Assured Briefing - Abbreviated

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1 Assured Research, LLC Assured Briefing - Abbreviated March, 2013 What s Inside The Assured Briefing is a monthly research note analyzing financial, legal, claim, or business development matters of relevance to insurance professionals. In this edition: Behind Rising Auto Bodily Injury Severity We excerpt from a soon-to-be-released Assured Industry Study where the leading theories behind the systemic and unexpected rise in bodily injury severity are explored. Cost-shifting, more severe accidents, attorneys, diminishing returns on legislation and auto safety we dig into the data. Industry Reserves at 2012: Will Cracks in the Foundation Slow Margin Expansion? Newly available 2012 statutory data is used to explore the breadth of the frequency of adverse reserve development across the industry s leading companies. Frequency of adverse development may prove to be a more predictive harbinger of what might come to pass than any single reserve point estimate. About Assured Research Assured Research is a research and advisory firm dedicated to the property/casualty insurance industry. Our offerings include: 1) The Assured Research Package: Subscription research of which the Assured Briefing is a key component. 2) Bespoke Research: Proprietary analysis for insurance professionals and investors. 3) Advisory Services: We combine deep analytical and actuarial experiences with our diverse set of industry alliances to address myriad operational and financial challenges. Contact us to learn more; please visit

2 Behind Rising Auto Bodily Injury Severity The unabridged version of the Assured Briefing (distributed to subscribers) contained an excerpt of our soon-to-be-released Assured Industry Study exploring the leading theories behind the systemic and unexpected rise in auto bodily injury severity. We invite you to contact us to learn how you can obtain a copy, and note that the Industry Study will soon be available for purchase at our website. Please contact us for the timing and pricing details. The study explores four main theories - previewed below. Theories Underpinning the Rise in Auto Bodily Injury Severity 1. Medical Cost Shifting Retail Hurts. 2. More Severe Accidents Fact or Fiction? a. Age We are on an inexorable trend toward older claimants (hint: higher medical costs). b. The Economy An improving economy is a double-edged sword. c. Ambulances A growth industry; guess who pays that price? 3. Attorney Involvement The legal profession may get a pass this time. 4. Diminishing Tailwinds Not adverse trends, just less of a good thing. a. Laws Have most benefits run their course? b. Auto Safety The role of America s rolling junkyard. 2

3 Industry Reserves at 2012: Will Cracks in the Foundation Slow Margin Expansion? The U.S. property/casualty (P/C) industry released reserves once again in calendar year 2012, extending the favorable development streak to an eighth consecutive year. This is so long that we ve noticed industry convention now assumes a question of or statement by management about prior period development presumes that the development was favorable. This leaves us shaking our heads in disbelief and thinking, remember when According to SNL data, the U.S. P/C industry recognized favorable loss reserve development on prior accident years of just over $11 billion for 2012, down from $13 billion of favorable development reported in calendar-year Those releases shaved about 2.5 points off the 2012 calendar-year combined ratio, compared with 3.0 points in calendar-year Again, this is not surprising, but a review of the industry s 25 largest insurers (ranked on reserves) reveals some potentially surprising cracks in the reserve foundation. Our metaphor may be trite, but it is fitting insurer s balance sheets are the foundation of their business. Signs of reserving concern have been appearing over much of the past year. Pockets of adverse reserve development have already appeared in workers compensation, New York contractor s liability, professional liability, and auto bodily injury due Our Analysis: Since year-end 2012 statutory statements for groups are still being consolidated, we reviewed Schedule P of the lead property/casualty company for each of the top 25 insurance groups in the U.S. Our analysis focuses on the frequency with which companies in our cohort reported favorable or adverse reserve development. This may strike some as a bit unusual, but somewhat like an underwriter typically cares more about the frequency of claims than the severity of an individual claim, so too we think the frequency, or breadth of adverse reserve development across the industry and individual lines could be indicative of spreading cracks in the reserve foundation. Many analysts will soon offer their views on overall industry and line of business reserve adequacy, but we re inclined to think that frequency of adverse development may be a more predictive harbinger of what might come to pass than any single reserve point estimate. to escalating severity trends. Other challenges facing insurers reserves include escalating medical loss cost trends that are (or, should be, we think) a major source of concern and reserving uncertainty. 3

4 $ Billions Assured Briefing March, 2013 U.S. P/C Industry Loss & LAE Reserve Development First, let s take a quick look at the U.S. P/C industry over the recent 10-year period. Figure 1 illustrates that the overall industry has enjoyed favorable prior period reserve development since We also see an inflection point in 2008 when the industry reported nearly $15 billion of reserve releases. Figure 2 shows that among the larger insurers within the industry, the number of companies reporting favorable calendar year development has been trending downward in recent years while the number reporting adverse development has been on the rise. Figure 1 U.S. Property/Casualty Incurred Loss & Defense & Cost Containment Development ( ) Excludes Mortgage & Financial Guaranty Insurers Calendar Year Positive Values = Adverse Development; Negative Values = Favorable Development Source: SNL Financial, Assured Research Figure 2 U.S. Property/Casualty Loss Reserve Development Trends ( ) % of Affiliated/Unaffiliated Single Cos. with over $250 Mil. in DPW Reporting Favorable & Adverse Development For Figure 2 we reviewed individual companies writing over $250 million in DPW through Interestingly, the percentage of those companies reporting adverse development increased from 16% in calendar-year 2010 to 27% in calendar-year The lines representing favorable and adverse development could be on a path to converge..something not seen since the timeframe! Top 25 Insurers Ghosts of 1999? Figure 3 shows that the number of companies reporting adverse development rose sharply during the year compared with previous calendar years. The current resemblance to the 1998/99 years is eerie. 4

