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Hurricanes Katrina & Rita: Impacts on the Property/Casualty Insurance & Reinsurance Industries

Hurricanes Katrina & Rita: Impacts on the Property/Casualty Insurance & Reinsurance Industries Insurance Information Institute October 14, 2005 Download at: http://www.disasterinformation.org/disaster2/facts/presentation/

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Hurricanes Katrina & Rita: Impacts on the Property/Casualty Insurance & Reinsurance Industries

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  1. Hurricanes Katrina & Rita:Impacts on the Property/Casualty Insurance & Reinsurance Industries Insurance Information Institute October 14, 2005 Download at: http://www.disasterinformation.org/disaster2/facts/presentation/ 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 • P/C Financial Overview: A Position of Strength • Industry Claims-Paying Resources • Underwriting Performance pre-Katrina • Pricing Impacts • Catastrophe Review: • Loss estimate overview • Hurricanes Katrina & Rita’s place in history • Loss distribution (geographic & by line) • Impact on financial & underwriting performance • Influence of legal environment on Katrina claims • Overview of the Natl. Flood Insurance Program • The Role of the Fed. Government & CAT Risk • Q & A

  3. P/C Financial OverviewStrong Pre-Katrina Results Help Industry Meet the Challenge

  4. P/C Net Income After Taxes1991-2005:H1 ($ Millions)* Pre-Katrina/Rita profits were strong, helping industry cope with mega-loss • 2001 ROE = -1.2% • 2002 ROE = 2.2% • 2003 ROE = 8.9% • 2004 ROE = 10.5%* • 2005:H1 ROE = 15.3% “Record” 2004 profits wrongly cited as reason why insurers should pay excluded flood losses *ROE figures are GAAP; 2004 figure is return on average surplus. 2005 figure is for first half of year. Sources: A.M. Best, ISO, Insurance Information Institute.

  5. ROE: P/C vs. All Industries 1987–2005F* 2005:H1 P/C ROAS = 15.3% 16.3 Pts. 2005 P/C ROAS = 9.5% after adjusting for Katrina & Rita *GAAP ROEs except 2004/5 P/C figure = return on average surplus. 2005 figure is III full-year estimate. Source: Insurance Information Institute; Fortune for all industry figures

  6. ROE vs. Equity Cost of Capital: US P/C Insurance:1991 – 2005* Because p/c insurers today generally are earning their cost of capital and are financially strong, they should be able to readily access fresh capital if necessary. +5.0 pts +0.6 pts -9.0 pts -1.7 pts -13.2 pts US P/C insurers missed their cost of capital by an average 6.3 points from 1991 to 2003 *First half 2005. Source: The Geneva Association, Ins. Information Inst.

  7. P/C Insurers Stocks Remain Up, Brokers Up Too, Reinsurers Down Total Return 2005 YTD Through October 7, 2005 P/C insurer stocks outperforming the market despite Katrina & Rita Reinsurers down more on Katrina & Rita news Brokers up on tight market hopes Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

  8. Change in YTD Stock Performance by Sector Pre- & Post-Katrina/Rita P/C & reinsurer stocks hurt by Katrina & Rita, broker stocks rose on expectation of tighter conditions and demand for broker services Katrina strikes Aug. 29 Rita comes ashore Sept. 24 Source: SNL Securities; Insurance Information Institute

  9. Insurer Claims Paying Resources

  10. U.S. Policyholder Surplus: 1975-2005* Capacity TODAY is $412.5B, 45% above its 2002 trough and 22% above its mid-1999 peak. Sufficient capacity exists to pay all Katrina & Rita claims. PHS backs all lines of insurance in all states. PHS is not fungible and is frequently misunderstood and misused $ Billions “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 6/30/05.

  11. US Reinsurers: Change in Policyholder Surplus ($ Billions) Reinsurer PHS fell 20% from 1998-2002. Capacity today similar to 1998. Same story globally. Source: A.M. Best; Insurance Information Institute

  12. UNDERWRITINGStrong Underwriting Results Pre-Katrina Will Help Industry Weather the Storm

  13. P/C Industry Combined Ratio* 2001 = 115.7 2002 = 107.2 2003 = 100.1 2004 = 98.3 2005:H1 = 92.7* Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.8 2000-05E: 103.9 The industry has just experienced its most remarkable recovery in recent history. Katrina will partially reverse this Sources: A.M. Best; ISO, III. *2005 figure is though 6/30/05.

  14. Underwriting Gain (Loss)1975-2005E* Before Katrina, p/c insurers were on track for only the second underwriting profit in 26 years $ Billions *2005 estimate is based on annualized actual 05H1 net underwriting profit of $13.2 billion. Source: A.M. Best, Insurance Information Institute

  15. Commercial vs. Personal Lines Combined Ratios, 1993-2005:H1* Personal lines outperforming commercial. Underwriting is now more important in long-tail commercial lines. Katrina impact will be severe. HurricaneAndrew Source: A.M. Best; Insurance Information Institute *III estimate for first half 2005. Actual 1H05 combined ratio all lines was 92.7.

  16. 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 • 2004/5: CATs hurt reinsurers HurricaneAndrew *RAA figure for 2005:H1 Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

  17. UNDERWRITING AFFECTS FINANCIAL STRENGTHIs There Causefor Concern?

  18. U.S. InsuredCatastrophe Losses ($ Billions) $ Billions 2005 is the worst year ever for CAT losses, breaking the record set in 2004 *As of 6/30/05 plus $920 in insured for Hurricane Dennis in July and $40 billion for Hurricane Katrina. 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. Source: Property Claims Service/ISO; Insurance Information Institute

  19. Reason for P/C Insolvencies(218 Insolvencies, 1993-2002) Reserve deficiencies account for more than half of all p/c insurers insolvencies Source: A.M. Best, Insurance Information Institute

  20. Downgrade/Upgrade Ratio* Downgrade to upgrade ratio is falling (primarily because the number of downgrades is falling; only a small increase in upgrades) Sources: Impairment Rate and Rating Transition Study—1977 to 2002, A.M. Best & Co. *U.S. property/casualty and life/health insurers before 2000; P/C only 2000-2004.

  21. Historical Ratings Distribution,US P/C Insurers, 2000 vs. 2004 2000 2004 A++/A+ shrinkage Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004.

  22. US Reinsurer Combined Ratio vs. Median Rating, 1999-2003* A++ A+ A+ A A A A A A- Are ratings related to performance? B++ B+ B *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.

  23. P/C Company AIU Insurance Co. Alfa Mutual Ins. Co. Amica Mutual Ins. Co. Church Mutual Ins. Co. Federal Insurance Co. General Reinsurance Corp. Great Northern Ins. Co. Lititz Mutual Ins. Co. Nationwide Mutual Fire Co. Otsego Mutual Fire Quincy Mutual Fire Ins. Co. State Automobile Mutual Ins. Co. State Farm Mutual Auto Ins. Co. Vigilant Insurance Co. Group Affiliation American International Group Alfa Insurance Group Amica Mutual Group None Chubb Group of Ins Cos. Berkshire Hathaway Ins. Group Chubb Group of Ins Cos. Lititz Mutual Group Nationwide Mutual Group None Quincy Mutual Group State Auto Ins. Group State Farm Group Chubb Group of Ins Cos. P/C Insurers Maintaining Rating of A+ or Better Rating for 50+ Years Source: Best’s Review, January 1, 2004.

  24. Cumulative Average Impairment Rates by Best Financial Strength Rating* Insurers with strong ratings are far less likely to become impaired over long periods of time. Especially important in long-tailed lines. *US P/C and L/H companies, 1977-2002 Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.

  25. Cumulative Avg. Implied Impairment Ratesby Holding Co. Senior Unsecured Debt Insurers with strong credit ratings are far less likely to become impaired over long periods of time. Especially important in long-tailed lines. *US P/C and L/H companies, 1977-2002 Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.

  26. Companies Under Review w/ Negative Implications CompanyA.M. Best Rating Allied World A+ Allmerica Financial P&C Cos . A- American Re A Balboa Insurance Grp. A DaVinci Re A Endurance Specialty A Florists Mutual Grp. A- Glencoe A Imagine Insurance Co. Ltd. A- IPCRe A+ Louisiana Farm Bureau Mutual A- Mississippi Farm Bureau Mutual A+ Munich Re A+ Mutual Savings Fire Ins. Co. B- Mutual Savings Life Ins. Co. B- Odyssey Re A PartnerRe Group A+ PXRE A- Renaissance Re A+ Rosemont Reinsurance Ltd. A- Transatlantic Re A+ XL Capital A+ XL Life Insurance & Annuity A+ XL Life Ltd. A+ Companies on Credit Watch with Negative Implications CompanyS&P Rating Allmerica BBB+ Allstate Corp. AA Aspen Group A Oil Casualty Insurance Ltd. A- Society of Lloyd’s A State Farm AA Swiss Re AA United Fire Group A Rating Agency Actions Following Hurricane Katrina (as of Oct. 6, 2005)* Downgrades CompanyS&P Rating A.M. Best • Alea A- to BBB+ A- to B++ • Olympus Re not rated A- to B+ • PXRE A to A- A to A- • Advent Synd. 780 3pi to 2pi not rated “…the replenishment of capital alone may not be sufficient to sustain a company’s rating.” A.M. Bestpress release Sept. 15, 2005 *ACE and Montpelier Re were originally placed on watch/ review but have been removed. Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry,Tillinghast, October 2005.

  27. INVESTMENTSImprovements Still Support Cash Flow Underwriting

  28. Net Investment Income Growth History 2002: -1.3% 2003: +3.9% 2004: +2.4% 2005:H1: +16.5%** $ Billions Source: A.M. Best, ISO, Insurance Information Institute; *Annualized. **2005:H1 over 2004:H1, adjusted for special dividend of $3.1B.

