Insurance Industry Trends, Forecasts & Financials
An Industry at the Crossroads
New York Insurance Association Annual Meeting Lake George, NY May 31, 2007
Download at www.iii.org/industry/outlooks/newyork
Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ bobh@iii.org ♦ www.iii.org
Presentation Outline
• P/C Profit Overview—2006, A Cyclical Peak
Focus on New York State
• • • • • • • • • • • •
Underwriting Trends: Unsustainable? Premium Growth: Approaching a Standstill Pricing: Competitive Pressures Mounting Expenses: Will Ratios Rise a Growth Slows? Capital & Capacity: Underleveraged ROE Pressure Catastrophe Loss Management
What is the Appropriate Role for Government?
Reinsurance Summary Financial Strength & Ratings Investments: Less Bang for the Buck Tort System: Great News for a Change (Mostly) Legislative & Regulatory Update Q&A
P/C PROFIT:
An Historical Perspective
Profits in 2006 Reached Their Cyclical Peak
P/C Net Income After Taxes 1991-2006 ($ Millions)*
$70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $14,178 $10,000 $0 -$10,000 91 92 93 94 95 96 97 98 99 00
*ROE figures are GAAP; 1Return on avg. Surplus. Sources: A.M. Best, ISO, Insurance Information Inst.
2001 ROE = -1.2% 2002 ROE = 2.2% 2003 ROE = 8.9% 2004 ROE = 9.4% 2005 ROE= 10.5% 2006 ROAS1 = 14.0%
Though up in 2006, insurer profits are highly volatile (2001 was the industry’s worst year ever). ROEs generally fall below that of most other industries.
$36,819 $30,773 $30,029
$63,695
$44,155 $38,501
$19,316
$24,404 $20,598
$21,865 $20,559
$10,870 $3,046
$5,840
01
02
03
04
05
06
-$6,970
ROE: P/C vs. All Industries 1987–2008E
20%
P/C profitability is cyclical, volatile and vulnerable
15%
10%
Sept. 11
5%
Hugo
0%
Lowest CAT losses in 15 years Northridge
91 92 93 94 95 96 97 98 99 00 01 02 03
Katrina, Rita, Wilma
Andrew
-5% 87 88 89 90
4 Hurricanes
07F 08F 04 05 06
US P/C Insurers
*2007-08 P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; Fortune
All US Industries
RETURN ON EQUITY (Fortune): Stock & Mutual vs. All Companies*
Stock 14.6% 14.9% 15% 14.0% 16% 14% Mutual 13.4% 13.0% 13% 15.0% 14% All Cos.* 13% 12% 10.4% 13% 13.9% 12% 10.0% 11% 12% 12.6% 10% 11% 11% 10% 10% 9% 8% 8% 7% 8% 6% 7% 6% 4% Mutual insurer ROEs are 2% 2% typically lower than for stock 0% companies, but gap has -2% -2% narrowed. All are cyclical. -4%
1998
*Fortune 1,000 group.
2000
2001
2002
2003
2004
2005
2006E 2007F 2008F
Source: Fortune Magazine, Insurance Information Institute.
Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F
25%
1977:19.0%
20% 15% 10% 5% 0%
10 Years
1987:17.3% 1997:11.6%
10 Y ears
2006:14.0%
s 9 Year
1975: 2.4%
-5%
1984: 1.8%
1992: 4.5%
2001: -1.2%
*2007-08 P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; ISO, A.M. Best.
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 07F 08F
ROE vs. Equity Cost of Capital: US P/C Insurance:1991-2007E
18% 16% 14%
+3.0 pts -9.0 pts -13.2 pts
The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years
+2.0 pts
12% 10%
+0.2 pts
8% 6% 4% 2% 0% -2% -4%
US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better 2003-07
91 92 93 94 95 96 97 98 99 00 01 02 03
The cost of capital is the rate of return insurers need to attract and retain capital to the business
04 05 06 07E
Source: The Geneva Association, Ins. Information Inst.
ROE
Cost of Capital
+1.0 pts
Insurance & Reinsurance Stocks: Strong Finish in 2006
Total Returns for 2006
13.62% 16.24% 19.95% 16.57% 10.33% 9.53% 0.61%
Broker stocks held back by weak earnings P/C insurer & reinsurer stocks rallied in late 2006 as hurricane fears dissipated and insurers turned in strong results
S&P 500 Life/Health Reinsurers P/C All Insurers Multiine Brokers
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Insurance & Reinsurance Stocks: Slow Start in 2007 in P/C, Reins
Total YTD Returns Through May 25, 2007
6.87% 12.15% 1.77% 1.18%
P/C insurance, reinsurance stocks lagging on soft market concerns and worries over 2007 hurricane season
S&P 500 Life/Health Reinsurers P/C All Insurers Multiline
5.78% 5.43% 11.07%
Brokers
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Top Industries by ROE: P/C Insurers Still Underperformed in 2006*
Oil & Gas Equip., Services Petroleum Refining Metals Food Services Household & Pers. Products Pharmaceuticals Industrial & Farm Equipment Mining & Crude Oil Prod. Aerospace & Defense Chemicals Securities Food Consumer Prod. Medical Prod. & Equip. Specialty Retailers Homebuilders P/C Insurers (Stock) All Industries: 500 Median
31.8% 30.7% P/C insurer 30.3% profitability in 2006 26.4% th out of 50 24.6% ranked 30 24.2% industry groups 22.6% despite renewed 21.8% 21.5% profitability 20.9% P/C insurers 20.9% underperformed 20.5% the All Industry 19.6% 19.4% median for the 19.1% 19th consecutive 14.9% 15.4% 5% 10% 15% 20% 25% 30%
year
35%
0%
*Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors. Source: Fortune, April 30, 2007 edition; Insurance Information Institute
Advertising Expenditures by P/C Insurance Industry, 1999-2005
$ Billions
$3.1 $2.9 $2.7 $2.5 $2.3 $2.1 $1.9 $1.7 $1.5
Ad spending by P/C insurers is at a record high, signaling increased competition
$2.111 $1.882 $1.736 $1.737 $1.803 $1.708
$2.975
99
00
01
02
03
04
05
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
PROFITABILITY IN NEW YORK
Rollercoaster Ride in the Empire State
ROE: P/C (US & NY) vs. All Industries, 1995–2006E*
20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 95 96 97 98 99 00 01 02 03 04 05 06*
NY P/C performance generally mirrors US P/C insurers (except in 2001)
