Outline: The Economics of Workers Comp The US Economy: Then and Now Lessons From the Depths of Great Recession—AIS 2009 AIS 2019: Strength, Vulnerability and Workers Comp

Labor Markets: A Deep Dive Adverse and favorable developments impacting WC

Financial Markets: A Decade After the Crisis Began Interest rate trends: An “about face” at the Fed Financial markets: The return of volatilityWhy this matters to WC

Infrastructure Initiatives Good news for workers comp or a road to nowhere?

Trade WarWhy the current escalation in trade tension is bad for workers comp

THE ECONOMY

The Strength of the Economy Has Always Influenced Growth in Insurers’ Exposure Base Across Most Lines—

Especially Workers Comp

The Links Between the Economy and Workers Comp Are Strengthening

WORKERS COMPENSATION AND THE ECONOMY

What a Difference a Decade Makes

The Ghosts of an AIS Past …

Today’s Top Economic Headlines … Unemployment Rate: 3.6% Best since 1969

Job Growth: 218K Jobs Created on Average Over the Past 12 Months Close to the best 12-month stretch in the post-crisis period

GDP Growth: 3.2% in Q1 Best start to the year since 2015

Wage Gains: 3.2% in April 2019 Strongest in post-crisis era

But the Economic Outlook Was Not Always This Rosy …What a Difference a Decade Makes

A Journey Back to AIS 2009 …

What a Difference a Decade Makes: Jobs—2009 vs. 2019

-5.1

2.6

-6

-4

-2

0

2

4

2009 2019Sources: Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Millions of Jobs • 2009: 5.1 million jobs lost• 8.6 million jobs lost

overall (2008-2009)• Jobs were not fully

recovered until May 2014 • 2019: 2.6 million jobs created (est.)

• 21.3 million jobs created since 2009 trough

• 12.7 million net new jobs (increase beyond pre-crisis peak)

May 2009: 344,000 jobs were lost—more than 10,000

per day!

Millions of Jobs Lost or Gained

Length of US Recessions, 1929-Present*

43

138

11 10 8 10 1116

6

16

8 8

19

05

101520253035404550

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 2019, inclusive.Sources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.

Months in Duration

The “Great Recession” was the longest since the Great Depression

AIS 2009Recession had nearly

two months left to run

What a Difference a Decade Makes: Unemployment Timeline

4.4%

10.0%

4.4% 3.6%

0%

2%

4%

6%

8%

10%

12%

May 2007 Pre-Crisis Low

Oct. 2009 Crisis Peak

Feb. 2017 Apr. 2019Lowest Since

Dec. 1969Sources: Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Unemployment Rate 1-of-10 people

in the labor force could not

find work

It took nearly a decade for the unemployment rate to return to its pre-crisis low

AIS 2009Unemployment hit 9% for the

first time since 1983

What a Difference a Decade Makes: Jobs Timeline

138.4129.7

138.5151.1

110120130140150160

Jan. 2008 Pre-Crisis Peak

Feb. 2010 Crisis Trough

May 2014 Jobs Recouped

Apr. 2019Lowest

UnemploymentRate in 50

YearsSources: Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Employed Persons (Millions)

Nearly 9 million jobs lost over

25 months

Took 51 months to recoup those jobs

AIS 2009: 6.9 million people had already lost their jobs—more than 430,000 per month since the recession began

Total Nonfarm Employment

What a Difference a Decade Makes: Payrolls—2009 vs. 2019

$310

-$310-$400-$300-$200-$100

$0$100$200$300$400

2009 2019Sources: Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Billions of Dollars of Wage & Salary Losses or Gains • 2009: $310 billion in lost

payroll as of Q2: 2009 from 2008:Q2 peak

• Payrolls did not fully recover until 2011:Q2

• 2019: $310 billion in new payroll anticipated in 2019

• $2.85 trillion in new payroll since 2009:Q2 trough

• $2.54 trillion increase beyond pre-crisis peak

Wage & Salary Loss/Gain ($ Bill)

AIS 2009The economy was

hemorrhaging $26B in payroll per month

Workers Comp Bore the Brunt of the Wounds From the Great Recession

$231.7

$198.4

$180$190$200$210$220$230$240

2006 2010

Sources: A.M. Best; Risk and Uncertainty Management Center, University of South Carolina.

All Commercial Lines ($ Billions)

$47.9$34.5

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

2006 2010

Workers Compensation($ Billions)

Great Recession Insurance Fact: The pace of decline in the workers comp line was twice that of commercial lines overall

Bottom Line: The Great Recession Damaged Works Comp More Than Any Other Line

40.3%

17.0%16.6%

6.6%

4.8%

4.1%10.6%

Financial Guaranty Workers Comp

Workers Comp accounted for 40% or $13.4B of the $33.3B

decline in commercial net written premiums during the financial

crisis—more than any other line—by far

Sources: A.M. Best; Risk and Uncertainty Management Center, University of South Carolina.

Other Liability

Commercial Auto

Products Liability

Med Professional Liability

All Other

AIS 2009: A Very Different Mood … A Very Different Message

Length of US Business Cycles, 1929-Present*

43

13 8 11 10 8 10 1116

616

8 819

50

80

3745

39

24

106

36

58

12

92

120

73

119

0102030405060708090

100110120

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

ContractionExpansion Following

Duration (Months)

Month Recession Started

Average Duration*Recession = 13.4 MonthsExpansion = 63.6 Months

* As of May 2019, inclusiveSources: National Bureau of Economic Research; Risk and Uncertainty Management Center, University of South Carolina.

