THE CYNICS ON

Wall Street say Sanford Weill, chairman and chief executive of

Citigroup

After all, it was only two years ago that Citi, the nation's biggest financial-services group, spent $2.4 billion to buy back all the outstanding stock of Travelers and convert the Connecticut-based insurer into a wholly owned subsidiary. And since then, the estimated market value of Travelers has risen 8%, to $17.5 billion from $16 billion based on a $17.50 offering price for Travelers shares. (Travelers stock will trade on the New York Stock Exchange under the stock symbol TAP.A) That's not a bad return for an investment made at the start of two-year bear market.

The cynics look at the timing of the Travelers IPO and say Weill one of Wall Street's savviest wheeler-dealers is looking to unload the company at what may be the peak of the business cycle for the property-and-casualty-insurance industry. And for this reason, they say, individual investors should be wary of Travelers and other big commercial insurers such as American International Group, Chubb, XL Capital, Berkshire Hathaway and Safeco.

As much as we value investor skepticism, however, we see little reason to bail out of the property-and-casualty sector just yet. Even though the Dow Jones Property/Casualty Index which tracks the performance of 37 stocks is near a 52-week high, plenty of people on Wall Street say there's still some gas left in the industry's tank. Timothy Ghriskey of Ghriskey Capital, a small money-management firm, points out that the business is highly cyclical, and it's now in the middle of a three- to four-year recovery phase. "It's well beyond the start of a recovery," says Ghriskey. "But I don't think Sandy Weill's timing coincides with the top of the market."

The industry's profit margins took a pounding in the 1990s after insurers paid out claims on huge natural disasters like Hurricane Andrew in 1992, the Northridge, Calif., earthquake in 1994 and several late-1990s hurricanes. But the earnings outlook for many property-and-casualty insurers has brightened considerably this year. Ironically, rather than dealing the crushing blow to the industry many had feared, the Sept. 11 terror attacks gave insurers cover to raise premiums by as much as 20% to 30%. That's a big reason the Dow Jones Property/Casualty Index is 15% higher than it was on Sept. 10.

Given the rosy earnings prospects, it seems as though the Travelers IPO has more to do with Weill's desire to bolster Citigroup's price/earnings multiple than a gambit to bail at the industry's peak. Citi's shares, based on the Thomson Financial/First Call's consensus earnings estimate for 2002, trade at P/E of 15 a lackluster number for what many on Wall Street consider one of the world's premier financial-services firms. By comparison, Goldman Sach Group, one of the premier Wall Street investment banks, trades at a 2002 P/E of 19. Weill seems to believe that Travelers is the reason for the sluggishness. Why? The property-and-casualty business is capital-intensive, requiring insurers to maintain huge reserve accounts so they can honor claims for catastrophic events. It can be a profitable enterprise if done right, but it can also be fraught with risk and high overhead due to the need to maintain big contingent reserves, and that's something Citi apparently would rather do without.

That doesn't mean investors should shun the sector, however. Even though many property and casualty stocks have rallied sharply since their post-Sept. 11 lows, a good number are still trading at relatively modest P/E multiples based on this year's projected earnings growth. The average 2002 P/E for the stocks in the Dow Jones Property/Casualty Index is 14, according to First Call compared with a high-teens historical average during industry up-cycles. While the sector's trailing P/E of 102 seems staggeringly high, remember that last year's results didn't include the new revenue from the big premium hikes and did include hefty write-offs for the estimated $70 billion in claims stemming from the Sept. 11 terror attacks. "From an earnings perspective, there is the opportunity for things to improve," says William Wilt, a vice president at Moody's Investor Services, the debt-rating agency. Similarly, Sean Egan, president of Egan-Jones Ratings, a corporate credit-rating and investor-research firm, expects the premium hikes to continue for a while.

It's true that shares of AIG the company many on Wall Street consider the gold standard of the property-and-casualty business aren't cheap, trading at a 2002 P/E of 21, according to First Call. But other stocks in the group are less costly and also pay dividends, something many investors value at a time when they're seeing little return from stock-price appreciation. The multiples for Chubb, XL, CNA Financial and reinsurance firm PartnerRE are 15, 14, 13 and 10, respectively. The potential success of the Travelers IPO is prompting General Electric to consider spinning off its property-and-casualty reinsurance concern, Reinsurance Corp.

Of course, another big terror attack like those of Sept. 11 could throw the rosy earnings projections out the window. The insurance industry had been looking to Capitol Hill to enact a law that would limit its exposure to future terror attacks, but the measure has failed to garner support. Meanwhile, many insurers are protecting themselves by excluding coverage for terrorist acts in new policies. Another potential headache for the industry are big claims arising from asbestos litigation something that's been back in the news again with recent jury verdicts against manufacturing and energy companies like Halliburton. If juries across the country keep awarding big judgments to plaintiffs in asbestos cases, some property-and-casualty firms may be forced to dig deeper into their pockets later this year.

But for now, it seems there's a bit more steam in the sector than many had predicted. Rather than fear the Travelers IPO as a sign of a bad news on the horizon, investors should see it as validation of the sector's relative strength.