overview & outlook for the p/c insurance industry: trends, challenges & opportunities...

Overview & Outlook for theP/C Insurance Industry:

Trends, Challenges & OpportunitiesIndependent Insurance Agents of Westchester County

Tarrytown, NYMarch 5, 2015

Download at www.iii.org/presentations

Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

2

Insurance Industry:Financial Update & Outlook

2014 Was a Reasonably Good Year2015: A Repeat of 2014?

2

P/C Industry Net Income After Taxes1991–2014E 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.3% 2014 ROAS1 = 7.6%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS through 2014:Q2, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

Sources: A.M. Best, ISO; Insurance Information Institute

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$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

9,4

56 $

33

,52

2

$6

3,7

84

$5

0,2

03

$3

8,5

01

$2

0,5

59

$4

4,1

55

$6

5,7

77

-$6,970

$2

8,6

72

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

14E

Net income rose strongly (+81.9%) in 2013 vs. 2012 on lower cats, capital gains

$ Millions

-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

12

13

14

15

F1

6F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2016F

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning

1977:19.0%1987:17.3%

1997:11.6% 2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years

9 Years

History suggests next ROE peak will be in 2016-2017, but that seems unlikely

ROE

1975: 2.4%

2013 10.4%

2014E 7.6%

2015F=6.5%

2016F=6.3%

7

ROE: Property/Casualty Insurance by Major Event, 1987–2014E

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through Q3:2014. 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 11 12 13 14*

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

Sandy

Low CATs

Modestly higher CATs

-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

14E

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers. 2014 figure is through Q3.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%

ROE

1975: 2.4%

2013 10.4%

2014:H1 7.6%

Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2014*

1969: 3.9%

1965: 2.2%1957: 1.8%

1972:13.7%

1966-67: 5.5%1959:6.8%

1950:8.0%

1950-70: ROEs were lower in this period. Low interest rates,

low inflation, “Bureau” rate regulation all played a role

1970-90: Peak ROEs were much higher in this period while troughs

were comparable. High interest rates, rapid inflation, economic

volatility all played roles

1990-2010s: Déjà vu. Excluding mega-

CATs, this period is very similar to the 1950-1970 period

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

26 28 30 32 34 36 38 40 42 44 46 48 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 14

Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998.Source: A.M. Best; Insurance Information Institute.

Economic Shocks, Inflation:

1976: 22.0%

Tort Crisis1985/86: 22.2%

Post-9/112002:15.3%

Twin Recessions; Interest Rate

Hikes1987: 3.7% Great

Recession:2010: -4.9%

ROE

2014E 4.0%

NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2014E

Great Depression1932: -15.9% max drop

Post WW II Peak:1947: 26.2%

Start of WW II1941: 15.8%

1950-70: Extended period of stability in growth and

profitability. Low interest rates, low inflation, “Bureau”

rate regulation all played a role

1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic

volatility, high interest rates, tort environment all played roles

1988-2000: Period of

inter-cycle stability

2010-20XX? Post-

recession period of

stable growth?

11

P/C Insurance Industry Combined Ratio, 2001–2014:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014:9M = 97.7. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.797.9

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 2013 2014

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

PremiumsRelatively 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

Sandy Impacts

Lower CAT

Losses

Best Combined

Ratio Since 1949 (87.6)

13

Return on Net Worth (RNW) All Lines:2004-2013 Average

25

.6

18

.4

13

.4

13

.2

9.2

8.9

7.9

7.8

7.1

7.1

6.6

4.9

-1.0

-5

0

5

10

15

20

25

30

Fire

Inla

nd Mar

ine

All O

ther

Med

ical

Pro

f Lia

bility

Comm

Auto

Tota

l

Comm

erci

al MP

All Lin

es

Oth

er L

iabili

ty

Work

ers

Comp

PP Auto

Tota

l

Homeow

ners

MP

Farmow

ners

MP

Allied L

ines

Source: NAIC; Insurance Information Institute.

Commercial lines have tended to be more profitable than

personal lines over the past decade

14

RNW All Lines by State, 2004-2013 Average:Highest 25 States

20

.5

18

.4

14

.6

14

.3

13

.4

13

.3

12

.3

12

.1

12

.0

12

.0

11

.7

11

.4

11

.1

11

.1

10

.9

10

.8

10

.7

10

.7

10

.5

10

.5

10

.3

9.9

9.8

9.8

9.6

9.5

02468

1012141618202224

HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region


Profitability Benchmark: All P/C

US: 7.9%

15

9.2

8.6

8.4

8.3

8.2

8.2

8.1

8.0

7.9

7.7

7.7

7.5

7.4

6.8

6.6

6.4

6.1

5.7

5.3

5.2

5.0

4.3

2.5

1.9

-6.9

-9.3

-14-12-10

-8-6-4-202468

10

NM FL TX WI KS MN CO PA US AR IL IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA

RNW All Lines by State, 2004-2013 Average: Lowest 25 States


Some of the least profitable states over the past decade were hit hard

by catastrophes

Source: A.M. Best; Barclays research for estimates.

Reserve Change

P/C Insurance Loss Reserve Development, 1992 – 2016E*

Reserve releases are expected to gradually taper off, but will

continue to benefit the bottom line and combined ratio through

at least 2016

17

Profitability and Growth in New York P/C Insurance

Markets

Analysis by Line and Nearby State Comparisons

18

RNW All Lines: NY vs. U.S., 2004-2013

Source: NAIC, Insurance Information Institute

-15%

-10%

-5%

0%

5%

10%

15%

20%

04 05 06 07 08 09 10 11 12 13

US All Lines NY All Lines

(Percent)

Average 2004-2013US: 7.9%NY: 5.2%

Great Recession

Sandy

19

RNW PP Auto: NY vs. U.S., 2004-2013


-5%

0%

5%

10%

15%

20%

25%

04 05 06 07 08 09 10 11 12 13

US PP Auto NY PP Auto

Average 2004-2013US: 7.1%NY: 8.3%

Sandy

20

NY No-Fault (PIP) Claim Severity Has Trended Up Sharply Upward, 2004-2014*

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

$10,000

$5,873$6,129

$6,853

$7,492

$8,269

$8,714 $8,694

$7,913$8,299

$8,573

$9,331

*2014 figure is for the four quarters ending in 2014:Q3 (latest available).Sources: Insurance Information Institute from ISO/PCI Fast Track data.

