The Economic Slump: What it Means for P/C Insurers

An Update & Outlook for the US Property/Casualty Insurance Industry for

2001 and Beyond

June 2001

Robert P. Hartwig, Ph.D. Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org www.iii.org

Presentation Outline

• Financial highlights and 2001 forecasts;

• Wall Street Review

• Scope of the economic slowdown

• P/C industry performance during recessions

• Threats to specific lines

• Other “Big Money” Issues

INDUSTRY HIGHLIGHTS &

FORECASTS

Highlights: Full-Year 2000($ Millions)

2000 1999 Change

Net Written Prem. 301,559 286,934 +5.1%

Loss & LAE 241,602 222,270 +8.7%

Net UW Gain (Loss) (28,634) (19,729) +45.1%

Net Inv. Income 40,836 38,855 +5.1%

Net Income (a.t.) 20,223 21,865 -7.5%

Surplus 319,399 334,348 -4.5%

Combined Ratio 110.5 107.8 +2.7 pts.

EPS Growth Strong; P/E Falling

20.7

19.0 18.618.1

13.6

$10

$15

$20

$25

EPS Growth P/E Ratio

($ B

illi

ons)

2000 2001E 2002E

Source: Merrill Lynch.

Recommendations:4 Buy

9 Accumulate7 Neutral

0%

5%

10%

15%

20%

25%

US P/C Insurers All US Industries Life

Diversified Finl. Comm. Banks

ROE: Financial Services Industry Segments, 1987–2000

* Some 2000 figures are estimates.Source: Insurance Information Institute

0%

5%

10%

15%

20%

25%

U.S.

Source: A.M. Best, Insurance Information Institute

Growth in Net Premiums Written (All P/C Lines)

1999: 1.9%

2000: 5.1%

2001 Forecast: 7.4%

The underwriting cycle went AWOL in the 1990s.

Is it Back?

2001*

95

100

105

110

115

120

Combined Ratio

P/C Industry Combined Ratio

1999 = 107.8

2000 = 110.5

2001 Forecast* = 109.1

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.7

* Based on III Groundhog Forecast

2001*

U.S. InsuredCatastrophe Losses

$7.5

$2.7$4.7

$22.9

$5.5

$16.9

$8.3 $7.3

$2.6

$10.1$8.3

$4.3$2.4

0

5

10

15

20

25

89 90 91 92 93 94 95 96 97 98 99 00 01*

*Estimate for first half 2001.Source: Property Claims Service, Insurance Information Institute

$ Billions

First Quarter 2001: $705MM;

2nd Quarter up to $1.7 billion

TS Alison: 44th CAT of 2001

WALL STREET PERSPECTIVE

Insurance Stock Performance:Off to a Slow Start in 2001

-13.13%

-9.08%

-8.06%

-3.75%

-3.58%

3.76%

-1.51%

-8.02%

-17.89%

-20% -15% -10% -5% 0% 5%

Nasdaq

S&P 500

DJIA

Banks

Life/Health

P/C

All Insurers

Brokers

Multiline

Source: SNL Securities, Insurance Information Institute

Total Return YTD through June 15, 2001

But Still Looking Good Over Past 12 Months

-47.46%

-16.90%

2.17%

5.08%

14.87%

19.53%

28.52%

30.70%

-60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40%

P/C

Life/Health

All Insurers

Banks

Multiline

Brokers

S&P 500

Nasdaq

Source: SNL Securities, Insurance Information Institute

Total Return Past 52 Weeks (through June 15, 2001)

Insurance IPO Boomlet

• 3 Insurance IPOs scheduled for June could raise as much as

$1.44 billion (there were only 3 insurance IPOs in all of

2000)Odyssey Re: Expected to raise $274.3 - $325.7MM

Willis Group: Expected to raise as much as $276MM

The Phoenix Cos.: Expected to raise as much as $836.2MM

• Why Insurance? Why Now?Sector outperforming S&P, NASDAQ (Tech)

Good counter-cyclical play; Hancock/MET success

Overall market more hospitable to IPOs

THE ECONOMIC SLOWDOWN

SCOPE OF THE PROBLEM

-0.5%

3.1%2.7%

4.0%

2.7%

3.6%

4.4% 4.4%4.2%

5.0%

1.8%

3.1%

-1%

0%

1%

2%

3%

4%

5%

Real GDP Growth

Source: US Department of Commerce; Insurance Information Institute.*Forecasts: Blue Chip Economic Indicators.

