Personal Lines P-C Insurance Markets:

Transcription

1 Personal Lines P-C Insurance Markets: Trends, Challenges & Opportunities for 2012 & Beyond Insurance Information Institute January 31, 2012 Download at Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 Presentation Outline Personal Lines Growth Overview Auto, Home: US and by State Average Premium/Expenditures Personal Lines Growth Drivers Exposure, Pricing Factors Personal Lines Profitability Analysis Catastrophe Loss Trends: US & Global Impacts Reinsurance Market Overview & Outlook Cyclical Drivers in Personal Lines Loss as a Cyclical Driver Private Passenger Auto Performance Distribution Trends P/C Financial Overview & Outlook: The Role of Cyclicality Profitability Premium Growth Capital, Capacity and Financial Strength Underwriting Performance Investment Performance Financial Crisis, Recession & Recovery: P/C Insurer Impacts Regulatory Environment Report Card Q&A 2

3 Personal Lines Growth Analysis Growth Trajectories Differ Substantially by Line, by State and Over Time 3

4 Distribution of Direct Premiums Written by Segment/Line, 2010 Distribution Facts 2010 Personal/Commercial lines split has been about 50/50 for many years; Personal Lines overtook Commercial Lines in 2010 Pvt. Passenger Auto is by far the largest line of insurance and is currently the most important source of industry profits Billions of additional i dollars in homeowners insurance premiums are written by staterun residual market plans Homeowners $68.2B/15% Commercial Lines $226.8B/49% Pvt. Pass Auto $165.0B/36% Sources: A.M. Best; Insurance Information Institute research. 4

5 Auto & Home vs. All Lines, Net Written Premium Growth, F 15% 13% 11% While homeowners insurance has grown faster than auto over the past decade, auto is generally more profitable 15.3% 14.5% Average Auto = % 9.2% Home = 6.4% 9% All Lines = 3.6% 7% 5% 3% 1% -1% -3% -5% 5.7% 50% 5.0% 0.9% Private Passenger Auto Homeowners All Lines 5.6% 22% 2.2% 1.4% -0.9% -4.9% 0.2% 6.4% 6.9% 7.0% 4.0% 4.5% 3.1% 2.2% 2.6% 2.7% F 12F 13F Sources: A.M. Best (historical); Insurance Information Institute (2011F-2013F). 5

6 Private Passenger Auto Insurance Net Written Premium, $ Billion $180 $170 $160 $150 $151.2 $157.3 $159.6 $160.2 $ $158.0 $158.9 $156.6 $139.7 PP Auto premiums written have $140 been basically flat in recent years $130 $128.0 to the weak economy impacting new vehicle sales, car choice, and $119.7 $120 increased price sensitivity among consumers, though h growth is $110 returning to the market $ Sources: A.M. Best; Insurance Information Institute. 6

7 Commercial Auto Insurance Net Written Premium, $ Billion $29 $27 $25 $24.6 $26.6 $26.7 $26.7 $25.4 $25.55 $23.7 $23 $21 $19 $17 $19.5 $21.8 In contrast to flat PP Auto NPW, Commercial auto premiums are down 22.0% since 2005 due to soft market conditions in commercial lines and negative exposure trends $21.8 $20.9 $ Sources: A.M. Best; Insurance Information Institute. 7

8 Percent Change in DPW: Pvt. Pass. Auto by State, Top 25 States Texas was the fastest growing state between 2005 and Pecent change (%) AL TX UT OK LA WY NM WA AK SC MT ND KS WI NC ID OR DE MS MO TN IA GA SD AR Sources: SNL Financial LC.; Insurance Information Institute.

9 Percent Change in DPW: Pvt. Pass. Auto by State, Bottom 25 States Pecent change (%) Massachusetts saw the biggest drop in premiums written, due in large part to recent reforms that increased competition and lowered overall rate levels RI NV DC KY MD VA IL NJ WV NE FL CT IN PA CO NY AZ CA HI OH MI MN VT NH ME MA Sources: SNL Financial LC.; Insurance Information Institute.

10 Homeowners Insurance Net Written Premium, $ Billions $65 $60 $55 $50 $45 $40 $35 $30 $32.4 $35.2 $40.0 $45.8 $49.5 $52.22 $54.6 $54.9 $55.7 $57.2 $60.4 Homeowners insurance NWP continues to rise (up 86.5% ) 2010) despite very little unit growth in recent years. Reasons include rate increases, especially in coastal zones, ITV endorsements (e.g., inflation guards ), and inelastic demand d Sources: A.M. Best; Insurance Information Institute. 10

11 Average Premiums For Home Insurance By State, 2009* (1) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 TX (2) $1,511 FL (3) $1,460 $1,4 430 $1,185 $1,123 $1,069 $1,069 LA MS OK DE RI MA $1,035 Top 25 States NY $1,021 CT $1,016 KS $9 991 AL $9 987 SC $ $92 $91 $91 $893 $892 $881 CA (4) AR MN CO AK MO US $880 $879 $853 $849 $848 $794 $789 HI ND NE NJ TN IL *Latest available. (1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides all risks coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. Note: Average premium=premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling. Source: NAIC; Insurance Information Institute. 11

12 Average Premiums For Home Insurance By State, 2009* (1) Bottom 25 States $800 $600 $ $7 7 $75 $751 $751 $740 $734 $727 $725 $717 $717 $711 $703 $694 $671 $651 $645 $645 $642 $613 $610 $5 552 $54 44 $54 44 $54 42 $485 $400 $200 $0 GA MD NH MT NM MI VA WY NC IN VT KY NV PA WV ME IA SD AZ OH DC WA OR UT WI ID (1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides all risks coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. Note: Average premium=premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling. Source: 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC. 12

