The following is one of our personal favorite watch lists. We started tracking the insurance industry in January 2011 and we’re very impressed with the results so far.
Anyone who wishes to be successful in insurance stocks should read the book The Davis Dynasty by John Rothchild. The book starts with Shelby Collum Davis investing approximately $50,000 to $100,000 that ultimately grew to $900 million after 47 years. The strategies employed by Davis seem more accessible to average investors as opposed to Warren Buffett’s leveraged strategies and education from Benjamin Graham.
| Symbol |
Name |
Price |
P/E |
EPS |
Yield |
P/B |
payout ratio |
% from low |
| TWGP |
Tower Group Inc. |
17.68 |
44.4 |
0.4 |
4.2 |
0.66 |
187.50% |
2.43% |
| PKIN |
Pekin Life Insurance Company |
10.8 |
59.67 |
0.18 |
1.1 |
1.56 |
66.67% |
4.85% |
| ASI |
American Safety Insurance Holdings Ltd. |
17.22 |
33.17 |
0.52 |
- |
0.52 |
n/a |
4.85% |
| FRFHF |
Fairfax Financial Holdings Limited |
372.45 |
- |
-34.42 |
- |
1.02 |
n/a |
5.13% |
| NSEC |
National Security Group Inc. |
8.15 |
- |
-3.16 |
1.2 |
0.65 |
-3.16% |
6.54% |
| GTS |
Triple-S Management Corporation |
17.72 |
9.17 |
1.93 |
- |
0.68 |
n/a |
6.55% |
| THG |
The Hanover Insurance Group Inc. |
35.61 |
10.12 |
3.52 |
3.4 |
0.58 |
34.09% |
6.75% |
| OB |
OneBeacon Insurance Group, Ltd. |
13.01 |
51.14 |
0.26 |
6.5 |
1.19 |
323.08% |
6.89% |
| CRVL |
CorVel Corporation |
42.74 |
20.64 |
2.06 |
- |
3.99 |
n/a |
8.03% |
| MHLD |
Maiden Holdings, Ltd. |
8.54 |
9.02 |
0.94 |
3.9 |
0.74 |
34.04% |
8.30% |
| ERIE |
Erie Indemnity Company |
66.3 |
22.84 |
2.9 |
3.3 |
4.53 |
76.21% |
8.35% |
| MIG |
Meadowbrook Insurance Group Inc. |
5.72 |
- |
-0.33 |
3.4 |
0.52 |
-60.61% |
8.40% |
| TDHOY |
T&D Holdings, Inc. |
5.31 |
21.99 |
0.24 |
- |
0.86 |
n/a |
8.59% |
| WSH |
Willis Group Holdings Public Limited Company |
34.87 |
16.12 |
2.17 |
3.2 |
2.22 |
49.77% |
9.26% |
Watch List Summary
Of interest to us on the Insurance Watch List is The Hanover Group (THG). In the past year, THG has traded as high as $41.52 and as low as $33.42. Currently, THG is trading at a price of $35.66, within 7% of the low.
According to Value Line Investment Survey dated September 14, 2012 (www.valueline.com), The Hanover Group is fairly valued at 12x earnings which, if based on normalized 2010 earnings, would be $39.72. However, Value Line projects 2013 earnings to be $4.40 which translates into a $52 stock price. Since 1997, THG has managed to trade at, and above, the 12x earnings level whenever the stock has declined significantly below such a level.
In 2011, Value Line indicates that The Hanover Group had earnings of $0.70. This is a considerable drop-off from the 2010 and projected 2012 levels. The last time that THG experienced such a dearth of earnings was in 2002 when the stock price declined from a 2000 high of $74.30 to a 2002 low of $7. Already, in the trailing twelve months THG has earned $3.52. This suggest that Value Line’s assessment for 2012 and 2013 is on track so far.
Our worst case scenario for a downside target for The Hanover Group is based on the 2009 low of $28. Surprisingly, in the period from 2006 to 2009, THG did not decline as much as most insurance stocks in the same period of time. According to Dow Theory, THG has the following downside targets:
-
$35.00
-
$32.67
-
$30.34
-
$28.00
The next stock that we’re interested in is Burmuda-based Maiden Holdings Inc. (MHLD). Like The Hanover Group, MHLD has a low payout ratio of 34% which suggests that the company has a manageable dividend that can weather future earnings volatility.
