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Personal Lines P-C I M k tInsurance Markets:
Trends, Challenges & Opportunitiesfor 2012 & Beyond
I I f ti I tit tInsurance Information InstituteDecember 1, 2011
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦ [email protected] ♦ www.iii.org
Presentation OutlinePersonal Lines Growth Overview
Auto, Home: US and by StateAverage Premium/Expenditures
Personal Lines Growth DriversExposure, Pricing Factors
Personal Lines Profitability AnalysisCatastrophe Loss Trends: US & Global ImpactsCatastrophe Loss Trends: US & Global ImpactsReinsurance Market Overview & OutlookCyclical Drivers in Personal Lines
Loss as a Cyclical Driver yPrivate Passenger Auto PerformanceDistribution TrendsP/C Financial Overview & Outlook: The Role of Cyclicality
ProfitabilityProfitabilityPremium GrowthCapital, Capacity and Financial StrengthUnderwriting PerformanceInvestment Performance
2
Financial Crisis, Recession & Recovery: P/C Insurer ImpactsRegulatory Environment “Report Card”Q&A
Personal Lines Growth Analysis
Growth Trajectories Differ jSubstantially by Line, by
State and Over Time3
State and Over Time
Distribution of Direct Premiums Written by Segment/Line, 2010
Distribution Facts 2010
Personal/Commercial lines split has been about 50/50 for many years; Personal Lines overtook Commercial Linesy ;Commercial Lines in 2010
Pvt. Passenger Auto is by far the largest line of insurance
$226.8B/49%
Homeowners$68.2B/15%
and is currently the most important source of industry profits
Billi f ddi i l d ll i
Pvt. Pass Auto$165.0B/36%
Billions of additional dollars in homeowners insurance premiums are written by state-run residual market plans
4Sources: A.M. Best; Insurance Information Institute research.
Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2013F
Private Passenger Auto
While homeowners insurance has grown faster than auto over the past decade, auto is
generally more profitable
14.5%
9 2%
15.3%
11%
13%
15% HomeownersAll Lines
Average 2000-2010Auto = 2.8
Home = 6.4%9.2%6.9% 7.0%
6.4%5.6%
2 2%
5.7%4.5%3.6%
2 5%5 0%5%
7%
9% All Lines = 3.6%
2.7%2.6%2.2%1.4%
-0.9%0.9%
2.2% 2.5%
0.2%
5.0%
-1%
1%
3%
-4.9%
-5%
-3%
00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F
5Sources: A.M. Best (historical); Insurance Information Institute (2011F-2013F).
Private Passenger Auto InsuranceNet Written Premium, 2000–2010$ Billion
$159 1 $ $158 9$160 2$159 6$170
$180
$139.7
$151.2
$159.1 $158.0 $156.6 $158.9$160.2$159.6$157.3
$140
$150
$160
PP Auto premiums written have b b i ll fl t i t
$119.7
$128.0
$120
$130
$140 been basically flat in recent years to the weak economy impacting
new vehicle sales, car choice, and increased price sensitivity among
th h th i
$100
$110
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
consumers, though growth is returning to the market
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: A.M. Best; Insurance Information Institute.
Commercial Auto InsuranceNet Written Premium, 2000–2010$ Billion
$25 4 $25 5$26.6 $26.7 $26.7$27
$29
$21.8
$24.6$25.4 $25.5
$23.7
$21.8$23
$25
In contrast to flat PP Auto NPW$19.5
$20.9
$19
$21In contrast to flat PP Auto NPW, Commercial auto premiums are down 22.0% since 2005 due to
soft market conditions in commercial lines and negative
$15
$17
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
commercial lines and negative exposure trends
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: A.M. Best; Insurance Information Institute.
Percent Change in DPW: Pvt. Pass. Auto by State, 2005-2010
18
Top 25 States15
.814
.6114
1618
Texas was the fastest growing state between
2005 and 2010
12.1
10.9
9.9
8.6
8.6 110
12
hang
e (%
)
8 8 8. 7.6
7.0
6.0
6.0
5.9
5.8
5.8
5.7
4.5
4.1
4.1 .8 5 5 3
68
Pece
nt c
h
4 4 3 3.5
3.5
3.3
3.1
3.0
024
8
0
TX UT
OK LA WY
NM WA
AK
SC MT
ND KS WI
NC ID OR DE
MS
MO TN IA AL
GA
SD AR
Sources: SNL Financial LC.; Insurance Information Institute.
Percent Change in DPW: Pvt. Pass. Auto by State, 2005-2010
5
Bottom 25 States2.
72.
42.
42.
01.
71.
61.
61.
50.
80.
60.
6 .8 .8 .0 1 6
0
5
-0 -0 -0 -1.
-1.
-1.6
-1.8
-2.1
-5.2
-5.9
-5.9
-6.8
-7.3
.610
-5
hang
e (%
)
--8
.-9
.9
-15
-10
Pece
nt c
h
Massachusetts saw the biggest drop in premiums written, due in large part to recent reforms that
-18.
7
-25
-20increased competition and lowered overall rate levels
9
-25
NV
DC KY
MD VA IL NJ
WV
NE FL CT IN PA CO NY AZ
CA HI
OH MI
MN VT RI
NH
ME
MA
Sources: SNL Financial LC.; Insurance Information Institute.
Homeowners InsuranceNet Written Premium, 2000–2010
$65
$ Billions
$52 2$54.6 $54.9
$60.4$57.2
$55.7$55
$60
$65
$45.8
$49.5$52.2
$45
$50
$55
Homeowners insurance NWP continues to i ( 86 5% 2000 2010) d it
$32 4
$40.0
$35.2$35
$40
$45 rise (up 86.5% 2000-2010) despite very little unit growth in recent years. Reasons
include rate increases, especially in coastal zones, ITV endorsements (e.g.,
“i fl ti d ”) d i l ti d d$32.4
$30
$
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
“inflation guards”), and inelastic demand
10Sources: A.M. Best; Insurance Information Institute.
Average Premiums For Home InsuranceBy State, 2008 (1)
$1,4
60
390$1,600
$
$1,
$1,1
55
$1,0
48
$1,0
26
$983
$980
$980 26 16 11 97 2 6 5 5 2$1 000
$1,200$1,400
$ $ $ $9 $91
$91
$89
$862
$856
$845
$845
$842
$814
$808
$791
$789
$788
$788
$749
$721
$715
$600$800
$1,000
$200$400
$0
TX (2
)
FL (3
)
LA OK
MA
NY
CT
MS
DC KS
CA
(4)
RI
HI
AK AL
MN
CO NE
ND US
SC AR
MO GA
MT MI
11
(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. (2) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms. (3) Florida data exclude policies written by Citizens Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly of incomparable with other states. (4) California data were provided by the California Department of Insurance.Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.
Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.
Average Premiums For Home InsuranceBy State, 2008 (1) (con’t)
03 92 92 1 3 6
$800
$70
$69
$69
$69
$68 3
$676
$658
$650
$647
$638
$637
$628
$628
$612
$609
$604
$601
$586
$572
$565
$535
$503
71
$600
$
$47
$439
$432
$387
$400
$200
$0
NM NV
TN NJ
NC
WY IN VT NH
WV
MD AZ IL IA SD VA KY PA ME
OH DE WI
WA
OR UT ID
12
(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.
Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.
Personal Lines Growth Drivers
Rate is Presently a Bigger y ggDriver than Exposure
13
Monthly Change* in Auto Insurance Prices, January 2005 - October 2011
(Percent Changefrom same month,prior year)
% % % % 4% % %
6%
Auto Insurance Price Increases Have Averaged 5.1% in 2010 over 2009, After
Averaging 4.5% in 2009 over 2008.
Pricing weakened materially in 2011 and
growth now lags homeowners
% % 3.8% 4.
0%4.
0% 4.3% 4.4% 4.
6%4.
6% 4.7%
4.6%
4.6%
4.6%
4.6%
4.6% 4.7%
4.7% 4.
9%5.
3 %5.
3%5.
3%5.
1% 5.3 %
5.1%
5.1% 5.
45.
3%5.
3%4.
5%4.
2%4.
0%3.
8%3.
8%.7
%
%4%
5%PPA Auto, like most p/c lines, exhibits
strong cyclicality in pricing. Prices rose from 2000 to late 2005, were flat/falling
3.4%
3.3%
3.0%
2.9%
2.4%
2.2%
2.0%
.9%
% %2.
6%2.
6% 2.7% 3.
0% 3.1% 3.
4 %3 3 3 3
3.3% 3.4 %
3.3%
2.9%
2%
3%
4%Underwriting
performance remained strong even when prices were flat or
from 2000 to late 2005, were flat/falling in 2006 and 2007 before beginning to
rise gain in 2008.
11.
3%0.
6% 0.9%
0.5%
0.2% 0.
4%0.
4% 0.5%
0.3%
0.2%
0.2%
1.0%
1.6 %
1.1%
0.8%
0.7% 0.8%
0.6%
0.4%
0.3% 0.
6%0.
6%0.
4%0.
1% 0.2% 0.
5%0.
9% 1.1% 1.
4% 1.7
0.9%
1%
2% pfalling due to
improvements in underlying frequency and severity trends
-0.2
%
0
-1%
0%
an 0
5eb
05
ar 0
5pr
05
ay 0
5un
05
ul 0
5g
0 5ep
05
ct 0
5ov
05
ec 0
5an
06
eb 0
6ar
06
pr 0
6ay
06
un 0
6ul
06
g 06
ep 0
6ct
06
ov 0
6ec
06
an 0
7eb
07
ar 0
7pr
07
ay 0
7un
07
ul 0
7g
07ep
07
ct 0
7ov
07
ec 0
7an
08
eb 0
8ar
08
pr 0
8ay
08
n 0
8ul
08
g 08
ep 0
8ct
08
ov 0
8ec
08
an 0
9eb
09
ar 0
9pr
09
ay 0
9un
09
ul 0
9g
09ep
09
ct 0
9ov
09
ec 0
9an
10
eb 1
0ar
10
pr 1
0ay
10
un 1
0ul
10
g 10
ep 1
0ct
10
ov 1
0ec
10
an 1
1eb
11
ar 1
1pr
11
ay 1
1un
11
ul 1
1g
11ep
11
ct 1
1
14
*Percentage change from same month in prior year, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute
Ja Fe Ma
Ap Ma Ju J Au S e Oc
No
De Ja Fe Ma
Ap Ma Ju J Au Se Oc
No
De Ja Fe Ma
Ap Ma Ju J Au Se Oc
No
De Ja Fe Ma
Ap Ma
Jun J Au Se Oc
No
De Ja Fe Ma
Ap Ma Ju J Au S e Oc
No
De Ja Fe Ma
Ap Ma Ju J Au Se Oc
No
De Ja Fe Ma
Ap Ma Ju J Au Se Oc
Monthly Change* in Auto Insurance Prices, 1991–2011*,
10%Cyclical peaks in PP Auto tend to occur
approximately every 10
6%
8%
pp y yyears (early 1990s, early
2000s and likely the early 2010s)
Pricing peak occurred in 2010
4%
6%
2% “Hard” markets tend to occur
during
-2%
0%g
recessionary periods
15
*Percentage change from same month in prior year; through October 2011; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Average Expenditures on Auto Insurance
$950The average expenditure on auto insurance is
lower today than it was in 2004
$830 $842 $831$816 $806
$824$850
$900
$705$726
$786$816
$795 $789$806
$703$750
$800
$651$668
$691$705
$690$685$703
$650
$700
$60094 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* 10*
Countrywide Auto Insurance Expenditures Decreased
16
Countrywide Auto Insurance Expenditures Decreased0.8% in 2008 and Increased 2.2% in 2009 (est.) and 2010 (est.)
* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.
Average Expenditures For Auto InsuranceBy State, 2008
126
05 81 5 4$1 200 $1,1
$1,1
$1,0
8
$1,0
55
$1,0
44
$1,0
07
$986
$970
$950
$922
$907
$904
$903
$858
$854
$840
817
816
808
89 76 5 1
$1,000
$1,200
$ $ $ $8 $8 $8 $78
$77
$76
$751
$729
$728
$727
$600
$800
$200
$400
$0
$200
DC LA NJ FL NY
DE RI
NV
CT
MD MI
AK
MA AZ
TX WA
PA HI
WV
US CA
GA
SC CO
NM NH
17
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle. Source: © 2010 National Association of Insurance Commissioners.
