Catastrophes,
the Credit Crunch,
and the Insurance Cycle
Impacts & Implications
for the P/C Insurance Industry
Casualty Actuaries of the Mid-Atlantic Region
Sheraton University City Hotel
Philadelphia, PA
June 5, 2008
Steven N. Weisbart, Ph.D., CLU, Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5540  Cell: (917) 494-5945  stevenw@iii.org  www.iii.org
The Weakening
Economy
and
the Credit Crunch
Real Annual GDP Growth, 2000-2009F
Blue bars are actual; Yellow bars are forecasts
4.0%
3.7%
3.5%
March 2001November
2001
recession
Recession?
3.6%
3.1%
2.9%
3.0%
2.5%
2.5%
2.2%
2.2%
2.0%
1.6%
1.4%
1.5%
1.0%
0.8%
0.5%
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.0%
Sources: US Department of Commerce, Blue Economic Indicators 4/08; Insurance Information Institute.
Real Quarterly GDP Growth, 2005-2009F
Red bars are actual, seasonally adjusted; Yellow bars are forecasts
5.5%
3 Major
hurricanes
5.0%
4.8%
Recession?
4.9%
4.5%
4.5%
4.0%
3.8%
3.5%3.6%
3.5%
3.1%
2.8%
2.5%
3.0%
2.8%2.9%
2.6%
2.4%
2.5%
2.1%
2.1%
1.9%2.0%
2.0%
1.5%
1.2%
1.1%
1.0%
0.9%
0.6%
0.6%
0.5%
0.1%
Sources: US Department of Commerce; Blue Economic Indicators 4/08; Insurance Information Institute.
09:4Q
09:3Q
09:2Q
09:1Q
08:4Q
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
06:4Q
06:3Q
06:2Q
06:1Q
05:4Q
05:3Q
05:2Q
05:1Q
04:4Q
04:3Q
04:2Q
0.0%
Case-Schiller Home Price Index
Monthly: 20 City Composite (Jan 2000=100)
210
200
190
180
170
160
150
140
130
120
110
100
Peak in July 2006 at 206.52.
Home prices more than
doubled between January
2000 and July 2006
Home prices are now
about where they
were in Oct 2004
Source: http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_052703.xls
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
March 2008 index value was
172.16: home prices were 16.6%
below their July 2006 peak
1.0
1.56
1.54
1.71
1.60
1.51
1.45
1.38
1.10
1.47
1.36
0.98
1.1
1.01
1.2
1.19
1.3
1.20
1.4
1.29
1.5
1.35
1.46
1.6
1.48
1.7
1.57
1.62
1.8
1.64
1.9
1.80
1.85
2.0
2008 vs. 2005 net
premium loss is $954
million (I.I.I. est).
2.07
2.1
I.I.I. estimate: 100,000 housing starts
= $87.5 million in gross premium.
1.96
New Private Housing Starts,
1990-2014F (Millions of Units)
0.9
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F 09F 10F 11F 12F 13F 14F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from
4/08 edition of BCEI; Insurance Info. Institute
Housing Starts, Annual Data
The slump is in single-family housing. Starts of multi-family
buildings have held at 310,000 to 350,000 units each year.
Thousands
of Units
units in multi-family buildings
single family units
2,100
1,800
1716
1611
1499
1465
1046
900
1273
1,200
1359
1,500
346
349
343
332
336
309
161
67
300
329
600
2001
2002
2003
2004
2005
2006
2007
2008:Q1
0
Source: US Census Bureau
Quarterly Housing Starts
The slump is in single-family housing. Starts of multi-family
buildings have held at 70,000 to 90,000 units each quarter.
265
161
188
260
278
333
372
67
84
85
77
62
80
85
88
82
433
382
97
85
471
91
79
485.00
369.00
90
92
370.00
440.00
84
71
84
99
95
80
456
345
377
412
406
304
84
98
2008:Q1
2007:Q4
2007:Q3
2007:Q2
2007:Q1
2006:Q4
2006:Q3
2006:Q2
2006:Q1
2005:Q4
2005:Q3
2005:Q2
2005:Q1
2004:Q4
2004:Q3
2004:Q2
2004:Q1
2003:Q4
2003:Q3
2003:Q2
2003:Q1
2002:Q4
2002:Q3
2002:Q2
2002:Q1
2001:Q4
2001:Q3
2001:Q2
2001:Q1
Source: US Census Bureau
319
361
89
76
386
293
81
88
87
74
0
392
100
285
341
274
200
374
300
single family units
units in multi-family buildings
Thousands
of Units
600
500
400
Homeowner Vacancy Rates,
Quarterly, 1990-2008:Q1
July 1990March 1991
recession
3.0%
March 2001November 2001
recession
2.5%
2.0%
1.5%
Vacancy rates began
rising in 2005:Q3
Source: U.S. Census Bureau, http://www.census.gov/hhes/www/housing/hvs/qtr108/q108tab1.html
2008:Q1
2007:Q2
2006:Q3
2005:Q4
2005:Q1
2004:Q2
2003:Q3
2002:Q4
2002:Q1
2001:Q2
2000:Q3
1999:Q4
1999:Q1
1998:Q2
1997:Q3
1996:Q4
1996:Q1
1995:Q2
1994:Q3
1993:Q4
1993:Q1
1992:Q2
1991:Q3
1990:Q4
1990:Q1
1.0%
Rental Vacancy Rates,
Quarterly, 1990-2008:Q1
March 2001November
2001
recession
July 1990March 1991
recession
10.5%
10.0%
9.5%
9.0%
8.5%
8.0%
7.5%
Source: U.S. Census Bureau, http://www.census.gov/hhes/www/housing/hvs/qtr108/q108tab1.html
2008:Q1
2007:Q2
2006:Q3
2005:Q4
2005:Q1
2004:Q2
2002:Q4
2002:Q1
2001:Q2
2000:Q3
1999:Q4
1999:Q1
1998:Q2
1997:Q3
1996:Q4
1996:Q1
1995:Q2
1994:Q3
1993:Q4
1993:Q1
1992:Q2
1991:Q3
1990:Q4
6.5%
1990:Q1
7.0%
2003:Q3
Vacancy rates began
falling in 2004:Q2
Auto/Light Truck Sales,
1999-2014F (Millions of Units)
18.0
17.5
Weakening economy,
credit crunch, high gas
prices hurt auto sales
2008 vs. 2005:
-8.3%
17.8
17.5
17.4
17.1
16.9 16.9
17.0
16.6
16.9 16.8
16.6 16.7
16.5
16.5
16.4
16.1
16.0
15.7
15.5
15.3
Falling auto sales will have a
smaller effect on auto insurance
exposure growth than problems in
the housing market will on home
insurers
15.0
14.5
14.0
99
00
01
02
03
04
05
06
07
08F
09F
10F
11F
12F
13F
14F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from
3/08 edition of BCEI; Insurance Info. Institute
Do Increases in Gas Prices Affect
Auto Collision Claim Frequency?