4.4%

3.5%

2.5%

5.7%

8.3%

4.8%5.6%

2.2%

1.0% 1.3%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Real GDP Growth

Source: US Department of Commerce; Insurance Information Institute.*Preliminary.

Economy is experiencing negative G-forces after several quarters of unsustainably high

real growth

Unemployment Rate (%)

5.6

6.8

7.56.9

6.15.6

5.44.9

4.54.2 4.0

4.4

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

90 91 92 93 94 95 96 97 98 99 00 May'01

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

Unemployment Holding Steady

Despite the economic slowdown, the unemployment rate remains at

generational lows. But layoffs are up.

3-Jan-01

2-Feb-00

21-Mar-00

15-May-01

18-Apr-01

20-Mar-01

31-Jan-01

21-Dec-99

16-May-00

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Source: Federal Reserve, Insurance Information Institute

Federal Funds Rate

Not much maneuvering room left.

Next FOMC meeting June 25-26.

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Jun-01 Dec-00 Jun-00 Jun-90

Source: Federal Reserve, Insurance Information Institute

Treasury Yield Curves

Low interest rates are keeping the economy out of recession

$0

$9

$18

$27

$36

$45

Net Investment Income

Facts

1997 Peak = $41.5B

1998 = $39.9B

1999 = $38.9B

2000 = $40.8B

Source: A.M. Best, Insurance Information Institute

Bil

lion

s

(US

$)

Pricing & underwriting problems were exacerbated by declining investment income

THE ECONOMIC SLOWDOWN

HISTORICAL IMPACTS ON PROFITABILITY

Impact of Recession on P/C Premiums and Profitability (1970-1999)

8.1%

5.4%

-2.7%

0.2%

3.9% 3.8%2.7%

4.1%

8.8%

4.7%

7.0%

8.9%9.4%

11.3%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Inflation (CPI) NWP Growth(unadj.)

Real NWPGrowth

ROE--P/CInsurers*

ROE--AllIndustries*

ROE--Banks* ROE--DiversifiedFinancial*

Recession Years (1970; 74-75; 80-82; 90-91)

Non-Recession Years (all other years, 1970-1999)

*GAAP return on equity, adjusted for inflation; Bank data 1952-99; Div. Fin. 1987-99Source: Insurance Information Institute

Impact of Recession on P/C Premiums and Profitability (1950-1999)

6.0% 5.7%

-0.3%

1.6%

5.5% 5.1%

2.7%3.4%

8.6%

5.2% 5.1%

8.7% 8.4%

11.3%

-2%

0%

2%

4%

6%

8%

10%

12%

Inflation (CPI) NWP Growth(unadj.)

Real NWPGrowth

ROE--P/CInsurers*

ROE--AllIndustries*

ROE--Banks* ROE--DiversifiedFinancial*

Recession Years (1953-54; 57-58; 60; 70; 74-75; 80-82; 90-91)

Non-Recession Years (all other years, 1950-1999)

*GAAP return on equity, adjusted for inflation; Bank data 1952-99; Div. Fin. 1987-99Source: Insurance Information Institute

Impact of Energy Price Shocks on P/C Premiums and Profitability

16.5%

9.0%

-2.3%

0.7%

4.7%3.5% 2.8%

1.3%

3.9%4.7%

6.8%8.6%

9.5%11.3%

-5%

0%

5%

10%

15%

20%

EnergyInflation

OverallInflation

Real NWPGrowth

ROE--P/CInsurers*

ROE--AllIndustries*

ROE--Banks* ROE--DiversifiedFinancial*

Energy Spike Years (1973-75; 1979-81; 1989-90)

Non-Energy Spike Years (all other years, 1970-1999)

*GAAP return on equity, adjusted for inflation.Source: Insurance Information Institute

THE ECONOMIC SLOWDOWN

SELECTED IMPACTS ON EXPOSURE

Motor Vehicle Retail Sales (Millions of Units)

15.515.5

16.0

17.417.8

16.6

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

96 97 98 99 00 01*

Source: US Department of Commerce; Insurance Information Institute*Annualized, based on data through May 2001.

