Personal Lines P-C Insurance
Markets:
Challenges & Opportunities
for 2011 & Beyond
AAA/CAA Insurance Conference
San Francisco, CA
March 8, 2011
Download at www.iii.org/presentations
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
 Personal Lines Growth Overview
 Auto, Home: US and by State
 Average Premium/Expenditures
 Personal Lines Growth Drivers
 Exposure, Pricing Factors





Personal Lines Profitability Analysis
Cyclical Drivers in Personal Lines Growth
Private Passenger Auto Performance
Distribution Trends
P/C Financial Overview & Outlook: The Role of Cyclicality





Profitability
Premium Growth
Capital, Capacity and Financial Strength
Underwriting Performance
Investment Performance
 Financial Crisis, Recession & Recovery: P/C Insurer Impacts
 Catastrophe Losses
 Q&A
2
Personal Lines
Growth Analysis
Growth Trajectories Differ
Substantially by Line, by
State and Over Time
3
Distribution of Direct Premiums Written
by Segment/Line, 2009
2009
Distribution Facts
 Personal/Commercial lines split
has been about 50/50 for many
years; Personal Lines likely
overtook Commercial Lines in
2010
 Pvt. Passenger Auto is by far
the largest line of insurance
and is currently the most
important source of industry
profits
Commercial Lines
$232.4B/51%
Homeowners
$65.4B/14%
Pvt. Pass Auto
$163.2B/35%
 Billions of additional dollars in
homeowners insurance
premiums are written by staterun residual market plans
Sources: A.M. Best; Insurance Information Institute research.
4
Auto & Home vs. All Lines, Net Written
Premium Growth, 2000–2010E
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%
6.0%
5%
3%
2.2% 3.0%
5.0%
1%
0.9%
-0.9%
0.5%
-1%
-4.9%
-3%
-5%
00
01
02
03
Sources: A.M. Best; Insurance Information Institute.
04
05
06
07
08
09
10E
5
Private Passenger Auto Insurance
Net Written Premium, 2000–2010E
$ Billion
$170
$157.3
$160
$159.6 $160.2 $159.1
$158.0 $156.6
$159.8
$151.2
$150
$139.7
PP Auto premiums written rose by an
estimated 3% in 2010 on stronger new
car sales after declining in recent years
due to the weak economy impacting new
vehicle sales, car choice, and increased
price sensitivity among consumers. 2011
should provide further gains.
$140
$128.0
$130
$120
$119.7
$110
2000
2001
2002
2003
Sources: A.M. Best; Insurance Information Institute.
2004
2005
2006
2007
2008
2009
2010E
6
Auto Insurance Net Premiums Written,
Canada, 2002-09
$Canadian
$30
Growth Rate
2003: 11.0%
2004: 22.7%
2005: 0.8%
2006: 5.2%
2007: 4.4%
2008: 9.6%
2009: 4.6%
$29.06
$27.77
$25.34
$24.28
$25
$20
$22.90
$23.09
2004
2005
$18.67
$16.82
$15
2002
2003
2006
2007
2008
2009
Auto insurance premiums are a significantly larger part of total premium
revenue in Canada compared to the U.S. Moreover, Auto NPW continued to
grow in Canada during the economic downturn but were flat/negative in the US
Sources: Best’s Aggregates & Averages, various years; Insurance Information Institute
7
Commercial Auto Insurance
Net Written Premium, 2000–2010E
$ Billion
$28
$26.6
$26
$26.7
$26.7
$25.5
$25.4
$24.6
$23.7
$24
$21.8
$22
$20
In contrast to flat PP Auto NPW,
Commercial auto premiums are
down 22.8% since 2006 due to
soft market conditions in
commercial lines and negative
exposure trends
$19.5
$21.8
$20.6
$18
2000
2001
2002
2003
Sources: A.M. Best; Insurance Information Institute.
2004
2005
2006
2007
2008
2009
2010E
8
Percent Change in NPW: Pvt. Pass. Auto
by State, 2004-2009
1.9
1.8
KS
DC
2.3
VA
3.4
TN
4.1
5.6
DE
AL
5.6
AK
4.4
5.8
OR
MD
6.1
GA
4.9
6.2
AZ
MS
6.3
HI
7.0
8.5
SC
OK
8.6
LA
7.1
8.7
ID
12.3
WY
9.0
12.4
NV
WA
12.6
NM
13.8
TX
NC
MT
Utah was the fastest growing
state between 2004 and 2009,
largely due to favorable
demographics and a less
severe economic downturn
16.0
16.6
20
18
16
14
12
10
8
6
4
2
0
UT
Pecent change (%)
Top 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
9
Percent Change in NPW: Pvt. Pass. Auto
by State, 2004-2009
MA -22.0
-10.9
MI
-9.6
-8.3
NH
MN
-8.3
-7.4
OH
ME
-7.2
NY
NJ
RI
NE
IN
CT
WV
WI
CO
PA
KY
IA
CA
MO
IL
ND
AR
-20
SD
Massachusetts saw the biggest
drop in premiums written, due in
large part to recent reforms that
increased competition and
lowered overall rate levels
-15
-25
-7.0
-10
VT
-6.3
-6.1
-5.2
-3.8
-3.3
-2.7
-2.5
-1.8
-1.6
-1.4
-1.4
-5
FL
Pecent change (%)
0
0.1
0.5
0.5
0.5
0.7
0.9
5
1.7
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
10
Increase in Population by Age Category,
2010 to 2020
(Millions)
16
Over the next decade, the
demand for personal lines
insurance will be driven by an
increasingly older population
14.575
14
12
10.110
10
8
6.468
6
4
2
0
Under 18
18-64
65+
Claim Trends in Personal Lines Will Shift With Demographics;
Insurers Must Adapt
Source: US Census Bureau
11
Homeowners Insurance
Net Written Premium, 2000–2010E
$ Billions
$65
$60.3
$60
$54.6
$55
$56.9
$52.2
$49.5
$50
$45.8
$45
$40.0
$40
$35.2
$35
$54.9
$55.7
$32.4
Homeowners insurance NWP continues to
rise (up 86.1% 2000-2010E) despite very
little unit growth in recent years. Reasons
include rate increases, especially in coastal
zones, ITV endorsements (e.g., “inflation
guards”), and inelastic demand
$30
2000
2001
2002
2003
Sources: A.M. Best; Insurance Information Institute.