Paid Claim Frequency = (No. of paid
claims)/(Earned Car Years) x 100
Collision Claim Frequency
Gas Prices
$3.00
$2.50
6.5
$2.00
$1.50
6.0
$1.00
5.5
$0.50
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm); ISO
Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: Fourth Quarter 2007,
published March 31, 2008 and earlier reports.
Avg Gas Price/Gal
Paid Claim Freq
7.0
Do Changes in Miles Driven Affect
Auto Collision Claim Frequency?
Paid Claim Frequency = (No. of paid
claims)/(Earned Car Years) x 100
Collision Claim Frequency
Billions of Vehicle Miles
7.0
3100
2900
6.5
2800
2700
6.0
2600
Billions of Miles Driven
Paid Claim Freq
3000
2500
5.5
2400
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08martvt/08martvt.pdf;
ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: Fourth Quarter 2007,
published March 31, 2008 and earlier reports.
Miles Driven vs. Gas Prices
in Recent Months
Miles Driven
Miles Driven
Gas Price/
Gallon
Gas Prices
280,000
$3.40
270,000
$3.20
260,000
$3.00
250,000
$2.80
240,000
$2.60
230,000
$2.40
220,000
210,000
$2.20
200,000
$2.00
Jan
Feb
2007
Mar
April
May
June
July
Aug
Sept
Oct
Nov
Dec
Jan
Feb March
2008
Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm);
Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08martvt/08martvt.pdf; .
Inflation Rate (CPI-U), % Change
from Prior Quarter, Annualized
6%
Inflation is up again.
Medical cost inflation,
important in WC, auto
5.1%
liability and other casualty
4.1% covers is running far ahead
of overall inflation.
5.5%
5.1%
4.6%
5%
3.8%
4%
3%
3.8%
3.3%
2.3%
3.0%
2.7%
2.6%
2.5%2.6%
2.3%2.3%2.3%
2.2%
1.8%
2%
1%
-2.0%
0%
09:Q4
09:Q3
09:Q2
09:Q1
08:Q4
08:Q3
08:Q2
08:Q1
07:Q4
07:Q3
07:Q2
07:Q1
06:Q4
06:Q3
06:Q2
06:Q1
05:Q4
05:Q3
05:Q2
05:Q1
-1%
-2%
-3%
Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Apr. 10, 2008; Ins. Info. Institute.
US Unemployment Rate,
(2007:Q1 to 2009:Q4F)
6.0%
Higher unemployment rate reduces workers comp exposure; could
signal a temporary claim frequency surge
5.5%
Blue bars are actual;
Yellow bars are forecasts
5.4%
4.6%
4.8%
4.7%
4.5% 4.5% 4.5%
5.6%
5.5% 5.5%
5.2%
5.0%
4.7%
5.5% 5.5%
4.9%
4.6%
4.5%
4.0%
3.5%
3.0%
06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/08); Insurance Info. Inst.
Implications for
the P/C Insurance Industry
5%
0%
-5%
-10%
6%
4%
5.2%
78
-0.9%
79
80-7.4%
81 -6.5%
-1.5%
82
1.8%
83
4.3%
84
85
86
5.8%
87
0.3%
88
-1.6%
89
-1.0%
90
-1.8%
91
-1.0%
92
3.1%
93
1.1%
94
0.8%
95
0.4%
96
0.6%
97
-0.4%
98
-0.3%
99
1.6%
00
5.6%
01
02
7.7%
03
1.2%
04
-2.9%
05
-0.5%
06
-2.9%
07
-2.7%
08F
Real NWP Growth
15%
10%
8%
Real NWP Growth
Real GDP
2%
0%
-2%
-4%
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 4/08; I.I.I.
Real GDP Growth
20%
P/C insurance industry’s growth is
influenced modestly by growth in
the overall economy
13.7%
25%
18.6%
20.3%
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
Wage & Salary Disbursements
(Payroll Base) vs. Workers Comp
Net Written Premiums
Wage & Salary Disbursement (Private Employment) vs. WC NWP
$ Billions
$ Billions
7/90-3/91
$7,000
$6,000
3/01-11/01
Wage & Salary
Disbursements
WC NPW
$45
$40
$35
$5,000
$30
$4,000
$3,000
$2,000
Shaded areas indicate recessions
$1,000
Weakening wage
and salary
growth is
expected to cause
a deceleration in
workers comp
exposure growth
$25
$20
$15
$10
$5
$0
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
*As of 7/1/07 (latest available).
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
What’s Being Done to “Fix” the Economy?
“Fix”
Fed Rate
Cuts
$168
Billion
Stimulus
Package
Bear
Stearns
Bailout
Effect on Insurers
Might reduce yields on new bond investments, but
Might also raise asset value of existing bonds (6580% of portfolio)
In the longer run, might contribute to inflation
Hope is that plan boosts overall economic activity
and employment (by 500,000 jobs)
and therefore might support p/c personal and
commercial exposures
But plan contributes to already-large federal budget
deficits; Washington might hike taxes
No direct effect, but tighter regulation of banks and
hedge funds seems likely.
Will it be the stimulus for a financial regulatory
structure that includes insurers, too?
