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Property/Casualty Insurance: An Industry Overview Focus on Energy Markets and Global Economic Concerns Insurance Information Institute February 1, 2008 Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute  110 William Street  New York, NY 10038

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Property/Casualty Insurance: An Industry OverviewFocus on Energy Markets andGlobal Economic Concerns

Insurance Information Institute

February 1, 2008

Robert P. Hartwig, Ph.D., CPCU, President

Insurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org  www.iii.org

presentation outline
Presentation Outline
  • Profitability
  • Financial Strength
  • Underwriting Trends: Overall & Commercial Lines
  • Premium Growth
  • Capacity
  • Investment Overview
  • Catastrophic Loss
  • Energy Market Overview
  • Shifting Legal Liability & Tort Environment
  • Weakening Economy, Credit Crunch Concerns
  • Q&A
p c net income after taxes 1991 2007f millions
P/C Net Income After Taxes1991-2007F ($ Millions)*
  • 2001 ROE = -1.2%
  • 2002 ROE = 2.2%
  • 2003 ROE = 8.9%
  • 2004 ROE = 9.4%
  • 2005 ROE= 9.6%
  • 2006 ROE = 12.2%
  • 2007E ROAS1 = 13.1%**

Insurer profits peaked in 2006/7

*ROE figures are GAAP; 1Return on avg. surplus. 2007E figure is annualized actual 9-month net income of $49.399B **Return on Average Surplus; Actual 9-month 2007 result.

Sources: A.M. Best, ISO, Insurance Information Inst.

roe p c vs all industries 1987 2008e
ROE: P/C vs. All Industries 1987–2008E

P/C profitability is cyclical, volatile and vulnerable

Sept. 11

Hugo

Katrina, Rita, Wilma

Lowest CAT losses in 15 years

Andrew

Northridge

4 Hurricanes

*2007 is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.

Source: Insurance Information Institute; Fortune

profitability peaks troughs in the p c insurance industry 1975 2008f
Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008F*

1977:19.0%

1987:17.3%

2006:12.2%

10 Years

1997:11.6%

9 Years

10 Years

1975: 2.4%

1984: 1.8%

1992: 4.5%

2001: -1.2%

*GAAP ROE for all years except 2007 which is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.

Source: Insurance Information Institute; Fortune

roe vs equity cost of capital us p c insurance 1991 2007e
ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2007E

The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years

+1.7 pts

+3.1 pts

-9.0 pts

-0.1 pts

+0.2 pts

-13.2 pts

US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better 2003-07

The cost of capital is the rate of return insurers need to attract and retain capital to the business

Source: The Geneva Association, Ins. Information Inst.

p c l h stocks beat the s p 500 index in 2007
P/C, L/H Stocks: Beat the S&P 500 Index in 2007

Total YTD Returns Through December 2007*

P/C insurance stocks benefiting from benign hurricane season, strategic buying as a countercyclical play

Mortgage & Financial Guarantee insurers are down 69% for the year, Title insurers down 22%

*As of Dec. 28; S&P 500 was up 3.53% as 12/31/07. **Includes Financial Guarantee.

Source: SNL Securities, Standard & Poor’s, Insurance Information Inst.

top industries by roe p c insurers still underperformed in 2006
Top Industries by ROE: P/C Insurers Still Underperformed in 2006*

P/C insurer profitability in 2006 ranked 30th out of 50 industry groups despite renewed profitability

P/C insurers underperformed the All Industry median for the 19th consecutive year

*Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors.

Source: Fortune, April 30, 2007 edition; Insurance Information Institute

financial strength ratings industry has weathered the storms well but cycle may takes its toll

FINANCIAL STRENGTH & RATINGSIndustry Has Weathered the Storms Well, But Cycle May Takes Its Toll

p c insurer impairment frequency vs combined ratio 1969 2007e
P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E

Impairment rates are highly correlated underwriting performance and could reach near-record low in 2007

2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969; 2007 will be lower; Record is 0.24% in 1972

Source: A.M. Best; Insurance Information Institute

reasons for us p c insurer impairments 1969 2005
Reasons for US P/C Insurer Impairments, 1969-2005

2003-2005

1969-2005

Deficient reserves, CAT losses are more important factors in recent years

*Includes overstatement of assets.

Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report,Nov. 2005;

p c insurance combined ratio 1970 2007e
P/C Insurance Combined Ratio, 1970-2007E*

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000s: 101.8*

Sources: A.M. Best; ISO, III

*Estimate based on actual 9M result..

p c insurance combined ratio 2001 2007e
P/C Insurance Combined Ratio, 2001-2007E

2007 deterioration due primarily to falling rates, but results still strong assuming normal CAT activity

As recently as 2001, insurers were paying out nearly $1.16 for every dollar they earned in premiums

2006 produced the best underwriting result since the 87.6 combined ratio in 1949

2005 figure benefited from heavy use of reinsurance which lowered net losses

Sources: A.M. Best; ISO, III. *Actual 9-month result.

ten lowest p c insurance combined ratios since 1920 vs 2007e
Ten Lowest P/C Insurance Combined Ratios Since 1920 vs. 2007E

2007 was one of the Top 12 best since 1920

The industry’s best underwriting years are associated with periods of low interest rates

The 2006 combined ratio of 92.5 was the best since the 87.6 combined in 1949

Sources: Insurance Information Institute research from A.M. Best data. *2007: III Earlybird survey.

underwriting gain loss 1975 2007f
Underwriting Gain (Loss)1975-2007F*

Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the second since 1978. Expected gain for 2007 is approximately $24 billion. Cumulative underwriting deficit since 1975 is $417 billion.

$ Billions

Source: A.M. Best, Insurance Information Institute *Actual 2007:9M underwriting profit = $18.146B

annualized to $24.192B.

impact of reserve changes on combined ratio
Impact of Reserve Changes on Combined Ratio

Reserve adequacy has improved substantially

Source: A.M. Best, Lehman Brothers estimates for years 2007-2009

cumulative prior year reserve development by line as of 12 31 06
Cumulative Prior Year Reserve Development by Line (As of 12/31/06)

Strengthening

Reserve redundancies in most lines have resulted in releases in recent years

Release

Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.

commercial lines combined ratio 1993 2008f
Commercial Lines Combined Ratio, 1993-2008F

Commercial coverages have exhibited significant variability over time.

Outside CAT-affected lines, commercial insurance is doing fairly well. Caution is required in underwriting long-tail commercial lines.

Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases

Source: A.M. Best; Insurance Information Institute .

commercial auto liability pd combined ratios
Commercial Auto Liability& PD Combined Ratios

Average Combined: Liability = 108.8

PD = 97.5

Commercial Auto has improved dramatically

Sources: A.M. Best; III

commercial multi peril combined liability vs non liability portion
Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)

CMP- has improved recently

Liab. Combined 1995 to 2004 = 113.8

Non-Liab. Combined = 105.2

Sources: A.M. Best; III

slide26

Workers Comp Combined Ratios, 1994-2006P

Percent

p Preliminary AY figure.

Accident Year data is evaluated as of 12/31/2006 and developed to ultimate

Source: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI Annual Statement Analysis.

Includes dividends to policyholders

slide27

Workers Comp Lost-Time

Claim Frequency (% Change)

Percent Change

Cumulative Change of –52.1%

since 1991 means that lost work time claims have been cut by more than half

Accident Year

2003p: Preliminary based on data valued as of 12/31/2006

1991-2005: Based on data through 12/31/2005, developed to ultimate

Based on the states where NCCI provides ratemaking services

Excludes the effects of deductible policies

Source: NCCI

slide28

Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2006p

Indemnity

Claim Cost (000s)

Annual Change 1991–1996: +1.2%

Annual Change 1997–2005: +6.6%

Cumulative Change = +108.5%

(1993-2006p)

Accident Year

2005p: Preliminary based on data valued as of 12/31/2006

1991-2005: Based on data through 12/31/2005, developed to ultimate

Based on the states where NCCI provides ratemaking services

Excludes the effects of deductible policies

Source: NCCI

wc medical severity rising far faster than medical cpi
WC Medical Severity Rising Far Faster than Medical CPI

WC medical severity rose more than twice as fast as the medical CPI (8.8% vs. 4.0%) from 1995 through 2006

3.5 pts

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

med costs share of total costs is increasing steadily
Med Costs Share of Total Costs is Increasing Steadily

2006p

1996

1986

Source: NCCI (based on states where NCCI provides ratemaking services).

share of losses paid by reinsurers by disaster
Share of Losses Paid by Reinsurers, by Disaster*

Reinsurance is playing an increasingly important role in the financing of mega-CATs; Reins. Costs are skyrocketing

*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.

Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

us reinsurer net income roe 1985 2006
US Reinsurer Net Income& ROE, 1985-2006

Reinsurer profitability has rebounded

Source: Reinsurance Association of America.

strength of recent hard markets by nwp growth
Strength of Recent Hard Markets by NWP Growth*

1975-78

1984-87

2001-04

Post-Katrina period resembles 1993-97 (post-Andrew)

2007: Projected 0% premium growth would be the first since 1943

Note: Shaded areas denote hard market periods.

