Is the World Becoming a Riskier Place? Economic Overview and New York Insurance Market Outlook for 2012 & Beyond Independent Insurance Agents & Brokers of New York Albany, NY January 30, 2012 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 What in the World Is Going On? Is the World Becoming a Riskier Place? What Are the Implications for Insurance and Risk Management? 3 We Are Living in an Age of Elevated Global Economic Uncertainty ECONOMIC & POLITICAL CONCERNS European Sovereign Debt, Bank & Currency Crises Global Economic Slowdown Echoes of the Financial Crisis & Financial Market Volatility Collapse of Major Financial Institutions U.S. Debt and Budget Crisis, S&P Downgrade & Tax Uncertainty Housing Crisis Persistently High Unemployment Inflation/Deflation Energy & Commodity Prices Volatility Political Upheaval in the Middle East (Arab Spring, Iran) Regulation & Regulatory Uncertainty New World Order: China’s Economic and Military Ascendency 2012 US Elections & Political Brinksmanship CATASTROPHIC LOSS Japan, New Zealand, Chile, Haiti Earthquakes Nuclear Fears (Japan, Germany, US) Floods (Thailand, US) U.S.: Tornadoes, Flooding, Wildfires, Hurricanes, Winter Storms Manmade Disasters (e.g., Deepwater Horizon) Cyber Attacks Resurgent Terrorism Risk (Bin Laden, Gadhafi, Kim Jong Il deaths) Are “Black Swans” everywhere or does it just seem that way? 4 P/C Insurance Industry Financial Overview Profit Recovery Was Set Back in 2011 by High Catastrophe Loss & Other Factors 8 $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* A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs A combined ratio of about 100 generated ~5.5% ROE in 2009/10, 10% in 2005 and 16% in 1979 Combined Ratio / ROE 15.9% 110 18% 108.2 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 7.4% 92.7 8.8% 100.8 12% 7.5% 9% 4.4% 6% 90 3.0% 85 3% 80 0% 1978 1979 2003 2005 2006 Combined Ratio 2007 2008 2009 2010 2011:Q3* ROE* Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs * 2008 -2011 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011:Q3 combined ratio including M&FG insurers is 109.9, ROAS = 1.9%. Source: Insurance Information Institute from A.M. Best and ISO data. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011* ROE 25% 1977:19.0% 1987:17.3% 20% History suggests next ROE peak will be in 2016-2017 2006:12.7% 1997:11.6% 15% 9 Years 2011: 3.0%* 10% 5% 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* -5% 1984: 1.8% *Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS through Q3 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG. Source: Insurance Information Institute; NAIC, ISO, A.M. Best. Profitability and Growth in New York P/C Insurance Markets Analysis by Line and Nearby State Comparisons 15 RNW All Lines: NY vs. U.S., 2000-2010 (Percent) 20% 15% 10% 5% 0% P/C Insurer profitability in NY is below that of the US overall from 2000-2010 US: 7.1% NY: 3.7% -5% -10% -15% -20% -25% 00 01 02 US All Lines Sources: NAIC. 03 04 05 06 07 08 09 10 NY All Lines 16 RNW PP Auto: NY vs. U.S., 2000-2010 25% 20% 15% 10% Average 2000-2010 5% US: 7.1% 0% NY: 8.0% -5% 00 01 02 US PP Auto Sources: NAIC. 03 04 05 06 07 08 09 10 NY PP Auto 17 RNW Comm. Auto: NY vs. U.S., 2000-2010 (Percent) Commercial Auto profitability in NY is generally below the US average 20% 15% 10% 5% Average 2000-2010 0% US: 8.5% -5% NY: 6.1% -10% 00 01 02 US Comm Auto Sources: NAIC. 03 04 05 06 07 08 09 10 NY Comm Auto 18 RNW Comm. Multi-Peril: NY vs. U.S., 2000-2010 (Percent) 30% 20% 10% 0% -10% -20% -30% -40% Average 2000-2010 -50% US: 8.2% -60% NY: 4.8% -70% 00 01 02 US Comm M-P Sources: NAIC. 03 04 05 06 07 08 09 10 NY Comm M-P 19 RNW Homeowners: NY vs. U.S., 2000-2010 (Percent) Average 2000-2010 US: 4.9% 25% NY: 18.1% 20% 15% 10% 5% 0% -5% -10% 00 01 02 US HO Sources: NAIC. 03 04 05 06 07 08 09 10 NY HO 20 RNW Workers Comp: NY vs. U.S., 2000-2010 (Percent) 15% 10% 5% 0% Average 2000-2010 US: 6.1% -5% NY: 4.6% -10% 00 01 02 US WComp Sources: NAIC. 03 04 05 06 07 08 09 10 NY WComp 21 All Lines: 10-Year Average RNW NY & Nearby States 2001-2010 Vermont 12.2% 11.1% Connecticut 10.9% Massachussets 8.0% 7.1% 6.6% 3.2% New Jersey New York All Lines profitability is below the US and regional average U.S. Pennsylvania New York 0% 5% Source: NAIC, Insurance Information Institute 10% 15% Top Ten Most Expensive And Least Expensive States For Automobile Insurance, 2009 (1) Rank Most expensive states Average expenditure Rank Least expensive states Average expenditure 1 D.C. $1,128 1 North Dakota $510 2 New Jersey 1,101 2 South Dakota 521 3 Louisiana 1,099 3 Iowa 532 4 New York 1,057 4 Idaho 555 5 Delaware 1,021 5 Nebraska 559 6 Florida 1,006 6 Kansas 578 7 Rhode Island 969 7 Wisconsin 590 8 Nevada 944 8 Maine 598 9 Connecticut 952 9 North Carolina 610 10 Maryland 929 10 Indiana 620 New York ranked 4th in 2009, with an average expenditure for auto insurance of $1,057. (1) Based on average automobile insurance expenditures. Source: © 2011 National Association of Insurance Commissioners. 