“Underwriting results are weakening, and the issues some very large insurers are facing will have an impact on the market as a whole,” he added. “The current climate is still soft, but underwriters cannot control many of the financial issues facing some insurers. These outside financial influences are starting to make the market a bit nervous–thus the moderating of rate reductions.”

(However, net written premiums and underwriting profit results for 2007 compiled for this edition of NU's annual Top 100 ranking of the biggest property-casualty insurance companies and groups give little indication that any change will come soon, Susanne Sclafane reports. See her story on page 12.)

According to MarketScout's “Market Barometer” survey:

o Commercial property posted the biggest decline of all p-c classes, with rates down 15 percent in June, compared to 14 percent in May.

o General liability rate decreases, which were also 14 percent in May, were 12 percent last month.

o Directors and officers liability saw the most modest decrease–with rates declining 6 percent, the same figure reported in May.

o Professional liability, which also declined 6 percent in May, dropped 7 percent in June.

With respect to industry classes, manufacturing, service and habitational risks saw rate declines of 12 percent, while premiums for energy exposures dropped 9 percent. Contracting, public entity and transportation risks all declined 10 percent.

In any case, the p-c insurance industry is in a strong financial condition, and it should be able to withstand the current drop in prices and a forecasted decline in premium growth, according to a report by Hartford-based Conning Research.

Conning's latest “Property-Casualty Industry Forecast” said the pricing outlook for the next three years, through 2010, is generally soft for the industry as a whole, with a 0.5 percent decline in premiums projected for 2008, compared with growth of 0.2 percent for 2007.

“We project continued deterioration in underwriting margins and implied return on equity,” noted Conning analyst Clint Harris.

However, Stephan Christiansen, Conning's director of research, said that looking beyond 2008, “our forecast contains a somewhat more optimistic view of 2009 and 2010 because we anticipate a modest rebound in the economy and also a moderating competitive environment.”

Indeed, he added, “we project a return to net premium rate increases beginning in some lines as early as 2009.” Industrywide premiums are expected to grow by 2 percent in 2009 and 3.4 percent in 2010, the firm forecast. “In fact, we are already beginning to observe some insurers taking corrective actions in their markets because of poor results,” Mr. Christiansen noted.

Conning said the largest year-over-year increase in combined ratio is forecast for 2008 at 100.5–five points over last year's figure of 95.5.

While this reflects a return to normal catastrophe losses, much of this deterioration is self-inflicted, as premium prices and premium rate adequacy continue to fall, Conning said. The firm predicted a 7.7 percent return on equity for the industry this year and 7.3 percent for 2009.

With carriers increasing their book value per share, the outlook for p-c insurance stocks is now viewed as “compelling” as opposed to “attractive,” according to a Bank of America analysis.

The analysis said that many p-c stocks are trading at or below book value. “We firmly believe that valuation is the most important criteria when investing in insurance, even though we realize that valuation has not mattered lately, as the stocks continue to fall,” the bank said.

According to the bank, valuation will eventually matter again. “When the stock market is essentially giving buyers the opportunity to receive $1 for every 80 cents invested, based on our estimates, at some point attractive valuation will be its own catalyst, which is why we are even more positive on the sector than at the beginning of the year.”

Bank of America said it has viewed p-c insurance stocks as attractive throughout 2008 so far. “We kept an overweight rating on p-c stocks because we viewed the sector as providing an attractive risk/reward opportunity,” said the analysis. “We also believed we had a well-reasoned thesis.”

The analysis said the reasons for this view include:

o High-quality investment portfolios in comparison to other financial stocks.

o Return on equity for insurers that is independent of the economy.

o An expectation that ROE would fall from 2007, but still lead to a growth in book value of 10 percent over 2008.

Additionally, the report said that with valuations below historical averages, “we expected the stocks to appreciate and reward shareholders.” But so far this year, the bank's analysts conceded, “while fundamentals and book-value growth generally materialized as we expected, the stocks did decline rather significantly…outperforming other financial stocks but underperforming the market.”

June stock performance was particularly bad, the bank noted. Property-casualty stocks outperformed banks and other financial services firms, but underperformed the S&P 500 by 12 percent, with virtually every p-c stock declining for the month. XL Capital, AIG and CNA ranked as “the worst performers year to date,” the analysis said.

But the bank added that stock performance may change through the second half. “As the tangible equity of the companies has increased and the stock prices have decreased, the valuations have changed from attractive to compelling, in our view.”

The bank said that higher than expected price decreases, deterioration in terms and conditions, and spikes in loss cost inflation or severe catastrophe losses are potential hurdles to strong p-c stock performance.

However, the bank added, “with strong capital positions, conservative investment portfolios and balance sheets, we believe selected p-c stocks seem like an excellent port in a storm. The valuations are attractive as they have come under pressure from overall economic concerns and credit worries. The stock valuations are below their historical averages, yet the expected ROEs are above the historical averages.”

The analysis pointed to Travelers and Aspen Insurance as the bank's top picks, while also mentioning The Hartford, Chubb Corp., RenaissanceRe, AXIS Capital, The Hanover Group Max Capital, Horace Mann and XL Capital as potential strong performers.