Mega-Trends Affecting the Workers Compensation Insurance Industry

Transcription

1 Mega-Trends Affecting the Workers Compensation Insurance Industry Challenges Amid the Economic Crisis 6 th Annual National Workers Compensation ExecuSummit Uncasville, CT February 2, 2009 Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212) bobh@iii.org

2 Presentation Outline Economic Factors Affecting Exposure in WC Economic Downturn and Inflation Overall P/C Insurance Industry Performance Cycles Profitability Underwriting Premium Growth Drivers Investment Performance Workers Comp Performance Review Underwriting performance Premium Drivers Frequency & Severity Trends Predictive Modeling and Workers Comp Mega-Trends/Emerging Issues Affecting Workers Comp The Aging Workforce The Obesity Epidemic Other Trends & Concerns Q&A Non-English Speaking Workers

3 THE ECONOMIC STORM What a Weakening Economy & Rising Unemployment Mean for Workers Comp Insurers

4 Real GDP Growth* -3.3% -0.5% -0.8% 0.8% 0.1% 1.6% 0.9% 1.2% 2.5% 3.7% 3.6% 3.1% 2.9% 2.8% 2.2% 2.6% 3.0% 3.3% 3.2% 4.8% 4.8% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.4% Recession began in December Economic toll of credit crunch, housing slump, labor market contraction is growing -0.2% -3.8% :1Q 07:2Q 07:3Q 07:4Q 08:1Q 08:2Q 08:3Q 08:4Q 09:1Q 09:2Q 09:3Q 09:4Q 10:1Q 10:2Q 10:3Q 10:4Q *Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 1/09; Insurance Information Institute.

5 Length of US Recessions, 1929-Present* Months in Duration Current recession began in Dec and is already the longest since If it extends beyond April, it will become the longest recession since the Great Depression Aug May 1937 Feb Nov July 1953 Aug Apr Dec Nov Jan Jul Jul Mar Dec * As of February 2009 Sources: National Bureau of Economic Research; Insurance Information Institute.

6 Workplace Injury Incidence Rates Declined in Last 4 Economic Downturns Incidence Rates per 100 FTE Workers (BLS) Recessions Manufacturing Industry Injuries and Illnesses per 100 Full-Time Workers Private Industry Injuries and Illnesses per 100 Full-Time Workers NCCI Lost-Time Claims per 100,000 Workers p Preliminary Source: US Department of Labor, Bureau of Labor Statistics (BLS), National Bureau of Economic Research; NCCI Frequency and Severity Analysis p Claims per 100,000 Workers (NCCI)

7 Unemployment Rate: On the Rise January 2000 through December Jan-00 Previous Peak: 6.3% in June 2003 Average unemployment rate was 5.0% Jan-01 Jan-02 Jan-03 Unemployment will likely peak above 8% or 9% during this cycle, impacting payroll sensitive p/c and non-life exposures Jan-04 Dec unemployment jumped to 7.2%, exceeding the 6.3% peak during the previous cycle Trough: 4.4% in March 2007 Jan-05 Jan-06 Jan-07 Jan-08 Dec-08 Source: US Bureau of Labor Statistics; Insurance Information Institute.

8 U.S. Unemployment Rate, (2007:Q1 to 2010:Q4F)* 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% Rising unemployment will erode payrolls and workers comp s exposure base. 4.5% Unemployment is expected to peak above 8% in the second half of % 4.6% 4.8% 4.9% 5.4% 6.1% 6.9% 7.4% 7.9% 8.3% 8.4% 8.4% 8.3% 8.2% 8.0% 4.0% 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 * Blue bars are actual; Yellow bars are forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1/09); Insurance Info. Inst.

9 Monthly Change Employment* (Thousands) Job losses in 2008 totaled million, the highest since 1945 at WW II s end; 11.1 million people are now defined as unemployed. The Nov./Dec losses were the largest since May 1980 loss of 431,000, but less than the Dec loss of 602, Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Source: US Bureau of Labor Statistics: Insurance Info. Institute

10 Years With Job Losses: * (Thousands) ,000-1,500-2,000-1,762-1, The US has seen net job losses in only 16 of the 70 years since ,500-3,000-2,750-2,589-2, s job losses were exceeded only by 1945, at the conclusion of WW II Source: Insurance Information Institute research from US Bureau of Labor Statistics data:

11 New Private Housing Starts, F (Millions of Units) Exposure growth forecast for HO insurers is dim for 2009 with some improvement in Impacts also for comml. insurers with construction risk exposure I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers $87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs is estimated at about $1.2 billion E 09F 10F New home starts plunged 34% from ; Drop through 2009 trough is 65% (est.) a net annual decline of 1.35 million units Source: US Department of Commerce; Blue Chip Economic Indicators (1/09); Insurance Information Inst

