Financial Crisis: Private & Public Sector Impacts Challenges Amid Economic and
Regulatory Uncertainty
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Southeastern Regulators Association ConferenceOrlando, FL
October 20, 2008
Presentation Outline
• Financial Crisis: Federal Government’s Financial Rescue PackageEmergency Economic Stabilization Act of 2008 (w/revisions)Troubled Asset Relief Program (TARP) Impacts for Financial Services and Insurers
• Regulatory Aftershocks• The Weakening Economy: Impact Analysis• P/C Insurance Industry Overview • Southeast US Catastrophe Exposure• Tort & Regulatory Environment
Q & A
Federal Government’s Financial Rescue
Package*(a.k.a. “The Bailout”)
Plan Details & Implications
*Including additional provision of the Emergency Economic Stabilization Act of 2008
Federal Government FinancialServices Rescue Package
Source: US Treasury, CNN Money.com and I.I.I. research.
THE SOLUTION: A 5-POINT PLAN1. Treasury Purchase of Equity Stakes in Banks
Treasury will buy up to $250B in senior preferred shares in wide variety of banks (out of $700B in EESA)
9 largest banks get $125B Stakes come in the form of non-voting shares and pay
5% for first 5 years and 9% thereafter Feds get warrants to buy up to 15% more shares Banks can buy back stake from government Must agree to limits on CEO compensation GOAL: Bolster bank capital/liquidity
2. Backing New Debt from Banks FDIC will guarantee new, senior unsecured debt issued by
banks, thrifts and bank holding cos. Must mature within 3 years; Banks can opt in until 6/30/2009
GOAL: Restore confidence of buyers of bank debt that they will be paid back (no matter what happens to bank)
Federal Government FinancialServices Rescue Package
THE SOLUTION: A 5-POINT PLAN (Cont’d)3. More Coverage for Bank Deposits
FDIC will provide unlimited coverage for all non-interest bearing accounts through 12/31/09. (Such accounts are typically used by businesses to meet short-term expenses such as payrolls)
Paid for by fees/premiums paid to FDIC GOAL: Boost liquidity for otherwise healthy banks
(esp. regional and local banks that might see nervous depositors withdraw money in favor of bigger banks
4. Buy Short-Term Commercial Paper Federal Reserve will buy until 4/30/09 high-quality 3-month
debt issued by businesses in commercial paper market Commercial paper is the prime source of funding to cover
op. expenses at many large corps. and financial institutions GOAL: Guarantees there will be a buyer of debt, so private
sector buyers will be willing to buy tooSource: US Treasury, CNN Money.com and I.I.I. research.
Federal Government FinancialServices Rescue Package
THE SOLUTION: A 5-POINT PLAN (cont’d)5. Buy Troubled Assets: “Troubled Asset Relief
Program” (TARP) Up to $450B available (theoretically) available to
purchase troubled assets from banks (and others?) Limits on CEO Compensation in Participating Firms Pricing: Debt Sold to Feds via Reverse Auction• Reverse auction is one in which sellers bid lowest price it will
accept from the government (i.e., rather a traditional auction in which the highest bid from buyer wins). Helps ensure that the Feds (taxpayer) does not overpay for questionable debt
• Will be sold in multi-billion dollar increments and run by outside asset managers in amounts ranging up to $50 billion
• Recoupment provision allows government to assess users of program to make taxpayers whole if program loses money
• GOAL: By removing “toxic” assets with uncertain underlying value from bank balance sheets, banks should be better able to attract capital
Source: I.I.I. research.
Distribution of $700 Billion in Funds Under Emergency Economic Stabilization Act of 2008
9 Large Banks*, 125 , 18%
Regional & Local Banks, 125 , 18%
Troubled Asset Purchases, 450 ,
64%
Shifting Emphasis
•Original EESA allocated all $700B to Troubled Asset Relief Program
•View was that TARP would take too long and that liquidity/credit crisis required direct infusion of capital in banks by feds
Source: US Treasury Department; Insurance Information Institute research.
Stakes Taken by Federal Government in 9 Large US Banks
$25
$25
$15
$10
$10
$10
$3
$2
$25
0 5 10 15 20 25 30
Citigroup
JP Morgan Chase
Wells Fargo*
Bank of America
Merrill Lynch
Goldman Sachs
Morgan Stanley
Bank of NY Mellon
State Street
*Includes $5 billion for purchase of Wachovia.Source: USA Today, Oct. 15, 2008, p. 1B.
•Feds announced a total $125B stake in 9 large banks on Oct. 14.
•Another $125B will be infused in regional and local banks
•Sum comes from $700B in Troubled Asset Relief Program in the Emergency Economic Stabilization Act of 2008
Top 10 Largest Bank Failures
$12.2 $13.0 $15.1 $18.5 $21.7 $30.2 $32.0 $32.5 $40.0
$307.0
$0
$50
$100
$150
$200
$250
$300
$350
Hom
efed
Ban
k(1
992,
San
Die
go)
Fir
st C
ity
Ban
corp
orat
ion
(198
8, H
oust
on)
Gib
ralt
arS
avin
gs (
1989
,S
imi V
alle
y)
Mco
rp (
1989
,D
alla
s)
Ban
k o
f N
ewE
ngl
and
(19
91,
Bos
ton
)
Am
eric
anS
avin
gs &
Loa
n(1
988,
Sto
ckto
n, C
A)
Ind
yMac
(20
08,
Pas
aden
a)
Fir
st R
epu
blic
(198
8, D
alla
s)
Con
tin
enta
lIl
linoi
s (1
984,
Ch
icag
o)
Was
hin
gton
Mu
tual
(20
08,
Sea
ttle
)
$ B
illi
ons
Source: FDIC; Insurance Information Institute research.
Resurgent bank failures (13 in 2008 as of Oct. 12)
are symptomatic of weakness in the financial system. FDIC says many
more may fail
Failure of IndyMac was the 4th largest in
history
Sept. 25 failure of Washington
Mutual was bar far the largest in
US history. Sold to JP Morgan Chase by govt. for $1.9B
plus WaMu’s loans and deposits
Top 10 P/C Insolvencies, Based Upon Guaranty Fund Payments*
$2,265.8
$1,272.7
$1,049.7$843.4
$699.4$566.5 $555.8 $543.1 $531.6 $516.8
$0
$500
$1,000
$1,500
$2,000
$2,500
* Disclaimer: This is not a complete picture. If anything the numbers are understated as some states have not reported in certain years.
Source: National Conference of Insurance Guaranty Funds, as of September 17, 2008.
