North AmericanProperty/Casualty Insurance Industry Review & Outlook

Canadian Insurance Accountants Association ConferenceThe Prince Edward Hotel

Charlottetown, Prince Edward IslandSeptember 20, 1999

Download this presentation at: http://www.iii.org/media/ciaa/index.html

Robert P. Hartwig, Ph.D. Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 669-9214 Fax: (212) 732-1916 bobh@iii.org www.iii.org

WORLD OVERVIEW

World P/C InsuranceMarket Shares

Europe33.0%

Asia16.2%

Africa0.9%

Oceania1.9%

Latin America3.1%North America

44.9%

Source: Swiss Re, Insurance Information Institute

1997=$897 Billion (US$)

Worldwide P/C premiums will

surpass $1 trillion in the

Year 2000

Global Non-Life Market Share

Canada3.0%

Japan11.3%

Germany8.9%

Italy2.9%

France4.5%

United Kingdom6.3%

Rest of World21.2%

United States41.9%

Source: Swiss Re, Insurance Information Institute

1997: Canada became the world’s 6th largest p/c market

North American P/C Insurance Market Place

$12.3 Billion (4.3%)

$281.5 Billion (95.7%)

Source: Insurance Information Institute, A.M. Best, Insurance Bureau of Canada

1998 (US$)

Japan1.2%

Asia/Pacificexcl. Japan

0.6%

Latin America7.0%

Bermuda2.6%

Canada9.7%

Europe78.9%

Source: Insurance Information Institute, Bureau of Economic Analysis

1997

Foreign Direct Investment inthe U.S. Insurance Industry

47.7% 51.1%

9.8%12.1%

18.4%11.6%

8.7%

3.2%5.4%4.3%

14.3%4.1%1.3%3.1%1.9%3.0%

US Canada

Liability

Auto

Personal Property

Workers Comp

Other

A&HMarine&Aircraft

Comm. Prop.Reinsurance

Product Line Share ofTotal Premium (1998)

Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute

Percent of Industry NPW

INDUSTRY FINANCIAL PERFORMANCE:

1999 YEAR-TO-DATE

1999 vs. 1998 US Industry: Stock Performance

40.72%

28.58%

11.62%

5.77%

-3.84% -3.22%

S&P 500 All Insurers P/C

Source: SNL Securities, Insurance Information Institute

52 W

eek

s E

nd

ing

9/3/

99

Fu

ll Y

ear

1998

1999 Stock Market Performance, by Segment

-45.85%

-16.96%

-14.67%

-3.56%

-3.15%

1.48%

8.39%

10.96%

18.95%

30.82%

-40% -20% 0% 20% 40%

Brokers

Multiline

S&P 500

Mort. Guar.

Banks

L/H

All Insurers

P/C

Fin. Guar.

Title

Source: SNL Securities, Insurance Information Institute

Year-to-Date through 09/03/99

1999 Insurer Stock Performance, by Asset Size

0.31%

-18.74%

-14.72%

-16.98%

-14.24%

-5.28%

>$10B $2.5-$10B $1-$2.5B $500M-$1B $250-$500M <$250M

Source: SNL Securities, Insurance Information Institute

Year-to-Date Through 09/03/99

Insurers vs. Banks:1999 Stock Performance

10.96%

-14.67%

-3.56%

1.48%

-20% -15% -10% -5% 0% 5% 10% 15%

S&P 500

Banks

All Insurers

P/C

Source: SNL Securities, Insurance Information Institute

Year-to-Date Through 09/03/99

0%

5%

10%

15%

20%

25%

U.S. Canada

Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute

Growth in Net Premiums Written

1999 NPW Growth Estimates:

US: 1.0%

Canada: 0.8%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Personal Lines Commercial Lines

Personal/Commercial Growth in NPW: Canada

Source: Insurance Bureau of Canada, Insurance Information Institute

0

2

4

6

8

10

12

14

16

18

20

(C$

, B

illi

on

s)

NPW Surplus (Equity)

Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute

Net Premiums Written and Surplus (Equity): Canada

0.5

1.3

2.0

2.8

US Canada

Net Premiums Written to Policyholder Surplus

Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute

1999-2000 (U.S. Est./Forecast) = 0.8

U.S. InsuredCatastrophe Losses

$1.3$4.7 $5.5

$16.9

$7.3$10.1

$7.5

$2.7

$22.9

$8.3

$2.6

0

5

10

15

20

25

Nominal ($ Billions)

1988 89 90 91 92 93 94 95 96 97 98

Source: Property Claims Service, Insurance Information Institute

1st-Half 1999 Cat losses: $5.2B

95

99

103

107

111

115

119

Canada US

Combined Ratio: 1970-1999*

* 1999 figures based on 1st-half results.

Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute

*

$0

$9

$18

$27

$36

$45

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

US Canada

Net Investment Income

US Facts

1997 Peak = $41.5B

1998 = $39.9B

1999 (Estimate) = $39B

2000 (Forecast) = $37B

Source: A.M. Best, Insurance Bureau of Canada, Insurance Information Institute

Bil

lion

s

(US

$)

Billion

s

(C$)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

US Canada All US Industries

Return on Equity1975 - 1998

* Estimate

*

Source: Insurance Bureau of Canada, Insurance Information Institute

MERGERS AND ACQUISITIONS

Insurance Mergers and Acquisitions

7.1 6.9 8.6 5 8.5 12.527

40.856.2

30.9

243 246

171 188149

221

349382

433

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

89 90 91 92 93 94 95 96 97 98 99(1stHalf)

Val

ue

of M

& A

s ($

bill

ion

s)

0

100

200

300

400

500

600

Nu

mb

er o

f M

& A

s

Value of Deals Number of Deals

Source: Compiled from Conning & Company reports.

1998: 565 deals valued at $165.4 B

A Big Piece of the Pie...

Total Value of U.S. Deals in 1998 (All Industries) = $1.6 Trillion

Insurance Deals

= $165.4 Billion or

10.3% (est.)

Overrepresented?

Insurance Share of US GDP = 8.5%

Source: Insurance Information Institute, Conning & Company, Securities Data Corp.

Insurance Deals = $165.4 Billion

or 10.3%

M&As by Segment/Value

Life22%

Health3%

Distribution37%

P/C38%

Source: Conning & Co.

1998 = $165.4 Billion

M&As by Segment/#Deals

Life12%

Health18%

Distribution43%

P/C27%

Source: Conning & Co.

1998 = 565 Deals

Major M&A Announcements Involving U.S. Insurers in 1999

TRANSACTION VALUE ANNOUNCED

ACE Ltd. (Bermuda) acquired Cigna’s p/coperations

$3.5B 1/12/99

AXA (France)/Guardian Royal (U.K.)/LibertyMutual{AXA Acquired Guardian; Liberty will acquirethe US operations of Guardian for $1.5B}

$5B 2/1/99

Chubb acquired Executive Risk $810MM 2/9/99

XL Capital Ltd. (Bermuda) acquired NAC Re $1.2B 2/16/99

Aegon (Netherlands) NV acquired Transamerica $9.7B 2/18/99

Fortis (Belgium) acquired American Bankers $2.6B 3/8/99

TOTAL $22.8B

How to Get Rid of Overcapacity

• Pay bigger dividends– policyholder & stock

• Share buybacks

• Reduce prices (underwriting losses rise)

• Buy non-P/C assets

• Wait for bear market (invest. losses rise)

M&As CAN’T DO IT ALONE

DISTRIBUTION & AGENCY/BROKER ISSUES

U.S. Insurance Industry Employment (All Segments)

Source: Bureau of Labor Statistics, U.S. Department of Labor.

2,050

2,120

2,190

2,260

2,330

2,400

An

nu

al A

vera

ges

(Th

ou

san

ds)

U.S. Insurance Industry Employment (By Segment)

Source: Bureau of Labor Statistics, U.S. Department of Labor.

500

600

700

800

900

1,000

P/C Companies Agents/Brokers L/H

An

nu

al A

vera

ges

(Th

ou

san

ds)

Personal Lines ($146B) Personal Lines ($146B)

$82.6B

Ind. Agents/ Brokers Ind. Agents/ Brokers

27%27%

Captive Agents 56.5%Captive Agents 56.5%

$39.5BDirect Response Direct Response

9.8%9.8%

Source: Insurance Information Institute, A.M. Best, DatamonitorSource: Insurance Information Institute, A.M. Best, Datamonitor

Banks 2.8% ($4.1B)Banks 2.8% ($4.1B)

$14.3 Other 3.0% ($4.4B)Other 3.0% ($4.4B)

Internet 0.9% ($1.3B)Internet 0.9% ($1.3B)

P/C Premium Distribution1998

Commercial Lines ($135B)Commercial Lines ($135B)

$36B

Ind. Agents/ Ind. Agents/

BrokersBrokers

73%73%

CaptiveCaptive

AgentsAgents

27%27%

$99B

Direct Response 0.3%Direct Response 0.3%

($0.4B)($0.4B)

Source: Insurance Information Institute, A.M. BestSource: Insurance Information Institute, A.M. Best

P/C Premium Distribution1998

Shifting Distribution Channels: Life/Health Insurers

Source: Datamonitor

20031998

Direct Response

3.9%

Banks14.9%

Internet2.9%

Other6.3%

Independent Agents31.9%

Captive Agents40.1%

Direct Response

2.8%

Banks9.2%

Internet0.5%

Other7.0%

Independent Agents35.5%

Captive Agents45.0%

Respondents Extremely/Very Comfortable Purchasing Auto Insurance(%), by

Outlet

80

21

9 8

Through Agent From a Bank By Phone On Internet

Source: Insurance Information Institute’s 1999 Insurance Pulse

Respondents Having Better Relationship with Agents, Banks, or Neither

51

23

17

10

Agent/Rep Bank Neither Don't Know

Source: Insurance Information Institute’s 1999 Insurance Pulse

Distribution Channels Continue to Proliferate

Customer InsurerAgent Broker

Mail Telephone

Bank

Internet Dealerships

Payroll Plans ???