Average Expenditures For Auto InsuranceBy State, 2008 (con’t)
7$800
$727
$720
$709
$699
$698
$667
$667
$663
$663
$657
$654
$653
$653
$641
$632
$617
$612
$600
$595
$581
$576
$562
547
20 19 3$600
$800
$ $5
$52
$51
$503
$400
$600
$200
$0
OR IL UT
KY
MN
MT AL
OK VA MO
MS VT AR
TN WY
OH IN ME
NC WI
KS ID NE
SD IA ND
18
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle. Source: © 2010 National Association of Insurance Commissioners.
Auto/Light Truck Sales, 1999-2022F
1.57.8
.419
(Millions of Units) New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2011-12 is
still far below 1999-2007 average f 17 illi it b t
16.9
16.5
16.1
1 4.7
15.1 15.4
15.5
15.4
16.9
16.617
.1171 717.
15161718 of 17 million units, but a
recovery is underway.
13.2
11.6 12
.7 13.5 14
. 1
12131415
Job growth and improved
10.4 1
9101112 g p
credit market conditions will boost auto sales in
2011 and beyond
99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F 16F 17F 18-22F
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point,
19Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 11/11); Insurance Information Institute.
g ,Bolstering the Auto Insurer Growth and the Manufacturing Sector.
Number of Insured Vehicles in the US, 2000-2009*
6 85.6
187.
1
86.8193
6 68.8 17
3.1
175.
9 180.
6
181.
6 18 1 1
173
183
159.
9 164.
6 1
153
163
(mill
ions
)
143
153
1332000 2001 2002 2003 2004 2005 2006 2007 2008 2009
The Number of Insured Passenger Vehicles Stopped Growing
20
*Latest available as of Nov. 2011.Source: Automobile Insurance Plans Service Office.
The Number of Insured Passenger Vehicles Stopped Growing During the Economic Downturn. Growth Has Likely Returned.
Do Changes in Miles Driven AffectAuto Collision Claim Frequency?
C lli i Cl i F
Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100
7.00
6.81 6.80 6.78
6.917.0
3000
3100
Collision Claim FrequencyBillions of Vehicle Miles
) ( )
6.596.65
6.326.5
m F
req
2800
2900
3000
s Dr
ivenPeople are
driving less in 2011 (-1 3% Sept
6.025.94
5.856.0
Paid
Cla
im
2600
2700
2800
Billi
ons
of M
iles2011 (-1.3% Sept.
2011 vs, Sept. 2010), and
frequency is flat
5.71 5.705.62 5.60 5.62
5.5 2400
2500
2600
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 2nd Qtr. 2011, published Sep. 30, 2011 and earlier reports. *2011 ISO figure is for 12 months ending 6/30/2011; FHA data is for 12 months ending Sep. 2011.
Auto Insurance: Claim Frequency Impacts of Energy Crisis/Recession of 1973/74
Oct. 17, 1973: Arab
oil March 17,oil embargo begins
Frequency
March 17, 1974: Arab oil states announce
end toFrequency Impacts
Collision: -7.7%PD: -9.5%BI: 13 3%
end to embargo
Frequency b tBI: -13.3%
Driving Stats
began to rebound almost
immediately ft thDriving Stats
Gas prices rose 35-40%Miles driven fell 6 7% in
after the embargo
ended
Source: ISO, US DOT.
fell 6.7% in 1974
Auto Insurance: Claim Severity Impacts of Energy Crisis/Recession of 1973/74
Oct. 17, 1973: Arab
oil
March 17, 1974: Arab oil states
Severity
oil embargo begins
oil states announce
end to embargo
Severity Impacts
Collision: -7.5%
PD: +15 9%
Collision severity began to reboundPD: +15.9%
BI: N/A*
Driving Stats
rebound almost
immediately after the embargoDriving Stats
Gas prices rose 35-40%Miles driven fell 6 7% in
embargo ended; PD
accelerated as inflation
rose; No
Source: ISO.
fell 6.7% in 1974
rose; No discernable
trend change in BI.
New Private Housing Starts, 1990-2022F
(Millions of Units)
1 1.85 1.
96 2.07
.80
1 9
2.1
New home starts plunged
72% from 2005-2009; A
t l
1.48
1.47 1.
62 1.64
1.57 1.60 1.
7 1 11.
36
1.34
.23 1.32 1.38 1.42
1.351.
461.
2920191 3
1.5
1.7
1.9 net annual decline of 1.49 million units, lowest since
records began in 1959
0.91
5 59 59 0.69
0.91
1.1.1.
011.
0.9
1.1
1.3 in 1959
The plunge and lack of recovery in homebuildingJob growth,
improved credit
0.55 0.5
0.5 0
0.3
0.5
0.7
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F17F18
The plunge and lack of recovery in homebuilding and in construction in general is holding back
homeowners and payroll exposure growth
improved credit market conditions and demographics
will eventually boost home construction
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F17F18-22F
Little Exposure Growth Likely for Homeowners Insurers Until 2014.
24Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 11/11); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety
Average Square Footage of Completed New Homes in U.S., 1973-2011*
4 469
2,52
12,
519
38 2,51
82,700Square Ft The average size of completed new
homes often falls in recessions (yellow bars), but historically bounces back in expansions
5 5 0 5 20 50 2,19
02,
223
2,26
62,
324
2,32
02,
330
2,34
9 2,43 2,
4 2 22,
432,
389 2
2,300
2,500p
0 0 5 825 1,90
5 1,99
52,
035
2,08
02,
075
2,09
52,
095
2,10
02,
095
2,12 2,
1 2
1 900
2,100
1,66
01,
695
1,64
51,
700
1,72
01,
755
1,76
01,
740
1,72
01,
710
1,72
51,
780
1,78 1,
8
1,700
1,900The trend toward building larger homes reversed
from2008 - 2010, affecting exposure growth beyond the decline in number of units built.
Rising again in 2011.
1,500
73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
The average size of completed new homes fell by 147 square feet (5 75%) from
*2011 figure is weighted average square feet of completed homes in first three quarters of 2011Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.
25
The average size of completed new homes fell by 147 square feet (5.75%) from 2008-2010. This was the largest recession-based drop in nearly four decades.
Value* of Construction Put In Place
$1,200
Nonresidential Public Residential Nonresidential PrivateBillionsTotal Construction Spending (Annual Rate)
$402
.0
413.
907
.089
.392
.0 2.6
1.5
8.4
2.6
2.8
2.6
7.2 4.8
5.6 .2 .4 1 1 6 3 3 3 4 1
$900
$ , g ( )Dec 2007: $1,109.0BNov 2010: $ 810.2 B
$410
.3
$321
.830
5.5
293.
727
7.3
265.
926
0.3
249.
124
5.3
247.
025
7.4
251.
628
0.1
273.
226
6.2
269.
238
.925
8.3
273.
726
9.6
268.
524
7.7
233.
223
6.2
245.
024
6.8
$ 4 $4 $38
$39
$40
$40
$39
$38 2
$372
$372
$347
$33
$32 5
$323
$316
$275
.9$2
75. 1
$274
.$2
70.
$269
.$2
52. 3
$253
.3$2
58. 3
$256
.4$2
56.1
$600
$289
.5
$308
.9$2
99.6
$294
.2$2
97.8
$301
.3$3
09.6
$310
.8$3
17.3
$314
.8$3
11.9
$311
.7$3
09.0
$301
.9$3
00.3
$298
.6$2
82.4
$290
.7$2
95.3
$294
.6$2
98.2
$298
.7$3
04.9
$306
.6$3
05.4
$307
.4
$ $ $ 2 $2 $2 $2 $2 $2 $2 $2 $2 $ $ 2 $2 $2 $23
$2 $2 $2 $2 $2 $2 $2 $2 $2
$0
$300
Since the recession started,private residential and nonresidential
$0
Dec '07
Nov '08
Dec '08
Jan '09
Feb '09Mar '0
9Apr '0
9May '0
9Ju
n '09Ju
l '09
Aug '09
Sep '09
Oct '09
Nov '09
Dec '09
Jan '10
Feb '10Mar '1
0Apr '1
0May '1
0Ju
n '10Ju
l '10
Aug '10
Sep '10
Oct '10
Nov '10
26*seasonally adjusted annual rate Source: http://www.census.gov/const/C30/release.pdf
Since the recession started,private residential and nonresidential construction together are down $300 billion (annual rate) – a drop of 38%. This affects property, surety, and other construction-related exposures.
State Population Growth Rate Projections, 2010-2020*
8.3% .4%
30%
35%
Projected Population Growth
Highest Growth Rate States
Lowest Growth Rate States
28 27
21.6
%
6.2%
5.2% .8%
.6%
.5%
6% % % %
20%
25%
30%U.S. overall:
+8.7%
1 15 14 14.
14.
13.6
13.1
12.4
%
11.3
%
8.7%
5% 5% 3% % 0% 9% % % % %5%
10%
15%
2.5
2.5
2.3
2.1
2.0
1.9
1.6
0.7%
0.6%
0.4%
-1.0
%
-1.5
%-5%
0%
5%
The Mountain West region is projected to grow the most from now to 2020 (up
- -
-10%
NV AZ FL TX UT ID NC
DE
WA
GA
OR
VA
US IL
MS LA WY
SD NE
PA NY
OH IA ND
WV
27*based on 2000 census. Source: http://www.census.gov/population/www/projections/projectionsagesex.html Table 7
The Mountain West region is projected to grow the most from now to 2020 (up 17.6%), followed by the South Atlantic (up 14.5%) and Pacific (up 11.2%).The Mid-Atlantic is projected to be the slowest-growing region (up 1.9%).
FLORIDA CASE STUDY: Weak Population Growth, Slow Household Formation Hurt Personal Lines Exposure Gains
Change in FL Population
Thousands
Household formation slowed
264.3250
300
Change in FL PopulationChange in No. Households faster than population
growth, suggesting people are consolidating
households as the state’s foreclosure crisis continues
108 1135.6
117.2 110 0128.8150
200
foreclosure crisis continues
108.1
68.2
28.2 38.7 50.0
99.7117.2 110.0
26.050
100
02007 2008 2009 2010 2011F 2012F
FL’s Construction Sector, One of Most Critical of FL’s Growth
28
FL s Construction Sector, One of Most Critical of FL s Growth Engines, Remains in a Deep Recession
Source: Dept. of Commerce (historical); Wells Fargo Securities (FL forecasts) as of September 2011; Insurance Information Institute.
FL Housing Permits: Multi-Family Unit Growth Poised to Soar, Single-Family Weak
Single-Family Permits
Annual Change, 2007 through 2012F Single-family home construction in 2012 is
expected to be barely half what
73,20070,000
80,000
Single Family PermitsMulti-Family Permits
p yit was pre-crisis. Multi-family dwelling great is expected to rise by 68% in 2012 as people
shun homeownership or it i b d th i
32,5
26
55 0
39,788
27 515 30,873 33,00037,50040,000
50,000
60,000 remains beyond their means
3
22,8
7,86
3
11,0
00 18,5
0 027,515 30,873
8,60
110,000
20,000
30,000
02007 2008 2009 2010 2011F 2012F
FL’s Construction Sector, One of Most Critical of FL’s Growth
29
FL s Construction Sector, One of Most Critical of FL s Growth Engines, Remains in a Deep Recession
Source: Dept. of Commerce (historical); Wells Fargo Securities (FL forecasts) as of September 2011; Insurance Information Institute.
Average Premium forHome Insurance Policies**
$950
Consumer efforts to economize (increased deductibles, more shopping, etc.) and
adverse exposure trends are depressing the average homeowners insurance premium
$822$791 $799 $807$804
$764$800
$850
$900
$668
$764$729
$6 0
$700
$750
$
$508$536
$593
$550
$600
$650
$508$500
00 01 02 03 04 05 06 07 08 09* 10*
30
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.
Percent Change in DPW: Homeowners, by State, 2005-2010
60
Top 25 States51
.546
.7
45505560 Hawaii was the fastest
growing state between 2005 and 2010
36.8
36.4
36.4
35.5
35.3
35.1
33.4
32.2
32.1
32.1
32.0
31.5
31.2
29.9
29.6
29.6
29.2
28.8
28.8
28.6
28.2
7.2
6.730
354045
hang
e (%
)
2 2 2 2 2 27 26
15202530
Pece
nt c
h
05
1015
31
0
HI
LA ID MO DE AR
NM SC MS
NC RI
UT
GA AL
WY
ND TN KY
CT
OK
MN
MT
ME
NH NY
Sources: SNL Financial LC.; Insurance Information Institute.