No-fault claim severity (average cost per claim) increased by 17.9%

($1,418) between 2011 and 2014* and 58.7% ($3,458) since 2004

21

RNW Comm. Auto: NY vs. U.S.,2004-2013


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

04 05 06 07 08 09 10 11 12 13

US Comm Auto NY Comm Auto

(Percent)

Average 2004-2013US: 9.2%NY: 7.6%

Sandy

Great Recession

22

RNW Comm. Multi-Peril: NY vs. U.S.,2004-2013

Sources: NAIC, Insurance Information Institute

-10%

-5%

0%

5%

10%

15%

20%

25%

04 05 06 07 08 09 10 11 12 13

US Comm M-P NY Comm M-P

(Percent)

Average 2004-2013US: 8.9%NY: 10.6%

Sandy

23

RNW Homeowners: NY vs. U.S.,2004-2013


-10%

-5%

0%

5%

10%

15%

20%

25%

04 05 06 07 08 09 10 11 12 13

US HO NY HO

(Percent)

Average 2004-2013US: 6.6%NY: 15.9%

Sandy

24

RNW Workers Comp: NY vs. U.S.,2004-2013

Source: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

04 05 06 07 08 09 10 11 12 13

US WComp NY WComp

(Percent)

Average 2004-2013US: 7.1%NY: 4.9%

All Lines: 10-Year Average RNW NY & Nearby States

5.7%

8.0%

10.3%

11.1%

14.6%

5.2%

7.9%

0% 5% 10% 15% 20%

Vermont

Massachusets

Connecticut

Pennsylvania

U.S.

New Jersey

New York

2004-2013

New York All Lines profitability is below the US and regional

average


PP Auto: 10-Year Average RNW NY & Nearby States

7.1%

8.1%

8.3%

9.2%

13.7%

6.1%

7.7%

0% 5% 10% 15%

Vermont

Connecticut

New York

Massachusets

Pennsylvania

U.S.

New Jersey

2004-2013

New York PP Auto profitability is above the US average and below the regional

average


27

Top Ten Most Expensive And Least Expensive States For Automobile Insurance, 2012 (1)

RankMost

expensive statesAverage

expenditure RankLeast

expensive statesAverage

expenditure

1 New Jersey $1,219.93 1 Idaho $534.56

2 D.C. 1,154.91 2 South Dakota 556.51

3 New York 1,152.45 3 Iowa 561.26

4 Florida 1,127.93 4 North Dakota 576.08

5 Louisiana 1,112.53 5 Maine 582.43

6 Delaware 1,065.37 6 Wisconsin 598.84

7 Michigan 1,048.87 7 North Carolina 611.48

8 Rhode Island 1,034.50 8 Nebraska 616.78

9 Connecticut 986.73 9 Wyoming 618.81

10 Massachusetts 976.65 10 Kansas 632.07

(1) Based on average automobile insurance expenditures.

Source: © 2014 National Association of Insurance Commissioners.

New York ranked 3rd as the most expensive state in 2012, with an average expenditure for auto insurance of $1,152.45.

Comm. Auto: 10-Year Average RNW NY & Nearby States

7.6%

9.2%

12.1%

14.6%

18.0%

5.7%

9.1%

0% 5% 10% 15% 20%

Vermont

Massachusets

Connecticut

U.S.

Pennsylvania

New York

New Jersey


2004-2013

New York Commercial Auto profitability is below the US and regional average

Homeowners: 10-Year Average RNW NY & Nearby States

7.1%

14.6%

15.8%

15.9%

17.6%

6.6%

11.0%

0% 5% 10% 15% 20%

Massachusets

New York

Vermont

Connecticut

Pennsylvania

New Jersey

U.S.


2004-2013

New York Homeowners profitability is above the US and regional average

31

Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2012 (1)

Rank Most

expensive statesHO average

premium RankLeast

expensive statesHO average premium

1 Florida $2,084 1 Idaho $538

2 Louisiana 1,742 2 Oregon 567

3 Texas 1,661 3 Utah 580

4 Oklahoma 1,501 4 Wisconsin 631

5 Mississippi 1,314 5 Washington 648

6 Alabama 1,248 6 Nevada 674

7 Rhode Island 1,233 7 Delaware 678

8 Kansas 1,213 8 Arizona 691

9 Connecticut 1,160 9 Ohio 721

10 New York 1,158 10 Maine 741

(1) Includes policies written by Citizens Property Insurance Corp. (Florida) and Citizens Property Insurance Corp. (Louisiana), Alabama Insurance Underwriting Association, Mississippi Windstorm Underwriting Association, North Carolina Joint Underwriting Association and South Carolina Wind and Hail Underwriting Association. Other southeastern states have wind pools in operation and their data may not be included in this chart. Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.

(2) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms. In addition, due to the Texas Windstorm Association (which writes wind-only policies) classifying HO-1, 2 and 5 premiums as HO-3, the average premium for homeowners insurance is artificially high.

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank state average expenditures and does not endorse any conclusions drawn from this data.Source: ©2014 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.

New York ranked as the 10th most expensive state for homeowners insurance in 2012, with an average expenditure of $1,158.

Workers Comp: 10-Year Average RNW NY & Nearby States

4.8%

6.7%

7.1%

7.6%

7.8%

4.1%

4.9%

0% 2% 4% 6% 8% 10%

Massachusets

Vermont

U.S.

Pennsylvania

New York

Connecticut

New Jersey


2004-2013

New York Workers Comp profitability is

below the US average and regional

average

33

All Lines DWP Growth: NY vs. U.S., 2004-2013

Source: SNL Financial.

7.5%

2.3% 3.

4%

0.5%

-2.1

%

-3.3

%

0.0%

3.7% 4.

6% 5.5%

9.0%

0.3%

4.0%

1.5%

-2.0

%

-3.6

%

0.0%

3.2%

5.3% 6.

