March 29, 2007: Insurance, who wins?

As I examine my portfolios, I do have some interesting insurance plays. The iShares Switzerland includes a number of the larger international insurers and is a favorite ETF of mine. I hold a relatively large position in a personal speculation, Convernium (CHR), which has performed as expected and is close to being bought out at a nice premium. Donegal Insurance (DGICA)is another holding of mine that is a prime buyout prospect. I think it is a steal at the current price of $17.00+ -/share.

As an sector, property casualty insurers continue to be risk averse in their positioning of fixed income investments in anticipation of higher interest rates. They may be betting the wrong way. Sub-prime exposure is NOT a significant problem.

If rates rise, companies such as Ace Limited, Max Re, Odessey Re, Ohio Casualty, Partner Re and Transatlantic are vulnerable to as much as an 11% decline in their stock price, according to some analysts.

On the other side of the coin, companies that maintain below average portfolio duration, above average cash and short term investments and above average investment leverage will do very well, indeed. These companies include American Physicians (ACAP), Arch Capital (ACGL), Navigators Group (NAVG), White Mountains (WTM) and XL Capital (XL).

All things being equal, if interest rates rise, many property-related insurance stocks will fall in value. This has been the case for over 25 years. The inverse, thus, is also true. Who wins? You do, with good research starting with the five recommendations above.