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2004 Overview & Outlook for the Property/Casualty Insurance Industry

2004 Overview & Outlook for the Property/Casualty Insurance Industry. Casualty Actuaries of Greater New York New York, NY December 6, 2004. Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038

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2004 Overview & Outlook for the Property/Casualty Insurance Industry

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  1. 2004 Overview & Outlook for the Property/Casualty Insurance Industry Casualty Actuaries of Greater New York New York, NY December 6, 2004 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org  www.iii.org

  2. Presentation Outline • Profitability • Presidential Party Affiliation & P/C Profitability • Underwriting • Investment Overview • Ratings, Solvency & Financial Strength • Impact of Spitzer Investigation • Capacity • Pricing Trends • Tort Environment • The Challenge of Terrorism • Q & A

  3. THE INSURANCE INFORMATION INSTITUTE:THE PLACE FOR INSURANCE INFORMATION

  4. About theInsurance Information Institute • The mission of the Insurance Information Institute (I.I.I.) is to improve public understanding of insurance -- what it does and how it works. The I.I.I. enjoys broad membership throughout the insurance industry, including most of the major p/c insurers and reinsurers operating in the United States, as well as companies operating on a regional basis and internationally.For more than 40 years, the I.I.I. has provided definitive insurance information. Today, the I.I.I. is recognized throughout the insurance industry as well as by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance.Each year, the I.I.I. works on more than 3,700 news stories, handles more than 6,000 requests for information from its members, the media, and other parties and answers nearly 50,000 questions from consumers.In addition to direct contact with the media, individuals and organizations, the I.I.I. publishes a host of helpful brochures and books on a wide variety of insurance topics, ranging in subjects from 12 Ways to Lower Your Auto Insurance Costs to the I.I.I. Fact Book series. I.I.I.’s members benefit from direct access to all information, I.I.I. staff and its members-only web site. The Institute does not lobby. Its central function is to provide accurate and timely information on insurance subjects. Questions concerning I.I.I. membership should be directed to Cary Schneider at (212) 346-5566 or by email at carys@iii.org.

  5. With 90+ million visitors annually, I.I.I drives customers to your site

  6. # 1 on Google! I.I.I. ranks 1st on Google out of 99.6 million hits on “insurance”

  7. Web Traffic onWWW.III.ORG Visits to I.I.I.’s public web site increased by 50% in 2003/4. The average number of web hits on I.I.I.’s site rose from 5 million per month in 2003 to 7.5 million in 2004 (est.) *2004 estimate based on average of 7.5 million hits per month through October.

  8. P/C FINANACIAL UPDATE:Profitability: Good but Not Good EnoughUnderwriting: Need to Stay DisciplinedInvestments: Keep Expectations Low

  9. P/C FINANCIAL OVERVIEW:PROFIT PRESSURE

  10. Highlights: Property/Casualty 1st Half 2004 vs. 1st Half 2003 *2003 surplus figure is as of 12/31/03 **The combined ratio for full-year 2003 was 100.1

  11. Strength of Recent Hard Markets by NWP Growth* 1975-78 1984-87 2001-04 Real NWP Growth During Past 3 Hard Markets 1975-78: 8.6% 1984-87: 11.2% 2001-04F: 6.9% Premium growth is faltering. Real growth in 2005 will approach ZERO. Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute *2004 based on 1st half results from ISO. 2005 figure is III forecast.

  12. P/C Net Income After Taxes1991-2004E* ($ Millions) • 2001 was first-ever full year net loss • 2002 ROE = 1.0% • 2003 ROE = 9.4% • 2004 ROE = 10% (est.)** *First half results; ** After adjusting for 2004 hurricanes Sources: A.M. Best, ISO, Insurance Information Institute.

  13. ROE: P/C vs. All Industries 1987–2004E Source: Insurance Information Institute; Fortune

  14. ROE vs. Cost of Capital: US P/C Insurance:1991 – 2004F The p/c insurance industry likely achieved its costs of capital in 2004 for the first time in many years +1.1 pts -1.2 pts -10.2 pts -14.6 pts US P/C insurers missed their cost of capital by an average 6.5 points from 1991 to 2003 Source: The Geneva Association, Ins. Information Inst.

  15. ROE: Financial Services Industry Segments, 1987–2004F P/C insurance was finally holding its own against other financial services segments until hurricanes Source: Insurance Information Institute, Fortune, Value Line.

  16. PRESIDENTIAL POLITICS & P/C PROFITABILITY

  17. Political Quiz • Does the P/C insurance industry perform better (as measured by ROE) under Republican or Democratic administrations? • Under which President did the industry realize its highest ROE (average over 4 years)? • Under which President did the industry realize its lowest ROE (average over 4 years)?

  18. BUSH P/C Insurance Asset Managers Energy/Oil/Coal HMOs/Drug Cos./ Benefit Managers Dividend Paying Stocks Defense KERRY Life Insurers Fannie Mae/Freddie Mac Alternative Energy Hospitals/Med Devices Medicaid HMOs Bonds/Municipal Bonds Home Builders Sectors Thought to be Favored, by Winner of 2004 Presidential Election Source: Wall Street Journal, October 7, 2004, D4, from survey of major brokerage firms.

  19. Insurance Industry Contributions, Election Cycles 1990-2004* Insurance industry contributions are overwhelmingly Republican: $157 million, 89% more than the $83 million contributed to Democrats since 1990 65% of insurance industry contributions since 1990 have gone to Republicans *Data for current cycle released by Federal Election Commission as of October 4, 2004 Source: Federal Election Commission via Center for Responsive Politics at www.opensecrets.org.

