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Insurance Markets in a Turbulent Economy
Trends & Challenges
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Association of Insurance Financial Analysts33rd Annual Conference
Naples, FL
March 4, 2008
Presentation Outline
• The Economic Storm What it Means for the Insurance Industry
• Financial & Underwriting Performance• Ratings & Financial Strength• Premium Growth• Capacity• Investment Overview• Shifting Legal Liability & Tort Environment
Q&A
A STORMY ECONOMIC FORECAST
What a Weakening Economy & Credit Crunch Mean for
the Insurance Industry
What’s Going On With the US Economy Today?
Fundamental Factors Affecting US Economy in 2008• Puncture of Two Bubbles: Credit and Housing• Credit Crunch: Credit is the lifeblood of the US economy, but some
markets have effectively seized (at least to some degree) Problem originated with interest rates being left too low for too long in the
early 2000s Subprime mortgage market first part of credit bubble to burst; Spread via
securitization and amplified via leverage and concentration of risk As lenders tighten standards, credit issues have spread to prime borrowers,
commercial mortgages, munis, credit cards, student loans• General Economic Impacts: Burst BubbleAsset Deflation
Home price bubble is bursting: Loss of value in most valuable asset impacts wealth via loss of home equity
Negative “wealth effect” implies consumers (2/3 of spending) become more cautious
Business scale back as prospects diminish in classic economic slowdown Job growth stagnating (-17,000 in Jan. 2008, first decline since Aug. 2003)
Source: Insurance Information Institute.
3.7
%
0.8
%
1.6
%
2.5
%
3.6
%
3.1
%
2.9
%
0.6
%
3.8
%
4.9
%
0.5
%
2.3
%
2.5
%
2.7
%
2.8
%
2.9
%
2.9
%
0.6
%
1.1
%
0%
1%
2%
3%
4%
5%
6%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
Real GDP Growth*
*Yellow bars are Estimates/Forecasts.Source: US Department of Commerce, Blue Economic Indicators 2/08; Insurance Information Institute.
Economic growth is expected to slow
dramatically in the year ahead
Unemployment Rate,(2007:Q1 to 2009:Q4F)
4.5% 4.5% 4.6%4.8%
5.0%5.2%
5.3% 5.4% 5.3% 5.3%5.2% 5.2%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/08); Insurance Info. Inst.
Rising unemployment rate negative impacts workers comp exposure and could signal a temporary claim
frequency surge
Toward a New WorldEconomic Order
Source: Insurance Information Institute
1. Credit Crunch (incl. Subprime) Issue Will Ultimately Cost Hundreds of Billions Globally
• Problem exacerbated by leveraged bets taken by some financial institutions therefore its reach extends beyond simple defaults
2. Heavy Toll on Capital Base of Some Large Financial Institutions Worldwide; US Bond Insurers
• Cash infusions necessary; Sovereign Wealth Funds important source
3. Most Significant Economic Event in a Generation• US economy will recover, but will take 18-24 months
4. Shuffling of Global Economic Deck; Economic Pecking Order Shifting
• China, oil producing countries hold the upper hand
5. IOUs are Being Redeemed• Stakes in hard assets/institutions demanded
6. Good News: No Shortage of Available Capital• Central banks are (generally) making right decisions; Dollar sinks
What’s Being Done to Fix the Economy?Impacts on Insurers
Economic Fix Impacts on Insurers
Fed Rate Cuts •Reduces bond yields (65% - 80% of portfolio)•Potentially contributes to inflation longer run
Stimulus Package
•Hope is that $168B plan boosts overall economic activity and employment (by 500,000 jobs) and therefore p/c personal and commercial exposures•Contributes to already exploding budget deficits—Washington may expand its search for people and industries to tax
Housing Bailout (?)
•Keeps more people in their homes and hopefully paying HO insurance premiums•Abandoned and neglected homes have demonstrably worse loss performance
Regulatory/ Legislative Action (?)
