Travelers Outperforming On Firmer Markets And Benign Losses

Although Travelers (TRV) is widely respected as a well-run P&C company, that hasn’t really benefited shareholders all that much, as this insurer’s market returns have lagged the broader sector (and the S&P 500) for many years now, though the last 12 months have been a period of outperformance.

While I don’t believe that Travelers has the same level of risk in its 2015-2018 book, I am concerned about increased competition in the small/medium-sized commercial market where Travelers specializes, as well as the company’s relative lack of specialty lines exposure. On the other hand, this is an insurer that has generated sustained (although not continuous) double-digit ROEs and demonstrated a great deal of discipline with respect to both underwriting and capital returns. With what looks like a prospective long-term annualized return of around 8%, Travelers strikes me as an “okay, but not great” idea today.

 

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Travelers Outperforming On Firmer Markets And Benign Losses

Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp

Focused and disciplined, Employers Holdings (EIG) isn’t likely to ever be a fiery growth stock, but then I think you could argue that aggressive growth in insurance doesn’t often work out so well. Instead, Employers has delivered consistent shareholder value growth since going public by staying focused on its core market opportunity of underwriting workers’ comp insurance for small businesses in industries with low-to-medium hazard risk.

I’m less than comfortable making a big leap into a pure workers’ comp play today, though. The industry has benefited from an extended period of lower losses due in part to the benefits of the ACA and rates have come under pressure in recent years as a result of lower losses and strong returns. Worsening loss trends are a threat, as is a slowdown in employment growth, and more insurers are trying to target the smaller business markets that Employers has targeted. While I do think the shares are modestly undervalued today, another dip toward $40 would certainly get my attention.

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Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp

Hartford Defies The Market And Announces A $2.1 Billion Deal For Navigators

Wall Street has a one-size-fits-all answer for what insurance companies should do with any extra capital - buy back shares. Hartford Financial (HIG) had frustrated the Street's push for a buyback all year, and at least some investors and analysts were disappointed that the company didn't announce a buyback with second quarter earnings, and now they've gone and announced a $2.1 billion acquisition of another insurance company (specialty insurer The Navigators Group (NAVG), or Navigators). As you might expect, the shares sold off on the announcement.

I'm not completely sold that Navigators is the right deal at the right price, but I don't believe it is liable to destroy shareholder value to any large extent. As I believed Hartford to be undervalued before the deal announcement, I still believe that to be the case, but sentiment is going to be an even greater obstacle now and it's going to take noticeably better than expected results from Hartford and Navigators to move the shares.

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Hartford Defies The Market And Announces A $2.1 Billion Deal For Navigators

United Fire Looks A Little Overheated In A Still-Challenging Sector

These are challenging times for the insurance industry, and small-cap player United Fire (UFCS) has not been immune. Healthy reserve releases have helped boost underwriting results, but the top line remains pressured, and management has decided to reinvest in the business by boosting its technology platform - a decision that should pay off long term, but that will pressure expense ratios in the near term. While United Fire has a decent enough business focusing on smaller businesses and offering coverage for commercial auto, fire (and allied lines), workers' comp, and product liability, the valuation more or less already captures the positives of the story.

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United Fire Looks A Little Overheated In A Still-Challenging Sector

In A Tougher Market, W.R. Berkley Has Outperformed

Insurance stocks are not in favor, with well-run companies like Arch Capital Group (NASDAQ:ACGL) and Chubb (NYSE:CB) looking at double-digit year-over-year price declines in their stocks, while Hartford Financial Services Group (NYSE:HIG) and Travelers (NYSE:TRV) are down more modestly. W.R. Berkley (NYSE:WRB), though, keeps on keeping on, with the shares up about 5% over the past year - weaker than the S&P 500, certainly, but above the sector averages for insurance in general and P&C insurance in particular.

This is a tough stock to recommend. While management has put up a very strong track record, and I like the company’s diverse specialty and small-client exposure, as well as its closer-to-the-client decentralized model, I’m concerned about the long-term impact of claims inflation and today’s valuation. I’ve learned over the years not to bet against W.R. Berkley, and the company’s strong investment operations can generate income growth at a time when underwriting profit growth is more challenging, but it’s hard to favor this pricey-looking name when there are rivals trading at what look to be substantial discounts to long-term fair value.

