Overview & Outlook for the
P/C Insurance Industry
Drivers of Revenue, Cost and Competition in
the Aftermath of the “Great Recession”
NAMIC Claims Conference
Orlando, FL
February 18, 2011
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5520  Cell: 917.453.1885  bobh@iii.org  www.iii.org
Presentation Outline
 Reasons for Optimism, Causes for Concern in the P/C
Insurance Industry
 P/C Profitability Overview & Outlook
 5 Key Pillars of Profitability: Past, Present & Future





Underwriting
Pricing (Commercial & Personal Lines)
Investments
Expenses
Leverage
 External Factors Influencing Profitability
 Tort System Review: Overview and Causes for Concern
 Regulatory Environment
 Exposure Analysis: Where Will Growth Come from in the
Aftermath of the Great Recession?”
 Crisis-Driven Exposure Issues: Personal & Commercial Lines
 Growth in the Post-Crisis World
 Catastrophe Loss Review
 Q&A
2
CLAIMS PROFESSIONALS’
JEOPARY
QUIZ: What is the
significance of this number?
7,221,448,563,867
3
ANSWER: This is the dollar
value of all claims paid by
P/C insurers since 1925.
$7,221,448,563,867
4
CLAIMS PROFESSIONALS’
JEOPARY
QUIZ: What is the
significance of this number?
12,611,756,109,849
5
ANSWER: This is the dollar
value of claims paid by P/C
insurers since 1925,
adjusted for inflation*
$12,611,756,109,849
*Adjusted to 2010 dollars by the Insurance Information Institute using BLS CPI-U data.
6
Dollar Value of Claims Paid by P/C
Insurers to Policyholders, 1925–2010E*
$ Billions
$400
Claim payouts in recent
years are volatile but have
reached a jagged plateau
Since 1925, P/C insurers have
paid more than $7.2 trillion in
claims to policyholders
$350
$300
$250
$200
Claim payouts
increased
exponentially
for decades
$150
$100
Catastrophe losses,
underwriting cycle
contribute to
volatility; Prolonged
soft market,
recession to plateau
$50
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Note: Data are not adjusted for inflation.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
*2005
*2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
$0
7
Cumulative Value of Claims Paid by P/C
Insurers to Policyholders, 1925–2010E*
$ Billions
It took 60 years for
the industry to pay
its first $1 trillion in
claims in the years
since 1925. Today,
the industry pays
$1 trillion in claims
every 3 to 4 years.
$8,000
$7,000
$6,000
$5,000
4 years (2010)
3 years (2006)
3 years (2003)
5 years (2000)
$4,000
4 years (1995)
$3,000
7 years (1991)
$2,000
60 years (1925 – 1984)
$1,000
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Note: Data are not adjusted for inflation.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
*2005
*2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
$0
8
Inflation-Adjusted Dollar Value of Claims
Paid by P/C Insurers, 1925–2010E*
$ Billions
$400
$350
$300
Since 1925, P/C insurers
have paid more than $12.6
trillion in claims to
policyholders on an
inflation-adjusted basis
$250
$200
Claim payouts
increased
exponentially for
decades, but
more erratically in
the post-1980 era
$150
$100
On an inflation-adjusted basis,
claims paid have fallen to 1990s
levels, reflecting improved
underwriting results, exposure
loss during the “Great Recession”
and leakage to alternative markets
$50
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
$0
9
Cumulative Value of Inflation-Adjusted
Claims Paid by P/C Insurers, 1925–2010E*
Adjusted for inflation, it
took 36 years for the
industry to pay its first
$1 trillion in claims in
the years since 1925.
Today, the industry
pays $1 trillion in claims
every 2 to 3 years after
adjusting for inflation.
$ Billions
$14,000
$13,000
$12,000
$11,000
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
3 years (2008)
3 years (2005)
2 years (2002)
4 years (2000)
3 years (1996)
3 years (1993)
4 years (1990)
4 years (1986)
5 years (1982)
7 years (1977)
9 years (1970)
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
*2005
*2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
36 years (1925 – 1961)
10
$12.5 Trillion of Paid Claims and Someone
Still Writes a Book With This Title?
This book by a Rutgers
University law professor asserts
that insurers do everything
possible to avoid paying
legitimate claims.
I will be debating Prof. Feinman
and refuting his allegations in
New Orleans on March 24.
11
Reasons for Optimism, Causes
for Concern in the P/C
Insurance Industry
The Outlook for the Economy
Has Brightened, But the Outlook
for P/C Insurance Is Mixed
12
Reasons for Optimism, Causes for
Concern in the P/C Insurance Industry
 Economic Recovery in US is Self-Sustaining and Strengthening
 No Double Dip Recession
 Economy is more resilient than most pundits presume





Consumer Confidence is Gradually Improving
Consumer Spending is Recovering Gradually
Consumer and Business Lending Are Expanding
Housing Market Remains Weak, but Some Improvement Expected in 2011
Inflation Remains Tame
 Runaway inflation is highly unlikely; Fed has things under control
 Deflation—threat has virtually disappeared
 Private Sector Hiring is Consistently Positive for 13 Months
 Acceleration in hiring later in 2011
 No significant secondary spike in unemployment





Sovereign Debt, Muni Bond “Crises” Overblown
Current Middle East Turmoil Poses Little Risk to US Economy
Interest Rates Are Rising but Remain Low by Historical Standards
Stock and Bond Markets More Stable, Less Volatile
Political Environment Is More Hospitable to Business Interests
13
Reasons for Optimism, Causes for
Concern in the P/C Insurance Industry
 Era of Mass P/C Insurance Exposure Destruction Has Ended
 Personal and commercial exposure growth is virtually certain in 2011
 But restoration of destroyed exposure will take 3-5 years in US
 Exposure Growth Returned in in 2nd Half 2010, Will Accelerate in 2011
 P/C Industry Saw Growth in 2010 (+0.8%) for the First Time Since 2006
 Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures
 Wage growth is also positive and could modestly accelerate
 Increase in Demand for Commercial Insurance Is in its Earliest Stages and
Will Accelerate in 2011
 Includes workers comp, commercial auto, marine, many liability coverages, D&O
 Laggards: Property, inland marine, aviation
 Personal Lines: Auto leads, homeowners lags
 Investment Environment Is/Remains Much More Favorable
 Return of realized capital gains as a profit driver
 Interest rates are low but are risingBoost to investment income
 Agent Commissions Should Begin to Rise in 2011
 Demand, Capital Management Strategies Will Temper Overcapitalization
14
P/C Insurance Industry
Financial Overview
Profit Recovery Continues
Early Stage Growth Begins
17
$65,777
$26,700
$3,043
$28,311
$44,155
$38,501
$30,029
$20,559
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$24,404
$50,000
$21,865
$60,000
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.3%
2009 ROAS1 = 5.8%
2010:Q3 ROAS = 6.7%
$30,773
$70,000






P-C Industry 2010:Q3 profits
were$26.7B vs.$16.4B in 2009:Q3,
due mainly to $4.4B in realized
capital gains vs. -$9.6B in previous
realized capital losses
$36,819
$80,000
$62,496
P/C Net Income After Taxes
1991–2010:Q3 ($ Millions)
$0
-$10,000
-$6,970
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS for
2010:Q3 and 4.6% for 2009. 2009:Q3 net income was $29.8 billion excluding M&FG.