2004
2005
2006
2007
2008
2009
2010E
12
$845
$842
$814
$808
$791
$789
$788
$788
MN
CO
NE
ND
US
SC
AR
MO
$715
$845
AL
MI
$856
AK
$721
$862
HI
MT
$897
RI
$749
$911
CA (4)
$800
GA
$916
KS
$980
MS
$926
$980
CT
DC
$983
$1,026
MA
$1,000
NY
$1,048
OK
$1,200
$1,155
$1,400
$1,390
$1,600
$1,460
Average Premiums For Home Insurance
By State, 2008 (1)
$600
$400
LA
FL (3)
$0
TX (2)
$200
(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the
policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. (2) The Texas Department of Insurance developed home
insurance policy forms that are similar but not identical to the standard forms. (3) Florida data exclude policies written by Citizens Property Insurance Corporation, the state's
insurer of last resort, and therefore are not directly of incomparable with other states. (4) California data were provided by the California Department of Insurance.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.
Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written
permission of NAIC.
13
$601
$586
$572
$565
KY
PA
ME
OH
$400
$387
$604
VA
$432
$609
SD
UT
$612
IA
$439
$628
IL
OR
$628
AZ
$471
$637
MD
$503
$638
WV
$600
$535
$647
$676
WY
NH
$683
NC
$650
$691
NJ
VT
$692
TN
$658
$692
NV
IN
$703
$800
NM
Average Premiums For Home Insurance
By State, 2008 (1) (con’t)
ID
WA
WI
$0
DE
$200
(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the
policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.
Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written
permission of NAIC.
14
Personal Lines
Growth Drivers
Rate is Presently a Bigger
Driver than Exposure
15
Private Passenger Auto
Economy, Employment
Are Main Drivers
Gas Prices: Big Wild Card
16
Monthly Change* in Auto Insurance
Prices, January 1991–January 2011*
10%
8%
Cyclical peaks in PP
Auto tend to occur
approximately every 10
years (early 1990s, early
2000s and likely the
early 2010s)
6%
A pricing peak
may be occurring
4%
2%
0%
“Hard” markets
tend to occur
during
recessionary
periods
Jan. 2011
change fell
to 4.2%
from 4.4%
in Dec.
-2%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
*Percentage change from same month in prior year; through January 2011; seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
17
Average Expenditures on Auto Insurance
The average expenditure on auto insurance is
lower today than it was in 2004
$950
$900
$850
$830
$842
$831
$795 $789
$786
$800
$750
$824
$816
$806
$726
$691
$700
$651
$705 $703
$668
$685 $690
$650
$600
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09*
10*
Countrywide Auto Insurance Expenditures Decreased
0.8% in 2008 and Increased 2.2% in 2009 (est.) and 2010 (est.)
* Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.
19
$854
$840
$817
$816
$808
$789
$776
$765
$751
$729
$728
$727
WA
PA
HI
WV
US
CA
GA
SC
CO
NM
NH
$903
MA
TX
$904
AK
$858
$907
MI
AZ
$922
$950
CT
MD
$970
NV
$1,044
NY
$986
$1,055
FL
RI
$1,081
NJ
$1,007
$1,105
LA
$1,000
DE
$1,126
$1,200
DC
Average Expenditures For Auto Insurance
By State, 2008
$800
$600
$400
$200
$0
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.
Source: © 2010 National Association of Insurance Commissioners.
20
$641
$632
$617
$612
$600
$595
$581
$576
$562
$547
TN
WY
OH
IN
ME
NC
WI
KS
ID
NE
$503
$653
AR
ND
$653
VT
$519
$654
MS
IA
$657
MO
$520
$663
VA
$600
SD
$663
OK
$698
MN
$667
$699
KY
AL
$709
UT
$667
$720
IL
MT
$727
$800
OR
Average Expenditures For Auto Insurance
By State, 2008 (con’t)
$400
$200
$0
Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.
Source: © 2010 National Association of Insurance Commissioners.
21
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.
22
Number of Registered Passenger Vehicles
in the US, 2000-2008
Growth in vehicle
registrations could
reach 1% in 2011
and 2012
The Number of Registered Passenger Vehicles Declined in 2009 for
the First Time in Many Years Could Rise in 2011/2012
Sources: US Federal Highway Administration, Bureau of Transportation Statistics; Barclays Capital; Insurance Information Institute.
