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Expected Reinsurer Deficit (ERD)

A structured process for gauging risk transfer in reinsurance contracts. ERD combines the present value underwriting loss severity and loss frequency into a single measure. It is the probability of loss a reinsurer will have multiplied by the size of the loss, calculated over the entire range of loss outcomes.

Insurance Industry News from

Over $41 Billion In Earnings(Editor’s Note: This article is followed by comments from Chris Burand)

Industry Reports Record Underwriting Profit of $6.4 Billion

Apparently unfazed by last year's devastating hurricane season, the nation's property and casualty insurers reported profits of $41.3 billion in 2004, representing a 28 percent increase over the $32.3 billion earned in 2003, according to Weiss Ratings, Inc., the nation's leading independent provider of ratings and analyses of financial services companies, mutual funds, and stocks.

Property and casualty insurers reporting the largest year-over-year increases in net income include:

Continental Casualty Co.
State Farm Mutual Auto Ins Co
State Farm Fire and Casualty Co.
Allstate Ins. Co.
Employers Reinsurance Co.

"Property and casualty insurers continue to post impressive results," said Melissa Gannon, vice president of Weiss Ratings, Inc. "The ability to withstand such a horrific hurricane season is an indicator of the industry's long-term financial strength."

Industry Reports Record Underwriting Profit; Capital and Surplus Grows

Contributing to the industry's outstanding performance, underwriting profits reached a record high, surging to $6.4 billion as of December 31, 2004 compared to a $2.9 billion loss the previous year. The underwriting gain was primarily due to an increase in earned premiums, which jumped from $387.7 billion in 2003 to $414.3 billion in 2004.

Insurers reporting the largest year-over-year increases in underwriting profits include:

Continental Casualty
Allstate Ins
State Farm Mutual Auto. Ins
State Farm Fire & Cas
Hartford Fire Ins

Improved underwriting was also responsible for a $51.5 billion, or 11.6 percent, increase in capital and surplus, which rose from $444.8 billion at December 31, 2003 to $496.3 billion at December 31, 2004.

Industry Loss Ratios Continue to Improve

As a result of the improved underwriting, the industry's loss ratio, which represents the percentage of losses paid out compared to earned premium collected, declined further. The overall loss ratio, which does not include loss adjustment expenses or underwriting expenses, fell to 59.8 percent for 2004 from 61.7 percent for 2003.

The industry also improved its combined ratio (1) to less than 98.9 in 2004, which is a 1.9 point improvement over the 100.1 posted in 2003. The lines of business posting the highest loss ratios for 2004 were products liability and health at 79.9 points and 69.2 points, respectively. Products liability was actually up 5.76 points over last year, while health was down 3.2 points.

Notable Upgrades and Downgrades - Among the 2,534 property and casualty insurers reviewed by Weiss, 90 companies were upgraded, while 87 were downgraded. Notable upgrades include:

Continental Ins. Co. from C- to C
QBE Insurance Corp. from C+ to B-
OK Farmers Union Mutual Ins Co from D+ to C

Notable downgrades include:
Amerin Guaranty Corp. from B+ to B
Insurance Corp of NY from D to E-
Avemco Ins Co from B+ to B

Editor’s Note: When sharing this information with financial consultant Chris Burand, he wrote:

“ What this is not saying, which is disappointing since it came from Weiss, is that a lot of the profits are not real. The companies are saying they over reserved in 2002 and 2003. Therefore, they are releasing those reserves and counting them as profits. Yet the early evidence is that they did not over reserve. They actually under reserved and some have already had to reverse their positions the situation was so egregious. The exact same thing occurred in 1996-1998. There is no doubt companies made a lot of money last year, but they did not make as much as they're claiming
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