Private equity market increasingly bullish on insurance and E&S
Historically, the insurance sector has not been high on the list of preferred investments for private equity markets, but since 2001 interest in insurance and reinsurance has been on the rise, not only with private equity firms, but also with other forms of alternative capital investments.
By mid-November more than $500 billion in private equity transactions had occurred in 2006, with $100 billion in October alone, according to Andrew Rosen, a partner with private equity firm HM Capital Partners. Dallas, Texas-based HM Capital has a controlling interest in national wholesale broker Swett & Crawford.
The terrorist events of 2001, followed by New York Attorney General Eliot Spitzer's investigations, and the hurricanes of 2004 and 2005 created investment opportunities, said Rosen at a meeting of the Texas Surplus Lines Association. "Private equity falls into an investment class that is considered alternative assets," Rosen said. "Within that class, private equity, at least the way we look at it, is considered controlled investing in established businesses with the use of leverage -- leverage meaning debt." Other forms of alternative investments include venture capital and hedge funds.
The private equity industry has seen "tremendous growth" over the past 20-plus years and the market has both evolved and matured during that time, he said. After a bit of a "Wild West" ride in the 1980s, investors figured out during the 1990s that in order to use the capital wisely, they needed to understand businesses, rather than just be financial investors. "A lot of firms, if they survived the early '90s period came out very strong. You started seeing a rise in the number of firms but also in the size of firms," Rosen said. The equity market today is at an all-time high in terms of "deal-flow" and equity capital raised. There are more than 100 firms that control more than $100 billion in capital, according to Rosen.
A lack of interest
There are a few reasons for the historical lack of interest in the insurance sector. One is that it is a highly regulated industry and trying to create change in a regulated environment can be difficult. In addition, underwriting firms are difficult to evaluate; without knowing what the long tail costs are, determinng profitability is a challenge. Different accounting standards and complex reserving requirements add to the confusion, and it can be a difficult business to leverage, he said.
Now, however, there is a lot of interest, particularly in the excess and surplus insurance market, where there has been much growth. "[W]hen you see fundamentals that are positive over a growing market, that will be interesting to private equity investors," he said.
HM Capital has shied away from the risk side of the business but it likes the wholesale brokerage business because in addition to tremendous growth, the market has good fundamentals. "Overall we're very bullish about this industry because of the role that it fills. The expertise, placing risks that are generally not suitable for the standard markets ... long term growth in this business is positive. And we like the fact that it is not as cyclical. We all recognize that this is a cyclical business, the private equity business is a cyclical business, but we like the fact that it's not as cyclical [as] the risk bearing businesses."
Wholesale brokers, he said, have the expertise and access to markets that their retail clients need, therefore they have business value. "This is not a capital intensive business," Rosen said. "So when you think about private equity and the fact that we do use leverage, high cash flow is important to us ... high cash flow, low capital requiring businesses is a huge positive."
With increased specialization in insurance, the knowledge and relationships wholesalers have is "of tremendous value to retailers. ... We're seeing more and more specialization by carriers and it makes it even more and more difficult for retailers to figure out how to place business. It makes the role of the wholesale broker extremely important."
Private equity can play the role of consolidator. "This industry is still relatively fragmented -- the top 10 wholesale brokers still represent only about one-third of the premiums ... there are just a lot of firms out in this marketplace. We do think there will be increasing consolidation of this business over time. On the retail front it will continue, on the wholesale front it will continue."
Rosen said HM Capital spent several years investigating the E&S sector before it acquired Swett and Crawford from Aon. "We didn't originally think there was anything for us in the wholesale sector. We didn't see anything of that size, of that scale. ... All of that changed because of Mr. Spitzer." Spitzer's investigations led big brokers, including Aon, to divest their wholesale operations.
He said HM Capital views its relationship with Swett as a partnership, rather than "just us acquiring a company." More than 20 percent of the company is owned by employees; there are more than 160 employee shareholders.
Swett has reorganized its management structure to focus on how the company interacts with its retail partners and its carriers. "We created practice groups and practice group leaders," Rosen said, "so that when we actually go and address the market, or the markets need to find a way to address us, it's very easy. ... We don't want to bring the resources of an office to solve a client's problem. We want to bring the entire resources of Swett, to have all of our offices interact together through these practice group leaders."
