Tuesday, November 11, 2014

2014 Good Year for Insurance

My insurance holdings are all doing well in 2014. I am not a swing-for-the-fences type of guy. I'd much prefer staid consistent returns. And insurance companies give me that — for now. Insurance companies are strictly regulated in the US. An insurance company requires a license from state regulators in whatever state it wants to operate. The regulators set guidelines for drawing up the liabilities, i.e., the reserves. This is especially true for life insurance companies. People's life expectancies are very well understood, and when a company combines thousands of policies together, the result is a very predictable income and payment stream. Life insurance is also a commodity because there is little room for innovation. For these reasons, life insurance companies are in a competitive low-margin business. On the other hand, many trade considerably below book. Kansas City Life (KCLI) is a case in point. The company's 3 month and 9 month earnings so far this year are in line with last year. But this is just a 4% return on equity! This is a paltry return for a company with no top line growth.

I also own AIG. AIG specializes in both life and property and casualty (P&C). The company's third quarter results was pretty much inline with a year ago period. AIG is now in its first quarter without Benmosche as CEO since 2009, when he steered the company out of the financial disaster. AIG's return on equity is better than KCLI but its relative market to book value is about the same, as shown below. But AIG is a more dynamic company and has much greater potential to improve results despite its larger size.

For comparison purposes, I have also included in the table two life insurance companies that I do not own. Independence Holdings (IHC) sells life and health insurance, and National Western Life (NWLI) sells life insurance along with a lot of annuities. The final insurer in the table is European Reliance (EUPIC). This company sells life, health and car insurance, among other services. It looks better than the others by all metrics. The downside to the company is that it is in Greece. But I bet few would know that after four years of negative GDP, the country is poised to be positive again in the coming quarter. And in my opinion, the dirt cheap stock price gives me ample margin of safety against the company's risks; I EUPIC is a much better stock to own than KCLI. And therefore, I plan to close my KCLI position and use the proceeds to add to my EUPIC position.

Price $ 50.000 $ 54.000 $ 14.220 $ 271.970 € 1.440
Market Cap 548.40 M 75.60 M 249.96 M 988.88 M € 39.60 M
($ 49 M USD)
P/E TTM 19.5 x 8.5 x 10.9 x 9.4 x 3.9 x
Div yield 2.2 % 0.9 % 2.5 % 0.1 % 0 %
P/BV 0.72 0.70 0.85 0.64 0.60
ROE3.7 % 8.2 % 7.8 % 6.9 % 15.5 %
ROA0.62 % 1.68 % 1.95 % 0.94 % 3.25 %

ITIC also reported earnings. The company earned $7.0M for the first 9 months versus $13.0M last year. This dramatic drop was not because of a drop in revenue, which was only slightly down, but due to positive effects of claim provisions last year. ITIC sells title insurance; however, I don't really think of it as an insurance company like the other five mentioned in the earlier table. Title insurance claims are a tiny fraction of the premium — less than 10% — and they don't take long to occur. If a claim is made on a policy it usually happens within a few years after purchase. Also, part of the cost of the title insurance policy is the title search that the insurer must perform. So, ITIC can be considered a service company as much as an insurance company.

And my fifth and final insurance company, Wellpoint, reported Q3 revenues up 4% and income up 3%. And most importantly, year end EPS guidance is now around $8.88, up from $8.81. The stock has gone up almost 40% year-to-date. Even the midterm elections last week couldn't drag it down. The Republicans now control both houses of Congress and now can ram through legislation to repeal Obamacare. Their rhetoric says they will too. Of course if they do president Obama will veto it and the Republics do not have the votes to override the veto.

Still, I was pleasantly surprised at the lack of reaction from the market. But I am really not at all concerned by the election results. Obamacare is most widely know for the individual mandate, which is mostly provided by the public exchanges. But the public exchanges only provide 750k customers out of 37M. Wellpoint is doing well now mainly because of better management and the benefits from medical insurance expansion through many aspects of Obamacare. If the Republicans do succeed somehow in changing healthcare, it will only be to tweak this system of private insurance with subsidies for the poor. But the spirit of Obamacare is here to stay. So Wellpoint will benefit no matter which party runs the government after Obama leaves in 2017.


  1. Hi, I was looking at EUPIC and was wondering if you had a chance to look at their bond portfolio...the reports show that they are holding for about 102M Euros of Government bonds..

    Do you have an idea from what country are these bonds?


    1. I don't remember 102M Euros in bonds. But my understanding is that they have about 50% of their assets in govt bonds and 12.5% are in Greek govt bonds. So that is about 6.5% of their total assets are Greek bonds which are going to take a haircut in the current quarter. The rest they said are high quality bonds such as US and first-tier european countries.

      BTW do you read Greek? I need help understanding the following announcement about the special shareholder meeting.



    2. Thanks bb for the reply...

      Unfortunately, I only speak French and English...I've google translated the document and it is mostly the usual stuff that relates to annual meetings...nothing really special about it

      You are correct when you say that about 50% of their portfolio is in gvt bonds. 6.5% to Greek bonds exposure isn't gonna hurt much i think...I like the margin of safety here...

      I'm a big fan of you blog now as I owned a few of the names that you mention in the past (itic, nwli, kcli, aig)

      Keep up the good work!


    3. Thanks for the feedback. It gets lonely writing this blogs sometimes!

      I am glad you find the info useful. But in the spirit of full disclosure I must tell you that I have sold out my ITIC and KCLI positions (both on valuation).

      good luck!