Quarterly PC industry snapshot Third quarter 2018 Information

Quarterly P/C industry snapshot: Third quarter 2018 Information and analysis provided by the Insurance Information Institute

2018 -2020 overview: The insurance industry and the economy P/C insurance markets • • 2018 combined ratios for catastrophe-affected lines of business will likely improve (due to reversion to the mean). Personal auto and commercial auto likely will be closer to 100. There is no sign of a hard market in 2018, but premium in both personal and commercial lines will likely continue to rise. Financial markets • In the U. S. , short-term interest rates are finally rising, and this is expected to continue. Long-term rates are finally rising, too. • Although bond yields anticipate inflation continuing to be near 2% for five or more years, more direct measures see prices rising closer to 3%, with wages and prices in some sectors rising faster. The U. S. economy • Real GDP growth has shown unexpected strength in recent calendar quarters. Both personal consumption (+4. 9%) and business nonresidential fixed investment (7. 1%) are rising, heralding a growing exposure base. • This is the second longest expansion since WWII, and many forecasters say it will become the longest when it persists into July 2019. There are virtually no signs of another recession. 2

Commercial lines trends as of 2018: Q 2

4 Property premiums* grow as investment does % change from same quarter, prior year 20% Investment in 10% 8. 1%** 4. 7% 0% -10% Recession % change, nonresidential fixed investment % change, property insurance premiums structures, equipment and software is expected to grow at least partly due to provisions in the Tax Cuts and Jobs Act. Premiums for commercial property insurance should grow nicely due to an expanding exposure base. -20% 08: Q 1 09: Q 1 10: Q 1 11: Q 1 12: Q 1 13: Q 1 14: Q 1 15: Q 1 16: Q 1 17: Q 1 18: Q 1 *Commercial property direct premiums written (fire, allied lines, CMP, inland marine, burglary and theft); business fixed investment (structures, equipment, and software). **Preliminary. Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates. Sources: https: //fred. stlouisfed. org/series/PNFI#0; National Bureau of Economic Research (recession dates); Insurance Information Institute. 4

As hiring goes, exposures follow (000) at quarter-end Manufacturing 25 000 Construction Mining & other extraction Of these industries, 22, 391 20, 784 20 000 17, 668 15 000 10 000 Sources: U. S. Bureau of Labor Statistics; Insurance Information Institute. 18: Q 3 17: Q 3 16: Q 3 15: Q 3 14: Q 3 13: Q 3 12: Q 3 11: Q 3 10: Q 3 09: Q 3 08: Q 3 0 07: Q 3 5 000 construction is enjoying the fastest growth. This is expected to continue for at least the shortterm. At the end of 2018: Q 3, employment in these three industries that are the heart of workers composition exposure, at 20. 8 million, was not quite back to the level reached before the Great Recession. 5

Hospital costs forecast injury costs Price change 10, 5% Recession Hospital CPI 9, 0% 7, 5% 6, 0% 4, 5% 3, 0% 1, 5% For the past five years, prices for hospital services grew more moderately than before, lately at rates ranging between 3% and 6%. Even with these more modest increases, prices for hospital care rose on average several 3. 8% percentage points faster than inflation generally. 0, 0% yy yy yy yy yy yy *Percentage change from same month in prior year through September 2018; seasonally adjusted. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute. 6

Personal lines trends as of 2018: Q 2

Driving patterns predict claim frequency Billions of miles driven in prior year 3 250 3 200 3 150 Overall collision claims per 100 insured vehicles Miles driven 6, 2 3, 218 6, 1 Collision claim frequency Recession 6. 02 6, 0 5, 9 3 050 5, 8 3 000 5, 7 2 950 5, 6 2 900 5, 5 06: Q 3 07: Q 1 07: Q 3 08: Q 1 08: Q 3 09: Q 1 09: Q 3 10: Q 1 10: Q 3 11: Q 1 11: Q 3 12: Q 1 12: Q 3 13: Q 1 13: Q 3 14: Q 1 14: Q 3 15: Q 1 15: Q 3 16: Q 1 16: Q 3 17: Q 1 17: Q 3 18: Q 1 3 100 The sharp rise in collision frequency in 2014 -2016 appears to have peaked in the last year. However, claim severity will likely continue to rise as 2018 will see another 17 million new cars on the road. The only force that could derail the relationship between miles driven and frequency would be a sharp and persistent rise in the cost of gasoline. Sources: Federal Highway Administration; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Institute for Highway Safety; Insurance Information Institute. 8

