What’s Keeping Insurance CEOs Awake at Night?
Trends, Challenges & Opportunities Alabama I-Day Tuscaloosa, AL
October 14, 2015 Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦ [email protected] ♦ www.iii.org
2
Insurance Industry Financial Performance
2014 Was a Reasonably Good Year 2015: A Repeat of 2014?
2
P/C Industry Net Income After Taxes 1991–2015:H1 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.2% 2014 ROAS1 = 8.4% 2015:H1 ROAS = 9.2%
•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO; Insurance Information Institute
$14,
178
$5,8
40$1
9,31
6
$10,
870
$20,
598
$24,
404 $3
6,81
9$3
0,77
3
$21,
865
$3,0
46$3
0,02
9
$62,
496
$3,0
43
$35,
204
$19,
456 $3
3,52
2$6
3,78
4
$55,
501
$30,
972
$38,
501
$20,
559
$44,
155
$65,
777
-$6,970
$28,
672
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
15:H
1
Net income fell modestly
(-12.5%) in 2014 vs. 2013
$ Millions
5
ROE: Property/Casualty Insurance by Major Event, 1987–2015E
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; Insurance Information Institute.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
Sandy
Low CATs
Modestly higher CATs
7
P/C Insurance Industry Combined Ratio, 2001–2015:H1*
* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0. Sources: A.M. Best, ISO.
95.7
99.3100.8
106.3
102.4
96.7 97.2 97.6
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15:H1
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums Relatively
Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Sandy Impacts
Lower CAT
Losses
Best Combined Ratio Since 1949 (87.6)
Avg. CAT Losses,
More Reserve Releases
A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE
* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014 combined ratio including M&FG insurers is 97.0; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
97.5100.6 100.1 100.8
92.7
101.299.5
101.0
96.7 97.2 97.6
102.4
106.5
95.7
14.3%15.9%
12.7%10.9%
7.4% 7.9%
4.7%6.2% 9.2%8.2%
9.6%8.8%
4.3%
9.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015:H10%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Lower CATs helped ROEs in 2013-15:Q2
9
Return on Equity by Financial Services Sector vs. Fortune 500, 2004-2014*
*GAAP basis. Sources: ISO, Fortune; Insurance Information Institute.
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
04 05 06 07 08 09 10 11 12 13 14
Fortune 500 P/C Insurers Life Insurers Commercial Banks(Percent)
Average: 2004 - 2014 Fortune 500: 13.9%
Commercial Banks: 9.8% Life: 8.2% P/C: 7.1%
Banks and Insurers Have Substantially Underperformed the Fortune 500 Since the Financial Crisis
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute.
Economic Shocks, Inflation:
1976: 22.0%
Tort Crisis 1985/86: 22.2%
Post-9/11 2002:15.3%
Twin Recessions; Interest Rate
Hikes 1987: 3.7% Great
Recession:2010: -4.9%
ROE
2015E 4.1%
NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2015E
Great Depression 1932: -15.9% max drop
Post WW II Peak: 1947: 26.2%
Start of WW II 1941: 15.8%
1950-70: Extended period of stability in growth and
profitability. Low interest rates, low inflation, “Bureau” rate regulation all played a role
1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic
volatility, high interest rates, tort environment all played roles
1988-2000: Period of
inter-cycle stability
2010-20XX? Post-
recession period of
stable growth?
14
RNW All Lines by State, 2004-2013 Average: Highest 25 States
20.5
18.4
14.6
14.3
13.4
13.3
12.3
12.1
12.0
12.0
11.7
11.4
11.1
11.1
10.9
10.8
10.7
10.7
10.5
10.5
10.3
9.9
9.8
9.8
9.6
9.5
02468
1012141618202224
HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD
The most profitable states over the past decade are
widely distributed geographically, though none
are in the Gulf region
Source: NAIC; Insurance Information Institute.
Profitability Benchmark: All P/C US: 7.9%
15
9.2
8.6
8.4
8.3
8.2
8.2
8.1
8.0
7.9
7.7
7.7
7.5
7.4
6.8
6.6
6.4
6.1
5.7
5.3
5.2
5.0
4.3
2.5
1.9
-6.9
-9.3
-14-12-10-8-6-4-202468
10
NM FL TX WI KS MN CO PA US AR IL IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA
RNW All Lines by State, 2004-2013 Average: Lowest 25 States
Source: NAIC; Insurance Information Institute.
Some of the least profitable states over the past decade
were hit hard by catastrophes, including Alabama
INVESTMENTS: THE NEW REALITY
17
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
17
Property/Casualty Insurance Industry Investment Income: 2000–2015E1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.3$46.2 $46.8
$39.6
$49.5$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E
Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014.
1 Investment gains consist primarily of interest and stock dividends. *2015 figure is estimated based on annualized data through Q2. Sources: ISO; Insurance Information Institute.
($ Billions) Investment earnings are still below their 2007 pre-crisis peak
20
U.S. Treasury Security Yields: A Long Downward Trend, 1990–2015*
*Monthly, constant maturity, nominal rates, through August 2015. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
U.S. Treasury yields plunged to historic lows in 2013. Longer-
term yields rebounded then sank fell again.
20
23
Interest Rate Forecasts: 2015 – 2021
3.1%
2.2%
2.7%
3.4%3.8%
4.0% 4.0% 4.0%
0.1%
0.8%
2.0%
2.8%3.1% 3.1%
0%
1%
2%
3%
4%
5%
15F 16F 17F 18F 19F 20F 21F 15F 16F 17F 18F 19F 20F 21F
A full normalization of interest rates is unlikely until the 2020s, more than a decade after the onset of the financial crisis.
Yield (%)
Sources: Blue Chip Economic Indicators (10/15 for 2015 and 2016; for 2017-2021 10/15 issue); Insurance Info. Institute.
3-Month Treasury 10-Year Treasury
The end of the Fed’s QE program in 2014 and a
stronger economy have yet to push longer-term
yields much higher
25
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Person
al Lin
es
Pvt Pas
s Auto
Pers Prop
Commerc
ial
Comml A
uto
Credit
Comm Prop
Comm C
as
Fidelity
/Surety
Warran
ty
Surplus
Line
s
Med M
al
WC Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums **US domestic reinsurance only Source: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
25
30
Profitability and Growth in Alabama P/C Insurance
Markets
Analysis by Line and Nearby State Comparisons
31
RNW All Lines: AL vs. U.S., 2004-2013
Sources: NAIC.
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
04 05 06 07 08 09 10 11 12 13
US All Lines AL All Lines
P/C Insurer profitability in AL is below that of the US
overall over the past decade US: 7.9% AL: 2.5%
(Percent)
2004/05 hurricanes
Tuscaloosa tornado
32
RNW PP Auto: AL vs. U.S., 2004-2013
Sources: NAIC.
0%
2%
4%
6%
8%
10%
12%
14%
04 05 06 07 08 09 10 11 12 13
US PP Auto AL PP Auto
Average 2004-2013 US: 7.1% AL: 7.6%
Tuscaloosa tornados
Katrina and other storms
33
RNW Comm. Auto: AL vs. U.S., 2004-2013
Sources: NAIC.
