Overview and Outlook for the P/C Insurance Industry Casualty Actuaries of New England April 2, 2012 Sturbridge, MA Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Office: 212.346.5540 Cell: (917) 494-5945 stevenw@iii.org www.iii.org Not All Data in a PowerPoint Slide Are Accurate or Reliable The Economic Situation Its Effect on the Industry’s Exposure Base, Growth, Investments, and Profitability 3 Length of US Business Cycles, 1929–Present* Length of Expansions Greatly Exceeds Contractions Duration (Months) 120 110 100 90 80 70 60 50 40 30 20 10 0 Contraction Expansion Following 106 Average Duration Recession* = 10.9 Mos Expansion** = 60.5 Mos 80 120 92 73 58 50 45 43 39 37 36 33 24 13 8 11 10 8 10 11 16 6 12 19 16 8 8 Aug May Feb Nov Jul Aug Apr Dec Nov Jan Jul Jul Mar Dec 1929 1937 1945 1948 1953 1957 1960 1969 1973 1980 1981 1990 2001 2007 Month Recession Started *Through March 2012. ** Post-WW II period through end of most recent completed expansion. Sources: National Bureau of Economic Research; Insurance Information Institute. 4 A Weak Recovery is Forecast: Real GDP Growth*, Yearly, 1970-2013F The “consensus” forecast is for at least two more years of real yearly GDP growth below 3% -- weaker than after most recent recessions Real GDP Growth (%) 7.5% 6.0% 4.5% 3.0% 1.5% 0.0% -1.5% -3.0% Estimates/Forecasts from Blue Chip Economic Indicators, 3/2012 issue. *chained 2005 $ Sources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls. 2012F 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 -4.5% 5 US Real GDP Growth, quarterly* 2.5% 2.7% 2.9% 3.0% 13:1Q 13:2Q 13:3Q 13:4Q 2.6% 2.4% 2.2% 2.1% 3.0% 2.0% 1.3% 0.4% 2.3% 3.8% 2.5% 3% 3.9% 1.3% 1.7% 6% 3.8% Worst quarterly drop since 1958:q1 (-11.1%) 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 10:2Q 10:1Q 09:4Q 09:3Q 09:2Q 08:3Q 08:2Q 08:1Q -12% 08:4Q -8.9% -9% We need stronger growth than this to return the economy to its full capacity anytime soon. -6.7% -6% 09:1Q -3.7% -3% -1.8% 0% Demand for insurance continues to be affected by a sluggish economy * Estimates/Forecasts from Blue Chip Economic Indicators Source: US Department of Commerce, Blue Economic Indicators 3/2012 issue (forecasts); Insurance Information Institute. 6 March 2012 Forecasts of Quarterly US Real GDP for 2012-13 Real GDP Growth Rate 5.0% 10 Most Pessimistic Median 10 Most Optimistic 4.0% 4.0% 3.4% 3.0% 2.8% 2.0% 2.1% 1.5% 2.9% 2.2% 1.4% 3.3% 3.5% 3.0% 1.7% 2.4% 2.6% 1.8% 2.5% 1.6% 12:Q3 12:Q4 13:Q1 2.0% 2.7% 3.6% 2.2% 2.9% 3.0% 2.1% 13:Q3 13:Q4 1.0% 0.0% 12:Q1 12:Q2 Sources: Blue Chip Economic Indicators (3/12); Insurance Information Institute 13:Q2 7 A Look Back: March 2011 Forecasts of Quarterly US Real GDP for 2011 Real GDP Growth Rate 10 Most Pessimistic 5.0% 4.0% 3.0% 4.2% 3.4% 2.7% Median 10 Most Optimistic 4.2% 4.1% 4.2% 3.4% 2.5% 3.4% 2.5% 3.4% 2.6% 11:Q2 11:Q3 11:Q4 2.0% 1.0% 0.0% 11:Q1 A month into 2011, all forecasts for the year predicted steady growth, but at different rates. Sources: Blue Chip Economic Indicators (2/12); Insurance Information Institute 8 Off Target: March 2011 Forecasts for 2011 vs. Actual US Real GDP Real GDP Growth Rate 10 Most Pessimistic 5.0% 4.0% 3.0% 4.2% 3.4% 2.7% Median 10 Most Optimistic Actual 4.2% 4.1% 4.2% 3.4% 2.5% 3.4% 2.5% 3.4% 3.0% 2.6% 2.0% 1.8% This 3.0% growth number is preliminary and will be revised 1.3% 1.0% 0.4% 0.0% 11:Q1 11:Q2 11:Q3 11:Q4 Even the most pessimistic forecasts were too bullish for the first three quarters of 2011. They were close to the fourth quarter number, though. Sources: Blue Chip Economic Indicators (2/12); Insurance Information Institute 9 First Half