Source: A.M. Best, Insurance Information Institute

*2007 figure (0.0%) is actual 9-month result.

growth in net written premium 2000 2007e
Growth in Net Written Premium, 2000-2007E

P/C insurers could experience their slowest growth rates since the 1940s…but underwriting results are expected to remain healthy

*2007 figure based on actual 9-month results.

Source: A.M. Best; Forecasts from the Insurance Information Institute.

average commercial rate change all lines 1q 2004 4q 2007
Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2007)

Magnitude of rate decreases diminished temporarily after Katrina but have grown again

-0.1%

KRW Effect

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

cumulative commercial rate change by line 4q99 4q07
Cumulative Commercial Rate Change by Line: 4Q99 – 4Q07

Commercial account pricing has been trending down for 3+ years and is now on par with prices in late 2001, early 2002

Source: Council of Insurance Agents & Brokers

average commercial rate changes by line 4q99 4q07
Average Commercial Rate Changes by Line: 4Q99 – 4Q07

Commercial account pricing has been trending down for 3+ years and is now on par with prices in late 2001, early 2002

Source: Council of Insurance Agents & Brokers

utilities how the risk dollar is spent respondent revenues 1b
Utilities: How the Risk Dollar is Spent(Respondent Revenues < $1B)

Source: 2006 RIMS Benchmark Survey

utilities how the risk dollar is spent respondent revenues 1b44
Utilities: How the Risk Dollar is Spent(Respondent Revenues > $1B)

Source: 2006 RIMS Benchmark Survey

u s policyholder surplus 1975 2007
U.S. Policyholder Surplus: 1975-2007*

Capacity as of 6/30/07 was $521.8B, 5.3% above year-end 2006, 80% above its 2002 trough and 54% above its 1999 peak.

Capacity exceeded a half trillion dollars for the first time during the 2nd quarter of 2007

$ Billions

Premium-to-surplus ratio reached a record low of $0.81:$1 at year end 2007, suggesting excess capital

“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 September 30, 2007

slide47

P/C Industry Premium-to-SurplusRatio, 1985-2007:Q3Private Carriers

$521.8B

$450 B

$145 B

$76 B

$ Billions P:S Ratio

At 0.86:1 as of 9/30/07, now approaching all-time record premium-to-surplus ratio of 0.84:1 in 1998

1.92:1

Low P:S Ratio 0.84:1 in 1998

0.86:1

Q3 = First 3 quarters as of 9/30/07

Source: Insurance Information Institute; 1985–2006, A.M. Best Aggregates & Averages;; 2007 ISO

Calendar Year

annual catastrophe bond transactions volume 1997 2006
Annual Catastrophe Bond Transactions Volume, 1997-2006

Catastrophe bond issuance has soared in the wake of Hurricanes Katrina and the hurricane seasons of 2004/2005

Source: MMC Securities and Guy Carpenter; Insurance Information Institute.

p c insurer share repurchases 1987 through q3 2007 millions
P/C Insurer Share Repurchases,1987- Through Q3 2007 ($ Millions)

Reasons Behind Capital Build-Up & Repurchase Surge

  • Strong underwriting results
  • Moderate catastrophe losses
  • Reasonable investment performance
  • Lack of strategic alternatives (M&A, large-scale expansion)

Returning capital owners (shareholders) is one of the few options available

First 9-months 2007 share buybacks are already 133% of the 2006 record

2007 repurchases to date equate to 4.4% of industry surplus, the highest in 20 years

Sources: Credit Suisse, Company Reports; Insurance Information Inst.

p c insurance related m a activity 1988 2006
P/C Insurance-Related M&A Activity, 1988-2006

2006 surge due mostly to 2 deals. No trend started.

Reinsurance, distribution are exceptions

No model for successful consolidation has emerged

.

Source: Conning Research & Consulting.

motivating factors for increased p c insurer consolidation in 2007
Motivating Factors for Increased P/C Insurer Consolidation in 2007
  • Motivating Factors for P/C M&As
  • Slow Growth: Growth is at its lowest levels since the late 1990s
    • NWP growth was 0% in 2007; Appears similarly flat in 2008
    • Prices are falling or flat in most non-coastal markets
  • Accumulation of Capital: Excess capital depresses ROEs
    • Policyholder Surplus up 6-7%% in 2007 and up 80% since 2002
    • Insurers hard pressed to maintain earnings momentum
    • Options: Share Buybacks, Boost Dividends, Invest in Operation, Acquire
    • Option B: Engage in destructive price war and destroy capital
  • Reserve Adequacy: No longer a drag on earnings
    • Favorable development in recent years bolsters earnings
  • Favorable Fundamentals/Drop-Off in CAT Activity
    • Underlying claims inflation (frequency and severity trends) are benign
    • Lower CAT activity took some pressure of capital base

Source: Insurance Information Institute.

net investment income
Net Investment Income

Investment income posted modest gains in 2006, but ran flat in 2007

$ Billions

Growth History

2002: -1.3%

2003: +3.9%

2004: +3.4%

2005: +24.4%*

2006: +5.2%

2007: 0.1%**

Source: A.M. Best, ISO, Insurance Information Institute;

*Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. **Based on annualized 9M result of $39.515B.

total returns for large company stocks 1970 2008
Total Returns for Large Company Stocks: 1970-2008*

S&P 500 was up 3.53% in 2007, but down 7.22% so far in 2008*

Markets were up in 2007 for the 5th consecutive year; 2008 off to a rough start

Source: Ibbotson Associates, Insurance Information Institute. *Through January 29, 2008.

us p c net realized capital gains 1990 2007 9 months millions
US P/C Net Realized Capital Gains,1990-2007:9 Months ($ Millions)

Realized capital gains rebounded strongly in 2004/5 but fell sharply in 2006 despite strong stock market as insurers “bank” their gains. Rising again in 2007.

Sources: A.M. Best, ISO, Insurance Information Institute. *As of September 30, 2007.

property casualty insurance industry investment gain 1
Property/Casualty Insurance Industry Investment Gain1

Investment rose in 2007 but are just 9.8% higher than what they were nearly a decade earlier in 1998

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.

2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.

*2005 figure includes special one-time dividend of $3.2B. **Annualized 9-month result of $47.718B.

Sources: ISO; Insurance Information Institute.

most of us population property has major cat exposure
Most of US Population & Property Has Major CAT Exposure

Texas is among the riskiest places in America for insurers to operate

Is Anyplace Safe?

u s insured catastrophe losses
U.S. Insured Catastrophe Losses*

$ Billions

$100 Billion CAT year is coming soon

2006/07 were welcome respites. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come.

*Excludes $4B-$6b 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

global insured catastrophe losses by region 2001 2006
Global Insured Catastrophe Losses by Region, 2001-2006

North America accounted for 73% of global catastrophe losses 2001-2006

Notes: 2001-03 figures for N. America include US only. 2001 figure includes only property losses from 9/11.

Source: Insurance Information Institute compiled from Swiss Re sigma issues.

states with largest insured catastrophe losses in 2007
States With Largest Insured Catastrophe Losses in 2007

2007 CAT STATS

  • 1.18 million CAT claims across 41 states arising
  • 23 catastrophic events
  • $6.5 billion in insured losses

TX CAT losses were 3rd highest in the US in 2007

Source: PCS/ISO; Insurance Information Institute.

texas insured catastrophe losses 1980 2007 2005 in millions
TEXAS: Insured Catastrophe Losses,1980-2007 ($2005, in Millions)*

Average Annual CAT Losses: $931 Million*

Texas has experienced billion dollar-plus CAT losses in 9 of the past 28 years*

Sources: ISO/PCS; Insurance Info. Inst. *Losses stated in 2005 dollars except 2006/07 figures are unadjusted

distribution of 2007 us cat losses by type and insured loss
Distribution of 2007 US CAT Losses, by Type and Insured Loss

$ Billions

Commercial claims accounted for 20% of all US insured CAT losses paid in 2007. Total CAT claim count was 1.18 million.

Source: PCS division of ISO.

inflation adjusted u s insured catastrophe losses by cause of loss 1987 2006
Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1987-2006¹

Insured disaster losses totaled $297.3 billion from 1987-2006 (in 2006 dollars). Wildfires accounted for approximately $6.6 billion of these—2.2% of the total.

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.

2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Source: Insurance Services Office (ISO)..

distribution of us insured cat losses tx fl vs us 1980 2006
Distribution of US Insured CAT Losses: TX, FL vs US, 1980-2006*

$ Billions of 2005 Dollars

Florida accounted for 22% of all US insured CAT losses from 1980-2006: $57B out of $249.3B

*All figures (except 2006 loss) have been adjusted to 2005 dollars.

Source: PCS division of ISO.

historical hurricane strikes in galveston county tx 1900 2007
Historical Hurricane Strikes in Galveston County, TX, 1900-2007

Source: NOAA Coastal Services Center, http://maps.csc.noaa.gov/hurricanes/pop.jsp/; Insurance Info. Institute.

new construction in galveston will dreams be blown away
New Construction in Galveston: Will Dreams be Blown Away?
  • More than $2.3 Billion Residential, Commercial and Public Construction is Under Way in 2007
  • More than 6,500 Residential Units Under Construction
    • Mostly condos, including several towers up to 27 stories high
    • One development by Centex Homes will consist of 2,300 condos and houses on 1,000 acres
  • The Average Home Price Rose 89% to $232,800 over the 4 Years Ending Jan. 2007
  • Typical Price Range for Newer Condos: $400,000 Up to $1.5 Million
    • An undeveloped waterview lot can go for as much as $300,000
    • Most will be insured via TWIALimits up to $1.6 million + contents
  • Inconvenient Truth: Galveston is Site of the Deadliest Natural Disaster in US History
    • At least 8,000 people were killed in a 1900 hurricane
    • 3,600 homes were destroyed
    • The current seawall is only 15.6 ft. high; Katrina’s storm surge was nearly 30 feet.
  • Insured Losses Today from Repeat of 1900 Storm Would Exceed $21 Billion
    • Would become the 3rd most expensive hurricane in US history (after Katrina and Andrew)

Source: Insurance Information Institute from “A Texas-Sized Hunger for Gulf Coast Homes,” New York Times, March 18, 2007 and www.1900storm.com and www.twia.org accessed July 9, 2007.

tx windstorm insurance association growth in exposure to loss building contents only billions
TX Windstorm Insurance Association: Growth In Exposure to Loss(Building & Contents Only, $ Billions)

TWIA’s liability in-force for building & contents has surged by 362 percent in the last 7 years from $12.1bn in 2000 to $55.9bn as of 09/30/07

Source: TWIA; Insurance Information Institute; *As of 11/30/06; **As of 09/30/07.

energy market s cat respite

Energy Market’s CAT Respite

A wrecked oil platform washes ashore in Alabama in the wake of Hurricane Katrina.

2007 hurricane season no big hits once again
2007 Hurricane Season:No Big Hits Once Again

A Sigh of Relief

The 2007 season saw 15 named storms (same as devastating 2004 season) including two rare Category 5 storms, but the US escaped this year with very little loss

Source: www.wunderground.com, accessed 1/11/08; Insurance Information Institute

2005 was a busy destructive deadly expensive hurricane season
2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season

All 21 names were used for the first time ever, so Greek letters were used for the final storms

2005 set a new record for the number of hurricanes & tropical storms at 28, breaking the old record set in 1933.

Source: WeatherUnderground.com, January 18, 2006.

katrina s path of destruction through the offshore energy industry
Katrina’s Path of Destruction Through the Offshore Energy Industry

Katrina (& Rita) tore through offshore facilities

Source: “Hurricane Katrina: Profile of a Super Cat,” RMS, October 2005.

hurricane rita s path was at least as devastating for energy concerns
Hurricane Rita’s Path Was at Least as Devastating for Energy Concerns

Rita did significant damage to onshore facilities too

Source: Energy Information Administration;iMapData Inc.

insured offshore energy losses for recent major gulf storms
Insured Offshore Energy Losses for Recent Major Gulf Storms

Hurricanes Katrina, Rita and Ivan cost energy insurers at least $7 billion

Sources: Insurance Information Institute research estimates. *Midpoint of estimated range for $2.0 to $2.5 billion)

hurricanes katrina rita initial damage to oil platforms rigs in gulf of mexico
Hurricanes Katrina/Rita: Initial Damage to Oil Platforms & Rigs in Gulf of Mexico

No. of Platforms/Rigs Destroyed, Damaged or Adrift, as of October 4, 2005.

Totals:

Destroyed: 114

Damaged: 69

Adrift: 19

Missing: 3

About 75% (3,050 out of roughly 4,000 GOM platforms were in the path of Katrina & Rita

Source: Minerals Management Service (MMS), US Department of the Interior.

katrina rita total energy losses onshore vs offshore
Katrina & Rita: Total Energy Losses, Onshore vs. Offshore*

Total = $9.15 Billion

Total = $5.89 Billion

Billions

*Loss estimates are total losses, not just insured losses.

hurricane katrina loss distribution by line millions
Hurricane Katrina Loss Distribution by Line ($ Millions)*

Total onshore insured losses are estimated at $40.579 billion from 1.7438 million claims. Additional offshore energy losses totaled $2 billion (5%)