$ MillionsThe 2001 bankruptcy of Reliance Insurance was the largest ever among p/c insurers
Top 10 Life Insolvencies, Based On GuarantyFund Payments and Net Estimated Costs*
$2,821.7
$173.6 $172.4 $131.6 $107.8 $106.9 $81.9 $61.6 $61.5 $57.2$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Executive LifeIns. Co. 1991
Corporate LifeIns. Co. 1994
NationalHeritage LifeIns. Co. 1995
LondonPacific Life &Annuity Co.
2004
Inter-American Ins.Co. of Illinois
1991
GuaranteeSecurity LifeIns. Co. 1992
New JerseyLife Ins. Co.
1993
AmericanChambers LifeIns. Co. 2000
AmericanIntegrity Ins.
Co. 1993
First NationalLife Ins. Co.of America
1999
*As of 2007.
Source: National Organization of Life and Health Guaranty Funds
$ Millions(Year Indicates Year of Liquidation)
The 1991 bankruptcy of Executive Life was by far the largest ever
among life insurers
Federal Government FinancialServices Rescue Package
Source: Insurance Info. Inst. research.
Other Recent Provisions1. Fannie/Freddie Will Increase Mortgage Buying
• Feds step-up buying MBS in open market
2. 10-Day Ban on Short-Selling 829 Financial Stocks• Most major public insurers on list• Expired Oct. 7
3. Increase FDIC Insurance Limits on Deposits to $250,000 from $100,000
4. Establish Financial Oversight Board• Includes Treasury Secretary, Fed Chairman and others TBD
Federal Government FinancialServices Rescue Package
Source: Insurance Info. Inst. research.
5. Conversion of Last 2 Remaining Investment Banks (Goldman Sachs and Morgan Stanley) to Bank Holding Companies• Recognition that Wall Street as it existed for decades is dead• High leverage investment bank model no longer viable in
current market environment• New entities will be subject to stringent federal regulation in
exchange for more access to federal dollars/liquidity facilities• Capital and liquidity requirements will be greatly enhanced• Reduced leverage means new entities will be less profitable
Other Recent Provisions (cont’d)
Liquidity Enhancements Implemented by Fed Due to Crisis
• Lowered Interest Rates for Direct Loans to Banks Federal funds rate cut from 5.5% in mid-2007 to 1.5% now Most recent cut from 2.0% to 1.5% globally coordinated on Oct. 7
• Injected Funds Into Money Markets• Increased FDIC Insurance Limits to $250,000 from $100,000• Coordinated Exchange Transactions w/Foreign Central Banks• Injected Cash Directly Into Banks; Will Take Ownership Stake• Created New and Expanded Auction & Lending Programs for
Banks e.g., Term Auction Facility expanded to $900B
• Started Direct Lending to Investment Banks for the First Time Ever
• Authorized Short-Term Lending to Fannie/Freddie, Backstopping a Treasury Credit Line
Source: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research as of Oct. , 2008.
Why Have Credit Markets Frozen & Why Are They So Hard to Thaw?
1. CRISIS OF CONFIDENCE: Banks are Fearful of Lending to Each Other as Well as Even Highly-Rated Corporate Risks Lehman and bank bankruptcies have deeply damaged faith in the
financial integrity of financial institutions Fear has spread to European banks Concern that US actions are insufficient and Europe’s too uncoordinated CONSEQUENCES: Lending is shriveling and LIBOR is rising
2. DELEVERAGING: Banks & Investors Want to Reduce Debt Issuing new loans, even short term, slows purge of debt from balance
sheets
3. TANGLED WEB OF RISK: Financial Innovations Designed to Spread and Hedge Against Risk Obscure Where Risk is Held an in What AmountsGenesis of the Systemic Risk The packaging, securitization and global sale of collateralized debt
obligations (CDOs) such as mortgage backed securities (MBS) has made every financial institution in the world vulnerable
Explosive and widespread use of derivative hedges such as credit default swaps create large numbers of potentially vulnerable counterpartiesSource: Wall Street Journal, 10/7/08, p. A2; Insurance Information Institute research.
Positive Signs & Silver Liningsin the Economy
1. CREDIT THAW: Banks are beginning to lend to each other and to others in unsecured credit markets Key interest rates falling (LIBOR)
2. DELEVERAGING: Banks, Businesses & Consumers reducing debt loads to more manageable levels
3. ENERGY PRICES FALLING: Oil prices are down more than 50% and gas prices down about 33% Falling energy prices are potent economic stimulus and confidence builder Helps all industries
4. INFLATION THREAT WANING: Falling energy, commodities prices will help consumers and cut off price spiral Less erosion in real wages
5. AFFORDABILITY IN HOUSING: Rapidly falling home prices will attract more buyers, more quickly Critical to clear away excess inventory, stem foreclosures
Source: Insurance Information Institute
The Deleveragingof America
Economic Downdraft and Regulatory Questions
Leverage Ratios for InvestmentBanks and Traditional Banks*
33.0
24.3
23.3
21.5
15.4
13.3
12.4
10.8
10.5
44.0
0 10 20 30 40 50
Merrill Lynch
Morgan Stanley
Goldman Sachs
Lehman Brothers
Fannie Mae
Citibank
JP Morgan Chase
Wells Fargo
Wachovia
Bank of America
*Based on data for last quarter reported (May or June 2008).Source: “The Perils of Leverage,” North Coast Investment Research, Sept. 15, 2008
Investment bank leverage ratios were extremely high.
Lehman filed for bankruptcy 9/15
Merrill merged with JP Morgan Chase
Goldman and Morgan converted to bank holding companies
How Does Leverage Work?
• Example of Non-Leverage Transaction Buy 1 share of stock for $100 Price of share rises to $110 RETURN = $10 or 10%
• Leveraged Transaction Invest $10 and borrow $90 Stock rises to $110 RETURN = $10 or 100% (less borrowing costs)
• This Pleasant Arithmetic Works Equally Unpleasantly in the Opposite Direction
• Declining asset values, seizing of credit markets made such borrowing impossible and the operating model of investment banks nonviable
Source: Insurance Information Institute.
Investment banks and others juiced their returns
by making big, bad bets with (mostly) borrowed
money on mortgage securities
Credit Default Swaps: Notional Value Outstanding, 2002:H2 – 2008:H1*
*End of calendar half (H1 = June 30, H2 = December 31).
Source: International Swaps and Derivatives Association: http://www.isda.org/statistics/recent.html
$1.6 $2.7 $3.8 $5.4$8.4
$12.4$17.1
$26.0
$34.4
$45.5
$62.2
$54.6
$0
$10
$20
$30
$40
$50
$60
$70
02:H2 03:H1 03:H2 04:H1 04:H2 05:H1 05:H2 06:H1 06:H2 07:H1 07:H2 08:H1
$ TrillionsAt year end 2007, the
notional value of CDS’s outstanding was $62.2
trillion or 4.5 times US GDP, up nearly 40 fold from 2002.
