When one thinks of publicly traded insurers, one's mind might drift to companies like MetLife (MET) and Prudential (PRU). But there is a universe of smaller, niche insurance companies, with dividend yields much higher than what the high market capitalization insurers pay. I am going to take a close look at one of those companies, Universal Insurance Holdings (UVE), and compare it with peers Homeowners Choice (HCII), Travelers (TRV), and Metlife.
Universal is a vertically integrated insurer, specializing in homeowners' policies in limited states. It makes no effort in markets like auto or commercial insurance, let alone life, health, or disability. What it does, homeowners, renters, and related policies, it does so in an integrated manner, handling underwriting, loss prevention, and claims. The company historically has operated exclusively in Florida, but has now gotten itself licensed to expand into the Carolinas, Georgia and Hawaii. This expansion will help to diversify Universal's risk profile. But it is still a Florida company, as it had on March 31, 2012 584,000 policies in place in Florida, and a total 16,500 policies in place in other four states combined.
From an earnings perspective, an uptick in expenses due to expansion and new accounting rules helped to drive down Universal's first quarter earnings down by 28% from $13.9 million or $0.34 per share a year ago, to $9.9 million, or $0.24 per share in the first quarter of 2012. Going forward, I look for substantial revenue gains as the company is more than just expanding geographically; it has pushed insurance premiums increases through of up to 15% in Florida.
For a smaller insurance carrier, its balance sheet is in pretty good shape with only $50 million in long term debt. But what really stands out about Universal is its dividend. It has been irregular over the past year, but in setting the quarterly rate at eight cents a share for the second quarter, management indicated its intent to maintain that through the rest of this year. That gives it a yield of 9.7%. The stock has traded more or less flat for the past 18 months, and as revenues and earnings increase in the second half of 2012, I expect the stock price to follow, and view Universal as a fine long term investment for the risk tolerant investor. Yet, given how thinly traded this company is, I thought it appropriate to offer a corresponding hedge, as a short position to counter Universal's long position. For that, I offer Homeowners Choice, by many measurements the virtual twin of Universal. Homeowners, as the name implies, specializes in homeowners and property insurance exclusively, again, in Florida.
Homeowners started as a virtual cooperative, "insurance for Floridians, by Floridians." It went public in July 2008, and has maintained profitability each of the sixteen quarters since then. Its recent financial performance has been remarkable. In the first quarter of 2012, it recorded revenue of just over $41 million, over twice the year earlier quarter's revenue. Profits soared, to $6.8 million, or $0.88 per share, compared to $800,000, or twelve cents per share in the first quarter of 2011. Much of this growth was due to the mid 2011 acquisition of Home Wise Insurance. The stock market agreed that Homeowners was doing well, and its shares have been bid up about three fold in the past 52 weeks.
This sort of growth in revenue and income growth, while admirable, certainly cannot continue indefinitely, and when the financial reports do come back down to earth, Homeowners stock may well land with a thud. I believe that these two companies, of similar size and in an identical market niche, pair well with one another. As I write this, Homeowners is suffering from a profit taking spree, and the stock is down to $18 per share. If covered at 22 per share, a short sale of Homeowners to hedge Universal makes sense for an investor who can afford some risk.
Of course, larger insurance carriers can make fine additions to your portfolio. My favorite big cap property insurance carrier right now is Travelers. This carrier had another in a string of strong financial quarters, highlighted by a combined ratio 92.2%. In today's low interest environment, being able to run the insurance company profitably without the need for investment income is a real key. Of course, a company like Travelers typically has plenty of investment income, and in the first quarter that totaled $740 million pretax. After tax income actually fell from $839 million a year ago to $806 million in the first quarter of 2012. As growth slugs along, I look for Travelers underwriting revenues to increase in the second half of this year. A lot of bad things might happen to the domestic economy in 2013, but if it Congress gets its act together, Travelers will build its business at the same pace as business growth. This socially and environmentally progressive company sports a 2.9% dividend yield, and is a suitable holding for conservative investors.
MetLife is another big company I am looking at right now in the life, health and disability sector. MetLife had expected by now to have sold its retail banking division to General Electric (GE). But regulators have been slow to approve the transaction, which when completed will do much to rid MetLife of FDIC interference in what will no longer be a bank, but will rather be a pure insurance company.
In the first quarter of 2012, premium income rose 7% from the first quarter of 2011, but due to a one time, $1.3 billion derivative loss, MetLife suffered an overall loss of $174 million, or $0.16 per share. Operating earnings of $1.46 billion were 11% ahead of the year earlier total, and six percent above analysts' expectations. MetLife is expected to post operating earnings this year of $5.22 per share, a four percent advance from last year.
But the story here is one of valuation. MetLife is selling for just over half its book price, and at a 25% discount to the price it was at this spring. Over the long run, it aims to get 20% of its operating earnings from developing countries, and boost returns on equity to 14%. If that happens, the stock is worth twice where it trades today, even assuming a below average price to earnings ratio. I view MetLife, with a current yield of 2.4%, as a long term core holding candidate.