Property/Casualty
Insurance Industry
Overview & Outlook
PIWA Annual Convention
Pearl River, New York
September 24, 2009
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Office phone: (212) 346-5540  Cell: (917) 494-5945  steven@iii.org  www.iii.org
Presentation Outline
1.
2.
3.
4.
5.
6.
A Glance at the U.S. Economy
P/C Industry Financial Performance
Catastrophe Loss Management
Investments
Capital & Capacity
Q&A
A Glance at
the U.S. Economy
2009-10 Outlook:
Time for a Rebound?
Total Industrial Production, monthly
Mar 2001-July 2009 (Index 2002=100)*
Index
113
Recession began
December 2007
March 2001November 2001
recession
110
Hurricane
Katrina
107
104
101
Source: http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt.
*seasonally adjusted
4
Jun 09
Mar 09
Dec 08
Sep 08
Jun 08
Mar 08
Dec 07
Sep 07
Jun 07
Mar 07
Dec 06
Sep 06
Mar 06
Dec 05
Sep 05
Jun 05
Mar 05
Dec 04
Sep 04
Jun 04
Mar 04
Dec 03
Sep 03
Jun 03
Mar 03
Dec 02
Sep 02
Jun 02
Mar 02
Dec 01
Sep 01
Jun 01
95
Mar 01
98
Jun 06
Nearing a
bottom?
Near-Term Forecasts for Quarterly
Industrial Production: A Wide Range
10.0%
8.0%
7.8%
8.3%
7.2%
6.7%
7.3%
6.9%
6.0%
0.6%
1.2%
1.8%
1.8%
10:Q4
2.0%
10:Q3
4.0%
0.0%
-0.2%
-2.0%
Source: Blue Chip Economic Indicators (8/09)
10:Q2
10:Q1
09:Q4
-3.1%
09:Q3
-4.0%
Avg of 10 Most
Optimistic
Forecasts
Avg of 10 Most
Pessimistic
Forecasts
Single vs. Multi-Family Housing Starts
The 2007-09 slump was mainly in single-family housing, but starts of multifamily units finally began dropping in late 2008 and continued in 2009.
Thousands
of Units
units in multi-family buildings
2008 single family
starts down 40%
vs. 2007
single family units
2,100
1,800
0
2007
2006
2005
2004
2003
2002
2001
Not seasonally adjusted
*average of first seven months of 2009, annualized
Source: US Census Bureau at http://www.census.gov/const/newresconst.pdf
2008
126 429
309
300
336
600
282
622
1046
1716
332
1465
1611
343
1359
346
1499
1273
900
329
1,200
349
1,500
2009*
2.07
1.96
Housing
bubble
1.36
1.80
1.71
1.60
1.64
1.57
1.47
1.48
1.35
1.29
0.90
1.01
Recession
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
0.57
I.I.I. estimate: each 100,000 decline in housing
starts “costs” home insurers $90 million in
gross premium. Estimated premium loss in
2008 vs. 2005: about $1 billion.
0.79
1.20
1.46
Recession
1.19
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
Measured by number of new units started,
exposure growth for HO insurers is low.
Housing start data also affects commercial
insurers with construction risk exposure.
1.62
Millions
of Units
1.85
In the Near Term, Millions Fewer
Private Housing Starts
06
07 08F 09F 10F
Sources: US Department of Commerce; Blue Chip Economic Indicators (8/09); Insurance Information Inst.
Unemployment and Underemployment
Rates: Rocketing Up in 2008-9
January 2000 through July 2009, seasonally adjusted
Percent
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
18
16
14
12
U-6 went from 9.2%
in April 2008 to
16.5% in June 2009
9.5% June 2009 unemployment rate (U-3)
was the highest monthly rate since 1983.
Peak rate in the last 30 years: 10.8% in
Nov-Dec 1982.
