Overview and Outlook for
the P/C Insurance Industry
Casualty Actuaries of New England
April 2, 2012
Sturbridge, MA
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Office: 212.346.5540  Cell: (917) 494-5945  stevenw@iii.org  www.iii.org
Not All Data in a PowerPoint Slide
Are Accurate or Reliable
The Economic Situation
Its Effect on the Industry’s
Exposure Base, Growth,
Investments, and Profitability
3
Length of US Business Cycles,
1929–Present*
Length of Expansions
Greatly Exceeds
Contractions
Duration
(Months)
120
110
100
90
80
70
60
50
40
30
20
10
0
Contraction
Expansion Following
106
Average Duration
Recession* = 10.9 Mos
Expansion** = 60.5 Mos
80
120
92
73
58
50
45
43
39
37
36
33
24
13
8
11
10
8
10
11
16
6
12
19
16
8
8
Aug May Feb Nov
Jul
Aug Apr Dec Nov Jan
Jul
Jul
Mar Dec
1929 1937 1945 1948 1953 1957 1960 1969 1973 1980 1981 1990 2001 2007
Month Recession Started
*Through March 2012. ** Post-WW II period through end of most recent completed expansion.
Sources: National Bureau of Economic Research; Insurance Information Institute.
4
A Weak Recovery is Forecast:
Real GDP Growth*, Yearly, 1970-2013F
The “consensus” forecast is
for at least two more years of
real yearly GDP growth below
3% -- weaker than after most
recent recessions
Real GDP Growth (%)
7.5%
6.0%
4.5%
3.0%
1.5%
0.0%
-1.5%
-3.0%
Estimates/Forecasts from Blue Chip Economic Indicators, 3/2012 issue.
*chained 2005 $
Sources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.
2012F
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
-4.5%
5
US Real GDP Growth, quarterly*
2.5%
2.7%
2.9%
3.0%
13:1Q
13:2Q
13:3Q
13:4Q
2.6%
2.4%
2.2%
2.1%
3.0%
2.0%
1.3%
0.4%
2.3%
3.8%
2.5%
3%
3.9%
1.3%
1.7%
6%
3.8%
Worst quarterly
drop since
1958:q1 (-11.1%)
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
10:2Q
10:1Q
09:4Q
09:3Q
09:2Q
08:3Q
08:2Q
08:1Q
-12%
08:4Q
-8.9%
-9%
We need stronger growth
than this to return the
economy to its full
capacity anytime soon.
-6.7%
-6%
09:1Q
-3.7%
-3%
-1.8%
0%
Demand for insurance continues to be affected by a sluggish economy
*
Estimates/Forecasts from Blue Chip Economic Indicators
Source: US Department of Commerce, Blue Economic Indicators 3/2012 issue (forecasts); Insurance Information Institute.
6
March 2012 Forecasts of Quarterly
US Real GDP for 2012-13
Real GDP Growth Rate
5.0%
10 Most Pessimistic
Median
10 Most Optimistic
4.0%
4.0%
3.4%
3.0%
2.8%
2.0% 2.1%
1.5%
2.9%
2.2%
1.4%
3.3%
3.5%
3.0%
1.7%
2.4%
2.6%
1.8%
2.5%
1.6%
12:Q3
12:Q4
13:Q1
2.0%
2.7%
3.6%
2.2%
2.9%
3.0%
2.1%
13:Q3
13:Q4
1.0%
0.0%
12:Q1
12:Q2
Sources: Blue Chip Economic Indicators (3/12); Insurance Information Institute
13:Q2
7
A Look Back: March 2011 Forecasts
of Quarterly US Real GDP for 2011
Real GDP Growth Rate
10 Most Pessimistic
5.0%
4.0%
3.0%
4.2%
3.4%
2.7%
Median
10 Most Optimistic
4.2%
4.1%
4.2%
3.4%
2.5%
3.4%
2.5%
3.4%
2.6%
11:Q2
11:Q3
11:Q4
2.0%
1.0%
0.0%
11:Q1
A month into 2011, all forecasts for the year predicted steady growth,
but at different rates.
