Property-Casualty Insur Rates Likely To Remain Strong

   Of DOW JONES NEWSWIRES

NEW YORK -- Property-casualty insurance rates are likely to remain strong, boosting earnings through 2003, if not 2004, analysts said Thursday.

In a research note Thursday, Jay A. Cohen, a Merrill Lynch insurance analyst, said first-quarter results were an indication that improved underwriting - and higher rates - are working their way down to the bottom lines at insurers.

"Some of the upside surprise in the quarter, especially among reinsurers was due to lack of large catastrophic losses," Cohen said. "Still, excluding the impact of weather, it appears that underlying underwriting results were solid and we saw more upward estimate revisions than downward revision in reaction to earnings releases. We expect the same pattern to continue over the next three quarters."

Ronald W. Frank, a Smith Barney insurance analyst, said in a separate research note Thursday that conditions should favor property-casualty insurance stocks in the coming months, as they benefit from continued pricing power and strong earnings prospects.

"While some property insurance and reinsurance markets have predictably stabilized at very profitable levels, casualty markets continue to show strong upward momentum," Frank said. "Low interest rates, capital damage from asbestos liabilities and investment portfolios and last, but not least, rating agency pressure all argue for an extended hard market."

Frank said rating agencies are playing a crucial role in extending a period of higher rates and tighter underwriting.

"It appears to us that, by limiting the operating and financial leverage which insurance companies can assume, the agencies are forcing insurers and reinsurers to focus ever more intently on capital allocation and on marginal returns from underwriting, which is very positive for the prospective duration of the hard market," Frank said.

Meanwhile, Cohen, the Merrill Lynch analyst, said 2003 earnings should benefit from prior rate hikes that are now being earned and additional price increases this year. If rate increases remain ahead of loss cost trends, 2004 earned premiums also should benefit, translating into 10% to 15% earnings increases at most insurers, he said.

Cohen sees rates plateauing in 2005 - meaning any price decreases won't be as sharp as some have feared. Rates have tended to slide as insurers shift their focus from underwriting and rate gains to increasing market share.

The most likely culprits that could hold back earnings are additional reserve charges, light investment income and weather losses, Cohen said.

Several insurers have boosted their reserves in recent quarters to reflect changes in asbestos-related losses and adverse trends in directors and officers insurance and other liability lines.

Cohen said Ace Ltd. (ACE) and Hartford Financial Services Group (HIG) are his favorites among large cap stocks he follows in the sector.

Merrill Lynch or an affiliate has received investment banking compensation from Ace and Hartford and makes a market in both stocks. Cohen doesn't own either stock.

Frank, the Smith Barney analyst, said he favors Ace and St. Paul Cos. (SPC). Smith Barney is a unit of Citigroup Inc. (C).

Citigroup Global Markets or an affiliate has received investment banking compensation from Ace and St. Paul. Frank doesn't own either stock.

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

Updated May 29, 2003 10:09 a.m.