© 2010 towers watson. all rights reserved. proprietary and confidential. for towers watson and...

© 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.comPresentation2

A National Workers Compensation OverviewAASCIF Austin Workshop

Bruce R. HockmanTowers [email protected] 215 246 1629October 19, 2010

© 2010 Towers Watson. All rights reserved.

mailto:[email protected]


A National Overview

This Business SUCKS!!!

Any questions???

1


A National Overview

No two carriers, public or private, approach the business the same way, but there are common issues which, as they say in consulting speak, are “Keeping company leaders awake at night”.

2

Reduced Top-Line Revenue Loss Ratio Deterioration

Expense Ratio Pressure

Medical Inflation Personnel Development

Sluggish Investment Market

Federal Intervention

Economy

Market Consolidation

Competition Indiscriminate Hair Loss


A National Overview

3

Reminder: Unless you are a national writer, with proportional premium distribution in each state,

National Statistics are:a) datedb) wrongc) of little value for strategic decision making

→Trust your own data whenever possible as it is likely to be a) timelyb) accurate

c) strategically reliable


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Presentation2


A National Overview

State Fund Private Market

Our Cozy little world of workers comp is getting smaller, and at the same time more crowded.


14.3B

39.7B

10.4B

43.6B

6.2B

33.8B

4

2004$54 Billion

2006$54 Billion

2009$40 Billion


A National Overview

For the last four years, the workers compensation market has been consolidating.

Zenith (14) → Fairfax Holdings (49)PMA (16) → Old Republic (15)First Comp (61) → Markel (0)

Why:— Organic growth is not available— Move towards “specialization”— Existing market opportunities have “topped out”


5

Product Pointer: Be mindful of ongoing consolidation among your distribution system.

Top Line Revenue Slippage


Presentation2


A National OverviewTop Line Revenue Slippage

The NCCI provided a detailed breakdown explaining the rationale for this market collapse.

But change was not uniform across the country?

California and Florida account for $6.5 billion of that lost business.

6

Change in loss costs -7%

Change in carrier pricing -4%

Change in total payroll -4%

Change in industry mix -5%

“Other” -6%


7

A National Overview

($ Billions)

Sources: A.M. Best (1973-2009); Insurance Information Institute calculations and estimates for 2010.

Premiums rise and fall for many reasons – and they will in the future.

Top Line Revenue Slippage

$3.5

$3.7

$4.2

$4.8

$5.5

$6.2 $7.5 $9.4 $11.3

$13.2

$14.2

$14.6

$14.0

$14.0

$15.1

$17.1 $

20.4 $23.4 $26.1

$28.2 $31.0

$31.3

$29.7

$34.3

$32.7

$29.5

$27.7

$26.5

$24.2

$23.1 $

26.2

$27.1 $

30.6 $32.9 $

36.7 $39.7

$41.8

$40.9

$37.3

$32.5

$30.5

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

WC

Ne

t P

rem

ium

s W

ritt

en

+36.3% -27.8% +17.1% -24.0%Cumulative Rate Change →

Lagging Investment Opportunities


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A Natural Overview

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.0

$12.6

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:Q1

In 2008, Investment Gains Fell by 50% Due to Lower Yields and Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income

1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute.

($ Billions)

Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q11


8


9

A Natural Overview

0.16% 0.16% 0.20% 0.29%0.62%

2.43%

3.01%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

1.76%

0.98%

3.99%3.80%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

July 2010 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve is near its most depressed level in at least 45 years. Investment income is falling

as a result

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

Treasury Yield Curves: Pre-Crisis (July 2007) vs. July 2010




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A National Overview

Like it or not, when income falls someone is going to check on how much free coffee is being consumed!

→In my experience, I have never seen a company go broke because of too high an expense ratio.


10

Product Pointer:Expenses should be properly managed in good times and times

like today. Remember, technology is terrific, but when was the last time that a computer got an injured worker back to work?


A National Overview

Cash flow in any business is important, in ours it is critical.


PC Industry 2008 2009

Premium Collected $434.5 $423.4

Losses Paid 260.9 250.6

Underwriting Expenses Paid 167.7 168.2

Dividends to Policy Holders 2.6 2.7

Underwriting Cash Flow ($3.2) ($1.9)

Net Investment Income $53.7 50.3

Other income 0.9 0.7

Pre-tax Operating Cash Flow $57.9 $53.0

(Billions)

11

Product Pointer: Model your cash flow situation under various scenarios.

