The notion that the month's indicator presages a near-term market shift, however, stands in stark contrast to theories of other experts who believe that only significant losses or substantially inadequate premiums will fuel a turn to higher insurance prices.

Speaking to National Underwriter in May during the Casualty Actuarial Society Seminar on Reinsurance, Paul Kneuer, senior vice president for Holborn Corp. in New York, for example, reiterated a view his firm put out in January–that a turn in the worldwide reinsurance market won't happen until the segment experiences catastrophe losses of $50 billion, or three times the magnitude of reinsurance losses from Hurricane Katrina.

Advancing a very different view of what drives cycles at the same seminar, Isaac Mashitz, chief pricing actuary for Armonk, N.Y.-based Swiss Reinsurance American Corp., demonstrated that the horrible soft market underwriting results experienced by primary insurers at the bottom of the last soft cycle had nothing to do with extraordinary losses.

Instead, Mr. Mashitz showed that inadequate premiums were the culprit that produced accident-year loss ratios for commercial casualty lines well in excess of 100 in the early years of this decade.

Expanding on Mr. Mashitz's analysis and adding expense ratio results for these lines produces combined ratios well north of 120 for the late 1990s and early 2000s– results that only the mortgage guaranty and financial guaranty lines have approached more recently, in 2007 and early 2008.

While Mr. Kneuer's report discussed the impact of property catastrophes and capital levels on the worldwide reinsurance market, Mr. Mashitz set his sights on exposing cycle drivers for commercial liability insurance lines–more precisely, asking what drives the dreadful underwriting results that come during the worst years of a soft cycle for primary liability insurers.

During his presentation at the Boston actuarial gathering, Mr. Mashitz analyzed historical gross premiums and loss data for accident years 1984-2006 for four casualty segments: commercial auto liability, nonprofessional liability (other liability occurrence and products), workers' compensation, and professional liability (other liability claims made).

Commenting on commercial auto liability, he highlighted the lack of growth in industry premiums from 1987 to 1999, noting that gross premiums for the line were $15 billion in 1987 and only $15.5 billion in 1999. “That's a 13-year span during which the industry did not increase its premiums,” even though “there was growth in the economy, some inflation,” he noted.

As a result, for the same years, the loss ratio grew from 72 in 1987 up to a “clearly unprofitable” level of 106 in 1999. “Premiums remained static, as losses grew more than 50 percent,” he said, displaying a chart revealing loss growth which amounted to just 3.5 percent per year, on average.

“You'll see that pattern again and again,” he continued, going on to make similar observations for the other casualty insurance lines he analyzed. For general liability, in fact, the pattern is even more disturbing, he said–noting that premiums fell from $26 billion in 1987 to $22 billion in 1999, while the loss ratio surged from the low 50s to over more than 120.

Such patterns, he said, led him to consider what would have happened if premiums had just increased steadily by small amounts each year, instead of remaining flat or declining in the late 90s, and then soaring from 1999 to 2002.

For each line, he demonstrated that such increases would have nearly eliminated the cyclical movements in loss ratios.

In the accompanying chart–titled “Soft Market Premiums”–NU has recreated a portion of Mr. Mashitz's presentation for accident years 1998-2006, with updated data now available for 2007, also adding information for accident year 2007. (Mr. Mashitz used data available through 2006 for his presentation.)

“Low and behold, the cycle essentially disappears,” he said, pointing to the column of “restated loss ratio” figures and noting, for example, that for commercial auto liability, restated loss ratios stabilize–remaining in a range from the mid-60s to low-70s for most years in the 1987-2006 time frame.

“A simple premium increase of 3 percent per year would have taken away the cycle for commercial auto [and] general liability,” he said, also noting that just a 4 percent increase would have had the same type of effect for the workers' comp line.

“The horrible results we have in the last soft market were driven by inadequate premiums, not by an explosion in losses” for these lines, he concluded.

Unlike Mr. Mashitz, who looked at premium adequacy for his analysis of the U.S. primary casualty market, Mr. Kneuer analyzed relationships between gross premiums and capital for the worldwide reinsurance market dating from 2001 through the third quarter of 2007.

Noting that there is no source of historical data for the entire worldwide reinsurance market, Mr. Kneuer combined information from the Reinsurance Association of America with information on Bermuda public companies, European reinsurers and Lloyd's.

After adjusting for currency and accounting differences as well as intercompany transactions, Holborn compiled summaries of gross written premiums, underwriting gains and losses, net income, and changes in capital funds for more than 90 percent of the worldwide reinsurance market. The firm used the information to analyze historical leverage ratios–ratios of gross written premiums to capital–and to develop estimates of premium, income and capital for 2007 and 2008.

