Global Economic Turmoil, Catastrophic Loss and Insurance: Implications for Risk Management in the Post-Crisis World

Transcription

1 Global Economic Turmoil, Catastrophic Loss and Insurance: Implications for Risk Management in the Post-Crisis World American Institute of Marine Underwriters Insurance Issues Seminar New York, NY Download at Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 Presentation Outline Is the World Becoming a Riskier Place? Recent Events and Implications for the Global P/C (Re)Insurance Industry The Global Financial Crisis, Risk and the New World Order Global Economic and Trade Outlook The Unfortunate Nexus: Opportunity, Risk & Instability Future growth is necessarily fraught with greater risk Types, magnitude of risk inherent in future growth opportunities Reshuffling the Global Economic Deck The Ascendency of China Foreign Direct Investment (FDI) and insurance exposure/demand P/C Insurance Financial Overview & Outlook Q&A 2

3 What in the World Is Going On? Is the World Becoming a Riskier Place? Are We Really Crawling Out of the Abyss or Falling Into a New One? 3

4 Uncertainty, Risk and Fear Abound Resurgent Terrorism Risk (e.g., Bin Laden Killing) Record Tornado Activity & Flooding in the US Japan, New Zealand, Haiti, Chile Earthquakes Political Upheaval in the Middle East Echoes of the Financial Crisis Housing Crisis US Debt and Budget Crisis Sovereign Debt & Currency Crises Inflation Runaway Energy & Commodity Prices Era of Fiscal Austerity Reshuffling the Global Economic Deck China Becomes #2 Economy in the World Nuclear Fears Manmade Disasters (e.g., Deepwater Horizon) Are Black Swans everywhere or does it just seem that way? 4

5 Mississippi River Floods: A Threat to Navigation Memphis (May 5, 2011) with the swollen Mississippi flooding fields in Arkansas across the river. The river is normally ½ mile across but is now 3 miles wide in places. Mississippi River just south of Memphis (May 5, 2011). TN is to the right, AR to the left. The was expected to crest on May at 48 ft., 14 ft. above flood stage and near the record of 47.8 ft. set in 1937 Sources: Photos by Robert Hartwig, Insurance Information Institute, May 5,

6 Terrorism, Insurance and the Killing of Osama bin Laden Is the World Less Risky and Do We Still Need the Terrorism Risk Insurance Program? 6

7 Bin Laden, Justice and the Future of Terrorism, Risk and Insurance Property - Other Property- WTC Bin Laden is Dead and Justice Is Served, But What Are the Implications for the P/C Insurance Industry? Sources: Insurance Information Institute. 7

8 Distribution of Insured September 11 Losses by Line ($ Billions, 2009 Dollars) 9/11 losses totaled $40.0 billion in 2010 dollars ($32.5 billion in 2001 dollars) Property-Other, $7.4 19% Property-WTC, $4.4 11% Life, $1.2 3% Business Interruption, $ % Workers Comp, $2.2 6% Aviation Hull, $0.6 9/11 was the largest remains the largest insured loss in global history until Hurricane Katrina in 2005 Other Liability, $4.9 12% Aviation Liability, $4.3 11% 2% Event Cancellation, $1.2 3% Property - Other Property- WTC (1) Loss total does not include NYC March 2010 settlement of up to $657.5 million to compensate about 10,000 Ground Zero workers. (2) Sum of segment totals may not equal overall total due to rounding. Adjusted to 2010 dollars using the Bureau of Labor Statistics (BLS) Inflation Calculator. Sources: Insurance Information Institute research. 8

9 Thwarted and Failed Terrorism Attempts Against the US in 2009 and /11 remains the largest WC loss in US history ($2.2 bn), even though 9/11 property losses were surpassed by Hurricane Katrina in 2005 Property Other PropertyWTC There Have Been Numerous Unsuccessful Attempts by Terrorists to Attack the US Over the Past 2 Years Sources: Terrorism Risk: A Reemergent Threat, Insurance Information Institute ( Federal Bureau of Investigation. 9

10 Summary of Japan Earthquake & Impacts on US P/C Markets The March 11 Quake & Other Major CATs Are Big Events, But Will They, Can They Impact US P/C Markets? 10

11 Location of March 11, 2011 Earthquake Near Sendai, Honshu, Japan March 11 Earthquake Facts as of 4/21/2011 Magnitude 9.0 earthquake struck Japan at 2:46PM local time (2:46AM Eastern) off northeast coast of Honshu, 80 miles east of Sendai Quake is among the 5 strongest in recorded history and the strongest in the 140 years for which records have been kept in Japan 12,000+ fatalities Economic loss: $100 - $300 bn Insured losses up to $45 bn Fukushima Nuclear Plant threat level LOCATION raised to Category 7 on April km (80 miles) E of Sendai, Honshu, Japan (highest, same as Chernobyl) 178 km (110 miles) E of Yamagata, Honshu, Japan 178 km (110 miles) ENE of Fukushima, Honshu, Japan Significant tsunami damage was 373 km (231 miles) NE of TOKYO, Japan Source: US Geological Service; Insurance Information Institute. recorded in Japan; relatively minor damage on the U.S. West Coast 11

12 Insured Japan Earthquake Loss Estimates* (Insured Losses, $ Billions) Eqecat Economic losses are likely to total in the $200-$300 billion range, meaning only a fraction of the loss is insured $12 - $25 bn RMS $21 - $34 bn AIR Worldwide $25 - $35 bn Towers Watson $20 - $45 bn $- $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 *As of April 21, Towers Watson estimate includes $3.0 (low) to $4.9 billion (high) in life insurance losses. RMS es timate includes insured life/health losses of $3 to $8 billion. Sources: AIR Worldwide, Eqecat, RMS, Towers Perrin; Insurance Information Institute. 12