10
8
6
4
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
2
U.S. Unemployment Rate Forecasts
Quarterly, 2009:Q3 to 2010:Q4
11.0%
Unemployment is
expected to peak in
late 2009 or first
quarter of 2010.
10.5%
10.0%
10.6%
10.5%
10.4%
10.1%
10.0%
9.9%
9.8%
9.5%
10.6%
10.1%
10.0%
9.9%
9.8%
9.6%
10.4%
9.7%
9.6%
9.2%
9.0%
8.9%
Rising unemployment will erode payrolls
and workers comp’s exposure base.
8.5%
09:Q3
09:Q4
10 most pessimistic
10:Q1
10:Q2
consensus/midpoint
Sources: Blue Chip Economic Indicators (8/09); Insurance Info. Inst.
10:Q3
10:Q4
10 most optimistic
Real Quarterly GDP Changes (annualized),
2005:Q3-2010:Q4F Red bars are actual; Yellow
bars are forecasts/estimates
Spike due almost entirely to the weak dollar
(growing exports and slowing imports)
2.2%
2.3%
2.5%
2.8%
2.8%
2.9%
09:4Q
10:1Q
10:2Q
10:3Q
10:4Q
09:2Q
08:Q4
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
06:4Q
06:3Q
06:2Q
06:1Q
05:4Q
05:3Q
-8%
09:1Q -6.4%
-5.4%
-6%
-2.7%
The Q1:2009 decline was
the steepest since the
Q1:1982 drop of 6.4%
-4%
09:3Q
-2%
-1.0%
-0.7%
1.5%
2.1%
3.6%
1.2%
3.0%
0%
0.1%
1.4%
2%
2.1%
4%
3.1%
6%
3.2%
5.4%
8%
Sources: US Department of Commerce, Bureau of Economic Analysis (actual) at
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Blue Chip Economic Indicators 8/09 issue (forecasts).
P/C Industry
Financial Performance
2009 Outlook is Dim
40 Years of
Hard and Soft Markets
1975-78
1984-87
Shaded areas
denote “hard
market” periods
2000-03
In 2007 net written
premiums fell, the
first decline since
1943
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009:Q1
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
Sources: A.M. Best, ISO, Insurance Information Institute
Year-to-Year Change in Net
Written Premium, 2000-2009*
P/C insurers are experiencing their
slowest growth rates since 1943
15.3%
Soft markets and slow
economy => continued
negative or slow growth
10.0%
8.4%
5.0%
4.2%
3.9%
0.5%
-1.0% -1.4%
-3.5%
2000
2001
2002
2003
2004
2005
2006
2007
2008
Sources: A.M. Best (historical through 2008; ISO for 2009. *first quarter 2009 only
2009*
Billions
$70
$63.7
2008 industry profits
dropped 96.2% vs. 2007
$80
$62.5
P/C Net Income After Taxes
1991-2009:Q1*
$2.4
-$1.3
$0
-$10
$44.2
$38.5
$30.0
$20.6
$24.4
$20.6
$3.0
$5.8
$10
$14.2
$20
$19.3
$30
$10.9
$40
$21.9
$36.8
$50
$30.8
$60
-$7.0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
*2009:Q1
Sources: A.M. Best, ISO, Insurance Information Inst.
P/C Insurance Industry ROEs,
1975 – 2009F*
1977:19.0%
1987:17.3%
25%
1997:11.6%
2006:12.2%
20%
15%
10%
2009F: 7.4%
5%
2008: 0.5%
0%
1975: 2.4%
1984: 1.8%
1992: 4.5%
2001: -1.2%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
06
08F
09F
-5%
Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2%.
Sources: ISO; A.M. Best (2009F); Insurance Information Institute.
