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Financial Forecast 2010: The Future of the Property/Casualty Insurance Industry

Financial Forecast 2010: The Future of the Property/Casualty Insurance Industry. Property Casualty Insurers Association of America Executive Roundtable Seminar Naples, FL January 23, 2006. Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist

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Financial Forecast 2010: The Future of the Property/Casualty Insurance Industry

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  1. Financial Forecast 2010: The Future of the Property/Casualty Insurance Industry Property Casualty Insurers Association of America Executive Roundtable Seminar Naples, FL January 23, 2006 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. Crystal Ball: 2010 Financial Competition Regulation Politics

  3. Financial PredictionsSlower Growth & Higher Losses = Disappointing Profits

  4. ROE: P/C vs. All Industries 1987–2010F* P/C profits continue to disappoint. ROE stuck at 9-10% Competition Low Interest Rates Sluggish Premium Growth Rising Loss Costs Mega CATs Excess Capital Accumulation *GAAP ROEs except 2005 P/C figure = return on average surplus. 2005E-10F are III estimates. Source: Insurance Information Institute; Fortune for all industry figures

  5. Strength of Recent Hard Markets by NWP Growth* 1975-78 1984-87 2001-04 2006-2010 (post-Katrina) period will resemble 1993-97 (post-Andrew) Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute *2005-10 figures are III forecasts/estimates.

  6. 2010: Leakage of P/C Insurance Premium Continues • Large Deductibles • Efficient Use of Corporate Capital • Makes Sense for Personal Lines Policyholders • Alternative Risk Transfer • Especially Captives: Popular for Ever-Smaller Risks • Dedicated Reinsurance Facilities • Contingent Funding: Debt, Post-Event Assessments, Govt. • Securitization • Diversification in Portfolios of Asset-Backed Securities • Self-Insurance • Self Insurance Groups • Risk-Retention Groups • Residual Markets • FL; Large Expansion in LA, MS, TX & Elsewhere

  7. U.S. Policyholder Surplus: 1975-2005* Capacity at year-end 2005 was $420 billion (est.). It will reach $500B by 2009 and $536 billion by year-end 2010 $ Billions CAGR 1975-2005E = 10.7% Assume CAGR 2005-2010 = 5% “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations Source: A.M. Best, ISO, Insurance Information Institute *As of 9/30/05.

  8. Announced Insurer Capital Raising*($ Millions, as of December 1, 2005) As of Dec. 1, 19 insurers announced plans to raise $9.95 billion in new capital. Twelve start-ups plan to raise as much as $8.65 billion more for a total of $18.65B. Likely at least $20B raised eventually. Existing companies will continue to find it relatively easy to raise cash… *Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.

  9. Announced Capital Raising by Insurance Start-Ups($ Millions, as of December 11, 2006) As of Dec. 11, 13 start-ups plan to raise as much as $8.75 billion. More likely to come. …so will start-ups *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.

  10. U.S. InsuredCatastrophe Losses ($ Billions) $ Billions $100 Billion CAT year is coming soon 2005 will be by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. *Includes $53.7 billion per ISO/PCS plus $4B 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

  11. Combined Ratio:Impact of Reserve Changes (Points) Reserve adequacy is improving substantially, which bodes well for 2010 Source: ISO, A.M. Best, Lehman Brothers for years 2005E-2007F

  12. Tort System Costs,2000-2010F After a period of rapid escalation, tort system costs as % of GDP appear to be stabilizing Source: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology.

  13. Shareholder Class Action Lawsuits* 1997-2001 remain problematic from a D&O perspective Sarbanes-Oxley Impact?? *Securities fraud suits filed in U.S. federal courts. **Suits of $100 million or more. Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute

  14. Regulatory PredictionsCongressional Apathy Continues on P/C Issues

  15. Tough Road for Comprehensive National Catastrophe Plan Unlikely National CAT Plan in place by 2010. Major obstacles include: • Divisions within industry • Opposition in Congress 1:500 Event Federal Catastrophe Reinsurance Contract Program 1:50 Event Private Reinsurance State Regional Catastrophe Fund State Attachment Personal Disaster Account Private Insurance Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

  16. TRIA’s Days Are Numbered: Congress & Administration Want it Dead Industry Aggregate Retention ($ Bns) Extension Obstacles Include • Opposition in Congress & Administration • Profitability/Growth in Capital Base/New Entry • Few examples of econ. disruption Source: Insurance Information Institute

  17. Status of Other RegulatoryIssues by 2010 • No Optional Federal Charter by 2010 • Little Progress on Regulatory Modernization (e.g., SMART Act) • Asbestos “Reform” Not to Industry Satisfaction • Incremental Additional Improvements in Tort Environment

  18. Competitive PredictionsWave of Consolidation Among Primary P/C Companies is Not Imminent

  19. M&A Activity AffectingPersonal Lines, 1992-2004 ($ Mill) M&A activity has been in the doldrums, no obvious reason for surge in consolidation, at least in personal lines, except via non-renewals Commercial lines M&A slow due to fear of “skeletons in the closet” Source: Insurance Information Inst. based on tabulation by Conning report The Emerging Shakeout in Personal Lines, 2005

  20. Class of 2005:Many Will Be Gone by 2010 As of Dec. 11, 13 start-ups plan to raise as much as $8.75 billion. More likely to come. …so will start-ups *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.

  21. Walmarted: Retailers Will Eventually Show Interest in P/C Insurance • Banks will continue to acquire distribution channels • Retailers chafing to get into retail banking • Insurance not far behind, at least on distribution side • Walmart shaking up warranty business Retailing & Insurance have a long history. Remember Sears and Allstate?

  22. Political PredictionsChange is in the Air

  23. 2010: Political Order Will Be Shaken Up • One House of Congress Changes Hands by 2010 • Change of Party in the White House • Eliot Spitzer is the Next Governor of New York

  24. Insurance Information Institute On-Line WWW.III.ORG If you would like a copy of this presentation, please give me your business card with e-mail address

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