Economic Factors Affecting the Workers Compensation Market:

Transcription

1 Economic Factors Affecting the Workers Compensation Market: An Overview and Outlook Workers Compensation Educational Conference Orlando, FL August 21, 2012 Download at Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Will Expand Workers Comp Payroll Exposure Base America s Manufacturing Renaissance? Construction Activity Still Depressed? 2

3 :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 11:1Q 11:2Q 11:3Q 11:4Q 12:1Q 12:2Q 12:3Q 12:4Q 13:1Q 13:2Q 13:3Q 13:4Q -5.3% -3.7% -1.8% -0.3% 2.7% 0.5% 3.6% 3.0% 1.7% 1.3% 1.4% 4.1% 1.1% 1.8% 2.5% 3.6% 3.1% 5.0% 2.3% 2.2% 2.6% 2.4% 0.1% 2.5% 1.3% 4.1% 2.0% 1.5% 1.7% 1.9% 1.8% 2.4% 2.7% 2.9% US Real GDP Growth* 7% 5% 3% 1% -1% -3% -5% -7% -9% Real GDP Growth (%) Recession began in Dec Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8% -8.9% 2012 is expected to see slow and choppy growth before accelerating modestly in 2013 Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and Gradually Benefit the Economy Broadly * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 8/12; Insurance Information Institute. 3

4 Percent Change in Real GDP by State, 2011 Growth varied considerably across states but in total was weak in 2011 with US overall growth at just 1.7% TX has been an economic growth leader Source: Bureau of Economic Analysis at ;Insurance Information Institute. 4

5 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug Consumer Sentiment Survey (1966 = 100) January 2010 through August Optimism among consumers Increased in August, and is well above year-ago levels; Suggests concern, but not fear on the part of consumers. Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially in late 2011 and early 2012 Source: University of Michigan; Insurance Information Institute 5

6 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 credit market conditions will boost auto sales in 2012 and beyond F 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 8/12); Insurance Information Institute. 6

7 New Private Housing Starts, F (Millions of Units) New home starts plunged 72% from ; A net annual decline of 1.49 million units, lowest since records began in The plunge and lack of recovery in homebuilding and in construction in general is holding back payroll exposure growth Job growth, improved credit market conditions and demographics will eventually boost home construction F13F14F15F 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 8/12); Insurance Information Institute. 7

8 Construction Employment, Jan July 2012* 5,593 Jan-10 5,529 Feb-10 5,552 Mar-10 5,559 Apr-10 5,518 May-10 5,507 Jun-10 5,491 Jul-10 5,511 Aug-10 5,492 Sep-10 5,499 Oct-10 5,488 Nov-10 5,477 Dec-10 5,456 Jan-11 5,489 Feb-11 5,496 Mar-11 5,495 Apr-11 5,498 May-11 5,495 Jun-11 5,508 Jul-11 5,498 Aug-11 5,528 Sep-11 5,519 Oct-11 5,520 Nov-11 5,546 Dec-11 5,564 Jan-12 5,563 2/30/2102 5,549 Mar-12 5,542 Apr-12 5,510 May-12 5,514 Jun-12 5,513 Jul-12 (Thousands) 5,650 5,600 Construction employment is still below where it was in Jan In a normal recovery, construction employment would be growing robustly 5,550 5,500 5,450 5,400 *Seasonally adjusted Sources: US Bureau of Labor Statistics at Insurance Information Institute. 8

9 Value of Construction Put in Place, June 2012 vs. June 2011* Growth (%) 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% 7.0% 13.1% 12.1% Private sector construction activity is up in both the residential and nonresidential segments Private: +13.1% Public: -3.7% 14.0% Public sector construction activity remains depressed -3.7% -27.5% -2.9% Total Construction Total Private Construction Residential-- Private Non- Residential-- Private Total Public Construction Residential- Public Non- Residential-- Public Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue *seasonally adjusted Source: U.S. Census Bureau, ; Insurance Information Institute. 9

10 Total Private Construction Residential Total Nonresidential Lodging Office Commercial Health Care Educational Religious Amusement & Rec. Transportation Communication Power Manufacturing Value of Private Construction Put in Place, by Segment, June 2012 vs. June 2011* Growth (%) Led by the Power industry, Private sector construction activity is up by double digits in many segments after plunging during the Great Recession 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 13.1% 12.1% 14.0% 26.3% 6.6% 6.6% 7.0% 18.8% 17.1% 26.5% 19.0% -1.7% -5.2% -10.5% Private Construction Activity is Up in Most Segments, Including Residential Construction but Led by Power *seasonally adjusted Source: U.S. Census Bureau, ; Insurance Information Institute. 10

