Insurance Company Comebacks

As an industry, insurers often see their fortunes rise and fall with trends over which they have no control.

Since insurers make money by investing premiums the stocks are heavily influenced by performance of the over-all stock and bond markets, as well as but interesty rates. So it should be no surprise that a third quarter in which the S&P 500 gained 17% was a good one for insurance companies, many of which report earnings the last week of October.

Thanks to the bull market, insurers will likely report higher net worths this earnings season, says Mark Dwelle, an analysts at RBC Capital Markets. The recession has taken a toll on the insurance business, in the form of flat or lower prices for policies. But insurance customers, from auto owners to huge businesses and governments, typically renew their coverage even in harsh economic times, one of the reasons insurers remain a favorite, conservative investment. Also helping out this quarter was a lack of natural disasters like hurricanes and floods which could have resulted in huge claims against property-casualty firms and the reinsurance firms that back them up.

As a result, writes Dwelle, insurance firm book values, the difference between assets and liabilities, will probably grow in the high single digits for the third quarter. The market seems already aware of insurance group's bounce back from last year's financial rout: the SPDR KBW Insurance ETF, a fund that holds a basket of industry stocks, is up 34.8% in the past three months, more than double the S&P 500's gain of 15.8%.

There are still bargains, says Dwelle. With interest rates at historic lows, insurers aren't getting much income by investing policyholder premiums. With many customers hurting from the economy, competition is fierce and prices are flat or falling. That means smart companies will have to earn bigger profits through smarter underwriting, that is, charging more for taking on less risk.

That environment favors primary insurers, who sell policies directly to customers, over reinsurers and insurance brokers, says Dwelle. He recommends purchasing shares of Chubb, which specializes in policies for wealthy clients and businesses. W.R. Berkley and Argo Group International Holdings have various specialties in property-casualty insurance. Max Capital Group and Arch Capital Group are mid-size, Bermuda-based reinsurers that could do well.