13 Recent Major Catastrophe Losses (Insured Losses, $US Billions) $35 $30 $25 $20 The March 2011 earthquake in Japan will become among the most expensive in world history in terms of insured losses (current leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars) $30.0 $15 $8.0 $10 $5 $10.0 $5.0 $0.5 $2.0 $0 Cyclone Yasi (Australia) Feb 2011 Australia Floods New Zealand Chile Earthquake (Dec - Feb 2011) Quake (Sep 2010) (Feb 2010) New Zealand Japan Earthquake Quake (Feb 2011) (Mar 2011) Insured Losses from Recent Major Catastrophe Events Exceed $55 Billion, an Estimated $53 Billion of that from Earthquakes Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute. 13

14 Significant Market Losses, * $100 Reinsurers share of major market losses was exceptionally high in 2010 and early 2011 $90 $80 $70 Billions $60 $50 $40 $30 $20 $10 $ Worldwide Direct Insured Losses Reinsured Losses Source: Holborn; RAA. * 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.

15 Change in Reinsurer Capital, :Q3 15

16 Potential Impacts of Japan Quake & Other Major CATs on P/C (Re)Insurance Markets Impacts Could Be Felt Well Beyond Japan 16

17 Nonlife (P/C) Insurance Market Impacts of Japan Earthquake Little/No Direct Impact for US Primary Insurance Markets Primary Insurance: Domestic Japanese Insurers Take Big Losses Few US/Foreign Insurers Had Direct Exposure to Japanese P/C Market Low single-digit market share for a small number of companies Not a capital event for any non-japanese primary insurer Significant Absorption of Loss by Japanese Government Residential earthquake damage Nuclear-related property and liability damage Significant Impacts for Global Reinsurers Property-Catastrophe covers on Commercial Lines Business Interruption/Contingent Business Interruption Currently an Earnings Event for Global Reinsurers Not a capital event: Global reinsurance markets entered 2011 with record capital Cost of Property/Cat Reinsurance Rising in Japan, New Zealand, Australia Up for all; Magnitude of increase is sensitive to size of loss Reinsurance Coverage Remains Available in Affected Regions Marginal Impact of Cost of US Property-Cat Reinsurance Market remains well capitalized and competitive Elevated global cat activity could halt price declines for property/cat reinsurance 17

18 Summary of April 2011 Tornado Outbreak 2011 Will Be Among the Most Deadly and Expensive for Tornadoes in History 18

19 Summary of Recent Tornado Activity There Have Been 1,042 Tornadoes Through May 6 in the US At least 361 People Have Been Killedd The April 27 Tornado Outbreak Killed at Least 342 People Now the 2nd deadliest outbreak in US history (747 killed in march 1925 event) States impacted: AR, TN, LA, MS, GA and especially AL Insured Losses Estimated at $2B to $5B (Eqecat); $3.7B - $5.5B (AIR) Economic Losses Likely in the $4 Bill to $10 Bill Range P/C Insurers (and their Reinsurers) Will Settle Tens of Thousands of Home, Business and Auto Claims There is Damage to Inland Port Facilities P/C Insurance Industry is Very Strong and Will Encounter No Difficulties in Paying these Claims 19

20 Number of Tornadoes and Related Deaths, * ,042 1,282 1,098 1,103 1,376 1,216 1,071 1,424 1,148 1,173 1,234 1,082 1,173 1, ,000 1,132 1,200 1,133 1, There were already tornadoes in the US by May Number of Deaths Number of Tornadoes 1,600 1,345 Number of Deaths 1, ,692 1,819 1,156 Number of Tornadoes 1,264 2,000 Tornadoes have already claimed nearly 400 lives P *2011 is preliminary data through May 6. Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service. 20

21 U.S. Tornado Count, 2010 There were 1483 tornadoes in the US in 2010, slightly above average 2011 is shaping to be a deadlier version of 2008 Source: NOAA 21

22 Location of Tornadoes in the US, January 1 April 29, tornadoes had killed more than 400 people through late April, including at least 340 on April 26, the second deadliest tornado outbreak in US history Source: NOAA Storm Prediction Center; 22

23 Severe Wind Reports, January 1 April 29, 2011 There have been 7,136 severe wind reports through April 29; 5,280 of those (74%) were in April; There have also been 1,992 Large Hail reports Source: NOAA Storm Prediction Center; 23

24 Global Catastrophe Losses Have Interrupted Trade Flows Ships, Ports Damaged 24

25 Natural Catastrophes Worldwide, (Number of events with trend) Number Increased claims paying capacity will be required on a global scale if current trends continue (as is expected) Geophysical events (Earthquake, tsunami, volcanic eruption) Source: Geo Risks Research, NatCatSERVICE Meteorological events (Storm) Hydrological events (Flood, mass movement) 2011 Munich Re Climatological events (Extreme temperature, drought, forest fire) 25