Sources: A.M. Best, ISO, Insurance Information Institute
09 10:Q3
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
A combined ratio of about 100
generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Combined Ratio / ROE
110
105
15.9%
14.3%
100.6
100
100.1
97.5
100.7
12.7%
15%
101.0
99.5
99.7
7.3%
7.7%
9.6%
95
18%
92.6
12%
9%
8.9%
6%
90
4.4%
85
3%
0%
80
1978
1979
2003
2005
Combined Ratio
2006
2008*
2009*
2010:Q3*
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2009 and 2010:Q3 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial
guaranty insurers
Source: Insurance Information Institute from A.M. Best and ISO data.
RNW for Major P/C Lines,
2000-2009 Average
20%
10-year returns for some lines are
excellent, though homeowners is a major
laggard, largely due to major
catastrophes. WC returns are slipping.
19.8%19.1%
15%
12.2%
10%
8.5% 8.0%
7.4%
7.2% 7.0%
6.4%
4.7% 4.7%
5%
0%
-5%
-3.9%
Fire
Inland
All Comm CMP
Marine Other Auto
Source: NAIC; Insurance Information Institute
Med
Mal
PP
Auto
All
Lines
WC
Other
Liab
HO
Allied
Profit Pillar #1
UNDERWRITING
Cyclicality is Driven Primarily
by the Industry’s Underwriting
Cycle, Not the Economy
23
P/C Insurance Industry
Combined Ratio, 2001–2010:Q3*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
Cyclical
Deterioration
120
115.8
110
Lower CAT
Losses,
More
Reserve
Releases
Best
Combined
Ratio Since
1949 (87.6)
107.5
100.1
100
101.0
100.8
98.4
99.3
99.7
2009
2010:Q3
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2
Sources: A.M. Best, ISO.
24
Underwriting Gain (Loss)
1975–2010:Q3*
($ Billions)
Cumulative
underwriting deficit
from 1975 through
2009 is $445B
$35
$25
$15
$5
-$5
-$15
-$25
The industry recorded
a $6.2B underwriting
loss in 2010:Q3
compared to $3.2B in
2009:Q3
-$35
-$45
-$55
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
Large Underwriting Losses Are NOT Sustainable
in Current Investment Environment
* Includes mortgage and financial guarantee insurers.
Sources: A.M. Best, ISO; Insurance Information Institute.
05
07
09
Calendar Year Combined Ratios
by Segment: 2008-2011F
Personal lines combined ratio is expected to remain stable in
2010 while commercial lines and reinsurance deteriorate
110
108
106
104
102
100
98
96
94
92
90
108
106
104.5
103.8
102.4
100
99.5
98.9
Personal Lines
Commercial Lines
2008
2009
2010P
2011F
Overall deterioration in 2011 underwriting performance is due to expected
return to normal catastrophe activity along with deteriorating underwriting
performance related to the prolonged commercial soft market
Sources: A.M. Best . Insurance Information Institute.
26
To Catch a Thief:
AUTO NO-FAULT FRAUD
Lock’em Up!
Unscrupulous Med Providers
and Attorneys Are Picking the
Pockets of Honest Drivers
30
Florida Casualty Referrals for Fraud:
1st Half 2010 vs. 1st Half 2009
Staged accidents, excessive
treatments and faked or
exaggerated injuries soared
during the 1st half of 2010
Percent Change
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
77%
74%
70%
64%
32%
24%
Staged
Accident
Excessive
Treatment
Faked or
Prior Injuries
Billed for
Exaggerated
Services Not
Injury
Rendered
Solicitation
Questionable PIP claims involving staged accidents surged 52% in 2009.
For 2010, early estimates suggest an even larger increase.
Sources: National Insurance Crime Bureau; Insurance Information Institute.
31
Florida Staged Accident Questionable
Claims by Loss Type: 2008 vs. 2009
+52%
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
+73%
776
652
+69%
509
377
+40%
+19%
240
142
No-Fault (PIP)
Bodily Injury
117
Other Auto
2008
164
Collision
68
81
Property
Damage
2009
Questionable PIP claims involving staged accidents surged 52% in 2009.
For 2010, early estimates suggest an even larger increase.
Sources: National Insurance Crime Bureau; Insurance Information Institute.
32
Average No-Fault Claim Severity,
2010:Q3
MI, NJ, NY and FL currently are the
largest states that have the most severe
problems in their no-fault system
$45,000
$40,000
$36,463
$50,000
$35,000
$1,891
$2,179
$2,617
$2,722
$3,226
$3,214
PA OR WA KY TX KS MD SC UT MA
$3,221
$4,277
HI
$3,385
$5,061
NY FL DE MN DC ND
$5,000
$3,664
$5,394
$5,395
$10,000
$7,364
$15,000
$8,096
$20,000
$8,647
$16,331
$25,000
$7,643
FL has the 4th highest auto no-fault
average claim cost (severity) in the US
$30,000
$0
MI
NJ
Several States Have Severe and Growing Problems With Rampant Fraud
and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.
Source: ISO/PCI Fast Track data; Insurance Information Institute.
33
Increase in No-Fault Claim Severity:
2004-2010*
+47.1%
$40,000
$35,865
$35,000
$30,000
$25,000
+36.6%
$24,385
$20,000
+49.5%
$16,573
$12,136
$15,000
$8,776
$10,000
$5,871
+17.6%**
$6,674 $7,847
$5,000
$0
Michigan
New Jersey
2004
New York
Florida
2010*
The no-fault systems in MI, NJ, NY and FL are under stress due to rising
fraud and abuse which will ultimately lead to higher premiums for drivers
*2009 figure is for the 4 quarters ending 2010:Q3.
**Since 2006 the increase in Florida was 23.7% (average severity that year was $6,344).
Sources: Insurance Information Institute research from ISO/PCI Fast Track data.
34
New York State No-Fault Claim Severity,
1997–2010:Q3
2.2%
2.0%
1.6%
1.4%
1.2%
10:03
1.0%
10:01
9:03
9:01
8:03
8:01
5:03
5:01
4:03
4:01
3:03
3:01
2:03
2:01
1:03
1:01
1999
1997
$5,000
7:03
$5,500
2.4%
1.8%
Claim Severity reached
a record high in
2010:Q2: $8,990
7:01
$6,000
6:03
$6,500
Avg. Claim
Severity Rose
63% in 5 years
after 1997
Presbyterian
Decision
6:01
$7,000
$6,156
$6,052
$5,820
$5,991
$5,615
$6,094
$5,914
$6,250
$6,269
$6,530
$6,606
$7,063
$7,323
$7,378
$7,297
$7,670
$7,740
$6,699
$7,500
$7,773
$7,311
$6,958
$6,870
$8,347
$8,327
$7,888
$7,507
$8,234
$8,000
$5,675
$6,063
No-Fault Claim Severity
$8,500
Avg. Claim Severity
Frequency
No-Fault Claim Frequency
$9,000
$9,235
$8,727
$8,577
$9,500
$8,443
$8,177
$8,507
$8,025
$8,563
$8,726
$8,646
$8,830
$8,646
$8,990
$8,647
Avg. Claim Severity is
up 54% since 2004:Q4
No-Fault Claim Severity
About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse
Sources: ISO/PCI Fast Track data; Insurance Information Institute.
