an economic perspective on the reinsurance market
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An Economic Perspectiveon the Reinsurance Market
Re Underwriting: Building Professional ExpertiseNew York, NY
September 11, 2013
Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org
2
The Growth of the Reinsurance Industry Depends on …
The Growth of the Global Exposure Base–New lines of business (e.g., flood in the U.S.)–GDP/capita growth–Increased world trade
Capital Market DevelopmentsThe Growth and Capital Position of the Primary Insurance Industry
The Capital Position of the Reinsurance IndustryThe Attractiveness and Extent of Alternate Sources/Methods of Risk Capital
Global Economic Outlook: Regional and Major Economy
Perspectives
3
Strength of Economies and Pace of Recovery Varies Greatly
Important Consequences for Insurer and Reinsurer Growth Opportunities
3
Reinsurance is a Global Business
4
Shares of Global Output, Advanced vs. Developing Economies, 2012
Advanced Economies
50.1%Developing Economies
49.9%
Sources: International Monetary Fund, World Economic Outlook, April 2013, p. 139; Ins. Info. Institute
China became the world’s second largest economy in 2010. The
developing world’s share of GDP will
exceed that of advanced economies in 2013 and beyond.
35 economies, led by US with
18.9%
153 economies, led by China with 14.9%
Largest economies (% of world GDP)
U.S. 18.9%China 14.9%Japan 5.6%India 5.6%
Germany 3.8%
7
Forecasts of 2013-14 GDP Growthof Selected Advanced Economies
Sources: International Monetary Fund, World Economic Outlook Update, July 2013, Table 1; Ins. Info. Institute.
-1.6%
2.0%2.7% 2.2%
1.5% 1.3% 0.8% 0.7%0.0%
1.2%
-1.8%
-0.2%
0.3%0.9%
1.7%1.7%
-2%
0%
2%
4%
6%
8%
UnitedStates
Canada UnitedKingdom
Germany France Italy Spain Japan
2013 2014
The July 2013 IMF report forecasts growth in advanced economies in 2013 generally around 1% or less in Europe, under 2% in North America.
Slight improvement forecast for 2014.
8
Forecasts of 2013-14 GDP Growthof Selected Developing Economies
*Indonesia, Malaysia, the Phillipines, Thailand, and VietnamSources: International Monetary Fund, World Economic Outlook Update, July 2013, Table 1; Ins. Info. Institute.
3.2% 3.3%
6.3%
7.7%
3.2%
5.7%5.6%
2.9%
7.8%
5.6%
2.5%2.5%
0%
2%
4%
6%
8%
Brazil Russia India China Mexico ASEAN-5*
2013 2014
IMF continues to forecast that 2013 growth in emerging/developing economies will outpace advanced economies’ growth
but now says growth will be more moderate than previously forecast.
12
World Trade Volume:2010—2014F
Growth in World Trade Volume (Imports + Exports)Has Slowed But Continues to Grow
Percentage Change (%)
12.9%
6.0%
2.5% 3.1%
5.4%
0%
2%
4%
6%
8%
10%
12%
14%
2010 2011 2012 2013F 2014F
After falling in 2011 and 2012, global trade
volume is expected rise in 2013 and 2014
Sources: IMF World Economic Outlook April 2013 and WEO Update, July 2013; Insurance Information Institute.
15
Global P/C Insurance Snapshot
Developing Economiesare Severely Under-insured;
Will Faster GDP Growth Translate into Significant Premium Growth?
15
16
Nonlife Premium: Advanced vs. Emerging Economies, 2012
Sources: Swiss Re Sigma No 3/2013 “World Insurance in 2012”; Insurance Information Institute research.
Nonlife premiums in the emerging economies grew 8.1% in 2011 and 8.6% in 2012, after inflation adjustment.
In the advanced economies, nonlife premiums grew by 0.9% in 2011 and 1.5% in 2012.
