The Financial Crisis & the
P/C Insurance Industry
Challenges Amid the
Economic Storm
Excess Surplus Lines Claims Association
Scottsdale, AZ
September 23, 2008
Robert P. Hartwig, Ph.D., CPCU, President
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
Presentation Outline
•
•
•
•
Federal Government Economic Bailout: Plan Summary, Insurer Implications
AIG’s Loan from the Fed: Structure of Agreement
Regulatory Aftershock: The Coming Regulatory Tsunami in Financial Services
Weakening Economy: Insurance Impacts & Implications
 Exposure Impacts: Commercial Insurance
 Inflation Threat Looming for Insurers?
•
•
•
•
•
•
•
•
•
Treasury “Blueprint” for Insurance Regulatory Modernization
Profitability
Underwriting Trends
Excess & Surplus Market Trends
Premium Growth
Capacity/Capital
Investment Overview
Catastrophic Loss
Shifting Legal Liability, Tort & Political Environment
Q&A
Troubled Asset
Relief Program
(a.k.a. “The Bailout”)
Plan Details &
Insurer Implications
Federal Government Financial
Services Rescue Package
THE SOLUTION: A 5-POINT PLAN
1. Mortgage Debt Purchases: Up to $700 billion in
mortgage debt to purchased by Feds
 Pricing: Debt Sold to Feds via Reverse Auction
•
•
•
Reverse auction is one in which sellers bid lowest price it will
accept from the government (i.e., rather a traditional auction
in which the highest bid from buyer wins). Helps ensure that
the Feds (taxpayer) does not overpay for questionable debt
Will be sold in $10 billion increments
Amassed portfolios will be run by 5-10 outside asset
managers in amounts ranging up to $50 billion
2. Fannie/Freddie Will Increase Mortgage Buying
•
Feds step-up buying MBS in open market
Source: Insurance Information Institute research.
Federal Government Financial
Services Rescue Package (cont’d)
3. Money Market Fund Stabilization: Commercial
Paper Market Froze After Mass Redemptions and
Lending Fears (“Breaking the Buck”)





Treasury will establish a 1-year temporary guaranty
program for the money-fund industry for deposits held as of
Sept. 19.
Will insure retail and institutional funds (but not those
investing exclusively in municipal and government debt)
Funds must pay a fee to participate in the program
Program financed with as much as $50 billion from the
Treasury's Exchange Stabilization Fund, which was
created in 1934 for exchange rate stabilization
The Federal Reserve will also essentially lend as much as
$230
billion to the industry, via banks, to be used
against their illiquid
asset-backed holdings
4. 10-Day Ban on Short-Selling 829 Source:
Financial
Stocks
Insurance Info.
Inst. research.
Federal Government Financial
Services Rescue Package (cont’d)
5. Conversion of Last 2 Remaining Investment Banks
(Goldman Sachs and Morgan Stanley) to Bank
Holding Companies





Recognition that Wall Street as we have known it for decades
is dead
High leverage investment bank model no longer viable in
current market environment
New entities will be subject to stringent federal regulation in
exchange for more access to federal dollars/liquidity facilities
Capital and liquidity requirements will be greatly enhanced
Reduced leverage means new entities will be less profitable
Source: Insurance Info. Inst. research.
Leverage Ratios for Investment
Banks and Traditional Banks*
44.0
Merrill Lynch
33.0
Morgan Stanley
24.3
Goldman Sachs
23.3
Lehman Brothers
21.5
Fannie Mae
Investment bank leverage ratios
were extremely high.
15.4
Citibank
13.3
JP Morgan Chase
Lehman filed for bankruptcy 9/15
Merrill merged with JP Morgan
Chase
12.4
Wells Fargo
Wachovia
10.8
Bank of America
10.5
0
10
Goldman and Morgan converted to
bank holding companies
20
30
40
*Based on data for last quarter reported (May or June 2008).
Source: “The Perils of Leverage,” North Coast Investment Research, Sept. 15, 2008
50
How Does Leverage Work?
• Example of Non-Leverage Transaction
 Buy 1 share of stock for $100
 Price of share rises to $110
 RETURN = $10 or 10%
• Leveraged Transaction
Investment banks and
others juiced their returns
by making big, bad bets
with (mostly) borrowed
money on mortgage
securities
 Invest $10 and borrow $90
 Stock rises to $110
 RETURN = $10 or 100% (less borrowing costs)
• This Pleasant Arithmetic Works Equally Unpleasantly
in the Opposite Direction
• Declining asset values, seizing of credit markets
made such borrowing impossible and the
operating model of investment banks nonviable
Source: Insurance Information Institute.
Government Rescue
Package of AIG
Motivation &
Structural Details
AIG Rescue Package by the Fed
• AIG suffered a liquidity crisis due to large positions, mostly
associated with Credit Default Swaps, related to mortgage debt
through its AIG Financial Products division
• The losses at AIGFP brought AIG’s holding company to the brink
of bankruptcy by Sept. 16 (AIG has 71 divisions)
 Efforts to create large credit pool via private banks failed
• AIG’s separately regulated insurance subsidiaries were solvent at
all times and met local capital requirements in all jurisdictions*
• Federal Reserve Agreed to Lend AIG $85 Billion to Prevent
Bankruptcy
 2-year term @ 850 bps over LIBOR (about 11 to 11.5%)
 Fed gets 79.9% stake in AIG (temporary nationalization)
 CEO Robert Willumstad replaced by former Allstate CEO Edward Liddy
• Proceeds from sale of non-core assets will be used to repay loan
• New CEO says most insurance divisions are “core”
Source: AIG press releases and regulator statements.
Rational for Federal Reserve’s
Rescue Package of AIG
• “Too Big to Fail” Doctrine Applied to Insurance for First
Time
• AIG is the Largest Insurer in the US and One of the Top
5 Globally: Internationally Disruptive
 Disorderly unwinding of CDS positions (which guarantee large
amounts of debt) would have had large negative consequences
on already fragile credit markets
• Fear Was that Generally Healthy Insurance Operations
Affecting Millions of People and Businesses Would Have
to Be Sold at Fire Sale Prices
• Loan Allowed Time for an Orderly Sale of Assets and a
Minimal Disruption on Credit Markets while also
Protecting Policyholders
• New CEO says most insurance divisions are “core”
Source: Insurance Information Institute research.
Leading U.S. Writers of P/C Insurance
By DWP, 2007 ($ Billions)1
Direct Written Premiums (DWP) $ Billions
$50 $49.4
AIG is the second largest p/c
insurer in the US and the
largest commercial insurer
(11% markets share)
$37.7
$40
$29.1 $27.7
$30
$22.2 $20.2
$16.1 $15.4 $14.0
$20
$11.5
$10
$0
State Farm
IL Group
1Before
AIG
Zurich
Insurance
Group
Allstate
Insurance
Group
Travelers
Group
reinsurance transactions, excluding state funds.
Liberty Nationwide Berkshire Progressive Hartford
Mutual
Group
Hathaway
Group
Fire &
Insurance
Ins. Group
Casualty
Group
Group
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline
Data LLC.
Leading U.S. Writers of Life Insurance
By DWP, 2007 ($ Billions)1
$60
Direct Written Premiums (DWP) $ Billions
$53.0
$51.9
$50
$42.3
$38.0
$40
$32.4
$29.8
$29.7
$30
$22.7
$21.9
Principal
Financial
Group
New York
Life Group
$21.5
$20
$10
$0
AIG
1Premium
Metropolitan Prudential of ING America Hartford Fire John Hancock Aegon USA
Group
America
Insurance
& Casualty
Group
Holding
Holding
Group
Group
Group
Lincoln
National
and annuity totals, before reinsurance transactions, excluding state funds.
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline
Data LLC.
AFTERSHOCK:
Regulatory Response
Could Be Harsh
All Financial Segments
Including Insurers
Will Be Impacted
Incurred Liabilities of the Federal
Government Due to Financial Crisis
$800
$700
$700
$ Billions
$600
$500
$400
$300
$ Billions
The Fed (and hence taxpayer)
are now exposed to as much as
$1.015 trillion in new debt tied to
the current financial crisis*
$200
$200
$85
$100
$30
$0
Mortgage
Security
Buyouts
Fannie/Freddie
Takeover
AIG Loan
Bear Stearns
Illiquid Asset
Assumption
*As of September 22, 2008. Amounts reflect maximum losses under terms at time of announcement.
Source: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research.
Liquidity Enhancements
Implemented by Fed Due to Crisis
• Lowered Interest Rates for Direct Loans to Banks
 Federal funds rate cut from 5.5% in mid-2007 to 2.0% now
• Injected Funds Into Money Markets
• Coordinated Exchange Transactions w/Foreign Central
Banks
• Created New Auction and Other Lending Programs for
Banks
• Started Direct Lending to Investment Banks for the First
Time Ever
• Authorized Short-Term Lending to Fannie/Freddie,
Backstopping a Treasury Credit Line
Source: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research.
From Hubris to the Humbling
of American Capitalism?
“Government is not the
solution to our problem,
government is the problem.”
--Ronald Reagan, from his first
inaugural address, January 20, 1981
From Hubris to the Humbling
of American Capitalism?
“Given the precarious state of
today’s financial markets, and
their vital importance to the daily
lives of the American people,
Government intervention is not
Only warranted, it is essential.”
--President George W. Bush, Sept. 19, 2008, on
the $700 billion financial institution bailout
Post-Crunch: Fundamental
Issues To Be Examined Globally
•
•
Failure of Risk Management, Control & Supervision at
Financial Institutions Worldwide: Global Impact



Colossal failure of risk management (and regulation)
Implications for Enterprise Risk Management (ERM)?
Misalignment of management financial incentives
Focus Will Be on Risk Controls: Implies More Stringent
Capital & Liquidity Requirements
 Data reporting requirements also likely to be expanded
•
•




Non-Depository Financial Institutions in for major regulation
Changes likely under US and European regulatory regimes
Will new regulations be globally consistent?
Can overreactions be avoided?
Accounting Rules



Problems arose under FAS, IAS
Asset Valuation, including Mark-to-Market
Structured Finance & Complex Derivatives
Ratings on Financial Instruments

New approaches to reflect type of asset, nature of risk
Source: Ins. Info. Inst.
Post-Crunch: Fundamental
Regulatory Issues & Insurance
•
•
Federal Encroachment on Regulation of Insurance



$85 billion AIG loan makes increased federal involvement in insurance
regulation a certainty
States will lose some of their regulatory authority
What Feds get/what states lose is unclear
Removing the “O” from “OFC”?






