the financial crisis and the future of the p/c insurance

130
The Financial Crisis and the Future of the P/C Insurance Industry Impact & Implications Southwest Actuarial Forum San Antonio, TX November 30, 2009 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 Fax: (212) 732-1916 [email protected] www.iii.org

Upload: others

Post on 20-Apr-2022

1 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: The Financial Crisis and the Future of the P/C Insurance

The Financial Crisis and the Future of the P/CInsurance IndustryImpact & Implications

Southwest Actuarial ForumSan Antonio, TX

November 30, 2009

Download at: www.iii.org/presentations/

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

Page 2: The Financial Crisis and the Future of the P/C Insurance

2

Presentation Outline• The Economic Storm: Financial Crisis & Recession

Exposure, Growth & Profitability• 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

ProfitabilityPremium GrowthUnderwriting Performance: Commercial & Personal LinesFinancial Market ImpactsMerger & Acquisition Activity

• Capital & Capacity• Catastrophe Loss Trends

Q&A

Page 3: The Financial Crisis and the Future of the P/C Insurance

THE ECONOMIC STORM

What the Financial Crisis and Recession Mean for the

Industry’s Exposure Base,Growth, Profitability and

Investments

Page 4: The Financial Crisis and the Future of the P/C Insurance

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

%

2.8%

2.8%

2.7% 2.9%

2.8% 3.0%

-0.7

%

-6.4%

-5.4%

-0.2%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

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 11/09; 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

Page 5: The Financial Crisis and the Future of the P/C Insurance

5

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

0102030405060708090

100110120

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 Months

Expansion = 60.5 MonthsLength of

expansions greatly exceeds

contractions

Page 6: The Financial Crisis and the Future of the P/C Insurance

6

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

%-4

.4%

-10%

-5%

0%

5%

10%

15%

20%

25%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

Real

NW

P G

row

th

-4%

-2%

0%

2%

4%

6%

8%

Rea

l GD

P G

row

th

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, 11/09; Insurance Information Inst.

Page 7: The Financial Crisis and the Future of the P/C Insurance

Regional Differences Will Significantly

Impact P/C Markets Recovery in Some Areas Will Begin Years Ahead of Others & Speed of Recovery Will Differ By Orders of

Magnitude

Page 8: The Financial Crisis and the Future of the P/C Insurance

8

State Economic Growth Varied Tremendously in 2008

Eastern US growing more slowly than Plains,

Mountains

Page 9: The Financial Crisis and the Future of the P/C Insurance

9

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

Page 10: The Financial Crisis and the Future of the P/C Insurance

10

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

Page 11: The Financial Crisis and the Future of the P/C Insurance

Labor Market Trends

Fast & Furious: Massive Job LossesSap the Economy and Personal &

Commercial Lines Exposure

Page 12: The Financial Crisis and the Future of the P/C Insurance

12

2.0

3.04.0

5.0

6.07.0

8.0

9.010.0

11.0

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

January 2000 through October 2009*

Unemployment will likely peak near 10.5 % during this cycle, impacting payroll

sensitive p/c and l/h exposures

Source: US Bureau of Labor Statistics; Insurance Information Institute.

Oct. 2009 unemployment was 10.2%, up 0.4% from Sept. and nearing its

highest level since April 1983 (10.8%)

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

Oct

-09

Page 13: The Financial Crisis and the Future of the P/C Insurance

Unemployment Rates by State, September 2009: Highest 25 States*

10.5

9.8

9.610

.110

.110

.5

9.3

9.1

9.2

8.89.

3

8.9

8.99.

5

11.4

11.6

10.7

10.8

10.9

11.011

.5

13.3

13.0

12.2

15.3

0

2

4

6

8

10

12

14

16

MI NV RI CA SC OR DC FL KY NC AL IL TN OH GA NJ IN MO WA MA MS AZ NY WV ID

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for September 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

The unemployment rate has been rising across the country, but some states are doing much

better than others.

Insurers with heavy footprints in these states will lag behind

Page 14: The Financial Crisis and the Future of the P/C Insurance

6.8

6.7

6.7

6.7

6.76.97.

27.

2

4.84.9

6.27.

07.1

4.2

6.7

8.2

8.3

7.27.37.47.

78.38.

58.

48.

48.8

0

2

4

6

8

10

PA ME AK CT WI DE TX NM LA MN HI MD NH AR CO KS WY IA OK VT MT VA UT NE SD ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, September 2009: Lowest 25 States*

The unemployment rate has been rising across the country, but some states are doing much

better than others.

*Provisional figures for September 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Page 15: The Financial Crisis and the Future of the P/C Insurance

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

.1%

10.0

%

9.8%

9.6%

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 forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (11/09); Insurance Info. Inst.

Rising unemployment is eroding payrolls and

workers comp’s exposure base.

Unemployment is expected to peak above

10% in early 2010.

Page 16: The Financial Crisis and the Future of the P/C Insurance

U.S. Unemployment Rate ForecastsQuarterly, 2009:Q4 to 2010:Q4

10.3% 10.4% 10.4% 10.3%

9.6%9.9%

9.6%

9.3%

8.9%

10.1%9.9%

9.8%10.0%

10.1%

9.8%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

09:Q4 10:Q1 10:Q2 10:Q3 10:Q4

10 most pessimistic consensus/midpoint 10 most optimistic

Sources: Blue Chip Economic Indicators (11/09); Insurance Info. Inst.

Unemployment is expected to peak in early 2010

Rising unemployment will erode payrolls and workers comp’s exposure base.

Page 17: The Financial Crisis and the Future of the P/C Insurance

17

Labor Underutilization: Broader than Just Unemployment

11.2%

16.4% 16.5% 16.3%

17.5%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 Oct-09

Marginally attached and unemployed persons account for 17.5% of the labor

force in Oct. 2009 (1 out every 5.7 people). Unemployment rate alone was 10.2%.

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 forfull-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

Page 18: The Financial Crisis and the Future of the P/C Insurance

24

68

10

1214

1618

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Traditional Unemployment Rate U-3Unemployment + Underemployment Rate U-6

January 2000 through October 2009, seasonally adjusted

U-6 went from 9.2% in April 2008 to

17.5% in Oct. 2009

Source: US Bureau of Labor Statistics; Insurance Information Institute.

10.2% Oct. 2009 unemployment rate (U-3) was the highest monthly rate since 1983. Peak rate in the last 30 years: 10.8% in

Nov-Dec 1982.

