O petróleo está em queda, mas a incerteza continua em alta

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Property Insurers Cheapest Since 2000 on Mistaken Subprime Link

By Josh P. Hamilton

Oct. 5 (Bloomberg) -- It's better to be lucky than smart, unless you're Travelers Cos., Ace Ltd. or any of the dozens of property and casualty companies that investors assume are so dim that they must have invested in subprime mortgage debt.

Insurers traded at their cheapest stock market valuations since 2000 in the quarter ended Sept. 30 because of concern they are saddled with losing investments tied to the housing market slump. The truth is their holdings linked to U.S. mortgages for people with bad credit histories represent about 1 percent of fixed-income assets, according to Fitch Ratings.

``Insurance companies had been willing to play the fool in the past, so investors sold those securities,'' said Michael Simon, a fund manager at Houston-based AIM Investments, which oversees about $160 billion and owns shares of Ace. This time, insurers ``aren't the dumb money,'' he said.

While subprime-derived securities became almost unmarketable in the third quarter, Treasuries maturing in zero to 10 years rallied 2.7 percent and corporate debt rated at least A gained 2 percent, data from Merrill Lynch & Co. show. Few, if any, insurers face credit rating cuts because of subprime assets, said Robert Riegel, who tracks the industry at Moody's Investors Service.

The Standard & Poor's 500 Property & Casualty Insurance Index dropped 6.2 percent in the third quarter, worse than the 4.9 percent decline of the S&P 500 Financials index, which includes subprime mortgage originators such as New York-based Lehman Brothers Holdings Inc. and Bear Stearns Cos. The average property and casualty insurance stock trades at about eight times earnings, down from 17 a year earlier, according to data compiled by Bloomberg.

Hurricane Katrina

Overall, 66 percent of the industry's investments are in bonds, including Treasuries, municipal and corporate debt, and securities backed by mortgages. About 98 percent of the fixed- income holdings are rated at least BBB and 2 percent are rated below that, according to Fitch, which compiled year-end 2006 data, the most recent from the National Association of Insurance Commissioners.

``The companies haven't been stretching for yields with riskier assets,'' because underwriting profits are so good, said Cliff Gallant, an analyst at KBW Inc. in New York, who has an ``outperform'' rating on shares of Ace and Travelers. That may change if insurance prices continue falling from the peak following Hurricane Katrina. Still, ``when we get third-quarter numbers, these stocks are positioned to do well,'' he said.

Allstate Corp., the largest publicly traded U.S. home and auto insurer, lost more market value at the depths of the past quarter's credit crisis than it did in the aftermath of 2005's Katrina, which cost the company $3.6 billion. Shares of the Northbrook, Illinois-based company slid 7 percent during the quarter, third-worst among its peers in the S&P index.

Asset Mix

``Allstate has been oversold,'' said Gallant, who rates the stock ``market perform.'' Any declines in the value of Allstate's subprime-related investments, 5 percent of the insurer's $123 billion of holdings as of June, may be cushioned by gains in high-quality corporate debt. Allstate traded at 1.59 times book value at yesterday's close, compared with an average 1.68 over the past decade.

Shares of Bermuda-based Ace fetch 1.4 times book value, or assets minus liabilities, 5.7 percent below their 10-year average and 27 percent less than the average for companies in the 92-member S&P Financials Index.

Ace is among insurers with the most conservative holdings, including $3.7 billion of Treasuries and so-called agency debt that has implicit backing from the U.S. government, compared with $280 million of investments linked to subprime loans, said Brian Meredith, an analyst at UBS AG in Stamford, Connecticut.

Market Discount

Travelers, with $205 million in subprime-backed holdings out of $72.9 billion, fell 5.9 percent in the quarter. While shares of the St. Paul, Minnesota-based company traded yesterday near their ten-year average of 1.42 times book value, they fetch 8.3 times earnings, 45 percent below the ten-year average.

XL Capital Ltd. of Bermuda invests about 3 percent of the company's fixed-income assets in subprime-backed bonds, with 81 percent of those rated AA or higher. XL also had about $230 million of second-lien mortgages and $90 million in asset-backed collateralized debt obligations. The holdings still gained 2.2 percent through mid-September, Meredith estimated.

``When people are worried about credit, property-casualty insurers are a good group to be in,'' said Meredith. He rates Ace, XL Capital and Travelers ``buy.''

Subprime Benefits

Odyssey Re Holdings Corp., down 13 percent since June, may gain if the biggest housing slump in 16 years worsens. The Stamford, Connecticut-based company reaped a $77 million pretax gain in July from derivatives that increased in value as the subprime market fell, Chief Financial Officer Richard Donovan said Aug. 3 in a conference call.

``Not only do they have absolutely no subprime credit exposure, they own credit-default swaps, which are beneficiaries'' of declines in the credit markets, said Mark Dwelle, an analyst at Richmond, Virginia-based Ferris Baker Watts who rates the stock ``buy.''

Assurant Inc. also profited from the subprime crisis, yet its stock fell 9.2 percent last quarter. The New York-based insurer said it recorded ``substantial growth'' selling banks policies for foreclosed homes and mortgaged properties where the owner let coverage lapse. Its own subprime investments total less than 1 percent of holdings, Assurant has said.

To contact the reporter on this story: Josh P. Hamilton in New York at jphamilton@bloomberg.net
Last Updated: October 5, 2007 00:08 EDT

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