Treasury in March proposed moving solvency and consumer protection
authority to a federal “Office of National Insurance”
Moving toward more universal approach for regulation of financial
services, perhaps under Fed/Treasury
Is European (e.g., FSA) approach in store?
Treasury proposed assuming solvency and consumer protection roles
while also eliminating rate regulation
Expect battle over federal regulatory role to continue to be a divisive
issue within the industry
States will fight to maximize influence, arguing that segments of the
financial services industry under their control had the least problems
Source: Insurance Information Institute
Summary of Treasury
“Blueprint”for
Financial Services
Modernization
Impacts on Insurers
Treasury Regulatory
Recommendations Affecting Insurers
•
•
•
•
Establishment of an Optional Federal Charter (OFC)

Would provide system for federal chartering, licensing, regulation and
supervision of insurers, reinsurer and producers (agents & brokers)
OFC Would Incorporate Several Regulatory Concepts



Ensure safety and soundness
Enhance competition in national and international markets
Increase efficiency through elimination of price controls, promote more
rapid technological change, encourage product innovation, reduce
regulatory costs and provide consumer protection
Establishment of Office of National Insurance (ONI)



Department within Treasury to regulate insurance pursuant to OFC
Headed by Commissioner of National Insurance
Commissioner has regulatory, supervisory, enforcement and
rehabilitative powers to oversee organization, incorporation, operation,
regulation of national insurers and national agencies
UPDATE: HR 5840 Introduced April 17 Would Establish
Office of Insurance Information (OII)

Would create industry “voice” within Treasury
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
Government Takeover
of Fannie Mae &
Freddie Mac
Beneficial for Insurers
Treasury’s Fannie/Freddie Rescue Package
Should Help Residential Property Insurers
THE PROBLEM
• Fannie Mae/ Freddie Mac borrow huge sums to buy
mortgages from mortgage lenders and do so with an
implicit government guarantee that should these
mortgage sour the government will come to the rescue
• Together the entities own or guarantee $5.4 trillion in
mortgages (about 50% of US total)
• Collectively Fan/Fred have lost about $14 billion over the
past 4 quarters and their capital is nearly depleted
• Loss of confidence in Fannie/Freddie is primary reason
why Fed’s slashing of rates since has not lowered interest
rates (esp. on mortgages)
Source: Wall Street Journal Online, 9/7/08; Insurance Information Institute.
Treasury’s Fannie/Freddie Rescue Package
Should Help Residential Property Insurers
THE SOLUTION: A 4-POINT PLAN
1. Government seizes Fannie Mae/ Freddie Mac and places
them in “conservatorship” under their regulator the
Federal Housing Finance Agency (FHFA)
 Current CEOs ousted. Fannie will be run by Herb Allison (CEO
TIAA-CREF) and Freddie by David Moffet (CEO US Bancorp)
2. Treasury purchases senior preferred stock; Govt. gains
79.9% ownership. Could buy up to $100 billion per firm.
3. Treasury will buy mortgage backed securities (MBS) in
the open market issued by Fan/Fred in attempt to lower
borrowing costs ($ unspecified)
4. Treasury establishing new lending facilities for Fan/Fred
Total federal involvement could amount to $200 billion
Source: Federal Housing Finance Agency; Wall Street Journal Online, 9/7/08; Insurance Information Institute.
Credit Crisis: Fed Interest Rate Cuts
Failed to Reduce Mortgage Rates
January 2000 through August 2008
Fed slashes interest rates by 325
basis points (from 5.25% to 2.00
from July 2007 to mid-2008)
9.0
8.0
Interest rate on conventional
mortgages remained high
despite Fed rate cuts
7.0
6.0
5.0
4.0
Mortgage FF spread
increased to 4.5% from
about 1% pre-crisis
3.0
2.0
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
0.0
Aug-08
1.0
Why Treasury’s Fannie/Freddie Rescue Package
Should Help Residential Property Insurers
•
Crash in housing market is already costing home insurers
alone about $1 billion annually in lost premium growth
based on 50%+ decline in new home construction (about
1 million fewer homes per year)
 Plan should lower interest rates, accelerate clearing away
existing inventory and stimulate new construction (don’t expect
big gains until 2010 at earliest)
 Mortgage rates fell ½ point day after announcement
•
•
Home in or headed for foreclosure are likely to suffer
worse than average loss experience (neglect, abuse,
abandonment, vandalism, theft…). Plan may bring
interest rate relief to people who’s mortgages will reset
over the next several years, averting some foreclosures.
Insurers hold tens of billion in Fan/Fred MBS debt as
well as shares in both companies. Both survive.
Source: Insurance Information Institute.
THE ECONOMIC
STORM
What a Weakening Economy &
The Threat of Inflation Mean
for the Insurance Industry
Real Annual GDP Growth, 2000-2009F
4.0%
3.7%
3.5%
March 2001November
2001
recession
3.6%
3.1%
Recession?
2.9%
3.0%
2.5%
2.5%
2.2%
2.0%
1.6%
1.6%
1.5%
1.5%
1.0%
0.8%
0.5%
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
* Red bars are actual; Yellow bars are forecasts
Sources: US Department of Commerce (actual), Blue Economic Indicators 8/08 (forecasts).
2008
2009
Real GDP Growth*
2.5%
2.7%
09:3Q
09:4Q
2.0%
1.1%
0.3%
1.2%
0.9%
1.9%
2.9%
0.1%
1%
3.1%
3.6%
0.8%
2%
1.6%
3%
2.5%
4%
3.7%
5%
4.8%
4.8%
6%
Economic toll of credit
crunch, labor market
contraction and high
energy prices is growing,
though no official recession
declared
0%
-0.2%
09:2Q
09:1Q
08:4Q
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2003
2002
2001
2000
-1%
*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 8/08; Insurance Information Institute.
Unemployment Rate:
On the Rise
January 2000 through August 2008
6.5
August 2008 unemployment
jumped to 6.1%, its highest
level since Sept. 2003
Previous Peak: 6.3% in
June 2003
6.0
5.5
5.0
Trough: 4.4% in March 2007
4.0
Average unemployment
rate since 2000 is 5.0%
3.5
Unemployment will likely continue to
approach 6% during this cycle, impacting
payroll sensitive p/c and non-life exposures
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
3.0
Aug-08
4.5
U.S. Unemployment Rate,
(2007:Q1 to 2009:Q4F)*
6.5%
Rising unemployment will
erode payrolls and workers
comp’s exposure base
6.1% 6.1% 6.1% 6.1%
5.9%
6.0%
5.7%
5.4%
5.5%
5.0%
4.7%
4.6%
4.8%
4.7%
4.5% 4.5% 4.5%
4.9%
4.6%
4.5%
4.0%
06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
* Blue bars are actual; Yellow bars are forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/08); Insurance Info. Inst.
89.9
92
91.7
89.7
90
91
103.0
100.1
97.7
100
94.9
115.2
115.4
111.8
109.8
108.2
108.8
110.9
111.0
108.6
110
106.0
Millions
120
114.0
Total Private Employment* Grew by
25½ Million Workers from 1991 to 2008
The US economy added 25.5
million jobs between 1991 and
2008, but job growth has recently
stagnated, impacted payrolls and
the workers comp exposure base
*seasonally adjusted at mid-year
Source: U.S. Bureau of Labor Statistics, at http://data.bls.gov/cgi-bin/surveymost
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
80
Average Weekly Real Earnings in Private
Employment Were Flat from 1999 to 2008
(at mid-year)
$290
$276.1
$277.3
06
$281.2
$276.9
05
$279.3
03
$276.0
$279.4
$275.1
01
02
$275.0
$276.1
00
$260.7
$258.0
$258.3
93
$260.1
$257.9
92
$260
$259.2
$270
$271.5
Virtually all of the
real wage growth
occurred between
1995 and 1999 and
has now stagnated
$264.3
$280
Constant 1982 dollars
Sources: U.S. Bureau of Labor Statistics; I.I.I.
08
07
04
99
98
97
96
95
94
91
$250
Wage & Salary Disbursements
(Payroll Base) vs. Workers Comp
Net Written Premiums
Wage & Salary Disbursement (Private Employment) vs. WC NWP
$ Billions
$ Billions
7/90-3/91
$7,000
$6,000
3/01-11/01
Wage & Salary
Disbursements
WC NPW
$45
$40
$35
$5,000
$30
$4,000
$3,000
$2,000
Shaded areas indicate recessions
$1,000
Weakening wage
and salary
growth is
expected to cause
a deceleration in
workers comp
exposure growth
$25
$20
$15
$10
$5
$0
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
*Average of quarterly figures.
Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at
http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Workplace Injury Incidence Rates
Declined in Last 4 Economic Downturns
3750
Claims per 100,000 Workers
(NCCI)
Incidence Rates per 100 FTE Workers
(BLS)
15
10
2500
5
1250
0
2007p
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
Recessions
Manufacturing Industry Injuries and Illnesses per 100 Full-Time Workers
Private Industry Injuries and Illnesses per 100 Full-Time Workers
NCCI Lost-Time Claims per 100,000 Workers
p Preliminary
Source: US Department of Labor, Bureau of Labor Statistics (BLS), National Bureau of Economic Research; NCCI Frequency and
Severity Analysis
New Private Housing Starts,
1990-2014F (Millions of Units)
1.28
1.15
1.05
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 2008 vs. 2005 is
estimated at $963 million.
0.97
1.35
1.36
1.42
1.56
1.80
2.07
1.96
1.85
1.71
1.60
1.64
1.57
1.47
1.48
New home starts plunged
34% from 2005-2007;
Drop through 2008
trough is 53% (est.)—a
net annual decline of
1.1 million units
0.97
1.01
1.29
1.20
1.46
1.62
Impacts also for comml. insurers
with construction risk exposure
1.19
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
Exposure growth forecast for HO
insurers is dim for 2008/09
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F 09F 10F11F 12F 13F 14F
Source: US Department of Commerce; Blue Chip Economic Indicators for 2008/09, Aug. 2008.
Insurance Information Institute for years 2010-2014.
Auto/Light Truck Sales,
1999-2014F (Millions of Units)
19
18
New auto/light trick sales are
expected to experience a net
drop of 2.8 million units
annually by 2008 compared
with 2005, a decline of 16.6%
Weakening economy,
credit crunch and high
gas prices are hurting
auto sales
17.8
17.5
17.4
17.1
17
16.9 16.9
16.6
16.7
16.5
16.1
16.9
16.0
16
15.4
Impacts of falling auto sales will
have a less pronounced effect on
auto insurance exposure growth
than problems in the housing
market will on home insurers
15
14
14.8
14.4
14.1
13
99
00
01
02
03
04
05
06
07F
08F
09F
10F
11F
12F
Source: US Department of Commerce; Blue Chip Economic Indicators for 2008/09, Aug. 2008.
