Insurance Shares Could See a Book Value Surge

NEW YORK (TheStreet) -- Insurance company book values are expected to rise by an average of 4.7% following third quarter earnings presentations as a result of strong bond and equity market gains, according to a report published Tuesday by Sandler O'Neill.

A rise in book value is one of the best things that can happen to a stock since companies are often valued on a price-to-book basis. Thus a 5% rise in book value is likely to drive a 5% increase in the stock price at the very least--though likely a bit more, since investors may expect the trend to continue. Rising book values due to investment gains may represent a good selling opportunity however, since there is little to suggest investment gains are likely to be sustainable and they aren't reflective of any great skill on the part of the company's management. Any insurance company portfolio manager can make money when both stocks and bonds are rising in value, as happened during the third quarter.

Here are the five insurance companies Sandler analysts expect to see the biggest surge in book value.

1. AIG (AIG)

Sandler analysts predict a 14.1% rise for AIG's book value, driven primarily by the company's participation in two rounds of share repurchases from Treasury. The rules of accounting are such that buying back shares when your shares trade below book value adds to book value per share.

"You could argue that the intrinsic value may not change, but the reported book value would increase--assuming stable marks in the market, obviously. It's just math," says Sander analyst Paul Newsome, one of the authors of the report.

2. Allstate (ALL)

Sandler analysts predict a 6.1% book value increase for Allstate, largely due to life insurance operations that add leverage to the overall investment portfolio. Allstate's leverage is 499.7%, versus 304.5% for Sandler's coverage universe, the report states. The analysts also believe Allstate will generate a return-on-equity of 10.0% this quarter despite the fact that the quarter is "historically heavily impacted by catastrophe losses." Finally, Sandler's analysts expect favorable investment portfolio marks on book value of 3.8%.

3. Cincinnati Financial Corporation (CINF)

Sandler's analysts see a 4.8% book value gain for Cincinnati Financial due to its "outsized" concentration in equities. The company allocates 25.7% of its portfolio to equities.

4. The Progressive Corp. (PGR)

Progressive is expected to see a 4.6% book value increase, also due to a large equity concentration in its investments. Progressive allocates 14.2% of its portfolio to equities.

5. The Travelers Companies, Inc (TRV)

Travelers will likely generate a return-on equity of 8.1% this quarter "alongside favorable investment portfolio marks on book value of 2.1%," according to the Sandler report.

-- Written by Dan Freed in New York.

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