by Tim Melvin | May 30, 2014 6:00 am
In spite of a general move up in the sector the past few years, many financial stocks are still very cheap on an asset basis. This is particularly true of some of the nation’s insurance companies. Many insurance stocks were so battered by the financial crisis that their stock plummeted to unheard of levels and they’re just now starting to recover.
Many insurance stocks had very high levels of exposure to the housing market in the form of mortgage-related investments while others actually sold mortgage insurance and saw large losses make their viability a question. Still others fell in line with the market and simply didn’t recover as the new super low interest rate environment made their products less attractive to consumers.
As the economy and housing markets have inched towards recovery, conditions have improved for many of these companies and they are still priced at levels that make them bargain issues.
Genworth Financial (GNW) is one of the best examples of these undervalued insurance stocks. Genworth is one of the largest issuers of mortgage insurance policies in the world as measured by premiums written. It is also the largest issuer of long-term care policies in the United States. In early 2013, the company issued a comprehensive capital a plan for its U.S. mortgage insurance operations that decreased risk and helped the company avoid the need for additional capital raises to survive.
The company is focusing on the long-term care business as the driver of revenue and earnings growth going forward and management feels like that market offers huge opportunities for Genworth. The stock is still very cheap as the shares fetch just 60% of tangible book value right now.
Shares of American National Insurance (ANAT) have slowly recovered form the financial crisis, but they are still trading well below book value and qualifies as a bargain issue. American National sells life insurance, annuities and property and casualty insurance. A combination of weak economy and low interest rates has hurt their life and annuity business but American National is starting to get back on track.
Strong growth in variable annuities is starting to help offset the dramatic declined in the fixed rate annuity business over the past couple of years. Trading at just 72% of book value, the stock is a bargain at the current price.
Hartford Financial Services (HIG) completely overhauled its business back in 2012. It decided to focus on its core property and casualty, mutual fund and group benefits business. HIG has disposed of several businesses and placed its annuity business into runoff mode.
Hartford recently announced the sale of the annuity business in Japan for $1.4 billion in an additional move to shore up the balance sheet and focus on what it does best. So far, it’s working, as the core business showed 23% earnings improvement on a year-over-year basis. HIG stock is still a bargain, trading at just 86% of book value.
The insurance industry was hit hard by the financial crisis, but is starting to recover. Many insurance stocks still trade well below book value and could reward patient, long-term investors who take advantage of the current bargain prices.
As of this writing, Tim Melvin was long ANAT and HIG.
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