Commercial carriers can look forward to reserve redundancies that will, if not bolster the bottom line, then at least not diminish it, according to an analyst.
Bank of America securities analyst Brian Meredith wrote this morning "the industry now has a tailwind."
"Overall we believe that the domestic commercial lines loss reserves are now in a redundant position, excluding asbestos and environmental liabilities," he wrote.
Accident years 2003 through 2005 contain redundancies, while 1997 through 2002 remain modestly deficient, he wrote.
American International Group and St. Paul Travelers appear to have put their loss reserving issues behind them with a relatively conservative loss reserve position, Mr. Meredith wrote.
"Given the commodity-like nature of commercial lines insurance, we would not expect gross accident-year loss ratios by company to be more than one standard deviation away from the mean," Mr. Meredith wrote.
Pressures to comply with federal Sarbanes-Oxley Act financial and accounting disclosure requirements have prompted companies to recognize reserve redundancies quicker than in the past, he added.
Regarding the 2003-2005 "redundant years," Mr. Meredith wrote that American International Group, The Hartford and St. Paul Travelers are the best positioned to support book value growth with reserve releases.
ACE, Safeco and XL are whose less conservative loss reserving was apparent in those years. "While we don't necessarily believe that the companies are deficient in these years, we think they are less likely to post favorable development as we head into a softer market," Mr. Meredith wrote.
In the 1997-2002 "deficient" years, ACE, AIG, Chubb, St. Paul and XL appeared to have the most conservative reserve positions. "Given their relative strength, these companies are likely to be adequate at this point," Mr. Meredith wrote.
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