15
92.4
95
90
102.0
100.1
100
95.5
105
100.7
107.4
110
105.1
09:Q1 combined ratio was
98.4 excl. M&FG vs. 96.8
in 08:Q1
98.3
115
The industry’s combined ratio appears to be on a “cyclical upturn”
dating to 2006. In 2008, even excluding net CAT losses (which added
3.4 points to the combined ratio vs. 2007) and M&FG losses (another
4.1 points vs. 2007), the 2008 ratio would have been 97.6.
115.8
Combined
Ratio
120
P/C Insurance Industry
Combined Ratio, 20012009:Q1E
85
2001
2002
2003
2004
Sources: A.M. Best, ISO; III preliminary estimates.
2005
2006
2007
2008
2009:Q1E
Underwriting Gain/(Loss)
1975-2009:Q1
Billions
$35
In the past 34 years, only twice has the p-c insurance
industry earned an underwriting profit of over $1.7
billion. In contrast, in that span it’s had underwriting
losses of $20 billion or more in 14 years.
$25
$15
$5
-$5
-$15
-$25
-$35
-$45
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:Q1*
-$55
Sources: A.M. Best; ISO; Insurance Information Institute
Personal, Commercial Lines Combined
Ratios* Varied Widely Since 1993
Commercial Lines
Personal Lines
125
120
Results benefited from
favorable loss cost trends,
improved tort
environment, low CAT
losses, WC reforms, and
reserve releases
115
110
105
100
95
90
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08E 09F
Sources: A.M. Best; Insurance Information Institute
*after dividends to policyholders
Catastrophe Losses
2008 Insured Catastrophe Loss
Distribution by Category
$ Billions
2008 CAT Facts
Commercial, $6.80 ,
27%
•The $25.2 billion in
insured losses was the 4th
highest ever, behind only,
2005, 2004 and 2001
Vehicle**, $2.27 ,
9%
•There were 37 designated
catastrophes in 2008, the
highest since 1998 (also 37)
•Commercial losses
accounted for 27% of
insured losses but just 9%
of claims
*Includes homeowers, condominium and rental policies.
**Includes commercial and private passenger vehicles
Source: PCS; Insurance Information Institute research.
Personal*, $16.13 ,
64%
20
Catastrophic Losses*: Was 2005
an Outlier or a Harbinger?
$ Billions
$70
Is $25 billion the new
level of expected
yearly CAT losses?
$60
$61.9
Before 2001, CAT
losses averaged about
$8-10 billion per year.
$50
$40
$30
$27.5
$26.5
$22.9
$26.0
$16.9
$20
$10 $7.5
$10.1$8.3
$8.3$7.4
$4.6
$2.6
$5.5
$2.7$4.7
$12.9
$9.2
$6.7
$5.9
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
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.
21
Source: Property Claims Service/ISO; Insurance Information Institute
08
07
06
05
04
03
01
02
00
99
98
97
95
96
94
93
92
91
90
89
$0
7.5
7.5
7.5
7.6
7.6
09F
10F
11F
12F
7.3
8.3
8.2
8.1
8.0
7.9
7.1
7.0
08
6.0
5.9
7.4
5.7
5.6
5.5
5.4
07
5.1
5.5
5.3
6.0
5.8
Hurricane
Andrew
6.5
6.6
7.0
Hurricane
Wilma
6.5
7.5
6.3
8.0
6.2
The State of Florida
now (Feb 09) forecasts
nearly 1 million more
households by 2019 (up
almost 13%). There will
be more businesses, too.
6.8
8.5
7.7
Millions of Households
8.5
A Million More Florida Resident
Households in the Next Decade?
Source: http://edr.state.fl.us/conferences/population/demographic.htm
Data are from Feb. 18, 2009 Florida Demographic Estimating conference
19F
18F
17F
16F
15F
14F
13F
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
5.0
August Forecast for the 2009
Hurricane Season: 10 Named Storms
Net Tropical Cyclone Activity
Named Storms
Hurricanes
Intense Hurricanes
Average,
19502000
100%
9.6
5.9
2005
2009F
275%
28
14
85%
10
4
2.3
7
2
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, August 4, 2009.
