The Shape of Things to Come for P/C Insurance Markets and the American Workplace

Transcription

1 The Shape of Things to Come for P/C Insurance Markets and the American Workplace NCCI Annual Issues Symposium Orlando, FL May 5, 2016 Download at Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell:

2 P/C Insurance Industry Financial Overview 2015: Second-Best Year in the Post-Crisis Era & Carbon Copy of 2014 Modest CATs, Reserve Releases Workers Comp Helped Too 2

3 $ Millions $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 P/C Industry Net Income After Taxes $14, ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS 1 = 3.5% 2012 ROAS 1 = 5.9% 2013 ROAS 1 = 10.2% 2014 ROAS 1 = 8.4% 2015 ROAS = 8.4% $5,840 $19,316 $10,870 $20,598 $24,404 $36,819 $30,773 $21,865 $20,559 $3,046 $30,029 $38,501 $44,155 $65,777 $62,496 Net income in 2015 was on par with 2014; ROE unchanged at 8.4% $3,043 $28,672 $35,204 $19,456 $33,522 $63,784 $55,870 $56,622 -$10,000 -$6, ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; 2015E is annualized figure based actual figure through Q3 of $44.0 Sources: A.M. Best, ISO; Insurance Information Institute E

4 Profitability Peaks & Troughs in the P/C Insurance Industry, ROE 25% 1977:19.0% 1987:17.3% History suggests next ROE peak will be in % 1997:11.6% 2006:12.7% 15% 9 Years % 2015: 8.4% 10% 5% 0% 1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2% % -5% *Profitability = P/C insurer ROEs figures are estimates based on ROAS data. Note: Data for exclude mortgage and financial guaranty insurers. Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning

5 P/C Insurance Industry Combined Ratio, * As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Best Combined Ratio Since 1949 (87.6) 92.6 Relatively Low CAT Losses, Reserve Releases 95.7 Cyclical Deterioration Relatively Low CAT Losses, Reserve Releases Avg. CAT Losses, More Reserve Releases Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Sandy Impacts Lower CAT Losses Consecutive Years of U/W Profits: First Time Since * Excludes Mortgage & Financial Guaranty insurers Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = Sources: A.M. Best, ISO ( ); Figure for is from A.M. Best P&C Review and Preview, Feb. 16,

6 Number of Years with Underwriting Profits by Decade, 1920s 2010s Number of Years with Underwriting Profits Underwriting Profit in 2016? Would be the first time since the 1970s with 4+ underwriting profits s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s** Underwriting profits were common before the 1980s: 40 of the 60 years before 1980 had combined ratios below 100, but then they vanished. Not a single underwriting profit was recorded in the 25 years from 1979 through * 2009 combined ratio excl. mort. and finl. guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit. **Data for the 2010s is for the period 2010 through Note: Data for based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data. 6

7 P/C Insurance Loss Reserve Development, E* Reserve Change Reserve releases are expected to gradually taper off slowly, but will continue to benefit the bottom line and combined ratio through at least 2017 Source: A.M. Best; Barclays research for estimates.

8 Policyholder Surplus, 2006:Q4 2015:Q4 ($ Billions) Sources: ISO, A.M.Best. 8 $437.1 $455.6 $487.1 $478.5 $463.0 $496.6 $490.8 $512.8 $521.8 $517.9 $515.6 $505.0 $511.5 $540.7 $530.5 $544.8 $538.6 $559.2 $566.5 $559.1 $550.3 $570.7 $567.8 $583.5 $586.9 $607.7 $614.0 $624.4 $653.4 $662.0 $671.6 $673.9 $675.2 $672.4 $673.7 $700 $650 $600 $550 $500 $450 $400 06:Q4 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 15:Q2 15:Q4 2007:Q3 Pre-Crisis Peak Drop due to near-record 2011 CAT losses Surplus as of 12/31/15 stood at a near-record high $673.7B The industry now has $1 of surplus for every $0.76 of NPW, close to the strongest claims-paying status in its history. 2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer s investment in a non-insurance business. The P/C insurance industry entered 2016 in very strong financial condition.

