property/casualty insurance financial & hurricane update insurance information institute april...
TRANSCRIPT
Property/Casualty Insurance Financial &
Hurricane Update
Insurance Information Institute
April 25, 2006
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Presentation Outline
• P/C Profit Overview• Wall Street Perspective• The Six Key Issues Impacting P/C Profitability
UnderwritingPricing InvestmentsExpensesLeverage (Capacity)P/C Operating Environment: Tort Focus
• Catastrophe Loss Management• Commercial & Personal Lines: A Quick Overview• Flood Insurance Penetration Rates• Q & A
P/C PROFIT OVERVIEW
2006 Outlook is Good
Highlights: Property/Casualty,2005 vs. 2004
Item 2005 2004 Change
Net Written Prem. 425,653 424,089 +0.4%
Loss & LAE 311,395 300,948 +0.9%
Net UW Gain (Loss) (5,928) 4,263 N/A
Net Inv. Income 49,456 39,966 +23.7%
Net Income (a.t.) 43,013 38,501 +12.3%
Surplus* 427,138 391,294 +9.2%
Combined Ratio* 100.9 98.3 +2.6 pts.
Source: ISO, Insurance Information Institute *Comparison is with year-end 2004 value.
Growth rate lowest since late 1990s
Investment Income Rebound?
P/C Net Income After Taxes1991-2005 ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598$24,404
$36,819
$30,773
$21,865
-$6,970
$3,046
$30,029
$43,013
$20,559
$38,501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*ROE figures are GAAP; **Return on avg. surplus. ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. Sources: A.M. Best, ISO, Insurance Information Inst.
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROAS** = 10.5%
2005 Net Income only now exceeding levels of mid-1990s
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
E2
00
6F
20
07
F2
00
8F
20
09
F2
01
0F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2006-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent.
2006-2010 (post-Katrina) period will resemble 1993-97
(post-Andrew)
2005: biggest real drop in premium since early 1980s
Advertising Expenditures by P/C Insurance Industry, 1999-2004
$ Billions
$1.736 $1.737$1.803
$1.708
$2.111
$1.882
$1.5
$1.6
$1.7
$1.8
$1.9
$2.0
$2.1
$2.2
99 00 01 02 03 04Source: Insurance Information Institute from consolidated P/C Annual Statement data.
Ad spending by P/C insurers is at a record high, signaling
increased competition
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
05H
1
05E
06E
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2006F*
*GAAP ROEs except 2005 P/C figure = return on average surplus. 2005 figure falls to 9.8% after adjustment for special dividend paid by investment subsidiary of 1 company. 2006E figure is III estimate.Source: Insurance Information Institute; Fortune for all industry figures.
2005 P/C ROAS = 10.5% reflecting record catastrophe losses
2005:H1 P/C ROAS = 15.3%2006 Estimate = 13%
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
US P/C Insurers All US Industries P/C excl. Hurricanes
ROE: P/C vs. All Industries 1987–2005
Source: Insurance Information Institute; Fortune
Andrew Northridge
Hugo Lowest CAT losses in 15 years
Sept. 11
2004/5 ROEs excl. hurricanes
4 Hurricanes
Katrina, Rita, Wilma
RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies*
*Fortune 1,000 group.
Source: Fortune Magazine, Insurance Information Institute.
13%
10%
13.4%14.6%
10.4% 10.0%
14.9%14%
13%
7%6%
11%12%
9%
-2%
8%7%
2%
10%
13.9%12.6%
-4%-2%
0%2%4%
6%8%
10%12%
14%16%
1998 2000 2001 2002 2003 2004 2005
StockMutualAll Companies*
Stock insurer ROEs consistently above mutuals
The gap between stock and mutual profitability
has been narrowing
RNW for Major P/C Lines,1995-2004 Average
16.5%
8.5% 7.9% 7.7%
5.5% 5.4% 4.6%3.4%
-2.5%
21.4%
15.7%
5.9%
-5%
0%
5%
10%
15%
20%
25%
InlandMarine
AllOther
Fire PPAuto
WC AllLines
CommAuto
CMP MedMal
OtherLiab
Home Allied
Source: NAIC; Insurance Information Institute
10-Year returns for some major p/c lines surprisingly good, but
HO is a major laggard
WALL STREET:
MAINTAINING THE CONFIDENCE OF WALL
STREET IS CRITICAL FOR MANY INSURERS
P/C Insurers Stocks Up in 2005, Brokers Up Too, Reinsurers Down
-0.52%
9.31%
9.40%
13.29%
17.14%
22.09%
3.00%
-5% 0% 5% 10% 15% 20% 25%
S&P 500
Life/Health
All Insurers
Brokers
Multiline
P/C
Reinsurers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total 2005 ReturnsP/C insurer stocks outperforming
the market despite hurricanes
Reinsurers lagging on record CAT losses
Brokers up on tight market hopes
4.2%
4.0% 4.5%
3.8%
2.2%
2.5% 3.
3%
2.7% 3.
9%
2.6% 3.2%
2.9%
4.9%
8.7% 9.3%
-4.0
%
-3.5
%
-2.7
%
-4.1
%
-5.3
%
-4.5
%
-5.7
%
-5.8
%
-6.0
%
-6.2
%
-5.3
%
-5.6
%
-5.6
%
-1.3
%
-0.5
%
-5.5
%
-6.4
% -4.8
%
-5.5
%
-0.6
%
1.9%
2.1% 3.
6% 4.8%
3.4%
2.2% 2.
8%
5.0%
7.0%
13.3
%
-10%
-5%
0%
5%
10%
15%
5-Aug
12-Aug
19-Aug
26-Aug
2-Sep
9-Sep
16-Sep
23-Sep
30-Sep
7-Oct
14-Oct
21-Oct
28-Oct
04-Nov
31-Dec
P/C Reinsurers Brokers
Source: SNL Securities; Insurance Information Institute
Change in YTD Stock Performance by Sector Pre- & Post-Katrina/Rita/Wilma
P/C & reinsurer stocks hurt but now fully recovered. Brokers rose on expectation of tighter conditions and demand for broker
services; closure of Spitzer issues.
Katrina: Aug. 29
Rita comes ashore Sept. 24
Wilma landfall Oct. 24
Insurance Stocks Off to a Slow Start in 2006
2.00%
-0.88%
-3.52%
4.50%
-2.08%
4.74%
5.05%
-4.0% -2.0% 0.0% 2.0% 4.0% 6.0%
S&P 500
Life/Health
All Insurers
Brokers
Multiline
P/C
Reinsurers
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
Total YTD Returns Through April 21, 2006
Issue #1UNDERWRITING
Surprisingly Strong in 2005, Stage is Set for a
Good 2006
115.8
107.4
100.198.3
92.7
100.9
97.7
90
100
110
120
01 02 03 04 05H1 05 06F IIIForecast*
P/C Industry Combined Ratio
Sources: A.M. Best; ISO, III. *III forecast for 2006
2005 figure reflects heavy use of reinsurance which
lowered net losses, but still a substantial deterioration
from first half 2005
Expectation is for an underwriting
profit in 2006
103.
