Even though insurance stocks are hardly exciting, they have performed quite well year-to-date, and many see the insurance industry as a possible outperformer for 2013. An investor who is thinking of investing in insurance companies this year, should certainly keep the following stocks into account.
American International Group, Inc. (NYSE:AIG): One of the biggest victims of the 2008 financial crisis, this bailed-out multinational insurance company might be starting to recover, and some investing kings like George Soros or Louis Bacon have been buying shares of the company. Would it be wise to follow suit?
1). With regards to valuation ratios, this stock looks extremely cheap. It has a P/E of only 2.63x; and a P/B of 0.55, which is very low even for insurance companies (which usually have lower P/B ratios than other industries). Forward P/E is higher, at 10.75.
2). On average, analysts have given AIG stock a target price of $39.90, which implies that the stock could have a 2.57% upside potential. However, recent price targets have been slightly higher than the consensus of $39.90, which could mean that analysts are turning increasingly bullish on AIG stock’s performance this year.
3). While AIG had a record of being a solid dividend-paying company pre-bailout, it currently does not pay a dividend to its shareholders. However, as business improves and balance sheets become healthier and healthier, there is no reason to believe AIG will not reinstate a dividend policy.
HCC Insurance Holdings, Inc. (NYSE: HCC)
1). HCC’s valuation ratios are certainly not as attractive as AIG’s. With a current P/E of 11.05, an almost identical forward P/E of 11.51, and a P/B of 1.12 the stock does not look necessarily cheap for an insurance company. However, it does not appear to be overvalued either, as the ratio is similar to the industry’s average.
2). Analysts give the stock an average target price of $41.13, which implies an upside potential of almost 6% from current prices. Average recommendation stands at an almost neutral 2.5, although some analysts rate this stock as a “strong buy”. Regardless of what analysts say, the stock has had a decent run since August of last year.
3). The stock pays a dividend of $0.66/share, which works out to a yield of 1.71%. While not being a very high dividend, the company does have a record of consistent, regular dividend payments to its shareholders.
Hartford Financial Services Group Inc (NYSE: HIG)
1). Hartford’s current P/E is 25.83, which is quite high, compared to industy’s average, and, in principle, would not suggest that the company is undervalued. However, the forward P/E and the P/B ratios paint a different picture. The stock’s forward P/E is an attractive 7.85 (the lowest of the three stocks analyzed in this post), and the P/B is very low as well, at just 0.46, even lower than AIG’s.
2). The stock’s average target price is $26.93, which implies a potential 6.65% upside from the current stock price. However, unlike AIG, the two most current analyst reports give the stock a lower target price: Barclays has a $22 price target, and FBR capital places it at $25, with both analysts giving the stock neutral ratings. This could be a sign that analysts are not expecting the stock to outperform in 2013, but are not bearish on the stock either.
3). HIG pays a dividend of $0.40/share (a yield of 1.59%). Like HCC, the company does have a very good dividend paying record, and has been paying its shareholders regularly since 1996. At any rate, current yields are historically low for this stock.
While all three stocks have their strengths, I believe AIG might have an overall edge. Even though it does not currently pay a dividend, extremely low valuations and the possibility of a strong rebound make this stock a great contrarian value play. After the settlement of the bailout package, AIG is now a cleaner, more efficient, less risky company, and yet it is still retains its position as one of the world’s insurance giants. A bull market, a recovering economy, and the very real possibility of a great turn-around story, should make investors seriously consider buying this one.
The article Top Insurance Stocks to Consider Buying originally appeared on Fool.com and is written by Alex Bastardas.