overview & outlook for the p/c insurance industry: trends & challenges for 2013 and beyond
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Overview & Outlook for the P/C Insurance Industry: Trends & Challenges for 2013 and Beyond. SITA Annual Meeting Hilton Head, SC October 2, 2012 Download at www.iii.org/presentations. Robert P. Hartwig, Ph.D., CPCU, President & Economist - PowerPoint PPT PresentationTRANSCRIPT
Overview & Outlook for the P/C Insurance Industry:
Trends & Challenges for 2013 and Beyond
SITA Annual MeetingHilton Head, SCOctober 2, 2012
Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
The Strength of the Economy Will Influence P/C Insurer
Growth Opportunities
2
Growth Will Expand Insurer Exposure Base Across Most Lines
2
Will Agriculture Remain Strong?America’s Manufacturing Renaissance?
Construction Activity Awakening?
3
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 9/12; 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%
1.8
%1
.8%
1.9
%1
.8%
1.9
%1
.9%
-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%
Percent Change in Real GDPby State, 2011
Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute. 4
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
.47
3.6
73
.67
2.2
73
.6 76
67
.86
8.9
68
.26
7.7 7
1.6 74
.5
74
.2 77
.5
67
.5 69
.8
74
.37
1.5
63
.75
5.7 5
9.5
60
.9 64
.16
9.9
75
.07
5.3
76
.27
6.4 7
9.3
73
.2
72
.3 74
.3 78
.3
40
45
50
55
60
65
70
75
80
85
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
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.
5
6
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
.117.5
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 9/12); 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
7
Monthly Change* in Auto Insurance Prices, 1991–2012*
*Percentage change from same month in prior year; through Aug. 2012; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
-2%
0%
2%
4%
6%
8%
10%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Cyclical peaks in PP Auto tend to occur
approximately every 10 years (early 1990s, early
2000s and likely the early 2010s)
“Hard” markets tend to occur
during recessionary
periods
Pricing peak occurred in 2010 at
5.1%, falling to 2.8% by Mar. 2012
The Aug. 2012 reading of 3.8% is
up from 3.4% a year earlier
9
Personal Auto: Premiums vs.Loss Cost Spread, Dec. 1997- Aug. 2012
Sources: Bureau of Labor Statistics, ISO, Evercore Group LLC; Insurance Information Institute.
Commercial Lines$226.8B/49%
Pvt. Pass Auto$165.0B/36%
Homeowners$68.2B/15%
Price gains exceeded loss cost increase (pure
premium) by 1.2 percentage points in Aug. 2012
Margin improvement; CR improves to 94.3
by 2004
Margin compression; CR
deteriorates to 109.5 by 2000
Margin compression; CR rises above 100 in
2008
10
(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
81
.42
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 9/12); 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
11
Construction Employment,Jan. 2010—August 2012*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,59
3
5,52
9 5,55
25,
559
5,51
8
5,50
7
5,49
1 5,51
1
5,49
2
5,49
9
5,48
8
5,47
75,
456
5,48
9
5,49
6
5,49
5
5,49
85,
495
5,50
8
5,49
8
5,52
85,
519
5,52
0 5,54
6 5,56
4
5,56
35,
549
5,54
2
5,51
0
5,51
45,
514
5,51
5
5,400
5,450
5,500
5,550
5,600
5,650
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
2/30
/210
2
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Construction employment is still below where it was in
Jan. 2010. In a normal recovery, construction employment would be
growing robustly
(Thousands)
13
Value of Construction Put in Place, June 2012 vs. July 2011*
-7.0%
-19.4%
-0.2%
9.3%
15.0%19.0%
11.7%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
TotalConstruction
Total PrivateConstruction
Residential--Private
Non-Residential--
Private
Total PublicConstruction
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 adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +15.0% Public: -0.7%
Public sector construction activity remains depressed
14
Value of Private Construction Put in Place, by Segment, June 2012 vs. July 2011*
2.8% 3.4%
20.3%
-7.2%-10.1%
17.9%
-4.6%
20.6%17.4%15.0%
19.0%
11.7%
35.7%
10.2%
-20%
-10%
0%
10%
20%
30%
40%
To
tal
Pri
vate
Co
nst
ruct
ion
Res
iden
tial
To
tal
No
nre
sid
enti
al
Lo
dg
ing
Off
ice
Co
mm
erci
al
Hea
lth
Car
e
Ed
uca
tio
nal
Rel
igio
us
Am
use
men
t &
Rec
.
Tra
nsp
ort
atio
n
Co
mm
un
icat
ion
Po
wer
Man
ufa
ctu
rin
g
Private Construction Activity is Up in Most Segments, Including Residential Construction but Led by Power
Growth (%) Led by the Lodging and Power industries, Private sector construction activity is up by double digits in many
segments after plunging during the “Great Recession”
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
58
.35
7.1
60
.45
9.6
57
.85
5.3
55
.15
5.2
55
.3 56
.9 58
.25
8.5 6
0.8
61
.4
59
.75
9.7
54
.2 55
.8
51
.4 52
.5
52
.55
1.8
52
.2 53
.1 54
.15
2.4 53
.4 54
.8
53
.54
9.7
49
.84
9.6 5
1.5
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
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
16
17
$200,000
$300,000
$400,000
$500,000
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—July 2012
*seasonally adjustedSource: 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 July 2012 was 35%. 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 July 2012 was up 32% to $479B from its June 2009 trough.
June figure is only 1.3% below its previous record high in July 2008.