•Nothing solid proposed but in the wake of subprime crisis and credit crunch, actions seem inevitable•Will actions be directed primarily toward banks or broadly affecting all financial institutions
Post-Crunch: Fundamental Issues To Be Examined Globally
Source: Insurance Information Institute
• Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwide Implications for ERM? Includes review of incentives
• Effectiveness and Nature of Regulation What sort of oversite is optimal given recent experience? Credit problems arose under US and European (Basel)
regulatory regimes Will new regulations be globally consistent? Can overreactions be avoided? Capital adequacy & liquidity
• Accounting Rules Problems arose under FAS, IAS Asset Valuation, including Mark-to-Market Structured Finance & Complex Derivatives
• Ratings on Financial Instruments New approaches to reflect type of asset, nature of risk
Insurance &The Economy
Important but Somewhat Muted Impacts
A Few Facts About the Relationship Between Insurance & Economy
• Vast Majority of Insurance Business is Tied to Renewals Approximately 98+% of P/C business (units) is linked to renewals A very large share of p/c insurance premiums are statutorily or de facto
compulsory (e.g., WC, auto liability, surety, usually HO…) P/C insurers have marginal exposure impact due to economy Most life revenues and units are renewals, but some products (e.g.,
variable annuities are sensitive to market volatility) Life insurers who manage 401(k) assets seeing more loans and hardship
withdrawals;• Insurers are Sensitive to Interest Rates
About 2/3 of P/C invested assets and 75% if Life assets are fixed income Historically, yield on industry portfolios has tracked 10-year note closely All else equal, lower total investment gain implies greater emphasis on
underwriting Historically, industry’s best underwriting performances are rooted in
periods when interests rates were low and/or equity market performance poor (1930s – 1950s, early 2000s gave rise to strong 2006/07)
Source: Insurance Information Institute.
5.2%
-0.9
%-7
.4%
-6.5
%-1
.5%
1.8%
4.3%
18.6
%20
.3%
5.8%
0.3%
-1.6
%-1
.0%
-1.8
%-1
.0%
3.1%
1.1%
0.8%
0.4%
0.6%
-0.4
%-0
.3%
1.6%
5.6%
13.7
%7.
7%1.
2%-2
.9% -0
.5%
-2.9
%-2
.7%
-10%
-5%
0%
5%
10%
15%
20%
25%7
87
98
08
18
28
38
48
58
68
78
88
99
09
19
29
39
49
59
69
79
89
90
00
10
20
30
40
50
60
70
8F
Rea
l N
WP
Gro
wth
-4%
-2%
0%
2%
4%
6%
8%
Rea
l G
DP
Gro
wth
Real NWP Growth Real GDP
Real GDP Growth vs. Real P/C Premium Growth: Modest Association
P/C insurance industry’s growth is influenced modestly by growth
in the overall economy
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/08; Insurance Information Inst.
Summary of Economic Risks and Implications for Insurers
Economic Concern Risks to Insurers
Credit Crunch/ Subprime Meltdown
•Some insurers have some asset risk•D&O/E&O exposure for some insurers•Client asset management liability for some•Bond insurer problems; Muni credit quality
Housing Slump •Reduced exposure growth•Deteriorating loss performance on neglected, abandoned and foreclosed properties
Lower Interest Rates •Lower investment income
Stock Market Slump •Decreased capital gains (which are usually relied upon more heavily as a source of earnings as underwriting results deteriorate)
General Economic Slowdown/Recession
•Reduced commercial lines exposure growth•Surety slump•Increased workers comp frequency
New Private Housing Starts,1990-2013F (Millions of Units)
2.07
1.80
1.36
1.02
1.17
1.54 1.
58 1.65
1.62
1.48
1.35
1.46
1.29
1.20
1.01
1.19
1.47
1.62 1.64
1.57 1.
60
1.71
1.85
1.96
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F 08F 09F 10F 11F 12F 13F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 2/08 edition of BCEF; Insurance Info. Institute
Exposure growth forecast for HO insurers is dim for 2008/09
Impacts also for comml. insurers with construction risk exposure
New home starts plunged 34% from 2005-2007; Drop
through 2008 trough is 51% (est.)—a net
annual decline of 1.05 million units
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 2008 vs. 2005 is estimated at $920 million.
$1
,08
2
$1
,14
4
$1
,22
6
$1
,30
7
$1
,37
0
$1
,39
6
$1
,43
8
$1
,49
5
$1
,56
3
$1
,64
1
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,8000
3
04
05
06
07
E
08
F
09
F
10
F
11
F
12
F
0%
1%
2%
3%
4%
5%
6%
7%
8%
% C
han
ge
Nonresidential Fixed Investment% Change Nonresidential Fixed Investment
Nonresidential Fixed Investment,* 2003 – 2012F
Sharp dip in business
investment in 2007/2008 will
slow commercial exposure growth
*Nonresidential fixed investment consists of structures, equipment and software.