Next month, the current economic expansion

will tie for the longest in US

history (began July

2009)

AIS 2009: Recession

had two months left

to run

THE SLOW AWAKENING OF AMERICA’S

“ANIMAL SPIRITS”

Economic Policy and the Insurance Industry

Consumer and Business Confidence Remain Key but Are

Being Tested

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 5/19; Center for Risk and Uncertainty Management, University of South Carolina.

2.7%

1.8%

-1.3

%-2

.8%

2.5%

2.2% 2.7%

4.5%

0.8% 1.

4%3.

5%2.

1%1.

2%3.

1% 3.2%

2.9%

2.2%

4.2%

3.4%

2.2% 3.

2%2.

0%

2.0%

1.8%

1.8%

1.6% 1.7%1.6% 2.

2%

1.8%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

2000

2001

2002

2003

2004

2005

2006

2007

20

0820

0920

1020

1120

1220

1320

1420

1516

:1Q

16:2

Q16

:3Q

16:4

Q17

:1Q

17:2

Q17

:3Q

17:4

Q18

:1Q

18:2

Q18

:3Q

18:4

Q19

:1Q

19:2

Q19

:3Q

19:4

Q20

:1Q

20:2

Q20

:3Q

20:4

Q

Demand for Insurance Should Increase in 2019 as GDP Growth Continues at a Steady Pace and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

“Great Recession”

began in Dec. 2007

Financial Crisis

2018 GDP forecasts were revised upward by ~0.4%

due to tax reform, but effects wane in 2019

Tax cuts help jolt growth in early 2018, but effects are waning, though Q1 2019

surprised to the upside. Trade war, weaker global growth are adversely affecting US GDP growth in 2019/20.

Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; I.I.I.

-6%

-4%

-2%

0%

2%

4%

6%

8%

2008:Q1

2008:Q3

2009:Q1

2009:Q3

2010:Q1

2010:Q3

2011:Q1

2011:Q3

2012:Q1

2012:Q3

2013:Q1

2013:Q3

2014:Q1

2014:Q3

2015:Q1

2015:Q3

2016:Q1

2016:Q3

2017:Q1

2017:Q3

2018:Q1

2018:Q3

DWP y-o-y change y-o-y nominal GDP growth

Direct written premiums track nominal GDP fairly tightly over time, suggesting the P/C insurance industry’s growth prospects inextricably

linked to economic performance.

The Economy Drives P/C Insurance Industry Premiums:2006:Q1–2018:Q4

Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

Consumer Confidence Index: Jan. 1987–Apr. 2019

Source: The Conference Board; Wells Fargo Research.

Outlook: Consumer confidence was shaken by financial volatility in late 2018/early 2019—but confidence is rebounding. Consumers are optimistic about the future, which is consistent with expectations for stronger economic growth (consumers account for nearly 70% of all

spending in the economy). Should positively influence growth of insurable exposures.

The Conference Board’s Consumer

Confidence Index stood at 129.2 in April, down from its post-recession high in Q3 2018 but is

rebounding from a drop in late 2019/early 2019

New Private Housing Starts, 1990-2025F

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1.85 1.

96 2.07

1.80

1.36

0.91

0.55 0.59 0.61

0.78 0.

92 1.00 1.

11 1.17 1.20 1.

261.

23 1.26 1.

34 1.37 1.41 1.45

1.45

1.351.

461.

291.

201.

011.

19

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F20F21F22F23F24F25F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/19 for 2019-20; 3/19 for 2021-25F); University. of South Carolina, Center for Risk and Uncertainty Management..

Insurers Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk

Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; a net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, and demographics should continue to stimulate new

home construction, but higher mortgage rates and a slowing

economy will slow the pace of growth

(Millions of Units)

NFIB Small Business Optimism Index:Jan. 1988–March 2019

Source: National Federal of Independent Business; Wells Fargo Research.

Outlook: Small businesses remain optimistic about the future

Small Business Optimism took a big hit in late 2018/early 2019 on fears of a greater

economic uncertainty. Tax reform, reduced

regulations and strong sales have driven

investment, hiring and exposures.

Construction Spending:Jan. 2000–Mar. 2019 ($ Bill)

Source: US Dept. of Commerce; Wells Fargo Securities.

Private construction spending, especially

residential construction has weakened over the

past year. Public construction spending is

increasing and could benefit from the massive $2 trillion infrastructure plan being discussed in

Congress.

LABOR MARKETS TRENDS:STRENGTHENING CONTINUES

IN 2019

Strong Job Gains ContinueUnemployment Is at a 50-Year LowPayrolls Expand to Record Highs

Private Sector Employment, 2000-2019*

111.

2

111.

0

109.

1

108.

8

115.

8

114.

7

108.

7

107.

9

109.

8

112.

3

114.

5

117.

1

119.

8

122.

1

124.

3

126.

6

128.

3

110.

2

112.

2

114.