Sources: Blue Chip Economic Indicators (2/12); Insurance Information Institute
8
Off Target: March 2011 Forecasts
for 2011 vs. Actual US Real GDP
Real GDP Growth Rate
10 Most Pessimistic
5.0%
4.0%
3.0%
4.2%
3.4%
2.7%
Median
10 Most Optimistic
Actual
4.2%
4.1%
4.2%
3.4%
2.5%
3.4%
2.5%
3.4%
3.0%
2.6%
2.0%
1.8%
This 3.0%
growth
number is
preliminary
and will be
revised
1.3%
1.0%
0.4%
0.0%
11:Q1
11:Q2
11:Q3
11:Q4
Even the most pessimistic forecasts were too bullish for the first three
quarters of 2011. They were close to the fourth quarter number, though.
Sources: Blue Chip Economic Indicators (2/12); Insurance Information Institute
9
First Half of 2012: Fastest Growth [3+%]
Expected in MI, AL, NV, ND, SC
MA: +2.89%
VT: +2.57%
CT: +2.04%
NH: +1.87%
ME: +0.05%
RI: -3.57%
10
The Strength of the Economy
Will Influence P/C Insurer
Growth Opportunities
Growth Will Expand Insurable Exposures
and Help Absorb Excess Capital
12
Consumer Sentiment Survey,
Jan 1978-Mar 2012 (1966 = 100)
13
Dollar Value* of Manufacturers’
Shipments Monthly, Jan. 1992—Jan. 2012
$ Millions
$500,000
The value of Manufacturing
Shipments in Dec. 2011 was up 30.2%
to $464B from its May 2009 trough.
Dec. figure is only 4.5% below its
previous record high in July 2008.
$400,000
$300,000
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36
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$200,000
Monthly shipments are nearly back to peak (which happened in July 2008, 8 months
into the recession). Trough in May 2009. Growth from trough to December 2011 was
30.2%. This growth leads to gains in many commercial exposures: WC, Commercial
Auto, Property and Various Liability Coverages
*seasonally adjusted
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 14
Manufacturing Growth for Selected
Sectors, Jan. 2012 vs. Jan. 2011
Growth (%)
Durables: +10.1%
35%
Non-Durables: +7.1%
31.2%
Manufacturing of
durable goods has
been especially strong
30%
25%
20%
13.4%
10.1%
10.9%
10.1%
5.8%
7.1%
7.5%
Food
Products
10%
8.4%
Non-Durable
Mfg.
15%
8.8%
5.2%
5%
Plastics &
Rubber
Chemical
Petroleum &
Coal
Transportation
Equip.
Electrical
Equip.
Machinery
Primary
Metals
Durable Mfg.
All
Manufacturing
0%
Manufacturing Is Expanding Across a Wide Range of Sectors that Will
Contribute to Growth in Insurable Exposures Including: WC, Commercial
Property, Commercial Auto and Many Liability Coverages
*seasonally adjusted
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 15
Labor Market Trends
Job Growth Finally Taking Hold,
Bolstering the Commercial &
Personal Lines Exposure Bases,
but Problems Remain
16
Monthly Change in Private Employment*
January 2007 through February 2012
At the rate of job growth in December 2011 through February 2012,
the unemployment rate will be down to 7.5% by the end of 2012.
*seasonally adjusted
Sources: U.S. Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute.
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
Nov-08
Sep-10
Payroll growth since
Jan 2010: $340.3
billion, equivalent to
roughly $2.25 billion in
WC premiums
-797
-658
Jan-09 -839
-725
Mar-09 -787
-802
May-09
-425
-480
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
(1,000)
Jan-07
(800)
Mar-07
Nov. ‘08.–Apr. 09
monthly losses were
the largest in the
Post-WW II period
(600)
Sep-08
(400)
-312
-426
-296
-219
-184
-232
-136
-112
-215
-216
-231
-259
-294
(200)
-42
-120
-40
-27
20
61
75
47
41
-4
-73
0
141
193
84
92
92
128
115
196
134
140
119
257
261
264
108
102
175
52
216
139
178
234
285
233
Private employers
added jobs in every
one of the last 24
months
121
61
172
57
200
46
400
229
(Thousands)
Monthly Change in Government Employment*
January 2009 through February 2012
(Thousands)
432
500
Census
400
300
33
-6
-1
Jan-12
Nov-11
-14
-27
-21
-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
-13
-20
-9
-37
-15
-13
-54
-18
-79
Nov-10
May-10
-259
Jul-10
-150
-179
-142
Sep-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
Jan-09
(200)
(300)
24
48
46
-51
-49
-56
-43
-12
-15
May-09
(100)
-8
0
-12
Mar-09
1
0
0
30
21
100
110
200
In 2011 employment by government at all levels dropped every month
except August. Total jobs lost in last twelve months: 278,000.
