Overview & Outlook for the
P/C Insurance Industry
Drivers of Revenue, Cost and Competition in
the Aftermath of the “Great Recession”
NAMIC Commercial Lines Conference
Chicago, IL
March 2, 2011
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5520  Cell: 917.453.1885  bobh@iii.org  www.iii.org
Presentation Outline
 Reasons for Optimism, Causes for Concern in the P/C
Insurance Industry
 P/C Profitability Overview & Outlook
 5 Key Pillars of Profitability: Past, Present & Future





Underwriting
Pricing Trends (Commercial Lines)
Investments
Expenses
Leverage
 External Factors Influencing Profitability
 Tort System Review: Overview and Causes for Concern
 Regulatory Environment
 Exposure Analysis: Where Will Growth Come from in the
Aftermath of the Great Recession?”
 Crisis-Driven Exposure Issues: Commercial Lines
 Growth in the Post-Crisis World
 Catastrophe Loss Review
 Q&A
2
Reasons for Optimism, Causes
for Concern in the P/C
Insurance Industry
The Outlook for the Economy
Has Brightened, But the Outlook
for P/C Insurance Is Mixed
3
Reasons for Optimism, Causes for
Concern in the P/C Insurance Industry
 Economic Recovery in US is Self-Sustaining and Strengthening
 No Double Dip Recession
 Economy is more resilient than most pundits presume





Consumer Confidence is Gradually Improving
Consumer Spending is Recovering Gradually
Consumer and Business Lending Are Expanding
Housing Market Remains Weak, but Some Improvement Expected in 2011
Inflation Remains Tame
 Runaway inflation is highly unlikely; Fed has things under control
 Deflation—threat has virtually disappeared
 Private Sector Hiring is Consistently Positive for 13 Months
 Acceleration in hiring later in 2011
 No significant secondary spike in unemployment





Sovereign Debt, Muni Bond “Crises” Overblown
Current Middle East Turmoil Poses Little Risk to US Economy
Interest Rates Are Rising but Remain Low by Historical Standards
Stock and Bond Markets More Stable, Less Volatile
Political Environment Is More Hospitable to Business Interests
4
Reasons for Optimism, Causes for
Concern in the P/C Insurance Industry
 Era of Mass P/C Insurance Exposure Destruction Has Ended
 Personal and commercial exposure growth is virtually certain in 2011
 But restoration of destroyed exposure will take 3-5 years in US
 Exposure Growth Returned in in 2nd Half 2010, Will Accelerate in 2011
 P/C Industry Saw Growth in 2010 (+0.8%) for the First Time Since 2006
 Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures
 Wage growth is also positive and could modestly accelerate
 Increase in Demand for Commercial Insurance Is in its Earliest Stages and
Will Accelerate in 2011
 Includes workers comp, commercial auto, marine, many liability coverages, D&O
 Laggards: Property, inland marine, aviation
 Personal Lines: Auto leads, homeowners lags
 Investment Environment Is/Remains Much More Favorable
 Return of realized capital gains as a profit driver
 Interest rates are low but are risingBoost to investment income
 Agent Commissions Should Begin to Rise in 2011
 Demand, Capital Management Strategies Will Temper Overcapitalization
5
P/C Insurance Industry
Financial Overview
Profit Recovery Continues
Early Stage Growth Begins
8
$65,777
$26,700
$3,043
$28,311
$44,155
$38,501
$30,029
$20,559
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$24,404
$50,000
$21,865
$60,000
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.3%
2009 ROAS1 = 5.8%
2010:Q3 ROAS = 6.7%
$30,773
$70,000






P-C Industry 2010:Q3 profits
were$26.7B vs.$16.4B in 2009:Q3,
due mainly to $4.4B in realized
capital gains vs. -$9.6B in previous
realized capital losses
$36,819
$80,000
$62,496
P/C Net Income After Taxes
1991–2010:Q3 ($ Millions)
$0
-$10,000
-$6,970
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS for
2010:Q3 and 4.6% for 2009. 2009:Q3 net income was $29.8 billion excluding M&FG.
Sources: A.M. Best, ISO, Insurance Information Institute
09 10:Q3
ROE: Property/Casualty Insurance,
1987–2010E*
(Percent)
P/C Profitability Is Both by
Cyclicality and Ordinary Volatile
20%
Katrina,
Rita, Wilma
15%
10%
Sept. 11
Hugo
5%
Andrew
0%
4 Hurricanes
Lowest CAT
Losses in
15 Years
Northridge
Financial
Crisis*
-5%
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
* Excludes Mortgage & Financial Guarantee in 2008 - 2010.
Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3.
04
05
06
07
08
09 10E
10
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
A combined ratio of about 100
generated ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Combined Ratio / ROE
110
105
15.9%
14.3%
100.6
100
100.1
97.5
100.7
12.7%
15%
101.0
99.5
99.7
7.3%
7.7%
9.6%
95
18%
92.6
12%
9%
8.9%
6%
90
4.4%
85
3%
0%
80
1978
1979
2003
2005
Combined Ratio
2006
2008*
2009*
2010:Q3*
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2009 and 2010:Q3 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial
guaranty insurers
Source: Insurance Information Institute from A.M. Best and ISO data.
RNW for Major P/C Lines,
2000-2009 Average
20%
10-year returns for some lines are
excellent, though homeowners is a major
laggard, largely due to major
catastrophes. WC returns are slipping.
19.8%19.1%
15%
12.2%
10%
8.5% 8.0%
7.4%
7.2% 7.0%
6.4%
4.7% 4.7%
5%
0%
-5%
-3.9%
Fire
Inland
All Comm CMP
Marine Other Auto
Source: NAIC; Insurance Information Institute
Med
Mal
PP
Auto
All
Lines
WC
Other
Liab
HO
Allied
Profit Pillar #1
UNDERWRITING
Cyclicality is Driven Primarily
by the Industry’s Underwriting
Cycle, Not the Economy
14
P/C Insurance Industry
Combined Ratio, 2001–2010:Q3*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
Cyclical
Deterioration
120
115.8
110
Lower CAT
Losses,
More
Reserve
Releases
Best
Combined
Ratio Since
1949 (87.6)
107.5
100.1
100
101.0
100.8
98.4
99.3
99.7
2009
2010:Q3
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2
Sources: A.M. Best, ISO.
