Mega Trends in Workers Compensation

Transcription

1 Mega Trends in Workers Compensation Past, Present and Future 16 th Annual AMCOMP Conference Las Vegas, NV March 27, 2014 Download at Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 Presentation Outline The Post-Crisis Economy & Workers Compensation The scars of the Great Recession are still visible on the WC line The New American Labor Force The Reindustrialization of America The Future of Healthcare in the United States WC s future in inextricably linked to influences in this key sector Workers Compensation Operating Result Update Workers Compensation: The Next 100 Years Q&A 2

3 The Slow and Uneven Nature of the Economic Recovery Is Changing the WC Playing Field Despite a Still-Sluggish Economy, there Are Potent Growth Drivers for Workers Comp and Commercial Insurers in General 3

4 US Real GDP Growth* Real GDP Growth (%) 7% 5% 3% 1% -1% -3% -5% -7% -9% 4.1% 1.1% 1.8% 2.5% 3.6% 3.1% 2.7% 0.5% 3.6% 3.0% 1.7% Recession began in Dec 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% -1.8% 1.3% -3.7% -5.3% -8.9% -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% 0.4% 1.1% 2.5% 4.1% 2.6% 1.9% 2.8% 3.0% 3.1% 3.0% 3.0% 3.0% 2.9% 2014/15 are expected to see a modest acceleration in growth :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 * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 3/14; Insurance Information Institute. 4

5 Real GDP by State Percent Change, 2012: Highest 25 States North Dakota was the economic growth juggernaut of the US in 2012 by far Percent Change (%) Only 10 states experienced growth in excess of 3%, which is what we would see nationally in a more typical recovery ND TX OR WA CA MN UT IN TN WV NC SC AZ FL IA MD MS MA MI OH US CO GA MT OK MO Sources: US Bureau of Labor Statistics; Insurance Information Institute. 5

6 Real GDP by State Percent Change, 2012: Lowest 25 States Percent Change (%) Growth rates in 8 states (and DC) were still below 1% in Connecticut was the only state to shrink in 2012 IL PA HI LA NE NV WI KS KY RI AR NJ NY AL VT AK VA DC ME NH ID DE NM SD WY CT Sources: US Bureau of Labor Statistics; Insurance Information Institute. 6

7 State-by-State Leading Indicators through 2014:Q2 The economic outlook for most of the US is positive for the first time in many years Sources: Federal Reserve Bank of Philadelphia at ;Insurance Information Institute. 7

8 Consumer Sentiment Survey (1966 = 100) January 2010 through March Impact of 2011 budget impasse Optimism among consumers dropped in Q as the government shutdown created uncertainty, then rebounded though the harsh winter took a toll 40 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially over the past 2+ years, though uncertainty in Washington sometimes takes a toll. Source: University of Michigan; Insurance Information Institute 8

9 New Private Housing Starts, F (Millions of Units) New home starts plunged 72% from ; A net annual decline of 1.49 million units, lowest since records began in 1959 Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction for several more years F15F16F17F18F19F Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the Great Recession Associated with Home Construction: Construction Risk Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure Source: U.S. Department of Commerce; Blue Chip Economic Indicators (3/14 and 3/13); Insurance Information Institute. 9

10 Commercial & Industrial Loans Outstanding at FDIC-Insured Banks, Quarterly, * $Trillions $1.6 $1.5 $1.4 $1.3 $1.2 $1.1 $1.0 $1.13 $ :Q1 $ :Q2 06:Q3 $1.22 $ :Q4 $ :Q1 07:Q2 $1.39 $ :Q3 Recession $ :Q4 08:Q1 $1.49 $ ;Q2 $ :Q3 08:Q4 $1.43 $ :Q1 $ :Q2 09:Q3 $ :Q4 $1.18 $ :Q1 10:Q2 In nominal dollar terms, this is an all-time high. $ :Q3 $1.18 $ :Q4 11:Q1 $ :Q2 $1.28 $ :Q3 11:Q4 $ :Q1 $1.42 $ :Q2 12:Q3 $ :Q4 $1.53 $1.56 $ :Q1 13:Q2 13:Q3 Outstanding loan volume has been growing for over two years and (as of year-end 2012) surpassed previous peak levels. *Latest data as of 2/2/2014. Source: FDIC at (Loan Performance spreadsheet); Insurance Information Institute. 10

11 ISM Non-Manufacturing Index (Values > 50 Indicate Expansion) January 2010 through February Optimism among nonmanufacturers was hurt by the uncertainty in Washington, but remains resilient Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Non-manufacturing industries have been expanding and adding jobs. This trend is likely to continue through Source: Institute for Supply Management at Insurance Information Institute. 11

12 Business Bankruptcy Filings, ,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 43,694 48,125 69,300 62,436 64,004 71,277 81,235 82,446 63,853 63,235 64,853 71,549 70,643 62,304 52,374 51,959 53,549 54,027 44,367 37,884 35,472 40,099 38,540 35,037 34,317 39, bankruptcies totaled 33,212, down 17.1% from 2012 the fourth consecutive year of decline. Business bankruptcies more than tripled during the financial crisis. % Change Surrounding Recessions % % % % % 19,695 28,322 43,546 60,837 56,282 47,806 40,075 33, Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline Sources: American Bankruptcy Institute ( ) at data from United States Courts at Insurance Information Institute. 12

13 Nonfarm Payroll (Wages and Salaries): Quarterly, :Q4 Billions $7,500 $7,250 $7,000 Latest (2013:Q4) was $7.23 trillion, a new peak--$980b above 2009 trough $6,750 $6,500 $6,250 $6,000 $5,750 $5,500 Prior Peak was 2008:Q1 at $6.60 trillion Recent trough (2009:Q3) was $6.25 trillion, down 5.3% from prior peak Payrolls are 15.7% above their 2009 trough and up 2.0% over the past year 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 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:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: National Bureau of Economic Research (recession dates); Insurance Information Institute. 13

14 12 Industries for the Next 10 Years: Insurance Solutions Needed Health Care Health Sciences Energy (Traditional) Alternative Energy Petrochemical Agriculture Natural Resources Technology (incl. Biotechnology) Many industries are poised for growth, though insurers ability to capitalize on these industries varies widely Light Manufacturing Insourced Manufacturing Export-Oriented Industries Shipping (Rail, Marine, Trucking, Pipelines) 14

15 CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK The Construction Sector Is Critical to the Economy and the WC Insurers 15

16 Value of New Private Construction: Residential & Nonresidential, * Billions of Dollars $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 $15.0 New Construction peaks at $ in 2006 $613.7 $298.1 Non Residential Residential Trough in 2010 at $500.6B, after plunging 55.1% ($411.2B) $261.8 $ : Value of new pvt. construction hits $667.5B, up 33% from the 2010 trough but still 27% below 2006 peak * Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates $311.5 $356.0 *2013 figure is a seasonally adjusted annual rate as of December. Sources: US Department of Commerce; Insurance Information Institute. 16

17 Change from Peak in New Construction Expenditures to 2013* Change (%) 0% -10% -20% -30% -40% -50% -60% -70% -24.3% -31.7% Residential Nonresidential Govt % -59.3% -28.8% -61.6% -48.6% -50.2% -11.8% -19.9% -17.1% All Construction (2006) Pvt. Construction (2006) Total Residential (2006) New Housing (2005) Total Nonresidential (2008) Lodging (2008) Office (2008) Commercial (2007) Manufacturing (2009) Other (2008) Government (2009) Despite Recent Improvements, Construction Activity (and Employment) Remains Far Below Pre-Crisis Peaks Note: Year in parentheses is the year of peak expenditure. *2013 figure is a seasonally adjusted annual rate as of June. Sources: US Department of Commerce; Insurance Information Institute. 17

18 Value of Construction Put in Place, January 2014 vs. January 2013* Growth (%) 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 9.3% 12.3% Private sector construction activity is now up in the residential and nonresidential segments Private: +12.3% Public: +2.5% 14.6% 9.7% Public sector construction activity remains low but is no longer contracting 2.5% -22.2% 3.0% Total Construction Total Private Construction Residential-- Private Non- Residential-- Private Total Public Construction 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 *seasonally adjusted Source: U.S. Census Bureau, ; Insurance Information Institute. 18

