P/C Reserving Issues

Loss and loss adjustment expense reserves are one of the more important factors utilized to scrutinize property and casualty insurance financial statements. A review of the June 30, 2003 quarterly statements of 2,569 property and casualty companies provided some interesting insights on year-end 2002 loss and loss adjustment expense reserve estimates.

The largest reserve strengthening reported was $993,464,000 by the Hartford Fire Insurance Company. The largest reserve redundancy reported was $1,449,555,000 by State Farm Mutual Auto Insurance Company. The largest 12 strengthening and redundancies reported to the National Association of Insurance Commissioners and the Departments of Insurance appear in the following graph of the results.

The importance of reserve strengthening is based, in part, on the relationship between the dollar amount of the reserve strengthening relative to the dollar amount of the company’s surplus as regards policyholders. The larger the company’s surplus as regards policyholders, the less impact that the reserve strengthening will have on the company’s balance sheet. The accompanying chart
presents company year-end 2002 reserve strengthening as of June 30, 2003.

The overall net reserve strengthening, the difference between reserve increases and reserve decreases, of the 2,569 P/C
companies reviewed was $2,490,740,000. In contrast, the overall net reserve strengthening of the 12 insurers with the largest reserve strengthenings was $3,686,803,000.

Based upon this information, it appears that the loss and loss adjustment expense reserve inadequacy of the P/C industry was concentrated in the loss and loss adjustment expense reserves of a relatively small number of the industry’s larger insurers. This being the case, studies that imply industry wide reserving problems might be a disservice to the overwhelming majority of insurers that are reasonably reserved.

To view the Quarterly Reserve Position of hundreds of P/C insurers on a company by company basis, visit www.demotech.com.

This analysis was prepared by Joseph L. Petrelli, president and Barry J. Koestler II, senior consultant, of Demotech Inc. The information underlying the analysis was statutory insurance accounting information purchased from Thomson Financial Insurance Solutions. Since 1985 Demotech Inc. has been a financial analysis and actuarial services firm serving the needs of the P/C industry. Demotech Inc. was the first company to have its rating process formally reviewed and accepted by Fannie Mae, Freddie Mac and HUD. Petrelli is a frequent author and speaker on actuarial and financial analysis issues. The Quarterly Reserve Position of nearly 2,000 P/C companies and other information can be found at www.demotech. com.

Topics Property Casualty