15
Underwriting Gain (Loss)
1975–2010:Q3*
($ Billions)
Cumulative
underwriting deficit
from 1975 through
2009 is $445B
$35
$25
$15
$5
-$5
-$15
-$25
The industry recorded
a $6.2B underwriting
loss in 2010:Q3
compared to $3.2B in
2009:Q3
-$35
-$45
-$55
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
Large Underwriting Losses Are NOT Sustainable
in Current Investment Environment
* Includes mortgage and financial guarantee insurers.
Sources: A.M. Best, ISO; Insurance Information Institute.
05
07
09
Calendar Year Combined Ratios
by Segment: 2008-2011F
Personal lines combined ratio is expected to remain stable in
2010 while commercial lines and reinsurance deteriorate
110
108
106
104
102
100
98
96
94
92
90
108
106
104.5
103.8
102.4
100
99.5
98.9
Personal Lines
Commercial Lines
2008
2009
2010P
2011F
Overall deterioration in 2011 underwriting performance is due to expected
return to normal catastrophe activity along with deteriorating underwriting
performance related to the prolonged commercial soft market
Sources: A.M. Best . Insurance Information Institute.
17
Financial Strength &
Underwriting
Cyclical Pattern is P-C Impairment
History is Directly Tied to
Underwriting, Reserving & Pricing
21
P/C Insurer Impairments, 1969–2009
5 of the 11 are Florida
companies (1 of these
5 is a title insurer)
18
19
16
18
14
15
35
31
29
12
16
14
13
5
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
0
7
6
9
13
12
9
11
9
7
8
10
15
12
20
19
30
31
34
34
40
36
41
50
49
50
47
49
50
48
55
60
60
58
70
The Number of Impairments Varies Significantly Over the P/C Insurance
Cycle, With Peaks Occurring Well into Hard Markets
Source: A.M. Best; Insurance Information Institute.
P/C Insurer Impairment Frequency vs.
Combined Ratio, 1969-2009
120
Combined Ratio after Div
P/C Impairment Frequency
2.0
1.8
1.6
1.4
110
1.2
105
1.0
0.8
100
90
0.4
2009 estimated impairment rate rose to 0.36% up from a near
record low of 0.23% in 2008 and the 0.17% record low in 2007;
Rate is still less than one-half the 0.79% average since 1969
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09*
95
0.6
Impairment Rate
Combined Ratio
115
0.2
0.0
Impairment Rates Are Highly Correlated With Underwriting Performance
and Reached Record Lows in 2007/08
Source: A.M. Best; Insurance Information Institute
23
Reasons for US P/C Insurer
Impairments, 1969–2008
Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause
of Insurer Impairments, Underscoring the Importance of Discipline.
Investment Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.7%
4.2%
Misc.
9.1%
Investment
Problems
Affiliate Impairment
7.0%
38.1%
Deficient Loss Reserves/
Inadequate Pricing
7.9%
7.6%
Catastrophe Losses
8.1%
Alleged Fraud
14.3%
Rapid Growth
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009
24
Profit Pillar #2
PRICING
Pricing is Key to Profitability
Trends in Personal and
Commercial
25
Soft Market Persisted in 2010 but May
Be Easing: Relief in 2011?
(Percent)
25%
1975-78
1984-87
2000-03
Net Written Premiums Fell 0.7% in
2007 (First Decline Since 1943) by
2.0% in 2008, and 4.2% in 2009, the
First 3-Year Decline Since 1930-33.
20%
15%
10%
5%
0%
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10F
-5%
NWP was up 0.8% through
10:Q3 vs. -4.5% through 09:Q3
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
26
Auto & Home vs. All Lines, Net Written
Premium Growth, 2000–2009
While homeowners insurance has grown faster
than auto over the past decade, auto is
generally more profitable
15.3%
15%
Private Passenger Auto
Homeowners
All Lines
14.5%
13%
11%
Average 2000-2009
Auto = 2.9
Home = 6.5%
All Lines = 3.4%
9.2%
9%
7%
5.7%
5%
3%
5.0%
1%
2.2%
0.9%
-0.9%
-1%
-3%
-4.9%
-5%
00
01
02
Sources: A.M. Best; Insurance Information Institute.
03
04
05
06
07
08
09
27
5%
0%
-5%
-10%
Sources: ISO, Insurance Information Institute.
2010:Q3
2010:Q2
2010:Q1
2009:Q4
2009:Q3
2009:Q2
2009:Q1
2008:Q4
2008:Q3
2008:Q2
2008:Q1
2007:Q4
2007:Q3
2007:Q2
2007:Q1
2006:Q4
2006:Q3
2006:Q2
2006:Q1
2005:Q1
-1.8%
-0.7%
-4.4%
-3.7%
-5.3%
-5.2%
-1.4%
-1.3%
-1.9%
-1.6%
-4.6%
2005:Q2
-4.1%
2005:Q3 -5.8%
2005:Q4
-1.6%
2004:Q4
2004:Q3
2004:Q2
2004:Q1
2003:Q4
2003:Q3
2003:Q2
2003:Q1
2002:Q4
2002:Q3
1.3%
2.3%
0.5%
2.1%
0.0%
10.3%
10.2%
13.4%
6.6%
15.1%
16.8%
16.7%
12.5%
10.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
10%
2002:Q2
15%
10.2%
20%
2002:Q1
P/C Net Premiums Written: % Change,
Quarter vs. Year-Prior Quarter
The longawaited uptick:
mainly
personal lines
Finally! Back-to-back quarters of net written premium growth
(vs. the same quarter, prior year)
28
Net Written Premium Growth
by Segment: 2008-2011F
Personal lines growth resumed in 2010 and will
continue in 2011, while commercial lines contracted
again in 2010 and but will stabilize in 2011
4%
2.8%
2.5%
2%
0.3%
0%
-2%
-0.1%
-0.1%
-4%
-2.0%
-3.1%
-6%
-8%
-10%
-9.4%
-12%
Personal Lines
2008
Commercial Lines
2009E
2010P
2011F
Rate and exposure are more favorable in personal lines, whereas a
prolonged soft market and sluggish recovery from the recession
weigh on commercial lines.
Sources: A.M. Best; Insurance Information Institute.
