Property/Casualty Insurancein a Post-Katrina World
An Industry at the CrossroadsInsurance Information Institute
May 9, 2007
Robert P. Hartwig, Ph.D., CPCU, President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Presentation Outline
• P/C Profit Overview—2006, A Cyclical Peak• Underwriting Trends: Unsustainable?• Premium Growth: Approaching a Standstill• Pricing: Competitive Pressures Mounting• Expenses: Will Ratios Rise a Growth Slows?• Capital & Capacity: UnderleveragedROE Pressure• Catastrophe Loss Management
What is the Appropriate Role for Government?• Reinsurance Summary• Financial Strength & Ratings• Investments: Less Bang for the Buck• Tort System: Great News for a Change (Mostly)• Legislative & Regulatory Update• Q&A
P/C PROFIT:An Historical Perspective
Profits in 2006 ReachedTheir Cyclical Peak
P/C Net Income After Taxes1991-2006 ($ Millions)*
$14,178
$5,840
$19,316
$10,870
$20,598$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$30,029
$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
*ROE figures are GAAP; 1Return on avg. Surplus.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= 10.5%2006 ROAS1 = 14.0%
Though up in 2006, insurer profits are highly volatile (2001 was the industry’s worst year ever). ROEs
generally fall below that of most other industries.
-5%
0%
5%
10%
15%
20%
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2008E
*2007-08 P/C insurer ROEs are I.I.I. estimates.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
RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies*
*Fortune 1,000 group.
Source: Fortune Magazine, Insurance Information Institute.
13%
13.4%14.6%
10.0%
14.9%13.0%
11%
13%
15%14%
13%
7%6%
11%12%
8%
11%12%
10%9%
-2%
8%7%
2%
10%
10.4%15.0%
14.0%
13.9%12.6%
-4%-2%0%2%4%6%8%
10%12%14%16%
1998 2000 2001 2002 2003 2004 2005 2006E 2007F 2008F
StockMutualAll Cos.*
Mutual insurer ROEs are typically lower than for stock
companies, but gap has narrowed. All are cyclical.
-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
F08
F
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F
*2007-08 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; ISO, A.M. Best.
1975: 2.4%
1977:19.0% 1987:17.3%
1997:11.6%
2006:14.0%
1984: 1.8% 1992: 4.5% 2001: -1.2%
10 Years
10 Years 9 Years
-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
+1.
0 p
ts
+3.
0 p
ts
-9.0
pts
The cost of capital is the rate of return
insurers need to attract and retain
capital to the business
+2.
0 p
ts
-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 06E
ROE Cost of Capital
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2006
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 2003-06
+1.
0 p
ts
+5.
5 p
ts
-9.0
pts
The cost of capital is the rate of return
insurers need to attract and retain
capital to the business
Insurance & Reinsurance Stocks:Strong Finish in 2006
0.61%
9.53%
10.33%
16.57%
19.95%
16.24%
13.62%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
S&P 500
Life/Health
Reinsurers
P/C
All Insurers
Multiine
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total Returns for 2006
P/C insurer & reinsurer stocks rallied in late 2006
as hurricane fears dissipated and insurers turned in strong resultsBroker stocks held back
by weak earnings
Insurance & Reinsurance Stocks: Slow Start in 2007 in P/C, Reins
7.30%
2.32%
4.68%
0.49%
0.04%
12.72%
5.10%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
S&P 500
Life/Health
Reinsurers
P/C
All Insurers
Multiline
Brokers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total YTD Returns Through May 4, 2007
P/C insurance, reinsurance stocks lagging on soft market
concerns and worries over 2007 hurricane season
Top 10 Most Profitable P/C InsurersRanked by 2006 ROE
23%
22%
21%
18%
18%
17%
17%
17%
16%
14.0%
15.4%
24%
0% 5% 10% 15% 20% 25% 30%
Progressive
Allstate
Safeco
W.R. Berkley
Chubb
USAA*
Markel
HCC Insurance Holdings
Travelers
Commerce Group
P/C Insurers
All Industry Median
*Not a stock company, but reported results under GAAP.Source: Fortune, April 30, 2007 edition; Insurance Information Institute
Top Industries by ROE: P/C Insurers Still Underperformed in 2006*
30.7%30.3%
26.4%24.6%
24.2%22.6%
21.8%21.5%
20.9%20.9%
20.5%19.6%19.4%19.1%
14.9%15.4%
31.8%
0% 5% 10% 15% 20% 25% 30% 35%
Oil & Gas Equip., ServicesPetroleum Refining
MetalsFood Services
Household & Pers. ProductsPharmaceuticals
Industrial & Farm EquipmentMining & Crude Oil Prod.
Aerospace & DefenseChemicalsSecurities
Food Consumer Prod.Medical Prod. & Equip.
Specialty RetailersHomebuilders
P/C Insurers (Stock)All Industries: 500 Median
*Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors.Source: Fortune, April 30, 2007 edition; Insurance Information Institute
P/C insurer profitability in 2006 ranked 30th out of 50
industry groups despite renewed
profitabilityP/C insurers
underperformed the All Industry median for the 19th consecutive
year
Advertising Expenditures by P/C Insurance Industry, 1999-2005
$ Billions
$1.736 $1.737 $1.803$1.708
$2.975
$2.111
$1.882
$1.5
$1.7
$1.9
$2.1
$2.3
$2.5
$2.7
$2.9
$3.1
99 00 01 02 03 04 05Source: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers is at a record high, signaling
increased competition
UNDERWRITING
Extremely Strong 2006, Momentum for 2007/08
115.8
107.4
100.198.3
100.7
92.4
98.696.6
90
100
110
120
01 02 03 04 05 06 07F 08F
P/C Industry Combined Ratio
Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.
