P/C Insurance Industry Overview and Outlook:
Focus on the Construction Sector
Insurance Information InstituteJune 11, 2014
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
The Strength of the U.S. Economy Will Influence P/C
Insurer Growth Opportunities
2
U.S. Growth Will Expand Insurer Exposure Base Across Most Lines
2
3
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 6/14; Insurance Information Institute.
2.7%
0.5%
3.6%
3.0%
1.7%
-1.8
%1.
3%-3
.7%
-5.3
%-0
.3%
1.4%
5.0%
2.3%
2.2% 2.6%
2.4%
0.1%
2.5%
1.3%
4.1%
2.0%
1.3%
3.1%
1.1% 2.
5%4.
1%2.
4%-1
.0%
3.7%
3.1%
3.1%
3.0%
3.0%
3.0%
2.9%
0.4%
-8.9%
4.1%
1.1% 1.
8% 2.5% 3.
6%3.
1%
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
07:1
Q07
:2Q
07:3
Q07
:4Q
08:1
Q08
:2Q
08:3
Q08
:4Q
09:1
Q09
:2Q
09:3
Q09
:4Q
10:1
Q10
:2Q
10:3
Q10
:4Q
11:1
Q11
:2Q
11:3
Q11
:4Q
12:1
Q12
:2Q
12:3
Q12
:4Q
13:1
Q13
:2Q
13:3
Q13
:4Q
14:1
Q14
:2Q
14:3
Q14
:4Q
15:1
Q15
:2Q
15:3
Q15
:4Q
Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor
market contraction was severe
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
2014/15 are expected to see a
modest acceleration in growth
4
Real GDP by State Percent Change, 2012:Highest 25 States
13.4
4.8
3.9
3.6
3.5
3.5
3.4
3.3
3.3
3.3
2.7
2.7
2.6
2.4
2.4
2.4
2.4
2.2
2.2
2.2
2.2
2.1
2.1
2.1
2.1
2.0
0
2
4
6
8
10
12
14
ND TX OR WA CA MN UT IN TN WV NC SC AZ FL IA MD MS MA MI OH US CO GA MT OK MO
Perc
ent C
hang
e (%
)
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
North Dakota was the economic growth juggernaut of the US
in 2012—by far
Only 10 states experienced growth in excess of 3%, which is what we would see nationally in
a more typical recovery
5
1.9
1.7
1.6
1.5
1.5
1.5
1.5
1.4
1.4
1.4
1.3
1.3
1.3
1.2
1.2
1.1
1.1
0.7
0.5
0.5
0.4
0.2
0.2
0.2
0.2
-0.1
-0.4-0.20.00.20.40.60.81.01.21.41.61.82.0
IL PA HI LA NE NV WI KS KY RI AR NJ NY AL VT AK VA DC ME NH ID DE NM SD WY CT
Perc
ent C
hang
e (%
)Real GDP by State Percent Change, 2012: Lowest 25 States
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Connecticut was the only state to shrink in 2012
Growth rates in 8 states (and DC) were still below
1% in 2012
State-by-State Leading Indicatorsthrough 2014:Q3
Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 6
The economic outlook for most of the US is generally
positive, though negative for 9 states
74.4
73.6
73.6
72.2 73.6 76
67.8 68.9
68.2
67.7 71
.6 74.5
74.2 77
.567
.5 69.8
74.3
71.5
63.7
55.7 59
.5 60.9 64
.169
.975
.075
.376
.276
.4 79.3
73.2
72.3 74
.382
.682
.774
.573
.8 77.6 78.6
84.5
84.1
85.1
82.1
77.5
73.2 75
.182
.581
.281
.680
.0 84.1
81.9
76.4
40
45
50
55
60
65
70
75
80
85
90
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12Fe
b-12
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13Fe
b-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14Fe
b-14
Mar
-14
Apr
-14
May
-14
Consumer Sentiment Survey (1966 = 100)
January 2010 through May 2014
Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially over the past 2+ years, though
uncertainty in Washington sometimes takes a toll.Source: University of Michigan; Insurance Information Institute
Optimism among consumers improved in the first part of 2014
7
Impact of 2011 budget impasse
$0
$10
$20
$30
$40
$50
$60
$70
$80
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
2010
2011
2012
2013
2014
:Q1
Net Worth of Households*Recently Hit A Historic High
*Includes nonprofit organizations. Data are not seasonally adjusted or inflation-adjusted.Source: Federal Reserve Board: http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf ; Insurance Information Institute.
2008-09 recession: -15.7% $ Trillions
2001 recession
1992 recession
1982 recession
Housing “bubble”
Rising net worth fuels a “wealth affect” that helps fuel consumer
spending, which accounts for 70% of spending in the U.S. economy
NFIB Small Business Optimism Index
January 1985 through April 2014
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 9
Small business optimism in April exceeded for the first
time its level when the crisis began in Dec. 2007.
13
43,6
9448
,125
69,3
0062
,436
64,0
04 71,2
77 81,2
3582
,446
63,8
5363
,235
64,8
53 71,5
4970
,643
62,3
0452
,374
51,9
5953
,549
54,0
2744
,367
37,8
8435
,472
40,0
9938
,540
35,0
3734
,317
39,2
0119
,695 28
,322
43,5
4660
,837
56,2
8247
,806
40,0
7533
,212
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Business Bankruptcy Filings,1980-2013
Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.
Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline
2013 bankruptcies totaled 33,212, down 17.1% from 2012—the fourth
consecutive year of decline. Business bankruptcies more than tripled during the financial crisis.
% Change Surrounding Recessions
1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%
13
50.7 52
.7 54.1
54.6
54.8
53.5
53.7
52.8 53
.9 54.6 56
57.1
59.4
59.7
56.3
54.4
53.3
53.4
53.8
52.6
52.6
52.6
52.6
53.0
56.8
56.1
55.0
53.7
54.1
52.7
52.9 54
.3 55.2
54.8
54.8 55
.755
.2 56.0
53.1 53.7
52.2
56.0
58.6
54.4 55
.453
.953
.0 54.0
51.6 53
.1 55.2 56
.3
54.4
40
45
50
55
60
65
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12Fe
b-12
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13Fe
b-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14Fe
b-14
Mar
-14
Apr
-14
May
-14
ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)January 2010 through May 2014
Non-manufacturing industries have been expanding and adding jobs. This trend is likely to continue through 2014.
Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.
Optimism among non-manufacturers has been
increasing despite uncertainty in Washington
14
NFIB Small Business Optimism Index
January 1985 through April 2014
Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 15
Small business optimism in April exceeded for the first
time its level when the crisis began in Dec. 2007.
16
12 Industries for the Next 10 Years: Insurance Solutions Needed
Export-Oriented Industries
Health Sciences
Health Care
Energy (Traditional)
Alternative Energy
Petrochemical
Agriculture
Natural Resources
Technology (incl. Biotechnology)
Light Manufacturing
Insourced Manufacturing
Many industries are
poised for growth, though
insurers’ ability to
capitalize on these
industries varies widely
Shipping (Rail, Marine, Trucking, Pipelines)
231
5217
052
126
573
-71
32 64 81 553
-115
-106
-221
-215
-206
-261
-258
-422
-486
-776 -6
93-8
21-6
98-8
10-8
01-2
94-4
26-2
72 -232
-141
-271
-15
-232
20-3
819
294 11
012
011
710
7 199
149
94 7222
323
1 320
166
186 21
912
526
817
719
1 222
364
228
246
102 131
7517
213
615
9 255
211
215
219 26
316
4 188 22
220
117
018
015
3 247 272
8616
6 201
200 27
021
6
113
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
Jan-
07Fe
b-07
Mar
-07
Apr
-07
May
-07
Jun-
07Ju
l-07
Aug
-07
Sep
-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08Fe
b-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09Fe
b-09
Mar
-09
Apr
-09
May
-09
Jun-
09Ju
l-09
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12Fe
b-12
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13Fe
b-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14Fe
b-14
Mar
-14
Apr
-14
May
-14
Monthly Change in Private Employment
January 2007 through May 2014 (Thousands, Seasonally Adjusted)
Private Employers Added 9.39 million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly losses in Dec. 08–Mar. 09 were
the largest in the post-WW II period
216,000 private sector jobs were
created in May. In March 2014, the last of the private jobs lost in the Great Recession were
recovered
17
Jobs Created2013: 2.368 Mill2012: 2.294 Mill2011: 2.400 Mill2010: 1.277 Mill
1,053,000 jobs created so far
in 2014
CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK
18
The Construction Sector Is Critical to the Economy and the P/C Insurance Industry
18
19
Value of New Private Construction: Residential & Nonresidential, 2003-2014*
Billions of Dollars
$0$100$200$300$400$500$600$700$800$900
$1,000
03 04 05 06 07 08 09 10 11 12 13 14*
Non ResidentialResidential
Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates
$298.1
$15.0
$613.7
New Construction peaks at $911.8. in 2006
Trough in 2010 at $500.6B,
after plunging 55.1% ($411.2B)
2014: Value of new pvt. construction hits $686.5B as of Apr. 2014, up 37%
from the 2010 trough but still 25% below 2006 peak
19
$261.8
$238.8
$308.0
$378.5
*2014 figure is a seasonally adjusted annual rate as of April.Sources: US Department of Commerce; Insurance Information Institute.
