Property-Casualty Rates Hikes Appear To Have Peaked

   Of DOW JONES NEWSWIRES

NEW YORK -- Property-casualty insurance rate hikes appear to have peaked after several quarters of rapid increases.

That's not a big surprise, given the levels at which commercial property insurance rose in the months following the Sept. 11 terrorist attacks.

However, a deceleration in price increases could affect price-to-book-value multiples at property-casualty companies, said Vinay Saqi, a Morgan Stanley insurance analyst, in a research note Monday.

Pricing has peaked in most business lines, and some lines - namely property - have even seen rate decreases, Saqi said. Those declines have been modest, so far.

"With the price-driven growth outlook now moderating, the expectation for sustainable multiple expansion should be waning," Saqi said in a research note Monday.

Price-to-book multiples tend to expand most when premium rates are rising, Saqi said.

At the same time, the threat of additional capital-raising could cap investor enthusiasm for property-casualty companies, Saqi said. The industry raised $15 billion in the quarter - the most since the fourth quarter of 2001.

"Though not enough to meaningfully hurt the (pricing) cycle, we believe it is another reason valuations are not likely to reach historical peaks," said Saqi, who expects the industry to have decent second-quarter results, but not as robust as the first quarter's.

Saqi said catastrophe losses in the quarter were higher than prior periods and some companies will have one-time losses. "Estimates are not likely to rise meaningfully, given the continuing low interest-rate environment," Saqi said.

Jay Cohen, a Merrill Lynch insurance analyst, said Monday that while the level of rate increases appears to have peaked, the absolute price levels haven't peaked.

"We think prices can continue to go up," Cohen said.

In a research note Monday, Cohen said price increases likely continued across most commercial lines in the second quarter. Standard commercial-line rate hikes likely showed further signs of deceleration, but price increases should remain above rising claims costs, he said.

   Directors-And-Officers Price Hikes Still Robust

Among certain liability lines, such as directors-and-officers and umbrella coverage, price hikes likely remained steep, Cohen said. Higher rates should show up as top-line growth for many companies in the quarter, he said.

"While weather-related losses will impact the earnings for several carriers, in general, we expect bottom-line earnings to gain on the momentum that was evident in the first quarter," Cohen said. "Earned premiums are now fully reflecting the price increases put in place over the past year, and we do not expect a broad move by insurers to address reserve issues in the quarter."

Cohen said there hasn't been much deceleration in business lines that need more adequate pricing, such as liability coverage.

Also, Cohen said he hasn't heard of any "irrational" competition among insurers. Property-casualty companies want to expand their businesses, but aren't reducing their underwriting standards to do so.

Meanwhile, another major increase in property rates isn't likely unless catastrophe losses mount to meaningful levels in the second half of the year, Saqi said. Property-insurance prices appear to have peaked in early January, with some lines peaking last July.

"Insurance brokers note that conditions have become more competitive in property, with rates declining in many cases," Saqi said. "Areas such as primary property, property-casualty and aviation seem most affected at this time."

Terms and conditions have continued to tighten in casualty lines, but the level of rate hikes has stopped accelerating, Saqi said.

"One area that remains strong - as signs of additional claims costs continue to emerge - is directors-and-officers coverage, where rates are still increasing at a rapid pace," Saqi said. "There too, though, we expect rates to moderate as we head into 2004."

Saqi said rates could be further affected by the impact of improving equity markets in Europe on reinsurer capital positions, reserve additions to reflect proposed asbestos legislation and increased competition in personal lines, such as personal auto and homeowners insurance.

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

Updated July 7, 2003 12:13 p.m.