2005 figure benefited from heavy use of reinsurance which lowered net losses
2006 produced the best underwriting result
since the 91.2 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 92.493.1 93.1 93.3
93.0
85
86
87
88
89
90
91
92
93
94
1949 1948 1943 1937 1935 2006 1950 1939 1953 1936
Ten Lowest P/C Insurance Combined Ratios Since 1920
Sources: Insurance Information Institute research from A.M. Best data.
The 2006 combined ratio of 92.4 was the best since the 87.6 combined in 1949
The industry’s best underwriting years are associated with
periods of low interest rates
-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
Underwriting Gain (Loss)1975-2006
Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
Insurers earned an underwriting profit of $31.2 billion in 2006, the largest ever but only
the second since 1978. Despite the 2006 underwriting profit, the cumulative
underwriting deficit since 1975 is $419 billion.
110.
3
110.
2
107.
6
103.
9
109.
7
112.
3
111.
1
122.
3
110.
2
102.
5
105.
1
94
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 06F
Commercial Lines Combined Ratio, 1993-2006E*
Source: A.M. Best; Insurance Information Institute .
Outside CAT-affected lines, commercial
insurance is doing fairly well. Caution is
required in underwriting long-
tail commercial lines.
2006 results will benefited from relatively disciplined underwriting
and low CAT losses
Commercial coverages have exhibited extreme variability. Are current
results anomalous?
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
91.0
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Personal LinesCombined Ratio, 1993-2006E
Source: A.M. Best; Insurance Information Institute.
A very strong 2006 resulted from favorable frequency & severity
trends and low CAT activity
$1
0.8
$2
2.7
$1
3.9
$9
.9
$8
.0
$5
.0
$2.0$0.4
2.41.9
1.1
0.4
6.5
3.63.5
0.1
$0
$5
$10
$15
$20
$25
2000 2001 2002 2003 2004 2005E 2006E 2007E
Re
se
rve
De
ve
lop
me
nt
($B
)
0
1
2
3
4
5
6
7
Co
mb
ine
d R
ati
o P
oin
ts
PY Reserve Development Combined Ratio Points
Impact of Reserve Changes on Combined Ratio
Source: A.M. Best, Lehman Brothers for years 2005E-2007F
Reserve adequacy has improved substantially
The Big Question: Is the Industry More Disciplined Today?
• Signs suggest that the answer is yes• Current period of sustained underwriting profitability is the first
since the 1950s• While prices are falling, underlying lost cost trends (frequency and
severity trends) are generally favorable to benign Suggest impact of falling prices will be less pronounced than late 1990s
• Reserve situation appears much improved an under control• Management Information Systems: Much More Sophisticated
Insurers can monitor and make adjustments much more quickly Adjustments made quickly by line, geographic area, producer, etc.
• Investment Income Relative to late 1990s, interest rates and stock markets returns are lower Has effect of imposing (some) discipline
• Ratings Agencies More stringent capital requirements Quicker to downgrade
PREMIUM GROWTH
Deceleration in 2006, Even Slower in 2007
-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
20
09
F2
01
0F
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
*2007-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey.
2006-2010 (post-Katrina) period could resemble 1993-97
(post-Andrew)
2005: biggest real drop in premium since early 1980s
Growth in Net Written Premium, 2000-2008F
Source: A.M. Best; Forecasts from the Insurance Information Institute’s Groundhog survey: http://www.iii.org/media/industry/financials/groundhog2007/.
5.1%
8.1%
14.1%
9.8%
4.7%
0.3%
4.3%
1.8% 1.9%
2000 2001 2002 2003 2004 2005 2006 2007F 2008F
P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are
expected to remain healthy
PRICING
Under Pressure in 2007
$651 $6
68 $691 $7
05
$703
$685
$690 $7
24
$780 $8
23 $851
$847
$838
$847
$600
$650
$700
$750
$800
$850
$900
$950
94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide auto insurance expenditures
are expected to fall 0.5% in 2007, the first drop
since 1999
Lower underlying frequency and modest
severity are keeping auto insurance costs in check
$418$440 $455
$481 $488 $508$536
$593
$668
$729
$787$835
$400$450$500$550$600$650$700$750$800$850$900
95 96 97 98 99 00 01 02 03 04 05* 06*
Average Expenditures on Homeowners Insurance**
*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute
Countrywide home insurance expenditures rose an estimated 6% in 2006
Homeowners in non-CAT zones will see
smaller increases, but larger in CAT zones
Average Commercial Rate Change,All Lines, (1Q:2004 – 1Q:2007)
-0.1%
-3.2%
-7.0%
-9.4%
-4.6%
-2.7%
-5.3%
-9.6%
-3.0%
-9.7%-11.3%
-5.9%
-8.2%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases diminished greatly after
Katrina but have grown again
KRW Effect
EXPENSES
Will Expense Ratio Rise as Premium Growth Slows?
Personal vs. Commercial Lines Underwriting Expense Ratio*
23.4%24.3%
25.0%
30.8%
24.4%
24.5%24.8%25.6%
24.6%
25.6%24.7%
26.6%25.6%
30.0%
31.1%
29.4%29.9%
29.1%
26.6%
25.0%
20%
22%
24%
26%
28%
30%
32%
96 97 98 99 00 01 02 03 04 05
Personal Commercial
*Ratio of expenses incurred to net premiums written.Source: A.M. Best; Insurance Information Institute
Expenses ratios will likely rise as premium
growth slows
43.6
%
43.2
%
42.8
%
38.8
%
37.5
%
36.7
%
34.8
%
32.7
%
27.6
%
27.3
%
26.5
%
25.9
%
26.0
%
26.1
%
27.4
%
25.5
%
20.0
%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 17
Underwriting Expense Ratio, P/C Insurance, 1930-2005
Source: A.M. Best; Insurance Information Institute.
The cost of selling p/c insurance has barely
moved in 35 years…Why?
