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  1. Home
  2. / Investing
  3. / Stocks

Insurance Stocks a Good Risk

Rising interest rates are buoying company returns and values.
By BRET JENSEN
Aug 05, 2013 | 11:00 AM EDT
Stocks quotes in this article: ALL, MET, CI, AIG, ACE, PRU

One of the highlights of the second quarter earnings report season so far is the remarkable strength and results of the insurance sector. Rising interest rates are buoying insurer's investment portfolio returns and values.

Most of the entire sector has reported results that have exceeded expectations both on the top and the bottom lines. Insurers ranging from Allstate (ALL), MetLife (MET) and Cigna (CI) have all reported stellar results and are sitting at 52-week highs. The improving fortunes of the industry was punctuated last week as American International Group (AIG) declared a dividend payout for the first time since the beginning of the financial crisis. This came after they once again blew through expectations during their earnings report.

Even though a good portion of the sector is at/near yearly highs, valuations are still reasonable and dividend increases and additional stock repurchases seem to be in the offing for the foreseeable future. Interest rates are likely to continue to rise over time and companies are showing stronger balance sheets and rising book values.

Here are two insurance stocks that still sport reasonable valuations and still should have further upside in this interest rate environment.

Ace Limited (ACE) is a specialty insurer that provides commercial insurance and reinsurance for a diverse group of international clients. Analysts have not factored in the turn in the company's underlying fundamentals yet judging by the last couple of earnings reports.  In late July, the company posted earnings of $2.29 a share, 34 cents a share above consensus estimates. This follows the previous quarter where Ace beat consensus earnings estimates by 24 cents a share.

Ace Limited is a market leader in Bermuda and London and has a growing Asian presence. The company sports a strong balance sheet and sells for just 15% book value. ACE also sells for less than 11x this year's expected earnings and I would expect earnings estimates to taken up in the next few weeks based on this latest strong earnings report. Finally, the shares yield 2.2% after the latest 4% dividend hike the company announced in April.

Prudential (PRU) offers a wide range of insurance, investment management and other financial products and services to customers in the U.S. and overseas. The company easily bested first quarter expectations in May and is due to post second quarter earnings mid-week. FY2013 Earnings are tracking to post an over 30% gain Y/Y and the stock is not expensive at under 10x this year's projected earnings.

The company is well positioned to capture a larger share of the growing retirement and savings market in the U.S. given its strong financial position, well recognized brand name and established distribution capabilities. Higher interest rates should support better annuity returns and sales growth. The company sells for just less than book value, yields 1.9% and recently announced a $1B stock repurchase authorization. Finally, sentiment on the stock could get a bump if Prudential is successful in its efforts in getting the Financial Stability Oversight Council to remove it from the "Too Big Too Fail" list of financial institutions.

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At the time of publication, Jensen was long AIG.

TAGS: Investing | U.S. Equity | Stocks

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