*seasonally adjusted
Sources: U.S. Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute.
Report of August 2011 Changes in Private,
Government, and Total Civilian Employment,
Initial and Revised
(Thousands)
Private Employment
Government Employment
Total Nonfarm Employment
125
100
75
50
25
17
0
0
(25)
-17
Sept report
Oct report
Nov report
Jan revision
The September 2011 report for employment in August was dis-spiriting.
BLS reported the U.S. economy added no net jobs.
Was the recovery stalling? Would we sink into another recession?
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Report of August 2011 Changes in Private,
Government, and Total Civilian Employment,
Initial and Revised
(Thousands)
Government Employment
Private Employment
Total Nonfarm Employment
125
100
75
57
42
50
25
17
15
0
0
(25)
-17
Sept report
Oct report
Nov report
Jan revision
In the October report the August figures were revised.
This report showed gains in both private and government employment,
for a net addition of 57,000 jobs.
Where were these revisions (and their implications) reported?
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Report of August 2011 Changes in Private,
Government, and Total Civilian Employment,
Initial and Revised
(Thousands)
Total Nonfarm Employment
Government Employment
Private Employment
125
105
100
72
75
57
42
50
25
32
17
15
0
0
(25)
-17
Sept report
Oct report
Nov report
Jan revision
In the November report the August employment numbers were revised
again, now showing that the economy in August to adding 105,000 net
new jobs. Latest report: +85,000 jobs.
Where were these revisions (and their implications) reported?
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Report of August 2011 Changes in Private,
Government, and Total Civilian Employment,
Initial and Revised
(Thousands)
Total Nonfarm Employment
Government Employment
Private Employment
125
105
100
85
72
75
57
42
50
25
52
17
32
33
Nov report
Jan revision
15
0
0
(25)
-17
Sept report
Oct report
In the January 2012 report for August, BLS revised the U.S. numbers for
all of 2011 to reflect new population estimates, on which the
employment samples from each month are projected.
Latest August data: +85,000 jobs.
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Percentage Change in Nonfarm Employment,
US & New England states, Jan 2012 vs. Jan 2011
Percent
Change
1.5
1.5
1.2
1
0.9
0.7
0.7
0.5
0.4
0
-0.3
-0.5
US
NH
VT
CT
ME
MA
RI
*Preliminary data for January 2012, seasonally adjusted.
Sources: US Bureau of Labor Statistics, Regional and State Employment and Unemployment—January 2012, published March 13,
2012; Insurance Information Institute.
23
Private Housing Starts, 1990-2013F
(Millions of Units)
2.07
2.1
1.96
1.85
1.8
1.621.64
1.5
1.19
1.2
1.20
1.29
1.46
1.48 1.47
1.35
1.80
1.71
Forecast
range for
2013:
680,000 to
1,450,000
Forecast
range for
2012:
610,000 to
900,000
1.57 1.60
1.36
1.01
0.90
0.9
0.89
0.73
0.550.59
0.6
0.61
13F
12F
11
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
0.0
90
0.3
Weak home construction forecast implies little exposure growth likely for
Homeowners insurers for the next few years,
but homeowners might fortify homes to mitigate storm and other damage.
Sources: U.S. Census Bureau and Department of Housing and Urban Development (history) at
http://www.census.gov/const/newresconst.pdf ; Blue Chip Economic Indicators (3/2012), forecasts; Insurance Information Institute.
24
Single vs. Multi-Family Housing Starts,
Annually, 2001-2012*
units in multi-family buildings
Thousands of
Units, Multi-Family
450
single family units
400
Thousands of Units,
Single Family
1800
Multi-family-unit starts
rose in 2011, and
single-family starts
are starting up in 2012.
350
300
Single family
plunge began
in 2006
250
1400
1200
1000
200
150
1600
800
Multi-family plunge
didn’t begin until 2009
600
100
400
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011 2012*
The slump is mainly in single-family housing,
but starts of multi-family units also plunged in 2009-10.
*January 2012 data, annualized, seasonally-adjusted, preliminary
Source: US Census Bureau at http://www.census.gov/construction/nrc/pdf/newresconst.pdf
Private Housing Starts in the
Northeast US, Monthly*, 1990-2012
Billions
250
225
200
175
150
125
100
75
50
25
0
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
*seasonally-adjusted annual rate; data through January 2012
Sources: U.S. Census Bureau and Department of Housing and Urban Development at http://www.census.gov/const/newresconst.pdf ;
Insurance Information Institute.