Average ROE: 1996-2006E US P/C: 7.82% NY P/C: 7.10% (9.77% excl. 2001) All Industries: 13.50%
US P/C Insurers
All US Industries
New York
*2005 is the latest available NAIC data for NY. Actual data for US p/c insurers (ISO) and All Industries. Source: Insurance Information Institute; NAIC, Fortune
ROE for Major Commercial Lines in New York, 1995 - 2004
10.6% 11.7% 8.0% 5.7% 7.3% 3.9% 2.0% 2.8% 1.7% 3.1% 7.0%
20% 10% 0%
9.5%
-20% -30% -40% -50% -60% -70%
1995
Source: NAIC
Commercial Auto & CMP have rebounded in New York in recent years, as in most other states
-59.9%
1996 1997 1998 1999 2000 2001 2002 2003 2004
-8.1%
-10%
-3.7%
-0.8% -2.2%
14.6% 12.9%
13.7%
30%
Commercial Multi-Peril Commercial Auto
ROE for Personal Lines in New York, 1995 – 2005*
19.7%
25% 20%
13.5%
Personal Auto
19.6% 18.2% 16.2% 17.7%
Homeowners
15.4% 14.6%
13.9%
15% 10% 5% 0% -5%
9.4%
9.8%
6.2%
1.0%
11.2%
Average 1995-2005: Auto: 10.1% Home: 16.5%
2001 2002 2003 2004 2005
1995
*Latest available Source: NAIC
1996
1997
1998
1999
-1.1%
2000
0.5%
12.9%
15.2%
18.7% 17.9%
19.8% 22.3%
Rates of Return on Net Worth for Homeowners Ins: US vs. NY
25% 19.7% 20% 15.4% 14.6% 15% 9.4% 10% 5.4% 5% 0% -5% -10% 1995 1996 3.6% 5.4% 3.8% 1.4% -4.2% 3.7% 12.4% 18.2% 11.2% 17.7% 15.2% 17.9% 9.7% 19.6%
NY HO market has been profitable, but coastal concerns loom large
22.3%
Averages: 1995 to 2005* US HO Insurance = 2.8% NY HO Insurance = 16.5%
1997 1998 1999 2000
-7.2%
US New York
-2.8%
2001
2002
2003
2004
2005
*Latest available. Source: NAIC, Insurance Information Institute
Rates of Return on Net Worth for Pvt. Passenger Auto: US vs. NY
20% 16.2% 15% 13.5% 13.9%
Averages: 1995 to 2005* US PPA Insurance = +8.7% NY PPA Insurance = +10.1%
10.1% 9.8% 7.7% 6.2% 4.1% 2.2% 2.0% 1.0% -1.1% 9.4% 12.9%
18.7% 19.8%
10%
12.4% 11.6% 12.1%
13.3% 11.0%
5%
US New York
0%
0.5%
-5% 1995
*Latest available. Source: NAIC, Insurance Information Institute
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
PP AUTO: Return on Equity, NY & Nearby States
1996 – 2005 Average
9.8% 9.0% 7.3% 13.4% 5.7% 11.5% 8.4%
US New York New Jersey Pennsylvania Connecticut Massachusetts Vermont
0%
5%
10%
15%
Source: NAIC, Insurance Information Institute
HOMEOWNERS: Return on Equity, NY & Nearby States
1996 – 2005 Average
16.1% 12.2% 7.6% 14.4% 13.2% 9.6% 2.8%
US New York New Jersey Pennsylvania Connecticut Massachusetts Vermont
0%
5%
10%
15%
20%
Source: NAIC, Insurance Information Institute
WORKERS COMP: Return on Equity, NY & Nearby States
1996 – 2005 Average
7.0% 5.4% 8.0% 10.7% 11.3% 6.3% 7.4%
US New York New Jersey Pennsylvania Connecticut Massachusetts Vermont
0%
2%
4%
6%
8%
10%
12%
Source: NAIC, Insurance Information Institute
UNDERWRITING
Extremely Strong 2006, Momentum for 2007/08
P/C Industry Combined Ratio
120 115.8
110
As recently as 2001, insurers were paying out nearly $1.16 for every dollar they earned in premiums
107.4
2007/8 deterioration due primarily to falling rates, but results still strong assuming normal CAT activity 2006 produced the best underwriting result since the 91.2 combined ratio in 1949
100.1 100 98.3
100.7 98.6 96.6
2005 figure benefited from heavy use of reinsurance which lowered net losses
90
01 02 03 04 05
92.4
06
07F
08F
Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.
Ten Lowest P/C Insurance Combined Ratios Since 1920
94 93.0 93 92 91 90 89 88 87 86 85
1949 1948 1943 1937 1935 2006 1950 1939 1953 1936
Sources: Insurance Information Institute research from A.M. Best data.
93.1
93.1
93.3
92.1 91.2
92.3
92.4
92.4
87.6
The 2006 combined ratio of 92.4 was the best since the 87.6 combined in 1949
The industry’s best underwriting years are associated with periods of low interest rates
Underwriting Gain (Loss) 1975-2006
35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 -40 -45 -50 -55
Insurers earned an underwriting profit of $31.2 billion in 2006, the largest ever but only the second since 1978. Despite the 2006 underwriting profit, the cumulative underwriting deficit since 1975 is $419 billion.
$ Billions
Source: A.M. Best, Insurance Information Institute
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
Commercial Lines Combined Ratio, 1993-2006E*
125 120
Commercial coverages have exhibited extreme variability. Are current results anomalous?
112.5 112.3 110.3 110.2 111.1 107.6 109.7
115 110 105 100 95 90 85
110.2
Outside CATaffected lines, commercial insurance is doing fairly well. Caution is required in underwriting longtail commercial lines.
122.3
103.9
2006 results will benefited from relatively disciplined underwriting and low CAT losses
93 94 95 96 97 98 99
.
102.0
102.5
105.1 05 06F 94
00
01
02
03
04
Source: A.M. Best; Insurance Information Institute
Personal Lines Combined Ratio, 1993-2006E
109.9
115
110.9 105.3 98.4
104.9
103.9
104.5
103.5
105 100 95 90 85
99.8
102.7
104.5
110
94.3
96.4
05 06F
A very strong 2006 resulted from favorable frequency & severity trends and low CAT activity
93 94 95 96 97 98 99 00 01 02 03
04
Source: A.M. Best; Insurance Information Institute.
91.0
Impact of Reserve Changes on Combined Ratio
PY Reserve Development Combined Ratio Points
$25 Reserve Development ($B) $20 $15 $10 $10.8 $5 0.1 $0 $0.4
2000 2001
6.5
7 Combined Ratio Points
Reserve adequacy has improved substantially
3.6
6 5 4
3.5 $22.7
2.4 $13.9 1.9 $9.9 1.1 $8.0 $5.0 0.4
3 2 1 $2.0 0
2002
2003
2004
2005E
2006E
2007E
Source: A.M. Best, Lehman Brothers for years 2005E-2007F
The Big Question: Is the Industry More Disciplined Today?