19 Value of Private Construction Put in Place, by Segment, Jan vs. Jan. 2013* Growth (%) 60% 50% 40% 30% 20% 12.3% 14.6% 9.7% 10% 0% -10% -20% 47.8% 17.0% 14.9% Led by the Residential Construction, Lodging, Communication and Office segments, Private sector construction activity is rising after plunging during the Great Recession. -3.9% 1.7% -12.2% 13.8% 7.8% 41.0% 7.9% 0.9% Total Private Construction Residential Total Nonresidential Lodging Office Commercial Health Care Educational Religious Amusement & Rec. Transportation Communication Power Manufacturing Private Construction Activity is Up in Most Segments, Including the Key Residential Construction Sector; Bodes Well for Early 2014 *seasonally adjusted Source: U.S. Census Bureau, ; Insurance Information Institute. 19

20 Private Construction by Segment/Project Type, Jan vs. Jan. 2013* Growth (%) 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 12.3% 21.0% 28.0% 17.0% -24.2% -3.6% 5.0% 0.9% 42.6% 41.0% Shopping malls/centers and warehouse construction are among the strongest nonresidential segments -16.6% -30.3% 0.6% 33.4% 20.6% -3.9% -5.9% -1.6% Total Private Construction Residential: Single Family Residential: Multi-Family Office: General Office: Financial Automotive Food/Beverage Retail: General Merchandise Retail: Shopping Center Shopping Mall Drug Store Building Supply Other Stores Warehouse: Commercial Warehouse: Mini-Storage Hospitals Medical Building Special Care Private Construction Activity is Up in Many Segments, Including the Key Residential Construction Sector, But Down in a Few *seasonally adjusted Source: U.S. Census Bureau, ; Insurance Information Institute. 20

21 Florida Total Private Housing Starts, F (Thousands of Units) CRASH, CRATER, RECOVERY Homebuilding in FL continues to recover, but employment and WC exposures will take more than a decade to recover The economic outlook for most of the US is positive for the first time in many years Source: University of Central Florida Institute for Economic Competitiveness: 21

22 Value of New Federal, State and Local Government Construction: * ($ Billions) $350 $300 $250 $216.1 $220.2 Construction across all levels of government peaked at $314.9B in 2009 $234.2 $255.4 $289.1 $308.7 $314.9 $304.0 Austerity Reigns Govt. construction is still shrinking, down $40.5B or 12.9% since 2009 peak $286.4 $279.0 $274.4 $200 $150 $100 $50 $ * Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Continues to Contract As State/Local Governments Grapple with Deficits and Federal Sequestration Takes Hold *2013 figure is a seasonally adjusted annual rate as of December. Sources: US Department of Commerce; Insurance Information Institute. 22

23 Value of Public Construction Put in Place, by Segment, Jan vs. Jan. 2013* Growth (%) 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% 2.5% Total Public Construction Public sector construction activity is down substantially in most segments, a situation that will likely persist, dragging on public entity risk exposures -22.2% Residential 3.0% Total Nonresidential -9.9% Office -27.8% Commercial -6.2% -3.0%-0.6% Health Care Educational Public Safety -15.1% Amusement & Rec. 7.8% Transportation 8.7% Power Highway, Transport, and Power projects lead public sector construction 15.3% Highway & Street 3.6% Sewage & Waste Disposal -6.2% -10.8% Water Supply Conservation & Develop. Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in *seasonally adjusted Source: U.S. Census Bureau, ; Insurance Information Institute. 23

24 Public Construction by Segment/Project Type, Jan vs. Jan. 2013* Growth (%) State and local public sector construction spending could 30% begin a slow recovery in 2014; Federal spending will languish. 20% 10% 0% -10% -20% -30% -40% 3.3% -5.4% -0.9% -6.2% -33.6% -7.2%-7.2% 14.5% 2.5% 1.6% -20.5% -1.9% 5.6% 5.2% -3.3% -0.2% 21.8% Total Public Construction State & Local Federal Education: Primary/Secondary Higher Education Library/Archive Correctional Public Safety Sports Peformance Center Convention Center Park/Camp Transport: Air Highway & Street Sewage & Waste Water Supply Conservation & Developmement Public Construction Activity is Down in Most Segments as Governments Grapple with Budget Deficits and Pension Shortfalls *seasonally adjusted Source: U.S. Census Bureau, ; Insurance Information Institute. 24

25 Construction Employment, Jan February 2014* (Thousands) 6,000 5,900 5,800 5,700 5,600 5,500 Construction employment is +506,000 above Jan (+9.3%) trough 5,581 5,522 5,542 5,554 5,527 5,512 5,497 5,519 5,499 5,501 5,497 5,468 5,435 5,478 5,485 5,497 5,524 5,530 5,547 5,546 5,583 5,576 5,577 5,612 5,629 5,644 5,640 5,636 5,615 5,622 5,627 5,630 5,633 5,649 5,673 5,711 5,735 5,783 5,799 5,792 5,791 5,801 5,804 5,805 5,822 5,830 5,849 5,876 5,926 5,941 5,400 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 2/30/2 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-12 Oct-13 Nov-13 Dec-13 Jan-14 Jan-14 Construction and manufacturing employment constitute 1/3 of all payroll exposure. *Seasonally adjusted. Sources: US Bureau of Labor Statistics at Insurance Information Institute. 25

26 Construction Employment, Jan February 2014 (Thousands) 8,000 7,500 Construction employment peaked at million in April 2006 Construction employment as of Feb totaled million, an increase of 506,000 jobs or 9.3% from the Jan trough 7,000 6,500 6,000 5,500 The Great Recession and housing bust destroyed 2.3 million constructions jobs Construction employment troughed at million in Jan. 2011, after a loss of million jobs, a 29.7% plunge from the April 2006 peak 5,000 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 The Construction Sector Could Be a Growth Leader in 2014 as the Housing Market, Private Investment and Govt. Spending Recover. WC Insurers Will Benefit. Note: Recession indicated by gray shaded column. Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute. 26

27 The New American Labor Force The Recovery s Winners and Losers Are Reshaping the Sources of WC s Payroll Exposure Base 27

28 Unemployment and Underemployment Rates: Still Too High, But Falling January 2000 through February 2014, Seasonally Adjusted (%) "Headline" Unemployment Rate U-3 Unemployment + Underemployment Rate U-6 U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 12.6% in Feb % to 10% is normal Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Source: US Bureau of Labor Statistics; Insurance Information Institute. As the unemployment rate approaches 6%, the Fed will begin signaling on shortterm rates Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Headline unemployment was 6.7% in February % to 6% is normal. Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving. 28

29 US Unemployment Rate Forecast 2007:Q1 to 2015:Q4F* 11% 10% 9% 8% 7% 6% 5% Rising unemployment eroded payrolls and WC s exposure base. Unemployment peaked at 10% in late % 4.5% 4.6% 4.8% 4.9% 5.4% 6.1% 6.9% 8.1% 9.3% 9.6% 10.0% 9.7% 9.6% 9.6% 9.6% 8.9% 9.1% 9.1% 8.7% 8.3% 8.2% 8.0% 7.8% 7.7% 7.6% 7.3% 7.0% 6.6% 6.5% 6.3% 6.2% 6.1% 6.0% 5.9% 5.8% Unemployment forecasts have been revised slightly downwards. Optimistic scenarios put the unemployment as low as 6.0% by Q4 of this year. Jobless figures have been revised slightly downwards for 2014/15 4% 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:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4 15:Q1 15:Q2 15:Q3 15:Q4 * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/14 edition); Insurance Information Institute. 29

30 Monthly Change in Private Employment January 2007 through February 2014 (Thousands, Seasonally Adjusted) (200) (400) (600) (800) (1,000) Monthly losses in Dec. 08 Mar. 09 were the largest in the post-ww II period Jobs Created 2013: Mill 2012: Mill 2011: Mill 2010: Mill ,000 private sector jobs were created in February Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Private Employers Added 8.34 million Jobs Since Jan After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: Insurance Information Institute 30