26 Natural Catastrophes, loss events Volcanic eruption Island, March/April Severe storms, tornadoes, floods Severe storms, floods United States, 30 April 3 May United States, March Severe storms, hail United States, May Flash floods France, 15 June Earthquake Haiti, 12 Jan. Winter Storm Xynthia, storm surge Western Europe, Feb. Heat wave/ Wildfires Russia, July-Sept. Landslides, flash floods China, 7 Aug. Floods Eastern Europe, 2-12 June Floods, flash floods, landslides China, June Hurricane Karl, floods Mexico, Sept. Insurance is a global business and claims paying ability is interconnected via reinsurance markets Natural catastrophes Selection of significant loss events (see table) Source: Geo Risks Research, NatCatSERVIC.E Earthquake China, 13 April Floods, flash floods Pakistan, July-Sept. Earthquake, tsunami Chile, 27 Feb. Geophysical events (earthquake, tsunami, volcanic activity) Meteorological events (storm) Typhoon Megi China, Philippines, Taiwan, Oct. Hailstorms, severe storms Australia, 22 March/6-7 March Floods Australia, Dec. Earthquake New Zealand, 4 Sept. Hydrological events (flood, mass movement) Climatological events (extreme temperature, drought, wildfire) 26

27 The Global Financial Crisis, Risk and the New World Economic Order The Crisis Made Insurers Path to Growth More Challenging/Risky 27

28 The New World Order: A New Level of Risk for Business Best Growth Opportunities are No Longer in Low-Risk Markets (W. Europe, US/Canada, Japan) Growth Rates are 2-3 Times Higher in Developing World Business investment will remain high, much of it in need of insurance Investment conditions will remain challenging for decades Unemployment Rates Are Much Lower in Emerging Economies Establishment of a middle class and a wealthy upper class Incomes Are Rising Faster in Emerging Economies Fueling demand for goods and services Foreign Direct Investment (FDI) and insurance exposure/demand Immature Institutions Raise Risk/Possible Systemic Risks Legal system, financial markets, regulation, infrastructure issues Instability in Emerging Nations Will Remain High Political instability; Corruption in some countries Economic vulnerability (trade, xrt risk, credit risk, commodities, energy) Natural Hazard Risks Are Often Elevated w/minimal Mitigation 28

29 World Economic Outlook: F F 1.4% 2.1% 1.6% 1.8% 1.7% 3.0% 2.9% 2.8% 6.5% 6.5% 7.3% 2.4% 2.6% 3.0% 4.4% 4.5% 5.0% 8% 6% 4% 2.7% 2% 0% -2% -0.5% -2.6% -4% -3.4% -4.1% -6% -8% World Output Advanced Emerging United States Euro Area Economies Economies 3.9% IMF says growth in emerging and developing economies will outpace advanced ones in 2011/12. The impact will be to accelerate the relative growth of insurance exposures outside the US, W. Europe and Japan. March 11 Japan quake will slow 2011 growth -6.3% Japan 2012F Outlook uncertain: The world economy continues to recover from the global economics, but activity is reviving at different speeds in different parts of the world, according to the IMF. A clear set of winners has emerged with direct implications for all industries and their insurers. Sources: IMF, World Economic Outlook, Apr. 2011; Insurance Information Institute. 29

30 F 8.7% 14.5% 8.8% -7.5% -8.3% -12.2% -12.6% Advanced Emerging Economies Economies 2012F 6.8% 5.9% 12.0% 10.2% 9.4% 13.5% 7.4% 6.9% 11.2% 5.8% 20% 15% 10% 5% 0% -5% -10% -15% -10.9% World Trade Volume 6.5% 12.4% World Trade Volume Outlook (Goods and Services): F IMPORTS Advanced Emerging Economies Economies EXPORTS Global trade in flows recovered sharply following the financial crisis, with both imports and exports rising sharply Sources: IMF, World Economic Outlook, Apr. 2011; Insurance Information Institute. 30

31 Commodity Price Changes in * Metals Food Raw Materials *data are through Jan. 20, 2011 Source: International Monetary Fund World Economic Outlook January 2011 update at Crude Oil 1/14/ /31/ /17/ /3/ /19/ /5/ /22/ /8/2010 9/24/2010 9/10/2010 8/27/2010 8/13/2010 7/30/2010 7/16/2010 7/2/2010 6/18/2010 6/4/2010 5/21/2010 5/7/2010 4/23/2010 4/9/2010 Raw materials prices doubled over the course of Some other commodity prices dropped during the year but ended 20-30% higher. The upward trend has continued in to /26/2010 3/12/2010 2/26/2010 2/12/2010 1/29/2010 1/15/2010 1/1/2010 Index (Jan 1, 2010 = 100) Gold 31

32 Trade-Index-Weighted U.S. Dollar Exchange Rate* Monthly, January 2000 through February Dollar appreciates as role as global reserve currency affirmed during global financial crisis Post-crisis depreciation of dollar Greece anxiety Depreciation of dollar after Tech bubble and post Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 The global financial crisis created significant exchange-rate volatility in and 2010 when the world needed a safe haven currency. As global stability returns, the dollar is depreciating again. *The Major Currency index is a weighted average of the foreign exchange values of the U.S. dollar against a subset of the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. Sources: US Federal Reserve, Board of Governors; Insurance Information Institute.