29
Average Commercial Rate Change,
All Lines, (1Q:2004–3Q:2010)
3Q10
-5.2%
1Q10
-5.3%
2Q10
4Q09
-5.6%
-6.4%
3Q09
-5.8%
2Q09
-4.9%
1Q09
-5.1%
-6.4%
-11.0%
-12.9%
-13.5%
-12.0%
-13.3%
-11.8%
-11.3%
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
-5.3%
-3.0%
-2.7%
-4.6%
KRW Effect
-16%
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
-14%
Magnitude of Price
Declines Shrank
During Crisis,
Reflecting Shrinking
Capital, Reduced
Investment Gains,
Deteriorating
Underwriting
Performance, Higher
Cat Losses and
Costlier Reinsurance
-9.6%
-12%
-8.2%
-10%
-9.7%
-8%
-9.4%
-6%
-7.0%
-4%
-5.9%
-2%
-3.2%
0%
-0.1%
1Q04
(Percent)
Market Remains
Soft as Capital
Restored and
Underwriting Losses
Remain Modest
32
Change in Commercial Rate Renewals,
by Account Size: 1999:Q4 to 2010:Q3
Percentage Change (%)
Peak = 2001:Q4
+28.5%
Pricing Turned
Negative in Early
2004 and Has
Been Negative
Ever Since
Market has Been Soft for
6+ years and Remains Soft
as Capital is Restored and
Underwriting Losses
Remain Modest
KRW
Effect
Trough = 2007:Q3
-13.6%
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
33
Cumulative Qtrly. Commercial Rate Changes,
by Account Size: 1999:Q4 to 2010:Q3
1999:Q4 = 100
Pricing today is
where is was in
Q3:2000 (pre-9/11)
Downward pricing
pressure is most
pronounced for
larger risks
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
34
Change in Commercial Rate Renewals,
by Line: 2010:Q3
1.0%
Su
re
ty
In
te
rru
pt
EP
io
n
L
Bu
s.
D
&O
ct
io
n
on
st
ru
m
U
C
br
el
la
lA
C
om
m
lP
om
C
G
L
m
om
Al
lC
ut
o
ro
p
m
er
ci
al
Percentage Change (%)
0.3%
0.0%
-1.0%
-2.0%
-3.0%
-2.8%
-4.0%
-3.7%
-5.0%
-6.0%
-2.7%
-5.2%
-4.7%
-5.6%
-4.4%
-4.2%
-5.3%
Most Major Commercial Lines Renewed Down in Q3:2010 at a Pace
Similar to that of a Year Earlier
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
35
Profit Pillar #3
INVESTMENTS
Investment Performance is a
Key Driver of Profitability
Does It Influence
Underwriting?
36
Property/Casualty Insurance Industry
Investment Gain: 1994–2010:Q31
2009:Q3
gain was
$29.3B
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$40
$55.7
$51.9
$48.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$39.0 $39.5
$36.0
$35.4
$31.7
$30
Investment gains in
2010 are on track to be
their best since 2007
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09 10:Q3
In 2008, Investment Gains Fell by 50% Due to Lower Yields and
Nearly $20B of Realized Capital Losses
2009 Saw Smaller Realized Capital Losses But Declining Investment Income
Investment Gains Recovered Significantly in 2010
1
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
* 2005 figure includes special one-time dividend of $3.2B.
Sources: ISO; Insurance Information Institute.
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. January 2011
6%
5%
4.82%
4.96%
5.04%
4.96%
4.82%
4.82%
4.88%
5.00%
4.93%
5.00%
4.17%
4%
3%
Treasury yield curve is near its most
depressed level in at least 45 years,
though longer yields rose in late 2010
as economy improved. Investment
income is falling as a result.
5.19%
4.42%
3.29%
2.66%
1.93%
2%
QE2 Target
0.99%
1%
0.62%
0.09%
0.14%
0.19%
0.29%
1M
3M
6M
1Y
January 2011 Yield Curve*
Pre-Crisis (July 2007)
0%
2Y
3Y
5Y
7Y
10Y
20Y
30Y
The Fed’s Announced Intention to Pursue Additional Quantitative Easing
Could Depress Rates in the 7 to 10-Year Maturity Range through June
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
39
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.
40
Distribution of P/C Insurance Industry’s
Investment Portfolio
Portfolio Facts
as of 12/31/2009
As of December 31, 2009
 Invested assets
totaled $1.26 trillion
68.8%
Bonds
 Generally, insurers
invest conservatively,
with over 2/3 of
invested assets in
bonds
 Only 18% of invested
assets were in
common or preferred
stock
*Net admitted assets.
Common &
Other 7.0% Preferred
6.2% Cash & Stock
18.0%
Short-term
Investments
Sources: NAIC; Insurance Information Institute research.
41
2011 Financial Overview
About Half of the P/C Insurance Industry’s Bond
Investments Are in Municipal Bonds
Bond Investment Facts
as of 12/31/09
As of December 31, 2009
 Investments in “Political
Subdivision [of states]” bonds
were $102.5 billion
 Investments in “States,
Territories, & Possessions”
bonds were $58.9 billion
 Investments in “Special
Revenue” bonds were $288.2
billion
 All state, local, and special
revenue bonds totaled 48.2%
of bonds, about 35.7% of
total invested assets
31.0%
Special
Revenue
Political
Subdivisions
11.0%
33.3%
Industrial
U.S.
Government
0.9%
15.5%
6.3% 2.0%
States, Terr., Foreign Govt
etc.
Sources: NAIC, via SNL Financial; Insurance Information Institute research.
42
2011 Financial Overview
When P/C Insurers Invest in Higher Risk Bonds,
It’s Corporates, Not Munis
Subdivisions of
States
0.1%
97.4%
2.5%
0.1%
States
92.5%
7.4%
Industrial
72.8%
0%
20%
40%
20.4%
60%
80%
Class 1
Class 2
Classes 3-6
6.8%
100%
The NAIC’s Securities Valuation Office puts bonds into one of 6 classes:
class 1 has the lowest expected impairments; successively higher
numbered classes imply increasing impairment likelihood.
Data are as of year-end 2009.
Sources: SNL Financial; Insurance Information Institute.
Profit Pillar #4
EXPENSES
Will Expense Ratios Fall As
Premium Growth Turns Positive?
44
Underwriting Expense Ratio*
All P/C Lines, 1994-2010E**
28.6%
29%
28.1%
28.0%
28%
27.4%
27.4%
27.0%
27.6%
27%
25.9%
26.1%
26.5%
26.3%
26.3%
27.0%
26%
25.3%
25%
25.5%
25.0%
24.5%
24%
23%
Underwriting expense
ratios are up
significantly as
premiums fall faster
than expenses during
generally soft market
conditions
22%
94
95
96
97
98
99
00
*Ratio of expenses incurred to net premiums written.