31 Cumulative Change in Private Employment: Dec Dec Millions December 2007 through December 2013 (Millions) Cumulative job losses peaked at million in February 2010 Cumulative job losses as of Dec totaled 587, Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Private Employers Added 8.14 million Jobs Since Jan After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: Insurance Information Institute 31

32 Cumulative Change in Private Sector Employment: Jan Feb Millions January 2010 through February 2014* (Millions) Job gains and pay increases have added nearly $1 trillion to payrolls since Jan Cumulative job gains through Feb totaled 8.64 million Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Private Employers Added 8.64 million Jobs Since Jan After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: Insurance Information Institute 32

33 Cumulative Change in Government Employment: Jan Dec January 2010 through Dec. 2013* (Millions) Temporary Census hiring distorted 2010 figures Government at all levels has shed more than 600,000 jobs since Jan even as private employers created 8.14 million jobs, though losses may now be stabilizing. Cumulative job losses through Dec totaled 631, Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the Financial Crisis: Sequestration Will Add to this Toll Source: US Bureau of Labor Statistics Insurance Information Institute 33

34 Net Change in Government Employment: Jan Dec. 2013* (Thousands) 0 State government employment fell by 1.9% since the end of 2009 but is recovering while Federal employment is down by 3.8% and deteriorating Local government employment shrank by 424,000 from Jan through Dec. 2013, accounting for 67% of all government job losses, negatively impacting WC exposures for those cities and counties that insure privately Total Local State Federal *Cumulative change from prior month; Base employment date is Dec Source: US Bureau of Labor Statistics Insurance Information Institute 34

35 Unemployment Rates by State, February 2014: Highest 25 States* In February, 29 states had over-the-month unemployment rate decreases, 10 states had increases, and 11 states and the District of Columbia had no change. Unemployment Rate (%) RI IL NV CA KY MI DC MS AZ AR GA NJ CT OR TN NY US NM AK MA OH AL MO NC WA FL PA *Provisional figures for February 2014, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 35

36 Unemployment Rates by State, February 2014: Lowest 25 States* Unemployment Rate (%) In February, 29 states had over-themonth unemployment rate decreases, 10 states had increases, and 11 states and the District of Columbia had no change CO IN ME WI DE WV MD SC TX ID MT OK KS VA MN NH HI LA IA WY UT VT NE SD ND *Provisional figures for February 2014, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 36

37 US Unemployment Rate Forecasts Quarterly, 2013:Q1 to 2014:Q4 10.0% 9.5% 9.0% 8.5% Unemployment will remain high even under the most optimistic of scenarios, but forecasts are being revised downwards 10 Most Pessimistic Consensus/Midpoint 10 Most Optimistic 8.0% 7.5% 7.0% 6.5% 6.0% 7.7% 7.7% 7.6% 7.6% 7.5% 7.5% 7.6% 7.4% 7.5% 7.5% 7.4% 7.4% 7.3% 7.2% 7.2% 7.1% 7.0% 6.9% 6.9% 6.7% 6.6% 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4 Sources: Blue Chip Economic Indicators (May 2013); Insurance Information Institute 37

38 Nonfarm Payroll (Wages and Salaries): Quarterly, :Q4 Billions $7,500 $7,250 $7,000 Latest (2013:Q4) was $7.23 trillion, a new peak--$980b above 2009 trough $6,750 $6,500 $6,250 $6,000 $5,750 $5,500 Prior Peak was 2008:Q1 at $6.60 trillion Recent trough (2009:Q3) was $6.25 trillion, down 5.3% from prior peak Payrolls are 15.7% above their 2009 trough and up 2.0% over the past year 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 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:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: National Bureau of Economic Research (recession dates); Insurance Information Institute. 38

39 Payroll vs. Workers Comp Net Written Premiums, E Payroll Base* $Billions WC NWP $Billions $7,000 $6,000 $5,000 Wage & Salary Disbursements WC NPW 7/90-3/91 3/01-11/01 WC premium volume dropped two years before the recession began 12/07-6/09 $50 $45 $40 $4,000 $3,000 $2, WC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in % in 2013E 13E $35 $30 $25 Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2014; +8.6% Growth Estimated for 2013 *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 ; NCCI; I.I.I. 39

40 Labor Force Participation Rate by Gender, (Percent) 100% 90% 86.6% or working age men participated in the labor force in 1948 compared to 32.7% or women By 2013, the labor force participation rate for men had declined to 69.7% while the participation rate for women had risen to 57.2% 80% 70% 60% 50% 40% 30% 20% 10% Men Women By 2013, 57.2% of working age women participated in the labor force, up from 32.7% in 1948 but down from its all time high of 60.0% in % Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute. 40

41 Labor Force Participation by Sex and Education through the Crisis: 2006, 2010 and 2013 Unemployment Rate (%) 16% 14% 12% 10% 8% 6% 4% 2% 0% 9.6% 7.4% % 7.6% 4.6% 4.6% 4.6% Men were hit harder and continue to do worse than women in the job market. Women are likely to do better than men for the indefinite future. 8.6% 7.1% 5.9% 13.9% 9.7% Workers lacking a college degree suffer from much higher rates of unemployment 4.1% 11.5% 7.9% 2.2% 6.0% 5.0% All Men Women Less than HS Diploma HS Diploma, No College Bachelor's Degree or Higher The composition and character of the U.S. labor force is changing rapidly. Winners and losers have clearly emerged. What does this mean for WC? Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute. 41

42 Unemployment Rates by Age and Race: 2006, 2010 and 2013 Unemployment Rate (%) 30% 25% % 22.9% Unemployment among younger workers remains a chronic problem Unemployment among some minority groups remains far above prerecession levels 20% 15% 10% 5% 18.0% 15.3% 16.0% 13.5% 13.1% 12.5% 9.6% 10.0% 9.0% 9.1% 7.4% 4.6% 5.2% 8.7% 6.5% 4.0% 0% All Black or African American Hispanic or Latino White Source: U.S. Bureau of Labor Statistics; Insurance Information Institute. 42

43 22.1% 22.5% 22.3% 23.0% 22.8% 23.0% 22.9% 23.5% 24.4% 24.4% 24.3% 24.9% 24.4% 24.4% 24.8% 25.2% 25.2% % 26.5% 26.2% 27.9% 27.2% 27.0% 27.4% 27.9% 27.3% 27.8% 27.6% 26.8% 27.6% 27.9% 28.5% 28.7% 29.3% 29.5% 30.8% 29.3% 30.1% 29.1% 30.3% 30.1% 30.9% 31.0% 30.7% 31.0% 31.4% 30.9% 31.2% 31.6% 31.3% 31.5% 31.4% 31.1% 32.8% 32.3% 32% Labor Force Participation Rate, Ages 65-69, Quarterly, 1998:Q1-2013:Q2 Labor Force participation rate 34% 1 in 3 in this age group are working. Virtually none of them are baby boomers 32.2% 32.2% 32.5% 31.8% 31.8% 31.7% 32.9% 30% 28% The brown bars indicate recessions. 26% 24% 22% 20% The labor force participation rate for workers might grow even faster in the future as seniors find they can t fully retire on their meager retirement savings. Not seasonally adjusted. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

44 % 12.2% 12.4% 12.9% 12.4% 13.6% 13.1% 13.1% 13.3% 13.5% 13.6% 13.8% 14.4% 13.7% 14.2% 14.2% 13.8% 14.2% 14.0% 14.0% 14.4% 14.4% 14.6% 14.9% 14.9% 15.4% 15.6% 15.3% Labor Force Participation Rate, Ages 70-74, Quarterly, 1998:Q1-2013:Q % 17.0% 15.8% 16.2% 16.7% 16.9% 17.2% 17.0% 16.7% 16.8% % 17.5% 17.3% 16.9% 18.6% 18.2% 17.7% 17.9% 18.9% 19.2% 18.0% 18.1% 17.4% 18.4% 18.0% 18.4% 19.3% 19.5% 19.2% 19.1% 19.9% 19.6% 18.8% 19.3% Labor Force participation rate 21% Nearly 1 in 5 in this age group is working. A dozen years ago it was 1 in 8. 18% 15% 12% 9% The labor force participation rate for workers grew by about 50% since Growth stalled during and after the Great Recession but has since resumed. Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

