Financial. Financial data are those data used by insurance regulators, rating organizations, investors, and investment analysts to evaluate an insurers solvency, claims-paying ability and profitability.

Statutory Annual Statements.The basic source of financial data is the statutory annual statement filed by almost every insurance company annually with state insurance departments and the National Association of Insurance Commissioners. The statutory annual statement is a voluminous filing containing detailed information about an insurer's premiums, losses, expenses, and investments. For example, the Annual Statement describes what types of investments - stocks, bonds, real estate - the insurance company holds. The Annual Statement is supplemented by quarterly financial filings.

The main users of the annual and quarterly filings are state insurance departments, rating organizations, and investors. Insurance department staffs supplement their review of the filings with on-site financial examinations to determine whether an insurer is solvent - has the financial resources to pay its claim obligations. Rating organizations, including the A.M. Best Company, Standard and Poors, Moody's, Duff and Phelps, and Weiss, analyze insurers' claim-paying ability and issue a rating, or ranking, for the insurer. The rating organizations will often supplement the annual statement and quarterly financial filings with additional research. Investment analysts will evaluate publicly owned insurance companies for purposes of issuing recommendations regarding investment in the insurance company, i.e. whether to purchase the stock of the insurance company or not.

Insurance experience is typically reported on either a direct or net basis. Direct refers to the initial insurance company experience as if there was no reinsurance. Reinsurance is insurance purchased by the insurance company. Net refers to experience after the effects of reinsurance - direct experience plus reinsurance assumed less reinsurance ceded. Reinsurance ceded means that part of the insurance portfolio is laid off to another insurance company. Reinsurance assumed means that part of another company's insurance portfolio is accepted by the reporting insurance company.

Individual insurance company Annual Statements are available for viewing at state insurance departments. To find the location of your state's insurance department, try the state government section of the telephone directory for the capital city of your state. Alternatively, state insurance department phone numbers and addresses are listed at the National Association of Insurance Commissioner's Internet site: www.naic.org.

Premium, loss and expense by state and line of insurance. One of the most useful pages in the Annual Statement for consumer advocates is the State Page or Page 15. Page 15 provides premium, loss and expense information broken out by state and by line of insurance. Table 2 lists the data elements reported on a direct basis on the Annual Statement Page, while Table 3 lists the lines of insurance reported.

Generally, the most valuable Page 15 data are those that have been compiled for all companies into lists showing market shares by insurer by line of insurance or into industrywide totals by line and by state. The state insurance department may produce, or otherwise make available, such compilations in the insurance department's Annual Report or in a special report.

Insurance Expense Exhibits. Another useful part of the Annual Statement is the Insurance Expense Exhibit (IEE), which is technically a supplement to the Annual Statement. In the IEE, insurance companies report countrywide experience on both net and direct bases by line of insurance. Both reports, net and direct, include the same data elements as Page 15 with the following exceptions. The IEE does not contain paid losses or paid ALAE, but does contain agent's balances, other acquisition expenses incurred, general expenses incurred, other income less other expenses, and pre-tax profit or loss excluding investment income. The IEE Net Report adds a few more crucial items - investment gain on funds attributable to insurance transactions, investment gain attributable to capital and surplus, and total profit or loss (including investment gains). The reporting instructions for the IEE provide the method to be used by insurance companies to allocate investment income to various lines of insurance.

Sources of Annual Statement, Page 15, and Insurance Expense Exhibit Data. Most insurance departments will make annual statement and quarterly filings available for public inspection and copying. Each Annual Statement is over 140 9" by 14" pages. Insurance companies typically file an Annual Statement in each state in which the insurance company is licensed to do business. The filings across states are identical, with the exception of the State Page. The State Pages will report the experience in the state in which the Annual Statement is filed.