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In A Tougher Market, W.R. Berkley Has Outperformed

Hartford Undervalued And Improving In A Sector That Seems Adrift

Cheapness, relative, or absolute, rarely moves stocks all on its own. More often, it requires a meaningful change in the trajectory of the underlying business (the dreaded overused and misused word "catalyst") or in the perception of the overall sector. In the case of Hartford (HIG), management has done some good things lately - selling the Talcott business, raising prices, and boosting overall underwriting profits - but the larger P&C sector seems to be drifting without much real pricing power and worries about weaker reserves and rising claims inflation.

I continue to believe that Hartford is undervalued and worth owning, but I can't say with much confidence that it's going to be a near-term outperformer. It will take time for the market to fully reward the emerging underwriting profitability improvements and likely even more time for investor love to rotate back to insurers.

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Hartford Undervalued And Improving In A Sector That Seems Adrift

In A Still-Challenging Market, Chubb's Strengths Stand Out

Insurance has been one of the worst-performing segments of the finance sector, and Chubb’s (CB) superior quality hasn’t shielded it, as the shares are down about 4% over the past year and down about 10% year-to-date. While claim inflation and lower reserve releases are issues, as is the fact that last year’s catastrophe losses didn’t resolve the excess capacity issue in the industry, Chubb’s market position seems to be affording it above-average pricing power and the company’s capital position gives the company options to fund organic growth, M&A, or capital returns to shareholders.

I believe $145 to $155 is a fair price for Chubb shares, but investors will need to have some patience for this sector to come back into favor, as book value growth reaccelerates in 2019.

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In A Still-Challenging Market, Chubb's Strengths Stand Out

Everest Re's Strong Reinsurance, And Improved Insurance, Operations Are Building Value

Everest Re (NYSE:RE) has long had a very good reinsurance business - although skewed toward property-catastrophe, the company’s focus on specialty/smaller lines and low overhead costs have helped generate pretty good returns even through recent weakness in pricing. What has been more impressive, though, has been the improvements in the insurance business - a business that management had elected to continue growing aggressively despite a pretty poor history of underwriting losses.

Everest Re management has done a lot to repair investors’ opinion of the insurance operations, and the company has also managed to benefit from M&A-driven dislocations in the market. Now, with insurance prices showing a little strength and higher rates supporting better investment returns, it’s not a bad set-up for the company. Between the too-high highs of last summer and the too-low lows of this past winter, I think Everest Re is more reasonably priced now, but “reasonable” in this case still suggests a total expected annual return in the low double digits.

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Everest Re's Strong Reinsurance, And Improved Insurance, Operations Are Building Value

W.R. Berkley Looking To Better Days, But The Market Is Already There

Commercial insurance companies are enjoying pretty high multiples on an historical basis, even though the market remains concerned about pressure on rates and claims inflation. W.R. Berkley's (WRB) recent performance is part of the reason I harp on valuations - although W.R. Berkley's operating results haven't been bad, the shares have lagged peers/rivals like Travelers (TRV), Hartford (HIG), and Chubb (CB) over the past year.

Looking at 2018 and beyond, I'm not bothered by W.R. Berkley's relative growth prospects. I think the company still has good growth prospects in a range of markets, and the company's more aggressive than average approach to investments (including real estate) has reliably contributed positively to income. My concern remains valuation, as the company trades at a high-teens multiple to forward EPS, and the shares seem to be factoring in a pretty exceptional level of growth.

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W.R. Berkley Looking To Better Days, But The Market Is Already There

Argo Growing Its Business, But Profitability Remains A Concern

Argo Group (AGII) has been an interesting, albeit frustrating, stock to follow for a number of years. There are a lot of positives, including strong underwriting quality, dividend growth, and recently reinvigorated premium growth, but there are also ongoing concerns related to issues like persistently sluggish tangible book value growth and weak returns on earnings. To that end, the shares are only up about 10% from my last write-up in early 2016, and investors would have done better with other insurers like Arch Capital (ACGL), Chubb (CB), Travelers (TRV), or W.R. Berkley (WRB).

I can't say that I really like the valuation on Argo today. I do think the company's efforts to grow its premiums will eventually help its expense leverage (a long-sought goal), and I likewise think that expanding its Lloyds business through M&A should help long-term leverage there. Offsetting that are worries about industry loss trends and the company's persistent issues with generating attractive operating leverage. While I do believe that Argo can generate double-digit EPS growth over the long term and eventually get its return on tangible equity above 10% on a consistent basis, I think the valuation amply reflects that.

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Argo Growing Its Business, But Profitability Remains A Concern

W.R. Berkley Has A Lot To Live Up To

I understand that good companies should trade at a premium, but it is getting harder for me to reconcile W.R. Berkley’s (WRB) valuation with the realities in the insurance market today and the likely trajectory over the next few years. W.R. Berkley is a very well-run specialty insurance company, but rate growth is hard to find, claims severity is worsening in some lines, and reserves are looking a little thin across the industry.

