<THE EVENING NEWS>
Tuesday, November 10, 1998
MARKET CLOSE
<% ' AvantGo:MarketClose %>DJIA             8863.98    -33.98      (-0.38%) 
 S&P 500          1128.26     -1.94      (-0.17%) 
 Nasdaq           1865.62     +4.57      (+0.25%) 
 Value Line Index  885.77     -4.69      (-0.53%) 
 30-Year Bond    99 12/32      unch   5.29 Yield<% ' AvantGo:End %> 
 

HEROES

<% ' AvantGo:Heroes %>Didn't we just do this? While a deal with Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> might not sound as sexy as a pact with Playboy.com, it will bring a lot more pop to K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %>. The entertainment and consumer products retailer and direct marketer rocketed up $11 3/8, or 98.4%, to $22 15/16 today after Bill Gates & Co. agreed to include the K-Tel Express home shopping service on the Microsoft Network's shopping channel. Last Tuesday's news of K-tel's plans to sell music on Hugh Hefner's online site pushed the company's stock up as much as 160% to $17 7/8 per share before settling at $10 1/4 per share on Friday. One day's worth of Microsoft news has already produced similarly impressive gains. We already know the kind of back-and-forth swings K-tel stock is capable of, so stay tuned.

Shares of consumer and commercial finance company ContiFinancial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CFN)") else Response.Write("(NYSE: CFN)") end if %> grew $1 1/2 to $8 11/16 after privately owned Cargill Inc., the world's top grain exporter, said it would buy the grain unit of ContiFinancial's parent company, privately owned Continental Grains. Financial terms of the deal were not disclosed. In a statement, Continental CEO Paul Fribourg said ContiFinancial, "along with the entire financial services industry, has been negatively impacted by the global financial crisis," but reaffirmed support for ContiFinancial, "under the appropriate conditions, should [it] have need for liquidity." ContiFinancial stock fell as low as $3 1/8 in early October on rumors -- which the company denied -- that it was about to file for bankruptcy. Shortly afterward, Continental (which will be renamed, ContiGroup) said it would buy back up to 2.5 million shares of ContiFinancial stock on the open market.

QUICK TAKES: Internet portal company Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: YHOO)") else Response.Write("(NYSE: YHOO)") end if %> moved ahead $11 13/16 to $176 9/16 as the company announced an official sponsorship of the National Hockey League today and reported a partnership with Genesis Direct's proteam.com site, which sells sports memorabilia... Microcontrollers and embedded control products maker Microchip Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCHP)") else Response.Write("(Nasdaq: MCHP)") end if %> tacked on $2 1/2 to $33 1/2 after introducing an advanced, high-performance in-circuit emulator tool, which rounds out the company's offerings in the 8-bit reduced instruction set computer (RISC) microcontrollers area... Fast-food legend McDonald's Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> gobbled up gains of $4 1/8 to $71 3/16 after Merrill Lynch boosted its 12-month price target to $90 per share from $85 per share, maintaining a "buy" rating on the stock.

Shares of computer manufacturer Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> moved ahead $7/8 to $63 3/4 today after it cut prices on its low-priced OmniBook 2100 notebook computers by 8% and its co-branded accessories by 18%... U.S. automaker General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> drove up $1 1/4 to $67 1/4 after newly installed President Richard Wagoner reportedly said he expects higher North American output and market share gains for the company in the first three quarters of next year... Telecommunications equipment maker Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> dialed up a $1 1/2 gain to $58 15/16 after it announced a three-year deal worth as much as $150 million to supply Priority Telecom with telephony-over-cable services in France and the Netherlands.

Internet services provider MindSpring Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %> jumped $4 9/16 to $57 3/8 after it said it will buy the consumer dial-up Internet access clients of Cox Interactive Media in U.S. several cities... Several other Internet-related stocks that rose yesterday enjoyed more success today. Bookseller Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> rose $4 7/8 to $131 3/4; October Daily Double CNET Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %> clicked ahead $5 1/16 to $49 3/8; online auctioneer eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %>, another recent Daily Double, was bid up $27 7/8 to $130 7/8; Onsale <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> moved ahead $2 9/16 to $20 9/16; software e-tailer Egghead.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %> rose $2 7/16 to $13 7/8; CD seller N2K <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %> took on $3 11/16 to close at $9 5/16; ZDNet operator Ziff-Davis <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZD)") else Response.Write("(NYSE: ZD)") end if %> jumped $2 to $8 1/2; and content aggregator Excite Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> won $4 1/8 to $51 5/8.