35
Florida’s No-Fault Fraud Tax: Estimated
Cost per Insured Vehicle, 2009-2011F
Fraud Tax Per Vehicle
$90
$80
$70
$60
$50
In 2010, the average
Florida driver’s fraud tax
was $48.62 per vehicle.
This means that the
fraud tax on a typical
family with 2 cars was
nearly $100 last year.
If nothing is done to
address Florida’s runaway
no-fault fraud problem, the
fraud tax per vehicle could
rise to $83.79 in 2011—an
increase of 72.3%
+72.3%
$83.79
+80.7%
$48.62
$40
$30
$26.92
$20
$10
$0
2009
2010E
2011F
Unscrupulous Medical Providers and Attorneys Are Costing
Honest Florida Drivers Hundreds of Millions of Dollars
*2010 estimate is based on data through Q3:2010. 2011 forecast is based on an assumed increase in pure premium of 25% (pure premium
increased 27% in the 4 quarters ending with 2010:Q3).
Source: Insurance Information Institute calculations and research.
41
Florida’s No-Fault Fraud Tax: Estimated
Aggregate Annual Cost, 2009-2011F ($ Millions)
If nothing is done to
address Florida’s runaway
no-fault fraud problem, the
aggregate fraud tax on
Florida vehicle owners
could rise to $946 in 2011
Fraud Tax ($ Millions)
$1,000
$900
$800
$700
$600
$500
$400
The total fraud tax
levied on Florida
vehicle owners was
and estimated $549
million in 2010.
+72.3%
$945.8
+80.7%
$548.9
$303.8
$300
$200
$100
$0
2009
2010E
2011F
Unscrupulous Medical Providers and Attorneys Are Costing
Honest Florida Drivers Hundreds of Millions of Dollars
*2010 estimate is based on data through Q3:2010. 2011 forecast is based on an assumed increase in pure premium of 25% (pure premium
increased 27% in the 4 quarters ending with 2010:Q3). Estimates assume 11.288 million insured vehicles in FL in 2009-2011 (11.288 million
is 2008 actual figure from AIPSO).
Source: Insurance Information Institute calculations and research from ISO/PCI and AIPSO data.
42
Florida’s No-Fault Fraud Tax: Estimated
Cumulative Cost, 2009-2011F ($ Millions)
If nothing is done to address
Florida’s runaway no-fault
fraud problem, the
cumulative fraud tax on
Florida vehicle owners could
reach $1.5 billion in 2011
Cumulative Fraud Tax
Cumulative Fraud Tax
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
The cumulative
fraud tax levied on
Florida vehicle
owners already
totaled $853
million by 2010
+72.3%
$1,494.7
+80.7%
$852.7
$303.8
$200
$0
2009
2010E
2011F
Unscrupulous Medical Providers and Attorneys Could Cost
Honest Florida Drivers Billions of Dollars
*2010 estimate is based on data through Q3:2010. 2011 forecast is based on an assumed increase in pure premium of 25% (pure premium
increased 27% in the 4 quarters ending with 2010:Q3). Estimates assume 11.288 million insured vehicles in FL in 2009-2011 (11.288 million
is 2008 actual figure from AIPSO).
Source: Insurance Information Institute calculations and research from ISO/PCI and AIPSO data.
43
Financial Strength &
Underwriting
Cyclical Pattern is P-C Impairment
History is Directly Tied to
Underwriting, Reserving & Pricing
44
P/C Insurer Impairments, 1969–2009
5 of the 11 are Florida
companies (1 of these
5 is a title insurer)
18
19
16
18
14
15
35
31
29
12
16
14
13
5
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
0
7
6
9
13
12
9
11
9
7
8
10
15
12
20
19
30
31
34
34
40
36
41
50
49
50
47
49
50
48
55
60
60
58
70
The Number of Impairments Varies Significantly Over the P/C Insurance
Cycle, With Peaks Occurring Well into Hard Markets
Source: A.M. Best; Insurance Information Institute.
P/C Insurer Impairment Frequency vs.
Combined Ratio, 1969-2009
120
Combined Ratio after Div
P/C Impairment Frequency
2.0
1.8
1.6
1.4
110
1.2
105
1.0
0.8
100
90
0.4
2009 estimated impairment rate rose to 0.36% up from a near
record low of 0.23% in 2008 and the 0.17% record low in 2007;
Rate is still less than one-half the 0.79% average since 1969
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09*
95
0.6
Impairment Rate
Combined Ratio
115
0.2
0.0
Impairment Rates Are Highly Correlated With Underwriting Performance
and Reached Record Lows in 2007/08
Source: A.M. Best; Insurance Information Institute
46
Reasons for US P/C Insurer
Impairments, 1969–2008
Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause
of Insurer Impairments, Underscoring the Importance of Discipline.
Investment Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.7%
4.2%
Misc.
9.1%
Investment
Problems
Affiliate Impairment
7.0%
38.1%
Deficient Loss Reserves/
Inadequate Pricing
7.9%
7.6%
Catastrophe Losses
8.1%
Alleged Fraud
14.3%
Rapid Growth
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009
47
Profit Pillar #2
PRICING
Pricing is Key to Profitability
Trends in Personal and
Commercial
48
Soft Market Persisted in 2010 but May
Be Easing: Relief in 2011?
(Percent)
25%
1975-78
1984-87
2000-03
Net Written Premiums Fell 0.7% in
2007 (First Decline Since 1943) by
2.0% in 2008, and 4.2% in 2009, the
First 3-Year Decline Since 1930-33.
20%
15%
10%
5%
0%
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10F
-5%
NWP was up 0.8% through
10:Q3 vs. -4.5% through 09:Q3
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
49
Auto & Home vs. All Lines, Net Written
Premium Growth, 2000–2009
While homeowners insurance has grown faster
than auto over the past decade, auto is
generally more profitable
15.3%
15%
Private Passenger Auto
Homeowners
All Lines
14.5%
13%
11%
Average 2000-2009
Auto = 2.9
Home = 6.5%
All Lines = 3.4%
9.2%
9%
7%
5.7%
5%
3%
5.0%
1%
2.2%
0.9%
-0.9%
-1%
-3%
-4.9%
-5%
00
01
02
Sources: A.M. Best; Insurance Information Institute.
03
04
05
06
07
08
09
50
5%
0%
-5%
-10%
Sources: ISO, Insurance Information Institute.
