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2012 Casualty Market Overview

2012 Casualty Market Overview. A Tale of Two Markets The State of The US Casualty Market. Presented By: Anthony DeFelice. It was the Best of Times, It was the Worst of Times. 1. Industry Experts Weigh In. It was the Worst of Times

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2012 Casualty Market Overview

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  1. 2012 Casualty Market Overview A Tale of Two Markets The State of The US Casualty Market Presented By: Anthony DeFelice

  2. It was the Best of Times, It was the Worst of Times 1

  3. Industry Experts Weigh In It was the Worst of Times • There’s no question that the market turn is definitive. It is here. William R. Berkley • Insurance Industry leaders believe the worst of the financial crisis now behind us; Industry now in the early stages of a hard market. Insurance Information Institute • The signs all point to an industry awareness that the risk being assumed needs more rate to produce adequate returns. Aspen Re

  4. Industry Experts Weigh In It was the Best of Times Positive premium rate movement remains in an early stage, but market competition remains fierce. Fitch December 2011 The company remains skeptical that a long term reversal in market pricing has arrived. A.M. Best As far as a hard market, we are not quite there yet, I think we’re still a year or two out. A.M. Best 3

  5. 2012 State of the Market? Brittle? Hardening? Tightening? Firming? Transitioning? One Word Can not capture the Dynamics of the Market 4

  6. A Tale of Two Markets Incumbent Business New Business vs Guaranteed Cost High Deductible vs Lead Umbrella Excess Limits vs High Hazard Risks Low - Moderate Hazard Risks vs vs Difficult Loss History Favorable Loss History vs Markets with Legacy Issues New Market Capacity 5

  7. Casualty Market Engine – Difficult Starting View Related Article 6

  8. Casualty Recap – 2011 • 9th year of soft casualty pricing • Many years producing double digit reductions • Rate reductions slowed following Financial Crisis • Exposures increasing • End of 2011beginning sees upward movement (rate) in the aggregate Let’s review Industry Issues 7

  9. Market Balance Rising Combined Ratios Lagging Investment Results Slowing Reserve Releases Rising Tort Costs Economic Pressures Record Policy Holder Surplus Market Competition Rate Increases 8

  10. POLICY HOLDER SURPLUS 9

  11. 11:Q2: -$7.4B (-1.0%) 11:Q3: -$27.9B (-4.6%) 11:Q4: -$16.2B (-2.5%) 12:Q1: +$3.2B (+0.7%) Policyholder Surplus, 2006:Q4–2012:Q1 Drop due to near-record 2011 CAT losses 2011:Q1Previous Surplus Peak ($ Billions) Surplus as of 3/31/12 hit an all time record high of $570.7B, 0.7% or $3.2B above the previous record set as of 3/31/11. The Industry now has $1 of surplus for every $0.80 of NPW, close to the strongest claims-paying status in its history. Quarterly Surplus Changes Since 2011:Q1 Peak * Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010. Sources: A.M .Best; ISO; Insurance Information Institute Graph. 10

  12. MARKET COMPETITION RECORD CAPACITY • Approximately $2.5 Billion of Available Capacity • $1.3 Billion available on Single Risk Through Traditional Sources • Ample Capacity for 98% of Corporate Risks • Class 1 Rails, Energy, Multi-National Conglomerates, Large Life Science, are exceptions 11

  13. RISING COMBINED RATIOS 12

  14. Underwriting Gain (Loss)1975–2012:Q1* Underwriting losses in 2011 totaled $36.5B, the largest since 2001 ($ Billions) Cumulative underwriting deficit from 1975 through 2011 is $479B Large Underwriting Losses Are NOT Sustainable Current Investment Environment * Includes mortgage and financial guaranty insurers in all years. Sources: A.M. Best; ISO; Insurance Information Institute Graph. 13

  15. General Liability Combined Ratio: 2005–2012F Commercial General Liability Underwriting Performance Has Deteriorated in Recent Years Sources: Conning Research and Consulting; Insurance Information Institute Graph. 14

  16. Other & Products Liability Combined Ratio: 1991–2012F Liability Lines Have Performed Better in the Post-Tort Reform Era (~2005), but There Has Been Some Deterioration in Recent Years Sources: A.M. Best; Insurance Information Institute Graph. 15

  17. Commercial Auto Combined Ratio: 1993–2012F Commercial Auto is Expected to Deteriorate as Loss Frequency and Severity Trends Deteriorate 2011-2012 Sources: A.M. Best; Insurance Information Institute Graph. 16

  18. Workers Compensation Combined Ratio: 1994–2012F Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They Have Been in a Decade Sources: A.M. Best; Insurance Information Institute Graph. 17