Loss Ratio Deterioration


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A National Overview

Whether we look at calendar year data, or accident year data, the arrows keep pointing in the wrong direction.

2009 data showed the 4th consecutive year of marked deterioration in combined ratios. We have seen nothing in 2010 to suggest that it will not be the markets worst results since 2001.


Pricing Levels

Frequency

Severity

Medical Inflation

12


A National Overview

Workers compensation loss results have always raised the industry’s loss ratio average.


Accident Year Los/LAE Ratios

Line 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Work Comp 109 100 85.5 74.8 64. 63.4 68.1 74.9 80.2 84.5

Commercial 84 83.6 70.5 61.9 59.8 64.1 58.9 61.5 70.7 67.5

All Lines 90.3 90. 76.5 67.3 64.3 69.3 62.9 66.1 75.2 74.2

→Medical inflation, increased severity, increased litigation, all play a role, but price deterioration is playing a larger part.

13


A National Overview

We cannot talk about calendar year results without looking at reserve development (positive or negative), and adequacy.

→ A.M. Best: Workers compensation reserves are $1.8BB inadequate

→ NCCI: $4BB deficient after discounting

Most “redundant” reserves built up between 2005 – 2009 have already been released.

→ Reserve inadequacy over any sustained period of time will put your company in jeopardy.


14

Product Pointer:Watch for those “hidden bombs”

a) settled indemnity claims with open medicalb) cases in litigation

The Economy


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A National Overview

10 1116

6

16

8 8

21

50

80

37

4539

24

106

36

58

12

92

120

73

43

138 11 10 8

0

10

20

30

40

50

60

70

80

90

100

110

120

Aug1929

May1937

Feb1945

Nov1948

Jul1953

Aug1957

Apr1960

Dec1969

Nov1973

Jan1980

Jul1981

Jul1990

Mar2001

Dec2007

Month Recession Started

Contraction Expansion Following

*August 2010 (likely the “official end” of recession was June 2009) Sources: National Bureau of Economic Research; Insurance Information Institute.

Average Duration**Recession = 10.4 MosExpansion = 60.5 Mos

Length of Expansions Greatly Exceeds Contractions

Duration (Months)

Length of US Business Cycles,1929–Present*

The Economy

15


16

A National Overview

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

% 6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.7

%

9.6

%

9.4

%

9.2

%

9.0

%

8.8

%9.5

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

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

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/10); Insurance Information Institute

2007:Q1 to 2011:Q4F*

US Unemployment Rate

The Economy


A Natural Overview

9.6% 9.5%

9.0%8.8%

8.4%8.2%

9.7%9.9% 9.8%9.7%

9.2%

9.6%9.5%

9.4%

8.7%9.0%

9.2%9.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4

10 Most PessimisticConsensus/Midpoint10 Most Optimistic

Unemployment will remain high even under the most optimistic of scenarios, but

forecasts are being revised downwards

Sources: Blue Chip Economic Indicators (8/10); Insurance Information Institute

Stubbornly High Unemployment Will Slow the Recovery of the Workers Compensation Exposure Base

Quarterly, 2010:Q1 to 2011:Q4

US Unemployment Rate Forecasts

The Economy

17


18

A Natural Overview

*As of July 2010; Not seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Millions

105

110

115

120

125

130

135

140

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

The number of employed people in the US today is

approximately the same as it was in late 2004

U.S. Nonfarm Employment, Monthly, 1990 - 2010

The Economy

What is next?


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* 2010 NWP and Surplus figures are % changes as of H1:10 vs H1:09. Sources: A.M. Best, ISO, Insurance Information Institute

A National Overview

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*

NWP % change Surplus % change

(Percent)Surplus growth is now positive but

premiums continue to fall, a departure from the historical pattern

Historically, hard markets follow when surplus “growth” is negative*The industry has excess capacity, but it is unevenly distributed.

What is next?

19


A National Overview

To take just a longer view of things, here is some direction over the next year or three:

Survive

– Do the right things, regardless of short term pain– Keep good people, doing good work, on good business– Remember, you are not alone, and you have staying power

Remain vital and relevant in your markets

– You grew substantially just a few years ago– Fight the “commodity” syndrome – add value to your offerings

Thrive

– There is an end to every cycle, but everyone will not be positioned to take advantage of it.

– Leadership is the key, followers fall by the wayside.

20

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