Insurance Information Institute for years 2010-2014.
13F
14F
$1,413
$1,406
$1,368
$1,226
8%
7%
6%
$1,000
5%
Sharp dip in business
investment growth in
2007-2009 will slow
commercial exposure
growth
$800
$600
$400
$200
4%
3%
2%
1%
Nonresidential Fixed Investment
% Change Nonresidential Fixed Investment
$0
0%
03
04
05
06
07
08F
09F
*Nonresidential fixed investment consists of structures, equipment and software.
Sources: US Bureau of Economic Analysis (Historical), Blue Chip Economic Indicators (7/08) for forecasts.
% Change
$1,200
$1,144
$1,400
$1,082
Nonresidential Fixed Investment ($ Bill)
$1,600
$1,307
Nonresidential Fixed Investment,*
2003 – 2009F (Billions of 2000 $)
Total Industrial Production,
(2007:Q1 to 2009:Q4F)
4.0%
3.2%
3.6%
Industrial production affects
exposure both directly and indirectly
3.0%
2.3%
1.7%
2.0% 1.5%
1.0%
2.7% 2.8%
1.1%
0.3%
0.2%
0.0%
-1.0%
-0.3%
-2.0%
-3.0%
-2.7%
Industrial production shrank
during Q1 2008 and is expected to
shrink again in Q2, growing very
slowly thereafter
-4.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/08); Insurance Info. Inst.
Percent Change in Debt Growth
(Quarterly since 2004:Q1, at Annualized Rate)
Home Mortgage
15%
Consumer Credit
Business Corporate
Corporate
deleveraging
12%
Deflation of housing
bubble is very evident
9%
6%
3%
Consumer
desperation?
Source: Federal Reserve Board, at http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
2008:Q1
2007:Q4
2007:Q3
2007:Q2
2007:Q1
2006:Q4
2006:Q3
2006:Q2
2006:Q1
2005:Q4
2005:Q3
2005:Q2
2005:Q1
2004:Q4
2004:Q3
2004:Q2
2004:Q1
0%
5%
0%
-5%
-10%
6%
4%
5.2%
78
-0.9%
79
80-7.4%
81 -6.5%
-1.5%
82
1.8%
83
4.3%
84
85
86
5.8%
87
0.3%
88
-1.6%
89
-1.0%
90
-1.8%
91
-1.0%
92
3.1%
93
1.1%
94
0.8%
95
0.4%
96
0.6%
97
-0.4%
98
-0.3%
99
1.6%
00
5.6%
01
02
7.7%
03
1.2%
04
-2.9%
05
-0.5%
06
-3.4%
07
08F -4.9%
Real NWP Growth
15%
10%
8%
Real NWP Growth
Real GDP
2%
Real GDP Growth
20%
P/C insurance industry’s growth
is influenced modestly by growth
in the overall economy
13.7%
25%
18.6%
20.3%
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
0%
-2%
-4%
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 8/08; Insurance Information Inst.
Favored Industry Groups for
Insurer Exposure Growth
Industry
Health Care
Energy (incl. Alt.)
Agriculture &
Food Processing &
Manufacturing
Export Driven
Natural Resources
& Commodities
Sources: Insurance Information Institute
Rationale
•Economic NecessityRecession Resistant
•Demographics: aging/immigrationGrowth
•Fossil, Solar, Wind, Bio-Fuels, Hydro & Other
•Consumer StapleRecession Resistant
•Grain and land prices high due to global demand,
weak dollar (exports)
•Acreage GrowingFarm Equipment, Transport
•Benefits many other industries
•Weak dollar, globalization persist
•Strong global demand,
•Supplies remain tight…but beware of bubbles
•Significant investments in R&D, plant & equip
required
Summary of Economic Risks and
Implications for (Re) Insurers
Economic Concern
Subprime Meltdown/
Credit Crunch
Lower Interest Rates
Stock Market Slump
General Economic
Slowdown/Recession
Risks to Insurers
•Some insurers have some asset risk
•D&O/E&O exposure for some insurers
•Client asset management liability for some
•Bond insurer problems; Muni credit quality
•Mortgage insurers face losses; Also tightening
standards and slowing real estate market
•Banks less able to lend, slowing construction
•Lower investment income
•Decreased capital gains (which are usually
relied upon more heavily as a source of
earnings as underwriting results deteriorate)
•Reduced commercial lines exposure growth
•Surety slump
•Decreased workers comp frequency due to
drop in high hazard class employment
Inflation
Overview
Pressures Claim Costs,
Expands Probable &
Possible Max Losses
Annual Inflation Rates
(CPI-U, %), 1990-2009F
In July 2008, on a year-over-year basis inflation
was 5.4% -- among the highest levels since 1991
6
5
4.9
4.4
3.8
4
3.0
3
2
5.4
5.1
3.2
3.3 3.4
3.0
2.9 2.8
2.6
2.4
2.5 2.3
2.8
2.9
1.9
1.5
1.3
1
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F
*12-month change August 2008 vs. August 2007
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, September 10, 2008. (forecasts)
Inflation: Important Economic Risks
and Implications for Insurers
Effects of Inflation
Claim Severity
Increase
Rate Inadequacy
Risks to Insurers & Buyers
•Claims (property and liability) costs may rise as
the price of goods and services increase
•PMLs could be (much) higher
•Accelerating inflation historically contributed to
rate inadequacy because ratemaking is largely a
retrospective process
•Many types of loss trends are sensitive to the pace
of inflation: medical cost, tort, etc.
•Historical loss cost trends could be biased
predictors of future loss if inflation accelerates
Inflation: Important Economic Risks
and Implications for Insurers (cont’d)
Effects of Inflation
Reserve
Deficiency
Inadequate
Insurance Limits
Inadequate
Reinsurance
Risks to Insurers
•Reserves are established using certain assumptions
about future development and discounting factors
•If inflation accelerates, development could be more
rapid and/or be more substantial (in dollar terms)
than assumed and discount factors may be too low
•Policyholders could find themselves inadequately
insured as claims costs escalate
•Inflation can lead to a more rapid and unexpected
exhaustion of reinsurance because losses are higher
than expected
Comparative 2007 Inflation
Statistics Important to Insurers ( %)
8
Inflation Rate (%)
7
CPI and “Core” CPI are
not representative of
many of the costs
insurers face
6.7
6
4.4
5
4
3
4.1
3.9
2.8
2
2.3
1
0
CPI-U
Core CPI*
Total
Medical
Care
Physician
Services
Hospital
Services
Legal
Services
*Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs.
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Medical & Tort
Cost Inflation
Amplifiers of Inflation, Major
Insurance Cost Driver
Consumer Price Index for Medical
Care vs. All Items, 1960-2007
(Base: 1982-84=100)
Index Value (1982-84=100)
400
300
200
Soaring medical
inflation is among
the most serious
long-term
challenges facing
casualty, disability
and LTC insurers
Inflation for Medical
Care has been surging
ahead of general
inflation (CPI) for 25
years. Since 1982-84, the
cost of medical care has
more than tripled
351.1
207.3
100
0
Medical Care
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
All Items
Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.
Tort Cost Growth & Medical Cost Inflation
vs. Overall Inflation (CPI-U), 1961-2008*
14%
Tort System is an
Inflation Amplifier
Tort costs move with
inflation but at twice the rate
Avg. Ann. Change: 1961-2008*
12%
Torts Costs: +8.4%
Med Costs: +6.0%
Overall Inflation: +4.2%
10%
8%
6%
4%
2%
Tort Costs
Medical Costs
CPI
0%
1961-70
1971-80
1981-90
1991-2000
2001-08E
*Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast.
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.
WC Medical Severity Rising Far
Faster than Medical CPI
16%
13.6%
14%
12%
WC medical severity rose
more than twice as fast as the
medical CPI (8.3% vs. 4.0%)
from 1995 through 2007p
10.6%
10.1%
9.2%
10%
8.3%
7.4%
7.6% 7.2%
6.2%
6% 5.1%
4%
2%
0%
6.0%
1.6 pts
8%
7.3%
8.6%
4.5%
3.5%
3.5%
3.2%
2.8%
4.1%
4.6% 4.7%
4.0% 4.4% 4.2% 4.0% 4.4%
Change in Medical CPI
Change Med Cost per Lost Time Claim
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007p
Sources: NCCI; Med CPI from Economy.com; WC med severity from NCCI based on NCCI states.
Workers Comp Medical Claims
Costs Continue to Climb
Medical
Claim Cost ($000s)
$25
Annual Change 1991–1993:
Annual Change 1994–2001:
Annual Change 2002-2006:
$25.4
$24.0
$22.1
$20.2
$19.0
$17.7
$16.5
+1.9%
+8.9%
+7.8%
$20
$15
$9.5
$10 $8.4 $8.5 $8.3 $9.1
$14.5
$13.5
$12.2
$11.3
$10.3
Cumulative Change = +200%
(1993-2007p)
$5
91
92
93
94
95
96
97
98
99
00
01
Accident Year
2007p: Preliminary based on data valued as of 12/31/2007
1991-2006: Based on data through 12/31/2006, developed to ultimate
Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
02
03
04
05
06 07p
Med Costs Share of Total
Costs is Increasing Steadily
Med cost inflation is one
factor to high WC severity.
Med cost are now nearly 60%
of all lost time claim costs
2007p
1997
Medical
59%
1987
Indemnity
53%
Indemnity
54%
Indemnity
41%
Medical
47%
Medical
46%
Source: NCCI (based on states where NCCI provides ratemaking services).
WC Med Cost Will Equal 70% of
Total by 2017 if Trends Hold
2017 Estimate
Indemnity
30%
Medical
70%
Source: Insurance Information Institute.
This trend will
likely be supported
by the increased
labor force
participation of
workers age 55 and
older.
PROFITABILITY
Profits in 2006/07 Reached
Their Cyclical Peak;
By No Reasonable Standard Can
Profits Be Deemed Excessive
$65,777
$32,936
$44,155
$38,501
$30,029
$20,559
$30,773
$21,865
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
Insurer profits
peaked in 2006
$36,819
$50,000
$24,404
$60,000
$20,598
$70,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 9.6%
2006 ROE = 12.2%
2007 ROAS1 = 12.3%**
2008 ROAS = 6.4%***
$61,940
P/C Net Income After Taxes
1991-2008 ($ Millions)*
08*
07
06
05
04
03
01
-$6,970
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
*ROE figures are GAAP; 2008 figure is annualized Q1 net income of $8.234B; 1Return on avg. surplus.