Recent Daily Double Inktomi Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INKT)") else Response.Write("(Nasdaq: INKT)") end if %>, a developer of scalable software for the Internet, jumped $14 3/8 to $130 1/8 following yesterday's news (and $15 1/2 per share gain) that Internet service provider PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> licensed Inktomi's Traffic Server network cache. The Fool interviewed Inktomi CEO David Peterschmidt in October... Clinical products developer Vysis Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VYSI)") else Response.Write("(Nasdaq: VYSI)") end if %> shot up $1 7/8 to $8 1/8 after a Food and Drug Administration panel unanimously recommended its PathVysion HER-2 DNA Probe Kit for detecting a gene that promotes tumor growth in breast cancer patients for conditional approval. The kit now awaits final FDA review and the passing of its pre-market approval application... Regional theme park company Premier Parks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PKS)") else Response.Write("(NYSE: PKS)") end if %> grabbed $2 9/16 to $25 9/16 after it reported Q3 EPS of $1.48 (excluding extraordinary losses), a dime above Wall Street's projections.

Diebold Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DBD)") else Response.Write("(NYSE: DBD)") end if %> advanced $3 7/16 to $34 3/4 after Salomon Smith Barney reiterated a "buy" rating on the card-based transaction systems maker... Web address registrar Network Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSOL)") else Response.Write("(Nasdaq: NSOL)") end if %> snagged $3 to $67 1/4 after it signed Internet services provider EarthLink Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNK)") else Response.Write("(Nasdaq: ELNK)") end if %> to its Alliance Program, in which EarthLink will give its customers a link to Network Solution's domain name registration and other services while Network Solutions will provide its customers with a link to EarthLink's Web hosting and dial-up Internet access services. EarthLink fell $5 1/16 to $50 1/16 today... Wireless telecommunications power amplifier company Microwave Power Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MPDI)") else Response.Write("(Nasdaq: MPDI)") end if %> rose $3/8 to $6 after it said it received a $12.4 million order for wireless telecommunications base station amplifiers from Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>.

Long-term care provider Intensiva HealthCare Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IHCC)") else Response.Write("(Nasdaq: IHCC)") end if %> blasted up $2 15/16 to $9 3/16 after it agreed to be bought by privately held Select Medical Corp. for $9.625 per share, a 54% premium to Intensiva's closing price on Monday... Asynchronous digital subscriber line (ADSL) technologies and software firm Aware Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AWRE)") else Response.Write("(Nasdaq: AWRE)") end if %> added $1 1/16 to $16 1/16 after BancBoston Robertson Stephens initiated coverage of the company with a "buy" rating... Hospital operator Tenet HealthCare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: THC)") else Response.Write("(NYSE: THC)") end if %> improved $1 9/16 to $30 7/16 after it completed the purchase of eight Philadelphia-area hospitals for $345 million... Mainframe re-engineering software developer SEEC Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEC)") else Response.Write("(Nasdaq: SEEC)") end if %> jumped ahead $1 1/16 to $10. SEEC leapt $3 1/16 yesterday after it won a contract with the New York State Office of General Services and got some good press in Barron's.

Earnings Movers

Au Bon Pain Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABPCA)") else Response.Write("(Nasdaq: ABPCA)") end if %> up $3/8 to $7 1/8; Q3 EPS: loss of $0.04 vs. gain of $0.12 last year; Estimate: loss of $0.07

OfficeMax <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMX)") else Response.Write("(NYSE: OMX)") end if %>, up $1/2 to $10 3/4; Q3 EPS of $0.27 vs. $0.25 last year; Estimate: $0.27

Pomeroy Computer Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMRY)") else Response.Write("(Nasdaq: PMRY)") end if %> up $3/4 to $18 1/4; Q3 EPS: $0.46 vs. $0.39 last year; Estimate: $0.46

