AXA's Accelerated Transformation Carries Bigger Risks

France's AXA (OTCQX:AXAHY) has never been afraid to do things its own way, and the company's past efforts to shift away from more capital-intensive savings-oriented life products in favor of protection-oriented products made it an early mover in what proved to be a sound strategic shift. More recently, management has been working to strip administrative costs out of operations, grow its P&C and health insurance products, shift more capital towards faster-growing regions like Asia, and begin selling down its U.S. operations. The biggest move, though, has also been the most controversial - the $15 billion-plus acquisition of XL Group (XL).

I don't fault the reasoning for making a large acquisition in P&C insurance/reinsurance, and I can see the positive leverage opportunities in acquiring a Bermuda-based reinsurer like XL Group. I'm not sure this was the right company, though, and I think at least some of the share price weakness has been a reasonable reaction to those concerns. While AXA does appear to trade at a double-digit discount to fair value, I'd just as soon own a company like Prudential plc (PUK) or Aviva (OTCPK:AVVIY) at this point.

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AXA's Accelerated Transformation Carries Bigger Risks

RenaissanceRe's High-Quality Model Serving It (And Investors) Well

Hard times tell you a lot about companies, and the combination of a very soft pricing market and recent catastrophe losses have highlighted a lot of what is good about RenaissanceRe (NYSE:RNR). While the shares have certainly lagged the S&P 500 over the past year, and lagged rival/peer Arch Capital (NASDAQ:ACGL), RenRe hasn't done poorly relative to other insurers like Everest Re (NYSE:RE), Aspen (NYSE:AHL), or Validus (NYSE:VR). Throughout this tough period, RenRe's underwriting standards, strong balance sheet, and business flexibility have served the company well, despite some erosion in underwriting profitability.

RenRe is trading at a premium relative to long-term valuation norms. Some of that can be attributed to what I believe is a legitimate and well-earned quality premium, but I do have some worries that investors have been too eager to factor in the benefits of harder insurance markets. While I do still see some upside for shareholders from here, I'd be cautious about establishing a big new position at these levels.

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RenaissanceRe's High-Quality Model Serving It (And Investors) Well

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: Endurance Specialty Is Getting Scale, But More Challenges As Well

Endurance Specialty (NYSE:ENH) chairman and CEO John Charman has made no secret of the fact that he believes Endurance needs more scale to be a truly competitive player in the evolving insurance and reinsurance markets. While Aspen (NYSE:AHL) rebuffed the company's takeover attempt, Montpelier Re (NYSE:MRH) put itself up for sale not long thereafter and the companies announced a merger on March 31 of this year.

While an acquisition of Aspen would have made more sense (at least superficially), the Montpelier deal should be accretive for Endurance on both earnings and ROE pretty much from day one. I'm a little concerned about the greater shift toward property catastrophe reinsurance, but it's not a transformative shift and it is one I believe Endurance can manage. What's more, Montpelier's Lloyds and Blue Capital assets may be a lot more valuable than the market currently projects. Valuing Endurance on the premise that the deal goes through suggests to me that the company could be more than 10% undervalued today, but there is going to be a "show me" process where management has to deliver on the proposed synergies to unlock the value.

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Endurance Specialty Is Getting Scale, But More Challenges As Well

Seeking Alpha: Skepticism Can Still Benefit Aspen Insurance Shareholders

Aspen Insurance (NYSE:AHL) continues to look like an opportunity within the insurance sector for a management team to drive better-than-expected results and positive re-ratings on the shares. More than a few sell-side analysts remain convinced that Aspen is going to see slower-than-expected premium growth (due largely to price pressure), higher losses, and lower than expected investment income. For its part, Aspen management believes that it is approaching a point of significant operating leverage for the insurance business and that a focus on more specialized segments within reinsurance can preserve pricing.

These shares are up about 10% from my last update on the company, and I believe they can go higher from here. I'm still not quite as bullish as management on its long-term ROE potential, but I don't think a low-to-mid $50's fair value is unreasonable today and if management can outperform the ultimate value will be higher. I'd also note that while Aspen management has been consistent regarding its views of Aspen's ability to gain share in the market and generate stronger than expected ROEs, the current move toward more M&A in the insurance sector could have suitors approaching the company once again.

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Skepticism Can Still Benefit Aspen Insurance Shareholders

Seeking Alpha: ACE Still The Place For Reasonable Insurance Returns

Despite worries to the contrary, this earnings cycle has shown that well-run P&C insurance companies are still finding opportunities to grow their business and generate respectable returns. One of the large commercial insurers, ACE Ltd (ACE) has used its significant global footprint and its relatively low property exposure to continue generating good premium growth and underwriting profits. The P&C market is likely to soften further, likely shrinking management's ability to generate such favorable reserve developments down the line, but ACE shares still appear to offer some upside at these levels.

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ACE Still The Place For Reasonable Insurance Returns

Seeking Alpha: XL Group Plc Is Over-Reserved, But Not That Undervalued

XL Group plc (XL) may have nearly gone out of business during the worst of the credit crisis, but in the time since the company has done a pretty decent job of repairing its capital situation, even if at a high cost in terms of dilution. The bigger question today is whether the company can generate substantially better results for the long-term - while the company looks over-reserved and over-capitalized, the nature of its underwriting may well limit the upside.

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XL Group Plc Is Over-Reserved, But Not That Undervalued

Investopedia: Aspen Doesn't Really Stand Out

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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Investopedia: Everest Re Trying To Balance Risk And Opportunity

Plenty has been written over the last few months about the hardening market in many insurance markets. With companies forced to pay out for major disasters across the globe, including major earthquakes and floods, companies are now pushing through policy price increases for the first time in quite a while.

When it comes to Everest Re (NYSE:RE), though, there appears to be some limit to how much this hardening market will help. Everest Re is a quality insurance company, and one with substantial property reinsurance exposure, but the company's decision to prudently manage its risk exposure could limit some of the growth potential from these market developments.

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Investopedia: Argo Group Is A Confounding, But Potentially Undervalued, Stock

The world of insurance stocks can be simultaneously quite simple and quite complex. Actuarial science is by no means easy, and it can be difficult-to-impossible to really evaluate a company's underwriting risks or investment strategy from outside of the company. On the other hand, watching metrics like book value growth, return on equity, premium growth, combined ratio and prior year development can usually point investors towards successful insurance stock picks.

Argo Group (Nasdaq:AGII) stands out as something of a challenging case. Book value growth and return on equity have both been unimpressive, but the company's low valuation may represent a real bargain if the company can improve its operating results.

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Investopedia: How Good Will The Good Times Be For Allied World Assurance?

Even though investment returns are low, and likely to remain so for the near future, many insurance company stocks have come to life over the last six months. One of the strongest has been Allied World Assurance (NYSE:AWH), a relatively small global insurance company that splits its activities among American and international insurance and reinsurance. While there are a lot of fine attributes that make Allied World a solid hold, the momentum in the stock has taken the cheapness out of the name.

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Investopedia: XL Group Seems To Be Back On The Right Track

While it never got as much attention as AIG (NYSE:AIG), XL Group (NYSE:XL) was also seriously stressed during the global credit crisis and found itself very much on the brink. New management and a new business plan has made a great deal of difference, though, and the company looks like it's back on a believable path. Investors have an interesting dilemma with this company, though, as the book value and near-term return on equity path seem to point in different directions as to the company's fair value.

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