Summary of Economic Risks and
Implications for (Re) Insurers
Economic Concern
Subprime Meltdown/
Credit Crunch
Housing Slump
Lower Interest Rates
Stock Market Slump
General Economic
Slowdown/Recession
Risks to Insurers
•Some insurers have some asset risk
•D&O/E&O exposure for some insurers
•Client asset management liability for some
•Bond insurer problems; Muni credit quality
•Reduced exposure growth
•Deteriorating loss performance on neglected,
abandoned and foreclosed properties
•Lower investment income
•Decreased capital gains (often relied upon more
heavily as a source of earnings as underwriting
results deteriorate)
•Reduced commercial lines exposure growth
•Surety slump
•Increased workers comp frequency
Post-Crunch:
Four Fundamental Issues
To Be Examined Globally
Post-Crunch: Fundamental
Issues To Be Examined Globally
• Effectiveness and Nature of Regulation
 What sort of oversight is optimal given recent
experience?
 Credit problems arose under both US and
European (Basel II) regulatory regimes
 Will new regulations be globally consistent?
 Can overreactions be avoided?
 Capital adequacy & liquidity
• Ratings on Financial Instruments
 New approaches to reflect type of asset, nature of
risk
Source: Insurance Information Institute
2 More Fundamental Issues
To Be Examined Globally
• Adequacy of Risk Management at Financial
Institutions Worldwide
 Colossal failure of risk management (and
regulation)
 Implications for ERM?
 Includes review of incentives
• Accounting Rules
 Problems arose under FAS, IAS
 Asset Valuation, including Mark-to-Market
 Structured Finance & Complex Derivatives
Source: Insurance Information Institute
Legal Aspects
of the Credit Crunch
Turbulent Markets
Give Rise to Lawsuits
Shareholder Class Action Lawsuits*
Count is
current as
of May 30.
Suits filed/year
300
266
242
231
210 215
202
188
200
164
226
185
173
163
237
182
177
118
111
87
100
Defendants include banks, investment banks,
builders, lenders, bond and mortgage insurers
0
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08*
*Securities fraud suits filed in U.S. federal courts. Not included above are 313 suits (all but 1 filed in 2001)
relating to IPO allocations.
Source: Stanford University School of Law (http://securities.stanford.edu
Origin of D&O Claims for
Public Companies, 2006
40% of D&O
suits originate
with shareholders
Competitors,
6%
Customers &
Clients, 4%
Shareholders,
40%
Employees,
25%
Government,
2%
Other 3rd
Party, 22%
Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.
Catastrophic Losses
On Average, the U.S. has a $35B+ (Direct Economic
Losses, 2005 $) Catastrophic Year Every 8 Years
Chart shows effects of hurricanes
but not other causes of catastrophic
levels of property loss.
$160
$160
$140
$117
$ Billions
$120
$100
$84
$80
$66
$70
$66
$62
$60
$68
$52
$48
$40
$39
$40
$49
$36
$20
27 Years
Sources: Source: Roger Pielke et al, “Normalized Hurricane Damage in the United States: 1900-2005,” Natural
Hazards Review, Vol. 9, No. 1 (February 1, 2008), pp. 29-41; Bonnie Cavanaugh, “A Century of Aftershocks,”
Best’s Review, April 2006, pp. 24-31.
2007
2003
1999
1995
1991
1987
1983
1979
1975
1971
1967
1963
1959
1955
1951
1947
1943
1939
1935
1931
1927
1923
1919
1915
1911
1907
1903
1899
$0
Largest Insured Losses (Adjusted to 2005
Exposure Levels) from 10 Hurricanes
With continued coastal development,
$35B+ storms will be more common.
$80
$41
$33
$34
$35
$26
ur
au
r(
de
19
rd
45
ale
,F
L)
Hu
rr
(1
94
7,
D
FL
o
O
nn
)
ke
a(
ec
19
ho
60
be
,
eH
FL
ur
)
r(
19
G
28
alv
,
FL
es
to
)
n
(1
90
0,
Be
TX
sts
)
y
(1
LI
96
5,
Ex
LA
pr
es
)
s(
19
38
K
,N
atr
Y
in
)
a(
20
05
,
A
LA
nd
re
)*
w
(1
99
M
2,
ia
m
FL
iH
)*
ur
r(
19
26
,F
L)
$20
$24
$33
$42
Ft
.L
H
om
es
te
ad
H
$ Billions
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
Source: AIR Worldwide
**ISO/PCS estimate as of June 8, 2006
32
Insured Losses (adjusted to 2005 exposure
levels) from 10 Most Damaging US Earthquakes
$120
$100
With development
along major fault lines,
the threat of $30B+
quakes looms large
3 of the Top 10
are not West
Coast events
$108
$88
$ Billions
$80
$60
$38
$40
$20
$25
$9
$11
$11
$12
$27
$16
Sa
n
Jo
se
,C
A
Po
(7
rtl
-1
an
-1
d,
91
O
1;
R
6.
(
Sa
6)
8n
1
2Fr
18
an
77
c
isc
M
;6
ar
o
.3
ke
(6
)
-1
d
-1
Tr
83
ee
8;
,
A
N
7.
R
or
2)
(1
th
rid
-5
-1
ge
84
,C
3;
A
H
6.
ay
(1
5)
wa
-1
7rd
19
,C
94
A
;6
(
10
Ft
.7
.T
)
-2
1ej
18
on
68
,C
;6
Ch
A
.8
ar
(1
)
le
9
sto
-1
85
n,
N
7;
SC
ew
7.
(8
9)
M
3ad
18
rid
86
,M
;7
O
Sa
.3
(2
)*
n
-7
Fr
-1
an
81
ci
2;
sc
o
7.
(4
7)
-1
*
819
06
;7
.9
)
$0
Source: AIR Worldwide
Number of Tornadoes, 1985 – 2007
2,000
1819
There are usually more than 1,000 confirmed
tornadoes each year in the US. They accounted
for about 25% of catastrophe losses since 1985.
1106
1093
06
07
1264
941
1216
1345
1071
1148
97
1424
1173
96
1234
1082
1132
91
856
702
656
765
800
684
1,000
1133
1,200
1990
1,400
1173
1297
1,600
1376
1,800
Sources: US Dept. of Commerce, Storm Prediction Center, National Weather Service,
at http://www.spc.noaa.gov/climo/torn/monthlytornstats.pdf
2005
04
03
02
01
2000
99
98
1995
94
93
92
89
88
87
86
1985
600
Top Five Catastrophic Wildland
Fires In California, 1970-2007*
Insured Losses (Billions 2006 $)
Oct. 20-21, 1991: Oakland, Alameda Cos., CA
$2.5
Oct. 2007: Southern CA Fires*
$1.6
Oct. 25-Nov. 4, 2003: San Diego Co., CA, "Cedar"
$1.2
Oct. 25-Nov. 3, 2003 San Bernardino County, CA, "Old"
$1.1
Nov. 2-3, 1993: Los Angeles Co., CA
$0.5
Oct. 27-28, 1993: Orange Co., CA
$0.5
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
*Estimated insured losses. Adjusted to 2006 dollars by the Insurance Information Institute. 2007 fire losses are stated in 2007 dollars.