24 Comm. Auto: 10-Year Average RNW NY & Nearby States 2000-2009 17.4% 14.3% Vermont Massachussets 12.6% Connecticut 8.5% U.S. 7.8% 6.9% 6.1% New York Commercial Auto profitability is below the US and regional average Pennsylvania New Jersey New York 0% 5% 10% Source: NAIC, Insurance Information Institute 15% 20% Comm. M-P: 10-Year Average RNW NY & Nearby States 2000-2009 18.1% 15.3% Connecticut 13.5% Vermont 11.9% 10.3% 8.0% 4.3% 0% 5% 10% Source: NAIC, Insurance Information Institute Massachussets New Jersey New York Commercial MultiPeril profitability is below the US and regional average 15% 20% Pennsylvania U.S. New York Homeowners: 10-Year Average RNW NY & Nearby States 2000-2009 19.9% Connecticut 18.5% New York 17.4% Massachussets 14.3% Pennsylvania 13.7% 11.9% 4.7% 0% 5% 10% New Jersey New York Homeowners profitability is above the US and regional average 15% Source: NAIC, Insurance Information Institute 20% 25% Vermont U.S. Workers Comp: 10-Year Average RNW NY & Nearby States 2000-2010 7.5% 6.4% New York Workers Comp profitability is below the US average and regional average Massachussets U.S. 6.0% Connecticut 5.9% Pennsylvania 5.8% Vermont 5.0% New York 3.5% New Jersey 0% 2% 4% Source: NAIC, Insurance Information Institute 6% 8% All Lines DWP Growth: NY vs. U.S., 2001-2010 0.0% 0.0% 0.5% 1.5% 5% 3.4% 4.0% 2.2% 0.3% 7.4% 8.9% 10% 9.8% 7.9% 15% 12.0% 12.2% 20% 14.3% 16.9% (Percent) -5% -3.3% -3.6% -2.1% -2.1% 0% -10% 01 Source: SNL Financial. 02 03 US DWP: All Lines 04 05 06 07 08 NY DWP: All Lines 09 10 30 Comm. Lines DWP Growth: NY vs. U.S., 2001-2010 -2.5% -1.7% -10% -7.3% -7.3% 4.0% -1.2% 0.2% 2.2% 0% 5.4% 7.4% 3.3% 1.4% 10% 4.5% 5.1% 20% 15.3% 14.6% 30% 11.4% 9.0% 19.0% 24.1% (Percent) -20% 01 02 03 04 US DWP: Comm. Lines Source: SNL Financial. 05 06 07 08 NY DWP: Comm. Lines 09 10 31 Personal Lines DWP Growth: NY vs. U.S., 2001-2010 (Percent) 1.1% 2.2% 2.5% 2.2% -5% 09 10 -0.6% -1.5% 0% -0.1% 1.2% 1.2% 0.7% 2.3% 2.3% 5% 5.4% 3.3% 10% 8.2% 9.4% 15% 9.2% 7.1% 11.1% 9.5% 20% -10% 01 02 03 04 US DWP: Personal Lines Source: SNL Financial. 05 06 07 08 NY DWP: Personal Lines 32 Private Passenger Auto DWP Growth: NY vs. U.S., 2001-2010 (Percent) -0.1% 1.6% 1.5% 2.0% 09 10 -0.4% -0.1% -4.3% -5% -2.6% 0% -2.0% 0.0% 0.5% 5% 0.6% 3.6% 1.6% 7.9% 6.5% 10.2% 9.9% 10% 8.2% 10.3% 15% -10% 01 Source: SNL Financial. 02 03 US DWP: PP Auto 04 05 06 07 08 NY DWP: PP Auto 33 Homeowner’s MP DWP Growth: NY vs. U.S., 2001-2010 (Percent) 25% 4.9% 2.8% 09 10 0.5% 3.9% 3.5% 4.4% 8.2% 4.2% 5% 7.4% 5.5% 7.3% 7.7% 11.1% 9.7% 9.1% 7.9% 10% 8.3% 6.0% 15% 13.5% 14.4% 20% 0% 01 Source: SNL Financial. 02 03 04 US DWP: HO Lines 05 06 07 08 NY DWP: HO Lines 34 New York No-Fault Update Fraud and Abuse Have Cost New Yorkers Nearly $1 Billion Since 2005 35 Average No-Fault Claim Severity, 2011:Q3* $45,000 $40,000 $36,229 $50,000 MI, NJ, NY and FL currently are the largest states that have the most severe problems in their no-fault system $35,000 $4,194 $2,919 $2,221 $1,868 MN $5,160 NY $5,042 FL $4,615 $10,000 $5,510 $15,000 $7,194 $20,000 $8,019 $25,000 NY has the 4th highest auto no-fault average claim cost (severity) in the US $9,108 $17,664 $30,000 KY DC HI ND PA KS UT MA $5,000 $0 MI NJ Several States Including NY Have Severe and Growing Problems With Rampant Fraud and Abuse in their No-Fault Systems. Claim Severities Are Up Sharply. *Average of the four quarters ending 2011:Q3. Source: ISO/PCI Fast Track data; Insurance Information Institute. 37 Increase in No-Fault Claim Severity: Selected States, 2004-2011* +48.6% $40,000 $36,229 $35,000 +45.6% $30,000 $25,000 $24,385 $17,664 $20,000 $15,000 +36.6% +36.5% +38.4% $12,136 $10,000 $5,871 $8,019 $9,108 $6,674 $5,198 $7,194 $5,000 $0 Michigan New Jersey New York 2004 Florida Minnesota 2011* The no-fault systems in MI, NJ, NY, FL, and MN are under stress due to rising fraud and abuse, which leads to higher premiums for honest drivers. *2011 figures are for the 4 quarters ending 2011:Q3. Sources: Insurance Information Institute research from ISO/PCI Fast Track data. 38 New York State No-Fault Claim Frequency and Severity, 1997–2011:Q3 $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 Claim Frequency was up 27% in 2011:Q1 from 2008:Q3 Claim Severity nearly reached a record high in 2010:Q2: $8,990 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 1997 1998 1999 2000 1:01 1:02 1:03 1:04 2:01 2:02 2:03 2:04 3:01 3:02 3:03 3:04 4:01 4:02 4:03 4:04 5:01 5:02 5:03 5:04 6:01 6:02 6:03 6:04 7:01 7:02 7:03 7:04 8:01 8:02 8:03 8:04 9:01 9:02 9:03 9:04 10:01 10:02 10:03 10:04 11:01 11:02 11:03 $5,000 2.4% 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 $8,407 $7,394 $8,285 $8,062 Avg. Claim Severity is up 44% since 2004:Q4 though 2011:Q3 No-Fault Claim Severity About 10% of No-Fault Claim Costs in 2011 Were Estimated to Be Attributable to Fraud and Abuse *2011 figure is based on data for the 4 quarters ending Q3:2011. Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data. 41 New York’s No-Fault Fraud Tax: Estimated Aggregate Annual Cost, 2005-2011E ($ Millions)* Fraud Tax ($ Millions) $250 The total fraud tax levied on New York vehicle owners exceeded more than $200 million in 2010 for the second straight year. NY’s no fault fraud tax burden soared by 241% between 2006 and 2009 $231.0 $203.6 $192.9 $200 $136.0 $150 $116.3 $100 $67.8 $50 $1.4 The total fraud tax levied on New York vehicle owners will total and estimated $136 million in 2011. The figure fell due to a drop in average claim severity and a flattening in frequency $0 2005 2006 2007 2008 2009 2010 2011E No-Fault Fraud Is Costing Honest New York State Drivers Hundreds of Millions of Dollars *2011 figure is based on data for the 4 quarters ending Q2:2011, adjusted by I.I.I. for 2011:Q1 data anomaly. Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data. 44 New York’s No-Fault Fraud Tax: Estimated Cumulative Cost, 2005-2011E ($ Millions)* Cumultaive Fraud Tax ($ Millions) The cumulative no-fault fraud tax burden on New York vehicle owners exceeded $949 million from 2005 through 2011 $1,000 $900 $800 $949.0 $812.9 $700 $609.3 $600 $500 $400 $378.4 $300 $200 $100 $185.5 $69.2 $1.4 $0 2005 2006 2007 2008 2009 2010 2011E Cumulative No-Fault Fraud Has Cost Honest New York State Drivers and Their Insurers Nearly $1 Billion Since 2005 *2011 figure is based on data for the 4 quarters ending Q2:2011, adjusted by I.I.I. for 2011:Q1 data anomaly. Source: Insurance Information Institute calculations and research from ISO/PCI Fast Track data. 45 Global Catastrophe Loss Developments and Trends 2011 Will Rewrite Catastrophe Loss and Insurance History But Will Losses Turn the Market? 52 Global Catastrophe Loss Summary: 2011 2011 Was the Highest Loss Year on Record for Economic Losses Globally Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss $380 Billion in Economic Losses Globally (New Record) New record, exceeding the previous record of $270B in 2005 $105 Billion in Insured Losses Globally 2011 losses were 2.5 times 2010 insured losses of $42B Second only to 2005 on an inflation adjusted basis (new record on a unadjusted basis) Over 5 times the 30-year average of $19B $72.8 Billion in Economic Losses in the US Represents a 129% increase over the $11.8 billion amount through the first half of 2010 $35.9 Billion in Insured Losses in the US Arising from 171 CAT Events Fifth highest year on record Represents 51% increase over the $23.8 billion total in 2010 Source: Munich Re; Insurance Information Institute. 53 Natural Loss Events, 2011 World Map Winter Storm Joachim France, Switzerland, Germany, 15–17 Dec. Wildfires Canada, 14–22 May Severe storms, tornadoes USA, 20–27 May Hurricane Irene USA, Caribbean 22 Aug.–2 Sept. Floods USA, April–May Drought Severe storms, tornadoes USA, Oct. 2010– USA, 22–28 April ongoing Flash floods, floods Italy, France, Spain 4–9 Nov. Earthquake Turkey 23 Oct. Earthquake, tsunami Japan, 11 March Wildfires USA, April/Sept. Floods Pakistan Aug.–Sept. Floods, flash floods Australia, Dec. 2010–Jan. 2011 Landslides, flash floods Brazil, 12/16 Jan. Natural catastrophes Selection of significant loss events (see table) Source: MR NatCatSERVICE Cyclone Yasi Australia, 2–7 Feb. Floods Thailand Aug.–Nov. Floods, landslides Guatemala, El Salvador 11–19 Oct. Number of Events: 820 Tropical Storm Washi Philippines, 16–18 Dec. Drought Somalia Oct. 2010–Sept. 2011 Geophysical events (earthquake, tsunami, volcanic activity) Meteorological events (storm) Earthquake New Zealand, 22 Feb. Earthquake New Zealand, 13 June Hydrological events (flood, mass movement) Climatological events (extreme temperature, drought, wildfire) 54 Top 16 Most Costly World Insurance Losses, 1970-2011** (Insured Losses, 2011 Dollars, $ Billions) $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Taken as a single event, the Spring 2011 tornado and thunderstorm season would likely become the 5th costliest event in global insurance history 5 of the top 14 most expensive catastrophes in world history have occurred within the past 2 years $47.6 $37.5 $19.1 $11.9 $9.7 $10.0 $9.3 $8.5 $8.3 $8.1 $7.7 Hugo (1989) Winter Storm Daria (1991) Chile Quake (2010) $21.3 $24.0 $25.0 $13.0 $13.1 Ivan Typhoon Charley Thailand Wilma New Ike Northridge Spring WTC (2004) Mirielle (2004) Floods (2005) Zealand (2008) (1994)Tornadoes/ Terror (1991) (2011) Quake Storms Attack (2011) (2011) (2001) *Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only. **Figures do not include federally insured flood losses. Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research. Andrew Japan Katrina (1992) Quake, (2005) Tsunami (2011)* 60 U.S. Insured Catastrophe Loss Update 2011 Was One of the Most Expensive Years on Record 63 Top 14 Most Costly Disasters in U.S. History (Insured Losses, 2011 Dollars, $ Billions) $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Taken as a single event, the Spring 2011 tornado and storm season are is the 4th costliest event in US insurance history $19.1 $4.3 $4.4 $5.5 $6.5 Irene (2011) Jeanne (2004) Frances (2004) Rita (2005) $7.7 $8.5 $9.0 Hugo (1989) Ivan (2004) Charley (2004) Hurricane Irene became the 11th most expense hurricane in US history $21.3 $47.6 $24.0 $25.0 $11.9 $13.1 Wilma (2005) Ike Northridge Spring 9/11 (2008) (1994) Tornadoes Attack & Storms* (2001) (2011) Andrew (1992) Katrina (2005) *Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30. Sources: PCS; Insurance Information Institute inflation adjustments. 64 Natural Disasters in the United States, 1980 – 2011 Number of Events (Annual Totals 1980 – 2011) 300 There were 117 natural disaster events in 2011 250 Number 200 150 100 37 8 50 51 2 1980 1982 1984 1986 1988 Geophysical (earthquake, tsunami, volcanic activity) Source: MR NatCatSERVICE 1990 1992 1994 1996 1998 Meteorological (storm) Hydrological (flood, mass movement) 2000 2002 2004 2006 2008 2010 Climatological (temperature extremes, drought, wildfire) 65 Losses Due to Natural Disasters in the US, 1980–2011 (Overall & Insured Losses) (Overall and Insured Losses) (2011 Dollars, $ Billions) 2011 was the 5th most expensive year on record for insured catastrophe losses in the US. Approximately 50% of the overall cost of catastrophes in the US was covered by insurance in 2011 2011 Overall Losses: $72.8 Bill Insured Losses: $35.9 Bill Insured losses (in 2011 values) Overall losses (in 2011 values) Source: MR NatCatSERVICE © 2011 Munich Re 66 US Insured Catastrophe Losses ($ Billions, 2011 Dollars) $100 $32.6 $14.1 $28.5 $10.3 $11.2 $71.7 $32.9 $15.9 $7.4 $6.0 $11.3 $14.0 $3.7 $10.7 $12.3 $8.6 $7.8 $4.7 $13.7 $40 $25.8 $36.9 $60 $33.9 $80 $20 Record Tornado Losses Caused 2011 CAT Losses to Surge $7.3 $120 $100.0 $100 Billion CAT Year is Coming Eventually $0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20?? US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation Adjusted Basis *PCS estimate through Sept. 30, 2011. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. 68 2011’s Most Expensive Catastrophes, Insured Losses $7,300 Thunderstorms, Apr. 22-26 $6,900 Thunderstorms, May 20-27 $5,000 Hurricane Irene, Aug. 26-28** $2,000 Thunderstorms, Apr. 3-5 $1,510 Thunderstorms, Apr. 8-11 $1,400 Thunderstorms, Apr. 14-16 $1,200 Thunderstorms, Jun. 16-22 Texas Drought, 2011* $1,000 Thunderstorms, Jul. 10-14 $980 Winter Storm, Jan. 31-Feb. 3 $975 Thunderstorms, Aug. 18-19 $840 Thunderstorms, Apr. 19-20 $830 Wildfire, Sep. 4-19 $530 Flooding, April* $500 $0 Includes approximately $2B in losses for May 22 Joplin tornado $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 **Includes $700 million in flood losses insured through the National Flood Insurance Program. Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute. Includes $1.65B in AL, mostly in the Tuscaloosa and Birmingham areas 8.1 4.4 2010 2008 2006 1.6 2.6 2.7 3.3 3.3 1.6 2002 2004 1.6 2000 1998 1.0 1996 5.0 5.4 3.6 2.9 2.3 2.1 1990 1992 1.2 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 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 1966 3.0 3.6 0.4 1964 1962 0.8 1.1 1.1 0.1 0.9 1 0 1960 5 4 3 2 5.9 1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.70* 8 7 6 3.3 2.8 10 9 8.8 Avg. CAT Loss Component of the Combined Ratio by Decade 1994 Combined Ratio Points 9.0 Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011* The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades *Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data. 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. 71 U.S. Thunderstorm Loss Trends, 1980 – 2011 Thunderstorm losses in 2011 totaled a record $25.8 billion Average thunderstorm losses are up more than 5 fold since the early 1980s Source: Property Claims Service, MR NatCatSERVICE Hurricanes get all the headlines, but thunderstorms are consistent producers of large scale loss. 2008-2011 are the most expensive years on record. 72 U.S. Winter Storm Loss Trends, 1980 – 2011 Insured winter storm losses in 2011 totaled $2.0 billion. Average winter storm losses have nearly doubled since the early 1980s Source: Property Claims Service, MR NatCatSERVICE 73 U.S. Insured Catastrophe Losses by Cause of Loss, 2011 ($ Millions) Flood , $535, (1.5%) Geological Events, $50, (0.1%) Winter Storms, $2,017 Wildfires, $855 Other, $1,000 2.8% Hurricanes & Tropical Storms, 1.5% $5,510 5.6% 15.4% Thunderstorm/ Tornado losses were 2.5 times above the 30year average 72.1% Thunderstorms (Incl. Tornadoes , $25,813 2011’s insured loss distribution was unusual with tornado and thunderstorm accounting for the vast majority of loss . Source: ISO’s Property Claim Services Unit, Munich Re; Insurance Information Institute. 76 2011: Nowhere to Run, Nowhere to Hide Most of the Country East of the Rockies Suffered Severe Weather in 2011, Impacting Most Insurers 78 Number of Federal Disaster Declarations, 1953-2011* 0 99 81 75 59 63 48 52 56 44 32 36 32 38 43 45 11 31 34 27 28 23 24 21 15 23 22 25 29 17 17 19 11 11 22 20 25 25 12 12 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 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* 7 7 13 17 18 16 16 40 30 38 42 48 46 46 60 20 69 65 80 The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s record 81 declarations. 50 45 45 49 100 There have been 2,049 federal disaster declarations since 1953. The average number of declarations per year is 34 from 1953-2010, though that few haven’t been recorded since 1995. 75 120 The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011 *Through December 31, 2011. Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute. Federal Disasters Declarations by State, 1953 – 2011: Highest 25 States* Over the past nearly 60 years, Texas has had the highest number of Federal Disaster Declarations 39 42 45 45 44 40 40 46 47 47 47 48 48 50 51 53 53 55 55 63 50 50 58 60 65 70 70 Disaster Declarations 80 78 90 86 100 30 20 10 0 TX CA OK NY FL LA AL KY AR MO IL MS TN IA MN KS NE PA WV OH VA WV ND NC IN *Through Dec. 31, 2011. Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute. 80 Federal Disasters Declarations by State, 1953 – 2011: Lowest 25 States* Over the past nearly 60 years, Wyoming, Utah and Rhode Island had the fewest number of Federal Disaster Declarations 9 9 10 9 11 14 15 16 17 17 22 23 24 24 25 25 26 26 27 33 35 36 39 33 20 20 28 30 36 Disaster Declarations 40 39 50 0 ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC RI UT WY *Through Dec. 31. Includes Puerto Rico and the District of Columbia. Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute. 81 SPRING 2011 TORNADO & SEVERE STORM OUTBREAK 2011 Losses Are Putting Pressure on US P/C Insurance and Reinsurance Markets 82 Number of Tornadoes and Related Deaths, 1990 – 2011 800 600 1,894 1,282 1,098 1,103 1,376 1,216 1,148 1,173 1,234 1,082 1,297 1,173 1,071 941 1,000 1,132 1,200 1,133 1,400 552 There were 1,884 tornadoes recorded in the US in 2011 400 600 500 400 300 200 Number of Deaths Number of Tornadoes 1,600 1,345 1,424 Number of Deaths 1,800 1,692 1,819 1,156 Number of Tornadoes 1,264 2,000 Tornadoes claimed more than 550 lives in 2011, the most since 1925 100 200 0 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P Insurers Expect to Pay at Least $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service. 83 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# 85 Insurers Making a Difference in Impacted Communities Destroyed home in Tuscaloosa. Insurers will pay some 165,000 claims totaling $2 billion in the Tuscaloosa/ Birmingham areas alone. Presentation of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm Recovery Fund Source: Insurance Information Institute 86 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# 87 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# 88 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# 89 New York’s Catastrophe Loss History: 2011 NY May Not Be a Gulf Coastal State, but It is No Stranger to Catastrophe 91 Severe Weather Reports in New York, January 1—December 31, 2011 There were 653 severe weather reports in NY in 2011 MN Total Reports = 653 Tornadoes = 17 (Red) Hail Reports = 197 (Green) Wind Reports = 439 (Blue) Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 92 The BIG Question: When Will the Market Turn? Are Catastrophes and Other Factors Pressuring Insurance Markets? 93 Criteria Necessary for a “Market Turn”: All Four Criteria Must Be Met Criteria Sustained Period of Large Underwriting Losses Material Decline in Surplus/ Capacity Status Comments •Apart from 2011 CAT losses, overall p/c underwriting losses remain modest •Combined ratios (ex-CATs) still in low 100s (vs. 110+ at onset of last hard market) Early Stage, •Prior-year reserve releases continue to reduce u/w losses, Inevitable boost ROEs, though more modestly Entered 2011 At Record High; Since Fallen Tight Reinsurance Somewhat in Market Place Renewed Underwriting Some Firming & Pricing esp. in Discipline Property, WC •Surplus hit a record $565B as of 3/31/11 •Fell by 4.6% through 9/30/11 (latest available) •Little excess capacity remains in reinsurance markets •Weak growth in demand for insurance is insufficient to absorb much excess capacity •Much of the global “excess capacity” was eroded by cats •Higher prices in Asia/Pacific •Modestly higher pricing for US risks •Commercial lines pricing trends have turned from negative to flat or up in some lines (property, WC); Casualty is flat. •Competition remains intense as many seek to maintain market share Sources: Barclays Capital; Insurance Information Institute. 94 1. UNDERWRITING Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market? 96 P/C Insurance Industry Combined Ratio, 2001–2011:Q3* As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, Reserve Releases Relatively Low CAT Losses, Reserve Releases 120 115.8 110 Cyclical Deterioration Best Combined Ratio Since 1949 (87.6) Avg. CAT Losses, More Reserve Releases 108.2 107.5 100.1 100 Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market 101.0 100.8 98.4 99.3 100.8 95.7 92.6 90 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* * Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9 Sources: A.M. Best, ISO. 97 Underwriting Gain (Loss) 1975–2011* ($ Billions) $35 $25 Cumulative underwriting deficit from 1975 through 2010 is $455B $15 Underwriting losses in 2011 at $34.9 through Q3 will be largest since 2001 $5 -$5 -$15 -$25 -$35 -$45 -$55 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 1011* Large Underwriting Losses Are NOT Sustainable in Current Investment Environment * Includes mortgage and financial guaranty insurers in all years Sources: A.M. Best, ISO; Insurance Information Institute. Financial Strength & Underwriting Cyclical Pattern is P-C Impairment History is Directly Tied to Underwriting, Reserving & Pricing 101 0 16 19 21 18 14 15 12 16 18 19 28 31 35 41 49 50 47 60 58 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 29 34 40 50 48 50 31 34 60 49 70 36 3 small insurers in Missouri did encounter problems in 2011 following the May tornado in Joplin. They were absorbed by a larger insurer and all claims were paid. 55 P/C Insurer Impairments, 1969–2011 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. 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. 104 Performance by Segment: Personal & Commercial Lines 107 158.4 Homeowners Insurance Combined Ratio: 1990–2011P 170 160 116.0 106.7 105.7 116.8 95.6 100.3 109.3 94.4 88.9 90 98.2 100 121.7 111.4 108.2 109.4 118.4 112.7 101.0 110 113.6 120 117.7 130 113.0 140 121.7 150 80 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P Homeowners Line Could Deteriorate in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected Due to Local Catastrophe Loss Activity Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P). 