Turning (Non-Life) Markets:
History, Triggers, Catalysts
and Impediments
Amsterdam Circle of Chief Economists
Amsterdam, Netherlands
24 February 2012
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5520  Cell: 917.453.1885  [email protected]  www.iii.org
Presentation Outline
 Historical Criteria, Triggers and Catalysts Associated
With “Market Turns” in Non-Life Insurance Markets
 Underwriting Loss Trends
 Capital/Capacity
 Reinsurance Markets
 Pricing Discipline
 Other Contributing Factors to the Underwriting Cycle
 Investment Environment
 Tort/Casualty Environment
 Inflation
 Economy (Supply/Demand)
 Q&A
2
Historically Four Criteria Must
Be Met for a “Hard Market”
Factors Contributing to Markets
Turns Are Consistent Over Time,
Though the “Great Recession” Has
Altered the Cyclical Dynamics
3
Traditional Criteria Necessary for a “Market
Turn”: All Four Criteria Must Be Met
Criteria
Sustained
Period of
Large
Underwriting
Losses
Material
Decline in
Surplus/
Capacity
Status
Comments on Current Situation
•Apart from 2011 CAT losses, overall p/c underwriting losses
remain modest
•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at
onset of last hard market)
•Prior-year reserve releases continue to reduce u/w losses,
Early Stage boost ROEs, though more modestly
Entered 2011
At Record
High; Since
Fallen
•Surplus hit a record $565B as of 3/31/11
•Fell by 4.6% through 9/30/11 (latest available)
•Little excess capacity remains in reinsurance markets
•Weak growth in demand for insurance is insufficient to
absorb much excess capacity
Tight
•Much of the global “excess capacity” was eroded by cats
Reinsurance Somewhat in •Higher prices in Asia/Pacific
Market
Place
•Modestly higher pricing for US risks
Renewed
•Commercial lines pricing trends have turned from negative
Underwriting Spotty; Some to flat or up in some lines (property, WC); Casualty is flat.
& Pricing
Firming esp. in •Competition remains intense as many seek to maintain
Discipline
Property, WC market share
Sources: Barclays Capital; Insurance Information Institute.
4
Historical Premium Growth
Trends Clearly Show Cyclicality
Primarily Driven by Large,
Sustained Underwriting Losses
Is There Evidence of a Broad
and Sustained Shift in Pricing
Today?
5
1. UNDERWRITING
Have Underwriting Losses
Been Large Enough for Long
Enough to Turn the Market?
Effect of Reserve Releases?
6
Natural Loss Events, 2011
World Map
Winter Storm Joachim
France, Switzerland,
Germany, 15–17 Dec.
Wildfires
Canada, 14–22 May Severe storms, tornadoes
USA, 20–27 May
Hurricane Irene
USA, Caribbean
22 Aug.–2 Sept.
Floods
USA, April–May
Drought
Severe
storms, tornadoes
USA, Oct. 2010–
USA,
22–28
April
ongoing
Flash floods, floods
Italy, France, Spain
4–9 Nov.
Earthquake
Turkey
23 Oct.
Earthquake, tsunami
Japan, 11 March
Wildfires
USA, April/Sept.
Floods
Pakistan
Aug.–Sept.
Floods, flash floods
Australia,
Dec. 2010–Jan. 2011
Landslides, flash floods
Brazil, 12/16 Jan.
Natural catastrophes
Selection of significant
loss events (see table)
Source: MR NatCatSERVICE
Cyclone Yasi
Australia, 2–7 Feb.
Floods
Thailand
Aug.–Nov.
Floods, landslides
Guatemala, El Salvador
11–19 Oct.
Number of Events: 820
Tropical Storm Washi
Philippines, 16–18 Dec.
Drought
Somalia
Oct. 2010–Sept. 2011
Geophysical events
(earthquake, tsunami, volcanic activity)
Meteorological events
(storm)
Earthquake
New Zealand, 22 Feb.
Earthquake
New Zealand, 13 June
Hydrological events
(flood, mass movement)
Climatological events
(extreme temperature, drought, wildfire)
7
US Non-Life Combined Ratio,
1969-2012F
120
Combined Ratio
115
Inflation,
liability
issues
110
Liability
crisis
Capacity
decline,
Torts,
market
crash,
Med cost
inflation
Recent underwriting
results are not as poor
as in prior periods
preceding “hard
markets”
105
100
90
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
95
Current Period Underwriting Results Have Deterorated But Not to
the Extend Experienced Prior to the Hard Markets of a Decade Ago
or in the 1980s; Similarities to the Mid-1970s?
