Earlier this week we learned that Q3 GDP came in at 2.8%, much stronger than the 2% consensus. Today, the monthly jobs number came in at over 200K jobs, much higher than expectations. This put to rest most of the nonsense that the government shutdown would have any major impacts on the job market.
These stronger than expected economic numbers are also boosting interest rates on projections for faster economic growth. This should produce a solid tailwind for insurance stocks as rising rates will lead to better results from their investment portfolios. Here are two insurers I would be adding to at these levels.
AEGON N.V. (AEG) is a leading international insurance group based in the Netherlands that primarily offers life insurance, pension, savings and investment products. The company is still working through legacy issues but executing well in improving operational performance.
Although based in Europe, more than 2/3's of the company's revenue comes from North America. The European "discount" some investors are putting on the shares does not seem warranted for this reason. In addition, AEG is selling at around half its book value very similar to major U.S Banks & Insurers circa early 2010.
The shares also yield slightly north of three percent and this should increase nicely as the company continues its turnaround. The stock has doubled over the last year and a half, but is less than 40% of the level the shares traded at before the financial crisis.
Earnings estimates for both FY2013 & FY2014 have been revised sharply higher over the last month. The shares are too cheap at under 9x forward earnings.
American International Group (AIG) is the infamous leading international insurance organization that has now fully repaid its $182.3 billion in government aid and has also made significant strides restructuring its operations including selling off non-core assets.
The stock has doubled over the past two years but is still priced at ~75% of book value. The company is mostly done with selling off assets and can now focus on growing its remaining core businesses. After declining slightly in 2013, revenue growth should resume in FY2014 with 3% to 4% sales increases.
Despite AIG's rise over the past two years, insiders have actually been net buyers of the stock so far in 2013. The 17 analysts that cover the shares currently have a $55 a share price target on the shares, ~15% above the current stock price. The stock pays a meager dividend now, but I would look for significant increases in the years ahead as the company removes the remaining vestiges of "Big Brother".
Both these insurance stocks offer good value in the current economic & interest rate environments. However, if interest rates rise they could benefit nicely along with the rest of the industry.