Homeowners Insurance: Is a Minnesota Meltdown Coming?

Transcription

1 Homeowners Insurance: Is a Minnesota Meltdown Coming? Insurance Federation of Minnesota Minneapolis, MN November 1, 2011 Download at Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY Tel: Cell: bobh@iii.org

2 What in the World Is Going On? Is the World (Including Minnesota) Becoming a Riskier Place? What Are the Implications for the Insurance Industry and Policyholders? 2

3 Uncertainty, Risk and Fear Abound ECONOMIC & POLITICAL CONCERNS Global Economic Slowdown European Sovereign Debt, Bank & Currency Crises US Debt and Budget Crisis and S&P Downgrade Echoes of the Financial Crisis Housing Crisis Persistently High Unemployment Inflation/Deflation Runaway Energy & Commodity Prices Political Upheaval in the Middle East 2012 US Elections CATASTROPHIC LOSS Japan, New Zealand, Turkey, Haiti, Chile Earthquakes Nuclear Fears US: Tornadoes, Flooding, Wildfires, Hurricanes, Winter Storms Manmade Disasters (e.g., Deepwater Horizon) Cyber Attacks Resurgent Terrorism Risk (e.g., Bin Laden, Gadhafi Killings) Are Black Swans everywhere or does it just seem that way? 3

4 Minnesota s Homeowners Insurance Market Profitability and Growth in MN vs. Other Lines and States 4

5 Return of Net Worth, All Lines: MN vs. U.S., * (Percent) 20% 15% MN profitability is about average since 2000 but has lagged in recent years 10% 5% 0% Average US: 7.0% -5% MN: 68% 6.8% -10% US All Lines MN All Lines *Latest available. Sources: NAIC; Insurance Information Institute. 5

6 Return on Net Worth, Homeowners: MN vs. U.S., * (Percent) Average % US: 4.7% 40% MN: -14.4% 20% 0% MN profitability in the -20% Homeowners line at 14.4% on avg. since 2000, -40% is far worse than the US average and is more like -60% that of a coastal, hurricane-exposed state -80% US HO MN HO *Latest available. Sources: NAIC; Insurance Information Institute. 6

7 Return on Net Worth, Pvt. Passenger Auto: MN vs. U.S., % 20% 15% MN profitability in the private passenger auto is above the US average, but in this era of direct auto-only marketers selling home as a loss leader won t work 10% 5% 0% Average US: 7.2% MN: 11.3% US PP Auto MN PP Auto *Latest available. Sources: NAIC; Insurance Information Institute. 7

8 All Lines: 10-Year Average RNW MN & Nearby States % South Dakota 8.2% Indiana 8.0% Wisconsin 6.8% 63% 6.3% 7.6% 7.0% Minnesota All Lines profitability is below the US and regional average North Dakota U.S. Minnesota Illinois 0% 2% 4% 6% 8% 10% 12% Source: NAIC, Insurance Information Institute

9 Homeowners: 10-Year Average RNW MN & Nearby States Minnesota Homeowners profitability is below the US average and the regional average 2.2% 4.7% U.S. 1.6% Illinois South Dakota 0.4% Wisconsin -14.4% 4% -10.8% -5.5% Indiana North Dakota Minnesota -20% -15% -10% -5% 0% 5% 10% Source: NAIC, Insurance Information Institute

10 Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2008 (1) Minnesota ranked as the 14th most expensive state for homeowners insurance in 2008, with an average expenditure of $845. Most Average Least Average Rank expensive states expenditure Rank expensive states expenditure 1 Texas (3) $1,460 1 Idaho $387 2 Florida (4) 1,390 2 Utah Louisiana ,155 3 Oregon Oklahoma 1,048 4 Washington Massachusetts 1,026 5 Wisconsin New York Delaware Connecticut t Ohio Mississippi Maine D.C Pennsylvania Kansas Kentucky 601 (1) States with the same premium receive the same rank. (2) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides all risks coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. (3) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms. (4) Florida data excludes policies written by Citizen's Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly comparable to other states. Note: Average premium=premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data. Source: 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC. 10

11 Homeowners Average Expenditure by State, 2008: Highest 25 States 1,600 1,200 1,460, ,155 1,048 1, MN ranks as the 14 th t expensive state for homeowners insurance 1, th most 1, TX FL LA OK MA NY CT MS DC KS CA RI HI AK AL MN CO NE ND US SC AR MOGAMT MI Note: Average premium=premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data. Source: 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC. 11

12 Homeowners Average Expenditure by State, 2008: Lowest 25 States NM NV TN NJ NC WY IN VT NH WV MD AZ IL IA SD VA KY PA ME OH DE WI WA OR UT ID Note: Average premium=premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data. Source: 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC. 12

13 MN Homeowners Average Expenditure, * $900 $800 $700 The average expenditure on homeowners insurance in MN was $54 or 6.8% above the US avg. of $791 in 2008, 14thh highest in the country. Avg. expenditure climbed 125% between 1998 and $733 $767 $790 $788 $800 $845 $600 $590 $500 $400 $375 $390 $420 $464 $ *Latest available. Note: Average premium=premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data. Source: 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC. 13