The insurance industry is cyclical and the difficult market conditions of today will eventually improve, but the shares seem to be pricing in high single-digit long-term earnings growth, and I don’t think that leaves much upside in the share price.

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W.R. Berkley Has A Lot To Live Up To

Hartford Financial Services Repositioned For Better Returns

The sell-side had long been waiting for Hartford (HIG) to “do something” on the M&A front, with widespread expectations that the company would eventually sell its Talcott run-off annuity business as well as rumors that Hartford could be a buyer or a seller in other areas of insurance. The last couple of months have seen most of these expectations come true, as the company sold its Talcott business and acquired Aetna’s (AET) group insurance business.

These deals leave Hartford better-positioned to reach and exceed that elusive 10% ROE threshold and shrink the valuation gap with peers like Travelers (TRV) and Chubb (CB). To that end, the shares are up about 25% since my last write-up, more or less running in line with Travelers and Chubb over that time.

At this point, I would consider Hartford more of a strong hold than a buy. The company has improved itself over the past two years and is active in attractive segments of the market, but there are increasing competitive risks and opportunities to improve returns that management may or may not be able to execute.

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Hartford Financial Services Repositioned For Better Returns

Arch Capital's Cycle-Management Capabilities Serving It Well

Arch Capital (NASDAQ:ACGL) continues to demonstrate why I regard it as among the best of the best insurance companies in the market. While the company's acquisition of AIG's (NYSE:AIG) mortgage insurance business (United Guaranty) was perhaps not universally lauded, I believe investors who understand the dynamics of the mortgage insurance and Arch Capital's strategy here will appreciate the value that it will add in the coming years - particularly as available returns in the primary insurance and reinsurance market are pretty lousy.

Arch Capital shares are up another 20% or so from when I last wrote about the company, beating broader insurance stock indices (like the Dow Jones U.S. Select Insurance Index) and other quality insurers like Chubb (NYSE:CB) and W.R. Berkley (NYSE:WRB) (XL Group (NYSE:XL) has done a fair bit better). The shares certainly aren't cheap on a conventional book value multiple basis, but I do believe and expect that Arch Capital's diversification into mortgage insurance and careful management of its insurance and reinsurance businesses can support high single-digit to low double-digit growth at a time when many other insurers are going to be hard-pressed. Granted, I don't think these shares are undervalued on a discounted earnings basis either, but they're not out of line if you believe in management's guidance and this management team has given investors few reasons for persistent pessimism.

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Arch Capital's Cycle-Management Capabilities Serving It Well

Aspen Insurance Not Operating At A Top-Notch Level

Aspen (NYSE:AHL) wasn't my favorite idea in P&C insurance back when I last wrote about the stock in early 2016 (I preferred Chubb (NYSE:CB)), as I thought the apparent undervaluation in the shares was overshadowed by some operational risks. While the shares have climbed about 10% since then, a lot of those operational risks have emerged as bigger issues, and Aspen has underperformed other insurance companies like Chubb and Travelers (NYSE:TRV), as well as the broader Dow Jones P&C Insurance Index (which is up about 25% since I last wrote about Aspen).

Aspen's "build it and they will come" strategy for insurance hasn't worked out yet, and the company has seen both higher adjusted loss ratios and higher expense ratios. The company's underwriting profitability has declined significantly and weak pricing is not going to help matters.

Aspen is shrinking its programs business and taking a harder look at expenses, but shrinking reserve releases and the prospect of claims inflation are worries. While I still believe that Aspen can get to low double-digit ROEs over the long term, and the shares are priced for high single-digit to low double-digit returns, there is still risk to those projections and it's hard for me to get excited about Aspen outside of potential M&A interest.

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Aspen Insurance Not Operating At A Top-Notch Level

Seeking Alpha: Hartford Financial Services Largely Performing To Plan

Back in June of 2015, I thought that Hartford's (NYSE:HIG) double-digit discount to fair value and its ongoing self-improvement efforts made it a good name to consider in the insurance space. Since then, the shares are up about 6% - which isn't super, but isn't too bad next to Allstate (NYSE:ALL) or AIG (NYSE:AIG). It also hasn't been a smooth ride, as the shares have been knocked back by worries about rising loss frequency in auto insurance and feeble prospects for near-term rate increases.

