2011-budgetanalysis_v1.pptx 1 the prefect storm. 2011-budgetanalysis_v1.pptx 2 rms v11 change...

2011-BudgetAnalysis_v1.pptx

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THE PREFECT STORM


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RMS v11Change Factors

Key factors causing increase:

1. Non-Coastal wind risk increasing due to information from Ike and Gustav that indicated inland losses were greater than previously modeled

2. Claims data from Hurricane Ike demonstrated that roofs frequently fail at much lower wind speeds than had previously been expected given the understanding of construction quality and building codes

a. Provided hard evidence of poorer than expected construction quality due to a lack of understanding and enforcement of building codes in Texas

b. Resulted in a re-examination of code enforcement and building practices in many other U.S. states and associated increases in those regions as well

3. Storm Surge –results in significant changes to accounts with coastal exposure


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RMS v11Potential Portfolio Impacts-Industry

• RMS provided quantitative estimates of potential impacts resulting from changes incorporated into v11 of their US Hurricane model*

* RMS® North Atlantic Hurricane and Europe Windstorm Model Changes: Executive Briefing #3


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RMS v11 - Variability

• Following illustrates the variability between portfolio’s.• At the individual account level the variability will likely be even higher.


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Data completeness

• With a growing volume of coastal assets at risk to tropical cyclones, insurers can mitigate risk by knowing the likelihood of a land-falling storm not only as it nears the coast but also before it has formed. Today’s leading-edge numerical weather prediction models combine with statistical techniques to make such analysis a reality.

• Methodologies for assessing potential damage from flooding and storm surge have improved significantly just in the last year or two, offering underwriters a better suite of tools to assess potential short-term and longer-term flooding hazards. For example, by pairing a database of mean sea level trends over the past 40 years with advanced catastrophic tropical cyclone simulation capabilities, researchers have been able to quantify the likelihood and scope of property damage because of flood in specific regions over the next 20 years. They determine that average annual losses from flood in the United States Gulf and East Coast regions, for example, will increase 18.6 percent (to $10.4 billion) over the next 20 years.

• The risks we face have grown increasingly volatile from both an environmental and exposure standpoint. To be useful, the data we employ to measure those risks must be consistent, complete, and easy to work with. Leading insurance carriers are increasingly working with private research organizations to integrate new data and technologies into their business practices to price and deliver products.


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CLAIMS ACTIVITY


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Geophysical events(earthquake, tsunami, volcanic activity)Meteorological events (storm)

Hydrological events(flood, mass movement)Selection of significant

loss events (see table)

Natural catastrophes

Earthquake, tsunami Japan, 11 March

EarthquakeNew Zealand, 22 Feb

Cyclone Yasi Australia, 2 Feb

Landslides, flash floodsBrazil, 12/16 Jan

Floods, flash floods Australia, Dec 2010-Jan 2011

Severe storms, tornadoesUSA, 22–28 April

Severe storms, tornadoesUSA, 20–25 May

WildfiresUSA, May–June

EarthquakeNew Zealand, 13 June

FloodsUSA, April–June

Climatological events(extreme temperature, drought, wildfire)

Number of events: 355Number of events: 355

Natural loss events January – June 2011World map

Source: MR NatCatSERVICE © 2011 Munich Re


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Worldwide Natural Disasters 2011 January – June only

EarthquakeNew Zealand

Earthquake Japan

Tornadoes, Wildfires, Floods US

FloodsAustralia

Three strong earthquakes in 9 months

High losses due to soil liquefaction

Strongest EQ in Japan Mw 9.0

Spring time brought extreme weather and climate events

Deadliest tornado outbreak since 1925 in the US (1. Half year : 589)

The series of floods 2010/11 were the most devastating in modern Australian history

Highest sea surface temperature off the Australian coastline



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2011 (Jan – June)

2010 (Jan – June)

Average of the last 10

years2001-2010

(Jan –June)

Average of the last 30

years1981-2010

(Jan –June)

Top Year 1981 -2010

(Jan – June)

Number of events 355 480 390 310 2007

Overall losses in US$m(original values)

265,000 97,200 47,400 36,400 1995 (EQ Kobe)

Insured losses in US$m(original values)

60,000 26,900 12,100 8,200 1994 (EQ, US

Northridge)

Fatalities 19,380 230,300 52,900 42,700 2010 (EQ Haiti)

Natural Catastrophes, 2011Overview and comparison with previous years



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Costliest Natural Catastrophes Since 1950Rank by insured losses

Year Event Region Insured lossUS$m(in original values)

2005 Hurricane Katrina USA 62,200

2011 EQ, tsunami Japan ~30,000

2008 Hurricane Ike USA, Caribbean 18,500

1992 Hurricane Andrew USA 17,000

1994 EQ Northridge USA 15,300

2004 Hurricane Ivan USA, Caribbean 13,800

2005 Hurricane Wilma USA, Mexico 12,500

2005 Hurricane Rita USA 12,100

2011 EQ New Zealand New Zealand >10,000

2004 Hurricane Charley USA, Caribbean 8,000



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Top 16 Most Costly World Insurance Losses, 1970-2011*

(Insured Losses, 2010 Dollars, $ Billions)

*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.

