The Great Tradeoff: Regulation, Strength & Solvency vs. Profitability & Growth Can They Co-Exist?

The Great Tradeoff: Regulation, Strength & Solvency

vs. Profitability & GrowthCan They Co-Exist?

St. John’s UniversitySchool of Risk Management, Insurance & Actuarial Science

New York, NYOctober 15, 2014

Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

2

Presentation Outline

PART I: PROFITABILITY A History of Insurance Industry Profitability

Can financial strength and robust profitability co-exist? Supply, Demand and Alternative “Capital”

When Profits Suffer, Who Is to Blame? 7 Leading Contenders: The “Fall Guys”

Is the Insurance Industry Becoming Less Risky? Since when? Why? Comparison with Banks

PART II: GROWTH A Global History & Overview of Growth

Pockets and Waves of Growth

Narrowing the “Underinsurance Gap” Growth through Consolidation? Q&A

PART I: PROFITABILITYHas Strength Come at the Expense of Performance?

3

What Can History Tell Us?

3

What Is Happening to Insurer Profitability?

4

What Can We Learn from History?Déjà Vu: Cycles or Super-Cycles?

4

P/C Industry Net Income After Taxes1991–2014* 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.3% 2014 ROAS1 = 7.8%*

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS through 2014:Q2, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. 2014 is annualized H1 data.

Sources: A.M. Best, ISO; Insurance Information Institute

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$6

3,7

84

$5

1,9

60

$3

8,5

01

$2

0,5

59

$4

4,1

55

$6

5,7

77

-$6,970

$2

8,6

72

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Net income rose strongly (+81.9%) in 2013 vs. 2012 on lower cats, capital gains

$ Millions

2014 is off to a slower start

6

RNW All Lines by State, 2003-2012 Average:Highest 25 States

21

.0

17

.7

15

.1

14

.8

13

.4

13

.3

13

.1

12

.6

12

.0

11

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11

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11

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11

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11

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11

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11

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11

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10

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10

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9.9

9.4

02468

1012141618202224

HI AK ND ME WY UT VT ID WA NH IA NE SC DC MA OR VA NC RI CA CT OH NM SD WV MT

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

Source: NAIC; Insurance Information Institute.

7

9.2

9.1

8.9

8.9

8.6

8.5

8.3

8.1

7.9

7.7

7.7

7.6

7.4

6.5

6.5

6.1

6.1

5.5

5.2

4.9

4.9

4.2

3.2

2.0

-6.5

-9.4

-14-12-10-8-6-4-202468

10

KS MD CO WI FL MN TX IN US AR PA IL AZ MO NV KY NJ GA NY MI TN DE OK AL MS LA

RNW All Lines by State, 2003-2012 Average: Lowest 25 States

Source: NAIC; Insurance Information Institute.

Some of the least profitable states over the past decade were hit hard

by catastrophes

8

P/C Insurance Industry Combined Ratio, 2001–2014:H1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014:H1 = 98.9. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.799.0

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

PremiumsRelatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

Best Combined

Ratio Since 1949 (87.6)

9

ROE: Property/Casualty Insurance by Major Event, 1987–2014:H1

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through H1:2014. Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

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 13 14*

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

-5%

0%

5%

10%

15%

20%

25%

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

13

14

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2014:H1*

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0%1987:17.3%

1997:11.6% 2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years9 Years

History suggests next ROE peak will be in 2015-2016

ROE

1975: 2.4%

2013 10.4%

2014:H1 7.7%

11

P/C Insurance ROE as 5-Year Moving Average

Source: Jessica Weinkle, Insurance Journal, “An Average Perspective Based Insurance Profitability Cycles,” October 6, 2014, based om I.I.I. data, http://www.insurancejournal.com/magazines/closingquote/2014/10/06/342096.htm.

After smoothing, there is a more evident trend

toward lower profitability

The Tradeoff:

Industry impairment rates have plunged

http://www.insurancejournal.com/magazines/closingquote/2014/10/06/342096.htm


12

P/C Insurance ROE Index(1974-2014:Q1 = 100)

Source: Jessica Weinkle, Insurance Journal, “An Average Perspective Based Insurance Profitability Cycles,” October 6, 2014, based om I.I.I. data, http://www.insurancejournal.com/magazines/closingquote/2014/10/06/342096.htm.

Lower profitability seems to be the norm after 1994. Is RBC a cause? Greater

use of modeling?

The Tradeoff:

Industry impairment rates have plunged



-5%

0%

5%

10%

15%

20%

25%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

14:H

1

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers. 2014 figure is through Q2.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0%

1987:17.3%

1997:11.6%

2006:12.7%

1984: 1.8%

1992: 4.5%2001: -1.2%

ROE

1975: 2.4%

2013 10.4%

2014:H1 7.7%

Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2014*

1969: 3.9%

1965: 2.2%1957: 1.8%

1972:13.7%

1966-67: 5.5%1959:6.8%

1950:8.0%

1950-70: ROEs were lower in this period. Low interest rates,

low inflation, “Bureau” rate regulation all played a role

1970-90: Peak ROEs were much higher in this period while troughs

were comparable. High interest rates, rapid inflation, economic

volatility all played roles

1990-2010s: Déjà vu. Excluding mega-

CATs, this period is very similar to the 1950-1970 period

14

7.3%7.0%8.4%

11.5%11.2%

4.2%5.7%

0%

2%

4%

6%

8%

10%

12%

14%

1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 2010-14*

Average Annual Percent Change (%)

Profitability Has Declined since the highs of the 1970s and 1980s, but is above that of the 1950s and 1960s

14Sources: Insurance Information Institute research.

Average ROE for the P/C Insurance Industry by Decade, 1950s – 2010s

Profitability peaked in the 1970s and 1980s but has tapered off

since thenP/C profitability was much lower in the 1960s and

1970s

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:H1 combined ratio including M&FG insurers is 98.9; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

96.799.0

102.4

106.5

95.7

14.3%

15.9%

12.7%

10.9%

7.4% 7.9%

4.7%6.2%

7.7%

9.6%8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:H10%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Lower CATs helped ROEs

in 2013

16

BANK LESSON: Profitability, Capital and Systemically Important Banks

Source: The Economist, “No Respite,” September 27, 2014.

Global Systemically Important bank Tier-1

capital ratios are up since the global financial crisis,

but ROEs are lower

The Message from Regulators:

Get used to it!

Who’s to Blame for the Decline in Peak P/C Profitability?

18

The 7 “Fall Guys”

18

#1 Mother Nature

1919

Profits in the Age of Mega CATs

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2013Number of Events (Annual Totals 1980 – 2013)

Source: MR NatCatSERVICE 21

22

19

81

6

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 128 natural disaster events in 2013

22

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013*

*2010s represent 2010-2013.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3

0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7 8.9

3.43.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.1E*

Combined Ratio Points Catastrophe losses as a share of all losses reached

a record high in 2012

23

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2013 Dollars, $ Billions)

$7.9 $8.8 $9.3 $11.2$13.6

$19.0$24.2 $24.9$25.9

$49.4

$7.6$7.2$6.8$5.7$5.6$4.5

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Superstorm Sandy in 2012 was the last

mega-CAT to hit the US

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have Occurred Over the Past Decade (2004-2013)

Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.

#2 Wall Street

2424

Crashes, Interest Rates & General Volatility

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14*

*Through Oct. 12, 2014.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html Ins. Info. Inst.

Tech Bubble Implosion

Financial Crisis

ROE

Energy Crisis

2014:H1 7.7%

S&P 500 Index Returns, 1950 – 2014*

Fed Raises Rate

Volatility is endemic to stock markets—and may be increasing—but there is no persistent

downward trend over long periods of time

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

26

P/C Insurer Net Realized Capital Gains/Losses, 1990-2013

Sources: A.M. Best, ISO, Insurance Information Institute.

