Category Archives: Insurance Watch List

Insurance Watch List: November 6, 2012

Posted on November 6, 2012 by | Leave a comment

The following is one of our personal favorite watch lists. We started tracking the insurance industry in January 2011 and we’re very impressed with the results so far.

Anyone who wishes to be successful in insurance stocks should read the book The Davis Dynasty by John Rothchild. 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 more accessible to average investors as opposed to Warren Buffett’s leveraged strategies and education from Benjamin Graham.

Symbol Name Price P/E EPS Yield P/B payout ratio % from low
TWGP Tower Group Inc. 17.68 44.4 0.4 4.2 0.66 187.50% 2.43%
PKIN Pekin Life Insurance Company 10.8 59.67 0.18 1.1 1.56 66.67% 4.85%
ASI American Safety Insurance Holdings Ltd. 17.22 33.17 0.52 - 0.52 n/a 4.85%
FRFHF Fairfax Financial Holdings Limited 372.45 - -34.42 - 1.02 n/a 5.13%
NSEC National Security Group Inc. 8.15 - -3.16 1.2 0.65 -3.16% 6.54%
GTS Triple-S Management Corporation 17.72 9.17 1.93 - 0.68 n/a 6.55%
THG The Hanover Insurance Group Inc. 35.61 10.12 3.52 3.4 0.58 34.09% 6.75%
OB OneBeacon Insurance Group, Ltd. 13.01 51.14 0.26 6.5 1.19 323.08% 6.89%
CRVL CorVel Corporation 42.74 20.64 2.06 - 3.99 n/a 8.03%
MHLD Maiden Holdings, Ltd. 8.54 9.02 0.94 3.9 0.74 34.04% 8.30%
ERIE Erie Indemnity Company 66.3 22.84 2.9 3.3 4.53 76.21% 8.35%
MIG Meadowbrook Insurance Group Inc. 5.72 - -0.33 3.4 0.52 -60.61% 8.40%
TDHOY T&D Holdings, Inc. 5.31 21.99 0.24 - 0.86 n/a 8.59%
WSH Willis Group Holdings Public Limited Company 34.87 16.12 2.17 3.2 2.22 49.77% 9.26%
  • Avoid insurance stocks with payout ratios that are in the negative or exceeding 100%
  • Insurance stocks with low average volume have low liquidity and considered high risk

Watch List Summary

Of interest to us on the Insurance Watch List is The Hanover Group (THG).  In the past year, THG has traded as high as $41.52 and as low as $33.42.  Currently,  THG is trading at a price of $35.66, within 7% of the low.

According to Value Line Investment Survey dated September 14, 2012 (www.valueline.com), The Hanover Group is fairly valued at 12x earnings which, if based on normalized 2010 earnings, would be $39.72.  However, Value Line projects 2013 earnings to be $4.40 which translates into a $52 stock price.  Since 1997, THG has managed to trade at, and above, the 12x earnings level whenever the stock has declined significantly below such a level. 

In 2011, Value Line indicates that The Hanover Group had earnings of $0.70.  This is a considerable drop-off from the 2010 and projected 2012 levels.  The last time that THG experienced such a dearth of earnings was in 2002 when the stock price declined from a 2000 high of $74.30 to a 2002 low of $7.  Already, in the trailing twelve months THG has earned $3.52.  This suggest that Value Line’s assessment for 2012 and 2013 is on track so far.

Our worst case scenario for a downside target for The Hanover Group is based on the 2009 low of $28.  Surprisingly, in the period from 2006 to 2009, THG did not decline as much as most insurance stocks in the same period of time.  According to Dow Theory, THG has the following downside targets:

  • $35.00
  • $32.67
  • $30.34
  • $28.00

The next stock that we’re interested in is Burmuda-based Maiden Holdings Inc. (MHLD).  Like The Hanover Group, MHLD has a low payout ratio of 34% which suggests that the company has a manageable dividend that can weather future earnings volatility.

