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Industry Results as of 12/03
Excess of Loss Reinsurance Lines
Schedule P Data ($000s) per A. M. Best
Market Conditions – Insurance: General
 Reported 2004 P&C Industry results were very good:
 Projected Combined Ratio of 98.1% (100.1% in 2003).
- Best result ( and 1st Underwriting profit!) since 1978.
- Includes $21.6Bn of hurricane loss (most retained net).
- “Normal” Cat activity is estimated to have produced around a 95% combined.
4.3% increase in Net Written Premiums (projected) in ’04 over ’03.
- Significant reduction from the 9.8% increase in ‘03.
- The increase is attributed more closely to exposure growth than to rate increase.
- Stability of primary pricing & underwriting discipline is a concern.
Capital and Surplus levels are at an all-time high (nearly $400Bn.) - After tax return approximately
11% (still marginal compared to the long-term average of other industries).
Offsetting underwriting profit, interest rates and long-term yields remain low (Reliance on
underwriting critical to maintaining earnings and ROE targets).
Personal Lines carriers outperformed Commercial Lines carriers.
Results have probably peaked - Are AY results optimistic?
Key is how to sustain profitability and underwriting focus in a more competitive market.
Companies seem more disciplined with capital management - share buybacks, increased
dividends – rather than competing for the business (but, time will tell!).
Other major issues persist; the full impact yet to be realized.
Source: Insurance Information Institute. “Groundhog Forecast for 2005”;
Best’s Review, January 2005. “Setting the Pace”
P/C Combined Ratios
Market Conditions – Insurance: Overview
Reserve Development:
Many large commercial lines companies are still reporting major increases in prior years reserves (ACE, St
Paul/Travelers, Zurich). Three main areas are:
- Asbestos & Environmental (Pre 1986): Large Commercial Lines carriers.
- Casualty business (1999 – 2001): High degree of optimism from National Stock carriers and reinsurers.
- Professional Liability (2000 – 2003): E&O, D&O and Medical Malpractice (lawsuits, lawsuits, lawsuits)
Although smaller companies have not completely been exempt, most regional carriers have posted more favorable
results and continue to increase their penetration and market share.
Legal Reform in 2004 was disappointing; 2005 has (had) shown glimmers of hope:
Tort System – Costs continue to rise although Class Action Fairness Act (CAFA) signed by Bush February 18, 2005
is a positive development. True impact difficult to measure.
Medical Malpractice – reforms, including caps, picking up steam at the state and federal level.
Asbestos - A major Bush initiative. The $140Bn fund/bill proposed by the Senate at a critical stage. Recent
insurance industry initiative to scrap this (at least in its current form) but still inching forward.
TRIA - Renewal not clear, had made some progress following comments by Greenspan. Recent push to establish some
blended public/private market arrangement. Will not be known until late 2005 (or 2006) as other issues continue to
dominate Congress’ agenda.
Industry issues persist …
Future pricing uncertainty and loss picks.
Increased concern and focus on catastrophe mitigation on known exposures and, more importantly, unknown risks.
Marginal investment returns.
Rising claim costs (medical inflation/increasing jury awards) - some moderation in Personal Lines.
Compliance costs/Transparency issues/ Traditional business practices questioned.
Continued regulatory scrutiny/Spitzer effect: “What Next?”
Source: Insurance Information Institute. “Groundhog Forecast for 2005”;
Best’s Review, January 2005. “Setting the Pace”
P/C Insurance Industry Reserve Development
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