Is It Time to Sell These Insurance Giants at Multi-Year Highs?

Should shareholders lock in gains now while these insurers are all trading within 3% of multi-year highs?

May 26, 2014 at 9:00AM

The stock market is currently in the middle of one of the most powerful bull markets in its history, and many companies have been along for the ride in the past few years.

American International Group (NYSE:AIG), Berkshire Hathaway (NYSE:BRK-B), and Travelers Companies (NYSE:TRV) are all major players in the insurance industry, and their stocks are all currently trading within 3% of multi-year highs.

Is now the time for shareholders to take the money and run, or do these stocks still have room to run?

The problem child
AIG was in the very eye of the financial crisis storm in 2008 and 2009, and it was for good reason.

During the height of the housing bubble, AIG provided hundreds of billions of dollars worth of insurance to owners of sup-prime mortgage-backed securities in the form of credit default swaps. 

It turns out that was not exactly the best idea, and when the housing bubble burst, this happened to AIG shareholders:

Aig Chart

It was a mistake that would have meant the end of AIG if not for the U.S. government bailout.

However, AIG's core insurance business was never the problem for the company. Once the company weathered the storm surrounding its toxic assets, its stock began to recover. 

At its current levels, AIG is trading at its highest point since it endured its precipitous fall during the crisis in 2008. So is it time for shareholders to cash in on AIG?

Incredibly, even at a multi-year high, AIG's price to tangible book value (P/TBV) is currently only 0.75. Although AIG's balance sheet has been through the wringer during the past decade, in the past 12 months the company's annual book value per share (BVPS) growth rate was 6.5%. 

Despite the fact that AIG is trading at multi-year highs, it is currently priced at a significant discount to it's TBV, which has been steadily growing over the past couple of years.

Buffett's baby
Berkshire Hathaway is Warren Buffett's massive international conglomerate holding company, which owns businesses devoted to railroads, energy, manufacturing, and more.

However, in the first quarter of 2014, about a third of Berkshire's earnings came from its insurance group, including Geico.  Like AIG, Berkshire Hathaway stock is now trading at its highest level since the financial crisis.

Unlike AIG, however, Berkshire is also now trading higher than it ever was prior to the crisis!


With Bershire Hathaway's stock sitting near all-time highs, is now the time to sell?

Berkshire's 1.7 P/TBV is somewhat steep compared to the 1.3 ratio of the property and casualty insurance industry as a whole.  

Unbelievably, during the past 10 years, including the financial crisis, Berkshire Hathaway has averaged an annual book value per share growth rate of 9.6%.

However, it seems fitting to also look at one of Buffett's favorite measures of stock performance: return on equity (ROE.) ROE is a measure of a company's performance based on how efficiently it is able to generate profits from shareholders' invested money. Berkshire's current ROE is sitting at 9%, which is about average for the company over the past decade.

Berkshire Hathaway is the epitome of consistency. Despite its relatively high current P/TBV, its strong, consistent growth in book value and its 9% ROE suggest that Berkshire is far from overpriced. Shareholders that have been feeling antsy about the recent rise in Berkshire's share price to all-time highs need not be spooked. 

Diamond of the Dow?
The Travelers Companies is the second largest provider of U.S. commercial property casualty insurance. Nearly 60% of Travelers insurance income in the first quarter of 2014 came from its business insurance segment,  but Travelers also has segments for auto and home property casualty insurance. Travelers' stock has been on quite a tear over the past couple of years as the company has increased its net income by more than 150% from $1.4 billion in 2011 to $3.7 billion in 2013. 


With its stock near all-time highs, is it time for shareholders to bail on Travelers?

The good news for Travelers shareholders is that the stock still appears to be relatively inexpensive. The company's 1.5 current P/TBV might be on the high side, but Travelers has been able to maintain an over 10% growth rate in BVPS over the past decade, a growth rate higher than even Berkshire Hathaway's. Couple that high growth rate with a strong ROE of over 15%, and Travelers stock doesn't yet look overpriced.

The bottom line
Stocks trading at multi-year highs can often be dangerous investments if their valuation metrics have reached unreasonable levels. After all, the adage of "buy low, sell high" is as old as the market itself.

However, when large rises in share price are fueled by exceptional fundamental performances by companies such as these three insurance powerhouses, there's nothing wrong with a little bit of "buy high, sell higher."

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Wayne Duggan is the author of Beating Wall Street with Common Sense and the developer of Wayne Duggan has no position in any stocks mentioned. The Motley Fool recommends American International Group and Berkshire Hathaway. The Motley Fool owns shares of American International Group and Berkshire Hathaway and has the following options: long January 2016 $30 calls on 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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