the financial crisis, no-fault insurance and the future of ...¾merger & acquisition activity...
TRANSCRIPT
The Financial Crisis, ,No-Fault Insurance and the
Future of the P/CI I d tInsurance Industry
New York Insurance AssociationAlbany, NY
November 5, 2009
Download at: www.iii.org/Presentations/NYIA-110509/
R b t P H t i Ph D CPCU P id t & E i tRobert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org
Presentation Outline• The Economic Storm: Financial Crisis & Recession
E G th & P fit bilitExposure, Growth & Profitability• New York No-Fault Update: The Crisis Returns• Key Threats and Issues Facing P/C Insurers Through 2015
R l t R f• Regulatory Reform• Financial Strength & Ratings
Key Differences Between Insurer and Bank Performance During Crisisi i O i & O• Insurance Industry Financial Overview & Outlook
ProfitabilityPremium GrowthUnderwriting Performance: Commercial & Personal LinesFinancial Market ImpactsMerger & Acquisition Activity
C i l & C i
2
• Capital & Capacity• Catastrophe Loss Trends
Q&A
THE ECONOMIC STORM
What the Financial Crisis and Recession Mean for theRecession Mean for the
Industry’s Exposure Base,G h P fi bili dGrowth, Profitability and
Investments
Real GDP Growth*
% %
The Q1:2009 decline was the steepest since the
Q1 1982 d f 6 4%
3.7%
% 2.5%
3.6%
3.1%
2.9%
4.8%
4.8%
%
3.5%
2.4% 2.6% 2.7% 2.8% 2.9%4%
6% Q1:1982 drop of 6.4%
0.8% 1.
6% 2
0.1%
%
1.5% 2 2
0 2%0%
2%
P l d
-0.7
%
-2.7
%
-0.7
%
-0.2%
-4%
-2% Recession began in December 2007. Economic toll of credit crunch, housing slump, labor
Personal and commercial lines
exposure base have been hit -
-6.4%
-5.4%
-8%
-6%
, g p,market contraction has been severe but recovery is in sight
hard and will be slow to come
back
4
8%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
Q
07:2
Q
07:3
Q
07:4
Q
08:1
Q
08:2
Q
08:3
Q
08:4
Q
09:1
Q
09:2
Q
09:3
Q
09:4
Q
10:1
Q
10:2
Q
10:3
Q
10:4
Q
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/09; Insurance Information Institute.
Length of U.S. Business Cycles, 1929-Present*1929 Present
120120
Contraction Expansion FollowingDuration (Months)
A erage D ration**
80
106
9290
100110120 Average Duration**
Recession = 10.4 MonthsExpansion = 60.5 Months
Length of expansions
greatly
50
80
58
73
60708090 g y
exceeds contractions
43
19
50
3745
39
2436
30405060
138 11 10 8 10 11
166
168 8
1912
01020
Month
5
Aug.1929
May1937
Feb.1945
Nov.1948
July1953
Aug.1957
Apr.1960
Dec.1969
Nov.1973
Jan.1980
Jul.1981
Jul.1990
Mar.2001
Dec.2007
* Through June 2009 (likely the “official end” of recession) **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Month Recession Started
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
3%
25% 8%
Premium Growth: Modest AssociationP/C insurance industry’s growth i i fl d d tl b th
18.6
% 20. 3
.7%
15%
20% 6%
is influenced modestly by growth in the overall economy
% % %13
7.7%10%
15%
Gro
wth
2%
4%
Gro
wth
5.2%
1.8%
4.3% 5.
8 %0.
3%
3.1%
1.1%
0.8%
0.4%
0.6% 1.
6%5.
6 %
1.2%
0%
5%
Real
NW
P
0%
2%
Rea
l GD
P G
-0.9
%
-1.5
%
-1.6
%-1
.0%
-1.8
%-1
.0%
-0.4
%-0
.3%
-2.9
% -0.5
%3.
8% 4% 5%
-5%
0%
-2%
6
-7.4
%-6
.5%
- -3 -4.
-4.
-10%
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
-4%Real NWP Growth Real GDP
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/09; Insurance Information Inst.
NY Direct Written Premiums (DWP) 1999 2008(DWP), 1999-2008
$32.
0
$33.
4
$34.
8
$35.
2
$34.
7
$33.
4
29.7$35
$40
B)
$
$22.
7
$25.
4 $2
$21.
8
$25$30
rem
ium
($ B
$10$15$20
t Writ
ten
Pr
Premium volume in NY state is shrinking due to the soft
commercial insurance market
$0$5
$10
Dire
ct commercial insurance market and weak economy
$099 00 01 02 03 04 05 06 07 08
Source: NAIC Annual Statement Database, via Highline Data LLC.
New York PIPI U dInsurance Update:
Is New York’s No-Fault Crisis Returning?
Summary of Findings: New York State’s No-Fault Auto Insurance ProblemNo-Fault Auto Insurance Problem No-Fault (PIP) Costs Are Surging
• New York’s no-fault (PIP) average claims costs—at $8,748 per claim—are the second highest in the US (as$8,748 per claim are the second highest in the US (as of the 2nd quarter of 2009)
• The average cost per no-fault claim in New York is more than double (111%) that of the US medianmore than double (111%) that of the US median ($4,152)
• The average cost of a no-fault claim has soared $3,133 gor 56% from $5,615 at the end of 2004 to $8,748 in the second quarter of 2009
• No-Fault claim costs as of Q2 of 2009 are the second
9
No Fault claim costs as of Q2 of 2009 are the second highest in NY history, just 5% short of their all-time high of $9,235 in the 1st quarter of 2002
NY’s Private Passenger AutoPassenger Auto
Insurance MarketInsurance MarketSi d M k t hSize and Marketshare
New York State Direct Pvt. Passenger Auto Premiums Written: 1999-2008
$10 558$10.710$11.0
uto emiums W itten: 999 008
$9.914
$10.558$10.262
$9.994$9.794 $9.789$10.0
$10.5
$9.018$9.0
$9.5Auto insurance premiums paid by NY drivers dropped by nearly 9%
$8.166 $8.175
$8.0
$8.5NY drivers dropped by nearly 9% or $921 million since the end of last
no-fault crisis in 2004, but the system is once again under siege
$7.0
$7.5system is once again under siege
from fraud and abuse
11
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Highline Data; Insurance Information Institute.
Private Passenger Auto Insurers in New York State, 2008 (1-25)New York State, 2008 (1 25)
Rank Company Group Direct Premiums Written Mkt. Share (%)
1. Geico BERKSHIRE HATHAWAY GRP 2,250,603,467 23.0
2. Allstate Insurance Co Group ALLSTATE INSURANCE GROUP 1,844,794,441 18.83. State Farm Mutual Group STATE FARM GRP 1,060,333,783 10.84. Progressive Casualty Group PROGRESSIVE GRP 641,957,648 6.65 Liberty Mutual Group LIBERTY MUTUAL INSURANCE GROUP 559,129,362 5.7.6. Travelers Cos & Affil TRAVELERS GRP 538,882,826 5.57 N i id G NATIONWIDE CORP GRP 286 052 407 2 97. Nationwide Group NATIONWIDE CORP GRP 286,052,407 2.98. New York Central Mut Fire Ins Co CENTRAL SERV GRP 269,489,658 2.89. Metropolitan P&C Ins Co & Affiliates METROPOLITAN GROUP 253,168,898 2.610. Hartford Fire Group HARTFORD FIRE & CASUALTY GROUP 222,681,116 2.311. American International Group AMERICAN INTL GRP 208,727,125 2.112 United Services Automobile ASN Group UNITED SERV AUTOMOBILE ASSN GRP 191 513 078 2 012. United Services Automobile ASN Group UNITED SERV AUTOMOBILE ASSN GRP 191,513,078 2.013. Unitrin Prop & Cas Ins Grp UNITRIN GRP 134,559,311 1.414. Motors Insurance Corp Group GMAC INS HOLDING GRP 104,591,800 1.115. Adirondack Ins Exch N/A 98,818,395 1.016. Onebeacon Ins Grp WHITE MOUNTAIN GROUP 91,412,435 0.9
17 Amica Mutual Group AMICA MUTUAL GRP 86 573 149 0 917. Amica Mutual Group AMICA MUTUAL GRP 86,573,149 0.918. Combined Federal Ins Co & Affiliates CHUBB & SON INC GRP 81,495,932 0.819. Hanover Insurance Co Group THE HANOVER INS GRP 81,413,362 0.820. Countrywide Insurance Co N/A 77,264,817 0.821. Erie Insurance Exchange Group ERIE INS GRP 61,404,626 0.622. Esurance Ins Co and Affiliate WHITE MOUNTAIN GROUP 60,874,361 0.6
12Source: Highline Data; Insurance Information Institute.
23. Ngm Ins Co MAIN STREET AMER GRP 56,858,636 0.624. Farmers Insurance Group ZURICH INS GRP 55,162,750 0.625. Preferred Mutual Insurance Co N/A 50,892,503 0.5
Top Private Passenger Auto Insurers in New York State, 2008 (26-50)in New York State, 2008 (26 50)
Rank Company Group Direct Written Premiums Mkt. Share (%)
26. Preferred Mutual Insurance Co N/A 50,892,503 0.5
26 Lincoln General Insurance Co KINGSWAY GRP 48 762 542 0 526. Lincoln General Insurance Co KINGSWAY GRP 48,762,542 0.5
27. Response Ins Grp RESPONSE INSURANCE GROUP 39,068,213 0.4
28. Commerce Group Inc COMMERCE INC GRP 33,329,594 0.3
29. Utica National Insurance Group UTICA GRP 29,739,636 0.3
30. Mercury Casualty Group MERCURY GENERAL GRP 28,114,418 0.3
31 QBE The Americas QBE INS GRP 26 518 443 0 331. QBE The Americas QBE INS GRP 26,518,443 0.3
32. Amer Natl Prop & Cas Co & Affiliates AMERICAN NATL FIN GRP 24,434,340 0.2
33. IDS Property Casualty Group AMERIPRISE FIN GRP 22,034,901 0.2
34. Firemans Fund Insurance Group ALLIANZ INSURANCE GROUP 17,792,523 0.2
35. Tri-State Consumer Insurance Co N/A 17,755,332 0.2
36 Electric Insurance Company ELECTRIC INS GRP 12 395 453 0 136. Electric Insurance Company ELECTRIC INS GRP 12,395,453 0.1
37. American Modern Home Group INC MUNICH RE GRP 12,310,466 0.1
38. Balboa Casualty Grp BANKAMERICA CORP GRP 12,275,118 0.1
39. Eveready Insurance Co N/A 12,002,501 0.1
40. Merchants Mutual Group MERCHANTS MUT GRP 11,354,814 0.1
41. Long Island Ins Co N/A 8,412,317 0.141. Long Island Ins Co N/A 8,412,317 0.1
42. Interboro Mutual Indemnity Ins Co N/A 7,793,341 0.1
43. California State Automobile Assoc CALIFORNIA STATE AUTO GRP 5,796,218 0.1
44. Harleysville Mutual Insurance Co Grp HARLEYSVILLE GRP 5,655,744 0.1
45. Assurant Group ASSURANT INC GRP 5,588,944 0.1
46. Ocean Harbor Casualty Insurance Co OCEAN HARBOR GRP 4,943,255 0.1
13Source: Highline Data; Insurance Information Institute.
47. Infinity Prop & Cas Cos INFINITY PROP & CAS INS GRP 4,553,098 0
48. Central Mutual of OH Group CENTRAL MUT INS CO GRP 4,516,397 0
49. United Farm Family Mut Ins Co & Affi INDIANA FARM BUREAU GRP 4,061,793 0
50. Sentry Insurance A Mutual Co Group SENTRY INSURANCE GROUP 3,950,514 0
NY PIP UPDATENY PIP UPDATE
I N Y k’ N F lIs New York’s No-Fault S t O t f C t lSystem Out of Control—
A i ?Again?