• Signs suggest that the answer is yes • Current period of sustained underwriting profitability is the first since the 1950s • While prices are falling, underlying lost cost trends (frequency and severity trends) are generally favorable to benign
Suggest impact of falling prices will be less pronounced than late 1990s
• Reserve situation appears much improved an under control • Management Information Systems: Much More Sophisticated
Insurers can monitor and make adjustments much more quickly Adjustments made quickly by line, geographic area, producer, etc.
• Investment Income
Relative to late 1990s, interest rates and stock markets returns are lower Has effect of imposing (some) discipline
• Ratings Agencies
More stringent capital requirements Quicker to downgrade
PREMIUM GROWTH
Deceleration in 2006, Even Slower in 2007
Strength of Recent Hard Markets by NWP Growth*
25% 20% 15% 10% 5% 0% -5% -10%
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F 2010F
*2007-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey.
1975-78
1984-87
2001-04
2006-2010 (post-Katrina) period could resemble 1993-97 (post-Andrew)
2005: biggest real drop in premium since early 1980s
Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute
Growth in Net Written Premium, 2000-2008F
14.1%
9.8% 8.1% 5.1%
P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are expected to remain healthy
4.7% 4.3% 1.8% 0.3% 1.9%
2000
2001
2002
2003
2004
2005
2006
2007F
2008F
Source: A.M. Best; Forecasts from the Insurance Information Institute’s Groundhog survey: http://www.iii.org/media/industry/financials/groundhog2007/.
PRICING
Under Pressure in 2007
Average Expenditures on Auto Insurance
$950 $900 $850 $800 $750
$668
$705
$691
$703
$685
$690
$724
$700 $650 $600
94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
*Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute
$651
$780
Countrywide auto insurance expenditures are expected to fall 0.5% in 2007, the first drop since 1999
$847
$851
Lower underlying frequency and modest severity are keeping auto insurance costs in check
$823
$838
$847
Average Expenditures on Homeowners Insurance**
$900 $835 $850 $787 $800 Homeowners in non$729 $750 CAT zones will see $668 $700 smaller increases, but $650 $593 larger in CAT zones $600 $536 $550 $508 $488 $481 $500 $455 $440 $418 $450 $400 95 96 97 98 99 00 01 02 03 04 05* 06*
*Insurance Information Institute Estimates/Forecasts **Excludes cost of flood and earthquake coverage. Source: NAIC, Insurance Information Institute
Countrywide home insurance expenditures rose an estimated 6% in 2006
Average Commercial Rate Change, All Lines, (1Q:2004 – 1Q:2007)
0%
-0.1%
-2% -4% -6% -8% -10% -12%
Magnitude of rate decreases diminished greatly after Katrina but have grown again
-2.7% -3.0% -4.6% -5.9% -7.0%
-8.2%
-3.2%
-5.3%
-9.4% -9.7%
KRW Effect
-9.6%
-11.3%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Average Commercial Rate Change by Line: 4Q99 – 1Q07
Commercial accounts trended downward from early 2004 to mid-2005 though that trend moderated post-Katrina
Source: Council of Insurance Agents & Brokers
Average Commercial Rate Change by Account Size: 4Q99 – 1Q07
Accounts of all sizes are renewing downward and more quickly than in 2006
Source: Council of Insurance Agents & Brokers
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2006
80% 70% 60% 50% 40% 30% 20% 10% 0% Southeast Southwest Pacific NW Northeast Midwest
Source: Council of Insurance Agents and Brokers
Commercial Property 71% 63% 48% 32%
Business Interruption
Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest
35% 28% 21% 12% 21% 10%
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4th Qtr. 2006
30% 25% 20% 15% 10% 5% 0% Southeast Southwest Pacific NW Northeast
Source: Council of Insurance Agents and Brokers
Commercial Property 25%
Business Interruption
“Soft” market seemed to hit Midwest about 1 year before the rest of the US
11% 8% 6% 6% 6%
Largest increases for Commercial Property & Business Interruption are in the Southeast, but are diminishing; Smallest in Midwest
6% 3% 0% 0% Midwest
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 1st Qtr. 2007
12% 10% 8% 6% 4% 2% 0% Southeast Southwest
Source: Council of Insurance Agents and Brokers
11%
Commercial Property 9% 8%
Business Interruption
9% 9%
5%
Commercial Property & Business Interruption increases are disappearing in the Southeast; Completely gone in the Midwest & Northeast
“Soft” market seemed to hit Midwest about 1 year before the rest of the US
0% 0%
0% 0% Midwest
Pacific NW Northeast
Commercial Accounts Rate Changes, 2nd Qtr. 2006 vs. 1st Qtr. 2007
10% 5% 0% -5% -10%
-10.2% -4.5% -6.9% -9.4% -10.2% -11.9% -3.6% -5.6% -9.8% -10.3% -2.3%
2Q06
1Q07 9.3%
Even commercial property is now renewing down in 2007
-15%
Commercial Workers Commercial General Umbrella Average Auto Comp Property Liability
Source: Council of Insurance Agents and Brokers
EXPENSES
Will Expense Ratio Rise as Premium Growth Slows?
Personal vs. Commercial Lines Underwriting Expense Ratio*
32% 30.8% 30% 28% 26% 24.3% 24% 22% 20% 96 97 98 99 00 01 02 03 04 05 23.4% 25.0% 25.6% 25.6% 29.4% 29.9% 31.1% 30.0% 29.1% 26.6% 24.8% 24.5% 25.0% 24.7% 25.6% 26.6% Personal Commercial
Expenses ratios will likely rise as premium growth slows
24.4%
24.6%
*Ratio of expenses incurred to net premiums written. Source: A.M. Best; Insurance Information Institute
CAPACITY/ SURPLUS
The Industry in Underleveraged
U.S. Policyholder Surplus: 1975-2006
$550 $500 $450 $400
$ Billions
$350 $300 $250 $200 $150 $100 $50 $0
Foreign reinsurance and residual market mechanisms absorbed 45% of 2005 CAT losses of $62.1B
Capacity as of 12/31/06 was $487.1B (est.), 14.4% above yearend 2005, 71% above its 2002 trough and 46% above its 1999 peak.
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
7576 77 7879 8081 82 8384 8586 87 8889 9091 9293 94 9596 9798 99 0001 0203 04 0506
Source: A.M. Best, ISO, Insurance Information Institute.
Capital Raising by Class Within 15 Months of KRW
$ Billions
Insurance Linked Securities, $6.253 , 19% Sidecars, $6.359 , 19%
Insurers & Reinsurers raised $33.7 billion in the wake of Katrina, Rita, Wilma
New Cos., $8.898 , 26%
Source: Lane Financial Trade Notes, January 31, 2007.