0%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

04 05 06 07 08 09 10 11 12 13

US DWP: All Lines NY DWP: All Lines

(Percent)

Average 2004-2013US: 2.2%NY: 2.4%

34

Comm. Lines DWP Growth: NY vs. U.S., 2004-2013


9.7

%

3.2

%

4.9

%

-0.3

%

-3.8

%

-7.3

% -2.5

%

5.1

%

5.1

%

6.1

%

13

.5%

2.0

% 7.3

%

2.1

%

-3.8

%

-7.3

% -1.7

%

3.1

% 6.1

%

7.8

%

-20%

-10%

0%

10%

20%

30%

04 05 06 07 08 09 10 11 12 13

US DWP: Comm. Lines NY DWP: Comm. Lines

(Percent)

Average 2004-2013US: 2.0%NY: 2.9%

35

Personal Lines DWP Growth: NY vs. U.S., 2004-2013


5.2

%

2.0

%

2.6

%

1.2

%

-0.1

%

1.1

% 2.5

%

2.2

% 4.2

%

5.1

%

3.3

%

-1.5

%

-0.6

%

0.7

%

1.2

%

2.2

%

2.2

%

3.1

%

3.9

%

3.2

%

-10%

-5%

0%

5%

10%

15%

20%

04 05 06 07 08 09 10 11 12 13

US DWP: Personal Lines NY DWP: Personal Lines

(Percent)

Average 2004-2013US: 2.6%NY: 1.8%

36

Private Passenger Auto DWP Growth:NY vs. U.S., 2004-2013


3.7%

0.1% 0.

8%

0.0%

-0.4

%

-0.1

% 1.5%

3.5% 4.

6%

1.6%

-4.3

% -2.6

%

-2.0

%

-0.1

% 1.6% 2.0% 2.

8% 3.6%

2.8%

1.5%

-10%

-5%

0%

5%

10%

15%

04 05 06 07 08 09 10 11 12 13

US DWP: PP Auto NY DWP: PP Auto

(Percent)

Average 2004-2013US: 1.5%NY: 0.5%

37

Homeowner’s MP DWP Growth: NY vs. U.S., 2004-2013


10

.4%

7.4

%

7.4

%

4.2

%

0.5

%

3.8

% 4.9

%

3.8

% 5.7

%

6.2

%

9.7

%

7.7

%

5.5

%

8.2

%

4.4

%

3.5

%

2.8

%

3.7

%

4.5

%

4.2

%

0%

5%

10%

15%

20%

25%

04 05 06 07 08 09 10 11 12 13

US DWP: HO Lines NY DWP: HO Lines

(Percent)

Average 2004-2013US: 5.4%NY: 5.4%

INVESTMENTS: THE NEW REALITY

45

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

45

Property/Casualty Insurance Industry Investment Income: 2000–20141

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4$45.7

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.

1 Investment gains consist primarily of interest and stock dividends. *2014 figure is estimated based on annualized data through Q3.Sources: ISO; Insurance Information Institute.

($ Billions) Investment earnings are still below their 2007 pre-crisis peak

Book Yield on Property/Casualty Insurance Invested Assets, 2007–2016F

4.42

4.19

3.95

3.71

3.283.20

3.13

3.74

3.523.38

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

07 08 09 10 11 12 13 14E 15F 16F

The yield on invested assets continues to decline as returns on maturing bonds generally still exceed new money yields. The end of the Fed’s QE program in Oct. 2014 should allow some increase

in longer maturities while short term interest rate increases are unlikely until mid-to-late 2015

Sources: Conning.

(Percent)

Book yield in 2014 is down 114 BP from pre-crisis levels

CAPITAL/CAPACITY

57

Capital Accumulation Has Multiple Impacts

57

58

Policyholder Surplus, 2006:Q4–2014:Q3

Sources: ISO, A.M .Best.

($ Billions)$4

87.1

$496

.6

$512

.8

$521

.8

$478

.5

$455

.6

$437

.1 $463

.0 $490

.8 $511

.5 $540

.7

$530

.5

$544

.8

$559

.2

$559

.1

$538

.6

$550

.3

$567

.8

$583

.5

$586

.9 $607

.7

$614

.0

$624

.4 $653

.3

$671

.6

$673

.9

$662

.0

$570

.7

$566

.5

$505

.0

$515

.6

$517

.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

14:Q

2

14:Q

3

2007:Q3Pre-Crisis Peak

Surplus as of 9/30/14 stood at a record high $673.9B

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .

The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2015in very strong financial condition.

63

Alternative Capital

63

New Investors Continue to Change the Reinsurance Landscape

First I.I.I. White Paper on Issue Will Be Released Q1 2015

Global Reinsurance Capital (Traditional and Alternative), 2006 - 2014

2014 data is as of June 30, 2014.Source: Aon Benfield Analytics; Insurance Information Institute.

Total reinsurance capital reached a record $570B in 2013, up 68% from

2008.

But alternative capacity has grown 210% since 2008, to $50B. It has more than doubled in the past three years.

Alternative Capital as a Percentage of Traditional Global Reinsurance Capital

2014 data is as of June 30, 2014.Source: Aon Benfield Analytics; Insurance Information Institute.

Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010.

Catastrophe Bond Issuance and Outstanding: 1997-2014

67

Risk Capital Amount ($ Millions)

2014 Has Seen the Largest Cat Bond Ever - $1.5 Billion (Florida Citizens). Bond Issuance Set a Record.

Source: Guy Carpenter.

Reinsurance Pricing: Change in Rate on Line for Cat Business

2014 reflects change through June 30 from prior year end. 2015 is for January 1 renewals..Source: Guy Carpenter; Insurance Information Institute.

Catastrophe Prices Fell 11 Percent on January 1 Renewals, Driven by Emergence of New Capital, Mild Catastrophe Losses.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-20%

-10%

0%

10%

20%

30%

40%

14% 14%

-11%

-6%

76%

-9%

-16%

10%

-12%

-3%

7%

-7%

-17%

-11%

(Change from Previous Year)

Japan, NZ Quakes, US Tornadoes.

2001-02: WTC Losses, Falling

Stock, Bond Prices Dry Up Capital.

2006: Higher Rates After Record Hurri-

canes.

76%Alternative

Capital, Low Levels of

Catastrophe Drive Rates

Down.

74

Commercial Lines Pricing Trends

Survey Results Suggest Commercial Pricing Has

Flattened Out

74

75

Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2014)

-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%

3.9

%5

.0%

5.2

%4

.3%

3.4

%2

.1%

1.5

%-0

.5%

0.1

%-0

.7%

-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

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

Pricing as of Q4:2014 had turned (slightly) negative for only the 2nd time in 3 years

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

76

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2014:Q4

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.


Percentage Change (%)

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

KRW : No Lasting Impact

Pricing turned positive in Q3:2011, the first increase in

nearly 8 years; Q1:2014 renewals were up 1.5%; Some insurers posted

stronger numbers.

