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Archive for January 23rd, 2013

On Insurance Investing, Part 1

Wednesday, January 23rd, 2013

Shrinking the Share Count

This post was prompted by this post from Avondale Asset Management on how the share count from The Travelers has shrunk since 2005 (two years after their merger with The St. Paul, a company that I once worked for).  Only 57% of the shares remain.  Way to go.

Now, buying back stock is not a panacea.  It is only good when the shares are trading below or not much above fair market value.  What’s fair market value, you ask?  Well, that’s not an easy question to answer in most places, but in insurance, it means around 1.3x book value, adjusting for intangibles that have no economic significance.

Now if a company has some proprietary products, technologies or methods that give it a sustainable competitive advantage, that multiple can rise — AFLAC might be an example of that.  But sustainable competitive advantages in a mature and competitive industry like insurance are rare.  Above the 1.3x book value hurdle, it would be better to do special dividends.

Avondale was spot-on to feature The Travelers.  They are in the upper end of those that bought back shares 2005-2012.  Here’s my list:

CompanyTickerIndustry% of shares remaining since 2005
WellPoint, Inc.WLP0706 – Insurance (Accident & Health)

52%

Infinity Property and CasualtyIPCC0715 – Insurance (Property & Casualty)

56%

Travelers Companies, Inc., TheTRV0715 – Insurance (Property & Casualty)

57%

Aetna Inc.AET0706 – Insurance (Accident & Health)

58%

Employers Holdings, Inc.EIG0715 – Insurance (Property & Casualty)

59%

White Mountains Insurance GrouWTM0715 – Insurance (Property & Casualty)

60%

Torchmark CorporationTMK0709 – Insurance (Life)

61%

Assurant, Inc.AIZ0709 – Insurance (Life)

61%

Chubb Corporation, TheCB0715 – Insurance (Property & Casualty)

67%

Erie Indemnity CompanyERIE0715 – Insurance (Property & Casualty)

68%

RenaissanceRe Holdings Ltd.RNR0715 – Insurance (Property & Casualty)

69%

Endurance Specialty Holdings LENH0715 – Insurance (Property & Casualty)

69%

Loews CorporationL0715 – Insurance (Property & Casualty)

71%

Allied World Assurance Co HoldAWH0715 – Insurance (Property & Casualty)

71%

W.R. Berkley CorporationWRB0715 – Insurance (Property & Casualty)

72%

Health Net, Inc.HNT0706 – Insurance (Accident & Health)

72%

Platinum Underwriters HoldingsPTP0715 – Insurance (Property & Casualty)

72%

Allstate Corporation, TheALL0715 – Insurance (Property & Casualty)

73%

CIGNA CorporationCI0706 – Insurance (Accident & Health)

75%

UnitedHealth Group Inc.UNH0706 – Insurance (Accident & Health)

77%

Progressive Corporation, ThePGR0715 – Insurance (Property & Casualty)

78%

Montpelier Re Holdings Ltd.MRH0715 – Insurance (Property & Casualty)

78%

Verisk Analytics, Inc.VRSK0712 – Insurance (Miscellaneous)

78%

American Financial GroupAFG0715 – Insurance (Property & Casualty)

80%

StanCorp Financial Group, Inc.SFG0706 – Insurance (Accident & Health)

80%

Primerica, Inc.PRI0709 – Insurance (Life)

80%

Investors Title CompanyITIC0715 – Insurance (Property & Casualty)

81%

Hanover Insurance Group, Inc.,THG0715 – Insurance (Property & Casualty)

83%

Coventry Health Care, Inc.CVH0706 – Insurance (Accident & Health)

84%

RLI Corp.RLI0715 – Insurance (Property & Casualty)

84%

Kemper CorpKMPR0715 – Insurance (Property & Casualty)

84%

Axis Capital Holdings LimitedAXS0715 – Insurance (Property & Casualty)

85%

First Acceptance CorporationFAC0715 – Insurance (Property & Casualty)

86%

Everest Re Group LtdRE0715 – Insurance (Property & Casualty)

89%

Eastern Insurance Holdings IncEIHI0709 – Insurance (Life)

90%

Prudential Financial IncPRU0709 – Insurance (Life)

91%

Horace Mann Educators CorporatHMN0715 – Insurance (Property & Casualty)

