establish a market presence in some of the areas.
This of course does vary considerably by state and by the type of medical specialties that are included in various companies’ books of business. But for the majority of the carriers we follow, rates still are adequate although they are under pressure.
McDONALD: And what are we saying about the general financial condition of the medical liability sector? I know we’ve seen what people have termed to be some fairly good underwriting years and obviously there’s an investment market that’s been challenging. How as med mal made out?
WITMER: Well right now we’re still viewing the industry as stable as a whole. So far, despite those competitive conditions the insurers that we do rate are exercising a significant amount of underwriting discipline and aggressive claims handling. Along with reaping the benefits of some of the conservative loss reserve setting, we are seeing improvements in the financial strength among those insurers that we do follow. Nonetheless, this is a cyclical business and we are watching developments very carefully.
McDONALD: Can you put that in terms of some of the key metrics or ratios that we consider when we look at the sector and companies? How are they doing?
WITMER: We look at the combined ratio and other profitability ratios, a variety of leverage ratios, growth rates and liquidity. Since about 2000, from our data, the industry’s calendar year combined ratio has improved. It peaked around 2003 at about 131.3 and now is down to about 82.7 as of 2008. A somewhat higher combined is expected for 2009 due to some declining premium rates.
Similarly from a peak from 5.2 in 2003, the industry net leverage ratio is down to about 3.4 in 2008 and looks to be around there for 2009. These are good numbers and will lead to favorable BCAR model calculations.
On the investment leverage side, especially in this day and age, is fairly conservative at this point, which is important and we are monitoring that. Growth rates for most companies also have been moderate lately. That’s a key factor we follow because one of the things that we see in the impairment studies is that excessive growth is one of the main reasons for companies becoming impaired or experiencing severe financial stress. Right now we’re not seeing too much of that aggressive growth, at least at this stage. Most companies are trying to hold on to their current books of business.
Also on the investment side, with most companies holding large cash positions and short durations on their bond portfolios, liquidity measures are fairly sound as well.
McDONALD: Sounds good. Henry, anything else, any particular developments or factors in addition to ratios that we’re paying close attention to at this point?
WITMER: Let me say that overall our focus is on durable financial strength and this will position a company through any ups and downs of the market cycles so they can provide secure coverage for their insureds. So in addition to the quantitative measures that I mentioned already, we do pay close attention to the nuances and risks associated with the various types of business that is covered. This would include whether the insured base is physicians, dentists, chiropractors and other specialty types of practices and even hospitals and clinics that might be on the books. Each has its own exposures and limits of liability and various circumstances and we need to see how those companies manage that, what their plans are for the future and how they will execute on those plans effectively, given the available resources that they have.
What we also need to understand is what is the value-added proposition of the company. How will they build on that for long-term viability?
McDONALD: Well thank you, Henry. Chad, you’ve done some excellent reports and I know you write a lot on this topic. One of the things that’s very important in a long-tail line like this is reserves and adequacy of reserves. What are you seeing?
KARLS: I think in terms of reserves, perhaps it’s instructive before we get into where the current state of the reserves are, is to take a step back and recall where we’ve been of late. The prior four-year period, that being 2005 through 2008, the industry has actually experienced some very favorable reserve run-off. Based on the data that we’ve seen of late I would fully expect that the forthcoming 2009 results, which are due out in a few weeks, will continue that pattern. In 2009 I expect to see the fifth year in a row now where the industry is going to have favorable reserve development flowing through the current year results.
That needs to be somewhat kept in context in that the years prior to these last four, the five years preceding this most recent period, that being the 2000 through 2004 years, actually the industry showed adverse reserve development in each of those years. As Henry mentioned earlier, 2003 had the highest combined ratio. In 2003 the industry’s reserve development, the adverse reserve development in 2003 actually represented nearly 25% of the industry’s net earned premium for that year.
So surely the prior-year reserve development can significantly affect the current-year result and for the last four years there has been favorable run-off. I expect that to continue again in 2009, once those results are reported. Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9