Unitog Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UTOG)") else Response.Write("(Nasdaq: UTOG)") end if %> up $7/8 to $18 7/8; Q3 EPS: $0.32 (excluding charges) vs. $0.34 last year; Estimate: $0.31 <% ' AvantGo:End %>

GOATS

<% ' AvantGo:Goats %>Personal computer products retailer CompUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> lost $3/16 to $14 7/8 after saying it "remains cautious" in its outlook for its fiscal second quarter and expects low single-digit negative comparable-store sales for the quarter due to "anticipated lower average selling prices" and "continued softness in corporate sales." The company anticipates that Q2 gross margins will be flat compared with Q1 figures. CompUSA reported EPS of $0.09, down 64% from $0.25 in the same year-earlier period but ahead of analysts' mean estimate of $0.07. Of course, analysts got a heads up early last month when the company reported a 1.7% drop in Q1 same-store sales. The company's comp-store sales have now dipped during each of the last three quarters as the sub-$1,000 PC has slashed average selling prices, which are now down by the mid-teens, percentage-wise, year over year. CompUSA's recent acquisition of the Computer City chain from Tandy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAN)") else Response.Write("(NYSE: TAN)") end if %> reduced Q1 EPS by $0.05 and will cut EPS by $0.01 to $0.02 per quarter for the rest of the year. The company originally projected that the purchase would negatively impact earnings for about six months.

Oilfield services and equipment companies tanked today after the International Energy Agency cut its forecast for growth in world oil demand for Q4 1998 and for 1999. The Paris-based agency said the imbalance between supply and demand will continue to worsen. Plus, several oil companies, including Chevron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHV)") else Response.Write("(NYSE: CHV)") end if %> and Atlantic Richfield, said they will cut back on capital expenditures next year. National Oilwell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOI)") else Response.Write("(NYSE: NOI)") end if %> tumbled $1 11/16 to $14 1/4, Cooper Cameron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RON)") else Response.Write("(NYSE: RON)") end if %> slid $1 7/8 to $30 1/4, Transocean Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RIG)") else Response.Write("(NYSE: RIG)") end if %> shed $2 13/16 to $33 1/2, Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> fell $2 5/8 to $53 3/16, Halliburton <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %> dipped $2 5/16 to $33 7/8, R&B Falcon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLC)") else Response.Write("(NYSE: FLC)") end if %> dropped $1 3/4 to $13 11/16, BJ Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BJS)") else Response.Write("(NYSE: BJS)") end if %> fell $1 to $19 1/16, Cliffs Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDG)") else Response.Write("(NYSE: CDG)") end if %> was drilled for a $2 5/8 loss to $23 5/16, Noble Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NE)") else Response.Write("(NYSE: NE)") end if %> sank $1 5/16 to $15 15/16, Ensco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ESV)") else Response.Write("(NYSE: ESV)") end if %> retreated $1 1/8 to $13 1/16, Rowan Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RDC)") else Response.Write("(NYSE: RDC)") end if %> finished down $1 1/4 to $13, Smith International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> lost $2 to $36 1/16, Diamond Offshore Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DO)") else Response.Write("(NYSE: DO)") end if %> pulled back $2 9/16 to $28 7/8, Tidewater <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDW)") else Response.Write("(NYSE: TDW)") end if %> fell $1 15/16 to $27 3/16, and Friede Goldman International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FGII)") else Response.Write("(Nasdaq: FGII)") end if %> was clipped $1 5/16 to $16 15/16.

QUICK CUTS: American Airlines parent AMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> was grounded for a $1 3/8 loss to $61 1/8 after The Financial Times reported that the U.S. will block any code-sharing agreement between the airline and British Airways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAB)") else Response.Write("(NYSE: BAB)") end if %>, which dipped $1 1/2 to $66 1/2, unless London's Heathrow Airport is substantially opened to competition... Drug and chemicals maker Rhone-Poulenc's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RP)") else Response.Write("(NYSE: RP)") end if %> American depositary receipts shed $1 11/16 to $46 1/2 as rumors of a merger with Hoechst <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOE)") else Response.Write("(NYSE: HOE)") end if %> faded and the FDA asked the company to add a warning to some widely used asthma drugs... Mirage Resorts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIR)") else Response.Write("(NYSE: MIR)") end if %> lost $7/8 to $17 13/16 after Goldman Sachs downgraded its rating on the resort and casino operator to "market outperform" from "trading buy." Yesterday the company reported Q3 EPS of $0.16 (before unusual items), down from $0.28 last year and short of estimates of $0.20.

