Financial Crisis,,, Recession, Stimulus & the Future of the P/C … · 2014. 6. 13. ·...
Transcript of Financial Crisis,,, Recession, Stimulus & the Future of the P/C … · 2014. 6. 13. ·...
Financial Crisis, Recession, , ,Stimulus & the Future of the
P/C Insurance IndustryP/C Insurance Industry Trends, Challenges & Opportunities, C g & Opp
Casualty Actuarial SocietySpring Annual Meeting
New Orleans, LAMay 5, 2009Download:Download:
http://www.iii.org/media/presentations/CASMay09//f
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ [email protected] ♦ www.iii.org
Presentation Outline• Financial Crisis & The Weakening Economy: Insurance
Impacts for the P/C Insurance IndustryImpacts for the P/C Insurance Industry• Recession, Growth & Insurance• Economic Stimulus Package Impacts
• Aftershock: The P/C Insurance Landscape After the Crisisp• Impacts & Implications for P/C Insurers
• Top 10 Threats/Issues Facing P/C Insurers• Financial Strength & RatingsFinancial Strength & Ratings
• Critical Differences Between P/C Insurers and Banks• P/C Insurance Industry Overview & Outlook
• Profitabilityy• Premium Growth• Underwriting Performance• Financial Market Impacts
C it l & C it• Capital & Capacity• Catastrophe Losses
THE ECONOMICTHE ECONOMIC STORMSTORM
What the Financial Crisis and D R i M f hDeep Recession Mean for the
P/C Insurance Industry/C nsu ance ndust y
Real GDP Growth*
% %
Recession began in December 2007. Economic toll of credit crunch, housing
l l b k i i i
3.7%
% 2.5%
3.6%
3.1%
2.9%
4.8%
4.8%
2.8%
% .3%
2.7% 2.9% 3.1%4%
6% slump, labor market contraction is growing
0.8% 1.
6% 2
0.1% 0.
9%
%
0.4%
1.6% 2
0 2%0%
2%
-0.5
%
-2.1
%
-0.2%
-4%
-2%
The Q4:2008 decline was the steepest since the
-6.1%-6.3%-8%
-6%
the steepest since the Q1:1982 drop of 6.4%
8%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
Q
07:2
Q
07:3
Q
07:4
Q
08:1
Q
08:2
Q
08:3
Q
08:4
Q
09:1
Q
09:2
Q
09:3
Q
09:4
Q
10:1
Q
10:2
Q
10:3
Q
10:4
Q
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/09; Insurance Information Institute.
GDP Growth: Advanced & Emerging Economies vs World
1970-2010F Emerging economies (led by China) are
Emerging Economies vs. World
8.0
10.0(led by China) are
expected to grow by 3.3% in 2009
The world economy is forecast to grow by 0.5% in 2009, but could shrink for the first time since WW II —by 1% to
2% according to the World Bank.
4.0
6.0g
0.0
2.0
A i i
-4.0
-2.0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Advanced economies will shrink by 1.9% in 2009
7 7 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook Update, Jan. 28, 2009; Ins. Info. Institute.
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
% 0.3%
25% 8%
Premium Growth: Modest AssociationP/C insurance industry’s growth i i fl d d tl b th
18.6
% 20
13.7
%
15%
20% 6%is influenced modestly by growth
in the overall economy
.2%
% 5.8%
5.6%
17.
7%10%
WP
Gro
wth
2%
4%
DP G
row
th
5.
1.8%
4.3% 5
0.3%
3.1%
1.1%
0.8%
0.4%
0.6%
% %1.
6%5
1.2%
%
0.2%
0%
5%
Real
NW
0%
Rea
l GD
-0.9
%% 5%
-1.5
%
-1.6
%-1
.0%
-1.8
%-1
.0%
-0.4
%-0
.3%
-2.9
% -0.5
%-3
.8%
-4.4
%-5% -2%
Real NWP Growth Real GDP
-7.4
%-6
.
-10%
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E
09F
-4%Real NWP Growth Real GDP
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 4/09; Insurance Information Inst.
Length of US Recessions,1929-Present*1929 Present
50 Current recession began inMonths in Duration
43
404550 Current recession began in
Dec. 2007 and is already the longest since 1981. It is now
also the longest recession since“We will rebuild. We will recover.”
253035
also the longest recession since the Great Depression.--President Barack Obama
addressing a joint session of Congress
13
811 10
810 11
16 16
8 8
18
152025
February 24, 2009
8 86
8 8
05
10
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
* As of May 2009, inclusiveSources: National Bureau of Economic Research; Insurance Information Institute.
Length of U.S. Business Cycles, 1929-Present*1929 Present
120120
Contraction Expansion FollowingDuration (Months)
A erage D ration**
80
106
9290
100110120 Average Duration**
Recession = 10.4 MonthsExpansion = 60.5 Months
Length of expansions
greatly
50
80
58
73
60708090 g y
exceeds contractions
4350
3745
39
2436
30405060
138 11 10 8 10 11
166
168 8
1812
01020
MonthAug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
* As of May 2009, inclusive; **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Month Recession Started
Annual Inflation Rates(CPI U %) 1990 2010F(CPI-U, %), 1990-2010F
6.0Inflation peaked at 5.6% in August 2008 on
high energy and commodity crisis The4.9 5.1
3 8 3 84 0
5.0
6.0 high energy and commodity crisis. The recession and the collapse of the commodity bubble have produced temporary deflation.
3.0 3.22.6
1 9
3.3 3.4
2.5 2.3
3.0
3.8
2.8
3.8
2.82.92.43.0
4.0
1.51.9
1.31.6
1.0
2.0
(0 7)(1.0)
0.0
(0.7)(1.0)90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, April 10, 2009 (forecasts).
Total Industrial Production,(2007:Q1 to 2010:Q4F)(2007:Q1 to 2010:Q4F)
Figures for 2010 revised upwards to reflect
1.5%3.2%3.6%
0.3%0.4%
2.7%3.3%3.7%4.0%
1.7%
0 0%
5.0%upwards to reflect expected impact of
Obama stimulus program
-3.4%
-0.6%
-5.0%
0.0%
I d t i lObama stimulus
program is
-8.8%
-5.5%
-10.0%
Industrial production began
to contract sharply during H2 2008 and
i t d t
program is expected benefit impact industrial production and
-12.1%
-15.9%
-15.0%is expected to
shrink through most of 2009
therefore insurance exposure both directly and
indirectly-20.0%
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/09); Insurance Info. Inst.
indirectly
Labor MarketLabor Market TrendsTrends
Fast & Furious: Massive Job LossesSap the Economy and WorkersSap the Economy and Workers
Comp Exposure
Unemployment Rate:On the Rise
January 2000 through March 2009
On the Rise
8.0
9.0 March 2009 unemployment jumped to 8.5%, exceeding the 6.3% peak during the previous Previous Peak: 6 3% in
6 0
7.0
% p g pcycle, and is now at it highest
level since Jan. 1984Previous Peak: 6.3% in
June 2003
5.0
6.0
U l t ill lik l k b t 9%
Trough: 4.4% in March 2007
3.0
4.0
00 01 02 03 04 05 06 07 08
Unemployment will likely peak between 9% and 10 % during this cycle, impacting
payroll sensitive p/c and non-life exposuresAverage unemployment rate 2000-07 was 5.0%
09
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Mar
-0
US Unemployment Rate:A Volatile History (update)January 1948 through February 2009
A Volatile History (update)
Aug. 1949 7.9%
Jul. 1958 7.5%
May 1975 9.0%
Nov/Dec 1982: 10.8%
Feb 2009 8 1%May 1961
7.1%8.1%
Jun. 1992Jun. 2003
6.3%
Jun. 1992 7.8%Aug. 1971
6.1%Sep. 1954
6.1%
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*(2007:Q1 to 2010:Q4F)
% 5% 6% 5% % %10.0%Rising unemployment
will erode payrolls
1%
8.8%
9.3% 9.
5
9.6
9.5
9.4%
9.3%
8 5%
9.0%9.5%
10.0% will erode payrolls and workers comp’s
exposure base.i
6.9%
8.1
7 0%7.5%8.0%8.5% Unemployment is
expected to peak near 10% in early 2010.
% 5.4%
6.1%
66.0%6.5%7.0%
4.5%
4.5% 4.6% 4.
8% 4.9%
5
4.5%5.0%5.5%
4.0%07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4
* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/09); Insurance Info. Inst.
Monthly Change Employment*(Thousands)(Thousands)
0January 2008 through March 2009
-72-144 -122
-160 -137 -161 -128-175-200
-100
160 161 -175
-321380
-400
-300 Job losses since the recession began in Dec. 2007
total 5 133 million; 13 2 -380
597-600
-500total 5.133 million; 13.2 million people are now defined as unemployed.
-597-681
-741-651 -663
-800
-700
J 08 F b 08 M 08 A 08 M J 08 J l 08 A 08 S 08 O t 08 N 08 D 08 J 09 F b 09 M 09
Monthly losses in Dec. – Mar. were the largest in the post-WW II period
Jan-08 Feb-08 Mar-08 Apr-08 May-08
Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute
Years With Job Losses: 1939-2009*(Thousands)(Thousands)
0
857
-545 -540 -462 -450 -432 -378 -371 -297-52
-1 000
-500
-1,512
-886 -857
-1,500
-1,000
The US has seen net jobLosses through March
-2,128-2055-1,762
-2,500
-2,000seen net job
losses in only 16 of the 70 years since
g2009 already rank the year as the 6th worst in
the post WW II era
-3,078
-2,750
-3,500
-3,000years since
19392008’s job losses even exceeded those in 1945, at the conclusion of WW II
2008 1945 1982 2009* 2001 1949 1944 1991 1957 2002 1953 1970 1960 1974 1954 1958 1981
*Through March 2009.Source: Insurance Information Institute research fromUS Bureau of Labor Statistics data: http://www.bls.gov/ces/home.htm.
