A market turn may be in the offing as property/casualty insurers continue to deal with extensive catastrophe losses and disappointing investment returns, market observers say.

While reserve releases continue, they're occurring at a slower pace. In addition, rising demand for commercial insurance is reflected in increased premium volume.

However, any turn is likely to be gradual and perhaps be more of stabilization than a true hard market, analysts say.

A survey of large commercial U.S. property/casualty insurers amply demonstrates the continued impact of catastrophe losses and poor investment returns during the first nine months of the year. Although net written premiums among the 10 largest U.S.-based or U.S.-listed commercial property/casualty insurers that report quarterly results were up 8.3% compared with the same period last year, the group's collective net income fell by nearly half and its combined ratio deteriorated nearly seven percentage points to 102.6%.

“It's been a difficult year,” said James Auden, an analyst with Fitch Ratings in Chicago. Few large insurers have an underwriting profit, and while specialty companies show an underwriting profit, they tend not to have significant property exposures, he said.

Catastrophe losses are “up considerably from last year,” with Hurricane Irene adding to third-quarter losses, he said. In addition, “pricing is inadequate broadly across commercial lines.”

“When we look at bottom-line performance, it's very rare for a company to produce a double-digit (return on equity) this year,” Mr. Auden said. “The industry is not generating an adequate return on capital.”

“The first issue is the extent of catastrophic losses in a relatively mild hurricane quarter and less consistency. We're seeing reserve releases dwindle as an earnings source,” said Meyer Shields, a director at Stifel Nicolaus & Co. in Baltimore.

“I do think we'll see results continue to worsen, and some of it is from the ongoing deterioration we're seeing in reserve releases. I think that will drive rates up, but I don't think we're at such a horrific state that we'll see the kind of increases we saw after 9/11,” Mr. Shields said, referring to the market tightening after the 2001 terrorist attacks on New York's World Trade Center and elsewhere.

A second issue that points to improvement in rates is a much worse outlook on investment income, Mr. Shields said. “Investment returns will remain low, which only leaves underwriting profit as a source of adequate return.”

Worldwide catastrophe losses— which Swiss Reinsurance Co. said amounted to $70 billion for the first half alone—and investment returns were big issues for the industry, said Mark Dwelle, an insurance analyst with RBC Capital Markets L.L.C., a unit of RBC Dominion Securities Inc. in Richmond, Va. Despite those factors, “results were generally pretty good in the context—we knew there were going to be catastrophe losses and they were generally well-telegraphed,” he said. “The optimism about the pricing environment had certainly increased, although there was only modest evidence of that in the actual results.”

“The question that most investors are asking at this stage is at what point rate increases will be sufficiently larger than loss-cost trends to produce improved margins,” said Mr. Dwelle.

There are some signs “with regard to overall pricing that it might be stabilizing,” said Rich Attanasio, a vp with A.M. Best Co. Inc. in Oldwick, N.J. Like other analysts, he pointed out that weather in the United States has had a “pretty significant impact” on insurers. In fact, weather events are a major issue for insurers, given the number of significant events in the past couple of years, he said.

“The question is: Is this the new normal?” said Mr. Attanasio.

He noted that price increases have not occurred equally across the board. While prices hikes have tended to fall hardest on homeowners and small commercial accounts, larger commercial property accounts are “probably stabilizing,” said Mr. Attanasio.

Fitch's Mr. Auden said that “one encouraging sign is, we continue to see premium growth in the sector and that's a sign of better economy,” thus creating more demand for coverage.

With greater revenue growth and despite weaker results, companies were making more positive statements about insurance pricing, said Mr. Auden. “But we don't know if that's an enduring trend. And given where accident-year results are, you need more pricing increases. We see it being more price stability rather than a hard market.”

“We got a more positive read on what is happening with rates, which should not be confused with rate adequacy, and it should not even be confused with rate increases keeping up with loss-cost inflation,” said Stifel Nicolaus' Mr. Shields.

“There doesn't seem to any kind of a hard market in the historical sense—it's more of a gradual process,” said Alan Murray, vp and senior credit officer at Moody's Investors Service in New York. He called the situation a sort of “good news/bad news dynamic.”

Mr. Murray said the bad news is the stabilization has come after many years of pricing weakening on commercial lines. But “the flip side is that companies remain quite well-capitalized.” He said one of the classic drivers of a hard market is weak earnings, significant loses and weakened balance sheets.

“We have not seen that combination of pressures materialize for the industry,” said Mr. Murray, who added, though, that Moody's moved the outlook for commercial insurers to stable from negative during the third quarter.