Alabama Homeowners Insurance:

Transcription

1 Alabama Homeowners Insurance: History and Trends for Catastrophic Loss and Impacts on Profitability Governor s Affordable Homeowners Insurance Commission Montgomery, AL December 12, 2011 Download at Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell: bobh@iii.org

2 Presentation Outline Catastrophe Loss Analysis for Alabama Insurance Markets Total Losses vs. Homeowners Insurance Line Claim Values and Claim Counts 2011 Catastrophe Claim Analysis Analysis Federal Disaster Declarations: Alabama s Long-Run Catastrophe Exposure History Spring 2011 Tornado and Severe Story Summary Quantification of Alabama s Coastal Exposure Problem Profitability and Performance in Alabama s Insurance Markets Homeowners Insurance: Return on Net Worth, Loss Ratios & Premium Growth Catastrophe Insurance Markets: Alabama Impacts World Markets Global & US Catastrophe loss Trends Reinsurance Market Overview Higher Catastrophe Losses Can Pressure Pricing Property/Casualty Insurance Markets & Catastrophic Loss Profitability Underwriting Performance Capital, Capacity and Financial Strength Q&A 2

3 Summary of Key Points Between 1998 and 2011, Insured Catastrophe Losses Across the State of Alabama Totaled $8.4 Billion Arising from Nearly 1.1 Million Claims Home/Condos/Renters policies accounted for 67% ($5.6 bn) of dollars paid and 73% of the total number of claims; Commercial property accounts for the remainder Was the Worst Year in AL History for Catastrophe Losses Insured catastrophe losses totaled $3.2 bn arising from nearly 175,000 claims Homeowners losses accounted for $1.826 bn (66%) of the total from 114,200 claims Homeowners losses paid exceeded estimated premiums collected of by more than $400 million in 2011 The average cost of a homeowners catastrophe claim reached a record $15,989 in 2011 Alabama s Homeowners Insurance Market is Unprofitable Return on Net Worth (RNW) from average -5.6% RNW from averaged -7.9%, ranking the state 43 rd out the 50 states Inclusion of the 2011 storms could make AL close to the least profitable state AL Has the 7 th Highest Total Federal Disaster Declarations Since 1953 April 2011 Tornadoes Were the Most Expensive/Deadly in US History Aggregated, this year s spring storms are the 5 th largest insurance loss in US history AL Losses Have Impacted Overall US and Global (Re)Insurance Markets 3

4 Insured Catastrophe Analysis for Alabama Insurance Markets: Focus on Homeowners Claims Alabama Has a Long History of Experience of Catastrophic Loss; Loss Data Are Trending Adversely 4

5 2011 Catastrophe Losses in Alabama s Homeowners Market Dwarf Premiums Paid ($ Billions) $1.9 $1.8 $1.7 $1.6 $1.5 $1.4 $1.3 $1.2 $1.1 Catastrophe losses paid to homeowners in AL are estimated to exceed premiums collected for the line by $437 million or 31.5% in 2011 $1.389 $1.826 $ Homeowners Insurance Direct Premiums Written* 2011 Insured Homeowners Catastrophe Losses Insurers ROE in the AL Homeowners Line in 2011 Will be Negative by Several Hundred Percent Sources: Homeowners DPW for AL is III estimated based on assumed 5% growth over 2010 actual of $1.323 bn.; Catastrophe loss data is from PCS as of Dec. 7,

6 Value of Insured Catastrophe Losses in Alabama, by Segment, * $1,826 $1,331 ($ Millions) $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Commercial Lines Homeowners From insurers paid $8.4 billion to nearly 1.1 million AL victims of catastrophes for damage to their homes and businesses $225 $33 $91 $100 $125 $ set a new record for catastrophe losses at $3.157 billion. 58% ($1.826B) of the losses paid went to homeowners, 42% to businesses $1,775 $1,478 $197 $200 $206 $512 $3, Alabama is No Stranger to Catastrophe, but 2011 Was Far More Devastating Than Any Year in History $76 *Data are current through Dec. 7, Source: PCS unit of ISO; Insurance Information Institute. 6

