Big banks have been the beneficiaries of higher interest rates and a surge in new investments. Now it’s the insurance companies' turn to grab the attention of the gurus.
New York-based insurance behemoth American International Group Inc. (AIG, Financial) got noticed by NWQ Managers (Trades, Portfolio), based in Los Angeles. Acting on more than a hunch for rising interest rates, the investment firm also initiated a top position in Aspen Insurance Holdings (AHL, Financial), which is based in Bermuda.
The two stocks made their most recent debuts in the asset manager’s portfolio in the final months of the year. The $6.9 billion portfolio added about a dozen new positions out of a total of 195 stocks. Other lower weighted new buys were in companies like Kaiser Aluminum Corp. (KALU, Financial), Deckers Outdoor Corp. (DECK, Financial), Astronics Corp. (ATRO, Financial), Snap-on Inc. (SNA, Financial) and Comcast Corp. (CMCSA, Financial).
While the two insurance companies have been plagued by negative or weak earnings before interest, taxes, depreciation and amortization per share, there is an expectation among investors that better results are in store. The economy is humming along as unemployment is at a 17-year low and inflation just below the target set by the nation’s central bank. The optimism is likely to spread to insurers’ bottom line, as people have more discretionary funds to go shopping for cars, electronics, travel and apparel. Insurers are also expected to get a boost from bond yields that flourish when interest rates go up. On Wednesday, the Federal Reserve said it would raise its benchmark rate to a range of 1.5% to 1.75%. It is the sixth time it has made such a move since the financial crisis.
NWQ Managers is a value investor in the traditional sense. It has an opportunistic frame of mind and seeks out buys in overlooked patches of territory or areas that have fallen out of favor. Its outlook is long term and heavy research is involved before any stock-picking is done.
Of NWQ’s portfolio, 31% is in financial services, 14% in technology, 13% in energy while the remainder is in consumer cyclical, industrials, health care and basic materials.
Turning things around
It’s no secret that insurers have not been amassing earnings lately.
EBITDA per share for AIG in the most recent reporting period stood at $6.99 a share, up from $4.84 in the prior year.
Aspen reported a loss in EBITDA per share of $3.18 compared to the prior year’s gain of $4.70 per share.
Rising revenue per share
The revenues of both companies rose year over year.
In December, both Aspen and AIG reported increases in revenue per share.
AIG reported revenue of $53.22 per share, compared to $48 in the prior year.
Aspen posted revenue of $44 per share, a drop from the prior year of $47. But revenue per share has been mostly on the rise since recessionary years.
The stocks of both companies were trading higher on Wednesday.
AIG's stock price has seen a 6% decline year to date. It stood at $55.89 a share, up 0.47%, on Wednesday.
Aspen saw its stock surge 9% year to date. In Wednesday trading, the stock was at almost $44 a share.
AIG
In the final months of the year, NWQ Managers (Trades, Portfolio) purchased more than 988,000 shares of AIG, which sit in 0.85% of the portfolio. The average price in the fourth quarter was $61.45 a share. Since the buy, shares have lost an estimated 9%.
The guru last sold out in the second quarter of 2017. It sold a final 4,000 shares from a high of 100,000 shares in the second quarter of 2016. The sale price in the second quarter of 2017 was $62 a share.
It's been 10 years since the Federal Reserve stepped in to pull AIG from bankruptcy. An infusion of $85 billion kept the giant insurer going and American banks from folding along with it.
Since then, the company’s long-term debt has been reduced to $31 billion from $192 billion in 2008. It paid an annual $1.2 billion in interest expense in 2017.
AIG has a market cap of $50 billion. Its price-book ratio is 0.77, versus a median of 1.25. The price-sales ratio is 1.07 versus an industry median of 1.04. It has a dividend yield of 2.29% versus an industry median of 3.98%.
According to the Peter Lynch chart, the company’s stock is above the price-earnings and median price-earnings without non-recurring items lines.
Aspen
Aspen has a market cap of $2.6 billion.
The company’s long-term debt has grown to $594 million from $250 million a decade ago. In 2017, it paid an annual $30 million in interest expenses.
NWQ bought 1.2 million shares in the fourth quarter, paying an average of $41.36 a share. Since the buy, the investment gain is an estimated 6%. The shares take up about 0.7% portfolio space.
The guru last sold out of the stock in the second quarter of 2014, when it owned 624,000 shares. The average price per share was $44.79.
Aspen's price-book ratio is 0.90 versus a median of 1.15. The company’s price-sales ratio is 1 versus a median of 1.50. Its dividend yield is 2.19% versus an industry median of 3.46%.
Its stock price is above the earnings line in the Peter Lynch chart below.
