P&C- The Next Big Thing
Sharmistha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is a known fact that Insurance is big business throughout the world without which, no modern economy can move forward. Even though the scenario is challenging and volatile, it is just a matter of time when the market forces will be ruled by the Insurance sector.
The Emerging Sector
Natural catastrophes like earthquakes tornadoes and floods plague the industry at large. Calamities in 2011 produced $105 billion in insured losses for the global P&C industry. Yet, Insurers continue to compete for business, provide capacity, and underwrite emerging risks. New capital continues to enter strategic segments of the insurance marketplace. Profits are generated through marginal expansions and revenues continue to rise faster than expenses. The market’s strong momentum from late 2011 has continued into the first quarter of 2012. The general outlook for the market is very encouraging.
Financial turbulences over the years caused many ups and downs in the Property and Casualty Insurance industry. It was not easy to sustain the kind of growth these companies were enjoying prior to recession. As a value investor it is important to know who are the world leaders in this field and have long-term growth potential.
The U.S. government cut its stake in American International Group Inc to about 21.5 percent. The Treasury Department sold $18 billion worth of the insurer's shares at $32.50 apiece, in what could yet be the largest ever secondary offering in U.S. history. A White House spokesman said on Monday that the AIG stock sale represents a "commitment to recover taxpayer money" and that President Obama is pleased with progress in winding down the government's stake. This stock has surged by 37.47% over the past year, outperforming the rise in the S&P 500 Index during the same period. As the earnings are looking up analysts say the firm will grow its earnings by more than 20 percent a year, on average, over the next five years.
The Emerging Names
The largest insurance company in history, American International Group, Inc. (NYSE: AIG) took the lead in writing Directors & Officers coverage, which today is a standard part of almost every sizable company’s insurance purchase. The company's strengths can be seen in multiple areas, such as its solid stock price performance, compelling growth in net income and notable return on equity. However, as a counter to these strengths, we also find weaknesses including poor profit margins, weak operating cash flow and feeble growth in the company's earnings per share. Although the company is getting very little credit for its turnaround, it's presumed that the brand will strengthen by bringing a gradual improvement in core operations. AIG is known and long renowned for its ability to emerge ahead of the competition and meet the expectation of its investors through its broad array of businesses and global reach.
ACE Limited (NYSE: ACE) is one of the world’s largest multiline property and casualty insurers. With operations in 53 countries, ACE provides commercial and personal property and casualty insurance, personal accident supplemental health insurance, reinsurance, and life insurance to a diverse group of clients. ACE USA is the U.S.-based retail operating division of the ACE Group, headed by ACE Limited, and is rated A+ (Superior) by A.M. Best Company and A+ (Strong) by Standard & Poor’s. The average volume for ACE has been 1.6 million shares per day over the past 30 days. ACE has a market cap of $25.75 billion. The Street Ratings rates ACE as a buy. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, attractive valuation levels and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had subpar growth in net income. ACE Ltd's quarterly operating profit trumped analysts' expectations, bolstered by lower catastrophe losses, prompting the company to raise its full-year operating profit forecast.
Insurance companies are a key component of the Berkshire Hathaway Inc. (NYSE: BRK-A) empire. A solid balance sheet, adequate liquidity, and continuing trend of growing book value are the other positives, in the portfolio of this Zurich-based property and casualty insurer. The Street Ratings has identified it as a strong “buy” insurance stock with the largest market capitalization. The company now expects an operating profit of between $7.20 and $7.60 per share, up from its previous estimate of between $7.03 and $7.43 per share. The company reflected strong performances in the P&C sector. In its second-quarter earnings, Berkshire’s property and casualty insurance business has been the key driver of growth. The pioneering efforts and phenomenal success of Buffett it is considered one of the best investment bets and interest in the Berkshire stocks is growing by the day.
The P&C industry operates as a shadow industry; as unemployment subsides and spending increases, demand for insurance is following. Insurance is after all an issue of trust. Although the sector has not grown the way that we enthusiasts would have liked it to, its superior strengths are not to be ignored.
Into The Future
We believe the favourable pricing changes combined with a continued economic recovery in the near future will lead the sector to outperform the broader market in the coming years.
Insurance stocks of the abovementioned companies have rose with the market this year inspite of many ups and downs. It was not easy to sustain the kind of growth these companies were enjoying prior to recession. We all want to invest in a company that stands by us in hard times. The good brand value that these companies offer, are driven by their capability to sustain themselves in good and bad times. We must remember that Insurance is a key driver of the economy. The insurers have a huge opportunity today to develop creative loss-prevention solutions and products that will reduce climate-related losses for consumers, governments, and investors and of course themselves.
SharmisthaB 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.If you have questions about this post or the Fool’s blog network, click here for information.