11 Value of Public Construction Put in Place, by Segment, June 2012 vs. June 2011* Total Public Construction Residential Total Nonresidential Office Commercial Health Care Educational Public Safety Amusement & Rec. Transportation Power Highway & Street Sewage & Waste Disposal Water Supply Conservation & Develop. Growth (%) 10% 5% 0% Public sector construction activity is down by substantially in many segments 0.0% 4.4% 0.2% 4.0% -5% -10% -3.7% -2.9% -6.0%-5.8% -2.3%-2.1% -15% -20% -25% -30% -27.5% -12.7% -17.8% -22.7% -18.8% Public Construction Activity is Up Down in Many Segments as State, City and County Budgets Remain Under Stress *seasonally adjusted Source: U.S. Census Bureau, ; Insurance Information Institute. 11

12 ISM Manufacturing Index (Values > 50 Indicate Expansion) Jan-10 Feb-10 Mar Apr-10 May Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov Dec-10 Jan-11 Feb-11 Mar-11 Apr May-11 Jun Jul Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar Apr-12 May Jun-12 Jul January 2010 through July Manufacturing activity contracted in June for the first time in nearly 3 years, but a resumption of expansion is possible 40 The manufacturing sector expanded for 34 consecutive months until June 2012 and added jobs. The question is whether this will continue. Source: Institute for Supply Management at Insurance Information Institute. 12

13 Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures Mar 01 Jun 01 Sep 01 Dec 01 Mar 02 Jun 02 Sep 02 Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 March 2001 through July 2012 Percent of Industrial Capacity 82% 80% Hurricane Katrina Full Capacity The US operated at 79.3% of industrial capacity in July 2012, above the June 2009 low of 68.3% and tied for the highest level since April % 76% 74% 72% 70% 68% March November 2001 recession The closer the economy is to operating at full capacity, the greater the inflationary pressure December June 2009 Recession 66% Source: Federal Reserve Board statistical releases at

14 Manufacturing Employment, Jan July 2012* 11,458 Jan-10 11,462 Feb-10 11,470 Mar-10 11,502 Apr-10 11,536 May-10 11,546 Jun-10 11,566 Jul-10 11,549 Aug-10 11,551 Sep-10 11,551 Oct-10 11,560 Nov-10 11,575 Dec-10 11,627 Jan-11 11,664 Feb-11 11,690 Mar-11 11,718 Apr-11 11,726 May-11 11,738 Jun-11 11,768 Jul-11 11,771 Aug-11 11,768 Sep-11 11,777 Oct-11 11,780 Nov-11 11,808 Dec-11 11,860 Jan-12 11,890 2/30/ ,932 Mar-12 11,942 Apr-12 11,955 May-12 11,965 Jun-12 11,990 Jul-12 (Thousands) 12,400 12,200 12,000 Manufacturing employment is up by more than 500,000 or 4.6% since Jan a surprising source of strength in the economy 11,800 11,600 11,400 11,200 11,000 *Seasonally adjusted Sources: US Bureau of Labor Statistics at Insurance Information Institute. 14

15 Dollar Value* of Manufacturers Shipments Monthly, Jan June 2012 $ Millions $500,000 $400,000 ENERGY INTENSIVE The value of Manufacturing Shipments in June 2012 was up 32% to $470B from its June 2009 trough. June figure is only 3.2% below its previous record high in July $300,000 $200,000 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan 01 Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May Growth from trough to March 2012 was 31%. Manufacturing is an energy intensive activty and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages *seasonally adjusted Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, and Orders, Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 15

16 Manufacturing Growth for Selected Sectors, 2012 vs. 2011* All Manufacturing Durable Mfg. Wood Products Primary Metals Fabricated Metals Machinery Electrical Equip. Transportation Equip. Non-Durable Mfg. Food Products Petroleum & Coal Chemical Plastics & Rubber Textile Products Growth (%) 25% 20% 15% 10% 5.8% 5% 9.1% 6.6% Durables: +9.1% Non-Durables: +3.0% 20.9% 6.5% 11.2% 3.8% Manufacturing of durable goods has been especially strong in % 3.0% 3.6% 5.6% -0.1% 6.5% 5.3% 0% -5% Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Energy Demand and Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages *Seasonally adjusted; Date are YTD comparing data through June 2012 to the same period in Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, and Orders, 16