08 09 10 11P 100.5 101.0 06 101.3 05 100.2 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 (1990-2010); Insurance Information Institute (2011P). Commercial Lines Combined Ratio, 1990-2012F Commercial Lines Combined Ratio 125 122.3 118.8 120 115 110 Commercial lines underwriting performance in 2011 was the worst since 2002 112.5 110.2 109.4 112.3 111.1 109.7 110.2 109.5 110.2 108.2 107.6 105.4 104.1 105 104.1 103.9 102.7 102.5 102.0 98.9 100 95 93.7 91.2 Source: A.M. Best; Insurance Information Institute 12F 11P 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 90 90 104.4 07 08 118.0 116.8 110.6 103.6 03 98.4 02 102.7 97 107.0 96 110.0 101.0 100 100.0 105 97.0 110 102.0 115 107.0 120 110.9 115.3 125 118.2 130 121.7 Workers Compensation Combined Ratio: 1994–2011P 95 90 85 80 94 95 98 99 00 01 04 05 06 09 Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They Have Been in a Decade Sources: A.M. Best (1994-2010); Insurance Information Institute (2011P). 10 11P 2. SURPLUS/CAPITAL/CAPACITY Have Large Global Losses Reduced Capacity in the Industry, Setting the Stage for a Market Turn? 112 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 *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. Quarterly Surplus Changes Since 2011:Q1 Peak 11:Q2: -$5.6B (-1.0%) 11:Q3: -$26.1B (-4.6%) 114 3. REINSURANCE MARKET CONDITIONS Record Global Catastrophes Activity is Pressuring Pricing 121 Global Property Catastrophe Rate on Line Index, 1990-2011 YTD (6/1/11) A modest increase in global property catastrophe reinsurance pricing was evident in June 1 renewals in the wake of record global catastrophe losses. Jan. 1, 2012 renewals were up modestly or flat in the US but higher in CAT-impacted areas. Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011. Historical Capital Levels of Guy Carpenter Reinsurance Composite, 1998—2Q11 Most excess reinsurance capacity was removed from the market in 2011, but there does not appear to be a shortage, leading relatively flat 2012 reinsurance renewals except in areas hit hard by CATs. Source: Guy Carpenter, GC Capital Ideas.com, November 23, 2011. 4. RENEWED PRICING DISCIPLINE Is There Evidence of a Broad and Sustained Shift in Pricing? 128 Soft Market Persisted in 2010 but Growth Returned: More in 2011? (Percent) 1975-78 1984-87 25% 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 3Year Decline Since 1930-33. 20% 15% 2011:Q3 growth was +3.1% 10% 5% 0% NWP was up 0.9% in 2010 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* -5% *2011 figure is through first 9 months vs. same period in 2010 Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute. 129 5% 0% -5% -10% Sources: ISO, Insurance Information Institute. 2011:Q3 2011:Q2 2011:Q1 2010:Q4 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% 1.3% 3.5% 1.6% 4.1% 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% 10.2% 15% 2002:Q2 20% 2002:Q1 P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter Through 2011:Q3, growth in personal lines predominating cos. (+3.1%) and commercial lines predominating cos. (+3.9%), diversified (+2.3%) Finally! Back-to-back quarters of net written premium growth (vs. the same quarter, prior year) 130 Monthly Change* in Auto Insurance Prices, 1991–2011* 10% 8% Cyclical peaks in PP Auto tend to occur approximately every 10 years (early 1990s, early 2000s and likely the early 2010s) Pricing peak occurred in 2010 6% 4% 2% 0% “Hard” markets tend to occur during recessionary periods -2% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 *Percentage change from same month in prior year; through October 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. 131 Average Commercial Rate Change, All Lines, (1Q:2004–4Q:2011) (Percent) 2% 0% -2% -4% -6% -8% -10% -12% -14% -16% -0.1% 1Q04 -3.2% 2Q04 3Q04 -5.9% -7.0% 4Q04 -9.4% 1Q05 2Q05 -9.7% -8.2% 3Q05 -4.6% 4Q05 1Q06 -2.7% 2Q06 -3.0% -5.3% 3Q06 -9.6% 4Q06 1Q07 -11.3% -11.8% 2Q07 3Q07 -13.3% 4Q07 -12.0% 1Q08-13.5% 2Q08 -12.9% 3Q08 -11.0% -6.4% 4Q08 -5.1% 1Q09 2Q09 -4.9% -5.8% 3Q09 -5.6% 4Q09 1Q10 -5.3% 2Q10 -6.4% -5.2% 3Q10 -5.4% 4Q10 1Q11 -2.9% 2Q11 -0.1% 0.9% 3Q11 2.8% 4Q11 4% Pricing as of Q3:2011 was positive for the first time since 2003. Slightly stronger gains in Q4. KRW Effect Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute Q2 2011 marked the 30th consecutive quarter of price declines 132 Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q3 Percentage Change (%) Peak = 2001:Q4 +28.5% Pricing Turned Negative in Early 2004 and Has Been Negative Ever Since Pricing turned positive (+0.9%) in Q3:2011, the first increase in nearly 7 years (Q4:2003) KRW Effect: No Lasting Impact Trough = 2007:Q3 -13.6% Source: Council of Insurance Agents and Brokers; Insurance Information Institute. 133 Change in Commercial Rate Renewals, by Line: 2011:Q4 Percentage Change (%) Property lines are showing larger increases than casualty lines, with the exception of workers compensation 8.0% 7.0% 7.5% 5.7% 6.0% 5.0% 2.0% 2.0% 2.1% 2.2% 2.3% Comml Auto D&O General Liability Umbrella 3.0% EPL 4.0% 2.7% 3.0% 2.0% Workers Comp Commercial Property Bus. Interruption Construction 0.0% 0.8% Surety 1.0% Major Commercial Lines Renewed Uniformly Upward in Q4:2011 for Only the Second Time Since 2003; Property Lines & Workers Comp Leading the Way Source: Council of Insurance Agents and Brokers; Insurance Information Institute. 135 Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010 Top 25 States 44.8 45 North Dakota is the growth juggernaut of the P/C insurance industry—too bad nobody lives there… 35 30 3.0 AL 1.1 3.1 WA TN 3.7 ID 1.2 3.8 NC AK 4.7 AR 1.5 5.2 UT WI 5.4 6.8 SC LA SD 0 ND 5 DC 7.1 8.1 MS NM 8.1 DE 11.9 MT 9.1 12.3 TX 10 NE 12.4 13.9 KS IA 14.2 15 WV 16.6 OK 20 17.3 19.8 25 WY 25.4 Pecent change (%) 40 Sources: SNL Financial LC.; Insurance Information Institute. 