9 Net Premium Growth (All P/C Lines): Annual Change, (Percent) 25% 20% 15% 10% Outlook 2016F: 3.9% 2017F: 3.8% Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3- Year Decline Since : 3.4% 2014: 4.2% 2013: 4.4% 2012: +4.2% 5% 0% -5% * Shaded areas denote hard market periods Sources: A.M. Best ( ), ISO ( ). 9

10 NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, ROE 30% 25% 20% 15% 10% Start of WW II 1941: 15.8% Post WW II Peak: 1947: 26.2% Economic Shocks, Inflation: 1976: 22.0% : Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic volatility, high interest rates, tort environment all played roles Tort Crisis 1985/86: 22.2% : Period of inter-cycle stability Post-9/ :15.3% % 5% 0% -5% -10% -15% -20% Great Depression 1932: -15.9% max drop : Extended period of stability in growth and profitability. Low interest rates, low inflation, Bureau rate regulation all played a role Note: Data through 1934 are based on stock companies only. Data include state funds beginning in Source: A.M. Best; Insurance Information Institute. Twin Recessions; Interest Rate Hikes 1987: 3.7% Great Recession: 2010: -4.9% XX? Postrecession period of stable growth?

11 Direct Premiums Written: Comm. Lines Percent Change by State, Top 25 States states showed commercial lines growth from 2007 through 2015 Growth Benchmarks: Commercial US: 9.0% 0 ND SD VT NE OK IA TX KS MN IN WI WY CO MA NY CT ME NJ CA NM UT AR ID RI US IL Pecent change (%) Sources: NAIC via SNL Financial; Insurance Information Institute.

12 Direct Premiums Written: Comm. Lines Percent Change by State, WA OH GA MT TN MO NH MS PA MI VA MD AK KY SC NC LA AL DC OR DE AZ Pecent change (%) HI FL NV WV Bottom 25 States Eight states still write less commercial business than they did in 2007 Sources: NAIC via SNL Financial; Insurance Information Institute.

13 Direct Premiums Written: Workers Comp Percent Change by State, * Top 25 States Pecent change (%) states showed positive growth in the workers comp line from (up from 13 through 2013 and 5 through 2012) IA CA NY SD NJ CT DC MN NE IN CO OK WI KS MI US GA VA NM RI IL VT MA MS *Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period. Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 13

14 Direct Premiums Written: Worker s Comp Percent Change by State, * Bottom 25 States Pecent change (%) ID States with the poorest performing economies also produced some of the most negative net change in premiums of the past 8 years MD PA TX NC NH AZ MO ME SC TN -9.5 AR AL LA AK FL UT KY HI MT DE OR NV *Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period. Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 14

15 U.S. INSURANCE MERGERS AND ACQUISITIONS, P/C SECTOR, E (1) ($ Millions) Transaction values $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 $5,100 $11,534 $8,059 $30,873 $55,825 $19,118 $40,032 $1,249 M&A activity in 2015 will likely reach its highest level since 1998 $486 $20,353 $425 $9, E (1) Includes transactions where a U.S. company was the acquirer and/or the target. $35,221 $13,615 $16,294 M&A activity in the P/C sector was up sharply in 2015 $3,507 $6,419 $12,458 $4,651 $4,397 $6,723 $32, Number of transactions Source: Conning proprietary database; 2015 I.I.I. estimate. 15

16 M&A Activity Is Shifting Toward North America and Asia and Away from Europe Asian, N. American deal volumes were up sharply in 2015 Ṡource: Thomson Reuters as of Oct from Geneva Association Newsletter Insurance and Finance, Jan. 2016, presentation Facts vs. Sentiment: Deals in the Insurance Sector, by Aviva CEO Mark Wilson. 16

17 INVESTMENTS: THE NEW REALITY Investment Performance is a Key Driver of Profitability Depressed Yields Will Necessarily Influence Underwriting & Pricing 17

18 Property/Casualty Insurance Industry Investment Income: ($ Billions) $60 Investment earnings are still below their 2007 pre-crisis peak $50 $49.5 $52.3 $54.6 $51.2 $47.1 $47.6 $49.2 $48.0 $47.3 $46.4 $47.2 $40 $38.9 $37.1 $36.7 $38.7 $39.6 $ Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.9%) increase in 2015 a trend that may continue. 1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute.