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

90

$5.8

5

$7.0

4

$6.1

8 $11.

43

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Insurers Posted Net Realized Capital Gains in 2010 - 2013 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital

Losses Were a Primary Cause of 2008/2009’s Large Drop in Profits and ROE

($ Billions)Realized capital gains rose

sharply as equity markets rallied

Property/Casualty Insurance Industry Investment Income: 2000–20141

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4$45.9

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Due to persistently low interest rates,investment income fell in 2012 and in 2013

and is falling again in 2014.

1 Investment gains consist primarily of interest and stock dividends. *2014 figure is estimated based on annualized H1 data.Sources: ISO; Insurance Information Institute.

($ Billions) Investment earnings are still below their 2007 pre-crisis peak

Property/Casualty Insurance Industry Investment Gain: 1994–20131

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2$54.2

$58.8$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13

Investment Income Continued to Fall in 2013 Due to Low Interest Rates but Realized Investment Gains Were Up Sharply; 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; Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2013 were their highest in the

post-crisis era

#3 The Federal Reserve

2929

Do Fed Rates Actions Help or Hurt P/C Insurers?

30

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*

*Monthly, constant maturity, nominal rates, through July 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

U.S. Treasury yields plunged to historic lows in 2013. Longer-

term yields have rebounded a bit.

30

http://www.federalreserve.gov/releases/h15/data.htm

http://www.federalreserve.gov/releases/h15/data.htm

31

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

-8%-7%-6%-5%-4%-3%-2%-1%0%

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

31

#4 The Economy

3232

Do Variability and Volatility in the Economy Make Earning

Reasonable ROEs More Difficult?

33

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 9/14; Insurance Information Institute.

2.7%

0.5%

3.6%

3.0%

1.7%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

1.4%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

2.7%

1.8%

4.5%

3.5%

-2.1

%4.

6%3.

0%3.

0%2.

9%2.

9%2.

9%2.

9%

0.4%

-8.9%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

2

00

0

2

00

1

2

00

2

2

00

3

2

00

4

2

00

5

2

00

6

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

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

14

:1Q

14

:2Q

14

:3Q

14

:4Q

15

:1Q

15

:2Q

15

:3Q

15

:4Q

Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction

was severe

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

Q1 2014 GDP data were hit hard by this

year’s “Polar Vortex” and harsh

winter

0

10

20

30

40

50

60

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 13

-4%

-2%

0%

2%

4%

6%

8%No. of ImpairmentsReal GDP Growth

34

Impairments vs. Real GDP Growth, P/C & L/H, 1978-2013No. of Impairments

Today, impairment rates seem less

sensitive to economic downturns

Historically, there has been a lagged, inverse

relationship between GDP growth and impairments

Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2013, March 31, 2014; Insurance Information Institute.

*US P/C and L/H companies, 1977-2013.

Very few impairments

Insurers are more resilient to economic volatility than in the past. That improvement began

well before Dodd-Frank Real GDP Growth

0

1

2

3

4

5

6

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 13

-4%

-2%

0%

2%

4%

6%

8%Downgrade/Upgrade RatioReal GDP Growth

35

Downgrade/Upgrade Ratio vs. Real GDP Growth, P/C & L/H, 1978-2013

Ratio of Downgrades to Upgrades

Historically, there has been a lagged, inverse

relationship between GDP growth and impairments



Increase in downgrade/upgrade ratio was smaller in

Great Recession than past recessions,

suggesting greater resilience

Downgrades tend to fall relative to upgrades as the economy improves

Real GDP Growth

36

Number of Recessions Endured by P/C Insurers, by Number of Years in Operation

32

27

20

13

8

0

5

10

15

20

25

30

35

1-50 51-75 76-100 101-125 126-150

Sources: Insurance Information Institute research from National Bureau of Economic Research data.

Number of Recessions Since 1860

Many US Insurers Are Close to a Century Old or Older

Number of Years in Operation

Insurers are true survivors—not just of natural catastrophes but also economic ones

36

#5 The President (of the United States)

3737

How Is Profitability Affected by the President’s Political Party?

15.10%

9.05%

8.93%

8.65%

8.35%

8.33%

7.98%

7.68%

6.98%

6.97%

5.43%

5.03%

4.83%

4.68%

4.43%

3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Carter

Reagan II

Obama II

Nixon

Clinton I

G.H.W. Bush

G.W. Bush II

Clinton II

Reagan I

Nixon/Ford

Truman

Eisenhower I

Eisenhower II

G.W. Bush I

Obama I

Johnson

Kennedy/Johnson

*Truman administration ROE of 6.97% based on 3 years only, 1950-52; Estimated ROE for 2014 = 7.8% based on data through 2014:Q2. Source: Insurance Information Institute

OVERALL RECORD: 1950-2014*

Democrats 7.72%Republicans 7.85%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950-2014*

-5%

0%

5%

10%

15%

20%

25%

50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

14

BLUE = Democratic President RED = Republican President

Tru

man Nixon/Ford

Ken

ned

y/

Joh

nso

n

Eis

enh

ow

er

Car

ter

Reagan/Bush I Clinton Bush II

P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2014*

Obama

Estimated ROE for 2014 = 7.8% based on data through 2014:Q2. Source: Insurance Information Institute

#6 Ratings Agencies

4040

Quasi-Regulators Must Have Some Impact

P/C Insurer Impairments, 1969–20137

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

11

21

3

0

10

20

30

40

50

60

70

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15

51

6 19 2

13

42

51

4

Source: A.M. Best Special Report “U.S. P/C Impairments Down Sharply in 2013; Alternative Risk Players Faltered,” June 23, 2014; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

41

Impairments among P/C insurers remain infrequent

42

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2013

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

11

21

3

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2013 impairment rate was 0.43%, down from 0.76% in 2012; the rate is lower than the 0.81% average since 1969

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

43

Reasons for US P/C Insurer Impairments, 1969–2013

44.3%

12.3%

7.1%

7.1%

7.8%

6.6%

8.4%

3.4%3.0%

Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid Growth

Alleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business


Leading causes of death (reserves and growth)

are generally under the control of insurers

44

2

(2)

(8)

(3)

(7)(10)(10)

(4)

(0)

11

24

1512

10

(4)

(9)

(13)(12)

(10)

(14)(11)(10)

(7) (7)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

E

14

E

15

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2015E

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: A.M. Best, ISO, Barclays Research (estimates for 2013-2015).

P/C reserve development is clearly cyclical

Rapid Growth ‘A Leading Cause’ of Impairment’

“The leading causes of impairment are deficient loss reserves (inadequate pricing) and rapid growth, together comprising more than 50 percent of annual impairments.”

- A.M. Best, 2013To

wer In

sura

nce

(201

3)

Legion

(200

1)

Relianc

e Nat

iona

l (19

99)

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

16.2%

27.7%

39.5%Annualized Growth in Final Years

45

Source: SNL Financial, Insurance Information Institute.

46

Top 10 Lines of Business for US P/C Impaired Insurers, 1969–2013

17.1%

26.4%

7.4%8.1%

8.1%

8.5%

4.8%

5.3%

4.0%

3.9%

6.4%

Workers Comp and Pvt. Passenger Auto Account for Nearly 45 Percent of the Impaired Insurers Since 1969

Workers Comp

Other

Pvt. Passenger Auto

HomeownersCommercial Multiperil

Commercial Auto Liability

Other Liability

Medical Prof. Liability

Surety

Title

Mortgage & Financial Guaranty


WC accounts for only about 9% of all premiums written

but 17% of premium of impaired insurers, whereas PPA accounts for 37% of all premiums but only 26% of impaired insurer premiums

Cumulative Average Impairment Rates by A.M. Best Financial Strength Rating*

0%

10%

20%

30%

40%

50%

60%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment

D

C/C-

C++/C+

B/B-

B++/B+

A/A-

A++/A+



Insurers with strong ratings are far less likely to become impaired (fail) over long periods of time.

