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Hartwig ‐ Outlook for 2014 and Beyond 7/30/2014
Wed_GS_Hartwig_Outlook for 2014 1
AEGIS 2014POLICYHOLDERS’ CONFERENCEAEGIS 2014POLICYHOLDERS’ CONFERENCE
U N C E R T A I N T I M E S : E C O N O M I C & I N S U R A N C E I N D U S T R Y O U T L O O K F O R 2 0 1 4 A N D B E Y O N D
Robert P. Hartwig, Ph.D., CPCUPresident & EconomistInsurance Information Institute
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Property Casualty Insurance Industry:Financial Update
2013 was a welcome respite from near-record catastrophe activity
2014: too soon to tell
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P/C Industry Net Income after Taxes
2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.3% 2014 ROAS1 = 8.4%
$14,
178
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$20,
559
-$6,970
$3,0
46
$30,
029
$38,
501
$44,
155
$65,
777
$62,
496
$3,0
43
$28,
672
$35,
204
$19,
456 $3
3,52
2
$63,
784
$13,
654
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
14:Q
1
Net income rose strongly (+81.9%) in
2013 vs. 2012 on lower CATs, capital gains
$ Millions
2014 is off to a slower start
ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 8.2% ROAS through 2014:Q1, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO; Insurance Information Institute
1991 – 2014:Q1
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-5%
0%
5%
10%
15%
20%
25%
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 09 10 11 12 13 14
Profitability Peaks & Troughs in the P/C Insurance Industry
1977: 19.0%1987: 17.3%
1997: 11.6% 2006: 12.7%
1984: 1.8% 1992: 4.5% 2001: -1.2%
9 years
History suggests next ROE peak will be in 2016-2017
1975: 2.4%
2013 10.4%
2014:Q1 8.2%
1975 – 2014:Q1*ROE
*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.
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P/C profitability is both by cyclicality and ordinary volatility
-5%
0%
5%
10%
15%
20%
87 88 89 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*
ROE: Property / Casualty Insurance by Major Event
Hugo
Andrew
Northridge
Lowest CAT losses in 15 years
Sept. 11
Katrina, Rita, Wilma
4 Hurricanes
Financial crisis*
Record tornado losses
Sandy
Low CATs
1987 – 2014:Q1Percent
* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through Q1:2014. Sources: ISO, Fortune; Insurance Information Institute.
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P/C Insurance Industry Combined Ratio
115.8
107.5
100.198.4
100.8
92.6
95.7
101.099.3
100.8
106.3
102.4
96.7 97.4
90
100
110
120
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
As recently as 2001, insurers paid out nearly $1.16 for every
$1 in earned premiums
Relatively low CAT losses,
reserve releases
Heavy use of reinsurance lowered
net losses
Relatively low CAT losses,
reserve releases
Avg. CAT losses, more
reserve releases
Higher CAT losses, shrinking reserve releases, toll of soft
market
Cyclical deterioration
Sandy impacts
Lower CAT losses
Best combined ratio since 1949 (87.6)
* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014:Q1 = 97.3. Sources: A.M. Best, ISO.
2001 – 2014:Q1*
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A 100 Combined Ratio Isn’t What It Once Was
* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:Q1 combined ratio including M&FG insurers is 97.3; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%.
Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.
Investment impact on ROEsCombined Ratio / ROE
97.5
100.6 100.1 100.8
92.795.7
101.299.5
101.0
106.5
102.4
96.7 97.4
14.3%15.9%
8.8%9.6%
12.7%10.9%
4.3%
7.4% 7.9%
4.7%6.2% 9.8%
8.2%
0%
5%
10%
15%
20%
1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:Q185
90
95
100
105
110
Combined Ratio ROE*
Lower CATs helped ROEs in 2013
A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979
Combined ratios must be lower in today’s depressedinvestment environment to generate risk appropriate ROEs
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1975-78 1984-87 2000-03
-5%
0%
5%
10%
15%
20%
25%
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 09 10 11 12 13 14
Net Premium Growth: Annual Change1971 – 2014:Q1
Percent
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 1930-33.
2014:Q1: 3.6%2013: 4.6%2012: +4.3%
Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.
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Average Commercial Rate Change, All Lines,-0
.1%
-3.2
%
-5.9
%
-7.0
%
-9.4
%
-9.7
%
-8.2
%
-4.6
% -2.7
%
-3.0
%
-5.3
%
-9.6
%
-11
.3%
-11
.8%
-13.
3%
-12.
0%
-13.
5%
-12.
9% -11
.0%
-6.4
%
-5.1
%
-4.9
%
-5.8
%
-5.6
%
-5.3
%
-6.4
%
-5.2
%
-5.4
% -2.9
%-0
.1% 0.
9% 2.7% 4.
4%
4.3%
3.9% 5.