33 Exchange Rate Indices* Daily (Jan 1, 2010 = 100) Index The US dollar has generally depreciated against other major currencies, as US monetary policy keeps yields on US assets artificially low Euro Yen Renminbi 1/14/ /31/ /17/ /3/ /19/ /5/ /22/ /8/2010 9/24/2010 9/10/2010 8/27/2010 8/13/2010 7/30/2010 7/16/2010 7/2/2010 6/18/2010 6/4/2010 5/21/2010 5/7/2010 4/23/2010 4/9/2010 3/26/2010 3/12/2010 2/26/2010 2/12/2010 1/29/2010 1/15/ /1/ Pound Sterling *data are through Jan. 21, 2011 Source: International Monetary Fund World Economic Outlook January 2011 update at 33

34 3.0 % 2.9 % 0.7 % 1.5% 1.0% 0.5% 0.0% 1.5 % 2.0 % 1.8 % 2.3 % 2.7% 2.2 % 1.7 % 3.2 % 4.0% 3.5% 3.0% 2.5% 2.0% 2.9 % Real GDP Growth Forecasts for Advanced Economies: United States United Kingdom Germany 2011F France Japan Canada 2012F Growth projections could slow for 2011 if supplies of middle-eastern oil (political disruption), developments involving sovereign debt (the PIGS or other countries) or Japanese exports (earthquake/tsunami effects) are worse than expected. Sources: Blue Chip Economic Indicators (4/2011 issue); Insurance Information Institute. 34

35 Real GDP Growth Forecasts for Key Developing Economies: % 4% 4.1 % 4.8 % 4.4 % 4.5 % Growth in China and India remain high, though China is tapping on the breaks to slow inflation. These markets are promising but foreign firms must contend with many barriers to entry. 4.5 % 8.0 % 8% 8.0 % 9.0% 9.0% 12% 0% China India Russia 2011F Brazil Mexico 2012F Growth in emerging and developing economies will greatly outpace advanced country growth in 2011/12. This will accelerate the growth of insurance exposures in emerging markets relative to the U.S., W. Europe and Japan. Sources: Blue Chip Economic Indicators (4/2011 issue); Insurance Information Institute. 35

36 Real GDP Growth Forecasts for Other Key Trading Economies: % 1.8 % 3.0 % 4% 3.6 % 4.9 % 4.9 % 4.5 % 4.3 % 4.3 % 4.5 % Asia/Pacific trading nations should show strong growth in 2011/12 compared to Europe and the US 8% 0% South Korea Taiwan Netherlands 2011F Hong Kong Australia 2012F Growth in industrialized Asian economies will greatly outpace much of the rest of the world in 2011/12. This will accelerate the growth of insurance exposures in emerging markets relative to the U.S., W. Europe and Japan. Sources: Blue Chip Economic Indicators (4/2011 issue); Insurance Information Institute. 36

37 GDP Growth: Advanced & Emerging Economies vs. World, F GDP Growth (%) World output is forecast to grow by 4.4% in 2011 and 4.5% in 2011, following growth of 3.0% in 2010 and a 0.6% drop in Emerging economies (led by China) are expected to grow by 6.5% in 2011 and Role of FDI in exposure growth key (2.0) Advanced economies are expected to grow at a relative modest 2.5% in both 2011 and (4.0) Advanced economies Emerging and developing economies World Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.

38 Relative Shares of Global Output, Advanced vs. Developing Economies, 2009 The gap is closing quickly. China became the world s second largest economy in 2010 and before long the developing world s share of GDP will exceed that of advanced economies. Developing Economies 47.1% Advanced Economies 52.9% Source: EDC Economics, The Moment of Truth: Global Export Forecast Fall 2010, at 38

39 Real Gross Fixed Investment: 2007:Q1 2010:Q3 Annualized % Change from Preceding Quarter Investment in machinery and equipment is running ahead of investment overall Emerging economy investment slumped in late Advanced economies Emerging economies Machinery & Equipment Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute Q Q Q Q Q Q Q Q Q3 Advanced economy investment is back to pre-crisis levels 2008 Q Q Q4 (40) 2007 Q3 (30) 2007 Q2 (20) Advanced economies disinvested during recession, while investment in emerging economies was mostly positive 2007 Q1 (10)

40 Global Industrial Production Rebounds From a Tailspin; Global Trade Recovering Annualized 3-Month Percent Change Global industrial production was down over 25% in early 2009, severelt curtailing global trade, but growing at a 9% clip in late Source: International Monetary Fund, World Economic Outlook Update, Jan. 26, 2010; Ins. Info. Institute.

41 Employment Growth in Advanced Economies -2 The job losses in 2008/2009 were among the steepest in postdepression history -3-4 Employment growth in advanced economies turned positive in 2010, but is not yet sufficient to offset the losses suffered in 2008 and m7 2009m8 2009m9 2009m m m m1 2009m5 2009m6 2008m m1 2009m2 2009m3 2009m4 2008m m m8 2008m9 2008m6 2008m7 2008m3 2008m4 2008m5 2007m m m1 2008m2 2007m4 2007m5 2007m6 2007m7 2007m8 2007m9 2007m m2 2007m3 2007m m8 2010m9 2010m m m2 2010m3 2010m4 2010m5 2010m6 2010m January 2007 through November 2010 (Percent Change; 3-month moving avg.) Unemployment Rates in Advanced Economies Remain Much Higher than Among Emerging Economies Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute. 41

42 Unemployment Rates for Major Global Economies, F Persistently high unemployment is among the greatest obstacles to insurer exposure/demand growth (nonlife and life) 12% 10% 10.1%10.0% 9.4% 9.3% 9.7% 9.6% 8.0% 8.3% 8.2% 8% 6% 4.3% 3.8% 4% 4.9% 4.7% 4.6% 3.7% 2% 0% Advanced Economies Newly Industrialized Economies Euro Zone Asia F US 2011F Unemployment in Advanced Economies is more than double that of Emerging Economies Sources: IMF, World Economic Outlook, Oct. 2010; Insurance Information Institute. 42

43 Real Private Consumption: 2007:Q1 2010:Q3 Annualized % Change from Preceding Quarter Advanced economies Emerging economies Consumer spending is recovering on a global scale, but much more powerfully in emerging markets (up about 8% vs. 2% in advanced economies) (2) (4) (6) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Consumers in Emerging and Developing Markets Are Increasingly Important to the Global Economy Source: International Monetary Fund, World Economic Outlook Update, January 2011; Ins. Info. Institute.