Average PIP (No-Fault) Claim Cost as of 2009:Q2as of 2009:Q2
7 Average No-Fault (PIP) claim$1
7,75
$16 000$18,000$20,000
Average No-Fault (PIP) claim costs in NY are the second
highest in the US and are more (111%) i
748$12,000
$14,000$16,000
Sev
erity
than double (111%) higher than the median cost of $4,152
74 3 9 45,13
7
$6,9
91
6352,599
4,95
5
$5,9
16$8, 7
$7,2
40$7
,193
$6 000$8,000
$10,000
g. P
IP C
laim
$3,3
7$2
,913
$2,8
49$2
,834
$2,3
30$1
,869
$1,7
36$1
,552
$668
$649
$604
$544
$539
$539
$ 5
$3,8
$4,1$4
,$4
$2,000$4,000$6,000
Avg
15
$ $ $ $ $ $
$0NJ NY FL MN DE DC KY HI ND PA WA OR TX MD KS SC UT MA MI MN AZ AL SC CO LA
Sources: Insurance Information Institute based on ISO Fast Track data.
NY PIP Claim Frequency & Severity (2000:04 – 2009:02)Severity, (2000:04 2009:02)
35$9 500 2 4%NY PIP Fraud is Back
Average cost per PIP claim
8,27
1$8
,327
8,23
4$9
,23
$8,7
27$8
,577
$8,4
43,1
77 $8,5
0725
$8,5
62 $8,7
48
$8,500
$9,000
$9,500
2.2%
2.3%
2.4%Average cost per PIP claim (severity) fell 39% between
02:Q1 and 04:Q4 but has since soared by 56% through 09:Q2Freq. down 32% since 2000:04$8 $
$7,8
88$7
,507
$ 8
$7,7
73$7
,311
58 063
$7,3
23$7
,378
$7,2
97 $7,6
70$7
,740
$8,
$8,0
2
70$7,500
$8,000
$ ,
im C
ost
2.0%
2.1% Claim
F
Freq. down 32% since 2000:04$
$6,9
5
6,15
6
0 991
,094
14 $6,2
50$6
,269 $6
,530
$6,6
06$7
, 0 $
052
$6,8
7
$6,500
$7,000
Avg
. Cla
i
1 7%
1.8%
1.9%
Frequency
PIP severity is now at its second highest
level in history: $8 748 l i$6
$5,8
20$5
,9$5
,615
$6,
$5,9
1 $
$6,
$5,500
$6,000
1.5%
1.6%
1.7%
y
Avg. Claim SeverityFrequency
$8,748 per claim
16
$5,000
0:04
1:01
1:02
1:03
1:04
2:01
2:02
2:03
2:04
3:01
3:02
3:03
3:04
4:01
4:02
4:03
4:04
5:01
5:02
5:03
5:04
6:01
6:02
6:03
6:04
7:01
7:02
7:03
7:04
8:01
8:02
8:03
8:04
9:01
9:02
1.4%
Sources: Insurance Information Institute based on ISO Fast Track data.
NY PIP Claim Frequency & Severity (1997 – 2009:02)Severity, (1997 2009:02)
5$9 500 2 4%
NY PIP Fraud is BackAverage cost per PIP claim
8,34
78,
327
,234
$9,2
3$8
,727
$8,5
77
$8,4
4317
7 $8,5
075
$8,5
62$8
,748
$8 500
$9,000
$9,500
2.2%
2.3%
2.4%Average cost per PIP claim (severity) fell 39% between
02:Q1 and 04:Q4 but has since soared by 56% through 09:Q2Freq. down 32% since 2000:04
$8 $8$7
,888
$7,5
07$8
,
$7,3
11
63 $7,3
23$7
,378
7,29
7 $7,6
70$7
,740
$8, 1
$8,0
25
8
$7,7
73
$7,500
$8,000
$8,500
m C
ost
2.0%
2.1% Claim
F
063
$6,6
99
$
$6,8
706,
156
052
91 094
4 $6,2
50$6
,269 $6
,530
$6,6
06$7
,06 $ $
$6,9
5 8
$6,500
$7,000
$ ,
Avg
. Cla
im
1 7%
1.8%
1.9%
FrequencyAvg Claim Severity
Second highest level in history: $8,748 per claim
$5,6
75 $6,0 $6 $6,0
$5,8
20$5
,99
$5,6
15$6
,$5
,91 4 $ $
$5,500
$6,000
A
1.5%
1.6%
1.7% y Avg. Claim SeverityFrequency
Claim severity rose 63% in the 5
years after the 1997 Presbyterian
decision
17
$5,000
1997
1998
1999
2000
1:01
1:02
1:03
1:04
2:01
2:02
2:03
2:04
3:01
3:02
3:03
3:04
4:01
4:02
4:03
4:04
5:01
5:02
5:03
5:04
6:01
6:02
6:03
6:04
7:01
7:02
7:03
7:04
8:01
8:02
8:03
8:04
9:01
9:02
1.4%
Sources: Insurance Information Institute based on ISO Fast Track data.
decision
New York Insurance Fraud Reports 1995 2008Reports, 1995 – 2008
20,000A t C lli i
No-fault fraud reports fell 35%
16,000
18,000Auto CollisionDamageAuto Theft
reports fell 35% between 2003 and 2006, but are now rising (up 22% in 2008 over 2006)
10,000
12,000
14,000
No-Fault Auto
)
6,000
8,000
,
Number of No-Fault related fraud reports remains high
d i b i i t i i
0
2,000
4,000 and is beginning to rise again
18
01995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*
Source: New York Department of Insurance, Insurance Frauds Bureau Annual Report; Insurance Info. Institute.
No-Fault/Auto Unit Arrests by NY Insurance Fraud BureauNY Insurance Fraud Bureau
600 No fault/auto unit arrests
479
391500
fell 30.3% from 2004 to 2006 but are beginning to
rise (up 5.4% in 2007)
332391
334 352
300
400
107182200
50
0
100
19
2000 2001 2002 2003* 2004 2005 2006 2007*In August 2003 the no-fault unit was merged with auto unit Data beginning in 2003 include no-fault autounit arrests.Source: New York Department of Insurance, Insurance Frauds Bureau Annual Report; Insurance Info. Institute.
No-Fault Auto Unit Investigations by NY Insurance Fraud Bureau
600No fault fraud investigations
by NY Insurance Fraud Bureau
479500No-fault fraud investigations have more than doubled since 2004—up 140% through 2007
278 250 268
349
300
400p g
200200
0
100
20
2002 2003 2004 2005 2006 2007
Source: New York Insurance Department http://www.ins.state.ny.us/acrobat/fd07ar2g.pdf; Ins. Info. Institute.
No-Fault Auto Unit Cases Opened by NY Insurance Fraud Bureau
160180
by NY Insurance Fraud Bureau
113122
142160
140
160
113
887380
100
120
No-fault cases 73
40
60
80opened have more than doubled since
2004 up 119%
0
20
40 2004—up 119% through 2007
21
2002 2003 2004 2005 2006 2007
Source: New York Insurance Department http://www.ins.state.ny.us/acrobat/fd07ar2g.pdf; Ins. Info. Institute.
What Needs to be Done?
Solutions to Reduce Costs in NY’s No-Fault SystemI tit t M di l P t l /Utili ti R i• Institute Medical Protocols/Utilization Reviews
Guidelines for medical care for specific auto accident-related injuries to reduce cost of over-treatment and unnecessary treatmentNote: NY’s no-fault system may be the last major payor for medical treatments that does not mandate protocols or
tili ti i Thi i t l “bl k h k” d iutilization reviews. This virtual “blank check” drives up system costs dramatically.
• Require Disputes Be Resolved via ArbitrationAvoids costs and uncertainty of trial for all partiesExpedites resolution of claimUnclogs overburdened court system
22
Unclogs overburdened court system• Increase Penalties for Runners
Upgrading to felony from misdemeanor as deterrent
What Needs to be Done? (cont’d)
Solutions to Reduce Costs in NY’s No-Fault System• Streamline Process for Adjudicating No Fault Claims• Streamline Process for Adjudicating No-Fault Claims
For small no-fault disputes (under $5,000), permit parties to submit proof based on sworn affidavit from their doctor rather requiring that the doctor appear in personNote: New York City courts are inundated with no-fault cases (approx. 1/3 of cases are no-fault and in 2009 courts were setting 2011 dates to hear cases)
• Implement Fair Burden of Proof RequirementsPresently, health service providers are required only to submit proof that a bill was received by the insurer to establish entitlement to receive amounts billed (irrespective of suspicions of fraud/abuse)Insurers burden is much higher—required to produce both a witness to testify under oath that the claim was handled in accordance with regulations and a medical expert to testify on the “lack of medical necessity”Solution: Require that in order to establish the right to no-fault benefits, the plaintiff be required to produce a witness with personal knowledge of the facts
23
galleged in a complaint. Furthermore, there should be no presumption medical necessity based on documents submitted by non-medical plaintiffs and/or witnesses who do not have personal knowledge of such necessity
Regional DifferencesRegional Differences Will SignificantlyWill Significantly
Impact P/C MarketsImpact P/C Markets Recovery in Some Areas Will Begin Y Ah d f Oth & S d fYears Ahead of Others & Speed of Recovery Will Differ By Orders of
iMagnitude
State Economic Growth Varied Tremendously in 2008Tremendously in 2008
E US i
25
Eastern US growing more slowly than Plains,
Mountains
Fastest Growing States in 2008: Plains, Mountain States LeadPlains, Mountain States Lead
PercentReal State GDP Growth
7.3%7.0%
8.0% Natural resource and agricultural states have done
b tt th t th
Percent
4.4%5.0%
6.0%
7.0% better than most others recently, helping insurance
exposure in those areas3.5%
2.9%2.0%2.1%2.5%
2.7%
2 0%
3.0%
4.0%
0.0%
1.0%
2.0%
26
0.0%ND WY SD CO OK WV IA TX, MN,
NM, WA
Source: US Bureau of Economic Analysis; Insurance Information Institute.
Slowest Growing States in 2008: Diversity of States SufferingDiversity of States Suffering
PercentReal State GDP Growth
-0 1%0.0%
KY CT AZ GA IN NV RI MI DE FL OH AKPercent
0.1%
-0.4%-0.6%-0.6% -0.6%-0.6%
1 0%
-0.5%
1 5%
-0.9%
-1.5%
-1.0%
States in the North, South, East and West -1.5%-1.6%-1.6%-1.7%
-2.0%-2.0%
South, East and West all represented among
hardest hit but for differing reasons
27
-2.5%g
Source: US Bureau of Economic Analysis; Insurance Information Institute.
Labor MarketLabor Market TrendsTrends
Fast & Furious: Massive Job LossesSap the Economy and Personal &Sap the Economy and Personal &
Commercial Lines Exposure
Unemployment Rate:On the Rise
January 2000 through September 2009*
On the Rise
9.0
10.0Sept. 2009 unemployment was 9.8%, up 0.3% from July but still near its
highest level since August 1983Previous Peak: 6 3% in
6 0
7.0
8.0 highest level since August 1983Previous Peak: 6.3% in June 2003
Trough: 4.4% in March 2007
4.0
5.0
6.0
U l t ill lik l k 10 %
2.0
3.0
00 01 02 03 04 05 06 07 08 09
Unemployment will likely peak near 10 % during this cycle, impacting payroll
sensitive p/c and l/h exposuresAverage unemployment rate 2000-07 was 5.0%
09
29
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Sep-
0
Unemployment Rates by State, September 2009: Highest 25 States*September 2009: Highest 25 States
5.3
16NY’s unemployment
8 9% i S t b
5 51.41.6
7.8.9.01.5
13.3
13.0
12.2
1 5
12
14
16
%)
was 8.9% in September, 0.9 pts. below the US
rate of 9.8%
10.5
9.8
9.610
.110
.110
.5
9.3
9.1
9.2
8.89.
