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Agenda
Industry Analysis
Firm Analysis
Forecasts, Projections, Recommendations
Economic Environment
Macro Impact on Firm & Industry
Industry Analysis
Economy & The Markets for
Insurance
Utility loss
from losing
$1,000
Wealth
Copyright2004 South-Western
0
$1,000
loss
Current
wealth
$1,000
gain
Managing Risks
Individuals/corporations can reduce
risk by choosing any of the following:
Diversify
Accept a lower return on their
investments
Buy Insurance
Example:
Fire Insurance
Owning fire insurance does not REDUCE the risk
of losing your home in fire
In case of the unlucky event, the insurance
company compensates you for the loss
Risk is spread between all the shareholders..
(e.g. 10,000)
Easy to bear 1/10,000th of risk
Adverse Selection
A high risk person/corporation
is more likely to apply for
insurance than a low-risk
person
Health Insurance healthy
people dont buy group
insurance
Moral Hazard
People have less incentive to be
careful about their risky
behavior
Fire Extinguishers to get the
discount, failure to maintain
Insurance Categories
Property & Casualty
Auto, Home etc.
Catastrophes
Babe Ruth:
Specialty Coverage Sickness Policy
Industry Size
Insurance Industry is typically categorized
under
Financial Services sector
Company/Group
$47,226,012
10.5%
32,366,506
7.2
23,055,892
5.1
15,209,080
3.4
14,830,949
3.3
13,731,118
3.0
Nationwide Group
13,429,281
3.0
12,750,912
2.8
12,191,955
2.7
10
11,462,591
2.5
Source: NAIC Annual Statement Database, via National Underwriter Insurance Data Services/Highline Data.
Group
Revenues
Assets
$81,300
$677,000
Berkshire Hathaway
63,859
180,559
56,065
136,441
Allstate
32,149
134,142
18,733
225,853
16,914
64,422
Nationwide
16,803
147,674
Loews (CNA)
15,810
77,881
15,139
64,872
10
Progressive
11,892
16,282
11
Chubb
11,394
38,361
12
USAA
10,593
41,044
13
8,958
39,563
14
7,715
7,312
15
Safeco
7,358
35,845
16
6,214
4,892
17
5,895
12,239
18
4,717
11,860
19
Auto-Owners Insurance
4,211
9,425
W.R. Berkley
3,630
9,335
20
Source: Fortune.,
($ millions)
Demand Factors
Risk Aversion
Most companies & people are Risk Averse!
Employee Benefits & Workers Compensation
Life, Dental, Vision + Short & Long Term Disability
Natural Disasters
Florida, Gulf-coast: Hurricanes
South Asian Tsunami Crisis
Fires, Earthquakes, Volcanoes, Floods
Man-made
Terrorism, 9/11
Re-insurance
Demand Factor:
Rising Employee Benefits Costs
Source - http://stats.bls.gov/news.release/pdf/eci.pdf
Demand Factors:
Weather, Global Warming
Demand Factors:
Hurricane Season!
2.0
1.9
1.8
1.7
1.6
1.70
1.70
1.60
1.35
1.4
1.29
1.3
1.20
1.19
1.01
1.1
1.0
1.85
1.48 1.47
1.46
1.5
1.2
1.96
90
91
92
93
94 95
96
97 98
99
00
01
02 03 04E 04F
90
64.1%
92
67.8% 67.9%
67.4%
66.8%
66.3%
65.7%
64.7%
64.5%
63.9%
68.3%
64.0%
93
94
95
96
97
98
99
00
01
02
03
Average Expenditures on
Homeowners Ins.: US
Average HO expenditures are
expected to rise by 8-10% in 2003
55
3
$600
60
3
$650
51
2
50
0
41
8
$450
45
5
44
0
48
1
$500
48
8
$550
2*
3*
200
*III Estimates
Source: NAIC, Insurance Information Institute
200
1*
200
9
199
0*
8
199
200
6
199
199
5
199
$400
$139,000
$133,300
$128,400
0.36%
$121,800
$125,000
$115,800
$150,000
$110,500
The cost of
homeowners
insurance relative to
the price of a typical
home has fallen!
