Property/Casualty Insurance Industry Overview

1
Property/CasualtyInsurance IndustryOverview
Outlook

• PIWA Annual Convention
• Pearl River, New York
• September 24, 2009

Steven N. Weisbart, Ph.D., CLU, Senior Vice
President Chief Economist Insurance Information
Institute ? 110 William Street ? New York, NY
10038 Office phone [phone] ? Cell
[phone] ? steven_at_iii.org ? www.iii.org
2
Presentation Outline

1. A Glance at the U.S. Economy
2. P/C Industry Financial Performance
3. Catastrophe Loss Management
4. Investments
5. Capital Capacity
6. Q A

3
A Glance atthe U.S. Economy 2009-10
OutlookTime for a Rebound?
4
Total Industrial Production, monthly Mar
2001-July 2009 (Index 2002100)
Index
Recession began December 2007
March 2001-November 2001 recession
Hurricane Katrina
Nearing a bottom?
4
Source http//www.federalreserve.gov/releases/g1
7/ipdisk/ip_sa.txt. seasonally adjusted
5
Near-Term Forecasts for QuarterlyIndustrial
Production A Wide Range
Source Blue Chip Economic Indicators (8/09)
6
Single vs. Multi-Family Housing Starts
The 2007-09 slump was mainly in single-family
housing, but starts of multi-family units finally
began dropping in late 2008 and continued in 2009.
Thousands of Units
2008 single family starts down 40 vs. 2007
Not seasonally adjusted average of first
seven months of 2009, annualizedSource US
Census Bureau at http//www.census.gov/const/newre
sconst.pdf
7
In the Near Term, Millions Fewer Private Housing
Starts
Measured by number of new units started, exposure
growth for HO insurers is low. Housing start data
also affects commercial insurers with
construction risk exposure.
Millions of Units
Housing bubble
Recession
Recession
I.I.I. estimate each 100,000 decline in housing
starts costs home insurers 90 million in gross
premium. Estimated premium loss in 2008 vs.
2005 about 1 billion.
Sources US Department of Commerce Blue Chip
Economic Indicators (8/09) Insurance Information
Inst.
8
Unemployment and UnderemploymentRates Rocketing
Up in 2008-9
January 2000 through July 2009, seasonally
adjusted
Percent
U-6 went from 9.2 in April 2008 to 16.5 in June
2009
9.5 June 2009 unemployment rate (U-3) was the
highest monthly rate since 1983. Peak rate in the
last 30 years 10.8 in Nov-Dec 1982.
Source US Bureau of Labor Statistics Insurance
Information Institute.
9
U.S. Unemployment Rate ForecastsQuarterly,
2009Q3 to 2010Q4
Unemployment is expected to peak in late 2009 or
first quarter of 2010.
Rising unemployment will erode payrolls and
workers comps exposure base.
Sources Blue Chip Economic Indicators (8/09)
Insurance Info. Inst.
10
Real Quarterly GDP Changes (annualized),2005Q3-2
010Q4F
Red bars are actual Yellowbars are
forecasts/estimates
Spike due almost entirely to the weak dollar
(growing exports and slowing imports)