Source: A.M. Best; Insurance Information Institute
10
US Non-Life Net Written Premium
Growth vs. Combined Ratio, 1971-2012F
120
Combined Ratio after Div
Net Written Premium Growth (%)
15%
110
10%
105
5%
100
0%
90
Premium growth tends to accelerate a few
years after underwriting results deteriorate
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
95
-5%
Net Written Premium Growth (%)
20%
115
Combined Ratio
25%
-10%
Premium Growth and Underwriting Results Are Highly Correlated,
But the Relationship is Lagged
Source: A.M. Best; Insurance Information Institute
11
Profitability Peaks & Troughs in the P/C
Insurance Industry, 1975 – 2012F*
ROE
25%
1977:19.0%
1987:17.3%
20%
History suggests next ROE
peak will be in 2016-2017
1997:11.6%
2006:12.7%
15%
9 Years
2012F:
6.1%*
10%
5%
2011E: 3.9%
0%
1975: 2.4%
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
07
08
09
10
11*
12
-5%
1984: 1.8%
*Profitability = P/C insurer ROEs. 2011-12 figures are A.M. Best estimates. Note: Data for 2008-2012 exclude mortgage and
financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG.
Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
Underwriting Gain (Loss)
1975–2011*
($ Billions)
$35
$25
Cumulative
underwriting deficit
from 1975 through
2010 is $455B
$15
Underwriting
losses in
2011 at $34.9
through Q3
will be
largest since
2001
$5
-$5
-$15
-$25
-$35
-$45
-$55
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011*
Large Underwriting Losses Are NOT Sustainable
in Current Investment Environment
* Includes mortgage and financial guaranty insurers in all years
Sources: A.M. Best, ISO; Insurance Information Institute.
P/C Reserve Development, 1992–2013F
Prior Yr. Reserve Release ($B)
Prior Yr. Reserve
Development ($B)
$25
$20
Impact on
Combined Ratio
(Points)
$15
$10
$5
24
15
11
11
8
6
4
9
2
2
0
$0
(2)
-$5
-$10
(0)
(3)
(2)
(4)
(5)
(7)
(8)
-$15
(7)
(9)
(10) (10)
(5)
-2
-4
(10) (11)
(14)
13F
12F
11E
10
09
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
-6
92
-$20
Impact on Combined Ratio (Points)
$30
Prior year reserve
releases totaled $8.8
billion in the first
half of 2010, up from
$7.1 billion in the
first half of 2009
Reserve Releases Remained Strong in 2010 But
Tapered Off in 2011. Releases Are Expected to
Further Diminish in 2012 and 2103
Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this
transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes
development from financial guaranty and mortgage insurance.
Sources: Barclays Capital; A.M. Best.
15
Number of Years with Underwriting
Profits by Decade, 1920s–2010s
Number of Years with Underwriting Profits
Underwriting profits
were the norm prior to
the era of high interest
rates in the mid-1970s
12
10
10
8
8
7
6
6
5
4
4
3
2
0
0
1980s
1990s
0
0
1920s
1930s
1940s
1950s
1960s
1970s
2000s*
2010s**
Underwriting Profits Were Common Before the 1980s
(40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –
But Then They Vanished. Not a Single Underwriting Profit Was
Recorded in the 25 Years from 1979 Through 2003
* 2009 combined ratio excl. mort. and finl. guar.anty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit.
**Data for the 2010s includes 2010, 2011 and estimate for 2012.
Note: Data for 1920–1934 based on stock companies only.
Sources: Insurance Information Institute research from A.M. Best Data.
16
Financial Strength &
Underwriting
Cyclical Pattern is P-C Impairment
History is Directly Tied to
Underwriting, Reserving & Pricing
17
0
16
19
21
18
14
15
12
16
18
19
28
31
35
41
49
50
47
60
58
5
9
13
12
9
9
11
7
8
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
10
15
12
20
16
14
13
19
30
29
34
40
50
48
50
31
34
60
49
70
36
3 small insurers in
Missouri did encounter
problems in 2011
following the May
tornado in Joplin. They
were absorbed by a
larger insurer and all
claims were paid.