Note: The cumulative likelihood of impairment has been falling uniformly across the 15-year time horizon for all but the riskiest (lowest rated)

riskiest insurers. This suggests that insurers have become less risky over the past several years.

#7 Regulators

4949

Is an Increased Regulatory Burden Reducing ROEs?

Is There Evidence that the (Re) Insurance Industry Is

Becoming Less Risky

50

Is Boring Better?

50

51

Policyholder Surplus, 2006:Q4–2014:H1

Sources: ISO, A.M .Best.

($ Billions)$4

87.1

$496

.6

$512

.8

$521

.8

$478

.5

$455

.6

$437

.1 $463

.0 $490

.8 $511

.5 $540

.7

$530

.5

$544

.8

$559

.2

$559

.1

$538

.6

$550

.3

$567

.8

$583

.5

$586

.9 $607

.7

$614

.0

$624

.4 $653

.3

$671

.6

$662

.0

$570

.7

$566

.5

$505

.0

$515

.6

$517

.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

14:Q

2

2007:Q3Pre-Crisis Peak

Surplus as of 6/30/14 stood at a record high $671.6B

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .

The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2014in very strong financial condition.

$0$50

$100$150$200$250$300$350$400$450$500$550$600$650$700$750

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US Policyholder Surplus:1975–2014*

* As of 6/30/14.Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners

Equity” or “Net Worth” in non-insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.73:$1 as of6/30/14, a Near Record Low (at Least in Recent History)

Surplus as of 6/30/14 was a record $671.6, up 2.8% from $653.3 of 12/31/13, and up 53.6% ($234.5B)

from the crisis trough of $437.1B at 3/31/09

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

$1.50

$1.60

$1.70

$1.80

$1.90

$2.00

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 13 14*

Premium-to-Surplus Ratio:1985–2014*

* As of 6/30/14.Source: A.M. Best, ISO, Insurance Information Institute.

The larger surplus is in relation to premiums—the lower the P:S ratio—

and the great the industry’s capacity to handle the risk it has accepted

(Ratio of NWP to PHS)

The Premium-to-Surplus Ratio Stood at $0.73:$1 as of6/30/14, a Record Low (at Least in Recent History)

Surplus as of 6/30/14 was $0.73:$1, a record low (at least in modern history)

9/11, Recession & Hard Market

P/C Industry:Loss Reserve-to-Surplus Ratio

Source: Calculations from A.M. Best data by Insurance Information Institute.

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

2007

2008

2009

2010

2011

2012

2013

0%

50%

100%

150%

200%

250%

1.3

1.2

1.1

1.4

2.1

2.0

1.9

1.9

1.9

1.9

1.8 1

.91

.91

.92

.12

.02

.0 2.1

2.0

2.0 2

.11

.9 2.0

1.8

1.8

1.6

1.4

1.2

1.1

1.1

1.1 1

.21

.41

.21

.21

.21

.11

.11

.31

.11

.0 1.1

1.0

0.9

RBC requirements took effect with 1994 Annual Statement.

The industry had be-come less leveraged

since 1994

The Property/Casualty Industry Adjusted Its Risk Portfolio in Response to Risk-Based Capital Requirements Implemented in 1994.

Inflation, Liability Crisis Increased Reserves, Plunging Stock Prices Depleted Surplus

P/C Industry:Capital Adequacy Is on the Rise

Source: Calculations from SNL Financial data by Insurance Information Institute.

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 130

2

4

6

8

10

12

7.3 7

.8 8.4 8.6 9

.0

8.8

8.2

8.1 8.3 8

.8

9.5 9

.8 9.9 1

0.4

10

.4

10

.3

10

.4

10

.7

For Every $1 of Capital Needed to Prevent Regulatory Capital, the Average Insurer Has More Than $10 – And the Cushion is Getting Larger.

Median Adjusted Capital/Authorized Control Level (ACL) Capital

Is There Any Parallel with the Banking World?

56

Have Banks Gotten Safer?

56

Commercial Banking:Loan/Deposit Ratio, 1973 – 2014

Source: Insurance Information Institute calculation from Board of Governors of the Federal Reserve System (FRED) data.

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

2007

2008

2009

2010

2011

2012

2013

2014

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0.7

20

.74

0.6

90

.69

0.7

20

.76

0.8

00

.78

0.7

90

.78

0.7

80

.82

0.8

20

.82

0.8

60

.88

0.8

90

.89

0.8

40

.83

0.8

5 0.9

30

.97

0.9

70

.97

0.9

91

.00

1.0

40

.96

0.9

50

.95

0.9

40

.98

1.0

01

.02

1.0

10

.87

0.8

60

.82

0.7

80

.75

0.7

6

(Loans and Leases in Bank Credit, All Commercial Banks/Deposits, All Commercial Banks)

Lending Has Become a Smaller Part of Commercial Banking Activity Since the Financial Crisis.

Gramm-Leach-Bliley Act became effective

November 1999.

Commercial Banking:Leverage Ratio, 1991 – 2014

Source: SNL Financial LC, Insurance Information Institute.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

15

.06

13

.79

12

.94

13

.09

13

.11

13

.11

13

.30

13

.30

12

.87

13

.04

12

.82

12

.76

12

.74

12

.77

12

.63

12

.72

13

.11

13

.51

11

.75

11

.45

11

.21

11

.10

10

.75

10

.56

Investments in Risk-Free Treasuries Have Helped Strengthened Banks’ Financial Status.

Financial Crisis

Adjusted Average Assets/Tier 1 Capital

Is Boring Better for Insurers?

59

Peak P/C ROEs Are Down, But Impairment Rates Appear to Be

Lower As Well

59

P/C Insurer Impairments, 1969–20137

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

11

21

3

0

10

20

30

40

50

60

70

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15

51

6 19 2

13

42

51

4


The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

60

Impairments among P/C insurers remain infrequent

61

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2013

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

11

21

3

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

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

2013 impairment rate was 0.43%, down from 0.76% in 2012; the rate is lower than the 0.81% average since 1969

Secrets of the AncientsThe Centenarians: Who Lives to Be 100+ in the P/C Insurance World?

6262

The Ultimate Test of Time

SIDEBAR

63

100+ Year Old Insurers as a Share of All P/C Insurers

87.7%

12.3%

Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; CDC

About 12% of P/C insurance companies (fewer than 1-in-8) today (2013) are 100+ years old. This is a surprisingly high percentage.

Insurers at Least 100 Years Old, 12.3%(287)

Insurers Less than 100 Years Old,

87.7%(1,979)

Odds of a Human Living to 100Born 1900: ~0.25% (1-in-400)

Born Today: ~2% (1-in-50)

64

Decade of Formation for P/C Insurers at Least 100 Years Old in 2014

39 10

22 2016

60

37

65

38

77

1 0 0 04 2

0

10

20

30

40

50

60

70

80

90

100

110

1750-59

1760-69

1770-79

1780-89

1790-99

1800-09

1810-19

1820-29

1830-39

1840-49

1850-59

1860-69

1870-79

1880-89

1890-99

1900-09

1910-19

Decade Of Formation

Source: insurance Information Institute analysis of National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

Of the Centenarian p/c insurers in existence today, 64% were formed since 1870. There was a post-Civil

war spike in formations in the 1870s and another in the 1890s. Another spike occurred in the 1910s after the financial crises of the 1900-1909 era and as workers

compensation systems were adopted.

