Downgrades Possible as P/C Reserve Releases Continue: S&P

Standard & Poor’s is warning property and casualty insurers to pull back on reserve releases or they may face a credit downgrade, according to a report released yesterday.

“If we find that a P/C insurer’s required reserves are inadequate, we might adjust the company’s reserve adequacy, earnings, or capital adequacy. In some cases, this could, based on materiality, result in rating actions,” according to a report entitled “Why U.S. Property/Casualty Insurers Might Have To Put The Brakes On Reserve Releases” (subscription required).

According to the rating agency, in 2008 U.S. P/C insurers (excluding mortgage and financial guaranty) released a record $14.7 billion of reserves. This after releasing $9.5 billion in reserves in 2007. The report says that the releases have come in “virtually all” long-tail lines regardless of their maturity.

At the same time, P/C insurers have revised up their ultimate losses from accident-years 2002 and 2006 from initial estimates.

“This supports our view that insurers might not be able to sustain some of these early reserve releases from recent accident years and that the reserves could develop adversely as insurers’ actual claims are reported, especially those related to longer-tail liability lines,” according to the report.

The rating agency added that the “big question” for the P/C industry is if it is entering a longer period of adverse development, causing significant losses on prior year claims.

“The answer will depend on how long the current soft cycle lasts and on P/C insurers’ effectiveness in using the various risk controls,” S&P said.

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