A.M. Best: Few Companies Excel at Managing Through Market Cycles

July 15, 2008

The findings from A.M. Best Co.’s cycle management study show just how difficult it is for property/casualty companies to surpass the performance of their peers on a consistent, long-term basis. Only 14 percent of the total study population outperformed their industry composite medians over the most recent soft and hard market cycles.

The report captured the peak years of the prior soft cycle (1997-2001), the subsequent hard market years (2002-2004) and the early years (2005-2006) of the current soft market cycle. Underwriting performance, as measured by the statutory calendar year combined ratio, was used as the basis for grouping the companies into better performing cycle managers (top group) and poorer performing cycle managers (bottom group).

A.M. Best identified a number of demographic and performance differences between companies that outperformed their peers through an underwriting cycle, including:

When specific operating measures are considered, insurers that performed better focused on underwriting to drive profits.
The top performers managed their loss reserves more conservatively and relied less on investment income as a driver of returns.
Higher investment returns were not able to compensate for poor underwriting performance.
Bottom performers were unable to grow as much as the top performers during the hard market years, perhaps finding themselves less well positioned after the prior soft market.
The better performing cycle managers were more likely to be medium-sized (surplus between $10 million – $100 million).
Commercial P/C writers also comprised a larger share of the top group than the total population.

Source: A.M. Best
www.bestweek.com.

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