Rate Increases Could Extend Beyond 2012 as Reserve Releases Slow

NU Online News Service, March 23, 2:03 p.m. EDT

Insurance-rate increases could extend beyond 2012 as insurers slow down their reserve releases and deal with deteriorating calendar-year underwriting profitability, says a financial analyst.

In an analyst note, Meyer Shields of Stifel Nicolaus examined the reserve-release slowdown noting that during the fourth quarter, statutory loss-reserve development declined by 12 percent from 2010 to 2011.

The calculations exclude American International Group, whose 2010 reserve strengthening is considered distortive, and financial and mortgage guarantors whose loss experience does not coincide with the rest of the P&C industry, says Shields.

For the year, statutory loss-reserve development declined by about 14 percent on a year-over-year basis, again excluding AIG.

In another report released recently by ALIRT Insurance Research, reserve-release activity increased for the 50 U.S. P&C companies that firm follows.

Among some of the companies noted in the in the Stefel Nicolaus report, GEICO reported a $166 million reserve development that “is probably an indication of modest rate inadequacies that could challenge underwriting profits and growth in the near term."

While most companies’ reserve releases are dwindling “along normal cyclical patterns,” Arch’s fourth-quarter 2011 release of close to $17 million was triple its $5 million fourth-quarter 2010 release, and the full-year 2011 reserve releases of $26 million rose about 39 percent from 2010’s $19 million.

While carriers are showing signs of some earnings stress, brokers should receive immediate benefit from the increases, says the report, as rate increases should spell an expansion of revenues, margins and earnings.

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