3
8.9
8.99.
5
11
10.
10.
10111
8
10
12
ent R
ate
(%
4
6
8
empl
oym
e
The unemployment rate has been rising across the country, b t t t d i h
0
2
4
Un but some states are doing much
better than others. 0
MI NV RI CA SC OR DC FL KY NC AL IL TN OH GA NJ IN MO WA MA MS AZ NY WV ID
*Provisional figures for September 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Unemployment Rates By State, September 2009: Lowest 25 States*September 2009: Lowest 25 States
22 01
8.2
8.3
2.37.47.
78.38.
58.
48.
48.8
8
10
%)
6.8
6.7
6.7
6.7
6.76.97.7.
.84.9
6.27.
07.1
6.77.77
6
8
ent R
ate
(%
44
4.2
4
empl
oym
e
The unemployment rate has been rising across the country,
0
2Une but some states are doing much
better than others.0
PA ME AK CT WI DE TX NM LA MN HI MD NH AR CO KS WY IA OK VT MT VA UT NE SD ND*Provisional figures for September 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*(2007:Q1 to 2010:Q4F)
% % %11.0% Rising unemployment
9.3% 9.
6% 10.0
%
10.1
%
10.0
%
9.8%
9.6%
9.5%10.0%10.5%11.0% g p y
is eroding payrolls and workers comp’s exposure base.
%
8.1%
7 5%8.0%8.5%9.0% Unemployment is
expected to peak above 10% in early 2010.
4%
6.1%
6.9%
6.0%6.5%7.0%7.5% y
4.5%
4.5% 4.6% 4.
8% 4.9%
5.4
4.5%5.0%5.5%
32
4.0%07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4
* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/09); Insurance Info. Inst.
Monthly Change Employment*(Thousands)(Thousands)
0January 2008 through September 2009
-72-144-122
-160-137-161-128-175 201
-200
-100
175
-321-380
-303 -304
-201-263
-400
-300 Job losses since the recession began in Dec. 2007 total 7.2 mill; 15.1
-597-519
-463-600
-500;
million people are now defined as unemployed.
Monthly losses in Dec May were-681
-741-681-652
-800
-700
Jan-08
Feb-08
Mar-08
Apr-08
M Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
M Jun-09
Jul-09
Aug-09
Sep-09
Monthly losses in Dec. – May were the largest in the post-WW II period
but pace of loss is diminishing
33
08 08 08 08 ay-08
08 08 08 08 08 08 08 09 09 09 09 ay-09
09 09 09 09
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute
Labor Underutilization: Broader than Just UnemploymentBroader than Just Unemployment
Percent % of Labor Force
16.4% 16.5% 16.3%17.0%16.8%
16%
17%
18%
14%15%
16%
Marginally attached and unemployed persons account for 17% of the labor
11.2%12%
13%
pforce in Sept. 2009 (1 out 6 people).
Unemployment rate alone was 9.8%. Underutilization shows a broader impact
WC d th i l10%
11%
Sep-08 May-09 Jun-09 Jul-09 Aug-09 Sep-09
on WC and other commercial exposures.
34
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are availableFor a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-marketrelated reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available forfull-time work but have had to settle for a part-time schedule.Source: US Bureau of Labor Statistics; Insurance Information Institute.
U.S. Nonfarm Private Employment, Monthly Nov 2007 – August 2009Monthly, Nov 2007 August 2009
0 1 0 9 8 8 7 6138 5
Millions The U.S. economy lost about 6 million
Employment peak; recession starts
138.
0
138.
1
138.
0
137.
9
137.
8
137.
8
137.
7
137.
6
137.
6
137.
4
137.
0
136.
7
36.2
136 5137.0137.5138.0138.5 lost about 6 million
jobs in 12 months
13
135.
1
134.
3
.7134 5135.0135.5136.0136.5
1
133.
133.
0
132.
5
132.
2
1.7 4132.5
133.0133.5134.0134.5
1
131
131.
4
131.
2
130.5131.0131.5132.0
130.0Nov07
Dec07
Jan08
Feb08
Mar08
Apr08
May08
June08
Jul08
Aug08
Sep08
Oct08
Nov08
Dec08
Jan09
Feb09
Mar09
Apr09
May09
Jun09
Jul09
Aug09
Seasonally adjusted. Source: US Bureau of Labor Statistics
Unemployment and UnderemploymentRates: Rocketing Up in 2008-09
18Traditional Unemployment Rate U-3Unemployment + Underemployment Rate U-6
January 2000 through September 2009, seasonally adjusted
Percent
14
1618 Unemployment + Underemployment Rate U-6
U-6 went from 9.2% in April 2008 to
17 0% in Sep 20099.8% Aug. 2009 unemployment rate (U-3) was the highest monthly rate since 1983.
1012
17.0% in Sep. 2009g yPeak rate in the last 30 years: 10.8% in
Nov-Dec 1982.
68
24
00 01 02 03 04 05 06 07 08 09
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Jan-
0
Source: US Bureau of Labor Statistics; Insurance Information Institute.
U.S. Unemployment Rate ForecastsQuarterly 2009:Q4 to 2010:Q4Quarterly, 2009:Q4 to 2010:Q4
11.0%Unemployment is expected to
peak in early 2010:Q1.
10 3% 10.4% 10 3%10 1%10.5%
11.0% p y Q
10.3% 10.3%10.2%
10.0%10.1%
10.0%9.8%
9 6%9.8%
9 6%
10.1%
9.9%
10.0%
9.6%9.6%
9.2%
8 9%9.0%
9.5%
Rising unemployment will erode payrolls d k ’ b 8.9%
8.5%09:Q4 10:Q1 10:Q2 10:Q3 10:Q4
and workers comp’s exposure base.
10 most pessimistic consensus/midpoint 10 most optimistic
Sources: Blue Chip Economic Indicators (10/09); Insurance Info. Inst.
Will the Recession End Soon?Feb -Oct 2009 Initial Jobless Claims*Feb. Oct. 2009 Initial Jobless Claims
7 50 50 658
659
51 48660 Continued drop in
620
640 643 64 65 65 6 64
638
625 63
263
062
7 632
623
617
618
616
07620
640
660 Continued drop in initial unemployment claims is a good news.
6058
567 66 57
167 57
357
04580
600
620
5656
055
7 565 565 5
564
554
549
541
532
540
560
580
5
500
520
8 4 1 8 5 6 3 0 7 8 5 1 8 5 2 9
4-week moving avg (000)
Feb
14Fe
b 21
Feb
28M
ar 7
Mar
14
Mar
21
Mar
28
Apr
4A
pr 1
1A
pr 1
8A
pr 2
5M
ay 2
May
9M
ay 1
6M
ay 2
3M
ay 3
0Ju
n 6
Jun
13Ju
n 20
Jun
27Ju
l 4Ju
l 11
Jul 1
8Ju
l 25
Aug
1A
ug 8
Aug
15
Aug
22
Aug
29
Sep
5Se
p 12
Sep
19Se
p 26
Oct
3O
ct 1
0
*seasonally adjusted; state programs only Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
N t W itt P iNet Written Premiums7/90 3/91 3/01 11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
12/07 ?
$6,000
$7,000
$35
$40
$45Wage & SalaryDisbursementsWC NPW
7/90-3/91 3/01-11/01 12/07-?
$4,000
$5,000
$25
$30
$35
$2,000
$3,000
$10
$15
$20Weakening
payrolls have eroded $2B+ in
$0
$1,000
$0
$5
$10Shaded areas indicate recessions eroded $2B+ in workers comp
premiums
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09**Average Wage and Salary data as of 7/1/2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Frequency: 1926-2008A Long Term Drift DownwardA Long-Term Drift Downward
Manufacturing—Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
25
30
20
25
10
15
0
5
'26
'28
'30
'32
'34
'36
'39
'41
'43
'45
'47
'49
'52
'54
'56
'58
'60
'62
'65
'67
'69
'71
'73
'75
'78
'80
'82
'84
'86
'88
'91
'93
'95
'97
'99
'01
'04
'06
Note: Recessions indicated by gray bar
Note: Recessions indicated by gray bar.
Sources: NCCI from U.S. Bureau of Labor Statistics; National Bureau of Economic Research
Crisis-DrivenCrisis Driven ExposureExposure DriversDrivers
Economic Obstaclesto Growth in P/C
IInsurance
New Private Housing Starts,1990-2010F (Millions of Units)1990 2010F (Millions of Units)
Exposure growth due to home construction forecast for HO insurers is dim for 2009
New home starts plunged 34%
from 2005 2007;
2.07
801.85 1.
96
1 92.02.1
forecast for HO insurers is dim for 2009 with some improvement in 2010.
Impacts also for comml. insurers with construction risk exposure
from 2005-2007; Drop through 2009 is 72% (est.)—a net
annual decline of 1 49 million1.
361.48
351.46 1.47
1.62 1.64
1.57 1.60 1.
71
1
1.51.61.71.81.9 p 1.49 million
units, lowest since record
began in 1959
1.3
0
1.3
1.29
1.20
1.01
1.19
1.11.21.31.41.5
0.90
0.58
0.81
1
0 60.70.80.91.0 I.I.I. estimates that each incremental
100,000 decline in housing starts costs home insurers $87.5 million in new exposure (gross premium). The net
exposure loss in 2009 vs. 2005 is
42
0
0.50.6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
pestimated at about $1.3 billion.
Source: US Department of Commerce; Blue Chip Economic Indicators (10/09); Insurance Information Inst.
Auto/Light Truck Sales,1999-2010F (Millions of Units)
Weak economy, credit crunch are h ti t l G i
New auto/light truck sales are expected to experience a
1999 2010F (Millions of Units)
17 117.517.8
17.41819
hurting auto sales; Gas prices have been a factor too.
are expected to experience a net drop of 6.5 million units annually by 2009 compared with 2005, a decline of 37%
and the lowest level since the l t 196016.916.916.6
17.116.5
16.1
1516
17late 1960s
“Cash for Clunkers” should
13.1
11 8131415
I t f f lli t l ill
generate $225M - $375M in net new personal auto premiums
10.4
11.8
1011
12 Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth
than problems in the housing market will on home insurers
43
910
99 00 01 02 03 04 05 06 07 08 09F 10F
market will on home insurers
Source: US Department of Commerce; Blue Chip Economic Indicators (10/09); Insurance Information Inst.
High Ratio of Unsold-Homes Inventory to Sales Will Likely Keep Prices Falling
Inventory of unsold homes number of homes sold
to Sales Will Likely Keep Prices FallingMillions of Homes, Annual Rate
7.1
6.56
7
8Inventory of unsold homes number of homes sold
# of house sales fell;inventory wasn’t the problem
# of house sales is rising but so is inventory
0 7 8 9 9 8 .1 .1
6
5.7
4.9
4.49 4.71
4.55 4.66
4.72 4.89 5.
24
5.10
4
5
6
2.8 3.
