the financial crisis and the future of the p/c insurance
TRANSCRIPT
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
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
THE ECONOMIC STORM
What the Financial Crisis and Recession Mean for the
Industry’s Exposure Base,Growth, Profitability 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
%
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
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
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.
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
8
State Economic Growth Varied Tremendously in 2008
Eastern US growing more slowly than Plains,
Mountains
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
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
Labor Market Trends
Fast & Furious: Massive Job LossesSap the Economy and Personal &
Commercial Lines Exposure
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
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
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.
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.
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.
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
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
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
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
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
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
$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
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
Crisis-Driven Exposure Drivers
Economic Obstaclesto Growth in 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.
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
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
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
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
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
State & Local Government Finances
in Dire StraightsLarge, Long-Term Cuts Necessary to
Align Spending with ShrinkingTax Revenues
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.
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.
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
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
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*
State-by-State Infrastructure
Spending & Job GainsBigger States Get More, Should Benefit
Commercial Insurers Exposure
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
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 $38,101,898,173
Sources: USA Today, 2/17/09; House Transportation and Infrastructure Committee; the Associated Press.
Infrastructure Stimulus Spending By State: Top 25 States ($ 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 $38.1B, allocated
largely by population size.
Infrastructure Stimulus Spending By State: Bottom 25 States ($ 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
Expected Number of Jobs Gained or
Preserved by Stimulus Spending
Larger States = More JobsWorkers Comp Benefits
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.
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)
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
GREEN SHOOTS
Is the RecessionNearing an End?
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.
49
11 Industries for the Next 10 Years: Insurance Solutions Needed
GovernmentEducation
Health CareEnergy (Traditional)Alternative Energy
AgricultureNatural Resources
EnvironmentalTechnology
Light ManufacturingExport Oriented Industries
Inflation Trends: Concerns Over
Stimulus Spending and Monetary Policy
Mounting Pressure on Claim Cost Severities?
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.
-$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.
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
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.
Key Threats Facing Insurers Amid
Financial CrisisChallenges for the
Next 5-8 Years
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).
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.
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
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???
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
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
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
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
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
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
Shifting Legal Liability & Tort
EnvironmentIs the Tort Pendulum
Swinging Against Insurers?
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
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
FINANCIAL STRENGTH &
RATINGSIndustry Has Weathered
the Storms Well
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
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
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
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
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.
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
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%
Critical Differences Between P/C
Insurers and BanksSuperior Risk Management Model
& Low Leverage Makea Big Difference
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
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
Regulatory Reform Obama Administration’s Plan
for Reforming Financial Services Industry Regulation
Will Impact Insurers
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.
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)
P/C INSURANCE FINANCIAL
PERFORMANCEA Resilient Industry in
Challenging Times
Profitability
Historically Volatile
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
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*
-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
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
Underwriting Trends
Financial Crisis Does Not Directly Impact Underwriting
Performance: Cycle, Catastrophes Were 2008’s Drivers
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
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%
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.
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
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
P/C Premium Growth
Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy
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
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*
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*
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
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%
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
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
Merger & Acquisition
Barriers to Consolidation Will Diminish in 2010
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%
Capital/Policyholder Surplus (US)
Shrinkage, but Not Enough to
Trigger Hard Market
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
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.
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.
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
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
-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 a Principle Source of Declining
Profitability
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
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
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.
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
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
Scale and Scope of the Financial Crisis on
Global (Re) Insurance Markets
Significant but Manageable Impacts
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.
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*
$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
Catastrophic Loss Catastrophe Losses Trends
Are Trending Adversely
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
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
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
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
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
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
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
130
Insurance Information Institute On-Line
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130