In looking at the background of Maiden Holdings, it reminds us of the relationship that Transatlantic Holdings (TRH) had with AIG (AIG).  To be specific, MHLD received a significant amount of its business from another insurer, in this case AmTrust Financial Services (AFSI).  According to MHLD’s 2011 annual report,

“AmTrust is Maiden’s largest client relationship and we will continue to derive a substantial portion of our business from AmTrust in the near term. We commenced our reinsurance business by providing traditional quota share reinsurance to AmTrust through the Master Agreement with AmTrust’s Bermuda reinsurance subsidiary AII, assuming initially a 40% quota share portion of the net liabilities less recoveries of the policies written by AmTrust.”

In the last two years, AmTrust Financial Services has been sitting pretty as it has reached a new 52-week high by closing up +14.18% today alone (11/6/2012) while Maiden Holdings has severely underperformed.

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  However, a side-by-side comparison between the two stocks suggests that MHLD is clearly undervalued, overall.

Valuation Measures AFSI MHLD
Market Cap (intraday): 1.84B 617.83M
Enterprise Value (Nov 7, 2012): 1.92B 883.30M
Trailing P/E (ttm, intraday): 12.15 9.1
Forward P/E (fye Dec 31, 2013): 9.94 7.13
PEG Ratio (5 yr expected): 0.75 1.6
Price/Sales (ttm): 1.03 0.34
Price/Book (mrq): 1.61 0.74
Enterprise Value/Revenue (ttm): 1.23 0.49
Enterprise Value/EBITDA (ttm): 9.05 7.9
     
Financial Highlights AFSI MHLD
Fiscal Year    
Fiscal Year Ends: 31-Dec 30-Dec
Most Recent Quarter (mrq): 30-Jun-12 30-Jun-12
     
Profitability AFSI MHLD
Profit Margin (ttm): 9.87% 3.80%
Operating Margin (ttm): 11.29% 5.84%
     
Management Effectiveness AFSI MHLD
Return on Assets (ttm): 1.94% 1.87%
Return on Equity (ttm): 16.52% 8.65%
     
Income Statement AFSI MHLD
Revenue (ttm): 1.57B 1.80B
Revenue Per Share (ttm): 23.69 24.92
Qtrly Revenue Growth (yoy): 25.50% 16.90%
Gross Profit (ttm): 281.02M 158.57M
EBITDA (ttm): 212.43M 111.81M
Net Income Avl to Common (ttm): 154.29M 68.47M
Diluted EPS (ttm): 2.27 0.94
Qtrly Earnings Growth (yoy): -19.50% N/A
     
Balance Sheet AFSI MHLD
Total Cash (mrq): 390.89M 58.93M
Total Cash Per Share (mrq): 5.85 0.82
Total Debt (mrq): 702.41M 333.79M
Total Debt/Equity (mrq): 65.49 40.47
Current Ratio (mrq): 1.4 0.74
Book Value Per Share (mrq): 14.97 11.41
     
Cash Flow Statement AFSI MHLD
Operating Cash Flow (ttm): 352.27M 304.06M
Levered Free Cash Flow (ttm): 328.54M 64.04M
source: Yahoo!Finance, Captial IQ    

The only problem with the numbers for MHLD is that when and if AMSI falters, as it should, we expect that MHLD will experience a decline in sales and earnings as well.  With this in mind, we’ve run the following downside targets for MHLD, based on Dow Theory:

  • $7.42
  • $5.08
  • $2.75

We’d consider buying MHLD at $7.42 and below.

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Posted in Insurance Watch List, MHLD, THG

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Insurance Watch List: August 13, 2012

Posted on August 14, 2012 by | Leave a comment

The following is one of our personal favorite watch lists. We started tracking the insurance industry in January 2011 and we’re very impressed with the results so far.

Anyone who wishes to be successful in insurance stocks should read the book The Davis Dynasty by John Rothchild. 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 more accessible to average investors as opposed to Warren Buffett’s leveraged strategies and education from Benjamin Graham.

