Less is more

The investment community lost two leading equity analysts last year when Michael Frinquelli and Margaret Alexandre (now Alexandre Jacobsen) left their high-profile jobs as insurance analysts at Merrill Lynch. Frinquelli was known for his focus on the property/casualty industry, while Jacobsen concentrated on the life/health side.

But the insurance world gained two investors as the pair opened Renaissance Fund Advisors Inc., an investment partnership that takes positions in the industry the pair has watched and reported on every day for a combined 30 years20 for Frinquelli and 10 for Jacobsen.

What they saw was an industry in the early stages of a merger and acquisition wave, a phenomenon occurring worldwide. Using a baseball analogy, they say the insurance industry is in the second or third inning of the property/casualty consolidation wave and fourth or fifth inning of life insurance consolidation. Since last May, the New York-based pair's partnership fund has passed the $70 million mark, with more than 25 investors each kicking in $1 million or more. They discussed their investing strategy recently from their offices in Manhattan.

Q. What's the point of a fund aimed at insurance industry restructuring and consolidation?

Frinquelli: Given the insurance industry's low return on equity, high expense ratios, relatively inefficient distribution mechanisms and fragmented structure, we think the business is likely to see accelerated restructuring and consolidation over the next five to 10 years. Much has occurred in commercial banking over the past decade.

Q. How is it going?

Frinquelli: We started investing the end of last May, and through the end of 1997, that portfolio was up by about 18%. So, we believe we did fine both on a relative basis and, more importantly, on an absolute basis. The fund has also exhibited remarkably low volatility, considering the overall market's heightened volatility. We tend to own "value" stocks-relatively low price/earnings, price/book value and beta. When the S&P 500 fell by 7% in one day last October, our portfolio fell by approximately 3%, but it did take us longer to snap back. We are not especially concerned about volatility, given the longer-term nature of our investors, but our consolidation theme drives us to reasonably stable situations. We do not seek out "troubled" companies, but rather good outfits that...