The 12% decline in 08:H1 was the first since 2001.
NY Insurance Superintendant Eric Dinallo is considering regulation of CDS’s as
insurance (would reverse 2000 decision that CDS’s
are not insurance)
0%
3%
6%
9%
12%
15%
20
04
:Q1
20
04
:Q2
20
04
:Q3
20
04
:Q4
20
05
:Q1
20
05
:Q2
20
05
:Q3
20
05
:Q4
20
06
:Q1
20
06
:Q2
20
06
:Q3
20
06
:Q4
20
07
:Q1
20
07
:Q2
20
07
:Q3
20
07
:Q4
20
08
:Q1
20
08
:Q2
Home Mortgage Consumer Credit Business Corporate
Percent Change in Debt Growth(Quarterly since 2004:Q1, at Annualized Rate)
Source: Federal Reserve Board, at http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
Deflation of housing bubble is very evident
Corporate deleveraging
Consumer desperation?
Ratio of Debt Service Payments to Disposable Income, 1980 – 2008:Q2
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
80q
181
q1
82q
183
q1
84q
185
q1
86q
187
q1
88q
189
q1
90q
191
q1
92q
193
q1
94q
195
q1
96q
197
q1
98q
199
q1
00q
101
q1
02q
103
q1
04q
105
q1
06q
107
q1
08q
1
HOUSEHOLD DELEVERAGING
In Q2 2008 13.85% of disposable personal income went to service
mortgage and consumer debt, down from a peak of 14.42% in Q4 2006,
Long-term ratio of debt service to income is 12.1%, well below where it is today
Source: Board of Governors of the Federal Reserve: http://www.federalreserve.gov/releases/housedebt/default.htm;
08q
2
% of Disposable Personal Income
Government Rescue Package of AIG
Motivation &Structural Details
AIG Rescue Package by the Fed
• AIG suffered a liquidity crisis due to large positions, mostly associated with Credit Default Swaps, related to mortgage debt through its AIG Financial Products division
• The losses at AIGFP brought AIG’s holding company to the brink of bankruptcy by Sept. 16 (AIG has 245 divisions, 71 are US domiciled insurers) Efforts to create large credit pool via private banks failed
• AIG’s separately regulated insurance subsidiaries were solvent at all times and met local capital requirements in all jurisdictions*
• Federal Reserve Agreed to Lend AIG $85 Billion to Prevent Bankruptcy, of which $70B has been borrowed (as of 10/10) 2-year term @ 850 bps over LIBOR (about 11 to 11.5%); 8% unborrowed Fed gets 79.9% stake in AIG (temporary nationalization) CEO Robert Willumstad replaced by former Allstate CEO Edward Liddy
• Proceeds from sale of non-core assets will be used to repay loan• New CEO says most insurance divisions are “core” *Sources: AIG press releases and regulator statements.
Expansion of AIG Rescue Package by the Fed on Oct. 8, 2008
• On Oct. 8 the Federal Reserve Bank of NY agreed to provide liquidity to AIG’s Securities Lending Program Fed will borrow investment grade fixed income securities from AIG’s
domestic life insurance companies, on commercial terms and conditions, in exchange for cash
Puts Fed into traditional lender of last resort position • Problem in the Securities Lending Program (SLP)
AIG lent securities to 3rd parties, receiving collateral in return Invested some of collateral in other assets whose value declined When borrowers of securities returned them, AIG had to make up
difference and sometimes couldn’t lend out securities for fresh collateral • NY Fed Authorized to Borrow $37.8B
AIG’s total securities lending obligations = $37.2B as of Oct. 6• Objective is to Provide Liquidity to SLP while Providing
Enhanced Credit Protection to NY Fed by Giving them Possession of Third Party Investment Grade Securities*
*Sources: AIG press releases; Wall Street Jounal and regulator statements.
Rational for Federal Reserve’s Rescue Package of AIG
• “Too Big to Fail” Doctrine Applied to Insurance for First Time
• AIG is the Largest Insurer in the US and One of the Top 5 Globally: Internationally Disruptive Disorderly unwinding of CDS positions (which guarantee large
amounts of debt) would have had large negative consequences on already fragile credit markets
• Fear Was that Generally Healthy Insurance Operations Affecting Millions of People and Businesses Would Have to Be Sold at Fire Sale Prices
• Loan Allowed Time for an Orderly Sale of Assets and a Minimal Disruption on Credit Markets while also Protecting Policyholders
• New CEO says most insurance divisions are “core” Source: Insurance Information Institute research.
AIG Actions to Date*• On October 3, New CEO Ed Liddy Announced Plan to Sell Assets and Focus
on Core Commercial P/C Operations Worldwide P/C premiums totaled approximately $40B in 2007
• Overall Impact May Be More Transformational for Global Life Industry• Will Sell:
All of Its US Life Insurance Operations Valued at as much as $24B**
Sell some foreign life operations, which collectively generated $64.5B in premiums, deposits and other considerations in 2007 (24.5% in Japan and 37.5% in Europe) Involves sale of American Life Ins. Co. (operates in Japan, Europe and Middle East &
elsewhere) as well as other life units operating in Japan and Taiwan Will retain majority stake in another life insurer operating in China and other Asian
countries May sell personal lines business (excluding Private Client Group)
Accounts for $4.8 billion in premiums ($4.1 billion excluding Private Client Group) and 3% market share in personal auto.
AIG's personal lines business (excluding its PCG is 73% direct and 27% agency*** Wind down AIG Financial Products (root of AIG’s problems), try to extract value Will sell aircraft leasing and asset management businesses Other, small insurance units and minor assets to be sold as well
*As of Oct. 5, 2008; **UBS analyst Andrew Klingerman (WSJ, Oct. 4, 2008) * **Barclay’s Capital, Oct. 3, 2008Sources: AIG, Wall Street Journal (Oct. 4, 2008), Insurance Information Institute research.
“Rescue” Treatment of AIGvs. Eight Large Banks
AIG 8 Large Banks*
U.S. Treasury’s ownership
79.9% of common stock Non-voting preferred stock; no dilution of common stock ownership
Interest/DividendsPayable toTreasury
•8.5% on unused line of credit up to $85 billion•8.5%+3-month LIBOR on borrowed money (total recently = 12.92%)•2% one-time fee on credit line
•5% on preferred stock**, rising to 9% after 5 years•Can borrow from the Fed’s discount “window” for as little as 1.75%
Time limit to pay off credit line
2 years Indefinite
“Toxic” assets
Unclear whether can sell to Treasury
Can sell to Treasury
*Citigroup, Bank of America (includes Merrill Lynch), JPMorganChase, Wells Fargo, Goldman, MorganStanley, State Street, Bank of New York Mellon. **$25 billion for Citi, BoA, JPMorgan, and Wells; $10 billion for Goldman and Morgan Stanley; $3 billion for BONY; $2 billion for State Street.
