Banks, Insurance Companies Operate in Different Spheres
Dunaief, Daniel, American Banker
Like the stocks of most financial services businesses, those of insurance companies move in the opposite direction of interest rates.
When rates go down, insurance companies' stocks tend to go up. But some say that's about where the similarity ends.
American Banker now follows insurance stocks in the weekly Market Monitor as part of its enhanced coverage of the banking industry's competitors in the financial services sector.
"Outside of the fact that banks and insurance companies are classified as financial services, they really operate in two different areas," said Charles Vincent, a banking and insurance industry analyst in Philadelphia for PNC Asset Management.
"Basically, when banks put out money, they expect to get it back," Mr. Vincent said. "When insurance companies put out money, they hope to get it back. They don't often have the luxury of knowing they'll get it back."
Insurance companies lose 2 to 8 cents on their underwriting dollar, which they make up in their investments, Mr. Vincent said.
Recent interest rate cuts by the Federal Reserve have given insurance stocks a lift. "Bank stocks were the better performers in the early part of 1995," said Michael A. Lewis, a senior industry analyst at Dean Witter Reynolds Inc., New York.
"The insurance stocks have been gaining strength in the second half of 1995 and through 1996," he said. "After the run-up in banks, investors wanted to stay in the interest-sensitive group, so insurance companies got some of the spill-over action."
Indeed, some analysts said that the connection between interest rates and the performance of insurance companies is not as direct as those for other financial services companies.
"Insurance companies do trade on interest rates," noted Mr. Vincent. "Some of that is market driven," he said, while some of it is related to the general interest-rate-generated movement among financial services stocks.
"When interest rates go up, it is beneficial to the dollars invested," Mr. …