2010:Q3
2010:Q2
2010:Q1
2009:Q4
2009:Q3
2009:Q2
2009:Q1
2008:Q4
2008:Q3
2008:Q2
2008:Q1
2007:Q4
2007:Q3
2007:Q2
2007:Q1
2006:Q4
2006:Q3
2006:Q2
2006:Q1
2005:Q1
-1.8%
-0.7%
-4.4%
-3.7%
-5.3%
-5.2%
-1.4%
-1.3%
-1.9%
-1.6%
-4.6%
2005:Q2
-4.1%
2005:Q3 -5.8%
2005:Q4
-1.6%
2004:Q4
2004:Q3
2004:Q2
2004:Q1
2003:Q4
2003:Q3
2003:Q2
2003:Q1
2002:Q4
2002:Q3
1.3%
2.3%
0.5%
2.1%
0.0%
10.3%
10.2%
13.4%
6.6%
15.1%
16.8%
16.7%
12.5%
10.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
10%
2002:Q2
15%
10.2%
20%
2002:Q1
P/C Net Premiums Written: % Change,
Quarter vs. Year-Prior Quarter
The longawaited uptick:
mainly
personal lines
Finally! Back-to-back quarters of net written premium growth
(vs. the same quarter, prior year)
51
Net Written Premium Growth
by Segment: 2008-2011F
Personal lines growth resumed in 2010 and will
continue in 2011, while commercial lines contracted
again in 2010 and but will stabilize in 2011
4%
2.8%
2.5%
2%
0.3%
0%
-2%
-0.1%
-0.1%
-4%
-2.0%
-3.1%
-6%
-8%
-10%
-9.4%
-12%
Personal Lines
2008
Commercial Lines
2009E
2010P
2011F
Rate and exposure are more favorable in personal lines, whereas a
prolonged soft market and sluggish recovery from the recession
weigh on commercial lines.
Sources: A.M. Best; Insurance Information Institute.
52
Profit Pillar #3
INVESTMENTS
Investment Performance is a
Key Driver of Profitability
Does It Influence
Underwriting?
59
Property/Casualty Insurance Industry
Investment Gain: 1994–2010:Q31
2009:Q3
gain was
$29.3B
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$40
$55.7
$51.9
$48.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$39.0 $39.5
$36.0
$35.4
$31.7
$30
Investment gains in
2010 are on track to be
their best since 2007
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09 10:Q3
In 2008, Investment Gains Fell by 50% Due to Lower Yields and
Nearly $20B of Realized Capital Losses
2009 Saw Smaller Realized Capital Losses But Declining Investment Income
Investment Gains Recovered Significantly in 2010
1
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
* 2005 figure includes special one-time dividend of $3.2B.
Sources: ISO; Insurance Information Institute.
$4.43
$8.92
$3.52
$9.70
$9.13
-$19.81
-$7.98
-$1.21
$6.61
Capital losses have
turned to capital gains,
aiding earnings
$6.63
$16.21
$13.02
$10.81
$9.24
$6.00
$1.66
$9.82
$9.89
$4.81
$20
$15
$10
$5
$0
-$5
-$10
-$15
-$20
-$25
$2.88
($ Billions)
$18.02
P/C Insurer Net Realized
Capital Gains, 1990-2010:Q3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10:Q3
Realized Capital Losses Were the Primary Cause
of 2008/2009’s Large Drop in Profits and ROE and Were a Major
Driver of Its Recovery in 2010
Sources: A.M. Best, ISO, Insurance Information Institute.
61
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. January 2011
6%
5%
4.82%
4.96%
5.04%
4.96%
4.82%
4.82%
4.88%
5.00%
4.93%
5.00%
4.17%
4%
3%
Treasury yield curve is near its most
depressed level in at least 45 years,
though longer yields rose in late 2010
as economy improved. Investment
income is falling as a result.
5.19%
4.42%
3.29%
2.66%
1.93%
2%
QE2 Target
0.99%
1%
0.62%
0.09%
0.14%
0.19%
0.29%
1M
3M
6M
1Y
January 2011 Yield Curve*
Pre-Crisis (July 2007)
0%
2Y
3Y
5Y
7Y
10Y
20Y
30Y
The Fed’s Announced Intention to Pursue Additional Quantitative Easing
Could Depress Rates in the 7 to 10-Year Maturity Range through June
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
62
Reduction in Combined Ratio Necessary to Offset
1% Decline in Investment Yield to Maintain
Constant ROE, by Line*
s
ne
i
L
-5.7%
-5.2%
-4.3%
-3.7%
-3.3%
-3.3%
-3.1%
-2.1%
-1.9%
-3.6%
-2.0%
-1.8%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-1.8%
s
ty
l
e
e
o
p
t
r
a
s
n
i
a
ro
p
l
Li
y
rc
Su
Au
s
o
t
P
C
a
/
al
r
e
l
s
s
n
y
n
t
a
t
P
u
M
m
m
m
m
li
P
di
so
s
pl
rra
d
e
m
m
m
m
r
r
r
t
e
C
a
e
d
o
o
r
o
o
Pe
Pv
Pe
C
C
C
C
C
Fi
W
Su
M
W
to
u
A
R
a
ur
s
n
ei
**
e
nc
-7.3%
Lower Investment Earnings Place a Greater Burden on
Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums
**US domestic reinsurance only
Source: A.M. Best; Insurance Information Institute.
63
Distribution of P/C Insurance Industry’s
Investment Portfolio
Portfolio Facts
as of 12/31/2009
As of December 31, 2009
 Invested assets
totaled $1.26 trillion
68.8%
Bonds
 Generally, insurers
invest conservatively,
with over 2/3 of
invested assets in
bonds
 Only 18% of invested
assets were in
common or preferred
stock
*Net admitted assets.
Common &
Other 7.0% Preferred
6.2% Cash & Stock
18.0%
Short-term
Investments
Sources: NAIC; Insurance Information Institute research.
64
2011 Financial Overview
About Half of the P/C Insurance Industry’s Bond
Investments Are in Municipal Bonds
Bond Investment Facts
as of 12/31/09
As of December 31, 2009
 Investments in “Political
Subdivision [of states]” bonds
were $102.5 billion
 Investments in “States,
Territories, & Possessions”
bonds were $58.9 billion
 Investments in “Special
Revenue” bonds were $288.2
billion
 All state, local, and special
revenue bonds totaled 48.2%
of bonds, about 35.7% of
total invested assets
31.0%
Special
Revenue
Political
Subdivisions
11.0%
33.3%
Industrial
U.S.
Government
0.9%
15.5%
6.3% 2.0%
States, Terr., Foreign Govt
etc.
Sources: NAIC, via SNL Financial; Insurance Information Institute research.
65
2011 Financial Overview
When P/C Insurers Invest in Higher Risk Bonds,
It’s Corporates, Not Munis
Subdivisions of
States
0.1%
97.4%
2.5%
0.1%
States
92.5%
7.4%
Industrial
72.8%
0%
20%
40%
20.4%
60%
80%
Class 1
Class 2
Classes 3-6
6.8%
100%
The NAIC’s Securities Valuation Office puts bonds into one of 6 classes:
class 1 has the lowest expected impairments; successively higher
numbered classes imply increasing impairment likelihood.
Data are as of year-end 2009.
Sources: SNL Financial; Insurance Information Institute.
Profit Pillar #4
EXPENSES
Will Expense Ratios Fall As
Premium Growth Turns Positive?
