The Aleph Blog Blog Archive On Insurance Investing, Part 1

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The Aleph Blog Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control 2012 Financial Report of the US Government 23 Jan

On Insurance Investing, Part 1

Shrinking the Share Count This post was prompted by this post from Avondale Asset Management on how the share count from The Travelers has shrunk since 2005 (two years after their Sprott Physical Gold merger with The St. Paul, a company that I once worked for). Only 57% of the shares remain. Way to www.sprottphysicalbullion.com go. A safe, secure and convenient way Now, buying back stock is not a panacea. It is only to invest in physical gold bullion. good when the shares are trading below or not much above fair market value. Whats fair market value, you ask? Well, thats not an easy question to answer in most places, but in insurance, it means around 1.3x book value, adjusting for intangibles that have no economic significance. Now if a company has some proprietary products, technologies or methods that give it a sustainable competitive advantage, that multiple can rise AFLAC might be an example of that. But sustainable competitive advantages in a mature and competitive industry like insurance are rare. Above the 1.3x book value hurdle, it would be better to do special dividends. Avondale was spot-on to feature The Travelers. They are in the upper end of those that bought back shares 2005-2012. Heres my list: % of shares remaining since 2005 Company Ticker Industry WellPoint, Inc. WLP 0706 Insurance (Accident & Health) 52% Infinity Property and Casualty IPCC 0715 Insurance (Property & Casualty) 56% Travelers Companies, Inc., The TRV 0715 Insurance (Property & Casualty) 57% Aetna Inc. AET 0706 Insurance (Accident & Health) 58% Employers Holdings, Inc. EIG 0715 Insurance (Property & Casualty) 59% White Mountains Insurance Grou WTM 0715 Insurance (Property & Casualty) 60% Torchmark Corporation TMK 0709 Insurance (Life) 61% Assurant, Inc. AIZ 0709 Insurance (Life) 61% Chubb Corporation, The CB 0715 Insurance (Property & Casualty) 67% Erie Indemnity Company ERIE 0715 Insurance (Property & Casualty) 68% RenaissanceRe Holdings Ltd. RNR 0715 Insurance (Property & Casualty) 69% Endurance Specialty Holdings L ENH 0715 Insurance (Property & Casualty) 69% Loews Corporation L 0715 Insurance (Property & Casualty) 71% Allied World Assurance Co Hold AWH 0715 Insurance (Property & Casualty) 71% W.R. Berkley Corporation WRB 0715 Insurance (Property & Casualty) 72% Health Net, Inc. HNT 0706 Insurance (Accident & Health) 72% Platinum Underwriters Holdings PTP 0715 Insurance (Property & Casualty) 72% Allstate Corporation, The ALL 0715 Insurance (Property & Casualty) 73% CIGNA Corporation CI 0706 Insurance (Accident & Health) 75% UnitedHealth Group Inc. UNH 0706 Insurance (Accident & Health) 77% Progressive Corporation, The PGR 0715 Insurance (Property & Casualty) 78% Montpelier Re Holdings Ltd. MRH 0715 Insurance (Property & Casualty) 78%