55
US Non-Life Insurer Impairments,
1969–2011
The Number of Impairments Varies Significantly Over the P/C Insurance
Cycle, With Peaks Occurring Well into Hard Markets
Source: A.M. Best Special Report “1969-2011 Impairment Review,” January 23, 2012; Insurance Information Institute.
P/C Insurer Impairment Frequency vs.
Combined Ratio, 1969-2011
120
Combined Ratio after Div
P/C Impairment Frequency
2.0
1.8
1.6
1.4
110
1.2
1.0
105
0.8
100
0.6
Impairment Rate
Combined Ratio
115
0.4
95
2011 impairment rate was 0.91%, up from 0.67% in 2010; the
rate is slightly higher than the 0.82% average since 1969
0.0
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
90
0.2
Impairment Rates Are Highly Correlated With Underwriting Performance
and Reached Record Lows in 2007; Recent Increase Was Associated
Primarily With Mortgage and Financial Guaranty Insurers and Not
Representative of the Industry Overall
Source: A.M. Best; Insurance Information Institute
19
Reasons for US P/C Insurer
Impairments, 1969–2010
Historically, Deficient Loss Reserves and Inadequate Pricing Are
By Far the Leading Cause of P-C Insurer Impairments.
Investment and Catastrophe Losses Play a Much Smaller Role
Reinsurance Failure
Sig. Change in Business
3.6%
4.0%
Misc.
8.6%
Investment Problems
(Overstatement of Assets)
Affiliate Impairment
7.3%
40.3%
Deficient Loss Reserves/
Inadequate Pricing
7.8%
7.1%
Catastrophe Losses
7.8%
Alleged Fraud
13.6%
Rapid Growth
Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.
20
2. SURPLUS/CAPITAL/CAPACITY
Have Large Global Losses Reduced
Capacity in the Industry, Setting
the Stage for a Market Turn?
22
US Policyholder Surplus:
1975–2012E
($ Billions)
Surplus as of 12/31/11 was $538.6 down 1.4% from
the record $556.9B as of 12/31/10 but is expected
hit a new record by year-end 2012
$600
$550
$500
$450
$400
$350
$300
$250
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance
organizations
$200
$150
$100
$50
$0
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09 11E
The Premium-to-Surplus Ratio Stood at $0.83:$1 as of
9/30/11, A Near Record Low (at Least in Recent History)*
Source: A.M. Best (2011/12 forecast from A.M. Best percentage growth est./forecast), ISO, Insurance Information Institute.
Policyholder Surplus,
2006:Q4–2012E
($ Billions)
2007:Q3
Previous Surplus Peak
$580
$520
$500
$480
$460
$440
$564.7
$556.9
$544.8
$560
$540
A.M. Best is predicting
year-end 2011 surplus
was down just 1.4% in
2011 and that surplus will
increase by 4.3% in 2012
$540.7
$530.5
$521.8
$517.9$515.6
$512.8
$505.0
$496.6
$487.1
$478.5
$561.0
$549.1
$538.6
$559.1
$511.5
$490.8
$463.0
The Industry now has $1 of
$455.6
surplus for every $0.83 of NPW,
$437.1
close to the strongest claimspaying status in its history.
Surplus as of 9/30/11 was
down 4.6% below its all time
record high of $564.7B set
as of 3/31/11, but an
increase is likely in 2012.
$420
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q4
*Includes $22.5B of paid-in
capital from a holding
company parent for one
insurer’s investment in a
non-insurance business in
early 2010.
Sources: ISO, A.M .Best (2011:Q4
and 2012:Q4 estimates).
24
Implied Excess (Deficit) Capital
Assuming Premium/Surplus Ratio = 0.9:1
Excess/(Deficit) Capital (Policyholder Surplus)
100
50
2000-2002: Tech
bubble bursts,
9/11, high
underwriting
losses erode
capital base
2006/07: Low CAT losses,
strong underwriting
results since 1940s
increase capital
21.6%
2009-10: End of
financial crisis,
rising asset
prices. modest
u/w losses
push capital to
record levels
25%
$81.9
$42.6
$41.7
14.4%
13.4%
Annual Change in
Policyholder Surplus
20%
15%
$22.9
10%
0
8.2% ($10.8)
($10.6)
-50
-5.1%
6.2%
($49.2)
($65.4) -1.5%
($76.5)
-100
-8.8%
-150
2000
12.3%
2001
($103.0)
($124.6)
2002
2003
2005: Katrina, Rita, Wilma
produce record CAT losses
2004
2005
2006
Capital Excess (Deficit)
2007
8.9%
($32.7)
2008: Financial
crisis causes
sharp drop in
-4.6%
capital
High cats, u/w
-12.0%
losses push
capital down
2008
2009
5%
0%
-5%
-10%
-15%
2010 2011*
Annual Change in Capital
Record Policyholder Surplus (Capital) Resulted in Significant Excess Capital in the P/C
Insurance Sector in 2010. Deteriorating Underwriting Losses, Higher CAT Activity,
More Modest Market Returns Shrank Excess Capital in 2011 by Nearly Half.
Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has
$74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.
Source: Insurance Information Institute calculations from A.M. Best and ISO data.
* Net Premiums Written
$39,507.0
M&A Activity in the US P/C Insurance
Industry, 1997-2011*
45,000
40,000
Number of Deals
87
90
74
$586.3
$418.7
$984.0
53
51
50
$8,869.7
40
$6,974.1
24
60
$5,552.5
40
56
$16,114.4
47
42
10,000
5,000
$17,346.9
52
56
$4,757.7
48
55
$10,389.9
$12,130.5
25,000
$10,646.5
$18,142.5
66
70
69
$22,029.6
30,000
15,000
100
30
Number of Deals
(Value of Deals $ Mill)
Value of Deals $ Mill)
80
35,000
20,000
P/C M&A activity in
2011 is up 60% since
2008, its highest level
(in $ terms) since 2008
20
10
0
0
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11*
M&A Activity in the P/C Insurance Industry Remains Well
Below its 1990s Peak
*2011 data are through December 1.
Source: SNL Securities; Insurance Information Institute.
28
Ratio of Net Premiums Written
to Policyholder Surplus, 1970-2011*
Record High P-S
Ratio was 2.7:1
in 1974
1.4
1.4
1.3
1.3
1.1
1.1
1.6
1.5
1.8
1.7
1.7
1.9
1.9
1.9
1.9
1.7
1.6
1.6
2.1
1.8
2.0
2.0
1.9
2.1
2.3
2.5
The premium-to-surplus ratio (a measure
of leverage) hit a record low at just 0.76:1
in 2010. It has decreased as PHS grows
more quickly than NPW, with the effect of
holding down profitability.
1.0
10
08
06
04
02
0
98
96
92
90
88
86
84
82
80
78
76
74
72
70
94
Record Low P-S Ratio was
0.76:1 as of 12/31/10, rising
slightly to 0.83:1 as of 9/30/11
0.5
0.0
0.9
0.84
0.86
0.94
1.13
1.29
1.17
1.07
0.99
0.91
0.84
0.95
0.82
0.76
0.83
2.7
2.5
2.5
2.5
3.0
The Premium-to-Surplus Ratio in 2011:Q3 Implies that P/C Insurers Held
$1 in Surplus Against Each $0.83 Written in Premiums. In 1974, Each $1
of Surplus Backed $2.70 in Premium.
*2011 data are as of 9/30/11.
Sources: Insurance Information Institute calculations from A.M. Best data.
30
3. REINSURANCE MARKET
CONDITIONS
Record Global
Catastrophes Activity is
Pressuring Pricing
31
Reinsurer Share of Recent Significant
Market Losses
Billions of 2011
Dollars
$40
$35
$30
$25
$20
$15
$10
$5
$0
$37.5
40% Reinsurance
share of total
insured loss
Reinsurer Share
Primary Insurer Share
$15.0
73%
$13.0
$22.5
60%
$10.0
$9.5
$6.0
$3.5
$4.0
95%
$8.3
$7.9
44%
$5.0
$2.2
$2.8
$0.4
Japan
Earthquake/
Tsunami (Mar
2011)
New Zealand Thailand Floods Chile Earthquake
Australia
Earthquake (Feb (Aug - Nov 2011) (Feb. 2010)
Cyclone/ Floods
2011)
(Jan-Feb 2011)
Reinsurers Paid a High Proportion of Insured Losses Arising from
Major Catastrophic Events Around the World in Recent Years
Source: Insurance Information Institute from reinsurance share percentages provided in RAA,
ABIR and CEA press release, Jan. 13, 2011.
32
Historical Capital Levels of Guy Carpenter
Reinsurance Composite, 1998—2Q11
Most excess
reinsurance capacity
was removed from
the market in 2011,
but there does not
appear to be a
shortage, leading
relatively flat 2012
reinsurance renewals
except in areas hit
hard by CATs.
