Transcript No Slide Title

Why 2008 is Shaping Up to Be a
Make or Break Year for the P/C
Insurance Industry
Trends, Challenges & Opportunity
State Insurance Trade Association
Annual Meeting
Seattle, WA
September 25, 2007
Robert P. Hartwig, Ph.D., CPCU, President
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  Fax: (212) 732-1916  [email protected]  www.iii.org
Presentation Outline
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P/C Profit Overview—2006, A Cyclical Peak
Subprime Lending Crisis: What Does it Mean for Insurers?
Underwriting Trends: Unsustainable?
Premium Growth: Approaching a Standstill
Pricing: Competitive Pressures Mounting
Capital & Capacity: UnderleveragedROE Pressure
Catastrophe Loss Management
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 2006/7 Reached
Their Cyclical Peak
$63,695
$65,192
07F
$44,155
$38,501
$30,029
$20,559
$30,773
$21,865
$10,870
$3,046
$10,000
$19,316
$20,000
$5,840
$30,000
$14,178
$40,000
Insurer profits peaked in
2006/7. “Normal” CAT year,
average investment gain
imply flattening
$36,819
$50,000
$24,404
$60,000
$20,598
$70,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 9.4%
2006 ROAS1 = 14.0%
2007F ROAS = 13.1%**
06
P/C Net Income After Taxes
1991-2007F ($ Millions)*
05
04
03
01
-$6,970
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
*ROE figures are GAAP; 1Return on avg. surplus. 2007F figure is annualized actual first half net income
of $32.596B **Actual first half 2007 result.
Sources: A.M. Best, ISO, Insurance Information Inst.
ROE: P/C vs. All Industries
1987–2008E
20%
P/C profitability is cyclical, volatile and vulnerable
15%
10%
Sept. 11
5%
US P/C Insurers
All US Industries
*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
07
F
08
F
06
04
03
02
01
00
99
98
4 Hurricanes
97
96
93
92
91
90
89
88
95
Northridge
-5%
05
Andrew
87
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
94
0%
Hugo
RETURN ON EQUITY (Fortune):
Stock & Mutual vs. All Companies*
Stock
18%
Mutual
14.9% 15.4%
14.6%
16%
14.0%
All Cos.*
14%
13.4%
13.0%
13%
14%
13% 15% 13%
10.4%
12%
13.9%
12%
10.0%
11%
12% 11% 11%
12.6%
10%
10%
10%
9%
8%
8%
7%
6%
8%
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
2000
2001
2002
2003
*Fortune 1,000 group.
Source: Fortune Magazine, Insurance Information Institute.
2004
2005
2006E 2007F 2008F
Profitability Peaks & Troughs in the
P/C Insurance Industry, 1975 – 2008F
25%
1977:19.0%
1987:17.3%
2006:14.0%
20%
1997:11.6%
15%
10%
5%
0%
1975: 2.4%
1984: 1.8%
1992: 4.5%
2001: -1.2%
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
-5%
*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2007E
18%
The p/c insurance industry achieved its cost of
capital in 2005/6 for the first time in many years
16%
12%
4%
2%
0%
-2%
-4%
The cost of capital
is the rate of return
insurers need to
attract and retain
capital to the
business
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
Source: The Geneva Association, Ins. Information Inst.
-0.1 pts
6%
+0.2 pts
-13.2 pts
8%
-9.0 pts
10%
+3.1 pts
+3.5 pts
14%
00
01
02
ROE
03
04
05
06 07E
Cost of Capital
Insurance & Reinsurance Stocks:
Slow Start in 2007 in P/C, Reins.
Total YTD Returns Through September 21, 2007
S&P 500
4.65%
Mortgage*
-29.34%
8.29%
Life/Health
0.49%
P/C insurance, reinsurance
stocks lagging on soft market
concerns, worries over 2007
hurricane season and
subprime selloff
Reinsurers
0.72%
P/C
0.92%
All Insurers
-1.98%
Multiline
2.12%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
Brokers
20.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Inst. *Includes Financial Guarantee
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
31.8%
30.7%
P/C insurer
30.3%
profitability in 2006
26.4%
th
ranked 30 out of 50
24.6%
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
0%
year
14.9%
15.4%
P/C Insurers (Stock)
All Industries: 500 Median
5%
10%
15%
20%
25%
30%
35%
*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, 1999-2006
$ Billions
$4.0
$3.5
Ad spending by P/C insurers
is at a record high, signaling
increased competition
$3.695
$2.975
$3.0
$2.5
$2.0
$1.736 $1.737 $1.803 $1.708
$1.882
$2.111
$1.5
99
00
01
02
03
04
05
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
06E
THE SUBPRIME
CRISIS
What Does it Mean for
the Insurance Industry
Insurer Exposure to Subprime
Mortgage Backed Securities*
•As of June 30, 2007, p/c
& life insurers had
$91.48B in exposure to
residential mortgage
backed securities or about
15% of the $600 billion
subprime market.
•Most securities rate AA
or higher (93% AA or
high among life insurers
$ Billions
Other, $3.41 , 3.7%
Life, $67.97 ,
74.3%
P/C, $20.10 , 22.0%
•Insurers & reinsurers
maintain sufficient
liquidity to weather
subprime storm virtually
unscathed
*Includes direct ownership of subprime loans, collateralized debt and loan obligations, bond fund
and hedge fund exposures.
Source: Standard & Poor’s Survey as reported in SNL Insurance Weekly, September 4, 2007.
Repackaged Mortgage-Backed Securities
Contain Varying Degrees of Risk
100%
75%
50%
25%
CLASS A
CLASS A
Safest class.
Typically
purchased by
insurers, federal
agencies and
institutional
money managers
33%
CLASS C
33%
CLASS B
Absorbs middle
third of losses
Suffers losses only
when more than
67% of underlying
portfolio not repaid
34%
Riskiest class.
Absorbs first 34% of
losses in portfolio.
Typically purchased
by hedge funds and
other high-risk risk
investors.
0%
Asset Class
Source: Mark Stancher and Kyongsoo Noh, “Subprime Not Quite Sublime? Recent Developments in the Subprime Mortgage Markets,”
Insights 7/13/07, JPMorgan Asset Management, accessed at http://www.jpmorgan.com/pages/jpmorgan/am/ia/research_and_publications/insights
Implications of Sub-Prime Mess &
Credit Crunch on P/C Insurers
• P/C Insurers Not Heavily Exposed to Subprime Residential
Mortgage Securities (RMBS)
 Subprime exposure equal to about 3% - 10% of policyholder surplus
• Asset Quality High
 Average security in P/C insurer portfolio carries AA rating
 Most P/C exposure to subprime market is in AAA tranches
• P/C Insurers Do Not Have Much Leverage in Business Model
 0-10% of capital structure typically
 Insurers accept risk primarily through underwriting
 Some leverage gained via reinsurers, who likewise are not heavily exposed
to subprime RMBS
• Rarely Necessarily for Insurers to Liquidate Securities
 Major CAT could be exception, but even payouts occur gradually and can
be paid primarily out of cash flow
 Implies insurers unlikely to be forced into “fire sale” to pay losses while
bond and stock prices are depressed
Source: Merrill Lynch, Insurance Information Institute;
Implications of Sub-Prime Mess &
Credit Crunch on P/C Insurers (cont’d)
• Impact on Profits
 Widening credit spreads do not impact insurers business
model, which is not leverage-based, so earnings should not be
affected
 Rising interest rates could push up average yield on insurers’
bond portfolio (about 2/3 of invested assets)
 Ability to realize capital gains will be hurt if swoon persists
 Fed cut fed funds rate 50 bps 9/18—huge stock rally
• Mark-to-Market (or Mark-to-Make Believe?)
 Insurers required to carry securities categorized as
“available for sale” at market value (most investments in this
category)
 Rising rates/falling prices for corporate bonds and RMBS
and CDOs will have to be marked to a lower market value
 Impact will be to decrease paper value of policyholder
surplus (net worth) and depress book value of stock insurers
Source: Merrill Lynch, Insurance Information Institute;
D&O/E&O Implications of
Sub-Prime Meltdown
• D&O/E&O Losses Pegged to Subprime Meltdown Variously Estimated at $1
Billion to $3 Billion, based on Experience in Past Financial Crises
 Pure play subprime lenders typically purchase low limits of cover
 Lender’s liability coverage (an E&O exposure) difficult to purchase last few years
 Usually regulatory fines and penalties not compensable under D&O, therefore
substantial share of costs may not be insured
 Defense cost shouldered by D&O insurers could be large
 Hedge funds sometimes carry D&O apart from parent entity
• Bond Ratings Agencies May be Object of Significant Litigation
 Likely to fail due First Amendment “free speech” opinions defense
• Class Actions Against Mortgage Brokers and Lenders Based on Allegations
Non-Suitability and Deceptive Sales Practices Will Be Attempted.