Unemployment and UnderemploymentRates: Rocketing Up in 2008-09

Percent

Oct

-09

Page 19: The Financial Crisis and the Future of the P/C Insurance

19

Monthly Change Employment*(Thousands)

-72-144-122

-160-137-161-128

-175

-321-380

-597

-681-741

-681-652

-519

-303

-463

-304

-154-219-190

-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

Oct-09

Job losses since the recession began in Dec. 2007 total 8.2 mill; 15.7 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 October 2009

Page 20: The Financial Crisis and the Future of the P/C Insurance

Years With Job Losses: 1939-2009*(Thousands)

-4,226

-3,078-2,750

-2,128-1,762

-1,512

-886 -857-545 -540 -462 -450 -432 -378 -371 -297

-52

-4,500

-4,000

-3,500

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

2009* 2008 1945 1982 2001 1949 1944 1991 1957 2002 1953 1970 1960 1974 1954 1958 1981

The US has seen net job losses in only 16 of the 70 years since

1939

*Through October 2009.Source: Insurance Information Institute research fromUS Bureau of Labor Statistics data: http://www.bls.gov/ces/home.htm.

2008’s job losses even exceeded those in 1945, at the conclusion of WW II

Losses through October 2009 already rank the

year as the worst in the post WW II era—by far

Page 21: The Financial Crisis and the Future of the P/C Insurance

U.S. Nonfarm Private Employment, Monthly, Nov. 2007 – Oct. 2009

138.

0

138.

1

138.

0

137.

9

137.

8

137.

8

137.

7

137.

6

137.

6

137.

4

137.

0

136.

7

136.

2

135.

1

134.

3

133.

7

133.

0

132.

5

132.

2

131.

7

131.

4

131.

3

131.

0

130.

8

130.0130.5131.0131.5132.0132.5133.0133.5134.0134.5135.0135.5136.0136.5137.0137.5138.0138.5

Nov07

Dec07

Jan08

Feb08

Mar08

Apr08

May08

June08

Jul08

Aug08

Sep08

Oct08

Nov08

Dec08

Jan09

Feb09

Mar09

Apr09

May09

Jun09

Jul09

Aug09

Sep09

Oct09

Seasonally adjusted. Source: US Bureau of Labor Statistics

Millions

The U.S. economy lost 7.3 million

jobs over 2 years

Employment peak; recession starts

Page 22: The Financial Crisis and the Future of the P/C Insurance

Will the “Job Recession” End Soon?Feb.-Nov. 2009 Initial Jobless Claims*

620

640 643 647 650

650 65

865

965

164

863

862

5 632

630

627 63

262

361

761

861

660

758

556

756

055

7 566 57

156

7 573

570

564

554

549

541

533

532

527

524

520

500

520

540

560

580

600

620

640

660

Feb

14Fe

b 21

Feb

28M

ar 7

Mar

14

Mar

21

Mar

28

Apr

4A

pr 1

1A

pr 1

8A

pr 2

5M

ay 2

May

9M

ay 1

6M

ay 2

3M

ay 3

0Ju

n 6

Jun

13Ju

n 20

Jun

27Ju

l 4Ju

l 11

Jul 1

8Ju

l 25

Aug

1A

ug 8

Aug

15

Aug

22

Aug

29

Sep

5Se

p 12

Sep

19Se

p 26

Oct

3O

ct 1

0O

ct 1

7O

ct 2

4O

ct 3

1N

ov 7

4-week moving avg (000)

*seasonally adjusted; state programs only Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm

Continued drop in initial unemployment claims is a good news.

Portends gradual slowdown in the loss of worker comp exposure

Page 23: The Financial Crisis and the Future of the P/C Insurance

$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 Premiums7/90-3/91

Shaded areas indicate recessions

3/01-11/01

Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions

12/07-?

Weakening payrolls have

eroded $2B+ in workers comp

premiums

Page 24: The Financial Crisis and the Future of the P/C Insurance

0

5

10

15

20

25

30

'26

'28

'30

'32

'34

'36

'39

'41

'43

'45

'47

'49

'52

'54

'56

'58

'60

'62

'65

'67

'69

'71

'73

'75

'78

'80

'82

'84

'86

'88

'91

'93

'95

'97

'99

'01

'04

'06

Frequency: 1926-2008A Long-Term Drift Downward

Manufacturing—Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers

Note: Recessions indicated by gray bar

Note: Recessions indicated by gray bar.

Sources: NCCI from U.S. Bureau of Labor Statistics; National Bureau of Economic Research

Page 25: The Financial Crisis and the Future of the P/C Insurance

Crisis-Driven Exposure Drivers

Economic Obstaclesto Growth in P/C

Insurance

Page 26: The Financial Crisis and the Future of the P/C Insurance

26

New Private Housing Starts,1990-2010F (Millions of Units)

2.07

1.80

1.36

0.90

0.57

0.79

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 1.5 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 (11/09); Insurance Information Inst.

Page 27: The Financial Crisis and the Future of the P/C Insurance

27

16.916.916.617.1

17.517.817.4

16.516.1

13.1

10.3

11.7

91011

1213141516

171819

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 6.6 million units annually by 2009 compared with 2005, a decline of 39%

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 (11/09); Insurance Information Inst.

“Cash for Clunkers” netted about $300M in net new personal auto

premiums

Page 28: The Financial Crisis and the Future of the P/C Insurance

28

Total Industrial Production,(2007:Q1 to 2010:Q4F)

1.5%3.2% 3.6%

0.3% 0.2%

-4.6%

-9.0%

-13.0%

-19.0%

-10.3%

4.5%4.3%4.3%4.5%5.2%5.5%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1109); Insurance Info. Inst.

Industrial production began

to contracted sharply in late

2008 and plunged in Q1 2009

End of recession in mid-2009, Obama stimulus program are benefiting industrial production, but insurance exposure lags as most gains are productivity driven

Figures for H2 2009 and 2010 revised

upwards to reflect expected impact of Obama stimulus

program and a gradual economic recovery

Page 29: The Financial Crisis and the Future of the P/C Insurance

29

Private Sector Business Starts,1993:Q2-2008:Q4*

175

186

174 18

0 186 19

218

818

7 189

186 19

0 194

191

199 20

420

219

519

619

620

620

620

119

2 198

206

206

203

211

205

212

200 20

520

420

419

7 203 20

9

203

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

210

209

195

187 18

9

201

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Business starts are down 15% in the current downturn, holding back most types of commercial

insurance exposure

*Latest available as of Oct. 2009.Source: Bureau of Labor Statistics: http://www.bls.gov/news.release/cewbd.t07.htm

Thousands189,000 business starts

were recorded 2008:Q4, the lowest

level since 1995

Page 30: The Financial Crisis and the Future of the P/C Insurance

30

Business Bankruptcy Filings,1980-2009*

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,000

010,00020,00030,00040,00050,00060,00070,00080,00090,000

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

% Change SurroundingRecessions

1980-82: 58.6%1980-87: 88.7%1990-91: 10.3%2000-01: 13.0%

2006-09: 204.6%*

*Based estimate of 60,000 business bankruptcies in 2009; actual first half total was 30,333.Source: American Bankruptcy Institute; Insurance Information Institute

There were 30,333 business bankruptcies during the first half of 2009, up 64% from 2008: H1 and on track for about 60,000 for all of 2009, the most since 1993. Current

recession will generate 200%+ surge.