Source: Guy Carpenter, GC Capital Ideas.com, November 23, 2011.
Global Property Catastrophe Rate on Line
Index, 1990—2012 (as of Jan. 1)
Property-Cat reinsurance
pricing is up about 8% as
of 1/1/12—modest relative
to the level CAT losses
Year Over Year % Change
100%
300
237
76%
68%
80%
255
250
235
233
230
60%
199
200
8%
10%
145
-3%
-12%
-16%
-9%
-6%
100
-11%
-11%
-18%
-20%
-8%
-13%
-20%
-3%
0%
0%
105
150
14%
115
154
152
133
14%
123 111
200
184
3%
100
20%
25%
15%
20%
147
141
195
173
184
40%
190
-40%
50
Cumulative Rate on Line (1990=100)
Year Over Year % Change in ROL
Cumulative Rate on Line Index
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: Guy Carpenter; Insurance Information Institute.
34
4. RENEWED PRICING
DISCIPLINE
Is There Evidence of a Broad
and Sustained Shift in Pricing?
35
Annual % Change in Non-Life Premiums:
Market Turns Are a Recurrent Event
(Percent)
1975-78
25%
20%
15%
1984-87
“Hard
Markets” in
Gray
Shading
2000-03
Net Written Premiums Fell
0.7% in 2007 (First Decline
Since 1943) by 2.0% in 2008,
and 4.2% in 2009, the First 3Year Decline Since 1930-33.
2012
expected
growth is
3.8%
10%
5%
0%
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11*
12
-5%
*2011 and 2012 figures are A.M. Best Estimates
Shaded areas denote “hard market” periods
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
36
Average Commercial Rate Change,
All Lines, (1Q:2004–4Q:2011)
(Percent)
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
-0.1%
1Q04
-3.2%
2Q04
3Q04
-5.9%
-7.0%
4Q04
-9.4%
1Q05
2Q05
-9.7%
-8.2%
3Q05
-4.6%
4Q05
1Q06
-2.7%
2Q06
-3.0%
-5.3%
3Q06
-9.6%
4Q06
1Q07
-11.3%
-11.8%
2Q07
3Q07 -13.3%
4Q07
-12.0%
1Q08-13.5%
2Q08 -12.9%
3Q08
-11.0%
-6.4%
4Q08
-5.1%
1Q09
2Q09
-4.9%
-5.8%
3Q09
-5.6%
4Q09
1Q10
-5.3%
2Q10
-6.4%
-5.2%
3Q10
-5.4%
4Q10
1Q11
-2.9%
2Q11
-0.1%
0.9%
3Q11
2.8%
4Q11
4%
Pricing as of Q3:2011 was
positive for the first time
since 2003. Slightly stronger
gains in Q4.
KRW Effect
Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute
Q2 2011 marked the
30th consecutive
quarter of price
declines
37
Change in Commercial Rate Renewals,
by Account Size: 1999:Q4 to 2011:Q4
Percentage Change (%)
Peak = 2001:Q4
+28.5%
Pricing turned positive (+0.9%)
in Q3:2011,
first increase
in
KRWthe
Effect:
No
nearly
8 years;
Q4:2011
Lasting
Impact
renewals were up 2.8%
Pricing Turned
Negative in Early
2004 and
Remained that
way for 7 ½ years
Trough = 2007:Q3
-13.6%
Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
38
Other Cycle-Influencing
Factors
Could Other Factors Act as a
Catalyst to Turn the Market?
41
INVESTMENTS:
THE NEW REALITY
Investment Performance is a
Key Driver of Profitability
Does It Influence
Underwriting or Cyclicality?
42
Property/Casualty Insurance Industry
Investment Gain: 1994–2011E1
($ Billions)
$70
$64.0
$58.0
$60
$52.3
$55.7
$51.9
$52.9
$56.0
$48.9
$47.2
$50
$59.4
$56.9
$45.3
$44.4
$42.8
$40 $35.4
$39.2
$36.0
$31.7
$30
Investment gains through
Q3:2011 were $2.1B above the
same period in 2010—a
surprise given falling rates
and flat stock markets
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09
10 11E*
Investment Gains in 2011 Were Surprisingly Robust. Investment Gains
Recovered Significantly Due to Realized Investment Gains; The Financial
Crisis Caused Investment Gains to Fall by 50% in 2008
1
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
* 2005 figure includes special one-time dividend of $3.2B; 2011 figure is annualized based 2011:Q3 actual of $42.0B.