Source: ISO's Property Claim Services Unit; Insurance Information Institute.
Global Insured Catastrophe Losses
by Region, Excluding U.S.,2001-2007
$20
$18
$16
$14
Seas/Space
Africa
Oceania/Australia
South America
Asia
Europe
$12
$10
$8
$6
$4
$2
$0
2001
2002
2003
2004
2005
2006
Sources: Insurance Information Institute compiled from Swiss Re sigma issues.
2007
Don’t Overlook the Catastrophes
that Didn’t Happen (or Haven’t Yet)
•
In 2007 two Category 5 storms struck the
Gulf of Mexico
 Luckily for the U.S., neither made landfall here
 Unluckily for Mexico, both made landfall there.
•
Stephen Flynn’s The Edge of Disaster
•
Nassim Taleb’s Fooled by Randomness and
The Black Swan
U.S. Insured Catastrophe Losses*
2004 and 2005 remind us that
it’s possible to suffer damage
from more than one hurricane
and/or other catastrophe in a
year. 2007 (in Mexico) reminds
us that it’s possible to have two
CAT-5 storms in one year.
$80
$100.0
$100
Is a $100
Billion CAT
year coming
soon?
$61.9
$ Billions
$120
$6.5
$27.5
$9.2
$5.9
01
02
$12.9
$26.5
$4.6
$8.3
99
00
$10.1
$2.6
$7.4
$5.5
92
93
$8.3
$4.7
$2.7
90
91
$20
$7.5
$40
$16.9
$22.9
$60
20??
06
07
04
05
03
97
98
95
96
94
89
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
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
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2%
Civil Disorders, $1.1
, 0.4%
Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 ,
6.4%
Winter Storms,
$23.1 , 7.8%
Terrorism, $22.3 ,
7.5%
Water Damage, $0.4
, 0.1%
Utility Disruption,
$0.2 , 0.1%
Tornadoes, $77.3 ,
26.0%
Insured disaster losses
totaled $297.3 billion from
1987-2006 (in 2006 dollars).
Wildfires accounted for
approximately $6.6 billion of
these—2.2% of the total.
All Tropical
Cyclones, $137.7 ,
46.3%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars.
Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.
2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions
and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
The 2008 Hurricane
Season:
Is a Bad Year in the Forecast?
Number of Major (Category 3, 4, 5)
Hurricanes Striking the US by Decade
Mid 1920s – mid-1960s:
AMO Warm Phase
Mid-1990s – 2030s?
AMO Warm Phase
9
8
8
6
8
4
6
6
5
5
4
6
10
10
Already as many major storms in
2000-2007 as in all of the 1990s
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s
*Figure for 2000s is extrapolated based on data for 2000-2007 (6 major storms: Charley, Ivan, Jeanne (2004) &
Katrina, Rita, Wilma (2005)).
Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
Atlantic Sea Surface Temperatures,
1948-2007
Source: AIR web site, http://www.air-worldwide.com/_public/html/air_currentsitem.asp?ID=1364
Outlook for 2008 Hurricane
Season: 60% Worse Than Average
Average*
2005
2008F
9.6
49.1
5.9
24.5
2.3
28
115.5
14
47.5
7
15
80
8
40
4
5
7
9
Accumulated Cyclone Energy
96.2
248
150
Net Tropical Cyclone Activity
100%
275%
160%
Named Storms
Named Storm Days
Hurricanes
Hurricane Days
Intense Hurricanes
Intense Hurricane Days
*Average over the period 1950-2000.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 9, 2008.
Major Hurricanes Might Form
But Not Make Landfall
• From Hurricane Irene in 1999 to Hurricane
Lili in 2002, 21 consecutive hurricanes
developed in the Atlantic basin without a
single U.S. landfall.
• “This is how nature sometimes works.”
 From 1966 to 2003, of 79 major (3-4-5) hurricanes, 19
(24%) made landfall.
 During 2004-5, 7 of 13 (54%) major hurricanes made
landfall
 During 2006-7, 0 of 4 (0%) major hurricanes made landfall
Source: Philip Klotzbach and William Gray, “Extended Range Forecast of Atlantic Seasonal Hurricane
Activity and U.S. Landfall Strike Probability for 2008,” Department of Atmospheric Science, Colorado
State University, April 9, 2008, p. 27.
Catastrophe Litigation
P/C Insurers Have Won Virtually
Every Major Post-Katrina Case
• Most cases centered on validity of flood exclusion and
various wind vs. water theories
• The victories in court came at a high public relations cost
 Post-Katrina litigation was dragged out over a 2+-year period
accounting for the vast majority of negative press in the first 16
months after the storm
 While the industry was successful at explaining the rationale for
pursuing most cases, it struggled with the classic David vs. Goliath
story
• The hostile stories feed “Insurance Hoax” genre of stories
 View that insurers systematically deny, delay and lowball
 Bad Faith litigation might be wave of future (e.g., LA AG suit)
• FL significantly added to negative press in 2007
• Exacerbated by hundreds of thousands of nonrenewals
Flood Insurance
People Buy It After a Flood…
but Just for a Year or Two
Number of New NFIP Flood Policies
in the Gulf States Since Katrina*
300,000
272,338
250,000
200,000
150,000
The number of flood
insurance policies sold
in the Gulf states in
the 2 years following
Katrina increased by
618,335 or 21.6%
187,799
111,984
100,000
50,000
34,683
11,531
0
Alabama
Florida
*Change from July 2005 through August 2007.
Sources: NFIP ; Insurance Information Institute.