of 2012: Fastest Growth [3+%] Expected in MI, AL, NV, ND, SC MA: +2.89% VT: +2.57% CT: +2.04% NH: +1.87% ME: +0.05% RI: -3.57% 10 The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Will Expand Insurable Exposures and Help Absorb Excess Capital 12 Consumer Sentiment Survey, Jan 1978-Mar 2012 (1966 = 100) 13 Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Jan. 2012 $ Millions $500,000 The value of Manufacturing Shipments in Dec. 2011 was up 30.2% to $464B from its May 2009 trough. Dec. figure is only 4.5% below its previous record high in July 2008. $400,000 $300,000 Ja n92 Ja n93 34 ,3 35 34 ,7 00 35 ,0 65 35 ,4 31 35 ,7 96 36 ,1 61 36 ,5 26 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 (which happened in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to December 2011 was 30.2%. This growth leads to gains in many commercial exposures: WC, Commercial Auto, 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/ 14 Manufacturing Growth for Selected Sectors, Jan. 2012 vs. Jan. 2011 Growth (%) Durables: +10.1% 35% Non-Durables: +7.1% 31.2% Manufacturing of durable goods has been especially strong 30% 25% 20% 13.4% 10.1% 10.9% 10.1% 5.8% 7.1% 7.5% Food Products 10% 8.4% Non-Durable Mfg. 15% 8.8% 5.2% 5% Plastics & Rubber Chemical Petroleum & Coal Transportation Equip. Electrical Equip. Machinery Primary Metals Durable Mfg. All Manufacturing 0% Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages *seasonally adjusted Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 15 Labor Market Trends Job Growth Finally Taking Hold, Bolstering the Commercial & Personal Lines Exposure Bases, but Problems Remain 16 Monthly Change in Private Employment* January 2007 through February 2012 At the rate of job growth in December 2011 through February 2012, the unemployment rate will be down to 7.5% by the end of 2012. *seasonally adjusted Sources: U.S. Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute. Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 Nov-10 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 Nov-08 Sep-10 Payroll growth since Jan 2010: $340.3 billion, equivalent to roughly $2.25 billion in WC premiums -797 -658 Jan-09 -839 -725 Mar-09 -787 -802 May-09 -425 -480 Jul-08 May-08 Mar-08 Jan-08 Nov-07 Sep-07 Jul-07 May-07 (1,000) Jan-07 (800) Mar-07 Nov. ‘08.–Apr. 09 monthly losses were the largest in the Post-WW II period (600) Sep-08 (400) -312 -426 -296 -219 -184 -232 -136 -112 -215 -216 -231 -259 -294 (200) -42 -120 -40 -27 20 61 75 47 41 -4 -73 0 141 193 84 92 92 128 115 196 134 140 119 257 261 264 108 102 175 52 216 139 178 234 285 233 Private employers added jobs in every one of the last 24 months 121 61 172 57 200 46 400 229 (Thousands) Monthly Change in Government Employment* January 2009 through February 2012 (Thousands) 432 500 Census 400 300 33 -6 -1 Jan-12 Nov-11 -14 -27 -21 -11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 -13 -20 -9 -37 -15 -13 -54 -18 -79 Nov-10 May-10 -259 Jul-10 -150 -179 -142 Sep-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 Jan-09 (200) (300) 24 48 46 -51 -49 -56 -43 -12 -15 May-09 (100) -8 0 -12 Mar-09 1 0 0 30 21 100 110 200 In 2011 employment by government at all levels dropped every month except August. Total jobs lost in last twelve months: 278,000. *seasonally adjusted Sources: U.S. Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute. Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised (Thousands) Private Employment Government Employment Total Nonfarm Employment 125 100 75 50 25 17 0 0 (25) -17 Sept report Oct report Nov report Jan revision The September 2011 report for employment in August was dis-spiriting. BLS reported the U.S. economy added no net jobs. Was the recovery stalling? Would we sink into another recession? Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised (Thousands) Government Employment Private Employment Total Nonfarm Employment 125 100 75 57 42 50 25 17 15 0 0 (25) -17 Sept report Oct report Nov report Jan revision In the October report the August figures were revised. This report showed gains in both private and government employment, for a net addition of 57,000 jobs. Where were these revisions (and their implications) reported? Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised (Thousands) Total Nonfarm Employment Government Employment Private Employment 125 105 100 72 75 57 42 50 25 32 17 15 0 0 (25) -17 Sept report Oct report Nov report Jan revision In the November report the August employment numbers were revised again, now showing that the economy in August to adding 105,000 net new jobs. Latest report: +85,000 jobs. Where were these revisions (and their implications) reported? Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised (Thousands) Total Nonfarm Employment Government Employment Private Employment 125 105 100 85 72 75 57 42 50 25 52 17 32 33 Nov report Jan revision 15 0 0 (25) -17 Sept report Oct report In the January 2012 report for August, BLS revised the U.S. numbers for all of 2011 to reflect new population estimates, on which the employment samples from each month are projected. Latest August data: +85,000 jobs. Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute Percentage Change in Nonfarm Employment, US & New England states, Jan 2012 vs. Jan 2011 Percent Change 1.5 1.5 1.2 1 0.9 0.7 0.7 0.5 0.4 0 -0.3 -0.5 US NH VT CT ME MA RI *Preliminary data for January 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics, Regional and State Employment and Unemployment—January 2012, published March 13, 2012; Insurance Information Institute. 23 Private Housing Starts, 1990-2013F (Millions of Units) 2.07 2.1 1.96 1.85 1.8 1.621.64 1.5 1.19 1.2 1.20 1.29 1.46 1.48 1.47 1.35 1.80 1.71 Forecast range for 2013: 680,000 to 1,450,000 Forecast range for 2012: 610,000 to 900,000 1.57 1.60 1.36 1.01 0.90 0.9 0.89 0.73 0.550.59 0.6 0.61 13F 12F 11 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 92 91 0.0 90 0.3 Weak home construction forecast implies little exposure growth likely for Homeowners insurers for the next few years, but homeowners might fortify homes to mitigate storm and other damage. Sources: U.S. Census Bureau and Department of Housing and Urban Development (history) at http://www.census.gov/const/newresconst.pdf ; Blue Chip Economic Indicators (3/2012), forecasts; Insurance Information Institute. 24 Single vs. Multi-Family Housing Starts, Annually, 2001-2012* units in multi-family buildings Thousands of Units, Multi-Family 450 single family units 400 Thousands of Units, Single Family 1800 Multi-family-unit starts rose in 2011, and single-family starts are starting up in 2012. 350 300 Single family plunge began in 2006 250 1400 1200 1000 200 150 1600 800 Multi-family plunge didn’t begin until 2009 600 100 400 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* The slump is mainly in single-family housing, but starts of multi-family units also plunged in 2009-10. *January 2012 data, annualized, seasonally-adjusted, preliminary Source: US Census Bureau at http://www.census.gov/construction/nrc/pdf/newresconst.pdf Private Housing Starts in the Northeast US, Monthly*, 1990-2012 Billions 250 225 200 175 150 125 100 75 50 25 0 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *seasonally-adjusted annual rate; data through January 2012 Sources: U.S. Census Bureau and Department of Housing and Urban Development at http://www.census.gov/const/newresconst.pdf ; Insurance Information Institute. 