An investment analyst that follows a number of Bermuda-based insurance companies has taken a cautious view of the sector's likely financial performance in upcoming quarters.

The view was revealed in a research note from Prudential Securities analyst Jay Gelb, in which he cut his recommendation on the property and casualty group to "neutral" from "favourable" earlier this week.

But Bermuda-based companies ACE and XL, both of which are followed by Mr. Gelb, were given a better report than some other industry players because of their orientation as predominately casualty insurers.

Mr. Gelb's office said he also follows a third Bermuda company, Renaissance Re. Looking at the sector overall, Mr. Gelb said a mid-year buyer's survey indicated overall prices for commercial insurance are expected to drop in the second half of 2004.

"The most recent survey shows that commercial insurers are approaching a negative inflection point on pricing, policy terms and conditions, and negotiating leverage with customers.

"Our major investment theme for the commercial P&C market is that we expect a period of stability for the next 12 to 18 months before a return to destructive competition."

Mr. Gelb said there would be "a decent support level" for P&C stocks, but not enough to maintain a favourable rating on the sector.

He added that rising interest rates could also put pressure on insurance company stock performance.

"Moreover, as the sector enters a period of stability and ultimately limps toward a soft market, we expect the stocks' valuation multiples to remain mostly unchanged or drift lower," Mr. Gelb said.

Insurers and reinsurers have been operating in what is called a 'hard market' since late 2001 when the September 11 terrorist attacks spurred on a void in capacity and rise in rates. But the cyclical insurance market is now showing signs of returning to a 'soft market' where competition for business becomes greater as capacity expands and pushing rates down.

Along many insurance lines, rates have already stabilised or started to drift downwards.

In connection with the sector call, Gelb downgraded at least one commercial insurer, St. Paul Travelers.

But Bermuda companies ACE and XL got a better report from the investment analyst with Mr. Gelb saying casualty insurers and reinsurers ? such as ACE, XL Capital and American International Group (AIG) ? because the casualty group is less competitive than property and offers potential for profitable growth.