Louisiana
Mississippi
Texas
Percent Growth of NFIP Flood
Policies in Gulf States Since Katrina*
90%
80%
70%
60%
The number of flood
insurance policies
sold in the Gulf
states in the 2 years
following Katrina
increased by 21.6%
80.24%
50%
40.54%
40%
30%
29.04%
26.69%
21.62%
14.15%
20%
10%
0%
Alabama
Florida
Louisiana Mississippi
*Change from July 2005 through August 2007.
Sources: NFIP ; Insurance Information Institute.
Texas
Total Gulf
States
Percentage of NFIP Flood Policies Issued
Since Katrina That Are Not Renewed*
35%
32%
30%
25%
Flood policy nonrenewal rates in
Gulf states are surprisingly high
25%
23%
20%
17%
19%
15%
8.6%
10%
5%
0%
Alabama
Florida
Louisiana Mississippi
Texas
US**
*Policies issued since July 2005 as of August 2007. **US figure is nonrenewal rate for all policies in
force, average over 12 month period ending August 2007.
Sources: NFIP ; Insurance Information Institute.
What Could Happen
in the
Mid-Atlantic States?
Nightmare Scenario: Insured Property
Losses for NJ/NY CAT 3/4 Storm
Insured Losses: $110B
Economic Losses: $200B+
Distribution of Insured Property Losses,
by State, ($ Billions)
$80
$70
$60
$40
$30
$20
Total Insured
Property Losses =
$110B, nearly 3
times that of
Hurricane Katrina
$5
$4
$1
PA
CT
Other
$0
NY
Source: AIR Worldwide
NJ
How Much Damage
Can a Mid-Atlantic Hurricane
Do?
Once Upon a Time …
“There is a detailed record of major destruction by landfalling
hurricanes [in the NJ-NY-NE region] in 1635, 1815, 1821,
and 1938.”
“A hurricane hitting the North does the same damage as a hit by
the next higher Safir-Simpson category hurricane in the
South.
• The nature of northern hurricanes, and the changes they
undergo as they move northward, also amplify damage.
• Their radius of maximum winds increase 2-3 times over southern
hurricanes. This changes increases storm surge damage along the
coasts as well as the areal extent of wind damage inland.”
Source: Nicholas Coch, “The Unique Damage Potential of Northern Hurricanes,” at
http://gsa.confex.com/gsa/2006AM/finalprogram/abstract_108209.htm
The Flood Risk in
the Mid-Atlantic States:
Few who live along the
New Jersey Coast
Have Flood Insurance
Flood Insurance Penetration Rates:
Top 25 Counties/Parishes in the US*
JEFFERSON/LA
WALTON/FL
BROWARD/FL
COLLIER/FL
LEE/FL
GALVESTON/TX
GLYNN/GA
ST. BERNARD/LA
MIAMI-DADE/FL
ORLEANS/LA
CARTERET/NC
ST. CHARLES/LA
ST. JOHNS/FL
CHARLOTTE/FL
ST. TAMMANY/LA
HORRY/SC
INDIAN RIVER/FL
BAY/FL
BRUNSWICK/NC
NASSAU/FL
BERKELEY/SC
PINELLAS/FL
BRAZORIA/TX
CHATHAM/GA
TERREBONNE/LA
0%
84.0%
81.5%
80.0%
78.7%
77.1%
74.1%
69.6%
68.4%
68.1%
66.7%
65.9%
65.5%
FL: 11 counties
62.4%
LA: 6 parishes
59.0%
56.2%
TX: 2 counties
51.6%
GA: 2 counties
49.6%
NC: 2 counties
48.0%
46.3%
SC: 2 counties
44.4%
MS: 0 counties
42.8%
42.8%
AL: 0 counties
42.0%
41.9%
40.1%
10%
20%
30%
40%
50%
60%
70%
80%
*As of 12/31/05.
Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
90%
100%
Flood Insurance Penetration Rates:
Counties/Parishes Ranked 26-50*
BALDWIN/AL
SARASOTA/FL
PALM BEACH/FL
CHARLESTON/SC
MANATEE/FL
MARTIN/FL
ATLANTIC/NJ
LAFOURCHE/LA
OKALOOSA/FL
GEORGETOWN/SC
FLAGLER/FL
MAUI/HI
LIVINGSTON/LA
BREVARD/FL
SUSSEX/DE
VOLUSIA/FL
ST. LUCIE/FL
JEFFERSON/TX
HAMPTON CITY/VA
OCEAN/NJ
HARRIS/TX
PASCO/FL
BOSSIER/LA
NEW HANOVER/NC
BRONX/NY
0%
39.8%
39.7%
39.2%
39.1%
38.7%
37.2%
36.5%
36.2%
34.2%
33.0%
32.1%
30.6%
28.3%
27.6%
27.0%
26.8%
26.4%
26.1%
25.4%
25.3%
25.2%
23.4%
23.3%
22.1%
21.7%
10%
20%
30%
40%
50%
FL: 10 counties
LA: 3 parishes
TX: 2 counties
SC: 2 counties
NJ: 2 counties
AL: 1 county
MS: 0 counties
CT: 0 counties
Where is Cape
May county?
60%
70%
80%
*As of 12/31/05.
Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
90%
100%
Flood Insurance Penetration Rates:
Counties/Parishes Ranked 51-75*
CAMERON/TX
FORT BEND/TX
SANTA ROSA/MS
HARRISON/MS
JACKSON/MS
NORFOLK CITY/VA
HILLSBOROUGH/FL
LAFAYETTE/LA
EAST BATON ROUGE/LA
VIRGINIA BEACH
ESCAMBIA/FL
HONOLULU/HI
SACRAMENTO/CA
CALCASIEU/LA
MONTGOMERY/TX
CITRUS/FL
MERCED/CA
CHESAPEAKE,
OSCEOLA/FL
HUDSON/NJ
DUVAL/FL
BARNSTABLE/MA
MARIN/CA
TULARE/CA
MONMOUTH/NJ
0%
21.6%
20.9%
20.1%
19.1%
18.3%
17.8%
17.7%
17.5%
16.7%
16.3%
15.8%
15.6%
15.4%
14.5%
14.0%
13.3%
12.9%
12.6%
11.7%
11.6%
11.3%
10.2%
9.3%
9.1%
8.5%
Where are
Cape May
and
Middlesex
counties?
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
*As of 12/31/05.
Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
Total $ NFIP Claim Payments
by State (Top 10) 1/1/1978 – 3/31/2008
$ Millions
$16,000
Until 2005 Texas ranked 1st
in terms of total flood
claims payments.
$15,454
$14,000
$12,000
$10,000
$8,000
$6,000
$3,453
$4,000
$2,971
$2,795
$921
$2,000
$846
$752
$736
$791
$478
$445
PA
NY
CA
VA
$0
LA
FL
TX
MS
AL
NJ
NC
Source: http://bsa.nfipstat.com/reports/1040.htm, visited 5/30/2008
Total Number of NFIP Claims
by State (Top 10) 1/1/1978 – 3/31/2008
Closed
Open
Closed W/O Payment
400,000
350,000
300,000
NC
PA
NY
Source: http://bsa.nfipstat.com/reports/1040.htm, visited 5/30/2008
24,297
NJ
29,465
AL
61,053
MS
44,288
TX
44,125
LA
64,445
FL
0
28,405
50,000
44,435
100,000
146,309
150,000
142,895
200,000
301,297
250,000
CA
VA
Who Should Pay
for the Risk of
Hurricane/Flood Damage?
63% of Non-coastal Policyowners Say Premium
Subsidies for Coastal Property Owners are Unfair
70%
63%
63%
60%
50%
50%
40%
22%
30%
31%
33%
32%
Interior Counties
Noncoastal States
30%
20%
10%
28%
0%
Coastal Counties
Very unfair
Coastal States
Source: Insurance Research Council
Somewhat Unfair
Most Non-coastal Policyowners Say Taxpayer
Subsidies for Coastal Property Owners are Unfair
Somewhat Unfair
70%
60%
Very unfair
59%
51%
50%
40%
61%
25%
30%
34%
31%
Interior Counties
Noncoastal States
29%
30%
20%
10%
22%
0%
Coastal Counties
Coastal States
Source: Insurance Research Council
My Financial
My
Financial
House
software
House
helps you
Personal
organize
and
assess
your
Finance
current is
Software
financial
popular
as well
situation
The Insurance
Cycle:
Will the Cycle
Be Unbroken?
Profitability:
Did Profits Reach
a Cyclical Peak in 2006/07?
By No Reasonable Standard Can
Profits Be Deemed Excessive
Profitability Peaks & Troughs in the
P/C Insurance Industry,1975 – 2008F*
25%
1977:19.0%
1987:17.3%
2006:12.2%
20%
1997:11.6%
15%
10%
5%
0%
1975: 2.4%
1984: 1.8%
1992: 4.5%
2001: -1.2%
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
07E
08F
-5%
*GAAP ROE for all years except 2007 which is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is
I.I.I. estimate.
Source: Insurance Information Institute; Fortune
ROE: U.S. P/C Insurance
Industry vs. Fortune 500
1987:17.3%
21%
2007:14.0%
1997:11.6%
18%
15%
12%
9%
Sept. 11
6%
3%
Katrina,
Rita, Wilma
Hugo
0%
Northridge
4 Hurricanes
Andrew
-3%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
US P/C Insurers
All US Industries
Sources: Insurance Information Institute; Fortune
Top Industries by ROE: P/C Insurers
Underperformed Again in 2007
56.0%
ousehold and Personal Products
Petroleum Refining
Hotels, Casinos
Oil & Gas Equipment
Food Services
Metals
Food Consumer Products
etwork, Communications Equip
Aerospace/Defense
Medical Products
Electronics
Pharmaceuticals
Industrial Equip
Health Care Insurance
P/C Insurers (Stock)
L/H Insurers (Stock)
Commercial Banks
Div. Financials
-10%
Source: Fortune magazine
0%
26.3%
26.1%
24.9%
23.9%
23.0%
22.0%
21.8%
20.6%
20.4%
20.4%
20.3%
20.0%
ROE of publicly-held
P/C insurers in 2007
ranked 31st out of 50
industry groups despite
near-peak profitability
…
but the P/C industry
outperformed most
other financial
industries in 2007
19.0%
13.5%
11.0%
10.7%
-1.2%
10%
20%
30%
40%
50%
60%
Personal/Commercial Lines &
Reinsurance ROEs, 2006-2008F*
18%
2006
2007E
16%
14.0%
2008F
10%
8%
16.8%
13.2%
14%
12%
ROEs are declining as
underwriting results
deteriorate
9.8%
9.4%
12.3%
10.7%
9.8%
6.3%
6%
4%
2%
0%
Personal
Commercial
Sources: A.M. Best Review & Preview (historical and forecast).
Reinsurance
Can Anything
Change the Profit Cycle?
4 Factors That Could Affect
the Length and Depth of the Cycle
Factors that Could Affect the
Length and Depth of the Cycle
Capacity: Rapid surplus growth in recent years has left the
industry with between $85 billion and $100 billion in excess
capital, according to analysts
 All else equal, rising capital leads to greater price
competition and a liberalization of terms and conditions
Investment Gains: 2007 was the 5th consecutive up year on Wall
Street. With declines in stock prices and falling interest
rates, portfolio yields are certain to fall
 Smaller realized capital gains
 A sustained equity market decline (and potentially a drop
in bond values) could reduce policyholder surplus
Factors that Could Affect the
Length and Depth of the Cycle
Reserves: Reserves are in the best shape (in terms of adequacy)
in decades, which could extend the depth and length of the
cycle
 Many companies have been releasing “redundant”
reserves, which allows them to boost net income even
as underwriting results deteriorate
 But reserve releases will diminish in 2008; Even more
so in 2009
Information Systems: Management has more and better tools
that allow faster adjustments to price, underwriting and
changing market conditions than it had during previous
soft markets
Source: Insurance Information Institute.
Underwriting
Trends
U.S. P/C Insurance Industry
Combined Ratio, 1970-2007
Combined Ratios
120
1970s: 100.3
1980s: 109.2
115
1990s: 107.8
2000s: 102.6*
110
105
100
95
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
90
*2000-2007
Sources: A.M. Best; ISO, III
P/C Insurance Combined Ratio,
2001-2007
120
115.8
110
2007 deterioration due
mainly to falling rates,
“normal” CAT activity
As recently as 2001, insurers
paid out nearly $1.16 for
every $1 in earned premiums
The best
combined ratio
since 1949
107.4
100.7
100.1
100
98.3
95.6
90
92.5
2005 figure benefited from heavy use
of reinsurance which lowered net losses
2001
Sources: A.M. Best; ISO, III.