Symbol Name Price P/E EPS Yield P/B Dividend payout ratio % from low
MCY Mercury General Corporation 37.3 14.24 2.62 6.6 1.1 2.44 93.13% 3.90%
ERIE Erie Indemnity Company 63.69 22.37 2.85 3.4 4.49 2.21 77.54% 4.19%
OB OneBeacon Insurance Group, Ltd. 12.69 22.38 0.57 6.6 1.07 0.84 147.37% 5.75%
TWGP Tower Group Inc. 18.76 47.14 0.4 4 0.71 0.75 187.50% 5.87%
FRFHF Fairfax Financial Holdings Limited 385 33.64 11.85 0 1.13 0 0.00% 5.90%
UNM Unum Group 19.39 26.31 0.74 2.7 0.65 0.52 70.27% 6.07%
FSR Flagstone Reinsurance Holdings SA 6.8 - -1.3 2.3 0.58 0.16 -12.31% 6.08%
WSH Willis Group Holdings Public Ltd. 35.5 14.99 2.37 3 2.29 1.08 45.57% 7.45%
ANAT American National Insurance Co. 70.73 10.46 6.76 4.3 0.58 3.08 45.56% 7.64%
THG The Hanover Insurance Group Inc. 35.16 14.55 2.42 3.4 0.6 1.2 49.59% 8.02%
ESGR Enstar Group Limited 93.78 7.69 12.19 0 1.07 0 0.00% 8.35%
MIG Meadowbrook Insurance Group Inc. 7.07 18.51 0.38 2.8 0.61 0.2 52.63% 8.44%
UNAM Unico American Corp. 10 20.83 0.48 2 0.71 0.2 41.67% 8.58%
RLI RLI Corp. 63.37 12.34 5.14 2 1.59 1.28 24.90% 8.88%
KFS Kingsway Financial Services Inc. 1.96 - -1.02 0 0.23 0 0.00% 8.89%
AIZ Assurant Inc. 34.91 5.6 6.23 2.3 0.59 0.84 13.48% 9.09%
NSEC National Security Group Inc. 8.35 - -3.16 4.6 0.77 0.4 -12.66% 9.15%
UVE Universal Insurance Holdings Inc. 3.31 8.11 0.41 9.6 0.82 0.32 78.05% 9.97%

Watch List Summary

On top of our watch list is Mercury General (MCY).  Because we like MCY as a trade and plan to buy the stock in our partnership account, we’d like to recommend an article with a negative view to offset our current favorable perspective.  The article is titled “ "Mercury General: High Yield, And High Risk" and outlines many good reasons to avoid the stock (found here).  Our experience with stocks near a new low is that there are great articles that can counteract much of the positive that we might see in a stock.  However, we believe that the aforementioned article is a good antidote to our recommendation.

According to Morningstar.com , MCY is considered a “buy” at $31 and at fair value at $45.  Our own model suggests that MCY is significantly undervalued at $39 and a “buy” at $45. Investment Quality Trends (www.iqtrends.com) indicates that when MCY is at a yield of 4.5% or higher, the stock should be considered for purchase.  Currently, MCY has a dividend yield of approximately 6.60%.  Keep in mind that we do not buy stocks for their dividend yield.  Instead, we use the company’s consistently increasing dividend as the only proof that the company management can:

  • increase earnings over time
  • reward current shareholders

Looking at Edson Gould’s Altimeter reveals that in the short-term Mercury General is undervalued.  However, when contrasted against the long-term picture from 1990 to the present, it is revealed that MCY has undergone a massive amount of change in valuation (see inset).

image

The new reality of Mercury General’s altimeter is a far cry from what it was in the past.  We’ve had to adjust our expectations for the stock with this new reality.  For now, the buy range for the Altimeter is at 65 and below suggesting that any price below $39.65 is reasonable.  MCY should be sold when the stock trades at or above 75 or $45.75.  Based on the current price of $37.30, MCY could potentially rise 22% from the current level.

Additionally, we see the downside risk, under “normal” market conditions, to be limited to the $31-$33 price range (approximately –17% from the current level).  Again, we see MCY as a reasonable way to achieve decent gains in the short to medium-term (approximately 10%-20% in the next year).

Also of particular interest to us is the second company on our list, Erie Indemnity (ERIE).  Erie seems like the type of company that should get bought out by Warren Buffett.  The aggressive rate that the dividend has been increased over the years has pushed this stock into the bargain basement.  ERIE has absolutely no debt with $2.76 billion in cash.  While ERIE is trading at a new one year low, Dow Theory suggests the following downside targets to consider:

  • $60.77
  • $50.46 (fair value)
  • $40.13

We suspect that ERIE will eventually sell close to the fair value level of $50.46 before rebounding to higher prices.  This is a great stock where dollar cost averaging as the price declines will definitely pay off (see more of the pros and cons of dollar cost averaging here).

