2
Economics 2012:
The World Is Changing
2012 Is the First Year Since 2005
Where Economic Perceptions and
Reality in the US Will Be Positive
Potentially Enormous Benefits for
P/C Insurers
3
Economic Outlook for 2012
Economic Growth Will Continue 2012/13, Albeit Modestly and Unevenly
No Double Dip Recession
Economy remains more resilient than most pundits presume
Consumer Confidence Could Ebb, But Won’t Collapse
Consumer Spending/Investment Will Continue to Expand Modestly
Consumer and Business Lending Continue to Expand Modestly
Business Bankruptcies Fall, New Business Formations Grow
Housing Market Remains Weak, but Some Improvement Expected by 2013
Inflation Remains Tame
Runaway inflation highly unlikely but energy spike possible; Fed has things under control
Private Sector Hiring Remains Consistently Positive But Anemic
Unemployment is about 8% by year’s end
Sovereign Debt, Euro Currency/Economy
European Recession in Milder than Commonly Presumed
Soft Landing in China
Threat from Oil Price Shock, Middle East Turmoil Has Subsided
Interest Rates Remain Low by Historical Standards; Fear & Fed Factors
Stock and Bond Market Stability Has Given Way to Fear Trading
Congress & President Agree on Tax Cut Extensions Before Year-End
4
Insurance Industry Predictions for 2012
P/C Insurance Exposures Grow Modestly
Personal and commercial exposure growth is certain in 2012; Strongest since 2004/5
But restoration of destroyed exposure will take until mid-decade
P/C Industry Growth in 2012 Will Be Strongest Since 2004
Growth likely to exceed A.M. Best projection of +3.8% for 2012
No traditional “hard market” emerges in 2012
Underwriting Fundamentals Deteriorate Modestly
Some pressure from claim frequency, in some severity in key lines
Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures
Wage growth is also positive and could modestly accelerate
WC will prove to be tough to fix from an underwriting perspective
Increase in Demand for Commercial Insurance Will Accelerate in 2012
Includes workers comp, property, marine, many liability coverages
Laggards: inland marine, aviation, commercial auto, surety
Personal Lines: Auto leads, homeowners lags (though HO leads in NPW growth due to rates)
Investment Environment Is Remains Relatively Stable
Return of realized capital gains as a profit driver
Interest rates remain low; Some upward pressure if economic strength surprises
5.0%
4.1%
3.9%
3.8%
6%
3.6%
3.2%
3.1%
3.0%
2.9%
2.9%
2.8%
2.7%
2.5%
2.5%
2.5%
2.4%
2.3%
2.3%
2.2%
2.1%
2.1%
1.9%
1.8%
1.8%
4%
1.6%
1.3%
1.1%
0.9%
0.6%
0.4%
2%
0%
-0.7%
-0.7%
-2% Recession began in Dec.
2007. Economic toll of
-4% credit crunch, housing
-4.0% 2012 is expected to see
slump, labor market a slow and choppy
-4.9%
-6% contraction has been acceleration in growth
severe but modest continuing into 2013
08:4Q-6.8%
09:1Q
09:2Q
09:3Q
09:4Q
10:1Q
10:2Q
10:3Q
10:4Q
11:1Q
11:2Q
11:3Q
11:4Q
12:1Q
12:2Q
12:3Q
12:4Q
13:1Q
13:2Q
13:3Q
13:4Q
2000
2001
2002
2003
2004
2005
2006
Growth varied
considerably
across states
but in total was
weak in 2011
with US overall
growth at just
1.7%
TX has been an
economic
growth leader
79.3
77.5
76.4
76.2
80
75.3
75.0
74.5
74.4
74.2
74.3
76
73.6
73.6
73.6
73.2
72.2
71.6
71.5
75
69.9
69.8
68.9
68.2
67.8
67.7
67.5
70
64.1
63.7
60.9
65
59.4
55.7
60
Nov-10
Jun-11
Jul-11
Nov-11
Jun-12
May-10
May-11
May-12
Jan-10
Jan-11
Jan-12
Aug-10
Aug-11
Mar-10
Oct-10
Mar-11
Oct-11
Mar-12
Apr-10
Feb-10
Dec-10
Apr-11
Sep-10
Feb-11
Dec-11
Apr-12
Sep-11
Feb-12
Consumer confidence has been low for years amid high
unemployment, falling home prices and other factors adversely impact
consumers, but improved substantially in late 2011 and early 2012
Source: University of Michigan; Insurance Information Institute 9
Auto/Light Truck Sales, 1999-2022F
New auto/light truck sales fell to
(Millions of Units) the lowest level since the late
1960s. Forecast for 2012-13 is
17.8
17.1
of 17 million units, but a
16.9
16.9
18
16.6
16.5
recovery is underway.
16.1
17
15.5
15.4
15.4
15.1
14.9
16
14.7
14.4
15
13.2
14
12.7
13
11.6
12 Job growth and improved
10.4
11 credit market conditions
will boost auto sales in
10 2012 and beyond
9
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 18-
22F
Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point,
Bolstering the Auto Insurer Growth and the Manufacturing Sector.
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 6/12); Insurance Information Institute. 10
Monthly Change* in Auto Insurance
Prices, 1991–2012*
Cyclical peaks in PP
10% Auto tend to occur
approximately every 10
Pricing peak
years (early 1990s, early occurred in 2010 at
8% 2000s and likely the 5.1%, falling to
early 2010s) 2.8% by Mar. 2012
6%
4%
2%
“Hard” markets
tend to occur The May 2012
during reading of 3.0%
0% recessionary was well below
periods the 3.8% recorded
in May 2011
-2%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
*Percentage change from same month in prior year; through May 2012; seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. 11
New Private Housing Starts, 1990-2022F
New home
2.07
(Millions of Units) starts plunged
1.96
2.1 72% from
1.85
1.80
2005-2009; A
1.71
1.9 net annual
1.64
1.62
1.60
decline of 1.49
1.57
1.7
1.48
1.46
million units,
1.47
1.42
1.38
1.35
lowest since
1.36
1.34
1.32
1.29
1.23
1.20
1.19
in 1959
1.3
1.01
0.91
1.1
0.87
0.73
0.9 Job growth,
improved credit
0.61
The plunge and lack of recovery in
0.59
0.55
market conditions
0.7 homebuilding and in construction in general and demographics
is holding back payroll exposure growth will eventually boost
0.5 home construction
0.3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F 16F17F 18-
22F
Little Exposure Growth Likely for Homeowners Insurers Until at least 2014.
Also Affects Commercial Insurers with Construction Risk Exposure, Surety
Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 6/12); Insurance Information Institute. 12
Construction Employment,
Jan. 2010—May 2012*
(Thousands) Construction employment is
5,650 still below where it was in
Jan. 2010. In a normal
5,593
recovery, construction
5,600 employment would be
5,564
5,563
5,559
5,552
growing robustly
5,549
5,546
5,544
5,529
5,528
5,550
5,520
5,519
5,518
5,516
5,511
5,508
5,507
5,499
5,498
5,498
5,496
5,495
5,495
5,492
5,491
5,489
5,488
5,477
5,500
5,456
5,450
5,400
Jun-10
Jul-10
Jun-11
Jul-11
Nov-10
Nov-11
Jan-10
May-10
Jan-11
May-11
Jan-12
May-12
Aug-10
Aug-11
Oct-10
Oct-11
Apr-10
Apr-11
Apr-12
Mar-10
Mar-11
Mar-12
Feb-10
Dec-10
Dec-11
Sep-10
Feb-11
Sep-11
2/30/2102
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute. 13
Value of Construction Put in Place,
May 2012 vs. May 2011*
Growth (%)
Private: +13.1% Public: -3.9%
30%
18.6%
20%
13.1%
10% 7.0% 7.5%
0%
-3.9% -3.0%
-10%
Private sector
construction activity is up Public sector
-20% construction activity
in both the residential and
nonresidential segments remains depressed
-30%
-29.4%
-40%
Total Total Private Residential-- Non- Total Public Residential- Non-
Construction Construction Private Residential-- Construction Public Residential--
Private Public
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute. 14
Value of Private Construction Put in Place,
by Segment, May 2012 vs. May 2011*
Growth (%) Led by the Power industry, Private sector construction
activity is up by double digits in many segments after
plunging during the “Great Recession”
40% 35.2%
29.4% 27.4%
30% 26.8%
18.6% 17.4%
20% 13.1%
11.1%11.2% 10.4%
10% 7.5% 6.5%
0%
-10% -4.2%
-20% -14.6%
Religious
Lodging
Construction
Amusement &
Office
Transportation
Communication
Educational
Power
Manufacturing
Residential
Commercial
Nonresidential
Total Private
Health Care
Total
Rec.
Private Construction Activity is Up in Most Segments, Including
Residential Construction but Led by Power
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute. 15
Value of Public Construction Put in Place,
by Segment, May 2012 vs. May 2011*
Growth (%) Public sector construction
activity is down by
substantially in many
segments 2.9%
5% 1.5% 1.6%
0%
-5% -0.2% -0.9%
-3.9% -3.0% -3.7%
-4.9% -6.5%
-10% -7.1%
-15% -11.3%
-11.4%
-13.2%
-20%
-25%
-30%
-29.4%
-35%
Construction
Amusement &
Office
Conservation &
Transportation
Educational
Waste Disposal
Highway &
Total Public
Public Safety
Power
Residential
Commercial
Nonresidential
Water Supply
Health Care
Street
Sewage &
Develop.
Total
Rec.
Public Construction Activity is Up Down in Many Segments as State, City
and County Budgets Remain Under Stress
*seasonally adjusted
Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute. 16
Dollar Value* of Manufacturers’
Shipments Monthly, Jan. 1992—May 2012
$ Millions ENERGY INTENSIVE
$500,000
The value of Manufacturing
Shipments in May 2012 was up 32%
to $469B from its May 2009 trough.
May figure is only 3.4% below its
$400,000 previous record high in July 2008.
$300,000
$200,000
01
02
03
04
05
06
07
08
09
10
11
12
92
93
94
95
96
97
98
99
00
n-
n-
n-
n-
n-
n-
n-
n-
n-
n
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession).
Trough in May 2009. Growth from trough to March 2012 was 31%. Manufacturing is an
energy intensive activty and growth leads to gains in many commercial exposures: WC,
Commercial Auto, Marine, Property and Various Liability Coverages
*seasonally adjusted
Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 17
Manufacturing Growth for Selected
Sectors, 2012 vs. 2011*
Growth (%)
Durables: +9.5% Non-Durables: +4.4%
25% 23.5%
Manufacturing of durable
goods has been
20%
especially strong in 2012
15% 12.0%
9.5%
10% 7.5% 7.5% 7.9% 7.8%
6.7% 6.7% 5.9%
4.1% 4.4% 4.2%
5%
1.7%
0%
Non-Durable
Manufacturing
Machinery
Transportation
Durable Mfg.
Petroleum &
Electrical
Chemical
Primary
Products
Products
Products
Plastics &
Fabricated
Metals
Textile
Rubber
Equip.
Wood
Food
Metals
Coal
Equip.
Mfg.
