Segments of the property-casualty insurance industry can expect increased merger and acquisition activity in the coming year despite losses and soft market revenue declines, according to a financial analyst's report.

Keefe, Bruyette & Woods released a study of the p-c insurance industry saying it believes merger and acquisition activity will increase in the coming year for some insurers and brokers.

The report said regional and specialty carriers would produce strong results in the second quarter of 2008 despite the soft market and the economic slowdown.

Catastrophe losses from the Midwest are expected to "make a dent" in earnings for those insurers with exposures in that section of the country, but loss reserves are in good shape, the report said.

The analysis said it foresees an increase in directors and officers suits related to the subprime crisis from lenders, but so far "severity has been held in check."

While regional and specialty insurers are looking to make acquisitions, some of them may be prime candidates for acquisition as many of these companies "have features that larger companies may find enticing."

On the personal lines insurer side, the proposed acquisition of Safeco by Liberty Mutual increased the stock price of other insurers along with higher gas prices that are expected to reduce driving and improve loss frequency.

However, the weather has been the primary concern with a record number of tornadoes, estimated at 1,161 during the second quarter of this year. Combined ratios are expected to increase over the year due to current and future storm losses.

Reinsurers and Bermuda carriers are getting hit with losses from the turbulent storm period in the Midwest, Keefe, Bruyette & Woods noted.

The firm said top line growth is expected to decline and reserve releases are to continue along with additional capital management. The sector, said the analysis, is expected to make a profit despite the loss trends.

"If the storm season is quiet, we would expect a rebound in share prices and/or a major round of capital management activity," the report said of the reinsurance industry.

The insurance brokerage group was described as "one of the lone bright spots" for the p-c insurance group. Willis Group Holdings' stock performance was the lone disappointment due to concerns over its announced acquisition of insurance broker Hilb, Rogal & Hobbs.

Keefe, Bruyette & Woods remained bullish over the deal, saying it saw Willis enhancing its position in the North American market and that the management team has proven experience at integration.

On another broker, Marsh & McLennan, the report said the firm's restructuring efforts "could lead to surprises in 2009 [earnings per share]."

Meanwhile, an analyst's note from Meyer Shields at Stifel Nicolaus said the p-c sector would probably see its book value growth offset by losses in equity markets and increased interest rates.

He also noted that there are signs of moderation in the soft market cycle with commercial lines and that organic growth is expected to remain tough for insurance brokers. "But the headwind for rate reductions should mostly be lighter than in [the first quarter of this year]."

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