24
“Light-Duty” Vehicle Registrations in
Canada*, 1999-2008
Millions
20
19
18
Exposure Growth Rate
2000: 1.8%
2001: 1.4%
2002: 2.8%
2003: 1.3%
2004: 0.9%
2005: 1.1%
2006: 3.4%
2007: 2.5%
2008: 2.1%
19.61
19.20
18.74
17.54
17.76
17.92
18.12
17.06
17
16.83
16.54
16
15
99
00
01
02
03
04
05
06
07
08
The number of light-duty vehicles grew every year during the past decade,
including recession years. In the US, where registration were flat or fell.
*Includes passenger autos, passenger vans, and light trucks and vans (less than 4,500 kg)
Sources: http://www.tc.gc.ca/eng/roadsafety/tp-tp3322-2008-1144.htm
Insurance Information Institute
25
Do Changes in Miles Driven Affect
Auto Collision Claim Frequency?
Paid Claim Frequency = (No. of paid
claims)/(Earned Car Years) x 100
7.00
6.81
Paid Claim Freq
3100
6.91
6.80
6.78
3000
6.65
6.59
6.5
6.32
6.02
5.94
6.0
People are
beginning to drive
more (+0.6% YTD),
and frequency
drop is flattening
2800
2700
2600
5.85
5.71
2900
5.70
5.62
5.58
5.5
2500
2400
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10*
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track
Monitoring System, Private Passenger Automobile Fast Track Data: 3rd Qtr. 2010, published Jan. 7, 2011 and earlier
reports. *2010 ISO figure is for 12 months ending 9/30/2010; FHA data is for 12 months ending Oct. 2010.
Billions of Miles Driven
7.0
Collision Claim Frequency
Billions of Vehicle Miles
Will Skyrocketing Gas Prices
Hurt Auto Insurers?
Here We Go Again!
27
Monthly Retail Price of Gasoline,
January 1990–February 2011*
U.S. City Average
$4.50
$4.00
$3.50
$3.00
Current Middle East
tensions, strengthening
demand threaten to push
gas beyond the $4 per
gallon level by late Spring
Record retail
price: $4.14/gal in
July 2008
$2.50
$2.00
$1.50
$1.00
$0.50
Gas prices tend to
eventually fall
during recessions
Gas prices
hit .
$3.44/gal in
the last
week of
February
$0.00
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
*Week ending Feb. 28.
Note: Recessions indicated by gray shaded columns.
Sources: Energy Information Administration; Insurance Information Institute.
28
Miles Driven and Annual Percent Change:
1986-2010
2,999.6
2,979.2
2,973.5
3,029.8
3,014.3
2,989.4
2,964.2
2,889.7
2,855.3
2,795.5
2,746.9
2,679.5
2,560.4
2,482.2
2,422.8
2,357.6
2,296.7
2,247.2
2,172.2
2,147.5
Billions of Vehicle Miles
Percent Change
6%
5%
4%
3%
2%
1%
In 2008, miles driven
dropped for the first time
in decades (-1.9%), but
were up 0.7% to almost
3 trillion miles in 2010
1,000
0%
-1%
-2%
-3%
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
Sources: Federal Highway Administration; Insurance Information Institute.
% Change in Miles Driven
1,500
2,025.6
2,000
1,924.3
2,500
2,107.0
3,000
1,838.2
Billions of Miles Driven
3,500
2,625.4
Higher gas prices will slow the
increase in miles driven, with
mixed impacts on private
passenger auto (less exposure
attributable to mileage, but perhaps
tempering claim frequency)
Auto Insurance: Claim Frequency Impacts
of Energy Crisis/Recession of 1973/74
Oct. 17,
1973: Arab
oil
embargo
begins
Frequency
Impacts
Collision: -7.7%
PD: -9.5%
BI: -13.3%
Driving Stats
Gas prices
rose 35-40%
Miles driven
fell 6.7% in
1974
Source: ISO, US DOT.
March 17,
1974: Arab
oil states
announce
end to
embargo
Frequency
began to
rebound
almost
immediately
after the
embargo
ended
Homeowners
Glut of Existing Homes,
Foreclosures, Weak
Demographics Mean Unit
Growth Will Remain Slow
32
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.
33
Average Square Footage of Completed
New Homes in U.S., 1973-2010*
2,500
2,300
2,100
1,900
1,700
The trend toward building larger homes reversed
in 2009 and 2010, affecting exposure growth
beyond the decline in number of units built
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
1,500
The average size of completed new
homes often falls in recessions
(yellow bars), but historically
bounces back in expansions
1,660
1,695
1,645
1,700
1,720
1,755
1,760
1,740
1,720
1,710
1,725
1,780
1,785
1,825
1,905
1,995
2,035
2,080
2,075
2,095
2,095
2,100
2,095
2,120
2,150
2,190
2,223
2,266
2,324
2,320
2,330
2,349
2,434
2,469
2,521
2,519
2,438
2,374
Square Ft
2,700
The average size of completed new homes fell by 147 square feet (5.75%) from
2008-2010. This is the largest recession-based drop in nearly four decades.
*2010 figure is weighted average square feet of completed homes in first three quarters of 2010
Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.
34
State Population Growth Rate
Projections, 2010-2020*
2.3%
2.1%
2.0%
1.9%
1.6%
0.7%
0.6%
0.4%
LA
WY
SD
NE
PA
NY
OH
IA
12.4%
OR
2.5%
13.1%
GA
MS
13.6%
WA
2.5%
14.5%
DE
5%
IL
14.6%
NC
10%
8.7%
14.8%
ID
15%
11.3%
15.2%
UT
U.S. overall:
+8.7%
16.2%
20%
Lowest Growth
Rate States
Highest Growth
Rate States
TX
25%
21.6%
30%
27.4%
35%
28.3%
Projected Population
Growth
-1.0%
-1.5%
WV
US
VA
FL
AZ
-10%
NV
-5%
ND
0%
The Mountain West region is projected to grow the most from now to 2020 (up
17.6%), followed by the South Atlantic (up 14.5%) and Pacific (up 11.2%).
