Bank of America Gives P-C Stocks A Rave

Property-casualty insurance stocks are a relatively safe haven for investors, with balance sheets “in the strongest shape in history,” stock analysts at an investment bank reported today.

Bank of America's Equity research said that in a time of financial and economic concern, most p-c insurers have insignificant exposure from the subprime mortgage market investments collapse.

Property insurers have returns on equity that are independent of the economy in the medium term, with strong balance sheets, and are generating excess capital, the bank said.

According to its analysts, price declines in the insurance market are expected to continue and terms and conditions will start to deteriorate. Still, they said p-c firms supported by capital management look poised to deliver midteens ROEs in 2008 and 2009.

Merger and acquisitions in the sector should pick up, the bank said.

The analysts said they favor reinsurance and commercial lines stocks, which have higher excess margin cushions and more attractive valuations than personal lines. They listed as their top picks: Travelers, XL Capital, Aspen and Everest Re.

Their report found p-c insurers' financial fundamentals strong in spite of price decreases and said 2007 should be the third year of underwriting profitability since 1978 with a 93.8 combined ratio for the first nine months of 2007. The fourth quarter should be strong despite some catastrophes.

Bank of America said favorable loss cost trends will help commercial lines results in 2008, offsetting some of the price decreases.

It found Bermuda reinsurance stocks were the best performers, with AXIS up 17 percent. The best-performing large caps were Chubb, up 3.2 percent; ACE, up 2 percent; and Travelers, flat.

The analysts said they believe management at p-c companies is more thoughtful and disciplined than in the past, but their true test will come in the next few years as prices decline and terms and conditions deteriorate.

They noted that in 2007 large capital firms through share buybacks and dividends have given shareholders 10 percent of their market capitalization and said they expect that trend to continue this year.

Giving back excess capital to shareholders “is vastly superior to reinvesting it in the business at unattractive prices or making ill-conceived or expensive acquisitions,” Bank of America said.