As of Jan. 1, 2014 there were 296 P/C that were at least 100 years old.

77 insurers formed in the decade 1910-

1919 are still in existence; 32 were

formed between 1910 and 1914

65

100-Year-Old Insurers: Independent vs. Part of Group/Holding Company*

51.2% 48.8%

*As of 2010.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

The number of 100-year-old insurers that are independent vs. part of a more diversified group structure is split almost evenly.

Independent, 48.8%(140)

Part of Holding Company, 51.2%

(147)

66

100-year-old Insurers: Mutual vs. Stock vs. Reciprocal

62.4%

35.9%

1.4%0.3%

*As of 2010.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

The vast majority (62.4%) of 100-year-old insurers are mutual insurers, while stock insurers account for 35.9% of the total.

Mutual, 62.4%,(179)

Stock, 35.9%,(103)

Reciprocal, 1.4%,(4)

Other, 0.3%,(1)

67

Premium to Surplus Ratios, “Centenarians” vs. Overall P-C Industry, 1998, 2008 and 2013

$0.85

$0.95

$0.73$0.72 $0.69

$0.51

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

1998 2008 2013

"Centenarians" Overall P-C Industry

“Centenarians” are companies at least 100 years old with positive NWP in 2013. Sources: National Association of Insurance Commissioners’ Annual Statements, via Highline; I.I.I. calculations

NWP/Surplus

Premiums are a rough measure of risk accepted; surplus is funds beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater the

capacity to handle the risk it has accepted.

Insurers that are 100+ years old hold nearly $2 in

surplus for every $1 dollar in premium they write

Is There Evidence that the (Re) Insurance Industry Is

Becoming More Risky

68

Is Boring Better?

68

69

Mentions of the Term “Alternative Capital” with “Insurance” or “Reinsurance”

* Estimate is annualized figure based on actual data through September 30, 2014.Source: Insurance Information Institute search of Factiva database.

11 9 20 21 35 52 29 4379 83

55 59116

409

712

0

100

200

300

400

500

600

700

800

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Should the Increased Use of Terms Such as “Alternative Capital,” “Hedge Fund” and “Pension Fund” in Conjunction with a (Re)Insurance Be a Concern

70

Mentions of the Term “Private Equity”with “Insurance” or “Reinsurance”

* Estimate is annualized figure based on actual data through September 30, 2014.Source: Insurance Information Institute search of Factiva database.

1,081 1,3532,004

2,5693,609

4,995

6,595

11,772 11,859

15,343

11,395

13,547

15,103 15,27015,525

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Should the Increased Use of Terms Such as “Alternative Capital,” “Hedge Fund” and “Pension Fund” in Conjunction with a (Re)Insurance Be a Concern

Does Deluge of “Alternative” Capital Suggest the Industry

is Riskier?

72

Or Has Capital Always Flowed in and Out of this Business?

72

Global Reinsurance Capital (Traditional and Alternative), 2007 - 2013

Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.

Total reinsurance capital reached a record $540B in 2013, up 58.8%

from 2008.

2007 2008 2009 2010 2011 2012 2013$0

$100

$200

$300

$400

$500

$600

410

340400

470 455505

540

22 19 22 24 28 39 50

Global Re Capital (Traditional & Alternative) Alternative Capital Only

(Billions)

Alternative capital constantly growing, even in 2011, when cat losses reduced total reinsurance

capital.

But alternative capacity has grown 163% since 2008, to $50B. It has grown 79% in the past two years.

Investor by Category

Years ended June 30.Source: Aon Benfield Securities; Insurance Information Institute.

Catas-trophe Fund43%

Insti-tu-

tional41%

Mutual Fund12%

Hedge Fund2%

Reinsurer2%

2013

Institutional investors are accounting for a larger

share of alternative reinsurance investors

Catas-trophe Fund51%

Insti-tu-

tional34%

Mutual Fund5%

Hedge Fund5%

Reinsurer5%

2012

Catastrophe Bonds: Issuance and Outstanding, 1997- 2014:Q2Risk Capital Amount ($ Millions)

Sources: Guy Carpenter; Insurance Information Institute.

63

3.0

84

6.1

98

4.8

1,1

30

.0

96

6.9 2,7

29

.2

3,3

91

.7

4,6

00

.3

4,1

08

.8

5,8

52

.9

7,0

83

.0

5,7

01

.7

1,991.11,142.8

1,729.8

6,9

96

.3

4,6

93

.4

1,219.5

$3

,45

0.0

$4

,04

0.4

$4

,90

4.2 $8

,54

1.6

$1

4,0

24

.2

$1

2,0

43

.6

$1

2,5

08

.8

$1

2,1

85

.0

$1

2,1

39

.1

$2

0,5

42

.8

$1

4,8

35

.7

$1

8,5

16

.7

$2

,95

0.0

$0

$4,000

$8,000

$12,000

$16,000

$20,000

$24,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:Q2Risk Capital IssuedRisk Capital Outstandng at Year End

2014 Issuance Slowed Down Substantially; May Not Surpass 2013 Record

CAT bond issuance reached a record high

in 2013.

Risk capital outstanding

reached a record high in 2014

Financial crisis depressed issuance

U.S. Wind-Exposed Risk Premium* 2010:Q1 to 2014: Q1

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-12

Q1-13

Q2-13

Q3-13

Q4-13

Q1-14

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

10.9%

8.2% 8.0%

8.0%

7.9%8.2%

8.2%

10.1%

10.9%

12.0%

12.0%

11.6%

11.0%

7.6%

7.4%7.2%

6.4%Wtd. Avg. Risk Spread

Ris

k S

pre

ad

(c

ou

po

n –

ris

k-f

ree

ra

te) Risk spreads

rose in 2011-2012 from cat activity and changes to catastrophe

models

78

* Trailing 12-month averageSOURCE: Willis Capital Markets, Insurance Information Institute.

Risk spreads dropped –

equivalent to lower rates –

low cat losses, capital entering

market.

U.S. Wind and Quake31%

U.S. Wind24%

Other (incl. U.S. Wind)13%

Euro Wind11%

U.S. Quake8%

Other (ex. U.S. Wind)

8%

Japanese Perils6%

80

Catastrophe Bonds Outstanding, Q1 2014

Source: Willis Capital Markets.

Catastrophe bonds are heavily

concentrated in U.S. hurricane

exposures. Two-thirds of

catastrophe risks outstanding cover

U.S. wind risks.

Reinsurance Pricing: Rate-on-Line Index by Region, 1990 – 2014*

*As of Jan. 1.Source: Guy Carpenter

Lower CATs and a flood of new

capital has pushed reinsurance pricing

down in most regions, including

the U.S.

83

Questions Arising from Influence of Alternative Capital What Will Happen When Investors Face Large-Scale

Losses?

What Happens When Interest Rates Rise?

Does ILS Have a Higher Propensity to Litigate?

How Much Lower Will Risk Premiums Shrink/ROLs Fall?

Will There Be Spillover Into Casualty Reinsurance?

Does the New Interconnectedness with Capital Markets Lend Credence to the Suggestion that Reinsurance Is a Systemic Risky Business?

Will Alternative Capital Drive Consolidation?

PART II: GROWTHHas Strength Come at the

Expense of Growth?

84

Obstacles and Opportunities

84

Will We Ever See Vigorous Growth Again?

85

Who and What Are to Blame?Soft Markets?

“Great Recession”?Regulation?