26
13
10.4
12
11
12.7
14
11.6
13.2
15
14.8
16
14.3
05
Forecast
range for
2013:
13.9 to
16.0
Forecast
range for
2012:
13.4 to
15.1
16.1
16.9
04
16.5
16.9
01
17
16.6
00
2011 AAA Survey: 1 in 4 drivers have
neglected repairs and maintenance
because of the economy
17.1
17.5
18
17.8
(Millions
of Units)
19
17.4
The Car-Buying Slump Will Create
Pressure to Replace Aging Vehicles
10
9
99
02
03
06
07
08
09
10
11
12F 13F
Many more older cars are on the road today than In “normal” times.
Previously in a 3-year span, new cars would replace about 35 million
old cars, but in 2008-10 only about 27 million old cars were replaced.
Sources: history--U.S. Department of Commerce; forecasts (including 2011 preliminary--Blue Chip Economic Indicators (3/2012);
Insurance Information Institute; USA Today 8/10/2011 edition (AAA Survey).
27
Recovery in Capacity Utilization is a
Positive Sign for Commercial Exposures
March 2001 through February 2012
“Full Capacity”
The US operated at 78.7% of
industrial capacity in Feb.
2012, above the June 2009
low of 68.3% and close to its
post-crisis peak
Percent of Industrial Capacity
82%
Hurricane
Katrina
80%
78%
76%
The closer the economy is
to operating at “full
capacity,” the greater the
inflationary pressure
74%
72%
March 2001November 2001
recession
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
Dec 11
Sep 11
Jun 11
Mar 11
Dec 10
Jun 10
Sep 10
Mar 10
Dec 09
Jun 09
Sep 09
Mar 09
Dec 08
Sep 08
Jun 08
Mar 08
Dec 07
Sep 07
Jun 07
Mar 07
Dec 06
Sep 06
Jun 06
Mar 06
Dec 05
Sep 05
Jun 05
Mar 05
Jun 04
Mar 04
Dec 03
Jun 03
Sep 03
Mar 03
Dec 02
Sep 02
Jun 02
Mar 02
Dec 01
Sep 01
Jun 01
Mar 01
66%
Dec 04
December 2007June 2009 Recession
68%
Sep 04
70%
28
28
Inflation Trends/Forecasts
and Effects on Claims
31
Historic and Forecast Annual Inflation
Rates, (CPI-U, %), 1990–2017F
Annual
Inflation
Rates (%)
Inflation peaked at 5.6% in August 2008
on high energy and commodity crisis.
The recession and the collapse of the
commodity bubble reduced inflationary
pressures in 2009/10
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
3.2
2.8
2.3
2.2 2.2
1.9
1.5
Higher energy,
commodity and food
prices pushed up
inflation in 2011, but
not longer turn
inflationary
expectations.
2.4 2.4 2.4 2.5
1.6
1.3
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 11 12F13F14F15F16F17F
The slack in the U.S. economy suggests that inflationary pressures should
remain subdued for an extended period of times. Energy, health care and
commodity prices, plus U.S. debt burden, remain longer-run concerns
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/12 (forecasts).
32
P/C Personal Insurance Claim Cost Drivers
Grow Faster Than the Core CPI Suggests
Price Level Change: 2011 vs. 2010
8%
Excludes
Food and
Energy
6%
7.1%
6.8%
5.1%
4%
5.0%
4.2%
3.2%
3.0%
3.2%
2%
1.7%
0%
Overall CPI
"Core" CPI
Inpatient
Hospital
Services
Outpatient
Hospital
Services
Prescription Medical Care
Drugs
Commodities
Legal
Services
Motor Vehicle Residential
Parts &
Maint. &
Equipment
Repair
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
Sources: Bureau of Labor Statistics; Insurance Information Institute.
33
P/C Commercial Property Insurance Claim Cost
Drivers Grow Faster than the Overall CPI Suggests
Price Level Change: 2011 vs. 2010
9%
9.0%
Excludes
Food and
Energy
6%
3%
7.1%
5.4%
3.6%
3.2%
1.7%
0%
Overall CPI
"Core" CPI
Inputs to
Construction
Industries
Non-residential
maintenance &
repair
Asphalt Paving &
Roofing Materials
Plumbing Fixtures &
Fittings
Copper prices spiked and retreated in 2011. In July its price was 33% higher
than a year earlier; by November it cost 8% less than in November 2010.
