Transcript No Slide Title

What Keeps Insurance CEOs
Awake at Night?
Especially in South Carolina
South Carolina Insurance News Service &
South Carolina Legislative Conference Annual Meetings
Charleston, SC
October 18, 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
1. Declining Profitability—Past the Cyclical Peak
 Subprime Lending Crisis: What Does it Mean for Insurers?
 Ratings & Financial Strength
2. Deteriorating Underwriting Trends: Still Strong, for How Long?
 Key Personal & Commercial Lines Review
3.
4.
5.
6.
7.
8.
Vanishing Premium Growth: Approaching a Standstill
Weak Pricing: Competitive Pressures Mounting
Rising Expenses: Creeping Upward
Overcapacity: Rapid Capital/Surplus GrowthROE Pressure
Investment Volatility: More Pain, Less Gain
Catastrophic Loss: The Worst Has Yet to Come
 Reinsurance Summary
9. Shifting Legal Liability & Tort Environment: Will the Pendulum
Swing Against Insurers?
10. Regulatory & Legislative Zealotry: Scrutiny is Mounting
Q&A
#1
DECLINING
PROFITABILITY
Profits in 2006/7 Reached
Their Cyclical Peak;
ROEs Already Falling
$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
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
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
South Carolina:
PROFITABILITY
COMPARISON
ALL LINES: 10yr Avg Return on
Equity, SC & Nearby States
1996-2005
8.0%
7.7%
South Carolina
Georgia
7.3%
North Carolina
7.2%
US
5.8%
Tennessee
5.2%
Florida
1.9%
Alabama
-12.8%
Mississippi
-15%
-10%
-5%
0%
Source: NAIC, Insurance Information Institute
5%
10%
PP AUTO: 10yr Avg Return on
Equity, SC & Nearby States
1996-2005
South Carolina
3.5%
8.0%
Georgia
6.1%
North Carolina
8.4%
US
7.2%
Tennessee
5.1%
Florida
9.0%
Alabama
2.8%
Mississippi
0%
2%
4%
6%
Source: NAIC, Insurance Information Institute
8%
10%
HOME: 10yr Avg Return on
Equity, SC & Nearby States
1996-2005
16.0%
3.1%
South Carolina
Georgia
-5.2%
North Carolina
2.8%
US
-4.5%
Tennessee
0.5%
Florida
-6.9%
Alabama
-35.0%
Mississippi
-40%
-30%
-20%
-10%
Source: NAIC, Insurance Information Institute
0%
10%
20%
Comm M-P: 10yr Avg Return on
Equity, SC & Nearby States
1996-2005
South Carolina
5.4%
8.9%
Georgia
8.3%
North Carolina
5.3%
US
2.7%
Tennessee
2.8%
Florida
-2.5%
Alabama
-17.4%
Mississippi
-20%
-15%
-10%
-5%
0%
Source: NAIC, Insurance Information Institute
5%
10%
15%
WC: 10yr Avg Return on Equity,
SC & Nearby States
1996-2005
South Carolina
1.0%
8.4%
Georgia
6.0%
North Carolina
7.4%
US
8.6%
Tennessee
9.8%
Florida
7.4%
Alabama
9.9%
Mississippi
0%
2%
4%
6%
Source: NAIC, Insurance Information Institute
8%
10%
12%
Comm Auto: 10yr Avg Return on
Equity, SC & Nearby States
1996-2005
South Carolina
5.0%
2.6%
Georgia
8.7%
6.2%
North Carolina
US
6.8%
Tennessee
2.3%
Florida
-1.2%
-2.7%
Alabama
Mississippi
-5%
0%
Source: NAIC, Insurance Information Institute
5%
10%
FINANCIAL
STRENGTH &
RATINGS
Industry Has Weathered
the Storms Well, But Cycle
May Takes Its Toll
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 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
#2
DETERIORATING
UNDERWRITING
Extremely Strong 2006/07;
Relying on Momentum &
Discipline for 2008
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.
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.
PERSONAL LINES:
Private Passenger Auto
90
95.0
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 07F
Private Passenger Auto (PPA)
Combined Ratio
110
PPA is the profit
juggernaut of the p/c
insurance industry today
105
107.9
104.2
103.5
101.7101.3101.3
101.0
Auto insurers have
shown significant
improvement in
PPA underwriting
performance since
mid-2002, but
results are
deteriorating.