67
Underwriting Expense Ratio*
All P/C Lines, 1994-2010E**
28.6%
29%
28.1%
28.0%
28%
27.4%
27.4%
27.0%
27.6%
27%
25.9%
26.1%
26.5%
26.3%
26.3%
27.0%
26%
25.3%
25%
25.5%
25.0%
24.5%
24%
23%
Underwriting expense
ratios are up
significantly as
premiums fall faster
than expenses during
generally soft market
conditions
22%
94
95
96
97
98
99
00
*Ratio of expenses incurred to net premiums written.
**2010 figure based on data through 2010:Q3.
Source: A.M. Best; Insurance Information Institute.
01
02
03
04
05
06
07
08
09 10E
Underwriting Expense Ratio*:
Personal vs. Commercial Lines, 1990-2010E**
Commercial lines
expense ratios are
highly cyclical
32%
30.6%
30.5%
29.9%
30%
30.0%
30.5%
28.5% 28.3%
27.4%
28%
29.9%
29.1%
29.3%
28.2%
27.7%
28.4% 28.7%
26.6%
27.8%
26.6% 25.6%
25.6%
26%
25.0%
24.3%
25.6%
24.7%
24.4%
24.3%
23.7%23.4%
24%
26.4%
26.4%
26.4%
26.2%
26.4%
25.0%
24.8%
24.7% 24.7%
24.5% 24.4% 24.6%
23.9%
23.5%
22%
Personal Lines
Commercial Lines
*Ratio of expenses incurred to net premiums written.
**2010 figures are estimates.
Source: A.M. Best; Insurance Information Institute.
10E
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
20%
Underwriting Expense Ratio*
Personal Lines (Auto & Home), 1994-2010E**
32%
31.1%
30.8%
30%
30.6%
30.6%
30.8%
29.8%
30.5%
30.5% 30.0%
30.3%
29.3%
28.5%
29.4%
28.5%
29.6%
28.4%
28%
27.7%
26%
24.5% 24.7%
24.3%
24.4%
25.0% 25.2% 25.1%
23.5% 23.4%
24%
21.8% 22.0% 21.8%
22%
23.6%
23.2%
23.6%
Expenses ratios for
both auto and home
are up from their
lows in 2003/04
23.5%
22.7%
Auto
Home
20%
94
95
96
97
98
99
00
01
*Ratio of expenses incurred to net premiums written.
**2010 figures are estimates.
Source: A.M. Best; Insurance Information Institute.
02
03
04
05
06
07
08
09 10E
Profit Pillar #5
LEVERAGE
Efficient Deployment of Capital
Exerts a Significant Impact on
Profitability
71
Policyholder Surplus,
2006:Q4–2010:Q3
($ Billions)
2007:Q3
Previous Surplus Peak
Surplus set a new
record in 2010:Q3*
$560
$544.8
$540.7
$540
$530.5
$512.8
$520
$460
$440
$515.6
$511.5
$505.0
$500 $487.1
$480
$521.8 $517.9
$496.6
$490.8
$478.5
The Industry now has $1 of
surplus for every $0.77 of
NPW—the strongest claimspaying status in its history.
$463.0
$455.6
$437.1
$420
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3
Quarterly Surplus Changes Since 2007:Q3 Peak
*Includes $22.5B of paid-in
capital from a holding
company parent for one
insurer’s investment in a
non-insurance business in
early 2010.
Sources: ISO, A.M .Best.
09:Q1: -$84.7B (-16.2%)
09:Q2: -$58.8B (-11.2%)
09:Q3: -$31.0B (-5.9%)
09:Q4: -$10.3B (-2.0%)
10:Q1: +$18.9B (+3.6%)
10:Q2: +$8.7B (+1.7%)
10:Q3: +$23.0B (+4.4%)
73
Ratio of Net Premiums Written
to Policyholder Surplus, 1970-2010*
Record High P-S
Ratio was 2.7:1
in 1974
1.4
1.4
1.3
1.3
1.1
1.1
1.6
1.5
1.8
1.7
1.7
1.9
1.9
1.9
1.9
1.7
1.6
1.6
2.1
1.8
2.0
2.0
1.9
2.1
2.3
2.5
The premium-to-surplus ratio (a measure
of leverage) hit a record low at just 0.79:1
in 2010. It has decreased as PHS grows
more quickly than NPW, with the effect of
holding down profitability.
1.0
0.9
0.84
0.86
0.94
1.13
1.29
1.17
1.07
0.99
0.91
0.84
0.95
0.82
0.79
2.7
2.5
2.5
2.5
3.0
10*
08
06
04
02
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
0.0
0
Record Low P-S
Ratio was 2.7:1
in 2010*
0.5
The Premium-to-Surplus Ratio in 2010 Implies that P/C Insurers Held $1
in Surplus Against Each $0.79 Written in Premiums. In 1974, Each $1 of
Surplus Backed $2.70 in Premium.
*2010 data are is estimated using annualized NWP data through 2010:Q3.
Sources: Insurance Information Institute calculations from A.M. Best data.
78
Secondary Profit Pillars
OPERATING ENVIRONMENT
REGULATORY ENVIRONMENT
Many Other Factors Influence
P/C Insurer Profitability
81
Shifting Legal Liability &
Tort Environment
Is the Tort Pendulum
Swinging Against Insurers?
82
Over the Last Three Decades, Total Tort Costs
as a % of GDP Appear Somewhat Cyclical
($ Billions)
$300
Tort Sytem Costs
2.50%
Tort Costs as % of GDP
$250
Tort System Costs
$200
$150
2.00%
$100
1.75%
Tort Costs Have Remained High but
Relatively Stable Since the mid-2000s.
As a Share of GDP they Should Fall as
the Economy Expands
$50
$0
Tort Costs as % of GDP
2.25%
1.50%
80 82 84
86 88 90 92 94
96 98 00 02 04 06
Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A
08 10E 12E
87
Business Leaders Ranking of Liability
Systems in 2010

Worst States
41.
New Mexico
42.
Florida
Nebraska
43.
Montana
4.
Indiana
44.
Arkansas
5.
Iowa
45.
Illinois
6.
Virginia
46.
California
 Texas
47.
Alabama
 South Carolina
 Hawaii
48.
Mississippi
49.
Louisiana

Best States
1.
Delaware
2.
North Dakota
3.
7.
Utah
8.
Colorado
9.
Massachusetts
10.
South Dakota
New in 2010
 North Dakota
 Massachusetts
 South Dakota
Drop-offs
 Maine
 Vermont
 Kansas
Midwest/West has mix of
good and bad states.
50. West Virginia
Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.
Newly Notorious
 New Mexico
 Montana
 Arkansas
Rising Above
The Nation’s Judicial Hellholes: 2010
Illinois
Watch List
 Madison County, IL
 Atlantic County, NJ
 St. Landry Parish,
LA
 District of Columbia
 NYC and Albany,
NY
 St. Clair County, IL
Cook County
West Virginia
Philadelphia
California
Los Angeles
and Humboldt
Counties
Dishonorable
Mention
 MI Supreme Court
 City of St. Louis
 CO Supreme Court
Nevada
Clark County
South Florida
Source: American Tort Reform Association; Insurance Information Institute
89
Inflation
Is it a Threat to Claim Cost
Severities
104
Annual Inflation Rates, (CPI-U, %),
1990–2014F
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 have reduced nearterm inflationary pressures
6.0
5.0
4.9
5.1
3.8
4.0
3.0
3.0
2.0
3.3 3.4
3.2
2.9 2.8
2.4
3.0
2.6
2.5
3.8
2.8
2.3
1.9
1.5
1.6
1.3
1.9 2.0
2.2 2.2
1.0
0.0
-0.4
-1.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F
The slack in the U.S. economy suggests that inflation should not heat up
before 2012, but other forces (commodity prices, inflation in countries from
which we import, etc.), plus U.S. debt burden, remain longer-run concerns
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 2/11 (forecasts).