Percent Change in DPW: Homeowners, by State, 2005-2010
30
Bottom 25 States26
.125
.625
.024
.524
.324
.023
.923
.623
.222
.422
.422
.222
.11.
1 .8 3
25
30
2 2 21 20 20.3
19.2
18.9
18.1
16.2
4.2
215
20
hang
e (%
)
112
.29.
68.
47.
010
15
Pece
nt c
h
Michigan was the slowest growing state
bet een 2005 and 2010 70.
0
0
5between 2005 and 2010
32
0
NJ
KS VA MA
WA FL TX IL WI IA O
R SD CO IN NE
OH VT AK
DC PA MD
WV AZ
NV
CA MI
Sources: SNL Financial LC.; Insurance Information Institute.
U.S. Residual Market Exposure to Loss($ Billions)
$757.9$771.9$703 0$800
$900($ Billions)
Katrina $
$656.7 $696.4$703.0
$600
$700
$
4 Florida Hurricanes
Katrina, Rita and Wilma
$281.8
$430.5$372.3
$292.0$244 2
$419.5
$300
$400
$500Hurricane Andrew
$54.7
$150.0
$244.2$221.3
$100
$200
$
$01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
In the 21-year period from 1990 through 2010, total exposure to loss in the
33Source: PIPSO; Insurance Information Institute (I.I.I.).
residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7 billion in 1990 to $757.9 billion in 2010.
U.S. Residual Market: Total Policies In-Force (1990-2010) (000)
2,841.42 621 3
2,780.62,840.43,000
(000)
4 Florida Hurricanes
Katrina, Rita and Wilma
1 785 0 1 741 7
2,479.42,621.3
2,209.32,203.9
2,000
2,500 Hurricane Andrew
931 6
1,785.0
1,458.1
1,196.5
1,741.7
1,319.7
1,642.31,500
,
931.6
500
1,000
01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: PIPSO; Insurance Information Institute
In the 21-year period between 1990 and 2010, the total number of policies in-force in the residual market (FAIR & Beach/Windstorm) Plans has more than tripled.
Hurricanes, Insolvencies and Insured Losses, 1984-2011Insured Loss ($ Bill, 2009 Dollars) No. of Insolvent Insurers
35
Sources: Florida TaxWatch, Risk & Reform: A Florida TaxWatch Analysis of Florida’s Property Insurance System,November 2011, citing the Insurance Information Institute and the Florida Hurricane Fact File.
Personal Lines Profitability Analysis
Significant Variability Over g yTime and Across States
36
Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2009*
30%
US All Lines US Home US PP Auto(Percent)
0%
10%
20%
30%
-20%
-10%
Average RNW: 1990-2009*
-50%
-40%
-30% All P-C Lines: 8.0% PP Auto: 9.1%
Homeowners: 0.4%**
Hurricane Andrew
-60%90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole.
37
*Latest available.**Excluding 1992, the Hurricane Andrew, produces a homeowners RNW of 3.3%.Sources: NAIC.
y yHomeowners Volatility is Associated Primarily With Coastal Exposure Issues
Return on Net Worth: All P-C Lines vs. Pvt. Pass. Auto, 1990-2009*
16%
US All Lines US PP Auto(Percent)
10%
12%
14%
4%
6%
8%
0%
2%
4% Average RNW: 1990-2009*All P-C Lines: 8.0%
PP Auto: 9.1%-2%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13
38*Latest available. Sources: NAIC.
y yof the 20 Years from 1990-2009 (Inclusive)
Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2009*
25%
US All Lines US Home(Percent)
Average RNW: 1990-2009*
15%
20%Average RNW: 1990 2009
All P-C Lines: 8.0% Homeowners: 3.3%**
5%
10%
-5%
0%
-10%90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Homeowners Insurance Is Considerably More Volatile than the Market Overall
39
*Latest available.**Excluding Hurricane Andrew (1992); including 1992 produces an average homeowners RNW of 0.4%.Sources: NAIC.
yDue to Coastal Exposure and Interior Wind/Hail Events
Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2000-2009*)
Top 25 States(Percent)
20.1
18.2
182022 Maine was the most profitable state
for auto insurers from 2000-2009
14.0
13.3
12.9
11.9
11.6
11.3
11.2
11.1
11.0
0.8
0.6
0.4
0.4
0.3
0.3
0.2
0.212
1416
PPA
1 1 1 1 1 10 10 10 10 10 109.
08.
98.
98.
88.
78.
5
68
1012
RN
W P
0246
40
0ME HI VT DC ID NH SD MN OH NM CT RI KS IA WY ND VA AZ OR AL CA WI UT IN CO
*Latest available.Sources: NAIC.
Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2000-2009*)
10
g ( )
Michigan was the least fit bl t t f
(Percent) Bottom 25 States8.
58.
38.
17.
97.
87.
77.
77.
67.
67.
37.
27.
27.
17.
07.
06.
86.
76.
7 .4 1
8
10 profitable state for auto insurers from
2000-2009
6 6 6 6. 6.1
5.5
4.9
4.7
3.6
4
6
Aut
o
32.
90.
82
4
RN
W
-0.4
-2
0
41
2
NY
NE
WA
SC AK
MD TN IL OK GA NJ
U.S
.M
O MA
MT AR
NC PA WV
TX KY
DE
MS NV FL LA MI
*Latest avaiiable.Sources: NAIC
Return on Net Worth: Homeowners Insurance, 10-Year Average (2000-2009*)
050 Hawaii was the most profitable
(Percent) Top 25 States45
.0
404550 Hawaii was the most profitable
state for home insurers from 2000-2009 due to the absence
of hurricanes during this period
.8 1 0 0253035
W H
O
20.
20.1
20.0
18.7
18.6
18.5
17.4
17.2
15.7
15.5
15.2
14.7
14.4
14.3
13.9
13.7
13.5
12.0
11.9
11.9
11.2
19.0
18.0
14.0
152025
RN
W
1
05
10
42
0HI SC RI DC CT AK UT NY NV MA DE AZ OR NC CA MT WY PA WA NJ CO NM ME VT ID
*Latest available.Sources: NAIC.
Return on Net Worth: Homeowners Insurance, 10-Year Average (2000-2009*)
0.3
3015
Bottom 25 States(Percent)10 9.3
5.3
5.1
4.7
4.3
2.2
1.6
0.5
8.0
1.0
0.4
05
1015
-4.9
-5.5
-6.7
-6.9
-7.1
-7.9 -8.6
-10.
8-1
1.8
14.4
-3.7-2.3
-1.6
20-15-10-5
RN
W H
O
Hurricanes Katrina and Rita made
.4
-1-2
9.0
-35-30-25-20 Hurricanes Katrina and Rita made
Louisiana and Mississippi the least profitable states for home insurers
from 2000-2009
-32
-4035
VAMD NH WV MIU.S.
KS SD IL IA FL WIOK TX OH TN IN NE AR GA AL KY ND MO MN MS LA
43
*Latest available.Sources: NAIC
Global Catastrophe Loss pDevelopments and Trends
2011 Will Rewrite Catastrophe Loss d I Hi tand Insurance History
But Will Losses Turn the Market?
44
Global Catastrophe Loss Summary: First Half 2011
2011 Is Already (as of June 30) the Highest Loss Year on Record GloballyExtraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of lossand tornadoes are the primary causes of loss
$260 Billion in Economic Losses GloballyNew record for the first six months, exceeding the previous record of $220B in 2005
Economy is more resilient than most pundits presume
$55 Billion in Insured Losses GloballyMore than double the first half 2010 amount
Over 4 times the 10-year average
$50 Billion in Economic Losses in the US (as of Oct. 31)More than double through same period in 2010
~$25 Billion in Insured Losses in the US Arising from 100+ CAT EventsRepresents close to a tripling through same period in 2010
45
Natural Loss Events,January – September 2011
World Map
46Source: MR NatCatSERVICE
Worldwide Natural Disasters 2011 Significant Natural Disasters (January – September only)
47Source: MR NatCatSERVICE
Worldwide Natural Disasters 2011% Distribution of Insured Losses Per Continent (January – June only)
Insured losses 2011 (January – June only): US$ 60bnInsured losses 2011 (January – June only): US$ 60bn
49%49%29% <1%
<1%
<1%
21%Continent Insured losses [US$ m] in 2011
Jan - June Africa minor America 17,800A i 30 080
48
Asia 30,080Australia/Oceania 12,900
Europe 100Source: MR NatCatSERVICE
Worldwide Natural Disasters, 1980-2011% Distribution of Insured Losses Per Continent (January – June only)
Insured losses 1980 - 2011 (January – June only): US$ 389bn Insured losses 1980 - 2011 (January – June only): US$ 389bn
12%58% 21%
12%
2%
<1%
6%Continent Insured losses [US$ m] Jan – June onlyAfrica 1,000America 237,200Asia 45,100
6%
49
Asia 45,100Australia/Oceania 25,100
Europe 80,900
Source: MR NatCatSERVICE © 2011 Munich Re
Top 16 Most Costly World Insurance Losses, 1970-2011*
(Insured Losses, 2010 Dollars, $ Billions)
Taken as a single event the
3 of the top 15 most expensive
catastrophes in world
$72.3
$60$70$80
Taken as a single event, the Spring 2011 tornado and
thunderstorm season would likely become the 7th
history have occurred in the past 18 months
$20 5$20 8 $23 1$24.9$35.0
$30$40
$50$60 likely become the 7th
costliest event in global insurance history
$11.3$14.0 $14.9$16.3$20.5$20.8 $23.1
$10.0$9.3$9.0$8.0$8.0$7.8
$0$10$20$
Winter Chile Hugo Typhoon Charley New Rita Wilma Ivan Spring Ike NorthridgeWTC TerrorAndrew Japan KatrinaWinterStormDaria(1991)
ChileQuake(2010)
Hugo (1989)
TyphoonMirielle(1991)
Charley(2004)
NewZealandQuake(2011)
Rita (2005)
Wilma(2005)
Ivan (2004)
SpringTornadoes/
Storms(2011)
Ike (2008)
Northridge(1994)
WTC TerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)*
Katrina(2005)
50
*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.
Worldwide Natural Disasters,1980 – 2011*
600Number of Events There were 355 events
through the first 6 months of 2011
400
500
months of 2011
300
100
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Meteorological events Hydrological events Climatological eventsGeophysical events
*2011 figure is through June 30.Source: MR NatCatSERVICE 51
Meteorological events(Storm)
Hydrological events(Flood, mass movement)
Climatological events(Extreme temperature, drought, forest fire)
Geophysical events(Earthquake, tsunami, volcanic eruption)
Worldwide Natural Disasters 1980–2011,Overall and Insured Losses*
300
First Half 2011Overall Losses: $265 Bill
250
Insured Losses: $60 Bill
S$b
n 150
200
US
100
50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
52
Overall losses (in 2011 values) Insured losses (in 2011 values)
*2011 figure is through June 30.Source: MR NatCatSERVICE © 2011 Munich Re
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
U.S. Insured Catastrophe pLoss Update
2011 CAT Losses Already Greatly y yExceed All of 2010 and Will Become One of the Most Expensive Years on Record
53
p
US Insured Catastrophe Losses
$100
.0$120$100 Billion CAT Year is
Coming Eventually($ Billions)
$61.
9
$
$60
$80
$100 Record Tornado Losses Caused
2011 CAT Losses to Surge
2000s: A Decade of Disaster2000s: $193B (up 117%)
1990s: $89B
3 4 0.1
3
$26.
5
9 12.9 $2
7.5
2 7
$27.
1
0.6
13.6 $2
5.0
5 $22.
9
5 $16.
9
$20
$40
$60$8
.3
$7.4
$2.6 $1
0
$8.3
$4.6
$5.9 $1 $9.
$6. 7 $10
$1
$7.5
$2.7
$4.7
$5. 5 $
$0
$20
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??
2011 Will Become the 5th or 6th Most Expensive Year in History for Insured Catastrophe Losses in the US
54
*Estimate through Oct. 31, 2011.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.Sources: Property Claims Service/ISO; Insurance Information Institute.