 Most states don’t require brokers to carry E&O (maybe fidelity); If they do,
limits usually about $300-$500K; No D&O
 Defendants will argue cases should be heard in fed court (due to federal
guarantees on many loans) which are less receptive to class actions
 Defendants will argue lack of homogeneity and cite Class Action Fairness Act to
get cases heard individually
Source: Lehman Brothers; Insurance Information Institute;
Share of Home Purchase Loans in 2005 for
Properties Not Occupied by Owner
Subprime
Prime
NV
29%
AZ
29%
32%
FL
CA
All Other
States
TOTAL US
14%
15%
17%
Insurers in FL being
asked to cover many
non-owner occupied
dwellings, many with
poor credit in major
CAT zone.
NV
14%
AZ
14%
15%
FL
CA
7%
All Other
States
10%
TOTAL US
10%
Source: Mortgage Bankers Association, HMDA reports; Wall Street Journal, August 31, 2007.
Defaults on Loans for Properties Not
Occupied by Owner as a % of All Defaults*
Subprime
Prime
32%
NV
26%
AZ
25%
FL
21%
CA
All Other
States
TOTAL US
13%
16%
24%
NV
18%
AZ
FL
CA
All Other
States
TOTAL US
14%
15%
11%
12%
*Defaults defined as 90+ days past due or in foreclosure. As of June 30, 2007.
Source: Mortgage Bankers Association, HMDA reports; Wall Street Journal, August 31, 2007.
UNDERWRITING
Extremely Strong 2006,
Momentum for 2007/08?
P/C Insurance Combined Ratio,
1970-2008F*
Combined Ratios
120
1970s: 100.3
1980s: 109.2
115
1990s: 107.8
2000s: 102.2**
110
105
100
95
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*
08F
90
Sources: A.M. Best; ISO, III
*Actual figure of 92.7 through first half 2007. **Through 2007:H1.
P/C Insurance Combined Ratio,
2001-2008F
120
115.8
110
As recently as 2001,
insurers were paying
out nearly $1.16 for
every dollar they
earned in premiums
107.4
2006 produced the best
underwriting result
since the 87.6 combined
ratio in 1949
100.7
100.1
100
2007/8 deterioration due
primarily to falling rates, but
results still strong assuming
normal CAT activity
98.3
97.0
2005 figure benefited from
heavy use of reinsurance
which lowered net losses
92.5
92.7
06
07:H1
93.5
90
01
02
03
04
Sources: A.M. Best; ISO, III. *III estimates for 2007/8.
05
07F
08F
Ten Lowest P/C Insurance Combined
Ratios Since 1920 (& 2007:H1)
94
92.7
92.4 92.5
92.3
92.1
93
92
93.3
93.0 93.1 93.1
2007 is off to a
great start
91.2
91
90
89
88
87.6
87
86
The industry’s best
underwriting years
are associated with
periods of low
interest rates
The 2006 combined
ratio of 92.5 was the
best since the 87.6
combined in 1949
85
1949
1948
1943
1937
1935
2006
2007*
1950
1939
1953
Sources: Insurance Information Institute research from A.M. Best data. *2007 first half actual.
1936
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50
-55
Insurers earned a record underwriting profit of
$31.7 billion in 2006, the largest ever but only the
second since 1978. Expect figure near $28 billion in
2007 assuming “normal” CAT losses. Cumulative
underwriting deficit since 1975 is $412 billion.
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
$ Billions
Underwriting Gain (Loss)
1975-2007F*
Source: A.M. Best, Insurance Information Institute *Actual 2007:H1 underwriting profit = $14.402B
annualized to $28.8B.
90
94.3
A very strong 2006 resulted from
favorable frequency & severity
trends and low CAT activity
96.4
104.5
105.3
94.3
95
98.4
100
102.7
99.8
104.9
103.5
104.5
105
103.9
110
109.9
115
110.9
Personal Lines
Combined Ratio, 1993-2006
85
93
94
95
96
97
98
Source: A.M. Best; Insurance Information Institute.
99
00
01
02
03
04
05
06
Private Passenger Auto (PPA)
Combined Ratio
PPA is the profit
juggernaut of the p/c
insurance industry today
110
105
107.9
104.2
103.5
101.7 101.3101.3
101.1
101.0
Auto insurers have
shown significant
improvement in
PPA underwriting
performance since
mid-2002, but
results are
deteriorating.
99.5
100
95
109.5
98.4
Average Combined
Ratio for 1993 to 2005:
101.0
94.3
95.1 95.5
90
93
94
Sources: A.M. Best; III
95
96
97
98
99
00
01
02
03
04
05
06
Homeowners Insurance
Combined Ratio
165
158.4
Average 1990 to 2006= 111.8
155
Insurers have paid out an average of
$1.12 in losses for every dollar earned
in premiums over the past 17 years
145
135
121.7
125
118.4
113.6
112.7
117.7
115 113.0
121.7
109.4 108.2111.4
105
109.3
101.0
98.2
95
100.3
94.4
90.4
85
90
91
92
Sources: A.M. Best; III
93
94
95
96
97
98
99
00
01
02
03
04
05 06F
Commercial Lines Combined
Ratio, 1993-2006
03
04
122.3
110.2
111.1
112.3
109.7
105.4
102.5
100
Outside CATaffected lines,
commercial
insurance is doing
fairly well. Caution is
required in
underwriting longtail commercial lines.
102.0
105
103.9
110
107.6
2006 results benefited from relatively
disciplined underwriting, low CAT
losses and reserve releases
95
90
90.5
115
110.3
120
110.2
125
112.5
Commercial coverages
have exhibited extreme
variability. Are current
results anomalous?
85
93
94
95
96
97
Source: A.M. Best; Insurance Information Institute
98
99
00
.
01
02
05
06
Impact of Reserve Changes on
Combined Ratio
$10
$5
$0
($5)
0.1
$0.4
$18.9
$15
$22.8
3.5
$36.9
$25
$20
$33.4
6.5
$10.8
Reserve Development ($B)
$35
$30
($10)
00
01
02
03
10
9
8
Reserve
7
adequacy has
6
4.5
improved
5
substantially
4
3
2
1
-1.2 -1.6 -1.3 -1.1
0
(1)
(2)
($5.0)
($5.3) ($7.0)($6.0)
(3)
04
05
06
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
07F
08F
09F
Combined Ratio Points
8.6 8.9
$40
PY Reserve Development
Combined Ratio Points
Cumulative Prior Year Reserve
Development by Line (As of 12/31/06)
$1,500
$1,000
$366
$1,172 $1,176
-$1,500
-$1,886
-$2,000
-$2,500
-$1,116
Release
-$3,000
-$96
-$100
-$100
-$254
Pr
C
op
om
m
.A
Pr
ut
od
o
.L
ia
bi
Fi
lit
nl
y
.G
ua
ra
In
nt
te
y
rn
at
io
na
l
O
Sp
th
ec
er
ia
lty
W
Li
or
ab
ke
.
r'
sC
Fi
om
de
p
lit
y/
C
Su
om
re
m
ty
er
ci
al
M
O
ul
th
ti
er
Li
ab
ili
R
ty
ein
su
ra
nc
e
Reserve redundancies in
most lines have resulted
in releases in recent
years
ec
ia
l
ty
M
al
Sp
M
ed
H
om
PD
A
PP
Li
ab
A
PP
e
-$3,006
ili
ty
-$3,500
-$413
-$1,000
-$475
-$779
-$500
-$1,174
$ Billions
$0
-$48
$500
-$53
Strengthening
Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.
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
KEY LINES
Results Will Remain
Fairly Robust in 2007,
But What About 2008?
