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A National Workers Compensation OverviewAASCIF Austin Workshop
Bruce R. HockmanTowers [email protected] 215 246 1629October 19, 2010
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A National Overview
This Business SUCKS!!!
Any questions???
1
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A National Overview
No two carriers, public or private, approach the business the same way, but there are common issues which, as they say in consulting speak, are “Keeping company leaders awake at night”.
2
Reduced Top-Line Revenue Loss Ratio Deterioration
Expense Ratio Pressure
Medical Inflation Personnel Development
Sluggish Investment Market
Federal Intervention
Economy
Market Consolidation
Competition Indiscriminate Hair Loss
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A National Overview
3
Reminder: Unless you are a national writer, with proportional premium distribution in each state,
National Statistics are:a) datedb) wrongc) of little value for strategic decision making
→Trust your own data whenever possible as it is likely to be a) timelyb) accurate
c) strategically reliable
Market Consolidation
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A National Overview
State Fund Private Market
Our Cozy little world of workers comp is getting smaller, and at the same time more crowded.
Market Consolidation
14.3B
39.7B
10.4B
43.6B
6.2B
33.8B
4
2004$54 Billion
2006$54 Billion
2009$40 Billion
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A National Overview
For the last four years, the workers compensation market has been consolidating.
Zenith (14) → Fairfax Holdings (49)PMA (16) → Old Republic (15)First Comp (61) → Markel (0)
Why:— Organic growth is not available— Move towards “specialization”— Existing market opportunities have “topped out”
Market Consolidation
5
Product Pointer: Be mindful of ongoing consolidation among your distribution system.
Top Line Revenue Slippage
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A National OverviewTop Line Revenue Slippage
The NCCI provided a detailed breakdown explaining the rationale for this market collapse.
But change was not uniform across the country?
California and Florida account for $6.5 billion of that lost business.
6
Change in loss costs -7%
Change in carrier pricing -4%
Change in total payroll -4%
Change in industry mix -5%
“Other” -6%
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A National Overview
($ Billions)
Sources: A.M. Best (1973-2009); Insurance Information Institute calculations and estimates for 2010.
Premiums rise and fall for many reasons – and they will in the future.
Top Line Revenue Slippage
$3.5
$3.7
$4.2
$4.8
$5.5
$6.2 $7.5 $9.4 $11.3
$13.2
$14.2
$14.6
$14.0
$14.0
$15.1
$17.1 $
20.4 $23.4 $26.1
$28.2 $31.0
$31.3
$29.7
$34.3
$32.7
$29.5
$27.7
$26.5
$24.2
$23.1 $
26.2
$27.1 $
30.6 $32.9 $
36.7 $39.7
$41.8
$40.9
$37.3
$32.5
$30.5
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
WC
Ne
t P
rem
ium
s W
ritt
en
+36.3% -27.8% +17.1% -24.0%Cumulative Rate Change →
Lagging Investment Opportunities
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A Natural Overview
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.0
$12.6
$58.0
$51.9$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:Q1
In 2008, Investment Gains Fell by 50% Due to Lower Yields and Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income
1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute.
($ Billions)
Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q11
Lagging Investment Opportunities
8
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A Natural Overview
0.16% 0.16% 0.20% 0.29%0.62%
2.43%
3.01%
4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%
1.76%
0.98%
3.99%3.80%
0%
1%
2%
3%
4%
5%
6%
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
July 2010 Yield Curve*Pre-Crisis (July 2007)
Treasury yield curve is near its most depressed level in at least 45 years. Investment income is falling
as a result
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Treasury Yield Curves: Pre-Crisis (July 2007) vs. July 2010
Lagging Investment Opportunities
Expense Ratio Pressure
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A National Overview
Like it or not, when income falls someone is going to check on how much free coffee is being consumed!
→In my experience, I have never seen a company go broke because of too high an expense ratio.
Expense Ratio Pressure
10
Product Pointer:Expenses should be properly managed in good times and times
like today. Remember, technology is terrific, but when was the last time that a computer got an injured worker back to work?
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A National Overview
Cash flow in any business is important, in ours it is critical.
Expense Ratio Pressure
PC Industry 2008 2009
Premium Collected $434.5 $423.4
Losses Paid 260.9 250.6
Underwriting Expenses Paid 167.7 168.2
Dividends to Policy Holders 2.6 2.7
Underwriting Cash Flow ($3.2) ($1.9)
Net Investment Income $53.7 50.3
Other income 0.9 0.7
Pre-tax Operating Cash Flow $57.9 $53.0
(Billions)
11
Product Pointer: Model your cash flow situation under various scenarios.
