U.S. property and casualty companies have clearly improved the strength of their reserves, and insurer shortfalls are no longer large enough to trigger downgrades for most companies, Moody's Investors Service said.
As of 2004, non-asbestos reserves for insurers are deficient by $4-to-$8 billion, or 1-to-2 percent of carried reserves, Moody's said in a report.
The firm said that individual estimates for the top 50 primary insurers suggest that group is collectively deficient by $2 billion, or 1.1 percent of carried reserves analyzed.
The rating firm said that as commercial lines insurers and reinsurers announced their results for the third quarter of 2005, many continued to shore up legacy reserves from the 1997-2001 soft market years, and Moody's expects this trend to continue into 2006.
Moody's said the reserving impact on earnings will be modest as companies release reserves on more recent accident years to offset adverse reserve development on older years.
The rating firm said it expects personal lines insurers will continue to maintain reserve cushions in 2006 but at diminished levels.
Moody's said 2004 redundancies in personal lines largely offset insurers' deficiencies elsewhere, and redundancies in newer accident years typically offset deficiencies in older accident years.
Kevin Lee, the report's author, said: "Insurers have devoted a significant portion of their earnings in recent years to rebuilding reserve strength."
Mr. Lee explained that "premium rate increases, a renewed sense of underwriting discipline and some favorable legislative reforms have all combined to make the business written in the past three years profitable, allowing companies to not only shore up legacy reserves but also to amass reserve redundancies for newer business."
He cautioned, however, that despite clear improvement, reserve strength varies greatly by individual company, and "a handful of commercial writers and reinsurers still have significant reserve shortfalls."
The analyst added that "some of these companies may try to grow their way out of reserving holes despite moderating prices, heightening their exposure to pricing and reserving errors."
Moody's said it has found in prior research that insured losses from the recent hurricanes may creep upward by meaningful amounts. If this turns out to be the case, some of the reserve redundancy embedded in recent accident years may be diverted to fund those additional losses, the rating firm said.
Downgrades, the report stressed, could be triggered by further strengthening of asbestos reserves or an inability to collect ceded or retroceded reinsurance.
Moody's noted that reinsurance disputes have continued to rise, in some cases to material levels, particularly with regard to asbestos claims. The dispute rate has gone from 1 percent to 1.6 percent of ceded recoverables over the past four years, Moody's said.
Excluding asbestos and environmental claims, the report said reinsurers were responsible for 42 percent of the insurance industry's total adverse reserve development reported between 2000 and 2004 while they only represented a small fraction of the industry's total surplus
The 14-page report, titled "Filling Cavities: Core Reserves No Longer the Main Concern For US P&C Insurers," summarizes Moody's loss reserve estimates for the U.S. property-casualty insurance industry and the Top 50 U.S. primary insurers as of year-end 2004.
The estimates exclude reserves for asbestos claims, other mass tort liabilities, and some excess casualty and professional liability claims.
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