0%
5.2%
4.3%
3.4%
2.1%
1.5%
-16%
-11%
-6%
-1%
4%
9%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
KRW effect
Pricing as of Q1:2014 was positive for the 11th consecutive quarter
Q2 2011 marked the last of 30th consecutive quarter
of price declines
1Q:2004 – 1Q:2014Percent
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Insurance Information Institute
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Change in Commercial Rate Renewals, by Line
0.0%
0.7% 0.9%
1.5% 1.7%2.0%
3.3%
4.1%
4.9%5.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
CommercialProperty
BusinessInterruption
Surety GeneralLiability
Umbrella Construction CommercialAuto
WorkersComp
EPL D&O
D&O increases are large than any other line, followed by EPL and Workers’ Comp
2014:Q1Percentage Change (%)
Major commercial lines renewed generally upward in Q4:2014 for the 11th consecutive quarter; D&O, employment practices and workers comp leading the way; lower cat losses and falling reinsurance prices have pressured property coverages lower; low interest rates still exert upward rate pressure
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
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Change in Commercial Rate Renewals, by Account Size
KRW : no lasting impact
Pricing turned negative in early 2004
and remained that way for 7 ½ years
Peak = 2001:Q4 +28.5%
Pricing turned positive in Q3:2011, the first increase in
nearly 8 years; Q1:2014 renewals were up 1.5%; some insurers
posted stronger numbers
Trough = 2007:Q3 -13.6%
1999:Q4 – 2014:Q1Percentage Change (%)
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
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Cumulative Quarterly Commercial Rate Changes, by Account Size1999:Q4 – 2014:Q1
1999:Q4 = 100
Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.
Despite 11 consecutive quartersof gains (Q1:2014 = +1.5%), pricing today is where is was in mid-2001
(around 9/11), suggesting additional rate need going forward, esp. in light
of record low interest rates
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Wed_GS_Hartwig_Outlook for 2014 7
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Policyholder Surplus$4
87.1
$496
.6
$512
.8
$521
.8
$517
.9
$515
.6
$505
.0
$478
.5
$455
.6
$437
.1
$463
.0
$490
.8
$511
.5
$540
.7
$530
.5
$544
.8
$559
.2
$566
.5
$559
.1
$538
.6
$550
.3
$570
.7
$567
.8
$583
.5
$586
.9
$607
.7
$614
.0
$624
.4
$653
.3
$662
.0
$400
$450
$500
$550
$600
$650
$700
06:Q
4
07:Q
1
07:Q
2
07:Q
3
07:Q
4
08:Q
1
08:Q
2
08:Q
3
08:Q
4
09:Q
1
09:Q
2
09:Q
3
09:Q
4
10:Q
1
10:Q
2
10:Q
3
10:Q
4
11:Q
1
11:Q
2
11:Q
3
11:Q
4
12:Q
1
12:Q
2
12:Q
3
12:Q
4
13:Q
1
13:Q
2
13:Q
3
13:Q
4
14:Q
1
2007:Q3Pre-crisis peak
Surplus as of 3/31/14 stood at a record high $662.0 billion
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 industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history
Drop due to near-record 2011 CAT losses
The P/C insurance industry entered 2014in very strong financial condition
Sources: ISO, A.M .Best.
2006:Q4 – 2014:Q1$ Billions
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US Insurance Mergers and Acquisitions, P/C Sector
(1) Includes transactions where a U.S. company was the acquirer and/or the target.Source: Conning proprietary database.
2002 – 2013 (1)$ Millions
$486
$20,353
$425
$9,264
$35,221
$13,615$16,294
3507.0$6,419
$12,458
$4,651 $4,397
0
10
20
30
40
50
60
70
80
90
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Transaction value Number of transactions
M&A activity in the P/C sector remains below pre-crisis levels
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US Insured Catastrophe Loss Update
2013 was a welcome respite from the high catastrophe losses in recent years
…but 2014 was the 5th costliest winter on record in the US
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U.S. Insured Catastrophe Losses
$14.
2
$4.9 $8
.1
$38.
3
$8.9
$26.
8
$12.
8
$11.
1
$3.8
$14.
5
$11.
7
$6.2
$35.
2
$7.7
$16.
5
$34.
2
$74.
5
$10.
7
$7.6
$29.
6
$11.
6
$14.
6
$34.
1
$35.
5
$12.
9
$9.5
$0
$10
$20
$30
$40
$50
$60
$70
$80
89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14*
$9.1 billion in insured CAT losses through June 30
$ Billions, $ 2013
*Through 6/30/14.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.
2013 was a welcome respite from 2012, the 3rd costliest year for insured disaster losses in US history. Longer-term trend
is for more—not fewer—costly events
2012 was the 3rd most expensive year ever for
insured CAT losses
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Combined Ratio Points Associated with Catastrophe Losses0.
8 1.1
1.1
0.1
0.9
3.6
0.4
1.2
0.4 0.
