Price cuts might be bottoming out in this softening market, asunderwriting results are weakening and outside economic factors areweighing on insurers, according to an electronic insuranceexchange.

Dallas-based MarketScout's latest Market Barometer analysisfound that while rates are still declining, on average, bydouble-digits, and the market is still considered soft, the Junecomposite rate was down 11 percent in June, compared to a 14percent decline in June 2007.

“This is the largest year-on-year rate moderation in the lastthree years,” MarketScout noted.

“If July continues in a similar pattern, we may be nearing thebottom of the soft market,” according to Richard Kerr, founder andchief executive officer at MarketScout.

“Underwriting results are weakening, and the issues some verylarge insurers are facing will have an impact on the market as awhole,” he added. “The current climate is still soft, butunderwriters cannot control many of the financial issues facingsome insurers. These outside financial influences are starting tomake the market a bit nervous–thus the moderating of ratereductions.”

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

According to MarketScout's “Market Barometer” survey:

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

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

o Directors and officers liability saw the most modestdecrease–with rates declining 6 percent, the same figure reportedin May.

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

With respect to industry classes, manufacturing, service andhabitational risks saw rate declines of 12 percent, while premiumsfor energy exposures dropped 9 percent. Contracting, public entityand transportation risks all declined 10 percent.

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

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

“We project continued deterioration in underwriting margins andimplied 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 somewhatmore optimistic view of 2009 and 2010 because we anticipate amodest rebound in the economy and also a moderating competitiveenvironment.”

Indeed, he added, “we project a return to net premium rateincreases beginning in some lines as early as 2009.” Industrywidepremiums are expected to grow by 2 percent in 2009 and 3.4 percentin 2010, the firm forecast. “In fact, we are already beginning toobserve some insurers taking corrective actions in their marketsbecause of poor results,” Mr. Christiansen noted.

Conning said the largest year-over-year increase in combinedratio is forecast for 2008 at 100.5–five points over last year'sfigure of 95.5.

While this reflects a return to normal catastrophe losses, muchof this deterioration is self-inflicted, as premium prices andpremium rate adequacy continue to fall, Conning said. The firmpredicted a 7.7 percent return on equity for the industry this yearand 7.3 percent for 2009.

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

The analysis said that many p-c stocks are trading at or belowbook value. “We firmly believe that valuation is the most importantcriteria when investing in insurance, even though we realize thatvaluation 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 opportunityto receive $1 for every 80 cents invested, based on our estimates,at some point attractive valuation will be its own catalyst, whichis why we are even more positive on the sector than at thebeginning of the year.”

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

The analysis said the reasons for this view include:

o High-quality investment portfolios in comparison to otherfinancial stocks.

o Return on equity for insurers that is independent of theeconomy.

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

Additionally, the report said that with valuations belowhistorical averages, “we expected the stocks to appreciate andreward shareholders.” But so far this year, the bank's analystsconceded, “while fundamentals and book-value growth generallymaterialized as we expected, the stocks did decline rathersignificantly…outperforming other financial stocks butunderperforming the market.”

June stock performance was particularly bad, the bank noted.Property-casualty stocks outperformed banks and other financialservices 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,” theanalysis said.

But the bank added that stock performance may change through thesecond half. “As the tangible equity of the companies has increasedand the stock prices have decreased, the valuations have changedfrom attractive to compelling, in our view.”

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

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

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