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Posted in ERIE, Erie Indemnity, Insurance Watch List, MCY, Mercury General

Insurance Watch List: July 3, 2012

Posted on July 5, 2012 by | Leave a comment

The following is one of our personal favorite watch lists. We started tracking the insurance industry in January 2011 and we’re very impressed with the results so far.

Anyone who wishes to be successful in insurance stocks should read the book The Davis Dynasty by John Rothchild. 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 more accessible to average investors as opposed to Warren Buffett’s leveraged strategies and education from Benjamin Graham.

Symbol Name Price P/E EPS Yield P/B % from low div/share payout ratio
MIG Meadowbrook Insurance 8.75 12.24 0.72 2.3 0.76 5.80% $0.20 27.78%
UNM Unum Group 19.58 25.76 0.76 2.2 0.68 6.59% $0.42 55.26%
WSH Willis Group Holdings 36.8 16.45 2.24 2.9 2.39 11.38% $1.08 48.21%
ORI Old Republic International 8.17 0 -0.5 8.7 0.55 14.27% $0.71 -142.00%
TWGP Tower Group Inc. 21.63 15.83 1.37 3.6 0.78 14.44% $0.75 54.74%
MFC Manulife Financial Corp 11.28 78.88 0.14 4.8 0.86 14.87% $0.52 371.43%
PRU Prudential Financial, Inc. 49 11.81 4.15 3 0.65 15.43% $1.45 34.94%
AIZ Assurant Inc. 35.61 5.94 5.99 2.4 0.61 16.18% $0.84 14.02%
FFG FBL Financial Group Inc. 29.17 39.8 0.73 1.4 0.7 19.06% $0.40 54.79%
XL XL Group plc 21.17 0 -0.23 2.1 0.68 19.67% $0.44 -191.30%

Watch List Summary

The first company on our watch list is Meadowbrook Insurance (MIG).  According to Yahoo!Finance, “…Meadowbrook Insurance Group, Inc., through its subsidiaries, operates as a specialty commercial insurance underwriter and insurance administration services company in the United States.”

Meadowbrook has had a checkered dividend history.  However, since the reintroduction of the dividend in 2008, Meadowbrook has displayed a declining Altimeter with consistent buy and sell indications.  Below is the Altimeter since March 12, 2008:

image

Again, even though the Altimeter is in a declining trend the more important feature is the consistency of the decline.  Below is the buy and sell indications using this approach:

Date Close altimeter buy/sell % change
4/29/2008 7.45 373 sell -17.18%
6/20/2008 6.17 309 buy 20.58%
9/4/2008 7.44 372 sell -29.44%
10/9/2008 5.25 263 buy 32.76%
1/21/2009 6.97 349 sell -15.49%
2/13/2009 5.89 295 buy 16.30%
5/6/2009 6.85 343 sell -2.34%
11/10/2009 6.69 223 buy 34.38%
6/15/2010 8.99 300 sell 0.67%
11/23/2010 9.05 226 buy 9.94%
10/21/2011 9.95 249 sell -4.62%
11/23/2011 9.49 190 buy 21.92%
1/18/2012 11.57 231 sell -28.26%
estimate 8.3 166 buy 24.70%
estimate 10.35 207 sell  

From the table above we can see that all “buy” indications resulted in an average gain of +22.65%.  The average decline based on sell signals was not as consistent in helping investors avoid major losses as in the case of May 6, 2009 and June 15, 2010.  So far, it appears that if Meadowbrook declines to $8.30 and below it is considered a “buy.”   Based on the declining trend of the Altimeter, the next sell price would be at $10.35 and above.  This would result in a gain of +24.70% if acquired at the $8.30 price.