20
Value of Construction Put in Place, April 2014 vs. April 2013*
1.2%
-29.3%
2.0%8.6%
11.7%17.2%
5.6%
-40%
-30%
-20%
-10%
0%
10%
20%
TotalConstruction
Total PrivateConstruction
Residential--Private
Non-Residential--
Private
Total PublicConstruction
Residential-Public
Non-Residential--
Public
Overall Construction Activity is Up, But Growth Is Almost Entirely in the Private Sector as State/Local Government Budget Woes Continue
Growth (%)
Private sector construction activity is up in the
residential and nonresidential segments
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Private: +11.7% Public: +1.2%
Public sector construction activity remains depressed
but better than a year ago (-5.2%)
21
Value of Private Construction Put in Place, by Segment, April 2014 vs. April 2013*
8.1%
-3.5% -4.1% -5.2%
12.2%
21.4%
-3.9%
7.3%
15.9%11.7%
17.2%
5.6%
17.2%
25.6%
-10%-5%0%5%
10%15%20%25%30%
Tota
l Priv
ate
Cons
truct
ion
Resi
dent
ial
Tota
lNo
nres
iden
tial
Lodg
ing
Offi
ce
Com
mer
cial
Heal
th C
are
Educ
atio
nal
Relig
ious
Amus
emen
t &Re
c.
Tran
spor
tatio
n
Com
mun
icat
ion
Pow
er/U
tility
Man
ufac
turin
g
Private Construction Activity is Up in Many Segments, Including the Key Residential Construction Sector; Bodes Well for the Remainder of 2014
Growth (%) Led by the Residential Construction, Lodging and Communication segments, Private
sector construction activity is rising after plunging during the “Great Recession.”
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
22
Value of Public Construction Put in Place, by Segment, Apr. 2014 vs. Apr. 2013*
-13.8%
4.9%
-12.4%-5.7%
6.3% 4.9%
-4.8%-7.2%
18.5%15.6%
1.2%
-29.3%
2.0%
-0.8%
-28.9%-40%
-30%
-20%
-10%
0%
10%
20%
30%
Tota
l Pub
licCo
nstru
ctio
n
Resi
dent
ial
Tota
lNo
nres
iden
tial
Offi
ce
Com
mer
cial
Heal
th C
are
Educ
atio
nal
Publ
ic S
afet
y
Amus
emen
t &Re
c.
Tran
spor
tatio
n
Pow
er
High
way
&St
reet
Sew
age
&W
aste
Dis
posa
l
Wat
er S
uppl
y
Cons
erva
tion
&De
velo
p.
Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2015.
Growth (%)
*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
Public sector construction activity is down substantially in many segments, a situation that will likely persist, dragging
on public entity risk exposures
Transportation, Power and Conservation
projects lead public sector construction
23
Real (Inflation-Adjusted) Nonresidential Construction, 2000-2014*
*Through Q1 2014.
Source: US Dept. of Commerce; Wells Fargo Securities (June 6, 2014 research report).
Construction activity has generally been positive since late
2010 but has occasionally be
erratic. Forecast is for slowing
improving growth
(Bar = CAGR; Line = Y/Y Growth Rate)
24
Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2014:Q1
$1.1
6$1
.18
$1.2
2
$1.4
4$1
.48
$1.4
9$1
.50
$1.4
9$1
.43
$1.3
7$1
.27
$1.2
1$1
.18
$1.1
7$1
.17
$1.1
8$1
.20
$1.2
4$1
.28 $1
.35
$1.3
7 $1.4
2$1
.45 $1.5
0$1
.52
$1.5
5$1
.57
$1.6
0$1
.61
$1.1
3
$1.2
5 $1.3
0 $1.3
9
$1.0
$1.1
$1.2
$1.3
$1.4
$1.5
$1.6
$1.7
06:Q
1
06:Q
3
07:Q
1
07:Q
3
08:Q
1
08:Q
3
09:Q
1
09:Q
3
10:Q
1
10:Q
3
11:Q
1
11:Q
3
12:Q
1
12:Q
3
13:Q
1
13:Q
3
14:Q
1
Outstanding Commercial Loan Volume Has Been Growing for Over Two Years and Is Now Nearly Back to Early Recession Levels. Bodes Very Well for the Creation of Current and Future Commercial Insurance Exposures
Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.
$Trillions
Commercial lending plunged by 21.2% ($330B) during the financial crisis and ensuing
period of tight credit
Commercial lending activity exceeds pre-crisis levels (+36.75% or $430B above
mid-2010 trough)
25
Percent of Non-current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks,Quarterly, 2006-2014:Q1
0.70
%0.
74%
0.64
%
0.67
%0.
81%
1.07
%1.
18% 1.
69% 2.
25% 2.
80%
3.57
%3.
43%
3.05
%2.
83%
2.73
%2.
44%
1.89
%1.
65%
1.49
%1.
29%
1.17
%1.
09%
0.98
%0.
88%
0.80
%0.
74%
0.72
%0.
62%
0.60
%
0.71
%
0.63
%0.
62%
0.63
%
0%
1%
2%
3%
4%
06:Q
106
:Q2
06:Q
306
:Q4
07:Q
107
:Q2
07:Q
307
:Q4
08:Q
108
;Q2
08:Q
308
:Q4
09:Q
109
:Q2
09:Q
309
:Q4
10:Q
110
:Q2
10:Q
310
:Q4
11:Q
111
:Q2
11:Q
311
:Q4
12:Q
112
:Q2
12:Q
312
:Q4
13:Q
113
:Q2
13:Q
313
:Q4
14:Q
1
Non-current loans (those past due 90 days or more or in nonaccrual status) are below even pre-recession levels, fueling bank willingness to lend.
Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.
Back to “normal” levels of noncurrent industrial
& commercial loans
Recession
27
$314.9 $304.0$286.4 $279.0 $271.4 $267.0
$216.1 $220.2$234.2
$255.4
$289.1$308.7
$0
$50
$100
$150
$200
$250
$300
$350
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
($ Billions)
Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Continues to Contract As State/Local Governments
Grapple with Deficits and Federal Sequestration Takes Hold
Value of New Federal, State and Local Government Construction: 2003-2014*
*2014 figure is a seasonally adjusted annual rate as of April; http://www.census.gov/construction/c30/historical_data.html Sources: US Department of Commerce; Insurance Information Institute.
Construction across all levels of government
peaked at $314.9B in 2009
Austerity Reigns Govt. construction is still shrinking, down $47.9B or
15.2% since 2009 peak
28
(Millions of Units)
New Private Housing Starts, 1990-2019F
1.48
1.47 1.
62 1.64
1.57 1.60 1.
71 1.85 1.
96 2.07
1.80
1.36
0.91
0.55 0.59 0.61
0.78 0.
92 1.05
1.27
1.44 1.
501.
511.
50
1.351.
461.
291.
201.
011.
19
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F15F16F17F18F19F
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/14 and 3/13); Insurance Information Institute.
Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk
Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure
New home starts plunged 72% from 2005-2009; A net
annual decline of 1.49 million units, lowest since records began
in 1959
Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction
for several more years
Florida Total Private Housing Starts,2000 – 2017F
29
The economic outlook for most of
the US is positive for the first time in many
years
Source: University of Central Florida Institute for Economic Competitiveness: http://iec.ucf.edu/post/2014/01/07/Florida-Metro-Forecast-December-2013.aspx
CRASH, CRATER, RECOVERY Homebuilding in FL continues
to recover, adding substantially to coastal exposures.
(Thousands of Units)
30
Construction Employment,Jan. 2010—May 2014*
*Seasonally adjusted.Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
5,58
15,
522
5,54
25,
554
5,52
75,
512
5,49
75,
519
5,49
95,
501
5,49
75,
468
5,43
5 5,47
85,
485
5,49
75,
524
5,53
05,
547
5,54
65,
583
5,57
65,
577
5,61
25,
629
5,64
45,
640
5,63
65,
615
5,62
25,
627
5,63
05,
633
5,64
95,
673
5,71
15,
735 5,78
35,
799
5,79
25,
791
5,80
15,
804
5,80
55,
822
5,83
05,
849
5,87
6 5,92
75,
927
5,96
45,
998
6,00
4
5,400
5,500
5,600
5,700
5,800
5,900
6,000
6,100
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13Fe
b-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-12
Oct
-13
Nov
-13
Dec
-13
Jan-
14Fe
b-14
Mar
-14
Apr
-14
May
-14
Construction employment is +569,000 above
Jan. 2011 (+10.5%) trough
(Thousands)
Construction and manufacturing employment constitute 1/3 of all payroll exposure.
31
Construction Employment, Jan. 2003–May 2014
Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.
5,000
5,500
6,000
6,500
7,000
7,500
8,000
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
The “Great Recession” and housing bust destroyed 2.3 million constructions jobs
The Construction Sector Could Be a Growth Leader in 2014 as the Housing Market, Private Investment and Govt. Spending Recover. WC Insurers Will Benefit.