  20. P/C Insurance Industry ROE by Presidential Party Affiliation,1950–2004E BLUE = Democratic PresidentRED = Republican President Truman Eisenhower Kennedy/ Johnson Nixon/Ford Carter Reagan/Bush Clinton Bush Source: Insurance Information Institute

  21. P/C Insurance Industry ROE byPresidential Administration,1950-2004* OVERALL RECORD: 1950-2004 Democrats 8.00% Republicans 7.85% Party of President has little bearing on profitability of P/C insurance industry *ROE for 2004 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52. Source: Insurance Information Institute

  22. WALL STREET:HIGH EXPECTATIONS

  23. Insurer Stocks: Outperforming the S&P 500 Total Return 2004 YTD Through October 8, 2004 If 2004 represents the cyclical peak for this industry, why aren’t p/c stocks soaring? Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

  24. Insurer Stocks: Hammered by the Spitzer Suit Total Return 2004 YTD Through October 15, 2004 Spitzer suit announced Oct. 14 produced huge hit on all insurance sectors, especially brokers Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

  25. Insurer Stocks: Spitzer Effect Will Linger Total Return 2004 YTD Through October 29, 2004 P/C insurer stocks have bounced back Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

  26. Insurer Stocks: Spitzer Effect Will Linger Total Return 2004 YTD Through November 19, 2004 P/C insurer stocks have bounced back Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

  27. Insurer Stocks: Spitzer Effect Will Linger Total Return 2004 YTD Through November 26, 2004 P/C insurer stocks have bounced back Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

  28. P/C FINANCIAL OVERVIEW:UNDERWRITING PRESSURE

  29. P/C Industry Combined Ratio 2001 = 115.7 2002 = 107.2 2003 = 100.1 2004: 1H = 94.4* 2004** = 100 Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.8 2000-04: 104.6** Sources: A.M. Best; ISO, III *2004 figures based on first half estimate. **After impact of hurricanes.

  30. Underwriting Gain (Loss)1975-2004F 2004 was likely to produce the largest underwriting profit in history = $18.1B based on annualized first half result, but hurricanes changed that… $ Billions *Based on first half result. **Estimate for full-year 2004 is $0 assuming a combined ratio . Source: A.M. Best, Insurance Information Institute

  31. Commercial vs. Personal Lines Combined Ratios 10-Year Average Combined Ratios Commercial: 109.9 Personal: 104.4 Source: A.M. Best; Insurance Information Institute

  32. Combined Ratios:Selected Major Lines, 2003E—2004F Commercial Personal U/W performance improving, but variation in results is enormous. Source: A.M. Best; Insurance Information Institute

  33. Combined Ratio: Reinsurance vs. P/C Industry • 2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well. • 2003: Big improvement in primary and reinsurer segments *1st Half 2004 Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

  34. 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 * 2004 figure is return on average statutory surplus based in first half data Source: Insurance Information Institute from A.M. Best and ISO data.

  35. PRICING:DOWNWARD PRESSURE?

  36. How the Risk Dollar is Spent (2003) Firms w/Revenues > $1 Billion Firms w/Revenues < $1 Billion Source: RIMS (2003); Insurance Information Institute

  37. Cost of Risk: 1990-2003* 2000-03 = +147.6% 1992-2000 = -41.8% * Cost of risk includes insurance premiums, retained losses and administrative expenses Source: 2003 RIMS Benchmark Survey; Insurance Information Institute

  38. Components of Cost of Risk Per $1,000 of Revenue* % Change 2001 -03 +45.8% +90.3% +113.8% +107.0% +44.8% +150.0% * Cost of risk includes insurance premiums, retained losses and administrative expenses Source: 2003 RIMS Benchmark Survey; Insurance Information Institute

  39. Commercial Premium Rate Changes Are Sharply Lower Is moderation due to realization of performance and profit goals, increasing capacity/ capital, or market- share strategies? Source: MarketScout.com

  40. Proportion of Workers Comp Accounts Renewing With Increase of 20% or More More than half of all WC accounts renewed up at least 20% in mid-2002, two years later virtually none did. Source: Council of Insurance Agents and Brokers; Insurance Information Institute

  41. World Rate-On-Line Index(1990 = 100) Reinsurance prices rising, limits falling: ROL up significantly, though not as much as after Hurricane Andrew in 1992 Source: Guy Carpenter

  42. P/C Soft Spots: % Accounts With Negative Price Change(3rd Qtr. 2004) Casualty/Liability/Terrorism Property More moderation is evident in the commercial casualty segments, but softening quickly Source: Council of Insurance Agents & Brokers; Insurance Information Institute

  43. P/C Soft Spots: % Accounts With Negative Price Change(4th Qtr. 2003) Casualty/Liability/Terrorism Property Source: Council of Insurance Agents & Brokers; Insurance Information Institute

  44. P/C Soft Spots: % Accounts With Negative Price Change(4th Qtr. 2002) Casualty/Liability/Terrorism Property Source: Council of Insurance Agents & Brokers; Insurance Information Institute

  45. P/C Soft Spots: % Accounts With Negative Price Change(4th Qtr. 2001) Casualty/Liability/Terrorism Property Source: Council of Insurance Agents & Brokers; Insurance Information Institute

  46. FATAL ATTRACTION?A LOSS OF PRICING & UNDERWRITING DISCIPLINERATINGS, SOLVENCY, FINANCIAL STRENGTH

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