September 20, 2010 2010 CLRS – Orlando FL
2010 U.S. INSURANCE MARKET UNDERWRITING CYCLE TRENDS
2
UW CYCLE ANALYSIS n 2009 Casualty results n Analysis of Casualty trends and
relationships • Premiums and price • AY and Cal Year results • Reserves and Cash Flow
n Lines of business • Workers Compensation • Other Liability – Occurrence
3
UW CYCLE - DRIVERS Casualty Market
Pricing Competition
Loss Trends
Economic Environment
n Pricing responds to Calendar Year results n Accident Year results ultimately reflect pricing n Ultimate AY results affect Cal Yr results – cyclical
• aka reserve development
n Loss trends reflects economic, social, and legal issues – frequency / severity
n Pricing response lags loss changes – cyclical n If losses stable, UW cycle dominated by pricing
n Capital, asset, interest, and inflation changes important, but secondary issues
n Casualty pricing does not appear to be ROE based n However, watch UW cash flows – cyclical
I M P
O R
T A
N C
E
4
UW CYCLE - PHASES Casualty Market
Unprofitable Hard
Profitable Hard
Profitable Soft
Unprofitable Soft
• AccYr Ult L/R • AY Ult vs Orig • Indicated Reserve Development • Ceded WP
• Pricing Level • CalYr L/R • CalYr vs AY L/R • Reported Development • UW Cash Flow
Position in Cycle 2009 year-end
5
UW CYCLE - ISSUES Casualty Market
Pricing Competition
n Recent profitable Calendar Year results have driven significant price decreases
n Price level still declining n Accident year results have “bottomed out”, and appear to becoming inadequate
n Calendar years will soon turn unfavorable • Reserve position
worsening • UW cash flows negative
and deteriorating Ø Pricing near turning point?
Loss Trends Economic Environment
n Benign for over a decade • Moderate severity
trends • Declining frequency
n Reform gains under pressure in various states
n Possible return of inflation • Economic recovery • Monetary policy
n Calendar year implications • Pressure on AY results • Reserves reflect implicit
historical inflation rate Ø Nowhere to go but up?
n Industry emerged from recent turmoil relatively unscathed • Watch treasury yields
n Pricing did not respond to increase in capital costs
n Need to bolster liquidity • Will insurers compete
to generate cash? n Business cycle downturn
reducing policies • Will insurers compete
to cover fixed costs? Ø Wildcard?
6 6
WORKERS COMPENSATION
7
WORKERS COMPENSATION Premium & Price
Price = WP / Payroll n National exposure
from Bureau of Labor Statistics
n 2009 slight payroll decline
Historical cycles n Prior peak in1991 n Soft cycle to 2000 n Peak in 2005 n Soften to 2009 n Slightly lower
price decrease in 2009 0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
55,000,000
60,000,000
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Direct WP
DWP/Payroll
8
WORKERS COMPENSATION Ceded Premium & Utilization
Ceded utilization also tied to UW cycle
n Increases in hard market
n Decreases in soft market
Reinsurance may prove valuable going forward
n Pricing uncertain n AY’s
deteriorating n Loss trends
uptick potential
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
CWP (non-affl)
CWP/DWP
9
WORKERS COMPENSATION Acc Yr Gross, Ceded, Net Results
Ceded L/R’s follow same cycle as gross L/R
n More volatile During inadequate soft cycles, ceded business fares significantly worse During other parts of cycle, slightly better
n Excess ceded business generally has low expenses
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
130.0%
140.0%
150.0%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Gross AY Ult LossLAE RatioCeded AY Ult LossLAE RatioNet AY Ult LossLAE Ratio
10
WORKERS COMPENSATION Accident Year Loss Development
Original L/R’s stable over adjacent time periods Cyclical Ultimate L/R’s develop up to +/- 25pts Recent AY loss ratios appear under booked
n Actuarial models not fully reflecting price deterioration
Indicated existing reserve deficiencies
n Est. $4.5B industry-wide as of 2008
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Net AY Ultimate LossALAE Ratio
Net AY Original LossALAE Ratio
11
WORKERS COMPENSATION Calendar Year Development
Calendar Year results follow lagged Accident Year results Cal Year results recently less volatile than Acc Year results
n Timely pricing change in 2000
n 2009 deteriorating Mixed development booked in 2009
n Priors yr adverse development
n Recent 10 AYs’ showing booked improvement
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(4,000,000)(3,500,000)(3,000,000)(2,500,000)(2,000,000)(1,500,000)(1,000,000)(500,000)-500,0001,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,000
Reserve Development (x Priors)Net AY Ultimate LossALAE RatioCal Year LossALAE Ratio (x Priors)
12
WORKERS COMPENSATION Acc Yr Premium & Loss Trends
Acc Year results move inversely with pricing
n Pricing changes cause AY results not vice versa
Losses trends drove results from 1985-1995 Since then, cycle driven by price competition Recent trends flat
n Investigate freq / severity trends
n Classes, states Potential threats
n Neg freq dissipates n Reform roll-back
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2.00%
2.20%
2.40%Net AY Ult LossALAE RatioDirect WP/PayrollNet AY Ult Loss/Payroll
13
WORKERS COMPENSATION Pricing vs. Calendar Year Results
Pricing follows Calendar Year results
n One year lag in pricing response
n Loss and economic trends can obscure
Softening continued in 2009 but decelerated Uptick in loss ratio may imply coming end of soft market Forecasting pricing depends of Calendar Year projections
n Indicated reserve position is key
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
90.0%
95.0%
100.0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-25.0%-22.5%-20.0%-17.5%-15.0%-12.5%-10.0%-7.5%-5.0%-2.5%0.0%2.5%5.0%7.5%10.0%12.5%15.0%17.5%20.0%22.5%25.0%