85

86

-5%

0%

5%

10%

15%

20%

25%

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 13 14

Net Premium Growth: Annual Change, 1971—2014F

(Percent)1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

2014F: 4.0%

2013: 4.6%

2012: +4.3%

87

Real GDP Growth vs. Real P/CPremium Growth: Modest Association

*Through Q2 2014.Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/14; Insurance Information Institute

4.3

%1

8.6

%2

0.3

%5

.8%

0.3

%-1

.6%

-1.0

%-1

.8%

-1.0

%3

.1%

1.1

%0

.8%

0.4

%0

.6%

-0.4

%-0

.3%

1.6

% 5.6

%1

3.7

%7

.7%

1.2

%-2

.9%

-0.5

%-3

.8%

-4.4

%-3

.3%

-0.7

%0

.1% 2.1

%2

.8%

2.2

%5.2

%-0

.9%

-7.4

%-6

.5% -1

.5%

1.8

%

-10%

-5%

0%

5%

10%

15%

20%

25%

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

13

14

*

Re

al N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Re

al G

DP

Gro

wth

Real NWP Growth

Real GDP

P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy

Real GDP Growth vs. Real P/C (%) Inflation-adjusted premium growth

was negative for 6 years in a row

before and during the Great

Recession

88

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

74

.6

36

.9

31

.9

27

.4

25

.2

24

.9

22

.5

22

.2

16

.6

15

.9

15

.7

14

.5

14

.5

14

.3

12

.6

11

.9

11

.8

11

.2

10

.5

10

.3

9.9

9.8

9.3

9.1

9.0

8.6

0

10

20

30

40

50

60

70

80

ND

SD

OK

NE

KS IA VT

TX

WY

TN

MN

AR

AK IN WI

CO MI

KY

OH NJ

LA

SC VA

AL

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota was the country’s growth leader over the past 6 years with premiums written

expanding by 74.6%

89

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

8.5

8.2

7.9

7.8

7.6

7.3

7.0

6.9

6.2

5.9

5.6

5.3

4.2

4.1

3.5

1.6

1.0

0.4

-0.7

-1.7

-1.9

-4.1

-5.7

-6.7

-12

.6

-15

.3

-20

-15

-10

-5

0

5

10

MS

CT

US

NC

GA

NY

MD

MA

UT

WA

PA IL RI

NH ID MT

ME

OR

CA

FL

DC AZ

WV HI

NV

DE

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 7 states and DC between

2007 and 2013

90

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

91

.1

42

.1

41

.4

33

.7

26

.3

25

.8

23

.6

19

.1

15

.6

14

.0

11

.3

10

.0

9.8

6.8

6.7

6.5

4.1

3.2

3.1

3.0

2.7

2.2

2.0

1.7

1.3

0.6

0

10

20

30

40

50

60

70

80

90

100

ND

OK

SD VT

NE IA KS ID AK

TX

WY

MN IN AR

TN W

I

OH

MA

CT

NM LA

MS

NJ

NY

US

MO

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LLC.; Insurance Information Institute.

Top 25 States

Only 30 states showed any commercial lines growth from 2007 through 2013

91

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

0.5

0.4

0.2

0.1

-0.5

-0.8

-0.9

-1.0

-1.1

-1.1

-1.9

-2.0

-2.1

-2.7

-3.3

-3.7

-4.3

-4.9

-10

.7

-11

.4

-11

.7

-12

.6

-12

.7

-13

.6

-22

.4

-25

.1

-30

-25

-20

-15

-10

-5

0

5

MD

NH PA

CO IL

WA

VA

KY

NC

ME RI

MI

SC AL

GA

CA

UT

DC

OR

MT HI

DE FL AZ

WV

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LLC.; Insurance Information Institute.

States with the poorest performing economies also produced the most negative net change in premiums of

the past 6 years

Nearly half the states have yet to see commercial lines premium

volume return to pre-crisis levels

92

Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2013*

32

.9

30

.8

24

.3

21

.5

13

.4

11

.5

11

.0

10

.6

8.1

4.8

4.5

3.0

1.5

-0.3

-0.6

-1.0

-2.3

-2.4

-2.9

-3.0

-3.7

-4.1

-5.7

-5.8

-8.0

-15

-10

-5

0

5

10

15

20

25

30

35

OK IA SD

NY

CA

CT

NJ

KS

NE IN MI

VT

MN

DC WI

IL

NH

US

NM TX PA

VA

MD

TN AR

Pe

ce

nt

ch

an

ge

(%

)

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Only 13 states have seen works comp premium volume

return to pre-crisis levels

93

Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2013*

-8.1

-8.4

-8.7

-8.8

-11

.1

-11

.3

-12

.0

-14

.7

-15

.3

-15

.4

-16

.0

-16

.3

-17

.1

-22

.1

-23

.0

-26

.5

-27

.5

-32

.5

-33

.3

-33

.5

-43

.8

-71

.0

-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50

MS

MA RI

GA

NC

AK ID CO LA

ME AZ

MO

SC AL

KY

UT FL

OR

DE HI

NV

MT

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.

States with the poorest performing economies also produced some of the most

negative net change in premiums of the past 6 years

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

94

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2013P

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2013 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2014; +8.6% Growth Estimated for 2013

7/90-3/91 3/01-11/0112/07-6/09

$Billions $Billions

WC premium volume dropped two years before

the recession began

WC net premiums written were down $14B or 29.3% to

$33.8B in 2010 after peaking at $47.8B

in 2005

http://research.stlouisfed.org/fred2/series/WASCUR

95

Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2014)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%-5

.1%

-4.9

%-5

.8%

-5.6

%-5

.3%

-6.4

%-5

.2%

-5.4

% -2.9

%

2.7

% 4.4

%4

.3%

3.9

%5

.0%

5.2

%4

.3%

3.4

%2

.1%

1.5

%-0

.5%

-0.1

% 0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

Pricing as of Q2:2014 had turned (slightly) negative for

the first time in 3 years

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

SIDEBARAdvertising in P/C Insurance

9797

Growth in Capacity Spurs Competition

Advertising Expenditures by P/C Insurance Industry, 1999-2013

$1.736 $1.737 $1.803 $1.708

$3.426

$4.102$4.354

$4.103

$5.079

$5.883$6.088 $6.175

$2.975

$2.111$1.882

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

$6.0

$6.5

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Source: Insurance Information Institute from consolidated P/C Annual Statement data, Insurance Expense Exhibit (Part I).

$ Billions P/C ad spend hit an all time record high of $6.175 billion in 2013, up 1.5% over 2012.

The pace of growth has slowed from 15.8% in 2011

and 23.8% in 2010

P/C ad spending has more than tripled since 2002 (up 256% from 2002-2013)Over the same period Net

Premiums Written rose ~45%

-20%

-10%

0%

10%

20%

30%

40%

50%

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Ad SpendingNet Written Premium GrowthPolicyholder Surplus

Growth in Premiums & Surplus vs. Growth in Advertising Expenditures, 2000 – 2013

Sources: Insurance Information Institute analysis from A.M. Best data.

Average Annual Growth Rates 2000 – 2013

Ad Spending: 10.1%Policyholder Surplus: 5.3%Net Written Premiums: 3.7%

Since 2000, Ad Spending has been increasing at nearly twice the pace of NWP and nearly double

the of PHS

100

3.7%

5.3%

10.1%

0%

2%

4%

6%

8%

10%

12%

Ad Spending Policyholder Surplus Net Written Premiums

Average Annual Percent Change (%)

Overall Growth in Ad Spending has greatly exceeded growth in capacity (policyholder surplus) or premium growth. This suggests that there are diminishing returns to advertising.

100Sources: Insurance Information Institute analysis from A.M. Best data.