$11.3$14.0 $14.0$14.9$20.5$20.8 $23.1$24.9

$30.0

$72.3

$10.0$9.3$9.0$8.0$8.0$7.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

WinterStormDaria(1991)

ChileQuake(2010)

Hugo (1989)

TyphoonMirielle(1991)

Charley(2004)

NewZealandQuake(2011)

Rita (2005)

SpringTornadoes

(2011)

Wilma(2005)

Ivan (2004)

Ike (2008)

Northridge(1994)

WTCTerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado season would likely become the 9th

costliest event in global insurance history

3 of the top 15 most expensive

catastrophes in world history have occurred in the past 18 months


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As of July 6, 2011

Number of Events Fatalities

Estimated Overall Losses (US $m)

Estimated Insured Losses (US $m)

SevereThunderstorm

43 593 23,573 16,350

Winter Storm 8 15 1,900 1,425

Flood 8 15 2,100 in progress

Earthquake 2 1 105 in progress

Tropical Cyclone 0 0 0 0

Wildfire 37 7 125 50

Natural Disaster Losses in the United StatesFirst Six months 2011

© 2011 Munich Re


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U.S. Winter Storm Loss Trends Annual totals 1980 – 2010 vs. First Half 2011

Average annual winter storm losses have increased over 50% since 1980.

First Half 2011 $1.4 billion



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Lower Mississippi Flood of 2011

• Heavy snowmelt, saturated soils, and over 20 inches of rain in a month lead to the worst flooding of the lower Mississippi River since 1927.

• Record river crests at Vicksburg and Natchez; Morganza Spillway opened in Louisiana to protect Baton Rouge and New Orleans from possible levee failures.

• Extensive agricultural damage, property, and inland marine losses due to flood.

> Economic Losses: $2 billion

Insured Losses: Estimation in Progress

April 2011

© 2011 Munich Re


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Other Notable Floods of 2011

• Similar to the triggers of the Mississippi River flood, heavy rains in the northern plains states and the melting of a heavy snowpack in the Rockies resulted in severe flooding along several river systems, including the:

> Missouri River: Numerous breached levees (some intentional to prevent flooding in densely populated regions), agriculture and transportation networks severely disrupted, Fort Calhoun nuclear power plant threatened, but no damage.

> Souris River: Record flood levels at Minot, North Dakota. Levees were overtopped by flood waters; an estimated 11,000 residents (25% of Minot’s population) was evacuated.

June 2011

© 2011 Munich Re


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Outlook for 2011 Hurricane Season: 75% More Active Than Average

Average* 2005(Katrina Year)

2011F

Named Storms 9.6 28 16

Named Storm Days 49.1 115.5 80

Hurricanes 5.9 14 9

Hurricane Days 24.5 47.5 35

Intense Hurricanes 2.3 7 5

Intense Hurricane Days 5.0 7 10

Accumulated Cyclone Energy 96.1 NA 160

Net Tropical Cyclone Activity 100% 275% 175%

*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.


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OTHER EVENTS

• Very active thunderstorm (tornado-hail) season with insured losses exceeding $16 billion, far above the 2001 to 2010 January – June average thunderstorm loss of $6.4 billion (in 2010 Dollars). It was also the deadliest thunderstorm season in over 50 years.

• Extensive severe flooding events in Midwest and Great Plains

• Large, damaging wildfires in Texas, Arizona, and New Mexico.

• Major blizzard and ice storm in Midwest; severe freezing conditions in Southwest

• Seasonal forecasts indicate “active” hurricane season; neither El Niño or La Niña conditions are expected to be a factor this year


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Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2011

Average* 2011F

Entire US Coast 52% 72%

US East Coast Including Florida Peninsula

31% 48%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 47%

ALSO…Above-Average Major HurricaneLandfall Risk in Caribbean for 2011 (61% vs. 42%)

*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 1, 2011.