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Net Written PremiumsNet Written Premiums
7/90 3/91 3/01 11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
12/07 ?
$6,000
$7,000
$35
$40
$45Wage & SalaryDisbursementsWC NPW
7/90-3/91 3/01-11/01 12/07-?
$4,000
$5,000
$25
$30
$35
Weakening wage
$2,000
$3,000
$10
$15
$20Weakening wage
and salary growth is
expected to cause a deceleration in
$0
$1,000
$0
$5
$10Shaded areas indicate recessions a deceleration in workers comp
exposure growth
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08**Wage and Salary data though October 2008.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
State Construction Employment, Dec 2007 Dec 2008Dec. 2007 – Dec. 2008
SD
NDMT
ID
OR
WA
MNME
WINY
VTNH
MA
NV
CA
UT
WY
NE
CO
IA
IL
KS
OH
MI
IN
MO
PA
RI
VAWV
CT
NJ
DE Construction
OK
LA
AZNM
MO
AR
KY
TN
MS AL
SC
NC
GA
MD
DCemployment declined in
47 of 50 iTX
LA
FL
AK
HI
AK states in 2008
180% to 4% -0.1% to -8.5% -8.8% to -22% 18
Sources: Associated General Contractors of America from Bureau of Labor Statistics; Insurance Information Institute.
New Private Housing Starts,1990-2010F (Millions of Units)1990 2010F (Millions of Units)
Exposure growth forecast for HO insurers is dim for 2009 with some
New home starts plunged 34%
from 2005 2007;
2.07
801.85 1.
96
1 92.02.1
insurers is dim for 2009 with some improvement in 2010.
Impacts also for comml. insurers with construction risk exposure
from 2005-2007; Drop through 2009 is 73% (est.)—a net
annual decline of 1 51 million1.
361.48
351.46 1.47
1.62 1.64
1.57 1.60 1.
71
1
1.51.61.71.81.9 p 1.51 million
units, lowest since record
began in 1959
1.3
0
1.3
1.29
1.20
1.01
1.19
1.11.21.31.41.5
0.90
.56
0.78
1
0 60.70.80.91.0 I.I.I. estimates that each incremental
100,000 decline in housing starts costs home insurers $87.5 million in new exposure (gross premium). The net
exposure loss in 2009 vs. 2005 is 0
0.50.6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
pestimated at about $1.3 billion.
Source: US Department of Commerce; Blue Chip Economic Indicators (4/09); Insurance Information Inst.
Auto/Light Truck Sales,1999-2010F (Millions of Units)
Weakening economy, credit h h ti t l
New auto/light truck sales are expected to experience a
1999 2010F (Millions of Units)
17.517.817 418
19
crunch are hurting auto sales; Gas prices less of a factor now.
are expected to experience a net drop of 6.7 million units annually by 2009 compared
with 2005, a decline of 39.6% and the lowest level
i th l t 196016.916.916.6
17.117.4
16.516.1
16
17
8 since the late 1960s
13.113
14
15
Impacts of falling auto sales will have a less pronounced effect on a to ins rance e pos re gro th
10 2
12.0
11
12
13 auto insurance exposure growth than problems in the housing market will on home insurers
10.210
99 00 01 02 03 04 05 06 07 08 09F 10FSource: US Department of Commerce; Blue Chip Economic Indicators (4/09); Insurance Information Inst.
AFTERSHOCKWhat Will the P/CWhat Will the P/C
Insurance Industry LookInsurance Industry Look Like After the Crisis?
6 Key Differences6 Key Differences
6 Key Differences: P/C Insurance in the Post-Financial Catastrophe Worldthe Post Financial Catastrophe World
1. The P/C Insurance Industry Will Be Smaller: The Industry Will Have Shrunk by About 3% in DollarIndustry Will Have Shrunk by About 3% in Dollar Terms and by 8% on an Inflation Adjusted Basis, 2007-09
Falling prices, weak exposure growth, increasing government intervention in private (re)insurance markets, large retentions and p ( ) , galternative forms of risk transfer have siphoned away premium
2. P/C Industry Will Emerge With Its Risk Mgmt. Model More Intact than Most Other Financial Service Segments
Benefits of risk-based underwriting, pricing and low leverage clear
3. There Will Be Federal Regulation of Insurers: Now in Waning Months of Pure State-Based Regulation
Federal regulation of “systemically important” firms seems certain
Source: Insurance Info. Inst.
Solvency and Rates regulation, Consumer Protection may be sharedDual regulation likely; federal/state regulatory conflicts are likelyWith the federal nose under the tent, anything is possible
6 Key Differences: P/C Insurance in the Post-Financial Catastrophe World
4. Investment Earnings Will Shrink Dramatically for an E t d d P i d f Ti F d l R P li
the Post Financial Catastrophe World
Extended Period of Time: Federal Reserve Policy, Shrinking Dividends, Aversion to Stocks
Trajectory toward lower investment earnings is being locked in
5. Insurers Will Return to Their Underwriting Roots: Extended Period of Low Investment Exert Pressure to Generate Underwriting Profits Since 1960sGenerate Underwriting Profits Since 1960s
Chastened and “derisked” but facing the same (or higher) expected losses, insurers must work harder to match risk to price
6. P/C Insurers: Profitable Before, During & After Crisis:Resiliency Once Again Proven
Directly the result of industry’s risk management practices
Source: Insurance Information Inst.
Directly the result of industry s risk management practices
Emerging Blueprint for Financial Services Regulatory OverhaulServices Regulatory Overhaul
Phase I: Systemic Risk Regulation/RegulatorIdentification of systemic risk points in the financial systemIdentification of systemic risk points in the financial systemDesign of appropriate regulation to prevent future collapsesWill require international consultation (US can’t manage systemic risk alone)
O i i i i i i• Oversight Responsibility: Likely With Federal ReserveFed would have capacity and power to assess risk across financial markets regardless of corporate form and to intervene when appropriate *appropriateFed could oversee (according to House FS Committee Chairman Barney Frank:
Hedge funds (need to ensure “complete transparency”)Credit ratings agenciesCredit ratings agenciesExecutive compensation (to curb “perverse risk incentives”)
TIMELINE: Frank wants “general outline” by April 2 meeting of G20 industrialized and developing nations
*http://financialservices.house.gov/press110/press0320082.shtml
Source: Wall Street Journal, “Frank Backs Regulator for Systemic Risk,” 2/4/09, p. C3; I.I.I. research.
Possible Regulatory Scenarios for P/C Insurers as of Year End 2009P/C Insurers as of Year-End 2009
• Status Quo: P/C Insurers Remain Entirely Under Regulatory Supervision of the StatesRegulatory Supervision of the States
Unlikely, but some segments of the industry might welcome this outcome above all others
• Federal Regulation: Everything is Regulated by Fedsg y g g yUnlikely that states will be left totally in the cold
• Optional Federal Charter (OFC): Insurers Could Choose Between Federal and State Regulationg
Unlikely to be implemented as envisioned for past several years by OFC supporters
• Dual Regulation: Federal Regulation Layer Above StateF d l l ti t t t i t /f l tiFeds assume solvency regulation, states retain rate/form regulation
• Hybrid Regulation: Feds Assume Regulation of Large Insurers at the Holding Company LevelS t i Ri k R l t F d F R l ti f
Source: Insurance Information Inst.
• Systemic Risk Regulator: Feds Focus on Regulation of Systemic Risk Points in Financial Services Sector
What are these points for insurers? P/C vs. Life?
10 Key Threats yFacing Insurers gAmid Financial
CrisisChallenges for the
Next 5-8 YearsNext 5-8 Years
Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015
1. Erosion of CapitalL l d i idl th i lLosses are larger and occurring more rapidly than is commonly understood or presumedSurplus down 13%=$66B since 9/30/07 peak; 12% ($80B ) in 2008P/C policyholder surplus could be even more by year-end 2009P/C policyholder surplus could be even more by year-end 2009“Price Elasticity of Capital” is too weak (low)Some insurers propped up results by reserve releasesDecline in PHS of 1999-2002 was 15% over 3 years and was yentirely made up and them some in 2003. Current decline is ~13% in 5 qtrs.During the opening years of the Great Depression (1929-1933) PHS fell 37% Assets fell 28% and Net Written Premiums fell byPHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35%. It took until 1939-40 before these key measures returned to their 1929 peaks.BOTTOM LINE: Capital and assets could fall much farther and
Source: Insurance Information Inst.
pfaster than many believe. It will take years to return to the 2007 peaks (likely until 2011 with a sharp hard market and 2015 without one)
Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015
2. Reloading Capital After “Capital Event”Continued asset price erosion coupled with major “capital event” could lead to shortage of capital among somecompaniesP ibl C I l i f d llPossible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirementsP/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after majorcapital can be raised quickly and cheaply after major events (post-9/11, Katrina).
This assumption may be incorrect in the current environmentCost of capital is much higher today reflecting bothCost of capital is much higher today, reflecting both scarcity & riskImplications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh
Source: Insurance Information Inst.
y p g y pcapital & generate internally. Already a reality for some life insurers.
Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015
3. Long-Term Loss of Investment ReturnL i t t t i k i t d iti dLow interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gainsPrice bubble in Treasury securities keeps yields lowPrice bubble in Treasury securities keeps yields lowMany insurers have not adjusted to this new investment paradigm of a sustained period of low investment gainsRegulators will not readily accept it; Many will reject itRegulators will not readily accept it; Many will reject itImplication 1: Industry must be prepared to operate in environment with investment earnings accounting for a smaller fraction of profitssmaller fraction of profitsImplication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.
Source: Insurance Information Inst.
yLessons from the period 1920-1975 need to be relearned
Important Issues & Threats Facing Insurers: 2009 2015
4. Economic Collapse L t d li i i d t th t i il t th 1930
Facing Insurers: 2009 - 2015
Long-term decline in industry growth prospects similar to the 1930sCollapse does not imply inability to remain profitableIndustry in 1930s shrank but became profitableSome insurers will not survive due to combination of poorSome insurers will not survive due to combination of poor investment environment, operating underwriting challenges and capital depletionPolicyholder behavior will change; Need Mitigation Strategies
C d d li it l d hi h d d tibl• Coverages dropped, limits lowered, higher deductibles• Properties not well maintained; more vacant/abandoned
properties• More uninsured motorists (already happening)o e u su ed o o s s ( e dy ppe g)• Insurance fraud will increase (anecdotal evidence mounting)Property crime will increase (burglary, auto theft)Wholesale destruction of wealth (happening now)L f i i (d i )
Source: Insurance Information Inst.
Loss of retirement security (deepening)Bottom Line: Industry can survive deep and prolonged economic downturn, but not without casualties
Important Issues & Threats Facing Insurers: 2009 – 2???
5. Regulatory Overreach Facing Insurers: 2009 – 2???
Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)Danger is high as feds get their nose under the tentStatus Quo is viewed as unacceptable by allQ p yPushing for major change is not without significantrisk in the current highly charged political environmentInsurance & systemic risk (e.g., AIG)Disunity within the insurance industryImpact of regulatory changes will be felt for decades
Source: Insurance Information Inst.
Impact of regulatory changes will be felt for decadesBottom Line: Regulatory outcome is uncertain and risk of adverse outcome is high
Important Issues & Threats Facing Insurers: 2009 2015
6. Creeping Restrictions on UnderwritingFacing Insurers: 2009 - 2015
Attacks on underwriting criteria such as credit, education, occupation, territory increasingIndustry will lose some battlesyView that use of numerous criteria are discriminatory and create an adverse impact on certain populationsImpact will be to degrade the accuracy of rating systems pact w be to deg ade t e accu acy o at g syste sto increase subsidiesPredictive modeling also at riskCurrent social and economic environment couldCurrent social and economic environment could accelerate these effortsDanger that bans could be codified at federal level during regulatory overhaul
Source: Insurance Information Inst.
during regulatory overhaulBottom Line: Industry must be prepared to defend existing and new criteria indefinitely
Important Issues & Threats Facing Insurers: 2009 2015
7. Exploitation of Insurance as a Wealth Redistribution Mechanism
Facing Insurers: 2009 - 2015
MechanismThere is a longstanding history of attempts to use insurance to advance wealth redistribution/economic agendas Attacks on underwriting criteria such as credit educationAttacks on underwriting criteria such as credit, education, occupation and territory have been targeted in the pastUrban subsidies; Coastal subsidiesInsurer focus on underwriting profitability (resulting inInsurer focus on underwriting profitability (resulting in higher rates) coupled with poor economic conditions could raise profile of affordability issueCalls for “excess profits tax” on insurers (during next cycleCalls for excess profits tax on insurers (during next cycle or post-cat)Increased government involvement in insurance (including ownership stakes) make this more likely
Source: Insurance Information Inst.
p ) yFederal regulation could impose such redistribution schemes Bottom Line: Expect efforts to address social and economic inequities through insurance
Important Issues & Threats Facing P/C Insurers: 2009 2015
8. Mega-Catastrophe Losses $100B CAT i t i b bl th t 5 7
Facing P/C Insurers: 2009 - 2015
$100B CAT year is not improbably over the next 5-7 yearSeverity trend remains upwardFrequency trends highly variable but more prone to spikesFINANCING U l if ffi i i l i fiFINANCING: Unclear if sufficient capital exists to finance mega-cats in current capital constrained environmentConcern over reinsurance capacity and pricingAlt ti f CAT fi i h d i dAlternative sources of CAT financing have dried upCAT bonds less attractive; Willow Re exampleSome regulators will continue to suppress ratesR id l k t h i hi hResidual markets shares remain highLoss of volume for private insurers in key states (e.g., FL)Serves as entry point for socialization of insuranceB tt Li C it t fi t i di i i h dBottom Line: Capacity to finance mega-cats is diminished. Government may fill the void, sometimes with the industry’s support; sometimes in spite of opposition
Important Issues & Threats Facing Insurers: 2009 2015
9. Creeping Socialization and Partial Nationalization of Insurance System
Facing Insurers: 2009 -2015
Insurance SystemCAT risk is, on net, being socialized directly via state-run insurance and reinsurance mechanisms or via elaborate subsidy schemes involving assessments, premium tax credits, etc.g , p ,Some (life) insurers beyond AIG asking for TARP moneyEfforts to expand flood program to include windHealth insurance may be substantively socializedT i i k l d j f d l l b k d b iTerrorism risk—already a major federal role backed by insurersEventually impacts for other lines such as personal auto liability,WC?Feds may open to more socialization of private insurance riskOwnership stakes in some insurers could be a slippery slopeOwnership stakes in some insurers could be a slippery slopeDespite best efforts of companies like State Farm to charge risk appropriate premiums, withdrawal becomes business imperative and leads to greater socializationSt t lik FL ill l h il W hi t i th t f
Source: Insurance Information Inst.
States like FL will lean heavily on Washington in the event of a mega-cat that threatens state financesBottom Line: Additional socialization likely. Can insurers/will insurers draw the line?
Important Issues & Threats Facing Insurers: 2009 2015
10. Emerging Tort ThreatN t t f ( t ti f t f ) i
Facing Insurers: 2009 -2015
No tort reform (or protection of recent reforms) is forthcoming from the current Congress or AdministrationE i f t f i t i t ( l dErosion of recent reforms is a certainty (already happening)Innumerable legislative initiatives will create
t iti t d i i ti f dopportunities to undermine existing reforms and develop new theories and channels of liabilityTorts twice the overall rate of inflationInfluence personal and commercial lines, esp. auto liab.Historically extremely costly to p/c insurance industryLeads to reserve deficiency, rate pressure
Source: Insurance Information Inst.
y, pBottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012
GREEN SHOOTSGREEN SHOOTS
Is the RecessionIs the RecessionNearing an End?g
Hopeful Signs That the EconomyWill Begin to Recover SoonWill Begin to Recover Soon
• Recession Appears to be Bottoming Out, Freefall Has EndedP f GDP h i k i b i i t di i i h• Pace of GDP shrinkage is beginning to diminish
• Pace of job losses is leveling off• Major stock market indices well off record lows, anticipating recovery• Some signs of retail sales stabilization are evident
• Financial Sector is Stabilizing• Banks are reporting quarterly profits• Banks are reporting quarterly profits• Many banks expanding lending to credit worthy people & businesses
• Housing Sector Likely to Find Bottom Soon• Home are much more affordable (attracting buyers)• Mortgage rates are at multi-decade lows (attracting buyers)• Freefall in housing starts and existing home sales is endingFreefall in housing starts and existing home sales is ending
• Inflation & Energy Prices Are Under Control• Consumer & Business Debt Loads Are Shrinking Source: Ins. Info. Inst.
10 Industries for the Next 10 Years: Insurance Solutions NeededInsurance Solutions Needed
GovernmentEducation
Health CareEnergy (Traditional)Alternative EnergyAlternative Energy
AgricultureNatural ResourcesNatural Resources
EnvironmentalTechnologTechnology
Light Manufacturing
THE $787 BILLION ECONOMIC STIMULUS
Sectoral Impacts & Implications for P/C
InsuranceInsurance
Summary of Short-Run Impacts of Stimulus Package on P/C InsuranceStimulus Package on P/C Insurance
• No Stimulus Provisions Specifically Address P/C Insurance• Spending Aid and Tax Reductions benefit other industries state and• Spending, Aid and Tax Reductions benefit other industries, state and
local governments, as well as individual and some corporate taxpayers • Stimulus Package is Unlikely to Increase Net Premiums Written
by More Than 1% or Approx. $4.5 Bill. by Year-End 2010 y pp $ y• “Direct” Impact to P/C Insurers Results Primarily from
Increased Demand for Commercial Insurance• Primarily the result of increased infrastructure spending and the resulting need y p g g
to insure workers, property and protect against liability risks• Because the primary objective of the stimulus is employment related, workers
compensation will be the p/c line that benefits the most• Assuming the target of 3.5 million jobs created or preserved is achieved, private g g j p , p
workers comp NPW (new and preserved) could amount to as much as $1.1 billion• Other commercial lines to benefit: surety, commercial auto, inland marine
• Other “Direct” P/C Demand Benefits Will Be MinimalT i i idi i ti t b d h d l t th• Tax provisions providing incentives to buy cars and homes and accelerate the depreciation of equipment will have little net impact on exposure
• Some additional premium may be generated as older cars and equipment are replaced with new and more valuable (and therefore more expensive to insure)
Economic Stimulus Package: Where the $787B GoesWhere the $787B Goes
$ BillionsObjective is to create or
Protecting the
Health Care, $59 , 7% Education & Training, $53 , 7%
Energy, $43 , 5%
preserve 3.5 million jobs
Infrastructure & Science,
Protecting the Vulnerable, $81 , 10%
Other, 8, 1%
$111 , 14%
Tax relief and aid to state and local
t t f Tax Relief, $288 , 38%government account for 56% of stimulus. Actual
spending accounts for only about 25%
State & Local Fiscal Relief, $144 , 18%
only about 25%
Source: http://www.recovery.gov/ accessed 2/18/09; Insurance Information Institute.
