Category Archives: Insurance Watch List

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.

Watch List Summary

The following are the most compelling insurance stocks that are currently on our watch list.  First among the companies is Willis Group Holdings (WSH).  According to Yahoo!Finance, Willis Group Holdings (WSH) “provides a range of insurance brokerage, reinsurance, and risk management consulting services to its clients worldwide.”  We believe that the reinsurance segment has the kind of allure that will quickly attract larger buyers.  Although Willis Group Holdings isn’t inexpensive, we believe that the technical conditions can help us determine reasonable prices to concentrate our purchases.

From a technical standpoint, Willis Group Holdings is considered fair value at $30.80.  If Willis Group Holdings (WSH) were to fall -50% (our benchmark for proper downside risk assessment), WSH would sell for $18.40 based on the April 27, 2012 closing price.  We believe a two phase purchase can take place at the current price and at any one of the following downside targets:

• $27.00
• $19.39
• $15.39

Next up is Tower Group (TWGP) which “provides commercial, specialty, and personal property and casualty insurance products and services to businesses in various industries and to individuals in the United States” as described by Yahoo!Finance.

From the longest available chart, Tower Group (TWGP) has an interesting record.  Although the decline from the 2007 high to the bottom in 2009 was -58%, the stock price hasn’t gone gangbusters since the 2009 low.  At the same time, based on the more conservative data available from Value Line Investment Survey, Tower Group (TWGP) has seen its shares outstanding nearly double while the book value has declined by more than half.  For some reason, Yahoo!Finance indicates that the book value at $26.37, we don’t trust that number and recommend that you always assume the more conservative number.

Despite these concerns, we believe that Tower Group is in the early stages of recovery from the mistakes that were made in the period from 2007 to the present.  The technicals suggest that reasonable purchases in two stages should take place at or below the following downside targets:

• $19.79
• $15.76
• $11.03

Finally, the next stock that we’re interested in from watch list above is American Safety Insurance Holdings (ASI) which “offers specialty insurance and reinsurance products to small and medium-sized businesses in the United States and internationally. Its Excess and Surplus Lines division provides environmental insurance products, such as general contractor pollution and/or professional liability coverage for contractors and consultants; primary general liability coverage for residential and commercial risks; excess and umbrella liability coverage in the construction and products liability areas; and property and packaged property and liability focused on fire exposed premises,” as indicated by Yahoo!Finance.

American Safety Insurance Holdings (ASI) is appealing for a couple of reasons.  First, the stock has increased both property/causality income and investment income consistently since 2003.  This performance has increased the book value of ASI by nearly double since 2003, making the company’s stock price appear undervalued by 40%.  A concern that may require some follow-up is the declining levels of underwriting income.

With the risks of a market decline, after the tremendous run from 2009 to the present, we would buy ASI at the current price and then again at the following downside targets spread over three different level:

• $16.96
• $11.53
• $9.53

Insurance Watch List Performance Review

The following is the performance of the stocks that were on our last Insurance Watch List dated January 27, 2012.

So far, Alleghany (Y) and HCC Insurance Holdings (HCC) have torn the cover off the ball when compared to the S&P Insurance ETF (KIE).  Alleghany has gained +18% while HCC has gained +14%.   On the opposite end of the spectrum, National Western Life Insurance (NWLI), American National Insurance (ANAT) and Tower Group (TWGP) have underperformed the +8% gain of the S&P Insurance ETF (KIE).  Again, this has only been a 3-month period so the underperformance suggests that there should not be any alarm about the declines so far.