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Two Years Without Major Catastrophe Losses Implications for P/C Insurance Markets

Two Years Without Major Catastrophe Losses Implications for P/C Insurance Markets. Benfield Catastrophe Summit Clearwater, FL February 6, 2008. Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute  110 William Street  New York, NY 10038

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Two Years Without Major Catastrophe Losses Implications for P/C Insurance Markets

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  1. Two Years Without Major Catastrophe LossesImplications for P/C Insurance Markets Benfield Catastrophe Summit Clearwater, FL February 6, 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

  2. Presentation Outline • Profitability • What the Respite in CAT Losses Means in: • Florida, Texas, Energy Markets • Underwriting Trends • Premium Growth • Capacity • Investment Overview • Catastrophic Loss • Complacency & Catastrophes • Q&A

  3. PROFITABILITYProfits Have Benefited from Lower CAT Losses in 2006/07, Other Factors Dominate

  4. 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.

  5. ROE: P/C vs. All Industries 1987–2007E 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

  6. 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

  7. 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.

  8. P/C, L/H Stocks: Ahead of the S&P 500 Index in 2008 Total YTD Returns Through February 1, 2008 P/C insurance stocks not affected as much as the overall market by credit, subprime concerns Mortgage & Financial Guarantee insurers were down 69% in 2008 *Includes Financial Guarantee. Source: SNL Securities, Standard & Poor’s, Insurance Information Inst.

  9. FLORIDA HURRICANES & INSURER PROFITABILITY:Selling Home Insurance in Florida is Challenging

  10. Underwriting Gain (Loss) in Florida Homeowners Insurance, 2004 - 2007E* Private Insurers** $ Billions Over the past four years, underwriting losses exceeded premiums in Florida by an estimated $6.7 billion *2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL. **Does not include Citizens Property Insurance Corporation results.

  11. Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2007E* Private Insurers** $ Billions Florida’s homeowners insurance market produces small/modest profits in most years and enormous losses in others *2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL. **Does not include Citizens Property Insurance Corporation results.

  12. Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2007E* Private Insurers** Regulator under US law has duty to allow rates that are “fair,” “not excessive” and “not unduly discriminatory.” Reality is that regulators in CAT-prone states suppress rates. $ Billions It took insurers 11 years (1993-2003) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits & 2005 deepened the hole. *2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL. **Does not include Citizens Property Insurance Corporation results.

  13. Landfalling Hurricanes: 1900-2007FL Landfalls are Common A hurricane strikes FL every other year on average—CAT 3+ every 4 years 1.7 hurricanes make landfall each year on average 38% of all hurricane landfalls occur in FL 37% of all FL landfalls are CAT 3+ Source: HURDAT database; Insurance Information Institute.

  14. Florida Citizens Exposure to Loss (Billions of Dollars) Exposure to loss in Florida Citizens more than doubled by Q1 2007 relative to year end 2005 Source: PIPSO; FL Citizens; Insurance Information Institute. *As of March 31

  15. Cost of Borrowing for State Could Exceed Expectations Interest Charge to Borrow $1 Billion at State/Municipal Bond Rates, Amortized Over 30 Years If state/muni bond rates rise to 6%, interest cost would be 51% higher than in January 2007, adding $392 million to the cost of each billion borrowed Millions If FL were to need to borrow money to fund state insurer deficits, the cost was 11.4% higher ($87.4 million) per billion borrowed in August (midst of credit crunch & hurricane season) than in January when legislation was passed Source: Insurance Information Institute; Federal Reserve Board of Governors.

  16. TEXAS EXPOSURE & VULNERABILITY GROWSCoastal Building Boom

  17. ROE for Homeowners Insurance in Texas, 1992 - 2006 Texas will need to allow insurers to earn risk appropriate rates of return that reflect huge losses in some years Average ROE in TX 1992 through 2006 was 0.14% Low CATs in 2006/2007 boosted profitability, but focus must be long term. Source: NAIC

  18. 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.

  19. 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.

  20. 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.

  21. Energy Market’s CAT Respite A wrecked oil platform washes ashore in Alabama in the wake of Hurricane Katrina.

  22. 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) Katrina/Rita price spike: Aug./Sept. 2005 *All countries spot market price weighted by estimated export volume. Source: Energy Information Administration; http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm

  23. 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

  24. 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.

  25. 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.

  26. 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.

  27. 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.

  28. Katrina & Rita: Total Energy Losses, Onshore vs. Offshore* Total = $9.15 Billion Total = $5.89 Billion Billions Source: Willis *Loss estimates are total losses, not just insured losses.

  29. 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)

  30. 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

  31. 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

  32. FINANCIAL STRENGTH & RATINGSIndustry Has Weathered the Storms Fairly Well

  33. 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

  34. 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;

  35. UNDERWRITINGTRENDSLower CATs Help Propel Strong 2006/07;Momentum for 2008

  36. P/C Insurance Combined Ratio, 1970-2007E* Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.8 2000s: 101.8* The magnitude and speed of the industry’s recovery from 2001-2006 was without precedent. Lower CATs were just one factor. Sources: A.M. Best; ISO, III *Estimate.

  37. 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.

  38. 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.

  39. 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.

  40. Impact of Reserve Changes on Combined Ratio Reserve adequacy has improved substantially Source: A.M. Best, Lehman Brothers estimates for years 2007-2009

  41. Homeowners Insurance Combined Ratio Average 1990 to 2006= 111.8 Insurers have paid out an average of $1.12 in losses for every dollar earned in premiums over the past 17 years Reinsurance recoverables helped to temper net losses in homeowners in 2005 Sources: A.M. Best

  42. Rates of Return on Net Worth for Homeowners Ins: US Averages: 1993 to 2005 US HO Insurance = +2.5% (+3.3% through 2006E) Source: NAIC; 2006/07 figures are Insurance Information Institute estimates.

  43. Comprehensive: Favorable Frequency and Severity Trends Benign weather is keeping costs down Weather related claims from Hurricanes Katrina, Rita & Wilma: 681,900 claims valued $3.29 billion *Average of 4 quarters ending with 3rd quarter 2007. Source: ISO Fast Track data.

  44. Commercial Lines Combined Ratio, 1993-2007E Commercial coverages have exhibited significant variability over time. Declining CAT losses are one factor leading to strong commercial lines results Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases Sources: A.M. Best

  45. PREMIUM GROWTHAt a Virtual Standstillin 2007/08

  46. Strength of Recent Hard Markets by NWP Growth* 1975-78 1984-87 2001-04 Post-Katrina period resembles 1993-97 (post-Andrew) 2008: 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 is actual 9-month figure.

  47. 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.

  48. 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.

  49. 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.

  50. New Private Housing Starts,1990-2013F (Millions of Units) Exposure growth forecast for HO insurers is dim for 2008, climbing slowly though 2013. Much is the decrease will occur in CAT exposed areas like FL, CA 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

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