Overview & Outlook for the
P/C Insurance Industry:
Trends & Challenges for 2013 and Beyond
Casualty Actuaries of Greater New York
New York, NY
December 6, 2012
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5520  Cell: 917.453.1885  bobh@iii.org  www.iii.org
The Strength of the Economy
Will Influence P/C Insurer
Growth Opportunities
Growth Will Expand Insurer Exposure
Base Across Most Lines
Will the “Fiscal Cliff” Adversely
Impact Insurers?
2
-5%
-7%
1.4%
2.3%
2.2%
2.6%
2.4%
0.1%
2.5%
1.3%
4.1%
2.0%
1.3%
2.7%
1.7%
1.6%
2.2%
2.6%
2.9%
2013 is expected to see
modest growth depending
on the outcome of the
“Fiscal Cliff” situation
-8.9%
2000
2001
2002
2003
2004
2005
2006
07:1Q
07:2Q
07:3Q
07:4Q
08:1Q
08:2Q
08:3Q
08:4Q
09:1Q
09:2Q
09:3Q
09:4Q
10:1Q
10:2Q
10:3Q
10:4Q
11:1Q
11:2Q
11:3Q
11:4Q
12:1Q
12:2Q
12:3Q
12:4Q
13:1Q
13:2Q
13:3Q
13:4Q
-9%
Recession began in Dec.
2007. Economic toll of
credit crunch, housing
slump, labor market
contraction has been
severe but modest
recovery is underway
-0.3%
-3%
-5.3%
-1%
-3.7%
1%
1.3%
3%
-1.8%
5%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
1.1%
1.8%
2.5%
3.6%
3.1%
2.7%
0.5%
3.6%
3.0%
1.7%
7%
4.1%
Real GDP Growth (%)
5.0%
US Real GDP Growth*
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 11/12; Insurance Information Institute.
3
Percent Change in Real GDP
by State, 2011
Growth varied
considerably
across states
but in total was
weak in 2011
with US overall
growth at just
1.7%
TX has been an
economic
growth leader
Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute.
4
Consumer Sentiment Survey (1966 = 100)
January 2010 through November 2012
69.9
75.0
75.3
76.2
76.4
79.3
73.2
72.3
74.3
82.6
82.7
Nov-12
Oct-12
Aug-12
Jun-12
Jul-12
May-12
Apr-12
Feb-12
Mar-12
Jan-12
Nov-11
Dec-11
Oct-11
Sep-11
Jul-11
Aug-11
Jun-11
May-11
Apr-10
May-10
Mar-10
Feb-10
40
Jan-10
45
Mar-11
Apr-11
50
Feb-11
55
Jan-11
Optimism among consumers
Increased in September, and is
well above year-ago levels;
Suggests concern, but not fear on
the part of consumers.
55.7
59.5
60.9
64.1
60
Nov-10
Dec-10
65
Oct-10
70
Aug-10
Sep-10
75
Jul-10
80
Jun-10
85
74.4
73.6
73.6
72.2
73.6
76
67.8
68.9
68.2
67.7
71.6
74.5
74.2
77.5
67.5
69.8
74.3
71.5
63.7
90
Consumer confidence has been low for years amid high
unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially in late 2011 and in 2012
Source: University of Michigan; Insurance Information Institute
5
Auto/Light Truck Sales, 1999-2022F
11.6
10.4
15.4
15.5
15.4
15.1
14.7
14.9
12.7
14.4
New auto/light truck sales fell to
the lowest level since the late
1960s. Forecast for 2012-13 is
still far below 1999-2007 average
of 17 million units, but a
recovery is underway.
13.2
16.1
16.5
16.9
16.9
16.6
17.1
17.5
17.8
19
18
17
16
15
14
13
12
11
10
9
17.4
(Millions of Units)
Job growth and improved
credit market conditions
will boost auto sales in
2012 and beyond
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 1822F
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point,
Bolstering the Auto Insurer Growth and the Manufacturing Sector.
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 11/12); Insurance Information Institute.
6
Monthly Change* in Auto Insurance
Prices, 1991–2012*
10%
8%
Cyclical peaks in PP
Auto tend to occur
approximately every 10
years (early 1990s, early
2000s and likely the
early 2010s)
Pricing peak
occurred in 2010 at
5.1%, falling to
2.8% by Mar. 2012
6%
4%
2%
0%
“Hard” markets
tend to occur
during
recessionary
periods
The Oct. 2012
reading of 4.0% is
up from 2.9% a
year earlier
-2%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
*Percentage change from same month in prior year; through Oct. 2012; seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
7
1.9
1.7
1.5
1.3
1.1
0.9
0.7
0.5
Low inventories of existing homes, and low
mortgage rates and stimulating new home
construction for the first time in years
0.55
0.59
0.61
0.77
0.93
2.1
New home
starts plunged
72% from
2005-2009; A
net annual
decline of 1.49
million units,
lowest since
records began
in 1959
1.19
1.01
1.20
1.29
1.46
1.35
1.48
1.47
1.62
1.64
1.57
1.60
1.71
1.85
1.96
2.07
1.80
1.36
0.91
(Millions of Units)
1.34
1.23
1.32
1.38
1.42
New Private Housing Starts, 1990-2022F
Job growth,
improved credit
market conditions
and demographics
will eventually boost
home construction
0.3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F 16F17F 1822F
Little Exposure Growth Likely for Homeowners Insurers Until at least 2014.
Also Affects Commercial Insurers with Construction Risk Exposure, Surety
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 11/12); Insurance Information Institute.
10
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
2/30/2
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
5,550
5,500
5,529
5,552
5,559
5,518
5,507
5,491
5,511
5,492
5,499
5,488
5,477
5,456
5,489
5,496
5,495
5,498
5,495
5,508
5,498
5,528
5,519
5,520
5,546
5,564
5,563
5,549
5,542
5,510
5,514
5,517
5,520
5,522
5,539
5,600
5,593
Construction Employment,
Jan. 2010—October 2012*
(Thousands)
5,650
Construction employment is
still below where it was in
Jan. 2010. In a normal
recovery, construction
employment would be
growing robustly
5,450
5,400
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
11
Value of Construction Put in Place,
October 2012 vs. October 2011*
Growth (%)
Private: +15.5%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
Public: -1.0%
20.8%
15.5%
10.7%
9.6%
Private sector
construction activity is up
in both the residential and
nonresidential segments
-0.4%
-1.0%
Public sector
construction activity
remains depressed
-20.9%
Total
Construction
Total Private Residential-Construction
Private
NonResidential-Private
Total Public
Construction
ResidentialPublic
NonResidential-Public
Overall Construction Activity is Up, But Growth Is Entirely in the Private
Sector as State/Local Government Budget Woes Continue
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
12
Value of Private Construction Put in Place,
by Segment, Oct. 2012 vs. Oct. 2011*
33.9%
20.8%
10.7%
18.8%
18.5%
17.6%
9.5%
3.6%
Manufacturing
Power
Communication
Transportation
-3.0% -3.0%
-6.6%
Amusement &
Rec.
Religious
-3.6%
Educational
Health Care
Commercial
Office
Lodging
-0.3%
Total
Nonresidential
Total Private
Construction
40%
35%
30%
25%
20% 15.5%
15%
10%
5%
0%
-5%
-10%
Led by the Residential Construction, Lodging and Power
industries, Private sector construction activity is up by
double digits in many segments after plunging during
the “Great Recession”
Residential
Growth (%)
Private Construction Activity is Up in Most Segments, Including
Residential Construction
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
13
Value of Public Construction Put in Place,
by Segment, Oct. 2012 vs. Oct. 2011*
22.0% 22.5%
13.5%
6.0%
1.3%
Conservation &
Develop.
-13.6%
Water Supply
Sewage &
Waste Disposal
Highway &
Street
Educational
Health Care
Commercial
Office
-20.9%
Power
-15.7%
-16.1%
Transportation and -5.0% -4.9%
Power projects lead
public sector
construction
Transportation
-8.1%
Amusement &
Rec.
-2.8%
Public Safety
-0.4%
Total
Nonresidential
Total Public
Construction
25%
20%
15%
10%
5%
0%
-5% -1.0%
-10%
-15%
-20%
-25%
Public sector construction activity is
down substantially in many
segments, but is actually now up in
some segments
Residential
Growth (%)
Public Construction Activity is Down in Many Segments as State, City
and County Budgets Remain Under Stress
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
14
ISM Manufacturing Index
(Values > 50 Indicate Expansion)
55
50
40
Manufacturing activity contracted in
4 of the past 6 months, but only
slightly. The recent trend is
basically flat.
