Shares of many large property and casualty firms have been pounded this year amid concerns about a never-ending series of natural disasters, including the Japan earthquake and tsunami in March. The sell-off, which continued as Hurricane Irene was set to pound the East Coast, is overdone.
Many investors are taking a shine to the sector today because the losses associated with Hurricane Irene — expected to hit $2.6 billion — are nowhere near as bad as originally projected. Wall Street, however, has otherwise not found much to like about these companies, many of which have posted huge losses recently. It’s easy to see why.
Catastrophes in the first quarter, such as the one in Japan and storms and flooding in Australia, resulted in global losses to the industry of $60 billion, almost five times their 10-year average. Losses in the U.S. alone reached $17.8 billion in the first half of the year, according to the Insurance Information Institute. What many investors might not realize is the industry can easily afford these disasters and others.
As of the first quarter, auto, home and business insurers had a combined surplus available to pay for premiums of $564.7 billion, according to the III. The industry has the financial muscle to afford calamities the size of both Hurricane Katrina ($45 billion in today’s dollars) and the Japanese earthquake and tsunami, where losses are expected to be as much as $30 billion.
Here are a few insurance stocks for investors to consider adding to their portfolios. All have significant upside potential, though some shares seem to be more fully valued than others. Many also pay dividends.
Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A), whose insurance businesses include GEICO, is a bargain for those investors lucky enough to afford the stock, which trades at a lofty price of more than $107,000. Shares of the company are off more than 10% this year because of concerns about the insurance business. Berkshire lost $828 million in the first six months of the year from its insurance underwriting business. Berkshire’s insurance float — net liabilities it assumes under insurance contracts — as of June 30 was $71 billion, an increase of $5 billion since the end of last year. Berkshire, which has nearly $50 billion in cash on its books, can afford to take the risk. For what it’s worth, the average analyst price target on Berkshire stock is $133,000. The stock trades at a premium multiple of 16.84.
Hartford Financial Services Group (NYSE:HIG) shares also are dirt cheap, trading at a multiple of 5.07. The stock has dropped more than 30% this year, even accounting for today’s gain, on concerns about higher catastrophe and asbestos liabilities. Wall Street is expecting the stock to make a huge comeback. Analysts’ average earnings price target is $32, well ahead of the $17.19 level where it recently traded. Its dividend yield is 2.16%.
Allstate (NYSE:ALL) is down more than 23% after the abrupt departure of one of its top executives and its continued financial struggles. The company is not a basket case. Its second-quarter loss of $620 million, or $1.19 per share, was better than Wall Street had expected. Analysts have a price target of $36.50, well ahead of the $24.43 where Allstate shares recently traded. The stock trades at a price-to-earnings multiple of 3.2, and its dividend yield is 3.23%.
The Travelers Cos. (NYSE:TRV) shares are down more than 10% this year. The lone insurer in the Dow Jones Industrial Average, recently posted its first quarterly loss since 2004 because of a high number of tornado claims. In response, Chairman and CEO Jay Fishman has cut back on share buybacks. Wall Street analysts believe the stock will make a comeback. Their average price target is $66, well above the $50.48 where it recently traded. It trades at a multiple of 11.14 based on current-year estimates. This is the least attractive of the stocks based on valuation. Its divided yield is 3.24%.
Jonathan Berr does not own shares of the companies listed. Follow him on Twitter at @jdberr.
