Impacts of the US Economic Stimulus

Package on the P/C Insurance Industry

American Recovery & Reinvestment Act of 2009

Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 bobh@iii.org www.iii.org

Insurance Information Institute

February 25, 2009

Summary of Short-Run Impacts of Stimulus Package on P/C Insurance

• No Stimulus Provisions Specifically Address P/C Insurance• Spending, Aid and Tax Reductions benefit other industries, state and local

governments, as well as individual and some corporate taxpayers • Stimulus Package is Unlikely to Increase Net Premiums Written by More

Than 1% or Approximately $4.5 Bill. by Year-End 2010 • “Direct” Impact to P/C Insurers Results Primarily from Increased

Demand for Commercial Insurance• Primarily the result of increased infrastructure spending and the resulting need to insure

workers, property and protect against liability risks• Because the primary objective of the stimulus is employment related, workers compensation

will be the p/c line that benefits the most• Assuming the target of 3.5 million jobs created or preserved is achieved, private workers comp

NPW (new and preserved) could amount to as much as $1.1 billion• Other commercial lines to benefit: surety, commercial auto, inland marine

• Other “Direct” P/C Demand Benefits Will Be Minimal• Tax provisions providing incentives to buy cars and homes and accelerate the depreciation of

equipment will have little net impact on exposure• Some additional premium may be generated as older cars and equipment are replaced with

new and more valuable (and therefore more expensive to insure)

Summary of Short-Run Impacts of Stimulus Package on P/C Insurance (cont’d)

• “Indirect” Impacts: Limited Gains for P/C Insurers• If stimulus is successful at increasing disposable and corporate income

via tax reductions and “multiplier” income and employment effects, then spending could rise and produce some additional insurable exposure growth for p/c insurers

• Investment Portfolio Impacts• It is impossible to discern what, if any, impact the stimulus will have on

stock and bond performance• If successful, the stimulus package (along with other initiatives) should

help stabilize and reinvigorate the economy, increasing stock prices and bolstering the value of corporate and asset-backed bonds

• The stimulus could be viewed as inflationary. Combined with existing large deficits and other spending initiatives, an expectation of inflation could push interest rates upward

THE ECONOMIC STORM

Current Economic Situation & The Administration’s Case for

Stimulus Spending

3.7

%

0.8

% 1.6

% 2.5

% 3.6

%

3.1

%

2.9

%

0.1

%

4.8

%

4.8

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0.9

%

2.8

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-0.5

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-1.5

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0.8

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2.4

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2.9

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3.1

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3.1

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07

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:4Q

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10

:2Q

10

:3Q

10

:4Q

Real GDP Growth*

*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/09; Insurance Information Institute.

Recession began in December 2007. Economic toll of credit crunch, housing

slump, labor market contraction is growing

The Q4:2008 decline was the steepest since the

Q1:1982 drop of 6.4%

Length of US Recessions,1929-Present*

43

13

811 10

810 11

16

6

16

8 8

14

0

5

10

15

20

25

30

35

40

45

50

Aug.1929

May1937

Feb.1945

Nov.1948

July1953

Aug.1957

Apr.1960

Dec.1969

Nov.1973

Jan.1980

Jul.1981

Jul.1990

Mar.2001

Dec.2007

* As of February 2009

Sources: National Bureau of Economic Research; Insurance Information Institute.

Current recession began in Dec. 2007 and is already the

longest since 1981. If it extends beyond April, it will become the longest recession since the Great Depression.

Months in Duration

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

January 2000 through January 2009

Unemployment will likely peak above 8% or 9% during this cycle, impacting payroll

sensitive p/c and non-life exposures

Source: US Bureau of Labor Statistics; Insurance Information Institute.

Jan. 2009 unemployment jumped to 7.6%, exceeding the 6.3% peak during the previous cycle, and is now at it highest

level since Sept. 1992

Unemployment Rate:On the Rise

Average unemployment rate 2000-07 was 5.0%

Previous Peak: 6.3% in June 2003

Trough: 4.4% in March 2007

Jan

-09

U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*

4.5%

4.5% 4.6% 4.