17 ISM Non-Manufacturing Index (Values > 50 Indicate Expansion) Jan-10 Feb-10 Mar Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul Aug-11 Sep-11 Oct-11 Nov-11 Dec Jan-12 Feb-12 Mar Apr-12 May-12 Jun-12 Jul-12 January 2010 through July Optimism among nonmanufacturers was stable in late 2011 and increased in early Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue. Source: Institute for Supply Management at Insurance Information Institute. 17

18 Business Bankruptcy Filings, : Q1 43,694 48, :Q1 69,300 62,436 64,004 71,277 81,235 82,446 63,853 63,235 64,853 71,549 70,643 62,304 52,374 51,959 53,549 54,027 44,367 37,884 35,472 40,099 38,540 35,037 34,317 39,201 19,695 28,322 43,546 60,837 56,282 47,806 10,998 % Change Surrounding Recessions 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010 the second consecutive year of decline. Business bankruptcies more than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1: % % % % %* Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline Sources: American Bankruptcy Institute at Insurance Information Institute 18

19 Private Sector Business Starts, 1993:Q2 2011:Q4* (Thousands) Business Starts 2006: 872, : 843, : 790, : 697, : 722, : 758,000* Business starts were up 5.0% to 758,000 in ,000 new business starts were recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new business starts since Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But Are Recovering Slowly * Data through Dec. 31, 2011 are the latest available as of Aug. 20, 2012; Seasonally adjusted. Source: Bureau of Labor Statistics,

20 12 Industries for the Next 10 Years: Insurance Solutions Needed Health Care Health Sciences Energy (Traditional) Alternative Energy Petrochemical Agriculture Natural Resources Technology (incl. Biotechnology) Many industries are poised for growth, though insurers ability to capitalize on these industries varies widely Light Manufacturing Insourced Manufacturing Export-Oriented Industries Shipping (Rail, Marine, Trucking) 20

21 Oil & Gas Extraction Employment, Jan June 2012* 156 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan /30/ Mar Apr May Jun-12 (Thousands) Oil and gas extraction employment is up 25.1% since Jan as the energy sector booms. Domestic energy production is essential to any robust economic recovery in the US. *Seasonally adjusted Sources: US Bureau of Labor Statistics at Insurance Information Institute. 21

22 Labor Market Trends Massive Job Losses Sapped the Economy and Commercial/Personal Lines Exposure, But Trend is Improving 22

23 Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling January 2000 through July 2012, Seasonally Adjusted (%) Jan 00 Jan 01 Traditional Unemployment Rate U-3 Unemployment + Underemployment Rate U-6 Recession ended in November 2001 Jan 02 Jan 03 Unemployment kept rising for 19 more months Jan 04 Jan 05 Jan 06 Recession began in December 2007 Jan 07 Source: US Bureau of Labor Statistics; Insurance Information Institute. Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 15.0% in July 2012 Unemployment stood at 8.3% in July 2012 Unemployment peaked at 10.1% in October 2009, highest monthly rate since Peak rate in the last 30 years: 10.8% in November - December 1982 Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving Jun 12 23

24 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 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 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul Monthly Change in Private Employment January 2008 through July 2012 (Thousands) (200) (400) (600) (800) (1,000) Monthly Losses in Dec. 08 Mar. 09 Were the Largest in the Post-WW II Period 172,000 private sector jobs were created in July Private Employers Added 4.65 million Jobs Since Jan After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: Insurance Information Institute 24

25 Millions Cumulative Change in Private Employment: Dec July Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May- Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May- Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May- Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May- Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May- Jun-12 Jul December 2007 through July 2012 (Millions) Cumulative job losses peaked at million in December 2009 Cumulative job losses as of June 2012 totaled million All of the jobs lost since President Obama took office in Jan have been recouped Private Employers Added 4.65 million Jobs Since Jan After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: Insurance Information Institute 25

26 Millions Cumulative Change in Private Sector Employment: Jan July Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul-12 January 2010 through July 2012* (Millions) Job gains and pay increases have added more than $600 billion to payrolls since Jan Cumulative job gains through July 2012 totaled million Private Employers Added 4.65 million Jobs Since Jan After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs) Source: US Bureau of Labor Statistics: Insurance Information Institute 26