$147,800
0.40%
$157,800
0.38% 0.38%
$175,000
$107,200
0.39%
0.38%
0.35%
0.35% 0.35%
0.33%
$100,000
0.30%
94
95
96
97
98
99
00
01
02
$200,000
17.8
17.4
17.5
17.2
17.3
17.1 17.0
17.0
17.1
16.7
17.2
16.8 16.9
16.5
16.0
16.0
15.5
15.5
15.5
15.0
96
97
98
99
00
01
02
Average Expenditures on
Auto Insurance: US
$800
68
3
70
4
70
6
66
8
$700
69
1
$750
78
4
$850
85
5
$900
$650
3*
0
200
200
9
199
2*
8
199
200
7
199
1*
6
199
200
5
199
$600
Labor Costs
5%
Inflation
4%
Credit/Int.
Rates
2%
Competition
9%
Insurance
20%
Regulations
11%
Poor Sales
19%
Taxes
19%
Source: National Federation of Independent Business (February 2003); Insurance Information Institute
Cost of risk to
corporations fell 42%
between 1992 and
2000
$9
$8.30
$7.70
$7.30
$8
$7
$6.49
$6.40
$6.10
$5.70
$6
$5
$4
Estimated 15%
increase in 2001,
25% in 2002
$6.94
$5.71
$5.55
$5.25
$5.20$4.83
91
92
93
94
95
96
97
98
99
00 01E 02E
Underwriting
Other
5%
Bonds
66%
Preferred Stock
1%
Capital
Management
Asset
Management
32.5%
Special Revenue
30.5%
Governments
18.0%
States/Terr/Other
15.4%
Public Utilities
3.1%
Parents/Subs/Affiliates 0.5%
Size of Industry
Insurance
Carriers
Insurance Agencies, Brokerages & Related
2.50
400000
350000
Current Dollars
300000
250000
200000
150000
100000
2.00
1.50
1.00
0.50
50000
0
1998
1999
2000
2001
2002
2003
Year
0.00
1998
1999
2000
2001
2002
2003
Year
Current Dollars
IO Code
524100
524200
Description
Insurance carriers (Current $)
Insurance agencies, brokerages, and related (Current $)
Insurance carriers (% of Total)
Insurance agencies, brokerages, and related (% of Total )
Total ALL Industries (in Current $)
2.4%
2.3%
2.2%
2.1%
2.1%
2.0%
2.0%
1.9%
1.9%
1.9%
1.8%
1.8%
1.8%
1.7%
1.6%
1.6%
1.5%
1.4%
1.6%
1.5%1.5%
1.2%
1.0%
88
89
90
91
92
93
94
95
96
97
98
99
00
01 02E
Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and
A.M. Best data.
1999
2000
2001
2002
2003
$876.4
$872.7
$862.0
$858.1
$918.8
$1,045.0
4.0
4.3
3.7
13.1
25.9
34.5
42.7
28.3
38.3
30.2
44.4
52.8
521.1
518.2
509.4
518.4
558.3
624.0
140.1
136.1
136.2
146.2
174.4
194.7
Treasury
70.4
60.6
52.1
52.0
61.2
68.4
69.7
75.5
84.1
94.2
113.2
126.3
Municipal securities
208.1
199.0
184.1
173.8
183.0
204.6
171.1
181.1
187.5
196.4
198.9
222.7
2.0
1.9
1.6
1.9
2.0
2.1
Corporate equities
200.1
207.9
194.3
173.9
152.3
182.7
Trade receivables
61.5
63.6
64.6
69.9
74.8
79.3
Miscellaneous assets
47.0
50.6
51.8
52.6
63.1
71.7
Commercial mortgages
Employment in Insurance
