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P/C Industry Outlook: 2013 and Beyond

P/C Industry Outlook: 2013 and Beyond. SITA Las Vegas, NV October 21, 2013. Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5540  Cell: 917.494.5945  stevenw@iii.org  www.iii.org.

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P/C Industry Outlook: 2013 and Beyond

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  1. P/C Industry Outlook:2013 and Beyond SITALas Vegas, NVOctober 21, 2013 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: 212.346.5540  Cell: 917.494.5945  stevenw@iii.org  www.iii.org

  2. Here’s What Some ofOur Customers Are Like 2

  3. 3/8 of US Adults Say They Get Less Than 6 Hours of Sleep per Night 60.4% 37.3% 2.3% Source: CDC, National Health and Nutrition Examination Survey, Hyattsville, MD, U.S. Department of Health and Human Services, CDC, National Center for Health Statistics; 2007-2010; highlighted at http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6236a9.htm?s_cid=mm6236a9_e eSlide – P6466 – The Financial Crisis and the Future of the P/C

  4. CDC Report: Cell Phone Use While Driving, US and Europe, Fall 2011 Percent saying“regularly” or“fairly often” “In the past 30 days, how often have you talked on the phone while you were driving?” “In the past 30 days, how often have you sent a text message or e-mail while you were driving?” Sources: “Mobile Device Use While Driving—United States and Seven European Countries, 2011,” in Morbidity and Mortality Weekly Report, Centers for Disease Control and Prevention, Vol. 62, No. 10, (March 15, 2013) available at http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6210a1.ht5m?s_cid=6210a1_e ;Insurance Information Institute 4 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  5. Even Frequent & Severe Floods Haven’t Changed Flood Insurance Ownership Much Q. Do you have a separate flood insurance policy?1 After Hurricane Irene After SuperStorm Sandy Despite extensive flooding (and wide publicity),few U.S. homeowners say they have a flood insurance policy;the percentage is lowest in the Northeast at 10 percent. 1Asked of those who have homeowners insurance and who responded “yes”. Source: Insurance Information Institute Annual Pulse Survey. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  6. Labor Force Participation Rate, Ages 65-69, Quarterly, 1998:Q1-2013:Q2 Labor Force participation rate 1 in 3 in this age group are working. Virtually none of them are “baby boomers” The brown bars indicate recessions. The labor force participation rate for workers 65-69 might grow even faster in the future as seniors find they can’t fully retire on their meager retirement savings. Not seasonally adjusted. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

  7. Labor Force Participation Rate,Ages 70-74, Quarterly, 1998:Q1-2013:Q2 Labor Force participation rate Nearly 1 in 5 in this age group is working.A dozen years ago it was 1 in 8. The labor force participation rate for workers 70-74 grew by about 50% since 1998.Growth stalled during and after the Great Recession but has since resumed. Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

  8. The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Will Expand Insurer Exposure Base Across Most Lines 8

  9. Yearly Nominal U.S. GDP vs.P/C Net Written Premiums: 2000-2012 Index: 2000 = 100 “Soft” market: NWP slipped before the overall economy did “Hard” market: NWP grew much faster than the overall economy Recession Post recession: comparable growth rates Sources: http://www.bea.gov/national/xls/gdplev.xls ; SNL Financial; I.I.I. calculations

  10. US Real GDP, Quarterly, 2013-14 October 2013 Forecasts Real GDP Growth Rate Despite the sequester and other challenges to the U.S. economy,virtually every forecast in the Blue Chip universe in early Septembersees improvement ahead Sources: Blue Chip Economic Indicators (10/13); Insurance Information Institute eSlide – P6466 – The Financial Crisis and the Future of the P/C

  11. Real GDP Growth: Recent Recessionsand Recoveries, Yearly, 1985-2012 In the current recovery, real yearly GDP growthhas been 2.4% or less Real GDP Growth (%) In most recoveries, real yearly GDP growth is often 3% or more But following the 2001 recession, real yearly GDP growth was weaker than 3% Source: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls. 11 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  12. Federal Spending as a Share of State GDP: Vulnerability to Sequestration Varies Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo; Insurance Information Institute.

  13. State-by-State Leading Indicatorsthrough 2013:Q4

  14. P/C Insurance:Forces Affecting Personal Lines Brighter Days Ahead,but Not Without Challenges 15

  15. Private Housing Unit Starts, 1990-2014F Millions of Units Forecast range for 2013 is 0.90 to 1.02 million units Housing“Bubble” Starts plunged 72% from 2005-2009 to lowest level since records began in 1959 Homeowners insurers are starting to see exposure growth for the first time since 2005. Commercial insurers with construction risk exposure, surety also benefit. Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (10/13); Insurance Information Institute.

  16. So Far, the Pickup Is Mostly in Multi-Family Housing Starts Thousands of Units, Single Family Thousands of Units, Multi-Family Multi-family-unit starts rose in 2011, more in 2012, still more so far in 2013. Single family plunge began in 2006 Multi-family plunge did not begin until 2009 Is the pickup slowing down? 2013:Q1 multi-unit starts were ata seasonally-adjusted annual rate of 325,000,but starts since then were at a SAAR of 261,000. *average of annualized seasonally adjusted January-August 2013 data; August is preliminary.Source: US Census Bureau at www.census.gov/construction/nrc/pdf/newresconst.pdf.