27 Cumulative Change in Government Employment: Jan July Jan-10-8 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul-12 January 2010 through July 2012* (Millions) Government at all levels has shed more than a half million jobs since Jan even as private employers created 4.65 million jobs Temporary Census hiring distorted 2010 figures Cumulative job losses through June 2012 totaled 538, Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the Financial Crisis, Causing Them to Reduce Staff Source: US Bureau of Labor Statistics Insurance Information Institute 27

28 Net Change in Government Employment: Jan June 2012* (Thousands) State government employment fell by 1.4% since the end of 2009 while Federal employment is down by 2.1% Local government employment shrank by 405,000 from Jan through June 2012, accounting for 76% of all government job losses, negatively impacting WC exposures for those cities and counties that insure privately Total Local State Federal *Cumulative change from prior month; Base employment date is Dec Source: US Bureau of Labor Statistics Insurance Information Institute 28

29 Unemployment Rate (%) Unemployment Rates by State, July 2012: Highest 25 States* In July, 44 states reported over-themonth unemployment rate increases, 2 states and the District of Columbia had decreases, and 4 states had no change FL s unemployment is above the US rate of 8.3% NV RI CA NJ NC SC GA MS NY MI DC IL FL OR CT WA TN AL AZ CO KY US IN PA AK LA *Provisional figures for July 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 29

30 Unemployment Rate (%) Unemployment Rates by State, July 2012: Lowest 25 States* 8 In July, 44 states reported over-themonth unemployment rate increases, 2 states and the District of Columbia had decreases, and 4 states had no change ME ID WV AR WI MO OH TX MD DE NM HI MT KS MA UT VA MN WY NH IA VT OK SD NE ND *Provisional figures for July 2012, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 30

31 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:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 4.5% 4.5% 4.6% 4.8% 4.9% 5.4% 6.1% 6.9% 8.1% 9.3% 8.9% 9.1% 9.1% 8.7% 8.3% 8.2% 8.2% 8.1% 8.0% 8.0% 7.9% 7.7% 9.6% 10.0% 9.7% 9.6% 9.6% 9.6% US Unemployment Rate Forecast 2007:Q1 to 2013:Q4F* 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% Rising unemployment eroded payrolls and workers comp s exposure base. Unemployment peaked at 10% in late Jobless figures have been revised slightly upwards for 2012/13 Unemployment forecasts have been revised slightly upwards for 2012 and Optimistic scenarios put the unemployment as low as 8.0% by Q4 of this year. * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/12 edition); Insurance Information Institute. 31

32 US Unemployment Rate Forecasts Quarterly, 2012:Q2 to 2013:Q4 10.0% 9.5% 10 Most Pessimistic Consensus/Midpoint 10 Most Optimistic 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 8.3% 8.2% 8.1% 8.3% 8.3% 8.1% 8.0% 8.0% 7.6% Unemployment will remain high even under the most optimistic of scenarios, but forecasts are being revised downwards 8.3% 8.0% 7.7% 8.2% 7.9% 7.5% 8.1% 7.7% 7.3% 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 Steadily Decreasing Unemployment Should Benefit the Workers Comp Exposure Base at Least Through 2013 Sources: Blue Chip Economic Indicators (8/12); Insurance Information Institute 32

33 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06: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:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 Nonfarm Payroll (Wages and Salaries): Quarterly, :Q2 Billions $7,000 $6,750 Prior Peak was 2008:Q1 at $6.60 trillion Latest (2012:Q2) was $6.89 trillion, a new peak--$640b above 2009 trough $6,500 $6,250 $6,000 $5,750 Recent trough (2009:Q3) was $6.25 trillion, down 5.3% from prior peak Pace of payroll growth is slowing in 2012 Growth rates in 2012 Q1:12 over Q4:11: 1.8% Q2 over Q1: 1.4% $5,500 Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: National Bureau of Economic Research (recession dates); Insurance Information Institute. 33

34 Payroll vs. Workers Comp Net Written Premiums, E Payroll Base* $Billions WC NWP $Billions $7,000 Wage & Salary Disbursements WC NPW 7/90-3/91 3/01-11/01 12/07-6/09 $50 $6,000 $5,000 WC premium volume dropped two years before the recession began +9% in 2012E $45 $40 $4,000 $3,000 $2,000 WC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in * $35 $30 $25 Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005 *Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is I.I.I. estimate based YTD 2012 actuals. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at ; NCCI; I.I.I. 34