19 U.S. Treasury Security Yields: A Long Downward Trend, * 9% 8% 7% 6% 5% 4% 3% Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for more than a decade. Despite the Fed s December 2015 rate hike, yield remain low though shortterm yields have seen some gains 2% 1% 0% Recession 2 Yr Yield 10 Yr Yield '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 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. *Monthly, constant maturity, nominal rates, through March Sources: Federal Reserve Bank at National Bureau of Economic Research (recession dates); Insurance Information Institute. 19

20 Net Investment Yield on Property/ Casualty Insurance Invested Assets, P* (Percent) Estimated book yield in 2016 is down about 140 BP from pre-crisis levels E 16P The yield on invested assets remains low relative to pre-crisis yields. The Fed s plan to raise interest rates in late 2015 has pushed up some yields, albeit quite modestly. Sources: A.M. Best; 2015E-2016P figures from A.M. Best P/C Review and Preview, Feb. 2016; Insurance Information Institute

21 Interest Rate Forecasts: Yield (%) 5% 3-Month Treasury 10-Year Treasury 4% 3% 2.3% 2.7% 2.9% 3.0% 2.2% 2.1% 2.8% 3.4% 3.7% 3.8% 3.9% 2% 1% 0% 0.1% 0.5% 1.3% The end of the Fed s QE program in 2014 and a stronger economy have yet to push longer-term yields much higher 15F 16F 17F 18F 19F 20F 21F 15F 16F 17F 18F 19F 20F 21F A full normalization of interest rates is unlikely until 2019, more than a decade after the onset of the financial crisis. Sources: Blue Chip Economic Indicators (4/16 for 2016 and 2017; for /16 issue); Insurance Info. Institute. 21

22 Profitability & Politics How Is Profitability Affected by the President s Political Party? 22

23 P/C Insurance Industry ROE by Presidential Administration, * Carter Reagan II Obama II Nixon Clinton I G.H.W. Bush G.W. Bush II Clinton II Reagan I Nixon/Ford Truman Eisenhower I Eisenhower II G.W. Bush I Obama I Johnson Kennedy/Johnson 5.43% 5.03% 4.83% 4.68% 4.43% 3.55% 8.93% 8.93% 8.65% 8.35% 8.33% 7.98% 7.68% 6.98% 6.97% 15.10% 16.43% OVERALL RECORD: * Democrats 7.72% Republicans 7.85% Party of President has marginal bearing on profitability of P/C insurance industry 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% *Truman administration ROE of 6.97% based on 3 years only, ;. Source: Insurance Information Institute

24 Trump vs. Clinton: Issues that Matter to P/C Insurers Issue Trump Clinton Economy Interest Rates Taxes International Trade Supply Side-Like Philosophy: Lower taxes Faster real GDP growth; Deficits likely grow as tax cuts are combined with targeted increased spending on Homeland Security, Defense, etc. May trend higher with larger deficits; Shift from monetary policy to fiscal focus (tax cuts, government spending) Favors lower tax rates for corporate and personal income tax rates; Tax code overhaul? Protectionist Tendencies (appeal primarily to manufacturing sector) Keynesian Philosophy: More government spending on infrastructure, education, social services; Deficits likely increase as tax increases likely difficult to pass Status quo at the Fed; Net impact on interest rates unclear Unlikely to reduce taxes or embark on major overhaul of tax code Has criticized Trans-Pacific Partnership but is a realist on international matters Tort System Doesn t like trial lawyers but Status Quo seems to like filing lawsuits Health Care ACA should be repealed & replaced Incremental Change 24

25 2015 Property and Casualty Insurance Regulatory Report Card AK AL = A = B = C = D = F = NG D C HI OR CA D WA C B NV B+ Not Graded: District of Columbia B ID UT MT D WY B+ ND SD C NE B+ CO C+ B KS MO A B B A TN A- OK AZ NM AR C Source: James Madison Institute, February B MS AL B B D+ C TX D A- MN A C+ IA LA D WI B IL IN C MI C+ KY B OH C C GA WV F SC PA A A- FL VA NC A NY C MD D D VT NH MA CT NJ DE B ME B B B RI C+ C- B C Source: R Street Insurance Regulation Report Card, December 2015

