Prudential: Hard Market To Continue

NU Online News Service, Jan. 2, 1:20 p.m. EST?The property-casualty industry will still see almost two more years of a high-priced hard market, according to a prediction by Prudential Equity Group Inc.[@@]

The New York-based Prudential Equity Group, part of Prudential Financial Inc. in Newark, N.J., commented in its equity research paper that its industry outlook is for the hard p-c market to continue in 2004, with a return to a soft market in late 2005, in both commercial and personal lines.

"Our outlook is for the hard (favorable) property-casualty market to end in late 2005," according to Prudential Equity Group.

This is because the entire p-c insurance industry may achieve a 10 percent real return on equity by then, Prudential noted, "which in the past has been a high enough return to cause a return to cutting prices to gain market share."

The investment firm also offered in its analysis a list of companies in the p-c sector that are likely to outperform in the coming year. In commercial lines, Prudential said it favors the Chubb Corporation in Warren, N.J.; The St. Paul Companies Inc. in St. Paul, Minn., (which is expected to merge with Hartford, Conn.-based Travelers Property Casualty Corp. this year); as well as ACE Limited and XL Capital, both headquartered in Bermuda.

In personal lines, Prudential chose the Allstate Corporation in Northbrook, Ill., as "the best-positioned personal-lines insurer," while picking the New York-based Marsh & McLennan Companies Inc. as its "favorite insurance broker stock."

Commenting on its commercial-lines picks, Prudential explained, "We believe best-positioned commercial insurers are those that focus on casualty lines, because they still command robust price increases and have the strongest earnings leverage due to improvements in combined ratios."

In that regard, Prudential dislikes Bermuda-based RenaissanceRe Holdings Ltd. and rated it "Underweight" mostly because of the insurer's focus on the softening property insurance and reinsurance markets.

In personal lines, Prudential forecast that the p-c market should be favorable throughout this year, but "unhealthy competition" could emerge in 2005 especially from the largest writer State Farm Insurance Companies in Bloomington, Ill.

On its choice of Allstate as "the best-positioned personal-lines insurer," Prudential explained that Allstate's combined ratio could improve, thanks to its "strategic risk management program" that focuses on attracting and retaining high-value customers. Other areas of Allstate, such as homeowner's and life insurance, "should show better results as well" in 2004, Prudential predicted.

Prudential also forecast challenges for the brokerage sector in the coming years and said insurance brokers could run into "headwinds in 2005" because of lower pricing for commercial coverage.

"But some brokers can handle this challenge better than others," the company observed. "Marsh & McLennan is our favorite insurance broker stock," Prudential explained, "because it can maintain among the highest organic growth and best margins in insurance brokerage."

On the other hand, Prudential has lower expectations for Chicago-based Aon Corporation, saying that the company's brokerage operation "could slide from one soft market to another without a meaningful improvement in top-line growth, margins or earnings-per-share."

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Prudential: Hard Market To Continue

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