**2010 figure based on data through 2010:Q3.
Source: A.M. Best; Insurance Information Institute.
01
02
03
04
05
06
07
08
09 10E
Underwriting Expense Ratio*:
Personal vs. Commercial Lines, 1990-2010E**
Commercial lines
expense ratios are
highly cyclical
32%
30.6%
30.5%
29.9%
30%
30.0%
30.5%
28.5% 28.3%
27.4%
28%
29.9%
29.1%
29.3%
28.2%
27.7%
28.4% 28.7%
26.6%
27.8%
26.6% 25.6%
25.6%
26%
25.0%
24.3%
25.6%
24.7%
24.4%
24.3%
23.7%23.4%
24%
26.4%
26.4%
26.4%
26.2%
26.4%
25.0%
24.8%
24.7% 24.7%
24.5% 24.4% 24.6%
23.9%
23.5%
22%
Personal Lines
Commercial Lines
*Ratio of expenses incurred to net premiums written.
**2010 figures are estimates.
Source: A.M. Best; Insurance Information Institute.
10E
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
20%
Profit Pillar #5
LEVERAGE
Efficient Deployment of Capital
Exerts a Significant Impact on
Profitability
48
Policyholder Surplus,
2006:Q4–2010:Q3
($ Billions)
2007:Q3
Previous Surplus Peak
Surplus set a new
record in 2010:Q3*
$560
$544.8
$540.7
$540
$530.5
$512.8
$520
$460
$440
$515.6
$511.5
$505.0
$500 $487.1
$480
$521.8 $517.9
$496.6
$490.8
$478.5
The Industry now has $1 of
surplus for every $0.77 of
NPW—the strongest claimspaying status in its history.
$463.0
$455.6
$437.1
$420
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3
Quarterly Surplus Changes Since 2007:Q3 Peak
*Includes $22.5B of paid-in
capital from a holding
company parent for one
insurer’s investment in a
non-insurance business in
early 2010.
Sources: ISO, A.M .Best.
09:Q1: -$84.7B (-16.2%)
09:Q2: -$58.8B (-11.2%)
09:Q3: -$31.0B (-5.9%)
09:Q4: -$10.3B (-2.0%)
10:Q1: +$18.9B (+3.6%)
10:Q2: +$8.7B (+1.7%)
10:Q3: +$23.0B (+4.4%)
50
Ratio of Insured Loss to Surplus for
Largest Capital Events Since 1989*
(Percent)
The Financial Crisis at its
Peak Ranks as the Largest
“Capital Event” Over
the Past 20+ Years
18%
15%
16.2%
13.8%
12%
10.9%
9.6%
9%
6.9%
6.2%
6%
3.3%
3%
0%
6/30/1989
Hurricane
Hugo
6/30/1992
Hurricane
Andrew
12/31/93
Northridge
Earthquake
6/30/01 Sept.
11 Attacks
6/30/04
Florida
Hurricanes
6/30/05
Hurricane
Katrina
* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event
** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%
Source: PCS; Insurance Information Institute
Financial
Crisis as of
3/31/09**
53
Ratio of Net Premiums Written
to Policyholder Surplus, 1970-2010*
Record High P-S
Ratio was 2.7:1
in 1974
1.4
1.4
1.3
1.3
1.1
1.1
1.6
1.5
1.8
1.7
1.7
1.9
1.9
1.9
1.9
1.7
1.6
1.6
2.1
1.8
2.0
2.0
1.9
2.1
2.3
2.5
The premium-to-surplus ratio (a measure
of leverage) hit a record low at just 0.79:1
in 2010. It has decreased as PHS grows
more quickly than NPW, with the effect of
holding down profitability.
1.0
0.9
0.84
0.86
0.94
1.13
1.29
1.17
1.07
0.99
0.91
0.84
0.95
0.82
0.79
2.7
2.5
2.5
2.5
3.0
10*
08
06
04
02
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
0.0
0
Record Low P-S
Ratio was 2.7:1
in 2010*
0.5
The Premium-to-Surplus Ratio in 2010 Implies that P/C Insurers Held $1
in Surplus Against Each $0.79 Written in Premiums. In 1974, Each $1 of
Surplus Backed $2.70 in Premium.
*2010 data are is estimated using annualized NWP data through 2010:Q3.
Sources: Insurance Information Institute calculations from A.M. Best data.
55
Merger & Acquisition
Capital Cycles Can
Drive Consolidation
56
U.S. P/C Insurance-Related
M&A Activity, 1988–2009
($ Billions)
$60
Transaction Value
Number of Transactions
120
$50
100
$40
80
$30
60
$20
40
$10
Number of Transactions
Transaction Value
140
20
$0
0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
$ Value of Deals Down 78%
in 2009, Volume Up 7%
Note: U.S. Company was the acquirer and/or target.
Source: Conning Research & Consulting.
2010: No Mega Deals, Despite Record
Capital, Slow Growth and Improved
Financial Market Conditions
57
Secondary Profit Pillars
OPERATING ENVIRONMENT
REGULATORY ENVIRONMENT
Many Other Factors Influence
P/C Insurer Profitability
58
Shifting Legal Liability &
Tort Environment
Is the Tort Pendulum
Swinging Against Insurers?
59
Over the Last Three Decades, Total Tort Costs
as a % of GDP Appear Somewhat Cyclical
($ Billions)
$300
Tort Sytem Costs
2.50%
Tort Costs as % of GDP
$250
Tort System Costs
$200
$150
2.00%
$100
1.75%
Tort Costs Have Remained High but
Relatively Stable Since the mid-2000s.
As a Share of GDP they Should Fall as
the Economy Expands
$50
$0
Tort Costs as % of GDP
2.25%
1.50%
80 82 84
86 88 90 92 94
96 98 00 02 04 06
Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A
08 10E 12E
62
Trial Bar Priorities
 Reverse U.S.
Supreme
Court
decisions on
pleadings
 Eliminate
pre-dispute
arbitration
 Erode federal
preemption
 Expand
securities
litigation
Source: Institute for Legal Reform.
