After the Crisis: the Economics of the P-C Insurance Industry Energy Market Trends and Challenges...

After the Crisis: the Economics of the P-C Insurance Industry Energy Market Trends and Challenges

Robert P. Hartwig, Ph.D., CPCU

President and Economist

Insurance Information Institute

Presentation Outline

• The Economic Storm: Reasons for Optimism, Causes for Concern

• Demand Drivers for Energy and Energy Insurance

• Looking Beyond the Crisis: Energy and Insurance Markets

• Energy Consumption, Capacity and Carbon Emissions

– Long-Term Investment in Energy Sector and Insurance Implications

• Insurance Industry Financial Overview and Outlook

– Profitability

– Financial Strength

– Premium Growth/Soft Market

Presentation Outline

• Insurance Industry Financial Overview and Outlook

– Underwriting Performance

– Capital/Capacity

– Financial Market Impacts

• Tort System Review: Overview and Causes for Concern

• Catastrophe Loss Overview

• Deepwater Horizon: Implications for Energy and Insurance Markets

The Economic Storm

The US Economic Recovery Will Remain Weak Impacting Insurance and Energy Markets Alike

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

• Economic recovery in US is self-sustaining: no double dip recession

• European debt crisis will pass; concerns are overblown

– Volatility will remain a reality, however

• No secondary spike in unemployment or swoon in payrolls

– But job and wage growth will remain sluggish

• Global P/C (re)insurance has recaptured 100% of capital/capacity eroded away during the financial crisis

– Critical given ongoing volatility and threat of severe hurricane season in the US and high catastrophe losses on a global basis

Source: Insurance Information Institute.

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

• Investment environment is/remains much more favorable

– Volatility, however, will persist and yields remain low

– Both are critical issues in pricing long-tailed commercial lines like WC, D&O

• Financial strength and ratings of global (re)insurance industries remained strong throughout the financial crisis in sharp contrast with banks

• Insurers avoided draconian outcomes in financial services reform

• Tort environment in US is beginning to deteriorate; no tort reform in US

• Major transformation of US economy underway with major opportunities for insurers through 2020 in health, tech, natural resources and energy

Source: Insurance Information Institute.

US Real GDP Growth: Exerts a Strong Influence on Energy Demand*

4.1

%

1.1

% 1.8

%

2.5

% 3.6

%

3.1

%

2.7

%

1.2

%

3.2

%

3.6

%

2.1

%

-0.7

%

1.5

%

-2.7

%

-5.4

%

-6.4

%

-0.7

%

2.2

%

5.6

%

2.7

%

3.2

%

2.7

%

2.8

%

2.8

%

3.0

%

3.1

%

3.2

%

-8%-6%-4%-2%0%2%4%6%8%

2

000

2

001

2

002

2

003

2

004

2

005

2

006

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

11:1

Q

11:2

Q

11:3

Q

11:4

Q

Real GDP Growth (%)

*Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/10; Insurance Information Institute.

Demand for Energy and Commercial Insurance Have Been Impacted by Sluggish Economic Conditions

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market

contraction has been severe but modest recovery is underway

The Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4%

Economic growth up sharply in Q4:09 with rebuilding of

inventories and stimulus. More moderate growth expected in

2010/11

Factors Influencing Demand for Energy and Insurance

Commercial and ConsumerDemand Drivers Remain Tepid

Total Industrial Production

1.5%3.2% 3.6%

0.3% 0.2%

-4.6%

-9.0%

-13.0%

-17.6%

-10.3%

8.3%7.0% 6.9% 6.3%

4.9% 4.6% 4.4% 4.3% 4.2% 4.2%

-20%

-15%

-10%

-5%

0%

5%

10%07

:Q1

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

Industrial production is aided by a rebuild of inventories, gradual economic recovery and Stimulus

Program (Q2:09 through 2010)Industrial production began

to contract sharply in late 2008 and plunged in 2009:Q1

2007:Q1 to 2011:Q4F (%)

End of Recession in mid-2009, Stimulus Program Benefited Industrial Production and Insurance Exposure Both Directly and Indirectly, Albeit it Very Modestly; Stimulus Effect is Waning in 2010 and Will Be Gone in 2011.

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/10); Insurance Information Institute

66%68%70%72%74%76%78%80%82%

Mar

01

Jun

01

Sep

01

Dec

01

Mar

02

Jun

02

Sep

02

Dec

02

Mar

03

Jun

03

Sep

03

Dec

03

Mar

04

Jun

04

Sep

04

Dec

04

Mar

05

Jun

05

Sep

05

Dec

05

Mar

06

Jun

06

Sep

06

Dec

06

Mar

07

Jun

07

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

Recovery in Capacity Utilization Is a Positive Sign for Energy and Insurance

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.

Hurricane Katrina

“Full Capacity”

The closer the economy is to operating at “full capacity,” the greater the demand

for both energy and insurance

Manufacturing capacity stood at 74.7% in May 2010, above the June 2009 low of 68.3% but well

below the pre-crisis peak of 80%+

Recession began December 2007

Percent of Manufacturing Capacity

March 2001-November 2001

recession

16

.9

16

.5

16

.1

13

.1

10

.3 11

.7 13

.1

16

.9

16

.6

17

.1

17

.5

17

.8

17

.4

9

11

13

15

17

19

99 00 01 02 03 04 05 06 07 08 09 10F 11F

Auto/Light Truck Sales, 1999-2011F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (7/10); Insurance Information Institute.

New auto/light truck sales fell to the lowest level since the

late 1960s. Forecast for 2010-11 is still far below 1999-2007

average of 17 million units

Sharply lower auto sales will have a smaller effect on auto insurance

exposure level than problems in the housing market will on home insurers

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

(Millions of Units)

Car/Light Truck Sales Will Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales; Gas Prices Could Once Again Become a Factor, Too

New Private Housing Starts, 1990-2011F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0

1.7

1 1.8

5

1.9

6

2.0

7

1.8

0

1.3

6

0.9

0

0.5

6

0.6

6 0.8

8

1.3

5

1.4

6

1.2

9

1.2

0

1.0

11.1

9

0.30.50.70.91.11.31.51.71.92.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F 11F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (7/10); Insurance Information Institute.