The Mid-Atlantic is projected to be the slowest-growing region (up 1.9%).
*based on 2000 census. Source: http://www.census.gov/population/www/projections/projectionsagesex.html Table 7
36
Average Premium for
Home Insurance Policies**
Consumer efforts to economize (increased
deductibles, more shopping, etc.) and
adverse exposure trends are depressing the
average homeowners insurance premium
$950
$900
$850
$804
$800
$822
$791
$799
$807
08
09*
10*
$764
$729
$750
$700
$668
$650
$593
$600
$550
$536
$508
$500
00
01
02
03
04
05
06
07
* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.
Source: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.
37
Percent Change in NPW: Homeowners,
by State, 2004-2009
70.6
31.1
30.0
29.7
29.5
WY
MT
MO
NH
27.7
31.6
AR
ND
32.6
NJ
27.8
32.8
NY
VA
33.8
UT
28.0
34.5
MA
ME
35.0
NC
36.7
GA
35.0
36.9
AL
CT
37.6
FL
41.0
ID
37.8
41.1
NM
MS
41.9
RI
38.9
42.7
SC
DE
Hawaii was the fastest
growing state between
2004 and 2009
52.7
LA
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
HI
Pecent change (%)
Top 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
38
Percent Change in NPW: Homeowners,
by State, 2004-2009
16.5
AZ
12.4
15
Michigan was the
slowest growing state
between 2004 and 2009
10
11.2
16.8
IN
19.2
WI
18.4
19.2
IL
19.5
19.6
19.7
20
19.8
20.6
22.1
22.2
22.6
23.1
23.2
23.7
24.2
24.7
24.5
22.0
Pecent change (%)
25
24.9
26.6
30
26.7
Bottom 25 States
MI
CA
WV
PA
OH
CO
NE
IA
SD
OR
OK
MD
AK
MN
NV
KS
TX
VT
DC
WA
TN
KY
0
0.2
5
Sources: SNL Financial LC.; Insurance Information Institute.
39
US Residual Market Exposure to Loss:
Can Drain Private Insurer Premium
($ Billions)
4 Florida
Hurricanes
$900
Katrina, Rita, and
Wilma
$771.9
$800
$600
Hurricane Andrew
$500
$372.3
$400
$281.8
$300
$200
$100
$696.4 $703.0
$656.7
$700
$221.3 $244.2
$430.5 $419.5
$292.0
$150.0
$54.7
$0
1990
1995
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
In the 20-year Period From 1990 and 2009, Total Exposure to Loss in the
Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B
in 1990 to $703.0B in 2008
Source: PIPSO; Insurance Information Institute
40
Advertising Spending Trends
After and Unprecedented and
Rapid Increase, Ad
Expenditures are Flattening Out
41
Advertising Expenditures by P/C
Insurance Industry, 1999-2009
($ Billions)
Ad spending by p/c
insurers increased by
170% ($2.74 bill) from
2001 to 2008 before
easing slightly in 2009.
The upward trend could
well resume as the
economy improves and
direct writers seek
growth and big insurers
seek to maintain share.
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$4.35
$4.15
$4.12
$3.44
$2.97
$2.34
$1.88
$1.69
$1.71
$1.64
$1.69
99
00
01
02
$1.5
03
04
05
06
07
08
09
Private Passenger Auto Accounts for the Largest Share of Advertising
Expenditures. One Company Accounts for 1/6 of Total P/C Ad Spending.
Source: SNL Financial LC.
42
Advertising Expenditures as a Percent of
P/C Insurance Industry NPW, 1999-2009
From 2003-2008
advertising as a percent
of NPW more than
doubled (up 115.2%)
1.00%
0.92%
0.99% 0.98%
0.77%
0.70%
0.75%
0.59% 0.58%
0.51%
0.50%
0.55%
0.46% 0.46%
0.25%
0.00%
99
00
01
02
03
04
05
06
07
08
09
In dollar terms, ad spending increased in every year from 2002 to 2008.
The percentage drops in 2002-03 (vs. 2001) are explained by the rapid
growth in premiums in the 2002-03 “hard market” that outpaced dollar
growth in ad spending.
Source: SNL Financial LC.
43
Personal Lines
Profitability Analysis
Significant Variability Over
Time and Across States
44
Return on Net Worth: All P-C Lines vs.
Homeowners & Pvt. Pass. Auto, 1990-2009*
(Percent)
US All Lines
US Home
US PP Auto
30%
20%
10%
0%
-10%
-20%
Average RNW: 1990-2009*
-30%
Hurricane
Andrew
-40%
All P-C Lines: 8.0%
PP Auto: 9.1%
Homeowners: 0.4%**
-50%
-60%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole.
Homeowners Volatility is Associated Primarily With Coastal Exposure Issues
*Latest available.
**Excluding 1992, the Hurricane Andrew, produces a homeowners RNW of 3.3%.
Sources: NAIC.
45
Return on Net Worth: All P-C Lines vs.