14 PP Auto: 10-Year Average RNW MN & Nearby States % South Dakota 11.3% Minnesota 10.3% North Dakota 8.9% 8.7% 7.6% 72% 7.2% Minnesota PP Auto profitability is above the US and regional average Wisconsin Indiana Illinois U.S. 0% 5% 10% 15% Source: NAIC, Insurance Information Institute

15 Top Ten Most Expensive And Least Expensive States For Automobile Insurance, 2008 (1) Most Average Least Average Rank expensive states expenditure Rank expensive states expenditure 1 D.C. $1,126 1 North Dakota $503 2 Louisiana 1,105 2 Iowa New Jersey 1,081 3 South Dakota Florida 1,055 4 Nebraska New York 1,044 5 Idaho Delaware 1,007 6 Kansas Rhode Island Wisconsin Nevada North Carolina Connecticut Maine Maryland Indiana 612 Minnesota ranked 30th in 2008, with an average expenditure for auto insurance of $698. (1) Based on average automobile insurance expenditures. Source: 2010 National Association of Insurance Commissioners. 15

16 All Lines DWP Growth: MN vs. U.S., (Percent) 20% Average All Lines Direct US: 44% 4.4% Written Premium (DPW) growth in MN 15% MN: 4.2% is little different from the US overall since 10% over the past decade 12.0% 12.2% %.4% % 11.4% 7.4% 5% 0% 3.9% 2.2% 3.4% 0.5 5% 2.1% 1.5% 0.0 % % -5% -0.4% -0.3% -2..1% -3.3% -3.9% -10% US DWP: All Lines MN DWP: All Lines Source: SNL Financial. 16

17 Personal Lines DWP Growth: MN vs. U.S., (Percent) 20% 15% 10% 5% 0% -5% 8.2% 9.4% 11.1% 13.5% 9.2% 9.8% Average % 2.6% US: 43% 4.3% MN: 3.9% 2.3% -1.2% 2.3% -1.9% 1.2% -0.4% Personal Lines DPW growth has been slower, on average, in MN relative to the US overall -0.1% 0.4% 1.1% 3.1% 2.5% 3.4% -10% US DWP: Personal Lines MN DWP: Personal Lines Source: SNL Financial. 17

18 Homeowner s MP DWP Growth: MN vs. U.S., (Percent) 30% 25% 20% 15% 10% 5% 0% % % 14.4% % 13.5% 20.5% 11.1% 8.1% Average US: 97% 9.7% MN: 7.6% 7.3% 3.0% 7.4% 0.8 8% 4.2% 3.5% Homeowners DPW growth has generally been higher in MN compared to the US overall 0.5 5% 5.2% 3.9% 8.9 9% 4.9% 7.7% US DWP: HO Lines MN DWP: HO Lines Source: SNL Financial. 18

19 Private Passenger Auto DWP Growth: MN vs. U.S., (Percent) 15% 10% 8.2% 8.2% 10.2% 10.2% 7.9% 6.3% Average US: 32% 3.2% MN: 1.6% PP Auto DPW growth from in MN was half the US average 5% 3.6% 0% 0.6% 0.6% 0.5% 0.0% -0.1% 0.3% % 1.5 % 1.0% -5% -3.0% -3.2% -2.2% % US DWP: PP Auto MN DWP: PP Auto Source: SNL Financial. 19

20 Leading Writers of HO Insurance in Minnesota by DPW, 2010 (1) Rank Company/Group DPW ($ 000) Market share 1 State Farm Mutual Automobile Insurance $399, % 2 American Family Mutual $209, % 3 Zurich Financial Services Ltd. $144, % 4 Allstate Corp. $84, % 5 Auto-Owners Insurance Co. $76, % 6 Liberty Mutual $50, % 7 Travelers Companies Inc. $48, % 8 MetLife Inc. $42, % 2.8% 9 USAA Insurance Group $35, % 10 Nationwide Mutual Group $33, % MN s homeowners insurance market remains competitive with dozens of insurers despite recent poor results 11 Auto Club Insurance Association Group $33, % 12 Western National Insurance Group $32, % 13 North Star Mutual Insurance Co. $28,499 19% 1.9% 14 COUNTRY Financial $25, % 15 Chubb Corp. $21, % 16 Hartford Financial Services $20, % 17 State Auto Insurance Companies $17, % 18 Austin Mutual Insurance Co. $15, % 1.0% 19 Homesite Group Inc. $13, % 20 Horace Mann Educators Corp. $13, % 21 Farm Bureau P&C Insurance Co. $12, % 22 American National Insurance $10, % 23 West Bend Mutual Insurance Co. $8, % 24 Grange Mutual Casualty Co. $8, % 25 Westfield Group $7, % (1) Before reinsurance transactions. Source: SNL Financial LC. 20

