Insurers Endure 'Kitchen Sink' Quarter

The fourth quarter of 2002 was one that analysts refer to as a“kitchen sink,” because of various extraordinary charges thatinsurers reported.

Some of the charges are listed below, with carriers listed inalphabetical order:

ACE Ltd.: $50 million to strengtheninternational casualty reserves; $80 million, after taxes, inEuropean property losses.

Allstate: $70 million of after-taxrestructuring charges; $59 million pre-tax reserve for settlementof Georgia diminished-value class-action; $75 million pre-taxincurred losses related to mold claims in Texas; $57 millionpre-tax reserve strengthening related to Encompass business; $49million expense charge before taxes related to guaranty fundassessments.

American International Group: $57.2 millionimpact of surety losses related to Enron; $20.4 million provisionfor Northridge earthquake claims (arising from AIGs minorityinterest in 21st Century Insurance Group).

Argonaut: $7.3 million of costs for increasingallowance for doubtful accounts on reinsurance recoverables andpremiums receivable; $7 million reserve strengthening forCalifornia workers compensation claims.

Berkshire-Hathaway: $800 million ($570 millionafter-tax) related to underreserving at General Re; $46 millionarising from General Res Enron-related coverages; $143 millionarising from large property losses on Gen Res international p-cbusiness.

Chubb: $143 million from Enron surety bondlosses

CNA: $125 million after-tax restructuring; $52million after-tax Enron-related losses; $69 million after-taxcharge to boost current year reserves of London-based commercialand marine operations; $160 million after-tax charge to strengthenprior-year reserves for CNAs London-based reinsuranceoperation.

Fairfax: Increase in Sept. 11 losses of C$48.3million (Canadian dollars); provision for Odyssey Res Enron lossesof C$23 million; adverse development of C$14.5 million for formerKingsmead syndicates; C$62.3 million in reinsurance premium relatedto reserve strengthening of European run-off operations.

GAINSCO: $20 million increase in ultimate claimliabilities; $13.4 million impairment of goodwill on a 1998acquisition.

Harleysville: Guaranty fund assessments added1.4 points to combined ratio.

Hartford: $11 million restructuring charge toexit from certain international operations; $39 million after-taxwrite-down of Enron securities

Markel: $70 million pre-tax expense charges andreserve strengthening for Markel International.

Mutual Risk Management: Increase in provisionsfor reserves and recoverables totaling $65 million.

Ohio Casualty: $26.8 million charge related tothe transfer of its renewal obligations on New Jersey auto businessto Proformance Insurance Company; $9.2 million reserves forasbestos; $1.5 million increase in expenses for exposure toguaranty fund assessments.

Philadelphia Consolidated: $1 million cost ofguaranty fund assessments.

Progressive: $14.3 million for guaranty fundassessments.

SAFECO: $18 million of Enron-related suretylosses; $8.1 million restructuring; $8.6 million write-offassociated with U.K. subsidiary.

State Auto Financial: Reserve adjustment forMeridian Mutual acquisition added 14.5 points to fourth-quarterloss ratio.

The St. Paul Companies: $612 million in reservestrengthening, restructuring charges and goodwill writedown; $10million in losses related to Enron.

Vesta Insurance Group: $4 million pre-taxcharge to increase reserves and $2 million of unusual expensesrelated to insolvency of Reliance.

W.R. Berkley Corp.: $12 million after-taxcharge for potential losses from Enron; $21.3 million after-taxreserve strengthening.

XL: Adverse prior-period development on U.S.companies, losses related to the bankruptcy of Enron, AmericanAirlines Flight 587 losses and several large European propertylosses.

While reserve charges were far and away the largest component ofaggregate disclosures made by these companies, rating agency A.M.Best in Oldwick, N.J., in a report released in early March,revealed that guaranty fund assessments related to the insolvencyof Reliance Group will cost property-casualty insurers roughly $1.2billion.

On the reserving front, Best representatives told NationalUnderwriter in January that they expected $9.5 billion ofadverse loss development in 2001 and $7.5 billion in 2002, bringingtheir estimated core (non-asbestos and environmental) reservedeficiency down from $40 billion to $23 billion for theindustry.

In addition to the charges related to losses on surety, anddirectors and officers liability insurance policies written forEnron Corp., Best estimated, in a report published in February,that p-c insurers had $604 million of investment exposures tied tothe energy giants collapse and an additional $52.4 million tied tothe bankruptcy of retailer KMart.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, April 1, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.