Heartland Analyst Likes Insurance Broker Brown & Brown

August 28, 2008

There’s value to be found in this rangebound market in areas like insurance brokerages, North American natural gas as well as some industrials, a fund manager said.

Brad Evans, who helps manage more than $2 billion in assets at Heartland Advisors, said he is cautiously optimistic on U.S. equity markets considering a possible recovery in the country’s economy sometime in 2009.

“Investors continue to be stuck in that mentality that we need to get international exposure to avoid the U.S. slowdown and I think that’s going to turn on itself, maybe it is already,” Evans told Reuters from Heartland’s offices in Milwaukee, Wisconsin.

One of Evans’ funds, the Heartland Value Plus, which has about $502 million in assets, is ranked first on a year-to-date performance basis as of July 31 out of 586 funds in the small-cap value category, data from fund analytics company Lipper, a unit of Thomson Reuters, shows.

Beyond regular valuation metrics for a company such as price-to-earnings and price-to-cash flow, Evans also looks at the private equity market value, or the value of a particular business to a financial or strategic buyer, based on a past completed transaction of a like business.

“We’ve cast our net and found a new idea. We’re very optimistic on Brown & Brown,” Evans said.

Brown & Brown, an insurance broker, is likely to benefit from a hardening insurance market where premiums are likely to edge higher given deteriorating combined ratios, increased catastrophe losses and reduced investment income.

Moreover, in early June, Willis Group Holdings, the world’s third largest insurance broker at the time, bought smaller rival Hilb, Rogal and Hobbs Co for $1.7 billion.

Based on that deal’s valuations, as well as Evans’ own projections for Brown & Brown, he feels fair value for the company’s shares is in the $28-$30 range over the next 12 to 18 months.

That represents an appreciation of about 30 percent from current levels.

However, Evans is still underweight the financials as a sector.

“While banks may look cheap statistically there’s still some downside risk left that isn’t priced in,” Evans said. “Investing in banks right now is speculative and that’s not our cup of tea.”

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