13 Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009 (Percent) 2.50% 2.35% 2. 28% % % Top 25 States 2.00% 1.50% 1.78%.72% 7% % 1.45% 1.42% 1.28% 1.28% 1.27% 1.24% 1.23% 1.21% 1.19% 1.17% 1.16% 1.13% 1.13% 1.12% 1.10%.09% 1.09% % 050% 0.50% 0.00% TX FL MS LA OK AR AL SC KS NM MO TN DC NY RI NE CA US GA KY WV MT MN NC ND *Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners. 13

14 Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009 (Percent) Bottom 25 States 2.00% 1.50% 1.08% 1.05% 1.05% 1.05% 1.03% 1.03% 1.01% 1.00% 0.99% 0.97% 0.97% 0.97% 0.96% 0.93% 0.88% 0.87% 0.86% 0.86% 0.86% 0.86% 0.85% 0. 80% 0.79% 0.77% 0.76% 0.71% 0.68% 01.00% 0.50% 0.00% 14 CO AK IN M H I I M A NV CT IL AZ WY M E SD VT PA IA DE O H VA NH NJ ID UT M D O R WI WA *Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

15 Personal Lines Growth Drivers Rate is Presently a Bigger Driver than Exposure 15

16 Monthly Change* in Auto Insurance Prices, * 10% 8% 6% Cyclical peaks in PP Auto tend to occur approximately every 10 years (early 1990s, early 2000s and likely the early 2010s) Pi Pricing i peak occurred in 2010 at 5.1%, falling to 3.6% in % 2% Hard markets tend to occur during 0% recessionary periods -2% '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 *Percentage change from same month in prior year; through December 2011; seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. 16

17 Monthly Change* in Auto Insurance Prices, January December 2011 (Percent Change from same month, prior year) 6% Auto Insurance Price Increases Have Averaged 5.1% in 2010 over 2009, After Averaging 4.5% in 2009 over Pricing weakened materially in 2011 and growth now lags homeowners 3.4% 3.3% 3.0% 2.9% % 3.8% 4.0% 4.0% 4.3% 4.4% 4.6% 4.6% 4.7% 4.6% 4.6% 4.6% 4.6% 4.6% 4.7% 4.7% 4.5% 4.2% 4.0% 3.8% 3.8%.7% 4.9%5.3% % 5.3% 5.3% 5.1% 5.3% 5.1% 5.1% 5.4 4% 5.3% %% 5.3% 5% %4% PPA Auto, like most p/c lines, exhibits strong cyclicality in pricing. Prices rose from 2000 to late 2005, were flat/falling % 2.4% 2.2% 2.0%.9% % 2.6% 2.6% 2.7% 3.0% 3.1%3.4% % 3.4% 3.3% 2.9% 3.0% 3.4% 3% 2% in 2006 and 2007 before beginning to rise gain in Underwriting performance remained strong even when prices were flat or 1 1.3% 0.6% 0.9% 0.9% 0.5% 0.2% 0.4% 0.4% 0.5% 0.3% 0.2% 0.2% 1.0% 1.6% 1.1% 0.8% 0.7% 0.8% 0.6% 0.4% 0.3% 0.6% 0.6% 0.4% 0.1% 0.2%0.5%0.9% 1.1% 1.4%1.7 1% falling due to improvements in underlying frequency and severity trends -0.2% 0 0% -1% Jan 05 Feb 05 Mar 05 Apr 05 May 05 JuJ un 05 ul 05 Aug 05 Se ep 05 Oc ct 05 Nov 05 Dec 05 Ja an 06 Feb 06 Mar 06 Apr 06 May 06 JuJ un 06 ul 06 Aug 06 Se ep 06 Oc ct 06 Nov 06 Dec 06 Ja an 07 Feb 07 Mar 07 Apr 07 May 07 JuJ un 07 ul 07 Aug 07 Se ep 07 Oc ct 07 Nov 07 Dec 07 Ja an 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 J ul 08 Aug 08 Se ep 08 Oc ct 08 Nov 08 Dec 08 Ja an 09 Feb 09 Mar 09 Apr 09 May 09 JuJ un 09 ul 09 Aug 09 Se ep 09 Oc ct 09 Nov 09 Dec 09 Ja an 10 Feb 10 Mar 10 Apr 10 May 10 JuJ un 10 ul 10 Aug 10 Se ep 10 Oc ct 10 Nov 10 Dec 10 Ja an 11 Feb 11 Mar 11 Apr 11 May 11 JuJ un 11 ul 11 Aug 11 Se ep 11 Oc ct 11 Nov 11 Dec 11 *Percentage change from same month in prior year, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute 17

18 Average Expenditures on Auto Insurance $950 The average expenditure on auto insurance is lower today than it was in 2003 $900 $850 $800 $830 $842 $831 $816 $808 $786 $795 $789 $785 $750 $700 $650 $651 $668 $691 $705 $703 $685 $690 $726 $ * Countrywide Auto Insurance Expenditures Decreased by 0.8% in 2008 and 0.5% in 2009 and Increased 3.0% in 2010 (est.) * Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute estimate for 2010 based on CPI and other data. 18

19 Average Expenditures For Auto Insurance By State, 2009 Top 25 States $1,128 $1,101 $1,099 $1,057 $1,021 $1,006 $969 $952 $944 $929 $913 $897 $860 $860 $837 $826 $815 $811 $786 $785 $754 $754 $741 $738 $738 $728 $1,200 $1,000 $800 $600 $400 $200 $0 19 DC NJ LA NY DE FL RI CT NV MD MI AK MA TX AZ WA WV PA HI US CA GA CO MS SC IL Note: Average expenditure=total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle. Source: 2010 National Association of Insurance Commissioners.

