Commercial Reserves $60 Billion Short: S&P

"A gaping hole in reserves" was a key reason S&P gave to support its continued negative outlook for commercial lines in the report it released yesterday.

Titled "U.S. Commercial-Lines Outlook 2004: Thirsting in an Oasis," the S&P puts a $60 billion estimate on the reserve shortfall for the industry?not including reserves for asbestos liabilities.

S&P's $60 billion estimate of the chasm between adequate reserves and those carried by commercial lines insurers for exposures other than asbestos is higher than other rating firms have published in recent months.

It falls well above a $37 billion to $48 billion shortfall range estimated by Chicago-based Fitch Ratings last month for non-asbestos exposures. (Including asbestos, Fitch put reserve shortfalls in the $46 billion to $77 billion range.)

And it is double the $30 billion figure estimated by New York-based Moody's in September.

"For the past year or so, we've been saying the industry outlook is poised to go to stable from negative, but the idea keeps getting shelved by the litany of negative surprises," said John Iten, an S&P director, in the report released by the New York-based firm yesterday.

(A negative outlook by a rating agency means that downgrades will continue to outpace upgrades for the sector.)

S&P cited workers' compensation, directors and officers liability, and medical malpractice among the lines with worrisome reserve issues.

Workers' comp was the "primary reason for 15 of the 28 property-casualty company failures" in 2002, the report pointed out.

"Even if insurers could boost their reserves" to appropriate levels, "they would be tripped up on the reinsurance front," S&P added, pointing to the "gaping discrepancies between gross reserves numbers and net reserves they're actually booking in anticipation of reinsurance recoverables that may not be forthcoming.

On a positive note, S&P said the premiums exceeded losses and expenses for U.S. p-c insurers for the first time since 1986 during the first half of this year.

But "the golden age of price increases is already losing its luster," the report said, predicting that "premium rates are likely to chart a downward course again by the end of 2004."