Conn. Gov. Rell to replace Cogswell as insurance commissioner
Connecticut Governor M. Jodi Rell has accepted the resignation of Insurance Commissioner Susan Cogswell and said she will name a replacement soon.
Cogswell is not leaving the department, however. She has accepted the position of deputy insurance commissioner and will focus her energies on health care access and affordability issues.
Cogswell's was one of six state agency commissioners' resignations Rell accepted. The others included Commissioner James Abromaitis of the Department of Economic and Community Development and Commissioner (Acting) William Ramirez of the Department of Motor Vehicles.
Other opportunities
"I thank these commissioners for their years of service and for their commitment to the people of Connecticut," said Rell. "They have served their state well and I fully understand their desires to pursue other opportunities."
Cogswell, a Torrington resident, was appointed by former Gov. John Rowland in June 2000 to be insurance commissioner. She was the state's first female commissioner.
Prior to becoming commissioner, Cogswell served for nine years as a Republican Torrington city councilman while also working as the Connecticut Insurance Department's chief of staff. Cogswell has also held management positions in both insurance and banking, including with Travelers Indemnity Company and Chase Manhattan Bank.
During her tenure she has overseen and approved a number of industry transactions including the merger of Travelers Property Casualty Corp. with The St. Paul Companies and Prudential's acquisition of CIGNA Life Insurance Co.
In November, 2000, she approved the sale of Aetna Life Insurance Co. to Ing Groep, N.V.
Just this month she reversed direction and issued a new department policy restricting insurers in requiring certain storm mitigation steps on coastal properties.
Rell kept Cogswell in the post in July, 2004 when she was sworn in to succeed her three-time Republican running mate, former Gov. John Rowland, who resigned amid a corruption investigation.
Former R.I. Gov. Sundlun and Lloyd's at odds
The London insurance market Lloyd's has sued former Rhode Island Gov. Bruce Sundlun, accusing him of failing to pay about $300,000 in principal and interest.
But Sundlun says he doesn't owe Lloyd's any money, and his lawyer has asked a federal judge in Providence to rule in Sundlun's favor.
Members of Lloyd's, both individuals and corporations, provide financial backing which acts as security for its policies to ensure claims are paid. At issue is whether Sundlun was ever a member of Lloyd's.
Lloyd's says Sundlun was a member but in January 1993 stopped underwriting.
The lawsuit says Lloyd's suffered severe financial losses and, as part of a recovery plan, required members to buy reinsurance for their pre-1993 underwriting responsibilities. But, the lawsuit says, Sundlun never paid the required premium.
A British court in 1997 entered a default judgment against Sundlun.
However, Sundlun says he never had a chance to defend himself because he was unaware he was being sued until the day the court entered the judgment.
In an affidavit filed in federal court, Sundlun said that an insurance agent friend of his suggested at some point before 1987 that he become a member of Lloyd's.
"At that time, I understood that any membership in Lloyd's would be an honorary position and that I would face no risk or liability in my capacity as a Lloyd's member," Sundlun said in the affidavit.
Sundlun, who served as governor from 1991 to 1995, said he never signed a membership application or took steps to become a member.
A motion filed by Sundlun's lawyer, former state Supreme Court justice Robert G. Flanders Jr., said any relationship Sundlun had with Lloyd's ended by January 1993 and that the British court lacked jurisdiction over his client.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
N.H. private school says insurer didn't do flood insurance homework; sues for buildings' damages
St. Paul's School in Concord, N.H. has filed a lawsuit accusing its insurer of refusing to cover most of the $5 million the school has spent repairing buildings and grounds damaged by flooding.
In May, floodwaters tore up the road in front of the school's Hargate Fine Arts Center and dumped more than four feet of water and mud in the building. The entryway of the campus post office was ripped away, carpets were ruined in a dormitory and the bottom floor of the library was soaked.
Most of the damage was repaired before students returned in the fall.
