State of State of the P&C the P&C MarketMarket

State of theState of the P&C MarketP&C Market

Presenters : Jim Dwane, Chartis Presenters : Jim Dwane, Chartis Insurance Insurance

Jim O’Connor, WillisJim O’Connor, Willis

AgendaAgenda

• Definitions & Historical Perspective

• Industry Trends

• Q & A

Definition of a Soft MarketDefinition of a Soft Market

• Excess Capacity

• Policy Holder Surplus (Current reserves to pay future losses)

• The more surplus the more premium companies can write

• Supply goes up; demand stays the same, Prices go down.

Impact of Combined RatiosImpact of Combined Ratios

• Combined ratio = losses paid out + expenses incurred / premiums

• Combined ratio < 100% Insurance company making a profit

• Combined ratio > 100% companies losing money on underwriting

• Historical Industry average – 100%

• Why would insurance companies write to break even? “Investment Return”.

Historical PerspectiveHistorical Perspective

Middle 80’s

Industry was losing money

Rate of return had plummeted

Shortfall of capacity due to profitability

What Happened?

• Coverage retracted

• Prices go up an average of 25 – 50%

• Tough to buy coverage

Historical PerspectiveHistorical Perspective

2001

Worst Year in Industry History

Combined ratio was 115%

Industry lost money for the first time ever

($13.8 billion)

Surplus depleted

Rates sky rocketed

““Changes in the Wind”Changes in the Wind”

2004

• Capacity Increased

• Combined's Improved

• Rates come down

2006

• Best Insurance Year Ever

• Combined's at 92.4%

• Investment return record

12.7%

2007

• Investment return 10.9%

2008

• Many natural disasters (bad

year)

• Investment return .1%

2009

• Investment return of 4.7%

Historical PerspectiveHistorical Perspective

2010

• Investment Return of 3.1%

Pop Quiz

• What is the average long term rate of

return for the Fortune 500?

2011 Market2011 Market

• Soft Phase which began in 2004 continues

• No major storms make land fall in US in 2010

• Deepwater Horizon spill. Insured losses 4.6 billion,

only effects energy markets

• Market remains “Over capitalized”

• Mixed Underwriting Results – net income after

taxes decreases 29% from 2010

2011 Market2011 Market

• Recession Issues

• Started with Sub-prime meltdown in 2007

• Economic slowdown – less to insure

• Demand for Insurance has tumbled – “Capacity

Increases”

• Slow / No recovery – Continue pressure on

premiums

• Insurance companies still competing for their share

of a shrinking market

What Could Change The Market?What Could Change The Market?

• Reserve release Issues• 2008 – 2010: Companies harvest “redundant”

reserves to help offset losses on other parts of the balance sheets

• 2011 reserves – will not have the benefit of prior year reserve releases

• Possible release errors

• Possibly to aggressive

• Profitability could plummet

• Inflation could put pressure on reserve adequacy.

What Could Change The Market?What Could Change The Market?

• Loss Activity – a large catastrophe or a number of smaller ones

• Universal application of RMS 11- increase loss estimates 60% to 150%• Current spotty usage and blended with RMS 7

• Looming Workers Compensation crisis• Average Workers Compensation premium is

now below Q4 2000 levels• Rates have dropped 63% since 2004• Combined Ratio

• 2005 – 54%• 2010 – 115%

Property /Casualty Property /Casualty Ongoing and Future TrendsOngoing and Future Trends

• Low Levels of Premium Growth

• Rate Stabilization

• Continued Deterioration in Underlying Underwriting Results

• Continued Strain on ROE

• Continued Improvements in Governance & ERM – “Finally More than a Buzzword”

• Increased Likelihood of Consolidation

• More Sophisticated Modeling Driving Insurance Company Portfolio Management

Low Levels of NWP GrowthLow Levels of NWP Growth

• 2010 - .9%

• 2011 – 3%-4%

• 2012 – 4%-5%

• 2013 – 5%-6%

Some recovery as a result of overall economic environment Some recovery as a result of rate stabilization

Sources: AM Best; Insurance Information Institute; SNL Financial; Conning Research & Consulting

Soft Market Persisted in 2010 but Soft Market Persisted in 2010 but Growth Returned: More in 2011Growth Returned: More in 2011??