Dollar General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DG)") else Response.Write("(NYSE: DG)") end if %> was discounted $1 11/16 to $23 1/2 after the discount retailer reported Q3 EPS of $0.19, up from $0.16 last year and even with analysts' mean estimate... Carl's Jr. and Hardee's restaurants franchisor and owner CKE Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKR)") else Response.Write("(NYSE: CKR)") end if %> got chomped for a $11/16 loss to $21 3/4 on news it expects Q3 EPS of $0.39 to $0.40, lower than analysts' current mean projection of $0.41... Grocery store operator Safeway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %> fell $1 15/16 to $48 after announcing that Dominick's Supermarkets <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DFF)") else Response.Write("(NYSE: DFF)") end if %> President and CEO Robert Mariano will resign from those posts effective the closing of the proposed merger between the two companies. Safeway also said it has filed a shelf registration statement with the SEC for 20 million shares of its common stock.

Hotel real estate investment trust (REIT) Patriot American Hospitality <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAH)") else Response.Write("(NYSE: PAH)") end if %> dropped another $1 1/4 to $8 1/8 after late Sunday reporting Q3 EPS from operations of $0.36, compared with $0.44 last year and Wall Street's consensus of $0.39... Radio broadcaster and diversified media company Chancellor Media <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMFM)") else Response.Write("(Nasdaq: AMFM)") end if %> tuned out for a $1 1/8 loss to $40 3/16 despite reporting a Q3 loss of $0.10 a share, a $0.02 improvement over the year-ago period and better than analysts' expectations of a loss of $0.21... Drug maker ICN Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ICN)") else Response.Write("(NYSE: ICN)") end if %> sank $1 1/8 to $22 5/16 after saying that weak economic conditions in Eastern Europe and Russia resulted in a loss of $0.45 per share (excluding loss provisions), compared with a profit of $0.50 a year ago and analysts' expectations of a loss of $0.15.

"Prestige" perfume maker French Fragrances <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRAG)") else Response.Write("(Nasdaq: FRAG)") end if %> stunk up a loss of $1 5/16 to $5 11/16 after warning that it expects earnings for fiscal Q3 and for the fiscal year will fall short of analysts' forecasts due to weak retail sales and the resulting inventory buildup. The company anticipates EPS of around $0.41 compared with estimates of $0.64... Medical equipment manufacturer Trex Medical Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TXM)") else Response.Write("(AMEX: TXM)") end if %> was pummeled for a $2 15/16 loss to $11 after announcing it couldn't record a number of orders as revenue in fiscal Q4 due to a delay in shipments, which resulted in lower-than-expected fiscal Q4 EPS of $0.13, compared with $0.15 a year ago and analysts' expectations of $0.17.

Telecommunications equipment maker Channell Commercial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHNL)") else Response.Write("(Nasdaq: CHNL)") end if %> plunged $1 7/16, or 16.4%, to $7 5/16 after saying it expects Q4 EPS of $0.18 to $0.22 and 1999 EPS of $0.93 to $0.97, compared with analysts' estimates of $0.26 and $1.15, respectively. The company reported Q3 EPS of $0.25, same as last year but below Street expectations of $0.28... Independent oil and gas producer Burlington Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BR)") else Response.Write("(NYSE: BR)") end if %> was clipped $4 1/4 to $38 after NationsBanc Montgomery downgraded its rating in the firm to "hold" from "buy" ... Information processing and communications equipment company Leasing Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSN)") else Response.Write("(NYSE: LSN)") end if %> dropped $1 to $8 after reporting a Q3 loss of $0.35 a share, compared with a profit of $0.42 last year, primarily due to non-cash adjustments to the book value of assets. Analysts had forecast EPS of $0.14.