20 Average Expenditures For Auto Insurance By State, 2009 Bottom 25 States $723 $718 $716 $713 $699 $694 $680 $668 $667 $656 $655 $652 $646 $634 $623 $620 $616 $610 $598 $591 $578 $559 $555 $532 $521 $510 $800 $600 $400 $200 $0 20 OR NH UT NM KY MN OK MO VA AR MT AL VT TN WY IN OH NC ME WI KS NE ID IA SD ND Note: Average expenditure=total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle. Source: 2010 National Association of Insurance Commissioners.

21 Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009 (Percent) Top 25 States 200% 2.00% 150% 1.50% 1.00% 1.66% 1.59% 1.57% % % % % % % % % 1.23% 1.22% 1.19% 1.11% 1.11% 1.11% 1.11% 1.08% 1.06% 1.05% 1.04% 1.04% 1.03% 1.02% 0.50% 0.00% LA DC FL WV NV NM MS TX MI NY AZ AR DE SC KY RI GA NJ OK AK US UT AL PA TN *Average auto insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners. 21

22 Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009 (Percent) Bottom 25 States 2.00% 150% 1.50% % 1.02% 1.01% 0.98% 0.97% 0.97% 0.94% 0.92% 0.92% 0.92% 0.91% 0.91% 0.91% 0.90% 0.89% 0..86% 0..86% 0..85% 0. 84% 0.83% 0.83% 0.81% 0.80% 8% 8% 8% % 1.00% % 0.00% 22 WA OR MT MO CA CT HI ID NC MD IL IN CO ME OH MA KS VT WY MN NH NE VA SD WI IA ND *Average auto insurance expenditure as a percentage of the 2009 median income for a family of four Sources: Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

23 Auto/Light Truck Sales, F (Millions of Units) New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for is still far below average of 17 million units, but a recovery is underway Job growth and improved 11 credit market conditions will boost auto sales in and beyond F 12F 13F 14F 15F 16F 17F 18-22F Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector. Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute. 23

24 Number of Insured Vehicles in the US, * (millions) The Number of Insured Passenger Vehicles Stopped Growing During the Economic Downturn. Growth Has Likely Returned. *Latest available as of Nov Source: Automobile Insurance Plans Service Office. 24

25 Do Changes in Miles Driven Affect Auto Collision Claim Frequency? Paid Claim Frequency = (No. of paid claims)/(earned )( Car Years) x 100 Paid Claim Freq Collision i Claim Frequency Billions of Vehicle Miles 3100 People are driving less in 2011 (-1.3% 3%Sept vs, Sept. 2010), and frequency is flat * Sources: Federal Highway Administration ( ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 2nd Qtr. 2011, published Sep. 30, 2011 and earlier reports. *2011 ISO figure is for 12 months ending 6/30/2011; FHA data is for 12 months ending Sep Billions of Miles Driven

26 Auto Insurance: Claim Frequency Impacts of Energy Crisis/Recession of 1973/74 Oct. 17, 1973: Arab oil embargo begins Frequency Impacts Collision: -7.7% PD: -9.5% BI: -13.3% 3% Driving Stats Gas prices rose 35-40% Miles driven fell 6.7% in 1974 March 17, 1974: Arab oil states announce end to embargo Frequency began to rebound almost immediately after the embargo ended Source: ISO, US DOT.

27 Auto Insurance: Claim Severity Impacts of Energy Crisis/Recession of 1973/74 Oct. 17, 1973: Arab oil embargo begins Severity Impacts Collision: - 7.5% PD: +15.9% BI: N/A* Driving Stats Gas prices rose 35-40% Miles driven fell 6.7% in 1974 Source: ISO. March 17, 1974: Arab oil states announce end to embargo Collision severity began to rebound almost immediately after the embargo ended; PD accelerated as inflation rose; No discernable trend change in BI.

28 New Private Housing Starts, F (Millions of Units) New home starts plunged % from ; A net annual The plunge and lack of recovery in homebuilding and in construction in general is holding back payroll exposure growth decline of 1.49 million units, lowest since records began 0.55 in Job growth, improved credit market conditions and demographics will eventually boost home construction F12F13F14F15F 16F17F 18-22F Little Exposure Growth Likely for Homeowners Insurers Until at least Also Affects Commercial Insurers with Construction Risk Exposure, Surety Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute. 28

29 Average Square Footage of Completed New Homes in U.S., * Square Ft 2,700 2,500 2,300 2, ,900 1,700 1,500 The average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions 0 1,660 1,695 1,645 1,700 1,720 1,755 1,760 1,740 1,720 1,710 1, ,905 1,995 2,035 2,080 2,075 2,095 2,095 2,100 2,095 2,12 2,1 1,780 1,78 1,8 2, ,223 2,266 2,324 2,320 2,330 2,349 2,43 2,4 2,521 2, The trend toward building larger homes reversed from , affecting exposure growth beyond the decline in number of units built. Rising again in * 2 2,43 2,389 2,518 The average size of completed new homes fell by 147 square feet (5.75%) from This was the largest recession-based drop in nearly four decades. *2011 figure is weighted average square feet of completed homes in first three quarters of 2011 Source: U.S. Census Bureau: Insurance Information Institute. 29

