The Guy Carpenter World ROL Index gained 8 percent, after two years of substantial declines. Despite the magnitude of catastrophes and financial losses, the turnaround in pricing was substantially less pronounced than those that followed Hurricane Andrew in 1992, the terror attacks of September 11, 2001, and Hurricanes Katrina, Rita, and Wilma in 2005.

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While the United States was home to the highest catastrophe price increases, Continental Europe was relatively stable, and the UK ranged from decreases to modest increases.

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Book values are unchanged from last week. The S&P 500 Banks Index implied book value continues to show a 32 percent aggregate decline from December 31, 2007. The Guy Carpenter Global Composite’s implied book value remains down 15 percent. As the composite is an index of 141 carriers from around the world, the 15 percent decrease indicates that global insurance industry capital could be down by a similar amount relative to year-end 2007.(Chart after the jump)

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Book values remained stable last week. The S&P 500 Banks Index implied book value has increased by three percentage points since the end of November, reflecting a 32 percent aggregate decline from December 31, 2007. The Guy Carpenter Global Composite regained some momentum, edging slightly higher from the previous week. The Global Composite has lost 15 percent of its aggregate implied book value, compared with 17 percent at the end of November.

(Chart after the jump)

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For non-U.S. major airline insurance coverage, based on an original market liability limit of USD1.5 billion, total capacity was 208.5 percent. Lloyd’s is the largest supplier, at 74.9 percent, followed closely by the rest of the world, with 67.8 percent. Markets in London and France account for 37.8 percent and 21.5 percent of non-U.S. capacity, respectively.

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Despite a slight uptick in airline insurance pricing, there recently has been a substantial reduction in the number of airlines and aircraft operated. This shrinking of the underlying exposure is expected to continue in line with global financial catastrophe.

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The aviation reinsurance market renews 65 percent of its reinsured capacity from October 1 to January 1 every year. Most treaties are excess of loss (XOL), with original market loss attachment points typically suited to risk appetites of USD100 million to USD500 million. XOL quoting was timely this year, without any last-minute changes.

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Despite these major changes in financial markets, asset allocation did not change substantially in the aggregate. Declines in nearly every other asset category offset partially the JPY1.3 trillion (USD13.5 billion) decline in the carrying value of domestic shares, which dropped 3 percent to 24 percent of cash and invested assets. Fixed income investments increased from 34 percent to 39 percent.

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Market conditions have had a particularly profound impact on investment income and realized gains in the Japanese market. Investment gains were off 50.7 percent year-over-year. Further, unrealized capital losses on domestic and foreign securities (including U.S. structured fixed income investments) pushed adjusted capital and surplus 12.3 percent lower for the first half of FY2008-and down 26.4 percent from the beginning of FY2007.

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Rate reductions and a slowing economy has precipitated a JPY100 billion (USD1.1 billion) reduction in net written premium, though net earned premium did grow lightly. Underwriting income fell 63.6 percent on an earned-incurred basis as a result of slightly higher losses in core lines of business and administrative expense growth. For the first half of FY2008, the combined ratio for these seven carriers was 99 percent, compared to 97.3 percent for the first half of FY2007.

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