105
P/C Insurance Claim Cost Drivers Grow
Faster than even the Medical CPI Suggests
Price Changes
in 2010
9%
8.8%
6%
Excludes
Food and
Energy
6.1%
4.3%
3%
3.4%
3.3%
3.1%
1.6%
1.0%
0%
Overall CPI
"Core" CPI Medical CPI
Inpatient
Hospital
Services
Outpatient
Hospital
Services
Physicians' Prescription Medical Care
Services
Drugs
Commodities
Healthcare costs are a major liability, med pay, and PIP claim cost driver.
They are likely to grow faster than the CPI for the next few years, at least
Source: Bureau of Labor Statistics; Insurance Information Institute.
106
Economic Drivers of P/C
Insurance Exposures
Growth in the Wake
of the “Great Recession”
107
2%
0.6%
4%
1.1%
1.8%
2.5%
3.6%
3.1%
2.7%
0.9%
3.2%
2.3%
2.9%
4.1%
6%
1.6%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
Real GDP Growth (%)
5.0%
3.7%
1.7%
2.6%
3.2%
3.5%
3.4%
3.5%
3.5%
3.1%
3.2%
3.2%
3.3%
US Real GDP Growth*
-0.7%
12:4Q
12:3Q
12:2Q
12:1Q
11:4Q
11:3Q
11:2Q
11:1Q
10:4Q
10:3Q
10:1Q
09:4Q
09:3Q
09:2Q
10:2Q
Economic growth projections
for 2011 have been revised
upward. This is a major
positive for insurance demand
and exposure growth.
-4.9%
09:1Q
08:4Q-6.8%
-4.0%
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2000
-8%
2003
-6%
2002
-4%
Recession began in Dec.
2007. Economic toll of credit
crunch, housing slump,
labor market contraction has
been severe but modest
recovery is underway
2001
-2%
-0.7%
0%
Demand for Insurance Continues To Be Impacted by Sluggish Economic
Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
*
Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 2/11; Insurance Information Institute.
108
2011 Financial Overview
State Economic Growth Varied in 2009
Mountain, Plains states
still growing the fastest
Some Southeast states
growing well, but others
among the weakest
110
Direct Premiums Written: All Lines
Percent Change by State, 2004-2009
Top 25 States
42.9
45
North Dakota is the growth
juggernaut of the P/C
insurance industry—too
bad nobody lives there…
12.2
11.5
10.7
KS
NC
ID
4.6
12.3
NE
HI
12.8
TX
5.0
12.9
DC
AR
13.0
SC
5.1
13.0
WV
GA
13.5
MS
5.5
14.0
NM
WA
14.1
IA
5.8
14.2
DE
10
FL
14.8
OK
7.9
15.4
15
UT
20
17.2
25
18.8
30
22.0
35
23.8
Pecent change (%)
40
AL
MT
WY
SD
LA
0
ND
5
Sources: SNL Financial LC.; Insurance Information Institute.
111
-15.2
CA
-8.2
NH
OH
-14.8
-3.7
ME
MI
-3.5
IL
-9.2
-3.1
NJ
MA
-2.8
RI
CO
-5.2
-2.4
CT
-1.8
-1.6
VT
MN
PA
IN
NY
NV
WI
OR
AZ
MD
KY
TN
VA
-15
MO
States with the poorest
performing economies also
produced the most negative
net change in premiums of
the past 5 years
-10
-20
-1.2
-0.5
-0.1
-5
AK
Pecent change (%)
0
0.0
0.5
0.6
0.7
0.9
2.0
2.4
2.5
Bottom 25 States
2.6
4.2
5
4.5
Direct Premiums Written: All Lines
Percent Change by State, 2004-2009
Over the 5 years from 2004-2009, 15 states saw premiums shrink,
one had no growth, and 4 others grew premiums by less than 1%
Sources: SNL Financial LC; Insurance Information Institute.
112
Auto/Light Truck Sales, 1999-2016F
13
10.4
12
11
10
11.6
14
13.1
13.2
15.5
15.0
15
13.9
16
15.1
16.1
16.5
16.9
16.9
17
16.6
17.1
17.5
17.8
18
17.4
19
14.7
New auto/light truck sales fell to
the lowest level since the late
1960s. Forecast for 2011-12 is
still far below 1999-2007 average
of 17 million units, but a
recovery is underway.
(Millions of Units)
Job growth and improved
credit market conditions
will boost auto sales in
2011 and beyond
9
99
00
01
02
03
04
05
06
07
08
09
10 11F 12F 13F 14F 15F 16F
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point,
but High Unemployment, Tight Credit Are Still Restraining Sales in 2011
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 2/11); Insurance Information Institute.
114
0.7
0.5
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
estimated at about $1.3 billion
0.89
0.9
0.55
0.59
0.67
1.1
0.91
1.3
1.20
1.29
1.5
1.19
1.01
1.7
New home
starts plunged
72% from
2005-2009; A
net annual
decline of 1.49
million units,
lowest since
records began
in 1959
1.20
1.33
1.43
1.50
1.9
1.46
1.35
1.48
1.47
1.62
1.64
1.57
1.60
1.71
2.1
1.36
(Millions of Units)
1.85
1.96
2.07
1.80
New Private Housing Starts, 1990-2016F
Job growth,
improved credit
market conditions
and demographics
will eventually boost
home construction
0.3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F
Little Exposure Growth Likely for Homeowners Insurers Until 2012.
Also Affects Commercial Insurers with Construction Risk Exposure, Surety
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 2/11); Insurance Information Institute.
115
2011 Financial Overview
Wage and Salary Disbursements (Payroll Base) vs.
Workers Comp Net Written Premiums
Wage and Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)
7/90-3/91
3/01-11/01
12/07-6/09
$7,000
$60
$6,000
$50
$5,000
$40
$4,000
$30
$3,000
$2,000
Wage & Salary
Disbursements
$1,000
WC NPW
WC net premiums written
were down $13.7B or 28.7%
to $34.1B in 2009 after
peaking at $47.8B in 2005
$0
$20
$10
$0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*
Weakening payrolls have eroded $2B+ in workers comp premiums; nearly
29% of NPW has been eroded away by the soft market and weak economy
* Average Wage and Salary data as of 7/1/2010. Shaded areas indicate recessions.