Sources: A.M. Best, ISO, Insurance Information Inst. ***9.5% excl. mortgage and finl. guarantee insurers.
ROE: P/C vs. All Industries
1987–2008:Q1
20%
Mortgage & Financial
Guarantee Impact
P/C profitability is
cyclical and volatile
15%
10%
Sept. 11
5%
Hugo
0%
Andrew
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
Northridge
4 Hurricanes
-5%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08Q1
US P/C Insurers
All US Industries
2008 P/C insurer figure is annualized Q1 return on average surplus. Excluding mortgage and financial
guarantee insurers = 9.5%.
Source: ISO, Fortune; Insurance Information Institute.
Profitability Peaks & Troughs in the
P/C Insurance Industry,1975 – 2008:Q1
25%
1977:19.0%
1987:17.3%
2006:12.2%
20%
1997:11.6%
15%
10%
5%
2008Q1: 6.4%
(9.5% excl. M&FG)
0%
1975: 2.4%
1984: 1.8%
1992: 4.5%
2001: -1.2%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
-5%
*GAAP ROE for all years except 2007 which is ROAS of 12.3%. All figures include mortgage an d financial
guarantee insurers. Excluding M&FG insurers 2008:Q1 ROAS is 9.5%..
Source: Insurance Information Institute, ISO; Fortune
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2008:Q1
18%
The p/c insurance industry achieved its cost of
capital in 2005/6 for the first time in many years
16%
-13.2 pts
8%
6%
4%
2%
0%
-2%
-4%
-9.0 pts
The cost of capital
is the rate of return
insurers need to
attract and retain
capital to the
business
US P/C insurers missed their
cost of capital by an average 6.7
points from 1991 to 2002, but on
target or better 2003-07
91
92
93
94
95
96
97
98
99
*Excludes mortgage and financial guarantee insurers.
Source: The Geneva Association, Ins. Information Inst.
00
-1.3 pts
10%
-1.7 pts
12%
+2.3 pts
14%
01
02
03
ROE
04
05
06
07 08*
Cost of Capital
Factors that Will Influence the
Length and Depth of the Cycle
•
Capacity: Rapid surplus growth in recent years has left the industry with between $85
billion and $100 billion in excess capital, according to analysts, at end of 2007
 All else equal, rising capital leads to greater price competition and a liberalization of terms
and conditions
•
•
•
Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which
could extend the depth and length of the cycle
Investment Gains: With sharp declines in stock prices and falling interest rates,
portfolio yields are certain to fallContributes to discipline and shallower cycle
Sarbanes-Oxley: Presumably SOX will lead to better and more conservative
management of company finances, including rapid recognition of deficient or
redundant reserves
 With more “eyes” on the industry, the theory is that cyclical swings should shrink
•
•
•
Ratings Agencies: Focus on Cycle Management; Quicker to downgrade
Information Systems: Management has more and better tools that allow faster
adjustments to price, underwriting and changing market conditions than it had
during previous soft markets
Analysts/Investors: Less fixated on growth, more on ROE through soft mkt.
 Management has backing of investors of Wall Street to remain disciplined
•
M&A Activity: More consolidatio would imply greater discipline
Source: Insurance Information Institute.
P/C Stocks: Mirroring the
S&P 500 Index in 2008
Total YTD Returns Through September 19 , 2008
Insurance stocks caught in
financial services downdraft, but -14.53%
some p/c insurers up
-24.70%
Mortgage &
Financial Guarantee
insurers were down
69% in 2007
-6.91%
S&P 500
All Insurers
2.12%
P/C
Life/Health
-68.38%
Multiline
-41.13%
Reinsurance
-54.44%
Mortgage*
5.93%
-80.0%
-60.0%
-40.0%
-20.0%
0.0%
*Includes Financial Guarantee.
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute.
20.0%
Brokers
Top Industries by ROE: P/C Insurers
Still Underperformed in 2007*
56.0%
Household & Pers. Products
Petroleum Refining
Hotels, Casinos, Resorts
Oil and Gas Equip., Services
Food Services
Metals
Food Consumer Prod.
Network & Other Comms.
Aerospace & Defense
Medical Prod. & Equip.
Electronics, Electrical Equip.
Pharmaceuticals
Industrial & Farm Equip.
Wholesalers: Diversified
Packaging, Containers
26.3%
26.1%
24.9%
23.9%
23.0%
22.0%
21.8%
20.6%
20.4%
20.4%
20.3%
20.0%
19.4%
19.2%
14.0%
15.2%
P/C Insurers (Stock)
All Industries: 500 Median
0%
10%
20%
30%
Source: Fortune, May 5, 2008 edition; Insurance Information Institute
P/C insurer
profitability in 2007
ranked 31st out of 51
industry groups
despite renewed
profitability,
underperforming the
All Industry median
for the 20th
consecutive year
40%
50%
60%
Factors that Will Influence the
Length and Depth of the Cycle
•
Capacity: Rapid surplus growth in recent years has left the industry with between $85
billion and $100 billion in excess capital, according to analysts, at end of 2007
 All else equal, rising capital leads to greater price competition and a liberalization of terms
and conditions
•
•
•
Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which
could extend the depth and length of the cycle
Investment Gains: With sharp declines in stock prices and falling interest rates,
portfolio yields are certain to fallContributes to discipline and shallower cycle
Sarbanes-Oxley: Presumably SOX will lead to better and more conservative
management of company finances, including rapid recognition of deficient or
redundant reserves
 With more “eyes” on the industry, the theory is that cyclical swings should shrink
•
•
•
Ratings Agencies: Focus on Cycle Management; Quicker to downgrade
Information Systems: Management has more and better tools that allow faster
adjustments to price, underwriting and changing market conditions than it had
during previous soft markets
Analysts/Investors: Less fixated on growth, more on ROE through soft mkt.
 Management has backing of investors of Wall Street to remain disciplined
•
M&A Activity: More consolidatio would imply greater discipline
Source: Insurance Information Institute.
Advertising Expenditures by P/C
Insurance Industry, 1999-2007E
$ Billions
$4.5
$4.0
Ad spending by P/C insurers
is at a record high, signaling
increased competition
$4.323
$3.695
$3.5
$2.975
$3.0
$2.5
$2.0
$1.736 $1.737 $1.803 $1.708
$1.882
$2.111
$1.5
99
00
01
02
03
04
05
06
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
07E
FINANCIAL
STRENGTH &
RATINGS
Industry Has Weathered
the Storms Well, But Cycle
May Takes Its Toll
P/C Insurer Impairments,
1969-2007
13
15
18
35
18
19
31
29
15
12
16
14
13
4
9
13
12
9
11
9
7
8
10
15
12
20
19
30
31
34
34
40
36
41
50
49
49
49
54
60
49
50
47
70
60
58
The number of impairments varies
significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
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
0
Source: A.M. Best; Insurance Information Institute
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2007E
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
2
1.8
1.6
1.4
110
1.2
105
1
0.8
100
95
0.4
2007 impairment rate was a record low 0.12%,
one-seventh the 0.8% average since 1969; Previous
record was 0.24% in 1972
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
90
0.6
Source: A.M. Best; Insurance Information Institute
0.2
0
Impairment Rate
120
Impairment rates
are highly
correlated
underwriting
performance and
could reached a
record low in 2007
Reasons for US P/C Insurer
Impairments, 1969-2005
2003-2005
Affiliate
Problems
8.6%
Catastrophe
Losses
8.6%
1969-2005
Deficient
Loss
Reserves/Inadequate
Pricing
62.8%
Deficient
Loss
Reserves/Inadequate
Pricing
38.2%
Investment
Problems*
7.3%
Alleged
Fraud
11.4%
Rapid
Growth
8.6%
Reinsurance
Sig. Change
Failure
in Business
3.5%
4.6%
Misc.
9.2%
Deficient
reserves,
CAT losses
are more
important
factors in
recent years
Affiliate
Problems
5.6%
Catastrophe
Losses
6.5%
Alleged
Fraud
8.6%
Rapid
Growth
16.5%
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Cumulative Average Impairment Rates by
Best Financial Strength Rating*
60%
50%
Insurers with strong ratings are far
less likely to become impaired over
long periods of time. Especially
important in long-tailed lines.
D
C/C-
40%
C++/C+
30%
B/BB++/B+
20%
A/A-
10%
A++/A+
0%
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15
Average Years to Impairment
*US P/C and L/H companies, 1977-2002
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
Top 10 P/C Insolvencies, Based
Upon Guaranty Fund Payments*
$2,500
$ Millions
The 2001 bankruptcy
of Reliance Insurance
was the largest ever
among p/c insurers
$2,265.8
$2,000
$1,500
$1,272.7
$1,049.7
$1,000
$843.4
$699.4
$566.5
$555.8
$543.1
$531.6
$516.8
$500
Source: National Conference of Insurance Guaranty Funds, as of September 17, 2008.
id
lan
M
In
s.
Fa
m
ily
dI
bi
li
ia
ut
ua
lL
M
an
er
ic
Am
* Disclaimer: This is not a complete picture. If anything the numbers are understated as some states have not reported in certain years.
So
ut
he
rn
ns
ur
an
ce
In
s.
ty
In
s.
Su
pe
rio
rN
at
y
as
ua
lt
sit
C
Tr
an
io
na
l
In
s.
In
s.
IC
O
PH
ni
ty
nd
em
Fr
em
on
tI
Ca
lif
or
ni
a
Co
m
pe
ns
ati
on
In
s.
In
s.
nc
e
In
su
ra
gi
on
Le
Re
lia
nc
eI
ns
ur
an
ce
$0
Top 10 Life Insolvencies, Based On Guaranty
Fund Payments and Net Estimated Costs*
$3,000
$ Millions
$2,821.7
(Year Indicates Year of Liquidation)
$2,500
The 1991 bankruptcy
of Executive Life was
by far the largest ever
among life insurers
$2,000
$1,500
$1,000
$500
$173.6
$172.4
$131.6
$107.8
$106.9
$81.9
$61.6
$61.5
$57.2
$0
Executive Life Corporate Life
National
London
InterGuarantee
Ins. Co. 1991 Ins. Co. 1994 Heritage Life Pacific Life & American Ins. Security Life
Ins. Co. 1995 Annuity Co. Co. of Illinois Ins. Co. 1992
2004
1991
*As of 2007.
Source: National Organization of Life and Health Guaranty Funds
New Jersey
American
American
First National
Life Ins. Co. Chambers Life Integrity Ins. Life Ins. Co.
1993
Ins. Co. 2000
Co. 1993
of America
1999
UNDERWRITING
TRENDS
Extremely Strong 2006/07;
Relying on Momentum &
Discipline for 2008
P/C Insurance Combined Ratio,
1970-2008F*
Combined Ratios
120
115
110
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000s: 102.0*
105
100
95
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08F
90
Sources: A.M. Best; ISO, III
*Full year 2008 estimates from III.