Construction employment troughed at 5.435 million in
Jan. 2011, after a loss of 2.291 million jobs, a 29.7% plunge
from the April 2006 peak
31
Construction employment
peaked at 7.726 million in April 2006
(Thousands) Construction employment as of
May 2014 totaled 6.0 million, an increase of 569,000 jobs or
10.5% from the Jan. 2011 trough
Gap between pre-recession
construction peak and today: 1.7 million jobs
32
Logging Employment,Jan. 2010—May 2014*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
48.8 49
.150
.351
.250
.950
.550
.650
.849
.849
.548
.347
.7 48.2
49.1
50.8
48.7
48.1
47.8
48.8
48.4
48.6
47.4
49.1 49
.5 50.0
49.7
49.8
49.1
50.9
51.1
50.8
50.5 50
.850
.850
.750
.649
.951
.5 51.9 52
.352
.552
.651
.7 52.5 52
.9 53.2
55.2
54.3
54.3
54.1
55.4
54.3
53.9
45
47
49
51
53
55
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
132/
30/2
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
132/
30/2
Mar
-13
Apr
-13
May
-13
Logging employment has been somewhat volatile but is up more than
10% from its 2010/2011 lows. Home construction activity in the US and some foreign demand should help this sector
(Thousands)
33
Logging Employment, Jan. 2003–May 2014
Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.
45
50
55
60
65
70
75
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
The “Great Recession” and housing bust destroyed at least 15,000 logging jobs
The Logging Sector Is Benefitting from Residential Home Construction, Renewable Energy Regulations in Europe (encourage wood burning) and some Asian pulp demand
Logging employment troughed at
47,400 in Oct. 2011
33
Logging employment
peaked at about 71,000 in early 2003
(Thousands)Logging employment as of May 2014 totaled 53,900, an increase of
6,500 jobs or 12.9% from the Oct. 2011
trough
34
Construction Jobs: Largest Gains & Losses by Metro Area, Apr. 2014 vs. Apr. 2013*
-3,700 -2,900-1,600 -1,300 -1,200 -1,200
11,1009,500 8,500 8,100
6,100 5,200
(6,000)(4,000)(2,000)
02,0004,0006,0008,000
10,00012,000
Los
Ang
eles
Dal
las
San
ta A
na/
Ana
heim
Atla
nta
Bal
timor
e
Orla
ndo
Bet
hesd
a/R
ockv
ille,
MD
Gar
y, IN
New
ark
Ber
gen/
Pas
saic
, NJ
Taco
ma,
WA
Alb
uque
rque
,N
M
Construction Employment Is Expanding—Albeit Modestly—in Much of the US
Change
Construction employment expanded in 220 out of the
339 metro areas in the US in April 2014
*Seasonally adjusted; Source: Associated General Contractors: http://www.agc.org/galleries/news/Metro_Empl_1404_Rank.pdf; Ins. Information Institute.
Largest Increases Largest Losses
35
Interest Rate on Convention 30-Year Mortgages: Up a Bit, 1990–2014*
*Monthly, through May 2014. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.
0%
2%
4%
6%
8%
10%
12%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Yields on 30-Year mortgages have been below 6% for a six
years
Rising mortgage interest rates have impacted home sales but are unlikely to derail the recovery on housing
Mortgages rates plunged to near-record lows in early 2013 but rose as the Fed initiated tapering in its
QE program
35
36
Mortgage Interest Rates Were Expected to Continue to Rise as the Fed Pursued Tapering and the Economy Recovered; Rates Are
Still Low by Historical Standards
4.53
%
4.51
%
4.41
%
4.39
%
4.32
%
4.23
% 4.28
% 4.33
%
4.37
%
4.28
%
4.37
%
4.32
% 4.40
%
4.41
%
4.34
%
4.27
% 4.33
%
4.29
%
4.21
%
4.20
%
4.14
%
4.12
%
4.14
%
3.9%
4.0%
4.1%
4.2%
4.3%
4.4%
4.5%
4.6%
03-J
an
10-J
an
17-J
an
24-J
an
31-J
an
07-F
eb
14-F
eb
21-F
eb
28-F
eb
07-M
ar
14-M
ar
21-M
ar
28-M
ar
04-A
pr
11-A
pr
18-A
pr
25-A
pr
02-M
ay
09-M
ay
16-M
ay
23-M
ay
30-M
ay
06-J
un
30-year mortgage rates are down nearly 40 basis points since
early January
30-Year Mortgages in 2014 Are Falling! What Will Be the Impact on Construction?
*Weekly through June 5, 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.; Insurance Information Institutes.
MANUFACTURING SECTOR OVERVIEW & OUTLOOK
37
The U.S. Is Experiencing a Mini Manufacturing Renaissance That Is Benefitting the US Economy and the P/C Insurance Industry
37
38
Manufacturing Employment,Jan. 2010—May 2014*
11,4
6011
,460
11,4
6611
,497
11,5
3111
,539
11,5
5811
,548
11,5
5411
,555
11,5
7711
,590
11,6
2411
,662
11,6
8211
,707
11,7
1511
,724
11,7
4711
,760
11,7
6211
,770
11,7
6911
,797
11,8
4111
,870
11,9
1011
,920
11,9
2611
,935
11,9
5711
,943
11,9
2511
,931
11,9
3811
,951
11,9
6511
,988
11,9
8411
,977
11,9
7211
,965
11,9
4811
,963
11,9
9312
,011
12,0
4612
,053
12,0
6112
,081
12,0
8512
,089
12,0
99
11,250
11,500
11,750
12,000
12,250Ja
n-10
Feb-
10M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-10
Jul-1
0A
ug-1
0S
ep-1
0O
ct-1
0N
ov-1
0D
ec-1
0Ja
n-11
Feb-
11M
ar-1
1A
pr-1
1M
ay-1
1Ju
n-11
Jul-1
1A
ug-1
1S
ep-1
1O
ct-1
1N
ov-1
1D
ec-1
1Ja
n-12
2/30
/2M
ar-1
2A
pr-1
2M
ay-1
2Ju
n-12
Jul-1
2A
ug-1
2S
ep-1
2O
ct-1
2N
ov-1
2D
ec-1
2Ja
n-13
Feb-
13M
ar-1
3A
pr-1
3M
ay-1
3Ju
n-13
Jul-1
3A
ug-1
3S
ep-1
3O
ct-1
3N
ov-1
3D
ec-1
3Ja
n-14
Feb-
14M
ar-1
4A
pr-1
4M
ay-1
4
Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.
*Seasonally adjusted. Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
(Thousands) Since Jan 2010, manufacturing employment
is up (+639,000 or +5.6%)and still growing.
39
$200,000
$300,000
$400,000
$500,000
Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Apr. 2014
* Seasonally adjusted; Data published June 3, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/
Monthly shipments in Apr. 2014 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial
exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.
$ Millions
39
The value of Manufacturing Shipments in Apr. 2014 was $497.6B—a new record high.
42
2.5%
4.9%
6.3%
7.8%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2013 2014F 2015F 2016F
Business Investment: Expected to Accelerate, Fueling Commercial Exposure Growth
Accelerating business investment will be a potent driver of
commercial property and liability insurance exposures and should drive employment and WC payroll
exposures as well (with a lag)
Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute.
ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT
44
US Is Becoming an Energy Powerhouse; Domestic Demand
and Exports Are KeyNeed Infrastructure Investment
44
20.2 19.9 20.0 19.5 18.9 19.420.2
21.1 21.622.4
24.025.3 25.6
20.6
10
12
14
16
18
20
22
24
26
28
00 01 02 03 04 05 06 07 08 09 10 11 12 13
U.S. Natural Gas Production, 2000-2013
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
Trillions of Cubic Ft. per Year
The U.S. is already the world’s largest natural gas producer—
recently overtaking Russia. This is a potent driver of commercial
insurance exposures
5.19 5.08 5.005.35 5.47 5.65
6.49
7.44
8.379.13
5.09
0
12
3
45
6
7
89
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F
U.S. Crude Oil Production, 2005-2015P
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
Millions of Barrels per Day
Crude oil production in the U.S. is expected to increase by 82.6% from 2008 through 2015—and could overtake
Saudi Arabia as the world’s largest oil producer
48
Oil & Gas Extraction Employment,Jan. 2010—May 2014*
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
156.
415
6.4
156.
715
7.6
158.
715
7.8
158.
015
9.5
160.
016
1.5
161.
216
1.2
163.
116
4.4
166.
616
9.3
170.
117
1.0
172.
517
3.6
176.
317
8.2
178.
518
0.9
181.
918
3.1
184.
818
5.2
185.
718
6.8
187.
618
8.0
188.
018
8.2
190.
019
1.7
191.
919
3.4
192.
419
2.6
193.
119
3.3
195.
019
6.5 199.
720
0.6
203.
020
4.1
205.
320
7.8
207.
520
8.9
210.
5
150
160
170
180
190
200
210
220
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
122/
30/2
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13Fe
b-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14Fe
b-14
Mar
-14
Apr
-14
May
-14
Oil and gas extraction employment is up 34.6% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in
the US.
(Thousands) Highest since Aug.
1986
354.8
523.9
629.8
729.2
819.6
406.0
0
100
200
300
400
500
600
700
800
900
1990 2000 2010 2020P 2030P 2040P
World Primary Energy Consumption, 1990-2040P
Source: Energy Information Administration, 2013 International Energy Outlook, Insurance Information Institute.
Between 2010 and 2040, energy consumption in projected to increase by
56.4% worldwide
Quadrillion BTUsGrowth in worldwide
energy consumption will create more risk and
vulnerabilities (natural and manmade); Innovations in
risk management and insurance are needed.