23
Major (Category 3, 4, 5) Hurricanes
Striking the US by Decade
Mid 1920s – mid-1960s:
AMO Warm Phase
9
8
8
Colorado State
team forecasts 3
more intense
hurricanes in
2009
3
8
6
6
6
Mid-1990s – 2030s?
AMO Warm Phase
5
5
10
10
7
4
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s
*Figure for 2000s is extrapolated based on data for 2000-2008 (7 major storms: Charley, Ivan, Jeanne (2004),
Katrina, Rita, Wilma (2005), Ike (2008)).
Sources: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.; I.I.I.
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1988-2007¹
Fire, $8.1 , 2.6%
Other, $1.7 , 0.5%
Wind/Hail/Flood,
$9.9 , 3.2%
Earthquakes, $19.5 ,
6.3%
Winter Storms,
$24.4 , 7.9%
Terrorism, $22.9 ,
7.4%
1
Tornadoes, $82.4 ,
26.5%
All Tropical
Cyclones, $141.6 ,
45.6%
Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars.
Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.
2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions
and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
Number of Tornadoes in Each
Calendar Quarter, 2005–2009:Q2
2005
2007
2009
1,000
900
2006
2008
944
The first two quarters
of 2009 were more
typical of prior years
than 2008.
800
700
617
571
543
504
600
500
394
360
400
305
300
244
209
235
193
157
200
105
160
118 112
100
81
0
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Sources: US Dept. of Commerce, Storm Prediction Center, National Weather Service,
at http://www.spc.noaa.gov/climo/torn/monthlytornstats.pdf 2009:Q2 is I.I.I. estimate
Investments
P/C Investment Income as a % of Invested
Assets Follows 10-Year U.S. T-Note
P-C Inv Income/Inv Assets
10-Year Treasury Note
9%
Investment yield
historically tracks 10year Treasury note
quite closely
8%
7%
6%
5%
4%
3%
Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.
09F
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
2%
$51.2
$51.4
09***
$49.5
$39.6
$38.7
$36.7
$37.1
$40.8
$38.6
08
$30
$33.7
$35
$38.0
$40
$36.8
Billions
$45
$39.9
$50
$41.5
Investment income might moderate
further if rates for new bond
investments stay low and/or if insurers
shift to shorter-maturity bonds and
more US government notes.
$54.6
$55
$52.3
P/C Industry Investment
Income*, 1994-2008
Investment income CAGR
1994-2007 was just 3.8%.
07
06
2005**
04
03
02
01
2000
99
98
97
96
95
1994
$25
*Primarily interest and stock dividends. ** Investment income (excluding one-time dividend) jumped in
2005 as insurers that had accumulated cash captured rising bond interest rates. Also, 2005 figure includes
special one-time dividend of $3.2B. ***2009 figure is Q1 actual, annualized
Sources: ISO; Insurance Information Institute.
P/C Industry Net Realized Capital
Gains and Losses, 1990-2009:Q1
$ Billions
$20
$18.02
$16.21
$13.02
$16
$12
$10.81
$9.24
$9.89 $9.82
$8
$6.63
$6.00
$4.81
$4 $2.88
$8.97
$9.13 $9.70
$6.61
$3.52
$1.66
$0
-$0.41
-$1.21
-$4
-$8
Nearly $9 billion in realized
capital gains in 2007, but
$-19.7 billion in 2008.
-$12
-$16
-$20
-$19.80
Sources: A.M. Best, ISO, Insurance Information Institute.