Pvt. Pass. Auto, 1990-2009*
(Percent)
US All Lines
US PP Auto
16%
14%
12%
10%
8%
6%
4%
Average RNW: 1990-2009*
2%
All P-C Lines: 8.0%
PP Auto: 9.1
0%
-2%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13
of the 20 Years from 1990-2009 (Inclusive)
*Latest available.
Sources: NAIC.
46
Return on Net Worth: Pvt. Pass. Auto vs.
Homeowners, 1990-2009* (excl. 1992)
(Percent)
US Home
US PP Auto
25%
Average RNW: 1990-2009*
20%
Homeowners: 3.3%**
PP Auto: 9.1
15%
10%
5%
0%
-5%
-10%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13
of the 20 Years from 1990-2009 (Inclusive)
*Latest available.
**Excluding 1992, the year of Hurricane Andrew. Including 1992 produces a homeowners RNW of 0.4%.
Sources: NAIC.
47
Return on Net Worth: Pvt. Passenger Auto,
10-Year Average (2000-2009*)
Top 25 States
18.2
8.5
8.7
8.8
8.9
8.9
9.0
10.2
10.2
10.3
10.3
10.4
10.4
10.6
10.8
11.0
11.1
11.2
11.3
11.6
12.9
13.3
13.8
Hawaii was the most profitable state for
auto insurers from 2000-2009
14.0
20
18
16
14
12
10
8
6
4
2
0
11.9
RNW PPA
(Percent)
HI VT ME DC ID NH SD MN OH NM CT RI KS IA WY ND VA AZ OR AL CA WI UT IN CO
Sources: NAIC * latest available
48
Return on Net Worth: Pvt. Passenger Auto,
10-Year Average (2000-2009*)
*Latest avaiiable.
Sources: NAIC
-0.6
MI
MI
LA
FL
NV
MS
DE
KY
TX
WV
PA
NC
AR
MT
MA
MO
NJ
US
GA
OK
IL
TN
MD
AK
SC
WA
NE
0.8
-0.4
3.6
2.9
4.9
4.7
5.5
6.4
6.1
6.7
6.7
7.0
6.8
7.0
7.2
7.1
7.3
7.2
Michigan was the least profitable state
for auto insurers from 2000-2009 (-0.6%
RNW), dragged down by rampant nofault fraud and abuse and the Michigan
Catastrophic Claims Association.
7.6
7.6
7.7
7.8
7.7
8.1
7.9
Bottom 25 States
8.5
8.3
10
9
8
7
6
5
4
3
2
1
0
-1
NY
RNW Auto
(Percent)
49
Return on Net Worth: Homeowners Insurance,
10-Year Average (2000-2009*)
Top 25 States
50
45
45.0
(Percent)
Hawaii was the most profitable
state for home insurers from
2000-2009 due to the absence
of hurricanes during this period
40
11.2
11.9
11.9
12.0
13.5
13.7
13.9
14.3
14.4
14.0
14.7
15.2
15.7
17.2
17.4
18.0
18.5
18.6
18.7
15.5
15
19.0
20
20.0
25
20.1
30
20.8
RNW HO
35
10
5
0
HI SC RI DC CT AK UT NY NV MA DE AZ OR NC CA MT WY PA WA NJ CO NM ME VT ID
Sources: NAIC
50
Return on Net Worth: Homeowners Insurance,
10-Year Average (2000-2009*)
0.4
1.6
1.0
0.5
4.3
2.2
5
5.3
5.1
4.7
10
Bottom 25 States
8.0
9.3
(Percent)
-29.0
-25
-11.8
-14.4
-20
Hurricanes Katrina and Rita made
Louisiana and Mississippi the least
profitable states for home insurers
from 2000-2009
-10.8
-15
-7.9
-8.6
-10
-6.9
-7.1
RNW HO
-5
-3.7
-4.9
-5.5
-6.7
-1.6
-2.3
0
-30
-32.4
-35
VA MD NH WV MI US KS SD IL
IA FL WI OK TX OH TN IN NE AR GA AL KY ND MO MN MS LA
Sources: NAIC
51
Claim Trends in
Auto Insurance
Rising Costs Held in Check by
Falling Frequency:
Can That Pattern Be Sustained?
56
Bodily Injury: Severity Trend Moderating,
Frequency Decline Continues
Annual Change, 2005 through 2010*
Severity
Frequency
8%
5.9%
6%
4%
6.1%
4.7%
2.9%
2.2%
2%
1.7%
0%
-2%
-1.1%
-4%
-6%
-3.1%
-3.8%
-5.4%
2005
2006
-5.0%
2007
2008
-3.2%
2009
2010*
Cost Pressures Will Increase if BI Severity Increases
Outpace Declines in Frequency
*For 2010, data are for the 4 quarters ending with 2010:Q3.
Source: ISO/PCI Fast Track data; Insurance Information Institute
57
Property Damage Liability: Frequency and
Severity Nearly Flat in 2009/10
Annual Change, 2005 through 2010*
Severity
3.6%
4%
3%
Frequency
2.9%
2.1%
2.0%
2%
0.8%
1%
0.6%
0.4% 0.3%
0%
-0.3%
-1%
-2%
-1.6%
-3%
-4%
2005
-3.5%
2006
2007
-3.4%
2008
2009
2010*
Stable Severity/Frequency Trends Keeping PD Costs in
Check, But Are These Trends Sustainable?
*For 2010, data are for the 4 quarters ending with 2010:Q3.