All
78%
76%
66%
Mar 01
Jun 01
Mar 02
Jun 02
Mar 03
Jun 03
Mar 04
Jun 04
Mar 05
Jun 05
Mar 06
Jun 06
Mar 07
Jun 07
Mar 08
Jun 08
Mar 09
Jun 09
Mar 10
Jun 10
Mar 11
Jun 11
Mar 12
Dec 01
Dec 02
Dec 03
Dec 04
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Sep 01
Sep 02
Sep 03
Sep 04
Sep 05
Sep 06
Sep 07
Sep 08
Sep 09
Sep 10
Sep 11
Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 19
19
11,000
11,200
11,400
11,600
11,800
12,000
12,200
12,400
Jan-10 11,458
*Seasonally adjusted
Mar-10 11,470
Apr-10 11,502
May-10 11,536
Jun-10 11,546
Jul-10 11,566
Aug-10 11,549
Sep-10 11,551
Oct-10 11,551
Nov-10 11,560
Dec-10 11,575
Jan-11 11,627
Jan. 2010—Apr. 2012*
Feb-11 11,664
11,690
surprising source of
Mar-11
4.3% since Jan. 2010—a
11,718
strength in the economy
Apr-11
is up by nearly 500,000 or
Manufacturing employment
May-11 11,726
Jun-11 11,738
Manufacturing Employment,
Aug-11 11,771
Sep-11 11,768
Oct-11 11,777
Nov-11 11,780
Dec-11 11,808
Jan-12 11,860
2/30/2102 11,890
Mar-12 11,931
Apr-12 11,947
20
ISM Non-Manufacturing Index
(Values > 50 Indicate Expansion)
January 2010 through June 2012
65
59.7
59.4
60
57.3
57.1
56.8
56.3
56.0
56
54.8
54.6
54.6
54.4
54.1
53.9
53.8
53.7
53.7
53.5
53.5
53.4
53.3
53.0
52.8
52.7
52.6
52.6
52.6
52.6
55
52.1
50.7
50
Optimism among non-
manufacturers was
45 stable in late 2011 and
increased in early 2012
40
Jun-10
Jul-10
Nov-10
Jun-11
Jul-11
Nov-11
Jun-12
May-10
May-11
May-12
Jan-10
Jan-11
Jan-12
Aug-10
Aug-11
Mar-10
Oct-10
Mar-11
Oct-11
Mar-12
Apr-10
Feb-10
Dec-10
Apr-11
Sep-10
Feb-11
Dec-11
Apr-12
Sep-11
Feb-12
Non-manufacturing industries have been expanding and adding
jobs. The question is whether this will continue.
81,235
82,446
1980-82 58.6%
90,000
71,549
71,277
70,643
69,300
1980-87 88.7%
64,853
64,004
63,853
63,235
80,000 1990-91 10.3%
62,436
62,304
60,837
2000-01 13.0%
56,282
54,027
53,549
70,000
52,374
51,959
2006-09 208.9%*
48,125
47,806
44,367
43,694
43,546
60,000
40,099
39,201
38,540
37,884
35,472
35,037
34,317
50,000
28,322
40,000
19,695
30,000 2011 bankruptcies totaled 47,806, down 15.1%
10,998
from 56,282 in 2010—the second consecutive
20,000 year of decline. Business bankruptcies more
than tripled during the financial crisis. Through
10,000 Q1:2012, filings are down 11.1% vs. Q1:2011
0
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:Q1
Significant Exposure Implications for All Commercial Lines as
Business Bankruptcies Begin to Decline
Sources: American Bankruptcy Institute at
http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633;
Insurance Information Institute 22
Private Sector Business Starts,
1993:Q2 – 2011:Q3*
(Thousands) Business Starts
2006: 872,000
2007: 843,000
230
223
2008: 790,000
221
220
220
220
2009: 697,000
218
216
220 2010: 722,000
212
212
212
211
2011: 748,000**
210
210
209
209
209
207
207
206
206
206
206
210
205
205
204
204
204
204
204
203
203
203
202
202
201
201
201
200
200
199
199
198
197
196
196
200
195
194
193
193
192
192
192
192
191
191
191
190
189
188
188
187
187
186
186
186
190
184
183
Business starts were up 3.5% to 561,000 in
180
179
176
180
175
175
the first 9 months of 2011 vs. first 9
174
172
169
months of 2011. 722,000 new business
170
starts were recorded in 2010, up 3.6% from
160 697,000 in 2009, which was the slowest
year for new business starts since 1993
150
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Business Starts Were Down Nearly 20% in the Recession,
Holding Back Most Types of Commercial Insurance Exposure, But
Are Recovering Slowly
* Data through June 30, 2011 are the latest available as of July 10, 2012; Seasonally adjusted. **Annualized based on data through Q3:2011.
Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. 23
NFIB Small Business Optimism Index
26
P/C Insurance Industry ROE by
Presidential Administration, 1950- 2012*
Carter 16.43%
Reagan II 15.10%
G.W. Bush II 9.40%
Nixon 8.93%
Clinton I 8.65%
OVERALL RECORD:
G.H.W. Bush 8.35%
Clinton II 7.98%
1950-2012*
Reagan I 7.68% Democrats 7.67%
Nixon/Ford 6.98% Republicans 7.97%
Truman 6.97%
Obama 6.65% Party of President has
Eisenhower I 5.43%
marginal bearing on
Eisenhower II 5.03%
G.W. Bush I 4.83%
profitability of P/C
Johnson 4.43% insurance industry
Kennedy/Johnson 3.55%
Obama
Carter
Johnson
Kennedy/
Truman
20%
15%
10%
5%
0%
-5%
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12E
*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0%
Source: Insurance Information Institute
Labor Market Trends
(1,000)
(800)
(600)
(400)
(200)
Jan-07 186
Feb-07 79
Mar-07 213
Apr-07 65
May-07 127
Jun-07 42
Jul-07 15
Aug-07 -109
Sep-07 -14
Oct-07 65
Nov-07 97
Dec-07 23
Jan-08 -12
Feb-08 -85
Mar-08 -58
Apr-08 -161
Aug-09 -215
Sep-09 -186
Oct-09 -262
Nov-09 75
Dec-09 -83
Jan-10 16
Feb-10 62
Mar-10 144
Apr-10 229
May-10 51
Jun-10 61
Jul-10 117
Aug-10 143
Sep-10 112
Oct-10 193
Jul-11
Aug-11 52
Sep-11 216
Oct-11 139
Nov-11 178
Private Employers Added 4.48 million Jobs Since Jan. 2010 After
Dec-11 234
Jan-12 277
Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State
and Local Governments Have Shed Hundreds of Thousands of Jobs)
Feb-12 254
were created in June
Mar-12 147
Apr-12 85
84,000 private sector jobs
May-12 105
Jun-12 84
31
Millions
-10
-8
-6
-4
-2
0
2
Dec-07 0.023
Jan-08 0.011
Feb-08 -0.074
Mar-08 -0.132
Apr-08 -0.293
May- -0.546
Jun-08 -0.776
Jul-08 -1.033
Aug-08 -1.380
-1.836
recouped
Sep-08
Oct-08 -2.383
since President
Nov-08 -3.117
Dec-08 -3.784
Jan-10 -8.428
Feb-10 -8.366
Mar-10 -8.222
in December 2009
Apr-10 -7.993
Cumulative job losses
-7.942
peaked at 8.444 million
May-
Jun-10 -7.881
Jul-10 -7.764
Aug-10 -7.621
Cumulative Change in Private
Sep-10 -7.509
Oct-10 -7.316
Nov-10 -7.188
Dec-10 -7.021
Jan-11 -6.902
Feb-11 -6.645
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute Mar-11 -6.384
Apr-11 -6.120
Employment: Dec. 2007—June 2012
May- -6.012
Jun-11 -5.910
Jul-11 -5.735
Aug-11 -5.683
Sep-11 -5.467
Oct-11 -5.328
3.964 million
Nov-11 -5.150
Dec-11 -4.916
-4.639
Private Employers Added 4.48 million Jobs Since Jan. 2010 After
Jan-12
Cumulative job losses
-4.385
as of June 2012 totaled
Feb-12
Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State
and Local Governments Have Shed Hundreds of Thousands of Jobs)
Mar-12 -4.238
Apr-12 -4.153
May- -4.048
Jun-12 -3.964
32
Cumulative Change in Private Sector
Employment: Jan. 2010—June 2012
January 2010 through June 2012* (Millions)
5.0
4.480
4.396
4.291
4.206
Job gains and pay
4.059
4.5
3.805
4.0
increases have added more
3.528
than $600 billion to payrolls
3.294
3.116
3.5
2.977
since Jan. 2010
Millions
2.761
2.709
2.534
3.0
2.432
2.324
2.060
2.5
1.799
1.542
2.0
1.423
1.256
1.5
0.935
1.0
0.502
0.5
Jan-10 0.016
0.0
Nov-10
Nov-11
Jun-10
Jan-11
Jun-11
Jan-12
Jun-12
Jul-10
Jul-11
Feb-10
Mar-10
Apr-10
Aug-10
Sep-10
Dec-10
Feb-11
Mar-11
Apr-11
Aug-11
Sep-11
Dec-11
Feb-12
Mar-12
Apr-12
May-10
Oct-10
May-11
Oct-11
May-12
Private Employers Added 4.48 million Jobs Since Jan. 2010 After
Having Shed 4.66 Million Jobs in 2009 and 3.81 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 33
Cumulative Change in Government
Employment: Jan. 2010—June 2012
January 2010 through June 2012* (Millions)
700 Government at all levels has
shed more than a half
518
500 million jobs since Jan. 2010
even as private employers
259
300
created 4.48 million jobs.
109
86
100
40
0
-8
-221
-230
-300
-267
2012 totaled 536,000
-282
-295
Census hiring
-349
-367
distorted 2010
-413
-427
-446
-454
-500
-475
-483
figures
-486
-488
-487
-491
-519
-536
-700
Nov-10
Nov-11
Jan-10
Jun-10
Jan-11
Jun-11
Jan-12
Jun-12
Jul-10
Jul-11
Feb-10
Mar-10
Apr-10
Aug-10
Sep-10
Dec-10
Feb-11
Mar-11
Apr-11
Aug-11
Sep-11
Dec-11
Feb-12
Mar-12
Apr-12
May-10
Oct-10
May-11
Oct-11
May-12
Governments at All Levels are Under Severe Fiscal Strain As Tax
Receipts Plunged and Pension Obligations Soared During the
Financial Crisis, Causing Them to Reduce Staff
Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute 34
Net Change in Government
Employment: Jan. 2010—June 2012*
(Thousands) State government employment fell by
1.4% since the end of 2009 while
Federal employment is down by 2.1%
0
-200
Local government employment
shrank by 405,000 from Jan.
-300 2010 through June 2012,
accounting for 76% of all
-400 government job losses,
-405 negatively impacting WC
exposures for those cities and
-500 counties that insure privately
-536
-600
Total Local State Federal
*Cumulative change from prior month; Base employment date is Dec. 2009.
Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute 35
Unemployment Rates by State, May 2012:
Highest 25 States*
In May, 18 states had over-the-month
14 unemployment rate increases, 14 states
and the District of Columbia had
decreases, and 18 states had no
11.6
change.
11.0
12
10.8
Unemployment Rate (%)
9.4
9.3
10 9.2
9.1
8.9
8.7
8.6
8.6
8.6
8.5
8.4
8.3
8.2
8.2
8.1
7.9
7.9
7.8
7.8
7.4
7.4
7.4
8
0
NV RI CA NC DC NJ SC GA MS FL IL NY MI OR WA AZ KY CO IN TN CT ID AL ME PA
5.6
5.6
6
5.2
5.1
5.0
4.8
4.6
4.3
3.9
4
TX’s unemployment
3.0
rate in May was 6.9%,
well below 8.2% for
2 the US overall
0
AR MO OH LA AK TX WV DE MD WI NM HI MT KS MA UT MN VA WY IA NH OK VT SD NE ND
Employment
growth in Texas
easily outpaces
the US overall,
favorably
impacting WC
payroll
exposures
Every
industry
group but
Government
has been
posting
growth in TX
10.0%
11.0% unemployment 2012
9.7%
9.6%
9.6%
9.6%
9.6%
eroded payrolls
9.3%
10.0% and workers
9.1%
9.1%
8.9%
comp’s
8.7%
8.3%
exposure base.