09:Q1
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
-$24
Capital & Capacity
Policyholder Surplus by Quarter,
2006:Q4 – 2009:Q1
Decline Since 2007:Q3 Peak
$425
2009Q1: -$84.7B (-16.2%)
$437.1
$450
$455.6
$505.0
$515.6
$517.9
$512.8
$478.5
$475
$487.1
$500
$496.6
$525
$521.8
Billions
$400
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1
Source: ISO
U.S. P/C Industry Premiums-toSurplus Ratio: 1985-2009:Q1
Ratio at year-end
2.0
1.8
Premiums are a rough measure of risk accepted; surplus
is funds beyond reserves to pay unexpected losses. The
larger surplus is in relation to premiums—the lower the
ratio of premiums to surplus—the greater the industry’s
capacity to handle the risk it has accepted.
1.6
1.03:1 as
of
3/31/09
1.4
1.2
1.0
1998
0.85:1–the lowest
(strongest) P:S ratio
in recent history.
0.8
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:Q1
Sources: A.M. Best, ISO, Insurance Information Institute.
Largest Capital Events as
a Percent of Surplus, 1989-present
18%
The financial crisis now ranks
as the largest “capital event”
over the past 20+ years
16.2%
13.8%
15%
12%
9.6%
9%
6%
10.9%
6.9%
6.2%
3.3%
Financial
Crisis as of
3/31/09**
6/30/05
Hurricane
Katrina
6/30/04
Florida
Hurricanes
6/30/01
Sept. 11
Attacks
12/31/93
Northridge
Earthquake
6/30/1992
Hurricane
Andrew
0%
6/30/1989
Hurricane
Hugo
3%
Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event.
Sources: PCS; Insurance Information Institute.
Premium-to-Surplus Ratios
Before Major Capital Events*
P/C insurance industry was better
capitalized going into the
financial crisis than before any
“capital event” in recent history
$1.9
$1.7
$1.65
$1.42
$1.5
$1.40
$1.15
$1.3
$1.05
$1.03
$1.1
$1.03
$0.88
$0.9
As of
3/31/09**
6/30/07
Financial
Crisis
6/30/05
Hurricane
Katrina
6/30/04
Florida
Hurricanes
6/30/01
Sept. 11
Attacks
12/31/93
Northridge
Earthquake
6/30/1992
Hurricane
Andrew
$0.5
6/30/1989
Hurricane
Hugo
$0.7
*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event.
**Latest available
Source: PCS; Insurance Information Institute.
Historically, Hard Markets Follow
When Surplus “Growth” is Negative
NWP % change
Surplus % change
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
Sources: A.M. Best, ISO, Insurance Information Institute
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
-15%
In 2008, A.M. Best Affirmed or
Upgraded 88% of P/C Insurers*
In 2008, despite
financial market
turmoil, high cat
losses and a soft
market, A.M. Best
lowered ratings on just
3.9% of P-C insurers.
It placed another 4.4%
under review
Upgraded, 59 , 4.2%
Downgraded, 55 ,
3.9%
Under Review, 63 ,
4.4%
Other, 59 , 4.2%
Affirm, 1,183 , 83.4%
*Through December 19.
Source: A.M. Best.
37
Reasons for US P/C Insurer
Impairments, 1969-2008
Sig. Change
in Business
Misc. 4.2%
Reinsurance
Failure
3.7%
9.1%
Deficient
Loss
Reserves/Inadequate
Pricing
38.1%
Investment
Problems
7.0%
Affiliate
Impairment
7.9%
Catastrophe
Losses Alleged Fraud
7.6%
8.1%
Rapid
Growth
14.3%
Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
Deficient loss
reserves and
inadequate
pricing are the
leading cause of
insurer
impairments,
underscoring the
importance of
discipline.
Investment
catastrophe losses
play a much
smaller role.
Summary
• The slumping economy has affected P/C exposure
growth but this might begin reversing soon
• Combined ratios seem headed up, continuing a recent
trend
• Likely continued low investment returns are probably
insufficient to overcome a continued soft market
 Clear need to remain underwriting focused
• A growing CAT threat continues
• The industry has had a major capital shock but is still
in fairly strong shape
Insurance Information
Institute On-Line
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