44 Nonlife Real Premium Growth Rates by Region: and 2009 Real Premium Growth Rates World Every emerging market region except Central and Eastern Europe experienced growth during the financial crisis Industrialised countries North America Western Europe Continental Europe Japan and newly industrialised Asian economies Oceania Emerging markets South and East Asia Latin America and the Caribbean Central and Eastern Europe Africa Middle East and Central Asia -12% Many emerging market economies continued to grow during the global financial crisis and continued to benefit from foreign direct investment Source: Swiss Re, sigma, No. 2/ % -4% 0% 4% 8% 12% 16% Growth rate 2009 Annual average growth rate

45 Distribution of Nonlife Premium: Industrialized vs. Emerging Markets, , $Billions Premium Growth Facts Although premium growth throughout the industrialized world was negative in 2009, its share of global nonlife premiums remained very high at nearly 86%--accounting for nearly $1.5 trillion in premiums. The financial crisis and sluggish recovery in the major insurance markets will accelerate the expansion of the emerging market sector Industrialized Economies $1, % 14.3% Emerging Markets $248.8 Developing markets now account for 47% of global GDP but just 14% of nonlife premiums Sources: NAIC; Insurance Information Institute research. 45

46 The Unfortunate Nexus: Opportunity, Risk & Instability Most of the Global Economy s Future Gains Will be Fraught with Much Greater Risk and Uncertainty than in the Past Insurance Is There to Help 46

47 Global Real (Inflation Adjusted) Nonlife Premium Growth: Nonlife premium growth in emerging markets has exceeded that of industrialized countries in 26 of the past 30 years, including the entirety of the global financial crisis.. Average: Real growth rates Industrialized Countries: 3.9% Emerging Markets: 9.2% 20% Overall Total: 4.2% 15% 10% 5% 0% Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as well as a lack of consistent cyclicality -5% Total Source: Swiss Re, sigma, No. 2/2010. Industrialised countries % Emerging markets 47

48 Nonlife Real Premium Growth in 2009 Latin and South American markets performed relatively well during the global financial crisis in terms of growth Source: Swiss Re, sigma, No. 2/2010. There was also growth in East and South Asia and well as Australia and New Zealand 48

49 Political Risk in 2010: Greatest Business Opportunities Are Often in Risky Nations The fastest growing markets are generally also among the politically riskiest Heightened risk has insurance implications Source: Maplecroft 49

50 Economic Threats to Global Economy & (Re)Insurance Industries At Least Eight to Monitor: Near-Term and Longer-Term Risks 50

51 Near-Term Issues with Potentially Adverse Impacts to Global Growth Japan Earthquake: Effects of the March 11 Earthquake/Tsunami/ Nuclear Reactor Accident Lost final production Disrupted supply chains Lost Japanese consumption Potential (modest) impact on GDP Political spillover in Europe (e.g., Germany) Political Unrest in the Middle East Higher energy prices Military action Elevated political uncertainty Safety of property and employees abroad Source: Insurance Information Institute. 51

52 Near-Term Issues with Potentially Adverse Impacts to Global Growth Inflation Transmitted Globally China, Brazil and other countries Soaring food, energy and other commodity prices Oil prices and supply reliability Tighter Monetary/Fiscal Policy/Austerity Slower Growth? Europe, US Source: Insurance Information Institute. 52

53 Political Risk in 2010: Greatest Business Opportunities Are Often in Risky Nations The fastest growing markets are generally also among the politically riskiest Heightened risk has insurance implications Source: Maplecroft 53

54 Inflation Rate Forecast for Largest European Economies & Euro Area, 2011F-2012F Change from Prior Year 4% 2011F 2012F 4% Inflation is forecast to be around 2% across most major European economies. If so, interest rates will remain low, obscuring tight conditions in trade credit markets 3.4% 3% 3% 2% 2.2% 2.0% 2.0% 1.8% 1.8% 1.7% 1.9% 1.8% 1.6% 2% 1% 1% 0% Germany France Source: Blue Chip Economic Indicators, March 2011 issue UK Netherlands EuroZone

55 Inflation Rate Forecast for Other Important Countries, F % Change from Prior Year 2011F 2012F 8.6% 9% 7.7% 8% 7% 6% 5% 4% 3% 7.4% 6.5% 5.3% 4.8% 4.3% 3.7% 2.2% 2.2% 2% 1% 0% 0.0% -0.2% -1% China India Brazil Japan Canada Russia Inflation is much higher in fast-growing economies such as Brazil, Russia, India, and China (the BRIC group). Inflation there can spread to advanced economies because the advanced countries import significantly from the BRICs. Source: Blue Chip Economic Indicators, March 2011 issue

56 Annual Inflation Rates, (CPI-U, %), F Annual Inflation Rates (%) Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble reduced inflationary pressures in 2009/ Higher energy, commodity and food prices are pushing up inflation in 2011, but not longer turn inflationary expectations F 12F 13F 14F The slack in the U.S. economy suggests that inflation should not heat up before 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/11 and 4/11 (forecasts). 56

57 U.S. P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests Price Changes in % 8.8% 6% Excludes Food and Energy 6.1% 4.3% 3% 3.4% 3.3% 3.1% 1.6% 1.0% 0% Overall CPI "Core" CPI Medical CPI Inpatient Hospital Services Outpatient Hospital Services Physicians' Prescription Medical Care Services Drugs Commodities Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least Source: Bureau of Labor Statistics; Insurance Information Institute. 57