TRANSFORMATIONAL CHANGE: Taking down the cost of selling insurance
to 20% or premium or less by 2017
CAPACITY/SURPLUS
The Industry in Underleveraged
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
7576777879808182838485868788899091929394959697989900010203040506
U.S. Policyholder Surplus: 1975-2006
Source: A.M. Best, ISO, Insurance Information Institute.
$ 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 12/31/06 was $487.1B (est.), 14.4% above year-
end 2005, 71% above its 2002 trough and 46% above its 1999
peak.Foreign reinsurance and residual market
mechanisms absorbed 45% of 2005 CAT
losses of $62.1B
Capital Raising by Class Within 15 Months of KRW
Existing Cos., $12.145 , 36%
New Cos., $8.898 , 26%
Sidecars, $6.359 , 19%Insurance Linked
Securities, $6.253 , 19%
Insurers & Reinsurers raised $33.7 billion in the wake of Katrina,
Rita, Wilma
Source: Lane Financial Trade Notes, January 31, 2007.
$ Billions
Annual Catastrophe Bond Transactions Volume, 1997-2006
$966.9
$1,729.8
$4,693.4
$1,991.1
$1,142.8$1,219.5$846.1$984.8
$1,139.0
$633.0
$0$500
$1,000$1,500
$2,000$2,500$3,000
$3,500$4,000
$4,500$5,000
97 98 99 00 01 02 03 04 05 06
Ris
k C
apita
l Iss
ues
($ M
ill)
02
46
81012
1416
1820
Nu
mb
er o
f Iss
uan
ces
Risk Capital Issued Number of Issuances
Source: MMC Securities and Guy Carpenter; Insurance Information Institute.
Catastrophe bond issuance has soared in the wake of Hurricanes
Katrina and the hurricane seasons of 2004/2005
MERGER & ACQUISITION
More Catalysts for Major P/C Consolidation?
P/C Insurance-Related M&A Activity, 1988-2006
$2,4
35
$5,1
00
$19,
118
$40,
032
$1,2
49
$486
$20,
353
$425
$9,2
64
$35,
221
$55,825
$30,
873
$8,0
59
$11,
534
$1,8
82
$3,4
50
$2,7
80
$5,1
37
$5,6
38
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Tran
sact
ion
Val
ue ($
Mill
)
0
20
40
60
80
100
120
140
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
*Announced May 7, 2007.
Source: Conning Research & Consulting.
2006 surge due mostly to 2 deals. No
trend started.
Liberty Mutual acquired Ohio
Casualty for $2.7B*
No model for successful
consolidation has emerged
Life Insurance-Related M&A Activity, 1988-2006
$1,8
88
$4,1
21
$15,
551
$14,
983
$2,7
96
$18,
533
$3,8
17
$21,
865
$5,0
55
$36,101
$32,473
$12,
250
$11,
760
$8,7
94
$6,4
59
$3,4
90
$3,3
67
$3,1
19
$2,7
10
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Tran
sact
ion
Val
ue ($
Mill
)
0
10
20
30
40
50
60
70
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
Source: Conning Research & Consulting.
Distribution Sector: Insurance-Related M&A Activity, 1988-2006
$542
$446
$1,9
34
$7$1,633
$2,7
20
$689
$60 $2
12
$944
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
96 97 99 00 01 02 03 04 05 06
Tran
sact
ion
Val
ue ($
Mill
)
0
50
100
150
200
250
300
Num
ber o
f Tra
nsac
tions
Transaction Values Number of Transactions
Source: Conning Research & Consulting.
No extraordinary trends evident
Distribution Sector M&A Activity, 2005 vs. 2006
Source: Conning Research & Consulting
Title9%Insurer
Buying Distributor
7%
Agency Buying Agency
51%
Other4%
Bank Buying Agency
29%
2005 2006
Title4%
Insurer Buying
Distributor7%
Agency Buying Agency
62%
Other2%
Bank Buying Agency
25%
Number of bank
acquisitions is falling
years
Motivating Factors for Increased P/C Insurer Consolidation in 2007
Motivating Factors for P/C M&As• Slow Growth: Growth is at its lowest levels since the late 1990s
NWP growth is forecast at 1.8% in 2007 and 1.9% in 2008 Prices are falling or flat in most non-coastal markets
• Accumulation of Capital: Excess capital depresses ROEs Policyholder Surplus up 14.4% in 2006 and up 71% since 2002 Insurers hard pressed to maintain earnings momentum Options: Share Buybacks, Boost Dividends, Invest in Operation, Acquire Option B: Engage in destructive price war and destroy capital
• Reserve Adequacy: No longer a drag on earnings Favorable development in recent years offsets pre-2002 adverse develop.
• Favorable Fundamentals/Drop-Off in CAT Activity Underlying claims inflation (frequency and severity trends) are benign Lower CAT activity took some pressure of capital base
Source: Insurance Information Institute.
Limiting Factors for Increased P/C Insurer Consolidation in 2007
Limiting Factors for P/C M&As• Ownership Structure
Mutuals are generally not targets (but can be buyers: Liberty & OCAS) P/C demutualizations are very difficult Inside Ownership: e.g., family involvement or entrenched management could
make deal unwieldy, complex• Size
Larger Insurer = Fewer Buyers• Price
More Expensive Share Price = Fewer Buyers, all else equal (but rising share price for acquiring company can serve as currency for acquisitions)
• Growth Opportunities Better Growth Opportunities = Less Likely Management Will Sell
• Culture Unique/distinct culture makes sale less likely
• Fear Many M&As in the 1990s went badly
Source: Insurance Information Institute; Lehman Borthers.
INVESTMENT IRONY
Markets & Interest Rates Up, Returns Flat
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7$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*Investment 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. Source: ISO; Insurance Information Institute.