26 13 10.4 12 11 12.7 14 11.6 13.2 15 14.8 16 14.3 05 Forecast range for 2013: 13.9 to 16.0 Forecast range for 2012: 13.4 to 15.1 16.1 16.9 04 16.5 16.9 01 17 16.6 00 2011 AAA Survey: 1 in 4 drivers have neglected repairs and maintenance because of the economy 17.1 17.5 18 17.8 (Millions of Units) 19 17.4 The Car-Buying Slump Will Create Pressure to Replace Aging Vehicles 10 9 99 02 03 06 07 08 09 10 11 12F 13F Many more older cars are on the road today than In “normal” times. Previously in a 3-year span, new cars would replace about 35 million old cars, but in 2008-10 only about 27 million old cars were replaced. Sources: history--U.S. Department of Commerce; forecasts (including 2011 preliminary--Blue Chip Economic Indicators (3/2012); Insurance Information Institute; USA Today 8/10/2011 edition (AAA Survey). 27 Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures March 2001 through February 2012 “Full Capacity” The US operated at 78.7% of industrial capacity in Feb. 2012, above the June 2009 low of 68.3% and close to its post-crisis peak 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 74% 72% March 2001November 2001 recession Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. Dec 11 Sep 11 Jun 11 Mar 11 Dec 10 Jun 10 Sep 10 Mar 10 Dec 09 Jun 09 Sep 09 Mar 09 Dec 08 Sep 08 Jun 08 Mar 08 Dec 07 Sep 07 Jun 07 Mar 07 Dec 06 Sep 06 Jun 06 Mar 06 Dec 05 Sep 05 Jun 05 Mar 05 Jun 04 Mar 04 Dec 03 Jun 03 Sep 03 Mar 03 Dec 02 Sep 02 Jun 02 Mar 02 Dec 01 Sep 01 Jun 01 Mar 01 66% Dec 04 December 2007June 2009 Recession 68% Sep 04 70% 28 28 Inflation Trends/Forecasts and Effects on Claims 31 Historic and Forecast Annual Inflation Rates, (CPI-U, %), 1990–2017F Annual Inflation Rates (%) Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble reduced inflationary pressures in 2009/10 6.0 5.0 4.9 5.1 3.8 4.0 3.0 3.0 2.0 3.3 3.4 3.2 2.9 2.8 2.4 3.0 2.6 2.5 3.8 3.2 2.8 2.3 2.2 2.2 1.9 1.5 Higher energy, commodity and food prices pushed up inflation in 2011, but not longer turn inflationary expectations. 2.4 2.4 2.4 2.5 1.6 1.3 1.0 0.0 -0.4 -1.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and commodity prices, plus U.S. debt burden, remain longer-run concerns Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/12 (forecasts). 32 P/C Personal Insurance Claim Cost Drivers Grow Faster Than the Core CPI Suggests Price Level Change: 2011 vs. 2010 8% Excludes Food and Energy 6% 7.1% 6.8% 5.1% 4% 5.0% 4.2% 3.2% 3.0% 3.2% 2% 1.7% 0% Overall CPI "Core" CPI Inpatient Hospital Services Outpatient Hospital Services Prescription Medical Care Drugs Commodities Legal Services Motor Vehicle Residential Parts & Maint. & Equipment Repair Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least Sources: Bureau of Labor Statistics; Insurance Information Institute. 33 P/C Commercial Property Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests Price Level Change: 2011 vs. 2010 9% 9.0% Excludes Food and Energy 6% 3% 7.1% 5.4% 3.6% 3.2% 1.7% 0% Overall CPI "Core" CPI Inputs to Construction Industries Non-residential maintenance & repair Asphalt Paving & Roofing Materials Plumbing Fixtures & Fittings Copper prices spiked and retreated in 2011. In July its price was 33% higher than a year earlier; by November it cost 8% less than in November 2010. Sources: Bureau of Labor Statistics; Insurance Information Institute. 