Overview & Outlook for the P/C Insurance Industry: Focus on Illinois

Transcription

1 Overview & Outlook for the P/C Insurance Industry: Focus on Illinois Central Illinois CPCU Chapter I-Day Bloomington, IL November 5, 2015 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 The U.S. Economy, : Most Signs Are Positive but Weak Favorable Consequences for the P/C Industry, if Current Trends Continue 2

3 US Real GDP Growth* Real GDP Growth (%) 6% 5% 4% 3% 2% 1% 0% 1.4% 5.0% 2.3% 2.2% 2.6% 2.4% 0.1% 2.5% 1.3% 4.1% 2.0% 1.3% 3.1% 0.4% 2.7% 1.8% 4.5% 3.5% 5 of the 8 occurred in the last two years 4.6% 4.3% 2.1% 0.6% 3.9% -1% -2% Are these numbers measuring growth correctly? 09:3Q 09:4Q 10:1Q 10:2Q 10:3Q 10:4Q 11:1Q 11:2Q 11:3Q 11:4Q 12:1Q 12:2Q -0.9% 12:3Q 12:4Q 13:1Q 13:2Q 13:3Q 13:4Q 14:1Q 14:2Q 14:3Q 14:4Q 15:1Q 15:2Q Since the Great Recession ended, there have been only 8 quarters (out of 24) when real growth (at an annual rate) was 3% or higher Sources: US Department of Commerce; Insurance Information Institute. 3

4 US Real GDP, Quarterly, October 2015 Forecasts Real GDP Growth Rate 4% 3% 3.2% 3.0% 3.2% 3.2% 3.2% 2.7% 2.7% 2.6% 2.7% 2.6% 2.6% 2% 2.1% 2.2% 2.1% 2.3% 2.1% 2.1% 1% 1.5% 10 Most Pessimistic Median 10 Most Optimistic 15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4 Despite the challenges to the U.S. economy, virtually every forecast in the Blue Chip universe in early October 2015 sees steady growth ahead Sources: Blue Chip Economic Indicators (10/15); Insurance Information Institute 4

5 Unemployment and Underemployment Rates: Still Falling uary 2000 through September 2015, Seasonally Adjusted (%) 18.5 "Headline" Unemployment Rate U Unemployment + Underemployment Rate U-6 U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 10.0% in September 2015; 8.5% to 9.5% is normal The job market is now clearly improving. Source: US Bureau of Labor Statistics; Insurance Information Institute Headline unemployment was 5.1% in September 2015; 4.5% to 5.5% is normal 7

6 Labor Market Slack: Elevated Number of Involuntary Part-time Workers In less than 18 months, 4.5 million additional people were involuntarily working part time The normal range (since 1980) 8

7 Number of Discouraged Workers : Elevated, but Dropping 1994 Sept 2015 Thousands 1,400 1,300 1,200 1,100 1, A discouraged worker in a month did not actively look for work in the prior month for reasons such as --thinks no work available, --could not find work, --lacks schooling or training, --thinks employer thinks too young or old, and other types of discrimination. Normal '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 In recent good times, the number of discouraged workers ranged from 200, ,000 ( ) or from 300, ,000 ( ). Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted. Sources: Bureau of Labor Statistics; National Bureau of Economic Research (recession dates). Latest reading: 635,000 in Sept

8 Unemployment Rates: US vs. IL uary August 2015 (%) 11.5 US "Headline" Unemployment Rate U IL Statewide The unemployment rate in Illinois was 5.4% in Sept The US headline unemployment rate was 5.1% in Sept Sources: US Bureau of Labor Statistics; Insurance Information Institute. US and IL are seasonally-adjusted. 12

9 Unemployment Rates: IL Statewide vs. Bloomington-Pontiac Region uary August 2015 (%) IL Statewide Bloomington-Pontiac Region The unemployment rate in Illinois was 5.6% in August The Bloomington- Pontiac unemployment rate was 4.6% in August 2015 Sources: US Bureau of Labor Statistics; Insurance Information Institute. Neither IL nor Bloomington-Pontiac are seasonally-adjusted. 13

10 Number of Owner-Occupied Housing Units, Midwest, Quarterly, 1992:Q1-2015:Q2 Millions of Owner- Occupied Housing Units :Q1 93:Q1 94:Q1 95:Q1 96:Q1 97:Q1 98:Q1 99:Q1 00:Q1 01:Q1 02:Q1 03:Q1 04:Q1 05:Q1 Number of owner-occupied units has been stuck at roughly 18¼ million units since :Q1 07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 15:Q1 There has been no growth in the number of owner-occupied housing units in over a dozen years. When will this end? Sources: US Census Bureau at Table 10; Insurance Information Institute. 21

11 Number of Rental-Occupied Housing Units, Midwest, Quarterly, 1992:Q1-2015:Q2 Millions of Renter- Occupied Housing Units Latest renteroccupied was 8.3 million units in 2015:Q Trough in 2004:Q2 at 6.4 million units :Q1 93:Q1 94:Q1 95:Q1 96:Q1 97:Q1 98:Q1 99:Q1 00:Q1 01:Q1 02:Q1 03:Q1 Since 2004 the number of renter-occupied housing units has grown by nearly 2 million units (+30%). When will this end? Sources: US Census Bureau at; Table 8; Insurance Information Institute. 04:Q1 05:Q1 06:Q1 07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 15:Q1 22

12 I.I.I. Poll: Home Insurance Q. Do you have renters insurance? 1 1 Asked of those who rent their home. The Percentage of Renters Who Have Renters Insurance Has Been Rising Since 2011 But is Still Quite Low. Source: Insurance Information Institute Annual Pulse Survey. 24

13 Business Bankruptcy Filings: Still Falling (1994:Q1 2015:Q2) (Thousands) Recessions in orange New Bankruptcy Law takes effect Well below prerecession level :Q1 94:Q3 95:Q1 95:Q3 96:Q1 96:Q3 97:Q1 97:Q3 98:Q1 98:Q3 99:Q1 99:Q3 00:Q1 00:Q3 01:Q1 01:Q3 02:Q1 02:Q3 03:Q1 03:Q3 04:Q1 04:Q3 05:Q1 05:Q3 06:Q1 06:Q3 07:Q1 07:Q3 08:Q1 08:Q3 09:Q1 09:Q3 10:Q1 10:Q3 11:Q1 11:Q3 12:Q1 12:Q3 13:Q1 13:Q3 14:Q1 14:Q3 15:Q1 Business bankruptcies in :Q2 were below both the Great Recession levels and the 2003:Q3-2005:Q1 period (the best five-quarter stretch in the last 20 years). Bankruptcies restrict exposure growth in all commercial lines. Sources: U.S. Courts Table F-2 at ; Insurance Information Institute 28

14 Private Sector Business Starts, 2004:Q1 2014:Q4* (Thousands) Recessions in orange Business Starts 2006: 872, : 782, : 844, : 800, : 787, ** 2009: 701, : 879, : 743, BLS job category revision Business starts were down nearly 20% in the Great Recession, holding back growth in most types of commercial insurance exposure, but are now back to pre-recession levels. * Data through Dec 31, 2014 are the latest available as of Oct 11, 2015; Seasonally adjusted. Sources: Bureau of Labor Statistics, Business Employment Dynamics, NBER (recession dates) 29

15 Profitability in Illinois P/C Insurance Markets Analysis by Line and Nearby-State Comparisons 31

16 PP Auto 32

17 RNW PP Auto: IL vs. U.S., % 12% 13.3% 12.9% 11.0% 13.9% 12.1% 11.3% US PP Auto IL PP Auto Average US: 7.1% IL: 8.5% 9% 6% 3% 8.8% 8.3% 4.5% 2.8% 4.8% 6.0% 6.1% 9.0% 2.6% 7.4% 3.8% 7.8% 4.2% 5.9% 0% In the 5 most recent years for which we have data, and for the decade as a whole, P/C insurer PP Auto profitability in IL surpassed the US overall. Sources: NAIC. 33

18 PP Auto: 10-Year Average RNW IL & Nearby States 9.2% 11.3% Iowa Wisconsin 7.5% 8.8% 8.5% Indiana Illinois Missouri 0% 2% 4% 6% 8% 10% 12% Sources: NAIC, Insurance Information Institute Illinois PP Auto profitability tops the US (7.1%) but trails most neighbors

19 Commercial Auto 35

20 RNW Commercial Auto: IL vs. U.S., % 15% 12% 9% 6% 14.0% 15.2% 13.7% 12.6% 14.0% 16.1% 12.0% 13.2% 8.6% 7.9% Average US: 9.2% IL: 9.8% 6.4% 6.9% 9.1% 10.1% US Comm Auto IL Comm Auto 6.4% 5.6% 3.4% 6.3% 4.0% 3.8% 3% 0% In 6 of the 10 years in the decade, P/C insurer Commercial Auto profitability in IL was above that of the US overall Sources: NAIC. 36

21 Commercial Auto: 10-Year Average RNW, IL & Nearby States 12.9% 12.8% 10.5% 9.8% 9.3% Iowa Wisconsin Indiana Illinois Missouri 0% 5% 10% 15% Sources: NAIC, Insurance Information Institute Illinois Commercial Auto 10- year average profitability is above the US (9.2%) but below most regional neighbors

22 Commercial Multi-Peril 38

23 RNW Commercial Multi-Peril: IL vs. U.S., Average % 15% 16.8% 18.4% 15.6% 13.8% 15.1% 13.6% US: 8.9% IL: 10.3% US Comm M-P IL Comm M-P 10% 8.8% 5.7% 7.1% 7.4% 8.4% 9.3% 9.2% 6.4% 9.5% 10.3% 8.2% 5% 3.1% 2.9% 3.3% 0% In 5 of the 10 years in the decade, P/C insurer Commercial Multi-Peril profitability in IL was below that of the US overall Sources: NAIC. 39

24 Commercial M-P: 10-Year Average RNW IL & Nearby States 8.4% 10.3% 11.2% Wisconsin Illinois Iowa 1.3% 4.4% Illinois Commercial Multi- Peril profitability is above the US average (8.9%) and most regional neighbors Indiana Missouri 0% 2% 4% 6% 8% 10% 12% Sources: NAIC, Insurance Information Institute

25 Homeowners 41

26 RNW Homeowners: IL vs. U.S., % 25% 20% 15% 10% 5% 0% -5% -10% -15% 3.7% 23.4% -2.8% 23.9% 18.5% 7.9% 16.0% Hurricane Ike 7.4% US HO IL HO -2.6% -7.9% 6.2% 0.2% Average % -7.0% US: 6.6% IL: 4.2% -3.8% -9.6% 8.1% 4.2% % -0.4% Tornadoes Since 2006, in every single year P/C insurer Homeowners profitability in IL was below that of the US overall Sources: NAIC. 42

27 Homeowners: 10-Year Average RNW IL & Nearby States 4.2% 5.8% 7.8% Iowa Wisconsin Illinois -3.3% -0.2% Missouri Indiana -5% 0% 5% 10% Illinois Homeowners profitability is below the US average (6.6%) but in the middle of its regional neighbors Sources: NAIC, Insurance Information Institute

28 Workers Comp 44

29 RNW Workers Comp: IL vs. U.S., % 10% 8% 6% 4% 2% 0% 10.1% 8.1% 9.6% 4.7% 10.0% 1.8% 9.0% 6.8% 5.1% 0.0% Average % US: 7.1% IL: 3.4% 3.9% 6.2% 3.5% 5.9% 5.1% 7.2% 7.5% -2% -4% -1.9% -1.4% US WComp IL WComp In 9 of the 10 years in the decade, P/C insurer Workers Comp profitability in IL was below that of the US overall Sources: NAIC. 45

30 Workers Comp: 10-Year Average RNW IL & Nearby States 9.8% 8.4% 3.7% 3.5% 3.4% Missouri Indiana Iowa Wisconsin Illinois 0% 2% 4% 6% 8% 10% 12% Sources: NAIC, Insurance Information Institute Illinois Workers Comp profitability is below the US average (7.1%) and even with some regional neighbors

31 Summary: 10-Yr Average RNW, NJ vs. US Line IL RNW US RNW PP Auto 8.5% 7.1% Commercial Auto 9.8% 9.2% Commercial M-P 10.3% 8.9% Homeowners 4.2% 6.6% Workers Comp 3.4% 7.1% All Lines 7.7% 7.9% 50

32 UNDERWRITING Underwriting Results in 2015 (and ) Were Helped by Generally Modest Catastrophe Losses Welcome Respites from 2011/

33 Severe Weather Reports, US:. 1 Oct. 13, Source: NOAA Storm Prediction Center;

34 Severe Weather Reports, NJ:. 1 Oct. 13, 2015 There were 549 severe weather reports in IL through Oct 13, 2015: 74 tornadoes; 148 large hail storms; 327 high wind events 53 Source: NOAA Storm Prediction Center;

35 Underwriting Gain (Loss) All Lines Combined, * ($ Billions) $ underwriting profit totaled $12.3B $20 $10 $0 -$10 -$20 -$30 -$40 -$50 -$ E High CAT losses in 2011 led to the highest underwriting loss since Lower CAT losses in 2013, 2014 and modest losses so far in First underwriting profits since Note: Includes mortgage and financial guaranty insurers in all years. Sources: A.M. Best, ISO, Insurance Information Institute. 58

36 P/C Insurance Industry Financial Overview Profit Recovery Was Set Back in 2011 by High Catastrophe Loss & Other Factors 59

37 Net Premium Growth (All P/C Lines): Annual Change, :Q1 (Percent) 25% 20% 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 % 10% 2015:Q1: 4.3% 2014: 4.1% 2013: 4.4% 2012: +4.2% 5% 0% -5% * Shaded areas denote hard market periods Sources: A.M. Best ( ), ISO (2014), Insurance Information Institute (2015:Q1 estimate from SNL data). 60

38 P/C Industry Net Income After Taxes :Q1 $ Millions $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10, ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS 1 = 3.5% 2012 ROAS 1 = 5.9% 2013 ROAS 1 = 10.2% 2014 ROAS 1 = 8.4% $14,178 $5,840 $19,316 $10,870 $20,598 $24,404 $36,819 $30,773 $21,865 $20,559 $3,046 $30,029 $38,501 $44,155 $65,777 $62,496 $3,043 $28,672 $35,204 $19,456 $33,522 $63,784 $55,501 $18,100 $0 -$10,000 -$6, ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for Sources: A.M. Best, ISO; Conning, Insurance Information Institute F

39 Policyholder Surplus, 2006:Q4 2015:Q1E ($ Billions) $750 $650 $550 $450 $487 $497 $513 $ :Q3 Pre-crisis Peak $518 $516 $505 $479 $456 $437 $463 $491 $511 $541 Drop due to near-record 2011 CAT losses $531 $545 $559 $567 $559 $539 $550 $571 $568 $583 $587 $608 $614 $624 $653 $662 $672 $674 $675 $675 $350 06:Q4 07:Q1 07:Q2 07:Q3 Sources: ISO, A.M.Best. 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 The industry now has $1 of surplus for every $0.74 of NPW, close to the strongest claims-paying status in its history. 2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer s investment in a non-insurance business. 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 The P/C insurance industry entered 2015 in very strong financial condition. 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4 15:Q1E 63

40 Investment Performance: a Key Driver of Profitability Depressed Yields Influence Underwriting & Pricing 64

41 U.S. Treasury Security Yields: A Long Downward Trend, * 9% 8% 7% 6% 5% 4% 3% Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade. U.S. Treasury yields plunged to historic lows in Longerterm yields rebounded then sank fell again. 2% 1% 0% Recession 2-Yr Yield 10-Yr Yield '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 Since roughly 80% of P/C bond/cash investments are in 5-to10-year durations, most P/C insurer portfolios will have low-yielding bonds for years to come. *Monthly, constant maturity, nominal rates, through Sept Sources: Federal Reserve Bank at National Bureau of Economic Research (recession dates); Insurance Information Institute. 65

42 Net Yield on P/C Insurer Invested Assets, Year-end :1H 5.0% 4.5% 4.49% 4.20% 4.0% 3.93% 3.73% 3.83% 3.68% 3.65% 3.5% 3.43% 3.14% 3.0% 2.5% :1H From year-end 2007 to 2015:1H, P/C Insurer net yields dropped by 135 basis points. This downtrend is likely to end in 2016 as interest rates rise above current levels and reverse in subsequent years. Sources: NAIC, via SNL Financial; I.I.I. 66

43 Interest Rate Forecasts: Yield (%) 5% 4% 3% 3-Month Treasury 2.7% 3.2% 3.3% 3.4% 3.4% 2.3% 10-Year Treasury 2.9% 3.9% 4.2% 4.3% 4.3% 4.3% 2% 1% 0.2% 1.1% The Fed is expected to begin raising short-term rates in September, but this could slip to late 2015 or even 2016 The end of the Fed s QE program in 2014 and a stronger economy have yet to push longer-term yields higher 0% 15F 16F 17F 18F 19F 20F 21F 15F 16F 17F 18F 19F 20F 21F A normalization of interest rates is unlikely until 2018 or later, a decade after the onset of the Financial Crisis. Sources: Blue Chip Economic Indicators (8/15 for 2015 and 2016; for /15 issue); Insurance Info. Institute. 68

44 Lengths of U.S. Business Cycles, 1945-Present* Duration (Months) Month Recession Started 8 37 Feb Nov Contraction July Aug Apr Expansion following 36 Dec Nov Jul Jul The average length of the 3 most recent expansions is 95 months. Based on recent history, the current expansion isn t likely to continue beyond June * As of October 2015 Sources: National Bureau of Economic Research; Insurance Information Institute. 73 Mar Dec. 2007

45 Insurance Information Institute Online: Thank you for your time and your attention! 70