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Verisk Analytics, Inc. VRSK 0712 Insurance (Miscellaneous) American Financial Group AFG 0715 Insurance (Property & Casualty) StanCorp Financial Group, Inc. SFG 0706 Insurance (Accident & Health) Primerica, Inc. PRI 0709 Insurance (Life) Investors Title Company ITIC 0715 Insurance (Property & Casualty) Hanover Insurance Group, Inc., THG 0715 Insurance (Property & Casualty) Coventry Health Care, Inc. CVH 0706 Insurance (Accident & Health) RLI Corp. RLI 0715 Insurance (Property & Casualty) Kemper Corp KMPR 0715 Insurance (Property & Casualty) Axis Capital Holdings Limited AXS 0715 Insurance (Property & Casualty) First Acceptance Corporation FAC 0715 Insurance (Property & Casualty) Everest Re Group Ltd RE 0715 Insurance (Property & Casualty) Eastern Insurance Holdings Inc EIHI 0709 Insurance (Life) Prudential Financial Inc PRU 0709 Insurance (Life) Horace Mann Educators Corporat HMN 0715 Insurance (Property & Casualty) FBL Financial Group FFG 0709 Insurance (Life) AFLAC Incorporated AFL 0706 Insurance (Accident & Health) Cincinnati Financial Corporati CINF 0715 Insurance (Property & Casualty) Kansas City Life Insurance Co KCLI 0709 Insurance (Life) Kingsway Financial Services In KFS 0715 Insurance (Property & Casualty) HCC Insurance Holdings, Inc. HCC 0715 Insurance (Property & Casualty) Unum Group UNM 0709 Insurance (Life) EMC Insurance Group Inc. EMCI 0715 Insurance (Property & Casualty) eHealth, Inc. EHTH 0712 Insurance (Miscellaneous) OneBeacon Insurance Group, Ltd OB 0715 Insurance (Property & Casualty) Aspen Insurance Holdings Limit AHL 0715 Insurance (Property & Casualty) Unico American Corporation UNAM 0715 Insurance (Property & Casualty) Markel Corporation MKL 0715 Insurance (Property & Casualty) Safety Insurance Group, Inc. SAFT 0715 Insurance (Property & Casualty) Humana Inc. HUM 0706 Insurance (Accident & Health) Atlantic American Corporation AAME 0709 Insurance (Life) State Auto Financial STFC 0715 Insurance (Property & Casualty) A.F.P Provida SA (ADR) PVD 0718 Investment Services American National Insurance CoANAT 0715 Insurance (Property & Casualty) Baldwin & Lyons, Inc. BWINB0715 Insurance (Property & Casualty) Mercury General Corporation MCY 0715 Insurance (Property & Casualty) Marsh & McLennan Companies, In MMC 0712 Insurance (Miscellaneous) National Western Life Insuranc NWLI 0709 Insurance (Life) Brown & Brown, Inc. BRO 0712 Insurance (Miscellaneous) Selective Insurance Group SIGI 0715 Insurance (Property & Casualty) Sun Life Financial Inc. (USA) SLF 0709 Insurance (Life) Life Partners Holdings, Inc. LPHI 0712 Insurance (Miscellaneous) Aon PLC AON 0712 Insurance (Miscellaneous) ProAssurance Corporation PRA 0715 Insurance (Property & Casualty) Principal Financial Group Inc PFG 0706 Insurance (Accident & Health) First American Financial Corp FAF 0715 Insurance (Property & Casualty) China Life Insurance Company L LFC 0709 Insurance (Life) Genworth Financial Inc GNW 0709 Insurance (Life) Navigators Group, Inc, The NAVG 0715 Insurance (Property & Casualty) National Interstate Corporatio NATL 0715 Insurance (Property & Casualty) Amerisafe, Inc. AMSF 0715 Insurance (Property & Casualty) Cna Financial Corp CNA 0715 Insurance (Property & Casualty)

78% 80% 80% 80% 81% 83% 84% 84% 84% 85% 86% 89% 90% 91% 92% 92% 93% 93% 93% 93% 94% 94% 95% 95% 95% 96% 97% 98% 98% 99% 100% 100% 100% 101% 101% 101% 101% 101% 101% 101% 101% 101% 102% 102% 102% 102% 103% 103% 104% 104% 104% 105%

