Composition of Reserve Releases Shifts; Personal Lines Now Driving Activity

U.S. property and casualty reserve releases have held steady over the past five years, but the composition of reserve development has shifted since 2008, with personal-lines releases increasing while commercial-lines releases have retreated, according to Moody's.

In a Special Comment, “U.S. P&C Insurers' Reserve Releases to Continue, but Remain Modest,” Moody's notes that commercial-lines reserve releases, excluding AIG, totaled $6 billion in 2008, more than any other sector. In 2012, commercial lines accounted for just over $1 billion, the lowest among the five sectors measured.

Personal lines, by contrast, accounted for just under $1.5 billion in 2008—second-lowest among the five sectors—but grew to just under $4.5 billion by 2012—the most among the five sectors.

Through the first half of 2013, Moody's says reserve releases represented approximately 34 percent of pre-tax operating income, with activity driven mainly by several large personal-lines carriers. The figure is up slightly from about 30 percent for the same period in 2012. The ratings agency says about 2/3 of the 2013 releases came from the 2012 accident year. Over the past five years, Moody's says reserve releases have accounted for about 40 percent of pre-tax operating earnings.

Moody's also notes that adjusted earnings for 2009-2012 were lower than reported, while adjusted earnings for 2003-2008 were higher than reported. Looking at the adjusted earnings, Moody's says it appears as if the market cycle peaked in 2006, when adjusted pre-tax operating income hit just under $100 billion. Since then, adjusted pre-tax operating income steadily declined, dropping to around $5 billion in 11 before rising again to just over $20 billion in 2012.

Going forward, Moody's says it believes U.S. P&C insurers will continue to release reserves in the medium term, “particularly for personal insurers. However, the level of releases for commercial insurers is expected to remain modest as redundancies for older accident years diminish, and there are minimal redundancies and some deficiencies for the most recent accident years.”