5 4. 3.7
3.6 3.8
3.6 3. 3.9
3.8 4 44 4
2
3
0
1
05 06 07 08
n-09
b 09 r 09
r 09
y 09
n 09 l 0
9
g 09
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Source: http://www.realtor.org/research/research/ehsdata
Private Sector Business Starts,1993:Q2 2008:Q4*1993:Q2-2008:Q4
Thousands189 000 business starts
1 2 2 216 22
0 223
220
220
221
221
8
220
230189,000 business starts
were recorded 2008:Q4, the lowest
level since 1995
192
8 9 90 194
9119
9 204
202
195
196
196
206
206
201
192 19
820
620
620
321
120
521
220
0 205
204
204
197 20
3 209
203
192
192
193
201 20
420
221
0 212
209
210 212
204 21
020
919
59
201
200
210level since 1995
175
186
174 18
0 186 1
188
187 18
918
6 1 9 19 1 1 1
187 18
9
170
180
190Business starts are down 15% in the current downturn, holding
150
160
170 the current downturn, holding back most types of commercial
insurance exposure
45
15093 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
*Latest available as of Oct. 2009.Source: Bureau of Labor Statistics: http://www.bls.gov/news.release/cewbd.t07.htm
Business Bankruptcy Filings,1980 2009*1980-2009
% Change SurroundingRecessionsSignificant
i li ti f b d30
0
4 ,277 81
,235
82,4
463 5 3 ,5
4964
3
80,00090,000
Recessions1980-82: 58.6%1980-87: 88.7%1990-91: 10.3%
implications for bond & surety lines
694
8,12
569
,362
,436
64,0
04 71,
63,8
5363
,235
64,8
53 71 70,
62,3
0452
,374
51,9
5953
,549
54,0
2736
74 99 0 1 54
660
,000
60,00070,00080,000
2000-01: 13.0%2006-09: 204.6%*
43,6 48
44,3
37,8
8435
,472
40,0
938
,540
35,0
3734
,317
39,2
0,6
95 28,3
2243
, 5
30,00040,00050,000
There were 30,333 business bankruptcies d i th fi t h lf f 2009 64% f 19
,
010,00020,000
,during the first half of 2009, up 64% from 2008: H1 and on track for about 60,000 for all of 2009, the most since 1993. Current
recession will generate 200%+ surge.
46
0
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
*Based estimate of 60,000 business bankruptcies in 2009; actual first half total was 30,333.Source: American Bankruptcy Institute; Insurance Information Institute
Percent Change in Business Bankruptcy Filings 1980-2009*Bankruptcy Filings,1980 2009
%S i b k i d i h
44.0
%
43.8
% 53.8
%37
.8%
40%
60%Surge in bankruptcies during the
“Great Recession” is the most severe in more than 30 years
10.1
%
2.5% 11
.4%
14.0
%1.
5% 2.6% 10
.3%
3.1%
0.9%
13.0
%
14.2
%
20%
40%
-9.9
%
16%
-1.0
%
-1.3
%11
.8%
5.9%
-0.8
%
0.9
%4.
6% -6.4
%
-3.9
%-9
.1% -2.1
%
-20%
0%
-22.
6 -1 -15
-17 -14
-49.8%-60%
-40%
2 3 4 5 6 7 8 9 0 2 3 4 5 6 7 8 9 0 2 3 4 5 6 7 8 *
Significant implications for bond & surety lines
47
81 82 83 84 85 86 87 88 89 90 91 9 2 93 94 95 96 97 98 99 00 01 0 2 03 04 05 06 07 08 09*
*Based estimate of 60,000 business bankruptcies in 2009. All figures are percent change from previous year.Source: Insurance Information Institute from American Bankruptcy Institute data.
Total Industrial Production,(2007:Q1 to 2010:Q4F)(2007:Q1 to 2010:Q4F)
End of recession in late 2009, Obama stimulus program t d t b fit i d t i l d ti d
1 5%3.2% 3.6% 4.4%3.8%4.0%4.3%3.5%
4.9%5.0%
10.0%are expected to benefit industrial production and
therefore insurance exposure both directly and indirectly
1.5%0.3% 0.2%
-5 0%
0.0%
-4.6%
-9.0%
13 0%-10.5%
15 0%
-10.0%
5.0%
Industrial production began
to contracted
Figures for H2 2009 and 2010 revised upwards to reflect expected impact
-13.0%
-19.0%-20.0%
-15.0% to contracted sharply in late
2008 and plunged in Q1 2009
of Obama stimulus program and a gradual
economic recovery
48
-25.0%
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
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/09); Insurance Info. Inst.
State & Local Government Finances
i i S iin Dire StraightsLarge, Long-Term Cuts Necessary to g , g y
Align Spending with ShrinkingTax Revenues
Year-Over-Year Change in Quarterly U.S. State Tax Revenues Inflation AdjustedState Tax Revenues, Inflation Adjusted
20%States revenues were down 17.8% in Q2 2009, the second consecutive quarter of
record revenue decline. This will impact public infrastructure spending significantly.%
9.9%
9.5%
% .2%
% 0%12
.4%
% %10%
15%
p p p g g y
2.4% 4.
7% 5.6 %
4.4%
1.8%
0.4%
0.0% 1.
6%
0.1%
4.0% 4.7% 5.
7 % 83.
4%6.
0 % 7.0
6.6%
4.2%
3.7%
6.3%
2.6%
1.3% 1.9% 2.3%
0.4% 0.8%
0.4%
3.0%
0.2%2.
4%
0%
5%
10%-1
.3%
-1.7
%-3
.0%
%
-0.6
%
.8%
10%
-5%
0%Nationwide, state-tax collections for fiscal year 2009 declined by a record $63 billion, or 8.2 percent from the previous year That loss
-7.6
%-1
0.7%
-5.
8%-1
3.4%-15%
-10% from the previous year. That loss is roughly twice the amount
states gained in fiscal relief from the federal stimulus package.
-17.
8
-20%
1Q99
2Q99
3Q99
4Q99
1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
Source: U.S. Census Bureau; Nelson A. Rockefeller Institute of Government:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf
Year-Over-Year Change in Quarterly State and Local Tax Revenues (Inflation Adjusted)and Local Tax Revenues (Inflation Adjusted)
State tax receipts are plunging far
more rapidly than
States spending on infrastructure will have to
decline even more, especially when stimulus funds dry up local taxeswhen stimulus funds dry up
after 2010.
Source: U.S. Census Bureau; Nelson A. Rockefeller Institute of Government:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf
State Tax Revenue GrowthAdjusted for Legislative ChangesAdjusted for Legislative Changes
State tax receiptsState tax receipts are plunging in NY
Source: U.S. Census Bureau and Bureau of Economic Analysis; Nelson A. Rockefeller Institute of Government:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf
States with Fastest Decline in Real Per-Capita Tax RevenuesReal Per Capita Tax Revenues
Period Ending April-June 2009 vs. Recent Peak*
5%
0%AK FL SC GA VA UT ID NC NV DE
Percent
Real per capital ta receipts in Fl declined
-15%
-10%
-5% Real per capital tax receipts in Fl declined 27.5% from $2406 to $1,744 in the 4
quarters ending June 2009 vs. June 2006
-20.4% -20.0%-16.5% -16.3% -16.3%-17.1%-18.2%-18.2%
-25%
-20%
15%
M t t ’-27.5%
-35%
-30%Many states’ revenues are down substantially since their highs early
i h d d53
-36.8%-40% in the decade*Peak defined as July – June period between 2006-2009 with highest peak per capita revenues.Source: US Bureau of Economic Analysis; Nelson A. Rockefeller Institute of Govt.; Insurance Info. Inst.
States with Slowest Decline in Real Per-Capita Tax RevenuesReal Per Capita Tax Revenues
Period Ending April-June 2009 vs. Recent Peak*
0.0%0.0%1%
0%MD AR MT VT WV IN IA SD ND WY
Percent
-2.1%2 4%
-2%
-1%
-2.4%
-3.9%4 1%
-4%
-3%
6 2%
-5.1% -4.9%-4.5% -4.1%
-6%
-5%
Some states are doing much better than others
54
-6.2%-7% better than others
*Peak defined as July – June period between 2006-2009 with highest peak per capita revenues.Source: US Bureau of Economic Analysis; Nelson A. Rockefeller Institute of Govt.; Insurance Info. Inst.
State-by-StateState by State Infrastructure
Spending & Job GainsBigger States Get More Should BenefitBigger States Get More, Should Benefit
Commercial Insurers Exposure
Distribution of $787 B in Stimulus Funds*Stimulus Funds
$ BillionsUnused $173.2B or 22% or the $787B in stimulus$ Billions
$300
$350Paid Out
$787B in stimulus money has been spent
as of Oct. 10, 2009.$288$275
$225 5$200
$250 $224
$225.5 $228.0 $160.3$100
$150
$62.5 $47.0 $63.7$0
$50
Tax Benefits Contracts Grants Entitlements
56
Tax Benefits Contracts, Grants,Loans
Entitlements
*As of 10/10/09Source: www.recovery.gov accessed 10/17/09; Insurance Information Institute.
Infrastructure Stimulus Spending by State (Total = $38 1B)by State (Total = $38.1B)
State Allocation State Allocation State AllocationAL $603,871,807 LA $538,575,876 OK $535,407,908, , , , , ,
AK $240,495,117 ME $174,285,111 OR $453,788,475
AZ $648,928,995 MD $704,863,248 PA $1,525,011,979
AR $405,531,459 MA $890,333,825 RI $192,902,023
CA $3 917 656 769 MI $1 150 282 308 SC $544 291 398CA $3,917,656,769 MI $1,150,282,308 SC $544,291,398
CO $538,669,174 MN $668,242,481 SD $213,511,174
CT $487,480,166 MS $415,257,720 TN $701,516,776
DE $158,666,838 MO $830,647,063 TX $2,803,249,599
DC $267 617 455 MT $246 599 815 UT $292 231 904DC $267,617,455 MT $246,599,815 UT $292,231,904
FL $1,794,913,566 NE $278,897,762 VT $150,666,577
GA $1,141,255,941 NV $270,010,945 VA $890,584,959
HI $199,866,172 NH $181,678,856 WA $739,283,923
ID $219,528,313 NJ $1,335,785,100 WV $290,479,108
IL $1,579,965,373 NM $299,589,086 WI $716,457,120
IN $836,483,568 NY $2,774,508,711 WY $186,111,170
IA $447,563,924 NC $909,397,136 U.S. T it i
$238,045,760Territories
KS $413,837,382 ND $200,318,301
KY $521,153,404 OH $1,335,600,553 Total $38,101,898,173
Sources: USA Today, 2/17/09; House Transportation and Infrastructure Committee; the Associated Press.
Infrastructure Stimulus Spending By State: Top 25 States ($ Millions)State: Top 25 States ($ Millions)
7 Infrastructure spending is3.
2 5
$3,9
17.7
$4,000$4,500
Infrastructure spending is in the stimulus package total $38.1B, allocated
i i0 0
$2,8
03$2
,774
.4.
9
$2 500$3,000$3,500
rs ($
Mill
) largely by population size.
0.6
0.3
6.5
0.6 .3 5 9 5 2 9 9$1
,335
.8
$1,5
80.
9.4
,141
.31,
150.
3$1
,335
.6
$1,5
25.
$1,7
9
$1,500$2,000$2,500
ulus
Dol
la
$890
$890
$836
$830
$739
.$7
16.
$704
.$7
01.
$668
.2$6
48.9
$603
.9$5
44.3
$538
.7$5
38.6
$90$1$ 1
$
$500$1,000$1,500
Stim
u
$0CA TX NY FL IL PA NJ OH MI GA NC VA MA IN MO WA WI MD TN MN AZ AL SC CO LA
Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.