30 Value* of Construction Put In Place Billions Nonresidential Public Residential Nonresidential Private $1,200 Total Construction Spending g( (Annual Rate) Dec 2007: $1,109.0B Nov 2010: $ B $402.0 $ $900 $410.3 $ $293.7 $277.3 $265.9 $260.3 $249.1 $245.3 $247.0 $257.4 $ $273.2 $266.2 $269.2 $238.9 $258.3 $273.7 $269.6 $268.5 $247.7 $233.2 $236.2 $245.0 $246.8 $4 $389.3 $392.0 $40 $40 $ $382.6 $372.8 $372.6 $347.2 $ $325.6 $323 $316 $275.9 $275.1 $274. $270. $269. $252.3 $253.3 $258.3 $256.4 $ $600 $289.5 $308.9 $299.6 $294.2 $297.8 $301.3 $309.6 $310.8 $317.3 $314.8 $311.9 $311.7 $309.0 $301.9 $300.3 $298.6 $282.4 $290.7 $295.3 $294.6 $298.2 $298.7 $304.9 $306.6 $305.4 $307.4 $ $ $300 $0 Dec '07 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 Since the recession started,private residential and nonresidential construction together are down $300 billion (annual rate) a drop of 38%. This affects property, surety, and other construction-related exposures. *seasonally adjusted annual rate Source: 30

31 State Population Growth Rate Projections, * Projected Population Growth 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% % NV.4% 27 AZ 21.6% FL Highest Growth Rate States 6.2% 1 TX % UT.8% 14 ID.6% 14. NC.5% 14. DE % WA % 13.1 GA 12.4% OR 11.3% VA 8.7% 2.5 5% 2.5 5% 2.3 3% % 2.1 Lowest Growth Rate States U.S. overall: +8.7% The Mountain West region is projected to grow the most from now to 2020 (up 17.6%), followed by the South Atlantic (up 14.5%) and Pacific (up 11.2%). The Mid-Atlantic is projected to be the slowest-growing region (up 1.9%). US IL MS LA WY 2.0 0% SD 1.9 9% NE % 1.6 PA 0.7% NY 0.6% OH 0.4% IA -1.0% ND -1.5% WV *based on 2000 census. Source: Table 7 31

32 FLORIDA CASE STUDY: Weak Population Growth, Slow Household Formation Hurt Personal Lines Exposure Gains Thousands Change in FL Population Change in No. Households Household formation slowed faster than population growth, suggesting people are consolidating households as the state s foreclosure crisis continues F 2012F FL s Construction Sector, One of Most Critical of FL s Growth Engines, Remains in a Deep Recession Source: Dept. of Commerce (historical); Wells Fargo Securities (FL forecasts) as of September 2011; Insurance Information Institute. 32

33 FL Housing Permits: Multi-Family Unit Growth Poised to Soar, Single-Family Weak Annual Change, 2007 through 2012F Single-family home construction in 2012 is Single-Family Permits expected to be barely half what Multi-Family Permits it was pre-crisis. Multi-family 80,000 73,200 dwelling great is expected to rise by 68% in 2012 as people 70,000 shun homeownership or it 60,000 remains beyond their means 50,000 40,000 30,000 20,000 10,000 32,526 39, ,8 27,515 8,601 30,873 33,000 7,863 11,000 37,500 18, F 2012F FL s Construction Sector, One of Most Critical of FL s Growth Engines, Remains in a Deep Recession Source: Dept. of Commerce (historical); Wells Fargo Securities (FL forecasts) as of September 2011; Insurance Information Institute. 33

34 Average Premium for Home Insurance Policies** $1,000 $900 $800 Home insurance premiums are rising in response to higher catastrophe losses $822 $804 $830 $764 $729 $880 $914 $956 $1,004 $700 $668 $600 $500 $593 $536 $ * 11* 12* * Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers. Source: NAIC, Insurance Information Institute estimates based on CPI and other data. 34

35 Percent Change in DPW: Homeowners, by State, Top 25 States 60 Hawaii was the fastest growing state between 2005 and Pecent change (%) MN HI LA ID MO DE AR NM SC MS NC RI UT GA AL WY ND TN KY CT OK MT ME NH NY Sources: SNL Financial LC.; Insurance Information Institute.

36 Percent Change in DPW: Homeowners, by State, Bottom 25 States Pecent change (%) Michigan was the slowest growing state between een 2005 and NJ KS VA MA WA FL TX IL WI IA OR SD CO IN NE OH VT AK DC PA MD WV AZ NV CA MI Sources: SNL Financial LC.; Insurance Information Institute.

37 U.S. Residual Market Exposure to Loss ($ Billions) ($ Billions) $900 $800 $700 $600 4 Florida Hurricanes Katrina, Rita and Wilma $ $696.4 $703.0 $656.7 $757.9 $500 $400 $300 $200 $100 Hurricane Andrew $54.7 $150.0 $281.8 $292.0 $ $221.3 $430.5 $372.3 $419.5 $ In the 21-year period from 1990 through 2010, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7 billion in 1990 to $757.9 billion in Source: PIPSO; Insurance Information Institute (I.I.I.). 37

38 U.S. Residual Market: Total Policies In-Force ( ) (000) (000) 3,000 2,500 2,000 1,500 1, Hurricane Andrew 4 Florida Hurricanes , , , , , ,196.5 Katrina, Rita and Wilma 2, , , , , , , In the 21-year period between 1990 and 2010, the total number of policies in-force in the residual market (FAIR & Beach/Windstorm) Plans has more than tripled. Source: PIPSO; Insurance Information Institute

