Standard & Poor's concedes that its longstanding belief about diminishing reserve releases has not yet come to pass.

But the ratings agency is standing firm in its projection, stating in a recent report, “Commercial-lines reserve releases have nowhere to go but down.”

S&P adds, “Most of the reserve redundancies accumulated during the last hard-market cycle—2002-2006—have likely already been released into earnings, so any further earnings benefit should be smaller.”

Still, S&P says it believes overall property and casualty reserves are adequate, and does not believe that recent reserving troubles at QBE Ltd., Tower Group International, and Meadowbrook Insurance Group are indicative of an overall trend for the industry. S&P says, “These three companies' casualties reflect the poor choices of their respective management teams.”

Concerning the rest of the industry, S&P states, “We believe the industry has displayed improved enterprise risk management capabilities and underwriting discipline since the last wave of reserve strengthening in the early 2000s, lowering our concern about repeat offenders.

S&P says it would be concerned if insurers were to release reserves from long-tail lines in recent accident years.

Citing ISO statistics, S&P says that P&C insurers had $10.8 billion in favorable reserve development for the first nine months of 2013, compared to $10.1 billion for the same period in 2012. The industry released $10 billion of reserves in 2012 compared to $13 billion in 2011. However, S&P notes that the commercial-lines sector released $3.6 billion in reserves in 2012 compared to $7.4 billion in 2011.

“We think that benign frequency loss-cost trends are unsustainable,” S&P states.

Overall for the industry, S&P says it expects 2013 to be the strongest year since 2007 for underwriting profitability since 2007, thanks to steady rate increases, lower catastrophes and the impact of reserve releases. S&P is maintaining its stable outlook on the U.S. P&C sector.

S&P notes, though, that it expects rate increases to lose steam throughout 2014. Additionally, the ratings agency expects challenges and uncertainties, such as possibly heightened regulatory hurdles and the potential for greater inflation that could inflate claims costs.

But S&P concludes, “The stable credit quality in the P&C sector hinges on insurers' efforts and commitment to improve underlying underwriting profitability against the headwinds of weather-related volatility, a sluggish economy, reinvestment risk resulting from low investment yields and potentially inadequate reserve levels.”

Special Reports /

S&P: Some Insurers' Reserve Troubles Not Indicative of Larger Industry Issues

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