NEW YORK—U.S. property/casualty insurance rates may begin to firm in the second half of 2009, but “adequate” levels of capital and the ongoing recession likely will keep any rate increases modest, analysts and industry executives say.

Among primary commercial lines insurers, recent pricing surveys show progressively smaller year-over-year price declines, raising the possibility that the average rate change will turn positive sometime in the second half of the year, said Grace Osborne, managing director and practice leader for North America insurance financial services at New York-based Standard & Poor's Corp, while speaking as part of S&P’s Insurance 2009 conference “Navigating through the financial turbulence” held Monday and Tuesday in New York.

Insurers—many of whom are trying to improve underwriting performance and repair damage to their balance sheets following last year’s catastrophe and investment losses—are becoming less competitive, “but there are significant economic pressures, and it’s unclear if this newfound discipline will hold in the recession,” she said.

The industry has been experiencing price reductions since 2005, with an acceleration of those reductions since 2007 following two strong years of operating results. Many in the industry thought the collective events of 2008 would reverse the cycle, but “there really has not been any clear evidence of that so far,” said Rob Jones, managing director at S&P in London.

In addition, “the capital levels in the industry remain adequate—not sufficient, but adequate—and I think that is one reason why rates have not moved as quickly as some had hoped,” said Evan G. Greenberg, chairman and CEO of ACE Ltd., another speaker.

S&P said the property/casualty industry finished 2008 with $456 billion of statutory capital.

The ongoing pressures of the recession also will likely continue to affect the pricing cycle, panelists said.

“On one hand, business activity has declined, and that means insurance buyers have significantly dialed back their exposures. On the other hand, clients simply view insurance as another expense item, and they are cutting back. It’s making it much harder to get rate increases,” Mr. Greenberg said.

S&P said that “due to ongoing pressures,” it is maintaining its negative outlook on the U.S. commercial lines property/casualty sector.

In the reinsurance sector, meanwhile, pricing has started to firm, with rate increases for property and other short-tail reinsurance as a result of higher catastrophe losses in 2008.

January global reinsurance renewals saw rate hikes for U.S. property-exposed catastrophe risks of as much as 15% to 30%, and the market seems poised for additional hardening at the June and July reinsurance renewals, S&P said in its midyear insurance outlook report.

Reinsurance casualty rates remain competitive, however, but premium rates have flattened since the beginning of 2009 compared with pricing reductions since mid-2004, S&P said.

In addition, although investment losses significantly reduced the reinsurance sector’s excess capital position, S&P believes that most U.S. and Bermuda firms continue to benefit from strong levels of capital adequacy. S&P said aggregate capital for Bermuda-based reinsurers stood at $65 billion at year-end 2008, while U.S. insurers posted a $37 billion surplus at year-end.

S&P said it is maintaining its stable outlook on the North American reinsurance sector.