s&p industry surveys: property - casualty
TRANSCRIPT
January 24, 2008
Industry SurveysInsurance: Property-Casualty
THIS ISSUE REPLACES THE ONE DATED JULY 26 , 2007 .THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR JULY 2008 .
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Catherine A. SeifertProperty & Casualty Insurance Analyst
CURRENT ENVIRONMENT..................................................................1Solid profits in 2007 could portend softer pricing in 2008
First-half 2007 underwriting results point to a profitable year Surplus also rises Monoline insurers expected to bear the brunt of insurers’ subprime pain
INDUSTRY PROFILE...............................................................................6Top companies control the lion’s share of premiums
INDUSTRY TRENDS .................................................................................6Significantly lower catastrophe losses aided underwriting results in 2006 Getting a handle on asbestos claims Insurers reexamine catastrophe risks, concede impact of climate change Haggling over TRIA Investigations lead to changes in business practices, high-profile trial M&A update
HOW THE INDUSTRY OPERATES .............................................................14The money flows in... ...and the money flows out Keep the cash circulating Loss reserves: the financial buffer Surplus funds: capital counts Forms of ownership Lines of coverage Distribution: getting policies to the people Regulation and competition hold insurers in line
KEY INDUSTRY RATIOS AND STATISTICS ...................................................22HOW TO ANALYZE A PROPERTY-CASUALTY INSURANCE COMPANY .............23
Pricing moves inversely with interest rates Predicting profits Cash flow and liquidity Looking at leverage
GLOSSARY .............................................................................................27
INDUSTRY REFERENCES.....................................................................29
COMPARATIVE COMPANY ANALYSIS .............................................31
Executive Editor: Eileen M. Bossong-MartinesAssociate Editor: Diane CappadonaStatistician: Sally Kathryn NuttallProduction: GraphMedia
Client Support: 1-800-523-4534Copyright © 2008 by Standard & Poor’sAll rights reserved.ISSN 0196-4666USPS No. 517-780Visit the Standard & Poor’s Web site:http://www.standardandpoors.com
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VOLUME 176, NO. 4, SECTION 2 THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 3 SECTIONS.
Standard & Poor’s Industry Surveys
Thanks to another benign hurricane season,most property-casualty insurers will likelypost an underwriting profit in 2007. Thisfollows a sharp turnaround in profitabilitythat the industry enjoyed in 2006 due tomuch lower catastrophe losses. Partly offset-ting the positive impact from lower catastro-phe losses was deterioration in claim trendsin certain core lines of business, includingpersonal auto. Nevertheless, some favorableprior-year loss developments in a number ofcommercial lines of coverage helped cushionthat blow for a number of carriers.
However, some segments of the insurancemarket face a challenging environment asthey enter 2008. Underwriting trends andcapital adequacy concerns that erupted in theaftermath of the subprime mortgage debacleled to a sell-off in the shares of financialguaranty insurers, who provide AAA creditenhancement to many structured credit prod-ucts linked to mortgages (many of whichwere subprime). Many of these insurers arenow scrambling to bolster their capital basesand preserve their much-needed AAA finan-cial strength ratings. Standard & Poor’s be-lieves the overall property-casualty insurancemarket will not experience a material, ad-verse impact from the subprime mortgage
crisis, though there are some pockets ofweakness within the financial guarantee seg-ment of the market. Commercial lines insur-ers who underwrote directors and officers’liability for financial institutions may faceclaims related to the mortgage meltdown,however.
Most insurers posted solid investment re-sults in 2006 and into the first half of 2007,bolstering their bottom-line profits. Year-to-year comparisons could become more diffi-cult in 2008, however, amid turmoil in themortgage-backed securities markets and eq-uity markets. Most insurers’ asset allocationstrategies are heavily weighted toward high-grade corporate debt, which should insulatethem from much of the downturn in theseother areas of the market.
Still, the likelihood that the property-casualty insurance industry is in the midst ofa soft patch or a “down market” was notlost on investors, who also shunned theshares of most financial services companiesamid concerns over turmoil in the creditmarkets. As of December 31, 2007, the S&PProperty-Casualty Index had declined 15.8%for the year, and the index for the overall Fi-nancials sector was down 20.7%; the S&P500 Stock Index, in contrast, advanced 3.5%during that period.
First-half 2007 underwriting resultspoint to a profitable year
The latest available aggregate industry op-erating results, released in October 2007 bythe Insurance Services Office (ISO), an insur-ance research and data collection organiza-tion, point to underwriting results marked byslowing top-line growth, but improved prof-itability despite some mixed underwritingtrends.
For the six months ended June 30, 2007,insurers in the ISO study reported a fraction-al rise in net written premiums to $223.4 bil-
CURRENT ENVIRONMENT
Solid profits in 2007 could portendsofter pricing in 2008
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UNDERWRITING PROFITS(In billions of dollars)
*1987=-0.3; 1988=-0.38Source: Standard & Poor’s Ratings Services.
1987 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 2006
80
60
40
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(20)
(40)
* *
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lion, from $223.1 billion in the comparable2006 period. For all of 2006, the property-casualty industry wrote $443.5 billion in pre-miums, a 4.2% rise over 2005 levels. Writtenpremiums represent business produced in agiven period. Insurers account for this overthe life of a policy (typically 12 months).Hence, the general volume and direction ofwritten premiums in one year is usually agood indication of the level of earned premi-ums (a revenue component on the incomestatement) the following year.
Written premiums in the personal linessector (the largest, accounting for 40% ofyear-to-date written premiums) rose 0.5%,year to year, in the first six months of 2007.This group’s business consists primarily ofpersonal auto and homeowners’ coverage,which is highly regulated and not as prone togreat pricing swings.
Strength in the personal lines sector wasoffset by deterioration in the commerciallines sector (which accounted for 48% of to-tal industry written premiums) in the first sixmonths of 2007. That group reported a1.4% year-over-year drop in written premi-ums, year to date, providing empirical sup-port for anecdotal evidence that thecommercial lines market had softened.
Balanced lines underwriters, who write acombination of personal and commerciallines coverage, accounted for the remaining22% of industry written premiums. Thisgroup posted a 2.1% rise in written premi-ums, year over year, in the first half of 2007.
Earned premiums for insurers in the ISOstudy advanced 1.4% to $217.9 billion forthe first six months of 2007, up from $214.8billion in the comparable period in 2006.This rate of growth represented a markedslowdown from the 4.3% premium growththe industry recorded in 2006. The last timethe industry recorded a double-digit rise inpremiums was in the “hard market” that en-sued in the aftermath of the September 11thterrorist attacks: earned premiums advanced11.9% in 2002 and 10.9% in 2003. Growthhas been trending downward ever since.
Looking ahead, Standard & Poor’s antici-pates that written premium growth forproperty-casualty insurers will likely be lessthan 2% in 2008. Earned premium growth isalso expected to be less than 2% in 2008, re-flecting a continuation of competitive or“soft” market conditions.
Investment results: an important bufferInvestment income is an important rev-
enue source for insurers, often accounting for15% to 20% or more of an insurer’s totalrevenues. Thanks to a generally favorableclaims environment, insurers have been ableto hold onto their cash and invest it, reapingthe rewards of this positive cash flow.
In the first six months of 2007, net invest-ment income for property-casualty insurersrose 19.3%, year over year, to $30.3 billion,from $25.4 billion in the comparable year-earlier period. Standard & Poor’s anticipatesthat the rate of net investment incomegrowth in 2008 will likely be below 2007’slevel, reflecting our view that underwritingresults may deteriorate slightly (which woulddrain cash from insurers’ coffers). Althoughinvestment income growth may also be re-strained somewhat by turmoil in the marketfor mortgage-backed securities, Standard &Poor’s does not anticipate that insurers willexperience any material adverse impact totheir financial situation because of their ex-posure to this asset class.
Realized investment gains (the profitsmade when investments are sold) totaled$4.2 billion in the first half of 2007. Thiswas up significantly from $881 million inthe comparable 2006 interim and con-tributed to insurers’ profitability. Insurersalso had unrealized investment gains ofmore than $6.3 billion in the first half of2007, also up from the year-earlier total of
PROPERTY-CASUALTY OPERATING RESULTS(In millions of dollars)
NET NET PRETAXUNDERWRITING INVESTMENT OPERATING
YEAR GAIN (LOSS) INCOME INCOME
*2007 14,402 24,505 39,070 *2006 15,021 25,396 39,686 R2006 31,115 52,309 84,607
2005 (5,612) 49,729 45,145 2004 4,263 39,966 43,963 2003 (4,853) 38,648 33,752 2002 (30,840) 37,225 5,581 2001 (52,602) 37,739 (13,800)2000 (31,220) 40,704 9,857 1999 (23,076) 38,855 14,426 1998 (16,764) 39,925 23,354 1997 (5,827) 41,499 35,469
*Six months. R-Revised.Source: Insurance Services Office.
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$4.6 billion. (Note: analysts typically ex-clude the impact of net realized investmentgains on insurers’ profits when forecastingearnings. Instead, earnings estimates arebased on net operating earnings, which ex-clude these gains and/or losses.)
Loss trends reflect a mixed pictureLoss costs and related expenses (common-
ly referred to as loss adjustment expenses)are often the largest expense item facing aninsurer. A change in the direction of these ex-penses can dramatically affect bottom-lineresults. Insurers in the ISO survey reportedslight erosion in underwriting margins, yearover year, in the first six months of 2007. In-curred losses rose 1.2% to $117.4 billion,from $116 billion in the comparable year-earlier period. Loss adjustment expensegrowth was well contained, and rose onlyfractionally. Loss adjustment expenses (thecosts incurred in settling claims) totaled$25.6 billion in the 2007 interim, comparedwith $25.4 billion in the year-earlier period.
Loss trends varied widely by line of busi-ness, with the personal lines area seeingperhaps the sharpest deterioration. We at-tribute this erosion to a couple of factors.Although there were no “mega-cats” (high-profile catastrophes) reported in the firsthalf of 2007, catastrophe loss claims for anumber of personal lines insurers rose dur-ing this period. Allstate Corp., the secondlargest personal lines carrier in the US, re-ported a 7.2% rise in claims and claim ex-penses (analogous to loss costs and lossadjustment expenses). Allstate noted thatunderwriting results were hurt by highercatastrophe losses and by deterioration insome underlying claim trends.
One area that has seen some deterioration ispersonal auto. After several years of favorableyear-over-year comparisons of loss costs —thanks to a combination of aggressive loss mit-igation and cost control efforts, favorable de-mographic trends, and driving patterns — thetide has turned, and personal auto loss costshave trended slightly upward.
Commercial lines carriers have benefitedfrom favorable prior-year loss develop-ments in a number of core lines. This fa-vorable trend can be seen in the first-half2007 results of the property-casualty divi-sion of American International Group(AIG), leading commercial lines insurer.
AIG’s property-casualty unit reported a12% year-over-year rise in underwritingprofits for the first half of 2007, largelydue to “favorable claim trends.”
Combined ratio a key gauge of underwritingperformance
The combined ratio is a key measure ofunderwriting performance. It is the sum ofthe loss ratio, the expense ratio, and (whereapplicable) the dividend ratio. A combinedratio under 100% indicates an underwritingprofit, while one in excess of 100% meansthere is an underwriting loss. (For more in-formation on the combined ratio and its im-plications for insurer profitability, pleaserefer to the “How to Analyze a Property-Casualty Insurer” and “Key Industry Ratios”sections of this Survey.)
Insurers in the ISO study reported a com-bined ratio of 92.7% in the six months end-ed June 30, 2007, compared with 92.0% inthe similar 2006 period. Underwriting resultsby type of insurer were mixed, however:commercial lines writers reported improvedunderwriting results, as evidenced by theircombined ratio of 88.8%, versus 90.0% inthe comparable year-earlier period. Balancedlines writers (who write both personal andcommercial lines of business) reported aslight deterioration in their underwriting re-sults and posted a combined ratio of 95.1%in the first half of 2007, compared with93.6% in the 2006 interim. Personal lineswriters, however, experienced the most sig-nificant deterioration in their underwritingresults, with a combined ratio of 95.0% re-ported for the six months ended June 30,2007, compared with 92.9% in the year-earlier period. In our view, these results re-flected the impact of higher catastrophelosses and erosion in a number of personalauto claim trends.
Loss ratios for this representative group ofinsurers (accounting for more than 96% ofindustry premium volume) improved to65.6% in the first half of 2007, versus65.8% a year earlier, and were driven by thecommercial lines sector, which posted an im-pressive 61.3% loss ratio, an improvementover the previous year’s (also decent) 63.8%loss ratio. This was offset by a deteriorationin loss trends in both the balanced linesgroup (which posted a loss ratio of 65.0%,versus 64.7% a year earlier) and the personal
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lines segment (whose aggregate loss ratio ad-vanced to 69.8% in the 2007 interim, from68.3% in the year-earlier period). These re-sults represent a slight deterioration from thefull-year 2006 loss ratio of 65.2% for alllines. However, loss trends have improvedrather significantly in recent periods. Duringthe previous five years (which included somerecord catastrophes like the 2005 hurricanesKatrina, Rita, and Wilma, and the 2001 ter-rorist attacks), the industry loss ratio aver-aged 78.4%.
Industry expense ratios inched up duringthe first half of 2007 to end the period at26.9%, a full percentage point above theyear-earlier level of 25.9%. The deterioration(albeit slight) was relatively broad-based,with all areas feeling the impact of a morecompetitive operating environment (whichtends to drive up the cost of writing newbusiness). The dividend ratio was unchanged,year to year, at 0.3%.
Surplus also rises
Surplus, in this instance, refers to capital,or net worth: the amount by which an in-surer’s assets exceed its liabilities. Surplus,which is often referred to as statutory sur-plus under statutory accounting principles(SAP), is analogous to shareholders’ equityunder general accepted accounting princi-ples (GAAP). At June 30, 2007, insurers inthe ISO study reported a combined surplusof $512.8.4 billion, up 15.3% from surplus of$444.7 billion at June 30, 2006. During2006, surplus increased by more than 14%and ended the year at $486.2 billion.
Since surplus advanced at a greater ratethan written premiums, the industry’s lever-age declined. In this instance, leverage refersto the degree to which the industry utilizesits capital (or surplus) to underwrite policies.The ratio used to measure leverage is the ra-tio of new written premiums to surplus. (Fora more detailed explanation of leverage,please refer to the “How to Analyze aProperty-Casualty Insurance Company” sec-tion of this Survey.)
At June 30, 2007, the ratio of net writtenpremiums to surplus equaled 0.87-to-1,down from 0.97-to-1 at June 30, 2006. Toput this ratio into some context, in the 12months ended June 30, 2007, insurers wrote$0.87 worth of premiums for every $1 ofsurplus, versus $0.97 worth of premiums forevery $1 of surplus in the same 2006 period.If we assume a “typical” rate of leverage of2-to-1 (which is what regulators usually al-low), we estimate that the industry had ap-proximately $291 billion of “excess” surplusat June 30, 2007.
We arrived at this conclusion by using thefollowing data points: the $443.7 billion innet written premiums in the 12 months end-ed June 30, 2007, and policyholders’ surplusof $512.8 billion at June 30, 2007. If we as-sume a 2-to-1 leverage ratio, the amount ofsurplus required to support the actual levelof premium volume is approximately $221.9billion ($443.7 billion divided by 2). The dif-ference between actual surplus ($512.8 bil-lion) and so-called required surplus ($221.9billion) is $290.9 billion. Put another way,this excess surplus could theoretically sup-port another $582 million of written premi-ums, more than the industry is currentlywriting on an annual basis!