1994-2003 (000s)
Insurance companies (1)
Year
Property/ casualty
Insurance agencies,
brokerages and related
services (2)
Reinsurers
Total industry
1994
812.0
568.8
37.7
700.3
2,118.8
1995
807.4
552.0
36.3
712.6
2,108.3
1996
788.0
558.2
35.4
726.4
2,108.0
1997
797.4
566.9
35.1
744.1
2,143.5
1998
816.8
592.0
34.3
766.3
2,209.4
1999
815.3
603.9
33.5
783.4
2,236.1
2000
808.8
591.6
32.3
787.8
2,220.5
2001
807.7
591.3
31.4
803.2
2,233.6
2002
791.1
590.0
31.7
820.4
2,223.2
2003
792.3
606.2
30.6
837.0
2,266.1
INSURANCE CEO
Source Insurance Information Institure
$36,819
$30,773
$30,000
$24,404
$20,598
$19,316
$20,000
$21,865$20,559
$14,178
$10,870
$10,000
$5,840
$2,903
$0
-$6,970
-$10,000
91
92
93
94
95
96
97
98
99
00
01
02
15%
10%
5%
0%
-5%
99
00
All US Industries
01
02
03F
($20)
($30)
($40)
($50)
($60)
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
$ Billions
($10)
Terrorism:
Sept. 11 Industry Loss Estimates
($ Billions)
Life
$2.7 (7%)
Aviation
Liability
$3.5 (9%)
Event
Cancellation
$1.0 (2%)
Workers
Comp
Aviation Hull
$2.0 (5%)
$0.5 (1%)
Property Other
$6.0 (15%)
Biz
Interruption
$11.0 (27%)
$14.5
$15
$10.0
$10
$5
$20.0$21.0
18.3
$18.0
$0.5
$2.0
$4.6
$0
1994
1995
1996
1997
1998
1999
2000
2001
2002P
1.33%
1.02% 1.03%
0.79%
0.58% = 0.72%
0.60%
30
0.21%
1993
1994
1995
0.28%
1996
30
38
0.23%
1997
1998
1999
2000
2001
2002
Change in Business
3%
Deficient Loss
Reserves
51%
Reserve
deficiencies
account for
more than half
of all p/c
insurers
insolvencies
Discounted Ops
8%
Overstated Assets
2%
Alleged Fraud
3%
Rapid Growth
10%
Policyholder Surplus:
1975-2002
$45
$ Billions
$36
$27
$18
Surplus is a measure of
underwriting capacity. It is
analogous to Owners Equity
or Net Worth in noninsurance organizations
$9
$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Billions
(US$)
10%
8%
History
6%
4%
2000 = $40.7B
2%
3-Month T-Bill
1-Yr. T-Bill
10-Year
T-Note
2001
= $37.7B
2003
*
2002
2001
2000
1999
2002 = $36.7B
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
1.
14%
12%
2.
10%
8%
6%
4%
2%
3-Month T-Bill
1-Yr. T-Bill
10-Year T-Note
2003
*
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
TORT-ure
Asbestos
Toxic Mold
Medical Malpractice
Construction Defects
Lead
Fast/Fattening Foods & Obesity
Reality TV
Arsenic Treated Lumber
Guns
Genetically Modified Foods (Corn)
Pharmaceuticals & Medical Devices
Security exposures (workplace violence, post-9/11 issues)
Slavery
Whats Next?
