Survey: 2003 Comml Insur Rates Expected To Increase 12%

   Of DOW JONES NEWSWIRES

NEW YORK -- Commercial insurance rates are expected to experience increases in the second half of 2003 in line with gains in the first part of the year, according to a new survey of insurance buyers.

Casualty rates are expected to increase about 15% for all of 2003, while property rates are expected to be flat, according to a midyear survey of risk managers released late Monday by Prudential Financial. Overall, commercial insurance rates are expected to increase 12% in 2003.

"Looking ahead, most respondents expect the hard market to persist through 2004, with a return to a soft market in 2005 or 2006," said Prudential analyst Jay Gelb in a research note. "Our outlook more specifically calls for an end to the hard market in 2005."

A hard insurance market is a period of adequate to rising insurance rates and tighter terms and conditions.

The survey interviewed 101 risk managers, with more than half from Fortune 1000 companies.

Policy terms and conditions are expected to remain tight, Gelb said. Of those surveyed, 94% said they expect policy terms to be at least as tight in 2003 as they were in 2002.

"We believe this factor means that the magnitude of the price increase is understated because the insurers are charging more for less coverage," Gelb said.

While the magnitude of price increases is slowing, that absolute level of prices remains high, Gelb said.

"We estimate that the property-casualty hard market is about two-thirds of the way over," Gelb said. "Property pricing has peaked, meaning that rate increases equal 0%. However, casualty lines, which account for two-thirds of commercial premiums, still benefit from a 15% median increase in rates."

Risk managers also expect the renewal process to be challenging, with 81% saying they expect the 2003 renewal process to be at least as challenging as in 2002.

However, the valuations of property-casualty stocks don't reflect the robust commercial property-casualty market, Gelb said.

"We expect pricing, particularly in casualty lines, to remain strong through 2004, resulting in improved top- and bottom-line results from insurers," Gelb said. "This factor, coupled with tighter policy terms, should lead to solid earnings growth through 2004 and probably into 2005. With this positive backdrop firmly in place, we believe the stocks' valuations will improve from current levels."

Gelb, who doesn't own any property-casualty stocks he covers, rates Ace Ltd. (Ace), American International Group (AIG), Chubb Corp. (CB), St. Paul Cos. (SPC), XL Capital (XL) and Marsh & McLennan Cos. (MMC) as buys in the group.

-Chad Bray, Dow Jones Newswires; 201-938-5293; chad.bray@dowjones.com

Updated August 26, 2003 9:36 a.m.