21 The Fifteen Costliest U.S. Winters by Insured Losses, (1) ($ mill) Rank Date Event Location Overall economic losses Incurred losses when occurred (2) Deaths 1 Mar , 1993 Blizzard 24 states affected $5,000 $1, Winter storm, Northeast, Southeast, South: CT, D.C., DE, GA, LA, MA, MD, Apr , 2007 tornadoes, floods ME, MS, NC,NH, NJ, NY, PA, RI, SC, TX, VA, VT, WV 2,000 1, Dec , 1992 Winter storm Northeast, Midwest; VA, MD, DE, NJ, NY, CT, RI, MA, NE 3,000 1, FL, GA, ID, IL, IN, IA, KS, KY, LA, MD, MA, MI, MN, MS, MO, MT, NE, NJ, NY, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, Dec , 1983 Winter storms TX, UT, VA, WA, WV, WI, WY 1, Winter damage, cold Jan , 1994 wave Midwest 1, South, Southeast: TX, OK, AR, LA, MS, AL, TN, GA, SC, NC, Feb , 1994 Winter damage VA 3, South, Midwest, Southeast, Northeast: TX, OK, AR, MO, LA, MS, AL, GA, FL, SC, NC, TN, IL, IN, OH, PA, WV, VA, MD, Jan. 1-4, 1999 Winter storm DE, NJ, NY, CT, RI, MA, ME 1, Jan. 4-9, 2008 Winter storm South, Southwest, Midwest, North, Northeast, Northwest: AR, CA, CO, IL, IN, KS, MI, MO, NY, OH, OK, OR, WA, WI, NV 1, Jan. 31-Feb. 6, 1996 Winter damage 31 states affected 1, Jan. 6-9, 1996 Snowstorm Midwest, Northeast 1, Winter storm, blizzards, winter VA, KY, SC, MS, MD: Dundalk, Harford; DC, DE, PA, NJ, NY, Feb damage RI, MA, OH, IL, IA, TX, OK, NC, WV NA Winter damage, ice Midwest, North, Northeast, Southeast: IL, IN, MI, OH, PA, Jan , 1999 storm WV, VA, MD, NJ, NY, CT, MA, VT, NH, ME NA Winter damage, ice Southeast, South Central, East, Midwest: AR, IN, KY, MO, Jan , 2009 storm OH, OK, WV 1, Southeast, South, Northeast: AL, GA, LA, NC, SC, TN, VA, Jan , 2000 Winter storm D.C., NY, PA, MA Southwest, Northwest, Southeast: CA, OR, FL, GA, LA, NC, Jan. 3-10, 1995 Winter storms, flood SC 1, (1) Costliest U.S. winters occurring from 1980 to 2010, based on insured losses when occurred. (2) Based on property losses including, if applicable, agricultural, offshore, marine, aviation and National Flood Insurance Program losses in the United States and may differ from data shown elsewhere. NA=Data not available. Source: 2011 Munich Re, Geo Risks Research, NatCatSERVICE. 21

22 Minnesota s Catastrophe Loss History It May Not Be a Coastal State, but MN is No Stranger to Catastrophe 22

23 Severe Weather Reports in Minnesota, January 1 October 25, 2011 There were 552 severe weather reports in MN through Oct. 25 MN Total Reports = 552 Tornadoes = 30 (Red) Hail Reports = 192 (Green) Wind Reports = 330 (Blue) Source: NOAA Storm Prediction Center; 23

24 States With Highest Insured Catastrophe Losses, 2007 ($ millions) State Estimated insured loss (1) California $1,427 Minnesota 747 Texas 677 Georgia 320 Illinois 272 Oklahoma 270 Kansas 262 Missouri 223 New York 202 Colorado 200 Alabama 200 (1) Does not include flood damage covered by the federally administered National Flood Insurance Program. Note: Catastrophes are assigned serial numbers by the Property Claim Services (PCS) unit of ISO when the insured loss to the industry resulting from an occurrence reaches at least $25 million and affects a significant number of policyholders and insurers. Source: ISO s Property Claims Services (PCS) unit. 24

25 Top Ten States By Highest Insured Catastrophe Losses, 2008 ($ millions) Rank State Estimated insured loss 1 Texas $11, Louisiana 2, Minnesota 1, Ohio 1, Georgia 1, Arkansas Indiana Kentucky Illinois Kansas Note: Catastrophes are assigned serial numbers by the Property Claim Services (PCS) unit of ISO when the insured loss to the industry resulting from an occurrence ce reaches es at least $25 million and affects a significant number of policyholders o and insurers. s Source: ISO's Property Claims Services (PCS) unit. 25

26 MN & U.S. Homeowners Loss Ratio, Minnesota had some very bad 160 years in the home insurance line, 140 with loss ratios well over 100% MN U.S. Source: SNL Financial. 26

27 Homeowners Insurance Combined Ratio: P P Homeowners Line Could Deteriorate in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected Due to Local Catastrophe Loss Activity Sources: A.M. Best ( ); Insurance Information Institute (2011P).

28 Number of Federal Disaster Declarations In Minnesota, * There have been 48 federal disaster declarations in MN since The average number of declarations per year is 0.8 from , though the number has been higher in recent years 3 federal disaster declarations were made through Oct. 31 in MN for severe storms, tornadoes and flooding between May and July * The Number of Federal Disaster Declarations Spike in 2010 and 2011 with Three Events Each Year, Second Only to 1997 *Through October 31, Source: Federal Emergency Management Administration: ; Insurance Information Institute.

