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TRANSCRIPT
Insurance Industry Overview & Outlook
Economic Challenges and Opportunities for 2013 and Beyond
AFP Insurance Client Conference
Miami, FL
October 16, 2012
Download at www.iii.org/presentations Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Reasons for Optimism, Causes for Concern in the Insurance
Industry
The Outlook for the Economy Is Still Cloudy, But the Outlook for
Insurance Could Improve
3
Reasons for Optimism, Causes for Concern in the Insurance Industry
Slow Economic Growth Will Persist through 2013
No Double Dip or Second Recession unless we go completely off the “Fiscal Cliff”
Economy is more resilient than commonly presumed
Consumer Confidence Has Improved
Consumer Spending is Recovering Gradually, Albeit Unevenly
Consumer and Business Lending Are Expanding, Albeit Fitfully
Housing Market Remains Weak but Has Bottomed Out
HousingConstruction will become a more important growth driver by mid-2013/2014
Private Sector Hiring is Consistently Positive for 33 Months
Acceleration in hiring is possible in 2013 compared to 2012
Government employment may be begin to turn positive
Interest Rates Remain Low (Fed to Keep Rates Lows Until mid-2015)
Good for borrowers; Challenge for savers and institutional investors like insurers
Major contributing factor to pension shortfalls
Inflation Is Up Marginally But Remains Under Control
Stock and Bond Markets More Stable, Less Volatile Compared to 2008/09
Eurozone Recession/ China Slowdown Don’t Push US into Recession
Eurozone does not (completely) disintegrate; Greece could exit
Political Uncertainty, Fiscal Cliff, Regulatory Uncertainty Loom Large in US
The Strength of the Global and US Economies Will Influence Insurer Growth Opportunities
4
Consumer Demand for Insurance
Products Should Increase
4
5
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 10/12; Insurance Information Institute.
2.7
%
0.5
%
3.6
%
3.0
%
1.7
%
-1.8
%
1.3
%
-3.7
%
-5.3
%
-0.3
%
1.4
%
5.0
%
2.3
%
2.2
%
2.6
%
2.4
%
0.1
%
2.5
%
1.3
%
4.1
%
2.0
%
1.3
%
1.7
%
1.8
%
1.7
%
2.2
%
2.6
%2
.8%
-8.9%
4.1
%
1.1
%
1.8
%
2.5
% 3.6
%
3.1
%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
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
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
12
:1Q
12
:2Q
12
:3Q
12
:4Q
13
:1Q
13
:2Q
13
:3Q
13
:4Q
Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit crunch, housing
slump, labor market contraction has been
severe but modest recovery is underway
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2012 is expected to see slow growth lasting into 2013; Fed’s QE3 could
push 2013 GDP up 0.2%
6
Annual Inflation Rates, (CPI-U, %), 1990–2013F
2.82.6
1.51.9
3.3 3.4
1.3
2.52.3
3.0
3.8
2.8
3.8
-0.4
1.6
3.2
2.1 2.0
2.9
2.4
3.23.0
5.14.9
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/12 (forecasts).
The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and
commodity prices, plus U.S. debt burden, remain longer-run concerns
Annual Inflation Rates (%)
Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the
commodity bubble reduced inflationary pressures in 2009/10
Higher energy, commodity and food
prices pushed up inflation in 2011, but
not longer term inflationary
expectations.
Medical Cost Inflation Has Outpaced Overall Inflation For Over 50 Years
752.3
1747.1
0
300
600
900
1200
1500
1800
61
66
71
76
81
86
91
96
01
06
11
Ind
ex
Va
lue (
19
61
=1
00
)
All Items
Medical Care
Source: Department of Labor (Bureau of Labor Statistics)
A claim that cost $1,000 in 1961 would cost nearly $17,500 based on
medical cost inflation trends over the past 51 years.
7
8
-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
12
P/C Net Premium Growth: Annual Change, 1971—2012:H1
(Percent)
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periods Sources: 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.
2012:H1 growth
was +3.6%
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$11,000
$12,000
$13,000
$14,000
$15,000
$16,000
$100
$200
$300
$400
$500
$600
$700
81
82
83
84
1985
86
87
88
89
1990
91
92
93
94
1995
96
97
98
99
2000
01
02
03
04
2005
06
07
08
09
2010
11
L/H Industry Premiums Nominal GDP
3 Decades of U.S. GDP vs. L/A Premiums: Fairly Strong Association
Note: 2011 premium data is premiums for 2011:Q3, annualized Sources: http://www.bea.gov/national/xls/gdplev.xls , NAIC Annual Statement data, via SNL Financial; I.I.I. calculations
Premiums,
Billions GDP,
Billions
2001 Recession
2008-09 Recession
10
Real GDP Growth Forecasts: Major Economies: 2011 – 2013F
Sources: Blue Chip Economic Indicators (9/2012 issue); Insurance Information Institute.
1.7
%
0.7
% 1.5
%
3.1
%
2.2
%
-0.3
%
0.9
%
7.8
%
2.3
%
2.1
%
1.1
%
0.3
%
1.1
%
8.2
%
1.4
%
9.2%
-0.7%-0.5%-2%
0%
2%
4%
6%
8%
10%
US UK Euro Area Germany China Japan
2011 2012F 2013F
Growth Prospects Vary Widely by Region: Stabilizing in the US, Mild Recession in the Eurozone, A “Soft Landing” in China and India,
Reconstruction Stimulus in Japan and Modest Growth in America’s Largest Trading Partners—Canada and Mexico.
The Eurozone and UK are in
recession. Both should end by early
2013
China growth has slowed, but remains strong in an expected “soft landing”
scenario
Tepid US recovery
continues
Rebuilding acts as a
stimulus to Japanese economy
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
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
F1
3F
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook , Oct. 2012; Ins. Info. Institute.