Earnings Movers

AirNet Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANS)") else Response.Write("(NYSE: ANS)") end if %> down $13/16 to $14 7/16; Q3 EPS: $0.20 vs. $0.28 last year; Estimate: $0.21

Aviron <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVIR)") else Response.Write("(Nasdaq: AVIR)") end if %> down $1 1/4 to $20 1/4; Q3 EPS: loss of $0.95 vs. loss of $0.43 last year; Estimate: loss of $0.73

Industrial Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IHII)") else Response.Write("(Nasdaq: IHII)") end if %> down $1 3/8 to $10 1/8; Q3 EPS: $0.13 vs. $0.13 (restated) last year

MDC Communications Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDCAF)") else Response.Write("(Nasdaq: MDCAF)") end if %> down $1/2 to $10 1/2; Q3 EPS: $0.22 vs. $0.08 last year; Estimate: $0.13

Pennzoil Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PZL)") else Response.Write("(NYSE: PZL)") end if %> down $2 9/16 to $36 3/8; Q3 EPS: loss of $2.91 vs. profit of $0.73 last year; Estimate: loss of $1.30

ReliaStar Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RLR)") else Response.Write("(NYSE: RLR)") end if %> down $1 1/4 to $43 3/16; Q3 EPS: $0.74 (from continuing operations) vs. $0.65 last year; Estimate: $0.75<% ' AvantGo:End %>

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

Tough Year for P&C Insurers

<% ' AvantGo:FOTH %>So far, 1998 hasn't been the best year for property & casualty insurers. Looking across the spectrum of companies, here are the year-to-date performances (with dividends reinvested):

Allstate <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALL)") else Response.Write("(NYSE: ALL)") end if %>: -5.4%
American Financial Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFG)") else Response.Write("(NYSE: AFG)") end if %>: -5.1%
American International Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIG)") else Response.Write("(NYSE: AIG)") end if %>: +22.7%
Chubb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CB)") else Response.Write("(NYSE: CB)") end if %>: -21.1%
Cincinnati Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CINF)") else Response.Write("(Nasdaq: CINF)") end if %>: -20.1%
Fremont General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMT)") else Response.Write("(NYSE: FMT)") end if %>: -15.4%
Frontier Insurance Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTR)") else Response.Write("(NYSE: FTR)") end if %>: -18.8%
General Re Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRN)") else Response.Write("(NYSE: GRN)") end if %>: +9.6%
Mercury General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCY)") else Response.Write("(NYSE: MCY)") end if %>: -24.6%
Old Republic International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ORI)") else Response.Write("(NYSE: ORI)") end if %>: -18.2%
Progressive Insurance <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGR)") else Response.Write("(NYSE: PGR)") end if %>: +20.1%
St. Paul Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPC)") else Response.Write("(NYSE: SPC)") end if %>: -15.8%
Safeco Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAFC)") else Response.Write("(Nasdaq: SAFC)") end if %>: -8.3%
Travelers Property Casualty Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAP)") else Response.Write("(NYSE: TAP)") end if %>: -29.8%
Zenith National Insurance <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZNT)") else Response.Write("(NYSE: ZNT)") end if %>: -4.3%

For the year, the S&P Supercomposite Property/Casualty Index is down 4.8%, although it's easy to see that most companies are down much farther than the index would suggest. This is hard to fathom if you believe the old saw about falling interest rates being good for financial services stocks. While decreasing interest rates do contribute to a general rise in the price investors will pay for financial assets, thus lifting the price investors will pay for a dollar's worth of earnings, this doesn't completely offset what happens to pricing in the insurance industry when interest rates drop.

With a general rise in the price of financial assets, the investment portfolios of insurance companies increase in value. Along with that, the amount of insurance coverage the industry can write increases as well, as regulators and executives look at their premium to surplus ratio, which is a company's ratio of net written premiums to what is basically its owners' equity. So if the bond market experiences a year of favorable conditions, a company's balance sheet is going to improve if it is long bonds. The greater the average maturity of its bond portfolio, the greater the positive effect a rising bond market will have on an insurer's balance sheet.

This phenomenon is exactly what economists talk about when they use the term "wealth effect" to describe the spending and saving patterns of individuals during times when the stock market is buoyant. If you're a 50-year-old couple with $1 million in the market in 1995 and you've seen that portfolio grow to $2 million today, you're more likely to feel secure in renting out a house on Lake Geneva for a week next summer. But if the market crashes between now and then and you can get back your deposit, you might do so. With insurers, they feel the wealth effect when their investment portfolios rise by 15% year-over-year and insured losses stay in-line with projections. Put in a couple of years of good investment and underwriting performance, and this wealth effect turns into a desire to gain market share and take on new lines of business.

