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 firstname.lastname@example.org www.iii.org
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
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P/C FINANACIAL UPDATE:Profitability: Good but Not Good EnoughUnderwriting: Need to Stay DisciplinedInvestments: Keep Expectations Low
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
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.
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.
ROE: P/C vs. All Industries 1987–2004E Source: Insurance Information Institute; Fortune
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.
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.
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)?
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.
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.
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
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
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
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
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
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
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
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.
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
Commercial vs. Personal Lines Combined Ratios 10-Year Average Combined Ratios Commercial: 109.9 Personal: 104.4 Source: A.M. Best; Insurance Information Institute
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
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
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.
How the Risk Dollar is Spent (2003) Firms w/Revenues > $1 Billion Firms w/Revenues < $1 Billion Source: RIMS (2003); Insurance Information Institute
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
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
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
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
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
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
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
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
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
FATAL ATTRACTION?A LOSS OF PRICING & UNDERWRITING DISCIPLINERATINGS, SOLVENCY, FINANCIAL STRENGTH