9
104.
5
103.
5
104.
9
99.8 10
2.7
104.
5
109.
9
110.
9
105.
3
98.4
94.3
101.
0
95.9
85
90
95
100
105
110
115
93 94 95 96 97 98 99 00 01 02 03 04 05E 06F
Personal LinesCombined Ratio, 1993-2006E
Source: A.M. Best; Insurance Information Institute. 2006 forecast from Fitch Ratings as of 12/7/05.
A very strong 2006 is expected in personal lines assuming “normal”
catastrophe loss activity
110.
3
110.
2
107.
6
103.
9
109.
7
112.
3
111.
1
122.
3
110.
1
102.
3
101
99
101.
9
112.
5
85
90
95
100
105
110
115
120
125
93 94 95 96 97 98 99 00 01 02 03 04 05E 06F
Commercial Lines Combined Ratio, 1993-2006E*
Source: A.M. Best; Insurance Information Institute *Fitch estimate for 2005. Actual 1H05 combined ratio all lines was 92.7.
Outside CAT-affected lines, commercial
insurance is doing fairly well. Caution is
required in underwriting long-
tail commercial lines.
2006 results dependent on a return to “normal” catastrophe loss levels
$10
.8
$22
.7
$13
.9
$9.
9
$8.
0
$5.
0
$2.0$0.4
2.41.9
1.1
0.4
6.5
3.63.5
0.1
$0
$5
$10
$15
$20
$25
2000 2001 2002 2003 2004 2005E 2006E 2007E
Rese
rve
Dev
elo
pm
ent
($B
)
0
1
2
3
4
5
6
7
Co
mb
ined
Rat
io P
oin
ts
PY Reserve Development Combined Ratio Points
Impact of Reserve Changes on Combined Ratio
Source: A.M. Best, Lehman Brothers for years 2005E-2007F
Reserve adequacy is improving substantially
$6,3
20
$2,1
18
$1,7
29
$1,1
09
$850
$241
$148
$27
($1,
779)
($1,
686)
($1,
156)
($79
9)
($61
7)
($10
3)
($27
)
$3,5
13
($3,000)($2,000)($1,000)
$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000
Oth
er L
iab
ilit
y
Rei
nsu
ran
ce
Wo
rk.
Co
mp
Pro
d.
Lia
b.
Co
mm
l. M
P
Fid
elit
y/S
ure
ty
Co
mm
l. A
uto
Med
Mal
Inte
rnat
ion
al
Fin
l. G
uar
anty
Sp
ecia
l L
iab
.
Oth
er
Sp
ecia
l P
rop
.
Ho
meo
wn
ers
PP
Au
to
Au
to P
D
2004 Prior Year Reserve Development by Line ($ Millions)
Source: A.M. Best, Lehman Brothers.
Longer-tail casualty coverages have been the source of most
reserve problems in recent years
Reserve Strengthening
Reserve Releases
($55)
($50)
($45)
($40)
($35)
($30)
($25)
($20)
($15)
($10)
($5)
$0
$5
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
Underwriting Gain (Loss)1975-2005
Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
Insurers sustained a $5.9 billion underwriting loss in 2005. Before
Katrina, p/c insurers were on track for only the second
underwriting profit in 27 years; U/W profit in 2006 is likely.
110
.5
10
5.0 11
3.6 11
9.2
10
4.8
10
0.8
10
0.5
114
.3
10
6.5
12
5.8
111
.0
12
4.6
12
9
10
8.8 11
5.8
10
6.9
10
8.5
10
6.7
10
6.0
10
1.9
10
5.9
10
8.0
110
.1 115
.8
10
7.4
10
0.1
98
.3
10
0.9
16
2.4
12
6.5
90
100
110
120
130
140
150
160
170
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
HurricaneAndrew
Sept. 11
2004/5 Hurricanes
97.5
100.6 100.198.3
92.7
100.9
9.4%
10.5%
15.3%14.3%
15.9%
9.4%
80
85
90
95
100
105
110
1978 1979 2003Actual
2004 2005:H1 2005
Co
mb
ine
d R
ati
o
6%
8%
10%
12%
14%
16%
18%
Re
tru
n o
n E
qu
ity
*
Combined Ratio ROE*
* 2005 figure is return on average statutory surplus.Source: Insurance Information Institute from A.M. Best and ISO data.
A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At
Combined ratios today must be below
95 to generate Fortune 500 ROEs
UNDERWRITING AFFECTS FINANCIAL
STRENGTH
Is There Causefor Concern?
P/C Company Insolvency Rates,1993 to 2004
Source: A.M. Best; Insurance Information Institute *1993-2003
1.20%
0.58%
0.21%0.28%
0.79%
0.60%
0.23%
1.02% 1.03%
1.33%
0.85%
0.42%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E 2004
•Insurer insolvencies are increasing•12-yr industry failure rate: 0.71%
•Failure rating for B+ or better rating: 0.49%*•Failure rate for D through B rating: 1.29%*
383030
12-yr Failure Rate
= 0.71%
21
10
Ratings Agencies Tightening Requirements for CATs
2006 SRQ CAT Model Reqs.*•All Property Exposure•Auto Physical Damage•Reinsurance Assumed•Pools & Assessments•All Flood Exposure•WC Losses from Quake•Fire Following•Storm Surge•Demand Surge•Secondary Uncertainty
ALSO “A.M. Best will perform additional “stress-tested” risk-adjusted capital analysis for a second event in order to determine the potential financial condition of an entity post a severe event.”IMPLICATION: Some insurers may be required to carry more capital to maintain the same rating.
*SRQ = Supplemental Rating QuestionnaireSource: A.M. Best Review & Preview, January 2006.
Best currently estimates PML for
100-yr. wind & 250-yr. quake to determine capital
adequacy
Historical Ratings Distribution,US P/C Insurers, 2000 vs. 2005
A/A-52.3%
A++/A+9.2%
B++/B+26.4%
Vulnerable*12.1%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings ‘B’ and lower.