5

100

105

110

115

120

125

130

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19*

Private sector employment is now 18.9% (20.4 million) above the crisis trough and 10.8% (12.5 million) above

its pre-crisis peak

*Annual averages of monthly data. 2019 figure is annualized based on data through April.Sources: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Millions of Workers

Annual Change in Private Sector Employment, 2000-2019*

2,31

6

-269

-1,8

33

-376

1,29

6

-1,0

38 -886

1,98

7

2,40

3

2,26

9

2,53

8

2,73

3

2,32

6

2,14

0

2,35

7

1,65

4

-5,989

1,38

8

2,08

6

2,24

1

(7,000)(6,000)(5,000)(4,000)(3,000)(2,000)(1,000)

01,0002,0003,0004,000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19*

The economy created an average of 2.34 million jobs per year from 2011

through 2018—and trillions in payroll

*Annual averages of monthly data. 2019 figure is annualized based in data through April.Sources: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

(Thousands)

US Unemployment Rate Forecast: 2007:Q1–2020:Q4

4.5%

4.5% 4.6% 4.

8% 4.9%

5.4%

6.1%

6.9%

8.1%

9.3% 9.

6% 10.0

%9.

7%9.

6%9.

6%

8.9% 9.

1%9.

1%8.

7%8.

3%8.

2%8.

0%7.

8%7.

7%7.

6%7.

3%7.

0%6.

6%6.

2%6.

1%5.

7%5.

6%5.

4%5.

2%5.

0%4.

9%4.

9%4.

9%4.

7%4.

7%4.

4%4.

3%4.

1%4.

1%3.

9%3.

8%3.

8% 3.9%

3.7%

3.6%

3.6%

3.6%

3.6% 3.7% 3.8%

9.6%

4%

5%

6%

7%

8%

9%

10%

11%

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

115

:Q2

15:Q

315

:Q4

16:Q

116

:Q2

16:Q

316

:Q4

17:Q

117

:Q2

17:Q

317

:Q4

18:Q

118

:Q2

18:Q

318

:Q4

19:Q

119

:Q2

19:Q

319

:Q4

20:Q

120

:Q2

20:Q

320

:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (5/19 edition); Risk and Uncertainty Management Center, University of South Carolina.

Optimistic scenarios put unemployment as low as 3.4% by Q4 2019 and 3.2% in Q4 2020, whereas pessimistic scenarios put it as high

as 4.4%, reflecting increased economic uncertainty ahead.

The unemployment rate is expected to remain below 4%

through 2020.

At 3.6%, the unemployment

rate is at its lowest reading

in 50 years.

Unemployment and Underemployment Rates: Still Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Jan15

Jan16

Jan17

Jan18

Jan19

"Headline" Unemployment Rate U-3

Unemployment + UnderemploymentRate U-6

“Headline” unemployment was 3.6% in April 2019.

4% to 6% is “normal”

Source: US Bureau of Labor Statistics; Center for Risk and Uncertainty Management, University of South Carolina.

U-6 was 7.3% in April 2019

January 2000 through April 2019, Seasonally Adjusted (%)

High unemployment and underemployment constrained overall economic growth for years, but the job market is operating near full employment.

U-6 went from 8.0% in March

2007 to 17.5% in October 2009

For U-6, 8% to 10% is “normal”

Unemployment Rates by State, March 2019:Highest 25 States* (Latest Available)

6.5

5.6

5.1

5.1

5.0

4.9

4.7

4.6

4.4

4.4

4.4

4.3

4.2

4.1

4.0

4.0

4.0

4.0

3.9

3.9

3.9

3.8

3.8

3.8

3.8

0

1

2

3

4

5

6

7

AK DC WV NM AZ MS LA WA OR OH IL CA NV NJ NC NY MI KY PA GA CT US TX RI MD

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for March 2019, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In March 2019, all but 4 states and the District of Columbia had

unemployment rates below 5%

In March 2019, the US unemployment rate of 3.8% was the lowest in

14 years

3.7

3.7

3.7

3.7

3.6

3.5

3.5

3.5

3.4

3.3

3.3

3.3

3.2

3.2

3.2

3.0

3.0

2.9

2.9

2.9

2.8

2.8

2.8

2.4

2.4

2.3

2.3

0

1

2

3

4

5

WY MT AR AL IN KS FL CO ME OK MO DE TN SC MN UT MA WI VA ID SD NE HI NH IA VT ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, March 2019: Lowest 25 States*

*Provisional figures for March 2019, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In March 2019, 12 states had unemployment rates of 3% or less

Smaller, more rural states have the lowest

unemployment rates in the US

Unemployment Rate by State: March 2019

Source: US Bureau of Labor Statistics; Center for Risk and Uncertainty Management, University of South Carolina.

At 6.5%, Alaska’s unemployment

rate is the highest in the country.

Lowest unemployment rates are found in

northern New England, upper Midwest and

northern plains. At 2.8%, Vermont and North Dakota have the lowest unemployment

rates in the US.

