Chasing Value: Insurance Stock Review -- Part 3

Last week, Warren Buffett, Chairman of Berkshire Hathaway (BRK.A and BRK.B), said India's 26% foreign ownership cap on insurers deters him from such an investment. This follows an earlier report that Buffett aims to enter the Indian insurance sector as a corporate agent of Bajaj Allianz General Insurance.

After numerous world calamities, Buffett's focus on insurance companies, and the fact that many hedge funds seem to be heavily focused on banks and neglecting insurance companies -- with the exception of Bruce Berkowitz -- I decided to explore the possibilities.

Even though we can anticipate billions of dollars in claims there still are buying opportunites.

The previously published stories, Chasing Value: Insured Profits or a Mountain of Risk? and Chasing Value: Insurance Stock Review -- Part 2 reduced the candidates from ten to eight. Continuing where we left off, I examine the dividend picture and the return-on-equity

Dividends

Homeowners Choice Inc. (HCII): 4.9%
Manulife Financial Corp. (MFC): 2.98%
Allstate Corp. (ALL): 2.54%
Chubb Corp. (CB): 2.46%
Travelers Companies Inc. (TRV): 2.39%
Aflac Inc. (AFL): 2.20%
MetLife Inc. (MET): 1.64%
Hartford Financial Services Group (HIG): 0.75%

When you consider that the average dividend paid by the S&P 500 stock is 1.7%, I find that most of these stocks are quite generous. Only Hartford is below that threshold, but I would not throw it out for this reason alone, as I expect it will raise the dividend to be inline with industry competitors as part of its recovery plan.

Return-on-Equity

Homeowners Choice Inc. (HCII): 25.80
Aflac Inc. (AFL): 23.29
Chubb Corp. (CB): 14.66
Travelers Companies Inc. (TRV): 12.89
Hartford Financial Services Group (HIG): 5.33
Allstate Corp. (ALL): 5.15
Manulife Financial Corp. (MFC): 1.83
MetLife Inc. (MET): -7.09

In this area, I would hope to find high double-digit returns. That is the case for only two of these stocks: Homeowners and Aflac. The next two, Chubb and Travelers, provide a respectable return. The bottom four just don't make the grade in terms of providing much shareholder value expansion, which many consider a reflection of the caliber of management leading the way. If this was the sole criteria I would drop them from consideration right here.

Clearly, the real standout of the group today providing the most shareholder value is HCII. I came to this conclusion months ago when I included this small company as one of my picks for the year. For this reason I will be sticking with this micro-cap success story, based on what we already know and suggesting again investors give it a look. This leaves us with the remaining seven stocks for the next round.

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.