Investment gains fell in 2006 and are now only
comparable to gains seen in the late 1990s
CATASTROPHICLOSS
Insurers Accused of Crying Wolf Over Cats
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
$1.2
$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
07Q
1
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 was a welcome respite. 2005 was by far the worst
year ever for insured catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
U.S. Catastrophe Losses 2006: States With Largest Losses ($ Millions)
*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.
Source: ISO; Insurance Information Institute
$601$688
$873$878
$1,500
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Indiana Missouri Tennessee Texas Kansas
SURPRISE!! Indiana led the US with $1.5 billion in
insured CAT losses in 2006
Some 33 catastrophe events* in 34 states cost insurers an estimated $8.8bn in 2006, compared with $61.9bn in 2005. Cat losses in the following five states -- totaling $4.5bn -- represent half the
total catastrophe losses for the year.
Number of Tornadoes,1985 – 2006p
1071 12
16
941
1376
1819
1254 13
33
1132
1133
856
702
65676
5
684
1297
1173
1082 12
34
1173
1148
1424
1345
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
Source: US Dept. of Commerce, Storm Prediction Center, National Weather Service; Ins. Info. Inst.
There are usually more than 1,000 confirmed tornadoes each year in the US. They
accounted for about 25% of catastrophe losses since 1985
$9 $11 $11 $12 $16$25 $27
$38
$88
$108
$0
$20
$40
$60
$80
$100
$120
San Jo
se, C
A (7-1
-191
1; 6.
6)
Portla
nd, O
R (8-1
2-18
77; 6
.3)
San F
rancis
co (6
-1-1
838;
7.2)
Mar
ked T
ree,
AR (1-5
-184
3; 6.
5)
North
ridge
, CA (1
-17-
1994
; 6.7)
Haywar
d, CA (1
0-21
-186
8; 6.
8)
Ft. Tejo
n, CA (1
-9-1
857;
7.9)
Charle
ston, S
C (8-3
-188
6; 7.
3)*
New M
adrid
, MO (2
-7-1
812;
7.7)
*
San F
rancis
co (4
-18-
1906
; 7.9)
$ B
illi
ons
With development along major fault lines, the threat of
$25B+ quakes looms large
Source: AIR Worldwide
(Billions of 2005 Dollars)
3 of the Top 10 are not West Coast events
Insured Losses from Top 10 Earthquakes Adjusted to 2005 Exposure Levels
Percentage of California Homeowners with Earthquake
Insurance, 1994-2004*
32.9%33.2%
19.5%17.4%
14.6%13.3%13.8%12.0%
15.8%15.7%16.8%
0%
5%
10%
15%
20%
25%
30%
35%
94 96 97 98 99 00 01 02 03 04 06**
*Includes CEA policies beginning in 1996. **2006 estimate from Insurance Information Network of CA.Source: California Department of Insurance; Insurance Information Institute.
The vast majority of California homeowners forego earthquake
coverage & play Russian Roulette with their most valuable asset.
$20.0$24.0 $26.0
$33.0 $33.0 $34.0 $35.0$41.0 $42.0
$80.0
$0$10$20$30$40$50$60$70$80$90
Homes
tead
Hurr
(194
5, FL)
Ft. Lau
derdale
Hurr
(194
7, FL)
Donna (
1960
, FL)
Okeech
obee
Hurr
(192
8, F
L)
Galve
ston (
1900
, TX)
Bestsy
(196
5, LA)
LI Exp
ress
(193
8, NY)
Katrin
a (20
05, L
A)*
Andre
w (199
2, FL)*
Mia
mi H
urr (1
926,
FL)
$ B
illi
ons
With rapid coastal development,
$40B+ storms will be more common
Source: AIR Worldwide **ISO/PCS estimate as of June 8, 2006
(Billions of 2005 Dollars) Plurality of worst-case
scenarios involve Florida
Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1986-2005¹
Utility Disruption0.1%
Terrorism7.7%
All Tropical
Cyclones3
47.5%
Tornadoes2
24.5%
Water Damage0.1%
Civil Disorders0.4%
Fire6
2.3%
Wind/Hail/Flood5
2.8%
Earthquakes4
6.7%
Winter Storms7.8%
Source: Insurance Services Office (ISO)..
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 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 $289.1 billion from
1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up
from 27.1% from 1984-2003.
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
Florida & New York lead the way for insured coastal property at more than $1.9 trillion each.
Northeast state insured coastal exposure totals
$3.73 trillion.
New Condo Construction inSouth Miami Beach, 2007-2009
• Number of New Developments: 15
• Number of Individual Units: 2,111
• Avg. Price of Cheapest Unit: $940,333
• Avg. Price of Most Expensive Unit: $6,460,000
• Range: $395,000 - $16,000,000
• Overall Average Price per Unit: $3,700,167*
• Aggregate Property Value: At least $6 Billion*Based on average of high/low value for each of the 15 developments
Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007.
Figure 14.
Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)
63.1%60.9%
57.9%54.2%
37.9%33.6%33.2%
28.0%25.6%25.6%
23.3%13.5%
12.0%11.4%
8.9%5.9%
1.4%
79.3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
FloridaConnecticut
New YorkMaine
MassachusettsLouisiana
New JerseyDelaware
Rhode IslandS. Carolina
TexasNH
MississippiAlabamaVirginia
NCGeorgia
Maryland
Source: AIR Worldwide
After FL, many Northeast states have
among the highest coastal exposure as a share of all insured
exposure in the state.
Value of Insured Residential Coastal Exposure (2004, $ Billions)
$512.1$306.6$302.2
$247.4$205.5
$88.0$65.1$64.5$60.0$60.0
$36.5$29.7$26.6$25.9$24.8$20.9
$5.4
$942.5
$0 $200 $400 $600 $800 $1,000
FloridaNew York
MassachusettsTexas
New JerseyConnecticut
LouisianaS. Carolina
MaineVirginia
North CarolinaAlabamaGeorgia
DelawareRhode Island
NewMississippiMaryland
Source: AIR
Florida has nearly $1 trillion in insured residential exposure and
counting. Nearly 1,000 people move to the state per day!