8% 4.9%

5.4%

6.1%

6.9%

7.6%

8.2%

8.6%

8.8%

8.8%

8.8%

8.6%

8.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

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 forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/09); Insurance Info. Inst.

Rising unemployment will erode payrolls

and workers comp’s exposure base.

Unemployment is expected to peak at

nearly 9% in late 2009 into 2010.

Years With Job Losses: 1939-2009*(Thousands)

-2,974-2,750

-2,128

-1,762-1,512

-886 -857-598 -545 -540 -462 -450 -432 -378 -371 -297

-52

-3,500

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

2008 1945 1982 2001 1949 1944 1991 2009* 1957 2002 1953 1970 1960 1974 1954 1958 1981

The US has seen net job

losses in only 16 of the 70 years since

1939

*Through January 2009.Source: Insurance Information Institute research fromUS Bureau of Labor Statistics data: http://www.bls.gov/ces/home.htm.

2008’s job losses even exceeded those in 1945, at the conclusion of WW II

Losses through January 2009 already rank the year as the 8th worst in

the post WW II era

New Private Housing Starts,1990-2010F (Millions of Units)

2.07

1.80

1.36

0.90

0.66

0.88

1.48

1.351.

46

1.29

1.20

1.01

1.19

1.47

1.62 1.64

1.57 1.60 1.

71

1.85

1.96

0.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F

Exposure growth forecast for HO insurers is dim for 2009 with some

improvement in 2010.

Impacts also for comml. insurers with construction risk exposure

New home starts plunged 34%

from 2005-2007; Drop through 2009 trough is 68% (est.)—a

net annual decline of 1.41 million units, lowest since

record began in 1959

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. 2005 is estimated at about $1.2 billion.

Source: US Department of Commerce; Blue Chip Economic Indicators (2/09); Insurance Information Inst.

11

SD

NDMT

ID

NV

CA

OR

WA

UT

WY

NE

CO

OK

TXLA

FL

MN

IA

IL

ME

AZNM

KS

WI

OH

MINY

VT

IN

MO

AR

KY

TN

NH

PA

RI

MS AL

SC

NC

GA

VAWV

MA

CT

AK

HI

NJ

DE

MD

DC

State Construction Employment, Dec. 2007 – Dec. 2008

0% to 4%

-0.1% to -8.5%

-8.8% to -22%

AK

11

Construction employment declined in

47 of 50 states in

2008

Sources: Associated General Contractors of America from Bureau of Labor Statistics; Insurance Information Institute.

16.916.916.6

17.117.5

17.817.4

16.516.1

13.1

10.9

12.7

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09F 10F

Weakening economy, credit crunch are hurting auto sales; Gas prices less of a factor now.

New auto/light truck sales are expected to experience a net drop of 6.0 million units annually by 2009 compared

with 2005, a decline of 35.5% and the lowest level

since the late 1960s

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

Auto/Light Truck Sales,1999-2010F (Millions of Units)

Source: US Department of Commerce; Blue Chip Economic Indicators (2/09); Insurance Information Inst.

THE $787 BILLION ECONOMIC STIMULUS

Sectoral Impacts & Implications for P/C

Insurance

Economic Stimulus Package: Where the $787B Goes

Tax Cuts, 38.0%

Aid, 37.9%

Spending, 24.1%

How much “stimulus” is actually in the stimulus

package is open to debate and dispute

Sources: Wall Street Journal , 2/13/09; House Ways and Means Committee; Senate Finance Committee.

