80 Years of Property Losses:
What Will it Take to Survive to
Next 80 Years?
Loss Executives Association Annual Meeting
Tampa, FL
February 3, 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
 80 Years: The Dollars and Cents
 Paying Claims Over the Long Haul: What Does it Take?
 Claims Paying Capital & Capacity
 Financial Strength
 Profits, Profitability and Claims Paying Ability
 Claims Paying and Investment Performance & Volatility
 The “Great Recession” as a case study
 External Challenges
 Shifting tort environment
 Claims Paying Capacity and the Economy
 Insurers must maintain the ability to pay claims even in deep recessions
 Catastrophe Loss Trends
 US
 Global
 Importance of reinsurance in claims paying capacity
 Q&A
2
CONGRATULATIONS LEA!!
80 YEARS: 1931-2011
QUIZ: What is the
significance of this number?
7,215,698,210,618
3
ANSWER: This is the dollar
value of all claims paid by
P/C insurers since 1931.
$7,215,698,210,618
4
CONGRATULATIONS LEA!!
80 YEARS: 1931-2011
QUIZ: What is the
significance of this number?
12,539,027,130,890
5
ANSWER: This is the dollar
value of claims paid by P/C
insurers since 1931,
adjusted for inflation*
$12,539,027,130,890
*Adjusted to 2010 dollars by the Insurance Information Institute using BLS CPI-U data.
6
Dollar Value of Claims Paid by P/C
Insurers to Policyholders, 1925–2010E*
$ Billions
$400
Claim payouts in recent
years are volatile but have
reached a jagged plateau
Since 1925, P/C insurers have
paid more than $7.2 trillion in
claims to policyholders
$350
$300
$250
$200
Claim payouts
increased
exponentially
for decades
$150
$100
Catastrophe losses,
underwriting cycle
contribute to
volatility; Prolonged
soft market,
recession to plateau
$50
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Note: Data are not adjusted for inflation.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
*2005
*2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
$0
7
Cumulative Value of Claims Paid by P/C
Insurers to Policyholders, 1925–2010E*
$ Billions
It took 60 years for
the industry to pay
its first $1 trillion in
claims in the years
since 1925. Today,
the industry pays
$1 trillion in claims
every 3 to 4 years.
$8,000
$7,000
$6,000
$5,000
4 years (2010)
3 years (2006)
3 years (2003)
5 years (2000)
$4,000
4 years (1995)
$3,000
7 years (1991)
$2,000
60 years (1925 – 1984)
$1,000
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Note: Data are not adjusted for inflation.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
*2005
*2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
$0
8
Inflation-Adjusted Dollar Value of Claims
Paid by P/C Insurers, 1925–2010E*
$ Billions
$400
$350
$300
Since 1925, P/C insurers
have paid more than $12.6
trillion in claims to
policyholders on an
inflation-adjusted basis
$250
$200
Claim payouts
increased
exponentially for
decades, but
more erratically in
the post-1980 era
$150
$100
On an inflation-adjusted basis,
claims paid have fallen to 1990s
levels, reflecting improved
underwriting results, exposure
loss during the “Great Recession”
and leakage to alternative markets
$50
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
$0
9
Cumulative Value of Inflation-Adjusted
Claims Paid by P/C Insurers, 1925–2010E*
Adjusted for inflation, it
took 36 years for the
industry to pay its first
$1 trillion in claims in
the years since 1925.
Today, the industry
pays $1 trillion in claims
every 2 to 3 years after
adjusting for inflation.
$ Billions
$14,000
$13,000
$12,000
$11,000
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
3 years (2008)
3 years (2005)
2 years (2002)
4 years (2000)
3 years (1996)
3 years (1993)
4 years (1990)
4 years (1986)
5 years (1982)
7 years (1977)
9 years (1970)
*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.
Sources: Insurance Information Institute research and calculations from A.M. Best data.
2010E
*2005
*2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
36 years (1925 – 1961)
10
What Does it Take to Pay Out
$1 Trillion Every 3-4 Years?