POSITIVE LABOR MARKET DEVELOPMENTS

Key Factors Driving Workers Compensation Exposure

Average Weekly Hours of All Private Workers, March 2006—April 2019*

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

33.533.633.733.833.934.034.134.234.334.434.534.634.734.8

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Hours worked totaled 34.4 per week in April,

just shy of the 34.6 hours typically worked before the “Great Recession”

Hours worked plunged

during the recession, impacting

payroll exposures

(Hours Worked)

Annual Change in Average Hourly Wage, 2007–2019*

3.0% 3.1%2.8%

1.9%2.1%

2.3%2.6% 2.5%

3.0%3.2%

2.1%1.9%2.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

07 08 09 10 11 12 13 14 15 16 17 18 19*

Wage growth continues to accelerate

*2019 figure year-over-year increase for April 2019 vs April 2018.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Risk and Uncertainty Management Center, University of South Carolina.

Wage growth acceleration will lead directly to faster WC payroll

exposure growth

Productivity Growth by Decade, 1950s–2010s*(Real Output per Hour, All Workers)

2.7% 2.8%

2.1%1.6%

2.2%2.8%

1.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1950s 1960s 1970s 1980s 1990s 2000s 2010s**2010s is through 2018.Sources: U.S. Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Average Annual Change

Declining Labor Productivity = Wage Growth Enemy #1

Wage growth in the 2010s is the lowest in the post-WW II era

Productivity gains are a critical driver of wage growth—

and thus WC payroll exposure

Productivity growth in Q1 2019 was the strongest since 2014:Q3,

and is a potential catalyst to faster wage growth ahead

Sources: US Bureau of Labor Statistics; Risk and Uncertainty Management Center, University of South Carolina.

Productivity Growth: On the Rise?(Real Output per Hour, All Workers, 2007:Q1–2019:Q1)

3.7% 3.6%

-4%

-2%

0%

2%

4%

6%

8%

10%

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

115

:Q2

15:Q

315

:Q4

16:Q

116

:Q2

16:Q

316

:Q4

17:Q

117

:Q2

17:Q

317

:Q4

18:Q

118

:Q2

18:Q

318

:Q4

19:Q

1

Take This Job And …Number of Quits, Jan. 2003—Feb. 2019*

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

The number of workers quitting

their jobs tumbled 1.5 million during

the recession, down 48%, from 3.1

million in 2006

In 2019, approximately 3.5 million people will quit their jobs, up 123% since 2009

(000)

Take This Job And … Quit It!Quit Rate, 2005–2019*

2.1% 2.2% 2.1%1.9%

1.6% 1.7% 1.8% 1.9%2.1% 2.2% 2.2% 2.3%

1.4% 1.4% 1.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19*

Improving labor market conditions are emboldening workers

to quit their jobs—presumably for higher wages

*Annual figures calculated from month seasonally adjusted data. 2019 figure through February.Sources: US Bureau of Labor Statistics JOLTS Survey at https://www.bls.gov/jlt/ ; Risk and Uncertainty Management Center, University of South Carolina.

Quit Rate

Approximately 2.3% of workers have or

will quit their jobs in 2019—the highest proportion in the

post-crisis era

Long-Term Unemployed (27+ Weeks), Jan. 2003—Apr. 2019*

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

The number of long-term

unemployed soared by 5.7 mill

to 6.8 million in 2010 (520%), from

1.1 mill in 2006

Today, there are 1.2 million long-term

unemployed, down 82% since 2010

(000) The ranks of the long-term unemployed remained near

the recession peak for 3 years after the recovery began

Help Wanted! Number of Job Openings, Jan. 2003—Feb. 2019*

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Job openings plunged to 2.3

million, 56%, from 4.9 mill in 2007

Today, there are 7.1 million job openings, up

214% since 2009

(Thousands)

Number of Unemployed Persons per Job Opening, Feb. 2003—Feb. 2019*

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

0

1

2

3

4

5

6

7

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

At the height of the recession,

there were nearly 7 job seekers for

every one opening

Today, there are just 0.9 job

seekers for every one opening,

down from 1.1 a year ago

Unemployed Persons per Job Opening

You’re Hired! Number of Hires, Jan. 2003—Feb. 2019*

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Hirings plunged to 3.6 million

during the recession, down

30%, from 5.5 mill in 2006

Some 5.7 million workers will be hired in 2019, up 50%

since 2009

(000)

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

Number of Job Openings vs. Quits, Jan. 2003—Feb. 2019*

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Quits and Openings

plunged during the Great

Recession

Today, there are 7.1 million job openings, up

214% since 2009(000)

A record 3.5 million will quit

their jobs in 2019, up by 123% since

2009!

Number of Job Openings, Hires and Quits, Jan. 2003—Feb. 2019*

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

OpeningsQuitsHires

Worker confidence in the job market

has soared

OPENINGS+214%

(000)

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics JOLTS survey: at http://www.bls.gov/jlt/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

HIRES+50%

QUITS+123%

DOES THE MINIMUM WAGE MATTER FOR WORKERS COMPENSATION?

Yes, and Increasingly So!

Source: James Madison Institute, February 2008.

ME

NH

PA

VA

NC

LATX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

DE

AL

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SD WI

INOH

MT

CA

NV

UT

WY

CO

AK

States Increasing Their Minimum Wage in 2019: Fuels WC Exposure

22 states (including DC) increased their minimum wage in 2019, adding about $5 billion in wages to 4+ million workers.

Approximately 24 cities boosted their minimum wages as well.

Sources: Economic Policy Institute, National Conference of State Legislators, BusinessInsider.com, USA Today; Risk and Uncertainty Management Center, University of South Carolina.