Business bankruptcies contribute to litigation

Page 31: The Financial Crisis and the Future of the P/C Insurance

31

Percent Change in Business Bankruptcy Filings,1980-2009*

10.1

%44

.0%

-9.9

%2.

5% 11.4

%14

.0%

1.5%

-22.

6%-1

.0%

2.6% 10

.3%

-1.3

%-1

1.8%

-15.

9%-0

.8%

3.1%

0.9%

-17.

9%-1

4.6% -6

.4%

13.0

%-3

.9%

-9.1

% -2.1

%14

.2%

43.8

% 53.8

%37

.8%

-49.8%-60%

-40%

-20%

0%

20%

40%

60%

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*

*Based estimate of 60,000 business bankruptcies in 2009. All figures are percent change from previous year.Source: Insurance Information Institute from American Bankruptcy Institute data.

Surge in bankruptcies during the “Great Recession” is the most severe in more than 30 years

Significant implications for bond & surety lines

Page 32: The Financial Crisis and the Future of the P/C Insurance

State & Local Government Finances

in Dire StraightsLarge, Long-Term Cuts Necessary to

Align Spending with ShrinkingTax Revenues

Page 33: The Financial Crisis and the Future of the P/C Insurance

Year-Over-Year Change in Quarterly U.S. State Tax Revenues, Inflation Adjusted

2.4% 4.

7% 5.6%

9.9%

9.5%

4.4%

1.8%

0.4%

-1.3

%-1

.7%

-3.0

%-7

.6%

-10.

7%0.

0% 1.6%

-0.6

%0.

1%4.

0% 4.7% 5.

7% 8.2%

3.4%

6.0% 7.

0%12

.4%

6.6%

4.2%

3.7%

6.3%

2.6%

1.3% 1.9% 2.3%

0.4% 0.8%

0.4%

3.0%

0.2%

-5.8

%

-17.

8%-1

3.4%

2.4%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1Q99

2Q99

3Q99

4Q99

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

Source: U.S. Census Bureau; Nelson A. Rockefeller Institute of Government:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf

Nationwide, state-tax collections for fiscal year 2009 declined by a record $63 billion, or 8.2 percent from the previous year. That loss

is roughly twice the amount states gained in fiscal relief from

the federal stimulus package.

States revenues were down 17.8% in Q2 2009, the second consecutive quarter of record revenue decline. This will impact public infrastructure spending significantly.

Page 34: The Financial Crisis and the Future of the P/C Insurance

Year-Over-Year Change in Quarterly State and Local Tax Revenues (Inflation Adjusted)

Source: U.S. Census Bureau; Nelson A. Rockefeller Institute of Government:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf

State tax receipts are plunging far

more rapidly than local taxes

States spending on infrastructure will have to

decline even more, especially when stimulus funds dry up

after 2010.

Page 35: The Financial Crisis and the Future of the P/C Insurance

State Tax Revenue GrowthAdjusted for Legislative Changes

Source: U.S. Census Bureau and Bureau of Economic Analysis; Nelson A. Rockefeller Institute of Government:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf

State tax receipts are plunging,

especially in FL, AZ, SC and AK

Page 36: The Financial Crisis and the Future of the P/C Insurance

36

States with Fastest Decline in Real Per-Capita Tax Revenues

-36.8%

-27.5%

-20.4% -20.0%-16.5% -16.3% -16.3%-17.1%-18.2%-18.2%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%AK FL SC GA VA UT ID NC NV DE

Many states’ revenues are down substantially since their highs early

in the decade*Peak defined as July – June period between 2006-2009 with highest peak per capita revenues.Source: US Bureau of Economic Analysis; Nelson A. Rockefeller Institute of Govt.; Insurance Info. Inst.

Percent

Period Ending April-June 2009 vs. Recent Peak*

Real per capital tax receipts in Fl declined 27.5% from $2406 to $1,744 in the 4

quarters ending June 2009 vs. June 2006

Page 37: The Financial Crisis and the Future of the P/C Insurance

37

States with Slowest Decline in Real Per-Capita Tax Revenues

-6.2%

-5.1% -4.9%-4.5%

-2.1%

0.0%0.0%

-2.4%

-3.9%-4.1%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%MD AR MT VT WV IN IA SD ND WY

Some states are doing much better than others

*Peak defined as July – June period between 2006-2009 with highest peak per capita revenues.Source: US Bureau of Economic Analysis; Nelson A. Rockefeller Institute of Govt.; Insurance Info. Inst.

Percent

Period Ending April-June 2009 vs. Recent Peak*

Page 38: The Financial Crisis and the Future of the P/C Insurance

State-by-State Infrastructure

Spending & Job GainsBigger States Get More, Should Benefit

Commercial Insurers Exposure

Page 39: The Financial Crisis and the Future of the P/C Insurance

39

Distribution of $787 B in Stimulus Funds*

$ Billions

$62.5 $47.0 $63.7

$225.5 $228.0 $160.3

$0

$50

$100

$150

$200

$250

$300

$350

Tax Benefits Contracts, Grants,Loans

Entitlements

UnusedPaid Out

*As of 10/10/09Source: www.recovery.gov accessed 10/17/09; Insurance Information Institute.

$173.2B or 22% or the $787B in stimulus

money has been spent as of Oct. 10, 2009.$288

$275$224

Page 40: The Financial Crisis and the Future of the P/C Insurance

Infrastructure Stimulus Spending by State (Total = $38.1B)

State Allocation State Allocation State AllocationAL $603,871,807 LA $538,575,876 OK $535,407,908

AK $240,495,117 ME $174,285,111 OR $453,788,475

AZ $648,928,995 MD $704,863,248 PA $1,525,011,979

AR $405,531,459 MA $890,333,825 RI $192,902,023

CA $3,917,656,769 MI $1,150,282,308 SC $544,291,398

CO $538,669,174 MN $668,242,481 SD $213,511,174

CT $487,480,166 MS $415,257,720 TN $701,516,776

DE $158,666,838 MO $830,647,063 TX $2,803,249,599

DC $267,617,455 MT $246,599,815 UT $292,231,904

FL $1,794,913,566 NE $278,897,762 VT $150,666,577

GA $1,141,255,941 NV $270,010,945 VA $890,584,959

HI $199,866,172 NH $181,678,856 WA $739,283,923

ID $219,528,313 NJ $1,335,785,100 WV $290,479,108

IL $1,579,965,373 NM $299,589,086 WI $716,457,120

IN $836,483,568 NY $2,774,508,711 WY $186,111,170

IA $447,563,924 NC $909,397,136 U.S. Territories

$238,045,760

KS $413,837,382 ND $200,318,301

KY $521,153,404 OH $1,335,600,553 Total $38,101,898,173

Sources: USA Today, 2/17/09; House Transportation and Infrastructure Committee; the Associated Press.

