Property Insurance Stocks: Troubled Times Are New Normal

Tornadoes in Texas serve as a reminder that earth-shattering natural disasters are now the rule, not the exception.

We have long spoke about the increasing rate of natural disasters and the impact it's having on the insurance industry. Indeed, it's only a matter of time before we see "the big one," a storm capable of inflicting overs trillion dollars in damage. In fact, we narrowly avoided one a few months ago when Hurricane Irene was slated to wipe out Lower Manhattan. 

Speculative storm damage
Let's face it, a day will come when a hurricane actually hits the Northeast coast with the force expected of Irene. It will be a monetary disaster, and the rarity of the event means the extent of the damage will be more speculation than expectation. And, unlike the seasoned veterans down in Florida, residents of the northeast coast are a bit out of their element, and likely less prepared, leaving more for insurance companies to clean up.

Consider: The freak Halloween snow storm in the Northeast also left behind a substantial amount of damage, and home/yard contractors expect that particular storm to increase work for years to come thanks to all the fallen and dying trees still gracing backyards along the coast.

Texas
The tornadoes in the Dallas-Fort Worth area are another example of the lack of prejudice natural disasters have on where they strike -- heavily populated or not, business epicenter or no, here they come.

Videos are already circulating of tornadoes ripping through populated Texas towns and tossing semi-trucks all willy-nilly into surrounding buildings (now rubble). Death toll still unknown. Financial toll? Expect a lot of zeroes.

Business section: Investing ideas
Property & casualty insurers are increasingly aware of the likelihood that a single storm can bankrupt the industry. So, how can you spot insurance companies that might be in trouble?

One way is to look at insurance companies that are already profitable and identify which ones are expected to see a reversal of fortune.

For this list, we started with a universe of property & casualty insurance companies. We collected profitability data and identified the most profitable insurance companies (by comparing profit margins to competitors).

We also created a second list from the universe of property & casualty insurance companies, this time screening for net institutional buying in the current quarter and insider buying in the past six months. Sophisticated investors seem to think these insurance profits are unsustainable -- do you agree?

Use these lists as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

Most profitable insurance companies:

1. Arch Capital Group: Provides insurance and reinsurance products worldwide. TTM gross margin at 14.67% vs. industry average at 14.16%. TTM operating margin at 14.67% vs. industry average at 11.27%. TTM pre-tax margin at 13.9% vs. industry average at 8.58%.

2. American Financial Group: Engages in property and casualty insurance business in the United States. TTM gross margin at 17.62% vs. industry average at 14.16%. TTM operating margin at 13.58% vs. industry average at 11.27%. TTM pre-tax margin at 11.79% vs. industry average at 8.58%.

3. AmTrust Financial Services (Nasdaq: AFSI  ) : Operates as a multinational specialty property and casualty insurance company in the United States and internationally. TTM gross margin at 20.74% vs. industry average at 14.16%. TTM operating margin at 17.18% vs. industry average at 11.27%. TTM pre-tax margin at 16.84% vs. industry average at 8.58%.

4. The Chubb Corporation (NYSE: CB  ) : Provides property and casualty insurance to businesses and individuals. TTM gross margin at 18.35% vs. industry average at 14.16%. TTM operating margin at 16.23% vs. industry average at 11.27%. TTM pre-tax margin at 16.23% vs. industry average at 8.58%.

5. HCC Insurance Holdings (NYSE: HCC  ) : Provides property and casualty, surety, group life, accident, and health insurance coverage, as well as related agency and reinsurance brokerage services to commercial customers and individuals worldwide. TTM gross margin at 16.71% vs. industry average at 14.16%. TTM operating margin at 15.93% vs. industry average at 11.27%. TTM pre-tax margin at 14.95% vs. industry average at 8.58%.

6. Loews (NYSE: L  ) : Operates primarily as a commercial property and casualty insurance company in the United States. TTM gross margin at 19.7% vs. industry average at 14.16%. TTM operating margin at 19.7% vs. industry average at 11.27%. TTM pre-tax margin at 15.8% vs. industry average at 8.58%.

Insurers with net institutional buying in the current quarter and insider buying in the past six months:

1. CNA Financial: Provides property and casualty insurance products to small, middle-market, and large businesses and organizations primarily in the United States, Europe, Canada, and Hawaii. Net institutional purchases in the current quarter at 835.0K shares, which represents about 3.18% of the company's float of 26.27M shares. Over the last six months, insiders were net buyers of 40,000 shares, which represents about 0.15% of the company's 26.27M share float

2. Maiden Holdings: Provides non-catastrophe inland marine and property coverage reinsurance solutions to the regional and specialty insurers in the United States and Europe. Net institutional purchases in the current quarter at 2.8M shares, which represents about 5.49% of the company's float of 51.04M shares. Over the last six months, insiders were net buyers of 141,488 shares, which represents about 0.28% of the company's 51.04M share float

3. MGIC Investment (NYSE: MTG  ) : Through its subsidiary, Mortgage Guaranty Insurance Corporation, provides private mortgage insurance to the home mortgage lending industry in the United States. Net institutional purchases in the current quarter at 28.7M shares, which represents about 14.47% of the company's float of 198.32M shares. Over the last six months, insiders were net buyers of 232,500 shares, which represents about 0.12% of the company's 198.32M share float.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Profitability and institutional data sourced from Fidelity, insider data from Yahoo! Finance.

The Motley Fool owns shares of AmTrust Financial Services. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (1)

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 April 05, 2012, at 3:34 PM, bff426 wrote:

    A couple of points:

    CNA is 90% owned by Loews Corporation. They are the same company.

    MGIC insures mortgages against nonpayment, they are not in the property casualty insurance business.

    The October snowstorm in the Northeast was a nonevent from the property casualty insurance point of view. The damage was to trees and to the power distribution system, both not covered by the industry. The losses to the industry from spoilage and business interruption from the power outages were insignificant.

    The chances of a direct hurricane hit on New York City are extremely, extremely low. Hurricane tracks up the East Coast from currents and prevailing winds, the way New Jersey and North Carolina jut out, make a direct hurricane force hit on New York City less than one in 1000.

    Huge, huge damages would be suffered by New Jersey, Long Island and Connecticut even if New York City were not hit. It's not necessary to exaggerate things by speculating on trillions of dollars in damages in New York City.

    What could happen in New York is flooding from water being pushed down Long Island Sound as a hurricane hit Long Island and Connecticut. But -- flooding is usually excluded under most property insurance policies. The federal government could take a huge hit, if property owners had bought federal flood insurance, not a given. Usually, it's only purchased by people who are forced to by their lien holder.

    Finally, I am totally confused by the point the writer is trying to make. Are we supposed to conclude that the most profitable companies are somehow set up for a reversal? If so, I fail to see the logic. If not, apparently I'm missing the entire point of the article.

  • Report this Comment On April 16, 2012, at 9:52 PM, TMFPennyWise wrote:

    Although some of what you write about sounds a little scary, your review of P & C and specialty insurers is eclectic and interesting and covers some companies seldom heard about on TMF so thanks for the fresh insights.

    If one is interested in investing in insurance companies I think it is important too to investigate the underwriting focus and practices peculiar to each company--some are much more risk averse than others and limit underwriting in various parts of the country and in certain industries.

    I would also look at the investments made with the reserves--some insurance companies are much more aggressive which can impact the bottom line especially when economic times are uncertain.

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