assets totaled $1.2 trillion as of 12/31/08, down from $1.3 trillion as of 12/31/07
•Insurers are generally conservatively invested, with 2/3+ of assets invested in bonds as of 12/31/08
•Only about 15% of assets were invested in common stock as of 12/31/08, down from 18% one year earlier
•Even the most conservative of portfolios were hit hard in 2008
Source: NAIC; Insurance Information Institute research;.
As of December 31, 2008
104
Underwriting Trends
Financial Crisis Does Not Directly Impact Underwriting
Performance: Cycle, Catastrophes Were 2008’s Drivers
106
115.8
107.5
100.198.4
100.8
92.6
99.5101.0
95.7
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009:H1*
P/C Insurance Industry Combined Ratio, 2001-2009:H1*
*Excludes Mortgage & Financial Guaranty insurers in 2008. Including M&FG, 2008=105.1, 2009=100.9 Sources: A.M. Best, ISO.
Best combined ratio since 1949
(87.6)
As recently as 2001, insurers paid out nearly $1.16 for every
$1 in earned premiums
Relatively low CAT
losses, reserve releases
Cyclical Deterioration
106
2005 ratio benefited from heavy use of reinsurance which lowered net losses
107
-55-50-45-40-35-30-25-20-15-10-505
101520253035
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:Q
1
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers
$ B
illi
ons
Insurers earned a record underwriting profit of $31.7B in 2006 and $19.3B in 2007, the largest ever but only the 2nd and 3rd since 1978. Cumulative underwriting deficit from
1975 through 2008 is $442B.
Underwriting Gain (Loss)1975-2009:H1*
$19.8 Bill underwriting loss in 2008
incl. mort. & FG insurers, -$2.2B in H1:09
107
Large underwriting losses are NOT
sustainable in current investment environment
108
Number of Years With Underwriting Profits by Decade, 1920s –2000s
67
10
8
45
0 0
3
0
2
4
6
8
10
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.
Number of Years with Underwriting ProfitsUnderwriting profits were common before the 1980s (40 of the 60 years
before 1980 had combined ratios below 100)—but then they vanished. Not a single underwriting profit was recorded in the 25 years from 1979
through 2003.
108
Personal Lines
Auto (~75% of Market)Home (~25%)
111
117.7
158.4
113.6118.4
112.7
121.7
101.0
108.2111.4
121.7
109.3
98.294.4
100.3
88.9
95.6
116.9
99
113.0109.4
85
95
105
115
125
135
145
155
165
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
Homeowners Insurance Combined Ratio
Average 1990 to 2008= 111.1
Insurers have paid out an average of $1.11in losses for every dollar earned in premiums over the past 17 years
Sources: A.M. Best (historical ); III forecast for 2009.
112
101.7101.3 101.0
99.5
101.1
103.5
109.5
107.9
104.2
98.4
94.395.1 95.5
98.3
100.299.5
101.3
90
95
100
105
110
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
Private Passenger Auto (PPA) Combined Ratio
Average Combined Ratio for 1993 to 2008 =100.8
Sources: A.M. Best (historical); III forecast for 2009.
PPA is the profit juggernaut of the
p/c insurance industry today
Auto insurers have shown significant
improvement in PPA underwriting
performance since mid-2002, but results
are deteriorating.
Commercial Lines
114
110.
3
110.
2
107.
6
103.
9
109.
7
112.
3
111.
1
122.
3
110.
2
102.
5
105.
4
91.1
95.1
106.
5
105.
1
102.
0
112.
5
85
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F
2006/07 benefited from favorable loss cost trends, improved tort environment, low CAT
losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and
mortgage and financial guarantee segments have big influence. 2009 is transition year.
Commercial coverages have exhibited significant
variability over time.
Commercial Lines Combined Ratio, 1993-2009F
Mortgage and financial guarantee may account for up to 4 points on the commercial
combined ratio in 2008
Sources: A.M. Best (historical and forecasts)
Catastrophic Loss
Catastrophe Losses Trends Are Trending Adversely
122
U.S. Insured Catastrophe Losses$7
.5$2
.7$4
.7$2
2.9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5$5
.9 $12.
9 $27.
5
$6.7
$26.
0$7
.5$1
00.0
$61.
9
$9.2
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
20??