Emerging economies (led by China) are expected to grow by 5.3% in 2012 and
5.6% in 2013.
GDP Growth: Advanced & Emerging Economies vs. World, 1970-2013F
Advanced economies are expected to grow at a sluggish pace of 1.3% in
2012 and 1.5% in 2013.
World output is forecast to grow by 3.3% in 2012 and 3.6% in 2013. The world economy shrank by 0.6% in
2009 amid the global financial crisis
GDP Growth (%)
12
Global Real (Inflation Adjusted) Nonlife Premium Growth: 1980-2010
Source: Swiss Re, sigma, No. 2/2010.
-10%
-5%
0%
5%
10%
15%
20%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Real growth rates
Total Industrialised countries Emerging markets
Nonlife premium growth in emerging markets has
exceeded that of industrialized countries in
27 of the past 31 years, including the entirety of the
global financial crisis..
Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as
well as a lack of consistent cyclicality
Average: 1980-2010
Industrialized Countries: 3.8%
Emerging Markets: 9.2%
Overall Total: 4.2%
13
Nonlife Real Premium Growth in 2010
Source: Swiss Re, sigma, No. 2/2011.
Latin and South American markets performed
relatively well during and after the global financial crisis in terms of growth
There was also growth in the Middle East, East and South Asia as well as Australia and New
Zealand
Percent Change in Real GDP by State, 2011
Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute. 14
Growth varied considerably across states
but in total was weak in 2011
with US overall growth at just
1.7%
TX has been an economic
growth leader
74
.4
73
.6
73
.6
72
.2
73
.6 76
67
.8
68
.9
68
.2
67
.7 71
.6 74
.5
74
.2 77
.5
67
.5 69
.8
74
.3
71
.5
63
.7
55
.7 59
.5
60
.9 64
.1
69
.9
75
.0
75
.3
76
.2
76
.4 79
.3
73
.2
72
.3 74
.3 78
.3
40
45
50
55
60
65
70
75
80
85
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0
Se
p-1
0
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Ju
n-1
1
Ju
l-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Consumer Sentiment Survey (1966 = 100)
January 2010 through September 2012
Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially in late 2011 and early 2012
Source: University of Michigan; Insurance Information Institute
Optimism among consumers Increased in September, and is
well above year-ago levels; Suggests concern, but not fear on
the part of consumers.
15
16
16
.9
16
.5
16
.1
13
.2
10
.4
11
.6 12
.7
14
.3 14
.8
14
.7
15
.1
15
.4
15
.5
15
.4
16
.9
16
.617
.1
17
.5
17
.8
17
.4
9
10
11
12
13
14
15
16
17
18
19
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 18-
22F
(Millions of Units)
Auto/Light Truck Sales, 1999-2022F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 10/12); Insurance Information Institute.
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector.
New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is
still far below 1999-2007 average of 17 million units, but a recovery is underway.
Job growth and improved credit market conditions will boost auto sales in
2012 and beyond
17
(Millions of Units)
New Private Housing Starts, 1990-2022F
1.4
8
1.4
7 1.6
2
1.6
4
1.5
7
1.6
0 1.7
1 1.8
5 1.9
6 2.0
7
1.8
0
1.3
6
0.9
1
0.5
5
0.5
9
0.6
1 0.7
5 0.8
9
1.3
4
1.2
3
1.3
2
1.3
8
1.4
2
1.3
51.4
6
1.2
9
1.2
0
1.0
11.1
9
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F 18-
22F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 10/12); Insurance Information Institute.
Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety
New home starts plunged
72% from 2005-2009; A net annual
decline of 1.49 million units, lowest since
records began in 1959
Low inventories of existing homes, and low mortgage rates and stimulating new home
construction for the first time in years
Job growth, improved credit
market conditions and demographics
will eventually boost home construction
18
Construction Employment, Jan. 2010—September 2012*
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,5
93
5,5
29 5
,55
2
5,5
59
5,5
18
5,5
07
5,4
91 5,5
11
5,4
92
5,4
99
5,4
88
5,4
77
5,4
56
5,4
89
5,4
96
5,4
95
5,4
98
5,4
95
5,5
08
5,4
98
5,5
28
5,5
19
5,5
20 5
,54
6 5,5
64
5,5
63
5,5
49
5,5
42
5,5
10
5,5
14
5,5
17
5,5
18
5,5
23
5,400
5,450
5,500
5,550
5,600
5,650
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0
Se
p-1
0
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Ju
n-1
1
Ju
l-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
2/3
0/2
10
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Construction employment is still below where it was in
Jan. 2010. In a normal recovery, construction employment would be
growing robustly
(Thousands)
19
Value of Construction Put in Place, August 2012 vs. August 2011*
-3.5%
-27.7%
-2.7%
6.5%
12.1%
17.8%
7.2%
-30%
-20%
-10%
0%
10%
20%
30%
Total
Construction
Total Private
Construction
Residential--
Private
Non-
Residential--
Private
Total Public
Construction
Residential-
Public
Non-
Residential--
Public
Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue
Growth (%)
Private sector construction activity is up in both the residential and nonresidential segments
*seasonally adjusted Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +12.1% Public: -3.5%
Public sector construction activity remains depressed
58
.3
57
.1
60
.4
59
.6
57
.8
55
.3
55
.1
55
.2
55
.3 56
.9 58
.2
58
.5 60
.8
61
.4
59
.7
59
.7
54
.2 55
.8
51
.4 52
.5
52
.5
51
.8
52
.2 53
.1 54
.1
52
.4 53
.4 54
.8
53
.5
49
.7
49
.8
49
.6 51
.5
40
45
50
55
60
65
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0
Se
p-1
0
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Ju
n-1
1
Ju
l-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
ISM Manufacturing Index (Values > 50 Indicate Expansion)
January 2010 through September 2012
The manufacturing sector expanded for 35 of the 38 months from Jan. 2010 through Sept. 2012. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.
