What Really Keeps Insurance CEOs Awake at Night?

Transcription

1 What Really Keeps Insurance CEOs Awake at Night? An Update & Outlook for the US Property/Casualty Insurance Industry Rocky Mountain Insurance Association Radisson Hotel Denver Denver, CO March 14, 2001 Robert P. Hartwig, Ph.D. Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212)

2 Highlights: First 9-Mos ($ Millions; *Year-end 1999) Change Net Written Prem. 228, , % Loss & LAE 176, , % Net UW Gain (Loss) (19,447) (13,374) +45.4% Net Inv. Income 29,189 28, % Net Income (a.t.) 16,502 17, % Surplus 327, ,348* -2.1% Combined Ratio * +1.2 pts.

3 Presentation Outline Insomnia: Major Problem Among Insurance CEOs Top 10 Reasons for Losing Sleep CATs: Asleep at the Switch? Q&A

4 #1 PROFITS

5 P/C Net Income After Taxes * ($ Millions) $40,000 $36,819 $35,000 $30,000 $30,773 $25,000 $20,000 $19,316 $20,598 $24,404 $22,170 $22,000 $15,000 $10,000 $10,870 $5,000 $ * *Estimate based on First Nine Months 2000 data. Sources: A.M. Best, ISO, Insurance Information Institute.

6 Return on Equity * 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% * Non-Life US All US Industries *Estimate Source: Insurance Information Institute

7 ROE: Financial Services Industry Segments, * 25% 20% 15% 10% 5% 0% US P/C Insurers All US Industries Life Diversified Finl. Comm. Banks * 2000 figures are estimates. Source: Insurance Information Institute

8 1999 Return on Equity (Profitability)DO CO % Fortune % 3.1% 2.8% 6.5% 5.5% 7.4% PP Auto US All P/C Lines Workers Comp Homeowners Comm Multi Peril Comm Auto 0% 5% 10% 15% 20% Source: NAIC, Insurance Information Institute

9 Return on Equity (Profitability)UP 10-Year Average* 9.0% 12.9% Fortune 500 US All P/C Lines 1.1% CO Workers Comp -18.4% 5.7% 5.8% CO PP Auto CO All P/C Lines CO Homeowners -20% -15% -10% -5% 0% 5% 10% 15% *Insurers: ; and Fortune 500: Source: Quicken.com

10 Return on Net Worth, Selected Lines in ColoradoUP 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% -80% -90% -100% -110% -120% -130% -140% -150% 10-Year Averages Auto +5.7% Home -18.4% WC Auto Homeowners Workers' Comp Source: NAIC, Insurance Information Institute

11 Return on Net Worth, Selected Lines in ColoradoUP 20% 10% 0% -10% -20% -30% -40% -50% 10-Year Averages Auto +5.7% Home -18.4% WC Auto Homeowners Workers' Comp Source: NAIC, Insurance Information Institute

12 Sagging Profits are the Symptom, not the Cause Capital/Capacity Pricing Fundamentals Investments Competition Consolidation Distribution Class Action Wall Street

13 #2 CAPITAL/ CAPACITY

14 Policyholder Surplus: * (Capital, Total P/C) $350 $ Surplus = $336.3 Billion Is it a Peak? Billions (US$) $250 $200 $150 Increase of 0.9% over 1998, smallest gain since 1984 Surplus decreased 2.1% in First 9 Months 2000 to $327.3 Billion $100 $50 $ Source: A.M. Best, Insurance Information Institute * First Nine Months 2000

15 Net Premiums Written to Policyholder Surplus : : (Forecast): US Source: A.M. Best, ISO, Insurance Information Institute

16 Distribution of Industry Surplus Nationwide 3.1% Other 67.2% State Farm 12.2% Source: PaineWebber Farmers 1.3% Liberty 2.1% USAA 1.8% Berkshire Hathaway 12.3%

17 Excess Capital: What to Do? CEOs: Buy It, Build It--They Will Come Policyholders: Lower my rates! Pay my dividend! Shareholders: Show me the money! Regulators: Keep your hands off of it! Rating Agencies: Keep your hands off of it and give it back!