Premium Growth Facts
17.3%82.7%
Industrialized Economies
$1, 647.5
Emerging Markets$344.1
2012, US$ Billions
Developing economies now produce half of
global GDP but just 17% of nonlife premiums
Non-life Premium/GDP* (Penetration)for Advanced Economies, 2002-2012
4.98
%
4.56
%
2.22
%
2.97
% 3.70
%
3.88
%
5.14
%
3.68
%
2.25
%
3.14
% 3.86
%
4.05
%
4.80
%
3.40
%
2.20
%
3.10
% 3.60
%
3.90
%4.60
%
2.90
%
2.20
%
3.00
% 3.50
%
3.80
%4.50
%
2.90
%
2.10
%
3.10
% 3.70
% 4.10
%4.52
%
2.84
%
2.27
%
3.28
%
3.62
%
3.89
%
0%
1%
2%
3%
4%
5%
6%
U.S. U.K. Japan France Germany Canada
2002 2004 2006 20082010 2012
*both measured in U.S. dollars; premiums exclude cross-border business Source: Swiss Re Sigma, various volumes
Year-to-year comparisons of the penetration percentage indicates the degree to which premium growth is keeping
up with exposure growth (as proxied by GDP).
Non-life Premium/GDP* (Penetration)for the BRIC Economies, 2002-2012
1.74
%
1.81
%
0.67
%
0.95
%1.62
% 2.22
%
0.64
% 1.05
%1.60
% 2.30
%
0.60
% 1.00
%1.60
% 2.30
%
0.60
% 1.00
%1.50
%
2.30
%
0.70
% 1.30
%
1.66
%
1.24
%
0.78
% 1.26
%
0%
1%
2%
3%
4%
5%
6%
Brazil Russia India China
2002 2004 2006
2008 2010 2012
*both measured in U.S. dollars; premiums exclude cross-border business Source: Swiss Re Sigma, various volumes
From 2001-2009, penetration in China and Russia grew steadily—an especially strong showing in light of the rapid growth in GDP (denominator in the Penetration ratio). Similarly, although the Penetration ratios in Brazil and India were essentially
flat, that means premium growth basically kept pace with exposure growth.
2012 Non-life Premium if Penetration in BRIC Economies Equaled Advanced Economies
$37.
48
$24.
30
$13.
14
$104
.30
$45.
16
$39.
19
$33.
70
$165
.56
$67.
74
$58.
78
$50.
55
$248
.33
$90.
32
$78.
37
$67.
39
$331
.11
$0
$100
$200
$300
$400
Brazil Russia India China
What it was2% (Japan)3% (UK, France)4% (US, Canada)
Sources: Swiss Re Sigma, various volumes; I.I.I. calculations
$US, billions
As Economies Grow Wealthier, Insurance Market Penetration Grows Also
0%
2%
4%
6%
8%
10%
12%
14%
$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000GDP per capita
Pene
tratio
n (%
)
Source: A.M. Best.
24
Reinsurance Market Conditions
Record Global Catastrophe Activityis Pressuring Pricing
24
25
Reinsurer Share ofRecent Significant Market Losses
Source: Insurance Information Institute from reinsurance share percentages provided in RAA, ABIR and CEA press release, Jan. 13, 2011.
Billions of 2011 Dollars
$0$5
$10$15$20$25$30$35$40
JapanEarthquake/
Tsunami (Mar2011)
New Zealand Earthquake (Feb
2011)
Thailand Floods(Aug - Nov 2011)
Chile Earthquake(Feb. 2010)
AustraliaCyclone/ Floods(Jan-Feb 2011)
Reinsurer SharePrimary Insurer Share
40% Reinsurance share of total insured loss
Reinsurers paid a high proportion of insured losses arising from major catastrophes around the world in recent years
$0.4$4.0
$22.5 $9.5
$15.0
$3.5
$37.5
$13.0
$6.0
$10.0
$7.9
$8.3$2.2$2.8
$5.0
73%60%
95%44%
25
Global Reinsurance Capital,2007-2012
$ Billions
% Change
Source: Aon Reinsurance Market Outlook, April 2013 Update from Individual Company and AonBenfield Analytics; Insurance Information Institute.