Infrastructure Stimulus Spending By State: Bottom 25 States ($ Millions)State: Bottom 25 States ($ Millions)
Infrastructure spending is in
847.6
5.3$521
.248
7.5
53.8$5
35.4
$600the stimulus package total
$38.1B, allocated largely by population size
78.9
0.0
7.6
.6 .5 .0 5
$413
.
$44
90.5
92.2
299.
6$405
. 5
$415$4 $4
5
$400
$500
rs ($
Mill
) population size
$27
$27
$26
$246
$240
.$2
38.
$219
.5$2
13.5
$200
.3$1
99.9
$192
.9$1
86.1
$181
.7$1
74.3
$158
.7$1
50.7
$2$2$ 2
$200
$300
ulus
Dol
la
$
$0
$100Stim
u
$
OK KY CT OR IA MS KS AR NM UT WV NE NV DC MT
AK
U.S.
Ter
r. ID SD ND HI RI WY NH ME DE VT
Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.
Expected Number pof Jobs Gained or
Preserved by yStimulus Spendingp g
Larger States = More JobsWorkers Comp BenefitsWorkers Comp Benefits
Estimated Job Effect of Stimulus: Jobs Created/Saved By State = 3 5 Mill TotalCreated/Saved By State 3.5 Mill Total
State Jobs Created State Jobs Created State Jobs CreatedAL 52 000 LA 50 000 OK 40 000AL 52,000 LA 50,000 OK 40,000
AK 8,000 ME 15,000 OR 44,000
AZ 70,000 MD 66,000 PA 143,000
AR 32,000 MA 79,000 RI 12,000
CA 396,000 MI 109,000 SC 50,000
CO 60,000 MN 66,000 SD 10,000
CT 41,000 MS 30,000 TN 71,000
DE 11,000 MO 69,000 TX 269,000
DC 12,000 MT 11,000 UT 32,000
FL 207,000 NE 23,000 VT 8,000
GA 107,000 NV 34,000 VA 93,000
HI 16,000 NH 16,000 WA 75,000
ID 17,000 NJ 100,000 WV 20,000
IL 148,000 NM 22,000 WI 70,000
IN 75,000 NY 215,000 WY 8,000
IA 37 000 NC 105 000IA 37,000 NC 105,000
KS 33,000 ND 9,000
KY 48,000 OH 133,000 Total 3,467,000
Sources: http://www.recovery.gov/; Council of Economic Advisers; Insurance Information Institute.
Estimated Job Effect of Stimulus Spending By State: Top 25 StatesSpending By State: Top 25 States
6 (Thousands)39
6
400
timul
us
The economic stimulus plan calls f th ti ti f
( )26
921
520
7
300
aved
by
S for the creation or preservation of 3.5 million jobs, allocated roughly
in proportion to the size of the
13314
8
00050709
143
2 2
200
Cre
ated
/Sa p p
state’s labor force.93 79 75 75 71 70 70 69 66 66 60 52 50 50
1010101
100
. of J
obs
C
0CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC
No.
Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.
Estimated Job Effect of Stimulus Spending By State: Bottom 25 StatesSpending By State: Bottom 25 States
(Thousands)7
4441 40
48
40
50
timul
us
( )
The economic stimulus plan calls for the creation or
33
37
303232
34
30
40
aved
by
S preservation of 3.5 million jobs, allocated roughly in
proportion to the size of the
2220
17 16 16 15
23
20
Cre
ated
/Sa p p
state’s labor force
12 12 11 11 10 9 8 8 810
. of J
obs
C
0KY OR CT OK IA NV KS AR UT MS NE NM WV ID HI NH ME DC RI DE MT SD ND AK VT WY
No.
Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.
GREEN SHOOTSGREEN SHOOTS
Is the RecessionIs the RecessionNearing an End?g
Hopeful Signs that theEconomic Recovery Is UnderwayEconomic Recovery Is Underway
• Recession Appears to be Bottoming Out, Freefall Has EndedGDP h i k h d d E i di• GDP shrinkage has ended; Economy is expanding
• Pace of job losses is slowing• Major stock market indices well off record lows, anticipating recovery• Some signs of retail sales stabilization are evident
• Financial Sector is Stabilizing• Banks are reporting quarterly profits• Banks are reporting quarterly profits• Many banks expanding lending to very credit worthy people & businesses
• Housing Sector Seems To Be Bottoming Out• Home are much more affordable (attracting buyers)• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)• Freefall in housing starts and existing home sales is ending in many areas
65
Freefall in housing starts and existing home sales is ending in many areas
• Inflation & Energy Prices Are Under Control• Consumer & Business Debt Loads Are Shrinking Source: Ins. Info. Inst.
11 Industries for the Next 10 Years: Insurance Solutions NeededInsurance Solutions Needed
GovernmentEducation
Health CareEnergy (Traditional)Alternative Energy
A i lAgricultureNatural Resources
E i t lEnvironmentalTechnology
Li ht M f t i66
Light ManufacturingExport Oriented Industries
Inflation Trends: Concerns Over
Stimulus Spending and Monetary Policy
Mounting Pressure on C i C S i i ?Claim Cost Severities?
Annual Inflation Rates(CPI U %) 1990 2010F(CPI-U, %), 1990-2010F
6.0Inflation peaked at 5.6% in August 2008 on
high energy and commodity crisis The4.9 5.1
3 8 3 84 0
5.0
6.0 high energy and commodity crisis. The recession and the collapse of the commodity bubble have produced temporary deflation.
3.0 3.22.6
1 9
3.3 3.4
2.5 2.3
3.0
3.8
2.8
3.8
1 9
2.82.92.43.0
4.0
1.51.9
1.31.9
1.0
2.0
There is so much slack in the US economy that
(0.5)(1.0)
0.0
yinflation should not be a concern through 2010, but depreciation of dollar is concern longer run.
68
( )(1.0)90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Oct. 10, 2009 (forecasts).
US Budget Deficit, 1969-2019F
$500 4%Federal Deficit ($ Bill) % GDP
$0 0%
2%
-$500
al D
efic
it
-4%
-2%
s %
of G
DP
-$1,000Fede
ra
-8%
-6%
Defic
it as
Concerns that deficit spending will drive up inflation. This would
harmful to insurance claim severity.-$1,500
-12%
-10%Deficit expected to hit record $1.8 trillion in 2009 or 13% or GDP a post WW II high
y
-$2,000
1969
1975
1980
1985
1990
1995
2000
2005
2010
2015
2019
-14%or GDP, a post-WW II high
Sources: Congressional Budget Office analysis of President’s budget, March 2009; Insurance Information Institute.
Balance Sheet of theFederal Reserve Dec 2006 Sept 2009*
70.4
5 9.0
Federal Reserve, Dec. 2006- Sept. 2009*
$ Billions
$2,2
7
$2,1
06.5
$2,1
79
$2,0
52.2
$2,000
$2,500 The size of the Fed’s balance sheet has more than doubled since the crisis began in 2007 from about
$900 billion to $2 2 trillion fueling
.7 .6 .4 .6 2.9 .3 6.4 $1
,186
.2
$1,500
$900 billion to $2.2 trillion, fueling inflation concerns.
$903
.
$903
.
$899
.
$911
$922
$921
$926
$
$
$1,000
$0
$500
70
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
*As of final Friday in each quarter.Source: Federal Reserve: http://www.federalreserve.gov/releases/h41/hist/h41hist1.htm
Top Concerns/Risks for Insurers if Inflation is ReignitedInflation is Reignited
CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B ( g ), pp $Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.
What are the potential impacts for insurers?Wh t / h ld i d t t t th l f th i k f i fl ti ?What can/should insurers do to protect themselves from the risks of inflation?
KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION• Rising Claim Severities
Cost of claims settlement rises across the board (property and liability)Cost of claims settlement rises across the board (property and liability)• Rate Inadequacy
Rates inadequate due to low trend assumptions arising from use of historical data • Reserve InadequacyReserve Inadequacy
Reserves may develop adversely and become inadequate (deficient)• Burn Through on Retentions
Retentions, deductibles burned through more quickly
71
• Reinsurance Penetration/ExhaustionHigher costs risks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly
Source: Ins. Info. Inst.
Key Threats Facing y gInsurers Amid
Financial CrisisChallenges for the
Next 5-8 YearsNext 5-8 Years
Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015
1. Erosion of CapitalL l d d idl th i lLosses were larger and occurred more rapidly than is commonly understood or presumedMax surplus loss at 3/31/09 was 16%=$85B from 9/30/07 peakP/C policyholder surplus loss could have been much largerP/C policyholder surplus loss could have been much largerDecline in PHS of 1999-2002 was 15% over 3 years and was entirely made up and them some in 2003. Current decline was ~16% in 5 qtrs.During the opening years of the Great Depression (1929-1933) PHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35%. It took until 1939-40 before these key measures returned to their 1929 peaks.their 1929 peaks.BOTTOM LINE: Capital and assets fell farther and faster than many believed possible. It will take years to return to the 2007 peaks—likely 2011 (without market relapse).
73Source: Insurance Information Inst.
Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015
2. Reloading Capital After “Capital Event”Continued asset price erosion coupled with major “capital event” would have led to shortage of capital among somecompaniesP ibl C I l i f d llPossible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirementsP/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after majorcapital can be raised quickly and cheaply after major events (post-9/11, Katrina).
This assumption may be incorrect in the current environmentCost of capital is much higher today (relative “risk-free”Cost of capital is much higher today (relative risk free rates), reflecting both scarcity & riskImplications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh
74Source: Insurance Information Inst.
y p g y pcapital & generate internally. Already a reality for some life insurers.
Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015
3. Long-Term Reduction in Investment EarningsL i t t t i k i t d iti dLow interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gainsFed actions in Treasury markets keep yields lowFed actions in Treasury markets keep yields lowMany insurers have not adjusted to this new investment paradigm of a sustained period of low investment gainsRegulators will not readily accept it; Many will reject itRegulators will not readily accept it; Many will reject itImplication 1: Industry must be prepared to operate in environment with investment earnings accounting for a smaller fraction of profitssmaller fraction of profitsImplication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.
75Source: Insurance Information Inst.
yLessons from the period 1920-1975 need to be relearned
Important Issues & Threats Facing Insurers: 2009 – 2???
4. Regulatory Overreach Facing Insurers: 2009 – 2???
Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)Strong arguments for Optional Federal Charter, but…Pushing for major change is not without risk in the g j gcurrent highly charged political environmentDangers exist if feds get their nose under the tentStatus Quo is viewed as unacceptable by allStatus Quo is viewed as unacceptable by allDisunity within the insurance industryInsurance & systemic risk—Who is important?Impact of regulatory changes will be felt for decades
76Source: Insurance Information Inst.
Impact of regulatory changes will be felt for decadesBottom Line: Regulatory outcome is uncertain and risk of adverse outcome exists
Health Insurance Reform Debate—Potential Spillover Impacts on P/C Insurersp p
• 24-Hour Coverage ProposalWould roll WC and med components of auto into natl. health care plan
• Rollback of McCarran-Ferguson ActWould repeal or restrict for health and medical malpractice insurersSlippery slope—Med Mal is a p/c line; Congress will not hesitate to breach M-F for other p/c lines in the future to show its ire over an issue (e.g., after major cat)
• Exclusion of Med Mal Reform from Health Care BillShows powerful influence of trial bar with Congress/Administration
• FTC granted authority to conduct studies “related to insurance” All Lines!• FTC granted authority to conduct studies “related to insurance” –All Lines!• Reporting of Claims• Adjustments to Medicare Fee Schedules• Patient “Bill of Rights” or Vague Standards of Care• Patient Bill of Rights or Vague Standards of Care• Cost Shifting into WC, Auto from Health System
WC/Auto Medical: more lucrative from provider perspective• “Windfall” Profit Taxes? Additional Premium Taxes?