45 The Aging Workforce 45

46 Fatality Rates Improved Slightly Since 2006 but Still Climb Sharply With Age Fatal Work Injury Rate per 100,000 full-time-equivalent workers The fatality rate for workers 65 and older was 5 times that of workers age The workplace of the future will have to be completely redesigned to accommodate the surge in older workers No improvement in fatal work injury rate for this age group Source: US Bureau of Labor Statistics, at 46

47 Median Days Away From Work Older Workers Lose More Days from Work Due to Injury or Illness Youngest baby boomer is age 48 (in 2013) Oldest baby boomer is age 67 (in 2013) Median lost time of workers age 65+ is 2-3X that of workers age Source: US Bureau of Labor Statistics, Nonfatal Occupational Injuries and Illnesses Requiring Days Away From Work, 2011 (Table 10), released November 8,

48 Older Workers Are Much More Likely to Break a Bone Incidence Rate* (2011) Fractures Multiple Traumatic Injuries *per 10,000 full-time-equivalent workers Source: US Bureau of Labor Statistics, US Department of Labor at Table 14 48

49 Older Workers Are More Likely to Slip When Walking, but Less Likely to Overexert Themselves Incidence Rate (2011) 60 Source/Nature of Injury: Vehicles Floors, Walkways, etc. Overexertion Source: US Bureau of Labor Statistics, US Department of Labor at Table 14 49

50 The Reindustrialization of America American Industrial Might Is Making a Comeback A Golden Opportunity for Workers Comp Insurers? 50

51 Dollar Value* of Manufacturers Shipments Monthly, Jan Dec $ Millions $500,000 The value of Manufacturing Shipments in Dec was $492.7B a near record high. $400,000 $300,000 $200,000 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan Jan 13-Jan Monthly shipments in Dec 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. *seasonally adjusted; Dec is preliminary; data published February 4, Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, and Orders, 51

52 ISM Manufacturing Index (Values > 50 Indicate Expansion) 65 January 2010 through February Manufacturing continued to expand in early Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 The manufacturing sector expanded for 48 of the 50 months from Jan through February Weakness in early 2014 stems largely from harsh winter weather and weakness in China. Source: Institute for Supply Management at Insurance Information Institute. 52

53 Manufacturing Growth for Selected Sectors, 2013 vs. 2012* Growth (%) 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 1.7% 3.1% Durables: +3.4% Non-Durables: +0.2% 14.0% 3.0% 0.4% 1.3% 0.0% -3.4% 8.1% Manufacturing of durable goods was especially strong in 2012 but weakened in % 0.2% -1.8% -0.5% 3.1% 6.9% All Manufacturing Durable Mfg. Wood Products Primary Metals Fabricated Metals Machinery Electrical Equip. Computers & Electronics Transportation Equip. Non-Durable Mfg. Food Products Petroleum & Coal Chemical Plastics & Rubber Textile Products Manufacturing Is Expanding Albeit Slowly Across a Number of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages *Seasonally adjusted; Date are YTD comparing data through November 2013 to the same period in Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, and Orders, 53

54 Durable Manufacturing: New Order Growth and Shipments, 2013 Growth (%) Shipments New Orders Most manufacturing sectors indicate order growth outstripping shipments, a favorable indicator for investment and expansion 12% 10% 8% 6% 4% 2% 0% -2% -4% 3.6% 6.4% 3.9% 1.3% 1.2% 2.9% 7.8% -3.2%-2.8% 3.6% 5.7% 10.1% 10.2% 2.3% 8.3% All Durable Mfg: Non-Defense Primary Metals Fabricated Metals Machinery Computers & Elect. Eq. Communications Equipment Motor Vehicles & Parts Non-Defense Capital Goods Manufacturing Is Expanding: New orders exceed shipments which suggests the industry is in an expansionary phase *Seasonally adjusted; Date are advance report YTD data comparing data through December 2013 to the same period in Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, and Orders, 54

55 Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures March 2001 through December 2013 Percent of Industrial Capacity 82% 80% Hurricane Katrina Full Capacity The US operated at 79.2% of industrial capacity in Dec. 2013, well above the June 2009 low of 66.9% but is still below pre-recession levels. 78% 76% 74% 72% The closer the economy is to operating at full capacity, the greater the inflationary pressure 70% 68% March November 2001 recession December June 2009 Recession 66% Mar 01 Jun 01 Sep Dec Mar 02 Jun 02 Sep Dec Mar 03 Jun 03 Sep Dec Mar 04 Jun 04 Sep Dec Mar 05 Jun 05 Sep Dec Mar 06 Jun 06 Sep Dec Mar 07 Jun 07 Sep Dec Mar 08 Jun 08 Sep Dec Mar 09 Jun 09 Sep Dec Mar 10 Jun 10 Sep Dec Mar 11 Jun 11 Sep Dec Mar 12 Jun 12 Sep Dec Mar 13 Jun 13 Sep Source: Federal Reserve Board statistical releases at 55 Dec 55

56 Manufacturing Employment, Jan February 2014* (Thousands) Since Jan 2010, 12,250 12,000 11,750 11,500 manufacturing employment is up (+605,000 or +5.3%) and still growing. 11,460 11,460 11,466 11,497 11,531 11,539 11,558 11,548 11,554 11,555 11,577 11,590 11,624 11,662 11,682 11,707 11,715 11,724 11,747 11,760 11,762 11,770 11,769 11,797 11,841 11,870 11,910 11,920 11,926 11,935 11,957 11,943 11,925 11,931 11,938 11,951 11,965 11,988 11,984 11,977 11,972 11,965 11,948 11,963 11,993 12,011 12,046 12,053 12,059 12,065 11,250 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 2/30/2 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high. *Seasonally adjusted; Jan. and Feb are preliminary Sources: US Bureau of Labor Statistics at Insurance Information Institute. 56

57 Business Investment: Expected to Accelerate, Fueling Commercial Exposure Growth 9% 8% 7% 6% 5% Accelerating business investment will be a potent driver of commercial property and liability insurance exposures and should drive employment and WC payroll exposures as well (with a lag) 4.9% 6.3% 7.8% 4% 3% 2.5% 2% 1% 0% F 2015F 2016F Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute. 57

58 U.S. Natural Has Imports and Exports, Trillions of Cubic Feet The US is now the largest gas producer in the world, though Russia is the largest exporter. The US needs to invest in its pipeline and LNG infrastructure and expedite regulatory approval to realize its full export potential Sources: US Energy Information Administration, Annual Energy Outlook 2014 Early Release Overview; ;Insurance Information Institute. 58

59 Oil & Gas Extraction Employment, Jan Feb. 2014* (Thousands) Oil and gas extraction employment is up 32.9% since Jan as the energy sector booms. Domestic energy production is essential to any robust economic recovery in the US Highest since Aug Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 2/30/2 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 *Seasonally adjusted Sources: US Bureau of Labor Statistics at Insurance Information Institute. 59

60 Growth in Health Professions, (Percent Annual Change) Average Annual Growth Average Healthcare: 2.5% Total Nonfarm: 1.0% Health care Total nonfarm The U.S. economy lost more than 8 million jobs during the Great Recession, but health sector employment expanded Healthcare employment has continued to grow in good times and bad - including the Great Recession. Sources: Bureau of Labor Statistics, Insurance Information Institute. 60

61 Occupations Ranked by Projected Percentage Growth, F (Millions) Healthcare Support Healthcare Practitioners Construction Personal Care and Service Computer and Math Social Service Business & Financial Groundskeeping/Janitorial Education All Occupations Legal Life, Phys and Social Science Repair Food Preparation Transportation Fire, Police, Etc. Architects and Engineers Sales Management Arts and Media Administrative Support Production Farming Healthcare professions are expected to grow at 2 to nearly 3 times employment growth overall Source: Bureau of Labor Statistics, Insurance Information Institute. 61

