Aug. 21 (Bloomberg) -- The outlook for U.S. insurance stocks is brightening just before the one-year anniversary of Hurricane Katrina, the costliest storm in the country's history.

Insurers are one of only two industry groups among 24 in the Standard & Poor's 500 Index where estimates of third- and fourth- quarter earnings are rising, according to Thomson Financial data. American International Group Inc., the world's largest insurer, reported profits this month that beat analysts' estimates.

Stock prices that are low by historical standards make insurers better investments than other financial companies, say strategists Richard Bernstein of Merrill Lynch & Co. and Ed Keon of Prudential Equity Group LLC.

``We look for things that are cheap and have good earnings momentum,'' said Keon. ``Insurance offers some of both.''

The S&P 500 Insurance Index has risen for the past seven trading days, the longest streak since 2000, and surpassed the S&P 500's gain last week.

Insurers may be less vulnerable to a repeat performance of last year, when Katrina battered the U.S. Gulf Coast in August. Claims related to the storm cost the industry $40.6 billion and Hurricanes Rita and Wilma helped push catastrophe losses to a record $61.2 billion, according to Insurance Services Office Inc. in Jersey City, New Jersey.

The S&P 500 insurance index rose 3.2 percent last week, its best performance since November. The industry's string of gains is the longest since a nine-day advance ended in December 2000.

Economic Reports

Data that suggested the Federal Reserve has inflation in check sent the broader market higher last week. Producer prices excluding food and energy dropped in July and so-called core consumer prices rose at the slowest pace in five months.

The S&P 500 gained every day of the week, the first time that has happened since March, and rose 2.8 percent to 1302.30. The Dow Jones Industrial Average added 2.7 percent to 11,381.47 and the Nasdaq Composite Index climbed 5.2 percent to 2163.95.

Reports this week on home sales may provide more clues about whether the Fed will avoid raising interest rates. The central bank this month kept its target rate at 5.25 percent after 17 straight increases.

The National Association of Realtors may say on Aug. 23 that sales of previously owned homes fell in July to the lowest since February 2004, according to economists' median forecast in a survey by Bloomberg News. A government report the next day may show new-home sales last month were the lowest since February.

`Very Well Prepared'

Anticipation of an economic slowdown made investors more pessimistic about stocks globally, according to a monthly survey that Merrill Lynch & Co. published last week. Forty-four percent of fund managers surveyed had stock holdings that exceeded their benchmarks, the lowest since September 2004.

Concern that the economy may slump has historically spurred buying of so-called defensive shares, whose earnings tend to be less tied to growth. Insurers may benefit from the trend this year, said Brian Barish of Cambiar Investors LLC in Denver.

``Most of these companies were very well prepared for a bad hurricane season, and so far we have seen no storms,'' said Barish, who manages $7.4 billion. This month, he added to his holdings in Ace Ltd., a business insurer.

Analysts raised third- and fourth-quarter earnings estimates for insurers by 0.4 percent and 0.9 percent in the past four weeks, respectively, according to Thomson data. Energy is the only other S&P 500 group where forecasts increased for both periods.

Price Increases

Property and casualty insurers responded to last year's hurricanes by reducing coverage limits, increasing deductibles and raising prices in disaster-prone areas.

Insurers charged 9.3 percent more to renew commercial property policies in the second quarter on average, a survey by the Council of Insurance Agents and Brokers showed. Prices for coastal properties rose as much as 500 percent.

Higher prices on property coverage contributed to a 23 percent increase in Ace's second-quarter profit. Last year, Katrina led to a third-quarter loss of $112 million.

Shares of the Hamilton, Bermuda-based company have fallen 2.5 percent this year. They change hands at 8.1 times estimated earnings, near a low of 7.4 during the past 10 years.

At AIG, higher premium revenue and lower claims costs helped push earnings from underwriting property and casualty coverage to a record last quarter. The New York-based company reported net income of $3.19 billion, or $1.21 a share.

`Momentum & Value'

The insurance-stock rally started the day after AIG's results were released, and the company's shares have also risen for seven straight days. Even so, they still trade at 11.4 times estimated earnings, below a five-year average of 19.5.

Merrill's Bernstein, based in New York, expects insurers to have the fastest earnings growth among financial companies this year and a ``long-term'' rate of increase that also exceeds the industry's, according to a note last week. Merrill added the insurance group to its ``Momentum & Value'' industry picks.

``Insurance remains a bright spot in our quantitative work for the short and long term, and might be worth overweighting,'' Bernstein wrote. He has an ``equal-weight'' recommendation for the broader financial group.

Prudential's Keon, also based in New York, has a ``slightly overweight'' rating for the financial group and cites insurers and brokers as among his top picks. His firm is a unit of Prudential Financial Inc., the second-largest U.S. life insurer.

The insurance group scored highly in Prudential's analysis of stock prices relative to earnings, book value and cash flow, along with earnings revisions and other criteria.

`Rolling the Dice'

Some insurance companies should not yet be considered cheap, Delphi Management Inc.'s Scott Black said. Home and auto insurers, including Allstate Corp. and Safeco Corp., lack pricing power, he said.

``You're rolling the dice'' until hurricane season ends, said Black, who manages $1.6 billion in Boston. ``That's why the P/Es on these companies are low.'' The season runs through the end of November.

Others are betting the share prices of insurers already reflect the risk of bigger-than-average losses from storms.

``If we just get a mild hurricane season, the insurers are going to produce some excellent results.'' said Laurian Lytle, an analyst at Waddell & Reed Financial Inc. in Overland, Kansas. Her firm manages $45 billion including shares of Ace.

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By Daniel Hauck

To contact the reporter on this story: Daniel Hauck in New York at dhauck1@bloomberg.net

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