The Electrons Are Coming...

E-Agencies (As of Sept. 1999)

Just 3% (1,200) of the 42,000 independent agencies in the US have a web site

THE DOLLARIZATION DEBATE

Advantages of a Single Currency

Benefits to insurers are peripheral

Elimination of FX risk Reduced transaction cost Facilitates cross-border investment

(real/financial) Encourages dollar-zone investment Promotes economic integration

EU Directives AffectingNon-Life Insurance

Reinsurance/Retrocession (February 2, 1964)

– Abolished nationality-based restrictions on reinsurance transactions

First Generation Directives (July 24, 1973[life];1979[non-life])

– Objective: Increase competitionInsurers from one member state allowed to operate inother member statesInsurers remained protectionist

Had right to sell, few allowed to buy

Largely ineffective until 1990s

EU Directives AffectingNon-Life Insurance

Second Generation Directives (June 22, 1988)

– Allowed medium/large commercial risks to buy P/L coverage in insurance markets of member states

– Personal lines excluded

Third Generation Directives (June 18, 1992)

– Objective: Remove remaining obstacles to open competition

Single license (issued by home country) permits operationin all EU statesHome country supervisory authority may not require priorapproval of rates, policy conditions, or formsCan’t deny entry based on “market disruption”

Standardization of regulatory oversight (esp. solvency)

Foreign branch operations regulated by home country

Lingering Problems for Insurers

No uniformity of contract law No standardization of corporate law Limited uniformity of insurance taxation General-good provision Language (11+ languages spoken in 15 EU nations)

Cultural differences Weak euro? Defections before 2002?

EMERGING ISSUESY2K

Financial Services Reform

Banks and Insurance

Firearms Exposure?

Fraud

Insurers’ Estimated Y2KExposure: Worst Case Scenario*

Directors & Officers$5 billion 14.3%

General Liability$8 billion22.9%

Business Interruption$4 billion11.4%

Errors and Ommissions

$4 billion11.4%

Declaratory Judgment Expenses

$10 billion28.6%

Miscellaneous$4 billion11.4%

*High estimate ($35 billion); M&R estimates range from $15 - $35 billion. Source: Milliman & Robertson

Financial Services Reform: Work (Still) in Progress

• Senate• Banks, securities firms &

insurers must operate as holding cos.

• Fed oversight• Bar banks from entering

commercial businesses/bar non-fin. cos. from thrifts

• Small, rural banks exempt from CRA

• Criminalize privacy breaches

• House• Holding cos/national bank

subsidiary structures permitted

• Fed/OCC oversight

• Banks can enter commercial services/non-fin. cos can own thrifts

• Extend CRA to holding companies

• Disclosure policies, customer consent

1997 Bank Insurance Premiums

Annuities$18.8 billion

68%Life

$1.4 billion5%

Personal$2.0 billion

7%

Commercial$2.8 billion

10%

Credit$2.8 billion

10%

Source: Association of Banks-in-Insurance

Total = $27.8 Billion

Firearms Exposure:Long Shot or Bull’s-Eye?

Source: FBI

27.5

82.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Aggravated Assaults withFirearms

West Virginia US

1.7

3.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Murder with Handguns

West Virginia US

Rate per 100,000 population (1997)

• Raises questions for insurance regulators in small states

• Adds fuel to federal v. state oversight debate

• Current safeguards designed to minimize insolvency risk, not risk of financial fraud.

• NAIC role/position Martin Frankel: Disappeared with $215 million in policyholder funds

Insurance Information Institute On-Line

•Tips on safety, disaster preparedness

•Consumer advice

•Information for Insurance Professionals

•Media Resources

•Industry Financial Results, Surveys & Polls

Download this presentation at: http://www.iii.org/media/ciaa/index.htm

Major P/C Industry Trends

• DISTRIBUTION

• GLOBALIZATION– Most investment coming from Europe– Asia: So bad it’s good

• CONSOLIDATION– Lots more ahead (all segments but brokers)– Driven by bull market

Major P/C Industry Trends

• DEMUTUALIZATION– Mostly on life side– Possible regulatory/shareholder backlash– Who needs more capital anyway?– Some distinct advantages to mutual form

• FIN. SERVICE INTEGRATION– Historical record poor (AmEx, Sears)– Gains from ‘cross-selling’ unproven– Undercut by technology– Retirement/tax deferral show promise