Although we need to qualify this exerciseas one designed to illustrate the degree towhich the industry has excess capital, we doit to make the point that there is an enor-mous amount of excess capital in the insur-ance marketplace. Some of this so-called“excess” capital would be absorbed in theevent of a number of significant increases toloss reserves and/or a significant catastropheloss. In addition, rating agency standardsfor capital adequacy have been tightened,rendering the 2-to-1 leverage of surplus ruleof thumb excessive in some cases. Neverthe-less, tens (if not hundreds) of billions ofdollars in excess capital, or underwriting ca-
ESTIMATED CHANGES IN POLICYHOLDERS’ SURPLUS(Total property-casualty industry, in billions of dollars)
FIRST HALFITEM 2005 R2006 2006 2007
Policyholders' surplus—beg. of period 391.3 425.8 425.8 486.2 Operating income 45.1 84.6 39.7 39.1 Realized capital gains 6.6 3.5 0.9 4.2 Income taxes 9.7 (22.4) (11.1) (10.6)
Net after-tax income 44.2 65.8 29.5 32.6 Unrealized capital gains (loss) (3.4) 20.6 4.6 6.3 Stockholder dividends & other (15.6) (24.7) (12.9) (11.7)New funds 14.4 3.8 1.1 1.4 Misc. surplus change (5.1) (4.9) (3.2) (2.1)
Policyholders' surplus—end of period 425.8 486.2 444.7 512.8
R-Revised.Source: Insurance Services Office.
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pacity, remain. Standard & Poor’s believesthis excess supply will continue to pressurepremium rates for most lines of coveragewell into 2008.
Monoline insurers expected to bearthe brunt of insurers’ subprime pain
Monoline insurers, as their name implies,insure one type of risk — that of third-partydebt obligations. Also known as financialguaranty insurers, these companies guaranteethe timely payment of principal and intereston the bonds they insure, and collect a pre-mium from the bond issuer. Premium ratesare based on a percentage of the spread be-tween a bond’s intrinsic credit quality and aAAA-rated bond.
Compared with the general insurance in-dustry, whose roots go back centuries, finan-cial guaranty insurance is relatively new: thefirst municipal bond insurance policy was is-sued in 1971. Since then, the industry hasgrown rapidly: according to data from theAssociation of Financial Guaranty Insurers, atrade association, the industry insured $574billion (par value) of municipal bonds andasset-backed securities in 2006.
Unlike the general property-casualty insur-ance industry, where literally hundreds of com-panies vie for slivers of market share, thefinancial guaranty insurance industry is moreconcentrated. The two largest underwriters ofmunicipal bonds are MBIA Inc. and AmbacAssurance Corp. (a subsidiary of Ambac Fi-nancial Group Inc.). Both companies haveleveraged their strength and market leadershipin the municipal bond insurance arena andhave expanded into other areas of the financialguaranty market — specifically, insuring struc-tured asset-backed and mortgage-backedobligations.
For municipal bond insurers, one of the primary areas of specialization and ex-pansion was insuring pools of residentialmortgage-backed securities. These pools, orcollateralized debt obligations (CDOs),grew rapidly as the housing and mortgagemarkets surged amid the favorable interestrate environment of recent years.
In the wake of a meltdown in the sub-prime mortgage market, however, insurershave been feeling the stress, as write-downsin these portfolios pressure their capitalbases. Investors are questioning the ability of
these firms to raise enough capital to staveoff a downgrade in their much needed top-tier financial strength rating. Investor con-cerns sent the shares of many of theseinsurers plummeting: during 2007, shares ofMBIA plunged nearly 75%, and shares ofAmbac Financial Group fell more than 71%.
P/C insurers have worries as wellAnother area of exposure P/C insurers
have to the subprime debacle is through theissuance of directors’ and officers’ liabilityinsurance, and errors and omission insur-ance. Directors’ and officers’ liability policiesgenerally cover the executives (directors andofficers) of a company for negligent acts oromissions and for misleading statements thatresult in lawsuits against the company. Er-rors and omissions insurance covers lossescaused by errors and omissions in profes-sions other than medicine; it is used bybanks, real estate companies, escrow compa-nies, etc., to protect against negligent actsthat might harm clients. Most commerciallines insurers, including companies likeAmerican International Group, ChubbCorp., and The Travelers Companies, Inc.,issue these kinds of policies.
As of late December 2007, it was too ear-ly to accurately quantify the magnitude ofclaims that are likely to result in the after-math of the mortgage market’s meltdown.Initial estimates indicate, however, that thiswill likely be a multibillion-dollar insuredevent. ■
The US property-casualty (P/C) industrycomprises thousands of companies, each vy-ing for a share of the multibillion-dollar mar-ket for personal and commercial linesinsurance coverage. However, a small groupof companies dominates the market.
According to the latest available datafrom Standard & Poor’s, the 10 largest P/Cinsurer groups (based on net written premi-um volume for P/C insurance) wrote approx-imately $213.3 billion of premiums in 2006.That accounted for approximately 47.4% ofthat year’s $450.3 billion in industrywide
written premiums. The five largest insurergroups wrote approximately $144.9 billionin premiums, for a market share of around32.2%. The two largest P/C insurers, StateFarm Group and American InternationalGroup Inc. (AIG), had an 18.6% share of theUS P/C market. Combined, they wrote some$83.6 billion in premiums in 2006.
Some US companies (notably, AIG) have along-established presence in numerous over-seas markets, and several large P/C insurershave sought to increase their presence in cer-tain foreign markets. For the most part,however, US-based P/C insurers operate pri-marily in the United States.
INDUSTRY TRENDS
An increasingly competitive pricing envi-ronment — brought on, ironically, by the in-dustry’s strong profitability in 2006 and2007, which fueled an oversupply of under-writing capacity — is once again threateningtop-line growth in 2008 for the insurance in-dustry. Favorable investment results and rela-tively benign catastrophe loss trends aidedbottom-line results in 2006 and 2007. An-other factor helping insurers’ profitability inrecent periods was the favorable trend inprior-year losses on certain “long tail” linesof business (where the ultimate cost to settlea claim is not known for many years). As-bestos claims are an example of “long tail”liabilities that were once the scourge of theinsurance industry; these appear to be finallycoming under control.
Despite the relatively mild hurricane sea-sons in 2006 and 2007, the industry is stillgrappling with its exposure to catastrophes.In response to the increasing severity of nat-ural disasters, more property-casualty (P/C)companies are acknowledging that changingweather patterns may play a significant rolein future losses, and that a greater degree of
INDUSTRY PROFILE
Top companies control the lion’s shareof premiums
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TOP 20 PROPERTY-CASUALTY UNDERWRITERS — 2006(Ranked by net premiums written)
NET PREMIUMS WRITTEN† (MIL.$)UNDERWRITER 2004 2005 2006
1. State Farm 47,762 47,924 48,651 2. American International
Group 31,534 31,715 34,970 3. Allstate Insurance Group 25,984 26,795 26,706 4. Travelers Group 17,654 17,883 18,636 5. Nationwide Corp. 14,346 15,201 15,953
6. Liberty Mutual Group 13,208 13,947 15,367 7. Berkshire Hathaway 10,972 16,860 15,046 8. Progressive Group 13,432 14,047 14,089 9. Farmers Insurance NA 12,456 13,253
10. Hartford Fire & Casualty Group 9,627 10,590 10,638
11. Chubb & Son Inc. 10,275 10,349 9,976 12. United Services Automobile
Asn Group 8,026 8,172 8,706 13. CNA Insurance Group 7,504 7,282 7,390 14. American Family
Insurance Group 5,956 5,976 5,905 15. Safeco Insurance Group 5,676 5,814 5,614
16. Zurich Insurance Group NA 5,202 5,434 17. Allianz Insurance Group 4,339 4,441 4,822 18. Ace Ltd. 4,527 4,529 4,633 19. W.R. Berkley Corp. 4,089 4,441 4,626 20. Auto Owners Group 4,271 4,364 4,355
†US only. NA-Not available.Source: Standard & Poor’s Ratings Services.
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property is at risk. In response, companiesare changing their underwriting and pricingassumptions in an attempt to better incorpo-rate this risk.
For risks such as acts of terrorism — forwhich affordable and available coverage isdifficult to find — federal support has beeninstrumental in addressing market disloca-tions. Congress is expected to pass anotheriteration of the Terrorism Risk InsuranceAct (TRIA), the federal terrorism backstopinsurance program that was enacted in2002 in the aftermath of the September11th terrorist attacks and renewed in 2005.Nevertheless, the industry still faces signifi-cant coverage gaps for nuclear, biological,and chemical attacks.
Finally, while investigations initiated sev-eral years ago by state attorneys general, in-surance commissioners, and federalauthorities into the industry’s business prac-tices have wound down, a high-profile trial isset to start in January 2008 that will likelycall noted investor Warren Buffet to thestand. A number of former executives atGeneral Re Corp. (a reinsurer owned byBerkshire Hathaway Inc.) and American In-ternational Group, are accused of, amongother things, fabricating a fraudulent finitereinsurance scheme that ultimately led to thedownfall and resignation of American Inter-national Group CEO Maurice “Hank”Greenberg.
Significantly lower catastrophe lossesaided underwriting results in 2006
You would have to go back more than 55years to find an underwriting performancethat compares with what the property-casualty (P/C) industry achieved in 2006.Crucial to that performance was the absenceof 2005’s record catastrophe losses of $61.9billion — most directly related to HurricanesKatrina, Rita, and Wilma. With catastrophelosses of only $9.2 billion in 2006, the indus-try reported a $31.2 billion net gain fromunderwriting, compared with a $5.6 billionunderwriting loss in 2005, according to theInsurance Services Office (ISO), an industryresearch group.
Contributing to the strong underwritingresults were favorable claims trends outsideof the catastrophe arena. Total incurred loss-es for insurers in the ISO survey fell 9.9% to
$231.1 billion in 2006, while loss adjustmentexpenses (the costs to settle claims) declined4.5% to $52.6 billion. Given the robust un-derwriting results and lower losses, the in-dustry’s loss ratio in 2006 fell by 9.5percentage points to 65.1%, according toISO. Among casualty business lines, the lossratio for general liability declined by 12.4percentage points to 51.6%, its lowest sinceat least 1979, ISO said.
But in a sign that competition to retain andcapture new business is raising insurers’ costs,the industry’s expense ratio rose marginally to26.5% in 2006, up from 25.8% in 2005. Per-sonal lines underwriters reported higher ex-penses, due, we suspect, to advertising costs inthe competitive personal auto business takinga bite out of overall underwriting perfor-mance. Indeed, the ISO survey found a 1.1percentage point jump to 24.4% in the ex-pense ratio for personal lines carriers.
Still, overall underwriting strength drovethe industry’s combined ratio down by 8.5percentage points to 92.4%. The combinedratio is the sum of the loss and expense ra-tios, along with dividend ratios, if applicable;a ratio below 100% demonstrates an under-writing profit, while one in excess of 100%signifies an underwriting loss. (For a furtherexplanation of key industry metrics such asthe combined ratio, see the “Key IndustryRatios and Statistics” section of this Survey.)
Despite what has been a softer environ-ment for premium pricing, the ISO studyfound that the industry’s net earned premi-ums rose 4.3% to $443.8 billion in 2006, upfrom $425.5 billion in 2005. Profitabilitysurged far beyond top-line growth, thanks tothe industry’s underwriting performance.Full-year 2006 net income jumped 44.3% to$63.7 billion, according to ISO.
Getting a handle on asbestos claims
While the main driver of improved in-surer profitability in 2006 was the precipi-tous drop in catastrophe claims, otherfactors also contributed. One was an im-proved claim environment for a number ofcasualty lines of business. Another was animproved environment for asbestos claims.According to A.M. Best, incurred asbestoslosses totaled $1.6 billion in 2006, downsharply from $3.6 billion of incurred lossesreported in 2005.
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Asbestos was used in a variety of commer-cial and consumer products, including roof-ing and flooring, fireproofing, and thermalinsulation. Because of its widespread usedecades ago, millions of people were exposedto this substance, which has been linked tocancer and other diseases.
The initial wave of asbestos claims be-gan more than 20 years ago and primarilytargeted companies that manufactured as-bestos and asbestos-related products. Lia-bility claims in these suits typically cameunder a portion of a manufacturer’s liabili-ty policy that had strict limits on insurers’liability. These resources were depleted,however, as many asbestos manufacturersfiled for bankruptcy.
A second, more costly wave of litigationinvolves companies that used asbestos prod-ucts. These claims are being filed under amore general area of a company’s liabilitypolicy — one that typically has less strictcoverage limits. Consequently, insurers’ lia-bilities for claim costs have escalated.
An overall increase in claims being filedhas exacerbated the impact on insurers.Many unions and lawyers are urging workersand others who may have had contact withasbestos to file claims, warning that if theylater develop an illness, there may not beenough resources left to pay their claims.
The lack of meaningful reform in the waycases are settled also prompted more claims.A 1999 US Supreme Court decision ruledthat a class action settlement of claimsagainst Fibreboard Corp., a major asbestosproducer, could not proceed because fundsmight be exhausted before all claims werepaid. In addition, because the Supreme Courtwould not give a number of these cases classaction status, the number of cases has in-creased. In recent years, however, the tidehas begun to turn, largely due to some mean-ingful tort reform measures and a backlash(largely on the part of some judges) in re-sponse to growing evidence that fraudulentclaims are being made.
Asbestos claim costs still an issue, but amanageable one
Given the level of uncertainty surroundingthis litigation, the potential financial impacton insurers is difficult to quantify. Neverthe-less, a survey published by Tillinghast-TowersPerrin, an actuarial consulting firm, estimated
that the final tab from asbestos could reach$200 billion. Tillinghast estimated that the USinsurance industry would bear about 30% ofthe total cost, or between $55 billion and $65billion. An estimated 31% would be borne byoverseas insurers. Manufacturers, suppliers,and other users of asbestos products wouldpay out the remaining 39%.
According to data obtained from ISO, in-curred asbestos losses and loss adjustmentexpenses rose from $1.0 billion in 1997 to apeak of $7.6 billion in 2002, before falling to$1.6 billion in 2006. According to a reportpublished in late November 2007 by A.M.Best, the US property-casualty insurance in-dustry’s exposure to asbestos claims is nearlyfully funded (based on the aforementionedTillinghast study estimates of ultimate loss-es). According to A.M. Best, nearly 96% ofthe industry’s ultimate asbestos loss estimateswere funded through year-end 2006, up fromapproximately 55% in 2001. However, thestudy also noted that many individual com-panies are likely to continue incurringcharges for asbestos claims, and that approx-imately 67% of the industry’s asbestos losseswere concentrated among five insurergroups.
Insurers reexamine catastrophe risks,concede impact of climate change
After a direct strike on the US Gulf Coastand the city of New Orleans in August 2005,Hurricane Katrina produced insured lossesmuch greater than what the insurance indus-try had expected. When that storm wasquickly followed by Hurricanes Rita andWilma in September and October 2005, USinsurers and the global industry were leftwith record natural catastrophe losses for thesecond consecutive year.
The industry suffered $61.9 billion in cat-astrophe losses in 2005, up from $27.5 bil-lion in 2004, according to Property ClaimsServices, a unit of Insurance Services OfficeInc. (ISO), an insurance research and datacollection organization. The scope of theselosses has led insurers to reexamine their ex-posure to catastrophes. Rating agencies arerequiring insurers to hold more capital in re-serves. Computer modeling firms, which pro-vide insurers with products that help themgauge their loss exposures, are changing keyassumptions about how wind pushes ocean
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water onshore and the way in which rebuild-ing costs skyrocket after a hurricane. In thecase of Hurricane Katrina, the failure to ade-quately account for these factors led to muchhigher losses than the models predicted.
The spate of devastating storms in 2005may have been more than just a statisticalanomaly or a run of bad fortune. The theo-ry that is fast becoming an industrywidestandard is that higher sea surface tempera-tures in the North Atlantic are contributingto more frequent and severe storms. Ac-cording to the National Center for Atmos-pheric Research (NCAR), there were 25 bigstorms (i.e., ranked Category 4 or 5 on theSaffir-Simpson Scale of storm intensity)from 1990 through 2004, but only 16 be-tween 1975 and 1989. In research pub-lished in September 2005, NCAR reportedthat the North Atlantic was the only globalregion that it studied where the total num-ber of hurricanes had risen over the pastdecade. The region averaged eight to ninehurricanes per year between 1995 and2004, compared with six to seven before1995. Another factor is that more stormsare making landfall than in the past. Mu-nich Reinsurance Co. notes that, in the cur-rent warm phase (since around 1995), thenumber of storms in Categories 3 to 5 thatmake landfall has increased about 70%compared with the previous warm phase(dating roughly from 1926 through 1970).