18 #3 PRICING

19 Average Price Change of Commercial Insurance Renewals E&S Umbrella Workers' Comp -11.0% Commercial Property CMP -10.0% General Liability Commercial Auto -4.3% -2.8% -7.0% -3.5%-2.1% -6.0% -6.6% -1.8% -4.1% -6.0% -5.0% -1.6% -1.2% -7.0% -4.4% -0.4% -2.0% -3.0% 1.4% 0.8% 4.1% 2.8% 3.2% 3.2% 0.2% 3.5% 8.9% 6.1% 9.5% 8.8% 8.3% 7.9% 9.0% Source: Conning -13 % -11 % -9% -7% -5% -3% -1% 1% 3% 5% 7% 9% Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98

20 Average Price Change of Personal Lines Renewals 5% Homeowners 2% 2% 4% 4% 3% Personal Auto -1% 0% 1% 1% -2% -1% 0% 1% 2% 3% 4% 5% Source: Conning Fall 2000 Spring 2000 Fall 99 Spring 99 Fall 98

21 Rate On Line Index (1989=100) * 01* Source: Guy Carpenter, Insurance Information Institute * Estimate

22 Average Expenditures on Auto Insurance: US vs. CO $825 $775 $725 $675 $625 $575 $525 $475 $425 $ Countrywide rates fell by 2.8% in 1998, 3.2% in 1999 (est.) * 2000* * III estimates; Sources: NAIC, Insurance Information Institute

23 States With Highest Auto Insurance Expenditures vs. CO $1,200 $1,138 $1,000 $960 $901 $800 $ Expenditures/Rank $734 $704 New Jersey New York Connecticut Colorado U.S. Source: Insurance Information Institute from NAIC Data, 1998.

24 States With Highest Auto Insurance Expenditures vs. CO $1,000 $855 $800 $600 $666 $655 $611 $504 $455 $400 $200 $ Expenditures/Rank Texas Louisiana Hawaii Florida Colorado US Source: Insurance Information Institute from NAIC Data, 1998.

25 Cumulative Workers Comp Rate/Loss Cost Changes* 0% -6.0% -10% -8.8% -14.0% -20% -20.6% -24.8% -26.6% -24.1% -30% Source: NCCI *Advisory Loss Costs

26 Filings Approved With Effective Dates in 2000 Countrywide Change = +3.3% * * * -8.9 Cumulative change from multiple filings Source: NCCI Increase 2.5 No Change Decrease No Filing Approved

27 #4 FUNDAMENTALS

28 P/C Industry Combined Ratio = (Est)* = Forecast* = Combined Ratios 1970s: s: s: * Based on III Groundhog Forecast Combined Ratio 2001*

29 Direct Loss Ratio Trends, Selected Lines, ColoradoUPDATE 200% 180% 160% 140% 120% 100% 80% 60% 40% Auto Homeowners Workers' Comp Source: NAIC, Insurance Information Institute

30 Underwriting Gain (Loss) * $10 $0 Billions (US$) ($10) ($20) ($30) ($40) In 2000, P-C insurers will paid out nearly $26 billion more in claims & expenses than they collected in premiums *I.I.I. estimate based on First 9 Monthsf 2000 data. Source: A.M. Best, Insurance Information Institute

31 U.S. Insured Catastrophe Losses CATs in 1990s caused $90B in insured losses $7.5 5 $2.7 $4.7 $22.9 $5.5 $ Billions $16.9 $8.3 $7.3 CATs cost insurers $750 million per month during the 1990s Didn t lose much sleep over CATs in 2000 $2.6 $10.1 $8.3 $ Source: Property Claims Service, Insurance Information Institute

