Financial Forecast 2010:
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Transcript of Financial Forecast 2010:
Financial Forecast 2010: The Future of the Property/Casualty
Insurance Industry
Property Casualty Insurers Association of AmericaExecutive Roundtable Seminar
Naples, FL
January 23, 2006
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038
Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org
Crystal Ball: 2010
Financial Predictions
Slower Growth & Higher Losses =Disappointing Profits
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E
06F
07F
08F
09F
10F
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2010F*
*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
P/C profits continue to disappoint. ROE stuck at 9-10%
-10%
-5%
0%
5%
10%
15%
20%
25%
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
2006
F20
07F
2008
F20
09F
2010
F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2005-10 figures are III forecasts/estimates.
2006-2010 (post-Katrina) period will resemble 1993-97
(post-Andrew)
2010: Leakage of P/C Insurance Premium Continues
• Large DeductiblesEfficient Use of Corporate CapitalMakes Sense for Personal Lines Policyholders
• Alternative Risk TransferEspecially Captives: Popular for Ever-Smaller RisksDedicated Reinsurance FacilitiesContingent Funding: Debt, Post-Event Assessments, Govt.SecuritizationDiversification in Portfolios of Asset-Backed SecuritiesSelf-InsuranceSelf Insurance GroupsRisk-Retention Groups
• Residual MarketsFL; Large Expansion in LA, MS, TX & Elsewhere
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
75 80 85 90 95 00 05E 10F
U.S. Policyholder Surplus: 1975-2005*
Source: A.M. Best, ISO, Insurance Information Institute *As of 9/30/05.
$ B
illio
ns
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Capacity at year-end 2005 was $420 billion (est.). It will reach $500B by
2009 and $536 billion by year-end 2010
CAGR 1975-2005E = 10.7%
Assume CAGR 2005-2010 = 5%
Announced Insurer Capital Raising*($ Millions, as of December 1, 2005)
$1,500
$38
$400$450$600
$710
$300$100$140
$600
$129$297
$620
$124$202$150$299
$490
$2,800
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Ace Ltd.
Argonau
tAspen
AxisEndu
rance
Everest
ReFair
fax Finl.
Glacier
Re
HCC Insuran
ceIP
C Hldgs
Kiln PLC
Max R
eMon
tpelier
ReNav
igator
sOdyss
ey Re
Partner
RePlat
inumPXRE
XL Cap
ital
$ M
illio
ns
*Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
As of Dec. 1, 19 insurers announced plans to raise
$9.95 billion in new capital. Twelve start-ups plan to raise as much as $8.65
billion more for a total of $18.65B. Likely at least $20B raised eventually.
Existing companies
will continue to find it
relatively easy to raise cash…
Announced Capital Raising by Insurance Start-Ups
($ Millions, as of December 11, 2006)
$1,500
$1,000$1,000$1,000$1,000
$750
$500 $500 $500 $500
$220 $180$100
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Harbo
r Poin
t*Amlin
Bermuda
Flagsto
ne Re
Validus H
oldings
Lanca
shire
Re*
*
Ariel R
eHisc
ox B
ermud
aNew
Cast
le Re
Arrow C
apita
lXL/H
ighfie
ldsGre
enlig
ht Re
Omega S
pecialt
yAsce
ndent R
e$
Mill
ions
*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.
As of Dec. 11, 13 start-ups plan to raise as
much as $8.75 billion. More likely to come.
…so will start-ups
U.S. InsuredCatastrophe Losses ($ Billions)
$7.5
$2.7
$4.7
$22.
9
$5.5 $1
6.9
$8.3
$7.4
$2.6 $1
0.1
$8.3
$4.6
$26.
5
$5.9 $1
2.9 $2
7.5
$57.
7
$100
$0
$20
$40
$60
$80
$100
$120
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
$ Billions
2005 will be by far the worst year ever for insured
catastrophe losses in the US, but the worst has yet to come.