34 P/C Premium and Underwriting Trends Mainly Driven by the Industry’s Underwriting Cycle, Not the Economy 35 Soft Market Persisted into Early 2011 but Growth Returned: More in 2012? (Percent) 1975-78 1984-87 2000-03 growth 25% 20% 15% 2012 forecast: 3.8% 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. NWP was up 3.5% (est.) in 2011 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% *2011 and 2012 figures are A.M. Best Estimates Shaded areas denote “hard market” periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute. 36 P/C Insurance Industry Combined Ratio, 2001–2011:Q3* As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, Reserve Releases Relatively Low CAT Losses, Reserve Releases 120 115.8 110 Cyclical Deterioration Best Combined Ratio Since 1949 (87.6) Avg. CAT Losses, More Reserve Releases 108.2 107.5 100.1 100 Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market 101.0 100.8 98.4 99.3 100.8 95.7 92.6 90 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* * Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9 Sources: A.M. Best, ISO. 37 P/C Reserve Development, 1992–2013F Prior Yr. Reserve Release ($B) Prior Yr. Reserve Development ($B) $25 $20 Impact on Combined Ratio (Points) $15 $10 $5 24 15 11 11 8 6 4 9 2 2 0 $0 (2) -$5 -$10 (0) (3) (2) (4) (5) (7) (8) -$15 (7) (9) (10) (10) (5) -2 -4 (10) (11) (14) 13F 12F 11E 10 09 08 07 06 05 04 03 02 01 00 99 98 97 96 95 94 93 -6 92 -$20 Impact on Combined Ratio (Points) $30 Prior year reserve releases totaled $8.8 billion in the first half of 2010, up from $7.1 billion in the first half of 2009 Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to Further Diminish in 2012 and 2103 Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best. 38 P/C Insurance Industry Financial Performance A Resilient Industry in Challenging Times 39 $3,043 $7,979 $28,672 $34,670 $65,777 $44,155 $38,501 $30,029 $20,559 $20,598 $10,870 $3,046 $10,000 $19,316 $20,000 $5,840 $30,000 $14,178 $40,000 $21,865 $50,000 $30,773 $60,000 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 5.6% 2011:Q3 ROAS1 = 1.9% P-C Industry 2011:Q3 profits were down 71% to $8.0B vs. 2010:Q3, due primarily to high catastrophe losses and as non-cat underwriting results deteriorated $36,819 $70,000 $24,404 $80,000 $62,496 P/C Net Income After Taxes 1991–2011:Q3 ($ Millions) $0 -$10,000 -$6,970 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 * ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for 2011:Q3, 7.5% for 2010 and 7.4% for 2009. Sources: A.M. Best, ISO, Insurance Information Institute 10 11* 40 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 generated ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979 107.5 14.3% 12.7% 105 100.6 100 100.1 15% 10.9% 101.0 100.8 9.6% 97.5 99.3 95.7 95 18% 7.4% 92.7 8.8% 102.0 100.8 12% 7.5% 9% 6.1% 4.4% 90 6% 3.9% 85 3% 80 0% 1978 1979 2003 2005 2006 2007 Combined Ratio 2008 2009 2010 2011E 2012F ROE* Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs * 2008 -2010 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011-12 combined ratios are A.M. Best estimate excl. M&FG insurers. Source: Insurance Information Institute from A.M. Best and ISO data. 41 Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012F* ROE 25% 1977:19.0% 1987:17.3% 20% History suggests next ROE peak will be in 2016-2017 1997:11.6% 2006:12.7% 15% 9 Years 2012F: 6.1%* 10% 5% 2011E: 3.9% 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. 2011-12 figures are A.M. Best estimates. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG. Source: Insurance Information Institute; NAIC, ISO, A.M. Best. 42 Financial Strength & Capacity The P-C Industry Has Weathered the Storm Well 43 P/C Insurer Impairments, 1969–2011 3 small Missouri insurers did encounter problems in 2011 after the May tornado in Joplin. They were absorbed by a larger insurer and all claims were paid. 0 35 16 19 21 18 14 15 12 16 18 19 28 31 29 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 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 Special Report “1969-2011 Impairment Review,” January 23, 2012; Insurance Information Institute. 44 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 45 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. 46 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. 47 US Policyholder Surplus: 1975–2009:Q3* ($ Billions) Surplus as of 9/30/09 was $490.8B, up from $437.1B as of 3/31/09. Recent peak was $521.8 as of 9/30/07. Surplus as of 9/30/09 is now only 5.9% below 2007 peak; Crisis trough was as of 3/31/0916.2% below 2007 peak. $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 07 The Premium-to-Surplus Ratio Stood at $0.87:$1 as of 9/30/09, Up from Near Record Low of $0.85:$1 at Year-End 2007 * As of 9/30/09 Source: A.M. Best, ISO, Insurance Information Institute. 09* Policyholder Surplus, 2006:Q4–2011:Q3 ($ Billions) 2007:Q3 = previous surplus peak $580 $564.7 $556.9 $544.8 $560 $540 $520 $500 $480 $460 $440 $559.1 $540.7 $530.5 $521.8 $517.9$515.6 $512.8 $505.0 $496.6 $487.1 $478.5 The industry now has $1 of surplus for every $0.83 of NPW, close to the strongest claimspaying status in its history $538.6 $511.5 $490.8 $463.0 $455.6 $437.1 Surplus as of 9/30/11 was down 4.6% below its all time record high of $564.7B set as of 3/31/11. Further declines are possible $420 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 Note: Beginning in 2010:Q1 figures include $22.5B of paid-in capital from a holding company parent to a subsidiary insurer. It was a single investment in a non-insurance business. Source: ISO; A.M .Best. Quarterly Surplus Changes Since 2011:Q1 Peak 11:Q2: -$5.6B (-1.0%) 11:Q3: -$26.1B (-4.6%) 49 Investment Performance Weak Investment Results Are a Main Cause of Low Profits 50 P/C Insurance Industry Investment Gain: 1994–2011:Q31 ($ Billions) $70 $64.0 $58.0 $60 $52.3 $55.7 $51.9 $52.9 $48.9 $47.2 $50 $59.4 $56.9 $45.3 $44.4 $42.8 $40 $35.4 $39.2 $36.0 $42.0 $31.7 $30 Investment gains at 2011:3Q were about $2.1 billion better than the same period in 2010 $20 $10 $0 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:3Q Investment gains recovered significantly in 2010 due to realized capital gains. The financial crisis caused investment gains to fall by 50% in 2008 1Investment 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. 51 -$7.98 -$19.81 -$15 -$20 -$25 -$5.70 $7.30 $8.92 $3.52 $9.70 -$1.21 $6.61 $6.63 $9.13 $11.2B positive swing $16.21 $13.02 $10.81 $9.24 $6.00 $9.82 $9.89 $1.66 $5 $0 -$5 -$10 $4.81 $20 $15 $10 $2.88 ($ Billions) $18.02 P/C Insurer Net Realized Capital Gains/Losses, 1990-2011E 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E* Insurers Posted Net Realized Capital Gains in 2011 for the First Time Since 2007. Realized Capital Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE *2011 is an estimate based on annualized actual 2011 9-month figure of $5.5B. Sources: A.M. Best, ISO, Insurance Information Institute. 52 2011: Nowhere to Run, Nowhere to Hide Most of the Country East of the Rockies Suffered Severe Weather in 2011, Impacting Most Insurers 53 The average number from 19962010 was 58.4. 