32 Lost-Time Claim Frequency Per Worker: On the Rise? 5% 3% 3% 0% 0% -5% -4% -3% -2% -4% -1% -6% -6% -10% Source: NCCI

33 Growth in Total PIP Claims Costs* 30% 32.1% Four Quarters Ending 2000:3rd PIP Claims Costs 20% 10% 0% 15.0% 14.9% 10.6% 10.3% 10.2% 4.3% 4.1% PIP Costs in Colorado are growing faster than in most other no-fault states. 3.3% 3.0% 2.2% 0.6% 0.2% NY FL DE UT CO HI MI KS MN TX PA KY ND DC MA NJ SC -10% -20% *Change in pure premium Source: Insurance Information Institute from ISO Fast Track Data -7.4% -8.9% -12.2% -17.2%

34 States With Highest PIP Average Loss (4 Qtrs. ending 2000:3 rd ) $8,500 $7,500 $6,500 $5,500 $4,500 $3,500 $2,500 $1,500 $500 -$500 $7,950 $7,796 $6,282 $5,081 $4, Expenditures/Rank New York New Jersey Colorado Florida Delaware Source: Insurance Information Institute from ISO Fast Track Data

35 #5 INVESTMENTS

36 Net Investment Income $45 $36 Pricing & underwriting problems were exacerbated by declining investment income Billions (US$) $27 $18 $9 $ Source: A.M. Best, Insurance Information Institute Facts 1997 Peak = $41.5B 1998 = $39.9B 1999 = $38.6B 2000 (Forecast)* = $38.9B * * Estimate based on First 9 Months 2000 results.

37 Stock Markets: Going Nowhere in 2001 YTD Total Return through 2/22/ % Nasdaq -5.11% S&P % DJIA -10% -8% -6% -4% -2% 0% Source: Insurance Information Institute

38 Treasury Yield Curves 9.0% 8.5% 8.0% 7.5% 7.0% Are interest rates too low for a recession? 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3-Mo 6-Mo 1-Yr 2-Yr 3-Yr 5-Yr 7-Yr 10-Yr 20-Yr 30-yr Mar-01 Dec-00 Dec-99 Jun-90 Source: A.M. Best, ISO, Insurance Information Institute

39 #6 COMPETITION

40 Competition Still on the Rise: Number of Insurers: ,000 2,500 Property/Casualty Life/Health ,000 1, , Sources: P/C: A.M. Best; L/H: NAIC.

41 Market Share of Top 5 P/C Insurers 30.2% 29.7% 29.3% 28.5% Source: Insurance Information Institute Fact Book (annual issues)

42 Market Share of Top 5 Life/Health Insurers 17.0% 18.0% 14.0% Source: Insurance Information Institute Fact Book (annual issues)

43 Growth in Net Premiums Written (All P/C Lines) 25% 20% 15% 10% 1999: 1.9% 2000 Est: 5.2% 2001 Forecast: 7.4% The underwriting cycle went AWOL in the 1990s. Is it Back? 5% 0% est.; 2001 forecast from III Groundhog Survey U.S. 2001* Source: A.M. Best, Insurance Information Institute

44 #7 CONSOLIDATION

45 Insurance Mergers and Acquisitions Value of M & As ($billions) $180 $160 $140 $120 $100 $80 $60 $40 $ : 565 deals valued at $165.4 B Number of M & As $ * 0 Value of Deals Number of Deals *First Half 2000 Source: Compiled from Conning & Company reports.