COMMERCIAL
MULTI-PERIL &
COMMERCIAL
AUTO
Commercial Auto Liability
& PD Combined Ratios
120.1
85
87.7
94
93.4
88.3
84.5
Commercial Auto has
improved dramatically
90
82.8
95
96.6
99.4
106.6
101.6
105.9
108.9
113
PD = 97.5
93.8
100
Average Combined:
Liability = 108.8
122.5
96.7
105
105.6
102.2
110
112
115
112.1
120
115.9
125
120.5
Comm Auto PD
112.1
Comm Auto Liab
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
06
Commercial Multi-Peril Combined
105.5
101.9
93.8
83.6
85
97.7
104.9
Liab. Combined 1995 to 2004 = 113.8
89.0
95
90
116.1
116.2
121.0
117.0
115.0
115.0
122.4
CMP- has
improved recently
100
CMP-Liability
CMP-Non-Liability
97.3
105
100.7
110
113.1
115
108.5
113.6
120
119.8
116.8
125
119.0
130
115.3
125.0
(Liability vs. Non-Liability Portion)
Non-Liab. Combined = 105.2
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
06
WORKERS
COMPENSATION
OPERATING
ENVIRONMENT
Workers Comp Combined Ratios,
1994-2006P
87
90
87
88
95
96
103
107
110
122
123
118
111
104
101
100
106
100
97
97
101
110
101
120
107
119
130
115
131
140
135
140
Percent
Workers Comp Calendar Year vs. Ultimate Accident Year –
Private Carriers
80
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
Calendar Year
Accident Year
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
Workers Comp Lost-Time
Claim Frequency (% Change)
Percent
Change
Lost-Time Claims
2
0.5
0.3
Cumulative Change of –52.1%
since 1991 means that lost work
time claims have been cut by
more than half
0
-2
-2.3
-4
-6
-4.2 -4.4
-3.9
-4.5
-6.5
-8
-10
91
92
-9.2
93 94
95
-3.9
-4.5 -4.1
-4.5
-6.6 -6.8
-6.9
96
97
98
99
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
00
01
02
03
04
05 06p
Workers Comp Indemnity Claims
Costs Have Accelerated, 1993-2006p
Indemnity
Claim Cost (000s)
$19
$17
Annual Change 1991–1996:
Annual Change 1997–2005:
Lost-Time Claims
+1.2%
+6.6%
$19.6
$16.5 $16.9
$17.7 $18.0
$18.6
$15.1
$15
$13.6
$12.4
$13
$11 $9.9 $9.6
$10.0
$9.4 $9.8
$9
$10.6
$11.4
Cumulative Change = +108.5%
(1993-2006p)
$7
$5
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
Accident Year
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
Med Costs Share of Total
Costs is Increasing Steadily
2006p
1996
Indemnity
41%
Medical
59%
1986
Indemnity
52%
Indemnity
55%
Medical
48%
Medical
45%
Source: NCCI (based on states where NCCI provides ratemaking services).
PREMIUM
GROWTH
At a Virtual Standstill
in 2007/08
Strength of Recent Hard Markets
by NWP Growth*
25%
1975-78
1984-87
2001-04
2006-2010 (post-Katrina)
period could resemble 1993-97
(post-Andrew)
20%
15%
10%
5%
0%
-5%
2005: biggest real drop in
premium since early 1980s
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
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2007-10 figures are III forecasts/estimates.
Growth in Net Written
Premium, 2000-2008F
15.3%
10.0%
8.4%
5.0%
P/C insurers will experience
their slowest growth rates
since the late 1990s…but
underwriting results are
expected to remain healthy
3.9%
2.7%
0.5%
2000
2001
2002
2003
2004
2005
*2007 figure base on 2007 actual first half result of 0.1%.
Source: A.M. Best; Forecasts from the Insurance Information Institute.
2006
0.1%
0.3%
2007F*
2008F
Most Layers of Coverage are
Being Challenged/Leaking
$100 Million
Retro
Reinsurance
$50 Million
Excess
$10 Million
Primary
$2 Million
$1 Million
Reinsurers losing to
higher retentions,
securitization
Excess squeezed by
higher primary
retentions, lower
reins. attachments
Lg. deductibles,
self insurance,
RRGs, captives
erode primary
Retention
Source: Insurance Information Institute from Aon schematic.
Risks are comfortable
taking larger retentions
Risk Retention Group Premiums,
1988 – 2006*
$2,449.1
$2,773.7
06*
$2,197.8
$1,737.7
05
$751.9
97
$944.0
$575.5
$707.6
95
$775.5
$585.8
94
$875.3
$527.2
$493.7
92
93
$493.6
$419.3
90
91
$358.4
500
89
1,000
$250.2
1,500
99
2,000
$790.5
2,500
98
Risk retention (& self-insurance)
group premiums have risen rapidly
in recent years and represent a form
of competition to traditional
insurers and captives
3,000
$1,265.1
Millions of Dollars
*2006 Projected
Source: Risk Retention Reporter, Insurance Info. Institute
04
03
02
01
00
96
88
0
Leading Captive Domiciles
Worldwide, 2005 vs. 2006
158
160
165
161
166**
169**
200
208
208
242
235
400
382
381
380
383*
600
542
563
800
Large and growing number of
captive domiciles worldwide
bleeding away tradition
commercial risks
733
740
1,000
2006
987*
989
2005
Sources: Business Insurance, March 12, 2007, III
i
aw
ai
H
ue
rn
se
y
Ba
rb
ad
Lu
os
xe
m
bo
Tu
ur
rk
g
s&
C
ai
co
s
Is
le
of
M
an
*BI estimate. **Excludes credit life insurers.
G
BV
I
Be
rm
ud
a
C
ay
m
an
s
V
er
m
on
t
0
Leading US Captive Domiciles,
2005 vs. 2006
59
70
NV
AZ
DC
6
10
53
74
SC
97
HI
100
58
122
146
200
158
160
300
15
17
400
13
21
500
15
30
U.S. captive domiciles
experienced dramatic
growth in 2006, hurting
traditional commercial
insurers, especially in the
middle market space
33
39
600
2006
542
563
2005
NY
UT
MT
GA
KY
0
VT
Sources: Business Insurance, March 12, 2007; III
PRICING
Under Intense Pressure
in 2007/08
$650
$847
$851
$847
$838
$823
$724
$690
$668
$700
$651
$750
$685
$800
$703
$850
$705
$900
Countrywide auto
insurance expenditures
are expected to fall 0.5%
in 2007, the first drop
since 1999
$691
$950
$780
Average Expenditures on
Auto Insurance
Lower underlying
frequency and modest
severity are keeping auto
insurance costs in check
$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
Average Expenditures on
Homeowners Insurance**
Countrywide home insurance expenditures
rose an estimated 6% in 2006
$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
$450 $418
$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
($25,000)
95
96
97
98
99
00
01
0.41%
0.40%
0.39%
0.38%
0.37%
0.36%
0.35%
0.34%
0.33%
0.32%
02
03
04
05 06E 07F 08F 0.31%
Median Existing Home Price
Homeowners Insurance Expenditure as % Home Price
Source: National Association of Realtors, NAIC; Insurance Info. Institute calculations and HO expenditure estimates/
forecasts for years 2005-2008.