A/A-48.4%
D0.2%C++/C+
1.9%
E/F2.3% A++/A+
11.5%
C/C-0.6%
B++/B+28.3%
B/B-6.9%
2000 2005 A++/A+ shrinkage
Ratings agencies increasing emphasis on multiple
eventsrequire more capital
CATASTROPHE LOSS
MANAGEMENT
Failure to Adequately Manage this Risk Has Been Devastating
Percentage of California Homeowners with Earthquake
Insurance, 1994E-2004
30.0%31.4%
19.5%17.4%
14.6%15.6%13.8%
15.8%15.7%16.8%
0%
5%
10%
15%
20%
25%
30%
35%
94E 96 97 98 99 00 01 02 03 04
Source: California Department of Insurance; Insurance Information Institute for 1994 figure.
The vast majority of California homeowners forego earthquake
coverage & play Russian Roulette with their most valuable asset.
Number of Tornados & Associated Deaths, 1985-2005p
68
4
65
6
70
2
85
6
1,1
33 1,2
97
1,1
73
1,2
34
1,1
73
1,4
24
1,3
45
1,0
71 1,2
16
94
1
1,3
76
1,8
19
1,2
00
76
5
1,1
32
1,1
48
1,0
82
94
5950
3930
130
40 40
54
36 3953
15
69 67
94
5532 3933
25
500
700
900
1,100
1,300
1,500
1,700
1,900
85
87
89
91
93
95
97
99
01
03
05
E
Nu
mb
er o
f T
orn
ados
0
20
40
60
80
100
120
140
Tor
nad
o D
eath
s
Number of Tornados Tornado DeathsSource: III from National Weather Service data.
There appears to be an upward trend in the number of tornados, though not deaths. Detection Increase?
U.S. InsuredCatastrophe Losses ($ Billions)*
$7.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$100
.0
$57.
7
$1.4
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
06:Q
1
20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.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.Source: Property Claims Service/ISO; Insurance Information Institute
$ Billions
2005 was by far the worst year ever for insured
catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Global Number of Catastrophic Events, 1970–2005
0
50
100
150
200
250
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Natural catastrophes Man-made disasters
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.
The number of natural and man-made
catastrophes has been increasing on a global
scale for 20 years
Record 248 man-made CATs &
record 149 natural CATs in 2005
Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E
0%
2%
4%
6%
8%
10%
12%
14%
16%
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05E
USWorldwideUS average: 1984-2004
*Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B.
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
US CAT losses were a record 13.8% of
net premiums earned in 2005 and were 4.2 times the 1984-2004 average
of 3.3%
Global Insured CAT Losses, 1970–2005(Property and Business Interruption)
$0
$10
$20
$30
$40
$50
$60
$70
$80
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Natural catastrophesMan-made disasters
Source: Swiss Re, sigma No. 1/2005 & 2/2006.
Billion USD, at 2004 prices
There has been a huge increase in the insured
value of global CAT losses in recent years
Record $78 billion in insured natural CAT
losses in 2005, compared to $5B in man-made disasters
Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade
4
6
65
4
6
88
5
8
6
9
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)).Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.
10
1930s – mid-1960s:
Period of Intense Tropical Cyclone Activity
Mid-1990s – 2030s?
New Period of Intense Tropical Cyclone Activity
Tropical cyclone activity in the mid-1990s entered the active
phase of the “multi-decadal signal” that could last into the 2030s
Already as many major storms in
2000-2005 as in all of the 1990s
Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)
$3.5 $3.8 $4.8 $5.0$6.6 $7.4 $7.7
$9.4
$21.6
$40.0
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Georges(1998)
Jeanne(2004)
Frances(2004)
Rita (2005)
Hugo(1989)
Ivan (2004)
Charley(2004)
Wilma(2005)
Andrew(1992)
Katrina(2005)
$ B
illi
ons
Sources: ISO/PCS; Insurance Information Institute.
Seven of the 10 most expensive hurricanes in US history
occurred in the 14 months from Aug. 2004 – Oct. 2005:
Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne
Insured Loss & Claim Count for Major Storms of 2005*
$1.1
$38.1
$9.4$5.0
104
381
1,025
1,752
$0.000$5.000
$10.000$15.000
$20.000$25.000
$30.000$35.000
$40.000$45.000
Dennis Rita Wilma Katrina
Size of Industry Loss ($ Billions)
Ins
ure
d L
os
s ($
Bill
ion
s)
02004006008001,0001,2001,4001,6001,8002,000
Cla
ims
(th
ou
sa
nd
s)
Insured Loss Claims
*Property and business interruption losses only. Excludes offshore energy & marine losses.
Source: ISO/PCS as of February 8, 2006 for Dennis, Rita, Katrina and March 27, 2006 for Wilma; Insurance Information Institute.
Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3
million claims
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,
1985-2004¹
Utility Disruption0.1%
Terrorism9.7% All Tropical
Cyclones3
34.6%
Tornadoes2
30.4%
Water Damage0.2%
Civil Disorders0.5%
Fire6
2.9%
Wind/Hail/Flood5
3.4%
Earthquakes4
8.4%
Winter Storms9.7%
Source: Insurance Information Institute estimates based on ISO data.
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2004 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.
Insured disaster losses totaled $221.3 billion from
1984-2004 (in 2004 dollars). After 2005 season, tropical
cyclones will account for about 45% of the total.
Total Value of Insured Coastal Exposure (2004, $ Billions)
$1,901.6$740.0
$662.4$505.8
$404.9$209.3
$148.8$129.7$117.2$105.3
$75.9$73.0
$46.4$45.6$44.7$43.8
$12.1
$1,937.3
$0 $500 $1,000 $1,500 $2,000 $2,500
FloridaNew York
TexasMassachusetts
New JerseyConnecticut
LouisianaS. Carolina
VirginiaMaine
North CarolinaAlabamaGeorgia
DelawareNew Hampshire
MississippiRhode Island
Maryland
Source: AIR Worldwide
Value of Insured Residential Coastal Exposure (2004, $ Billions)
$512.1$306.6$302.2
$247.4$205.5
$88.0$65.1$64.5$60.0$60.0
$36.5$29.7$26.6$25.9$24.8$20.9
$5.4
$942.5
$0 $200 $400 $600 $800 $1,000
FloridaNew York
MassachusettsTexas
New JerseyConnecticut
LouisianaS. Carolina
MaineVirginia
North CarolinaAlabamaGeorgia
DelawareRhode Island
NewMississippiMaryland
Source: AIR
Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)
63.1%60.9%
57.9%54.2%
37.9%33.6%33.2%
28.0%25.6%25.6%
23.3%13.5%
12.0%11.4%
8.9%5.9%
1.4%
79.3%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
FloridaConnecticut
New YorkMaine
MassachusettsLouisiana
New JerseyDelaware
Rhode IslandS. Carolina
TexasNH
MississippiAlabamaVirginia
NCGeorgia
Maryland
Source: AIR Worldwide
The 2006 Hurricane Season:
Preview to Disaster?