8 1.3
0.3
0.4 0.7
1.5
10.
4
0.4 0.7
1.8
1.1
0.6 1.
4 21.
3 20.
50.
5 0.7
3
1.2
2.1
8.8
2.3
5.9
3.3
2.8
13.
62.
91.
65.
41.
63.
33.
38.
12.
71.
65
2.6
3.4
8.7 8.9
3.4
0
2
4
6
8
10
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
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
2009
2010
2011
2012
2013
E
The catastrophe loss component of private insurer losses has increased sharply in recent decades
Catastrophe losses as a share of all losses reached
a record high in 2012
*2010s represent 2010-2013.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 (1960-2011); A.M. Best (2012E) Insurance Information Institute.
1960 – 2013*Combined Ratio Points
Avg. CAT loss component of the combined ratio by decade
1960s: 1.04 1990s: 3.39
1970s: 0.85 2000s: 3.52
1980s: 1.31 2010s: 6.1E*
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Top 16 Most Costly Disasters in US History, Insured Losses
$4.5
$5.6
$5.7
$6.8
$7.2
$7.6
$7.9
$8.8
$9.3 $11.
2
$13.
6 $19.
0 $24.
2
$24.
9
$25.
9
$49.
4
$0
$10
$20
$30
$40
$50
$60
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita(2005)
Tornadoes /T-Storms
(2011)
Tornadoes /T-Storms
(2011)
Hugo(1989)
Ivan(2004)
Charley(2004)
Wilma(2005)
Ike(2008)
Sandy*(2012)
Northridge(1994)
9/11 Attack(2001)
Andrew(1992)
Katrina(2005)
Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.
Hurricane Irene became the 12th most expensive hurricane in US history in 2011
2013 Dollars$ Billions
12 of the 16 most expensive events in US history have occurred over the past decade
Hurricane Sandy became the 5th
costliest event in US insurance history
Includes Tuscaloosa, AL,
tornado
Includes Joplin, MO, tornado
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Top Ten States for Insured Catastrophe Losses
$1,995
$1,509
$1,190
$909 $907 $805 $773 $762
$677 $593
$0
$400
$800
$1,200
$1,600
$2,000
Oklahoma Texas Illinois Minnesota Colorado Mississippi Nebraska Georgia Indiana Louisiana
Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.
2013$ Millions
Oklahoma led the country in insured CAT losses in 2013
due largely to severe tornado activity
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Top Five States by Insured Catastrophe Losses in 2012*
$9,756
$6,369
$2,318 $1,511 $1,440
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
New York New Jersey Texas Kentucky Colorado
*Includes catastrophe losses of at least $25 million.Sources: PCS unit of ISO; Insurance Information Institute.
2012$ Billions
NY and NJ led the US in CAT losses in 2012 due to Sandy
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Inflation Adjusted US Catastrophe Losses by Cause of Loss
41.1%
36.0%
6.4%
6.4%
4.8%3.8%1.4%
0.1%
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2013 dollars.
2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. 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.
Hurricanes & tropical storms, $159.1
Fires (4), $5.5
Events involving tornadoes (2), $139.3
Winter storms, $24.7
Terrorism, $24.8
Geological events, $18.4Wind / hail / flood (3), $14.6 Other (5), $0.2
Wind losses by far cause the most catastrophe
losses, even if hurricanes / tropical storms are
excluded
Tornado share of CAT losses is rising
Insured CAT losses from 1993-2012 totaled $386.7
billion, an average of $19.3 billion per year or $1.6
billion per month
1994 – 20131
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Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity) Climatological (temperature extremes, drought, wildfire)Meteorological (storm) Hydrological (flood, mass movement)
Natural Disasters in the United States
22
19
81
6
There were 128 natural disaster events in 2013
1980 – 2013Number of Events (Annual Totals 1980 – 2013)
Source: MR NatCatSERVICE
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Losses Due to Natural Disasters in the US
2013 CAT lossesOverall : $21.8BInsured: $12.8B
Indicates a great deal of losses are uninsured
(~40%-50% in the US) = growth opportunity
2013 losses were far below 2011 and 2012 and were
44% lower than the average from 2000-2012
1980 – 2013 (overall and insured losses)2013 Dollars, $ Billions
Source: MR NatCatSERVICE
Overall losses (in 2012 values) Insured losses (in 2013 values)
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As of December 31, 2013Number
of Events FatalitiesEstimated OverallLosses (US $m)
Estimated Insured Losses (US $m)
Severe Thunderstorm 69 110 16,341 10,274
Winter Storm 11 43 2,935 1,895
Flood 19 23 1,929 240
Earthquake & Geophysical 6 1 Minor Minor
Tropical Cyclone 1 1 Minor Minor
Wildfire, Heat, & Drought 22 29 620 385
Totals 128 207 21,825 12,794
Natural Disaster Losses in the United States, by Type, 2013
Source: Munich Re NatCatSERVICE
$ Millions
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Top 16 Most Costly World Insurance Losses, 1970 – 2013*
$7.9 $8.2 $8.7 $8.8 $9.3 $9.7 $11.2$13.6 $13.6 $13.6
$19.0
$24.2 $24.9 $25.9
$39.1
$49.4
$0
$10
$20
$30
$40
$50
$60
Hugo(1989)
WinterStormDaria(1991)
ChileQuake(2010)
Ivan(2004)
Charley(2004)
TyphoonMirielle(1991)
Wilma(2005)
ThailandFloods(2011)
NewZealandQuake(2011)
Ike(2008)
Sandy(2012)
Northridge(1994)
WTCTerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)**
Katrina(2005)
*Figures do not include federally insured flood losses.Sources: Munich Re; Swiss Re; Insurance Information Institute research.