HO Ins. Expend. As % Home Price
0.398%$222,700
0.397%
$218,800
$221,900
0.376%
$219,000
0.359%
0.373%
$180,200
0.371%
$167,600
0.354%
$156,600
0.342%
$147,300
0.345%
$141,200
$136,000
$129,000
$25,000
0.346%
$75,000
0.354%
$125,000
0.353%
$175,000
0.359% $122,600
$225,000
0.357% $117,000
Median Existing Home Price
$275,000
Record catastrophe losses and
declining home prices are pushing
HO insurance expenditures as a %
of median home price up
$195,200
Homeowners Insurance Expenditures
as a % of Median Existing Home
Prices, 1995-2008F
Average Commercial Rate Change,
All Lines, (1Q:2004 – 2Q:2007)
0%
-0.1%
-2%
-4%
-6%
-8%
Magnitude of rate decreases diminished
greatly after Katrina but have grown again
-2.7%
-3.0%
-4.6%
-5.3%
-3.2%
-5.9%
-7.0%
-8.2%
-10%
-12%
-9.4%
-9.7%
-9.6%
KRW Effect
-11.3%
-11.8%
-14%
1Q04 2Q04 3Q04 4Q041Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q064Q06 1Q07 2Q07
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Cumulative Commercial Rate
Change by Line: 4Q99 – 2Q07
Commercial account pricing
has been trending down for 3
years and is now on par with
prices in late 2001, early 2002
Source: Council of Insurance Agents & Brokers
Average Commercial Rate
Change by Line: 4Q99 – 2Q07
Commercial accounts trended
downward from early 2004 to mid2005 though that trend moderated
post-Katrina
Source: Council of Insurance Agents & Brokers
Average Commercial Rate Change
by Account Size: 4Q99 – 2Q07
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%
Commercial Property
Business Interruption
71%
Largest increases for Commercial
Property & Business Interruption are
in the Southeast, smallest in Midwest
63%
60%
48%
50%
40%
32%
35%
28%
30%
21%
20%
21%
12%
10%
Northeast
Midwest
10%
0%
Southeast
Southwest
Pacific NW
Source: Council of Insurance Agents and Brokers
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 1st Qtr. 2007
12%
Commercial Property
11%
10%
8%
9%
Business Interruption
9% 9%
8%
6%
5%
Commercial Property &
Business Interruption
increases are
disappearing in the
Southeast; Completely
gone in the Midwest &
Northeast
4%
2%
“Soft” market seemed to
hit Midwest about 1 year
before the rest of the US
0%
Southeast
Southwest
Pacific NW
Source: Council of Insurance Agents and Brokers
0% 0%
0% 0%
Northeast
Midwest
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 2nd Qtr. 2007
12%
Commercial Property
11%
10%
8%
6%
4%
4%
4%
Business Interruption
Commercial Property & Business
Interruption increases are disappearing
even in the Southeast; Completely gone
in the Midwest & Northeast
“Soft” market seemed to
hit Midwest about 1 year
5%
before the rest of the US
3%
2%
0%
0%
Southeast
Southwest
0%
Pacific NW
Source: Council of Insurance Agents and Brokers
0%
0% 0%
Northeast
Midwest
EXPENSES
Will Expense Ratio Rise as
Premium Growth Slows?
Personal vs. Commercial Lines
Underwriting Expense Ratio*
30%
Personal
31.1%
32%
29.4%
Commercial
30.0%
30.8%
29.9%
29.1%
28%
25.6% 26.4% 26.3%
26.6%
26%
25.0%
24.3%
24%
25.6% 25.6%
23.4%
25.0%
24.8% 24.5%
24.4%
26.1%
24.6%
24.7%
Expenses ratios will likely rise
as premium growth slows
22%
20%
96
97
98
99
00
01
*Ratio of expenses incurred to net premiums written.
Source: A.M. Best; Insurance Information Institute
02
03
04
05
06
CAPACITY/
SURPLUS
The Industry in
Underleveraged
U.S. Policyholder Surplus:
1975-2007*
$550
$500
$450
Capacity as of 6/30/07 was $512.8B,
5.3% above year-end 2006, 80%
above its 2002 trough and 54%
above its 1999 peak.
$400
$ Billions
$350
$300
$250
$200
Foreign reinsurance
and residual market
mechanisms absorbed
45% of 2005 CAT
losses of $62.1B
$150
$100
$50
Capacity exceeded a
half trillion dollars for
the first time during
the 2nd quarter of 2007
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
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*
Source: A.M. Best, ISO, Insurance Information Institute.
*As of June 30, 2007
Capital Raising by Class Within
15 Months of KRW
$ Billions
Insurance Linked
Securities, $6.253 ,
19%
Insurers &
Reinsurers raised
$33.7 billion in the
wake of Katrina,
Rita, Wilma—
much of via
offshore vehicles
New Cos., $8.898 ,
26%
Source: Lane Financial Trade Notes, January 31, 2007.
Sidecars, $6.359 ,
19%
Existing Cos.,
$12.145 , 36%
Annual Catastrophe Bond
Transactions Volume, 1997-2006
Number of Issuances
Risk Capital Issues ($ Mill)
$4,693.4
$5,000
Catastrophe bond issuance has
$4,500
soared in the wake of Hurricanes
$4,000
Katrina and the hurricane
$3,500
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
97
98
99
00
01
02
03
Source: MMC Securities and Guy Carpenter; Insurance Information Institute.
04
05
06
20
18
16
14
12
10
8
6
4
2
0
Number of Issuances
Risk Capital Issued
Reasons Behind Capital Build-Up
& Repurchase Surge
$769.2
95
$7,094.1
$4,370.0
$5,242.3
$763.7
$658.8
94
$566.8
92
$310.1
$418.1
91
$952.4
$311.0
$646.9
88
$1,000
$564.0
$2,000
87
$3,000
$1,539.9
$4,000
Returning capital owners
(shareholders) is one of the few
options available
$2,764.2
$5,000
$4,297.3
$6,000
$5,266.0
•Reasonable investment
performance
•Lack of strategic alternatives
(M&A, large-scale expansion)
$4,586.5
$7,000
98
•Moderate catastrophe losses
$4,497.5
$8,000
$2,385.6
•Strong underwriting results
97
First half 2007 share
buybacks are already 86%
of the 2006 record
$6,173.0
P/C Insurer Share Repurchases,
1987- First Half 2007 ($ Millions)*
06
05
04
03
02
01
07H1
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
00
99
96
93
90
89
$0
MERGER &
ACQUISITION
Few Catalysts for Major
P/C Consolidation in ‘08
P/C Insurance-Related M&A
Activity, 1988-2006
100
$20,353
80
$9,264
60
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
.
Source: Conning Research & Consulting.
120
40
20
0
Number of Transactions
$35,221
140
$425
$8,059
$11,534
$1,882
$0
$2,435
$5,137
$2,780
$10,000
$3,450
$20,000
$5,100
$30,000
$486
$40,000
No model for
successful
consolidation
has emerged
$19,118
Reinsurance,
distribution are
exceptions
$40,032
$55,825
$30,873
$50,000
2006 surge due
mostly to 2 deals. No
trend started.
$5,638
Transaction Value ($ Mill)
$60,000
Number of Transactions
$1,249
Transaction Values
Distribution Sector: InsuranceRelated M&A Activity, 1988-2006
$2,500
$2,000
300
No extraordinary
trends evident
$1,934
250
200
$1,633
$0
96 & Consulting.
97 99
Source: Conning Research
00
01
02
$944
03
04
150
100
50
$212
$60
$500
$446
$542
$1,000
$689
$1,500
$7
Transaction Value ($ Mill)
$3,000
Number of Transactions
0
05
06
Number of Transactions
$2,720
Transaction Values
Distribution Sector M&A
Activity, 2005 vs. 2006
2005
Other
4%
Title
Insurer
9%
Buying
Distributor
7%
Bank Buying
Agency
29%
Source: Conning Research & Consulting
2006
Agency
Buying
Agency
51%
Insurer
Title
Buying
4%
Distributor
7%
Bank Buying
Agency
25%
Number of
bank
acquisitions
is falling
years
Other
2%
Agency
Buying
Agency
62%
Motivating Factors for Increased
P/C Insurer Consolidation in 2007
Motivating Factors for P/C M&As
• Slow Growth: Growth is at its lowest levels since the late 1990s
 NWP growth is forecast at 1.8% in 2007 and 1.9% in 2008
 Prices are falling or flat in most non-coastal markets
• Accumulation of Capital: Excess capital depresses ROEs




Policyholder Surplus up 14.4% in 2006 and up 71% since 2002
Insurers hard pressed to maintain earnings momentum
Options: Share Buybacks, Boost Dividends, Invest in Operation, Acquire
Option B: Engage in destructive price war and destroy capital
• Reserve Adequacy: No longer a drag on earnings
 Favorable development in recent years offsets pre-2002 adverse develop.
• Favorable Fundamentals/Drop-Off in CAT Activity
 Underlying claims inflation (frequency and severity trends) are benign
 Lower CAT activity took some pressure of capital base
Source: Insurance Information Institute.
INVESTMENT
IRONY
More Pain, Little Gain
Net Investment Income
$60
$ Billions
$50
$40
Investment income
posted modest gains
in 2006, but is
running flat in 2007
Growth History
$30
2002: -1.3%
2003: +3.9%
$20
2004: +3.4%
2005: +24.4%*
$10
$0
2006: +5.2%
2007: 0.0%**
757677 787980 818283 848586 878889 909192 939495 969798 990001 020304 050607*
Source: A.M. Best, ISO, Insurance Information Institute;
*Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. **Based on annualized H1 result of $26.128B.
Total Returns for Large Company
Stocks: 1970-2007*
S&P 500 was up 13.62% in 2006, Up 7.58% YTD 2007*
40%
30%
20%
10%
0%
-10%
Markets are up in 2007
for the 5th consecutive
-20%
Source: Ibbotson Associates, Insurance Information Institute.
