Gen Re's Tad Montross: Why the Soft Market Should Be Over

[twacowfca]

Reactions recently published an interview with Gen Re's Ted Montross.  The full article may be available in another day or so. 

 

In the interview, Montross says, "Interest rates are at all time lows. The US 10 year Treasury note yields 2.34% today. The industry’s return on equity at a 99% combined ratio is in the single digits. The actual combined ratio is probably 103% to 108% for 2010. To achieve a double digit ROE (return on equity), the combined ratio has to drop to the low 90s."

 

Montross says the problem is that interest rates are being held artificially low and the risk of inflation (possibly severe inflation) in the next five years is enormous. Comparing today’s main indicators with those of the previous soft market, Montross says theoretically the soft market should be over. But the industry is in denial.

 

“The industry’s underwriting cash flow was negative in both 2008 and 2009. The ratio of paid to incurred losses has jumped to 105%, exactly where it was in 1998, the heart of the last soft market,” he says. “Underwriting expenses climbed to 27.4% in 2008, the same level they reached back in 1999."

 

“The reported accident year combined ratios are worse than the calendar year combined ratios. As prior year reserve development transitions from positive to negative, the relationship will reverse,” he says. “[Meanwhile], reported primary rate levels for commercial business are back at levels last seen 10 years ago.”

[omagh]

twacowfca,

 

Interesting.  Bill Berkley is claiming that combined ratios will be even worse -- "We believe the real accident year combined ratio for the current year will be somewhere between 110 - 115.  At the same time, investment returns have come down by 200 basis points."

 

(Page 4)

http://ir.wrberkley.com/common/download/download.cfm?companyid=BER&fileid=411620&filekey=a51eb556-8e08-486b-99d3-76b238bf9ed9&filename=NAPSLO%202010.pdf

 

Also, a previous Reactions interview with Montross is available:

http://www.genre.com/sharedfile/pdf/MediaArt_TheQuietAmericanSpeaksOut_TMontross_Reactions-en.pdf

 

-O

Reactions recently published an interview with Gen Re's Ted Montross.  The full article may be available in another day or so. 

 

In the interview, Montross says, "Interest rates are at all time lows. The US 10 year Treasury note yields 2.34% today. The industry’s return on equity at a 99% combined ratio is in the single digits. The actual combined ratio is probably 103% to 108% for 2010. To achieve a double digit ROE (return on equity), the combined ratio has to drop to the low 90s."

 

Montross says the problem is that interest rates are being held artificially low and the risk of inflation (possibly severe inflation) in the next five years is enormous. Comparing today’s main indicators with those of the previous soft market, Montross says theoretically the soft market should be over. But the industry is in denial.

 

“The industry’s underwriting cash flow was negative in both 2008 and 2009. The ratio of paid to incurred losses has jumped to 105%, exactly where it was in 1998, the heart of the last soft market,” he says. “Underwriting expenses climbed to 27.4% in 2008, the same level they reached back in 1999."

 

“The reported accident year combined ratios are worse than the calendar year combined ratios. As prior year reserve development transitions from positive to negative, the relationship will reverse,” he says. “[Meanwhile], reported primary rate levels for commercial business are back at levels last seen 10 years ago.”