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HURRICANE IRENE-BY THE NUMBERS

1st since Hurricane Ike (9/2008) to hit USA 1st to threaten NYC since Hurricane Gloria (9/1985) Similar in size to Hurricane Katrina

Irene - 290 miles Katrina – 230 miles

River flooding records broken in 26 rivers NJ (8); NY (14); Vermont (4)

2.3 million people evacuated 10,000 flights cancelled Amtrak shut down its Northeast corridor 10th Billion dollar event in 2011


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FINANCIAL IMPACT


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A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.3100.8

102.2101.0

6.5%7.5%7.4%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010* 2011*0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generated ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979


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P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter

Sources: ISO, Insurance Information Institute.

Finally! Back-to-back quarters of net written premium growth(vs. the same quarter, prior year)

10.2

%15

.1%

16.8

%16

.7%

12.5

%10

.1%

9.7%

7.8%

7.2%

5.6%

2.9%

5.5%

-4.6

%-4

.1%

-5.8

%-1

.6%

10.3

%10

.2% 13

.4%

6.6%

-1.6

%2.

1%0.

0%-1

.9%

0.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3% 2.

3%1.

3%3.

5%

-10%

-5%

0%

5%

10%

15%

20%

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

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

The long-awaited uptick. In 2011:Q1 occurring in

personal lines predominating cos. (+3.8%) and commercial

lines predominating cos. (+3.5%)


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Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q11

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$52.9

$13.5

$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 11:Q1

Investment Gains Recovered Significantly in 2010 Due to 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.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2010 were the best

since 2007


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$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11*

US Policyholder Surplus:1975–2011*

* As of 3/31/11.Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.77:$1 as of3/31/11, A Near Record Low (at Least in Recent History)**

Surplus as of 3/31/11 was a record $564.7B, up from $437.1B at the crisis trough at 3/31/09. Prior

peak was $521.8 as of 9/30/07. Surplus as of 3/31/11 was 8.2% above 2007 peak; Crisis trough was as of

3/31/0916.2% below 2007 peak.


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Policyholder Surplus, 2006:Q4–2011:Q1

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8$556.9

$564.7

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

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

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)11:Q4: +$42.9B (+8.2%)

Surplus set a new record in 2011:Q1*

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.

The Industry now has $1 of surplus for every $0.77 of

NPW—the strongest claims-paying status in its history.


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-5%

0%

5%

10%

15%

20%

25%

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*

Soft Market Persisted in 2010 but Growth Returned: More in 2011?

(Percent)1975-78 1984-87 2000-03

*2011 figure is an estimate based on Q1 data. Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

NWP was up 0.9% in 2010

2011:Q1 growth was +3.5%; First Q1 growth since 2007


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RESPONSIVENESS


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The Lexington Advantage – Claims

• Catastrophe Advantage Program (CAP) – innovative modeling technology to more effectively plan for and manage impending CAT events

• Service agreements in place with independent adjuster resources who stand ready to respond to a major wind or earthquake CAT event

• Earthquake Preparedness Program – established panel of earthquake adjusters, engineers, and building consultants available to respond to claims in the wake of an event

• Major Loss Event (MLE) – a major loss reporting process to alert property staff of potential large property exposures on a world wide basis

• iClaims – the latest paperless technology to scan and automatically route all claims information to the appropriate claims specialist


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Property Claims Group

• Simulated CAT event testing– Regularly test systems, processes, procedures, and resources under simulated CAT

event scenarios to ensure readiness for a real event

• 24 hour response time for claims acknowledgement• Streamlined resolution of property losses*, including:

– Early assessment of loss for advance payment– Waiving of partial Proofs of Loss– Express mailing of settlement checks– Waiving of settlement holdbacks

• Operational benchmarks for customer service including: – Communication– Advance payments– Written claim acknowledgement


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• Insureds should know if their insurer has the experience and infrastructure to stand and deliver in the wake of a CAT loss.

• Advocacy and access matter. Insureds and their brokers should have a relationship with senior property underwriting and claims management.

• CAT events result in a rush of claim activity. Earthquakes, flooding, hurricanes, winter storms, wildfires, etc. can result in an immediate need for supplemental professional staff. Insureds should know if their insurer has a plan.

Ask the Right Questions

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Thank You for Your Attendanceand Participation!

Patricia ChaseVice President

2011-budgetanalysis_v1.pptx 1 the prefect storm. 2011-budgetanalysis_v1.pptx 2 rms v11 change...

Documents

prefect storm slide

rms v11 variability

coastal exposure slide

claims activity slide

potential damage

claims data

storm surge results

significant changes