Sources: US Bureau of Economic Analysis (Historical), Value Line (2/22/08) estimates/forecasts for 2008-2012.
Non
resi
den
tial F
ixed
In
vest
men
t ($
Bill
)
Total Industrial Production,(2007:Q1 to 2009:Q4F)
1.1%
3.5% 3.6%
-1.0%
0.2%0.7%
1.8%
2.4%2.7% 2.7% 2.6% 2.6%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
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:Q4Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/08); Insurance Info. Inst.
Industrial production shrank during the final quarter of 2007 and is expected to grow only very slowly
during the first half of 2008
Industrial production affects exposure both directly and indirectly
Employment Change by Industry
(27,000)(28,000)
11,000
(11,000)
47,000
19,000
(18,000)
(40,000)
(30,000)
(20,000)
(10,000)
0
10,000
20,000
30,000
40,000
50,000
60,000
Construction Manuf. Retail Trade Professional& Biz
Services
Education &Health
Leisure &Hospitality
Government
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Employment fell by 17,000 in January, the first decline since Aug. 2003.
Manufacturing and Construction are always the hardest hit in an economic slowdown, with each losing more than 150,000 jobs over the past 12 months.
Dec. 2007 to Jan. 2008p
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45Wage & SalaryDisbursementsWC NPW
*As of 7/1/07 (latest available).Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp
Net Written Premiums
7/90-3/91
Shaded areas indicate recessions
3/01-11/01
Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions
Weakening wage and salary growth is
expected to cause a deceleration in workers comp
exposure growth
Inflation Rate (CPI-U, %),1990 – 2009F
4.9 5.1
3.0 3.2
2.6
1.51.9
3.3 3.4
1.3
2.5 2.3
3.0
2.2
4.3
2.9
2.3
3.8
2.82.92.4
0
1
2
3
4
5
6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F*12-month change Jan. 2008 vs. Jan. 2007; CPI rose at 6.8% pace NSource: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Feb. 10, 2008; Ins. Info. Institute.
Inflation is Accelerating
Inflation often amplified in casualty lines (e.g, WC)Rising inflation can also lead to rate inadequacyAdverse reserve development
Favored Industry Groups for Insurer Exposure Growth
Industry Rationale
Health Care •Economic NecessityRecession Resistant•Demographics: aging/immigrationGrowth
Alternative Energy •Solar, Wind, Bio-Fuels, Hydro & Other
Agriculture & Food Processing & Manufacturing
•Consumer StapleRecession Resistant•Grain and land prices high due to global demand, weak dollar (exports)•Ethanol/Bio-Fuel Source•Acreage GrowingFarm Equipment, Transport•Benefits many other industries
Export Driven •Weak dollar, globalization persist; Cuba angle?
Natural Resources & Commodities
•Strong global demand, •Supplies remain tight…but beware of bubbles•Significant investments in R&D, plant & equip required
Sources: Insurance Information Institute
Shareholder Class Action Lawsuits*
*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through February 29.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute
164202
163
231188
111
173
242210215
497
267226237
182
118
176
24
0
100
200
300
400
500
600
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
Pace of suits is up due in part to subprime issues,
housing collapse and market volatility.
Defendants include banks, investment banks,
builders, lenders, bond and mortgage insurers
Includes 44 suits related to subprime in 2007/08
A credit crunch creating a “contagion” effect resulting
in significant financial distress and bankruptcies in
other sectors could breed more securities litigation
Origin of D&O Claims for Public Companies, 2006
Customers & Clients, 4%Competitors,
6%
Employees, 25%
Government, 2%
Other 3rd Party, 22%
Shareholders, 40%
40% of D&O suits originate
with shareholders
Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.
PROFITABILITY & PERFORMANCE
Profits in 2006/07 ReachedTheir Cyclical Peak
P/C Net Income After Taxes1991-2008F ($ Millions)*$1
4,17
8
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$59,
200
$46,
300
-$6,970
$63,
695
$44,
155
$20,
559
$38,
501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07E
08F
*ROE figures are GAAP; 1Return on avg. surplus. **Return on Average Surplus; Actual 9-month 2007 result. Sources: A.M. Best, ISO, Insurance Information Inst.
