The decline in reserve releases could indicate that the property and casualty market is set for a turn in the cycle that could come as soon as 2012, according to a financial analyst’s report.
Reviewing 54 insurers’ third-quarter earnings for this year, Stifel Nicolaus said in an analyst’s note that year-over-year reserve releases declined by almost 23 percent, indicating that the industry is nearing the point where releases will “stop masking accident-year underwriting result deterioration.”
As results worsen, Stifel Nicolaus said it expects carriers to either begin raising rates or dropping unprofitable business. These moves will result in 10 percent rate increases by the industry by mid-2012, the report said.
“Company by company, the industry seems to be slowly absorbing the fact that the gravy train of post-hard-market reserve releases is slowing down,” the report said.
Stifel Nicolaus noted 47 percent of the public companies surveyed reported lower reserve releases in the third quarter compared to last year. This was slightly more than the 46.5 percent that reported lower reserve releases in the second quarter of this year, but it was a significant increase from the 39 percent in the first quarter.
In what may be another indicator of insurers’ financial condition, a report from Fitch Ratings examining operating expenses of insurers in the p&c industry said that over the past five years “expense ratios have increased significantly, adversely affecting profitability and fueled in part by declining premium volume due to competitive market conditions and the economic recession.”
Fitch said that no “material market hardening” is expected in the near future, and because of that “insurers will continue to be challenged to balance expense structures and still maintain underwriting and service capabilities.”
For insurance brokers, Stifel Nicolaus said that the five major publicly traded firms (Aon, Arthur J. Gallagher, Brown & Brown, Marsh and Willis) are beginning to see improvements in organic growth as the economy improves. The trend is “more dramatic outperformance…when insurers’ deteriorating calendar-year results actually start to push rates upward.”
The future change in the current soft-market condition for insurers has almost been a mantra for William R. Berkley, chairman and chief executive officer of Greenwich, Conn.-based W.R. Berkley Corp.
In his most recent assessment of the p&c insurance marketplace during a report on the company’s 2010 third-quarter results, Mr. Berkley said that with the industry facing a combined ratio of 110 for the year, the pricing environment needs to change.
“Current behavior needs to change,” he said, “and it will when declining investment returns and underwriting losses can no longer be ignored.”