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
45
51.4
52.5
52.5
51.8
52.2
53.1
54.1
52.4
53.4
54.8
53.5
49.7
49.8
49.6
51.5
51.7
49.5
60
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
65
58.3
57.1
60.4
59.6
57.8
55.3
55.1
55.2
55.3
56.9
58.2
58.5
60.8
61.4
59.7
59.7
54.2
55.8
January 2010 through November 2012
The manufacturing sector expanded for 33 of the 35 months from Jan.
2010 through Oct. 2012. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
15
Dollar Value* of Manufacturers’
Shipments Monthly, Jan. 1992—Oct. 2012
$ Millions
$500,000
$400,000
ENERGY INTENSIVE
The value of Manufacturing
Shipments in Oct. 2012 were up 35%
to $482B from its May 2009 trough.
June figure is only 0.7% below its
previous record high in July 2008.
$300,000
Ja
n92
Ja
n93
Ja
n94
Ja
n95
Ja
n96
Ja
n97
Ja
n98
Ja
n99
Ja
n00
Ja
n
01
Ja
n
02
Ja
n
03
Ja
n
04
Ja
n
05
Ja
n
06
Ja
n
07
Ja
n
08
Ja
n
09
Ja
n
10
Ja
n
11
Ja
n
12
$200,000
Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession).
Trough in May 2009. Growth from trough to Oct. 2012 was 35%. Manufacturing is an
energy intensive activity and growth leads to gains in many commercial exposures: WC,
Commercial Auto, Marine, Property and Various Liability Coverages
*seasonally adjusted
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 16
Manufacturing Growth for Selected
Sectors, 2012 vs. 2011*
Growth (%)
Non-Durables: +2.3%
Durables: +7.4%
14.6%
11.0%
9.4%
7.4% 7.2%
Manufacturing of durable
goods has been
especially strong in 2012
5.3%
4.7%
2.7%
4.3% 4.8%
2.3% 2.7%
Textile
Products
Plastics &
Rubber
Chemical
Petroleum &
Coal
Food
Products
Non-Durable
Mfg.
Transportation
Equip.
Electrical
Equip.
Machinery
Fabricated
Metals
Primary
Metals
Wood
Products
-1.3%
Durable Mfg.
All
Manufacturing
16%
14%
12%
10%
8%
6% 4.6%
4%
2%
0%
-2%
-4%
Manufacturing Is Expanding Across a Wide Range of Sectors that Will
Contribute to Growth in Energy Demand and Insurable Exposures Including:
WC, Commercial Property, Commercial Auto and Many Liability Coverages
*Seasonally adjusted; Date are YTD comparing data through October 2012 to the same period in 2011.
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 17
Recovery in Capacity Utilization is a
Positive Sign for Commercial Exposures
March 2001 through October 2012
“Full Capacity”
The US operated at 77.8% of
industrial capacity in Oct.
2012, above the June 2009 low
of 68.3%
Percent of Industrial Capacity
82%
Hurricane
Katrina
80%
78%
76%
The closer the economy is
to operating at “full
capacity,” the greater the
inflationary pressure
March 2001November 2001
recession
Sep 12
Jun 11
Sep 11
Dec 11
Mar 12
Jun 12
Dec 10
Mar 11
Jun 10
Sep 10
Sep 09
Dec 09
Mar 10
Mar 09
Jun 09
Sep 08
Dec 08
Jun 07
Sep 07
Jun 06
Sep 06
Sep 04
Dec 04
Dec 03
Mar 04
Jun 04
18
Jun 03
Sep 03
Dec 02
Mar 03
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.
Jun 02
Sep 02
Sep 01
Dec 01
Mar 02
Mar 01
Jun 01
66%
Dec 07
Mar 08
Jun 08
December 2007June 2009 Recession
68%
Dec 06
Mar 07
70%
Sep 05
Dec 05
Mar 06
72%
Mar 05
Jun 05
74%
18
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
2/30/2
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
12,400
12,200
12,000
11,800
11,600
11,458
11,462
11,470
11,502
11,536
11,546
11,566
11,549
11,551
11,551
11,560
11,575
11,627
11,664
11,690
11,718
11,726
11,738
11,768
11,771
11,768
11,777
11,780
11,808
11,860
11,890
11,932
11,942
11,955
11,962
11,980
11,967
11,953
11,966
Manufacturing Employment,
Jan. 2010—October 2012*
(Thousands)
Manufacturing employment is up by
more than 500,000 or 4.4% since Jan.
2010—a surprising source of strength
in the economy—though employment
is down slightly since mid-year.
11,400
11,200
11,000
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
19
ISM Non-Manufacturing Index
(Values > 50 Indicate Expansion)
January 2010 through November 2012
60
55
50.7
52.7
54.1
54.6
54.8
53.5
53.7
52.8
53.9
54.6
56
57.1
59.4
59.7
56.3
54.4
53.3
53.4
53.8
52.6
52.6
52.6
52.6
53.0
56.8
57.3
56.0
53.5
53.7
52.1
52.6
53.7
55.1
54.2
54.7
65
50
40
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
45
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Optimism among nonmanufacturers iss stable
and remained
expansionary in 2012
Non-manufacturing industries have been expanding and adding
jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.
20
Business Bankruptcy Filings,
1980-2012:H1
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%*
2011 bankruptcies totaled 47,806, down 15.1%
from 56,282 in 2010—the second consecutive
year of decline. Business bankruptcies more
than tripled during the financial crisis. Through
H1:2012, filings are down 18.3% vs. H1:2011
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12:H1
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
56,282
47,806
19,622
% Change Surrounding
Recessions
Significant Exposure Implications for All Commercial Lines as
Business Bankruptcies Begin to Decline
Sources: American Bankruptcy Institute at
http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633;
Insurance Information Institute
21
Private Sector Business Starts,
1993:Q2 – 2012:Q1*
230
220
210
200
190
180
170
Business Starts
2006: 872,000
2007: 843,000
2008: 790,000
2009: 697,000
2010: 742,000
2011: 748,000*
175
186
174
180
186
192
188
187
189
186
190
194
191
199
204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200
205
204
204
197
203
209
201
203
192
192
193
201
204
202
210
212
209
216
220
223
220
220
210
221
212
204
218
209
207
207
199
191
193
172
176
169
184
175
179
188
200
183
187
191
197
193
(Thousands)
Business starts were up 2.2% to 748,000 in
2011 vs. 2010. 742,000 new business
starts were recorded in 2010, up 6.0% from
700,000 in 2009, which was the slowest
year for new business starts since 1993
160
150
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11 12
Business Starts Were Down Nearly 20% in the Recession,
Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly
* Data through Mar. 31, 2012 are the latest available as of Dec. 2, 2012; Seasonally adjusted.
Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
22
NFIB Small Business Optimism Index
January 1985 through October 2012
Small business optimism has
increased but is still only at
the level it was when the
Financial Crisis began
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIBoptimism-index.gif ; Insurance Information Institute.
23
12 Industries for the Next 10 Years:
Insurance Solutions Needed
Health Care
Health Sciences
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Many
industries are
poised for
growth,
though
insurers’
ability to
capitalize on
these
industries
varies widely
Light Manufacturing
Insourced Manufacturing
Export-Oriented Industries
Shipping (Rail, Marine, Trucking)
24
Fiscal Cliff: Implications for
P/C Insurance Industry
Premium Growth Rates Vary
Tremendously by State
25
The Fiscal Cliff: Key Issues for the P/C
Insurance Industry
 Growth: P/C Insurance Industry Shares This Concern with All Industries
 Worried that the simultaneous combination of higher taxes and sharp spending
cuts will slow the economy—even push it into recession—and hurt growth
 Consumer/Business spending could be reduced and/or postponed
 Investments: Markets Hate Uncertainty
 Will the uncertainty hurt stock markets?
 Will the Fed have to redouble efforts to keep interest rates low (hurting inv. Inc.)?
 Agent/Brokers: Higher Marginal Tax Rates & Capital Gain Tax Hikes
 Many agencies/small brokers are effectively small businesses, so higher marginal
tax rates hurt owners and a higher capital gains tax rate reduces value in M&A
 Tax Reform—After the Fiscal Cliff
 There is a general view that the US tax code is badly in need of reform
 Part of the reform could mean casting a wider net for revenue
 Deductibility of reserves, tax treatment of muni bonds are issues of future
concern
 Health Insurers Have the Most to Be Concerned About
Source: Insurance Information Institute research.