**Estimated “official” end of recession June 2009.
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
118
Recovery in Capacity Utilization is a
Positive Sign for Commercial Exposures
“Full Capacity”
Percent of
Industrial Capacity
The US operated at
75.2% of industrial
capacity in November
2010, above the June
2009 low of 68.3%
82%
Hurricane
Katrina
80%
78%
76%
The closer the economy is
to operating at “full
capacity,” the greater the
inflationary pressure
74%
72%
70%
March 2001November 2001
recession
68%
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
119
Sep 10
Jun 10
Mar 10
Dec 09
Sep 09
Jun 09
Mar 09
Dec 08
Sep 08
Jun 08
Mar 08
Dec 07
Sep 07
Jun 07
Mar 07
Dec 06
Jun 06
Sep 06
Mar 06
Dec 05
Sep 05
Jun 05
Mar 05
Dec 04
Jun 04
Sep 04
Mar 04
Dec 03
Sep 03
Jun 03
Mar 03
Dec 02
Sep 02
Jun 02
Mar 02
Dec 01
Sep 01
Jun 01
Mar 01
66%
December 2007June 2009 Recession
Business Bankruptcy Filings,
1980-2010:Q3
90,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1980-82
1980-87
1990-91
2000-01
2006-09
58.6%
88.7%
10.3%
13.0%
208.9%*
There were 60,837 business bankruptcies in 2009, up
40% from 2008 and the most since 1993. 2010:Q3
bankruptcies totaled 29,059, down 5.5% from 2009:Q3
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
10:3Q
70,000
43,694
48,125
80,000
69,300
62,436
64,004
71,277
81,235
82,446
63,853
63,235
64,853
71,549
70,643
62,304
52,374
51,959
53,549
54,027
44,367
37,884
35,472
40,099
38,540
35,037
34,317
39,201
19,695
28,322
43,546
60,837
43,016
% Change Surrounding
Recessions
Significant Exposure Implications for All Commercial Lines
Sources: American Bankruptcy Institute at
http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ;
Insurance Information Institute
120
Labor Market Trends
Massive Job Losses Sapped the
Economy and Commercial/Personal
Lines Exposure, But Trend is
Improving
123
Unemployment and Underemployment
Rates: Falling Faster in 2011?
January 2000 through January 2011, Seasonally Adjusted (%)
18
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 16.1%
in December
2010
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
16
Recession
ended in
November
2001
14
12
Unemployment
kept rising for
19 more
months
Recession
began in
December
2007
Unemployment
rate fell to 9.4%
in December
10
Unemployment
peaked at 10.1%
in October 2009,
highest monthly
rate since 1983.
8
6
Peak rate in the
last 30 years:
10.8% in
November December 1982
4
2
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Stubbornly high unemployment and underemployment
will constrain payroll growth, which directly affects WC exposure
Source: US Bureau of Labor Statistics; Insurance Information Institute.
124
Monthly Change in Private Employment
(1,000)
158
241
16
62
75
-83
-334
-452
-297
-215
-186
-262
-109
Monthly Losses in
Dec. 08–Mar. 09 Were
the Largest in the
Post-WW II Period
-734
-667
-806
-707
-744
-649
(800)
-12
-85
-58
-161
-253
-230
-257
-347
-456
-547
(600)
113,000 private sector jobs
were created in December
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
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
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
(400)
-14
0
(200)
Private employers added jobs in
every month in 2010 for a total of
1.346 million for the year
65
97
23
213
65
127
42
15
79
200
186
400
51
61
117
143
112
193
128
139
50
January 2008 through January 2011* (Thousands)
Private Employers Added 1.411 million Jobs in 2010 After Having
Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
4.9%
08:Q1
4.6%
07:Q3
4.8%
4.5%
07:Q2
07:Q4
4.5%
07:Q1
6.0%
5.4%
7.0%
8.3%
8.5%
8.6%
8.8%
9.0%
9.2%
9.4%
9.5%
9.6%
9.6%
9.6%
9.7%
10.0%
8.1%
6.9%
8.0%
6.1%
Unemployment
peaked at 10% in
late 2009.
9.0%
5.0%
9.3%
2007:Q1 to 2012:Q4F*
Rising
unemployment
11.0%
eroded payrolls
and workers comp’s
10.0%
exposure base.
9.6%
US Unemployment Rate
Unemployment
forecasts remain
stubbornly high
through 2011, but still
imply millions of new
jobs will created.
*
= actual;
= forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/11); Insurance Information Institute
12:Q4
12:Q3
12:Q2
12:Q1
11:Q4
11:Q3
11:Q2
11:Q1
10:Q4
10:Q3
10:Q2
10:Q1
09:Q4
09:Q3
09:Q2
09:Q1
08:Q4
08:Q3
08:Q2
4.0%
127
Catastrophic Loss –
Catastrophe Losses Trends Are
Trending Adversely
135
US Insured Catastrophe Losses
$9.2
$27.1
$27.5
$12.9
$5.9
$26.5
$4.6
$8.3
$10.1
$2.6
$7.4
$8.3
$16.9
$4.7
$2.7
$20
$7.5
$40
$5.5
$22.9
$60
$13.6
$80
First Half
2010 CAT
Losses Were
Down 19% or
$1.4B from
first half 2009
$61.9
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
$10.6
$100
$6.7
$120
$100.0
$100 Billion CAT Year is
Coming Eventually
($ Billions)
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*20??
2010 CAT Losses Were Close to “Average”
Figures Do Not Include an Estimate of Deepwater Horizon Loss
*Estimate from Munich Re.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal
property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.
Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.
136
Combined Ratio Points Associated with
Catastrophe Losses: 1960 – 2010E
Combined Ratio Points
8.1
8.8
2.6
3.3
2010E
1.6
2.7
2008
2002
2006
1.6
2004
1.6
2000
3.3
3.3
3.6
2.9
1.0
1998
1996
1994
5.0
5.4
5.9
3.3
2.8
2.3
2.1
1990
1992
1.2
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1.2
0.4
0.8
1.3
0.3
0.4
0.7
1.5
1.0
0.4
0.4
0.7
1.8
1.1
0.6
1.4
2.0
1.3
2.0
0.5
0.5
0.7
1968
0.4
1966
1962
1964
3.0
3.6
1960s: 1.04
1970s: 0.85
1980s: 1.31
1990s: 3.39
2000s: 3.52
0.8
1.1
1.1
0.1
0.9
1960
10
9
8
7
6
5
4
3
2
1
0
Avg. CAT Loss
Component of the
Combined Ratio
by Decade
The Catastrophe Loss Component of Private Insurer Losses Has
Increased Sharply in Recent Decades
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted
for losses ultimately paid by foreign insurers and reinsurers.
Source: ISO; Insurance Information Institute estimate for 2010.
137
Natural Disasters in the United States,
1980 – 2010
Number of Events (Annual Totals 1980 – 2010)
Number
There were a record 247
natural disaster events in
the US in 2010
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
Meteorological (storm)
Hydrological
(flood, mass movement)
Climatological
(temperature extremes,
drought, wildfire)
138
Insured Losses Due to Weather Perils
in the U.S.: 1980 – 2010
(Tropical Cyclone, Thunderstorm, and Winter Storm only)
For the second year in a row,
insured losses due to
weather perils in the U.S. in
2010 were the highest on
record for a year without a
hurricane landfall.
