Last week's successful $400 million issue by Nationwide Mutual Insurance shows there is still strong demand for property and casualty insurance paper, says Greg Habeeb, portfolio manager at Calvert Asset Management in Bethesda, Md. Because, bonds of large household property and casualty insurance names, such as Allstate and American International Group, have more than recovered their pre-disaster spread levels, Habeeb says the real premium is in lesser-known names. Recent purchases he has made include bonds of Liberty Mutual Insurance in 30- and 100-year maturities. He says Liberty is a comparable credit to Nationwide, although it trades well behind that name. Last week, the Liberty 7.875% notes of '26 were trading at 345 over Treasuries, while the Nationwide paper was at a spread of 305 basis points over the curve. Other purchases Calvert has made include Lumberman's Mutual Casualty Insurance,XL Capital and Renaissance Re.
David Havens, analyst at UBS Warburg, says spreads on all the companies Habeeb mentions should tighten, as they benefit from higher rates going forward. He sees the Lumberman's 9.15% notes of '26, bid at 455 last week, eventually trading "with a three-handle," or into the 300 basis point off the curve range. He also recommends the Zurich 8.376% trust preferred securities of '37 (Aa3/A+), which were bid at 310 basis points over Treasuries last week. He says that though there is downgrade risk, he believes fair value is 25 basis points tighter.