NU Online News Service, Aug. 15, 2:24 p.m. EDT

Rate increases are likely to continue as reserve releases decline and carriers realize minor returns on their investment portfolios, says a financial analyst with Stifel Nicolaus.

In its review of 49 publicly-reporting insurers, based on the companies' second quarter results, reserve releases were down 8.4 percent from the previous year, says Stifel Nicolaus. Total net reserve releases stood at $1.43 billion in 2012 compared to the previous year's $1.56 billion.

The analysis excludes The Hartford Financial Services, says Stifel Nicolaus, because the company's $290 million strengthening of asbestos reserves in the second quarter of 2011 is an outlier that distorts the underlying industry trend.

The figures suggest “that reserve releases are decreasingly masking accident year underwriting-result deterioration inevitably stemming from prior periods' declining rates, 'normal' claim inflation, and the ongoing spate of global natural catastrophes.”

Seven insurers accounted for 67 percent of the group's total reserve releases, the analyst's note says, but only accounted for 30 percent of the group's net earned premiums.

The seven companies are:

ACE.
Chubb.
Cincinnati Financial Corp.
Markel Corp.
Partner Re.
Travelers.

The report goes on to say that 56 percent of the public companies in the analysis reported lower reserve releases year-over-year. About 14 percent of the companies reported net unfavorable loss development.

Stifel Nicolaus went on to say that, during earning calls, most insurers reported improved pricing, but there were few, if any, that reported rate increases “that currently match or exceed claim cost inflation.”

The analysis adds, “Now that the expectation of interest rate increases seems very remote, we expect insurers to raise insurance rates or walk away from unprofitable business.”

The analysis went on to say that the increase in prices will benefit brokers while carriers' return on equity will be challenged until “rate increases both accelerate from current levels and flow into earned premiums.”

Special Reports /

Continued Reserve-Release Decline Should Spur Rate Increases

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