Meadowbrook has displayed a consistently growing book value since 2008.  Value Line Investment Survey indicates that Meadowbrook (MIG) has a 5-year growth rate of book value at 10.5%.  Although MIG has increased the book value nearly 100% since 2003, the shares outstanding has grown by approximately 80% in the same period of time.   With long-term debt at relatively low levels, Meadowbrook appears to be a reasonable purchase as long as the stock does not exceed 10% of portfolio value.  We are also drawn to MIG’s low payout ratio which allows for some wiggle room in case earnings decline.

Those interested in Unum Group (UNM) will find our view on the company at the following link.  We believe that UNM is a strong buy at $15.54 and below.

The next stock on our list is Willis Holdings Group Plc (WSH).  According to Yahoo!Finance, Willis Group Holdings is “…provides a range of insurance brokerage, reinsurance, and risk management consulting services to its clients worldwide.”

Below is the Altimeter for WSH:

image

Initially, there is very little to make of the movements in the Altimeter for Willis Group Holdings.  For this reason, we’ve applied Dow Theory to the 2009 low to the 2011 high.  According to Dow Theory, the downside targets, based on the Altimeter, are:

  • $35.64
  • $31.59 (fair value)
  • $27.54
  • $19.44

Willis Group Holdings’ ability to stay above the $35.64 would be very constructive.  However, at the current trading price of $37.64, we wouldn’t be surprised to see the stock decline to the $31.59 level before re-testing the $36.90 level.  According to Morningstar.com, Willis Group Holdings has had a steady dividend payment with reasonable increases in the last few years.  We would consider acquiring WSH at levels below $31.59.

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Posted in Altimeter, Edson Gould, Insurance Watch List, MIG, WSH

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Insurance Watch List: April 27, 2012

Posted on April 28, 2012 by | Leave a comment

The following is one of our personal favorite watch lists.  We started tracking the insurance industry in January 2011 and we’re very impressed with the results so far. 

Anyone who wishes to be successful in insurance stocks should read the book The Davis Dynasty by John Rothchild.  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 more accessible to average investors as opposed to Warren Buffett’s leveraged strategies and education from Benjamin Graham.

Symbol Name Price P/E EPS Yield P/B % from Low payout ratio
NWLI National Western Life Insurance 136.93 8.95 15.3 0.3 0.39 5.33% 2.35%
ANAT American National Insurance Co. 71.08 9.87 7.2 4.3 0.52 8.17% 42.78%
MIG Meadowbrook Insurance Group Inc. 9 10.84 0.83 2.2 0.77 8.83% 24.10%
AFFM Affirmative Insurance Holdings Inc. 0.46 0 -10.66 0 -0.1 9.52% 0.00%
ESGR Enstar Group Limited 96.1 8.89 10.81 0 1.13 11.03% 0.00%
WSH Willis Group Holdings 36.8 31.83 1.16 2.9 2.61 11.38% 93.10%
TWGP Tower Group Inc. 22.05 15 1.47 3.4 0.83 11.48% 51.02%
BWINA Baldwin & Lyons Inc. 23.02 0 -1.9 4.3 1.07 12.24% -52.63%
ASI American Safety Insurance Holdings 19.06 18.87 1.01 0 0.59 12.32% 0.00%
CISG Cninsure Inc. 5.9 0 -0.95 0 0.68 12.81% 0.00%
SAFT Safety Insurance Group Inc. 40.29 44.77 0.9 5 0.92 13.49% 222.22%
CRVL CorVel Corporation 43.72 21.22 2.06 0 4.45 14.93% 0.00%
UFCS United Fire Group, Inc 17 0 0 3.6 0.61 14.94% 0.00%
HTH Hilltop Holdings Inc. 7.93 0 -0.12 0 0.68 15.26% 0.00%
KCLI Kansas City Life Insurance Company 32.7 14.29 2.29 3.3 0.52 16.74% 47.16%
MHLD Maiden Holdings, Ltd. 8.27 21.21 0.39 3.9 0.76 18.31% 82.05%
NATL National Interstate Corporation 24.35 13.31 1.83 1.7 1.34 18.61% 21.86%
FSR Flagstone Reinsurance Holdings SA 7.62 0 -4.65 2.1 0.67 18.88% -3.44%
OB OneBeacon Insurance Group, Ltd. 14.28 24.58 0.58 5.9 1.24 19.00% 144.83%
LPHI Life Partners Holdings, Inc. 2.53 57.5 0.04 16.2 1.1 19.34% 1000.00%
FFG FBL Financial Group Inc. 29.24 29.24 1 1.4 0.7 19.35% 40.00%

