Favorable development of loss and loss-adjustment-expense reserves for prior accident years among U.S. property and casualty insurers all but evaporated during the third quarter, an S&P Global Market Intelligence analysis finds.
A lower level of reserve releases, in combination with higher reinsurance rates in the aftermath of recent natural catastrophes, could support a push for higher pricing in certain lines of business as carriers may be compelled to exercise greater underwriting discipline. It has already served to reinforce the push for rate increases in the embattled commercial auto liability business. But it is unclear whether the third-quarter statistics are the product of isolated episodes of unexpected claims emergence involving specific lines and/or accident years or the start of a broader trend.
Bond insurers, AIG build reserves
The industry's prior-year development on a total-filed basis, according to disclosures on Part 3 of quarterly statutory statements compiled Dec. 4, was unfavorable by approximately $627.3 million, but that sum reflects nearly $1.11 billion in reserve-building by a collection of bond insurers and American International Group Inc. When excluding those entities, favorable development totaled $478.9 million for the third quarter, down from $1.15 billion in the year-earlier period after a series of similar adjustments and the elimination of extraordinary development that resulted from shifts of business inside and outside of the scope of statutory data by certain U.S. P&C units of Allianz Group.
S&P Global Market Intelligence's P&C industry outlook for 2017 contemplated a lower level of favorable development, but the pace of decline through the first nine months of the year has been more rapid than expected.
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AIG may not repeat the multibillion-dollar reserve builds it conducted in each of the past two fourth quarters, but new President and CEO Brian Duperreault made headlines with a material third-quarter reserve charge that sought to address early signs of greater-than-expected claims emergence in the most recent accident years.
The U.S. P&C units of AIG showed unfavorable development of $574.4 million for the third quarter, which reflects the difference between the reported build of $348.7 million for the first nine months of 2017 and the favorable development of $225.8 million they recorded in the first half of the year. AIG's reserves developed unfavorably by $379.2 million in the third quarter of 2016.
A collection of 11 individual entities deemed to be primarily engaged in bond insurance combined to show $531.7 million in unfavorable development during the third quarter, of which $136.2 million and $120.2 million were attributable to MBIA Inc.'s National Public Finance Guarantee Corp. and Assured Guaranty Ltd.'s Assured Guaranty Municipal Corp. Both MBIA and Assured Guaranty said they increased reserves for certain municipal exposures in Puerto Rico, the U.S. territory that already faced a fiscal crisis before Hurricane Maria made landfall in September and caused widespread devastation on the island.
The 11 bond insurers combined to generate favorable development of $45.6 million in the third quarter of 2016. Bond insurers accounted for four of the quarter's 11 largest reserve builds at the P&C group level.
Challenging comparisons
Allianz companies accounted for the largest year-over-year changes in the amount of third-quarter reserve development among individual P&C entities owing to no repeat of the nearly $2.87 billion in unfavorable development they generated during the three-month period ended Sept. 30, 2016. The timing and nature of the transfer of business among San Francisco Reinsurance Co., Fireman's Fund Insurance Co., Allianz Global Risks US Insurance Co. and a non-U.S. affiliate helped produce that extraordinary figure.
Liberty Mutual, at both the individual and P&C group levels, otherwise accounted for the most noteworthy swings in reserve development.
Liberty Mutual Insurance Co. and the Liberty Mutual Holding Co. Inc. group had third-quarter unfavorable development of $352.2 million and $686.6 million, respectively, as compared with $47 million and $94.5 million in the year-earlier period. Peerless Insurance Co.'s unfavorable development increased to $140.9 million from $18.8 million.
Liberty Mutual blamed unfavorable development in the commercial auto liability line and asbestos-and-environmental exposures for the increases. The commercial auto action followed the company's completion of a reserve review for the business line, which it undertook after observing higher-than-expected claims emergence in prior accident years. Chairman, President and CEO David Long, speaking during a November conference call, said that "you'll need double-digit [rate increases] for multiple years to get to where we need to get to" in the commercial auto business.
Regarding the asbestos and environmental liabilities, Liberty Mutual ceded substantially all of them to National Indemnity Co. under a 2014 retroactive reinsurance agreement.
Other P&C insurers reported adverse asbestos and environmental reserve development during the third quarter, including Travelers Cos. Inc. and American Financial Group Inc. While favorable development of other reserves offset the additional funding of asbestos and environmental reserves at Travelers, the U.S. P&C units of American Financial Group generated unfavorable development across business lines totaling nearly $69 million. Great American Insurance Co. reported $89 million in unfavorable development related to asbestos and environmental exposures in its run-off operations.
Mixed messages
Not only did the absolute amount of favorable development decline when excluding results attributable to the bond insurers, AIG and select entities that were responsible for extraordinary items in the past, it also decreased relative to the industry's prior-year-end policyholders' surplus. The adjusted amount of favorable development represented less than 0.1% of Dec. 31, 2016, surplus among those entities not excluded from the analysis, down from 0.2% in the third quarter of 2016 and an average of just over 0.4% for the same periods of the previous five years.
The trend is more muddled when looking at results for the first nine months of 2017 using a similar set of exclusions. Favorable reserve development increased on a year-over-year basis in that context, both in terms of aggregate dollar value and relative to 2016 surplus. The group led by State Farm Mutual Automobile Insurance Co. accounted for much of the increase, however, and when adding it to the list of exclusions the overall amount of favorable development totals $4.34 billion, or 0.6% of 2016 surplus, down from $4.65 billion, or 0.7% of 2016 surplus, in the year-earlier period.
Assuming no repeat of AIG's fourth-quarter reserve charges of the past two years, the industry may still post a higher level of favorable development for a full calendar year for the first time since 2013. But also assuming the sort of reserve building that emerged in the third quarter is not an anomaly, the comparisons will get more challenging as 2018 begins.