$ Millions
17
18
Manufacturing Growth for Selected Sectors, 2012 vs. 2011*
11.4%
3.9%
11.6%
2.4% 3.4% 3.9%
-0.5%
5.9% 5.0%5.3%8.8%
6.7%
19.2%
6.1%
-5%
0%
5%
10%
15%
20%
25%
All
Ma
nu
fact
uri
ng
Du
rab
le M
fg.
Wo
od
Pro
du
cts
Pri
ma
ryM
eta
ls
Fa
bri
cate
dM
eta
ls
Ma
chin
ery
Ele
ctri
cal
Eq
uip
.
Tra
nsp
ort
atio
nE
qu
ip.
No
n-D
ura
ble
Mfg
.
Fo
od
Pro
du
cts
Pe
tro
leu
m &
Co
al
Ch
em
ica
l
Pla
stic
s &
Ru
bb
er
Te
xtile
Pro
du
cts
Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Energy Demand and Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages
Growth (%)
Manufacturing of durable goods has been
especially strong in 2012
*Seasonally adjusted; Date are YTD comparing data through July 2012 to the same period in 2011.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Durables: +8.8% Non-Durables: +2.4%
66%
68%
70%
72%
74%
76%
78%
80%
82%
Mar
01
Jun 0
1
Sep 0
1
Dec 0
1
Mar
02
Jun 0
2
Sep 0
2
Dec 0
2
Mar
03
Jun 0
3
Sep 0
3
Dec 0
3
Mar
04
Jun 0
4
Sep 0
4
Dec 0
4
Mar
05
Jun 0
5
Sep 0
5
Dec 0
5
Mar
06
Jun 0
6
Sep 0
6
Dec 0
6
Mar
07
Jun 0
7
Sep 0
7
Dec 0
7
Mar
08
Jun 0
8
Sep 0
8
Dec 0
8
Mar
09
Jun 0
9
Sep 0
9
Dec 0
9
Mar
10
Jun 1
0
Sep 1
0
Dec 1
0
Mar
11
Jun 1
1
Sep 1
1
Dec 1
1
Mar
12
Jun 1
2
Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 19
Percent of Industrial Capacity
Hurricane Katrina
March 2001-November 2001
recession
“Full Capacity”
The closer the economy is to operating at “full
capacity,” the greater the inflationary pressure
The US operated at 78.2% of industrial capacity in Aug.
2012, above the June 2009 low of 68.3% and tied for the
highest level since April 2008
December 2007-June 2009 Recession
March 2001 through August 2012
19
20
Manufacturing Employment,Jan. 2010—August 2012*
11,4
5811
,462
11,4
7011
,502
11,5
3611
,546
11,5
6611
,549
11,5
5111
,551
11,5
60
11,5
7511
,627
11,6
6411
,690
11,7
1811
,726
11,7
38
11,7
6811
,771
11,7
6811
,777
11,7
8011
,808
11,8
6011
,890
11,9
32
11,9
4211
,955
11,9
6211
,985
11,9
70
11,000
11,200
11,400
11,600
11,800
12,000
12,200
12,400
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0A
ug-1
0
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
102
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Manufacturing employment is up by more than 500,000 or 4.6% since Jan. 2010—a
surprising source of strength in the economy
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands)
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
40
45
50
55
60
65
Jan
-10
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Jun
-10
Jul-
10
Au
g-1
0
Se
p-1
0
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Fe
b-1
1
Ma
r-1
1
Ap
r-1
1
Ma
y-1
1
Jun
-11
Jul-
11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-1
1
Jan
-12
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Jun
-12
Jul-
12
Au
g-1
2
ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)
January 2010 through August 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
21
22
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
5371
,549
70,6
4362
,304
52,3
7451
,959
53,5
4954
,027
44,3
6737
,884
35,4
7240
,099
38,5
4035
,037
34,3
1739
,201
19,6
95 28,3
2243
,546
60,8
3756
,282
47,8
0610
,998
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 1112
: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%*
22
23
Private Sector Business Starts, 1993:Q2 – 2011:Q4*
175
186
174
180
186
192
188
187 18
918
6 190 19
419
119
9 204
202
195
196
196
206
206
201
192
198
206
206
203
211
205
212
200 20
520
420
419
720
320
920
1
192
192
193
201 20
420
221
0 212
209
216 22
0 223
220
220
210
221
212
204
218
209
207
207
199
191 19
317
2 176
169
184
175 17
918
820
018
3 187 19
119
7
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 Sept. 20, 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 Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000*
23
25
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)
26
Presidential Politics & the P/C Insurance Industry
How Is Profitability Affected by the President’s Political Party?
26
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
man Nixon/Ford
Ken
ned
y/
Joh
nso
n
Eis
enh
ow
er
Car
ter
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
ama
29
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
29
30
Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
Unemployment stood at 8.1% 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 August 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
30
Aug 12
186
7921
365
127
42 15-1
09-1
465
9723
-12
-85 -58
-161
-253 -230
-257
-347
-456
-547
-734 -6
67-8
06-7
07-7
44-6
49-3
34-4
52-2
97-2
15 -186
-262
75-8
316
62
229
51 6111
714
311
2 193
128 16
711
925
726
126
410
810
2 175
5221
613
9 178 23
4 277
254
147
8511
663
162
10314
4
(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan-
07F
eb-0
7M
ar-0
7A
pr-0
7M
ay-0
7Ju
n-07
Jul-0
7A
ug-0
7S
ep-0
7O
ct-0
7N
ov-0
7D
ec-0
7Ja
n-08
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-0
9Ju
n-09
Jul-0
9A
ug-0
9S
ep-0
9O
ct-0
9N
ov-0
9D
ec-0
9Ja
n-10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-1
1Ju
n-11
Jul-1
1A
ug-1
1S
ep-1
1O
ct-1
1N
ov-1
1D
ec-1
1Ja
n-12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Monthly Change in Private Employment
January 2008 through August 2012 (Thousands)
Private Employers Added 4.65 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
103,000 private sector jobs were created in
August
31
0.02
30.