Financial Strength Was the
Key to the Past 80 Years—
It is the Key to the Next 80
As Well
11
Capital/Policyholder
Surplus (US)
Total Surplus Exhibits Little
Cyclicality, While Surplus Leverage
Ratios Influence Cycle
12
US Policyholder Surplus:
1975–2010*
($ Billions)
Surplus as of 9/30/10 was a record $544.8B, up
from $437.1B at the crisis trough at 3/31/09. Prior
peak was $521.8 as of 9/30/07. Surplus as of
9/30/10 is now 4.4% above 2007 peak; Crisis trough
was as of 3/31/0916.2% below 2007 peak.
$600
$550
$500
$450
$400
$350
$300
$250
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance
organizations
$200
$150
$100
$50
$0
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
The Premium-to-Surplus Ratio Stood at $0.77:$1 as of
9/30/10, A Record Low (at Least in Recent History)**
* As of 9/30/10; **Calculated using annualized net premiums written based on 9-month 2010 data.
Source: A.M. Best, ISO, Insurance Information Institute.
07
09
Policyholder Surplus,
2006:Q4–2010:Q3
($ 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: +$23.0B (+4.4%)
14
Historically, Hard Markets Follow
When Surplus “Growth” is Negative*
(Percent)
30%
Growth in claims paying capital has
great exceeded that of underling
premium growth for decades
25%
20%
15%
10%
5%
0%
-5%
-10%
Avg. Annual Growth: 1978-2010*
PHS: 9.8%
NWP: 5.7%
-15%
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*
NWP % change
Surplus % change
The Relatively Fast Growth of Claims Paying Capital (Surplus) Has
Increased the Financial Strength of the Industry Over Time, Enabling it to
Better Withstand Cyclical, Financial, Economic and Catastrophe Shocks
* 2010 NWP and Surplus figures are % changes as of Q3:10 vs Q3:09.
Sources: A.M. Best, ISO, Insurance Information Institute
15
Ratio of Insured Loss to Surplus for
Largest Capital Events Since 1989*
(Percent)
The Financial Crisis at its
Peak Ranks as the Largest
“Capital Event” Over
the Past 20+ Years
18%
15%
16.2%
13.8%
12%
10.9%
9.6%
9%
6.9%
6.2%
6%
3.3%
3%
0%
6/30/1989
Hurricane
Hugo
6/30/1992
Hurricane
Andrew
12/31/93
Northridge
Earthquake
6/30/01 Sept.
11 Attacks
6/30/04
Florida
Hurricanes
6/30/05
Hurricane
Katrina
* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event
** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%
Source: PCS; Insurance Information Institute
Financial
Crisis as of
3/31/09**
16
Paid-in Capital, 2005–2010:9M
($ Billions)
$25
$20
The p/c insurance industry has
been able to quickly attract large
amounts of capital after natural
disaster (2004/2005) and financial
crises (2008) alike. The ability to
attract and retain capital is critical
to claims paying over the long run.
Paid-in capital for insurance
operations in 2009:9M was
$3.9B. In 2010:9M it was a
record $23.8B
$23.8
$22.5
$15
$10
$14.4
$12.3
$5
$3.8
$3.2
2006
2007
$0
2005
2008
$6.5
$1.3
2009
2010:Q1
In 2010:H1 One Insurer’s Paid-in Capital Rose by $22.5B
as Part of an Investment in a Non-insurance Business
Source: ISO.
17
Global Reinsurance Capacity Shrank
in 2008, Mostly Due to Investments
Global Reinsurance Capacity
$370
Source of Decline in 2008
Realized
Capital
Losses
$360
$350
$350
31%
$330
$310
55%
$300
Change in
Unrealized
Capital Losses
$290
14%
Hurricanes
$270
2007
2008
2009E
Global Reinsurance Capacity
Fell by an Estimated 17% in 2008
Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute estimate for 2009.