Although catastrophe losses have fallenprecipitously in recent years — to $9.2 bil-lion for all of 2006 and $4.7 billion for thefirst nine months of 2007 — insurers haveremained mindful of the impact that cli-mate change is having on catastrophes andon their business models in general. In-deed, according to a research study spon-sored by Ceres (an environmentally focusedinstitutional investor group), the global in-surance industry has “vastly” increased itsresponse to global warming. According tothe Ceres study, insurers doubled the cli-mate change–related products and servicesbeing offered in 2007. In our view, the in-surance industry’s response is multifacetedand reflects steps many companies havetaken to be good corporate citizens (i.e., bypledging to reduce their carbon footprint)and to better incorporate climate change asa risk that is integrated into their under-writing processes.
For Swiss Re, one of the world’s leadingreinsurers, “climate change is a coreissue…and an important element in the com-pany’s long-term strategy. Climate change hasthe potential to significantly shift globalweather patterns, thereby strongly affectingthe number and severity of natural catastro-phes, and, in turn, the entire insurance indus-try.” Swiss Re’s chief goal in its climatechange activities is perceiving and understand-ing current and future risks to allow the com-pany to better adapt its business strategy.Further, Swiss Re actively pursues an ongoingrisk dialogue to assist clients through sharingknowledge and developing risk solutions.
A number of US insurers have also inte-grated a number of environmentally friendlypractices into their underwriting standards.One of the areas of focus for environmentalgroups is the level of auto emissions and thedangers posed by them. A number of autoinsurers have offered incentives and dis-counts to drivers who adopt “green” habits.Many offer insurance discounts for hybridvehicles, and a number have structured theirauto policies as a “pay as you drive” model,which typically offers discounts to driverswho do not drive a lot.
Haggling over TRIA
Though losses from natural disasters likeHurricane Katrina and the California wildfireshave made headlines in recent years, insurershave also had to contend with man-made dis-asters, including terrorist attacks. Insured loss-es from the September 11th terrorist attacks(which included property damage, business in-terruption coverage, commercial liability, andgroup life insurance claims) totaled $35.9 bil-lion (in 2006 dollars), according to data ob-tained from the Insurance InformationInstitute. Approximately two-thirds of theselosses were covered by reinsurers.
Before September 11th, insurers typicallyprovided terrorism coverage to their com-mercial insurance policies at essentially noadditional cost because the risk of such anevent on US soil was considered remote. Inthe aftermath of the unprecedented lossesfrom the 9/11 attacks, however, many insur-ers and reinsurers instituted “terrorism ex-clusions” in a number of their policies.Those insurers who did offer terrorism cov-erage did so at premium rates that were pro-
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hibitively expensive. The US business com-munity argued that a lack of coverage washindering the economic recovery and threat-ening certain business sectors.
To alleviate the market dislocation, theTerrorism Risk Insurance Act (TRIA) waspassed and signed into law in November2002. The law set up a federal reinsuranceprogram in which insurers and the federalgovernment would share losses. At the timeit was passed, the 2002 law was seen as atransition, until a market-based solutioncould be created. In December 2005, howev-er, it was extended for another two yearsamid a continued shortage of available rein-surance for insurers to lay off their risks.
TRIA’s extension in 2005, made with thesupport of an eleventh-hour lobbying cam-paign from industry groups and other busi-ness leaders, left the industry still searchingfor longer-term alternatives to terrorism cov-erage. Before the elections in November2006, the Bush administration said that itwould not support another extension of theprogram. The US Department of the Trea-sury, the program’s administrator, arguedthat the program would hinder developmentof coverage in the private market. Reportspublished in late 2006 by the US Govern-ment Accountability Office and the Presi-dent’s Working Group on Financial Marketsechoed these sentiments and said that thecontinuation of TRIA would hinder the for-mation of a meaningful, private market solu-tion to the lack of terrorism insurance.
Terrorism insurance poses challengesfor P/C industry
The insurance industry’s perspective oninsuring terrorism is that this kind of riskis unlike any other for which the industryprovides coverage. To be insurable, a riskmust first be measurable. To adequatelyprice a risk, insurers must be able to ascer-tain the probable number of events (i.e.,the frequency) likely to result in claims.Next, they must be able to estimate the po-tential maximum size or cost of theseevents (i.e., the severity). By calculating theprobable frequency and severity of anevent, insurers can then better evaluate thecost of insuring a particular risk.
A terrorist act, according to the insuranceindustry, does not possess these characteris-tics, rendering it impossible to price as a risk.
Also, since there have been very few large-scale terrorist attacks, very little data existfrom which to draw conclusions as to bothseverity and frequency trends.
There is a general agreement that the es-tablishment and extension of TRIA hashelped insurance companies provide somemeaningful terrorism protection, largely dueto the backstop protection the federal gov-ernment offers. Indeed, the extension ofTRIA in 2005 greatly increased the percent-age of losses that private insurers would haveto absorb before the government stepped in:the triggering event rose to $50 million from$5 million. In 2007, the triggering event roseto $100 million: only terrorist events thatproduced losses in excess of $100 millionwould result in the outlay of federal funds.Moreover, individual insurance companieswould have to incur losses equal to 20% oftheir commercial insurance premiums in2007 before the federal program kicked in.
In return for the federal backstop, com-mercial insurers were required to make ter-rorism coverage available and to explicitlystate its cost. Policyholders could opt out ofthe terrorism coverage if they chose.
TRIA expiring againNow that the TRIA extension is set to ex-
pire, both houses of Congress have intro-duced legislation to extend the Act. TheSenate version essentially keeps the majorcomponents of TRIA intact. The original ver-sion of the House proposal sought to lowerthe threshold under which the governmentwould contribute payments. The House pro-posal originally sought to make coverageavailable for nuclear, biological, chemical,and radiological (NBCR) attacks, but subse-quent revisions dropped that proposal.
As of early December 2007, the Houseproposal was still seeking to expand cover-age to include group life contracts. Both theHouse and Senate proposals call for remov-ing the distinction between domestic andforeign-backed terrorism. (The original actonly covered foreign-backed acts of terror-ism.) Given how close the deadline is, andhow vehemently President Bush is vowingto veto any expansion of the TRIA act,Standard & Poor’s believes that the versionof TRIA that is finally enacted will closelyresemble the version of the Act that was re-newed in 2005.
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Helping homeowners could prove elusive forCongress in 2008
While negotiations over the extension andover certain provisions within TRIA maylead to some spirited debates as the deadlinelooms, Standard & Poor’s expects passage ofTRIA to occur. A renewal of TRIA will helpcommercial insureds in the event of a terror-ist attack. What is less clear is the fate ofbills in the House and Senate aimed at aidinghomeowners impacted by catastrophes.
One of the many unfortunate side effectsfrom a significant catastrophe — in additionto the destruction of property — is the likeli-hood that insurance rates in storm-prone ar-eas tend to rise, sometimes significantly.Homeowners unlucky to have been in thepath of Hurricane Katrina received a doublyrude awakening: not only did many see theirinsurance premiums surge, some were noteven able to get coverage as insurers soughtto reduce their exposure to storm-prone ar-eas. Seeking to alleviate this crisis, the Houseof Representative in November 2007 passeda bill dubbed the Homeowners Defense Act.
The bill, which was introduced into theHouse in August 2007 by a group of Floridarepresentatives, contains two parts. First, itwould establish a National Catastrophe RiskConsortium, which would allow states tovoluntarily bundle their catastrophic riskprograms (like Florida’s Hurricane Catastro-phe Fund), then transfer that risk to the pri-vate markets through the use of catastrophebonds sold to investors or through privatereinsurance contracts. The second part of thebill proposes establishing a National Home-owners Insurance Stabilization Program,which would allow the US Treasury to makeloans to any state that faces a significant fi-nancial disaster in the aftermath of a majorcatastrophe.
The bill passed in the House by a relative-ly wide margin (258 to 155) and has movedto the Senate, where Senators Bill Nelson (D-Florida) and Hillary Rodham Clinton (D-New York) have introduced matchinglegislation.
Support for this legislation is relativelylight, and many observers believe its chancesof passage in the Senate are slim. Membersof the regulatory community are in favor ofthis proposed legislation, while insurers aremixed in their support. The Bush administra-tion opposes the legislation and said it be-
lieves the private insurance market is work-ing just fine. Some homeowners in Floridawould probably disagree!
Investigations lead to changes inbusiness practices, high-profile trial
Since late 2004, the US insurance industryhas been embroiled in several investigationsinto its business practices. Spearheaded byElliot Spitzer (then the attorney general ofNew York State; governor, as of January 1,2007) and joined by other states’ attorneysgeneral and the Securities and ExchangeCommission, the probes have examined con-tingent commissions, bid rigging, finite rein-surance contracts, and other accountingirregularities.
The investigations led to numerous multi-million-dollar settlements and earnings re-statements. As of May 2006, the New YorkAttorney General’s office noted that its probeof insurance industry misconduct had led tosettlements with six companies and the re-covery of about $3 billion in restitution andpenalties since late 2004.
The results of these probes have been pro-found. Most insurance brokers have agreedto stop accepting contingent commissions, astandard industry practice that had formedthe lion’s share of their revenues. These com-missions may involve payments from insurersto brokers based on the profitability of thebusiness placed, the volume of a client’s busi-ness placed with an insurer, or even the per-centage of a client’s business that the insurerrenews.
Regulators’ scrutiny of reinsurance trans-actions under the broad banner of finite rein-surance and alternative risk products hasdramatically curtailed premium volume forthose firms once active in this segment. Italso has led to increased disclosure require-ments by state regulators and the NAIC.
In April 2006, the Financial AccountingStandards Board (FASB), the private groupthat sets US standards of financial account-ing and reporting, said that it would examinerisk transfer in insurance and reinsurancecontracts. FASB’s project is expected to de-velop an accounting standard that separatesthe finance and insurance aspects of thesecontracts so that they are appropriately ac-counted for as liabilities or as risk transfermechanisms. The Board plans to issue an Ex-
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posure Draft in the second quarter of 2008that will do three things: clarify the level ofinsurance risk transfer required for a con-tract to be accounted for as reinsurance, re-quire non-insurance policyholders to evaluatetheir contracts to ensure that risk is actuallybeing transferred, and improve insurance andreinsurance disclosure requirements.
Probe set off in 2004In October 2004, attorney general Spitzer
charged Marsh & McLennan CompaniesInc. (MMC) with fraud and antitrust viola-tions. The lawsuit pointed to an allegedscheme in which MMC, in collusion withcertain insurers, would solicit and obtainfake quotes, or bids, for insurance contracts.The complaint noted that other insurers par-ticipated in Marsh & McLennan’s alleged“steering” scheme (in which the company so-licited false and inflated bids from underwrit-ers, then determined which would beawarded the insurance contract). A broadrange of MMC’s clients were affected by thealleged scheme, including large corporations,mid-sized businesses, and municipal govern-ments. The result of this bid rigging, accord-ing to the suit, was to deceive insurers and/orclients into believing that a truly competitivebidding process had taken place for clients’business.
Other insurers mentioned in the lawsuitwere American International Group Inc.(AIG), ACE Ltd., Hartford Financial ServicesGroup Inc., and a unit of Munich Re. Short-ly after Mr. Spitzer’s office originally filedsuit against Marsh & McLennan in October2004, many insurance brokers stopped ac-cepting contingent commissions.
In January 2005, Marsh & McLennansettled with the New York Attorney Generaland the New York State Department of In-surance. Under the agreement, the companyestablished an $850 million fund to compen-sate US clients that had retained the firm be-tween January 1, 2001, and December 31,2004, to place insurance and where contin-gent commissions were involved.
Similar settlement agreements were an-nounced in the following months. In March2005, Aon Corp., the second largest US bro-ker, agreed to set up a $190 million fund tocompensate clients where the placement ofinsurance business included contingent com-missions. The following month, Willis Group
Holdings Ltd. announced a $51 million fundas part of a settlement with attorneys generalin New York and Minnesota and with theNew York Insurance Department.
Insurers and brokers are now guided bymodel rules set forth by the NAIC. Theserules require clients’ acknowledgement andapproval before brokers can collect compen-sation from insurers or other third partieswhen placing business.
Settlements highlight reinsurance dealsThe initial lawsuit against Marsh &
McLennan in 2004 quickly spread to otherinsurers. Zurich Financial Services and ACELtd. both settled charges in 2006 regardingbids solicited by brokers as part of an allegedscheme to fix prices for excess casualty insur-ance, a product that provides coverage forlosses above an existing primary insurancepolicy.
Both Zurich and ACE, along with AIG,were alleged to have engaged in improper fi-nite reinsurance agreements that bolsteredtheir financial results and those of theirclients. Zurich agreed in March 2006 to pay$171.7 million in restitution and penalties aspart of a settlement with attorneys general innine states and one insurance commissioner.ACE, a Bermuda-based reinsurance firm,agreed in April 2006 to an $80 million settle-ment with attorneys general in New York,Connecticut, and Illinois, and with the NewYork State insurance department.
The finite and nontraditional reinsuranceagreements under scrutiny by regulators gen-erally included similar features. The amountof risk transferred was not sufficient to qual-ify as reinsurance for accounting purposesand probably should have been listed as a li-ability, like a loan.
Transactions also may have included sideagreements that were not disclosed. The na-ture of these agreements served to cap thereinsurer’s losses, and at times guaranteedthe profits the reinsurer could make from thedeals, thus eliminating risk.
For AIG, the world’s largest insurancegroup, questionable reinsurance deals and im-proper accounting ultimately led it in May2005 to restate earnings downward by nearly$4 billion for the five years from 2000through 2004. As a result, shareholders’ equi-ty was reduced by $2.26 billion, to $80.61billion as of year-end 2004. These events
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proved to be the undoing of longtime AIGchairman and CEO Maurice “Hank” Green-berg, who resigned in early 2005. The trialagainst several General Re Corp. executivesaccused of devising the fraudulent finite rein-surance scheme with AIG was set to com-mence on January 7, 2008. Among those onthe government’s witness list is famed investorWarren Buffet, chairman of Berkshire Hath-away Inc., the parent company of General Re.
M&A update
The P/C industry ended 2006 with morethan $200 billion in excess underwriting ca-pacity, making for a competitive operatingenvironment that is pushing premium rateslower. Although conditions of excess capital,competition, and limited prospects for organ-ic growth generally set the stage for mergerand acquisition (M&A) activity within the fi-nancial services sector, they were not muchof a catalyst for combinations among P/Cfirms in 2006.
In 2006, global M&A volume reached$3.8 trillion, nearly a 38% increase over2005 levels, according to Thomson Finan-cial. While the financial sector has beenamong the more active participants, insurersseem content to either sell off nonstrategicassets or buy up books of business, generallyto extract income from improved claimsmanagement.
The overall factor that has limited block-buster deals in the P/C insurance space, pri-marily since 2003, may be the difficultnature of gaining industry control throughconsolidation. In the P/C industry, there arelow barriers to entry. Perceived capacityshortages, which would give companies adominant market position in other indus-tries, only serve to attract even more capi-tal. In the wake of catastrophe losses in2005, for example, more than $10 billionin capital flowed to Bermuda to form newreinsurance companies. In addition, insur-ers that want to expand geographicallywithin the United States need only to filewith insurance regulators for admittance toa particular state. Then they can beginwriting new business.
One result of the insurance industry investi-gations has been to propel acquisition activityamong P/C brokers. Deals in 2007 mostly fea-tured private equity players who saw opportu-
nities to extract savings from the brokers’ dis-tribution model. The steady cash flows thatstable brokers’ operations provide give thesebuyers a chance to leverage up the capitalstructure of the acquired company. In Febru-ary 2007, an affiliate of Goldman SachsGroup paid $1.4 billion for USI Holdings, thenation’s ninth largest broker (based on 2006premiums). That was followed in March bythe $1.8 billion purchase of Hub InternationalLtd. by a group led by Apex Partners. In June2007, Alliant Insurance Services, a mid-sizedbroker, agreed to be acquired by the Black-stone Group for $1.4 billion.