Number of States Increasing Their Minimum Wage, 2014–2019

13

21

14

19 18

22

0

5

10

15

20

25

2014 2015 2016 2017 2018 2019**Includes the District of Columbia. Sources: Economic Policy Institute, National Conference of State Legislators, BusinessInsider.com, USA Today; Risk and Uncertainty Management Center, University of South Carolina.

Number of States

Minimum wage increases by states, cities and counties have added tens of billions of dollars to

the WC exposure base in recent years. The federal minimum wage of $7.25 hasn’t changed since 2009.

The Minimum Wage and Workers Comp In 2018, 81.9 million workers age 16+ were paid on an hourly basis,

representing 58.5% of all wage and salary workers (BLS)

Of those paid by the hour, 434,000 earned the prevailing federal minimum wage of $7.25 (down from 542,000 in 2017 and 701,000 in 2016) and 1.3 million made less than the federal minimum (down from 1.8 million in 2017)

These workers account for 2.1% of the labor force, down from 2.3% in 2017, 2.7% in 2016 and 3.3% in 2015

This suggests that large numbers of workers are benefiting from minimum wage increases and the strong labor market

Tens of billions of new WC payroll exposure added

ADVERSE LONG-TERMLABOR MARKET DEVELOPMENTS

Key Factors Harming Workers Compensation Exposure and the

Overall Economy

Notes: Recessions indicated by gray shaded columns. Data are not seasonally adjusted.Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

0100200300400500600700800900

1,0001,1001,2001,3001,400

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).

There were 454,000 discouraged workers

in Apr. 2019, down 66% from the crisis peak of 1.32 mill in

Dec. 2010, but up 11% from a year ago

Thousands

“Discouraged Workers” are people who have searched for work for so long in vain

that they actually stop searching and drop out of

the labor force

Number of “Discouraged Workers”: Jan. 1994—Apr. 2019

More than 1 million people exited the labor force

during the recession and were slow to return

Labor Force Participation Rate,Jan. 2002—April 2019*

*Defined as the percentage of working age persons in the population who are employed or actively seeking work.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

62

63

64

65

66

67

68

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Large numbers of people exited during

the recession—a trend that continued for years afterward

Labor force participation remains stubbornly low—far below pre-recession levels

and remains one of the country’s most vexing labor

market problems

Labor Force Participation as a % of Population

April 2019: 62.8% (unchanged from

April 2018)

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2019:Q1

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates).

Billions

$5,500$5,750$6,000$6,250$6,500$6,750$7,000$7,250$7,500$7,750$8,000$8,250$8,500$8,750$9,000$9,250$9,500

05:Q

105

:Q2

05:Q

305

:Q4

06:Q

106

:Q2

06:Q

306

:Q4

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

115

:Q2

15:Q

315

:Q4

16:Q

116

:Q2

16:Q

316

:Q4

17:Q

117

:Q2

17:Q

317

:Q4

18:Q

118

:Q2

18:Q

318

:Q4

19:Q

1

Prior peak was 2008:Q3

at $6.54 trillion

Recent trough (2009:Q1) was $6.23 trillion, down 5.3%

from prior peak

Growth rates2018: 4.6% 2017: 4.5%2016: 3.4%2015: 3.2%2014: 4.9% 2013: 5.2%2012: 2.3% 2011: 3.9% 2010: 5.5%

Latest (2019:Q1) was $9.08 trillion, a new

peak–$2.85 trillion (46%) above 2009 trough

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2018

*Private employment; Shaded areas indicate recessions. WC premiums are from NCCI through 2018.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR.

Continued payroll growth will benefit WC exposure growth, but falling rates will adversely impact growth in net written premiums

7/90-3/91 3/01-11/01 12/07-6/09

$Billions $Billions

WC premium volume dropped two

years before the recession began

WC net premiums written were down $14B or 29.3%

to $33.8B in 2010 after peaking at $47.8B in 2005

INVESTMENTS: THE NEW REALITY

Investment Performance Is a Key Driver of Insurer Profitability

The Fed’s New Dovish Turn, Oval Office Pressure Don’t Bode Well for Insurers

Obstacles to Growing Investment Earnings Are Mounting

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

,*Through May 10, 2019.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html; Center for Risk and Uncertainty Management, University of South Carolina

Tech Bubble Implosion

Financial Crisis

Annual Return

Energy Crisis

2019: +10.7%*2018: -6.2%

S&P 500 Index Returns, 1950–2019*

Fed Raises Rate

Stock markets rose sharply following the 2016 election and continued to rise

throughout 2017, but trade, growth concerns and rising interest rates took a toll in late

2018; taking a toll in April/May 2019 as well

Property/Casualty Insurance Industry Investment Income: 2000–2018

$38.9$37.1$36.7

$38.7

$54.6

$51.2

$47.1$47.6$49.2

$48.0$47.3 $46.4$47.2$46.6$48.9

$55.3

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18*

Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.7%) increase in 2015—though 2016 experienced

another decline. Up 5.1% in 2017 and 13.1% in 2018

*2018 figure is distorted by provisions of the TCJA of 2017.1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; University of South Carolina, Center for Risk and Uncertainty Management.

