Severe weather conditions, including tornadoes, hurricanes and earthquakes across the world, have meant challenging operating conditions for the insurance industry in 2011. The fact they are also financial stocks has resulted in many investors lumping them in with banks and other lenders that have exposure to the European sovereign debt crisis. Overall though, many leaders in the industry have held up quite well this year, and the outlook over the next few years supports looking at them closely for potential stock purchases.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
The Travelers (NYSE:TRV) is a member of the Dow Jones Industrial Average and with a current market capitalization of nearly $24 billion, one of the largest insurers out there. Its reach spans property, auto, workers compensation, and general liability insurance for both individuals and businesses. Its stock performance so far in 2011 has been strong because it has been in positive territory. In contrast, the overall market is down slightly and related financial stocks have been among the worst performers this year. The stock trades right at about book value just about $61 per share, which is a reasonable level for a stable industry leader. The dividend yield is also above average at 2.9%. (To know more about EPS, read How To Evaluate The Quality Of EPS.)
Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) owns dozens of businesses across a wide array of industries but is known primarily as an insurance firm. Perhaps its best known unit is auto insurer GEICO, but it also owns other insurers including National Fire & Marine, Cypress Insurance and Columbia Insurance. The stock trades a slight premium to book value but has historically traded at higher premiums, such as 173% of book back in 2008. On September 26, Berkshire announced a share buyback "at prices no higher than a 10% premium over the then-current book value of the shares." This offered a rare signal that Buffett considers the shares a good buy at around book. This also suggests he finds them undervalued at current levels.
Property & casualty (P&C) insurer Chubb (NYSE:CB) also currently trades at a slight premium to its book value, which is currently just below $60 per share. It caters to the higher end of the insurance market and high net worth individuals in particular. This improves its ability to charge higher premiums and compete less on price, which can lead to bad underwriting if prices do not properly reflect the risk of claims being made. Growth is slow but steady, and the price-to-book ratio is currently the lowest it has been in more than a decade. So far in 2011, the stock has returned more than 10%, which makes it among the best performers in the industry and in the stock market overall. It also sports a dividend yield of 2.3%.
Ace Limited (NYSE:ACE) offers traditional P&C insurance but also offers reinsurance, which is basically insurance for insurance firms. Like Chubb, its stock has done well so far in 2011 and is up close to 10%. Despite this strong performance, the stock still trades to a discount from a book value per share level of close to $70. It also has a global focus, offering insurance to businesses across the world. Overall, there is little wrong to find with the investment story, and the dividend yield is decent at 2.1%.
P&C insurer The Allstate (NYSE:ALL) trades well below its book value of close to $30 per share and sports one of the highest dividend yields in the industry at 3.2%. These appealing metrics have quite a bit to do with the fact that Allstate has some operating challenges to overcome. In the auto insurance business, those that market directly to consumers, such as GEICO, have stolen market share. Allstate's investment portfolio also took a hit during the credit crisis. Finally, severe weather conditions in 2011 have resulted in a high number of claims. Overall though, Allstate should eventually recover and see its price to book ratio increase.
The Bottom Line
Other than Allstate, the above insurance firms have posted solid stock returns so far in 2011. Their size and respective leadership positions in the industry should continue to serve them well going forward. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.