Agree on insurance companies....
NEW YORK (Reuters) - Want to make money in insurance stocks next year? Too late.
Like a rare plant that blooms suddenly every five years or so, U.S. insurance stocks flowered briefly in the second half of this year. They recovered from years of neglect by technology-mad investors, as insurers finally managed to hike the prices they charge for their policies after a decade-long decline.
But now it looks as if the good news for insurers -- higher premium rates, hopes for lower interest rates, strife in other sectors -- may already have worked its magic.
With insurance stocks floating around 52-week highs, industry watchers are bracing for a potentially withering year, as inflation keeps pumping up the cost of repairing cars and homes and providing medical treatment, and investors worry that insurers have not put enough money aside to pay for old claims.
``As a stockholder -- in terms of how to make money -- you have to be poised to recognize when the rate of appreciation (in premium rates) begins to slow,'' Tom Goggins, who manages about $2.8 billion for John Hancock Funds' Financial Institutions investment team, told Reuters.
``Then you want to get the hell out of the stocks.''
Raising premium rates to keep ahead of rising costs of claims being paid out is the key to insurers' profits -- and their share prices.
``We all got terribly beaten up (property-casualty insurance stocks),'' said Edward Liddy, CEO of the U.S.'s largest publicly traded insurer, Allstate Corp. (NYSE:ALL - news), in an interview with Reuters in the middle of this year.
The ``deadly combination'' of premium rate cuts and cost increases really hurt insurers, he said. ``But there has been some return to sanity, with rising rates offsetting some of the pressure of rising costs.''
Best In Show
For now, car, home and business insurers are reflecting on a great year in the stock market. The Standard & Poor's property insurance index, which tracks the share prices of the largest U.S. insurers, has risen a whopping 46 percent from the beginning of the year, while the S&P 500 index slipped 14 percent. The Nasdaq composite index, containing many of the technology stocks that stole investors away from old economy stocks, has fallen 43 percent.
Allstate posted a 71 percent rise in the year, closing on Wednesday above $40 after slumping as low as $17-1/2 in March. The stock's steady rise was powered by mounting evidence that some insurance rates are rising, and coincided with a tumbling Nasdaq.
St Paul Cos. Inc. (NYSE:SPC - news) and Chubb Corp. (NYSE:CB - news), two other leading insurers in the S&P property insurance index, also saw their share prices rise 53 percent and 47 percent respectively in the year, boosted by price hikes in their main company insurance lines.
``But what's the duration of that price increase? Three months or two years? That's the $64,000 question,'' said Goggins.
Bermuda-based insurance and reinsurance groups Ace Ltd. (NYSE:ACL - news), XL Capital (NYSE:XL - news) and Everest Re (NYSE:RE - news), are the stocks to go for now, said Goggins, on the grounds that reinsurers -- the firms which insure insurers -- are seeing very strong rises in premium rates.
Tricky Sell
Sell-side analysts -- who have spent much of the last three years desperately looking for ways to convince people to buy insurance stocks -- also see that next year could be a tough sell.
``Valuations are close to peak multiples,'' said Deutsche Banc Alex. Brown insurance analyst Alain Karaoglan in a recent report. ''For the stocks to appreciate markedly in 2001, companies need to deliver better-than-expected earnings.''
This is unlikely, Karaoglan said, unless 2001 is another easy one for storms, like this year.
``Keep your powder dry, or consider personal lines companies,'' recommends Karaoglan, referring to car and home insurers, which some expect will see price rises in the second half of next year, lagging behind their business insurance counterparts. Other car and home insurers on the S&P property insurance index include Progressive Corp. (NYSE:PGR - news) and Safeco Corp. (NasdaqNM:SAFC - news).
State regulators are still authorizing car insurance rate rollbacks, however, said Goggins. ``I wouldn't be buying Allstate or Progressive,'' he said, also pointing out that State Farm -- the nation's largest car and home insurer, which is a mutual and doesn't have to worry about profit figures or a share price -- is still driving down the cost of insurance to win market share.
Insurers haven't yet licked the problem of raising rates enough, according to Ted Devine, a partner at management consultants McKinsey & Co., who deals with several U.S. insurers.
``How to maintain increasing profitability in an environment where the underlying claims costs seem to be escalating,'' is the main problem facing insurers this year, he said, in an interview with Reuters.
If insurers don't manage to do that, expect the stocks to spend another couple of years in the dark |
