Quality of Insurer Earnings is now Quantifiable
Columbus, Ohio, March 1, 2018: Year-end 2017 statutory financial information has been compiled and submitted to the National Association of Insurance Commissioners. Industry analysts and prognosticators will soon be publishing their discussions of the relative adequacy of loss and loss adjustment expense reserves (loss and LAE). Clearly, the adequacy of loss and LAE reserves is a critical determinant of the solvency of insurers. However, loss and LAE adequacy also affects the quality of reported statutory earnings. As such, Demotech introduces SPEQUELLAE, (spuh – kwell – uh), the first service to independently measure and identify the quality of pretax statutory earnings reported for a calendar year. Our SPEQUELLAE service is based upon self-prepared carrier information.
Demotech will update its SPEQUELLAE service on an annual basis as carrier managements re-evaluate earlier loss and LAE estimates. The quality of property and casualty pretax statutory earnings reported over the period 2011 through 2015, re-evaluated as of December 31, 2016, is available at www.demotech.com. The SPEQUELLAE service using a re-evaluation of previous L&LAE for the year-end 2017 financial statements will be available in May 2018.
The SPEQUELLAE service is an acronym created by Demotech:
Statutory
Pretax
Earnings
Quality
Using
Emerging
Loss
Loss Adjustment Expense
Estimates.
Demotech’s SPEQUELLAE service measures the impact of adverse loss and loss adjustment expense reserve development, self-reported by an insurer, on the carrier’s initial report of statutory pretax earnings. An index from our SPEQUELLAE service of 100 or higher indicates that management has historically been obsessed on the integrity of its reported pretax statutory earnings. An index from our SPEQUELLAE service of 100 or higher indicates that emerging estimates of loss and LAE reserves affirm the integrity of management’s initial estimates of L&LAE reserves.
An index from the SPEQUELLAE service that is below 100 indicates the degree to which the reported statutory pretax earnings in previously reported periods were overstated due to the under-estimation of loss and LAE reserves.
According to Joseph L. Petrelli, President and Co-founder, Demotech, “Loss and loss adjustment expense reserve adequacy favorably impacts more than the solvency of a carrier, impacting earnings as well. Although some carriers are large enough to under-estimate loss and LAE reserves and remain solvent, under-estimation of loss and LAE impacts the quality of their statutory pretax income.”
Petrelli went on to state, “The introduction of our SPEQUELLAE index for P&C carriers provides a basis for evaluating the quality of pretax statutory earnings using management’s emerging loss and LAE estimates from prior periods. The higher the SPEQUELLAE index, the higher the realization of the reported income. Carriers that get their loss and LAE reserves right realize 100% of the statutory pretax income that they previously reported. These carriers should be rewarded.”
A webinar featuring a discussion of SPEQUELLAE as well as the introduction of the year-end 2017 SPEQUELLAE index for P&C, Title, and Health insurers is scheduled for May 23 at 2:00 PM Eastern. Registration for the webinar is required. Register at this link: https://demotech.webex.com/demotech/onstage/g.php?MTID=e30b64f085fb2a5bf09d7c7e87327180c.
About Demotech, Inc.
Demotech, Inc. is a financial analysis firm specializing in evaluating the financial stability of regional and specialty insurers. Since 1985, Demotech has served the insurance industry by assigning accurate, reliable and proven Financial Stability Ratings® (FSRs) for Property & Casualty insurers and Title underwriters. FSRs are a leading indicator of financial stability, providing an objective baseline of the future solvency of an insurer. Demotech’s philosophy is to review and evaluate insurers based on their area of focus and execution of their business model rather than solely on financial size. Visit www.demotech.com for more information.