Workers Compensation and the Economy Trends, Challenges and Opportunities Workers Compensation...

Workers Compensation and the Economy

Trends, Challenges and Opportunities

Workers Compensation Education ConferenceOrlando, FL

August 20, 2013

Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

2

Labor Market Trends

Massive Job Losses Sapped Workers Comp Exposure During the Great

Recession, But Trend Has Improving

2

3

Unemployment and Underemployment Rates: Stubbornly High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 7.4% in July 2013—its

lowest level in more than 4 years.

Unemployment peaked at 10.1% in

October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years: 10.8% in

November - December 1982

Source: US Bureau of Labor Statistics; Insurance Information Institute.

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 14.0%

in July 2013

January 2000 through July 2013, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving

3

4

Unemployment Rates by State, June 2013:Highest 25 States*

9.6

9.2

9.0

8.9

8.8

8.7

8.7

8.6

8.5

8.5

8.5

8.4

8.4

8.1

8.1

8.0

7.9

7.6

7.5

7.5

7.3

7.3

7.2

7.1

7.0

7.0

0

2

4

6

8

10

12

NV IL MS RI NC MI NJ GA CA DC TN IN KY CT SC AZ OR US NY PA AR DE OH FL CO LA

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for June 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In June, 28 states had over-the-month unemployment rate increases, 11 states

had decreases, and 11 states and the District of Columbia had no change.

Florida’s unemployment rate is below the US average

5

7.0

7.0

6.9

6.8

6.8

6.8

6.8

6.5

6.5

6.4

6.1

6.1

5.8

5.5

5.4

5.2

5.2

5.2

4.7

4.6

4.6

4.6

4.4

4.0

3.9

3.1

0

2

4

6

8

MD MA MO ME NM WA WI AL TX ID AK WV KS VA MT MN NH OK UT HI IA WY VT NE SD ND

Un

em

plo

ym

en

t R

ate

(%

)

Unemployment Rates by State, June 2013: Lowest 25 States*

*Provisional figures for June 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In June, 28 states had over-the-month unemployment rate increases, 11

states had decreases, and 11 states and the District of Columbia had no

change.

6

US Unemployment Rate Forecast

4.5

%4

.5%

4.6

%4

.8%

4.9

% 5.4

% 6.1

%6

.9%

8.1

%9

.3%

9.6

% 10

.0%

9.7

%9

.6%

9.6

%

8.9

%9

.1%

9.1

%8

.7%

8.3

%8

.2%

8.0

%7

.8%

7.7

%7

.6%

7.4

%7

.3%

7.2

%7

.1%

7.0

%6

.8%

9.6

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

Rising unemployment

eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10%

in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/13 edition); Insurance Information Institute.

2007:Q1 to 2014:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

unemployment as low as 6.5% by Q4 of next year.

Jobless figures have been revised

slightly downwards for 2013/14

22

75

41

68

50

12

36

61

-79

24 6

8 74

51

2-1

14

-10

5-2

22

-21

9-2

03

-26

7-2

69

-42

9-4

84

-78

6 -70

1-8

21

-69

2-8

12

-82

1-2

88

-44

2-2

82 -2

22 -1

62

-23

3-3

4-1

67

-17

-26

17

01

02

94 10

31

29

11

3 18

81

54

11

48

02

43

22

3 30

31

83

17

72

06

12

92

56

17

41

97 24

9 32

32

65

20

81

20 15

27

81

77

13

11

18

21

7 25

62

24

16

43

19

15

4 18

81

87

19

61

61

11

1

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-

13

Jun

-13

Jul-

13

Monthly Change in Private Employment

January 2007 through July 2013 (Thousands)

Private Employers Added 7.29 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

161,000 private sector jobs were created in July

7

Jobs Created2012: 2.247 Mill2011: 2.420 Mill2010: 1.235 Mill

http://www.bls.gov/ces/home.htm

0.05

10.

