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

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

National Underwriter, using data from year-endstatutory filings now available in the aggregate and on a groupbasis through Highline Data, an NU data affiliate, findsthe level of prior-year takedowns for the property and casualtyindustry neared $17 billion for the second consecutive calendaryear, if a $5 billion prior-year boost from Chartis is excludedfrom the totals.

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

In conjunction with its annual publication of the Top-100insurance groups (based on 2010 net premiums written) for the July25 edition of NU magazine, NU gathered information on reserve changes (follow link to seechart) impacting individual carrier and industry combined ratios.The analysis revealed that Chartis was one of only two Top-20insurance groups that boosted prior-year loss reserves enough toimpact its calendar-year combined ratio. (Allianz, the other, has aless significant charge.)

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

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

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

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

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

TURN INDICATOR/ RESERVE ADEQUACY

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

An analysis of loss-development histories by an actuary orqualified reserve specialist is required to answer suchquestions.

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

Prior-Year Reserve Changes ByLine (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 ofChartis' $1.8 billion increase in prior-year reserves for theworkers' comp line, the rest of the industry recorded almost nochange in prior-year comp reserves.

• Excluding the impact of Chartis' $3.0 billion hike inprior-year reserves for the general-liability occurrence-basedpolicies, the rest of the industry recorded anaggregate takedown of $1.9 billion, shaving 9.5 points off theoverall 2010 calendar-year combined ratio for the line. There hasbeen no larger takedown for this line recorded in the 13 calendaryears 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 includingthe 2010 boost.

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

Casualty Reserve Changes By AccidentYear

• A good chunk of Chartis' $5 billion boost to prior-year lossreserves came from fairly recent accident years. In fact, justfocusing 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, withroughly $1.7 billion of that attributable to accident-years2006-2009.

• In contrast, for these same casualty lines, the rest of theindustry released $8.1 billion in in prior-year reserves in 2010,with $7.6 billion of the total coming from accident years2006-2009.

Initial Accident-Year LossRatios (follow link to see chart)

Conservative analysts and purists will also want to remove thebenefit the prior-year reserve cushion to understand how the mostrecent accident-year combined ratios are trending for key lines ofbusiness.

• The accompany graph reveals that the workers' compensationaccident-year 2010 loss ratio of 76.7 set by comp insurers inaggregate at Dec. 31, 2010 was the highest 12-month accident-yearloss 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 initialloss-ratio picks based on 12-month incurred losses for eachaccident-year (from Sch P-Part 2).

Insurers actually saw comp-loss ratios develop downward frominitial picks for accident-years 2003-2007—by as much as 10 pointsfor the earliest years. Accident-years 2002 and prior, however,developed unfavorably (ultimately rising from the ratios booked at12 months shown on the accompanying graph by as much as 11points).

• For the other-liability line (for occurrence-based policies),insurers have been setting their initial accident-year liabilityloss ratios higher for the last four accident years. Still, theaccident-years 2010 other-liability ratio of 67.6 remains 3-10points below initial loss ratios set in the late 1990s and early2000s.

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

(Editor's Note: The loss ratios shown on the accompanying graphinclude defense and cost-containment expenses captured on SchP-Part 2, but not unallocated adjusting expenses, which would addroughly another 8 points.)