Top 13 (14?) Most Costly Disastersin U.S. History
(Insured Losses, 2010 Dollars, $ Billions)**
$45.8
$40$45$50
Taken as a single event, the Spring 2011 tornado season
would likely become 5th costliest
$ $12 8$16.3 $17.5
$22.6 $23.1$20$25$30$35
yevent in US insurance history
$8.6$11.5 $12.8
$8.2$6.7$6.3$5.3$4.3$4.3
$0$5
$10$15
Irene Jeanne Frances Rita Hugo Ivan Charley Wilma Ike Spring NorthridgeAndrew9/11 AttackKatrinae e(2011)
Jea e(2004)
a ces(2004)
a(2005)
ugo(1989)
a(2004)
C a ey(2004)
a(2005)
e(2008)
Sp gTornadoes& Storms*
(2011)
o dge(1994)
d e(1992)
9/ ac(2001)
a a(2005)
55
*Losses will actually be broken down into several “events” as determined by PCS.**Hurricane Irene losses stated in 2011 dollars.Sources: PCS; Insurance Information Institute inflation adjustments.
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011:H1*
810
Avg. CAT Loss Component of theCombined Ratio
by Decade
Combined Ratio Points
8.8
5.9
4
8.1
6789
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31
0 0
3.0
1 .35
3.3
2.8 3.
62.
9
5.4
3.3
3.3
2.7
5.0
2.6 3.
35.
0
3.6
3456 1990s: 3.39
2000s: 3.52 2010s: 4.15*
0.4 1.
20.
4 0.8 1.
30.
3 0.4 0.
7 1.5
1.0
0.4
0.4 0.
71.
81.
10.
6 1.4 2.
01.
3 2.0
0.5
0.5 0.7 1.
2 2.1 2.
1.0 1.
6
1.6
21.
6
2
0.9
0.1
1.1
1.1
0.8
0123
0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 E
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
E
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
56
*Insurance Information Institute estimates for 2010 and 2011:H1Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.
Increased Sharply in Recent Decades
Natural Disasters in the United States, 1980 – 2011*Number of Events (Annual Totals 1980 – 2010 and First Half 2011)u be o e ts ( ua ota s 980 0 0 a d st a 0 )
300
There were 98 natural
200
250
There were 98 natural disaster events in the first
half of 2011
Num
ber
150
200
N
50
10037
8
Geophysical ClimatologicalMeteorological (storm)
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
51
2
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
*Through June 30.Source: MR NatCatSERVICE 57
U.S. Thunderstorm Loss Trends, 1980 – 2011*
Thunderstorm losses in the first half of 2011 totaled $16.4 billion, a new
annual record through just 6 months
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss
Average thunderstorm losses are up more
producers of large scale loss. 2008-2011 are the most expensive
years on record.
losses are up more than 8 fold since the
early 1980s
58*Through June 30, 2011.Source: Property Claims Service, MR NatCatSERVICE
U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals) vs. First Half 2011
Insured winter storm losses in 2011 totaled $1.4 billion
and are up 50% since 1980and are up 50% since 1980.
Source: Property Claims Service, MR NatCatSERVICE 59
U.S. Acreage Burned by Wildfires, 1980 – 2010 (Annual Totals) vs. First Half 2011
2011 could be a severe year for wildfire damage. Acresfor wildfire damage. Acres
burned through June 30 already exceed all of 2010.
Source: National Forest Service, MR NatCatSERVICE 60
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–2011:H11
2.4%
Fires (4), $9.0
Geological Events, $18.5
Wind/Hail/Flood (3), $12.7
Other (5), $0.6
0.2%3.4%4.9%
6.6%
Terrorism, $24.9
8.0%42.7%
Hurricanes & Tropical Storms, $160.5
Winter Storms, $30.0
Tornado share of CAT l i
31.8%
T d (2) $119 5
Wind losses are by far cause the most catastrophe losses,
if h i /TS
CAT losses is rising
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2 E l d
Tornadoes (2), $119.5 even if hurricanes/TS are excluded.
61
2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.
Number of Federal Disaster Declarations, 1953-2011*
193
90
100The number of federal
disaster declarations set a new record in 2011, with 93 d l ti th h N
There have been 2,043 federal disaster
declarations since 1953 The average
75
65
5669
6375
5981
60
70
80declarations through Nov.
13. It is no wonder that FEMA is broke!
1953. The average number of declarations
per year is 34 from 1953-2010, though that
few haven’t been recorded since 1995
5 5 29
48 46 4638
30 542
3427 28 31
38
4532
3632
44
5045 45
495
4852
43
30
40
50recorded since 1995.
1317 18 16 16
7 712 12
22 2025 25
11 1119
217 17
22 25 2315
24 21
2 223
11
10
20
30
0
53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011
*Through November 13, 2011.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.
Record in 2011
Federal Disasters Declarations by State, 1953 – Nov. 13, 2011: Highest 25 States
100
Over the past nearly 60 years,
Texas has had the
8678
0
8090
100
s
Texas has had the highest number of Federal Disaster
Declarations
7065 63
58 55 55 53 53 51 50 50 8 8 7 7 7 6506070
clar
atio
ns
5 5 4 4 47 47 47 46 45 45 44 42 40 39
304050
sast
er D
e
102030
Di
63
0TX CA OK NY FL LA AL KY AR MO IL MS TN IA MN KS NE PA WV OH VA WV ND NC IN
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
Federal Disasters Declarations by State, 1953 – Nov. 13, 2011: Lowest 25 States*
50Over the past nearly 60 years, Wyoming, Utah
39 3936 5 5
40
s
and Rhode Island had the fewest number of
Federal Disaster Declarations3 3 3
32 3227 27 26 26 25 25 24 3 3
30
ecla
ratio
ns
2 23 23 2220
17 16 16 15 141
20
isas
ter D
e
119 9 910
D
64
0ME SD GA AK WI VT NJ NH OR MA PR HI MI AZ ID NM MD MT NV CO CT SC DE DC RI UT WY
*Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
SPRING 2011 TORNADO &SPRING 2011 TORNADO & SEVERE STORM OUTBREAK
2011 Losses Are Putting Pressure on gUS P/C Insurance Markets
65
Number of Tornadoes and Related Deaths, 1990 – 2011*
6921,819 1,80
5
1 800
2,000 600Number of Tornadoes
Number of Deaths
Tornadoes have already claimed more than 500 lives
33 32
1,29
7
173
2 1,23
4
173
48
1,42
4
1,34
5
1 1,21
6 1,37
6
1,26
4
03 98
1,6
156 1,28
2
546
1,400
1,600
1,800
does
400
500
Num
1,13
1,13 1,1
1,08
2 1
1,1
1,1
1,07
1 1
941
1,10
1,09 1,
1
800
1,000
1,200
ber o
f Tor
nad
300
mber of D
eaThere were 1,805
200
400
600
Num
b
100
200
aths
,tornadoes recorded in the US by Oct. 13
0
200
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P0
Insurers Expect to Pay at Least $2 Billion Each for the April 2011
66
*2011 is preliminary data through October 13.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.
Insurers Expect to Pay at Least $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin
U.S. Tornado Count, 2005-2011*
There were 1,819 tornadoes i h US i 2011 h hin the US in 2011 through
Oct. 29, far above average, but well below 2008’srecord
D dl dDeadly and costly April/ May spike
67Source: http://www.spc.noaa.gov/wcm/ *Through October 29.
Insurers Making a Difference in Impacted Communities
Destroyed home in Tuscaloosa. Insurers will pay some 165 000will pay some 165,000
claims totaling $2 billion in the Tuscaloosa/
Birmingham areas alone.
P t ti f h kPresentation of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm
Source: Insurance Information Institute 68
Recovery Fund
Location of Tornadoes in the US, January 1—October 13, 2011
1 805 tornadoes1,805 tornadoes killed 546 people through Oct. 13, including at least 340 on April 26340 on April 26 mostly in the
Tuscaloosa area, and 130 in Joplin
on May 22on May 22
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 69
Location of Large Hail Reports in the US, January 1—October 13, 2011
There were 9,287 “Large Hail”
reports through Oct. 13, causing
extensive damage to homes,
businesses and vehicles
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 70
Location of Wind Damage Reports in the US, January 1—Oct. 13, 2011
There were 18,293 “Wind Damage” reports through Oct 13 causingOct. 13, causing
extensive damage to homes and,
businesses
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 71
Severe Weather Reports,January 1—October 13, 2011
There have been 29,385
severe weather reports through
Oct. 13; ;including 1,805
tornadoes; 9,287 “Large Hail” reportsHail reports
and 18,293 high wind events
72Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
Number of Severe Weather Reports in US, by Type: January 1—October 13, 2011
Tornadoes, 1,805 , 6%
Large Hail, 9,287 , 32%
Wind Damage,
18,293 , 62%
Tornadoes accounted for just 6% of all Severe Weather Reports through
O t b 13 b t18,293 , 62% October 13 but more than 500 deaths
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
Underwriting Trends:Cycle Catastrophes Are AmongCycle, Catastrophes Are Among
2011 and 2012 Drivers
74
P/C Insurance Industry Combined Ratio, 2001–2011:H1*
As Recently as 2001, Insurers Paid Out
Nearly $1 16 for Every
Relatively Low CAT L
Heavy Use of Reinsurance Lowered Net
Relatively Low CAT Losses, Reserve
Higher CAT
Losses, Shrinking ReserveNearly $1.16 for Every
$1 in Earned Premiums
Losses, Reserve Releases
Lowered Net Losses Reserve
Releases
Avg. CAT
Reserve Releases, Toll of Soft
Market
109 4
115.8120
Best Combined
Ratio Since 1949 (87 6)
Cyclical Deterioration
gLosses,
More Reserve Releases
99 3100.8
109.4
101.0100.8100.1
107.5110 1949 (87.6)
95.7
99.3
92.6
98.4
90
100
75
* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=110.5 Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-M&FG was 102.2).
902001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Underwriting Gain (Loss)1975–2011*
$35 Cumulative underwriting deficit f 1975 th h
($ Billions) Underwriting losses in
2011 will be much larger:
$5
$15
$25 from 1975 through 2010 is $455B
much larger: $24.1B
based on H1 data
$25
-$15
-$5
-$45
-$35
-$25
The industry recorded a $10.4B underwriting loss in 2010 compared
to $3 0B in 2009
Large Underwriting Losses Are NOT Sustainable
-$5575 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011*
to $3.0B in 2009
* Includes mortgage and financial guaranty insurers in all years. 2011 figure is actual H1 underwriting losses of $24.098 billion.Sources: A.M. Best, ISO; Insurance Information Institute.
in Current Investment Environment
P/C Reserve Development, 1992–2011E
23.2$25
$30
$B)
6
8 Impac
Prior Yr. ReserveDevelopment ($B)
Prior year reserve releases totaled
$8.8 billion in the first half of 2010 up
11.7 13.79.9
7.3$
$10
$15
$20
e R
elea
se ($
2
4
6 ct on Com
b
Impact onCombined Ratio
first half of 2010, up from $7.1 billion in
the first half of 2009
2.3
-2.1 -2.6-6 6
-4.1
1
6 7 -5$10
-$5
$0
$5
rYr.
Res
erve
-2
0
ined Ratio (
-8.3 -6.6-9.9 -9.8
-6.7-9.5
-14.6-16 -15-$20
-$15
-$10
2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 E E
Prio
r
-6
-4
(Points)
92 9 94 9 9 9 9 9 0 0 02 0 0 4 0 0 0 0 0
10E
11E
Reserve Releases Are Continuing Strong in 2010 But Should Begin to Taper Off in 2011
77
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. Sources: Barclay’s Capital; A.M. Best.
Number of Years with Underwriting Profits by Decade, 1920s–2000s
10
12Number of Years with Underwriting Profits
8
10
76
8
10
3
54
6
4
6
0 00
2
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
Underwriting 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
78
* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.
Recorded in the 25 Years from 1979 Through 2003
Performance by Segment:y gPersonal Lines
79
Homeowners Insurance Combined Ratio: 1990–2012F
8.4170
158
77140
150
160
113.
0
117.
7
113.
6
01.0 10
9.4
108.
2
111.
4 121.
7
109.
3
.2 4 00.3
6
116.
8
105.
7
106.
7 116.
0
108.
0118.
4
112.
7 121.
7
110
120
13010 98
.
94.4 10
88.9 95
. 6
80
90
100
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P12F
Homeowners Line Could Deteriorate in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected Due to
Local Catastrophe Loss Activity
Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P/12F).
Private Passenger Auto Combined Ratio: 1993–2012P
9.5
9
115
101.
7
101.
3
101.
3
101.
0
109
107.
9
104.
2
.4 .3 00.2
101.
3
101.
0
102.
0
103.
0
9.5 101.
1
103.