Insured losses, 2013 dollars$ Billions 5 of the top 14 most expensive catastrophes
in world history have occurred within the most recent four years (2010-2013)
Hurricane Sandy is now the 6th costliest event in global insurance history
2012 insured CAT losses totaled $60 billion; economic losses totaled $140
billion, according to Swiss Re
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Meteorological events (storm)
880loss
events
EarthquakeChina, 20 April
Severe storms, tornadoesUSA, 18–22 May
FloodsIndia, 14–30 June
HailstormsGermany, 27–28 July
Winter Storm Christian (St. Jude)Europe, 27–30 October
Typhoon HaiyanPhilippines, 8–12 November
Severe storms, tornadoesUSA, 28–31 May
Hurricanes Ingrid & ManuelMexico, 12–19 September
FloodsCanada, 19–24 June
FloodsEurope, 30 May–19 June
Heat waveIndia, April–June
Typhoon FitowChina, Japan, 5–9 October
Earthquake (series)Pakistan, 24–28 September
FloodsAustralia, 21–31 January
Meteorite impactRussian Federation, 15 February
Flash floodsCanada, 8–9 July
FloodsUSA, 9–16 September
Source: Munich Re Geo Risks Research, NatCatSERVICE – as of January 2014.
Natural Loss EventsFull year 2013World Map
Geophysical events(earthquake, tsunami, volcanic activity)
Hydrological events(flood, mass movement)
Meteorological events (storm)
Selection of significant Natural catastrophes
Natural catastrophes
Climatological events(extreme temperature, drought, wildfire)
Extraterrestrial events(Meteorite impact)
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Wed_GS_Hartwig_Outlook for 2014 14
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Nu
mb
er
Natural Disasters Worldwide
There were 880 natural disaster events globally in 2013 compared to 905 in 2012
1980 – 2013
Geophysical (earthquake, tsunami, volcanic activity) Climatological (temperature extremes, drought, wildfire)Meteorological (storm) Hydrological (flood, mass movement)
Source: MR NatCatSERVICE
Number of Events
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1980 – 2013 (overall and insured losses)2013 Dollars, $ Billions
Source: MR NatCatSERVICE
Overall losses (in 2012 values) Insured losses (in 2013 values)
Losses Due to Natural Disasters Worldwide
10-Year avg. lossesOverall: $184 billionInsured: $56 bilion
2013 lossesOverall: $125B Insured: $34B
There is a clear upward trend in both insured
and overall losses over the past 30+ years
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US Thunderstorm Insured Loss Trends
Thunderstorm losses in 2013 totaled $10.3 billion, the 6th highest on record
Average thunderstorm losses are up sevn-fold
since the early 1980s. The 5-year running average
loss is up sharply
Hurricanes get all the headlines, but thunderstorms are consistent producers
of large scale loss. 2008-2013 are the most expensive years on record
1980 – 2013
Source: Property Claims Service, and MR NatCatSERVICE
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Convective Loss Events in the US
Convective events are those caused by straight-
line winds, tornadoes, hail, heavy precipitation, flash
floods and lightning
The frequency of convective events has rising tremendously
over the past 30+ years
1980 – 2013Number of Events
Source: Geo Risks Research, NatCatSERVICE.
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Overall losses (in 2012 values) Insured losses (in 2013 values)
Convective Loss Events in the US
Convective events are those caused by straight-line winds,
tornadoes, hail, heavy precipitation, flash floods
and lightning
The insured and total economic cost of convective events
has rising tremendously over the past 30+ years
1980 – 2012 and first half 2013 (overall and insured losses) $ Billions US
Analysis contains: straight-line winds, tornadoes, hail, heavy precipitation, flash floods, lightning.Source: Geo Risks Research, NatCatSERVICE.
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Insured Homeowners Losses Due to Lightning
$735.5
$819.6
$882.2
$942.4
$1,065.5
$798.0
$1,033.5
$952.5 $969.0
$673.5
$500
$600
$700
$800
$900
$1,000
$1,100
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Insurance Information Institute.