Existing Cos., $12.145 , 36%
Annual Catastrophe Bond Transactions Volume, 1997-2006
Risk Capital Issued Number of Issuances $4,693.4 $5,000 Catastrophe bond issuance has $4,500 soared in the wake of $4,000 Hurricanes Katrina and the $3,500 hurricane seasons of 2004/2005 $3,000 $2,500 $1,991.1 $1,729.8 $2,000 $1,139.0 $1,500 $966.9$1,219.5 $1,142.8 $846.1 $984.8 $1,000 $633.0 $500 $0
20 18 16 14 12 10 8 6 4 2 0
Risk Capital Issues ($ Mill)
97
98
99
00
01
02
03
04
05
06
Source: MMC Securities and Guy Carpenter; Insurance Information Institute.
Number of Issuances
MERGER & ACQUISITION
Few Catalysts for Major P/C Consolidation
P/C Insurance-Related M&A Activity, 1988-2006
Transaction Values Number of Transactions
$55,825 $40,032
$60,000
Transaction Value ($ M ill)
$40,000 $30,000 $20,000
$19,118
$20,353
Liberty Mutual acquired Ohio Casualty for $2.7B*
$11,534
100 80 60
$1,882 $5,100
$5,137 $2,435
$5,638
$3,450
$2,780
$8,059
40 20 0
$486
$0
*Announced May 7, 2007. Source: Conning Research & Consulting.
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
$425
$10,000
$1,249
N um ber of Transactions
$30,873
$9,264
$35,221
$50,000
2006 surge due mostly to 2 deals. No trend started.
No model for successful consolidation has emerged
140 120
Distribution Sector: InsuranceRelated M&A Activity, 1988-2006
Transaction Values Number of Transactions
$3,000
Transaction Value ($ M ill) $1,934
$2,720
$2,000 $1,500
200
$1,633
150
$944 $542 $689
$1,000 $500 $0
$7
100 50 0
Source: Conning Research & Consulting.
96
97
99
00
01
02
03
04
$60
05
$212
06
N um ber of Transactions
$2,500
No extraordinary trends evident
300 250
$446
Distribution Sector M&A Activity, 2005 vs. 2006
2005
Other 4% Title 9% Agency Buying Agency 51%
2006
Insurer Title Buying 4% Distributor 7% Other 2% Agency Buying Agency 62%
Insurer Buying Distributor 7%
Bank Buying Agency 25%
Bank Buying Agency 29%
Number of bank acquisitions is falling years
Source: Conning Research & Consulting
INVESTMENT IRONY
Markets & Interest Rates Up, Returns Flat
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$60 $52.3 $50 $42.8 $40 $30 $20 $10 $0 $35.4 $47.2 $57.9 $51.9 $44.4 $36.0 $45.3 $56.9 $48.9 $59.4 $55.7
Investment gains fell in 2006 and are now only comparable to gains seen in the late 1990s
94 95 96 97 98 99 00 01 02 03 04 05** 06
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.
CATASTROPHIC LOSS
Insurers Accused of Crying Wolf Over Cats
U.S. Insured Catastrophe Losses*
$120 $100 $80 $60 $40 $7.5 $2.7 $20 $0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 $4.7
2006 was a welcome respite. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come.
$22.9 $16.9 $10.1 $26.5 $8.3 $7.4 $2.6 $8.3 $4.6 $5.5
$12.9 $27.5
$61.9
$5.9
$9.2
*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
07Q1 20??
$1.2
$100.0
$ Billions
$100 Billion CAT year is coming soon
U.S. Catastrophe Losses 2006: States With Largest Losses ($ Millions)
$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0
Indiana Missouri Tennessee Texas Kansas *ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.
Source: ISO; Insurance Information Institute
$1,500
Some 33 catastrophe events* in 34 states cost insurers an estimated $8.8bn in 2006, compared with $61.9bn in 2005. Cat losses in the following five states -- totaling $4.5bn -- represent half the total catastrophe losses for the year.
$878 $873 $688 $601
SURPRISE!! Indiana led the US with $1.5 billion in insured CAT losses in 2006
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1986-2005¹
Wind/Hail/Flood5 2.8% Earthquakes 4 6.7% Winter Storms 7.8% Terrorism 7.7% Water Damage Civil Disorders 0.1% 6 0.4% Fire Tornadoes 2 2.3% Utility Disruption 24.5% 0.1%
Insured disaster losses totaled $289.1 billion from 1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up from 27.1% from 1984-2003.
All Tropical
Cyclones 3 47.5% 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III. 2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
Total Value of Insured Coastal Exposure (2004, $ Billions)
Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $1,937.3 $1,901.6 $740.0 $662.4 $505.8 $404.9 $209.3 $148.8 $129.7 $117.2 $105.3 $75.9 $73.0 $46.4 $45.6 $44.7 $43.8 $12.1
Florida & New York lead the way for insured coastal property at more than $1.9 trillion each. Northeast state insured coastal exposure totals $3.73 trillion.
$1,500 $2,000 $2,500
$0
Source: AIR Worldwide
$500
$1,000
The 2007 Hurricane Season:
Preview to Disaster?
Outlook for 2007 Hurricane Season: 85% Worse Than Average
Average* Named Storms Named Storm Days Hurricanes Hurricane Days Intense Hurricanes Intense Hurricane Days Accumulated Cyclone Energy Net Tropical Cyclone Activity 9.6 49.1 5.9 24.5 2.3 5 96.2 100% 2005 28 115.5 14 47.5 7 7 NA 275% 2007F 17 85 9 40 5 11 170 185%
*Average over the period 1950-2000. Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007
Average* Entire US Coast 52% 2007F 74%
US East Coast Including 31% 50% Florida Peninsula Gulf Coast from FL Panhandle 30% 49% to Brownsville, TX ALSO…Above-Average Major Hurricane Landfall Risk in Caribbean for 2007
*Average over the period 1950-2000. Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007
NOAA 13-17 7-10 CSU 17 9 2005 Actual 28 15
Number Named Storms Number of Hurricanes Number of Major Hurricanes (Category 3+)
3-5
5
7
Sources: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007; NOAA forecast as of May 22, 2007.
Hurricane Risk in New York
Is it Real?
Historical Hurricanes Impacting New York Coast, 1850-2006*
5 4 3
New York typically experiences about one hurricane per decade, on average
3 2 2
4
Will NY’s luck run out in 2007?
3
2 1
0
0 18501879 18801909 19101939 19401969 19701999 20002006
*Includes significant and notable tropical storms. Source: Weather2000.
