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THE HAVES AND THE HAVE NOTS

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Caution is the key to predicting the performance of commercial property/casualty stocks this year.

While the stocks may do well relative to the overall market's performance, experts say discrimination is clearly called for in selecting particular stocks.

More analysts also are including lesser-known companies in their stock recommendations, along with still-popular names like American International Group Inc., Chubb Corp. and General Re Corp. (see story, page 22).

Insurers and reinsurers had a stronger year in 1995 than the overall stock market, with stock values increasing 35.2%, according to the Business Insurance Industry Stock Report. By contrast, the Standard & Poor's 500 Index increased 34.1%. Through Jan. 12, the insurer and reinsurer stocks declined 1.8%, while the S&P 500 fell 2.3%.

Analysts note insurance company stocks overall should do well this year if interest rates remain relatively low. Insurance stocks tend to do well in low-interest rate environments, possibly because the value of insurers' large bond portfolios-and therefore their book values-increase when interest rates decline.

Investors may also believe that low interest rates mean the economy is moving toward a recession, which has a less severe impact on insurers than it does on other companies, like industrial manufacturers.

Some analysts say, however, that while interest rates may remain stable, they are also unlikely to continue to decline.

The stocks may benefit, however, should acquisition activity increase, say analysts.

But whatever the trends may be, careful stock selection is called for, they warn.

"We've a selective approach to 1996," said David Seifer, an analyst with Donaldson, Lufkin & Jenrette Securities Corp. in New York.

"We think that those that can show consistent underwriting and earnings capability will outperform the general stock market, and we feel that if interest rates and inflation remain at or near current levels and industrial earnings lag," then insurance companies that have a 10% to 15% earnings growth rate "should compare favorably with many industrial groups."

"I think increased selectivity will be important for picking stocks in 1996 vs. 1995," agreed Jay Cohen, an analyst with Merrill Lynch & Co. in New York. "In 1995, the yield on the long bond went roughly from 8% to roughly 6%.

"I can almost assure you it will not go from 6% to 4% in 1996, and therefore the stocks, which are interest rate-sensitive, will not benefit to the same extent from that drop in interest rates."

As a result, "I think it's increasingly important to pick those stocks that can grow their earnings despite the competitive environment," he said.

"I would say in general we have a somewhat more cautious outlook for 1996, although we do see selected opportunities," said Weston M. Hicks, an analyst with Sanford Bernstein & Co. in New York.

"In 1995, we had the twin benefits of declining interest rates and improving fundamentals in terms of margin trends, and in 1996 we're more likely to see stable interest rates, so that by itself I would say it's going to be tougher going."

"Basically, I would say that we would look for a quieter year in the marketplace on the property/casualty side of the equation," with no major trend in industry fundamentals, said Michael Lewis, first vp with Dean Witter Reynolds in New York.

"For starters, we believe that most of the catch-up has been accomplished by the multiline companies, and they were the real drivers last year."

With a favorable interest rate, though, he said, the stocks "should be able to perform at least in line with the marketplace."

Harry Fong, a director at C.J. Lawrence/Deutsche Securities Corp. in New York, said he is not clear how this year will shape up. "On the one hand, we have pricing off anywhere from 5% to 10% with commercial insurers. On the other hand, we have earnings that seem to be holding at relatively nice levels," if you can believe the numbers. "Bottom line, I think the outlook is mixed for the stocks," said Mr. Fong.

More optimistic was Carol Manning, vp with Prudential Securities Inc. in New York. While the industry fundamentals remain mediocre, "since the stocks do well when interest rates are declining, the stocks should do better than the market this year," Ms. Manning said.

Donald Franz Jr., vp and senior analyst with New York-based Advest Inc., said assuming interest rates remain stable, he generally expects insurance stocks to be "somewhat above average market performers, notwithstanding the continuation of heavy price competition."

Gloria Vogel, managing director and senior insurance analyst at Ladenburg, Thalmann & Co. Inc. in New York, divided up the year for insurance stocks.

"I think the first half will be OK," she said. "I'm a little concerned about what happens in the second half of the year."

Third-quarter comparisons are "going to be tough this year" because interest rates "are going to mean investment income is going to be harder to come by," said Ms. Vogel.

In addition, right now the industry is benefiting from taking down reserves commensurate with its sluggish premium growth and the auto and workers compensation lines are doing very well.

"I'm just not sure how long the industry can rest on its laurels," added Ms. Vogel. Eventually, auto and workers comp lines will deteriorate and this will be reflected in stock prices, she said.

Consolidation could boost stock prices next year, however, observers say.

"Our intelligence indicates there's a lot of acquisition activity that could be heating up and there's a lot of companies, including many strategic buyers as well as leveraged buyout buyers, looking for acquisitions," said Mr. Franz.

"That would certainly be a positive for the stock price actions for the coming year," he said.

"The obvious big ones have taken place," Ms. Vogel pointed out.

"It was speculated for most of '95 that Aetna was going to do something, and that's clearly now been announced, but there could be other things out there. We don't know," she said.

Aetna agreed to sell its property/casualty operations to the Travelers Corp. last year in a $4 billion transaction (BI, Dec. 4, 1995).

"I would say that a wild card some companies may benefit from is a consolidation trend," agreed Mr. Lewis.

If that "picks up steam," it could help the stocks' performance, he said.