51
US Electric Power Generation by Fuel Source, 2010-2035F (Billions of Kilowatt Hours)
3225 26 26 27 27
776903 874 882 983 1,074
807 830 887 917 914 887390 504 544 579 594 630
1,799 1,531 1,604 1,710 1,757 1,803
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2010 2015 2020 2025 2030 2035
Coal Petroleum Natural Gas Nuclear Renewable Other
Source: US Energy Information Administration, Annual Energy Outlook 2012, Appendix A7.
Demand for Electricity Is Expected to Grow at a 0.6% Annual Rate Through 2035. Renewables and Natural Gas Will Account for an Increasing Share of Fuel Source
3,806 3,796 3,937 4,118 4,279 4,427
54
U.S. Private Power Construction,2000-2014* (% Change, 3-Month Moving Avg.)
*Through April 2014.
Source: US Dept. of Commerce; Energy Information Administration, Wells Fargo Securities (June 6, 2014 research report).
Power construction accounts for a large share of all construction activity. The
recent slowdown was in part due to the expiration of renewable production tax credits. Going forward, about 75% of
new capacity will be for gas fired plants
55
Labor Market Trends
Massive Job Losses Sapped the Economy and Commercial/Personal
Lines Exposure, But Trend is Improving
55
56
Unemployment and Underemployment Rates: Still Too High, But Falling
2
4
6
8
10
12
14
16
18
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Jan11
Jan12
Jan13
Jan14
"Headline" Unemployment Rate U-3
Unemployment + Underemployment RateU-6
“Headline” unemployment
was 6.3% in May 2014. 4% to 6% is
“normal.”
Source: US Bureau of Labor Statistics; Insurance Information Institute.
January 2000 through May 2014, Seasonally Adjusted (%)
Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving.
56
U-6 went from 8.0% in March
2007 to 17.5% in October 2009; Stood at 12.2%
in May 2014.8% to 10% is
“normal.”
57
US Unemployment Rate Forecast4.
5%4.
5% 4.6% 4.8% 4.9% 5.
4%6.
1%6.
9%8.
1%9.
3% 9.6% 10
.0%
9.7%
9.6%
9.6%
8.9% 9.1%
9.1%
8.7%
8.3%
8.2%
8.0%
7.8%
7.7%
7.6%
7.3%
7.0%
6.7%
6.4%
6.3%
6.1%
6.0%
5.9%
5.8%
5.7%
9.6%
4%
5%
6%
7%
8%
9%
10%
11%
07:Q
107
:Q2
07:Q
307
:Q4
08:Q
108
:Q2
08:Q
308
:Q4
09:Q
109
:Q2
09:Q
309
:Q4
10:Q
110
:Q2
10:Q
310
:Q4
11:Q
111
:Q2
11:Q
311
:Q4
12:Q
112
:Q2
12:Q
312
:Q4
13:Q
113
:Q2
13:Q
313
:Q4
14:Q
114
:Q2
14:Q
314
:Q4
15:Q
115
:Q2
15:Q
315
:Q4
Rising unemployment
eroded payrolls
and WC’s exposure base.Unemployment peaked at 10%
in late 2009.
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/14 edition); Insurance Information Institute.
2007:Q1 to 2015:Q4F*
Unemployment forecasts have been revised slightly
downwards. Optimistic scenarios put the
unemployment as low as 5.9% by Q4 of this year.
Jobless figures have been revised
slightly downwards for 2014/15
58
Unemployment Rates by State, April 2014:Highest 25 States*
8.3
8.0
7.9
7.8
7.7
7.5
7.5
7.4
7.0
6.9
6.9
6.9
6.9
6.9
6.8
6.7
6.6
6.6
6.4
6.3
6.3
6.2
6.2
6.1
6.0
6.0
6.0
0
2
4
6
8
10
RINV IL CA KY DC MS MI
GA AL AZCT NJ OR NM NY AR
MO AK TN US FL NC WA CO MA WV
Une
mpl
oym
ent R
ate
(%)
*Provisional figures for April 2014, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In April, 43 states had over-the-month unemployment rate decreases, 2
states had increases, and 5 states and the District of Columbia had no
change.
59
5.8
5.8
5.7
5.7
5.7
5.7
5.5
5.3
5.2
5.0
4.9
4.8
4.8
4.7
4.6
4.5
4.4
4.4
4.3
3.8
3.8
3.7
3.6
3.3
2.6
0
1
2
3
4
5
6
7
DE WI IN ME OH PA MD SC TX ID VA KS MT MN OK LA HI NH IA SD UT WY NE VT ND
Une
mpl
oym
ent R
ate
(%)
Unemployment Rates by State, April 2014: Lowest 25 States*
*Provisional figures for April 2014, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.
In April, 43 states had over-the-month unemployment rate decreases, 2
states had increases, and 5 states and the District of Columbia had no
change.
231
5217
052
126
573
-71
32 64 81 553
-115
-106
-221
-215
-206
-261
-258
-422
-486
-776 -6
93-8
21-6
98-8
10-8
01-2
94-4
26-2
72 -232
-141
-271
-15
-232
20-3
819
294 11
012
011
710
7 199
149
94 7222
323
1 320
166
186 21
912
526
817
719
1 222
364
228
246
102 131
7517
213
615
9 255
211
215
219 26
316
4 188 22
220
117
018
015
3 247 272
8616
6 201
200 27
021
6
113
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
Jan-
07Fe
b-07
Mar
-07
Apr
-07
May
-07
Jun-
07Ju
l-07
Aug
-07
Sep
-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08Fe
b-08
Mar
-08
Apr
-08
May
-08
Jun-
08Ju
l-08
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09Fe
b-09
Mar
-09
Apr
-09
May
-09
Jun-
09Ju
l-09
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10Fe
b-10
Mar
-10
Apr
-10
May
-10
Jun-
10Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11Fe
b-11
Mar
-11
Apr
-11
May
-11
Jun-
11Ju
l-11
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12Fe
b-12
Mar
-12
Apr
-12
May
-12
Jun-
12Ju
l-12
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13Fe
b-13
Mar
-13
Apr
-13
May
-13
Jun-
13Ju
l-13
Aug
-13
Sep
-13
Oct
-13
Nov
-13
Dec
-13
Jan-
14Fe
b-14
Mar
-14
Apr
-14
May
-14
Monthly Change in Private Employment
January 2007 through May 2014 (Thousands, Seasonally Adjusted)
Private Employers Added 9.39 million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Monthly losses in Dec. 08–Mar. 09 were
the largest in the post-WW II period
216,000 private sector jobs were
created in May. In March 2014, the last of the private jobs lost in the Great Recession were
recovered
60
Jobs Created2013: 2.368 Mill2012: 2.294 Mill2011: 2.400 Mill2010: 1.277 Mill
1,053,000 jobs created so far
in 2014
0.05
50.
058
-0.0
57-0
.163
-0.3
84-0
.599
-0.8
05-1
.066
-1.3
24-1
.746
-2.2
32-3
.008
-3.7
01-4
.522
-5.2
20-6
.030
-6.8
31-7
.125
-7.5
51-7
.823
-8.0
55-8
.196
-8.4
67-8
.482
-8.7
14-8
.694
-8.7
32-8
.619
-8.4
27-8
.333
-8.2
23-8
.103
-7.9
86-7
.879
-7.6
80-7
.531
-7.4
37-7
.365 -6.9
11-6
.591
-6.4
25-6
.239
-6.0
20-5
.895
-5.6
27-5
.450
-5.2
59-5
.037
-4.6
73-4
.445
-4.1
99-4
.097
-3.9
66-3
.891
-3.7
19-3
.583
-3.4
24-3
.169
-2.9
58-2
.743
-2.5
24-2
.261
-2.0
97-1
.909
-1.6
87-1
.486
-1.3
16-1
.136
-0.9
83-0
.736
-0.4
64-0
.378
-0.2
12-0
.011
0.18
90.
459
0.67
5
-7.1
42-10
-8
-6
-4
-2
0
2
Dec
-07
Apr
-08
Aug
-08
Dec
-08
Apr
-09
Aug
-09
Dec
-09
Apr
-10
Aug
-10
Dec
-10
Apr
-11
Aug
-11
Dec
-11
Apr
-12
Aug
-12
Dec
-12
Apr
-13
Aug
-13
Dec
-13
Apr
-14
Mill
ions
Cumulative Change in Private Employment: Dec. 2007—May 2014December 2007 through May 2014 (Millions)
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute
Cumulative job losses peaked at 8.765 million
in February 2010
It took more than 6 ½ years (79 months) to
recover all of the private sector jobs lost in the Great Recession
61
Private Employers Added 9.39 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)
Pvt. employment hit 116.6 million in April 2014—
617,000 above its pre-crisis peak of 116.0 million
65
Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2014:Q1
Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.
Billions
$5,500
$5,750
$6,000
$6,250
$6,500
$6,750
$7,000
$7,250
$7,50005
:Q1
05:Q
205
:Q3
05:Q
406
:Q1
06:Q
206
:Q3
06:Q
407
:Q1
07:Q
207
:Q3
07:Q
408
:Q1
08:Q
208
:Q3
08:Q
409
:Q1
09:Q
209
:Q3
09:Q
410
:Q1
10:Q
210
:Q3
10:Q
411
:Q1
11:Q
211
:Q3
11:Q
412
:Q1
12:Q
212
:Q3
12:Q
413
:Q1
13:Q
213
:Q3
13:Q
414
:Q1
Prior Peak was 2008:Q1 at $6.60 trillion
Latest (2014:Q1) was $7.29 trillion, a new peak--$1.04 trillion above 2009 trough
Recent trough (2009:Q3) was $6.25 trillion, down
5.3% from prior peak
Payrolls are 16.6% above
their 2009 trough and up 3.6% over
the past year
65
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
$25
$30
$35
$40
$45
$50Wage & Salary DisbursementsWC NPW
66
Payroll Base* WC NWP
Payroll vs. Workers Comp Net Written Premiums, 1990-2013P
*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2013 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.
Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2014; +8.6% Growth Estimated for 2013
7/90-3/91 3/01-11/0112/07-6/09
$Billions $Billions
WC premium volume dropped two years before
the recession began
WC net premiums written were down $14B or 29.3% to
$33.8B in 2010 after peaking at $47.8B
in 2005
Workers Compensation Operating Environment
67
Workers Comp Results Have Improved Substantially in Recent Years
67
Workers Compensation Combined Ratio: 1994–2015F
102.
0
97.0 10
0.0
101.
0
112.
6
108.
6
105.
1
102.
7
98.5 10
3.5
104.
5 110.
6 115.
0
115.
0
108.
0
101.
0
99.0
98.0
121.
7
107.
0
115.
3
118.
2
80
85
90
95
100
105
110
115
120
125
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13E14F 15F
Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-
2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2013P) and are for private carriers only; Insurance Information Institute (2014-15). 68
WC results have improved markedly
since 2011
Workers Compensation Premium: Third Consecutive Year of IncreaseNet Written Premium
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 130
10
20
30
40
50
31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3
25.0 26.129.2 31.1
34.737.8 38.6 37.6
33.830.3 29.9 32.3
35.1 37.0
35.3 35.7 34.3 35.433.6
30.128.5
26.9 25.9 25.0
28.632.1
37.7
42.3
46.5 47.8 46.544.3
39.3
34.6 33.836.4
39.641.9
State Funds ($ B)Private Carriers ($ B)
Pvt. Carrier NWP growth was +5.4% in 2013 and
8.7% in 2012
$ Billions
Calendar Yearp Preliminary
Source: 1990–2013p Private Carriers, Annual Statement Data, NCCI.1996–2013p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements
State Funds available for 1996 and subsequent
70
2013 Workers Compensation Direct Written Premium Growth, by State*
PRIVATE CARRIERS: Overall 2013 Growth = +5.4%
*Excludes monopolistic fund states (in white): OH, ND, WA and WY.Source: NCCI.
While growth rates varied widely, all states experienced positive growth in 2013
Workers Compensation Lost-Time Claim Frequency Declined in 2013Lost-Time Claims
71
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13P-10
-8-6-4-202468
1012
-4.2 -4.4
-9.2
0.3
-6.5
-4.5
0.5
-3.9-2.3
-4.5
-6.9
-4.5 -4.1 -3.7
-6.6
-4.5
-2.2
-4.3-5.7
11
-4
-6.1
-2.0
3.5
-1
AdjustedIndicated
Frequency Change: 2007—2012Contracting: 7.97.1 -9.3%
Manufacturing: 13.612.0 -11.8%
Percent
Accident Year*Adjustments primarily due to significant audit activity.2013p: Preliminary based on data valued as of 12/31/20131991–2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policiesFrequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost levelSource: NCCI.
Cumulative Change of –55.4%(1991–2011 adj.)
Workers Compensation Medical SeverityModerate Increase in 2013
72
Accident Year
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%
Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)
$8.1
$8.2
$8.1
$8.8
$9.1
$9.8
$10.8
$11.7
$12.9
$13.9
$15.7
$17.1
$18.4
$19.4
$21.0
$22.2
$23.5
$25.1
$26.1
$26.4
$27.1
$27.9
$28.8
+6.8%+1.3%-2.1%+9.0%+5.1%+7.4%
+10.1%+8.3%
+10.6%+7.3%
+13.5%+8.8%
+7.7%+5.4%
+7.8%+5.8%
+6.1%+6.8%
+4.0%+1.2%+2.6%
+3.0%+3%
5
10
15
20
25
30
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13p
2013p: Preliminary based on data valued as of 12/31/2013.1991-2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Cumulative Change = 256%(1991-2013p)
Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2013: +5.2%
Accident Year
4.5%3.5%
2.8%3.2%3.5%4.1%4.6%4.7%
4.0%4.4%4.2%4.0%4.4%3.7%
3.2%3.4%3.0% 3.0%
5.1%
7.4%
10.1% 10.6%
13.5%
5.4%
7.8%
6.1%6.8%
4.0%3.0%
2.0%
4%
3%
1.2%
5.8%
8.8%7.7%
7.3%
8.3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13p
Change in Medical CPIChange Med Cost per Lost Time Claim
WC Medical Severity Generally Outpaces the Medical CPI Rate
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Average annual increase in WC medical severity form 1995 through 2011 was well above the medical CPI (6.8% vs. 3.8%), but
the gap is narrowing.
$9.8
$9.5
$9.2
$9.7
$9.8
$10.4
$11.2
$12.2
$13.5
$14.8
$16.2
$16.7
$17.5
$22.3
$22.5
$22.1
$22.2
$22.7$18.2
$17.7
$19.2
$20.8
$21.9
+2+0.5%-2.7%
+1.0%+9.1% +1.1%
+5.9%+3.1%+1.0%+4.6%+3.1%+9.2%
+10.1%+10.1%
+9.0%+7.7%
+5.9%+1.7%+4.9%-2.8%-3.1%+1.0%
+6.5%
5
7
9
11
13
15
17
19
21
23
25
91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 10 11 12 13p
IndemnityClaim Cost ($ 000s)
Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2013:+3.3%
Accident Year
Workers Comp Indemnity Claim Costs: Small Increase in 2013
Average indemnity costs per claim were up 2% in
2013 to $22,700
Average Indemnity Cost per Lost-Time Claim
2013p: Preliminary based on data valued as of 12/31/2013.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.
Workers Comp Rate Changes,2008:Q4 – 2014:Q1
Source: Council of Insurance Agents and Brokers; Information Institute.
-5.5
%
-4.6
%
-4.0
%
-4.6
%
-3.7
%
-3.9
%
-5.4
% -3.7
%
-3.4
% -1.6
%
2.6% 4.
1%
7.5%
7.4% 8.
3%
8.1% 9.
0% 9.8%
8.3%
5.8%
4.9%
4.1%
-8%-6%
-4%-2%
0%2%4%
6%8%
10%12%
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
WC rate changes have been positive for 12
consecutive quarters, longer than any other
commercial line
(Percent Change)
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
81
P/C Insurance Industry Financial Overview
2013: Best Year in the Post-Crisis Era
Performance Improved with Lower CATs, Strong Markets
81
P/C Net Income After Taxes1991–2013 ($ Millions)
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 6.1% 2013 ROAS1 = 10.3%
• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.8% ROAS in 2013, 6.3% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
$14,
178
$5,8
40
$19,
316
$10,
870 $20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$62,
496
$3,0
43
$35,
204
$19,
456
$35,
074
$63,
784
$28,
672
-$6,970
$65,
777
$44,
155
$20,
559
$38,
501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
2013 ROAS was 10.3%
Net income in 2013 was up substantially
(+81.9%) from 2012
-5%
0%
5%
10%
15%
20%
25%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013*
*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
1977:19.0% 1987:17.3%
1997:11.6%2006:12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years9 Years
2011: 4.7%
ROE
1975: 2.4%
2013: 9.8 %
A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE
* 2008 -2013 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2013 combined ratio including M&FG insurers is 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
97.5100.6 100.1 100.8
92.7
101.299.5
101.0
96.7
102.4
106.5
95.7
14.3%15.9%
12.7%10.9%
7.4% 7.9%
4.7%6.2%9.6%8.8%
4.3%
9.8%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 20130%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979
Lower CATs helped ROEs
in 2013
85
Policyholder Surplus, 2006:Q4–2013:Q4
Sources: ISO, A.M .Best.
($ Billions)
$487.1$496.6
$512.8$521.8
$478.5
$455.6$437.1
$463.0
$490.8
$511.5
$540.7$530.5
$544.8$559.2 $559.1
$538.6$550.3
$567.8$583.5$586.9
$607.7$614.0$624.4
$653.3
$570.7$566.5
$505.0$515.6$517.9
$400
$450
$500
$550
$600
$650
$700
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
2007:Q3Pre-Crisis Peak
Surplus as of 12/31/13 stood at a record high $653.3B
2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .
The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2014in very strong financial condition.
87
U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 2002-2013 (1)
$486
$20,353
$425
$9,264
$35,221
$13,615$16,294
$3,507
$6,419
$12,458
$4,651 $4,397
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012
Tran
sact
ion
valu
es
0
10
20
30
40
50
60
70
80
90
Num
ber of transactions
($ Millions)
(1) Includes transactions where a U.S. company was the acquirer and/or the target.
Source: Conning proprietary database.
M&A activity in the P/C sector remains below
pre-crisis levels.
P/C UNDERWRITING
88
Underwriting Losses in 2013 Much Improved After High
Catastrophe Losses in 2011/1288
89
P/C Insurance Industry Combined Ratio, 2001–2013*
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1. Sources: A.M. Best, ISO.