$410
$340
$400
$455$470$505
18%
-17%
-3%
11%
18%
$300
$400
$500
$600
2007 2008 2009 2010 2011 2012-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Reinsurer Capital Change
2007-2012 compound average growth rate: 4.3%High Global Catastrophe Losses Have Had a Modest Adverse Impact on
Global Reinsurance Market Capacity
26
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1Q1360
80
100
120
140
160
180
200
USD
bn
Soft market
Hard market
Hard market softening
Crisis
Excess capital
Guy Carpenter Reinsurance Composite,Historical Capital Levels, 1998 - 2013:Q1
Source: Guy Carpenter
28
Regional Property Catastrophe Rate-on-Line Index, 1990—2013 (as of January 1)
Sources: Guy Carpenter; Insurance Information Institute.
Property-Cat reinsurance pricing was up in the US as of 1/1/13 but was down in Europe/UK
US
UK
Europe
29
Catastrophe Bonds,Risk Capital Issued, 2002-2012
$2.73$3.39
$4.60$3.86
$5.85
$1.22$1.73
$1.14
$1.99
$4.69
$7.00
$0
$1
$2
$3
$4
$5
$6
$7
$8
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: GC Securities and Guy Carpenter & Company, LLC.
($ Billions)
30
Catastrophe Bonds,Risk Capital Outstanding, 2002-2012
$12.04 $12.51 $12.18 $11.89
$14.83
$2.95 $3.45 $4.04$4.90
$8.54
$14.02
$0
$2
$4
$6
$8
$10
$12
$14
$16
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: GC Securities and Guy Carpenter & Company, LLC.
($ Billions)
31
Reinsurance Utilization Rates,1995-2011
20.6%
21.4%21.1%
19.6%
20.6%
18.8%18.6%18.8%
20.0%
18.9%
19.7%
17.4%
16.2%
16.9%17.2%
18.7%19.0%
16%
17%
18%
19%
20%
21%
22%19
95
1996
1997
1998
1999
2000
2000
1
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: RAA, from GC Securities and Guy Carpenter & Company, LLC.; I.I.I.
Since 1999, the reinsurance utilization rate has been continually above 18.5%, despite the remarkable increase in surplus per dollar of premium.
32
Economic Threatsto the Reinsurance Industry
33
Near-Term Issues
Effects of the near-stagnation of the major European economiesTight monetary/fiscal policy => Slow/No GrowthOther headwinds affecting growth:
– Population agingInflation Transmitted Globally
From Russia, India, Brazil, and other countriesSoaring food and other commodity pricesOil prices and supply reliability
Helpful and Harmful: Inflation affects claims and investment income
IMF Inflation Rate Forecast for 2013-14 for Selected Emerging Economies
6.1% 6.
9%
10.8
%
3.0%
6.6%
5.8%
3.7% 4.
5%4.7%
6.2%
10.7
%
3.0%
5.3% 5.5%
3.2%
4.5%
0%
2%
4%
6%
8%
10%
12%
Brazil Russia India China Turkey SouthAfrica
Mexico ASEAN-5
2013 2014
Sources: International Monetary Fund, World Economic Outlook, April 2013, Chapter 2; Ins. Info. Institute.
Change from Prior Year
Inflation is forecast to be 6% or more in 2013 in some major emerging economies. Inflation there can spread to advanced economies through imports. The IMP
forecasts a slight decrease in inflation in 2014.
IMF Inflation Rate Forecast for Selected Advanced Economies, 2013-2014
1.7%
1.6%
2.7% 2.8%
1.6% 2.
0%
0.3% 0.5%
1.8%
1.5%
1.5% 1.7% 2.
5%
1.7%
1.5%
1.4%
2.3%
-0.2
%
1.7% 1.8%
-2%
0%
2%
4%
6%G
erm
any
Fran
ce UK
Net
herla
nds
Italy
Spai
n
Swee
den
Switz
erla
nd
US
Can
ada
2013 2014
Sources: International Monetary Fund, World Economic Outlook, April 2013, Chapter 2; Ins. Info. Institute.
