Transcript WCEC081909 - Insurance Information Institute

Workers Compensation
& the Economy
Impact of the Financial Crisis,
Economic Recession & Stimulus
Workers Compensation Educational Conference
Orlando, FL
August 18, 2009
Download at www.iii.org/presentations/WCEC081809/
Robert P. Hartwig, Ph.D., CPCU, President
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  [email protected]  www.iii.org
Presentation Outline
• The Economic Storm: Recession & Recovery
• Economic Trends: Workers Comp Exposure
Implications
• Labor Force and Payroll Trends
• Financial Strength & Ratings
• P/C Insurance Industry Overview
•
•
•
•
•
Profitability
Premium Growth
Underwriting Performance
Financial Market Impacts
Capital & Capacity
2
THE ECONOMIC
STORM
What the Financial Crisis and
Recession Mean for the Workers
Comp Exposure Base
and Growth
0%
-6%
-2.7%
-4%
-1.0%
-0.7%
Recession began in December
2007. Economic toll of credit
crunch, housing slump, labor
market contraction has been
severe but recovery is in sight
2.9%
2.8%
2.8%
2.5%
Personal and
commercial lines
exposure base
have been hit
hard and will be
slow to come
back
-0.2%
-2%
2.3%
2.2%
1.5%
2.9%
3.1%
3.6%
2.5%
0.1%
2%
1.6%
0.8%
4%
3.7%
6%
The Q1:2009 decline was
the steepest since the
Q1:1982 drop of 6.4%
4.8%
4.8%
Real GDP Growth*
-5.4%
-6.4%
*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.
Source: US Department of Commerce, Blue Economic Indicators 8/09; Insurance Information Institute.
4
10:4Q
10:3Q
10:2Q
10:1Q
09:4Q
09:3Q
09:2Q
09:1Q
08:4Q
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
2006
2005
2004
2003
2002
2001
2000
-8%
Fastest Growing States in 2008
vs. Florida
Real State GDP Growth
Fastest growing states
are in the Plains,
Mountain and Upper
Midwest regions
Percent
8.0%
7.3%
7.0%
6.0%
Florida was in
a 4-way tie as
the 8th-fastest
growing state
in 2008
4.4%
5.0%
3.5%
4.0%
3.0%
2.9%
2.7%
2.5%
2.1%
2.0%
IA
TX, MN,
NM, WA
2.0%
1.0%
0.0%
-1.0%
ND
WY
SD
CO
OK
WV
-2.0%
FL
-1.6%
-3.0%
Source: US Bureau of Economic Analysis; Insurance Information Institute.
5
Length of U.S. Business Cycles,
1929-Present*
Duration (Months)
120
110
100
Contraction
Expansion Following
Average Duration**
Recession = 10.4 Months
Expansion = 60.5 Months
90
106
Length of
expansions
greatly
exceeds
contractions
58
80
80
70
60
50
50 43
45
37
40
39
92
73
36
24
30
20
13
10
Month 0
Recession
Started
120
Aug.
1929
May
1937
* As of August 2009, inclusive;
8
Feb.
1945
11
Nov.
1948
10
July
1953
8
Aug.
1957
10
Apr.
1960
11
Dec.
1969
**Post-WW II period through end of most recent expansion.
Sources: National Bureau of Economic Research; Insurance Information Institute.
16
12 16
6
Nov.
1973
Jan.
1980
Jul.
1981
21
8
Jul.
1990
8
Mar.
2001
Dec.
2007
6
Total Industrial Production,
(2007:Q1 to 2010:Q4F)
End of recession in late 2009, Obama stimulus program
are expected to benefit industrial production and
therefore insurance exposure both directly and indirectly
10.0%
5.0%
3.3% 3.6% 3.7% 4.1% 4.1%
3.2% 3.6%
1.5%
1.7%
0.3% 0.2%
0.0%
-5.0%
-4.6%
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/09); Insurance Info. Inst.