-10%
-5%
0%
5%
10%
15%
20%
04 05 06 07 08 09 10 11 12 13
US Comm Auto AL Comm Auto
(Percent) Commercial Auto
profitability in AL is generally below the
US average
Average 2004-2013 US: 9.2% AL: 3.7%
Katrina and other storms
34
RNW Comm. Multi-Peril: AL vs. U.S., 2004-2013
Sources: NAIC.
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
04 05 06 07 08 09 10 11 12 13
US Comm M-P AL Comm M-P
(Percent)
Average 2004-2013 US: 8.9% AL: -1.6% Tuscaloosa
tornados Katrina and
other storms in 2004/05
35
RNW Homeowners: AL vs. U.S., 2004-2013
Sources: NAIC.
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
04 05 06 07 08 09 10 11 12 13
US HO AL HO
(Percent)
Average 2004-2013 US: 6.6%
AL: -13.1% Tuscaloosa
tornados Katrina and other storms
in 2004/05
36
RNW Workers Comp: AL vs. U.S., 2004-2013
Sources: NAIC.
0%
2%
4%
6%
8%
10%
12%
04 05 06 07 08 09 10 11 12 13
US WComp AL Wcomp
(Percent)
Average 2004-2013 US: 7.1% AL: 7.9%
All Lines: 10-Year Average RNW AL & Nearby States
2.5%
6.4%
7.9%
8.6%
-6.9%
5.3%
-10% -5% 0% 5% 10%
Florida
U.S.
Tennessee
Georgia
Alabama
Mississippi
Source: NAIC, Insurance Information Institute
2004-2013
Alabama All Lines profitability is below the
US and the regional average
PP Auto: 10-Year Average RNW AL & Nearby States
4.5%
6.2%
7.1%
7.6%
4.4%
5.8%
0% 2% 4% 6% 8%
Alabama
U.S.
Tennessee
Georgia
Mississippi
Florida
Source: NAIC, Insurance Information Institute
2004-2013
Alabama PP Auto profitability is above the US and regional
average
Comm. Auto: 10-Year Average RNW AL & Nearby States
4.7%
6.4%
9.0%
9.2%
3.7%
5.7%
0% 2% 4% 6% 8% 10%
U.S.
Tennessee
Georgia
Mississippi
Florida
Alabama
Source: NAIC, Insurance Information Institute
2004-2013
Alabama Commercial Auto profitability is below the US and regional average
Comm. M-P: 10-Year Average RNW AL & Nearby States
-1.6%
5.7%
7.4%
8.9%
-6.4%
5.0%
-10% -5% 0% 5% 10%
U.S.
Florida
Tennessee
Georgia
Alabama
Mississippi
Source: NAIC, Insurance Information Institute
2004-2013
Alabama Commercial Multi-Peril profitability
is below the US average and below the
regional average
Homeowners: 10-Year Average RNW AL & Nearby States
-13.1%
-8.2%
-0.4%
6.6%
-25.8%
-10.2%
-30% -20% -10% 0% 10%
U.S.
Florida
Georgia
Tennessee
Alabama
Mississippi
Source: NAIC, Insurance Information Institute
2004-2013
Alabama Homeowners profitability is below the US average and below the regional average
43
Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2012 (1)
Rank Most
expensive states HO average
premium Rank Least
expensive states HO average
premium 1 Florida $2,084 1 Idaho $538
2 Louisiana 1,742 2 Oregon 567 3 Texas 1,661 3 Utah 580 4 Oklahoma 1,501 4 Wisconsin 631 5 Mississippi 1,314 5 Washington 648 6 Alabama 1,248 6 Nevada 674 7 Rhode Island 1,233 7 Delaware 678 8 Kansas 1,213 8 Arizona 691 9 Connecticut 1,160 9 Ohio 721
10 New York 1,158 10 Maine 741 (1) Includes policies written by Citizens Property Insurance Corp. (Florida) and Citizens Property Insurance Corp. (Louisiana), Alabama Insurance
Underwriting Association, Mississippi Windstorm Underwriting Association, North Carolina Joint Underwriting Association and South Carolina Wind and Hail Underwriting Association. Other southeastern states have wind pools in operation and their data may not be included in this chart. 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. In addition, due to the Texas Windstorm Association (which writes wind-only policies) classifying HO-1, 2 and 5 premiums as HO-3, the average premium for homeowners insurance is artificially high.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank state average expenditures and does not endorse any conclusions drawn from this data. Source: ©2014 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.
Alabama ranked as the 6th most expensive state for homeowners insurance in 2012, with an average expenditure of $1,248.
Workers Comp: 10-Year Average RNW AL & Nearby States
7.1%
7.3%
7.9%
10.5%
4.6%
7.3%
0% 2% 4% 6% 8% 10% 12%
Florida
Alabama
Mississippi
Tennessee
U.S.
Georgia
Source: NAIC, Insurance Information Institute
2004-2013
Alabama Workers Comp profitability is
above the US average and above the regional
average
45
All Lines DWP Growth: AL vs. U.S., 2005-2014
Source: SNL Financial.
2.3%
3.4%
0.5%
-2.1
%
-3.3
%
0.0%
3.7% 4.
6% 5.5%
4.4%
4.5%
5.8%
1.5%
-0.3
%
-3.6
%
-0.2
%
3.1% 4.
0%
6.2%
2.7%
-6%
-4%
-2%
0%
2%
4%
6%
8%
05 06 07 08 09 10 11 12 13 14US DWP: All Lines AL DWP: All Lines
(Percent) Average 2005-2014
US: 1.9% AL: 2.4%
46
Comm. Lines DWP Growth: AL vs. U.S., 2005-2014
Source: SNL Financial.
2.6%
4.6%
-0.1
%
-4.0
%
-7.3
%
-2.5
%
5.1%
5.1% 6.
1%
4.3%5.
0%
8.0%
-0.3
%
-3.0
%
-7.4
%
-3.3
%
2.3%
4.2% 5.
2%
1.2%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
05 06 07 08 09 10 11 12 13 14US DWP: Comm. Lines AL DWP: Comm. Lines
(Percent)
Average 2005-2014 US: 1.4% AL: 1.2%
47
Personal Lines DWP Growth: AL vs. U.S., 2005-2014
Source: SNL Financial.
2.2% 2.3%
1.2%
-0.1
%
1.1%
2.5%
2.2%
4.2%
5.1%
4.8%
4.0% 4.2%
3.1%
2.2%
-0.2
%
2.6%
2.6%
4.0%
6.8%
4.1%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
05 06 07 08 09 10 11 12 13 14US DWP: Pers. Lines AL DWP: Pers. Lines
(Percent)
Average 2005-2014 US: 2.6% AL: 3.3%
48
Private Passenger Auto DWP Growth: AL vs. U.S., 2005-2014
Source: SNL Financial.
0.5%
0.4%
0.0%
-0.3
%
-0.1
%
1.5%
1.5%
3.5%
4.6% 4.9%
1.6% 2.