2004 – 2013$ Millions
The increased number and value of expensive electronic devices in homes has pushed total lightning claim costs to about $1 billion in many years even as the number of lightning claims falls
Lightning claims cost insurers an estimated $673.5 million in 2013, down from previous years
as drought and fewer convective events reduced strikes
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Wed_GS_Hartwig_Outlook for 2014 17
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Outlook for the 2014 Atlantic Hurricane Season
Hurricanes and tropical storms drive some of the largest losses utilities expect each year
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Top 12 Most Costly Hurricanes in US History
$4.5 $5.6 $5.7 $6.8 $7.9 $8.8 $9.3$11.2
$13.6
$19.0
$25.9
$49.4
$0
$10
$20
$30
$40
$50
$60
Irene(2011)
Jeanne(2004)
Frances(2004)
Rita(2005)
Hugo(1989)
Ivan(2004)
Charley(2004)
Wilma(2005)
Ike(2008)
Sandy(2012)
Andrew(1992)
Katrina(2005)
Sources: PCS; Insurance Information Institute inflation adjustments to 2013 dollars using the CPI.
Insured losses, 2013 dollars$ Billions
10 of the 12 most costly hurricanes in insurance history occurred over the past 10 years (2004—2013)
Hurricane Sandy is the 3rd costliest hurricane in US insurance history
Hartwig ‐ Outlook for 2014 and Beyond 7/30/2014
Wed_GS_Hartwig_Outlook for 2014 18
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Outlook for 2014 Hurricane Season
Median*2005
(Katrina Year) 2014F
Named Storms 12.0 28 10
Named Storm Days 60.1 115.5 40
Hurricanes 6.5 14 4
Hurricane Days 21.3 47.5 15
Major Hurricanes 2.0 7 1
Major Hurricane Days 3.9 7 3
Accumulated Cyclone Energy 92.0 NA 65
Net Tropical Cyclone Activity 103% 275% 70%
30% less active than typical year
*Over the period 1981-2010.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.
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Probability of Major Hurricane Landfall (CAT 3, 4, 5)
Average* 2014F
Entire US Coast 52% 40%
US East Coast Including Florida Peninsula 31% 22%
Gulf Coast from FL Panhandle to Brownsville, TX 30% 23%
Also…above-average major hurricane
landfall risk in Caribbean for 2011 (32% vs. 42%)
*Average over the past century.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.
2014
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Selected Large Outages Associated with Tropical Systems
0.63
0.78
0.81
0.91
0.94
[VALUE].00
1.07
1.27
1.6
2.1
2.47
2.62
3.25
3.5
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
Connecticut: Sandy (2012)
Texas: Rita (2005)
New Jersey: Irene (2011)
Katrina: Katrina (2005)
New York: Irene (2011)
Mississippi: Katrina (2005)
Alabama: Ike (2008)
Pennsylvania: Sandy (2012)
Florida: Charley (2004)
New York: Sandy (2012)
Texas: Ike (2008)
New Jersey: Sandy (2012)
Florida: Wilma (2005)
Florida: Frances (2004)
Hurricanes and tropical storms have produced significant losses
for insurers in recent years, including with Sandy in 2012
By StateMillions of Customers
Sources: US Dept. of Energy, Vertyx, AP analysis; Insurance Information Institute.
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Fire & Ice
Increasingly extreme weather has proven costly to utilities and insurers alike
The “polar vortex” and wildfire
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Winter 2014
This winter’s “Polar Vortex” allowed frigid air to stream southward
into the Eastern US and Canada. Minimum temperatures
in some locations were the coldest in 20 years. Cold, snow and
ice led to several significant frozen precipitation and freezing events,
reaching as far south as the Gulf Coast and North Florida
Energy demand skyrocketed, created stress on the grid and caused natural gas prices to skyrocket
The “polar vortex”
Source: NASA; Munich Re.
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Insured losses from severe
winter events totaled $2.4
billion in 2014
5-year running average
Winter Storm and Winter Damage Events in the US and Canada
Insured Losses (Millions, $ 2014)
Sources: Munich Re NatCatSERVICE; Insurance Information Institute.
Insured winter storm and damage losses in the US and Canada totaled $2.4 billion this year, making 2014 the 5th costliest winter since 1980. Economic losses totaled $3.4 billion.