2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.6%2006 ROE = 12.2%2007E ROAS1 = 13.1%**
Insurer profits peaked in 2006
-5%
0%
5%
10%
15%
20%
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2008E
*2007 is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
4 Hurricanes
Katrina, Rita, Wilma
P/C profitability is cyclical, volatile and vulnerable
-5%
0%
5%
10%
15%
20%
25%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 0607
E08
F
Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008F*
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006:12.2%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
*GAAP ROE for all years except 2007 which is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E
ROE Cost of Capital
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2007E
Source: The Geneva Association, Ins. Information Inst.
The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years
-13.
2 p
ts
+0.
2 p
ts
US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on
target or better 2003-07
-0.1
pts
+1.
7 p
ts
-9.0
pts
The cost of capital is the rate of return
insurers need to attract and retain
capital to the business
+3.
1 p
ts
P/C, L/H Stocks: Ahead of the S&P 500 Index in 2008
-11.76%
-36.25%
-9.68%
-18.90%
-9.59%
-5.08%
-11.49%
-9.38%
-40.0% -30.0% -20.0% -10.0% 0.0%
S&P 500
All Insurers
P/C
Life/Health
Multiline
Reinsurance
Mortgage*
Brokers
*Includes Financial Guarantee.Source: SNL Securities, Standard & Poor’s, Insurance Information Inst.
Total YTD Returns Through February 29, 2008
P/C insurance stocks not affected as much as the overall
market by credit, subprime concerns
Mortgage & Financial Guarantee insurers were
down 69% in 2008
FINANCIAL STRENGTH &
RATINGS
Financially Fit
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E
90
95
100
105
110
115
120
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
E
Co
mb
ine
d R
ati
o
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Imp
air
me
nt
Ra
te
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly correlated
underwriting performance and could reach near-record low in 2007
Source: A.M. Best; Insurance Information Institute
2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969;
2007 will be lower; Record is 0.24% in 1972
Reasons for US P/C Insurer Impairments, 1969-2005
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Catastrophe Losses8.6%
Alleged Fraud11.4%
Deficient Loss
Reserves/In-adequate Pricing62.8%
Affiliate Problems
8.6%
Rapid Growth
8.6%
2003-2005 1969-2005
Deficient reserves,
CAT losses are more important factors in
recent years
Reinsurance Failure3.5%
Rapid Growth16.5%
Misc.9.2%
Affiliate Problems
5.6%
Sig. Change in Business
4.6%
Deficient Loss
Reserves/In-adequate Pricing38.2%
Investment Problems*
7.3%
Alleged Fraud8.6%
Catastrophe Losses6.5%
Cumulative Average Impairment Rates by Best Financial Strength Rating*
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment
D
C/C-
C++/C+
B/B-
B++/B+
A/A-
A++/A+
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
Insurers with strong ratings are far less likely to become impaired over
long periods of time. Especially important in long-tailed lines.
*US P/C and L/H companies, 1977-2002
UNDERWRITINGTRENDS
Extremely Strong 2006/07
90
95
100
105
110
115
120
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
*0
8F
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.8
2000s: 101.8*
Sources: A.M. Best; ISO, III *2007 is actual 9-month result; 2008F from A.M. Best.
P/C Insurance Combined Ratio, 1970-2008F*
115.8
107.4
100.198.3
100.7
92.4
98.6
93.8
90
100
110
120
01 02 03 04 05 06 07F 08F
P/C Insurance Combined Ratio, 2001-2008F
Sources: A.M. Best; ISO, III. *2007 is actual 2007 9-monoth result; 2008 is from A.M. Best.
2005 figure benefited from heavy use of reinsurance which lowered net losses
2006 produced the best underwriting result
since the 87.6 combined ratio in 1949
As recently as 2001, insurers were paying out nearly $1.16 for
every dollar they earned in premiums
2007/8 deterioration due primarily to falling rates, but results still strong assuming
normal CAT activity
87.6
91.2
92.1 92.3 92.4 92.593.1 93.1 93.3
93.8
93.0
85
86
87
88
89
90
91
92
93
94
95
1949 1948 1943 1937 1935 2006 1950 1939 1953 1936 2007E
Ten Lowest P/C Insurance Combined Ratios Since 1920 vs. 2007E
Sources: Insurance Information Institute research from A.M. Best data. *2007: Actual 9-mo. result.