8.2%
9.0%
8.1%
8.1%
8.0%
8.0%
7.8%
7.7%
7.6%
Unemployment
8.0% peaked at 10% in
6.9%
late 2009.
7.0%
6.1%
Unemployment forecasts
have been revised slightly
5.4%
unemployment as low as
5.0% 7.9% by Q4 of this year.
4.0%
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
12:Q1
12:Q2
12:Q3
12:Q4
13:Q1
13:Q2
13:Q3
13:Q4
* = actual; = forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/12 edition); Insurance Information Institute. 40
US Unemployment Rate Forecasts
9.0%
$6,500
Pace of payroll
$6,250 growth is
accelerating
$6,000
Recent trough (2009:Q3) Growth rates in 2011/12
was $6.25 trillion, down Q2 over Q1: 0.6%
$5,750 5.3% from prior peak Q3 over Q2: 0.4%
Q4 over Q3: 1.3%
Q1 over Q4: 1.0%
$5,500
05:Q1
05:Q2
05:Q3
05:Q4
06:Q1
06:Q2
06:Q3
06:Q4
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
12: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. 42
Payroll vs. Workers Comp Net Written
Premiums, 1990-2011
Payroll Base* WC NWP
$Billions $Billions
$7,000 Wage & Salary Disbursements $50
WC NPW 12/07-6/09
7/90-3/91 3/01-11/01
$6,000 $45
WC premium +7.9% in
volume dropped
two years before 2011
$5,000 the recession began $40
Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow
Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005
*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2011 is I.I.I. estimate
Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I. 43
POSITIVE LABOR MARKET DEVELOPMENTS
44
Mass Layoff Announcements,
Jan. 2002—Apr. 2012*
3,500
Mass layoff
announcements peaked There were 1,388 may
layoffs announced in
3,000 at more than 3,000 per April 2012. The 1,273
month in Feb. 2009 mass layoffs
announced in Mar. 2012
2,500 was the smallest since
Sept. 2007
2,000
1,500
1,000
500
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
*Percentage change from same month in prior year; seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates);
Insurance Information Institute. 45
Average Weekly Hours of All Private
Workers, Mar. 2006—May 2012
(Hours Worked)
34.8
34.7
34.6
34.5
34.4
34.3
Hours worked
34.2
plunged during
34.1 the recession,
34.0 impacting payroll Hours worked totaled
33.9 exposures 34.4 per week in May,
33.8
still shy of the 34.6
hours typically worked
33.7 before the “Great
33.6 Recession”
33.5
'06 '07 '08 '09 '10 '11 '12
*Seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession
dates); Insurance Information Institute. 46
Average Hourly Wage of All Private
Workers, Mar. 2006—May 2012
(Hourly Wage)
$24.00
$23.00
$22.00
*Seasonally adjusted
Mar-10 11,470
Apr-10 11,502
May-10 11,536
Jun-10 11,546
Jul-10 11,566
Aug-10 11,549
Sep-10 11,551
Oct-10 11,551
Nov-10 11,560
Dec-10 11,575
Jan-11 11,627
11,664
Jan. 2010—May 2012*
Feb-11
Mar-11 11,690
surprising source of
Apr-11 11,718
4.3% since Jan. 2010—a
11,726
Manufacturing employment
May-11
Jun-11 11,738
11,768
Manufacturing Employment,
Jul-11
Sep-11 11,768
Oct-11 11,777
Nov-11 11,780
Dec-11 11,808
Jan-12 11,860
2/30/2102 11,890
Mar-12 11,932
Apr-12 11,941
May-12 11,953
48
Construction Employment,
Jan. 2010—Apr. 2012*
(Thousands) Construction employment is
5,650 still below where it was in
Jan. 2010. In a normal
5,593
recovery, construction
5,600 employment would be
5,564
5,563
5,560
5,559
5,558
5,552
growing robustly
5,546
5,529
5,528
5,550
5,520
5,519
5,518
5,511
5,508
5,507
5,499
5,498
5,498
5,496
5,495
5,495
5,492
5,491
5,489
5,488
5,477
5,500
5,456
5,450
5,400
Jun-10
Jul-10
Jun-11
Jul-11
Nov-10
Nov-11
Jan-10
May-10
Jan-11
May-11
Jan-12
Aug-10
Aug-11
Oct-10
Oct-11
Apr-10
Apr-11
Apr-12
Mar-10
Mar-11
Mar-12
Feb-10
Dec-10
Dec-11
Sep-10
Feb-11
Sep-11
2/30/2102
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute. 49
ADVERSE LONG-TERM
LABOR MARKET DEVELOPMENTS
50
Duration of Unemployment,
May 2011 vs. May 2012
The plight of the long-
term unemployed
(Thousands) remains a serious issue
for the US. Skills -12.8%
May 2011 May 2012
7,000 atrophy over time—
impact on WC claim 6,204
6,000 frequency/severity?
5,411
5,000
1,000
0
Less Than 5 Weeks 5-14 Weeks 15-26 Weeks 27 Weeks +
65
Large numbers of
people are exiting (or
64
not returning to the
labor force
63
62
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
*Defined as the percentage of working age persons in the population who are employed or actively seeking work.
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates);
Insurance Information Institute. 52
Number of “Discouraged Workers,”
Jan. 2002—May 2012
Thousands
1,400
1,300 “Discouraged Workers” are Large numbers of
1,200 people who have searched people are exiting
1,100 for work for so long in vain (or not returning to)
1,000 the labor force
that they actually stop
900 searching and drop out of
800 the labor force
700
600
There were
500 830,000
400 discouraged
300 workers in
May 2012
200
100
0
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
In recent good times, the number of discouraged workers ranged from
200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).
Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.
Sources: Bureau of Labor Statistics; National Bureau of Economic Research (recession dates). 53
P/C Insurance Industry
Financial Overview
$65,777
$80,000 2006 ROE = 12.7% profits were up 29% from
$62,496
2007 ROE = 10.9% 2011:Q1, due primarily to
$70,000 2008 ROE = 0.1%
lower catastrophe losses
2009 ROE = 5.0%
$60,000 2010 ROE = 6.6%
$44,155
2011 ROAS1 = 3.5%
$38,501
$36,819
$50,000 2012:Q1 ROAS1 = 7.2%
$35,204
$30,773
$30,029
$28,672
$40,000
$24,404
$21,865
$20,598
$20,559
$19,316
$19,150
$30,000
$14,178
$10,870
$10,141
$20,000
$5,840
$3,046
$3,043
$10,000
$0
-$10,000 -$6,970
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12:Q1
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for
2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.
Sources: A.M. Best, ISO, Insurance Information Institute
A 100 Combined Ratio Isn’t What It
Once Was: Investment Impact on ROEs
Combined Ratio / ROE A combined ratio of about 100 generates an
ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10,
10% in 2005 and 16% in 1979 18%
110 15.9%
14.3% 106.4
15%
105 12.7% 10.9%
100.6 100.1 100.8 101.0 100.9
99.3 12%
100 97.5 9.6% 97.6
95.7
7.4% 7.6% 8.2% 9%
95 92.7
8.8% 4.4%
90 4.6% 6%
Year Ago
85 2011:Q1 = 102.2, 3%
6.1% ROE
80 0%
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012:Q1
15% 2012:Q
9 Years 8.2%
10%
5%
2011:
0% 4.6%*
11*
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
12:
*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude
mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% including M&FG.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
ROE: Property/Casualty Insurance vs.
Fortune 500, 1987–2012:Q1*
(Percent)
P/C Profitability Is Both by
20%
Cyclicality and Ordinary Volatility Katrina,
Rita, Wilma
15%
10%
Sept. 11
5% Hugo
Lowest CAT 4 Hurricanes
Losses in
Andrew 15 Years
0% Record
Northridge Financial Tornado
Crisis* Losses
-5%
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:Q1
* Excludes Mortgage & Financial Guarantee in 2008 – 2012. 2012 Fortune 500 figure is III estimate.
Sources: ISO, Fortune; Insurance Information Institute. 58
ROE vs. Equity Cost of Capital:
U.S. P/C Insurance:1991-2011*
(Percent)
The P/C Insurance Industry Fell Well
18%
Short of Its Cost of Capital Every Year Since 2008
16%
14%
12%
-3.2 pts
10%
+1.7 pts
-2.4 pts
+2.3 pts
-6.4 pts
-7.3 pts
-9.0 pts
8%
-13.2 pts
6%
4%
The Cost of Capital is
2% US P/C Insurers Missed Their Cost of the Rate of Return
Capital by an Average 6.7 Points from Insurers Need to
0% 1991 to 2002, but on Target or Better Attract and Retain
2003-07, Fell Short in 2008-2010 Capital to the Business
-2%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10* 11*
ROE Cost of Capital
* Return on average surplus in 2008-2011 excluding mortgage and financial guaranty insurers.
Source: The Geneva Association, Insurance Information Institute 59
Profitability Comparison in
Texas and Nearby States
60
RNW All Lines: TX, OK, AR & NM vs.
U.S., 2001-2010
(Percent)
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
01 02 03 04 05 06 07 08 09 10
US All Lines TX All Lines OK All Lines AR All Lines NM All Lines
Sources: NAIC. 61
All Lines: 10-Year Average RNW
2001-2010
7.1% U.S.
6.6% Arkansas
4.9%
Texas
4.0%
Oklahoma
0% 2% 4% 6% 8% 10% 12%
25%
20%
15%
10%
5%
0%
-5%
-10%
01 02 03 04 05 06 07 08 09 10
Sources: NAIC. 63
PP Auto: 10-Year Average RNW
2001-2010
7.6% U.S.
7.4% Arkansas
7.4%
Texas
7.1%
Oklahoma
0% 2% 4% 6% 8% 10% 12%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
01 02 03 04 05 06 07 08 09 10
US HO TX HO OK HO AR HO NM HO
Sources: NAIC. 66
RNW Homeowners: TX, LA, FL, AL, MS
vs. U.S., 2001-2010
(Percent)
100%
50%
0%
-50%
-100%
-150%
-200%
-250% Impact of
Hurricane Katrina
-300%
-350%
-400%
01 02 03 04 05 06 07 08 09 10
US HO TX HO LA HO FL HO AL HO MS HO
2001-2010
5.0% U.S.
0.4% Texas
-4.4%
Arkansas
-8.3%
Oklahoma
Florida and
Virginia were the
top ranked states
in terms
preparedness of
residential
structures against
hurricane damage
Despite catastrophic
losses from Hurricane
Katrina in 2005, MS still
has no statewide building
code, putting it dead last
in the US;
AL and TX rank poorly as
well despite major post-
Andrew storms
Source: Rating the States, Dec. 31, 2011, Insurance Institute for Business and Home Safety; Insurance Information Institute. 69
Top Ten Most Expensive And Least Expensive
States For Homeowners Insurance, 2009
Texas ranked as the most expensive: $1,511, Oklahoma ranked 5th most expensive: $1,123,
Arkansas ranked 14th most expensive: $919, and New Mexico ranked 27th most expensive:
$751.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The
NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data.