In August, Vice Rector for Students Doug Dickson said he hoped the school's insurance policy would cover most of the repairs. But by then, the insurance company had already disputed the school's claim, saying that most of the buildings were in "Flood Zone A" and not covered.
Travelers Indemnity Co. has denied coverage for the library, dorm, fine arts center and central heating plant, saying those buildings were in a flood zone and therefore not covered. After an unsuccessful appeal, the school responded with a federal lawsuit.
According to the lawsuit, the Federal Emergency Management Agency inspected the campus and concluded that the dorm, the fine arts center and the heating plant were outside the flood zone. The school argues that even if a building is partly in the flood zone, any damaged sections outside the zone should be entitled to coverage.
The school's insurance policy allows for up to $10 million for flood damage as long as the affected area is not in a flood zone. The insurer has until mid-January to respond in court.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
AJG resolves federal class action case
Arthur J. Gallagher & Co. has agreed to resolve all claims in the Federal Multi-District class action pending in the New Jersey Federal District Court against commercial insurers and brokers relating to industry-wide contingent commission matters.
In its written statement, Gallagher admitted no wrongdoing, but said it chose to conclude its involvement, rather than prolong what could be a costly and burdensome lawsuit. The settlement, which is subject to court approval, provides for Gallagher to distribute $28 million to current and former clients and others that used a broker to purchase retail insurance from 1994 to 2005. The company will also pay $8.85 million in plaintiff's attorney fees.
Chubb ends contingent commissions
The Chubb Corp. entered into a settlement agreement with the Attorneys General of New York, Connecticut and Illinois to resolve an investigation of customer steering, improper finite reinsurance transactions, and other unlawful industry practices. Under terms of the settlement, Chubb agreed to discontinue paying contingent commissions on all insurance lines in the United States beginning in 2007. The company also agreed to contribute $15 million to a settlement fund as well as an additional $2 million to help defray the costs of the investigation by the Attorneys General.
Chubb was not assessed any fine or penalty in connection with this settlement, but acknowledged that it appears to have unknowingly benefited from the bid-rigging activities of others in the excess casualty market, which may have provided the company with an advantage in retaining renewal business.
Chubb says it will replace contingent commissions with a supplemental compensation program "in a manner consistent with evolving marketplace standards and reforms urged by the attorneys general."
N.Y., Conn., Ill. AGs bring another suit, this time against Acordia
The attorneys general of Connecticut, Illinois and New York continued their campaign against undisclosed compensation and account steering by simultaneously bringing suit against one of the nation's largest insurance brokers.
The suits were bought against Acordia Inc. and its parent company, Wells Fargo Bank N.A., in late December for allegedly steering their customers to insurance companies that paid for the business with undisclosed payments.
Acordia Inc. said it will vigorously defend against the allegations.
According to the lawsuits, the practice of steering business represents a "significant conflict of interest" that places Acordia's own financial interests ahead of the well-being of its clients.
The lawsuit offers what it says are details about how Acordia allegedly conspired with several insurance companies, known as Acordia's "Millennium Partners," to steer customers to them in exchange for secret payments. Acordia's top management, including its then-CEO, Robert Nevins, is alleged to have actively participated in the Millennium Partners scheme.
When insurance companies refused to make the improper payments, according to the lawsuit, Acordia's management punished them by steering customers away from them and towards insurers who did pay kickbacks.
The documents cite Acordia's then-chief marketing officer, Charles Ruoff, as telling Acordia staff in 1999: "At this time we are concentrating on the plans and initiatives put forward by our 'priority' [insurance companies] to the exclusivity [sic] of all other [insurance companies]."
The suits further allege that Wells Fargo participated directly in Acordia's fraud. In one alleged scheme, Wells Fargo agreed to "funnel" its own retail banking clients to Acordia for advice about insurance coverage, the documents claim. Wells Fargo did so with the understanding that Acordia, in turn, would steer this additional business to The Hartford, an insurance company that paid Acordia for such steering, the allegations continue.
The suits contend that contingent commissions and other so-called "concealed incentives" were a significant source of income for Acordia. From 2000 through 2005, the company made approximately $200 million in undisclosed contingent commissions.