Manufacturing activity contracted in June for the first time in nearly 3
years, but a resumption of expansion began in September
20
21
$200,000
$300,000
$400,000
$500,000
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—August 2012
*seasonally adjusted Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to Aug. 2012 was 31%. Manufacturing is an
energy intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages
ENERGY INTENSIVE
The value of Manufacturing Shipments in Aug. 2012 was up 31% to $477B from its June 2009 trough. June figure is only 1.7% below its previous record high in July 2008.
$ Millions
21
50
.7 52
.7 54
.1
54
.6
54
.8
53
.5
53
.7
52
.8 53
.9
54
.6 56 5
7.1 5
9.4
59
.7
56
.3
54
.4
53
.3
53
.4
53
.8
52
.6
52
.6
52
.6
52
.6
53
.0
56
.8
57
.3
56
.0
53
.5
53
.7
52
.1
52
.6 53
.7 55
.1
40
45
50
55
60
65
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0
Se
p-1
0
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Ju
n-1
1
Ju
l-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
ISM Non-Manufacturing Index (Values > 50 Indicate Expansion)
January 2010 through September 2012
Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.
Optimism among non-manufacturers was stable in late 2011 and remained
expansionary in 2012
22
23
43
,69
4
48
,12
5
69
,30
0
62
,43
6
64
,00
4
71
,27
7
81
,23
5
82
,44
6
63
,85
3
63
,23
5
64
,85
3
71
,54
9
70
,64
3
62
,30
4
52
,37
4
51
,95
9
53
,54
9
54
,02
7
44
,36
7
37
,88
4
35
,47
2
40
,09
9
38
,54
0
35
,03
7
34
,31
7
39
,20
1
19
,69
5
28
,32
2 43
,54
6
60
,83
7
56
,28
2
47
,80
6
10
,99
8
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
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
:Q1
Business Bankruptcy Filings, 1980-2012: Q1
Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more
than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1:2011
% Change Surrounding Recessions
1980-82 58.6%
1980-87 88.7%
1990-91 10.3%
2000-01 13.0%
2006-09 208.9%*
23
24
Private Sector Business Starts, 1993:Q2 – 2011:Q4*
175
186
174
180
186
192
188
187 189
186 1
90 1
94
191
199 2
04
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 2
05
204
204
197
203
209
201
192
192
193
201 204
202
210 212
209
216 2
20 223
220
220
210
221
212
204
218
209
207
207
199
191 193
172 1
76
169
184
175 1
79
188
200
183 1
87 1
91
197
203
150
160
170
180
190
200
210
220
230
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly * Data through Dec. 31, 2011 are the latest available as of Oct. 3, 2012; Seasonally adjusted.
Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.
(Thousands)
Business starts were up 2.2% to 748,000 in 2011 vs. 2010. 742,000 new business
starts were recorded in 2010, up 6.0% from 700,000 in 2009, which was the slowest year for new business starts since 1993
Business Starts 2006: 872,000 2007: 843,000 2008: 790,000 2009: 697,000 2010: 742,000 2011: 748,000*
24
NFIB Small Business Optimism Index
January 1985 through September 2012
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 25
Small business optimism has increased but is still only at
the level it was when the Financial Crisis began
26
12 Industries for the Next 10 Years: Insurance Solutions Needed
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light Manufacturing
Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking)
27
Healthcare Employment, 2002—September 2012*
11,536.0
11,817.1
12,055.3
12,313.9
12,601.8
12,946.8
13,289.9
13,543.0
13,776.9
14,045.7
14,424.8
11,000
11,500
12,000
12,500
13,000
13,500
14,000
14,500
15,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*
Employment in the Healthcare industry increased by 9.8%-- a
gain of 1.3 million jobs between Dec. 2007 (start of the
recession) and Sept. 2012
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands)
The increase in healthcare employment has driven workers comp payroll
exposures up faster than almost any other industry
28
Oil & Gas Extraction Employment, Jan. 2010—August 2012*
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
15
6
15
7
15
7
15
8
15
9
15
8
15
8
16
0
16
0
16
2
16
1
16
1 16
3
16
4 16
7 17
0
17
1 17
3 17
5
17
7 18
0 18
3
18
3 18
6 18
8
19
0 19
2
19
3
19
4
19
5
19
6
19
7
150
155
160
165
170
175
180
185
190
195
200
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0
Se
p-1
0
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Ju
n-1
1
Ju
l-1
1
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
2/3
0/2
10
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Oil and gas extraction employment is up 26.3% since Jan. 2010 as the energy sector booms. Domestic
energy production is essential to any robust economic recovery in the US.
(Thousands)
29
P/C Growth Analysis by State: 2006 - 2011
Premium Growth Rates Vary Tremendously by State
29
30
Direct Premiums Written: Total P/C Percent Change by State, 2006-2011
71
.5
41
.8
26
.4
22
.8
22
.6
20
.8
18
.2
11
.8
10
.5
6.6
6.3
6.1
5.8
4.9
4.7
4.2
3.9
2.4
2.2
2.1
2.1
2.1
0.9
0.9
0.7
0.4
0
10
20
30
40
50
60
70
80
ND
SD
MT IA
NE
KS
OK
WY
TX
MN LA
AR
WI
TN IN AK
DE
NM
NC
KY
SC
WA
DC
MO VT
MS
Pe
ce
nt
ch
an
ge
(%
)
Sources: SNL Financial, LLC.; Insurance Information Institute.