29 Average Number of Tornadoes per Year, Minnesota averaged 51 tornadoes per year from , but experiences only 30 in 2011 through Oct. 25 Source: NOAA at 29

30 Tornado by County, MN is on the northern edge of tornado alley Source: NOAA at 30

31 Tornado Tracks by EF Scale, Minnesota has experiences every strength of tornado, including EF-5 storms Source: NOAA at: 31

32 2010 Tornado and Severe Thunderstorm Watches & Departure from Average MN tornado activity was well above average in 2010 Source: NOAA at 32

33 U.S. Insured Catastrophe Loss Update 2011 CAT Losses Already Greatly Exceed All of 2010 and Will Become One of the Most Expensive Years on Record 33

34 US Insured Catastrophe Losses ($ Billions) $120 $60 $100 Billion CAT Year is Coming Eventually $ s: A Decade of Disaster Record Tornado 2000s: $193B (up 117%) Losses Caused $ CAT Losses 1990s: $89B to Surge $61.9 $100.0 $40 $20 $0 $7.5 $2.7 $4.7 $22.9 $5.5 5 $16.9 $8.3 $7.4 $2.6 $ $8.3 $4.6 $26.5 $5.9 $ $27.5 $9. 2 $6.7 $27.1 $ $ $ *20?? First Half 2011 US CAT Losses Already Exceed Losses from All of Even Modest Hurricane Losses Will Make 2011 Among the Most Expensive Ever for CATs *Estimate through Sept. 30, 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. Sources: Property Claims Service/ISO; Insurance Information Institute. 34

35 Top 12 (13?) Most Costly Disasters in U.S. History (Insured Losses, 2010 Dollars, $ Billions) Taken as a single event, the Spring 2011 tornado season would likely become 5 th costliest event in US insurance history $50 $45 $40 y $35 $30 $25 $20 $15 $10 $5.3 $6.3 $6.7 $4.3 $5 $0 Jeanne (2004) Frances (2004) Rita (2005) Hugo (1989) $8.2 Ivan (2004) $8.6 Charley (2004) $11.5 Wilma (2005) $12.8 $14.0 Ike (2008) Spring Tornadoes* (2011) $17.5 Northridge (1994) $22.6 $23.1 $45.8 Andrew 9/11 Attack Katrina (1992) (2001) (2005) *Losses will actually be broken down into several events as determined by PCS. Sources: PCS; Insurance Information Institute inflation adjustments. 35

36 Combined Ratio Points Associated with Catastrophe Losses: :H1* Combined Ratio Points Avg. CAT Loss Component of the Combined Ratio 10 by Decade s: s: s: s: s: s: 4.15* The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades E *Insurance Information Institute estimates for 2010 and 2011:H1 Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers. Source: ISO; Insurance Information Institute. 36

37 Natural Disasters in the United States, * Number of Events (Annual Totals and First Half 2011) There were 98 natural disaster events in the first half of Number Geophysical (earthquake, tsunami, volcanic activity) Meteorological (storm) Hydrological (flood, mass movement) Climatological (temperature extremes, drought, wildfire) *Through June 30. Source: MR NatCatSERVICE 37 2

38 U.S. Thunderstorm Loss Trends, * Thunderstorm losses in the first half of 2011 totaled $16.4 billion, a new annual record through just 6 months Average thunderstorm losses are up more than 8 fold since the early 1980s Hurricanes get all the headlines, but thunderstorms are consistent producers of large scale loss are the most expensive years on record. *Through June 30, Source: Property Claims Service, MR NatCatSERVICE 38

39 U.S. Winter Storm Loss Trends, (Annual Totals) vs. First Half 2011 Insured winter storm losses in 2011 totaled $1.4 billion and are up 50% since Source: Property Claims Service, MR NatCatSERVICE 39

40 U.S. Acreage Burned by Wildfires, (Annual Totals) vs. First Half could be a severe year for wildfire damage. Acres burned through June 30 already exceed all of Source: National Forest Service, MR NatCatSERVICE 40

41 Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, :H1 1 Wind/Hail/Flood (3), $12.7 Fires (4), $9.0 Other (5), $0.6 Geological Events, $ % 4.9%3.4%0.2% Terrorism, $ % Winter Storms, $ % Tornado share of CAT losses is rising Tornadoes (2), $ % 42.7% Hurricanes & Tropical Storms, $160.5 Wind losses are by far cause the most catastrophe losses, even if hurricanes/ts are excluded. 1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars. 2. Excludes snow. 3. Does not include NFIP flood losses 4. Includes wildland fires 5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation. Source: ISO s Property Claim Services Unit. 41

42 Number of Federal Disaster Declarations, * There have been 2,036 federal disaster declarations since The average number of declarations per year is 34 from , though that few haven t been recorded since The number of federal disaster declarations set a new record in 2011, with 86 declarations through h Sept. 30. It is no wonder that FEMA is broke! * The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011 *Through October 31, Source: Federal Emergency Management Administration: ; Insurance Information Institute.

