What are we looking for?
North American insurance companies with strong fundamentals.
The screen
Insurance companies sell policies to people and businesses and collect premiums that they hold until a later date to pay out claims. These paid premiums, called float, are then invested for the duration of the policy to generate earnings for the company.
Underwriting profits – when the premiums received exceed total expenses and claims losses – are another source of revenue. Although many firms run underwriting losses in their insurance business and focus on earnings through investment activities, I only screened for firms that had underwriting profits. To calculate this, analysts use the "combined ratio" by taking the sum of claims losses and expenses divided by earned premiums. A combined ratio below 100 per cent results in an underwriting profit and the lower the ratio, the better.
I also filtered insurance companies with five-year average revenue growth above 5 per cent, market capitalization above $1-billion (U.S.) and a price-to-earnings ratio lower than 20. On a valuations basis, firms with a price-to-tangible-book-value per share of less than 1.5 times were included.
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What did we find?
I used Thomson Reuters Eikon and found 12 insurance companies that fit my screening criteria. MetLife Inc. is a global provider of insurance services based in the United States. The firm is trading at an attractive price-to-tangible-book-value around one with a dividend yield of nearly 2 per cent. The firm has a return of equity of nearly 10 per cent and has been aggressively buying back shares, a positive indicator.
Fairfax Financial Holdings Ltd. is a Canadian-based holding company engaged in the insurance and reinsurance business. The company's combined ratio of 85 per cent shows their ability to effectively manage expenses while mitigating claims losses. Prem Watsa has grown the company's book value by 20 per cent annually since founding the company in 1985 and is known as "the Canadian Warren Buffett" for his value investment style.
Charles Martin, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.