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Stock analysts disagree as to how well commercial property/ casualty insurance stocks will do relative to the overall market.

But there is general agreement on one major point-the need for selectivity. "If you pick wisely, you're going to be able to get winners," said Joanne Stone Morrissey, president and chief executive officer of Morristown, N.J.-based Firemark Group Inc.

Insurance industry stocks advanced 23.1% on a weighted-average basis last year, according to an index compiled by Hartford, Conn.-based Langen McAlenney, a division of Janney-Montgomery Scott Inc. This compares with a 20.3% improvement in the Standard & Poor's 500 Index.

Results differed by segment. Primary property/casualty stocks were up 22%, for instance, while reinsurer stocks were up 6%, and multiline insurers were up 31.3%. Life insurers were up 21.8%, while the two insurance brokers included in the Langen McAlenney index were up 13.1%.

Steven A. Gavios, managing director at Bear, Stearns & Co. Inc. in New York, expects the property/casualty group to underperform the market this year, "given continued pressure on pricing and underwriting results for most key companies."

As a result, "our investment thesis is to focus on finding the special situations, or the exceptions to the group, in this difficult environment," said Mr. Gavios, whose recommendations include Chubb Corp. as well as USF&G Corp. and NAC Re Corp.

"It's going to be a more challenging year for the stocks to advance than it was in 1996" because of rising combined ratios and slow premium growth, said Alice Schroeder, vp at Oppenheimer & Co. Inc. in New York.

She added, however, that investors may begin to focus more on core fundamentals, because many insurers whose stocks have lagged have been successfully executing an ongoing strategy rather than making dramatic changes. Some of those stocks are likely to do better in 1997, said Ms. Schroeder, whose recommendations include General Re Corp. and EXEL Ltd.

"I would say the outlook is uninspiring for the pure commercial P/C stocks," said Weston Hicks, an analyst with Sanford Bernstein & Co. in New York. "I think, in the commercial lines area, the excess capacity situation is as large as ever. There's evidence of increasing competition, particularly in the more commodity-like portions of the business, and the valuations of the stocks are not especially cheap," he said.

Mr. Hicks has "neutral" ratings on two-thirds of the commercial lines insurers he follows. Stocks he does recommend include Chubb and Travelers/Aetna Property Casualty Corp.

Commercial property/casualty stocks will lag somewhat behind the overall market, said Ms. Morrissey. "Analysts are beginning to cut their estimates, and I think that's going to continue," she said.

"We don't see it as being disastrous for the industry at all, but we don't expect that it's going to be a terrific year," she said.

Others have more positive outlooks.

Jay Cohen, an analyst with Merrill Lynch in New York, said he has "muted optimism."

"I would say that we certainly don't expect much improvement in premium rates, so as far as improving fundamentals helping the stocks as a whole, it's not really in our forecast," he said.

However, he added: "Individually, a number of companies have been able to produce, or should produce, pretty good earnings growth next year, and that could help those stocks. So in essence, on the fundamentals side, selectivity will be pretty important."

Furthermore, "If we get another situation this year with modest economic growth and a limited threat of inflation, these stocks should perform pretty well."

Industry consolidation could help the share prices, he said. "Most people believe the industry is overcapitalized, or at least amply capitalized, and consolidation is a likely outgrowth of this over capitalization. That generally would be seen as good for the industry and probably would help the share price," said Mr. Cohen, whose recommendations include Frontier Insurance Group, Bermuda-based Terra Nova (Bermuda) Holding Ltd. and reinsurance broker E.W. Blanch Holdings Inc.

Harry Fong, director at C.J. Lawrence-/Deutsche Securities Corp. in New York, said he is optimistic. "Underwriting results continue to be better than most people believe. Return on equity is not particularly good, but that may be a function of how much capital there is in the industry. Bottom line, despite that position, I think the group as a whole could turn in an above-average year.

"Corporate profits in general may be coming under pressure, and other economically sensitive groups could find '97 a lot more difficult than the environment that existed in '95 and '96, hence relative to other sectors of the economy, this group could turn in a pretty good performance, so I'm actually encouraged."

Mr. Fong's recommendations include Chubb, St. Paul Cos., Travelers/Aetna and ITT Hartford Group Inc.

John Keefe, Richmond, Va.-based vp and analyst with Ferris Baker Watts, who specializes in small-capitalization insurers, said, "I think the specialty insurers will continue to deliver above-average results in 1997.

"As the Hartford-based and New York-based multiline insurance companies exit from the smaller suburban and rural markets, it opens up opportunities for the specialty insurers."

Price competition is considerably less sensitive in this market segment, said Mr. Keefe. "Not every insurance company or broker is shooting at the small-business owner who pays $5,000 a year in premiums," said Mr. Keefe, who noted his firm's index of small-account specialty insurers was up 22% in 1996. His recommendations include Penn America Group Inc. and the Markel Corp.