Peak = 2001:Q4 +28.5%

79

Change in Commercial Rate Renewals, by Line: 2014:Q4

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Major Commercial Lines Renewals Were Mixed to Flat in Q4:2014; Commercial Auto and EPL Led the Way

Percentage Change (%)

0.7%

2.3%2.8% 3.0%

-2.2%

-1.3%

-0.4% -0.3%

0.0% 0.1%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Co

mm

erc

ial

Pro

pe

rty

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

Um

bre

lla

Co

nst

ruct

ion

Su

rety

Wo

rke

rsC

om

p

D&

O

EP

L

Co

mm

erc

ial

Au

to

Commercial Auto rate increases are large than any other line, followed

by Employment Practices


80

Performance by Segment

80

Private Passenger Auto Combined Ratio: 1993–2016F

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

2.1

10

1.6

10

2.2

10

1.0

10

0.8

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 12 13 14E15F16F

Private Passenger Auto Accounts for 37% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry

81Sources: A.M. Best (1990-2013); Insurance Information Institute (2014F – 2015F).

Homeowners Insurance Combined Ratio: 1990–2015F

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

2.3

10

4.1

94

.0

97

.5

99

.5

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 12 13 14E 15F

1

Homeowners Performance in 2011/12 Impacted by Large Cat Losses. Extreme Regional Variation Can Be Expected Due to

Local Catastrophe Loss Activity

82

Hurricane Ike

Hurricane Sandy

Record tornado activity

Hurricane Andrew

Sources: A.M. Best (1990-2014F);Conning (2015F); Insurance Information Institute.

10

9.4

11

0.2

11

8.8

10

9.5 1

12

.5

11

0.2

10

7.6

10

4.1

10

9.7

11

0.2

10

2.5 1

05

.4

91

.1

93

.6

10

4.2

98

.9

10

2.4

10

7.9

10

3.4

98

.3 99

.9

98

.9

10

2.0

11

1.1

11

2.3

12

2.3

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

13

F

14

F

15

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 (1990-2014F); Conning (2015F) Insurance Information Institute.

Commercial Lines Combined Ratio, 1990-2015F*

Commercial lines underwriting

performance is expected to improve as

improvement in pricing environment persists

83

Commercial Auto Combined Ratio: 1993–2015F

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4

94

.1 96

.8 99

.1

97

.8

10

3.4 10

6.8

10

6.5

10

6.4

10

5.2

11

8.1

11

5.7

11

6.2

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14E 15F

Commercial Auto is Expected to Improve Only Slowly as Rate Gains Barely Offset Adverse Frequency and Severity Trends

84Sources: A.M. Best (1990-2014E);Conning (2015F); Insurance Information Institute.

Commercial Property Combined Ratio: 2007–2016F

72.4

105.

8

83.3 86

.5

85.4 89

.4

90.1

106.

5

105.

8

82.7

70

75

80

85

90

95

100

105

110

07 08 09 10 11 12 13 14E 15F 16F

Commercial Property Underwriting Performance Has Been Volatile in Recent Years, Largely Due to

Fluctuations in CAT Activity

Source: Conning Research and Consulting. 85

General Liability Combined Ratio: 2005–2015F

112.

9

95.1 99

.0

94.2

104.

1

101.

4

103.

0

103.

9107.

1 110.

8

99.8

80

85

90

95

100

105

110

115

05 06 07 08 09 10 11 12 13F 14F 15F

Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years

Source: Conning Research and Consulting. 86

89

Growth Analysis by State and Business Segment

Post-Crisis Paradox? Premium Growth Rates Vary

Tremendously by State

89

90

-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 13 1415

F14

F

Net Premium Growth: Annual Change, 1971—2016F

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

*Actual figure based on data through Q3 2014.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.

2015-16F: 4.0%

2014E: 3.9%*

2013: 4.6%

2012: +4.3%

92

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

74

.6

36

.9

31

.9

27

.4

25

.2

24

.9

22

.5

22

.2

16

.6

15

.9

15

.7

14

.5

14

.5

14

.3

12

.6

11

.9

11

.8

11

.2

10

.5

10

.3

9.9

9.8

9.3

9.1

9.0

8.6

0

10

20

30

40

50

60

70

80

ND

SD

OK

NE

KS IA VT

TX

WY

TN

MN

AR

AK IN WI

CO MI

KY

OH NJ

LA

SC VA

AL

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 StatesNorth Dakota was the country’s growth leader over the past 6 years with premiums written

expanding by 74.6%, fueled by the state’s energy boom

Growth Benchmarks: Total P/C

US: 7.9%

93

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

8.5

8.2

7.9

7.8

7.6

7.3

7.0

6.9

6.2

5.9

5.6

5.3

4.2

4.1

3.5

1.6

1.0

0.4

-0.7

-1.7

-1.9

-4.1

-5.7

-6.7

-12

.6

-15

.3

-20

-15

-10

-5

0

5

10

MS

CT

US

NC

GA

NY

MD

MA

UT

WA

PA IL RI

NH ID MT

ME

OR

CA

FL

DC AZ

WV HI

NV

DE

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States


Growth was negative in 7 states and DC between

2007 and 2013

94

Direct Premiums Written: PP AutoPercent Change by State, 2007-2013

34

.1

26

.7

25

.8

24

.0

19

.7

18

.7

16

.8

15

.5

14

.9

14

.6

14

.4

14

.3

14

.2

14

.1

13

.8

13

.7

13

.6

13

.5

13

.5

12

.3

11

.4

10

.9

10

.7

10

.6

10

.5

10

.4

0

5

10

15

20

25

30

35

40

ND

TX MI

OK

SD

NE

NJ

TN

CO

KS FL IA KY WI

DE

UT VA

SC

NY LA

AR

US

MT

MO

WY

AL

Pe

ce

nt

ch

an

ge

(%

)


Top 25 States

Growth Benchmarks: PPA

US: 10.9%

98

Direct Premiums Written: HomeownersPercent Change by State, 2007-2013

60.5

53.3

50.7

50.7

50.5

49.2

46.3

45.4

45.4

44.7

44.0

43.5

42.9

42.5

42.1

41.9

40.3

38.1

37.1

37.1

35.7

34.9

34.1

33.6

33.0

32.6

0

10

20

30

40

50

60

70

OK

ND

MN

AR

TN

SD

MO

CO

KY

KS WI

WY

NE IA GA

MT

TX

NM

OH IN AL IL SC

DE

UT ID

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LLC.; Insurance Information Institute.