62 The Future of Healthcare in America Workers Comp Is Increasingly Along for the Ride in the American Health Care Saga 62

63 U.S. Health Care Expenditures, F $42.0 $46.3 $51.8 $58.8 $66.2 $74.9 $83.2 $93.1 $103.4 $117.2 $133.6 $153.0 $174.0 $195.5 $221.7 $255.8 $296.7 $334.7 $369.0 $406.5 $444.6 $476.9 $519.1 $581.7 $647.5 $724.3 $791.5 $857.9 $921.5 $972.7 $1,027.4 $1,081.8 $1,142.6 $1,208.9 $1,286.5 $1,377.2 $1,493.3 $1,638.0 $1,775.4 $1,901.6 $2,030.5 $2,163.3 $2,298.3 $2,406.6 $2,501.2 $2,600.0 $2,700.7 $2,806.6 $2,914.7 $3,093.2 $3,273.4 $3,458.3 $3,660.4 $3,889.1 $4,142.4 $4,416.2 $4,702.0 $5,008.8 $ Billions $6,000 $5,000 $4,000 $3,000 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. $2,000 $1,000 $0 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 Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute. 63

64 National Health Care Expenditures as a Share of GDP, F* % of GDP 20% Health care expenditures as a share 18% of GDP rose from 5.8% in 1965 to 16% 18.0% in 2013 and are expected to reach 19.9% of GDP by % 12% 10% 8% 6% 4% 2% % 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? 0% Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

65 Rate of Health Care Expenditure Increase Compared to Population, CPI and GDP 8000% 7000% 6000% 5000% Accelerating business investment will be a potent driver of commercial property and liability insurance exposures and should drive employment and WC payroll exposures as well (with a lag) 1965: $719.1 Bill 2013: $16,797.5 Bill 1965: $42.0 Bill 2013: $2,914.7 Bill % 4000% 3000% 2000% 1000% 0% 1965: Mill 2013: Mill 63.1% 650.7% % Population CPI GDP Health Care Expenditures Source: Insurance Information Institute research. 65

66 Medical Cost Inflation vs. Overall CPI, % Though moderating, medical inflation will continue to exceed inflation in the overall economy 4% 3% 2% 1% 0% -1% Average Annual Growth Average Healthcare: 3.8% Overall CPI: 2.4% Change in Medical CPI CPI-All Items Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

67 Possible Effects of the Affordable Care Act ( ObamaCare ) on Workers Compensation 67

68 WC Medical Severity Generally Outpaces the Medical CPI Rate 16% 14% 12% 10% 8% 6% 4% 2% 0% 7.4% 10.1% 8.3% 10.6% 13.5% 8.8% Average annual increase in WC medical severity form 1995 through 2011 was well above the medical CPI (6.8% vs. 3.8%), but the gap is narrowing. 7.7% 7.8% 7.3% 6.3% 6.6% 5.1% 5.4% 5.4% 4.1% 3.6% 4% 4.7% 4.4% 4.0% 4.2%4.0% 4.4% 3.2% 4.5%3.5%2.8% 3.5%4.1%4.6% 3.7% 3.2% 3.4% 3.0% 3% Change in Medical CPI Change Med Cost per Lost Time Claim 1.4% Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

69 A Few Potential Impacts of the ACA on Workers Compensation Issue Concern Contravening Argument Surge in People Covered by Health Insurance Electronic Health Records Claim Shifting System is overwhelmed MD shortage Patient care adversely impacted Cost Provider/patient may prefer claim handled via WC system Over time, people will have access to preventative care, improving the general health of the population Greater use of PA s, etc. Computerization of patient data could help flag issues and improve risk management and improve patient outcomes Reduction in uninsured population reduces shifting Source: Insurance Information Institute research; WCRI. 69

70 ACA Impact on WC May Occur via Changes in Rates Set by State Regulators WC rates often tied to WC but can change for reasons independent of this link There could be both positive and negative effects of a cut in Medicare rates on WC performance in states which tie reimbursement to Medicare WC reimbursement rates would go down Doctors may be unwilling to see WC patients: 64% of Dr. s surveyed said they would stop accepting new Medicare patients if planned rate cuts go through; some of these same doctors may also refuse WC patients if WC rates also decrease These effects would likely be short lived 350% 300% 250% 200% 150% All states which tie their fee schedules to Medicare already increase the Medicare rates to set WC rates, so any drop in the Medicare rates would likely be soon offset by a higher WC adjustment WC rates tied to Medicare WC rates not tied to Medicare WC Maximum Allowable Reimbursement Rates as Percentage of Medicare 100% 50% 0% MA HI WV MD FL CA TX MI UT VT NY NC PA OH WA CO ND SC KY KS SD WY AR OK GA MN ME MO AZ NM TN LA MS AL NE CT OR NV ID RI IL AK SOURCE: NCCI Annual Issues Symposium 2009, Medicare s Impact on Workers Compensation, AMA: Physicians reactions to the Medicare physician payment cuts from 3/13/13 presentation by Christopher Cunniff, FCAS, of Liberty Mutual.

71 PPACA May Have Distinct Impacts on WC Depending on Claim Frequency/Severity Industry Portfolio by Claim Type (Relative Volume by Claim Frequency & Paid Dollars) High Volume, Low Severity Complicated Ex: med only, quick to settle, <25K Ex: back pain claims, very litigious Potential ACA Impact Expanded coverage may shift some small claims to the health insurance system (+) Physician access problems could lead to indemnity increases and may bleed into the complicated cases (-) Preventative care and early record keeping decreases WC comorbidities (+) Soft tissue treatments, a large portion of slow burn claims, may decrease in cost (+) Catastrophic Injuries Ex: spinal cord injury, multiple trauma claims No significant impacts Frequency Distribution Paid Dollars Distribution SOURCE: Dr. Glenn Pransky, Liberty Mutual Research Institute for Health & Safety extracted from from 3/13/13 presentation by Christopher Cunniff, FCAS, of Liberty Mutual: Impacts of Healthcare Reform on Workers Compensation,

72 Possible Effects on Workers Comp 1. Could slow the growth in WC medical care costs IPAB recommendations and PCORI reports, plus Medicare changes, could have beneficial effects on cost and treatment effectiveness 2. Could ACA be first step in federal regulation of insurance products and markets? Will regulation like that requiring products to be priced to meet Medical Loss Ratios be applied to WC? Will cost-control mechanisms such as the Independent Payment Advisory Board be developed for WC? Will WC insurers lose their limited exemption from anti-trust laws that they have had under McCarran-Ferguson since 1945? 72

73 States of Play Management of Health- Insurance Exchanges & ObamaCare Some states are running new health-insurance exchanges on their own. Other are leaving some or all of the task to the federal government. Federally Run exchange State-run exchange Federal and state joint-run exchange WA OR NV CA ID UT MT WY CO ND SD NE KS MN IA MO WI IL MI IN OH KY WV NY PA VA VT NH NJ DE MD ME MA RI CT AK AZ HI NM TX OK AR LA MS TN AL GA NC SC FL RI CT NJ DE MD DC Source: Wall Street Journal, September 20,

74 Number of People Signed Up for Health Care Under the ACA, Oct. 1 March 1 As of March 1, 4.2 million people have signed up for coverage under the ACA since enrollment opened on Oct. 1, 2013 UPDATE HHS announced that enrollment as of 3/16 now exceeds 5 million 759,800 Source: Centers for Medicare and Medicaid as of March 7, 2014: 74

75 Projected Number of People with No Health Insurance, * Millions By 2018 the number of people under age 65 without insurance is expected to drop by 25 million (~45%) E 2014F 2015F 2018F 2022F The projected decline in the uninsured population is very sensitive to the enrollment rate under the Affordable Care Act *Under age 65. Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute. 75

76 Will Skill Shortages in the Medical Field Adversely Impact WC? Concern that the ACA Will Overwhelm the Healthcare Delivery System, Harming Outcomes 76