12 Auto/Light Truck Sales, F (Millions of Units) Weakening economy, credit crunch are hurting auto sales; Gas prices less of a factor now New auto/light trick sales are expected to experience a net drop of 5.7 million units annually by 2009 compared with 2005, a decline of 20.7% Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth than problems in the housing market will on home insurers F 08E 09F 10F Source: US Department of Commerce; Blue Chip Economic Indicators (1/09); Insurance Information Inst

13 Total Industrial Production, (2007:Q1 to 2010:Q4F) 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% 1.5% 07:Q1 Obama stimulus program is expected benefit impact industrial production and therefore insurance exposure both directly and indirectly 3.2% 3.6% 0.3%0.4% Industrial production began to contract sharply during H and is expected to shrink through the first half of :Q2 07:Q3 07:Q4 08:Q1-3.4% 08:Q2-8.9% -8.6% 08:Q3 08:Q4-6.1% 09:Q1-2.6% 09:Q2 0.5% 09:Q3 2.9% 3.3%3.8% 3.7% 2.0% Figures for H2:09 and 2010 revised sharply upwards to reflect expected impact of Obama stimulus program Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1/09); Insurance Info. Inst. 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4

14 Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Wage & Salary Disbursement (Private Employment) vs. WC NWP $ Billions $ Billions 7/90-3/91 3/01-11/01 12/07-? Wage & Salary Disbursements WC NPW Shaded areas indicate recessions * *9-month data for 2008 Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at I.I.I. Fact Books Weakening wage and salary growth is expected to cause a deceleration in workers comp exposure growth $45 $40 $35 $30 $25 $20 $15 $10 $5 $0

15 U.S. $825B Economic Stimulus Package, By Category $300 $200 $100 $214.5 $124.0 I.I.I. Estimate $77.7 $ Billions Every 1 million jobs created or preserved will increase (or preserve) as much as $1 billion in workers comp premium. Obama stimulus target is 3-4 million jobs. $68.4 $49.4 Commercial insurance lines that will benefit from the Obama stimulus plan include workers comp, commercial property, commercial auto, surety, inland marine and others $26.8 $19.2 $0 Public sector jobs and vital services Help workers hurt by the economy Transportation, Infrastructure Education Energy Lower healthcare costs Science, technology Sources: House Appropriations Committee; Wall Street Journal, January 16, 2009

16 Real GDP Growth vs. Real P/C Premium Growth: Modest Association 25% -7.4% -6.5% -0.9% -1.5% -1.6% -1.0% -1.8% -1.0% -0.4% -0.3% -2.9% -0.5% -3.4% -4.9% 5.2% 1.8% 4.3% 0.3% 3.1% 1.1% 0.8% 0.4% 0.6% 1.6% 1.2% 5.8% 5.6% 7.7% 13.7% 18.6% 20.3% 20% 15% 10% 5% 0% -5% -10% P/C insurance industry s growth is influenced modestly by growth in the overall economy 8% 6% 4% 2% F Real NWP Growth Real GDP Growth Real NWP Growth Real GDP 0% -2% -4% Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 8/08; Insurance Information Inst.

17 Total Private Employment* Grew by 25½ Million Workers from 1991 to 2008 Millions The US economy added 25.5 million jobs between 1991 and 2008, but job growth has recently stagnated, impacted payrolls and the workers comp exposure base *seasonally adjusted at mid-year Source: U.S. Bureau of Labor Statistics, at

18 Average Weekly Real Earnings in Private Employment Were Flat from 1999 to 2008 (at mid-year) $290 $259.2 $257.9 $258.3 $260.1 $258.0 $260.7 $264.3 $271.5 $276.1 $279.4 $279.3 $281.2 $276.1 $275.0 $275.1 $276.0 $276.9 $277.3 $280 $270 $260 Virtually all of the real wage growth occurred between 1995 and 1999 and has now stagnated Constant 1982 dollars $ Sources: U.S. Bureau of Labor Statistics; I.I.I.

19 New Private Housing Starts, F (Millions of Units) Exposure growth forecast for HO insurers is dim for 2008/09 Impacts also for comml. insurers with construction risk exposure I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers $87.5 million in new exposure (gross premium). The net exposure loss in 2008 vs is estimated at $971 million New home starts plunged 34% from ; Drop through 2008 trough is 54% (est.) a net annual decline of 1.11 million units F08F 09F 10F11F 12F 13F 14F Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 8/08 edition of BCEF; Insurance Info. Institute

20 Nonresidential Fixed Investment,* F (Billions of 2000 $) Nonresidential Fixed Investment ($ Bill) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $1,082 $1,144 $1,226 $1,307 Sharp dip in business investment growth in will slow commercial exposure growth F 09F $1,368 $1,406 Nonresidential Fixed Investment % Change Nonresidential Fixed Investment *Nonresidential fixed investment consists of structures, equipment and software. Sources: US Bureau of Economic Analysis (Historical), Blue Chip Economic Indicators (7/08) for forecasts. $1,413 8% 7% 6% 5% 4% 3% 2% 1% 0% % Change

21 Total Industrial Production, (2007:Q1 to 2009:Q4F) 4.0% 3.0% 2.0% 1.0% 0.0% 1.5% 3.2% 3.6% Industrial production affects exposure both directly and indirectly 0.3% 0.2% 1.1% 1.7% 2.3% 2.7% 2.8% -1.0% -0.3% -2.0% -3.0% -4.0% -2.7% Industrial production shrank during Q and is expected to shrink again in Q2, growing very slowly thereafter 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/08); Insurance Info. Inst.