95.7
99.3100.8
106.3
102.4
96.7
101.0
92.6
100.898.4
100.1
107.5
115.8
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Best Combined
Ratio Since 1949 (87.6)
As Recently as 2001, Insurers Paid Out
Nearly $1.16 for Every $1 in Earned
Premiums
Relatively Low CAT Losses, Reserve Releases
Heavy Use of Reinsurance Lowered Net
Losses
Relatively Low CAT Losses, Reserve Releases
Avg. CAT Losses,
More Reserve Releases
Higher CAT
Losses, Shrinking Reserve
Releases, Toll of Soft
Market
Cyclical Deterioration
Sandy Impacts
Lower CAT
Losses
90
Combined Ratios by Predominant Business Segment, 2013 vs. 2012*
*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute
102.3101.1
102.3
104.8
96.797.6
94.3
98.7
90
92
94
96
98
100
102
104
106
All Lines Personal LinesPredominating
Commercial LinesPredominating
Diversified Insurers
2012 2013
(Percent)
The combined ratios for both personal and
commercial lines improved substantially in 2013
Underwriting Gain (Loss)1975–2013*
* Includes mortgage and financial guaranty insurers in all years.Sources: A.M. Best, ISO; Insurance Information Institute.
Large Underwriting Losses Are NOT Sustainable in Current Investment Environment
-$55
-$45
-$35
-$25
-$15
-$5
$5
$15
$25
$35
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Cumulative underwriting deficit from 1975 through
2012 is $510B
($ Billions) Underwriting profit in 2013
totaled $15.5B
High cat losses in 2011 led to the highest
underwriting loss since 2002
93
2
(2)
(8)
(3)(7)
(10)(10)
(4)(0)
11
24
1512 10
(4)(9)
(13)(12)(10)(14)
(11)(10)(7) (7)
-$20
-$15
-$10
-$5
$0
$5
$10
$15
$20
$25
$3092 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
13E
14E
15E
Prio
r Yr.
Res
erve
Rel
ease
($B
)
-6
-4
-2
0
2
4
6
8 Impact on C
ombined R
atio (Points)
Prior Yr. ReserveDevelopment ($B)
Impact onCombined Ratio(Points)
P/C Reserve Development, 1992–2015E
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. Sources: A.M. Best, ISO, Barclays Research (estimates for 2013-2015).
95
Performance by Segment
95
109.
4
110.
211
8.8
109.
5 112.
5
110.
210
7.6
104.
110
9.7
110.
2
102.
5 105.
4
91.1 93
.6
104.
298
.9
102.
110
6.7
104.
910
2.1
101.
4
101.
3
102.
0
111.
1
112.
3
122.
3
90
95
100
105
110
115
120
125
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F
14F
15F
Com
mer
cial
Lin
es C
ombi
ned
Rat
io
*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2011); Conning (2012-2015F) Insurance Information Institute
Commercial Lines Combined Ratio, 1990-2015F*
Commercial lines underwriting
performance is expected to improve as
improvement in pricing environment persists
96
Commercial Auto Combined Ratio: 1993–2015F
112.
1
112.
0
113.
0
115.
9
102.
7
95.2
92.9
92.1
92.4 94
.3 96.8 99
.4
98.0
104.
6
107.
1
101.
7
100.
3
99.8
118.
1
115.
7
116.
2
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F 15F
Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends
97Sources: A.M. Best (1990-2012E);Conning (2012-2015F); Insurance Information Institute.
General Liability Combined Ratio: 2005–2015F
112.
9
95.1 99
.0
94.2
101.
4
104.
4
105.
8
108.
3
107.
1 110.
8
99.8
80
85
90
95
100
105
110
115
05 06 07 08 09 10 11 12 13F 14F 15F
Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years
Source: Conning Research and Consulting. 99
Inland Marine Combined Ratio: 1999–2015F
101.9
92.8
100.2
83.8
77.379.5
93.3
89.386.2
97.7 96.7
89.7 89.6 89.5
80.882.5
89.9
70
75
80
85
90
95
100
105
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F 15F
Inland Marine is Expected to Remain Among the Most Profitable of All Lines
Sources: A.M. Best (1999-2011); Conning (2012-2015F) 100
102
U.S. Insured Catastrophe Loss Update
2013 Was a Welcome Respite from the High Catastrophe Losses in Recent Years
102
103
$12.
6
$11.
0$3
.8$1
4.3
$11.
6$6
.1
$34.
7$7
.6 $16.
3$3
3.7
$73.
4
$10.
5$7
.5
$29.
2$1
1.5
$14.
4$3
3.6
$35.
0$1
2.9
$14.
0
$4.8 $8
.0
$37.
8$8
.8
$26.
4
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*
U.S. Insured Catastrophe Losses
*Through 12/31/13.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Well
Below 2011 and 2012 YTD Totals.
2012 was the third most expensive year ever for insured CAT
losses
Record tornado losses caused
2011 CAT losses to surge
($ Billions, $ 2012)
103
104
Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013*
*2010s represent 2010-2013.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.
0.4
1.2
0.4 0.
8 1.3
0.3 0.4 0.
71.
51.
00.
40.
4 0.7
1.8
1.1
0.6
1.4 2.
01.
3 2.0
0.5
0.5 0.7
3.0
1.2
2.1
8.8
2.3
5.9
3.3
2.8
1.0
3.6
2.9
1.6
5.4
1.6
3.3
3.3
8.1
2.7
1.6
5.0
2.6
3.4
8.7 8.9
3.43.6
0.9
0.1
1.1
1.1
0.8
0123456789
10
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades
Avg. CAT Loss Component of the Combined Ratio
by Decade
1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.1E*
Combined Ratio Points Catastrophe losses as a share of all losses reached
a record high in 2012
105
Top 16 Most Costly Disastersin U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
$7.8 $8.7 $9.2 $11.1 $13.4$18.8
$23.9 $24.6$25.6
$48.7
$7.5$7.1$6.7$5.6$5.6$4.4
$0
$10
$20
$30
$40
$50
$60
Irene (2011) Jeanne(2004)
Frances(2004)
Rita (2005)
Tornadoes/T-Storms
(2011)
Tornadoes/T-Storms
(2011)
Hugo (1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Ike (2008)
Sandy*(2012)
Northridge(1994)
9/11 Attack(2001)
Andrew(1992)
Katrina(2005)
Hurricane Sandy became the 5th
costliest event in US insurance history
Hurricane Irene became the 12th most expense hurricane
in US history in 2011
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
12 of the 16 Most Expensive Events in US History Have
Occurred Over the Past Decade*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
106
Top 10 States for InsuredCatastrophe Losses, 2013
$1,995
$1,509
$1,190
$909 $907$805 $773 $762
$677$593
0200400600800
1,0001,2001,4001,6001,8002,000
Oklahoma
Texas
Illinois
Minnesota
Colorado
Mississ
ippi
Nebras
ka
Georg
ia
Indiana
Louisiana
Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.
$ Millions
Oklahoma had the highest CAT losses
in the US in 2013
Num
ber
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2013Number of Events (Annual Totals 1980 – 2013)
Source: MR NatCatSERVICE 108
22
19
81
6
50
100
150
200
250
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
There were 128 natural disaster events in 2013
Losses Due to Natural Disasters in the US, 1980–2013
109
Overall losses (in 2012 values) Insured losses (in 2013 values)
Source: MR NatCatSERVICE
(2013 Dollars, $ Billions) (Overall and Insured Losses)
50
100
150
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
2013 CAT LossesOverall : $21.8BInsured: $12.8B
Indicates a great deal of losses are uninsured (~40%-50% in the US) =
Growth Opportunity
2013 losses were far below 2011 and 2012 and were 44% lower
than the average from 2000-2012
111
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1993–20121
0.1%
1.7%
3.8%4.7%
6.3%
7.1%
36.0%
40.4%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.
Hurricanes & Tropical Storms, $158.2
Fires (4), $6.5
Tornadoes (2), $140.9
Winter Storms, $27.8
Terrorism, $24.8
Geological Events, $18.4
Wind/Hail/Flood (3), $14.9
Other (5), $0.2
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
Insured cat losses from 1993-2012
totaled $391.7B, an average of $19.6B per year or $1.6B
per month
113Sources: Munich Re NatCatSERVICE; Insurance Information Institute.
Winter Storm and Winter Damage Events in the US and Canada, 1980-2013 (2013 US$)
Three of the four most costly years ever for insured losses from
winter storms and damage occurred in the 1990s, led by the “Storm of the Century” in 1993.
Insured losses from
severe winter events
totaled $2 billion in
2013.
Insured winter storm and damage losses in Jan. 2014 already totaled $1.5 billion. Continued severe weather since then makes it likely that
2014 will become one of the top 5 costliest winters since 1980.
Insured Losses (Millions, $ 2013)
5-year running average
U.S. Thunderstorm Insured Loss Trends, 1980 – 2013
116Source: Property Claims Service, MR NatCatSERVICE
Thunderstorm losses in 2013 totaled $10.3 billion, the 6th
highest on record
Average thunderstorm
losses are up 7 fold since the early
1980s. The 5-year running average
loss is up sharply
Hurricanes get all the headlines, but thunderstorms are consistent
producers of large scale loss. 2008-2013 are the most expensive
years on record.