Loss Ratio Deterioration
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A National Overview
Whether we look at calendar year data, or accident year data, the arrows keep pointing in the wrong direction.
2009 data showed the 4th consecutive year of marked deterioration in combined ratios. We have seen nothing in 2010 to suggest that it will not be the markets worst results since 2001.
Loss Ratio Deterioration
Pricing Levels
Frequency
Severity
Medical Inflation
12
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A National Overview
Workers compensation loss results have always raised the industry’s loss ratio average.
Loss Ratio Deterioration
Accident Year Los/LAE Ratios
Line 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Work Comp 109 100 85.5 74.8 64. 63.4 68.1 74.9 80.2 84.5
Commercial 84 83.6 70.5 61.9 59.8 64.1 58.9 61.5 70.7 67.5
All Lines 90.3 90. 76.5 67.3 64.3 69.3 62.9 66.1 75.2 74.2
→Medical inflation, increased severity, increased litigation, all play a role, but price deterioration is playing a larger part.
13
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A National Overview
We cannot talk about calendar year results without looking at reserve development (positive or negative), and adequacy.
→ A.M. Best: Workers compensation reserves are $1.8BB inadequate
→ NCCI: $4BB deficient after discounting
Most “redundant” reserves built up between 2005 – 2009 have already been released.
→ Reserve inadequacy over any sustained period of time will put your company in jeopardy.
Loss Ratio Deterioration
14
Product Pointer:Watch for those “hidden bombs”
a) settled indemnity claims with open medicalb) cases in litigation
The Economy
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A National Overview
10 1116
6
16
8 8
21
50
80
37
4539
24
106
36
58
12
92
120
73
43
138 11 10 8
0
10
20
30
40
50
60
70
80
90
100
110
120
Aug1929
May1937
Feb1945
Nov1948
Jul1953
Aug1957
Apr1960
Dec1969
Nov1973
Jan1980
Jul1981
Jul1990
Mar2001
Dec2007
Month Recession Started
Contraction Expansion Following
*August 2010 (likely the “official end” of recession was June 2009) Sources: National Bureau of Economic Research; Insurance Information Institute.
Average Duration**Recession = 10.4 MosExpansion = 60.5 Mos
Length of Expansions Greatly Exceeds Contractions
Duration (Months)
Length of US Business Cycles,1929–Present*
The Economy
15
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A National Overview
4.5
%
4.5
%
4.6
%
4.8
%
4.9
% 5.4
% 6.1
% 6.9
%
8.1
%
9.3
%
9.6
% 10
.0%
9.7
%
9.7
%
9.6
%
9.4
%
9.2
%
9.0
%
8.8
%9.5
%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
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
11
:Q1
11
:Q2
11
:Q3
11
:Q4
* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/10); Insurance Information Institute
2007:Q1 to 2011:Q4F*
US Unemployment Rate
The Economy
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A Natural Overview
9.6% 9.5%
9.0%8.8%
8.4%8.2%
9.7%9.9% 9.8%9.7%
9.2%
9.6%9.5%
9.4%
8.7%9.0%
9.2%9.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4
10 Most PessimisticConsensus/Midpoint10 Most Optimistic
Unemployment will remain high even under the most optimistic of scenarios, but
forecasts are being revised downwards
Sources: Blue Chip Economic Indicators (8/10); Insurance Information Institute
Stubbornly High Unemployment Will Slow the Recovery of the Workers Compensation Exposure Base
Quarterly, 2010:Q1 to 2011:Q4
US Unemployment Rate Forecasts
The Economy
17
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A Natural Overview
*As of July 2010; Not seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
Millions
105
110
115
120
125
130
135
140
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
The number of employed people in the US today is
approximately the same as it was in late 2004
U.S. Nonfarm Employment, Monthly, 1990 - 2010
The Economy
What is next?
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* 2010 NWP and Surplus figures are % changes as of H1:10 vs H1:09. Sources: A.M. Best, ISO, Insurance Information Institute
A National Overview
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*
NWP % change Surplus % change
(Percent)Surplus growth is now positive but
premiums continue to fall, a departure from the historical pattern
Historically, hard markets follow when surplus “growth” is negative*The industry has excess capacity, but it is unevenly distributed.
What is next?
19
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A National Overview
To take just a longer view of things, here is some direction over the next year or three:
Survive
– Do the right things, regardless of short term pain– Keep good people, doing good work, on good business– Remember, you are not alone, and you have staying power
Remain vital and relevant in your markets
– You grew substantially just a few years ago– Fight the “commodity” syndrome – add value to your offerings
Thrive
– There is an end to every cycle, but everyone will not be positioned to take advantage of it.
– Leadership is the key, followers fall by the wayside.
20