Just a few days before the Federal Reserve raised short-term interest rates, money manager Karen L. Finkel of PaineWebber Inc. calmly adjusted the paperwork in front of her.

"I am not really concerned if interest rates are raised," said Ms. Finkel, portfolio manager for the PaineWebber Financial Services Fund. "I have the luxury to invest based on trends, which are independent of interest rate fluctuations, economic growth, and inflation."

Even if she's not worried about interest rates, Ms. Finkel is one of many portfolio managers making a switch out of banks-and into insurance companies. For the past two years, Ms. Finkel has been gradually lightening her positions in bank stocks in order to get a head start in what she sees as a future boom for insurance companies.

The bank portion of her $160 million portfolio-which is made up of financial stocks-has steadily dropped to one-half from two-thirds.

Ms. Finkel said she does not expect the position in bank stocks to fall below one third, but noted: "The financial industry was changing so rapidly that our historical orientation, which was toward banks and thrifts only, needed to be broadened.

"The lines between banks and other financial institutions was becoming fuzzier and fuzzier," she added. "We didn't want to be limited to banks; we wanted to invest in companies that had the greatest potential to succeed in the changing environment."

The fact that insurance companies are showing the greatest potential has not eluded the radar of other money managers.

During the first quarter, a number of them who oversee financial mutual funds have been taking larger position in the sector. Analysts said that the shift in gears is to be expected as the bull run in the banks stocks appears to be slowing down. Insurance stocks, on the other hand, are just beginning to hit their stride, said bank analyst Michael Mulvihill of Morningstar Inc.

So far, the affair with insurance stocks is most evident among smaller cap funds, said Mr. Mulvihill. But considering current market conditions, it may just be a matter of time before portfolio managers of larger funds started moving aggressively in the same direction.

Ms. Finkel said she still remains bullish on banks, particularly those that have strong fee-income based businesses that can weather drops in the market. Her biggest positions include Northern Trust Corp., Chicago; Synovus Financial Corp., Columbus, Ga., and First Empire State Corp., Buffalo.

But insurance stocks are increasingly taking on the allure that banks stocks used to have two years ago, argues Ms. Finkel.

Consolidation is clearly visible in this industry, she asserted, and some firms have showing impressive earnings growth. Ms. Finkel also notes that at a time when bank stocks appear fully valued, insurance stocks look like a bargain.

Some of her favorite insurance stocks include SunAmerica Inc., Nationwide, and Traveler's Corp.

Her on-target bank picks and shift to insurance has made PaineWebber's financial fund one of the best performing sector funds on a short and long- term basis.

According to Morningstar, the 10-year annualized returns on the fund were 17%, while the returns of the Standard & Poor's 500 were 13%. For five years, annualized returns, were 22.69% and returns for the S&P 500 were 16.41%.

In the last two years, as Ms. Finkel started adding the insurance companies, PaineWebber returns were 34% versus the S&P 500's, 26%.

George Schwartz, who oversees the $200 million Schwartz's Value Fund in Bloomfield Hills, Mich.., has been shifting from bank stocks to insurance stocks since the fourth quarter and stepped up the practice even more in this quarter. Within that time he has reduced our exposure to bank and thrift stocks by 10% to 20%, said Mr. Schwartz, president of Schwartz Investment Counsel Inc.

Mr. Schwartz argues that many banks stocks no longer have the appeal that they did two years ago.

Loan losses are increasing and the ability to reduce expenses is becoming more difficult, said Mr. Schwartz. Competition in the industry has increased and buyback programs, which has helped boosted the stock prices of many banks, is not as nearly as effective as it once was, he added.

"The bloom is off the rose," said Mr. Schwartz. "There just isn't much upside" in the sector.

Yet, Mr. Schwartz does see possibilities in property and casualty insurance-particularly among the smaller players. Depending on the company, small insurance firms stocks can be bargains and the chances of them being taken over are steadily increasing.

Portfolio managers at larger mutual funds also have been showing increasingly interest in the sector.

Scott Edgar, director of research at the $830 million Sife Trust Fund, Walnut Creek, Calif., said that he is not increasing his position in insurance stocks at the expense of banks stocks-although, he concedes "that would not be imprudent."

Instead, he has been taking excess cash this quarter and putting it into annuity and life insurance companies. This quarter SIFE's portfolio manager has allocated 2% to 3% of the fund to four insurance companies, including: AFLAC Inc. Columbus, Ga.; American International Group Inc., New York; Equitable of Iowa Companies, Des Moines; and SunAmerica.

"We use insurance stocks not as a substitute for financial service as a whole but more as opportunity," said Mr. Edgar. "If we see good growth this quarter, we could potentially add more to the portfolio."

Michael R.Hamilton, who oversees the Princor Funds, which invests heavily in bank stocks-agrees that insurance stocks are becoming increasingly attractive.

He noted that those insurance companies that focus on investment products will be able to take advantage of the demographic trends-which indicate that a large proportion of the population is becoming savings oriented as opposed to consumer oriented.

However, insurance companies like banks are affected by higher interest rates, said Mr. Hamilton. "There is also the question of too much competition in the sector, which could effect their margins." At best, consolidation will be uneven, he added. "The ones that have better distribution will do better than others."

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