109.5
101.1
99.5
100
98.4
96.5
95
Average Combined
Ratio for 1993 to 2006:
101.0
94.3
95.1 95.5
90
93
94
95
Sources: A.M. Best; III
96
97
98
99
00
01
02
03
04
05
06
07F
RNW: Private Passenger Auto,
United States, 1992-2006E
Segmentation
should help
profitability
16%
14%
14%14%
12%
12%
13%
11%
12%
11% 12%
10%
10%
11%
9%
8%
6%
4%
8%
Private passenger auto
profitability deteriorated
throughout the 1990s but
has improved dramatically
4%
2%
2%
2%
0%
92
93
94
95
96
97
Source: NAIC; Insurance Information Institute
98
99
00
01
02
03
04
05 06E
Homeowners Insurance
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
109.4108.2111.4
105
109.3
101.0
98.2
95
100.3
94.4
90.4 91
85
90
91
92
Sources: A.M. Best; III
93
94
95
96
97
98
99
00
01
02
03
04
05
06 07F
Rates of Return on Net Worth for
Homeowners Ins: US
Averages: 1993 to 2005
US HO Insurance = +2.5%
(+3.3% through 2006E)
20%
14.0%
15%
12.4%
9.7%
10%
5%
2.5%
3.6%
5.4%
5.4%
3.6%
3.8%
1.4%
0%
-2.8%
-1.7%
-5%
-4.2%
-7.2%
-10%
93
94
95
96
97
98
99
00
01
Source: NAIC; 2006 figure is Insurance Information Institute estimate.
02
03
04
05
06E
COMMERCIAL
LINES
Commercial Auto
Commercial Multi-Peril
Workers Comp
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
#3
VANISHING
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
Leading US Captive Domiciles,
2005 vs. 2006
600
2006
542
563
2005
500
400
U.S. captive domiciles
experienced dramatic growth in
2006, hurting traditional
commercial insurers, especially
in the middle market space
15
17
6
10
DC
13
21
AZ
15
30
59
70
NV
33
39
53
74
SC
97
HI
100
SC added 24 captives in
2006, a 20% increase
58
122
146
200
158
160
300
NY
UT
MT
GA
KY
0
VT
Sources: Business Insurance, March 12, 2007; III
#4
WEAK PRICING
Under Intense Pressure
in 2007/08, Especially
Commercial Lines
$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
#5
RISING EXPENSES
Expense Ratios Will 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%
27.0%
25.6% 26.4%26.3%
26.6%
26%
25.0%
24.3%
24%
25.6% 25.6%
23.4%
24.8% 24.5%
25.0%
26.1%
26.6%
24.7%
24.4% 24.6%
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
07F
#6
OVERCAPACITY
Accumulation of Capital/
Surplus Depresses ROEs
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
P/C Industry Premium-to-Surplus
Ratio, 1985-2007:H1
Private Carriers
$ Billions
P:S Ratio
At 0.87:1 as of 6/30/07, now
approaching all-time record
premium-to-surplus ratio of
0.84:1 in 1998
600
1.92:1
$512.8B
500
2.5
2.0
400
$447 B
300
1.0
$145 B
Low P:S Ratio
0.84:1 in 1998
100
NWP
0.87:1
P:S Ratio
H1
07
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
0.0
89
88
87
85
86
$76 B
0
Surplus
0.5
06
200
1.5
Calendar Year
H1 = First Half
Source: 1985–2006, A.M. Best Aggregates & Averages;; 2007 ISO
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%
#7
FLAT & VOLATILE
INVESTMENTS
More Pain,
Little Gain
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.
#8
CATASTROPHIC
LOSS
What Will 2008 Bring?
Most of US Population & Property
Has Major CAT Exposure
Is
Anyplace
Safe?
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
$4.7
$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. **Through 9/30/07.
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)..
2007 Hurricane Season:
No Big Hits…So Far
So Far, So Good
2007 season has
seen 13 named
storms including
two rare Category 5
storms, but both
have missed the US
Source: www.wunderground.com, accessed 9/29/07; Insurance Information Institute
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
South Carolina has at least
$150 billion in insured
coastal property exposure—
more than Mississippi,
which suffer $13 billion in
Katrina losses
$0
Source: AIR Worldwide
$500
$1,000
$1,500
$2,000
$2,500
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
44% or all insured
coastal exposure in
South Carolina is
residential, totaling some
$65.1 billion 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
$0
Source: AIR
$200
$400
$600
56% or all insured
coastal exposure in
SC is commercial,
totaling some $83.7
million in 2004
$800
$1,000 $1,200 $1,400 $1,600
Hurricane Strikes &
Population Growth in
South Carolina, By County
Hurricane Strikes vs. Population for
Beaufort County, South Carolina
Source: NOAA
Hurricane Strikes vs. Population for
Charleston County, South Carolina
Source: NOAA
Hurricane Strikes vs. Population for
Colleton County, South Carolina
Source: NOAA
Hurricane Strikes vs. Population for
Georgetown County, South Carolina
Source: NOAA
Hurricane Strikes vs. Population for
Horry County, South Carolina
Source: NOAA
Top 10 Most Costly Hurricanes in
US History, (Insured Losses, $2005)
$45
$40
Seven of the 10 most expensive
hurricanes in US history impacted
Florida:
$41.1
$35
$ Billions
$30
$25
$20
$15
Andrew, Katrina, Wilma, Charley,
Ivan, Frances & Jeanne
Hugo still ranks as the
most expensive storm ever
$10.3
$10
$5
$21.6
6th
$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)
Insured Losses from Top 10 Earthquakes
Adjusted to 2005 Exposure Levels
(Billions of 2005 Dollars)
With development
along major fault
lines, the threat of
$25B+ quakes
looms large
$120
$100
$ Billions
$80
$60
$40
3 of the Top 10
are not West
Coast events
$11
$9
$11
$12
$88
$38
$25
$20
$108
$27
$16
Source: AIR Worldwide
2)
(1
or
-5
th
-1
rid
84
ge
3;
,C
6.