7 Number of Insured Catastrophe Claims in Alabama, by Segment, * 114,200 60,250 Number of Claims 250, ,000 Commercial Lines Personal Lines 226, was the costliest year on record and ranked 3 rd in terms of number of claims paid at 174,450. Nearly twothirds (114,200) of the claims paid were to homeowners, 1/3 to businesses 179, , , , , ,700 50, ,900 32,000 18,805 26,300 12,400 53,750 21,500 16, $76 Insurers in Alabama Paid More than 55,000 Catastrophe Claims on Average Annually Between 1998 and 2011, Most to Homeowners *Data are current through Dec. 7, Source: PCS unit of ISO; Insurance Information Institute. 7

8 Value of Alabama Insured Catastrophe Losses: Homeowners, * ($ Millions) $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 From insurers paid $5.6 billion to nearly 775,000 AL victims of catastrophes for damage to their homes $163 $24 $ homeowners claims set a new record at $1.826 billion in 2011 $53 $93 $90 $1,500 $944 $134 $140 $151 $380 $1, Insurers Paid an Average of $400 million per Year to More than 55,000 Homeowners in Alabama from $37 *Data are current through Dec. 7, Source: PCS unit of ISO; Insurance Information Institute. 8

9 14,355 8,500 23,000 19,000 9,000 30,000 31,500 14,200 4, ,200 96,500 83, , ,000 Number of Homeowners Catastrophe Losses Paid by Insurers in AL, * (Number of Claims Paid) 250, , saw the 3 rd largest number of homeowners claims since 1998 even though 2011 was the costliest year ever ($1.826 Bill) claims were more than double the 55,000 annual average since , ,000 50, * Insurers in Alabama Paid Nearly 775,000 Catastrophe Claims Between 1998 and 2011 to Homeowners Across the State *Data are current through Dec. 7, Source: PCS unit of ISO; Insurance Information Institute calculations. 9

10 2011 Catastrophic Homeowners* Claim Activity in Alabama, by Event** Date Perils Avg. Pmt $ Total $ Pd. # Claims HO $ % HO # % Event Total 2011:Q1 Total Event Total Event Total 2011 has been the most expensive in history for insured catastrophe losses paid to Alabama homeowners. Payments totaled $1.826 billion arising from 114,200 claims Event Total 2011:Q2 Total Event Total 2011:Q3 Total 2011 YTD Totals **Through Dec, 7, Source: PCS Division of ISO. *Includes all categories of dwelling policies, such as home, condo and renters policies 10

11 $1,687 $1,686 $2,304 $3,000 $6,118 $4,895 $4,254 $4,578 $7,500 $7,416 $10,648 $9,250 $15,556 Average Value of Insured Homeowners Catastrophe Loss Claims in AL, * (Cost of Average Personal Lines Claim $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 The average homeowners catastrophe claim reached a new record of $15,989 in 2011, more than double the average of $6,069 (+163%) from $15, * Insured Catastrophe Losses to Homes in Alabama Are Volatile and Are Trending Upward *Data are current through Dec. 7, Source: PCS unit of ISO; Insurance Information Institute calculations. 11

12 Cumulative Value of Catastrophe Losses Paid by Insurers in Alabama, * $225 $258 $349 $449 $574 $759 $2,534 $4,012 $4,209 $4,409 $4,614 $5,126 $5,202 ($ Millions) $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Insurers have paid nearly $8.4 billion on almost 1.1 million catastrophe claims in Alabama since The trend in catastrophe losses began to accelerate in $8, * Catastrophe Losses in Alabama Are High Relative to the Size of the State s Economy and Population *Data are current through Dec. 7, Source: PCS unit of ISO; Insurance Information Institute calculations. 12

