The property and casualty insurance industry's earnings are expected to be modest for the first half of this year after insurers were hit by a series of weather-related losses, according to a financial analyst's report.

A separate report notes that although insurers are expected to see premium growth through 2011, reserve-adequacy issues, stricter regulations and worsening combined ratios will challenge industry profitability.

Insurers may see some relief from the rising combined ratios based on the findings of yet two more reports, which suggest that evidence in the marketplace is pointing to a swing to a harder market.

For the 2011 first half, analyst firm Keefe, Bruyette & Woods (KBW) says major losses “have eliminated earnings” for many carriers. Coupled with a weak economy, weak revenues and low investment yields, KBW says it “anticipates [return on equities] to be in the single digits for 2011, with many companies losing money.” The firm also says it expects book values to be “likely flat or down.”

KBW notes that companies' capital positions “generally remain sound,” but the firm says that few companies are buying back stock.

The firm says reinsurers will likely see little profit for the first half of the year because of weather-related losses and earthquakes, and primary carriers are expected to have weak results.

Meanwhile, in its “World Insurance in 2010” report, Swiss Re says the global insurance industry returned to positive premium growth in 2010 after two years of falling premium volume. For non-life insurance, global premiums climbed 2.1 percent in 2010, with Asia driving the growth.

In Europe and the U.S., however, Swiss Re says growth was sluggish, reflecting the ongoing soft-market pricing.

Swiss Re says it expects premium growth to remain strong in emerging markets and to improve in developed markets throughout 2011.

However, the report notes that reserve adequacy is weakening due to the prolonged soft market, and 2011 first-half catastrophe losses have been high.

Additionally, the report says excessive regulation of insurance could slow growth, as some policymakers may be tempted to adopt overly stringent capital requirements and other measures “to make the industry 100 percent crisis-proof.” Swiss Re notes that such strategies could impact the profitability of insurers and unintentionally harm policyholders and the economy.

Further complicating the environment for P&C insurers, a Moody's Special Comment notes the industry is the most-exposed sector among financial institutions to volatility within the municipal-bond market, holding about $355 billion in municipal bonds.

Moody's says municipal bonds represent 60 percent of the industry's equity-capital base, as measured by policyholders' surplus. Describing the risks, Moody's states, “The municipal-bond sector continues to be under stress due to macroeconomic pressures and the attendant budgetary strains.” Moody's adds that it expects more muni-bond downgrades than upgrades in 2011, and it expects muni defaults to rise.

For insurers, Moody's says that although exposure has come down over the last year, it still remains high. Additionally, Moody's says muni-bond portfolios generally have long durations, with an average duration of six years, exposing companies to interest-rate risk and greater market volatility.

But Moody's says the overall level of risk for insurers should be manageable as insurance-company muni-bond portfolios have high-credit quality and are well diversified both by geography and bond type. Moody's also says that, as part of its stress testing of P&C insurers, it projected losses on muni-bond portfolios under both baseline and downside scenarios—and in both cases credit losses were manageable.

Analyst firm Stifel Nicolaus, in its “2Q Insurance Industry Earnings Preview,” says personal-lines insurers are more attractive to investors than commercial-lines carriers because personal-auto and homeowners' premium rates are continuing to increase on a year-over-year basis while the commercial-insurance market remains mired in a soft market.

Commercial insurers may see a change in the market cycle, though, according to MarketScout's latest Market Barometer and a report by insurance-broker Marsh.

MarketScout says June insurance rates took a step toward pricing moderation as overall average property and casualty rate decreases moved from a three-month run of minus-4 percent to minus-3 percent.

“It looks like workers' compensation will be the coverage leading us out of the soft market,” says Richard Kerr, MarketScout's CEO. “Rates for workers' compensation are up 1 percent. Workers' comp is the only coverage with an actual rate increase in June.”

In its “Second Quarter 2011 Insurance Market Update,” Marsh says the global catastrophes in New Zealand, Australia and Japan have “depleted insurers' 2011 catastrophe-claims reserves” before the beginning of the June 1 hurricane season.

While the broker says the markets remain “well capitalized and generally competitive,” the report notes that some insurers are responding to events by withdrawing from catastrophe-affected regions and loss-making sectors of business.

Marsh says that, overall, there has not been a change in market pricing and fundamentals, but “expectations of an active U.S. hurricane season, combined with greater insurer discipline, increase the potential for a changing market dynamic through the balance of 2011.”

Special Reports /

Industry Facing Profitability Headwinds, But Market Turn Starting

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