011
-0.0
74-0
.132
-0.2
93-0
.546
-0.7
76-1
.033
-1.3
80-1
.836
-2.3
83-3
.117
-3.7
84-4
.590
-5.2
97-6
.041
-6.6
90-7
.024
-7.4
76-7
.773
-7.9
88-8
.174
-8.4
36-8
.361
-8.4
44-8
.428
-8.3
66-8
.222
-7.9
93-7
.942
-7.8
81-7
.764
-7.6
21-7
.509
-7.3
16-7
.188
-7.0
21-6
.902 -6.3
84-6
.120
-6.0
12-5
.910
-5.7
35-5
.683
-5.4
67-5
.328
-5.1
50-4
.916
-4.6
39-4
.385
-4.2
38-4
.153
-4.0
37-3
.974
-3.8
12-3
.709
-6.6
45
-10
-8
-6
-4
-2
0
2
Dec
-07
Jan-
08F
eb-0
8M
ar-0
8A
pr-0
8M
ay-
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09F
eb-0
9M
ar-0
9A
pr-0
9M
ay-
Jun-
09Ju
l-09
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10F
eb-1
0M
ar-1
0A
pr-1
0M
ay-
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11F
eb-1
1M
ar-1
1A
pr-1
1M
ay-
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12F
eb-1
2M
ar-1
2A
pr-1
2M
ay-
Jun-
12Ju
l-12
Aug
-12
Mill
ion
sCumulative Change in Private Employment: Dec. 2007—August 2012
December 2007 through August 2012 (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job losses peaked at 8.444 million
in December 2009
Cumulative job losses as of June 2012 totaled
3.709 million
32
All of the jobs “lost” since
President Obama took office in Jan.
2009 have been recouped
Private Employers Added 4.74 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)
0
-8
40
86
518
259
109
-70
-212 -188
-201
-221
-230
-267
-282
-295
-349
-367
-446 -4
13
-427
-454
-475
-486
-488
-483
-487
-504
-533
-551
-572
-579
-700
-500
-300
-100
100
300
500
700
Jan-
10
Feb
-10
Mar
-10
Apr
-10
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Cumulative Change in Government Employment: Jan. 2010—August 2012
January 2010 through August 2012* (Millions)
Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
Cumulative job losses through Aug. 2012 totaled 579,000
34
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 more than a half
million jobs since Jan. 2010 even as private employers created 4.74 million jobs.
Temporary Census hiring distorted 2010
figures
35
Net Change in Government Employment: Jan. 2010—August 2012*
-579
-426
-92-61
-700
-600
-500
-400
-300
-200
-100
0
Total Local State Federal
(Thousands)
Local government employment shrank by 426,000 from Jan.
2010 through Aug. 2012, accounting for 74% of all government job losses,
negatively impacting WC exposures for those cities and counties that insure privately
*Cumulative change from prior month; Base employment date is Dec. 2009.Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute
State government employment fell by 1.8% since the end of 2009 while
Federal employment is down by 2.1%
36
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.
37
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
Une
mpl
oym
ent 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.
38
US Unemployment Rate Forecast
4.5
%
4.5
%
4.6
%
4.8
%
4.9
% 5.4
% 6.1
%
6.9
%
8.1
%
9.3
%
9.6
% 10
.0%
9.7
%
9.6
%
9.6
%
8.9
%
9.1
%
9.1
%
8.7
%
8.3
%
8.2
%
8.2
%
8.2
%
8.1
%
8.0
%
7.9
%
7.8
%
9.6
%4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
07
:Q1
07
:Q2
07
:Q3
07
:Q4
08
:Q1
08
:Q2
08
:Q3
08
:Q4
09
:Q1
09
:Q2
09
:Q3
09
:Q4
10
:Q1
10
:Q2
10
:Q3
10
:Q4
11
:Q1
11
:Q2
11
:Q3
11
:Q4
12
:Q1
12
:Q2
12
:Q3
12
:Q4
13
:Q1
13
:Q2
13
:Q3
13
:Q4
Rising unemployment eroded payrolls
and workers comp’s
exposure base.
Unemployment peaked at 10% in
late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/12 edition); Insurance Information Institute.
2007:Q1 to 2013:Q4F*
Unemployment forecasts have been revised slightly
upwards for 2012 and 2013. Optimistic scenarios put the
unemployment as low as 7.3% by Q4 of next year.
Jobless figures have been revised
slightly upwards for 2012/13
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
41
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2012E
*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is I.I.I. estimate based YTD 2012 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
+9% in 2012E
43
Mass Layoff Announcements,Jan. 2002—August 2012*
*Seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute.
500
1,000
1,500
2,000
2,500
3,000
3,500
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Mass layoff announcements peaked at more than 3,000 per
month in Feb. 2009
There were 1,276 may layoffs announced in Aug. 2012, close to
pre-recession levels
49
Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Ins. Info. Inst.
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).