The lawsuits seek restitution for the companies' customers, disgorgement of illegal profits, and penalties.
"Contingent compensation agreements have been a long-standing and well-known practice in the insurance industry, and these commissions continue to be paid by insurers to hundreds of insurance agents and brokers throughout the country, including New York," said Dave Zuercher, Acordia Inc. president and CEO. "These agreements have been held by courts to be legal and enforceable."
Acordia discloses its contingent compensation agreements to its customers in a manner consistent with guidelines approved by the National Association of Insurance Commissioners, the company said in a statement.
"Acordia is confident that contingent compensation agreements, properly administered, are consistent with the responsibility of its brokers to its customer," Zuercher said.
"Our legal action shows that Acordia masked a scheme of kickbacks and contract steering with the illusion of customer loyalty -- giving real loyalty to any insurer willing to pay for it," Connecticut Attorney General Richard Blumenthal said. "This lawsuit brings us closer to ending the insurance industry's hidden pay-to-play game."
Blumenthal's lawsuit was filed in cooperation with Department of Consumer Protection Commissioner Edwin R. Rodriguez.
BOPping in on employment practices liability insurance
It's the ogre hiding under the bridge. And a hungry ogre at that. The owners of many small- to mid-sized companies hope to tip-toe by without incident, but there is no ignoring the potential for trouble.
The number of legal claims filed against employers by their employees is startlingly high -- and getting higher all the time. All businesses -- small, medium and large -- are vulnerable. It used to be that large companies were the most common targets. Today, however, more than 50 percent of employment-related claims are brought against companies with fewer than 100 employees.
In 2004, more than half of all companies --57 percent -- were sued by an employee, up 8 percent over the previous year. Employment-related lawsuits now comprise one out of every 12 federal court cases.
It's not only the number of cases that is growing, but also the financial impact, with juries awarding more than $1 million in 12 percent of employment-related cases. To say nothing of the cost in reduced employee morale and productivity, as well as increased workers' compensation costs.
While more than 75-percent of cases are found to be without merit, the cost of mounting an effective legal defense, in terms of time, money and distraction, can devastate a business all by itself -- especially a small- or mid-sized business.
But there is an effective defense against this ogre. It is called employment practice liability insurance (EPLI) and it is available to most small- to mid-sized businesses through local independent insurance agents.
Avenues BOP
My own company, The Hanover Insurance Group, continually reviews and enhances its products and services to assure that its capabilities meet the local market needs of our independent agent partners and their clients.
Because small- to mid-size business is an important market segment for our agent partners, earlier this year, we introduced EPLI as an endorsement to our Avenues Business Owner's Policy, or BOP, product, and our agents are responding with strong and very positive feedback.
Avenues BOP is part of our small commercial platform, which allows agents to quote and, in most instances, issue BOP, commercial auto, umbrella and workers' compensation policies, and complete endorsements, all online.
Offering EPLI as an endorsement to Avenues BOP allows our agent partners to initiate discussions with their commercial customers, right at the point-of-sale, about potential risks to their business, reinforcing the important role of the independent insurance agent as a valued consultant and asset to the business.
Because it is structured as a BOP endorsement, this EPLI is more affordable for small businesses than most stand-alone policies. Businesses can choose between the standard EPLI limit of $25,000, or opt for the higher limit of $100,000 or $250,000, with applicable state-specific guidelines for limits and deductibles. Minimum limits vary by state.
The EPLI product provides protection for the business entity, its owners and partners. Coverage is on a claims-made basis, and includes sexual harassment, job discrimination and wrongful termination claims made by full-time, part-time, seasonal and temporary workers. It does not cover prior acts, known acts or criminal acts.
Other product features include expert claims service, a loss-prevention program, an automated POS entry system, and automatic endorsement capabilities that help agents move through the sales process with maximum speed and efficiency.
Client's needs
Unlike a stand-alone product, which may include too much coverage at too high a cost for a small business, our EPLI endorsement is tailored specifically to meet the needs of businesses with up to 25 employees -- a key commercial target for our independent agent partners.