The review of individual Annual Statements may be useful for the analyst interested in one or two companies. Several organizations provide the Annual Statement data in electronic format - typically on a CD-ROM. The Annual Statement data may be in full detail for all insurance companies or it may be compiled into various summaries by state or by line. Two sources of Annual Statement data on CD-ROM are the National Association of Insurance Commissioners and the A.M. Best Company. Annual Statement data compilations on CD-ROM cost thousands of dollars.

Some states publish compilations of Annual Statement State Page and IEE information. For example, the Texas Department of Insurance annually publishes the most recent Texas Page 15 information for all reporting companies and a compilation of IEE data for all companies operating in Texas. These Texas reports are available in print and electronic format. The electronic reports are available for free from the Texas Department of Insurance Internet Site. In addition, most state insurance departments publish annual reports of their operations. These annual reports often contain state-specific premium information by line and by company.

Best's Aggregates and Averages. Two other important sources of financial information are Best's Aggregates and Averages, Property Casualty Edition published annually by the A.M. Best Company and the Report of Profitability by State and By Line published annually by the National Association of Insurance Commissioners. Best's Aggregates and Averages provides extensive summaries of Annual Statement and Insurance Expense Exhibit data, including separate summaries by type of insurance company (stock, mutual, reciprocal) and by line of business. It also provides valuable time series information and the most recent annual results by major insurance group for selected lines of insurance. Best's Aggregates and Averages contains little state-specific information. While Best's Aggregates and Averages offers a tremendous amount of information, the 1999 cost is about $350.00. Best's Aggregates and Averages available from the A.M. Best Company, Oldwick, NJ 08848. (908) 439-2200, telephone. Internet Site: www.ambest.com.

The NAIC Report of Profitability by State by Line. The NAIC Profitability Report provides detailed data and analysis by Annual Statement line of insurance and by state. The report pulls information from Annual Statement state pages and from the Insurance Expense Exhibit and, with very detailed calculations, shows profitability by state and by line by year for the most recent ten years. For example, one can look at various data elements and profit calculations for private passenger automobile liability, private passenger automobile physical damage, and homeowners insurance for each state. The report does not contain any insurer-specific data, but only aggregate data at the by-state, by-line level of detail.

The report can be used, among other things, to obtain basic information about a particular line of insurance by state or countrywide, to compare profitability by line of insurance among states, to compare insurance industry profitability to other lines of insurance, to analyze profitability over time, and to analyze the major components of the premium dollar (losses, loss adjustment expenses, selling expenses, investment gains) at the by-line and by-state level of detail.

The Profitability Report contains a huge amount of information at the by-state, by-line level of detail for a relatively low cost. It is an excellent source of state-specific, industry-aggregate information in addition to the profitability calculations. The profitability calculations are well respected and particularly useful for comparing the relative profitability of states to one another. The Profitability Report is a relative bargain at the 1999 price of $160. NAIC Report on Profitability by State by Line from the National Association of Insurance Commissioners. (816) 374-7259 telephone. Internet Site: www.naic.org.

One weakness of the Profitability Report is that the insurance industry profitability is understated. First, the Report understates insurance profitability because unrealized capital gains or losses are included in the calculation of net worth, but are excluded from the calculation of income. Consider the return on net worth calculation as a fraction with income as the numerator and net worth as the denominator. The NAIC Report on Profitability by State by Line includes unrealized capital gains or losses in the denominator, but not in the numerator. Thus, the unrealized capital gains serve to increase the size of the base against which income is compared to calculate the return on net worth.

Changes in unrealized capital gains should be included in the calculation of income (numerator) if these gains are included in the calculation of net worth (denominator). According to Technical Note 4 of the NAIC Report on Profitability by State by Line in 1997, the inclusion of unrealized capital gains or losses in the calculation of income would have increased the overall return on net worth by 5.0% in 1995, by 2.5% in 1996 and by 6.2% in 1997.