Rate StabilizationRate Stabilization

• Six straight years of decline

• Through 2Q, pricing is flat

• …But the market is not quite ready to “turn”

Average Commercial Rate Change, Average Commercial Rate Change, All Lines, (1Q:2004–2Q:2011)All Lines, (1Q:2004–2Q:2011)

Change in Commercial Rate Change in Commercial Rate Renewals, by Line: 2011-Q2Renewals, by Line: 2011-Q2

Criteria Necessary for a Criteria Necessary for a “Market Turn”:“Market Turn”:

• All Four Criteria Must Be Met:

Continued Deterioration in Continued Deterioration in Underlying U/W ResultsUnderlying U/W Results

• Large underwriting losses are not sustainable in the current investment environment.

• Industry combined ratio has climbed steadily since 2006

• 2011 is already the highest catastrophe loss year on record.

Underwriting Gain (Loss)Underwriting Gain (Loss)1975–2011*1975–2011*

P/C Insurance IndustryP/C Insurance IndustryCombined Ratio, 2001–2011:H1*Combined Ratio, 2001–2011:H1*

Continued Strain on Continued Strain on Return on EquityReturn on Equity

• Combined ratios must be better than they used to be!

• The industry continues to struggle to meet its cost of capital.

2008 – 6.4% shortfall

2009 – 3.2% shortfall

2010 – 2.7% shortfall

A 100 Combined Ratio Isn’t What It Once A 100 Combined Ratio Isn’t What It Once Was: Investment Impact on ROEsWas: Investment Impact on ROEs

Profitability Peaks & Troughs in the P/C Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011*Insurance Industry, 1975 – 2011*

Continued Improvements in Continued Improvements in Governance & ERMGovernance & ERM

• ERM – “Finally more than a Buzzword”

• Companies are more aware of their correlated and uncorrelated risk

• Board Level Committees

• More robust Chief Risk Officer function

Increased Likelihood of Increased Likelihood of ConsolidationConsolidation

Driven By:

• Need for infrastructure & scale

• Solvency II in Europe as a means of meeting the new Capital requirements

• A protracted soft market that is having an “exhausting” effect on smaller and/or weaker carriers & brokers.

Improved Modeling Improved Modeling SophisticationSophistication

• Actuarial modeling has become more precise and more broadly used

• Increased refinement of catastrophe modeling

• There is an ongoing reduction in the correlation among lines as it relates to portfolio management.

Property markets have CAT & Casualty markets have TORT, inflation & public policy

Q&AQ&A

P/C Net Income After TaxesP/C Net Income After Taxes1991–2011:Q1 ($ Millions)1991–2011:Q1 ($ Millions)

Global Catastrophe Loss Global Catastrophe Loss Summary: First Half 2011Summary: First Half 2011

Insured Loss Estimates for Selected Insured Loss Estimates for Selected Major Catastrophes in 2011Major Catastrophes in 2011

US Second Quarter Insured US Second Quarter Insured Catastrophe Losses, 2000–2011Catastrophe Losses, 2000–2011

Top 15 Most Costly World Top 15 Most Costly World Insurance Losses, 1970-2011*Insurance Losses, 1970-2011*

Worldwide Natural Disasters,Worldwide Natural Disasters,1980 – 2011*1980 – 2011*

Worldwide Natural Disasters 1980–Worldwide Natural Disasters 1980–2011,Overall and Insured Losses*2011,Overall and Insured Losses*

US Insured Catastrophe LossesUS Insured Catastrophe Losses

Combined Ratio Points Associated withCombined Ratio Points Associated withCatastrophe Losses: 1960 – 2011:H1*Catastrophe Losses: 1960 – 2011:H1*

P/C Reserve Development, 1992–P/C Reserve Development, 1992–2011E2011E

US Policyholder Surplus:US Policyholder Surplus:1975–2011*1975–2011*

Policyholder Surplus,Policyholder Surplus,2006:Q4–2011:Q12006:Q4–2011:Q1

Historically, Hard Markets Follow When Historically, Hard Markets Follow When Surplus “Growth” is Negative*Surplus “Growth” is Negative*

Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*

P/C Net Premiums Written: % Change, P/C Net Premiums Written: % Change, Quarter vs. Year-Prior QuarterQuarter vs. Year-Prior Quarter