26
Growth Analysis by State and
Business Segment
Premium Growth Rates Vary
Tremendously by State
27
Direct Premiums Written: Total P/C
Percent Change by State, 2006-2011*
Top 25 States
A limited number of states
showed strong growth over
the past 5 years
71.5
80
60
50
41.8
6.6
6.3
6.1
5.8
4.9
4.7
4.2
3.9
2.4
2.2
2.1
2.1
2.1
0.9
0.9
0.7
0.4
LA
AR
WI
TN
IN
AK
DE
NM
NC
KY
SC
WA
DC
MO
VT
MS
10.5
TX
OK
MT
SD
0
ND
10
MN
11.8
20.8
KS
WY
22.6
NE
20
18.2
22.8
30
IA
40
26.4
Pecent change (%)
70
Sources: SNL Financial LC.; Insurance Information Institute.
28
Direct Premiums Written: Total P/C
Percent Change by State, 2006-2011*
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
NV
AZ
-19.2
-13.5
-12.0
CA
-10.8
WV
-11.7
-10.5
NH
FL
-10.3
-6.0
MI
RI
MD
CO
NJ
HI
-5.8
-4.4
OR
ME
-4.1
ID
-5.2
-3.5
-3.2
-3.1
-2.5
-2.0
PA
CT
GA
US
UT
NY
VA
OH
AL
-20
IL
States with the poorest
performing economies also
produced the most negative
net change in premiums of
the past 5 years
-15
-25
MA
-10
-1.9
-5
-1.6
-1.4
-1.3
-1.1
-0.8
-0.6
Pecent change (%)
0
-0.8
0.4
5
29
Direct Premiums Written: Comm. Lines
Percent Change by State, 2006-2011*
Top 25 States
80
NC -7.9
NY -7.8
WA -7.6
MS -6.7
NM -6.6
MA -6.6
OH -6.4
IL -6.3
-0.5
AR
-3.0
0.0
IN
DC
0.2
VT
-2.5
0.9
WI
TN
2.7
AK
-1.5
2.9
TX
WY
OK
MT
SD
-20
ND
0
LA
4.0
MN
8.3
25.6
KS
20
14.9
27.9
NE
40
28.9
38.9
60
IA
60.8
Pecent change (%)
100
Only 12 states showed any
commercial lines growth
20065 and 2011
100.9
120
Sources: SNL Financial LC.; Insurance Information Institute.
34
Direct Premiums Written: Comm. Lines
Percent Change by State, 2006-2011*
Bottom 25 States
0
NV
WV
-33.0
-26.4
-24.4
AZ
-19.9
HI
-23.7
-19.8
NH
FL
-19.4
-16.7
DE
CA
-16.0
MI
-15.0
OR
NJ
MD
ID
GA
VA
AL
SC
CT
ME
PA
KY
-35
US
-30
MO
States with the poorest
performing economies also
produced the most negative
net change in premiums of
the past 5 years
-25
-40
-14.7
-13.6
CO
-20
UT
-13.2
RI
-13.2
-12.9
-12.7
-12.2
-11.6
-11.4
-10.8
-10.1
-15
-10.0
-9.0
-8.1
-8.0
-10
-7.9
Pecent change (%)
-5
Sources: SNL Financial LC.; Insurance Information Institute.
35
Direct Premiums Written: Workers’ Comp
Percent Change by State, 2006-2011*
350
321.6
Top 25 States
250
160.5
200
150
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
AL-19.8
RI-19.4
VA-18.6
NM-17.2
LA-17.0
NC-16.4
MA-16.1
IN-15.3
ME-14.8
MI-14.6
MN-13.4
NJ-13.3
NE -11.6
PA -10.5
OH -10.4
-7.0
CT
-1.5
KS
IL -6.9
0.6
NY
WY -6.3
1.2
10.9
OK
MT
-50
ND
0
WI
12.7
IA
50
13.2
100
SD
Pecent change (%)
300
36
Direct Premiums Written: Worker’s Comp
Percent Change by State, 2006-2011*
Bottom 25 States
-28.4
-29.0
-29.2
-29.6
-29.8
AK
MO
NH
AZ
CA
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute.
FL
-52.5
-49.0
WV
-46.1
NV
-45.2
-44.2
DE
HI
-43.8
WA
-40.3
UT
VT
KY
MD
DC
GA
TX
AR
SC
MS
TN
-50
ID
-45
OR
States with the poorest
performing economies also
produced the most negative
net change in premiums of
the past 5 years
-40
-55
-36.1
-35
CO
-26.1
-25.6
-30
-25.5
-23.6
-23.4
-23.1
-23.1
-23.0
-22.9
-22.2
-21.0
-19.9
-25
US
Pecent change (%)
-20
-19.8
-15
37
Presidential Politics & the P/C
Insurance Industry
How Is Profitability Affected by
the President’s Political Party?
38
P/C Insurance Industry ROE by
Presidential Administration, 1950- 2012*
16.43%
Carter
Reagan II
15.10%
G.W. Bush II
9.40%
Nixon
8.93%
8.65%
Clinton I
G.H.W. Bush
OVERALL RECORD:
1950-2012*
Democrats 7.67%
Republicans 7.97%
8.35%
Clinton II
7.98%
Reagan I
7.68%
Nixon/Ford
6.98%
Truman
6.97%
Obama
6.65%
Eisenhower I
5.43%
5.03%
Eisenhower II
G.W. Bush I
4.83%
Johnson
4.43%
Kennedy/Johnson
Party of President has
marginal bearing on
profitability of P/C
insurance industry
3.55%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
*Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments.
Estimated ROE for 2012 = 7.0%.
Source: Insurance Information Institute
P/C insurance Industry ROE by
Presidential Party Affiliation, 1950- 2012*
Clinton
Bush II
Obama
Reagan/Bush I
94
96
RED = Republican President
82
84
Nixon/Ford
Carter
Kennedy/
Johnson
20%
Truman
25%
Eisenhower
BLUE = Democratic President
15%
10%
5%
0%
*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0%
Source: Insurance Information Institute
12E
08
10
02
04
06
98
00
90
92
86
88
78
80
74
76
70
72
66
68
60
62
64
56
58
52
54
50
-5%
Labor Market Trends
Massive Job Losses Sapped the
Economy and Commercial/Personal
Lines Exposure, But Trend is
Improving
41
Unemployment and Underemployment
Rates: Stubbornly High in 2012, But Falling
January 2000 through Oct. 2012, Seasonally Adjusted (%)
18
U-6 went from
8.0% in March
2007 to 17.5% in
October 2009;
Stood at 14.6%
in Aug. 2012
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
stood at 7.9% in
Oct. 2012
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
Jan
12
Sep.
12
Stubbornly high unemployment and underemployment constrain overall
economic growth, but the job market is now clearly improving
Source: US Bureau of Labor Statistics; Insurance Information Institute.
42
(600)
(800)
(1,000)
Monthly Losses in
Dec. 08–Mar. 09 Were
the Largest in the
Post-WW II Period
-734
-667
-806
-707
-744
-649
-452
-297
-215
-186
-262
-334
-161
-253
-230
-257
-347
(400)
-456
-547
(200)
-14
-83
-12
-85
-58
-109
0
144
400
229
51
61
117
143
112
193
128
167
119
257
261
264
108
102
175
52
216
139
178
234
277
254
147
85
116
63
163
134
128
184
16
62
75
213
186
127
65
97
23
42
15
65
79
200
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Monthly Change in Private Employment
January 2008 through Oct. 2012 (Thousands)
184,000 private sector jobs
were created in October
Private Employers Added 5.08 million Jobs Since Jan. 2010 After
Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State
and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
43
-4
-6
-8
-10
-0.074
-0.132
-0.293
-0.546
-0.776
-1.033
-1.380
-1.836
-2.383
-3.117
-3.784
-4.590
-5.297
-6.041
-6.690
-7.024
-7.476
-7.773
-7.988
-8.174
-8.436
-8.361
-8.444
-8.428
-8.366
-8.222
-7.993
-7.942
-7.881
-7.764
-7.621
-7.509
-7.316
-7.188
-7.021
-6.902
-6.645
-6.384
-6.120
-6.012
-5.910
-5.735
-5.683
-5.467
-5.328
-5.150
-4.916
-4.639
-4.385
-4.238
-4.153
-4.037
-3.974
-3.811
-3.677
-3.549
-3.365
-2
0.023
0.011
0
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
MayJun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
MayJun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
MayJun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
MayJun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
MayJun-12
Jul-12
Aug-12
Sep-12
Millions
Cumulative Change in Private
Employment: Dec. 2007—Oct. 2012
December 2007 through October 2012 (Millions)
2
Cumulative job losses
peaked at 8.444 million
in December 2009
Cumulative job losses
as of Oct. 2012 totaled
3.365 million
All of the jobs
“lost” since
President Obama
took office in Jan.
