What Really Keeps Insurance CEOs Awake at Night An Update

1
What Really Keeps Insurance CEOs Awake at
Night?An Update Outlook for the US
Property/Casualty Insurance Industry

• Rocky Mountain Insurance Association
• Radisson Hotel Denver
• Denver, CO
• March 14, 2001

Robert P. Hartwig, Ph.D. ? Vice President Chief
Economist Insurance Information Institute ? 110
William Street ? New York, NY 10038 Tel (212)
669-9214 ? Fax [phone] ? bobh_at_iii.org ?
www.iii.org
2
Highlights First 9-Mos. 2000( Millions
Year-end 1999)
3
Presentation Outline

• Insomnia Major Problem Among Insurance CEOs
• Top 10 Reasons for Losing Sleep
• CATs Asleep at the Switch?
• QA

4
1
PROFITS
5
P/C Net Income After Taxes1993-2000 ( Millions)
Estimate based on First Nine Months 2000
data. Sources A.M. Best, ISO, Insurance
Information Institute.
6
Return on Equity1975 2000

Estimate Source Insurance Information Institute
7
ROE Financial Services Industry Segments,
19872000
2000 figures are estimates.
Source Insurance Information Institute
8
1999 Return on Equity (Profitability)DO CO
1999
Source NAIC, Insurance Information Institute
9
Return on Equity (Profitability)UP
10-Year Average
Insurers 1989-1998 and Fortune 500
1990-1999. Source Quicken.com
10
Return on Net Worth,Selected Lines in ColoradoUP
10-Year Averages Auto 5.7 Home -18.4 WC 1.1
Source NAIC, Insurance Information Institute
11
Return on Net Worth,Selected Lines in ColoradoUP
10-Year Averages Auto 5.7 Home -18.4 WC 1.1
Source NAIC, Insurance Information Institute
12
Sagging Profits are the Symptom, not the Cause

• Capital/Capacity
• Pricing
• Fundamentals
• Investments
• Competition
• Consolidation
• Distribution
• Class Action
• Wall Street

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2
CAPITAL/ CAPACITY
14
Policyholder Surplus 1975-2000 (Capital, Total
P/C)

• 1999 Surplus 336.3 Billion Is it a Peak?
• Increase of 0.9 over 1998, smallest gain since
  1984
• Surplus decreased 2.1 in First 9 Months 2000 to
  327.3 Billion

Billions (US)
Source A.M. Best, Insurance Information
Institute
First Nine Months 2000
15
Net Premiums Written to Policyholder Surplus
1998 0.84 1999 0.85 2000 (Forecast) 0.94
Source A.M. Best, ISO, Insurance Information
Institute
16
Distribution of Industry Surplus
Source PaineWebber
17
Excess Capital What to Do?

• CEOs Buy It, Build It--They Will Come
• Policyholders Lower my rates! Pay my dividend!
• Shareholders Show me the money!
• Regulators Keep your hands off of it!
• Rating Agencies Keep your hands off of it and
  give it back!

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3
PRICING
19
Average Price Change of Commercial Insurance
Renewals
Source Conning
20
Average Price Change of Personal Lines Renewals
Source Conning
21
Rate On Line Index(1989100)
Source Guy Carpenter, Insurance Information
Institute Estimate
22
Average Expenditures on Auto Insurance US vs. CO
Countrywide rates fell by 2.8 in 1998, 3.2 in
1999 (est.)
23
States With Highest AutoInsurance Expenditures
vs. CO
1
2
3
15
Source Insurance Information Institute from NAIC
Data, 1998.
24
States With Highest AutoInsurance Expenditures
vs. CO
1
2
3
14
4
Source Insurance Information Institute from NAIC
Data, 1998.
25
Cumulative Workers Comp Rate/Loss Cost Changes
Source NCCI Advisory Loss Costs
26
Filings Approved With Effective Dates in 2000
27
4
FUNDAMENTALS
28
P/C Industry Combined Ratio
Combined Ratios 1970s 100.3 1980s 109.2 1990s
107.7
1999 107.9 2000 (Est) 109.9 2001 Forecast
109.1
2001
Based on III Groundhog Forecast
29
Direct Loss Ratio Trends, Selected Lines,
ColoradoUPDATE
Source NAIC, Insurance Information Institute
30
Underwriting Gain (Loss)1975-2000
Billions (US)
In 2000, P-C insurers will paid out nearly 26
billion more in claims expenses than they
collected in premiums
I.I.I. estimate based on First 9 Monthsf 2000
data. Source A.M. Best, Insurance Information
Institute
31
U.S. InsuredCatastrophe Losses
CATs cost insurers 750 million per month during
the 1990s
CATs in 1990s caused 90B in insured losses
Billions
Didnt lose much sleep over CATs in 2000
Source Property Claims Service, Insurance
Information Institute
32
Lost-Time Claim Frequency Per Worker On the Rise?
Source NCCI
33
Growth in Total PIPClaims Costs
Four Quarters Ending 20003rd
PIP Claims Costs PIP Costs in Colorado are
growing faster than in most other no-fault states
.
Change in pure premium Source Insurance
Information Institute from ISO Fast Track Data
34
States With Highest PIP Average Loss (4 Qtrs.
ending 20003rd)
1
2
3
4
5
Source Insurance Information Institute from ISO
Fast Track Data
35
5
INVESTMENTS
36
Net Investment Income
Pricing underwriting problems were exacerbated
by declining investment income
Billions (US)
Facts 1997 Peak 41.5B 1998 39.9B 1999
38.6B 2000 (Forecast) 38.9B
Source A.M. Best, Insurance Information
Institute
Estimate based on First 9 Months 2000 results.
37
Stock MarketsGoing Nowhere in 2001
YTD Total Return through 2/22/01
Source Insurance Information Institute
38
Treasury Yield Curves
Are interest rates too low for a recession?
Source A.M. Best, ISO, Insurance Information
Institute
39
6
COMPETITION
40
CompetitionStill on the Rise Number of
Insurers 1970-1998
Sources P/C A.M. Best L/H NAIC.
41
Market Share of Top 5 P/C Insurers
Source Insurance Information Institute Fact Book
(annual issues)
42
Market Share of Top 5 Life/Health Insurers
Source Insurance Information Institute Fact Book
(annual issues)
43
Growth in Net Premiums Written (All P/C Lines)
1999 1.9 2000 Est 5.2 2001 Forecast 7.4
The underwriting cycle went AWOL in the 1990s. Is
it Back?
2001
2000 est. 2001 forecast from III Groundhog Survey
Source A.M. Best, Insurance Information
Institute
44
7
CONSOLIDATION
45
Insurance Mergers and Acquisitions
1998 565 deals valued at 165.4 B
First Half 2000 Source Compiled from Conning
Company reports.
46
Number of Deals First Half 2000 vs. First Half
1999
Total 161
Total 244
1999
2000
Source Conning
47
Value of Deals First Half 2000 vs. First Half
1999
Total 11.3B
Total 30.9B
N/A
1999
2000
Source Conning
48
8
DISTRIBUTION
49
Shifting Distribution Channels Property/Casualty
Insurers
2003
1998
Source Datamonitor
50
Web Presence of the Nation's 250 Largest P/C
Companies
Source John P. Franzis, PricewaterhouseCoopers
Management
51
Projected Online Sales of Auto, Home Term Life
Insurance
Millions
Source Forrester Research
52
Internet Insurance Sales Forecast, 2003
(Online-closed salesTotal 4.8 Billion)
Source Conning Co. (Life), Forrester Group
(Auto Home)
53
Small Insurance Firms Lag in Web Access and
Exposure
Source The Industry Standard, Summer 2000
54
Distribution Channels Continue to Proliferate
Agent Broker Mail Telephone Bank
Customer
Insurer
Internet Dealerships Payroll Plans Stock
Exchanges Online Auctions (e.g.
Priceline.com) ????
55
Insurers Tangled in the Web?
www.NoAgent.com
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CLASS ACTION ABUSE
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TORT-ure