 Confirm pro Pass Foreign
trial lawyer
Manufactures
judges –
Legal
“Federalize
Accountability
Madison
Act
County”
 Grant
 Roll back
enforcement
existing
authorities to
legal reforms
state AGs
Trial Lawyer Poll: Which Areas Offer
the Greatest Potential Benefit?
Top Categories
Percentage
Environmental
14%
Insurance coverage
13%
Mortgage fraud
12%
Nursing home/seniors issues
11%
Bad-faith against insurance companies
10%
41 different practice areas were included as categories
Source: Institute for Legal Reform poll, December 2009.
Business Leaders Ranking of Liability
Systems in 2010

Worst States
41.
New Mexico
42.
Florida
Nebraska
43.
Montana
4.
Indiana
44.
Arkansas
5.
Iowa
45.
Illinois
6.
Virginia
46.
California
 Texas
47.
Alabama
 South Carolina
 Hawaii
48.
Mississippi
49.
Louisiana

Best States
1.
Delaware
2.
North Dakota
3.
7.
Utah
8.
Colorado
9.
Massachusetts
10.
South Dakota
New in 2010
 North Dakota
 Massachusetts
 South Dakota
Drop-offs
 Maine
 Vermont
 Kansas
Midwest/West has mix of
good and bad states.
50. West Virginia
Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.
Newly Notorious
 New Mexico
 Montana
 Arkansas
Rising Above
The Nation’s Judicial Hellholes: 2010
Illinois
Watch List
 Madison County, IL
 Atlantic County, NJ
 St. Landry Parish,
LA
 District of Columbia
 NYC and Albany,
NY
 St. Clair County, IL
Cook County
West Virginia
Philadelphia
California
Los Angeles
and Humboldt
Counties
Dishonorable
Mention
 MI Supreme Court
 City of St. Louis
 CO Supreme Court
Nevada
Clark County
South Florida
Source: American Tort Reform Association; Insurance Information Institute
66
Average Jury Awards 1999 - 2008
$1,200
$1,077
$1,100
$1,018 $1,022
$1,000
$1,046
$950
$900
$800
$725
$747
$756
2000
2001
$800
$799
2002
2003
$700
$600
$500
1999
Source: Jury Verdict Research; Insurance Information Institute.
2004
2005
2006
2007
2008
Avg. Jury Awards 1999 vs. 2003 and 2008
$2,338
$4,000
$4,885
$5,446
$849
$901
$589
$327
$208
$201
$799
$1,000
$644
$2,000
$1,046
$3,000
$3,722
2008
$3,499
2003
$2,887
1999
$3,717
$5,000
$4,164
$6,000
$4,838
$7,000
$0
Overall
Vehicular
liability
*Award trends in wrongful deaths of adult males.
Source: Jury Verdict Research; Insurance Information Institute.
Premises
liability
Wrongful
death*
Medical
malpractice
Products
liability
Sum of Top 10 Jury Awards 2004-2010
$6,000
$5,159
$5,000
$4,000
$2,954
$3,000
$2,000
$1,344
$815
$1,000
$1,511
$1,568
2009
2010
$616
$0
2004
2005
2006
2007
2008
Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009, and 2010.
2010 Top Ten Jury Verdicts
Value
Issue
State
$505.1 Million Products Liability
Nevada
$208.8 Million Personal Injury (Asbestos/Mesothelioma case)
California
$152 Million
Massachusetts
Wrongful Death (Tobacco verdict)
$132.5 Million Personal Injury (Ford rollover retrial)
Mississippi
$124.5 Million Personal Injury (Passenger van rollover case)
Texas
$103 Million
Legal Malpractice/Breach of Fiduciary Duty
Mississippi
$90.8 Million
Products Liability, Wrongful Death (Tobacco verdict)
Florida
$89 Million
Personal Injury, Products Liability
Pennsylvania
$82.5 Million
Wrongful Death
Texas
$80 Million
Wrongful Death (Tobacco verdict)
Florida
Source: Lawyers USA, January 18, 2011.
Inflation
Is it a Threat to Claim Cost
Severities
81
Annual Inflation Rates, (CPI-U, %),
1990–2014F
Annual
Inflation
Rates (%)
Inflation peaked at 5.6% in August 2008
on high energy and commodity crisis.
The recession and the collapse of the
commodity bubble have reduced nearterm inflationary pressures
6.0
5.0
4.9
5.1
3.8
4.0
3.0
3.0
2.0
3.3 3.4
3.2
2.9 2.8
2.4
3.0
2.6
2.5
3.8
2.8
2.3
1.9
1.5
1.6
1.3
1.9 2.0
2.2 2.2
1.0
0.0
-0.4
-1.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F
The slack in the U.S. economy suggests that inflation should not heat up
before 2012, but other forces (commodity prices, inflation in countries from
which we import, etc.), plus U.S. debt burden, remain longer-run concerns
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 2/11 (forecasts).
82
P/C Insurance Claim Cost Drivers Grow
Faster than even the Medical CPI Suggests
Price Changes
in 2010
9%
8.8%
6%
Excludes
Food and
Energy
6.1%
4.3%
3%
3.4%
3.3%
3.1%
1.6%
1.0%
0%
Overall CPI
"Core" CPI Medical CPI
Inpatient
Hospital
Services
Outpatient
Hospital
Services
Physicians' Prescription Medical Care
Services
Drugs
Commodities
Healthcare costs are a major liability, med pay, and PIP claim cost driver.
They are likely to grow faster than the CPI for the next few years, at least
Source: Bureau of Labor Statistics; Insurance Information Institute.
83
Economic Drivers of P/C
Insurance Exposures
Growth in the Wake
of the “Great Recession”
84
2%
0.6%
4%
1.1%
1.8%
2.5%
3.6%
3.1%
2.7%
0.9%
3.2%
2.3%
2.9%
4.1%
6%
1.6%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
Real GDP Growth (%)
5.0%
3.7%
1.7%
2.6%
3.2%
3.5%
3.4%
3.5%
3.5%
3.1%
3.2%
3.2%
3.3%
US Real GDP Growth*
-0.7%
12:4Q
12:3Q
12:2Q
12:1Q
11:4Q
11:3Q
11:2Q
11:1Q
10:4Q
10:3Q
10:1Q
09:4Q
09:3Q
09:2Q
10:2Q
Economic growth projections
for 2011 have been revised
upward. This is a major
positive for insurance demand
and exposure growth.