Sources: Bureau of Labor Statistics; Insurance Information Institute.
34
P/C Premium and Underwriting
Trends
Mainly Driven by the
Industry’s Underwriting Cycle,
Not the Economy
35
Soft Market Persisted into Early 2011
but Growth Returned: More in 2012?
(Percent)
1975-78
1984-87
2000-03
growth
25%
20%
15%
2012
forecast:
3.8%
Net Written Premiums Fell
0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008,
and 4.2% in 2009, the First 3Year Decline Since 1930-33.
NWP was
up 3.5%
(est.) in
2011
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
10
11*
12
-5%
*2011 and 2012 figures are A.M. Best Estimates
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
36
P/C Insurance Industry
Combined Ratio, 2001–2011:Q3*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
120
115.8
110
Cyclical
Deterioration
Best
Combined
Ratio Since
1949 (87.6)
Avg. CAT
Losses,
More
Reserve
Releases
108.2
107.5
100.1
100
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of Soft
Market
101.0
100.8
98.4
99.3
100.8
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011*
* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9
Sources: A.M. Best, ISO.
37
P/C Reserve Development, 1992–2013F
Prior Yr. Reserve Release ($B)
Prior Yr. Reserve
Development ($B)
$25
$20
Impact on
Combined Ratio
(Points)
$15
$10
$5
24
15
11
11
8
6
4
9
2
2
0
$0
(2)
-$5
-$10
(0)
(3)
(2)
(4)
(5)
(7)
(8)
-$15
(7)
(9)
(10) (10)
(5)
-2
-4
(10) (11)
(14)
13F
12F
11E
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
-6
92
-$20
Impact on Combined Ratio (Points)
$30
Prior year reserve
releases totaled $8.8
billion in the first
half of 2010, up from
$7.1 billion in the
first half of 2009
Reserve Releases Remained Strong in 2010 But
Tapered Off in 2011. Releases Are Expected to
Further Diminish in 2012 and 2103
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this
transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes
development from financial guaranty and mortgage insurance.
Sources: Barclays Capital; A.M. Best.
38
P/C Insurance Industry
Financial Performance
A Resilient Industry in
Challenging Times
39
$3,043
$7,979
$28,672
$34,670
$65,777
$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
$21,865
$50,000
$30,773
$60,000
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 5.6%
2011:Q3 ROAS1 = 1.9%
P-C Industry 2011:Q3 profits were
down 71% to $8.0B vs. 2010:Q3,
due primarily to high catastrophe
losses and as non-cat
underwriting results deteriorated
$36,819
$70,000







$24,404
$80,000
$62,496
P/C Net Income After Taxes
1991–2011:Q3 ($ Millions)
$0
-$10,000
-$6,970
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for
2011:Q3, 7.5% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
10
11*
40
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
Combined Ratio / ROE
15.9%
110
A combined ratio of about 100
generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
107.5
14.3%
12.7%
105
100.6
100
100.1
15%
10.9%
101.0
100.8
9.6%
97.5
99.3
95.7
95
18%
7.4%
92.7
8.8%
102.0
100.8
12%
7.5%
9%
6.1%
4.4%
90
6%
3.9%
85
3%
80
0%
1978
1979
2003
2005
2006
2007
Combined Ratio
2008
2009
2010
2011E
2012F
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2008 -2010 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011-12 combined ratios are A.M.
Best estimate excl. M&FG insurers.
Source: Insurance Information Institute from A.M. Best and ISO data.
41
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2012F*
ROE
25%
1977:19.0%
1987:17.3%
20%
History suggests next ROE
peak will be in 2016-2017
1997:11.6%
2006:12.7%
15%
9 Years
2012F:
6.1%*
10%
5%
2011E: 3.9%
0%
1975: 2.4%
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
07
08
09
10
11*
12
-5%
1984: 1.8%
*Profitability = P/C insurer ROEs. 2011-12 figures are A.M. Best estimates. Note: Data for 2008-2012 exclude mortgage and
financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
42
Financial Strength & Capacity
The P-C Industry
Has Weathered the Storm Well
43
P/C Insurer Impairments, 1969–2011
3 small Missouri insurers did
encounter problems in 2011 after
the May tornado in Joplin. They
were absorbed by a larger insurer
and all claims were paid.