6%
1.6%
0.1%
-1.8
%
0.9%
0.8%
2.6%
7.6%
4.5%
-4%
-2%
0%
2%
4%
6%
8%
10%
05 06 07 08 09 10 11 12 13 14US DWP: PP Auto AL DWP: PP Auto
(Percent)
Average 2005-2014 US: 1.6% AL: 2.1%
49
Homeowner’s MP DWP Growth: AL vs. U.S., 2005-2014
Source: SNL Financial.
7.4%
7.4%
4.2%
0.5%
3.8%
4.9%
3.8%
5.7% 6.
2%
4.4%
9.6%
7.4%
6.2% 6.4%
2.9%
5.3% 5.5% 5.8%
5.8%
3.6%
0%
2%
4%
6%
8%
10%
12%
05 06 07 08 09 10 11 12 13 14US DWP: HO Lines AL DWP: HO Lines
(Percent)
Average 2005-2014 US: 4.8% AL: 5.9%
CAPITAL/CAPACITY
50
Capital Accumulation Has Multiple Impacts
50
51
Policyholder Surplus, 2006:Q4–2015:Q2
Sources: ISO, A.M .Best.
($ Billions) $4
87.1
$496
.6
$512
.8
$521
.8
$478
.5
$455
.6
$437
.1 $463
.0 $490
.8 $511
.5 $540
.7
$530
.5
$544
.8
$559
.2
$559
.1
$538
.6
$550
.3 $567
.8
$583
.5
$586
.9 $607
.7
$614
.0
$624
.4 $653
.4 $671
.6
$673
.9
$674
.7
$672
.4
$662
.0
$570
.7
$566
.5
$505
.0
$515
.6
$517
.9
$400
$450
$500
$550
$600
$650
$700
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
14:Q
2
14:Q
3
14:Q
4
15:Q
2
2007:Q3 Pre-Crisis Peak
Surplus as of 6/30/15 stood at a near-record high $672.4B
2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .
The industry now has $1 of surplus for every $0.73 of NPW, close to the strongest claims-paying status in its history.
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2015 in very strong financial condition.
56
Alternative Capital
56
New Investors Continue to Change the Reinsurance Landscape
First I.I.I. White Paper on Issue Was
Released in March 2015
Global Reinsurance Capital (Traditional and Alternative), 2006 - 2014
2014 data is as of June 30, 2014. Source: Aon Benfield Analytics; Insurance Information Institute.
Total reinsurance capital reached a record $570B in 2013, up 68% from
2008.
But alternative capacity has grown 210% since 2008, to $50B. It has more than doubled in the past three years.
Alternative Capital as a Percentage of Traditional Global Reinsurance Capital
2014 data is as of June 30, 2014. Source: Aon Benfield Analytics; Insurance Information Institute.
4.6% 5.7% 5.9% 5.8% 5.4%
6.5%
8.4%
10.2%
11.5%
0%
2%
4%
6%
8%
10%
12%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010.
Catastrophe Bond Issuance and Outstanding: 1997-2015:Q2
94
8.2
87
4.2
1,0
62
.5
1,1
42
.0
96
6.9
98
9.5
1,9
88
.2
1,1
42
.8
1,4
99
.0
4,6
14
.7
7,1
87
.0
3,0
09
.9
3,3
96
.0
4,5
99
.9
4,1
07
.1
5,8
55
.3
7,0
83
.0
8,0
26
.7
3,8
42
.2
4,2
89
.0
5,0
85
.0
7,6
77
.0
13
,41
6.4
12
,53
8.6
12
,50
8.2
12
,19
5.7
12
,34
2.8
14
,83
9.3
18
,57
6.9
22
,86
7.8
21
,55
9.6
0
5,000
10,000
15,000
20,000
25,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*
New Issuance Outstanding
60
Risk Capital Amount ($ Millions)
Cat Bond Issuance Appears to Be Slowing Down in 2015 from 2014’s Record Pace. Lower Yields on Bonds Explain Some of the Contraction.
Source: Guy Carpenter.
65
Performance by Segment
65
Homeowners Insurance Combined Ratio: 1990–2015F
113.
011
7.7
158.
411
3.6
101.
0 109.
410
8.2
111.
4 121.
710
9.3
98.2
91.7 96
.485
.4 91.7
114.
510
3.1
103.
811
9.4
101.
487
.7 92.4 96
.6
118.
411
2.7 12
1.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F 15F
1
Homeowners Performance in 2011/12 Impacted by Large Cat Losses. Extreme Regional Variation Can Be Expected Due to
Local Catastrophe Loss Activity
66
Hurricane Ike
Hurricane Sandy
Record tornado activity
Hurricane Andrew
Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute.
Private Passenger Auto Combined Ratio: 1993–2017F
101.
710
1.3
101.
310
1.0
109.
510
7.9
104.
298
.494
.395
.195
.5 98.3 10
0.2
101.
310
1.0
102.
010
2.1
101.
610
2.3
102.
210
2.3
102.
4
99.5 10
1.1
103.
5
80
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F
Private Passenger Auto Underwriitng Performance Is Exhibiting Remarkable Stability
67
Sources: A.M. Best (1990-2014); Conning (2015F – 2017F); Insurance Information Institute.
68
Collision Coverage: Severity & Frequency Trends Are Both Higher in 2015*
2.8%
1.3%
4.2%
1.6%
3.0%
-1.8%
-3.6%
2.5%
-2.4%-1.4%
4.2%
1.7%
3.9%3.1%
0.1% 0.5%
-2.3%
-0.1%
-1.4%-0.5%
0.9%
2.3%
-4%
-3%
-2%
-1%
0%1%
2%
3%
4%
5%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
Severity Frequency
Annual Change, 2005 through 2015*
The Recession, High Fuel Prices Helped Temper Frequency and Severity, But this Trend Will Likely Be Reversed Based on
Evidence from Past Recoveries *2015 figure is for the 4 quarters ending with 2015:Q1. Source: ISO/PCI Fast Track data; Insurance Information Institute
109.
4
110.
211
8.8
109.
5 112.
5
110.
210
7.6
104.
110
9.7
110.
2
102.
5 105.
491
.1 93.6
104.
2
98.9
102.
4
107.
910
3.5
94.8
94.3
98.3 99
.2102.
0
111.
1
112.
3
122.
3
90
95
100
105
110
115
120
125
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F
16F
Com
mer
cial
Lin
es C
ombi
ned
Rat
io
*2007-2012 figures exclude mortgage and financial guaranty segments. Source: A.M. Best (1990-2014); Conning (2015-16F) Insurance Information Institute.
Commercial Lines Combined Ratio, 1990-2016F*
Commercial lines underwriting performance improved in 2013/14 but higher cats, diminishing prior year reserves and rising loss cost trends in some lines could push
combined ratios higher
69
98
Growth Analysis by State and Business Segment
Post-Crisis Paradox? Premium Growth Rates Vary
Tremendously by State
98
99
-5%
0%
5%
10%
15%
20%
25%
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 12 13 14 15*
Net Premium Growth (All P/C Lines): Annual Change, 1971—2015:H1 (Percent)
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periods Sources: A.M. Best (1971-2013), ISO (2014-15).
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.