26 Labor Markets Trends: Recovery Continues in Largest Job Gains in Many Years Unemployment Rate Fell to Lowest Level Since 2008 Payrolls Expanded to Record High 26

27 Unemployment and Underemployment Rates: Still Falling January 2000 through March 2016, Seasonally Adjusted (%) "Headline" Unemployment Rate U-3 Unemployment + Underemployment Rate U-6 U-6 went from 8.0% in March 2007 to 17.5% in October 2009 For U-6, 8% to 10% is normal. U-6 was 9.8% in March Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Source: US Bureau of Labor Statistics; Insurance Information Institute. Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan- 16 Headline unemployment was 5.0% in March % to 6% is normal. High unemployment and underemployment constrained overall economic growth for years, but the job market is clearly improving. 27

28 US Unemployment Rate Forecast 2007:Q1 to 2017:Q4F* % 4.5% 4.6% 4.8% 4.9% 5.4%6.1% 5.4% 5.2% 5.0% 4.9% 4.8% 4.7% 4.6% 4.6% 4.6% 4.5% 4.5% 6.9% 8.1% 9.3% 9.6% 8.9% 9.1% 9.1% 8.7% 8.3% 8.2% 8.0% 7.8% 7.7% 7.6% 7.3% 7.0% 6.6% 6.2% 6.1% 5.7% 5.6% 10.0% 9.7% 9.6% 9.6% 11% 9.6% 10% 9% 8% 7% 6% 5% Unemployment forecasts have been revised modestly downwards. Optimistic scenarios put the unemployment as low as 4.4% by Q4 of Rising unemployment eroded payrolls and WC s exposure base. Unemployment peaked at 10% in late Jobless figures have been revised downwards for % 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 15:Q1 15:Q2 15:Q3 15:Q4 16:Q1 16:Q2 16:Q3 16:Q4 17:Q1 17:Q2 17:Q3 17:Q4 * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/16 edition); Insurance Information Institute.

29 Unemployment Rates by State, March 2016: Highest 25 States* Unemployment Rate (%) Residual impacts of the housing collapse, weak economies are holding back several states In March, 21 states had over-the-month unemployment rate decreases, 15 states had increases, and 14 states and the District of Columbia had no change AK DC IL WV MS AL NM LA NV WA CT SC KY GA NC AZ CA RI WY OH IN US FL PA MI NY *Provisional figures for March 2016, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 29

30 Unemployment Rates by State, March 2016: Lowest 25 States* Unemployment Rate (%) In March, 21 states had over-the-month unemployment rate decreases, 15 states had increases, and 14 states and the District of Columbia had no change Strength in Energy, Agricultural Statesmost also avoided housing bust MD OR TN WI DE MA NJ OK MT TX MO AR VA KS IA ID MN UT ME VT HI ND NE CO NH SD *Provisional figures for March 2016, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 30

31 Nonfarm Payroll (Wages and Salaries): Quarterly, :Q1 Billions $8,250 $8,000 $7,750 $7,500 $7,250 $7,000 $6,750 $6,500 $6,250 $6,000 $5,750 $5,500 Prior Peak was 2008:Q3 at $6.54 trillion Recent trough (2009:Q1) was $6.23 trillion, down 5.3% from prior peak Latest (2016:Q1) was $8.03 trillion, a new peak--$1.80 trillion (29%) above 2009 trough Growth rates 2011:Q1 over 2010:Q1: 5.5% 2012:Q1 over 2011:Q1: 4.2% 2013:Q1 over 2012:Q1: 2.5% 2014:Q1 over 2013:Q1: 4.3% 2015:Q1 over 2014:Q1: 4.5% 2016:Q1 over 2015:Q1: 4.5% 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 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 15:Q1 15:Q2 15:Q3 15:Q4 16:Q1 Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: National Bureau of Economic Research (recession dates); Insurance Information Institute. 31

