Insurance stocks ready to shine, analysts say

Jan 16, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - Last year's hurricanes, floods and scandals won't prevent insurers from having a record year in 2006, according to several industry analysts.

Insurance stocks rose almost 16% last year, according to A.M. Best Co., an Oldwick, N.J., firm that tracks insurer financial performance. Analysts think that this year will be even better as premiums rise.

Property-and-casualty insurers might have their best year in the past 50, according to Cliff Gallant, an insurance analyst with Keefe Bruyette & Woods Inc. in New York.

The projected highest fliers, including insurance broker Aon Corp. in Chicago, and insurers ACE Ltd. of Hamilton, Bermuda, and American International Group Inc. in New York, are firms that suffered the most from last year's contingent-commission and bid-rigging scandals.

Premiums for property-and-casualty coverage are expected to rise substantially due to last year's catastrophes, and insurers and reinsurers are poised to benefit from the higher revenue, analysts say. Several new companies without baggage from last year's losses have been formed by venture capitalists and private-equity firms hoping to cash in on the higher prices.

"Return on equity remains well above average for commercial underwriters, aided by tighter contract terms and conditions, and the expected benefit to pricing, from recent catastrophe losses," said Mark Lane, a securities analyst with William Blair & Co. LLC in Chicago. Brokers also are expected to benefit because their commission income is a percentage of the higher premiums, he added.

Mutual funds stock up

Some mutual fund managers are expanding their insurance industry holdings in anticipation of the expected gains.

"We've added more commercial insurers and reinsurers to our portfolio," said Charlie Hebard, manager of the $418 million Financial Services Fund (FAFSX), offered by Fidelity Investments in Boston.

"There will be sizable pricing increases, up to 100% in some instances, in property reinsurance because of last year's hurricanes," he said. "Companies are expected to have healthy growth in 2006, barring additional catastrophes."

"We are seeing tremendous value in the reinsurance sector and are considering adding to our holdings," said Derek Rollingson, manager of the $211 million ICON Financial Fund (ICFSX), offered by Greenwood Village, Colo.-based ICON Advisers Inc.

According to the fund's valuation model, reinsurers provide $1.53 in value per $1 invested, he noted. Mr. Rollingson sees value in the established reinsurers as well as the new ones formed in Bermuda after the recent catastrophes.

"Insurance brokers had a lot of bad news in 2005, but nothing that will affect earnings in the long run," he said. "They'll pay their fines, find new sources of income to replace the contingent commissions, and their major problems will be over."

Brokers return $1.10 per $1 invested, Mr. Rollingson said.

Mergers drive gains

Life insurance companies are also expected to have a financially healthy year, according to a report released this month by Zurich, Switzerland-based Swiss Re, but they will likely be buoyed more by consolidation than underwriting profits.

"Less competition in the life insurance industry means that the companies will have the ability to increase prices," Mr. Rollingson said. The life sector provides $1.12 in value for each $1 invested, according to his firm's valuation model, he added.

"They had strong performance at the end of 2005, and I expect that to carry over," Mr. Rollingson said.

"Mergers and acquisitions will be the central theme in life insurance during 2006," said Rob Haines, an analyst with CreditSights in New York. Some investors will bet on acquisition candidates.

"Regarding property-casualty, I expect very decent earnings in 2006, but I disagree that it will be the best year in the past 50," Mr. Haines said. "I think that some people are being overly bullish about the pricing trends stemming from the catastrophes," he said. "I've heard anecdotally that the Jan. 1 renewal price increases have not been as large as what was hoped for by the insurers."

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