The changing nature of consolidation activityTo remain competitive in a relatively
weak environment for premium rates, in-surers have turned to tweaking their busi-ness models. Some companies are selling offnonstrategic assets, downsizing, or exitingthe business.
The capital-intensive nature of the insur-ance industry pushed corporate giant Gener-al Electric Co. (GE) to sell its GE InsuranceSolutions unit to Swiss Reinsurance Co. for$6.8 billion in November 2005. GE chippedin $3.4 billion to the unit’s reserves as part ofthe deal.
While the GE transaction was in thereinsurance space, reserve levels for someinsurers also may need adjustment, puttingsome under financial pressure. Some ofthese insurers could be acquired, if theprice were right, though general warinesstoward traditional M&A still prevails inthe current environment.
The cautious stance toward M&A alsomay relate to the investigations into the in-dustry’s practices, which have shrouded P/Cinsurers in a regulatory cloud since late2004. Now that these investigations arewinding down, companies may be more in-clined to consider shifting or enhancing theirbusiness mix or increasing their economies ofscale through M&A. An exception, however,is Liberty Mutual. Though still fighting alle-gations of improper commission payments,among others, the insurer agreed in May2007 to acquire Ohio Casualty Corp. in adeal valued at $2.7 billion. The transactionshould allow Liberty Mutual to strengthenits regional presence and expand the distribu-tion of its products through Ohio Casualty’sindependent agents.
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For their part, global insurers and reinsur-ers continue to engage in strategic transac-tions. In May 2007, Converium Holding AG,a Switzerland-based reinsurer, agreed to beacquired by Scor SA, a French reinsurer.Converium had rejected Scor’s initial offer,but reconsidered when Scor increased theprice. The transaction calls for Scor to pay$2.8 billion for Converium in a stock-and-cash deal.
HOW THE INDUSTRY OPERATES
The property-casualty (P/C) insurance in-dustry is essentially a risk-bearing enterprise.In the event of a loss, insurance is a meansby which the burden of that loss — whetherrelated to the destruction of property or anincurred liability — is shared. Typical P/Cpolicies include auto coverage, workers’compensation coverage, homeowners’ cover-age, and others.
There are two kinds of ownership struc-tures in the P/C industry: mutual and stock.A mutual insurance company is owned by itspolicyholders, and its capital is called policy-holders’ surplus. State Farm Group — thelargest P/C insurer in the United States,based on premium volume — is a mutual in-surance company.
The second largest P/C insurer, AmericanInternational Group Inc., is a stock insurancecompany. Investors (that is, shareholders) areissued stock as evidence of their ownershipinterest, which is represented by sharehold-ers’ equity.
The money flows in...
Regardless of an insurance company’sownership structure, the insurance businessis one of shared risk. Insurers collect pay-ments in the form of premiums from peoplewho face similar risks. A portion of thosepayments is set aside to cover policyholders’losses. Therefore, earned premiums are typi-cally an insurer’s primary revenue source.
At the time a policy is issued, it is record-ed on the insurer’s books as a written premi-um. Then, over the life of the policy, thepremium is “earned,” or recognized as rev-enue, on a fractional basis. These premiumsare classified as deferred revenues and as-signed to an unearned premium reserve,
which is listed as a liability on an insurer’s fi-nancial statement.
There is usually a lag of about 12 monthsbetween the time a policy is written and thetime the full premium is recognized as rev-enue. For example, a $600 premium for ayear of auto insurance coverage would be“earned” by the insurer at the rate of $50 amonth for 12 months. (See the cash flow dia-gram for details on the flow of funds.)
After premiums, the second largest com-ponent of insurer revenues is investment in-come. This is derived from investing thefunds set aside for loss reserves and unearnedpremium reserves and from policyholders’surplus or shareholders’ equity.
The third and usually smallest revenue com-ponent is realized investment gains; this com-ponent is the most volatile and hardest topredict. Realized investment gains arise fromthe sale of securities (usually stocks and bonds)in an insurer’s investment portfolio. Becausethe timing and magnitude of the gains dependon conditions in the securities markets, whichare by their nature dynamic, it is difficult toforecast realized investment gains.
...and the money flows out
An insurer’s revenue must cover a varietyof expenses. One expense is the commissionpaid to the insurance broker, agent, or sales-person for selling a policy; this is usually de-ducted immediately from the collectedpremium. The insurance company generallyaccounts for this commission by deducting itfrom its policyholders’ surplus account andcrediting it to the unearned premium reserve.
After commissions are paid, premium dol-lars are used to cover a variety of expenses.The largest expense facing a P/C insurer islosses, also referred to as policyholderclaims. Funds also are used to pay claims-related expenses and loss adjustment expenses,including insurance adjusters’ fees and litiga-tion expenses. Insurers face other expenses re-lated to the underwriting process, such assalaries for actuarial staff. The underwritingprofit (or loss) is determined by subtractingthese expenses from earned premiums.
Like most other companies, insurers incurvarious other operating expenses and interestcosts. Pretax profits are calculated by sub-tracting these expenses from underwritingprofits. After-tax (or net) income is derived
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CASH FLOW DIAGRAM—PROPERTY-CASUALTY INSURANCE COMPANIES (A simplified model)
POLICYHOLDER PAYS PREMIUM
COMPANYEARNS
PREMIUM OVER TERM OF POLICY
POLICYHOLDERS’ SURPLUS
AGENT WITHHOLDS COMMISSION
FULL PREMIUM NOW EARNED
COMPANY PUTS PREMIUM INTOUNEARNED PREMIUM RESERVE
COMPANY REPLACES MONEYTAKEN FROM SURPLUS
UNDERWRITING PROFIT (OR LOSS)
DIVIDENDS TO POLICYHOLDERS
INVESTMENT EXPENSES
NET OPERATING INCOME(OR LOSS)
DIVIDENDS TO STOCKHOLDERS
ADDITIONS TO POLICYHOLDERS‘
SURPLUS TO SUPPORTFUTURE GROWTH
NET INVESTMENT GAIN(OR LOSS)
INVESTMENT INCOME INVESTMENT INCOME
TOTAL INVESTMENT INCOME
COMPANY PAYS OTHER BUSINESS EXPENSES
COMPANY PAYS TAXES AND FEES
COMPANY ADDS AMOUNT OF COMMISSION TO UNEARNED
PREMIUM RESERVES
COMPANY PAYS CLAIMS OR CREATES LOSS RESERVES TO PAY
UNSETTLED CLAIMS
LOSS RESERVES PRODUCE
POLICYHOLDERS’ SURPLUS PRODUCES
PREMIUM RESERVES PRODUCE
1
2
3
4
5
6
7
8
1 The excess of assets over liabilities.2 Overhead costs — rent, salaries, etc.3 Federal, state, local taxes, licenses, and fees.4 Includes interest, dividends, rents, and realized capital gains.5 On certain lines only.6 Costs of operating the company’s investment program.7 If underwriting loss exceeds investment gain, there will be a net operating loss.8 Applies only in the case of capital stock companies.
Source: Insurance Information Institute.
INVESTMENT INCOME
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by taking pretax profits and subtractingshareholder dividends and federal and stateincome taxes.
According to data obtained from Insur-ance Services Office Inc. (ISO), an industryresearch and data collection organization,net written premiums for the P/C insuranceindustry rose approximately 4.3% to $443.8billion in 2006, from $425.5 billion in 2005.Earned premiums advanced by 4.4% to$435.8 billion in 2006 from $417.6 billionin 2005.
Underwriting results in 2006 improvedconsiderably compared with 2005 due to farfewer catastrophe losses. With no hurricanesstriking the US in 2006, the industry posteda $31.2 billion net gain on underwriting, re-versing the $5.6 million net loss on under-writing in 2005. According to ISO’s PropertyClaim Services unit, catastrophes in 2006caused $9.2 billion in direct property losses(before recoveries from reinsurance), com-pared with $61.9 billion in 2005, the yearthat Hurricanes Katrina, Rita, and Wilmastruck the US. (A catastrophe is defined as anincident or series of incidents causing insuredlosses of $25 million or more.)
The industry’s 2006 underwriting perfor-mance benefited from favorable loss develop-ments in most other lines of business, inaddition to the sharply lower catastrophelosses. In 2006, total incurred losses fell9.9% to $231.1 billion, from $256.5 billionin 2005. Loss adjustment expenses (the ex-penses incurred in settling claims) declinedby 4.5% to $52.6 billion, from $55.1 billionin 2005. Incurred losses and loss adjustmentdecreased by 9.0% to $283.7 million, from$311.4 billion in 2005.
Along with the underwriting profits andlower loss costs, investment activities alsocontributed to insurers’ bottom lines in2006. Realized gains fell sharply, though,contributing to a decline in overall invest-ment gains. Net investment income rose by5.2% to $52.3 billion, from $49.7 billion in2005. Realized capital gains on investmentsfell 65.4% to $3.4 billion in 2006, versus$9.7 billion in 2005. As a result, total invest-ment gains decreased by 6.4% to $55.7 bil-lion in 2006, from $59.4 billion in 2005.
The industry had unrealized capital gainsof $20.8 billion in 2006, a reversal from2005, when it had unrealized capital lossesof $3.4 billion, according to ISO. Manage-ment of insurance companies may have de-cided to “bank” some capital gains in 2006in order to have the option of bolsteringprofits in the future should underwriting re-sults deteriorate, according to research by theInsurance Information Institute.
The sharp swing in underwriting results,lower loss costs, and investment gains result-ed in a 44.1% rise in the industry’s net in-come in 2006. Insurers in the ISO studyreported after-tax income of $63.7 billion,versus net income of $44.2 billion in 2005.
Keep the cash circulating
Many property-related insurance claimsare settled relatively quickly. They often arereferred to as “short-tail” liabilities becausethe period between the incident causing theloss (such as a storm that damages a home)and the claim settlement is relatively short.Because of this, P/C insurers maintain the ma-jority of their investments in highly liquid se-curities that can be converted quickly to cash.This liquidity ensures that policyholders canbe paid promptly in the event of a loss.
Based on the latest available aggregate in-dustry statistics from Standard & Poor’s(which includes both mutual and stock insur-ance companies in its survey), assets of theP/C industry totaled $1.62 trillion at year-end 2006, up 5.2% from $1.54 trillion atyear-end 2005. Of the total assets at year-end2006, investments constituted 82.3%, or ap-proximately $1.35 trillion. As a portion ofinvested assets, bonds accounted for morethan 61%. Other investments included com-mon stocks (24.9%), preferred stocks(1.2%), and cash and short-term investments
DISTRIBUTION OF ASSETS — 2006(Total US property-casualty industry, in percent)
Source: Standard & Poor’s Ratings Services.
Cash & short-term investments 7.3%
Other investedassets 4.4% Bonds 61.2%
Real estate &mortgage loans
1.0%
Preferred stock 1.2%
Common stock 24.9%
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(7.3%). The remaining 5.4% of the P/C in-dustry’s investments were in mortgage loans,real estate, and other investments.
An insurer derives funds for investmentfrom three primary sources: its loss reserves,its unearned premium reserve, and its policy-holders’ surplus. Loss reserves, which are thefunds set aside to pay claims, are by far thelargest component of the P/C industry’s lia-bilities. For the insurers in the ISO survey,loss and loss adjustment reserves amountedto $514.2 billion at year-end 2006, or about55% of total liabilities of $941.2 billion.
The second largest liability on an insurer’sbooks, and a principal source of investmentincome, is the unearned premium reserve. Atyear-end 2006, unearned premiums for theinsurers in the ISO survey equaled $202.7billion, or 21.5% of total liabilities. The un-earned premium reserve represents the liabili-ty for that portion of a written premium thathas been charged to the policyholder but hasnot yet been used. Using our earlier exampleof the $600 annual auto insurance premium,the unearned premium reserve would total$550 at the end of the first month, because$50 (or one-twelfth) of the annual premiumhad been “earned,” or accounted for as anearned premium on the insurer’s books.
Loss reserves: the financial buffer
As the largest component of an insurer’sliabilities, loss reserves have an importantbearing on financial results. An insurer’sprosperity depends largely on its ability toquantify accurately the ultimate cost of thelosses from the risks it assumes.
When reserve levels are too high — thatis, when an insurer sets aside too much mon-ey to pay future claims — profits appearlower than they actually are. Consequently,premium rates might not appear high enoughto cover losses, causing the insurer to raiseits rates unnecessarily. Conversely, if reservesare too low, profits will be inflated, leadingan insurer to lower its rates inappropriately.In either situation, once losses develop, inac-curate reserve levels ultimately will have tobe adjusted. Such erratic accounting adjust-ments can make an insurer’s financial posi-tion seem unstable.
Establishing premium and loss reservelevels requires an insurer to estimate theultimate value of future losses, which is ex-
tremely difficult to do accurately. Alongwith the unpredictability of natural disas-ters, forecasts of future losses are subjectto several other variables, including (butnot limited to) real economic growth, infla-tion, interest rates, sociopolitical trends,judicial rulings, and voter initiatives.
The trend in recent years toward a greaterproportion of the insurance business beingwritten in casualty lines has made the reservingprocess even more difficult. It is considerablyharder to estimate the ultimate losses from ca-sualty lines than from property lines such ashomeowners’ coverage, because casualty lineshave “long tails” — that is, the periods be-tween the origination of the policy, the eventleading to a claim, and the subsequent pay-ment of that claim may be years or evendecades. Inflation can have a highly negativeimpact on the insurer’s eventual costs as the lia-bility’s “tail” lengthens. On the plus side, how-ever, this characteristic of casualty lines lets theinsurer invest those premium dollars for alonger time.
Estimating the losses...The calculation of loss reserves involves
considering four different kinds of losses,each with differing levels of uncertainty.
◆ Losses that have been incurred, report-ed, and settled, but not yet paid. These lossesare the most certain of the four loss types.Because the size of the ultimate loss has beenestablished, setting aside an accurate reservelevel is easiest here.
◆ Losses that have been incurred and re-ported, but not settled. These carry a slightlyincreased level of uncertainty. Here, the insureris aware that a loss has occurred, but final pay-ment terms have not yet been established.
◆ Losses that have been incurred and re-ported, but not settled, due to a liability. Be-cause such losses usually involve longer-tailliabilities, calculating the ultimate cost of set-tlement is more difficult.
◆ Losses that have been incurred, but notreported (IBNR). These losses carry the mostuncertainty. In some cases, insurers knowabout IBNR losses and try to make prelimi-nary loss estimates. For example, suppose anearthquake hit a certain area on December
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30, and a local P/C insurer ends its fiscalyear on December 31. In its year-end state-ments, the insurer could estimate its earth-quake-related IBNR loss based on itsexperience in prior earthquakes.
In other cases, however, IBNR lossesemerge years after the damage first occurs.Such losses are very difficult to predict. Forexample, the various asbestos lawsuits thathave recently plagued P/C insurers relate toinjuries incurred many years ago, but report-ed much later.
...and calculating the loss reservesMost insurance companies assign the task
of establishing appropriate loss reserve levelsto their actuarial staffs. Actuaries — special-ists trained in mathematics, statistics, and ac-counting — are responsible for calculatingpremium rates, reserves, and dividends. Theyuse a variety of quantitative methods to es-tablish loss reserves. The five most common-ly used methods are the following:
◆ Claim-file estimates plus. This methodestablishes the estimated liability for reportedlosses by aggregating pending claim-file esti-mates (such as estimates being prepared bythe claims department), from which pay-ments that have already been made are de-ducted. Added to this total are formulacalculations for additional payments onclosed claims that will be reopened for IBNRlosses. The sum of the component parts con-stitutes the full loss liability as of the end ofthe accounting period.
This method, considered the least sophisti-cated, is appropriate for property lines inwhich claim frequency is low and the rangeof loss costs is sizable. Furthermore, its de-pendence on claims department estimates ex-poses it to a degree of subjectivity.