  29. Total Returns for Large Company Stocks: 1970-2005* S&P 500 was up 9% in 2004. Fears of higher interest rates, inflation, the falling dollar, resurgent oil prices are concerns in 2005 • 2003/4 were the first consecutive gains since 1999 2005 Source: Ibbotson Associates, Insurance Information Institute. *Through October 10, 2005.

  30. Property/Casualty Insurance Industry Investment Gain* Investment gains are rising but will still fall short of their 1998 peak. CAT losses will reduce investable assets. *Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2005 figure is as of 6/30/05, adjusted for special dividend of $3.1B. Source: Insurance Services Office; Insurance Information Institute.

  31. Proportion of P/C Portfolio Invested in Cash and ST Securities Holdings of cash and short-term securities has more than doubled since 1999 Source: A.M. Best; Insurance Information Institute

  32. PRICING TRENDSWill Katrina & Rita Harden Markets?

  33. 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% 2001-04: 6.9% Premium growth is faltering. Real growth in 2005 will be NEGATIVE Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute *2005 figure is III forecast based on 05Q1 result.

  34. Commercial Premium Rate Changes Are Sharply Lower The magnitude of rate decreases is leveling off. Will Katrina/Rita reverse the slide in commercial rates? Source: MarketScout.com

  35. Average Rate Change, All Lines,(1Q:2004 – 2Q:2005) Magnitude of rate decreases accelerated during the first half of 2005, but flattened out in Q2 Source: Council of Insurance Agents & Brokers; Insurance Information Institute

  36. Rate Changes by Line,2nd Qtr. 2005 Magnitude of rate decreases flattened out during the second quarter of 2005 Source: Council of Insurance Agents & Brokers; Insurance Information Institute

  37. Average Commercial Rate Change by Account Size Commercial accounts have trending downward for 4-5 quarters, with large commercial leading the way. Now starting to flatten.

  38. Cumulative Quarterly Rate Change by Account Size Commercial rates are well off their late 2003 peaks for accounts of all size and are approximately where they were in mid-2002 At which point do the reductions become destructive?

  39. Reinsurance Prices are Only at 1995 Levels, Despite Increased Risk US cat reinsurance price index: 1994 = 100 Sources: Swiss Re, Cat Market Research

  40. CATASTROPHE LOSS MANAGEMENTFocus on Hurricanes Katrina & Rita

  41. Global Number of Catastrophic Events, 1970–2004 The number of natural and man-made catastrophes has been increasing on a global scale for 20 years Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005, page 4.

  42. Global Insured CAT Losses, 1970–2004(Property and Business Interruption) Billion USD, at 2004 prices There has been a huge increase in the insured value of global CTA losses in recent years Source: Swiss Re, sigma No. 1/2005, page 6

  43. Insured Property Catastrophe Losses, 1983–2004 Cat Losses as a % of Non-Life Net Premiums Earned Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting

  44. 2005 Has Been a Busy, Destructive, Deadly & Expensive Hurricane Season Source: WeatherUnderground.com, October 12, 2005.

  45. Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade 1930s – mid-1960s: Period of Intense Tropical Cyclone Activity Mid-1990s – 2030s? New Period of Intense Tropical Cyclone Activity 9 Tropical cyclone activity in the mid-1990s entered the active phase of a normal cycle that could last into the 2030s *Figure for 2000s is extrapolated based on data for 2000-2005 (5 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita (2005). Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.

  46. Hurricane Katrina Insured Loss Estimates Still Vary Widely Typically unmodeled losses: Demand surge*, LAE, debris removal, tree damage, mold, spoilage, power outage, off-premises power loss, flood, fraud, civil authority, assessments, pollution, litigation RMS estimate predicts $15-$25B in privately insured flood losses, mostly commercial (modeled after the event) *Rising material costs, e.g., plywood rose 38% and framing lumber by 14% through Sept. 16, 2005. Sources: RMS, AIR, Eqecat, Tillinghast; Compiled by the Insurance Information Institute.

  47. Hurricane Katrina Insured Loss Estimates Still Vary Widely Typically unmodeled losses: Demand surge*, LAE, debris removal, tree damage, mold, spoilage, power outage, off-premises power loss, flood, fraud, civil authority, assessments, pollution, litigation ISO/PCS estimates is $34.4B and 1.6 million claims RMS estimate predicts $15-$25B in privately insured flood losses, mostly commercial (modeled after event) *Rising material costs, e.g., plywood rose 38% and framing lumber by 14% through Sept. 16, 2005. Sources: RMS, AIR, Eqecat, ISO/PCS, Tillinghast; Compiled by the Insurance Information Institute.

  48. Hurricane Rita Losses:Much Smaller & Less Variable RMS includes $1-$2B in offshore energy losses. AIR, Eqecat do not model offshore energy losses. Sources: RMS, AIR, Eqecat; Compiled by the Insurance Information Institute.

  49. Breakdown of RMS $40-$60 Billion Katrina Loss Estimate *Primarily commercial flood and associated business interruption losses. Sources: RMS; Adapted from Responding to Katrina, Lane Financial LLC, Sept. 16, 2005.

  50. Breakdown of Tillinghast $40-$55 Billion Katrina Loss Estimate

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