118
Outlook for the 2014 Atlantic Hurricane Season
Somewhat Below Average Activity, Fewer Landfalls
Expected
Outlook for 2014 Hurricane Season: 30% Less Active Than Typical Year
Median* 2005(Katrina Year)
2014F
Named Storms 12.0 28 10
Named Storm Days 60.1 115.5 40
Hurricanes 6.5 14 4Hurricane Days 21.3 47.5 15Major Hurricanes 2.0 7 1
Major Hurricane Days 3.9 7 3
Accumulated Cyclone Energy 92.0 NA 65
Net Tropical Cyclone Activity 103% 275% 70%
*Over the period 1981-2010.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2014
Average* 2014F
Entire US Coast 52% 40%
US East Coast Including Florida Peninsula
31% 22%
Gulf Coast from FL Panhandle to Brownsville, TX
30% 23%
ALSO…Above-Average Major HurricaneLandfall Risk in Caribbean for 2011 (32% vs. 42%)
*Average over the past century.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.
PRICING & GROWTH
135
P/C Insurance Industry Will Grow by $16B - $20B in 2014
135
136
-5%
0%
5%
10%
15%
20%
25%
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Net Premium Growth: Annual Change, 1971—2014F(Percent)
1975-78 1984-87 2000-03
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
Net Written Premiums Fell 0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.
2014F: 4.0%2013: 4.6%
2012: +4.3%
137
P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter
Sources: ISO, Insurance Information Institute.
Sustained Growth in Written Premiums(vs. the same quarter, prior year) Will Continue through 2014
10.2
%15
.1%
16.8
%16
.7%
12.5
%10
.1%
9.7%
7.8%
7.2%
5.6%
2.9%
5.5%
-4.6
%-4
.1%
-5.8
%-1
.6%
10.3
%10
.2% 13
.4%
6.6%
-1.6
%2.
1%0.
0%-1
.9%
0.5%
-1.8
%-0
.7%
-4.4
%-3
.7%
-5.3
%-5
.2%
-1.4
%-1
.3%
1.3% 2.
3%1.
7% 3.5%
1.6%
4.1%
3.8%
3.0% 4.
2% 5.1%
4.8%
4.1% 4.7%
3.8%
5.8%
-10%
-5%
0%
5%
10%
15%
20%
2002
:Q1
2002
:Q2
2002
:Q3
2002
:Q4
2003
:Q1
2003
:Q2
2003
:Q3
2003
:Q4
2004
:Q1
2004
:Q2
2004
:Q3
2004
:Q4
2005
:Q1
2005
:Q2
2005
:Q3
2005
:Q4
2006
:Q1
2006
:Q2
2006
:Q3
2006
:Q4
2007
:Q1
2007
:Q2
2007
:Q3
2007
:Q4
2008
:Q1
2008
:Q2
2008
:Q3
2008
:Q4
2009
:Q1
2009
:Q2
2009
:Q3
2009
:Q4
2010
:Q1
2010
:Q2
2010
:Q3
2010
:Q4
2011
:Q1
2011
:Q2
2011
:Q3
2011
:Q4
2012
:Q1
2012
:Q2
2012
:Q3
2012
:Q4
2013
:Q1
2013
:Q2
2013
:Q3
2013
:Q4
Premium growth in Q4 2013 was up 5.8% over Q4 2012, marking the
15th consecutive quarter of growth
138
4.0%
7.2%
9.0%
5.4%4.2% 4.1%
5.0%
0.6%
4.6%
0%1%2%3%4%5%6%7%8%9%
10%
PersonalAuto
Home OtherLiability*
WC CMP Fire & Allied
Comm. Auto
All OtherLines
Total P/C
Growth by Major P/C Line, 2013
Other Liability and Homeowners were the fastest growing
lines in 2013
*Includes Products Liability.Source: Annual Statement data for by line statistics; NCCI for WC; ISO for Total P/C; Insurance Information Institute.
139
Change in Commercial Rate Renewals, by Line: 2014:Q1
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Major Commercial Lines Renewed Generally Upward in Q4:2014 for the 11th Consecutive Quarter; D&O, Employment Practices and Workers Comp Leading
the Way; Lower Cat Losses and Falling Reinsurance Prices Have Pressured Property Coverages Lower; Low Interest Rates Still Exert Upward Rate Pressure
Percentage Change (%)
3.3%
4.1%4.9% 5.2%
0.0%0.7% 0.9%
1.5% 1.7% 2.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Com
mer
cial
Pro
perty
Bus
ines
sIn
terru
ptio
n
Sur
ety
Gen
eral
Liab
ility
Um
brel
la
Con
stru
ctio
n
Com
mer
cial
Aut
o
Wor
kers
Com
p
EP
L
D&
O
D&O increases are large than any other line,
followed by EPL and Workers Comp
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Commercial Umbrella Rate Changes,2010:Q1 – 2014:Q1
Source: Council of Insurance Agents and Brokers; Information Institute.
-4.6
%
-6.0
% -4.4
%
-4.5
%
-1.7
%
-1.5
%
1.3% 2.
3% 3.3% 3.
8%
3.1% 3.5% 4.
6%
3.7%
2.9%
2.3%
1.7%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
Commercial Umbrella rate changes have been
positive for 11 consecutive quarters
(Percent Change)
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
141
Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2014)
-3.2
%-5
.9%
-7.0
%-9
.4%
-9.7
%-8
.2%
-4.6
% -2.7
%-3
.0%
-5.3
%-9
.6%
-11.
3%-1
1.8%
-13.
3%-1
2.0%
-13.
5%-1
2.9% -11.
0%-6
.4%
-5.1
%-4
.9%
-5.8
%-5
.6%
-5.3
%-6
.4%
-5.2
%-5
.4% -2
.9%
2.7% 4.
4%4.
3%3.
9% 5.0%
5.2%
4.3%
3.4%
2.1%
1.5%
-0.1
% 0.9%
-0.1
%
-16%
-11%
-6%
-1%
4%
9%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
KRW Effect
Pricing as of Q1:2014 was positive for the 11th
consecutive quarter.
(Percent)
Q2 2011 marked the last of 30th
consecutive quarter of price declines
142
Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2014:Q1
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Percentage Change (%)
KRW : No Lasting Impact
Pricing Turned Negative in Early
2004 and Remained that
way for 7 ½ years
Peak = 2001:Q4 +28.5% Pricing turned positive in
Q3:2011, the first increase in nearly 8 years; Q1:2014 renewals were up 1.5%; Some insurers posted
stronger numbers.
Trough = 2007:Q3 -13.6%
143
Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2014:Q1
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
1999:Q4 = 100Despite 11 consecutive
quarters of gains (Q1:2014 = +1.5%), pricing today is where
is was in mid-2001 (around 9/11), suggesting additional
rate need going forward, esp. in light of record low interest
rates
144
Cumulative Qtrly. Commercial Rate Changes, by Line: 1999:Q4 to 2014:Q1
1999:Q4 = 100
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.
Rate levels are rising but at different paces rather all being up sharply as in the early 2000s
146
Growth Analysis by State and Business Segment
Post-Crisis Paradox? Premium Growth Rates Vary
Tremendously by State146
147
Direct Premiums Written: Total P/CPercent Change by State, 2007-2013
74.6
36.9
31.9
27.4
25.2
24.9
22.5
22.2
16.6
15.9
15.7
14.5
14.5
14.3
12.6
11.9
11.8
11.2
10.5
10.3
9.9
9.8
9.3
9.1
9.0
8.6
0
1020
30
40
5060
70
80
ND SD OK NE
KS IA VT TX WY
TN MN AR
AK IN WI
CO MI
KY
OH NJ LA SC VA AL
MO
NM
Pece
nt c
hang
e (%
)
Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
North Dakota was the country’s growth leader over the past 6 years with premiums written
expanding by 74.6%
148
Direct Premiums Written: Total P/CPercent Change by State, 2007-2013
8.5
8.2
7.9
7.8
7.6
7.3
7.0
6.9
6.2
5.9
5.6
5.3
4.2
4.1
3.5
1.6
1.0
0.4
-0.7
-1.7
-1.9
-4.1
-5.7
-6.7
-12.
6
-15.
3
-20
-15
-10
-5
0
5
10
MS
CT
US
NC GA
NY
MD
MA
UT
WA
PA IL RI
NH ID MT
ME
OR CA FL DC AZ
WV HI
NV
DE
Pece
nt c
hang
e (%
)
Bottom 25 States
Sources: SNL Financial LC.; Insurance Information Institute.
Growth was negative in 7 states and DC between
2007 and 2013
149
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013
91.1
42.1
41.4
33.7
26.3
25.8
23.6
19.1
15.6
14.0
11.3
10.0
9.8
6.8
6.7
6.5
4.1
3.2
3.1
3.0
2.7
2.2
2.0
1.7
1.3
0.6
0102030405060708090
100
ND
OK SD VT NE IA KS ID AK
TX WY
MN IN AR
TN WI
OH
MA
CT
NM LA MS NJ
NY
US
MO
Pece
nt c
hang
e (%
)
Sources: SNL Financial LLC.; Insurance Information Institute.
Top 25 States
Only 30 states showed any commercial lines growth from 2007 through 2013
150
Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013
0.5
0.4
0.2
0.1
-0.5
-0.8
-0.9
-1.0
-1.1
-1.1
-1.9
-2.0
-2.1
-2.7
-3.3
-3.7
-4.3
-4.9
-10.
7
-11.
4
-11.
