Before companies released their Q1 results for 2012, globalinvestment bank Keefe, Bruyette & Woods (KBW) had warned ofrising reserve deficiencies among the 55 insurance stocks itfollows. But KBW—along with many other industry observers—turnedout to be wrong, as its group of non-life insurers released“surprisingly strong” reserves during the quarter.

Only eight companies in the group added to reserves during thefirst three months of this year and releases slowed only marginallycompared to 2011's first quarter, KBW says. Overall, the sector“solidly outperformed” the investment bank's earnings-per-shareestimates.

But KBW believes that it'sunlikely that good fortune will last.

“Going forward we expect that some of the 'luck' of good weatherin [Q1] is unlikely to hold, and the pressures of slowing reservereleases and weak investment yields will pressure returns,” KBWsays in a recent report.

Ratings agency A.M. best agrees, at least with respect toslowing reserve releases.

The ratings agency posits that “the industry has largelyexhausted its reserve cushion, primarily as a result of significantreserve releases and the extent to which rate levels have beeninadequate as a result of predominating soft-market conditions inrecent years.”

While A.M. Best does expect reserve releases to continue through2012, they will occur at a declining level—and that the increasesto rates seen in recent months will not be sufficient to prevent acontinued deterioration of the industry's overall core reservedeficiency.

A third analyst review reports that while reserves remainadequate, the industry is “flirting with inadequacy,” with Workers'Compensation presenting the greatest risk of experiencingdeficiencies.

Stifel Nicolaus says in a report, “Reserves are still adequate,albeit weaker than at [year end 2010]—but inadequacies could emergeif inflation ramps up.”

According to Stifel Nicolaus analyst Meyer Shields, the $573.7billion in consolidated reserves stands about $4 billion above whatthe firm determines to be the minimum adequate level.

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

For the group of 55 insurance companies KBW follows, 2012'sfirst quarter saw positive premium growth of 3.6 percent.Acquisitions accounted for some of that, but “organic growth andstrong moves into specialty areas were major drivers,” says KBW,adding that it expects single-digit growth to continue. The group'scombined ratio fell to 93.7 compared to 112 during 2011's firstquarter.

The industry's strong first quarter follows a rough 2011. Forthe U.S. commercial-lines segment, A.M. Best says net incomedeclined by 50.4 percent during 2011 compared to 2010, withunderwriting losses tripling to $15.8 billion due mainly tocatastrophe losses.