Page 41: The Financial Crisis and the Future of the P/C Insurance

Infrastructure Stimulus Spending By State: Top 25 States ($ Millions)

$890

.6$8

90.3

$836

.5$8

30.6

$739

.3$7

16.5

$704

.9$7

01.5

$668

.2$6

48.9

$603

.9$5

44.3

$538

.7$5

38.6

$1,3

35.8

$1,5

80.0

$909

.4$1

,141

.3$1

,150

.3$1

,335

.6

$1,5

25.0

$2,8

03.2

$2,7

74.5

$1,7

94.9

$3,9

17.7

$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500

CA TX NY FL IL PA NJ OH MI GA NC VA MA IN MO WA WI MD TN MN AZ AL SC CO LA

Stim

ulus

Dol

lars

($ M

ill)

Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.

Infrastructure spending is in the stimulus package total $38.1B, allocated

largely by population size.

Page 42: The Financial Crisis and the Future of the P/C Insurance

Infrastructure Stimulus Spending By State: Bottom 25 States ($ Millions)

$278

.9$2

70.0

$267

.6$2

46.6

$240

.5$2

38.0

$219

.5$2

13.5

$200

.3$1

99.9

$192

.9$1

86.1

$181

.7$1

74.3

$158

.7$1

50.7

$413

.8

$447

.6

$290

.5$2

92.2

$299

.6$405

.5

$415

.3$521

.2$4

87.5

$453

.8$535

.4

$0

$100

$200

$300

$400

$500

$600

OK KY CT OR IA MS KS AR NM UT WV NE NV DC MT

AK

U.S.

Ter

r. ID SD ND HI RI WY NH ME DE VT

Stim

ulus

Dol

lars

($ M

ill)

Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.

Infrastructure spending is in the stimulus package total

$38.1B, allocated largely by population size

Page 43: The Financial Crisis and the Future of the P/C Insurance

Expected Number of Jobs Gained or

Preserved by Stimulus Spending

Larger States = More JobsWorkers Comp Benefits

Page 44: The Financial Crisis and the Future of the P/C Insurance

Estimated Job Effect of Stimulus: Jobs Created/Saved By State = 3.5 Mill Total

State Jobs Created State Jobs Created State Jobs CreatedAL 52,000 LA 50,000 OK 40,000

AK 8,000 ME 15,000 OR 44,000

AZ 70,000 MD 66,000 PA 143,000

AR 32,000 MA 79,000 RI 12,000

CA 396,000 MI 109,000 SC 50,000

CO 60,000 MN 66,000 SD 10,000

CT 41,000 MS 30,000 TN 71,000

DE 11,000 MO 69,000 TX 269,000

DC 12,000 MT 11,000 UT 32,000

FL 207,000 NE 23,000 VT 8,000

GA 107,000 NV 34,000 VA 93,000

HI 16,000 NH 16,000 WA 75,000

ID 17,000 NJ 100,000 WV 20,000

IL 148,000 NM 22,000 WI 70,000

IN 75,000 NY 215,000 WY 8,000

IA 37,000 NC 105,000

KS 33,000 ND 9,000

KY 48,000 OH 133,000 Total 3,467,000

Sources: http://www.recovery.gov/; Council of Economic Advisers; Insurance Information Institute.

Page 45: The Financial Crisis and the Future of the P/C Insurance

Estimated Job Effect of Stimulus Spending By State: Top 25 States

93 79 75 75 71 70 70 69 66 66 60 52 50 50

13314

8

100

105

107

109

143

269

215

207

396

0

100

200

300

400

CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC

No.

of J

obs

Cre

ated

/Sav

ed b

y St

imul

us

Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.

The economic stimulus plan calls for the creation or preservation of 3.5 million jobs, allocated roughly

in proportion to the size of the state’s labor force.

(Thousands)

Page 46: The Financial Crisis and the Future of the P/C Insurance

2220

17 16 16 1512 12 11 11 10 9 8 8 8

33

37

2330

3232

34

4441 40

48

0

10

20

30

40

50

KY OR CT OK IA NV KS AR UT MS NE NM WV ID HI NH ME DC RI DE MT SD ND AK VT WY

No.

of J

obs

Cre

ated

/Sav

ed b

y St

imul

usEstimated Job Effect of Stimulus

Spending By State: Bottom 25 States

(Thousands)

Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.

The economic stimulus plan calls for the creation or

preservation of 3.5 million jobs, allocated roughly in

proportion to the size of the state’s labor force

Page 47: The Financial Crisis and the Future of the P/C Insurance

GREEN SHOOTS

Is the RecessionNearing an End?

Page 48: The Financial Crisis and the Future of the P/C Insurance

48

Hopeful Signs that theEconomic Recovery Is Underway

• Recession Appears to be Bottoming Out, Freefall Has Ended• GDP shrinkage has ended; Economy is expanding• 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 very credit worthy people & businesses

• Housing Sector Seems To Be Bottoming Out• 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.

Page 49: The Financial Crisis and the Future of the P/C Insurance

49

11 Industries for the Next 10 Years: Insurance Solutions Needed

GovernmentEducation

Health CareEnergy (Traditional)Alternative Energy

AgricultureNatural Resources

EnvironmentalTechnology

Light ManufacturingExport Oriented Industries

Page 50: The Financial Crisis and the Future of the P/C Insurance

Inflation Trends: Concerns Over

Stimulus Spending and Monetary Policy

Mounting Pressure on Claim Cost Severities?

Page 51: The Financial Crisis and the Future of the P/C Insurance

51

Annual Inflation Rates(CPI-U, %), 1990-2010F

4.9 5.1

3.0 3.22.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

(0.4)

2.0

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, 11/09.

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 2011, but depreciation of dollar is concern longer run.

Page 52: The Financial Crisis and the Future of the P/C Insurance

-$2,000

-$1,500

-$1,000

-$500

$0

$50019

69

1975

1980

1985

1990

1995

2000

2005

2010

2015

2019

Fede

ral D

efic

it

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Def

icit

as %

of 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.

