As is often the case with an extended bull market, value is
now trumping growth.
Many once-soaring tech stocks have come crashing downward in
2014, even as some once-loathed sectors are heating up. And few
sectors were as disliked as the insurers, which have been among
the deep value plays in this bull market.
Back in April 2013
, I noted that
Protective Life (NYSE:
, for example, sported a stunning 23% free cash flow yield.
And a month later
, I noted that many insurers, including Protective Life, traded
at a considerable discount to book value. This insurer is no
longer a deep bargain, now that Japan's Dai-ichi has announced
plans to buy it for $5.7 billion. Notably, Protective Life
carries just $4.2 billion in tangible book value, implying a nice
premium to book in this purchase price.
Why would Dai-ichi pay such a stiff price? Because the
Japanese financial services firm realizes that the U.S. insurance
market is on the cusp of a cyclical upturn, thanks to rising
insurance premiums. Insurers always have pricing power when
companies start to feel more optimistic about business
conditions. In fact, Dai-ichi intends to use Protective Life as a
platform to acquire other, smaller U.S. insurers.
Frankly, it's unrealistic to expect other insurers to garner
such a huge premium to stated book value -- if they are acquired.
But it's equally clear that insurers don't deserve to trade below
book value. Yet a number of them still do.
To be sure, some of these below-book insurers are simply too
large to acquire.
I remain a big fan
, but the current $80 billion value renders a buyout nearly
impossible. Book value is on track to exceed $75 a share by the
end of 2015, and this stock remains a bargain as long as it
trades below that price.
Some of these insurers are in the midst of share buybacks,
which makes a lot sense whenever shares trade below book.
In a recent profile on our sister site
, ProfitableTrading.com, I suggested that municipal bond insurer
Assured Guaranty (NYSE:
had roughly 35% upside, thanks to a recently-articulated buyback
Still, it's fair to wonder why insurers end up trading at
sharp discounts to book value. National Western Life Insurance,
for example, is a very profitable insurer, and has managed to
boost tangible book value by 44% since the end of 2008. Perhaps
the triple-digit share price scares many investors away. Perhaps
it's because CEO Robert Moody's family controls the board through
a separate class of stock. Or perhaps it's because this insurer
pays a very small dividend. Regardless, value investors will do
very well with this stock over the long haul, as book value moves
higher and higher.
Some insurers trade on the cheap due to a legacy of troubled
Genworth Financial (NYSE:
generated very weak returns in both its mortgage insurance
business and its long-term care business, though recent results
suggest that those lagging niches are now much healthier. "Many
investors appear to have anchored their perceptions of the stock
to a time when the company faced much greater uncertainty than it
does currently," notes BTIG's Mark Palmer, who rates shares a
"buy" and expects Genworth to start a buyback program of a
dividend payment scheme later this year.
Book value at many insurers is expected to keep on rising,
especially as long-term interest rates start to move up. These
insurers carry considerable cash balances, which are currently
earning subpar rates of interest income. You can see the book
value trajectory in an insurer like
CNA Financial (NYSE:
, which currently trades for around $40 a share. Book value stood
at $44 a share at the end of 2012, and Merrill Lynch's analysts
see that figure rising to $52 a share by the end of 2016. These
analysts concede that "CNA's discount to book value is warranted
due to a below average ROE (return on equity)," but they add that
"improving returns should allow for gradual multiple
Risks to Consider:
Some of these insurers are exposed to major events such as
hurricanes, so book value won't rise every year.
Action to Take -->
As the acquisition of Protective Life shows, insurers hold great
appeal thanks to robust cash flow, strong balance sheets and an
economic tailwind. Until these stocks move up to or even exceed
book value, they are safe to buy.
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