Insurance Companies: Determining Value Creation

If you grow book value, particularly if your liabilities are short, you will grow market value.  Many reinsurance and insurance companies aim at growing fully convertible book value per share.

Fully convertible book value per share assumes that you invest your dividends in the common stock (without taxation), and thus compound your gains through reinvestment, taking account of dilution.  Hmmm… when will someone dream up the idea of structuring an insurance company as an MLP or a REIT?  I don’t think it is likely, but maybe someone could dream it up.

It also implies that all possible dilution is factored in from convertible preferred stock or convertible bonds.  Now insurance companies tend to trade near book value over the long run, so companies that can grow their book value rapidly and pay dividends can be interesting investments.  Particularly where the liabilities of the company are short — property reinsurance or personal lines insurance, growth in book value plus dividends tends to be a reliable indicator of value creation.

If liabilities are longer, it gets more questionable, because under-reserving becomes more likely — it is very hard to be certain of the reserving of long-dated or volatile coverages.

Anyway, here is a list of insurance companies, and how they have accumulated book value plus dividends over the past seven years.  Note that this is a mathematical calculation off a limited database, and that splits and M&A can throw this calculation off.  With that caveat, here is the list:

company ticker sic img_desc mktcap Growth of FCBV
Life Partners Holdings, Inc. LPHI 6411 0712 – Insurance (Miscellaneous)

50.7

76%

Universal Insurance Holdings, UVE 6331 0715 – Insurance (Property & Casualty)

185.2

75%

CNinsure Inc. (ADR) CISG 6411 0712 – Insurance (Miscellaneous)

337.6

56%

Amtrust Financial Services, In AFSI 6331 0715 – Insurance (Property & Casualty)

2,128.7

38%

Employers Holdings, Inc. EIG 6331 0715 – Insurance (Property & Casualty)

652.6

32%

Enstar Group Ltd. ESGR 6331 0715 – Insurance (Property & Casualty)

1,951.0

26%

Tower Group Inc TWGP 6331 0715 – Insurance (Property & Casualty)

734.8

25%

Amerisafe, Inc. AMSF 6331 0715 – Insurance (Property & Casualty)

508.5

23%

Humana Inc. HUM 6324 0706 – Insurance (Accident & Health)

11,297.2

21%

Allied World Assurance Co Hold AWH 6331 0715 – Insurance (Property & Casualty)

2,856.1

21%

Arthur J. Gallagher & Co. AJG 6411 0712 – Insurance (Miscellaneous)

4,441.2

20%

Willis Group Holdings PLC WSH 6411 0712 – Insurance (Miscellaneous)

6,009.5

20%

China Life Insurance Company L LFC 6311 0709 – Insurance (Life)

94,339.3

20%

ProAssurance Corporation PRA 6331 0715 – Insurance (Property & Casualty)

2,698.5

19%

RenaissanceRe Holdings Ltd. RNR 6331 0715 – Insurance (Property & Casualty)

3,949.8

18%

National Interstate Corporatio NATL 6331 0715 – Insurance (Property & Casualty)

576.7

18%

Argo Group International Holdi AGII 6331 0715 – Insurance (Property & Casualty)

910.3

17%

Brown & Brown, Inc. BRO 6411 0712 – Insurance (Miscellaneous)

3,851.4

17%

AFLAC Incorporated AFL 6321 0706 – Insurance (Accident & Health)

24,134.6

16%

Endurance Specialty Holdings L ENH 6331 0715 – Insurance (Property & Casualty)

1,796.8

16%

W.R. Berkley Corporation WRB 6331 0715 – Insurance (Property & Casualty)

5,455.7

15%

American Financial Group AFG 6331 0715 – Insurance (Property & Casualty)

3,772.7

15%

Horace Mann Educators Corporat HMN 6331 0715 – Insurance (Property & Casualty)

830.9

15%

Eastern Insurance Holdings Inc EIHI 6311 0709 – Insurance (Life)

135.5

15%

Validus Holdings, Ltd. VR 6331 0709 – Insurance (Life)