Page 53: The Financial Crisis and the Future of the P/C Insurance

53

$903

.7

$903

.6

$899

.4

$911

.6

$922

.9

$921

.3

$926

.4 $1,1

86.2

$2,2

70.4

$2,1

06.5

$2,1

79.0

$2,0

52.2

$0

$500

$1,000

$1,500

$2,000

$2,500

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Balance Sheet of theFederal Reserve, Dec. 2006- Sept. 2009*

*As of final Friday in each quarter.Source: Federal Reserve: http://www.federalreserve.gov/releases/h41/hist/h41hist1.htm

The size of the Fed’s balance sheet has more than doubled since the crisis began in 2007 from about

$900 billion to $2.2 trillion, fueling inflation concerns.

$ Billions

Page 54: The Financial Crisis and the Future of the P/C Insurance

54

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 costs risks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly

Source: Ins. Info. Inst.

Page 55: The Financial Crisis and the Future of the P/C Insurance

Key Threats Facing Insurers Amid

Financial CrisisChallenges for the

Next 5-8 Years

Page 56: The Financial Crisis and the Future of the P/C Insurance

56

Important Issues & Threats Facing Insurers: 2009 - 2015

Source: Insurance Information Inst.

1. Erosion of CapitalLosses were larger and occurred more rapidly than is commonly understood or presumedMax surplus loss at 3/31/09 was 16%=$85B from 9/30/07 peakP/C policyholder surplus loss could have been much largerDecline 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 fell farther and faster than many believed possible. It will take years to return to the 2007 peaks—likely 2011 (without market relapse).

Page 57: The Financial Crisis and the Future of the P/C Insurance

57

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 led to shortage of capital among somecompaniesPossible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirementsP/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 environmentCost of capital is much higher today (relative “risk-free”rates), reflecting both scarcity & riskImplications: 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.

Page 58: The Financial Crisis and the Future of the P/C Insurance

58

Important Issues & Threats Facing Insurers: 2009 - 2015

Source: Insurance Information Inst.

3. Long-Term Reduction in Investment EarningsLow interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gainsFed actions in Treasury markets keep yields lowMany insurers have not adjusted to this new investment paradigm of a sustained period of low investment gainsRegulators will not readily accept it; Many will reject itImplication 1: Industry must be prepared to operate in environment with investment earnings accounting for a smaller fraction of profitsImplication 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

Page 59: The Financial Crisis and the Future of the P/C Insurance

59Source: 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)Strong arguments for Optional Federal Charter, but…Pushing for major change is not without risk in the current highly charged political environmentDangers exist if feds get their nose under the tentStatus Quo is viewed as unacceptable by allDisunity within the insurance industryInsurance & systemic risk—Who is important?Other: Less Independent Fed = Less Credible FedImpact of regulatory changes will be felt for decadesBottom Line: Regulatory outcome is uncertain and risk of adverse outcome exists

Important Issues & Threats Facing Insurers: 2009 – 2???

Page 60: The Financial Crisis and the Future of the P/C Insurance

60

Health Insurance Reform Debate—Potential Spillover Impacts on P/C Insurers

• 24-Hour Coverage ProposalWould roll WC and med components of auto into natl. health care plan

• Rollback of McCarran-Ferguson ActWould repeal or restrict for health and medical malpractice insurersSlippery slope—Med Mal is a p/c line; Congress will not hesitate to breach M-F for other p/c lines in the future to show its ire over an issue (e.g., after major cat)

• Exclusion of Med Mal Reform from Health Care BillShows powerful influence of trial bar with Congress/Administration

• FTC granted authority to conduct studies “related to insurance” –All Lines!• Reporting of Claims• Adjustments to Medicare Fee Schedules• Patient “Bill of Rights” or Vague Standards of Care• Cost Shifting into WC, Auto from Health System

WC/Auto Medical: more lucrative from provider perspective• “Windfall” Profit Taxes? Additional Premium Taxes?• Executive Compensation Restrictions?• Public “Option” in P/C Lines—Nat Cat/Wind?• Perception that Feds Regulate Insurance Industry Taking Root

Page 61: The Financial Crisis and the Future of the P/C Insurance

The Affordable Health Care for America Act (H.R. 3962) includes the following benefit to the trial bar:

Section 2531, entitled “Medical Liability Alternatives,” establishes an incentive program for states to adopt and implement alternatives to medical liability litigation. [BUT]…… “a state is not eligible for the incentive payments if that state puts a law on the books that limits attorneys’fees or imposes caps on damages.”

Jeopardizes some $54 billion in savings in medical care costs that Congressional Budget Office (CBO) says litigation reform would bring.

Source: Andrew Breitbart, http://biggovernment.com; Congressional Budget Office (CBO)

Healthcare Reform Bill is a Trial Lawyer Dream Come True

Page 62: The Financial Crisis and the Future of the P/C Insurance

62Source: Insurance Information Inst.

Creeping Restrictions on UnderwritingAttacks on underwriting criteria such as credit, education, occupation, territory increasingView that use of numerous criteria are discriminatory and create an adverse impact on certain populationsImpact will be to degrade the accuracy of rating systems to increase subsidiesCatastrophe and Predictive modeling also at riskCurrent social and economic environment could accelerate these effortsDanger that bans could be codified at federal level during regulatory overhaulBottom Line: Industry must be prepared to defend existing and new criteria indefinitely

Important Issues & Threats Facing Insurers: 2010 - 2015

Page 63: The Financial Crisis and the Future of the P/C Insurance

Source: Insurance Information Inst.

Creeping Socialization and Partial Nationalization of Insurance System

CAT risk is, on net, being socialized directly via state-run insurance and reinsurance mechanisms or via elaborate subsidy schemes involving assessments, premium tax credits, etc.Some insurers sought/received TARP moneyEfforts to expand flood program to include windHealth insurance may be substantively socializedTerrorism risk—already a major federal role backed by insurersEventually impacts for other lines such as personal auto, WC?Feds, states may open to more socialization of private insurance riskOwnership stakes in some insurers could be a slippery slopeStates like FL will lean heavily on Washington in the event of a mega-cat that threatens state financeBottom Line: Additional socialization likely. Can insurers/will insurers draw the line—and where?

Important Issues & Threats Facing Insurers: 2009 -2015

Page 64: The Financial Crisis and the Future of the P/C Insurance

Source: Insurance Information Inst.

