U.S. P/C Capital “Solid” for Hurricane Season, But Reserves Diminishing: S&P
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U.S. P/C Capital “Solid” for Hurricane Season, But Reserves Diminishing: S&P

U.S.-based property/casualty insurers are “generally on solid financial footing” and their credit ratings will be able to withstand large catastrophes during the 2012 hurricane season, according to a Standard & Poor’s report released Wednesday.

But reserves at many insurers have been eaten away – especially among commercial lines carriers – and the rating agency warned the industry that the consequences of could happen sooner rather than later.

“We believe that reserves for the overall P/C industry are adequate, but the reserve cushion is diminishing, so reserve risk remains key, in our view,” the rating agency said. “Any small change in industry reserves could have a sizable impact on earnings or capital.”

Catastrophe losses, a soft market and “dim investment gains” strained U.S. insurers’ underwriting and operating earnings in 2011, with $40 billion of the record-high $116 billion in disaster losses hitting U.S. carriers directly, S&P said citing Swiss Re Sigma Data. That caused U.S. P/C industry’s combined ratio to deteriorate to 106.4% from 100.9%.

In spite of the significant losses, industry capital was relatively unchanged as insurers absorbed the hit. S&P’s 2012 forecast calls for 104% combined ratio for the industry, with a 102% combined ratio for personal lines, 106% combined ratio for commercial lines and 9% return on revenue “assuming investment yields remain low,” the report stated.

More of a concern for the rating agency is the slow evaporation of U.S. insurance reserves and how that could impact earnings going forward, especially for carriers in commercial lines such as workers’ compensation, liability and excess liability.

“Commercial lines insurers’ reserve releases have generally bolstered profitability since 2006, following about five years of significant adverse reserve development,” the S&P report warned. “We believe that this obscures true accident-year profitability.”

The report adds that commercial lines insurers will not be able to sustain reserve releases, taking out a key pillar of underwriting results. “[If] history is any indication–and if pricing remains soft–P/C insurers likely will strengthen reserves for their long-tail business lines,” the report said.

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