Get Excited About Insurance

 | Apr 29, 2013 | 12:00 PM EDT
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Insurance is never the most popular topic, despite the best whimsical efforts of the creative folks at GEICO and Progressive. The vast majority of times we have to deal directly with the companies that provide insurance usually are as a result of a negative event like a car accident, rate hike or property damage. And writing about undervalued insurance stocks won't drive the sort of the traffic one would get by just commenting on the latest tidbit out on Apple (AAPL).

But let's talk about the insurance sector anyway.

Many stocks in the sector that remain undervalued, have earnings multiples that are much lower than the overall market and seem to be one of the few sectors beating on both the bottom and top lines this quarter. Many still sell near or below book value, have gotten religion about pricing and risk, as well as bumping up their dividend payouts nicely recently, and have investment portfolios that will eventually be buoyed when interest rates inevitably rise at some point in the future. The sector has also quietly outperformed the overall market both over the last year and so far in 2013.

Travelers (TRV) is a leading provider of commercial property-liability as well as homeowners and auto insurance. There is a lot to like about the stock right here. Travelers has an A-rated balance sheet, yields 2.3% and is selling at about 11x 2014's projected earnings. The company has also easily beat earnings estimates now for three-straight quarters. Travelers reported earnings last week that beat estimates by 28 cents a share and easily surpassed consensus on the top line a well. Its combined ratio fell from 92.2 to 88.5 (a good thing) y/y on back of rate hikes that stuck. The company bought back $300 million worth of stock during the quarter, saw its book value increase 7% y/y and raised its dividend payout by 9% as well. The well-received report drove upgrades on TRV from Bernstein, which sees the stock continuing to hit new highs this year, and Goldman Sachs, which raised its price target to $96 a share.

Metlife (MET) has divested its banking operations and as a result was able recently to bump its dividend almost 50% and the stock now yields 2.9%. The company has beat on the bottom line for six-straight quarters and it reports earnings later this week. The shares are very cheap at 65% of book value and under 7x 2014's projected earnings.  The company has more than doubled operating cash flow over the last couple of completed fiscal years and consensus earnings for both FY2013 and FY2014 have ticked up over the last few months.

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