Exploitation of Insurance as a Wealth Redistribution Mechanism

There is a longstanding history of attempts to use insurance to advance wealth redistribution/economic agendas Urban subsidies; Coastal subsidies are old; Could be extended to workers comp in variety of waysInsurer focus on underwriting profitability (resulting in higher rates) coupled with poor economic conditions could raise profile of affordability issueCalls for “excess profits tax” on insurersIncreased government involvement in insurance (including ownership stakes) make this more likelyFederal regulation could impose such redistribution schemes Bottom Line: Expect efforts to address social and economic inequities through insurance

Important Issues & Threats Facing Insurers: 2009 - 2015

Page 65: The Financial Crisis and the Future of the P/C Insurance

65Source: Insurance Information Inst.

Emerging Tort ThreatNo tort reform (or protection of recent reforms) is forthcoming from the current Congress or AdministrationErosion 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 liabilityTorts twice the overall rate of inflationInfluence personal and commercial lines, esp. auto liab.Historically extremely costly to p/c insurance industryLeads to reserve deficiency, rate pressureBottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012-2014

Important Issues & Threats Facing Insurers: 2009 -2015

Page 66: The Financial Crisis and the Future of the P/C Insurance

Shifting Legal Liability & Tort

EnvironmentIs the Tort Pendulum

Swinging Against Insurers?

Page 67: The Financial Crisis and the Future of the P/C Insurance

Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical

$0

$50

$100

$150

$200

$250

$300

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

E

2010

E

Tor

t Sys

tem

Cos

ts

1.50%

1.75%

2.00%

2.25%

2.50%

Tor

t Cos

ts a

s % o

f GD

P

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

Page 68: The Financial Crisis and the Future of the P/C Insurance

The Nation’s Judicial Hellholes (2008/2009)

Source: American Tort Reform Association; Insurance Information Institute

ALABAMAMacon and

Montgomery Counties

South Florida

ILLINOISCook County West Virginia

Watch ListRio Grande

Valley & Gulf Coast, TX

Madison County, IL

Baltimore, MDSt Louis (the city of), St Louis and

Jackson Counties, MO

Dishonorable Mentions

MA Supreme Judicial CourtMO Supreme

Court

NEVADAClark County (Las Vegas)

NEW JERSEYAtlantic County (Atlantic City)

CALIFORNIALos Angeles

County

Page 69: The Financial Crisis and the Future of the P/C Insurance

FINANCIAL STRENGTH &

RATINGSIndustry Has Weathered

the Storms Well

Page 70: The Financial Crisis and the Future of the P/C Insurance

70

P/C Insurer Impairments,1969-2008

815

127

11 934

913 12

199

16 14 1336

4931

3450 48

5560 58

4129

1612

3118 19

49 5047

3518

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

Page 71: The Financial Crisis and the Future of the P/C Insurance

71

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

Com

bine

d R

atio

0.00.20.40.60.81.01.21.41.61.82.0

Impa

irmen

t Rat

e

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

Page 72: The Financial Crisis and the Future of the P/C Insurance

P/C Impairment Frequency vs. Catastrophe Points in Combined Ratio, 1977-2008

0

2

4

6

8

10

12

14

16

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

Cat

astro

phe

Poin

ts o

n C

ombi

ned

Rat

io

0.00.20.40.60.81.01.21.41.61.82.0

Impa

irmen

t Rat

e

Catastrophe Points in Combined RatioP/C Impairment Frequency

Impairment rates are highly

correlated with underwriting

performance and reached record lows in 2007/08

Source: A.M. Best, PCS; 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

Page 73: The Financial Crisis and the Future of the P/C Insurance

Number of Impairments by State, 1969-2008

22 22 21 20 17 15 15 15 15 14 14 13 11 10 9 9 8 8 6 6 6 6 6 5 5 5 5 5 5 5 4 4 4 3 3 3 2 2 2 2 1 1 0

4166

22242533

63

9691

73

140

0

20

40

60

80

100

120

140

160

TX FL CA IL NY PA LA MO

OK

OH AZ IN NJ GA NE WI

DE MA

MD SC CO TN PR RI HI KY MI

NC WV AL DC UT VA WA IA KS MN

MS

MT

NM OR SD VI WY AR CT VT AK ME

NH NV GU ID ND

No.

of I

mpa

irmen

ts

TX, FL and CA have the largest number of impairments.

Catastrophe risk plays a big role. Other factors influencing

impairments include the political environment and business mix

Source: A.M. Best; Insurance Information Institute

More TX insurers have become impaired over the past 40 years

than in any other state

17 insurers impaired

insurers in WI since

1969

Page 74: The Financial Crisis and the Future of the P/C Insurance

74

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.

74

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.

Page 75: The Financial Crisis and the Future of the P/C Insurance

75

Historical Ratings Distribution,US P/C Insurers, 2008 vs. 2005 and 2000

Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.

A/A-48.4%

D0.2%C++/C+

1.9%

E/F2.3% A++/A+

11.5%

C/C-0.6%

B++/B+28.3%

B/B-6.9%

2008 2005

P/C insurer financial strength has improved since 2005 despite financial crisis

A/A-52.3%

A++/A+9.2%

B++/B+26.4%

Vulnerable*12.1%

A/A-60.0%

A++/A+10.8%

B++/B+21.3%

Vulnerable*7.9%

2000A++/A+ and A/A- gains

Page 76: The Financial Crisis and the Future of the P/C Insurance

76

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%

Page 77: The Financial Crisis and the Future of the P/C Insurance

Critical Differences Between P/C

Insurers and BanksSuperior Risk Management Model

& Low Leverage Makea Big Difference

Page 78: The Financial Crisis and the Future of the P/C Insurance

78

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 146 banks have gone under as of 11/20/09)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 Institute78

Page 79: The Financial Crisis and the Future of the P/C Insurance

79

• Emphasis on UnderwritingMatching of risk to price (via experience and modeling)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk

• Strong Relationship Between Underwriting and Risk BearingInsurers always maintain a stake in the business they underwrite, keeping “skin in the game”at all timesBanks 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 LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry

• Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid

• Comprehensive Regulation of Insurance OperationsThe 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 TransparencyInsurance companies are an open book to regulators and the public

Source: Insurance Information Institute79

Reasons Why P/C Insurers Have Fewer Problems Than Banks:

A Superior Risk Management Model

Page 80: The Financial Crisis and the Future of the P/C Insurance

Regulatory Reform Obama Administration’s Plan

for Reforming Financial Services Industry Regulation

Will Impact Insurers

Page 81: The Financial Crisis and the Future of the P/C Insurance

81

Obama Regulatory Reform Proposal:Plan Components

I. Office of National Insurance (ONI) Duties1. Monitor “all aspects of the insurance industry”2. Gather information3. Identify the emergence of any problems or gaps in

regulation that could contribute to a future crisis4. Recommend to the Federal Reserve insurance companies

it believes should be supervised as Tier 1 FHCs5. Administer the Terrorism Risk Insurance Program6. 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.

