There is still plenty of upside for United Fire Group (UFCS +0.18%), one of my favorite value stocks. The train is leaving the station with Monday's nice gain but there is still time to get on board. Here is why I like the stock:
They have been succesful in attracting new business because their underwriters are taking a thoughtful underwriting approach as opposed to many of their competitors which have issued unilateral, across the board rate increases. These types of rate increases make insurance agents and their customers pretty grumpy and they have been turning to United Fire as a new market. Their performance is particularly impressive when compared to several competitors. Meadowbrook (NYSE: MIG),EMC Insurance Group (EMCI +0.00%) and State Auto Financial (STFC +0.00%) all reported second quarter operating losses.
Meadowbrook had to increase their loss reserves and is trading near a 52-week low. EMC Insurance also had an issue with their loss reserves, the prior years reserves are not performing as well as they had predicted. State Auto Financial has been plagued with continuing catastrophic losses and a decline in book value from $18.46 in the first quarter to $17.82. This is an alarming trend when you consider that the book value was $21.33 at the end of 2009.
Back to United Fire:
Oh, and did I mention the $28.91 book value? With the stock trading around $21, our downside risk is limited. Also, they have been straight shooters on reserving practices so I am comfortable with their stated book value.
The 3% dividend. It's always nice to collect a dividend while you wait for the price to appreciate and the dividend is amply covered by their earnings.
The integration risk from their March 2011 purchase of Mercer Insurance is greatly reduced and the acquisition has proven to be a smart, accretive purchase.
I have saved the best for last. From 2004-2008, the stock traded at a multiple to book value in a range from 122% to 186%. With the acquisition of Mercer and success in attracting new business, the company is writing more premium than they ever have and the book value is the highest it has ever been. If we apply the historic multiple to book value of 122%-186% to the current book value of $28.91, it gives us a price range of $34-$54 a share. This is my idea of an outstanding value stock.