Source: ISO/PCI Fast Track data; Insurance Information Institute
58
Collision Coverage: Frequency and
Severity Trends Have Been Favorable
Annual Change, 2005 through 2010*
Severity
5%
4%
Frequency
3.9%
3.1%
2.5%
3%
2%
1%
0.0%
0.5%
0%
-1%
-2%
-1.2%
-1.8%
-3%
-2.6%
-4%
2005
-3.6%
2006
2007
2008
-0.7%-0.7%
-2.3%
2009
2010*
The Recession, High Fuel Prices Have Helped Push Down
Frequency and Temper Severity, But this Trend Will Likely Be
Reversed Based on Evidence from Past Recoveries
*For 2010, data are for the 4 quarters ending with 2010:Q3.
Source: ISO/PCI Fast Track data; Insurance Information Institute
59
Comprehensive Coverage: Recent Severity
Trends Favorable, Frequency is Up in 2010
Annual Change, 2005 through 2010*
Severity
Frequency
20%
15.5%
15%
12.8%
10%
7.8%
5%
1.7%
1.5%
0%
-5%
-3.1%
-1.4%
-1.4%
-6.6%
-10%
-8.2%
-9.8%
-10.7%
-15%
2005
2006
2007
2008
2009
2010*
Weather Creates Volatility for Comprehensive Coverage;
Recession Has Helped Push Down Frequency and Temper
Severity, But This Factors Will Weaken as Economy Recovers
*For 2010, data are for the 4 quarters ending with 2010:Q3.
Source: ISO/PCI Fast Track data; Insurance Information Institute
60
No-Fault (PIP) Liability: Frequency and
Severity Trends Are Adverse*
Annual Change, 2005 through 2010*
Severity
Frequency
8%
6%
6.3%
6.4%
6.4% 5.9%
5.7%
6.4%
4.7%
4%
2.4%
2%
0%
-2%
-2.7%
-4%
-6%
-4.8%
-5.7%
-8%
2005
2006
2007
-6.9%
2008
2009
2010*
Multiple States Are Experiencing Severe Fraud and Abuse
Problems in their No-Fault Systems, Especially FL, MI, NY and NJ
*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT; 2010 data are for the 4 quarters ending 2010:Q3.
Source: ISO/PCI Fast Track data; Insurance Information Institute
61
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 $6,344).
Sources: Insurance Information Institute research from ISO/PCI Fast Track data.
62
Florida’s No-Fault Fraud Tax: Estimated
Aggregate Annual Cost, 2009-2011F ($ 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
No-Fault Fraud is 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.
63
New York State No-Fault Claim Severity,
1997–2009:Q4
$7,000
$6,500
$6,000
$5,500
Avg. Claim
Severity Rose
63% in 5 years
after 1997
Presbyterian
Decision
$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
2.4%
2.2%
No-Fault Claim Frequency
$9,000
$9,235
$8,727
$8,577
$9,500
$8,443
$8,177
$8,507
$8,025
$8,562
$8,748
$8,690
$8,862
Avg. Claim Severity is
up 58% since 2004:Q4
No-Fault Claim Severity
2.0%
1.8%
1.6%
1.4%
Avg. Claim Severity is
at its 2nd Highest Level
in History = $8,862
1.2%
9:03
9:01
8:03
8:01
7:03
7:01
6:03
6:01
5:03
5:01
4:03
4:01
3:03
3:01
2:03
2:01
1:03
1:01
1999
1.0%
1997
$5,000
About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse
Sources: ISO/PCI Fast Track data; Insurance Information Institute.
64
Distribution Trends
Distribution by Channel Type
Continues to Evolve
65
Personal Lines Distribution Channels,
Direct vs. Independent Agents
80%
70%
60%
50%
40%
30%
20%
10%
Independent agents have lost significant personal
lines market share since the early 1970s.
Although the trend has slowed, it may be
accelerating again.
0%
72 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
Direct
Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
67
P/C Insurance Industry
Financial Overview
Profit Recovery Continues
Early Stage Growth Begins
69
$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
ROE: Property/Casualty Insurance,
1987–2010E*
(Percent)
P/C Profitability Is Both by
Cyclicality and Volatile
20%
Katrina,
Rita, Wilma
15%
10%
Sept. 11
Hugo
5%
Andrew
0%
4 Hurricanes
Lowest CAT
Losses in
15 Years
Northridge
Financial
Crisis*
-5%
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
* Excludes Mortgage & Financial Guarantee in 2008 - 2010.
Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3.
04
05
06
07
08
09 10E
71
P/C Premium Growth Cycles
Cyclicality is Driven Primarily
by the Industry’s Underwriting
Cycle, Not the Economy
75
Soft Market Persisted in 2010 but May
Be Easing: Relief in 2011?
(Percent)
1975-78
1984-87
2000-03
25%
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%
NWP was up 0.5% in 2010 (est.) with
forecast growth of 1.4% in 2011
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
10E
11F
-5%
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
76
Premiums Written, Net vs. Direct,
Canada, 2002-09
$Canadian
Net Premiums
Direct Premiums
$45
$42.81
$41.04
$39.49
$40
$35.71
$36.34
$34.40
$35
$36.66
$38.72
$37.23
$41.65
$40.33
$38.07
$34.50
$32.64
$31.51
$30
$29.08
$25
2002
2003
2004
2005
2006
2007
2008
2009
Unlike the situation in the U.S. (where premiums written dropped year-over-year
for three straight years (2007-09), in Canada direct premiums written grew every
year and net premiums written dropped only once (2008) in the current decade.