Page 82: The Financial Crisis and the Future of the P/C Insurance

82

II. Systemic Risk Oversight & Resolution AuthorityFederal Reserve given authority to oversee systemic risk of large financial 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)

Page 83: The Financial Crisis and the Future of the P/C Insurance

P/C INSURANCE FINANCIAL

PERFORMANCEA Resilient Industry in

Challenging Times

Page 84: The Financial Crisis and the Future of the P/C Insurance

Profitability

Historically Volatile

Page 85: The Financial Crisis and the Future of the P/C Insurance

85

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

85

Page 86: The Financial Crisis and the Future of the P/C Insurance

86

-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*

Page 87: The Financial Crisis and the Future of the P/C Insurance

-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 pt

s

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

pts

-9.0

pts

The cost of capitalis the rate of return

insurers need to attract and retain

capital to the business

-7.1

pts

87

-6.0

pts

Page 88: The Financial Crisis and the Future of the P/C Insurance

88

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*

Com

bine

d R

atio

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Ret

run

on E

quity

*

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

Page 89: The Financial Crisis and the Future of the P/C Insurance

Underwriting Trends

Financial Crisis Does Not Directly Impact Underwriting

Performance: Cycle, Catastrophes Were 2008’s Drivers

Page 90: The Financial Crisis and the Future of the P/C Insurance

90

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

90

2005 ratio benefited from heavy use of reinsurance which lowered net losses

Page 91: The Financial Crisis and the Future of the P/C Insurance

91

P/C Reserve Development, 1992-2011E

-6.6

-9.8

13.7

9.9

7.3

-6.7

-9.5

-14.

6-1

6 -15

-5

23.2

11.7

1

-4.1

-9.9

-2.1

-8.3

-2.6

2.3

($20)($15)($10)($5)$0$5

$10$15$20$25$30

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11E

Prio

r Yr.

Res

erve

Rel

ease

($ B

ill)

(6)

(4)

(2)

0

2

4

6

8

Impa

ct o

n Co

mbi

ned

Ratio

(Poi

nts)

Prior Yr Reserve Development ($ Bill) Impact on Combined Ratio (Points)

.Note: 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. Source: Barclay’s Capital; A.M. Best.

2009 off to a stronger start with AIG unit sales and

Bermuda consolidation

$ Value of deal up 20% in 2009,

volume down 12%

Page 92: The Financial Crisis and the Future of the P/C Insurance

92

Calendar Year vs. Accident Year P/C Combined Ratio:1992- 2010E1

115.

7

106.

9

108.

4

106.

4

107.

8 110.

1

115.

9

107.

3

100.

1

98.3 10

0.9

92.4

95.5

105.

1

101.

9 105.

9

115.

7

106.

9

108.

4

106.

4

105.

8

101.

6 105.

6 107.

8 110.

0 112.

3

100.

8

96.6

96.0

100.

6

93.9

97.4

105.

5

105.

7 109.

4

105.

6

101.

6

105.

8

80

85

90

95

100

105

110

115

120

92 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E

Calendar Year Accident YearAccident year results show a

more significant deterioration in underwriting performance.

Calendar year results are helped by reserve releases

92

.Note: 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. Source: Barclay’s Capital; A.M. Best.

Page 93: The Financial Crisis and the Future of the P/C Insurance

93

-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 0809

:Q1

Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers

$ B

illio

ns

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

93

Large underwriting losses are NOT

sustainable in current investment environment

Page 94: The Financial Crisis and the Future of the P/C Insurance

94

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.

94

Page 95: The Financial Crisis and the Future of the P/C Insurance

P/C Premium Growth

Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy

Page 96: The Financial Crisis and the Future of the P/C Insurance

96

-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

96

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

Page 97: The Financial Crisis and the Future of the P/C Insurance

Industrialized Countries: Change in Non-life Premiums, 2008 vs. 2007

-3.10%0.40%

-2.10%-3.20%

-1.50%0.00%

-3.30%-1.50%

2.80%

-1.90%

-4% -3% -2% -1% 0% 1% 2% 3% 4%

Asianeconomies**Australia

Italy

France

Germany

U.K.

Japan

Canada

U.S.

Industrialisedcountries

* In real terms, ie adjusted for inflation**Hong Kong, Singapore, South Korea, Taiwan.Source: Swiss Re, sigma, No.3/2009

Non-life premiums Change*

Page 98: The Financial Crisis and the Future of the P/C Insurance

Emerging Markets: Change in Non-Life Premiums, 2008 vs. 2007

9.5%9.0%

5.5%7.9%

9.5%14.8%

-0.7%3.1%3.0%

7.1%

-1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

Africa

Middle East & CentralAsiaIndia

China

South & East Asia

Russia

Central & EasternEuropeBrazil

Latin America &CaribbeanEmerging markets

* In real terms, ie adjusted for inflation**Hong Kong, Singapore, South Korea, Taiwan.Source: Swiss Re, sigma, No.3/2009

Non-life premiums Change*

Page 99: The Financial Crisis and the Future of the P/C Insurance

99

$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

Page 100: The Financial Crisis and the Future of the P/C Insurance

100

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% 4.7%

4.5%

0.2%

0%

1%

2%

3%

4%

5%

6%

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-Se

p-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08Fe

b-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-Se

p-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09Ju

l-09

Aug

-Se

p-09

Monthly Change in Auto Insurance Prices*

*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics

Auto insurance price increases seem to have leveled off

in recent months at about +4.5%

Page 101: The Financial Crisis and the Future of the P/C Insurance

101

$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 forHome 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

Page 102: The Financial Crisis and the Future of the P/C Insurance

102

Average Commercial Rate Change,All Lines, (1Q:2004 – 3Q:2009)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

% -8.2

%-4

.6% -2

.7%

-3.0

%-5

.3%

-9.6

%-1

1.3%

-11.

8%-1

3.3% -1

2.0%

-13.

