My Top Insurance Stocks For 2015

|
Includes: AEL, AFG, AFSI, AGO, AHL, ALL, AMSF, ARGO, AWH, AXS, DGICA, EIG, ESGR, FAC, FNHC, HCI, IHC, LNC, MET, MHLD, NAVG, ORI, PFG, RGA, SIGI, SLF, THG, UIHC, WRB
by: Stan Stafford

Summary

In this series of articles, I will be reviewing individual industry sectors and selecting my favorite stock picks for 2015.

For Part 33, I will be reviewing the Insurance industry sector, taking a look at revenue/earnings growth and the overall financial stability of the companies.

Out of this group of reviewed stocks, my top picks for 2015 are Allied World Assurance, Employers Holdings, and Reinsurance Group.

Overview

In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2015. In Part 1, I reviewed 47 stocks within the Aerospace and Defense industry sector. For part 33, in determining my favorite stocks in this sector for 2015, I will review the following Insurance stocks:

  • ACE (NYSE:ACE)
  • Aflac (NYSE:AFL)
  • Alleghany (NYSE:Y)
  • Allied World Assurance (NYSE:AWH)
  • Allstate (NYSE:ALL)
  • Ambac Financial Group (NASDAQ:AMBC)
  • American Equity Investment Life (NYSE:AEL)
  • American Financial Group (NYSE:AFG)
  • American International (NYSE:AIG)
  • American National (NASDAQ:ANAT)
  • Amerisafe (NASDAQ:AMSF)
  • AmTrust Financial Services (NASDAQ:AFSI)
  • Aon (NYSE:AON)
  • Arch Capital Group (NASDAQ:ACGL)
  • Argo Group International (AGII)
  • Arthur J Gallagher (NYSE:AJG)
  • Aspen Insurance (NYSE:AHL)
  • Assurant (NYSE:AIZ)
  • Assured Guaranty (NYSE:AGO)
  • Axis Capital Holdings (NYSE:AXS)
  • Baldwin & Lyons (BWINB)
  • WR Berkley (NYSE:WRB)
  • Brown & Brown (NYSE:BRO)
  • Chubb (NYSE:CB)
  • Cincinnati Financial (NASDAQ:CINF)
  • CNA Financial (NYSE:CNA)
  • CNO Financial Group (NYSE:CNO)
  • Crawford (NYSE:CRD.A)
  • Donegal Group (NASDAQ:DGICA)
  • EHealth (NASDAQ:EHTH)
  • EMC Insurance (NASDAQ:EMCI)
  • Employers Holdings (NYSE:EIG)
  • Endurance Specialty (NYSE:ENH)
  • Enstar Group (NASDAQ:ESGR)
  • Erie Indemnity (NASDAQ:ERIE)
  • Everest Re Group (NYSE:RE)
  • Fairfax Financial Holdings (OTCQB:FRFHF)
  • FBL Financial Group (NYSE:FFG)
  • Federated National (NASDAQ:FNHC)
  • Fidelity & Guaranty Life (FGL)
  • Fidelity National Financial (NYSE:FNF)
  • First Acceptance (NYSE:FAC)
  • First American Financial (NYSE:FAF)
  • Genworth Financial (NYSE:GNW)
  • Global Indemnity (NASDAQ:GBLI)
  • Greenlight Capital Re (NASDAQ:GLRE)
  • Hallmark Financial Services (NASDAQ:HALL)
  • Hanover Insurance (NYSE:THG)
  • Hartford Financial Services Group (NYSE:HIG)
  • HCC Insurance Holdings (NYSE:HCC)
  • HCI Group (NYSE:HCI)
  • Health Insurance (NASDAQ:HIIQ)
  • Horace Mann Educators (NYSE:HMN)
  • Independence Holding (NYSE:IHC)
  • Infinity Property and Casualty (NASDAQ:IPCC)
  • Investors Title (NASDAQ:ITIC)
  • Kansas City Life (NASDAQ:KCLI)
  • Kemper (NYSE:KMPR)
  • Lincoln National (NYSE:LNC)
  • Loews (NYSE:L)
  • Maiden Holdings (NASDAQ:MHLD)
  • Manulife Financial (NYSE:MFC)
  • Markel (NYSE:MKL)
  • Marsh & McLennan (NYSE:MMC)
  • MBIA (NYSE:MBI)
  • Meadowbrook Insurance (NYSE:MIG)
  • Mercury General (NYSE:MCY)
  • MetLife (NYSE:MET)
  • Montpelier RE Holdings (NYSE:MRH)
  • National Interstate (NASDAQ:NATL)
  • National Western Life Insurance (NASDAQ:NWLI)
  • Navigators Group (NASDAQ:NAVG)
  • Old Republic International (NYSE:ORI)
  • OneBeacon Insurance Group (NYSE:OB)
  • Phoenix Cos (NYSE:PNX)
  • Primerica (NYSE:PRI)
  • Principal Financial (NYSE:PFG)
  • Progressive (NYSE:PGR)
  • Prudential Financial (NYSE:PRU)
  • Reinsurance Group (NYSE:RGA)
  • RenaissanceRe Holdings (NYSE:RNR)
  • RLI (NYSE:RLI)
  • Safety Insurance Group (NASDAQ:SAFT)
  • Selective Insurance Group (NASDAQ:SIGI)
  • StanCorp Financial Group (NYSE:SFG)
  • State Auto Financial (NASDAQ:STFC)
  • Stewart Information Services (NYSE:STC)
  • Sun Life Financial (NYSE:SLF)
  • Symetra Financial (NYSE:SYA)
  • Third Point Reinsurance (NYSE:TPRE)
  • Torchmark (NYSE:TMK)
  • Travelers Companies (NYSE:TRV)
  • United Fire Group (NASDAQ:UFCS)
  • United Insurance Holdings (NASDAQ:UIHC)
  • Unum (NYSE:UNM)
  • Validus Holdings (NYSE:VR)
  • White Mountains Insurance Group (NYSE:WTM)
  • Willis Group Holdings (WSH)
  • XL Group (NYSE:XL)