Three of the four most costly years ever for insured losses from winter storms and damage occurred inthe 1990s, led by the “Storm of the Century” in 1993
1980 – 2014*
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Number of Acres Burned in Wildfires
Acreage burned was at near-record levels
in 2011-2012
Source: National Interagency Fire Center
1980 – 2013
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Wildland Fire Outlook for the Western US Is Grave
Much of the West and Northwest US is at an
elevated risk for wildfire due to
prolonged drought and high temperatures
Source: National Interagency Fire Center
Hartwig ‐ Outlook for 2014 and Beyond 7/30/2014
Wed_GS_Hartwig_Outlook for 2014 22
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Cyber Risk
Cyber risk is a rapidly emerging exposure for businesses large and small in every industryNEW III white paper available at: www.iii.org
AEGIS 2014POLICYHOLDERS’ CONFERENCE
157
321
446
656
498
662
419447
619
66.9
19.1
127.7
35.7
222.5
16.2 22.9 17.3
87.9
0
40
80
120
160
200
240
2005 2006 2007 2008 2009 2010 2011 2012 2013*100
200
300
400
500
600
700
# Data Breaches # Records Exposed (Millions)
Data Breaches 2005-2013
*2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.
By number of breaches and records exposed# Data Breaches/Millions of Records Exposed
The total number of data breaches (+38%) and number of records exposed (+408%) in 2013 soared
Millions
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43%
36%
17%
4%
External Cyber Crime Costs
Other costs* 0%Business disruption
*Other costs include direct and indirect costs that could not be allocated to a main external cost categorySource: 2013 Cost of Cyber Crime: United States, Ponemon Institute.
Information loss (43%) and business disruption or lost productivity (36%) account for the majority of external costs due to cyber crime
Equipment Damage
Business Disruption
Revenue loss
Information loss
Fiscal year 2013
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34.4%
43.8%
9.0%
9.1%3.7%
2013 Data Breaches By Business Category
Other costs* 0%Business disruption
Source: Identity Theft Resource Center, http://www.idtheftcenter.org/images/breach/2013/UpdatedITRCBreachStatsReport.pdf
The majority of the 614 data breaches in 2013 affected business and medical / healthcareorganizations (Govt./Military breaches fell)
Banking / Credit / Financial, 23 (3.7%)
Educational, 55 (9.0%)
Govt. / Military, 56 (9.1%)
Business, 211 (34.4%)
By number of breaches
Medical / Healthcare, 269 (43.8%)
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Wed_GS_Hartwig_Outlook for 2014 24
AEGIS 2014POLICYHOLDERS’ CONFERENCE
41%
29%
30%
Main Causes of Data Breach Globally
Other costs* 0%Business disruption
*The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection.Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014
Human error
Malicious or criminal attack*
System glitch
Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30 percent concern
a negligent employee or contractor (human factor).
AEGIS 2014POLICYHOLDERS’ CONFERENCE
21%
21%
13%
11%
9%
8%
7%
5%5%
The Most Costly Cyber Crimes
Other costs* 0%Business disruption
Source: 2013 Cost of Cyber Crime: United States, Ponemon Institute.
Malicious insiders
Malicious code
Phishing + social engineering
Denial of service, malicious code and web-based attacks account for more than 55 percent of all cyber costs per US organization on an annual basis
Fiscal year 2013
Denial of service
Web-based attacks
Stolen devices
Malware
Viruses, worms, TrojansBotnets
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AEGIS 2014POLICYHOLDERS’ CONFERENCE
Top Ten Global Business Risks for 2014
10%
10%
12%
14%
15%
19%
21%
24%
33%
43%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Quality deficiencies, serial defects
Theft, fraud, corruption
Cyber crime, IT failures, espionage
Intensified competition
Loss of reputation or brand value (e.g. from social…
Market stagnation or decline
Changes in legislation and regulation
Fire, explosion
Natural catastrophes
Business interruption, supply chain risk
Cyber and reputational challenges are the most significant movers in this year’s Risk Barometer rankings. Cyber moved into the top 10 global business risks for the first time.
Source: Allianz Risk Barometer on Business Risks 2014
AEGIS 2014POLICYHOLDERS’ CONFERENCE
Perception Is That the Risk of Cybercrime Is Increasing
Source: 2014 Global Economic Crime Survey, PWC.
4%
57%
39%
4%
47%
48%
Decreased
Remained the same
Increased
2014 Global 2011Global
The perception of the risk of cybercrime is increasing at a faster pace than reported actual occurrences. In 2014, some 48% of respondents
said their perception of the risk of cybercrime increased, up from 39% in 2011.
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Wed_GS_Hartwig_Outlook for 2014 26
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Cybercrime Costs Are Higher for US Companies Compared to Global Average
Source: 2014 Global Economic Crime Survey, PWC.
8%
3%
19%
7%
Lost $50,000 to $1 million
Lost $1 million or more
2014 USA 2014 global
US organizations are more at risk of suffering financial losses in excess of $1 million due to cybercrime.