5
105
110
98.
94.3
95.1
95.5 98
. 19 9
90
95
100
80
85
90
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F
Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industrygg y
Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P/12F).
Cycle DriversCycle Drivers
The Role of Losses and Reserves in the Underwriting Cycle
82
PP Auto Liability: Loss and LAE vs. Net Premiums Written, 1990-2010
95
100
10%
12%Loss & LAE Ratio NPW Growth Historically, losses drive
premium
90
95
E R
atio
6%
8%
Chan
pgrowth (which
is primarily driven by rate)
80
85
Loss
+ L
AE
2%
4%
nge in NPW
75-2%
0%
70
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
-4%
While Premium Growth Decelerated, the Driver Was Primarily Lower
83Source: A.M. Best; Insurance Information Institute
, yLosses, Allowing Auto Insurers to Maintain String Margins
PP Auto Liability: % Change in NPW vs. % Change in Loss & LAE, 1990 - 2010
8 3%
10.3%9.8%10%
12% Average annual Net Written Premiums grew by 3.8% percent from 1990 – 2010
vs 3 0% for Loss and LAE
Premium growth decelerated but so did
losses (even more quickly) allowing auto 8.3%
4.5%
7.6%6.9%
7.0%
8.8%
3 9%
8.6%
4.1%5.5% 7.6%
7.8%
7.8%
4.7%6%
8%
vs. 3.0% for Loss and LAE q y) ginsurers to improve
margins despite flat/falling rates
0.3% 0.5%1.4%3.9%
5.7%
1 7%
3.6%2.2%
3.9%4.1%
2.3%
4.8%
1.4%
4.1%
2%
4%
1.4% 1.7%1.1%1.1%
0.3% 0.0%
-1.4%
0.7%
-1.8%-0.6%-0.6%
0.2%
-0.5%-1.5% -0.6%-2%
0%
NPW Loss & LAE-4%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Losses Drive Premiums
84
Premiums Exhibit an Elastic Response (with a Lag) to Changes in Losses
Sources: Insurance Information Institute calculations from A.M. Best data..
PP Auto Physical Damage: Change in NPW vs. Change in Loss & LAE, 1990 - 2010
14.5%15% NPW
Loss & LAE
Decelerating premium growth
is driven by
4.3%6.2%
7.6%
6 7%8.7%
11.6%
8.2%3.7%
8.6%
4.2%7.6%
8.3%
5.1% 6.1%6.6%
7.5%8.5%
3 2%5%
10%
yfalling loss costs
2.2%0.2%3.3%
6.7%
1.4% -0.2%
3.2%3.3%
0.4%0 8%
2.9%
5.0%
0.4%1.6%
0 6%
5.2%1.2% 2.6%
3.2%
0%
5%
-5.0%-3.4%
-1.5%-0.8%-0.9% -2.50%
-0.6%
-6.40%
-5%Average annual Net Written
Premiums grew by 3.7% percent from 1990 – 2010 vs.
3 4 % for Loss and LAE-10%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
L T d Ulti t l D i P i T d
3.4.% for Loss and LAE
85
Loss Trends Ultimately Drive Premium Trends
Sources: Insurance Information Institute calculations from A.M. Best data.
P-C Loss Development vs. Change in NPW, 1983-2009
20 000
25,000
30,000
20%
25%Change in Reserve NPW Growth
Periods of reserve releases i t d ith ft( )
10,000
15,000
20,000
eser
ves
5%
10%
15%
Chan
are associated with soft(er) market conditions
(5,000)
0
5,000
hang
e in
Re
-5%
0%
5%
nge in NPW
(20,000)
(15,000)
(10,000)C
-15%
-10%Reserve releases bolster the bottom line and perpetuate
soft market(25,000)
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
-20%
R R l i Additi t L D i P i i C l
86Source: A.M. Best; Insurance Information Institute
Reserve Releases, in Addition to Losses, Drive Pricing Cycles
P-C Industry Loss Development,1983-2009 ($ Millions)
$20 000
$25,000
‘00s peak: $22.9B
$10,000
$15,000
$20,000 00s peak: $22.9B in 2002‘80s peak: $9.2B in
1986
$0
$5,000
llion
s of
Dol
lars
$15 000
-$10,000
-$5,000Mi
-$25,000
-$20,000
-$15,000$19.7B released last year, a record
87Sources: A.M. Best, Insurance Information Institute
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
Industry Loss Development as % of Net Earned Premium, 1983-2009
7%
3%
5%
-1%
1%
Net
Ear
ned
Pre
miu
m
-5%
-3%
% o
f
Prior year reserve releases in
-7%
-5%
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
2009 accounted for 4.6% of Net Earned Premium
88
Sources: A.M. Best, Insurance Information Institute
REINSURANCE MARKET CONDITIONS
R d Gl b lRecord Global Catastrophes Activity is
Pressuring Pricing
89
Significant Market Losses, 1985-2011*
$90
$100
$70
$80
$90
Reinsurers’ share of major market losses was
exceptionally high in 2010 and early 2011
REINSURANCE PRICING TRENDS
•Property/CAT reinsurance prices
$40
$50
$60
Bill
ion
s
ye su a ce p cesare up substantially in Asia/Pacific markets•US pricing is up 10-15%, but ex-Florida closer to flat
$10
$20
$30closer to flat
$0
$
1985 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1998 1999 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011
Worldwide Direct Insured Losses Reinsured LossesWorldwide Direct Insured Losses Reinsured LossesSource: Holborn; RAA.* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.
Significant Market Losses by Event, 1985-2011*
Reinsurers are bearing a very high
Losses are putting pressure on property cat reinsurance prices in affected
regions. The impact for US property catastrophe pricing is uncertainbearing a very high
share of recent catastrophe losses
catastrophe pricing is uncertain.
Source: Holborn, RAA. *2011 events as of March 31 are preliminary and may change as loss estimates are refined further.
Global Reinsurance Capital, 2007-2011:H1
Reinsurer Capital % Change
17%18%$500 20%Global reinsurance
$411 $402
$445$470
$420$440$460$480
5%
10%
15%market capacity is down in mid-2011 due to large
catastrophe losses
$411
$342
$402-5%
$360$380$400$420
10%
-5%
0%
5%
$342
-17%$300$320$340
2007 2008 2009 2010 2011 H1-20%
-15%
-10%
2007 2008 2009 2010 2011:H1
Reinsurer Capital Change
High Global Catastrophe Losses Have Had a Modest Adverse Impact on
Source: Aon Reinsurance Market Outlook, September 2011 from Individual Company and AonBenfield Analytics; Insurance Information Institute.
Global Reinsurance Market Capacity
Historical Capital Levels of Guy Carpenter Reinsurance Composite, 1998—2Q11
Most excess reinsurance capacity was
removed from theremoved from the market in 2011,
leaving uncertainty as to the direction ofthe direction of
2012 reinsurance renewals
Source: Guy Carpenter, GC Capital Ideas.com, November 23, 2011.
Global Property Catastrophe Rate on Line Index, 1990-2011 YTD (6/1/11)
A modest increase in global property catastrophe reinsurance pricing was
evident in June 1 renewals in theevident in June 1 renewals in the wake of record global catastrophe
losses. Larger increase could occur for the Jan.1, 2012 renewals
Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.
Claim Trends in A t IAuto Insurance
Ri i C t H ld i Ch k bRising Costs Held in Check by Falling Frequency:
Can That Pattern Be Sustained?
95
Bodily Injury: Severity Trend Rising, Frequency Decline Has Ended
Annual Change, 2005 through 2011*
3 9%4.7%
5.7% 5.9%6%
8%
Severity Frequency
3.9%
0.0%
2.2%2.9%
2.1%3.2%
0%
2%
4%
-3.8% -4 0% 4 2%
-2.2%-4%
-2%
0%
-5.4%3.8% -4.0% -4.2%
-6%2005 2006 2007 2008 2009 2010 2011*
Cost Pressures Will Increase if BI Severity Frequency
96
*For 2011, data are for the 4 quarters ending with 2011:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
Cost Pressures Will Increase if BI Severity Frequency Increases Continue
Property Damage Liability: Severity is Up, Frequency Nearly Flat Since 2009
Annual Change, 2005 through 2011*
2.6%2.9%3.6%
2.0% 2.0%3%
4%
Severity Frequency
0.9% 0.6%
2.0% 2.0%
0.8%
0%
1%
2%
-1.6%
-0.3% -0.3%-0.3%
-3%
-2%
-1%
-3.5% -3.4%-4%2005 2006 2007 2008 2009 2010 2011*
Severity/Frequency Trends Were Stable Through 2010 But
97
Severity/Frequency Trends Were Stable Through 2010, But Rising Severity in 2011 Is a Concern
*For 2011, data are for the 4 quarters ending with 2011:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse*
Annual Change, 2005 through 2011*
5.3% 5.0%4.2%4.7%
6.4% 6.5% 6.2%5.4%6%
8%
Severity Frequency
3.2%2.4%
0%
2%
4%
-4.8%-5 7%
-4.1%-5 7%
-6%
-4%
-2%
-5.7% -5.7%-8%
2005 2006 2007 2008 2009 2010 2011*
Multiple States Are Experiencing Severe Fraud and Abuse
98
*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT; 2010 data are for the 4 quarters ending 2011:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ
Collision Coverage: Frequency and Severity Trends Have Been Favorable
Severity Frequency
Annual Change, 2005 through 2011*
2.5%
3.9%3.1%
3%
4%
5%
y q y
1.6%
0 2%
1.3%
0.1% 0.5%
0 1%0%1%
2%
-1.8%-2.4%
-1.6%
-0.2%
-2.3%
-0.1%
4%
-3%
-2%
-1%
-3.6%-4%2005 2006 2007 2008 2009 2010 2011*
The Recession, High Fuel Prices Have Helped Temper Frequency and Severity But this Trend Will Likely Be Reversed Based on
99
and Severity, But this Trend Will Likely Be Reversed Based on Evidence from Past Recoveries
*For 2011, data are for the 4 quarters ending with 2011:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
Comprehensive Coverage: Frequency and Severity Trend in 2011 is Unfavorable
Severity Frequency
Annual Change, 2005 through 2011* Severe weather is likely a principal cause of the
spike in both frequency d it i 2011
8 8%
15.5%12.6%
10%
15%
20%
y q y and severity in 2011
8.8%
1.8% 1.8%5.8% 5.1%
0%
5%
10%
-3.1%
-9.8%-6.3%
-1.4% -1.5%
-8.2%-6.0%
15%
-10%
-5%
-15%2005 2006 2007 2008 2009 2010 2011*
Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper
100
Recession Has Helped Push Down Frequency and Temper Severity, But This Factors Will Weaken as Economy Recovers
*For 2011, data are for the 4 quarters ending with 2011:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute
Average No-Fault Claim Severity, 2011:Q2*
6
$50,000MI, NJ, NY and FL currently are the
largest states that have the most severe bl i th i f lt t
$36,
786
$35,000
$40,000
$45,000 problems in their no-fault system
FL has the 3rd highest auto no-fault
$17,
025
9 2
$20,000
$25,000
$30,000g
average claim cost (severity) in the US and recently surpassed NY
$8,5
49
$8,1
62
$5,1
78
$5,1
65
$4,2
12
$2,9
19
$2,2
45
$1,8
92$7,2
30
$5,5
36
$5,2
69$5,000
$10,000
$15,000
$0MI NJ FL NY MN DC KY HI ND PA KS UT MA
Several States Including FL Have Severe and Growing Problems With Rampant
101
g g pFraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.
*Average of the four quarters ending 2011:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute.
Increase in No-Fault Claim Severity: Selected States, 2004-2011*
$36,786$40,000
+50.9%
$24,385$25,000$30,000$35,000
+40.3%
$17,025
$8,162 $8,549 $7 230$6 674$
$12,136
$10 000$15,000$20,000$ ,
+39.0% +28.1% +39.1%
, $7,230$5,198$6,674$5,871
$0$5,000
$10,000
Michigan New Jersey New York Florida MinnesotaMichigan New Jersey New York Florida Minnesota
2004 2011*
The no-fault systems in MI, NJ, NY, FL, and MN are under stress due to
102
*2011 figures are for the 4 quarters ending 2011:Q2. Sources: Insurance Information Institute research from ISO/PCI Fast Track data.
y , , , ,rising fraud and abuse, which leads to higher premiums for honest drivers.