32 Payroll vs. Workers Comp Net Written Premiums, E Payroll Base* $Billions $7,000 $6,000 $5,000 Wage & Salary Disbursements WC NPW 7/90-3/91 3/01-11/01 WC premium volume dropped two years before the recession began 12/07-6/09 WC NWP $Billions $50 $45 $40 $4,000 $3,000 $2,000 WC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in $35 $30 $25 Continued payroll growth and rate gains suggest WC NWP will grow again in *Private employment; Shaded areas indicate recessions. WC premiums are from NCCI through 2014; I.I.I. estimate for Sources: NBER (recessions); Federal Reserve Bank of St. Louis at (annualized as of Q4 2015); NCCI; I.I.I. 32

33 POSITIVE LABOR MARKET DEVELOPMENTS Key Factors Driving Workers Compensation Exposure 33

34 Average Weekly Hours of All Private Workers, March 2006 March 2016 (Hours Worked) Hours worked plunged during the recession, impacting payroll exposures Hours worked totaled 34.4 per week in March, just shy of the 34.6 hours typically worked before the Great Recession '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 *Seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at National Bureau of Economic Research (recession dates); Insurance Information Institute. 34

35 Average Hourly Wage of All Private Workers, March 2006 March 2016 (Hourly Wage) $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 Wage gains continued during the recession, despite massive job losses The average hourly wage was $26.43 in March 2016, up 19.8% from $21.22 when the recession began in Dec $0.00 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 *Seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at National Bureau of Economic Research (recession dates); Insurance Information Institute. 35

36 ADVERSE LONG-TERM LABOR MARKET DEVELOPMENTS Key Factors Harming Workers Compensation Exposure and the Overall Economy 36

37 Labor Force Participation Rate, Jan March 2016* Labor Force Participation as a % of Population Labor force participation remains far below prerecession levels but has improved modestly in recent months Large numbers of people are exiting (or not returning to the labor force) 62 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 *Defined as the percentage of working age persons in the population who are employed or actively seeking work. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics at National Bureau of Economic Research (recession dates); Insurance Information Institute. 37

38 Number of Discouraged Workers, Jan March 2016 Thousands 1,400 1,300 1,200 1,100 1, Discouraged Workers are people who have searched for work for so long in vain that they actually stop searching and drop out of the labor force Large numbers of people exited the labor force and were slow to return There were 585,000 discouraged workers in March 2016, down from 738,000 a year earlier '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 In recent good times, the number of discouraged workers ranged from 200, ,000 ( ) or from 300, ,000 ( ). Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted. Sources: Bureau of Labor Statistics ; NBER (recession dates); Ins. Info. Inst. 38

39 CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK The Construction Sector Is Critical to the Economy and the P/C Insurance Industry 39

40 Value of New Private Construction: Residential & Nonresidential, * Billions of Dollars $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 New Construction peaks at $ in 2006 $613.7 $298.1 Non Residential Residential Trough in 2010 at $500.6B, after plunging 55.1% ($411.2B) $261.8 $ : Value of new pvt. construction hits $846.2B as of Feb. 2016, up 69.0% from the 2010 trough but still 7.2% below 2006 peak * Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates $447.9 $398.3 *2016 figure is a seasonally adjusted annual rate as of February. Sources: US Department of Commerce ; Insurance Information Institute. 40

41 Value of Construction Put in Place, 2016 vs. 2015* Growth (%) 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 10.3% 10.6% 10.7% 10.6% Private sector construction activity is up in both the residential and nonresidential segments Total Construction Private: +10.6% Public: +9.2% Total Private Construction Residential-- Private Public sector construction activity is finally beginning to create less drag after years of decline Non- Residential-- Private 9.2% Total Public Construction -5.2% Residential- Public 9.5% Non- Residential-- Public Overall construction activity is up again after languishing in early 2015; state/local government sector may be recovering as budget woes ease in some jurisdictions. *seasonally adjusted data through February Source: U.S. Census Bureau, ; Insurance Information Institute. 41

42 New Private Housing Starts, F (Millions of Units) New home starts plunged 72% from ; A net annual decline of 1.49 million units, lowest since records began in 1959 Job growth, low inventories of existing homes, still-low mortgage rates and demographics should continue to stimulate new home construction for several more years F 17F 18F 19F20F 21F Insurers are continuing to see meaningful exposure growth in the wake of the Great Recession ; Construction is a potent driver of workers comp exposure. Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/16 for ; 3/16 for F; Insurance Information Institute. 42