13 115, , , , , , , , , , ,525 1,057, , ,275 Cumulative Number of Catastrophe Losses Paid by Insurers in Alabama, * (Number of Claims Paid) 1,200,000 1,000,000 Insurers have paid nearly 1.1 million catastrophe claims in Alabama valued at nearly $8.4 billion since The trend in catastrophe losses began to accelerate in , , , , * The Number of Catastrophe Losses in Alabama Is High Relative to the Size of the State s Economy and Population *Data are current through Dec. 7, Source: PCS unit of ISO; Insurance Information Institute calculations. 13

14 Distribution of Catastrophe Insured Claims in AL, by Segment, * Value of Claims Paid Number of Claims Paid Homeowners 66.8% ($5.59 Bill) Commercial 33.2% ($2.77 Bill) Homeowners 73.2% (774,555 Claims) Commercial 26.8% (283,170 Claims) 2/3 of the catastrophe claim dollars paid since 1998 were for damage to homes *Data are current through Dec. 7, Source: PCS unit of ISO; Insurance Information Institute calculations. Nearly 3/4 of the catastrophe claims paid since 1998 were for damage to homes 14

15 Federal Disaster Declarations: Trending Adversely Alabama Has the 7 th Highest Number of Federal Disaster Declarations From

16 Number of Federal Disaster Declarations, * * There have been 2,048 federal disaster declarations since The average number of declarations per year is 34 from , though that few haven t been recorded since The number of federal disaster declarations set a new record in 2011, with 98 declarations through Dec The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011 *Through December 11, Source: Federal Emergency Management Administration: ; Insurance Information Institute.

17 Federal Disasters Declarations by State, 1953 Dec. 11, 2011: Highest 25 States Disaster Declarations Over the past nearly 60 years, Texas has had the highest number of Federal Disaster Declarations AL has had 55 federal disaster declarations since 1953, nearly one per year, and has had 1 so far in 2011 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 Source: FEMA: Insurance Information Institute. 17

18 Disaster Declarations Federal Disasters Declarations by State, 1953 Dec. 11, 2011: Lowest 25 States* Over the past nearly 60 years, Wyoming, Utah and Rhode Island had the fewest number of Federal Disaster Declarations ME SD GA AK WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC RI UT WY *Includes Puerto Rico and the District of Columbia. Source: FEMA: Insurance Information Institute. 18

19 Number of Federal Disaster Declarations In Alabama, * * There have been 55 federal disaster declarations in AL since The average number of declarations per year is 0.9 from , though the number has been higher in recent years The one federal disaster declaration in 2011 was associated with the severe tornado and severe storm outbreak in April The Number of Federal Disaster Declarations Spike in 2009 Was the Highest Ever, Mostly Associated with Tornadoes, Severe Storms, Straight Line Winds, Floods and Tropical Storm Ida *Through December 11, Source: Federal Emergency Management Administration: ; Insurance Information Institute.

20 Number of Tornadoes Number of Tornadoes and Related Deaths, * 1,133 1,132 1,297 1,173 1,082 1,234 1,173 1,148 1,424 1,345 1,071 1, ,376 1,264 1,103 1,098 1,692 1,156 1,282 1,880 Number of Deaths 2,000 1,800 1,600 Number of Tornadoes Number of Deaths Tornadoes have already claimed more than 500 lives 1, ,400 1, , There were 1,880 tornadoes recorded in the US by Dec P Insurers Expect to Pay Approximately $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin 0 *2011 is preliminary data through December 4. Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service. 21

21 Location of Tornadoes in the US, January 1 December 5, ,880 tornadoes killed 546 people through Dec. 5, including at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in Joplin on May 22 Source: NOAA Storm Prediction Center; 23