Growth in Premiums, Capacity vs. Growth in Advertising Expenditures, 2000 – 2013

Growth in the “Supply” of insurance

has exceeded “Demand” Efforts to sell have intensified

101

I.I.I. Poll: Ads Are Everywhere

Q. How long has it been since you have seen or heard an advertisement for auto insurance?

Source: Insurance Information Institute Annual Pulse Survey, May 2014.

Four Out of Five Respondents Have Seen An Auto Insurance Ad in the Past Week.

2%3%5%

80%

9%

Less Than a Week

1 week to 1 month

Never Seen Or Heard AdMore Than 6 Months

1 to 6 months

Global Insurance Premium Growth Trends

102

Growth Is Uneven Across Regions and Market Segments

102

Life, $2.61 , 56.2%

Non-Life, $2.03 , 43.8%

Life insurance accounted for 56.2% of global premium volume in 2013 vs. 43.8% for Non-Life

Distribution of Global Insurance Premiums, 2013 ($ Trillions)

103

Total Premium Volume = $4.641 Trillion*

Source: Swiss Re, sigma, No. 3/2014; Insurance Information Institute.

104

Distribution of Nonlife Premium: Industrialized vs. Emerging Markets, 2013

Sources: Swiss Re sigma No.4/2013; Insurance Information Institute research.

Emerging market’s share of nonlife premiums increased to 19.5% in 2013, up from 17.3% in 2012 and 14.3% in 2009. The share of premiums written in the $2 trillion global nonlife market remains much larger (80.5%) but continues to shrink.

The financial crisis and sluggish recovery in the major insurance markets will accelerate the expansion of the emerging market sector

Premium Growth Facts

19.5%80.5%

Industrialized Economies

$1, 653.0

Emerging Markets$399.8

2013, $Billions

Developing markets now account for about 40% of global GDP but just under 20% of nonlife premiums

105

Premium Growth by Region, 20130.

7%

-6.9

%

12.2

%

4.0%

4.1% 5.

6%

12.8

%

9.0%

2.3%

1.9%

-0.3

%

2.6%

1.7%

13.4

%

1.7% 2.1%

5.1%

1.4%

-2.0

%

9.4%

2.2%

0.8%

0.3%

7.5%

2.6%

10.2

%

7.1%

-3.2

%

-0.1

%

7.2%

-10%

-5%

0%

5%

10%

15%

World N.America

LatinAmerica

W.Europe

Central &E. Europe

AdvancedAsia

EmergingAsia

MiddleEast &Central

Asia

Africa Oceania

Life Non-Life Total

Global Premium Volume Totaled $4.641 Trillion in 2013, up 1.4% from $4.599 Trillion in 2012. Global Growth Was Weighed Down by Slow Growth

in N. America and W. Europe and Partially Offset by Emerging Markets

Latin America growth was

the strongest in 2013

Growth in Advanced Asia (incl. China) markets decelerated in 2013

Source: Swiss Re, sigma, No. 3/2013.

Strength in Africa,

107

Non-Life Insurance: Global Real (Inflation Adjusted) Premium Growth, 2013


Market Life Non-Life Total

Advanced -0.2 1.1 0.3

Emerging 6.4 8.3 7.4

World 0.7 2.3 1.4

Real growth in non-life insurance

premiums was faster in China and most of SE Asia than the US

108

Global Real (Inflation Adjusted) Premium Growth: 1980-2013


Emerging market growth has exceeded that of

industrialized countries in 30 of the past 34 years,

including the entirety of the global financial crisis and

subsequent recovery

Premium growth is very erratic in part to inflation volatility in emerging markets as well as a lack of

consistent cyclicality

Globalization:The Global Economy Creates and Transmits Cycles & Risks

109

Globalization Is a Double Edged Sword—Creating Opportunity and Wealth But

Potentially Creating and Amplifying Risk

109

Emerging vs. “Advanced” Economies

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

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

13

14

F1

5F

Advanced economies Emerging and developing economies World

Source: International Monetary Fund, World Economic Outlook , October 2014; Insurance Information Institute.

Emerging economy growth rates are

expected to ease to 4.4% in 2014 and 5.0% in 2015

GDP Growth: Advanced & Emerging Economies vs. World, 1970-2015F

Advanced economies are expected to grow at a modest pace of 1.8% in

2014 and to 2.3% in 2015.

World output is forecast to grow by 3.3% in 2014 and 3.8% in 2015. The world economy shrank by 0.6% in

2009 amid the global financial crisis

GDP Growth (%)

111

Real GDP Growth Forecasts: Major Economies: 2011 – 2015F

Sources: Blue Chip Economic Indicators (10/2014 issue); IMF (10/2014); Insurance Information Institute.

1.6%

1.5%

0.9%

2.3%

2.2%

0.8%

3.2%

1.3%

2.3%

7.4%

3.1%

1.3%

2.7%

2.2% 2.4%

7.1%

9.3%

2.6%

4.6%

-0.7

%

7.7%

2.9%

0.3%

1.7%1.8%2.

2%

-0.5

%

2.0%2.

6%

7.7%

-2%

0%

2%

4%

6%

8%

10%

US Euro Area UK Latin America Canada China

2011 2012 2013F 2014F 2015F

Growth Prospects Vary Widely by Region but the Outlook for 2015 Has Dimmed Except in the US and UK

The Eurozone remains weak

Growth in China has slowed but outpaces the US and Europe

US growth should

acceleratein 2015

Political turmoil in Latin America is hurting growth

112

Real GDP Growth Forecasts: Selected Economies: 2011 – 2015F

Sources: Blue Chip Economic Indicators (10/2014 issue); IMF (10/2104); Insurance Information Institute.

3.6% 4.

1%

7.7%

4.3%

3.9%

2.0%

1.5%

3.4%

1.0%

3.6% 3.

9%

2.8%

2.1%

4.4%

1.3%

2.3% 2.4%

1.1%

3.5% 3.6%

5.5%

0.2% 0.4%

3.0%

2.4%

3.7%

3.6%

6.1%

0.8% 1.

3%

2.9%

3.6%

2.7%

2.4%

4.7%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

S. Korea Taiwan India Russia Brazil Australia Mexico

2011 2012 2013 2014F 2015F

Growth Is Expected Accelerate Modestly in Most of the World in 2014 and 2015

Strong economies in smaller industrialized nations will bolster demand for products, services, international trade and insure

Growth in Russia is being hit hard by sanctions

117

World Trade Volume: EXPORTS2010 – 2015F

14.7%

6.7%

4.6% 4.4% 3.9%

5.8%

12.2%

5.3%

2.0% 2.4%3.6%

4.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2010 2011 2012 2013 2014F 2015F 2010 2011 2012 2013 2014F 2015F

Growth (%)

Export growth in emerging economies has

decelerated sharply

Advanced Economies Emerging Economies

Sources: IMF World Economic Outlook (October 2014); Insurance Information Institute.

