I had a look at a couple of insurance companies recently based on a periodic benchmark review I run for stocks that I hold in my portfolio. Since I am very bullish about the impact of AIG's (AIG) intended share repurchases on book value per share growth, I compared AIG's operating metrics and market valuation with its closest US competitors: Metlife (MET), Prudential (PRU) and Hartford Financial Services Group (HIG).
Almost all insurance companies trade with steep discounts from their intrinsic value. This post should offer investors an overview of the current market mis-pricings with regard to big name US insurance stocks. In summary, I prefer AIG and MET due to their very cheap valuations on a P/B basis. Historically and on a P/B level, insurance companies are very cheap: Especially AIG, Metlife and Hartford.
Metlife is down about 25% over the course of 52 weeks and was especially hit in the 2nd quarter. However, the stock trades just insanely cheap and is completely disconnected from its fundamentals. Metlife is a S&P 500 company and provides insurances, annuities, retirement, health and social security benefits.
The stock trades only at 5.5x earnings and only a little over half book value. The operating margin of 12% shows that the company operates profitably and can pay a dividend of 2.44%.
Given the high profitability ratios, the unprovoked decline from a 52 week high of $42 and a multiple of 5.5x forward earnings, I rate Metlife a Strong Buy.
Risk factors include a deterioration in the company's financials and an unexpected increase in catastrophe losses.
AIG is a S&P 500 constituent, property and casualty insurance operation and has a market cap of $56 billion. The company operates two main business segments with its subsidiaries Chartis and SunAmerica. Chartis offers casualty insurance products (protection against accidents, natural disasters) and SunAmerica provides term life, universal life insurances as well as retirement solutions.
The company gained notoriety through its high publicized bailout in 2008. Nonetheless, AIG is dirt cheap: The forward P/E stands at 9.71 and the P/B ratio at 0.54. AIG investors can expect a couple of catalysts going forward such as the sale of non-core assets AIA and ILFC. The main value driver for shareholders going forward is likely to be the repurchase of shares from the US government rather than any material improvement in operations. I rate AIG a Strong Buy.
The biggest risk investors are facing, is a loss of confidence in the capital initiatives program or a delay in such.
Prudential is the third S&P 500 constituent representing the insurance industry. The company has a market cap of $22.7 billion and ranks third behind AIG and MET.
Prudential also offers life insurances, annuities, retirement-related services and mutual funds. The company trades at a forward P/E of 6.23x and a P/B of 0.65. Based on profitability, the company posts only a 6% return on equity and a 4% profit margin. However, the stock was in free fall in the 2nd quarter opening up a $4.5 gap just below its $60 share mark. The stock has previously rebounded from its support level of $45. PRU pays one of the highest dividends (yield 3%) of the big name insurance companies.
RBC capital markets has an outperform rating on Prudential with a target price of $79, which was issued in early June. With a current quote of $48, this would mark an upside potential of 65%. Given the lower profitability, the very low earnings multiple as well the appealing chart, I rate PRU a Buy.
As with MET and AIG, the biggest risk factor for long investors is an impact on financials due to increased payouts from natural disaster claims.
Hartford Financial Services operates a property and casualty insurance operation and has a market cap of $7.30 billion.
The biggest catalyst for an increase in HIG's share price is John Paulson. The activist hedge fund manager built up a position during the financial crisis years and publicly pressured management to split up the company to realize its fundamentally higher share value. In fact, the company followed suit and gave in to Paulson's demand to sell off the annuity line of business. This circle of events could lead to higher share prices as the market begins to appreciate the value inherent in HIG's property and casualty business.
I like about HIG that the share price has come down about 35% of its 52 week high of $24.49. The company is dirt cheap at a multiple of only 4.5x forward earnings. In addition, the market applies a 65% discount from book value allowing for a considerable margin of safety.
Stifel Nikolaus upgraded HIG to BUY in May with a target price of $24 - close to its previous 52 week high. Since the stock price has corrected substantially since then, Paulson continues to work for investors as a catalyst for unlocking greater value. Since the valuation is very low by any ratio, I rate Hartford also a Strong Buy.
HIG probably faces at least some execution risk in relation to selling off non-core business and concentrate on its core property and casualty segment.
Disclosure: I am long AIG.