With so many stories out there in the insurance sector--from turnarounds or restructurings like Hartford (NYSE:HIG) and XL Group (NYSE:XL) to well-run operations like Allied World (NYSE:AWH) and RenRe (NYSE:RNR)--investors have plenty of choices and a lot of undervalued stocks to consider. Unfortunately, Aspen (NYSE:AHL) really doesn't stand out in any particular regard. While this company has a reasonable record of returning cash to shareholders, and the move towards writing more insurance business makes sense, neither the strategy nor the valuation are exceptional today.
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Diversity Helps ... but Only to a Point
Aspen is part of that generation of reinsurance companies that came into being after the 9/11 attacks and the major hardening of insurance markets. Like many of that generation, Aspen has diversified as the years have gone on.
SEE: The Impact Of 9/11 On Business
Not only does Aspen have a sizable overseas business, but the company has also diversified into more specialized lines of business like energy, aviation, agriculture and marine insurance. While these markets do require more elaborate modeling, the underwriting can be lucrative even with periodic disasters like the Costa Concordia.
The company is also increasing its reliance upon insurance in favor of reinsurance. While Aspen once derived most of its business from reinsurance, management is targeting a shift to over 60% from insurance. As investors might imagine, there are trade-offs here. Reinsurance business can post years of excellent returns on equity, but that can all be wiped out in one especially bad disaster or a series of unfortunate events. Consequently, moving more focus to insurance should reduce the volatility at Aspen, but likely at the cost of profits.
SEE: How Return On Equity Can Help You Find Profitable Stocks
Make the Best of Present Circumstances
Like ACE (NYSE:ACE), Arch Capital (Nasdaq:ACGL) and Allied World, Aspen management has to balance the opportunities offered by today's improving property insurance and reinsurance markets with its capital position and risk exposures.
Rates are improving at mid-to-high single-digit rates, and it looks like management is taking advantage. Gross written premiums rose 17% for the last reported quarter, with net written premiums up 24%. Combine that with what looks like slightly redundant reserves and a weak investment market, and it seems likely that capital is going to be going towards growing the business instead of flowing back to shareholders this year.
SEE: Looking Deeper Into Capital Allocation
The Bottom Line
Aspen does trade at a discount to book value and a discount to its long-term average valuation multiples. Then again, looking at the company's recent return on equity trajectory and book value growth, there's no particular reason to think that valuation should be strong today.
These are not great times for the insurance industry; the cost of equity is high, returns on investments are low and expected rate increases may not materialize as expected. Moreover, there's nothing in Aspen's numbers to suggest strong return on equity performance over the next five years. Aspen isn't a bad insurance company, but with so many under-valued insurance stocks out there, it's hard to see why investors should gravitate to this name today.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.