On Insurance Investing, Part 2

If you grow book value, particularly if your liabilities are short, you will grow market value.  Many reinsurance and insurance companies aim at growing fully convertible book value per share.

Fully convertible book value per share assumes that you invest your dividends in the common stock (without taxation), and thus compound your gains through reinvestment, taking account of dilution.  Hmmm… when will someone dream up the idea of structuring an insurance company as an MLP or a REIT?  I don’t think it is likely, but maybe someone could dream it up.

It also implies that all possible dilution is factored in from convertible preferred stock or convertible bonds.  Now insurance companies tend to trade near book value over the long run, so companies that can grow their book value rapidly and pay dividends can be interesting investments.  Particularly where the liabilities of the company are short — property reinsurance or personal lines insurance, growth in book value plus dividends tends to be a reliable indicator of value creation.

If liabilities are longer, it gets more questionable, because under-reserving becomes more likely — it is very hard to be certain of the reserving of long-dated or volatile coverages.

Anyway, here is a list of insurance companies, and how they have accumulated book value plus dividends over the past seven years.  Note that this is a mathematical calculation off a limited database, and that splits and M&A can throw this calculation off.  With that caveat, here is the list:

companytickersicimg_descmktcapGrowth of FCBV
Life Partners Holdings, Inc.LPHI64110712 – Insurance (Miscellaneous)

50.7

76%

Universal Insurance Holdings,UVE63310715 – Insurance (Property & Casualty)

185.2

75%

CNinsure Inc. (ADR)CISG64110712 – Insurance (Miscellaneous)

337.6

56%

Amtrust Financial Services, InAFSI63310715 – Insurance (Property & Casualty)

2,128.7

38%

Employers Holdings, Inc.EIG63310715 – Insurance (Property & Casualty)

652.6

32%

Enstar Group Ltd.ESGR63310715 – Insurance (Property & Casualty)

1,951.0

26%

Tower Group IncTWGP63310715 – Insurance (Property & Casualty)

734.8

25%

Amerisafe, Inc.AMSF63310715 – Insurance (Property & Casualty)

508.5

23%

Humana Inc.HUM63240706 – Insurance (Accident & Health)

11,297.2

21%

Allied World Assurance Co HoldAWH63310715 – Insurance (Property & Casualty)

2,856.1

21%

Arthur J. Gallagher & Co.AJG64110712 – Insurance (Miscellaneous)

4,441.2

20%

Willis Group Holdings PLCWSH64110712 – Insurance (Miscellaneous)

6,009.5

20%

China Life Insurance Company LLFC63110709 – Insurance (Life)

94,339.3

20%

ProAssurance CorporationPRA63310715 – Insurance (Property & Casualty)

2,698.5

19%

RenaissanceRe Holdings Ltd.RNR63310715 – Insurance (Property & Casualty)

3,949.8

18%

National Interstate CorporatioNATL63310715 – Insurance (Property & Casualty)

576.7

18%

Argo Group International HoldiAGII63310715 – Insurance (Property & Casualty)

910.3

17%

Brown & Brown, Inc.BRO64110712 – Insurance (Miscellaneous)

3,851.4

17%

AFLAC IncorporatedAFL63210706 – Insurance (Accident & Health)

24,134.6

16%

Endurance Specialty Holdings LENH63310715 – Insurance (Property & Casualty)

1,796.8

16%

W.R. Berkley CorporationWRB63310715 – Insurance (Property & Casualty)

5,455.7

15%

American Financial GroupAFG63310715 – Insurance (Property & Casualty)

3,772.7

15%

Horace Mann Educators CorporatHMN63310715 – Insurance (Property & Casualty)

830.9

15%

Eastern Insurance Holdings IncEIHI63110709 – Insurance (Life)

135.5

15%

Validus Holdings, Ltd.VR63310709 – Insurance (Life)

3,296.1

15%

CIGNA CorporationCI63240706 – Insurance (Accident & Health)

16,104.2

14%

Reinsurance Group of America IRGA63210706 – Insurance (Accident & Health)

4,143.2

14%

Safety Insurance Group, Inc.SAFT63310715 – Insurance (Property & Casualty)

715.6

14%

Chubb Corporation, TheCB63310715 – Insurance (Property & Casualty)

20,701.5

13%

Loews CorporationL63310715 – Insurance (Property & Casualty)

16,854.0

13%

ACE LimitedACE63510715 – Insurance (Property & Casualty)

28,285.6

13%

HCC Insurance Holdings, Inc.HCC63310715 – Insurance (Property & Casualty)

3,937.5

13%

Travelers Companies, Inc., TheTRV63310715 – Insurance (Property & Casualty)

29,108.4

13%

Coventry Health Care, Inc.CVH63240706 – Insurance (Accident & Health)

6,080.9

12%

Markel CorporationMKL63310715 – Insurance (Property & Casualty)

4,456.4

12%

Torchmark CorporationTMK63110709 – Insurance (Life)

