Reserve releases masking deteriorating results in reinsurance sector

Reserve releases are masking deteriorating results in the U.S. and Bermuda reinsurance market, said Greg Reisner, a senior financial analyst at AM Best.
Reisner offered delegates of AM Best’s ‘Market Briefing: Canada’ an overview of the U.S. and Bermuda reinsurance markets on Sept. 8, 2010 in Toronto.
He noted the trends emerging in the U.S. and Bermuda markets may also apply to the Canadian reinsurance market.
Reisner noted the U.S. and Bermuda reinsurance industry reported an ROE of 16% in 2009. “If you strip out those reserve releases, you’re really looking at an ROE around 11%,” he said. “And if you strip out reserve releases through 2010 H1, we’re actually looking at an ROE around 6% for this sector.
“You can see that results are certainly deteriorating, but those releases have been masking that deterioration.”
Between 2006 and 2009, net premium written (NPW) in the U.S. and Bermuda reinsurance market has been stale, he said. He observed that in 2006, the industry reported $51.7 billion in net premiums written; in 2009, it was $50.3 billion.
The industry reported a “solid” combined operating ratio (COR) of 87% in 2006, with minimal favourable loss reserve development, Reisner said.
But loss reserve development picked up in 2007, 2008, and 2009. By the end of June 2010, the industry reported 6.6 percentage points of favourable loss reserve development – far exceeding analysts’ expectations, he said.
The favourable loss reserve development “is certainly aiding underwriting results, as well as the return on equity (ROE) components,” Reisner said. “But this trend cannot continue. We are at the point where we are starting to question some companies’ reserve adequacy.”