Top 25 States
A limited number of states showed strong growth over
the past 5 years
31
Direct Premiums Written: Total P/C Percent Change by State, 2006-2011
0.4
-0.6
-0.8
-0.8
-1.1
-1.3
-1.4
-1.6
-1.9
-2.0
-2.5
-3.1
-3.2
-3.5
-4.1
-4.4
-5.2
-5.8
-6.0
-10
.3
-10
.5
-10
.8
-11
.7
-12
.0
-13
.5
-19
.2
-25
-20
-15
-10
-5
0
5
AL
OH IL VA
NY
UT
US
GA
CT
PA
NJ
CO
MD
MA ID
OR RI
ME MI
HI
NH
WV
FL
CA
AZ
NV
Pe
ce
nt
ch
an
ge
(%
)
Bottom 25 States
States with the poorest performing economies also produced the most negative net change in premiums of
the past 5 years
Sources: SNL Financial, LLC.; Insurance Information Institute.
32
Presidential Politics & the P/C Insurance Industry
How Is Profitability Affected by the President’s Political Party?
32
15.10%
9.40%
8.93%
8.65%
8.35%
7.98%
7.68%
6.98%
6.97%
6.65%
5.43%
5.03%
4.83%
4.43%
3.55%
16.43%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Carter
Reagan II
G.W. Bush II
Nixon
Clinton I
G.H.W. Bush
Clinton II
Reagan I
Nixon/Ford
Truman
Obama
Eisenhower I
Eisenhower II
G.W. Bush I
Johnson
Kennedy/Johnson
*Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments.
Estimated ROE for 2012 = 7.0%.
Source: Insurance Information Institute
OVERALL RECORD: 1950-2012*
Democrats 7.67% Republicans 7.97%
Party of President has marginal bearing on profitability of P/C insurance industry
P/C Insurance Industry ROE by Presidential Administration, 1950- 2012*
-5%
0%
5%
10%
15%
20%
25%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
E
BLUE = Democratic President RED = Republican President
Tru
ma
n
Nixon/Ford
Ke
nn
ed
y/
Jo
hn
so
n
Eis
en
ho
wer
Ca
rte
r
Reagan/Bush I Clinton Bush II
P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2012*
*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0%
Source: Insurance Information Institute
Ob
am
a
35
Labor Market Trends
Massive Job Losses Sapped P/C Life Exposures, But Trends Are Improving
35
36
Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling
2
4
6
8
10
12
14
16
18
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Jan
11
Jan
12
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 7.8% in
Aug. 2012
Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.
Peak rate in the last 30 years:
10.8% in November -
December 1982
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 14.7%
in Aug. 2012
January 2000 through Sept. 2012, Seasonally Adjusted (%)
Recession ended in
November 2001
Unemployment kept rising for
19 more months
Recession began in
December 2007
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving
36
Sep.
12
186
79
213
65
127
42
15
-109
-14
65 9
723
-12
-85 -58
-161
-253
-230
-257
-347
-456
-547
-734 -6
67
-806-7
07
-744 -6
49
-334
-452
-297 -2
15
-186
-262
75
-83
16 6
2
229
51 61117
143
112193
128 167
119
257
261
264
108
102 1
75
52
216
139 178 234 277
254
147
85 1
16
63
163
97 104144
(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan-0
7F
eb-0
7M
ar-
07
Apr-
07
May-0
7Jun-0
7Jul-07
Aug-0
7S
ep-0
7O
ct-
07
Nov-0
7D
ec-0
7Jan-0
8F
eb-0
8M
ar-
08
Apr-
08
May-0
8Jun-0
8Jul-08
Aug-0
8S
ep-0
8O
ct-
08
Nov-0
8D
ec-0
8Jan-0
9F
eb-0
9M
ar-
09
Apr-
09
May-0
9Jun-0
9Jul-09
Aug-0
9S
ep-0
9O
ct-
09
Nov-0
9D
ec-0
9Jan-1
0F
eb-1
0M
ar-
10
Apr-
10
May-1
0Jun-1
0Jul-10
Aug-1
0S
ep-1
0O
ct-
10
Nov-1
0D
ec-1
0Jan-1
1F
eb-1
1M
ar-
11
Apr-
11
May-1
1Jun-1
1Jul-11
Aug-1
1S
ep-1
1O
ct-
11
Nov-1
1D
ec-1
1Jan-1
2F
eb-1
2M
ar-
12
Apr-
12
May-1
2Jun-1
2Jul-12
Aug-1
2S
ep-1
2
Monthly Change in Private Employment
January 2008 through Sept. 2012 (Thousands)
Private Employers Added 4.83 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly Losses in Dec. 08–Mar. 09 Were
the Largest in the Post-WW II Period
104,000 private sector jobs were created in September
37
38
(Thousands)
851
822
744
741
671
631
576
477
394
860
872
878
1,391
1,769
1,840
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
Construction
Retail Trade
Offices of Health Practioners
Hospitals
Home Health Care Serv.
Food Serv. & Drinking Places
Individual & Family Serv.
Nursing & Residential Care Facil.
Wholesale Trade
Local Govt. Education
Computer Systems Design & Rltd. Serv.
Employment Services
Mgmt., Tech., Scientific Consulting Serv.
Colleges, Universities & Prof. Schools
Outpatient, Lab. & Ambulatory Care Serv.
Surprisingly, growth in Construction
employment is projected to lead all industries from 2010 to 2020.
Reason: Starts from low base and assumes a resumption of more
normal economic growth patterns
Sources: US Bureau of Labor Statistics: http://www.bls.gov/news.release/ecopro.t03.htm ; Insurance Information Institute.
