NU Online News Service, July 21, 3:10 p.m. EDT

The common assertion that the level of prior-year loss-reserve releases declined last year is not entirely correct, according to a recent compilation of reserve changes that excludes the impact of one large carrier's reserve hike.

National Underwriter, using data from year-end statutory filings now available in the aggregate and on a group basis through Highline Data, an NU data affiliate, finds the level of prior-year takedowns for the property and casualty industry neared $17 billion for the second consecutive calendar year, if a $5 billion prior-year boost from Chartis is excluded from the totals.

The releases, totaling $16.6 billion in calendar-year 2009 and $17.0 billion in 2010 for the industry minus Chartis, shaved roughly 4 points off the full-year combined ratios in both years.

In conjunction with its annual publication of the Top-100 insurance groups (based on 2010 net premiums written) for the July 25 edition of NU magazine, NU gathered information on reserve changes (follow link to see chart) impacting individual carrier and industry combined ratios. The analysis revealed that Chartis was one of only two Top-20 insurance groups that boosted prior-year loss reserves enough to impact its calendar-year combined ratio. (Allianz, the other, has a less significant charge.)

The calendar-year combined ratio, which is the industry's measure of underwriting profits and losses, essentially compares losses and expenses incurred to premiums, with results over 100 signifying underwriting losses.

Incurred losses used in the combined-ratio calculation in any given calendar year consist of losses paid and reserves set up for claims that occurred during that year—current accident-year incurred losses—and changes in loss reserves for claims that occurred in prior years.

For Chartis, the $5 billion boost in prior-year reserves added nearly 25 points to its calendar-year 2010 combined ratio, which came in at 129.2.

The aggregate combined ratio for the rest of the industry—excluding Chartis—was 101.4, with the $17 billion of prior-year reserve releases helping to shave 4.2 points off the total. In other words, without Chartis, the accident-year 2010 combined ratio—which excludes the dip into the prior-year reserve cushion—was 105.6. It should be noted that industry results were also adversely impacted by losses emerging in the financial and mortgage-guaranty lines last year, which added about 1.6 points to the accident-year combined ratio.

Overall, including Chartis in industry-wide totals, the aggregate prior-year loss reserve takedown amounted to $11.8 billion, with a net benefit of 2.8 points to the industry's booked calendar-year 2010 combined ratio.

TURN INDICATOR/ RESERVE ADEQUACY

Industry commentators attempting to time a market turn often point to the depletion of prior-year loss reserve cushion as a lead turn-indicator. NU's compilation does not provide a view about whether any cushion remains for carriers to harvest in 2011. Also unclear is whether Chartis' charge is a precursor of things to come for the rest of the industry.

An analysis of loss-development histories by an actuary or qualified reserve specialist is required to answer such questions.

For readers interested in pursuing a more rigorous analysis, however, NU has prepared some additional graphical information and commentary as a starting point on the following pages.

Prior-Year Reserve Changes By Line (follow link to see chart)

The bulk of Chartis' reserve charge came in the workers' compensation and other-liability claims made lines.

• As the accompanying graph reveals, excluding the impact of Chartis' $1.8 billion increase in prior-year reserves for the workers' comp line, the rest of the industry recorded almost no change in prior-year comp reserves.

• Excluding the impact of Chartis' $3.0 billion hike in prior-year reserves for the general-liability occurrence-based policies, the rest of the industry recorded an aggregate takedown of $1.9 billion, shaving 9.5 points off the overall 2010 calendar-year combined ratio for the line. There has been no larger takedown for this line recorded in the 13 calendar years reviewed by NU.

• Chartis/AIG boosted GL-OCC prior-year reserves by more than $1.0 billion—over 40 points—four times in the last decade including the 2010 boost.

• The rest of the industry recorded prior-year reserve hikes representing 15-25 points in calendar years 2002-2005.

Casualty Reserve Changes By Accident Year

• A good chunk of Chartis' $5 billion boost to prior-year loss reserves came from fairly recent accident years. In fact, just focusing on selected casualty lines (workers' comp, auto liability, general liability, products liability and medical malpractice), NU finds that Chartis added $5.2 billion in total, with roughly $1.7 billion of that attributable to accident-years 2006-2009.

• In contrast, for these same casualty lines, the rest of the industry released $8.1 billion in in prior-year reserves in 2010, with $7.6 billion of the total coming from accident years 2006-2009.

Initial Accident-Year Loss Ratios (follow link to see chart)

Conservative analysts and purists will also want to remove the benefit the prior-year reserve cushion to understand how the most recent accident-year combined ratios are trending for key lines of business.

• The accompany graph reveals that the workers' compensation accident-year 2010 loss ratio of 76.7 set by comp insurers in aggregate at Dec. 31, 2010 was the highest 12-month accident-year loss ratio for the line in a decade.

• The same observation holds true with respect to Chartis' accident-year 2010 booked loss ratio of 81.2.

• The loss ratios shown on the accompanying graph are initial loss-ratio picks based on 12-month incurred losses for each accident-year (from Sch P-Part 2).

Insurers actually saw comp-loss ratios develop downward from initial picks for accident-years 2003-2007—by as much as 10 points for the earliest years. Accident-years 2002 and prior, however, developed unfavorably (ultimately rising from the ratios booked at 12 months shown on the accompanying graph by as much as 11 points).

• For the other-liability line (for occurrence-based policies), insurers have been setting their initial accident-year liability loss ratios higher for the last four accident years. Still, the accident-years 2010 other-liability ratio of 67.6 remains 3-10 points below initial loss ratios set in the late 1990s and early 2000s.

• Ultimate other-liability loss ratios for accident-years 2001 and prior rose from the initial values insurers pegged 12 months from the start of each of those accident years (by more than 10 points in some years).

(Editor's Note: The loss ratios shown on the accompanying graph include defense and cost-containment expenses captured on Sch P-Part 2, but not unallocated adjusting expenses, which would add roughly another 8 points.)

Special Reports /

Prior-Year Reserve Releases Still At High Levels In 2010: Data Analysis

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