Reserve Deficit Down to $30B: Moody's

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NU Online News Service, Sept. 5, 2003, 9:30 a.m.EDT?With $11 billion of adverse development recorded in2002, the property-casualty industry's loss reserve deficiencystood at about $30 billion at year-end 2002, according to Moody'sInvestors Service.

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In a preview written by the study's author, Sarah Hibler, forNational Underwriter, the Moody's vice president andsenior credit officer noted that the indicated deficiency ofroughly $30 billion as of Dec. 31, 2002 is about 10 percent ofcarried reserves for claims other than those related to asbestosand environmental exposures and excluding reinsurance lines. Thepreview will be published in NU's Sept. 8 printedition.

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Ms. Hibler writes: "Despite substantial prior accident yearreserve strengthening by many primary insurers and reinsurers inthe past two years, Moody's believes that the industry's lossreserves for these lines of business remain inadequate."

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"That said, it does appear, in retrospect, that year-end 2001marked the low point of the industry's reserve adequacy. Ouranalysis suggests that the level of reserve adequacy had improvedsomewhat by year-end 2002, as the benefits of a favorable pricingenvironment, tighter terms and conditions, a low level ofcatastrophes and additions to prior-year reserves combined tostrengthen individual companies' balance sheets."

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Moody's estimate is based on both a top-down approach, (industryaggregate by line of business) as well as a bottom-up approach(analyzing the Top 25 U.S. p-c groups).

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Ms. Hibler noted that the reserve inadequacy, far from beinguniformly distributed throughout the industry, is predominatelybeing borne by commercial insurers which have almost the entireshare of the inadequacy. Personal lines insurers essentially occupya range from breakeven to modestly deficient, while diversifiedcompanies in our study can all be characterized as modestlydeficient in their reserve adequacy, she said.

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