Economic Stimulus Package: $143 4 in Construction Spending$143.4 in Construction Spending
$ Billions
W kf D l
Energy & Technology, 29.8, 20% School Building, 9.2, 6%
Workforce Development & Safety, 4.3, 3%
Other, 8.0, 5%
Building Infrastructure, 29.6, 20%
Other, 0.2, 0%
There is approximately $140B
Transportation Infrastructure, 49.3, 32%
29.6, 20%in new construction
spending in the stimulus package,
b 1/3 f i fWater & Environmental Infrastructure, 21.4, 14%
about 1/3 of it for transportation.
Source: Associated General Contractors at http://www.agc.org/cs/rebuild_americas_future (2/18/09); Insurance Info. Inst..
State-by-State Infrastructure Employment &
Spending ImpactsBigger States Get More ShouldBigger States Get More, ShouldBenefit WC Insurers the Most
Infrastructure Stimulus Spending By State: Top 25 States ($ Millions)State: Top 25 States ($ Millions)
7 Infrastructure spending is3.
2 5
$3,9
17.7
$4,000$4,500
Infrastructure spending is in the stimulus package total $38.1B, allocated
i i0 0
$2,8
03$2
,774
.54.
9
$2 500$3,000$3,500
ars
($ M
ill) largely by population size.
CA will get $3.9B—the highest amount of any state
0.6
0.3 .5 .6 3 5 9 5 2 9$1,3
35.8
$1,5
80. 0
9.4
,141
.3,1
50.3
$1,3
35.6
$1,5
25.0
$1,7
94
$1,500$2,000$2,500
mul
us D
olla highest amount of any state
$890
$890
$836
$830
$739
.$7
16. 5
$704
.9$7
01.5
$668
.2$6
48.9
$603
.9$5
44.3
$538
.7$5
38.6
$
$909$1
,$1
$
$500$1,000$1,500
Stim
$0CA TX NY FL IL PA NJ OH MI GA NC VA MA IN MO WA WI MD TN MN AZ AL SC CO LA
Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.
Estimated Job Effect of Stimulus Spending By State: Top 25 StatesSpending By State: Top 25 States
6 (Thousands)39
6
400
Stim
ulu The economic stimulus plan calls for
the creation or preservation of 3.5
( )26
921
520
7
300
Save
d by
S million jobs, allocated roughly in proportion to the size of the state’s labor force. CA is expected to see
13314
8
00050709
143
2 2
200
Cre
ated
/S labor force. CA is expected to see 396,000 jobs created or preserved.
93 79 75 75 71 70 70 69 66 66 60 52 50 50
1010101
100
o. o
f Job
s
0CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC
No
Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.
Stimulus: Reading The Economic Tea Leaves for the Next 4 to 8 YearsTea Leaves for the Next 4 to 8 Years
• Growing Role of Government: 2009 Stimulus Package and Other Likely Spending Initiatives Guarantee thatand Other Likely Spending Initiatives Guarantee that Government Will Play a Much Larger Role Than at Any Other Time in Recent History
Every industry including insurance will and must attempt toEvery industry, including insurance, will and must attempt to maximize direct and indirect benefits from this paradigm shift
• Obama Administration Priorities: Stimulus Package Acts as “Economic Tea Leaf” on the Administration’s Fiscal Priorities for the Next Several Years
• These Include:Alternative EnergygyHealth CareEducationAging/New InfrastructureEnvironment
Source: Insurance Information Institute
Environment• Stimulus is Only One Leg of the Stool
(1) Stimulus; (2) Housing, and (3) Financial Services Reform
FINANCIAL STRENGTH &
RATINGSIndustry Has Weathered dust y as Weat e ed
the Storms Well
P/C Insurer Impairments,1969 20081969-2008
The number of impairments varies i ifi tl th / i l
60 860
70
significantly over the p/c insurance cycle, with peaks occurring well into hard markets
649 50 48
556 58
41
49 5047
40
50
60
34
19
36
3134
29 318 19
35820
30
40
815
127
11 9 913 12
19
16 14 13
1612
1 1 114 15
75
0
10
20
0
69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: A.M. Best; Insurance Information Institute
P/C Insurer Impairment Frequency vs Combined Ratio 1969 2008vs. Combined Ratio, 1969-2008
Combined Ratio after DivP/C I i t F
Impairment rates are highly
115
1201.82.0
P/C Impairment Frequencye g ycorrelated with underwriting
performance and reached record lows in 2007/08
110
115
Rat
io
1.21.41.6
t Rat
e
lows in 2007/08
100
105
Com
bine
d
0 60.81.0
Impa
irmen
950.20.40.6
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and
90
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
0.0
Source: A.M. Best; Insurance Information Institute
barely one-fourth the 0.82% average since 1969
P/C Impairment Frequency vs. Catastrophe Points in Combined Ratio, 1977-2008Points in Combined Ratio, 1977 2008
Catastrophe Points in Combined RatioImpairment rates
are highly
14
16
Rat
io
1.82.0
pP/C Impairment Frequency
e g ycorrelated with underwriting
performance and reached record lows in 2007/08
10
12
Com
bine
d
1 21.41.6
Rat
e
lows in 2007/08
6
8
Poin
ts o
n C
0.81.01.2
mpa
irmen
t
2
4
atas
troph
e
0.20.40.6 Im
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and
0
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
Ca
0.0
Source: A.M. Best, PCS; Insurance Information Institute
barely one-fourth the 0.82% average since 1969
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*Ratings Actions in 2008
P/C insurance is by design a resilient in
Upgraded, 59 , 4.0%
Initial, 41 , 2.8%Downgraded, 55 , 3 8%
design a resilient in business. The dual threat of financial
disasters and catastrophic losses are Under Review, 63 ,
4.3%
O h 59 4 0%
3.8%catastrophic losses are anticipated in the
industry’s risk management strategy.
Other, 59 , 4.0%
Despite financial market turmoil, high cat losses
and a soft market inand a soft market in 2008, 81% of ratings actions by A.M. Best
were affirmations; just 3.8% were downgrades
Affirm, 1,183 , 81.0%*Through December 19.Source: A.M. Best.
52
3.8% were downgrades and 4.0% upgrades
Historical Ratings Distribution,US P/C Insurers 2008 vs 2005 and 2000US P/C Insurers, 2008 vs. 2005 and 2000
2008 2005 2000A++/A+ and
D0.2%C++/C+
1.9%
E/F2.3% A++/A+
11 5%
C/C-0.6%
A++/A+9.2%
Vulnerable*
A++/A+10.8%Vulnerable*
A++/A+ and A/A- gains
.9% 11.5%B/B-6.9%
Vulnerable12.1%
B++/B+21.3%
7.9%
A/A-
B++/B+28.3%
A/A-52 3%
B++/B+26.4%
A/A48.4%
P/C insurer financial strength has improved since 2005
52.3%A/A-
60.0%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.
has improved since 2005 despite financial crisis
Reasons for US P/C Insurer Impairments 1969 2008Impairments, 1969-2008
Reinsurance Sig. Change Deficient
Deficient loss reserves and inadequate i i th
Failure3.7%
Misc.9.1%
Sig. Change in Business
4.2%
Loss Reserves/In-
adequate Pricing38 1% pricing are the
leading cause of insurer
impairments
38.1%
Investment Problems
7 0% impairments, underscoring the
importance of discipline. Affiliate
Impairment
7.0%
pInvestment
catastrophe losses play a much
ll lRapid
Impairment7.9%
All d F d
Catastrophe Losses
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
smaller role.Growth14.3%
Alleged Fraud8.1%
Losses7.6%
Critical Differences Between P/C
Insurers and BanksSuperior Risk Management ModelSuperior Risk Management Model
& Low Leverage MakeBi Diffa Big Difference
How Insurance Industry Stability Has Benefitted ConsumersHas Benefitted Consumers
BOTTOM LINE:I M k U lik B ki A O i• Insurance Markets—Unlike Banking—Are Operating Normally
• The Basic Function of Insurance—the Orderly TransferThe Basic Function of Insurance the Orderly Transfer of Risk from Client to Insurer—Continues Uninterrupted
• This Means that Insurers Continue to:P l i ( h 57 b k h d f 5/1)Pay claims (whereas 57 banks have gone under as of 5/1)
The Promise is Being FulfilledRenew existing policies (banks are reducing and eliminating li f dit)lines of credit)Write new policies (banks are turning away people who want or need to borrow)Develop new products (banks are scaling back the products they offer)
Source: Insurance Information Institute56
Reasons Why P/C Insurers Have Fewer Problems Than Banks:
A Superior Risk Management Model• Emphasis on Underwriting
Matching of risk to price (via experience and modeling)
A Superior Risk Management Model
g p ( p g)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk
• Strong Relationship Between Underwriting and Risk BearingInsurers always maintain a stake in the business they underwrite keeping “skin in the game”Insurers always maintain a stake in the business they underwrite, keeping skin in the game at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101
• Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry
• Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid
• Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge y g y p g g ( g gfunds, private equity, complex securitized instruments, credit derivatives—CDS’s)
• Greater TransparencyInsurance companies are an open book to regulators and the public
Source: Insurance Information Institute57
US Bank Failures:* 1995 2009**1995-2009
35Through May 1, 2009
25
32
30
35 Bank failures are up sharply. 57 banks (but no p/c or life
insurers) failed in 2008/09 due to h fi i l i i i l di h
20
25Remarkably, as recently
as 2005 and 2006, no banks failed—the first
time this had happened in
the financial crisis, including the largest in history—Washington
Mutual with $307B in assets.
