Insurance Watch List: January 2016

Performance Review

Below is the performance of the insurance watch list stocks created on August 6, 2014:

The average performance of the entire list was +8.23%.  Of note is the performance of the insurance watch list based on analyst estimated earnings.  As indicated at the time, “Our recommendation is to start with the companies that have the worst prospects, according to the analysts, and through a process of elimination determine which company has the least risks.”  As it turned out the stocks expected to perform the worse (starting on the left side of the chart) did quite well.    The only stock expected to decline in price that didn’t register a gain was Aflac (AFL).

Insurance Watch List: January 2016

Below is the watch list of insurance companies that we’re following:

Watch List Summary

Stocks of specific interest are CNA Financial Corp. and Endurance Specialty Holdings.  According to Yahoo!Finance, CNA Financial Corp.  “…provides commercial property and casualty insurance products primarily in the United States. It operates through Specialty, Commercial, International, Life & Group Non-Core, and Corporate & Other Non-Core segments.”

As indicated above, CNA has a p/e ratio of approximately 12 and a dividend yield of 3.00%.  According the Value Line Investment Survey dated December 11, 2015, CNA has a fair value of $39 or 13 times earnings.  CNA has had an improving combined ratio since 2012 at the current level of an estimated level of 6% for 2015.  The company has a dividend payout ratio of 36% which is respectable.  However, the downside is that CNA is leading the trend to the downside as compared to the iShares US Insurance ETF (IAK).  This could be an indication that there is much more to go.

Another issue is that when the decline is complete, CNA has little hesitation in cutting the dividend if necessary, as indicated at the bottom of the chart in the period from 2007 to 2008.  While a dividend cut may be prudent, it can mess up the income plans of retirement portfolios.  Below are the downside targets for CNA Financial Corp. based on the work of Edson Gould.

The fact that CNA Financial has fallen below the ascending conservative downside target of $36.13 indicates that the expected range to the downside is $28.57.

The other company of interest is Endurance Specialty Holdings (ENH).  According to Value Line Investment Survey, ENH “…underwrites P/C reinsurance on a treaty and facultative basis for insurance and reinsurance companies in the U.S. and abroad. The company operates in two segments: Reinsurance (56% of ’14 net premiums earned) and Insurance (44%).”

Looking at the Value Line data (dated January 22, 2016), we immediately notice that ENH has a “Earnings Predictability” rating of 10 out of 100.  This says a lot about what to expect if you hold this stock, it’s going to be a wild ride.  While CNA Financial has an improving combined ratio in the single digits, ENH has a similar improved combined ratio in the 30% range.  It is not unusual for ENH to have such a high combined ratio, since 2005, only three years had less that double-digit gains (2005, 2011 & 2012).

Endurance Specialty Holdings is almost a lock to fall to the $55.69 level and is only $5 dollars away from hitting that target.  However, what lurks in the background is the prospect of falling to the downside target near the $40 level.  On the conservative side, falling to $40 should be expected as a natural retracement from the peak before any recovery could take place.  All of this conflicts with the fact that ENH has a p/e ratio of less than 10, a book value of $71 and a dividend that is easily covered by earnings.  The fundamentals say the stock is a buy and the technicals indicate that waiting is necessary.  If your goal is income at a reasonable price then accumulation of ENH is acceptable at current levels and lower.