18
Financial Strength is
Synonymous With Claims
Paying Ability
Industry is Resilient but Cyclical
Pattern in P-C Impairment History
is Directly Tied to Underwriting,
Reserving & Pricing
19
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
21
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
22
The Ability to Pay Claims
Begins With Sustained
Profitability
Profits Are Volatile but
Resilient in the P/C
Insurance Industry
23
$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
25
ROE vs. Equity Cost of Capital:
U.S. P/C Insurance:1991-2010:9-Months*
(Percent)
18%
16%
6%
4%
2%
0%
-9.0 pts
-13.2 pts
8%
+1.7 pts
10%
-3.2 pts
12%
-6.4 pts
+2.3 pts
14%
-2.7 pts
The P/C Insurance Industry Fell Well
Short of Its Cost of Capital in 2008 but
Narrowed the Gap in 2009 and 2010
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,
Fell Short in 2008-2010
-2%
91
92
93
94
95
96
97
98
99
ROE
00
01
02
03
04
05
06
07 08* 09* 10*
Cost of Capital
* Return on average surplus in 2008-2010 excluding mortgage and financial guaranty insurers.
Source: The Geneva Association, Insurance Information Institute
26
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.
Claims Paying Ability Must Be
Maintained Over the Cycle
Industry’s Ability to Pay Claims
Was Unimpaired by Protracted
Period of Weak/Negative Growth
28
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.
29
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)
30
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.
31
Claims Paying Ability Must Be
Maintained Irrespective of
Investment Climate
Investment Volatility Shouldn’t
Matter to Policyholders
32
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.
$4.43
$8.92
$3.52
$9.70
$9.13
-$19.81
-$7.98
-$1.21
$6.61
Capital losses have
turned to capital gains,
aiding earnings
$6.63
$16.21
$13.02
$10.81
$9.24
$6.00
$1.66
$9.82
$9.89
$4.81
$20
$15
$10
$5
$0
-$5
-$10
-$15
-$20
-$25
$2.88
($ Billions)
$18.02
P/C Insurer Net Realized
Capital Gains, 1990-2010:Q3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10:Q3
Realized Capital Losses Were the Primary Cause
of 2008/2009’s Large Drop in Profits and ROE and Were a Major
Driver of Its Recovery in 2010
Sources: A.M. Best, ISO, Insurance Information Institute.
34
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. December 2010
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 improves. 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
October 2010 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 Further Depress Rates in the 7 to 10-Year Maturity Range
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
35
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.
36
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.
37
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.
38
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.
Strength Through Underwriting:
Underwriting Profits Support
Claims Paying Capability When
Investments Can’t
40
P/C Insurance Industry
Combined Ratio, 2001–2010:Q3*
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Heavy Use of
Reinsurance
Lowered Net
Losses
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
Cyclical
Deterioration
120
115.8
110
Lower CAT
Losses,
More
Reserve
Releases
Best
Combined
Ratio Since
1949 (87.6)
107.5
100.1
100
101.0
100.8
98.4
99.3
99.7
2009
2010:Q3
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2
Sources: A.M. Best, ISO.
41
Underwriting Gain (Loss)
1975–2010:Q3*
($ 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
-$55
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
Large Underwriting Losses Are NOT Sustainable
in Current Investment Environment
* Includes mortgage and financial guarantee insurers.
Sources: A.M. Best, ISO; Insurance Information Institute.
05
07
09
Number of Years with Underwriting
Profits by Decade, 1920s–2000s
Number of Years with Underwriting Profits
12
10
10
8
8
7
6
6
5
4
4
3
2
0
0
1980s
1990s
0
1920s
1930s
1940s
1950s
1960s
1970s
2000s*
Underwriting Profits Were Common Before the 1980s
(40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was
Recorded in the 25 Years from 1979 Through 2003
* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which
would bring the 2000s total to 4 years with an underwriting profit.
Note: Data for 1920–1934 based on stock companies only.
Sources: Insurance Information Institute research from A.M. Best Data.
43
Calendar Year Combined Ratios
by Segment: 2008-2011F
Personal lines combined ratio is expected to remain stable in
2010 while commercial lines and reinsurance deteriorate
110
108
106
104
102
100
98
96
94
92
90
108
106
104.5
103.8
102.4
100
99.5
98.9
Personal Lines
Commercial Lines
2008
2009
2010P
2011F
Overall deterioration in 2011 underwriting performance is due to expected
return to normal catastrophe activity along with deteriorating underwriting
performance related to the prolonged commercial soft market
Sources: A.M. Best . Insurance Information Institute.