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Increase in Purchase of Cyber Insurance among US Companies
Source: Benchmarking Trends: Interest in Cyber Insurance Continues to Climb, Marsh Risk Management Research Briefing, April 2014
37%
11%
11%
13%
14%
19%
29%
21%
All other
Health care
Communications, media…
Professional services
Education
Retail / wholesale
Financial institutions
All industries
Interest in cyber insurance continues to climbThe number of companies purchasing cyber insurance increased 21% from 2012 to 2013
2013
Hartwig ‐ Outlook for 2014 and Beyond 7/30/2014
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AEGIS 2014POLICYHOLDERS’ CONFERENCE
Investments: The New Reality
Investment performance is a key driver of profitabilityDepressed yields are still pressuring pricing
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Property / Casualty Insurance Industry Investment Income
$38.9$37.1 $36.7
$38.7 $39.6
$49.5$52.3
$54.6
$51.2
$47.1 $47.6$49.2
$48.0 $47.4$45.8
$30
$40
$50
$60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
1 Investment gains consist primarily of interest and stock dividends. *2014 investment income is estimated Q1, annualized.Sources: ISO; Insurance Information Institute..
2000 – 20141
$ Billions
Due to persistently low interest rates, investment income fell in 2012 and in 2013 and is falling again in 2014
Investment earnings are still 16% below their 2007 pre-crisis peak
Hartwig ‐ Outlook for 2014 and Beyond 7/30/2014
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Property / Casualty Insurance Industry Investment Income
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Recession
2‐Yr Yield
Yields on 10-Year US Treasury Notes have been essentially below
5% for a full decade
US Treasury yields plunged to historic
lows in 2013. Longer-term yields have rebounded a bit
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 June 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.
1990 – 20141
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Energy Sector: Industry Future is Bright
US is becoming an energy powerhouse; will fuel P&C exposures
Need infrastructure investment
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AEGIS 2014POLICYHOLDERS’ CONFERENCE
$20.2 $20.6$19.9 $20.0 $19.5
$18.9 $19.4$20.2
$21.1 $21.6$22.4
$24.0
$25.3 $25.6
$10
$12
$14
$16
$18
$20
$22
$24
$26
$28
00 01 02 03 04 05 06 07 08 09 10 11 12 13
US Natural Gas Production
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
2000 – 2013Trillions of Cubic Ft. per Year The US is already the world’s largest natural gas producer—
recently overtaking Russia. This is a potent driver of commercial insurance exposures
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5.19 5.09 5.08 55.35 5.47 5.65
6.49
7.44
8.37
9.13
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F
US Crude Oil Production
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
2005 – 2015PMillions of Barrels per Day Crude oil production in the US is expected to increase by
82.6% from 2008 through 2015—and could overtake Saudi Arabia as the world’s largest oil producer
Hartwig ‐ Outlook for 2014 and Beyond 7/30/2014
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AEGIS 2014POLICYHOLDERS’ CONFERENCE
156.
415
6.4
156.
715
7.6
158.
715
7.8
158
159.
516
016
1.5
161.
216
1.2
163.
116
4.4
166.
616
9.3
170.
117
117
2.5
173.
617
6.3
178.
217
8.5
180.
918
1.9
183.
118
4.8
185.
218
5.7
186.
818
7.6
188
188
188.
219
019
1.7
191.
919
3.4
192.
419
2.6
193.
119
3.3
195
196.
519
9.7
200.
620
320
4.1
205.
320
7.8
207.
520
7.9
210.
221
1.5
150
160
170
180
190
200
210
220
1/10
2/10
3/10
4/10
5/10
6/10
7/10
8/10
9/10
10/1
011
/10
12/1
01/
112/
113/
114/
115/
116/
117/
118/
119/
1110
/11
11/1
112
/11
1/12
2/12
3/12
4/12
5/12
6/12
7/12
8/12
9/12
10/1
211
/12
12/1
21/
132/
133/
134/
135/
136/
137/
138/
139/
1310
/13
11/1
312
/13
1/14
2/14
3/14
4/14
5/14
6/14
Oil & Gas Extraction Employment
*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
January, 2010 – June, 2014*Thousands Oil and gas extraction employment is up 35.2% since January, 2010 as the
energy sector booms. Domestic energy production is essential to any robust economic recovery in the US
Highest since August, 1986
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Power Sector Supply, Demand and Investment
Substantial energy infrastructure investments are necessary for decades to come—along with insurance solutions
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354.8406
523.9
629.8
729.2
819.6
0
100
200
300
400
500
600
700
800
900
1990 2000 2010 2020P 2030P 2040P
World Primary Energy Consumption
Source: Energy Information Administration, 2013 International Energy Outlook, Insurance Information Institute.
1990 – 2040PQuadrillion BTUs
Between 2010 and 2040, energy consumption is projected to increase by 56.4% worldwide
Growth in worldwide energy consumption will create more risk and vulnerabilities (natural and manmade); innovations in risk
management and insurance are needed
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3%
44%
27%
25%
Cumulative Projected Investment in Global Energy Infrastructure
Other costs* 0%Business disruption
Source: International Energy Agency, World Energy Outlook 2011.