Second, the NAIC Report on Profitability by State by Line understates insurance profitability because the return on net worth is calculated on the basis of average net worth instead of beginning year net worth. Again, consider the fraction income divided by net worth as the return on net worth. Now, consider how most investors would evaluate the return on an investment. Suppose that $1,000 was invested on January 1 and by the end of the year $200 was earned on that investment. The return on investment was 20%.

But the NAIC Report on Profitability by State by Line return on net worth calculation does not work this way. Assume that $200 in earnings was retained by the investor. By the end of the year, the investor now has $1,200 in capital. The NAIC Report on Profitability by State by Line calculates net worth as the average of beginning year and ending year net worth. Thus, using mean net worth, as in the Report on Profitability by State by Line, the investor's return on net worth is $200 divided by $1,100 (the average of $1,000 and $1,200) or 18.2%.

The NAIC Report on Profitability by State by Line use of average net worth, instead of beginning year net worth, dramatically understates insurance profitability over the past several years because the insurance industry's surplus and net worth have been growing dramatically.

Securities and Exchange Commission Filings for Public Companies. A publicly traded insurance company, in addition to filings to insurance departments, will also make filings to the Securities and Exchange Commission, like any other publicly-traded company. Thus, another source of financial data and information for insurers are their SEC filings, including the 10K Annual Report to Stockholders. It is important to note that insurance companies are subject to one set of accounting principles - Statutory Accounting Principles or SAP - for insurance regulators and another for investors - Generally Accepted Accounting Principles or GAAP. SEC filings typically contain management's discussion of operations. SEC filings can be viewed at the SEC Internet Site using the EDGAR search engine: www.sec.gov/cgi-bin/srch-edgar.

Executive Compensation. Several states require insurance companies to report compensation - salary, bonuses, and other compensation - for the top executives in the insurance company. For publicly held (stock) companies, executive compensation is also found in certain SEC filings. A compilation of executive compensation information is performed by The Insurance Forum, a monthly magazine published by Professor Joe Belth. The Insurance Forum deals mainly with life insurance issues and demututualizations issues. The July or August issue generally contains the executive compensation compilation. The Insurance Forum, P.O. Box 245, Ellettsvile, Indiana 47429-0245. Telephone (812) 876-6502. Annual subscription $75 for 12 monthly issues.

Statistical Data. Statistical data refers generally to data reported by insurers to state insurance regulators that provides insurance company premium, exposure, and loss experience at a more detailed level than the statewide totals found in the Annual Statements. Statistical data collection is intended to help regulators analyze rates and markets.

Statistical Agents, Advisory Organizations and Statistical Plans. Insurers generally report their statistical data to the state insurance department through a statistical agent or advisory organization. The data are reported according to instructions contained in a statistical plan. A statistical plan is typically unique to a specific statistical agent. The statistical plan defines the data elements, reporting formats, and time frames for company reporting. The statistical agent is generally required to check the data for completeness, accuracy, and reasonableness ("edit" the data).

A statistical plan will typically require reporting of sufficient detail to enable the regulator and advisory organization to evaluate detailed rating factors. For example, a statistical plan for private passenger automobile insurance will require an insurer to report its premium, exposure, and loss experience broken out by:

• Coverage
• Deductible
• Limits
• Year or Time Period
• Rating Territory or ZIP Code
• Driver Classification
• Discounts
• Surcharge
• Voluntary vs. Involuntary Market

A useful introduction to statistical data is the NAIC Statistical Handbook of Data Available to Insurance Regulators. The Handbook is an attempt by insurance regulators, through the mechanism of the NAIC, to provide minimum statistical reporting standards for insurance companies and statistical agents. The Handbook is available from the National Association of Insurance Commissioners, (816) 374-7259 telephone. Internet Site: www.naic.org. Price: $135.

The Handbook describes minimum reporting requirements from the statistical agent to the regulator. The information reported by insurance companies to the regulator will vary by state and by statistical agents. For example, companies reporting to the National Association of Independent Insurers and the National Independent Statistical Service report summary information, while companies reporting to the Insurance Services Office report each premium and loss transaction.