Leading U.S. Writers of P/C Insurance by DWP, 2007 ($ Billions)1
1Before reinsurance transactions, excluding state funds.
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via HighlineData LLC.
$49.4
$37.7
$29.1 $27.7$22.2 $20.2
$16.1 $15.4 $14.0 $11.5
$0
$10
$20
$30
$40
$50
State FarmIL Group
AIG ZurichInsurance
Group
AllstateInsurance
Group
TravelersGroup
LibertyMutual
InsuranceGroup
NationwideGroup
BerkshireHathawayIns. Group
ProgressiveGroup
HartfordFire &
CasualtyGroup
Direct Written Premiums (DWP) $ Billions
AIG is the second largest p/c insurer in the US and the
largest commercial insurer (11% markets share)
Leading U.S. Writers of Life Insurance By DWP, 2007 ($ Billions)1
1Premium and annuity totals, before reinsurance transactions, excluding state funds.
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via HighlineData LLC.
$53.0 $51.9
$42.3$38.0
$32.4$29.8 $29.7
$22.7 $21.9 $21.5
$0
$10
$20
$30
$40
$50
$60
AIG MetropolitanGroup
Prudential ofAmerica
ING AmericaInsuranceHoldingGroup
Hartford Fire& Casualty
Group
John HancockGroup
Aegon USAHoldingGroup
PrincipalFinancial
Group
New YorkLife Group
LincolnNational
Direct Written Premiums (DWP) $ Billions
AIG is the largest life insurer in the US in addition to being the
second largest p/c insurer
AFTERSHOCK: Regulatory Response
Could Be Harsh
All Financial Segments Including InsurersWill Be Impacted
Incurred Liabilities of the Federal Government Due to Financial Crisis
$700
$200
$29$122.8
$0
$100
$200
$300
$400
$500
$600
$700
$800
Mortgage SecurityBuyouts & Bank
Stakes
Fannie/FreddieTakeover
AIG Loans Bear Stearns IlliquidAsset Assumption
$ B
illi
ons
*As of October 10, 2008. Amounts reflect maximum losses under terms at time of announcement.Source: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research. AIG amount consistent of$85B loan on Sept. 16 and additional $37.8B on Oct. 8.
The Fed (and hence taxpayer) are now exposed to as much as
$1.047 trillion in new debt tied to the current financial crisis*
$ Billions
$250B for Bank
Stakes
From Hubris to the Humblingof American Capitalism?
“Government is not the solution to our problem, government is the problem.”
--Ronald Reagan, from his first inaugural address, January 20, 1981
From Hubris to the Humblingof American Capitalism?
--President George W. Bush, Sept. 19, 2008, on the $700 billion financial institution bailout
“Given the precarious state of today’s financial markets, andtheir vital importance to the dailylives of the American people,Government intervention is notOnly warranted, it is essential.”
Post-Crunch: Fundamental Issues To Be Examined Globally
Source: Ins. Info. Inst.
• Failure of Risk Management, Control & Supervision at Financial Institutions Worldwide: Global Impact Colossal failure of risk management (and regulation) Implications for Enterprise Risk Management (ERM)? Misalignment of management financial incentives
• Focus Will Be on Risk Controls: Implies More Stringent Capital & Liquidity Requirements Data reporting requirements also likely to be expanded Non-Depository Financial Institutions in for major regulation Changes likely under US and European regulatory regimes Will new regulations be globally consistent? Can overreactions be avoided?
• Accounting Rules Problems arose under FAS, IAS Asset Valuation, including Mark-to-Market Structured Finance & Complex Derivatives
• Ratings on Financial Instruments New approaches to reflect type of asset, nature of risk
Post-Crunch: Fundamental Regulatory Issues & Insurance
Source: Insurance Information Institute
• Federal Encroachment on Regulation of Insurance in Certain Amid a Regulatory Tsunami $123 billion in loans to AIG makes increased federal involvement in
insurance regulation a certainty States will lose some of their regulatory authority What Feds get/what states lose is unclear
• Removing the “O” from “OFC”? Treasury in March proposed moving solvency and consumer
protection authority to a federal “Office of National Insurance” Moving toward more universal approach for regulation of financial
services, perhaps under Fed/Treasury Is European (e.g., FSA) approach in store? Treasury proposed assuming solvency and consumer protection roles
while also eliminating rate regulation Expect battle over federal regulatory role to continue to be a divisive
issue within the industry States will fight to maximize influence, arguing that segments of the
financial services industry under their control had the least problems
Post-Crunch: Fundamental Regulatory Issues & Insurance
Source: Insurance Information Institute
• Unclear How Feds Will Approach and Implement New Regulations on Financial Services Industry Option A: Could take “Big Bang” Approach and pass massive,
sweeping reform measure that draws little distinction between various segments of the financial services industry
Option B: Limited legislation pertaining to all segments with detailed treatment of each segment
• Removing the “O” from “OFC”? Treasury in March proposed moving solvency and consumer
protection authority to a federal “Office of National Insurance” Moving toward more universal approach for regulation of financial
services, perhaps under Fed/Treasury Is European (e.g., FSA) approach in store? Treasury proposed assuming solvency and consumer protection roles
while also eliminating rate regulation Expect battle over federal regulatory role to continue to be a divisive
issue within the industry States will fight to maximize influence, arguing that segments of the
financial services industry under their control had the least problems
Reasons Why Insurers Are Better Risk
Managers Than Banks
Risk ManagementMatters
6 Reasons Why P/C Insurers Have Fewer Problems Than Banks
1. Superior Risk Management Model Insurers overall approach to risk focuses on underwriting discipline,
pricing accuracy and management of potential loss exposure Banks eventually sought to maximize volume, disregarded risk
2. Low Leverage Insurers do not rely on borrowed money to underwrite insurance
3. Conservative Investment Philosophy High quality portfolio that is relatively less volatile and more liquid
4. Strong Relationship Between Underwriting and Risk Bearing Insurers always maintain a stake in the business they underwrite Banks and investment banks package up and securitize, severing the link
between risk underwriting and risk bearing, with disastrous consequences
5. Tighter Solvency Regulation Insurers are more stringently regulated than banks or investment banks
6. Greater Transparency Insurers are an open book to regulators and the public
Source: Insurance Information Institute
THE ECONOMIC STORM
Weakening Economy, Threat of Inflation
3.7%
0.8%
1.6%
2.5%
3.6%
2.9%2.8%
2.0%
1.5%
0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Real Annual GDP Growth, 2000-2009F
March 2001-November
2001 recession
Recession is likely second half 2008 into first half 2009
* Red bars are actual; Yellow bars are forecastsSources: US Department of Commerce (actual), Blue Economic Indicators 10/08 (forecasts).