5 # of Companies Assured Briefing March, 2013 Figure 3 Calendar Year Loss Reserve Development Trends ( ) for Top 25 Companies Number of Companies Reporting Adverse Prior-Year Loss-Reserve Development Calendar Year Source: SNL Financial, Assured Research In calendar year 2012, the number of lead companies in the top 25 reporting adverse development increased to nine, more than double the total reported in Is it coincidence that the 1998/1999 jump looks a lot like the 2011/2012 move? Probably but this is insurance; it usually pays to see the glass half-empty! Lead Companies for the Top 25 Groups (by Loss & LAE Reserves): Ace American Insurance Co. Medical Liability Mutl Ins Co. Allianz Global Risks US Ins Co Nationwide Mutual Ins Co Allstate Insurance Co. Old Republic Insurance Co. American Family Mutual OneBeacon Insurance Co. Auto-Owners Insurance Co. Philadelphia Indemnity Ins Co. Berkley Insurance Co. Cincinnati Insurance Co. Continental Casualty Co. Progressive Casualty Ins Co. Farmers Insurance Exchange State Compensation Ins Fund Federal Insurance Co. State Farm Mutl Automobile Ins Great American Insurance Co. Travelers Indemnity Co. Hartford Fire Insurance Co. United Services Automobile Liberty Mutual Insurance Co. Zurich American Insurance Co. National Union Fire Ins Co. Moving to accident years, the number of companies reporting adverse development rose sharply beginning in accident year 2010 and Figure 4 shows that this continued for accident year 2011 across these larger insurance companies. 5

6 Figure 4 U.S. Property/Casualty Loss Reserve Development Trends (AYs ) Frequency of Top 25 Companies Reporting Adverse Development by Accident and Calendar Years All Lines of Business Combined Years in Which Losses Were Incurred Months Months Months Months Months Months Months Months Months Months Totals INCURRED NET LOSSES AND DEFENSE AND COST CONTAINMENT EXPENSES REPORTED AT YEAR END Source: SNL Financial, Assured Research Some observations on Figure 4: Lines of Business under the Microscope Figure 5 shows the number of companies reporting total one-year development by accident year in key lines of business. 6

7 Figure 5 U.S. Property/Casualty Loss Reserve Development Trends Frequency of Companies within the Top 25 Reporting One Year Adverse Development in CY 2012, by Accident Year and Key Lines of Business AY All Lines Commercial Auto Commercial Multi-Peril Other Liability - Claims Made Other Liability - Occurrence Private Passenger Auto Liability Workers' Comp Source: SNL Financial, Assured Research With the exception of Other Liability Claims Made, close to half of these companies reported adverse development in key business lines for accident year 2011, a trend that looks to have started in accident year We ll focus our attention on commercial auto, CMP, and WC. Commercial Auto: Problems in Both Directions Commercial auto appears to be showing problems both in its initial evaluation of reserve adequacy (i.e., down the first column) and by calendar year across many accident years (i.e., across the diagonal). Our eyes are drawn to: Commercial Multi-Peril: Current Accident Years Flare Up CMP is generally thought to be a short-to-medium-tailed line of business. It s not too surprising to see relatively benign behavior across the diagonal of the triangle for the older accident years. However, there are a few hot-spots worth noting: Workers Compensation: Again, Trouble in Both Directions WC is on the radar screen of nearly every analyst and industry pundit with a pen or a microphone. Count us in. 7

8 Conclusion The month of March should be called Reserving Madness rather than March Madness. With 2012 statutory filings now available, many point estimates of industry adequacy or deficiency will begin to appear. For our part, we expect 2013 will bring. Section omitted available in the full edition of the Assured Briefing Notably, we observed during the 4Q earnings calls that a number of companies began to open the reserve (release) spigot a bit wider. (Re)insurers from the Class of 2001 released reserves from their oldest accident years, another moved (down) to the middle of its reserve range, and still others released reserves from North American casualty business in a sign that they don t see bad-news lurking around their corners. Measuring the size of that good or bad news (aka reserve redundancy or deficiency) is the analytical sport du jour; and appropriately so as insurer s balance sheets are fundamental to their business. However, before the scales were brought out, we thought it important to analyze the depth and breadth of the frequency of adverse reserve development across a large swath of the industry. Frequency of adverse development (measured by line of insurance, accident year, and across companies) may prove For our part, we were surprised to see how widespread the reserving cracks appear to be in the foundation of insurer s reserves. Section omitted available in the full edition of the Assured Briefing 8