*As of June 8, 2006

Source: PCS division of ISO; Insurance Information Institute

hurricane rita loss distribution by line millions
Hurricane Rita Loss Distribution, by Line ($ Millions)*

Total insured losses are estimated at $5.0464 billion (from 383,000 claims plus an additional $3.0 billion in offshore energy losses (37%)

*As of June 8, 2006

Source: PCS division of ISO, Insurance Information Institute

energy market key trends
Energy Market: Key Trends
  • Energy loss record continues to improve after second consecutive quiet year (2006/07)
  • Profitable energy sector has led to increased market capacity (highest since 9/11)
  • Greater capacity has led to continued price pressure in 2008 (mirrors most of commercial mkt.)
  • Energy sector not at center of emerging D&O issue arising from subprime issue (no similarities to Enron era)

Source: Insurance Information Institute; Willis.

energy insurer capacities and average rating levels 1993 2008 excl gulf of mexico windstorm
Energy Insurer Capacities and Average Rating Levels, 1993-2008(Excl. Gulf of Mexico Windstorm)

In general, rates for energy business are back at 2001 levels but nowhere near where they were during last soft market.

Source: Willis Energy Market Review, January 2008

energy market primary threats
Energy Market: Primary Threats
  • Major CATs, esp. in Gulf of Mexico
  • Facilities running at full capacity: strained?
  • Pushing limits of existing/new technology?
  • Increased political risk abroad in some areas
  • Higher labor, contractor & building materials costs: Rebuild/repair costs rising
  • Oil is at center of global commodities boom; Could go bust, esp. as economies weaken
  • Climate change, CO2 regs, enviro. regs
  • Ocean Marine, Transport Risk
  • Terrorism Threats/Vulnerability
  • US political & tort shifts?

Source: Insurance Information Institute

rising prices commodity service prices increase energy exposures
Rising Prices Commodity & Service Prices Increase Energy Exposures

Drilling contractor day rates have skyrocketed, as a result of increased demand, particularly for semi-submersible rigs.

Semi-submersible day rates have quadrupled in less than three years, increasing potential cost of redrilling wells after a blowout.

Source: Willis Energy Market Review, January 2008; Datastream Database

world crude oil prices 1997 january 2008
World Crude Oil Prices: 1997- January 2008

Dollars per Barrel*

Crude oil prices in January 2008 ($92.93) are up 511% since January 1998 ($15.21)

*All countries spot market price weighted by estimated export volume.

Source: Energy Information Administration; http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm

demand for oil in 2007
Demand for Oil In 2007

Thousands of Barrels per Day

The U.S. remains the world’s largest user of oil by far, consuming one of every four barrels produced worldwide.

Sources: Wall Street Journal, January 3, 2008.

biggest users of oil no of barrels of oil consumed per person 2006
Biggest Users of Oil: No. of Barrelsof Oil Consumed Per Person, 2006

Per capita oil in China, India and many other developing economies is small compared to US, but is growing rapidly

Source: Wall Street Journal, January 3, 2008; PFC Energy.

avg annual change in consumption of crude oil in major world regions
Avg. Annual Change in Consumption of Crude Oil in Major World Regions

000 barrels per day

Demand for oil will increase by a projected 49% in China, 30% in India and Middle East by 2015

*Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey and UK.

Source: Wall Street Journal, January 3, 2008 edition; International Energy Agency

global political risk is always an issue in energy markets
Global Political Risk is Always an Issue in Energy Markets
  • IRAN: Leader unpopular at home; Constant saber-rattling with US; Domestic energy shortages
  • IRAQ: Situation improving but unclear if Iraqi regime can protect oil infrastucture
  • RUSSIA: Politically and economically resurgent country; nationalism rising
  • NIGERIA: Domestic political instability, energy infrastructure vulnerable
  • VENEZUELA: Chavez is US antagonist

Source: Insurance Information Institute

dow jones aig commodity price index 2000 2008
Dow Jones-AIG Commodity Price Index, 2000-2008*

Commodities prices have soared in recent years doubling since 2002; Sign of demand, weak dollar, flight to hard assets, speculation

Are commodities experiencing their own price bubble?

*January averages of daily values for each year.