Less than ¼ of the stimulus package is direct spending on

infrastructure

Economic Stimulus Package: Where the $787B Goes

Tax Relief, $288 , 38%

State & Local Fiscal Relief, $144 , 18%

Infrastructure & Science, $111 , 14%

Protecting the Vulnerable, $81 , 10%

Health Care, $59 , 7% Education & Training, $53 , 7%

Energy, $43 , 5%

Other, 8, 1%

Tax relief and aid to state and local

government account for 56% of stimulus. Actual

spending accounts for only about 25%

Source: http://www.recovery.gov/ accessed 2/18/09; Insurance Information Institute.

$ BillionsObjective is to create or preserve 3.5 million jobs

$30

$19

$9$5

$8

$18

$8

$29

$6

$0

$5

$10

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24.1% or $132.2B of the stimulus package is

allocated toward direct spending. This is the

component that will most directly benefit p/c

insurers.

Lines Most Likely to Benefit:

Workers Comp Commercial Auto

Inland Marine Commercial Property &

Liability Surety

U.S. Economic $787B Stimulus Package: Major Spending Components

Sources: Wall Street Journal , 2/13/09; House Ways and Means Committee; Senate Finance Committee; Ins. Info. Inst.

Objective is to create or preserve 3.5 million jobs

$ Billions

Economic Stimulus Package: $143.4 in Construction Spending

Transportation Infrastructure, 49.3, 32%

Water & Environmental Infrastructure, 21.4, 14%

Building Infrastructure, 29.6, 20%

Other, 0.2, 0%

Workforce Development & Safety, 4.3, 3%

Energy & Technology, 29.8, 20% School Building, 9.2, 6%

Other, 8.0, 5%

There is approximately $140B in new construction spending

in the stimulus package, about 1/3 of it for transportation.

Source: Associated General Contractors at http://www.agc.org/cs/rebuild_americas_future (2/18/09); Insurance Info. Inst..

$ Billions

$5.1 $6.6

$116.1

$69.8

$0

$20

$40

$60

$80

$100

$120

Business deductions Refundable Tax creditfor 1st-time

homeowners

Tax credit to low incomeworkers & married

couples

Middle-income taxexemption

U.S. Economic $787B Stimulus Package: Major Tax Cut Components

Sources: The Wall Street Journal 2/13/09; Speaker of the House; House Ways and Means Committee; Senate Finance Committee; Insurance Information Institute.

$ Billions38% or $288 of the stimulus package is earmarked for tax relief. There are virtually no direct impacts for insurers.

Secondary impacts could benefit auto and home insurers if

consumer spending rises and real estate markets and residential

construction improve.

Business tax deductions geared toward firms with physical capital

$40.6

$87.0

$2.0$8.0

$1.4

$17.2

$0.20

$27

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

State aid Medicaid Foreclosedproperty

investments

Publicsafety

Educationtax credit

Student aid Collegeprograms

Joblessbenefits

U.S. Economic $787B Stimulus Package: Major Aid Components

$ Billions

38% or $288B of the stimulus package is earmarked for aid, mostly to the states. It is the largest component of the package and the

least likely to have any stimulus impact. There is few direct benefits to p/c insurers,

other than making ongoing funding available for public works projects. Most of the

dollars will plug state budget gaps.

Sources: The Wall Street Journal 2/13/09; Speaker of the House; House Ways and Means Committee; Senate Finance Committee; Insurance Information Institute.

State-by-State Infrastructure

SpendingBigger States Get More, Should Benefit

Commercial Insurer Exposure

Infrastructure Stimulus Spending by State (Total = $38.1B)

State Allocation State Allocation State AllocationAL $603,871,807 LA $538,575,876 OK $535,407,908