43 Federal Disasters Declarations by State, 1953 Oct. 31, 2011: Highest 25 States clarations saster De Di MN has had 48 federal disaster declarations since 1953, less than one per year, on average (1 declaration about every 1.2 years) Over the past nearly 60 years, Texas has had the highest number of Federal Disaster Declarations TX CA OK NY FL LA AL KY AR MO IL MS TN IA MN KS NE PA WV OH WA VA ND NC IN Source: FEMA: Insurance Information Institute. 43

44 Federal Disasters Declarations by State, 1953 Oct. 31, 2011: Lowest 25 States* isaster De eclarations D Over the past nearly 60 years, Wyoming, Utah and Rhode Island had the fewest number of Federal Disaster 3Declarations ME SD GA AK WI VT NJ NH OR MA PR HI MI AZ ID NM MD MT NV CO CT SC DE DC RI UT WY *Includes Puerto Rico and the District of Columbia. Source: FEMA: Insurance Information Institute. 44

45 SPRING 2011 TORNADO & SEVERE STORM OUTBREAK 2011 Will Be Among the Most Deadly and Expensive for Tornadoes In History 45

46 Number of Tornadoes and Related Deaths, * Numb ber of Tornad does 2,000 Number of Tornadoes ,800 1,600 1,400 1,200 1, , ,13 32 Number of Deaths 1,297 1, ,082 1,234 1, ,1 1,424 1,345 Tornadoes have already claimed more than 500 lives 1, , ,376 1,819 1,264 1,10 03 There were 1,805 tornadoes recorded in the US by Oct. 13 1, , , ,282 1, Num mber of Dea aths P Insurers Expect to Pay at Least $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin *2011 is preliminary data through October 13. Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service. 46

47 U.S. Tornado Count, * There were 1,819 tornadoes in the US in 2011 through h Oct. 29, far above average, but well below 2008 srecord Deadly and costly April/ May spike Source: *Through October

48 Insurers Making a Difference in Impacted Communities Destroyed home in Tuscaloosa. Insurers will pay some 165,000 claims totaling $2 billion in the Tuscaloosa/ Birmingham areas alone. Presentation ti of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm Recovery Fund Source: Insurance Information Institute 48

49 Location of Tornadoes in the US, January 1 October 13, ,805 tornadoes killed 546 people through Oct. 13, including at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in Joplin on May 22 Source: NOAA Storm Prediction Center; 49

50 Location of Large Hail Reports in the US, January 1 October 13, 2011 There were 9,287 Large Hail reports through Oct. 13, causing extensive damage to homes, businesses and vehicles Source: NOAA Storm Prediction Center; 50

51 Location of Wind Damage Reports in the US, January 1 Oct. 13, 2011 There were 18,293 Wind Damage reports through Oct. 13, causing extensive damage to homes and, businesses Source: NOAA Storm Prediction Center; 51

52 Severe Weather Reports, January 1 October 13, 2011 There have been 29,385 severe weather reports through Oct. 13; including 1,805 tornadoes; 9,287 Large Hail reports and 18,293 high wind events Source: NOAA Storm Prediction Center; 52

53 Number of Severe Weather Reports in US, by Type: January 1 October 13, 2011 Tornadoes, 1,805, 6% Large Hail, 9,287, 32% Wind Damage, 18,293, 62% Tornadoes accounted for just 6% of all Severe Weather Reports through October 13 but more than 500 deaths Source: NOAA Storm Prediction Center;

54 Global Catastrophe Loss Developments and Trends 2011 and 2010 Are Rewriting Catastrophe t Loss and Insurance History 54

55 Global Catastrophe Loss Summary: First Half Is Already (as of June 30) the Highest Loss Year on Record Globally Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss $260 Billion in Economic Losses Globally New record for the first six months, exceeding the previous record of $220B in 2005 Economy is more resilient than most pundits presume $55 Billion in Insured Losses Globally More than double the first half 2010 amount Over 4 times the 10-year average $27 Billion in Economic Losses in the US Represents a 129% increase over the $11.8 billion amount through the first half of 2010 $17.3 Billion in Insured Losses in the US Arising from 100 CAT Events Represents a 162% increase over the $6.6 billion amount through the first half of

56 Natural Loss Events, January September 2011 World Map Source: MR NatCatSERVICE 56

57 Worldwide Natural Disasters 2011 Significant Natural Disasters (January September only) Source: MR NatCatSERVICE 57

58 Worldwide Natural Disasters 2011 % Distribution of Insured Losses Per Continent (January June only) Insured losses 2011 (January June only): US$ 60bn 29% <1% 49% <1% <1% Continent Insured losses [US$ m] in 2011 Jan - June Africa minor America 17,800 Asia 30, Australia/Oce ania 12,900 Europe 100 Source: MR NatCatSERVICE 21% 58

59 Worldwide Natural Disasters, % Distribution of Insured Losses Per Continent (January June only) Insured losses (January June only): US$ 389bn 58% 21% 12% <1% 2% Continent Insured losses [US$ m] Jan June only Africa 1,000 America 237,200 Asia 45,100 Australia/Oce ania 25,100 Europe 80,900 6% Source: MR NatCatSERVICE 2011 Munich Re 59