5)
A
(1
H
-1
ay
7w
19
ar
94
d,
;6
C
A
.7
(1
)
0Ft
21
.T
-1
86
ej
on
8;
,C
6.
8)
A
C
(
ha
19rl
es
18
to
57
n,
;7
S
N
.9
C
ew
)
(8
-3
M
-1
ad
88
ri
6;
d,
7.
M
3)
O
*
(
2Sa
7
n
-1
Fr
81
an
2;
cis
7.
7)
co
*
(4
-1
819
06
;7
.9
)
7.
R
(6
-1
-1
83
8;
N
Tr
ee
,A
Fr
an
n
Sa
M
ar
ke
d
cis
co
(8
R
rt
la
nd
,O
Po
Sa
n
Jo
se
,C
A
(7
-1
-1
91
1;
-1
218
77
;
6.
6.
6)
3)
$0
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.
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.
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.
#9
Shifting Legal
Liability & Tort
Environment
Is the Pendulum Swinging
Against Insurers?
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
#10
REGULATORY/
LEGISLATIVE
ZEALOTRY
Scrutiny is Mounting
Legal, Legislative & Regulatory
Threats are Multiplying
•
•
•
Attacks on Underwriting: Perennial issue, with challenges to even longestablished underwriting criteria popping up; Will be a bigger problem with
evolution of Predictive Modeling
 Credit-Based Insurance Scores: Remain the largest issue & became the
subject of a US House O&I hearing Oct. 2
 Education/Occupation Attacked (e.g., FL)
 CAT Models: Black box allegation, short vs. long-term model
 Any type of individual risk rating factor is subject to allegations of
discrimination
Allegations of Collusion via Ratings Agencies, Trades & Modelers: Novel theory
espoused by Gov. Crist and OIR in FL that insurers collude indirectly via ratings
agencies, trade associations and modeling firms
 Some insurers subpoenaed for documents
 Some discussion at recent NAIC meeting
Proliferation of Insurance Regulators: Insurance Commissioner’s influence and
power is waning in many states. There are 632 insurance regulators in the US (50
Commissioners, 50 AGs, 50 Governors, 50 Senators and 432 US)
 Attorneys General: Spitzer (and copycats) did serious damage to
commissioner authority; Followed by AG Hood in MS
 Congress is exerting itself over a wide range of issues
 Governors like Crist not shy on insurance matters Source: Insurance Information Institute.
Legal, Legislative & Regulatory
Threats are Multiplying
•
Antitrust Allegations Against Reinsurance Broker: CT Attorney General Richard
Blumenthal on Oct. 9 filed an antitrust action against Guy Carpenter in CT
Superior Court accusing the reinsurance broker of “choreographing the
reinsurance market to fix prices, stifle competitors and collect excessive profits
at the expense of the entire industry.”
 Alleges 170 small/medium insurers over 50 years overpaid for reinsurance
 Blumenthal says policyholders consequently paid premiums that were up to
40% higher costing them potentially hundreds of millions of dollars
 Suit alleges “Guy Carpenter conspired with numerous reinsurers to exploit
its position as a well-known and dominant reinsurance broker in order to fix
prices and output, foreclose competitors from access, allocate markets,
eliminate competition and substantially increase profits in the extremely
lucrative market for reinsurance.”
 Suit accuses Guy Carpenter of trading exclusive access to a lucrative
book of business in exchange for “excessive fees and other benefits by
creating a series of reinsurance ‘facilities’ aimed at a large block of its
smallest clients.” and “by withholding critical information and leading them
to believe that Guy Carpenter was acting in their best interests.”
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 S. XXXX: “Terrorism Risk Insurance Program Reauthorization Act of 2007”








•
7-Yr. Extension, expiring 12/31/14
Maintains 20% Direct Earned Premium Deductible for duration of Extension
NBCR risks remain excluded (in contrast to House bill)
Eliminates distinction between foreign and domestic acts of terrorism
Deletes requirement that terrorist act be on behalf of foreign person or foreign interest
Changes in definition of terrorist act require substantial rate and form filings in states
Federal government’s cap remains at $100 billion through 2014
Requires Comptroller General to issue report within 1 year on feasibility of NBCR
insurance market; CG must also issue report within 180 days on obstacles in development
of private sector market for terror insurance
Administration has said it will not oppose Senate bill (issued veto threat for House)
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 2006/07; 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
 Managing regulatory/legislative activism
Insurance Information
Institute On-Line
If you would like a copy of this presentation, please
give me your business card with e-mail address