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
-30%
1970
year (so far)
*Through September 21, 2007.
$4,173
$3,359
$13,016
$9,701
$9,125
$6,610
$9,244
$5,997
$1,664
$4,806
$5,000
$2,880
$10,000
$9,818
$9,893
$15,000
$10,808
$18,019
Realized capital gains
rebounded strongly in 2004/5
but fell sharply in 2006
despite strong stock market
as insurers “bank” their
gains. Rising again in 2007.
$6,631
$20,000
$16,205
US P/C Net Realized Capital Gains,
1990-2007:H1 ($ Millions)
-$1,214
$0
-$5,000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
Sources: A.M. Best, ISO, Insurance Information Institute.
*As of June 30, 2007.
Property/Casualty Insurance
Industry Investment Gain1
$ Billions
$57.9
$60
$52.3
$56.9
$51.9
$47.2
$50
$59.4
$44.4
$42.8
$55.7
$48.9
$36.0
$40 $35.4
$30
$45.3
$60.6
Investment gains fell in 2006 and
even now are only marginally larger
than in the late 1990s
$20
$10
1Investment
07
**
06
05
*
04
03
02
01
00
99
98
97
96
95
94
$0
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. **Annualized H1 result of $30.301B.
Sources: ISO; Insurance Information Institute.
CATASTROPHIC
LOSS
What Will 2008 Bring?
Most of US Population & Property
Has Major CAT Exposure
Is
Anyplace
Safe?
Source: Risk Management Solutions.
U.S. Insured Catastrophe Losses*
$8.3
$7.4
$2.6
$10.1
$8.3
$4.6
95
96
97
98
99
00
01
02
$100.0
$4.0
$5.5
$16.9
$9.2
$61.9
$4.7
91
92
93
94
$5.9
$7.5
$2.7
$20
89
90
$40
$26.5
$60
$22.9
$80
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.
$12.9
$27.5
$120
$100
$100 Billion
CAT year is
coming soon
$ Billions
07**
20??
03
04
05
06
$0
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Estimated through 9/22/07.
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
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)..
Distribution of US Insured CAT
Losses: TX, FL vs US, 1980-2006*
$ Billions of 2005 Dollars
Rest of US, $176 ,
68%
Florida
accounted for
22% of all US
insured CAT
losses from
1980-2006:
$57B out of
$249.3B
*All figures (except 2006 loss) have been adjusted to 2005 dollars.
Source: PCS division of ISO.
Texas, $25.6 , 10%
Florida, $57 , 22%
Announced Katrina, Rita, Wilma
Losses by Segment
$ Billions
Lloyd's, $3.5 , 9%
Europe, $4.9 , 13%
Catastrophes are
global events.
Only 39% of
KRW losses were
borne by US
primary insurers
Bermuda, $10.9 ,
29%
*As of 2/21/06
Source: Dowling & Partners, RAA.
U.S. Reinsurer,
$3.4 , 9%
Other, $0.3 , 1%
U.S. Primary, $14.2
, 39%
2007 Hurricane Season:
No Big Hits…So Far
So Far, So Good
2007 season has
seen 10 named
storms including
two rare Category 5
storms, but both
have missed the US
Source: www.wunderground.com, accessed 9/17/07; Insurance Information Institute
U.S. Catastrophe Losses 2006: States
With Largest Losses ($ Millions)
$1,600
$1,400
$1,200
$1,000
$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
$800
$873
$688
$601
$600
$400
$200
SURPISE!! Indiana ranked first
highest, with $1.5 billion in insured
catastrophe losses in 2006
$0
Indiana
Missouri
Tennessee
Texas
Kansas
*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.
Source: ISO; Insurance Information Institute
U.S. Catastrophe Losses 2007:Q2
States With Largest Losses ($ Millions)
$500
$450
$435
Six catastrophe events produced 504,000
claims* in 25 states and cost insurers $2.175bn
during the 2nd quarter of 2007. Catastrophe
losses through the first half of 2007 total $3.4bn.
$400
$322
$350
$300
$250
$210
$200
$160
$150
$130
$100
$50
$0
Texas
Minnesota
Kansas
New Jersey
New York
*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.
Source: PCS/ISO; Insurance Information Institute
Number of Tornadoes,
1985 – 2006p
1254
1333
1819
1376
941
1216
1071
1148
97
1345
1173
96
1424
1234
95
1132
91
702
88
856
656
87
800
684
1,000
765
1,200
1133
1,400
90
1,600
1082
1,800
1173
2,000
1297
There are usually more than
1,000 confirmed tornadoes
each year in the US. They
accounted for about 25% of
catastrophe losses since 1985
600
400
200
Source: US Dept. of Commerce, Storm Prediction Center, National Weather Service; Ins. Info. Inst.
06p
05
04
03
02
01
00
99
98
94
93
92
89
86
85
0
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
$0
Source: AIR Worldwide
$500
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.
$1,000
$1,500
$2,000
$2,500
Percentage Increase in Estimated Housing
Units for MA Counties, 2000 to 2006
Nantucket
Dukes
Plymouth
Worcester
Barnstable
Hampshire
Bristol
Norfolk
Essex
Franklin
Middlesex
Berkshire
Suffolk
Hampden
Massachusetts (State)
0%
13.8%
8.2%
5.2%
5.2%
5.0%
3.5%
3.3%
3.1%
3.0%
2.8%
2.4%
2.1%
1.8%
1.3%
3.2%
2%
4%
Source: Population Division, U.S. Census Bureau
Coastal growth in housing
construction in MA exceeds
the state overall by a wide
margin. Barnstable, Dukes,
Plymouth and Nantucket
counties are seeing large
increases in housing units.
6%
8%
10%
12%
14%
16%
Value of Insured Residential
Coastal Exposure (2004, $ Billions)
Florida
New York
Massachusetts
Texas
New Jersey
Connecticut
Louisiana
S. Carolina
Maine
Virginia
North Carolina
Alabama
Georgia
Delaware
Rhode Island
New Hampshire
Mississippi
Maryland
$942.5
$512.1
$306.6
$302.2
$247.4
$205.5
$88.0
$65.1
$64.5
$60.0
$60.0
$36.5
$29.7
$26.6
$25.9
$24.8
$20.9
$5.4
$0
Source: AIR
$200
42% or all insured
coastal exposure is
commercial, totaling
some $3.0 trillion in 2004
$400
$600
$800
$1,000
Value of Insured Commercial
Coastal Exposure (2004, $ Billions)
New York
Florida
Texas
Massachusetts
New Jersey
Connecticut
Louisiana
S. Carolina
Virginia
Maine
North Carolina
Georgia
Alabama
Mississippi
New Hampshire
Delaware
Rhode Island
Maryland
$1,389.6
$994.8
$437.8
$355.8
$258.4
$199.4
$121.3
$83.7
$69.7
$52.6
$45.3
$43.3
$39.4
$23.8
$20.9
$19.9
$17.9
$6.7
58% or all insured
coastal exposure is
commercial, totaling
some $4.2 trillion in 2004
$0
Source: AIR
$200
$400
$600
$800
$1,000 $1,200 $1,400 $1,600
Insured Losses from Top 10 Hurricanes
Adjusted to 2005 Exposure Levels
(Billions of 2005 Dollars)
With rapid coastal
development,
$40B+ storms will
be more common
$33.0
L)
)*
26
,F
ur
r(
19
M
ia
m
iH
(1
9
nd
re
w
A
rin
a
(2
00
5,
92
,
LA
FL
)*
)
19
38
,N
Y
pr
es
s(
K
at
LI
Ex
(1
96
5,
(1
90
0,
TX
LA
)
)
FL
)
ve
st
on
G
al
be
e
O
ke
ec
ho
D
on
na
H
ur
r(
(1
96
0,
19
28
,
FL
)
FL
)
au
Ft
.L
$26.0
$24.0
ur
r(
19
47
,
FL
de
rd
a
le
H
ur
r(
19
45
,
H
d
es
te
a
H
om
Source: AIR Worldwide
$35.0
$80.0
$42.0
$41.0
)
$20.0
$34.0
$33.0
Be
sts
y
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
$ Billions
Majority of
worst-case
scenarios involve
Florida
**ISO/PCS estimate as of June 8, 2006
Top 10 Most Costly Hurricanes in
US History, (Insured Losses, $2005)
$45
$40
$35
$ Billions
$30
$25
$20
Seven of the 10 most expensive
hurricanes in US history impacted
Florida:
Andrew, Katrina, Wilma, Charley,
Ivan, Frances & Jeanne
$15
$21.6
$10.3
$10
$5
$40.6
$3.5
$3.8
$4.8
$5.0
Georges
(1998)
Jeanne
(2004)
Frances
(2004)
Rita
(2005)
$6.6
$7.4
$7.7
Hugo
(1989)
Ivan
(2004)
Charley
(2004)
$0
Sources: ISO/PCS; Insurance Information Institute.