Sources: MR NatCatSERVICE, Property Claims Services
© 2011 Munich Re
139
Significant Natural Catastrophes, 2010
($1 Billion + Economic Loss and/or 50 Fatalities)
(As of January 1, 2011)
Event
Estimated
Estimated Economic Insured Losses
Losses (US $m)
(US $m)
March 13 - 15
Winter Storm
1,700
1,225
April 30 – May 3
Thunderstorms
2,700
800
May 12 – 1
Thunderstorms
2,700
2,000†
July 20 – 25
Thunderstorms
1,050
785†
October 4 – 6
Thunderstorms
2,000
1,450†
Date
Sources: MR NatCatSERVICE,
† - Property Claims Services (PCS)
140
Natural Disasters in the United States,
2010 (Insured Losses)
As of December 31, 2010
Fatalities
Estimated Overall
Losses (US $m)
Severe
Thunderstorms
56
13,185
9,503
Winter Storm
64
3,734
2,625
Flood
68
2,933
1,059
Wildfire
1
314
210
Earthquake
0
200
128
Tropical Cyclone
8
200
120
Source: MR NatCatSERVICE
Estimated Insured
Losses (US $m)
141
Number of U.S. Landfalling Tropical
Cyclones,1900 – 2010
Only 1 tropical cyclone,
Bonnie, made landfall in the
US in 2010
Source:NOAA; Munich Re
144
Insured U.S. Tropical Cyclone Losses,
1980 – 2010
The current 5-year average
(2006-2010) insured tropical
cyclone loss is $4.6 billion,
down $19 billion from the
previous 5-year average
Sources: Property Claims Service, MR NatCatSERVICE: NFIP
145
U.S. Winter Storm Loss Trends,
1980 – 2010 (Annual Totals)
Insured winter storm losses
in 2010 are one of the top
five in US history, totaling
$2.6 billion in 2010
Source: Property Claims Service, MR NatCatSERVICE
146
U.S. Thunderstorm Loss Trends,
1980 – 2010 (Annual Totals)
Thunderstorm losses in
2010 totaled $9.5 billion, the
3rd highest ever
Average thunderstorm losses
have now quintupled since
the early 1980s
Hurricanes get all the headlines,
but thunderstorms are consistent
producers of large scale loss
Source: Property Claims Service, MR NatCatSERVICE
147
Top 12 Most Costly Disasters
in US History
(Insured Losses, 2009, $ Billions)
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Hurricane Katrina Remains, By Far, the
Most Expensive Insurance Event in US
and World History
$45.1
$22.2
$22.7
$11.3
$12.6
Wilma
(2005)
Ike
Northridge Andrew
(2008)
(1994) (1992)
9/11
Attacks
(2001)
$17.2
$4.2
$5.2
Jeanne Frances
(2004) (2004)
$6.2
$6.6
$8.1
$8.5
Rita
(2005)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Katrina
(2005)
8 of the 12 Most Expensive Disasters in US History
Have Occurred Since 2004;
8 of the Top 12 Disasters Affected FL
Sources: PCS; Insurance Information Institute inflation adjustments.
150
Share of Losses Paid by Reinsurers for
Major Catastrophic Events
70%
60%
60%
Reinsurance plays a very
large role in claims payouts
associated with major
catastrophes
45%
50%
40%
33%
30%
30%
25%
20%
20%
10%
0%
Hurricane
Hurricane
Hugo (1989) Andrew (1992)
Sept. 11
Terrorist
Attack (2001)
2004
Hurricane
Season
2005
Hurricane
Season
2008 Texas
Hurricane
Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.
Total Value of Insured Coastal Exposure
(2007, $ Billions)
Florida
$2,458.6
New York
$2,378.9
$895.1
Texas
Massachusetts
$772.8
$895B Insured
New Jersey
$635.5
Coastal
Connecticut
$479.9
Louisiana
$224.4
Exposure in
S. Carolina
$191.9
Texas in 2007
Virginia
$158.8
Maine
$146.9
In 2007, Florida Still Ranked as the #1 Most
North Carolina
$132.8
Exposed State to Hurricane Loss, with
$92.5
Alabama
$2.459 Trillion Exposure, but Texas is very exposed
Georgia
$85.6
too, and ranked #3 with $895B
Delaware
$60.6
in insured coastal exposure
New Hampshire $55.7
Mississippi $51.8
The Insured Value of All Coastal Property Was $8.9
Rhode Island $54.1
Trillion in 2007, Up 24% from $7.2 Trillion in 2004
Maryland $14.9
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
$3,000
152
Global Catastrophe Loss Trends
Claims Paying Capacity Will Need to
Increase in the Future if Current
Disaster Trends Continue
154
Natural Catastrophes Worldwide,
1980 – 2010 (Number of events with trend)
Number
Increased claims paying
capacity will be required on
a global scale if current
trends continue (as is
expected)
1 200
1 000
800
600
400
200
1980
1982
1984
1986
Geophysical events
(Earthquake, tsunami,
volcanic eruption)
Source: Geo Risks Research, NatCatSERVICE
1988
1990
1992
Meteorological events
(Storm)
1994
1996
1998
2000
Hydrological events
(Flood, mass movement)
© 2011 Munich Re
2002
2004
2006
2008
2010
Climatological events
(Extreme temperature,
drought, forest fire)
155
Natural Catastrophes, 2010
Overview and comparison with previous years
2010
2009
Average of
the last 10
years
2000-2009
950
900
785
615
Overall losses
(US$m)
130,000
60,000
110,000
95,000
Insured losses
(US$m)
37,000
22,000
35,000
23,000
Fatalities
295,000
11,000
77,000
66,000
Number of events
Average of
the last 30
years
1980-2009
The number and cost of
natural catastrophes on a
global scale was far above
average in 2010
Source: Geo Risks Research, NatCatSERVICE
156
Natural Catastrophes, 2010
950 loss events
Volcanic eruption
Island, March/April
Severe storms, tornadoes, floods
Severe storms, floods
United States, 30 April – 3 May
United States, 13 -15 March
Severe storms, hail
United States, 12-16 May
Flash floods
France,
15 June
Earthquake
Haiti, 12 Jan.
Winter Storm Xynthia, storm surge
Western Europe, 26-28 Feb.
Heat wave/ Wildfires
Russia, July-Sept.
Landslides, flash floods
China, 7 Aug.
Floods
Eastern Europe,
2-12 June
Floods, flash floods,
landslides
China, 13-29 June
Hurricane Karl, floods
Mexico, 15-21 Sept.
Insurance is a
global business and
claims paying ability
is interconnected
via reinsurance
markets
Natural catastrophes
Selection of significant
loss events (see table)
Source: Geo Risks Research, NatCatSERVICE
Earthquake
China, 13 April
Floods, flash floods
Pakistan, July-Sept.
Earthquake, tsunami
Chile, 27 Feb.
Geophysical events
(earthquake, tsunami, volcanic activity)
Meteorological events
(storm)
Typhoon Megi
China, Philippines,
Taiwan, 18-24 Oct.
Hailstorms,
severe storms
Australia, 22 March/6-7 March
Floods
Australia, Dec.
Earthquake
New Zealand, 4 Sept.
Hydrological events
(flood, mass movement)
Climatological events
(extreme temperature, drought, wildfire)
157
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