Moody’s: U.S. P/C Insurers’ Report Meaningful 2010 Reserve Releases

July 26, 2011

U.S. property/casualty insurers reported meaningful reserve redundancies in their 2010 earnings, Moody’s Investors Service said, marking the sixth straight year in which the industry has posted a benefit to earnings.

During 2010 P/C insurers, excluding financial guarantors and mortgage insurers, released approximately $10.1 billion in reserves from 2009 and prior accident years, or about 1.9% of year-end 2009 carried loss reserves, net of about $5.0 billion in adverse development reported by AIG subsidiary Chartis.

“Excluding the impact of Chartis, the P/C industry reported more favorable reserve development in 2010, to the tune of $15.1 billion, than in the past two years,” said analyst and author of the report Yunqin Li. “Further, favorable development took place across all major market segments and all lines of business, with the exception of products liability.”

The favorable development originated for the most part from the 2005-2009 accident years and was attributable to the last hard market, which included rate increases, improved underwriting discipline, better-than-expected loss trends, and relatively low natural catastrophe losses in 2006, 2007 and 2009,Li said.

A breakout of the top 50 U.S. primary insurance groups shows that personal lines released significantly greater reserves in 2010 than in 2009 (3.9% of prior year-end reserves versus 1.5%), while diversified carriers released slightly less (2.4% versus 2.5%). Commercial insurers collectively reported modest unfavorable reserve development of 1.9% in 2010, compared with 0.3% of favorable development in 2009. However, excluding Chartis, commercial insurers reported favorable development of
2.4% in 2010, about in line with the 2.5% reported in 2009.

Nevertheless, with prices declining over the past five years, reserves are expected to come under pressure for the 2009-2010 accident years, according to Moody’s.

“In future years, the strengthening of reserves in these recent accident years could offset older reserve redundancies,” Li said. “And given that reserves were breakeven to modestly redundant at year-end 2010, we expect reserve releases to taper off over the next 12 to 24 months.”

Moody’s said that statutory disclosures for the first quarter of 2011 suggest that although favorable development continues at a similar pace as last year, reserve releases were generally smaller for commercial lines carriers.

Furthermore, as releases taper off, and with lower investment yields, insurers must either raise prices or their combined ratios will go up, Moody’s said.

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