86
8 711
10
15 time this had happened in FDIC history (dating
back to 1934)
13 4 3 4
0 03
0
5
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09**95 96 97 98 99 00 01 02 03 04 05 06 07 08 09**
*Includes all commercial banking and savings institutions. **Through May 1.Source: FDIC: http://www.fdic.gov/bank/historical/bank/index.html; Insurance Info. Institute
58
Top 10 P/C Insolvencies, Based Upon Guaranty Fund Payments*Upon Guaranty Fund Payments
$2,265.8$2,500 $ Millions
$1 500
$2,000
$ MillionsThe 2001 bankruptcy of Reliance Insurance was the largest ever$1,272.7
$1,049.7$843.4
$699.4$
$1,000
$1,500 was the largest ever among p/c insurers
$566.5 $555.8 $543.1 $531.6 $516.8
$0
$500
$0
Relian
ce Ins
uranc
e
Legion
Insur
ance
iforni
a Com
pensa
tion I
ns.Fr
emon
t Ind
emnit
y Ins
.
PHIC
O Ins.
Transit
Casu
alty I
ns.
Supe
rior N
ation
al Ins
.ica
n Mutu
al Liab
ility I
ns.M
idlan
d Insu
rance
South
ern Fa
mily In
s.
Califo F
Americ
* Disclaimer: This is not a complete picture. If anything the numbers are understated as some states have not reported in certain years.
Source: National Conference of Insurance Guaranty Funds, as of September 17, 2008. 59
P/C INSURANCE FINANCIAL
PERFORMANCE
A R ili I d iA Resilient Industry in Challenging TimesChallenging Times
ProfitabilityProfitability
Hi t i ll V l tilHistorically Volatile
P/C Net Income After Taxes1991 2008F ($ Millions)*1991-2008F ($ Millions)
,496
,777
$70 000
2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE 8 9%
Insurer profits peaked in 2006 and
819
$62,
$65,
44,1
55
501$50,000
$60,000
$70,000 2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.4%
peaked in 2006 and 2007, but fell 96.2% during the economic
crisis in 2008
78 9,31
6
0 20,5
98
$24,
404 $3
6,8
$30,
773
21,8
65 $30,
029 $4
0,55
9
$38,
5
$30,000
$40,000
$ ,2008 ROAS = 0.5%*
$14,
1
$5,8
40
$19
$10,
870
$2 $2
$3,0
46
$2,4
96
$2
$10,000
$20,000
-$6,970-$10,000
$0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 8F0
*ROE figures are GAAP; 1Return on avg. Surplus. Excluding Mortgage & Financial Guarantee insurers yields an 4.2% ROAS for 2008.Sources: A.M. Best, ISO, Insurance Information Inst.
62
P/C Insurance Industry ROEs,1975 – 2009F*
25%1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2%
20%
25%
10%
15%
2009F 7 4%
0%
5%2008: 0.5%
2009F: 7.4%
-5%
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 06 08F
09F
1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2%
Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2%.Sources: ISO; A.M. Best (2009F); Insurance Information Institute. 63
ROE vs. Equity Cost of Capital:US P/C Insurance:1991 2008
18%
US P/C Insurance:1991-2008The p/c insurance industry fell well
h f i f i l i 2008
12%
14%
16% short of is cost of capital in 2008
3 pt
s
6%
8%
10%
pts -1
.7 p
ts +2. 3
-9.0
pts
6.6
pts
2%
4%
6%
-13.
2 p
US P/C insurers missed their t f it l b 6 7
-
The cost of capitalis the rate of return
-6
4%
-2%
0% cost of capital by an average 6.7 points from 1991 to 2002, but on
target or better 2003-07
insurers need to attract and retain
capital to the business
-4%91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
ROE Cost of Capital*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.
g
64
A 100 Combined Ratio Isn’t What it U d t B 95 i Wh It’ At
110 18%
Used to Be: 95 is Where It s At
100 6 100 7 101 0
14.3% 15.9%105
110
16%
18%Combined Ratio ROE*
97.5
100.6 100.1 100.7 101.0
12.7%
95
100
ned
Rat
io
12%
14%
on E
quity
*
92.6
8 9%
9.6%90
95
Com
bin
8%
10%
Ret
run
oCombined ratios must me must lower in today’s depressed
investment 8.9%
4.2%
80
85
4%
6%environment to generate risk
appropriate ROEs80
1978 1979 2003 2005 2006 2008*4%
* 2008 figure is return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.
Presidential PoliticsPresidential Politics & P/C Insurance& P/C Insurance
How is Profitability Affected by the President’s Political Party?President s Political Party?
P/C Insurance Industry ROE byPresidential Administration,1950-2008*
15 10%16.43%Carter
Reagan II 15.10%8.93%
8.65%8.65%
Reagan IINixon
G.W. Bush IIClinton I
OVERALL RECORD: 1950 2008*%
8.35%7.98%
7.68%
G.H.W. BushClinton IIReagan I
1950-2008*Democrats 8.00%
6.98%6.97%
5.43%5 03%
Nixon/FordTruman
Eisenhower IEisenhower II
Republicans 7.89%
Party of President has marginal bearing on5.03%
4.83%4.43%
3.55%
Eisenhower IIG.W. Bush I
JohnsonKennedy/Johnson
marginal bearing on profitability of P/C insurance industry
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
y
*Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute
P/C PremiumP/C Premium GrowthGrowth
Primarily Driven by thePrimarily Driven by the Industry’s UnderwritingIndustry s Underwriting Cycle, Not the Economy
Strength of Recent Hard Marketsby NWP Growth
24%
y NW G1975-78 1984-87 2000-03Shaded areas
denote “hard
18%20%22% denote hard
market” periods
Net written premiums fell 1 0%
12%14%16% premiums fell 1.0%
in 2007 (first decline since 1943)
and by 1.4% in 2008, the first back-
4%6%8%
10% 2008, the first backto-back decline
since 1930-33
2%0%2%4%
-2%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
F
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute69
Year-to-Year Change in Net Written Premium 2000-2009F*Written Premium, 2000 2009F
P/C insurers are Protracted i d f15.3%
10 0%
experiencing their slowest growth rates
since 1930-33
period of negative or slow growth is possible due to soft
5 0%
8.4%10.0%
Slow growth means retention is critical
due to soft markets and
slow economy
5.0%3.9%
0.5%
4.2%
0.9%
-1.0% -1.4%
*2008 figure is from ISO. Excluding Mortgage & Financial Guarantee insurers = -1.5%.Source: A.M. Best (historical and forecast)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F
70
Personal/Commercial Lines & Reinsurance NPW Growth 2006-2009FReinsurance NPW Growth, 2006 2009F
35%Declines in premium growth
began to stabilize in later 200828.1%
25%30%35% began to stabilize in later 2008
and are firming to some extent in 2009, but are partly offset by flat/declining exposures
0% 5%5% .0%
% % 7.6%
10%15%20%
by flat/declining exposures due to the recession
2.0 3.5
2.5 5
%
0.0%
%
1.0%
%-5%0%5%
-0.3
%
-11.9%-3.8
%
-1.4
%-15%-10%-5%
2006 2007 2008E 2009F
Personal Commercial Reinsurance
Sources: A.M. Best Review & Preview, Feb. 2009
Average Commercial Rate Change,All Lines (1Q:2004 1Q:2009)All Lines, (1Q:2004 – 1Q:2009)
0%% Magnitude of price
.2%
%2.
7%3.
0%-4%
-2%
-0.1
% Magnitude of price declines is now
shrinking. Reflects shrinking capital,
reduced investment i d t i ti-3
-5.9
%7.
0%
%-4
.6% - - 3
-5.3
%
-6.0
% -5.0
%
-8%
-6%gains, deteriorating
underwriting performance, higher cat losses and costlier
reinsurance-7-9
.4%
-9.7
% -8.2
%
-9.6
%.3
%8% % 1.
0%-12%
-10%reinsurance
-11.
-11.
8-1
3.3% -1
2.0 %
-13.
5%-1
2.9% -1
1
-16%
-14%
4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9
KRW Effect
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Average Expenditures on Auto InsuranceAuto Insurance
Countrywide auto insurance
$875
0 41042 1
$900
$950Countrywide auto insurance expenditures increased 2.6% in 2008 and are rising at a
4% pace in 2009
6
$786 $8
30 $84
$817
$82 0$8
4
$83
$800
$8504% pace in 2009
651
$668 $6
91 $705
$703
$685
$690 $7
2 6$700
$750
$6 $
$600
$650
94 95 96 97 98 99 00 01 02 03 04 05 05 07* 08* 09**Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Monthly Change in Auto Insurance Prices*
% %5%
Insurance PricesAuto insurance
% % 3.4% 3.
7% 4.0%
4.0% 4.
3% 4.4
4%
4%
5%Auto insurance
prices have clearly begun to rise in
t th
%2.
6%2.
6% 2.7% 3.
0 % 3.1 3
3%
3%
4% recent months
0.8%
0.8%
5% % % % 5% 6% 5% 5%0.