-4.9%
09:1Q
08:4Q-6.8%
-4.0%
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2000
-8%
2003
-6%
2002
-4%
Recession began in Dec.
2007. Economic toll of credit
crunch, housing slump,
labor market contraction has
been severe but modest
recovery is underway
2001
-2%
-0.7%
0%
Demand for Insurance Continues To Be Impacted by Sluggish Economic
Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
*
Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 2/11; Insurance Information Institute.
85
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
18.6%
20.3%
Real GDP Growth vs. Real P/C (%)
4%
7.7%
2%
1.2%
1.6%
5.6%
6%
0%
-2.9%
-0.5%
-3.8%
-4.4%
-3.3%
-0.8%
-0.5%
-1.6%
-1.0%
-1.8%
-1.0%
8%
-2%
-4%
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10E
11F
-10%
-7.4%
-6.5%
-1.5%
-5%
-0.9%
0%
-0.4%
-0.3%
3.1%
1.1%
0.8%
0.4%
0.6%
0.3%
5%
5.8%
1.8%
4.3%
5.2%
15%
10%
Real GDP
Real GDP Growth
Real NWP Growth
20%
Real NWP Growth
13.7%
25%
P/C Insurance Industry’s Growth is Influenced Modestly
by Growth in the Overall Economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/11; Insurance Information Institute
86
2011 Financial Overview
State Economic Growth Varied in 2009
Mountain, Plains states
still growing the fastest
Some Southeast states
growing well, but others
among the weakest
87
Direct Premiums Written: All Lines
Percent Change by State, 2004-2009
Top 25 States
42.9
45
North Dakota is the growth
juggernaut of the P/C
insurance industry—too
bad nobody lives there…
12.2
11.5
10.7
KS
NC
ID
4.6
12.3
NE
HI
12.8
TX
5.0
12.9
DC
AR
13.0
SC
5.1
13.0
WV
GA
13.5
MS
5.5
14.0
NM
WA
14.1
IA
5.8
14.2
DE
10
FL
14.8
OK
7.9
15.4
15
UT
20
17.2
25
18.8
30
22.0
35
23.8
Pecent change (%)
40
AL
MT
WY
SD
LA
0
ND
5
Sources: SNL Financial LC.; Insurance Information Institute.
88
-15.2
CA
-8.2
NH
OH
-14.8
-3.7
ME
MI
-3.5
IL
-9.2
-3.1
NJ
MA
-2.8
RI
CO
-5.2
-2.4
CT
-1.8
-1.6
VT
MN
PA
IN
NY
NV
WI
OR
AZ
MD
KY
TN
VA
-15
MO
States with the poorest
performing economies also
produced the most negative
net change in premiums of
the past 5 years
-10
-20
-1.2
-0.5
-0.1
-5
AK
Pecent change (%)
0
0.0
0.5
0.6
0.7
0.9
2.0
2.4
2.5
Bottom 25 States
2.6
4.2
5
4.5
Direct Premiums Written: All Lines
Percent Change by State, 2004-2009
Over the 5 years from 2004-2009, 15 states saw premiums shrink,
one had no growth, and 4 others grew premiums by less than 1%
Sources: SNL Financial LC; Insurance Information Institute.
89
11 Industries for the Next 10 Years:
Insurance Solutions Needed
Health Care
Health Sciences
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Technology (incl. Biotechnology)
Light Manufacturing
Export-Oriented Industries
Shipping (Rail, Marine)
90
0.7
0.5
I.I.I. estimates that each incremental 100,000
decline in housing starts costs home insurers
$87.5 million in new exposure (gross premium).
The net exposure loss in 2009 vs. 2005 is
estimated at about $1.3 billion
0.89
0.9
0.55
0.59
0.67
1.1
0.91
1.3
1.20
1.29
1.5
1.19
1.01
1.7
New home
starts plunged
72% from
2005-2009; A
net annual
decline of 1.49
million units,
lowest since
records began
in 1959
1.20
1.33
1.43
1.50
1.9
1.46
1.35
1.48
1.47
1.62
1.64
1.57
1.60
1.71
2.1
1.36
(Millions of Units)
1.85
1.96
2.07
1.80
New Private Housing Starts, 1990-2016F
Job growth,
improved credit
market conditions
and demographics
will eventually boost
home construction
0.3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F
Little Exposure Growth Likely for Homeowners Insurers Until 2012.
Also Affects Commercial Insurers with Construction Risk Exposure, Surety
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 2/11); Insurance Information Institute.
92
2011 Financial Overview
Wage and Salary Disbursements (Payroll Base) vs.
Workers Comp Net Written Premiums
Wage and Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)
7/90-3/91
3/01-11/01
12/07-6/09
$7,000
$60
$6,000
$50
$5,000
$40
$4,000
$30
$3,000
$2,000
Wage & Salary
Disbursements
$1,000
WC NPW
WC net premiums written
were down $13.7B or 28.7%
to $34.1B in 2009 after
peaking at $47.8B in 2005
$0
$20
$10
$0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*
Weakening payrolls have eroded $2B+ in workers comp premiums; nearly
29% of NPW has been eroded away by the soft market and weak economy
* Average Wage and Salary data as of 7/1/2010. Shaded areas indicate recessions.
**Estimated “official” end of recession June 2009.
Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at
http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books
95
Recovery in Capacity Utilization is a
Positive Sign for Commercial Exposures
“Full Capacity”
Percent of
Industrial Capacity
The US operated at
75.2% of industrial
capacity in November
2010, above the June
2009 low of 68.3%
82%
Hurricane
Katrina
80%
78%
76%
The closer the economy is
to operating at “full
capacity,” the greater the
inflationary pressure
74%
72%
70%
March 2001November 2001
recession
68%
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
96
Sep 10
Jun 10
Mar 10
Dec 09
Sep 09
Jun 09
Mar 09
Dec 08
Sep 08
Jun 08
Mar 08
Dec 07
Sep 07
Jun 07
Mar 07
Dec 06
Jun 06
Sep 06
Mar 06
Dec 05
Sep 05
Jun 05
Mar 05
Dec 04
Jun 04
Sep 04
Mar 04
Dec 03
Sep 03
Jun 03
Mar 03
Dec 02
Sep 02
Jun 02
Mar 02
Dec 01
Sep 01
Jun 01
Mar 01
66%
December 2007June 2009 Recession
Business Bankruptcy Filings,
1980-2010:Q3
90,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1980-82
1980-87
1990-91
2000-01
2006-09
58.6%
88.7%
10.3%
13.0%
208.9%*
There were 60,837 business bankruptcies in 2009, up
40% from 2008 and the most since 1993. 2010:Q3
bankruptcies totaled 29,059, down 5.5% from 2009:Q3
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10:3Q
70,000
43,694
48,125
80,000
69,300
62,436
64,004
71,277
81,235
82,446
63,853
63,235
64,853
71,549
70,643
62,304
52,374
51,959
53,549
54,027
44,367
37,884
35,472
40,099
38,540
35,037
34,317
39,201
19,695
28,322
43,546
60,837
43,016
% Change Surrounding
Recessions
Significant Exposure Implications for All Commercial Lines
Sources: American Bankruptcy Institute at
http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ;
Insurance Information Institute
97
Private Sector Business Starts,
1993:Q2 – 2010:Q1*
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
199
191
193
230
220
210
170
160
184
171
180,000 businesses started in
2009:Q4, the best quarter in 2009.