39 Hurricanes, Insolvencies and Insured Losses, Insured Loss ($ Bill, 2009 Dollars) No. of Insolvent Insurers Sources: Florida TaxWatch, Risk & Reform: A Florida TaxWatch Analysis of Florida s Property Insurance System, November 2011, citing the Insurance Information Institute and the Florida Hurricane Fact File. 39

40 Personal Lines Profitability Analysis Significant Variability Over Time and Across States 40

41 Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, * (Percent) 30% 20% 10% 0% -10% US All Lines US Home US PP Auto -20% -30% -40% -50% Hurricane Andrew Average RNW: * All P-C Lines: 7.9% PP Auto: 8.9% Homeowners: 0.7%** -60% Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole. Homeowners Volatility is Associated Primarily With Coastal Exposure Issues *Latest available. **Excluding 1992, the Hurricane Andrew, produces a homeowners RNW of 3.5%. Sources: NAIC. 41

42 Return on Net Worth: All P-C Lines vs. Pvt. Pass. Auto, * (Percent) 16% 14% 12% 10% 8% 6% US All Lines US PP Auto 4% 2% 0% -2% Average RNW: * All P-C Lines: 7.9% PP Auto: 8.9% Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13 of the 21 Years from (Inclusive) *Latest available. Sources: NAIC. 42

43 Return on Net Worth: All P-C Lines vs. Homeowners, * (Percent) US All Lines US Home 25% 20% 15% Average RNW: * All P-C Lines: 7.9% Homeowners: 3.5%** 10% 5% 0% -5% -10% Homeowners Insurance Is Considerably More Volatile than the Market Overall Due to Coastal Exposure and Interior Wind/Hail Events *Latest available. **Excluding Hurricane Andrew (1992); including 1992 produces an average homeowners RNW of 0.7%. Sources: NAIC. 43

44 Return on Net Worth: Pvt. Passenger Auto, 10-Year Average ( *) (Percent) Top 25 States RNW PPA 22 Hawaii was the most profitable state for auto insurers from *Latest available. Sources: NAIC HI VT ME ID DC NH ND MN SD OH KS NM CT IA RI OR WY VA AZ WI CA UT IN AL AK 44

45 Return on Net Worth: Pvt. Passenger Auto, 10-Year Average ( *) (Percent) Bottom 25 States 10 Michigan was the least profitable state for auto insurers from Auto 4 RNW CO NY SC WA NE IL MD TN MO US MT AR GA TX WV NJ OK PA NC MA KY MS DE NV FL LA MI -1 *Latest avaiiable. Sources: NAIC

46 Return on Net Worth: Homeowners Insurance, 10-Year Average ( *) (Percent) Top 25 States RNW HO 50 Hawaii was the most profitable 45 state for home insurers from due to the absence of hurricanes during this period HI SC RI AK CT DC NV DE NY UT MA OR NC CA WA NM VT ME PA ID NJ VA WY AZ MD *Latest available. Sources: NAIC. 46

47 Return on Net Worth: Homeowners Insurance, 10-Year Average ( *) RNW HO (Percent) Bottom 25 States Hurricanes Katrina and Rita made Louisiana and Mississippi the least profitable states for home insurers from NH CO MT MI US WV KS SD WI IL IA TX FL IN OH AR TN GA KY AL ND OK NE MN MO LA MS *Latest available. Sources: NAIC 47

48 Global Catastrophe Loss Developments and Trends 2011 Will Rewrite Catastrophe Loss and dinsurance History But Will Losses Turn the Market? 48

49 Global Catastrophe Loss Summary: Was the Highest Loss Year on Record for Economic Losses Globally Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss $380 Billion in Economic Losses Globally (New Record) New record, exceeding the previous record of $270B in 2005 $105 Billion in Insured Losses Globally 2011 losses were 2.5 times 2010 insured losses of $42B Second only to 2005 on an inflation adjusted basis (new record on a unadjusted basis) Over 5 times the 30-year average of $19B $72.8 Billion in Economic Losses in the US Represents a 129% increase over the $11.8 billion amount through the first half of 2010 $35.9 Billion in Insured Losses in the US Arising from 171 CAT Events Fifth highest year on record Represents 51% increase over the $23.8 billion total in 2010 Source: Munich Re; Insurance Information Institute. 49

50 Natural Loss Events, 2011 World Map Wildfires Canada, May Drought USA, Oct ongoing Wildfires USA, April/Sept. Floods, landslides Guatemala, El Salvador Oct. Winter Storm Joachim France, Switzerland, Germany, Dec. Severe storms, tornadoes USA, May Hurricane Irene USA, Caribbean 22 Aug. 2 Sept. Floods USA, April May Severe storms, tornadoes USA, April Flash floods, floods Italy, France, Spain 4 9Nov. Earthquake Turkey 23 Oct. Floods Pakistan Aug. Sept. Floods Thailand Aug. Nov. Earthquake, tsunami Japan, 11 March Tropical Storm Washi Philippines, Dec. Cyclone Yasi Australia, 2 7 7Feb. Number of Events: 820 Landslides, flash floods Brazil, 12/16 Jan. Floods, flash floods Australia, Dec Jan Drought Somalia Oct Sept Earthquake New Zealand, 22 Feb. Earthquake New Zealand, 13 June Natural catastrophes Selection of significant loss events (see table) Geophysical events (earthquake, tsunami, volcanic activity) Meteorological events (storm) Hydrological events (flood, mass movement) Climatological events (extreme temperature, drought, wildfire) Source: MR NatCatSERVICE 50