Step 1

The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of these stocks within the industry sector. I removed the following stocks from further review because of their negative or flat (less than 3%) earnings growth over the past five years:

  • ACE
  • American International
  • Arch Capital Group
  • Baldwin & Lyons
  • Cincinnati Financial
  • CNA Financial
  • CNO Financial Group
  • EHealth
  • EMC Insurance
  • Endurance Specialty
  • Fidelity & Guaranty Life
  • Genworth Financial
  • Global Indemnity
  • Hallmark Financial
  • Health Insurance
  • Infinity Property & Casualty
  • Kemper
  • Loews
  • Markel
  • Meadowbrook Insurance
  • Mercury General
  • National Interstate
  • OneBeacon Insurance Group
  • Phoenix Companies
  • Primerica
  • Prudential Financial
  • RenaissanceRe Holdings
  • Third Point Reinsurance
  • Unum
  • Validus Holdings
  • Willis Group Holdings
  • XL Group

Step 2

I then took the list of remaining stocks and checked the revenue growth of each over the past two years. I am removing any stocks that had flat (less than 4%) growth or saw a decline in revenue over the past two years. These stocks include:

  • Aflac
  • Ambac Financial Group
  • American National
  • Aon
  • Chubb
  • Crawford
  • First American Financial
  • Greenlight Capital Re
  • Hartford Financial
  • HCC Insurance Holdings
  • Horace Mann Educators
  • Investors Title
  • MBIA
  • Montpelier RE Holdings
  • National Western Life
  • StanCorp Financial Group
  • State Auto Financial
  • Stewart Information
  • Symetra Financial
  • White Mountains Insurance

Step 3

My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 1 to focus more specifically on fairly valued/undervalued stocks. These stocks included:

  • Alleghany
  • Arthur J Gallagher
  • Assurant
  • Brown & Brown
  • Erie Indemnity
  • Everest Re Group
  • Fairfax Financial Holdings
  • FBL Financial Group
  • Kansas City Life
  • Manulife Financial
  • Marsh & McLennan
  • Progressive
  • RLI
  • Safety Insurance Group
  • Torchmark
  • Travelers Companies
  • United Fire Group

Step 4

The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here.

  Fundamental Score Value Score
Allied World Assurance 9 10
Allstate 7 9
American Equity 6 5
American Financial Group 9 9
AMERISAFE 8 10

AmTrust Financial Services

9 7
Argo Group International 6 10
Aspen Insurance Holdings 9 10
Assured Guaranty 9 10
Axis Capital Holdings 9 9
WR Berkley 9 10
Donegal Group 7 9
Employers Holdings 8 10
Enstar Group 8 8
Federated National Holdings 7 10
First Acceptance 2 NA
Hanover Insurance 9 10
HCI Group 8 8
Independence Holding 9 10
Lincoln National 8 10
Maiden Holdings 9 10
MetLife 8 10
Navigators Group 8 9
Old Republic International 6 10
Principal Financial 6 10
Reinsurance Group 8 9
Selective Insurance 8 10
Sun Life Financial 7 9
United Insurance Holdings 9 10

To determine the best stocks for 2015, I'm only taking into consideration stocks that have both a fundamental score and a value score of 8 or higher. Doing this left me with the following remaining stocks:

  • Allied World Assurance
  • American Financial Group
  • AMERISAFE
  • Aspen Insurance Holdings
  • Assured Guaranty
  • Axis Capital Holdings
  • WR Berkley
  • Employers Holdings
  • Enstar Group
  • Hanover Insurance
  • HCI Group
  • Independence Holding
  • Lincoln National
  • Maiden Holdings
  • MetLife
  • Navigators Group
  • Reinsurance Group
  • Selective Insurance
  • United Insurance Holdings

Step 5

My next step was to look at the book value of each company and to remove any stock that has seen a decrease in its book value over the past five years. However, none of the remaining stocks saw a decline in book value during this time period.