3,296.1

15%

CIGNA Corporation CI 6324 0706 – Insurance (Accident & Health)

16,104.2

14%

Reinsurance Group of America I RGA 6321 0706 – Insurance (Accident & Health)

4,143.2

14%

Safety Insurance Group, Inc. SAFT 6331 0715 – Insurance (Property & Casualty)

715.6

14%

Chubb Corporation, The CB 6331 0715 – Insurance (Property & Casualty)

20,701.5

13%

Loews Corporation L 6331 0715 – Insurance (Property & Casualty)

16,854.0

13%

ACE Limited ACE 6351 0715 – Insurance (Property & Casualty)

28,285.6

13%

HCC Insurance Holdings, Inc. HCC 6331 0715 – Insurance (Property & Casualty)

3,937.5

13%

Travelers Companies, Inc., The TRV 6331 0715 – Insurance (Property & Casualty)

29,108.4

13%

Coventry Health Care, Inc. CVH 6324 0706 – Insurance (Accident & Health)

6,080.9

12%

Markel Corporation MKL 6331 0715 – Insurance (Property & Casualty)

4,456.4

12%

Torchmark Corporation TMK 6311 0709 – Insurance (Life)

5,103.5

12%

UnitedHealth Group Inc. UNH 6324 0706 – Insurance (Accident & Health)

55,732.6

12%

Partnerre Ltd PRE 6331 0715 – Insurance (Property & Casualty)

5,116.2

12%

Meadowbrook Insurance Group, I MIG 6331 0715 – Insurance (Property & Casualty)

311.6

12%

StanCorp Financial Group, Inc. SFG 6321 0706 – Insurance (Accident & Health)

1,704.1

12%

Prudential Financial Inc PRU 6311 0709 – Insurance (Life)

26,777.4

12%

Infinity Property and Casualty IPCC 6331 0715 – Insurance (Property & Casualty)

688.6

12%

Assurant, Inc. AIZ 6311 0709 – Insurance (Life)

2,935.0

12%

Greenlight Capital Re, Ltd. GLRE 6331 0715 – Insurance (Property & Casualty)

837.4

12%

Progressive Corporation, The PGR 6331 0715 – Insurance (Property & Casualty)

13,738.8

11%

Protective Life Corp. PL 6311 0709 – Insurance (Life)

2,451.0

11%

Axis Capital Holdings Limited AXS 6331 0715 – Insurance (Property & Casualty)

4,508.1

11%

Molina Healthcare, Inc. MOH 6324 0706 – Insurance (Accident & Health)

1,300.1

11%

American Equity Investment Lif AEL 6311 0709 – Insurance (Life)

834.1

11%

Symetra Financial Corporation SYA 6311 0709 – Insurance (Life)

1,578.3

11%

Aon PLC AON 6411 0712 – Insurance (Miscellaneous)

18,199.1

10%

Mercury General Corporation MCY 6331 0715 – Insurance (Property & Casualty)

2,169.0

10%

Everest Re Group Ltd RE 6331 0715 – Insurance (Property & Casualty)

5,843.7

10%

American Safety Insurance Hold ASI 6331 0715 – Insurance (Property & Casualty)

197.1

10%

Prudential Public Limited Comp PUK 6311 0709 – Insurance (Life)

38,071.4

10%

Aspen Insurance Holdings Limit AHL 6331 0715 – Insurance (Property & Casualty)

2,324.9

10%

Berkshire Hathaway Inc. BRK.A 6331 0715 – Insurance (Property & Casualty)

236,577.4

9%

EMC Insurance Group Inc. EMCI 6331 0715 – Insurance (Property & Casualty)

326.3

9%

RLI Corp. RLI 6331 0715 – Insurance (Property & Casualty)

1,439.1

9%

Hanover Insurance Group, Inc., THG 6331 0715 – Insurance (Property & Casualty)

1,781.6

9%

Unico American Corporation UNAM 6331 0715 – Insurance (Property & Casualty)