In looking at the background of Maiden Holdings, it reminds us of the relationship that Transatlantic Holdings (TRH) had with AIG (AIG). To be specific, MHLD received a significant amount of its business from another insurer, in this case AmTrust Financial Services (AFSI). According to MHLD’s 2011 annual report,
“AmTrust is Maiden’s largest client relationship and we will continue to derive a substantial portion of our business from AmTrust in the near term. We commenced our reinsurance business by providing traditional quota share reinsurance to AmTrust through the Master Agreement with AmTrust’s Bermuda reinsurance subsidiary AII, assuming initially a 40% quota share portion of the net liabilities less recoveries of the policies written by AmTrust.”
In the last two years, AmTrust Financial Services has been sitting pretty as it has reached a new 52-week high by closing up +14.18% today alone (11/6/2012) while Maiden Holdings has severely underperformed.
However, a side-by-side comparison between the two stocks suggests that MHLD is clearly undervalued, overall.
| Valuation Measures |
AFSI |
MHLD |
| Market Cap (intraday): |
1.84B |
617.83M |
| Enterprise Value (Nov 7, 2012): |
1.92B |
883.30M |
| Trailing P/E (ttm, intraday): |
12.15 |
9.1 |
| Forward P/E (fye Dec 31, 2013): |
9.94 |
7.13 |
| PEG Ratio (5 yr expected): |
0.75 |
1.6 |
| Price/Sales (ttm): |
1.03 |
0.34 |
| Price/Book (mrq): |
1.61 |
0.74 |
| Enterprise Value/Revenue (ttm): |
1.23 |
0.49 |
| Enterprise Value/EBITDA (ttm): |
9.05 |
7.9 |
| |
|
|
| Financial Highlights |
AFSI |
MHLD |
| Fiscal Year |
|
|
| Fiscal Year Ends: |
31-Dec |
30-Dec |
| Most Recent Quarter (mrq): |
30-Jun-12 |
30-Jun-12 |
| |
|
|
| Profitability |
AFSI |
MHLD |
| Profit Margin (ttm): |
9.87% |
3.80% |
| Operating Margin (ttm): |
11.29% |
5.84% |
| |
|
|
| Management Effectiveness |
AFSI |
MHLD |
| Return on Assets (ttm): |
1.94% |
1.87% |
| Return on Equity (ttm): |
16.52% |
8.65% |
| |
|
|
| Income Statement |
AFSI |
MHLD |
| Revenue (ttm): |
1.57B |
1.80B |
| Revenue Per Share (ttm): |
23.69 |
24.92 |
| Qtrly Revenue Growth (yoy): |
25.50% |
16.90% |
| Gross Profit (ttm): |
281.02M |
158.57M |
| EBITDA (ttm): |
212.43M |
111.81M |
| Net Income Avl to Common (ttm): |
154.29M |
68.47M |
| Diluted EPS (ttm): |
2.27 |
0.94 |
| Qtrly Earnings Growth (yoy): |
-19.50% |
N/A |
| |
|
|
| Balance Sheet |
AFSI |
MHLD |
| Total Cash (mrq): |
390.89M |
58.93M |
| Total Cash Per Share (mrq): |
5.85 |
0.82 |
| Total Debt (mrq): |
702.41M |
333.79M |
| Total Debt/Equity (mrq): |
65.49 |
40.47 |
| Current Ratio (mrq): |
1.4 |
0.74 |
| Book Value Per Share (mrq): |
14.97 |
11.41 |
| |
|
|
| Cash Flow Statement |
AFSI |
MHLD |
| Operating Cash Flow (ttm): |
352.27M |
304.06M |
| Levered Free Cash Flow (ttm): |
328.54M |
64.04M |
| source: Yahoo!Finance, Captial IQ |
|
|
The only problem with the numbers for MHLD is that when and if AMSI falters, as it should, we expect that MHLD will experience a decline in sales and earnings as well. With this in mind, we’ve run the following downside targets for MHLD, based on Dow Theory:
We’d consider buying MHLD at $7.42 and below.