AK $240,495,117 ME $174,285,111 OR $453,788,475

AZ $648,928,995 MD $704,863,248 PA $1,525,011,979

AR $405,531,459 MA $890,333,825 RI $192,902,023

CA $3,917,656,769 MI $1,150,282,308 SC $544,291,398

CO $538,669,174 MN $668,242,481 SD $213,511,174

CT $487,480,166 MS $415,257,720 TN $701,516,776

DE $158,666,838 MO $830,647,063 TX $2,803,249,599

DC $267,617,455 MT $246,599,815 UT $292,231,904

FL $1,794,913,566 NE $278,897,762 VT $150,666,577

GA $1,141,255,941 NV $270,010,945 VA $890,584,959

HI $199,866,172 NH $181,678,856 WA $739,283,923

ID $219,528,313 NJ $1,335,785,100 WV $290,479,108

IL $1,579,965,373 NM $299,589,086 WI $716,457,120

IN $836,483,568 NY $2,774,508,711 WY $186,111,170

IA $447,563,924 NC $909,397,136 U.S. Territories

$238,045,760

KS $413,837,382 ND $200,318,301

KY $521,153,404 OH $1,335,600,553 Total $38,101,898,173

Sources: USA Today, 2/17/09; House Transportation and Infrastructure Committee; the Associated Press.

Infrastructure Stimulus Spending By State: Top 25 States ($ Millions)

$890

.6$8

90.3

$836

.5$8

30.6

$739

.3$7

16.5

$704

.9$7

01.5

$668

.2

$648

.9$6

03.9

$544

.3$5

38.7

$538

.6

$1,3

35.8

$1,5

80.0

$909

.4$1

,141

.3

$1,1

50.3

$1,3

35.6

$1,5

25.0

$2,8

03.2

$2,7

74.5

$1,7

94.9

$3,9

17.7

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

CA TX NY FL IL PA NJ OH MI GA NC VA MA IN MO WA WI MD TN MN AZ AL SC CO LA

Stim

ulus

Dol

lars

($ M

ill)

Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.

Infrastructure spending is in the stimulus package total

$38.1B, allocated largely by population size

Infrastructure Stimulus Spending By State: Bottom 25 States ($ Millions)

$278

.9$2

70.0

$267

.6$2

46.6

$240

.5$2

38.0

$219

.5$2

13.5

$200

.3$1

99.9

$192

.9$1

86.1

$181

.7$1

74.3

$158

.7$1

50.7

$413

.8

$447

.6

$290

.5$2

92.2

$299

.6$405

.5

$415

.3$521

.2$4

87.5

$453

.8$535

.4

$0

$100

$200

$300

$400

$500

$600

OK KY

CT

OR IA MS

KS

AR

NM UT

WV NE

NV

DC

MT

AK

U.S

. Ter

r. ID SD

ND HI

RI

WY

NH

ME

DE

VT

Stim

ulus

Dol

lars

($ M

ill)

Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.

Infrastructure spending is in the stimulus package total

$38.1B, allocated largely by population size

Expected Number of Jobs Gained or

Preserved by Stimulus Spending

Larger States = More JobsWorkers Comp Benefits

Estimated Job Effect of Stimulus: Jobs Created/Saved By State = 3.5 Mill Total

State Jobs Created State Jobs Created State Jobs CreatedAL 52,000 LA 50,000 OK 40,000

AK 8,000 ME 15,000 OR 44,000

AZ 70,000 MD 66,000 PA 143,000

AR 32,000 MA 79,000 RI 12,000

CA 396,000 MI 109,000 SC 50,000

CO 60,000 MN 66,000 SD 10,000

CT 41,000 MS 30,000 TN 71,000

DE 11,000 MO 69,000 TX 269,000

DC 12,000 MT 11,000 UT 32,000

FL 207,000 NE 23,000 VT 8,000

GA 107,000 NV 34,000 VA 93,000

HI 16,000 NH 16,000 WA 75,000

ID 17,000 NJ 100,000 WV 20,000

IL 148,000 NM 22,000 WI 70,000

IN 75,000 NY 215,000 WY 8,000

IA 37,000 NC 105,000

KS 33,000 ND 9,000

KY 48,000 OH 133,000 Total 3,467,000

Sources: http://www.recovery.gov/; Council of Economic Advisers; Insurance Information Institute.