Sources: Best’s Aggregates & Averages, various years; Insurance Information Institute
77
Capital/Policyholder
Surplus (US)
Total Surplus Exhibits Little
Cyclicality, While Surplus Leverage
Ratios Influence Cycle
78
Policyholder Surplus,
2006:Q4–2010:Q3
($ 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%)
80
Investment Performance
Investments Cycles Also Influence
P/C Insurer Profitability
87
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.
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.
91
EXPENSES
Expense Ratios Are Highly Cyclical
and Contribute Deteriorating
Underwriting Performance
95
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%
28%
29.6%
28.4%
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
Financial Strength &
Underwriting
Cyclical Pattern is P-C Impairment
History is Directly Tied to
Underwriting, Reserving & Pricing
99
P/C Insurer Impairments, 1969–2010E
There have been very few p/c
failures in recent years, mostly
title insurers and small Florida
property insurers
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
10
0
7
6
9
18
19
12
18
14
15
35
31
29
16
16
14
13
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.
Reasons for US P/C Insurer
Impairments, 1969–2009
Deficient loss reserves and inadequate pricing are the leading cause
of insurer impairments, underscoring the effect of an inflation spurt.
Reinsurance Failure
Sig. Change in Business
3.6%
4.0%
Misc.
8.8%
Investment
Problems
7.1%
40.1%
Affiliate Impairment
Deficient Loss Reserves/
Inadequate Pricing
7.8%
7.2%
Catastrophe Losses
7.8%
Alleged Fraud
13.6%
Rapid Growth
Source: A.M. Best: 1969-2009 Impairment Review, Special Report, June 21, 2010
102
Personal Lines
Underwriting Trends:
Cycle, Catastrophes Are the
Typical Drivers of Performance
103
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.
104
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.
105
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.
106
09 10E 11P
98.5
08
99.0
06
101.3
05
100.3
95.5
04
98.3
95.1
95
94.3
96
98.4
95
104.2
101.0
94
101.1
101.3
93
100
99.5
101.3
105
101.7
110
103.5
109.5
115
107.9
Private Passenger Auto Combined
Ratio: 1993–2011P
90
85
80
97
98
99
00
01
02
03
07
Private Passenger Auto Accounts for 34% of Industry Premiums and
Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best; Insurance Information Institute.
158.4
Homeowners Insurance Combined
Ratio: 1990–2011P
170
160
99.0
103.5
105.6
117.0
95.7
100.1
121.7
111.4
108.2
109.3
94.2
89.4
90
98.3
100
109.4
118.4
112.7
101.0
110
113.6
120
117.7
130
113.0
140
121.7
150
80
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11P
Homeowners Line Is Expected to Improve in 2011. Extreme
Regional Variation Can Be Expected Due to Local Catastrophe
Loss Activity
Sources: A.M. Best; Insurance Information Institute.
Economic Issues for the
Next 3-5 Years
Growth in the Wake
of the “Great Recession”
109
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.
110
Canadian Real GDP Annual Change,
2000-2010
Real GDP
Growth
6% 5.2%
Economic growth rates
in Canada are expected
to be slightly below the
US in 2011-2012
5.4%
3%
2.2%
1.9%
1.8%
3.1%
3.0% 2.8%
2.9%
2.6%
2.9%
0.5%
Forecasts from Blue Chip Economic Indicators, 2/2011 issue.
Sources: World Bank, World Development Indicators, I.I.I. calculations; Blue Chip
2012F
2011F
2010
-2.5%
2009
2008
2007
2006
2005
2004
2003
2002
2001
-3%
2000
0%
111
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
113
The Economic Storm
What the Financial Crisis and
Recession Mean for the Industry’s
Exposure Base, Growth and
Profitability
114
3.2%
3.0%
2.7%
2.5%
2.3%
2.0%
3.7%
1.7%
0.6%
1.6%
2.9%
2.3%
3.2%
2.7%
3.1%
3.6%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
0.9%
2%
2.5%
1.1%
4%
1.8%
6%
4.1%
Real GDP Growth (%)
5.0%
US Real GDP Growth*
11:4Q
11:3Q
11:2Q
11:1Q
10:4Q
10:3Q
10:2Q
10:1Q
09:4Q
09:3Q
09:2Q
09:1Q
08:4Q-6.8%
-4.0%
08:3Q
08:2Q
Economic growth up sharply
in late 2009 with rebuilding of
inventories and stimulus.
More moderate growth
expected in 2010/11 but no
“double dip”
-4.9%
-0.7%
07:4Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2000
-8%
2003
-6%
2002
-4%
2001
Recession began in Dec.
2007. Economic toll of credit
crunch, housing slump,
labor market contraction has
been severe but modest
recovery is underway
08:1Q
-2%
-0.7%
0%
Demand Commercial 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 10/10; Insurance Information Institute.
115
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
18.6%
20.3%
Real GDP Growth vs. Real P/C (%)
4%
7.7%
2%
1.2%
1.6%
5.6%
6%
0%
-2.9%
-0.5%
-3.8%
-4.4%
-3.3%
-1.6%
-1.6%
-1.0%
-1.8%
-1.0%
8%
-2%
-4%
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
10E
-10%
-7.4%
-6.5%
-1.5%
-5%
-0.9%
0%
-0.4%
-0.3%
3.1%
1.1%
0.8%
0.4%
0.6%
0.3%
5%
5.8%
1.8%
4.3%
5.2%
15%
10%
Real GDP
Real GDP Growth
Real NWP Growth
20%
Real NWP Growth
13.7%
25%
P/C Insurance Industry’s Growth is Influenced Modestly
by Growth in the Overall Economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/10; Insurance Information Institute
116
Labor Market Trends
Massive Job Losses Sapped the
Economy and Commercial/Personal
Lines Exposure, But Trend is
Improving
117
Unemployment and Underemployment
Rates: Falling Faster in 2011?