The best defense against lawsuits is to avoid them altogether, so we also provide experienced EPLI claims specialists and access to a valuable loss-prevention program -- important value-added services geared especially for small- and mid-sized businesses.
While some commercial customers are quick to dismiss the need for EPLI, independent agents, in their role as consultant, only need to point to the hard statistics -- to that ogre under the bridge -- that the small- and mid-sized business owners will someday be sued by an employee.
When business owners weigh the cost of the endorsement against the potential cost of claim, EPLI will appear to be not just a value, but an essential element in a smart and comprehensive plan for insurance protection.
For 2007, The Hanover looks forward to further strengthening its Avenues commercial lines suite, when we will introduce more BOP specialty products and new smart Web solutions for agents, including an enhanced POS system with a unique "account view" that helps agents to manage and grow client relationships more efficiently.
Jay A. Coon is assistant vice president -- segment leader for Commercial Lines operations at The Hanover Insurance Group.
Drunk driving death rates decline in 23 states
Drunken-driving deaths declined slightly across the nation in 2005, and the rate of drunken-driving deaths fell in 23 states, according to transportation officials.
The National Highway Traffic Safety Administration reported that 23 states and Puerto Rico had a decrease in the fatality rate for crashes involving a driver with an illegal blood alcohol level of at least 0.08. The death rate involving those circumstances increased in 21 states and the District of Columbia and remained flat in six other states.
The government said 12,945 motorists died in a crash involving a legally drunk driver in 2005, compared with 13,099 in 2004. Alcohol-related fatalities also fell during that span: from 16,919 in 2004 to 16,885 in 2005.
All 50 states have a 0.08 standard with Minnesota's adoption of the law last year.
States with lower fatality rates involving at least one driver with an illegal blood-alcohol level were: Alabama, Arkansas, Colorado, Connecticut, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New Mexico, New York, North Carolina, Oregon, Rhode Island, South Carolina, Tennessee, Texas, Utah and Virginia.
States with higher rates were: Arizona, California, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Minnesota, Missouri, Montana, Nevada, New Hampshire, North Dakota, Oklahoma, South Dakota, Vermont, Washington state, Wisconsin and Wyoming.
The six states with the same rates were: Alaska, Kansas, Nebraska, Ohio, Pennsylvania and West Virginia.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
13 states file briefs against credit scoring
Delaware Commissioner of Insurance Matt Denn has taken arguments against insurance industry use of credit scoring to the U.S. Supreme Court, filing a brief in a pending case involving the practice.
The amicus curiae, or "friend of the court," brief was filed in late December with the Supreme Court in Washington, D.C., in the cases of Safeco v. Burr and GEICO v. Edo. Consumers in the cases claim that insurance companies Safeco and GEICO violated the federal Fair Credit Reporting Act by not sending out "adverse action notices" required under FCRA when a consumer's credit information results in the consumer receiving a higher rate.
Denn and 12 other insurance commissioners told the Supreme Court that they were filing their brief to "further their collective mission of protecting consumers by supporting interpretations of the FCRA that (a) put valuable information in the hands of consumers, (b) provide appropriate incentives for insurance companies that use consumer credit information to adopt procedures that assure compliance with the law, and (c) hold insurance companies accountable when they adopt policies that recklessly disregard consumer rights in contravention of the FCRA."
The brief urges the Court to uphold the decisions of the 9th Circuit Court of Appeals in the Safeco and GEICO cases that the companies willfully disregarded the FCRA by not sending adverse action notices to some consumers.
"As long as our law allows insurance companies to use credit scoring, consumers deserve to know when something in their credit score has resulted in them getting higher rates," Denn said.
The other states joining the brief include Arkansas, California, Georgia, Iowa, Kansas, Michigan, Montana, New Mexico, North Dakota, Oklahoma, Utah and Washington.
Despite Katrina lessons, Congress keeps extending flood insurance
The federal flood insurance program may be going broke after incurring $20 billion in debt from recent storms like Hurricane Katrina. But that hasn't stopped politicians from trying to extend the taxpayer-subsidized coverage for some of the riskiest -- and potentially most valuable -- properties in the country.