139 Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010 Bottom 25 States Sources: SNL Financial LC; Insurance Information Institute. -15.5 -13.5 NV CA -8.3 AZ -14.2 -8.2 MA ME HI NJ CO RI OH VT CT IL MI -8 NH -5.8 -4.8 -4.7 -4.5 -4.1 -3.6 -3.4 -2.9 -2.8 FL OR VA MN GA NY IN KY -20 MO -15 PA States with the poorest performing economies also produced the most negative net change in premiums of the past 5 years US -10 -5.7 US Direct Premiums Written declined by 1.6% between 2005 and 2010 -2.5 -1.7 -1.6 -1.4 -0.8 -0.5 -0.3 -0.1 -5 MD Pecent change (%) 0 0.1 0.6 0.7 5 140 INVESTMENTS: THE NEW REALITY Investment Performance is a Key Driver of Profitability Does It Influence Underwriting or Cyclicality? 142 Property/Casualty 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 through Q3:2011 were $2.1B above the same period in 2010—a surprise given falling rates and flat stock markets $20 $10 $0 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:Q3 Investment Gains through Q3:2011 Were Surprisingly Robust. Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to Fall by 50% in 2008 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. -$7.98 -$19.81 -$15 -$20 -$25 -$5.70 $5.50 $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, 1990-2011:3Q 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011:Q3 Insurers Are Posting 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 Sources: A.M. Best, ISO, Insurance Information Institute. 144 Treasury Yield Curves: Pre-Crisis (July 2007) vs. Dec. 2011 6% 5% 4% 3% 2% 4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2014. 5.00% 4.93% 5.00% 5.19% 2.98% 2.67% 1.98% 1.43% 0.89% 1% 0.00% 0.01% 0.05% 0.12% 0.26% 1M 3M 6M 1Y 2Y 0.39% November 2011 Yield Curve* Pre-Crisis (July 2007) 0% 3Y 5Y 7Y 10Y 20Y 30Y The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through 2013 and Possibly into 2014 Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute. 147 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. 148 Inflation Is it a Threat to Claim Cost Severities 155 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 2.1 2.1 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 -1.0 -0.4 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, 10/11 and 1/12 (forecasts). 156 The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Would Also Help Absorb Excess Capital 167 1.6% 2% 0.6% 4% The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8% 1.1% 1.8% 2.5% 3.6% 3.1% 2.7% 0.9% 3.2% 2.3% 2.9% 6% 4.1% Real GDP Growth (%) 5.0% 3.9% 3.8% 2.5% 2.3% 0.4% 1.3% 1.8% 2.8% 2.0% 2.3% 2.3% 2.7% 2.6% 2.7% 2.8% 3.0% US Real GDP Growth* -2% -4% -6% -8% 2000 2001 2002 2003 2004 2005 2006 07:1Q 07:2Q 07:3Q 07:4Q 08:1Q -0.7% 08:2Q 08:3Q -4.0% 08:4Q-6.8% 09:1Q -4.9% 09:2Q -0.7% 09:3Q 09:4Q 10:1Q 10:2Q 10:3Q 10:4Q 11:1Q 11:2Q 11:3Q 11:4Q 12:1Q 12:2Q 12:3Q 12:4Q 13:1Q 13:2Q 13:3Q 13:4Q 0% Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway 2011 got off to a sluggish start, but growth is expected to proceed at a modest pace in 2012-2013 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 1/12; Insurance Information Institute. 168 1.9 1.7 1.5 1.3 1.1 0.9 0.7 0.5 The plunge and lack of recovery in homebuilding and in construction in general is holding back payroll exposure growth 0.55 0.59 0.60 0.71 0.87 2.1 New home starts plunged 72% from 2005-2009; A net annual decline of 1.49 million units, lowest since records began in 1959 1.19 1.01 1.20 1.29 1.46 1.35 1.48 1.47 1.62 1.64 1.57 1.60 1.71 1.85 1.96 2.07 1.80 1.36 0.91 (Millions of Units) 1.34 1.23 1.32 1.38 1.42 New Private Housing Starts, 1990-2022F 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 11F12F13F14F15F 16F17F 1822F Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute. 170 Auto/Light Truck Sales, 1999-2022F 11.6 10.4 15.4 15.5 15.4 15.1 14.7 14.4 13.7 12.8 New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is still far below 1999-2007 average of 17 million units, but a recovery is underway. 13.2 16.1 16.5 16.9 16.9 16.6 17.1 17.5 17.8 19 18 17 16 15 14 13 12 11 10 9 17.4 (Millions of Units) Job growth and improved credit market conditions will boost auto sales in 2012 and beyond 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F 16F 17F 1822F Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector. Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute. 171 Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures “Full Capacity” Percent of Industrial Capacity The US operated at 77.8% of industrial capacity in Nov. 2011, above the June 2009 low of 68.3% and a post-crisis high 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. 