Historical Hurricane Strikes in Galveston County, TX, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population of Galveston County is 5
times what it was when the hurricane of 1900 struck, killing 8,000
Figure 7.
Historical Hurricane Strikes in Suffolk County, NY, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population in Suffolk County is 4.5 times what it was in the 1940s
Figure 8.
Historical Hurricane Strikes in Barnstable County, MA, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population in Barnstable County
(Cape Cod) is 5 times what it was in the 1950s
Figure 9.
Historical Hurricane Strikes in Dare County, NC, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Population in Dare County is 6 times what
it was in the 1950s
Figure 10.
Source: AIR Worldwide
Insured Losses: $110BEconomic Losses: $200B+
$70
$30
$5 $4 $1$0
$20
$40
$60
$80
NY NJ PA CT Other
Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm
Total Insured Property Losses =
$110B, nearly 3 times that of
Hurricane Katrina
Distribution of Insured Property Losses,
by State, ($ Billions)
1,96
1
1,88
2
1,91
9
2,17
7
2,99
4 4,64
7 6,39
5
1,76
8
2,76
1
2,71
4
3,12
8
3,36
8
6,37
7
10,5
26
3,62
0
12,7
38
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2000 2001 2002 2003 2004 2005 2006 2007*
US* US-All Print Media**
Media Coverage of Flood Insurancein the US Overall, 2000-2007*
US newspaper coverage of flood insurance rose an
estimated 194% between 2003 and 2006 and rose 278%
across all print media
*Newspaper coverage as of May 2, 2007. **Includes newspapers, magazines, wire services, etc.Source: Insurance Information Institute analysis based on Nexis search.
The 2007 Hurricane Season:
Preview to Disaster?
Outlook for 2007 Hurricane Season: 85% Worse Than Average
Average* 2005 2007F
Named Storms 9.6 28 17Named Storm Days 49.1 115.5 85
Hurricanes 5.9 14 9Hurricane Days 24.5 47.5 40Intense Hurricanes 2.3 7 5
Intense Hurricane Days 5 7 11
Accumulated Cyclone Energy 96.2 NA 170
Net Tropical Cyclone Activity 100% 275% 185%*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007
Average* 2007F
Entire US Coast 52% 74%
US East Coast Including Florida Peninsula
31% 50%
Gulf Coast from FL Panhandle to Brownsville, TX
30% 49%
ALSO…Above-Average Major Hurricane
Landfall Risk in Caribbean for 2007
*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
REINSURANCE MARKETS
Big Risk, Big Reward orBig Government?
Announced Katrina, Rita, Wilma Losses by Segment
U.S. Primary, $14.2 , 39%
U.S. Reinsurer, $3.4 , 9%
Other, $0.3 , 1%
Lloyd's, $3.5 , 9%
Bermuda, $10.9 , 29%
Europe, $4.9 , 13%
Catastrophes are global events. Only 39% of
KRW losses were borne by US
primary insurers
*As of 2/21/06Source: Dowling & Partners, RAA.
$ Billions
Share of Losses Paid by Reinsurers, by Disaster*
30%25%
60%
20%
45%
0%
10%
20%
30%
40%
50%
60%
70%
Hurricane Hugo(1989)
Hurricane Andrew(1992)
Sept. 11 TerrorAttack (2001)
2004 HurricaneLosses
2005 HurricaneLosses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly
important role in the financing of mega-CATs; Reins. Costs
are skyrocketing
Ratio of Reinsurer Loss & Underwriting Expense to Premiums Written, 1985-2006
1.1
0
1.0
8
1.1
0
1.0
3
1.0
2
1.0
6 1.1
4
1.1
3
1.1
7
1.0
1 1.0
6
1.2
6
0.9
5
1.3
9
1.2
1
1.0
6
1.0
7
1.0
7
1.0
9 1.1
8
1.0
7 1.0
8
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Lo
ss
& L
AE
Ra
tio
Source: Reinsurance Association of America.
Despite the respite in 2006, reinsurers paid an average of $1.11 in loss and expense
for every $1 in written premium since 1985
US Reinsurer Net Income& ROE, 1985-2006
$1.9
4
$2.0
3
$1.9
5 $3.7
1
$4.5
3
$5.4
3
$1.4
7
$1.9
9
$1.3
1 $3.1
7
$3.4
1
$2.5
1
$9.6
8
($2.98)
$0.1
2
$1.9
5
$1.3
8
$1.2
2
$1.8
7
$1.1
7 $2.5
2
$1.7
9
($4)
($2)
$0
$2
$4
$6
$8
$10
$12
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Net
Inco
me
($ B
ill)
-10%
-5%
0%
5%
10%
15%
20%
RO
E
Net Income ROE
Source: Reinsurance Association of America.
Reinsurer profitability has rebounded
Debate Over Reinsurance Market Performance & Government
• Reinsurance markets typically suffer large shocks, followed by a period of higher prices and transient capacity constraints
• A new equilibrium between Supply and Demand is typically found within 18 months, commensurate with changes in the risk landscape. This is Economics 101 and is a textbook illustration of how capitalism works.
• A competing hypothesis suggests that reinsurance markets “fail” because they do not provide a stable price or quantity of protection as is required in an economy with continuously exposed fixed assets, especially one that is growth oriented
• Public Policy Solution: Acting on this hypothesis generally results in displacement of private (re)insurance capital by government intermediaries
• Question Asked: Are policyholders and the economy better served through free markets, government or some hybrid?