77
W d a o t a es? dd t o a e u a es?• Executive Compensation Restrictions?• Public “Option” in P/C Lines—Nat Cat/Wind?• Perception that Feds Regulate Insurance Industry Taking Root
Important Issues & Threats Facing Insurers: 2009 2015
5. Emerging Tort ThreatN t t f ( t ti f t f ) i
Facing Insurers: 2009 -2015
No tort reform (or protection of recent reforms) is forthcoming from the current Congress or AdministrationE i f t f i t i t ( l dErosion of recent reforms is a certainty (already happening)Innumerable legislative initiatives will create
t iti t d i i ti f dopportunities to undermine existing reforms and develop new theories and channels of liabilityTorts twice the overall rate of inflationInfluence personal and commercial lines, esp. auto liab.Historically extremely costly to p/c insurance industryLeads to reserve deficiency, rate pressure
78Source: Insurance Information Inst.
y, pBottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012-2014
Shifting LegalShifting Legal Liability & TortLiability & Tort
EnvironmentIs the Tort Pendulum
Swinging Against Insurers?Swi gi g gai st su e s?
Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclicalas a % of GDP Appear Somewhat Cyclical
$300 2.50%Tort Sytem Costs Tort Costs as % of GDPBillions
$250
sts 2.25% GD
P
$150
$200
yste
m C
os
2.00% s as %
of
$50
$100
Tor
t Sy
1.75%
Tor
t Cos
ts
2009 2010 G th i T t C t % f
$0
$50
80 82 84 86 88 90 92 94 96 98 00 02 04 06 8E 0E
1.50%
T2009-2010 Growth in Tort Costs as % of GDP is due in part to shrinking GDP
198
198
198
198
198
199
199
199
199
199
200
200
200
200
2008
2010
Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010
*Excludes the tobacco settlement, medical malpractice
The Nation’s Judicial Hellholes (2008/2009)Hellholes (2008/2009)
Watch List
ILLINOIS
Rio Grande Valley & Gulf
Coast, TXMadison County,
IL NEVADA
NEW JERSEYAtlantic County (Atlantic City)
ALABAMA
ILLINOISCook County West VirginiaBaltimore, MD
St Louis (the city of), St Louis and
Jackson Counties, MO
Clark County (Las Vegas)
ALABAMAMacon and
Montgomery Counties
Counties, MODishonorable
MentionsMA Supreme
Judicial Court
CALIFORNIALos Angeles
County
South Florida
Judicial CourtMO Supreme
Court
Source: American Tort Reform Association; Insurance Information Institute
FINANCIAL STRENGTH &
RATINGSIndustry Has Weathered dust y as Weat e ed
the Storms Well
P/C Insurer Impairments,1969 20081969-2008
The number of impairments varies i ifi tl th / i l
60 860
70
significantly over the p/c insurance cycle, with peaks occurring well into hard markets
649 50 48
556 58
41
49 5047
40
50
60
34
19
36
3134
29 318 19
35820
30
40
815
127
11 9 913 12
19
16 14 13
1612
1 1 114 15
75
0
10
20
83
0
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
Source: A.M. Best; Insurance Information Institute
P/C Insurer Impairment Frequency vs Combined Ratio 1969 2008vs. Combined Ratio, 1969-2008
Combined Ratio after DivP/C I i t F
Impairment rates are highly
115
1201.82.0
P/C Impairment Frequencye g ycorrelated with underwriting
performance and reached record lows in 2007/08
110
115
Rat
io
1.21.41.6
t Rat
e
lows in 2007/08
100
105
Com
bine
d
0 60.81.0
mpa
irmen
t
95
C
0.20.40.6 I
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and
84
90
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
0.0
Source: A.M. Best; Insurance Information Institute
barely one-fourth the 0.82% average since 1969
P/C Impairment Frequency vs. Catastrophe Points in Combined Ratio, 1977-2008Points in Combined Ratio, 1977 2008
Catastrophe Points in Combined RatioImpairment rates
are highly
14
16
Rat
io
1.82.0
pP/C Impairment Frequency
e g ycorrelated with underwriting
performance and reached record lows in 2007/08
10
12
Com
bine
d
1 21.41.6
Rat
e
lows in 2007/08
6
8
Poin
ts o
n C
0.81.01.2
mpa
irmen
t
2
4
atas
troph
e
0.20.40.6 Im
2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and
0
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
Ca
0.0
Source: A.M. Best, PCS; Insurance Information Institute
barely one-fourth the 0.82% average since 1969
Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*Ratings Actions in 2008
P/C insurance is by design a resilient in
Upgraded, 59 , 4.0%
Initial, 41 , 2.8%Downgraded, 55 , 3 8%
design a resilient in business. The dual threat of financial
disasters and catastrophic losses are Under Review, 63 ,
4.3%
O h 59 4 0%
3.8%catastrophic losses are anticipated in the
industry’s risk management strategy.
Other, 59 , 4.0%
Despite financial market turmoil, high cat losses
and a soft market inand a soft market in 2008, 81% of ratings actions by A.M. Best
were affirmations; just 3.8% were downgrades
86
Affirm, 1,183 , 81.0%*Through December 19.Source: A.M. Best.
86
3.8% were downgrades and 4.0% upgrades
Historical Ratings Distribution,US P/C Insurers 2008 vs 2005 and 2000US P/C Insurers, 2008 vs. 2005 and 2000
2008 2005 2000A++/A+ and
D0.2%C++/C+
1.9%
E/F2.3% A++/A+
11 5%
C/C-0.6%
A++/A+9.2%
Vulnerable*
A++/A+10.8%Vulnerable*
A++/A+ and A/A- gains
.9% 11.5%B/B-6.9%
Vulnerable12.1%
B++/B+21.3%
7.9%
A/A-
B++/B+28.3%
A/A-52 3%
B++/B+26.4%
A/A48.4%
P/C insurer financial strength has improved since 2005
52.3%A/A-
60.0%
87Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.
has improved since 2005 despite financial crisis
Reasons for US P/C Insurer Impairments 1969 2008Impairments, 1969-2008
Reinsurance Sig. Change Deficient
Deficient loss reserves and inadequate i i th
Failure3.7%
Misc.9.1%
Sig. Change in Business
4.2%
Loss Reserves/In-
adequate Pricing38 1% pricing are the
leading cause of insurer
impairments
38.1%
Investment Problems
7 0% impairments, underscoring the
importance of discipline. Affiliate
Impairment
7.0%
pInvestment
catastrophe losses play a much
ll lRapid
Impairment7.9%
All d F d
Catastrophe Losses
88Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008
smaller role.Growth14.3%
Alleged Fraud8.1%
Losses7.6%
Critical Differences Between P/C
Insurers and BanksSuperior Risk Management ModelSuperior Risk Management Model
& Low Leverage MakeBi Diffa Big Difference
How Insurance Industry Stability Has Benefitted ConsumersHas Benefitted Consumers
BOTTOM LINE:• Insurance Markets—Unlike Banking—Are Operating
NormallyTh B i F ti f I th O d l T f• The Basic Function of Insurance—the Orderly Transfer of Risk from Client to Insurer—Continues Uninterrupted
• This Means that Insurers Continue to:This Means that Insurers Continue to:Pay claims (whereas 123 banks have gone under as of 10/2/09)
The Promise is Being FulfilledRenew existing policies (banks are reducing and eliminating lines of credit)Renew existing policies (banks are reducing and eliminating lines of credit)Write new policies (banks are turning away people and businesses who want or need to borrow)Develop new products (banks are scaling back the products they offer)
90
Develop new products (banks are scaling back the products they offer)Compete Intensively (banks are consolidating, reducing consumer choice)
Source: Insurance Information Institute90
Reasons Why P/C Insurers Have Fewer Problems Than Banks:
A Superior Risk Management Model• Emphasis on Underwriting
Matching of risk to price (via experience and modeling)
A Superior Risk Management Model
g p ( p g)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk
• Strong Relationship Between Underwriting and Risk BearingInsurers always maintain a stake in the business they underwrite keeping “skin in the game”Insurers always maintain a stake in the business they underwrite, keeping skin in the game at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101
• Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry
• Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid
• Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge
91
y g y p g g ( g gfunds, private equity, complex securitized instruments, credit derivatives—CDS’s)
• Greater TransparencyInsurance companies are an open book to regulators and the public
Source: Insurance Information Institute91
Regulatory ReformRegulatory Reform Obama Administration’s Plan
for Reforming Financialfor Reforming Financial Services Industry Regulation
Will Impact InsurersWill Impact InsurersStatus: Stalled in Congress
Obama Regulatory Reform Proposal:Plan ComponentsPlan Components
I. Office of National Insurance (ONI) Duties( )1. Monitor “all aspects of the insurance industry”2. Gather information3. Identify the emergence of any problems or gaps in
regulation that could contribute to a future crisis4. Recommend to the Federal Reserve insurance companies
it believes should be supervised as Tier 1 FHCs5 Administer the Terrorism Risk Insurance Program5. Administer the Terrorism Risk Insurance Program6. Authority to enter into international agreements and
increase international cooperation on insurance regulation
93
p g
Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.
Obama Regulatory Reform Proposal:Plan Components (cont’d)
II. Systemic Risk Oversight & Resolution Authority
Plan Components (cont d)
Federal Reserve given authority to oversee systemic risk of large financial holding companies (Tier 1 FHCs)
Insurers are explicitly included among the types of entities that could be found to be p y g ypa Tier 1 FHC
ONI given authority to “recommend to the Federal Reserve any insurance companies that the ONI believes should be supervised as Tier 1 FHC.”
Proposal also recommends “creation of a resolution regime to avoid disorderly resolution of failing bank holding companies, including Tier 1 FHCs “…in situations where the stability of the financial system is at i k ” Di l ff i i 2risk.” Directly affects insurers in 2 ways:
Resolution authority may extend to an insurer within the BHC structure if the BHC is failing
94
If systemically important insurer is failing (as identified by ONI as Tier 1 FHC) resolution authority may apply
Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.
P/C INSURANCE FINANCIAL
PERFORMANCE
A R ili I d iA Resilient Industry in Challenging TimesChallenging Times
ProfitabilityProfitability
Hi t i ll V l tilHistorically Volatile
P/C Net Income After Taxes1991 2009:H1 ($ Millions)*1991-2009:H1 ($ Millions)
677$80 0002005 ROE= 9.4%2006 ROE = 12 2%
Insurer profits peaked in 2006 and
9
$62,
496
$65,
77
,155
1
$60,000
$70,000
$80,000 2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:H1 ROAS = 2.5%*
peaked in 2006 and 2007, but fell 96.2% during the economic
crisis in 2008
78 ,316
0,59
8
24,4
04 $36,
819
$30,
773
1,86
5
$30,
029 $4
4 ,
,559
$38,
501
$30 000
$40,000
$50,000
$14,
17
$5,8
40
$19,
$10,
870
$20 $2 $21
$3,0
46
$2,3
79
$5,7
57
$20,
$10,000
$20,000
$30,000
$
-$6,970-$10,000
$0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 H1
97
09:H
*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 4.5% ROAS for 2008 and 2.2%. 2009:Q1 net income was $10.0 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.
97
ROE: P/C vs. All Industries 1987–2009: H1*
20%
1987–2009: H1P/C profitability is Financial Crisis*
15%cyclical and volatile
5%
10%Sept. 11
0%
%
A d
Hugo Lowest CAT losses in 15 years
Katrina, Rita, Wilma
-5%87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:H1
Andrew Northridge 4 Hurricanes
98
US P/C Insurers All US Industries
*Excludes Mortgage & Financial Guarantee in 2008 and 2009Sources: ISO, Fortune; Insurance Information Institute.
