NU Online News Service, June 19, 3:11 p.m. EDT
Property-casualty insurers' reserve adequacy "deteriorated" in 2008, ending with a 0.4 percent–$2.2 billion–deficiency that will hurt their earnings, an investment firm said.
For this reason, Keefe, Bruyette & Woods said it is only recommending individual insurance stocks with solid balance sheets and experienced management "rather than sectors."
The firm said the 0.4 percent deficiency applied to accident years 1999 to 2008.
The deficiency contrasts a $2.4 billion redundancy at year-end 2007.
"We believe accident years 2006 and 2007 are redundant, but earlier accident years continue to show a deficiency. We also believe reserves established for accident year 2008 are deficient and will develop adversely over time," said KBW.
The firm reported its analysis finds reserve strength is greatest in the medical malpractice line and weakest in the non-proportional assumed reinsurance-liability line.
KBW forecasted that most p-c insurers will see a drop off in the earnings benefit they receive from favorable development going forward, and said it "expects many companies will even need to take reserve charges in the next couple of years."
The firm said it cautions that investors besides reviewing a company's operating performance, consider its balance sheet strength–both on the asset side and the liability side–and the track record of its management team when making investment decisions.
"When the mask of favorable loss reserve development is removed, these factors may very well determine whether or not the company achieves its targeted earnings," KBW commented.
The firm said non-proportional assumed liability reinsurance, the most deficient line at year-end 2008, has an estimated $2.9 billion deficiency or approximately 7.3 percent of total reserves for the line.
It said worst accident years for the line were 1998 to 2001, particularly 2000, and the sector has recorded $3.5 billion of adverse development over the past three calendar years, including $300 million of adverse development in calendar year 2008.
The line "shows significant volatility," said KBW.
By contrast KBW found that reserves for non-proportional assumed property reinsurance have developed favorably by $2.5 billion in the most recent four calendar years, including $800 million of favorable
development in calendar year 2008.
Still KBW believes this line is now deficient overall–by $1 billion or 13.8 percent of reserves.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.