0
35
16
19
21
18
14
15
12
16
18
19
28
31
29
5
9
13
12
9
9
11
7
8
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
10
11
10
15
12
20
16
14
13
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 Special Report “1969-2011 Impairment Review,” January 23, 2012; Insurance Information Institute.
44
P/C Insurer Impairment Frequency vs.
Combined Ratio, 1969-2011
120
Combined Ratio after Div
P/C Impairment Frequency
2.0
1.8
1.6
1.4
110
1.2
1.0
105
0.8
100
0.6
Impairment Rate
Combined Ratio
115
0.4
95
2011 impairment rate was 0.91%, up from 0.67% in 2010; the
rate is slightly higher than the 0.82% average since 1969
0.0
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
90
0.2
Impairment Rates Are Highly Correlated With Underwriting Performance
and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not
Representative of the Industry Overall
Source: A.M. Best; Insurance Information Institute
45
Reasons for US P/C Insurer
Impairments, 1969–2010
Historically, Deficient Loss Reserves and Inadequate Pricing Are
By Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.6%
4.0%
Misc.
8.6%
Investment Problems
(Overstatement of Assets)
7.3%
40.3%
Affiliate Impairment
Deficient Loss Reserves/
Inadequate Pricing
7.8%
7.1%
Catastrophe Losses
7.8%
Alleged Fraud
13.6%
Rapid Growth
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
46
Top 10 Lines of Business for US P/C
Impaired Insurers, 2000–2010
Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the
Premium Volume of Impaired Insurers Over the Past Decade
Title
Surety
Med Mal
Financial Guaranty
2.0%
4.4%
4.8%
6.5%
Workers Comp
26.6%
Other Liability
6.9%
7.7%
Commercial Auto Liability
8.1%
Commercial Multiperil
22.2%
Pvt. Passenger Auto
10.9%
Homeowners
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
47
US Policyholder Surplus:
1975–2009:Q3*
($ Billions)
Surplus as of 9/30/09 was $490.8B, up from
$437.1B as of 3/31/09. Recent peak was $521.8
as of 9/30/07. Surplus as of 9/30/09 is now only
5.9% below 2007 peak; Crisis trough was as of
3/31/0916.2% below 2007 peak.
$550
$500
$450
$400
$350
$300
$250
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance
organizations
$200
$150
$100
$50
$0
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
The Premium-to-Surplus Ratio Stood at $0.87:$1 as of
9/30/09, Up from Near Record Low of $0.85:$1 at Year-End 2007
* As of 9/30/09
Source: A.M. Best, ISO, Insurance Information Institute.
09*
Policyholder Surplus,
2006:Q4–2011:Q3
($ Billions)
2007:Q3 = previous
surplus peak
$580
$564.7
$556.9
$544.8
$560
$540
$520
$500
$480
$460
$440
$559.1
$540.7
$530.5
$521.8
$517.9$515.6
$512.8
$505.0
$496.6
$487.1
$478.5
The industry now has $1 of
surplus for every $0.83 of NPW,
close to the strongest claimspaying status in its history
$538.6
$511.5
$490.8
$463.0
$455.6
$437.1
Surplus as of 9/30/11 was
down 4.6% below its all time
record high of $564.7B set
as of 3/31/11. Further
declines are possible
$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 10:Q4 11:Q1 11:Q2 11:Q3
Note: Beginning in 2010:Q1
figures include $22.5B of paid-in
capital from a holding company
parent to a subsidiary insurer. It
was a single investment in a
non-insurance business.
Source: ISO; A.M .Best.
Quarterly Surplus Changes Since 2011:Q1 Peak
11:Q2: -$5.6B (-1.0%)
11:Q3: -$26.1B (-4.6%)
49
Investment Performance
Weak Investment Results
Are a Main Cause of Low Profits
50
P/C Insurance Industry Investment Gain:
1994–2011:Q31
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$55.7
$51.9
$52.9
$48.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$40 $35.4
$39.2
$36.0
$42.0
$31.7
$30
Investment gains at
2011:3Q were about
$2.1 billion better than
the same period in 2010
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09
10 11:3Q
Investment gains recovered significantly in 2010 due to realized capital
gains. The financial crisis caused investment gains to fall by 50% in 2008
1Investment
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.