Rates of Return on Net Worth for All Li US NY 1998 2007*
14.4%15%
20%
All Lines: US vs. NY, 1998–2007*
6.6%3 3%
9.5% 10.0%
5.3%8.6% 8.3%
12.5% 12.5%
6.5%8.8%
8.8%9.2%
13.2%
8.9%
10.9%
4.1%5%
10%
15%
3.3%
-0.5%-5%
0%
Excluding 2001, returns
-22.3%20%
-15%
-10%g ,
in NY’s p/c insurance markets have been
about average%
-25%
-20%
98 99 00 01 02 03 04 05 06 07
about average
US NYSource: NAIC. *Latest available.
ROE vs. Equity Cost of Capital:US P/C Insurance:1991 2009:H1*
18%
US P/C Insurance:1991-2009:H1The p/c insurance industry fell well
h f i f i l i 2008
12%
14%
16% short of is cost of capital in 2008
2.3
pts
8%
10%
pts -1.7
pts
+2
-9.0
pts
1 pt
s
0 pt
s
2%
4%
6%
-13.
2 p
US P/C insurers missed their cost of capital by an
-
The cost of capitalis the rate of ret rn
-7.
-6.0
-2%
0%
% their cost of capital by an average 6.7 points from
1991 to 2002, but on target or better 2003-07, but
falling well short in 2008/09
is the rate of return insurers need to
attract and retain capital to the
business-4%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09Q1*
ROE Cost of Capital*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.
falling well short in 2008/09 business
100
A 100 Combined Ratio Isn’t What it U d t B 95 i Wh It’ At
110 18%
Used to Be: 95 is Where It s At
100 6 100 7 101 0
14.3% 15.9%105
110
14%
16%
18%Combined Ratio ROE*
97.5
100.6 100.1 100.799.5
101.0
12.7%9.6%
95
100
ned
Rat
io
10%
12%
on E
quity
*
92.68.9%
4.2%
4 5%90
95
Com
bin
6%
8%
Ret
run
o
Combined ratios must me must lower in today’s depressed
i t t 4.5%
80
85
0%
2%
4%investment environment to generate risk
appropriate ROEs
101
801978 1979 2003 2005 2006 2008* 2009:H1*
0%
* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.
P/C PremiumP/C Premium GrowthGrowth
Primarily Driven by thePrimarily Driven by the Industry’s UnderwritingIndustry s Underwriting Cycle, Not the Economy
Strength of Recent Hard Marketsby NWP Growth
22%24%
y NW G1975-78 1984-87 2000-03
Sh d d
16%18%20%22%
Net written premiums fell 1.0%
in 2007 (first decline since 1943)
Shaded areas denote “hard
market” periods
8%10%12%14%
decline since 1943) by 1.4% in 2008, and 4.2% in H1 2009, the first 3-
year decline since
2%4%6%8%
y1930-33
6%-4%-2%0%
103
-6%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
09:H
1
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute103
Average Expenditures on Auto InsuranceAuto Insurance
Countrywide auto insurance
$875
0 41042 1
$900
$950Countrywide auto insurance expenditures increased 2.6% in 2008 and are rising at a
4% pace in 2009
6
$786 $8
30 $84
$817
$82 0$8
4
$83
$800
$8504% pace in 2009
651
$668 $6
91 $705
$703
$685
$690 $7
2 6$700
$750
$6 $
$600
$650
104
94 95 96 97 98 99 00 01 02 03 04 05 05 07* 08* 09**Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Monthly Change in Auto Insurance Prices*
% % % %
6%
Insurance PricesAuto insurance
% 4% 3.7% 4.
0%4.
0% 4.3% 4.4% 4.
7%4.
4% 4.7 %
4.6% 4.7%
4.5%
4%
5% price increases seem to have leveled off
in recent months at
%2.
6%2.
6% 2.7% 3.
0% 3.1% 3.
4 3
3%
in recent months at about +4.5%
0.8%
0.8%
5% % % % 5% .6%
5%%
5% 0.9% 1.
1% 1.3% 1.
7%
%1%
2%
0 00.
50.
40.
3 %0.
3% 0.5 0. 0.5
0.1% 0.
50.
2%
0%
%
-07
-07
-07
-07
-07
-07
-07
ug-
-07
-07
-07
-07
-08
-08
-08
-08
-08
-08
-08
ug-
-08
-08
-08
-08
-09
-09
-09
-09
-09
-09
-09
ug-
-09
105
Jan-
Feb-
Mar
-A
pr-
May
-Ju
n-Ju
l- Au
Sep-
Oct
-N
ov-
Dec
-Ja
n-Fe
b-M
ar-
Apr
-M
ay-
Jun-
Jul- Au
Sep-
Oct
-N
ov-
Dec
-Ja
n-Fe
b-M
ar-
Apr
-M
ay-
Jun-
Jul- Au
Sep-
*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics
Average Premium forHome Insurance Policies**Home Insurance Policies
Countrywide auto insurance
04 07 820
$841
$850$900$950
yexpenditures increased 1.6% in 2008 and are increasing at 2.6% annual rate in 2009
8 $729 $7
64 $80
$80 $8 $
$750$800$850
6 $593
$66
$600$650$700
$508 $5
36
$500$550$600
106
00 01 02 03 04 05 06 07* 08* 09**Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.
Average Commercial Rate Change,All Lines (1Q:2004 3Q:2009)All Lines, (1Q:2004 – 3Q:2009)
0%% Magnitude of price
.2%
%2.
7%3.
0%-4%
-2%
-0.1
% Magnitude of price declines is now
shrinking. Reflects shrinking capital,
reduced investment i d t i ti-3
-5.9
%7.
0%
%-4
.6% - - 3
-5.3
%
-6.4
% -5.1
%-4
.9%
-5.8
%
-8%
-6%gains, deteriorating
underwriting performance, higher cat losses and costlier
reinsurance-7-9
.4%
-9.7
% -8.2
%
-9.6
%.3
%8% % 1.
0%-
-12%
-10%reinsurance
-11.
-11.
8-1
3.3% -1
2.0 %
-13.
5%-1
2.9% -1
1
-16%
-14%
4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9
KRW Effect
107
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Merger & gAcquisitionq
Barriers to Consolidation i i i i i 2010Will Diminish in 2010
P/C Insurance-Related M&A Activity 1988 2008M&A Activity, 1988-2008
Transaction Values Number of Transactions
32
$55,825
$50 000
$60,000
120
1402009 off to a stronger start with AIG unit sales and
$ Value of deal up 20% in 2009,
volume down 12%
$40,
03
$35,
221
30,8
73$40,000
$50,000
ue ($
Mill
)
80
100
nsac
tions
AIG unit sales and Bermuda
consolidation
$19,
118
$20,
353
4 ,615
16,2
94
$ 3
4$20 000
$30,000
actio
n Va
l
60
80
ber o
f Tra
n
2,43
5
$5,1
00
1,24
986 25
$9,2
64 $13 $1
$8,0
59$1
1,53
,882
$3,4
50$2
,780
$5,1
37
$5,6
38
$10,000
$20,000
Tran
sa
20
40
Num
b
109
$ $1 $4 $4$1,$ $
$088 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
0.Source: Conning Research & Consulting.
Capital/i
pPolicyholder S l (US)Surplus (US)
Shrinkage butShrinkage, but Not Enough to g
Trigger Hard Market
U.S. Policyholder Surplus: 1975 2009:H1*
$550
1975-2009:H1*Actual capacity as of 6/30/09 was $463.0B, up from
$400
$450
$500 $437.1B as of 3/31/09 Recent peak was $521.8 as of 9/30/07. Surplus as of 6/30/09 is 11.2% below 2007 peak; Crisis trough was as of 3/31/09 16.2% below 2007 peak
$300
$350
$400
$ B
illio
ns The premium-to-surplus ratio stood at $0.92:$1 as of
6/30/09 f
$150
$200
$250
$
“Surplus” is a measure of underwriting capacity It is
6/30/09, up from near record low of $0.85:$1 at
year-end 2007
$50
$100
$150 underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
y
111
$075 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 0809*
Source: A.M. Best, ISO, Insurance Information Institute. *As of 6/30/09111
Global Reinsurance Capacity Shrank in 2008 Mostly Due to Investmentsin 2008, Mostly Due to Investments
Global Reinsurance Capacity Source of Decline
$360
$350$360$370
Global
Change in Unrealized
Capital Losses
Realized Capital Losses31%
$$330$340$350 Global
reinsurance capacity fell by
an estimated 17% in 2008
Losses55%
$300$300$310$320 17% in 2008
H i
$270$280$290
Hurricanes14%
$2702007 2008
112Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.
Policyholder Surplus, 2006:Q4 – 2009:H12006:Q4 2009:H1
$ BillionsCapacity peaked at $ Billions
$512.8$521.8
$505 0$515.6
$517.9$520
$540$521.8 as of 9/30/07
$487.1$496.6
$478.5$463 0
$505.0
$480
$500
D li Si 2007 Q3 P k $455.6
$437.1
$463.0
$440
$460 Declines Since 2007:Q3 Peak08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%)
$380
$400
$420Q ( )
08:Q4: -$66.2B (-12.9%) 09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)
113
$38006:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2
Source: ISO, AM Best.113
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*Largest Capital Events Since 1989
The financial crisis now ranks as the largest
10 9%
16.2%13.8%
14%16%18%
ranks as the largest “capital event” over the
past 20+ years
9.6%6.9%
10.9%
6.2%8%10%12%
3.3%
0%2%4%6%
0%
/30/
1989
Hur
rican
eH
ugo
/30/
1992
Hur
rican
eA
ndre
w
2/31
/93
rthr
idge
rthq
uake
6/30
/01
Sept
. 11
Atta
cks
6/30
/04
Flor
ida
urric
anes
6/30
/05
Hur
rican
eK
atrin
a
nanc
ial
sis
as o
f/3
1/09
**
114
6/ H 6/ H A 12 No
Ear 6 F
Hu H Fi Cri 3 /
*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Date of maximum capital erosion; As of 6/30/09 (latest available) ratio = 11.2%.Source: PCS; Insurance Information Institute.
Historically, Hard Markets Follow When Surplus “Growth” is Negative*
30%
NWP % changeSurplus % change
When Surplus Growth is NegativeSharp decline in capacity is a necessary but not sufficient
20%
25%
30% Surplus % change necessary but not sufficient condition for a true hard market
10%
15%
5%
0%
5%
-15%
-10%
-5%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
*2009 NWP and Surplus figures are % changes for H1:09 vs H1:08Sources: A.M. Best, ISO, Insurance Information Institute
Investment Performance
Investments are a PrincipleInvestments are a Principle Source of Declining
fi bilif g
Profitability
Property/Casualty Insurance Industry Investment Gain:1994- 2009:H11
$ Billions$64 0
$42 8$47.2
$52.3
$44.4 $45.3$48.9
$59.4$55.7
$64.0$56.9
$51.9
$57.9
$50
$60
$35.4$42.8 $44.4
$36.0
$
$31.4$30
$40
$12.4$10
$20 Investment gains fell by 51% in 2008 due to lower yields, poor equity market
conditions. Falling again in 2009.$0
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08
09:H
1
conditions. Falling again in 2009.
117
09
1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
117
P/C Insurer Net Realized Capital Gains 1990-2009:H1Capital Gains, 1990 2009:H1
$16.21$18.02
$16$18$20 $ Billions
$9.89
$6 00
$9.24$10.81
$13.02
$6.63 $6.61$8.92$9.70$9.13$9.82
$8$10$12$14$16
$2.88$4.81
$1.66
$6.00$3.52
$2$0$2$4$6$8
-$1.21
-$10-$8-$6-$4-$2
Realized capital losses hit a record $19.8 billion in 2008 due to financial market turmoil, a $27.7
-$11.17
-$19 80$20-$18-$16-$14-$12$ ,
billion swing from 2007, followed by an $11.2B drop in H1 2009. This is a primary cause of 2008/2009’s large drop in profits and ROE.