43 Value of New Federal, State and Local Government Construction: * ($ Billions) $350 $300 $250 $216.1 Construction across all levels of government peaked at $314.9B in 2009 $220.2 $234.2 $255.4 $289.1 $308.7 $314.9 $304.0 $286.4 Austerity Reigns Govt. construction MAY finally be turning around; still down $17.1B or 5.4% since 2009 peak $279.3 $270.7 $275.7 $291.3 $297.8 $200 $150 $100 $50 $ * 2016* Government construction spending peaked in 2009, helped by stimulus spending, but contracted as state/local governments grappled with deficits and federal sequestration--only now recovering. *2016 figure is a seasonally adjusted annual rate as of February; Sources: US Department of Commerce; Insurance Information Institute. 43

44 Construction Employment, Jan March 2016* (Thousands) *Seasonally adjusted. Sources: US Bureau of Labor Statistics at Insurance Information Institute. 44 5,581 5,522 5,542 5,554 5,527 5,512 5,497 5,519 5,499 5,501 5,497 5,468 5,435 5,478 5,485 5,497 5,524 5,530 5,547 5,546 5,583 5,576 5,577 5,612 5,629 5,629 5,628 5,627 5,608 5,623 5,632 5,641 5,649 5,668 5,684 5,724 5,746 5,798 5,815 5,813 5,833 5,856 5,854 5,866 5,893 5,918 5,953 5,937 6,006 6,032 6,062 6,103 6,114 6,121 6,152 6,169 6,191 6,201 6,231 6,275 6,316 6,347 6,335 6,365 6,377 6,378 6,383 6,391 6,410 6,484 6,549 6,597 6,615 6,635 6,672 6,800 6,700 6,600 6,500 6,400 6,300 6,200 6,100 6,000 5,900 5,800 5,700 5,600 5,500 5,400 Construction employment is million above Jan (+22.8%) trough Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Construction and manufacturing employment constitute 1/3 of all WC payroll exposure.

45 Construction Employment, Jan March 2016 (Thousands) 8,000 Construction employment peaked at million 7,500 in April 2006 Construction employment as of March 2016 totaled million, an increase of 1.237MM jobs or 22.8% from the Jan trough 7,000 6,500 6,000 5,500 The Great Recession and housing bust destroyed 2.3 million constructions jobs Construction employment troughed at million in Jan. 2011, after a loss of million jobs, a 29.7% plunge from the April 2006 peak Gap between prerecession construction peak and today: 1.05 million jobs 5,000 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 The construction sector was a growth leader in as the housing market, private investment, and govt. spending recover. WC insurers continue to benefit. Note: Recession indicated by gray shaded column. Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute. 45

46 MANUFACTURING & ENERGY SECTOR OVERVIEW & OUTLOOK The U.S. Manufacturing and Energy Sectors Are Being Buffeted by a High Dollar, Weak Export Markets and Plunging Oil Prices 46

47 Dollar Value* of Manufacturers Shipments Monthly, Jan Feb $ Millions $500,000 $400,000 $300,000 $200,000 The value of Manufacturing Shipments in Feb was $462.8B down 9% from the July 2014 record high of $508.1B Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Weakness abroad, falling energy prices and a strong dollar are hurting the manufacturing sector, especially exports. Manufacturing growth leads to gains in many commercial exposures: WC, commercial auto, marine, property, and various liability coverages. * Seasonally adjusted; Data published Apr. 4, Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, and Orders, 47

48 ISM Manufacturing Index (Values > 50 Indicate Expansion) 65 January 2010 through April Manufacturing began to contract in late 2015 but seems to be rebounding Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 The manufacturing sector expanded for 70 of the 76 months from Jan through Apr Manufacturing sector has weakened recently due to weakness abroad, strong dollar and collapse in oil prices. Source: Institute for Supply Management at Insurance Information Institute. 48

