Buyout Firm Calls Nonlife Insurers A Good Buy in Tech-Heavy Market.

While stock exchanges in the United States continue to show little interest in property/casualty insurers and reinsurance companies, a Southport, Conn.-based private-equity buyout firm is eager to acquire them for up to $500 million and would consider as much as $1 billion.

"The market doesn't understand insurance companies," said Diane Coogan, director of insurance at Dailey Capital Management. "That's largely because of accounting distortions with GAAP for insurance companies. We think many of these companies are significantly undervalued."

In particular, Dailey looks for companies with strong customer and/or agent franchises and clean books of business, she said.

Dailey's eagerness to buy runs contrary to analysis and advice by Wall Street equity-research firms, although some say the property/casualty underwriting cycle may have hit bottom last year.

Coogan said the market is overly fearful that banks and start-ups will displace traditional insurers and that this fear is depressing valuations of all insurers. While some insurers are eroding their equity through net losses, this problem can be corrected by increasing operational leverage, she said.

Dailey raises capital from large private-equity firms, high-net-worth people and sometimes from institutions. The company either coordinates co-investors into a pool or creates an insurance-specific fund. The latter has to do with the way money comes in and establishes a pecking order for distribution of returns, Coogan said.

Dailey maintains that its strategy can succeed, regardless of Wall Street's estimates of value, because the firm has no intention of selling within a stipulated time. Coogan said most insurers in which Dailey is interested generate more free cash flow than they need to run their business or support growth. This cash can be returned to investors or used to finance other acquisitions. It's a model similar to that of Berkshire Hathaway Inc., except that Berkshire and the companies it buys are publicly traded. Both were hammered in late 1998 and early 1999.

In a July 13 industry update, New York-based J.P. Morgan Securities Inc. said it was too early to invest in the standard commercial lines insurers, but that insurance brokers such as Aon Corp. and Marsh & McLennan will benefit from gradually improving pricing trends.

Another equity research firm, Baltimore-based Ferris Baker Watts, said in June that last fall marked the bottom of the "most relentlessly soft property/casualty underwriting cycle in decades," during which reserve charges missed earnings, fear and pessimism "nailed insurance equity valuations to the floor." From March 8 through June 21, however, the stocks followed by the firm rose 32.5%, compared with 8.2% for the Standard & Poor's 500 stock index.

Since Dailey Capital's decision to pursue insurance companies, it has bought a Canadian start-up that writes ore than $2 million in monthly premium in only its fifth month of operation, Coogan said. It operated in a paperless environment. Dailey is working on three other transactions, she said.

Coogan said she has no idea when stocks of nonlife insurers will come out of the doldrums, but she predicted a lot would depend on how long technology stocks remain in favor.