Projected energy infrastructure investment through 2035 total $38 trillion; implies substantial incurrence of risk
2011 – 2035 ($ Trillion)Coal, $1.1, (3%)
Biofuels, $0.3, (1%)
Power, $16.9, (44%)
Oil, $10.1, (27%)
Natural gas, $9.5, (25%)
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US Electricity Generation by Fuel
Other costs* 0%Business disruption
1990 – 2040F (Trillions of kWh)
Natural gas share of fossil fired generation will grow rapidly (more
investment needed). Coal fired generation will remain flat but its share will fall due to abundant
gas and EPA carbon regulations
Source: US Energy Information Administration, 2014 Annual Energy Outlook Early Release Overview; Insurance Information Institute.
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1799 1598 1606 1641 1652 1640 1635
3217 15 16 15 15 16
776 894 1020 1118 1256 1374 1471
807 774 779 779 782 786 811390 534 630 625 660 644 735
0500
100015002000250030003500400045005000
2010 2015 2020 2025 2030 2035 2040
Coal Petroleum Natural Gas Nuclear Renewable Other
US Electric Power Generation by Fuel Source
Source: US Energy Information Administration, Annual Energy Outlook 2014, Appendix A7.
2010 – 2040FBillions of Kilowatt Hours
Demand for electricity is expected to grow at an 0.8% annual rate through 2040 Renewables and natural gas will account for an increasing share of fuel source
3,806 3,8194,025 4,217 4,370 4,508 4,675
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US Electric Power Generation by Fuel Source
0.8%
1.7%1.4%
0.4%0.2%
-0.5%-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
Overall Renewable Natural Gas Coal Nuclear Petroleum
Source: US Energy Information Administration, Annual Energy Outlook 2014; Insurance Information Institute.
2012 – 2040F (Billion kWh)Annual Growth Rate (%)
Overall power generation capacity will growth at just 0.8% through 2040, mostly from natural gas
Growth in renewable capacity is projected to be the fastest but is probably also the most uncertain
Natural gas generation will account for the majority of
new capacity
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US Private Power Construction
*Through April 2014.Source: US Dept. of Commerce; Energy Information Administration, Wells Fargo Securities (June 6, 2014 research report).
2000 – 2014* (% change, 3-month moving average)
Power construction accounts for a large
share of all construction activity. The recent
slowdown was in part due to the expiration of
renewable production tax credits. Going forward,
about 75% of new capacity will be for gas
fired plants
Hartwig ‐ Outlook for 2014 and Beyond 7/30/2014
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AEGIS 2014POLICYHOLDERS’ CONFERENCE
Value of Power Sector Construction
$23.6 $21.0 $22.0$17.4 $16.4
$21.7 $22.0$29.3 $31.5
$36.8$41.5
$35.4 $38.4 $42.2
$66.1
$81.1$88.9
$77.9 $75.2
$97.4$90.6
$107.4
$0
$20
$40
$60
$80
$100
$120
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
*seasonally adjusted at annualized rates through May 2014 (latest available).Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.
1993 – 2014*$ Billions
The Value of Power Construction in the US Is Rising
Power construction can be erratic but now seems to be headed for a record $100+ billion
in 2014 (based on data through May)
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Investment in US Power Plants
$1,234.0
$185.0 $183.0$4.0
$90.0 $143.0$57.0
$219.0$72.0
$212.0$67.0
$0$200$400$600$800
$1,000$1,200$1,400
Tot
al
Coa
l
Ga
s
Oil
Nuc
lear
Bio
ene
rgy
Hyd
ro
Win
d O
nsh
ore
Win
d O
ffsh
ore
So
lar
PV
Oth
er*
*Includes geothermal, concentrating solar power and marine.Sources: International Energy Agency, 2014 World Energy Investment Outlook, Table 3.2; Insurance Information Institute.
2004 – 2013$ Billions of 2012
An estimated $1.234 trillion will be invested in power plants through 2035
An estimated $1.234 trillion will be invested in power plants in the
US through 2035 – 12.9% of the $9.553 trillion forecast globally
Hartwig ‐ Outlook for 2014 and Beyond 7/30/2014
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AEGIS 2014POLICYHOLDERS’ CONFERENCE
Investment in US Transmission & Distribution Infrastructure
$254.0
$98.0$19.0
$138.0
$564.0
$183.0
$16.0
$365.0
$0$100$200$300$400$500$600
Tot
al
New
Dem
and
Ren
ewab
les
Ref
urb
ish
me
nt
Tot
al
New
Dem
and
Ren
ewab
les
Ref
urb
ish
me
nt
Sources: International Energy Agency, 2014 World Energy Investment Outlook, Table 3.3; Insurance Information Institute.
2014 – 2035F$ Billions of 2012
An estimated $819 billion will be invested in transmission and distribution infrastructure through 2035
Transmission Distribution
AEGIS 2014POLICYHOLDERS’ CONFERENCE
www.iii.org
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwig