NEW YORK (
) -- Insurance-company stocks rose 23% last year, beating the 19% gain of the
Dow Jones Industrial Average
. But some insurers, including the following five, have fallen short of analysts' mean price targets and may catch up in the weeks ahead.
5. Assured Guaranty
: The Bermuda-based insurer provides mortgage and financial guaranty insurance, and reinsurance. The company's acquisition of Financial Security Assurance Holdings boosted its bond-insurance business.
31.5% to $30.33 (analysts' mean price target).
The purchase of Financial Security Assurance Holdings increased cash and cash equivalents to more than $260 million in the third quarter from $8.5 million in the previous three months. Assets more than doubled to $16 billion. Policy reserves have grown each quarter for the past year to $8.9 billion. Third-quarter policy income climbed to $330 million but was offset by $140 million of losses on securities, producing a net loss of $40 million. Operating income after taxes totaled $70 million.
Assured Guaranty trades at a 29% premium to book value. The third-quarter diluted loss per share was 22 cents, but operating earnings per share reached 44 cents. Trading volume is average, and the short interest ratio is 2.9. The shares are up 5.9% this year, bringing the gain to 110% over 12 months. The stock has a beta of 1.8 and a dividend yield of 0.78%.
News and Gossip:
Assured Guaranty delayed its relisting of some debt securities of Financial Security Assurance Holdings until the end of the first quarter. It has a new senior managing director for its international business, Nicolas Proud, who had been with the U.K. unit since 2001.
4. SeaBright Insurance Holdings
: The Seattle-based company is a specialist in workers-compensation insurance with a niche in maritime insurance.
32.6% to $14.70.
Third-quarter cash and equivalents grew 20% to $24 million from the previous quarter. Investments, likewise, increased 20%, to $616 million over 12 months. Policy income has risen for the past two quarters, up 11% to $64 million. Net investment income of $5.9 million was higher than the same quarter of 2008. After $12 million in securities losses over 12 months, the company gained $300,000 in the third quarter. SeaBright has been profitable in every quarter for 12 months, and net income appears to be strengthening.
Book value per share continues to grow, up 16% to $16.80 since the third quarter of 2008. Earnings per share have risen every quarter of 2009, reaching 31 cents in the third quarter. A price-to-earnings ratio of 8.9 reflects investor confidence, but the 66% price-to-book value is low. Trading is light at 90% of the recent average volume, and there is some short interest at 4.2. The stock is down 3.5% this year and 9.5% in the past 12 months. With a beta of 0.7, the shares don't indicate much correlation with the market. The company doesn't pay dividends.
News and Gossip:
Having taken the hard decision to cut executive salaries by up to 20% in May, Seabright has reinstated base salaries at previous levels, effective Jan. 1. This suggests the company is more positive now than it was about the future.
: A Swiss-based leader in insurance and reinsurance that does business in more than 50 countries.
33.5% to $63.78.
After hitting a cash low in the second quarter, ACE improved its position by $88 million, or 14%, in the following quarter. Total assets rose for the third consecutive quarter, by 2.9% to $77.8 billion. Policy reserves continued to rise, advancing $315 million. Policy income rose 3.9%, boosting total revenue by 1.7%. Operating income after taxes of $701 million fell fractionally, though jumped 39% from a year earlier. Third-quarter net income declined 7.7% from the previous quarter, but, as with operating income, climbed from a year earlier.
Book value per share of $55.71 indicates a 15% price discount to book value. Diluted earnings per share were $1.46, and the 8.1 price-to-earnings ratio is reasonable. The dividend yield is 2.6%. There is little short interest, and it's dropping. After lackluster trading, investor interest is rising, with activity doubling in the past week. The stock dropped 4.8% last year and has fallen this year.
News and Gossip:
ACE ranks 23rd among the largest medical-malpractice insurers, according to SNL. Despite a 1.2% drop in premiums, the insurer rose two spots in the rankings. It's a profitable business, and ACE has a 41% loss ratio. In earnings guidance for 2010, ACE expects operating income per diluted share of $6.25 to $6.75. The Thompson First Call mean earnings estimate is $7.64 per share.
William Blair & Co.
includes ACE on its three- to five-year investment-pick list for 2010.
2. MGIC Investment Corp.
: The company is a Milwaukee-based mortgage insurer.
39.3% to $9.42.
Cash and equivalents continued to fall in the third quarter, by 14% to $870 million. Investments shot up to $7.9 billion from a low of $6.7 billion a year earlier. Net investment income was down slightly for the quarter, and premium income fell 14% from a year earlier. Losses of $518 million far exceeded revenue.
The book value per share of $13.18 doesn't reflect the risk perceived by investors, who are holding the stock at a 49% discount to book. Low trading volume, a short interest ratio of 4.9 and a volatile beta of 1.9 show why daily price movements of 7.8% last Thursday are possible. Still, the shares have risen 17% this year and 69% over 12 months. Risk has its rewards.
News and Gossip:
Mortgage-guaranty insurance written in November rose 2.4% from October and, at the same time, defaults dropped 1.5%, and cures increased 6.8%. The better news was that, in December, the Wisconsin insurance regulator waived, until Dec. 31, 2011, the requirement that MGIC maintain a specific level of minimum regulatory capital to write new mortgage-guaranty policies. This removed a large impediment.
1. Meadowbrook Insurance Group
: The company is a Michigan-based specialty property and casualty insurer.
46% to $10.13.
Cash and equivalents of $71 million is at a low for the year. Investment assets grew 4.6% to $1.1 billion in the third quarter, and net income from investments increased 3%. Losses on securities fell to $700,000, a low for the year and a fraction of the $14.2 million lost over the prior 12 months. The reduced securities losses were more than offset by an increase of 32% in claims expenses.
Book value per share continues to rise, it's now at $8.91, and the 22% discount to book price is attractive. The price-to-earnings ratio of 9.1 isn't high. The company has operating earnings per share of 20 cents and a dividend yield of 1.7%. Trading volume has fallen 26%, and short interest has risen to 5.2. The stock has fallen 6.2% this year, limiting a one-year gain to 2.5%.
News and Gossip:
Meadowbrook's 2010 forecast is in line with analysts' expectations, with net operating income of 85 to 95 cents per share. Like other property and casualty insurers, the company started to repurchase shares for the first time in 2009 during the third quarter, buying back a modest 0.5% of outstanding shares. Sidoti & Co., an equity-research company, reiterated its "buy" rating for the stock in December with an $11 target.
Gavin Magor is the senior analyst responsible for assigning financial-strength ratings to insurance companies. He conducts industry analysis and supports consumer products. Magor has more than 22 years of international experience in operations and credit-risk management, commercial lending and analysis. His experience includes international assignments in Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.