Risk Management

SIDEBAR: A Flight to Quality?

Wall Street rediscovered insurance stocks long before the new price hikes.
David KatzNovember 1, 2000

With the current southward drift of the NASDAQ, might a flight to quality that includes interest in newly seductive insurance stocks be afoot?

If that’s true, the higher premiums plaguing CFOs might be recouped by their companies’ investment in insurance stocks.

In the last year, p-c stocks have certainly turned their performance around relative to the rest of the market. Based on calculations weighted toward companies with higher market capitalizations, p-c stocks lost 25.7% of their value in 1999, while Standard & Poor’s 500 index gained 21%, according to a recent report by the Insurance Information Institute.

But by late October of this year, p-c stocks had recorded a total return of almost 19% for the year to date, while the S&P and NASDAQ had declined 4% and 14.4%, respectively, the report noted.

“The interest in tech was one reason the value of insurance [stocks] dropped off” last year, says Robert Hartwig of the New York-based III. Now, investors are discovering that “investing in companies that actually make money makes sense.”

“I know for a fact that there are certain pension fund managers that are going to make big bonuses this year because early in 2000 they loaded up on insurance stocks,” he says.

Besides higher premiums see story about insurance price hikes , another offshoot of the p-c industry’s resurgence will be a continuing falloff in merger activity, Hartwig predicts. He noted that insurer M&A activity peaked in 1998 and fell drastically in 1999 and the first half of this year.

With the increased market capitalization of U.S. p-c insurers, they’ve become more expensive to acquire, he said, noting that Europeans are more likely to be interested in buying life insurance and “wealth management” companies now. But there may be some new partnerships between p-c companies and banks, he thinks.