3.7
%
0.8
% 1.6
% 2.5
%
3.6
%
3.1
%
2.9
%
0.1
%
4.8
%
4.8
%
0.9
%
2.8
%
-0.3
%
-0.1
%
1.2
% 2.1
%
2.5
%
-1.1%
-0.2%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
Real GDP Growth*
*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/08; Insurance Information Institute.
Recession likely began Q2:08. Economic toll of credit
crunch, housing slump, labor market contraction and high
energy prices is growing
Real GDP Growth by State, 2006-2007
Growth in Southeast is weak
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
January 2000 through August 2008
Unemployment will likely continue to approach 6% during this cycle, impacting payroll sensitive p/c and non-life exposures
Source: US Bureau of Labor Statistics; Insurance Information Institute.
August 2008 unemployment jumped to 6.1%, its highest
level since Sept. 2003
Unemployment Rate:On the Rise
Average unemployment rate since 2000 is 5.0%
Previous Peak: 6.3% in June 2003
Trough: 4.4% in March 2007
Au
g-08
U.S. Unemployment Rate,(2007:Q1 to 2009:Q4F)*
4.7%
4.6% 4.
7%
4.5%
4.5%
4.5% 4.
6% 4.8% 4.
9%
5.3%
6.0%
6.3%
6.7% 6.
9% 7.0%
7.0%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
06:Q1 06:Q2 06:Q3 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
* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/08); Insurance Info. Inst.
Rising unemployment will erode payrolls and workers
comp’s exposure base.
Unemployment is expected to peak at about 7% in the
second half of 2009.
4.1%4.7% 4.8% 4.9%
6.1% 6.3% 6.5% 6.8%7.6% 7.7%
11.8%
0%
2%
4%
6%
8%
10%
12%
14%
WV LA AR AL US GA FL KY SC MS PR
Unemployment Rates in the Southeast, August 2008
Unemployment rates in the Southeast are generally higher
than that of the US overall
Source: US Bureau of Labor Statistics.
Total Private Employment* Grew by25½ Million Workers from 1991 to 2008
89.7
89.9 91
.7 94.9 97
.7 100.
1 103.
0 106.
0 108.
6
108.
8
108.
2
115.
4
115.
2
110.
9 114.
0
111.
8
111.
0
109.
8
80
90
100
110
120
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
*seasonally adjusted at mid-yearSource: U.S. Bureau of Labor Statistics, at http://data.bls.gov/cgi-bin/surveymost
Millions
The US economy added 25.5 million jobs between 1991 and
2008, but job growth has recently stagnated, impacted payrolls and the workers comp exposure base
Monthly Change Employment*(Thousands)
-76-83 -88
-67
-47
-100
-67 -73
-159-180
-160
-140
-120
-100
-80
-60
-40
-20
0
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08
Job losses now total 760,000 (from January through
September 2008)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute
Average Weekly Real Earnings in Private Employment Were Flat from 1999 to 2008$2
59.2
$257
.9
$258
.3
$260
.1
$258
.0
$260
.7 $264
.3
$271
.5 $276
.1 $279
.4
$279
.3
$281
.2
$276
.1
$275
.1
$277
.3
$276
.9
$275
.0
$276
.0
$250
$260
$270
$280
$290
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Sources: U.S. Bureau of Labor Statistics; I.I.I.
(at mid-year)
Constant 1982 dollars
Virtually all of the real wage growth occurred between 1995 and 1999 and has now stagnated
New Private Housing Starts,1990-2019F (Millions of Units)
2.07
1.80
1.36
0.96
0.90
1.17
1.50
1.66
1.66 1.68
1.62
1.48
1.35
1.46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.60
1.71
1.85
1.96
0.80.91.01.11.21.31.41.51.61.71.81.92.02.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F09F10F11F12F13F14F 15-19F
Exposure growth forecast for HO insurers is dim for 2008/09
Impacts also for comml. insurers with construction risk exposure
New home starts plunged 34% from 2005-2007;
Drop through 2009 trough is 57% (est.)—a net annual decline of
1.17 million units
I.I.I. estimates that each incremental 100,000 decline in housing starts costs
home insurers $87.5 million in new exposure (gross premium). The net
exposure loss in 2008 vs. 2005 is estimated at about $1 billion.
Source: US Department of Commerce; Blue Chip Economic Indicators (10/08); Insurance Information Inst.
16.216.4
16.916.916.6
17.117.5
17.817.4
16.516.1
13.813.5
14.7
15.515.8
16.1
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07F 08F 09F 10F 11F 12F 13F 14F 15-19F
Weakening economy, credit crunch and high gas prices are hurting
auto sales
New auto/light trick sales are expected to experience a net
drop of 3.3 million units annually by 2008 compared
with 2005, a decline of 18.3%
Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth
than problems in the housing market will on home insurers
Auto/Light Truck Sales,1999-2019F (Millions of Units)
Source: US Department of Commerce; Blue Chip Economic Indicators (10/08); Insurance Information Inst.
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45Wage & SalaryDisbursementsWC NPW
*Average of quarterly figures.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Net Written Premiums
7/90-3/91
Shaded areas indicate recessions
3/01-11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
Weakening wage and salary growth is
expected to cause a deceleration in workers comp
exposure growth
$1
,08
2
$1
,14
4
$1
,22
6
$1
,30
7
$1
,36
8
$1
,40
5
$1
,36
7
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
03 04 05 06 07 08F 09F
-4%
-2%
0%
2%
4%
6%
8%
% C
ha
ng
e
Nonresidential Fixed Investment% Change Nonresidential Fixed Investment
Nonresidential Fixed Investment,* 2003 – 2009F (Billions of 2000 $)
Sharp dip in business investment growth in 2007-2009 will slow commercial
exposure growth. Investment is projected to
fall by 2.8% in 2009
*Nonresidential fixed investment consists of structures, equipment and software.
Sources: US Bureau of Economic Analysis (Historical), Blue Chip Economic Indicators (10/08) for forecasts.
Non
resi
den
tial F
ixed
In
vest
men
t ($
Bill
)
Total Industrial Production,(2007:Q1 to 2009:Q4F)
1.5%
3.2%3.6%
0.3% 0.4%
-3.1%-2.5%
-2.1%
-0.8%
0.8%
2.1%2.6%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/08); Insurance Info. Inst.