75 63 59 69 48 52 56 45 45 49 *Through March 9, 2012. Sources: Federal Emergency Management Administration at http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute. 11 09 07 05 01 99 97 95 There have been 2,057* federal disaster declarations since 1953. Note that 2005 was a relatively low year for number of disaster declarations in the 1996-2010 period, but that year included Hurricanes Katrina, Rita, and Wilma. 8 32 36 32 93 91 89 87 85 83 81 79 77 75 73 71 69 67 65 63 61 59 57 55 53 44 43 45 38 31 11 15 24 21 23 22 25 27 28 23 34 38 29 17 17 11 11 19 22 20 25 25 The number of federal disaster declarations set a new record in 2011. 7 7 10 12 12 13 17 18 16 16 30 30 40 0 42 48 46 46 50 20 50 60 03 70 The average number from 1972-1995 was 31.7. 65 80 From 1953-71, the average number of declarations per year was 16.5. 75 90 81 100 99 Number of Federal Disaster Declarations, 1953-2012* 15 Costliest World Insurance Losses, 1970-2011* Insured Losses, 2010 Dollars, $ Billions $80 $70 $60 Taken as a single event, the Spring 2011 tornado season would be the 7th costliest event in global insurance history 3 of the 11 most expensive catastrophes in world history occurred in the past 9 months $72.3 $50 $35.0 $40 $30 $20 $10 $8.0 $8.0 $9.0 $9.3 $10.0 $14.9 $16.3 $14.0 $11.3 $20.5 $20.8 $23.1 $24.9 $0 Chile Hugo Typhoon Charley New Rita Quake (1989) Mirielle (2004) Zealand (2005) (2010) (1991) Quake (2011) Wilma (2005) Ivan Spring Ike Northridge WTC (2004) Tornadoes (2008) (1994) Terror (2011) Attack (2001) Andrew Japan Katrina (1992) Quake, (2005) Tsunami (2011)* *Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable. Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute. 55 US Insured Catastrophe Losses ($ Billions) $70 $60 CAT Losses Surged on NearRecord Tornado Activity $61.9 2000s: A Decade of Disaster 2001-2010: $202B (up 122%) 1991-2000: $91B $24.0 $13.6 $10.6 $27.1 $6.7 $9.2 $12.9 $5.9 $26.5 $4.6 $8.3 $10.1 $2.6 $7.4 $5.5 $4.7 $2.7 $10 $7.5 $20 $8.3 $30 $16.9 $22.9 $40 $27.5 $50 $0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11* First half 2011 US CAT losses exceeded losses from all of 2010. Even modest fourth quarter losses will put 2011 among the worst ever for CATs *First three quarters of 2011 (est). 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. 56 Federal Disaster Declarations in New England States, 1953 – 2012* 100 90 86 Over the past nearly 60 years, Texas has had the highest number of Federal Disaster Declarations Disaster Declarations 80 70 60 50 39 40 33 30 28 27 17 20 9 10 0 TX ME VT NH MA *Through Feb. 26, 2012. Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute. CT RI 58 U.S. Tornado Count, 2005-2011 There were 1,893 tornadoes in the US in 2011 far above average, but well below 2008’srecord Deadly and costly April/ May spike Source: http://www.spc.noaa.gov/wcm/ 60 Location of Tornadoes in the US, 2011 1,894 tornadoes killed 552 people in 2011, including at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in Joplin on May 22 Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 61 Location of Large Hail Reports in the US, 2011 There were 9,417 “Large Hail” reports in 2011, causing extensive damage to homes, businesses and vehicles Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 62 Location of Wind Damage Reports in the US, 2011 There were 18,685 “Wind Damage” reports through Dec. 27, causing extensive damage to homes and, businesses Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 63 Severe Weather Reports, 2011 There were 29,996 severe weather reports in 2011; including 1,894 tornadoes; 9,417 “Large Hail” reports and 18,685 high wind events Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 64 Economics 2012: The World Is