02
03
04
05
06
2007
Impact of Reserve Changes on
Combined Ratio
$10
$5
$0
($5)
0.1
$0.4
$18.9
$15
$22.8
3.5
$36.9
$25
$20
$33.4
6.5
$10.8
Reserve Development ($B)
$35
$30
($10)
00
01
02
03
10
9
8
Reserve
7
adequacy has
6
4.5
improved
5
substantially
4
3
2
1
-1.2 -1.6 -1.3 -1.1
0
(1)
(2)
($5.0)
($5.3) ($7.0)($6.0)
(3)
04
05
06
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
07F
08F
09F
Combined Ratio Points
8.6 8.9
$40
PY Reserve Development
Combined Ratio Points
Premium Growth
At a Virtual Standstill
in 2007/08
Three “Hard Markets” in the
Last 40 Years
25%
1975-78
1984-87
2001-04
Post-Katrina period
resembles 1993-97
(post-Andrew)
20%
15%
10%
5%
0%
-5%
2007: -0.6% premium growth is
the first decline since 1943
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
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
Growth in Net Written
Premium, 2000-2007E
15.3%
10.0%
8.4%
5.0%
P/C insurers are
experiencing their slowest
growth rates since
1943…but underwriting
results are expected to
remain relatively healthy
3.9%
2.7%
0.5%
2000
2001
2002
2003
2004
*2007 figure based on actual 9-month results.
Source: A.M. Best; Forecasts from the Insurance Information Institute.
2005
0.0%
2006
2007*
Personal/Commercial Lines &
Reinsurance NPW Growth, 2006-2008F
30%
25%
20%
Net written premium
growth is expected to be
slower for commercial
insurers and reinsurers
28.1%
15%
10%
5%
2.0%-0.1%1.4%
3.5%
0%
-5%
-10%
-15%
-1.5%-2.3%
2006
2007E
Personal
2008F
Commercial
Sources: A.M. Best Review & Preview (historical and forecast).
-5.0%
-8.5%
Reinsurance
Rates Under Pressure
in 2007/08,
Especially Commercial Lines
00
$847
99
04
05
06
07
$724
98
$690
$703
97
$685
$705
$650
$668
$700
$651
$750
$691
$800
$851
$780
$850
$847
$900
Across the U.S., auto insurance
expenditures are expected to fall 0.5%
in 2007, the first drop since 1999
$823
$950
$838
Lower Underlying Frequency, Modest
Severity, Check Auto Insurance Costs
$600
94
95
96
Sources: NAIC, Insurance Information Institute
01
02
03
Across the U.S., Home Insurance
Costs* Rose 4% in 2007
$900
Homeowners in non-CAT zones
$868
$835
have seen smaller increases than
$850
$787
those in CAT zones
$800
$729
$750
$700
$668
$650
$593
$600
$536
$550
$508
$488
$481
$500
$455
$440
$450 $418
$400
95 96 97 98 99 00 01 02 03 04 05 06 07
*Excludes cost of flood and earthquake coverage.
Source: NAIC, Insurance Information Institute
Average Quarterly Commercial Rate
Change, All Lines, (1Q:2004 – 1Q:2008)
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
1Q08 -13.5%
-12.0%
4Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
1Q04
-16%
3Q07 -13.3%
-5.3%
-3.0%
-2.7%
KRW Effect
-11.8%
-14%
-11.3%
-12%
-9.6%
-10%
Commercial account
pricing is now on par
with prices in late 2001,
early 2002
-8.2%
-9.4%
-8%
-9.7%
-5.9%
-6%
-7.0%
-4%
-4.6%
-3.2%
-2%
-0.1%
0%
Rising Epenses
Expense Ratios Will Rise as
Premium Growth Slows
32%
Personal
31.1%
Commercial
31%
30%
29%
30.8%
29.4%
29.9%
30.0%
29.1%
28%
27.0%
26.6%
27%
26%
25.0%
25.6% 25.6% 24.8%
24.3%
25%
24.5%
24% 23.4%
25.6%
26.4%
26.3%
27.5%
27.1%
26.6%
26.1%
25.0%
24.7%
24.4% 24.6%
23%
22%
96
97
98
99
00
01
02
*Ratio of expenses incurred to net premiums written.
Source: A.M. Best; Insurance Information Institute
03
04
05
06
07E
08F
Advertising Expenditures by P/C
Insurance Industry, 1999-2007E
$ Billions
$4.5
$4.0
$4.3
Ad spending by P/C insurers
is at a record high, signaling
increased competition
$3.7
$3.5
$3.0
$3.0
$2.5
$2.0
$1.7
$1.7
$1.8
99
00
01
$1.9
$1.7
02
$2.1
$1.5
03
04
05
06
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
07E
PP Auto Insurance 2005 Market
Concentration, by HHI, by State
Green bars = Unconcentrated markets
Gray bars = Moderately concentrated markets
15
13
Number of States
11
10
Concentrated
markets
10
5
4
3
3
2
2
1
1
0
0
0
0
601700
701800
801900
9011000
1001- 1101- 1201- 1301- 1401- 1501- 1601- 1701- 1801+
1100 1200 1300 1400 1500 1600 1700 1800
HHI
Sources: J. Robert Hunter, State Automobile Insurance Regulation, Consumer Federation of America, April
2008, pp. 19-20; I.I.I. calculations.
The P/C Industry’s
Financial Strength
and Capacity
U.S. P-C Insurers’ Policyholder
Surplus: 1975-2007
$550
$500
Surplus exceeded a half trillion
dollars for the first time during
the 2nd quarter of 2007.
$450
$400
$ Billions
$350
$300
$250
At year end 2007, P/C
insurers held $1.17 in
surplus for every $1 of
NWP.
$200
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$150
$100
$50
$0
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
Sources: A.M. Best, ISO, Insurance Information Institute.