Sources: Insurance Information Institute
FINANCIAL STRENGTH &
RATINGS Industry Has Weathered
the Storms Well
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%
P/C Insurer Impairments,1969-2006
815
127
11 934
913 12
199
16 14 1336
4931
3449 49
5460
5841
2915
1231
18 1949 50
4735
1813 15
0
10
20
30
40
50
60
70
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
The number of impairments varies significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
Source: A.M. Best; Insurance Information Institute
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006
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
Co
mb
ined
Rat
io
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Imp
airm
ent R
ate
Combined Ratio after DivP/C Impairment Frequency
Impairment rates are highly
correlated underwriting performance
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
STATE RESIDUAL MARKETS
How Big is Too Big?
Florida Citizens Exposure to Loss (Billions of Dollars)
Source: PIPSO; Insurance Information Institute
408.8
$210.6$206.7$195.5
$154.6
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2002 2003 2004 2005 2006
Exposure to loss in Florida Citizens nearly doubled in 2006
Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.Source: Insurance Information Institute
-$516
-$1,425
-$1,770
-$954
-$595 *
-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000
-$800-$600-$400-$200
$0
Florida HurricaneCatastrophe Fund
(FHCF) Florida Citizens Louisiana Citizens
Mississippi WindstormUnderwriting
Association (MWUA)
2004 2005
Hurricane Katrina pushed all of the residual market property plans in
affected states into deficits for 2005, following an already record hurricane loss year in 2004
What Role Should the Federal Government
Play in Insuring Against Natural Disaster Risks?
NAIC’s Comprehensive National Catastrophe Plan
• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private
insurance & reinsurance industry Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state catastrophe funds (like FHCF)
• Layer 3: Federal Catastrophe Reinsurance Mechanism
Source: Insurance Information Institute
Comprehensive National Catastrophe Plan Schematic
Personal Disaster Account
Private Insurance
State Regional Catastrophe Fund
National Catastrophe Contract Program
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
State Attachment
1:50 Event
1:500 Event
Legislation has been introduced and ideas
espoused by ProtectingAmerica.org will likely get a more
thorough airing in 2007/8
KEY LINES
Discipline Will Remain (Mostly) Intact in 2007
Private Passenger Auto
101.7101.3101.3101.0
99.5
101.1
103.5
109.5
107.9
104.2
98.4
94.395.1
93.0
90
95
100
105
110
93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Private Passenger Auto Combined Ratio
Average Combined 1993 to 2005= 101.4
Most auto insurers have shown sig-nificant improvements in underwriting
performance since mid-2002
Sources: A.M. Best; III
PPA is the profit juggernaut of the p/c
insurance industry today
9%
17%
13%
15%
12%14%14%
11% 12%12%
10%
8%
2% 2%
4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F
RNW: Private Passenger Auto, United States, 1992-2006E
Source: NAIC; Insurance Information Institute
Private passenger auto profitability deteriorated throughout the 1990s but
has improved dramatically
Segmentation should help profitability
-4%
-2%
0%
2%
4%
6%
8%
10%
00
:Q1
00
:Q2
00
:Q3
00
:Q4
01
:Q1
01
:Q2
01
:Q3
01
:Q4
02
:Q1
02
:Q2
02
:Q3
02
:Q4
03
:Q1
03
:Q2
03
:Q3
03
:Q4
04
:Q1
04
:Q2
04
:Q3
04
:Q4
05
:Q1
05
:Q2
05
:Q3
05
:Q4
06
:Q1
06
:Q2
06
:Q3
06
:Q4
Auto Insurance Component of CPI Personal Auto-PD Pure Premium
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
Pure Premium Spread: Personal Auto PD Liability, 2000-2006:Q4
Margin necessary to maintain PPA
profitability
2000 PPA Combined=110
Inversion of pure premium spread is a warning sign but now in synch
2006 PPA Combined=92E
-2.2%
-5.3%
-4.0%-3.3%
-0.9%
-2.6%
-5.4%
-3.8%
3.0%3.6% 3.8%
3.4%2.8%
4.8%
-0.3%
4.7%
-6%
-4%
-2%
0%
2%
4%
6%
99 00 01 02 03 04 05 06*
Frequency Severity
Bodily Injury: Severity Trend Running Ahead of Frequency
*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.
Medical inflation
is a powerful
cost driver
0.8%
-1.5%
0.3%
-2.0% -2.3% -2.4%-1.6%
-3.3%
3.9%3.3%
2.8%
0.5%
2.2%
3.7%4.3%
6.2%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03 04 05 06*
Frequency Severity
PD Liability: Frequency Trend Roughly Offsets Severity
Fewer accidents, but more damage when they occur:
Higher Deductibles?
*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.
-1.6%
1.1%
-1.1%
0.0%
-0.6%
-7.2%-5.4% -5.1%
3.2%
6.5%
-4.0%
0.5%
4.8%2.4%
6.3%
16.1%
-10%
-5%
0%
5%
10%
15%
20%
99 00 01 02 03 04 05 06*
Frequency Severity
PIP: Frequency Trend Now Offsets Rising Claim Severity
Fraud caused problems from
1999-2001
Is No-Fault living on borrowed time?
*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.
2.6%
-0.4%
1.9%
-3.8%
-5.1%-4.4%
-1.8%
-3.5%
3.7% 3.7%
1.7%
3.8%3.2%3.0%
4.1%
6.8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03 04 05 06*
Frequency Severity
Collision: Frequency Trend Offsetting Rising Claim Severity
*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.
-1.7% -2.6%
3.3%
-5.7%
-2.1%
-8.3%
-3.1%
-9.8%-6.9%
15.1%
-1.2%-4.1%
-2.4%
3.3%
-4.7%
8.9%
-15%
-10%
-5%
0%
5%
10%
15%
20%
99 00 01 02 03 04 05 06*
Frequency Severity
Comprehensive: Favorable Frequency and Severity Trends
*Average of 4 quarters ending with 3rd quarter 2006.Source: ISO Fast Track data.
