Thursday, January 19, 2006

Analyst Bullish on Insurance

Forbes, John Dobosz, 19 January 2005

Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter, is bullish on the insurance group as a whole and recommends buying into a sector fund to take advantage of the group’s strength. His top pick: Fidelity Select Insurance (FSPCX).

Several factors influence his bullish outlook, including the pricing power shown by property and casualty companies, along with consistent execution by life insurers and ongoing industry consolidation. Although insured losses have been huge in the past two years thanks to devastating hurricane seasons in 2004 and 2005, property and casualty insurers will make up for the big payouts with higher premiums.

“Property insurance rates in hurricane-affected states of the Southeast will likely increase significantly,” says Subramanian. “Ace expects property and casualty net earned premiums to grow 6% to 8% in 2006.”

Fidelity Select Insurance invests a minimum of 80% of assets in securities of businesses that are principally involved in underwriting, reinsuring, selling, distributing and placing insurance. Among the top holdings of the fund are MetLife, AFLAC, Prudential Financial and Allstate.

At 10% of holdings, its largest investment is in shares of insurance and financial services behemoth American International Group, the New York company that has been under pressure due to an investigation by the New York attorney general, a restatement of past earnings going back to 2001, and the inglorious departure of longtime Chief Executive Maurice “Hank” Greenberg.

Over the past year, Fidelity Select Insurance has returned 15.1%, closing Tuesday at $69.05 per share. The fund yields about 0.9%, carries an expense ratio of 1.04%, and earns a five-star rating from Morningstar.

Subramanian believes that a lot of the insurance industry's fundamentals point toward more growth.

“On the legislative front, President Bush has reauthorized the Terrorism Risk Insurance Program for two years beyond its originally scheduled expiration date of Dec. 31, 2005. This program provides government support for terror-related catastrophes,” say Subramanian, noting that it takes some burden off insurers.

“Among life insurers, Prudential Financial is executing well and is expecting earnings to grow 18% in 2006. Supplemental insurance provider AFLAC expects operating earnings to grow 15% in 2006, and the company is on a robust growth trajectory and has increased the number of agents by over 8% from year-ago levels,” says Subramanian.

Consolidation in the industry has also picked up in the past year. “In July 2005, MetLife completed its acquisition of Travelers Life & Annuity, and in October 2005, Lincoln National announced its merger with Jefferson-Pilot,” says Subramanian. “Given the fragmented and competitive nature of this industry, we believe insurers with strong balance sheets will pursue acquisition opportunities creating value for investors.”

There are, of course, Subramanian cites, natural or terrorism-related catastrophic events that may increase reimbursement and impact earnings. In addition, political interference (particularly in the P&C segment) may result in unfavorable changes. Lastly, he says, stock prices in the insurance group are generally sensitive to interest-rate movements since insurance is part of the financial services group.

”Notwithstanding such risks, we like the prospects for Fidelity Select Insurance and include it in the core model portfolio,” says Subramanian, who also notes that an alternative to the FSI is the streetTracks KBW Insurance exchange-traded fund from State Street Global Advisors and Keefe, Bruyette & Woods. The “Insurance ETF” has only been trading for two months, and there have been several days when zero shares have traded. Investors concerned about liquidity should stick with the Fidelity Select Insurance.