118
-$19.80-$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
09H
1
Sources: A.M. Best, ISO, Insurance Information Institute. 118
Treasury Yield Curves: Pre-Crisis (July 2007) vs Sept 2009
4 96% 5 04% 4 96% 5 00% 5 00% 5.19%6%
Pre Crisis (July 2007) vs. Sept. 2009
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%
4.19%4.14%4%
5%
Treasury Yield Curve is at its
2 37%
3.02%3.40%
3%
4% most depressed level in at least 45 years. Investment
income is falling as a result.
0 96%1.48%
2.37%
2% Stock dividend cuts will further pressure
investment income
0.06% 0.12% 0.21% 0.40%
0.96%
0%
1%September 2009 Yield CurvePre-Crisis (July 2007)
investment income
119
0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Distribution of P/C Insurance Industry’s Investment PortfolioIndustry s Investment Portfolio
P tf li F tAs of December 31, 2007
Common Stock
Bonds66.7%
Portfolio Facts•Invested assets totaled $1.3 trillion as of 12/31/07
Common Stock17.9%•Insurers are generally
conservatively invested, with 2/3 of assets invested in bonds as of
Cash & Short-Term Investments
7.2%
12/31/07•Only about 18% of assets were invested in common stock as of
P f d St k
Real Estate0.8%
Other
common stock as of 12/31/07•Even the most conservative of portfolios was hit hard in 2008 Preferred Stock
1.5%Other5.9%
was hit hard in 2008
Source: NAIC; Insurance Information Institute research;.120
Distribution of P/C Insurance Industry’s Investment PortfolioIndustry s Investment Portfolio
P tf li F tAs of December 31, 2008
Common StockBonds68.4%
Portfolio Facts•Invested assets totaled $1.2 trillion as of 12/31/08, down from $1.3
i i f 12/31/0
Cash & Short-
14.8%68.4%trillion as of 12/31/07
•Insurers are generally conservatively invested, with 2/3+ of assets
Term Investments8.0%
R l E t t
invested in bonds as of 12/31/08•Only about 15% of assets were invested in
Preferred Stock
Real Estate0.9%
Other
assets were invested in common stock as of 12/31/08, down from 18% one year earlier•Even the most
1.8%Other6.2%
Even the most conservative of portfolios were hit hard in 2008
Source: NAIC; Insurance Information Institute research;.121
UnderwritingUnderwriting TrendsTrends
Financial Crisis Does Not DirectlyFinancial Crisis Does Not Directly Impact Underwriting
P f C l C t t hPerformance: Cycle, Catastrophes Were 2008’s Drivers
P/C Insurance Industry Combined Ratio, 2001-2009:H1*
120
Ratio, 2001 2009:H1As recently as 2001, insurers
paid out nearly $1.16 for every Relatively low CAT
115.8 $1 in earned premiums low CAT losses, reserve releases
Cyclical
2005 ratio benefited from heavy use of reinsurance
hi h l d t l107.5110
Best combined ratio since 1949
(87 6)
Cyclical Deterioration
which lowered net losses
100.198.4
100.899.5
101.0100
(87.6)
92.6
95.7
123
902001 2002 2003 2004 2005 2006 2007 2008 2009:H1*
*Excludes Mortgage & Financial Guaranty insurers in 2008. Including M&FG, 2008=105.1, 2009=100.9 Sources: A.M. Best, ISO.
123
P/C Reserve Development, 1992 2011E1992-2011E
$30 8Prior Yr Reserve Development ($ Bill) Impact on Combined Ratio (Points)
.7
23.2
$20$25$30
ll)
6
8
nts)
2009 off to a stronger start with AIG unit sales and
Bermuda
$ Value of deal up 20% in 2009,
volume down 12%
139.
97.
3
11.7
$5$10$15
e R
elea
se ($
Bi
2
4
ned
Ratio
(Poi
nconsolidation
5
1
-4.1
-2.1
-2.6
2.3
($5)$0$5
or Y
r. R
eser
ve
(2)
0
act o
n Co
mbi
n
-6.6
-9.8 -6
.7-9
.54.
616 -1
5- 5
-9.9
--8
.3
-
($20)($15)($10)Pr
i
(6)
(4)
( )
Imp
124
-1 - 1 -($20)92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11E
(6).Note: 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. Source: Barclay’s Capital; A.M. Best.
Calendar Year vs. Accident Year P/C Combined Ratio:1992- 2010E1P/C Combined Ratio:1992 2010E
Calendar Year Accident YearAccident year results show a more
significant deterioration in
115.
7
1
115.
9
115.
7
0 12.3115
120
Calendar Year Accident Year significant deterioration in underwriting performance.
Calendar year results are helped by reserve releases
106.
9
108.
4
106.
4
107.
8 110.
1
107.
3
0.1
00.9
105.
1
101.
9 105.
9
106.
9
108.
4
106.
4
105.
8
01.6
105.
6 107.
8 110.
0 11
00.8 0.6
105.
5
105.
7 109.
4
105.
6
01.6
105.
8
105
110
100
98.3 10
92.4
95.5
11 1 0
96.6
96.0
10
93.9
97.4
1
95
100
80
85
90
125
8092 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E
125
.Note: 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. Source: Barclay’s Capital; A.M. Best.
Underwriting Gain (Loss)1975 2009:H1*
3035 Insurers earned a record underwriting profit of $31.7B in
2006 d $19 3B i 2007 h l b l h 2 d
1975-2009:H1
1015202530 2006 and $19.3B in 2007, the largest ever but only the 2nd
and 3rd since 1978. Cumulative underwriting deficit from 1975 through 2008 is $442B.
15-10-505
10
$ B
illio
ns
-35-30-25-20-15$
$19.8 Bill underwriting loss in 2008
Large underwriting losses are NOT
-55-50-45-4035
5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 1
loss in 2008 incl. mort. & FG insurers, -$2.2B in H1:09
losses are NOT sustainable in current
investment environment
126
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 0809
:Q1
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers126
Number of Years With Underwriting Profits by Decade 1920s –2000sProfits by Decade, 1920s 2000s
Number of Years with Underwriting ProfitsU d i i fi10
88
10Underwriting profits were common before the 1980s (40 of the 60 years
before 1980 had combined ratios below 100)—but then they vanished. N i l d i i fi
67
56
8 Not a single underwriting profit was recorded in the 25 years from 1979
through 2003.
45
34
0 00
2
127
01920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*
Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.
127
Catastrophic LossCatastrophic Loss Catastrophe Losses Trends
Are Trending AdverselyAre Trending Adversely
U.S. Insured Catastrophe Losses
0.0
$120$ Billions
2008 CAT losses exceeded$100 Billion CAT
year is coming t ll
$100
.9
$100
$120 2008 CAT losses exceeded 2006/07 combined. 2005 was by
far the worst year ever for insured catastrophe losses in the
eventually
2009 cat losses were down 29%
5 5 0
$61.
$60
$80 insured catastrophe losses in the US, but the worst has yet to come.
down 29% in H1 from $10.6B in H1 2008
$7.5
2.7 4.7
$22.
95.
5 $16.
9$8
.3$7
.42.
6 $10.
1$8
.34.
6$2
6.5
5.9 $12.
9 $27.
5
$6.7
$26.
0$7
.5
$9.2$20
$40
$ $2 $4 $5 $ $ $2$ $ $4 $ $ $$
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
20??
129
2
*Based on PCS data through June 30 = $7.5 billion.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute
129
Top 12 Most Costly Disasters in US History (Insured Losses $2008)US History, (Insured Losses, $2008)
$45 3$50 8 of the 12 most expensive disasters in
$45.3
$35$40$45 US history have occurred since 2004;
8 of the top 12 disasters affected FL
$22.8 $23.8$25$30$35
Bill
ions In 2008, Ike became the 4th most
expensive insurance event and 3rd most expensive hurricane in US history
$7 3 $8.1 $8.5$11.3 $11.3 $12.5
$10$15$20$
B expensive hurricane in US history arising from about 1.35 mill claims
$4.2 $5.2 $6.2 $7.3 $8.1 $
$0$5
$10
Jeanne Frances Rita Hugo Ivan Charley Wilma Northridge Ike 9/11 Andrew KatrinaJeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Northridge(1994)
Ike(2008)*
9/11Attacks(2001)
Andrew(1992)
Katrina(2005)
*PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.
130
Distribution of US Insured CAT Losses: TX FL LA vs US 1980 2008*TX, FL, LA vs US, 1980-2008*
$ Billions of Dollars
Rest of US, $176, 60% Texas, $31.2,Texas, $31.2,
10%Florida accounted for 19% of all US
Louisiana, $33.6, 11%
19% of all US insured CAT losses from
Fl id $57 1
1980-2008: $57.1B out of
$297 9B Florida, $57.1,19%
$297.9B
*All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.
States With Highest Insured Catastrophe Losses in 2008Catastrophe Losses in 2008
$ Billions$ Billions
$10.2$10 0
$12.0 In 2008, insurers paid $26 billion to 3.9 million victims of 37 major
$8.0
$10.0 jnatural catastrophes across 40 states. 64% of the payouts (in $ terms) went
to homeowners 27% to business
$2 2$4.0
$6.0 to homeowners, 27% to business owners and 9% to vehicle owners
$2.2 $1.6 $1.3 $1.0
$0.0
$2.0
132
$Texas California Minnesota Ohio Georgia
Source: PCS; Insurance Information Institute.
Total Value of Insured Coastal Exposure (2007 $ Billions)Coastal Exposure (2007, $ Billions)
$2 378 9$2,458.6Florida
New York $2,378.9$895.1
$772.8$635.5
$479 9
New YorkTexas
MassachusettsNew Jersey
Connecticut
NY has more coastal exposure than any state
other than Florida$479.9
$224.4$191.9
$158.8$146 9
ConnecticutLouisiana
S. CarolinaVirginia
Maine
In 2007, Florida still ranked as the #1 most exposed state to hurricane loss,
with $2 459 trillion exposure an$146.9$132.8
$92.5$85.6
$60 6
MaineNorth Carolina
AlabamaGeorgia
Delaware
with $2.459 trillion exposure, an increase of $522B or 27% from $1.937
trillion in 2004, but NY is a close second at $2.379 trillion.
$60.6$55.7$51.8$54.1
$14 9
DelawareNew Hampshire
MississippiRhode Island
Maryland
The insured value of all coastal property was $8.9 trillion in 2007, up
24% from $7.2 trillion in 2004. $14.9
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
Maryland
Source: AIR Worldwide 133
U.S. Residual Market Exposure to Loss (Billions of Dollars)to Loss (Billions of Dollars)
$900 In the 19-year period
$771.9$696.4
$656.7$700$800$900 In the 19-year period
between 1990 and 2008, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54 7bn in
Katrina, Rita and Wilma
4 Florida
$372 3$430.5
$656
$419.5$500$600
has surged from $54.7bn in 1990 to $696.4bn in 2008.
4 Florida Hurricanes
H i
$150 0
$281.8$244.2
$292.0$372.3
$221.3
$
$200$300$400 Hurricane
Andrew
$54.7
$150.0
$0$100$200
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: PIPSO; Insurance Information Institute
1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Insurance Information Institute On LineInstitute On-Line
THANK YOU FOR YOUR TIME ANDTHANK YOU FOR YOUR TIME AND
YOUR ATTENTION!
135
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