2015:H1: 4.1% 2014: 4.1% 2013: 4.4%
2012: +4.2%
100
Direct Premiums Written: Total P/C Percent Change by State, 2007-2014
70.7
36.7
36.2
30.3
29.4
26.8
24.7
23.7
21.6
20.7
19.2
19.2
18.6
18.1
18.0
17.0
15.2
15.1
15.0
14.9
14.8
14.7
14.4
14.2
13.8
13.5
0
10
20
30
40
50
60
70
80
ND
OK SD TX NE
KS IA VT WY
CO
MN IN MI
TN AR WI
GA
SC NJ
OH AK
KY VA LA CT
MT
Pece
nt c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
North Dakota was the country’s growth leader over the past 7 years with premiums written
expanding by 70.7%, fueled by the state’s energy boom
Growth Benchmarks: Total P/C US: 13.0%
101
Direct Premiums Written: Total P/C Percent Change by State, 2007-2014
13.4
13.1
13.1
13.0
13.0
12.9
12.4
12.2
11.7
11.0
10.5
9.4
9.4
9.2
9.1
8.2
6.3
6.0
4.7
2.2
1.3
-0.8
-1.6
-4.3
-7.3
-12.
9
-15
-10
-5
0
5
10
15
MO NY
UT
US
NM MS
MA AL
NC
MD
WA RI
NH IL PA ID ME CA
OR FL AZ
DC HI
WV
NV
DE
Pece
nt c
hang
e (%
)
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
Growth was negative in 4 states and DC between
2007 and 2014
102
Direct Premiums Written: Comm. Lines Percent Change by State, 2007-2014
80.4
36.8
33.3
29.4
24.8
22.5
21.0
20.6
15.2
14.6
13.9
11.8
10.3
8.7
8.5
8.4
8.0
7.9
7.6
7.1
6.6
5.9
5.9
5.8
5.4
4.5
0102030405060708090
ND SD VT OK NE IA KS TX WY
AK IN MN WI
MA
AR
CT
NY NJ
CO
NM OH LA US
MS
NH
MO
Pece
nt c
hang
e (%
)
Sources: SNL Financial LLC.; Insurance Information Institute.
Top 25 States
43 states showed commercial lines growth from 2007
through 2014
Growth Benchmarks: Commercial US: 5.9%
103
Direct Premiums Written: Comm. Lines Percent Change by State, 2007-2014
4.5
4.4
4.2
4.1
3.9
3.8
3.7
3.3
3.3
3.2
3.1
2.8
2.8
2.2
2.1
1.4
0.9
-1.3
-3.2
-5.3
-6.5
-6.9
-9.2
-10.
7
-19.
9
-22.
2
-25
-20
-15
-10
-5
0
5
10
MI
TN MD
MT CA RI
WA
GA PA UT IL KY VA NC
ME
SC ID AL
DC HI
FL OR AZ
DE NV
WV
Pece
nt c
hang
e (%
)
Bottom 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
Alabama DPW growth has been
sluggish
Nearly half the states have yet to see commercial lines premium
volume return to pre-crisis levels
106
Pricing Trends
Survey Results Suggest Commercial Pricing Has
Flattened Out but Personal Lines Are Up
106
107
Monthly Change in Auto Insurance Prices, 1991–2015*
*Percentage change from same month in prior year; through July 2015; seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-2%
0%
2%
4%
6%
8%
10%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Cyclical peaks in PP Auto tend to occur roughly every 10 years (early
1990s, early 2000s and likely the early 2010s)
“Hard” markets tend to occur
during recessionary
periods
Pricing peak occurred in late
2010 at 5.3%, falling to 2.8% by Mar. 2012
July 2015 reading of 5.4% is up from 4.2%
a year earlier
109
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2015:Q1
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Percentage Change (%)
Peak = 2001:Q4 +28.5%
KRW : No Lasting Impact
Pricing turned positive in
Q3:2011, the first increase in nearly 8 years
Trough = 2007:Q3 -13.6%
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
Rate trends are roughly flat, some carriers
reporting small gains, others flat, others small
declines
M&A UPDATE: A PATH TO GROWTH?
112
Are Capital Accumulation, Drive for Growth and Scale Stimulating
M&A Activity?
112
113
U.S. INSURANCE MERGERS AND ACQUISITIONS, P/C SECTOR, 1994-2014 (1)
$5,1
00
$11,
534
$8,0
59
$30,
873
$19,
118
$40,
032
$1,2
49
$486
$20,
353
$425
$9,2
64
$35,
221
$13,
615
$16,
294
$3,5
07 $6,4
19
$12,
458
$4,6
51
$4,3
97
$6,7
23
$55,825
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Tran
sact
ion
valu
es
0
20
40
60
80
100
120
140
Num
ber of transactions
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target. Source: Conning proprietary database.
M&A activity in the P/C sector was up sharply in 2014 but remains well
below pre-crisis or late 1990s levels.
M&A activity in 2015 will
likely reach its highest level since 1998
117
Insured Catastrophe Losses
2013/14 and YTD 2015 Experienced Below Average CAT Activity After Very High CAT
Losses in 2011/12 Winter Storm Losses Far Above Average in
2014 and 2015
117
118
$13.
0$1
1.3
$3.9
$14.
8$1
1.9
$6.3
$35.
8$7
.8 $16.
8$3
4.7
$10.
9$7
.7$3
0.1
$11.
8$1
4.9
$34.
6$3
6.1
$13.
1$1
5.5
$11.
0
$75.7
$14.
4$5
.0 $8.2
$38.
9$9
.1$2
7.2
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*
U.S. Insured Catastrophe Losses
*Through 9/30/15 in 2015 dollars. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for
more—not fewer—Costly Events
2012 was the 3rd most expensive year ever for
insured CAT losses
$11.0B in insured CAT losses though
9/30/15
($ Billions, $ 2014)
118
US Insured CAT Losses Through Q3to Date: 30 Events =$11 Billion in Claims
Source: PCS; Insurance information Institute.
Top 10 Insured CAT Losses Through 2015 Q3: 30 Events = $11 Bill. in Claims
Source: PCS; Insurance information Institute.
Loss Events in the US, 1980 – 2014 Overall and Insured Losses
122
Overall losses (in 2013 values)*
Insured losses (in 2013 values)*
*Losses adjusted to inflation based on CPI.
Overall losses totaled $25bn; Insured losses totaled $15.3bn
50
100
150
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Property Claim Services, MR NatCatSERVICE.
$ Billions 2015 First Half: $8.2 Billion Insured Losses
$12.0 Overall Losses
123
Number of National Flood Insurance Program Policies in Force at Year-End, 1980-2015*
Source: National Flood Insurance Program. * As of July, 2015
2.10
4
2.01
7 2.47
8
3.47
7
4.36
9 4.96
2 5.65
6
5.68
4
5.70
0
5.64
5
5.64
6
5.62
0
5.56
9
5.35
1
5.15
1
0
1
2
3
4
5
6
1980 1985 1990 1995 2000 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015*
(mill
ions
)
The number of NFIP policies in force has
plunged by 549,000 or 9.6% since 2009, even
as coastal development surges and sea levels rise
124
10% 14%
40%52%
62%
87% 95% 99%
0%10%20%30%40%50%60%70%80%90%
100%
CAEarthquake
Flood Renters Cyber Terrorism Pvt.Passenger
Auto
Home WorkersComp
Sources: CA Earthquake (WSJ, http://www.wsj.com/articles/california-pushes-homeowners-to-insure-against-earthquakes-1440980138 ); Flood and Renters (I.I.I. June 2015 Pulse Survey); Cyber (Advisen, 2015); Terrorism (Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014; data for 2013); Pvt. Passenger Auto (Insurance Research Council, Uninsured Motorists, 2014 Edition, data for 2012); Home and Workers Comp (I.I.I. estimates); Insurance Information Institute research.
