Mr. Karaoglan: Non-life really focuses on property-casualty insurance companies, as differentiated from the life insurance and the annuity companies, which are grouped under life insurance. Most of the non-life analysts also cover the insurance brokerage industry, which are the intermediaries for the property-casualty industry. In addition, it also includes multiline insurance companies such as AIG (AIG) and Hartford Financial Services (HIG).
TWST: How have the stocks in the non-life group performed in the last 12
months? Also, would you touch on the study you did in analyzing the
historical valuations and patterns for these socks, a study in which you
attempted to answer some questions?
Mr. Karaoglan: When we were coming off of 1999, property-casualty stocks
underperformed significantly the S&P 500 and other sectors. At the
beginning of this year, they continued to underperform until March.
Since then, they've been on a tear and really outperformed the S&P 500.
They have done extremely well, with many names more than doubling from
March until today. From a sector that was really an orphan sector, that
no investors wanted to look at it in the beginning of the year, we have
significant changes now. We have what I would call a lot of momentum
investing. We did a lot of work on valuations to see whether it makes
sense to value some of these names at the valuations they are currently
at, and we looked at it from several angles. We looked at it based on
average valuations relative to the weighted average S&P 500 p/e
multiple, and we looked at valuations relative to the median p/e
multiple of the S&P 500. We also looked at it with respect to peak
valuation multiples and how these stocks performed in the best P&C cycle
in the mid 1980s. In a momentum market, average valuations aren't as
important because the last investors who buy the stock are really
looking at a very optimistic scenario or fundamental changes, and
therefore looking at peak multiples. So we looked at how these stocks
did over the past 20 years at the highest possible multiples, in order
to look at it from what's the highest valuation we could justify for
some of the names in the sector. The conclusion is that the stocks are
trading at close to peak multiples; there might be another 5% to 7% to
go for some of the names. From an investor's point of view, we recommend
being cautious and being selective because we think it's very important
in a mature industry to buy stocks at attractive valuations. The reason
for that is that, at best, in a mature industry the better companies
will grow their earnings in the low double digits. In order to achieve
20% plus appreciation in a stock, you need to buy it at the right
valuation. It's more likely to achieve a 20% plus appreciation at a low
multiple than at a high multiple.
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