5 Solid Dividend Plays in the Insurance Industry

Dividends can be very attractive in a low rate environment, such as the one we currently find ourselves in, where the Fed has vowed to keep target rates low through mid-2015. Worth noting is that dividend stocks are not without risks, however we look to limit risk by ensuring the companies can afford to pay dividends throughout an extended economic contraction.

Most of the money insurance companies make do not come from premiums, rather from interest paid on the premiums. Insurance companies sell policies at what they expect to pay out in the future, and then invest the premiums. As a result, although insurance companies can be strained in low-rate, tough economic times, insurance companies have the potential to see stock appreciation as sentiment improves, as well as paying out solid dividends.

SAC CAPITAL ADVISORS

We have identified five such stocks that operate in the insurance industry and pay dividends that yield over 3%, as well as dividends that represent a less than 85% payout ratio. In addition to solid yields, all of these companies have dividends that have grown over the last five years.

Prudential PLC (NYSE:PUK) is the first stock on our list. The company does pay one of the lowest dividends of our five at a yield of 3.0%, but has highest five-year dividend growth rate at 8.9%. The company also has a very positive payout ratio at only 39%. Prudential, a provider of insurance services internationally, has operations in Asia, the U.S. and the U.K. During the first six months of 2012, the company grew operating profits by 13%, which was driven by its positive growth into new Asian markets; this segment saw profits up 18%. Prudential’s U.K. profits were up only 4%, but given the company’s 1.9 beta it should be able to see nice growth as the global economy grows. Prudential saw little fund interest in 2Q, with the exception of Fisher Asset Management, who still only held a modest position.

Cincinnati Financial Corporation (NASDAQ:CINF) is another one of our top yielding insurance companies. The company is a property and casualty insurance operator and pays the richest dividend of our five insurance stocks at a 4.0% yield, and has shown positive five-year dividend growth of 3.7% annually. The payout ratio also has the dividend relatively safe with a 72% payout, while the company’s P/B ratio is also on the low end at 1.2x. The company reported 3Q earnings that came in at $0.64, compared to $0.13 for the same quarter last year, topping estimates of $0.44. Written premiums were also up, driving top line growth of 14%, and supporting S&P’s recent boost in its price target to $42 for the company.

Cincinnati Financial had various top names, such as Steven Cohen, Ken Fisher, Jim Simons and Chuck Royce, owning only a small number of shares, but it did see First Eagle Investment Management have 2% of their 2Q portfolio invested in Cincinnati; check out all the funds owning Cincinnati.

Arthur J. Gallagher & Co. (NYSE:AJG) provides insurance brokerage services in the U.S. and internationally. Its payout is one of the highest of all our insurance companies at 85%, but the company’s yield is close to the top-end at 3.8%. Arthur’s five-year dividend growth rate has been around 1.9% annually. For the company’s most recent quarter, it posted earnings of $0.59 compared to $0.37 for the same quarter last year. The company continues to be in growth mode, having made four acquisitions so far this year. This should help the company outpace the industry over the next five years, with an expected 5-year EPS CAGR of 12% compared to the industry average of 10%. For Arthur, there was no overwhelming fund interest, but Ken Griffin upped his 1Q stake 130%, while D.E. Shaw took an entirely new stake.

Partnerre Ltd (NYSE:PRE) is an international reinsurance company with a 3.0% dividend yield and an 8% annual five-year dividend growth rate. The company grew its dividend the most of our five insurance stocks, and has the lowest payout ratio of the bunch at 25%. Partnerre is a major insurer of crops, but reported no major catastrophe losses in 3Q, which spurred Credit Suisse to increase its 4Q EPS estimates by 11%. The company also trades favorably on a valuation basis at a 0.91 P/B ratio.

Partnerre, like our other insurance companies, has been flying under the radar when it comes to fund interest. Chuck Royce, Israel Englander and Clint Carlson were all modest investors during 2Q.

Willis Group Holdings PLC (NYSE:WSH) is a global insurance broker. Willis Group pays out a dividend that yields 3.2%, and despite a weak economic backdrop has managed to grow its dividend annually over the last five years at 2.0%. Currently, the company only pays out around 66% of its earnings in the form of dividends. The company posted continuing operations EPS of $0.15, compared to the same quarter last year of $0.34, and well below consensus estimates of $0.31. Willis Group’s stock price is down 10% over the last month on this news, while worries over its continued restructuring efforts persist. We believe, though, that the company is a buy at its current forward P/E of 12x.

Additionally, Willis Group saw the most fund interest of all insurance companies mentioned here. Notable investor Jeffrey Ubben had almost 6% of his firm’s 2Q 13F invested in the company, while Mason Hawkins was also invested heavily with 1.4% of his firm’s 13F. SAC Capital and First Eagle Investment Management were also invested with over 1.8 million shares each; check out all the funds owning Willis Group here.

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