Several buyside firms are considering increasing their exposure to property and casualty insurers--the same companies whose bond prices plummeted in the wake of the Sept.11 attacks. Graham Allen, head of the roughly $50 billion taxable fixed-income portfolio at Wells Capital Management, says the firm wants to take advantage of spread-widening and the p&c companies' presumed ability to raise premiums going forward.
Kevin Ceurvorst, buyside analyst at Principal Capital in Des Moines, is particularly high on the bonds of insurance brokers such as Marsh & McLennan (A2/AA-) and Aon Corporation (A3/A+). He says both will generate larger commissions and fees from an increase in premiums, but have limited liabilities from claims payments. Among companies which have greater claims liabilities, Ceurvost says he has recommended Principal's portfolio managers buy St. Paul Companies (A1/A+), a commercial-line carrier, Progressive Corp (A2/A+), a personal-line carrier, and American International Group (Aaa/AAA secured rating), a multi-line carrier.
The resiliency of the sector is "nothing short of miraculous, and an incredible testament to this industry," says David Havens, analyst at UBS Warburg. "It could be on the hook for $50 billion dollars worth of losses or more, and we're probably only talking about ratings downgrades of one to two notches, and most damages accounted for and paid off this year." Havens recommends that fixed-income investors focus on large, well-capitalized companies such as Allstate (Aa2/AA+), and, for investors with more of an appetite for risk, Royal & Sun Alliance (A2/A).
As a personal-line carrier, Allstate's exposure to damages from the attacks is relatively limited, according to Ceurvost. Allstate's 6.5% notes of '11 widened from 120 to 145 basis points over ten-year Treasuries immediately after Sept. 11, but have already recouped those losses. Nonetheless, Havens expects Allstate to outperform other benchmark names by 10 basis points. Royal & Sun, which has far more liability, saw its major issue, the 8.95% of '29, balloon from 200 basis points over the curve to 310 over comparable Treasuries last week. Assuming no major attacks, Havens expects up to 50 basis points of tightening in the bonds.
Wells Capital's Allen, responsible for some $50 billion in taxable fixed-income, says the firm has been slightly underweight the insurance sector, but is considering changing that strategy, with particular emphasis on p&c insurers. He declines to discuss specific names the firm is looking at, but says it wants to study the matter further to be fully convinced that the bad news has been fully discounted, and that price increases will stick. It is not inconceivable, he says, that Wells will move to an overweight position in insurance within the next month.