Weather related claims from Hurricanes Katrina,
Rita & Wilma: 681,900 claims valued $3.29 billion
Private Passenger Auto: Future Shock
• Underwriting acumen is ultimate determinant of success• Innovations in technology, computing power, data retrieval/ storage
and new data/criteria will increase the number and quality of rating factors and lead to increasingly sophisticated underwriting models and a ever expanding number of price points; Integrate with new auto safety features
• Buzz Words: “Predictive Modeling” & “Segmentation”• Impact is to create a rating system that is more accurate and therefore
more fair, equitable to all• Risk is more accurately and reliably mapped to a price across a
broader range of circumstances• Life-cycle approach to underwriting
Can underwriting customer under almost any circumstance Recognizes fact that customer acquisition costs are high and new accounts
perform less well than seasoned accounts• Agents will need to be intimately familiar with new approaches in order
to communicate impact to customer
Homeowners Insurance
117.7
158.4
113.6118.4
112.7
121.7
101.0
108.2111.4
121.7
109.3
98.294.4
100.3
93
113.0109.4
90
100
110
120
130
140
150
160
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Homeowners Insurance Combined Ratio
Average 1990 to 2005= 113.1
Insurers have paid out an average of $1.13 in losses for every dollar earned
in premiums over the past 16 years
Sources: A.M. Best; III
Rates of Return on Net Worth for Homeowners Ins: US
Source: NAIC; 2005/6 figures are Insurance Information Institute estimates.
9.7%
3.6%
16.0%
-7.0%
-1.7%-4.2%
3.6%
12.4%
5.4%2.5%
5.4% 3.8%
1.4%
-7.2%-10%
-5%
0%
5%
10%
15%
20%
93 94 95 96 97 98 99 00 01 02 03 04 05E 06E
Averages: 1993 to 2005E
US HO Insurance = +2.1%
(+3.2% through 2006E)
Legal Liability & Tort Environment
Definitely Improving ButNot Out of the Woods
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0$49.6 $58.7
$95.2
$17.1
$51.0$70.9
$86.7
$5.2
$20.4
$30.0
$49.4
$0
$50
$100
$150
$200
$250
1980 1990 2000 2005
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.3 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Total = $121.0 Billion
Total = $159.6 Billion
Total = $231.3 Billion
Tort System Costs,2000-2008F
$179
$233$246
$270
$295
$260
$261
$261
$205
1.82%2.03%
2.22% 2.22%
2.04%2.09% 2.03%2.05%
2.24%
$100
$120
$140
$160
$180
$200
$220
$240
$260
$280
$300
00 01 02 03 04 05 06E 07F 08F
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
After a period of rapid escalation, tort system costs as % of GDP are now falling
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.
Inflation Adjusted Tort CostsPer Capita, 1950-2005
$96
$199
$340
$444
$780$722
$878 $897 $914 $880
$0$100$200$300$400$500
$600$700$800$900
$1,000
50 60 70 80 90 00 02 03 04 05
Tort costs per capita have
increased 817% since 1950 even
after adjusting for inflation
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
KATRINA TORT UPDATE
Suits Add to Uncertainty, Expense
Likely Market Impacts of Post-Katrina Litigation
• Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market
Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium
• Some Courts’ Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk
Compounded by juries willing to award millions in punitives• People Discouraged from Buying Flood Coverage• BOTTOM LINE: Weather, Courts, Juries Together
Create Nearly Impossible Operating Environment• Coverage Under These Circumstances Will Necessarily
Become More Expensive, Less Available
REGULATORY UPDATE
Busy Year for Insurersin Washington
Federal Legislative UpdateFederal Terrorism Reinsurance (TRIA)• TRIA expires 12/31/07. The current federal program offers $100 billion of
coverage subject to a $27.5B industry aggregate retention.
• New Democratic Congress (with Committee chairs from urban Northeast states) predisposed to extend. Despite resistance/lackluster Administration support TRIA will likely extended for a multi-year period, perhaps 6-8 but potentially as long as 15 years (last extension in 2005 was for 2 years)
• Potential changes include extensions of coverage for domestic terrorism losses
(not included currently), and a lower industry retention for nuclear, biological, chemical, or radiological (NBCR) attacks. There could possibly be a modestly higher industry retention for non-NBCR losses, and it needs to be resolved whether liability and group life losses will be covered.
• Original hope for first-half 2007 extension have faded. Now looking at fall or even 11th-hour extension as in 2005.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
Natural Disaster Coverage• Some insurers are pushing for federal catastrophic risk fund coverage in the
wake of billions of dollars of losses suffered by insurers from the 2004-2005 hurricane seasons.
• Legislative relief addressing property/casualty insurers’ exposure to natural catastrophes, such as the creation of state and federal catastrophe funds, has been advocated by insurers include Allstate and State Farm recently. However, there is active opposition many other insurers and all reinsurers.
• There are supporters in Congress, mostly from CAT-prone states. Skeptics in Congress believe such a plan would be a burden on taxpayers like the NFIP and that the private sector can do a better job. Unlike TRIA, the industry is not unified on this issue.
• Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has not yet indicated much support.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative UpdateOptional Federal Charter (OFC)• Large P&C and life insurers are the major supporters of OFC. Supporters
argue that the current patchwork of 50 state regulators reduces competition, redundant, slows new product introductions and adds cost to the system.
• In general, global P/C insurers , reinsurers and large brokers mostly support the concept, while regulators (state insurance commissioners), small single-state and regional insurers, and independent agency groups largely oppose the idea. An optional federal charter is more favorable for global P&C insurers, because an insurer that operates in multiple states could opt to be regulated under federal rules rather than multiple state regulations. As a result, this could increase innovation in the industry.