2009 have been
recouped
Private Employers Added 5.08 million Jobs Since Jan. 2010 After
Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State
and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
44
Cumulative Change in Private Sector
Employment: Jan. 2010—Oct. 2012
January 2010 through October 2012* (Millions)
5.079
4.895
4.767
4.633
4.470
4.407
4.291
4.206
4.059
3.805
3.528
3.116
2.977
2.761
2.709
2.534
2.432
2.060
Oct-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Cumulative job gains
through Oct. 2012
totaled 5.08 million
Mar-11
1.799
Feb-11
1.542
Jan-11
1.423
Dec-10
1.256
0.935
Sep-10
Nov-10
0.823
Aug-10
0.563
Jun-10
0.680
0.502
May-10
Jul-10
0.451
Apr-10
Mar-10
0.078
Feb-10
0.0
Jan-10 0.016
1.0
0.222
2.0
1.128
3.0
Apr-11
4.0
Oct-10
Millions
5.0
2.324
Job gains and pay
increases have added more
than $600 billion to payrolls
since Jan. 2010
3.294
6.0
Private Employers Added 5.08 million Jobs Since Jan. 2010 After
Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State
and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
45
Cumulative Change in Government
Employment: Jan. 2010—Oct. 2012
January 2010 through Oct. 2012* (Millions)
Government at all levels has
shed nearly half a million jobs
since Jan. 2010 even as
private employers created
5.08 million jobs, though
losses may now be ending.
518
700
259
500
86
-8
0
40
100
109
300
-475
-455
-468
Sep-12
Oct-12
-504
Apr-12
Aug-12
-487
Mar-12
-533
-483
Feb-12
Jul-12
-488
Jan-12
Jun-12 -551
-486
Dec-11
-533
-475
Nov-11
May-12
-454
-427
Sep-11
Oct-11
-413
Aug-11
-446
-367
Jun-11
Jul-11
-349
May-11
-295
Apr-11
-230
Jan-11
-282
-221
Dec-10
Mar-11
-201
Nov-10
-267
-188
Oct-10
Feb-11
-212
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Jan-10
-500
Feb-10
Temporary
Census hiring
distorted 2010
figures
-300
-700
Cumulative job
losses through Oct.
2012 totaled 468,000
-70
-100
Governments at All Levels are Under Severe Fiscal Strain As Tax
Receipts Plunged and Pension Obligations Soared During the
Financial Crisis, Causing Them to Reduce Staff
Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
46
Unemployment Rates by State, October 2012:
Highest 25 States*
7.4
7.5
7.9
7.9
8.0
8.1
8.1
8.2
8.2
8.4
8.5
8.1
8
8.6
8.6
8.7
8.7
8.8
8.9
9.0
9.1
9.3
9.7
10.1
10
10.4
Unemployment Rate (%)
12
11.5
14
8.5
In October, 37 states and the
District of Columbia reported overthe-month unemployment rate
decreases, 7 states had increases,
and 6 had no change.
6
4
2
0
NV RI CA NJ NC MI CT MS IL GA NY OR SC DC FL KY TN WA AL AZ PA IN US CO WV ME
*Provisional figures for October 2012, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
48
6.6
6.6
6.6
6.7
6.8
6.9
6.9
6.9
7.0
7.1
3.8
4.5
5.1
5.2
5.2
5.3
5.5
5.5
5.7
5.7
5.7
5.8
6.0
6
In October, 37 states and the District of
Columbia reported over-the-month
unemployment rate decreases, 7 states
had increases, and 6 had no change.
6.3
4
3.1
Unemployment Rate (%)
8
7.2
Unemployment Rates by State, October 2012:
Lowest 25 States*
2
0
AR AK ID MO OH WI DE MD LA MA TX NM MT MN KS NH VA HI VT OK UT WY IA SD NE ND
*Provisional figures for October 2012, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
49
US Unemployment Rate Forecast
2007:Q1 to 2013:Q4F*
8.0%
7.0%
6.0%
5.0%
Unemployment
peaked at 10% in
late 2009.
9.3%
9.6%
10.0%
9.7%
9.6%
9.6%
9.6%
8.9%
9.1%
9.1%
8.7%
8.3%
8.2%
8.1%
7.9%
7.9%
7.8%
7.7%
7.6%
9.0%
8.1%
10.0%
Rising
unemployment
eroded payrolls
and workers
comp’s
exposure base.
4.5%
4.5%
4.6%
4.8%
4.9%
5.4%
6.1%
6.9%
11.0%
Jobless figures
have been revised
slightly downwards
for 2012/13
Unemployment forecasts
have been revised slightly
downwards. Optimistic
scenarios put the
unemployment as low as
7.3% by Q4 of next year.
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
12:Q1
12:Q2
12:Q3
12:Q4
13:Q1
13:Q2
13:Q3
13:Q4
4.0%
*
= actual;
= forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (11/12 edition); Insurance Information Institute.
50
Payroll vs. Workers Comp Net Written
Premiums, 1990-2012E
Payroll Base*
$Billions
$7,000
7/90-3/91
$6,000
$5,000
$4,000
$3,000
WC NWP
$Billions
Wage & Salary Disbursements
3/01-11/01
WC NPW
12/07-6/09
WC premium
volume dropped
two years before
the recession began
+9% in
2012E
$50
$45
$40
WC net premiums
written were down
$14B or 29.3% to
$33.8B in 2010 after
peaking at $47.8B
in 2005
$2,000
$35
$30
$25
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow
Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005
*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is I.I.I. estimate based YTD 2012 actuals.
Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
52
Mass Layoff Announcements,
Jan. 2002—October 2012*
3,500
Mass layoff
announcements peaked
at more than 3,000 per
month in Feb. 2009
3,000
There were 1,360 may
layoffs announced in
Oct. 2012, close to
pre-recession levels
2,500
2,000
1,500
1,000
500
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
*Seasonally adjusted.
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates);
Insurance Information Institute.
'12
53
P/C Insurance Industry
Financial Overview
Profit Recovery in 2012 After
High CAT Losses; Ultimate
Impact of Sandy Still Unclear
55
$16,423
$19,150
$3,043
$28,672
$35,204
$65,777
$44,155
$38,501
$30,029
$20,559
$20,598
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
$21,865
$50,000
P-C Industry 2012:H1
profits were up 245% from
2011:H1, due primarily to
lower catastrophe losses
$30,773
$60,000
2005 ROE*= 9.6%
2006 ROE = 12.7%
2007 ROE = 10.9%
2008 ROE = 0.1%
2009 ROE = 5.0%
2010 ROE = 6.6%
2011 ROAS1 = 3.5%
2012:H1 ROAS1 = 5.9%
$36,819
$70,000








$24,404
$80,000
$62,496
P/C Net Income After Taxes
1991–2012:Q2 ($ Millions)
$0
-$10,000
-$6,970
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for
2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
11 12:H1
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
Combined Ratio / ROE
15.9%
110
A combined ratio of about 100 generates an
ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
106.4
14.3%
12.7%
105
100.6
100
100.1
101.0
100.8
99.3
95.7
95
7.4%
92.7
8.8%
15%
10.9%
9.6%
97.5
18%
101.1
100.9
7.6%
12%
9%
6.2%
4.4%
4.6%
90
6%
Year Ago
85
3%
2011:H1 = 109.4,
2.3% ROE
0%
80
1978
1979
2003
2005
2006
2007
Combined Ratio
2008
2009
2010
2011
2012:H1
ROE*
Combined Ratios Must Be Lower in Today’s Depressed
Investment Environment to Generate Risk Appropriate ROEs
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:H1 combined ratio
including M&FG insurers is 102.2, ROAS = 5.9%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO data.
