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Katrina is no disaster for insurance stocks
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An opportunity for the strong
But double that $25 billion estimate and, at 12.5% of industry capital, the insured losses from Katrina are big enough to set in motion the machinery that leads to higher insurance prices and to higher stock prices for the shares of insurance companies with the strongest balance sheets.
On my regular Wednesday morning appearance on CNBC's "Morning Call" I picked three "best-in-class" insurance stocks for after Katrina.
American International Group (AIG, news, msgs). This company, once the acknowledged class of the industry, has been tarnished by everything from fraudulent accounting to revelations of self-dealing and out-of-control executive pay. All that cost the company its coveted AAA rating. But the damage to the company's long-term business and to its balance sheet has been remarkably limited. For example, investors worried that the loss of reputation would hurt the company with conservative customers in Asia. But that hasn't been the case in the first two quarters of 2005. A.G. Edwards estimates that the company's foreign life insurance business, with market-leading positions in China, Japan, and Korea, will grow pretax operating income by 18% in 2006. In the second quarter sales grew by 25% from the same period in 2004. The bond market has stuck by AIG as well with interest-rate spreads; the measure of the premium that investors demand from AIG has declined modestly in 2005. American International Group estimates that it will take a third-quarter loss of $1.1 billion due to Hurricane Katrina, or about 25 cents to 30 cents a share. Wall Street estimates that the company will earn $5.02 a share in 2005, so the shares are trading at just 12 times projected 2005 earnings. Our StockScouter rates these shares an 8 out of a possible 10.
PartnerRe (PRE, news, msgs). The terrible extent of the destruction caused by Katrina will push a large portion of the losses onto reinsurers. (The companies that sell primary insurance buy insurance against catastrophic losses from reinsurers. The primary insurer pays claims up to a certain ceiling and the reinsurer pays claims above that.) For example, management at PartnerRe recently estimated that it would see about $350 million in claims in the third quarter due to Katrina. That would whack about $6.25 a share off the company's earnings. But that's relatively low thanks to the company's discipline in withdrawing from some markets as price competition strengthened. (The company actually wrote fewer premiums in 2004 than in 2003 and fewer in the first six months of 2005 than in the first six months of 2004.)
Here's some context: Montpelier Re Holdings (MRH, news, msgs), a reinsurer with about one-fifth PartnerRe's sales, recently estimated its losses from Katrina at $450 million to $675 million. PartnerRe should be one of the main beneficiaries from 2006 rate increases since its losses from Katrina are relatively minor and the company has plenty of underwriting capacity. Wall Street projects that PartnerRe will earn $7.79 a share in 2006. The stock now trades at 8.3 times projected 2006 earnings. Our StockScouter rates the shares a 6 out of a possible 10.
Axis Capital Holdings (AXS, news, msgs). Axis Capital is now the fourth-largest Bermuda-based reinsurer, and with its business concentrated in reinsurance and in the property insurance area, investors get exposure to two markets likely to see price increases post-Katrina. The balance sheet seems exceptionally clean -- the debt to equity ratio is just .16 -- and the shares are strongly supported by book value of $22.11 a share. The stock trades at just 6.9 times Wall Street's projected 2005 earnings of $4.21 a share. Axis Capital Holdings also pays a dividend of 2.1%. Our StockScouter rates these shares a 6 out of a possible 10.
As always, I have two more exclusive picks for the readers of CNBC.com on MSN Money. There's more going on in the insurance sector than Hurricane Katrina, and these two stocks represent other kinds of opportunities in the sector.
Allianz (AZ, news, msgs). Allianz seems to have finally put its house in order -- the company has spent two years bolstering its balance sheet and earning a ratings boost from Standard & Poor's -- which frees up the company for acquisitions just as the European financial sector is starting a major consolidation. Internal growth will come from continued cost-cutting and from the company's life and asset-management businesses, where revenue climbed 14% in the first half of 2005. The stock trades at 9.7 times projected 2005 earnings per share. Our StockScouter rates these shares an 8 out of a possible 10.
Cincinnati Financial (CINF, news, msgs). This insurance company's strength has long been in its relationships with the agents who sell the company's insurance, who year in and year out sell more insurance per capita than its competitors' agents. That relationship got a boost this year with the rollout of a new computer system that should encourage agents who now sell only the company's commercial insurance lines to also write personal insurance with Cincinnati. This extremely conservative insurer has built a long-term relationship with shareholders on regular dividend growth -- the yield is now 2.9% -- and, more recently, share buybacks. The company estimates its Katrina losses at around $34 million. The stock has been punished, overly so in my opinion, because so much of the company's investment portfolio is wrapped up in interest-rate-sensitive bank stocks, particularly the shares of Fifth Third Bancorp (FITB, news, msgs). Shares trade at 13.9 times projected 2005 earnings per share. Our StockScouter rates this stock a 6 out of a possible 10.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: AIG American International Group. He doesn't own short positions in any stock mentioned in this column.
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