Watch List Summary

The following are the most compelling insurance stocks that are currently on our watch list.  First among the companies is Willis Group Holdings (WSH).  According to Yahoo!Finance, Willis Group Holdings (WSH) “provides a range of insurance brokerage, reinsurance, and risk management consulting services to its clients worldwide.”  We believe that the reinsurance segment has the kind of allure that will quickly attract larger buyers.  Although Willis Group Holdings isn’t inexpensive, we believe that the technical conditions can help us determine reasonable prices to concentrate our purchases.

image

From a technical standpoint, Willis Group Holdings is considered fair value at $30.80.  If Willis Group Holdings (WSH) were to fall -50% (our benchmark for proper downside risk assessment), WSH would sell for $18.40 based on the April 27, 2012 closing price.  We believe a two phase purchase can take place at the current price and at any one of the following downside targets:

  • $27.00
  • $19.39
  • $15.39

Next up is Tower Group (TWGP) which “provides commercial, specialty, and personal property and casualty insurance products and services to businesses in various industries and to individuals in the United States” as described by Yahoo!Finance.

image

From the longest available chart, Tower Group (TWGP) has an interesting record.  Although the decline from the 2007 high to the bottom in 2009 was -58%, the stock price hasn’t gone gangbusters since the 2009 low.  At the same time, based on the more conservative data available from Value Line Investment Survey, Tower Group (TWGP) has seen its shares outstanding nearly double while the book value has declined by more than half.  For some reason, Yahoo!Finance indicates that the book value at $26.37, we don’t trust that number and recommend that you always assume the more conservative number.

Despite these concerns, we believe that Tower Group is in the early stages of recovery from the mistakes that were made in the period from 2007 to the present.  The technicals suggest that reasonable purchases in two stages should take place at or below the following downside targets:

  • $19.79
  • $15.76
  • $11.03

Finally, the next stock that we’re interested in from watch list above is American Safety Insurance Holdings (ASI) which “offers specialty insurance and reinsurance products to small and medium-sized businesses in the United States and internationally. Its Excess and Surplus Lines division provides environmental insurance products, such as general contractor pollution and/or professional liability coverage for contractors and consultants; primary general liability coverage for residential and commercial risks; excess and umbrella liability coverage in the construction and products liability areas; and property and packaged property and liability focused on fire exposed premises,” as indicated by Yahoo!Finance.

image

American Safety Insurance Holdings (ASI) is appealing for a couple of reasons.  First, the stock has increased both property/causality income and investment income consistently since 2003.  This performance has increased the book value of ASI by nearly double since 2003, making the company’s stock price appear undervalued by 40%.  A concern that may require some follow-up is the declining levels of underwriting income.

With the risks of a market decline, after the tremendous run from 2009 to the present, we would buy ASI at the current price and then again at the following downside targets spread over three different level:

  • $16.96
  • $11.53
  • $9.53

Insurance Watch List Performance Review

The following is the performance of the stocks that were on our last Insurance Watch List dated January 27, 2012.

Symbol Company 1/27/2012 4/27/2012 % change
Y Alleghany 288.05 340.97 18.37%
NWLI National Western Life Insurance 143.2 136.93 -4.38%
ANAT American National Insurance 71.88 71.08 -1.11%
TWGP Tower Group 21.72 22.05 1.52%
HCC HCC Insurance Holdings 27.8 31.92 14.82%
Average 5.84%
KIE S&P Insurance ETF 38.85 42.23 8.70%

image

So far, Alleghany (Y) and HCC Insurance Holdings (HCC) have torn the cover off the ball when compared to the S&P Insurance ETF (KIE).  Alleghany has gained +18% while HCC has gained +14%.   On the opposite end of the spectrum, National Western Life Insurance (NWLI), American National Insurance (ANAT) and Tower Group (TWGP) have underperformed the +8% gain of the S&P Insurance ETF (KIE).  Again, this has only been a 3-month period so the underperformance suggests that there should not be any alarm about the declines so far.

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