It won't take much to make this year better for the insurance industry than 1991.
The bad times included a downward spiral in the property-casualty business, worries about junk bond and real estate investments, and the failure of some major insurers.
Consumers and potential investors in insurance company stocks remain wary. The life insurance industry has been left with far greater conservatism in investment portfolios, while the property-casualty group remains stuck in a rut. Would-be investors in these stocks must be cautious, selecting those equities whose lower prices make them attractive for the long run.
"The property-casualty industry needs price increases, yet heated price competition continues and I see it being 12 to 18 months away from a positive turn," said Ronald Frank, analyst with Smith Barney, Harris Upham & Co. "Its return is currently a pathetic 8 percent."
Hopefully, all of this is the storm before the calm.
"While property-casualty is at the bottom of the trough, perhaps if the situation seems bad enough, industry pricing will finally start to move upward," said Jeffrey Hopson, analyst with A.G. Edwards & Sons. "Until the financial strain seems great enough to really do something about it, there simply won't be improvement."
Quality life insurers continue to expand their advantage over their weaker competitors, a trend likely to continue well into the future. The investment scenario for life insurers is better this year because the junk bond situation has eased and commercial real estate has bottomed out, said Hopson. Yet, in terms of getting baby boomer investment money, he's convinced that mutual fund companies and brokers will do much better in gaining those dollars than the life insurance companies will.
In property-casualty, shares of American International Group (AIG) are recommended by both Frank and Hopson because their price is reasonable.
Chubb Corp. is suggested by Frank because it is a disciplined company, outperforming its peer group in underwriting and featuring specialized lines that are less price-sensitive. Its stock price is also at an historic low. "The individual investor shouldn't take a trading mentality toward property-casualty stocks, but buy at a point when they're depressed and then sit and wait for cyclical improvement," said Frank. "You just can't outsmart the world in calling a cycle."
State Auto Financial is the stock pick of Hopson, who points out that people are driving less during the economic slowdown, resulting in fewer claims.
"Remember that property-casualty stocks can be interest-rate sensitive, resulting in weakness if rates go up," warned Hopson, "because they go hot and cold, they never garner overwhelming appeal, yet make sense if you buy when out of favor and put them in the drawer."
Among life insurers, Capital Holding is recommended by Frank because its stock is depressed due to "perception of risk." It's a well-managed company with a strong record of growth and dividends, and its Home Service Life Insurance division is a particularly strong moneymaker.
Meanwhile, the Value Line Investment Survey among diversified insurance companies recommends American Bankers Insurance Group, CIGNA Corp., Crawford & Co. and MBIA Inc. Its life insurance picks are Conseco Inc., AFLAC Inc., Jefferson-Pilot Corp., UNUM Corp. and Washington National Corp.