Outlook for 2006 Hurricane Season
Average* 2005 2006F
Named Storms 9.6 26 17
Named Storm Days 49.1 115.5 85
Hurricanes 5.9 14 9
Hurricane Days 24.5 47.5 45
Intense Hurricanes 2.3 7 5
Intense Hurricane Days 13 7 13
Net Tropical Cyclone Activity 100% 275% 195%
*Average over the period 1950-2000.Source: Dr. William Gray, Colorado State University, April 4, 2006.
Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2006
Average* 2006F
Entire US Coast 52% 81%
US East Coast Including Florida Peninsula
31% 64%
Gulf Coast from FL Panhandle to Brownsville, TX
30% 47%
ALSO…Above-Average Major Hurricane
Landfall Risk in Caribbean for 2006
*Average over past century.
Source: Dr. William Gray, Colorado State University, April 4, 2006.
Hurricanes Katrina, Rita & Wilma:
Their Place in History
Hurricane Katrina Insured Loss Distribution by State ($ Millions)*
Mississippi, $12,105 , 31.8%
Louisiana, $24,275 , 63.7%
Tennessee, $59.0 , 0.2%Florida, $543.0 , 1.4%
Georgia, $27.0 , 0.1%Alabama, $1,102 ,
2.9%
*As of February 8, 2006Source: PCS division of ISO.
Louisiana accounted for
64% of the insured losses
paid and 56% of the claims filed
Total Insured Losses =
$38.111 Billion
Hurricane Katrina Claim Count Distribution by State*
Mississippi, 515,000 , 29.4%
Tennessee, 15,000 , 0.9%
Louisiana, 975,000 , 55.7%
Florida, 115,000 , 6.6%
Georgia, 7,800 , 0.4%
Alabama, 124,000 , 7.1%
*As of February 8, 2006Source: PCS division of ISO.
Louisiana accounted for 64%of insured
losses paid and 56% of claims filed
Total # Claims = 1,751,800
Hurricane Katrina Loss Distribution by Line ($ Billions)*
Homeowners, $17,694.0 , 46%
Commercial Property & BI, $18,278.0 , 48%
Vehicle, $2,139.0 , 6%
Total insured losses are
estimated at $38.1 billion from 1.7518
million claims. Excludes $2-
$3B in offshore energy losses
*As of February 8, 2006Source: PCS division of ISO.
Hurricane Katrina Insured Loss and Claim Distribution by State*
State Losses ($Mill) # Claims % Losses % Claims
LA $ 24,275.0 975,000 63.7% 55.7%
MS $ 12,105.0 515,000 31.8% 29.4%
AL $ 1,102.0 124,000 2.9% 7.1%
FL $ 543.0 115,000 1.4% 6.6%
TN $ 59.0 15,000 0.2% 0.9%
GA $ 27.0 7,800 0.1% 0.4%
Totals $ 38,111.0 1,751,800 100.0% 100.0%
*As of February 8, 2006.Source: PCS division of ISO.
Hurricane Rita Insured Loss Distribution by State ($ Millions)*
Texas, $1,970.0 , 39.6%
Tennessee, $10.0 , 0.2%
Louisiana, $2,912.5 , 58.5%
Arkansas, $13.7 , 0.3%Florida, $23.0 , 0.5%
Alabama, $13.0 , 0.3%
Mississippi, $34.0 , 0.7%
*As of February 8, 2006Source: PCS division of ISO.
Louisiana accounted for
59% of the insured losses, Texas 40%.
Total claims = 381,000.
Excludes offshore energy losses of $2-3B
Total Insured Losses =
$4.9762 Billion
Hurricane Rita Claim Count Distribution by State*
Texas, 169,000 , 44.4%
Tennessee, 3,500 , 0.9%
Louisiana, 185,000 , 48.6%
Arkansas, 5,500 , 1.4%Florida, 6,000 , 1.6%
Alabama, 5,000 , 1.3%
Mississippi, 7,000 , 1.8%
*As of February 8, 2006Source: PCS division of ISO.
Louisiana accounted for 48.6% of the
insured losses, Texas 44.4%.
Excludes offshore energy losses of $2-3BTotal # Claims
= 381,000
Hurricane Rita Loss Distribution, by Line ($ Millions)*
Homeowners, $2,944.0 , 59%
Commercial Property & BI, $1,846.2 , 37%
Vehicles, $186.0 , 4%Total insured
losses are estimated at $5.0
billion (excl. offshore energy of $2-$3B) from 381,000 claims.
*As of February 8, 2006Source: PCS division of ISO.
Hurricane Rita Insured Loss and Claim Distribution by State*
State Losses ($Mill) # Claims % Losses % Claims
LA $ 2,912.5 185,000 58.5% 48.6%
TX $ 1,970.0 169,000 39.6% 44.4%
MS $ 34.0 7,000 0.7% 1.8%
FL $ 23.0 6,000 0.5% 1.6%
AR $ 13.7 5,500 0.3% 1.4%
AL $ 13.0 5,000 0.3% 1.3%
TN $ 10.0 3,500 0.2% 0.9%
Totals $ 4,976.2 381,000 100.0% 100.0%
*As of February 8, 2006.Source: PCS division of ISO.
Hurricane Wilma Loss Distribution by Line ($ Millions)*
Homeowners, $6,600 , 71%
Commercial Property & BI, $2,000 , 21%
Vehicle, $750 , 8%Total insured
losses are estimated at $9.35 billion from 1.025
million claims
*As of March 27, 2006. All losses are in FL.Source: PCS division of ISO.
Hurricane Wilma Claim Count Distribution by Line ($ Millions)*
Homeowners, 680,000 , 66% Commercial
Property & BI, 80,000 , 8%
Vehicle, 265,000 , 26%
Total insured losses are
estimated at $9.35 billion from 1.025
million claims
*As of March 27, 2006. All losses are in FL.Source: PCS division of ISO.
Government Aid After Major Disasters (Billions)*
$104.4
$43.9
$17.7 $15.5 $15.0
$0
$20
$40
$60
$80
$100
$120
Hurricane Katrina(2005)
Sept. 11 TerroristAttack (2001)
Hurricane Andrew(1992)
NorthridgeEarthquake (1994)
Hurricanes Charley,Frances, Ivan &Jeanne (2004)
$ B
illi
ons
*In 2005 dollars.Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05.
Hurricane Katrina aid will dwarf aid following
all other disasters. Congress may authorize
$150-$200 billion ultimately (about
$400,000 for each of the 500,000 displaced
families). Is the incentive to buy insurance and
insure to value diminished?
Within 3 weeks of Katrina’s LA landfall, the federal government
had authorized $75B in aid—more than all the federal aid for the 9/11 terrorist attacks, 2004’s
4 hurricanes and Hurricane Andrew combined! $29B more
was authorized in Dec. 2005. At least $80B more is sought.