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2012:H1*
ROE
History suggests next ROE
peak will be in 2016-2017
25%
1977:19.0%
1987:17.3%
20%
2006:12.7%
1997:11.6%
15%
9 Years
2012:H1:
6.2%
10%
5%
2011:
4.6%*
0%
1975: 2.4%
1992: 4.5%
2001: -1.2%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11*
12:
-5%
1984: 1.8%
*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude
mortgage and financial guaranty insurers. 2012:H1 ROAS = 5.9% including M&FG.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
Hurricane Sandy Summary
Sandy Will Become One of the
Most Expensive Events in
Insurance History
67
Summary of Key Financial Issues Related
to Hurricane Sandy
 Sandy Will Likely Become the 3rd Most Expensive Hurricane in US History in
Terms of Insured Losses—With Insured Losses of Up to $25 Billion
 Ranks behind 2005’s Katrina ($47.6B) and 1992’s Andrew ($25.0B) [in 2011 $]
 Total Claim Count is Estimated at Approximately 1.38 million
 Hurricane Katrina produced 1.743 million claims
 2012 Could Become the 3rd Costliest Year in US History in Terms of Insured
Losses—Totaling Approximately $34-$35 Billion as of Late 2012
 Ranking behind 2005 ($71.7B) and 1992 ($36.9B) [both stated in 2011 dollars]
 2012 Will Likely Be the 2nd Costliest Year for the NFIP (~$7B+), Likely
Exhausting the Flood Program’s Remaining Borrowing Authority
 Record was $17.74B in 2005 (original dollars), the year of Hurricane Katrina
 Too Soon to Determine Impact on P/C Insurance Industry Financials
 Impact of US insurers’ combined ratio and ROEs will be influenced by the degree
to which reinsurance coverage is triggered
 US Cat losses had been running 40% - 50% below 2011 levels prior to Sandy
 P/C Insurance Industry Entered 2012 Hurricane Very Strong Financially
 Industry remains very strong in the wake of Sandy, despite high losses
68
Hurricane Sandy Insured Loss Estimates:
Late Season Large Loss* ($ Billions)
RMS
Average of the midpoints
of the 3 risk modeler
estimates is $18.8 billion
$16 - $22B
AIR
$10 - $20B
Eqecat
$0
$20 - $25B
$5
$10
$15
$20
$25
*US insured property and business interruption losses only. Sandy’s landfall in the northeast US occurred Oct. 29, 2012.
Sources: RMS (11/14/12 est.), AIR (11/26/12 est.), Eqecat (11/1/12 est.); Compiled by the Insurance Information Institute.
US Insured Catastrophe Losses
$7.3
$10.3
$34.3
$28.5
$32.9
$15.9
$7.4
$6.0
$11.3
$14.0
$3.7
$10.7
$12.3
$8.6
$10
$7.8
$20
$4.7
$30
$13.7
$40
$25.8
$36.9
$50
$33.9
$60
$32.3
$70
2012 CAT losses
were down nearly 50%
from 2011 until Sandy
struck in late October
$14.1
$80
$11.2
$71.7
($ Billions, 2011 Dollars)
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
US CAT Losses in 2012 Could Become the 3rd
Highest in US History on An Inflation-Adjusted
Basis. 2011 Losses Were the 5th Highest
Record Tornado
Losses Caused
2011 CAT Losses
to Surge
*As of 11/26/12 in 2012 dollars. Includes $18.8B gross loss estimate for Hurricane Sandy.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and
personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)
Sources: Property Claims Service/ISO; Insurance Information Institute.
71
71
Top 16 Most Costly Disasters
in U.S. History
(Insured Losses, 2011 Dollars, $ Billions)
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Hurricane Sandy could
become the 5th
costliest event in US
insurance history
Includes
Tuscaloosa, AL,
tornado
Includes
Joplin, MO,
tornado
$24.0 $25.0
$18.8 $19.1
$8.5 $9.0
$6.5 $6.9 $7.3 $7.7
$5.5
$4.3 $4.4
Irene (2011) Jeanne
(2004)
Frances
(2004)
Rita
Tornadoes/Tornadoes/ Hugo
(2005) T-Storms T-Storms
(1989)
(2011)
(2011)
Hurricane Irene became the
12th most expense hurricane
in US history in 2011
$47.6
Ivan
(2004)
Charley
(2004)
$11.9 $13.1
Wilma
(2005)
Ike
(2008)
Sandy* Northridge9/11 Attack Andrew
(2012)
(1994)
(2001)
(1992)
Katrina
(2005)
NY Gov. Andrew Cuomo has requested
$42 billion in federal aid. NJ Gov. Chris
Christie has requested $29.4B
*Estimate as of 11/26/12 based on average of range midpoints from AIR, RMS and Eqecat..
Sources: PCS; Insurance Information Institute inflation adjustments.
72
Top 12 Most Costly Hurricanes
in U.S. History
(Insured Losses, 2011 Dollars, $ Billions)
10 of the 12 most costly hurricanes in insurance
history occurred over the past 8 years (2004—2012)
Hurricane Sandy could
become the 3rd costliest
hurricane in US
insurance history
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Hurricane Irene
became the 12th most
expense hurricane in
US history in 2011
$4.3
$4.4
$5.5
$6.5
Irene
(2011)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
$47.6
$25.0
$18.8
$7.7
$8.5
$9.0
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
$11.9
$13.1
Wilma
(2005)
Ike
(2008)
*Estimate as of 11/26/12 based on average of range estimate midpoints from AIR, Eqecat and RMS..
Sources: PCS; Insurance Information Institute inflation adjustments.
Sandy*
(2012)
Andrew
(1992)
Katrina
(2005)
73
Residential NFIP Flood Take-Up Rates
in NJ (2010) & Sandy Storm Surge
Flood coverage penetration
rates were extremely low in
many very vulnerable areas in
NJ, with take-up rates far below
50% in many areas
Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.
80
Residential NFIP Flood Take-Up Rates
in NY, CT (2010) & Sandy Storm Surge
Flood
coverage
penetration
rates were
extremely low
in many very
vulnerable
areas of NY
and CT, with
take-up rates
far below 50%
in many areas
Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.
81
U.S. Insured Catastrophe
Loss Update
2012 Catastrophe Losses Were Close to
“Average” in the First Half of 2012
2011 Was the 5th Most Expensive
Year on Record
87
Natural Disasters in the United States,
1980 – 2012:H1
Number of Events (Annual Totals 1980 – 2011 and First Half 2012)
300
250
There were 90 natural
disaster events in the first
half of 2012
Number
200
150
100
22
6
50
61
1
1980
1982
1984
1986
1988
Geophysical
(earthquake, tsunami,
volcanic activity)
Source: MR NatCatSERVICE
1990
1992
1994
1996
1998
2000
Meteorological (storm)
Hydrological
(flood, mass movement)
2002
2004
2006
2008
2010
2012
Climatological
(temperature extremes,
drought, wildfire)
91
U.S. Thunderstorm Loss Trends,
1980 – 2012:H1
Hurricanes get all the headlines,
but thunderstorms are consistent
producers of large scale loss.
2008-2012 are the most expensive
years on record.
Average
thunderstorm
losses are up more
than 5 fold since
the early 1980s.
2012 will likely be
among the top 5
years on record.
Source: Property Claims Service, MR NatCatSERVICE
Thunderstorm losses in 2012:H1
totaled $8.8 billion, the 3rd highest
first half on record
95
U.S. Acreage Burned by Wildfires,
1980 – 2012*
1.7 millions acres were burned by
wildfires in the first half of 2012.
Most of the insured losses were in
CO totaling close to $500 mill.
*Through June 30.
Source: National Forest Service, MR NatCatSERVICE
96
Combined Ratio Points Associated with
Catastrophe Losses: 1960 – 2011*
8.0
8.1
4.4
2010
2008
2006
1.6
2.6
2.7
3.3
3.3
1.6
2002
2004
1.6
2000
1998
1.0
1996
5.0
5.4
3.6
2.9
2.3
2.1
1990
1992
1.2
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1.2
0.4
0.8
1.3
0.3
0.4
0.7
1.5
1.0
0.4
0.4
0.7
1.8
1.1
0.6
1.4
2.0
1.3
2.0
0.5
0.5
0.7
1966
3.0
3.6
0.4
1964
1962
0.8
1.1
1.1
0.1
0.9
1
0
1960
5
4
3
2
5.9
1960s: 1.04
1970s: 0.85
1980s: 1.31
1990s: 3.39
2000s: 3.52
2010s: 6.20*
8
7
6
3.3
2.8
10
9
8.8
Avg. CAT Loss
Component of the
Combined Ratio
by Decade
1994
Combined Ratio Points
The Catastrophe Loss Component of Private Insurer Losses Has
Increased Sharply in Recent Decades
*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.
Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for
losses ultimately paid by foreign insurers and reinsurers.
Source: ISO; Insurance Information Institute.
