Despite consistent indications of falling property-casualty insurance prices, Morgan Stanley research analysts argue that an expanded focus on returns means a brighter industry outlook for 2006.
Morgan Stanley's research note was published just after MarketScout released its monthly barometer showing that a composite rate index for December 2005 dipped 6 percent for commercial lines.
"With the exception of January and February, rates decreased every month during 2005," the Dallas-based electronic insurance exchange reported. "Our forecast is for further softening in early 2006." Workers' compensation pricing showed the sharpest decline at 9 percent.
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 Sept. 11, back in 2001 insurer returns-on-equity were close to zero, while now the baseline ROE of insurers is 16-to-18 percent. 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," said MarketScout.
"The primary reason the market continues to soften is the availability of additional capacity," said Richard Kerr, chairman and CEO of MarketScout. "These new insurers plan to capitalize on what they perceive as an overpriced market."
New insurers that don't have the legacy issues their veteran competitors must overcome will give them an underwriting advantage, Mr. Kerr suggested.
And don't count on reinsurers to firm up the market, as some analysts have speculated. "Many key insurers are writing large net lines, so the pricing of reinsurance is not much of a factor," Mr. Kerr said. "The renewal of the Terrorism Risk Insurance Act will provide confidence to many insurers, thus further driving a softening market."
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.
(Additional reporting by Steven Tuckey.)
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