*Based on PCS data through June 30 = $7.5 billion.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 exceeded
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
eventually
122
2009 cat losses were down 29% in H1 from $10.6B in H1 2008
Insured Property Catastrophe Losses as % Net Premiums Earned, 1984–2008
0%
2%
4%
6%
8%
10%
12%
14%
16%
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
US
US average: 1984-2008
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
US CAT losses were a record 14.4% of
net premiums earned in 2005 and
were 4 times the 1984-2008 average
of 3.6%
124
States With Highest Insured Catastrophe Losses in 2008
$ Billions
$10.2
$2.2$1.6 $1.3 $1.0
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
Texas California Minnesota Ohio Georgia
Source: PCS; Insurance Information Institute.
In 2008, insurers paid $26 billion to 3.9 million victims of 37 major
natural catastrophes across 40 states. 64% of the payouts (in $ terms) went
to homeowners, 27% to business owners and 9% to vehicle owners
Top 12 Most Costly Disasters in US History, (Insured Losses, $2008)
$4.2 $5.2 $6.2 $7.3 $8.1 $8.5$11.3 $11.3 $12.5
$22.8 $23.8
$45.3
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Northridge(1994)
Ike(2008)*
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
$ B
illi
ons
*PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.
8 of the 12 most expensive disasters in US history
have occurred since 2004
In 2008, Ike became the 4th most expensive insurance event and 3rd most
expensive hurricane in US history arising from about 1.35 mill claims
126
Total Value of Insured Coastal Exposure (2007, $ Billions)
$2,378.9$895.1
$772.8$635.5
$479.9$224.4
$191.9$158.8$146.9$132.8
$92.5$85.6
$60.6$55.7$51.8$54.1
$14.9
$2,458.6
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
In 2007, Florida still ranked as the #1 most exposed state to hurricane loss,
with $2.459 trillion exposure, an increase of $522B or 27% from $1.937
trillion in 2004.
The insured value of all coastal property was $8.9 trillion in 2007, up
24% from $7.2 trillion in 2004.
$522B increase since 2004, up 27%
128
129
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1988-2007¹
Fire, $8.1 , 2.6%
Tornadoes, $82.4 , 26.5%
All Tropical Cyclones, $141.6 ,
45.6%
Civil Disorders, $1.1 , 0.4%
Utility Disruption, $0.2 , 0.1%
Water Damage, $0.4 , 0.1%Wind/Hail/Flood,
$9.9 , 3.2%
Earthquakes, $19.5 , 6.3%
Winter Storms, $24.4 , 7.9%
Terrorism, $22.9 , 7.4%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Insured disaster losses totaled $310.5 billion from 1988-2007 (in 2007 dollars)
Distribution of US Insured CAT Losses: TX, FL, LA vs US, 1980-2008*
Rest of US, $176, 60%
Louisiana, $33.6, 11%
Texas, $31.2,10%
Florida, $57.1,19%
Florida accounted for 19% of all US insured CAT losses from 1980-2008:
$57.1B out of $297.9B
*All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
$ Billions of Dollars
Top 10 Major Disaster Declaration Totals By State: 1953- 2009*
8374
63 6257 55
51 50 49 49 48 46 44 43 42
0
10
20
30
40
50
60
70
80
90
TX CA FL OK NY LA AL KY AR MO IL MS OH WA MN,PA,WV
Total Number
*Through July 2, 2009.Source: Federal Emergency Management Agency (FEMA)
ucky and Ohio are among the states with the most disaster
between 1953-2009*
Government Aid After Major Disasters (Billions)*
$137.1
$48.4
$22.8 $19.5 $17.1 $16.5
$0
$20
$40
$60
$80
$100
$120
$140
$160
Hurricane Katrina(2005)*
Sept. 11 TerroristAttack (2001)
Hurricane Ike(2008)
Hurricane Andrew(1992)
NorthridgeEarthquake (1994)
HurricanesCharley, Frances,
Ivan & Jeanne(2004)
$ B
illi
ons
*Adjusted to 2008 dollars by the Insurance Information Institute.Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05; Houston Chronicle, 09/24/08 for Ike.
Hurricane Katrina aid will dwarf aid following all
other disasters. Congress may authorize $150-$200 billion ultimately (about $400,000 for each of the
500,000 displaced families). Is the incentive to buy
insurance and insure to value diminished?
The federal government poured an estimated
$22.8B into areas affected by Hurricane Ike
134
Insurance Information Institute On-Line
THANK YOU FOR YOUR TIME AND
YOUR ATTENTION!
134