2007 was one of the Top 12
best since 1920
The industry’s best underwriting years are associated with
periods of low interest rates
The 2006 combined ratio of 92.5 was the best since the 87.6 combined in 1949
-55-50-45-40-35-30-25-20-15-10-505
101520253035
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
E0
8F
Source: A.M. Best. *Actual 2007:9M underwriting profit = $18.146B
$ B
illi
ons
Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the
second since 1978. Expected gain for 2007 is approximately $20 billion. Cumulative
underwriting deficit since 1975 is $421 billion.
Underwriting Gain (Loss)1975-2008F*
110.
3
110.
2
107.
6
103.
9
109.
7
112.
3
111.
1
122.
3
110.
2
102.
5
105.
4
91.2 94
.0 97.5
102.
0
112.
5
85
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08F
Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases
Commercial coverages have exhibited significant
variability over time.
Commercial Lines Combined Ratio, 1993-2008F
Outside CAT-affected lines, commercial insurance is
doing fairly well. Caution is required in underwriting
long-tail commercial lines.
Sources: A.M. Best (historical and forecasts)
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
98.4
94.3 96
.4
94.3 95
.6 98.6
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08FSource: A.M. Best; Insurance Information Institute.
Recent strong results attributable favorable frequency
trends and low CAT activity
Personal LinesCombined Ratio, 1993-2007E
CATASTROPHICLOSS
What Will 2008 Bring?
U.S. Insured Catastrophe Losses*$7
.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$6.5
$100
.0
$61.
9
$9.2
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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
$ Billions
2006/07 were welcome respites. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2%
Tornadoes, $77.3 , 26.0%
All Tropical Cyclones, $137.7 ,
46.3%
Civil Disorders, $1.1 , 0.4%
Utility Disruption, $0.2 , 0.1%
Water Damage, $0.4 , 0.1%Wind/Hail/Flood,
$9.3 , 3.1%
Earthquakes, $19.1 , 6.4%
Winter Storms, $23.1 , 7.8%
Terrorism, $22.3 , 7.5%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Insured disaster losses totaled $297.3 billion from
1987-2006 (in 2006 dollars). Wildfires accounted for
approximately $6.6 billion of these—2.2% of the total.
Annual Catastrophe Bond Transactions Volume, 1997-2007
$1,729.8
$966.9
$7,329.6
$4,693.4
$1,991.1
$1,142.8$1,219.5$846.1$984.8$1,139.0
$633.0
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
97 98 99 00 01 02 03 04 05 06 07
Ris
k C
apita
l Iss
ues
($ M
ill)
0
5
10
15
20
25
30
35
Nu
mb
er o
f Iss
uan
ces
Risk Capital Issued Number of Issuances
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
Catastrophe bond issuance has soared in the wake of Hurricanes
Katrina and the hurricane seasons of 2004/2005, despite two
quiet CAT years
The 2008 Hurricane Season:
Less Activity Predicted
Outlook for 2008 Hurricane Season: 25% Worse Than Average
Average* 2005 2008F
Named Storms 9.6 28 13Named Storm Days 49.1 115.5 60
Hurricanes 5.9 14 7Hurricane Days 24.5 47.5 30Intense Hurricanes 2.3 7 3
Intense Hurricane Days 5 7 6
Accumulated Cyclone Energy 96.2 NA 115
Net Tropical Cyclone Activity 100% 275% 125%*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.
Landfall Probabilities for 2008 Hurricane Season: Above Average
Average* 2008F
Entire US East Coast 52% 60%US East Coast Including Florida Peninsula
31% 37%
Gulf Coast from Florida Panhandle to Brownsville
30% 36%
Caribbean NA Above Average
*Average over the past century.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.
PREMIUM GROWTH
At a Virtual Standstillin 2007/08
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
F2
00
8F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2007 figure is actual 9-month figure.
Post-Katrina period resembles
1993-97 (post-Andrew)
2007/2008: Premium growth of 0% or less would be slowest since a decline in 1943
109.4110.2
118.8
109.5
112.5
110.2
107.6
104.1
109.7 110.2
102.5
105.4
90.5
102.0
111.1112.3
122.3
$7.3
0
$6.4
9
$13.
