Hedge funds' 13F filings came out a few weeks ago and they're always a good way to follow some of the heavy hitters. Looking through John Paulson's filings, I saw three insurers in which he has significant positions: XL Group (XL), Hartford Financial (HIG), and CNO Financial (CNO). Earlier this year I wrote about XL Group and Hartford. In fact, after writing about XL Group, I went out and bought some shares. The stock hasn't performed well since then, down about 2.5%, but shares are still incredibly cheap and I'll be a long term holder.
The entire sector is out of favor for a variety of reasons. Pricing has been poor, the threat of inflation looms, municipal bonds may explode, and no one wants to get blown up again like they did in 2008. Pricing has been poor because the balance sheets of many insurers are just too good. The tragedies in Japan, New Zealand, Australia and, more recently, in the U.S. have affected those balance sheets. I expect pricing to improve. Don't just believe me, though. Steve Eisman from FrontPoint Partners told attendees of the Ira Sohn Conference that he liked property-casualty insurers. If you're too chicken to buy the actual insurers, he suggested brokers like Marsh & McLennan (MMC) and Aon (AON).
Looking at price to book ratios alone, we can see why Eisman and Paulson are so bullish. Multiples are depressed, the strong and smart insurers have been buying back shares, and conditions and pricing are improving. If you can hitch a ride on an insurer who can grow book value, and just get that P/B ratio back to something reasonable when compared to the past, you're going to see a nice gain.
Hartford Financial: I wrote an article called, "Is Now the Time to Buy Hartford Financial?" back in early February. My conclusion then was … maybe. Shares were cheap then, and they're even cheaper now. I think there are better options out there, but I do continue to think Hartford shares are cheap. Their current P/B is 0.6. Historically it's closer to 1.5. Paulson has owned this baby since Q3 of 2009 and he really likes it. He owns nearly 10% of the company and it makes up about 3.5% of his portfolio.
XL Group:: XL Group sports a lower market cap and higher P/B ratio than Hartford, but I like XL Group more because Hartford seems to be a grow at all costs insurer. Hartford seems to care more about market share than pricing. XL Group CEO Michael McGavick is the opposite. This insurer is adept at going into insurance lines that are most profitable for them. Believe me when I say that McGavick is a rock star and you could do much worse than hitching your ride with him. Or, better yet, don't believe me. Just ask some industry insiders. This guy knows what he's doing. You've got a P/B of 0.7 here when it should be closer to 1.4. Plus, book value will grow considerably from here, which will give you a positive double whammy. That's probably why Paulson owns 9.5% of the company and has ramped it up in the first quarter, buying nearly 21 million shares. Learn more by reading one of my articles on XL from January: "Four Cheap Reinsurers to Research: Historically Low Price to Book."
CNO Financial: Paulson also owns nearly 10% of the CNO Financial. He hasn't made any recent transactions with it, and has held shares since Q3 2009. I mentioned the stock in an article in March: "Four Insurers Hitting New Highs on a Down Day." As the title would suggest, Paulson has done pretty well with this holding. Even so, P/B is still only 0.4. He agitated for change here a few years ago, and shares have steadily climbed since. It appears there is plenty more room to go. I'm staying clear because I'm not a fan of life insurers and annuities, but I can see how Paulson is comfortable taking that risk on for such a low multiple. A couple of weeks ago the company announced a $100 million share repurchase program. Considering the market cap is less than $2 billion, that's a bullish sign.
Disclosure: I am long XL.