Despite consistent indications of falling property-casualty insurance premium rates, Morgan Stanley research analysts argue that an expanded focus on returns and rates means a brighter industry outlook for 2006.

Morgan Stanley's research note was published this morning. And late yesterday, MarketScout released its monthly barometer showing that a composite rate index for December 2005 dipped 6 percent for commercial lines of insurance.

“With the exception of January and February, rates decreased every month during 2005,” noted the report from MarketScout, a Dallas-based electronic insurance exchange. “Our forecast is for further softening in early 2006,” the report said.

At Morgan Stanley, however, analyst William Wilt warned investors not to be gloomy about the outlook for insurers in the presence of such forecasts. “A single-minded focus on premium rates misses important aspects of the total return equation,” he wrote.

In the research note, Mr. Wilt said that while rates are not hardening as much as they were just after 9/11, back in 2001, insurer returns-on-equity were close to zero.

Now, the baseline ROE of insurers is 16-to-18 percent, Mr. Wilt said. He added that balance sheets and book values of insurers are now fairly stated, which was not the case in late 2001, when reserve deficiencies loomed as a larger problem.

The Morgan Stanley report referred to rate increases in the mid-single digits across a portfolio of risks, while MarketScout–limiting its focus to commercial lines only–found increases for the month of December in only three lines: commercial property (up 3 percent), business income (up 3 percent), and directors and officers liability (up 1 percent).

“There are some areas where rates are increasing, but they are limited primarily to offshore energy, coastal property and some tough liability classes,” according to accompanying commentary distributed with the barometer.

“The primary reason the market continues to soften is the availability of additional capacity,” Richard Kerr, chairman and CEO of MarketScout, said in the announcement.

From an investment perspective, Morgan Stanley views the industry as “attractive” overall, with reinsurers representing the best risk/reward tradeoff for investors, and primary commercial insurers presenting a good tradeoff.

Among the stocks highlighted in the report (with an “overweight” rating from Morgan Stanley) are commercial insurers ACE, American International and Axis, and Bermuda reinsurers IPC Re, Renaissance Re and PartnerRe.

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Analyst Optimistic Despite Rate Forecasts

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