22 Tornado Tracks by Enhanced Fujita (EF) Scale, January July 2011 Alabama averaged 59 tornadoes per year from , but 128 from Jan. July 2011, the highest in the country AL had the highest concentration of EF-3, 4 and 5 storms in 2011 Source: NOAA at: 24

23 Average Number of Tornadoes per Year, Alabama averaged 59 tornadoes per year from Source: NOAA at 25

24 Tornado by County, AL is quite vulnerable to tornadoes Source: NOAA at 26

25 Tornado Tracks by EF Scale, Alabama has experiences every strength of tornado, including EF-5 storms Source: NOAA at: 27

26 Location of Large Hail Reports in the US, January 1 December 5, 2011 There were 9,413 Large Hail reports through Dec. 5, causing extensive damage to homes, businesses and vehicles Source: NOAA Storm Prediction Center; 28

27 Location of Wind Damage Reports in the US, January 1 December 5, 2011 There were 18,580 Wind Damage reports through Dec. 5, causing extensive damage to homes and, businesses Source: NOAA Storm Prediction Center; 29

28 Severe Weather Reports, January 1 December 5, 2011 There have been 29,885 severe weather reports through Dec. 5; including 1,881 tornadoes; 9,413 Large Hail reports and 18,580 high wind events Source: NOAA Storm Prediction Center; 30

29 Number of Severe Weather Reports in US, by Type: January 1 December 5, 2011 Tornadoes, 1,885, 6% Large Hail, 9,413, 32% Wind Damage, 18,580, 62% Tornadoes accounted for just 6% of all Severe Weather Reports through October 13 but more than 500 deaths Source: NOAA Storm Prediction Center;

30 Alabama s 2011 Severe Loss Summary Tornadoes, Hail and Severe Thunderstorms Took their Toll 32

31 Severe Weather Reports in Alabama, January 1 December 5, 2011 There were 1,288 severe weather reports in AL through Dec. 5 ALABAMA Total Reports = 1,288 Tornadoes = 170 (Red) Hail Reports = 217 (Green) Wind Reports = 901 (Blue) Source: NOAA Storm Prediction Center; 33

32 Insurers Making a Difference in Impacted Communities Destroyed home in Tuscaloosa. Insurers will pay some 133,000 claims totaling $3 billion across AL for Q2 damage, concentrated in the Tuscaloosa/ Birmingham areas Presentation of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm Recovery Fund Source: Insurance Information Institute 34

33 Coastal Exposure in Alabama Remains a Primary Concern Alabama s Coastal Exposure Is Considerable Despite Its Small Coast 35

34 Total Value of Insured Coastal Exposure in 2007 ($ Billions) Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $92.5 $85.6 $60.6 $51.8 $54.1 $14.9 $224.4 $191.9 $158.8 $146.9 $132.8 $55.7 $479.9 $635.5 $772.8 $895.1 Even though Alabama s coast is small, the total value of insured coastal exposure was $92.5 billion in 2007 $2,458.6 $2,378.9 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Source: AIR Worldwide

35 Insured Coastal Exposure As a % Of Statewide Insured Exposure In 2007 Florida Connecticut 64.0% 79.0% New York 62.0% Maine 59.0% Massachusetts 54.0% Delaware 36.0% Louisiana 35.0% New Jersey 34.0% Rhode Island 29.0% S. Carolina Texas NH Mississippi Alabama Virginia NC 13.0% 12.0% 11.0% 9.0% 28.0% 26.0% 23.0% Even though Alabama s coast is small, coastal exposure accounts for 12.0% of all insured exposure in the state Georgia 5.0% Maryland 1.0% 0% 20% 40% 60% 80% 100% Source: AIR Worldwide