Some Measures Insurers are Reported to be Taking in Coastal NY
• Rating Actions: 5% - 30% Increases Reported • Non-renewals • Limiting Number of New Policies Written • No New Business in One or More of (or Parts of): Long Island, Westchester & NYC • Writing Only in Selected Tiers • Won’t Write Within 1 Mile of Shore • Won’t Write Within 1000 ft. of Shore
Historical Hurricane Strikes in Nassau County, NY, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Historical Hurricane Strikes in Suffolk County, NY, 1900-2002
Population in Suffolk County is 4.5 times what it was in the 1940s
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Historical Hurricane Strikes in Westchester County, NY, 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
Historical Hurricane Strikes in New York County (Manhattan) 1900-2002
Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.
NY Hurricane Risk Data in a More Realistic Context
Expected Return Periods for a Categories 2 & 3 Hurricanes in NY City as a Function of Distance from Storm Center: 1870-2004
600 550 Expected Return Period (Years) 500 450 400 300 200 150 100 0 0 10 20 30 40 NMi
Source: Based on data provided by the NOAA Tropical Prediction Center
400 Category 3 Category 2 220 150 75 50 60 70 80
50
HURISK Results for Hurricanes Passing Within 75 NM of NYC: 1870 - 2004
Source: Graph courtesy of Colin McAdie, NOAA Tropical Prediction Center
Track of “Long Island Express” Storm of 1938
“Great New England Hurricane” of 1938 a.k.a.“Long Island Express” caused severe damage through much of the Northeast, including Long Island. 600+ Deaths $308 million
Source: WeatherUnderground.com, accessed February 4, 2006.
Damage Caused by “Long Island Express” Hurricane of 1938
700 deaths, 708 injured 4,500 homes, cottages, farms destroyed; 15,000 damaged 26,000 destroyed automobiles 20,000 miles of electrical power and telephone lines downed • 1,700 livestock and up to 750,000 chickens killed • $2,610,000 worth of fishing boats, equipment, docks, and shore plants damaged or destroyed • Half the entire apple crop destroyed at a cost of $2 million
Source SUNY Suffolk: http://www2.sunysuffolk.edu/mandias/38hurricane/damage_caused.html
• • • •
Storm Season of 1944: A Busy one for the Northeast
Three storms affected NY, NJ and New England in 1944, including “Great Atlantic Hurricane” 46 deaths $100 million damage 109mph gusts in Hartford
Source: WeatherUnderground.com, accessed May 31, 2006; NOAA loss & fatality figures.
Storm Season of 1954: The Northeast Hit Again
NY/New England areas hit by Carol & Edna two weeks apart Carol: 8-10 ft. floodwaters in Providence Edna hits Cape Cod Combined: 80 deaths, $501 million losses
Source: WeatherUnderground.com, accessed May 31, 2006; NOAA loss & fatality figures.
Storm Season of 1960: Brenda & Donna Came to Visit
NY/New England areas were hit twice in 1960. Donna killed 50, $387 million damage along East Coast
Source: WeatherUnderground.com, accessed May 31, 2006; NOAA loss & fatality figures.
After a 25 Hiatus, Hurricane Gloria Hit in 1985
NY/New England areas were hit by Gloria 9/27/85 8 deaths $900 million damage
Source: WeatherUnderground.com, accessed May 31, 2006; NOAA loss & fatality figures.
REINSURANCE MARKETS
Big Risk, Big Reward or Big Government?
Share of Losses Paid by Reinsurers, by Disaster*
70% 60% 50% 40% 30% 20% 10% 0%
Hurricane Hugo Hurricane Andrew Sept. 11 Terror 2004 Hurricane 2005 Hurricane (1989) (1992) Attack (2001) Losses Losses *Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005. Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance is playing an increasingly important role in the financing of megaCATs; Reins. Costs are skyrocketing 30% 25%
60% 45%
20%
Ratio of Reinsurer Loss & Underwriting Expense to Premiums Written, 1985-2006
Despite the respite in 2006, reinsurers paid an average of $1.11 in loss and expense for every $1 in written premium since 1985
1.21 1.18 1.14 1.06 1.10 1.08 1.09 1.07 1.07 1.08 1.10 1.06 1.13 1.07 1.03 1.02
1.5 1.4
Loss & LAE Ratio
1.39
1.3 1.2 1.1 1.0 0.9 0.8
1.17
1.01
1.06
1.26 0.95
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Reinsurance Association of America.
US Reinsurer Net Income & ROE, 1985-2006
$9.68 $3.17 $3.41 $2.51
$12 $10
Net Income ($ Bill)
Reinsurer profitability has rebounded
$4.53 $5.43 $3.71
20% 15% 10% 5% 0% -5%
ROE
$8
$1.95 $1.94
$6
$1.38 $1.22
$1.87 $2.03
$2.52 $1.79
$1.47
$2 $0 ($2) ($4)
$0.12
Net Income
$1.17
ROE
($2.98)
$1.31
$4
$1.95
$1.99
-10%
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Reinsurance Association of America.
Debate Over Reinsurance Market Performance & Government
• Reinsurance markets typically suffer large shocks, followed by a period of higher prices and transient capacity constraints • A new equilibrium between Supply and Demand is typically found within 18 months, commensurate with changes in the risk landscape. This is Economics 101 and is a textbook illustration of how capitalism works. • A competing hypothesis suggests that reinsurance markets “fail” because they do not provide a stable price or quantity of protection as is required in an economy with continuously exposed fixed assets, especially one that is growth oriented • Public Policy Solution: Acting on this hypothesis generally results in displacement of private (re)insurance capital by government intermediaries • Question Asked: Are policyholders and the economy better served through free markets, government or some hybrid?
Sources: Insurance Information Institute
FINANCIAL STRENGTH & RATINGS
Industry Has Weathered the Storms Well
Reasons for US P/C Insurer Impairments, 1969-2005
2003-2005
Affiliate Problems 8.6% Catastrophe Losses 8.6% Alleged Fraud 11.4% Rapid Growth 8.6% Deficient Loss Reserves/Inadequate Pricing 62.8%
1969-2005
Reinsurance Sig. Change Failure in Business 3.5% 4.6% Misc. 9.2% Deficient Loss Reserves/Inadequate Pricing 38.2%
Investment Problems* 7.3%
Deficient reserves, CAT losses are more important factors in recent years
Affiliate Problems 5.6% Catastrophe Losses 6.5%
Alleged Fraud 8.6%
Rapid Growth 16.5%
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
P/C Insurer Impairments, 1969-2006
70 60 50
36 34 49 49 49
The number of impairments varies significantly over the p/c insurance cycle, with peaks occurring well into hard markets
54 60 58 49 50 47 41 29 31 18 19 35 18 13 15 15 12
30
15 12 11 13 12 16 14 13 9
20 10 0
8
Source: A.M. Best; Insurance Information Institute
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
7
9
9
19
31 34
40
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006
120 115
Combined Ratio
Impairment rates are highly correlated underwriting performance
Combined Ratio after Div P/C Impairment Frequency
2 1.8
Impairment Rate
110 105 100 95 90
2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969
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
1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0
Source: A.M. Best; Insurance Information Institute
STATE RESIDUAL MARKETS
How Big is Too Big?
