Like the stocks of most financial services businesses, those of insurance companies move in the opposite direction of interest rates.
When rates go down, insurance companies' stocks tend to go up. But some say that's about where the similarity ends.
American Banker now follows insurance stocks in the weekly Market Monitor as part of its enhanced coverage of the banking industry's competitors in the financial services sector.
"Outside of the fact that banks and insurance companies are classified as financial services, they really operate in two different areas," said Charles Vincent, a banking and insurance industry analyst in Philadelphia for PNC Asset Management.
"Basically, when banks put out money, they expect to get it back," Mr. Vincent said. "When insurance companies put out money, they hope to get it back. They don't often have the luxury of knowing they'll get it back."
Insurance companies lose 2 to 8 cents on their underwriting dollar, which they make up in their investments, Mr. Vincent said.
Recent interest rate cuts by the Federal Reserve have given insurance stocks a lift.
"Bank stocks were the better performers in the early part of 1995," said Michael A. Lewis, a senior industry analyst at Dean Witter Reynolds Inc., New York.
"The insurance stocks have been gaining strength in the second half of 1995 and through 1996," he said. "After the run-up in banks, investors wanted to stay in the interest-sensitive group, so insurance companies got some of the spill-over action."
Indeed, some analysts said that the connection between interest rates and the performance of insurance companies is not as direct as those for other financial services companies.
"Insurance companies do trade on interest rates," noted Mr. Vincent. "Some of that is market driven," he said, while some of it is related to the general interest-rate-generated movement among financial services stocks.
"When interest rates go up, it is beneficial to the dollars invested," Mr. Vincent said. "They get a higher rate of return on fixed-income investments. On the other hand, when interest rates go up, that increases the cost of longer-duration claims."
Regardless of the direction of rates, insurance companies pay a price and receive a benefit.
The insurance company label encompasses a broad array of businesses, whose stocks each trade at different multiples.
Most life and health insurance companies trade somewhere along the lines of 10 to 13 times earnings and about 1.5 to 2 times book, Mr. Lewis said.
Property and casualty companies, by contrast, trade at a wider range, approximately 10 to 15 times earnings and 1.3 to 2 times book value.
"In property and casualty, everyone loses money," said Michael Leit, a fixed-income analyst at Prudential Securities Inc., New York. "Over the last seven or eight years, no one made money underwriting - it was made through the investment portfolio."
Like banks, insurance companies have seen prices erode on their primary product, and have been pushed in most cases into finding revenue from other areas, and in some cases, into consolidation.
"It's the same situation as with most financial institutions," Mr. Lewis said. "There are too many institutions and some of the areas in the insurance industry are relatively mature. The best way to make progress is to buy up other companies and knock out the home office expense."
The consolidation has progressed at a considerably slower pace among insurance companies.
Mr. Lewis has "strong buy" ratings on American International Group, Allstate, and American General Corp.
"We're looking for industry leaders with a good track record and high ratings, as well as those that are low-cost distributors," he said.
Mr. Lewis said the market looks good for insurance companies for the first half of the year, in light of a potentially steepening yield curve.
