Bermuda reinsurers, financial guarantors and brokers are a sound investment, according to analysts from Morgan Stanley.

In an industry overview of insurance entitled "Bonfire of the Beancounters", Morgan Stanley analysts Alice Schroeder, Vinay Saqi and Chris Winans highlight four key points for investing in the insurance industry.

On the accounting risk for insurers, the analysts said: "We believe products and practices that were formerly acceptable may now be deemed improper with hindsight."

The analysts also said image was a key issue for insurance, adding: "In general, we believe that non-life insurers may suffer more from image issues than from financial meltdowns."

The analysts said that some stocks appear more immune than others, saying: "Berkshire Hathaway is the poster child for pristine financial reporting. We also believe the Bermuda property reinsurers, financial guarantors, and brokers have below average risk."

The analysts also proposed a "buy on weakness" strategy for the intrepid. The analysts said: "This may take a cast-iron stomach, given the potential volatility. However, we belive most companies will prove to be fundamentally intact."

Assessing the investment possibilities in insurance stocks, the Morgan Stanley analysts said: "Based on our experience, there are few qualities coveted by investors in an insurance stock more than trustworthy management that can be relied on to report the numbers fairly. We believe that investors usually gauge this quality, which is obviously subjective, based on reliability of information... and adequacy of disclosure - including management's willingness to be candid about negative as well as positive information, and weather the company provides enough detailed information about the business for investors to form their own judgments, and not simply trust management's representations that all is well."

The analysts say that unfortunately, few insurance companies fully measure up to these ideals, and added: "The best examples of insurers in our universe that we belive investors do trust in terms of reliability and candour about negative as well as positive information are Berkshire Hathaway, Renaissance Re, Progressive and XL Capital."

The analysts said that financial services in general, and nonlife insurance in particular, carries an additional risk of multiple contraction until this issue is more fully addressed.

However, they said: "The basic business of risk management and risk transfer remains intact, so we are not concerned that the long-term health of the insurance industry has been compromised."

They say a few nonlife insurers appear to have very little risk in this area and that there is no management that has been more candid about its business and financial condition than Berkshire Hathaway and there appears to be no company that is more trusted for fair financial reporting.

"With its credibility, low leverage and triple-A balance sheet, Berkshire is the `un-Enron'", said the analysts.

They continued: "We also believe a few of the Bermuda short-tail reinsurers, (IPC Re, PartnerRe, Renaissance Re), the financial guarantors, and the insurance brokers have below average risk simply due to the nature of their businesses.

"In our view, companies such as Progressive and XL Capital also score better than average with investors for management credibility, which may mitigate other inherent financial and market risks (e.g., XL's financial services risk)."

The analysts said that they believed a "buy on weakness" strategy makes sense for companies like AIG with strong financial strength ratings and excellent business franchises. However, they said AIG may continue to be the subject of second guessing over accounting issues given the diversity of the company's business.

The analysts conclude: "At some point, companies and investors are likely to adapt a new set of accounting and disclosure standards. If this means a world of higher balance sheet leverage and greater earnings volatility for most of the S&P, we believe AIG would still be quite healthy as a business even if the market and this stock go through a rough adjustment period."