49 Manufacturing Growth for Selected Sectors, 2016 vs. 2015* Growth (%) 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -2.2% 1.3% 2.9% Durables: +1.3% Non-Durables: -5.3% -14.3% -0.3% -1.6% -8.0% -6.8% 7.0% Manufacturing of nondurable goods is weaker than for durables -0.6% -5.6% -30.6% 1.6% -0.7%-0.5% All Manufacturing Durable Mfg. Wood Products Primary Metals Fabricated Metals Machinery Electrical Equip. Computers & Electronics Transportation Equip. Non-Durable Mfg. Food Products Petroleum & Coal Chemical Plastics & Rubber Textile Products Manufacturing is contracting across a number of sectors, especially petroleum and coal. Adverse exposure impacts are likely for: WC, commercial property, commercial auto and certain liability coverages. *Seasonally adjusted; Date are YTD comparing data through February 2016 to the same period in Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, and Orders, 49

50 Manufacturing Employment, Jan March 2016* (Thousands) 12, ,460 11,460 11,466 11,497 11,531 11,539 11,558 11,548 11,554 11,555 11,577 11,590 11,624 11,662 11,682 11,707 11,715 11,724 11,747 11,760 11,762 11,770 11,769 11,797 11,841 11,870 11,910 11,920 11,926 11,935 11,957 11,943 11,925 11,931 11,938 11,951 11,965 11,988 11,984 11,977 11,972 11,965 11,948 11,963 11,993 12,011 12,046 12,053 12,061 12,081 12,085 12,094 12,109 12,130 12,154 12,157 12,169 12,243 12,272 12,294 12,311 12,315 12,318 12,316 12,324 12,325 12,336 12,318 12,309 12,311 12,314 12,320 12,338 12,320 12,291 12,250 12,000 11,750 11,500 Since Jan 2010, manufacturing employment is up (+831,000 or +7.3%) and is now falling Manufacturing employment in March fell to its lowest level since Dec ,250 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 Manufacturing employment has been a surprising source of strength in the economy. Global economic weakness, falling oil prices have hurt. *Seasonally adjusted. Sources: US Bureau of Labor Statistics at Insurance Information Institute.

51 Employment in Oil & Gas Extraction, Jan March 2016* (000) Employment peaked in Oct at 201,500 its highest level since Dec *Seasonally adjusted Sources: US Bureau of Labor Statistics at Insurance Information Institute Oil and gas extraction employment is down 11.2% since Oct as oil prices sink 150 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16

52 The Sharing Economy: An Update The On-Demand Economy Will Transform the American Workforce and the P/C Insurance Industry Too 52

53 The Sharing Economy Has Grown And Attracted Political Scrutiny 53

54 Political Skepticism About the Gig Economy "Many Americans are making extra money renting out a spare room, designing a website... even driving their own car. This on demand or so called 'gig' economy is creating exciting opportunities and unleashing innovation, but it's also raising hard questions about workplace protections and what a good job will look like in the future." --Hillary Clinton, July 13,

55 Regulatory Issues Abound as Well, With Implications for Insurance Coverages A driver for Uber is an employee, not a contractor, according to a California Ruling that eventually could push up costs for the smartphone-based ride hailing service and hurt the closely watched start-up's valuation. The California Labor Commissioner's decision could ripple through the burgeoning industry of providing services via smartphones, with potential implications for other crowdsourced services such as Uber rival Lyft, chore service Task Rabbit, and cleaning service Home joy. --Reuters, June 18,

56 Percent of Americans Who Have Engaged in the Gig/Sharing Economy by Transaction Drivers have significant WC exposures About 22% of Americans have offered services in the sharing economy. Service platforms have the most direct link to WC; 11% of Americans have offered their services Sources: The SelfEmployed.com accessed at based on a poll by Time magazine, Burson-Marsteller and The Aspen Institute; Insurance Information Institute. 56

57 Americans Who Offer Services in the Sharing/Gig Economy Are Statistically More Prone to Workplace Injury Young, urban minority males are the most likely to offer their services in the sharing economy. Sources: The SelfEmployed.com accessed at based on a poll by Time magazine, Burson-Marsteller and The Aspen Institute; Insurance Information Institute. 57

58 Opinions Are Split on Whether the Sharing Economy Needs More Regulation The most frequent offerers of services though online platforms are equally divided over the need for more regulation Sources: The SelfEmployed.com accessed at based on a poll by Time magazine, Burson-Marsteller and The Aspen Institute; Insurance Information Institute. 58