Historically, organizations owned by insurance companies were licensed by state insurance departments to collect statistical data from insurance companies. The primary role of these organizations - called "advisory organizations" - was to compile statistical data from many insurance companies, analyze the data, and publish recommended rates. This method of joint decision-making by insurers through advisory organizations was, and is, legal, because insurance companies are generally exempt from anti-trust laws. In addition to licensing advisory organizations, state insurance departments also approved the statistical plan to be used by a particular advisory organization - thereby determining what information would be available to the regulator. In addition to providing compiled information to insurance companies subscribing to its services, the advisory organization also provided statistical data reports to the insurance regulator. From the insurance regulator's perspective, the advisory organization was acting as a statistical agent for the regulator.

For private passenger automobile and homeowners insurance, there are three main statistical agents - the Insurance Services Office, the National Association of Independent Insurers, and the National Independent Statistical Services. Of the three, only ISO is a true advisory organization. As such, ISO makes a variety of statistical information available to insurers and makes some statistical information available to the public.

In theory, the statistical agent's authority to collect data from insurance companies comes from the insurance regulator. In practice in most states, the insurance regulator is quite passive and does not require that the statistical agent's primary obligation be to the regulator. In some instances, the statistical agent has refused to provide information to the regulator, citing agreements with insurance companies not to divulge certain information. In recent years, the state of Texas has developed a new model for statistical agents, including the development of Texas-specific statistical plans that provide information relevant for effective market monitoring and regulation of insurance companies. The Texas private passenger automobile statistical plan can be obtained from the Texas Department of Insurance Internet Site (www.tdi.state.tx.us) or by contacting the Technical Analysis Division of the Department (512) 475-3026.

Of particular interest from Texas are two reports in the private passenger automobile statistical plan. The Annual Aggregate Experience report provides premium and loss experience by individual company by private passenger automobile coverage. This statistical report - compiled into industrywide totals - forms the basis for the industrywide automobile rate hearing in Texas. The Annual Aggregate Experience Report exemplifies a statistical data report designed for ratemaking analysis. Table 4 lists the data elements (fields) contained in the Texas Annual Aggregate Experience Report.

While the Texas Annual Aggregate Experience Report provides ratemaking information, the Texas Quarterly Market Report is the exemplar of statistical data designed for market monitoring. For most consumer advocates, access to market monitoring information will be far more useful than access to ratemaking data because effective use of market monitoring data requires far less insurance technical expertise than that required for effective use of ratemaking data.

Table 5 lists the data elements contained the Texas Quarterly Market Report. Examples of how these ZIP Code data have been used to identify redlining problems are the Center for Economic Justice studies, described in Section 6.2.2 below. Although the Texas Quarterly Market Report is just one example of a market monitoring report, it should serve as a template for any similar request to a state insurance department. For the information to be useful, it must allow identification of market segments (preferred, standard, nonstandard), detailed geographic location of business (some measure of exposure at the ZIP Code level), and changes in activity over time (cancellations and nonrenewals). Although most insurance departments will not have the precise information specified in the Texas Quarterly Market Report, the report is a good starting point for discussions with the insurance department. For example, instead of vehicles on policies in force, the insurance department may have access to policies written or earned car years. The key is to be persistent and find out what is available - not just learn what is not available.

Availability of statistical data will vary dramatically by state. For example, in Illinois, where the Department of Insurance has no responsibility or authority for reviewing auto or homeowners rates, the Department of Insurance elects not to receive statistical data for ratemaking. However, the Illinois Department of Insurance does collect market monitoring information from insurance companies.

In other states, the Commissioner is responsible for reviewing industry aggregate rate levels. In Texas, North Carolina, and Massachusetts, for example, detailed industry-aggregate statistical compilations are produced annually. In other states, statistical data reports may be generated on more of an ad-hoc basis.