45
Legal Liability &
Tort Environment Can Stress
Claims Paying Ability
Tort Trends Have a Major Impact on
the Price/Availability of Insurance
46
Over the Last Three Decades, Total Tort Costs
as a % of GDP Appear Somewhat Cyclical
($ 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
$0
Tort Costs as % of GDP
2.25%
1.50%
80 82 84
86 88 90 92 94
96 98 00 02 04 06
Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A
08 10E 12E
47
Cost of US Tort System ($ Billions)
$180
$169
$167
$156
$156
$159
$144
$141
$130
$150
$129
$200
$148
$270
$259
$270
$248
$255
$252
$247
$261
$246
$233
$250
$205
$300
$260
Tort costs consumed 1.74% of GDP in 2009, down from 2.21% in 2003
$100
Per capita “tort tax” was $808
in 2009, up from $793 in 2000*
$50
* Restated in 2009 dollars, based on CPI.
Source: Towers Watson, 2010 Update on US Tort Cost Trends.
12E
10E
08
06
04
02
00
98
96
94
92
90
$0
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
Watch List
Illinois
 Madison County, IL
 Atlantic County, NJ
 St. Landry Parish,
LA
 District of Columbia
 NYC & 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
50
Source: Marsh, 2008 Limits of Liability Report
20
20
20
20
20
20
20
20
20
08
07
06
05
04
03
02
01
00
99
$2.015
$1.660
$1.645
$1.570
$1.535
$1.425
$1.575
$1.710
$2.045
$1.941
$2.011
$1.721
$1.405
$3.0
19
98
97
96
$1.334
$1.432
$2.5
19
19
19
95
94
$2.0
19
19
Excess Liability Market Capacity
North America ($ Billions)
$1.5
$1.0
$0.5
$0.0
Claims Paying Ability and
the Economy
Insurers Must Have the Ability to Pay
Claims Even in Times of Economic
Turmoil and Panic
52
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%
3.2%
3.3%
3.3%
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 1/11; Insurance Information Institute.
53
Inflation Rate (CPI-U), 1925–2010*
Inflation Rate (%)
20
High inflation
during the 1970s
and early 1980s
increased claim
severities
significantly
Rate of inflation can dramatically
impact claim severities and
trends
15
10
5
0
(5)
Very low inflation
during the “Great
Recession”
Deflation during
the Great
Depression
(10)
Sources: US Bureau of Labor Statistics; Insurance Information Institute
2010E
*2005
*2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
(15)
54
Capital/Capacity Are Not
Enough
Risk Management Matters
55
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
56
Examples Where Attention Risk
Management Reduces Claims
 Workplace Safety
 Automobile and Highway Safety
 Aviation
 Marine
 Health & Environmental Safety
 Food Safety
 Medicine
 Energy
 Corporate Governance (D&O)
57
Catastrophic Loss –
Catastrophe Losses Trends Are
Trending Adversely
58
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.
59
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.
60
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)
61
Significant Natural Catastrophes,
1950 – 2010
Number of Events ($1 billion economic loss and/or 50 fatalities)
There were 5 significant
natural catastrophes in the
US in 2010
Sources: MR NatCatSERVICE
65
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
67
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
69
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
70
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.
73
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
In 2007, Florida Still Ranked as the #1 Most
Maine
$146.9
North Carolina
$132.8
Exposed State to Hurricane Loss, with
$92.5
$2.459 Trillion Exposure, but Texas is very exposed
Alabama
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
$3,000
75
US Residual Market Exposure to Loss
($ Billions)
Katrina, Rita, and
Wilma
$900
$800
$700
$600
$696.4
$656.7
Hurricane Andrew
$500
$372.3
$400
$281.8
$300
$200
$100
$771.9
4 Florida
Hurricanes
$221.3 $244.2
$430.5 $419.5
$292.0
$150.0
$54.7
$0
1990
1995
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in
the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from
$54.7B in 1990 to $696.4B in 2008
Source: PIPSO; Insurance Information Institute
76
Global Catastrophe Loss Trends
Claims Paying Capacity Will Need to
Increase in the Future if Current
Disaster Trends Continue
77
Natural Catastrophes, 2010
Overview and comparison with previous years
2010
2009
Average of
the last 10
years
2000-2009
950
900
785
615
Overall losses
(US$m)
130,000
60,000
110,000
95,000
Insured losses
(US$m)
37,000
22,000
35,000
23,000
Fatalities
295,000
11,000
77,000
66,000
Number of events
Average of
the last 30
years
1980-2009
The number and cost of
natural catastrophes on a
global scale was far above
average in 2010
Source: Geo Risks Research, NatCatSERVICE
78
Natural Catastrophes, 2010
950 loss events
Volcanic eruption
Island, March/April
Severe storms, tornadoes, floods
Severe storms, floods
United States, 30 April – 3 May
United States, 13 -15 March
Severe storms, hail
United States, 12-16 May
Flash floods
France,
15 June
Earthquake
Haiti, 12 Jan.