51 Natural Catastrophes Worldwide, 2011 Overview and Comparison with Previous Years Average of the last 10 years Average of the last 30 years Top Year Number of events Overall losses in US$ m (original values) Insured losses in US$ m (original values) , , ,000 75, ,000 42,000 35,000 19, (1,025) 2005 (227,000) 2005 (101,000) Fatalities , , ,000 69,000 (296,000) Source: MR NatCatSERVICE 2011 Munich Re 51

52 5 Costliest Natural Catastrophes Worldwide in Terms of Insured Losses, 2011 ($Mill) Date Region Event Fatalities March 11 Japan Overall losses US$ m Insured losses US$ m Earthquake, 35,000-15, ,000 tsunami 40, Feb. 22 New Zealand Earthquake ,000 13,000 Aug. 1 Nov. 15 Thailand Floods, landslides ,000 10,000 Apr USA Severe storms/ tornadoes ,000 7,300 Aug USA, Hurricane Sep. 2 Caribbean Irene 55 15,000 7,000 Source: MR NatCatSERVICE 2011 Munich Re 52

53 Natural Catastrophes Worldwide 2011 Insured losses US$ 105bn - Percentage distribution per continent 2% 44% In 2011, just 37% of insured natural catastrophe losses were in the Americas, barely half the average of 66% over the prior 30 years ( ) 37% <1% 17% Continent Insured losses US$ m America (North and South America) 40,000 Europe 2,000 Africa Minor damages Asia 45,000 In 2011, 61% of insured natural catastrophe losses were in the Asia/Pacific region, nearly35timesthe 3.5 the average of 13% over the prior 30 years ( ) Australia/Oceania 18, Source: MR NatCatSERVICE

54 Natural Catastrophes Worldwide Insured losses US$ 870bn - Percentage distribution per continent 16% 13% 66% <1% 5% Continent America (North and South America) Insured losses US$ m 566,000 Europe 146,000 Africa 2,000 Asia 115,000 In 2011, 61% of natural catastrophe losses were in the Asia/Pacific region, nearly 3.5 times the average of 13% over the prior 30 years ( ) Australia/Oceania 41, Source: MR NatCatSERVICE

55 Natural Catastrophes in Asia Overall and insured losses in 2011 Dollars ($ Billions) 2011 set a record for both overall economic losses 200 in Asia ($266B) and insured losses ($45B) The rapid economic development of Asia and increased insurance 140 penetration guarantee 120 that losses will trend higher in the future Overall losses (in 2011 values) Insured losses (in 2011 values) Source: MR NatCatSERVICE 2011 Munich Re 55

56 Top 16 Most Costly World Insurance Losses, ** $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 (Insured Losses, 2011 Dollars, $ Billions) Taken as a single event, the Spring 2011 tornado and thunderstorm season would likely become the 5 th costliest event in global insurance history $7.7 $8.1 $8.3 $8.5 $9.3 $9.7 Hugo (1989) Winter Storm Daria (1991) Chile Quake (2010) Ivan (2004) Typhoon Mirielle (1991) Charley (2004) $10.0 $11.9 $13.0$13.1 Thailand Floods (2011) Wilma (2005) New Zealand Quake (2011) Ike (2008) 5 of the top 14 most expensive catastrophes in world history have occurred within the past 2 years 1 $24.0$25.0 $19.1 $21.3 Northridge Spring (1994) Tornadoes/ Storms (2011) WTC Terror Attack (2001) Andrew (1992) $37.5 Japan Quake, Tsunami (2011)* $47.6 Katrina (2005) *Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only. **Figures do not include federally insured flood losses. Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research. 56

57 Worldwide Natural Disasters, Number of Events There were 820 events in Geophysical events (Earthquake, tsunami, volcanic eruption) Meteorological events Hydrological events Climatological events (Storm) (Flood, mass (Extreme temperature, movement) drought, forest fire) Source: MR NatCatSERVICE 57

58 Worldwide Natural Disasters , Overall and Insured Losses (Insured Losses, 2011 Dollars, $ Billions) Overall Losses: $380 Bill 350 Insured Losses: $105 Bill Overall losses (in 2011 values) Insured losses (in 2011 values) Source: MR NatCatSERVICE 2011 Munich Re 58

59 U.S. Insured Catastrophe Loss Update 2011 Was One of the Most Expensive Years on Record 59

60 Top 14 Most Costly Disasters in U.S. History (Insured Losses, 2011 Dollars, $ Billions) Taken as a single event, the Spring 2011 tornado and storm season are is the 4 th costliest event in US $35 insurance history $50 $45 $40 $30 $25 $20 $15 $10 $5 $0 $4.3 $4.4 $5.5 $6.5 $7.7 $8.5 $9.0 $11.9 $13.11 $19.1 $21.3 $24.0 $25.0 $47.6 Irene Jeanne Frances Rita Hugo Ivan Charley Wilma Ike Northridge Spring 9/11 Andrew Katrina (2011) (2004) (2004) (2005) (1989) (2004) (2004) (2005) (2008) (1994) Tornadoes & Storms* (2011) Attack (2001) (1992) (2005) Hurricane Irene became the 11 th most expense hurricane in US history *Losses will actually be broken down into several events as determined by PCS. Includes losses for the period April 1 June 30. Sources: PCS; Insurance Information Institute inflation adjustments. 60