1994
2001
$6,000
($000)
$5,000
3,902
$4,000
$3,000
$2,000
$1,000
2,288
1,744
1,727
1,365
1,185
789
419
187 323
333
Vehicular
Liability
Premises
Liability
1,140
759
$0
Overall
Business
Negligence*
Wrongful
Death
Medical
Malpractice
Products
Liability
$350
$300
$298
$250
$205
$200
$150
$129 $130
$167 $169
$180
$100
$50
$0
90
91
92
93
94
95
96
97
98
99
00
01
05F
Life
$11.8 billion
12%
Disability
$0.5 billion
1%
Prop./Casualty
$22.4 billion
23%
Introduction to AIG
AIG
Financial Services
AIG Performance
90
80
USD Billions
70
60
Premiums
50
Investment Income
Total Revenue
40
Losses Incurred
30
Net Income
20
10
0
2000
2001
2002
2003
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
95
19
96
19
19
94
General Insurance
Operating Income
Life insurance
Operating Income
Financial Services
Operating income
Retirement Services
Operating Income
93
19
Dollars (Millions)
AIG Performance
Dollars (Millions)
14.0%
100000
12.0%
10.0%
80000
8.0%
60000
Revenue
Net Income
6.0%
40000
4.0%
20000
2.0%
0.0%
1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004
Net Profit
AIG vs Industry
Ratios
80
Loss Ratio
60
Expense Ratio
40
20
0
1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004
Source AIG Annual Report
21
20.5
20
Expense Ratio
19.5
19
18.5
18
17.5
1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004
4000
Net Income
2000
0
19
93
19
94
19
96
19
95
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Dollars (Millions)
8000
-2000
Dollars (Millions)
500000
400000
Total Invested Assets
300000
Total Reserves
200000
100000
0
1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003
10000
8000
6000
4000
2000
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
95
19
96
19
94
0
19
93
Dollars(Millions)
16000
20
18
16
14
12
10
8
6
4
2
0
70000
60000
50000
40000
30000
20000
10000
0
19
93
19
94
19
96
19
95
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Dollars (millions)
80000
ROE(%)
Shareholders Equity
ROE
Strengths
Global Presence
Agreement with the Peoples Insurance Company of China (PICC) to develop the
market for accident and health products in China
Largest foreign life insurer in China
General Insurance expense ratio further improved to 19.10 from 20.19 a year ago.
Weaknesses
vulnerable to price-cutting
Regulatory Scrutiny/investigations
Poor claims-payment reputation
AIG Strategy
Practices diversification & expansion
Example - Financial Services, Aircraft
Leasing
Helps to protect & cushions from exposure
to pure insurance markets
Claims Management
Recommendations
Spreading risk between
Insureds, Insurers, Re-insurers & the State
(Appendix A)
Global Expansion
With Partners
AIG is clearly demonstrated its partnership
capabilities
Economic Environment
Insurance Industry
Financial
Markets
+
Short-term Capital
for Underwriting
Stocks,
Treasuries, Bonds
Claim Events
Natural Disasters
Life Event
Loss of Property
Man-made: Terrorism
Home
Life
Health
Auto
Man-made &
Natural
Disasters
State
Regulations
Insurance Premiums
Property & Casualty
Employee Insurance
People
Corporations
Workers Comp
Financial Aid
Macro Impact
Catastrophic events
Insurance Industry
Financial
Markets Increasing Capital (remains Constant)
Returns
Stocks,
Treasuries, Bonds
Claim Events
Natural Disasters
Life Event
Loss of Property
Man-made: Terrorism
Home
Life
Health
Auto
More
Profits
For
Industry
Insurance Premiums
Property & Casualty
Employee Insurance
People
Corporations
Workers Comp
Catastrophic event
Interest
Rates
Financial
Markets
Insurance Industry
State
Stocks,
Treasuries, Bonds
CLAIMS
Home
Life
Health
Auto
INCREASE!
Insurance Premiums
Property & Casualty
Employee Insurance
People
Corporations
Workers Comp
Financial Aid
Wrap Up
Appendix A
The role of the State & Insurance
Industry
Back Up Slides
AIG Facts & Figures
AIG Worldwide
AIG Facts
86,000 Employees
50 Million Customers
628,000 Sales Representatives
130 Countries & Jurisdictions
Source BEA:
GDP & Insurance Industry
How are insurance services measured in GDP?
In the 2003 comprehensive revision of the national income and product accounts, BEA adopted a new measure of insurance services. The
measure of insurance that is included in GDP is an estimate of the value of the services provided by the insurance company to its policyholders.
Insurance companies provide financial protection to policyholders through the pooling of risk, and they provide financial intermediation services
through the investment of reserves that are held to help cover extraordinary losses. After accounting for investment income, insurance companies
set premiums to cover the expected costs of providing the services, of settling claims, of maintaining reserves against future claims, and of
purchasing reinsurance.