9% 1.1% 1.
3%1.
7%
%
1%
2%
2%
0 00.
50.
4%0.
3%0.
3% 0.5 0.6
0.5
0.1%
0.5
0.2%
0%
1%
%
07 07 07 07 07 07 07 g- 07 07 07 07 08 08 08 08 08 08 08 g- 08 08 08 08 09 09 09
Jan-
0Fe
b-0
Mar
-0A
pr-0
May
-0Ju
n-0
Jul-0 Aug
Sep-
0O
ct-0
Nov
-0D
ec-0
Jan-
0Fe
b-0
Mar
-0A
pr-0
May
-0Ju
n-0
Jul-0 Aug
Sep-
0O
ct-0
Nov
-0D
ec-0
Jan-
0Fe
b-0
Mar
-0
*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
Average Premium forHome Insurance Policies**Home Insurance Policies
Countrywide auto insurance
04 07 820
$841
$850$900$950
yexpenditures increased 1.6% in 2008 and are increasing at 2.6% annual rate in 2009
8 $729 $7
64 $80
$80 $8 $
$750$800$850
6 $593
$66
$600$650$700
$508 $5
36
$500$550$600
00 01 02 03 04 05 06 07* 08* 09**Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Capital/P li h ldPolicyholder
SurplusSurplusShrinkage, butShrinkage, but
Capital is WithinHi t i NHistoric Norms
U.S. Policyholder Surplus: 1975 2008*
$550
1975-2008*Actual capacity as of 12/31/08 was $455.6, down 12.0%
$400
$450
$500 from 12/31/07 at $517.9B, but still 60% above its 2002 trough. Recent peak was $521.8 as of 9/30/07. Surplus
as of 12/31/08 is 12.7% below 2007 peak.
$300
$350
$400
$ B
illio
ns The premium-to-surplus ratio stood at $0.95:$1 at
2008 f
$150
$200
$250
$
“Surplus” is a measure of underwriting capacity It is
year end 2008, up from near record low of $0.85:$1
at year-end 2007
$50
$100
$150 underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
y
$075 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
Source: A.M. Best, ISO, Insurance Information Institute. *As of 12/31/0877
Policyholder Surplus, 2006:Q4 – 2008:Q42006:Q4 2008:Q4
$ BillionsCapacity peaked at $ Billions
$512 8$521.8
$515.6$517.9$520
$540$521.8 as of 9/30/07
$487.1$496.6
$512.8
$478 5
$505.0$500
$520
$478.5
$455.6$460
$480 Declines Since 2007:Q3 PeakQ2: -$16.6B (-3.2%)
$420
$440 Q3: -$43.3B (-8.3%) Q4: -$66.2 (-12.0%)
$06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4
Source: ISO.78
Premium-to-Surplus Ratios Before Major Capital Events*Before Major Capital Events
P/C insurance industry was better it li d i i t th
$1.65
$1.42 $1 40$1 5$1.7$1.9 capitalized going into the
financial crisis than before any “capital event” in recent history
$1.42 $1.40
$1.03 $0.95$0 88$1.05
$1.15$1.1$1.3$1.5
$0.88
$0 5$0.7$0.9
$0.5
/30/
1989
Hur
rican
eH
ugo
/30/
1992
Hur
rican
eA
ndre
w
2/31
/93
orth
ridge
rthq
uake
6/30
/01
Sept
. 11
Atta
cks
6/30
/04
Flor
ida
urric
anes
6/30
/05
Hur
rican
eK
atrin
a
6/30
/07
Fina
ncia
lC
risis
As
of2/
31/0
8**
6/ H 6/ H A 12 No
Ear 6 F
Hu H F 12
*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*Largest Capital Events Since 1989
The financial crisis now ranks as the 2nd largest
10.9%12.9%13.8%
12%14%16%
ranks as the 2 largest “capital event” over the
past 20+ years
9.6%
6.9% 6.2%6%8%
10%12%
3.3%
0%2%4%6%
0%
/30/
1989
Hur
rican
eH
ugo
/30/
1992
Hur
rican
eA
ndre
w
2/31
/93
orth
ridge
rthq
uake
6/30
/01
Sept
. 11
Atta
cks
6/30
/04
Flor
ida
urric
anes
6/30
/05
Hur
rican
eK
atrin
a
inan
cial
sis
as o
f2/
31/0
8**
6/ H 6/ H A 12 No
Ear 6 F
Hu H Fi Cris 12
*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.
U.S. P/C Industry Premiums-to-Surplus Ratio: 1985-2008
2.0
Surplus Ratio: 1985 2008Premiums measure risk accepted; surplus is funds
b d t t d l Th l
1.8
beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the ratio
of premiums to surplus—the greater the industry’s capacity to handle the risk it has accepted.
1 4
1.6P/C insurers remain well
capitalized despite recent erosion f it l 50 1 52
1.2
1.4
19980.84:1–the lowest
of capital. 50-year average = 1.52.
1.0
0.84:1 the lowest (strongest) P:S ratio
in recent history. 0.95:1 as of
12/31/080.8
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Sources: A.M. Best, ISO, Insurance Information Institute.
Historically, Hard Markets Follow When Surplus “Growth” is Negative
30%
NWP % changeSurplus % change
When Surplus Growth is NegativeSharp decline in capacity is a necessary but not sufficient
20%
25%
30% Surplus % change necessary but not sufficient condition for a true hard market
10%
15%
5%
0%
5%
-15%
-10%
-5%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Sources: A.M. Best, ISO, Insurance Information Institute
New Funds Contributing to US Policyholder Surplus 2005-2008Policyholder Surplus, 2005 2008
$ Billions$14.4
$11 2$14.0
$16.0 New funds entering the p/c insurance industry is $11.2
$8 0
$10.0
$12.0p/c insurance industry is up in 2008, but swamped by amount eroded away
$3.8 $3.2$4.0
$6.0
$8.0
$0.0
$2.0
05 06 07 08*
*Through Q4 2009 (latest available).Source: ISO; Insurance Information Institute
Investment Performance
Investments are the PrincipleInvestments are the Principle Source of Declining
fi bilif g
Profitability
Distribution of P/C Insurance Industry’s Investment PortfolioIndustry s Investment Portfolio
P tf li F tAs of December 31, 2007
Common Stock
Bonds66.7%
Portfolio Facts•Invested assets totaled $1.3 trillion as of 12/31/07
Common Stock17.9%•Insurers are generally
conservatively invested, with 2/3 of assets invested in bonds as of
Cash & Short-Term Investments
7.2%
12/31/07•Only about 18% of assets were invested in common stock as of
P f d St k
Real Estate0.8%
Other
common stock as of 12/31/07•Even the most conservative of portfolios was hit hard in 2008 Preferred Stock
1.5%Other5.9%
was hit hard in 2008
Source: NAIC; Insurance Information Institute research;.85
Property/Casualty Insurance Industry Investment Gain:1994- 20081
$ Billions$64 0
$42 8$47.2
$52.3
$44.4 $45.3$48.9
$59.4$55.7
$64.0$56.9
$51.9
$57.9
$50
$60
$35.4$42.8 $44.4
$36.0
$
$31.4$30
$40
Investment gains fell by 51% in
$10
$20Investment gains fell by 51% in 2008 due to lower yields, poor
equity market conditions$0
94 95 96 97 98 99 00 01 02 03 04 05* 06 07
08:Q
3
q y
08
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
86
Net Investment Income$60 Investment income fell
7 0% i 2008 th fi t$50
7.0% in 2008, the first drop since 2002 and the largest since the
$30
$40
Bill
ions
Growth History2003: +3 9%
g8.0% drop in 2001
$20
$30$ 2003: +3.9%2004: +3.4%
2005: +24.4%*
$102006: +5.2%2007: 5.3%2008 7 0%
$075 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
2008: -7.0%
Source: A.M. Best, ISO, Insurance Information Institute;*Includes special dividend of $3.2B. Increase is 15.7% excluding dividend.
P/C Insurer Net Realized Capital Gains 1990-2008Capital Gains, 1990 2008
$16.21$18.02
$18$20 $ Billions
$9.89
$6 00
$9.24$10.81
$13.02
$6 63 $6 61$8.92$9.70$9.13$9.82
$8$10$12$14$16
$2.88$4.81
$1.66
$6.00 $6.63 $6.61
$3.52
$0$2$4$6$8
-$1.21
-$8-$6-$4-$2$0
Realized capital losses hit a record $19 8 billion in 2008 due to financial
$18-$16-$14-$12-$10 $19.8 billion in 2008 due to financial
market turmoil, a $27.7 billion swing from 2007. This is the primary cause of 2008’s large drop in profits and ROE.
-$19.80-$20-$18
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Sources: A.M. Best, ISO, Insurance Information Institute.
g p p
88
Total Returns for Large Company Stocks: 1970-2009*Company Stocks: 1970 2009
S&P 500 is down 2.9% in 2009*
25%
35%
5%
15%
-15%
-5%
-35%
-25% The market crash of 2008 was the biggest since 1931
-45%
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Ibbotson Associates, Insurance Information Institute. *Through May 1, 2009.89
Treasury Bond Yields HaveGenerally Been FallingGenerally Been Falling
10%U.S. Treasury 10-Year Note Yield
8%
10%July 1990-
March 1991 recession
March 2001-November 2001
recession
6%
2%
4% Investment yields on the safest assets
are near multi-d d l
December 2007 –Present
(Current
0%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F
10F
decade lows (Current Recession)
-2%
0
Sources: US Bureau of Labor Statistics (history); Blue Chip Economic Indicators, April 2009 issue (forecasts)
Treasury Yield Curves: Pre Crisis vs Current*
4 96% 5 04% 4 96% 5 00% 5 00% 5.19%6%
Pre-Crisis vs. Current
3.78% 3 64%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%
4%
5%
Treasury Yield Curve is at its most
2.42%2.82%
3.78% 3.64%
3%
4% depressed level in at least 45 years. Investment income will fall
significantly as a result.