New home starts plunged 34% from 2005-2007; drop

through 2009 was 72% (est.); A net annual decline of 1.49 million units,

lowest since records began

in 1959

Impacts growth in residential energy demand

Weak Housing Markets Impacts Energy and Insurance Demand

(Millions of Units)

Average Square Footage of Completed New Homes in U.S., 1973-2010:Q1

1,6

60

1,6

95

1,6

45

1,7

00

1,7

20

1,7

55

1,7

60

1,7

40

1,7

20

1,7

10

1,7

25

1,7

80

1,7

85

1,8

25

1,9

05

1,9

95

2,0

35

2,0

80

2,0

75

2,0

95

2,0

95

2,1

00

2,0

95

2,1

20

2,1

50

2,1

90

2,2

23

2,2

66

2,3

24

2,3

20

2,3

30

2,3

49

2,4

34

2,4

69

2,5

21

2,5

19

2,4

38

2,3

89

1,500

1,700

1,900

2,100

2,300

2,500

2,7007

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

0

Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.

The trend to building larger homes reversed in 2009, affecting exposure

growth beyond the decline in number of units built

Average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions

Square Ft

43

,69

4

48

,12

5

69

,30

0

62

,43

6

64

,00

4

71

,27

7

81

,23

5

82

,44

6

63

,85

3

63

,23

5

64

,85

3

71

,54

9

70

,64

3

62

,30

4

52

,37

4

51

,95

9

53

,54

9

54

,02

7

44

,36

7

37

,88

4

35

,47

2

40

,09

9

38

,54

0

35

,03

7

34

,31

7

39

,20

1

19

,69

5

28

,32

2 43

,54

6 60

,83

7

14

,60

7

010,000

20,00030,00040,000

50,00060,00070,000

80,00090,000

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

:Q1

Business Bankruptcy Filings,1980-2010:Q1

Source: American Bankruptcy Institute; Insurance Information Institute

There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993.

2010:Q1 bankruptcies totaled 14,607, up 18% from Q1:2009

% Change Surrounding Recessions

1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*

Significant Exposure Implications for All Commercial Lines

Private Sector Business Starts,1993:Q2 – 2009:Q3*

175

186

174 18

0 186 19

218

818

718

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192 19

820

620

620

321

120

521

220

0 205

204

204

197 20

3 209

201

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

199

191

193

171 17

716

9

203

150

160

170

180

190

200

210

220

230

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

*Latest available as of June 7, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure

(Thousands)

169,000 businesses started in 2009:Q3, actually declining during form the prior quarter.

The figure is the lowest level since 1993.

US Unemployment Rate

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

%

9.7

%

9.6

%

9.4

%

9.2

%

9.0

%

8.8

%9.5

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%0

7:Q

1

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

:Q1

11

:Q2

11

:Q3

11

:Q4

Rising unemployment eroded payrolls and workers comp’s

exposure base.

Unemployment likely peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/10); Insurance Information Institute

Unemployment forecasts are being revised downward

for the first time in years

2007:Q1 to 2011:Q4F*

-128

-175

-321

-380

-597

-681

-779 -726

-753

-528 -3

87

-515

-346 -2

12

-225

-224

64

-109

14 39

208 31

3 433

-125

-161

-137

-160-122

-144-7

2

-1,000-800-600-400-200

0200400600

Ja

n 0

8

Fe

b 0

8

Ma

r 0

8

Ap

r 0

8

Ma

y 0

8

Ju

n 0

8

Ju

l 08

Au

g 0

8

Se

p 0

8

Oc

t 0

8

No

v 0

8

De

c 0

8

Ja

n 0

9

Fe

b 0

9

Ma

r 0

9

Ap

r 0

9

Ma

y 0

9

Ju

n 0

9

Ju

l 09

Au

g 0

9

Se

p 0

9

Oc

t 0

9

No

v 0

9

De

c 0

9

Ja

n 1

0

Fe

b 1

0

Ma

r 1

0

Ap

r 1

0

Ma

y 1

0

Ju

n 1

0

Monthly Change Employment*

Job Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; Stands at 7.4 Million Through June 2010; 14.6 Million People are Now Defined as Unemployed

January 2008 through June 2010* (Thousands)

*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Monthly losses in Dec. 08–Mar. 09 were the largest in the Post-WW II Period

May’s gain of 433,000 jobs was distorted by the hiring of 411,000 temporary Census workers. June’s loss of 125,000 jobs was distorted by the end of 225,000 Census jobs. Private sector

employment was up 41,000 in May and 83,000 in June.

4.3%

18.6

%

20.3

%

5.8%

0.3%

-1.6

%

-1.0

%

-1.8

%

-1.0

%

3.1%

1.1%

0.8%

0.4%

0.6%

-0.4

%

-0.3

%

1.6%

5.6%

13.7

%

7.7%

1.2%

-2.9

%

-0.5

%

-3.8

%

-4.4

%

-3.3

%

-3.0

%

1.8%

-1.5

%

-6.5

%

-7.4

%

-0.9

%

5.2%

-10%-5%0%5%

10%15%20%25%

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

-4%

-2%

0%

2%

4%

6%

8%

Real NWP Growth Real GDP

Real GDP Growth vs. Real P/CPremium Growth: Modest AssociationReal GDP Growth vs. Real P/C (%)

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 7/10; Insurance Information Institute

P/C Insurance Industry’s Growth Is Influenced Modestly by Growth in the Overall Economy

Re

al G

DP

Gro

wth

Re

al N

WP

Gro

wth

Inflation Trends: Concerns over Stimulus Spending and Monetary Policy Have Not Yet Materialized

Rising Inflation Would Pressure Claim Costs Severities via Higher Materials, Labor, Medical and Tort Costs

Annual Inflation Rates(CPI-U, %), 1990–2011F

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.33.0

3.8

2.8

3.8

-0.4

1.7 1.5

2.92.4

3.23.0

5.14.9

-1.00.01.02.03.04.05.06.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F 11F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, July 10, 2010 (forecasts).

Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The

recession and the collapse of the commodity bubble have reduced inflationary pressures

Annual Inflation Rates (%)

There is So Much Slack in the US Economy Inflation Should Not Be a Concern Through 2010/11, but Deficits and Monetary Policy Remain Longer Run Concerns

P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests

*Measured Dec. 2009 vs. Dec. 2008.Source: Bureau of Labor Statistics. Tort cost is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.

-0.4%

2.7% 3.0% 3.1% 3.4% 3.8%

5.5%6.9%

-2%0%2%4%6%8%

Overall CPI LegalServices

US TortCosts

MedicalCare

PrescriptionDrugs*

MotorVehicle

Body Work

WC MedSeverity

HospitalServices*

(Percent)

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

4.5%

3.5%2.8%

3.2% 3.5%4.1%

4.6% 4.7%4.0%

4.4% 4.2% 4.0%4.4%

3.7% 3.4%

5.1%

7.4%

10.1%

8.3%

10.6%

7.3%

13.5%

8.8%

7.3%

5.6%

7.4%

5.4% 5.4%

6.7%

5.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Change in Medical CPI

Change Med Cost per Lost Time Claim

WC Medical Severity Risingat Twice the Medical CPI Rate

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

Average annual increase in WC medical severity form 1995 through 2009 was nearly twice the medical CPI (7.6% vs. 3.9%). New healthcare reform legislation is unlikely to

have any impact on the gap.

Recent Appreciation of the Dollar Reduces Inflationary Pressure, Especially for Energy Inputs

*As of June 2010.Source: Source: US Federal Reserve, Board of Governors; Insurance Information Institute.

$1.065

$0.923 $0.895$0.945

$1.256

$1.371

$1.473

$1.394

$1.223$1.245$1.244

$1.132

$0.8$0.9$1.0$1.1$1.2$1.3$1.4$1.5$1.6

99 00 01 02 03 04 05 06 07 08 09 10*

US Dollar vs. Euro, 1999 through June 2010

World Crude Oil Prices: 1997- July 2010

*All countries spot market price weighted by estimated export volume. Source: Energy Information Administration; http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan 10

Crude oil prices peaked at $145.29in July 2008, fell 75% to $34.57 in Jan. 2009, but rose again to over

$82/bbl in March 2010 before settling back to $75/bbl in early July

Jan. 1998 $15.21

PEAKJul. 2008 $145.29

TROUGHJan. 2009

$34.57

RECENT2 July 2010

$73.31

Dollars per Barrel*

Beyond the Crisis

Impacts on Energy Demand, Supply and Insurance Exposure

Severe Recession Depressed US Energy Demand: Change 2009 vs. 2008

-2.2%-1.3%

-1.7% -1.7%

-6.4%-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Oil Natural Gas Electricty(Industrial)

Electricty (All) Coal forElectricity

Sources: Energy Information Administration based on Short-Term Energy Outlook, March 2009 and March 2010.

Industrial consumption of electricity has

experienced the most severe declines

Percentage Change in Consumption, 2009 vs. 2008

US Energy Expenditures as a % of GDP Have Been Hurt by Recession

0%

2%

4%

6%

8%

10%

12%

14%8

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

0F

11

F

Source: Energy Information Administration, Short-Term Energy Outlook, March 2010; Ins. Info. Inst.

The energy price bubble pushed energy expenditures to 9.9% of GDP in 2008. The bursting of the bubble and recession pushed expenditures

down to 7.0% of GDP in 2009, rising to about 8% in 2010 and 2011.

Energy Demand is recovering from the global recession and 2008 energy price spike, but remains below pre-crisis levels

Percentage of GDP

U.S. Total Electricity Consumption,1999-2011P

Sources: Energy Information Administration: Short-Term Energy Outlook, March 2010; Insurance Information Institute.

Recession hada significant but in the long-run minor impact on electricity consumption

Modest growth in consumption is projected for both

2010 and 2011

1.7%

-0.7%

2.1%

0.8%1.2%

2.8%

0.2%

2.8%

-1.6%

-3.9%

2.0%1.5%

2.8%

-5%

-4%-3%

-2%

-1%0%

1%

2%3%

4%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010P 2011P

Electricity Consumption in the United States*1999-2011P

*Change based on billions of kilowatthours used per day. Source: Energy Information Administration, Short-Term Energy Outlook, March 2010, Insurance Information Institute.

Electricity consumption in the US was hit severely due to the deep recession

but is now rebounding modestly

347.7

472.4508.3

551.5595.7

637.3678.3

462.1

0

100

200

300

400

500

600

700

800

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

World Primary Energy Consumption, 1990-2030P

Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

Between 2006 and 2030, energy consumption in projected to increase annually by 1.5%

worldwide but only 0.5% in the US

Global energy consumption is expected to increase by

33.4% between 2010 and 2030 but by only 12% in the US

Quadrillion BTUs

Avg. Annual Change in Total Energy Consumption by Country/Region:2006-2030P

3.2%

2.6% 2.5%

1.5%

0.9%0.5% 0.5%

1.1%1.2%1.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%C

hin

a

Bra

zil

Ind

ia

Ca

na

da

S.

Ko

rea

Me

xic

o

Au

st/

NZ

Ru

ss

ia US

Eu

rop

e(O

EC

D)

Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute

US/Europe have the slowest growth rates for energy consumption through 2030, growing at less than 1/6 the rate

in China and 1/5 that of India

Average Annual Change in Consumption (Quadrillion BTUs)

Global Net Electricity Generation Is Growing Faster than Consumption

Sources: Energy Information Administration: International Energy Outlook 2009; Insurance Information Institute.

• Electricity generation is growing faster than total energy consumption

• This suggests that there is a net substitution away from other energy sources to electricity

• Implies a bright future for utilities

• Requires significant insurance capacity

US Primary Energy Consumption by Source and Sector, 2008 (Quadrillion BTUs)

Sources: Energy Information Administration: Annual Energy Review 2008 accessed at: http://www.eia.doe.gov/aer/pdf/pecss_diagram.pdf ; Insurance Information Institute.