60 US Second Quarter Insured Catastrophe Losses, $ Billions $16 $14 $12 $10 Q2 CAT losses from average $4.0 billion. 2011:Q2 CAT losses were nearly 4 times that amount at $15.09 billion 2011:Q2 CAT losses totaled $15.09 billion and are the highest on record $ $15.09 $8 $6 $4 $2 $1.46 $6.24 $2.79 $5.05 $2.33 $0.93 $5.04 $2.30 $7.11 $4.47 $6.38 $ Record Q2 (and First Half) CAT Losses Will Adversely Impact Insurer Results in 2011 Sources: ISO/PCS; Insurance Information Institute. 60

61 Top 15 Most Costly World Insurance Losses, * (Insured Losses, 2010 Dollars, $ Billions) $80 Three of the top 15 most expensive catastrophes in world history have occurred in the past 18 months $70 y $60 $50 $40 $30 $20 $10 $0 $7.8 $8.0 $8.0 $9.0 $9.3 $23.1 $24.9 $20.5 $20.8 $11.3 $14.0 $14.9 $10.0 $35.0 $72.3 Winter Chile Hugo TyphoonCharley New Rita Wilma Ivan Ike Northridge WTC Andrew de Japan Katrina a Storm Daria (1991) Quake (2010) (1989) Mirielle (1991) (2004) Zealand (2005) Quake (2011) (2005) (2004) (2008) (1994) Terror Attack (2001) (1992) Quake, Tsunami (2011)* (2005) *Through June 20, disaster figures are estimates; Figures include federally insured flood losses, where applicable. Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute. 61

62 Top 16 Most Costly World Insurance Losses, * (Insured Losses, 2010 Dollars, $ Billions) Taken as a single event, the $80 Spring 2011 tornado and $70 thunderstorm season would $60 likely become the 7 th $50 costliest event in global $40 insurance history $30 $20 $10 $0 $7.8 $8.0 $8.0 $9.0 $9.3 3 of the top 15 most expensive catastrophes in world history have occurred in the past 18 months $20 5$20.8 $23.1$24.9 $10.0$11.3 $14.0 $14.9 $16.3$20.5 $35.0 $72.3 Winter Chile Hugo Typhoon Charley New Rita Wilma Ivan Spring Ike NorthridgeWTC TerrorAndrew Japan Katrina Storm Daria (1991) Quake (2010) (1989) Mirielle (1991) (2004) Zealand Quake (2011) (2005) (2005) (2004) Tornadoes/ (2008) Storms (2011) (1994) Attack (2001) (1992) Quake, Tsunami (2011)* (2005) *Through June 20, disaster figures are estimates; Figures include federally insured flood losses, where applicable. Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute. 62

63 Worldwide Natural Disasters, * Number of Events There were 355 events through the first 6 months of Geophysical events (Earthquake, tsunami, volcanic eruption) Meteorological events Hydrological events Climatological events (Storm) (Flood, mass (Extreme temperature, movement) drought, forest fire) *2011 figure is through June 30. Source: MR NatCatSERVICE 63

64 Worldwide Natural Disasters , Overall and Insured Losses* First Half 2011 Overall Losses: $265 Bill Insured Losses: $60 Bill 200 US S$bn Overall losses (in 2011 values) Insured losses (in 2011 values) *2011 figure is through June 30. Source: MR NatCatSERVICE 2011 Munich Re 64

65 Global Property Catastrophe Rate on Line Index, YTD (6/1/11) A modest increase in global property catastrophe reinsurance pricing was evident in June 1 renewals in the wake of record global catastrophe losses. Larger increase could occur for the Jan.1, 2012 renewals Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.

66 P/C Insurance Industry Financial Overview Profit Recovery Will Be Set Back by High CATs, Low Interest Rates, Diminishing Reserve Releases 66

67 P/C Net Income After Taxes :H1 ($ Millions) $80, ROE*= 9.6% 2006 ROE = 12.7% $70, ROE = 10.9% 2008 ROE = 0.3% $60, ROAS 1 = 5.9% $50, ROAS = 6.5% 2011:H1 ROAS = 17% 1.7% $40,000 $30,000 $20,000 $10,000 $14,178 $5,840 $19,3 316 $10,870,598 $20 $2 24,404 P-C Industry 2011:H1 profits were down 71.6% to $4.8B vs. 2010:H1, due to high catastrophe losses and as non-cat underwriting results deteriorated 9 $36,81 $30,773 $21 1,865,559 $20 $3 3,046 $30,029 $38,5 501 $4 44,155 $6 65,777 $62,,496 $3 3,043 $28,672 $34,670 $4,758 $0 -$10,000 -$6, * * ROE figures are GAAP; 1 Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 2.3% ROAS for 2011:H1, 7.5% for 2010 and 7.4% for Sources: A.M. Best, ISO, Insurance Information Institute

68 A 100 Combined Ratio Isn t What It Once Was: Investment Impact on ROEs Combined Ratio / ROE % % 59% % 9.6% 8.9% A combined ratio of about 100 generated ~7.5% ROE in 2009/10, 10% in 2005 and 16% in % % % % % 18% 15% 12% 9% 6% 3% * 2009* 2010* 2011:H1* 0% Combined Ratio ROE* Combined Ratios Must Be Lower in Today s Depressed Investment Environment to Generate Risk Appropriate ROEs * 2009 and 2010 figures are return on average statutory surplus figures exclude mortgage and financial guaranty insurers. 2011H1 combined ratio including M&FG insurers is 110.5, ROAS = 2.3%. Source: Insurance Information Institute from A.M. Best and ISO data.