TRIA EXTENSION
The Burden Grows
Insurance Industry Retention Under TRIA ($ Billions)
$10.0$12.5
$15.0
$25.0$27.5
$0
$5
$10
$15
$20
$25
$30
$35
Year 1(2003)
Year 2(2004)
Year 3(2005)
Year 4(2006)
Year 5(2007)
$ B
illi
ons
Source: Insurance Information Institute
•Individual company retentions rise to 17.5%
in 2006, 20% in 2007
•Above the retention, federal govt. pays 90% in
2006, 85% in 2007
Extension
Congress & Administration
want TRIA dead
TRIA Extension: Major Features
• Term: 2-Year Extension—Sunsets December 31, 2007 Extension for 3rd year possible if progress made toward long-term solution
• Trigger Increased: Up from $5MM now to $50MM in 2006 and $100MM in 2007
• Lines Dropped Commercial Auto, Prof. Liability, Surety, Burglary & Theft, FMP
• Deductibles Increase for Individual Companies: 15% Now 17.5% in 2006 20% in 2007 for all lines
• Retentions Increase for Industry Aggregate: $15B Now $25B in 2006 $27.5B in 2007
• Co-Pays Increase for Amount Above Industry Aggregate 10% Now 10% in 2006 15% in 2007
• Federal Recoupment Remains conditional
• Study to Develop Long-Term Solutions Must produce report to Congress by September 30
• Nuclear, Biological, Chemical & Radiological Risk Maintains exclusion
Terrorism Coverage Take-Up Rate Rising
Source: Marsh, Inc.; Insurance Information Institute
23.5% 26.0%
32.7%
44.2% 46.2% 44.0%48.0%
55.0%
2003:II 2003:III 2003:IV 2004:I 2004:II 2004:III 2004:IV 2005August
Terrorism take-up rate for non-WC risk rose through
2003, 2004 and 2005
TAKE UP RATE FOR WC COMP TERROR
COVERAGE IS 100%!!
Terrorism Coverage: Take-Up Rates by Industry
72.5%
71.0%
66.3%
65.1%
63.3%
54.3%
53.4%
47.8%
38.6%
37.5%
28.6%
65.3%
60.1%
48.4%
42.5%
53.7%
41.7%
41.5%
40.5%
37.8%
48.0%
23.1%
39.0%
30.2%
26.8%
31.0%
31.5%
22.1%
21.6%
35.3%
27.1%
25.9%
29.5%
18.2%
20.0%
12.2%
40.5%36.4%
41.2%
57.9%
58.1%
35.5%
58.3%
60.2%
34.7%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Real estate
Financial Institutions
Health care
Hospitality
Tech/Telecom
Education
Media
Utility
Public Entity
Transportation
Manufacturing
Retail
Construction
Energy
Food & beverage
2005*
2004
2003
Source: Marsh, Inc. *As of August 2005.
If TRIA sunsets at the end of 2007,
additional reinsurance
capacity will be badly needed (now estimated at just
$4-$6 billion)
Overview of Plans for a National
Catastrophe Insurance Plan
NAIC’s Comprehensive National Catastrophe Plan
• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private
insurance & reinsurance industry Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves
• Layer 2: Establishes system of state catastrophe funds (like FHCF)
• Layer 3: Federal Catastrophe Reinsurance Mechanism
Source: Insurance Information Institute
Comprehensive National Catastrophe Plan Schematic
Personal Disaster Account
Private Insurance
State Regional Catastrophe Fund
National Catastrophe Contract Program
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
State Attachment
1:50 Event
1:500 Event
REINSURANCE
Catastrophes, Consolidation & New Competitors
Global Number of Catastrophic Events, 1970–2005
0
50
100
150
200
250
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Natural catastrophes Man-made disasters
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.
The number of natural and man-made
catastrophes has been increasing on a global
scale for 20 years
Record 248 man-made CATs &
record 149 natural CATs in 2005
Distribution of Katrina Losses by Market ($Billions)
Market Percentage Amount
Insurers 47% - 53% $18.8 - $28.9
Reinsurers 52% - 44% $20.7 - $24.0
Capital Markets 1% - 3% $0.4 - $1.6
TOTAL 100% $39.9 - $54.6
Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005.
FY2005 Loss as a Percentage ofFirst Half 2005 Shareholder Equity*
22%32%
31%13%
32%26%
32%30%
15%76%
36%31%
10%106%
22%19%
9%21%
24%
49%
-10% 10% 30% 50% 70% 90% 110%
IPCPartnerRe
RenaissanceReCLASS OF 1993
ArchAspen
AWACAxis
EnduranceMax Re
MontpelierPlatinum
CLASS OF 2001Ace
PXREXL
CLASS OF 1985-86White Mountains
QuantaTOTAL
Many smaller reinsurers lost 30%+ of their equity
(surplus) as a result of record CAT losses in 2005
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
US Reinsurers: Change in Policyholder Surplus ($ Billions)
$60.9$58.9 $57.9
$46.8$48.8
$73.0
$68.0
$64.8
$40
$45
$50
$55
$60
$65
$70
$75
1998 1999 2000 2001 2002 2003 2004 2005E
$ B
illi
ons
Source: A.M. Best; Insurance Information Institute
Reinsurer PHS fell 20% from 1998-2002. Capacity today similar to 1998. Same story
globally.
Analysts predict a modest decline in
reinsurer PHS
115.1 115.4
122.8
100.6
124.6 124.1
141.4
90
100
110
120
130
140
150
160
99 00 01 02 03 04 05E
US
Re
ins
ure
r C
om
bin
ed
Ra
tio
Reinsurer Combined Ratio
Rating-Large (PHS>$250M)
US Reinsurer Combined Ratio vs. Median Rating, 1999-2005E*
*Combined ratio is for all US reinsurers. Rating is for large reinsurers (policyholder surplus exceeding $250 million). The median rating for small reinsurers (PHS<$250M) was A- throughout the 1999-2003 period.
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 and 2006 Review & Preview.
A+A++A+AA-B++B+B
A A A A
Are ratings related to
performance?
A A
-5%
-11%-9% -8%
-4%
2%
16%
21%
11%
-4%-6%
25%
-20%
-10%
0%
10%
20%
30%
40%
94 95 96 97 98 99 '00 '01 '02 '03 '04 05E 06F
0
25
50
75
100
125
rate changes [left] index level [right]
Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006.
Reinsurance Prices Surged in 2006 Following Record CATs in 2005
US cat reinsurance price index:
1994 = 100
Changes in the 2006 Reinsurance Markets
• Property CAT reins. rates up 20% - 30% nationally
• Property CAT coverage in hurricane exposed areas up 100%-300%
• Aggregate reinsurer exposure is down 20-30%
• Cedants retaining more risk, often by 50-100% or more (higher attachment pts.)