Direct WP/Payroll (ann. %chg)Cal Year LossALAE Ratio (x Priors)
14
WORKERS COMPENSATION Reserve Position & UW Cash Flow
Industry Schedule P data can be evaluated to estimate indicated reserve position
n Conning Research reports reserve deficiency as of 2008 (2009 indications mixed to flat)
n Past indications in line with subsequent development with lagged response to loss/price trend changes
UW Cash Flow appears to be an early indicator of future reserve development
n Price change are correlated with unrecognized reserve weakening • If pricing is weak, reserves
generally inadequate paid losses rise relative to WP
• Reverse is true as well n Cash flow deteriorating
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(4,000,000)(3,500,000)(3,000,000)(2,500,000)(2,000,000)(1,500,000)(1,000,000)(500,000)-500,0001,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,000
Reseve Development (x Priors)Net Paid Loss/Net WP
Indicated SubsequentCalendar (Redundancy)/ Booked (x Priors)
Year Deficiency Development2009 ???? ????2008 4,467 (444) 2007 3,946 (2,311) 2006 (4,725) (2,731) 2005 N/A (3,205) 2004 10,684 2,170 2003 3,705 6,368 2002 5,209 10,122 2001 5,490 11,812 2000 4,526 10,897
15 15
OTHER LIABILITY Occurrence Policies
16
OTHER LIABILITY (Occ.) Premium & Price
Price = WP / GDP n Industry measure
of exposures Historical cycles
n Soft cycle to 2000 n Peak in 2003 n Soften continuing
through 2009 No current “hidden hard market”
n Exposures down due to economy
n Pricing still down 0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
0.50%
Direct WP
DWP/GDP
17
OTHER LIABILITY (Occ.) Ceded Premium & Utilization
Ceded utilization also tied to UW cycle
n Increases in hard market
n Decreases in soft market
Reinsurance may prove valuable going forward
n Pricing uncertain n AY’s
deteriorating n Loss trends
uptick potential
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
CWP (non-affl)
CWP/DWP
18
OTHER LIABILITY (Occ.) Acc Yr Gross, Ceded, Net Results
Ceded L/R’s follow same cycle as gross L/R
n More volatile During inadequate soft cycles, ceded business fares significantly worse During other parts of cycle slightly better
n Excess ceded business generally has low expenses
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
130.0%
140.0%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Gross AY Ult LossLAE RatioCeded AY Ult LossLAE RatioNet AY Ult LossLAE Ratio
19
OTHER LIABILITY (Occ.) Accident Year Loss Development
Original L/R’s stable over adjacent time periods
n 2001 WTC impact Cyclical Ultimate L/R’s develop up to +/- 25pts
Recent AY loss ratios appear conservative
n Actuarial models not fully reflecting loss improvement
Implied existing reserve redundancies
n Est. $4.9B industry-wide as of 2009
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Net AY Ultimate LossALAE RatioNet AY Original LossALAE RatioNet AY Proj Ult LossALAE Ratio
20
OTHER LIABILITY (Occ.) Calendar Year Development
Calendar Year results follow lagged Accident Year results Cal Year results recently less volatile than Acc Year results
n Timely pricing change in 2000
n 2009 deteriorating Favorable development booked in 2009 excl. 1999 and prior AYs
n Past development n Recent AYs’
showing booked improvement
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(2,500,000)
(2,000,000)
(1,500,000)
(1,000,000)
(500,000)
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Reserve Development (x Priors)Net AY Ultimate LossALAE RatioCal Year LossALAE Ratio (x Priors)
21
OTHER LIABILITY (Occ.) Acc Yr Premium & Loss Trends
Acc Year results move inversely with pricing
n Pricing changes cause AY results not vice versa
Losses trends volatile through 2000, with spike in 1998 Recent trends moderate
n Investigate freq / severity trends
n Classes, states Potential threats
n Neg freq dissipates n Reform roll-back
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
Net AY Ult LossALAE RatioDirect WP/GDPNet AY Ult Loss/GDP
22
OTHER LIABILITY (Occ.) Pricing vs. Calendar Year Results
Pricing follows Calendar Year results
Softening continued in 2009 at same rate as 2008 Uptick in loss ratio may imply bottom of soft market Forecasting pricing depends of Calendar Year projections
n Indicated reserve position is key
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
90.0%
95.0%
100.0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-25.0%-22.5%-20.0%-17.5%-15.0%-12.5%-10.0%-7.5%-5.0%-2.5%0.0%2.5%5.0%7.5%10.0%12.5%15.0%17.5%20.0%22.5%25.0%
Direct WP/GDP (ann. %chg)Cal Year LossALAE Ratio (x Priors)
23
OTHER LIABILITY (Occ.) Reserve Position & UW Cash Flow
Industry Schedule P data can be evaluated to estimate indicated reserve position
n Conning reports reserve redundancy as of 2008 (2009 Willis estimate)
n Past indications in line with subsequent development with lagged response to loss/price trend changes
UW Cash Flow appears to be an early indicator of future reserve development
n Price change are correlated with unrecognized reserve weakening • If pricing is weak, reserves
generally inadequate paid losses rise relative to WP
• Reverse is true as well n Cash flow deteriorating
Indicated SubsequentCalendar (Redundancy)/ Booked (x Priors)
Year Deficiency Development2009 (4,894) ????2008 (6,029) (1,434) 2007 620 (3,376) 2006 (2,805) (2,549) 2005 N/A (3,205) 2004 6,295 413 2003 3,807 6,125 2002 8,095 8,447 2001 13,116 9,001 2000 3,117 7,471
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(2,500,000)
(2,000,000)
(1,500,000)
(1,000,000)
(500,000)
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Reseve Development (x Priors)Net Paid Loss/Net WP
24
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