M. Stanley Cuts Property Insurs, Says Rates Have Peaked

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   By Chad Bray
   Of DOW JONES NEWSWIRES

NEW YORK -- Morgan Stanley insurance analyst Alice Schroeder cut her outlook for the property-casualty industry and downgraded seven insurers on Friday.

In a research note, Schroeder said investors should be more valuation sensitive to personal lines insurers, as a consumer backlash may be emerging due to high rates. She stressed she's not turning negative on personal lines, but the market will be more difficult to navigate. She downgraded the overall property-casualty sector to in-line.

Also, pure-play property-casualty companies aren't likely to outperform, given the likelihood an economic upturn won't happen in mid-2003, as some have expected, Schroeder said.

"While we believe conditions are in place for sustained high margins for some time to come, rates do appear to have peaked, raising the question of what positive news investors might not already know about the cycle," Schroeder said.

Schroeder downgraded five companies to equal weight from overweight: American International Group (AIG), Marsh & McLennan Cos. (MMC), XL Capital Ltd. (XL), Max Re Capital (MXRE) and Allstate Corp. (ALL). She also cut PartnerRe Ltd. (PRE) and MBIA Inc. (MBI) to underweight from equal weight.

In commercial lines, Schroeder noted that she believes Ambac Financial Group Inc. (ABK), AIG, Marsh & McLennan, Max Re and MBIA as having "above-average economic and capital markets sensitivity."

Schroeder said she's considering the economic and capital markets sensitivity of Ace Ltd. (ACE), Chubb Corp. (CB), St. Paul Cos. (SPC) and XL Capital and their related businesses, but doesn't believe there are as significant drivers of the stock.

Despite cutting much of the sector, Schroeder did upgrade some insurers. She raised her rating for Travelers Property Casualty Corp. (TAPA) to overweight from equal weight, citing it as a play on primary insurance.

She also raised Everest Re (RE) to overweight from equal weight and Progressive Corp. (PGR) to equal weight from underweight, citing valuation.

Morgan Stanley or an affiliate has received investment banking compensation within the past 12 months from Allstate, AIG, Everest Re, MBIA, Marsh & McLennan, PartnerRe, Progressive, Travelers and XL Capital. The company or an affiliate owns 1% or more of the common stock of Allstate, Everest Re, MBIA and Travelers.

An employee of Morgan Stanley or an affiliate is a director of Allstate, Marsh & McLennan and PartnerRe. Also the investment bank or an affiliate makes a market in Allstate, Everest Re, MBIA, Max Re, PartnerRe and XL Capital.

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

Updated January 24, 2003 9:42 a.m. EST