Insurance is often a stable business. True, American International Group (AIG) got into trouble during the Great Recession, but that was due to its bets on real estate and the use of such exotic instruments as credit default swaps, rather than problems in its bread-and-butter conventional insurance business. Warren Buffett's Berkshire Hathaway (BRK.A) has a good-sized chunk of its assets in such insurance businesses as GEICO, General Re and National Indemnity Co., among others.
Insurance companies are well worth including in one's investment portfolio, and right now three such firms are earning high grades from my guru strategies. These are computerized strategies I created to mirror the investment approaches of such well-regarded Wall Street gurus as Peter Lynch, Benjamin Graham and, yes, Warren Buffett.
One company, which is liked by my Buffett-based strategy, is AmTrust Financial Services (AFSI). This is a multinational specialty property and casualty insurer focused on small to midsized businesses. The Buffett strategy likes AmTrust because: it has a strong market position, earnings per share that have increased in nine of the last 10 years, a solid return on equity that has averaged 20.7% over the previous decade, and a projected annual return to investors over the coming decade of 14.3%. This is a solid company with a strong performance record.
Also exhibiting a strong performance is United Insurance Holdings (UIHC). It is in the property and casualty insurance business in several states, including Florida, Massachusetts, New Jersey, the Carolinas, Rhode Island and Texas. My Peter Lynch-based strategy favors United because of its very favorable ratio of price-to-earnings relative to growth, or P/E/G, and is a measure of how much the investor is paying for growth. With a P/E/G of 0.29, United is in very favorable territory. In addition, its equity-to-assets ratio of 35% is particularly strong, and way above the strategy's 5% minimum.
Another Lynch favorite is Universal Insurance Holdings (UVE), a vertically integrated insurance holding company involved with insurance underwriting, distribution and claims. It is one of the three leading writers of homeowners insurance in Florida, and is licensed in several other states as well. Like United, Universal gets high grades from my Lynch strategy. The company's P/E/G is a very favorable 0.34, while its equity-to-assets ratio is a solid 24%.
Get an email alert each time I write an article for Real Money. Click the red "+Follow" next to my byline on this article.