To rent or to buy? Millions of renter-occupied housing units 48 Millions of owner-occupied housing units Renter-occupied 77 Owner-occupied 78 76 46 74 44 43 42 72 70 40 68 66 38 64 36 62 34 18: Q 2 16: Q 2 14: Q 2 12: Q 2 10: Q 2 08: Q 2 06: Q 2 04: Q 2 02: Q 2 00: Q 1 98: Q 1 96: Q 1 94: Q 1 92: Q 1 90: Q 1 32 60 From 2004 to 2016: Q 4, the number of renteroccupied housing units grew by about 10. 5 million units (+34%), but there was no growth in the number of owner-occupied housing units for 12 years. This streak appears to have ended in 2016: Q 4. This is good news for homeowners insurance premium growth. 58 Sources: U. S. Census Bureau at http: //www. census. gov/housing/hvs/data/histtabs. html, Table 8; Insurance Information Institute. 9

Economic and financial trends as of 2018: Q 2

P/C industry net income after taxes* Billions, 2018 dollars $40 $34, 49 $35 $32, 27 $31, 60 $30 $26, 49 $25 $22, 20 $19, 77 $20 the year, net income varied over the last decade. 2018 had the highest profit in the last 11 years. Why did profits spike in 2018? Favorable conditions: Earned premiums grew by more than 9%, but claims grew by only 3%. $18, 43 $15, 91 $15 $10 $6, 02 In the second quarter of $4, 95 $5 $0 09 10 11 12 13 14 15 16 17 18 *Through second quarter. Adjusted for inflation using the BLS CPI calculator to 2018 dollars. Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 11

Key sources of P/C insurer profits Billions $50 Net investment gains Underwriting gains/losses In the second quarter $40 $6, 7 $3, 2 $4, 3 $30 $1, 0 $29, 3 $29, 1 $35, 0 $28, 2 $31, 0 $32, 4 $27, 4 $28, 0 $33, 4 $10 $12, 9 $0 -$1, 6 -$10 -$0, 6 -$6, 1 -$4, 3 -$3, 7 of 2018, underwriting gains were stronger than any recent prior year. In the second quarter of 2018, investment gains were comparable to or better than most recent first quarters. -$23, 4 -$20 -$30 09 10 11 12 13 14 15 16 17 18 Through second quarter. Data are before taxes and exclude extraordinary items. Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 12

Sources of investment gains Billions $40 Net investment income Realized capital gains/losses 2018: Q 2 had the sixth $35 $30 $5, 5 $10, 7 $4, 2 $3, 7 $25 $7, 5 $3, 9 $8, 4 $4, 7 $3, 8 $20 $15 $10 $24, 0 $25, 1 $25, 4 $24, 3 $23, 6 $24, 0 $22, 7 $24, 1 10 11 12 13 14 15 16 17 $27, 8 $5 $0 -$5 -highest realized capital gains in the last 10 years. Net investment income in the second calendar quarter of each year has been steady, but realized capital gains/losses have been quite variable. -$11, 1 -$10 -$15 09 18 Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute. 13

Bond yields Yield 6, 00% Recession Yield Top investment-grade bond yields have ranged from 3. 5% to 4. 5% for the last three years. These yields probably will not rise much above 5. 0% through 2018. 5, 50% 5, 00% 4, 50% 4, 00% 3. 91% 3, 00% 07: Q 1 07: Q 3 08: Q 1 08: Q 3 09: Q 1 09: Q 3 10: Q 1 10: Q 3 11: Q 1 11: Q 3 12: Q 1 12: Q 3 13: Q 1 13: Q 3 14: Q 1 14: Q 3 15: Q 1 15: Q 3 16: Q 1 16: Q 3 17: Q 1 17: Q 3 18: Q 1 18: Q 3 3, 50% Note: Recession indicated by gray shaded column. Sources: https: //fred. stlouisfed. org/series/AAA#0 ; National Bureau of Economic Research (recession dates); Insurance Information Institute. 14

