The Accident and Health Insurance Sector: The Breakdown

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Property casualty and health are two very different kinds of insurance, but they do share a lot of similarities between them. Both ultimately come down to one party (the insured) passing on its risk of catastrophic loss to another party (the insurance company). I was looking for a company to add some stability to my portfolio, and thought I'd share my results with my fellow Fools. All my results are taken from the stock screener at Yahoo! finance.

Overall, I'm not that impressed with most of these entries. The most profitable company, Aflac (NYSE: AFL), is currently trading at a rather irritating 1.6 times book value. I understand that insurance companies are supposed to be conservative, particularly when they evaluate themselves, but this is a bit steep. Although I can accept the 8.83 P/E ratio, particularly considering this is by far the largest of the companies my screener turned up (22.68 billion market cap) and carries a half-reasonable 2.7% dividend yield. I'll quack to that. I really like the fact that Aflac offers a superior product to its competitors. While "disability income replacement" is a term that many companies apply to their offerings, most do not make the process as easy as Aflac does. While the product doesn't make the company, Aflac also has a serious marketing edge over its competitors, and that contributes to a solid moat.

Assurant (NYSE: AIZ) looks a good deal better. First, I like its .6 price to book. Second, I like the unusual business model Assurant takes on, underwriting more unusual types of risk-reduction products than just "vanilla" insurance. While its 6.8% profit margin is nothing special, it does carry a 2.20% dividend and a 6.27 P/E ratio. It looks like a reasonable deal to me, and I appreciate its diversification into the oft-unexplored "other" category of financial products. Seriously, there are very few kinds of hazard, health or collateral insurance offerings that Assurant doesn't offer. Assurant Health is also well-niched into small business health coverage, which naturally serves a huge growth area as these companies get larger.

CNO Financial Group (NYSE: CNO) is another modestly good entry into the "insurance possibility" stack. I like its 9.8% profit margins, .5 price to book ratio, 6.68 P/E ratio and fairly small market cap ($2.24 billion). What I don't like is its .80% dividend. Thanks, but no thanks. I could do better in my savings account...

Of course, CNO has a lot going for it on the diversification front. For one thing, it holds onto several powerful brands such as Colonial Penn Life Insurance, Bankers Life and Casualty and owns the investment advisory company called 40/86 Advisors. Having its hands in a lot of pies puts it just outside the Fortune 500 list, at #503 when last I checked. With solid diversification and size, it's a fairly sound moat.

StanCorp Financial Group (NYSE: SFG). It's something of a stereotypical "We do everything for the middle market" financial company, and its fingers are dipped into everything from health and dental benefits and AD&D (accidental death and dismemberment, not role-playing) to the individual sale of financial services. I'm okay with the 10.15 P/E ratio because StanCorp carries a .7 price to book ratio. I also like that this fairly small and spry company ($1.44 billion market cap) pays a 2.80% dividend as I write this. It's boring as all get-out, but after the crap in 2008 I can stand a little boredom. Bore me all the way to the bank, and keep boring me for years to come. Pretty please.

StanCorp is great because it primarily specializes in business-to-business (B2B) services like dental and accidental death and dismemberment policies. While going to the dentist or having a limb ripped off by machinery isn't pleasant in the slightest, these are relatively simple types of insurance to manage risk for. With this stable core, and the fact that StanCorp doesn't have its hand in any other businesses, it's a solid bet for turning a solid profit without having to diversify unnecessarily.

I will also admit to respecting Unum Group (NYSE: UNM), in spite of its silly name. While it's true that anything Latin is supposed to sound more profound, my eyes didn't light up until I learned three things about this, my new favorite insurance company:

1. Its .7 price to book makes up for its 27.11 P/E ratio. It's not perfect, but I trust book value more than earnings. Earnings are too easy to mess with.

2. The dividend yield is a solid 2.60%. Third-highest on the list, and distinctly middle-of-the-road size-wise.

3. Unum specializes in disability income. Nobody is obligated to get disability income replacement insurance, and some people actually can't get it because of pre-existing conditions. Insurance plans play to people who are thinking of the possibility of being seriously injured or ill beyond the point of being independent. While no one who isn't gaming the system knows they will get injured, people who understand that this is possible tend to be less risky people.

4. The coup de grace that makes Unum my favorite is that it's diversified into both the US and Great Britain. It has a solid foothold on two continents, which is more than a lot of insurance companies can claim. This also gives it strength based on doing business in American Dollars, British Pounds and Euros (though this is by far a smaller percentage of its income than the other two currencies), which works to moderate any potential currency woes.

Overall, I would rate Unum first on my list and StanCorp as a fairly close second. They're dull, they're diversified, they pay an okay dividend and they're trading with what I consider to be a reasonable margin of safety. And if you buy them and they promptly go down 90%, remember that you should always do your own research. I may be wrong. And if there's no fundamental reason for a drop like that, I'd just buy 10 times as many shares and wait for the market to get its head on straight.

pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Aflac and Assurant. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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