Financial Forecast 2010:

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Financial Forecast 2010:

  1. 1. Financial Forecast 2010: The Future of the Property/Casualty Insurance Industry Property Casualty Insurers Association of America Executive Roundtable Seminar Naples, FL January 23, 2006 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. 2. Crystal Ball: 2010
  3. 3. Financial Predictions Slower Growth & Higher Losses = Disappointing Profits
  4. 4. ROE: P/C vs. All Industries 1987–2010F* 20% P/C profits continue to disappoint. ROE stuck at 9-10% 15% 10% 5% 0% -5% 06F 07F 08F 09F 10F 05E 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 US P/C Insurers All US Industries *GAAP ROEs except 2005 P/C figure = return on average surplus. 2005E-10F are III estimates. Source: Insurance Information Institute; Fortune for all industry figures
  5. 5. Strength of Recent Hard Markets by NWP Growth* 1975-78 1984-87 2001-04 25% 2006-2010 (post-Katrina) 20% period will resemble 1993-97 (post-Andrew) 15% 10% 5% 0% -5% -10% 2006F 2007F 2008F 2009F 2010F 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute *2005-10 figures are III forecasts/estimates.
  6. 6. 2010: Leakage of P/C Insurance Premium Continues • Large Deductibles Efficient Use of Corporate Capital Makes Sense for Personal Lines Policyholders • Alternative Risk Transfer Especially Captives: Popular for Ever-Smaller Risks Dedicated Reinsurance Facilities Contingent Funding: Debt, Post-Event Assessments, Govt. Securitization Diversification in Portfolios of Asset-Backed Securities Self-Insurance Self Insurance Groups Risk-Retention Groups • Residual Markets FL; Large Expansion in LA, MS, TX & Elsewhere
  7. 7. U.S. Policyholder Surplus: 1975-2005* $600 Capacity at year-end 2005 was $420 $550 billion (est.). It will reach $500B by $500 2009 and $536 billion by year-end 2010 $450 $400 CAGR 1975-2005E = 10.7% $ Billions $350 $300 Assume CAGR 2005-2010 = 5% $250 $200 “Surplus” is a measure of $150 underwriting capacity. It is $100 analogous to “Owners Equity” or “Net Worth” in $50 non-insurance organizations $0 75 80 85 90 95 00 05E 10F Source: A.M. Best, ISO, Insurance Information Institute *As of 9/30/05.
  8. 8. Announced Insurer Capital Raising* ($ Millions, as of December 1, 2005) $3,000 As of Dec. 1, 19 insurers $2,800 announced plans to raise Existing $2,500 $9.95 billion in new capital. companies Twelve start-ups plan to will continue $2,000 raise as much as $8.65 to find it billion more for a total of $ Millions $1,500 $18.65B. Likely at least relatively easy $1,500 $20B raised eventually. to raise cash… $1,000 $710 $600 $600 $620 $450 $490 $500 $400 $300 $297 $299 $202 $150 $38 $100$140 $129 $124 $0 cie . M C e um IP nce t l e iln s nl A td. e dy ors E en In Re au En xis ita e Pa Re e Ev anc g rR N rR PL Fa t R on x R R ld Fi sp L on in ap ra A at PX r H ey r ne ie ax es A ce at a ig du su rg C ss el C rt er Pl av A irf la K L tp G X C O C M H *Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
  9. 9. Announced Capital Raising by Insurance Start-Ups ($ Millions, as of December 11, 2006) As of Dec. 11, 13 start- $1,600 $1,500 ups plan to raise as $1,400 much as $8.75 billion. $1,200 More likely to come. $1,000$1,000$1,000$1,000 $1,000 …so will $ Millions $750 $800 start-ups $600 $500 $500 $500 $500 $400 $220 $180 $200 $100 $0 a l t* s a s * ita lty e e ud e ng e e ld ud R e* in R R R R ap ia ie rm di R Po m ht nt tle e el ec hf on ol C er lig ri e de Be as ig Sp r ir H A ow st B bo en en H C sh ag lin us a x ar L/ rr re sc ca ew eg co Fl id m H A X A G an is m al N A H O V L *Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs. Sources: Morgan Stanley, Company Reports; Insurance Information Institute.
  10. 10. U.S. Insured Catastrophe Losses ($ Billions) $ Billions $100 Billion $120 CAT year is $100 $100 2005 will be by far the worst coming soon year ever for insured $57.7 $80 catastrophe losses in the US, $60 but the worst has yet to come. $27.5 $26.5 $22.9 $40 $16.9 $12.9 $10.1 $8.3 $8.3 $7.5 $7.4 $20 $5.9 $5.5 $4.7 $4.6 $2.7 $2.6 $0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05* 20?? *Includes $53.7 billion per ISO/PCS plus $4B 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
  11. 11. Combined Ratio: Impact of Reserve Changes (Points) Points (Reduced)/Increased 7 Reserve 6.3 6 adequacy is 5.2 5 improving 4 substantially, 3.5 3 which bodes 2.5 well for 2010 1.9 2 1.1 1 0.5 0.4 0 -1 (0.4) -2 -3 (2.4) 1998 1999 2000 2001 2002 2003 2004 2005E 2006F 2007F Source: ISO, A.M. Best, Lehman Brothers for years 2005E-2007F