36 Value of Insured Residential Coastal Exposure In 2007 ($ Billions) Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Maine North Carolina Virginia Alabama Georgia Delaware Rhode Island New Hampshire Mississippi Maryland $96.9 $90.1 $81.1 $78.4 $72.6 $46.5 $38.1 $36.7 $31.9 $30.8 $25.7 $7.2 $388.3 $373.0 $319.5 $250.8 $660.4 Residential coastal exposure totaling $46.5 bill in Alabama accounts for about half the $92.5 billion in total coastal exposure $1,238.6 Source: AIR Worldwide $0 $200 $400 $600 $800 $1,000 $1,200 $1,400

37 Population Growth Projections for Hurricane Exposed States (2000 to 2030) (000) Florida Texas North Carolina Georgia Virginia New Hampshire Maryland Delaware South Carolina Hawaii New Jersey Maine Massachusetts Rhode Island Alabama Mississippi Connecticut Louisiana New York , , , , , ,746.5 By 2030, Alabama is expecting a population increase of 427,000 12, , ,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Source: U.S. Census Bureau, accessed at

38 Value Of Insured Commercial Coastal Exposure 2007 ($ Billions) New York Florida Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Georgia Alabama Mississippi New Hampshire Delaware Rhode Island Maryland $506.8 $399.8 $316.0 $229.1 $127.5 $101.8 $86.2 $65.9 $54.4 $47.5 $46.0 $26.1 $24.9 $23.8 $22.2 $7.7 $1,220.0 Commercial coastal exposure totaling $46.0 bill in Alabama accounts for about half the $92.5 billion in total coastal exposure $1,718.6 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 Source: AIR Worldwide

39 Profitability & Performance Analysis: Alabama Homeowners Insurance Markets Alabama s Home Insurance Market is Highly Volatile 41

40 RNW All Lines: AL vs. U.S., * 20% US All Lines AL All Lines 15% 10% 5% 0% -5% -10% 7.7% -2.9% 8.8% 15.7% 5.6% 11.8% 12.0% 7.8% -1.0% 7.7% 12.6% 0.1% 6.6% Average US: 8.0% AL: 4.9% 4.6% 1.0% -0.5% -7.3% 6.5% 13.6% 10.0% 5.3% 14.4% -7.0% 2.4% 6.3% % 2004/05 hurricane seasons *Latest available as of December 11, Source: NAIC; Insurance Information Institute. 42

41 RNW Homeowners: AL vs. U.S., * 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% -80% -0.9% -18.1% US HO AL HO 17.8% 12.4% 11.3% 5.8% 3.7% 2.5% 3.7% 3.8% -54.3% -4.2% -45.0% -10.1% -7.2% Return on Net Worth fluctuates wildly in AL s home insurance market Average US: 0.4% AL: -5.6% 9.7% -2.8% -67.1% 18.5% -16.0% -2.6% 6.2% 11.5% -24.1% *Latest available as of December 11, Source: NAIC; Insurance Information Institute. 43

42 Losses Incurred as a Percent of Premiums HO: AL vs. U.S., * 160% 140% 120% 100% 80% US HO AL HO 2004/05 hurricane seasons 60% 40% 20% 0% Average US: 68.9% AL: 76.3% *Latest available as of December 11, Source: NAIC; Insurance Information Institute. 44

43 All Lines: 10-Year Average RNW AL & Nearby States Alabama All Lines profitability is below the US and above the regional average -13.0% -9.3% 7.0% 6.7% 5.3% 3.7% 3.3% 10.8% South Carolina U.S. Florida Georgia Texas Alabama Mississippi Louisiana -15% -10% -5% 0% 5% 10% 15% Source: NAIC, Insurance Information Institute

44 Homeowners: 10-Year Average RNW AL & Nearby States Alabama Homeowners profitability is below the US and above the regional average -32.4% -29.0% -7.1% -7.9% -2.3% % 4.7% 20.8% -40% -30% -20% -10% 0% 10% 20% 30% South Carolina U.S. Florida Texas Georgia Alabama Mississippi Louisiana Source: NAIC, Insurance Information Institute