172 Sep 11 Jun 11 Mar 11 Dec 10 Sep 10 Jun 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 Jun 05 Sep 05 Mar 05 Jun 04 Mar 04 Dec 03 Sep 03 Jun 03 Mar 03 Dec 02 Sep 02 Jun 02 Mar 02 Dec 01 Jun 01 Sep 01 Mar 01 66% Dec 04 December 2007June 2009 Recession 68% Sep 04 70% Dollar Value* of Manufacturers’ Shipments Monthly, Jan 1992-Nov 2011 $ Millions $500,000 $400,000 The value of Manufacturing Shipments in Nov. 2011 is up 27.8% to $455B from its May 2009 trough. Nov. figure is only 6.2% below its previous record high. $300,000 Ja n92 Ja n93 Ja n94 Ja n95 Ja n96 Ja n97 Ja n98 Ja n99 Ja n00 Ja n 01 Ja n 02 Ja n 03 Ja n 04 Ja n 05 Ja n 06 Ja n 07 Ja n 08 Ja n 09 Ja n 10 Ja n 11 $200,000 Monthly shipments are nearly back to peak (in July 2008, 6 months into the recession). Trough in May 2009. Growth from trough to November 2011 was 27.8% *seasonally adjusted Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, November 2011, Jan. 4, 2012 173 Business Bankruptcy Filings, 1980-2011:Q3 90,000 80,000 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%* 2010 bankruptcies totaled 56,282, down 7.5% from 60,837 in 2009—which were up 40% from 2008 and the most since 1993. As of 2011:Q3 filings are down 15.4% from 2010: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 11 60,000 43,694 48,125 70,000 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 56,282 36,385 % Change Surrounding Recessions Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information Institute 180 Private Sector Business Starts, 1993:Q2 – 2011:Q1* 230 220 210 200 190 180 170 Business Starts 2006: 872,000 2007: 843,000 2008: 790,000 2009: 697,000 2010: 722,000 175 186 174 180 186 192 188 187 189 186 190 194 191 199 204 202 195 196 196 206 206 201 192 198 206 206 203 211 205 212 200 205 204 204 197 203 209 201 203 192 192 193 201 204 202 210 212 209 216 220 223 220 220 210 221 212 204 218 209 207 207 199 191 193 172 176 169 184 175 179 188 200 183 (Thousands) 722,000 new business starts were recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new business starts since 1993. Business starts remained weak in early 2011. 160 150 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure * Data through March 31, 2011 are the latest available as of January 16, 2012; Seasonally adjusted Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. 181 11 Industries for the Next 10 Years: Insurance Solutions Needed Health Care Health Sciences Energy (Traditional) Alternative Energy Agriculture Natural Resources Environmental Many industries are poised for growth, but many insurers do not write in these economic segments Technology (incl. Biotechnology) Light Manufacturing Export-Oriented Industries Shipping (Rail, Marine, Trucking) 182 Labor Market Trends Massive Job Losses Sapped the Economy and Commercial/Personal Lines Exposure, But Trend is Improving 183 Unemployment and Underemployment Rates: Stubbornly High in 2011, But Falling January 2000 through December 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 15.2% in Dec. 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 stood at 8.5% in December 10 Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983. 8 6 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 Dec 11 Peak rate in the last 30 years: 10.8% in November December 1982 Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market might finally be improving Source: US Bureau of Labor Statistics; Insurance Information Institute. 184 Monthly Change in Private Employment (800) (1,000) 144 229 16 62 75 -83 -334 -297 -215 -186 -262 -452 -109 Monthly Losses in Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period 212,000 private sector jobs were created in December -734 -667 -806 -707 -744 -649 (600) -12 -85 -58 -161 -253 -230 -257 -347 -456 -547 (400) Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 DecJan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 DecJan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 DecJan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 DecJan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec- (200) -14 0 65 97 23 213 65 127 42 15 79 200 186 400 51 61 117 143 112 193 128 167 94 261 219 241 99 75 173 72 220 120 134 212 January 2008 through December 2011* (Thousands) Private Employers Added 3.343 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute Unemployment Rates by State, November 2011: Highest 25 States* 8.0 8.2 8.4 8.5 8.5 8.7 8.7 8.7 9.0 9.1 9.1 8.7 8.1 8 9.1 9.4 9.8 9.9 9.9 10.0 10.0 10.5 11.3 10.5 10.0 10 10.6 Unemployment Rate (%) 12 13.0 14 In November, 43 states and the District of Columbia reported over-the-month unemployment rate decreases, 3 had increases, and 4 had no change. 6 4 2 0 NV CA DC MS RI FL IL NC GA SC MI KY NJ OR TN IN US AL AZ WA ID OH CT MO TX AR *Provisional figures for November 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 190 Unemployment Rates By State, November 2011: Lowest 25 States* 3.4 4 4.1 4.3 5.2 5.3 5.7 5.8 5.9 6.2 6.4 6.5 6.1 6 6.5 6.9 6.9 7.0 7.0 7.1 7.3 7.3 7.6 7.9 7.9 8.0 8 8.0 Unemployment Rate (%) 10 6.5 In November, 43 states and the District of Columbia reported over-the-month unemployment rate decreases, 3 had increases, and 4 had no change. 2 0 CO NY PA WV DE AK WI MT ME MA LA MD HI KS NM UT VA OK MN WY IA VT NH SD NE ND *Provisional figures for November 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 191 Payroll vs. Workers Comp Net Written Premiums, 1990-2011 Payroll Base* $Billions WC NWP $Billions Wage & Salary Disbursements WC NPW $7,000 7/90-3/91 $6,000 $5,000 $4,000 $3,000 $50 12/07-6/09 3/01-11/01 $45 WC premium volume dropped two years before the recession began $40 WC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in 2005 $2,000 $35 $30 $25 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11* Resumption of payroll growth and rate increases suggests WC NWP will grow again in 2012 *Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2011 is I.I.I. estimate Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I. 194 Insurance Information Institute Online: www.iii.org Thank you for your time and your attention! 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