When the employees of Florida-based FairholmeCapital came into
work on Jan. 11, 2010, they were greeted with great news.Rating
firm Morningstar had just selected Fairholme's Bruce Berkowitz as
the "Domestic-StockFund Manager of the Decade." That's quite an
accolade, considering the heady competition.
Morningstar chose him because "his aptitude for pickingstocks
sets him apart from his peers, and Fairholme's portfolio is
filled with attractively priced firms that generate highfree cash
flow ." In the just-completed decade -- a decade in which the
S&P 500 delivered slightly negative returns -- Berkowitz's
Fairholme generated a 10-year annualized total return of 13%.
The accolades are still pouring in. GuruFocus.com anointed
Berkowitz as its "Investing Guru of the Year 2012."
These days, Berkowitz is still seeking out stocks with solid
value andcash flow characteristics. According to recent filings,
Berkowitz is loading up onshares of four insurers that are the
epitome of deep value.
Berkowitz's Insurance Picks
In the second quarter, Berkowitz couldn't resist the urge to
buy yet more shares of
American International (
This much beleaguered company survived a near-death
experience, and is now on the mend. I profiled AIG about a month
ago and completely agree with Berkowitz that it offers
tremendous value, trading at just 0.71 times tangiblebook value .
The fact that AIG recentlyput into place adividend and buyback
program simply underscores this stock's appeal.
Berkowitz is beginning to build a major position in
Genworth Financial (
as well. Although he has bought this insurer at an average price
of $9.38 a share, and it has already risen to $12, look for
Berkowitz to keep on buying. After all, tangible book stands at
$27 a share. Equally important, book value has been rising
roughly $4 peryear , implying this figure may move above the $40
mark in the next three to four years.
More broadly, all insurers are entering the sweetspot of their
cycles: "The fundamental outlook of the life insurers continues
to strengthen, reflecting stronger macro conditions,
favorableoperating leverage , and robust capital management,"
notedanalysts at Morgan Stanley, adding that "while the stocks
have reacted positively to these developments, with the sector
having increased about 45% year to date, the valuations remain
low relative to other financial services sectors."
Back in May, I noted a series offactors underpinning an
eventual move up in insurance stocks, and investors are now
paying closer attention to this deep-bargain sector.
In the second quarter, Berkowitz initiated positions in two other
Lincoln National (
Hartford Financial (
||Berkowitz was selected by Morningstar as the
"Domestic-Stock Fund Manager of the Decade."
The appeal of Hartford Financial stems from its below-book
valuation but also a move to refocus the core business on fewer
but more profitable niches. The company is slowly exiting the
annuities business and recently sold a division that operated
retirement plans. The remaining core: property and casualty
(P&C) insurance, employee benefits programs and mutualfunds
With those moves largely complete, Hartford Financial "has
significant capital flexibility to de-lever itsbalance sheet ,
reduce risk in its runoffvariable annuity block, and returncash
to shareholders," noted Citigroup analysts who rate the stock as
a "buy" with a $37price target . "Over time, we see significant
value as results in the core P&C and group benefits
Some of that returning cash to shareholders is coming in the
form of a stock buyback. As I've written, buying back shares
while they trade well below tangible book value is a no-brainer.
Hartford Financial said in June that it was adding $750 million
to its buyback program, bringing the total authorization to $1.25
billion. If the move is completed at current prices, it would
reduce the share count by more than 100 million shares -- roughly
22% of the total share count.
Risks to Consider:
Insurance stocks have already posted solidgains this year and
may need a breather before resuming their climb toward book
Action to Take -->
It always pays to track the moves of Bruce Berkowitz, as his
valueinvesting approach never goes out of style. These insurers
not only possess solidupside in an improvingeconomy but alsooffer
soliddownside protection if the economy stumbles, thanks to their
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