Anyone who wishes to be successful in insurance stocks should read the book The Davis Dynasty by John Rothchild (found here). The book starts with Shelby Collum Davis investing approximately $50,000 to $100,000 that ultimately grew to $900 million after 47 years. The strategies employed by Davis seem highly accessible to average investors. The following is a key insight from the book:
“Davis identified three other Depression enhancers: (1) Congress's slapping stiff tariffs on foreign products to shelter U.S. manufacturers, (2) collapsing currencies abroad, and (3) corporate mergers. (Given the merger mania and the multiple currency crises in the late 1990s, plus the vigorous debate over free trade, all three have contemporary relevance.) How could mergers depress an economy? Davis explained as follows. Big companies combined to make bigger companies, until a few names (General Electric, DuPont, General Motors, and U.S. Steel) dominated their respective industries. With these giants throwing their weight around, smaller, more innovative enterprises scrambled to survive.”
We found the commentary on mergers to be fascinating. In most cases, mergers are touted as boosting shareholder value. In the end, based on the Davis’ remarks, mergers stifle innovation especially when absorbed into large cap companies.
Insurance Watch List
| Symbol | Name | Price | P/E | EPS | Yield | P/B | % from low |
| BRO | Brown & Brown | 30.10 | 20.34 | $1.48 | 1.26% | 2.18 | 8.43% |
| WSH | Willis Group | 41.16 | 20.18 | $2.04 | 2.72% | 3.33 | 9.29% |
| XL | XL Group plc | 30.40 | 9.41 | $3.23 | 1.84% | 0.75 | 9.39% |
| PKIN | Pekin Life | 11.99 | 26.94 | $0.45 | 0.67% | 1.72 | 9.50% |
| AXS | Axis Capital | 43.97 | 7.41 | $5.93 | 2.32% | 0.93 | 10.09% |
Analyst Estimates
Below is a snapshot of the analysts low estimated earnings assuming a price-to-earnings ratio of 15 in blue and the estimated price change if the current P/E were to remain the same for the remainder of 2014 in red and the percentage change in price that is implied based on these estimates.
What to make of the analyst estimates that are so divergent? For us, a good way to use the estimates is to take the projected declines as a minimum downside target.
Watch List Summary
One stock of interest to us is Brown & Brown (BRO). BRO has increased the dividend every year for 19 consecutive years in a row. According to Value Line Investment Survey, BRO has a 2013 fair value of $30.80. Value Line indicates that for 2014, BRO would be fairly valued at $35.70, based on a cash flow of $2.55 per share. Dow Theory has the following downside targets:
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$27.96
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$24.89
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$21.81
Based on the history of the trading volume for BRO, the stock may be approaching a low in the price, as seen in the chart below.
In the first instance of higher volume, using a 75-day moving average (1.2 million shares or more), BRO went from $19.10 to $26.50, a gain of +38%. In the second spike in volume, BRO went from $21.91 to $34.12, a gain of +55%. Currently the average trading volume has exceeded 1.2 million shares based on the 75-day moving average. This reminds us of the scenario that was faced by Bank of Hawaii (found here). We can’t be certain that BRO is actually at the lowest point in price. However, this is a stock that is worth watching going forward.