New Motor Vehicle Sales

Sales so far in 2001 are down modestly from 2000’s record

pace. Impact on exposure growth this year is marginal.

Decrease of 1 to 1.5 million new vehicles likely in 2001

$1.30

$1.35

$1.40

$1.45

$1.50

$1.55

$1.60

$1.65

$1.70

$1.75

$1.80

Pri

ce/G

al

(Mid

-Gra

de)

Source: Energy Information Administration, Insurance Information Institute

But Will Soaring Gas Prices Push Drivers Out of Their SUVs?

New Private Housing Starts(Millions of Units)

1.193

1.014

1.200

1.288

1.4571.345

1.477 1.474

1.617 1.667 1.5921.587

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

90 91 92 93 94 95 96 97 98 99 00 01*

Source: US Department of Commerce; Insurance Information Institute*Annualized April 2001 data.

New Private Housing Starts Annualized starts in early 2001 were

surprisingly strong: Virtually no exposure impact for insurers

-10%

-5%

0%

5%

10%

15%

20%

Real GDP Claim Frequency Real Claim Cost per Worker

Source: Insurance Information Institute, US Department of Commerce, NCCI.

Workers Comp Claim Frequency & Costs vs. Real GDP

1/80-7/80 7/81-11/82 7/90-3/91

Shaded areas

represent recessions

Exposure: Employment, Wages & Salaries

107112

115117 119 118 119 120

123 125 127130 132 134 135

110

100

105

110

115

120

125

130

135

140

85 86 87 88 89 90 91 92 93 95 95 96 97 98 99 00

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000Employed Persons Wage & Salary Disbursements

Source: U.S. Bureau of Labor Statistics, Insurance Information Institute.

Disb

ursem

ents ($B

illions)

Em

plo

ymen

t (M

illio

ns)

Exposure: Employment Base Shrinking

135.6

135.4

135.1

135.9

135.0

135.1

135.2

135.3

135.4

135.5

135.6

135.7

135.8

135.9

136.0

00:IV 01:I Apr '01 May '01

Employed Persons

Source: U.S. Bureau of Labor Statistics, Insurance Information Institute.

Em

plo

ymen

t (M

illio

ns)

4.8%

9.3%

5.2%

1.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

TotalConstruction

Non-Residential Public Residential

Surety: Construction Activity is Holding its Own

Source: US Department of Commerce; Insurance Information Institute.*April 2001 over April 2000, from annualized data.

Telecom: +35.9%

Industrial: + 19.1%

Office: +11.0%

Hotels/Motels: -10.1%

Water Supply: 19.0%

Educational: +12.2%

Other Public Bldgs: + 8.4%

Highways & Streets: -8.9%

OTHER “BIG MONEY” ISSUES

15.0%

14.9%

10.6%

10.3%

10.2%

4.3% 4.1%3.3% 3.0%

2.2%

0.6% 0.2%

-7.4%

-8.9%

-12.2

%

-17.2

%

32.1%

-20%

-10%

0%

10%

20%

30%

NY FLDE UT

CO HIM

IKS M

N TX PA KY ND DCM

A NJSC

Growth in Total PIPClaims Costs*

*Change in “pure premium”Source: Insurance Information Institute from ISO Fast Track Data

PIP Claims Costs

PIP Costs in New York are growing faster than in any other no-fault

state—by far .

Four Quarters Ending 2000:3rd

Asbestos: Reserve Deficiency and Ultimate Costs Growing

23.926.0

31.9

16.1 14.0

33.1

40.0 40.0

65.0

$0

$10

$20

$30

$40

$50

$60

$70

1996 1997 2001

($ B

illi

ons)

Incurred Losses to Date Unfunded Future Liabilities Ultimate Costs

Source: A.M. Best.

Reserve Deficiency = $33.1 Billion

Insurance Information Institute On-Line

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