Insurance can be a very difficult business to establish an economic moat in. The products and services are often commodity-like in nature, so businesses compete largely on the price of offerings. There are, however, a handful of insurance stocks that have been quietly increasing their dividends year after year, decade after decade, exponentially. Like most insurers, their stocks are at fairly modest valuations right now, even though dividend stocks in general seem to have had a bit of a price increase.
Chubb Corporation (CB)
What happens when a company has almost zero revenue growth over a seven-year period? Well, in Chubb's case, it doubles your money.
Through a combination of increasing dividends and aggressive share repurchases, Chubb's high shareholder yield allows it to give investors good returns even without core growth, and in this case, the company would have roughly doubled your money if you had invested seven years ago and reinvested all dividends. There's nothing substantially different about today compared to back then, except that I expect Chubb to have some modest growth over this period.
The company has among the best underwriting standards out of insurance stocks, allowing them to extract profits both from their investment income as well as their underwriting. Chubb has increased dividends every year since the mid 1960s. See the full analysis of Chubb here.
Cincinnati Financial Corporation (CINF)
Towards the other end of the underwriting profitability spectrum is Cincinnati Financial Corporation. For a number of years now, large spring storms have caused significant damage to their clients and therefore to their own bottom line.
The company seems to be holding on as best as it can to its dividend. With a 4.17% yield, the company has the highest dividend yield on the list. Unfortunately, dividend growth has been almost non-existent in recent years due to the aforementioned underwriting problems. The company had a nice 10% dividend increase for 2008, but after that, started having problems. The dividend stayed flat for six quarters instead of four, but it still grew each calendar year. When it started going up again, it was by a token amount each time. The most recent increase was from $0.40 per quarter to $0.4025 per quarter; an increase of only 0.625%!
The company is hanging on hard to its token dividend growth because the company has one of the longest streaks of consecutive dividend growth in the world, at over 50 consecutive years. Without fail for five consecutive decades, the company has raised dividends every calendar year.
One thing I certainly like about CINF is its portfolio, because it has equity exposure to a variety of companies that produce income for them. Its portfolio is conservative by an investor's standards, with a strong weighting towards bonds rather than equities, but it's a bit more aggressive than some of its peers with pure bond portfolios. I expect its portfolio to do quite well, while still being rather conservative.
The combination of dividend yield and growth, however, is weak. The investment would only make sense if an investor expects profitability and growth to return in the near future.
Aflac Incorporated (AFL)
Aflac offers supplemental insurance primarily in Japan, and also in the United States. Compared to many other insurance stocks, its performance has been strong. Unlike Chubb which has experienced problematic economic headwinds (but excellent underwriting standards and use of capital), and unlike CINF that has had underwriting losses, Aflac has had spectacular core operation performance over the last decade. Revenue is up, underwriting standards are solid, and its brand continues to grow. The company has almost three decades of consistent annual dividend growth.
The catch is that 5-6% of its portfolio consists of debt from the PIIGS countries, primarily Italy and Spain. Aflac has realized billion-dollar impairments over the last few years, which has resulted in an uncertain scenario (and a low stock valuation to go along with it). The company has taken steps to manage risk with regards to its European debt exposure, but there's still $5.6 billion in risky debt to worry about.
If the company grows EPS by 7% per year going forward, and raises the dividend by 15% per year over the next 10 years (which is lower than its recent growth record), then the dividend payout ratio will still be only 50% in ten years. If after that, it maintains a constant payout ratio, then the dividend would grow at the same pace as EPS.
Using a two-stage dividend discount model, with 15% estimated dividend growth for the first 10 years and 6% terminal dividend growth, and using a 12% discount rate, I calculate that the fair price for the stock is $56.
At its current price in the mid-$40s, I think the margin of safety is decent. Therefore, I believe Aflac represents a solid value stock. Risky, uncertain, and most likely volatile, but likely a value as well. See the recent analysis of Aflac here.
Full Disclosure: As of this writing, I am long CB. AFL is on my watch list. You can see my stock portfolio here.