Top 15 Industries with Largest Projected Growth in Wage and Salary Employment: 2010-2020P
0
-8
40 8
6
518
259
109
-70
-212
-188
-201
-221
-230
-267
-282
-295
-349
-367
-446
-413
-427
-454
-475
-486
-488
-483
-487
-504
-533
-551
-533
-488
-478
-700
-500
-300
-100
100
300
500
700
Jan-1
0
Feb-1
0
Mar-
10
Apr-
10
May-1
0
Jun-1
0
Jul-10
Aug-1
0
Sep-1
0
Oct-
10
Nov-1
0
Dec-1
0
Jan-1
1
Feb-1
1
Mar-
11
Apr-
11
May-1
1
Jun-1
1
Jul-11
Aug-1
1
Sep-1
1
Oct-
11
Nov-1
1
Dec-1
1
Jan-1
2
Feb-1
2
Mar-
12
Apr-
12
May-1
2
Jun-1
2
Jul-12
Aug-1
2
Sep-1
2
Cumulative Change in Government Employment: Jan. 2010—Sept. 2012
January 2010 through Sept. 2012* (Millions)
Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
Cumulative job losses through Sept. 2012 totaled 478,000
39
Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the
Financial Crisis, Causing Them to Reduce Staff
Government at all levels has
shed nearly half a million jobs
since Jan. 2010 even as
private employers created
4.83 million jobs, though
losses may now be ending.
Temporary Census hiring distorted 2010
figures
40
Unemployment Rates by State, August 2012: Highest 25 States*
12
.1
10
.7
10
.6
9.9
9.7
9.6
9.4
9.2
9.1
9.1
9.1
9.0
8.9
8.8
8.8
8.6
8.5
8.5
8.5
8.3
8.3
8.2
8.1
8.1
7.8
7.6
0
2
4
6
8
10
12
14
NV RI CA NJ NC SC MI GA IL MS NY CT OR DC FL WA AL KY TN AZ IN CO US US AK ME
Un
em
plo
ym
en
t R
ate
(%
)
*Provisional figures for August 2012, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In August, 26 states reported over-the-month unemployment rate increases, 12 states and the District of Columbia had
decreases, and 12 states had no change.
41
7.5
7.5
7.4
7.4
7.3
7.2
7.2
7.1
7.1
6.9
6.5
6.3
6.3
6.2
6.1
5.9
5.9
5.8
5.7
5.7
5.5
5.3
5.1
4.5
4.0
3.0
0
2
4
6
8
WV WI ID LA AR MO OH MD TX DE NM MA MT KS HI MN VA UT NH WY IA VT OK SD NE ND
Un
em
plo
ym
en
t R
ate
(%
)
Unemployment Rates by State, August 2012:
Lowest 25 States*
*Provisional figures for August 2012, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In August, 26 states reported over-the-month unemployment rate increases, 12 states and the District of Columbia had decreases, and 12 states had no
change.
42
P/C Insurance Industry Financial Overview
Profit Recovery Was Set Back in 2011 by High Catastrophe
Loss & Other Factors
42
P/C Net Income After Taxes 1991–2012:Q2 ($ Millions)
$1
4,1
78
$5
,84
0
$1
9,3
16
$1
0,8
70
$2
0,5
98
$2
4,4
04 $
36
,81
9
$3
0,7
73
$2
1,8
65
$3
,04
6
$3
0,0
29
$6
2,4
96
$3
,04
3
$3
5,2
04
$1
9,1
50
$1
6,4
23$
28
,67
2
-$6,970
$6
5,7
77
$4
4,1
55
$2
0,5
59
$3
8,5
01
-$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:H1
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:H1 ROAS1 = 5.9%
P-C Industry 2012:H1 profits were up 245% from 2011:H1, due primarily to lower catastrophe losses
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for 2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:H1 combined ratio including M&FG insurers is 102.2, ROAS = 5.9%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO data.
97.5
100.6 100.1 100.8
92.7
101.099.3
100.9 101.1
106.4
95.7
6.2%
4.6%
7.6%7.4%
4.4%
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:H1
0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s Depressed Investment 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
Year Ago
2011:H1 = 109.4, 2.3% ROE
-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
*1
2:
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:H1*
*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude
mortgage and financial guaranty insurers. 2012:H1 ROAS = 5.9% including M&FG.
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%
9 Years
2011:
4.6%*
History suggests next ROE
peak will be in 2016-2017
ROE
1975: 2.4%
2012:H1: 6.2%
46
ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2012:H1*
* Excludes Mortgage & Financial Guarantee in 2008 – 2012. 2012 Fortune 500 figure is III estimate. Sources: ISO, Fortune; Insurance Information Institute.
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112:H1
P/C Profitability Is Both by Cyclicality and Ordinary Volatility
Hugo
Andrew
Northridge
Lowest CAT Losses in 15 Years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial Crisis*
(Percent)
Record Tornado Losses
47
Life/Health Insurance Industry Financial Overview
Steady but Unspectacular
47
48
Billions
Life/Annuity Industry Profits, 2001-2011
$31.6
-$52.3
$21.5
$28.1
$14.4
$37.0$36.6$32.5
$25.9
$3.6
$11.0
($60)
($40)
($20)
$0
$20
$40
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: NAIC, via SNL Financial; Insurance Information Institute.
The Life/Annuity industry has produced steady (if unspectacular) profits, except for years in which the industry’s investment results produced
significant realized capital losses.
Realized Capital Losses Depress Net Income
$1
3.6
$1
9.2
$2
1.7
$1
8.0
$2
0.9
$2
2.2
$9
.8
$4
.1
$2
6.6
$3
2.2
$3
6.0
$3
6.2
$3
1.9
-$5
2.6
$2
1.1
$28
.1
$1
4.4
-$60
-$50
-$40
-$30
-$20
-$10
$0
$10
$20
$30
$40
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
L/H Net Income L/H Realized Capital Gains (Losses)
Source: NAIC Annual Statement data, Summary of Operations and Exhibit of Capital Gains (Losses)
50
Median ROEs for Insurers and Other Financial Services in the “Fortune 500,” 2010
Profits as a % of Owners’ Equity: Median of Fortune 500 Companies in Selected Industries
Source: Fortune, May 23, 2011; Insurance Information Institute.
