Although most investor attention is focused on the investment portfolios of insurance companies, and with good reason given the environment we are in, equally important for the long-term success of these companies is the underwriting profitability of the business that is written. (For a review of the insurance industry, take a look at our Insurance Industry Handbook.)
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Over the last six months, there have been tantalizing hints that the market in insurance is turning from a soft market to a hard market. Most of the evidence has come from industry surveys showing that the pricing environment is getting "less worse" as double digit declines in prices slow to single digit declines.

The latest commercial property and casualty insurance market index survey from the Council of Insurance Agents & Brokers indicated that rates declined on average by 4.9% in the second quarter of 2009. This was approximately equal to the declines in the last two quarters.

During its second quarter earnings conference call, Markel Insurance (NYSE:MKL) indicated that things were still getting slightly worse. "The market is continuing to soften and we did have a couple of minor surprises which adversely affected the underwriting side," said Steven Markel, the vice chairman of Markel Insurance.

Ramani Ayer, the CEO of Hartford Financial Services (NYSE:HIG) made similar comments on his call. "The property and casualty industry remains very competitive. While we continue to see a deceleration in rate decreases in our commercial lines, a dramatic shift to higher rates is unlikely due to the impact of the recession. We believe that commercial lines rate declines will continue to moderate at a slow, but steady pace," said Ayer. He did indicate that rates were increasing in personal lines.

An executive at XL Capital (NYSE:XL) called the current environment "selective hardening" where certain markets were getting better while others were lagging. The company must have benefited somewhat from this as it turned in a combined ratio of 93% in its property and casualty business in the quarter.

Ace Limited (NYSE:ACE) probably has the most optimistic view of the market and said during its call that "market continues to firm, though not in all classes," with rates up an average of 4% in the quarter. These rate increases, however, were offset by lower renewals and reductions in exposure by customers due to the recession.

It wasn't a bad quarter for most insurers, as the height of the financial crisis and recession has arguably passed, and the soft market seems to be in a stable to improving trend.

A review of the second quarter earnings commentary from some of the large insurers shows that the hard market is still not here, although things are not getting any worse as the sector feels the impact of the recession just like any other industry.

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