Monday, December 16, 2013

Why I Own Insurance Stocks

Over my investing years, I have tried to make some general rules to hopefully help me avoid trouble. Currently, my general minimum critera are:
  1. low PE
  2. profitable over last several years
  3. low debt requirement for operations, and
  4. domiciled in a developed country

I have other requirements which are desirable but not necessary: I prefer small caps, and I have touched on it extensively in this blog.

When I initially invested and wrote about it last year, AIG fits the criteria except that it hasn't been profitable recently. But that was last year. In the year plus since, it has earned money consistently. In all, AIG has been profitable the last 9 consecutive quarters. I feel that companies that don't regularly need tons of capital expenditures are in general better investments. That's in general Warren Buffet's strategy up until recently when he bought Burlington Southern.

I bought AIG over a year ago when it was $30, and was trading at around 0.6x book. Since then it has run up to $50. A year after I bought AIG I tried to find a small cap company like it. I found Kansas City Life Insurance to be a small cap that also trades at 0.6x book; 0.6x is just about the lowest book I could find for insurance companies. KCLI has since run up 30%. The following table summarizes KCLI and AIG today

AIG does primarily Property and Casualty and Life Insurance and Annuities. KCLI only does Life Insurance and Annuities. AIG also owns ILFC, which is a aircraft leasing business. Just today, AIG announced it will divest ILFC to another company, AerCap. Although I don't think AIG will have any gains or losses from this transaction, I think it is yet another sign that AIG's dark days of five years ago are behind them.

My other insurance holding is Wellpoint; but then again WLP is not really an insurance company as much as a healthcare company. I have written many times about WLP as my bet on Obamacare. I have never really heard of any other investor taking my view. Until I saw a Forbes piece on Larry Robbins. Larry Robbins runs a hedge fund that is one of the best performers this year because he made a big contrarian bet on the healthcare sector. After following the hedge fund moves in the last year, it seems like to me the hedge funds are just being too conventional when their name implies that they should act contrarian.

My bottom line is, I am really liking insurance right now!

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