12.0%
10.0%
9.0%
8.0%
8.0%
8.0%
5.0%
3.5%
12.0%
0% 2% 4% 6% 8% 10% 12% 14%
Health Insurance/Managed Care
Diversified Financials
P/C Insurance (stock)
L/A Insurance (stock)
Securities
Commercial Banks
L/A Insurance (mutual)
P/C Insurance (mutual)
Fortune 500
Industry
51
Don’t Call It the “Life Insurance” Industry
Annuities Dominate
Industry Premiums and Profits
Distribution of Premiums by Line of Business, 1996-2011
48
.8%
50
.0%
52
.3%
56
.7%
57
.7%
54
.5%
54
.8%
55
.0%
53
.5%
52
.3%
51
.8%
50
.8%
51
.7%
44
.2%
49
.1%
52
.7%
28
.6%
28
.6%
28
.3%
24
.9%
24
.7%
26
.9%
27
.2%
25
.7%
26
.6%
26
.5%
25
.2%
22
.6%
22
.8%
23
.6%
17
.5%
19
.8%
21
.3%
19
.8%
17
.4%
16
.6%
15
.7%
17
.7%
17
.9%
19
.2%
23
.0%
21
.0%
22
.9%
23
.5%
25
.0%
31
.8%
29.4
%
27
.2%
1.4% 1.9% 2.2% 1.8% 1.9% 0.8% 0.1% 0.1% 0.3% 3.1% 0.5% 0.4% 4.2% 0.3%
0%
25%
50%
75%
100%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Credit/Other
A&H
Life
Annuities
Source: NAIC, via SNL Financial; I.I.I.
In 2011 life insurance was 19.8% of total premiums, down from 28% a dozen years prior. Annuities have been the main premium source for decades.
Insurance
U.S. Life/Annuity Insurance Industry Profit Sources, by Percent, 2011
19.9%
-2.3%
12.7%
5.9%
19.1%
22.3%
1.3%
21.2%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Sources: NAIC Annual Statements, p. 6, from SNL Financial; I.I.I. calculations
17.6% 18.6% 41.4%
2011 was a very unusual year. Normally, annuities provide the bulk of profits, with life and A&H each about one-quarter (see next slide).
U.S. Life/Annuity Insurance Industry Profit Sources, by Percent, 2010
8.7%
35.6%
13.8%
4.6%
12.7% 11.6%
0.6%
12.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Sources: NAIC Annual Statements, p. 6, from SNL Financial; I.I.I. calculations
44.3%
18.4% 24.3%
55
Life/Health:
Markets, Revenues, and Revenue Drivers
56
Billions
Life/Annuity Industry Capital & Surplus + AVR, General Account, 1990-2010
$1
47
.2
$1
60
.1
$1
72
.7
$1
81
.2
$1
88
.5
$1
90
.7
$2
02
.3
$2
31
.3
$2
49
.6
$2
54
.6
$2
65
.9
$2
81
.8
$2
63
.3
$3
01
.2
$3
15
.0
$1
50
.9
$1
36
.7
$1
28
.0
$1
15
.2
$1
06
.0
$9
1.4
$50
$100
$150
$200
$250
$300
$350
19
90
91
92
93
94
19
95
96
97
98
99
20
00
01
02
03
04
20
05
06
07
08
09
10
C&S AVR*
*prior to 1992, this was the Mandatory Securities Valuation Reserve (MSVR) Sources: ACLI 2011 Life Insurance Fact Book; Insurance Information Institute.
Life/Annuity insurers are stronger than the C&S dollars indicate, because the Asset Valuation Reserve (AVR), booked as a liability, is essentially a surplus account to
“cushion” asset value drops. The Interest Maintenance Reserve (IMR), another liability account, buffers the insurer’s C&S against drops in investment income.
From 1990 to 2009, the industry’s capital ratio—(C&S+AVR)/General
Account Assets)—ranged from 8.5% (1990) to 11.9% in 1996. Ratio
in 2009 was 9.7%
$346.3
$292.4
$226.4
$180.6
$106.2
$0
$100
$200
$300
$400
$500
$600
$700
81
82
83
84
1985
86
87
88
89
1990
91
92
93
94
1995
96
97
98
99
2000
01
02
03
04
2005
06
07
08
09
2010
11
Life/Annuity Industry Premiums, 1981-2011: Fairly Steady Growth, but Changing Composition
Sources: NAIC Annual Statement data, via SNL Financial; NBER (recession dates)
Premiums, Billions 2001
Recession
2008-09 Recession
1991 Recession
1981-82 Recession
Overall Life/Annuity premiums in 2011 ($623.9B) nearly equaled the 2008 prior peak ($625.2B). 2011 annuity premiums hit a new peak in 2011 ($327.0B) but life insurance
premiums of $122.8B are significantly off the 2008 peak of $142.8B.
Life/Annuity/A&H Direct Premiums by Market, 2011
Individual Products 50%
Group Products, 38%
Some of Each, 18%
Source: NAIC Annual Statement data, from SNL Financial; I.I.I. calculations
Individual Life Insurance & Annuity Premiums Generally Track DPl
$7
.65
$8
.01
$8
.38
$8
.89
$9
.28
$9
.92
$1
0.4
0
$1
0.9
5
$11
.03
$11
.13
$11
.55
$11
.89
$150
$170
$190
$210
$230
$250
$270
$290
$310
$3
$6
$9
$12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*
Disposable Personal Income
Individual Life Insurance & Annuity Premiums
*DPI is 2012:Q2 estimate, published Sept. 28, 2012
Sources: www.bea.gov and SNL Financial; I.I.I. calculations
DPI
($ Trillion)
Individual Life
Insurance & Annuity
Premiums ($ Billion)
Individual Life Insurance & Annuity premiums dropped
31% in 2009 vs. 2008, although DPI rose by 1%
Group Insurance Premiums (line) Track Nonfarm Employment (bars)
131
.8
130.3
130.0
131.4
133.7
136.1
137.6
136.8
130.8
129.8
131.4
13
3.8
$190
$210
$230
$250
125
130
135
140
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*
Group Premiums (billions)
Nonfa
rm E
mplo
ym
ent (m
illio
ns)
Nonfarm employment* Group Ins Premiums
*2012 is preliminary August 2012; Data are not seasonally adjusted
Sources: NAIC Annual Statements, via SNL Financial; http://www.bls.gov/ces/
Deferred + Immediate Individual Annuity Sales, 1999-2010
$1
22
.0
$1
37
.0
$111.0
$11
7.0
$1
29
.4
$1
32
.9
$1
36
.9
$1
60
.4
$1
84
.0
$1
55
.7
$1
28
.0
$140.5
$4
2.0
$5
3.0
$74.0
$1
03
.0
$8
9.4
$8
7.9
$7
9.5
$7
8.3
$7
2.8
$1
09
.3
$11
0.6
$80
.8
$0
$25
$50
$75
$100
$125
$150
$175
$200
$225
$250
$275
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Variable Fixed
Source: LIMRA International; I.I.I.