Wilma
(2005)
Andrew
(1992)
Katrina
(2005)
Nightmare Scenario: Insured Property
Losses for NJ/NY CAT 3/4 Storm
Insured Losses: $110B
Economic Losses: $200B+
Distribution of Insured Property Losses,
by State, ($ Billions)
$80
$70
$60
$40
$30
$20
Total Insured
Property Losses =
$110B, nearly 3
times that of
Hurricane Katrina
$5
$4
$1
PA
CT
Other
$0
NY
Source: AIR Worldwide
NJ
THE FLORIDA
APPROACH TO
CATASTROPHE
RISK
Insurer, Policyholder &
State Impacts
Major Residual Market Plan Estimated
Deficits 2004/2005 (Millions of Dollars)
Florida Hurricane
Catastrophe Fund
(FHCF)
$0
-$200
-$400
-$600
-$800
-$1,000
-$1,200
-$1,400
-$1,600
-$1,800
-$2,000
2004
Florida Citizens
2005
Louisiana Citizens
Mississippi Windstorm
Underwriting
Association (MWUA)
-$516
-$595 *
-$954
-$1,425
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
Florida Citizens Exposure to
Loss (Billions of Dollars)
$700
$600
Exposure to loss in Florida
Citizens nearly doubled in 2006
and was up another 50%
during the first half of 2007
$600.0
$500
$408.8
$400
$300
$200
$154.6
$195.5
$206.7
$210.6
2003
2004
2005
$100
$0
2002
Source: PIPSO; Insurance Information Institute. *As of June 30.
2006
2007E*
Pre- vs. Post-Event in FL for
2007 Hurricane Season
$43.8B
$10.1
$10.4
$10.9
$12.4
$15.0
$17.6
1-in-20
1-in-30
1-in-50
1-in-70
1-in-85
1-in-100
$0
$25.8
$14.6
$10
Total =
$25.0B
$20.0 Billion
$24.1
$35.0B
$40
$20
$54.2
$49.5B
$50
$30
$55.0B
$37.4
$60
There is a very significant
likelihood of major, multiyear assessments in 2007
$80.0B
$9.9
Billions
$70
Post-Event Funding (Assessments & Bonds)
$34.5
$80
Pre-Event Funding
$31.4
$90
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.
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.
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
TAMPA
Average Savings: $100
Cost of 1-in-30 Storm: $2,300
Cost is 23 times avg. savings
Average Savings: $30
Cost of 1-in-30 Storm: $2,075
Cost is 69 times avg. savings
MIAMI
Average Savings: $1,120
Cost of 1-in-30 Storm: $3,375
Cost is 3 times avg. savings
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
New Condo Construction in
South Miami Beach, 2007-2009
• Number of New Developments: 15
• Number of Individual Units: 2,111
• Avg. Price of Cheapest Unit: $940,333
• Avg. Price of Most Expensive Unit: $6,460,000
• Range: $395,000 - $16,000,000
• Overall Average Price per Unit: $3,700,167*
• Aggregate Property Value: At least $6 Billion
*Based on average of high/low value for each of the 15 developments
Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007.
REINSURANCE
MARKETS
Reinsurance Prices are
Stabilizing; Falling in Some
Areas
Share of Losses Paid by
Reinsurers, by Disaster*
70%
60%
50%
40%
30%
Reinsurance is playing
an increasingly
important role in the
financing of megaCATs; Reins. Costs are
skyrocketing
30%
25%
60%
45%
20%
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.
Announced Katrina, Rita, Wilma
Losses by Segment
$ Billions
Lloyd's, $3.5 , 9%
Europe, $4.9 , 13%
Catastrophes are
global events.
Only 39% of
KRW losses were
borne by US
primary insurers
Bermuda, $10.9 ,
29%
*As of 2/21/06
Source: Dowling & Partners, RAA.
U.S. Reinsurer,
$3.4 , 9%
Other, $0.3 , 1%
U.S. Primary, $14.2
, 39%
Ratio of Reinsurer Loss & Underwriting
Expense to Premiums Written, 1985-2006
1.26
1.06
1.01
1.17
1.13
1.14
1.06
1.02
1.10
1.18
1.08
1.03
0.95
1.0
Katrina,
Rita, Wilma
Hurricane Andrew
1.07
1.1
1.08
1.09
1.06
1.10
1.2
1.07
1.3
Liability Crisis
1.07
1.4
1.21
Loss & LAE Ratio
1.5
Sept. 11
1.39
Despite the respite in 2006,
reinsurers paid an average of
$1.11 in loss and expense for
every $1 in written premium
since 1985
0.9
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
REINSURANCE
An Industry
Under Siege?
Reinsurer Market Share Comparison:
1990 vs. 2006
1990
Offshore
Reinsurer
35.3%
U.S.
Reinsurer
64.7%
2006
Offshore
Reinsurer
53.1%
U.S. Reinsurer market
share fell precipitously
between 1990 and 2006
Sources: Reinsurance Association of America; Insurance Information Institute.
U.S.
Reinsurer
46.9%
Reasons to Be Concerned About LongRun Reinsurance Market Prospects
Reasons why, over time, reinsurer underwriting
results will be worse than primary insurers:
1. Increasing capital concentration/less need for reinsurance
2. Increasing ease and speed of post-event capital raising
3. Increasingly sophisticated primary clients, aided by
reinsurance intermediaries
4. End of “payback” concept
5. Trend toward government intervention in reinsurance
6. Tougher rating agency capital requirements
Source: Dowling & Associates, June 22, 2007.
Historical Analysis of US
vs. Alien Reinsurance
Market Share
Long-Term Trend for US Professional
Reinsurers Looks Bleak
32
32
35
46
45
46
42
47
40
40
51
57
65
67
65
63
73
69
94
91
61
60
75
80
96
100
The number of U.S. Professional
Reinsurers reporting to the RAA
has dropped by 74% since 1981,
reflecting the increasing
dominance of foreign reinsurers
105
120
120
140
124
129
Number of U.S. Professional Reinsurers
Reporting to the RAA, 1981-2006
20
0
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
Source: Reinsurance Association of America; Insurance Information Institute.
Number of Offshore Domiciles,
1997-2006
115
While the number of offshore domiciles for
reinsurers has not changed significantly over the
past decade, the number of offshore reinsurers and
premiums ceded to them have increased sharply.
110
105
105
102
101
100
96
98
98
105
100
96
95
95
90
85
80
97
98
99
00
01
02
Source: Reinsurance Association of America; Insurance Information Institute.
03
04
05
06
Avg. Number of Reinsurers per Domicile:
Assuming vs. Assuming & Owing
Recoverables, 1997-2006
38.2
41.1
04
05
24.0
22.3
22.8
23.8
23.3
32.1
20.5
29.5
21.8
23.3
20
18.3
30
20.9
27.9
35
34.0
40
42.2
40.9
45
25
43.4
50
44.8
The average number of offshore reinsurers per domicile
is growing. Since 1997 the number of reinsurers
assuming premiums is up 31.5%. Including those
owing recoverables, the increase is 60.4%.
15
10
97
98
99
00
01
02
03
Avg. Number Assuming Premium Avg. No. Assumng Prem or Owing Recoverables
Source: Reinsurance Association of America; Insurance Information Institute.
06
Number of Offshore Reinsurers
Assuming Premium vs. Number of
Offshore Domiciles, 1997-2006
2,400
2,300
2,200
2,100
2,000
1,900
1,800
1,700
1,600
1,500
2,287
2,283
Number of Offshore Domiciles
2,321 2,330 2,344
2,283
2,155
110
2,132
2,009
100
While the number of offshore domiciles for
reinsurers has not changed significantly over the
past decade, the number of offshore reinsurers
increased by 437 or 23.4% since 1997
90
1,846
80
97
98
99
00
01
02
03
Source: Reinsurance Association of America; Insurance Information Institute.
04
05
06
Number of Offshore Domiciles
No. Reinsurers Assuming Premium
No. Offshore Reinsurers Assuming Premium
No. of Offshore Reinsurers Assuming
Premium or Owing Recoverables vs.