The Q12009 decline was the steepest since the
Q11982 drop of 6.4
Sources US Department of Commerce, Bureau of
Economic Analysis (actual) at http//www.bea.gov/n
ewsreleases/national/gdp/gdpnewsrelease.htm Blue
Chip Economic Indicators 8/09 issue (forecasts).
11
P/C IndustryFinancial Performance 2009 Outlook
is Dim
12
40 Years ofHard and Soft Markets
1975-78
1984-87
2000-03
Shaded areas denote hard market periods
In 2007 net written premiums fell, the first
decline since 1943
Sources A.M. Best, ISO, Insurance Information
Institute
13
Year-to-Year Change in Net Written Premium,
2000-2009
P/C insurers are experiencing their slowest
growth rates since 1943
Soft markets and slow economy gt continued
negative or slow growth
Sources A.M. Best (historical through 2008 ISO
for 2009. first quarter 2009 only
14
P/C Net Income After Taxes1991-2009Q1
Billions
2008 industry profits dropped 96.2 vs. 2007
2009Q1 Sources A.M. Best,
ISO, Insurance Information Inst.
15
P/C Insurance Industry ROEs,1975 2009F
197719.0
198717.3
200612.2
199711.6
10 Years
10 Years
9 Years
2009F 7.4
2008 0.5
1975 2.4
1984 1.8
1992 4.5
2001 -1.2
Note 2008 result excluding Mortgage Financial
Guarantee insurers is 4.2. Sources ISO A.M.
Best (2009F) Insurance Information Institute.
15
16
P/C Insurance Industry Combined Ratio,
2001-2009Q1E
The industrys combined ratio appears to be on a
cyclical upturn dating to 2006. In 2008, even
excluding net CAT losses (which added 3.4 points
to the combined ratio vs. 2007) and MFG losses
(another 4.1 points vs. 2007), the 2008 ratio
would have been 97.6.
Combined Ratio
09Q1 combined ratio was 98.4 excl. MFG vs. 96.8
in 08Q1
Sources A.M. Best, ISO III preliminary
estimates.
17
Underwriting Gain/(Loss)1975-2009Q1
Billions
In the past 34 years, only twice has the p-c
insurance industry earned an underwriting profit
of over 1.7 billion. In contrast, in that span
its had underwriting losses of 20 billion or
more in 14 years.
Sources A.M. Best ISO Insurance Information
Institute
18
Personal, Commercial Lines Combined Ratios
Varied Widely Since 1993
Results benefited from favorable loss cost
trends, improved tort environment, low CAT
losses, WC reforms, and reserve releases
Sources A.M. Best Insurance Information
Institute after dividends to
policyholders .
19
Catastrophe Losses
20
2008 Insured Catastrophe Loss Distribution by
Category
Billions

• 2008 CAT Facts
• The 25.2 billion in insured losses was the 4th
  highest ever, behind only, 2005, 2004 and 2001
• There were 37 designated catastrophes in 2008,
  the highest since 1998 (also 37)
• Commercial losses accounted for 27 of insured
  losses but just 9 of claims