Therefore, services of the property-casualty insurance industry are measured as direct premiums earned plus premium supplements -- that is,
the expected investment income earned from the investment of reserves that are directly attributable to policyholders because of prepayment of
premiums or accrual of benefits -- minus normal losses incurred and dividends paid to policyholders. The normal losses are calculated on the
basis of historical experience. Because the measurement of insurance services now uses normal losses rather than actual losses, the measure
no longer exhibits large swings when disasters take place. Additional information is available from the following articles:
How is GDP affected by a disaster?
GDP is a measure of the Nations current production of goods and services; as such, it is not directly
affected by the loss of property (structures and equipment) produced in previous periods. GDP may be
affected indirectly by the actions that consumers, businesses, and governments take in response to
disruptions in production or to the loss of property, but these responses are not amenable to precise
quantification; moreover, the responses may be spread out over a long period of time. For example:
Rebuilding activity, which may occur over many months following a disaster, will typically be reflected
in the regular source data used to estimate residential and nonresidential investment. There is no way
to disentangle the disaster-related rebuilding from other construction activity.
Tourism and other types of consumer spending may be canceled or postponed in the face of a
disaster; whether canceled or merely postponed, the effects will be embedded in the source data that
are used to estimate personal consumption expenditures. Again, there is no way to disentangle
disaster-related spending from other consumer spending.
As a measure of the Nations current production of goods and services, GDP includes the value of
insurance services produced for policyholders; under a new methodology adopted in the 2003
comprehensive revision, the value of insurance services is not directly affected by the payment of
benefits in the wake of a disaster. (See How are insurance services measured in GDP?)
$10,000
$3,300
$2,000
$0
-$2,000
$22
$15
$7
$26
$12
$12
$41
-$2
1995
1996
1997
1998
1999
2000
2001
2002*
Commercial Lines
Personal Lines
$160
$29.6
$140
Billions
Self (Un)Insured
$120
$20.1
$100
$70.9
$80
$51.0
$60
$40
$5.4
$17.1
$20
$0
$49.1
$57.2
1990
2000
$17.0
1980
Asbestos
Defendants
39%
US Insurers
30%
$78 billion
$60 billion
$62 billion
Foreign
Insurers
31%
Medical Malpractice:
Tort Cost Growth is Skyrocketing
$2.3
$1.9
$2
$1.5
$4
$1.2
$4.4
$6
$2.9
$3.6
$8.7
$7.9
$7.2
$7.1
$6.8
$7.0
$6.5
$8
$5.4
$10
$7.1
$12
$16.2
$14.6
$13.5
$14
$12.4
$16
$11.6
$18
$10.8
$20.9
$19.4
$20
$9.4
$22
$17.6
$ Billions
$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
7.3%
7.4%
8.1%
7.6%
6.1%
5.7%
99
00
14.7%
12.0%
0.2%
1.3%
2.1%
5%
2.5%
5.1%
10%
6.4%
9.0%
8.0%
10.1%
15%
7.3%
11.2%
10.7%
-5%
92
93
-1.1%
-2.1%
0%
94
95
96
97
98
WC
01
02
$19.675B
$20
$1.75B
Industry
Co-Share
$0.925B
Industry
Co-Share
$10.575
$2.0B
Industry
Co-Share
$18.00
($ Billions)
$25
$15.75
$30
$15
$0.125B
$5
$8.75
$18.75
$12.50
$0
Year 1
Industry Retention
Year 2
Surcharge Layer
Year 3
Co-Reinsurance Layer
Assumes $30B Commercial Prop & WC Loss, $125B At Risk Commercial DPE
Source: Insurance Information Institute.
Sources/Links
http://www.aig.com
http://www.aigcorporate.com
http://www.businessinsurance.com/cgi-bin/news.pl?newsId=4870
http://www.wsj.com
http://www.businessweek.com
http://www.iii.org
http://www.bls.gov
http://www.bea.gov
http://www.swissre.com
http://www.bigcharts.com
Principles of Economics, Third Edition, N. Gregory Mankiw, Thomson,
South-Western