For all it didn't accomplish last year, Congress passed two bills carving out exceptions to a law passed years ago to phase out federal spending that might encourage development in environmentally sensitive and disaster-prone areas. One of the bills benefited Jekyll Island, a vacation spot off Georgia's coast that is poised for redevelopment, while the other helped a mostly undeveloped 10-lot subdivision on Florida's Gulf Coast.
A handful of similar proposals are pending. And after seeing the success of the Georgia and Florida bills this year, property owners in Alabama, Texas and elsewhere are lobbying for their own continued coverage.
"You only have to look at 300 miles of Katrina and Rita wasteland to see that bankrolling federal flood insurance in high-risk areas is just asking the American taxpayer to flush money down the toilet," said Oliver Houck, director of the environmental law program at Tulane University in New Orleans. "If people want to build out there, that's one thing. But to build out there with federal support is insane."
The debate involves a Reagan-era environmental law called the Coastal Barrier Resources Act that was hailed as a free-market approach to conservation. Instead of restricting where private landowners could build, the law, nicknamed COBRA, mandated that the government would not subsidize such construction, whether through flood insurance, roads or otherwise.
However, as people flock to the coasts, Congress has repeatedly chipped away at the covered territory. Often responding to wealthy property owners who argue they were mistakenly included, lawmakers have redrawn COBRA maps more than 40 times in the past 15 years, according to the U.S. Fish and Wildlife Service, which oversees the maps.
At least four other bills stalled last year, and Fish and Wildlife officials say they have received more than 20 other requests for changes.
Even critics concede that mapping corrections are sometimes warranted and that the two exemptions approved last year are hardly a blip in the federal flood portfolio, which carries 5.4 million policies and recently eclipsed $1 trillion in coverage.
But they say Congress' continued willingness to extend coverage is alarming, particularly in the hindsight of Katrina.
"The underlying principle is that every time COBRA runs up against individual interests, it's always COBRA that loses," said Steve Ellis, vice president of the watchdog group Taxpayers for Common Sense. "These are clearly areas where there's a lot of development pressure and COBRA's having an impact in denying that."
Despite anecdotes that private flood insurance is unavailable, industry officials say it is for sale, just without the government subsidies.
It's those subsidies that have put the federal system in need of a taxpayer bailout. The program owes the Treasury $20 billion. It takes in just $2 billion a year in premiums. More than a third of that -- nearly $720 million a year -- is now eaten up by debt interest.
Congress has wrestled with reforming the system by raising premiums and placing new requirements on homeowners. But lawmakers adjourned again last year without acting.
Instead, the two COBRA bills, added hundreds of high-risk properties and paved the way for new construction on vulnerable land.
"In the galaxy of federal subsidies, I don't think there's one that is so pointedly subsidizing wealthy people," Houck said. "What happened to getting the government out of the hair of the private economy and letting the market work?"
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Absence of hurricane losses proves beneficial to insurers' bottomline
P/C industry posts $24.4 billion net gain on underwriting in first three quarters of 2006
Driven by a sharp decline in catastrophe losses from hurricanes and other natural disasters in 2006, the U.S. property/casualty industry posted a $24.4 billion net gain on underwriting through nine months. The net gain on underwriting through nine-months 2006 stands in stark contrast to the $2.5 billion net loss on underwriting through nine-months 2005.
The industry's positive underwriting results contributed to an increase in its net income after taxes to $44.9 billion in nine-months 2006 from $29.7 billion in nine-months 2005. Reflecting the increase in net income after taxes, the industry's annualized rate of return on average policyholders' surplus (net worth) rose to 13.4 percent in nine-months 2006 from 9.8 percent in nine-months 2005, according to ISO and the Property Casualty Insurers Association of America (PCI).
The figures are consolidated estimates for all private property/casualty insurers based on reports accounting for at least 96 percent of all business written by private U.S. property/casualty insurers.
Catastrophe Losses
According to ISO's Property Claim Services (PCS) unit, direct insured losses from catastrophes dropped to $7.6 billion in nine-months 2006 from $51.1 billion in nine-months 2005.