January 2000 through February 2011, Seasonally Adjusted (%)
18
Traditional Unemployment Rate U-3
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 15.9%
in February 2011
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 8.9%
in February
10
Unemployment
peaked at 10.1%
in October 2009,
highest monthly
rate since 1983.
8
6
4
Feb
11
2
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Peak rate in the
last 30 years:
10.8% in
November December 1982
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.
118
Unemployment Rate in Canada
January 2008 through
January 2011 (%)
Unemployment peaked at
8.7% in Canada in Aug.
2009. US peak was
10.1% in Oct. 2009
9
8.7
Canada’s
unemployment
problem has
been less severe
than the US
8
7.8
7.6
7
Current unemployment rate
in Canada is between 7.5%
and 8.0% compared to
about 9% in the US
6
5.9
5
Jan
08
Apr
08
Jul
08
Oct
08
Source: www.tradingeconomics.com
Jan
09
Apr
09
Jul
09
Oct
09
Jan
10
Apr
10
Jul
10
Oct
10
Jan
11
119
Monthly Change in Private Employment
(800)
(1,000)
51
61
117
143
112
193
128
167
68
222
16
62
75
-83
-109
Monthly Losses in
Dec. 08–Mar. 09 Were
the Largest in the
Post-WW II Period
-334
-452
-297
-215
-186
-262
(600)
-734
-667
-806
-707
-744
-649
(400)
222,000 private sector jobs
were created in February
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
Feb-11
(200)
-14
0
Private employers added jobs in
every month in 2010 for a total of
1.449 million for the year
-12
-85
-58
-161
-253
-230
-257
-347
-456
-547
65
97
23
213
65
127
42
15
79
200
186
400
158
241
January 2008 through February 2011* (Thousands)
Private Employers Added 1.739 million Jobs Since Jan. 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
Inflation
Is it a Threat to Claim Cost
Severities
125
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).
126
P/C Personal Insurance Claim Cost Drivers
Grow Faster than the Overall CPI Suggests
Price Changes
in 2010
9%
8.8%
6%
Excludes
Food and
Energy
6.1%
4.3%
3%
3.3%
4.3%
3.6%
3.1%
3.3%
1.6%
1.0%
0%
Overall CPI "Core" CPI
Inpatient
Hospital
Services
Outpatient Physicians' Prescription Medical Care Legal Motor Vehicle Residential
Hospital
Services
Drugs Commodities Services
Parts &
Maint. &
Services
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
Source: Bureau of Labor Statistics; Insurance Information Institute.
127
Catastrophic Loss –
Catastrophe Losses Trends Are
Trending Adversely
128
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
$7.9
$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 Are Running Below 2009, So Far
Figures Do Not Include an Estimate of Deepwater Horizon Loss
*Through June 30, 2010.
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.
129
Combined Ratio Points Associated with
Catastrophe Losses: 1960 – 2009
Combined Ratio Points
8.1
2008
1.6
2.6
2.7
2006
1.6
2002
2004
1.6
2000
1.0
1998
3.3
3.3
3.6
2.9
3.3
2.8
1996
5.0
5.4
5.9
1994
1990
2.1
2.3
3.0
1.2
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
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
1.2
1966
3.6
0.4
1964
1962
0.8
1.1
1.1
0.1
0.9
1
0
1960
5
4
3
2
1960s: 1.04
1970s: 0.85
1980s: 1.31
1990s: 3.39
2000s: 3.52
1992
8
7
6
8.8
Avg. CAT Loss
Component of the
Combined Ratio
by Decade
10
9
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.
130
Natural Disasters in the United States,
1980 – 2010
Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)
Number of events in first half of 2010 is close to the annual totals from five of past ten years.
250
First Half 2010
95 Events
Number
200
150
100
50
1980
1982
1984
1986
1988
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
1990
1992
1994
1996
1998
Meteorological (storm)
Hydrological
(flood, mass movement)
© 2010 Munich Re
2000
2002
2004
2006
2008
2010
Climatological
(temperature extremes,
drought, wildfire)
131
U.S. Thunderstorm Loss Trends
Annual Totals 1980 – 2009 vs. First Half 2010
Thunderstorm losses have quadrupled since 1980.
First Half 2010
$3.0 Bn
Source: Property Claims Service, MR NatCatSERVICE
© 2010 Munich Re
135
U.S. Winter Storm Loss Trends
Annual totals 1980 – 2009 vs. First Half 2010
Average annual winter storm losses have increased over 50% since 1980.
Severe winter storms in
early 2010 caused major
damage to energy
infrastructure
First Half 2010
$2.4 Bn
Source: Property Claims Service, MR NatCatSERVICE
© 2010 Munich Re
136
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
$45.3
$22.8
$23.8
$11.3
$12.5
Wilma
(2005)
Ike
Northridge 9/11
(2008)
(1994) Attacks
(2001)
Andrew
(1992)
$18.2
$4.2
$5.2
Jeanne Frances
(2004) (2004)
$6.2
$7.3
$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.
138
Insurance Information Institute Online:
www.iii.org
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