NU Online News Service, May 31, 3:03 p.m. EDT

A financial analyst's review has determined that while property and casualty industry reserves remain adequate, the industry is “flirting with inadequacy,” with workers' compensation presenting the greatest risk of experiencing deficiencies.

Based on its review of consolidated statutory reserves at year-end 2011, released by the National Association of Insurance Commissioners through SNL Financial, Stifel Nicolaus says in a report, “Reserves are still adequate, albeit weaker than at [year end 2010], but inadequacies could emerge if inflation ramps up.”

According to Stifel Nicolaus analyst Meyer Shields, the $573.7 billion in consolidated reserves stands just north of $5 billion above what the firm determines to be the minimum adequate level.

Stifel Nicolaus says that in 2010, there was a reserve cushion of $11.6 billion cushion. In 2009, the cushion stood at $26.7 billion.

“We believe the industry's overall carried reserves are barely adequate, as personal-auto redundancies mask other lines' less-conservative reserves,” the report says.

The size of companies' reserve releases are expected to decline at some point, but “favorable reserve development should continue in 2012.”

Stifel Nicolaus' view is in line with two recent reports by Keefe, Bruyette & Woods and A.M. Best. Both firms said companies should continue to release reserves through 2012, but that the industry has largely depleted its reserve cushion.

Workers' comp is viewed as “the line most vulnerable to adverse development,” Stifel Nicolaus says, noting that even if results improve this year, the line is still likely to “experience adverse reserve development on more recent accident years, which should perpetuate workers' compensation rate increases in 2013.”

At the other end of the spectrum, the report says private passenger auto reserves are at $88 billion, well above the $75.1 billion figure Stifel Nicolaus considers to be the minimum adequate reserve level.

Pointing to two insurers, Stifel Nicolaus gave a positive outlook on reserves to Markel Corp., saying “its reserves stand out as overly-conservative to both its standard and specialty peers.”

Mercury General received a negative vote of confidence from the firm. Stifel Nicolaus says the company's “aggressive reserving practices” exposes its 2012 and 2013 earnings estimates to “adverse reserve development.”

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Analyst: Industry &lsquo;Flirting with Inadequacy&rsquo; on Reserves

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Analyst: Industry ‘Flirting with Inadequacy’ on Reserves