A Tale Of Two Insurers

6/7/2010


Our story begins in the ruins of the financials sector, where despite a profit resurgence in the last three quarters, most of the largest companies are still too risky to own. Within that wasteland, Aflac ($43; AFL) and Travelers ($49; TRV) stand out. Both earn excellent Quadrix scores, as shown below, and both stocks are roughly flat for the year. However, the companies are very different.

Aflac, a provider of supplemental medical insurance, enjoys solid near-term growth potential, with the consensus projecting per-share-profit growth of 12% this year and 9% next year. Concerns about exposure to European bonds have weighed on the shares. Travelers, a property-and-casualty insurer, delivered per-share-profit growth of 25% over the last four quarters, but Wall Street expects weak profits this year and next year.

Both stocks seem capable of double-digit annualized profit growth over the next five years and look cheap relative to that growth potential. Both are Focus List Buys and Long-Term Buys, and we present more information on both companies below.

PIIGS get Aflac dirty

Aflac owns about $4.2 billion in bonds from the five European PIIGS — Portugal, Italy, Ireland, Greece, and Spain — accounting for less than 6% of its investment portfolio. A massive European bailout plan, a series of austerity measures at the troubled countries, and a vote of confidence from China have eased fears of an immediate meltdown.

The euro continues to fall against the dollar, and the threat of further problems in Europe could drag on Aflac shares. By one analysis, Aflac has enough excess capital to absorb a loss of 60% on all of its PIIGS bonds without issuing new equity or debt.

At eight times expected year-ahead earnings, Aflac trades at a 43% discount to its three-year average forward P/E ratio, reflecting a lot of bad news that may never occur. An annual report for Aflac Inc. is available at 1932 Wynnton Road, Columbus, GA 31999; (706) 323-3431, www.aflac.com.

AFLAC
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '10 $1.41 vs. $1.22 + 5% $55.20 -

$45.78

14 - 11
Dec '09 0.80 vs. 0.42 + 8% 47.75 - 39.82 13 - 11
Sep '09 1.18 vs. 0.21 + 23% 44.07 - 28.17 16 - 10
Jun '09 0.87 vs.

1.01

- 1% 37.73 - 17.25 13 - 6
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
90 56 95 83 81 72 23

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.

Travelers has room to move

Expectations for Travelers are very low, with Wall Street projecting a per-share-profit decline of 9% this year, followed by a 2% uptick in 2011. Travelers trades at a substantial discount to both its peer-group average and its own history based on price/earnings and price/cash flow ratios.

Some pessimism is justified, as organic growth has been weak. In the March quarter, net written premiums rose just 1%. And while Travelers’ 2010 profit guidance allows for $640 million in catastrophe losses (up from $390 million last year), oil-spill exposure could render that target conservative.

However, Travelers has a solid balance sheet and a reputation for conservative underwriting policies, attributes that served it well during the recession and should continue to do so during the recovery. An annual report for The Travelers Cos. Is available at 385 Washington St., St. Paul, MN 55102; (651) 310-7911, www.travelers.com.


TRAVELERS
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '10 $1.22 vs. $1.34 + 7% $55.20 -

$45.78

9 - 7
Dec '09 2.12 vs. 1.58 + 11% 47.75 - 39.82 8 - 7
Sep '09 1.61 vs. 0.55 + 3% 44.07 - 28.17 9 - 6
Jun '09 1.25 vs.

1.50

- 2% 37.73 - 17.25 8 - 3
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
95 84 98 81 86 43 26

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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