Ten weeks into the year and never a dull moment. Pondering the remaining 42 weeks and beyond, where will value be found? We know that "my pal Warren" is on the prowl waist high in Berkshire Hathaway cash to invest, and he is on record as chomping on the bit to do so. Just this morning it was reported that Buffett had closed a $9 billion deal to buy Lubrizol Corp. (LZ), the Wickliffe, Ohio-based maker of engine lubricants. More evidence of this abounds: Wednesday March 2, (Reuters) - US-based Berkshire Hathaway aims to enter the Indian insurance sector as a corporate agent of Bajaj Allianz General Insurance.
This is part 1 of a series examining the insurance market for expansion, stock valuations, potential risks and opportunities, excluding health care focused companies, a whole other breed of enterprise.
The recent huge natural disasters in New Zealand, devastating the city of ChristChurch with a 6.3 magnitude earthquake in February, and then this past week with Japan's largest recorded quake offshore followed by a roaring tsunami destroying everything in its path leaving the population yet to determine the full extent of the damage.
We will start our exploration with ten companies, large and small. This is an industry with many significant non-public players, including: Fireman's Fund, Progressive Insurance, and State Farm Inc. to name a few. It is highly regulated and highly competitive, although one might not think so upon receiving a rate increase.
Today we will look at two metrics, price-to-earnings and price-to-sales leaving additional attributes for another day. The P/E has been the traditional measure of comparative value, but my studies have attributed greater long term significance to the P/S so I listed both.
Price-to-earnings
- Travelers Companies Inc. (TRV) P/E 9.27 (TTM)
- Hartford Financial Services Group (HIG) P/E 9.79 (TTM)
- Chubb Corp (CB) P/E 9.94 (TTM)
- Homeowners Choice Inc. (HCII) P/E 10.03 (TTM)
- AFLAC Inc (AFL) P/E 10.05 (TTM)
- MetLife Inc. (MET) P/E 10.45
- Allstate Corp (ALL) P/E 11.21 (TTM)
In the above group Travelers is the clear winner but I would not arrive at any definitive conclusions from such limited information. I separated out the next three stocks because the P/E's had anomalies.
In the case of AIG which has returned from the dead thanks entirely to a bailout by the federal government (taxpayers) the extra low P/E is misleading and the forward looking figure makes it an outlier too. China Life's P/E is simply too high unless growth projections are accelerating, otherwise being twice the average of its peers is way out of line. Hard to reconcile the fact that the P/E is projected to rise; implying lower earnings projections. Manulife, like AIG is in recovery mode like AIG but earnings look to be rising substantially not on growth but on reducing debt and cleaning up the balance sheet over the last three years.
- Amer Intl Group (AIG) P/E 2.5 (TTM), 19.76 going forward
- China Life Insurance ADS (LFC) P/E 21.04 (TTM), 22.68 going forward
- Manulife Financial Corp (MFC) P/E 65.00 (TTM) 10.98 going forward
Price-to-sales
- Amer Intl Group (AIG) 0.10
- Allstate Corp (ALL) 0.53
- Hartford Financial Services Group (HIG) 0.56
- MetLife Inc. (MET) 0.75
- Manulife Financial Corp (MFC) 0.81
- Homeowners Choice Inc. (HCII) 0.82
- Travelers Companies Inc. (TRV) 1.07
- AFLAC Inc (AFL) 1.26
- Chubb Corp (CB) 1.44
- China Life Insurance ADS (LFC) 1.97
If the analysis ended here I would be dropping China Life from consideration. The top seven range from scary cheap to reasonable values. AFLAC is acceptable and Chubb is average. Surprisingly only one company, Hartford, is in the top half for both metrics. AIG looks cheap but one can't help thinking this is an anomaly like the P/E. However, last November I posted Serious Money: AIG Takeover by Fairholme Capital? after learning Bruce Berkowitz had raised his stake to 29% so maybe he likes these numbers. I hope so because he cant like the fact that the stock has dropped from $41.52 to $37.35.
As large insurers go Travelers Companies Inc. (TRV), capitalized at $25.5 billion is on my watchlist and on the micro side I have recommended the $53 million microcap Homeowers Choice Inc. (HCII). I suggested Manulife (MFC) to "my pal Warren" in July, see Serious Money: Buffett Going Global -- Part 5, when it was trading at $15.30. It is trading at $17.88 now for a 16.86% gain over 7 months, or a 29% annualized profit.
Stay tuned -- as current events unfold this could be a long wild ride.
Sheldon Liber is an architect and the CEO of Chasing Value™ Asset Management, Inc. He writes the columns Chasing Value™ and Serious Money and is on twitter: @ChasingValue. Disclosure: Mr. Liber currently owns shares of BRK.B, and HCII.
Reader Comments (Page 1 of 1)
3-17-2011 @ 3:19PM
william lindblad said...
Bet he does not buy any - at least not at this point in time. Improbable events happen, just as Mr. Murphy said - if it can go wrong, it will. We are in a period of advanced seismic events and if one starts with Mt. St. Helens in 1980 and works forward to present it becomes quite evident, especially when compared to the last 100 years.
Example: There is an island in the Canary Islands that is cracked in half from a previous event. Highly unlikely that it will split in half anytime soon. However, when it does, it will make the East Coast of the U.S. much like what we see at Japan.