Sources: Dow Jones: http://www.djindexes.com/mdsidx/downloads/xlspages/aigci/djaig_full_hist.xls accessed 1/30/08; I.I.I.

top five risks facing national oil companies
Top Five Risks Facing National Oil Companies
  • Availability of Oil and Gas Resources:
    • Access to and availability of reserves to ensure continuity of supply and meet growing worldwide demand for oil and gas
  • Recruitment and retention of a qualified work force:
    • Inability to develop, recruit, and retain appropriately qualified/skilled work force
  • Political/regulatory risk issues:
    • Potential adverse impact of decisions driven by constituent political groups such as state intervention, expropriation and lack of legal clarity; financial implications of new and existing laws
  • Environmental impact of operations:
    • Impact of climate change on oil industry and impact of operations on the environment
  • Infrastructure and development obsolescence:
    • Financial implications of constructing, maintaining, and upgrading systems and structures so they continue to meet required technical standards and existing usage requirements

Source: The Impact of Risk on National Oil Companies, Marsh, 2007

how to address risks strategic approach to risk management
How to Address Risks: Strategic Approach to Risk Management
  • Resource Availability:
    • Do we have the resources necessary for implementing strategies to mitigate risk and control costs?
  • Ability to meet demand:
    • What is the risk of not being able to fulfill a spike in consumer demand for our products? What contingency plans can we put in place in case of a spike?
  • Brand reputation:
    • What is the risk to our brand if an incident occurs along our supply chain? Consequences beyond financial, insurable ones?
  • Industry regulation:
    • Do we understand the regulatory challenges facing our industry?
  • Political changes:
    • Are we actively analyzing political trends and thinking about long-term political changes that may affect the regulatory environment for our industry?

Source: The Impact of Risk on National Oil Companies, Marsh, 2007

cost of us tort system billions
Cost of US Tort System ($ Billions)

Tort costs consumed 1.87% of GDP in 2006, down from 2.24% in 2003

Per capita “tort tax” was $825 in 2006, up from $680 in 2000

Reducing tort costs relative to GDP by just 0.25% (to 1.84%) would produce an economic stimulus of $31.1B

Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

personal commercial self un insured tort costs
Personal, Commercial & Self (Un) Insured Tort Costs*

Total = $216.7 Billion

Total = $159.6 Billion

Billions

Total = $121.0 Billion

Total = $39.3 Billion

*Excludes medical malpractice

Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

tort system costs and tort costs as a share of gdp 2000 2009f
Tort System Costs and Tort Costs as a Share of GDP, 2000-2009F

After a period of rapid escalation, tort system costs as % of GDP are now falling

Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

the nation s judicial hellholes 2007

TEXAS

Rio Grande Valley and Gulf Coast

The Nation’s Judicial Hellholes (2007)

Watch List

Madison County, IL

St. Clair County, IL

Northern New Mexico

Hillsborough County, FL

Delaware

California

Dishonorable Mentions

District of Columbia

MO Supreme Court

MI Legislature

GA Supreme Court

Oklahoma

Some improvement in “Judicial Hellholes” in 2007

NEW JERSEY

Atlantic County (Atlantic City)

NEVADA

Clark County (Las Vegas)

ILLINOIS

Cook County

West Virginia

South Florida

Source: American Tort Reform Association; Insurance Information Institute

business leaders ranking of liability systems for 2007
Best States

Delaware

Minnesota

Nebraska

Iowa

Maine

New Hampshire

Tennessee

Indiana

Utah

Wisconsin

Worst States

Arkansas

Hawaii

Alaska

Texas

California

Illinois

Alabama

Louisiana

Mississippi

West Virginia

Business Leaders Ranking of Liability Systems for 2007

New in 2007

ME, NH, TN, UT, WI

Drop-Offs

ND, VA, SD, WY, ID

Newly Notorious

AK

Rising Above

FL

Midwest/West has mix of good and bad states

Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.

shareholder class action lawsuits
Shareholder Class Action Lawsuits*

1997-2001 were problematic from a D&O perspective

Pace of suits is up due in part to subprime issues and market volatility

Includes 40 suits related to subprime in 2007/08

*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through January 28.

Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute

financial restatements filed continue to grow
Financial Restatements Filed Continue to Grow

Restatements are fodder for plaintiffs attorneys looking to form class actions

Restatements rose to a record 1,538 in 2006, as companies came under continuing intense scrutiny.