91
$13.
15
$11
.94
$11
.95
$8.3
0
$13.
50
$8.4
2
$4.8
3
$5.2
0
$5.7
1
$5.2
5
$5.7
0
$7.7
0
$6.4
0
$6.1
0
90
95
100
105
110
115
120
125
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Co
mm
erc
ial L
ine
s C
om
bin
ed
Ra
tio
($1)
$1
$3
$5
$7
$9
$11
$13
$15
Co
st
of
Ris
k/$
10
00
Re
ve
nu
e
CommercialCombined Ratio
Cost of Risk
Source: RIMS, A.M. Best 2007 Aggregates & Averages; Insurance Information Institute
Cost of Risk vs. Commercial Lines Combined Ratio
CAPACITY/SURPLUS
Accumulation Continues
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
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 0607*
U.S. Policyholder Surplus: 1975-2007*
Source: A.M. Best, ISO, Insurance Information Institute. *As of September 30, 2007
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity as of 9/30/07 was $521.8B, 5.3% above year-end
2006, 80% above its 2002 trough and 54% above its 1999 peak.
Premium-to-surplus ratio neared a record
low of $0.84:$1 at year end 2007, suggesting
excess capital
Capacity exceeded a half trillion dollars for the first time during
the 2nd quarter of 2007
Q3 = First 3 quarters as of 9/30/07Source: Insurance Information Institute; 1985–2006, A.M. Best Aggregates & Averages;; 2007 ISO
0
100
200
300
400
500
600
0.0
0.5
1.0
1.5
2.0
2.5
NWP Surplus P:S Ratio
$ Billions P:S Ratio
Calendar Year
P/C Industry Premium-to-SurplusRatio, 1985-2007:Q3
Private Carriers
$521.8B
$76 B
$145 B
$450 B
Low P:S Ratio 0.84:1 in 1998 0.86:1
1.92:1
At 0.86:1 as of 9/30/07, now approaching all-time record premium-to-surplus ratio of
0.84:1 in 1998
P/C Insurer Share Repurchases,1987- Through Q3:2007 ($ Mill)
$564
.0
$646
.9
$311
.0
$952
.4
$418
.1
$566
.8
$310
.1
$658
.8
$769
.2
$4,5
86.5
$5,2
66.0
$763
.7
$5,2
42.3
$4,3
70.0 $7,0
94.1
$17,412.7
$4,4
97.5
$1,5
39.9
$2,7
64.2
$2,3
85.6
$4,2
97.3
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07Q
3
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
First 9-months 2007 share buybacks are already
133% of the 2006 record
Reasons Behind Capital Build-Up & Repurchase Surge
•Strong underwriting results
•Moderate catastrophe losses
•Reasonable investment performance
•Lack of strategic alternatives (M&A, large-scale expansion)
Returning capital owners (shareholders) is one of the
few options available
2007 repurchases to date equate to 4.4% of industry surplus, the highest in 20 years
INVESTMENT OVERVIEW
More Pain, Little Gain
Property/Casualty Insurance Industry Investment Gain1
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$61.9$56.9
$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05* 06
07**
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 $3.2B. **A.M. Best estimateSources: ISO; Insurance Information Institute.
Investment rose in 2007 but are marginally higher than what they
were nearly a decade earlier in 1998
Investment Gain on Funds & Other Income, 1997-2006
10.9% 10.6%
9.4%
10.3%
8.9%
6.4% 6.3% 6.4%7.1% 7.1%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
97 98 99 00 01 02 03 04 05 06
Sources: A.M. Best; Insurance Info. Inst.
Invest gains have been trending
generally downward over the past decade
US P/C Net Realized Capital Gains,1990-2007:9 Months ($ Millions)
$2,8
80 $4,8
06
$9,8
93
$1,6
64
$5,9
97
$9,2
44
$10,
808
$13,
016 $1
6,20
5
$6,6
31
-$1,
214
$6,6
10
$8,2
04
$18,019
$3,3
59
$9,7
01
$9,1
25
$9,8
18
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
Sources: A.M. Best, ISO, Insurance Information Institute. *As of September 30, 2007.
