Big losses for insurance shareholders

Money managers have lost at least $5 billion in their stock portfolios since three insurers landed in Eliot Spitzer's hot seat.

Despite the losses, some value managers are bullish on insurance stocks.

Mr. Spitzer, New York's attorney general, announced Oct. 14 that he was bringing civil charges of bid rigging against Marsh & McLennan Cos. Inc. and American International Group. Eleven days later, he said he also uncovered wrongdoing at Aon Corp., but no civil charges have been brought against the firm as of late last week.

Mr. Spitzer accused each firm of allowing its brokers to present property and casualty insurance bids to its customers in order to divvy up the market and fix prices.

The top institutional shareholders of the three companies as of June 30, and their losses assuming they still own the stock, were:

• Fidelity Management & Research Corp., Boston, which held 146,251,457 shares of AIG. Fidelity saw the value of those shares plummet to about $8.95 billion on Oct. 28, from about $9.78 billion on Oct. 13, the eve of Mr. Spitzer's announcement of the investigations and civil charges.

• Capital Research & Management Co., Los Angeles, which held 83,201,104 shares of AIG and 27,267,500 of MMC, lost a total of about $750 million.

• T. Rowe Price Associates Inc., Baltimore, which owned 13,144,309 shares of MMC, has seen the value of those shares plummet to about $379 million from about $606 million on Oct. 13.

• NWQ Investment Management Co., Los Angeles, which held 21,492,234 shares of Aon, saw the value of those shares drop to about $454 million from about $589 million on Oct. 13

• Wellington Management Co., Boston, held 23,968,467 shares of MMC as of June 30. The value of those shares dropped to about $688 million from about $1.093 billion at the close of the trading day Oct. 13.

• State Street Corp., Boston, parent to passive index giant State Street Global Advisors, held 41,147,616 shares of MMC, 22,309,090 shares of Aon and 82,641,673 shares of AIG as of June 30. The drop in value of those shares between Oct. 13 and Oct. 28 totaled about $1.335 billion.

• Barclays Bank, London, parent to passive powerhouse Barclays Global Investors, San Francisco, held 92,767,354 shares of AIG, held 10,155,242 shares of Aon and 24,984,867 of MMC as of June 30. Between Oct. 13 and Oct. 28, the total value of the combined shares dropped by about $1.118 billion.

• Citigroup Inc., held 36,885,625 shares of AIG as of June 30. The total value of those shares dropped by about $209 million.

• Southeastern Asset Management held 46,208,400 shares of Aon as of June 30. The value of those shares plummeted by about $279 million.

• Pzena Asset Management, a concentrated value manager in New York that owns 8,451,000 shares of Aon, has seen the value of those shares drop by about $55 million.

The holdings data were taken from form 13F filings provided by ShareWatch Web, a service of Thomson Corp.

Officials at T. Rowe and Pzena still like the stocks.

"It's reasonable to think that MMC will go forward as a profitable entity, and it's reasonable to think MMC can achieve $3 to $6 per share in earnings in 2006," said Jeff Arricale, an analyst at T. Rowe Price who follows financial services companies.

"We anticipate MMC to be trading at 12 to 13 times earnings in 2006," he said. "Now, is that a home run? No. But is that attractive? Yes."

Said Rich Pzena, president and founder of Pzena Asset: "We like insurance companies because the valuations are low compared to their cash flows." The firm also owns stocks of MetLife Inc. and Allstate Insurance Co.

"We don't think this (the investigation) is a threat to Aon's business, so we're content to sit here with short-term volatility."

Mr. Arricale said Marsh & McLennan still offers a tremendous amount of value to investors. "MMC experienced what amounted to a 50% drop in valuation," he said.

Mr. Arricale said its investment management operation, Putnam Investments, "is worth about $10 per share and Mercer (Inc.) is worth about $10 to $12 per share. That gets you about $22 per share. Its acquisition of Kroll (Inc., a risk mitigation firm acquired in July) adds about $3 per share, so I think you can be comfortable with the stock being worth about $30 per share," he said.

Marsh & Mac's shares closed at $28.22 on Oct. 28, down from $46.13 on Oct. 13. The stock hit bottom on Oct. 19, when it closed at $24.10. The accusations also led to the Oct. 25 resignation of Jeffrey W. Greenberg, chairman and chief executive officer.

Mr. Arricale said investors should be cautiously optimistic about MMC. Mr. Greenberg's "resignation was critical because (Mr. Spitzer) all but said he would not negotiate with MMC if he is there. It's reasonable to think that it will go forward as a profitable entity and that it can produce $2 to $3 in earnings per share in 2005 and 2006. The only thing that remains to be seen is whether there will be a dividend cut."

He believes AIG could be even more attractive, and said Mr. Spitzer's investigation might just be a bump in the road.

"It's disconcerting, sure. It's the kind of stock where it is critical that investors have faith in its management. But the fact is it is a franchise that is impossible to replicate. We're in a rather sensationalist environment with respect to the investigations, but when you strip all of that away what you're left with is an amazing franchise," Mr. Arricale said.

"When you think about AIG and its AAA rating, it is quite attractive right now. It continues to have excellent fundamentals. Its property and casualty business is still excellent and its non-U.S. life insurance business is doing phenomenally well. Its aircraft leasing business is cyclical as well."

He added that the one drawback to AIG is that "its business is very opaque for an outsider so it probably deserves some sort of discount." But, he added, because of the strength of its businesses, "It is reasonable to foresee it trading at 13 to 15 times earnings in 2006."

AIG's share price had closed at a low of $54.28 on Oct. 22, compared with a close of $66.91 on Oct. 13. It closed at $61.21 on Oct. 28.

As for Aon, Mr. Pzena would only say that his firm sees its share price as being cheap compared to its earnings. "The risk (of holding the stock) is modest," he said, based on the company's fundamentals. Aon accounted for 3.6% of its all-cap value portfolio as of June 30.

"We have clients call and ask, ‘why are you holding on to all those Aon shares? And once I explain it to them, they are usually satisfied."

Aon closed at $21.52 on Oct. 28, down from $27.65 on Oct. 13. On Oct. 25, when Mr. Spitzer announced that his office had found evidence of wrongdoing at the company, Aon's shares closed at $19.64.

correction appended