◆ Percentage of losses paid to date. Al-though this method of extrapolating liabilityfrom past percentages of losses paid is re-garded as simple to apply, its use is limited tocoverages where payment patterns are rela-tively consistent.
The percentage of losses paid to ultimateincurred losses is calculated for variousstages of development for prior years. Fromthis history, percentages paid are selected foreach stage of development. The amount oflosses paid to date for the period under re-
view is then divided by the appropriate per-centage, to arrive at the estimated ultimateloss cost. The amount of losses paid to dateis subtracted from this figure to produce theestimated loss liability.
◆ Counts and average costs of incurredlosses. This method indirectly establishes the li-ability for losses from loss counts and averagecosts. The projected number of loss units is ob-tained from the number of loss units receivedto date, based on percentages reported in prioryears at the same stage of development.
The average cost of loss units closed todate is calculated and compared with averageclosed costs of prior years at the same stageof development. To arrive at the total esti-mated ultimate loss, the estimated ultimateaverage cost derived is multiplied by the pro-jected ultimate number of loss units. Lossespaid to date are then subtracted to obtain theestimated liability.
◆ Counts and average values of unpaidlosses. This method directly establishes the li-ability from loss counts and average valuesof unpaid losses. In this case, a selected aver-age value is applied to the number of lossunits. If the data are based on reported loss-es, the selected average value is applied tothe number of open loss units, and a separatecalculation for IBNR losses is necessary. Ifthe data are based on accidents incurred, theselected average value is based on the totalnumber of open and IBNR losses.
◆ Loss ratio. This method estimates theultimate loss by using an estimated loss ra-tio. Selected for whatever period of cover-age is involved, the ratio is applied to theapplicable earned premiums, producing theestimated ultimate losses incurred for thatperiod. Losses paid to date on accidents oc-curring during the period are deductedfrom this total to derive the estimated totalloss liability.
This overview illustrates the various meth-ods used to quantify an insurer’s estimated li-ability for losses as of the evaluation date.Obviously, a great deal more detail and con-siderable judgment are involved in applyingthese methods. Furthermore, no singlemethod is ideal for all situations: which onea particular insurer chooses will depend on
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that company’s unique experience and prod-uct mix. In fact, many companies use morethan one method to ensure a high degree ofaccuracy and reliability.
For a more detailed discussion of the vari-ous loss-reserving methods, Standard &Poor’s recommends Property & Casualty In-surance Accounting, published by the Insur-ance Accounting and Systems Association.
Surplus funds: capital counts
After investment assets and loss reserves,the third largest component of an insurer’sbalance sheet is policyholders’ surplus, anal-ogous to shareholders’ equity. At December31, 2006, the insurers in the ISO study hadan aggregate surplus of $487.1 billion, up14.4% from the year-end 2005 surplus of$425.8 billion.
Policyholders’ surplus is one of the indica-tors that state regulators use to monitor andcontrol insurers’ solvency and growth. Indus-try surplus (sometimes referred to as capitalor equity) appreciates or depreciates throughretained earnings or losses, unrealized gainsor losses from investment portfolios, and ad-ditions to investors’ capital.
Typically, regulators permit insurers toleverage their surplus to a certain extent, al-lowing them to underwrite business equal totwo to three times the amount of their sur-plus. Regulators tend to give insurers moreleeway on the short-tail property lines thanon the long-tail casualty lines, because of theformer’s relatively greater predictability ofunderwriting performance.
Thus, as the industry has increased its ex-posure to casualty lines, its leverage has de-clined. Industry leverage also has declined inresponse to reassessments of risk and becauseof various factors contributing to overcapaci-ty. (Industry surplus leverage is discussed fur-ther in the “How to Analyze a Property-Casualty Insurance Company” section of thisSurvey.)
Two accounting methods usedP/C insurers generally account for their
surplus by using statutory accounting princi-ples (SAP), which require them to expenseimmediately all costs related to writing busi-ness, rather than by using generally acceptedaccounting principles (GAAP), which attemptto match an insurer’s income and expenses
by prorating the costs of an insurance policyover its assumed life.
Many insurers report their financial re-sults using both accounting systems. They re-port their results to regulators using SAP; forinvestors, they use GAAP. (Many analysts,however, also use SAP financial statementswhen analyzing an insurer.) This differencelargely reflects the disparate priorities ofshareholders, investors, and regulators.Shareholders and investors are likely to bemost interested in a company’s ability to earna profit, while regulators’ primary concern isthe company’s solvency — its ability to meetpolicyholder obligations.
The primary difference between GAAPand SAP lies in an accounting conceptknown as the matching principle. UnderGAAP accounting, an insurer charges ex-penses to the period in which they wereused to generate revenues. Under SAP ac-counting, expenses are recognized as soonas they occur.
For example, when an insurer uses SAP,any expenses associated with writing an in-surance policy — such as commissions andother underwriting expenses — are immedi-ately deducted from income. Under GAAPaccounting, these same charges are treated asassets — referred to as deferred policy acqui-sition costs — and are amortized over the in-surance policy’s life. Hence, the moreconservative SAP emphasizes a company’ssolvency. An insurer’s income and surplustend to be lower under SAP than underGAAP, which emphasizes the firm’s ongoingprofitability.
Forms of ownership
A P/C insurer’s ownership structure cantake one of two forms: a publicly held stockinsurance company or a mutual insurancecompany owned by its policyholders. In ad-dition, an insurance company can be struc-tured as a hybrid mutual holding company.
◆ Stock insurance companies. As theirname implies, stock insurance companies areowned by shareholders, who can buy or sellshares in the public stock market. The capi-tal of a stock insurance company is calledshareholders’ equity. Since these companiesare publicly held, they are required to filequarterly financial reports with the Securities
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and Exchange Commission (SEC). Thus, ob-taining timely financial information aboutthese companies is relatively easy.
As publicly owned companies, these insur-ance companies are obligated to provide themost favorable return on shareholders’ capi-tal. Sometimes, this goal may conflict withthe interests of policyholders.
For example, a stockholder-owned insurermay be under pressure to keep claim costs inline in order to return a profit to its share-holders. This scrutiny of claims, althoughcertainly legal, may not always be in the bestinterest of the policyholder, who relies on theinsurer to promptly pay his or her claim.
◆ Mutual insurance companies. For mutu-al insurance companies, in contrast, policy-holders are the owners. A mutual insurancecompany’s capital is called policyholders’ sur-plus. Because these companies are owned bytheir policyholders, they are not required topublicly disclose financial information. Al-though some mutual insurers distribute finan-cial information to policyholders, obtainingfinancial information about a mutual insureris more difficult.
◆ Mutual holding companies. In some in-stances, insurance companies have formedmutual holding companies to combine thebenefits of mutual ownership with those ofpublic ownership. In this case, the holdingcompany remains in the hands of the policy-holders, while shares in the operating sub-sidiary are sold to the public. However, thisarrangement can lead to conflicting priori-ties, as management seeks to please both pol-icyholders, who prefer that the companyretain its capital to pay claims, as well asshareholders, who prefer that managementuse its capital to grow the business and paydividends.
DemutualizationThe process by which a mutual insurance
company converts to a shareholder-ownedstructure is called demutualization. In recentyears, some of the nation’s largest mutual in-surers demutualized. Prudential FinancialInc. completed its initial public offering inDecember 2001. In April 2000, MetropolitanLife Insurance Co. completed its demutual-ization on the heels of John Hancock Finan-cial Services Inc., which completed its
demutualization in January 2000. (Note:Manulife Financial Corp. acquired JohnHancock Financial Services on April 28,2004.)
The forces behind these high-profile de-mutualizations differ from those that drove anumber of other companies, including TheEquitable, to demutualize in the late 1980s.Back then, insurers needed access to the capi-tal markets to sell equity and debt securitiesin an attempt to boost their sagging capitalbases. At that time, many companies weresaddled with illiquid and underperformingreal estate loans and assets, which eroded thestrength of their capital bases and threatenedtheir solvency. They needed to raise capital inorder to survive.
The more recent spate of demutualiza-tions was driven by insurers’ need to in-crease their operating and financialflexibility. One aspect of this is the abilityto issue stock. Although the merger and ac-quisition boom of the late 1990s hasslowed considerably, the ability to acquireanother company through the issuance ofstock (the currency of choice in most deals)is a critical success factor for many compa-nies. Furthermore, in this era of rewardingperformance with stock options, many mu-tual insurers believed they were at a disad-vantage in recruiting and retaining topmanagement talent by not being able to of-fer this benefit to employees.
Lines of coverage
Although P/C insurance is available on awide variety of coverages, several lines con-stitute the bulk of industry premium volume,as shown in the “Property/casualty industry’sproduct-line distribution” chart.
◆ Automobile coverage. This is the largestP/C line; it covers both physical (property)damage and car owners’ liability. Accordingto Standard & Poor’s, this sector accountedfor approximately 37% of the industry’s netwritten premium volume in 2006.
Automobile coverage (both personal andcommercial) has long dominated the indus-try’s product mix. Its growth over the past20 years has been fueled by the adoption ofmandatory automobile insurance in manystates and by escalating litigation and med-ical care costs.
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◆ Homeowners’ multi-peril. This is an-other principal line of business for the P/Cinsurance industry, accounting for some 12%of written premium volume in 2006. Home-owners’ insurance covers both the physicaldamage to the insured property and the lia-bility or legal responsibility arising from anyinjuries and/or property damage that the pol-icyholder may cause to other people. Dam-age caused by most natural disasters iscovered, except that which is caused byfloods and earthquakes. A separate policyusually is required to cover earthquake andflood damage.
◆ Workers’ compensation. Another ma-jor line of business for the P/C industry isworkers’ compensation, which accountedfor more than 9% of 2006 premium vol-ume. This business line insures organiza-tions that are required by state laws tocompensate employees who are injured ordisabled because of an occupational hazard.It also helps compensate families of em-ployees killed on the job.
During the 1960s and 1970s, the growthin this business line was helped by changes incertain state laws that increased mandatedcoverage and by the general upgrading of
benefit levels. However, in the past severalyears, this market has contracted as corpora-tions and local governments have sought lesscostly means of providing this coverage, suchas self-insuring. Some insurers have alsowithdrawn from this line of business in re-sponse to poor underwriting results.
◆ Other lines. The remaining 40% or soof the market comprises a variety of types ofcoverage, including homeowners’ multi-perilcoverage, commercial multi-peril coverage,and an array of liability coverages.
Distribution: getting policiesto the people
Insurance companies distribute their person-al and commercial policies through either di-rect selling systems or agency systems. In adirect selling distribution system, the insurancecompany (sometimes referred to as a directwriter) contacts its customers (“insureds”)through its own employees. Within this frame-work, the insurer sells policies through a num-ber of outlets, including direct mail andcompany-run agencies.
Under an agency system, the insurer con-tracts outside agents to sell its policies in ex-change for a commission. Some agents maysell only a single insurer’s policies (“exclusiveagents”), while others (“independentagents”) may offer policies from various in-surance companies.
While there are advantages and disadvan-tages to both systems, the tradeoff is betweencosts and control. A direct selling system canbe expensive to establish and operate, but itgives an insurer more control over the distri-bution process. The agency system reducesthe amount of control an insurer has overeach aspect of the distribution system, but itusually offers an established networkthrough which the insurer can distribute itsproducts. This is especially helpful to smalland regional insurers without the means toestablish their own distribution network.
Regulation and competition holdinsurers in line
The insurance industry is regulated on astate-by-state basis. Each of the 50 states andthe District of Columbia has an insurancecommissioner, who grants insurers operating
PROPERTY/CASUALTY INDUSTRY’S PRODUCT-LINE DISTRIBUTION(In percent, by net premiums written)
Source: Standard & Poor’s Ratings Services.
Otherpremium 30.2%
Other liability/occurence 5.0%
Other liability/occurence 5.9%
Commercialmultiple peril 6.8%
Commercial multiple peril 7.1%
Homeowners multiple peril 10.7%
Workers’ compensation 9.3%
Private passenger auto physical damage 17.4%
Private passengerauto physical damage 16.0%
Private passenger auto liability 21.9%
Private passengerauto liability 21.2%
Workers’ compensation 8.1%
Homeowners multiple peril 12.3%
2002
2006Other
premium 28.1.%
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licenses to let them conduct business withinthat state.
State regulators serve three primaryfunctions. First, they monitor the financialcondition and claims-paying ability of eachinsurance company operating in their state.Second, they serve as consumer watchdogs,ensuring that policyholders are not over-charged or discriminated against. Finally,regulators try to ensure that essential insur-ance coverage is readily available to allconsumers.
The National Association of InsuranceCommissioners (NAIC), based in KansasCity, Missouri, coordinates the activities ofstate insurance commissioners. Founded in1871 as the National Convention of Insur-ance Commissioners, the NAIC undertookthe formulation of uniform accounting pro-cedures as one of its first actions. Today,one of the NAIC’s main functions is to de-velop and improve insurance reporting andaccounting standards and practices. Theseactions are intended to improve state regu-lators’ knowledge of the financial conditionof insurers in their jurisdiction.
Insurance companies are required to file aset of financial statements each year withregulators in every state in which they oper-ate. These records, called annual statements,use statutory accounting terms to outline thecompany’s profits, losses, and overall finan-cial condition.
Other forms of regulation and controlalso govern the insurance industry. For in-stance, publicly held insurance companies —those that issue stock — are subject to regu-lation by the SEC.
Finally, the intense level of competitionamong industry participants in all lines alsousually serves as a measure of control. Com-
petition helps keep pricing in line and pre-vents any one participant from becoming toopowerful.
KEY INDUSTRY RATIOS AND STATISTICS
For purposes of formulating industry-wide benchmarks in this portion of theSurvey, we define the property-casualty in-surance industry as comprising the compa-nies that report their operating statistics tothe National Association of InsuranceCommissioners; these statistics are thencompiled by Standard & Poor’s. Therewere approximately 1,130 such companiesin 2006.
� Return on assets (ROA). This is a mea-sure of profitability; it is equal to net incomedivided by average total assets. The ROA formost property-casualty insurers typicallyranges from 2.0% to 5.0%. In 2006, proper-ty-casualty insurers tracked by Standard &Poor’s posted an average ROA of 4.6%, upfrom 3.3% in 2005.
� Return on equity (ROE). Usually con-sidered in tandem with ROA, ROE is anothermeasure of profitability. For a stockholder-owned insurance company, ROE is calculat-ed by dividing net income by average share-holders’ equity.
To calculate the ROE for the entireproperty-casualty insurance industry (whichincludes mutual insurance companies), thedenominator in this equation would be poli-cyholders’ surplus. Policyholders’ surplus is astatutory accounting term that is generallyanalogous to shareholders’ equity. The return
CLASSIFICATION OF NET PREMIUMS — LEADING LINES FOR PROPERTY-CASUALTY INSURANCE COMPANIES(Premiums written, in millions of dollars and as a percentage of total)
PRIVATE PASSENGER AUTO HOMEOWNERS’ WORKERS’ COMMERCIAL OTHER OTHER TOTAL NET % CHG INAUTO LIABILITY PHYS. DAMAGE MULTIPLE PERIL COMPENSATION MULTIPLE PERIL LIABILITY/OCCURRENCE PREMIUMS PREMIUMS PREMIUMS
YEAR WRITTEN % WRITTEN % WRITTEN % WRITTEN % WRITTEN % WRITTEN % WRITTEN % WRITTEN WRITTEN
2006 94,430 21.2 71,318 16.0 54,781 12.3 41,528 9.3 31,691 7.1 26,440 5.9 124,873 28.1 445,061 3.6 2005 94,853 22.1 71,880 16.7 52,471 12.2 39,807 9.3 29,643 6.9 23,846 5.6 116,945 27.2 429,446 0.5 2004 92,954 21.7 71,920 16.8 49,607 11.6 36,710 8.6 29,109 6.8 24,869 5.8 122,211 28.6 427,380 4.4 2003 89,291 21.8 69,122 16.9 45,768 11.2 33,145 8.1 27,418 6.7 21,999 5.4 122,465 29.9 409,208 9.3 2002 82,141 21.9 64,991 17.4 40,033 10.7 30,190 8.1 25,420 6.8 18,532 5.0 113,040 30.2 374,347 NA
NA-Not available.Source: Standard & Poor’s Ratings Services.