Realized capital gains rebounded strongly in 2004/5
but fell sharply in 2006 despite strong stock market as insurers “banked” their
gains. Rising again in 2007.
Realized capital gains rose during the last
soft market as they are now, as underwriting
results deteriorate
0%
1%
2%
3%
4%
5%
6%
11/0
412
/04
1/05
2/05
3/05
4/05
5/05
6/05
7/05
8/05
9/05
10/0
511
/05
12/0
51/
062/
063/
064/
065/
066/
067/
068/
069/
0610
/06
11/0
612
/06
01/0
702
/07
03/0
704
/07
5/07
6/07
7/07
8/07
9/07
10/0
711
/07
12/0
71/
082/
08
The “Fed” is Now Aggressively Pushing the “Fed Funds” Rate Down
Source: Federal Reserve Bank of New York.
Cuts in the “Fed Funds” rate—for very short-term loans—has so far not brought down longer-term yields as
inflationary expectations build
The Fed has cut rates by 2.25 points since Aug. 2007. More cuts likely by end of March
Yield Curves for Last Week of February 2008, 2007, 1978*
0%1%2%3%4%5%6%7%8%9%
1m 3m 6m 1y 2y 3y 5y 7y 10y 20y 30y
Feb. 1978 Feb. 2007 Feb. 2008
*Constant maturities for last week of February each year. No data for 1m, 3m or 6m available for 1978. 20-yr 1978 figures is III interpolated value.
Sources: Federal Reserve; Insurance Information Institute.
2008: Fed action pushed ST yields down, LT little changed
and reflect inflation fears
2007: Pre-credit crunch flat/inverted yield curve
1978: Stagflation yield curve built in
LT inflationary expectations. Are
they building again?
Shifting Legal Liability & Tort
Environment
Will the Pendulum SwingAgainst Insurers?
$17.0$49.6 $58.7
$85.6$17.1
$51.0$70.9
$85.6
$5.2
$20.4
$30.0
$45.5
$0
$50
$100
$150
$200
$250
1980 1990 2000 2006
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.3 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
Total = $121.0 Billion
Total = $159.6 Billion
Total = $216.7 Billion
Personal, Commercial & Self (Un) Insured Tort Costs*
Tort System Costs, 1950-2009E
$1.8 $5.4 $7.9$13.9$20.0
$83.7
$130.2
$179.2
$246.0$265
$277
$158.5
$247.0
$42.7
$3.4
0.62%
0.82%
1.03%
1.34%1.22%
1.98%2.14%
1.82% 1.83%1.83%
1.87%
2.24%2.24%
1.53%
1.11%
$0
$50
$100
$150
$200
$250
$300
50 55 60 65 70 75 80 85 90 95 00 03 06 08E 09E
Tor
t S
yste
m C
osts
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Tor
t C
osts
as
% o
f G
DP
Tort Sytem Costs Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP
After a period of rapid escalation,
tort system costs as a % of GDP are
now falling
The Nation’s Judicial Hellholes (2007)
Source: American Tort Reform Association; Insurance Information Institute
TEXAS
Rio Grande Valley and Gulf Coast
South Florida
ILLINOIS
Cook County West Virginia
Some improvement in “Judicial
Hellholes” in 2007
Watch ListMadison County, ILSt. Clair County, IL
Northern New Mexico
Hillsborough County, FLDelawareCalifornia
Dishonorable Mentions
District of ColumbiaMO Supreme Court
MI LegislatureGA Supreme Court
Oklahoma
NEVADA
Clark County (Las Vegas)
NEW JERSEY
Atlantic County (Atlantic City)
Sum of Top 10 Jury Awards
$ Millions
$615.0$815.0
$2,953.7
$5,158.8
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2004 2005 2006 2007
Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.
Total of Top 10 awards in 2007 was 25% lower than in 2006
Excess Liability Market Capacity – North America
Source: Marsh, 2007 Limits of Liability Report
$1.660$1.645
$1.570$1.535$1.425
$1.575
$1.710
$2.045
$1.941$2.011
$1.721
$1.405$1.334
$1.432
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
$2.2
$2.4
$2.6
$2.8
94 95 96 97 98 99 00 01 02 03 04 05 06 07
Bil
lio
ns
Capacity is up 16.5% since its 2003 trough
Insurance Information Institute On-Line
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