Electricity accounts for 40% of US energy demand. More than

half (51%) of that demand is met

via coal.

US Electricity Demand Growth:1950-2035P (Billions Kilowatt Hours)

Sources: Energy Information Administration: Annual Energy Outlook 2010; Insurance Information Institute.

Electricity demand continues to grow but

at a slower rate in response to slowing

population growth and efficiency enhancements.

Demand for insurance should be similar but

could vary depending on liability environment .

US Electricity Generation Additions by Fuel Type, 2009-2035P (Gigawatts)

Natural gas will account for most

of the capacity additions in the US longer-run.

Globally the major will be from coal.

Sources: Energy Information Administration: Annual Energy Outlook 2010; Insurance Information Institute.

A burst of new capacity using renewable fuel sources

is expected through 2015, but natural gas will

eventually dominate.

Energy Consumption, Capacity and Carbon

Long-Run Projections for the US Energy Sector Relative to the Global Energy Market and Insurance Implications

US Primary Energy Consumption As a Share of Global Consumption, 1990-2030P

102.9109.1

84.7

99.9100.0100.5 105.4

113.6

21.8% 21.6% 21.8% 20.7% 19.8% 19.1%

24.4%28.8%

50

60

70

80

90

100

110

120

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

0%

5%

10%

15%

20%

25%

30%

35%

US Primary Energy Consumption US Share of Global Primary Energy Consumption

The US share of global energy consumption is projected to fall from 24.4% in 1990 to

21.6% in 2010 and 19.1% in 2030P

Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute calculations.

Impact of recession; Faster growth in

emerging markets

US

Pri

mar

y E

ner

gy

Co

nsu

mp

tio

n,

Qu

ad.

Btu

)U

S S

hare o

f Glo

bal P

rimary

En

ergy C

on

sum

ptio

n

Avg. Annual Change in Electricity Generating Capacity by Country/Region:2006-2030P

4.6%

3.3%3.0%

2.1%

1.5% 1.4% 1.3% 1.3%0.9%

2.1%1.9% 1.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%C

hin

a

Ind

ia

Bra

zil

Afr

ica

Mid

dle

Ea

st

Me

xic

o

S. K

ore

a

Eu

rop

e(O

EC

D)

Ca

na

da

Ru

ss

ia

Au

st/

NZ

US

Source: Energy Information Administration, 2009 International Energy Outlook, Ins. Info. Institute

Electrical generation capacity in the US is expected to grow more

slowly than almost anywhere else

Average Annual Change in Generating Capacity (Gigawatts)

US Share of Global Electricity Generation Capacity as a Share of Global Capacity, 1990-2030P

1,130

9591,0611,0241,021

1,201

18.6%18.9%19.3%22.2%

23.9%

20.4%

50

250

450

650

850

1,050

1,250

1,450

2006 2010P 2015P 2020P 2025P 2030P

0%

5%

10%

15%

20%

25%

30%

US Generating Capacity US Share of Installed Generating Capacity

The US share of global energy generation capacity is projected to fall from 22.2% in

2010 and 18.6% in 2030


US

Ele

ctri

cal

Gen

erat

ion

C

apac

ity

(Gig

awat

ts)

US

Sh

are of G

lob

al Electricity

Gen

eration

Cap

acity

Avgerage Annual Change in Carbon Dioxide Emissions by Country/Region: 2006-2030P

2.8%2.5%

2.1%1.9%

0.8%0.6% 0.6%

0.3%0.1%

1.5%

1.2% 1.1%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%C

hin

a

Bra

zil

Ind

ia

Mid

dle

Ea

st

Afr

ica

S. K

ore

a

Me

xic

o

Ca

na

da

Au

st/

NZ

Ru

ss

ia

US

Eu

rop

e(O

EC

D)

Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute

CO2 emissions in the US are expected to just 0.3% per year through 2030, among the slowest in the world and

about 1/30th the rate in China

Millions of metric tons

21

,48

8 29

,02

8

30

,96

7

33

,11

1

35

,42

8

37

,87

9

40

,38

5

4,9

89

5,9

75

5,9

07

5,8

01

5,9

04

5,9

82

6,1

25

6,4

14

28

,29

6

0

10,000

20,000

30,000

40,000

50,000

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

World US

US & Global Carbon Dioxide Emissions, 1990-2030P


Between 2006 and 2030, CO2 emissions are projected to increase by 0.3% annually in the US

(and just 0.1% in Europe) vs. 1.4% worldwide

Global CO2 emissions are expected to increase by 30.4% between 2010

and 2030 but by only 10.6% in the US

Millions of metric tons

US Carbon Dioxide Emissions as a Share of Global Emissions, 1990-2030P

5,9046,125

4,989

5,8015,9075,975 5,982

6,414

16.2% 15.9%16.9%

17.8%18.7%21.1%

23.2%

20.4%

4,000

5,000

6,000

7,000

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

0%

5%

10%

15%

20%

25%

US Emissions US Share of Global Energy Consumption

The US share of global carbon emissions is projected to fall from 23.2% in 1990 to 18.7% in 2010 and 15.9% in 2030P


US

CO

2 E

mis

sio

ns

Mil

. M

etri

c T

on

s)U

S S

hare o

f Glo

bal

CO

2 Em

ission

s

US Consumption of Hydroelectric & Other Renewable Energy as a Share of Global Consumption, 1990-2030P

8.3

10.4

6.2

7.46.56.1

9.5

10.9

14.7%15.3%15.1%15.2%16.2%

17.2%

23.6%

17.7%

0

2

4

6

8

10

12

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

0%

5%

10%

15%

20%

25%

US Consumption US Share of Global Consumption

The US share of renewable energy consumption is projected to fall from 23.6% in 1990 to 16.2% in 2010 and 14.7% in 2030P