2009 was the slowest year for new
business starts since 1993.
169
177
180
186
174
175
180
186
200
190
Business Starts
2006: 872,000
2007: 843,000
2008: 790,000
2009: 697,000
172
(Thousands)
150
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Business Starts Were Down Nearly 20% in the Recession,
Holding Back Most Types of Commercial Insurance Exposure
* Latest available as of December 29, 2010, seasonally adjusted
Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.
98
Labor Market Trends
Massive Job Losses Sapped the
Economy and Commercial/Personal
Lines Exposure, But Trend is
Improving
100
Unemployment and Underemployment
Rates: Falling Faster in 2011?
January 2000 through January 2011, Seasonally Adjusted (%)
18
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 16.1%
in December
2010
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
16
Recession
ended in
November
2001
14
12
Unemployment
kept rising for
19 more
months
Recession
began in
December
2007
Unemployment
rate fell to 9.4%
in December
10
Unemployment
peaked at 10.1%
in October 2009,
highest monthly
rate since 1983.
8
6
Peak rate in the
last 30 years:
10.8% in
November December 1982
4
2
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Stubbornly high unemployment and underemployment
will constrain payroll growth, which directly affects WC exposure
Source: US Bureau of Labor Statistics; Insurance Information Institute.
101
Monthly Change in Private Employment
(1,000)
158
241
16
62
75
-83
-334
-452
-297
-215
-186
-262
-109
Monthly Losses in
Dec. 08–Mar. 09 Were
the Largest in the
Post-WW II Period
-734
-667
-806
-707
-744
-649
(800)
-12
-85
-58
-161
-253
-230
-257
-347
-456
-547
(600)
113,000 private sector jobs
were created in December
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
(400)
-14
0
(200)
Private employers added jobs in
every month in 2010 for a total of
1.346 million for the year
65
97
23
213
65
127
42
15
79
200
186
400
51
61
117
143
112
193
128
139
50
January 2008 through January 2011* (Thousands)
Private Employers Added 1.411 million Jobs in 2010 After Having
Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
4.9%
08:Q1
4.6%
07:Q3
4.8%
4.5%
07:Q2
07:Q4
4.5%
07:Q1
6.0%
5.4%
7.0%
8.3%
8.5%
8.6%
8.8%
9.0%
9.2%
9.4%
9.5%
9.6%
9.6%
9.6%
9.7%
10.0%
8.1%
6.9%
8.0%
6.1%
Unemployment
peaked at 10% in
late 2009.
9.0%
5.0%
9.3%
2007:Q1 to 2012:Q4F*
Rising
unemployment
11.0%
eroded payrolls
and workers comp’s
10.0%
exposure base.
9.6%
US Unemployment Rate
Unemployment
forecasts remain
stubbornly high
through 2011, but still
imply millions of new
jobs will created.
*
= actual;
= forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/11); Insurance Information Institute
12:Q4
12:Q3
12:Q2
12:Q1
11:Q4
11:Q3
11:Q2
11:Q1
10:Q4
10:Q3
10:Q2
10:Q1
09:Q4
09:Q3
09:Q2
09:Q1
08:Q4
08:Q3
08:Q2
4.0%
104
Unemployment Rates by State, December 2010:
Highest 25 States*
8.8
8.8
9.0
9.1
9.1
9.3
9.3
9.4
9.4
9.5
9.5
9.5
9.6
9.6
9.7
10.2
10.3
10.6
10.7
12.5
11.5
10.1
9.8
10
11.7
12
12.0
Unemployment Rate (%)
14
14.5
16
In December, 31 states and DC reported
unemployment rate decreases from a
year earlier, 16 states had increases and
3 had no change.
8
6
4
2
16 states + DC had
unemployment rates above
the US average in Dec. 2010,
34 states were below.
0
NV CA FL MI RI SC OR KY GA MS NC DC WV OH MO IN ID US TN AZ WA IL NJ AL CT CO
*Provisional figures for December 2010, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
106
Unemployment Rates By State, December 2010:
Lowest 25 States*
3.8
4
4.4
4.6
5.5
6.3
6.4
6.7
6.8
6.8
7.0
6.4
5.8
6
7.3
7.4
7.5
7.5
7.9
8.2
8.2
8.3
8.5
8.1
8
8.0
Unemployment Rate (%)
8.5
8.5
10
7.2
In December, state and regional
unemployment rates were little changed.
Some 31 states and DC reported
unemployment rate decreases from a
year earlier, 16 states had increases and
3 had no change.
2
0
PA NM DE TX NY MA AK LA AR WI UT MD ME MT MN OK KS VA WY HI IA VT NH SD NE ND
*Provisional figures for December 2010, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
107
Estimated Effect of Recessions* on
Payroll (Workers Comp Exposure)
(Percent
Change)
10%
8%
6%
(All Post WWII Recessions)
Recessions in the 1970s and 1980s
saw smaller exposure impacts
because of continued wage
inflation, a factor not present
during the 2007-2009 recession
The Dec. 2007 to mid2009 recession
caused the largest
impact on WC
exposure in 60 years
8.5%
4.6%
3.7%
4%
3.5%
2.1%
2%
1.1%
0%
-0.5%
-1.1%
-2%
-2.0%
-4%
-6%
-3.6%
-4.4%
19481949
19531954
19571958
19601961
19691970
19731975
1980
19811982
19901991
2001
20072009
Recession Dates (Beginning/Ending Years)
*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual data
Source: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of
Economic Research (recession dates).