• A new bill should be introduced in May or June. Currently appears to be more momentum for OFC for life than for P&C insurers based on the homogeneous nature of many life products. The debate should intensify and although passage may not occur in the current session of Congress, it may lay the groundwork for passage in the 2009-2010 session.
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative UpdateMcCarran-Ferguson Insurance Antitrust Exemption• Under McCarran-Ferguson Act of 1945, insurers have limited immunity under
federal anti-trust laws allowing insurers to pool past claims information to develop accurate (actuarially credible) rates.
• Very low level of understanding of M-F in Washington
• Certain legislators threaten to revoke McCarran-Ferguson because of alleged collusion in the wake of Hurricane Katrina. However, the view among some Washington insiders is that such a move would hurt small insurers with less resources rather than the large insurers perhaps being targeted. The current bills designed to revoke McCarran-Ferguson are S.618 and H.R. 1081.
• The government appointed Antitrust Modernization Commission in an April 2007 report strongly encouraged Congress to re-examine the McCarran-Ferguson Act. Notably, 4 of the commissions 12 members called for a full repeal of the law.
Sources: Lehman Brothers, Insurance Info. Institute
FLORIDA SPECIAL SESSION
LEGISLATIVE CHANGES
Insurer, Policyholder & State Impacts
Why There is Concern Over the Florida Legislature’s & Governor’s Changes
• Risk is Now Almost Entirely Borne Within State• Virtually Nothing Done to Reduce Actual Vulnerability• Creates Likelihood of Very Large Future Assessments• Potentially Crushing Debt Load• State May be Forced to Raise/Levy Taxes to Avoid Credit
Downgrades• Many Policyholder Will See Minimal Price Drop
“Savings” came from canceling recent/planned rate hikes• Residents in Lower-Risk Areas, Drivers, Business
Liability Policyholders Will Come to Resent Subsidies to Coastal Dwellers
• Governor’s Emergency Order for Rate Freezes & Rollbacks Viewed as Unfair & Capricious
Sources: Insurance Information Institute.
Pre- vs. Post-Event in FL for 2007 Hurricane Season
$12.
4
$15.
0
$17.
6
$25.
8
$9.9
$14.
6
$24.
1
$31.
4
$34.
5
$37.
4
$54.
2
$10.9$10.4$10.1$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250
Pre-Event Funding Post-Event Funding (Assessments & Bonds)
Bil
lion
s
Total = $20.0 Billion
Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not includefinancing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
$35.0B
$25.0B
$43.8B $49.5B
$55.0B
$80.0BThere is a very significant likelihood of major, multi-year assessments in 2007
Per Household Savings vs. Long-Term Costs of FL Legislation for
2007 Hurricane Season
$3
,50
3
$4
,41
6
$4
,69
4
$4
,95
6
$7
,85
5
$2
,52
8
$3
,21
9
$3
,49
7
$3
,75
2
$6
,11
6
$265$1,005 $1,486
$1,066$721
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
Savings 1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250
Direct Costs Indirect Costs
Bil
lion
s
Total = $1,726
Notes: Assumes average homeowners insurance premium of $1300 in 2007. Savings for 2007 reflects 24.3% savings on hurricane costs, assumed to be 63% of premium. Savings based on statewide OIR estimate. Actual savings may be less.Direct costs include assessments paid by policyholders on home and personal auto premiums. Indirect costs includeassessments on commercial lines passed on to policyholders via higher prices. Amounts are in nominal dollars, or the totalcost of borrowing including finance charges over the term of the bond. Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
$2,552
$6,031 $7,635
$8,191 $8,708
$13,971
Savings dwarfed by potential costs under
most scenarios
Savings vs. Costs by Region: Neither Equitable nor Proportionate
TALLAHASSEEAverage Savings: $20
Cost of 1-in-30 Storm: $2,000Cost is 100 times avg. savings
TAMPAAverage Savings: $100
Cost of 1-in-30 Storm: $2,300Cost is 23 times avg. savings
ORLANDO
Average Savings: $30
Cost of 1-in-30 Storm: $2,075
Cost is 69 times avg. savings
MIAMI
Average Savings: $1,120
Cost of 1-in-30 Storm: $3,375
Cost is 3 times avg. savings
STATEWIDE AVERAGEAverage Savings: $265
Cost of 1-in-30 Storm: $2,550Cost is 10 times avg. savings
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
22%30% 31%
28%
33% 32%
0%
10%
20%
30%
40%
50%
60%
70%
Coastal Counties Interior Counties Noncoastal States
Very unfair
Somewhat Unfair
Source: Insurance Research Council
Public Attitude Monitor 2006: Unfairness of Policyholder Subsidies
Coastal States
Most non-coastal policyholders believe premium subsidies for coastal property owners are unfair
29% 25% 30%
22% 34% 31%
0%
10%
20%
30%
40%
50%
60%
70%
Coastal Counties Interior Counties Noncoastal States
Very unfair
Somewhat Unfair
Source: Insurance Research Council
Public Attitude Monitor 2006: Unfairness of Taxpayer Subsidies
Most non-coastal dwellers believe taxpayer subsidies for coastal property owners are unfair
Coastal States
Summary• Personal & Commercial lines results were unsustainably good 2006; Overall
profitability reached its highest level (est. 14%) since 1988• Underwriting results were aided by lack of CATs & favorable underlying loss
trends, including tort system improvements• Property cat reinsurance markets peaking & more competitive• Premium growth rates are slowing to their levels since the late 1990s;
Commercial leads decreases• Rising investment returns insufficient to support deep soft market in terms of
price, terms & conditions• Clear need to remain underwriting focused• How/where to deploy/redeploy capital??• Major Challenges:
Slow Growth Environment AheadMaintaining price/underwriting disciplineManaging variability/volatility of results
Insurance Information Institute On-Line
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