Insurers: The Forgotten Financials

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 |  Includes: BAC, BBT, C, HBAN, HIG, JPM, LNC, PRU, RF, STI, XLF
by: Stone Fox Capital

With all the news lately regarding the mega banks like Bank of America (NYSE:BAC), Citigroup (NYSE:C), or JPMorgan (NYSE:JPM) and even the regional banks, nobody seems to notice that Life and Property & Casualty insurers like Hartford Financial (NYSE:HIG) and Lincoln National (NYSE:LNC) continue to trade at some of the lowest multiples in the financial sector.

Both insurance providers trade at book value multiples of 0.6x and forward PE multiples in the 7 range while most of the mega banks have forward PEs in the 10 range and trade much closer to book value. Some of the regional banks like Huntington Bank (NASDAQ:HBAN) and BB&T (NYSE:BBT) even trade with 15x PE multiples and others like Regions Financial (NYSE:RF) and SunTrust Bank (NYSE:STI) trade at much higher multiples.

So why buy a mega bank or a regional bank when insurers have lower multiples? Hard to tell, considering the banks face loan loss issues along with a multitude of regulatory issues. The mega banks like BAC even face loan put-back issues that will likely cost billions of dollars while the regional banks face huge commercial property loan hurdles and low loan demand. Sure the insurers face some of the same issues, especially in the commercial property area where they invested heavily, but do they really face higher hurdles?

In general it appears that the insurers face similar if not fewer risks and the market has failed to recognize their relative value. The insurers such as HIG and LNC have been very profitable in 2010 unlike most of the regional banks that still face high loan loss provisions.

Raymond James recently released its 'Analysts Best Picks for 2011' and sure enough BAC made the list but so did LNC. From reading the analysis for both companies, it seems clear that both are value stocks, but the market just doesn't focus on the life insurance sector as opposed to the current obsession with banks. If anything, the best bet is to invest in both selections for diversification considering the myriad of risks that still exist in the financial sector.

Though the risks appear more then priced in with forward PEs in the 7s, this sector appears to provide a lot more upside and a better risk/reward scenario then any of the regional banks listed previously or commonly discussed. You just won't hear that on the TV shows that still appear obsessed with smaller banks even though most of them provide little in the way of compelling valuations.

Even fellow insurance provider Prudential (NYSE:PRU) trades at 10x multiple and a much higher book value at 0.86x. The issues in the financial sector are numerous. Why not buy the cheapest stocks?

Symbol Trade EPS Est (next yr) P/B
HIG 28.50 3.77 0.62
LNC 29.28 3.72 0.68
PRU 61.93 6.32 0.86
JPM 45.25 4.60 1.04
C 4.85 0.46 0.92
BAC 14.96 1.48 0.72
RF 7.51 0.03 0.68
HBAN 7.20 0.47 1.34
STI 29.30 0.85 0.78
BBT 27.52 1.72 1.15
Click to enlarge

Disclosure: I am long HIG, RF.
Additional disclosure: I may initiate a position in LNC within the next 72 hours.