There were 844,000
discouraged workers in Aug. 2012
Thousands
“Discouraged Workers” are people who have searched for work for so long in vain
that they actually stop searching and drop out of
the labor force
Number of “Discouraged Workers,”Jan. 2002—August 2012
Large numbers of people are exiting
(or not returning to) the labor force
54
P/C Insurance Industry Financial Overview
Profit Recovery Was Set Back in 2011 by High Catastrophe
Loss & Other Factors
54
P/C Net Income After Taxes1991–2012:Q1 ($ 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
0,1
41
$2
8,6
72
-$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:Q1
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:Q1 ROAS1 = 7.2%
P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due primarily to lower catastrophe losses
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 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 ItOnce Was: Investment Impact on ROEs
Combined Ratio / ROE
* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio including M&FG insurers is 99.0, ROAS = 7.2%; 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
97.6
106.4
95.78.2%
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:Q10%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Year Ago
2011:Q1 = 102.2, 6.1% 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:Q1*
*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:Q1 ROAS = 7.2% 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%
10 Years
10 Years9 Years
2011:4.6%*
History suggests next ROE peak will be in 2016-2017
ROE
1975: 2.4%
2012:Q8.2%
60
Personal Lines Profitability Analysis
Significant Variability Over Time and Across States
61
18
.5
14
.5
14
.3
14
.1
13
.5
12
.4
12
.1
11
.8
11
.7
11
.6
11
.3
11
.2
11
.1
11
.0
10
.8
10
.7
10
.7
10
.5
10
.4
10
.2
9.8
9.7
9.6
9.2
9.1
02468
10121416182022
HI VT ME ID DC NH ND MN SD OH KS NM CT IA RI OR WY VA AZ WI CA UT IN AL AK
RN
W P
PA
*Latest available.
Sources: NAIC.
Hawaii was the most profitable state for auto insurers from 2001-2010
Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*)
Top 25 States(Percent)
62
9.0
8.9
8.8
8.8
8.5
8.4
8.0
7.8
7.7
7.6
7.5
7.4
7.4
7.4
7.4
7.1
7.1
7.1
7.0
6.8
5.4
5.3
5.1
4.2
3.4
2.7
-1.2-2
0
2
4
6
8
10
CO NY
SC
WA
NE IL
MD
TN MO US
MT
AR
GA
TX WV
NJ
OK PA
NC
MA
KY
MS
DE
NV FL LA MI
RN
W A
uto
Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*)
*Latest avaiiable.Sources: NAIC
Michigan was the least profitable state, in
large part due to fraud in its no-fault system
(Percent) Bottom 25 States
64
45.5
22.3
20.6
20.3
19.5
18.6
18.4
18.1
17.6
16.5
15.4
15.3
14.6
13.1
12.7
12.7
12.5
12.5
12.2
11.2
10.5
9.4
19.0
18.0
14.0
0
5
10
15
20
25
30
35
40
45
50
HI SC RI AK CT DC NV DE NY UT MA OR NC CA WA NM VT ME PA ID NJ VA WY AZ MD
RN
W H
O
*Latest available.
Sources: NAIC.
Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*)
(Percent) Top 25 States
Hawaii was the most profitable state for home insurers from 2001-2010
65
9.2
8.0
6.4
5.0
4.8
4.5
3.4
3.4
0.9
-29
.2
8.0
1.0
-4.4
-5.9
-7.1
-7.1
-7.2
-7.3
-8.3
-8.6
-10
.6
-11
.1
-25
.4
-3.8
-2.6-0
.3
0.4
-40-35-30-25-20-15-10-505
1015
NH CO MT MI US WV KS SD WI IL IA TX FL IN OH AR TN GA KY AL ND OK NE MN MO LA MS
RN
W H
O
*Latest available.Sources: NAIC
Bottom 25 States(Percent)
Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*)
Home insurance profitability in
catastrophe prone states suffered
the most over the past decade
74
Top 16 Most Costly World Insurance Losses, 1970-2011**
(Insured Losses, 2011 Dollars, $ Billions)
*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.**Figures do not include federally insured flood losses.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.
$11.9$13.0 $13.0$13.1
$19.1$21.3
$24.0$25.0
$37.5
$47.6
$7.7 $8.1 $8.3 $8.5 $9.3 $9.7
$0$5
$10$15$20$25$30$35$40$45$50
Hugo (1989)
WinterStormDaria(1991)
ChileQuake(2010)
Ivan (2004)
TyphoonMirielle(1991)
Charley(2004)
Wilma(2005)
ThailandFloods(2011)
NewZealandQuake(2011)
Ike (2008)
Northridge(1994)
SpringTornadoes/
Storms(2011)
WTC TerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)*
Katrina(2005)
5 of the top 14 most expensive
catastrophes in world history have occurred within the past 2 years
Taken as a single event, the Spring 2011 tornado and
thunderstorm season would likely become the 5th
costliest event in global insurance history
Geophysical events(earthquake, tsunami, volcanic activity)
Meteorological events (storm)
Hydrological events(flood, mass movement)
Selection of significant loss events (see table)
Natural catastrophes
Climatological events(extreme temperature, drought, wildfire)
Number of events: 450Number of events: 450
Severe storms, tornadoesUSA, 2–4 MarchFatalities: 41
Severe stormsUSA, 28–29 April
EarthquakeMexico, 20 March
Cyclone FunsoMozambique, 19–28 JanuaryFatalities: 46
Floods, flash floodsAustralia, Feb–March
Floods, landslidesChina, May–JuneFatalities: 127
Winter damage/avalanchesAfghanistan, Jan–MarchFatalities: 160
Cold waveEastern Europe, Jan–FebFatalities: 745
EarthquakeItaly, 20/29 MayFatalities: 18
Winter Storm AndreaEurope, 5–6 January
Source: MR NatCatSERVICE 75
Natural Loss Events:First Half 2012
World Map
86
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
86
87
US Catastrophe Loss Summary: First Half 2012 $12.5 Billion in Insured Losses in the US Arising from ~90 CAT Events
Down 49% from $24.4B in 2011:H1; But loss is still 44% above average over past 10 yrs.