5,103.5

12%

UnitedHealth Group Inc.UNH63240706 – Insurance (Accident & Health)

55,732.6

12%

Partnerre LtdPRE63310715 – Insurance (Property & Casualty)

5,116.2

12%

Meadowbrook Insurance Group, IMIG63310715 – Insurance (Property & Casualty)

311.6

12%

StanCorp Financial Group, Inc.SFG63210706 – Insurance (Accident & Health)

1,704.1

12%

Prudential Financial IncPRU63110709 – Insurance (Life)

26,777.4

12%

Infinity Property and CasualtyIPCC63310715 – Insurance (Property & Casualty)

688.6

12%

Assurant, Inc.AIZ63110709 – Insurance (Life)

2,935.0

12%

Greenlight Capital Re, Ltd.GLRE63310715 – Insurance (Property & Casualty)

837.4

12%

Progressive Corporation, ThePGR63310715 – Insurance (Property & Casualty)

13,738.8

11%

Protective Life Corp.PL63110709 – Insurance (Life)

2,451.0

11%

Axis Capital Holdings LimitedAXS63310715 – Insurance (Property & Casualty)

4,508.1

11%

Molina Healthcare, Inc.MOH63240706 – Insurance (Accident & Health)

1,300.1

11%

American Equity Investment LifAEL63110709 – Insurance (Life)

834.1

11%

Symetra Financial CorporationSYA63110709 – Insurance (Life)

1,578.3

11%

Aon PLCAON64110712 – Insurance (Miscellaneous)

18,199.1

10%

Mercury General CorporationMCY63310715 – Insurance (Property & Casualty)

2,169.0

10%

Everest Re Group LtdRE63310715 – Insurance (Property & Casualty)

5,843.7

10%

American Safety Insurance HoldASI63310715 – Insurance (Property & Casualty)

197.1

10%

Prudential Public Limited CompPUK63110709 – Insurance (Life)

38,071.4

10%

Aspen Insurance Holdings LimitAHL63310715 – Insurance (Property & Casualty)

2,324.9

10%

Berkshire Hathaway Inc.BRK.A63310715 – Insurance (Property & Casualty)

236,577.4

9%

EMC Insurance Group Inc.EMCI63310715 – Insurance (Property & Casualty)

326.3

9%

RLI Corp.RLI63310715 – Insurance (Property & Casualty)

1,439.1

9%

Hanover Insurance Group, Inc.,THG63310715 – Insurance (Property & Casualty)

1,781.6

9%

Unico American CorporationUNAM63310715 – Insurance (Property & Casualty)

66.6

9%

Montpelier Re Holdings Ltd.MRH63310715 – Insurance (Property & Casualty)

1,318.1

9%

Seabright Holdings IncSBX63310715 – Insurance (Property & Casualty)

249.0

9%

Alleghany CorporationY63310715 – Insurance (Property & Casualty)

5,950.7

8%

Hallmark Financial Services, IHALL63310715 – Insurance (Property & Casualty)

176.8

8%

White Mountains Insurance GrouWTM63310715 – Insurance (Property & Casualty)

3,509.0

8%

Investors Title CompanyITIC63610715 – Insurance (Property & Casualty)

139.1

8%

Marsh & McLennan Companies, InMMC64110712 – Insurance (Miscellaneous)

19,020.9

8%

FBL Financial GroupFFG63110709 – Insurance (Life)

869.4

8%

Erie Indemnity CompanyERIE63310715 – Insurance (Property & Casualty)

3,264.4

8%

Metlife IncMET63110709 – Insurance (Life)

39,615.8

8%

Aetna Inc.AET63240706 – Insurance (Accident & Health)

15,698.1

8%

WellPoint, Inc.WLP63240706 – Insurance (Accident & Health)

19,054.4

8%

Hilltop Holdings Inc.HTH63310715 – Insurance (Property & Casualty)

773.3

8%

Citizens, Inc.CIA63110709 – Insurance (Life)

485.8

7%

Donegal Group Inc.DGICA63310715 – Insurance (Property & Casualty)

370.9

7%

National Western Life InsurancNWLI63110709 – Insurance (Life)

596.1

7%

Navigators Group, Inc, TheNAVG63310715 – Insurance (Property & Casualty)

766.0

7%

Kemper CorpKMPR63310715 – Insurance (Property & Casualty)

1,842.8

7%

Allstate Corporation, TheALL63310715 – Insurance (Property & Casualty)

20,817.6

7%

Cna Financial CorpCNA63310715 – Insurance (Property & Casualty)

7,982.2

6%

Lincoln National CorporationLNC63110709 – Insurance (Life)

7,626.2

6%

Arch Capital Group Ltd.ACGL63310715 – Insurance (Property & Casualty)

6,084.7

6%

Platinum Underwriters HoldingsPTP63310715 – Insurance (Property & Casualty)

1,565.0

6%

Baldwin & Lyons, Inc.BWINB63310715 – Insurance (Property & Casualty)

339.5

5%

Selective Insurance GroupSIGI63310715 – Insurance (Property & Casualty)