51
-$7.98
-$19.81
-$15
-$20
-$25
-$5.70
$7.30
$8.92
$3.52
$9.70
-$1.21
$6.61
$6.63
$9.13
$11.2B
positive
swing
$16.21
$13.02
$10.81
$9.24
$6.00
$9.82
$9.89
$1.66
$5
$0
-$5
-$10
$4.81
$20
$15
$10
$2.88
($ Billions)
$18.02
P/C Insurer Net Realized
Capital Gains/Losses, 1990-2011E
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E*
Insurers Posted Net Realized Capital Gains in 2011 for the First Time Since
2007. Realized Capital Losses Were the Primary Cause
of 2008/2009’s Large Drop in Profits and ROE
*2011 is an estimate based on annualized actual 2011 9-month figure of $5.5B.
Sources: A.M. Best, ISO, Insurance Information Institute.
52
2011: Nowhere to Run,
Nowhere to Hide
Most of the Country East of
the Rockies Suffered Severe
Weather in 2011, Impacting
Most Insurers
53
The average
number from 19962010 was 58.4.
75
63
59
69
48
52
56
45
45
49
*Through March 9, 2012. Sources: Federal Emergency Management Administration at
http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.
11
09
07
05
01
99
97
95
There have been 2,057* federal disaster declarations since 1953.
Note that 2005 was a relatively low year for number of disaster
declarations in the 1996-2010 period,
but that year included Hurricanes Katrina, Rita, and Wilma.
8
32
36
32
93
91
89
87
85
83
81
79
77
75
73
71
69
67
65
63
61
59
57
55
53
44
43
45
38
31
11
15
24
21
23
22
25
27
28
23
34
38
29
17
17
11
11
19
22
20
25
25
The number of federal
disaster declarations set
a new record in 2011.
7
7
10
12
12
13
17
18
16
16
30
30
40
0
42
48
46
46
50
20
50
60
03
70
The average
number from
1972-1995 was
31.7.
65
80
From 1953-71, the
average number
of declarations
per year was 16.5.
75
90
81
100
99
Number of Federal Disaster
Declarations, 1953-2012*
15 Costliest World Insurance Losses,
1970-2011*
Insured Losses,
2010 Dollars,
$ Billions
$80
$70
$60
Taken as a single event, the
Spring 2011 tornado season
would be the 7th costliest
event in global insurance
history
3 of the 11 most
expensive
catastrophes in world
history occurred in
the past 9 months
$72.3
$50
$35.0
$40
$30
$20
$10
$8.0 $8.0 $9.0 $9.3 $10.0
$14.9 $16.3
$14.0
$11.3
$20.5 $20.8 $23.1
$24.9
$0
Chile Hugo Typhoon Charley New
Rita
Quake (1989) Mirielle (2004) Zealand (2005)
(2010)
(1991)
Quake
(2011)
Wilma
(2005)
Ivan
Spring Ike
Northridge WTC
(2004) Tornadoes (2008) (1994) Terror
(2011)
Attack
(2001)
Andrew Japan Katrina
(1992) Quake, (2005)
Tsunami
(2011)*
*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.
Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.
55
US Insured Catastrophe Losses
($ Billions)
$70
$60
CAT Losses
Surged on NearRecord Tornado
Activity
$61.9
2000s: A Decade of Disaster
2001-2010: $202B (up 122%)
1991-2000: $91B
$24.0
$13.6
$10.6
$27.1
$6.7
$9.2
$12.9
$5.9
$26.5
$4.6
$8.3
$10.1
$2.6
$7.4
$5.5
$4.7
$2.7
$10
$7.5
$20
$8.3
$30
$16.9
$22.9
$40
$27.5
$50
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
First half 2011 US CAT losses exceeded losses from all of 2010. Even
modest fourth quarter losses will put 2011 among the worst ever for CATs
*First three quarters of 2011 (est).
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.