Export growth in advanced economies

should accelerate in 2014

120

The “Underinsurance” Gap

120

Why is So Much Loss Uninsured and How to Close the Gap

Losses Due to Natural Disasters in the US, 1980–2013

121

Overall losses (in 2012 values) Insured losses (in 2013 values)

Source: MR NatCatSERVICE

(2013 Dollars, $ Billions) (Overall and Insured Losses)

50

100

150

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

2013 CAT Losses

Overall : $21.8B

Insured: $12.8B

Indicates a great deal of losses are uninsured (~40%-50% in the US) =

Growth Opportunity

2013 losses were far below 2011 and 2012 and were 44% lower

than the average from 2000-2012

Losses Due to Natural Disasters Worldwide, 1980–2013 (Overall & Insured Losses)

122

Overall losses (in 2013 values) Insured losses (in 2013 values)

Source: MR NatCatSERVICE

(2013 Dollars, $ Billions)(Overall and Insured Losses)

100

200

300

400

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

US$ bn

2013 Losses

Overall : $125B

Insured: $34B

There is a clear upward trend in both insured and overall losses over the past

30+ years

10-Yr. Avg. Losses

Overall : $184B

Insured: $56B

Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014. 123

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Climatological events(extreme temperature, drought, wildfire)

Extraterrestrial events(Meteorite impact)

880Loss events

EarthquakeChina, 20 April

Severe storms, tornadoesUSA, 18–22 May

FloodsIndia, 14–30 June

HailstormsGermany, 27–28 July

Winter Storm Christian (St. Jude)Europe, 27–30 October

Typhoon HaiyanPhilippines, 8–12 NovemberSevere storms, tornadoes

USA, 28–31 May

Hurricanes Ingrid & ManuelMexico, 12–19 September

FloodsCanada, 19–24 June

FloodsEurope, 30 May–19 June

Heat waveIndia, April–June

Typhoon FitowChina, Japan, 5–9 October

Earthquake (series)Pakistan, 24–28 September

FloodsAustralia, 21–31 January

Meteorite impactRussian Federation, 15 February

Flash floodsCanada, 8–9 July

FloodsUSA, 9–16 September

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Selection of significant Natural catastrophes

Natural catastrophes Hydrological events(flood, mass movement)

Climatological events(extreme temperature, drought, wildfire)

Natural Loss Events:Full Year 2013

World Map

Even as Insurance Coverage Expands, the Insured Share of Losses Is Falling

124Source: Swiss Re Economic Research & Consulting; Geneva Association; Insurance Information Institute.

Total and insured losses as a share of

global GDP have both increased over the past

40 years, but insured losses as a share of

total losses has shrunk

Many emerging market nations have very large insurance gaps. In the US, the

gap is about 50%.

Natural Catastrophe Protection Gap (1974 – 2013)

Total Global vs. Insured Losses as % GDP (1974 – 2013)

125125Sources: Guy Carpenter, World Bank, IMF; Insurance Information Institute.

Gap Between GDP Growth and Reinsurance Limit in Asia-Pacific Region: 2004—2013

The gap between GDP and reinsurance limit in Asia is growing—suggesting the

region is “under-reinsured”

126

I.I.I. Poll: Homes Near Hazards

Q. If you were to purchase a home today, which of the following summarizes your views on that home’s risk of damage from natural disasters . . . and your decision to purchase that home?

Source: Insurance Information Institute Annual Pulse Survey.

More Than Half of the Public Would Be Significantly Influenced by Risk of Damage from Natural Disasters. Close to a Third Do Not

Regard Such a Risk To Be a Major Consideration.

3%

17%

53%28%

Risk a Significant Influence

on Purchase

Willing to Accept Risk

Risk Not a Major Consideration

Don’t Know

Causes of the Underinsurance Gap and Ways to Narrow/Close It

Affordability

Lack of Awareness

Limits to Insurability

Regulatory Deficiencies

Compulsory Insurance

Create a Conducive Regulatory, Legal and Tax Environment

Build Public-Private Partnerships

Develop New Products

Microinsurance

Enhance Data Collection/Sharing

Foster a More Strategic Approach to Risk Among Businesses

Contributing Factors to theUnderinsurance Gap

Solutions that Will Help Close the Underinsurance Gap

Source: Geneva Association; Insurance Information Institute.

Growth Through M&AMerger and Acquisition Activity

131

Will Slow Growth, Excess Capacity Lead to Consolidation?Hasn’t Happened—YET

131

132

U.S. INSURANCE MERGERS AND ACQUISITIONS, All Sectors, 1989-2013 (1)

$7.1$6.9$8.6$5.0

$8.5$12.5

$27.0

$40.8

$56.2

$41.7

$55.7

$41.5

$9.7

$59.9

$14.9

$50.8

$43.0

$50.4

$31.4

$14.4

$46.5

$54.7

$43.2

$19.3

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Tra

ns

ac

tio

n v

alu

es

0

100

200

300

400

500

600

Nu

mb

er o

f tran

sa

ctio

ns

($ Billions)

(1) Includes transactions where a U.S. company was the acquirer and/or the target.

Source: Conning proprietary database.

M&A activity recovered to pre-crisis levels but deal values dropped sharply

in 2013

$165.4

133

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 2002-2013 (1)

$486

$20,353

$425

$9,264

$35,221

$13,615

$16,294

$3,507

$6,419

$12,458

$4,651 $4,397

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012

Tra

ns

ac

tio

n v

alu

es

0

10

20

30

40

50

60

70

80

90

Nu

mb

er o

f tran

sa

ctio

ns

($ Millions)



M&A activity in the P/C sector remains below

pre-crisis levels.

134

U.S. INSURANCE MERGERS AND ACQUISITIONS,LIFE/ANNUITY SECTOR, 2002-2013 (1)

$2,796

$18,533

$3,817

$21,865

$5,055$5,849

$382 $840

$23,848

$3,063

$6,083

$3,299

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Tra

ns

ac

tio

n v

alu

es

0

5

10

15

20

25

30

35

40

Nu

mb

er o

f tran

sa

ctio

ns

($ Millions)



Life/Annuity sector M&A activity is highly volatile

188 189 182

224 216

264279

297

184204

289

321

267

314

177

10

60

110

160

210

260

310

360

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:6M

Agent/Broker M&A Deals, 2000-2014:6M

Source: Optis Partners, “Agent-Broker Merger & Acquisition Statistics: The New Normal?”, August 2014; Insurance Information Institute.

Number of Deals

Agent/Broker activity is running at a record pace in 2014 with 314

deals announced through June 30.

Shifting Legal Liability & Tort Environment

137

(Temporary) “Taming” of the Tort System and Better Risk

Management Lack of Recent Liability Crises Removes Hard Market Catalyst

137

138

Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E

$0

$50

$100

$150

$200

$250

$300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A

Tort costs in dollar terms have remained high but relatively stable

since the mid-2000s., but are down substantially as a share of GDP

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

139

Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010

Billions of Dollars

$0

$20

$40

$60

$80

$100

$120

$140

$160

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

Self (Un) Insured ShareInsurer Share

Tort Costs and the Share Retained by Risks Both Grew Rapidly from the mid-1970s to mid-2000s, When Tort Costs Began to Fall But Self-

Insurance Shares Continued to Rise

$9.5

$15.0

$6.0

1973: Commercial Tort Costs

Totaled $6.49B, 94% was insured,

6% self-(un)insured

1985: $46.6B 74.5% insured,

25.5% self-(un)insured

1995: $83.6B 69.5% insured,


2005: $143.5B 66.4% insured,


2009: $126.5B 64.4% insured,


Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 139

141

Where the Growth Is

141

Growth Is Uneven Across Geographies, Industries

142

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT

143

US Is Becoming an Energy Powerhouse; Domestic Demand

and Exports Are KeyNeed Infrastructure Investment

143

20.2 19.9 20.0 19.518.9 19.4

20.221.1

21.622.4

24.0

25.3 25.6

20.6

10

12

14

16

18

20

22

24

26

28

00 01 02 03 04 05 06 07 08 09 10 11 12 13

U.S. Natural Gas Production, 2000-2013

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

Trillions of Cubic Ft. per Year

The U.S. is already the world’s largest natural gas producer—

recently overtaking Russia. This is a potent driver of commercial

insurance exposures

5.19 5.08 5.005.35 5.47 5.65

6.49

7.44

8.37

9.13

5.09

0

1

2

3

4

5

6

7

8

9

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

U.S. Crude Oil Production, 2005-2015P

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

Millions of Barrels per Day

Crude oil production in the U.S. is expected to increase by 82.6% from 2008 through 2015—and could overtake

Saudi Arabia as the world’s largest oil producer

146

Oil & Gas Extraction Employment,Jan. 2010—August 2014*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

616

9.3

170.