Changing 2012 Is the First Year Since 2005 Where Economic Perceptions and Reality in the US Will Be Positive Potentially Enormous Benefits for P/C Insurers 65 Economic Outlook for 2012 Economic Growth Will Accelerate Modestly in 2012/13, Beating Expectations No Double Dip Recession Economy remains more resilient than most pundits presume Consumer Confidence Will Continue to Improve Consumer Spending/Investment Will Continue to Expand Consumer and Business Lending Continue to Expand Housing Market Remains Weak, but Some Improvement Expected in 2012 Inflation Remains Tame Runaway inflation highly unlikely but energy spike possible; Fed has things under control Private Sector Hiring Remains Consistently Positive, Exceeds Expectations Unemployment dips below 8% by year’s end Sovereign Debt, Euro Currency/Economy, Muni Bond “Crises” Overblown European Recession is Milder than Commonly Presumed Soft Landing in China Higher Oil Prices and Current Middle East Turmoil Pose Greater Risk to US Economy than in 2011 Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End Political Environment Is More Hospitable to Business Interests 66 7 Insurance P/C Industry Predictions for 2012 1. P/C Insurance Exposures Grow Robustly Personal and commercial exposure growth is certain in 2012; Strongest since 2004 But restoration of destroyed exposure will take until mid-decade 2. P/C Industry Growth in 2012 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional “hard market” emerges in 2012 3. Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, in some severity in key lines 67 7 Insurance P/C Industry Predictions for 2012 4. Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures Wage growth is also positive and could modestly accelerate WC will prove to be tough to fix from an underwriting perspective 5. Increase in Demand for Commercial Insurance Will Accelerate in 2012 Includes workers comp, property, marine, many liability coverages Laggards: inland marine, aviation, commercial auto, surety Personal Lines: Auto leads, homeowners lags (though HO leads in NPW growth due to rates) 6. Investment Environment Is/Remains Much More Favorable Return of realized capital gains as a profit driver 7. Industry Capacity Hits a New Record by YearEnd 2012 (Barring Mega-CAT) 68 10 Greatest Potential Threats to the Global Economy as of March 2012 1. Conflict in the Middle East, Disrupting Oil Markets A conflict between Iran and Israel viewed by some as imminent $200/bbl oil is possible; Severe supply disruptions Resultserious damage to the global economy, killing fragile recovery 2. Rising Oil Prices Even in the absence of conflict, oil prices slowing growth Sustained $10/bbl increase -0.2% on global GDP in Year 1; -0.5% Year 2 3. Sovereign Debt Concerns in Europe (was #1 threat in 2011) Contagion spreads beyond GreeceItaly, Spain, Portugal, etc. Greek/EU political/economic solution fails resulting in disorderly default 4. “Hard Landing” of Chinese Economy A sharp decline in China’s GDP would damage global economies 69 10 Greatest Potential Threats to the Global Economy as of March 2012 5. Mega-Catastrophe Trends Continue at Record Pace Catastrophes trimmed 0.5% off global GDP in 2011 Massive disruptions to fragile global supply chains 6. Sudden Weakening of US Economy 7. Intensification of Geopolitical Instability (esp. in Middle East) 8. Disintegration of Eurozone (Political Failure) 9. Commodity Price Inflation (apart from oil) 10. Large-Scale Cyber Attack/Terrorism Attack (including cyberterror) 70 Insurance Information Institute Online: www.iii.org Thank you for your time and your attention!