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on equity/surplus for property-casualty insur-ers can range from under 5% to about 18%.Most insurers strive to earn an ROE of 12%to 15%.
� Net investment yield. This measure ofinvestment performance is typically calculat-ed as net investment income divided by av-erage invested assets. Investment yieldstypically fall within a range of 4% to 12%,though they can be lower than or wellabove that range, depending on the mix ofinvested assets in an insurer’s portfolio. Forthe property-casualty industry, the averageyield on invested assets was 4.6% in 2006,up from 4.4% in 2005, according to figurescompiled by Standard & Poor’s.
The next two ratios, which measure un-derwriting performance, are derived fromdata published quarterly by Insurance Ser-vices Office Inc. (ISO), an industry researchand data collection organization.
� Net premiums written to surplus. Thisratio measures the extent to which the indus-try (or an insurer) has leveraged its capital towrite business. Sometimes referred to as ameasure of capacity utilization, it is equal tonet written premiums divided by policyhold-ers’ surplus.
Typically, regulators permit an insurer tohave a ratio of net written premiums to sur-plus of 2-to-1. In other words, insurers wouldbe permitted to write $2 in premiums forevery $1 in capital. Because premium rates formany lines of business declined in 2006, theindustry remained underleveraged. At Decem-ber 31, 2006, the ratio of net written premi-ums to policyholders’ surplus was 0.91-to-1.
In other words, the industry wrote $0.91worth of premiums for every $1.00 in capital.
� Combined ratio. A key measure of un-derwriting performance, the combined ratiois calculated by adding three figures: the lossratio (losses plus loss adjustment expenses,divided by earned premiums), the expense ra-tio (other underwriting expenses divided bywritten premiums), and the dividend ratio(policyholder dividends divided by earnedpremiums). A combined ratio of 100% orless indicates an underwriting profit; in ex-cess of 100%, it signals an underwriting loss.
A typical range for combined ratios is100% to 110%. The loss ratio usuallyranges from 60% to 80%, and the expenseratio from 25% to 35%. The dividend ratiousually ranges from 1.0% to 2.0%.
Companies strive to earn a profit fromunderwriting, but only a small percentage ofthem actually achieve this goal. According toa study by the ISO, between 1952 and 1998,the industry earned a profit from underwrit-ing — and achieved a combined ratio below100% — in just 15 of those 47 years. Until2004, the last time this happened was in1978, when the industry’s combined ratioequaled 97.5%. In 2006, the industry againproduced a combined ratio below 100%.
For the 12 months ended December 31,2006, the industry’s combined ratio was92.4%, according to ISO. This improvementfrom 100.9% in the year ended December31, 2005, reflected the steep decline in cata-strophe losses. The combined ratio for 2006consisted of a loss ratio of 65.1% (versus74.6% in 2005), an expense ratio of 26.5%(25.8% in 2005), and a dividend ratio of0.8% (0.4% in 2005).
HOW TO ANALYZE A PROPERTY-CASUALTY INSURANCE COMPANY
When analyzing a property-casualty (P/C)insurer, consider three central points: itsprofitability, or ability to make money; itsliquidity, or ability to convert assets into cashto pay claims and meet other expenses; andits leverage, or the extent to which it uses itscapital to produce business.
As with the markets for most other goodsand services, the P/C insurance market func-tions within supply and demand curves. De-
US PROPERTY/CASUALTY COMBINED RATIOS
Source: Insurance Services Office.
140
120
100
80
60
40
20
01998 99 00 01 02 03 04 05 2006
Commercial lines
Personal lines
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mand for insurance is fairly stable and in-elastic: it is influenced by growth in the econ-omy (as measured by gross domesticproduct), the inflation rate, and the need toprotect assets. The supply curve, however,moves primarily with interest rates.
Pricing moves inverselywith interest rates
Theoretically, when interest rates rise, insur-ers are willing to provide more insurance atthe same price, because each premium dollargenerates more investment income for the in-surer. Thus, insurance prices decline until addi-tional demand is stimulated or until it becomesunprofitable to provide coverage, promptinginsurers to withdraw. Either way, supply anddemand are brought back into balance.
The fundamental relationship between in-surance pricing and interest rates, therefore,is that prices increase when interest rates fall,and they decline when interest rates rise. Themagnitude of changes in price varies with themagnitude of changes in interest rates.
Price and premium growth levels also areinfluenced by competitive pressures withinthe industry and by each firm’s capacity tounderwrite. The industry is competitive andhas relatively few barriers to entry, so com-panies tend to overreact to interest ratechanges, either overpricing or underpricingas situations warrant. In recent years, howev-er, this theory did not match reality. During aperiod of historically low interest rates, in-surance pricing remained competitive. This islargely attributable to an oversupply of un-derwriting capacity, or capital, that remainedwithin the insurance marketplace.
Prospects for inflation also play an impor-tant role in insurance prices. If claim costsare expected to rise because of inflation, a
higher level of income will be needed to cov-er these potentially higher costs in the future.Thus, insurance companies must incorporateestimates of future inflation into their pricingstructures.
When there is a wide range of inflationexpectations, companies with lower-than-average estimates of future inflation may of-fer their products for below-average prices.Of course, insurers often can garner marketshare when their policies are priced belowthose of their competitors. Therefore, overallprice trends tend to move toward the levels setby companies with a less inflationary outlook.
Predicting profits
Two broad measures of profitability thatare applicable to P/C insurance companiesare return on assets (ROA) and return on eq-uity (ROE). ROA is net income divided byaverage total assets. A typical range of ROAsfor the P/C insurance industry is somewherebetween 0.5% and 2.0%, with the averagesomewhere around 1.5%. ROE is calculatedby dividing the insurer’s net income by aver-age shareholders’ equity. Most insurers striveto achieve an ROE of at least 15%.
A P/C insurer’s profitability depends pri-marily on two components: underwriting in-come and investment income. Following, wediscuss each of these components of an in-surer’s operating income.
Principles of underwritingThe first element to consider when analyz-
ing underwriting results is the rate of writtenpremium growth. It should be comparedwith industry data to judge how a companystacks up against its peers.
Pay careful attention to the circumstancessurrounding the rate of premium growth. Forexample, if a company expands its writtenpremium base at 10% a year while the over-all industry is growing at 6% a year, thatcompany would appear to be outperformingits peer group. Presumably, the stock marketwould award that firm a higher valuationthan some of its slower-growing counterpartswould enjoy. However, if the insurer isachieving premium growth by followingrisky underwriting standards — such as un-derpricing policies to gain market share orwriting a great deal of business in a high-riskcoverage line avoided by other insurers —
PREMIUM VOLUME AND UNDERWRITING RATIOS FOR THE TOTAL US PROPERTY-CASUALTY INDUSTRY
NETPREMIUMS ‡LOSS †EXPENSE COMBINEDWRITTEN RATIO RATIO RATIO
YEAR (MIL. $) (%) (%) (%)
2006 445,061 65.2 26.4 92.4 2005 429,446 74.5 25.9 100.8 2004 427,380 72.8 25.3 98.5 2003 409,208 74.7 25.0 100.1 2002 374,347 81.1 25.5 107.1
‡Incurred to premiums earned. †Incurred to premiums written. Source: Standard & Poor’s Ratings Services.
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the insurer’s valuation would have to be ad-justed downward.
Conversely, a company growing its pre-mium base at a rate slower than the overallindustry could be doing so because it islimiting its exposure to an unattractiveclass of business. For example, a numberof insurers have reduced their exposure toworkers’ compensation insurance in re-sponse to that line’s adverse claim trends.These insurers may have posted minimalwritten premium growth in recent years,but many have seen their profitability im-prove after purging these loss-laden busi-ness lines.
Another factor that affects a company’spremium growth rate is the extent to whichan insurer uses reinsurance, which is thepractice of transferring some of its risk —and premium income — to reinsurancecompanies. In an attempt to offset slowingpremium growth, an insurer might reducethe level of premiums that it cedes to rein-surers. Using less reinsurance lets an insurerkeep more of each premium dollar, so a re-duced level of reinsurance may enhanceyear-to-year premium growth comparisons.At the same time, using less reinsurance re-moves the protection it affords, potentiallyexposing the primary insurer to a large fi-nancial claim.
◆ The combined ratio. To evaluate an in-surer’s underwriting performance, many ana-lysts use a statistical measure called thecombined ratio. This ratio equals the sum ofthe loss ratio, the expense ratio, and the divi-dend ratio, which are described following. Acombined ratio below 100% indicates an un-derwriting profit; one above 100% means aninsurer has incurred an underwriting loss.Unless otherwise stated, most companies cal-culate these ratios using statutory accountingprinciples.
◆ The loss ratio. The loss ratio measuresclaims cost experience. It is derived by divid-ing losses and loss adjustment expenses byearned premiums. It typically ranges from60% to 80%, but it can soar during a periodof heavy catastrophe losses.
◆ The expense ratio. The expense ratiomeasures how cost-effectively an insurerwrites new business. It is derived by dividing
operating expenses by written premiums. Ittypically ranges from 25% to 35%.
◆ The dividend ratio. The dividend ratio,the smallest component of the combined ra-tio, is obtained by dividing policyholders’dividends by earned premiums. It typicallyranges from 1% to 2%. (The combined ratiooften is presented excluding the dividend ra-tio. This is the case in the “Underwriting ex-perience” and “Premium volume andunderwriting ratios” tables.)
Playing the investment fieldInvestment income is an important source
of profits for P/C insurers. Theoretically, invest-ment income should be used to provide finan-cial protection against unforeseen and unantici-pated underwriting losses. Many insurers,however, have come to rely on investment in-come to remain profitable. When evaluating aninsurer’s investment portfolio, analysts review acompany’s asset allocation strategy, makingsure its mix of invested assets is appropriate forthe type of business it writes.
For most P/C insurers, this process is fair-ly straightforward: the typical P/C insurermaintains most of its invested assets in rela-tively liquid fixed-income or equity securitiesthat are converted easily into cash. This isbecause most P/C insurance claims are settledin a relatively short amount of time. Withineach asset class, such as stocks or bonds, areview of asset quality and diversification isnecessary. To help in the analysis of assetquality, insurers usually provide the debt rat-ing of bonds in their portfolio or an averagedebt rating for their entire portfolio.
Two important ratios used in analyzinginvestment results are the investment yieldand the total return on the portfolio. Invest-ment yield is usually calculated as the net in-vestment income during a certain timeperiod, divided by the portfolio’s average val-ue during the same period. Total return isusually calculated as net investment incomeplus or minus realized and unrealized gains,divided by beginning market value of theportfolio, plus or minus the weighted averageof additions or dispositions.
Cash flow and liquidity
Liquidity is another key benchmark foranalyzing a P/C insurer, because of the insur-
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er’s need to pay claims promptly. An insurer’ssources of liquidity arise from underwritingcash flow, investment cash flow, and assetliquidation cash flow. All of these are consid-ered internal sources because they are gener-ated by the insurer’s operations.
Because of the somewhat unpredictablenature of the P/C insurance business, cashflow from underwriting activities is probablythe most volatile element of an insurer’s totalcash flow. Nevertheless, the underwritingcash flow for most insurers is usually posi-tive; when combined with the cash flow frominvestment activities, most insurers end upwith a substantial positive cash flow.
Looking at leverage
For P/C insurers, leverage refers to how thecompany uses its surplus, or capital, to writepolicies. The ratio of net written premiums topolicyholders’ surplus is usually a good indica-tor of the industry’s capacity utilization.
Historically, insurers leveraged their sur-plus by a multiple of two to three, dependingon the types of business they underwrote.For example, an insurer with $10 million ofsurplus could probably write $20 million to$30 million of annual premiums. Regulatorstend to give insurers more leeway in surplusleverage on shorter-tail property lines of cov-erage than on longer-tail liability lines, be-cause the former have greater predictability.(The terms “short-tail” and “long-tail” referto the time between the occurrence of aclaim and its settlement; short-tail claimsusually can be settled more quickly thanlong-tail claims.)
Thus, as the industry’s exposure to casual-ty lines has increased, surplus leverage hasdecreased. Overcapacity in the insurancebusiness also has caused surplus leverage todecline, as have strong investment returns.Thus, while regulators still may use a 2-to-1leverage of surplus as a benchmark, thisbenchmark has to be considered against abackdrop of industrywide “underleverage.”In fact, industry leverage has been less than1-to-1 for much of the last 15 years. Industryleverage increased somewhat in the after-math of the September 2001 terrorist attacksand back-to-back record hurricane seasons in2004 and 2005.
Based on data obtained from A.M. Best, aprovider of insurance company ratings and
information, and the Insurance Services Of-fice, an industry research and data collectionorganization, the ratio of net written premi-ums to policyholder surplus was 0.91-to-1 atDecember 31, 2006, versus 1.00-to-1 at De-cember 31, 2005, and 1.08-to-1 at December31, 2004 — both of which were down slight-ly from 1.17-to-1 at December 31, 2003. ■
AAccqquuiissiittiioonn ccoosstt — The amount of money paid by an in-surance company for new policies that it under-writes or for the purchase of another block ofbusiness; it includes commissions to agents and bro-kers and, in some cases, field supervision expenses.
AAccttuuaarryy — An insurance professional whose job is toestimate statistical risks, set premium levels, and an-alyze other technical aspects of insurance.
AAddmmiinniissttrraattiivvee sseerrvviicceess oonnllyy ((AASSOO)) aaggrreeeemmeenntt — Anagreement under which an insurer provides a clientwith such services as actuarial work, benefit plandesign, claims processing, financial advice, and re-port preparation. The client typically accepts the un-derwriting risk or self-insures.
AAggeenntt — A person who sells insurance policies as arepresentative of the insurer. An independent agentrepresents two or more underwriters, while an ex-clusive agent may be an employee or commissionedrepresentative of a single company.
BBrrookkeerr — A producer that deals with either agents orunderwriting companies to arrange insurance cover-age for clients. Legally, a broker represents the buy-er of insurance rather than the underwritingcompany.
CCaappaacciittyy — The level of underwriting business an in-surer can support, based on its ability or willingnessto accept risks, with certain protection limits.
CCaappttiivvee iinnssuurreerr — An insurance organization estab-lished by an entity to insure its own risks.
CCaattaassttrroopphhee — An incident or series of related inci-dents causing insured losses of $25 million or more.
CCeeddee — The transfer of part of an insurer’s liability to areinsurance company. The insurer “cedes” its liabili-ty; the reinsurer “assumes” the liability.
CCoommbbiinneedd rraattiioo — A financial measure of underwritingperformance used in the insurance industry; it is thesum of the loss ratio, the expense ratio, and the divi-dend ratio. A combined ratio of less than 100% gen-erally indicates an underwriting profit, while a ratioin excess of 100% indicates an underwriting loss.
CCoonnvveennttiioonn ssttaatteemmeenntt — Documents filed with state in-surance departments detailing the financial statisticsof individual insurance companies. Convention state-ments are prepared using statutory accounting prin-ciples, rather than generally accepted accountingprinciples.
DDiivviiddeenndd rraattiioo — Policyholders’ dividends as a percent-age of earned premiums. It is a component of thecombined ratio.
EEaarrnneedd pprreemmiiuumm — Portion of a premium for whichthe insurer already has provided protection to thepolicyholder.
EExxppeennssee rraattiioo — Operating expenses as a percentageof premiums written, calculated on a statutory basis.It measures an insurer’s efficiency in writing newbusiness and is a component of the combined ratio.
FFiinniittee rreeiinnssuurraannccee — A broad term used to describereinsurance transactions that include limited trans-fer of risk; can also refer to financial reinsurance, orthe transfer of a known loss, with the only uncertain-ty being the timing of the loss payment.
GGeenneerraallllyy aacccceepptteedd aaccccoouunnttiinngg pprriinncciipplleess ((GGAAAAPP)) —An accounting method that, among other things, at-tempts to match income and expenses by proratingcosts over the assumed life of an insurance policy.The GAAP method is used in the audited financialstatements of publicly held companies. (See Statuto-ry accounting principles.)