  17. Rental-Occupied Housing Units as % ofTotal Occupied Units, Quarterly, 1990-2013 Millions Trend down began in 1994:Q3 from 36.2% in Q2 Increasing percent of renters Increasing percent of owners Latest was 35.0% in 2013:Q1 & Q2 Trough in 2004:Q2 and Q4 at 30.8% Since the Great Recession ended, renters occupied 3.6 million more units (+9.9%)—outstripping population growth (+2.9%) Sources: US Census Bureau, Residential Vacancies & Home Ownership in the Second Quarter of 2013 (released July 30, 2013) and earlier issues; Insurance Information Institute. 18 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  18. Auto/Light Truck Sales, 1999-2014F Truck purchases by contractors are especially strong Forecast range for 2013 is 15.3 to 15.8 million units (Millions of Units) Lowest level since the late 1960s Job growth and improved credit market conditions will boost auto sales in 2013 and beyond, bolstering the manufacturing sector and the economy generally. Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (10/13); Insurance Information Institute.

  19. But Something Unusual is Happening:Miles Driven*, 1990–2013 Billions Peak in November 2007 Miles Driven Growth per 5-Yr Span1997 vs. 1992: 13.9%2002 vs. 1997: 11.5%2007 vs. 2002: 6.1% 2012 vs. 2007: -3.0% Some of the growth in miles driven is due to population growth: 1997 vs. 1992: +5.1% 2002 vs. 1997: +7.4%2007 vs. 2002: +4.7%2012 vs. 2007: +3.4% A record: miles driven has been below the prior peak for 67 straight months. Previous record below peak was in the early 1980s (39 months) Will the trend toward hybrid and non-gasoline-powered vehicles affect miles driven? What about the aging and retirement of the baby boomers? *Moving 12-month total. The latest data is for June 2013. Note: Recessions indicated by gray shaded columns.. Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute. 20 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  20. P/C Insurance:Forces AffectingCommercial Lines Brighter Days Ahead,but Not Without Challenges 22

  21. Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2013:Q2 Billions Latest (2013:Q2) was $7.09 trillion, a new peak -- $860B above 2009 trough Prior Peak was 2008:Q1 at $6.54 trillion Payrolls are 12.1% above their 2009 trough Recent trough (2009:Q1) was $6.23 trillion, down 4.7% from prior peak Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute. 23 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  22. Dollar Value* of Manufacturers’ Shipments Monthly, January 1992—June 2013 The value of Manufacturing Shipments in June 2013 was up 34% to $481.8B from its May 2009 trough. June figure is slightly below its record high in Nov. 2012. Modest weakening in recent months. $ Millions Monthly shipments in Nov. 2012 exceeded the pre-crisis (July 2008) peak but have since receded slightly. Manufacturing is an energy-intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and various Liability Coverages. *seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/ 24 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  23. Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2013* In nominal dollar terms, this is an all-time high. $Trillions Recession Outstanding loan volume has been growing for over two yearsand (as of year-end 2012) surpassed previous peak levels. *Latest data, released 8/29/2013. Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  24. Percent of Non-current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks,Quarterly, 2006-2013:Q2* Almost back to “normal” levels of noncurrent industrial & commercial loans Recession Non-current loans (those past due 90 days or more or in nonaccrual status) are back to early-recession levels, fueling bank willingness to lend. *Latest data, released 8/29/2013. Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  25. Business Bankruptcy Filings: Fallingbut Still High in 2012 (1994:Q1 – 2012:Q3) New Bankruptcy Law Takes Effect Quarterly average for 2001:Q1-2005:Q3 was 8,915 (Thousands) Recessions in orange Business bankruptcies were down 42% in 2012:Q3 vs. recent peak in 2009:Q2 but were still higher than 2008:Q1, the first full quarter of the Great Recession. Bankruptcies restrict exposure growth in all commercial lines. Sources: American Bankruptcy Institute at www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute. 27 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  26. Private Sector Business Starts,1993:Q2 – 2012:Q4* Business Starts2006: 861,0002007: 844,0002008: 787,0002009: 701,000 2010: 742,000 2011: 781,0002012: 769,000 (Thousands) Recessions in orange Business starts were down nearly 20% in the Great Recession, holding back most types of commercial insurance exposure,but now are recovering. * Data through Dec 31, 2012 are the latest available (posted July 30, 2013); Seasonally adjusted. Sources: Bureau of Labor Statistics, www.bls.gov/news.release/cewbd.t08.htm; NBER (recession dates). 28 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  27. EEOC Workplace Discrimination Complaints, FY1997-FY2012* Thousands of Complaints 2008-2012 Avg.= 97,600/year Biggest jumps in FY2008 complaints came for retaliation and age discrimination. But FY2008 excluded the worst of the recession. 1997-2007 Avg.= 79,800/year FY *The federal fiscal year runs from Oct 1 of a given year to Sept 30 of the following year. The year is designated by its endpoint. Thus FY2009 covers the period from Oct 1, 2008 through Sept 30, 2009.Sources: EEOC at http://www.eeoc.gov/stats/charges.html ; I.I.I.