053

-0.0

61-0

.166

-0.3

88-0

.607

-0.8

10-1

.077

-1.3

46-1

.775

-2.2

59-3

.045

-3.7

46-4

.567

-5.2

59-6

.071

-6.8

92-7

.180

-7.6

22-7

.904

-8.1

26-8

.288

-8.5

21-8

.555

-8.7

22-8

.739

-8.7

65-8

.654

-8.4

84-8

.382

-8.2

88-8

.185

-8.0

56-7

.943

-7.7

55-7

.601

-7.4

87-7

.407

-6.9

41-6

.638

-6.4

55-6

.278

-6.0

72-5

.943

-5.6

87-5

.513

-5.3

16-5

.067

-4.7

44-4

.479

-4.2

71-4

.151

-3.9

99-3

.921

-3.7

44-3

.613

-3.4

95-3

.278

-3.0

22-2

.798

-2.6

34-2

.315

-2.1

61-1

.973

-1.7

86-1

.590

-1.4

29

-7.1

64

-10

-8

-6

-4

-2

0

2

De

c-0

7Ja

n-0

8F

eb

-08

Ma

r-0

8A

pr-

08

Ma

y-0

8Ju

n-0

8Ju

l-0

8A

ug

-08

Se

p-0

8O

ct-0

8N

ov-

08

De

c-0

8Ja

n-0

9F

eb

-09

Ma

r-0

9A

pr-

09

Ma

y-0

9Ju

n-0

9Ju

l-0

9A

ug

-09

Se

p-0

9O

ct-0

9N

ov-

09

De

c-0

9Ja

n-1

0F

eb

-10

Ma

r-1

0A

pr-

10

Ma

y-1

0Ju

n-1

0Ju

l-1

0A

ug

-10

Se

p-1

0O

ct-1

0N

ov-

10

De

c-1

0Ja

n-1

1F

eb

-11

Ma

r-1

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pr-

11

Ma

y-1

1Ju

n-1

1Ju

l-1

1A

ug

-11

Se

p-1

1O

ct-1

1N

ov-

11

De

c-1

1Ja

n-1

2F

eb

-12

Ma

r-1

2A

pr-

12

Ma

y-1

2Ju

n-1

2Ju

l-1

2A

ug

-12

Se

p-1

2O

ct-1

2N

ov-

12

De

c-1

2Ja

n-1

3F

eb

-13

Ma

r-1

3A

pr-

13

Ma

y-1

3Ju

n-1

3Ju

l-1

3

Mill

ion

sCumulative Change in Private Employment: Dec. 2007—July 2013

December 2007 through July 2013 (Millions)


Cumulative job losses peaked at 8.765 million

in February 2010

Cumulative job losses as of July 2013 totaled

1.429 million

8

All of the jobs “lost” since President

Obama took office in Jan.

2009 have been recouped



-0.0

17-0

.043

0.06

80.

238

0.34

00.

434

0.53

70.

666

0.77

90.

967

1.12

11.

235

1.31

51.

558

1.78

12.

084

2.26

72.

444

2.65

02.

779

3.03

53.

209

3.40

63.

655

3.97

84.

243

4.45

14.

571

4.72

34.

801

4.97

85.

109

5.22

75.

444

5.70

05.

924

6.08

86.

407

6.74

96.

936

7.13

27.

293

6.56

1

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Mill

ion

sCumulative Change in Private Sector Employment: Jan. 2010—July 2013

January 2010 through July 2013* (Millions)


Cumulative job gains through July 2013 totaled 7.29 million

9

Job gains and pay increases have added more than $750 billion to payrolls

since Jan. 2010



4-1

033

9251

128

798

-68

-224 -1

84-1

94-2

13-2

24-2

71-2

89-2

88-3

56 -324

-452

-449

-480

-488

-511

-530

-542

-536

-539

-547

-574

-565

-589 -555

-535

-592

-601

-606

-622

-609

-610

-621

-629

-628

-621

-800

-600

-400

-200

0

200

400

600

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Cumulative Change in Government Employment: Jan. 2010—July 2013

January 2010 through July 2013* (Millions)

Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

Cumulative job losses through June 2013 totaled 628,000

10

Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the

Financial Crisis: Sequestration Will Add to this Toll

Government at all levels has shed more than 625,000 jobs

since Jan. 2010 even as private employers created 7.29 million jobs, though losses may now

be stabilizing.

Temporary Census hiring distorted 2010

figures

http://www.bls.gov/data/

11

Net Change in Government Employment: Jan. 2010—July 2013*

-628

-421

-126-81

-700

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employment shrank by 421,000 from Jan.

2010 through July 2013, accounting for 67% of all government job losses,

negatively impacting WC exposures for those cities and counties that insure privately

*Cumulative change from prior month; Base employment date is Dec. 2009.Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

State government employment fell by 2.4% since the end of 2009 while

Federal employment is down by 2.9%

http://www.bls.gov/data/

12

Construction Employment,Jan. 2010—July 2013*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

5 5,47

85,

485

5,49

75,

524

5,53

05,

547

5,54

6 5,58

35,

576

5,57

7 5,61

25,

629

5,64

45,

640

5,63

65,

615

5,62

25,

627

5,63

05,

633

5,64

95,

673 5,

711

5,73

5 5,78

35,

797

5,79

25,

791

5,79

95,

793

5,400

5,450

5,500

5,550

5,600

5,650

5,700

5,750

5,800

5,850

5,900

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

132/

30/2

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Construction employment growth accelerated in the second half of

2012 but flattened out by mid-2013. Construction is a key driver of

workers comp exposure growth.