Florida’s No-Fault Fraud Tax: Estimated Aggregate Annual Cost, 2009-2011E ($ Millions)
The total fraud tax levied on Florida vehicle owners
is an estimated $658
$800$900
$1,000
s)
is an estimated $658 million in 2011.
+107.6% +6.5%
$657.6$617.3
$$500$600$700$800
ax ($
Mill
ions
$297.0
$100$200$300$400
Frau
d Ta
$02009 2010E 2011F
Unscrupulous Medical Providers and Attorneys Are Costing
103
*2011 estimate is based on data through Q2:2011.Source: Insurance Information Institute calculations and research from ISO/PCI and AIPSO data.
p y gHonest Florida Drivers Hundreds of Millions of Dollars
New York State No-Fault Claim Frequency and Severity, 1997–2011:Q2q y y,
235
0 90$9,500 2.4%Avg. Claim Severity
No-Fault Claim Severity Avg. Claim Severity is up 48% since 2004:Q4 though 2011:Q2
$8,3
47$8
,327
$7,8
8807
$8,2
34$9
, 2$8
,727
$8,5
777,
773
670
,740
$8,4
43$8
,177 $8
,507
$8,0
25$8
,563
$8,7
26$8
,646
$8,8
30$8
,646 $8
,99
$8,6
47$8
,407
$8,3
46$8
,285
$8 000
$8,500
$9,000
$ ,
ever
ity
2.0%
2.2% No-Fau
g yFrequency
3$6
,699
$$7
,50 $7
$7,3
11$6
,958
$6,8
7056 2 94 25
026
9$6
,530
$6,6
06 $7,0
63 $7,3
23$7
,378
$7,2
97 $7,6 $7
$6 500
$7,000
$7,500
$8,000
ult C
laim
Se
1.6%
1.8%
lt Claim
FreAvg. Claim
Claim Frequency was up 27% in 2011:Q1 from
2008:Q3
$5,6
75 $6,0
63
$6,1
5$6
,052
$5,8
20$5
,991
$5,6
15$6
,09
$5,9
14 $6,2
$6,
$5,500
$6,000
$6,500
No-
Fau
1.2%
1.4%
quencyClaim Severity nearly reached a record high
in 2010:Q2: $8,990
gSeverity Rose 63% in 5 years
after 1997 Presbyterian
Decision$5,000
1997
1998
1999
2000
1:01
1:02
1:03
1:04
2:01
2:02
2:03
2:04
3:01
3:02
3:03
3:04
4:01
4:02
4:03
4:04
5:01
5:02
5:03
5:04
6:01
6:02
6:03
6:04
7:01
7:02
7:03
7:04
8:01
8:02
8:03
8:04
9:01
9:02
9:03
9:04
10:0
110
:02
10:0
310
:04
11:0
111
:02
1.0%
About 10% of No Fault Claim Costs in 2011 Were Estimated to Be
,
104
About 10% of No-Fault Claim Costs in 2011 Were Estimated to Be Attributable to Fraud and Abuse
*2011 figure is based on data for the 4 quarters ending Q2:2011, adjusted by I.I.I. for 2011:Q1 data anomaly.Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data.
New York’s No-Fault Fraud Problem,Paid Claims Severity**
US city medical care index* NY PIP Avg claim severity
Medical Care Cost Index
NY PIP Severity Index
1.60
1.70
1.60
1.70No-fault fraud and abuse has resulted in
claim severity increases far in excess of the general increase in the cost of medical care
1.40
1.50
1.40
1.50Average NY PIP Claim Severity, Indexed to
2004:Q4=100 aud
Gap
?
1.20
1.30
1.20
1.30
Fra
1 00
1.10
1 00
1.10Medical Care Cost Index
1.00
04:4
05:1
05:2
05:3
05:4
06:1
06:2
06:3
06:4
07:1
07:2
07:3
07:4
08:1
08:2
08:3
08:4
09:1
09:2
09:3
09:4
10:1
10:2
10:3
10:4
11:1
11:2
1.00
*Middle month of quarter **For the four quarters ending in quarter indicatedSources: Insurance Information Institute calculations based on ISO/PCI Fast Track Data and BLS Medical Care CPI
Distribution TrendsDistribution Trends
Distribution by Channel Type y ypContinues to Evolve
106
All P/C Lines Distribution Channels, Direct vs. Independent Agents
70%
50%
60%
30%
40%
Independent agents steadily lost market share
10%
20%
30% from the early 1980s through the early 2000s across all P/C lines, but have gained or held
generally steady in recent years. Direct channels include exclusive agency companies, direct
k t d di t l ( i t t)
0%
10%
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
marketers and direct sales (e.g., internet)
107Source: Insurance Information Institute; based on data from Conning and A.M. Best.
Direct Independent Agents
Personal Lines Distribution Channels, Direct vs. Independent Agents
80%
60%
70%
40%
50%
20%
30%
Independent agents have lost significant personal lines market share since the early 1970s. Although the trend has slowed it may be
0%
10%
72 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
Although the trend has slowed, it may be accelerating again.
108Source: Insurance Information Institute; based on data from Conning and A.M. Best.
Direct Independent Agents
Commercial P/C Distribution Channels, Direct vs. Independent Agents
90%
60%
70%
80%
40%
50%
60%Independent agents have seen only modest erosion in commercial lines market share
in recent decades
20%
30%
0%
10%
72 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
109Source: Insurance Information Institute; based on data from Conning and A.M. Best.
Direct Independent Agents
P/C Insurance Industry Financial Overview
Profit Recovery Will Be Set B k b Hi h CAT LBack by High CATs, Low
Interest Rates, Diminishing
110
Reserve Releases
P/C Net Income After Taxes1991–2011:H1 ($ Millions)
,496
65,7
77
$70 000
$80,000 2005 ROE*= 9.6%2006 ROE = 12.7%
P-C Industry 2011:H1 profits were down 71.6% to $4.8B vs. 2010:H1,
due to high catastrophe losses and as non cat underwriting
9
$62,
0
$6
44,1
55
501
$50 000
$60,000
$70,000 2007 ROE = 10.9%2008 ROE = 0.3%2009 ROAS1 = 5.9%2010 ROAS = 6.5%2011 H1 ROAS 1 7%
and as non-cat underwriting results deteriorated
8 316
,598
24,4
04 $36,
81
$30,
773
1,86
5
$30,
029
$34,
670
$28,
672$ 4
,559
$38,
5
$30,000
$40,000
$50,000 2011:H1 ROAS = 1.7%
$14,
178
$5,8
40
$19,
3
$10,
870 $20 $2 $21
3,04
6
3,04
3
$4,7
58
$20
$10,000
$20,000
,
$
$3 $3 $
-$6,970-$10,000
$0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 2.3% ROAS for 2011:H1, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE
109.415.9%11018%
A combined ratio of about 100 generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
97 5100.6 100.1 100.7
99.3100.8101.0
9 6%
5 9%14.3%
12.7%
100
105
110
12%
15%
97.5
92.67.5%7.4%
9.6%
8.9%90
95
100
6%
9%
2.3%4.4%
80
85
1978 1979 2003 2005 2006 2008* 2009* 2010* 2011 H1*0%
3%
1978 1979 2003 2005 2006 2008* 2009* 2010* 2011:H1*
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s Depressed
* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurers. 2011H1 combined ratio including M&FG insurers is 110.5 , ROAS = 2.3%.
Source: Insurance Information Institute from A.M. Best and ISO data.
Investment Environment to Generate Risk Appropriate ROEs
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011*
25%1977:19.0% 1987:17.3%
History suggests next ROE peak will be in 2016-2017
ROE
15%
20%1997:11.6%
2007:12.3%
10%
15%10 Years
2011:2.3%*
5%
-5%
0%
1984: 1.8% 1992: 4.5% 2001: -1.2%1975: 2.4%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for H1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:H1 ROAS = 1.7% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2010:H1*
18%The P/C Insurance Industry Well
Short of Its Cost of Capital in 2008 but Narrowed the Gap in 2009 and 2010
(Percent)
12%
14%
16%
2.3
pts
Narrowed the Gap in 2009 and 2010
6%
8%
10%
pts +1
.7 p
ts
+2
.0 p
ts
-6.4
pts
-3.2
pts
-2.9
pts
2%
4%
6%
-13.
2 p
-9
-
US P/C Insurers Missed Their Cost of Capital by an Average 6 7 Points from 1991
The Cost of Capital is the Rate of Return Insurers Need to
-2%
0%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10*
Capital by an Average 6.7 Points from 1991 to 2002, but on Target or Better 2003-07,
Fell Short in 2008-2010
Insurers Need to Attract and Retain
Capital to the Business
114
* Return on average surplus in 2008-2010 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute
ROE Cost of Capital
P/C P i G th C lP/C Premium Growth Cycles
Cyclicality is Driven Primarily y y yby the Industry’s Underwriting
Cycle, Not the Economy115
Cycle, Not the Economy
Soft Market Persisted in 2010 but Growth Returned: More in 2011/12?
25%
(Percent)1975-78 1984-87 2000-03
20%
25%Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
10%
15% 2011:H1 growth
was +2.6%
5%
10%
-5%
0%
NWP was up 0.9% in 2010
116
-5%
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
*2011 figure is for H1 vs. 2010:H1. Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter
5.1% 16
.8%
16.7
%% %
20% Positive premium growth continued into through
the first half of 2011
10.2
%15
12.5
%10
.1%
9.7%
7.8%
7.2%
6% 5%
10.3
%10
.2% 13
.4.6
%10%
15%the first half of 2011.
75.
62.
9%5.
5 6
2.1%
0.0% 0.5% 1.3% 2.
3%1.
3% 3.5%
1.6%
0%
5%-4
.6%
-4.1
%-5
.8%
-1.6
%
-1.6
%
-1.9
%
-1.8
%-0
.7%
-4.4
%-3
.7%
-5.3
%-5
.2%
-1.4
%-1
.3%
-10%
-5%
Pricing and more stable exposure environment are contributing to
--10%
2002
:Q1
2002
:Q2
2002
:Q3
2002
:Q4
2003
:Q1
2003
:Q2
2003
:Q3
2003
:Q4
2004
:Q1
2004
:Q2
2004
:Q3
2004
:Q4
2005
:Q1
2005
:Q2
2005
:Q3
2005
:Q4
2006
:Q1
2006
:Q2
2006
:Q3
2006
:Q4
2007
:Q1
2007
:Q2
2007
:Q3
2007
:Q4
2008
:Q1
2008
:Q2
2008
:Q3
2008
:Q4
2009
:Q1
2009
:Q2
2009
:Q3
2009
:Q4
2010
:Q1
2010
:Q2
2010
:Q3
2010
:Q4
2011
:Q1
2011
:Q2
117Sources: ISO, Insurance Information Institute.
consistent positive growth in recent quarters(vs. the same quarter, prior year)
Average Commercial Rate Change,All Lines, (1Q:2004–3Q:2011)
0.9%2%
Pricing as of Q3:2011 is positive
for the first time since 2003
(Percent)
%
-0.1
%
0.9%
-0.1
%
-2%
0%
since 2003
-3.2
%5.
9%%
-4.6
% -2.7
%-3
.0%
-5.3
%
4% -5.1
%-4
.9%
5.8% 5.6%
-5.3
%4% -5
.2%
-5.4
%-2
.9%
8%
-6%
-4%
-5-7
.0%
-9.4
%-9
.7% -8
.2%
--9
.6%
% % % 0%-6
. 4 -5 -5 --6
.4 -
-12%
-10%
-8%
Q2 2011 marked the 30th consecutive
-11.
3-1
1.8 %
-13.
3% -12.
0 %-1
3.5%
-12.
9% -11.
0-16%
-14%
4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9 9 0 0 0 0 1 1 1
KRW Effect
30th consecutive quarter of price
declines
118
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q3Percentage Change (%)
Peak = 2001:Q4 +28.5%
Pricing turned positive (+0.9%) in Q3:2011, the first increase in
l (Q4 2003)
Pricing Turned
nearly 7 years (Q4:2003)
gNegative in Early
2004 and Has Been Negative
Ever SinceKRW Effect: No Lasting Impact
Trough = 2007:Q3 -13.6%
119Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q3
Despite Q3:2011 gain of
1999:Q4 = 100
Despite Q3:2011 gain of 0.9%, pricing today is
where is was in late 2000 (pre-9/11)
Downward pricing pressure still
evident for large accounts, down 0.6% in Q3:2011
120Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Capital/Policyholderp ySurplus (US)
Have Large Global Losses Reduced C it i th I d t S ttiCapacity in the Industry, Setting
the Stage for a Market Turn?
