S&P Weighs Rita's Threat to Property Insurers

Analyst Cathy Seifert is concerned that some outfits' capital bases will be severely depleted. Also: Opinions on Willis Group and others

Property & Casualty Insurance Subindustry (ACE ): Reiterates Neutral

Analyst: Cathy Seifert

We expect this subindustry to remain under pressure amid an unprecedented level of catastrophe losses from Hurricanes Katrina and possibly Rita. Though this group has a capital base of nearly $400 billion, we remain concerned that some insurers' capital bases will be severely depleted; however, we believe these unfortunate and very costly events will return pricing power to the sub-industry. Our top picks in this industry are Allstate (ALL ) and Hartford Financial Services (HIG ), each ranked 5 STARS (strong buy), and American International Group (AIG ) and Chubb(CB ), each ranked 4 STARS (buy).

Willis Group(WSH ): Ups to 4 STARS (buy) from 3 STARS (hold)

Analyst: Frank Braden

Due to the impact of Hurricane Katrina and the likely impact of Hurricane Rita, we expect premium pricing to strengthen in 2006. We expect to see commissions and fees slowly rise to compensate insurance brokers for lost contingent commissions. We see Willis Group's reinsurance segment benefiting as we expect insurers will cede more business to reinsurers due to the impact of the storms in 2004 and 2005. We are initiating our 2006 operating earnings per share estimate (earlier not stated as estimate) at $2.60. We are raising our target price to $44 from $37, 17 times our 2006 earnings per share estimate, a premium to its historic multiple.

POSCO(PKX ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Andrea West, CFA

POSCO announced planned price and production cuts for a number of major steel products. We believe prices for these products will decline 6% to 9% in the near term as POSCO reacts to rising inventories and increasing competition from Chinese imports into South Korea. Steel pricing seems to be falling more rapidly than we had expected, and we are reducing our earnings per share estimates to $13.18 from $13.34 for 2005, and to $9.77 from $10.18 for 2006. We are cutting our 12-month target price to $56 from $60, based on a blend of our discounted cash flow and relative valuation models.

Corn Products International (CPO ): Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Joseph Agnese

Corn Products reduced its 2005 earnings per share guidance to $1.16 to $1.22 from $1.34 to $1.44 due to increased energy costs, as unreliable coal boiler performance has led to increased usage of backup natural gas boilers. Although installation of a new coal boiler has begun, the company does not expect completion until the second half of 2006. Based on our expectation of increased margin pressures from increased energy costs, we are reducing our 2005 and 2006 earnings per share estimates by 22 cents and 20 cents, respectively, to $1.20 and $1.40. As a result, our 12-month target price falls by $9 to $20, based on our updated p-e analysis.

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