59 THE INTERNET OF THINGS Capturing Economic Value Amid a Shifting Insurer Value Chain 59

60 The Internet of Things and the Insurance Industry Value Chain Who owns the data? Where does It flow? Who does the analytics? Who is the capital provider? Source: Willis Capital Markets & Advisory; Insurance Information Institute. 60

61 The Internet of Things and The Insurance-Net of Things 61

62 The Insurance Industry s Future Is in the Cloud Aviation Rail & Public Transport The Cloud Trucking & Fleet Vehicles Marine Transport Private Motor Vehicles 62

63 The Insurance Industry s Future Is in the Cloud Human Beings Rail & Public Transport Aviation Trucking & Fleet Vehicles The Cloud Marine Transport Private Motor Vehicles 63

64 OCCUPATIONAL DEATHS IN TRANSPORTATION: IS TECHNOLOGY THE SOLUTION? Technology Promises Safer Vehicles, Highways But How Much of this Is Silicon Valley Hype? 64

65 Fatal Occupational Injuries by Event: Transportation Accidents Lead by Far Transportation incidents accounted for 41% all occupational deaths in 2014 (1,984 our of 4,821 total) Source: US Bureau of Labor Statistics Insurance Information Institute.

66 Fatal Occupational Injuries Due to Transportation Incidents Roadway incidents accounted for nearly 60% of all transportation incidents in 2014 Source: US Bureau of Labor Statistics Insurance Information Institute.

67 Transportation Incidents Accounted for the Majority of Occupation Deaths in 2014 Transportation incidents accounted for 50% of the net increase in workrelated deaths in 2014 New technologies make reducing occupation deaths and injuries from transportation incidents relatively low-hanging fruit. Source: US Bureau of Labor Statistics Insurance Information Institute.

68 Deaths Involving Crashes with Large Trucks: Room for Improvement Deaths 4,000 3,500 3,000 2,500 2,000 1,500 2, = 3,660 Deaths 2004 = 5,099 Deaths Trucks crashes killed 33% fewer passenger vehicle occupants and 21% fewer truck occupants but only 6% fewer pedestrians, cyclists, etc. 3,693 Future Shock in WC: Cyber risks loom loom large 1, Passenger Vehicle Occupants Large Truck Occupants Motocyclists, Bicyclists, Pedestrian* Passenger Vehicle Occupants Large Truck Occupants Motocyclists, Bicyclists, Pedestrian* Despite improvements (-28% from ), truck crashes kill thousands of people every year. New technology could radically reduce occupational and non-occupational injuries and deaths from truck crashes. *includes Other and Unknown. Source: Source: IIHS analysis of data from the U.S. Department of Transportation's Fatality Analysis Reporting System (FARS) at Insurance Information Institute. 68

69 #RiskyRide SXSW March 13, 2016, Austin, TX

70 INSURANCE TECHNOLOGY: FIN TECH ZEROES IN Number and Value of Deals Is Increasing In Search of the Elusive Insurance Unicorn 70

71 Insurance Technology Financing Trend: Change Is Coming ($ Millions) $2,000 $1,800 Insurance tech deals reached a new record in 2016:Q1 $1, Investment $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $ $62 $29 $22 $18 11:Q1 11:Q2 11:Q3 11:Q4 13 Investment in insurance tech is rising $240 $31 $44 $71 $37 $107 $133 $32 $29 12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q $ $148 $82 $171 14:Q1 14:Q2 14:Q3 14:Q4 15:Q $369 $272 $650 15:Q2 15:Q3 15:Q4 16:Q1 Source: CB Insights at Insurance Information Institute Number of Deals 71

72 Insurance Tech Activity by Area of Interest, :Q1 (Percent) With the ACA in the rear view window, non-health insurance tech accounts for the majority of investment :Q1 Health Insurance Tech Non-Health Insurance Tech Total Silicon Valley and the venture capital community have the insurance industry in their sights. Most will fail. Some will succeed. Source: CB Insights at Insurance Information Institute.

73 Insurance Information Institute Online: Thank you for your time and your attention! Twitter: twitter.com/bob_hartwig Download at 73