US P&C reserves deficit widens to $4.3bn: Morgan Stanley
The US P&C industry's reserving deficit deepened to $4.3bn in 2017, according to research from Morgan Stanley.
Last year, Morgan Stanley analysts led by Kai Pan estimated that US P&C carriers had a $2.5bn deficiency for 2016. That was the first time industry reserves had fallen into negative territory since the research team started its annual reserving analysis in 2009.
In the latest research report, Pan noted that although industry reserves remain well within his estimated actuarial range of $606bn-$634bn, a thinner reserve cushion could lead to a "slippery slope" toward lower reserve releases, or even adverse development.
"Large reserve releases in the face of deteriorating cushion heighten reserve risks - at best, an earnings headwind, at worse, balance sheet erosion," Pan wrote.
Pan said he saw reserve deficiencies in five of the top six reserve lines, including workers' compensation, personal auto liability, commercial auto liability, other liability occurrence and other liability claims-made business.
He said: "Most lines saw favourable development in 2017, which could heighten potential reserve risks in the face of deteriorating cushion, in our view."
But the US P&C industry did take reserve charges in commercial auto ($1.2bn), personal auto ($957mn) and other liability claims-made ($114mn).
Since 2010, the US P&C industry has released approximately $73bn of reserves, at a rate of around $9bn a year. This has provided around 20 percent of industry earnings, according to Morgan Stanley.
However, Morgan Stanley said that large industry reserve releases are not sustainable.
The P&C industry released around $12.3bn of reserves in 2017, an increase of $3.2bn year on year when excluding AIG's $5.4bn one-off reserving improvement.
Pan noted particular concerns around the high level of releases for workers' comp business, which had $5.1bn of favourable development in 2017.
Of this $5.1bn, $1.0bn came from the most recent accident year. This is equivalent to 2.4 points of the industry loss ratio, this highest of any accident year since 2012, Pan wrote.
"This seems aggressive to us, given the very long-tailed nature of this line," he wrote.
Analysis at a company level shows an excess of reserves, but cushions are thinning, noted Pan. As a result, Morgan Stanley is lowering its reserve release assumptions by 3-5 percent on average for its 2018 and 2019 earnings estimates.
WR Berkley and National General were the only companies in Morgan Stanley's analysis to hold a reserving deficit for 2017, at $51mn and $26mn, respectively.
"WR Berkley has seen reserve releases in each of the past nine calendar years, though the level has been quite varied," Pan wrote. "We note that recent accident years have seen more frequent charges than older accident years."
Travelers, meanwhile, is estimated to have held a small reserving excess of $35mn for 2017, down around $80mn year on year.
Morgan Stanley's company reserve analysis does not include AIG due to its complex reinsurance arrangement with Berkshire Hathaway.