NEW YORK (CNN/Money) - It's safe to say that there are plenty of insurance executives in Hartford currently cursing the name of one Eliot Spitzer.
And investors in insurance stocks are probably doing the same now that the New York State Attorney General has launched a probe into the industry about alleged bid-rigging practices.
Shares of insurance broker Marsh and McLennan, the central subject of the investigation, have plunged 50 percent in the past week.
Other companies mentioned in Spitzer's lawsuit, including property and casualty insurers Ace, American International Group and Hartford Financial Services, have also tumbled.
And fears that the probe will extend to other parts of the industry have caused several healthcare and life insurance companies, most notably Aetna, Cigna, MetLife and UnumProvident, to take a big hit as well. All four companies said on Tuesday that they have received subpoenas from Spitzer's office.
But has Wall Street punished the sector unjustifiably during the past week?
One fund manager thinks that the market's reaction is very rational.
"You should rightly be concerned when there's a regulatory storm cloud over an industry," said Lanny Thorndike, portfolio manager with Century Capital Management, which runs the Century Shares Trust mutual fund, a fund with a large weighting in insurance stocks.
Thorndike said that Wall Street is still in information-gathering mode. There are a lot of questions about what will happen next in the probe and given all this uncertainty, investors are dumping stocks first and asking questions later.
"How widespread and rampant is this alleged price fixing? That's a major concern so the sell-off is probably warranted," Thorndike said. He added that he has made changes to his portfolio as a result of the probe but would not say which stocks he has sold or bought.
Guilt by association
But others think that the market has unfairly punished some stocks that won't wind up being implicated for any wrongdoing, which means some insurance companies are now relative bargains.
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| The Spitzer effect: Insurance stocks have been crushed during the past week. |
"There is a presumption of broad guilt across the industry but as more information comes out the doubts will ease a little bit," said Jeffrey Schuman, an analyst with Keefe, Bruyette & Woods.
Schuman cites MetLife as one key example. He said the company announced Tuesday that it had conducted an internal review and has so far found that it had made no fictitious bids. For this reason, he thinks MetLife's sell-off (the stock has fallen 12 percent in the past week) is overdone.
In addition, Schuman said Aflac and Prudential Financial, which have fallen in sympathy with the group even though they have not been subpoenaed by Spitzer, now look like good buying opportunities. (He doesn't own any of these stocks but his firm expects to receive banking fees from Prudential within the next three months.)
| * as of 10/19/04 | | Source: Thomson/Baseline |
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Other fund managers say that some smaller insurance names that have been dumped recently are also being unfairly tarnished.
Ken Mertz, manager of the Emerald Banking and Finance fund, said he does not believe that some of the insurance companies he owns, namely niche property and casualty insurers Philadelphia Consolidated, HCC Insurance Holdings and Selective Insurance, will be affected by Spitzer's probe.
That's because they tend to deal more with independent agents than the big insurance brokers like Marsh and McLennan, he said. In fact, Mertz said he's added to his position in some of his insurance holdings due to the pullback in the stocks. (He wouldn't identify the specific stocks he bought though.)
And Amy LaGuardia, manager of the Legg Mason Financial Services fund, also thinks that Wall Street was making a mistake by punishing nearly all insurance stocks during the past few days.
She also owns Philadelphia Consolidated as well and adds that two smaller insurance brokers she owns, Hilb Rogal and Hobbs and Brown and Brown, have also been punished even though she is fairly confident that neither company will be found to have engaged in any major wrongdoing.
Overall, LaGuardia said that the main casualty (pardon the pun) of the investigation will probably be Marsh and McLennan. But she believes that the rest of the insurance sector will eventually bounce back and points to the fact that many investment banking stocks have recovered nicely after being targeted by Spitzer a few years ago.
"Remember when Spitzer went after the securities industry? There were terrible headlines and they got off with a relatively minor fine. This too shall pass," she said.
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