(FORTUNE Magazine) – The past six months have left owners of property and casualty insurance stocks bemused. As earnings for the companies have floated ever higher, the prices of the shares have sunk ever lower. The reason: Many investors think the sizable profits insurers reaped in 1986 won't be seen again this year. That belief, coupled with the rash of year-end tax selling, battered the stocks. Whether these investors sold too early is hotly debated on Wall Street. But whatever happens to the big players, analysts point to a group of specialty insurance stocks they say will run circles around the market this year. Specialty insurers underwrite specific risks that are sometimes hard to insure elsewhere. Because they are in small niche markets with little or no competition, they are less subject to the periodic bouts of price cutting that hit the multiline property and casualty companies. Says Joseph Reed of Morgan Olmstead in Los Angeles: ''The easy money has been made for the multiline % companies; now only the specialty players will be able to continue to raise rates.'' Specialty insurance issues are not widely followed on Wall Street, and so they sell at low multiples. Donald Zerbarini, an analyst with Prescott Ball & Turben who does follow them, notes the average P/E for these stocks on 1987 estimated earnings is 8.2, compared with 9.2 for the large property and casualty companies and 13.6 for Standard & Poor's 500-stock index. ''We've seen superior results from specialty insurers, and we will continue to see them do well because they are simply better focused than the large companies,'' says Zerbarini. ''They know their markets so well that they can price their products much better than the multiline companies can. So earnings growth is more predictable.'' A perfect example of a company with steady earnings growth, says Zerbarini, is Nobel Insurance Ltd., based in Bermuda, which was formed eight years ago by 24 companies in the explosives business that, not surprisingly, had a tough time getting adequate coverage for their operations. The name is in honor of Alfred Nobel, the inventor of nitroglycerin explosives, and the earnings are dynamite: Since 1979 they have grown at a 26% average annual compound rate. Vita Marino, an analyst with Firemark, a research company specializing in insurance stocks, adds that Nobel management has done a bang-up job, ''consistently keeping its underwriting amazingly profitable.'' She estimates the company will earn $1.40 in 1986 and $1.80 this year, up from 88 cents in 1985. Another Marino favorite is Avemco, based in Frederick, Maryland, and the nation's largest insurer of private aircraft. The company has a P/E of 10.7 on 1987 estimated earnings of $2.50, a 13% rise from 1986. Herbert Goodfriend of Prudential Bache likes Progressive Corp. of Beachwood, Ohio, which underwrites auto insurance for high-risk drivers. The company is able to charge double or triple ordinary rates for its coverage, and Goodfriend expects earnings will rise to $2.05 a share in 1986 and $2.65 in 1987. ''Other insurers have been pulling out of this market, which means Progressive can now insure higher-quality risks and raise rates,'' he notes. Analysts at Salomon Brothers and Merrill Lynch agree on the outlook for W.R. Berkley, an insurer in Greenwich, Connecticut, that has three lines of specialty business: excess and surplus coverage, such as policies protecting outfielders' arms and movie stars' legs; strong property and casualty sales in the nonlitigious Midwest; and a solid reinsurance business. A few years ago the company ran into trouble with some injudicious underwriting in the oil business, but those losses are behind it now, the analysts say. ''Its earnings picture is super; I estimate $2.45 for 1986, $4.05 for 1987, and $4.75 in 1988,'' says Salomon's A. Michael Frinquelli. ''On 1987 earnings that's a P/E of just 6.7, and Berkley is very attractive at that price.'' Fairmont Financial, based in Burbank, California, is the choice of Morgan Olmstead's Joseph Reed. Fairmont has carved out a lucrative market underwriting workers' compensation, mostly in California. ''It insures small- to medium-size companies that are too small for the big insurers. But it can insure selectively since its market is so large,'' says Reed. And lest Fairmont run out of good business in California, the company is expanding into Colorado and Texas. Reed estimates the insurer will earn $2.20 a share in 1987, which means it's selling at only 7.6 times earnings. ''Fairmont should have a multiple of 12,'' says Reed, ''and once investors take a close look, I think it will get there.''

CHART: COMPANY (Exchange) REVENUES NET STOCK PRICE RECENT last 12 mos. INCOME RANGE PRICE in millions in millions last 12 months P/E multiple* Progressive (OTC) $674.6 $66.0 $14.375-$38.50 $31.25/15.9 W.R. Berkley (OTC) $353.6 $26.2 $9.875-$40.25 $27.25/15.6 Fairmont Financial (ASE) $134.1 $7.9 $10.75-$19.875 $16.75/14.7 Avemco (NYSE) $83.0 $11.1 $19.50-$32.00 $26.75/13.0 Nobel (OTC) $31.9 $5.7 $12.00-$18.25 $16.25/12.3

*Multiple based on earnings for the latest four quarters, exclusive of nonrecurring items and gains on securities.

CREDIT: NO CREDIT CAPTION: Underwriters Who Score as Niche Players Security analysts foresee few earnings casualties for shareholders of these five fast-growing property and casualty companies, which serve markets that other insurers disdain. DESCRIPTION: See above