Fixed annuity sales spike
when the stock market tumbles
$ Billions
Variable sales dropped after the stock market plunge in 2000 but recovered by 2004. 2007 was a record year. 2009 variable sales vs. 2007 dropped by 30.4%.
In inflation-adjusted terms, total sales
since 2003 are essentially flat.
Individual Immediate Annuity Sales, 2003-2010
$0.5 $0.3 $0.3 $0.4 $0.3 $0.1 $0.1 $0.0
$4.8 $5.3 $5.3
$6.1 $6.5
$7.9 $7.5 $7.6
$0
$2
$4
$6
$8
2003 2004 2005 2006 2007 2008 2009 2010
Fixed
Variable
Sources: LIMRA International, U.S. Individual Annuity Yearbook--2010, p. 10 (Table 1); I.I.I.
Almost no one buys variable immediate annuities or
indexed immediate annuities $ Billions
Ordinary Life Insurance Lapse Rates, 1996-2010
5.9% 6.0%
5.6%
6.1% 6.1%
6.5%
9.0%
6.1% 6.4%
6.0% 6.2%
5.9%
7.1%
6.1%
5.4%
6.4% 6.7%
6.1% 6.2% 6.5%
5.9%
6.6%
5.7% 5.4%
4.9% 4.9% 5.1%
6.2%
5.7% 5.4%
4%
5%
6%
7%
8%
9%
10%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
by number of policies
by amount of insurance
Sources: NAIC Annual Statements, p. 25 line 15 (lapses) and average of lines 1 and 21, from SNL Financial; I.I.I. calculations
Was the 2002 spike in lapse rates
related to the 2001 recession?
2008-09 recession
Yearly Percent Change in Applications for Individual U.S. Life Insurance Policies
-4.3
%
-2.5
%
-0.9
% -3
.9%
-2.7
%
-2.6
%
-4.3
%
-2.0
%
1.7
%
-4.9
%
-1.9
%
5.2
%
-3.8
%
1.8
%
13.0
%
-4.4
%
-0.1
%
9.9
%
-2.2
%
0.1
%
8.9
%
2.1%
-0.4%
2.8%
-10%
-5%
0%
5%
10%
15%
Under 45 45-59 60 and over
2005 2006 2007 2008 2009 2010 2011 2012*
*for 2012, Sept 2012 vs. Sept 2011 Source: MIB Life Index, monthly releases
Since 2007, the age-60-and-over is the only group consistently increasing life insurance applications. And even in 2005-06, the drop-off in applications was smaller for the 60+ group vs. younger ones.
Ages
INVESTMENTS: THE NEW REALITY
65
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
65
66
Insurers Have Not Yet Fully Adapted to a Persistently Low Interest Rate Environment
No Expectation that Rates Would Be:
Pushed to Such Low Levels
Pushed Down so Rapidly
Held to Such Low Levels for So Long
Suppressed via Unprecedented Aggressiveness of the Federal Reserve
– Use of traditional and unconventional tools (QE)
– Unconventional ’s policies couldn’t be anticipated, esp. QE1, 2, and 3 (QE 4 Ever???)
Competitive PressureProtracted Soft Market
Ability to Release Prior Reserves Eased Urgency
Realization of Capital Gains
Property/Casualty Insurance Industry Investment Income: 2000–2012F1
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.0
$47.4
$39.6
$49.5
$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12F
Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates
1 Investment gains consist primarily of interest and stock dividends. *2012F is based on annualized H1:2012 actual figure of $23.718B. Sources: ISO; Conning Research & Consulting; Insurance Information Institute.
($ Billions)
Investment earnings in 2012 are running 13% below their
2007 pre-crisis peak
68
P/C Insurer Net Realized Capital Gains/Losses, 1990-2012:H1
Sources: A.M. Best, ISO, Insurance Information Institute.
$2
.88
$4
.81
$9
.89
$9
.82
$1
0.8
1 $1
8.0
2
$1
3.0
2
$1
6.2
1
$6
.63
-$1
.21
$6
.61
$9
.13
$9
.70
$3
.52 $8
.92
-$7
.90
$5
.85
$7
.19
$1
.71
-$1
9.8
1
$9
.24
$6
.00
$1
.66
-$25
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112:H1
Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE
($ Billions) Realized capital gains
through 2012:H1 are down 53% from $3.61B in 2011:H1
Property/Casualty Insurance Industry Investment Gain: 1994–2012F1
$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
$53.4$56.2
$50.8
$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 12F
Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower 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; 2012F figure is III estimate based on annualized actual H1:2012 result of $25.424B. Sources: ISO; Insurance Information Institute.
($ Billions)
Investment gains in 2012 are running approximately 20% below their pre-crisis peak
70
U.S. 10-Year Treasury Note Yields: A Long Downward Trend, 1990–2012*
*Monthly, through Sept. 2012. Note: Recessions indicated by gray shaded columns.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.
