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I did a silly thing this week. While cleaning up the notes I had taken at the 25th annual

Association of Insurance and Financial Analysts

conference in Naples, Fla., I logged onto

to see if anyone else was covering the conference. Unbelievably,

Cory Johnson

must have somehow misunderstood his instructions from his editors and was filing reports from the

Robertson Stephens' Tech 2000 Conference in San Francisco. Not a single mention of the AIFA conference!

Before I go on, let me admit that the ideas I threw out for further research at

last year's AIFA conference came to represent portfolio neutron bombs. But like many value-oriented investors, I am drawn to the beaten and downtrodden masses like a staggering moth to the light. A year wiser -- albeit no richer from this sector -- I think there are some gems to be had in the rubble, and I'd like to share with you some of the more thought-provoking themes I encountered there.

For those who are thinking that only morons would be interested in insurance when the e-sirens beckon you to a beautiful coastline, there was a nice reminder from a panel speaker about what the attraction of insurance has been to smart people over the years. The point was that the key to any insurance business is:

    How much money you're bringing in from premiums. How much you have to give back and how long you can keep it. What return you can earn on this money while you have it.

Even by new economy standards, this is a wonderful concept, perhaps even a shade better than


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model. In insurance, you get to sell a profitable product, get paid upfront for it, and then you get to invest and have fun for a period of time. In some cases, you never even have to deliver the product.

Unfortunately -- and dot-commers should take note -- this industry is also a perfect example of how well-intentioned, well-educated people with excessive access to capital manage to do terribly uneconomic things on a collective basis; the business of property/casualty has been a disaster for the past few years.

Moving along, let me first say if there ever was a mood that would make a contrarian leap for joy, it would have been set by this conference. I was expecting a pretty somber affair given the


levels of most insurance stocks, but it is difficult to convey just how bad the mood was or who was unhappier, the companies presenting or the analysts covering them.

Although one analyst thoughtfully noted during the opening night clambake, "We can't be at the bottom if we are still being served lobster," it was still pretty bad. Companies were whining about their stock prices and how they were the good being tarnished by the bad. The analysts as a group seemed to have, with few exceptions, little confidence in managements' abilities to run their businesses properly. There was talk of the bigger Wall Street firms cutting back on analyst coverage of the industry, or not replacing analysts who had left.

While the year 2000 is supposed to be the year of acquisitions in the aftermath of the funeral for


, there was a numbing silence as to what, if anything, will happen. The problem is insurance stocks are generally too low for even the worst CEO to consider using his stock as currency. There is also a huge case of denial and sticker shock even if someone wanted to do a cash bid: No seller wants a 22 bid when his stock is sitting at 15 down from 35.

There is also the case that most bigger acquisitions in the property/casualty field have been notoriously unsuccessful, so both CEO's and analysts are wary. The exception may be

Traveler's Property-Casualty

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, whose CFO, William Hannon did his best

Sandy Weill

imitation. Besides putting up very solid numbers in the midst of a rotten environment and with a well-executed acquisition under their belt, Travelers has $2 billion plus of excess capital, and the backing of the analyst community to do, according to Hannon, "a really big deal ... anyone but AIG is potentially a target for us ... but I think Sandy would disagree with me on that."

I also overheard a number of truly inane conversations from both the analyst and company sides about the reluctance to do acquisitions on a cash basis because of the effect of goodwill on earnings. This is stupid thinking under the best of circumstances, and it reflects the disastrous focus by both analysts and insurance companies on short-term income statement issues vs. long-term balance-sheet issues. This is an erroneous focus, which can also be blamed for the industry's disastrous slide into underwriting unprofitability. What are they thinking -- that investors are too dumb to look at anything but earnings per share, which are nearly irrelevant for the insurance investor as they can be managed to the point of a criminal act?

I would bet that most of the bigger deals will come on the life-insurance side, and the banks and big foreign insurers could be eager players. (But before you start predicting a number of cross-industry acquisitions, realize the following: Banks think insurers are poorly managed and capital-intensive. Insurers think that banks couldn't sell air to a drowning man. Unfortunately, both sides could be right.)

One such player could be

John Hancock Financial Services


(now 35 or so days into existence as a public company), which seems to be ideally suited to be an acquirer of both assets and asset gathering distribution. Its new COO David F. D'Alessandro seems terrific and very capable of leading the company into profitable growth, if not being a predator on his own.

There will also be some nice opportunities for smaller insurers to pick up both the people and the client lists in the fallout from some big mergers, and my nominees include

Philadelphia Consolidated




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Cincinnati Financial

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Check back for Part 2 of this column later today.

Jeffrey Bronchick is chief investment officer of Reed Conner & Birdwell, a Los Angeles-based money-management firm with $1.2 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value fund. At time of publication, RCB owned Philadelphia Consolidated Holdings, Markel and White Mountains Insurance Group, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at