Do you have any interest in insurance companies amidst the turmoil, disaster and current crises in Japan? A crises that followed so closely on the heals of the destruction of the New Zealand city of ChristChurch by a 6.3 magnitude earthquake. Perhaps you think this is even a poorer idea than catching that proverbial falling knife we are always hearing about when stock prices are collapsing.
Certainly there will be billions of dollars in claims. On the other hand, perhaps the burden will be spread around the globe to reinsurer's such that none is struck too hard and this is a buying opportunity. After all, when the dust settles, insurers will cry for mercy, and in particular, rate increases. It is also likely those that never saw the need for insurance have been awakened and demand will increase.
This is a continuation of a series, begun earlier in the week: Chasing Value: Insured Profits or a Mountain of Risk? Today we further explore the metrics of ten large players in this current quagmire of doom and gloom, not to mention claims and debt.
One of the largest insurance concerns in the United States is "my pal Warren's" Berkshire Hathaway. It is a conglomerate that includes three operating groups of subsidiaries.
The largest group (by premium volume) is GEICO Corp ("GEICO") a multiple line property and casualty insurer, the principal business of which is writing private passenger automobile insurance. The Reinsurance Division provides treaty and limited reinsurance to other property/casualty insurers and reinsurers. Berkshire is one of the world's leading providers of catastrophe excess of loss reinsurance. Berkshire's third group of businesses underwrite miscellaneous forms of direct insurance. National Indemnity Company and other affiliated entities underwrite multiple lines of traditional insurance for primarily commercial accounts.
The following metrics reflect three more data points of interest to value investors. After previously reviewing price-to-earnings and price-to-sales we continue with price-to-book (P/B), price-to-cash-flow (P/CF) and price-to-earnings-to-growth (PEG).
- Hartford Financial Services Group (HIG): 0.50
- Travelers Companies Inc. (TRV): 0.88
- MetLife Inc. (MET): 0.90
- Allstate Corp. (ALL): 0.94
- Manulife Financial Corp. (MFC): 0.96
- Homeowners Choice Inc. (HCII): 1.07
- Chubb Corp. (CB): 1.09
- Aflac Inc. (AFL): 2.31
- China Life Insurance ADS (LFC): 3.38
- American International Group (AIG): -0.57
As most investors quickly learn anything approaching a price-to-book at or below 1.0 is worth a look. In the case of our stock group seven of them seem very compelling. Aflac and China Life are out of line and would be dropped from consideration if this metric was the only consideration. AIG is still dancing through recovery mode more than the others with a debt burden it will be working off for a while .
- American International Group (AIG): 0.30
- Manulife Financial Corp. (MFC): 1.49
- China Life Insurance ADS (LFC): 3.70
- Aflac Inc. (AFL): 3.76
- Hartford Financial Services Group (HIG): 4.02
- Allstate Corp. (ALL): 4.47
- Homeowners Choice Inc. (HCII): 4.93
- MetLife Inc. (MET): 5.10
- Chubb Corp. (CB): 8.08
- Travelers Companies Inc. (TRV): 9.30
The figures here vary greatly. For the overall market a P/CF of 10.0 is about average. This is apparently not the case for insurers. The average among this group is 4.52. Only two of these stocks stray very far from this level. Interestingly Warren Buffett has favored insurance companies for their cash flow or float and the fact that the entire group bests the over all market in this respect is very telling
- Allstate Corp. (ALL): 0.53
- Hartford Financial Services Group (HIG): 0.56
- Aflac Inc. (AFL): 0.62
- MetLife Inc. (MET): 0.64
- China Life Insurance ADS (LFC): 0.93
- Chubb Corp. (CB): 1.11
- Travelers Companies Inc. (TRV): 1.11
- Manulife Financial Corp. (MFC): 1.15
- American International Group (AIG): N/A
- Homeowners Choice Inc. (HCII): N/A
Peter Lynch, the retired fund manager for the Fidelity Magellan fund, one of the greatest successes in the history of the mutual fund industry, promoted the PEG ratio as a means of crediting a rapidly growing company stock even if it's P/E ratios seemed high. Again all of the stocks do well here. Five of them exceedingly well, three very good and two with insufficient data from which to come up with a figure.
From the five criteria we reviewed to date I am going to drop two stocks from consideration going forward. China Life had the highest P/E and P/S in the initial review and now the P/B is just too high. The PEG and P/CF are respectable but they just do not outweigh the other metrics. I am also dropping AIG which has made an amazing comeback from a near death experience, saved by government life support. There might be value here, but the effort to decipher all of the financial data is too laborious given all the alternatives. In the end I suppose both AIG and LFC make me uncomfortable because I do not have the same level of confidence in the financial information and their markets as I do the others.
The remaining eight stocks are starting to look like very viable opportunities -- there will be more to come as we narrow the field.
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.