35 POSITIVE LABOR MARKET DEVELOPMENTS Key Factors Driving Workers Compensation Exposure 35

36 Mass Layoff Announcements, Jan June 2012* 3,500 3,000 2,500 Mass layoff announcements peaked at more than 3,000 per month in Feb There were 1,317 may layoffs announced in June 2012, close to pre-recession levels 2,000 1,500 1, '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *Seasonally adjusted. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at National Bureau of Economic Research (recession dates); Insurance Information Institute. 36

37 Average Weekly Hours of All Private Workers, Mar June 2012 (Hours Worked) Hours worked plunged during the recession, impacting payroll exposures Hours worked totaled 34.5 per week in June, still shy of the 34.6 hours typically worked before the Great Recession '06 '07 '08 '09 '10 '11 '12 *Seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at National Bureau of Economic Research (recession dates); Insurance Information Institute. 37

38 Average Hourly Wage of All Private Workers, Mar June 2012 (Hourly Wage) $24.00 $23.00 $22.00 $21.00 $20.00 $19.00 Wage gains continued during the recession, despite massive job losses The average hourly wage was $23.50 in June, up 10.6% from $21.25 when the recession began in Dec $18.00 '06 '07 '08 '09 '10 '11 '12 *Seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at National Bureau of Economic Research (recession dates); Insurance Information Institute. 38

39 ADVERSE LONG-TERM LABOR MARKET DEVELOPMENTS Key Factors Harming Workers Compensation Exposure and the Overall Economy 39

40 Duration of Unemployment, June 2011 vs. June 2012 (Thousands) 7,000 6,000 June 2011 June 2012 The plight of the longterm unemployed remains a serious issue for the US. Skills atrophy over time impact on WC claim frequency/severity? 6, % 5,370 5,000 4,000 3, % -5.0% 3,068 2,810 2,976 2, % 2,000 1,874 1,811 1,000 0 Less Than 5 Weeks 5-14 Weeks Weeks 27 Weeks + Source: US Bureau of Labor Statistics at Insurance Information Institute. 40

41 Labor Force Participation Rate, Jan June 2012* Labor Force Participation as a % of Population Labor force participation continues to shrink despite a falling unemployment rate Large numbers of people are exiting (or not returning to the labor force 62 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 *Defined as the percentage of working age persons in the population who are employed or actively seeking work. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at National Bureau of Economic Research (recession dates); Insurance Information Institute. 41

42 Number of Discouraged Workers, Jan June 2012 Thousands 1,400 1,300 1,200 1,100 1, Discouraged Workers are people who have searched for work for so long in vain that they actually stop searching and drop out of the labor force Large numbers of people are exiting (or not returning to) the labor force '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 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 ; NBER (recession dates); Ins. Info. Inst. There were 821,000 discouraged workers in June

43 P/C Insurance Industry Financial Overview Profit Recovery Was Set Back in 2011 by High Catastrophe Loss & Other Factors 43

44 P/C Net Income After Taxes :Q1 ($ 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 $35,204 $19,150 $10,141 $80,000 $70,000 $60,000 $50, 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:Q1 ROAS 1 = 7.2% P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due primarily to lower catastrophe losses $40,000 $30,000 $20,000 $10,000 $0 -$10,000 -$6, :Q1 * ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for Sources: A.M. Best, ISO, Insurance Information Institute

45 A 100 Combined Ratio Isn t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE % % % A combined ratio of about 100 generates an ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10, 10% in 2005 and 16% in % 12.7% 10.9% % % % Year Ago 2011:Q1 = 102.2, 6.1% ROE % % :Q1 18% 15% 12% 9% 6% 3% 0% Combined Ratio ROE* Combined Ratios Must Be Lower in Today s Depressed Investment Environment to Generate Risk Appropriate ROEs * figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio including M&FG insurers is 99.0, ROAS = 7.2%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

46 Profitability Peaks & Troughs in the P/C Insurance Industry, :Q1* * 12: ROE 25% 1977:19.0% 1987:17.3% History suggests next ROE peak will be in % 1997:11.6% 2006:12.7% 15% 10% 9 Years 2012:Q 8.2% 5% 0% 2011: 4.6%* -5% 1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2% *Profitability = P/C insurer ROEs figure is an estimate based on ROAS data. Note: Data for exclude mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% including M&FG. Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