121
US Policyholder Surplus:1975–2011*
$600
($ Billions)
Surplus as of 6/30/11 was a near-record $559.1 down 1% from the record $564 7B as of 3/31/11 but
$400$450$500$550 down 1% from the record $564.7B as of 3/31/11, but
up 27.9% ($122B) from the crisis trough of $437.1B at 3/31/09. Prior peak was $521.8 as of 9/30/07.
Surplus as of 6/30/11 was 7.1% above 2007 peak.
$250$300$350$400
“Surplus” is a measure of
$50$100$150$200 underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in
non-insurance organizations
$0$50
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11*
organizations
The Premium-to-Surplus Ratio Stood at $0.78:$1 as of
* As of 6/30/11.Source: A.M. Best, ISO, Insurance Information Institute.
The Premium to Surplus Ratio Stood at $0.78:$1 as of6/30/11, A Near Record Low (at Least in Recent History)**
Policyholder Surplus, 2006:Q4–2011:Q2
($ Billions)
$559 1$580
2007:Q3Previous Surplus Peak
Surplus as of 6/30/11 fell by 1% below its all time record high of $564.7B set
as of 3/31/11. Further declines are likely
$512.8$521.8
$511.5
$540.7$530.5
$544.8$556.9
$559.1
$515.6$517.9$520
$540
$560
$
$487.1$496.6
$5 8
$478.5
$455.6$463.0
$490.8
$511.5$505.0
$460
$480
$500
$520
The Industry now has $1 of l f $0 78 f $455.6
$437.1
$420
$440
$460
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q2
surplus for every $0.78 of NPW—the strongest claims-paying status in its history.
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q2
Quarterly Surplus Changes Since 2007:Q3 Peak
09:Q1: -$84.7B (-16.2%)09:Q2: -$58.8B (-11.2%)
10:Q2: +$8.7B (+1.7%)10:Q3: +$23 0B (+4 4%)
*Includes $22.5B of paid-in capital from a holding company parent for one
’
123Sources: ISO, A.M .Best.
09:Q2: $58.8B ( 11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)10:Q1: +$18.9B (+3.6%)
10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)11:Q1: +$42.9B (+8.2%)11:Q2: +37.3B (+7.1%)
insurer’s investment in a non-insurance business in early 2010.
Implied Excess (Deficit) Capital Assuming Premium/Surplus Ratio = 0.9:1
Excess/(Deficit) Capital (Policyholder Surplus)
$81.921.6%100 25%
Annual Change in Policyholder Surplus
2000-2002: Tech bubble bursts,
/
2006/07: Low CAT losses, strong underwriting results since 1940s
i it l
2009-10: End of financial crisis,
rising asset prices. modest
u/w losses h it l t
$22.9$41.714.4%13.4%50
10%
15%
20%9/11, high
underwriting losses erode capital base
increase capital push capital to record levels
($10.6)
$
($10.8)($32.7)
($49.2)
8.9%12.3%6.2%
-5.1%
8.2%-50
0
0%
5%
10%
2008: Financial ($65.4)
($124.6)($103.0)
($76.5)
-12.0%-8.8%
-1.5%
-150
-100
-15%
-10%
-5%2005: Katrina, Rita, Wilma
produce record CAT losses
crisis causes sharp drop in
capital
1502000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
15%
Capital Excess (Deficit) Annual Change in CapitalRecord Policyholder Surplus (Capital) Has Resulted Significant Excess Capital in the P/C Insurance Sector As of Year End 2010 Deteriorating Underwriting Losses HigherP/C Insurance Sector As of Year End 2010. Deteriorating Underwriting Losses, Higher CAT Activity, More Modest Market Returns Will Likely Shrink Excess Capital in 2011.
Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has $74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.
Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written
Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*
30%
(Percent) Surplus growth still exceeds premium growth, suggesting an ongoing build-up of capacity in
l 2011
15%
20%
25% early 2011
0%
5%
10%
15%
-10%
-5%
0%
-15%78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
NWP % change Surplus % change
Sharp Decline in Capacity is a Necessary but
125
* 2011 NWP and Surplus figures are % changes as of H1:11 vs. H1:10. Sources: A.M. Best, ISO, Insurance Information Institute
Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market
Ratio of Net Premiums Writtento Policyholder Surplus, 1970-2011*
2.7
2.52.52.5
3.0 The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.76:1 in 2010. It has decreased as PHS grows
Record High P-S Ratio was 2.7:1
in 1974
2.1
1.9
22.
3
1.8
1.7
1.7
1.9
1.9
1.9
1.9
1.7
6 6
2.0
2
2.1
2.0
2.5 more quickly than NPW, with the effect of holding down profitability.
1 1 11.
61.
61.
41.
41.
31.
31.
11.
10.
9 8
1.13
0.94
.8684
1.29
1.17
1.07
0.99
840.91 60.95
82
1.6 1.
8
1 0
1.5
0
0.700.0.8
0.80
0.760.8
0.5
1.0
Record Low P-S Ratio was 0.76:1 as of 12/31/10, rising
slightly to 0 78:1 as of 6/30/110.0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 0 02 04 06 08 10
The Premium-to-Surplus Ratio in 2011:H1 Implies that P/C Insurers Held $1 in Surplus Against Each $0 78 Written in Premiums In 1974 Each $1
slightly to 0.78:1 as of 6/30/11
126
$1 in Surplus Against Each $0.78 Written in Premiums. In 1974, Each $1 of Surplus Backed $2.70 in Premium.
*2011 data are as of 6/30/11.Sources: Insurance Information Institute calculations from A.M. Best data.
Merger & AcquisitionMerger & Acquisition
Capital Cycles Can Drive Consolidation
127
U.S. P/C Insurance-RelatedM&A Activity, 1988–2009
$56$60 140Transaction Values
$35$40
$40
$50
($ B
illio
n)
100
120
Num
be
Number of Transactions
$19 $20
$35
$16
$31
$20
$30
ctio
n Va
lue
60
80
er of Transa
$2$5
$1 $0 $0
$9$14
$16
$4$8
$12
$2$3 $3 $5$6
$10
$20
Tran
sac
20
40
ctions
$$0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090
2010: No Mega Deals So Far, Despite Record Capital Slo Gro th and Impro ed$ Value of Deals Down 78%
128
Note: U.S. Company was the acquirer and/or target.Source: Conning Research & Consulting.
Record Capital, Slow Growth and Improved Financial Market Conditions
$in 2009, Volume Up 7%
M&A Activity Globally Among P/C Insurers Remains Subdued: Little Capacity Leaving
5.1 .2 .4 3.9
6.5
2010
Property-Casualty Life-Annuity Health/Managed Care Distribution Services
.4
$45
8
$1
8
$2
4
$13
.0$1
62010$2
4.
$5.8
$0.8
$9.4
3
$15.2009
$5.5
$2.3
$9.8
$7.6
$30.
3
2008
$51.
8
$13.
8
$15.
3
$6.9
$50.
6
2007
129
$0 $35 $70 $105 $140
Sources: Conning Research; Insurance Information Institute.
$ Billions
INVESTMENTS:INVESTMENTS: THE NEW REALITY
Investment Performance is a Key Driver of ProfitabilityKey Driver of Profitability
130
Property/Casualty Insurance Industry Investment Gain: 1994–2011:H11
$64.0$70
($ Billions)
$42.8$47.2
$52.3
$44.4 $45.3$48.9
$59.4$55.7
$39 2
$52.9$58.0
$51.9$56.9
$50
$60
$35.4 $36.0$31.7
$39.2
$24.8
$20
$30
$40
2011 investment gains are likely to come in
$0
$10
$20 below 2010 due to lower interest rates and poor stock market returns
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:H1
Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to
Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
Treasury Yield Curves: Pre-Crisis (July 2007) vs. Sept. 2011*
4 82% 4.96% 5.04% 4.96% 4 82% 4 82% 4 88% 5.00% 4 93% 5.00% 5.19%6%
4.82% 4.96% 4.96% 4.82% 4.82% 4.88% 4.93%
4%
5%
Treasury yield curve remains near its most depressed level
1.98%
3.18%2.83%
2%
3%
near its most depressed level in at least 45 years.
Investment income is falling as a result. Fed is unlikely to hike rates until well into 2013
0 01% 0 01% 0 04% 0 10% 0.21%
1.42%0.90%
0.35%1%
2%
September 2011 Yield Curve*
hike rates until well into 2013.
0.01% 0.01% 0.04% 0.10%0%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Pre-Crisis (July 2007)
The End of the Fed’s Quantitative Easing Is Unlikely to Push Interest
132
The End of the Fed s Quantitative Easing Is Unlikely to Push Interest Rates Up Substantially Given Ongoing Economic Weakness
*Average of daily rates.Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Property/Casualty Insurance Industry Investment Gain: 1994–2010:H11
$64.0$70
($ Billions) 2009:H1 gain was $12.5B
$42.8$47.2
$52.3
$44.4 $45.3$48.9
$59.4$55.7
$39 0
$58.0$51.9
$56.9
$50
$60
$35.4 $36.0$31.7
$39.0
$25.8
$20
$30
$40
Investment gains in
$0
$10
$20 Investment gains in 2010 are on track to be their best since 2007
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:H1In 2008, Investment Gains Fell by 50% Due to Lower Yields and
Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income p g
Investment Gains Are Recovering So Far in 20101 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
l Lines
s Autop cia
lAuto
PropCas Suret
yy Lin
esl ance
**
y
Persona
l L
Pvt Pas
s A
Pers Prop
Commerc
i
Comml A
u
Credit
Comm Pro
Comm C
a
Fidelity
/Su
Warranty
Surplus L
i
Med M
al
WC Reinsu
ran
.8%
.8%
.0% .9%
.1%
%
-3%-2%-1%0%
-1 -1 -2.
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
5.7%
-1 -2.
-3.1
%
-7%-6%-5%-4%
-5 -7.3%-8%
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
134
Underwriting and Pricing Discipline*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Distribution of P/C Insurance Industry’s Investment Portfolio
Portfolio Facts As of December 31, 2008
Invested assets totaled $1.214 trillion as of 12/31/08
68.4%
Bonds
Insurers are generally conservatively invested, with more than 2/3 of assets invested in bonds as of
68.4%
12/31/08
Only about 15% of assets were invested in common stock
f 12/31/08 8 0%14.8%6.1%
P f d St k
Other
as of 12/31/08
Even the most conservative of portfolios was hit hard in 2008
8.0%
0.9%1.8% Common
StockReal Estate
Cash and Short-term
Investments
Preferred Stock
135Sources: NAIC; Insurance Information Institute research.
Financial Strength & gUnderwriting
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
136
g, g g
P/C Insurer Impairments, 1969–2010
60 5860
70 8 of the 18 in 2009 were small Florida carriers. Total also
includes a few title insurers.
49 50 4855
541
49 504750
6034
9
36
3134
29 318 9
358 8
30
40
815
127
11 9 913 12
199
16 14 13
1612
18 19 1814 15 16 18
11
5
10
20
0
69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Th N b f I i t V i Si ifi tl O th P/C I
Source: A.M. Best Special Report “1969-2010 Impairment Review,” June 21, 2010; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2010
115
120
1.8
2.0Combined Ratio after Div P/C Impairment Frequency
110
115
Rat
io
1.2
1.4
1.6
Impai
100
105
Com
bine
d
0 6
0.8
1.0
rment R
ate
950.2
0.4
0.6
2010 impairment rate was 0.35%, down from 0.65% in 2009 and near the record low of 0.17% in 2007; Rate is still less than
one-half the 0.81% average since 196990
69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
0.0g
Impairment Rates Are Highly Correlated With Underwriting Performance
138Source: A.M. Best; Insurance Information Institute
p g y gand Reached Record Lows in 2007
Reasons for US P/C Insurer Impairments, 1969–2010
Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
3.6%4 0%
Investment and Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Mi
Sig. Change in Business
4.0%8.6%
7.3%40 3%
Deficient Loss Reserves/Inadequate Pricing
Investment Problems (Overstatement of Assets)
Misc.