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
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.
Yields on 10-Year U.S. Treasury Notes recently
plunged to all time record lows
70
71
Treasury Yield Curves: Pre-Crisis (July 2007) vs. Sept. 2012
0.08% 0.11% 0.14% 0.18% 0.26%
1.12%
1.72%
4.82%4.96% 5.04% 4.96%
4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
0.67%0.34%
2.88%
2.49%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
September 2012 Yield Curve
Pre-Crisis (July 2007)
Treasury yield curve remains near its most depressed level
in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2015
at the earliest.
The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through Mid-2015; This Adds to Pricing Pressure for Insurers.
Source: Federal Reserve Board of Governors; Insurance Information Institute.
72
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Per
sona
l Lin
es
Pvt P
ass
Aut
o
Per
s Pro
p
Com
mer
cial
Com
ml A
uto
Cre
dit
Com
m P
rop
Com
m C
as
Fidel
ity/S
uret
y
War
rant
y
Sur
plus
Lin
es
Med
Mal
WC
Rei
nsur
ance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums
**US domestic reinsurance only
Source: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
72
73
U.S. Insured Catastrophe Loss Update
2012 Catastrophe Losses Were Close to
“Average” in the First Half of 2012
2011 Was the 5th Most Expensive
Year on Record 73
74
$1
2.3
$1
0.7
$3
.7
$1
4.0
$1
1.3
$6
.0
$3
3.9
$7
.4
$1
5.9
$3
2.9
$7
1.7
$1
0.3
$7
.3
$2
8.5
$1
1.2
$1
4.1
$3
2.3
$1
3.8
$1
3.7
$4
.7
$7
.8
$3
6.9
$8
.6
$2
5.8
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
US Insured Catastrophe Losses
*PCS figure for H1 2012 (stated in 2012 dollars).
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)
Sources: Property Claims Service/ISO; Insurance Information Institute.
US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation-Adjusted Basis
H1 2012 CAT losses were down $11.9B or 49% from
$24.4B in H1 2011
Record Tornado Losses Caused
2011 CAT Losses to Surge
($ Billions, 2011 Dollars)
74
UNDERWRITING
75
Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?
75
76
P/C Insurance Industry Combined Ratio, 2001–2012:H1*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:H1=102.2.
Sources: A.M. Best, ISO.
95.7
99.3100.8
106.4
101.1101.0
92.6
100.8
98.4100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012:H1
Best Combined Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned Premiums
Relatively Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Lower CAT
Losses
Underwriting Gain (Loss) 1975–2012:H1*
* Includes mortgage and financial guaranty insurers in all years.
Sources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
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
Cumulative underwriting deficit from 1975 through
2011 is $479B
($ Billions)
Underwriting losses in
2012 totaled $7.0B
High cat losses in 2011 led to the highest
underwriting loss since 2002
Financial Strength & Underwriting
78
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
78
79
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011
90
95
100
105
110
115
1206
97
07
17
27
37
47
57
67
77
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
80
91
01
1
Co
mb
ine
d R
ati
o
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Imp
airm
en
t Ra
te
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
80
Number of Recessions Endured by P/C Insurers, by Number of Years in Operation
32
27
20
13
8
0
5
10
15
20
25
30
35
1-50 51-75 76-100 101-125 126-150
Sources: Insurance Information Institute research from National Bureau of Economic Research data.
Number of Recessions Since 1860
Many US Insurers Are Close to a Century Old or Older
Number of Years in Operation
Insurers are true survivors—not just of natural catastrophes but also economic ones
80
P/C SURPLUS/CAPITAL/CAPACITY
81
Have Large Global Losses Reduced Capacity in the Industry, Setting
the Stage for a Market Turn?
81
82
Policyholder Surplus, 2006:Q4–2012:H1
Sources: ISO, A.M .Best.
($ 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$570.7$566.5
$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 11:Q2 11:Q3 11:Q4 12:Q1 12:H1
2011:Q1 Previous Surplus Peak
Surplus as of 6/30/12 was down $2.9B or 0.5% from the all time record high of $570.7B set as of 3/31/11.
*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
Shifting Legal Liability & Tort Environment
83
Will the Tort Pendulum Swinging Against Insurers?
83
84
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
To
rt S
ys
tem
Co
sts
1.50%
1.75%
2.00%
2.25%
2.50%
To
rt Co
sts
as
% o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
Tort costs in dollar terms have remained high but relatively stable since the mid-2000s., but are down
substantially as a share of GDP
Deepwater Horizon Spike
in 2010
1.68% of GDP in 2013
2.21% of GDP in 2003
= pre-tort reform peak
Regulatory Environment & Financial Services Reform
85
State Regulatory Environments Vary Tremendously and Can
Impact Insurer Profitability and Ability to Compete
Source: James Madison Institute, February 2008.
ME
NH
MA
CT
PA
WV
VA
NC
LA
TX
OK
NE
ND
MN
MI
IL
IA
ID
WA
OR
AZ
HI
NJ
RI B
DE
AL
VT
NY
MD
SC
GA
TN
AL
FL
MS
AR NM
KY MO KS
SD WI
IN
OH
MT
CA
NV
UT
WY
CO
AK
= A = B = C = D = F = NG
Source: Heartland Institute, June 2012
B- B+
B
C
A
C
B
B
B
C-
A B-
C
C
C-
C
C+ D
B
C-
D+
C
C C+
A
B+
B+
A+
A+
C
B
B+
A+
B-
C+
B-
B
B+
B
C-
D+
C D
C
B-
C-
D F
D
2011 Property and Casualty Insurance Regulatory Report Card
Not Graded: District of Columbia
www.iii.org
Thank you for your time and your attention!
Twitter: twitter.com/bob_hartwig
Download at www.iii.org/presentations
Insurance Information Institute Online:
87