With the shares up some and the company performing more or less in line with my expectations, the valuation argument doesn't seem quite as compelling. Hartford does still look like one of the more undervalued companies I pay attention to in the property & casualty space, but that undervaluation comes with lower growth prospects and near-term pricing concerns. While I think the shares still make some sense for more value-inclined investors, it's hard to work up a lot of enthusiasm.

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Hartford Financial Services Largely Performing To Plan

Seeking Alpha: Chubb Ltd - Bigger And Better In A Soft Market

Insurance companies have a problem right now with what to do with their capital. Years of relatively benign losses and good premiums have built up their capital positions, but the options to deploy that capital are limited. Underwriting more business at soft rates is an option, but one that risks future underwriting profits. Investing in securities is an option, but rates are unimpressive, and returning cash to shareholders doesn't build the business. That leaves M&A, but even here there's a problem as insurance industry valuations haven't really been in bargain territory for most of the past year or so.

I do not believe that ACE Ltd.'s (NYSE:ACE) acquisition of Chubb, now known as Chubb Ltd. (NYSE:CB), was a case of having no better options for capital. Instead, I believe this is a merger that creates real opportunities for long-term synergy, as the companies combine ACE's strong broker-based business with Chubb's strong agency business and ACE's strong international business with Chubb's U.S. middle-market commercial and high net worth businesses.

In terms of what is likely to be achieved in cash earnings growth over the next five years, Chubb is probably not that cheap today. Over the longer term, though, I think there are meaningful high-quality opportunities to grow this business and I think fair value lies in the low to mid $120s.

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Chubb Ltd - Bigger And Better In A Soft Market

Seeking Alpha: W.R. Berkley Continues To Navigate Tricky Waters

I can't say that I feel like I've missed out on much since thinking W.R. Berkley (NYSE:WRB) didn't look like a terrific bargain back in May of 2015. While the shares did rise close to 20% from that article at one point on takeover speculation, the net movement of 3% is more in keeping with what I'd expected given the challenging conditions in the commercial P&C market and W.R. Berkley's already-healthy valuation.

My basic sentiment on W.R. Berkley today is "same as it ever was." The company has done a very good job of finding growth in a challenging market, helped by niche/specialty market focus, good underwriting, and its investment portfolio. I still believe that W.R. Berkley can generate good earnings growth over the next five years, but the stock looks like it is already priced for that sort of performance.

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W.R. Berkley Continues To Navigate Tricky Waters

Seeking Alpha: Hartford Financial Still Has More To Give

Hartford Financial (NYSE:HIG) has the unenviable task of running off a multibillion-dollar portfolio of assets through a run-off operation that is unlikely to generate returns much above the mid-single digits. Even so, this excellent small commercial underwriter is on a path back to double-digit ROEs as strong underwriting results in commercial and personal P&C and aggressive capital management add value. If Hartford can get to 10% ROE in five years (and move closer to 12% over the long term), I think $45 is a fair price today. I'd also note that the Hartford is an appealing asset and its five-year performance may be moot as larger insurance companies ponder what to do with their surplus capital.

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Hartford Financial Still Has More To Give

Seeking Alpha: W.R. Berkley Pushing On Through A Tough Market

Tougher times are in the property and casualty insurance market, as insurers like ACE Limited (NYSE:ACE), Chubb (NYSE:CB), Hartford (NYSE:HIG), Travelers (NYSE:TRV), and W.R. Berkley (NYSE:WRB) are finding it harder to push rate increases and weak interest rates limit returns on conventional investment options. With loss trends having been pretty benign in recent years, there are worries among some investors and analysts that the industry is setting itself up for a string of weak performance as losses bite into capital and push down returns.

I'm really not that concerned about W.R. Berkley in that context. I am worried about limited premium growth potential and the year-to-year risks of the company's more aggressive investment philosophy, but I think the company's underwriting quality has shown itself over time and I still see opportunities for the company to grow its underwriting operations organically. I'm still not crazy about the valuation, but bargains in the P&C are hard to find these days.

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W.R. Berkley Pushing On Through A Tough Market

Seeking Alpha: ACE Limited Earns Its Premium, But Excess Capital Weighs On Returns

P&C insurance company ACE Limited (NYSE:ACE) is another of those examples of the sometimes-frustrating difference between a company and a stock. As a company, I think anybody who follows insurance will appreciate and admire how ACE limited runs itself. As a stock, though, the shares didn't look cheap a year ago and they still don't look all that cheap today. While ACE arguably still merits a place in a long-term portfolio and has ample capital with which to build the business, it's hard for me to work up a lot of enthusiasm for buying shares today.

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ACE Limited Earns Its Premium, But Excess Capital Weighs On Returns