Estimated Job Effect of Stimulus Spending By State: Top 25 States

9379 75 75 71 70 70 69 66 66 60 52 50 50

13314

8

100

105

107

109

143

269

215

207

396

0

100

200

300

400

CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC

No.

of J

obs

Cre

ated

/Sav

ed b

y S

timul

us

Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.

The economic stimulus plan calls for the creation or preservation of 3.5 million jobs, allocated roughly

in proportion to the size of the state’s labor force

(Thousands)

2220

17 16 16 1512 12 11 11 10 9 8 8 8

33

37

2330

3232

34

44

41 40

48

0

10

20

30

40

50

KY OR CT OK IA NV KS AR UT MS NE NM WV ID HI NH ME DC RI DE MT SD ND AK VT WY

No.

of J

obs

Cre

ated

/Sav

ed b

y S

timul

usEstimated Job Effect of Stimulus

Spending By State: Bottom 25 States

(Thousands)

Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.

The economic stimulus plan calls for the creation or

preservation of 3.5 million jobs, allocated roughly in

proportion to the size of the state’s labor force

Stimulus: Reading The Economic Tea Leaves for the Next 4 to 8 Years

Source: Insurance Information Institute

• Growing Role of Government: 2009 Stimulus Package and Other Likely Spending Initiatives Guarantee that Government Will Play a Much Larger Role Than at Any Other Time in Recent History Every industry, including insurance, will and must attempt to

maximize direct and indirect benefits from this paradigm shift• Obama Administration Priorities: Stimulus Package

Acts as “Economic Tea Leaf” on the Administration’s Fiscal Priorities for the Next Several Years

• These Include: Alternative Energy Health Care Education Aging/New Infrastructure Aid to States

• Stimulus is Only One Leg of the Stool (1) Stimulus; (2) Housing, and (3) Financial Services Reform

FINANCIAL STRENGTH & CAPACITY

Industry Has Weathered the Storms Well; Insurers Have Capacity to Accommodate

Stimulus Spending

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*

Under Review, 63 , 4.3%

Upgraded, 59 , 4.0%

Initial, 41 , 2.8%

Other, 59 , 4.0%

Affirm, 1,183 , 81.0%

Downgraded, 55 , 3.8%

*Through December 19.Source: A.M. Best.

30

Despite financial market turmoil, high cat losses and a soft market in 2008, 81% of ratings actions by A.M. Best

were affirmations; just 3.8% were downgrades

and 4.0% upgrades

P/C insurance is by design a resilient in business. The dual threat of financial

disasters and catastrophic losses are

anticipated in the industry’s risk

management strategy.

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

75 76 77 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

U.S. Policyholder Surplus: 1975-2008*

Source: A.M. Best, ISO, Insurance Information Institute. *Towers Perrin estimate as of 12/31/08

$ B

illi

ons

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Actual capacity as of 9/30/08 was $478.5, down 7.6% from 12/31/07 at $517.9B, but 68% above its 2002

trough. Recent peak was $521.8 as of 9/30/07. Estimate as of 12/31/08 is $438B is 16% below 2007

peak.

The premium-to-surplus ratio stood at $0.94:$1 at year end 2008, up from

near record low of $0.85:$1 at year-end 2007

31

Insurers Can Accommodate Stimulus and Economic Expansion

BOTTOM LINE:• Insurance Markets—Unlike Banking—Are Operating

Normally• The Basic Function of Insurance—the Orderly Transfer

of Risk from Client to Insurer—Continues Uninterrupted• This Means that Insurers Continue to:

Pay claims (whereas 38 banks have gone under as of 2/13) The Promise is Being Fulfilled

Renew existing policies (banks are reducing and eliminating lines of credit)

Write new policies (banks are turning away people who want or need to borrow)

Develop new products (banks are scaling back the products they offer)

Source: Insurance Information Institute32

Insurance Information Institute On-Line

33