P/C Insurance Industry Combined
Ratio, 2001-2008:Q1 Including
120
115.8
As recently as 2001, insurers
paid out nearly $1.16 for every
$1 in earned premiums
2005 ratio benefited from
heavy use of reinsurance
which lowered net losses
107.4
110
100
Relatively
low CAT
losses,
reserve
releases
Best combined
ratio since 1949
(87.6)
Excluding
Mortgage
& Fin.
Guarantee
insurers
100.7
100.1
Mortgage
& Fin.
Guarantee
insurers
99.9
98.3
96.7
95.6
92.4
90
2001
2002
2003
2004
*Excluding Mortgage & Financial Guarantee insurers.
2005
2006
2007
08:Q1
Sources: A.M. Best, ISO; III.
08:Q1*
Ten Lowest P/C Insurance Combined
Ratios Since 1920 vs. 2007
97
95
2007 was the 20th
best since 1920
The 2006 combined
ratio of 92.2 was the
best since the 87.6
combined in 1949
92.1 92.3 92.4 92.4
93
95.6
93.0 93.1 93.1 93.3
91.2
91
The industry’s best
underwriting years
are associated with
periods of low
interest rates
89
87.6
87
85
1949
1948
1943
1937
2006
1935
1950
1939
1953
1936
2007
Sources: Insurance Information Institute research from A.M. Best data. *2007: III Earlybird survey.
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
Insurers earned a record underwriting profit of
$31.7 billion in 2006, the largest ever but only the
second since 1978. Cumulative underwriting deficit
from 1975 through 2007 is $422 billion.
$561 mill
underwriting
loss in 08:Q1
incl. mort. &
FG insurers
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
$ Billions
Underwriting Gain (Loss)
1975-2008:Q1*
Source: A.M. Best, ISO; Insurance Information Institute
* Includes mortgage * finl. guarantee insurers
Impact of Reserve Changes on
Combined Ratio
$10
$5
$0
($5)
0.1
$0.4
$18.9
$15
$22.8
3.5
$36.9
$25
$20
$33.4
6.5
$10.8
Reserve Development ($B)
$35
$30
($10)
00
01
02
03
10
9
8
Reserve
7
adequacy has
6
4.5
improved
5
substantially
4
3
2
1
-1.2 -1.6 -1.3 -1.1
0
(1)
(2)
($5.0)
($5.3) ($7.0)($6.0)
(3)
04
05
06
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
07F
08F
09F
Combined Ratio Points
8.6 8.9
$40
PY Reserve Development
Combined Ratio Points
Cumulative Prior Year Reserve
Development by Line (As of 12/31/06)
$1,500
$1,000
$366
$1,172 $1,176
-$1,500
-$1,886
-$2,000
-$2,500
-$1,116
Release
-$3,000
-$96
-$100
-$100
-$254
Pr
C
op
om
m
.A
Pr
ut
od
o
.L
ia
bi
Fi
lit
nl
y
.G
ua
ra
In
nt
te
y
rn
at
io
na
l
O
Sp
th
ec
er
ia
lty
W
Li
or
ab
ke
.
r'
sC
Fi
om
de
p
lit
y/
C
Su
om
re
m
ty
er
ci
al
M
O
ul
th
ti
er
Li
ab
ili
R
ty
ein
su
ra
nc
e
Reserve redundancies in
most lines have resulted
in releases in recent
years
ec
ia
l
ty
M
al
Sp
M
ed
H
om
PD
A
PP
Li
ab
A
PP
e
-$3,006
ili
ty
-$3,500
-$413
-$1,000
-$475
-$779
-$500
-$1,174
$ Billions
$0
-$48
$500
-$53
Strengthening
Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.
COMMERCIAL
LINES
Commercial Auto
Commercial Multi-Peril
Workers Comp
Commercial Lines Combined
Ratio, 1993-2008F
04
90
91.2
Recent results benefited from
favorable loss cost trends, improved
tort environment, low CAT losses,
WC reforms and reserve releases
95
97.5
102.5
03
100
94.0
111.1
112.3
109.7
110.2
102.0
105
103.9
107.6
110
110.2
112.5
115
110.3
120
105.4
125
Outside CAT-affected lines,
commercial insurance is
doing fairly well. Caution is
required in underwriting
long-tail commercial lines.
122.3
Commercial coverages
have exhibited significant
variability over time.
85
93
94
95
96
97
Sources: A.M. Best (historical and forecasts)
98
99
00
01
02
05
06 07E 08F
EXCESS &
SURPLUS LINES
Growth, Performance
& Markets
Direct Surplus Lines Premiums
Written (Non-Admitted, Top 10 Writers)
$ Billions
$16
$15.1
$15
$14.5
$13.6
$14
$13
$12
$13.8
$13.6
Aggressive
pricing has taken
its toll on surplus
lines premiums
$11.1
$11
$10
02
03
04
05
Source: Business Insurance, Sept. 8, 2008; Insurance Information Institute.
06
07
Surplus Lines
Taxes Collected
+$124.4M
+10.8%
$ Millions
$1,350
$1,300
+$114.9M
+11.7%
$1,250
$1,200
$1,150
+$49.5M
+5.4%
$1,000
$1,300.7
$1,157.4
$1,097.9
Surplus Lines
pay more than
$1.3B annually in
premium taxes
$1,100
$1,050
$1,281.8
+$18.9M
+1.5%
$983.0
$950
$900
03
04
05
06
Source: Business Insurance, Sept. 8, 2008; Insurance Information Institute.
07
Top 10 E&S Insurers by Non-Admitted
2007 Direct Premiums Written
$ Millions
$6,619.3
Lexington Insurance (AIG)
$1,489.4
American Intl Specialty (AIG)
$1,198.5
Scottsdale Insurance (Nationwide)
Columbia Casualty (CNA)
$763.0
Landmark American (Alleghany)
$707.1
Evanston Insurance (Markel)
$660.8
Arch Specialty (Arch Capital)
$640.6
Admiral Insurance (Berkley)
$561.7
National Fire & Marine (Berkshire)
$544.6
The Top 10 E&S
insurers wrote $13.6
billion in premiums in
2007, down 10.2%
from 2006 but up
22.5% from 2002
$430.6
Essex Insurance (Markel)
$0
$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000
Source: Business Insurance, Sept. 8, 2008; Insurance Information Institute.
Top 10 E&S Markets, by First Half 2008
Gross Surplus Lines Premiums Written
$ Millions
$3,116.8
California
$2,585.8
Florida
$1,841.0
New York
$1,577.8
Texas
$608.4
Illinois
California and
Florida are by far
the largest markets
$504.2
Pennsylvania
Washington
$274.0
Arizona
$249.3
Nevada
$160.0
Mississippi
$156.9
$0
$500
$1,000
$1,500
$2,000
$2,500
Source: Business Insurance, Sept. 8, 2008; Insurance Information Institute.
$3,000
$3,500
Top 10 States With Fastest
Growing E&S Markets, 2003-2005
% Change in Gross Premiums Written: 2003-2005
103.5%
Wyoming
95.5%
New York
81.0%
South Dakota
76.2%
Montana
57.9%
Hawaii
52.4%
New Hampshire
Minnesota
46.0%
Arizona
45.5%
42.8%
Wisconsin
40.5%
Alabama
0%
Fastest growth is not
usually in most CATprone states as might
be expected
20%
40%
60%
80%
Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.
100%
120%
Top 10 States With Fastest
Growing E&S Markets, 2005-2007
% Change in Gross Premiums Written: 2005-2007
69.0%
Tennessee
54.6%
Louisiana
Mississippi
47.9%
North Dakota
47.4%
44.8%
South Carolina
42.1%
Indiana
Wyoming
34.8%
Florida
34.2%
33.2%
Hawaii
25.6%
Texas
0%
Fastest growth is
often, but not
always, in most
CAT-prone states
10%
20%
30%
40%
50%
60%
Source: Business Insurance, Sept. 8, 2008; Insurance Information Institute.
70%
80%
Most Common Classes of E&S
Business Written, 2005
Percentage of Most Common Types Offered
91.7%
General Liability
83.3%
Commercial Property
79.2%
Professional E&O
75.0%
Product Liability
70.8%
Inland Marine
50%
55% 60%
65%
70% 75%
GL and
Commercial
Property are the
biggest sellers
80%
85% 90%
Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.
95%
Most Common Classes of E&S
Business Written, 2007
Percentage of Most Common Types Offered
General Liability
80.8%
Professional E&O
80.8%
Commercial Property
76.9%
GL and
Professional
E&O are the
biggest sellers
Inland Marine
76.9%
76.9%
Product Liability
50%
55%
60%
65%
70%
75%
Source: Business Insurance, Sept. 8 2008; Insurance Information Institute.
80%
85%
EMERGING RISKS
Common Mistake is to
Assume all Emerging Risks
are About Underwriting
Emerging Risks Impacting the
Global (Re)Insurance Industry
Issue
Issue
Erosion of Tort Reform
Inflation Risk
Bad Faith Litigation
Employment Practices Liability
Post-Catastrophe Litigation
Energy Sector
Climate Change (liability>property)
Nursing Home/Asst. Living
Products Liability (Imports, Food)
Currency Risk
Regulatory Risk
Economic Shock/Contagion Effects
Securities Litigation
Terrorism
Asset Valuation Risk (Mark-to-Market)
Nanotechnology
Environmental Liability
Pharmaceuticals
Latent Occupational Disease
Disintermediation
Socialization of Insurance Markets
US Tax Policy
Source: Insurance Information Institute
PREMIUM
GROWTH
At a Virtual Standstill
in 2007/08
Strength of Recent Hard Markets by
NWP Growth
1975-78
24%
1984-87
2000-03
Shaded areas
denote “hard
market” periods
22%
20%
18%
16%
14%
Excluding
Mortgage &
Financial
Guarantee
insurers, Q1
2008 NWP
dropped
0.9%
12%
10%
8%
6%
4%
2%
0%
In 2007 net written
premiums fell 0.6%, the
first decline since 1943
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-2%
2008 is Q1 actual (-0.7%), including Mortgage & Financial Guarantee insurers
Sources: A.M. Best, ISO, Insurance Information Institute
Year-to-Year Change in Net
Written Premium, 2000-Q1:2008
15.3%
P/C insurers are experiencing
their slowest growth rates
since 1943.
10.0%
Excluding
Mortgage &
Financial
Guarantee
insurers, Q1
2008 NWP
dropped
0.9%
8.4%
5.0%
4.2%
3.9%
0.5%
-0.6% -0.7%
2000
2001
2002
Source: A.M. Best; ISO.
