A.M. Best Special Report: Pools and Trusts Show Continued Upswing in Performance.

OLDWICK, N.J. -- Rated self-insurance pools and trusts in 2005 saw a significant change in operating performance compared with 2004. The operating results for 2005 were characterized by a precipitous decrease in the loss and loss adjustment expense ratio, which was offset partially by an increase in the underwriting expense ratio. The net result of these changes was a 4.3-point drop in the combined ratio after policyholder dividends, according to a new special report from A.M. Best Co.

The premium increase slowed for 2005, as the rate increases observed in 2002-2004 abated as expected in 2005 and 2006. Preliminary 2006 results indicate continuing good operating performance, which may translate into continuing mitigation of rate increases for 2006. Another factor observed in preliminary 2006 results is the growth of exposure experienced by the funds domiciled in the Southeastern United States. This is the result of a booming local economy in Alabama and Louisiana. Accordingly, net income has risen after declining in the two prior years and reflects the relatively small increase in premium coupled with the aforementioned decrease in losses.

Investment yields stabilized in 2005 after several years of consistent declines. Pools and trusts generally produce lower net investment yields, compared with the commercial casualty industry, due to a more conservative investment portfolio policy, which typically is dominated by highly rated, fixed income securities.

Self-insurance pools and trusts are alternative risk transfer vehicles organized primarily to meet the need of members to mitigate the costs of risk. These members are bound together by similar risk profiles and an interest in reducing claim frequency and aggressively mitigating those losses that do occur. The results of rated self-insurance pools bear out the effectiveness of the stringent entrance requirements for members, focused loss mitigation activities and ownership interest in both loss exposure and operational expenses.

Rated self-insurance pools and trusts have, in general, outperformed domestic captive insurance companies and the commercial casualty insurance index.

The combination of at-risk member capital, as well as joint-and-several liability, is a strong incentive to control losses, minimize frictional expenses and detect and control fraud. This is borne out in the results, with the five year average loss and LAE ratio for rated self-insurance pools at 61.0%, vs. 88.9% for captives and 80.2% for A.M. Best's commercial casualty insurance industry index. The five year average underwriting expense ratio of self-insurance pools, which is 22.4%, is somewhat above the comparative 19.1% for captives but compares favorably with the 26.5% underwriting expense ratio of the commercial casualty insurance industry index.

The captive ratio is affected substantially by the tendency of issuing sizeable policyholder dividends, while pools and trusts more frequently offer upfront premium discounts to members following favorable experience. Dominant characteristics of the rated self-insurance pools are management expertise, excellent operating results, strong capital position and a defined market presence.

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A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.