  19. Another Look at Combined Ratios * Excludes Mortgage & Financial Guarantee Losses 18

  20. LAGGING INVESTMENT RETURNS 19

  21. Treasury Yield Curves: Pre-Crisis (July 2007) vs. August 2012 Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2014 at the earliest. The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through Mid-2015; This Adds to Pricing Pressure for Insurers. Source: Federal Reserve Board of Governors; Insurance Information Institute Graph. 20

  22. Property/Casualty Insurance Industry Investment Income: 2000–2012F1 ($ Billions) Investment earnings in 2011 were 10.3% below their 2007 pre-crisis peak Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates 1 Investment gains consist primarily of interest and stock dividends. *2012F is based on annualized Q1:2012 actual figure of $11.656B. Sources: ISO; Conning Research & Consulting; Insurance Information Institute Graph. 21

  23. P/C Net Income After Taxes1991–2012:Q1 ($ Millions) • 2005 ROE*= 9.6% • 2006 ROE = 12.7% • 2007 ROE = 10.9% • 2008 ROE = 0.1% • 2009 ROE = 5.0% • 2010 ROE = 6.6% • 2011 ROAS1 = 3.5% • 2012:Q1 ROAS1 = 7.2% P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due primarily to lower catastrophe losses • ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. Sources: A.M. Best; ISO; Insurance Information Institute Graph. 22

  24. A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs A combined ratio of about 100 generates an ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10,10% in 2005 and 16% in 1979 Combined Ratio / ROE Year Ago 2011:Q1 = 102.2, 6.1% ROE Combined Ratios Must Be Lower in Today’s Depressed Investment Environment to Generate Risk Appropriate ROEs * 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio including M&FG insurers is 99.0, ROAS = 7.2%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Sources: A.M. Best; ISO; Insurance Information Institute Graph. 23

  25. Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line* Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline *Based on 2008 Invested Assets and Earned Premiums **US domestic reinsurance only Sources: A.M. Best; Insurance Information Institute Graph. 24

  26. SLOWING RESERVE RELEASES 25

  27. P/C Reserve Development, 1992–2013F Prior year reserve releases totaled $8.8 billion in the first half of 2010, up from $7.1 billion in the first half of 2009 Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to Further Diminish in 2012 and 2103 Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best; Insurance Information Institute Graph. 26 12/01/09 - 9pm

  28. RISING TORT COSTS 27

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  31. Top 10 Verdicts 2011 #1 Texas $482M Patent Infringement #2 Mississippi $322M Product/Asbestos #3 Virginia $212M Product #4 Nevada $183M Product #5 Michigan $144M Medical Malpractice #6 Texas $116M Fraud #7 Nevada $104M Product #8 Illinois $95M Sexual Harassment #9 West Virginia $91M Nursing Home #10 Illinois $90M Product Source: Lawyers USA Weekly 30

  32. Top Ten Jury Verdicts In 2011, the average size of “top ten verdicts” rose by $27 Million or 17% to $184 Million In 2011, the lowest award in the top 10 is nearly $90 Million - $10 Million more than 2010 In 2011 the top award was $482 Million, slightly lower than the $505 Million figure for 2010 The Total of the largest five liability verdicts was $1.1 Billion in 2010, up 77% from 2009 which was up 52% from 2008 Bloomberg Source: “Top 10 Jury Verdicts of 2011.” Lawyers USA. 17 January 2011 31

  33. AON GRIP DATA CIAB DATA 33

  34. Aon Grip Data – Risk Management Accounts Primary Casualty – Quarterly Year-Over-Year Change in Average Rate Data Source: Aon Analytics Research and Aon GRIPSM 34

  35. Aon Grip Data – Risk Management Accounts Umbrella/Excess Liability – Quarterly Year-Over-Year Change in Average Rate Data Source: Aon Analytics Research and Aon GRIPSM 35

  36. Change in Commercial Rate Renewals, by Line: 2012:Q2 Workers Comp rate increases are large than any other line, followed by Property lines Percentage Change (%) Major Commercial Lines Renewed Uniformly Upward in Q2:2012 for Only the Fourth time Since 2003; Property Lines & Workers Comp Leading the Way; Cat Losses and Low Interest Rates Provide Momentum Going Forward Sources: Council of Insurance Agents and Brokers; Insurance Information Institute Graph. 36

  37. Storm Clouds on the Horizon? • Will Industry Surplus Begin to Decline? • Will Combined Ratios in Casually Lines Continue to Increase? • How will the Global Economy react in 2012? • Will “Social Inflation” continue to impact the Tort System? • Will reserve releases turn to reserve strengthening? 37

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