A Policy Decision
In like a lion, out like a lion.
For the nation’s property-casualty insurers, 1996 ended just as it began, with a chunk of the country getting walloped by fierce winter storms that caused widespread damage and a battery of insurance claims.
The Pacific Northwest was the victim of heavy snow and flooding as the year closed, just as the Northeast was buried by blizzards when the year began. And in the middle, Hurricane Fran punished the Eastern Seaboard.
Yet stocks of property-casualty insurers finished 1996 with gains that were in lock-step with the broader market, thanks in good part to a year-end rally in bonds.
Because insurers invest their premiums mostly in bonds, the bond market’s gains in recent months prompted stock investors to look beyond the insurers’ catastrophe losses and to bid insurance shares higher. The Standard & Poor’s index of property-casualty stocks rose 20% during the year, about the same gain posted by the benchmark S&P; 500 index.
The stocks overcame not only the bad weather, but widespread price cutting that habitually infects the industry and erodes its profit margins. For instance, the 10 major insurers tracked by Dow Jones & Co. showed an average 2% drop in their third-quarter 1996 profits.
Despite those trends--and the soaring number of damage claims now coming out of Seattle, Portland and other points in the Pacific Northwest--analysts are recommending a number of property-casualty insurers for 1997.
But they’re being mighty choosy.
Peter Wade, an analyst with Lehman Bros., recently put Allstate Corp. on his buy list even though Allstate’s stock surged 41% during 1996 and now trades at about $59 a share. Among his reasons: Allstate has $5 billion of excess capital, which should enhance its aggressive plan to buy back its shares.
General Re Corp. is the top pick of Susan Spivak of Donaldson, Lufkin & Jenrette Securities, even though the stock badly trailed its peers last year with a meager 2% gain. It currently trades at about $154 a share.
General Re is a reinsurer--it essentially sells insurance to the primary carriers such as Allstate--and the stock is a bargain because of its strong market position, solid balance sheet and gains from its recent purchase of rival National Re Corp. for $881 million, Spivak said in a recent report.
Seattle-based Safeco Corp., which turned in a 14% gain last year and now trades at about $39 a share, is also being recommended by some analysts. But Daniel F. Nelson, an analyst at the regional brokerage firm Ragen MacKenzie in Seattle, isn’t one of them.
Nelson said he isn’t concerned about the Pacific Northwest storms inflicting heavy damage on Safeco. “I wouldn’t think their exposure is all that large,” he said. Rather, the stock “right now is fairly valued” and therefore “I wouldn’t expect it to do much for the next six months,”
In fact, he recommends buying only one property-casualty insurer, Hartford Steam Boiler Inspection & Insurance Co., which insures commercial boilers and other energy-related equipment and provides engineering services.
The stock, at a recent $47 a share, “looks a little undervalued” in the face of its growth prospects, and it’s carrying “an above-average [dividend] yield” of nearly 5%, Nelson noted.
Another insurer, Frontier Insurance Group Inc., may not be a household name, but its growth and profitability continue to draw cheers from Wall Street. The stock jumped 32% last year and now trades at about $38 a share.
The Rock Hill, N.Y.-based concern is boosting its operating revenue by specializing in growing niche markets--medical malpractice and earthquake coverage, to name two--and it’s simultaneously producing above-average profits from those operations.
Reliance Group Holdings Inc., currently trading at $9 a share, is being touted by analyst Alice Schroeder of Oppenheimer & Co. Reliance is a turnaround story, and she likes the company’s renewed earnings growth and the 3.6% dividend yield.
But regardless of the companies’ operating results or the weather outside, analysts caution that the property-casualty insurers will continue to be buffeted by changes in interest rates and bond prices. And there’s no shortage of credit analysts predicting higher rates in 1997.
As Merrill Lynch & Co. analyst A. Michael Frinquelli noted recently, “most property-casualty insurers make most or all of their money from the investment function rather than underwriting.”
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Portfolio Insurance
Major storms in the Pacific Northwest aren’t likely to inflict heavy damage on property-casualty stocks, but analysts are nevertheless picky about which stocks should do well this year. A look at the S&P; property-casualty index and how major industry stocks fared in 1996:
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% Chg Stock Symbol Recent Price in ’96 Allstate ALL $58.50 +41% Chubb CB 56.00 +11% Frontier FTR 37.75 +32% Safeco SAFC 38.75 +14% St. Paul SPC 57.75 + 5% USF&G; FG 21.50 +24% S&P; 500 +20%
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