77 Physician Supply and Demand, A potential large and growing physician gap looms over the next decade, with potential for users of health care Source: American Association of Medical Colleges Insurance Information Institute. 77

78 Projected Physician Supply and Demand, , ,800 A potential large and growing shortage of physicians looms. Estimates suggest a shortage of 91,500 physicians by 2020 a gap 12% gap. Will this be a negative for MPL? Source: American Association of Medical Colleges Insurance Information Institute. 78

79 Physician Supply and Demand, Demand for physicians is expected to outstrip supply through 2020 by a wide margin Source: American Association of Medical Colleges Insurance Information Institute. 79

80 Growth in Healthcare Profession by Skill Level, F (Thousands of Jobs) 7,000 6,000 5,000 4,000 3,000 2,000 5,005 6, Mill +20.3% 2,893 3, , % 2,492 3, , % 1, , % 2,196 1,000 0 Practitioners, including RNs Technicians, including LPNs Aides Other Source: Bureau of Labor Statistics, Insurance Information Institute. 80

81 Workers Compensation Operating Environment The Weak Economy and Soft Market Have Made the Workers Comp Operating Increasingly Challenging 81

82 Workers Compensation Combined Ratio: F WC results have improved markedly since F 14F Workers Comp Results Began to Improve in Underwriting Results Deteriorated Markedly from /11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best ( ); NCCI ( P) and are for private carriers only; Insurance Information Institute ( ). 82

83 Return on Net Worth, , Workers Comp vs. All P/C Lines (Percent) US WComp US All P/C Lines 16% 14% 12% 10% 8% 6% 4% 2% 0% 9.5% 6.9% 10.1% 10.0% 10.0% 9.6% 5.3% 14.4% 12.5% 9.0% 5.1% 2.4% Average: WC: 7.1% All P/C Lines: 7.9% 8.0% 4.2% 6.3% 3.9% 6.2% 5.9% 4.9% % WC Has Been Marginally Less Profitable than the P/C Insurance Industry Overall Sources: NAIC, Report on Profitability by Line by State in

84 Workers Comp Return on Net Worth, 2012 Percent Top 25 States states posted double-digit profits in WC in DC MT* NV* MI WV SD AR AL TX MA VT AK NE ME FL KS MS KY MN HI TN NH Sources: NAIC; Insurance Information Institute * Denotes results exclude state funds. Other state funds are included in results 84

85 Workers Comp Return on Net Worth, 2012 Percent Bottom 25 States In 2012, in 7 states the Return on Net Worth was under 4% IN VA OR SC* IA MD* LA UT MO PA* US GA IL AZ NC CT RI WI NJ CA CO* ID NM NY OK* DE Sources: NAIC; Insurance Information Institute * Denotes results exclude state funds. Other state funds are included in results. 85

86 Change in Price Paid for Medical Professional Services in WC, * Pecent change (%) % Increases in WC med costs varied enormously over the past decade from a high of 56% in Wisconsin to a low of 2% in North Carolina States in GOLD had no fee schedule in These generally saw larger increases in WC medical costs over the past decade AR AZ CA CT FL GA IA IL IN LA MA MD MI MN MO NC 2 NJ NY OK PA SC TN TX VA WI *Data are preliminary as of 6/30/12. Sources: Workers Compensation Research Institute, WCRI Medical Price Index for Workers Compensation, 5 th Edition; Ins. Info. Institute. 86

87 Workers Compensation Medical Severity Moderate Increase in 2012 Medical Claim Cost ($000s) Average Medical Cost per Lost-Time Claim $8.1 Annual Change : +1.9% Annual Change : +8.9% +8.9% Annual Change : : +5.7% +6.0% Cumulative Change = 252% ( p) +6.8%+1.3% -2.1% +9.0% +5.1%+7.4% $8.2 $8.1 $8.8 $9.2 $ % +7.3% +10.1% +8.3% $10.9 $11.8 $13.1 $ % +5.4% +8.8% +13.5% Accident Year 2012p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2011, developed to ultimate Based on the states where NCCI provides ratemaking services including state 87 funds, excluding WV; Excludes high deductible policies. $15.9 $17.3 $18.7 $ % +5.4% +7.8% $21.2 $22.3 $ % +3% +4.1%+1.4% +6.6% p Accident Year $25.3 $26.4 $26.7 $27.7 $28.5

88 $22.4 $22.2 $21.7 $22.4 $22.2 $20.8 $19.2 $18.2 $17.7 $17.5 $16.7 $16.2 $14.8 $13.5 $12.2 $11.2 $10.4 $9.8 $9.7 $9.2 $9.5 $ Workers Comp Indemnity Claim Costs: Small Increase in 2012 Indemnity Claim Cost ($ 000s) +9.0% +7.7% +5.9% +4.9%+1.7% +1.0% -3.1%-2.8% Average Indemnity Cost per Lost-Time Claim Annual Change : -1.7% Annual Change : +7.3% Annual Change : +3.2% Average indemnity costs per claim were up 1% in 2012 to $22, % +10.1% +5.6% +3.1% +4.6%+1.0% +3.1% +9.2% +8.8% +0.7% +2.2% -3.0% +6.2% +1% p Accident Year 2012p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2011, developed to ultimate Based on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

89 Workers Compensation Lost-Time Claim Frequency Declined in 2012 Lost-Time Claims Percent Frequency Change: Contracting: % Manufacturing: % Cumulative Change of 55.4% ( adj.) p Indicated Adjusted Accident Year *Adjustments primarily due to significant audit activity. 2012p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2011, developed to ultimate Based on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policies Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level 89

90 WC Indemnity Severity vs. Wage Inflation, p 12% 10% 8% Change in CPS Wage 7.7% 9.0% 10.1% 10.1% 9.2% Change in Indemnity Cost per Lost-Time Claim Indemnity severities usually outpace wage gains 5.9% 5.6% 6.2% 6% 6.3% 4.6% 3.6% 5.2% 5.6% 3.6% 4% 3.1% 4.7% 4.7% 4.2% 4.3% 4.6% 2.9% 2.3% 2% 2% 1.1% 2.7% 3.5% 2.7% 2.3% 2.2% 1.7% 1.1% 1.0% 0.7% 0% 1% Annual Change : -1.7% Annual Change : +7.3% WC indemnity -2% Annual Change : +3.2% severity turned positive again in % -4% P 8.8% 2011p: Preliminary based on data valued as of 12/31/2011; : Based on data through 12/31/2010, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey. Source: NCCI

91 Questionable Claims, Top 10 Policy Types: (Number of Questionable Claims) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, % 62,481 69,219 78,024 Pvt. Pass. Auto +47.1% 11,677 11,877 17,183 Personal Prop.: HO 3,222 3,470 According to the NICB, the number of Questionable Claims in WC and EL increased by 38.4% from 2010 through % +2.4% +15.3% % 4,459 WC & EL 2,866 3,052 3,554 Comm. Auto 2,298 2,571 CGL 2, ,090 2,621 Personal Prop: Other Comm. Prop: CMP Comm. Liab: Bus. Owners % +30.0% -10.1% +6.0% Pers. Prop.: Fire Comm. Prop: Bus. Owners Source: National Insurance Crime Bureau, ForeCAST Report, May 10, 2013; Insurance Information Institute 91

92 Workers Compensation Premium: Second Consecutive Year of Increase $ Billions Net Written Premium State Funds ($ B) Private Carriers ($ B) Pvt. Carrier NWP growth was +9.0% in 2012, the best since p p Preliminary Calendar Year Source: p Private Carriers, Annual Statement Data, NCCI p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent

93 Direct Premiums Written: Workers Comp Percent Change by State, * Top 25 States Pecent change (%) OK 21.7 IA 18.8 SD 12.4 NY 4.0 KS 0.8 CT 0.2 CA -0.3 NE -1.1 IN -1.8 WI -2.5 NJ -2.7 MI -3.6 MN -3.9 IL -4.7 VA -5.4 PA -6.8 NH -9.1 VT -9.2 US -9.7 AK NM TX MD *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. 93

