Sector Watch: The price of premiums
While competitive pressures are pushing rates and premiums down for many property and casualty insurance providers, two specialty suppliers, SeaBright Insurance Holdings, Inc. (Nasdaq: SEAB) and Tower Group Inc. (Nasdaq: TWGP) are continuing to post robust growth due to their niche focuses.
Seabright Insurance Holdings specializes in niche products such as maritime workers insurance, alternative dispute resolution (ADR) insurance and State Act workers compensation insurance. It is licensed to sell insurance in 45 states and distributes its products through independent brokers and wholesalers.
SeaBright is growing premiums faster than the overall market because of its focus on specialty segments of the workers compensation insurance market. Although workers compensation is a huge market (generating premiums of $46 billion annually), premiums declined last year because of competitive pricing. Premium growth is forecast at only 1.5% in 2007, the slowest growth since 1998.
This company is one of only a handful of insurance providers authorized to write maritime coverage under the USL&H Act, a federal law covering longshoremen injured in shipyards and vessel unloading areas. SeaBright is also authorized to provide coverage under the Jones Act, a federal law protecting seamen and offshore workers injured through employer negligence and under OCSLA, which covers maritime workers on off-shore drilling platforms.
In addition, SeaBright is one of a few select insurance companies that provides coverage to employers subject to collectively bargained workers compensation agreements. These agreements, also known as ADR programs, reduce litigation costs by using informal arbitration rather than litigation to resolve disputes. ADR programs are prevalent in California. In addition, SeaBright provides coverage under State Act workers compensation laws, which vary from state to state. SeaBright focuses mainly on State Act workers compensation customers in California, Alaska, Illinois and Hawaii.
For the nine months ended Sept. 30, 2007, SeaBright increased net premiums earned 22% year-over-year to $163.1 million, grew its customer base 56% to nearly 900 customers and boosted per-share earnings 18% year-over-year to $1.43 per share. Analysts anticipate SeaBright will post 17% EPS growth this year and longer-term growth averaging 15% annually. At closing on Tuesday, shares of SEAB were at $16.06. Over the last 52 weeks, shares of the company have ranged between $14.23 and $19.98. My $22 target for Seabright is about 40% above the current price.
Like SeaBright, Tower Group also achieves superior premium growth as a result of its focus on specialty products for small and mid-sized businesses. The company covers non-standard risks that don’t fit the underwriting criteria of most carriers, due to the type of business, location or premiums per policy.
Tower Group’s customers include retail and wholesale stores, grocery stores, restaurants, artisan contractors, and residential and commercial building owners. Its insurance products are distributed through 800 retail agents and 60 wholesale agents in the metro New York area.
Between 2002 and 2006, the company’s premiums grew more than 34% annually. A reinsurance subsidiary, CastlePoint Holdings, formed in 2006, is allowing Tower Group to reduce its own risk (by transferring premiums to CastlePoint), market reinsurance to other small insurance companies and accelerate expansion of its premium base. In addition, the 2007 acquisition of Preserver Group enables Tower Group to sell insurance in five additional states.
For the nine months ended Sept. 30, 2007, Tower Group’s net premiums earned rose 23% year-over-year to $207.5 million and per-share earnings improved 21% year-over-year to $1.65. The company plans to use net proceeds of $89 million from a 2007 equity offering to boost premium growth and is targeting full-year 2007 EPS at least 50% higher than last year. Analysts forecast Tower Group will generate 24% growth next year and 23% average annual longer-term growth. Shares of TWGP have ranged between 23.60 and $37.47 over the last 52 weeks; the stock closed at $32.55 on Tuesday. My $40 price target for Tower Group is 20% higher than the recent share price.