7
10:Q4
10:Q3
10:Q2
09:Q3
09:Q2
09:Q1
08:Q4
08:Q3
-19.1%
10:Q1
-11.6%
-13.0%
09:Q4
Figures for 2010
revised upwards to
reflect expected
impact of Obama
stimulus program
and a gradual
economic recovery
-9.0%
08:Q2
08:Q1
07:Q4
-25.0%
07:Q1
-20.0%
07:Q3
-15.0%
07:Q2
Industrial
production began
to contracted
sharply in late
2008 and plunged
in Q1 2009
-10.0%
Labor Market
Trends
Fast & Furious: Massive Job Losses
Sap the Economy Workers Comp &
Other Commercial Exposure
Unemployment Rate:
On the Rise
January 2000 through July 2009
10.0
9.0
8.0
Previous Peak: 6.3% in
June 2003
July 2009 unemployment was 9.4%,
down 0.1% from July but still near
its highest level since August 1983
7.0
Trough: 4.4% in March 2007
6.0
5.0
Source: US Bureau of Labor Statistics; Insurance Information Institute.
14
Jul-09
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-03
Jan-02
Jan-00
2.0
Jan-01
Average unemployment
rate 2000-07 was 5.0%
3.0
Unemployment will likely peak near 10 %
during this cycle, impacting payroll
sensitive p/c and l/h exposures
Jan-04
4.0
9.7%
9.9%
9.9%
10.0%
10.1%
8.1%
6.9%
6.1%
5.4%
4.9%
4.8%
4.6%
4.5%
Unemployment is
expected to peak above
10% in early 2010.
9.3%
Rising unemployment
is eroding payrolls and
workers comp’s
exposure base.
4.5%
11.0%
10.5%
10.0%
9.5%
9.0%
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
9.8%
U.S. Unemployment Rate,
(2007:Q1 to 2010:Q4F)*
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
* Blue bars are actual; Yellow bars are forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/09); Insurance Info. Inst.
15
Monthly Change Employment*
(Thousands)
January 2008 through July 2009
0
-100
-200
-300
-400
-500
-600
-700
-800
-72
-144-122-160-137-161-128
-175
Job losses since the
recession began in Dec. -321
2007 total 6.7 mill; 14.5 -380
million people are now
defined as unemployed.
Monthly losses in Dec. – May
were the largest in the postWW II period but pace of loss
is diminishing
Jan- Feb- Mar- Apr- May- Jun08
08
08
08
08
08
-247
-303
-443
-519
-597
-681
-652
-681
-741
Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun08
08
08
08
08
08
09
09
09
09
09
09
16
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute
Jul09
Wage & Salary Disbursements
(Payroll Base) vs. Workers Comp
Net Written Premiums
Wage & Salary Disbursement (Private Employment) vs. WC NWP
$ Billions
7/90-3/91
$7,000
$6,000
3/01-11/01
$ Billions
12/07-?
Wage & Salary
Disbursements
WC NPW
$45
$40
$35
$5,000
$30
$4,000
$3,000
$2,000
Shaded areas indicate recessions
$1,000
Weakening wage
and salary
growth is
expected to cause
a deceleration in
workers comp
exposure growth
$0
$25
$20
$15
$10
$5
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*
*Average Wage and Salary data as of 4/1/2009.
Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at
http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
8.6
8.7
8.7
9.0
9.0
9.2
9.2
9.3
9.3
10.1
10
10.1
10.3
10.6
10.7
10.9
10.8
10.9
11.0
The unemployment rate has been rising
across the country, but some states are
doing much better than others.