58 Commodity Price Changes in * Metals Food Raw Materials *data are through Jan. 20, 2011 Source: International Monetary Fund World Economic Outlook January 2011 update at Crude Oil 1/14/ /31/ /17/ /3/ /19/ /5/ /22/ /8/2010 9/24/2010 9/10/2010 8/27/2010 8/13/2010 7/30/2010 7/16/2010 7/2/2010 6/18/2010 6/4/2010 5/21/2010 5/7/2010 4/23/2010 4/9/2010 Raw materials prices doubled over the course of Some other commodity prices dropped during the year but ended 20-30% higher. The upward trend has continued in to /26/2010 3/12/2010 2/26/2010 2/12/2010 1/29/2010 1/15/2010 1/1/2010 Index (Jan 1, 2010 = 100) Gold 58

59 Longer-Term Issues Persistently Low Interest Rates/Int. Rate Policy Lower investment income, more pressure on u/w profit Policy Dilemma: Stimulus/Low UnN or Price Stability Currency Market Instability Exchange rate volatility Future of the euro Sovereign Bond Market Concerns Portugal, Greece, Ireland, Spain, etc. Strong Capital Flows to Emerging/Developing Economies => Asset Price Bubbles? Regulatory Backlash/Developments Solvency II, Basel III US Financial Services Reform (Dodd-Frank) Source: Insurance Information Institute. 59

60 Internationally, Most Short-Term Interest Rates Are Generally Still Quite Low Central Bank Current Interest Rate Last Changed Bank of Canada Bank of England Bank of Japan 1.00% 0.50% 0.10% Sept. 8, 2010 March 5, 2009 Dec 19, 2008 European Central Bank 1.00% May 7, 2009 U.S. Federal Reserve The Reserve Bank of Australia China Hong Kong SAR 0.25% 4.75% 6.06% 0.50% Dec 16, 2008 Nov. 2, 2010 Feb. 8, 2011 Dec 17, 2008 Korea, Republic of 3.00% March 10, 2011 Hungary 6.00% Jan. 24, 2011 Source:

61 2012F 6% 5% Interest rates remain generally low in much of the world, depressing insurer investment earnings. Some countries, including the U.S., are intentionally holding rates low. 7.79% 5.57% 7% 5.16% 8% 4.78% Other countries are intentionally raising rates to fight inflation. 4.57% 2011F 9% 7.23% Forecast: End-of-Year 3-Month Interest Rates for Major Global Economies, F 1.10% 0.20% 2.14% 1.09% 0.33% 1% 0.24% 2% 1.30% 3% 2.18% 4% 0% Euro Area Japan U.K. Source: Blue Chip Economic Indicators, March 2011 issue U.S. China Australia India

62 10-Year Bond: Yield Forecasts for 2011:Q1-2012:Q2 U.S. Euroland U.K. Canada 4.60% 4.40% 4.20% 4.00% 3.80% 3.60% 3.40% 2011:Q1 2011:Q2 2011:Q3 2011:Q4 2012:Q1 2012:Q2 As these nations economies improve, and actions to keep interest rates low are ended, the yields on longer-term bonds are expected to rise. But persistent high rates of unemployment and excess capacity, plus central bank concerns about inflation, will likely keep them from rising more than one percentage point by mid Source: Wells Fargo Economics Group, Global Chartbook, March 2011

63 PIGS Government Bond Spreads (2-Year Yield Spreads over German Bunds) in * Basis Points 1800 For one day in 2010, it took nearly percentage points more yield to lure an 1400 investor to a 2-Year Greek bond vs. a 1200 comparable German bond billion-Euro rescue package drove the Greece bond spread down below 700 bp but the market isn t convinced the rescue will work Greece Ireland Portugal *data are through Jan. 21, 2011 Source: International Monetary Fund World Economic Outlook January 2011 update at 1/14/ /31/ /17/ /3/ /19/ /5/ /22/ /8/2010 9/24/2010 9/10/2010 8/27/2010 8/13/2010 7/30/2010 7/16/2010 7/2/2010 6/18/2010 6/4/2010 5/21/2010 5/7/2010 4/23/2010 4/9/2010 3/26/2010 3/12/2010 2/26/2010 2/12/2010 1/29/2010 1/15/ /1/ Spain 63

64 Trade-Index-Weighted U.S. Dollar Exchange Rate* Monthly, January 2000 through February Dollar appreciates as role as global reserve currency affirmed during global financial crisis Post-crisis depreciation of dollar Greece anxiety Depreciation of dollar after Tech bubble and post Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 The global financial crisis created significant exchange-rate volatility in and 2010 when the world needed a safe haven currency. As global stability returns, the dollar is depreciating again. *The Major Currency index is a weighted average of the foreign exchange values of the U.S. dollar against a subset of the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. Sources: US Federal Reserve, Board of Governors; Insurance Information Institute.