Sources: ISO; Insurance Information Institute.
Property/Casualty Insurance Industry
Investment Income: 2000–2011E1
($ Billions)
$60
$54.6
$52.3
$49.5
$50
$40
$51.2
$48.7
$47.1
$38.9
$38.7
$37.1
$36.7
01
02
$47.2
Investment earnings in
2011 are estimated to be
about 11% below their
2007 pre-crisis peak
$39.6
$30
00
03
04
05
06
07
08
09
10
11E*
Investment Income in 2011 Was Surprisingly Strong, Though Investment
Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates
1
Investment gains consist primarily of interest and stock dividends.
* 2011E figure is annualized based on actual $36.5B in investment income through 2011:Q3.
Sources: ISO; Insurance Information Institute.
-$7.98
-$19.81
-$15
-$20
-$25
-$5.70
$7.30
$8.92
$3.52
$9.70
-$1.21
$6.61
$6.63
$9.13
$11.2B
positive
swing
$16.21
$13.02
$10.81
$9.24
$6.00
$9.82
$9.89
$1.66
$5
$0
-$5
-$10
$4.81
$20
$15
$10
$2.88
($ Billions)
$18.02
P/C Insurer Net Realized
Capital Gains/Losses, 1990-2011E
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E*
Insurers Posted Net Realized Capital Gains in 2011 for the First Time Since
2007. Realized Capital Losses Were the Primary Cause
of 2008/2009’s Large Drop in Profits and ROE
*2011 is an estimate based on annualized actual 2011 9-month figure of $5.5B.
Sources: A.M. Best, ISO, Insurance Information Institute.
45
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. Jan. 2012
6%
5%
4%
3%
2%
4.82%
4.96%
5.04%
4.96%
4.82%
4.82%
4.88%
Treasury yield curve remains
near its most depressed level
in at least 45 years.
Investment income is falling
as a result. Fed is unlikely to
hike rates until well into 2014.
5.00%
4.93%
5.00%
5.19%
3.03%
2.70%
1.97%
1.38%
0.84%
1%
0.02%
0.03%
0.07%
0.12%
1M
3M
6M
1Y
0.24%
2Y
0.36%
January 2012 Yield Curve
Pre-Crisis (July 2007)
0%
3Y
5Y
7Y
10Y
20Y
30Y
The Fed Is Actively Signaling that it Is Determined to Keep Rates Low
Through Late 2014
Source: Federal Reserve Board of Governors; Insurance Information Institute.
48
3-Month Interest Rates for
Major Global Economies, 2008-2012F
6.0%
5.0%
2008
2009
2010
2011
2012F
4.9%
5.5%
Interest rates remain generally low in
much of the world, depressing
insurer investment earnings. Some
countries, including the US are
intentionally holding rates low.
0.2%
0.2%
0.1%
0.1%
1.4%
1.0%
0.9%
1.1%
0.9%
1.3%
2.0%
0.7%
0.8%
0.9%
0.7%
0.3%
0.6%
0.2%
0.2%
0.2%
0.9%
1.1%
0.9%
1.8%
0.7%
2.0%
1.0%
2.1%
3.0%
2.5%
2.9%
4.0%
0.0%
Euro Area
Japan
UK
Source: Blue Chip Economic Indicators, Feb. 2012 edition.
China
Netherlands
US
Reduction in Combined Ratio Necessary to Offset
1% Decline in Investment Yield to Maintain
Constant ROE, by Line*
s
ne
i
L
-5.7%
-5.2%
-4.3%
-3.7%
-3.3%
-3.3%
-3.1%
-2.1%
-1.9%
-3.6%
-2.0%
-1.8%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-1.8%
s
ty
l
e
e
o
p
t
r
a
s
n
i
a
ro
p
l
Li
y
rc
Su
Au
s
o
t
P
C
a
/
al
r
e
l
s
s
n
y
n
t
a
t
P
u
M
m
m
m
m
li
P
di
so
s
pl
rra
d
e
m
m
m
m
r
r
r
t
e
C
a
e
d
o
o
r
o
o
Pe
Pv
Pe
C
C
C
C
C
Fi
W
Su
M
W
to
u
A
R
a
ur
s
n
ei
**
e
nc
-7.3%
Lower Investment Earnings Place a Greater Burden on
Underwriting and Pricing Discipline
*Based on 2008 Invested Assets and Earned Premiums
**US domestic reinsurance only
Source: A.M. Best; Insurance Information Institute.
