Insurance: 4 Stocks to Avoid, 1 to Buy
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With monthly $85 billion worth of liquidity injections into the US economy, it’s easy to present a bullish prospect for the insurance industry. Couple it with a housing recovery, dipping unemployment rates and rising industrial output, and the recipe for growth is ready. However despite the long term bullish prospects, insurance claims arising due to “Super storm Sandy” provides some headwinds to the industry. Analysts estimate that the damages due to the storm could reach as much as $50 billion, most of which will be borne by insurance agencies. Earlier, analysts had estimated AIG’s (NYSE: AIG) sandy related damages to be around $650 million. But the management recently announced that the damages would be around $1.3 billion, which obviously shocked the street. This means AIG’s net operating income for the first 3 quarters could be wiped out and this negates all the short term positive triggers for the company.
Sandy Related Damages: D
2012 Q3 Net income (Trailing): NI
Chubb Corporation (NYSE: CB) has a high exposure to “Sandy-hit” areas. The company recently announced that the storm would create a $570 million post-tax hole in its balance sheet. Chubb’s Q3 net income stood at $533 million, which is lower than sandy related loss. Though the company said it would resume it dividend repurchase program, it however pushed back its share buyback timeline. Shares of Chubb Corporation trade at P/E multiples of 11x and appear to be undervalued. However, on including the $570 million loss, the P/E shoots to over 20x and Chubb appears to be overvalued.
Chubb's D/NI = 106.9%
Allstate Financial (NYSE: ALL) is amongst the worst hit. Its Q3 net income stood at $723 million, from $175 million in the last year’s quarter. According to its management, sandy related losses would account to a massive $1.07 billion. According to reports, 66% of its losses were from New York and 20% from New Jersey. Even if the company repays its liabilities without raising more debt, its cash reserves and valuations would take a hit.
Allstate Financial's D/NI = 147.9%
Analysts had estimated that the losses incurred by Progressive Energy (NYSE: PGR) could wipe off less than 25% of its Q4 earnings. Its losses were estimated to be lower than its peers, because the company is an auto insurer. Companies like Allstate Financial provide home insurance, which is where the main damage has been done. However the company recently reported that “Sandy” related claims could account to over $90 million, which was higher than the previous estimates. In its recent earnings release, the company had reported a net income of $78 million, lower than sandy related losses.
Progressive Energy's D/NI = 115.4%
However property and casualty insurer ACE Limited (NYSE: ACE) seems to be having the least sandy-loss related worries. Its Q3 net income came in better than expected at $640 million against a net loss of $39 million. Its net income for the first three quarters sums up to $1.94 billion, compared to $805 million in the same period last year. According to management, Sandy related losses would be limited to only $380 million. ACE Limited has one of the lowest “D/NI” ratio in the industry, owing to its well positioned and geographically diversified portfolio.
ACE Limited's D/NI = 59.37%
Earlier this year, management had announced that the increasing crop insurance claims could hurt its bottom-line. However, the lower than estimated Sandy related damages, offset the crop insurance claims, following which management raised its full year operating profit guidance from $7.2-$76 to $7.73-$8.03.
Shares of ACE Limited trade at forward P/E multiples of 10x with a healthy P/FCF of 9.5x. Its shares yield a decent 2.4% with a modest payout of 25%. Several agencies including Barclays, JPM Securities and UBS have an outperform rating for ACE Limited with price targets as high as $90. I believe investors can look to invest in the company on the back of solid financial performance, improved guidance and the lowest D/NI ratio.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!