Winter Storm Xynthia, storm surge
Western Europe, 26-28 Feb.
Heat wave/ Wildfires
Russia, July-Sept.
Landslides, flash floods
China, 7 Aug.
Floods
Eastern Europe,
2-12 June
Floods, flash floods,
landslides
China, 13-29 June
Hurricane Karl, floods
Mexico, 15-21 Sept.
Insurance is a
global business and
claims paying ability
is interconnected
via reinsurance
markets
Natural catastrophes
Selection of significant
loss events (see table)
Source: Geo Risks Research, NatCatSERVICE
Earthquake
China, 13 April
Floods, flash floods
Pakistan, July-Sept.
Earthquake, tsunami
Chile, 27 Feb.
Geophysical events
(earthquake, tsunami, volcanic activity)
Meteorological events
(storm)
Typhoon Megi
China, Philippines,
Taiwan, 18-24 Oct.
Hailstorms,
severe storms
Australia, 22 March/6-7 March
Floods
Australia, Dec.
Earthquake
New Zealand, 4 Sept.
Hydrological events
(flood, mass movement)
Climatological events
(extreme temperature, drought, wildfire)
79
Natural Catastrophes, 2010
Insured losses US$ 37bn - % distribution by continent
15%
41%
2%
US accounts for the
greatest share of
losses over the past
30 years, but more
losses in the future
will originate in
developing
countries
Source: Geo Risks Research, NatCatSERVICE
<1%
22%
20%
Continent
Africa
America
Asia
Insured losses [US$ m]
23,000
750
Australia/Oceania
7,500
Europe
5,500
81
Natural Catastrophes, 1980 - 2009
20%
66%
9%
US accounts for the
greatest share of
losses over the past
30 years, but more
losses in the future
will originate in
developing
countries
<1%
3%
2%
Continent
Africa
America
475,000
Asia
66,000
Australia/Oceania
15,000
Europe
Source: Geo Risks Research, NatCatSERVICE
Insured losses
[US$ m – in 2010 values]
2,000
142,000
82
Costliest Natural Catastrophes Since 1950
Rank by insured losses - in values of 2010
Insured loss
US$m, 2010 values
Year
Event
Region
2005
Hurricane Katrina
USA
69,900
1992
Hurricane Andrew
USA
26,500
1994
EQ Northridge
USA
22,500
2008
Hurricane Ike
USA, Caribbean
18,700
2004
Hurricane Ivan
USA, Caribbean
16,000
2005
Hurricane Wilma
USA, Mexico
14,000
2005
Hurricane Rita
USA
13,500
1991
Typhoon Mireille
Japan
11,200
2004
Hurricane Charley
USA, Caribbean
9,250
1989
Hurricane Hugo
USA, Caribeean
9,000
1990
Winter Storm Daria
Europe
8,500
2010
Earthquake
Chile
8,000
Source: Geo Risks Research, NatCatSERVICE
© 2011 Munich Re
83
Natural Catastrophes Worldwide,
1980 – 2010 (Number of events with trend)
Number
Increased claims paying
capacity will be required on
a global scale if current
trends continue (as is
expected)
1 200
1 000
800
600
400
200
1980
1982
1984
1986
Geophysical events
(Earthquake, tsunami,
volcanic eruption)
Source: Geo Risks Research, NatCatSERVICE
1988
1990
1992
Meteorological events
(Storm)
1994
1996
1998
2000
Hydrological events
(Flood, mass movement)
© 2011 Munich Re
2002
2004
2006
2008
2010
Climatological events
(Extreme temperature,
drought, forest fire)
84
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Thank you for your time
and your attention!
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