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In my regular appearance on CNBC's Morning Call on Wednesday, I picked these well-run, financially strong insurance companies that stand to benefit from increases in the premiums for property-and-casualty insurance.
Berkshire Hathaway. Let's start at the top of the insurance food chain. Berkshire Hathaway's General Re and National Indemnity units are major reinsurance players. As reinsurers, they buy risk from insurance companies that want to limit their own exposure in case of a catastrophic event. Such as a hurricane. Or, as in 2005, multiple hurricanes. The combination of Katrina, Rita and Wilma cost Berkshire Hathaway's reinsurance businesses $3.4 billion in losses in 2005. But so strong is the company's overall insurance business, which includes the Geico low-cost auto insurance franchise, that Berkshire Hathaway managed a $53 million underwriting profit in 2005. So the company had temporary use of $49 billion in float (money paid in premiums today that will be paid out in claims in the future). And thanks to the slight underwriting profit for 2005, once more Berkshire Hathaway could invest this money at no cost. In 2006, thanks to premium increases, that cash float should be even larger, and barring a hurricane season that's worse than that of 2005, Berkshire Hathaway should again pay nothing for the use of this money. In 2005, the company used part of this float to make five acquisitions: Medical Protective (a medical malpractice insurer), Forest River (a recreational vehicle manufacturer), Business Wire (a distributor of corporate information), Applied Underwriters (a provider of payroll services and workman's compensation insurance), and PacifiCorp (an electric utility serving six Western states.) StockScouter doesn't rate these shares.
Philadelphia Consolidated (PHLY, news, msgs) operates in a very profitable array of niches in the property-casualty market. About 47% of its commercial policies (which in turn make up 72% of its business) go to social service organizations. Other niches include insurance for health and fitness centers, daycare providers, private schools, condo associations, bowling centers and office parks. The customers in these niches buy relatively small policies -- with premiums averaging $7,000 to $8,000, according to Piper Jaffray -- but make smaller claims, too. That combination makes Philadelphia Consolidated one of the most consistently profitable underwriters of property and casualty insurance. Over the last 10 years, the company shows a combined ratio of almost 90%, meaning that it made an underwriting profit of 10 cents on every premium dollar. (Any investment income would be on top of that underwriting profit.) For 2006, management has told Wall Street to expect organic revenue growth of about 15% and a combined ratio of between 80% to 85% (for an underwriting profit of 15% to 20% on every premium dollar). Projected earnings per share will be $2.70 to $2.80. The stock recently traded at 12.8 times projected 2006 earnings per share. Our StockScouter rates these shares a 7 out of a possible 10.
HCC Insurance Holdings (HCC, news, msgs) got whacked by the hurricanes of 2005 and by the hurricanes of 2004 -- but thanks to careful underwriting and the purchase of reinsurance, losses were relatively minor, amounting to $74 million (after reinsurance in 2005) and $55 million in 2004. That's typical of this multiline insurance company. HCC Insurance Holdings has shown itself adept are shifting between market niches to maximize profits from premiums -- the combined ratio was 93% in 2005 -- and to minimize risk. Despite the hurricanes of 2005, HCC Insurance managed a 15% return on equity for the year. Wall Street is projected earnings of $2.63 a share in 2006. Recently the stock was trading at 12.4 times projected 2006 earnings per share. Our StockScouter rates these shares an 8 out of a possible 10.
And as always I have two "exclusive" picks for readers of CNBC.com on MSN Money.
Cincinnati Financial (CINF, news, msgs). Cincinnati Financial had a tough year in 2005. Competition from other Midwestern insurers kept the combined ratio in the company's property-and-casualty business to 84% in the fourth quarter. (Remember that means 16 cents in underwriting profit on every dollar in premiums.) That was down from a 83% combined ratio in the fourth quarter of 2004. Of course, even a bad year for Cincinnati Financial would be a good year for most insurers. Commercial property and casualty insurance, one of the fastest growing parts of the company's business, showed a combined ratio of 87% in 2005. That's better, according to A.G. Edwards, than the low 90% range reported by commercial insurers even after excluding their hurricane-related losses. On top of that underwriting profit, the company saw investment income grow by 9% in the fourth quarter of 2005. The stock recently traded for 14.8 times projected 2006 earnings per share. It yields 3%. Our StockScouter rates these shares an 8 out of a possible 10.
W.R. Berkley (BER, news, msgs). W.R. Berkley reported the best quarter in its history to end 2005. Part of the story was an improved combined ratio: 87% in the fourth quarter of 2005 versus 90% in the fourth quarter of 2004. But the big story was a huge 38% surge in investment income. (About 20% of this is parked in short-term cash equivalents, according to Ferris, Baker Watts, so the company is decently positioned if interest rates go up.) According to management, 2006 and 2007 won't bring much of a fall off: Operating return on equity will exceed 20% in 2006 and be near 20% in 2007, only slightly below the 25% of 2005. Premiums are projected to increase by 6% to 12% in 2006. The Wall Street consensus calls for earnings growth of 17% in 2006. Recently the stock traded at 12.7 times projected 2006 earnings per share. Our StockScouter rates these shares an 8 out of a possible 10.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Berkshire Hathaway. He does not own short positions in any stock mentioned in this column.
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