Top 25 States

Growth Benchmarks: HO

US: 26.8%

99

Direct Premiums Written: HomeownersPercent Change by State, 2007-2013

32

.6

32

.5

31

.4

30

.6

30

.4

30

.3

29

.8

29

.6

27

.5

27

.2

26

.8

26

.4

25

.3

24

.6

22

.5

22

.3

20

.8

19

.7

19

.2

17

.2

16

.1

15

.4

8.3

8.0

2.1

0.5

0

5

10

15

20

25

30

35

40

MS

NC VA

NJ

CT RI

LA

PA

WV

WA

US

NH

ME

MD

NY

OR

MA

AK

DC AZ

VT MI

HI

CA

FL

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States


The collapse of the housing bubble hit CA, FL and NV hard, leading

to the slowest growth rates in the US between

2007 and 2013

100

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

91

.1

42

.1

41

.4

33

.7

26

.3

25

.8

23

.6

19

.1

15

.6

14

.0

11

.3

10

.0

9.8

6.8

6.7

6.5

4.1

3.2

3.1

3.0

2.7

2.2

2.0

1.7

1.3

0.6

0

10

20

30

40

50

60

70

80

90

100

ND

OK

SD VT

NE IA KS ID AK

TX

WY

MN IN AR

TN W

I

OH

MA

CT

NM LA

MS

NJ

NY

US

MO

Pe

ce

nt

ch

an

ge

(%

)


Top 25 States

Only 30 states showed any

commercial lines growth from 2007

through 2013

Growth Benchmarks: Commercial

US: 1.3%

101

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

0.5

0.4

0.2

0.1

-0.5

-0.8

-0.9

-1.0

-1.1

-1.1

-1.9

-2.0

-2.1

-2.7

-3.3

-3.7

-4.3

-4.9

-10

.7

-11

.4

-11

.7

-12

.6

-12

.7

-13

.6

-22

.4

-25

.1

-30

-25

-20

-15

-10

-5

0

5

MD

NH PA

CO IL

WA

VA

KY

NC

ME RI

MI

SC AL

GA

CA

UT

DC

OR

MT HI

DE FL AZ

WV

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 6 years

Nearly half the states have yet to see commercial lines premium

volume return to pre-crisis levels

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

106

Growth Will Expand Insurer Exposure Base Across Most Lines

106

107

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/15; Insurance Information Institute.

2.7%

1.8%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

0.4%

2.7%

1.8%

3.5%

-2.1

%4.

6% 5.0%

2.2% 2.7%

2.9%

3.0%

2.9%

2.8%

2.8%

2.8%

2.7%

-8.9%

4.5%

1.4%

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

2

00

7

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

14

:1Q

14

:2Q

14

:3Q

14

:4Q

15

:1Q

15

:2Q

15

:3Q

15

:4Q

16

:1Q

16

:2Q

16

:3Q

16

:4Q

Demand for Insurance Should Increase in 2015 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in in June

2009

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

Q1 2014 GDP data were hit hard by this

year’s “Polar Vortex” and harsh

winter

State-by-State Leading Indicatorsthrough 2015:Q2

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 108

The economic outlook for most of the US is generally

positive, though flat-to-negative for

2 states

Growth in the West is

finally beginning to pick up

http://www.philadelphiafed.org/index.cfm

109

Real GDP by State Percent Change, 2013:Highest 25 States

9.7

7.6

5.1

4.2

4.1

3.8

3.8

3.7

3.1

3.0

3.0

2.9

2.8

2.7

2.7

2.4

2.3

2.2

2.1

2.0

2.0

1.9

1.9

1.9

1.8

1.8

0

1

2

3

4

5

6

7

8

9

10

ND WY WV OK ID CO UT TX SD NE MT IA MN OR WA AR NC FL IN MI CA VT KS HI GA US

Pe

rce

nt

Ch

an

ge

(%

)

Sources: U.S. Bureau of Economic Analysis; Insurance Information Institute.

North Dakota was the economic growth juggernaut of the US

in 2013—by far

Only 9 states experienced growth in excess of 3% in 2013, which is what we would see nationally in a

more typical recovery

Growth Benchmarks: Real GDP

US: 1.8%

http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm


110

1.8

1.7

1.6

1.6

1.6

1.6

1.5

1.4

1.3

1.2

1.1

1.1

1.0

0.9

0.9

0.9

0.9

0.8

0.8

0.8

0.7

0.7

0.1

0.0

-0.5

-2.5

-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5

OH WI MA DE KY MS NM RI LA SC NJ AZ NV CT ME NH IL MO AL TN NY PA VA MD DC AL

Pe

rce

nt

Ch

an

ge

(%

)Real GDP by State Percent Change, 2013: Lowest 25 States

Sources: US Bureau of Economic Analysis; Insurance Information Institute.

DC and Alabama were the only

states to shrink in 2013

Growth rates in 11 states were still below 1% in

2013




113

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4

15.5 16

.4 16.9

17.1

16.9

16.8

16.9

16.8

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 12 13 14 15F 16F 17F 18F 19F 20F

(Millions of Units)

Auto/Light Truck Sales, 1999-2020F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/15 and 10/14); Insurance Information Institute.

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2014-15 is

still below 1999-2007 average of 17 million units, but a robust recovery is well underway.

Job growth and improved credit market conditions will boost auto sales in

2014 and beyond

Truck purchases by contractors are

especially strong

Yearly car/light truck sales will likely continue at current levels, in part replacing cars that were held onto in 2008-12. New vehicles will generate more physical damage insurance coverage but will be more expensive to

repair. PP Auto premium might grow by 5% - 6%.

Sales have returned to pre-

crisis levels

114

Monthly Change in Auto Insurance Prices, 1991–2015*

*Percentage change from same month in prior year; through January 2015; 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 '13 '14 '14

Cyclical peaks in PP Auto tend to occur roughly every 10 years (early

1990s, early 2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in late

2010 at 5.3%, falling to 2.8% by Mar. 2012

The Jan. 2015 reading of 5.0% is

up from 3.4%a year earlier

115

Average Expenditures on Auto Insurance

$651$668

$691$705

$726

$786

$830$842

$831$816

$795$789 $787 $792 $798$815

$835$856

$877

$690$685$703

$600

$650

$700

$750

$800

$850

$900

$950

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13E

14E

15F

Countrywide Auto Insurance Expenditures decreased by 6.5% from 2004 through 2009, rising gradually since the with annual increases

in the 2.0% to 2.5% range* Insurance Information Institute Estimates/Forecasts

Source: NAIC, Insurance Information Institute estimate for 2013-2015 based on CPI and other data.