Source: © 2011 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly
prohibited without written permission of NAIC. 70
Texas Windstorm Insurance Association (TWIA):
Exposure to Loss (Building & Contents Only) ($ Billions)
$50
$38.3
$40
$30
$23.3
$18.8 $20.8
$20 $16.0
$12.1 $13.2
$10
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Mar
31-
2012
Source: TWIA at 06/05/12, Texas Department of Insurance, Southwestern Insurance Information Services (SIIS)
RNW Comm. Auto: TX, OK, AR & NM vs.
U.S., 2001-2010
(Percent)
20%
15%
10%
5%
0%
-5%
-10%
01 02 03 04 05 06 07 08 09 10
US Comm Auto TX Comm Auto OK Comm Auto
AR Comm Auto NM Comm Auto
Sources: NAIC. 72
Comm. Auto: 10-Year Average RNW
2001-2010
9.2% U.S.
8.1%
Oklahoma
7.6%
Arkansas
6.8%
Texas
0% 5% 10% 15%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
01 02 03 04 05 06 07 08 09 10
US Comm M-P TX Comm M-P OK Comm M-P
AR Comm M-P NM Comm M-P
Sources: NAIC. 74
Comm. M-P: 10-Year Average RNW
2001-2010
8.3% U.S.
7.1% Arkansas
4.3%
Oklahoma
2.2%
Texas
0% 5% 10% 15%
25%
20%
15%
10%
5%
0%
-5%
-10%
01 02 03 04 05 06 07 08 09 10
US WComp TX WComp OK WComp
AR WComp NM WComp
Sources: NAIC. 76
Workers Comp: 10-Year Average RNW
2001-2010
12.2% Arkansas
9.5% Texas
6.1%
U.S.
2.4%
Oklahoma
0% 5% 10% 15%
20%
15%
10%
5%
0%
-5%
-10%
02 03 04 05 06 07 08 09 10 11
US All Lines TX All Lines OK All Lines AR All Lines NM All Lines
79
Return on Net Worth: Pvt. Passenger Auto,
10-Year Average (2001-2010*)
(Percent)
Top 25 States
18
14.5
14.3
14.1
16
13.5
12.4
12.1
11.8
14 11.7
11.6
11.3
RNW PPA
11.2
11.1
11.0
10.8
10.7
10.7
10.5
10.4
10.2
12
9.8
9.7
9.6
9.2
9.1
10
8
6
4
2
0
HI VT ME ID DC NH ND MN SD OH KS NM CT IA RI OR WY VA AZ WI CA UT IN AL AK
*Latest available.
Sources: NAIC. 80
Return on Net Worth: Pvt. Passenger Auto,
10-Year Average (2001-2010*)
(Percent)
Bottom 25 States
Auto insurance
profitability in Texas is
10 below the US average
9.0
8.9
8.8
8.8
8.5
8.4
8.0
7.8
7.7
7.6
7.5
7.4
7.4
7.4
7.4
8
7.1
7.1
7.1
7.0
6.8
5.4
5.3
6
5.1
RNW Auto
4.2
3.4
4
2.7
2
MI-1.2
-2
WA
WV
AR
GA
PA
MA
LA
NV
NJ
IL
FL
NY
NE
US
KY
MS
DE
SC
OK
NC
MD
CO
MO
MT
TX
TN
*Latest avaiiable.
Sources: NAIC 81
Return on Net Worth: All P-C Lines vs.
Homeowners, 1990-2010*
(Percent)
US All Lines US Home Impact of
25%
Hurricane
Average RNW: 1990-2009* Irene
20% All P-C Lines: 7.9%
Homeowners: 3.5%**
15%
10%
5%
0%
Texas
-5% “Mold”
Crisis Katrina, Rita,
Wilma
-10%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
2001-2010
Home insurers in Texas
earned an average annual
return little different from U.S.
zero from 2001 through 2010
5.0%
0.4% Texas
-0.3% Florida
-7.2%
Alabama
-25.4%
Louisiana
-29.2%
Mississippi
(Percent)
Top 25 States
45.5
50
45
40
35
30
RNW HO
22.3
20.6
20.3
19.0
25
19.5
18.6
18.4
18.0
18.1
17.6
16.5
15.4
15.3
20
14.6
14.0
13.1
12.7
12.7
12.5
12.5
12.2
11.2
10.5
15
9.4
10
5
0
HI SC RI AK CT DC NV DE NY UT MA OR NC CA WA NM VT ME PA ID NJ VA WY AZ MD
*Latest available.
Sources: NAIC. 86
Return on Net Worth: Homeowners Insurance,
10-Year Average (2001-2010*)
(Percent)
Bottom 25 States Home insurance
profitability in Texas is
well below the US
15 average and has been
9.2
8.0
8.0
10
6.4 effectively zero over
5.0
4.8
4.5
3.4
3.4
the past decade
1.0
5
0.4
0.9
0
-0.3
-5
-2.6
-3.8
-4.4
RNW HO
-5.9
-10
-7.1
-8.3
-8.6
-7.1
-7.3
-11.1
-7.2
-10.6
-15
-20
-25
-25.4
-30
-29.2
-35
-40
NH CO MT MI US WV KS SD WI IL IA TX FL IN OH AR TN GA KY AL ND OK NE MN MO LA MS
*Latest available.
Sources: NAIC 87
Average Premiums For Home Insurance
By State, 2009* (1)
$1,511
Top 25 States
$1,460
$1,430
$1,600
$1,400 $1,185
$1,123
$1,069
$1,069
$1,035
$1,021
$1,016
$1,200
$991
$987
$970
$922
$919
$919
$893
$892
$881
$880
$879
$853
$849
$848
$1,000
$794
$789
$800
$600
$400
$200
$0
AL
CA (4)
LA
MA
AR
AK
NJ
RI
HI
IL
MS
DE
NY
KS
US
NE
FL (3)
OK
SC
MN
ND
CO
MO
CT
TX (2)
TN
*Latest available.
(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the
policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.
Source: NAIC; Insurance Information Institute.
88
Average Premiums For Home Insurance
By State, 2009* (1)
$787 Bottom 25 States
$779
$757
$751
$751
$740
$734
$727
$725
$800
$717
$717
$711
$703
$694
$671
$651
$645
$645
$642
$613
$610
$552
$544
$544
$542
$600
$485
$400
$200
$0
AZ
VA
WA
WV
IA
GA
PA
WI
WY
NV
MI
VT
KY
ME
IN
ID
MD
NH
NC
SD
OH
DC
OR
NM
MT
UT
(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the
policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.
Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.
Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written
permission of NAIC.
89
Ratio of Avg. Premium for Homeowners
Insurance to Median Family Income, 2009
(Percent) 2.35%
Top 25 States
2.28%
2.16%
2.16%
2.50%
1.78%
1.72%
2.00%
1.57%
1.56%
1.45%
1.42%
1.28%
1.28%
1.27%
1.24%
1.23%
1.21%
1.19%
1.17%
1.16%
1.50%
1.13%
1.13%
1.12%
1.10%
1.09%
1.09%
1.00%
0.50%
0.00%
TX FL MS LA OK AR AL SC KS NM MO TN DC NY RI NE CA US GA KY WV MT MN NC ND
*Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of four
Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance
Commissioners. 90
Ratio of Avg. Premium for Homeowners
Insurance to Median Family Income, 2009
(Percent)
Bottom 25 States
2.00%
1.50%
1.08%
1.05%
1.05%
1.05%
1.03%
1.03%
1.01%
1.00%
0.99%
0.97%
0.97%
0.97%
0.96%
0.93%
0.88%
0.87%
0.86%
0.86%
0.86%
0.86%
0.85%
0.80%
0.79%
0.77%
0.76%
0.71%
1.00%
0.68%
0.50%
0.00%
AZ
VA
WA
AK
MA
PA
IA
WI
NV
WY
NJ
MI
HI
IL
VT
DE
ME
IN
SD
NH
ID
OH
MD
OR
CO
CT
UT
*Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of four
Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance
Commissioners. 91
Ratio of Avg. Expenditure for Pvt. Passenger
Auto Insurance to Median Family Income, 2009
(Percent)
Top 25 States
2.00%
1.66%
1.59%
1.57%
1.37%
1.36%
1.35%
1.35%
1.34%
1.29%
1.28%
1.27%
1.23%
1.22%
1.50%
1.19%
1.11%
1.11%
1.11%
1.11%
1.08%
1.06%
1.05%
1.04%
1.04%
1.03%
1.02%
1.00%
0.50%
0.00%
LA DC FL WV NV NM MS TX MI NY AZ AR DE SC KY RI GA NJ OK AK US UT AL PA TN
*Average auto insurance expenditure as a percentage of the 2009 median income for a family of four
Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance
Commissioners. 92
Ratio of Avg. Expenditure for Pvt. Passenger
Auto Insurance to Median Family Income, 2009
(Percent)
Bottom 25 States
2.00%
1.50%
1.02%
1.01%
0.98%
0.97%
0.97%
0.94%
0.92%
0.92%
0.92%
0.91%
0.91%
0.91%
0.90%
0.89%
0.86%
0.86%
0.85%
0.84%
0.83%
0.83%
0.81%
0.80%
0.78%
0.78%
0.78%
0.72%
1.00%
0.65%
0.50%
0.00%
WA
VA
CA
MA
IA
WI
WY
HI
IL
VT
ME
KS
NE
OR
ID
NC
IN
OH
NH
SD
ND
MD
MN
CO
MO
MT
CT
*Average auto insurance expenditure as a percentage of the 2009 median income for a family of four
Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance
Commissioners. 93
Global Catastrophe Loss
Developments and Trends
$35.9 Billion in Insured Losses in the US Arising from 171 CAT Events
Fifth highest year on record
Represents 51% increase over the $23.8 billion total in 2010
Source: MR NatCatSERVICE 96
Natural Catastrophes Worldwide, 2011
Overview and Comparison with Previous Years
2011 2010 Average of Average Top Year
the last 10 of the last 1981-
years 30 years 2010
2001-2010 1981-2010
Insured losses in
2005
US$ m 105,000 42,000 35,000 19,000
(101,000)
(original values)
Fatalities 2010
27,000 296,000 106,000 69,000
(296,000)
Overall Insured
losses losses
Date Region Event Fatalities US$ m US$ m
Earthquake, 35,000-
March 11 Japan 15,840 210,000
tsunami 40,000
Aug. 1 – Floods,
Thailand 813 40,000 10,000
Nov. 15 landslides
Severe storms/
Apr. 22-28 USA 350 15,000 7,300
tornadoes
2%
44%
16%
13%
66%
<1%
5%
80
60
40
20
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Overall losses (in 2011 values) Insured losses (in 2011 values)
*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.
**Figures do not include federally insured flood losses.
Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research. 102
Worldwide Natural Disasters,
1980 – 2011
Number of Events There were 820
1 200 events in 2011
1 000
800
600
400
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Geophysical events Meteorological events Hydrological events Climatological events
(Earthquake, tsunami, (Storm) (Flood, mass (Extreme temperature,
volcanic eruption) movement) drought, forest fire)
2011
400 Overall Losses: $380 Bill
350 Insured Losses: $105 Bill
300
250
200
150
100
50
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Overall losses (in 2011 values) Insured losses (in 2011 values)
105
Top 14 Most Costly Disasters
in U.S. History
(Insured Losses, 2011 Dollars, $ Billions)
300
200
Number
150
100
37
50 8
51
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Overall losses (in 2011 values) Insured losses (in 2011 values)
$71.7
$80
$70 Record Tornado
Losses Caused
$60 2011 CAT Losses
to Surge
$50
$36.9
$33.9
$32.9
$32.3
$28.5
$40
$25.8
$30
$15.9
$14.0
$14.1
$13.7
$12.3
$11.3
$11.2
$10.7
$10.3
$20
$8.6
$7.8
$7.4
$7.3
$6.0
$4.7
$3.7
$3.4
$10
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
US CAT Losses in 2011 Were the 5th Highest Q1 2012 CAT losses
in US History on An Inflation-Adjusted Basis were up $1.2B or 55%
from $2.2B in Q1 2011
Severe
69 617 46,548 25,813
Thunderstorm
Earthquake 5 1 257 50
Severe
69 617 46,548 25,813
Thunderstorm
Earthquake 5 1 257 50
Wildfire
58 15 1,922 855
(Primarily in TX)
**Includes $700 million in flood losses insured through the National Flood Insurance Program.
Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute.
