Bermuda's insurers are "bullish" on near-term prospects - while reinsurers were somewhat disappointed by a deflated sector.

So say Morgan Stanley analysts Alice Schroeder, Vinay Saqi and Chris Winans who recently visited Bermuda-based insurers and reinsurers, including some of the start-ups.

The analysts characterised the views of company management teams as bullish, with nearly all of them expecting solid financial results in 2002 and 2003 similar to what they have been saying for the past six months.

Most companies that have both insurance and reinsurance operations said the reinsurance market fell short of their expectations early in 2002, while the primary insurance market was stronger, in some cases more so than anticipated.

"The visit reinforced our thinking about the pricing cycle or our investment thesis. We continue to believe that insurance premium rates, particularly in casualty lines, have enough momentum to continue to increase through 2003; beyond that, we believe, it is too early to say," wrote the analysts in their weekly Property and Casualty Insurance Risk Briefing.

One of the key themes from the analysts meetings in Bermuda included pricing.

"While most companies acknowledged that pricing at some point would turn down, all of them were bullish on near-term prospects. We do expect that January 1, 2003 property catastrophe reinsurance rates are likely to be relatively flat, because rates are already adequate. In addition to a variety of reasons that have been talked about over the past year lower investment yields, asbestos, and rising loss costs, for example the most compelling case for further rate increases continues to be the issue of liquidity, we believe," said the analysts.

They said that management teams stressed that the cash flow relating to the World Trade Center loss and other large losses from 2001 such as tropical storm Allison has not yet begun in earnest.

"We estimate that significantly less than 25 percent of the World Trade Center loss - estimated to be in the $40-50 billion range - has been paid. Also, no single company has claimed that it has material exposure to Fortress Re, the now-defunct aviation reinsurer.

"Once the claims begin to flow, we believe it could be a trying time for some companies, reinsurers in particular, that are not as well prepared to meet the cash requirements. The result, in our view, could be a domino effect, with reinsurance recoverables once again becoming an issue, triggering a shortage in capacity."

The analysts said with jury awards and other loss costs continuing to rise, the primary insurance companies agreed that casualty lines present a greater opportunity today than property lines, which in some cases might be reaching peak pricing levels at least for the current cycle.

Property rates are not at the same levels as those following Hurricane Andrew, but most companies do not expect them to approach that level, either. The most competitive sector of the market, said the analysts, appears to be property-catastrophe reinsurance.

They also said the incumbents largely dismissed the impact that start-ups are having on pricing, saying this has been unnoticeable.

But most acknowledged that this had taken away some of their potential market share, particularly in property/catastrophe lines and one company said the slope of the pricing increase would have been higher had it not been for new capital.

The analysts also said that recent turmoil at Lloyd's has created an opportunity for the Bermuda companies, including the start-ups.

"Former Lloyd's underwriters run two of the start-ups. The business flow to Bermuda has obviously increased, but we find it interesting that even the London market brokers are now setting up shop in Bermuda something that was unheard of previously. Companies that have a presence in the Lloyd's market said they would continue to assess their participation on annual basis," said the analysts.

They said the start-ups and even some of the incumbents are opportunistically capitalising on the Lloyd's market by participating in quota-share arrangements for select syndicates. "Though we believe this business may dry up in two years, or become less profitable, the current thinking is to take advantage of it while it lasts."

Concerning the Island's new companies, the analysts said: "Nearly all of them said that their participation in January renewals was not as robust as they would have liked, primarily because of a late start."