Much like a farmer bringing in his crop in the fall, U.S. property/casualty insurers have harvested significant reserve redundancies, according to a report issued today by Moody's Investors Service, leaving a narrower cushion for the next 12 to 24 months.
The report, "U.S. P&C Insurers Harvest Significant Reserve Redundancy," cites a weak pricing environment as P&C insurers' primary impediment to building reserves at the same pace as recent years.
Moody's says that insurers reported less—though still significant—benefit from reserve releases in their 2009 statutory earnings compared to 2008.
"Though we believe reserves are still redundant as of year-end 2009, we expect that as reserve releases taper off, coupled with lower investment yields, insurers will either raise prices or experience continued pressure on underwriting profitability," says Moody's analyst Enrico Leo, author of the report. "Continued deterioration for 2008 and 2009 accident years is likely to offset benefits received from older accident years, leading to a reduction in total reserve releases over the medium term," notes Leo.
Approximately $10 billion, or 1.9%, of prior year-end reserves was posted in 2009, the report says. Moody's goes on to note that favorable reserve development was seen across most major market sectors and nearly all lines of business. A breakout of the top 50 primary insurance groups illustrates that personal lines reported favorable development of 1.5%, compared to 1.1% in 2008, while diversified carriers reported 2.5% compared to 4% one year ago. Commercial lines insurers experienced less favorable development, reporting just 0.3%, compared to 2% last year.
Reserve releases over the last five years resulted from more favorable conditions of the last hard market, including price increases and improved terms and conditions, favorable loss cost trends and relatively little natural catastrophe activity in 2006 and 2007, Moody's adds.
"As a result, P&C insurers experienced redundancies in their reserves, which contributed to strengthened earnings and capital positions in recent years," Leo says.
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