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Commercial property/casualty insurance stocks have been flourishing in the stock market this year.

But some observers said they think the stocks, whose performance this year has been boosted by both actual and rumored consolidation, as well as a favorable, low-interest rate environment, are unlikely to maintain the same momentum the rest of the year.

Insurer stocks have done well along with an overall strong stock market so far in 1997. According to the BI Industry Stock Report of 93 insurers and reinsurers, through July 18 stocks advanced 22.77% year to date, though some analysts' own indexes based on the stocks they follow show even greater growth.

This compares with a 22.33% increase for the Dow Jones Industrial Average and a 23.57% increase for the Standard & Poor's 500 for the same period.

Meanwhile, Federal Reserve Board Chairman Alan Greenspan's report to Congress last week, in which he gave no hint that an interest rate increase is imminent, provided a big boost to the stock market overall.

"I would expect that virtually all equities will realize some benefit from his upbeat, positive presentation," said John L. Ward, chairman of Cincinnati-based Ward Financial Group Inc.

Analysts are putting a wide range of property/casualty stocks on their "buy" lists, including old favorites, such as Chubb Corp., American International Group Inc. and General Re Corp.

Michael Lewis, senior insurance analyst with Dillon Read & Co. in New York, who said as a group property/casualty stocks have outperformed the S&P 500 this year, observed they have done so "despite the difficult commercial property/casualty operating environment."

Mr. Lewis pointed to the low-interest-rate environment, which is helping interest-sensitive stocks-including insurers'-as well as the ongoing consolidation in the sector, "which is certainly having a positive effect on mid-cap property/casualty names.

"And finally, I would say the distinctly improved capital management being instituted in the sector is also enabling the industry to produce better operating results," said Mr. Lewis.

Said Ron Frank, an analyst with Smith Barney in New York, "I think the stocks' performance has been pretty good, or about as good as you could expect considering the fundamentals certainly haven't improved any."

"You certainly had some excitement surrounding some of these stocks" regarding acquisitions, both actual and speculated, said Mr. Frank. The stocks also have benefited from a favorable bond environment, he said. "My own view is that to some extent you have seen these stocks catch up with the bank stocks," he said.

"Through the first half of the year, insurance stocks had generally outpaced the S&P 500 by a lot if you were a property/casualty insurer," said Michael Smith, an analyst with Salomon Brothers in New York.

And while reinsurer and bond insurer stocks trailed behind the market, they were "still up nicely," he said.

"It's interesting because the property/casualty stocks have been among the strongest performers this year, and yet that's where the earnings performance has not been as attractive, and in many cases the earnings quality is downright ugly, so basically Wall Street has been bidding up all the property/casualty stocks indiscriminately," said Mr. Smith.

"It becomes interesting when you contrast it with the continued mediocre performance of the reinsurance sector," he said. "You do have a situation in the reinsurance sector where the fundamentals are still reasonably attractive, and yet Wall Street has been waiting for the past two or three years for those fundamentals to deteriorate and has thus shunned the stocks, and in my view has created some very attractive investment opportunities."

Many observers say they do not expect the stocks to do quite as well relative to the overall stock market for the remainder of the year.

"It's tough to foresee these stocks matching the exceptional performance we saw in the first half of the year," said Jay Cohen, an analyst with Merrill Lynch in New York.

"Interest rates have already come down significantly, and that has been a positive for the stocks. We may not get the same benefit from the movement in rates during the second half of the year."

Furthermore, the fundamentals, or the pricing environment, remains very competitive, said Mr. Cohen.

"I think a lot of the stocks have had a pretty good run. It's hard to believe that they can continue to run away from general market averages after having done as much as they have in both 1996 and 1997," said David Seifer, vp with Donaldson Lufkin & Jenrette Securities Corp. in New York.

"I think they can be market to above-average market from here, at least talking about the rest of the year, but I would suspect that most of the performance of the year percentage-wise has been achieved."

Mr. Lewis said, "I'm cautious in nature." He said he is concerned about the group's ability to sustain its current level if interest rates or valuation expectations ever turn around.

"I think they're operating in a pretty optimum environment right now," he said. While the group has done very well, "I don't know what's going to bring them to the next level."

Mr. Smith also said, "I think the market will become much more discriminating, and there will be pressure on the stocks of those companies that turn in earnings disappointments, and I think the earnings disappointments are going to become more prevalent."

Mr. Frank said that if the stock market remains bullish, however, "I think it's possible to continue making money in the stocks," though investors may have to shift their strategies.

During the past 12 to 18 months, many of the top stock performers have been involved in either restructuring or acquisition activity, he explained. But, "you can't keep finding those forever, and at some point you're going to have to gravitate back to the steady performers, large and small.