45 Return on Net Worth: Homeowners Insurance, 10-Year Average ( *) RNW HO (Percent) Top 25 States Hawaii was the most profitable state for home insurers from due to the total absence of hurricanes during this period HI SC RI DC CT AK UT NY NV MA DE AZ OR NC CA MT WY PA WA NJ CO NM ME VT ID *Latest available. Sources: NAIC. 47

46 Return on Net Worth: Homeowners Insurance, 10-Year Average ( *) RNW HO (Percent) VA MD NH WV MI U.S. KS SD IL Bottom 25 States Hurricane Katrina and other storms made Alabama among the least profitable states for home insurers from , ranking 43 rd out of the 50 state catastrophe losses will likely push the state to 48 th position. IA FL WI OK TX OH TN IN NE AR GA AL KY ND MO MN MS LA *Latest available. Sources: NAIC 48

47 Pecent change (%) Percent Change in DPW: Homeowners, by State, HI 46.7 LA 36.8 ID 36.4 MO 36.4 DE 35.5 AR 35.3 NM 35.1 SC 33.4 MS 32.2 NC 32.1 RI 32.1 UT 32.0 GA 31.5 AL 31.2 WY 29.9 ND 29.6 TN 29.6 KY 29.2 CT 28.8 OK 28.8 MN 28.6 MT 28.2 ME 27.2 NH 26.7 NY Top 25 States While premium growth in the Alabama homeowners line has been above average, it hasn t kept pace with losses, especially after considering record 2011 losses. Sources: SNL Financial LC.; Insurance Information Institute. 49

48 Pecent change (%) Percent Change in DPW: Homeowners, by State, NJ 25.6 KS 25.0 VA 24.5 MA 24.3 WA 24.0 FL 23.9 TX 23.6 IL 23.2 WI 22.4 IA 22.4 OR 22.2 SD 22.1 CO 21.1 IN 20.8 NE 20.3 OH 19.2 VT 18.9 AK 18.1 DC 16.2 PA 14.2 MD 12.2 WV 9.6 AZ 8.4 NV 7.0 CA 0.0 MI Bottom 25 States Michigan was the slowest growing state between 2005 and Sources: SNL Financial LC.; Insurance Information Institute. 50

49 Global Catastrophe Loss Developments and Trends 2011 Will Rewrite Global Catastrophe Loss and Insurance History 51

50 Natural Loss Events, January September 2011 World Map Source: MR NatCatSERVICE 52

51 Top 16 Most Costly World Insurance Losses, * $80 $70 $60 $50 $40 $30 $20 $10 (Insured Losses, 2010 Dollars, $ Billions) $0 $7.8 Winter Storm Daria (1991) Taken as a single event, the Spring 2011 tornado and thunderstorm season would likely become the 7 th costliest event in global insurance history $8.0 Chile Quake (2010) $8.0 Hugo (1989) $9.0 Typhoon Mirielle (1991) $9.3 Charley (2004) $30.0 $11.3 $14.0 $14.9 $16.3 $20.5 $20.8 $23.1 $24.9 $10.0 New Zealand Quake (2011) Rita (2005) Wilma (2005) Ivan Spring Ike (2004) Tornadoes/ (2008) Storms (2011) 3 of the top 15 most expensive catastrophes in world history have occurred in the past 18 months Northridge WTC (1994) Terror Attack (2001) Andrew (1992) Japan Quake, Tsunami (2011)* $72.3 Katrina (2005) *Through June 20, disaster figures are estimates; Figures include federally insured flood losses, where applicable. Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute. 53

52 Worldwide Natural Disasters, * Number of Events 600 There were 355 events through the first 6 months of Geophysical events (Earthquake, tsunami, volcanic eruption) Meteorological events (Storm) Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, forest fire) *2011 figure is through June 30. Source: MR NatCatSERVICE 54

53 U.S. Insured Catastrophe Loss Update 2011 CAT Losses Already Greatly Exceed All of 2010 and Will Become One of the Most Expensive Years on Record 55

