NU Online News Service, May 16, 12:03 p.m. EDT
The outlook for the insurance industry is not so rosy as reserve releases and other economic trends are putting pressure on company performance, according to two industry observers.
Two reports indicate that company performance points to a turnaround in soft market pricing with reserve releases in decline and overall positive industry performance coming from a few isolated major insurers.
In an analyst's note, Meyer Shields with Stifel Nicolaus points to a slowdown in reserve releases that declined by almost 12 percent on year-over-year basis for the first quarter of 2011.
The compilation of results, based on a review of 53 insurers, shows that net releases dropped from $2.22 billion in the first quarter of 2010 to $1.96 billion in 2011.
He says the result implies that the industry is nearing the point when "reserve releases stop masking the accident-year underwriting result deterioration inevitably stemming from declining rates and rising (and potentially accelerating) claim costs."
Of the 53 companies, only six accounted for more than half of the total $1.96 billion in reserve releases, with more than 61 percent of the public companies surveyed reporting lower reserve releases.
"Company by company, the insurance industry seems to be absorbing the inevitable reality of slowing post-hard-market reserve releases," he says.
Ultimately, the soft market is "oh-so-slowly grinding to a halt," he continues, adding that rate levels are beginning to stabilize.
While that will point premium increases for clients, brokers will see some benefit from higher brokerage commissions, he notes.
In a review of company performance, Charles L. Ruoff, president of CR Market Strategies Inc., a consulting firm, says that while year-end results from the ISO (Insurance Services Office) points to the industry doing better than it did in 2009, recording net income after tax of $35 billion in 2010 compared to $29 billion in 2009, there were some "troubling signs buried within the data."
He says while personal lines carriers premium grew more than 3 percent commercial lines carriers' premium declined at 2.7 percent.
There are serious questions about how much additional reserve redundancy remains for carriers, as they used a total of $9 billion in 2010 compared to $11 billion in 2009.
Investment income, which showed slight upward movement in 2010, benefited from a special acquisition transaction of $1.3 billion in income. The reality, says Ruoff, is that investment fell to $45.9 billion from $47.1 billion the year before.
Net surplus growth in 2010 was at $45.5 billion, below last year's $54.3 billion. He also questions the claims-paying strength of the industry for catastrophe events, which is placed at $1.3 trillion.
The number is comprised of:
• Surplus — $557 billion
• Claim reserves — $558 billion
• Unearned Premium Reserves — $199 billion.
Under that approach, he says claim reserves appear to be counted twice because claim reserves are set aside for existing claims and are not available for new claims that may arise.
The industry remains in "a difficult period" and continues to be highly competitive, he says, adding that too much capacity is leading some insurers to write "questionably priced business."
Despite the April losses from tornadoes amounting to $5 billion, he says it will "not cause any abrupt change in market conditions."
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