Change* in the core** Consumer Price Index Percent change 3, 0% Recession Core CPI Over the last decade, 2, 5% 2. 2% 2, 0% 1, 5% 1, 0% prices tracked by the core CPI have generally risen about 2% per year. Lately, however, the core CPI has been rising past the 2% mark. With the economy near full employment, higher core CPI rates seem likely in the near future. 0, 5% 0, 0% 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 *Monthly, year-over-year, through September 2018, seasonally adjusted. **CPI less food and energy. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute. 15

Snapshot special topic The outlook for small businesses is bright

Small business optimism index Index 1986=100 110 108. 8 107. 9 Index is near an all-time high 105 100 95 90 85 13 14 15 16 17 18 Data are seasonally adjusted. Source: NFIB Small Business Economic Trends, September 2018, p. 4; Insurance Information Institute. 17

Private sector business starts, 1994– 2017 Thousands 1 000 956 957 963 Recessions 918 900 867 872 789 800 801 810 826 881 874 777 862 834 829 808 812 888 792 809 746 751 700 600 500 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Data for 2007– 2017 posted July 25, 2018, the latest available. Seasonally adjusted. Sources: Bureau of Labor Statistics, http: //www. bls. gov/news. release/cewbd. t 08. htm. NBER (recession dates). 18

Small business: Single most important problem, Sept 2018 Percent citing problem Problem Current % % 1 year ago Highest % Lowest % Taxes 17 21 32 8 Inflation 3 2 41 0 Poor sales 5 11 34 2 Financing & interest rates 3 1 37 1 Cost of labor 8 5 9 2 Govt. regulations & “red tape” 14 16 27 4 Competition from large businesses 10 9 14 4 Quality of labor 22 19 25 3 Cost/availability of insurance 10 7 29 4 Other 8 9 2004– 06 hard market 31 Source: NFIB Small Business Economic Trends, September 2018, p. 18; Insurance Information Institute. 1 19

Business bankruptcy filings (1994: Q 1– 2018: Q 2) Thousands 18 16 Recessions New bankruptcy law takes effect Below pre-recession level 14 12 10 8 6 4 0 94: Q 1 94: Q 3 95: Q 1 95: Q 3 96: Q 1 96: Q 3 97: Q 1 97: Q 3 98: Q 1 98: Q 3 99: Q 1 99: Q 3 00: Q 1 00: Q 3 01: Q 1 01: Q 3 02: Q 1 02: Q 3 03: Q 1 03: Q 3 04: Q 1 04: Q 3 05: Q 1 05: Q 3 06: Q 1 06: Q 3 07: Q 1 07: Q 3 08: Q 1 08: Q 3 09: Q 1 09: Q 3 10: Q 1 10: Q 3 11: Q 1 11: Q 3 12: Q 1 12: Q 3 13: Q 1 13: Q 3 14: Q 1 14: Q 3 15: Q 1 15: Q 3 16: Q 1 16: Q 3 17: Q 1 17: Q 3 18: Q 1 18: Q 3 2 Business bankruptcies in 2014 were below both the Great Recession levels and the 2003: Q 3– 2005: Q 1 period (the best five-quarter stretch in the last 20 years). Bankruptcies restrict exposure growth in all commercial lines. Sources: U. S. Courts at http: //www. uscourts. gov/sites/default/files/statistics_import_dir/0914_f 2 q. pdf/ Table F-2; Insurance Information Institute. 20

Rate change by account size, 2017: Q 2– 2018: Q 2 3, 0% 2, 0% Small Medium 1, 8% 2, 1% Small- and medium 1, 8% 0, 7% 0, 8% 1, 0% 0, 0% -1, 0% sized businesses have experienced modest rate increases lately, following reductions a year ago. -0, 5% -1, 0% -1, 2% -2, 0% -3, 1% -4, 0% 2017: Q 2 2017: Q 3 2017: Q 4 2018: Q 1 Source: CIAB, Commercial Property/Casualty Market Index, Q 2/2018. 2018: Q 2 21

Summary Outlook for the small business market Business owners are optimistic about the present and the near future. New business starts are at record highs. Bankruptcy filings are unusually low. Taxes and government regulations are the two single largest problems. Cost and quality of labor make it hard to fill job openings. Only 10 percent cite the cost and availability of insurance as the single most important problem. This is slightly above last year and not far above the all-time low. Commercial insurance rates are rising modestly. 22

Quarterly P/C industry snapshot: Third quarter 2018 For more information, contact: Dr. Steven Weisbart | stevenw@iii. org