0 93%1.31%
1.82%
2.42%
2% Stock dividend cuts will further pressure
investment income
0.10% 0.22% 0.43% 0.64%0.93%
0%
1%
Current Yield Curve*Pre-Crisis (July 2007)
investment income
91
0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
*March 2009.Sources: Federal Reserve; Insurance Information Institute.
UnderwritingUnderwriting TrendsTrends
Financial Crisis Does Not DirectlyFinancial Crisis Does Not Directly Impact Underwriting
P f C l C t t hPerformance: Cycle, Catastrophes Were 2008’s Drivers
P/C Insurance Combined Ratio, 1970 2008F*
120Combined Ratios
1970 100 3
1970-2008F*
I l di M t
115
1970s: 100.31980s: 109.21990s: 107.8
Including Mort. & Fin. Guarantee insurers = 105.1;
Excl. = 101.0.
1102000s: 102.9
100
105
95
90
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 08F
Sources: A.M. Best; ISO, III *Excluding mortgage & financial guarantee insurers in 2008 = 101.0.93
P/C Insurance Industry Combined Ratio, 2001-2009E
120
Ratio, 2001 2009EAs recently as 2001, insurers
paid out nearly $1.16 for every Relatively low CAT
Including Mortgage
115.8 $1 in earned premiums low CAT losses, reserve releases
Mortgage & Fin.
Guarantee insurers
2005 ratio benefited from heavy use of reinsurance
hi h l d t l107.5
105.1
110Best combined ratio since 1949
(87 6)
Cyclical Deterioration
which lowered net losses
100.198.4
100.8 101101.0100
(87.6)
92.6
95.7
902001 2002 2003 2004 2005 2006 2007 2008 2008* 2009F
*Includes Mortgage & Financial Guarantee insurers. Sources: A.M. Best.94
Underwriting Gain (Loss)1975 2008*
3035 Insurers earned a record underwriting profit of $31.7B in
2006 d $19 3B i 2007 h l b l h 2 d
1975-2008*
1015202530 2006 and $19.3B in 2007, the largest ever but only the 2nd
and 3rd since 1978. Cumulative underwriting deficit from 1975 through 2008 is $442B.
-10-505
10
$ B
illio
ns
-30-25-20-15-10$
$19.799 Bill
-50-45-40-3530 $
underwriting loss in 2008
incl. mort. & FG insurers
-55
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
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers
G su e s
95
Number of Years With Underwriting Profits by Decade 1920s –2000sProfits by Decade, 1920s 2000s
Number of Years with Underwriting ProfitsU d i i fi10
88
10Underwriting profits were common before the 1980s (40 of the 60 years
before 1980 had combined ratios below 100)—but then they vanished. N i l d i i fi
67
56
8 Not a single underwriting profit was recorded in the 25 years from 1979
through 2003.
45
34
0 00
2
01920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.
96
Personal LinesPersonal Lines
Auto (~75% of Market)Auto ( 75% of Market)Home (~25%)( )
Personal LinesCombined Ratio 1993 2009FCombined Ratio, 1993-2009F
2008 d t i ti
5 9 5
109.
9
110.
9
3110
115deterioration due to price
competition and higher CAT
103.
9
104.
5
103.
5
104.
9
9.8 10
2.7
104.
5
105.
4
103.
3
105
110 glosses. Trends
reverse in 2009.
99 98.4
94.3 96
.4
93.9
97.6
97.6
95
100
Improvement in 2009 assumes
90
preasonable degree of underwriting
discipline and average CAT activity ($10 B -$12B)
85
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09FSource: A.M. Best (historical and forecast).
y ($ $ )
Homeowners Insurance Combined Ratio
158.4165
Combined Ratio
Average 1990 to 2008E= 111.1
145
155g
Insurers have paid out an average of $1.11in losses for every dollar earned
121.7 121.7125
135in premiums over the past 17 years
117.7113.6
118.4112.7
121.7
108.2111.4
121.7
109.3
116.5113.0
109.4115
125
101.098.3
94.2100.1
89.495.7 98
95
105
8590 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F
Sources: A.M. Best (historical and forecasts)
Private Passenger Auto (PPA) Combined Ratio
109.5110
(PPA) Combined RatioPPA is the profit Auto insurers have
h i ifi t107.9
104 2105
juggernaut of the p/c insurance
industry today
shown significant improvement in PPA
underwriting performance since
101.7101.3 101.0
99 5
101.1
103.5104.2
101.3
105 y y pmid-2002, but results
are deteriorating.
99.598.4
95 1 95.5
98.3 98.597.5
100
Average Combined94.4
95.195
Average Combined Ratio for 1993 to 2006:
100.7
9093 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F
Sources: A.M. Best (historical and forecasts)
Monthly Change in Auto Insurance Prices*
% %5%
Insurance PricesAuto insurance
% % 3.4% 3.
7% 4.0%
4.0% 4.
3% 4.4
4%
4%
5%Auto insurance
prices have clearly begun to rise in
t th
%2.
6%2.
6% 2.7% 3.
0 % 3.1 3
3%
3%
4% recent months
0.8%
0.8%
5% % % % 5% 6% 5% 5%0.
9% 1.1% 1.
3%1.
7%
%
1%
2%
2%
0 00.
50.
4%0.
3%0.
3% 0.5 0.6
0.5
0.1%
0.5
0.2%
0%
1%
%
07 07 07 07 07 07 07 g- 07 07 07 07 08 08 08 08 08 08 08 g- 08 08 08 08 09 09 09
Jan-
0Fe
b-0
Mar
-0A
pr-0
May
-0Ju
n-0
Jul-0 Aug
Sep-
0O
ct-0
Nov
-0D
ec-0
Jan-
0Fe
b-0
Mar
-0A
pr-0
May
-0Ju
n-0
Jul-0 Aug
Sep-
0O
ct-0
Nov
-0D
ec-0
Jan-
0Fe
b-0
Mar
-0
*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
Commercial LinesCommercial Lines
Commercial Lines Combined Ratio 1993 2009F
3
Commercial coverages have exhibited significant
Ratio, 1993-2009FMortgage and financial
guarantee may account for up to
3
122.
3
5
120
125have exhibited significant
variability over time.gu ee y ccou o up o
4 points on the commercial combined ratio in 2008
110.
3
110.
2
107.
6
3.9 10
9.7
112.
3
111.
1
110.
2
5 05.4
106.
5
05.1
0
112.
5
110
11510
3
102.
5 10
5.1
1 10
102.
0
100
105
2006/07 benefited from favorable loss cost trends improved tort environment low CAT
91.1 95
90
95trends, improved tort environment, low CAT
losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and
mortgage and financial guarantee segments have big influence 2009 is transition year
85
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F
have big influence. 2009 is transition year.
Sources: A.M. Best (historical and forecasts)
Average Commercial Rate Change,All Lines (1Q:2004 1Q:2009)All Lines, (1Q:2004 – 1Q:2009)
0%% Magnitude of price
3.2%
% -2.7
%3.
0%-4%
-2%
-0.1
% Magnitude of price declines is now
shrinking. Reflects shrinking capital,
reduced investment i d t i ti-3
-5.9
%7.
0%
%-4
.6% - -3
-5.3
%
-6.0
% -5.0
%
-8%
-6%gains, deteriorating
underwriting performance, higher cat losses and costlier
reinsurance-7-9
.4%
-9.7
% -8.2
%
-9.6
%.3
%8% 0% %1.
0%-12%
-10%reinsurance
-11
-11.
8-1
3.3% -1
2.0
-13.
5%-1
2.9 % -1
1
-16%
-14%
4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9
KRW Effect
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Catastrophe LossesCatastrophe Losses
I ti U d itiImpacting Underwriting Results and the Bottom LineResults and the Bottom Line
Top 10 Changes in the Financing of Catastrophic LossFinancing of Catastrophic Loss
1. Capital Has Become Much More ScarceTh h ill d i i US / i l b h k b i d 16% f• Though still adequate, existing US p/c capital base shrank by an estimated 16% as of year-end 2008 from Q3:07 peak; Global (re)insurance impacted as well as recent deal with Buffett deal with Swiss Re indicates.
