Blame It on the Weather

Don't look now but property and casualty insurance companies are being featured in their very own game of whack-a-mole whether they realize it or not -- and this time the weather-related excuse does hold water.

Since the beginning of the year we have dealt with the worst tornado outbreak in a half decade, a widespread flood down the Mississippi, and the destructor known as Hurricane Irene. These weather events don't even take into account the liabilities P&C insurers faced due to large natural disasters like the tragic earthquake and subsequent tsunami in Japan in March. Adding up all of these tragic events in just a few short months has ravaged insurers' balance sheets and stock prices.

While I don't enjoy finding opportunity in these tragic events, P&C insurance stocks now seem cheaper than ever. Just take a look at a few of these valuations:

Company

Price/Book

Forward P/E

Dividend Yield

Allstate (NYSE: ALL  )

0.71

6.8

3.3%

Cincinnati Financial (Nasdaq: CINF  )

0.90

17.9

5.8%

Tower Group (Nasdaq: TWGP  )

0.90

7.5

3.2%

White Mountains Insurance Group (NYSE: WTM  )

0.86

20.9

0.3%

American International Group (NYSE: AIG  )

0.52

8.0

N/M

Source: Morningstar.

Allstate has been creamed by weather-related catastrophes within the past year. The company recorded $2.3 billion in catastrophe-related expenses in the second quarter, more than twice that of rival Travelers (NYSE: TRV  ) , yet bright spots remain. The company's combined ratio, which measures how profitable it is for an insurer to underwrite policies, actually improved to 87.5 from 88.1 in the year-ago period. These are strong numbers, as anything below 100 implies underwriting profitability. Trading at 71% of book value and below seven times forward earnings, Allstate may be a name you can trust.

Cincinnati Financial and Tower Group are two names I've featured as dividend champions of the insurance sector. Cincinnati Financial hasn't lowered its quarterly distribution since 1960 and has apportioned more than a quarter of its $12 billion investment portfolio into dividend-paying equities that allow it to maintain such a lofty payout. Tower Group, one of my picks as a small cap to rule them all, has outperformance written all over its results. Its five-year annual dividend growth rate of 49.7% crushes nearly all of its peers.

If the name White Mountains sounds familiar, that may be because it's a Rising Star buy of fellow Fool Jason Moser. I'm a big fan of book value when determining whether a financial company is undervalued, which may I add is not always as cut-and-dried as it appears. White Mountains, despite a rough year in 2010, has grown its book value at a compounded rate of 10.5% since 1993. With two-thirds of its investment portfolio in fixed-income assets, it's one of the safer bets in the P&C sector.

American International Group might be an odd name to add to this list considering how murky its balance sheet could be following the credit crisis of 2008. But, with the company now handsomely profitable and trading for roughly half of its book value, the potential rewards appear to be outweighing the risks. Currently suing Bank of America (NYSE: BAC  ) for $10 billion, the company is looking to shore up a debt-burdened balance sheet. With the mortgage mess largely behind it and revenue stabilizing, the company can get back to growing at 10% per year.

The property and casualty sector could provide the safety net your portfolio needs to ride out these volatile markets. While these aren't ringing endorsements for any of these companies, it does provide the basis for further research into this sector. You can get started by adding Allstate, Cincinnati Financial, Tower Group, White Mountains Insurance, and American International Group to your watchlist.

What's your favorite stock in the insurance sector? Share it with the community in the comments section below!

Fool contributor Sean Williams owns shares of Bank of America but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong.The Motley Fool owns shares of Bank of America, White Mountains Insurance Group, and 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 that has survived an earthquake, hurricane, and tornado outbreak ... but is terrified of Taco Tuesdays.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 09, 2011, at 1:33 PM, whyaduck1128 wrote:

    I don't blame it on the weather. I blame it on the fact that I bought some CINF a month or two back. Sometimes I think I'm the dark cloud of investing. :-D

  • Report this Comment On September 09, 2011, at 1:57 PM, TMFUltraLong wrote:

    whyaduck1128,

    You should make that back up in no time thanks to that ridiculous dividend.

    TMFUltraLong

  • Report this Comment On September 09, 2011, at 9:20 PM, Kiffit wrote:

    The trouble is that what is troubling the insurance industry isn't just the weather, but the climate parameters that underpin it.

    The latter is changing with global warming, making adverese weather events more extreme and frequent.

    The insurance industry is being punished by the weather all over the world.

    Earlier this year, the Australian state of Queensland had a category 5 cyclone in its tropical north and massive floods in the capital city of Brisbane in its sub-tropical south.

    The insurance industry will be one of the first major industrial casualties of global warming.

    And even if we were making extreme efforts to fix global warming, which we are not, the disturbances to climate patterns already in train, won't subside for possibly centuries.

    What is now happening to insurance premiums in Far North Queensland is that the assumptions underpinning them are serious weather events every 5-7 years. The previous major storm was 2005-6 with 'only' 240kph winds.

    My family, which owns commercial property in lovely Mission Beach in Far North Queensland were lucky when the 300kph Cyclonic winds of cyclone Yasi hit them in early February. They got storm and tempest payouts, eventually. Their neigbours on Dunk Island, some 3-5 Km off shore took the brunt of the storm surge. They are under 5-6 metres of sand and they won't get much at all, because most of it is uninsurable flood damage.

    And beyond that, one has to wonder what will happen to the huge numbers of low lying canal developments in Southern Queensland as sea levels start to rise...........

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