US

Co

nsu

mp

tio

n o

f R

enew

able

E

ner

gy,

Qu

adri

llio

n B

TU

s)U

S S

hare o

f Glo

bal R

enew

able

En

ergy C

on

sum

ptio

n

1,9

09 2

,66

0

2,7

61

3,0

45

3,3

85

3,6

46

3,8

44

57

7

78

2

78

7

80

9

83

1

86

2

86

7

90

7

2,6

39

0500

1,0001,5002,0002,5003,0003,5004,0004,500

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

World US

World & US Nuclear Energy Consumption, 1990-2030P


Between 2006 and 2030, nuclear energy consumption in projected to increase by

0.6% annually in the US vs. 1.5% worldwide

Global CO2 emissions are expected to increase by 30.4% between 2010

and 2030 but by only 10.6% in the US

Billion kilowatthours

Avg. Annual Change in Nuclear Energy Consumption by Country/Region: 2006-2030P

9.9%8.9%

3.5% 3.2%

1.2% 1.1% 0.8% 0.6% 0.6%-0.1%

2.3%2.0% 1.5%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Ind

ia

Ch

ina

Ru

ss

ia

Afr

ica

S. K

ore

a

Bra

zil

Ca

na

da

Ja

pa

n

Me

xic

o

Ca

na

da

Ru

ss

ia

US

Eu

rop

e*

*OECD Countries.Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.

The US will see small increases in nuclear energy consumption

through 2030

Billions of killowatthours

US Nuclear Energy Consumption as a Share of Global Consumption, 1990-2030P

831.0867.0

577.0

809.0787.0782.0

862.0

907.0

23.6%23.8%25.5%

27.3%

29.3%29.6%30.2% 29.6%

500550600650700750800850900950

1990 2005 2006 2010P 2015P 2020P 2025P 2030P

0%

5%

10%

15%

20%

25%

30%

35%

Europe (OECD Countries) OECD Europe Share of Global Energy Consumption

The US share of global energy consumption is projected to fall from 30.2% in 1990 to

29.3% in 2010 and 23.6% in 2030P


US

Nu

clea

r E

ner

gy

Co

nsu

mp

tio

n (

Bil

l. K

wh

)U

S S

hare o

f Glo

bal N

uclear

En

ergy C

on

sum

ptio

n

Energy Infrastructure

Huge in Investments Required over Next 30 Years in US and Globally; Will Drive Demand for Energy Insurance Products Too

11.3

14.6

1820.6

23.226

28.931.8

12.6

0

5

10

15

20

25

30

35

1990 1995 2000 2006 2010 2015 2020 2025 2030

World Net Effective Electric Power Generation, 1990-2030P


Global electric power generation was dampened about 3% by the global financial

crisis, but will still grow at 2.9% per year through 2030 compared to 1.9% for total

energy consumption

Trillions of kilowatt hoursc

World Energy Supply Infrastructure Investment by Category: 2001-2030P

Transmission, $1,56816%

Distribution $3,75538%

Generation-New, $4,08042%

Generation-Refurbished, $4394%

Source: International Atomic Energy Agency, World Outlook for Electricity Investment.

$ BillionsGeneration will

account for 46% or $4.5 trillion of all

investment through 2030 to meet rising demand. Financial

crisis had no significant impact on

long-term global energy demand and the need to develop

supply infrastructure

Electricity Supply Infrastructure: Despite Crisis, Huge Investments Needed Along With Insurance: 2001-2030 (Est.)

$1,351

$1,876

$809

$377

$744

$258

$609

$1,913

$799 $783

$0

$500

$1,000

$1,500

$2,000

$2,500

Eu

rop

e

No

rth

Am

eri

ca

Pa

cif

ic

Ru

ss

ia

Ch

ina

E. A

sia

S. A

sia

La

tin

Am

eri

ca

Mid

dle

Ea

st

Afr

ica

Source: International Atomic Energy Agency, World Outlook for Electricity Investment.

North American investment could total $1.876 trillion

$ Billions

Investments in electricity supply infrastructure globally are expected to total $9.841

trillion between 2001 and 2030

Proposed New Investments in US Energy Infrastructure Over Next 30 Years

Sources: National Geographic, June 2010; Insurance Information Institute.

Huge investments will be needed in the US to meet the energy demands of the future. Insurance products will help

make this possible.

Insurance IndustryFinancial Performance

Impacted by Soft Market, Volatile Investment Environment

P/C Net Income After Taxes1991–2010:Q1

$3

6,8

19

$3

0,7

73

$2

1,8

65

$2

0,5

59

$3

,04

6

$3

0,0

29

$3

8,5

01

$4

4,1

55

$6

5,7

77

$6

2,4

96

$3

,04

3

$2

8,3

11

$8

,85

6$2

4,4

04

$2

0,5

98

$1

0,8

70

$1

9,3

16

$5

,84

0

$1

4,1

78

-$6,970-$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 0 1 2 3 4 5 6 7 8 9 10:Q1

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 8.3% ROAS for 2010:Q1, 7.3% for 2009 and 4.4% for 2008. 2009 net income was $34.5 billion and $20.8 billion in 2008 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

P-C Industry 2010:Q1 profits rose vs. -$1.3B in 2009:Q1, due mainly to $1B in realized capital

gains vs. -$8B in previous realized capital losses

$ Millions 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:Q1 ROAS = 6.7%

P/C Premium Growth Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy

-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 0910F

Soft Market Appears to Persistin 2010. Relief in 2011?

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

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.