50
Shifting Legal Liability &
Tort Environment
Tort Environment Appears to Be
Less of a Driver than in Past
51
Over the Last Three Decades, Total Tort Costs as a
% of GDP Appear Somewhat Cyclical, 1980-2013E
($ Billions)
$300
2.25%
Deepwater
Horizon Spike
in 2010
$200
2.00%
$150
$100
1.75%
Tort costs in dollar terms have
remained high but relatively stable
since the mid-2000s., but are down
substantially as a share of GDP
$50
Tort Costs as % of GDP
2.21% of
GDP in 2003
= pre-tort
reform peak
$250
Tort System Costs
2.50%
Tort Costs as % of GDP
Tort Sytem Costs
1.68% of
GDP in
2013
1.50%
$0
80
82
84
86
88
90
92
94
96
98
00
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
02
04
06
08
10
12E
52
Inflation
Is it a Threat to Claim Cost
Severities?
53
Annual Inflation Rates, (CPI-U, %),
1990–2017F
Annual
Inflation
Rates (%)
Inflation peaked at 5.6% in August 2008
on high energy and commodity crisis.
The recession and the collapse of the
commodity bubble reduced inflationary
pressures in 2009/10
6.0
5.0
4.9
5.1
3.8
4.0
3.0
3.0
2.0
3.3 3.4
3.2
2.9 2.8
2.4
3.0
2.6
2.5
3.8
3.2
2.8
2.3
2.1 2.1
1.9
1.5
Higher energy,
commodity and food
prices pushed up
inflation in 2011, but
not longer turn
inflationary
expectations.
2.4 2.4 2.4 2.5
1.6
1.3
1.0
0.0
-1.0
-0.4
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F
The slack in the U.S. economy suggests that inflationary pressures should
remain subdued for an extended period of times. Energy, health care and
commodity prices, plus U.S. debt burden, remain longer-run concerns
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 1/12 (forecasts).
54
The Strength of the Economy
Will Influence P/C Insurer
Growth Opportunities
Growth Will Expand Insurable Exposures
and Help Absorb Excess Capital
55
1.6%
2%
0.6%
4%
The Q4:2008 decline was
the steepest since the
Q1:1982 drop of 6.8%
1.1%
1.8%
2.5%
3.6%
3.1%
2.7%
0.9%
3.2%
2.3%
2.9%
6%
4.1%
Real GDP Growth (%)
5.0%
3.9%
3.8%
2.5%
2.3%
0.4%
1.3%
1.8%
2.8%
2.1%
2.2%
2.4%
2.6%
2.5%
2.7%
2.9%
3.0%
US Real GDP Growth*
-2%
-4%
-6%
-8%
2000
2001
2002
2003
2004
2005
2006
07:1Q
07:2Q
07:3Q
07:4Q
08:1Q
-0.7%
08:2Q
08:3Q
-4.0%
08:4Q-6.8%
09:1Q
-4.9%
09:2Q
-0.7%
09:3Q
09:4Q
10:1Q
10:2Q
10:3Q
10:4Q
11:1Q
11:2Q
11:3Q
11:4Q
12:1Q
12:2Q
12:3Q
12:4Q
13:1Q
13:2Q
13:3Q
13:4Q
0%
Recession began in Dec.
2007. Economic toll of
credit crunch, housing
slump, labor market
contraction has been
severe but modest
recovery is underway
2012 is expected to
see a steady
acceleration in growth
continuing into 2013
Demand for Insurance Continues To Be Impacted by Sluggish Economic
Conditions, but the Benefits of Even Slow Growth Will Compound and
Gradually Benefit the Economy Broadly
*
Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 2/12; Insurance Information Institute.
56
Summary
 None of the “Traditional Criteria” for a Market Turn (or
“Hard Market”) Has Been Completely Realized
 Other Major Driving Factors Such as a Material
Deterioration in Tort Environment or Inflation Are
Absent
 Deterioration in Underwriting Results Has Been Masked
 Prior-year reserve releases
 Investment Earnings in Aggregate Have Yet to Fall
Materially
 Decline in investment income offset by realization of capital gains
57
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and your attention!
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