Take-Up Rates for Various Types of Insurance in the U.S.
Take-Up Rate
Take-up rates vary widely by type of coverage
125
Top 16 Most Costly Disasters in U.S. History—Katrina Still Ranks #1
(Insured Losses, 2014 Dollars, $ Billions)
$8.1 $9.0 $9.4 $11.4$13.8$19.3
$24.6 $25.3$26.4
$50.2
$7.7$7.3$6.9$5.8$5.7$4.6
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne(2004)
Frances(2004)
Rita (2005)
Tornadoes/T-Storms
(2011)
Tornadoes/T-Storms
(2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Northridge(1994)
9/11 Attack(2001)
Andrew(1992)
Katrina(2005)
Storm Sandy in 2012 was the last mega-CAT
to hit the US
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have Occurred Since 2004
Sources: PCS; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI.
127
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1995–20141
0.1%
1.5%5.4%
0.1%6.2%
6.8%
39.2%
40.7%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2014 dollars. 2. Excludes snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. 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.
Hurricanes & Tropical Storms, $161.2
Fires (4), $6.0
Events Involving Tornadoes (2), $154.9
Winter Storms, $26.9
Terrorism, $24.5
Geological Events, $0.5
Wind/Hail/Flood (3), $21.4
Other (5), $0.2
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1995-2014
totaled $395.6B, an average of $19.8B per year or $1.65B
per month
Winter storm losses were much above average in 2014/15 are
will push this share up
Convective Loss Events in the US Overall and insured losses, 1980 – 2014
136
$ Billions
Analysis contains: severe storm, tornado, hail, flash flood and lightning
10
20
30
40
50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
*Losses adjusted to inflation based on CPI
Source: Geo Risks Research, NatCatSERVICE
Overall losses (in 2014 values)*
Insured losses (in 2014 values)* The period from 2008-2014 has
been the most expensive on record for insured losses from “Convective Events” (severe thunderstorms, tornado, hail,
lightning and flash flood)
2015 First Half: $5.1 Billion Insured Losses
$7.0 Overall Losses
137
Federal Disaster Declarations Patterns:
1953-2015
137
Disaster Declarations Set New Records in Recent Years
Number of Federal Major Disaster Declarations, 1953-2015*
1317 18 16 16
7 712 12
22 2025 25
11 1119
2917 17
48 46 4638
3022 25
4223
1524 21
3427 28
2311
3138
4532
3632
7544
6550
45 4549
5669
4852
6375
5981
9947
6245
36
43
0
20
40
60
80
100
120
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 12 13 14 15*
*Through October 3, 2015. Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
The Number of Federal Disaster Declarations Is Generally Rising and Set New Records in 2010 and 2011 Before Dropping in 2012-2014
The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s
record 81 declarations.
There have been 2,239 federal disaster
declarations since 1953. The average
number of declarations per year is 36 from
1953-2014, though there haven’t been that few recorded since 1995.
36 federal disasters have declared so far in 2015*
138
139
Federal Disasters Declarations by State, 1953 – 2015: Highest 25 States*
89
81
76
69 67
61 61 58 57 56 56 56 54 54 53 52 51 51 50 49 47 47 45 44 41
0102030405060708090
100
TX CA OK NY FL KY LA AL AR MO IA WV MS TN IL NE MN KS PA WA OH VA ND SD ME
Dis
aste
r Dec
lara
tions
Over the past 60 years, Alabama has had the 8th
highest number of Federal Disaster Declarations
*Through Oct. 3, 2015. Includes Puerto Rico and the District of Columbia. Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
140
Federal Disasters Declarations by State, 1953 – 2015: Lowest 25 States*
43
40 40 39 39
37 36
34
30 29 28 28 27 26 25 25 24 23 23
20
17 17
15
13 12 11 10
0
10
20
30
40
50
NC AK IN GA VT WI NJ NH MA OR HI NM MI PR MD MT AZ ID CO CT NV SC DE DC RI UT WY
Dis
aste
r Dec
lara
tions
Over the past 60 years, Wyoming and Utah had
the fewest number of Federal Disaster
Declarations
*Through Oct. 3, 2015. Includes Puerto Rico and the District of Columbia. Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
The Strength of the Economy Will Influence P/C Insurer
Growth Opportunities
143
Growth Will Expand Insurer Exposure Base Across Most Lines
143
144
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 10/15; Insurance Information Institute.
2.7%
1.8%
-1.8
%1.
3%-3
.7%
-5.3
%-0
.3%
5.0%
2.3%
2.2% 2.6%
2.4%
0.1%
2.5%
1.3%
4.1%
2.0%
1.3%
3.1%
0.4%
2.7%
1.8%
3.5%
-0.9
%4.
6%4.
3%2.
1%0.
6%3.
9%2.
1% 2.7%
2.6%
2.7%
2.6%
2.6%
-8.9%
4.5%
1.4%
4.1%
1.1% 1.
8% 2.5% 3.
6%3.
1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
08:1
Q08
:2Q
08:3
Q08
:4Q
09:1
Q09
:2Q
09:3
Q09
:4Q
10:1
Q10
:2Q
10:3
Q10
:4Q
11:1
Q11
:2Q
11:3
Q11
:4Q
12:1
Q12
:2Q
12:3
Q12
:4Q
13:1
Q13
:2Q
13:3
Q13
:4Q
14:1
Q14
:2Q
14:3
Q14
:4Q
15:1
Q15
:2Q
15:3
Q15
:4Q
16:1
Q16
:2Q
16:3
Q16
:4Q
Demand for Insurance Should Increase in 2016 as GDP Growth Continues at a Steady, Albeit Moderate Pace and Gradually Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in in June
2009
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
Q1 2014/15 GDP data were hit hard by this year’s “Polar Vortex”
and harsh winter
146
Real GDP by State Percent Change, 2014*: Highest 25 States
6.3
5.2
5.1
5.1
4.7
3.6
3.1
3.0
2.8
2.8
2.7
2.7
2.5
2.3
2.3
2.3
2.2
2.2
2.1
1.9
1.9
1.9
1.8
1.8
1.8
1.7
0
1
2
3
4
5
6
7
ND TX WY WV CO OR UT WA OK CA ID FL NY GA NH MA US SC OH MI MN LA MT KS PA TN
Perc
ent C
hang
e (%
)
*Advance statistics Sources: U.S. Bureau of Economic Analysis; Insurance Information Institute.
