National Property Practice

Wells Fargo Insurance Services

© 2006 Wells Fargo Bank, N.A. All rights reserved. The entire presentation is confidential. Distributing or sharing this presentation in any form to anyone who is not a Wells Fargo team member is prohibited.


Property Market Trends and Developments

David Laning, CPCUNational Property Practice



National Property Practice

Sixteen experienced professionals Embedded within regions Resources Win, Retain and Drive Property Insurance Successes Needs of our customers Better, Faster Creativity / Options / Alternatives


National Property Practice

Knowledgeable Efficient Effective Proactive Support


Property / Market 2009

The “Hard Market of 2009” did not materialize Generally flat rates ± 5% Some increase on CAT Exposures and Reduced Capacity Quiet storm season to date Could make for an interesting end of the year Marine and Equipment Breakdown flat to -5%

Reinsurance All Insurers paid more for their treaties on January 1 and July 1 Indications are renewals will be flat on January 1, 2010.

2010 Predictions Flat to slightly down rates barring no significant catastrophe or capital event Very tenuous and fragile market Underwriting discipline will continue


Cost of Capital

Market Drivers


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09Q1*

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2009:Q1*

*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.

The p/c insurance industry fell well short of is cost of capital in 2008

-13.

2 pt

s

US P/C insurers missed their cost of capital by an average 6.7 points from

1991 to 2002, but on target or better 2003-07, but

falling well short in 2008/09

-1.7

pts

+2.3

pts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

-7.1

pts

7

-8.4

pts


Combined Ratiosand

Rate Changes


9

110.

3

110.

2

107.

6

103.

9 109.

7

112.

3

111.

1

122.

3

110.

2

102.

5 105.

4

91.1 93

.6

103.

5

105.

1

102.

0

112.

5

85

90

95

100

105

110

115

120

125

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F

2006/07 benefited from favorable loss cost trends, improved tort environment, low CAT

losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and

mortgage and financial guarantee segments have big influence. 2009 is transition year.

Commercial coverages have exhibited significant

variability over time

Commercial Lines Combined Ratio, 1993-2009FMortgage and financial

guarantee account for about 3-4 points on the commercial combined ratio in 2008/09

Sources: A.M. Best (historical and forecasts)


10

97.5

100.6 100.1 100.7

92.6

98.4101.0

8.9%4.2%

12.7%

14.3% 15.9%

9.6%

2.2%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009:Q1*

Com

bine

d R

atio

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Ret

run

on E

quity

*

Combined Ratio ROE*

* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.

A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At

Combined ratios must me must lower in today’s depressed

investment environment to generate risk

appropriate ROEs


11

Average Commercial Rate Change,All Lines, (1Q:2004 – 2Q:2009)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

% -8.2

%-4

.6% -2

.7%

-3.0

%-5

.3%

-9.6

%-1

1.3%

-11.

8%-1

3.3% -1

2.0%

-13.

5%-1

2.9% -1

1.0%

-6.0

% -5.0

%-5

.0%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%1Q

042Q

043Q

044Q

041Q

052Q

053Q

054Q

051Q

062Q

063Q

064Q

061Q

072Q

073Q

074Q

071Q

082Q

083Q

084Q

081Q

092Q

09

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

-0.1

% Magnitude of price declines is now

shrinking. Reflects shrinking capital,

reduced investment gains, deteriorating

underwriting performance, higher cat losses and costlier

reinsurance


Catastrophe Losses


13

U.S. Insured Catastrophe Losses$7

.5$2

.7$4

.7$2

2.9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5$5

.9 $12.

9 $27.

5

$6.7

$26.

0$6

.9$1

00.0

$61.

9

$9.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

20??

*Based on PCS data through June 30 = $6.9 billion.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

$ Billions2008 CAT losses exceeded

2006/07 combined. 2005 was 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

eventually

13

2009 cat losses were down 43% in H1 from $10.3B in H1 2008


14

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1988-2007¹

Fire, $8.1 , 2.6%

Tornadoes, $82.4 , 26.5%

All Tropical Cyclones, $141.6 ,

45.6%

Civil Disorders, $1.1 , 0.4%

Utility Disruption, $0.2 , 0.1%

Water Damage, $0.4 , 0.1%Wind/Hail/Flood,

$9.9 , 3.2%

Earthquakes, $19.5 , 6.3%

Winter Storms, $24.4 , 7.9%

Terrorism, $22.9 , 7.4%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Insured disaster losses totaled $310.5 billion from 1988-2007 (in 2007 dollars)


Policy Holder Surplusand

Capital Events


16

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809*

U.S. Policyholder Surplus: 1975-2009:H1*

Source: A.M. Best, ISO, Insurance Information Institute. *As of 6/30/09

$ B

illio

ns

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Actual capacity as of 6/30/09 was $471B, up from $437.1B as of 3/31/09 Recent peak was $521.8 as of

9/30/07. Surplus as of 6/30/09 is 9.8% below 2007 peak; Crisis trough was as of 3/31/0916.2% below 2007 peak

The premium-to-surplus ratio stood at $1.03:$1 as of

3/31/09, up from near record low of $0.85:$1 at

year-end 2007

16


17

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

3.3%

9.6%6.9%

10.9%

16.2%13.8%

6.2%

0%2%4%6%8%

10%12%14%16%18%

6/30

/198

9H

urric

ane

Hug

o

6/30

/199

2H

urric

ane

And

rew

12/3

1/93

Nor

thrid

geEa

rthq

uake

6/30

/01

Sept

. 11

Atta

cks

6/30

/04

Flor

ida

Hur

rican

es

6/30

/05

Hur

rican

eK

atrin

a

Fina

ncia

lC

risis

as

of3/

31/0

9**

*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.

The financial crisis now ranks as the largest

“capital event” over the past 20+ years


Property Market Trends and Recommendations Distinguish yourself Be out ahead of the market Create a positive story for your risk Losses – Positive spin – What is being done to prevent what has happened Quality of Risk - Information Risk Improvements Unparalleled underwriting data Value Justification and stratification Disaster Preparedness and tested recovery plan Loss Control and prevention Rate History Coverage Audit Retentions CAT Modeling Flood Mapping


Food For Thought

Terrorism

Swine Flu H1N1

Enterprise Risk Management

NPIP – Remapping

Industry Segment Program Development

Rating Agencies


© 2006 Wells Fargo Bank, N.A. All rights reserved. The entire presentation is confidential. Distributing or sharing this presentation in any form to anyone who is not a Wells Fargo team member is prohibited.

National Property Practice

Documents

Transcript of National Property Practice