Change from Prior Year
Inflation is forecast to be less than 2% in 2013 across most major European economies. If so, inflation is unlikely to be imported to the US, and interest rates
are likely to remain low, obscuring tight conditions in trade credit markets.
36
Longer-Term Issues (a partial list)
1.Persistently Low Interest Rates2.Currency Market Instability3.Sovereign Bond Market Concerns (Greece,
Spain, Ireland, etc.)4.Strong Capital Flows to Emerging/Developing
Economies => Asset Price Bubbles?5.Regulatory Backlash/Developments6.Terrorism
1.50%
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
2012:Q4 2013:Q1 2013:Q2 2013:Q3 2013:Q4
U.S. Germany U.K. Canada
Sources: Wells Fargo Economics Group, Global Chartbook, September 2012; I.I.I.
As these nations’ economies improve and concerns about inflation increase, actions to keep interest rates low will ease, and the yields on
longer-term bonds are expected to rise. But persistent high rates of unemployment and excess capacity will likely keep them from rising more
than one percentage point by the end of 2013.
Yield Forecasts for 10-Year Government Bonds, 2012:Q4-2013:Q4
38
Terrorism Risk and Insurance
38
Download I.I.I.’s Terrorism Insurance Report at:
http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2013.html
“Traditional” Losses Arisingfrom Terror Attack Scenarios
Risk ConcernProperty •Cost to repair, rebuild, replace
Casualty •Death/injury of workers•Death/injury customers & other 3rd parties
Liability •Claims of negligence (direct & 3rd party)
Business Interruption
•Loss of income/extra expense may exceed insurance and company resources
Source: Insurance Information Institute
“Less Traditional” Losses Arising from Terror Attack Scenarios
Risk ConcernContingent Business Interruption
•Upstream damage/dislocations interfere with ability to operate
D&O •Shareholders could allege management/ directors did not take prudent steps to prevent attack or manage its effects
Latent Liability
•Claims of disability/disease/death well after the event (e.g., first responders post 9/11)
Political Risk
•Global political landscape and economic opportunities could shift•US government policy influences risk
Source: Insurance Information Institute
“Non-Traditional” Losses Arising from Terror Attack Scenarios
Risk ConcernCyber Risk •Infiltration, disruption or disruption
•Could involve your IT, or up/downstream
Investment Risk •Terrorist attack will likely negatively influence investment opportunities, possibly for extended period
Reputational Risk
•Loss of income/extra expense may exceed insurance and company resources
Regulatory Risk •Responses could impact performance
Economic Risk •State of the economy pre/post-attack influences performance
Source: Insurance Information Institute
Insurance Industry RetentionUnder TRIA and Its Successors
$10.0$12.5
$15.0
$25.0$27.5
$0
$5
$10
$15
$20
$25
$30
$35
2003 (Year 1)
2004 2005 2006 2007-2014
$ B
illio
ns
Source: Insurance Information Institute
• Individual company retentions fixed at 20% for 2007-2014
• Above the retention, federal government pays 85% for 2007-
2014
“Room” for a significant role for reinsurance
A Steady Take-Up Ratefor Terrorism Coverage
Source: Marsh, Inc.: 2013 Terrorism Risk Insurance Report, p.9; Insurance Information Institute
27%
49%
58% 59% 59% 57%61% 62% 64% 62%
0%
10%
20%
30%
40%
50%
60%
70%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
In 2011 overall terrorism coverage
take-up rate reached a record 64%The effective take-up rate
for workers comp is 100%
Cyber Risk
45
Cyber Risk is a Rapidly Emerging Exposure for Businesses in Every
IndustryNew I.I.I. White Paper:
http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf
45
Data Breaches 2005-2013, By Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed
* 2013 figures as of March 19, 2013.Source: Identity Theft Resource Center
157
321
446
656
498
419447
662
17.322.935.7
19.1
66.9
222.5
16.2
127.7
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012020406080100120140160180200220
# Data Breaches # Records Exposed (Millions)
The total number of data breaches and number of records exposed fluctuates from year to year and over time.