U.S. Acreage Burned by Wildfires,
1980 – 2011
September: Bastrop
County Complex Fire near
San Antonio destroys over Source: FEMA
1,600 homes, insured loss
of $530 million.
8.8
9
8.1
8.0
8 1960s: 1.04
1970s: 0.85
7 1980s: 1.31
5.9
5.4
6 1990s: 3.39
5.0
2000s: 3.52
4.4
5
2010s: 6.20*
3.6
3.6
3.3
3.3
3.3
4
3.0
2.9
2.8
2.7
2.6
2.3
3
2.1
2.0
2.0
1.8
1.6
1.6
1.6
1.5
1.4
1.3
1.3
2
1.2
1.2
1.1
1.1
1.1
1.0
1.0
0.9
0.8
0.8
0.7
0.7
0.7
0.6
0.5
0.5
0.4
0.4
0.4
0.4
0.4
0.3
1
0.1
0
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
The Catastrophe Loss Component of Private Insurer Losses Has
Increased Sharply in Recent Decades
*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.
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; Insurance Information Institute. 115
U.S. Thunderstorm Loss Trends,
1980 – 2011
Thunderstorm losses in
2011 totaled a record
$25.8 billion
Thunderstorm/
Tornado losses
were 2.5 times
above the 30-
year average
72.1%
Thunderstorms (Incl.
Tornadoes , $25,813
2011’s insured loss
distribution was
unusual with tornado
and thunderstorm
accounting for the
vast majority of loss
.
Source: ISO’s Property Claim Services Unit, Munich Re; Insurance Information Institute. 118
Inflation Adjusted U.S. Catastrophe
Losses by Cause of Loss, 1990–2011:H11
Wind/Hail/Flood (3), $12.7 Fires (4), $9.0
Other (5), $0.6
Geological Events, $18.5 2.4%
4.9% 3.4%0.2%
Terrorism, $24.9
6.6%
99
1953. The average
100 number of declarations shattering 2010’s record 81
per year is 34 from
declarations.
81
1953-2010, though that
75
75
80 few haven’t been
69
recorded since 1995.
65
63
59
56
60
52
50
49
48
48
46
46
45
45
45
44
43
42
38
38
36
40
34
32
32
31
30
29
28
27
25
25
25
24
23
23
22
22
21
20
19
19
19 federal disasters
18
17
17
17
16
16
15
20
13
12
12
were declared
11
11
11
7
7
Declarations
78
80
71
Disaster Declarations
70
65
64
58
60
56
56
53
53
51
51
50
48
48
48
48
47
47
50
45
45
45
42
40
39
40
30
20
10
0
TX CA OK NY FL LA AL KY AR MO IL TN MS IA MN WV KS NE PA OH VA WA ND NC IN
40 Disaster Declarations
37
36
35
Disaster Declarations
34
33
29
30
28
27
26
26
25
24
24
23
22
21
20
17
17
17
15
14
11
10
10
9
9
0
ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC UT RI WY
*Through July 10, 2012. Includes Puerto Rico and the District of Columbia.
Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute. 123
SPRING 2012 TORNADO &
SEVERE STORM OUTBREAK
124
Number of Tornadoes and Related
Deaths, 1990 – 2012*
Tornadoes claimed 553 lives in
2011, the most since 1925
2,000 Number of Tornadoes 600
1,819
1,692
Number of Deaths 553
1,800
500
1,424
1,600
1,376
1,345
1,297
1,282
1,264
Number of Tornadoes
1,234
1,216
1,400
Number of Deaths
1,173
1,173
1,148
1,146
400
1,133
1,132
1,691
1,103
1,098
1,082
1,071
1,200
941
1,000 300
872
800 872 tornadoes have
600
been recorded so far 200
this year*
400
100
200
0 0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*
2012 Tornado Losses Got Off to an Ominous Beginning, but Slowed. First
Half 2011 Insured Losses from Tornadoes and Thunderstorms Topped $21B.
*Through July 4, 2012.
Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html 125
U.S. Tornado Count, 2005-2012*
2012 count is
running well
behind 2011
The June 29
derecho traveled
600 miles in just 10
hours—an average
speed of 60 MPH!
Peak wind gusts
80-100 MPH.
1,894 tornadoes
killed 553 people
in 2011, including
at least 340 on
April 26 mostly in
the Tuscaloosa
area, and 130 in
Joplin on May 22
There were
already 13,177
severe weather
reports through
July 4;
including 874
tornadoes;
5,452 “Large
Hail” reports
and 6,851 high
wind events
There were
29,996 severe
weather reports
in 2011;
including 1,894
tornadoes;
9,417 “Large
Hail” reports
and 18,685 high
wind events
Tornadoes,
1,894 , 6%
Large Hail,
9,417 , 31%
Tornadoes
Wind accounted for just
6% of all Severe
Damage, Weather Reports but
18,685 , 63% more than 550
deaths in 2011, the
most in 75 years
Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 136
TEXAS CATASTROPHE ACTIVITY: 2012 vs. 2011
137
Severe Weather Reports in Texas,
January 1—December 31, 2011
TEXAS
Total Reports = 1,537
Tornadoes = 115 (Red)
Hail Reports = 741 (Green)
Wind Reports = 681 (Blue)
TEXAS
Total Reports = 1,341
Tornadoes = 98 (Red)
Hail Reports = 711 (Green)
Wind Reports = 532 (Blue)
Texas leads
the US with
150
tornadoes
per year, on
average
141
Criteria Necessary for a “Market Turn”:
All Four Criteria Must Be Met
Criteria Status Comments
•Apart from 2011 CAT losses, overall p/c underwriting losses
Sustained
remain modest
Period of
•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at
Large
onset of last hard market); CR= 97.6 in Q1:2012 (ex-M&FG)
Underwriting Early Stage, •Prior-year reserve releases continue to reduce u/w losses,
Losses
Inevitable boost ROEs, though more modestly
•Surplus hit a record $570.7B as of 3/31/12
Material •Fell just 1.6% in 2011 due to CATs
Decline in Entered 2011 •Will likely see new records later in 2012
Surplus/ At Record •Little excess capacity remains in reinsurance markets
Capacity High; Only •Modest growth in demand for insurance is insufficient to
Small Decline absorb much excess capacity
Tight •Much of the global “excess capacity” was eroded by cats
Reinsurance Somewhat in •Higher prices in Asia/Pacific
Market Place •Modestly higher pricing for US risks
Renewed •Commercial lines pricing trends have turned from negative
Underwriting Some Firming to flat and now positive, esp. Property & WC;
& Pricing esp. in •Competition remains intense as many seek to maintain
Discipline Property, WC market share
Sources: Barclays Capital; Insurance Information Institute. 142
1. UNDERWRITING
90
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=106.4
Sources: A.M. Best, ISO. 144
Underwriting Gain (Loss)
1975–2011E*
($ Billions) Underwriting
$35 Cumulative losses in
underwriting deficit 2011 totaled
$25 from 1975 through $36.5B, the
2011 is $479B largest since
$15 2001
$5
-$5
-$15
-$25
-$35
-$45
-$55
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 1011*
104.0
102.4
102.0 101.3
100.0
All Lines Personal Lines Commercial Lines
Predominating Predominating
Source: ISO/PCI; Insurance Information Institute 146
P/C Reserve Development, 1992–2013F
Prior year reserve
$30 releases totaled $8.8 8
Development ($B)
half of 2010, up from 6
$20 $7.1 billion in the
Impact on 15
$15 Combined Ratio first half of 2009 4
11 11
(Points) 9
$10 2
$5 2
$0 0
(0)
-$5 (2) (3) (2) -2
(4) (5) (5)
-$10 (7) (7)
(8) (9)
(10) (10) (10) (11) -4
-$15
(14)
-$20 -6
11E
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
12F
13F
Reserve Releases Remained Strong in 2010 But
Tapered Off in 2011. Releases Are Expected to
Further Diminish in 2012 and 2103
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: Barclays Capital; A.M. Best. 147
Number of Years with Underwriting
Profits by Decade, 1920s–2010s
Number of Years with Underwriting Profits
12
10
10
8
8 7
6
6 5
4
4 3
2
0 0 0
0
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**
Source: A.M. Best, P/C Review/Preview 2012; Insurance Information Institute. *Excluding mortgage and financial guaranty 149
Financial Strength &
Underwriting
60
58
60 tornado in Joplin. They
55
were absorbed by a
50
50
49
49
48
47
50 larger insurer and all
claims were paid.
41
40
36
35
34
34
31
31
29
28
30
21
19
19
19
18
18
20
16
16
16
15
15
14
14
13
13
12
12
12
11
9
10
8
5
0
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
The Number of Impairments Varies Significantly Over the P/C Insurance
Cycle, With Peaks Occurring Well into Hard Markets
Source: A.M. Best Special Report “1969-2011 Impairment Review,” January 23, 2012; Insurance Information Institute. 151
P/C Insurer Impairment Frequency vs.
Combined Ratio, 1969-2011
120 Combined Ratio after Div P/C Impairment Frequency 2.0
1.8
115
1.6
1.4
Impairment Rate
Combined Ratio
110
1.2
105 1.0
0.8
100
0.6
0.4
95
2011 impairment rate was 0.91%, up from 0.67% in 2010; the 0.2
rate is slightly higher than the 0.82% average since 1969
90 0.0
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
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
Source: A.M. Best; Insurance Information Institute 152
Reasons for US P/C Insurer
Impairments, 1969–2010
Historically, Deficient Loss Reserves and Inadequate Pricing Are
By Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.6%
Misc. 4.0%
8.6%
Investment Problems
(Overstatement of Assets) 7.3% Deficient Loss Reserves/
40.3% Inadequate Pricing
7.8%
Affiliate Impairment
7.1%
Catastrophe Losses
7.8%
13.6%
Alleged Fraud
Rapid Growth
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011. 153
Top 10 Lines of Business for US P/C
Impaired Insurers, 2000–2010
Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the
Premium Volume of Impaired Insurers Over the Past Decade
Financial Guaranty
Title
Surety 2.0%
4.4%
Med Mal 4.8%
Workers Comp
6.5% 26.6%
Other Liability
6.9%
Homeowners
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011. 154
Number of Recessions Endured by P/C
Insurers, by Number of Years in Operation
Number of Recessions Since 1860
10 8
5
0
1-50 51-75 76-100 101-125 126-150
Sources: Insurance Information Institute research from National Bureau of Economic Research data. 155
Performance by Segment
156
A.M. Best Commercial Lines Outlook:
Negative (as of January 2012)
Underwriting Margins Pressured
Will recent rate increases hold?