92%

FBL Financial GroupFFG0709 – Insurance (Life)

92%

AFLAC IncorporatedAFL0706 – Insurance (Accident & Health)

93%

Cincinnati Financial CorporatiCINF0715 – Insurance (Property & Casualty)

93%

Kansas City Life Insurance CoKCLI0709 – Insurance (Life)

93%

Kingsway Financial Services InKFS0715 – Insurance (Property & Casualty)

93%

HCC Insurance Holdings, Inc.HCC0715 – Insurance (Property & Casualty)

94%

Unum GroupUNM0709 – Insurance (Life)

94%

EMC Insurance Group Inc.EMCI0715 – Insurance (Property & Casualty)

95%

eHealth, Inc.EHTH0712 – Insurance (Miscellaneous)

95%

OneBeacon Insurance Group, LtdOB0715 – Insurance (Property & Casualty)

95%

Aspen Insurance Holdings LimitAHL0715 – Insurance (Property & Casualty)

96%

Unico American CorporationUNAM0715 – Insurance (Property & Casualty)

97%

Markel CorporationMKL0715 – Insurance (Property & Casualty)

98%

Safety Insurance Group, Inc.SAFT0715 – Insurance (Property & Casualty)

98%

Humana Inc.HUM0706 – Insurance (Accident & Health)

99%

Atlantic American CorporationAAME0709 – Insurance (Life)

100%

State Auto FinancialSTFC0715 – Insurance (Property & Casualty)

100%

A.F.P Provida SA (ADR)PVD0718 – Investment Services

100%

American National Insurance CoANAT0715 – Insurance (Property & Casualty)

101%

Baldwin & Lyons, Inc.BWINB0715 – Insurance (Property & Casualty)

101%

Mercury General CorporationMCY0715 – Insurance (Property & Casualty)

101%

Marsh & McLennan Companies, InMMC0712 – Insurance (Miscellaneous)

101%

National Western Life InsurancNWLI0709 – Insurance (Life)

101%

Brown & Brown, Inc.BRO0712 – Insurance (Miscellaneous)

101%

Selective Insurance GroupSIGI0715 – Insurance (Property & Casualty)

101%

Sun Life Financial Inc. (USA)SLF0709 – Insurance (Life)

101%

Life Partners Holdings, Inc.LPHI0712 – Insurance (Miscellaneous)

101%

Aon PLCAON0712 – Insurance (Miscellaneous)

102%

ProAssurance CorporationPRA0715 – Insurance (Property & Casualty)

102%

Principal Financial Group IncPFG0706 – Insurance (Accident & Health)

102%

First American Financial CorpFAF0715 – Insurance (Property & Casualty)

102%

China Life Insurance Company LLFC0709 – Insurance (Life)

103%

Genworth Financial  IncGNW0709 – Insurance (Life)

103%

Navigators Group, Inc, TheNAVG0715 – Insurance (Property & Casualty)

104%

National Interstate CorporatioNATL0715 – Insurance (Property & Casualty)

104%

Amerisafe, Inc.AMSF0715 – Insurance (Property & Casualty)

104%

Cna Financial CorpCNA0715 – Insurance (Property & Casualty)

105%

Donegal Group Inc.DGICA0715 – Insurance (Property & Casualty)

106%

Stewart Information Services CSTC0715 – Insurance (Property & Casualty)

106%

Berkshire Hathaway Inc.BRK.A0715 – Insurance (Property & Casualty)

107%

Prudential Public Limited CompPUK0709 – Insurance (Life)

107%

Willis Group Holdings PLCWSH0712 – Insurance (Miscellaneous)

107%

Crawford & CompanyCRD.B0712 – Insurance (Miscellaneous)

111%

Old Republic International CorORI0715 – Insurance (Property & Casualty)

112%

Molina Healthcare, Inc.MOH0706 – Insurance (Accident & Health)

112%

United Fire Group, Inc.UFCS0715 – Insurance (Property & Casualty)

113%

Partnerre LtdPRE0715 – Insurance (Property & Casualty)

113%

Protective Life Corp.PL0709 – Insurance (Life)

114%

Manulife Financial CorporationMFC0709 – Insurance (Life)

114%

Independence Holding CompanyIHC0709 – Insurance (Life)