69 P/C Insurance Industry Combined Ratio, :H1* As Recently as 2001, Insurers Paid Out Nearly $ for Every $1 in Earned Premiums Heavy Use of Reinsurance Lowered Net Losses Relatively Low CAT Losses, Reserve Releases Relatively Low CAT Losses, Reserve Releases Higher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market Best Combined Ratio Since 1949 (87.6) Cyclical Deterioration Avg. CAT Losses, More Reserve Releases * * Excludes Mortgage & Financial Guaranty insurers Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=110.5 Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-m&fg was 102.2). 69

70 Underwriting Gain (Loss) * ($ Billions) Underwriting $35 Cumulative underwriting deficit $25 from 1975 through h 2010 is $455B $15 $5 -$5 -$15 -$25 losses in 2011 will be much larger: $24.1B based on H1 data -$35 -$45 -$55 The industry recorded a $10.4B underwriting loss in 2010 compared to $3.0B in * Large Underwriting Losses Are NOT Sustainable in Current Investment Environment * Includes mortgage and financial guaranty insurers in all years figure is actual H1 underwriting losses of $ billion. Sources: A.M. Best, ISO; Insurance Information Institute.

71 Financial Strength & Underwriting Cyclical Pattern is P-C Impairment History is Directly Tied to Underwriting, Reserving & Pricing 71

72 P/C Insurer Impairments, of the 18 in 2009 were small Florida carriers. Total also includes a few title insurers The Number of Impairments Varies Significantly ifi Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets Source: A.M. Best Special Report Impairment Review, June 21, 2010; Insurance Information Institute.

73 P/C Insurer Impairment Frequency vs. Combined Ratio, Combined Ratio after Div P/C Impairment Frequency Ratio Impai Combined rment Rate impairment rate was 0.35%, down from 0.65% in 2009 and near the record low of 0.17% in 2007; Rate is still less than one-half the 0.81% average since Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007 Source: A.M. Best; Insurance Information Institute 73

74 Reasons for US P/C Insurer Impairments, Historically, Deficient Loss Reserves and Inadequate Pricing Are By Far the Leading Cause of P-C Insurer Impairments. Investment and Catastrophe Losses Play a Much Smaller Role Sig. Change in Business Misc. 8.6% Reinsurance Failure 3.6% 40% 4.0% Investment Problems (Overstatement of Assets) 7.3% Deficient Loss Reserves/ 40.3% Inadequate Pricing Affiliate Impairment 7.8% 7.1% Catastrophe Losses 7.8% Alleged Fraud 13.6% Rapid Growth Source: A.M. Best: Impairment Review, Special Report, April

75 Number of Recessions Endured by P/C Insurers, by Number of Years in Operation Number of Recessions Since Insurers are true survivors not just of natural 32 catastrophes but also economic ones Number of Years in Operation Many US Insurers Are Close to a Century Old or Older Sources: Insurance Information Institute research from National Bureau of Economic Research data. 75

76 SURPLUS/CAPITAL/CAPACITY Have Large Global Catastrophe Losses Reduced d Capacity in the Industry, Setting the Stage for a Market Turn? 76

77 US Policyholder Surplus: * ($ Billions) $600 $550 $500 $450 $400 $350 $300 Surplus as of 6/30/11 was a near-record $559.1 down 1% from the record $564.7B as of 3/31/11, but up 27.9% ($122B) from the crisis trough of $437.1B at 3/31/09. Prior peak was $521.8 as of 9/30/07. Surplus as of 6/30/11 was 7.1% above 2007 peak. $250 Surplus is a measure of $200 underwriting capacity. It is $150 analogous to Owners Equity or Net Worth in $100 non-insurance $50 organizations $ * The Premium-to-Surplus Ratio Stood at $0.78:$1 as of 6/30/11, A Near Record Low (at Least in Recent History)** * As of 6/30/11. Source: A.M. Best, ISO, Insurance Information Institute.