Percent

NWP down 1.3% in 10:Q1 vs. 09:Q1

-0.1

%

-3.2

%

-5.9

%

-7.0

%

-9.4

%

-9.7

% -8.2

%

-4.6

% -2.7

%

-3.0

%

-5.3

%

-9.6

%

-11

.3%

-11

.8%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%

-5.1

%

-4.9

%

-5.8

%

-5.6

%

-5.3

%

-13

.3%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2010)

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

Percent

KRW Effect

Magnitude of Price Declines Shrank During

Crisis, Reflecting Shrinking Capital,

Reduced Investment Gains, Deteriorating

Underwriting Performance, Higher Cat Losses and Costlier Reinsurance

Market Remains Soft as Capital Restored and Underwriting Losses Fall

-5.3% -5.4% -5.0% -4.6% -4.4%-3.9% -3.9%

-2.9% -2.5% -2.1%

0.4%

-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%

All

Co

mm

erci

al

Co

mm

l Pro

p

GL

Um

bre

lla

Co

mm

l Au

to

Co

nst

ruct

ion

WC

Bu

s.In

terr

up

tio

n

EP

L

D&

O

Su

rety

Change in Commercial Rate Renewals, by Line: 2010:Q1

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

Percentage Change (%)

Most Major Commercial Lines Renewed Down in Q1:2010 by Roughly the Same Margin as a Year Earlier

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q1

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Market has Been Soft for 6 years

and Remains Soft as Capital is Restored and Underwriting Losses Fall

Peak = 2004:Q4 +28.5%

KRW EffectTrough =

2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Has Been Negative Ever

Since

Percentage Change (%)

Small Accounts Midsize Accounts Large Accounts

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q1

Pricing today is where is was in

Q4:2000 (pre-9/11)

1999:Q4 = 100

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Small Accounts Midsize Accounts Large Accounts

Capital/PolicyholderSurplus (US)

Shrinkage, but Not Enoughto Trigger Hard Market

Policyholder Surplus, 2006:Q4–2010:Q1E

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$540.7

$511.5$517.9 $515.6$505.0

$420$440$460$480$500$520$540$560

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:Q1E

Sources: ISO, A.M .Best.

$ Billions2007:Q3

Previous Surplus PeakSurplus set a new

record in 2010: Q1*

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business

Quarterly Surplus Changes Since 2007:Q3 Peak

08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%)09:Q1: -$84.7B (-16.2%)

09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-2.0%)10:Q1: +$18.9B (+3.6%)

3.3%

6.9%

10.9%

6.2%

13.8%

16.2%

9.6%

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992Hurricane

Andrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of

3/31/09**

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute

Percent The Financial Crisis at its Peak Ranks as the Largest “Capital Event” Over

the Past 20+ Years

Investment Performance

Investments Are a PrincipleSource of Declining Profitability

$35.4

$47.2$52.3

$58.0$51.9

$56.9

$44.4$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7$39.0

$12.6

$42.8

$0$10$20$30$40$50$60$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:Q1

Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q11

1 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.

$ Billions2009:Q1 gain was

$3.7B

In 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

0.08% 0.19% 0.32%0.72%

1.17%2.00%

2.66%3.20%

3.95% 4.13%

0.12%

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

0%

1%

2%

3%

4%

5%

6%

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

June 2010 Yield Curve* Pre-Crisis (July 2007)

Treasury Yield Curves: Pre-Crisis (July 2007) vs. June 2010

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

Stock Dividend Cuts Have Further Pressured Investment Income

Treasury yield curve is near its most depressed level in at least 45 years.

Investment income is falling as a result

-1.8% -1.8% -2.0%

-3.6%

-1.9% -2.1%-3.1% -3.3% -3.3% -3.7%

-5.2%-5.7%

-7.3%

-4.3%

-8%-7%-6%-5%-4%-3%-2%-1%0%

Per

son

alL

ines

Pvt

Pas

s A

uto

Per

s P

rop

Co

mm

erci

al

Co

mm

l Au

to

Cre

dit

Co

mm

Pro

p

Co

mm

Cas

Fid

elit

y/S

ure

ty

War

ran

ty

Su

rplu

s L

ines

Med

Mal

WC

Rei

nsu

ran

ce**

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

Financial Strength and Ratings

Industry Has Weathered the Storms Well

812

711 9

34

91312

19

9161413

36

49

3134

504855

6058

41

29

1612

31

1819

495047

35

181415

5 7 6

15

010203040506070

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

P/C Insurer Impairments, 1969–2009

Source: A.M. Best; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

5 of the 11 are Florida companies (1 of these 5 is

a title insurer)

Reasons for US P/C Insurer Impairments, 1969–2008

Rapid Growth, 14.3%

Misc, 9.1%

Deficient Loss Reserves/In-adequate Pricing

38.1%

Alleged Fraud, 8.1%

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments,

Underscoring the Importance of

Discipline. Investment Catastrophe

Losses Play a Much Smaller Role

Catastrophy Losses, 7.6%

Affiliate Impairment, 7.9%

Investment Problems, 7.0%

Sig. Change in Business, 4.2%

Reinsurance Failure, 3.7%

Underwriting Trends –Financial Crisis Does Not Directly Impact Underwriting Performance: Cycle, Catastrophes Were 2008’s Drivers

112.1 113.0115.9

118.1115.7 116.2

102.7

95.292.9 92.1 92.4

94.296.8 97.0 98.5

112.0

80859095

100105110115120125

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10P

Commercial Auto Combined Ratio: 1993–2010P

Sources: A.M. Best; Insurance Information Institute.

Commercial Auto is Expected to Remain Reasonably Profitable in 2010

P/C Reserve Development, 1992–2011E

-6.6-9.8

13.79.9

7.3

-6.7-9.5

-14.6 -15.0

-5.0

-16.0

23.2

11.7

1.0

-4.1

-9.9

-2.1

-8.3

-2.6

2.3

-$20-$15-$10-$5$0$5

$10$15$20$25$30

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11E-6

-4

-2

0

2

4

6

8

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

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.

Pri

or

Yr.

Res

erve

Rel

ease

($B

) Imp

act on

Co

mb

ined

Ratio

(P

oin

ts)

Reserve Releases Will Expected to Taper Off in 2010 and Drop Significantly in 2011

96.8

101.

110

4.2

103.

699

.496

.4 101.

410

2.8

103.

911

2.5

121.

911

8.8

121.

111

7.6

118.

411

8.2

117.

412

2.6

121.

510

9.1

102.

097

.010

0.0

101.

010

7.0

115.

311

8.2

121.

711

0.9

110.

010

7.0

102.

798

.4 103.

510

4.3

109.

011

2.0

99.9

0

20

40

60

80

100

120

140

73 77 81 85 89 93 97 01 05 09E

Workers Compensation Combined Ratio: 1973–2010P

Source: A.M. Best; Insurance Information Institute.

