Roger Crombie

Insurance and reinsurance companies routinely make complex forecasts about their financial performance. Internal budgets and plans, return on equity forecasts, regulatory and ratings agency filings, the "dog and pony" investor and broker road shows--all are prepared in microscopic detail.

In property and catastrophe insurance and reinsurance, however, the most important factor, losses, cannot be forecast with much confidence. On Sept. 10,2001, many property catastrophe insurers and reinsurers were enjoying a great year. A day later, 2001 had become the worst year on record for catastrophes.

But the level of catastrophe claims for the 2002 financial year was relatively low. Some of the best experience was recorded by the companies that incorporated in Bermuda in the aftermath of the events of Sept. 11.

The post-9/11 Bermuda companies were born when interest rates were at historic lows, making the emphasis on underwriting central to the companies' business strategies. It comes as no surprise, in a generally low claims year, to discover that the combined ratios of the new companies were less than 100 percent.

The combined ratio is the total of estimated claims expenses for a period (itself requiring a degree of estimation), plus overhead, expressed as a percentage of earned premiums.

A ratio below 100 percent represents a measure of core profitability and the efficiency of underwriting techniques. Ratios above 100 percent denote a failure to earn sufficient premiums to cover expected claims. High ratios occur either because of underpricing and/or because of unexpectedly high claims experience.

That is not to say that companies can't achieve a ratio of less than 100 percent. The ratio is inexact, since claims do not always relate to the premiums with which they are being compared. When a company strengthens its reserves on old business, for example, the charge is often taken in the current year's claims.

Arch Capital Group reported a 2002 combined ratio of 90.9 percent. Allied World Assurance was similar at 90.8 percent. The results are informative, since these companies write across different lines of business and have different insurance/reinsurance mixes. Platinum was only in business for a few weeks in 2002 and its 91.5 percent combined ratio included start-up costs.

Axis Capital did better, reporting a combined ratio of 70.7 percent, and Montpelier better still at 67.4 percent. A new company could not ask for a much stronger performance in its first year.

Many Reinsurers Back an Track

Relatively easy claims conditions in 2002 helped many established Bermuda companies return to the right track. Everest Re's ratio dropped to 99 percent in 2002 from 113.5 percent in 2001. White Mountains' Folksamerica subsidiary also reported 99 percent, down from 120 percent a year earlier.

Many of the majors were in the same ballpark. Max Re's 2002 was 95.0 percent, down from 100.1 percent in 2001; XL Capital achieved a 2002 ratio in its general insurance and reinsurance operations of 97 percent, down from 139.7 in 2001; PartnerRe reported 97.9 percent in 2002, down from 130.2 in 2001; PXRE did better with a ratio of 77.7 percent, down from 127 in 2001; IPC Re had an extraordinary 2002 with a ratio of 34.1 percent, down from 129.4 in 2001. Not even Renaissance Re, a perennial leader in this category, could match LPC. Renaissance reported a 2002 ratio of 57.1 percent, but its 2001 ratio of 70.2 percent, affected by the Sept. 11 attacks, was always going to be a hard act to follow.

Some of the Bermuda majors appeared above the 100 percent line for 2002. ACE recorded a combined ratio of 101.7 percent, down from 111.6 in 2001; Trenwick's ratio for 2002, its annus horribilis, was 128.4 percent, down from 132.6 in 2001.

In the catastrophe business, which underpins the Bermuda market, financial performance depends largely on Mother Nature. The provision of risk capital to combat her caprice is the raison d' etre of insurance and reinsurance.

Roger Crombie may be reached at crombie@northrock.bm.

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