Lanny Thorndike, whose Century Shares Trust mutual fund has about a third of its assets in insurance stocks, is keeping his investments in Marsh & McLennan Cos. and American International Group Inc. as U.S. regulators expand their industry-wide probe of improper sales practices.

Marsh has lost almost half its market value since the world's largest insurance brokerage was sued Oct. 14 by New York Attorney General Eliot L. Spitzer for rigging insurance bids, an alleged fraud that "jacked up" prices for companies and schools. Spitzer said his probe touches "virtually every line of insurance." American International's stock fell 14 percent in the past week and closed Friday at $54.70 per share, slightly above its 52-week low of $54.50.

"There's definitely a storm cloud on the industry and there's definitely going to be some fallout, but we think the markets have oversold," Thorndike, 38, said in an interview from his office in Boston. "If you look at the value that's been carved out, we think that's excessive."

American International, or AIG, the world's biggest insurer, is Thorndike's No. 3 holding after Warren Buffett's Berkshire Hathaway Inc. and UnitedHealth Group Inc., the largest U.S. health insurer.

Founded in 1928, the Century Shares Trust is the fifth-oldest mutual fund in the United States. The $375 million fund rose at an average annualized rate of almost 10 percent during the past five years, compared with the 1.6 percent drop of the Standard & Poor's 500-stock index. The Century fund fell 3.4 percent in the past week.

Spitzer's probe is "certainly a troubling thing for them," said David Kathman, an analyst at Morningstar Inc., a mutual fund industry research firm in Chicago. "Who knows how this is going to shake out?"

Century Shares Trust has a larger portion of its assets in insurance companies than most competing financial services funds, Kathman said.

Spitzer's lawsuit against New York-based Marsh alleges that the company and insurers including AIG fabricated bids on commercial policies to create the appearance that insurers were competing for their business. In reality, Marsh and the insurers predetermined who would get the business, and Marsh received payments from favored insurers, the suit said.

"The most damning claim is the allegation of price fixing," said Thorndike, who has degrees from Harvard and Northwestern. "That scares investors the most."

The fund has had a position in AIG for at least a decade. The New York-based company led by Chairman Maurice R. "Hank" Greenberg delivered annual returns of more than 10 percent from 1991 to 2000. Thorndike reduced the fund's stake in AIG earlier this year, before Spitzer's suit emerged.

"I do think AIG will get hand-slapped, but the grossly negligent price fixing seems to be compartmentalized to a few individuals and a few lines of business," said Thorndike, who co-manages the fund with Kevin Callahan. "We just don't know yet."

Spitzer's claims reveal cracks in the insurance business, which lacks "good disclosure" and relies heavily on relationships with brokers to make deals, Thorndike said. The increased scrutiny will likely change the way insurance is sold in the next three to five years, he said.

Thorndike, who has managed Century Shares Trust since 1999, looks for companies that can generate a 15 percent return on equity on a rolling basis over three to five years, and double their book values every five years. The fund typically holds 45 to 55 stocks, and has about 45 percent of its assets in financial companies.

The Century fund started as a financial services fund, investing almost exclusively in the industry. Three years ago, it sought to diversify its holdings because of concern that financial services stocks would reach a "natural peak" as interest rates declined, Thorndike said.

Thorndike's shift away from financial stocks may prove prescient, depending on the outcome of Spitzer's investigation.

"Everyone will be tarred and feathered if it's found to be more widespread," he said.

Thorndike initiated investment positions in companies such as Johnson & Johnson this year as insurance stocks declined. Shares of Johnson & Johnson are up 11 percent in 2004 and closed Friday at $57.29. The maker of Band-Aids and medical devices last week reported a 13 percent increase in third-quarter earnings.