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Donegal Group Inc. DGICA 0715 Insurance (Property & Casualty) 106% Stewart Information Services C STC 0715 Insurance (Property & Casualty) 106% Berkshire Hathaway Inc. BRK.A 0715 Insurance (Property & Casualty) 107% Prudential Public Limited Comp PUK 0709 Insurance (Life) 107% Willis Group Holdings PLC WSH 0712 Insurance (Miscellaneous) 107% Crawford & Company CRD.B 0712 Insurance (Miscellaneous) 111% Old Republic International Cor ORI 0715 Insurance (Property & Casualty) 112% Molina Healthcare, Inc. MOH 0706 Insurance (Accident & Health) 112% United Fire Group, Inc. UFCS 0715 Insurance (Property & Casualty) 113% Partnerre Ltd PRE 0715 Insurance (Property & Casualty) 113% Protective Life Corp. PL 0709 Insurance (Life) 114% Manulife Financial Corporation MFC 0709 Insurance (Life) 114% Independence Holding Company IHC 0709 Insurance (Life) 116% ACE Limited ACE 0715 Insurance (Property & Casualty) 116% Reinsurance Group of America IRGA 0706 Insurance (Accident & Health) 118% Citizens, Inc. CIA 0709 Insurance (Life) 119% Universal Insurance Holdings, UVE 0715 Insurance (Property & Casualty) 121% Phoenix Companies, Inc., The PNX 0709 Insurance (Life) 122% AEGON N.V. (ADR) AEG 0709 Insurance (Life) 124% Symetra Financial Corporation SYA 0709 Insurance (Life) 124% Arch Capital Group Ltd. ACGL 0715 Insurance (Property & Casualty) 127% Fidelity National Financial In FNF 0715 Insurance (Property & Casualty) 128% Hilltop Holdings Inc. HTH 0715 Insurance (Property & Casualty) 130% Arthur J. Gallagher & Co. AJG 0712 Insurance (Miscellaneous) 131% ING Groep N.V. (ADR) ING 0709 Insurance (Life) 135% Argo Group International Holdi AGII 0715 Insurance (Property & Casualty) 136% Seabright Holdings Inc SBX 0715 Insurance (Property & Casualty) 138% Global Indemnity plc GBLI 0715 Insurance (Property & Casualty) 141% Metlife Inc MET 0709 Insurance (Life) 143% MBIA Inc. MBI 0715 Insurance (Property & Casualty) 145% Hartford Financial Services Gr HIG 0715 Insurance (Property & Casualty) 146% American Safety Insurance HoldASI 0715 Insurance (Property & Casualty) 150% CNO Financial Group Inc CNO 0709 Insurance (Life) 153% Universal American CorporationUAM 0706 Insurance (Accident & Health) 153% Radian Group Inc. RDN 0715 Insurance (Property & Casualty) 155% American Equity Investment Lif AEL 0709 Insurance (Life) 159% Hallmark Financial Services, I HALL 0715 Insurance (Property & Casualty) 160% Validus Holdings, Ltd. VR 0709 Insurance (Life) 160% Lincoln National Corporation LNC 0709 Insurance (Life) 161% Enstar Group Ltd. ESGR 0715 Insurance (Property & Casualty) 169% Meadowbrook Insurance Group, I MIG 0715 Insurance (Property & Casualty) 172% Greenlight Capital Re, Ltd. GLRE 0715 Insurance (Property & Casualty) 173% Alleghany Corporation Y 0715 Insurance (Property & Casualty) 191% Tower Group Inc TWGP 0715 Insurance (Property & Casualty) 196% ALTE 0715 Insurance (Property & Casualty) 197% Alterra Capital Holdings Ltd CNinsure Inc. (ADR) CISG 0712 Insurance (Miscellaneous) 208% XL Group plc XL 0715 Insurance (Property & Casualty) 215% MGIC Investment Corp. MTG 0715 Insurance (Property & Casualty) 220% Amtrust Financial Services, In AFSI 0715 Insurance (Property & Casualty) 259% Assured Guaranty Ltd. AGO 0715 Insurance (Property & Casualty) 262% American International Group, AIG 0715 Insurance (Property & Casualty) 1265% On the top side, and I did not see any of these, be aware of reverse splits, which can reduce the share count, are a sign of a badly run company, but do nothing for the economics of a firm, aside from keeping them listed on a major exchange.

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On the bottom side, factor in large mergers paid for with shares. Most large-scale mergers dont work out well, so I dont mind those companies being near the bottom of the list. On a closing note, there is a weak positive correlation in most mature industries between stock price performance and relative decreases in share count, assets, and sales. This sounds counter-intuitive, but good management teams know when to grow and when not to grow. They dont do acquisitions for scale. They dont grow sales if the sales growth wont justify the cost of capital. Building the assets of the company bigger does nothing for the bottom line; selective asset sales can free up cash for more productive uses. Good management teams do not build empires they add when it makes sense (grow), subtract when it makes sense (shrink), divide when it makes sense (spinoffs), and multiply when it makes sense (IPOs, JVs, new projects). PS What does the WSJ have today? An article on buybacks. Enjoy.

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One Response to On Insurance Investing, Part 1

Wednesday links: from lows to highs - Abnormal Returns | Abnormal Returns says: 23 January 2013 at 12:42 pm [...] Travelers ($TRV) is not shy about buying back shares. (Avondale Asset, Aleph Blog) [...] Log in to Reply

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http://alephblog.com/2013/01/23/on-insurance-investing-part-1/

31/01/2013