66.6

9%

Montpelier Re Holdings Ltd. MRH 6331 0715 – Insurance (Property & Casualty)

1,318.1

9%

Seabright Holdings Inc SBX 6331 0715 – Insurance (Property & Casualty)

249.0

9%

Alleghany Corporation Y 6331 0715 – Insurance (Property & Casualty)

5,950.7

8%

Hallmark Financial Services, I HALL 6331 0715 – Insurance (Property & Casualty)

176.8

8%

White Mountains Insurance Grou WTM 6331 0715 – Insurance (Property & Casualty)

3,509.0

8%

Investors Title Company ITIC 6361 0715 – Insurance (Property & Casualty)

139.1

8%

Marsh & McLennan Companies, In MMC 6411 0712 – Insurance (Miscellaneous)

19,020.9

8%

FBL Financial Group FFG 6311 0709 – Insurance (Life)

869.4

8%

Erie Indemnity Company ERIE 6331 0715 – Insurance (Property & Casualty)

3,264.4

8%

Metlife Inc MET 6311 0709 – Insurance (Life)

39,615.8

8%

Aetna Inc. AET 6324 0706 – Insurance (Accident & Health)

15,698.1

8%

WellPoint, Inc. WLP 6324 0706 – Insurance (Accident & Health)

19,054.4

8%

Hilltop Holdings Inc. HTH 6331 0715 – Insurance (Property & Casualty)

773.3

8%

Citizens, Inc. CIA 6311 0709 – Insurance (Life)

485.8

7%

Donegal Group Inc. DGICA 6331 0715 – Insurance (Property & Casualty)

370.9

7%

National Western Life Insuranc NWLI 6311 0709 – Insurance (Life)

596.1

7%

Navigators Group, Inc, The NAVG 6331 0715 – Insurance (Property & Casualty)

766.0

7%

Kemper Corp KMPR 6331 0715 – Insurance (Property & Casualty)

1,842.8

7%

Allstate Corporation, The ALL 6331 0715 – Insurance (Property & Casualty)

20,817.6

7%

Cna Financial Corp CNA 6331 0715 – Insurance (Property & Casualty)

7,982.2

6%

Lincoln National Corporation LNC 6311 0709 – Insurance (Life)

7,626.2

6%

Arch Capital Group Ltd. ACGL 6331 0715 – Insurance (Property & Casualty)

6,084.7

6%

Platinum Underwriters Holdings PTP 6331 0715 – Insurance (Property & Casualty)

1,565.0

6%

Baldwin & Lyons, Inc. BWINB 6331 0715 – Insurance (Property & Casualty)

339.5

5%

Selective Insurance Group SIGI 6331 0715 – Insurance (Property & Casualty)

1,086.8

5%

United Fire Group, Inc. UFCS 6331 0715 – Insurance (Property & Casualty)

587.9

5%

Universal American Corporation UAM 6324 0706 – Insurance (Accident & Health)

793.6

5%

Principal Financial Group Inc PFG 6321 0706 – Insurance (Accident & Health)

8,663.8

5%

American National Insurance Co ANAT 6331 0715 – Insurance (Property & Casualty)

2,055.2

4%

Kansas City Life Insurance Co KCLI 6311 0709 – Insurance (Life)

416.9

4%

Cincinnati Financial Corporati CINF 6331 0715 – Insurance (Property & Casualty)

6,771.0

3%

Independence Holding Company IHC 6311 0709 – Insurance (Life)

169.1

3%

State Auto Financial STFC 6331 0715 – Insurance (Property & Casualty)

582.5

3%

Unum Group UNM 6311 0709 – Insurance (Life)

6,190.3

3%

Sun Life Financial Inc. (USA) SLF 6311 0709 – Insurance (Life)

17,283.4

3%

Alterra Capital Holdings Ltd ALTE 6331 0715 – Insurance (Property & Casualty)

2,861.2

3%

Assured Guaranty Ltd. AGO 6351 0715 – Insurance (Property & Casualty)