  28. U.S. InsuredCatastrophe Loss Update Catastrophe Losses in Recent Years Have Been Very High 31

  29. U.S. Insured Catastrophe Losses ($ Billions, 2012 Dollars) 2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Below Average But Q3 Is Typically the Costliest Quarter. Record tornado losses caused 2011 CAT losses to surge *Through 6/2/13. Includes $2.6B for 2013:Q1 (PCS) and $5.32B for the period 4/1 – 6/2/13 (Aon Benfield Monthly Global Catastrophe Recap). Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute. 32 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  30. Natural Disasters in the United States, 1980 – June 2013*Number of Events (Annual Totals 1980 – June 2013*) There were 68 natural disaster events in the first half of 2013 There were over 150 natural disaster events in the US every year since 2006. That hadn’t happened in any year before. Number 41 19 121 3 Meteorological (storm) Climatological (temperature extremes, drought, wildfire) Geophysical (earthquake, tsunami, volcanic activity) Hydrological (flood, mass movement) *Through June 30, 2013. Source: MR NatCatSERVICE 33

  31. Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012* Avg. CAT Loss Component of theCombined Ratio by Decade 1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 7.20* Catastrophe losses as a share of all losses reached a record high in 2012 Combined Ratio Points The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers. Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

  32. If They Hit Today, the Dozen Costliest (to Insurers) Hurricanes in U.S. History Insured Losses,2012 Dollars, $ Billions Storms that hit long ago had less property and businesses to damage, so simply adjusting their actual claims for inflation doesn’t capture their destructive power.Karen Clark’s analysis aims to overcome that. When you adjust for the damage prior storms could have done if they occurred today, Hurricane Katrina slips to a tie for 6th among the most devastating storms. *Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B. Sources: Karen Clark & Company, Historical Hurricanes that Would Cause $10 Billion or More of Insured LossesToday, August 2012; I.I.I.

  33. Investments Investment Performance is a Key Driver of Profitability 36

  34. U.S. Treasury Security Yields*:A Long Downward Trend, 1990–2013 Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade. U.S. Treasury security yields recently plunged to record lows Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come. *Monthly, constant maturity, nominal rates, through September 2013. Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes. 37 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  35. Distribution of Bond Maturities,P/C Insurance Industry, 2003-2012 The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds (from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category (from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in investment income along with lower yields. Sources: SNL Financial; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  36. P/C Insurance Industry Financial Overview 39

  37. P/C Net Income After Taxes1991–2013:1H ($ Millions) Net income is up substantially (+42.4%) from 2012:1H $17.2B • 2005 ROE*= 9.6% • 2006 ROE = 12.7% • 2007 ROE = 10.9% • 2008 ROE = 0.1% • 2009 ROE = 5.0% • 2010 ROE = 6.6% • 2011 ROAS1 = 3.5% • 2012 ROAS1 = 5.9% • 2013:Q1 ROAS1 = 9.6% • ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.7% ROAS in 2013:Q1, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009. • Sources: A.M. Best, ISO, Insurance Information Institute

  38. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:1H* History suggests next ROE peak will be in 2016-2017 ROE 1977:19.0% 1987:17.3% 2006:12.7% 10 Years 1997:11.6% 2013:1H 8.2% 10 Years 9 Years 2012: 5.9% 1984: 1.8% 1975: 2.4% 1992: 4.5% 2001: -1.2% *Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

  39. Policyholder Surplus, Quarterly, 2006:Q4–2013:1H Up nearly $175 Billion from the 2009:Q1 trough, a new peak ($ Billions) Down $84 Billion from the previous peak, due to the financial crisis, CATs The industry at year-end 2012 had $1 of surplus for every $0.78 of NPW, the strongest claims-paying status in its history. 2013:Q1 is estimatedSources: ISO; A.M .Best. 43 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  40. Key Takaways 44

  41. Takeaways:P/C Insurance Predictions for 2013-14 • P/C Insurance Exposures Will Grow With the U.S. Economy • Personal lines exposure growth is likely in 2013 • Wage and employment growth is also positive and could modestly accelerate • P/C Industry Growth in 2013 Will Be Strongest Since 2004 • Growth likely to exceed A.M. Best projection of +3.8% for 2012 • No traditional “hard market” emerges in 2013-4 • Underwriting Fundamentals Deteriorate Modestly • Some pressure from claim frequency, severity in some key lines • Industry Capacity Hits a New Record by Year-End 2013 (Barring Meg-CAT) • Investment Environment Is/Remains Challenging • Interest rates remain low eSlide – P6466 – The Financial Crisis and the Future of the P/C

  42. Insurance Information Institute www.iii.org Thank you for your timeand your attention!

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