Past Problems May Hit Insurer Ratings

The Munich Re reviews were undertaken as a result of Munich Res announcement on July 10 that case reserves and claims incurred but not reported for its American Re-Insurance subsidiary had to be strengthened by $2 billion. At the same time, Munich Re said it would increase reserves for World Trade Center claims by $500 million.

Moodys said the review of St. Pauls rating was focused on the companys stated need for capital in response to recent adverse loss development (namely the loss of a major asbestos related case, called Western MacArthur), and the companys progress with respect to its planned divestiture of its reinsurance operations, which have been put on hold due to conditions in the stock market.

Last week, St. Paul announced a $100 million addition to its reserves for health care business.

Further, XL Capital Ltd. last week said it increased reserves for losses relating to the attacks on the World Trade Center by approximately $200 million in the second quarter of 2002.

When prices of p-c stocks went up after 9/11, it was the result of expectations about dramatically strengthened pricing, said Ted Collins, managing director of Moodys in New York.

"I think that many investors probably imagined that all that pricing would fall through to the bottom line. However, not all that pricing is falling through to the bottom line," he said. "A lot of it is going to fund shortfalls in reserves from prior years."

Over the past 12 months, companies have recorded reserve charges as a result of asbestos claims, reserve strengthening on more recent accident years that represented the bottom of the soft markets1997, 1998 and 1999and Sept. 11 losses and adjustments, Mr. Collins said.

"We acknowledge that there is a hard market in full swing, but the soft market was so deep that its going to take companies a while to figure out just how deep the hole was," he said.

As a result, companies are not going to have the kind of bottom-line results in 2002 that one would expect, given the nature of the rate increases being seen, he said. "Companies need to divert some of that profit and use it to fund reserve inadequacies off of prior years, and thats exactly whats happened so far this year."

While there is significant pricing improvement occurring, "there is still plenty of balance sheet fundamental clean-up that has to be addressed," said Mark Puccia, managing director with S&P in New York.

Regarding Munich Re specifically, Mr. Puccia said Munich Res reserve announcement was "very disappointing."

"The fact is that 2001 offered an opportunity for reinsurers to clean up any discrepancies they might have had in their accounts in terms of under-reserving in particular," said Mr. Puccia, who has responsibility as chief quality officer for S&Ps insurance ratings globally.

"Its very disappointing that this company hadnt identified all those adverse development trends prior to the closing of the books" last year, Mr. Puccia said. "It establishes an enormous credibility gap," he said.

Mr. Puccia noted that American Re has significantly under-performed its peers for years.

"Thats not just a 2002 event," he said. "There are some real underwriting control problems there that have to be addressed," he said.

There are no indications from the ratings agencies yet that XL is being put under ratings review.

However, Fred Loeloff, director at S&P in New York, commented that the disappointing aspect of XLs recent announcement is the fact that XL doesnt get to take advantage of the near term benefits of the hard market during the first half of this year. "However, barring any major catastrophes, they should have a very good year, despite whats happened in the first six months," he said.

Last year, XL felt it had done a very thorough ground-up analysis and they came close to a reasonable 9/11 estimate at the time, he said. "But apparently, after more due diligence, they uncovered more exposures concentrated to a couple large insureds," he said.

Mr. Loeloff suggested that XL is being affected by its growth through acquisition strategy. "As you grow and evolve, sometimes you do not get your arms around all risks that you inherit," he said.

When a company grows by acquisition, "you inherit books of business that have been underwritten by others, and sometimes those individuals are no longer with the company when the events occur, which makes it difficult to monitor the book," he said.

In addition, growth by expansion can cause unforeseen aggregation problems, he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 29, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.