116%

ACE LimitedACE0715 – Insurance (Property & Casualty)

116%

Reinsurance Group of America IRGA0706 – Insurance (Accident & Health)

118%

Citizens, Inc.CIA0709 – Insurance (Life)

119%

Universal Insurance Holdings,UVE0715 – Insurance (Property & Casualty)

121%

Phoenix Companies, Inc., ThePNX0709 – Insurance (Life)

122%

AEGON N.V. (ADR)AEG0709 – Insurance (Life)

124%

Symetra Financial CorporationSYA0709 – Insurance (Life)

124%

Arch Capital Group Ltd.ACGL0715 – Insurance (Property & Casualty)

127%

Fidelity National Financial InFNF0715 – Insurance (Property & Casualty)

128%

Hilltop Holdings Inc.HTH0715 – Insurance (Property & Casualty)

130%

Arthur J. Gallagher & Co.AJG0712 – Insurance (Miscellaneous)

131%

ING Groep N.V. (ADR)ING0709 – Insurance (Life)

135%

Argo Group International HoldiAGII0715 – Insurance (Property & Casualty)

136%

Seabright Holdings IncSBX0715 – Insurance (Property & Casualty)

138%

Global Indemnity plcGBLI0715 – Insurance (Property & Casualty)

141%

Metlife IncMET0709 – Insurance (Life)

143%

MBIA Inc.MBI0715 – Insurance (Property & Casualty)

145%

Hartford Financial Services GrHIG0715 – Insurance (Property & Casualty)

146%

American Safety Insurance HoldASI0715 – Insurance (Property & Casualty)

150%

CNO Financial Group IncCNO0709 – Insurance (Life)

153%

Universal American CorporationUAM0706 – Insurance (Accident & Health)

153%

Radian Group Inc.RDN0715 – Insurance (Property & Casualty)

155%

American Equity Investment LifAEL0709 – Insurance (Life)

159%

Hallmark Financial Services, IHALL0715 – Insurance (Property & Casualty)

160%

Validus Holdings, Ltd.VR0709 – Insurance (Life)

160%

Lincoln National CorporationLNC0709 – Insurance (Life)

161%

Enstar Group Ltd.ESGR0715 – Insurance (Property & Casualty)

169%

Meadowbrook Insurance Group, IMIG0715 – Insurance (Property & Casualty)

172%

Greenlight Capital Re, Ltd.GLRE0715 – Insurance (Property & Casualty)

173%

Alleghany CorporationY0715 – Insurance (Property & Casualty)

191%

Tower Group IncTWGP0715 – Insurance (Property & Casualty)

196%

Alterra Capital Holdings LtdALTE0715 – Insurance (Property & Casualty)

197%

CNinsure Inc. (ADR)CISG0712 – Insurance (Miscellaneous)

208%

XL Group plcXL0715 – Insurance (Property & Casualty)

215%

MGIC Investment Corp.MTG0715 – Insurance (Property & Casualty)

220%

Amtrust Financial Services, InAFSI0715 – Insurance (Property & Casualty)

259%

Assured Guaranty Ltd.AGO0715 – Insurance (Property & Casualty)

262%

American International Group,AIG0715 – Insurance (Property & Casualty)

1265%

On the top side, and I did not see any of these, be aware of reverse splits, which can reduce the share count, are a sign of a badly run company, but do nothing for the economics of a firm, aside from keeping them listed on a major exchange.

On the bottom side, factor in large mergers paid for with shares.  Most large-scale mergers don’t work out well, so I don’t mind those companies being near the bottom of the list.

On a closing note, there is a weak positive correlation in most mature industries between stock price performance and relative decreases in share count, assets, and sales.  This sounds counter-intuitive, but good management teams know when to grow and when not to grow.  They don’t do acquisitions for scale.  They don’t grow sales if the sales growth won’t justify the cost of capital.  Building the assets of the company bigger does nothing for the bottom line; selective asset sales can free up cash for more productive uses.  Good management teams do not build empires — they add when it makes sense (grow), subtract when it makes sense (shrink), divide when it makes sense (spinoffs), and multiply when it makes sense (IPOs, JVs, new projects).

PS —  What does the WSJ have today?  An article on buybacks.  Enjoy.

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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