Florida Citizens Exposure to Loss (Billions of Dollars)
$450 $400 $350 $300 $250 $200 $150 $100 $50 $0
2002 2003 2004 2005 2006
Source: PIPSO; Insurance Information Institute
Exposure to loss in Florida Citizens nearly doubled in 2006
408.8
$195.5 $154.6
$206.7
$210.6
Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)
Florida Hurricane Catastrophe Fund (FHCF)
2004
Florida Citizens
2005
Louisiana Citizens
Mississippi Windstorm Underwriting Association (MWUA)
$0 -$200 -$400 -$600 -$800 -$1,000 -$1,200 -$1,400 -$1,600 -$1,800 -$2,000
-$516 -$954 -$1,425
-$595 *
Hurricane Katrina pushed all of the residual market property plans in affected states into deficits for 2005, following an already record -$1,770 hurricane loss year in 2004
* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid. Source: Insurance Information Institute
What Role Should the Federal Government Play in Insuring Against Natural Disaster Risks?
NAIC’s Comprehensive National Catastrophe Plan
• Proposes Layered Approach to Risk • Layer 1: Maximize resources of private insurance & reinsurance industry
Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state catastrophe funds (like FHCF) • Layer 3: Federal Catastrophe Reinsurance Mechanism
Source: Insurance Information Institute
Comprehensive National Catastrophe Plan Schematic
1:500 Event
National Catastrophe Contract Program
1:50 Event
State Regional Catastrophe Fund
State Attachment
Personal Disaster Account
Private Insurance
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
Legislation has been introduced and ideas espoused by ProtectingAmerica.org will likely get a more thorough airing in 2007/8
KEY LINES
Discipline Will Remain (Mostly) Intact in 2007
Private Passenger Auto
Private Passenger Auto Combined Ratio
110
PPA is the profit juggernaut of the p/c insurance industry today
103.5 101.7 101.3101.3 101.0 101.1 99.5
109.5 107.9
105
104.2
100
98.4
Average Combined 1993 to 2005= 101.4
95
Most auto insurers have shown significant improvements in underwriting performance since mid-2002
93 94 95 96 97 98 99 00 01 02 03
94.3
95.1 93.0
90
04 05 06F
Sources: A.M. Best; III
RNW: Private Passenger Auto, United States, 1992-2006E
16% 14% 12% 10% 8% 6% 4% 2% 0%
14.3% 14.2% 11.4% 11.6%
12.4% 12.1%
Segmentation should help profitability
10.1%
15.0% 13.3% 11.0% 9.4%
7.7% Private passenger auto profitability deteriorated throughout the 1990s but has improved dramatically
4.1%
2.2% 2.0% 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06E
Source: NAIC; Insurance Information Institute
NY PIP UPDATE
Is New York’s NoFault System Truly Under Control?
NY PIP Claim Frequency & Severity, (2000:04 – 2006:04)
$9,500 $9,000
$8,327 $8,234 $7,859 $7,888
$9,235
$8,727
Avg. Claim Severity
$8,577
2.4% 2.3% 2.2% 2.1%
$7,299
Frequency
$8,500
Avg. Claim Cost
$7,507
$8,000 $7,500 $7,000 $6,500 $6,000 $5,500 $5,000
$7,322
Why is PIP severity tracking upward again?
$6,963 $6,865 $7,030 $6,521 $6,602
$7,773
Claim Frequency
2.0% 1.9% 1.8% 1.7% 1.6% 1.5% 1.4%
NY PIP: An incredible success story! Severity down 25% since 2002:01; Frequency down 36% since 2000:04
$6,153
$6,045
$6,004
$6,071
$5,812
Sources: Insurance Information Institute based on ISO Fast Track data.
0:04 1:01 1:02 1:03 1:04 2:01 2:02 2:03 2:04 3:01 3:02 3:03 3:04 4:01 4:02 4:03 4:04 5:01 5:02 5:03 5:04 6:01 6:02 6:03 6:04
$5,630
$5,913
$6,226
$6,259
Homeowners Insurance
Homeowners Insurance Combined Ratio
160 150 140 130 120 110 100 90 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Sources: A.M. Best; III
158.4
Average 1990 to 2005= 113.1 Insurers have paid out an average of $1.13 in losses for every dollar earned in premiums over the past 16 years
121.7 121.7 111.4 109.4 108.2 101.0 109.3 98.2 100.3 94.4 93
117.7 113.0
118.4 113.6 112.7
Rates of Return on Net Worth for Homeowners Ins: US
20% 15%
Averages: 1993 to 2006E US HO Insurance = +3.3%
14.0% 12.4% 9.7% 3.7% 1.4% -2.8% -4.2% -7.2%
98 99 00 01 02 03 04 05E 06E
10% 5% 0% -5% -10% 93 94 95 96 97
2.5%
3.6%
5.4%
5.4%
3.8%
-1.7%
Source: NAIC; 2006 figure is an Insurance Information Institute estimate.