Industrial production contracted sharply
during Q2 2008 and is expected to shrink through early 2009
Industrial production affects exposure both directly and indirectly
5.2%
-0.9
%-7
.4%
-6.5
%-1
.5%
1.8%
4.3%
18.6
%20
.3%
5.8%
0.3%
-1.6
%-1
.0%
-1.8
%-1
.0%
3.1%
1.1%
0.8%
0.4%
0.6%
-0.4
%-0
.3%
1.6%
5.6%
13.7
%7.
7%1.
2%-2
.9% -0
.5%
-3.4
%-4
.9%
-10%
-5%
0%
5%
10%
15%
20%
25%7
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
8F
Rea
l N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Rea
l G
DP
Gro
wth
Real NWP Growth Real GDP
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 8/08; Insurance Information Inst.
The Housing CrashCollapse of Home Price Bubble
Will Influence Auto &Home Purchases
Case-Schiller Home Price Index: 20 City Composite
0
50
100
150
200
250
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
January 2000 = 100
Peak in July 2006 at 206.52, meaning home prices had
more than doubled between Jan. 2000 and July 2006
July 2008 index value was 166.23, meaning home prices were 19.5%
below their July 2006 peakHome prices are
approximately where they were in mid 2004
Source: Standardandpoors.com (SPCS20R Index); Insurance Info. Institute
Jul-
08
Loss of home equity is hurting car sales
Change in Home Values from July 2006 Housing Bubble Peak, by City*
-34.
4%
-34.
2%
-32.
9%
-30.
9%
-29.
7%
-27.
9%
-26.
5%
-24.
4%
-21.
8%
-19.
5%
-16.
0% -11.
5%
-10.
7%
-10.
4%
-8.6
%
-7.2
%
-5.4
%
-3.0
%
-1.9
%
-1.8
%
4.1%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Phoen
ix
Las V
egas
Mia
mi
San D
iego
Los A
ngeles
San F
rancis
co
Tampa
Detro
it
Was
hing
ton
Compos
ite-2
0
Min
neap
olis
Clevela
nd
Chica
go
New Y
ork
Bosto
n
Atlant
a
Denve
r
Portla
nd
Seattl
e
Dallas
Charlo
tte
Home prices are falling across the country, down 19.5% on average in July 2008
*Calculated as of July 2008 (latest available) by III from monthly Case-Schiller price index data. Date of maximum price varies by city (July 2006 for 20-city composite: SPCS20R Index).Source: Case-Schiller Home Price Index at Standardandpoors.com; Insurance Info. Institute
Home equity is a common source of wealth used to
fund car purchases
Home Price History:Anatomy of a Bubble
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Annual Change on a Monthly Basis: Jan. 1988 – Jul. 2008
Source: Standardandpoors.com (CSXR series); Insurance Info. Institute
Jan. 1988
Early stages of S&L fallout; Credit tightens
post-Oct. 1987 crash
April 1991
Max pace of decline.
S&L bank shakeout; Recession, Gulf War,
Energy price spike
Aug. 1990
Price decline begins.
Gulf War, Energy price spike, Recession
March 1996
House price recovery begins after 6 years of falling or flat prices.
Feb. 2002
Home price increases slow post 9/11 and tech bubble collapse; recession ends late 2001. Stock markets
down; Lowest interest rates in 40 years begin to fuel massive real estate
and credit bubble
Jul. 2004
Peak annual increase reached: 20.5%;
Credit standards deteriorate rapidly; Explosion in subprime loans, MBS, CDS
Jan. 2007
Home prices
begin to fall
Jul. 2008
Home prices plunge
17.5% vs. July 2007
Inflation Overview
Pressures Claim Costs, Expands Probable & Possible Max Losses
Annual Inflation Rates(CPI-U, %), 1990-2009F
4.9 5.1
3.0 3.2
2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
3.8
2.8
4.94.4
2.52.82.9
2.4
0
1
2
3
4
5
6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F
*12-month change September 2008 vs. September 2007 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, October 10, 2008. (forecasts)
In September 2008, on a year-over-year basis inflation was 4.9% -- still high but down from its peak of 5.6% in August
Do Changes in Miles Driven AffectAuto Collision Claim Frequency?
7.00
6.81
6.59
6.80 6.78
6.91
6.65
6.32
6.035.93
5.71
5.84 5.82
5.5
6.0
6.5
7.0
96 97 98 99 00 01 02 03 04 05 06 07 08*
Pa
id C
laim
Fre
q
2400
2500
2600
2700
2800
2900
3000
3100
Bil
lio
ns
of
Mil
es D
rive
n
Collision Claim FrequencyBillions of Vehicle Miles
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08juntvt/08juntvt.pdf; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: First Half 2008, published October 1, 2008 and earlier reports. 2008 figure is for 4 quarters ending Q2 2008.
Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100
Medical & Tort Cost Inflation
Amplifiers of Inflation, Major Insurance Cost Driver
Consumer Price Index for Medical Care vs. All Items, 1960-2007
207.3
351.1
0
100
200
300
400
60 61 62 63 64 65 66 67 68 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
Ind
ex V
alu
e (1
982-
84=
100)
All Items Medical Care
Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.
(Base: 1982-84=100)
Inflation for Medical Care has been surging
ahead of general inflation (CPI) for 25
years. Since 1982-84, the cost of medical care has
more than tripled
Soaring medical inflation is among the most serious
long-term challenges facing
casualty, disability and LTC insurers
P/C INSURANCE PROFITABILITY
In the Midstof a Cyclical Decline
P/C Net Income After Taxes1991-2009F ($ Millions)*
$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
$61,
940
$27,
866
$25,
000
-$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
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
08F
09F
*ROE figures are GAAP; 1Return on avg. surplus. 2008 numbers are annualized based on H1 actual.Sources: A.M. Best, ISO, Insurance Information Inst.
2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.3%2008 ROAS = 5.4%*
Insurer profits peaked in 2006.
PRICING TRENDS
Under Pressure
$651 $6
68 $691 $7
05
$703
$685
$690 $7
26
$781 $8
24 $859
$834
$837
$840
$829
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05 06* 07* 08*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2006-2008 based on CPI data.
Countrywide auto insurance expenditures are expected to increase about 2.5% in 2008,
highest since 2002/03
Lower underlying frequency and modest severity have kept auto insurance costs in check
$418$440$455
$481$488$508
$536
$593
$668
$729$760$775$764$757
$400
$450
$500
$550
$600
$650
$700
$750
$800
95 96 97 98 99 00 01 02 03 04 05 06* 07* 08*
Average Expenditures on Homeowners Insurance**
*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute estimates 2006-2008 based on CPI data.