56
Federal Disaster Declarations
in New England States, 1953 – 2012*
100
90
86
Over the past nearly 60
years, Texas has had the
highest number of Federal
Disaster Declarations
Disaster Declarations
80
70
60
50
39
40
33
30
28
27
17
20
9
10
0
TX
ME
VT
NH
MA
*Through Feb. 26, 2012.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
CT
RI
58
U.S. Tornado Count, 2005-2011
There were 1,893 tornadoes
in the US in 2011 far above
average, but well below
2008’srecord
Deadly and
costly April/
May spike
Source: http://www.spc.noaa.gov/wcm/
60
Location of Tornadoes in the US, 2011
1,894 tornadoes
killed 552 people
in 2011, including
at least 340 on
April 26 mostly in
the Tuscaloosa
area, and 130 in
Joplin on May 22
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
61
Location of Large Hail Reports in the
US, 2011
There were 9,417
“Large Hail”
reports in 2011,
causing extensive
damage to homes,
businesses and
vehicles
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
62
Location of Wind Damage Reports in
the US, 2011
There were 18,685
“Wind Damage”
reports through
Dec. 27, causing
extensive damage
to homes and,
businesses
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
63
Severe Weather Reports, 2011
There were
29,996 severe
weather reports
in 2011;
including 1,894
tornadoes;
9,417 “Large
Hail” reports
and 18,685 high
wind events
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#
64
Economics 2012:
The World Is Changing
2012 Is the First Year Since 2005
Where Economic Perceptions and
Reality in the US Will Be Positive
Potentially Enormous Benefits for
P/C Insurers
65
Economic Outlook for 2012
 Economic Growth Will Accelerate Modestly in 2012/13, Beating Expectations
 No Double Dip Recession
 Economy remains more resilient than most pundits presume





Consumer Confidence Will Continue to Improve
Consumer Spending/Investment Will Continue to Expand
Consumer and Business Lending Continue to Expand
Housing Market Remains Weak, but Some Improvement Expected in 2012
Inflation Remains Tame
 Runaway inflation highly unlikely but energy spike possible; Fed has things under control
 Private Sector Hiring Remains Consistently Positive, Exceeds Expectations
 Unemployment dips below 8% by year’s end
Sovereign Debt, Euro Currency/Economy, Muni Bond “Crises” Overblown
European Recession is Milder than Commonly Presumed
Soft Landing in China
Higher Oil Prices and Current Middle East Turmoil Pose Greater Risk to US
Economy than in 2011
 Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End
 Political Environment Is More Hospitable to Business Interests




66
7 Insurance P/C Industry Predictions
for 2012
1. P/C Insurance Exposures Grow Robustly
 Personal and commercial exposure growth is certain
in 2012; Strongest since 2004
 But restoration of destroyed exposure will take until
mid-decade
2. P/C Industry Growth in 2012 Will Be
Strongest Since 2004
 Growth likely to exceed A.M. Best projection of +3.8%
for 2012
 No traditional “hard market” emerges in 2012
3. Underwriting Fundamentals Deteriorate
Modestly
 Some pressure from claim frequency, in some
severity in key lines
67
7 Insurance P/C Industry Predictions
for 2012
4. Increasing Private Sector Hiring Will Drive
Payrolls/WC Exposures
 Wage growth is also positive and could modestly accelerate
 WC will prove to be tough to fix from an underwriting perspective
5. Increase in Demand for Commercial Insurance
Will Accelerate in 2012
 Includes workers comp, property, marine, many liability coverages
 Laggards: inland marine, aviation, commercial auto, surety
 Personal Lines: Auto leads, homeowners lags (though HO leads in
NPW growth due to rates)
6. Investment Environment Is/Remains Much
More Favorable
 Return of realized capital gains as a profit driver
7. Industry Capacity Hits a New Record by YearEnd 2012 (Barring Mega-CAT)
68
10 Greatest Potential Threats
to the Global Economy as of March 2012
1. Conflict in the Middle East, Disrupting Oil Markets
 A conflict between Iran and Israel viewed by some as imminent
 $200/bbl oil is possible; Severe supply disruptions
 Resultserious damage to the global economy, killing fragile
recovery
2. Rising Oil Prices
 Even in the absence of conflict, oil prices slowing growth
 Sustained $10/bbl increase  -0.2% on global GDP in Year 1; -0.5%
Year 2
3. Sovereign Debt Concerns in Europe (was #1 threat in 2011)
 Contagion spreads beyond GreeceItaly, Spain, Portugal, etc.
 Greek/EU political/economic solution fails resulting in disorderly
default
4. “Hard Landing” of Chinese Economy
 A sharp decline in China’s GDP would damage global economies
69
10 Greatest Potential Threats
to the Global Economy as of March 2012
5. Mega-Catastrophe Trends Continue at Record Pace
 Catastrophes trimmed 0.5% off global GDP in 2011
 Massive disruptions to fragile global supply chains
6. Sudden Weakening of US Economy
7. Intensification of Geopolitical Instability (esp. in Middle East)
8. Disintegration of Eurozone (Political Failure)
9. Commodity Price Inflation (apart from oil)
10. Large-Scale Cyber Attack/Terrorism Attack (including
cyberterror)
70
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!