61 Natural Disasters in the United States, Number of Events (Annual Totals ) There were 117 natural disaster events in Number Geophysical (earthquake, tsunami, volcanic activity) Meteorological (storm) Hydrological (flood, mass movement) Climatological (temperature extremes, drought, wildfire) Source: MR NatCatSERVICE 61

62 Losses Due to Natural Disasters in the US, (Overall & Insured Losses) (2011 Dollars, $ Billions) (Overall and Insured Losses) 2011 was the 5 th most expensive year on record for insured catastrophe losses in the US. Approximately 50% of the overall cost of catastrophes in the US was covered by insurance in Overall Losses: $72.8 Bill Insured Losses: $35.9 Bill Overall losses (in 2011 values) Insured losses (in 2011 values) Source: MR NatCatSERVICE 2011 Munich Re 62

63 US Insured Catastrophe Losses ($ Billions) $120 $60 $100 Billion CAT Year is Coming Eventually $ s: A Decade of Disaster Record Tornado 2000s: $193B (up 117%) Losses Caused $ CAT Losses 1990s: $89B to Surge $61.9 $100.0 $40 $20 $0 $7.5 $2.7 $4.7 $22.9 $5.5 5 $16.9 $8.3 $7.4 $2.6 $ $8.3 $4.6 $26.5 $5.9 $ $27.5 $9. 2 $6.7 $27.1 $ $ $ *20?? US CAT Losses Already Exceed Losses from All of Even Modest Hurricane Losses Will Make 2011 Among the Most Expensive Ever for CATs *PCS estimate through Sept. 30, Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Sources: Property Claims Service/ISO; Insurance Information Institute. 63

64 US Insured Catastrophe Losses ($ Billions, 2011 Dollars) $120 $60 $100 Billion CAT Year is Coming Eventually $100 Record Tornado Losses Caused $ CAT Losses to Surge $40 $20 $0 $ $4.7 $7.8 $36.9 $8.6 $ $1 $ $3.7 $ $1 $6.0 $ *20?? $7.4 $15.9 $32.9 $71.7 $ $7.3 $ $1 $ $32.6 $100.0 US CAT Losses in 2011 Were the 5 th Highest in US History on An Inflation Adjusted Basis *PCS estimate through Sept. 30, Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. 64

65 Natural Disaster Losses in the United States: 2011 As of Jan. 1, 2012 Number of Events Fatalities Estimated Overall Losses (US $m) Estimated Insured Losses (US $m) Severe Thunderstorm ,548 25,813 Winter Storm ,708 2,017 Flood , Earthquake Tropical Cyclone ,700 5,510 Wildfire , Other ,000 1,000 Source: MR NatCatSERVICE 65

66 2011 s Most Expensive Catastrophes, Insured Losses Thunderstorms, Apr Thunderstorms, May Hurricane Irene, Aug ** Thunderstorms, Apr. 3-5 Thunderstorms, Apr Thunderstorms, Apr Thunderstorms, Jun Texas Drought, 2011* Thunderstorms, Jul Winter Storm, Jan. 31-Feb. 3 Thunderstorms, Aug Thunderstorms, Apr Wildfire, Sep Flooding, April* $530 $500 $1,000 $830 $1,510 $1,400 $1,200 $980 $975 $840 $2,000 $5,000 Includes approximately $2B in losses for May 22 Joplin tornado $6,900 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $7,300 Includes $1.65B in AL, mostly in the Tuscaloosa and Birmingham areas **Includes $700 million in flood losses insured through the National Flood Insurance Program. Source: PCS except as noted by * which are sourced to Munich Re; Insurance Information Institute.

67 Combined Ratio Points Associated with Catastrophe Losses: * Combined Ratio Points Avg. CAT Loss Component of the Combined Ratio by Decade 1960s: s: s: s: s: s: 6.70* The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades *Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data. Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers. Source: ISO; Insurance Information Institute. 67

68 U.S. Thunderstorm Loss Trends, Thunderstorm losses in 2011 totaled a record $25.8 billion Average thunderstorm losses are up more than 5 fold since the early 1980s Hurricanes get all the headlines, but thunderstorms are consistent producers of large scale loss are the most expensive years on record. Source: Property Claims Service, MR NatCatSERVICE 68

69 U.S. Winter Storm Loss Trends, Insured winter storm losses in 2011 totaled $2.0 billion. Average winter storm losses have nearly doubled since the early 1980s Source: Property Claims Service, MR NatCatSERVICE 69

70 U.S. Acreage Burned by Wildfires, millions acres were burned by wildfires in 2011, one of the worst years on record, causing $855 in insured losses Source: National Forest Service, MR NatCatSERVICE 70

71 Notable Wildfires in 2011 Worst wildfire year on record in Texas due to persistent drought. Spring: Over 3 million acres burned in west Texas from 12 major seats of fire. Over 200 homes and businesses destroyed, $50 million insured loss. September: Bastrop County Complex Fire near San Antonio destroys over 1,600 homes, insured loss of $530 million. Source: FEMA 2011 Munich Re 71

72 U.S. Insured Catastrophe Losses by Cause of Loss, 2011 ($ Millions) Flood, $535, (1.5%) Geological Events, $50, (0.1%) Winter Storms, $2,017 Wildfires, $855 Other, $1, % Hurricanes & Tropical Storms, 1.5% $5, % 15.4% Thunderstorm/ Tornado losses were 2.5 times above the 30- year average 72.1% Thunderstorms (Incl. Tornadoes, $25,813 Source: ISO s Property Claim Services Unit, Munich Re; Insurance Information Institute s insured loss distribution was unusual with tornado and thunderstorm accounting for the vast majority of loss. 72