65 Exchange Rate Indices* Daily (Jan 1, 2010 = 100) Index The US dollar has generally depreciated against other major currencies, as US monetary policy keeps yields on US assets artificially low Euro Yen Renminbi 1/14/ /31/ /17/ /3/ /19/ /5/ /22/ /8/2010 9/24/2010 9/10/2010 8/27/2010 8/13/2010 7/30/2010 7/16/2010 7/2/2010 6/18/2010 6/4/2010 5/21/2010 5/7/2010 4/23/2010 4/9/2010 3/26/2010 3/12/2010 2/26/2010 2/12/2010 1/29/2010 1/15/ /1/ Pound Sterling *data are through Jan. 21, 2011 Source: International Monetary Fund World Economic Outlook January 2011 update at 65

66 But Exchange-Rate Changes Generally Have Little Effect on U.S. Import Prices In theory, a change in the value of the dollar should raise or lower the cost of foreign goods, thereby reducing or increasing U.S. demand for imports. However, numerous economic studies have shown that when the dollar fluctuates against foreign currencies, U.S. import prices tend to show much less change. This can crimp profits. Using data for 1999 to 2008, a recent paper estimates exchange rate pass-through to U.S. import prices for aggregate U.S. imports (all imports excluding oil and consumer goods), and for prices of imports from Japan, the European Union (EU), Canada, the NIEs, and Latin America. The exchange rate pass-through estimates were found to be low (0.47 for all imports excluding oil and 0.26 for consumer goods) over 4 quarters. Estimates of bilateral exchange- rate pass-through range from 0.59 for Latin America (largely Mexico) to 0.0 for the NIEs (Taiwan, Singapore, South Korea, and Hong Kong). Source: U.S. International Trade Commission at 66

67 Reshuffling the Global Economic Deck Through Foreign Direct Investment The Global Financial Crisis Concentrates Growth Opportunities in Risky Places/Industry Groups 67

68 Global Foreign Direct Investment, Net Inflows: * Trillions of Current US Dollars $2.5 $2.0 FDI collapsed during the financial crisis, plunging $1.23 trillion or 52.3% FDI dropped by 59.6% following the tech bubble bursting in 2000 $1.5 $1.0 $0.5 $ Most Growth Will Be in Parts of the World Where Foreign Direct Investment is High. FDI Flows Are Highly Volatile Meaning that New Income Streams for Businesses (and Insurers) Will Also Be Volatile *Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an enterprise operating in an economy other than that of the investor. Source: World Bank; Insurance Information Institute.

69 Following the Money Trail: Foreign Direct Investment Source: The Economist, Nov ,

70 Following the Money Trail: Outward Foreign Direct Investment The UK s share of FDI peaked at 45% in 1914 The US s share of FDI peaked at 50% in 1967 China s share of FDI stood at 6% in 2009 Source: The Economist, Nov ,

71 Crisis Driven Change in Outward Foreign Direct Investment by Region: Who s Creating Global Insurance Exposure? (Percent) 0% -10% -7.6% -12.2% -20% -30% -40% -50% -60% -70% -36.7% Growth in the global GDP (and insurable exposures) will increasingly by tied to the direction and magnitude of global flow of investment capital -67.9% -80% Asia Oceania North America Europe *Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world. Source: United Nations UNCTADSTAT; Insurance Information Institute. 71

72 China: Outward Foreign Direct Investment: * Millions of Current US Dollars Chinese foreign direct investment increased 5,600% from 2000 to 2008 (from $916 mill to $52.2 bill). The financial crisis caused only a minor disruption in Chinese investment abroad $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $ Despite the Crash in Foreign Direct Investment During the Global Financial Crisis, Chinese Investments Abroad Remain Near Record Levels. Implication: Growth Opportunities for Business (and their Insurers) May Not Be in China but In Chinese Investment Target Nations/Companies/Industries. *Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world. Source: United Nations UNCTADSTAT; Insurance Information Institute.

73 Major Chinese Banks Loans Abroad: (Billions of US $) $500 $400 $300 Chinese banks are willing to loan heavily, despite global economic turmoil, to expand Chinese investment abroad. The health and investment policies of Chinese will take on an evergreater impact in the ability to financial insurable exposures worldwide. Financial risk is an issue. $200 $100 Dim Sun Bonds?? America s industrial rise began years before it became a global financial power in the 1920s. Will it take China that long? Probably not. $ Chinese Banks Lending Activity Abroad Showed Little Impact from the Global Financial Crisis, but Eventually, Bank Crises Will Originate in China Source: Data estimated from The Economist, Nov , 2010 from: ICBC, China Construction Bank, China Development Bank, Bank o f China and China Eximbank. 73

74 Hong Kong: Outward Foreign Direct Investment: * Millions of Current US Dollars $70,000 Foreign Direct Investment from Hong Kong increased 1,000% from 2003 to 2009 (from $5.5 bill to $52.3 bill) $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $ Despite the Crash in Foreign Direct Investment During the Global Financial Crisis, Investments Abroad by Hong Kong Remain Near Record Levels *Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world. Source: United Nations UNCTADSTAT; Insurance Information Institute.

75 South Korea: Outward Foreign Direct Investment: * Millions of Current US Dollars $20,000 Foreign Direct Investment from South Korea increased 437% from 2001 to 2009 (from $2.4 bill to $10.6 bill), but plunged 44% during the financial crisis $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $ The Global Financial Crisis Hit South Korean Foreign Direct Investment Abroad Harder than Was the Case in Several of Its Neighbors *Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world. Source: United Nations UNCTADSTAT; Insurance Information Institute.

76 United States: Outward Foreign Direct Investment: * Millions of Current US Dollars $450,000 $400,000 Foreign Direct Investment from the United States plunged $145.4 bill or 36% during the financial crisis $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $ Direct Investments Abroad by US Interests Were Hit Hard by the Global Financial Crisis *Foreign Direct Investments are defined as the net inflows of investment to acquire a lasting management interest (at least 10% of voting stock) in an enterprise operating in an economy other than that of the investor. Outward FDI represents flow from investing country to rest of the world. Source: United Nations UNCTADSTAT; Insurance Information Institute.