• Increased demand for Excess of Loss coverXoL is potentially more volatile for reinsurers
• Some supply issues as a few small players enter run-off
• Marine/Energy reinsurance most challenging
• Start-ups becoming more active
Sources: Morgan Stanley, Lehman Brothers
Long-Term Issues for Reinsurers
• Managing Record Global CAT Losses• Underwriting/Pricing Discipline of Primary Insurers• Competition & Low Barriers to Entry• Alternative Risk Transfer & Securitization• Consolidation• Reinsurance Collectibles • Collateralization Debate/Feud• Global Glut of Capital• Persistently Low Long-Term Interest Rates• Political Risk in Developing/Emerging Markets
Issue #2PRICING
Can Discipline be Maintained?
$418$440 $455
$481 $488$508
$536
$593
$668$693
$711$739
$400
$450
$500
$550
$600
$650
$700
$750
$800
95 96 97 98 99 00 01 02 03 04* 05* 06*
Average Expenditures on Homeowners Insurance**
*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute
Countrywide home insurance expenditures are expected to rise at
least 4% in 2006
Homeowners in CAT zones will see much larger
increases
$651$668
$691$705 $703
$685 $689
$723
$777
$821
$867$844
$863
$600
$650
$700
$750
$800
$850
$900
94 95 96 97 98 99 00 01 02 03 04* 05* 06*
Average Expenditures on Auto Insurance
*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute
Countrywide auto insurance expenditures are expected to
rise 0.5% in 2006
Will the “big guys” stay disciplined? So far, so good. Tiering
adopted to avoid adverse selection
14
%11
% 13
%1
6%
19
%2
2%
28
%3
1%
31
%2
8% 3
0% 3
2% 33
%2
8% 29
% 30
% 32
%3
0%
27
%2
5%
28
%2
2%
18
%1
8%
17
%1
6%
12
%1
2%
10
% 12
%11
%9
%
7%
7%
5%
4%
4%
2%
2%
2%
1%
0%
-1%
-2%
-2%
-3%
-5%
-6% -5
% -4%
-4%
-6%
-6% -5
%-6
%
9%
9%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Ju
l-0
1A
ug
-01
Sep
-01
Oct
-01
No
v-0
1D
ec-0
1J
an
-02
Feb
-02
Ma
r-0
2A
pr-
02
Ma
y-0
2J
un
-02
Ju
l-0
2A
ug
-02
Sep
-02
Oct
-02
No
v-0
2D
ec-0
2J
an
-03
Feb
-03
Ma
r-0
3A
pr-
03
Ma
y-0
3J
un
-03
Ju
l-0
3A
ug
-03
Sep
-03
Oct
-03
No
v-0
3D
ec-0
3J
an
-04
Feb
-04
Ma
r-0
4A
pr-
04
Ma
y-0
4J
un
-04
Ju
l-0
4A
ug
-04
Sep
-04
Oct
-04
No
v-0
4D
ec-0
4J
an
-05
Feb
-05
Ma
r-0
5A
pr-
05
Ma
y-0
5J
un
-05
Ju
l-0
5A
ug
-05
Sep
-05
Oct
-05
No
v-0
5D
ec-0
5J
an
-06
Feb
-06
Ma
r-0
6
Source: MarketScout.com
Commercial Premium Rate Changes Are Sharply Lower
The magnitude of rate decreases is leveling off, but no
reversal is evident post- Katrina/Rita/Wilma
Average Commercial Rate Change,All Lines, (1Q:2004 – 1Q:2006)
-0.1%
-3.2%
-7.0%
-9.4% -9.7%
-4.6%
-2.7%
-5.9%
-8.2%
-12%
-10%
-8%
-6%
-4%
-2%
0%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Magnitude of rate decreases has diminished
greatly since mid-2005
Average Commercial Rate Change by Account Size
Commercial accounts trended downward from
early 2004 to mid-2005 but are now that trend is
shrinking post-Katrina
Source: Council of Insurance Agents & Brokers
Average Commercial Rate Change by Line
Source: Council of Insurance Agents & Brokers
Commercial accounts trended downward from
early 2004 to mid-2005 but now trend is shrinking post-Katrina & Property is up.
Percent of Commercial Accounts Renewing w/Positive Rate Changes, 1st Qtr. 2006
54%
26%20%
15%
50%
26%23%
16% 15%
23%
0%
10%
20%
30%
40%
50%
60%
Southeast Northeast Pacific NW Southwest Midwest
Commercial Property Business Interruption
Source: Council of Insurance Agents and Brokers
Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest
Percent of Commercial Property Accounts Renewing Negative, 1st Qtr. 2006
40%
89%
100%
95%
91%
63%
80%
61%
90%
91%
89%
91%
88%
86%
53%
47%
65% 75
%
77%
94%
94%
91%
81%
40% 48
%
89%
79%
0%
20%
40%
60%
80%
100%
120%
04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4 06Q1
Midwest Northwest Southwest
Source:; Insurance Information Institute from Council of Insurance Agents and Broker data.
Little evidence suggesting that insurers fleeing CATs are leading to
a non-hurricane state softening
Average Rate Increase/Decreaseby Industry Class
5%
0%
-1% -2%-4%
10%
-3%
3%
0%2%
-8%
0%
-5%-6%
-10%
-5%
0%
5%
10%
15%
Energy Contracting Public Entity Transport. Habitational Service Manufacturing
September 2005 March 2006
Source: MarketScout.com
Largest increases are in the energy sector
-5%
-11%-9% -8%
-4%
2%
16%
21%
11%
-4%-6%
25%
-20%
-10%
0%
10%
20%
30%
40%
94 95 96 97 98 99 '00 '01 '02 '03 '04 05E 06F
0
25
50
75
100
125
rate changes [left] index level [right]Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006.
Reinsurance Prices Surged in 2006 Following Record CATs in 2005
US cat reinsurance price index:
1994 = 100
In hurricane-prone areas, property CAT
reinsurance prices are up 100-300%+
Issue #3INVESTMENTS
Does Investment Performance Affect
Discipline?
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.2$56.9$51.9
$57.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03 04 05***Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.**2005 figure includes special one-time dividend of $3.2B.Source: Insurance Services Office; Insurance Information Institute.
Investment gains are rising but are only now
comparable to gains seen in the late 1990s
Issue #4EXPENSES
Will Expense Ratio Rise as Premium Growth Slows?