COMMERCIAL MULTI-PERIL & COMMERCIAL AUTO
Commercial Multi-Peril Combined
(Liability vs. Non-Liability Portion)
125.0 122.4 130 119.0 125 120 115 110 105 100 95 90 85 80 100.7 119.8 116.8 121.0 117.0 CMP-Liability CMP-Non-Liability 116.2 116.1 104.9 115.3
108.5 113.6
113.1
115.0 115.0
Liab. Combined 1995 to 2004 = 114.6 Non-Liab. Combined = 107.1
95 96 97 98 99 00 01 02
03
89.0
04
05
Sources: A.M. Best; III
93.8
CMP- has improved recently
97.3
97.7
101.9
Commercial Auto Liability & PD Combined Ratios
120.5 120.1 Comm Auto Liab 125 112.1 120 115 110 105 96.7 100 95 90 85 80
Sources: A.M. Best; III
Comm Auto PD 122.5 115.9
Average Combined: Liability = 110.2 PD = 97.1
112
113
103.6
102.2
99.7
102.3
106.6 99.4
99.0
99.0
95.9
96.6
Commercial Auto has improved dramatically
95 96 97 98 99 00 01 02 03
04
87.1
93.3 90.7
92.1
05
WORKERS COMPENSATION OPERATING ENVIRONMENT
Workers Comp Combined Ratios, 1994-2006P
140 131
Percent
Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers 135 118 122 123 111 104 110
140
119
130 120
107
115
100 106 101
107
101 97 97 101
110 100 90 80
103 88 87 97 87
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2006 and developed to ultimate Source: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI Annual Statement Analysis. Includes dividends to policyholders
Calendar Year
Accident Year
96
Workers Comp Lost-Time Claim Frequency (% Change)
Percent Change
Lost-Time Claims
0.3 0.5
2 0 -2 -4 -6 -8 -10 91 -4.2 -4.4
Cumulative Change of –52.1% since 1991 means that lost work time claims have been cut by more than half
-2.3 -4.5 -6.5 -9.2 92 93 94 -3.9 -4.5 -6.9 96 97 98 99 00 01 02 03 04 -3.9 -4.5 -4.1 -6.6 -6.8
95
05 06p
Accident Year
2003p: Preliminary based on data valued as of 12/31/2006 1991-2005: Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI
Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2006p
Indemnity Claim Cost (000s)
Lost-Time Claims
+1.2% +6.6%
$19.6 $16.5 $16.9 $17.7 $18.0 $18.6
$19 $17 $15 $13
Annual Change 1991–1996: Annual Change 1997–2005:
$15.1 $13.6 $12.4 $10.6 $11.4
$11 $9.9 $9.6 $9.4 $9.8 $10.0 $9 $7 $5
Cumulative Change = +108.5% (1993-2006p)
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
2005p: Preliminary based on data valued as of 12/31/2006 1991-2005: Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI
Accident Year
Workers Comp Medical Claims Continue to Climb
Medical Claim Cost ($000s)
$25
Annual Change 1991–1996: Annual Change 1997–2005:
$20
$15 $9.4 $10 $8.3 $8.4 $8.2 $8.9 $5 91 92 93 94 95
$20.5 $19.2 $17.6 $16.4 $14.4 $13.3 $12.0 $11.1 $10.1
+4.1% +9.5%
$24.6 $22.9
Cumulative Change = +200% (1993-2006p)
96 97 98 99 00 01 02 03 04 05 06p
Accident Year
2006p: Preliminary based on data valued as of 12/31/2006 1991-2005: Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Med Costs Share of Total Costs is Increasing Steadily
2006p
1996
1986
Indemnity 52%
Medical 45%
Indemnity 41% Medical 59%
Medical 48%
Indemnity 55%
Source: NCCI (based on states where NCCI provides ratemaking services).
OTHER LIABILITY
Other Liability Combined Ratios*
150 140 130 120 110 100 90 80 117.6 112.3 108.5 104.5 110.5 111.8 138.6
Average Combined Ratio 1995-2005 116.1
122.6 124.4 114.4 112.1
Improvements in tort and D&O environment have contributed to performance
95 96 97 98 99 00 01 02 03 04 05
*Includes Officers’ & Directors’ coverage.
Sources: A.M. Best; III
Legal Liability & Tort Environment
Definitely Improving But Not Out of the Woods
Personal, Commercial & Self (Un) Insured Tort Costs*
$250 Commercial Lines Personal Lines Self (Un)Insured
Total = $231.3 Billion
$200
Billions
Total = $159.6 Billion
$49.4
$150
Total = $121.0 Billion
$30.0
$86.7
$100
Total = $39.3 Billion
$20.4 $70.9 $51.0 $95.2 $49.6 1990 $58.7
$50 $5.2 $17.1 $17.0 1980
$0
2000
2005
*Excludes medical malpractice Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
Tort System Costs, 2000-2008F
$300 $280 $260
2.22% 2.24% 2.22% 2.03% 1.82% $233 $205 $179 $246 $260
$295 2.09% 2.05% $270 2.03% 2.04% $261 $261
2.5%
2.0%
$240 $220 $200 $180 $160 $140 $120 $100 00 01
1.5%
After a period of rapid escalation, tort system costs as % of GDP are now falling
02 03 04 05 06E 07F 08F
Tort Sytem Costs Tort Costs as % of GDP
1.0%
0.5%
0.0%
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.
Tort Costs as % of GDP
Tort System Costs
KATRINA TORT UPDATE
Suits Add to Uncertainty, Expense
Likely Market Impacts of PostKatrina Litigation
• Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market
Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium
•
Some Courts’ Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk
Compounded by juries willing to award millions in punitives
• • •
People Discouraged from Buying Flood Coverage BOTTOM LINE: Weather, Courts, Juries Together Create Nearly Impossible Operating Environment Coverage Under These Circumstances Will Necessarily Become More Expensive, Less Available
REGULATORY UPDATE
Busy Year for Insurers in Washington
Federal Legislative Update
Federal Terrorism Reinsurance (TRIA)
• • TRIA expires 12/31/07. The current federal program offers $100 billion of coverage subject to a $27.5B industry aggregate retention. New Democratic Congress (with Committee chairs from urban Northeast states) predisposed to extend. Despite resistance/lackluster Administration support TRIA will likely extended for a multi-year period, perhaps 6-8 but potentially as long as 15 years (last extension in 2005 was for 2 years) Potential changes include extensions of coverage for domestic terrorism losses (not included currently), and a lower industry retention for nuclear, biological, chemical, or radiological (NBCR) attacks. There could possibly be a modestly higher industry retention for non-NBCR losses, and it needs to be resolved whether liability and group life losses will be covered. Original hope for first-half 2007 extension have faded. Now looking at fall or even 11th-hour extension as in 2005.
•
•
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
Natural Disaster Coverage
• Some insurers are pushing for federal catastrophic risk fund coverage in the wake of billions of dollars of losses suffered by insurers from the 2004-2005 hurricane seasons. Legislative relief addressing property/casualty insurers’ exposure to natural catastrophes, such as the creation of state and federal catastrophe funds, has been advocated by insurers include Allstate and State Farm recently. However, there is active opposition many other insurers and all reinsurers. There are supporters in Congress, mostly from CAT-prone states. Skeptics in Congress believe such a plan would be a burden on taxpayers like the NFIP and that the private sector can do a better job. Unlike TRIA, the industry is not unified on this issue. Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has not yet indicated much support.
•
•
•
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
Optional Federal Charter (OFC)
• Large P&C and life insurers are the major supporters of OFC. Supporters argue that the current patchwork of 50 state regulators reduces competition, redundant, slows new product introductions and adds cost to the system. In general, global P/C insurers , reinsurers and large brokers mostly support the concept, while regulators (state insurance commissioners), small single-state and regional insurers, and independent agency groups largely oppose the idea. An optional federal charter is more favorable for global P&C insurers, because an insurer that operates in multiple states could opt to be regulated under federal rules rather than multiple state regulations. As a result, this could increase innovation in the industry. A new bill should be introduced in May or June. Currently appears to be more momentum for OFC for life than for P&C insurers based on the homogeneous nature of many life products. The debate should intensify and although passage may not occur in the current session of Congress, it may lay the groundwork for passage in the 2009-2010 session.