North Dakota was the economic growth juggernaut of the US
in 2014—by far
Only 7 states experienced growth in excess of 3% in 2014, which is a
growth rate we would see nationally in a more typical recovery
Growth Benchmarks: Real GDP US: 2.2%
147
1.6
1.4
1.4
1.2
1.2
1.2
1.0
1.0
1.0
1.0
0.9
0.8
0.8
0.8
0.7
0.7
0.6
0.6
0.6
0.4
0.4
0.4
0.2
0.0
-1.2
-1.3-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
DC NC AZ IL RI DE WI KY NM NV MO AR HI MD NE AL SD VT CT IA IN NJ ME VA MS AK
Perc
ent C
hang
e (%
)Real GDP by State Percent Change, 2014*: Lowest 25 States
*Advance statistics Sources: US Bureau of Economic Analysis; Insurance Information Institute.
Mississippi and Alaska were the
only states to shrink in 2014
Growth rates in 16 states were still below 1% in 2014, including in AL
149
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend Has Greatly Improved
149
150
Unemployment and Underemployment Rates: Still Too High, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Jan14
Jan15
"Headline" Unemployment Rate U-3
Unemployment + Underemployment RateU-6
“Headline” unemployment
was 5.1% in Sep. 2015. 4.5% to
5.5% is “normal.”
Source: US Bureau of Labor Statistics; Insurance Information Institute.
January 2000 through September 2015, Seasonally Adjusted (%)
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is continuing to improve.
150
U-6 soared from 8.0% in March
2007 to 17.5% in October 2009; Stood at 10.0% in Sept. 2015. 8% to 10% is
“normal.”
152
US Unemployment Rate Forecast 4.
5%4.
5% 4.6% 4.8% 4.9% 5.
4%6.
1%6.
9%8.
1%9.
3% 9.6% 10
.0%
9.7%
9.6%
9.6%
8.9% 9.1%
9.1%
8.7%
8.3%
8.2%
8.0%
7.8%
7.7%
7.6%
7.3%
7.0%
6.6%
6.2%
6.1%
5.7%
5.6%
5.4%
5.2%
5.0%
4.9%
4.8%
4.8%
4.7%
9.6%
4%
5%
6%
7%
8%
9%
10%
11%
07:Q
107
:Q2
07:Q
307
:Q4
08:Q
108
:Q2
08:Q
308
:Q4
09:Q
109
:Q2
09:Q
309
:Q4
10:Q
110
:Q2
10:Q
310
:Q4
11:Q
111
:Q2
11:Q
311
:Q4
12:Q
112
:Q2
12:Q
312
:Q4
13:Q
113
:Q2
13:Q
313
:Q4
14:Q
114
:Q2
14:Q
314
:Q4
15:Q
115
:Q2
15:Q
315
:Q4
16:Q
116
:Q2
16:Q
316
:Q4
Rising unemployment eroded payrolls
and WC’s exposure base.
Unemployment peaked at 10% in late 2009.
* = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/15 edition); Insurance Information Institute.
2007:Q1 to 2016:Q4F*
Unemployment forecasts have been revised modestly
downwards. Optimistic scenarios put the
unemployment as low as 5.0% by Q4 of 2015.
Jobless figures have been revised
downwards for 2015/16
153
Unemployment Rates by State, August 2015: Highest 25 States*
7.6
6.8
6.8
6.7
6.6
6.3
6.3
6.2
6.1
6.1
6.0
6.0
5.9
5.9
5.7
5.7
5.6
5.6
5.6
5.4
5.4
5.3
5.3
5.3
5.2
5.2
0
2
4
6
8
WV DC NV NM AK AZ MS AL CA OR LA SC GA NC NJ TN IL MO RI AR PA CT FL WA KY NY
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for August 2015, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In August, 29 states had over-the-month unemployment rate decreases, 10 states had increases, and 11 states and the District of Columbia had no change.
154
5.1
5.1
5.1
4.9
4.7
4.7
4.6
4.6
4.6
4.5
4.5
4.5
4.2
4.2
4.1
4.1
4.0
4.0
3.7
3.7
3.7
3.6
3.6
3.5
2.9
2.8
0
1
2
3
4
5
6
MD MI US DE MA OH IN KS OK ME VA WI CO ID MT TX MN WY IA SD UT NH VT HI ND NE
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates by State, August 2015: Lowest 25 States*
*Provisional figures for August 2015, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In August, 29 states had over-the-month unemployment rate decreases, 10 states had increases, and 11 states and the District of Columbia had no change.
CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK
155
The Construction Sector Is Critical to the Economy and the P/C Insurance Industry
155
156
Value of New Private Construction: Residential & Nonresidential, 2003-2015*
Billions of Dollars
$0$100$200$300$400$500$600$700$800$900
$1,000
03 04 05 06 07 08 09 10 11 12 13 14 15*
Non ResidentialResidential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$15.0 $613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2015: Value of new pvt. construction hits $787.8B as of
July 2015, up 57.4% from the 2010 trough but still 13.6% below
2006 peak
156
$261.8
$238.8
$407.0
$380.8
*2015 figure is a seasonally adjusted annual rate as of July. Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
161
Construction Employment, Jan. 2010—Sept. 2015*
*Seasonally adjusted. Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,58
15,
522
5,54
25,
554
5,52
75,
512
5,49
75,
519
5,49
95,
501
5,49
75,
468
5,43
55,
478
5,48
55,
497
5,52
45,
530
5,54
75,
546
5,58
35,
576
5,57
75,
612
5,62
95,
629
5,62
85,
627
5,60
85,
623
5,63
25,
641
5,64
95,
668
5,68
45,
724
5,74
6 5,79
85,
815
5,81
35,
833
5,85
65,
854
5,86
65,
893
5,91
85,
953
5,93
7 6,00
66,
032
6,06
26,
103
6,11
46,
121
6,15
26,
169
6,19
16,
201
6,23
16,
275
6,31
66,
347
6,33
56,
365
6,37
76,
378
6,38
36,
388
6,39
6
5,400
5,500
5,600
5,700
5,800
5,900
6,000
6,100
6,200
6,300
6,400
6,500
Jan-
10F
eb-1
0M
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-1
0Ja
n-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
0M
ar-1
2A
pr-1
2M
ay-1
2Ju
n-12
Jul-1
2A
ug-1
2S
ep-1
2O
ct-1
2N
ov-1
2D
ec-1
2Ja
n-13
Feb
-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-12
Oct
-13
Nov
-13
Dec
-13
Jan-
14F
eb-1
4M
ar-1
4A
pr-1
4M
ay-1
4Ju
n-14
Jul-1
4A
ug-1
4S
ep-1
4O
ct-1
4N
ov-1
4D
ec-1
4Ja
n-15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15Ju
l-15
Aug
-15
Sep
-15
Construction employment is +948,000 above
Jan. 2011 (+17.4%) trough
(Thousands)
Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.
162
(Millions of Units)
New Private Housing Starts, 1990-2021F
1.48
1.47 1.
62 1.64
1.57 1.60 1.
71 1.85 1.
96 2.07
1.80
1.36
0.91
0.55 0.59 0.61
0.78 0.
921.
10 1.13 1.
28 1.42 1.47
1.47 1.50
1.50
1.351.
461.
291.
201.
011.
19
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F 18F 19F20F 21F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/15); Insurance Information Institute.
Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk
Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure
New home starts plunged 72% from 2005-2009; A net
annual decline of 1.49 million units, lowest since records began
in 1959
Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction
for several more years
165
I.I.I. Poll: Renter’s Insurance
Source: Insurance Information Institute Annual Pulse Survey.
29% 31% 35% 37%
40%
10%
20%
30%
40%
50%
60%
70%
2011 2012 2013 2014 2015
The Percentage of Renters Who Have Renters Insurance Has Been Rising Since 2011.
Q. Do you have renters insurance? 1
1Asked of those who rent their home.
Americans are increasingly choosing to rent, but are slow to understand the
need to insure, exacerbating the underinsurance gap
ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT
BUT VOLATILE
168
US Is Becoming an Energy Powerhouse but Fall in Prices
Will Have Negative Impact
168
5.19 5.08 5.00 5.35 5.47 5.656.49
7.44
8.679.31 9.53
5.09
0
2
4
6
8
10
12
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015F
2016F
U.S. Crude Oil Production, 2005-2016P
Source: Energy Information Administration, Short-Term Energy Outlook (January 15, 2015) , Insurance Information Institute.
Millions of Barrels per Day
Crude oil production in the U.S. is expected to increase by 90.6% from 2008 through 2016—and could overtake
Saudi Arabia as the world’s largest oil producer
171
Employment in Oil & Gas Extraction, Jan. 2010—Sept. 2015*
*Seasonally adjusted Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.
7 15
7.6
158.
7 15
8.1
158.
4 15
9.7
160.
2 16
1.5
161.
4 16
1.0
162.
7 16
4.3
166.
6 16
9.2
170.
1 17
1.2
172.
6 17
4.0
176.
6 17
8.2
178.
7 18
0.6
181.
3 18
2.3
184.
7 18
5.2
186.
2 18
7.8
188.
6 18
9.3
189.
4 18
9.4
190.
5 19
2.2
193.
1 19
4.6
194.
0 19
3.8
193.
1 19
2.5
193.
0 19
3.4
193.
3 19
3.1
194.
0 19
4.0
194.
0 19
5.4
193.
7 19
4.6
196.
4 19
7.6
198.
6 19
8.4
199.
4 20
1.5
201.
0 20
1.2
199.
4 19
7.6
197.
7 19
4.4
194.
2 19
3.2
193.
6 19
2.1
191.
0
150
160
170
180
190
200
210
Mar
-10
May
-10
Jul-1
0S
ep-1
0N
ov-1
0Ja
n-11
Mar
-11
May
-11
Jul-1
1S
ep-1
1N
ov-1
1Ja
n-12
Mar
-12
May
-12
Jul-1
2S
ep-1
2N
ov-1
2Ja
n-13
Mar
-13
May
-13
Jul-1
3S
ep-1
3N
ov-1
3Ja
n-14
Mar
-14
May
-14
Jul-1
4S
ep-1
4N
ov-1
4Ja
n-15
Mar
-15
May
-15
Jul-1
5S
ep-1
5
Oil and gas extraction employment was up
28.8% by Oct. 2014 but falling energy prices have taken their toll
(000)
Employment in the O&G segment is down 5.2%
since its Oct. 2014 peak
MANUFACTURING SECTOR OVERVIEW & OUTLOOK
172
The U.S. Was Experiencing a Mini Manufacturing Renaissance but Headwinds from Weak Export
Markets and Strong Dollar Hurt
172
176
Manufacturing Employment, Jan. 2010—Sept. 2015*
11,4
6011
,460
11,4
6611
,497
11,5
3111
,539
11,5
5811
,548
11,5
5411
,555
11,5
7711
,590
11,6
2411
,662
11,6
8211
,707
11,7
1511
,724
11,7
4711
,760
11,7
6211
,770
11,7
6911
,797
11,8
3411
,857
11,8
9911
,916
11,9
3011
,941
11,9
6511
,961
11,9
4811
,951
11,9
4711
,961
11,9
8012
,002
12,0
0612
,006
12,0
0712
,005
11,9
8312
,011
12,0
2212
,040
12,0
7212
,086
12,1
0212
,122
12,1
3112
,142
12,1
5412
,177
12,1
9112
,205
12,2
1412
,237 12,2
8212
,301
12,3
1812
,321
12,3
2712
,327
12,3
3312
,334
12,3
4512
,327
12,3
18
11,250
11,500
11,750
12,000
12,250
12,500Ja
n-10
Feb-
10M
ar-1
0Ap
r-10
May
-10
Jun-
10Ju
l-10
Aug-
10Se
p-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Apr-1
1M
ay-1
1Ju
n-11
Jul-1
1Au
g-11
Sep-
11O
ct-1
1N
ov-1
1D
ec-1
1Ja
n-12
2/30
/2M
ar-1
2Ap
r-12
May
-12
Jun-
12Ju
l-12
Aug-
12Se
p-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13Fe
b-13
Mar
-13
Apr-1
3M
ay-1
3Ju
n-13
Jul-1
3Au
g-13
Sep-
13O
ct-1
3N
ov-1
3D
ec-1
3Ja
n-14
Feb-
14M
ar-1
4Ap
r-14
May
-14
Jun-
14Ju
l-14
Aug-
14Se
p-14
Oct
-14
Nov
-14
Dec
-14
Jan-
15Fe
b-15
Mar
-15
Apr-1
5M
ay-1
5Ju
n-15
Jul-1
5Au
g-15
Sep-
15
Manufacturing employment has been a surprising source of strength in the economy. Employment was at a multi-year high until recently.
*Seasonally adjusted. Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands) Since Jan 2010, manufacturing employment is up (+858,000 or +7.5%) but has slipped in recent months as economies abroad weaken, hurting
exports of manufactured goods
Profitability & Politics
181
181
How Is Profitability Affected by the President’s Political Party?
15.10%9.00%8.93%
8.65%8.35%8.33%
7.98%7.68%
6.98%6.97%
5.43%5.03%
4.83%4.68%
4.43%3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
CarterReagan IIObama II
NixonClinton I
G.H.W. BushG.W. Bush II
Clinton IIReagan I
Nixon/FordTruman
Eisenhower IEisenhower II
G.W. Bush IObama I
JohnsonKennedy/Johnson
*Truman administration ROE of 6.97% based on 3 years only, 1950-52;. Source: Insurance Information Institute
OVERALL RECORD: 1950-2014*
Democrats 7.72% Republicans 7.85%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950-2014*
-5%
0%
5%
10%
15%
20%
25%
50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
BLUE = Democratic President RED = Republican President Tr
uman
Nixon/Ford
Ken
nedy
/ Jo
hnso
n
Eise
nhow
er
Car
ter
Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2014
Obama
. Source: Insurance Information Institute
CYBER RISK & CYBER INSURANCE
184
Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and
Small in Every Industry
184
Data Breaches 2005-2015, by Number of Breaches and Records Exposed # Data Breaches/Millions of Records Exposed
*Figures as of June 30, 2015, from the Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf
157
321
446
656
498
419470
614
400
783
662
117.6
85.692.0
17.522.935.7
19.1
66.9
222.5
16.2
127.7
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *2015020406080100120140160180200220
# Data Breaches # Records Exposed (Millions)
The total number of data breaches (+27.5%) hit a record high of 783 in 2014, exposing 85.6 million records. Through June 30, this year has
seen 117.6 million records exposed in 400 breaches.*
Millions
191
Main Causes of Data Breach Globally
30%
29%
42%
*The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection. Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014
Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30
percent concern a negligent employee or contractor (human factor).