Loss Reserve Redundancies Fade
Historically Low Investment Yields
OFFSETTING FACTORS
Capitalization Still Solid
Emergence of Sophisticated Price Monitoring
and Underwriting Tools
157
Private Passenger Auto Combined
Ratio: 1993–2012P
115
109.5
107.9
110
104.2
103.5
101.7
101.3
101.3
101.3
101.1
101.0
101.0
100.8
100.3
100.2
105 99.5
98.4
98.3
100
95.5
95.1
94.3
95
90
85
80
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E 12F
170 158.4
160
150
140
123.7
121.7
121.7
118.4
117.7
116.8
130
113.6
113.0
112.7
111.4
109.4
109.3
108.2
106.7
120
105.7
105.0
101.0
100.3
110
98.2
95.6
94.4
100
88.9
90
80
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E12F
180
138.8
160
126.5
Loss & LAE Ratio (%)
121.1
118.4
118.4
140
113.7
109.6
106.4
120
99.8
99.0
93.5
89.3
88.2
86.7
86.1
84.9
100
82.5
82.4
82.1
80.5
80.0
78.2
75.0
80
60
40
20
0
TN AL KS MO IA CT NC AR SD WY OH AZ NJ MD PA IL WI GA NE MA IN UT SC OK MN
61.7
61.4
59.3
54.8
60
53.4
52.9
51.7
51.0
48.0
47.9
Loss & LAE Ratio (%)
46.9
45.2
44.2
50
43.6
42.2
38.9
40
30
16.5
20
10
0
CO TX VA NM MS KY MT RI MI VT WV NY AK ND NH DE NV ID ME WA CA DC LA OR FL HI
120 118.8
the worst since 2002
115
112.5 112.3
110.2 110.2 111.1 110.2
109.4 109.5 109.7
110 107.6 107.5
105.4
105 104.1
102.5 102.0
102.0 101.2 101.0
99.5
100
94.8
95
91.2
90
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
12F
11P
*2007-2012 figures exclude mortgage and financial guaranty segments.
Source: A.M. Best; Insurance Information Institute 162
Commercial Auto Combined Ratio:
1993–2012F
125
118.1
116.2
115.9
115.7
120
113.0
112.1
112.0
115
110
102.7
102.6
102.1
105
99.4
98.0
96.8
95.2
100
94.3
92.9
92.4
92.1
95
90
85
80
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F
CMP-Liability CMP-Non-Liability
125.0
122.4
130
121.0
119.8
119.0
117.0
116.8
125
116.2
116.1
115.3
115.0
115.0
113.6
113.1
113.0
120
108.5
108.4
115
105.4
104.9
102.5
102.1
101.9
110
100.7
98.6
105
97.7
97.7
97.3
96.2
95.4
94.2
93.8
100
89.8
89.0
95
83.8
90
85
80
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E* 12F
110.8
109.9
115
107.1
104.3
110
105
100 99.0
95.1
94.2
95
90
85
80
05 06 07 08 09 10 11 12F
105
101.9
100.2
100
95.2
95 92.8 93.2
89.9 89.4
90 88.2
86.2
85 83.8
82.5
80.8
79.5
80 77.3
75
70
99 00 01 02 03 04 05 06 07 08 09 10 11E 12F
Sources: A.M. Best (historical and forecast); Insurance Information Institute. 166
Other & Products Liability Combined
Ratio: 1991–2012F
150
143.6
133.2
132.8
140
125.5
124.4
123.5
122.6
130
114.5
114.4
112.0
112.1
111.8
110.6
110.3
109.8
120
109.1
106.6
105.4
100.0
110
99.0
96.3
95.1
100
90
80
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F
154.7
160 expense for every $1 they restored med mal’s
earned in premiums viability
142.3
150
137.3
136.0
140
130.4
127.9
130
115.7
115.7
115.8
120
110.9
109.2
108.8
108.3
108.0
108.0
107.9
107.5
107.5
107.0
106.7
106.6
106.0
105.9
103.7
102.0
102.0
110
101.2
101.0
100.9
100.8
100.1
99.8
99.5
98.4
96.4
94.8
100
92.7
92.0
91.1
In 2001, med mal
87.0
84.3
90
83.4
insurers paid out $1.55
80.6
for every dollar earned
77.4
80
70
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E 12F
Medical Malpractice All Lines Combined Ratio
Source: AM Best, Insurance Information Institute 168
Workers Compensation Combined
Ratio: 1994–2012F
130
121.7
118.2
125
116.8
116.0
115.3
115.0
120
110.9
110.6
110.0
115 107.0
107.0
104.4
103.6
102.7
110
102.0
101.0
100.0
105
98.4
97.0
100
95
90
85
80
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F
170
Workers Comp Medical Claim Costs
Continue to Rise
Medical Average Medical Cost per Lost-Time Claim
Claim Cost ($000s)
Does smaller pace of
$30 Annual Change 1991–1993: +1.9% increase suggest that small
med-only claims are +2.0%
Annual Change 1994–2001: +8.9% +5.4%
becoming lost-time claims? +5.0%
Annual Change 2002-2009: +6.6%
$25 +6.1%
+6.1%
+9.1%
Cumulative Change = 238% +5.4%
$20 +7.7%
(1991-2010p) +8.8%
$27.7
$27.1
+13.5%
$25.7
$24.5
$23.1
$15 +7.3%
$21.8
+10.6%
$20.0
$18.9
+8.3%
$17.6
$16.2
+10.1%
+7.4% $14.2
$13.3
$10 +9.0%+5.1%
$12.0
$11.1
+6.8%+1.3%-2.1%
$10.1
$9.4
$8.9
$8.2
$8.4
$8.2
$5
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10p
Accident Year
2010p: Preliminary based on data valued as of 12/31/2010
1991-2008: Based on data through 12/31/2008, developed to ultimate
Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
171
Workers Comp Indemnity Claim Costs
Decline in 2010
Average Indemnity Cost per Lost-Time Claim
Indemnity
Claim Cost ($ 000s) Claiming behavior has changed
significantly. Large numbers of lost time,
25 low severity claims have entered the
system—claims that previously were
23 +8.2%+0.8% -3%
medical only, driving down average
indemnity costs per claim. +5.9%
21
+5.6%
19 Annual Change 1991–1993: -1.7% +3.4%
+4.6%+1.6%
17
Annual Change 1994–2001: +7.3% +9.2%+3.1%
Annual Change 2002–2009: +4.1% +10.1%
$23.0
15
$22.8
$22.3
+10.1%
$20.8
$19.9
+9.0%
$18.8
13
$18.2
$17.9
+7.7%
$17.1
$16.6
+5.9%
11 +1.0%-3.1%
-2.8%+4.9%
+1.7% $15.2
$13.8
$12.5
$11.5
9
$10.7
$10.0
$10.1
$9.9
$9.7
$9.4
5
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p
Accident Year
2010p: Preliminary based on data valued as of 12/31/2010
1991–2008: Based on data through 12/31/2008, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies 172
Workers Compensation Premium
Continues Its Sharp Decline
Net Written Premium
$ Billions
50 State Funds ($ B) 46.5
47.8
46.5
44.3
Private Carriers ($ B) 42.3
39.3
40 37.7
34.6 33.8
32.1
31.0 31.3
29.8 30.5 29.1
28.2 28.6
30 26.3 26.9 25.9
25.0
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p
p Preliminary Calendar Year
Source: 1990–2009 Private Carriers, Best's Aggregates & Averages; 2010p, NCCI
1996–2010p 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
Nonfarm Payroll (Wages and Salaries):
Quarterly, 2005–2011:Q4
Billions
Peak was 2008:Q1 Latest (2011:Q4)
$6,750 was $6.71 trillion,
at $6.60 trillion
a new peak
$6,500
$6,250
Pace of payroll
growth is
accelerating
$6,000
Growth rates in 2011
Recent trough (2009:Q3) Q2 over Q1: 0.6%
was $6.25 trillion, down Q3 over Q2: 0.4%
$5,750 5.3% from prior peak Q4 over Q3: 1.0%
$5,500
05:Q1
05:Q2
05:Q3
05:Q4
06:Q1
06:Q2
06:Q3
06:Q4
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
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. 174
Payroll vs. Workers Comp Net Written
Premiums, 1990-2011
Payroll Base* WC NWP
$Billions $Billions
$7,000 Wage & Salary Disbursements $50
WC NPW 12/07-6/09
7/90-3/91 3/01-11/01
$6,000 $45
WC premium
volume dropped
two years before
$5,000 the recession began $40
(Percent
Change) The Q4 2011 WC rate
change was the largest
among all major
10% commercial lines
8% 7.5%
6%
4.1%
4% 2.6%
2%
0%
-2%
-1.6%
-4%
-4.0% -3.7% -3.9% -3.7% -3.4%
-6% -4.6% -4.6%
-5.5% -5.4%
-8%
08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4
40
35 showed growth in workers
30 comp premium volume
23.1
20
Pecent change (%)
1.4
5
0
-5
-3.7
-10
-7.3
-9.3
-10.0
-10.3
-10.9
-10.9
-15
-13.0
-14.7
-15.3
-15.9
-16.9
-20
-17.8
-19.8
-21.4
-21.7
-25
-30
-35
VA
AL
LA
IA
PA
AR
WI
NJ
IL
KS
NY
MS
NE
ID
OK
SD
MD
NC
SC
MN
NM
MT
CT
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute. 178
Direct Premiums Written: Worker’s Comp
Percent Change by State, 2005-2010*
Bottom 25 States
-20
-22.6
-23.7
-24.2
-25.0
-25.2
-25.2
-25.3
-26.8
-30 -26.9
-28.1
-28.3
-28.7
-29.0
-30.1
-32.5
-32.6
-33.8
-34.7
-36.1
-40
States with the poorest
-42.7
-45.4
-50 performing economies also
-50.7
produced the most negative
-51.2
-60 net change in premiums of
-57.7
the past 5 years
-70
AZ
AK
CA
GA
MA
NV
VT
MI
RI
HI
FL
ME
KY
US
DE
IN
NH
OR
DC
MO
CO
UT
TX
TN
*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.
Sources: SNL Financial LC.; Insurance Information Institute. 179
2. SURPLUS/CAPITAL/CAPACITY
180
US Policyholder Surplus:
1975–2011*
($ Billions)
0 10%
8.9%
($10.6) 8.2% ($10.8) 12.3% 5%
6.2% ($32.7)
-50 0%
-5.1% ($49.2) 2008: Financial
($65.4) -1.5% crisis causes
-5%
($76.5) sharp drop in -4.6%
-100 capital
-8.8% ($103.0) 2005: Katrina, Rita, Wilma High cats, u/w -10%
($124.6) produce record CAT losses -12.0% losses push
-150 capital down -15%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Capital Excess (Deficit) Annual Change in Capital
Record Policyholder Surplus (Capital) Resulted in Significant Excess Capital in the P/C
Insurance Sector in 2010. Deteriorating Underwriting Losses, Higher CAT Activity,
More Modest Market Returns Shrank Excess Capital in 2011 by Nearly Half.
Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has
$74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.
Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written 183
M&A Activity in the US P/C Insurance
Industry, 1997-2011*
P/C M&A activity in
$39,507.0
45,000 Value of Deals $ Mill) 100
2011 is up 60% since
40,000 Number of Deals 2008, its highest level 90
87 (in $ terms) since 2008
35,000 80
74
(Value of Deals $ Mill)
69 70
Number of Deals
30,000
$22,029.6
66
56
55 56 60
$18,142.5
25,000 52
$17,346.9
$16,114.4
53
48 50
42 47 51
20,000
$12,130.5
$10,646.5
40
$10,389.9
40
$8,869.7
15,000
$6,974.1
30
$5,552.5
$4,757.7
24
10,000 20
$984.0
$586.3
$418.7
5,000 10
0 0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
$30 $27.4
Paid-in capital for insurance
operations rose by $27.4B
$25 in 2010, the largest on $22.5 Very little
record dating back to 1959 new capital
$20 entered the
industry in
2011
$15
$10
$14.4 $12.3
$5
$6.6 $4.9 $2.2
$3.8 $3.2
$0
2005 2006 2007 2008 2009 2010 2011
In 2010 One Insurer’s Paid-in Capital Rose by $22.5B
as Part of an Investment in a Non-insurance Business
15% 13.8%
12% 10.9%
9.6%
9%
6.9%
6.2%
6%
3.3% 3.8%
3%
0%
6/30/1989 6/30/1992 12/31/93 6/30/01 6/30/04 6/30/05 Financial 3/31/11
Hurricane Hurricane Northridge Sept. 11 Florida Hurricane Crisis as of Tornados &
Hugo Andrew Earthquake Attacks Hurricanes Katrina 3/31/09** Severe
Storms
* Ratio is for end-of-quarter surplus immediately after the event. Date shown is end of quarter prior to event
** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%
Source: PCS; Insurance Information Institute 186
Historically, Hard Markets Follow
When Surplus “Growth” is Negative*
(Percent) Surplus growth was
positive until Q1:2011
30% but is now down slightly
25%
20%
15%
10%
5%
0%
-5% 2008 surplus
plunge did
-10% not lead to a
hard market
-15%
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
2.1
2.0
1.9
1.9
1.9
1.9
1.9
2.0
1.8
1.7
1.7
1.7
1.6
1.6
1.8
1.4
1.4
1.29
1.5
1.6
1.3
1.3
1.17
1.13
1.07
1.1
1.1
0.99
0.95
0.94
0.91
0.86
0.84
0.84
0.9
0.82
0.80
0.76
1.0
72
74
76
78
80
82
84
86
88
90
92
94
96
98
02
04
06
08
10
The Premium-to-Surplus Ratio in 2011:Q4 Implies that P/C Insurers Held
$1 in Surplus Against Each $0.80 Written in Premiums. In 1974, Each $1
of Surplus Backed $2.70 in Premium.
*2011 data are as of 12/31/11.
Sources: Insurance Information Institute calculations from A.M. Best data. 188
3. REINSURANCE MARKET
CONDITIONS
Record Global
Catastrophes Activity is
Pressuring Pricing
189
Reinsurer Share of Recent Significant
Market Losses
Billions of 2011 40% Reinsurance
Dollars share of total
insured loss
$40 $37.5 Reinsurer Share
$35
Primary Insurer Share
$30 $15.0
$25 73%
60%
$20 95%
$13.0 44%
$15 $10.0
$10 $22.5 $8.3
$9.5 $6.0 $5.0
$5 $7.9 $2.2
$3.5 $4.0 $2.8
$0 $0.4
Japan New Zealand Thailand Floods Chile Earthquake Australia
Earthquake/ Earthquake (Feb (Aug - Nov 2011) (Feb. 2010) Cyclone/ Floods
Tsunami (Mar 2011) (Jan-Feb 2011)
2011)
255
250
237 235
230 233
60% 199
200 190 200
195
184 173 184
40%
25%
154
20%
147 152 150
141
15%
133
14%
14%
20% 145
10%
123 111
8%
100 115 3%
105 100
0%
0%
-3%
-3%
-6%
-8%
-9%
-11%
-11%
-12%
50
-13%
-16%
-20%
-18%
-20%
-40% 0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Most excess
reinsurance
capacity was
removed from the
market in 2011, but
there does not
appear to be a
shortage, leading to
modest increases in
2012 reinsurance
renewals except in
areas hit hard by
CATs.
193
Distribution of Direct Premiums Written
by Segment/Line, 2010
15% 2012:Q1
growth
was
10% +3.1%
5%
0%
-5%
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
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute. 195
Direct Premiums Written: All P/C Lines
Percent Change by State, 2005-2010
Top 25 States
North Dakota is the growth
44.8
20
14.2
13.9
12.4
12.3
11.9
15
9.1
8.1
8.1
10
7.1
6.8
5.4
5.2
4.7
3.8
3.7
3.1
3.0
5
1.5
1.2
1.1
0
WA
AL
WV
LA
IA
AR
AK
WI
WY
KS
NE
DE
MS
ID
ND
SD
OK
SC
DC
NC
NM
MT
UT
TX
TN
Sources: SNL Financial LC.; Insurance Information Institute.
196
Direct Premiums Written: All P/C Lines
Percent Change by State, 2005-2010
Bottom 25 States
5
0.7
0.6
-0.1
0.1
0
-0.3
-0.5
-0.8
Pecent change (%)
-1.4
-1.6
-1.7
-2.5
-2.8
-2.9
-3.4
-3.6
-5
-4.1
-4.5
-4.7
-4.8
-5.7
-5.8
US Direct Premiums
-8
-8.2
-8.3
-10 Written declined by States with the poorest
1.6% between 2005
and 2010
performing economies also
produced the most negative
-13.5
-15
-14.2
net change in premiums of
-15.5
the past 5 years
-20
AZ
KY
NY
GA
VA
PA
MA
CA
RI
HI
MI
MO
CO
NJ
FL
IL
VT
CT
US
ME
NV
IN
MD
MN
OR
OH
NH
Sources: SNL Financial LC; Insurance Information Institute.
197
-10%
-5%
10%
15%
20%
0%
5%
2002:Q1 10.2%
2002:Q2 15.1%
2002:Q3 16.8%
2002:Q4 16.7%
2003:Q1 12.5%
2003:Q2 10.1%
2003:Q3 9.7%
2003:Q4 7.8%
2004:Q1 7.2%
2004:Q2 5.6%
2004:Q3 2.9%
2008:Q1 0.5%
2008:Q2 -1.8%
2008:Q3 -0.7%
(vs. the same quarter, prior year) 2008:Q4 -4.4%
2009:Q1 -3.7%
2009:Q2 -5.3%
2009:Q3 -5.2%
2009:Q4 -1.4%
P/C Net Premiums Written: % Change,
2010:Q1 -1.3%
2010:Q2 1.3%
2010:Q3 2.3%
2010:Q4 1.7%
2011:Q1 3.5%
Finally! Back-to-back quarters of net written premium growth
2011:Q2 1.6%
(+2.9%) and commercial
lines predominating cos.
lines predominating cos.
2011:Q3 4.1%
In 2011, growth in personal
2011:Q4 3.8%
198
Growth in Net Written Premium by
Segment, 2011 vs. 2010
Personal lines insurer Commercial lines
growth decelerated as growth improved
auto pricing moderated dramatically as a 7-
(Percent)
even has homeowners year long soft market
insurance rates rose came to an end and an
2010 2011
5% 4.3% improving economy
3.8% bolstered demand
4% 3.3%
2.9%
3% 2.3% 2.4%
2% 1.3%
1%
0%
-1%
-2%
-2.3%
-3%
All Lines Personal Lines Commercial Lines Diversified Insurers
Predominating Predominating
Source: ISO/PCI; Insurance Information Institute 199
Monthly Change* in Auto Insurance
Prices, 1991–2012*
Cyclical peaks in PP
10% Auto tend to occur
approximately every 10
Pricing peak
years (early 1990s, early occurred in 2010 at
8% 2000s and likely the 5.1%, falling to
early 2010s) 2.8% by Mar. 2012
6%
4%
2%
“Hard” markets
tend to occur The Feb. 2012
during reading of 2.7%
0% recessionary was the lowest
periods since July 2008
-2%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
*Percentage change from same month in prior year; through March 2012; seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. 200
Average Commercial Rate Change,
All Lines, (1Q:2004–1Q:2012)
(Percent) Pricing as of Q1:2012 was
positive for only the third
time since 2003. Slightly
9%
stronger gains in Q4.
4.4%
2.7%
0.9%
4%
-0.1%
-0.1%
-1%
-2.7%
-2.9%
-3.0%
-3.2%
-4.6%
-4.9%
-5.1%
-6%
-5.2%
-5.3%
-5.3%
-5.4%
-5.6%
-5.8%
-5.9%
-6.4%
-6.4%
-7.0%
-8.2%
-9.4%
-9.6%
-9.7%
-11%
-11.0%
-11.3%
-11.8%
-12.9%
30th consecutive
-13.3%
-13.5%
-16% quarter of price
declines
KRW Effect
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
Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute 201
Change in Commercial Rate Renewals,
by Account Size: 1999:Q4 to 2012:Q1
Percentage Change (%)
Peak = 2001:Q4 Pricing turned positive in
Q3:2011, the first increase in
+28.5%
nearly 8 years; Q1:2012
renewals were up 4.4%
Pricing Turned
Negative in Early
2004 and
Remained that KRW : No
way for 7 ½ years Lasting
Impact
Trough = 2007:Q3
-13.6%
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. 202
Cumulative Qtrly. Commercial Rate Changes,
by Account Size: 1999:Q4 to 2012:Q1
1999:Q4 = 100
Despite 3 consecutive
quarters of gains
(Q1:2012 = 4.4%), pricing
today is where is was in
early 2001 (pre-9/11)
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute. 203
Change in Commercial Rate Renewals,
by Line: 2012:Q1
Percentage Change (%)
Workers Comp rate
increases are large than
8.0% any other line, followed 7.4%
by Property lines
7.0% 6.5%
6.0%
5.0%
3.8% 4.0% 4.0%
4.0% 3.3% 3.6%
3.1% 3.1%
3.0%
2.0%
2.0%
0.8%
1.0%
0.0%
Construction
General
Umbrella
Surety
Interruption
Commercial
Comml Auto
D&O
EPL
EPL
Liability
Workers
Comp
Property
Bus.
Major Commercial Lines Renewed Uniformly Upward in
Q1:2012 for Only the Third Time Since 2003; Property Lines &
Workers Comp Leading the Way
Source: Council of Insurance Agents and Brokers; Insurance Information Institute. 204
Workers Comp Rate Changes,
2008:Q4 – 2012:Q1
6%
4.1%
4% 2.6%
2%
0%
-2%
-1.6%
-4%
-4.0% -3.7% -3.9% -3.7% -3.4%
-6% -4.6% -4.6%
-5.5% -5.4%
-8%
08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1
$300 -20%
2007 2008 2009 2010 2011:H1
Reinsurer Capital Change
$13.91
Commercial Lines Combined Ratio
120 118.8
$13.50
$13.15
10.25
$12
$11.94
115
$11.55
112.5 112.3 $10
$10.68
$10.35
110.2 110.2 111.1 110.2
$10.02
109.4 109.5 109.7
110 107.6 107.5 $8
$8.42
$8.30
105.4
$7.70
104.1 104.1
105
$7.30
102.5 $6
$6.49
$6.40
102.0 101.2
$6.10
$5.71
$5.70
$5.25
98.9
$5.20
100 $4
$4.83
95 93.7
$2
91.2
90 $0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*
*Insurance Information Institute estimates for 2011.
Source: 2011 RIMS Benchmark Survey; A.M. Best; Insurance Information Institute 207
How the Risk Dollar is Spent (2011)
Liability Liability
Liability Retained Total Mgmt.
Premiums, Premiums, Liab., 6%
Retained 21% Losses, 12%
Liability 10%
Property
Losses, 3% Retained
Losses, 13%
Retained
Property
WC
Losses, 8%
Premiums,
6%
Property
Premiums,
21% Property
Premiums,
13%
Total Mgmt.