7.8%
40.3% Inadequate Pricing
Affiliate Impairment
7.1%
7.8% 13.6%Catastrophe Losses
139Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Rapid GrowthAlleged Fraud
Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010
Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade
2.0%4 4%
Financial Guaranty
SuretyTitle
4.4%4.8%
6.5%
6 9%
26.6%Workers Comp
Other Liability
Med Mal
6.9%
7.7%Commercial Auto Liability
8.1%
10.9%
22.2%Pvt. Passenger Auto
Commercial Multiperil
140Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
Homeowners
The Economic StormThe Economic Storm
Wh t th Fi i l C i i dWhat the Financial Crisis and Recession Mean for the Industry’s
E B G th dExposure Base, Growth and Profitability
141
US Real GDP Growth*
0% % %% %6%
Real GDP Growth (%) The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2.7%
0.9%
3.2%
2.3% 2.9%
0.6% 1.
6%5.
03.
9%3.
8%2.
5%2.
3%0.
4% 1.3% 2.
0% 2.3%
1.9% 2.2% 2.4% 2.6%4.
1 %1.
1% 1.8% 2.
5% 3.6 %
3.1%
2%
4%
6%
-0.7
%
%
-0.7
%
-4%
-2%
0%
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump,2011 got off to a sluggish
start, but growth is expected
-4.0
%-6
.8% -4
.9%
-8%
-6%
0 2
3
4
5
6 Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
to proceed at a more modest, though still relatively weak
pace through 2012
20
00
20
01
20
0 2
20
03
20
04
20
05
20
06
07:1
07: 2
07:3
07:4
08:1
08: 2
08:3
08:4
09:1
09: 2
09:3
09:4
10:1
10: 2
10:3
10:4
11:1
11: 2
11:3
11:4
12:1
12: 2
12:3
12:4
Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions but the Benefits of Even Slow Growth Will Compound and
142
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 11/11; Insurance Information Institute.
Conditions, but the Benefits of Even Slow Growth Will Compound and Gradually Benefit the Economy Broadly
Real GDP Growth vs. Real P/CPremium Growth: Modest Association
% 3%25% 8%R l NWP G th R l GDP
Real GDP Growth vs. Real P/C (%)
18.6
%20
.3
13.7
%%
15%
20%
25%
wth 4%
6%
8%
Rea
Real NWP Growth Real GDP
4.3% 5.
8%0.
3% 3.1%
1.1%
0.8%
0.4%
0.6% 1.6%
5.6% 7.
7%1.
2%
5.2%
1.8%5%
10%
al N
WP
Gro
0%
2%
al GD
P Grow0
-1.6
%-1
.0%
-1.8
%-1
.0%
0 0-0
.4%
-0.3
%
-2.9
% -0.5
%-3
.8%
-4.4
%-3
.3%
-1.4
%-0
.6%
-0.9
%4% 5%
-1.5
%
-10%
-5%
0%Rea
-6%
-4%
-2%
wth
-
-7.4 -6.10%
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
6%
P/C I I d t ’ G th i I fl d M d tl
143Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 11/11; Insurance Information Institute
P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy
Labor Market TrendsLabor Market Trends
Massive Job Losses Sapped the Economy and Personal/CommercialEconomy and Personal/Commercial
Lines Exposure, But Trend is Improving
144
Improving
Unemployment and Underemployment Rates: Stubbornly High in 2011
16
18 Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6U-6 went from 8.0% in March
2007 to 17.5% in O 2009
January 2000 through October 2011, Seasonally Adjusted (%)
12
14
Unemployment
October 2009; Stood at 16.2%
in Oct. 2011Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
8
10
Unemployment stood at 9.0% in
OctoberUnemployment peaked at 10.1% i O t b 2009
4
6
in October 2009, highest monthly rate since 1983.Peak rate in the last 30 years:S
2
4
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
last 30 years: 10.8% in
November -December 1982
Sep 11
145
00 01 02 03 04 05 06 07 08 09 10 11
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Stubbornly high unemployment and underemploymentwill constrain overall economic growth
Monthly Change in Private Employment86 21
3
229
3 93 67
261
219
241
73 914
400January 2008 through October 2011* (Thousands)
1879
265
127
42 1509
-14
65 9723
-12
8 5 -58
75-8
316
62
251 61
117 143
112 1 9
128 1 6
94
2
99 751 7
721 9
10414
4
0
200-1
0 -
-161
-253 -230
-257
-347
-456
7
-334
-452
-297 -2
15 -186
-262
-
(600)
(400)
(200)
Monthly Losses in 104,000 private sector jobs --5
47-7
34 -667
-806
-707
-744
-649
-(1 000)
(800)
(600) Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period
jwere created in October
(1,000)
Jan-
07Fe
b-07
Mar
-07
Apr
-07
May
-07
Jun-
07Ju
l-07
Aug
-07
Sep
-07
Oct
-07
Nov
-07
Dec
-Ja
n-08
Feb-
08M
ar-0
8A
pr-0
8M
ay-0
8Ju
n-08
Jul-0
8A
ug-0
8S
ep-0
8O
ct-0
8N
ov-0
8D
ec-
Jan-
09Fe
b-09
Mar
-09
Apr
-09
May
-09
Jun-
09Ju
l-09
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-Ja
n-10
Feb-
10M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-10
Jul-1
0A
ug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-
Jan-
11Fe
b-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Private Employers Added 2.952 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly Change Employment*
3 432600
January 2008 through October 2011* (Thousands)The job gain and loss figures in 2010 were severely distorted by the hiring
64 14 3920
8 313 4
-1
210
93 152
6823
522
121
753 20 85 10
4 158
80
0
200
400y y g
and termination of temporary Census workers. In 2010, 1.178 million nonfarm
jobs were created.
-72
-144 -122
-160 -137
-161 -128
-175
-321
-380
7 28 -387
15-3
46 -212
-225
-224 -1
09
-175
-66 -41
-600
-400
-200
80,000 f j b
-597
-681
-779 -726
-753
-52
-51
-1,000
-800
600
8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 1
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
nonfarm jobs were created
in October
Jan
08Fe
b 08
Mar
08
Apr
08
May
08
Jun
08Ju
l 08
Aug
08
Sep
08
Oct
08
Nov
08
Dec
08
Jan
09Fe
b 09
Mar
09
Apr
09
May
09
Jun
09Ju
l 09
Aug
09
Sep
09
Oct
09
Nov
09
Dec
09
Jan
10Fe
b 10
Mar
10
Apr
10
May
10
Jun
10Ju
l 10
Aug
10
Sep
10
Oct
10
Nov
10
Dec
10
Jan
11Fe
b 11
Mar
11
Apr
11
May
11
Jun
11Ju
l 11
Aug
11
Sep
11
Oct
11
Job Losses Since the Recession Began in Dec. 2007 Peaked at 8 4 Mill i D 09 13 9 Milli P l N D fi d
147Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
8.4 Mill in Dec. 09; 13.9 Million People are Now Defined as Unemployed
Unemployment Rates by State, October 2011:Highest 25 States*
13.414In October, 36 states and the District of
Columbia reported over-the-month unemployment rate decreases 5 had
11.7
11.0
10.6
10.6
10.5
10.4
10.4
10.3
10.2
10.1
6 6 510
12
(%)
unemployment rate decreases, 5 had increases, and 9 had no change.
9. 9. 9.5
9.3
9.1
9.0
9.0
9.0
9.0
9.0
8.8
8.7
8.5
8.4
8.2
8
10
ent R
ate
(
4
6
nem
ploy
m
0
2
Un
148
0NV CA DC MI MS SC NC RI FL GA IL KY TN OR AL NJ US AZ IN OH WA ID CT MO TX AR
*Provisional figures for October 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Unemployment Rates By State, October 2011: Lowest 25 States*
10In October, 36 states and the District of
Columbia reported over-the-month
8.2
8.1
8.1
7.9
7.9
7.7
7.6
7.4
7.3
7.3 .2 0 08
10
%)
punemployment rate decreases, 5 had
increases, and 9 had no change.
7 7 7 7 7.0
7.0
6.7
6.6
6.5
6.4
6.4
6.1
6.0
5.7
5.6
5.3
5
6
ent R
ate
(%
4.5
4.2
3.54
empl
oym
e
0
2Une
149
0WV CO PA DE NY WI MT AK ME MA MD LA UT KS NM HI MN VA OK IA WY VT NH SD NE ND
*Provisional figures for October 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
US Unemployment Rate
0%11.0%Rising
unemployment
2007:Q1 to 2012:Q4F* Jobless figures have been revised
upwards for 2011/12
%9.
3% 9.6% 10
. 09.
7%9.
6%9.
6%
8.9% 9.1%
9.1%
9.1%
9.1%
9.0%
8.9%
8.9%
9.6%
9.0%
10.0%
p yeroded payrolls
and workers comp’s exposure base.Unemployment
% 6.9%
8.1%
7.0%
8.0%
Unemployment peaked at 10% in
late 2009.
Unemployment
5% 5% .6%
4.8% 4.9% 5.
4%6.
1 %
5.0%
6.0%
p yforecasts remain stubbornly high
through 2011, but still imply millions of new
jobs will created.
4. 4. 4
4.0%
5.0%
7:Q
1
7:Q
2
7:Q
3
7:Q
4
8:Q
1
8:Q
2
8:Q
3
8:Q
4
9:Q
1
9:Q
2
9:Q
3
9:Q
4
0:Q
1
0:Q
2
0:Q
3
0:Q
4
1:Q
1
1:Q
2
1:Q
3
1:Q
4
2:Q
1
2:Q
2
2:Q
3
2:Q
4
j
150
07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (11/11); Insurance Information Institute
InflationInflation
Is it a Threat to Claim Cost SSeverities?
151
Annual Inflation Rates, (CPI-U, %),1990–2017FAnnual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
dit b bbl d d i fl ti
Higher energy, commodity and food prices are pushing up inflation in 2011
3.8 3.8
5.14.9
4 0
5.0
6.0 commodity bubble reduced inflationary pressures in 2009/10
up inflation in 2011, but not longer turn
inflationary expectations.
2.8 2.6
1 51.9
3.3 3.4
2.5 2.3
3.0
3.8
2.8
3.8
1.6
3.2
2.2 2.3 2.4 2.4 2.4 2.52.9
2.4
3.23.0
2.0
3.0
4.0
1.5 1.31.6
0.0
1.0
2.0
-0.4-1.090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F17F
The slack in the U.S. economy suggests that inflation should not heat up
152Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 11/11 (forecasts).
before 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns
Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years
1589.81800
All ItemsMedical Care
1500
100) A claim that cost $1,000 in 1961
would cost nearly $16,000 based on
719.8900
1200
alue
(196
1=
would cost nearly $16,000 based on medical cost inflation trends over the
past 50 years.
300
600
Inde
x V
a
0
300
61 66 71 76 81 86 91 96 01 06 1*6 6 7 7 8 8 9 9 0 0 11
*Based on change from Feb. 2011 to Feb. 2010 (latest available) Source: Department of Labor (Bureau of Labor Statistics)
P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests
5 5%6.2%
6%
8%(Percent)
2.7% 3.0% 3.1%3.8%
4.3%5.5%
4%
6%
0%
2%
-0.4%-2%
Overall Legal US Tort Medical Motor Bodily WC Med No-FaultCPI Services Costs Care Vehicle
BodyWork
InjurySeverity
Severity ClaimSeverity
Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are
Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.
Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely
154
Regulatory Environment & Financial Services Reform
State Regulatory Environments Vary Tremendously and CanVary Tremendously and Can
Impact Insurer Profitability and Ability to Compete
155
Ability to Compete
2010 Property and Casualty InsuranceRegulatory Report Card
Pennsylvania’s regulatory environment got a grade of
“C” in 2010
ME
NH
ND
MN
WA
AL
VTMT
AK
B+C-
B
D
A+A
C in 2010
NH
MA
CT
PA
NE
MN
MI
IL
IA
IDOR
NJRI B
DE
NY
MD
SD WI
INOH
NV
WY
= A= B= C= D
B+
B
B+
B+C-
B
B- D-B+
A+B
BC+
B-
C+
C
F D-
WVVA
NC
OK
IL
AZSC
TN
ARNM
KYMOKS
IN
CA
NV
UTCO
D= F= NG
B B+
DB-
B
C+
C-
C-B
C-
C-C+
B+A
B-
B-
D+FD+
Source: James Madison Institute, February 2008.
LATX
HI GAAL
FL
MS
NM
C- B+C-F
C-B+ C- C+B
C+N t G d d Di t i t f C l bi
Source: Heartland Institute, May 2011
F FNot Graded: District of Columbia
Insurance Information Institute Online:
www iii orgwww.iii.org
Thank you for your timed tt ti !and your attention!
Twitter: twitter.com/bob_hartwig_ g