Sources: Huron Consulting Group 1997-2002, Glass Lewis & Co. 2003-2006; Insurance Info. Institute

origin of d o claims for public companies 2006
Origin of D&O Claims for Public Companies, 2006
  • Tort System is extremely inefficient:
  • Only 22% of the tort dollar compensates victims for economic losses
  • At least 54% of every tort dollar never reaches the victim

Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.

subprime issue credit crunch key points
Subprime Issue/Credit Crunch:Key Points
  • Subprime Issue Will Ultimately Cost Hundreds of Billions Globally
    • Problem exacerbated by leveraged bets taken by some financial institutions therefore its reach extends beyond simple defaults
  • Heavy Toll on Capital Base of Some Large Financial Institutions Worldwide; US Bond Insurers
    • Cash infusions necessary; Sovereign Wealth Funds primary source
  • Most Significant Economic Event in a Generation
    • US economy will recover, but will take time
  • Shuffling of Global Economic Deck; Economic Pecking Order Shifting
    • China, oil producing countries hold the upper hand
  • IOUs are Being Redeemed
    • Stakes in hard assets/institutions demanded
  • Good News: No Shortage of Available Capital-SWFs
    • Central banks are (generally) taking right actions; Dollar sinks

Source: Insurance Information Institute

largest sovereign wealth funds billions as of september 2007
Largest Sovereign Wealth Funds($ Billions, as of September 2007)

Abu Dhabi Investment Authority controls some $875 billion in assets

As of early 2008, SWFs held nearly $3 trillion in assets, double the $1.5 trillion of hedge funds but a fraction of the $53 trillion held by institutional investors like hedge funds and endowments

Source: Morgan Stanley; Council of Foreign Relations http://www.cfr.org/publication/15251/#2;

Insurance Information Institute

us trade deficit 1960 2007
US Trade Deficit, 1960-2007

US trade deficit exploded in recent years. US has piled up staggering IOUs to the rest of the world. Now they want something in return. Enter the Sovereign Wealth Funds.

Sources: US Census Bureau; III

real gdp growth
Real GDP Growth*

Economic growth is expected to slow dramatically in the year ahead

*Yellow bars are Estimates/Forecasts.

Source: US Department of Commerce, Blue Economic Indicators 1/08; Insurance Information Institute.

fed is now pushing rates downward aggressively to avert recession
Fed is Now Pushing Rates Downward Aggressively to Avert Recession

Fed rate cuts will blunt economic downturn, but will further weaken US dollar unless other central banks do the same

*As of week ending January 25, 2008.

Source: Board of Governors, Federal Reserve System; Insurance Information Institute.

depreciation of dollar is partly responsible for rising energy prices
Depreciation of Dollar is Partly Responsible for Rising Energy Prices

Weakening dollar spurs oil producers to try to maintain purchasing power by keeping oil prices high. Dollar has dropped 39% relative to Euro since 2001.

Interest rate cuts will keep downward pressure on the dollar

*Average through January 29, 2008.

Source: Board of Governors of the Federal Reserve Bank; Insurance Information Institute.

real gdp growth vs real premium growth modest association
Real GDP Growth vs. Real Premium Growth: Modest Association

P/C insurance industry’s growth is influenced modestly by growth in the overall economy

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators; Insurance Information Institute.

new private housing starts 1990 2013f millions of units
New Private Housing Starts,1990-2013F (Millions of Units)

Exposure growth forecast for HO insurers is dim for 2008, climbing slowly though 2013

New home starts plunged 34% from 2005-2007; Drop through 2008 trough is 43% (est.)—a net annual decline of 880,000 units

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers $87.5 million in new exposure (gross premium). The net exposure loss in 2008 vs. 2005 is estimated at $770 million.

Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), Insurance Info. Institute

auto light truck sales 1999 2013f millions of units
Auto/Light Truck Sales,1999-2013F (Millions of Units)

Weakening economy, credit crunch and high gas prices are hurting auto sales

New auto/light trick sales are expected to experience a net drop of 900,000 units annually by 2008 compared with 2005, a decline of 5.3%

Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth than problems in the housing market will on home insurers

Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), Insurance Info. Institute

wage salary disbursements payroll base vs workers comp net written premiums
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

Wage & Salary Disbursement (Private Employment) vs. WC NWP

$ Billions

$ Billions

7/90-3/91

3/01-11/01

Weakening wage and salary growth is expected to cause a deceleration in workers comp exposure growth

Shaded areas indicate recessions

*As of 7/1/07 (latest available).

Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books

summary
Summary
  • Industry results were strong in 2007; Overall profitability in 2007/2006 reached its highest level since 1988. Strong momentum into 2008.
  • Underwriting results are aided by lack of CATs & favorable underlying loss trends, including tort system improvements
  • Energy markets are in generally good shape
  • Premium growth rates are slowing to their levels since the late 1940s; Commercial leads decreases
  • Rising investment returns insufficient to support deep soft market in terms of price, terms & conditions
  • How/where to deploy/redeploy capital??
  • Major Challenges:
    • Slow Growth Environment Ahead (Market/Economy Driven)
    • Maintaining price/underwriting discipline
    • Managing variability/volatility of results
insurance information institute on line
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