IInnssuurraannccee eexxaammiinneerr — A state insurance departmentrepresentative assigned to participate in the officialaudit and examination of insurance companies.
IInnssuurraannccee iinn ffoorrccee — The potential maximum claimagainst an insurer.
LLoossss rraattiioo — An insurer’s loss and loss adjustment ex-penses as a percentage of premiums earned, calcu-lated on a statutory basis. A component of thecombined ratio, it is a measure of an insurer’s claimscost experience.
MMaannaaggiinngg ggeenneerraall aaggeenntt ((MMGGAA)) — A special type ofproducer that, unlike other persons or firms sellinginsurance, often has “binding authority” in certaininsurance and reinsurance markets. MGAs havecontractual agreements whereby they can acceptentire books of business on behalf of insurance andreinsurance underwriters.
MMuuttuuaall iinnssuurraannccee ccoommppaannyy — An incorporated insur-ance organization with a governing body elected bypolicyholders. Mutual insurance companies general-ly issue participating policies.
NNeett ooppeerraattiinngg iinnccoommee — After-tax income before netrealized investment gains or losses. Analysts mostcommonly use this measure of insurer profitabilitywhen modeling future earnings of an insurer.
GLOSSARY
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NNeett pprreemmiiuummss wwrriitttteenn — Premium income brought in byinsurance companies, directly or through reinsur-ance, minus payments made for business reinsured.
NNoonnppaarrttiicciippaattiinngg ppoolliiccyy — An insurance policy in whichthe insurer does not distribute any part of its surplusto policyholders. Premiums are usually lower fornonparticipating policies than for comparable partic-ipating policies.
PPaarrttiicciippaattiinngg ppoolliiccyy — An insurance policy under whichthe insurer agrees to distribute to its policyholdersthe portion of its surplus that management does notdeem necessary to retain. Such a distribution servesto reduce the premiums that each policyholder haspaid during the year.
PPoolliiccyy rreesseerrvveess — The funds that an insurer holdsspecifically for the fulfillment of its policy obligations.
PPrreemmiiuumm — The payment, or one of the periodic pay-ments, that a policyholder agrees to make for an in-surance policy.
PPrreemmiiuumm llooaann — A policy loan made for the purpose ofpaying premiums.
PPrriimmaarryy iinnssuurreerr — An insurance company that, eitherthrough an independent insurance agent or a broker,provides coverage in the outside market. The buyersof primary insurance are consumers.
PPrroodduucceerr — A person or firm that sells insurance. Aproducer may be an agent or a broker.
RReeiinnssuurraannccee — Coverage that a primary insurer (or“reinsured”) purchases from another company toprotect itself from losses beyond a dollar amount itfeels can be safely carried. This amount is normallycalled the reinsured’s “net line.” The reinsurancecompany can, in turn, reinsure through a processknown as retrocession.
RReesseerrvveess — Funds that an insurer sets aside to coverobligations to policyholders; the amount may repre-sent both actual and potential liabilities.
RRiiddeerr — A special provision or group of provisions thatmay be added to a policy to expand or limit the bene-fits otherwise payable.
SSttaattuuttoorryy aaccccoouunnttiinngg pprriinncciipplleess ((SSAAPP)) — An accountingformat used by state insurance regulators. As op-posed to the generally accepted accounting princi-ples (GAAP) method, statutory accounting isessentially cash-oriented (rather than accrual) andhas such requirements as immediately expensing allcosts related to writing business. More conservativethan GAAP, SAP focuses on a firm’s ability to meet itsobligations (its solvency), whereas GAAP focuses onprofit growth.
SSttoocckk iinnssuurraannccee ccoommppaannyy — An insurance companyowned by its stockholders, who elect a board to di-rect the firm’s management. In general, stock com-panies issue nonparticipating insurance, but theymay also issue participating policies.
SSuurrpplluuss lliinneess — Generally, a risk for which no normalinsurance market exists.
TTeerrrroorriisstt iinnssuurraannccee — Coverage that can be added to aproperty insurance program to provide protectionagainst destruction of property by terrorists.
UUnnddeerrwwrriittiinngg pprrooffiitt//lloossss — Profits or losses of an insur-ance company that result from insurance activities,calculated on a statutory basis. A net underwritingprofit or loss represents underwriting results afterpolicyholder dividends are deducted.
WWaarr rriisskkss iinnssuurraannccee — Coverage on ships or cargoagainst loss or damage by enemy action and againstdamages sustained in fighting such an action. Theperils of war are excluded from most policies.
INDUSTRY REFERENCES
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PERIODICALS
AAggggrreeggaatteess && AAvveerraaggeess:: PPrrooppeerrttyy--CCaassuuaallttyyBBeesstt’’ss RReevviieewwBBeessttWWeeeekkA.M. Best Co. Inc.Ambest Rd., Oldwick, NJ 08858(908) 439-2200Web site: http://www.ambest.comThe first is an annual that provides financial and under-writing data on the entire property-casualty insuranceindustry; the other two are monthly and weekly publica-tions, respectively, that cover topics and issues in theproperty-casualty insurance industry.
BBuussiinneessss IInnssuurraanncceeCrain Communications Inc.360 N. Michigan Ave., Chicago, IL 60601(312) 649-5200Web site: http://www.businessinsurance.comWeekly; covers corporate risk, employee benefit, andmanaged healthcare news.
NNaattiioonnaall UUnnddeerrwwrriitteerr (Property/Casualty edition)The National Underwriter Co.33-41 Newark St., 2nd Fl., Hoboken, NJ 07030(201) 526-1230Web site: http://www.nunews.com/pandcWeekly newspaper; covers issues related to theproperty-casualty insurance market.
BOOKS
GGlloossssaarryy ooff IInnssuurraannccee TTeerrmmss,, 2nd Ed.Richard V. Rupp, CPCUChatsworth, Calif.: NILS Publishing Co., 1996
PPrrooppeerrttyy && CCaassuuaallttyy IInnssuurraannccee AAccccoouunnttiinngg,, 8th Ed.Insurance Accounting & Systems Association, 20033511 Shannon Rd., Ste. 160, Durham, NC 27707(919) 489-0991Web site: http://www.iasa.org
TRADE ASSOCIATIONS
IInnssuurraannccee IInnffoorrmmaattiioonn IInnssttiittuuttee ((IIIIII)) 110 William St., New York, NY 10038(212) 346-5500Web site: http://www.iii.orgNonprofit, industry-supported organization that pro-vides information about the property-casualty insur-ance industry.
IInnssuurraannccee SSeerrvviicceess OOffffiiccee IInncc.. ((IISSOO)) 545 Washington Blvd., Jersey City, NJ 07310(800) 888-4476; (201) 469-2000Web site: http://www.iso.comTrade organization and publisher of aggregate industryunderwriting statistics.
COMPANY REPORTS
AACCEE LLiimmiitteeddWeb site: http://www.acelimited.com
AAllllssttaattee CCoorrpp.. Web site: http://www.allstate.com
AAmmbbaacc FFiinnaanncciiaall GGrroouupp IInncc.. Web site: http://www.ambac.com
AAmmeerriiccaann IInntteerrnnaattiioonnaall GGrroouuppWeb site: http://www.aig.com
TThhee CChhuubbbb CCoorrpp.. Web site: http://www.chubb.com
CCiinncciinnnnaattii FFiinnaanncciiaall CCoorrpp.. Web site: http://www.cinfin.com
CCNNAA FFiinnaanncciiaall CCoorrpp.. Web site: http://www.cna.com
HHaarrttffoorrdd FFiinnaanncciiaall SSeerrvviicceess GGrroouuppWeb site: http://www.thehartford.com
MMBBIIAA IInncc.. Web site: http://www.mbia.com
PPrrooggrreessssiivvee CCoorrpp.. Web site: http://www.progressive.com
SSAAFFEECCOO CCoorrpp.. Web site: http://www.safeco.com
TThhee TTrraavveelleerrss CCoommppaanniieess IInncc.. Web site: http://www.travelers.com
XXLL CCaappiittaall LLttdd.. Web site: http://www.xlcapital.com
Operating revenuesNet sales and other operating revenues. Excludesinterest income if such income is “nonoperating.”Includes franchised/leased department income forretailers and royalties for publishers and oil and miningcompanies. Excludes excise taxes for tobacco, liquor,and oil companies.
Net incomeProfits derived from all sources, after deductions ofexpenses, taxes, and fixed charges, but before anydiscontinued operations, extraordinary items, anddividend payments (preferred and common).
Return on revenues Net income divided by operating revenues.
Return on assets Net income divided by average total assets. Used inindustry analysis and as a measure of asset-use efficiency.
Return on equity Net income, less preferred dividend requirements,divided by average common shareholder‘s equity.Generally used to measure performance and to makeindustry comparisons.
Price/earnings ratio The ratio of market price to earnings, obtained bydividing the stock’s high and low market price for theyear by earnings per share (before extraordinary items).It essentially indicates the value investors place on acompany’s earnings.
Dividend payout ratioThis is the percentage of earnings paid out in dividends.It is calculated by dividing the annual dividend by theearnings. Dividends are generally total cash paymentsper share over a 12-month period. Although payments areusually calculated from the ex-dividend dates, they mayalso be reported on a declared basis where this has beenestablished to be a company’s payout policy.
Dividend yield The total cash dividend payments divided by the year’shigh and low market prices for the stock.
Earnings per shareThe amount a company reports as having been earnedfor the year (based on generally accepted accountingstandards), divided by the number of shares outstanding.Amounts reported in Industry Surveys excludeextraordinary items.
Tangible book value per shareThis measure indicates the theoretical dollar amount per common share one might expect to receive shouldliquidation take place. Generally, book value isdetermined by adding the stated (or par) value of thecommon stock, paid-in capital, and retained earnings,then subtracting intangible assets, preferred stock atliquidating value, and unamortized debt discount. Thisamount is divided by the number of outstanding shares to get book value per common share.
Share price This shows the calendar-year high and low of a stock’smarket price.
In addition to the footnotes that appear at the bottom ofeach page, you will notice some or all of the following:NA—Not available.NM—Not meaningful.NR—Not reported.AF—Annual figure. Data are presented on an annualbasis.CF—Combined figure. In this case, data are not availablebecause one or more components are combined withother items.
DEFINITIONS FOR COMPARATIVE COMPANY ANALYSIS TABLES
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73.0
71
.3
35.9
30
.2
25.7
18
.0
34.8
25
.7
524
417
284
277
140
SAF
*SA
FECO
COR
PDE
C88
0.0
691.
1 62
0.2
339.
2 30
1.1
(1,0
45.3
)43
9.0
7.2
NM
27.3
20
0 15
7 14
1 77
69
SAFT
§SA
FETY
INSU
RAN
CE G
ROUP
INC
DEC
111.
9 95
.2
45.0
28
.5
10.5
0.
0 N
AN
AN
M17
.6
****
****
NA
SKP
§SC
PIE
HOLD
INGS
INC
DEC
12.3
3.
5 (7
.9)
(12.
8)(3
8.4)
(58.
0)30
.2
(8.6
)N
M25
4.1
41
11
(26)
(42)
(127
)SI
GI§
SELE
CTIV
E IN
S GR
OUP
INC
DEC
163.
6 14
7.5
128.
6 66
.3
42.1
26
.3
55.6
11
.4
44.1
10
.9
294
265
232
119
76
STC
§ST
EWAR
T IN
FORM
ATIO
N S
ERVI
CES
DEC
43.3
88
.8
82.5
12
3.8
94.5
48
.7
14.4
11
.6
(2.3
)(5
1.3)
300
615
572
857
654
TWGP
§TO
WER
GRO
UP IN
CDE
C36
.8
20.8
9.
0 6.
3 5.
6 N
AN
AN
AN
A77
.1
****
****
NA
TRV
*TR
AVEL
ERS
COS
INC
DEC
4,20
8.0
2,06
1.0
955.
0 1,
696.
0 21
5.6
1,06
2.0
391.
0 26
.8
31.7
10
4.2
1,07
6 52
7 24
4 43
4 55
UF
CS§
UNIT
ED F
IRE
& C
AS C
ODE
C88
.1
9.0
78.8
55
.6
20.8
24
.1
22.0
14
.9
29.6
87
4.0
401
41
359
253
95
XL*
XL C
APIT
AL L
TDDE
C1,
762.
8 (1
,252
.0)
1,16
6.6
412.
0 40
5.6
(576
.1)
494.
3 13
.6
NM
NM
357
(253
)23
6 83
82
ZN
T§
ZEN
ITH
NAT
ION
AL IN
SURA
NCE
CP
DEC
258.
7 15
6.4
117.
7 65
.8
1.0
(23.
8)37
.6
21.3
N
M65
.4
688
416
313
175
3
RREEIINN
SSUURRAA
NNCCEE
‡‡RE
†EV
ERES
T RE
GRO
UP L
TDDE
C84
0.8
(218
.7)
494.
9 42
6.0
231.
3 99
.0
112.
0 22
.3
53.4
N
M75
1 (1
95)
442
380
206
MMUULL
TTII--LL
IINNEE
GGRROOUU
PP‡‡AF
G†
AMER
ICAN
FIN
ANCI
AL G
ROUP
INC
DEC
428.
2 20
7.8
367.
9 32
1.2
125.
0 (4
.8)
262.
0 5.
0 N
M10
6.0
163
79
140
123
48
AIG
*AM
ERIC
AN IN
TERN
ATIO
NAL
GRO
UPDE
C14
,014
.0
10,4
77.0
9,
983.
0 9,
265.
0 5,
519.
0 5,
499.
0 2,
897.
3 17
.1
20.6
33
.8
484
362
345
320
190
AIZ
*AS
SURA
NT
INC
DEC
715.
9 47
9.4
350.
6 18
5.7
259.
7 98
.1
NA
NA
48.8
49
.3
****
****
NA
GNW
*GE
NW
ORTH
FIN
ANCI
AL IN
CDE
C1,
324.
0 1,
221.
0 1,
145.
0 96
9.0
NA
NA
NA
NA
NA
8.4
****
****
NA
HIG
*HA
RTFO
RD F
INAN
CIAL
SER
VICE
SDE
C2,
745.
0 2,
274.
0 2,
138.
0 (9
1.0)
1,00
0.0
549.
0 (9
9.0)
NM
38.0
20
.7
NM
NM
NM
NM
NM
HCC
†HC
C IN
SURA
NCE
HOL
DIN
GS IN
CDE
C34
2.3
188.
4 15
9.0
106.
9 10
5.8
30.2
29
.3
27.9
62
.5
81.6
1,
168
643
543
365
361
HMN
†HO
RACE
MAN
N E
DUCA
TORS
COR
PDE
C98
.7
77.3
56
.3
19.0
11
.3
25.6
73
.8
3.0
31.0
27
.7
134
105
76
26
15
LTR
*LO
EWS
CORP
DEC
2,51
7.0
1,19
2.9
1,23
5.3
(666
.1)
982.
6 (5
35.8
)1,
383.
9 6.
2 N
M11
1.0
182
86
89
(48)
71
UTR
†UN
ITRI
N IN
CDE
C28
3.1
255.
5 24
0.2
123.
6 (8
.2)
380.
9 13
2.5
7.9
(5.8
)10
.8
214
193
181
93
(6)
IINNSSUU
RRAANN
CCEE BB
RROOKKEE
RRSS‡‡
AOC
*AO
N C
ORP
DEC
626.
0 64
2.0
577.
0 66
3.0
466.
0 14
7.0
291.
8 7.
9 33
.6
(2.5
)21
5 22
0 19
8 22
7 16
0 AJ
G†
ARTH
UR J
GAL
LAGH
ER &
CO
DEC
128.
5 28
.6
188.
5 14
6.2
129.
7 12
5.3
45.8
10
.9
0.5
349.
3 28
1 62
41
2 31
9 28
3 BR
O†
BROW
N &
BRO
WN
INC
DEC
172.
4 15
0.6
128.
