NU Online News Service, June 22, 2:09 p.m. EDT
The property and casualty industry still has “robust” excess capital, but not as much as July 2010, according an analysis by Morgan Stanley.
“We found overall amounts [of excess capital] have decreased as lower excess reserves, capital deployment…worsening underwriting trends…and higher PMLs (probable maximum loss) from the new RMS 11 model led to lower capital levels than in our July 2010 analysis,” says Morgan Stanley in its report, “2011 Reserve & Capital Analysis: Excess Remains.”
Morgan Stanley says it estimates that an actuarially reasonable range of reserves is between $512.5 billion and $580.8 billion. “Industry-carried reserves of $561.9 billion fall at the 72nd percentile of this range, or about $15.3 billion above our midpoint,” Morgan Stanley explains.
This total represents around 3 percent of carried reserves, and a 21 percent decline from the $19 billion in excess capital in July 2010.
Still, Morgan Stanley says many carriers are showing significant reserve positions. “While industry standards have deteriorated in recent years due to lower pricing, benign loss trends in long-tail lines reveal reserve levels to be set at appropriate levels.”
Morgan Stanley lists workers’ compensation as a “line of concern,” noting that carried reserves fall at the 52nd percentile of its suggested range, for an estimated excess of “only about $300 million above our midpoint.” Morgan Stanley says this represents a “significant drop” from its indicated margin a year ago, and is less than 0.5 percent of carried reserves, “not a large margin for such a long-tailed line.”
The report looks at excess capital carried by 14 P&C companies: ACE Limited, Allstate, American International Group, Arch Capital, AXIS Capital, Chubb, Everest Re, PartnerRe, Progressive, RenaissanceRe, Transatlantic, Travelers, W.R. Berkley and XL Group.
Morgan Stanley estimates that ACE Limited has $6.5 billion in excess capital representing 27 percent of equity. RenaissanceRe has $600 million in excess capital representing 20 percent of equity. Chubb has $2.5 billion in excess capital, representing 16 percent of equity.
On the opposite end of the spectrum, Morgan Stanley estimates that AIG Global P&C (Chartis) has a reserve deficiency of between $2 billion and $4 billion as of year-end 2010. Transatlantic has $100 million in excess capital representing 2 percent of equity. Allstate has $500 million in excess capital representing 3 percent of equity.
The report also takes a look at the P&C pricing cycle, noting that property pricing has turned while casualty “remains muted.” Morgan Stanley says, “Property pricing inflected higher following [the March 11 Japan earthquake] and this trend appears in place at least through [the 2012 first quarter].”
Longer-tail casualty lines, meanwhile, have flattened and are showing “pockets of improvement,” but Morgan Stanley says the future trajectory is unclear.