The insurance industry has seen its usually predictable stocks shoot the market rapids in the past year. So with insurance shares climbing again, the question is: What next?
"I think these stocks will turn in a respectable performance from here to the end of the year," said Steve Berman, senior equity analyst following the financial services sector with Stein Roe & Farnham Inc.
The reason behind the volatility in the insurance sector is interest rates.
As rates fell in the last half of 1995 and early this year, many companies watched their share prices rise above historical valuation levels, said J. Chris Sergeant, an insurance industry analyst at Dain Bosworth Inc., Minneapolis.
The wild ride really began as rates turned upward in late February and early March, yanking the rug from under the stocks. Insurance equities dropped 15% lower in a matter of days.
While nearly all have recovered since then, the stellar performers are those taking advantage of the changing industry, Mr. Sergeant said.
"Buy companies on the acquisition track," he advised. "They know how to do additive deals and they have all the money."
Among the top performers in this group is Travelers Group. In recent years, the insurer has bought Primerica Financial Services, Shearson, the brokerage firm, and most recently Aetna Property & Casualty for $4 billion.
This latest acquisition is expected to add 23 cents a share to 1996 net income, according to estimates from Richard K. Strauss, an analyst at Goldman, Sachs & Co. On May 29, he upgraded Travelers' stock to Goldman's selective buy roster, its U.S. Recommended List.
He said Travelers' various components sell at 20% below their public market worth, and the stock itself is at a 32% discount.
Another such company is SunAmerica Corp. of Los Angeles. Besides being "a very aggressive acquirer," Mr. Berman said the company has product and distribution breadth that few of its competitors have.
The company sells its variable rate annuities and branded mutual fund products through a network of securities companies and other financial institutions. Insurance companies have traditionally relied upon a nationwide network of agents to market its products.
And the company's stock has reflected investor belief in this system. After diving $11.88 a share in a month, to a low of $45.125 in mid-April, SunAmerica's share price has returned to its pre-January levels, closing at $56.375 on Thursday. According to Mr. Sergeant, the stock is not yet fully priced.
The market also likes companies that are cutting back on out-of-favor lines of business. When Allstate Corp., Northbrook, Ill. recently said it would cut hurricane exposure in Florida, its shares soared past $46 from a low of $38 a share on May 7. It closed at $45.875 on Thursday.
Adding to the long-term potential for the industry are some evolutionary changes. Like banks, insurance companies are returning excess capital to shareholders. And like banks, information technology is allowing the top performers to target highly profitable niches.
But unlike banks, industry consolidation will move much more slowly, Mr. Sergeant predicts. "Insurance companies don't have the geographic necessity of doing deals that banks have had," he said. "So deals are driven more from raw economics."