Added together, gross premiums for the latest full year available–2006–topped $200 billion ($19 billion for U.S. reinsurers other than National Indemnity, $58 billion for Bermuda, $98 billion for Europe, and $31 billion for the Lloyd's market), while year-end capital approached $217 billion.

The resulting leverage ratio–.94-to-1–is a far cry from the 1.7-to-1 ratios of 2001 and 2002 shown in his firm's report.

Worldwide premiums have grown slower than capital, Mr. Kneuer observed, using his knowledge of market changes since third-quarter 2007 to predict a continuation of that pattern for 2007 and 2008.

Despite share buybacks and acquisitions, which released some capital from the industry, his firm's resulting estimates (summarized on the accompanying chart, “Analyzing the Reinsurance Market”) reveal leverage ratios falling under .9-to-1 for 2007 and 2008.

Interpreting the implications of these estimates for NU, Mr. Kneuer noted that for the industry to return to even a moderate 1.25-to-1 leverage ratio–roughly the average of the historical ratios calculated for 2001-2006–would require a reduction in capital of at least $50 billion.

Mr. Kneuer, whose firm published the first report that NU came across this year containing the now much-repeated $50 billion figure, put the number in perspective.

Reinsurers paid out somewhere between $15- and $20 billion in losses after taxes for Hurricane Katrina. Therefore, it would take three Katrina-sized events to reach an average historical leverage ratio, he said.

Mr. Kneuer told NU at the May meeting that while the speed of capital charges related to subprime issues and some lower-than-expected reported premiums for reinsurers in the first quarter have been a bit of a surprise, his firm's view of a market-turning event has not changed fundamentally since the January report.

The 2008 estimates contained in the report assume no individual catastrophes over $10 billion and roughly $3 billion in professional liability reinsurance losses related to subprime mortgage issues.

Even with a major loss in 2008, reinsurers' capital will remain above industry premiums, and it will be much higher than historical norms, the report said.

While natural catastrophes in 2008 may not turn the market, they are occurring in record numbers, according to market reports. In addition, several second-quarter events are already producing underwriting losses for some U.S. insurers–including two ranked among the 100 largest property-casualty insurance groups.

Cincinnati Financial, the 21st-largest group in NU's Top 100, after recording a combined ratio of 90.3 for all of 2007–nearly five points better than the industry–recently reported that $115 million in catastrophe losses will add 15 points to its combined ratio for the second quarter.

Columbus, Ohio-based State Auto, ranked 49th, which recorded a combined ratio for 92.4 in 2007, expects roughly $80 million in pretax catastrophe losses for the quarter–nearly four-times higher than the level of catastrophe losses the company experienced in second-quarter 2007.

While these isolated regional insurer reports give little indication of the overall toll on the industry and the adequacy of industrywide premium collected to cover such risks, Standard & Poor's recently stated that second-quarter catastrophes–primarily Midwest floods–are not expected to impact ratings for the majority of rated companies.

The ultimate impact of the subprime and related credit crisis on the industry is also unclear, but the most direct hit to underwriting results became visible in the Top 100 rankings for 2007. Financial guaranty and mortgage guaranty insurers, which show up with the lowest combined ratios in the industry for nearly every year in the history of NU's published rankings, emerged with the worst combined ratios in 2007.

In total, 11 financial guaranty companies included in the rankings reported an average combined ratio of 159.1 in 2007, compared to 38.0 in 2006, while 38 mortgage insurers came in with a combined ratio average of 133.0 in 2007, compared to 70.7 in 2006.

In first-quarter 2008, despite the fact that all 49 guaranty insurers only contributed $2 billion in net premiums to a $112 billion total for the industry, their overall first-quarter combined ratio of 275.9 was bad enough to add more than three points to the industry first-quarter combined ratio, bringing it to a breakeven level of 100.0.

Looking past the guarantors, first-quarter 2008 results and 2007 figures presented on our rankings reveal a relatively unchanged picture from the one Mr. Mashitz and Mr. Kneuer saw when they put out their studies.

For the industry as a whole, and for the top 20 groups taken together, premium changes for 2007 were measured in tenths of a percent, with net written premiums for the top 20 rising only 0.1 percent, and industry aggregate premiums down 0.2 percent overall. The only evidence of growth came for groups making acquisitions, such as Liberty Mutual's deal for Ohio Casualty, and QBE's deals for Winterthur U.S. and Praetorian.

The industry aggregate combined ratio deteriorated three points to 95.6 in 2007, compared to 92.4 in 2006. But even in first-quarter 2008, it remained comfortably below breakeven for nonguaranty companies.

Not all lines continued to be profitable in 2007, however, as the biggest line–personal auto liability–joined the smallest guaranty lines with an underwriting loss. The personal auto liability 2007 combined ratio of 101.2 marked the first underwriting loss for the line since 2003.