77 P/C Insurance Industry Financial Overview Profit Recovery Continues Early Stage Growth Begins 77

78 $28,672 $3,043 $34,670 $65,777 $44,155 $38,501 $30,029 $20,559 $20,598 $10,870 $3,046 $10,000 $19,316 $20,000 $5,840 $30,000 $14,178 $40,000 $21,865 $50,000 $30,773 $60,000 $36,819 $70,000 P-C Industry 2010 profits were$34.7b vs.$28.7b in 2009, due mainly to $5.7B in realized capital gains vs. -$7.9B in previous realized capital losses 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS 1 = 5.9% 2010 ROAS = 6.5% $24,404 $80,000 $62,496 P/C Net Income After Taxes ($ Millions) $0 -$10,000 -$6, * ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010 and 7.4% for Sources: A.M. Best, ISO, Insurance Information Institute 10

79 ROE: Property/Casualty Insurance, * (Percent) P/C Profitability Exhibits Both Cyclicality and Ordinary Volatility 20% Katrina, Rita, Wilma 15% 10% Sept. 11 Hugo 5% Lowest CAT Losses in 15 Years Andrew 0% 4 Hurricanes Northridge Financial Crisis* -5% * Excludes Mortgage & Financial Guaranty in Sources: ISO, Fortune; E 79

80 A 100 Combined Ratio Isn t What It Once Was: Investment Impact on ROEs A combined ratio of about 100 generated ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979 Combined Ratio / ROE % 14.3% % 15% % 9.6% 95 18% 7.4% % 9% 8.9% 90 6% % 3% 80 0% Combined Ratio * 2009* 2010* ROE* Combined Ratios Must Be Lower in Today s Depressed Investment Environment to Generate Risk Appropriate ROEs * 2009 and 2010 figures are return on average statutory surplus. 2008, 2009 and 2010 figures exclude mortgage and financial guaranty insurers Source: Insurance Information Institute from A.M. Best and ISO data.

81 PREMIUM GROWTH TRENDS Winds of Change or Moving Sideways? 81

82 Soft Market Persisted in 2010 but Growth Returned: More in 2011? (Percent) % 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 % 15% 10% 5% 0% NWP was up 0.9% in 2010 with forecast growth of 1.4% in E 11F -5% Shaded areas denote hard market periods Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute. 82

83 -10% Sources: ISO, Insurance Information Institute. -5% 2010:Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q 4-1.8% -0.7% -4.4% -3.7% -5.3% -5.2% -1.4% -1.3% -1.9% -1.6% 1.3% 2.3% 1.3% 0.5% 2.1% 0.0% 0% 2007:Q :Q :Q :Q :Q :Q :Q 1-4.6% 2005:Q 2-4.1% 2005:Q 3-5.8% 2005:Q 4-1.6% 2004:Q :Q :Q :Q :Q :Q :Q :Q :Q 4 5% 6.6% 10.3% 10.2% 13.4% 15.1% 16.8% 16.7% 12.5% 10.1% 9.7% 7.8% 7.2% 5.6% 2.9% 5.5% 20% 2002:Q 3 10% 10.2% 15% 2002:Q :Q 2 P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter The longawaited uptick: mainly personal lines Finally! Back-to-back quarters of net written premium growth (vs. the same quarter, prior year) 83

84 Net Written Premium Growth by Segment: F Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted again in 2010 and but will stabilize in % 2.8% 2.5% 2% 0.3% 0% -2% -0.1% -0.1% -4% -2.0% -3.1% -6% -8% -10% -9.4% -12% Personal Lines Commercial Lines P 2011F Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Sources: A.M. Best; Insurance Information Institute. 84

85 UNDERWRITING Cyclicality is Driven Primarily by the Industry s Underwriting Cycle, Not the Economy 85

86 P/C Insurance Industry Combined Ratio, * As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, Reserve Releases Relatively Low CAT Losses, Reserve Releases Cyclical Deterioration Avg. CAT Losses, More Reserve Releases Best Combined Ratio Since 1949 (87.6) * Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4 Sources: A.M. Best, ISO. 86

87 Calendar Year Combined Ratios by Segment: F Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate Personal Lines Commercial Lines P 2011F Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting performance related to the prolonged commercial soft market Sources: A.M. Best. Insurance Information Institute. 87

88 P/C Reserve Development, E $25 $ Impact on Combined Ratio $ $10 $ $ $ E 10E $ $0 -$ Prior Yr. Reserve Release ($B) Prior Yr. Reserve Development ($B) Impact on Combined Ratio (Points) $30 Prior year reserve releases totaled $8.8 billion in the first half of 2010, up from $7.1 billion in the first half of 2009 Reserve Releases Are Remained Strong in 2010 But Should Begin to Taper Off in 2011 Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including thi s 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: Barclay s Capital; A.M. Best. 88

89 EXPENSES Expense Ratios Are Highly Cyclical and Contribute Deteriorating Underwriting Performance 89

90 Underwriting Expense Ratio*: Personal vs. Commercial Lines, E** Commercial lines expense ratios are highly cyclical 32% 30.6% 30.5% 29.9% 30% 30.0% 30.5% 28.5% 28.3% 27.4% 28% 29.9% 29.1% 29.3% 28.2% 27.7% 28.4% 28.7% 26.6% 27.8% 26.6% 25.6% 26% 25.0% 24.3% 25.6% 24.7% 24.4% 24.3% 23.7%23.4% 24% 25.6% 26.4% 26.4% 26.4% 26.2% 26.4% 25.0% 24.8% 24.7% 24.7% 24.5% 24.4% 24.6% 23.9% 23.5% 22% Personal Lines Commercial Lines *Ratio of expenses incurred to net premiums written. **2010 figures are estimates. Source: A.M. Best; Insurance Information Institute. 10E %