97
Homeowners Insurance Catastrophe-Related
Claim Frequency and Severity, 1997—2012*
Avg. catastrophe
claim cost rose
approximately 200%
from 1997-2011
Cat claim frequency in
2011 was at historic
highs and more than
double the rate in 1997
*All policy forms combined, countrywide.
Source: Insurance Research Council, Trends in Homeowners Insurance Claims, Sept. 2012 from ISO Fast Track data.
101
Federal Disaster
Declarations Patterns:
1953-2012
Despite Sandy, Fewer Disasters
Were Declared in 2012 than the
Record Number of Declarations in
2010 and 2011
102
Number of Federal Disaster
Declarations, 1953-2012*
99
81
75
46
59
63
48
52
56
44
32
36
32
38
43
45
11
31
34
24
21
15
23
22
25
27
28
23
38
30
29
17
17
19
11
11
22
20
25
25
12
12
46 federal disasters
were declared through
Dec. 6, 2012
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
7
7
13
17
18
16
16
40
0
42
48
46
46
60
20
69
65
80
The number of federal
disaster declarations set a
new record in 2011, with 99,
shattering 2010’s record 81
declarations.
50
45
45
49
100
There have been 2,081
federal disaster
declarations since
1953. The average
number of declarations
per year is 35 from
1953-2011, though that
few haven’t been
recorded since 1995.
75
120
The Number of Federal Disaster Declarations Is Rising and Set New Records
in 2010 and 2011. Hurricane Sandy Produced 9 Declarations in 2012.
*Through Dec. 6, 2012.
Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
103
Federal Disasters Declarations by State,
1953 – 2012: Highest 25 States*
Over the past 60
years, Texas has
had the highest
number of Federal
Disaster
Declarations
39
46
47
46
42
40
40
47
47
48
48
48
51
51
51
53
53
56
57
65
50
50
59
60
66
70
72
Disaster Declarations
80
78
90
86
100
30
20
10
0
TX CA OK NY FL LA AL KY AR MO IL TN MS WV IA MN KS NE PA VA OH WA ND NC IN
*Through Dec. 5, 2012. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
104
Federal Disasters Declarations by State,
1953 – 2012: Lowest 25 States*
Over the past 60 years,
Wyoming and Rhode
Island had the fewest
number of Federal
Disaster Declarations
9
15
15
13
11
10
10
17
17
22
23
24
24
24
25
26
26
27
28
34
35
36
38
39
18
20
30
30
36
Disaster Declarations
40
39
50
0
ME SD AK GA WI NJ VT NH OR MA PR HI MI AZ MD NM ID MT CT NV CO DE SC DC UT RI WY
*Through Dec. 6, 2012. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
105
2012 TORNADO &
SEVERE STORM SUMMARY
2012 Got Off to a Worrisome Start,
But Is No Repeat of 2011
106
Number of Tornadoes and Related
Deaths, 1990 – 2012*
800
600
1,692
400
1,043
1,691
1,282
1,098
1,103
1,376
1,216
1,071
1,148
1,173
1,234
1,082
1,173
1,297
1,132
553
500
941
1,000
1,133
1,200
600
1,043 tornadoes have
been recorded so far
this year, 68 deaths*
400
300
200
Number of Deaths
Number of Tornadoes
1,600
1,345
1,424
Number of Deaths
1,800
1,400
1,819
1,146
Number of Tornadoes
1,264
2,000
Tornadoes claimed 553 lives in
2011, the most since 1925
100
200
0
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
2012 Tornado Losses Got Off to an Ominous Beginning, but Slowed. First
Half 2012 Insured Losses from Tornadoes and Thunderstorms Totaled $8.8B.
*Through Nov. 30, 2012.
Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html 107
U.S. Tornado Count, 2005-2012*
There were 1,897 tornadoes
in the US in 2011 far above
average, but well below
2008’s record
2012 count is
running far
behind 2011
*Through Dec. 4, 2012.
Source: http://www.spc.noaa.gov/wcm/
108
The BIG Question:
Where Is the Market Heading?
Catastrophes and Other Factors Are
Pressuring Insurance Markets
New Factor: Record Low Interest
Rates Are Contributing to
Underwriting and Pricing Pressures
118
Historical Criteria for a “Market Turn”:
Low Interest Rates Add New Pressure
Criteria
Sustained
Period of
Large
Underwriting
Losses
Material
Decline in
Surplus/
Capacity
Status
Comments
Large CAT
Losses in
2011/12
Pushed Up
Combineds
•CAT Losses contributing to higher underwriting losses
•Apart from CAT losses, overall p/c underwriting losses
remain modest
•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at
onset of last hard market); CR= 101.1 in H1:2012 (ex-M&FG)
•Prior-year reserve releases continue to reduce u/w losses,
boost ROEs, though more modestly
Small Decline
Due to 2011
Cats; Could
drop in 2012
•Surplus fell 0.5% as of 6/30/12 from 3/31 record $570.7B
•Fell 1.6% in 2011 due to CATs
•Little excess capacity remains in reinsurance markets
•Modest growth in demand for insurance should begin to
absorb some capacity
Tight
•Much of the global “excess capacity” was eroded by cats
Reinsurance Somewhat in •Higher prices in Asia/Pacific
Market
Place
•Modestly higher pricing for US risks
Renewed
Underwriting Firming Broad, •Commercial lines pricing trends have turned from negative
& Pricing
Sustained,esp. to flat and now positive, esp. Property & WC;
Discipline
in Property, WC •Markets remain competitive in most segments
Sources: Barclays Capital; Insurance Information Institute.
119
INVESTMENTS:
THE NEW REALITY
Investment Performance is a Key
Driver of Profitability
Depressed Yields Will Necessarily
Influence Underwriting & Pricing
120
Property/Casualty Insurance Industry
Investment Income: 2000–2012F1
($ Billions)
$60
$54.6
$52.3
$50
$40
$51.2
$49.5
$47.1
$38.9
$38.7
$37.1
$36.7
01
02
$39.6
$47.6
$49.0
$47.4
Investment earnings in 2012
are running 13% below their
2007 pre-crisis peak
$30
00
03
04
05
06
07
08
09
10
11
12F
Investment Income in 2011 Was Surprisingly Strong, Though Investment
Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates
1
Investment gains consist primarily of interest and stock dividends.
*2012F is based on annualized H1:2012 actual figure of $23.718B.
Sources: ISO; Conning Research & Consulting; Insurance Information Institute.
Property/Casualty Insurance Industry
Investment Gain: 1994–2012F1
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$55.7
$51.9
$53.4
$56.2
$50.8
10
11 12F
$48.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$40 $35.4
$39.2
$36.0
$31.7
$30
$20
Investment gains in 2012 are
running approximately 20%
below their pre-crisis peak
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05* 06
07
08
09
Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce
Investment Income and Lower Realized Investment Gains; The Financial
Crisis Caused Investment Gains to Fall by 50% in 2008
1
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
* 2005 figure includes special one-time dividend of $3.2B; 2012F figure is III estimate based on annualized actual H1:2012 result of $25.424B.
Sources: ISO; Insurance Information Institute.
$1.71
-$7.90
-$19.81
-$15
-$20
-$25
$7.19
$5.85
$8.92
$3.52
$9.70
-$1.21
$6.61
$6.63
$9.13
Realized capital gains
through 2012:H1 are down
53% from $3.61B in 2011:H1
$16.21
$13.02
$10.81
$9.24
$6.00
$9.82
$9.89
$1.66
$5
$0
-$5
-$10
$4.81
$20
$15
$10
$2.88
($ Billions)
$18.02
P/C Insurer Net Realized
Capital Gains/Losses, 1990-2012:H1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112:H1
Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following
Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE
Sources: A.M. Best, ISO, Insurance Information Institute.
124
U.S. 10-Year Treasury Note Yields:
A Long Downward Trend, 1990–2012*
9%
8%
Yields on 10-Year U.S.
Treasury Notes recently
plunged to all time
record lows
7%
6%
5%
4%
3%
2%
Yields on 10-Year U.S. Treasury
Notes have been essentially
below 5% for a full decade.
1%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations,
most P/C insurer portfolios will have low-yielding bonds for years to come.
*Monthly, through Nov. 2012.
Note: Recessions indicated by gray shaded columns.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.
National Bureau of Economic Research (recession dates); Insurance Information Institutes.
125
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. Nov. 2012
6%
5%
4%
3%
2%
4.82%
4.96%
5.04%
4.96%
4.82%
4.82%
4.88%
Treasury yield curve remains
near its most depressed level
in at least 45 years.
Investment income is falling
as a result. Fed is unlikely to
hike rates until well into 2015
at the earliest.