2003
2004
2005
2006
2007
Q1:2008
Personal/Commercial Lines &
Reinsurance NPW Growth, 2006-2008F
30%
25%
20%
Net written premium
growth is expected to be
slower for commercial
insurers and reinsurers
28.1%
15%
10%
5%
2.0%-0.1%1.4%
3.5%
0%
-5%
-10%
-15%
-1.5%-2.3%
2006
2007E
Personal
2008F
Commercial
Sources: A.M. Best Review & Preview (historical and forecast).
-5.0%
-8.5%
Reinsurance
Commercial P/C Distribution Channels,
Direct vs. Independent Agents
Direct
Independent Agents
90%
80%
70%
60%
50%
Independent agents have seen only
modest erosion in commercial lines
market share in recent decades
40%
30%
20%
10%
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
0%
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
PRICING
TRENDS
Under Pressure
Cost of Risk vs. Commercial
Lines Combined Ratio
$11.55
110.2
$8.42
$8
105.4
102.5
102.0
$6
$4
$4.83
$5.20
$5.71
$5.25
$5.70
$6.49
$7.30
$7.70
$6.40
104.1
$10
95
90.5
91.4
90
$2
$0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Source: RIMS Benchmark Survey, A.M. Best 2007 Aggregates & Averages; Insurance Information Institute
Cost of Risk/$1000 Revenue
$13.15
$13.91
$13.50
$12
107.6
105
100
112.3
111.1
109.7
$14
$11.94
110.2
109.4
$8.30
110
112.5
110.2
109.5
$11.95
115
122.3
Commercial
Combined Ratio
Cost of Risk
118.8
120
$6.10
Commercial Lines Combined Ratio
125
How the Risk Dollar is Spent (2006)
Total liability costs account for 35% - 40% of the risk dollar
Firms w/Revenues < $1 Billion Firms w/Revenues > $1 Billion
Property
Premiums,
18%
Retained
Property
Losses, 5%
Other Costs,
4%
Property
Premiums,
13%
Liability
Premiums,
Admin Costs,
20%
Other Costs,
4%
Retained
Property
Losses, 11%
Liabilit
Premium
11%
12%
Admin Costs,
14%
Liability Prof. Liability
Retained Costs, 2%
Losses, 5%
Prof. Liability
Costs, 7%
Retained WC
Losses, 7%
WC
Premiums,
14%
Total Mgmt.
Liab., 5%
Retained
Liability
Losses, 13%
Retained WC,
21%
Source: RIMS (2007); Insurance Information Institute
WC
Premiums,
5%
Total Mgmt.
Liab., 7%
Average Commercial Rate Change,
All Lines, (1Q:2004 – 2Q:2008)
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
1Q08 -12.9%
1Q08 -13.5%
-12.0%
4Q07
3Q07 -13.3%
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
1Q05
4Q04
3Q04
2Q04
1Q04
-16%
2Q05
KRW Effect
-11.8%
-5.3%
-3.0%
-2.7%
-4.6%
-14%
-11.3%
-12%
-9.6%
-10%
A flattening in the
magnitude of price
declines is evident
-8.2%
-8%
-9.7%
-5.9%
-6%
-9.4%
-4%
-7.0%
-3.2%
-2%
-0.1%
0%
Cumulative Commercial Rate
Change by Line: 4Q99 – 2Q08
Commercial account pricing has been
trending down for 4+ years and is now
on par with prices in late 2001
Source: Council of Insurance Agents & Brokers
Average Commercial Rate Change
by Account Size: 4Q99 – 2Q08
While pricing has moved in
synch across account size,
large accounts have seen the
most pronounced declines
Source: Council of Insurance Agents & Brokers
Average Commercial Rate Change
by Line: 4Q99 – 2Q08
Pricing has generally been
negative since early 2004
Post-Katrina property
insurance price impact
Source: Council of Insurance Agents & Brokers
Most Layers of Coverage are
Being Challenged/Leaking
$100 Million
Retro
Reinsurance
$50 Million
Excess
$10 Million
Primary
$2 Million
$1 Million
Reinsurers losing to
higher retentions,
securitization
Excess squeezed by
higher primary
retentions, lower
reins. attachments
Lg. deductibles,
self insurance,
RRGs, captives
erode primary
Retention
Source: Insurance Information Institute from Aon schematic.
Risks are comfortable
taking larger retentions
U.S. Domiciled Captives- Net
Premiums Written ($ Millions)
$10.5
$ Millions
$10.0
Following a five-year period of
rapid growth, U.S. captive
insurers saw net premiums
written increase by just 2.7
percent in 2006, after 6.2
percent growth in 2005.
$9.5
$9.9
$9.3
$9.0
$9.0
$8.5
$10.2
$8.4
$8.0
2002
2003
2004
2005
Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review
2006
Risk Retention Group Premiums,
1988 – 2006*
$944.0
$775.5
$875.3
$585.8
$527.2
$493.7
$419.3
90
$493.6
$358.4
500
89
1,000
$250.2
1,500
$790.5
$2,773.7
$2,449.1
$2,197.8
$1,737.7
2,000
$751.9
2,500
$575.5
$707.6
Risk retention (& self-insurance)
group premiums have risen rapidly
in recent years and represent a form
of competition to traditional
insurers and captives
3,000
$1,265.1
Millions of Dollars
Could be expanded
to property risks
05
04
03
02
01
00
99
98
06*
*2006 Projected
Source: Risk Retention Reporter, Insurance Info. Institute
97
96
95
94
93
92
91
88
0
RISING EXPENSES
Expense Ratios Will Rise as
Premium Growth Slows
Personal vs. Commercial Lines
Underwriting Expense Ratio*
30%
Personal
31.1%
32%
29.4%
Commercial
30.0%
30.8%
29.9%
29.1%
28%
26%
25.0%
24.3%
24%
25.6% 25.6%
23.4%
27.0% 27.5%
26.6%
26.3%
25.6% 26.4%
27.1%
26.6%
25.0%
24.5%
26.1%
24.8%
24.7%
24.4% 24.6%
Expenses ratios will likely rise
as premium growth slows
22%
20%
96
97
98
99
00
01
02
*Ratio of expenses incurred to net premiums written.
Source: A.M. Best; Insurance Information Institute
03
04
05
06
07E
08F
CAPACITY/
SURPLUS
Accumulation of Capital/
Surplus Depresses ROEs
U.S. Policyholder Surplus:
1975-2008:Q1*
$550
$500
Capacity as of 3/31/08 was $515.6, down 0.4% from
12/31/07 was $517.9B, but 80% above its 2002 trough.
$450
Recent peak was $521.8 as of 9/30/07
$400
$ Billions
$350
$300
$250
$200
The premium-to-surplus
fell to $0.85:$1 at yearend 2007, approaching
its record low of
$0.84:$1 in 1998
$150
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: A.M. Best, ISO, Insurance Information Institute.
*As of March 31, 2008
Annual Catastrophe Bond
Transactions Volume, 1997-2007
Risk Capital Issues ($ Mill)
$8,000
Number of Issuances
Catastrophe bond issuance has
soared in the wake of Hurricanes
Katrina and the hurricane
seasons of 2004/2005, despite two
quiet CAT years
$7,000
$6,000
$5,000
$7,329.6
35
30
25
$4,693.4
20
$4,000
15
$3,000
$1,000
$633.0
$846.1$984.8
$1,139.0
$1,219.5
$966.9
10
$1,991.1
$1,729.8
$2,000
$1,142.8
5
$0
0
97
98
99
00
01
02
03
04
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
05
06
07
Number of Issuances
Risk Capital Issued
P/C Insurer Share Repurchases,
1987- Through Q4 2007 ($ Millions)
Reasons Behind Capital BuildUp & Repurchase Surge
•Strong underwriting results
$22,322.6
•Moderate catastrophe losses
$418.1
$566.8
$310.1
$658.8
$769.2
91
92
93
94
95
$7,094.1
$5,266.0
$5,242.3
$763.7
$952.4
90
$1,539.9
$311.0
89
$2,764.2
$646.9
88
$4,297.3
$564.0
87
$5,000
$4,586.5
$10,000
Returning capital owners
(shareholders) is one of the
few options available
2007 repurchases to
date equate to 3.9% of
industry surplus, the
highest in 20 years
$2,385.6
$4,497.5
$15,000
•Reasonable investment
performance
•Lack of strategic alternatives
(M&A, large-scale expansion)
$20,000
$4,370.0
$25,000
2007 share buybacks shattered
the 2006 record, up 214%
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
07
06
05
04
03
02
01
00
99
98
97
96
$0
MERGER &
ACQUISITION
Are Catalysts for P/C
Consolidation Growing
in 2008?
P/C Insurer M&A Activity,*
1997-2008**
$36,407
15
Transaction Value ($ Mill)
$40,000
$35,000
$30,000
$25,000
10
7
$8,683
$5,000
Source: Lehman Brothers.
10
8
$9,325
$3,318
2 $599
1
2
0
98 99
12
$12,823
$0
97
14
9
$13,808
$15,000
16
M&A activity began to accelerated in
2007. The largest deals in 2008 are
Liberty Mutual’s acquisition of Safeco
for $6.2B and Allied World’s
acquisition of Darwin for $550 million
$18,289
$20,000
$10,000
Number of Transactions
00
01
02
0
03
04
$6,750 4
$800
1
2
05
6
06
Number of Transactions
Transaction Values
2 2
0
07 08**
*Deals exceeding $500 million. *Through June 30, 2008.
Distribution of P/C Insurer
Acquisitions, Jan. 2007 – June 2008
Deals Exceeding $100 Million
SUMMARY STATS
•22 deals
Personal &
Commercial, 32%,
32%
•$23 billion total
transaction value
•$475 million median
deal value
•Acquirers mostly
p/c insurers and
limited number of
private equity deals
Source: SNL, Lehman Brothers.
Personal, 23%,
23%
Commercial, 45%,
45%
Motivating Factors for Increased
P/C Insurer Consolidation
Motivating Factors for P/C M&As
• Slow Growth: Growth is at its lowest levels since the late 1990s
 NWP growth was 0% in 2007; Appears similarly flat in 2008
 Prices are falling or flat in most non-coastal markets
• Accumulation of Capital: Excess capital depresses ROEs




Policyholder Surplus up 6-7%% in 2007 and up 80% since 2002
Insurers hard pressed to maintain earnings momentum
Options: Share Buybacks, Boost Dividends, Invest in Operation, Acquire
Option B: Engage in destructive price war and destroy capital
• Reserve Adequacy: No longer a drag on earnings
 Favorable development in recent years offsets pre-2002 adverse develop.
