Two recent reports by the same analyst firm illustrate theunpredictability of the insurance-pricing cycle, as one reportnotes industry reserves are approaching inadequacy, while the otherstates that property-catastrophe rate increases, which had led thecharge out of the soft market, appear to be slowing.

A Stifel Nicolaus reportanalyzing National Association of Insurance Commissioners’ datareleased through SNL Financial states that industry reserves remainadequate for now—but contends that insurers are “flirting withinadequacy,” with Workers’ Comp possessing the greatest risk ofexperiencing deficiencies.

Reserves were weaker at year-end 2011 compared to 2010, StifelNicolaus notes. According to firm analyst Meyer Shields, the $573.7billion in consolidated industry reserves at the end of 2011 standsjust $5 billion above what the firm determines to be the minimumadequate reserve level.

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

Furthermore, the report says the situation across all lines maybe worse than it appears, as strong Personal Auto redundancies aremasking other lines’ less-conservative reserves.

The size of companies’ reserve releases are expected to declineat some point, but “favorable reserve development should continuein 2012,” the report states.

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

Workers’ Comp is viewed as “the line most vulnerable to adversedevelopment,” Stifel Nicolaus says, noting that even if resultsimprove this year, the line is still likely to “experience adversereserve development on more recent accident years, which shouldperpetuate Workers’ Compensation rate increases in 2013.”

At the other end of the spectrum, the report says PrivatePassenger Auto reserves are at $88 billion—well above the $75.1billion figure Stifel Nicolaus considers to be the minimumadequate-reserve level.

The analyst firm gave a positive outlook on reserves to MarkelCorp., saying “its reserves stand out as overly conservative toboth its standard and specialty peers.”

Mercury General received a negative vote of confidence, withStifel Nicolaus stating the company’s “aggressive reservingpractices” expose its 2012 and 2013 earnings estimates to “adversereserve development.”

While a vanishing reserve cushion would seem to suggest theonset of a hard market as insurers push harder for rate toreplenish depleted reserves, the second Stifel Nicolaus reportpoints out the inconsistencies seen in rate increases acrossvarious lines.

For example, the report says one line showing less momentum withrespect to rate increases is Property Catastrophe, which had seenaggressive price increases in response to high losses in 2011.

Shields says ample supply in the reinsurance market is meetingthe high demand for coverage, which is helping to slow. He saysrecent reports indicate that Property Catastrophereinsurance-renewal pricing for carriers was lower than manyexpected.

Regarding rate movement across a broader spectrum of commerciallines, Stifel Nicolaus says rate increases for Workers’ Comp,Commercial Auto Liability, Commercial Multiple Peril and ProductLiability should continue to gain traction as underwriting profitsdeteriorate. Commercial Multiple Peril is described as “volatile”due to catastrophe losses from 2009-2011.

While a small line of business, Product Liability has beenunprofitable and continues to display a “consistent track record ofoverall adverse development and deteriorating...accident-yeardevelopment,” the report says.

Other commercial-lines coverages are showing improved results,which may indicate a slower pace for rate increases, StifelNicolaus says.