Number of Offshore Domiciles, 1997-2006
No. Offshore Reins. Assuming Prem. or Owing Recoverables
4,305
4,013 4,164
4,257
4,113
4,000
3,336
3,500
3,000
4,007
110
3,371
2,822 2,830
100
2,500
2,000
1,500
While the number of offshore domiciles for
reinsurers has not changed significantly over the
past decade, the number of offshore reinsurers
assuming premium or owing recoverables
increased by 1,435 or 50.9% since 1997
90
1,000
80
97
98
99
00
01
02
03
Source: Reinsurance Association of America; Insurance Information Institute.
04
05
06
Number of Offshore Domiciles
4,500
No. Reinsurers Assuming Premium
No. of Offshore Domiciles
U.S. Unaffiliated Reinsurance Premium
Ceded to U.S. Professional Reinsurers vs.
Ceded Offshore, 1997-2006*
$41,834
$19,620
$22,214
$44,876
$23,246
$45,562
$21,961
$48,816
$22,846
$46,452
$21,275
$21,458
$21,630
2000
$23,601
1999
$25,970
1998
$25,177
1997
$23,246
$18,670
$15,399
$31,630
$14,012
$17,618
$10,000
$16,019 $10,904
$20,000
$16,123 $10,051
$30,000
$26,923
$40,000
$26,174
$50,000
$34,069
$60,000
$44,704
Foreign reinsurer market share continues to
grow relative to US reinsurers
2001
2002
2003
2004
2005
2006
$0
Unaffiliated US Prem Ceded to US Prof. Reins Cos.
Unaffiliated US Prem Ceded Offshore
*Excludes pools.
Sources: Reinsurance Association of America; Insurance Information Institute.
Reinsurer Market Share Comparison:
1997 vs. 2006
1997
Offshore
Reinsurer
$10,051
38.4%
U.S.
Reinsurer
$16,123
61.6%
2006
Offshore
Reinsurer
$22,214
53.1%
U.S. Reinsurer market
share fell sharply between
1997 and 2006
Sources: Reinsurance Association of America; Insurance Information Institute.
U.S.
Reinsurer
$19,620
46.9%
U.S. Reinsurance Cos. vs. Alien Cos.
Market Share, US Unaffiliated
Reinsurance Premium, 1990-2010F*
US reinsurer market share shrank almost every
year since 1990. Forecast is for continued erosion.
42.5%
42.4%
42.3%
41.8%
41.6%
41.9%
40.5%
44.3%
45.2%
48.0%
45.8%
46.8%
48.2%
51.8%
53.1%
57.0%
57.5%
57.6%
57.7%
58.2%
58.4%
58.1%
59.5%
55.7%
54.8%
52.0%
54.2%
53.2%
51.8%
48.2%
46.9%
43.0%
80%
35.3%
90%
64.7%
100%
70%
60%
50%
40%
30%
20%
10%
0%
90 91 92 93 94 95 96 98 99 00 01 02 03 04 05 06 10F
U.S. Reinsurers Alien Reinsurers
*Excludes pools.
Sources: Reinsurance Association of America; Insurance Information Institute.
U.S. Reinsurance Cos. vs. Alien Cos.
Market Share, US Unaffiliated
Reinsurance Premium, 1990-2010F*
35%
52.0%
48.0%
54.2%
45.8%
53.2%
46.8%
51.8%
48.2%
48.2%
51.8%
46.9%
53.1%
43.0%
57.0%
45.2%
44.3%
40.5%
41.9%
41.6%
41.8%
38.4%
40%
35.3%
45%
42.3%
42.5%
50%
42.4%
55%
54.8%
2010 forecast for additional
US market share erosion
55.7%
59.5%
61.6%
58.1%
58.4%
58.2%
57.7%
60%
57.6%
57.5%
65%
64.7%
70%
U.S. insurer market share fell from 64.7% in 1990 to
46.9% in 2006 while foreign reinsurer market share
rose from 35.3% to 53.1%over the same period
30%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 10F
U.S. Reinsurers Alien Reinsurers
*Excludes pools.
Sources: Reinsurance Association of America; Insurance Information Institute forecast for 2010.
U.S. Reinsurance Cos. vs. Alien Cos.
Market Share, US Unaffiliated
Reinsurance Premium, 1997-2006*
Foreign reinsurer market share
continues to grow as US shrinks
53.1%
60%
51.8%
48.2%
46.8%
45.8%
48.0%
45.2%
70%
44.3%
80%
40.5%
90%
38.4%
100%
54.8%
52.0%
54.2%
53.2%
51.8%
48.2%
46.9%
20%
55.7%
30%
59.5%
40%
61.6%
50%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
10%
0%
U.S. Reinsurers Alien Reinsurers
*Excludes pools.
Sources: Reinsurance Association of America; Insurance Information Institute.
48.2%
51.8%
46.9%
53.1%
54.2%
51.8%
48.2%
2000
53.2%
46.8%
1999
45.8%
45.2%
40%
44.3%
45%
38.4%
50%
40.5%
55%
52.0%
48.0%
54.8%
60%
55.7%
65%
U.S. insurer market share fell from 61.6%
in 1997 to 46.9% in 2006 while foreign
reinsurer market share rose from 38.4%
to 53.1%over the same period
59.5%
70%
61.6%
U.S. Reinsurance Cos. vs. Alien Cos.
Market Share, US Unaffiliated
Reinsurance Premium, 1997-2006*
2002
2003
2004
2005
2006
35%
30%
1997
1998
U.S. Reinsurers
2001
Alien Reinsurers
*Excludes pools.
Sources: Reinsurance Association of America; Insurance Information Institute.
U.S. Reinsurance Cos. vs. Alien Cos.
Market Share, US Unaffiliated
Reinsurance Premium, 1997-2006*
Foreign reinsurer markets share continues
to grow as US shrinks
$21,630
$19,620
$22,214
$23,601
$23,246
$25,970
$21,961
$25,177
$22,846
$23,246
$21,275
$18,670
$21,458
$15,399
$17,618
20%
$16,019
40%
$16,123
60%
$14,012
$10,904
80%
$10,051
100%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
0%
U.S. Reinsurers
Alien Reinsurers
*Excludes pools.
Sources: Reinsurance Association of America; Insurance Information Institute.
Top 10 Domiciles for Unaffiliated
Assuming Reinsurers, 2006*
538
Turks & Caicos
412
Bermuda
295
United Kingdom
176
Cayman Islands
Reinsurance risk is
spread throughout the
globe, with significant
numbers of domiciles
in small countries
128
Island of Nevis
55
British Virgin Islands
Barbados
48
Belgium
48
Germany
45
Ireland
45
0
100
200
300
400
Sources: Reinsurance Association of America; Insurance Information Institute.
500
600
Reinsurers Net Written Premiums,
US Business, 1997 - 2005
($ Billions)
$ Billions Premiums Written
$35
$30
Premiums written
are actually falling
despite higher prices
$29.50
$30.63
$28.76
$26.69
$25
$20
$25.33
$24.85
$21.21
$19.93
$19.44
97
98
US reinsurance premiums
written grew 54% between
1997 and 2003, but fell 17%
from 2003 through 2005
$15
$10
99
00
01
02
03
Source: Reinsurance Association of America; Insurance Information Institute Fact Book 2007, p. 38.
04
05
EXCESS &
SURPLUS LINES
Growth, Performance
& Markets
Premiums: Surplus vs.
Commercial Lines, 2005
1995
Surplus
Lines
6.4%
2005
Commercial
Lines
Surplus
Lines
12.7%
The surplus lines share of the
commercial market doubled
between 1995 and 2005
Source: A.M. Best: Special Report: Surplus Lines Market 2006, September 2006
Commercial
Lines
Gross Surplus Lines Premiums
Written (Non-Admitted GPW)
$37
$35
$33
$31
$29
The importance
of Surplus Lines $ Billions
is demonstrated
+$4.4B
by much faster
+21.4%
growth than for
$33.2
the overall P/C
insurance
industry
+$1.7B
+5.3%
$34.9
$28.8
$27
$25
03
04
Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.
05
Surplus Lines
Taxes Collected
$ Millions
$1,200
$1,150
$1,100
+$114.9M
Surplus Lines
+11.7%
pay more than
$1B+ annually in $1,097.9
premium taxes
+$50.5M
+4.6%
$1,148.5
$1,050
$1,000
$983.0
$950
$900
03
04
Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.