117

1.0

172.

517

3.6

176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

019

1.7

191.

919

3.4

192.

419

2.6

193.

119

3.3

195.

019

6.5 19

9.7

200.

620

3.0

204.

120

5.3

207.

820

7.5

207.

921

0.1

211.

321

2.1

211.

7

150

160

170

180

190

200

210

220

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Oil and gas extraction employment is up 35.4% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in

the US.

(Thousands) Highest since mid-1986

http://data.bls.gov/

354.8

523.9

629.8

729.2

819.6

406.0

0

100

200

300

400

500

600

700

800

900

1990 2000 2010 2020P 2030P 2040P

World Primary Energy Consumption, 1990-2040P

Source: Energy Information Administration, 2013 International Energy Outlook, Insurance Information Institute.

Between 2010 and 2040, energy consumption in projected to increase by

56.4% worldwide

Quadrillion BTUsGrowth in worldwide

energy consumption will create more risk and

vulnerabilities (natural and manmade); Innovations in

risk management and insurance are needed.

Biofuels, $0.3 , 1%

Oil, $10.1 , 27%

Natural Gas, $9.5 ,

25%

Power, $16.9 , 44%

Coal, $1.1 , 3%

Projected energy infrastructure investment

through 2035 total $38 trillion; Implies substantial

incurrence of risk.

Cumulative Projected Investment in Global Energy Infrastructure, 2011-2035 ($ Trill.)

Source: International Energy Agency, World Energy Outlook 2011.

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

149

The Construction Sector Is Critical to the Economy and the P/C Insurance Industry

149

150

Value of New Private Construction: Residential & Nonresidential, 2003-2014*

Billions of Dollars

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

03 04 05 06 07 08 09 10 11 12 13 14*

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2014: Value of new pvt. construction hits $685.5B as of June 2014, up 37%

from the 2010 trough but still 25% below 2006 peak

150

$261.8

$238.8

$329.5

$355.9

*2014 figure is a seasonally adjusted annual rate as of June.Sources: US Department of Commerce; Insurance Information Institute.

151

Value of Construction Put in Place, June 2014 vs. June 2013*

-2.9%

-12.3%

-2.7%

5.5%

9.2%7.4%

11.2%

-15%

-10%

-5%

0%

5%

10%

15%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth Is Almost Entirely in the Private Sector as State/Local Government Budget Woes Continue

Growth (%)

Private sector construction activity is up in the

residential and nonresidential segments

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +9.2% Public: -2.9%

Public sector construction activity remains depressed

http://www.census.gov/construction/c30/c30index.html

MANUFACTURING SECTOR OVERVIEW & OUTLOOK

152

The U.S. Is Experiencing a Mini Manufacturing Renaissance That Is Benefitting the US Economy and the P/C Insurance Industry

152

154

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—July 2014

* Seasonally adjusted; Data published Sept. 4, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in July 2014 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial

exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.

$ Millions

154

The value of Manufacturing Shipments in July 2014 was

$507.4.B—a new record high.

http://www.census.gov/manufacturing/m3/

HEALTHCARE

156

Healthcare Will Consume Ever More of US GDP & Demand More

Insurance Solutions

156

U.S. Health Care Expenditures,1965–2022F

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$42.

0$4

6.3

$51.

8$5

8.8

$66.

2$7

4.9

$83.

2$9

3.1

$103

.4$1

17.2

$133

.6$1

53.0

$174

.0$1

95.5

$221

.7$2

55.8

$296

.7$3

34.7

$369

.0$4

06.5

$444

.6$4

76.9

$519

.1$5

81.7

$647

.5$7

24.3

$791

.5$8

57.9

$921

.5$9

72.7

$1,0

27.4

$1,0

81.8

$1,1

42.6

$1,2

08.9

$1,2

86.5

$1,3

77.2

$1,4

93.3

$1,6

38.0

$1,7

75.4

$1,9

01.6

$2,0

30.5

$2,1

63.3

$2,2

98.3

$2,4

06.6

$2,5

01.2

$2,6

00.0

$2,7

00.7

$2,8

06.6

$2,9

14.7

$3,0

93.2

$3,2

73.4

$3,4

58.3

$3,6

60.4

$3,8

89.1

$4,1

42.4

$4,4

16.2

$4,7

02.0

$5,0

08.8

U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,

inflation of GDP growth

157

From 1965 through 2013, US health care expenditures had

increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have

increased 119 fold.

$ Billions

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

65 66 67 68 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 13 14 15 16 17 18 19 20 21 22

National Health Care Expenditures as a Share of GDP, 1965 – 2022F*

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

1965 5.8%

Health care expenditures as a share of GDP rose from 5.8% in 1965 to 18.0% in 2013 and are expected to

reach 19.9% of GDP by 2022

% of GDP

2022 19.9%

1980: 9.2%

1990: 12.5%

2000: 13.8%

2010: 17.9%

Since 2009, heath expenditures as a %

of GDP have flattened out at about 18%--the

question is why and will it last?



CAT OF THE FUTURE?CYBER RISK

159

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large

and Small in Every IndustryNEW III White Paper:

http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2014.pdf

159

http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2014.pdf

Data Breaches 2005-2013, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.

157

321

446

656

498

419447

619662

87.9

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013*0

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The Total Number of Data Breaches (+38%) and Number of Records Exposed (+408%) in 2013 Soared

Millions

161

2013 Data Breaches By Business Category, By Number of Breaches

3.7%9.1%

9.0%

43.8%

34.4%

Source: Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/2013/UpdatedITRCBreachStatsReport.pdf

The majority of the 614 data breaches in 2013 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.

Business, 211 (34.4%)Govt/Military, 56 (9.1%)

Banking/Credit/Financial, 23 (3.7%)

Educational, 55 (9.0%)

Medical/Healthcare, 269 (43.8%)

162

External Cyber Crime Costs: Fiscal Year 2013

4%

17%

36%

43%

* Other costs include direct and indirect costs that could not be allocated to a main external cost categorySource: 2013 Cost of Cyber Crime: United States, Ponemon Institute.

Information loss (43%) and business disruption or lost productivity (36%) account for the majority of external costs due to cyber crime.

Information loss

Equipment damages

Other costs* 0%

Revenue loss

Business disruption

Terrorism Risk Insurance

163

Risk Is RisingTRIA’s Future Is Uncertain

163

164

Terrorism Insurance Take-up Rates,By Year, 2003-2013

Source: Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014 and earlier editions.

27%

49%

58% 59% 59% 57%61% 62% 64% 62% 62%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

In 2003, the first year TRIA was in effect, the terrorism take-up rate was 27 percent. Since then, it has increased steadily, remaining in the

low 60 percent range since 2009.

TRIA’s high take-up rates, availability and affordability have benefitted businesses,

workers and the entire US economy since the program’s enactment

165

Summary

P/C Insurance Markets Remain Profitable Peak profitability has declined over the past several cycles

Lower bound profitability has remained virtually unchanged

Many factors: economic, market & institutional at work

Quantum Shift or Evidence of a Super-Cycle? Profitability patterns today more reminiscent of the

pre-1970 era (and back to WW II and even pre-war)

Growth Concerns Are Valid Apart from international trade barriers, sound regulation is

not a leading driver or impediment to growth

Economics are a major driver

Innovative insurance solutions needed for old & new risks

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentations

Insurance Information Institute Online:

166

http://www.iii.org/presentations

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