Millions
47
2012 Data Breaches By Business Category, By Number of Breaches
3.8%11.2%
13.6%
34.5%
36.9%
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC%20Breach%20Report%202012.pdf.
The majority of the 447 data breaches in 2012 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.
Business, 165 (36.9%)Govt/Military, 50 (11.2%)
Banking/Credit/Financial, 17 (3.8%)
Educational, 61 (13.6%)
Medical/Healthcare, 154 (34.5%)
48
Average Organizational Cost of a Data Breach, 2008-2011* ($ Millions)
*Findings of this benchmark study pertain to the actual data breach experiences of 49 U.S. companies from 14 different industry sectors, all of which participated in the 2011 study. Total breach costs include: lost business resulting from diminished trust or confidence of customers ;costs related to detection, escalation, and notification of the breach; and ex-post response activities, such as credit report monitoring.Source: 2011 Annual Study: U.S. Cost of a Data Breach, the Ponemon Institute.
$6.8
$5.5
$7.2
$6.7
$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
2011
2010
2009
2008
($ Millions)
The average organizational cost of a data breach in 2011 was $5.5 million, down 24% from $7.2 million in 2010. Companies have improved steps
taken in both preparing for and responding to a data breach.
50
Marsh: Increase in Purchase of Cyber Insurance Among U.S. Companies, 2012
Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013
27.7%
20.2%
21.6%
22.9%
32.2%
72.2%
75.5%
33.3%
All Other
Health Care
Communications, Media & Technology
Retail/Wholesale
Financial Institutions
Education
Services
All Industries
Interest in cyber insurance continues to climb. The number of companies purchasing cyber insurance increased 33 percent from 2011 to 2012.
52
Marsh: Total Limits Purchased, By Industry: Cyber Liability, Revenue $1 Billion+
Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013
$27.
9
$59.
4
$11.
7
$46.
6
$12.
7 $18.
7
$30.
0 $38.
7
$41.
8
$11.
3 $17.
3
$11.
6
$27.
5
$9.0
$40.
6
$14.
1
$0
$10
$20
$30
$40
$50
$60
$70
All Industries Comms, Media& Technology
Education FinancialInstitutions
Health Care Retail/Wholesale Services All Other
Avg. 2011 Limits Avg. 2012 Limits
Among larger companies in 2012, average cyber insurance limits purchased increased nearly 30% over 2011.
($ Millions)
53
Cyber Liability: Historical Rate (price per million) Changes
-0.21%
2.67%
0.55%
2.92%
-0.81%
2.22%2.24%
0.54%
-1.0%
1.0%
3.0%
5.0%
12:Q1 12:Q2 12:Q3 12:Q4
Primary Price Per Million Change
Total Price Per Million Change Overall, rates for cyber insurance were essentially flat in the fourth quarter of 2012.
Source: Marsh Global Analytics, Marsh Risk Management Research Briefing, March 2013
54
Catastrophe Loss Update
Catastrophe Losses in Recent Years Have Been Very High
54
55
Total Value of Insured Coastal Exposure in 2012(2012, $ Billions)
Source: AIR Worldwide
$293.5$239.3
$182.3$164.6$163.5
$118.2$106.7$81.9$64.0$60.6$58.3
$17.3
$567.8$713.9
$849.6$1,175.3
$2,862.3$2,923.1
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500
New YorkFloridaTexas
MassachusettsNew JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
$1.175 Trillion Insured Coastal Exposure in Texas in 2012, up
$280.2 bill or 33.1% since 2007—well above the 20% for overall
coastal exposure growth
In 2012, New York Ranked as the #1 Most Exposed State to Hurricane Loss, Overtaking Florida with $2.862 Trillion. Texas is very exposed too, and
ranked #3 with $1.175 Trillionin insured coastal exposure
The Insured Value of All Coastal Property Was $10.6 Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and
Up 48% from $7.2 Trillion in 2004
57
Total Potential Home Value Exposure to Storm Surge Risk in 2013*($ Billions)
*Insured and uninsured property. Based on estimated property values as of April 2013.Source: Storm Surge Report 2013, CoreLogic.