($ Billions)Investment income is slowly

recovering. 2018 figure overstates improvement due to

provision of the TCJA 2017

Policyholder Surplus (Capacity), 2006:Q4–2018:Q4

Sources: ISO, A.M .Best; Center for Risk and Uncertainty Management, University of South Carolina.

($ Billions)$4

87.1

$496

.6

$512

.8

$521

.8

$478

.5

$455

.6

$437

.1

$463

.0 $490

.8

$511

.5 $540

.7

$530

.5

$544

.8

$559

.2

$559

.1

$538

.6

$550

.3

$567

.8

$583

.5

$586

.9

$607

.7

$614

.0

$624

.4 $653

.4

$671

.6

$673

.9

$675

.2

$674

.2

$673

.7

$676

.3

$700

.9

$717

.0 $750

.7 $781

.5

$742

.2

$662

.0

$570

.7

$566

.5

$505

.0

$515

.6

$517

.9

$400$450$500$550$600$650$700$750$800$850

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

14:Q

2

14:Q

3

14:Q

4

15:Q

2

15:Q

4

16:Q

1

16:Q

4

17:Q

2

17:Q

4

18:Q

3

18:Q

4

Financial Crisis

Surplus (capacity) as of 12/31/18 at $742.2B was still

close to its all-time record high

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business.

Drop due to near-record 2011 CAT losses

Capacity/Capital “shocks” typically do not on their own, drive a sustained firming of

the pricing environment

Surplus dropped by $8.5B or 1.1% in

2018

Net Investment Yield on Property/Casualty Insurance Invested Assets, 2007–2018*

4.4

4.0

4.6 4.5

3.7 3.83.7

3.43.7

3.2 3.1 3.13.3

4.6

4.23.9

2.5

3.0

3.5

4.0

4.5

5.0

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 have pushed up some yields, albeit quite modestly. Shrinking of Fed’s balance sheet should help too, in 2018

and beyond. Both Fed moves might be on hold in 2019.Sources: NAIC data, sourced from S&P Global Market Intelligence; 2017 figure is from ISO.

(Percent)

Investment yield in 2017 was down about 150 BP

from pre-crisis levels

P/C Industry Net Income After Taxes,1991–2019F 2005 ROE= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.2% 2014 ROAS1 = 8.4% 2015 ROAS = 8.4% 2016 ROAS = 6.2% 2017 ROAS =5.0% 2018 ROAS = 8.0%

ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2%ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; Sources: A.M. Best, ISO.

$14,

178

$5,8

40$1

9,31

6$1

0,87

0 $20,

598

$24,

404 $3

6,81

9$3

0,77

3$2

1,86

5

$3,0

46$3

0,02

9

$62,

496

$3,0

43

$35,

204

$19,

456 $3

3,52

2$6

3,78

4$5

5,87

0$5

6,82

6$4

2,92

4$3

6,81

3$5

9,99

4$3

6,60

0

$38,

501

$20,

559

$44,

155

$65,

777

-$6,970

$28,

672

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Net income is up sharply in 2018 due to lower CATs

and the TCJA

$ Millions

-5%

0%

5%

10%

15%

20%

25%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975–2019F

Profitability = P/C insurer ROEs. 2011-18 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, A.M. Best, USC RUM Center.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

9 Years

ROEs in 2017 plunged to their lowest levels since 2008 but

rebounded in 2018 due to lower CATs and the TCJA.

ROE

1975: 2.4%

2013 9.8%

2017 5.0%

2015: 8.4%

2019F 4.8%

2018 8.0%

INTEREST RATE ANDINFLATION TRENDS

Federal Reserve Policy, Economic Strength, Trade Policy and

Deficits Will Drive Interest Rates and Inflation

2020 Election Politics Will Have an Increasing Impact Too!

Political Pressure on the Fed to Lower Rates: Now a Twitter Staple

Source: Bloomberg.com; USAToday.com.

Over the past year, President Trump has

commented in public on the Fed approximately 27

times, 7 of those times via Twitter, like this one

on April 30, 2019

The President is seeking a very accommodative

Fed, emphasizing growth and employment at the

possible expense of inflation and price

stability

Federal Funds Rate: Jan. 2006–Apr. 2019

Note: Recessions indicated by gray shaded columns.Source: Board of Governors, Federal Reserve; National Bureau of Economic Research (recession dates); Center for Risk and Uncertainty Management, University of South Carolina.

0

1

2

3

4

5

6

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

The Fed’s aggressive rate cutting ushered in what will be at least 15

years of depressed investment earnings for the P/C insurance

industry

The Fed’s glacial pace of interest rate normalization

suggests P/C will be lucky to see pre-crisis

level interest rates until the early 2020s

Federal Funds Rate (%)

Pre-Crisis: 5.25%

Post-Crisis: Near 0% for 8

years

Today: 2.50%

US Treasury Security Yields:A Long Downward Trend, 1990–2018*

*Monthly, constant maturity, nominal rates, through Dec. 2018.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year US Treasury Notes have been essentially

below 5% for more than a decade

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

Fed tightening has pushed ST

rates higher but the 2-10 yield spread

has narrowed substantially

Yield Spread Between 10- and 2-Yr. Treasury, May 2013–April 2019

Note: Recessions indicated by gray shaded columns.Source: Federal Reserve Bank of St. Louis. FRED Economic Data; Center for Risk and Uncertainty Management, University of South Carolina.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

'13 '14 '15 '16 '17 '18

The narrowing of the spread between long-

and short-term investments is not

helpful to P/C insurers, especially in long-tail lines like WC

Yield Spread (% Points)

Recent High: 260 Basis Pts.