2,911.2

3%

Fidelity National Financial In FNF 6361 0715 – Insurance (Property & Casualty)

5,838.5

3%

Atlantic American Corporation AAME 6311 0709 – Insurance (Life)

69.2

2%

Health Net, Inc. HNT 6324 0706 – Insurance (Accident & Health)

2,140.7

2%

Hartford Financial Services Gr HIG 6331 0715 – Insurance (Property & Casualty)

10,641.6

2%

ING Groep N.V. (ADR) ING 6311 0709 – Insurance (Life)

37,878.4

2%

Manulife Financial Corporation MFC 6311 0709 – Insurance (Life)

26,357.8

2%

Genworth Financial  Inc GNW 6311 0709 – Insurance (Life)

4,500.3

2%

AEGON N.V. (ADR) AEG 6311 0709 – Insurance (Life)

13,073.0

1%

Old Republic International Cor ORI 6351 0715 – Insurance (Property & Casualty)

2,994.2

1%

OneBeacon Insurance Group, Ltd OB 6331 0715 – Insurance (Property & Casualty)

1,328.8

0%

Global Indemnity plc GBLI 6331 0715 – Insurance (Property & Casualty)

555.8

-4%

CNO Financial Group Inc CNO 6311 0709 – Insurance (Life)

2,192.9

-5%

Crawford & Company CRD.B 6411 0712 – Insurance (Miscellaneous)

326.7

-5%

Stewart Information Services C STC 6361 0715 – Insurance (Property & Casualty)

536.7

-9%

XL Group plc XL 6331 0715 – Insurance (Property & Casualty)

8,182.5

-9%

Phoenix Companies, Inc., The PNX 6311 0709 – Insurance (Life)

155.4

-14%

First Acceptance Corporation FAC 6331 0715 – Insurance (Property & Casualty)

51.2

-17%

Radian Group Inc. RDN 6351 0715 – Insurance (Property & Casualty)

820.6

-23%

MBIA Inc. MBI 6351 0715 – Insurance (Property & Casualty)

1,561.5

-24%

Kingsway Financial Services In KFS 6331 0715 – Insurance (Property & Casualty)

53.4

-25%

MGIC Investment Corp. MTG 6351 0715 – Insurance (Property & Casualty)

567.7

-28%

American International Group, AIG 6331 0715 – Insurance (Property & Casualty)

51,803.5

-32%

eHealth, Inc. EHTH 6411 0712 – Insurance (Miscellaneous)

501.2

Maiden Holdings, Ltd. MHLD 6331 0715 – Insurance (Property & Casualty)

725.7

United Insurance Holdings Corp UIHC 6331 0715 – Insurance (Property & Casualty)

92.7

Homeowners Choice, Inc. HCI 6331 0715 – Insurance (Property & Casualty)

240.0

Verisk Analytics, Inc. VRSK 6411 0712 – Insurance (Miscellaneous)

9,103.9

Primerica, Inc. PRI 6311 0709 – Insurance (Life)

1,868.1

First American Financial Corp FAF 6361 0715 – Insurance (Property & Casualty)

2,648.6

Imperial Holdings, Inc. IFT 6411 0712 – Insurance (Miscellaneous)

86.3

Fortegra Financial Corp FRF 6411 0712 – Insurance (Miscellaneous)

177.3

Now, it makes a lot of difference how dividends are set, and how buybacks are done.  Dividends should reflect a conservative estimate of how much free cash flow that a company is willing to part with.  Buybacks should only be done when it is at a discount to the intrinsic value of the firm.  If you have to distribute capital when the stock price is above fair market value, do a special dividend.

And when capital is dear, stop the buyback, maybe even reduce the dividend, or do a small secondary IPO.  When there are genuinely profitable opportunities to write business take them.

This is yet another reason why insurance stocks tend to trade near book — capital is so flexible that if capital can enter and exit easily, it should trade near book, because capital enters and exits at book, for the most part.

Ignore the extremes, but realize that companies that compound their fully converted book values can be excellent investments.

By David Merkel, CFA of Aleph Blog