"As far as how the group overall performs, I wouldn't be at all surprised, frankly, if interest rates call the tune to a large extent," said Mr. Frank. If rates are stable or favorable, the group could be either an average performer or modestly outperform the overall market, though it is unlikely the stocks will do well if interest rates increase, he said.

Assuming there is no major change in interest rates, "I think there's still some potential," agreed Gloria Vogel, senior vp with Advest Inc. in New York. "I mean, they're not grossly overvalued," she said.

Chubb Corp., General Re Corp., AIG, St. Paul Cos. Inc., Reliance Group Holdings Inc., and CIGNA Corp. are among the large domestic companies on analysts' recommended lists.

Chubb "has sold off its underperforming assets, and its core property/casualty insurance business continues to perform exceptionally well despite the challenging market conditions," said Mr. Cohen.

Gen Re's stock remains relatively cheap, though "certainly it's not the bargain it was just a month or so ago, but I still think there's some room in that one," said Mr. Frank.

Gen Re is the premier reinsurer in the United States, said Mr. Smith, who noted its acquisitions have helped its earnings.

AIG's global operations, both in terms of penetration and concentration, "have not really been appreciated in a marketplace that has done all its evaluations based on domestic U.S. conditions," but its stock performance this year "reflects some sensitivity toward their global growth and leading position relative to the competition," said Mr. Seifer.

Reliance's stock performance this year shows "people are beginning to believe that management is a capable, quality group," said Mr. Seifer, who also includes it on his recommended list.

In addition, he said, "They've taken six points off their combined ratio in a very, very difficult market environment in which to demonstrate underwriting improvement, and they're beginning to be rewarded."

Ms. Vogel, who also recommends Reliance, said, "If you look at the company for the last three years, they've shown better than 15% growth in earnings," as well as a better than 15% return on equity.

"A lot of the growth is coming from specialty lines, and I think if you look at their multiples vis-a-vis what I would call their peer group, the stock is still below what I think its potential is."

Ms. Vogel also recommends St. Paul, which she said has become "a lot more focused" since its sale of Minet Group (BI, April 22). "They now have bought Northbrook, Allstate's commercial book of business, and I think that should look good for them," (BI, July 29, 1996) said Ms. Vogel, who also noted that St. Paul has been "a good quality underwriter."

Mr. Lewis' recommendations include CIGNA, which is "evolving more and more into the health care arena and has delivered consistently superior, better-than-projected earnings growth over the last two years."

Bermuda companies analysts recommended include EXEL Ltd., Partner Re Ltd. and RenaissanceRe Holdings Ltd.

Mr. Cohen said he recommends EXEL because it "is diversifying its book of business, managing its balance sheet very well and, looks very reasonably valued given the company's strong balance sheet and strong cash flow."

EXEL is also recommended by Susan Spivak, vp at DLJ, who says its excess liability and directors and officers liability lines are able to maintain high retention ratios despite the very competitive market conditions. The company also has aggressive capital management and has been repurchasing its stock, she said.

Partner Re, which Mr. Frank recommends, is "entering a whole new phase of its development with the acquisition of the SAFR Re operation, and I think the market has begun to appreciate that, but I think there's still room for the benefits of that to become apparent in the stock price," he said (BI, April 7).

Mr. Smith, who recommends RenaissanceRe, said Wall Street has not yet adequately recognized the company's profitability in its trading price.

Small-cap companies recommended by analysts include Leucadia National Corp., which through its Empire Insurance Group subsidiary insures commercial taxi cabs, said Blair Sanford, an analyst with Hoefer & Arnett in San Francisco.

It is "one of the very few companies in my universe trading anywhere near book value, and the book value, here I think, has a high level of quality to it; i.e., there's a lot of cash beneath that book value," he said.

John Keefe, vp with Ferris Baker Watts in Richmond, Va., also recommends RLI Corp., which he said has had a below 100% combined ratio for 17 of the past 20 years and recently has been in the high 80s or low 90s.

"It appears to be a genuine value compared to other quality specialty insurance companies," he said.

Mr. Keefe's recommendations include Markel Corp., a Glen Allen, Va.-based niche market insurance holding company. 'It's one of the most compelling specialty insurance stories that I'm aware of," he said. "It's a company with an obsession with underwriting profits and an extraordinary amount of investment leverage."

Other stocks analysts recommend include USF&G Corp., NAC Re Corp., HCC Insurance Holdings, Vesta Insurance Co., Mutual Risk Management Ltd., Fremont General Corp., MMI Cos. Inc. and Orion Capital Corp.