$65.2$51.0$50.3
$35.0$22.4$20.5
$15.9$10.4$7.2$4.7$3.1$2.7$2.6$0.6
$65.6$72.0$78.0
$118.8$135.0
$386.5
$0 $50 $100 $150 $200 $250 $300 $350 $400 $450
FloridaNew York
New JerseyVirginia
LouisianaS. CarolinaN. Carolina
TexasMassachusetts
ConnecticutMarylandGeorgia
DelawareMississippi
Rhode IslandAlabama
MaineNew
PennsylvaniaDC
Texas has $51 billion in home value is exposed
to storm surge
The Value of Homes Exposed to Storm Surge was $1.147 Trillion in 2013.* Only a fraction of this is insured, hence the huge demand for federal aid
following major coastal flooding events.
Meteorological events(Storm)
Hydrological events(Flood, mass movement)
Climatological events(Extreme temperature, drought, forest fire)
Geophysical events(Earthquake, tsunami, volcanic eruption)
Natural Catastrophes Worldwide 1980 – 2013Number of Events (Annual Totals 1980 – 2012 vs. First Six Months 2013)
Source: MR NatCatSERVICE
200
400
600
800
1 000
1 200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
First Six Months in 2013 460 Events
Number
58
Natural Catastrophes Worldwide 1980 – 2013Overall and Insured Losses (Annual Totals 1980 – 2012 vs. First Six Months 2013)
Overall losses (in 2012 values) Insured losses (in 2012 values)
Overall losses totaled US$ 45bn; Insured losses totaled US$ 13bn
Source: MR NatCatSERVICE
50
100
150
200
250
300
350
400
450
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
(bn US$)
60
New Study Suggests Increase inConvective Activity Is Costly for Insurers
• Study examines convective (hail, tornado, heavy rainfall and thundersquall) events in the US with losses exceeding US$ 250m in the period 1970–2009
• Past losses are normalized (i.e., adjusted) to currently exposed values
• After normalization there are still increases of losses • Increases are correlated with the increase in the
meteorological potential for severe thunderstorms and its variability
For the first time, research shows that climatic changes have already influenced US thunderstorm losses
61Source: Munich Re research paper, March 18, 2013: Rising Variability in Thunderstorm-Related U.S. Losses as a Reflection of Changes in Large-Scale Thunderstorm Forcing.
Investments: A Key Driver of Profitability
62
Depressed Yields Will Necessarily Influence Underwriting & Pricing
62
P/C Industry Investment Gains, Inflation-Adjusted: 1994–20121
$54.8
$64.5$69.1
$74.8
$57.6
$45.9
$56.5$59.4
$69.8
$63.4
$70.9
$33.8
$42.0
$56.2$57.4$53.9
$50.0
$81.7
$71.5$75.9
$30
$45
$60
$75
$90
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 1213:Q1E
Because the Federal Reserve Board aims to keep interest rates exceptionally low until the unemployment rate hits 6.5%—likely at least
another year off—maturing bonds will be re-invested at even lower rates.1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.*2005 figure includes special one-time dividend of $3.2B; 2013F figure is I.I.I. estimate for 2013:Q1, annualized.
Sources: ISO; Insurance Information Institute.
($ Billions, 2012 dollars) 1994-2012 average yearly gain:
$60.85B. We haven’t hit that average in the last 5 years.
64
U.S. Treasury Security Yields*:A Long Downward Trend, 1990–2013
*Monthly, constant maturity, nominal rates, through May 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
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.
U.S. Treasury security yields
recently plunged to record lows
64
65
Distribution of Bond Maturities,US P/C Insurance Industry, 2003-2012
16.0%
15.2%
15.7%
16.2%
16.3%
29.8%
29.2%
28.8%
29.5%
30.0%
32.4%
36.2%
39.5%
41.4%
40.4%
31.3%
32.5%
34.1%
34.1%
33.8%
31.2%
28.7%
26.7%
26.8%
27.6%
15.4%
15.4%
13.6%
13.1%
12.9%
12.7%
11.7%
11.1%
10.3%
9.8%
9.2%
7.6%
7.6%
7.4%
8.1%
8.1%
7.3%
6.4%
6.3%
5.7%16.5%
15.2%
14.4%
16.0%
15.4%
0% 20% 40% 60% 80% 100%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Under 1 year1-5 years5-10 years10-20 yearsover 20 years
Sources: SNL Financial; Insurance Information Institute.