54 $7.5 $2.7 $4.7 $5.5 $8.3 $7.4 $2.6 $10.1 $8.3 $4.6 $5.9 $12.9 $9.2 $6.7 $10.6 $22.9 $16.9 $13.6 $26.5 $27.5 $27.1 $27.0 $61.9 $100.0 US Insured Catastrophe Losses ($ Billions) $120 $100 Billion CAT Year is Coming Eventually $100 $ s: A Decade of Disaster 2000s: $193B (up 117%) 1990s: $89B Record Tornado Losses Caused 2011 CAT Losses to Surge $60 $40 $20 $ *20?? 2011 Will Become the 5 th or 6 th Most Expensive Year in History for Insured Catastrophe Losses in the US *Estimate through Nov. 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. 56

55 Top 13 (14?) Most Costly Disasters in U.S. History (Insured Losses, 2010 Dollars, $ Billions)** $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 $4.3 Irene (2011) Taken as a single event, the Spring 2011 tornado season would likely become 5 th costliest event in US insurance history $4.3 Jeanne (2004) $5.3 Frances (2004) $6.3 Rita (2005) $6.7 Hugo (1989) $8.2 Ivan (2004) $8.6 $11.5 $12.8 $16.3 $17.5 Charley (2004) Wilma (2005) $22.6 $23.1 $45.8 Ike Spring NorthridgeAndrew9/11 AttackKatrina (2008) Tornadoes (1994) & Storms* (2011) (1992) (2001) (2005) *Losses will actually be broken down into several events as determined by PCS. **Hurricane Irene losses stated in 2011 dollars. Sources: PCS; Insurance Information Institute inflation adjustments. 57

56 Combined Ratio Points Associated with Catastrophe Losses: :H1* E 5.0 Combined Ratio Points Avg. CAT Loss Component of the Combined Ratio by Decade 1960s: s: s: s: s: s: 4.15* The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades *Insurance Information Institute estimates for 2010 and 2011:H1 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. 58

57 Number Natural Disasters in the United States, * Number of Events (Annual Totals and First Half 2011) There were 98 natural disaster events in the first half of Geophysical (earthquake, tsunami, volcanic activity) Meteorological (storm) Hydrological (flood, mass movement) Climatological (temperature extremes, drought, wildfire) *Through June 30. Source: MR NatCatSERVICE 59 2

58 U.S. Thunderstorm Loss Trends, * Thunderstorm losses in the first half of 2011 totaled $16.4 billion, a new annual record through just 6 months Average thunderstorm losses are up more than 8 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. *Through June 30, Source: Property Claims Service, MR NatCatSERVICE 60

59 REINSURANCE MARKET CONDITIONS Record Global Catastrophes Activity is Pressuring Pricing, But Capacity is Adequate 62

60 Global Reinsurance Capital, :H1 Reinsurer Capital % Change $500 $480 $460 $440 $420 $400 $380 $360 $340 $320 $300 Global reinsurance market capacity is down in mid-2011 due to large catastrophe losses $411 $342-17% 18% $402 17% $470 $445-5% :H1 20% 15% 10% 5% 0% -5% -10% -15% -20% Reinsurer Capital Change High Global Catastrophe Losses Have Had a Modest Adverse Impact on Global Reinsurance Market Capacity Source: Aon Reinsurance Market Outlook, September 2011 from Individual Company and AonBenfield Analytics; Insurance Information Institute.

61 Historical Capital Levels of Guy Carpenter Reinsurance Composite, Q11 Most excess reinsurance capacity was removed from the market in 2011, leaving uncertainty as to the direction of 2012 reinsurance renewals Source: Guy Carpenter, GC Capital Ideas.com, November 23, 2011.

