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:
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:
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.