The average expenditure on auto insurance remained below 2004 until 2013

116

(Millions of Units)

New Private Housing Starts, 1990-2020F

1.4

81

.47 1

.62

1.6

41

.57

1.6

0 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

60

.91

0.5

50

.59

0.6

1 0.7

8 0.9

21

.01 1

.16 1.3

0 1.4

21

.46

1.4

81

.50

1.3

51.4

61

.29

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 12 13 14 15F16F17F18F19F20F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/15 and 10/14); Insurance Information Institute.

Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk

Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction

for several more years

NFIB Small Business Optimism Index

January 1985 through December 2014

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 119

Small business optimism remains near its post-

crisis highs

http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif

121

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8247

,806

40,0

7533

,212

26,9

83

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 13 14

Business Bankruptcy Filings,1980-2014

Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013-14 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

2014 bankruptcies totaled 26,983, down 18.8% from 2013—the 5th consecutive year of decline.

Business bankruptcies more than tripled during the financial crisis.

% Change Surrounding Recessions

1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%

121

http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633

http://news.uscourts.gov/

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

125

The Construction Sector Is Critical to the Economy and the P/C Insurance Industry

125

126

Value of New Private Construction: Residential & Nonresidential, 2003-2014*

Billions of Dollars

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

03 04 05 06 07 08 09 10 11 12 13 14*

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2014: Value of new pvt. construction hits $698.6B as of Nov. 2014, up 40%

from the 2010 trough but still 23% below 2006 peak

126

$261.8

$238.8

$349.6

$349.0

*2014 figure is a seasonally adjusted annual rate as of December.Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

http://www.census.gov/construction/c30/c30index.html

127

Value of Construction Put in Place, Dec. 2014 vs. Dec. 2013*

6.7%

3.2%

6.8%

2.2%

0.4%

-4.0%

5.3%

-6%

-4%

-2%

0%

2%

4%

6%

8%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth In the Private Sector Slowed in Late 2014 While Picking in the State/Local Sector Government

Sector as Budget Woes Ease in Some Jurisdictions

Growth (%)

Private sector construction activity is up in the

residential and nonresidential segments but

growth is sluggish

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +0.4% Public: +6.7%

Public sector construction activity is finally beginning to pick up after years of

decline

http://www.census.gov/construction/c30/c30index.html

131

$314.9$304.0

$286.4 $279.0 $271.4$281.1

$216.1 $220.2$234.2

$255.4

$289.1$308.7

$0

$50

$100

$150

$200

$250

$300

$350

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

($ Billions)

Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Contracted As State/Local Governments Grappled with

Deficits and Federal Sequestration

Value of New Federal, State and Local Government Construction: 2003-2014*

*2014 figure is a seasonally adjusted annual rate as of December; http://www.census.gov/construction/c30/historical_data.html Sources: US Department of Commerce; Insurance Information Institute.

Construction across all levels of government

peaked at $314.9B in 2009

Austerity Reigns

Govt. construction MAY be turning a corner; still down

$33.8B or 10.7% since 2009 peak

http://www.census.gov/construction/c30/historical_data.html

http://www.census.gov/construction/c30/historical_data.html

133

Construction Employment,Jan. 2010—December 2014*

*Seasonally adjusted.Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

55,

478

5,48

55,

497

5,52

45,

530

5,54

75,

546

5,58

35,

576

5,57

75,

612

5,62

95,

644

5,64

05,

636

5,61

55,

622

5,62

75,

630

5,63

35,

649

5,67

35,

711

5,73

5 5,78

35,

799

5,79

25,

791

5,80

15,

804

5,80

55,

822

5,83

05,

849

5,87

6 5,92

75,

927

5,96

46,

000

6,00

96,

017

6,04

76,

064

6,08

26,

098

6,11

8 6,16

6

5,400

5,500

5,600

5,700

5,800

5,900

6,000

6,100

6,200

6,300

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-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

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Construction employment is +731,000 above

Jan. 2011 (+13.4%) trough

(Thousands)

Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.

http://data.bls.gov/

ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT

BUT VOLATILE

135

US Is Becoming an Energy Powerhouse but Fall in Prices

Will Have Negative Impact

135

20.2 19.9 20.0 19.518.9 19.4

20.221.1

21.622.4

24.0

25.3 25.6

20.6

10

12

14

16

18

20

22

24

26

28

00 01 02 03 04 05 06 07 08 09 10 11 12 13

U.S. Natural Gas Production, 2000-2013

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

Trillions of Cubic Ft. per Year

The U.S. is already the world’s largest natural gas producer—

recently overtaking Russia. This is a potent driver of commercial

insurance exposures

138

Employment in Oil & Gas Extraction,Jan. 2010—Dec. 2014*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

Feb

-10

Apr

-10

Jun-

10

Aug

-10

Oct

-10

Dec

-10

Feb

-11

Apr

-11

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb

-12

Apr

-12

Jun-

12

Aug

-12

Oct

-12

Dec

-12

Feb

-13

Apr

-13

Jun-

13

Aug

-13

Oct

-13

Dec

-13

Feb

-14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

150

160

170

180

190

200

210

220

156.

615

6.9

157.

515

8.7

158.

215

8.3

159.

716

0.1

161.

216

1.4

160.

816

2.8

164.

416

6.8

169.

217

0.1

171.

117

2.6

173.

917

6.4

177.

917

8.6

180.

418

1.4

182.

418

4.9

185.

218

6.2

187.

818

8.6

189.

018

9.2

189.

019

0.6

192.

419

3.2

194.

819

4.2

194.

919

5.7

196.

019

7.5

198.

719

9.7

200.

620

3.1

204.

320

5.3

207.

820

7.5

207.

921

0.1

211.

321

2.2

212.

221

3.1

215.

121

5.7

216.

1

Oil and gas extraction employment is up 37.7% since Jan. 2010 as the energy sector

booms. (Previous boom in 1979-81, employment peak at

267,000 in March 1982.)

(000)

Highest employment in this sector since July 1986.


