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Reserve releases unsustainable, will contribute less to earnings over time: Moody’s

5th August 2019 - Author: Luke Gallin

Analysts at Moody’s have warned that European property and casualty (P&C) insurers will be less able to bolster their earnings with reserve releases over the coming years.

reservesAnalysts expect reserve releases to fall gradually, ultimately eroding what’s been a key earnings contributor for European P&C players, accounting for around 20% of companies’ profit before tax over the last five years.

In 2018, reserve releases equated to 2% of total net earned premiums and accounted for 23% of the group’s combined profit before tax, compared with a five year average of 16%.

So, it’s clear that reserve releases have been a fairly significant contribution to earnings, while releases have also helped P&C insurers across Europe offset diminished investment returns in light of persistently low interest rates.

Moody’s warns that reserve releases at the current level are simply not sustainable over the long-term, which is mostly driven by a hike in claims costs – which is in part related to the growing technological complexity of motor vehicles, which inflates repair costs, and which analysts expect to persist.

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At the same time, large industry losses from adverse weather events across parts of Europe has combined with challenging pricing conditions in other parts of the region, both of which have made it more difficult for insurers to set aside reserve buffers to be released in future years.

Despite an expectation of fading reserve releases, Moody’s states that it does not expect to see any widespread and severe reserve strengthening as insurers remained focus on disciplined underwriting, backed by a history of prudent reserving practices.

Interestingly, global insurer and reinsurer Hiscox announced recently that it had strengthened its reserves for Typhoon Jebi and Hurricane Michael by $40 million, which suggests that some other European players might also reveal some specific reserve strengthening in the coming weeks.

“Across Europe, we estimate that over the last five years, reserve releases have amounted to around 2% of brought forward reserves, and have risen in each of the last three years. However, we believe insurers’ reserve buffers have deteriorated, reducing the scope for future releases.

“We therefore expect there to be a gradual decline in profit contributions from this source over the coming years,” say analysts.

With profitability under pressure from intense competition, low interest rates and a rise in adverse weather losses in recent times, reserve releases have clearly been a strong positive for European P&C players.

However, current market dynamics suggest that this won’t be the case moving forward, which means that the profits of companies will likely come under further pressure in the months ahead as companies are less able to mask true underwriting performance with reserve releases.

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