•
•
Sources: Lehman Brothers, Insurance Information Institute
Federal Legislative Update
McCarran-Ferguson Insurance Antitrust Exemption
• Under McCarran-Ferguson Act of 1945, insurers have limited immunity under federal anti-trust laws allowing insurers to pool past claims information to develop accurate (actuarially credible) rates. Very low level of understanding of M-F in Washington Certain legislators threaten to revoke McCarran-Ferguson because of alleged collusion in the wake of Hurricane Katrina. However, the view among some Washington insiders is that such a move would hurt small insurers with less resources rather than the large insurers perhaps being targeted. The current bills designed to revoke McCarran-Ferguson are S.618 and H.R. 1081. The government appointed Antitrust Modernization Commission in an April 2007 report strongly encouraged Congress to re-examine the McCarran-Ferguson Act. Notably, 4 of the commissions 12 members called for a full repeal of the law. Sources: Lehman Brothers, Insurance Info. Institute
• •
•
FLORIDA SPECIAL SESSION LEGISLATIVE CHANGES
Insurer, Policyholder & State Impacts
Why There is Concern Over the Florida Legislature’s & Governor’s Changes
• • • • • • • • Risk is Now Almost Entirely Borne Within State Virtually Nothing Done to Reduce Actual Vulnerability Creates Likelihood of Very Large Future Assessments Potentially Crushing Debt Load State May be Forced to Raise/Levy Taxes to Avoid Credit Downgrades Many Policyholder Will See Minimal Price Drop
“Savings” came from canceling recent/planned rate hikes
Residents in Lower-Risk Areas, Drivers, Business Liability Policyholders Will Come to Resent Subsidies to Coastal Dwellers Governor’s Emergency Order for Rate Freezes & Rollbacks Viewed as Unfair & Capricious
Sources: Insurance Information Institute.
Pre- vs. Post-Event in FL for 2007 Hurricane Season
$90 $80 $70
Pre-Event Funding
Post-Event Funding (Assessments & Bonds)
$80.0B
Billions
$50 $40 $30 $20 $10 $0 1-in-20 1-in-30 1-in-50
Total = $25.0B $20.0 Billion $35.0B
$49.5B $43.8B
$9.9
$14.6
$24.1
$31.4
$34.5
$37.4
$10.1
$10.4
$10.9
1-in-70
$12.4
1-in-85
$15.0
1-in-100
$17.6
1-in-250
Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not include financing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.” Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
$25.8
$54.2
$60
There is a very significant likelihood of major, multiyear assessments in 2007
$55.0B
Per Household Savings vs. LongTerm Costs of FL Legislation for 2007 Hurricane Season
$16,000 $14,000 $12,000 $10,000
Direct Costs
Indirect Costs
$13,971
$6,116 $7,855
Billions
$2,000 $0
$265 Savings
$721 $1,005 1-in-20
$1,066 $1,486 1-in-30
1-in-50
1-in-70
$4,416
1-in-85 1-in-100 1-in-250
Notes: Assumes average homeowners insurance premium of $1300 in 2007. Savings for 2007 reflects 24.3% savings on hurricane costs, assumed to be 63% of premium. Savings based on statewide OIR estimate. Actual savings may be less. Direct costs include assessments paid by policyholders on home and personal auto premiums. Indirect costs include assessments on commercial lines passed on to policyholders via higher prices. Amounts are in nominal dollars, or the total cost of borrowing including finance charges over the term of the bond. Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
$4,694
$4,956
$4,000
Total = $1,726
$2,552
$3,503 $2,528
$6,000
$3,219
$6,031
$3,497
$3,752
$8,000
Savings dwarfed by potential costs under most scenarios
$8,191 $7,635
$8,708
Average Annual Assessment per Household, 1-in-50 Year Event in 2007
The average Florida household will pay $6,042 over 30 years in assessments if a 1-in-50 year event strikes in 2007. Assessments could rise if additional storms hit in 2007 or beyond.
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
Average Annual Assessment per Household, 1-in-100 Year Event in 2007
The average Florida household will pay $8,699 over 30 years in assessments if a 1-in-100 year event strikes in 2007. Assessments could rise if additional storms hit in 2007 or beyond.
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
Average Annual Assessment per Household, 1-in-250 Year Event in 2007
The average Florida household will pay $13,979 over 30 years in assessments if a 1-in-100 year event strikes in 2007. Assessments could rise if additional storms hit in 2007 or beyond.
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
Savings vs. Costs by Region: Neither Equitable nor Proportionate
STATEWIDE AVERAGE Average Savings: $265 Cost of 1-in-30 Storm: $2,550 Cost is 10 times avg. savings ORLANDO TALLAHASSEE Average Savings: $20 Cost of 1-in-30 Storm: $2,000 Cost is 100 times avg. savings Average Savings: $30 Cost of 1-in-30 Storm: $2,075 Cost is 69 times avg. savings
TAMPA Average Savings: $100 Cost of 1-in-30 Storm: $2,300 Cost is 23 times avg. savings
MIAMI Average Savings: $1,120 Cost of 1-in-30 Storm: $3,375 Cost is 3 times avg. savings
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
Public Attitude Monitor 2006: Unfairness of Policyholder Subsidies
70% 60% 50% 40% 30% 20% 10% 0% Coastal Counties Interior Counties Noncoastal States
Most non-coastal policyholders believe premium subsidies for coastal property owners are unfair
Very unfair Somewhat Unfair
33% 28% 30%
32%
22%
31%
Coastal States
Source: Insurance Research Council
Public Attitude Monitor 2006: Unfairness of Taxpayer Subsidies
70% 60% 50% 40% 30% 20% 10% 0% Coastal Counties Interior Counties Noncoastal States
Most non-coastal dwellers believe taxpayer subsidies for coastal property owners are unfair
Very unfair Somewhat Unfair
22%
34%
31%
29%
25%
30%
Coastal States
Source: Insurance Research Council
Summary
• Personal & Commercial lines results were unsustainably good 2006; Overall profitability reached its highest level (est. 14%) since 1988 • Underwriting results were aided by lack of CATs & favorable underlying loss trends, including tort system improvements • Property cat reinsurance markets peaking & more competitive • Premium growth rates are slowing to their levels since the late 1990s; Commercial leads decreases • Rising investment returns insufficient to support deep soft market in terms of price, terms & conditions • Clear need to remain underwriting focused • How/where to deploy/redeploy capital?? • Major Challenges: Slow Growth Environment Ahead Maintaining price/underwriting discipline Managing variability/volatility of results
Insurance Information Institute On-Line
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