Countrywide home insurance
expenditures are expected to rise by an estimated 2% in 2008
Homeowners in non-CAT zones have seen smaller increases than
those in CAT zones
Average Commercial Rate Change,All Lines, (1Q:2004 – 2Q:2008)
-3.2
%
-5.9
%
-7.0
%
-9.4
%
-9.7
% -8.2
%
-4.6
% -2.7
%
-3.0
%
-5.3
%
-9.6
%
-11.
3%
-11.
8%
-13.
3% -12.
0%
-13.
5%
-12.
9%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
-0.1
% A flattening in the magnitude of price declines is evident
CAPACITY/SURPLUS
Capital/ Surplus Falling
from 2007 Peak
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
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
U.S. Policyholder Surplus: 1975-2008:H1*
Source: A.M. Best, ISO, Insurance Information Institute. *As of June 30, 2008
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity as of 6/30/08 was $505.0, down 2.5% from 12/31/07 was $517.9B, but 80% above its 2002 trough.
Recent peak was $521.8 as of 9/30/07
The premium-to-surplus fell to $0.85:$1 at year-end 2007, approaching
its record low of $0.84:$1 in 1998
INVESTMENT OVERVIEW
More Pain, Little Gain
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
*
Source: Ibbotson Associates, Insurance Information Institute. *Through October 17, 2008.
Total Returns for Large Company Stocks: 1970-2008*
S&P 500 was up 3.53% in 2007, but down 36.0% so far in 2008*
Markets were up in 2007 for the 5th consecutive year
before the crash of 2008
Property/Casualty Insurance Industry Investment Gain1
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$63.6
$24.8
$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05* 06 07
08H1
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
Investment gains are off in 2008 due to lower yields and
poor equity market conditions.
P/C Insurer Net Realized Capital Gains, 1990-2008:H1
$2.88
$4.81
$9.89
$1.66
$6.00
$9.24
$10.81
$13.02
$16.21
$6.63
-$1.21
$6.61
$8.97
-$1.07
$18.02
$3.52
$9.70$9.13
$9.82
-$2
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
08:H
1
Sources: A.M. Best, ISO, Insurance Information Institute.
Realized capital gains exceeded $9 billion in
2004/5 but fell sharply in 2006 despite a strong stock market. Nearly $9 billion again in 2007, but $-1.1
billion in 2008:H1.
$ Billions
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well
P/C Insurer Impairments,1969-2007
815
12
711
934
913
12
19
916
14
13
36
49
31 3
449
49
54
60
58
41
29
15
12
31
18 19
49 50
47
35
18
13 15
4
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
The number of impairments varies significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
Source: A.M. Best; Insurance Information Institute
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007
90
95
100
105
110
115
120
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
Co
mb
ined
Ratio
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Imp
air
men
t R
ate
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly correlated
underwriting performance and could reached a
record low in 2007
Source: A.M. Best; Insurance Information Institute
2007 impairment rate was a record low 0.12%, one-seventh the 0.8% average since 1969;
Previous record was 0.24% in 1972
Reasons for US P/C Insurer Impairments, 1969-2005
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Catastrophe Losses8.6%
Alleged Fraud11.4%
Deficient Loss
Reserves/In-adequate Pricing62.8%
Affiliate Problems
8.6%
Rapid Growth
8.6%
2003-2005 1969-2005
Deficient reserves,
CAT losses are more important factors in
recent years
Reinsurance Failure3.5%
Rapid Growth16.5%
Misc.9.2%
Affiliate Problems
5.6%
Sig. Change in Business
4.6%
Deficient Loss
Reserves/In-adequate Pricing38.2%
Investment Problems*
7.3%
Alleged Fraud8.6%
Catastrophe Losses6.5%
CATASTROPHICLOSS
Southeast is Very Vulnerable
Most of US Population & Property Has Major CAT Exposure
Is Anyplace
Safe?
U.S. Insured Catastrophe Losses*$7
.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$6.7
$22.
0$1
00.0
$61.
9
$9.2
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
08**
20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.**Based on preliminary PCS data through June 30. PCS $1.8B loss of for Gustav. $9.8B for Ike of 9/22.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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions2008 CAT losses already exceed 2006/07 combined. 2005 was by
far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Top 12 Most Costly Disasters in US History, (Insured Losses, $2007)
$4.0 $5.0 $6.0 $7.0 $7.8 $8.2 $9.8 $10.9 $10.9
$22.0 $22.9
$43.6
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Ike(2008)*
Wilma(2005)
Northridge(2004)
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
$ B
illi
ons
*Based on average of midpoints of range estimates from risk modelers AIR, RMS and Eqecat as of 9/15/08.Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.
10 of the 12 most expensive disasters in US
history have occurred since 2004
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2%
Tornadoes, $77.3 , 26.0%
All Tropical Cyclones, $137.7 ,
46.3%
Civil Disorders, $1.1 , 0.4%
Utility Disruption, $0.2 , 0.1%
Water Damage, $0.4 , 0.1%Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 , 6.4%
Winter Storms, $23.1 , 7.8%
Terrorism, $22.3 , 7.5%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 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.
Insured disaster losses totaled $297.3 billion from
1987-2006 (in 2006 dollars). Wildfires accounted for
approximately $6.6 billion of these—2.2% of the total.
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
Northeast states have significant exposure. In 2004
Florida had more insured coastal exposure—at nearly $2 trillion than any other state. Future “Mega-Losses” are
UNAVOIDABLE.
Total Value of Insured Coastal Exposure (2007, $ Billions)
$2,378.9$895.1
$772.8$635.5
$479.9$224.4
$191.9$158.8$146.9$132.8
$92.5$85.6
$60.6$55.7$51.8$54.1
$14.9
$2,458.6
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
In 2007, Florida still ranked as the #1 most exposed state to hurricane loss, with $2.459 trillion exposure, an increase of $522B or 27% from
$1.937 trillion in 2004.
The insured value of all coastal property was $8.9 trillion in 2007, up 24% from $7.2 trillion in 2004.
$522B increase since 2004, up 27%
Insured Losses from Top 10 Hurricanes Since 1900 & Katrina Adjusted for Inflation, Growth in Coastal
Properties, Real Growth in Property Values & Increased Property Insurance Coverage
$10.1 $11.0 $12.4 $12.6 $13.1 $14.5
$20.8 $21.1
$31.3
$41.1
$65.3
$0
$10
$20
$30
$40
$50
$60
$70
Number 9(1909,
FL)
Hazel(1954,NC)
Number 4(1938,NY)
Number 2(1919,
FL)
Number 4(1928,
FL)
Bestsy(1965,LA)
Number 2(1915,TX)
Number 1(1900,TX)
Andrew(1992,
FL)
Katrina(2005,LA)*
Number 6(1926, FL)
$ B
illi
ons
The p/c insurance industry will likely experience a $20B+ event approximately every 10-12 years, on average—mostly
associated with hurricanes
*ISO/PCS estimate as of June 8, 2006.Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005; Insurance Info. Institute.