1,086.8

5%

United Fire Group, Inc.UFCS63310715 – Insurance (Property & Casualty)

587.9

5%

Universal American CorporationUAM63240706 – Insurance (Accident & Health)

793.6

5%

Principal Financial Group IncPFG63210706 – Insurance (Accident & Health)

8,663.8

5%

American National Insurance CoANAT63310715 – Insurance (Property & Casualty)

2,055.2

4%

Kansas City Life Insurance CoKCLI63110709 – Insurance (Life)

416.9

4%

Cincinnati Financial CorporatiCINF63310715 – Insurance (Property & Casualty)

6,771.0

3%

Independence Holding CompanyIHC63110709 – Insurance (Life)

169.1

3%

State Auto FinancialSTFC63310715 – Insurance (Property & Casualty)

582.5

3%

Unum GroupUNM63110709 – Insurance (Life)

6,190.3

3%

Sun Life Financial Inc. (USA)SLF63110709 – Insurance (Life)

17,283.4

3%

Alterra Capital Holdings LtdALTE63310715 – Insurance (Property & Casualty)

2,861.2

3%

Assured Guaranty Ltd.AGO63510715 – Insurance (Property & Casualty)

2,911.2

3%

Fidelity National Financial InFNF63610715 – Insurance (Property & Casualty)

5,838.5

3%

Atlantic American CorporationAAME63110709 – Insurance (Life)

69.2

2%

Health Net, Inc.HNT63240706 – Insurance (Accident & Health)

2,140.7

2%

Hartford Financial Services GrHIG63310715 – Insurance (Property & Casualty)

10,641.6

2%

ING Groep N.V. (ADR)ING63110709 – Insurance (Life)

37,878.4

2%

Manulife Financial CorporationMFC63110709 – Insurance (Life)

26,357.8

2%

Genworth Financial  IncGNW63110709 – Insurance (Life)

4,500.3

2%

AEGON N.V. (ADR)AEG63110709 – Insurance (Life)

13,073.0

1%

Old Republic International CorORI63510715 – Insurance (Property & Casualty)

2,994.2

1%

OneBeacon Insurance Group, LtdOB63310715 – Insurance (Property & Casualty)

1,328.8

0%

Global Indemnity plcGBLI63310715 – Insurance (Property & Casualty)

555.8

-4%

CNO Financial Group IncCNO63110709 – Insurance (Life)

2,192.9

-5%

Crawford & CompanyCRD.B64110712 – Insurance (Miscellaneous)

326.7

-5%

Stewart Information Services CSTC63610715 – Insurance (Property & Casualty)

536.7

-9%

XL Group plcXL63310715 – Insurance (Property & Casualty)

8,182.5

-9%

Phoenix Companies, Inc., ThePNX63110709 – Insurance (Life)

155.4

-14%

First Acceptance CorporationFAC63310715 – Insurance (Property & Casualty)

51.2

-17%

Radian Group Inc.RDN63510715 – Insurance (Property & Casualty)

820.6

-23%

MBIA Inc.MBI63510715 – Insurance (Property & Casualty)

1,561.5

-24%

Kingsway Financial Services InKFS63310715 – Insurance (Property & Casualty)

53.4

-25%

MGIC Investment Corp.MTG63510715 – Insurance (Property & Casualty)

567.7

-28%

American International Group,AIG63310715 – Insurance (Property & Casualty)

51,803.5

-32%

eHealth, Inc.EHTH64110712 – Insurance (Miscellaneous)

501.2

Maiden Holdings, Ltd.MHLD63310715 – Insurance (Property & Casualty)

725.7

United Insurance Holdings CorpUIHC63310715 – Insurance (Property & Casualty)

92.7

Homeowners Choice, Inc.HCI63310715 – Insurance (Property & Casualty)

240.0

Verisk Analytics, Inc.VRSK64110712 – Insurance (Miscellaneous)

9,103.9

Primerica, Inc.PRI63110709 – Insurance (Life)

1,868.1

First American Financial CorpFAF63610715 – Insurance (Property & Casualty)

2,648.6

Imperial Holdings, Inc.IFT64110712 – Insurance (Miscellaneous)

86.3

Fortegra Financial CorpFRF64110712 – Insurance (Miscellaneous)

177.3

Now, it makes a lot of difference how dividends are set, and how buybacks are done.  Dividends should reflect a conservative estimate of how much free cash flow that a company is willing to part with.  Buybacks should only be done when it is at a discount to the intrinsic value of the firm.  If you have to distribute capital when the stock price is above fair market value, do a special dividend.

And when capital is dear, stop the buyback, maybe even reduce the dividend, or do a small secondary IPO.  When there are genuinely profitable opportunities to write business take them.

This is yet another reason why insurance stocks tend to trade near book — capital is so flexible that if capital can enter and exit easily, it should trade near book, because capital enters and exits at book, for the most part.

Ignore the extremes, but realize that companies that compound their fully converted book values can be excellent investments.