MANUFACTURING SECTOR OVERVIEW & OUTLOOK

139

The U.S. Is Experiencing a Mini Manufacturing Renaissance but Headwinds from Weak Export

Markets and Strong Dollar139

140

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—November 2014

* Seasonally adjusted; Data published Jan. 6, 2015.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in Nov. 2014 exceeded the pre-crisis (July 2008) peak but has declined in recent months. Manufacturing is energy-intensive and growth leads to

gains in many commercial exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.

$ Millions

140

The value of Manufacturing Shipments in Nov. 2014 was

$495.7B—down slightly since the July 2014 record high of $508.1B

http://www.census.gov/manufacturing/m3/

142

Manufacturing Employment,Jan. 2010—December 2014*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

4111

,870

11,9

1011

,920

11,9

2611

,935

11,9

5711

,943

11,9

2511

,931

11,9

3811

,951

11,9

6511

,988

11,9

8411

,977

11,9

7211

,965

11,9

4811

,963

11,9

9312

,011

12,0

4612

,053

12,0

6112

,081

12,0

8512

,094

12,1

0912

,130

12,1

5412

,157

12,1

6912

,193

12,2

2212

,239

11,250

11,500

11,750

12,000

12,250

12,500Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-Ja

n-12

2/30

/2M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-

Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.

*Seasonally adjusted. Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands) Since Jan 2010, manufacturing

employment is up (+877,000 or +7.7%)and still growing.


147

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend Has Greatly Improved

147

148

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Jan14

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 5.7% in Jan. 2015. 4.5% to

5.5% is “normal.”

Source: US Bureau of Labor Statistics; Insurance Information Institute.

January 2000 through January 2015, Seasonally Adjusted (%)

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving.

148

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 11.3% in Jan. 2015.8% to 10% is

“normal.”

149

US Unemployment Rate Forecast4

.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%

8.0

%7

.8%

7.7

%7

.6%

7.3

%7

.0%

6.6

%6

.2%

6.1

%5

.7%

5.6

%5

.4%

5.3

%5

.2%

5.2

%5

.1%

5.0

%5

.0%

9.6

%

4%

5%

6%

7%

8%

9%

10%

11%

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

14

:Q1

14

:Q2

14

:Q3

14

:Q4

15

:Q1

15

:Q2

15

:Q3

15

:Q4

16

:Q1

16

:Q2

16

:Q3

16

:Q4

Rising unemployment eroded payrolls

and WC’s exposure base.

Unemployment peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/15 edition); Insurance Information Institute.

2007:Q1 to 2016:Q4F*

Unemployment forecasts have been revised modestly

downwards. Optimistic scenarios put the

unemployment as low as 5.0% by Q4 of 2015.

Jobless figures have been revised

downwards for 2015/16

23

15

21

70

52

12

65

73

-71

32 6

4 81

55

3-1

15

-10

6-2

21

-21

5-2

06

-26

1-2

58

-42

2-4

86

-77

6 -69

3-8

21

-69

8-8

10

-80

1-2

94

-42

6-2

72

-23

2 -14

1-2

71

-15

-23

22

0-3

81

92

94 11

01

20

11

71

07

19

91

49

94

72

22

32

31 3

20

16

61

86 21

91

25

26

81

77

19

12

22

36

42

28

24

61

02

13

17

51

72

13

61

59

25

52

11

21

52

19 26

31

64

18

82

22

20

11

70

18

01

53

24

72

72

86

18

31

75 22

33

13

23

8 27

22

43

20

92

35

21

84

14

32

02

67

11

3

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

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

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Monthly Change in Private Employment

January 2007 through Jan. 2015 (Thousands, Seasonally Adjusted)

Private Employers Added 11.20 million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 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

320,000 private sector jobs were

created in Jan. In March 2014, the last of the private jobs lost in the Great Recession were

recovered

150

Jobs Created2014: 2.723 Mill2013: 2.368 Mill2012: 2.294 Mill2011: 2.400 Mill2010: 1.277 Mill

2,723,000 jobs were created

in 2014

http://www.bls.gov/ces/home.htm

151

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2014:Q3

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,250

$7,500

$7,75005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

213

:Q3

13:Q

414

:Q1

14:Q

214

:Q3

Prior Peak was 2008:Q3 at $6.54 trillion

Recent trough (2009:Q1) was $6.23 trillion, down

5.3% from prior peak

Growth rates2011:Q3 over 2010:Q3: 4.1%2012:Q3 over 2011:Q3: 3.2%2013:Q3 over 2012:Q3: 3.6%2014:Q3 over 2013:Q3: 4.4%

151

Latest (2014:Q3) was $7.46 trillion, a new peak--$1.21 trillion above 2009 trough

http://research.stlouisfed.org/fred2/series/WASCUR

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

152

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2014P

*Private employment; Shaded areas indicate recessions. WC premiums for 2014 are I.I.I. estimates..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 Gains Suggest WC NWP Will Grow Again in 2015

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

http://research.stlouisfed.org/fred2/series/WASCUR

Workers Compensation Operating Environment

157

Workers Comp Results Have Improved Substantially in Recent Years

157

Workers Compensation Combined Ratio: 1994–2014E

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5

103.

5

104.

5 110.

6 115.

0

115.

0

108.

0

101.

0

96.0

121.

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 12 13 14F

Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-

2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2014F) and are for private carriers only; Insurance Information Institute. 158

WC results have improved markedly

since 2011

Workers Compensation Premium: Third Consecutive Year of IncreaseNet Written Premium

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 130

10

20

30

40

50

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3

25.0 26.129.2 31.1

34.737.8 38.6 37.6

33.830.3 29.9

32.335.1 37.0

35.3 35.734.3 35.4

33.6

30.128.5

26.9 25.9 25.0

28.6

32.1

37.7

42.3

46.547.8

46.544.3

39.3

34.6 33.836.4

39.641.9

State Funds ($ B)

Private Carriers ($ B)

Pvt. Carrier NWP growth was +5.4% in 2013 and

8.7% in 2012

$ Billions

Calendar Yearp Preliminary

Source: 1990–2013p Private Carriers, Annual Statement Data, NCCI.1996–2013p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

Workers Compensation Lost-Time Claim Frequency Declined in 2013Lost-Time Claims

161

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13P-10

-8

-6

-4

-2

0

2

4

6

8

10

12

-4.2 -4.4

-9.2

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5

-6.9

-4.5 -4.1 -3.7

-6.6

-4.5

-2.2

-4.3

-5.7

11

-4

-6.1

-2.0

3.5

-1

AdjustedIndicated

Frequency Change: 2007—2012

Contracting: 7.97.1 -9.3%

Manufacturing: 13.612.0 -11.8%

Percent

Accident Year*Adjustments primarily due to significant audit activity.2013p: Preliminary based on data valued as of 12/31/20131991–2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policiesFrequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost levelSource: NCCI.

