NU Online News Service, Jan. 17, 9:45 a.m. EST

Keefe, Bruyette & Woods (KBW) said it expects weakening returns on equity and continued soft pricing for the property and casualty industry, but the financial analyst said a hard market could emerge “sooner than many anticipate.”

KBW made the statement while commenting on its favorable outlook for big brokers relative to the rest of the p&c industry.

For the p&c industry overall, KBW said in its report, “Property and Casualty: Limping out of 2010; Fourth-Quarter Earnings Preview,” that it expects “little change in regard to the difficulties of pricing for the marketplace.” KBW also said, “We expect discussions of January renewals to be downbeat with average rate declines of 5-10 percent.”

KBW added that it expects little to no organic growth, and that while it expects companies to report continued favorable loss reserve development in the 2010 fourth quarter, it anticipates the “recent trend of favorable loss reserve development to slow down considerably for most p&c companies” going forward.

KBW recommended an “underweight position on the p&c sector among financials,” meaning less exposure to p&c in an investment portfolio relative to other financials.

KBW said its “top picks” are “long-term values,” or companies such as ACE Limited, Allied World Assurance Holdings, The Chubb Corporation and ProAssurance Corp.

But KBW was optimistic on large brokers Aon Corp., Marsh & McLennan Companies and Willis Group Holdings.

“We believe this group serves as a good defensive play in a difficult economic environment, given their lack of balance sheet concerns, strong cash flows, international exposures and active buyback plans,” KBW said. “Additionally, we acknowledge that with widespread deterioration in the insurer fundamentals, a hard market could emerge sooner than many anticipate, and we believe the large brokers present an excellent option on the potential surprise of a hard market.”

Elsewhere in the p&c sector, KBW said regional weather events such as blizzards in the Northeast and Northwest U.S. as well as heavy rain on the West Coast and tornadoes in Missouri and Arkansas do not bode well for personal lines insurers. But losses from weather along with a “disciplined marketplace” have led to modest pricing gains for personal lines.

“Regional weather has ruined a number of quarters for personal lines companies over the last several years and it looks like that will continue to be a major factor on the homeowners pricing front” in the 2010 fourth quarter, KBW added.

Pressure on investment results and smaller fourth-quarter loss events are expected to impact underlying results for Bermuda companies and reinsurers, KBW said. The analyst noted, however, “Despite these pressures, we still expect to see full-year [return on equity] near 10 percent, driven in part by active capital management strategies which should help produce mid-teens book value growth for the year.”