Low for Longer:

The Effect of Low Interest Rates

On the U.S. P&C Industry

Dale A. Thatcher, CPA, CPCU, CLU

EVP, CFO & Treasurer

Selective Insurance Group, Inc.
Return On Equity: P&C Insurance vs. Fortune 500

2

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014

2015E

Fortune 500 P/C Insurers

*GAAP basis. 

Sources: ISO, Fortune; Insurance Information Institute.
P&C Insurance Industry Combined Ratio*

3

90

95

100

105

110

115

120

1988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 

2013: = 96.1; 2014: = 97.0. 

Sources: A.M. Best, ISO (2014-2015); Figure for 2010-2013 is from A.M. Best P&C Review and Preview, Feb. 18, 2016.
Declining Investment Yields

4 Source: Bank of America Merrill Lynch 5-7 Year AA US Corporate Index

In the 10 year period ended 7/31/2016, pre-tax yields have declined by 380 bps

7/31/16 Yield 

1.9%

7/31/06 Yield 

5.7%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%
Industry Profitability

5

A.M. Best projects a 99% combined ratio and 6% ROE for the 

 P&C industry in 2016*

*A.M. Best Review & Preview (February 18, 2016)

For purposes of this presentation, the Reinsurance sector was not included

• The 380 bps decline in new money yield equates to an ultimate 7.5 point decline in 

ROE

• Assumes 2.5x investment leverage and ~20% tax rate

• In practicality, lower new money yields impact investment portfolios over time as 

existing bonds mature and new cash flow is invested
Return on Equity Attribution – 2006 vs. 2016

6

9% 9%

1%

0%

2%

4%

6%

8%

10%

12%

Investments Underwriting Other Total

2006 – Attribution @ 99% Combined Ratio

6% 6%

1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Investments Underwriting Other Total

2016 – Attribution @ 99% Combined Ratio

-1%

-1%
Combined Ratio for 11% ROE in 2016

7

6%

11%

6%

0%

2%

4%

6%

8%

10%

12%

14%

Investments Underwriting Other Total

At 1:1 NPW/Surplus, the industry requires a 91% combined

ratio which, all else being equal, would require a ~11%

price increase 

-1%
Reduction in C/R to Offset 1% Decline in Investment Yield for Constant ROE by Line*

8

-1.8%-1.8%

-2.0%

-3.6%

-1.9%

-2.1%

-3.1%

-3.3%-3.3%

-3.7%

-4.3%

-5.2%

-

-7%

5.7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

*Based on 2008 Invested Assets and Earned Premiums

Source: A.M. Best; Insurance Information Institute.

Lower Investment Earnings Place a Greater Burden on 

Underwriting and Pricing Discipline
2016 P&C Industry Conclusions*

9

Underwriting:

With Net Premiums Written to Policyholder’s Surplus of 1:1;

1.5 points of combined ratio = 1 point of ROE

Investments:

With Invested Assets to Equity (Policyholder’s Surplus) of $2.50

and an Investment Tax Rate of ~ 20%;

50 bps of pre-tax yield (40 bps of after-tax yield) = 1 point of ROE

Conclusion:

To offset a 50 bps decline in yield, the industry must improve the combined

ratio by 1.5 points; this requires a 2% price increase above the level of 

expected claim inflation (which is currently running at about 2.5%)

*A.M. Best Review & Preview (February 18, 2016) Report used to calculate industry leverage

For purposes of this presentation, the Reinsurance sector was not included