11.1
11.6
12.0
12.1
12
12.2
Unemployment Rate (%)
14
12.4
16
15.2
Unemployment Rates by State, June
2009: Highest 25 States*
8
Florida had the 13th highest
unemployment rate in the
US in June 2009 at 10.6%
vs. 9.5% for the US
6
4
2
0
MI RI OR SC NV CA OH NC DC KY TN IN FL IL AL GA MO WA NJ WV MS WI AZ NY MA
*Provisional figures for June 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
Unemployment Rates By State, June
2009: Lowest 25 States*
4.2
5.0
5.1
5.7
6.2
6.3
6.8
6.8
6.4
5.9
6
6.8
7.1
7.2
7.2
7.5
7.4
7.3
8.4
8.4
8.4
8.3
7.6
8
8.0
Unemployment Rate (%)
8.5
8.4
10
7.0
North Dakota had the lowest
unemployment rate in the
US in June 2009 at 4.2% vs.
9.5% for the US
4
2
0
ME AK MN DE ID PA CT CO TX HI MD AR VA VT KS LA NH NM MT OK IA WY UT SD NE ND
*Provisional figures for June 2009, seasonally adjusted.
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
State Economic Growth Varied
Tremendously in 2008
FL had the second-to-worst
economic growth in 2008 at
-1.6% vs US +0.7%
20
Percent Change in Employment
by Industry: Most Declined
-53
-128
-44
-38
Government
Education &
Health
Professional
& Business
Services
Retail
17
Leisure &
Hospitality
40
20
0
-20
-40
-60
-80
-100
-120
-140
Manufacturing
Percent
Change
Construction
Change in July 2009 vs. June 2009
9
7
Few industries saw
gains in employment
last month
The US economy lost 247,000 jobs in
July 2009 and 6.7 million jobs since
the recession began in Dec. 2007
Source: US Bureau of Labor Statistics; Insurance Information Institute.
21
Expected Number
of Jobs Gained or
Preserved by
Stimulus Spending
Larger States = More Jobs
Workers Comp Benefits
50
50
52
60
66
66
69
70
70
71
75
75
79
93
109
107
143
133
The economic stimulus plan calls
for the creation or preservation of
3.5 million jobs (207,000 in FL),
allocated roughly in proportion to
the size of the state’s labor force.
105
100
100
148
200
207
215
300
269
400
(Thousands)
396
No. of Jobs Created/Saved by Stimulus
Estimated Job Effect of Stimulus
Spending By State: Top 25 States
0
CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC
Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.
GREEN SHOOTS
Is the Recession
Nearing an End?
Hopeful Signs That the Economy
Will Begin to Recover Soon
•
Recession Appears to be Bottoming Out, Freefall Has Ended
•
•
•
•
Pace of GDP shrinkage is beginning to diminish
Pace of job losses is slowing
Major stock market indices well off record lows, anticipating recovery
Some signs of retail sales stabilization are evident
• Financial Sector is Stabilizing
• Banks are reporting quarterly profits
• Many banks expanding lending to credit worthy people & businesses
• Housing Sector Likely to Find Bottom Soon
• Home are much more affordable (attracting buyers)
• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)
• Freefall in housing starts and existing home sales is ending in many areas
• Inflation & Energy Prices Are Under Control
• Consumer & Business Debt Loads Are Shrinking
31
Source: Ins. Info. Inst.
11 Industries for the Next 10 Years:
Insurance Solutions Needed
Government
Education
Health Care
Energy (Traditional)
Alternative Energy
Agriculture
Natural Resources
Environmental
Technology
Light Manufacturing
Export Oriented Industries
32
Crisis-Driven
Exposure
Implications
Exposure Growth Slowed
as Economy Nosedived
1.80
1.96
1.85
1.36
1.60
1.57
1.64
1.62
0.90
90
91
92
93
94
95
96
97
98
99
00
01
0.57
I.I.I. estimates that each incremental
100,000 decline in housing starts costs
home insurers $87.5 million in new
exposure (gross premium). The net
exposure loss in 2009 vs. 2005 is
estimated at about $1.3 billion.
0.79
1.47
1.48
1.35
New home starts
plunged 34%
from 2005-2007;
Drop through
2009 is 73%
(est.)—a net
annual decline of
1.5 million units,
lowest since
record began in
1959
1.01
1.29
1.20
1.46
Impacts also for comml. insurers with
construction risk & WC exposure
1.19
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
0.5
1.71
Exposure growth due to home construction
forecast for HO insurers is dim for 2009
with some improvement in 2010.
2.07
New Private Housing Starts,
1990-2010F (Millions of Units)
02
03
04
05
06
07
08 09F 10F
34
Source: US Department of Commerce; Blue Chip Economic Indicators (8/09); Insurance Information Inst.
Auto/Light Truck Sales,
1999-2010F (Millions of Units)
Weak economy, credit crunch,
gas prices hurt auto sales;
“Cash for Clunkers” will help.
19
18
17.4
17.8
17.5
17.1
16.6
17
16.9
16.9
New auto/light truck sales are
expected to experience a net drop
of 6.6 million units annually by
2009 compared with 2005, a decline
of 39.1% and the lowest level since
the late 1960s. Boost in 2009/10
due to Cash for Clunkers program
16.5
16.1
16
15
14
13.1
Impacts of falling auto sales will
have a less pronounced effect on
auto insurance exposure growth
than problems in the housing
market will on home insurers
13
12
11
11.9
10.3
10
9
99
00
01
02
03
04
05
06
07
08
09F 35 10F
Source: US Department of Commerce; Blue Chip Economic Indicators (8/09); Insurance Information Inst.
FINANCIAL
STRENGTH &
RATINGS
Industry Has Weathered
the Storms Well
P/C Insurer Impairments,
1969-2008
49
50
48
55
60
18
14
15
35
18
19
31
29
16
12
16
14
13
5
7
9
13
12
9
11
9
7
8
10
15
12
20
19
30
31
34
34
40
36
41
50
49
50
47
70
60
58
The number of impairments varies
significantly over the p/c insurance cycle,
with peaks occurring well into hard markets
69
70
71
72
73
74
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
0
Source: A.M. Best; Insurance Information Institute
37
P/C INSURANCE
FINANCIAL
PERFORMANCE
A Resilient Industry in
Challenging Times
Profitability
Historically Volatile
$65,777
$62,496
07
$2,379
-$1,309
$44,155
$38,501
$30,029
$20,559
$24,404
$20,598
$3,046
$10,000
$10,870
$20,000
$5,840
$30,000
$14,178
$40,000
$19,316
$50,000
$21,865
$60,000
$30,773
$70,000
$36,819
$80,000
Insurer profits
peaked in 2006 and
2007, but fell 96.2%
during the economic
crisis in 2008
2005 ROE= 9.4%
2006 ROE = 12.2%
2007 ROAS1 = 12.4%
2008 ROAS = 0.5%*
2009:Q1 ROAS = 1.2%*
06
P/C Net Income After Taxes
1991-2009:Q1 ($ Millions)*
*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guarantee insurers
yields an 4.2% ROAS for 2008 and 2.2%. 2009:Q1 net income was $2.4 billion excl. M&FG.
44
Sources: A.M. Best, ISO, Insurance Information Inst.
09:Q1
08F
05
04
03
01
-$6,970
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
A 100 Combined Ratio Isn’t What it
Used to Be: 95 is Where It’s At
110
14.3%
Combined Ratio
18%
ROE*
15.9%
16%
105
100
100.1
12.7%
97.5
85
98.4
92.6
Combined ratios 8.9%
must me must lower
in today’s depressed
investment
environment to
generate risk
appropriate ROEs
12%
10%
9.6%
95
90
14%
101.0
8%
4.2%
6%
4%
2.2%2%
80
0%
1978
1979
2003
2005
2006
2008*
2009:Q1*
* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.
Source: Insurance Information Institute from A.M. Best and ISO data.
45
Retrun on Equity*
Combined Ratio
100.6
100.7
P/C Premium
Growth
Primarily Driven by the
Industry’s Underwriting
Cycle, Not the Economy
Strength of Recent Hard Markets
by NWP Growth
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
1975-78
1984-87
2000-03
Net written
premiums fell 1.0%
in 2007 (first
decline since 1943)
by 1.4% in 2008,
and 3.6% in Q1
2009, the first 3year declines since
1930-33
Shaded areas
denote “hard
market” periods
4%
2%
0%
-2%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
09:Q1
-4%
47
Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
49
2Q09
1Q09
2Q08 -12.9%
3Q08
-11.0%
4Q08
-12.0%
1Q08 -13.5%
4Q07
1Q07
2Q07
4Q06
3Q06
1Q06
2Q06
4Q05
3Q05
2Q05
4Q04
1Q05
3Q04
2Q04
1Q04
-16%
3Q07 -13.3%
-5.3%
-3.0%
-2.7%
KRW Effect
-11.8%
-14%
-11.3%
-12%
Magnitude of price
declines is now
shrinking. Reflects
shrinking capital,
reduced investment
gains, deteriorating
underwriting
performance, higher
cat losses and costlier
reinsurance
-9.6%
-10%
-8.2%
-8%
-9.7%
-5.9%
-7.0%
-6%
-9.4%
-4%
-4.6%
-3.2%
-2%
-0.1%
0%
-6.0%
-5.0%
-5.0%
Average Commercial Rate Change,
All Lines, (1Q:2004 – 2Q:2009)
Capital/
Policyholder
Surplus
Shrinkage, but
Capital is Within
Historic Norms
U.S. Policyholder Surplus:
1975-2009:Q1*
$550
$500
$450
Actual capacity as of 3/31/09 was $437.1, down 4.2%
from 12/31/08 at $455.6B, but still 53% above its 2002
trough. Recent peak was $521.8 as of 9/30/07. Surplus
as of 3/31/09 is 16.2 below 2007 peak.
$400
$ Billions
$350
$300
$250
$200
$150
The premium-to-surplus
ratio stood at $1.03:$1 as of
3/31/09, up from near
record low of $0.85:$1 at
year-end 2007
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809*
Source: A.M. Best, ISO, Insurance Information Institute.
*As of 3/31/09
51
Investment
Performance
Investments are the Principle
Source of Declining
Profitability
Property/Casualty Insurance Industry
Investment Gain:1994- 2009:Q11
$ Billions
$64.0
$57.9
$60
$52.3
$47.2
$42.8
$50
$56.9
$51.9
$44.4
$59.4
$55.7
$48.9
$45.3
$36.0
$40 $35.4
$31.4
$30
Investment gains fell by 51% in 2008
due to lower yields, poor equity market
conditions. Falling again in 2009.
$20
$10
$3.7
1Investment
Q
1
09
:
08
07
06
05
*
04
03
02
01
00
99
98
97
96
95
94
$0
gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.
*2005 figure includes special one-time dividend of $3.2B.
58
Sources: ISO; Insurance Information Institute.
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. July 2009
6%
5.19%
5.04% 4.96%
5.00%
5.00%
4.96%
4.93%
4.82%
4.82% 4.82% 4.88%
5%
4.38% 4.41%
4%
3%
Treasury Yield Curve is at its
most depressed level in at
least 45 years. Investment
income will fall as a result.
2%
3.56%
3.14%
2.46%
Stock dividend cuts will
further pressure
investment income
1.55%
1.02%
1%
0.15% 0.18% 0.30%
0.48%
July 2009 Yield Curve
Pre-Crisis (July 2007)
0%
1M
3M
6M
1Y
2Y
3Y
5Y
7Y
10Y
20Y
30Y
60
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
Insurance Information
Institute On-Line
THANK YOU FOR YOUR TIME AND
YOUR ATTENTION!
Download at http://www.iii.org/presentations/WCEC081809.ppt
67