78 Policyholder Surplus, 2006:Q4 2011:Q2 ($ Billions) $580 $560 $540 $520 $500 $480 $460 $440 $ :Q3 Previous Surplus Peak $521.8 $517.9 $512.8 $515.6 $505.0 $496.6 $487.1 $478.5 The Industry now has $1 of surplus for every $078 $0.78 of NPW the strongest claimspaying status in its history. Surplus as of 6/30/11 fell by 1% below its all time record high of $564.7B set as of 3/31/11. Further declines are likely $455.6 $437.1 $463.0 $490.8 $511.5 $556.9 $559.1 $540.7 $544.8 $ :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:Q2 *Includes $22.5B of paid-in capital from a holding company parent for one insurer s investment in a non-insurance business in early Sources: ISO, A.M.Best. Quarterly Surplus Changes Since 2007:Q3 Peak 09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%) 09:Q3: -$31.0B (-5.9%) 09:Q4: -$10.3B (-2.0%) 10:Q1: +$18.9B (+3.6%) 10:Q2: +$8.7B (+1.7%) 10:Q3: +$23.0B (+4.4%) 4%) 10:Q4: +$35.1B (+6.7%) 11:Q1: +$42.9B (+8.2%) 11:Q2: +37.3B (+7.1%) 78

79 The Strength of the Economy Will Influence P/C Insurer Growth Opportunities Growth Would Also Help Absorb Excess Capital 79

80 US Real GDP Growth* 6% 4% 2% 0% Real GDP Growth (%) 4.1% 1.1% 1.8% 2.5% 3.6% 3.1% 2.7% 0.9% 3.2% The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8% 2.3% 2.9% 0.6% 1.6% 5.0 0% 3.9% 3.8% 2.5% 2.3% 0.4% 1.3% 2.5% 1.9% 1.9% 2.2% 2.5% 2.7% -2% -4% -6% -8% Recession began in Dec Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underway -0.7% -4.0% -6.8% -4.9% -0.7% 2011 got off to a sluggish start, but growth is expected to proceed at a more modest, though still relatively weak pace through :1 Q 07:2 2Q 07:3 3Q 07:4 4Q 08:1 Q 08:2 2Q 08:3 3Q 08:4 4Q 09:1 Q 09:2 2Q 09:3 3Q 09:4 4Q 10:1 Q 10:2 2Q 10:3 3Q 10:4 4Q 11:1 Q 11:2 2Q 11:3 3Q 11:4 4Q 12:1 Q 12:2 2Q 12:3 3Q 12:4 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 * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 10/11; Insurance Information Institute. 80

81 Real GDP Growth: Minnesota vs. US, % 6% 4% 2% 0% -2% -4% 5.30% 4.50% 6.80% 4.4% 4.8% 42% 4.2% 0.80% MN s economy underperformed the US prior to the recession, in part because it did not experience a home building bubble 4.10% 3.40% 28% 2.8% 2.6% 27% 2.7% 2.30% 3.20% 3.4% 1.3% 1.9% 1.40% 1.7% 2.1% 1.70% 0.20% -0.3% 0.30% Minnesota GDP Growth US GDP Growth MN s economy has closely tracked the US economy overall in recent years -2.5% -2.90% Florida s Dependence on the Construction Sector Will Cause it to Lag the Economic Recovery in the US Overall Source: Bureau of Economic Analysis; Insurance Information Institute. 81

82 New Private Housing Starts, F (Millions of Units) New home starts plunged % from ; A net annual decline of million units, 1.5 lowest since records began in The plunge and lack of recovery in homebuilding and in construction in general is holding back payroll exposure growth Job growth, improved credit market conditions and demographics will eventually boost home construction F12F13F14F15F16F17F18-22F Little Exposure Growth Likely for Homeowners Insurers Until Also Affects Commercial Insurers with Construction Risk Exposure, Surety Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11); Insurance Information Institute. 82

83 Labor Market Trends Massive Job Losses Sapped the Economy and Commercial/Personal Lines Exposure, But Trend is Improving 83

84 Unemployment and Underemployment Rates: Stubbornly High in 2011 January 2000 through September 2011, Seasonally Adjusted (%) 18 Traditional Unemployment Rate U Unemployment + Underemployment Rate U-6 Recession ended in November 2001 Unemployment kept rising for 19 more months Recession began in December 2007 Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Sep 11 Stubbornly high unemployment and underemployment will constrain overall economic growth 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 16.5% in Sept Unemployment stood at 9.1% in September Unemployment peaked at 10.1% in October 2009, highest monthly rate since Peak rate in the last 30 years: 10.8% in November - December

85 Monthly Change in Private Employment January 2008 through September 2011* (Thousands) (200) (400) (600) -Monthly Losses in 137,000 private sector jobs (800) (1,000) Dec. 08 Mar. 09 Were the Largest in the Post-WW II Period j were created in September Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 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 Private Employers Added million Jobs Since Jan After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs Source: US Bureau of Labor Statistics: Insurance Information Institute

86 Unemployment Rates by State, September 2011: Highest 25 States* ent Rate (%) In September, 25 states reported overthe-month unemployment rate decreases, 14 had increases, and 11 and the District of Columbia had no change Un nemploym NV CA DC MI SC FL MS NC RI GA IL AL TN KY OR NJ AZ OH WA US ID CT IN MO TX AR *Provisional figures for September 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 86

87 Unemployment Rates By State, September 2011: Lowest 25 States* 10 In September, 25 states reported overthe-month unemployment rate decreases, 14 had increases, and 11 and the District of Columbia had no change. Une employme ent Rate (% ) The unemployment rate in MN at 6.9% is well below the 9.1% for the US overall CO PA WV DE NY WI MT AK ME MD UT MA LA MN KS NM VA HI IA OK VT WY NH SD NE ND *Provisional figures for September 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute. 87

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