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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!