Total Prof. Liab., 5% Total Prof.
Liability WC Retained
Liability WC Retained
WC Costs, 3% Losses, 21%
Costs, 8% Losses, 9%
Premiums,
8%
Source: 2011 RIMS Benchmark Survey, Advisen; Insurance Information Institute 208
Claim Trends in
Auto Insurance
Frequency and Severity Trends
Are Mixed But On Net Have
Deteriorated
209
US Bodily Injury: Severity Trend Rising,
Frequency Decline Has Ended
Annual Change, 2005 through 2011
Severity Frequency
8%
5.7% 5.9%
6% 4.7%
4% 2.9% 3.1% 2.7%
2.1%
2% 1.1%
0.0%
0%
-2%
-2.2%
-4%
-3.8% -4.0% -4.2%
-6% -5.4%
2005 2006 2007 2008 2009 2010 2011
Severity Frequency
4% 3.6%
2.9%
3% 2.3%
2.0% 2.0%
2%
0.9%
1% 0.6% 0.4%
0.0% 0.0%
0%
-1% -0.3%
-2% -1.6%
-3%
-4% -3.5% -3.4%
2005 2006 2007 2008 2009 2010 2011
Severity Frequency
8% 6.5%
6.4% 6.2%
6% 5.3% 5.3%5.0%
4.7% 4.2%
4%
2.4%
2%
0%
-2%
-4% -3.4%
-4.1%
-6% -4.8%
-5.7%
-6.4%
-8%
2005 2006 2007 2008 2009 2010 2011
Severity Frequency
5%
3.9%
4%
3.1% 2.8%
3% 2.5%
2%
1.1%
1% 0.5%
0.1%
0%
-0.1%
-0.4%
-1%
-2% -1.6%
-1.8%
-3% -2.4% -2.3%
-4% -3.6%
2005 2006 2007 2008 2009 2010 2011*
10%
5.8% 6.1%
5% 1.8% 1.8%
0%
-1.4% -1.5%
-5% -3.1%
-6.3% -6.0%
-10% -8.2%
-9.8%
-15%
2005 2006 2007 2008 2009 2010 2011
$40,000 $36,710
$35,000
$30,000 +46.4%
$24,385
$25,000
$17,766
+34.5% +42.0% +36.5%
$20,000
$15,000 $12,136
$9,478
$10,000 $7,897 $6,674 $7,094
$5,871 $5,198
$5,000
$0
Michigan New Jersey New York Florida Minnesota
2004 2011
The no-fault systems in MI, NJ, NY, FL, and MN are under stress due to
rising fraud and abuse, which leads to higher premiums for honest drivers.
Sources: Insurance Information Institute research from ISO/PCI Fast Track data. 215
Distribution Trends
216
All P/C Lines Distribution Channels,
Direct vs. Independent Agents
70%
60%
50%
40%
30%
Independent agents steadily lost market share
from the early 1980s through the early 2000s
across all P/C lines, but have gained or held
20% generally steady in recent years. Direct channels
include exclusive agency companies, direct
10% marketers and direct sales (e.g., internet)
0%
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
Direct Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best. 217
Personal Lines Distribution Channels,
Direct vs. Independent Agents
80%
70%
60%
50%
40%
30%
Independent agents have lost significant personal
20%
lines market share since the early 1970s.
Although the trend has slowed, it may be
10%
accelerating again.
0%
72 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
Direct Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best. 218
Commercial P/C Distribution Channels,
Direct vs. Independent Agents
90%
80%
70%
60%
Independent agents have seen only modest
50% erosion in commercial lines market share
in recent decades
40%
30%
20%
10%
0%
72 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
Direct Independent Agents
Source: Insurance Information Institute; based on data from Conning and A.M. Best. 219
Other Cycle-Influencing
Factors
Investment Performance is a
Key Driver of Profitability
Does It Influence
Underwriting or Cyclicality?
221
Insurers Have Not Yet Fully Adapted to a
Persistently Low Interest Rate Environment
No Expectation that Rates Would Be:
Pushed to Such Low Levels
Pushed Down so Rapidly
Held to Such Low Levels for So Long
Suppressed via Unprecedented Aggressiveness
of the Federal Reserve
– Use of traditional and unconventional tools (QE)
– Unconventional ’s policies couldn’t be anticipated,
esp. QE1, 2 (3?)
Competitive PressureProtracted Soft Market
Ability to Release Prior Reserves Eases Urgency
Realization of Capital Gains
222
Property/Casualty Insurance Industry
Investment Income: 2000–2012F1
($ Billions)
$60
$54.6
$52.3
$51.2
$49.5 $49.0
$50 $47.6
$47.1 $46.6
$38.9 $39.6
$40 $38.7 Investment earnings in
$37.1 $36.7
2011 were 10.3% below
their 2007 pre-crisis peak
$30
00 01 02 03 04 05 06 07 08 09 10 11 12F
$18.02
from 2008-2011
$16.21
$13.02
$10.81
$20
$9.89
$9.82
$9.70
$9.24
$9.13
$8.92
$7.19
$15
$6.63
$6.61
$6.00
$5.85
$4.81
$3.52
$2.88
$10 $1.66
$0.69
$5
$0
-$1.21
-$5
-$10
-$7.90
-$15
-$20
-$19.81
-$25
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112:Q1
Insurers Posted Net Realized Capital Gains in 2010 and 2011 After Following
Two Years of Realized Losses During the Financial Crisis. Realized Capital
Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE
Sources: A.M. Best, ISO, Insurance Information Institute. 225
U.S. 10-Year Treasury Note Yields:
A Long Downward Trend, 1990–2012*
9%
8%
Yields on 10-Year U.S.
Treasury Notes have
7% been essentially below
4% since January 2008.
6%
5%
4%
3%
Yields on 10-Year U.S. Treasury
Notes have been essentially
2% below 5% for nearly a decade.
1%
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations,
most P/C insurer portfolios will have low-yielding bonds for years to come.
*Monthly, through May 25, 2012. Note: Recessions indicated by gray shaded columns.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.
National Bureau of Economic Research (recession dates); Insurance Information Institutes. 226
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. Mar. 2012
6%
5.19%
4.96% 5.04% 4.96% 5.00% 4.93% 5.00%
4.82% 4.82% 4.82% 4.88%
5%
s to ty *
ine u al to p s re nes ce*
L A i u o a u i n
nal ss rop erc l A Pr C y/S nty s
L al ura
o a P m m it m m i t a lu M
rs tP rs d
de
l
ar
r rp ed ns
e v e om om re om om i u C ei
P P P C C C C C F W S M W R
0%
-1%
-2%
-1.8%
-1.8%
-1.9%
-2.0%
-2.1%
-3%
-3.1%
-3.3%
-3.3%
-4%
-3.6%
-3.7%
-4.3%
-5%
-5.2%
-6%
-5.7%
-7%
-8% -7.3%
229
Over the Last Three Decades, Total Tort Costs as a
% of GDP Appear Somewhat Cyclical, 1980-2013E
($ Billions)
2.21% of
$250 GDP in 2003
= pre-tort
2.25%
$200
Horizon Spike
in 2010
$150 2.00%
$100
1.75%
Tort costs in dollar terms have
$50 remained high but relatively stable 1.68% of
since the mid-2000s., but are down GDP in
substantially as a share of GDP 2013
$0 1.50%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A 230
Commercial Lines Tort Costs: Insured
vs. Self-(Un)Insured Shares, 1973-2010
2005: $143.5B
Billions of Dollars 66.4% insured,
33.6% self-
(un)insured
$160 Self (Un) Insured Share
$15.0 1995: $83.6B
$140 Insurer Share 69.5% insured,
30.5% self-
$120 1973: 1985: $46.6B (un)insured
Commercial 74.5% insured,
$100 Tort Costs 25.5% self-
Totaled $9.5(un)insured $6.0
$80 $6.49B, 94%
was insured,
$60 6% self- 2009: $126.5B
$40 (un)insured 64.4% insured,
35.6% self-
$20 (un)insured
$0
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
Tort Costs and the Share Retained by Risks Both Grew Rapidly from
the mid-1970s to mid-2000s, When Tort Costs Began to Fall But Self-
Insurance Shares Continued to Rise
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 231
Commercial Lines Tort Costs: Insured
vs. Self-(Un)Insured Shares, 1973-2010
Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.
233
The Nation’s Judicial Hellholes: 2011
Illinois
Watch List Madison , St. Clair West Virginia Philadelphia
and McLean
Eastern District of counties
Texas
Cook County, IL
Southern NJ
Franklin County, AL
Smith County, MS California
Louisiana
Dishonorable
Mention New York
Albany and
MI Supreme Court NYC
AK Supreme Court
MO Supreme Court
Nevada
Clark County
South Florida
Source: American Tort Reform Association; Insurance Information Institute 234
Inflation
235
Annual Inflation Rates, (CPI-U, %),
1990–2017F
Annual Inflation peaked at 5.6% in August 2008 Higher energy,
Inflation on high energy and commodity crisis. commodity and food
Rates (%) The recession and the collapse of the prices pushed up
commodity bubble reduced inflationary inflation in 2011, but
6.0 not longer turn
5.1 pressures in 2009/10 inflationary
4.9
5.0 expectations.
3.8 3.8
4.0
3.2 3.3 3.4 3.2
3.0 2.9 2.8 3.0
2.8
3.0 2.4 2.6 2.5 2.4 2.4 2.4 2.4 2.5
2.3 2.2
1.9
2.0 1.5 1.6
1.3
1.0
0.0
-0.4
-1.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F
The slack in the U.S. economy suggests that inflationary pressures should
remain subdued for an extended period of times. Energy, health care and
commodity prices, plus U.S. debt burden, remain longer-run concerns
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 5/12 (forecasts). 236
P/C Personal Insurance Claim Cost Drivers
Grow Faster Than the Core CPI Suggests
Price Level Change: 2011 vs. 2010
8%
7.1%
6.8%
6% Excludes
Food and
Energy
5.1% 5.0%
4% 4.2%
0%
Overall CPI "Core" CPI Inpatient Outpatient Prescription Medical Care Legal Motor Vehicle Residential
Hospital Hospital Drugs Commodities Services Parts & Maint. &
Services Services Equipment Repair
Healthcare costs are a major liability, med pay, and PIP claim cost driver.
They are likely to grow faster than the CPI for the next few years, at least
Sources: Bureau of Labor Statistics; Insurance Information Institute. 237
P/C Commercial Property Insurance Claim Cost
Drivers Grow Faster than the Overall CPI Suggests
Price Level Change: 2011 vs. 2010
9%
9.0%
7.1%
Excludes
6% Food and
Energy
5.4%
3% 3.6%
3.2%
1.7%
0%
Overall CPI "Core" CPI Inputs to Non-residential Asphalt Paving & Plumbing Fixtures &
Construction maintenance & Roofing Materials Fittings
Industries repair
Copper prices spiked and retreated in 2011. In July its price was 33% higher
than a year earlier; by November it cost 8% less than in November 2010.
Sources: Bureau of Labor Statistics; Insurance Information Institute. 238
Medical Cost Inflation Has Outpaced
Overall Inflation For Over 50 Years
1500
A claim that cost $1,000 in 1961
Index Value (1961=100)
600
300
0
61
66
71
76
81
86
91
96
01
06
11
Source: Department of Labor (Bureau of Labor Statistics)
239
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
Twitter: twitter.com/bob_hartwig
Download at www.iii.org/presentations
240