47 ROE: Property/Casualty Insurance vs. Fortune 500, :Q1* (Percent) 20% P/C Profitability Is Both by Cyclicality and Ordinary Volatility Katrina, Rita, Wilma 15% 10% Sept. 11 5% 0% -5% Hugo Andrew Northridge Lowest CAT Losses in 15 Years 4 Hurricanes Financial Crisis* Record Tornado Losses :Q1 * Excludes Mortgage & Financial Guarantee in Fortune 500 figure is III estimate. Sources: ISO, Fortune; Insurance Information Institute. 47

48 ROE vs. Equity Cost of Capital: U.S. P/C Insurance: * pts -9.0 pts +1.7 pts +2.3 pts -6.4 pts -3.2 pts -2.4 pts -7.3 pts (Percent) 18% 16% The P/C Insurance Industry Fell Well Short of Its Cost of Capital Every Year Since % 12% 10% 8% 6% 4% 2% 0% -2% US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from 1991 to 2002, but on Target or Better , Fell Short in * 09* 10* 11* ROE Cost of Capital The Cost of Capital is the Rate of Return Insurers Need to Attract and Retain Capital to the Business * Return on average surplus in excluding mortgage and financial guaranty insurers. Source: The Geneva Association, Insurance Information Institute 48

49 Financial Strength & Underwriting Cyclical Pattern is P-C Impairment History is Directly Tied to Underwriting, Reserving & Pricing 49

50 P/C Insurer Impairments, small insurers in Missouri did encounter problems in 2011 following the May tornado in Joplin. They were absorbed by a larger insurer and all claims were paid 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 2012; Insurance Information Institute. 50

51 Combined Ratio P/C Insurer Impairment Frequency vs. Combined Ratio, Impairment Rate 120 Combined Ratio after Div P/C Impairment Frequency impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall Source: A.M. Best; Insurance Information Institute 51

52 Reasons for US P/C Insurer Impairments, Historically, Deficient Loss Reserves and Inadequate Pricing Are By Far the Leading Cause of P-C Insurer Impairments. Investment and Catastrophe Losses Play a Much Smaller Role Sig. Change in Business Misc. 8.6% 3.6% 4.0% Reinsurance Failure Investment Problems (Overstatement of Assets) 7.3% 40.3% Deficient Loss Reserves/ Inadequate Pricing Affiliate Impairment 7.8% 7.1% Catastrophe Losses 7.8% Alleged Fraud 13.6% Rapid Growth Source: A.M. Best: Impairment Review, Special Report, April

53 Top 10 Lines of Business for US P/C Impaired Insurers, Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade Other Liability Med Mal Surety 6.9% 6.5% Financial Guaranty Title 2.0% 4.4% 4.8% 26.6% Workers Comp Commercial Auto Liability 7.7% Commercial Multiperil 8.1% 10.9% 22.2% Pvt. Passenger Auto Homeowners Source: A.M. Best: Impairment Review, Special Report, April

54 Workers Compensation Operating Environment The Weak Economy and Soft Market Have Made the Workers Comp Operating Increasingly Challenging 54

55 Commercial Lines Combined Ratio Commercial Lines Combined Ratio, F* P 12F Commercial lines underwriting performance in 2011 was the worst since * figures exclude mortgage and financial guaranty segments. Source: A.M. Best; Insurance Information Institute 55

56 Workers Compensation Combined Ratio: F P 12F Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They Have Been in a Decade Sources: A.M. Best ( all carriers); NCCI for 2011 (Private carriers only); 2012 (All Carriers) Insurance Information Institute. 56

57 Workers Comp Benefits* and Costs** per $100 of Covered Wages, F (Dollars per $100 of Covered Wages) $2.50 $2.00 $1.50 $1.00 WC costs to employers began to rise in 2011/12 for the first time since $0.50 $ E12F Employer Costs Benefits Paid * Benefits paid during calendar year to injured workers and to providers of their medical care. **Costs are employer expenditures for WC benefits, associated administrative costs and insurance premiums. Includes self-insured employers and payments of benefits under large insurance programs. Sources: National Academy of Social Insurance ( ); Insurance Information Institute estimates for

58 Workers Comp Medical and Cash Benefits per $100 of Covered Wages, F (Dollars per $100 of Covered Wages) $1.20 Medical benefits as a share of total benefits has increased dramatically over the pat 20 years $1.00 $ $0.60 $0.40 $ $ E12F Cash (Wage) Benefits Medical Benefits Sources: National Academy of Social Insurance ( ); Insurance Information Institute estimates for

59 Index Value (1961=100) Medical Cost Inflation Has Outpaced Overall Inflation For Over 50 Years All Items Medical Care A claim that cost $1,000 in 1961 would cost nearly $17,500 based on medical cost inflation trends over the past 51 years Source: Department of Labor (Bureau of Labor Statistics) 59

60 Workers Compensation Medical Severity Moderate Increase in 2011 Medical Claim Cost ($000s) Average Medical Cost per Lost-Time Claim Annual Change : +1.9% Annual Change : +8.9% Annual Change : +6.0% Cumulative Change = 245% ( p) Accident Year 2011p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2010, developed to ultimate Based on the states where NCCI provides ratemaking services; Excludes high 60 deductible policies

61 $22.3 $21.9 $22.5 $22.3 $20.8 $19.3 $18.3 $17.6 $17.5 $16.7 $16.2 $14.8 $13.5 $12.2 $11.2 $10.4 $9.8 $9.7 $9.2 $9.5 $ Workers Comp Indemnity Claim Costs: Modest Increase in 2011 Indemnity Claim Cost ($ 000s) +9.0% +7.7% +5.9% +4.9%+1.7% +1.0% -3.1%-2.8% Average Indemnity Cost per Lost-Time Claim Annual Change : -1.7% Annual Change : +7.3% Annual Change : +3.4% Average indemnity costs per claim resumed its upward climb in % +10.1% +3.6% +4.6%+1.0% +3.1% +9.2% +5.5% +2% +8.8%+0.6% -2.8% +6.5% p Accident Year 2010p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2010, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes high deductible policies

62 Workers Compensation Premium Continues Its Sharp Decline Net Written Premium $ Billions State Funds ($ B) Private Carriers ($ B) p p Preliminary Calendar Year Source: Private Carriers, Best's Aggregates & Averages; 2010p, NCCI p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent

63 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06: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:Q1 11:Q2 11:Q3 11:Q4 Nonfarm Payroll (Wages and Salaries): Quarterly, :Q4 Billions $6,750 $6,500 Peak was 2008:Q1 at $6.60 trillion Latest (2011:Q4) was $6.71 trillion, a new peak $6,250 $6,000 $5,750 Recent trough (2009:Q3) was $6.25 trillion, down 5.3% from prior peak Pace of payroll growth is accelerating Growth rates in 2011 Q2 over Q1: 0.6% Q3 over Q2: 0.4% Q4 over Q3: 1.0% $5,500 Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: National Bureau of Economic Research (recession dates); Insurance Information Institute. 63

64 Payroll vs. Workers Comp Net Written Premiums, Payroll Base* $Billions $7,000 $6,000 $5,000 Wage & Salary Disbursements WC NPW 7/90-3/91 3/01-11/01 WC premium volume dropped two years before the recession began 12/07-6/09 WC NWP $Billions $50 $45 $40 $4,000 $3,000 $2,000 WC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in * $35 $30 $25 Resumption of payroll growth and rate increases suggests WC NWP will grow again in 2012 *Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2011 is I.I.I. estimate Sources: NBER (recessions); Federal Reserve Bank of St. Louis at ; NCCI; I.I.I. 64

65 Average Approved Bureau Rates/Loss Costs Percent Cumulative % 2.9 History of Average WC Bureau Rate/Loss Cost Level Changes -6.4 Cumulative % Cumulative % 1.2 Calendar Year Cumulative % * * States approved through 4/23/2010 Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organization *States approved through 4/8/11. Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization. Source: NCCI. 0.2

66 Workers Comp Rate Changes, 2008:Q4 2011:Q4 (Percent Change) 10% 8% The Q WC rate change was the largest among all major commercial lines 7.5% 6% 4% 2% 0% 2.6% 4.1% -2% -4% -6% -8% -1.6% -5.5% -4.6% -4.0% -4.6% -3.7% -3.9% -3.7% -3.4% -5.4% 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 Source: Council of Insurance Agents and Brokers; Information Institute. 66

