Managing a Company
in the Soft Market
2006 Ratemaking Seminar
Salt Lake City, Utah
General Session
Monday, March 13, 2006
8:00 a.m. – 9:30 a.m.
Moderator: Brian Z. Brown, FCAS, MAAA
Consulting Actuary
Milliman, Inc.
1
Managing a Company in a Soft Market
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•
•
Industry has been historically unprofitable
Reserve inadequacy
Low interest rates
Easy to raise capital
New entrants
2
P/C Industry Combined Ratio
1980-2005*
2001 = 115.7
120
115
2002 = 107.2
Combined
Ratios
2003 = 100.1
1980s: 109.2
1990s: 107.7
2004 = 98.3
2000s: 105.3
2005* = 105.3
110
105
100
Sources: A.M. Best; III
*05 based on III Earlybird Survey.
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
89
88
87
86
85
84
83
82
81
80
95
3
Combined Ratio:
Impact of Reserve Changes (Points)
Points (Reduced)/Increased
7
6
5
4
3
2
1
0
-1
-2
-3
6.3
5.2
3.5
2.3
1.9
0.5
(0.4)
(2.4)
1998
1999
2000
2001
2002
2003
*2005 is an estimate.
Source: ISO, A.M. Best, MorganStanley, Insurance Information Institute.
2004
2005*
4
Interest Rates: Lower Than They’ve
Been in Decades
16%
14%
12%
10%
8%
6%
4%
2%
3-Month T-Bill
1-Yr. T-Bill
10-Year T-Note
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
5
Source: Board of Governors, Federal Reserve System; A.M. Best, Insurance Information Institute
Announced Insurer Capital
Raising*
($ millions, as of December 1, 2005)
As of Dec. 1 (after Hurricanes
Katrina, Rita, and Wilma), 19
insurers announced plans to raise
$9.95 billion in new capital. Twelve
start-ups plan to raise as much as
$8.65 billion more for a total of
$18.65B. Likely at least $20B raised
eventually.
$3,000
$2,000
$1,500
Existing
companies will
continue to find it
relatively easy to
raise cash…
$1,500
$1,000
$600
$400 $450
$500
$710
$620
$600
$300
$297
$100$140
$38
$129
$490
$124$202 $150
$299
du
r
Ev anc
e
er
es
Fa t R
e
irf
ax
Fi
G
nl
la
cie .
H
C
r
C
In Re
su
ra
IP nce
C
H
ld
gs
K
iln
PL
C
M
a
M
x
on
R
e
tp
el
ier
R
N
e
av
ig
at
O
dy ors
ss
ey
R
Pa
e
rt
ne
rR
e
Pl
at
in
um
PX
R
X
E
L
C
ap
ita
l
xi
s
A
En
sp
en
ut
A
na
rg
o
A
ce
L
td
.
$0
A
$ Millions
$2,500
$2,800
6
*Existing
(re) insurers. Announced amounts may differ from sums actually raised.
Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
Announced Capital Raising by
Insurance Start-Ups
($ millions, as of December 11, 2005)
As of Dec. 11, “The Class of
2005” (13) plans to raise as much
as $8.75 billion. More, likely to
come.
$1,600 $1,500
$1,400
$1,200
$ Millions
$1,000$1,000$1,000$1,000
…so will
start-ups
$1,000
$750
$800
$600
$500 $500 $500 $500
$400
$220 $180
$200
$100
en
t
R
e
ty
sc
en
d
A
eg
a
Sp
ec
ia
l
ht
R
e
O
m
G
re
en
lig
hf
ie
ld
s
l
ita
X
L/
H
ig
ap
C
rr
ow
C
ew
N
A
as
tle
R
e
ud
a
B
er
m
ri
el
R
e
H
is
co
x
A
R
e*
*
s
ca
sh
ir
e
an
L
V
al
id
u
sH
st
o
ne
ol
di
ng
R
e
a
Fl
ag
Be
rm
ud
m
lin
A
H
ar
bo
r
Po
i
nt
*
$0
*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated
amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.
Sources: Morgan Stanley, Company Reports; Insurance Information Institute.
7