(Thousands)

http://data.bls.gov/

13

Construction Employment, Jan. 2003–July 2013

Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

5,000

5,500

6,000

6,500

7,000

7,500

8,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

The “Great Recession” and housing bust destroyed 2.3 million constructions jobs

The Construction Sector Could Be a Growth Leader in 2013 and 2014 as the Housing Market and Private Investment Recover. WC Insurers Will Benefit.

Construction employment

troughed at 5.435 million in Jan.

2011, after a loss of 2.291 million jobs, a 29.7%

plunge from the April 2006 peak

13

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of July 2013 totaled 5.793 million, an

increase of 358,000 jobs or 6.6% from the

Jan. 2011 trough

14

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.4

8

1.4

7 1.6

21

.64

1.5

71

.60 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

6

0.9

10

.55

0.5

9

0.6

1 0.7

8 0.9

7

1.1

8 1.3

5

1.4

41

.50

1.5

11

.50

1.3

51.4

61

.29

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (8/13 and 3/13); Insurance Information Institute.

Insurers Are Starting to See Meaningful Exposure Growth for the First Time Since 2005 Associated with Home Construction: Construction Risk Exposure,

Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage

rates and demographics are stimulating new home construction

for the first time in years

15

Value of Construction Put in Place, June 2013 vs. June 2012*

-9.3%

-4.7%

-9.4%

3.3%

9.7%

18.1%

1.4%

-15%

-10%

-5%

0%

5%

10%

15%

20%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue

Growth (%)

Private sector construction activity is up in the

residential segment but down in nonresidential

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +9.7% Public: -9.3%

Public sector construction activity remains depressed

http://www.census.gov/construction/c30/c30index.html

16

Value of Private Construction Put in Place, by Segment, June 2013 vs. June 2012*

0.0%

-3.9%-0.8%

-12.7%

-3.0%

-14.4%

5.2%

-1.9%

8.5%9.7%

18.1%

1.4%

27.9%

6.2%

-20%-15%-10%

-5%0%5%

10%15%20%25%30%35%

To

tal

Pri

vate

Co

nst

ruct

ion

Res

iden

tial

To

tal

No

nre

sid

enti

al

Lo

dg

ing

Off

ice

Co

mm

erci

al

Hea

lth

Car

e

Ed

uca

tio

nal

Rel

igio

us

Am

use

men

t &

Rec

.

Tra

nsp

ort

atio

n

Co

mm

un

icat

ion

Po

wer

Man

ufa

ctu

rin

g

Private Construction Activity is Up in Some Segments, Including the Key Residential Construction Sector, But Weakened in the First Half of 2013

Growth (%) Led by the Residential Construction, Lodging and Office segments, Private sector

construction activity is remains mixed after plunging during the “Great Recession.”

Most segments expanded in 2012 but weakened in early 2013.



17

Value of Public Construction Put in Place, by Segment, June 2013 vs. June 2012*

3.9%

-15.3%

-5.1%

-15.3%

7.4%

-12.4%

5.2%

-0.1%

-17.0%

9.6%

-9.3%

-4.7%

-9.4%

-25.5%

-20.2%

-30%-25%

-20%-15%

-10%-5%

0%5%

10%15%

To

tal

Pu

bli

cC

on

stru

ctio

n

Res

iden

tial

To

tal

No

nre

sid

enti

al

Off

ice

Co

mm

erci

al

Hea

lth

Car

e

Ed

uca

tio

nal

Pu

bli

c S

afet

y

Am

use

men

t &

Rec

.

Tra

nsp

ort

atio

n

Po

wer

Hig

hw

ay &

Str

eet

Sew

age

&W

aste

Dis

po

sal

Wat

er S

up

ply

Co

nse

rvat

ion

&D

evel

op

.

Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2014.

Growth (%)


Public sector construction activity is down substantially in most segments, a situation that will likely persist, dragging

on public entity risk exposures

Transportation and Power projects lead

public sector construction


18

Manufacturing Employment,Jan. 2010—July 2013*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

4111

,870

11,9

1011

,920

11,9

2611

,935

11,9

5711

,943

11,9

2511

,931

11,9

3811

,951

11,9

6511

,988

11,9

8411

,977

11,9

7211

,969

11,9

75

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3

Manufacturing employment is up by more than 500,000 or 4.5% since Jan.

2010—a surprising source of strength in the economy. The sector has weakened

recently as US corporations remains cautious and Europe, China slow.