Cumulative Change of –55.4%(1991–2011 adj.)

Workers Compensation Medical SeverityModerate Increase in 2013

162

Accident Year

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%

Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)

$8

.1

$8

.2

$8

.1

$8

.8

$9

.1

$9

.8

$1

0.8

$11

.7

$1

2.9

$1

3.9

$1

5.7

$1

7.1

$1

8.4

$1

9.4

$2

1.0

$2

2.2

$2

3.5

$2

5.1

$2

6.1

$2

6.4

$2

7.1

$2

7.9

$2

8.8

+6.8%+1.3%-2.1%+9.0%+5.1%

+7.4%+10.1%

+8.3%+10.6%

+7.3%

+13.5%

+8.8%+7.7%

+5.4%

+7.8%+5.8%

+6.1%

+6.8%+4.0%+1.2%

+2.6%+3.0%

+3%

5

10

15

20

25

30

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13p

2013p: Preliminary based on data valued as of 12/31/2013.1991-2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Cumulative Change = 256%(1991-2013p)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2013: +5.2%

Accident Year

U.S. Health Care Expenditures,1965–2022F

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$42.

0$4

6.3

$51.

8$5

8.8

$66.

2$7

4.9

$83.

2$9

3.1

$103

.4$1

17.2

$133

.6$1

53.0

$174

.0$1

95.5

$221

.7$2

55.8

$296

.7$3

34.7

$369

.0$4

06.5

$444

.6$4

76.9

$519

.1$5

81.7

$647

.5$7

24.3

$791

.5$8

57.9

$921

.5$9

72.7

$1,0

27.4

$1,0

81.8

$1,1

42.6

$1,2

08.9

$1,2

86.5

$1,3

77.2

$1,4

93.3

$1,6

38.0

$1,7

75.4

$1,9

01.6

$2,0

30.5

$2,1

63.3

$2,2

98.3

$2,4

06.6

$2,5

01.2

$2,6

00.0

$2,7

00.7

$2,8

06.6

$2,9

14.7

$3,0

93.2

$3,2

73.4

$3,4

58.3

$3,6

60.4

$3,8

89.1

$4,1

42.4

$4,4

16.2

$4,7

02.0

$5,0

08.8

U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,

inflation of GDP growth

165

From 1965 through 2013, US health care expenditures had

increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have

increased 119 fold.

$ Billions

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

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 13 14 15 16 17 18 19 20 21 22

National Health Care Expenditures as a Share of GDP, 1965 – 2022F*

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

1965 5.8%

Health care expenditures as a share of GDP rose from 5.8% in 1965 to 18.0% in 2013 and are expected to

reach 19.9% of GDP by 2022

% of GDP

2022 19.9%

1980: 9.2%

1990: 12.5%

2000: 13.8%

2010: 17.9%

Since 2009, heath expenditures as a %

of GDP have flattened out at about 18%--the

question is why and will it last?



174

U.S. Insured Catastrophe Loss Update

2014 Experiencing Below Average CAT Activity Following a Welcome Respite in

2013 from Very High CAT Losses in 2011/12

174

175

$1

2.8

$1

1.1

$3

.8

$1

4.5

$1

1.7

$6

.2

$3

5.2

$7

.7

$1

6.5

$3

4.2

$7

4.5

$1

0.7

$7

.6

$2

9.6

$1

1.6

$1

4.6

$3

4.1

$3

5.5

$1

2.9

$1

5.3

$1

4.2

$4

.9 $8

.1

$3

8.3

$8

.9

$2

6.8

$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 13 14

U.S. Insured Catastrophe Losses

*Through 12/31/14.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.

2013 Was a Welcome Respite from 2012, the 3rd Costliest Year for Insured Disaster Losses in US

History. Longer-term Trend is for more—not fewer—Costly Events

2012 was the 3rd most expensive year ever for

insured CAT losses

$15.3 billion in insured CAT

losses estimated for 2014

($ Billions, $ 2013)

175

179

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1994–20131

0.1%

1.4%

3.8%4.8%

6.4%

6.4%

36.0%

41.1%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $159.1

Fires (4), $5.5

Events Involving Tornadoes (2), $139.3

Winter Storms, $24.7

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.6

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1993-2012

totaled $386.7B, an average of $19.3B per year or $1.6B

per month

180

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2013 Dollars, $ Billions)

$7.9 $8.8 $9.3 $11.2$13.6

$19.0$24.2 $24.9$25.9

$49.4

$7.6$7.2$6.8$5.7$5.6$4.5

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Superstorm Sandy in 2012 was the last

mega-CAT to hit the US

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

Occurred Over the Past Decade

Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.

CYBER RISK & CYBER INSURANCE

187

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and

Small in Every IndustryRapidly Increasing Interest from

Businesses, Media & Public Policymakers187

Data Breaches 2005-2014, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

* 2014 figures as of Jan. 12, 2014 from the ITRC.Source: Identity Theft Resource Center.

157

321

446

656

498

419447

619

783

662

85.687.9

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The Total Number of Data Breaches Rose 28% While the Number of Records Exposed Was Relatively Flat (-2.6%)

Millions

188

Data/Privacy Breach:Many Potential Costs Can Be Insured

Source: Zurich Insurance; Insurance Information Institute

Forensic costs to discover

cause

190

Source: Insurance Information Institute research.

The Three Basic Elements of Cyber Coverage: Prevention, Transfer, Response

Loss Prevention

Post-Breach Response(Insurable)

Loss Transfer (Insurance)

Cyber risk management today involves three essential components, each designed

to reduce, mitigate or avoid loss. An increasing number of cyber risk products

offered by insurers today provide all three.

191

192

I.I.I. Released its Second Cyber Report in 2014: Cyber Risk: The Growing Threat

I.I.I.’s 2nd report on cyber risk released June 2014

Provides information on cyber threats and insurance market solutions

Global cyber risk overview

Quantification of threats by type and industry

Cyber security and cost of attacks

Cyber terrorism

Cyber liability

Insurance market for cyber risk

3rd Report in Q2 2015

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentations

Insurance Information Institute Online:

199

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