67 Pecent change (%) Direct Premiums Written: Worker s Comp Percent Change by State, * 34.4 OK 23.1 MT 14.2 ID 10.2 LA 9.0 SD 4.6 IA 1.4 KS -3.7 NY -7.3 WI -9.3 PA MS IL NM NJ NE MD NC AL CT VA SC AR MN Top 25 States Only 7 (small) states showed growth in workers comp premium volume between 2005 and 2010 Workers Comp DPW in MD dropped 14.7% from between 2005 and *Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period. Sources: SNL Financial LC.; Insurance Information Institute. 67

68 Pecent change (%) Direct Premiums Written: Worker s Comp Percent Change by State, * AZ ME GA KY IN NH OR DC MA TN VT US TX AK MO MI UT RI CO DE NV HI CA FL Bottom 25 States Workers Comp DPW plunged 28.7% from between 2005 and States with the poorest performing economies also produced the most negative net change in premiums of the past 5 years *Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period. Sources: SNL Financial LC.; Insurance Information Institute. 68

69 2. SURPLUS/CAPITAL/CAPACITY Have Large Global Losses Reduced Capacity in the Industry, Setting the Stage for a Market Turn? 69

70 US Policyholder Surplus: * ($ Billions) $600 $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Surplus as of 12/31/11 was $550.3 down 2.5% from the record $564.7B as of 3/31/11, but still up 25.9% ($113.2B) from the crisis trough of $437.1B at 3/31/09. Pre-crisis peak was $521.8 as of 9/30/07. Surplus as of 12/31/11 was 5.5% above 2007 peak. Surplus is a measure of underwriting capacity. It is analogous to Owners Equity or Net Worth in non-insurance organizations * The Premium-to-Surplus Ratio Stood at $0.80:$1 as of 12/31/11, A Near Record Low (at Least in Recent History)* * As of 12/31/11. Source: A.M. Best, ISO, Insurance Information Institute.

71 Policyholder Surplus, 2006:Q4 2012:Q1 ($ Billions) $580 $560 $540 $520 $500 $480 $460 $440 $420 $496.6 $487.1 Sources: ISO, A.M.Best. $521.8 $517.9 $512.8 $515.6 $505.0 $478.5 The Industry now has $1 of surplus for every $0.80 of NPW, close to the strongest claimspaying status in its history. 2011:Q1 Previous Surplus Peak $455.6 $437.1 $463.0 $490.8 $511.5 $566.5 $570.7 $559.2 $559.1 $550.3 $540.7 $544.8 $538.6 $ :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:Q1 11:Q2 11:Q3 11:Q4 12:Q1 *Includes $22.5B of paid-in capital from a holding company parent for one insurer s investment in a non-insurance business in early Quarterly Surplus Changes Since 2011:Q1 Peak 11:Q2: -$7.4B (-1.0%) 11:Q3: -$27.9B (-4.6%) 11:Q4: -$16.2B (-2.5%) 12:Q1: +$3.2B (+0.7%) Drop due to near-record 2011 CAT losses Surplus as of 3/31/12 hit an all time record high of $570.7B, 0.7% or $3.2B above the previous record set as of 3/31/11. 71

72 Implied Excess (Deficit) Capital Assuming Premium/Surplus Ratio = 0.9:1 Excess/(Deficit) Capital (Policyholder Surplus) : Tech bubble bursts, 9/11, high underwriting losses erode capital base ($10.6) -5.1% ($65.4) -8.8% -1.5% 21.6% ($103.0) ($124.6) 2006/07: Low CAT losses, strong underwriting results since 1940s increase capital 13.4% ($76.5) 8.2% ($49.2) 14.4% $22.9 ($10.8) 6.2% 2005: Katrina, Rita, Wilma produce record CAT losses : End of financial crisis, rising asset prices. modest u/w losses push capital to record levels ($32.7) $ % Annual Change in Policyholder Surplus $ % 8.9% $ : Financial crisis causes sharp drop in capital High cats, u/w losses push capital down -4.6% * Capital Excess (Deficit) Annual Change in Capital Record Policyholder Surplus (Capital) Resulted in Significant Excess Capital in the P/C Insurance Sector in Deteriorating Underwriting Losses, Higher CAT Activity, More Modest Market Returns Shrank Excess Capital in 2011 by Nearly Half. 25% 20% 15% 10% 5% 0% -5% -10% -15% Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb announcement by Advisen, Ltd., that the US P/C insurance industry has $74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1. Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written 72