Today: <0.20 Basis Pts.

(Apr. 2018: 50BP)Also concern that a

shrinking yield spread suggests little confidence

in the strength of the economy in the years ahead

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Apr. 2016, 2018 and 2019

0.24% 0.30% 0.42% 0.62%0.86%

1.63% 1.82%

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

1.55%1.79% 1.98%

2.52% 2.70% 2.82% 2.87% 2.96% 3.07%

2.22%2.62%

1.02%1.34%

2.50%

2.15%

2.81%2.98%2.57%2.46%2.36%2.34%2.36%

2.43%2.46%2.45%2.43%

0%

1%

2%

3%

4%

5%

6%

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

May 2016 Yield CurvePre-Crisis (July 2007)'April 2018

The Fed Began to Raise Rates in Dec. 2015 but Rates Remained Far Below Pre-Crisis Levels. The Flattening and Inversion of the Yield Curve Caused

Hysterics on Wall Street in Late 2018 as Foreshadowing a Recession.Source: Federal Reserve Board of Governors: http://www.federalreserve.gov/releases/h15/data.htm; University of South Carolina.

April 2016

April 2018

Pre-Crisis

April 2019

Interest Rate Forecasts: 2019F–2025F

2.8% 2.6% 2.8%3.1% 3.2% 3.4% 3.5% 3.5%

2.4% 2.4% 2.5% 2.6% 2.7% 2.8%

0%

1%

2%

3%

4%

19F 20F 21F 22F 23F 24F 25F 19F 20F 21F 22F 23F 24F 25F

A full normalization of interest rates is unlikely until the early 2020s, approximately 15 years after the onset of the financial crisis.

Yield (%)

Sources: Blue Chip Economic Indicators (5/19 for 2019 and 2020; for 2021-2025 3/19 issue); University of South Carolina.

3-Month Treasury 10-Year TreasuryThe Fed’s pause in

rate hikes, its decision to

maintain large bond holdings and a weaker global economy are suppressing

interest rates—again. Significant political pressure

from President Trump could be a

factor as well.

Annual Inflation Rates, (CPI-U, %),1990–2020F

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.6

3.2

2.11.5 1.6

0.1

1.3

2.12.4

1.9 2.1

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F20F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 5/19 (forecasts).

Inflation remains remarkably tame despite a tight US labor market, modest economic growth, rising energy prices, tariff-induced price increases and a

rapidly rising federal budget deficit.

Annual Inflation Rates (%)

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

commodity bubble reduced inflationary pressures in 2009/10

Inflationary expectations are

consistent with the Fed’s 2% target,

but trade war could increase

inflationary pressure

Trade War Alert

A sustained trade war with China could

increase inflation by 0.1 to 0.4

points

-1%

0%

1%

2%

3%

4%

5%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Change in Medical CPI CPI-All Items

Medical Cost Inflation vs. Overall CPI, 1995–2018

Sources: US Bureau of Labor Statistics.

Average Annual Growth Average1995 – 2018

Healthcare: 3.4%Overall: 2.2%

Medical inflation typically exceeds inflation in the

overall economy, though not in 2018

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%3.2%3.4%

2.5%2.4%3.0%

3.8%

2.5%

5.1%

7.4%

10.1% 10.6%

13.5%

5.4%

7.8%

5.9%7.0%

4.4% 4.0%

6.0%

4.1%

2.0%

3.0% 3.7%

1.0%

-1.4%

1.8%

2.4%1.1%

0.2%

5.8%

8.8%7.7%

7.3%

8.3%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

95 97 99 01 03 05 07 09 11 13 15 17p

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaced the Medical CPI Rate but No Longer, 1995–2018p

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 from 1995

through 2017 was well above the medical CPI (5.6% vs. 3.6%), but

the gap has narrowed.

18p

4.2%5.2%5.6%

4.7%

6.3%

2.3%

1.1%

4.7%4.6%

2.7%

1.1%

2.5%2.9%

5.9%

7.7%

9.0%

10.1%

4.6%

5.9%6.6%

9.3%

2.9% 2.7%

4.4%

3.0%

3.1%4.3%

2.7%3.1%

3%2.9%2.3%

1.1%3.5%

3.6% 3.0%

0.9%

3.1%

1.5%

0%

0.9%0.6%

-2.2%

1.0%1.7%

10.1%

9.2%

3.1%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18p

Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim

WC Indemnity Severity vs. Wage Inflation, 1995–2018p

2017p: Preliminary based on data valued as of 12/31/2017; Developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI; University of South Carolina, Center for Risk and Uncertainty Management.

Annual Change 1995–2018Indemnity Claim Sev.: +4.3%US Avg. Weekly Wage: +3.4%

Indemnity severities historically

outpaced wage gains, but both are more in sync today

$0

$5

$10

$15

$20

$25

66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17

US National Debt, 1966–2018*

*As of Feb. 2019.Source: Congressional Budget Office; Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/GFDEGDQ188S

The national debt hit $22 trillion for the first time in February 2019 and will continue to grow rapidly for the foreseeable future.

