Prospects Are Improving for Insurers

 | Mar 26, 2013 | 11:30 AM EDT  | Comments
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I am allocating more of my portfolio into insurance stocks. This certainly is not a sexy move like buying an up-and-coming tech stock or adding another Bakken play to my investments, but one that makes a lot of sense right now. 

The insurance sector is one of few areas where most of the stocks still look pretty cheap even after the rally of the last few months. Several major carriers are still selling significantly under book value and the industry has several tailwinds picking up.  First, the insurance stocks will benefit as interest rates rise and boost the performance of their investment portfolios. Second, the pricing environment for property insurers after Sandy is much improved.  In addition, book value is growing nicely again after taking significant hits during the financial crisis. Finally, many of the bigger insurance stocks are picking up buybacks and/or boosting their dividends.

 Here are a couple of well-known names in the space that look like good values here.

 Allstate (ALL)

Four reasons Allstate will go higher from $48 a share:

  1. Analysts keep underestimating the company's earnings power. Allstate has beat earnings estimates easily each of the last six quarters. The average beat over consensus during that time span has been more than 50%.  Consensus earnings estimates for both fiscal 2013 and fiscal 2014 have risen steadily over the last three months.
  2. The firm has an A-rated balance sheet and yields 2.1%. I would look for accelerating dividend growth in the future as the industry continues to recover from the financial crisis.
  3. The company recently announced a significant stock repurchase program and Goldman Sachs just upgraded the shares to a Buy today.
  4. The stock is priced at under 11x this year's expected earnings even as it hits a 52-week high.

Prudential (PRU)

Four reasons PRU has upside at just over $58 a share:

  1. Prudential is one of the cheaper insurers in the sector. The stock currently sells for just 71% of book value and book value per share has increased some 25% over the past two fiscal years.
  2. PRU also sells for less than 7x 2014's projected earnings, has an A-rated balance sheet and also yields 2.7%. The mean analyst price target held by the 18 analysts who cover the shares is around $68.50 a share.
  3. The company has taken advantage of the turmoil in the aftermath of the financial crisis to grow its business via acquisitions. Revenues have more than doubled over the past five years and the company is well-diversified with major operations in Asia and Latin America as well as the U.S. It has over $1 trillion in assets under management.
  4. Prudential is well-positioned to take advantage of the secular trend of aging demographics throughout the developed world that will increase demand for its core retirement products (excluding annuities).

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