Property-casualty insurers can be expected to increase their use of claims reserve monies to bolster earnings this year, according to an investment bank analysis.

Morgan Stanley property-casualty analyst William Wilt noted that reserve releases barely accelerated last year when compared to 2005.

That trickle, he said, could be explained by some adverse developments from the 2005 hurricanes or some legacy liabilities from before 2001.

But another explanation is possible.

“A cynic might observe that releases were low in 2006 simply because reinsurers and insurers did not need them to create healthy return on equity figures,” Mr. Wilt wrote.

As pricing competition accelerates and margins decrease, improvements in combined ratios remain problematic, and so-called “cookie jar” (held in reserve) releases will help boost earnings per share and book value growth numbers.

“Every analytical fiber in our collective bones tells us that releases will accelerate in 2007,” Mr. Wilt wrote.

“We don't expect the dam to burst in 2007, but as price competition accelerates and assuming a more normal year for weather, we think the age of 2002-2004 will allow for a rising tide of take-downs,” he added.

The credibility of reserves for accident-years 2002-2005 will be difficult to deny by the end of this year and definitely next, according to Mr. Wilt.

“While we appreciate conservatism as much as the next person, there will come a time when the dire warnings of the perils of releasing reserves too early will wear thin,” Mr. Wilt concluded.

In a related observation, Mr. Wilt wrote that insurers may have to actually increase environmental reserves, particularly if a Democratic ticket wins the White House next year.

“As the Environmental Protection Agency spends more money on cleaning up hazardous waste sites, their activities and attendant legal pursuit of companies known to have dumped at those sites creates insurance claims and reserving problems for insurers,” he wrote.

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