94 Direct Premiums Written: Worker s Comp Percent Change by State, * Bottom 25 States Pecent change (%) TN DC MA RI States with the poorest performing economies also produced the most negative net change in premiums of the past 5 years MS GA AR ID LA ME NC SC AL MO MT CO KY AZ UT OR FL HI DE NV *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. 94

95 2012 Workers Compensation Direct Written Premium Growth, by State* PRIVATE CARRIERS: Overall 2012 Growth = +9% While growth rates varied widely, all states experienced growth in excess of 5% in 2012 *Excludes monopolistic fund states (in white): OH, ND, WA and WY. Source: NCCI. 95

96 Workers Comp. Quarterly Rate Changes, by Line: 2000:Q1 to 2013:Q2 1999:Q4 = 100 Most accounts are now renewing upwards 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 and Brokers; Barclay s Capital; Insurance Information Institute. 96

97 Change in Commercial Rate Renewals, by Line: 2013:Q3 Percentage Change (%) 7.0% 6.0% 5.0% Workers Comp rate increases are large than any other line, followed by Property lines 4.7% 5.4% 5.8% 4.0% 3.3% 3.5% 2.9% 2.7% 2.9% 2.9% 3.0% 2.0% 1.0% 1.0% 0.0% Surety Construction Business Interruption Umbrella General Liability Commercial Auto Commercial Property D&O EPL Workers Comp Major Commercial Lines Renewed Uniformly Upward in Q3:2013 for the 9 th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat Losses and Low Interest Rates Provide Momentum Going Forward 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 and Brokers; Insurance Information Institute. 97

98 Workers Comp Rate Changes, 2008:Q4 2013:Q3 (Percent Change) 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -1.6% -5.5% -4.6%-4.0% -4.6% -3.7% -3.9% -3.7% -3.4% -5.4% WC rate changes have been positive for 10 consecutive quarters, longer than any other commercial line 4.1% 2.6% 7.5%7.4% 8.3% 8.1% 9.0% 9.8% 8.3% 5.8% 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:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 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 and Brokers; Information Institute.

99 Growth in Direct Written Premium by Line, F* (Percent) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 4.4% 4.0% 4.3% All Lines 4.4% 4.1% P/C growth is expected to remain fairly stable through % Personal Lines 4.4% 3.9% 4.7% Commercial Lines 4.1% 3.6% 3.2% Personal Auto 5.1% 5.1% 5.5% 5.8% 6.1% 6.0% Homeowners Commercial Auto 8.6% 8.0% 7.5% 5.6% 6.0% 7.0% 6.2% 3.7% 3.4% WC CMP GL 2013F 2014F 2015F Source: Conning. 99

100 Average Approved Bureau Rates/Loss Costs Percent Cumulative % 2.9 History of Average WC Bureau Rate/Loss Cost Level Changes Cumulative % Cumulative % Calendar Year 6.6 Approve rates/loss costs are seeing their first significant increase since 2003 Cumulative % * *States approved through 7/31/12. Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization. Source: NCCI

101 Current NCCI Voluntary Market Filed Rate/Loss Cost Changes (Excludes Law-Only Filings) Ratio AL WVKY AR MEMOOK KS SD TX MT TNNC*NVMD UT OR IN* AK GA ID IL HI CO VT IA CT NE AZ LA DC RI NH SCNM FL MS VA Effective Dates 1/1/2012 and Prior Effective Dates Subsequent to 1/1/2012 Filed and Pending IN and NC filed in cooperation with state rating bureau Source: NCCI 101

102 Impact of Discounting on Workers Compensation Premium NCCI States Private Carriers Percent 10 Rate/Loss Cost Departure Schedule Rating 5 Dividends p p Preliminary Policy Year Dividend ratios are based on calendar year statistics NCCI benchmark level does not include an underwriting contingency provision Based on data through 12/31/2011 for the states where NCCI provides ratemaking services Source: NCCI. 102

103 INVESTMENTS: THE NEW REALITY Investment Performance is a Key Driver of Profitability Depressed Yields Will Necessarily Influence Underwriting & Pricing 103

104 Property/Casualty Insurance Industry Investment Income: * 1 ($ Billions) $60 $50 $49.5 $52.3 $54.6 $51.2 $47.1 $47.6 $49.2 $47.7 $45.8 $40 $38.9 $37.1 $36.7 $38.7 $39.6 Investment earnings are running below their 2007 pre-crisis peak $ * Investment Income Fell in 2012 and is Falling in 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing 1 Investment gains consist primarily of interest and stock dividends.. *Estimate based on annualized actual 9M:2013 investment income of $34.338B. Sources: ISO; Insurance Information Institute.

105 P/C Insurer Net Realized Capital Gains/Losses, :Q3 ($ Billions) Realized capital gains in 2013 will eclipse 2012 gains $20 $15 $10 $5 $0 -$5 -$10 -$15 -$20 -$25 $2.88 $4.81 $9.89 $9.82 $1.66 $6.00 $9.24 $10.81 $18.02 $13.02 $16.21 $6.63 -$1.21 $6.61 $9.13 $9.70 $3.52 $8.92 -$ $7.90 $5.85 $7.04 $6.21 $ :9M Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital Losses Were the Primary Cause of 2008/2009 s Large Drop in Profits and ROE Sources: A.M. Best, ISO, Insurance Information Institute. 105

106 Property/Casualty Insurance Industry Investment Gain: :Q3 1 ($ Billions) $70 $60 $50 $40 $30 $20 $10 $0 $35.4 $58.0 $56.9 $52.3 $51.9 $47.2 $42.8 $44.4 $36.0 $45.3 $48.9 $64.0 $59.4 $55.7 Investment gains through 2013:Q3 were approximately double those through 2012:Q3 $31.7 $39.2 $53.4 $56.2 $53.9 $ * :9M 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 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.

107 Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line* Personal Lines Pvt Pass Auto Pers Prop Commercial Comml Auto Credit Comm Prop Comm Cas Fidelity/Surety Warranty Surplus Lines Med Mal WC Reinsurance** 0% -1% -2% -3% -4% -5% -6% -7% -8% -1.8% -1.8% -2.0% -3.6% -1.9% -2.1% -3.1% -3.3% -3.3% -3.7% -4.3% -5.2% -5.7% -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. 107

108 U.S. 10-Year Treasury Note Yields: A Long Downward Trend, * 9% 8% 7% 6% Yields on 10-Year U.S. Treasury Notes recently plunged to record modernera lows in early 2013 but have since risen as the Fed begins tapering its QE program in % 4% 3% 2% Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade. 1% '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 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. *Monthly, through February Note: Recessions indicated by gray shaded columns. Sources: Federal Reserve Bank at National Bureau of Economic Research (recession dates); Insurance Information Institutes. 108

109 U.S. Treasury Security Yields: A Long Downward Trend, * 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Recession 2-Yr Yield 10-Yr Yield Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade. '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 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. *Monthly, constant maturity, nominal rates, through February Sources: Federal Reserve Bank at National Bureau of Economic Research (recession dates); Insurance Information Institute. U.S. Treasury yields plunged to historic lows in Only longer-term yields have rebounded. 109

110 Treasury Yield Curves: Pre-Crisis (July 2007) vs. Feb % 5% 4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19% 4% 3% 2% Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. Even as the Fed tapers rates are unlikely to return to pre-crisis levels anytime soon 1.40% 2.15% 2.71% 3.38% 3.66% 1% 0% 0.05% 0.05% 0.08% 0.12% 0.33% 0.69% Feb Yield Curve Pre-Crisis (July 2007) 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Until Unemployment Drops Below 6.5% or Until Inflation Expectations Exceed 2.5%; Low Rates Add to Pricing Pressure for Insurers. Source: Federal Reserve Board of Governors; Insurance Information Institute. 110