05
Top 10 E&S Insurers by Non-Admitted
2005 Direct Premiums Written
$ Millions
$5,016.6
Lexington Insurance (AIG)
$1,808.0
American Intl Specialty (AIG)
$1,560.0
Steadfast Insurance (Zurich)
$1,194.4
Scottsdale Insurance (Nationwide)
Columbia Casualty (CNA)
$819.1
Arch Specialty (Arch)
$801.4
Evanston Insurance (Markel)
$725.5
Landmark American (Alleghany)
$699.7
Admiral Insurance (Berkley)
$596.9
Essex Insurance (Markel)
$542.0
$0
The Top 10 E&S
insurers wrote $13.76
billion in premiums in
2005, up 126% from
2001 but down 4.8%
from 2003
$1,000 $2,000 $3,000 $4,000 $5,000 $6,000
Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.
Top 10 E&S Markets, by 2005 Gross
Surplus Lines Premiums Written (2005)
$ Millions
$6,423.1
California
$5,202.4
New York
$3,467.2
Florida
$3,046.4
Texas
$1,197.3
New Jersey
California and New
York are by far the
largest E&S markets
$1,016.4
Illinois
$987.7
Pennsylvania
Georgia
$895.6
Louisiana
$882.2
$760.8
Massachusetts
$0
$1,000
$2,000
$3,000
$4,000
$5,000
Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.
$6,000
$7,000
Top 10 States With Fastest
Growing E&S Markets, 2003-2005
% Change in Gross Premiums Written: 2003-2005
103.5%
Wyoming
95.5%
New York
81.0%
South Dakota
76.2%
Montana
57.9%
Hawaii
52.4%
New Hampshire
Minnesota
46.0%
Arizona
45.5%
42.8%
Wisconsin
40.5%
Alabama
0%
Fastest growth is not
usually in most CATprone states as might
be expected
20%
40%
60%
80%
Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.
100%
120%
Most Common Classes of E&S
Business Written, 2005
Percentage of Most Common Types Offered
91.7%
General Liability
83.3%
Commercial Property
79.2%
Professional E&O
75.0%
Product Liability
70.8%
Inland Marine
50%
55% 60%
65%
70% 75%
GL and
Commercial
Property are the
biggest sellers
80%
85% 90%
Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.
95%
Non-Admitted DWP by Top 10
Surplus Lines Insurers ($Bill)
+$3.4B
+30.2%
+$5.0B
+82.0%
$16
$14
+0.2B
+1.0%
$13.6
$13.8
$11.1
$12
$10
$8
$14.5
-0.9B
-5.7%
The Top 10 E&S insurers
wrote $13.76 billion in
premiums in 2005, up
126% from 2001 but
growth has slowed lately
$6.1
$6
$4
$2
$0
01
02
03
04
Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.
05
80.0
80.7
80
79.8
90
74.5
100
B
C
D
W
X
114.3
110
116.8
120
121.6
130
124.4
140
Y
Z
85.8
There was a wide
performance gap in
2005 between the
divergence in
combined ratios
150
136.1
5 Lowest & Highest Combined
Ratios Among E&S Insurers in 2005
70
60
50
A
Source: A.M. Best; Insurance Information Institute.
E
V
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%
1969-2005
Deficient
Loss
Reserves/Inadequate
Pricing
62.8%
Deficient
Loss
Reserves/Inadequate
Pricing
38.2%
Investment
Problems*
7.3%
Alleged
Fraud
11.4%
Rapid
Growth
8.6%
Reinsurance
Sig. Change
Failure
in Business
3.5%
4.6%
Misc.
9.2%
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
13
15
18
35
18
19
31
29
15
12
16
14
13
9
13
12
9
11
9
7
8
10
15
12
20
19
30
31
34
34
40
36
41
50
49
49
49
54
60
49
50
47
70
60
58
The number of impairments varies
significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
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
0
Source: A.M. Best; Insurance Information Institute
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2006
Combined Ratio
115
Combined Ratio after Div
P/C Impairment Frequency
110
105
1.6
1.4
1.2
1
0.8
0.6
0.4
100
95
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
90
2
1.8
Source: A.M. Best; Insurance Information Institute
0.2
0
Impairment Rate
120
Impairment
rates are highly
correlated
underwriting
performance
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
$49.4
Billions
$200
Total = $159.6 Billion
$150
Total = $121.0 Billion
$30.0
$20.4
$100
$70.9
Total = $39.3 Billion
$51.0
$50
$0
$86.7
$95.2
$5.2
$17.1
$17.0
$49.6
$58.7
1980
1990
2000
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
2005
Tort System Costs,
2000-2008F
Tort System Costs
$260
2.03%
1.82%
$246
$233
$240
$220
$200
$180
$260
2.09% 2.05% $270
2.04% 2.03%
2.0%
1.5%
$205
$179
After a period of rapid
escalation, tort system costs
as % of GDP are now falling
$160
$140
$120
2.5%
$100
1.0%
0.5%
0.0%
00
01
02
03
Tort Sytem Costs
04
05
06E
07F
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.
08F
Tort Costs as % of GDP
$280
$295
$261
2.22% 2.24% 2.22%
$261
$300
Business Leaders Ranking of
Liability Systems for 2007
Best States
1. Delaware
2. Minnesota
3.
4.
5.
6.
7.
8.
9.
10.
New in 2007
ME, NH, TN,
UT, WI
Drop-Offs
Nebraska
Iowa
ND, VA, SD, WY,
ID
Maine
New Hampshire
Tennessee
Indiana
Utah
Midwest/West has
Wisconsin
mix of good and
bad states
Worst States
41. Arkansas
42. Hawaii
43. Alaska
44. Texas
45. California
46. Illinois
47. Alabama
Newly
Notorious
AK
Rising
Above
FL
48. Louisiana
49. Mississippi
50. West Virginia
Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
(2006)
Some improvement
in “Judicial
Hellholes” in 2006
Watch List
Miller County, AR
Los Angeles County, CA
San Francisco, CA
Philadelphia, PA
Orleans Parish, LA
Delaware
ILLINOIS
Cook County
Madison County
St. Clair County
West Virginia
Dishonorable
Mentions
Providence, RI
MA Supreme Court
LA Supreme Court
New Jersey
NE Supreme Court
California
TEXAS
Rio Grande
Valley and Gulf
Coast
Source: American Tort Reform Association; Insurance Information Institute
South Florida
Preventing/Limiting Erosion
of Recent Tort Reform
•
•
Tort Pendulum Likely to Swing Against Insurers as Political
Environment Changes
Insurers Must Remain Active Members of Tort Reform
Coalitions at State and Federal Level

•
Pursuing Good Cases Can Set Precedent & Bring About
Quantum Shifts in Judicial Philosophy




•
Campbell v. State Farm (limited punitives)
Safeco v. Burr, Geico v. Edo (FCRA reporting violations)
Asbestos: Class actions limited; no pre-pack bankruptcies
Products Liability: Merck’s successful Vioxx defense
Educate Policyholders About Link Between Tort Environment
and Cost/Availability of Insurance


•
May have more success at the state level
Businesses understand; Need facts to support local efforts
Personal lines customers understand relationship, agents do
Tighten Contract Language

From 9/11 to Katrina, alleged “ambiguities” cost big bucks
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.
•
Under H.R. 2761: “Terrorism Risk Insurance Revision and Extension Act”





15-Yr. Extension, expiring 12/31/22
Certification now required of Treasury Secretary and DHS Secretary and Atty. General
Congress must then enact a joint resolution to fund backstop
Expansion of Act to include NBCR risks (as of 1/1/09) and Group Life
NBCR insurer deductible is 3.5% of direct earned premium, rising 0.5 pts. each year
thereafter
 Eliminates distinction between foreign and domestic act of terrorism
 Reduces trigger to $50 million from $100 million
•
•
•
•
New Democratic Congress (with Committee chairs from urban Northeast states)
predisposed to extend.
Administration has issued veto threat
Senate will likely water down bill
Looking at late 2007 before legislation becomes law.
Sources: 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.
• 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
Summary
• Results were unsustainably good 2006; Overall profitability
reached its highest level (est. 14%) since 1988
 Strong first half in 2007 but ROEs slipping
• Underwriting results were aided by lack of CATs & favorable
underlying loss trends, including tort system improvements
• Property cat reinsurance markets past peak & 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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