Represents 80%+ of global total
Mild winter helped keep first half losses down
T-storm (includes tornado, hail and wind damage) accounted for est. $11.9B or 95% of first half insured losses and represent the 3rd most expensive spring t-storm season ever
~$19.6 Billion in Economic Losses in the US Down from approximately $75B in 2011:H1
Mild Winter Helped Keep First Half Insured Losses Down Lack of heavy precipitation limited spring flood but exacerbated drought conditions
Severe Droughts Now Impacting Central and Southwest Parts of US Two major wildfires in Colorado in June caused record $500 mill damage in the state
Largest wildfire in New Mexico history occurred in May
Insured crop losses could be high in 2012
Mild Hurricane Season While season got off to an early start, insured losses are not large by historical standards
Source: Munich Re; PCS; Insurance Information Institute.
Isaac likely in the lower end of modeled loss
range of $600M to $2B
Natural Disaster Losses in the United States: First Half 2012
88Source: MR NatCatSERVICE
89
Top 14 Most Costly Disastersin U.S. History
(Insured Losses, 2011 Dollars, $ Billions)
*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.Sources: PCS; Insurance Information Institute inflation adjustments.
$9.0$11.9 $13.1
$19.1$21.3
$24.0 $25.0
$47.6
$8.5$7.7$6.5$5.5$4.4$4.3
$0$5
$10$15$20$25$30$35$40$45$50
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Northridge(1994)
SpringTornadoes& Storms*
(2011)
9/11Attack(2001)
Andrew(1992)
Katrina(2005)
Taken as a single event, the Spring 2011 tornado and storm season are
is the 4th costliest event in US insurance history
Hurricane Irene became the 11th most expense
hurricane in US history
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2012:H1Number of Events (Annual Totals 1980 – 2011 and First Half 2012)
Source: MR NatCatSERVICE 90
22
6
61
1
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 90 natural disaster events in the first
half of 2012
92
$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
2.5
$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.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)
92
$500
$530
$830
$975
$980
$1,000
$1,200
$1,400
$1,510
$2,000
$5,000
$6,900
$7,300
$840
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000
Flooding, April*
Wildfire, Sep. 4-19
Thunderstorms, Apr. 19-20
Thunderstorms, Aug. 18-19
Winter Storm, Jan. 31-Feb. 3
Thunderstorms, Jul. 10-14
Texas Drought, 2011*
Thunderstorms, Jun. 16-22
Thunderstorms, Apr. 14-16
Thunderstorms, Apr. 8-11
Thunderstorms, Apr. 3-5
Hurricane Irene, Aug. 26-28**
Thunderstorms, May 20-27
Thunderstorms, Apr. 22-26
**Includes $700 million in flood losses insured through the National Flood Insurance Program.Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute.
2011’s Most Expensive Catastrophes, Insured Losses
The Midwest was hard hit by catastrophes in 2011, especially thunderstorms,
including tornadoes, hail and high winds
U.S. Thunderstorm Loss Trends, 1980 – 2012:H1
94Source: Property Claims Service, MR NatCatSERVICE
Average thunderstorm
losses are up more than 5 fold since the early 1980s.
2012 will likely be among the top 5 years on record.
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss. 2008-2012 are the most expensive
years on record.
Thunderstorm losses in 2012:H1 totaled $8.8 billion, the 3rd highest
first half on record
*Through June 30.Source: National Forest Service, MR NatCatSERVICE
U.S. Acreage Burned by Wildfires, 1980 – 2012*
95
1.7 millions acres were burned by wildfires in the first half of 2012.
Most of the insured losses were in CO totaling close to $500 mill.
96
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011*
*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3 0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
4.4
8.0
3.6
0.9
0.1
1.1
1.1
0.8
0
1
2
3
4
5
6
7
8
9
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of the Combined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.20*
Combined Ratio Points
Homeowners Insurance Catastrophe-Related Claim Frequency and Severity, 1997—2012*
*All policy forms combined, countrywide.Source: Insurance Research Council, Trends in Homeowners Insurance Claims, Sept. 2012 from ISO Fast Track data. 100
Avg. catastrophe claim cost rose
approximately 200% from 1997-2011
Cat claim frequency in 2011 was at historic highs and more than
double the rate in 1997
101
Federal Disaster Declarations Patterns:
1953-2012
101
Records Were Set for Federal Disaster Declarations in 2010 and
2011—Most Declarations Were Unrelated to Tropical Activity
Number of Federal Disaster Declarations, 1953-2012*
13 1
7 18
16
16
7 71
21
22
22
0 25
25
11
11
19
29
17
17
48
46
46
38
30
22 2
54
22
31
52
42
13
42
7 28
23
11
31
38
45
32 3
63
27
54
46
55
04
54
5 49
56
69
48 5
26
37
55
98
19
93
3
43
0
20
40
60
80
100
120
53
54
55
56
57
58
59
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
08
09
10
11
12
*Through Sept. 28, 2012.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.
The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011
The number of federal disaster declarations set a
new record in 2011, with 99, shattering 2010’s record 81
declarations.
There have been 2,068 federal disaster
declarations since 1953. The average
number of declarations per year is 34 from
1953-2010, though that few haven’t been
recorded since 1995.