Personal Lines Underwriting Expense Ratio,* 1994-2005E
21.8% 22.0% 21.8%
23.5%
29.8%
24.3%24.4%
23.6%
23.4%
22.7%23.2% 23.3%
23.4%
28.4%
28.4%
28.5%28.5%
30.8%
31.1%30.8%
30.6% 30.3%
30.6%
29.4%
20%
22%
24%
26%
28%
30%
32%
94 95 96 97 98 99 00 01 02 03 04 05E
Auto Home
*Ratio of expenses incurred to net premiums written. 2005 figures are III estimates.Source: A.M. Best; Insurance Information Institute
Can the downward trend in PPA and HO expenses
ratios be sustained as premium growth slows?
Issue #5LEVERAGE
Can the Industry Efficiently Employ Its Increasing Capital?
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
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 0405*
U.S. Policyholder Surplus: 1975-2005*
Source: A.M. Best, ISO, Insurance Information Institute *As of 12/31/05.
$ B
illi
ons
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity TODAY is $427.1B, 9.2% above year-end 2004, 47% above its 2002 trough and
22% above its mid-1999 peak. Sufficient capacity exists to pay all hurricane claims.
Foreign reinsurance and residual market mechanisms absorbed $27-$32B (57%-67%) of 2005
CAT losses of $57.7B
Announced Insurer Capital Raising*($ Millions, as of December 1, 2005)
$1,500
$38
$400 $450$600
$710
$300$100$140
$600
$129$297
$620
$124$202 $150$299
$490
$3,200
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$ M
illio
ns
*Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
As of Dec. 1, 19 insurers announced plans to raise $10.35 billion in new capital. Twelve start-ups plan to
raise as much as $8.75 billion more for a total of $19.1 billion. Actual total higher as Lloyd’s syndicates
have added capacity for 2006.
Announced Capital Raising by Insurance Start-Ups($ Millions, as of April 15, 2006)
$1,500
$1,000$1,000$1,000$1,000$1,000
$750
$500 $500 $500 $500
$220 $180$100
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$ M
illi
ons
*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Morgan Stanley, Company Reports; Insurance Information Institute.
As of April 15, 14 start-ups plan to raise as
much as $9.75 billion.
COMMERCIAL INSURANCE
BETTER—FOR NOW
119.0
119.8
10
8.5
12
5.0
113.1
115.0 1
21.0
116.2
116.2
10
4.1
10
0.7
10
9.2
98
114.4
12
2.3
10
8.3
13
3.1
94
.6
83
.2
95
.2
80
90
100
110
120
130
140
95 96 97 98 99 00 01 02 03 04
CMP-Liability
CMP-Non-Liability
Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)
Liab. Combined 1995 to 2004 = 115.4
Non-Liab. Combined = 105.9
Sources: A.M. Best; III
CMP- has improved recently
189.5179.1
131.9 138.8156.4
133.3
215.4
355.2
167.2 159.8
100
150
200
250
300
350
400
95 96 97 98 99 00 01 02 03 04
Products LiabilityCombined Ratio
Average Combined 1995 to 2004 = 180.0
Sources: A.M. Best; III
Products Liability has improved dramatically, but
remains very much a problem
112.
1
112
113 11
5.9 12
0.5
120.
1
122.
5
105.
6
99.4
95.8
96.7
102.
7
103.
5 106.
7
109.
2
107.
7
99.7
91.1
82.3
80.9
80
85
90
95
100
105
110
115
120
125
95 96 97 98 99 00 01 02 03 04
Commercial Auto Liability& PD Combined Ratios
Average Combined: Liability = 110.7
PD = 98.1
Sources: A.M. Best; III
Commercial Auto has improved dramatically
138.6
117.6
108.5
112.3
104.5
110.9
122.5124.3
111.8114.5
100
105
110
115
120
125
130
135
140
145
95 96 97 98 99 00 01 02 03 04
Other Liability Combined Ratio
Average Combined 1995 to 2004 = 116.3
Sources: A.M. Best; III
Other Liability remains a problematic “catch all” category
99.8
106.6 107.9
115.7
129.7133.8
154.8
142.3138.1
112.3
90
100
110
120
130
140
150
160
95 96 97 98 99 00 01 02 03 04
Medical MalpracticeCombined Ratio
Average Combined 1995 to 2004 = 125.5
Sources: A.M. Best; III
Med Mal is off life support but is still in critical condition
AUTO & HOME:
A SUCCESSFUL SHIFT TO THE UNDERWRITING
CULTURE?
101.7 101.3 101.3 101.0
99.5
101.1
103.5
109.5
107.9
104.2
98.4
94.093.1
90
95
100
105
110
93 94 95 96 97 98 99 00 01 02 03 04 05F
Private Passenger Auto Combined Ratio
Average Combined 1993 to 2004= 102.7
Many auto insurers have shown sig-nificant improvements in underwriting
performance since mid-2002
Sources: A.M. Best; III
PPA is the profit juggernaut of the p/c
insurance industry today
50%
60%
70%
80%
90%
100%
110%
99
:Q1
99
:Q2
99
:Q3
99
:Q4
00
:Q1
00
:Q2
00
:Q3
00
:Q4
01
:Q1
01
:Q2
01
:Q3
01
:Q4
02
:Q1
02
:Q2
02
:Q3
02
:Q4
03
:Q1
03
:Q2
03
:Q3
03
:Q4
04
:Q1
04
:Q2
04
:Q3
04
:Q4
05
:Q1
05
:Q2
05
:Q3
05
:Q4
Collision Comprehensive Liability (BI & PD)
Source: ISO Fast Track; Insurance Information Institute. *Direct basis
Private Passenger Auto:Incurred Loss Ratios*, 1999-2005:Q4
Loss ratios for all major coverages trending down; Comp is CAT impacted
-4%
-2%
0%
2%
4%
6%
8%
10%
00
:Q1
00
:Q2
00
:Q3
00
:Q4
01
:Q1
01
:Q2
01
:Q3
01
:Q4
02
:Q1
02
:Q2
02
:Q3
02
:Q4
03
:Q1
03
:Q2
03
:Q3
03
:Q4
04
:Q1
04
:Q2
04
:Q3
04
:Q4
05
:Q1
05
:Q2
05
:Q3
05
:Q4
Auto Insurance Component of CPI Personal Auto-PD Pure Premium
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
Pure Premium Spread: Personal Auto PD Liability, 2000-2005:Q4
Margin necessary to maintain PPA
profitability
2000 PPA Combined=110
2004 PPA Combined=94
Inversion of pure premium spread is a warning sign
-2.2%
-5.3%
-4.0%-3.4%
-0.9%
-2.6%
-5.4%
3.0%3.6% 3.8% 3.4%
2.8%
-0.3%
4.7%
-6%
-4%
-2%
0%
2%
4%
6%
99 00 01 02 03 04 05*
Frequency Severity
Bodily Injury: Severity Trends Now Offset Declining Claim Freq.
*Four quarters ending 2005:Q4.Source: ISO Fast Track data.
