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The success of insurance companies lies heavily in their diversification of product offerings, their ability to keep costs low, and their ability to gain market share through expansion. The entire sector had been subdued over a period of time due to the ongoing economic turmoil and, based on my research, a few key companies within the sector are likely to outperform with a recovery in the world economy. Hence, investors who believe in contrarian bets can consider investing in the three companies below because they are involved in acquisitions and restructuring to remain competitive for the mid to long term.

ACE Limited (NYSE:ACE) is a global insurance and reinsurance company serving both commercial and individual customers' worldwide and boasting of a market capitalization of about $24 billion. The company has enormous potential of growth and has therefore been further analyzed to provide investors with an informed choice. Not only do they look after property and casualty (P&C) insurance and reinsurance of clients, small or large, across industries, but also have special insurance products like life insurance, supplemental health and personal accident of individuals in some countries. The company primarily operates in four major segments namely: the Insurance-North American, the Insurance-Overseas General, the Global Reinsurance and finally the Life insurance. In December 2011, for furthering their business interests, the company acquired Rio Guayas Compania de Seguros y Reaseguros, a general insurance company in Ecuador.

As far as the breakdown of their segments are concerned, the Insurance-North American segment of the company accounts for approximately 42% of their business, followed by Insurance-Overseas general contributing about 39%. Thereafter their business in life insurance and Global Re-insurance account about 11% and 8% respectively to their revenue.

This company has excellent cash flow and has been accumulating a healthy profit over the years. The total revenue garnered by the company in the year 2011 has been to the tune of $16.83 billion, with an operating margin of 14.34% against the industry average of $1.62 billion and 6.13% respectively. Further, they have a current EPS of $4.65 and a P/E ratio of 15.65 against an industry average of $0.68 and 13.38 respectively. Moreover, the company has also been rewarding its shareholders with a healthy share of their profit. In the last quarter of 2011, the company has declared an increase in dividend by 34%, totaling $0.47 per share. They have also given a strong guidance on its income from $6.65 to about $7.05 per share.

The stock is currently trading at its 52-week high levels and is at its book value. However, the low beta of less than 1, coupled with the ever increasing earnings estimates of the stock, make it likely to remain stable and outperform in the medium to long term in my opinion.

Another company which competes in the same business with a higher market capitalization of $54 billion is the American International Group (NYSE:AIG). The company is well known for its operations in the insurance sector, both in US as well as internationally. In the past year, the company restructured its business by few sell-offs and has since turned its business around. Consequently, it has been able to focus on its core business and staged a turnaround through the restructuring process by going into green in 2011 from almost a billion dollar loss a year ago. However, the reduction in stakes and sell offs of businesses has resulted in a significant downside of its earnings per share from about $16 to about $10. In comparison to the ACE, this company, being a high beta stock of more than 3, has shown high volatility in tandem with the market swings. Hence, when we compare the fundamentals of this leading company within the same industry to that of ACE, the business future of ACE seems to be on much sounder footing justifying its higher P/E valuations.

Travelers Companies, Inc. C (NYSE:TRV) is another tough competitor in the same sector. This company has a similar market cap to that of ACE and has higher revenue of about $25 billion. Like ACE, it has also been on a buying spree, acquiring stakes in a Brazilian Insurance Business towards their future growth. Similarly, the company is also currently trading at its book value, just like the ACE, but at a higher P/E of 17.36. However, as compared to ACE, the company's operating margin, net income and EPS is much lower at 6.83%, $1.41 billion and $3.37. This indicates that ACE as a company is running a far efficient business model than its competitors.

To its credit, the ACE stock has managed to surpass its earnings estimates even during the difficult period of 2011, revealing its strong and efficient management. Added to this is the fact that the company's business is in the financial sector which can only grow with the growth in world's prosperity. In my opinion, ACE not only appears cheap amongst its peers in the industry, but is also in a business which has tremendous growth potential in the emerging economic and geo-political scenario. Therefore, I strongly recommend buying this stock with a medium to long term perspective, since the company is well-placed to take advantage of a promising industry in particular and the sector in general.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 Dynamic Insurance Companies For Stable Growth In 2012