Banc of America Analysts: Insurance Companies Poised for Turnaround

September 22, 2000

The industry is also beginning to look for opportunities to sell its products over the Internet, says Banc of America Securities analyst Robert Ryan. Zucker, Meredith, and Ryan made their comments at the 30th Annual Banc of America Securities Investment Conference, which runs through Sept. 22 at the Ritz-Carlton Hotel in San Francisco.

The five-day conference features 250 presentations from companies that are driving the Business Services, Consumer & Retail, Energy, Entertainment, Media & Telecom, Financial Services, Health Care, Industrial Growth, Real Estate & Lodging and Technology industries.

Meredith noted the disastrous performance of the property casualty insurance sector over the past six months and said it is still 16% off its 1998 peak.

While absolute price/earnings multiples on one-year forward earnings are now above their historical averages, the absolute price/book value multiples are still near their historical average and significantly below the peak reached during the 1980s, the last favorable pricing environment for commercial lines, he said.

“The industry faces a number of investment positives, including rising standard commercial lines and reinsurance pricing,” Meredith said. “Over the next two to three years, we can make a bullish case for standard commercial insurers as companies continue to raise rates in an effort to achieve returns equal to or greater than their cost of capital.”

Likewise, earnings growth for standard commercial lines should accelerate through 2003, he added. Meredith’s strong buy recommendations include Ace Limited (ACL), XL Capital (XL), and Hartford Insurance Group (HIG).

Ryan, who covers bond and mortgage insurance companies, said the insurance industry’s entry into the Internet space has been relatively small compared to the total addressable market of $1 trillion.

As insurance companies compare selling their products over the Internet with their current agent distribution network, they have seen that the two are not mutually exclusive, he said. Insurance companies face two major impediments in launching Internet business, Ryan said.

“The first is questionable demand,” he said.” Is the Internet appropriate for selling complex products, and are companies prepared to assume the risks of adverse selection?”

A second impediment is channel conflict, he said.

“The insurers are faced with a difficult balancing act because e-insurance offers considerable promise, but currently is a negligible part of the industry’s premium production. This issue needs to be addressed.”

Ryan’s top bond insurance company picks are MBIA Inc. (MBI) and Ambac Financial Group (ABK). His top mortgage insurance company selections are MGIC Investment Corp. (MTG), Radian Group (RDN), and The PMI Group (PMI).

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