In a report on the Property & Casualty sector, Credit Suisse analysts said the disconnect between casualty prices bottoming while returns remain resilient suggests reserves are being eroded as they’re used to maintain past levels of profitability and warned of results deteriorating in future years.
Many publicly traded re/insurers are still reporting generally strong returns, with 2017 accident year ROEs still in the 8-10% range, despite the fact that all commercial P&C firms agreed that casualty lines need rate increases.
ROEs for commercial underwriters with normal cat losses are 8-10%, thus Credit Suisse analysts believe that actual profitability levels could be more negative than what’s being reported and are buoyed up by reserve releases.
“Industry and company underwriting casualty margins have held up relatively well despite what we estimate to be cumulative rate reductions of 5-10% over the past 3 years on liability lines.
“This doesn’t necessarily mean that companies have been under-reserved for recent accident years.
“Our work suggests that casualty loss trends have likely run below the 3-4% annual inflation rate that companies have in the past used as in computing reserves,” explained Credit Suisse.
Going forward, casualty results could become more volatile than they’ve been in the past.
More recent accident years are also less likely to produce the same level of cumulative reserve redundancy as they have in the past.
The Credit Suisse P&C report also highlighted evidence of deterioration of recent year casualty results; “in addition to the fact that results have been better than expected tested against the assumption of a 3-4% loss trend, our analysis of 2016 year-end company and statutory filings shows that the quality of 2016 accident year underwriting results were weaker than expected for much of the year, a trend that we think persisted into 2017.”