NU Online News Service, April 9, 3:39 p.m. EDT

Larger insurance brokers are expected to see improvements in earnings as the market cycle begins to turn, but middle market brokers may still suffer from the effects of the economic downturn, according to a financial analyst's report.

Keefe, Bruyette & Woods issued its "Property and Casualty 1Q09 Earnings Preview: Relative Normalcy" today, saying overall p-c results are expected to be mixed as "pricing remains flattish" with premium pricing ranging from down 2-3 percent to up 5 percent excluding short-tail reinsurance lines.

"We anticipate top-line growth to remain weak outside of the Bermudians, who benefitted from a good January 1 renewal season. More importantly, the global recession will pressure unit growth," the report said.

For brokers, the report said the analysts expect "a decent quarter" with "modest low- to mid-single-digit revenue growth..."

The large brokers (Aon, Marsh, and Willis), according to the KB&W analysis, are expected to do better than middle-market brokers because they are better positioned to benefit from price increases and marketplace dislocation.

A modest revenue growth is projected in the low to mid-single digits with the large brokers benefiting from reinsurance price improvements. Organic growth should be flat to slightly up for the large brokers, while middle-market should see modest growth, KB&W said.

Merger and acquisition activity, said the report, should offset the weak organic growth numbers, especially for the middle market brokers.

Overall, insurance rates, said KB&W, are expected to increase by the second half of this year, with reinsurance rates already seeing increases.

Regional agency and specialty insurers are expected to see increases in overall gross premiums on a year over year basis, the report noted, however the current economic crisis will reduce exposures and have impact on the insurance business.

Weather related losses are not seen as having much impact on regional and specialty insurers. Non-catastrophe related claims are expected to be flat, but professional liability claims will probably increase "driven by the significant decline in value of real estate, stocks and other investments," the report said.

Workers' compensation severity is increasing in California and Florida, which is translating into the need for rate increases, the analyst's said.

Favorable loss reserved development is expected to "slow down considerably" for p-c companies and the boost to earnings from those loss reserved developments will not be "as significant going forward as it has been in the past" eight to 12 quarters, said KB&W.

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