Workers Comp Underwriting Results Are Deteriorating Markedly

Shifting Legal Liability and Tort Environment

Is the Tort PendulumSwinging Against Insurers?

Important Issues & Threats Facing Insurers: 2010–2015

• No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration

• Erosion of recent reforms is a certainty (already happening)

• Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability

• Torts twice the overall rate of inflation

• Influence personal and commercial lines, esp. auto liability

• Historically extremely costly to p/c insurance industry

• Leads to reserve deficiency, rate pressure

Source: Insurance Information Institute

Bottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012–2014

Emerging Tort Threat

• Reverse U.S. Supreme Court decisions on pleadings

• Eliminate pre-dispute arbitration

• Erode federal preemption

• Expand securities litigation

• Pass Foreign Manufactures Legal Accountability Act

• Grant enforcement authorities to state AGs

• Confirm pro-trial lawyer judges – “Federalize Madison County”

• Roll back existing legal reforms

Trial Bar Priorities

Source: Institute for Legal Reform.

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

0

50

100

150

200

250

300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E1.50%

1.75%

2.00%

2.25%

2.50%

Tort Sytem Costs Tort Costs as % of GDP* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

To

rt S

yste

m C

ost

sT

ort C

osts as %

of G

DP

$ Billions

2009–2010 Growth in Tort Costs as % of GDP is Due in

Part to Shrinking GDP

Business Leaders Ranking of Liability Systems

Best States1. Delaware

2. North Dakota

3. Nebraska

4. Indiana

5. Iowa

6. Virginia

7. Utah

8. Colorado

9. Massachusetts

10. South Dakota

Worst States41. New Mexico

42. Florida

43. Montana

44. Arkansas

45. Illinois

46. California

47. Alabama

48. Mississippi

49. Louisiana

50. West Virginia

New in 2009

North Dakota Massachusetts South Dakota

Drop-offs

Maine Vermont Kansas

Newly Notorious

New Mexico Montana Arkansas

Rising Above

Texas South Carolina Hawaii

Source: US Chamber of Commerce 2009 State Liability Systems Ranking Study; Insurance Info. Institute.

Midwest/West has mix of good and bad states.

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

New MexicoAppellate Courts

Watch List California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley, TX

Dishonorable Mention

AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme

Judicial Court Sacramento County

New JerseyAtlantic County (Atlantic City)

New York City

$725$756

$800 $799

$1,018 $1,022

$950

$1,077$1,046

$747

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Average Jury Awards 1999 - 2008

Source: Jury Verdict Research; Insurance Information Institute.

164 163

231188

111

173

241209 216

498

266227 238

182

119

176

222

168

66

202

$0

$100

$200

$300

$400

$500

$600

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*

Securities Class Action Suits Filed: 1991-2010*

*Securities fraud suits filed in U.S. federal courts as of June 30, 2010Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute

After surging in 2007 and 2008, litigation activity related to the

financial crisis began to ebb after financial markets began to

recover in the 2nd quarter of 2009

Catastrophic Loss –Catastrophe Losses Trends Are Trending Adversely

$7

.5

$4

.7

$2

2.9

$5

.5 $1

6.9

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $2

7.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$6

.1

$1

00

.0

$2

.7

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10*20??

US Insured Catastrophe Losses

*Through June 30, 2010.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; Munich Re; Insurance Information Institute.

2010 CAT Losses Are Running Below 2009, So Far Figures Do Not Include an Estimate of Deepwater Horizon Loss

$ Billions $100 Billion CAT Year is Coming Eventually

First Half 2010 CAT Losses

Were Down 19% or $1.4B from first half 2009

2000s: A Decade of Disaster2000s: $193B (up 117%)

1990s: $89B

Geophysical events(earthquake, tsunami, volcanic activity)Meteorological events (storm)

Hydrological events(flood, mass movement)Climatological events(extreme temperature, drought, wildfire)

Selection of significant natural catastrophes (see table)

Global natural catastrophes

1

2

3

4

5

7

6

8 911 10

12

Severe winter weather in the Eastern US produced insured losses of

produced at least $1B in insured losses and $2B in economic losses

The 12 Jan. Haiti quake killed 225,500 people,

caused $8B+ in economic damage, but

little in the way of insured losses

Chilean earthquake (mag. 8.8) on 27 Feb. produced at least $4 billion in

insured losses, $20 billion in economic losses. Most costly

insurance event in 2010

Winter Storm Xynthia produced at least $2B in insured losses and

$4B in economic losses

Global Natural Catastrophes: January – June 2010

© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 16 June 2010

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

First Half 2010

95 Events

Number of events in first half of 2010 is close to the annual totals from five of past ten years.

Num

ber

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2010

Source: MR NatCatSERVICE

Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)

Source: Property Claims Service, MR NatCatSERVICE

Average annual winter storm losses have increased over 50% since 1980.

First Half 2010 $2.4 Bn

U.S. Winter Storm Loss Trends

Severe winter storms in early 2010 caused major damage to

energy infrastructure

Annual totals 1980 – 2009 vs. First Half 2010

Thunderstorm losses have quadrupled since 1980.

First Half 2010 $3.0 Bn

U.S. Thunderstorm Loss Trends

Source: Property Claims Service, MR NatCatSERVICE

Annual Totals 1980 – 2009 vs. First Half 2010

Outlook for 2010 North Atlantic Hurricane Season*

Forecast ParameterAverage

(1950-2000)2010 Forecast*

Named Storms 9.6 18

Named Storm Days 49.1 90

Hurricanes 5.9 10

Hurricane Days 24.5 40

Major Hurricanes 2.3 5

Major Hurricane Days 5.0 13

Accumulated Cyclone Energy 96.1 185

Net Tropical Cyclone Activity 100% 195%

*Forecast as of June 2, 2010Source: Colorado State University, Department of Atmospheric Sciences; Insurance Information Institute

The 2010 hurricane season is expected to be nearly twice as active as the long-run average (195% of normal)

Probability of Landfall of at Least One Major Hurricane (CAT 3-4-5) in 2010*

RegionAverage Over Last

Century2010 Forecast*

Entire U.S. Coastline 52% 76%

U.S. East Coast Incl. FL Peninsula 31% 51%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 50%

