Stock buybacks are often a good way for companies to reward shareholders. However, many buyback authorizations are never fully implemented and, even worse, companies that are poor capital allocators often buy company stock when valuations are rich. After all, that’s when the company has the excess cash to begin with. I own two insurers that don’t fall into that trap: Platinum Underwriters Holdings (PTP) and XL Group (XL).
I note these two stocks not just because I own them, but because I’ve followed them for some time and have respected their stock buyback behavior. Both are shrinking their share base significantly and at attractive prices. Insurers are a bit different from typical companies. For insurers, it’s okay to shrink the company when prospects are poor. In fact, it’s a sign of discipline. Pricing has not been good in some time for many segments and increased uncertainty can lead to poor underwriting. When an insurer is confident in its reserving and still trades at or under book value, it makes sense to buy back shares and to do it aggressively.
I first came across Platinum Underwriters just for that reason. Back in March, I pointed out it had bought back more than 20% of its shares in 2010 and had authorization to buy back $250 million more. It's slowed that down so far this year because of big losses in Japan, but still has the ability to buy back an additional 7.5 million shares, which works out to another 20%. As of the last quarter, Platinum Underwriters' tangible book value per share is $50.20. That makes its price to tangible book 0.7. That’s incredibly cheap. Tangible book is a good measure for an insurer when management is decent at reserving. Anything less than one is cheap.
XL Group recently reported a tremendous quarter. It bought back 5% of its shares in 2010, and has been even more aggressive so far this year. It still has authorization to buy back $440 million of company shares from an original $1 billion buyback plan. That’s another 6.5% of the current outstanding shares. According to its latest conference call, the company intends to follow through. This is after buying back 4 million shares in the second quarter and 7 million in the first, or cumulatively about 3% of the outstanding shares. Like Platinum Underwriters, XL Group trades at a price to tangible book value of 0.7.
The common thread among these two insurers is strong leadership. For XL, it’s CEO Mike McGavick, who sets a very strong tone for the company. For Platinum Underwriters, CEO Michael Price stresses underwriting profit, not volume. That’s the stated goal of many insurers, but it’s not how many insurers operate. One way you can tell these two leaders are serious about being disciplined is in the buyback behavior of each company. They buy when valuations are cheap and they’re comfortable with selling fewer policies until pricing improves.
Either one of these insurers would be good bets. XL Group is about five times larger than Platinum Underwriters and has a more diverse line of insurance products in addition to its reinsurance line. XL Group is still recovering somewhat from some negatives during the financial crisis, and before it brought McGavick on board. Both stocks are trading at valuation levels that are historically low for them, and both are continuing to get cheaper as their share count decreases.