46 Number of Deals: First Half 2000 vs. First Half 1999 P/C Life Health/MC Service Distribution Total = 161 Total = Source: Conning

47 Value of Deals: First Half 2000 vs. First Half 1999 P/C Life Health/MC Service Distribution Total = $11.3B Total = $30.9B N/A Source: Conning

48 #8 DISTRIBUTION

49 Shifting Distribution Channels: Property/Casualty Insurers Captive Agents 56.5% Independent Agents 27.0% Captive Agents 48.8% Independent Agents 23.3% Other 3.0% Internet 0.9% Banks 2.8% Direct Response 9.8% Other 2.5% Internet 7.3% Banks 8.1% Direct Response 10.0% Source: Datamonitor

50 Web Presence of the Nation's 250 Largest P/C Companies No Web Site Whatsoever 27.5% Rudimentary Quote Forms 4.0% Billboard Sites: No Quotes or Transactions 60.9% Transaction Sites: Real Time Quotes but No Sales 7.2% Processor Sites: Quotes, Sales, and Claims Online 0.4% Source: John P. Franzis, PricewaterhouseCoopers Management

51 Projected Online Sales of Auto, Home & Term Life Insurance $ Millions 0 Auto Home Term Life Source: Forrester Research

52 Internet Insurance Sales Forecast, 2003 Home = $0.3B 6% (Online-closed sales=total $4.8 Billion) Auto = $3.2B 67% Life = $1.3B 27% Source: Conning & Co. (Life), Forrester Group (Auto & Home)

53 Small Insurance Firms Lag in Web Access and Exposure Percentage of Small Firms with Internet Access Percentage of Small Firms with Their Own Web Site 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 82% Real Estate Agencies 70% Law Firms 56% Insurance Firms and Agencies 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 30% Real Estate Agencies 41% Law Firms 23% Insurance Firms and Agencies Source: The Industry Standard, Summer 2000

54 Distribution Channels Continue to Proliferate Customer Agent Broker Mail Telephone Bank Insurer Internet Dealerships Payroll Plans Stock Exchanges Online Auctions (e.g. Priceline.com)????

55 Insurers: Tangled in the Web?

56 #9 CLASS ACTION ABUSE

57 TORT-ure Asbestos Aftermarket Parts Medical Claims Review Totaled Cars (CCC/ADP) Guns Genetically Modified Foods (Corn) Y2K Sue & Labor HMOs Nursing Homes/Med Mal Tobacco Redlining Toxic Mold

58 Average Jury Awards 1993 vs.1999 $7,000 $6,000 $5, ,361 ($000) $4,000 $3,000 $2,000 $1,000 $0 1, Overall 759 1,727 Business Negligence Vehicular Liability* Premises Liability *Comparison is between 1994 and Source: Jury Verdict Research; Insurance Information Institute. 2,959 Personal Negligence 1,953 3,495 Medical Malpractice 1,444 Products Liability

59 Median Jury Award for Product Liability Cases $2,000,000 1,806,000 $1,700,000 $1,400,000 1,257,000 $1,100,000 $800,000 $500, , , , , ,000 $200, Source: Jury Verdict Research

60 Median Jury Award for Vehicular Liability Cases $350, ,653 $300, ,569 $250, ,619 $200, , , ,676 $150, Source: Jury Verdict Research

61 Trends in Million Dollar Verdicts* 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4% % 12% Vehicular Liability 8% 7% 12% Premises Liability 7% 11% 14% Personal Negligence 17% 22% 28% Business Negligence *Verdicts of $1 million or more. Source: Jury Verdict Research; Insurance Information Institute. 26% 23% 20% Government Negligence 35% 36% 45% Medical Malpractice 37% 43% 63% Products Liability

62 Florida Average Severity per GL/PL Claim $500 $450 Long-Term Care Facilities 2001 Aon Study 2000 Aon Study 455 $ ($000) $350 $300 $250 $ $150 Source: Aon Risk Consultants

63 Florida Loss Cost per Occupied Bed ($000) $13,000 $12,000 $11,000 $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 2,800 2,096 Source: Aon Risk Consultants. 4,000 Long-Term Care Facilities 2001 Aon Study 2000 Aon Study 2,806 5,400 3,865 7,900 5,082 10,000 6,283 12,

64 Asbestos Cumulative Paid Lossesand Reserves $20 Cumulative Paid Losses Net Asbestos Reserves 17.6 $ ($ Billions) $ $5 $0 Source: A.M. Best