Step 6

I then looked at the remaining stocks and only included stocks with earnings yields of 10% or higher in my final analysis. The stocks that had earnings yields lower than 10% are:

  • American Financial Group
  • AMERISAFE
  • WR Berkley
  • Enstar Group
  • Hanover Insurance
  • Independence Holding
  • Lincoln National
  • Maiden Holdings
  • Navigators Group
  • Selective Insurance
  • United Insurance Holdings

Step 7

My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2015. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern.

Allied World Assurance

For its latest quarter, the company reported a 9% increase in revenue and an increase in earnings per share from $0.72 to $1.51 compared to the same period last year.

The company had a strong full year in which it grew book value per share by 12% and net income ROE by 13%. In terms of performance, this company's stock has been about as steady and consistent as they come over the past several years.

AWH Chart

AWH data by YCharts

Aspen Insurance Holdings

For its last quarter, the company posted a 7% increase in revenue and a decline in earnings per share from $1.13 to $0.97 compared to the same period last year. The company had decent full year results, but this was the second quarter in a row in which its missed both revenue and earnings expectations. With its growth rate expected to fall some this year and next, I feel like the stock may be stuck in neutral for the short term even with its currently fairly attractive valuation.

Assured Guaranty

For its last quarter, the company posted a 16% decline in revenue and a decline in earnings per share from $0.73 to $0.50 compared to the same period last year.

I believe the company remains an attractive long term option with its significant share buyback program in place along with the recent purchase of Radian Asset Assurance. I think the buyback program will keep the stock price steady, but I don't see much potential in short-term price appreciation outside of the buyback effect.

Axis Capital Holdings

For its last quarter, the company posted a 14% decline in revenue and a decline in earnings per share from $1.41 to $1.18 compared to the same period last year.

For the full year, there were both positives and negatives to the company's financial results. Gross premiums written were flat, but net income and return on average common equity both increased.

The company's merger with PartnerRe should lead to future growth, and with an attractive valuation I believe Axis Capital has a strong future, but I'm not confident that this will translate into significant short term price appreciation.

Employers Holdings

For its last quarter, the company posted flat revenue and an increase in earnings from -$0.03 per share to $0.44 per share compared to the same period last year.

The company appears in a significantly better position than it was in a year ago with better earnings, better expense ratio, broader exposure, and a better cash position. Looking at the chart below, you can see that Employers Holdings has the best future growth rate in terms of estimates for current/next four quarters out of the eight remaining stocks.

AWH EPS Estimates for Current and Next 4 Quarters Chart

AWH EPS Estimates for Current and Next 4 Quarters data by YCharts

HCI Group

Before looking at last quarter's results, taking a look at the chart just above, you can see that HCI Group is the only stock out of this group that shows a decline in future estimated earnings. This isn't much of a surprise considering the 1% decline in revenue and a slight decline in earnings from $1.31 to $1.30 compared to the same period last year.

Based on recent and estimated future results, there is no reason to assume this stock will perform well in the short-term and in order to perform well in the long-term, there will be significant changes needed by this company.

MetLife

For its last quarter, the company posted a 1% decline in revenue and a 1% increase in earnings per share compared to the same period last year. Looking at the chart below, you can see that MetLife's stock price has been basically stagnant over the past year with lots of very short term ups and downs.

MET Chart

MET data by YCharts

I feel that this trend will continue for the remainder of this year, expecting the stock to not really break out until we see a significant rise in interest rates, which I do not believe will happen in the short term.

Reinsurance Group

In its last quarter, the company posted a 2% decline in revenue and an increase in earnings per share from $2.17 to $2.99 compared to the same period last year.

Unlike, MetLife, Reinsurance has seen a significant increase in its stock price over the past year (over 20%). This has continued a longer trend of price appreciation in this stock, a trend that I feel is likely to continue.

RGA Chart

RGA data by YCharts

Conclusion

Out of the group of remaining stocks, I believe that Allied World Assurance, Employers Holdings, and Reinsurance Group are the most likely to see significant price appreciation throughout the remainder of this year. These three stocks have the highest short term future earnings estimates, but they also each have their own strong points, that I believe make them solid short term bets to beat the market in general.

Looking at the chart below, you can see that Employers Holdings has the lowest debt to equity of the remaining stocks.

AWH Financial Debt to Equity (Quarterly) Chart

AWH Financial Debt to Equity (Quarterly) data by YCharts

While Reinsurance Group has the lowest cash dividend payout ratio and Allied World Assurance has been able to lower its outstanding shares the most over the past five years.

For part thirty four of this series, I will be reviewing the Internet & Catalog Retail industry sector. As always, I suggest individual investors perform their own research before making any investment decisions.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.