February 8, 2005 by Canadian Underwriter
The “lingering cloud” of reserve strengthening promises to hang over U.S. p&c insurers 2004 results, despite rising profits, says a new report by Standard & Poor’s.
S&P says insurers were looking for vastly improved returns last year on the back of prior-year premium increases, but these “periodic glimpses of rising profitability” will likely be overshadowed by an estimated US$13 billion in reserve additions expected to be announced along with yearend 2004 financial results for insurers.
“the need to fund future claims for policies underwritten prior to 2002 casts a shadow on the industry’s recovery and rules out any rapid return to higher credit ratings”, S&P says. 2004 marks the sixth successive year of significant reserve additions being made by insurers, points out Steven J. Dreyer, managing director of S&P’s insurance ratings group. “Following colossal prior-year reserve additions of $22 billion in 2002 and $19 billion in 2003, we estimate that 2004 financial statements will show that at least an additional $13 billion will be plowed back into prior-year reserves,” he notes.
The seemingly endless nature of reserve strengthening is not only putting pressure on insurer earnings, but also chipping away at raters’ “confidence about insurers’ ability to measure and manage risks”, Dreyer adds.
This is part of the reason S&P maintains its negative outlook on the U.S. commercial lines sector, coupled with concerns over the ability to maintain price discipline and the impact of various U.S. investigations into industry practices. “. Although 2004 will produce strong earnings, and signs are reasonably good for 2005, the negative outlook indicates that we still see more ratings falling than rising over the course of the year,” the report notes.