Malicious or criminal attack*
Human error
System glitch
193
US: External Cyber Crime Costs: Fiscal Year 2014
2%2%
18%
38%
40%
* Other costs include direct and indirect costs that could not be allocated to a main external cost category Source: 2014 Cost of Cyber Crime: United States, Ponemon Institute.
Information theft (40%) and business disruption or lost productivity (38%) account for the majority of external costs due to cyber crime.
Information theft
Equipment damages Other costs*
Revenue loss
Business disruption
Data/Privacy Breach: Many Potential Costs Can Be Insured
Source: Zurich Insurance; Insurance Information Institute
Data Breach Event
Costs of notifying affecting
individuals Defense and settlement
costs
Lost customers and damaged
reputation
Cyber extortion payments
Business Income Loss
Regulatory fines at home & abroad
Costs of notifying
regulatory authorities
Forensic costs to discover
cause
194
196
I.I.I. Will Release its Third Cyber Report in 2015: Cyber Risks Threat and Opportunity
I.I.I.’s 3rd report on cyber risk scheduled for Q4 2015
Provides information on cyber threats and insurance market solutions
Global cyber risk overview
Quantification of threats by type and industry
Cyber security and cost of attacks
Cyber terrorism
Cyber liability
Insurance market for cyber risk
198
Marsh: Percentage of U.S. Companies Purchasing Cyber Insurance Increased in 2014
*Take-up rate refers to the overall percentage of clients that purchased standalone cyber insurance. Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015
8%
12%
18%
21%
21%
22%
26%
32%
50%
16%
11%
13%
14%
17%
17%
16%
22%
45%
13%
6%Manufacturing
Communications, Media and Tech
Retail/Wholesale
Power and Utilities
Financial Institutions
Services
Hospitality and Gaming
Education
Health Care
All Industries
Take-up rate 2014* Take-up rate 2013
Ever larger numbers of insureds seek financial
protection via cyber insurance. The
percentage of U.S. companies buying cyber
insurance rose to 16 percent in 2014.
199
Marsh: Total Limits Purchased, By Industry – Cyber Liability, All Revenue Size
Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015
$22.0
$4.2
$9.9 $10.5$9.5$11.1 $10.2
$13.2
$19.7
$6.7
$23.5
$10.5$12.0
$14.9
$21.0
$4.4
$22.2
$12.8
All Industries Comms, Media& Technology
Education FinancialInstitutions
Health Care Manufacturing Power andUtilities
Retail/Wholesale Services
Avg. 2013 Limits Avg. 2014 Limits
Average limits purchased for cyber risk rose to $12.8 million for all industries and all company sizes in 2014. Power and utility companies witnessed the sharpest
percentage increase in average limits, at 59 percent.
($ Millions)
202
INDUSTRY DISRUPTORS
Technology, Society and the Economy Are All
Changing at a Rapid Pace Thoughts on the Future
202
204
Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance
By 2035, it is estimated that 25% of new vehicle
sales could be fully autonomous models
Source: Boston Consulting Group.
Questions
Are auto insurers monitoring these trends?
How are they reacting?
Will Google take over the industry?
Will the number of auto insurers shrink?
How will liability shift?
205
On-Demand/Sharing/Peer-to-Peer Economy Impacts Many Lines of Insurance The “On-Demand” Economy is or
will impact many segments of the economy important to P/C insurers Auto (personal and commercial)
Homeowners/Renters
Many Liability Coverages
Professional Liability
Workers Comp Many unanswered insurance
questions
Insurance solutions are increasingly available to fill the many insurance gaps that arise
206
A Few Thoughts on the Future of Auto Insurance Global auto insurance premiums written total about $600B ~80% personal, 20% commercial
US accounts for more than 1/3 of this total (about $210B in 2014)
Innovations in automobile safety will, over time, reduced claim frequency but severities could still rise as repair costs escalate Claim activity clearly not immune to economy
Frequency declines could lead price declines, aiding profitability More cars, not fewer will be on highways in the US, world Exposure (insured car years) grows even as frequency declines
Timeline for large numbers of mass produced autonomous vehicles on American highways is wildly optimistic Mid-2030s is more likely timeframe; Transition occurring through mid-century
Tech media is enamored with anything involving Google, Apple
Auto insurance will be the largest, most important of all P/C lines for many years to come
208
Send in the Drones: Potential Rapid Adoption in Industry; Media Loves It
Drones or Unmanned Aerial Vehicle (UAV) technology is seeing rapid adoption rate in many industries, including insurance
FAA granting Section 333 exemptions for commercial use and testing of UAS
At least 5 insurers have received permission to test
Wide variety of applications: claims, pre-event property inspections…
Insurers partnering with construction industry to guide R&D and regulation of UAV use via Property Drone Consortium: www.propertydrone.org
Shifting Legal Liability & Tort Environment
210
Will the Tort Pendulum Swing Against Insurers?
210
Business Leaders Ranking of Liability Systems in 2015
Best States 1. Delaware
2. Vermont
3. Nebraska
4. Iowa
5. New Hampshire
6. Idaho
7. North Carolina
8. Wyoming
9. South Dakota
10. Utah
Worst States 41. Arkansas
42. Missouri
43. Mississippi
44. Florida
45. New Mexico
46. Alabama
47. California
48. Illinois
49. Louisiana
50. West Virginia
Source: US Chamber of Commerce 2015 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2015 Vermont New Hampshire North Carolina South Dakota
Drop-offs
Minnesota Kansas Virginia North Dakota
Newly Notorious
Arkansas Missouri
Rising Above
Oklahoma Montana
214
215
$750,392$653,898
$782,657
$1,045,048 $1,009,788
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
2009 2010 2011 2012 2013
Average Personal Injury Jury Award, 2009 – 2013
Average awards in Personal Injury cases
have increased by more than 1/3 in recent years
Source: Current Award Trends in Personal Injury, 54th Edition; Insurance Information Institute.
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14%
16%
14% 14%
16%
13%
14%
14%
15%
15%
16%
16%
17%
2003-04 2005-06 2007-09 2010-11 2012-13
Percent of Personal Injury Jury Awards Over $1 Million, 2003 – 2013*
The share of $1MM+ jury awards has returned ot
its pre-crisis high
*Latest available. Source: Current Award Trends in Personal Injury, 53rd and 54th Editions; Insurance Information Institute.
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The Nation’s Judicial “Hellholes”: 2014/2015
Source: American Tort Reform Association; Insurance Information Institute
West Virginia Illinois Madison County
New York
City Asbestos Litigation
Watch List Atlantic County, New
Jersey Mississippi Delta Montana Nevada Newport News, Virginia Philadelphia,
Pennsylvania
Dishonorable Mention
AL Supreme Court PA Supreme Court
California
Florida
Volkswagen: Massive tort actions, fines, penalties certain. Are others vulnerable? Issue of cheating on
environmental standards and liability looms large.
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