  12. 12. Tort System Costs, 2000-2010F $350 2.5% 2.22% 2.23% 2.23% 2.24%2.27% 2.25% 2.21%2.20% 2.20% 2.03% $295 1.83% $288 Tort Costs as % of GDP $300 2.0% $279 $282 $283 $262 $269 Tort System Costs $245 $250 $232 1.5% $206 $200 1.0% $179 After a period of rapid $150 escalation, tort system costs as % 0.5% of GDP appear to be stabilizing $100 0.0% 00 01 02 03 04 05E 06F 07F 08F 09F 10F Tort Sytem Costs Tort Costs as % of GDP Source: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology.
  13. 13. Shareholder Class Action Lawsuits* 600 1997-2001 remain 497 500 problematic from a D&O perspective Sarbanes-Oxley 400 Impact?? 300 272 231 240 222 235 202 188 203 214 172 181 200 164 163 109 100 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 *Securities fraud suits filed in U.S. federal courts. **Suits of $100 million or more. Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute
  14. 14. Regulatory Predictions Congressional Apathy Continues on P/C Issues
  15. 15. Tough Road for Comprehensive National Catastrophe Plan 1:500 Event Unlikely National CAT Federal Catastrophe Plan in place Reinsurance Contract by 2010. Program Major 1:50 Event obstacles include: State Regional Catastrophe Fund •Divisions State Attachment within industry Personal Disaster Private •Opposition in Account Insurance Congress Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
  16. 16. TRIA’s Days Are Numbered: Congress & Administration Want it Dead Industry Aggregate Retention ($ Bns) Extension $35 Obstacles Include $30 •Opposition in Congress & Administration $27.5 $25.0 $25 •Profitability/Growth in Capital Base/New Entry $ Billions $20 •Few examples of econ. disruption $15.0 $15 $12.5 $10.0 $10 $5 $0 Year 1 Year 2 Year 3 Year 4 Year 5 (2003) (2004) (2005) (2006) (2007) Source: Insurance Information Institute
  17. 17. Status of Other Regulatory Issues by 2010 • No Optional Federal Charter by 2010 • Little Progress on Regulatory Modernization (e.g., SMART Act) • Asbestos “Reform” Not to Industry Satisfaction • Incremental Additional Improvements in Tort Environment
  18. 18. Competitive Predictions Wave of Consolidation Among Primary P/C Companies is Not Imminent
  19. 19. M&A Activity Affecting Personal Lines, 1992-2004 ($ Mill) Commercial M&A activity has been in the $25,000 lines M&A $24,108 doldrums, no 30 slow due to obvious reason fear of 24 23 for surge in 25 $20,000 “skeletons in consolidation, at 20 least in personal the closet” Number of Deals lines, except via Value of Deals 20 $15,000 16 non-renewals 15 13 15 12 12 11 11 $9,182 $10,000 10 9 $7,860 $6,790 10 5 $5,000 $3,073 $2,367 5 $978 $14 $798 $386 $72 $66 $68 $0 0 92 93 94 95 96 97 98 99 0 1 2 3 4 Value of Deals Number Of Deals Source: Insurance Information Inst. based on tabulation by Conning report The Emerging Shakeout in Personal Lines, 2005
  20. 20. Class of 2005: Many Will Be Gone by 2010 As of Dec. 11, 13 start- $1,600 $1,500 ups plan to raise as $1,400 much as $8.75 billion. $1,200 More likely to come. $1,000$1,000$1,000$1,000 $1,000 …so will $ Millions $750 $800 start-ups $600 $500 $500 $500 $500 $400 $220 $180 $200 $100 $0 a l t* s a s * ita lty e e ud e ng e e ld ud R e* in R R R R ap ia ie rm di R Po m ht nt tle e el ec hf on ol C er lig ri e de Be as ig Sp r ir H A ow st B bo en en H C sh ag lin us a x ar L/ rr re sc ca ew eg co Fl id m H A X A G an is m al N A H O V L *Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs. Sources: Morgan Stanley, Company Reports; Insurance Information Institute.
  21. 21. Walmarted: Retailers Will Eventually Show Interest in P/C Insurance • Banks will continue to acquire distribution channels • Retailers chafing to get into retail banking • Insurance not far Retailing & Insurance behind, at least on have a long history. distribution side Remember Sears and Walmart shaking up Allstate? warranty business
  22. 22. Political Predictions Change is in the Air
  23. 23. 2010: Political Order Will Be Shaken Up • One House of Congress Changes Hands by 2010 • Change of Party in the White House • Eliot Spitzer is the Next Governor of New York
  24. 24. Insurance Information Institute On-Line If you would like a copy of this presentation, please give me your business card with e-mail address

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