33 federal disasters were declared through
Sept. 28, 2012
102
103
Federal Disasters Declarations by State, 1953 – 2012: Highest 25 States*
86
78
72
65
64
59
57
56
53
53
51
51
51
49
48
48
48
47
47
46
46
46
42
40
39
0
10
20
30
40
50
60
70
80
90
100
TX CA OK NY FL LA AL KY AR MO IL TN MS WV IA MN KS NE PA VA OH WA ND NC IN
Dis
as
ter
De
cla
rati
on
s
Over the past nearly 60 years,
Texas has had the highest number of Federal Disaster
Declarations
*Through Sept. 28, 2012. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
104
Federal Disasters Declarations by State, 1953 – 2012: Lowest 25 States*
39
39
37
36
36
34
34
29
28
27
26
26
25
24
24
23
23
22
17
17
17
15
14
12
10
9 9
0
10
20
30
40
50
ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC UT RI WY
Dis
as
ter
De
cla
rati
on
s
*Through Sept. 28, 2012. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.
Over the past nearly 60 years, Utah and Rhode Island had the fewest
number of Federal Disaster Declarations
105
2012 TORNADO & SEVERE STORM SUMMARY
2012 Got Off to a Worrisome Start, But Is No Repeat of 2011
105
106
1,1
33
1,1
32 1
,29
7
1,1
73
1,0
82 1,2
34
1,1
73
1,1
48
1,4
24
1,3
45
1,0
71 1,2
16
94
1
1,3
76
1,2
64
1,1
03
1,0
98
1,6
92
1,1
46 1,2
82
97
3
1,819
1,6
91
553
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
Nu
mb
er
of
To
rna
do
es
0
100
200
300
400
500
600
Nu
mb
er o
f De
ath
s
Number of Tornadoes
Number of Deaths
*Through Sept.23, 2012.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html
Number of Tornadoes and Related Deaths, 1990 – 2012*
Tornadoes claimed 553 lives in 2011, the most since 1925
973 tornadoes have been recorded so far this year, 68 deaths*
2012 Tornado Losses Got Off to an Ominous Beginning, but Slowed. First Half 2012 Insured Losses from Tornadoes and Thunderstorms Totaled $8.8B.
U.S. Tornado Count, 2005-2012*
107
*Through Sept. 27, 2012.Source: http://www.spc.noaa.gov/wcm/
2012 count is running far behind 2011
There were 1,897 tornadoes in the US in 2011 far above
average, but well below 2008’s record
Location of Tornadoes in the US, 2012*
*Through Sept. 23, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html# 109
977 tornadoes killed 68 people through Sept. 23
Location of Large Hail Reports in the US, 2012*
112*Through Sept. 23, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#
There were 6,781 “Large Hail”
reports through Sept. 23, 2012,
causing extensive damage to homes,
businesses and vehicles
Location of Wind Damage Reports in the US, 2012*
114*Through Sept. 23, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#
Extreme density due to late June derecho
There were 13,550 “Wind Damage” reports through
Sept. 23, causing extensive damage
to homes and, businesses
Severe Weather Reports, 2012*
116*Through Sept. 23, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#
There were already 21,310 severe weather reports through
Sept. 23; including 977
tornadoes; 6,781 “Large Hail” reports
and 13,550 high wind events
2012 US Drought: Implications for Crop (Re)Insurers
119*Credit Suisse, P&C Sector Forecast, Sept. 12, 2012.Source: US Drought Monitor: http://droughtmonitor.unl.edu/
The drought in the US has
diminished in intensity over
the past month. Crop combined
ratios are expected to be in the 100-110
range. For reinsurers, most XOL insurance
kicks-in at 104*
The BIG Question:When Will the Market Turn?
121
Catastrophes and Other Factors Are Pressuring Insurance Markets
121
New Factor: Record Low Interest Rates Are Contributing to
Underwriting and Pricing Pressures
122
Historical Criteria for a “Market Turn”:Low Interest Rates Add New Pressure
Criteria Status Comments
Sustained Period of
Large Underwriting
Losses
Large in 2011, Breakeven in
2012; Will Likely Grow
•Apart from 2011 CAT losses, overall p/c underwriting losses remain modest•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at onset of last hard market); CR= 97.6 in Q1:2012 (ex-M&FG)•Prior-year reserve releases continue to reduce u/w losses, boost ROEs, though more modestly
Material Decline in Surplus/ Capacity
Only Small Decline Due to
2011 Cats; Record Highs
in 2012
•Surplus hit a record $570.7B as of 3/31/12•Fell just 1.6% in 2011 due to CATs•Will likely see new records later in 2012•Little excess capacity remains in reinsurance markets•Modest growth in demand for insurance is insufficient to absorb much excess capacity
Tight Reinsurance
MarketSomewhat in
Place
•Much of the global “excess capacity” was eroded by cats•Higher prices in Asia/Pacific•Modestly higher pricing for US risks
Renewed Underwriting
& Pricing Discipline
Firming Broad, Sustained,esp. in Property, WC
•Commercial lines pricing trends have turned from negative to flat and now positive, esp. Property & WC; •Competition remains intense as many seek to maintain market share
Sources: Barclays Capital; Insurance Information Institute.
INVESTMENTS: THE NEW REALITY
123
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence
Underwriting & Pricing 123
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
$46.6
$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 Q1:2012 actual figure of $11.656B.Sources: ISO; Conning Research & Consulting; Insurance Information Institute.
($ Billions)
Investment earnings in 2011 were 10.3% below
their 2007 pre-crisis peak
128
U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*
*Monthly, through Aug. 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
128
129
Treasury Yield Curves: Pre-Crisis (July 2007) vs. August 2012
0.09% 0.10% 0.14% 0.18% 0.27%
1.14%
1.68%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
0.71%0.37%
2.77%2.40%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
August 2012 Yield CurvePre-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 2014
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.
130
-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%
Perso
nal L
ines
Pvt Pass
Aut
o
Pers P
rop
Comm
ercia
l
Comm
l Auto
Credit
Comm
Pro
p
Comm
Cas
Fidelity
/Sure
ty
Warra
nty
Surplu
s Line
s
Med
Mal
WC
Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
130
1. UNDERWRITING
131
Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?
