3 Insurance Stocks in Prime Position

11/22/2011 7:30 am EST


David Fried

Editor, The Buyback Letter

The picks below represent some of the reasons why a buyback-focused portfolio continues to outperform the market, writes David Fried of The Buyback Letter.

Three of our new holdings are in the insurance sector: Aetna (AET), Arch Capital Group Ltd. (ACGL), and WellPoint (WLP).

Aetna is one of the nation’s largest health-insurance companies, serving more than 36 million people. Aetna has been in the news lately because it has been playing hardball with hospitals, trying to drive down costs in an attempt to get a handle on medical costs.

Investors have rewarded that strategy, sending Aetna shares up some 30% year to date. A component of the S&P 500, Aetna had third-quarter operating earnings of $528.4 million ($1.40 per share), a per-share increase of 40% over 2010.

For the nine months ended September 30, operating earnings per share and net income per share were both $4.19. The stock offers a dividend of 60 cents (yield of 1.50%), and the company has low debt.

In the last 12 months, management has reduced shares outstanding by a whopping 21.4%.

Arch Capital is a Bermuda-based company with more than $4.84 billion in capital, and provides worldwide insurance and reinsurance for property and casualty lines through its wholly owned subsidiaries in Bermuda, the US, Europe, and Canada.

We all know what insurance is and how it works. But reinsurance occurs when an insurance company wants to transfer some of its risk to another insurer. The insurance company must then pay reinsurance premiums to the reinsurer.

Reinsurance can be a risky, unpredictable business because it bets on the outcome of future events. For example, the shocking hurricane losses of 2005 were devastating for some reinsurance companies.

An investment in reinsurance is optimism that the team running the company will make you money without taking on too much risk—the competitive advantage any reinsurer has is the skill and discipline of its management team.

ACGL reported revenue of $765 million for the third quarter of 2011. Third-quarter net income rose to $162.5 million, compared with $148 million in the same quarter a year earlier.

The company has $401.17 million in net cash on its balance sheet. The company is expected to earn $2.04 in 2011, and $2.78 in 2012.

In the last 12 months, management has reduced shares outstanding by 15.1%.

WellPoint is the nation’s largest health-benefits company, with more than 34 million members in its affiliated health plans and 66 million individuals served through subsidiaries.

As an independent licensee of the Blue Cross and Blue Shield Association, one of every nine Americans is a member of a WellPoint-affiliated health plan.

In general, companies specializing in the sale and administration of health-care plans have performed well in the last 12 months, as the need to cover emergency medical needs has increased, and Medicare and Medicaid programs have grown.

WellPoint’s current operating margin is 8.02%, and revenue per share as stated in its last income statement was $155.46. Revenues grew by 4.60% last quarter compared with the same period last year.

The company has extended its share-repurchase program by $5 billion, to be exercised in the coming years as industry conditions offer buyback value. In the first half of this year, it repurchased 20.8 million shares at a cost of $1.5 billion.

Wellpoint has reduced shares outstanding by 13% in the past 12 months.

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