Insurance companies over the past few years have lagged the rest of the market. That's especially true of those that were heavily invested in real estate and related securities and had a large exposure to interest-rate sensitive life insurance products.
But many of these companies appear poised for a dramatic move higher – making them among stocks to buy now.
Hartford Financial Group (NYSE: HIG), for example, is one insurance stock that appears to be on the verge of a significant climb.
Following losses in the variable annuity business and the general economic weakness of the recession, Hartford shares plunged in one year from over $70 down into the single digits.
Although the shares recovered into the low $20s, they have been mired there for some time now and trade at a significant discount to other insurance companies.
The company last year came under pressure from activist investors to exit the life business and focus on its core property and casualty business. Hartford's P&C business is a 200-year old company that focuses on higher margin small-business policies and investors felt that the company is worth far more than the price of the combined company.
Management responded by selling its life insurance operations to Prudential (NYSE: PRU) and the variable annuity business to Woodbury Financial Services. They placed the existing book of annuity business into run-off mode and are now focused on the core P&C business and mutual funds.
The commercial segment is seeing decent premium growth while the consumer insurance division remains steady. Almost 74% of the consumer insurance division revenue comes from selling auto and home insurance to American Association of Retired People (AARP) members.
Hartford management is taking the necessary steps to improve the balance sheet. They have sold additional wealth management divisions and are using the proceeds to pay down debt. They have committed to reducing the debt load by $1 billion in the next year.
They are also using part of the proceeds to fund share buybacks in a measure designed to return capital and build shareholder value. Trading at just 50% of tangible book value compared to a range of 90 to 100% of tangible book for most of its competitors, the stock appears to be a tremendous bargain opportunity.
There are signs that the reorganization is working and earnings should improve. The company's earnings per share are expected to grow to more than $3.50 this year, well up from the less than $2 earned in 2011.
That'll lift the shares markedly higher over the next few years.
Stocks to Buy: These Investors Love AIG
Multiline insurance giant American International Group Inc. (NYSE: AIG) is for many the face of the credit crisis. The company ended up receiving more than $180 billion in federal aid and at one point the U.S. government owned more than 90% of the company.
Today, however, the government has sold its stake and the insurance company is well on the road to recovery.
Although domestic operation will take a hit from Hurricanes Isaac and Sandy, AIG is expanding overseas in a venture with HSBC (NYSE ADR: HBC) that will allow it to build its presence and image in international markets.
One of the more intriguing aspects of AIG is that amidst the controversy, many of the world's smartest and most successful investors have amassed large stakes in the company. The shareholders list of the company looks like an investors Hall of Fame.
Bruce Berkowitz's Fairholme Funds own more 85 million shares and is the largest shareholder. Daniel Loeb of Third Point Partners has more than 18 million shares. Legendary investor Seth Klarman of Baupost purchased 7 million shares in the last quarter of 2012.
With the shares trading at just 60% of tangible book value, AIG appears to have tremendous upside potential for the next year and beyond.
AIG and Hartford are two of the cheapest insurance companies on a valuation basis and could become market leaders as their condition and prospects continue to improve.
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