131
132
P/C Insurance Industry Combined Ratio, 2001–2012:Q1*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q1=99.0. Sources: A.M. Best, ISO.
95.7
99.3100.8
106.4
97.6
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012:Q1
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:Q1*
* 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
2011 totaled $36.5B, the
largest since 2001
135
2
(2)
(8)
(3)
(7)(10) (10)
(4)
(0)
11
24
15
119
(5)
(9)
(14)
(10) (11)(7)
(5)(2)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$309
2
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
E
12
F
13
F
Pri
or
Yr.
Re
se
rve
Re
lea
se
($
B)
-6
-4
-2
0
2
4
6
8 Imp
ac
t on
Co
mb
ine
d R
atio
(Po
ints
)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2013F
Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to
Further Diminish in 2012 and 2103Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best.
Prior year reserve releases totaled $8.8
billion in the first half of 2010, up from
$7.1 billion in the first half of 2009
Financial Strength & Underwriting
138
Cyclical Pattern is P-C Impairment History is Directly Tied to
Underwriting, Reserving & Pricing
138
P/C Insurer Impairments, 1969–20118
15
12
71
19
34
91
31
21
99
16
14
13
36
49
31 3
45
04
85
56
05
84
12
91
61
23
11
8 19
49 50
47
35
18
14 15 16 1
9 21
34
5
0
10
20
30
40
50
60
70
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; Insurance Information Institute.
The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets
3 small insurers in Missouri did encounter
problems in 2011 following the May
tornado in Joplin. They were absorbed by a
larger insurer and all claims were paid.
139
144
Performance by Segment
144
Private Passenger Auto Combined Ratio: 1993–2012P
10
1.7
10
1.3
10
1.3
10
1.0
10
9.5
10
7.9
10
4.2
98
.4
94
.3
95
.1
95
.5 98
.3 10
0.2
10
1.3
10
1.0
10
2.0
10
0.3
99
.5 10
1.1
10
3.5
80
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F
Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry
Sources: A.M. Best (1990-2012F); Insurance Information Institute. 145
Homeowners Insurance Combined Ratio: 1990–2012F
11
3.0
11
7.7
15
8.4
11
3.6
10
1.0 10
9.4
10
8.2
11
1.4 1
21
.7
10
9.3
98
.2
94
.4 10
0.3
89
.0 95
.6
11
6.6
10
5.8
10
6.9
12
2.4
10
5.0
11
8.4
11
2.7 12
1.7
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F
Homeowners Performance Deteriorated in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected
Due to Local Catastrophe Loss Activity
Sources: A.M. Best (1990-2012E); Insurance Information Institute. 146
147
Homeowners Multi-Peril Loss & LAE Ratio, 2011:Highest 25 States
21
4.8
18
2.6
13
8.8
12
6.5
12
1.1
11
8.4
11
8.4
11
3.7
10
9.6
10
6.4
99
.8
99
.0
93
.5
89
.3
88
.2
86
.7
86
.1
84
.9
82
.5
82
.4
82
.1
80
.5
80
.0
78
.2
75
.0
0
2040
6080
100120
140160
180200
220
TN AL KS MO IA CT NC AR SD WY OH AZ NJ MD PA IL WI GA NE MA IN UT SC OK MN
Lo
ss &
LA
E R
atio
(%
)
Sources: SNL Financial; Insurance Information Institute.
TN and AL had the worst underwriting performance of all states in 2011 due to high
tornado and storm losses
148
Homeowners Multi-Peril Loss & LAE Ratio, 2011:Lowest 25 States
73.7
73.2
72.3
69.0
68.6
67.3
67.1
64.4
64.1
61.7
61.4
59.3
54.8
53.4
52.9
51.7
51.0
48.0
47.9
46.9
45.2
44.2
43.6
42.2
38.9
16.5
0
10
20
30
40
50
60
70
80
CO TX VA NM MS KY MT RI MI VT WV NY AK ND NH DE NV ID ME WA CA DC LA OR FL HI
Loss
& L
AE
Rat
io (%
)
Sources: SNL Financial; Insurance Information Institute.
HI and FL had the best performance in 2011 due to the absence of
hurricanes/tropical storms impacts in either state last year
109.4110.2
118.8
109.5
112.5
110.2
107.6
104.1
109.7 110.2
102.5
105.4
91.1
93.6
104.2
98.9
102.1
108.0
102.0102.0
111.1112.3
122.3
90
95
100
105
110
115
120
125
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
F
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute
Commercial Lines Combined Ratio, 1990-2012F*
Commercial lines underwriting
performance in 2011 was the worst since 2002
149
Workers Compensation Combined Ratio: 1994–2012F
102.
0
97.0 10
0.0
101.
0
112.
6
108.
6
105.
1
102.
7
98.5
103.
6
104.
6 110.
4 116.
6
117.
1
116.
0121.
7
107.
0
115.
3
118.
