Other underwriting expense ratio 26.5 % 26.3 % 24.6 % 25.7 % 27.4 %
U.S. property reinsurance market conditions tightened, particularly within peak catastrophe zones, during 2006. This market hardening was particularly pronounced in third quarter renewals with incrementally higher rate changes and even more restrictive coverage terms than earlier in 2006. As a result, many reinsurance buyers were not able to fully place their reinsurance program and have been forced to raise retention levels and/or
The Company’s incurred losses and LAE increased by 13.2% to $3,724.3 million in 2005 from $3,291.1 million in 2004. The increase in incurred losses and LAE was principally attributable to the increase in estimated losses due to property catastrophes, partially offset by favorable attritional prior period reserve development and a lower level of earned premiums. Incurred losses and LAE in 2005 reflected ceded losses and LAE of $95.2 million compared to ceded losses and LAE in 2004 of $141.0 million.
The U.S. Insurance segment’s incurred losses and LAE decreased 19.4%, or $128.0 million, for 2005 as compared to 2004. The segment’s loss ratio improved by 5.8 points from 2004 primarily due to favorable prior period adjustments principally on the California workers’ compensation business for the 2004 accident year as the results of benefit reform have become clearer and the 2004 unfavorable prior period reserve adjustments related principally to the casualty classes for accident years 2000 through 2002, where the Company strengthened its reserves for California workers’ compensation insurance. While management believes the cumulative results through 2005 remain quite positive, there was some deterioration in claim frequency and severity related to accident years 2001 and 2002.
respectively, reflecting changes in fair value for the equity put options. See also Note 2 of Notes to the Consolidated Financial Statements.
The following table displays the estimated components of earned but not reported premiums by segment at December 31 for the years indicated:
During 2005 and 2004, the Company invested in interest only strips. These investments were intended to mitigate potential decreases in unrealized appreciation on the Company’s fixed income portfolio during a period when management believed there was high potential for increased general interest rates. These securities give the holder the right to receive interest payments at a stated coupon rate on an underlying pool of mortgages. The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the mortgage pool. Generally, as mortgage rates decline, mortgagors tend to pre-pay their mortgage loans which decreases the average life of a mortgage pool and reduces expected cash flows. Conversely, as mortgage rates rise, prepayments are more likely to slow and ultimate cash flows tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. Although the Company invested in interest only strips during 2005 and 2004, the Company had liquidated its positions in interest only strips and held no such securities at or after December 31, 2005.
After-tax Change in Unrealized Appreciation $ (239.5 ) $ (119.7 ) $ -