The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds
(from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category (from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in investment income along with lower yields.
Bonds Rated NAIC Quality Category 3-6 as a Percent of Total Bonds, 2003–2012
2.69%
2.10% 2.17%1.98%
3.07% 3.10%
4.07%
2.04%2.27%
2.58%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
There are many ways to capture higher yields on bond portfolios.One is to accept greater risk, as measured by NAIC bond ratings.
The ratings range from 1 to 6, with the highest quality rated 1.Even in 2012, over 95% of the industry’s bonds were rated 1 or 2.
Sources: SNL Financial; Insurance Information Institute.
From 2006-07 to year-end 2012, the percentage of lower-quality
bonds in P/C industry portfolios more than doubled
67
P/C Insurance Industry Financial Overview
Profit Recovery in 2012 After High CAT Losses; Ultimate
Impact of Sandy Still Unclear
67
P/C Net Income After Taxes1991–2013:Q1 ($ Millions)
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 ROAS1 = 5.9% 2013:Q1 ROAS1 = 9.6%
• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.7% ROAS in 2013:Q1, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
$14,
178
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$62,
496
$3,0
43
$35,
204
$19,
456 $3
3,52
2
$14,
394$2
8,67
2
-$6,970
$65,
777
$44,
155
$20,
559
$38,
501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13:Q1
2012:Q1 ROAS
was 7.2%Net income is up
substantially (+40.9%) from 2012:Q1 $10.2B
-5%
0%
5%
10%
15%
20%
25%
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 1213
:Q1
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:Q1*
*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
2012: 5.9%
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2013:Q1 9.7%
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.
97.5100.6 100.1 100.8
92.7
101.299.5
101.0
94.8
102.4
106.5
95.79.7%
6.2%4.7%
7.9%7.4%4.3%
9.6%
15.9%14.3%
12.7% 10.9%
8.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013:Q10%
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 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Catastrophes and lower investment
income pulled down ROE in 2012
P/C Insurer Impairments, 1969–20128
1512
711 9
349
13 1219
916 14 13
3649
3134
50 4855
60 5841
2916
1231
18 1949 50
4735
1814 15 16
19 2134
18
5
0
10
20
30
40
50
60
70
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
Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012 and March 6, 2013 update; Insurance Info. Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
71
Impairments among P/C insurers remain infrequent
$0$50
$100$150$200$250$300$350$400$450$500$550$600$650
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13*
US Policyholder Surplus:1975–2013*
* As of 3/31/13.Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in non-
insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.77:$1 as of3/31/13, A Near Record Low (at Least in Recent History)*
Surplus as of 3/31/13 was a record $607.7, up 3.6% from $586.9 of 12/31/12, and up 39.0% ($170.6B) from the crisis trough of $437.1B at 3/31/09. Pre-
crisis peak was $521.8 as of 9/30/07. Surplus as of 3/31/13 was 16.5% above 2007 peak.
73
Policyholder Surplus, 2006:Q4–2013:Q1
Sources: ISO, A.M .Best.
($ 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$559.2 $559.1
$538.6$550.3
$567.8
$583.5$586.9
$607.7
$570.7$566.5
$505.0$515.6$517.9
$420$440$460$480$500$520$540$560$580$600$620
06:Q407:Q107:Q207:Q307:Q408:Q108:Q208:Q308:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q413:Q1
2007:Q3Pre-Crisis Peak
Surplus as of 3/31/13 stood at a record high $607.7B
*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 $0.80
of NPW, close to the strongest claims-paying
status in its history.
Drop due to near-record 2011 CAT losses
The P/C Insurance Industry Both Entered and Emerged from the 2012 Hurricane
Season Very Strong Financially.
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Insurance Information Institute Online:
74
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