Debt/GDP Ratio = 104% (Highest Since WW II)

$22 Trillion

($ Trillions)

18

Inflation AlertLarge deficits that increase as a share of GDP are, at some point,

unsustainable and

inflationary.

INFRASTRUCTURE INITIATIVES

WC Insurance Will Be a Primary Beneficiary of Any Major

Infrastructure Initiatives, But …

Composition of Infrastructure Spending Under President Trump’s Plan (April 2018)

5.0%10.0%

10.0%

25.0%

50.0%

$100B: Infrastructure

Incentive Grants

$50B: Rural Formula

Funds

Sources: The White House, 2018 Budget: Infrastructure Initiative accessed at:https://www.whitehouse.gov/; Risk and Uncertainty Management Center, University of South Carolina.

$20B: “Transformative Project Fund”

$20B: Infrastructure

Financing Programs

$10B: Federal Capital Revolving Fund

FY2019 White House Plan: UpdateCalled for $200B in infrastructure

spending on transportation, water, environmental, broadband and education initiatives with a $2 trillion impact over 10 years

Went nowhere, as predicted at AIS

FY2020 $2 Trillion Agreement With House and Senate (April 30)Already effectively deadNo politically feasible way to fundAIS prediction: Truly Dead

US TRADE POLICY

How Will the WC Insurance Industry Be Impacted by

Escalating Trade Disputes?

Trade Actions and Workers CompensationMajor Trade Actions Announced So FarMarch 2018: Steel and Aluminum

– 25% tariff on foreign steel, 10% tariff on imported aluminum

April 2018: $50B in tariffs announced on some 1,300 Chinese products Sept. 2018: 10% tariffs on $200B worth of Chinese products

– China retaliates immediate with highly targeted tariffs on American products

May 10, 2019: 10% tariffs 25% on $200B on Chinese products– Threat to implement 25% on remaining $325B not current subject to tariff– China retaliates with $60B in tariffs on US goods

Potential Impacts: Job and Income Losses Could Be Severe if Targeted Countries Retaliate Hundreds of thousands of jobs would be lost across many industries

WC premium shrinkage would be measured in the billions as hundreds of billions in wages and salaries would be at risk

199,388145,251143,888

85,12084,789

76,44171,170

64,46763,47961,72761,694

50,50246,46044,590

248,399

0 50,000 100,000 150,000 200,000 250,000 300,000

CaliforniaTexas

FloridaNew York

IllinoisPennsylvania

OhioGeorgiaVirginia

North CarolinaMichigan

New JerseyMassachusetts

TennesseeColorado

Source: Trade Partnerships Worldwide LLC, Estimated Impacts of Tariffs on the US Economy and Workers, February 2019, accessed at: https://tradepartnership.com/wp-content/uploads/2019/02/All-Tariffs-Study-FINAL.pdf.

Total Net Job Loss = 2.235 million (est.)

Under the 25% US tariff scenario with full

Chinese retaliation, net job losses occur in all

50 states

States With Largest Net Job Losses Under 25% Tariff Scenario (Assuming Full Chinese Retaliation)

Job Impact Distribution by Sector: 25% US Tariff Scenario With Full Chinese Relation (1-3 Years After Imposed)

236.4

-2,383.7 -2,235.4-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

Manufacturing Services Net Job Change

Job Gain/Loss(Thousands)

A small number of protected US

industries benefit from tariffs—but at a

cost of 10 jobs lost for every 1 job created

An estimated 2.235 million jobs would be lost under a

sustained trade war scenario

Source: Trade Partnerships Worldwide LLC, Estimated Impacts of Tariffs on the US Economy and Workers, February 2019, accessed at: https://tradepartnership.com/wp-content/uploads/2019/02/All-Tariffs-Study-FINAL.pdf.

Economic Factor ImpactReal US GDP (annual change) -1.04%Real US National Income (annual change) -193.8 Bill

US Exports to Rest of World (annual change) -8.7%

US Imports From Rest of World (annual change) -11.5%

Annual Cost per US Family of 4 $2,389Net Impact on US Jobs (one-time change) -2.235 MillCost to Save 1 US Job $583,683

Trade War: Summary of Potential Economic Impacts(1-3 Years After Tariffs Imposed, Full Chinese Retaliation)

Source: Trade Partnerships Worldwide LLC, Estimated Impacts of Tariffs on the US Economy and Workers, February 2019, accessed at: https://tradepartnership.com/wp-content/uploads/2019/02/All-Tariffs-Study-FINAL.pdf.

SUMMARY

The Ever-Changing Economics of Workers Compensation

Summary: The Economics of Workers Comp Economy: The strong economy is the primary driving force behind the

majority of commercial exposure growth, including (and especially) for WC insurers Business and consumer confidence is strong but is not unshakable

Labor Markets: Strongest they have been in 18 years Expect employment growth to slow since the economy is at full employment and/or

if trade war heats up

Modest wage pressures should build and productivity improves

Investment Earnings: Little improvement as interest rates stay put or fall Infrastructure: Little significant impact or benefit Trade Disputes: Unambiguous negative—threat is looming ever larger

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigrobert.hartwig@moore.sc.edu