Analysts Salomon Smith Barney has upgraded its European insurance sector rating from neutral to outperform, in its latest report on the industry.

The report says the European insurance sector has underperformed the broad STOXX index by 16% in 1999 to date, caused mainly, by a sharp back-up in bond yields.

Salomon says a more stable outlook for yields, rather than a bond market rally is needed for the sector to rebound.

However, it says that the worst of the bond decline is over, causing it to improve its rating for the sector.

In addition to more favourable bond forecasts, Salomon notes hardening premium rates as cause for optimism especially in the UK personal lines market.

Tough trading conditions had forced Salomon to adopt a cautious position and downgrade its ratings for the life and non-life insurance markets at the start of the current year.