• Speed with which any given amount of capital can be raised has slowed 2 Capital Has Become More Expensive2. Capital Has Become More Expensive
• Scarcity and volatility have driven cost of capital higher• More competition on the open market for the limited amount of capital available
3. Investment Earnings Can Offset Only a Smaller Share of Catastrophe LLosses• Low interest rates, poor equity market performance, write downs eat into returns
4. Alternative Sources of Capital Have Dried-Up• E.g., hedge fund, private equity money is far less availableg g p q y y
5. Catastrophe Bonds Cannot Be Assumed to Be Uncorrelated With Tradition Financial Market Risk• Example of Willow Re (failed to fully meet Feb. 2 interest payment due to Lehman’s failure
which caused a total return swap to become worthless, exposing investor principal and p , p g p pinterest to market risk); A.M. Best concerned about 3 other Lehman-backed bonds from Ajax Re , Newton Re & Carillon Re
• Will result in changes in how such instruments are funded and investments held
Top 10 Changes in the Financing of Catastrophic LossFinancing of Catastrophic Loss
6. State Run Residual Markets Are More Vulnerable Due to Shaky Financing Arrangementsg• FL’s situation is more precarious than ever & growing; Threatens state’s finances• States using assessment mechanism as zero cost lines of credit (e.g., Texas) creating a high
opportunity cost for insurers without fixing state’s fiscal exposure7. Economics of Start-Ups and Take-Out Companies in CAT Zones Becomes p p
Less Compelling Due to Higher Cost of Capital• Harder to raise cash• Tougher to meet target ROI as cost of capital rises
8. Financial Services Regulatory Overhaul Will Change How the Business of8. Financial Services Regulatory Overhaul Will Change How the Business of Insurance Is Regulated• Unclear how this will affect how cat loss is financed• Nat Cat legislation is not (currently) part of the overhaul discussion• Systemic Risk Regulator: What are p/c systemic risk points? (CAT exposure?; GuarantySystemic Risk Regulator: What are p/c systemic risk points? (CAT exposure?; Guaranty
Funds?)• Will be impacts on sources of capital as well (e.g., hedge funds)
9. Federal Government is Fiscally ConstrainedCan/would federal play a bigger role in financing CAT risk? Fed backstops to be sought?Can/would federal play a bigger role in financing CAT risk? Fed backstops to be sought?
10. Return on Investment for Mitigation is Greatly IncreasedInvestments in mitigation provide a guaranteed high rate of return: up to 500%Mitigation preserves and conserves scarce private capital and government resources
U.S. Insured Catastrophe Losses*
0.0
$120$ Billions
2008 CAT losses exceeded$100 Billion CAT year is
$100
.9
$100
$120 2008 CAT losses exceeded 2006/07 combined. 2005 was by
far the worst year ever for insured catastrophe losses in the
CAT year is coming soon
5 5 0
$61.
$60
$80 insured catastrophe losses in the US, but the worst has yet to come.
$7.5
2.7 4.7
$22.
95.
5 $16.
9$8
.3$7
.42.
6 $10.
1$8
.34.
6$2
6.5
5.9 $12.
9 $27.
5
$6.7
$26.
0
$9.2$20
$40
$ $2 $4 $5 $ $ $2$ $ $4 $ $$
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0708
**20
??
*Excludes $4B $6b offshore energy losses from Hurricanes Katrina & Rita 0 2Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.**Based on PCS data through Dec. 31. PCS $2.1B loss of for Gustav. $10.655B for Ike of 12/05/08.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
108
Number of PCS Catastrophe Events 1998-2008*Events, 1998 2008
$ Billions
37
33
37
35
40 The number of catastrophe events reached
27
33
2530
35 pa 10-year high in 2008
24
20
24 232221
25
20
25
15
20
98 99 00 01 02 03 04 05 06 07 08*PCS defines a catastrophe as an even that caused at least $25 million in insured property damage andaffects and significant number of policyholders and insurers.Source: PCS; Insurance Information Institute
States With Highest Insured Catastrophe Losses in 2008Catastrophe Losses in 2008
$ Billions$ Billions
$10.2$10 0
$12.0Big catastrophe losses turned
up in some surprising states in$8.0
$10.0 up in some surprising states in 2008, due to high tornado, hail and wildfire damage as well as
$2 2$4.0
$6.0g
inland hurricane damage
$2.2 $1.6 $1.3 $1.0
$0.0
$2.0
$Texas California Minnesota Ohio Georgia
Source: PCS; Insurance Information Institute.
Share of Losses Paid by Reinsurers, by Disaster*, y
60%70% Reinsurance is playing an
increasingly important role in60%
45%40%
50%
60% increasingly important role in the financing of mega-CATs
30%25%
40%
30%
40%
20%
10%
20%
0%
10%
Hurricane Hugo(1989)
HurricaneAndrew (1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
Hurricane Ike*(2008)(1989) Andrew (1992) Attack (2001) Losses Losses (2008)
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005. Ike share is an estimate as of 2/9/09.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Number of U.S. Significant Natural Catastrophes* 1950 – 2008Natural Catastrophes ,1950 – 2008
$1 billion economic loss and/or 50 fatalities
There is a clear upward trend in the number of
significant naturalsignificant natural catastrophes in the US
Sources: Munich Re NatCatSERVICE *$1 billion economic loss and/or 50 fatalities.
Top 12 Most Costly Disasters in US History (Insured Losses $2007)US History, (Insured Losses, $2007)
$50 9 of the 12 most expensive $43.6
$35$40$45
pdisasters in US history
have occurred since 2004
$22.0 $22.9$25$30$35
Bill
ions In 2008, Ike became the 6th most
expensive insurance event and 4th most expensive hurricane in US history
$7 0 $7 8 $8.2$10.7 $10.9 $10.9
$10$15$20$
B expensive hurricane in US history
$4.0 $5.0 $6.0 $7.0 $7.8 $8.2
$0$5
$10
Jeanne Frances Rita Hugo Ivan Charley Ike Wilma Northridge 9/11 Andrew KatrinaJeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Ike(2008)*
Wilma(2005)
Northridge(2004)
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
*PCS estimate as of 12/15/08.Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.
113
2008 Insured Catastrophe Loss Distribution by CategoryDistribution by Category
2008 CAT FACTS$ Millions
Commercial, $6,804 , 27% Vehicle**, $2,268 ,
9%
2008 CAT FACTS•The $25.2 billion in insured losses was the 4th
highest ever, behind only, 2005, 2004 and 2001•There were 37 designated catastrophes in 2008, the highest since , g1998 (also 37)•Commercial losses accounted for 27% of insured losses but just
Personal*, $16,128 , 64%
insured losses but just 9% of claims
*Includes homeowers, condominium and rental policies.**Includes commercial and private passenger vehiclesSource: PCS; Insurance Information Institute research.
114
2008 Insured Catastrophe Loss Distribution by Number of ClaimsDistribution by Number of Claims
Vehicle**, $876 ,$ Millions2008 CAT FACTS
Commercial, $340 , 9%
Vehicle , $876 , 22%
2008 CAT FACTS•The $25.2 billion in insured losses was the 4th
highest ever, behind only, 9%2005, 2004 and 2001•There were 37 designated catastrophes in 2008, the highest since , g1998 (also 37)•Commercial losses accounted for 27% of insured losses but just
Personal*, $2,700 , 69%
insured losses but just 9% of claims
69%
*Includes homeowers, condominium and rental policies.**Includes commercial and private passenger vehiclesSource: PCS; Insurance Information Institute research.
115
Natural Catastrophes in 2008 by Type and Locationby Type and Location
750 natural hazard losses events
Energy sector was impacted significantly by catastrophes in 2008: Ike, European
Wind/Winter Storms, China EarthquakeGeophysical (earthquake, tsunami, volcanic)
Meteorological (storm)
Hydrological (flood, mass movement)
Significant loss events
Great natural catastrophesHurricane Ike ( Sept. 6-14, 2008) Caribbean, USACyclone Nargis (May 2-5, 2008) Myanmar
Climatological (extreme temperature, drought, wildfire)
Earthquake (May 12, 2008) China
Winter damage (Jan 10–Feb 13, 2008) China
Source: 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE As of January 2009
Some of the Costliest Natural Catastrophes in 2008 Impacted the Energy Business and
Its Insurers SignificantlyDeadliest catastrophesD t E t A D th
Its Insurers Significantly
Date Event Area DeathsMay Cyclone Nargis Myanmar 84,500May Earthquake China 70,000January Cold wave Afghanistan, Kyrgyzstan,
Tajikistan1,000
TajikistanAugust/September Floods India, Nepal, Bangladesh 635
Costliest catastrophes (overall losses) US$mMay Earthquake China 85 000May Earthquake China 85,000September Hurricane Ike Caribbean, USA 30,000January/February Winter damage China 21,100August/September Hurricane Gustav Caribbean, USA 10,000
Costliest catastrophes (insured losses) US$mSeptember Hurricane Ike Caribbean, USA 15,000August/September Hurricane Gustav Caribbean, USA 5,000J /F b Wi t d Chi 1 600January/February Winter damage China 1,600March Winter storm Emma Europe 1,500
Source: 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE As of January 2009
Number of Natural CatastrophesW ld id 1980 2008
1 200
Worldwide, 1980 - 2008Number of events
Th b f t l
800
1 000
The number of natural catastrophes is rising globally. This has significant ramifications for the
energy sector and its insurers
600
800
Num
ber
energy sector and its insurers
200
400
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Climatological eventsHydrological eventsM t l i l t Climatological events (Extreme temperature, drought, forest fires)
Hydrological events (Flood, mass movement)
Meteorological events(Storm)
Geophysical events (Earthquake, tsunami, volcanic eruption)
Source: 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE As of January 2009
Overall and Insured Losses from Natural Catastrophes Worldwide 1980 2008
250
Catastrophes Worldwide, 1980 - 2008The overall and insured
t f t l200
costs from natural catastrophes has been on
the rise in recent year. This has significant
100
150
US
$bn
gimplications for insurers
and reinsurers
50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Overall losses (2008 values) Insured losses (2008 values)
Source: 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICE As of January 2009
Rising Number of U.S. Landfalling Tropical Cyclones Has Been Very
Costly for InsurersCostly for InsurersSix tropical cyclones
d l df ll i thmade landfall in the US in 2008
Source: Munich Re from NOAA
Insurance Information Institute On LineInstitute On-Line
THANK YOU FOR YOUR TIME ANDTHANK YOU FOR YOUR TIME AND
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