• Favorable Fundamentals/Drop-Off in CAT Activity
 Underlying claims inflation (frequency and severity trends) are benign
 Lower CAT activity took some pressure of capital base
Source: Insurance Information Institute.
Distribution Sector: InsuranceRelated M&A Activity, 1988-2006
$2,500
$2,000
300
No extraordinary
trends evident
$1,934
250
200
$1,633
$0
96 & Consulting.
97 99
Source: Conning Research
00
01
02
$944
03
04
150
100
50
$212
$60
$500
$446
$542
$1,000
$689
$1,500
$7
Transaction Value ($ Mill)
$3,000
Number of Transactions
0
05
06
Number of Transactions
$2,720
Transaction Values
Distribution Sector M&A
Activity, 2005 vs. 2006
2005
Other
4%
Title
Insurer
9%
Buying
Distributor
7%
Bank Buying
Agency
29%
Source: Conning Research & Consulting
2006
Agency
Buying
Agency
51%
Insurer
Title
Buying
4%
Distributor
7%
Bank Buying
Agency
25%
Number of
bank
acquisitions
is falling
years
Other
2%
Agency
Buying
Agency
62%
INVESTMENT
OVERVIEW
More Pain,
Little Gain
Property/Casualty Insurance
Industry Investment Gain1
$ Billions
$57.9
$60
$52.3
$56.9
$51.9
$47.2
$50
$59.4
$44.4
$42.8
$55.7
$48.9
$36.0
$40 $35.4
$30
$45.3
$63.6
Investment gains are off in
2008 due to lower yields and
poor equity market conditions.
$20
$10
$12.2
1Investment
08
Q
1
07
06
05
*
04
03
02
01
00
99
98
97
96
95
94
$0
gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.
*2005 figure includes special one-time dividend of $3.2B.
Sources: ISO; Insurance Information Institute.
P/C Insurer Net Realized
Capital Gains, 1990-2008:Q1
$20
$ Billions
Realized capital gains
exceeded $9 billion in
2004/5 but fell sharply in
2006 despite a strong stock
market. Nearly $9 billion
again in 2007, but $-0.5
billion in 2008:Q1.
$18.02
$18
$16.21
$16
$13.02
$14
$12
$10.81
$9.24
$9.89 $9.82
$10
$9.13
$8
$6.63
$6.00
$6
$9.70
$8.97
$6.61
$4.81
$3.52
$4 $2.88
$1.66
$2
$0
07
06
05
04
-$0.50
03
02
01
-$1.21
08:Q1
Sources: A.M. Best, ISO, Insurance Information Institute.
00
99
98
97
96
95
94
93
92
91
90
-$2
Total Returns for Large Company
Stocks: 1970-2008*
S&P 500 was up 3.53% in 2007, but down 14.5% so far in 2008*
40%
30%
20%
10%
0%
-20%
-30%
Markets were up in 2007
for the 5th consecutive year;
2008 off to a rough start
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008*
-10%
Source: Ibbotson Associates, Insurance Information Institute.
*Through September 19, 2008.
P/C Investment Income as a % of Invested
Assets Follows 10-Year US T-Note
P-C Inv Income/Inv Assets
10-Year Treasury Note
9%
Investment yield
historically tracks
10-year Treasury
note quite closely
8%
7%
6%
5%
4%
3%
*As of July 2008.
Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.
08*
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
2%
CATASTROPHIC
LOSS
This is (One Reason)
Why You Buy
Reinsurance
Most of US Population & Property
Has Major CAT Exposure
Is
Anyplace
Safe?
$120
$100
$80
2008 CAT losses already exceed
2006/07 combined. 2005 was by
far the worst year ever for
insured catastrophe losses in the
US, but the worst has yet to come.
$100 Billion
CAT year is
coming soon
$61.9
$ Billions
$100.0
U.S. Insured Catastrophe Losses*
$20
$9.2
$6.7
$22.0
$40
$7.5
$2.7
$4.7
$22.9
$5.5
$16.9
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
$26.5
$5.9
$12.9
$27.5
$60
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08**
20??
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
**Based on preliminary PCS data through June 30. PCS $1.8B loss of for Gustav. $9.8B for Ike of 9/22.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and
personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.
Source: Property Claims Service/ISO; Insurance Information Institute
Top 12 Most Costly Hurricanes in
US History, (Insured Losses, $2007)
$50
$45
$40
$ Billions
$35
$30
With Ike, 9 of the 11 most
expensive hurricanes in
US history occurred since
2004 (Gustav insured
losses totaled $1.8B)
$25
Ike could
become the 4th
most
expensive
hurricane in
US history*
$22.9
Category of
storm at
landfall
$20
$15
$10
$5
$0
$43.6
$7.0
$7.8
$3.8
$4.0
$5.0
$6.0
2
3
3
3
4
3
Georges
(1998)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
Hugo
(1989)
Ivan
(2004)
$8.2
4
Charley
(2004)
$9.8
$10.9
2
3
5
3
Ike
(2008)
Wilma
(2005)
Andrew
(1992)
Katrina
(2005)
*Based on average of midpoints of range estimates from risk modelers AIR, RMS and Eqecat as of 9/15/08.
Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.
Hurricane Ike Initial Insured
Loss Estimates
(Billions of $, as of September 19, 2008)
AIR
Ike came ashore in
Galveston, Texas, as a
Cat 2 hurricane on
September 13
$8 - $12B
$7 - $12B
RMS
Eqecat
$4
Average of the
midpoints of
the 3 ranges is
$9.8 billion
$6
$8 - $12B
$8
$10
$12
Sources: RMS, AIR Worldwide, Eqecat; Compiled by the Insurance Information Institute as of 9/19/08.
Natural Disasters in the United
States, 1980-2008 (Jan – June Totals)
Number
Number of events
has more than
doubled since 1980
109 events
through June 30
is a record
Geophysical
(earthquake, tsunami,
volcanic activity)
© 2008 Munich Re Group
Meteorological (storm)
Hydrological
(flood, mass movement)
Climatological
(temperature extremes,
drought, wildfire)
Source: MR NatCatSERVICE
Global Insured Catastrophe Losses
1970-2007 ($ 2007)
$80
$60
$40
$20
$16.9
$27.6
$100
$2.4
$5.0
$5.8
$9.1
$5.0
$6.4
$5.6
$5.4
$11.3
$7.0
$4.2
$8.9
$10.3
$6.8
$11.6
$5.6
$15.4
$12.4
$23.7
$27.9
$24.4
$42.5
$18.4
$34.4
$25.6
$18.0
$11.2
$24.9
$43.1
$15.0
$41.8
$16.7
$21.6
$52.8
$120
Impact of Hurricane Katrina
on 2005 losses was dramatic,
but losses are trending
upward in general
$113.9
$ Billions
$0
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: Swiss Re Sigma No.1/08, Natural catastrophes and man-made disasters in 2007
Insured Offshore Energy Losses for
Recent Major Gulf Storms
$4.0
$ Billions
$3.0
$2.0
Hurricanes Katrina, Rita and
Ivan cost energy insurers at least
$7 billion. Gustav estimates
range from $1B - $3B.
$2.0
$2.0
Katrina
(2005)
Gustav
(2008)*
$3.0
$2.25
$1.0
$0.0
Ivan
(2004)**
Rita (2005)
*Midpoint of RMS estimated range of $1.0 to $3.0 billion as of 9/1/08; **Midpoint of range ofr $2.0 to $2.5 billion)
Sources: Insurance Information Institute research estimates.
Total Value of Insured
Coastal Exposure (2004, $ Billions)
Florida
New York
Texas
Massachusetts
New Jersey
Connecticut
Louisiana
S. Carolina
Virginia
Maine
North Carolina
Alabama
Georgia
Delaware
New Hampshire
Mississippi
Rhode Island
Maryland
$1,937.3
$1,901.6
$740.0
$662.4
$505.8
$404.9
$209.3
$148.8
$129.7
$117.2
$105.3
$75.9
$73.0
$46.4
$45.6
$44.7
$43.8
$12.1
In 2004 Florida had more
insured coastal exposure—
at nearly $2 trillion dollars.
Future “Mega-Losses” are
UNAVOIDABLE.
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
Total Value of Insured
Coastal Exposure (2007, $ Billions)
Florida
New York
Texas
Massachusetts
New Jersey
Connecticut
Louisiana
S. Carolina
Virginia
Maine
North Carolina
Alabama
Georgia
Delaware
New Hampshire
Mississippi
Rhode Island
Maryland
$2,458.6
$2,378.9
$895.1
$772.8
$635.5
$479.9
$224.4
$191.9
$158.8
$146.9
$132.8
$92.5
$85.6
$60.6
$55.7
$51.8
$54.1
$14.9
$522B increase
since 2004, up 27%
The insured value of all
coastal property was $8.9
trillion in 2007, up 24% from
$7.2 trillion in 2004.
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
$3,000
The 2008 Hurricane
Season:
Preview to Disaster?
Outlook for 2008 Hurricane
Season: 90% Worse Than Average
Average*
2005
2008F
9.6
49.1
5.9
24.5
2.3
28
115.5
14
47.5
7
17
90
9
45
5
5
7
11
Accumulated Cyclone Energy
96.2
NA
175
Net Tropical Cyclone Activity
100%
275%
190%
Named Storms
Named Storm Days
Hurricanes
Hurricane Days
Intense Hurricanes
Intense Hurricane Days
*Average over the period 1950-2000.
Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, August 5, 2008.
Landfall Probabilities for 2008
Hurricane Season: Above Average
Entire US East & Gulf Coasts
US East Coast Including
Florida Peninsula
Gulf Coast from Florida
Panhandle to Brownsville
Caribbean
Average*
2008F
52%
31%
67%
43%
30%
42%
NA
Above
Average
*Average over the past century.
Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, August 5, 2008.
REINSURANCE
MARKETS
Reinsurance Prices are
Falling in Non-Coastal
Zones, Casualty Lines
Share of Losses Paid by
Reinsurers, by Disaster*
70%
60%
50%
40%
30%
Reinsurance is playing
an increasingly
important role in the
financing of megaCATs; Reins. Costs are
skyrocketing
30%
25%
60%
45%
20%
20%
10%
0%
Hurricane Hugo Hurricane Andrew
Sept. 11 Terror
2004 Hurricane
2005 Hurricane
(1989)
(1992)
Attack (2001)
Losses
Losses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer,
which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at
$3.85 billion for 2004 and $4.5 billion for 2005.
Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
US Reinsurer Net Income
& ROE, 1985-2007*
$7.96
$9.68
5%
0%
-5%
ROE
07*
06
05
04
-10%
03
02
99
98
97
96
95
94
93
92
91
90
89
88
87
86
01
($2.98)
($4)
85
15%
ROE
$2.51
$3.41
$3.17
$1.31
$4.53
$1.47
$1.95
$2.52
$1.79
$1.17
$1.87
$2.03
Net Income
($2)
20%
10%
00
$0
$1.95
$1.94
$2
$1.38
$4
$1.22
$6
$3.71
$8
$0.12
Net Income ($ Bill)
$10
$1.99
$12
$5.43
Reinsurer profitability
rebounded post-Katrina
but is now falling
Source: Reinsurance Association of America. *2007 ROE figure is III estimate based return on average 2007 surplus.
Regional Distribution of
Reinsurers by NWP, 2006
International
reinsurers from
Germany,
Switzerland and
France account for
40 percent of global
reinsurance volume.
Bermuda is a
growing market,
with a 10 percent
share. Lloyd’s and
London-based
reinsurers account
for 6 percent of the
world market.
Eight countries account for 89 percent
of global reinsurance volume.
U.S.
25%
Germany
25%
Other
11%
Ireland
2%
Bermuda
10%
Japan
6%
Switzerland
12%
France
Source: Standard & Poor’s, Global Reinsurance Highlights, 2007 Edition 3%
U.K.
6%
Reinsurer Market Share Comparison:
1990 vs. 2006
1990
Offshore
Reinsurer
35.3%
U.S.
Reinsurer
64.7%
2006
Offshore
Reinsurer
53.1%
U.S. Reinsurer market
share fell precipitously
between 1990 and 2006
Sources: Reinsurance Association of America; Insurance Information Institute.
U.S.
Reinsurer
46.9%
Shifting Legal
Liability & Tort
Environment
Is the Tort Pendulum
Swinging Against Insurers?
“King of Torts” Dickie Scruggs
•Won billions in tobacco, asbestos and Katrina
litigation
•Pleaded guilty for attempting to offer a judge
$40,000 bribe to resolve attorney fee allocation
from Katrina litigation in his firm’s favor. His
son/othersguilty on related charges
•Could get 5 years in prison, $250,000 fine
Source: Wall Street Journal, 3/15/07
“King of Class Actions” Bill Lerach
•Former partner in class action firm Milberg
Weiss
•Admitted felon. Guilty of paying 3 plaintiffs
$11.4 million in 150+ cases over 25 years &
lying about it repeatedly to courts
•Will serves 1-2 years in prison and forfeit
$7.75 million; $250,000 fine
Source: San Diego Union Tribune, 9/19/07
Bad Year for Tort Kingpins*
“King of Class Actions” Melvyn Weiss
•Former partner in class action firm Milberg
Weiss; Earned $251 million in legal fees
•Pled guilty to federal charges of racketeering
and conspiracy for paying kickbacks to
professional plaintiffs
•Sentenced to 30 months in prison, pay $9.75
million in restitution; $250,000 fine
Source: Wall Street Journal, various issues.
Bad Year for Tort Kingpins*
(Continued)
Personal, Commercial &
Self (Un) Insured Tort Costs*
$250
Commercial Lines
Personal Lines
Self (Un)Insured
Total = $216.7 Billion
Billions
$200
$45.5
Total = $159.6 Billion
$150
Total = $121.0 Billion
$30.0
$85.6
$20.4
$100
$70.9
Total = $39.3 Billion
$51.0
$50
$0
$85.6
$5.2
$17.1
$17.0
$49.6
$58.7
1980
1990
2000
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
2006
Growth in Cost of U.S. Tort System,
1951-2009F
Tort costs moderated beginning in 2003 as many
improvements in the tort system began to bear fruit
13.8% 13.7%
15%
10%
2001-2005: 7.8%
11.9% 11.8%
11.6%
9.8%
2006-2009F: 1.6%
5.6% 5.7%
5%
4.7%
3.2%
2.4%
0.4%
0%
-5%
195160
196170
197180
-10%
Source: Tillinghast-Towers Perrin.
198190
19912000
2001
2002
2003
2004
Asbestos-related and other costs
drove tort growth sharply
upward in 2001 and 2002
2005
2006
-5.4%
2007E 2008E
$100
$180
$169
$167
$156
$156
$159
$144
$141
$130
$150
$129
$200
$148
$277
$265
$253
$247
$261
$246
$250
Per capita “tort tax” was $825
in 2006, up from $680 in 2000
$233
$300
$205
Tort costs consumed 1.87% of GDP in
2006, down from 2.24% in 2003
$260
Cost of US Tort System
($ Billions)
Reducing tort costs relative to GDP by
just 0.25% (to 1.84%) would produce an
economic stimulus of $31.1B
$50
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
09E
08E
07E
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
$0
$300
Tort System Costs
$250
$200
$150
$100
$50
After a period of
rapid escalation,
tort system costs as
a % of GDP are
now falling
2.24%
$277
2.24%
$265
2.14%
$246.0
1.98%
$247.0
1.82%
1.83%
1.83%
1.53%
1.87%
$179.2
1.34%
$158.5
1.22%
1.11%
$130.2
1.03%
0.82%
$83.7
0.62%
2.5%
$42.7
$13.9$20.0
$7.9
$5.4
$1.8 $3.4
0.5%
$0
2.0%
1.5%
1.0%
0.0%
50
55
60
65
70
75
80
Tort Sytem Costs
85
90
95
00
03
06 08E 09E
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP
Tort Costs as % of GDP
Tort System Costs, 1950-2009E
Tort System Costs and Tort Costs as
a Share of GDP, 2000-2009F
1.82%
$246
$220
$200
$180
$260
$233
$240
2.10%
$205
$179
$277
$265
1.87% 1.84%1.83%1.83% 2.0%
1.5%
After a period of rapid
escalation, tort system costs
as % of GDP are now falling
$160
$140
$120
1.0%
0.5%
$100
0.0%
00
01
02
03
04
Tort Sytem Costs
05
06
07E
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
08E
09E
Tort Costs as % of GDP
$260
2.03%
$261
Tort System Costs
$280
2.5%
$253
2.22% 2.24% 2.23%
$247
$300
Liability: Average Cost per $1,000 of Revenue*
United States, 2001 to 2007
$0.48
$0.32
$0.23
$0.18
$0.14
$0.11
$1.27
$1.06
$0.50
$0.33
$1.00
$0.67
$0.65
$1.25
$2.00
$1.56
$1.07
$2.50
$1.50
Liability insurance costs
relative to the client’s
revenues are down by
25% - 35% since 2004
$2.49
$3.00
2007
$0.36
$0.23
$3.50
2004
$0.17
$3.21
2001
$0.86
$0.63
$4.00
$0.00
$0 - $200M
$201M$500M
$501M-$1B
*Across entire liability program (full population)
Source: Marsh, 2007 Limits of Liability Report
$1B-$5B
$5B-$10B
$10B+
All
The Nation’s Judicial
Hellholes (2007)
Watch List
Madison County, IL
St. Clair County, IL
Northern New
Mexico
Hillsborough
County, FL
Delaware
California
Some improvement
in “Judicial
Hellholes” in 2007
NEVADA
Clark County
(Las Vegas)
ILLINOIS
Cook County
NEW JERSEY
Atlantic County
(Atlantic City)
West Virginia
Dishonorable
Mentions
District of Columbia
MO Supreme Court
MI Legislature
GA Supreme Court
Oklahoma
TEXAS
Rio Grande
Valley and
Gulf Coast
Source: American Tort Reform Association; Insurance Information Institute
South Florida
Business Leaders Ranking of
Liability Systems for 2007
New in 2007
Best States
1. Delaware
ME, NH, TN,
UT, WI
2. Minnesota
3. Nebraska
Drop-Offs
4. Iowa
ND, VA, SD, WY,
5. Maine
ID
6. New Hampshire
7. Tennessee
8. Indiana
Midwest/West has
9. Utah
mix of good and
10. Wisconsin
bad states
Worst States
Newly
41. Arkansas
Notorious
42. Hawaii
AK
43. Alaska
Rising
44. Texas
Above
45. California
FL
46. Illinois
47. Alabama
48. Louisiana
49. Mississippi
50. West Virginia
Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.
Sum of Top 10 Jury Awards,
2004-2007
$6,000
$ Millions
$5,158.8
$5,000
$4,000
$2,953.7
$3,000
Total of Top 10
awards in 2007
was 25% lower
than in 2006
$2,000
$1,000
$815.0
$615.0
2006
2007
$0
2004
2005
Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.
Number of Top 10 Jury Awards,
1995 - 2007
25
22 22
TX, NY and CA lead
the U.S. in jumbosize jury awards
20
20
17
15
10
8
7
6
5
5
4
3
2
2
2
2
1
1
1
Source: LawyersWeekly USA,, January 22, 2008.
N
J
N
V
N
M
SC
O
R
D
M
LA
TN
IL
G
A
A
L
D
C
*
O
M
FL
C
A
N
Y
TX
0
*All against Iran for terrorist activity
Total Top 10 Verdicts,
through 2006
Source: Lawyers USA, 2007
1995
2007 Top Ten Verdicts
Value
Issue
State
$109 Million
Medical Malpractice
New York
$102.7 Million
Premises Liability, Death
Florida
$55.2 Million
Product Liability, Death
California
$54 Million
Private Air Crash
Florida
$54 Million
Nursing Home, Death
New Mexico
$50 Million
DUI Crash
Florida
$50 Million
Product Liability, Death
Alabama
$47.6 Million
Prempro
Nevada
$47.5 Million
Vioxx
New Jersey
$45 Million
Auto Crash, Death
Florida
Source: LawyersWeekly USA, January 22, 2008.
REGULATORY &
LEGISLATIVE
ENVIRONMENT
Isolated Improvements,
Mounting Zealoutry
Rating of Auto/Home Insurance
Regulatory & Operating Environment*
Most states (25) get a “B”, but 7 got A’s, 10 got
C’s (including DC), 5 earned D’s and 4 got F’s
AK
AL
WA
ME
MT
ND
VT
NH
MN
OR
=A
=B
=C
=D
=F
SD
ID
MA
NY
WI
CT
MI
RI
WY
NJ
PA
IA
DC
OH
NE
IL
NV
IN
DE
MD
WV
UT
VA
CO
MO
KS
KY
CA
NC
TN
AZ
HI
OK
NM
SC
AR
Source: James Madison Institute, FebruaryAL2008.
MS
GA
LA
TX
FL
*Criteria considered were auto/home residual mkts.,
auto/home mkt. concentration, loss ratio stability,
reg. env.,form regulation, credit scores, territorial
restrictions
Source: James Madison Institute, Feb. 2008
Insurance Information
Institute On-Line
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