• Asbestos
• Aftermarket Parts
• Medical Claims Review
• Totaled Cars (CCC/ADP)
• Guns
• Genetically Modified Foods (Corn)
• Y2K Sue Labor
• HMOs
• Nursing Homes/Med Mal
• Tobacco
• Redlining
• Toxic Mold

58
Average Jury Awards1993 vs.1999
Comparison is between 1994 and 1999. Source
Jury Verdict Research Insurance Information
Institute.
59
Median Jury Award for Product Liability Cases
Source Jury Verdict Research
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Median Jury Award for Vehicular Liability Cases
Source Jury Verdict Research
61
Trends in Million Dollar Verdicts
Verdicts of 1 million or more. Source Jury
Verdict Research Insurance Information Institute.
62
Florida Average Severity per GL/PL Claim
Long-Term Care Facilities
Source Aon Risk Consultants.
63
Florida Loss Cost per Occupied Bed
Long-Term Care Facilities
Source Aon Risk Consultants.
64
Asbestos Cumulative Paid Lossesand Reserves
Source A.M. Best.
65
Paid vs. IncurredAsbestos Losses
Source A.M. Best.
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10
WALL STREET
67
Performance on Wall Street Highly Erratic
P/C insurers were up 43.4 in 2000 Down 25.7 in
1999 YTD 2001 -7.5
Source SNL Securities Insurance Information
Institute
68
Insurance Stock PerformanceAfter the Tech Crash
Total Return March 10 through Year End 2000
NASDAQ peaked on March 10, 2000 at
5048.62 Source Insurance Information Institute,
SNL Securities
69
Insurance Stock PerformanceOff to a Slow StartUP
YTD Total Return through March 8, 2001
CREDIT SENSITIVITY Mortgage Guarantee
-15.22 Financial Guarantee -7.34
Source SNL Securities, Insurance Information
Institute
70
BONUSWORRY
The Economy
71
Impact of Recession on P/C Premiums and
Profitability (1970-1999)
GAAP return on equity, adjusted for inflation
Bank data 1952-99 Div. Fin. 1987-99 Source
Insurance Information Institute
72
Change in Consumer Price Index
Source Bureau of Labor Statistics
73
Motor Vehicle Retail Sales (Millions of Units)
New Motor Vehicle Sales Sales in late 2000
fell sharply. There will be an impact on
exposure growth in the personal auto line in
2001 Net loss of 2 to 3 million vehicles likely
by mid-2001
Source US Department of Commerce Insurance
Information Institute Seasonally Adjusted Annual
Rate (Jan-Nov 2000).
74
New Private Housing Starts(Millions of Units)
New Private Housing Starts Annualized starts in
late 2000 were down by 140,000 units compared
with 1999, representing an estimated 70 million
decrease in new exposure.
Source US Department of Commerce Insurance
Information Institute Annualized 3rd Quarter
2000 data.
75
Recession Credit RiskImpact on Earnings
Surplus
4.08 Default Rate All Corporates
10 Default Below Investment Grade
100 Default Below Investment Grade

• Some Companies with Credit Woes
• Xerox
• Sunbeam
• TWA
• PGE
• Edison Intl.

• Credit Default Swaps
• Debt Guarantees

Source Goldman Sachs 10K/10Q Reports.
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Anything ElseYou Bet?

• Worries 1-10
• The Economy
• Banks in Insurance
• Privacy
• Federal vs. State Regulation
• Attracting/Retaining Talent

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