(Billions of 2005 Dollars) Great Miami Hurricane
Galveston Storm
Government as Property Insurer of
Last Resort
Credit and Economic Crisis Increases Vulnerability
U.S. Residual Market Exposure to Loss (Billions of Dollars)
Source: PIPSO; Insurance Information Institute
$54.7
$150.0
$281.8$244.2
$292.0
$372.3$430.5
$770.4
$656.7
$221.3
$419.5
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007
Exposure to Loss
In the 17-year period between 1990 and 2007, total exposure to loss in the
residual market (FAIR & Beach/Windstorm) Plans has surged
132 fold from $54.7bn in 1990 to $770.4bn in 2007.
Florida Citizens Annual Exposure to Loss (Billions of Dollars)
*PIPSO Data. **Florida Citizens as of July 2008.Source: PIPSO; Florida Citizens; Zurich American Insurance Co; Insurance Information Institute
$439.1$485.1
$373.7
$210.6$206.7$195.5$154.6
$0
$100
$200
$300
$400
$500
$600
2002* 2003 2004 2005 2006 2007 2008**
Exposure to Loss
Since its creation in 2002, total exposure to loss in Florida Citizens has increased by 184 percent, from $154.6bn to $439.1bn in 2008.
Credit crisis likely makes ability to raise cash for any Cat Fund shortfall more
difficult and more expensive
Beach and Windstorm PlansExposure to Loss ($ Billion), 2007
*As of Aug. 31, 2008
Source: PIPSO; NCIUA; TWIA.
$66.6
$15.8
$67.8
$5.6
$0
$10
$20
$30
$40
$50
$60
$70
$80
AL MS NC* SC TX*
Exposure to Loss
NA
FHCF: Capacity Shortfall, But Strong Liquidity
Source: SBAFLA; FHCF
• FHCF total reimbursement capacity est. at $13.3 billion for 12mth period and $11.8 billion if bonding limited to 6mth period
• Ests. reflect a shortfall from FHCF’s theoretical capacity of $10 billion to $15 billion
• Shortfall in FHCF capacity estimate is the result of: Current conditions in the financial markets due to liquidity crisis Increases in interest rates Slight reduction in FHCF’s assessment base Expenses paid out of the fund for $4 billion put option agreement with
Berkshire Hathaway Investment losses
• But – the FHCF has a strong liquidity position: $2.8 billion in year-end cash for payment of claims Plus $3.5 billion in five-year floating rate notes totaling $6.5 billion Additional $4 billion from Berkshire Hathaway put option
Natural Catastrophe Plans (1)
Source: Insurance Information Institute
• Homeowners’ Defense Act of 2007 (H.R. 3355) (Co-authors Rep. Tim Mahoney (D-FL) and Rep. Ron Klein (D-FL)): Would create a national catastrophe fund Allow states to pool catastrophe risk and transfer risk to
private market via cat bonds or reinsurance Also create a federal loan program to provide funds to state
reinsurance plans both prior and after a disaster Bill passed House Nov. 2007, but is currently stalled in the
Senate (S. 2310)
• Allstate -- ProtectingAmerica.org: Created in 2005 by coalition of emergency management
officials, first responders, disaster relief experts, insurers and others
Propose establishing a national catastrophe fund to serve as financial backstop for state catastrophe funds
Backs H.R. 3355
Natural Catastrophe Plans (2)
Source: Insurance Information Institute
• The Hartford – Coastal Catastrophe Partnership: Seek to put risk back on private insurers Mandate flood insurance for all coastal homeowners Create a Federal and state-level reinsurance funds to backstop
losses by private insurers Establish untaxed savings accounts (“supplemental catastrophic
security accounts”) to pay for property insurance
• The Travelers, Nationwide and broker groups: Create Federally regulated “Coastal Hurricane Zone” from
Texas to Maine. Fed. Govt would not have a financial role, but would oversee
wind underwriting by private insurers, including pricing Federal reinsurance sold at cost for extreme events such as $100
billion+ hurricane Risk-based, actuarially sound rates using approved standards
and wind risk models Incentives for state and local governments to adopt federal
guidelines for appropriate building codes and land use planning.
Shifting Legal Liability & Tort
Environment
Is the Tort PendulumAbout to Swing?
The Nation’s Judicial Hellholes (2007)
Source: American Tort Reform Association; Insurance Information Institute
TEXAS
Rio Grande Valley and Gulf Coast
South Florida
ILLINOIS
Cook County West Virginia
Some improvement in “Judicial
Hellholes” in 2007
Watch ListMadison County, ILSt. Clair County, IL
Northern New Mexico
Hillsborough County, FLDelawareCalifornia
Dishonorable Mentions
District of ColumbiaMO Supreme Court
MI LegislatureGA Supreme Court
Oklahoma
NEVADA
Clark County (Las Vegas)
NEW JERSEY
Atlantic County (Atlantic City)
Business Leaders Ranking of Liability Systems for 2007
Best States1. Delaware2. Minnesota3. Nebraska4. Iowa5. Maine6. New Hampshire7. Tennessee8. Indiana9. Utah10. Wisconsin
Worst States41. Arkansas42. Hawaii43. Alaska
44.Texas45. California46. Illinois47. Alabama48. Louisiana49. Mississippi50. West Virginia
Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2007
ME, NH, TN, UT, WI
Drop-Offs
ND, VA, SD, WY, ID
Newly Notorious
AK
Rising Above
FL
Midwest/West has mix of good and bad states
REGULATORY & LEGISLATIVE
ENVIRONMENT
Significant DiversityAcross States
Rating of Auto/Home Insurance Regulatory & Operating Environment*
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WVVA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI
MDDE
AL
VT
NY
DC
SC
GA
TN
AL
FL
MS
ARNM
KYMOKS
SDWI
IN
OH
MT
CA
NV
UT
WY
CO
AK
Most states (25) get a “B”, but 7 got A’s, 10 got C’s (including DC), 5 earned D’s and 4 got F’s
*Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env.,form regulation, credit scores, territorial restrictions
= A= B= C= D= F
Source: James Madison Institute, Feb. 2008
Insurance Information Institute On-Line
THANK YOU FOR YOUR TIME AND
YOUR ATTENTION!