(Thousands)


19

Oil & Gas Extraction Employment,Jan. 2010—July 2013*


156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

6 169.

317

0.1

171.

017

2.5

173.

6 176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

019

1.7

191.

919

3.4

192.

419

2.6

193.

119

2.6

193.

9

150

155

160

165

170

175

180

185

190

195

200

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3

Oil and gas extraction employment is up 24.0%

since Jan. 2010 as the energy sector booms.

Domestic energy production is essential to any robust economic

recovery in the US.

(Thousands)


20

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8247

,806

40,0

75

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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 08 09 10 11 12

Business Bankruptcy Filings,1980-2012

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

2012 bankruptcies totaled 40,075, down 16.2% from 2011—the third

consecutive year of decline. Business bankruptcies more than tripled during the financial crisis.

% Change Surrounding Recessions

1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*

20

http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633

http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633

21

Private Sector Business Starts, 1993:Q2 – 2012:Q4*

17

51

86

17

41

80

18

61

92

18

81

87 18

91

86 1

90 1

94

19

11

99 2

04

20

21

95

19

61

96

20

62

06

20

11

92

19

82

06

20

62

03

21

12

05

21

22

00 2

05

20

42

04

19

72

03

20

92

01

19

21

92

19

32

01 20

42

02

21

0 21

22

09

21

6 22

0 22

32

20

22

02

10

22

12

12

20

42

18

20

92

07

20

71

99

19

1 19

31

72 1

76

16

91

84

17

5 17

91

88

20

01

83 1

87 1

91

19

71

93

19

1 19

31

92

20

3

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But

Are Recovering Slowly* Data through Dec. 30, 2012 are the latest available as of Aug. 16, 2013; Seasonally adjusted. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up 2.8% in 2012 to 769,000 following a 2.2% gain to

748,000 in 2011. Start-ups could accelerate in 2013.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000 2012: 769,000

21

http://www.bls.gov/news.release/cewbd.t08.htm

22

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2013:Q2

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.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,25005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

2

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2013:Q2) was $7.09 trillion, a new peak--$762B

above 2009 trough

Recent trough (2009:Q3) was $6.25 trillion, down

5.3% from prior peak

Payrolls are 13.4% above

their 2009 trough and up 2.7% over

the past year

22

http://research.stlouisfed.org/fred2/series/WASCUR


$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

23

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2012E

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2012 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005

7/90-3/91 3/01-11/0112/07-6/09

$Billions $Billions

WC premium volume dropped two years before

the recession began

WC net premiums written were down $14B or 29.3% to

$33.8B in 2010 after peaking at $47.8B

in 2005

+9% in 2012E


The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

24

Growth Will Expand Insurer Exposure Base Across Most Lines

24

25

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/13; Insurance Information Institute.

2.7

%0

.5%

3.6

%3

.0%

1.7

%-1

.8%

1.3

%-3

.7%

-5.3

%-0

.3%

1.4

%5

.0%

2.3

%2

.2%

2.6

%2

.4%

0.1

%2

.5%

1.3

%4

.1%

2.0

%1

.3% 3

.1%

1.1

%1

.7%

2.3

%2

.7%

2.8

%2

.9%

2.9

%2

.9%

0.4

%

-8.9%

4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

2

00

0

2

00

1

2

00

2

2

00

3

2

00

4

2

00

5

2

00

6

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction

was severe

The Q4:2008 decline was the steepest since the Q1:1982

drop of 6.8%

2013 is expected to see uneven growth,

then gradually accelerate throughout the year and into 2014

26

Real GDP by State Percent Change, 2012:Highest 25 States

13

.4

4.8

3.9

3.6

3.5

3.5

3.4

3.3

3.3

3.3

2.7

2.7

2.6

2.4

2.4

2.4

2.4

2.2

2.2

2.2

2.2

2.1

2.1

2.1

2.1

2.0

0

2

4

6

8

10

12

14

ND TX OR WA CA MN UT IN TN WV NC SC AZ FL IA MD MS MA MI OH US CO GA MT OK MO

Pe

rce

nt

Ch

an

ge

(%

)

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

North Dakota was the economic growth juggernaut of the US

in 2012—by far

FL’s economy is getting back on track after the Great Recession, posting growth better than the

US oevrall in 2012

27

1.9

1.7

1.6

1.5

1.5

1.5

1.5

1.4

1.4

1.4

1.3

1.3

1.3

1.2

1.2

1.1

1.1

0.7

0.5

0.5

0.4

0.2

0.2

0.2

0.2

-0.1

-0.4-0.20.00.20.40.60.81.01.21.41.61.82.0

IL PA HI LA NE NV WI KS KY RI AR NJ NY AL VT AK VA DC ME NH ID DE NM SD WY CT

Pe

rce

nt

Ch

an

ge

(%

)