8 11
0.3
83.1
53
.9
16.5
26
.4
26.2
14
.5
1,04
5 91
3 78
1 66
9 50
4 HR
H§
HILB
ROG
AL &
HOB
BS C
ODE
C87
.0
56.2
81
.4
75.0
61
.2
32.3
11
.4
22.5
21
.9
54.9
76
3 49
3 71
4 65
7 53
6 M
MC
*M
ARSH
& M
CLEN
NAN
COS
DEC
818.
0 36
9.0
176.
0 1,
540.
0 1,
365.
0 97
4.0
459.
3 5.
9 (3
.4)
121.
7 17
8 80
38
33
5 29
7
Net
Inco
me
Mill
ion
$Co
mpo
und
Gro
wth
Rat
e (%
)In
dex
Bas
is (1
996
= 10
0)
Tick
erCo
mpa
nyYr
. End
2006
2005
2004
2003
2002
2001
1996
10-Y
r.5-
Yr.
1-Yr
.20
0620
0520
0420
0320
02
Not
e: D
ata
as o
rigin
ally
repo
rted.
‡
S&P
1500
Inde
x gr
oup.
* C
ompa
ny in
clud
ed in
the
S&P
500.
†
Com
pany
incl
uded
in th
e S&
P M
idCa
p.
§ Co
mpa
ny in
clud
ed in
the
S&P
Smal
lCap
. #
Of t
he fo
llow
ing
cale
ndar
yea
r. *
* N
ot c
alcu
late
d; d
ata
for b
ase
year
or e
nd y
ear n
ot a
vaila
ble.
JAN
UA
RY
24,
2008
/ I
NS
UR
AN
CE:
PR
OP
ERTY
-CA
SU
ALT
Y I
ND
US
TRY
SU
RV
EY
33
Retu
rn o
n Re
venu
es (%
)Re
turn
on
Asse
ts (%
)Re
turn
on
Equi
ty (%
)
Tick
erCo
mpa
nyYr
. End
2006
2005
2004
2003
2002
2006
2005
2004
2003
2002
2006
2005
2004
2003
2002
PPRROOPP
EERRTTYY
CCAASS
UUAALLTT
YY‡‡AC
E*
ACE
LTD
DEC
17.2
7.9
9.4
13.3
1.1
3.5
1.7
2.1
3.0
0.1
17.3
9.1
11.9
18.2
0.8
ALL
*AL
LSTA
TE C
ORP
DEC
13.9
5.0
9.9
8.5
5.0
3.2
1.2
2.4
2.2
1.3
23.8
8.4
15.8
14.3
8.5
ABK
*AM
BAC
FIN
ANCI
AL G
PDE
C48
.445
.551
.950
.044
.84.
43.
94.
13.
93.
115
.214
.415
.615
.913
.1BE
R†
BERK
LEY
(W R
) COR
PDE
C13
.010
.99.
79.
36.
84.
74.
34.
24.
12.
823
.723
.323
.122
.315
.4CB
*CH
UBB
CORP
DEC
18.1
13.0
11.8
7.1
2.4
5.1
4.0
3.7
2.2
0.7
19.2
16.2
16.6
10.5
3.3
CIN
F*
CIN
CIN
NAT
I FIN
ANCI
AL C
ORP
DEC
23.8
16.0
16.2
11.8
8.4
5.6
3.7
3.7
2.5
1.7
14.4
9.8
9.4
6.3
4.1
CGI
†CO
MM
ERCE
GRO
UP IN
C/M
ADE
C12
.412
.911
.99.
82.
86.
06.
56.
35.
81.
617
.220
.121
.118
.94.
4FN
F†
FIDE
LITY
NAT
ION
AL F
INAN
CIAL
DEC
4.6
8.5
9.5
11.4
NA
6.7
9.8
11.3
NA
NA
14.7
20.9
21.7
NA
NA
FAF
†FI
RST
AMER
ICAN
COR
P/CA
DEC
3.4
6.1
5.2
7.3
5.0
3.6
7.0
6.3
10.9
7.5
9.3
17.7
16.1
27.8
19.0
THG
†HA
NOV
ER IN
SURA
NCE
GRO
UP IN
CDE
C7.
32.
95.
92.
7N
M1.
90.
40.
70.
3N
M9.
73.
68.
04.
0N
M
IPCC
§IN
FIN
ITY
PROP
ERTY
& C
AS C
ORP
DEC
8.5
10.1
10.1
7.6
6.5
4.4
5.4
5.0
3.4
2.8
13.5
18.1
19.2
13.8
9.7
LFG
§LA
NDA
MER
ICA
FIN
ANCI
AL G
PDE
C2.
54.
24.
25.
65.
82.
54.
74.
98.
38.
37.
413
.613
.320
.118
.8M
BI*
MBI
A IN
CDE
C30
.331
.441
.046
.248
.02.
22.
12.
73.
33.
311
.810
.813
.113
.811
.4M
CY†
MER
CURY
GEN
ERAL
COR
PDE
C6.
88.
510
.78.
13.
75.
16.
68.
56.
42.
712
.916
.521
.115
.76.
1OR
I†
OLD
REPU
BLIC
INTL
COR
PDE
C12
.314
.512
.514
.014
.33.
85.
04.
35.
04.
711
.114
.011
.713
.713
.2
PHLY
§PH
ILAD
ELPH
IA C
ONS
HLDG
COR
PDE
C23
.014
.910
.210
.07.
99.
15.
83.
83.
93.
029
.121
.514
.112
.27.
9PR
A§
PROA
SSUR
ANCE
COR
PDE
C17
.212
.49.
25.
51.
93.
12.
22.
41.
40.
413
.511
.612
.67.
42.
3PG
R*
PROG
RESS
IVE
CORP
-OHI
ODE
C11
.29.
812
.010
.67.
28.
67.
79.
98.
45.
425
.424
.832
.428
.519
.0RL
I§
RLI C
ORP
DEC
21.8
18.8
12.6
13.7
9.4
4.9
4.1
3.2
3.7
2.3
18.6
16.3
12.4
14.1
9.1
SAF
*SA
FECO
COR
PDE
C14
.410
.910
.04.
54.
36.
14.
72.
51.
00.
921
.917
.213
.97.
27.
5
SAFT
§SA
FETY
INSU
RAN
CE G
ROUP
INC
DEC
16.4
14.2
7.1
4.8
2.0
8.6
7.7
3.9
2.8
1.0
25.3
27.5
15.7
11.1
5.2
SKP
§SC
PIE
HOLD
INGS
INC
DEC
8.5
2.3
NM
NM
NM
1.8
0.4
NM
NM
NM
6.2
1.8
NM
NM
NM
SIGI
§SE
LECT
IVE
INS
GROU
P IN
CDE
C9.
08.
88.
24.
93.
63.
63.
53.
52.
11.
515
.915
.815
.89.
56.
8ST
C§
STEW
ART
INFO
RMAT
ION
SER
VICE
SDE
C1.
83.
73.
85.
55.
33.
16.
97.
413
.212
.45.
512
.112
.522
.221
.3TW
GP§
TOW
ER G
ROUP
INC
DEC
12.3
9.4
8.4
8.4
9.0
4.6
3.6
2.3
2.6
NA
22.3
15.1
12.7
55.3
NA
TRV
*TR
AVEL
ERS
COS
INC
DEC
16.8
8.5
4.2
11.2
1.5
3.7
1.8
1.1
2.6
0.4
17.8
9.5
5.8
15.3
2.1
UFCS
§UN
ITED
FIR
E &
CAS
CO
DEC
13.9
1.5
13.0
9.7
4.1
3.2
0.2
3.0
2.2
0.9
14.9
1.0
17.9
15.3
6.2
XL*
XL C
APIT
AL L
TDDE
C18
.4N
M11
.85.
26.
22.
9N
M2.
51.
01.
218
.5N
M15
.35.
56.
6ZN
T§
ZEN
ITH
NAT
ION
AL IN
SURA
NCE
CP
DEC
24.3
12.2
11.3
7.8
0.2
9.4
6.1
5.3
3.6
0.1
31.3
25.8
26.6
18.8
0.3
RREEIINN
SSUURRAA
NNCCEE
‡‡RE
†EV
ERES
T RE
GRO
UP L
TDDE
C18
.6N
M9.
910
.49.
05.
0N
M3.
63.
82.
618
.2N
M14
.415
.411
.3
MMUULL
TTII--LL
IINNEE
GGRROOUU
PP‡‡AF
G†
AMER
ICAN
FIN
ANCI
AL G
ROUP
INC
DEC
10.1
5.1
9.4
9.6
3.3
1.8
0.9
1.7
1.6
0.7
15.9
8.5
16.3
16.9
7.8
AIG
*AM
ERIC
AN IN
TERN
ATIO
NAL
GRO
UPDE
C12
.39.
710
.311
.48.
21.
51.
31.
31.
51.
014
.912
.613
.214
.29.
9AI
Z*
ASSU
RAN
T IN
CDE
C9.
06.
44.
82.
74.
02.
81.
91.
50.
81.
119
.013
.111
.27.
28.
6GN
W*
GEN
WOR
TH F
INAN
CIAL
INC
DEC
12.0
11.6
10.4
8.3
NA
1.2
1.2
1.1
NA
NA
9.9
9.3
8.0
NA
NA
HIG
*HA
RTFO
RD F
INAN
CIAL
SER
VICE
SDE
C10
.48.
49.
4N
M6.
30.
90.
80.
9N
M0.
616
.115
.416
.5N
M10
.1
HCC
†HC
C IN
SURA
NCE
HOL
DIN
GS IN
CDE
C16
.511
.512
.411
.315
.84.
72.
92.
92.
53.
118
.312
.513
.411
.112
.9HM
N†
HORA
CE M
ANN
EDU
CATO
RS C
ORP
DEC
11.3
8.9
6.4
2.2
1.5
1.6
1.4
1.1
0.4
0.3
16.0
13.4
10.2
3.6
2.3
LTR
*LO
EWS
CORP
DEC
14.6
7.8
8.1
NM
5.8
3.4
1.7
1.6
NM
1.3
17.0
9.4
10.6
NM
9.4
UTR
†UN
ITRI
N IN
CDE
C9.
28.
47.
94.
2N
M3.
12.
82.
81.
5N
M12
.712
.212
.56.
8N
M
IINNSSUU
RRAANN
CCEE BB
RROOKKEE
RRSS‡‡
AOC
*AO
N C
ORP
DEC
7.0
6.5
5.7
6.8
5.3
2.4
2.3
2.1
2.5
1.9
11.9
12.3
12.0
15.7
12.6
AJG
†AR
THUR
J G
ALLA
GHER
& C
ODE
C8.
41.
912
.711
.311
.63.
80.
96.
15.
46.
615
.73.
727
.325
.528
.8BR
O†
BROW
N &
BRO
WN
INC
DEC
19.6
19.2
19.9
20.0
18.2
10.1
10.5
12.2
13.6
13.4
20.4
21.7
23.0
24.8
29.3
HRH
§HI
LB R
OGAL
& H
OBBS
CO
DEC
12.2
8.3
13.1
13.3
13.5
6.3
4.3
7.0
8.0
9.2
15.1
10.7
17.3
20.1
27.0
MM
C*
MAR
SH &
MCL
ENN
AN C
OSDE
C6.
93.
21.
513
.313
.14.
52.
01.
110
.710
.114
.67.
13.
429
.426
.8
Not
e: D
ata
as o
rigin
ally
repo
rted.
‡
S&P
1500
Inde
x gr
oup.
* C
ompa
ny in
clud
ed in
the
S&P
500.
†
Com
pany
incl
uded
in th
e S&
P M
idCa
p.
§ Co
mpa
ny in
clud
ed in
the
S&P
Smal
lCap
. #
Of th
e fo
llow
ing
cale
ndar
yea
r.
JAN
UA
RY
24,
2008
/ I
NS
UR
AN
CE:
PR
OP
ERTY
-CA
SU
ALT
Y I
ND
US
TRY
SU
RV
EY
34
Pric
e / E
arni
ngs
Ratio
(Hi
gh-L
ow)
Divi
dend
Pay
out R
atio
(%)
Divi
dend
Yie
ld (H
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11-7
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16-1
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13-9
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9
Tick
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mpa
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. End
2006
2005
2004
2003
2002
2006
2005
2004
2003
2002
2006
2005
2004
2003
2002
Not
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JAN
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2008
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PHLY
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0.95
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7.
87
6.89
45
.99-
29.8
234
.13-
21.7
722
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15.2
317
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9.52
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A§
PROA
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C3.
96
2.66
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1.34
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40
33.6
1 24
.59
20.9
2 18
.77
17.4
9 53
.40-
45.7
352
.32-
36.0
640
.58-
29.8
433
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20.0
021
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14.1
0PG
R*
PROG
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CORP
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13
1.77
1.
93
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9.15
7.
74
6.43
5.
81
4.32
30
.09-
22.1
831
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20.3
424
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18.2
721
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11.5
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11.1
9RL
I§
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5.40
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21
2.90
2.
84
1.80
30
.08
26.0
7 23
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20.9
8 17
.37
57.5
0-44
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56.5
0-39
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43.7
0-33
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38.1
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SAF
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COR
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C7.
56
5.49
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62
2.45
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33
37.3
0 33
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30.8
8 34
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30.6
9 64
.85-
49.0
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45.1
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37.9
539
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31.7
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24.9
9
SAFT
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7.07
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87
1.44
30
.84
24.5
7 19
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17.5
6 16
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57.7
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44.3
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18.4
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SKP
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1.29
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5 20
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24.3
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28.9
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3411
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SIGI
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2 16
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1 12
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5 29
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24.8
929
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20.8
822
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15.8
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2.37
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0 30
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TWGP
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6.12
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0.53
30
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0 17
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3.37
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18.5
5 14
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4 37
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3 72
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59.8
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13
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3.80
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ITRI
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28.9
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21.5
6 51
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39.3
354
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40.8
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1.98
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42.7
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24.4
232
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26.4
834
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25.4
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BROW
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WN
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1.23
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0.20
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08
35.2
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31.9
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23.3
8-16
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18.8
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18.5
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HRH
§HI
LB R
OGAL
& H
OBBS
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DEC
2.42
1.
57
2.27
2.
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2.09
(5
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(5.0
8)(3
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45.4
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39.9
3-31
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38.9
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MM
C*
MAR
SH &
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ENN
AN C
OSDE
C1.
49
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0.
34
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52
(3.3
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(0.7
2)32
.73-
24.0
034
.25-
26.6
749
.69-
22.7
554
.97-
38.2
757
.30-
34.6
1
Tick
erCo
mpa
nyYr
. End
2006
2005
2004
2003
2002
2006
2005
2004
2003
2002
2006
2005
2004
2003
2002
Not
e: D
ata
as o
rigin
ally
repo
rted.
‡
S&P
1500
Inde
x gr
oup.
* C
ompa
ny in
clud
ed in
the
S&P
500.
†
Com
pany
incl
uded
in th
e S&
P M
idCa
p.
§ Co
mpa
ny in
clud
ed in
the
S&P
Smal
lCap
. #
Of t
he fo
llow
ing
cale
ndar
yea
r. J
-Thi
s am
ount
incl
udes
inta
ngib
les
that
can
not b
e id
entif
ied.
The
anal
ysis
and
opi
nion
set
forth
in th
is p
ublic
atio
n ar
e pr
ovid
ed b
y St
anda
rd &
Poo
r’s E
quity
Res
earc
h Se
rvic
es a
nd a
re p
repa
red
sepa
rate
ly fr
om a
ny o
ther
ana
lytic
act
ivity
of S
tand
ard
& P
oor’s
. In
this
rega
rd, S
tand
ard
& P
oor’s
Equ
ity R
esea
rch
Serv
ices
has
no a
cces
s to
non
publ
ic in
form
atio
n re
ceiv
ed b
y ot
her u
nits
of S
tand
ard
& P
oor’s
. The
acc
urac
y an
d co
mpl
eten
ess
of in
form
atio
n ob
tain
ed fr
om th
ird-p
arty
sou
rces
, and
the
opin
ions
bas
ed o
n su
ch in
form
atio
n, a
re n
ot g
uara
ntee
d.
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