22 Medical & Tort Cost Inflation Amplifiers of Inflation, Major Insurance Cost Driver

23 Consumer Price Index for Medical Care vs. All Items, (Base: =100) Index Value ( = Soaring medical inflation is among the most serious long-term challenges facing casualty, disability and LTC insurers Inflation for Medical Care has been surging ahead of general inflation (CPI) for 25 years. Since , the cost of medical care has more than tripled All Items Medical Care Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.

24 Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), * 14% 12% 10% 8% Tort costs move with inflation but at twice the rate Tort System is an Inflation Amplifier Avg. Ann. Change: * Torts Costs: +8.4% Med Costs: +6.0% Overall Inflation: +4.2% 6% 4% 2% 0% Tort Costs Medical Costs CPI *Medical cost and CPI-U from BLS. Tort figure is for full-year 2008 from Tillinghast. Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.

25 Inflation Overview Pressures Claim Costs via Medical and Tort Channels

26 Annual Inflation Rates (CPI-U, %), F Inflation spiked through August 2008 on the strength of a commodities and oil bubble, then dropped rapidly as the recession took hold, depressing demand for most goods and services. Prices in 2009 are actually expected to decline (1) F10F (0.0) Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, January 10, (forecasts)

27 Comparative 2008 Inflation Statistics Important to Insurers ( %) Inflation Rate (%) CPI and Core CPI are not representative of 7.4 many of the costs insurers face Medical/Legal costs typically CPI-U Core CPI* Total Medical Care run well ahead of inflation 2.7 Physician Services Hospital Services 4.0 Legal Services *Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs. Source: US Bureau of Labor Statistics; Insurance Information Institute.

28 P/C INSURANCE FINANCIAL PERFORMANCE A Resilient Industry in Challenging Times

29 P/C Net Income After Taxes F ($ Millions)* $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10, ROE = -1.2% 2002 ROE = 2.2% 2003 ROE = 8.9% 2004 ROE = 9.4% 2005 ROE= 9.4% 2006 ROE = 12.2% 2007 ROAS 1 = 12.3% 2008 ROAS = 1.1%* $14,178 $5,840 $19,316 $10,870 $20,598 $24,404 $36,819 Insurer profits peaked in $30,773 $21,865 $20,559 $3,046 $30,029 $38,501 $44,155 $65,777 $61,940 $5,421 $0 -$10,000 -$6, F *ROE figures are GAAP; 1 Return on avg. surplus numbers are annualized based on 9-mos. Actual of $4.066 billion. 29 Sources: A.M. Best, ISO, Insurance Information Inst.

30 P/C Insurance Industry ROEs, E* 25% 1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2% 20% 10 Years 15% 10% 10 Years 9 Years 5% 0% -5% 1975: 2.4% 2008F: 1.1% 1984: 1.8% 1992: 4.5% 2001: -1.2% Note: 2008 figure is actual 9-month result. Sources: ISO; Insurance Information Institute. 30

31 ROE vs. Equity Cost of Capital: US P/C Insurance: :Q3 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better * *Excludes mortgage and financial guarantee insurers. Source: The Geneva Association, Ins. Information Inst. The p/c insurance industry fell well short of is cost of capital in pts -9.0 pts ROE -1.7 pts The cost of capital is the rate of return insurers need to attract and retain capital to the business +2.3 pts -9.7 pts Cost of Capital 31

32 P/C Insurance Combined Ratio, F* Combined Ratios 1970s: s: s: s: 102.0* F Sources: A.M. Best; ISO, III *A.M. Best year end estimate of 103.2; Actual 9-mos. result was

33 P/C Insurance Industry Combined Ratio, E As recently as 2001, insurers paid out nearly $1.16 for every $1 in earned premiums ratio benefited from heavy use of reinsurance which lowered net losses Best combined ratio since 1949 (87.6) Relatively low CAT losses, reserve releases Cyclical Deterioration Including Mortgage & Fin. Guarantee insurers * 2009F 33 *Includes Mortgage & Financial Guarantee insurers. Sources: A.M. Best.

34 U.S. Insured Catastrophe Losses* $120 $100 $80 $60 $ Billions 2008 CAT losses exceeded 2006/07 combined was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $100 Billion CAT year is coming soon $61.9 $100.0 $40 $20 $0 $ $2.7 $ $22.9 $ $16.9 $ $7.4 $ $10.1 $ $ $ $5.9 $12.9 $ $9.2 $6.7 $ ** *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Based on PCS data through Dec. 31. PCS $2.1B loss of for Gustav. $10.655B for Ike of 12/05/08. 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. Source: Property Claims Service/ISO; Insurance Information Institute 34 20??

35 Commercial Lines Combined Ratio, F Commercial coverages have exhibited significant variability over time Mortgage and financial guarantee may account for up to 4 points on the commercial combined ratio in /07 benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and mortgage and financial guarantee segments have big influence is transition year E 09F Sources: A.M. Best (historical and forecasts)

36 Underwriting Gain (Loss) :Q3* $ Billions Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the second since Cumulative underwriting deficit from 1975 through 2007 is $422 billion. $ Bill underwriting loss in 08:9M incl. mort. & FG insurers Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee 36 insurers

37 Number of Years With Underwriting Profits by Decade, 1920s 2000s Number of Years with Underwriting Profits Underwriting profits were common before the 1980s (40 of the 60 years before 1980 had combined ratios below 100) but then they vanished. Not a single underwriting profit was recorded in the 25 years from 1979 through s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* Note: Data for based on stock companies only. 37 Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.

38 Strength of Recent Hard Markets by NWP Growth 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Shaded areas denote hard market periods Sources: A.M. Best, ISO, Insurance Information Institute Net written premiums fell 1.0% in 2007 (first decline since 1943) and by 0.4% in 2008, the first backto-back decline since

39 Year-to-Year Change in Net Written Premium, E* 8.4% 15.3% 10.0% P/C insurers are experiencing their slowest growth rates since Slow growth means retention is critical Protracted period of negative or slow growth is possible due to soft markets and slow economy 5.0% 3.9% 4.2% 0.5% -1.0% -0.4% F *2008 figure is 9-month actual result from ISO. Source: A.M. Best (historical) 39

40 Distribution of P/C Insurance Industry s Investment Portfolio Portfolio Facts Invested assets totaled $1.3 trillion as of 12/31/07 Insurers are generally conservatively invested, with 2/3 of assets invested in bonds as of 12/31/07 Only about 18% of assets were invested in common stock as of 12/31/07 Even the most conservative of portfolios was hit hard in 2008 As of December 31, 2007 Bonds 66.7% Other 5.9% Common Stock 17.9% Cash & Short- Term Investments 7.2% Real Estate 0.8% Preferred Stock 1.5% Source: NAIC; Insurance Information Institute research;. 40

41 Property/Casualty Insurance Industry Investment Gain: :Q3 1 $60 $50 $40 $30 $20 $10 $0 94 $ $57.9 $56.9 $52.3 $51.9 $42.8 $ $ Billions 01 $ $ $45.3 $48.9 Investment gains are off sharply in 2008 due to lower yields and poor equity market conditions. 04 $59.4 $55.7 $ * $ :Q3 1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B. 41 Sources: ISO; Insurance Information Institute.

42 P/C Insurer Net Realized Capital Gains, :Q3 $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 -$2 -$4 -$6 -$8 -$10 $ Billions $4.81 $2.88 $9.89 $9.82 $1.66 $6.00 $10.81 $9.24 $18.02 $13.02 Realized capital gains exceeded $9 billion in 2004/5 but fell sharply in 2006 despite a strong stock market. Nearly $9 billion again in 2007, but $-9.7 billion in 2008 through Q3. $16.21 $6.63 -$1.21 $6.61 $9.70 $9.13 $3.52 $8.97 -$ Sources: A.M. Best, ISO, Insurance Information Institute :Q3

43 Total Returns for Large Company Stocks: * S&P 500 was down 38.5% in 2008* 35% 25% 15% 5% -5% -15% -25% -35% The market crash of 2008 was the largest since % * 43 Source: Ibbotson Associates, Insurance Information Institute. *Through December 31, 2008.

44 VIX Volatility Index: Stock Market Volatility at Record Highs in 2008* Stock market volatility is at its highest levels since the 1930s, pushing the VIX Volatility Index (a.k.a. Investor Fear Gauge ) to record highs in 2008 VIX Interpretation VIX >30: Extreme Volatility VIX<20: Low Volatility Average: * = F VIX is an indicator of market volatility over the next 30 days Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 *Through December 31, Sources: Chicago Board Options Exchange: 44

45 Workers Compensation Review: Underwriting and Operating Performance

46 Workers Comp Combined Ratios, (Calendar Year, Private Carriers) p Percent WC insurers lopped 30 points off the combined ratio in just 5 years p p Preliminary. Sources: Calendar Years , A.M. Best Aggregates & Averages; Calendar Year 2007p NCCI Includes dividends to policyholders

47 Percent WC Calendar Year Combined Ratio On the Rise Again? Private Carriers 1.9% Due to September 11 Loss LAE Underwriting Expense Dividends p P = Preliminary Calendar Year Source: , Best's Aggregates & Averages; 2007p, NCCI

48 Workers Comp Combined Ratios, F* Percent Workers Comp Calendar Year vs. Ultimate Accident Year Private Carriers A.M. Best expects 2008 combined ratio to rise by 2.5 points E 08F Calendar Year Accident Year p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2007 and developed to ultimate Source: Calendar Years , A.M. Best Aggregates & Averages; Calendar Year 2007p and Accident Years pbased on NCCI Annual Statement Analysis. Includes dividends to policyholders *2008 figure from A.M. Best.

49 California Workers Compensation CY Combined Loss and Expense Ratios 180 Percent As of December 31, * * 2007 Combined Loss and Expense Ratio is preliminary Data includes State Compensation Insurance Fund Source: WCRIB California via NCCI Calendar Year

50 California Workers Compensation AY Combined Loss and Expense Ratios Percent As of December 31, Other Expenses LAE Losses * * 2007 Other Expenses are preliminary Data includes State Compensation Insurance Fund Source: WCIRB California Accident Year * 14 48

51 Calendar Year Reserve Deficiencies Continue to Decline 30 $ Billions WC Loss and LAE Reserve Deficiency: Private Carriers Tabular Discount Is $5.5 Billion Calendar Year Considers all reserve discounts as deficiencies Loss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selections Source: NCCI analysis

52 Workers Comp Pre-Tax Operating Gain Ratio: Strong But Slipping? Percent * 91* p Calendar Year *Adjusted to include realized capital gains to be consistent with 1992 and after. Sources: , Best s Aggregates and Averages; 2007p, NCCI

53 WC Investment Income Has Been Less Helpful Lately in Producing Profits Pre-Tax Operating Gain Ratio Adjusted Combined Ratio* 25% 20% 15% 10% As u/w results strengthened, investment results weakened, producing only a modest operating gain ratio 5% 0% -5% p -10% -15% -20% -25% * Adjusted Combined Ratio (ACR) translates combined ratio into typical percentage terms. For example, a combined ratio of becomes a -7.0% ACR. Source: NCCI

54 Workers Comp Cost Drivers Medical/Indemnity Frequency & Severity Trends

55 Workers Compensation Medical Claim Trends

56 Workers Comp Medical Claims Costs Continue to Climb Medical Claim Cost ($000s) $25 $20 $15 $10 Annual Change : +1.9% Annual Change : +8.9% Annual Change : +7.8% $8.4 $8.5 $8.3 $11.3 $12.2$13.5 $9.1 $9.5$10.3 $14.5 $16.5 $17.7$19.0 $24.0 $25.4 $22.1 $20.2 Cumulative Change = +200% ( p) $ p Accident Year 2007p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2006, developed to ultimate Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

57 WC Medical Severity Rising at Double the Medical CPI Rate 16% 14% 12% 10% 8% 6% 5.1% 7.4% 10.1% 8.3% 10.6% 7.3% 13.6% Average annual increase in WC medical severity from 1995 through 2007 was more than twice the medical CPI rate (8.2% vs. 4.0%) 7.6% 7.2% 6.2% 9.2% 8.6% 6.0% 4% 2% 0% 4.5% 3.5% 2.8% 3.2% 3.5% 4.1% 4.6% 4.7% 4.0% 4.4% 4.2% 4.0% 4.4% Change in Medical CPI Change Med Cost per Lost Time Claim p Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

58 Med Costs Share of Total Costs is Increasing Steadily 2007p 1997 Indemnity 41% 1987 Indemnity 47% Medical 53% Medical 59% Indemnity 54% Medical 46% Source: NCCI (based on states where NCCI provides ratemaking services).

59 WC Med Cost Will Equal 70% of Total by 2017 if Trends Hold 2017 Estimate Indemnity 30% Medical 70% This trend will likely be supported by the increased labor force participation of workers age 55 and older. Source: Insurance Information Institute.

60 Indemnity Claim Cost Trends

61 Workers Compensation Indemnity Claim Costs Growth Is Moderate Indemnity Claim Cost ($ 000s) Lost-Time Claims $9.9 Annual Change : -1.7% Annual Change : +7.3% Annual Change : +3.1% +1.0% -3.1%-2.8% +4.9%+1.7% +5.9%+7.7% $9.6 $9.4 $9.8 $10.0 $10.6 $ % +9.0% $12.4 $ % $ % +5.0% +2.7% +1.1% +8.9% +2.3%+4.5% $16.4 $16.8 $17.5 $17.7 $18.2 $19.1 $ p 2007p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2006, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Accident Year

62 Workers Comp Indemnity Claims Cost Growth Has Moderated Recently Indemnity Claim Cost (000s) $21 $19 $17 $15 $13 $11 $9 $7 $5 Annual Change : -1.7% Annual Change : +7.3% Annual Change : +3.1% $9.9 $9.6 $9.4 $9.8 $10.0 $10.6$11.4 Lost-Time Claims $15.0 $13.7 $12.4 $16.4 $16.8$17.5 $17.7 $18.2 $19.1 $ p Accident Year 2007p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2006, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI Cumulative Change = % ( p)

63 WC Indemnity Severity vs. Wage Inflation 12% 10% 8% Change in CPS Wage 7.7% 10.1% 9.0% 10.9% Change in Indemnity Cost per Lost-Time Claim 9.7% WC indemnity severity is once again outpacing wage inflation 6% 4% 2% 5.9% 3.0% 4.3% 3.0% 1.7% 5.0% 4.4% 5.2% 4.4% 5.5% 4.8% 4.0% 3.0% 2.4% 1.9% 2.4% 2.4% 2.8% 3.4% 3.3% 2.0% 0% p 2006p: Preliminary based on data valued as of 12/31/2006; : Based on data through 12/31/2005, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey. Source: NCCI

64 Residual Market Overview

65 WC Residual Market Shares Continue to Decline Percent Workers Compensation Insurance Plan States* Premium as a Percentage of Direct Written Premium p p Preliminary NCCI Plan states plus DE, IN, MA, MI, NJ, NC Source: NCCI Calendar Year

66 WC Residual Market Combined Ratios Percent NCCI-Serviced Workers Compensation Residual Market Pools as of December 31, * Policy Year * Incomplete Policy Year Projected to Ultimate Source: NCCI

67 Workers Compensation Residual Market Premium Volume Declines $ Billions NCCI-Serviced Workers Compensation Residual Market Pools as of December 31, * 2006 * Incomplete Policy Year Projected to Ultimate Source: NCCI Policy Year

68 Workers Compensation Residual Market Underwriting Results NCCI-Serviced Workers Compensation Residual Market Pools as of December 31, 2007 $ Millions , ,500-1,396-1,222-2,000-2, * ,807-1,714-1,906-2,087 * Incomplete Policy Year Projected to Ultimate Source: NCCI Policy Year

69 Residual Markets Are Depopulating in Most States First Quarter 2008 vs. First Quarter 2007 Size of Risk Change $ 0 $ 2,499 36,146 32,868-9% $ 2,500 $ 4,999 5,064 4,458-12% $ 5,000 $ 9,999 3,332 3,092-7% $ 10,000 $ 49,999 3,187 2,682-16% $ 50,000 $ 99, % $ 100,000 and over % Total 48,275 43,489-10% Total number of assigned risk policies in force Includes residual market policies for: AK, AL, AR, AZ, CT, DC, GA, ID, IL, IA, IN, KS, MS, NV, NH, NM, OR, SC, SD, VT, VA Source: NCCI

70 Investment Performance

71 Workers Compensation Investment Returns Remain Below Historical Average Percent 25 Investment Gain on Insurance Transactions-to-Premium Ratio Private Carriers Average ( ): 15.3% *1991* p Calendar Year p Preliminary * Adjusted to include realized capital gains to be consistent with 1992 and after Investment Gain on Insurance Transactions includes Other Income Source: , Best's Aggregates & Averages; 2007p, NCCI

72 Premium Growth & Pricing Environment

73 Total Workers Compensation Premium Declined Again in 2007 $ Billions State Funds ($ B) Private Carriers ($ B) Net Written Premium p Preliminary p Calendar Year Source: Private Carriers, A.M. Best Aggregates & Averages; 2007p, NCCI p State Funds: AZ, CA, CO, HI, ID, KY, LA, MO, MT, NM, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent

74 History of Average WC Bureau Rate/ Loss Cost Level Changes Percent Cumulative % Cumulative % Cumulative % Cumulative % * 2008* Calendar Year * States approved through 4/11/2008 Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization

75 Average Approved Bureau Rates/Loss Costs Percent All States All States Ex CA All States vs. All States Excluding California Cumulative % All States 6.1% All States Ex CA * 2008* Calendar Year * States approved through 4/11/2008 Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization Source: NCCI

76 Current NCCI Voluntary Market Filed Rate/Loss Cost Changes Percent Excludes Law-Only Filings HI FL AR AK NV MO AL CO LA UT DC TN RI KY NM MS VT NE ID NH OR ME MT MD WVSD IA IN NC VA GA CT IL AZ KS OK SC Effective Dates 1/1/08 and Prior Effective Dates Subsequent to 1/1/08 Filed and Pending States filed through 4/18/2008 Source: NCCI

77 Impact of Discounting on Workers Compensation Premium Percent NCCI States Private Carriers p Rate/Loss Cost Departure Schedule Rating Dividends Policy Year p Preliminary NCCI benchmark level does not include an underwriting contingency provision Dividend ratios are based on calendar year statistics Based on data through 12/31/2007 for the states where NCCI provides ratemaking services Source: NCCI

78 According to Goldman Sachs, Most Survey Respondents See Declining WC Prices Agent Responses on Policy Renewal Premiums vs. 12 Months Prior Percentage of Respondents Down 21%+ Down 11 20% Down 1 10% No Change Up 1 10% Up 11%+ 0.0 January 2006 January 2007 January 2008 Source: Goldman Sachs Research, Independent Insight US Insurance: Non-Life, Proprietary Survey (Exhibit 8, Workers Compensation, Percentage of Respondents)

79 Alternative Risk Transfer Market Saps Traditional WC Carriers $ Billions Property, 10% Automobile, 12% Source: MarketStance. Workers Comp, 43% Workers Comp account for the largest share of the alternative market, particularly captives Liability (excl. Auto), 35%

80 FREQUENCY & SEVERITY TRENDS

81 Injury & Fatality Incidence Rates and Claim Cost Trends

82 Rate of Work-Related Injuries Decreases Over Time Due to Improved Working Conditions Rate of Injury per 100 FTE Workers Private Industry Injuries and Illnesses per 100 Full-Time Workers Manufacturing Industry Injuries and Illnesses per 100 Full-Time Workers Source: US Department of Labor, Bureau of Labor Statistics; NCCI

83 Workers Comp Lost-Time Claim Frequency Down More than 50% Since 1991 Percent Change Lost-Time Claims 0.5 Cumulative Change of 53.3% since 1991 means that lost work time claims have been cut by more than half p Accident Year 2007p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI

84 : Claim Frequency Declined for All Injury Types Other Than Permanent Total % 4% -27% -40% % Fatal Permanent Total Permanent Partial Temporary Total Lost-Time 0.00 Percentage Change Between Policies Expiring in 1997 and 2006 Claim Frequency per $1M of Wage-Adjusted Payroll All NCCI states except NV and TX Source: NCCI Unit Statistical Plan data, First Report

85 Lost-Time Claim Frequency Declined for All Industry Groups Percentage Change Between Policies Expiring in 2002 and 2006 Claim Frequency per $1M of Wage-Adjusted Payroll % -19% -20% -18% -14% Manufacturing Contracting Office & Clerical Goods & Services Miscellaneous All NCCI states except NV and TX Source: NCCI Unit Statistical Plan data, First Report Source: NCCI

86 Permanent Total Claim Frequency by Industry Group Percentage Change Between Policies Expiring in 2002 and 2006 Claim Frequency per $1M of Wage Adjusted Payroll % 20% -8% 12% 40% Manufacturing Contracting Office & Clerical Goods & Services Miscellaneous 2006 All NCCI states except NV and TX Source: NCCI Unit Statistical Plan data, First Report Source: NCCI

87 WHY YOU SHOULD FEEL GOOD ABOUT WHAT YOU DO Saving Lives, Increasing Productivity and Much More It s Not Just About the Money

88 Did You Know That When You Prevent a Workplace Injury You Keeping Workers Comp Costs Down is Just the Beginning You Help Companies Remain Productive 1 Permanently Disabling Injuries 565 Lost Future Work Days on Avg. Fatal Injuries 5,850 Lost Future Work Days on Average You Increase/Preserve Worker Incomes Seriously Injured Workers Have Lower Lifetime Earnings, on Average Reduced Likelihood of Filing Bankruptcy Less Likely to Need Public Assistance You Maintain/Improve the Quality of Worker s Home Life Higher Incidence of Divorce, Substance Abuse, Depression Among Seriously Injured ALL REASONS TO BE PROUD OF WHAT YOU DO!! 1 US Census Bureau:

89 Workers Comp Lost-Time Claim Frequency Down More than 50% Since 1991 Percent Change Lost-Time Claims 0.5 Cumulative Change of 53.3% since 1991 means that lost work time claims have been cut by more than half p Accident Year 2007p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI

90 Number of Fatal Work Injuries is Continues to Fall, p 6,800 6,600 6,400 6,200 6,000 5,800 5,600 5,400 5,200 6,217 6,331 6,632 6,275 6,202 6,238 Workers comp insurers & the entire workplace safety community have contributed to the 17% decline in workplace fatalities since ,055 6,054 5, * p Source: US Bureau of Labor Statistics, US Department of Labor; III. *Excludes 9/11 deaths. 5,920 5,915 5,534 5,575 5,764 5,734 5,840 5,488

91 Rate of Fatal Work Injuries Continues to Drop, p Fatal Work Injuries per 100,000 Workers Fatality rates are down 22.2% since 1994 better than the 17% decline in the number of on the job fatalities * p Source: US Bureau of Labor Statistics ; Insurance Information Institute. *Excludes 9/11 deaths.

92 Workplace Deaths Rising Slowly ( ) After Steep Fall ( ) 6,800 6,600 6,632 Number of deaths grew 1.4% per year since ,400 6,200 6,000 5,800 6,331 6,217 6,275 6,202 6,238 6,055 6,054 5,920 5,915 5,764 5,734 5,840 5,600 5,400 5,534 5,575 5,488 5, p Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

93 Rate of Work Fatalities at Historically Low Level Fatal Work Injuries per 100,000 Workers Fatality rates are down 26.4% since 1994 nearly double the 14% decline in the number of on the job fatalities Source: US Bureau of Labor Statistics ; Insurance Information Institute.

94 2,000 1,800 1,600 1,400 1,200 1, Lives Saved Due to Reduction in Fatal Work Injury Rate, Reduction in Occupational Deaths Due to Fall in Fatality Rate from 5.3 per 100,000 Workers in 1994 to 4.0 in 2006 Workers comp insurers are a major force in saving worker lives ,077 1,210 1,382 1,757 1,758 1,623 Nearly 2,000 work lives are saved annually due to improved workplace safety! 1,898 1, Source: Insurance Information Institute from BLS data.

95 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Cumulative Lives Saved Due to Reduction in Fatal Work Injury Rate Cumulative Lives Saved Due to Fall in Fatality Rate from 5.3 per 100,000 Workers in 1994 to 4.0 in Since 1994, nearly 15,000 worker lives have been saved due to improved workplace safety! 6,055 4,673 3,463 2,385 1, ,811 9,569 11,192 12,909 Saving a Life, Saves a Family 14, Source: Insurance Information Institute from BLS data.

96 Four Most Frequent Work- Related Fatal Events, ,496 1,3431,3461,346 1,3931,442 1,365 1,409 1,373 1,353 1,398 1,437 1,356 1,242 1,158 1,0741,080 1,044 1, Work-related homicides dropped 50% since Highway deaths still #1 killer Struck by Object Falls Homicides Highway Incidents Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

97 EMERGING TRENDS & CHALLENGES IN WORKERS COMP

98 #1 Emerging (Mega) Trend The Obesity Epidemic

99 What Do We Mean by Obesity and How Do We Measure It? Definitions: Obesity Having a very high amount of body fat in relation to lean body mass Body Mass Index of 30 or higher Body Mass Index (BMI) A measure of an adult s weight in relation to his or her height, Specifically, the adult s weight in kilograms divided by the square of his or her height in meters Source: Centers for Disease Control and Prevention.

100 BMIs for Various Heights and Weights BMI=25 BMI=30 BMI=35 BMI=40 Weight (lbs) Obesity is defined as a BMI > Height (inches)

101 Obesity Trends* Among U.S. Adults BRFSS, 1990, 1998, 2006 (*BMI 30, or about 30 lbs. overweight for 5 4 person) No Data <10% 10% 14% 15% 19% 20% 24% 25% 29% 30%

102 In Every State (except Colorado), Over 20% of the Adult Population is Obese Source: Centers for Disease Control and Prevention, Behavioral Risk Factor Surveillance System

103 For Analysis Purposes, We Create BMI Categories BMI Categories Underweight: BMI <18.5 Healthy Weight: BMI= Overweight: BMI= Obese Class I BMI= Class II BMI= Class III BMI>40.0

104 The Most Obese Workers File Twice as Many WC Claims as Healthy-Weight Workers Lost Workdays per 100 FTEs The most obese have 13 times more lost workdays than healthy weight workers! BMI <18.5 (Underweight) (Healthy Weight) (Overweight) Lost Workdays (Obese (Obese Class I) Class II) Claims (Obese Class III) Source: Ostbye, T., et al, Obesity and Workers Compensation, Archives of Internal Medicine, April 23, Claims per 100 FTEs

105 WC Medical Claims Costs are 6.8x Higher for the Most Obese Workers $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $7,109 $3,924 Indemnity costs are 11 times higher for the most obese workers than for healthyweight workers. $7,503 $5,396 $13,338 $13,569 $19,661 $23,633 $23,373 $34,293 $51,091 $59,178 $0 BMI <18.5 (Underweight) (Healthy Weight) (Overweight) (Obese Class I) (Obese Class II) 40+ (Obese Class II) Medical Claims Costs Indemnity Claims Costs Source: Ostbye, T., et al, Obesity and Workers Compensation, Archives of Internal Medicine, April 23, 2007.

106 It s Not All Because of Obesity: Confounding Factors Some people with high BMI also have other characteristics that contribute to disability and/or death. They Smoke and/or regularly drink alcohol heavily Are older and/or male Have chronic diseases (e.g., diabetes, heart disease) Have other conditions/circumstances (e.g., no health insurance, don t exercise) that are related to poor health Failure to adjust for these confounding factors likely results in overstating the effect of obesity. Source: Flegal, Graubard, Williamson, and Gail, Excess Deaths Associated with Underweight, Overweight, and Obesity, JAMA Vol. 293, No. 15 (April 20, 2005) pp

107 Relative* Death Risk for Never- Smokers by BMI and Age Category Relative Risk For never-smokers, the relative death risk appears to be highest for ages whose BMI is either under 18.5 or over The pattern including smokers is similar BMI <18.5 (Underweight) (Healthy Weight) *Compared to people with BMI of (Overweight) (Obese Class I) >70 Source: Flegal, Graubard, Williamson, and Gail, Excess Deaths Associated with Underweight, Overweight, and Obesity, JAMA Vol. 293, No. 15 (April 20, 2005) pp