One of the best businesses in the world is one that is pretty much ignored by investors: insurance stocks. Insurance is basically a giant casino, but instead of betting on cards and dice the players are betting on casualty and loss rates as well as life expectancy.
Property and casualty companies know the odds of you having an accident, a home or some sort of business loss and they price the policy to reflect those odds. You are betting you will have a loss and they are betting you won’t, and the odds are set to give them a huge edge.
Life Insurance companies have an even better deal. You are betting you will die sooner rather than later and they are betting you will not. Since they have enough actuarial data that they pretty much know when you will die; they have an enormous edge over you. Best of all, both types of companies accept your bet and then place the money in their investment account until they have a loss. The profits earned on your bet are theirs to keep.
The recent market setback is giving us a chance to buy some insurance stocks at bargain prices. A significant portion of insurance companies’ profits come from profits earned on policy holder’s capital, and investing this “float” has been a chief component of Warren Buffett’s huge returns over the past 40 years.
With that in mind, here’s a look at two underappreciated insurance stocks worth buying for long-term value.
Insurance Stocks: Prudential Financial (PRU)
Prudential Financial (PRU) is one of the largest insurance companies in the world, with more than $1 trillion in total assets. The company operates through three divisions: U.S. Retirement Solutions and Investment Management, US Individual Life and Group Insurance, and International Insurance. PRU also has what it calls a closed block of business, which is policies and products no longer offered by the company that are in runoff mode.
Prudential is expanding in Japan and emerging markets with its life insurance operations, and that should help drive long-term growth. The company should also see strong growth in the U.S.-based retirement planning and wealth management business. PRU stock has been generous with shareholders and returned more than $2 billion in the form of dividends and stock buybacks in 2015.
PRU stock has slipped almost 20% in 2015 and currently trades at just 71% of book value. PRU yields more than 4% at current prices, so it may appeal to income investors as well as more growth-oriented accounts.
Insurance Stocks: Hallmark Financial Services (HALL)
Hallmark Financial Services is a property and casualty insurance company that operates in niche markets. The company offers personal line such as auto, and renter insurance, but the real driver of its growth has been the commercial insurance markets.
Hallmark Financial serves industries like restaurants, contractors and auto storage and care facilities. It also offers specialty coverages like medical professional, airport and aircraft insurance, focusing on the rural and smaller cities in the western U.S., as well as Arkansas, Hawaii and Missouri. In Texas and Montana, Hallmark also offers workers compensation insurance.
The company has a huge 3rd quarter of 2015, with earnings that were almost 100% higher than the comparable quarter in 2014. In spite of this, HALL stock has fallen in the recent market decline and now trades at just 80% of book value and 10.6 times forward earnings.
The focus on niche regional and product markets should pay off and allow the company to grow at strong pace for the next several years. At the current price, HALL stock appears to be a bargain that should reward patient, long-term shareholders.
Insurance stocks have helped many famous investors like Warren Buffett and Shelby Davis earn huge returns in the past and should continue to so in the future.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Reportthat seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.
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