$100 Billion CAT year is coming soon
Points (Reduced)/Increased
0.5
(2.4)
5.26.3
3.52.5
1.91.1
(0.4)
0.4
-3-2-101234567
1998 1999 2000 2001 2002 2003 2004 2005E 2006F 2007F
Combined Ratio:Impact of Reserve Changes (Points)
Source: ISO, A.M. Best, Lehman Brothers for years 2005E-2007F
Reserve adequacy is improving
substantially, which bodes well for 2010
Tort System Costs,2000-2010F
$179
$232$245
$262 $269$282 $283
$295$288$279
$206
1.83%2.03%
2.22% 2.23%2.24% 2.25% 2.20%2.20%2.21%2.27%2.23%
$100
$150
$200
$250
$300
$350
00 01 02 03 04 05E 06F 07F 08F 09F 10F
Tor
t Sys
tem
Cos
ts
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Tor
t Cos
ts a
s % o
f GD
P
Tort Sytem Costs Tort Costs as % of GDP
Source: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology.
After a period of rapid escalation, tort system costs as % of GDP appear to be stabilizing
Shareholder Class Action Lawsuits*
*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
164202
163
231188
109172
240203 214
497
272222 235
181
0
100
200
300
400
500
600
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
1997-2001 remain problematic from a D&O perspective Sarbanes-Oxley
Impact??
Regulatory Predictions
Congressional Apathy Continues on P/C Issues
Tough Road for Comprehensive National Catastrophe Plan
Personal Disaster Account
Private Insurance
State Regional Catastrophe Fund
Federal Catastrophe Reinsurance Contract
Program
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
State Attachment
1:50 Event
1:500 Event Unlikely National CAT Plan in place
by 2010. Major
obstacles include:
•Divisions within industry
•Opposition in Congress
TRIA’s Days Are Numbered: Congress & Administration Want it Dead
$10.0$12.5
$15.0
$25.0$27.5
$0
$5
$10
$15
$20
$25
$30
$35
Year 1(2003)
Year 2(2004)
Year 3(2005)
Year 4(2006)
Year 5(2007)
$ B
illio
ns
Source: Insurance Information Institute
Obstacles Include•Opposition in Congress &
Administration•Profitability/Growth in Capital
Base/New Entry•Few examples of econ. disruption
ExtensionIndustry Aggregate Retention ($ Bns)
Status of Other RegulatoryIssues 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
Competitive Predictions
Wave of Consolidation Among Primary P/C Companies is Not
Imminent
M&A Activity AffectingPersonal Lines, 1992-2004 ($ Mill)
$14
$3,073
$6,790
$386
$24,108
$9,182
$2,367$66 $978
$72 $68
$7,860
$798
119
1315
24 23
1210
5
12
16
20
11
$0
$5,000
$10,000
$15,000
$20,000
$25,000
92 93 94 95 96 97 98 99 0 1 2 3 4
Val
ue o
f Dea
ls
0
5
10
15
20
25
30
Num
ber
of D
eals
Value of Deals Number Of Deals
Source: Insurance Information Inst. based on tabulation by Conning report The Emerging Shakeout in Personal Lines, 2005
M&A activity has been in the doldrums, no
obvious reason for surge in
consolidation, at least in personal lines, except via non-renewals
Commercial lines M&A slow due to
fear of “skeletons in
the closet”
Class of 2005:Many Will Be Gone by 2010
$1,500
$1,000$1,000$1,000$1,000
$750
$500 $500 $500 $500
$220 $180$100
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Harbo
r Poin
t*Amlin
Bermuda
Flagsto
ne Re
Validus H
oldings
Lanca
shire
Re*
*
Ariel R
eHisc
ox B
ermud
aNew
Cast
le Re
Arrow C
apita
lXL/H
ighfie
ldsGre
enlig
ht Re
Omega S
pecialt
yAsce
ndent R
e$
Mill
ions
*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.
As of Dec. 11, 13 start-ups plan to raise as
much as $8.75 billion. More likely to come.
…so will start-ups
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 behind, at least on distribution side
Walmart shaking up warranty business
Retailing & Insurance have a long history.
Remember Sears and Allstate?
Political Predictions
Change is in the Air
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
Insurance Information Institute On-Line
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