Frequency: 1926–2008
A Long-Term Drift Downward
Manufacturing – Total Recordable Cases
Rate of Injury and Illness Cases per 100 Full-Time Workers
30
25
20
15
10
5
0
'26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07
Note: Recessions indicated by gray bars.
Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research
111
Catastrophic Loss –
Catastrophe Losses Trends Are
Trending Adversely
112
US Insured Catastrophe Losses
$9.2
$27.1
$27.5
$12.9
$5.9
$26.5
$4.6
$8.3
$10.1
$2.6
$7.4
$8.3
$16.9
$4.7
$2.7
$20
$7.5
$40
$5.5
$22.9
$60
$13.6
$80
First Half
2010 CAT
Losses Were
Down 19% or
$1.4B from
first half 2009
$61.9
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
$10.6
$100
$6.7
$120
$100.0
$100 Billion CAT Year is
Coming Eventually
($ Billions)
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*20??
2010 CAT Losses Were Close to “Average”
Figures Do Not Include an Estimate of Deepwater Horizon Loss
*Estimate from Munich Re.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal
property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.
Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.
113
Combined Ratio Points Associated with
Catastrophe Losses: 1960 – 2010E
Combined Ratio Points
8.1
8.8
2.6
3.3
2010E
1.6
2.7
2008
2002
2006
1.6
2004
1.6
2000
3.3
3.3
3.6
2.9
1.0
1998
1996
1994
5.0
5.4
5.9
3.3
2.8
2.3
2.1
1990
1992
1.2
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1.2
0.4
0.8
1.3
0.3
0.4
0.7
1.5
1.0
0.4
0.4
0.7
1.8
1.1
0.6
1.4
2.0
1.3
2.0
0.5
0.5
0.7
1968
0.4
1966
1962
1964
3.0
3.6
1960s: 1.04
1970s: 0.85
1980s: 1.31
1990s: 3.39
2000s: 3.52
0.8
1.1
1.1
0.1
0.9
1960
10
9
8
7
6
5
4
3
2
1
0
Avg. CAT Loss
Component of the
Combined Ratio
by Decade
The Catastrophe Loss Component of Private Insurer Losses Has
Increased Sharply in Recent Decades
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted
for losses ultimately paid by foreign insurers and reinsurers.
Source: ISO; Insurance Information Institute estimate for 2010.
114
Natural Disasters in the United States,
1980 – 2010
Number of Events (Annual Totals 1980 – 2010)
Number
There were a record 247
natural disaster events in
the US in 2010
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
Meteorological (storm)
Hydrological
(flood, mass movement)
Climatological
(temperature extremes,
drought, wildfire)
115
Insured Losses Due to Weather Perils
in the U.S.: 1980 – 2010
(Tropical Cyclone, Thunderstorm, and Winter Storm only)
For the second year in a row,
insured losses due to
weather perils in the U.S. in
2010 were the highest on
record for a year without a
hurricane landfall.
Sources: MR NatCatSERVICE, Property Claims Services
© 2011 Munich Re
116
Number of U.S. Landfalling Tropical
Cyclones,1900 – 2010
Only 1 tropical cyclone,
Bonnie, made landfall in the
US in 2010
Source:NOAA; Munich Re
121
Insured U.S. Tropical Cyclone Losses,
1980 – 2010
The current 5-year average
(2006-2010) insured tropical
cyclone loss is $4.6 billion,
down $19 billion from the
previous 5-year average
Sources: Property Claims Service, MR NatCatSERVICE: NFIP
122
U.S. Winter Storm Loss Trends,
1980 – 2010 (Annual Totals)
Insured winter storm losses
in 2010 are one of the top
five in US history, totaling
$2.6 billion in 2010
Source: Property Claims Service, MR NatCatSERVICE
123
U.S. Thunderstorm Loss Trends,
1980 – 2010 (Annual Totals)
Thunderstorm losses in
2010 totaled $9.5 billion, the
3rd highest ever
Average thunderstorm losses
have now quintupled since
the early 1980s
Hurricanes get all the headlines,
but thunderstorms are consistent
producers of large scale loss
Source: Property Claims Service, MR NatCatSERVICE
124
Top 12 Most Costly Disasters
in US History
(Insured Losses, 2009, $ Billions)
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Hurricane Katrina Remains, By Far, the
Most Expensive Insurance Event in US
and World History
$45.1
$22.2
$22.7
$11.3
$12.6
Wilma
(2005)
Ike
Northridge Andrew
(2008)
(1994) (1992)
9/11
Attacks
(2001)
$17.2
$4.2
$5.2
Jeanne Frances
(2004) (2004)
$6.2
$6.6
$8.1
$8.5
Rita
(2005)
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
Katrina
(2005)
8 of the 12 Most Expensive Disasters in US History
Have Occurred Since 2004;
8 of the Top 12 Disasters Affected FL
Sources: PCS; Insurance Information Institute inflation adjustments.
127
Share of Losses Paid by Reinsurers for
Major Catastrophic Events
70%
60%
60%
Reinsurance plays a very
large role in claims payouts
associated with major
catastrophes
45%
50%
40%
33%
30%
30%
25%
20%
20%
10%
0%
Hurricane
Hurricane
Hugo (1989) Andrew (1992)
Sept. 11
Terrorist
Attack (2001)
2004
Hurricane
Season
2005
Hurricane
Season
2008 Texas
Hurricane
Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.
Total Value of Insured Coastal Exposure
(2007, $ Billions)
Florida
$2,458.6
New York
$2,378.9
$895.1
Texas
Massachusetts
$772.8
$895B Insured
New Jersey
$635.5
Coastal
Connecticut
$479.9
Louisiana
$224.4
Exposure in
S. Carolina
$191.9
Texas in 2007
Virginia
$158.8
Maine
$146.9
In 2007, Florida Still Ranked as the #1 Most
North Carolina
$132.8
Exposed State to Hurricane Loss, with
$92.5
Alabama
$2.459 Trillion Exposure, but Texas is very exposed
Georgia
$85.6
too, and ranked #3 with $895B
Delaware
$60.6
in insured coastal exposure
New Hampshire $55.7
Mississippi $51.8
The Insured Value of All Coastal Property Was $8.9
Rhode Island $54.1
Trillion in 2007, Up 24% from $7.2 Trillion in 2004
Maryland $14.9
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
$3,000
129
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