2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F
Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They
Have Been in a DecadeSources: A.M. Best; Insurance Information Institute. 156
$9
.8
$9
.5
$9
.2
$9
.7
$9
.8
$1
0.4
$1
1.2
$1
2.2
$1
3.5
$1
4.8
$1
6.2
$1
6.7
$1
7.5
$2
2.3
$2
2.5
$2
2.3$
18
.3
$1
7.6
$1
9.3
$2
0.8
$2
1.9
-2.8%+0.6%+8.8%
+2%
+5.5%
+3.6%+1.0%+4.6%
+3.1%+9.2%
+10.1%
+10.1%
+9.0%+7.7%
+5.9%+1.7%+4.9%-2.8%-3.1%+1.0%
+6.5%
5
7
9
11
13
15
17
19
21
23
25
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011p
IndemnityClaim Cost ($ 000s)
Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2010:+3.4%
2010p: Preliminary based on data valued as of 12/31/20111991–2010: Based on data through 12/31/2010, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes high deductible policies
Accident Year
Workers Comp Indemnity Claim Costs: Modest Increase in 2011
Average indemnity costs per claim resumed its upward climb in 2011
Average Indemnity Cost per Lost-Time Claim
2. SURPLUS/CAPITAL/CAPACITY
167
Have Large Global Losses Reduced Capacity in the Industry, Setting
the Stage for a Market Turn?
167
169
Policyholder Surplus, 2006:Q4–2012:Q1
Sources: ISO, A.M .Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6
$437.1
$463.0
$490.8
$511.5
$540.7$530.5
$544.8
$559.2 $559.1
$538.6
$550.3
$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
2011:Q1Previous Surplus Peak
Quarterly Surplus Changes Since 2011:Q1 Peak
11:Q2: -$7.4B (-1.0%)11:Q3: -$27.9B (-4.6%)11:Q4: -$16.2B (-2.5%)12:Q1: +$3.2B (+0.7%)
Surplus as of 3/31/12 hit an all time record high of $570.7B, 0.7% or $3.2B
above the previous record 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
176
3. REINSURANCE MARKET CONDITIONS
Record Global Catastrophes Activity is
Pressuring Pricing
176
178
Global Property Catastrophe Rate on Line Index, 1990—2012 (as of July 1)
15%
-3%
-13%
-8%
-20% -18% -1
1%
3%
14%
-11%
-6%
-9%
-16%
10%
-12%
-3%
7%
14%
76%
68%
25%
20%
0%
115
141
230
200184
147
121
152
255
233
195
215
184
196
133111
108
237
100
154
173
145
190
-40%
-20%
0%
20%
40%
60%
80%
100%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Ye
ar
Ov
er
Ye
ar
% C
ha
ng
e in
RO
L
0
50
100
150
200
250
300
Cu
mu
lativ
e R
ate
on
Lin
e (1
99
0=
10
0)
Year Over Year % Change
Cumulative Rate on Line Index
Sources: Guy Carpenter; Insurance Information Institute.
Property-Cat reinsurance pricing is up about 7% as of
7/1/12 but much more over the past 7-12 years—a cost that
must be reflected in LPI rates
4. RENEWED PRICING DISCIPLINE
180
Is There Evidence of a Broad and Sustained Shift in Pricing?
180
182
-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
Premium Growth Is Up Modestly: More in 2012?
(Percent)1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
2012:Q1 growth
was +3.1%
190
Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2012)
-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%
-11
.0%
-6.4
%-5
.1%
-4.9
%-5
.8%
-5.6
%-5
.3%
-6.4
%-5
.2%
-5.4
% -2.9
%
2.7
% 4.4
%4
.3%
-0.1
% 0.9
%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Pricing as of Q2:2012 was positive marking the first full
year of gains since 2003. Increases are holding steady in
2012.
(Percent)
Q2 2011 marked the 30th consecutive quarter of price
declines
192
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2012:Q2
1999:Q4 = 100
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Upward pricing pressure is smaller for large accounts, 3.7% in
Q2:2012, vs. 4.3% for small accounts and
4.9% for medium accounts
Despite 4 consecutive quarters of gains (Q2:2012 = 4.3%),
pricing today is where is was in early 2001 (pre-9/11),
suggesting additional rate need going forward, esp. in light of
record low interest rates
193
Change in Commercial Rate Renewals, by Line: 2012:Q2
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewed Uniformly Upward in Q2:2012 for Only the Fourth Time Since 2003; Property Lines & Workers
Comp Leading the Way; Cat Losses and Low Interest Rates Provide Momentum Going Forward
Percentage Change (%)
4.7%5.1%
7.2%
8.3%
0.6%
3.0%3.8% 3.9% 4.1% 4.3%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Su
rety
Co
mm
l Au
to
Um
bre
lla
Bu
sin
ess
Inte
rru
ptio
n
Ge
ne
ral
Lia
bili
ty
EP
L
D&
O
Co
nst
ruct
ion
Co
mm
erc
ial
Pro
pe
rty
Wo
rke
rsC
om
p
Workers Comp rate increases are large than any other line, followed
by Property lines
Shifting Legal Liability & Tort Environment
209
Is the Tort PendulumSwinging Against Insurers?
209
Business Leaders Ranking of Liability Systems in 2012
Best States
1. Delaware
2. Nebraska
3. Wyoming
4. Minnesota
5. Kansas
6. Idaho
7. Virginia
8. North Dakota
9. Utah
10. Iowa
Worst States
41. Florida
42. Oklahoma
43. Alabama
44. New Mexico
45. Montana
46. Illinois
47. California
48. Mississippi
49. Louisiana
50. West Virginia
Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.
New in 2012
Wyoming Minnesota Kansas Idaho
Drop-offs
Indiana Colorado Massachusetts South Dakota
Newly Notorious
Oklahoma
Rising Above
Arkansas
213
214
The Nation’s Judicial Hellholes: 2011
Source: American Tort Reform Association; Insurance Information Institute
South Florida
West VirginiaIllinois
Madison , St. Clair and McLean
counties
New YorkAlbany and
NYC
Watch List
Eastern District of Texas
Cook County, IL Southern NJ Franklin County, AL Smith County, MS Louisiana
Dishonorable Mention
MI Supreme Court AK Supreme Court MO Supreme Court
California
Philadelphia
NevadaClark County
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220