"Much of the improvement in insurers' underwriting and overall results is attributable to the decline in catastrophe losses from the record level experienced in nine-months 2005, as Hurricanes Katrina and Rita slammed into the Gulf Coast," noted Michael R. Murray, ISO assistant vice president for financial analysis. "Allowing for losses from Katrina and Rita that didn't emerge until after insurers closed their books for nine-months 2005 and factoring out losses covered by residual market insurers, the Florida Hurricane Catastrophe Fund and foreign insurers, ISO estimates the catastrophe losses included in private U.S. insurers' net financial results declined by $17.3 billion to $10.1 billion in nine-months 2006 from $27.5 billion in nine-months 2005. ISO also estimates that catastrophe-related net loss adjustment expenses declined to $0.5 billion in nine-months 2006 from $0.9 billion in nine-months 2005, contributing another $0.4 billion to the improvement in underwriting results."
"While the fact that no major hurricanes hit the U.S. in 2006 was certainly good news for the millions of consumers still recovering from the devastating impact of the 2004 and 2005 storm seasons, we view this development as an anomaly rather than a trend," said Genio Staranczak, PCI's chief economist. "Natural catastrophes still pose a huge threat to consumers and businesses along the Gulf and Atlantic Coasts. The industry, state and federal governments, private businesses and individuals must continue to better prepare themselves by ensuring that financial reserves are adequate, strengthening building codes and land use regulations, and putting in place catastrophe recovery plans to speed relief to those who need it after a disaster occurs."
ISO and the PCI noted that modeling by AIR Worldwide indicates that hurricanes causing $100 billion or more insured losses are a very real possibility and that large population centers in the West and Midwest face the prospect of a major earthquake.
Underwriting results
The improvement in underwriting results in nine-months 2006 reflects both growth in premiums and a decline in loss and loss adjustment expenses.
Net written premiums climbed $16.5 billion to $337.8 billion in nine-months 2006 from $321.3 billion in nine-months 2005, with written premium growth accelerating to 5.1 percent in nine-months 2006 from negative 0.2 percent in nine-months 2005. Net earned premiums rose $14.9 billion to $325.4 billion in nine-months 2006 from $310.5 billion in nine-months 2005, with earned premium growth accelerating to 4.8 percent in nine-months 2006 from 0.8 percent in nine-months 2005.
Overall loss and loss adjustment expenses declined $17.9 billion, or 7.8 percent, to $212.2 billion in nine-months 2006 from $230 billion in nine-months 2005. Non-catastrophe loss and loss adjustment expenses declined $0.1 billion, or 0.1 percent, to $201.5 billion in nine-months 2006 from $201.6 billion a year earlier.
Other underwriting expenses rose $5.5 billion, or 6.7 percent, to $87.7 billion in the first three quarters of this year from $82.2 billion in the first three quarters of last year.
Dividends to policyholders rose 47.1 percent to $1.1 billion in nine-months 2006 from $0.7 billion in nine-months 2005.
The net gain on underwriting in nine-months 2006 amounts to 7.5 percent of the $325.4 billion in premiums earned during the period, whereas the net loss on underwriting in nine-months 2005 amounted to 0.8 percent of the $310.5 billion in premiums earned during that period.
Combined ratio
The combined ratio -- a key measure of losses and other underwriting expenses per dollar of premium -- improved 8.4 percentage points to 91.5 percent in the first three quarters of 2006 from 99.9 percent in the first three quarters of 2005.
Last year, one insurer ceded $6 billion in premiums and the same amount of loss and loss adjustment expenses to its foreign parent. And earlier this year, one insurer stopped reporting as a property/casualty insurer and began instead reporting as a health insurer. If not for those developments, industry written premiums would have increased 3.8 percent in nine-months 2006, and loss and loss adjustment expenses would have declined 9.4 percent.
"At an adjusted 3.8 percent, written premium growth in nine-months 2006 fell far short of growth in the economy," added Murray. "U.S. gross domestic product (GDP) rose 6.6 percent in the first three quarters of 2006 compared with its level a year earlier. That premiums rose only about half as much as GDP is an indication that insurers' recent results are spurring competition."