5.00%
4.93%
5.00%
5.19%
2.80%
2.39%
1.65%
1.08%
0.67%
1%
0.12%
1M
0.09%
0.14%
0.18%
0.27%
3M
6M
1Y
2Y
0.36%
September 2012 Yield Curve
Pre-Crisis (July 2007)
0%
3Y
5Y
7Y
10Y
20Y
30Y
The Fed Is Actively Signaling that it Is Determined to Keep Rates Low
Through Mid-2015; This Adds to Pricing Pressure for Insurers.
Source: Federal Reserve Board of Governors; Insurance Information Institute.
126
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.
127
1. UNDERWRITING
Underwriting Losses in 2011
and 2012 Are Elevated by High
Catastrophe Losses
128
P/C Insurance Industry
Combined Ratio, 2001–2012:H1*
Heavy Use of
Reinsurance
Lowered Net
Losses
As Recently as 2001,
Insurers Paid Out
Nearly $1.16 for Every
$1 in Earned
Premiums
Relatively
Low CAT
Losses,
Reserve
Releases
Relatively
Low CAT
Losses,
Reserve
Releases
120
115.8
110
Best
Combined
Ratio Since
1949 (87.6)
107.5
Cyclical
Deterioration
Higher
CAT
Losses,
Shrinking
Reserve
Releases,
Toll of Soft
Market
Avg. CAT
Losses,
More
Reserve
Releases
106.4
101.0
100.8
100.1
99.3
98.4
100
Lower
CAT
Losses
101.1
100.8
95.7
92.6
90
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011*
2012:H1
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:H1=102.2.
Sources: A.M. Best, ISO.
129
Underwriting Gain (Loss)
1975–2012:H1*
($ Billions)
$35
$25
Cumulative
underwriting deficit
from 1975 through
2011 is $479B
Underwriting
losses in
2012 totaled
$7.0B
$15
$5
-$5
-$15
-$25
High cat losses
in 2011 led to
the highest
underwriting
loss since 2002
-$35
-$45
-$55
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Large Underwriting Losses Are NOT Sustainable
in Current Investment Environment
* Includes mortgage and financial guaranty insurers in all years.
Sources: A.M. Best, ISO; Insurance Information Institute.
Combined Ratios by Predominant
Business Segment, 2012:H1 vs. 2011:H1
The combined ratios for
both personal and
commercial lines
improved substantially
in 2012:H1
(Percent)
114
2011:H1
2012:H1
112.1
112
110
109.4
109.3
107.3
108
106
103.4
104
102
101.5
101.1
100
98.8
98
96
All Lines
Personal Lines
Predominating
Source: ISO/PCI; Insurance Information Institute
Commercial Lines
Predominating
Diversified Insurers
131
Financial Strength &
Underwriting
Cyclical Pattern is P-C Impairment
History is Directly Tied to
Underwriting, Reserving & Pricing
134
0
34
16
19
21
18
19
16
12
18
14
15
31
35
41
49
50
47
60
58
5
9
13
12
9
9
11
7
8
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
10
15
12
20
16
14
13
19
30
29
34
40
50
48
50
31
34
60
49
70
36
3 small insurers in
Missouri did encounter
problems in 2011
following the May
tornado in Joplin. They
were absorbed by a
larger insurer and all
claims were paid.
55
P/C Insurer Impairments, 1969–2011
The Number of Impairments Varies Significantly Over the P/C Insurance
Cycle, With Peaks Occurring Well into Hard Markets
Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; Insurance Information Institute.
135
P/C Insurer Impairment Frequency vs.
Combined Ratio, 1969-2011
120
Combined Ratio after Div
P/C Impairment Frequency
2.0
1.8
1.6
1.4
110
1.2
1.0
105
0.8
100
0.6
Impairment Rate
Combined Ratio
115
0.4
95
2011 impairment rate was 0.91%, up from 0.67% in 2010; the
rate is slightly higher than the 0.82% average since 1969
0.0
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
90
0.2
Impairment Rates Are Highly Correlated With Underwriting Performance
and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not
Representative of the Industry Overall
Source: A.M. Best; Insurance Information Institute
136
Reasons for US P/C Insurer
Impairments, 1969–2010
Historically, Deficient Loss Reserves and Inadequate Pricing Are
By Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.6%
4.0%
Misc.
8.6%
Investment Problems
(Overstatement of Assets)
7.3%
40.3%
Affiliate Impairment
Deficient Loss Reserves/
Inadequate Pricing
7.8%
7.1%
Catastrophe Losses
7.8%
Alleged Fraud
13.6%
Rapid Growth
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
137
Top 10 Lines of Business for US P/C
Impaired Insurers, 2000–2010
Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the
Premium Volume of Impaired Insurers Over the Past Decade
Title
Surety
Med Mal
Financial Guaranty
2.0%
4.4%
4.8%
6.5%
Workers Comp
26.6%
Other Liability
6.9%
7.7%
Commercial Auto Liability
8.1%
Commercial Multiperil
22.2%
Pvt. Passenger Auto
10.9%
Homeowners
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
138
Workers Compensation
Operating Environment
The Weak Economy and Soft Market Have
Made the Workers Comp Operating
Increasingly Challenging
140
10
11 12F
116.0
117.1
08
116.6
104.6
07
110.4
103.6
98.5
102.7
97
105.1
96
108.6
101.0
100
100.0
105
97.0
110
102.0
115
107.0
120
112.6
115.3
125
118.2
130
121.7
Workers Compensation Combined
Ratio: 1994–2012F
95
90
85
80
94
95
98
99
00
01
02
03
04
05
06
09
Workers Comp Underwriting Results Are
Deteriorating Markedly and the Worst They
Have Been in a Decade
Sources: A.M. Best; Insurance Information Institute.
141
Workers Compensation Medical Severity
Moderate Increase in 2011
Medical
Claim Cost ($000s)
Average Medical Cost per Lost-Time Claim
Annual Change 1991–1993:
Annual Change 1994–2001:
Annual Change 2002–2010:
+1.9%
+8.9%
+6.0%
Cumulative Change = 245%
(1991-2011p)
Accident Year
2011p: Preliminary based on data valued as of 12/31/2011
1991-2010: Based on data through 12/31/2010, developed to ultimate
Based on the states where NCCI provides ratemaking services; Excludes high
142 deductible policies
Workers Comp Indemnity Claim Costs:
Modest Increase in 2011
Average Indemnity Cost per Lost-Time Claim
Indemnity
Claim Cost ($ 000s)
Average indemnity costs
per claim resumed its
upward climb in 2011
25
23
21
Annual Change 1991–1993:
Annual Change 1994–2001:
Annual Change 2002–2010:
19
17
+2%
+8.8%+0.6%
-2.8%
+6.5%
+5.5%
+3.6%
+4.6%+1.0%
+9.2%+3.1%
-1.7%
+7.3%
+3.4%
+10.1%
$22.3
$21.9
$22.5
$20.8
$19.3
$18.3
$17.6
$17.5
$16.7
$16.2
$14.8
$13.5
$11.2
$10.4
$9.8
$9.7
$9.2
$9.5
7
$9.8
9
$12.2
+10.1%
+9.0%
13
+7.7%
+5.9%
11 +1.0%-3.1%
+4.9%+1.7%
-2.8%
$22.3
15
5
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011p
Accident Year
2010p: Preliminary based on data valued as of 12/31/2011
1991–2010: Based on data through 12/31/2010, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes high deductible policies
Workers Compensation Premium:
First Increase in Years
Net Written Premium
$ Billions
50
46.5
State Funds ($ B)
47.8
46.5
44.3
Private Carriers ($ B)
42.3
40
39.3
37.7
31.0 31.3
30
34.6 33.8
32.1
29.8 30.5 29.1
28.2
26.3
26.9 25.9
25.0
28.6
20
31.0 31.3 29.8 30.5
29.1
10
36.3
34.7
26.3 25.2
25.0 26.1
24.2 23.3
22.3
29.2
37.8 38.6 37.6
31.1
33.8
30.3 29.9
32.2
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20102011p
p Preliminary
Calendar Year
Source: 1990–2010 Private Carriers, Best's Aggregates & Averages; 2011p, NCCI
1996–2011p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements
State Funds available for 1996 and subsequent
Average Approved Bureau
Rates/Loss Costs
History of Average WC Bureau Rate/Loss Cost Level Changes
Percent
15
Cumulative 2000–2003
12.1
+17.1%
10.0
10
Approve rates/loss
costs are seeing their
first significant
increase since 2003
7.8
7.4
6.6
Cumulative 1994–1999
4.9
-27.8%
5
Cumulative 2004–2011
-25.6%
3.5
2.9
1.2
0.4
0
-0.7
-5
Cumulative
1990–1993
-2.6
-3.2
+36.3%
-8.0
91
92
93
94
95
96
-5.1
97
-6.0
-5.7
-6.6
Calendar Year
-10
90
-3.1
-5.4
-6.0
-6.4
-2.0
98
99
00
01
02
03
04
05
06
07
08
09
*States approved through 7/31/12.
Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.
Source: NCCI.
10
11 12*
Current NCCI Voluntary Market
Filed Rate/Loss Cost Changes
(Excludes Law-Only Filings)
Ratio
25
0.0
0.4
0.6
1.0
1.4
1.5
1.9
2.3
2.7
2.9
2.9
3.5
3.6
3.7
4.1
4.4
4.5
4.9
5.2
6.0
6.2
6.4
6.7
7.3
7.4
8.9
9.9
10.5
20
15
10
5
-5
-10
-15
-9.3
-8.1
-7.5
-4.1
-3.8
-3.0
-1.7
-0.5
-0.3
-0.3
0
-20
-25
AL WV KY AR MEMOOK KS SD TX MT TNNC*NV MD UT OR IN* AK GA ID IL HI CO VT IA CT NE AZ LA DC RI NH SC NM FL MS VA
Effective Dates 1/1/2012 and Prior
•IN and NC filed in cooperation with state rating bureau
Source: NCCI
Effective Dates Subsequent to 1/1/2012
Filed and Pending
148
2. SURPLUS/CAPITAL/CAPACITY
How Will Large Catastrophe Losses
Impact Capacity?
150
Policyholder Surplus,
2006:Q4–2012:H1
($ Billions)
Drop due to near-record
2011 CAT losses
2011:Q1
Previous Surplus Peak
$580
$566.5
$559.2
$560
$544.8
$540.7
$530.5
$540
$520
$500
$480
$460
$440
$521.8
$517.9$515.6
$512.8
$505.0
$496.6
$487.1
$478.5
$570.7
$567.8
$559.1
$550.3
$538.6
$511.5
$490.8
$463.0
The Industry now has $1 of $455.6
surplus for every $0.80 of NPW,
close to the strongest claims$437.1
paying status in its history.
Surplus as of 6/30/12 was
down $2.9B or 0.5% from
the all time record high of
$570.7B set as of 3/31/11.
$420
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:H1
*Includes $22.5B of paid-in capital
from a holding company parent for
one insurer’s investment in a noninsurance business in early 2010.
Sources: ISO, A.M .Best.
152
3. REINSURANCE MARKET
CONDITIONS
Record Global
Catastrophes Activity is
Pressuring Pricing
153
Global Property Catastrophe Rate on Line
Index, 1990—2012 (as of July 1)
Year Over Year % Change
100%
237
76%
68%
80%
255
250
233
230
60%
215
200
200
154
150
100
-3%
-16%
-9%
-6%
7%
10%
145
-12%
14%
14%
152
133
-11%
-11%
-18%
-20%
-8%
196
184
3%
115
-13%
-20%
121 111
108
-3%
0%
0%
100
20%
25%
15%
20%
147
141
190
195
173
184
40%
300
-40%
50
Cumulative Rate on Line (1990=100)
Year Over Year % Change in ROL
Cumulative Rate on Line Index
Property-Cat reinsurance
pricing is up about 7% as of
7/1/12 but much more over the
past 7-12 years—a cost that
must be reflected in LPI rates
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: Guy Carpenter; Insurance Information Institute.
155
4. RENEWED PRICING
DISCIPLINE
Evidence of a Broad and
Sustained Shift in Pricing
157
Net Premium Growth: Annual Change,
1971—2012:H1
(Percent)
1975-78
1984-87
25%
2000-03
Net Written Premiums Fell
0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008,
and 4.2% in 2009, the First 3Year Decline Since 1930-33.
20%
15%
2012:H1
growth
was
+3.6%
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
10
11
12
-5%
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
159
20%
5%
-5%
-10%
Sources: ISO, Insurance Information Institute.
1.3%
2.3%
1.7%
3.5%
1.6%
4.1%
3.8%
3.1%
4.2%
0.5%
2.1%
0.0%
0%
10.3%
10.2%
13.4%
6.6%
15.1%
16.8%
16.7%
12.5%
10.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
10%
10.2%
15%
2002:Q1
2002:Q2
2002:Q3
2002:Q4
2003:Q1
2003:Q2
2003:Q3
2003:Q4
2004:Q1
2004:Q2
2004:Q3
2004:Q4
2005:Q1 -4.6%
2005:Q2
-4.1%
2005:Q3 -5.8%
2005:Q4
-1.6%
2006:Q1
2006:Q2
2006:Q3
2006:Q4
2007:Q1
-1.6%
2007:Q2
2007:Q3
2007:Q4
-1.9%
2008:Q1
2008:Q2
-1.8%
2008:Q3
-0.7%
2008:Q4 -4.4%
2009:Q1
-3.7%
2009:Q2 -5.3%
2009:Q3 -5.2%
2009:Q4
-1.4%
2010:Q1
-1.3%
2010:Q2
2010:Q3
2010:Q4
2011:Q1
2011:Q2
2011:Q3
2011:Q4
2012:Q1
2012:Q2
P/C Net Premiums Written: % Change,
Quarter vs. Year-Prior Quarter
In 2011, growth in personal
lines predominating cos.
(+2.9%) and commercial
lines predominating cos.
(+4.3%), diversified (+2.4%)
Finally! A sustained period of growth in written premium growth
(vs. the same quarter, prior year)
160
Growth in Net Written Premium by
Segment, 2012:H1 vs. 2011:H1*
(Percent)
6%
5%
Personal lines insurer
growth accelerated
modestly as auto
pricing remains stable
2012:H1
5.6%
3.8%
4%
3%
2011:H1
Commercial lines
growth improved
dramatically as a 7year long soft market
came to an end and an
improving economy
bolstered demand
2.7%
2.7%
2.9%
3.0%
2.8%
2.3%
2%
1%
0%
All Lines
Personal Lines
Predominating
*Excludes mortgage and financial guaranty insurers.
Source: ISO/PCI; Insurance Information Institute
Commercial Lines
Predominating
Diversified Insurers
161
Shifting Legal Liability &
Tort Environment
Is the Tort Pendulum
Swinging Against Insurers?
170
Over the Last Three Decades, Total Tort Costs as a
% of GDP Appear Somewhat Cyclical, 1980-2013E
($ Billions)
$300
2.25%
Deepwater
Horizon Spike
in 2010
$200
2.00%
$150
$100
1.75%
Tort costs in dollar terms have
remained high but relatively stable
since the mid-2000s., but are down
substantially as a share of GDP
$50
Tort Costs as % of GDP
2.21% of
GDP in 2003
= pre-tort
reform peak
$250
Tort System Costs
2.50%
Tort Costs as % of GDP
Tort Sytem Costs
1.68% of
GDP in
2013
1.50%
$0
80
82
84
86
88
90
92
94
96
98
00
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
02
04
06
08
10
12E
171
Business Leaders Ranking of Liability
Systems in 2012

Worst States
41.
Florida
42.
Oklahoma
43.
Alabama
44.
New Mexico
45.
Montana
46.
Illinois
47.
California
North Dakota
48.
Mississippi
Utah
49.
Louisiana
50.
West Virginia

Best States
1.
Delaware
2.
Nebraska
3.
Wyoming
4.
Minnesota
5.
Kansas
6.
Idaho
7.
Virginia
8.
9.
10. Iowa
New in 2012




Wyoming
Minnesota
Kansas
Idaho
Drop-offs




Indiana
Colorado
Massachusetts
South Dakota
Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.
Newly Notorious
 Oklahoma
Rising Above
 Arkansas
174
The Nation’s Judicial Hellholes: 2011
Illinois
Watch List
 Eastern District of
Texas
 Cook County, IL
 Southern NJ
 Franklin County, AL
 Smith County, MS
 Louisiana
Madison , St. Clair
and McLean
counties
West Virginia
Philadelphia
California
Dishonorable
Mention
New York
Albany and
NYC
 MI Supreme Court
 AK Supreme Court
 MO Supreme Court
Nevada
Clark County
South Florida
Source: American Tort Reform Association; Insurance Information Institute
175
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
Twitter: twitter.com/bob_hartwig
181