62 Global Property Catastrophe Rate on Line Index, YTD (6/1/11) A modest increase in global property catastrophe reinsurance pricing was evident in June 1 renewals in the wake of record global catastrophe losses. Larger increase could occur for the Jan.1, 2012 renewals Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.

63 Underwriting Trends: Cycle, Catastrophes Are Among 2011 and 2012 Drivers 66

64 P/C Insurance Industry Combined Ratio, :H1* As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, Reserve Releases Relatively Low CAT Losses, Reserve Releases Higher CAT Losses, 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=110.5 Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-m&fg was 102.2). 67

65 Underwriting Gain (Loss) * ($ Billions) $35 $25 $15 $5 -$5 -$15 -$25 -$35 -$45 -$55 Underwriting losses in 2011 will be much larger: ~$40B due to big CATs * Large Underwriting Losses Are NOT Sustainable in Current Investment Environment * Includes mortgage and financial guaranty insurers in all years figure is III estimate based on actual H1 underwriting losses of $ billion. Sources: A.M. Best, ISO; Insurance Information Institute.

66 Homeowners Insurance Combined Ratio: P P Homeowners Line Will Deteriorate in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected Due to Local Catastrophe Loss Activity Sources: A.M. Best ( ); Insurance Information Institute (2011P).

67 P/C Insurance Industry Financial Overview Profit Recovery Will Be Set Back by High CATs, Low Interest Rates, Diminishing Reserve Releases 70

68 P/C Net Income After Taxes :H1 ($ Millions) $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 $34,670 $4,758 $80,000 $70,000 $60,000 $50, ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS 1 = 5.9% 2010 ROAS = 6.5% 2011:H1 ROAS = 1.7% P-C Industry 2011:H1 profits were down 71.6% to $4.8B vs. 2010:H1, due to high catastrophe losses and as non-cat underwriting results deteriorated $40,000 $30,000 $20,000 $10,000 $0 -$10,000 -$6, * * ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 2.3% ROAS for 2011:H1, 7.5% for 2010 and 7.4% for Sources: A.M. Best, ISO, Insurance Information Institute

69 Capital/Policyholder Surplus (US) Have Large Global Losses Reduced Capacity in the Industry, Setting the Stage for a Market Turn? 72

70 Policyholder Surplus, 2006:Q4 2011:Q2 ($ Billions) $580 $560 $540 $520 $500 $480 $460 $440 $420 $512.8 $521.8 $517.9$515.6 $487.1 $496.6 $505.0 Sources: ISO, A.M.Best. 2007:Q3 Previous Surplus Peak The Industry now has $1 of surplus for every $0.78 of NPW the strongest claimspaying status in its history. $478.5 $455.6 $437.1 $463.0 $490.8 $511.5 $556.9 $559.1 $540.7 $544.8 $ :Q4 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 11:Q2 *Includes $22.5B of paid-in capital from a holding company parent for one insurer s investment in a non-insurance business in early Surplus as of 6/30/11 fell by 1% below its all time record high of $564.7B set as of 3/31/11. Quarterly Surplus Changes Since 2007:Q3 Peak 09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%) 09:Q3: -$31.0B (-5.9%) 09:Q4: -$10.3B (-2.0%) 10:Q1: +$18.9B (+3.6%) 10:Q2: +$8.7B (+1.7%) 10:Q3: +$23.0B (+4.4%) 10:Q4: +$35.1B (+6.7%) 11:Q1: +$42.9B (+8.2%) 11:Q2: +37.3B (+7.1%) 74

71 Financial Strength & Underwriting P-C Impairments Remain Low Despite High Catastrophe Losses and Poor Economic Environment 75

72 P/C Insurer Impairments, of the 18 in 2009 were small Florida carriers. Total also includes a few title insurers The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets Source: A.M. Best Special Report Impairment Review, June 21, 2010; Insurance Information Institute.

73 Insurance Information Institute Online: Thank you for your time and your attention! Twitter: twitter.com/bob_hartwig Download at