7
-12.
6
-12.
7
-13.
6
-22.
4
-25.
1
-30
-25
-20
-15
-10
-5
0
5
MD
NH PA CO IL WA VA KY
NC
ME RI
MI
SC AL
GA
CA
UT
DC
OR
MT HI
DE FL AZ
WV
NV
Pece
nt c
hang
e (%
)
Bottom 25 States
Sources: SNL Financial LLC.; Insurance Information Institute.
States with the poorest performing economies also produced the most negative net change in premiums of
the past 6 years
Nearly half the states have yet to see commercial lines premium
volume return to pre-crisis levels
151
Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2013*
32.9
30.8
24.3
21.5
13.4
11.5
11.0
10.6
8.1
4.8
4.5
3.0
1.5
-0.3
-0.6
-1.0
-2.3
-2.4
-2.9
-3.0
-3.7
-4.1
-5.7
-5.8
-8.0
-15-10-505
101520253035
OK IA SD NY CA
CT NJ
KS
NE IN MI
VT MN
DC WI IL N
H US
NM TX PA VA MD TN AR
Pece
nt c
hang
e (%
)
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
Top 25 States
Only 13 states have seen works comp premium volume
return to pre-crisis levels
152
Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2013*
-8.1
-8.4
-8.7
-8.8
-11.
1
-11.
3
-12.
0
-14.
7
-15.
3
-15.
4
-16.
0
-16.
3
-17.
1
-22.
1
-23.
0
-26.
5
-27.
5
-32.
5
-33.
3
-33.
5
-43.
8
-71.
0
-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50
MS
MA RI
GA
NC AK ID CO LA ME AZ
MO SC AL
KY
UT FL OR DE HI
NV
MT
Pece
nt c
hang
e (%
)
Bottom 25 States
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.
States with the poorest performing economies also produced some of the most
negative net change in premiums of the past 6 years
Terrorism Update
153
TRIA’s SuccessConsequences of Expiration
Download III’s Terrorism Insurance Report at: http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2014.html
153
156
*Data for 27 states with sufficient data.Source: Marsh 2014 Terrorism Risk Insurance Report; Insurance Information Institute.
The overall US take-up rate for terrorism coverage was 62% in 2013 and ranged from
a lows of 41% in Michigan to a high of
84% in Massachusetts (where demand likely increased due to the
April 2013 Boston Marathon bombing)
Terrorism Insurance Take-Up Rates by State for 2013*
158
Terrorism Risk Insurance Program Testified before House Financial Services Nov. 2013 Testified before Senate Banking Cmte. in Sept. 2013 Provided testimony at NYC hearing in June 2013 Provided Capitol Hill Joint House/Senate Staff Briefing in
April 2014 I.I.I. Published Several Updates to its Study on Terrorism
Risk and Insurance Working with Trades, Congressional Staff, GAO & Others
Senate Banking Committee, 9/25/13House Financial Services Subcommittee, 11/13/13
159
Summary of President’s Working Group Report on TRIA (April 2014)
Insurance for terrorism risk is available and affordable Availability/affordability have has not changed appreciably since 2010
Prices for terrorism risk insurance vary considerably depending on the policyholder’s industry and location of risk
Prices have declined since TRIA was enacted Currently ~3% to 5% of commercial property insurance premiums
Take-up rates have improved since adoption of TRIA Overall take-up rate is steady at ~60% (62% in 2013 per Marsh)
Market capacity is currently tightening given uncertainty over TRIA reauthorization
The private market does not have the capacity to provide reinsurance for terror risk to the extent currently provided by TRIA
In the absence of TRIA, terrorism risk insurance would likely be less available. Coverage that would be available likely would be more costly and/or limited in scope
Source: Report of the President’s Working Group on Financial Markets,The Long-Term Availability and Affordability of Insurance for Terrorism Risk,April 2014.
INVESTMENTS: THE NEW REALITY
160
Investment Performance is a Key Driver of Profitability
Depressed Yields Will Necessarily Influence Underwriting & Pricing
160
Property/Casualty Insurance Industry Investment Income: 2000–20131
$38.9$37.1 $36.7
$38.7
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.4
$39.6
$49.5$52.3
$30
$40
$50
$60
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Investment Income Fell in 2012 and 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing
1 Investment gains consist primarily of interest and stock dividends...Sources: ISO; Insurance Information Institute.
($ Billions)
Investment earnings are running below their 2007
pre-crisis peak
162
P/C Insurer Net Realized Capital Gains/Losses, 1990-2013
Sources: A.M. Best, ISO, Insurance Information Institute.
$2.8
8
$4.8
1 $9.8
9
$9.8
2
$10.
81 $18.
02
$13.
02
$16.
21
$6.6
3
-$1.
21
$6.6
1
$9.1
3
$9.7
0
$3.5
2 $8.9
2
-$7.
90
$5.8
5
$7.0
4
$6.1
8 $11.
43
-$19
.81
$9.2
4
$6.0
0
$1.6
6
-$25-$20-$15-$10
-$5$0$5
$10$15$20
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Insurers Posted Net Realized Capital Gains in 2010 - 2013 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE
($ Billions) Realized capital gains were up sharply as equity markets rallied
164
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Persona
l Line
s
Pvt Pass
Auto
Pers P
rop
Commerc
ial
Comml A
uto
Credit
Comm P
rop
Comm C
as
Fidelity
/Sure
ty
Warra
nty
Surplus
Line
s
Med M
al
WC
Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
164
166
U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*
*Monthly, constant maturity, nominal rates, through May 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Recession2-Yr Yield10-Yr Yield
Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.
U.S. Treasury yields plunged to historic lows in 2013. Longer-
term yields have rebounded a bit.
166
167
-1.8
%
-1.8
%
-2.0
%
-3.6
%
-3.3
%
-3.3
%
-3.7
%
-4.3
%
-5.2
%
-5.7
%
-7.3%
-1.9
%
-2.1
%
-3.1
%
-8%-7%-6%-5%-4%-3%-2%-1%0%
Persona
l Line
s
Pvt Pass
Auto
Pers P
rop
Commerc
ial
Comml A
uto
Credit
Comm P
rop
Comm C
as
Fidelity
/Sure
ty
Warra
nty
Surplus
Line
s
Med M
al
WC
Reinsu
rance
**
Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.
Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*
167
171
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2012
90
95
100
105
110
115
12069 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Com
bine
d R
atio
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Impairm
ent Rate
Combined Ratio after Div P/C Impairment Frequency
Source: A.M. Best; Insurance Information Institute
2012 impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower than the 0.82% average since 1969
Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall
176
REINSURANCE MARKET CONDITIONS
Ample Capacity as Alternative Capital is
Transforming the Market—And Pushing Down
Prices176
Global Reinsurance Capital (Traditional and Alternative), 2007 - 2013
Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.
Total reinsurance capital reached a record $540B in 2013, up 58.8% from 2008. Of that, $50B (9.3%) is alternative capacity, up 163% from
$19B since 2008
Reinsurance Pricing: Rate-on-Line Index by Region, 1990 – 2014*
*As of Jan. 1.Source: Guy Carpenter
Lower CATs and a flood of new
capital has pushed reinsurance pricing
down in most regions, including
the US
Catastrophe Bonds: Issuance and Outstanding, 1997- 2014:Q1*Risk Capital Amount ($ Millions)
*Through Jan. 31, 2014.Source: Guy Carpenter; Insurance Information Institute.
633.
0
846.
1
984.
8
1,13
0.0
966.
9 2,72
9.2
3,39
1.7
4,60
0.3
4,10
8.8
5,85
2.9
7,08
3.0
1,41
0.0
1,991.11,142.8
1,729.8
6,99
6.3
4,69
3.4
1,219.5
$3,4
50.0
$4,0
40.4
$4,9
04.2 $8
,541
.6
$14,
024.
2
$12,
043.
6
$12,
508.
8
$12,
185.
0
$12,
139.
1
$14,
835.
7 $18,
516.
7
$2,9
50.0
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:Q1Risk Capital IssuedRisk Capital Outstandng at Year End
Catastrophe Bond Issuance Is Approaching Pre-Crisis Levels While Risk Capital Outstanding Stands at an All-Time Record
CAT bond issuance reached a record high in 2013
Risk capital outstanding
reached a record high in 2013
Financial crisis depressed issuance
Shifting Legal Liability & Tort Environment
180
Will the Tort PendulumSwing Against Insurers?
180
181
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E
$0
$50
$100
$150
$200
$250
$300
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
Tort
Syst
em C
osts
1.50%
1.75%
2.00%
2.25%
2.50%
Tort Costs as %
of GD
P
Tort Sytem Costs Tort Costs as % of GDP
($ Billions)
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
Tort costs in dollar terms have remained high but relatively stable
since the mid-2000s., but are down substantially as a share of GDP
Deepwater Horizon Spike
in 2010
1.68% of GDP in 2013
2.21% of GDP in 2003
= pre-tort reform peak
185
The Nation’s Judicial Hellholes: 2012/2013
Source: American Tort Reform Association; Insurance Information Institute
West VirginiaIllinoisMadison County
New YorkAlbany and
NYC
Watch List Philadelphia,
Pennsylvania South Florida Cook County, Illinois New Jersey Nevada Louisiana
Dishonorable Mention
MO Supreme Court WA Supreme Court
California
MarylandBaltimore
www.iii.org
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186