A.M. Best: Reserve Releases to Slow as Industry Exhausts Most of Its Cushion

NU Online News Service, May 29, 2:13 p.m.

While reserve releases are expected to continue through 2012, the industry has likely exhausted most of its reserve cushion, and rate actions that companies have taken in recent months may not be sufficient to prevent continued deterioration, A.M. Best says. 

In a special report on the U.S. property and casualty industry’s 2011 results, A.M. Best notes that the industry benefitted from a greater level of favorable reserve development in 2011 compared to 2010.

However, the percentage of U.S. P&C groups and unaffiliated single companies reporting favorable development declined slightly during the year, the ratings agency notes. Furthermore, A.M. Best says that AIG took $4.1 billion reserve increase in 2010.Without that reserve action, 2011 would have seen a $1.2 billion decrease in favorable development compared to 2010.

Looking forward, A.M. Best says it believes the industry’s reserve cushion has likely been exhausted “primarily as a result of significant reserve releases and the extent to which rate levels have been inadequate as a result of predominating soft-market conditions in recent years.”

Ongoing reserve releases may benefit calendar-year results, says A.M. Best, but loss and loss-adjustment expense reserves for those accident years will not provide the same level of benefit for future years.

A recent Keefe, Bruyette & Woods report said 2012 first-quarter reserve releases were “surprisingly strong,” and beat the firm’s estimates, but the firm agrees with A.M. Best that the first quarter’s strength in this area is unlikely to be repeated and KBW also expects a slowing of reserve releases as the year progresses.

Regarding the industry’s 2011 results, catastrophe losses, a struggling economy and a weak investment environment hurt most segments of the industry in 2011.

For commercial lines, excluding mortgage and financial-guaranty insurers, 2011 net income declined by 50.4 percent compared to 2010. The segment tripled its underwriting loss in the year to $15.8 billion as it suffered many catastrophe losses that were not severe enough to trigger reinsurance programs. The segment’s combined ratio jumped to 108.2 compared to 102.6, A.M. Best says.

The personal-lines segment saw net income drop to $3.7 billion in 2011 compared to $13.2 billion in 2010. Catastrophe losses were estimated at $24 billion in 2011 compared to $12.1 billion in 2010.

The U.S. reinsurance segment posted an underwriting loss of about $2.5 billion in 2011 compared to a gain of $1.3 billion in 2010. The segment’s combined ratio climbed to 108.8 from 94.5.