65 Paid vs. Incurred Asbestos Losses $5 Incurred Losses Paid Losses $4 3.4 ($ Billions) $3 $2 $ $0 Source: A.M. Best

66 #10 WALL STREET

67 Performance on Wall Street Highly Erratic Property/Casualty All Insurers Life/Health Banks S&P % -6.5% -9.6% -3.1% -9.1% 43.4% 39.8% 34.5% 18.1% 21.0% P/C insurers were up 43.4% in 2000; Down 25.7% in 1999; YTD 2001= -7.5% Nasdaq -39.3% 86.0% -60% -40% -20% 0% 20% 40% 60% 80% 100% Percentage Change Source: SNL Securities; Insurance Information Institute

68 Insurance Stock Performance: After the Tech Crash Total Return: March 10 through Year End 2000* -51.1% -10.6% Nasdaq S&P % 47.8% 78.0% 77.5% 76.6% 72.6% Banks P/C Life/Health All Insurers Multiline Brokers -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% * NASDAQ peaked on March 10, 2000 at Source: Insurance Information Institute, SNL Securities

69 Insurance Stock Performance: Off to a Slow StartUP YTD Total Return through March 8, % -8.53% -8.40% -9.57% -4.95% -1.18% 2.71% 5.16% CREDIT SENSITIVITY Mortgage Guarantee: % Financial Guarantee: % Nasdaq DJIA S&P 500 Banks Multiline All Insurers P/C Brokers Life/Health -15% -10% -5% 0% 5% 10% 15% Source: SNL Securities, Insurance Information Institute

70 BONUS WORRY The Economy

71 Impact of Recession on P/C Premiums and Profitability ( ) 12% 10% 8% 6% 4% 2% 0% 8.1% 4.1% Recession Years (1970; 74-75; 80-82; 90-91) Non-Recession Years (all other years, ) 8.8% 9.4% 8.9% 7.0% 5.4% 4.7% 3.9% 3.8% 0.2% 2.7% 11.3% -2% -4% Inflation (CPI) NWP Growth (unadj.) -2.7% Real NWP Growth ROE--P/C Insurers* ROE--All Industries* ROE--Banks* *GAAP return on equity, adjusted for inflation; Bank data ; Div. Fin Source: Insurance Information Institute ROE-- Diversified Financial*

72 Change in Consumer Price Index Percent CPI - All Items ( =100) Source: Bureau of Labor Statistics

73 Motor Vehicle Retail Sales (Millions of Units) New Motor Vehicle Sales Sales in late 2000 fell sharply. There will be an impact on exposure growth in the personal auto line in 2001 Net loss of 2 to 3 million vehicles likely by mid * Nov. '00 Source: US Department of Commerce; Insurance Information Institute *Seasonally Adjusted Annual Rate (Jan-Nov 2000).

74 New Private Housing Starts (Millions of Units) New Private Housing Starts Annualized starts in late 2000 were down by 140,000 units compared with 1999, representing an estimated $70 million decrease in new exposure * Source: US Department of Commerce; Insurance Information Institute *Annualized 3 rd Quarter 2000 data.

75 Recession & Credit Risk: Impact on Earnings & Surplus 4.08% Default Rate All Corporates 10% Default Below Investment Grade 100% Default Below Investment Grade -2.1% -4.1% Decline 2001E Earnings Decline in Surplus Credit Default Swaps Debt Guarantees -0.5% -1.2% Some Companies with Credit Woes Xerox Sunbeam TWA PG&E Edison Intl. -5.2% -12.1% Source: Goldman Sachs; 10K/10Q Reports.

76 Anything Else You Bet? Worries 1-10 The Economy Banks in Insurance Privacy Federal vs. State Regulation Attracting/Retaining Talent

77 Insurance Information Institute On-Line If you would like a copy of this presentation, please give me your business card with address