Includes homeowers, condominium and rental
policies. Includes commercial and private
passenger vehicles Source PCS Insurance
Information Institute research.
20
21
Catastrophic Losses Was 2005an Outlier or a
Harbinger?
Billions
Is 25 billion the new level of expected yearly
CAT losses?
Before 2001, CAT losses averaged about 8-10
billion per year.
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
21
22
A Million More Florida Resident Households in the
Next Decade?
Millions of Households
The State of Florida now (Feb 09) forecasts
nearly 1 million more households by 2019 (up
almost 13). There will be more businesses, too.
Hurricane Wilma
Hurricane Andrew
Source http//edr.state.fl.us/conferences/populat
ion/demographic.htm Data are from Feb. 18, 2009
Florida Demographic Estimating conference
23
August Forecast for the 2009 Hurricane Season 10
Named Storms
Average,1950-2000 2005 2009F
Net Tropical Cyclone Activity 100 275 85
Named Storms 9.6 28 10
Hurricanes 5.9 14 4
Intense Hurricanes 2.3 7 2
Source Philip Klotzbach and Dr. William Gray,
Colorado State University, August 4, 2009.
23
24
Major (Category 3, 4, 5) Hurricanes Striking the
US by Decade
Mid-1990s 2030s? AMO Warm Phase
Mid 1920s mid-1960s AMO Warm Phase
Colorado State team forecasts 3 more intense
hurricanes in 2009
Figure for 2000s is extrapolated based on data
for 2000-2008 (7 major storms Charley, Ivan,
Jeanne (2004), Katrina, Rita, Wilma (2005),
Ike (2008)). Sources Tillinghast from National
Hurricane Center http//www.nhc.noaa.gov/pastint.
shtm. I.I.I.
25
Inflation-Adjusted U.S. Insured Catastrophe
Losses By Cause of Loss, 1988-2007¹
1 Catastrophes are all events causing direct
insured losses to property of 25 million or more
in 2007 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.
Source Insurance Services Office (ISO)..
26
Number of Tornadoes in Each Calendar Quarter,
20052009Q2
The first two quarters of 2009 were more typical
of prior years than 2008.
Sources US Dept. of Commerce, Storm Prediction
Center, National Weather Service,at
http//www.spc.noaa.gov/climo/torn/monthlytornstat
s.pdf 2009Q2 is I.I.I. estimate
27
Investments
28
P/C Investment Income as a of Invested Assets
Follows 10-Year U.S. T-Note
Investment yield historically tracks 10-year
Treasury note quite closely
Sources Board of Governors, Federal Reserve
System A.M.Best Insurance Information Institute.
29
P/C Industry Investment Income, 1994-2008
Investment income might moderate further if rates
for new bond investments stay low and/or if
insurers shift to shorter-maturity bonds and more
US government notes.
Investment income CAGR 1994-2007 was just 3.8.
Primarily interest and stock dividends.
Investment income (excluding one-time dividend)
jumped in 2005 as insurers that had accumulated
cash captured rising bond interest rates. Also,
2005 figure includes special one-time dividend of
3.2B. 2009 figure is Q1 actual,
annualized Sources ISO Insurance Information
Institute.
30
P/C Industry Net Realized Capital Gains and
Losses, 1990-2009Q1
Billions
Nearly 9 billion in realized capital gains in
2007, but-19.7 billion in 2008.
Sources A.M. Best, ISO, Insurance Information
Institute.
31
Capital Capacity
32
Policyholder Surplus by Quarter,2006Q4 2009Q1
Decline Since 2007Q3 Peak 2009Q1 -84.7B
(-16.2)
Source ISO
33
U.S. P/C Industry Premiums-to-Surplus Ratio
1985-2009Q1
Premiums are a rough measure of risk accepted
surplus is funds beyond reserves to pay
unexpected losses. The larger surplus is in
relation to premiumsthe lower the ratio of
premiums to surplusthe greater the industrys
capacity to handle the risk it has accepted.
Ratio at year-end
1.031 as of 3/31/09
19980.851the lowest (strongest) PS ratio in
recent history.
Sources A.M. Best, ISO, Insurance Information
Institute.
34
Largest Capital Events asa Percent of Surplus,
1989-present
The financial crisis now ranks as the largest
capital event over the past 20 years
Ratio is for end-of-quarter surplus immediately
prior to event. Date shown is end of quarter
prior to event.
Sources PCS Insurance
Information Institute.
35
Premium-to-Surplus Ratios Before Major Capital
Events
P/C insurance industry was better capitalized
going into the financial crisis than before any
capital event in recent history
Ratio is for end of quarter immediately prior
to event. Date shown is end of quarter prior to
event. Latest available Source PCS Insurance
Information Institute.
36
Historically, Hard Markets Follow When Surplus
Growth is Negative
Sources A.M. Best, ISO, Insurance Information
Institute
37
In 2008, A.M. Best Affirmed or Upgraded 88 of
P/C Insurers
In 2008, despite financial market turmoil, high
cat losses and a soft market, A.M. Best lowered
ratings on just 3.9 of P-C insurers. It placed
another 4.4 under review
Through December 19. Source A.M. Best.
37
38
Reasons for US P/C Insurer Impairments, 1969-2008
Deficient loss reserves and inadequate pricing
are the leading cause of insurer impairments,
underscoring the importance of discipline.
Investment catastrophe losses play a much smaller
role.
Source A.M. Best 1969-2008 Impairment
Review, Special Report, Apr. 6, 2008
39
Summary

• The slumping economy has affected P/C exposure
  growth but this might begin reversing soon
• Combined ratios seem headed up, continuing a
  recent trend
• Likely continued low investment returns are
  probably insufficient to overcome a continued
  soft market
• Clear need to remain underwriting focused
• A growing CAT threat continues
• The industry has had a major capital shock but is
  still in fairly strong shape

40
Insurance Information Institute On-Line
WWW.III.ORG
If you would like a copy of this presentation,
please give me your business card with e-mail
address