Caribbean 42% 65%

*Forecast as of June 2, 2010Source: Colorado State University, Department of Atmospheric Sciences; Insurance Information Institute

The probability of a major hurricane making landfall somewhere along the US coast is greatly elevated in 2010, including a 50% chance along the oil spill-impacted gulf coast

Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*

Louisiana $33.60,11%

Texas $31.20,10%

Florida $57.10,19%

* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

Florida Accounted for 19% of All US Insured

CAT Losses from 1980-2008: $57.1B

out of $297.9B

Rest of US $176,60%

$ Billions

The Deepwater Horizon Disaster

Insurance and Energy Market Implications

Largest International Oil Well Blowouts by Volume, as of July 12, 2010

Date Well Location Bbl Spilled

April 20 2010-present Deepwater Horizon Gulf of Mexico, USA est. 4,050,000 thru July 12*

June 1979-April 1980 Ixtoc I Bahia del Campeche, Mexico 3,300,000

October 1986 Abkatun 91 Bahia del Campeche, Mexico 247,000

April 1977 Ekofisk Bravo North Sea, Norway 202,381

January 1980 Funiwa 5 Forcados, Nigeria 200,000

October 1980 Hasbah 6 Gulf, Saudi Arabia 105,000

December 1971 Iran Marine International Gulf, Iran 100,000

January 1969 Alpha Well 21 Platform A Pacific, CA, USA 100,000

March 1970 Main Pass Block 41 Platform C Gulf of Mexico 65,000

October 1987 Yum II/Zapoteca Bahia del Campeche, Mexico 58,643

December 1970 South Timbalier B-26 Gulf of Mexico, USA 53,095

*Based on estimate of 50,000 barrels per day for 781days derived from Flow Rate Technical Group whose members include U.S. Geological Survey (USGS), NOAA, Bureau of Ocean Energy Management (part of DOE) and outside academics. Does not include offset for any amounts recovered.Source: American Petroleum Institute (API), 09/18/2009; http://www.api.org/ehs/water/spills/upload/356-Final.pdf and updates from the Insurance Information Institute.

Gulf Coast Near Deepwater Horizon Site

Sources: Energy Information Administration

On April 20, 2010, an explosion and

fire occurred on the offshore drilling rig Deepwater Horizon,

which had been drilling an

exploratory well in approx. 5,000 ft of water in the Gulf of Mexico, 52 miles SE

of Venice, Louisiana.

The platform subsequently sank,

with 11 crewmembers

presumed dead, and the

uncompleted well leaking oil.

Operating Group for Deepwater Horizon: Joint Venture

Mitsui Oil Exploration10%

Anadarko Petroleum25%

BP66%

Source: Barclays Capital research note 05/10/10; I.I.I. research.

The operating group for Deepwater Horizon is a joint venture led by BP.

BP has said it will assume liability for all “legitimate claims caused by the

oil spill.BP is self-insured, so large portion of

losses will not hit the insurance industry.

On June 1, 2010, U.S. Attorney General said federal authorities have

opened criminal and civil investigations into the spill.

As of early July, BP says that its costs have exceeded $3 billion, including $105 million paid on 32,000 claims. BP CEO Tony Hayward is insisting “Other parties besides BP may be responsible for

costs and liabilities arising from the oil spill, and we expect those parties to live up to their obligations.” But Anadarko accuses BP of gross negligence.

Insured Losses Significant, But Manageable

• The loss is a major event for the offshore energy insurance and reinsurance market

• Companies with direct exposure to the Deepwater Horizon oil rig are insured for losses totaling between $1.4 billion and $3.5 billion, according to initial reports

• The risks are well-syndicated, with the insured loss spread across a broad range of insurers and reinsurers on a global scale

• Since BP, which owns 65% of the Deepwater Horizon consortium self insures, a large portion of the losses will not hit the insurance industry.

• Lawsuits against equipment manufacturers, suppliers and sub-contractors, and business interruption claims, will likely increase total insured losses.

• BP said it will assume liability for all legitimate claims caused by the oil spill. Primary liability for clean up costs will be with BP consortium.

Source: Insurance Information Institute (I.I.I.); Barclays Capital research note 05/10/10; Credit Suisse research note 05/11/10

Insured Loss

Long-Run Implications of Deepwater Horizon on Energy & Energy Insurance Markets

• Deepwater Horizon Will Become the Single Most Expensive Environmental Disaster in US History

• Reaction (and Overreaction) to Spill Will Have Multi-Decade Impact on Energy Business

– Impacts will not be confined to offshore oil & gas industry


Long-Run Implications of Deepwater Horizon on Energy & Energy Insurance Markets (cont’d)

• Current Administration’s Hostility Toward Some Energy Segments is Obvious and Politicization of Deepwater Incident Means There Are Potential Impacts On:

– Carbon legislation (cap & trade)

– Coal mining & equipment (not just in the US)

– Oil sands and pipeline project

– Utilities

– Nuclear power

– Alternative energy

– Fiscal policy/“stimulus”Source: Insurance Information Institute

Long-Run Implications of Deepwater Horizon: US Energy Policy Shift

• Danger that Deepwater Results in “Three Mile Island Effect”– Regulatory, political reaction could make future deep water drilling

impossible (logistically, economically)– Higher (unlimited) limits of financial responsibility– Drilling moratorium remains in effect despite impact on jobs, economy– CA, FL no longer willing to consider offshore drilling

• Hostility Toward Fossil Fuels Intensifies– More regulation (not necessarily based on facts or science)– Higher taxes on energy producers– Higher costs for consumers– Continued/higher subsidies for alternative fuels/technologies


Long-Run Implications of Deepwater Horizon: US Energy Policy Shift (cont’d)

• Corporate Governance

– Accountability for issue will quickly rise to the highest levels

– The Tony Hayward Legacy


Oil Spill Testimony by I.I.I.

Insurance Information Institute Online:www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

After the Crisis: the Economics of the P-C Insurance Industry Energy Market Trends and Challenges...

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