111 Treasury Yield Curves: Pre-Crisis (July 2007) vs. Feb % 5% 4% 3% 2% 1% 0% 4.85% 4.75% 4.80% 4.48% 4.43% 4.63% 2.80% 1.40% 3.66% 3-Month 5-Year 10-Year 3.26% 3.22% 2.20% 1.93% Longer term yields are expected to rise in 2014 and 2015 while short-term yields will not begin to normalize until % 2.78% 0.76% 1.80% 1.17% 2.35% 1.80% 0.15% 0.14% 0.05% 0.06% 0.09% 0.10% 3.50% 4.20% 3.50% 1.60% F 2015F Higher longer-term yields will help insurers but short term yields are expected to lag behind Source: Federal Reserve Board of Governors ( ), Swiss Re ( ); Insurance Information Institute. 111

112 Outlook for U.S. Treasury Bond Yields Through 2015 % Yield Month 5-Year 10-Year Long-term yields should begin to normalize in 2014 but short-term yields will remain very low until F 2015F 4.20 Longer-tail lines like MPL and workers comp will benefit the most from the normalization of yields Source: Federal Reserve Board of Governors ( ), Swiss Re ( ); Insurance Information Institute. 112

113 Financial Strength & Underwriting History Suggests that WC, Like Other Long-Tailed Lines Is Much More Difficult to Underwrite 113

114 P/C Insurer Impairments, Impairments among P/C insurers remain infrequent 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 Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle, June 2013; Insurance Information Institute. 114

115 P/C Insurer Impairment Frequency vs. Combined Ratio, Impairment Rate 120 Combined Ratio after Div P/C Impairment Frequency Combined Ratio impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower than the 0.82% average since 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 115

116 Number of Recessions Endured by P/C Insurers, by Number of Years in Operation Number of Recessions Since Insurers are true survivors not just of natural catastrophes but also economic ones Number of Years in Operation Many US Insurers Are Close to a Century Old or Older Sources: Insurance Information Institute research from National Bureau of Economic Research data. 116

117 Reasons for US P/C Insurer Impairments, 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 Sig. Change in Business Misc. 8.4% 3.1% 3.5% Reinsurance Failure Investment Problems (Overstatement of Assets) 6.6% 8.0% 43.4% Deficient Loss Reserves/ Inadequate Pricing Affiliate Impairment 7.1% Catastrophe Losses 7.2% Alleged Fraud 12.6% Rapid Growth Source: A.M. Best Special Report Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle, June 2013; Insurance Information Institute. 117

118 Top 10 Lines of Business for US P/C Impaired Insurers, Medical Professional Liability Accounts for Only About 2% of Industry DPW but 6.7% of Insurer Impairments Other Title 4.0% 8.6% Surety 4.8% Med Mal 6.7% 19.7% Workers Comp Other Liability 8.6% 22.2% Commercial Auto Liability 7.3% 8.8% 9.2% Pvt. Passenger Auto Commercial Multiperil Homeowners Source: A.M. Best Special Report Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle, June 2013; Insurance Information Institute.. 118

119 Workers Compensation The NEXT 100 Years 119

120 Threats and Challenges Will Advances in Workplace Safety Make WC Irrelevant? Loss of Pricing Discipline Persistently Low Interest Rates Affordable Care Act ( ObamaCare ) Probably a small net benefit for WC insurers Less cost shifting possible Potential downward pressure on drivers of med cost inflation; Wellness? Obesity Aging Workforce Opioids Regulatory Risk Anti-Immigration Sentiment in Washington Likely holding back growth in high and low skill jobs Adoption of Employer Liability Laws? (e.g., TX, OK) Big Data and Workers Comp Proliferation of advanced analytics 120

121 Workers Compensation Timeline Industrialization of US in the Late 19 th /Early 20 th Century Led to Increasing & Unacceptably High Number of Deaths and Injuries Among Workers In 1912, an estimated 18,000 to 23,000 workers were killed on the job (compared to 5,071 in 2008) and approximately 4.7 million (12% or workforce) suffered a nonfatal illness or injury (compared to 3.7 million 2008) The 1912 death/injury rates would imply 75,600 deaths and 17 million injuries today More awareness of broader impacts on families of injured/killed workers Workers Could Seek Redress Under Tort Law, But Seldom Prevailed Employers usually won suits filed by injured workers by arguing: Contributory Negligence: Employee was at least partially to blame for the accident Assumed Risk: By taking the job, the employee understood the hazards involved Fellow Servant Rule: A fellow worker caused the accident, so the employer was not at fault European Countries Began to Implement Workers Compensation Programs Germany (1884); England (1897) Insurers Began to Sell Commercial Liability Coverage in the Late 1800s Coverage for inadvertent errors became more commonplace In the workforce, such policies became the first employer liability policies Source: Insurance Information Institute. 121

122 Key Workers Compensation Developments in the 1910s Nationwide NY passes WC law (ruled unconstitutional) WI passes WC law (constitutionality upheld) NY passes WC law US Supreme Ct rules WC laws are constitutional Gov. commission studies WC reform laws 1912 law made compulsory 1st Ohio WC law passes (voluntary) DOI allows private WC insurers State law prohibits private WC insurers Ohio Feb: State Supreme Ct rules WC laws constitutional Sept: Constitutional amendment OKs state fund State Supreme Ct OKs private WC insurers Source: Insurance Information Institute. 122

123 Cumulative Number of WC Laws Passed, No. of states New York was the first state to pass a WC law in 1910, and Ohio was one of the first ten when its law passed in By 1920, 43 of the 48 states at that time had passed WC laws Source: Insurance Information Institute. 123

124 Workers Compensation: 4 Predictions for the Next 100 Years 1. The Workplace Will Become Safer Continuation of a nearly century long trend Deaths and injuries will continue to fall and perhaps plummet due to improvements in risk management, technology and medicine Technologies such as autonomous (driverless vehicles) will likely be a reality within years causing motor-vehicle related fatalities and injuries (including MSDs) to fall 2. The Footprint of Federal Regulation on Insurance Will Increase TRIA: Workers comp is arguably the most TRIA-dependent line Post-Dodd-Frank: One (and in the future perhaps more) Systemically Important Financial Institution (SIFI) is a big WC insurer; The Fed is the ultimate regulator of SIFIs Other WC insurers and reinsurers could be designated as Internationally Active Insurance Group (IAIG); Impact of this in the US is still unclear; More capital? Federal Insurance Office (FIO): Pushing for greater consistency in state regulation Affordable Care Act and subsequent healthcare legislation Will the federal government take direct interest in WC? It already has (e.g., TRIA) but will not seek to completely usurp states As WC medical loss share rises, WC will get pulled into a tighter federal orbit Insurers could once again resurrect the Optional Federal Charter debate Bottom Line: The federal regulatory camel s nose is under the tent; The hump is next. Source: Insurance Information Institute. 124

125 Rate per 100,000 Workers Workplace Fatalities, ,000 Fatalities Rate per 100,000 Workers 35 16, ,000 12, Fatalities 10,000 8,000 6,000 4,000 2, Workplace deaths and injury rates have been falling for decades trends that will likely continue for many years to come Source: Bureau of Labor Statistics; National Safety Council; Insurance Information Institute

126 U.S. Workforce Injury & Illness Rates, (Injuries and Illnesses per 100 Full-Time Workers) Total Manufacturing Construction Workplace injury rates have declined in all industries from 11.0 in 1973 to 3.4 in 2012; in the same period injury rates in manufacturing declined from 15.3 to 4.3 and in construction from 19.8 to 3.7. Sources: Bureau of Labor Statistics; Insurance Information Institute 126

127 Frequency: A Long-Term Drift Downward '26 '28 '30 '32 '34 '36 '39 '41 '43 '45 '47 '49 '52 '54 '56 '58 '60 '62 '65 '67 '69 '71 '73 '75 '78 '80 '82 '84 '86 '88 '91 '93 '95 '97 '99 '01 '04 '06 '08 '10 Manufacturing Total Recordable Cases Rate of Injury and Illness Cases per 100 Full-Time Workers Note: Recessions indicated by gray bars. Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research. 127

128 Workplace Injury Incidence Rates Declined in Last Four Economic Downturns Note: Recessions indicated by gray bars. Sources: NCCI, US Bureau of Labor Statistics; 128