When lots of companies in the insurance industry feel this wealth effect, premiums (pricing) soften. In a recent Best's Review article on reinsurance for homeowners' multiperil coverage, Insurance Information Institute vice president and economist Robert Hartwig said, "It is questionable whether prices can continue to drop, but I'm not sure anything on its own could harden the market [improve pricing] except perhaps a series of catastrophes or a loss of capital through a prolonged drop in bonds or stock prices." Furthermore, insurers are increasing their underwriting risks to offset the pricing risks.

This happens in a couple of ways. First, an insurer can cede less premiums, meaning it takes out less insurance on the insurance it writes. While it gets to keep more of the premiums its takes in and thus gets to invest those premiums rather than laying off the risk to a reinsurer, that means that a large loss event such as hurricanes, earthquakes, hailstorms, or tornadoes can have a larger effect on the insurer's losses. In addition, there is the temptation to take smaller loss provisions. As in the banking industry, reserves are set aside in advance of the actual losses taking place. By experience, a bank knows that a certain percentage of credit card borrowers, home mortgage holders, and auto borrowers will default on their obligations. At the inception of those loans, the bank sets aside loan loss provisions and has to make adjustments depending upon the actual loss experience that develops.

An insurer models risks and takes loss provisions in advance of the actual occurrence of loss events. If a company wants to improve earnings a little bit, it will set aside a smaller loss provision on its income statement. In the worst case scenario, it could pay out those under-reserved earnings to shareholders or use the capital for bad acquisitions. If it runs into a bad loss, it's toast. In a more benign scenario, it keeps those premiums and invests them. If a big insured loss event comes along, the company will show larger losses than it would have had it taken adequate reserves.

Such pricing environments eventually catch up to the industry, though. Last week Reuters quoted A.M. Best senior vice-president Eric Simpson as saying today's pricing environment is "not close to the bloodletting of the early '80s." In the face of such conditions, the idea is not to abandon the industry as an investor, it's to look for the companies that are handling these conditions most rationally. First, dropping loss provisions to shore up the income statement is something to avoid, unless a company is grossly overreserved and can truly afford to reduce its contingent liabilities. Analysts won't ascribe much, if any, multiple to marginal earnings that are brought about by unwarranted decreases in loss provisions anyway. So the market is supposedly efficient when it comes to that sort of thing, but it's not uncommon to see an insurance company go from stellar results to the doghouse because of poor underwriting standards that eventually come home to roost.

Investors should pay attention to those companies that say they're pulling back from a certain market when management thinks there's too much capital chasing too few insurance risks. Just as in any market, supply and demand in the short run can get out of whack with where supply and demand would optimally be in the long run. The players that write insurance at prices that don't compensate them for the risks they're taking on usually get washed out anyway. In the short term, their irrational actions can hurt the industry overall, but it's the companies with strong balance sheets and prudent risk management that can take advantage of the highly attractive pricing environments that follow large catastrophes such as Hurricane Hugo. In fact, one of the largest inflows of capital into the insurance world took place after that hurricane brought about severe insurance losses and hurt the irrational insurers. In the excellent pricing environment that followed, the fortress-like insurers thrived.

Finally, the best way to take advantage of things is to look at the companies that have developed special underwriting niches, underwriting practices, and strong competitive advantages. For instance, Berkshire Hathaway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A)") else Response.Write("(NYSE: BRK.A)") end if %> subsidiary GEICO spends less to produce a policy than its competition because it doesn't use brokers. Its underwriting profitability isn't as good as auto insurer Progressive, but both end up with about the same operating profit margin because GEICO has lower overhead. Then there are companies like Chubb, which has gotten rid of commodity lines to concentrate on business lines where it can differentiate itself. Three of its most interesting business lines are its art collection insurance, underwriting of Broadway shows, and intellectual property insurance for Internet companies. In all, not every insurance company suffers long term just because of poor short-term fundamentals. Almost anytime an industry takes a bit of a beating, there's always a few companies that can handle it and develop strategies to overcome the competition in both the short- and long-term.<% ' AvantGo:End %>

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