When I recommend insurance companies, I get the same reaction a lot: Really? After Hurricane Sandy?
Believe me, I know all about Sandy. I was afraid the winds of my apartment in New York City were going to blow out, and I was among those who lost power for a long time. Still, I consider myself lucky, as so many people lost so much more.
Yes, insurance companies will have to pay out some serious money to cover Sandy-related claims, but there are a couple of important points to keep in mind: First, the payouts will be big but not crippling for most companies. Second, the major insurance companies are only responsible for a portion of those payouts. Reinsurance firms, which purchase portions of policies and share in the risk, cover the rest. In fact, they usually take the biggest hits after major storms. So the short-term negatives aren’t as bad as a lot of people think.
More important, insurance companies are raising premiums at the same time that they are improving their ability to manage risk. Advancements in mathematical modeling and technology used by insurance companies have boosted the industry’s margins, so a bigger percentage of those higher premiums goes to the bottom line.
Two Insurers Worth a Look
In a recent appearance on Bloomberg TV, I was part of a panel discussing retail stocks. You can watch the video below.
As we discussed last time, I’m wary of retailers in general because margins are going to be squeezed by all of the discounting going on. This is why I think it’s safer to invest in other industries. During the interview, I briefly mentioned some insurance companies that have done well recently: Aflac (NYSE:AFL) and Ameriprise (NYSE:AMP). Both are near their 52-week highs, and I expect that momentum to carry into 2013. I would definitely give these two another look.
AFL’s chart is impressive. The quacking duck has been in a steady uptrend since early July as it has run about 40% from $38 per share to $53 per share. The company also recently raised its quarterly dividend payout 6% to 35 cents per share, and the annual yield is still an attractive 2.7% even with the run-up in price. That’s higher than the S&P 500 average yield of 2.1% and a lot better than the interest rate you’ll find on CDs and savings accounts. Third-quarter earnings of $1.77 a share beat analysts’ estimates of $1.66.
AMP is another insurance company that caught my attention for similar reasons. The stock has been strong the second half of the year, moving over 30% from $45 per share to $60 per share since early July. Ameriprise’s yield is a little bit higher than Aflac’s at 2.95%, and the company also bumped up its quarterly dividend by more than 27% from 35 cents per share to 45 cents per share. AMP also came in ahead of Wall Street’s expectations in its last earnings report, earning $1.32 a share versus estimates of $1.19.
I know insurance companies may not be the most exciting businesses in the world, but some changes in the industry have them on the move. They will not only take care of the damage done by Super Storm Sandy, but in terms of investments, they’re in a good position to take care of you too.