Medical inflation a powerful
cost driver
0.8%
-1.5%
0.3%
-1.8%-2.6% -2.4% -2.3%
3.9%3.3%
2.8%
0.5%
2.4%
4.3%
6.2%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
99 00 01 02 03 04 05*
Frequency Severity
PD Liability: Frequency Trend Swamps Rising Claim Severity
Fewer accidents, but more damage when they occur:
Higher Deductibles?
*Four quarters ending 2005:Q4.Source: ISO Fast Track data.
-1.6%
1.1%
-1.1%
0.0%
-0.6%
-7.2%-5.4%
3.2%
6.5%
-3.9%
0.5%
4.9%6.3%
16.1%
-10%
-5%
0%
5%
10%
15%
20%
99 00 01 02 03 04 05*
Frequency Severity
PIP: Frequency Trend Now Offsets Rising Claim Severity
Fraud caused problems from
1999-2001
*Four quarters ending 2005:Q4.Source: ISO Fast Track data.
Is No-Fault living on borrowed time?
2.6%
-0.4%
1.9%
-3.8%
-5.1%-4.6%
-1.8%
3.7% 3.7%
1.6%
3.9%3.0%
4.1%
6.8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
99 00 01 02 03 04 05*
Frequency Severity
Collision: Frequency Trend Swamps Rising Claim Severity
*Four quarters ending 2005:Q4.Source: ISO Fast Track data.
-1.7%-2.6%
3.3%
-5.6%
-2.1%
-8.2%
-2.1%
-7.0%
-4.1%
7.0%
-2.7%
3.3%
-4.7%
8.9%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
99 00 01 02 03 04 05*
Frequency Severity
Comprehensive: Favorable Frequency and Severity Trends
*Four quarters ending 2005:Q4.Source: ISO Fast Track data.
Homeowners
117.7
158.4
113.6118.4
112.7
121.7
101.0
108.2111.4
121.7
109.3
98.295.1
110113.0
109.4
90
100
110
120
130
140
150
160
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E
Homeowners Insurance Combined Ratio
Average 1990 to 2005E= 114
Insurers have paid out an average of $1.14 in losses for every dollar earned
in premiums over the past 16 years
Sources: A.M. Best; III
Insurance-to-Value in HO is a National Problem, Improved Recently
73%
64%61% 59%
22%
25%27%
35%
20%
30%
40%
50%
60%
70%
80%
2002 2003 2004 2005
Proportion of Home Undervalued Average Undervaluation*According MS/B.Source: Marshall & Swift/Boeckh
Less than ITV means homeowners insurers left $8 billion on the table in 2003*
Flood Statistics
Property Damage from Hurricane Katrina Flood & Storm Surge ($ Millions)*
LA Storm Surge Loss, $16,200 , 36.8%
New Orleans Flood Loss, $22,600 , 51.3%
FL Storm Surge Loss, $32 , 0.1%
AL Storm Surge Loss, $793 , 1.8%
MS Storm Surge Loss, $4,400 , 10.0%
*Value of property damage by flood and storm surge whether or not insured.Source: AIR Worldwide, September 29, 2005.
Hurricane Katrina caused $44 billion in flood and storm
surge damage, most of it uninsured, 88.1% of it in
Louisiana
Flood Insurance Penetration Rates:Top 25 Counties/Parishes in US*
81.5%80.0%
78.7%77.1%
74.1%69.6%
68.4%68.1%
66.7%65.9%65.5%
62.4%59.0%
56.2%51.6%
49.6%48.0%
46.3%44.4%
42.8%42.8%
42.0%41.9%
40.1%
84.0%
0% 20% 40% 60% 80% 100%
JEFFERSON/LAWALTON/FL
BROWARD/FLCOLLIER/FL
LEE/FLGALVESTON/TX
GLYNN/GAST. BERNARD/LAMIAMI-DADE/FL
ORLEANS/LACARTERET/NC
ST. CHARLES/LAST. JOHNS/FL
CHARLOTTE/FLST. TAMMANY/LA
HORRY/SCINDIAN RIVER/FL
BAY/FLBRUNSWICK/NC
NASSAU/FLBERKELEY/SC
PINELLAS/FLBRAZORIA/TXCHATHAM/GA
TERREBONNE/LA
Highest flood insurance penetration rates are in
LA and FL, but most are underinsured
No counties in the Northeast
are represented in Top 25
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
Flood Insurance Penetration Rates:Counties/Parishes Ranked 26-50*
39.7%39.2%39.1%
38.7%37.2%
36.5%36.2%
34.2%33.0%
32.1%30.6%
28.3%27.6%
27.0%26.8%26.4%26.1%
25.4%25.3%25.2%
23.4%23.3%
22.1%21.7%
39.8%
0% 10% 20% 30% 40% 50%
BALDWIN/ALSARASOTA/FL
PALM BEACH/FLCHARLESTON/SC
MANATEE/FLMARTIN/FL
ATLANTIC/NJLAFOURCHE/LA
OKALOOSA/FLGEORGETOWN/SC
FLAGLER/FLMAUI/HI
LIVINGSTON/LABREVARD/FL
SUSSEX/DEVOLUSIA/FL
ST. LUCIE/FLJEFFERSON/TX
HAMPTON CITY/VAOCEAN/NJ
HARRIS/TXPASCO/FL
BOSSIER/LANEW HANOVER/NC
BRONX/NY
Mid-Atlantic/Northeast Counties are
underrepresented
People along the eastern
seaboard have not gotten the
message
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
Flood Insurance Penetration Rates:Counties/Parishes Ranked 51-75*
20.9%20.1%
19.1%18.3%
17.8%17.7%17.5%
16.7%16.3%
15.8%15.6%15.4%
14.5%14.0%
13.3%12.9%
12.6%11.7%11.6%
11.3%10.2%
9.3%9.1%
8.5%
21.6%
0% 5% 10% 15% 20% 25%
CAMERON/TXFORT BEND/TX
SANTA ROSA/MSHARRISON/MS
JACKSON/MSNORFOLK CITY/VA
HILLSBOROUGH/FLLAFAYETTE/LA
EAST BATON ROUGE/LAVIRGINIA BEACH
ESCAMBIA/FLHONOLULU/HI
SACRAMENTO/CACALCASIEU/LA
MONTGOMERY/TXCITRUS/FL
MERCED/CACHESAPEAKE,
OSCEOLA/FLHUDSON/NJ
DUVAL/FLBARNSTABLE/MA
MARIN/CATULARE/CA
MONMOUTH/NJ
*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.
MS coastal counties
rank abysmally
low
Barnstable is only county in all of New England among Top 75
Insurance Information Institute On-Line
If you would like a copy of this presentation, please give me your business card with e-mail address