73 Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, :H1 1 Wind/Hail/Flood (3), $12.7 Fires (4), $9.0 Other (5), $0.6 Geological Events, $ % 4.9%3.4%0.2% Terrorism, $ % Winter Storms, $ % Tornado share of CAT losses is rising Tornadoes (2), $ % 42.7% Hurricanes & Tropical Storms, $160.5 Wind losses are by far cause the most catastrophe losses, even if hurricanes/ts are excluded. 1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars. 2. Excludes snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO s Property Claim Services Unit. 73

74 2011: Nowhere to Run, Nowhere to Hide Most of the Country East of the Rockies Suffered Severe Weather in 2011, Impacting Most Insurers 74

75 Number of Federal Disaster Declarations, * 80 There have been 2, The number of federal federal disaster declarations since disaster declarations set a The average new record in 2011, with 99, shattering 2010 s record 81 declarations number of declarations per year is 34 from , though that few haven t been recorded since * The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011 *Through December 31, Source: Federal Emergency Management Administration: ; Insurance Information Institute.

76 Federal Disasters Declarations by State, : Highest 25 States* clarations saster De Di Over the past nearly 60 years, Texas has had the highest number of Federal Disaster Declarations TX CA OK NY FL LA AL KY AR MO IL MS TN IA MN KS NE PA WV OH VA WV ND NC IN *Through Dec. 31, Source: FEMA: Insurance Information Institute. 76

77 Federal Disasters Declarations by State, : Lowest 25 States* isaster De eclarations D Over the past nearly 60 years, Wyoming, Utah and Rhode Island had the fewest number of Federal Disaster 3Declarations ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC RI UT WY *Through Dec. 31. Includes Puerto Rico and the District of Columbia. Source: FEMA: Insurance Information Institute. 77

78 SPRING 2011 TORNADO & SEVERE STORM OUTBREAK 2011 Losses Are Putting Pressure on US P/C Insurance and Reinsurance Markets 78

79 Number of Tornadoes and Related Deaths, Numb ber of Tornad does 2,000 Number of Tornadoes ,800 1,600 1,400 1,200 1, , ,13 32 Number of Deaths 1,297 1, ,082 1,234 1, , ,424 Tornadoes claimed more than 550 lives in 2011, the most since ,345 1,071,216 1, 941 1,376 1,819 1,264 1,103 There were 1,884 tornadoes recorded in the US in ,098 1, , ,282 1, Nu umber of Dea aths P Insurers Expect to Pay at Least $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service. 79

80 U.S. Tornado Count, There were 1,893 tornadoes in the US in 2011 far above average, but well below 2008 srecord Deadly and costly April/ May spike Source: 80

81 Location of Tornadoes in the US, ,894 tornadoes killed 552 people in 2011, including at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in Joplin on May 22 Source: NOAA Storm Prediction Center; 81

82 Insurers Making a Difference in Impacted Communities Destroyed home in Tuscaloosa. Insurers will pay some 165,000 claims totaling $2 billion in the Tuscaloosa/ Birmingham areas alone. Presentation ti of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm Recovery Fund Source: Insurance Information Institute 82

83 Location of Large Hail Reports in the US, 2011 There were 9,417 Large Hail reports in 2011, causing extensive damage to homes, businesses and vehicles Source: NOAA Storm Prediction Center; 83

84 Location of Wind Damage Reports in the US, 2011 There were 18,685 Wind Damage reports through Dec. 27, causing extensive damage to homes and, businesses Source: NOAA Storm Prediction Center; 84

85 Severe Weather Reports, 2011 There were 29,996 severe weather reports in 2011; including 1,894 tornadoes; 9,417 Large Hail reports and 18,685 high wind events Source: NOAA Storm Prediction Center; 85

86 Number of Severe Weather Reports in US, by Type, 2011 Tornadoes, 1,894, 6% Large Hail, 9,417, 31% Wind Damage, 18,685, 63% Tornadoes accounted for just 6% of all Severe Weather Reports but more than 550 deaths in 2011, the most in 75 years Source: NOAA Storm Prediction Center;

87 Underwriting Trends: Cycle, Catastrophes Are Among 2011 and 2012 Drivers 87

88 P/C Insurance Industry Combined Ratio, :Q3* As Recently as 2001, Insurers Paid Out Nearly $ 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 Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Best Combined Ratio Since 1949 (87.6) Cyclical Deterioration Avg. CAT Losses, More Reserve Releases * * Excludes Mortgage & Financial Guaranty insurers Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9 Sources: A.M. Best, ISO. 88

89 Underwriting Gain (Loss) * ($ Billions) Underwriting $35 Cumulative underwriting deficit $25 from 1975 through h 2010 is $455B $15 $5 -$5 -$15 -$25 -$35 -$45 losses in 2011 at $34.9 through Q3 will be largest since $ * Large Underwriting Losses Are NOT Sustainable in Current Investment Environment * Includes mortgage and financial guaranty insurers in all years Sources: A.M. Best, ISO; Insurance Information Institute.

90 P/C Reserve Development, E Prior Yr. Reserve e Release ($ $B) $30 $25 $20 $15 $10 $5 $0 -$5 -$10 -$15 -$ Prior Yr. Reserve Development ($B) Impact on Combined Ratio Prior year reserve releases totaled $8.8 billion in the first half of 2010, up from $7.1 billion in the first half of Impac ct on Comb ined Ratio (Points) Reserve Releases Are Continuing Strong in 2010 But Should Begin to Taper Off in E 11E Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay s Capital; A.M. Best. 90