5%-1

2.9% -1

1.0%

-6.4

% -5.1

%-4

.9%

-5.8

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%1Q

042Q

043Q

044Q

041Q

052Q

053Q

054Q

051Q

062Q

063Q

064Q

061Q

072Q

073Q

074Q

071Q

082Q

083Q

084Q

081Q

092Q

093Q

09

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

Page 103: The Financial Crisis and the Future of the P/C Insurance

Merger & Acquisition

Barriers to Consolidation Will Diminish in 2010

Page 104: The Financial Crisis and the Future of the P/C Insurance

104

P/C Insurance-Related M&A Activity, 1988-2008

$2,4

35

$5,1

00

$19,

118

$40,

032

$1,2

49$4

86$2

0,35

3$4

25$9

,264

$35,

221

$13,

615

$16,

294

$55,825

$30,

873

$8,0

59$1

1,53

4

$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

Valu

e ($

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%

Page 105: The Financial Crisis and the Future of the P/C Insurance

Capital/Policyholder Surplus (US)

Shrinkage, but Not Enough to

Trigger Hard Market

Page 106: The Financial Crisis and the Future of the P/C Insurance

106

$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

illio

ns

“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 3/31/09 16.2% 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

106

Page 107: The Financial Crisis and the Future of the P/C Insurance

Global Reinsurance Capacity Shrank in 2008, Mostly Due to Investments

$360

$300

$270$280$290$300$310$320$330$340$350$360$370

2007 2008

Global Reinsurance Capacity

Global reinsurance capacity fell

by an estimated 17%

in 2008

107

Hurricanes14%

Change in Unrealized

Capital Losses55%

Realized Capital Losses31%

Source of Decline

Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.

Page 108: The Financial Crisis and the Future of the P/C Insurance

Catastrophe Bond and Sidecar Issuance, 2004-2008

$1.14 $1.50

$4.69

$7.62

$2.73

$0.00

$2.33

$3.85

$1.75

$0.28$0

$2

$4

$6

$8

$10

2004 2005 2006 2007 2008

Cat BondsSidecars

$ BillionsThe credit crisis and decline in global capital have taken their

toll on alternative forms of catastrophe risk transfer

108Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.

Page 109: The Financial Crisis and the Future of the P/C Insurance

109

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 Peak08: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

109

Page 110: The Financial Crisis and the Future of the P/C Insurance

110

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%

6/30

/198

9H

urric

ane

Hug

o

6/30

/199

2H

urric

ane

And

rew

12/3

1/93

Nor

thrid

geEa

rthq

uake

6/30

/01

Sept

. 11

Atta

cks

6/30

/04

Flor

ida

Hur

rican

es

6/30

/05

Hur

rican

eK

atrin

a

Fina

ncia

lC

risis

as

of3/

31/0

9**

*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

Page 111: The Financial Crisis and the Future of the P/C Insurance

-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

Page 112: The Financial Crisis and the Future of the P/C Insurance

Investment Performance

Investments are a Principle Source of Declining

Profitability

Page 113: The Financial Crisis and the Future of the P/C Insurance

113

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

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08

09:H

1

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.

113

Page 114: The Financial Crisis and the Future of the P/C Insurance

114

P/C Insurer Net Realized Capital Gains, 1990-2009:H1

$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

114

Page 115: The Financial Crisis and the Future of the P/C Insurance

115

0.06% 0.12% 0.21% 0.40%

0.96%1.48%

2.37%

3.02%3.40%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%

4.19%4.14%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

September 2009 Yield CurvePre-Crisis (July 2007)

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Sept. 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 is falling as a result.

Page 116: The Financial Crisis and the Future of the P/C Insurance

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

116

Page 117: The Financial Crisis and the Future of the P/C Insurance

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

117

Page 118: The Financial Crisis and the Future of the P/C Insurance

Scale and Scope of the Financial Crisis on

Global (Re) Insurance Markets

Significant but Manageable Impacts

Page 119: The Financial Crisis and the Future of the P/C Insurance

Potential Writedowns by Segmentand Region: 2007-2010*

$1,604

$737

$2,470

$218

$75

$301

$890

$381

$1,283

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

US Europe JapanBanks Insurers Other

Insurers account for 7.5% of potential

securities writedowns globally (8.0% in US, 6.3% in US and 7.4%

in Japan)

Billions of US Dollars

$2,712

$1,193

$4,054

* Includes loans and securities. Europe includes euro countries plus United Kingdom. Insurance category includes life and non-life insurers.Source: IMF Global Financial Stability Report, April 2009.

Page 120: The Financial Crisis and the Future of the P/C Insurance

120

US Europe

Insurer writedowns of securities are expected to total 7.5% of all financial

institution losses through 2010

Insurers8.0%

Banks59.1%

Other 32.8%

Japan

Insurers6.3%

Banks61.8%

Other 31.9%

Insurers7.4%

Banks60.9%

Other 31.6%

* Includes loans and securities. Europe includes euro countries plus United Kingdom. Insurance category includes life and non-life insurers.Source: IMF Global Financial Stability Report, April 2009.

Share of Potential Writedowns by Segment and Region: 2007-2010*

Page 121: The Financial Crisis and the Future of the P/C Insurance

$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 the Credit Crunch*

*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

121

Page 122: The Financial Crisis and the Future of the P/C Insurance

Catastrophic Loss Catastrophe Losses Trends

Are Trending Adversely

Page 123: The Financial Crisis and the Future of the P/C Insurance

123

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

123

2009 cat losses were down 29% in H1 from $10.6B in H1 2008

Page 124: The Financial Crisis and the Future of the P/C Insurance

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

illio

ns

*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;

8 of the top 12 disasters affected FLIn 2008, Ike became the 4th most

expensive insurance event and 3rd most expensive hurricane in US history arising from about 1.35 mill claims

124

Page 125: The Financial Crisis and the Future of the P/C Insurance

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

Page 126: The Financial Crisis and the Future of the P/C Insurance

126

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

Page 127: The Financial Crisis and the Future of the P/C Insurance

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%

127

Page 128: The Financial Crisis and the Future of the P/C Insurance

U.S. Residual Market Property Policies In-ForceExposure

Source: PIPSO; Insurance Information Institute

931.6

1,319.7

1,785.0

1,196.5

1,642.31,741.7

2,209.3

2,840.42,621.32,780.6

1,458.1

2,203.9

0

500

1,000

1,500

2,000

2,500

3,000

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

In the 19-year period between 1990 and 2008, total residual market policy count (FAIR & Beach/Windstorm Plans) has nearly tripled to more than 2.6

million policies

Katrina, Rita and Wilma

4 Florida Hurricanes

Page 129: The Financial Crisis and the Future of the P/C Insurance

U.S. Residual Market Exposure to Loss (Billions of Dollars)

Source: PIPSO; Insurance Information Institute

$54.7

$150.0

$281.8$244.2

$292.0$372.3

$430.5

$771.9$696.4

$656.7

$221.3

$419.5

$0$100$200$300$400$500$600$700$800$900

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

In the 19-year period between 1990 and 2008, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $696.4bn in 2008.

Katrina, Rita and Wilma

4 Florida Hurricanes

Hurricane Andrew

Page 130: The Financial Crisis and the Future of the P/C Insurance

130

Insurance Information Institute On-Line

THANK YOU FOR YOUR TIME AND

YOUR ATTENTION!

Download at www.iii.org/presentations/

130