Three good picks in life and health insurance that are suitable for your portfolio

Insurance –life and health insurance

I often have a range of companies in my portfolio. Some are core, while others I just take a nibble on. The reason for the ‘nibbles’ and small stakes is to help focus my attention. Nothing sharpens attention more than ownership, even at a low level. Therefore, besides my core positions, I often have ancillary and small positions in a range of other comparable firms.

My use of life and insurance companies is to help diversify my holdings while providing some good short-term yield and long-term dividend growth. Well-managed insurance companies can also continue to grow and develop their earnings over time, which is a good reason for me to love this type of company. There has been a general shift in risk management since the GFC and the 2010 period, reflecting more risk aversion in the investments and portfolios.

MFC

This is, I admit, one of the cornerstones of where I like to spread investments. It is a well-managed firm with a long history and slow-and-steady earnings growth. There is a reasonable yield, and the management team provides a shareholder-friendly regular increase in the dividend yields. When I can buy this on a dip, I can often add to my position at attractive prices and further develop my position.

At the moment, I think the combination of dividend yield and recent growth in the dividend payout remains attractive. The analyst expectations are for reasonable earnings growth into the future, with FactSet analysts also expecting a continuation of dividend increases. Naturally, such expectations can only be met with a market that continues to perform and avoids catalysts and crises.

I like the 4.14%yield (Fastgraphs) and the 10.9% 5-year dividend growth rate (SeekingAlpa).

The earnings are expected to grow at 13% p.a. over the next five years, giving a reasonable long-term growth, as forecast by FactSet analyst.s (I note a reasonably poor level of forecast accuracy in the past.)

FastGraphs. Note the steady dividend growth and recent steady growth in earnings.

 

LNC

This is more of an ancillary position. They demonstrated a qualitatively solid and stable dividend increase history from the 1990s through to the GFC, then have been rebuilding their distributions from that time.

There is quite a wide divergence in analyst expectations for long-term earnings growth; the FactSet analyst expectations are lower than those for Yahoo Finance and there is a relatively poor record for FactSet forecasting future earnings.

2.75% yield, 5ygr10.46%; 35% pa earnings growth (5-year expectation; Yahoo) with a 17% (FactSet); analysts have a poor record of forecasting earnings here.

Source: Fastgraphs. Note the steady growth and rapid expansion of earnings expected in the future as well as recent stable growth in dividends

CI

The categorization here is a little odd – ‘healthcare services’ does not fit with my conceptualization of the company where the core is still in insurance. The firm has a long history of strong and steady growth and has recently begun to pay a dividend, giving a 1.87% yield at present with dividends expected to grow from about 4.00 to 7.48 USD/year by 2027 (FactSet analysts). It has 11% long-term earnings growth (FactSet analysts) and has reasonable analyst accuracy (Fastgraphs). The difference in forecast accuracy may accrue to the other divisions of CI beyond insurance; the insurance earnings (e.g., in MFC and LNC) appear to be difficult to forecast, while the other divisions in CI may provide greater earning stabilities. Certainly, the visual demonstration of ongoing and steady growth would attest to this.

Source: FastGraphs. Note the steady expansion of earnings over time and the expected growth of earnings.

Verdict:

LNC and MFC both have demonstrated commitment to dividend growth; MFC has a higher yield and LNC starts lower but has greater expectations for earnings growth. Both seem to be difficult to forecast accurately and are slightly more volatile than CI.

In contrast, while having only recently introduced dividends, the CI earnings growth is stable and durable and appears to be more easily forecast, although at a lower level of expected growth. The current yield is low but expected to grow approx. 85% by 2027, showing strong expected annual growth.

As I find the insurance companies should be durable and stable, given these circumstances, I would opt for investments in CI as a good fit for my long-term investments. Note that this discussion has not calculated intrinsic values but you can see from each of the images that the shares are trading well below their 15 PE ratios, suggesting a level of undervaluation.

Risks: a future financial crisis, like the GFC, will probably rattle these positions and shake earnings and dividends. Further government regulation leveled on the industry might drag on earnings. The incidence of long-COVID seems to be sneaking up on society and this could represent a fundamental shift in returns to the insurance companies if it results in significant and enduring claims.

Remember:

  • I like to reduce my risk of loss and drawdown by taking value-oriented positions with a ‘margin of safety’ in stocks trading below their intrinsic value. This means there i s less likely to be a substantial down-side risk, providing me with a buffer. If the stocks recover and expand their multiples, I may rotate out and into other value-oriented positions.
  • I prefer stocks with growing long-term dividends and a shareholder-friendly policy regarding distributions. I often balance this in my portfolio with some slow-and-steady growers (kings and aristocrats) along with those that have more recently begun to pay dividends consistently but look set to continue.
  • I have a multi-prong approach where some positions are set for stability (bond-proxy investments), such as utilities and telecos. I design other positions to grow dividends slowly and steadily over time. A final prong is firms with faster expected earnings growth rates (demonstrated in the past and analyst expectations); these firms provide capital expansion and often offer higher yield growths for the portfolio. The prongs provide me with expectations of income in the near-term, with long-term appreciation and growth giving positions I hope to leave as a legacy for my children.

Insurance –life and health insurance I often have a range of companies in my portfolio. Some are core, while others I just take a nibble on. The reason for the ‘nibbles’ and small stakes is to help focus my attention. Nothing sharpens attention more than ownership, even at a low level. Therefore, besides my core…

Insurance –life and health insurance I often have a range of companies in my portfolio. Some are core, while others I just take a nibble on. The reason for the ‘nibbles’ and small stakes is to help focus my attention. Nothing sharpens attention more than ownership, even at a low level. Therefore, besides my core…

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