Real GDP by State Percent Change, 2012: Lowest 25 States

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Connecticut was the only state to shrink in 2012

Growth rates in 8 states (and DC) were still below

1% in 2012

28

P/C Insurance Industry Financial Overview

So Far, So Good:Profit Recovery in 2013 and

Workers Comp Is Part of the Reason

28

P/C Net Income After Taxes1991–2013:Q1 ($ Millions)

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

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$1

4,3

94

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13:Q1

2012:Q1 ROAS

was 7.2%Net income is up

substantially (+40.9%) from 2012:Q1 $10.2B

-5%

0%

5%

10%

15%

20%

25%

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

08

09

10

11

12

13

:Q1

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:Q1*

*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.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

1984: 1.8% 1992: 4.5%2001: -1.2%

10 Years

10 Years9 Years

2012: 5.9%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013:Q1 9.7%

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

94.8

102.4

106.5

95.79.7%

6.2%4.7%

7.9%7.4%

4.3%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013:Q10%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Catastrophes and lower investment

income pulled down ROE in 2012

INVESTMENTS: THE NEW REALITY

32

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

32

Property/Casualty Insurance Industry Investment Gain: 1994–2013:Q11

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2

$53.9

$12.8

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13:Q1

Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower Realized Investment Gains; The Financial

Crisis Caused Investment Gains to Fall by 50% in 2008

1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2012 were approximately 16%

below their pre-crisis peak

38

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2013*

*Monthly, constant maturity, nominal rates, through July 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

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.

U.S. Treasury security yields

recently plunged to record lows

38

http://www.federalreserve.gov/releases/h15/data.htm

Terrorism Update

42

Boston Marathon Bombings Underscore the Need for Extension of the Terrorism

Risk Insurance ProgramDownload III’s Terrorism Insurance Report at: http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2013.html

42

http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2013.html

http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2013.html

Life$1.2 (3%)

Aviation Liability

$4.3 (11%)

Other Liability

$4.9 (12%)

Biz Interruption $13.5 (33%)

Property -WTC 1 & 2*$4.4 (11%) Property -

Other$7.4 (19%)

Aviation Hull$0.6 (2%)

Event Cancellation

$1.2 (3%)Workers Comp

$2.2 (6%)

Total Insured Losses Estimate: $40.0B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.

**$32.5 billion in 2001 dollars.

Source: Insurance Information Institute.

Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2011)

($ Billions)

4.2%

5.2%5.6%

4.7%

6.3%

2.3%

1.1%

2.7%

4.3%4.7%4.6%

2.7%

5.9%

7.7%

9.0%

10.1%

4.6%

3.6%

5.6%6.2%

8.8%

2%

2.9%2.3%

1.1%3.5%

3.6%

1%

2.2%

0.7%

-3.0%

1.0%1.7%

10.1%

9.2%

3.1%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12P

Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim

WC Indemnity Severity vs. Wage Inflation, 1995 -2012p

2011p: Preliminary based on data valued as of 12/31/2011; 1991-2010: Based on data through 12/31/2010, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI

WC indemnity severity turned

positive again in 2011

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2011:+3.2%

Indemnity severities usually

outpace wage gains

4. RENEWED PRICING DISCIPLINE

65

Evidence of a Broad and Sustained Shift in Pricing

65

Workers Comp Rate Changes,2008:Q4 – 2013:Q2

Source: Council of Insurance Agents and Brokers; Information Institute.

-5.5%-4.6%-4.0%-4.6%

-3.7%-3.9%

-5.4%

-3.7%-3.4%

-1.6%

2.6%4.1%

7.5%7.4%8.3%8.1%

9.0%9.8%

8.3%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

08:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q413:Q113:Q2

WC rate changes have been positive for 9

consecutive quarters, longer than any other

commercial line

(Percent Change)

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

67

Change in Commercial Rate Renewals, by Line: 2013:Q2

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Major Commercial Lines Renewed Uniformly Upward in Q2:2013 for the 8th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

5.4%5.9% 5.9%

8.3%

1.1%

3.5% 3.6% 3.7%4.6% 4.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Su

rety

Ge

ne

ral

Lia

bili

ty

Bu

sin

ess

Inte

rru

ptio

n

Um

bre

lla

Co

mm

erc

ial

Au

to

Co

nst

ruct

ion

EP

L

D&

O

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

Workers Comp rate increases are large than any other line, followed

by Property lines

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

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