$1.17
$1.10
$1.01
$0.93
$0.86
$0.78
$1.17
$1.18
$1.06
$0.90
$0.77
$0.75
$0.72
$0.71
$0.64
$0.64
$0.54
$0.53
$0.6
$0.52
$0.8
$0.58
$1.0
$0.95
$1.2
Capacity: “Surplus”
dollars per NWP dollar
$0.89
$1.4
$1.12
In General, the Industry Has Grown Its Capacity
to Accept Risk (but that capacity can also shrink)
Premiums measure risk accepted; surplus is funds
beyond reserves to pay unexpected losses. The higher
the ratio of surplus to premiums, the greater the
industry’s capacity to handle the risk it has accepted.
$0.4
$0.2
Sources: NAIC Annual Statement data, via HighlineData; Ins. Info. Inst.
07
06
2005
04
03
02
01
2000
99
98
97
96
1995
94
93
92
91
1990
89
88
87
86
1985
$0.0
Annual Catastrophe Bond
Transactions Volume, 1997-2007
Risk Capital Issues ($ Mill)
$8,000
Number of Issuances
Catastrophe bond issuance has
soared in the wake of Hurricanes
Katrina and the hurricane
seasons of 2004/2005, despite two
quiet CAT years
$7,000
$6,000
$5,000
$7,329.6
35
30
25
$4,693.4
20
$4,000
15
$3,000
$1,000
$633.0
$846.1$984.8
$1,139.0
$1,219.5
$966.9
10
$1,991.1
$1,729.8
$2,000
$1,142.8
5
$0
0
97
98
99
00
01
02
03
04
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
05
06
07
Number of Issuances
Risk Capital Issued
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2007E
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
2
1.8
1.6
110
1.4
1.2
105
1
100
0.8
0.6
95
0.4
0.2
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
07E
90
2006 impairment rate was 0.43%, or 1-in-233
companies, half the 0.86% average since 1969;
2007 will be lower; Record is 0.24% in 1972
Source: A.M. Best; Insurance Information Institute
0
Impairment Rate
120
Impairment rates are
highly correlated
with underwriting
performance and
could reach nearrecord low in 2007
Reasons for US P/C Insurer
Impairments, 1969-2005
2003-2005
Affiliate
Problems
8.6%
Catastrophe
Losses
8.6%
1969-2005
Deficient
Loss
Reserves/Inadequate
Pricing
62.8%
Deficient
Loss
Reserves/Inadequate
Pricing
38.2%
Investment
Problems*
7.3%
Alleged
Fraud
11.4%
Rapid
Growth
8.6%
Reinsurance
Sig. Change
Failure
in Business
3.5%
4.6%
Misc.
9.2%
Deficient
reserves, CAT
losses are
more
important
factors in
recent years
Affiliate
Problems
5.6%
Catastrophe
Losses
6.5%
Alleged
Fraud
8.6%
Rapid
Growth
16.5%
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Investment Overview
Not Much to Look Forward To
P/C Investment Income as a % of Invested
Assets Follows 10-Year US T-Note
P-C Inv Income/Inv Assets
10-Year Treasury Note
9%
Investment yield
historically tracks
10-year Treasury
note quite closely
8%
7%
6%
5%
4%
3%
*As of May 30, 2008.
Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.
08*
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
2%
Property/Casualty Industry
Investment Income*, 1994-2007
$60
02
03
04
$54.6
$52.3
$49.5
$39.6
$36.7
01
$38.7
$37.1
98
$40.8
97
$38.6
96
$39.9
95
$41.5
$38.0
$30
$36.8
$40
$33.7
Billions
$50
$20
1994
99
2000
*Primarily interest and stock dividends.
2005 figure includes special one-time dividend of $3.2B.
05
06
2007
Sources: ISO; Insurance Information Institute.
US P/C Industry Net Realized
Capital Gains, 1990-2007
Realized capital gains exceeded $9 billion in 2004/5 but fell sharply in
2006 despite a strong stock market. Nearly $9 billion again in 2007.
$ Millions
$20,000
$18,019
$18,000
$16,205
$16,000
$13,016
$14,000
$12,000
$10,808
$9,244
$9,893 $9,818
$10,000
$8,000
$9,125
$6,631
$5,997
$6,000
$9,701
$8,971
$6,610
$4,806
$3,524
$4,000 $2,880
$1,664
$2,000
$0
-$2,000
90
91
92
93
94
95
96
97
98
99
Sources: A.M. Best, ISO, Insurance Information Institute.
00
-$1,214
01 02 03
04
05
06
07
Bonus:
Presidential Politics and
P/C Insurance Industry
Profitability
Political Quiz
• Does the P/C insurance industry perform better (as
measured by ROE) under Republican or Democratic
administrations?
• Under which President did the P/C insurance industry
realize its highest ROE (average over 4 years)?
• Under which President did the P/C insurance industry
realize its lowest ROE (average over 4 years)?
P/C Insurance Industry ROE by
Presidential Administration,1950-2008*
16.43%
15.10%
Carter
Reagan II
10.45%
8.93%
OVERALL RECORD:
8.65%
1950-2008*
8.35%
7.98%
Republicans 8.92%
7.68%
6.98%
Democrats
8.00%
6.97%
5.43%
5.03%
Party of President has marginal
4.83%
bearing on profitability of P/C
4.43%
insurance industry
3.55%
G.W. Bush II
Nixon
Clinton I
G.H.W. Bush
Clinton II
Reagan I
Nixon/Ford
Truman
Eisenhower I
Eisenhower II
G.W. Bush I
Johnson
Kennedy/Johnson
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
*ROE for 2007/8 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.
Source: Insurance Information Institute
P/C Insurance Industry ROE by
Presidential Party Affiliation,
1950–2008E
20%
Truman
25%
BLUE = Democratic President
Eisenhower
Kennedy/
Johnson
Nixon/Ford Carter
RED = Republican President
Reagan/Bush
Clinton
Bush
15%
10%
5%
0%
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
08E
-5%
Source: Insurance Information Institute
Summary
• Results were excellent in 2006/07; Overall
profitability reached its highest level (est. 13-14%)
since 1988
• Underwriting results were aided by lack of CATs &
favorable underlying loss trends, including tort system
improvements
 But forecast for 2008 is for worse-than-average hurricane
season
• Premium growth rates are slowing to their levels since
WW II; Commercial lines lead decreases
• Investment returns insufficient to support deep soft
market in terms of price, terms & conditions as in
1990s
Insurance Information
Institute On-Line
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