3 Stocks In The Insurance And Financial Sector

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After the last economic crisis, investors have found it hard to trust insurance companies. Some said they were too big to fail, while others, too big to ignore. Either way, we will look into some of the main firms in the industry, American Insurance Group (NYSE: AIG), MetLife (NYSE: MET), and Hartford (NYSE: HIG), and analyze the main pros and cons that they offer for investors.

A stock in recovery

AIG is slowly recuperating after the business disaster that led to the federal government bailout. In order to reconstruct the firm, explained Morningstar's Jim Ryan, a new management has been selling assets that are not indispensable and considerably limiting risky investments, resulting AIG’s return to common stockholders.

Analysts recommend caution regarding this company, and for reasons that appear quite clear. Nevertheless, AIG is not a "sell," but more a "hold" kind of situation. Zack's estimates short term returns to be somewhere around 10% (annualized) and the stock price to reach $41.00, up 6% within one year. Meanwhile, fiscal 2012's fourth quarter delivered higher earnings than consensus estimates, while stock price rose 28% over the last 12 months, and 13% in the last 100 days.

Under these circumstances, however, some of the main investment websites still recommend AIG. CNNMoney analyst, Paul La Monica, compliments CEO, Robert Benmosche, and declares he is confident about past and future results, although a full recovery to a pre-2009 point seems highly unlikely. Morningstar also assures that the company is undervalued and due to increase investors’ value, as the management team is extremely “committed to increasing profitability through operational improvements and a shift in business mix. AIG lost its way by relying on extremely risky financial bets that obfuscated weak performance in core operations, and current management has put an end to those activities.” Taking this into account, paying 26.2 times P/E could be worth it.

A stock with good growth prospects?

Similar to AIG's case, opinion about MetLife is pretty divided. By mid-March, the company was expected to underperform, delivering a scarce 6% increase in stock price by the end of the fiscal year. However, projections have become more optimistic. Target price now is now expected to reach approximately $44.50 (Barrons), up 25% from the current $35.60. Zack's also reconsidered its "hold" recommendation and changed it to a "buy," while Barrons' consensus suggests to overweight the stock (although most of its analysts counsel to "buy").

Several reasons to invest in this company can be listed. For starters, MetLife's diversified product offering makes it one of the main providers in the U.S., Mexico, Japan, Chile, Poland, and Korea, and helps drive expansion in emerging economies. The ALICO acquisition also provided an important boost to international expansion as MetLife’s operations increased to 64 countries, up from 17, before the purchase, doubling the value of international revenue share within one year from the buy. This procurement is also expected to deliver a $0.05 buildup in EPS during 2013, and another $0.15 in 2014. Management has also proven effective, while maintaining the company's leverage, liquidity, and capital position, even during the toughest times in the economic crisis.

In this context, understanding why MetLife trades at 31.3 times P/E, above its historical average, and higher than 36 of the 45 global companies in the life insurance business, becomes easier. However, some major risks should be taken into account. As debt builds up, concern does too. MetLife issued over $10 billion in debt over the past three years. Partly as a result, several analysts feel that bankruptcy can't be completely ruled out, as the firm's Altman Z-Score of 0.15 sits in the zone of distress.

A stock to more closely examine 

Finally, there's Hartford. Its future is not looking extremely bright, but not doomed, either. On one hand, the stock is priced reasonably and trades at 0.52 times P/B and 0.44 times P/S, one of the lowest values in the industry. The recent announcement regarding the firm’s run-off, Talcott Resolution’s capital self-sufficiency, liberates exceeding capital to be reinvested. In this line, company estimations show the intention to repurchase over $100 million in stock every quarter, as more than $2.2 billion in free capital is projected to be available by the end of 2014. Buybacks and other encouraging signals, like strong risk-reduction efforts, have pushed the target price to $35 (Barrons), and 0.75 times P/B value is estimated for 2014, up 30% from current $26.84 and much better that the -8% projected by Zack's only one month ago.

However, several severe warning signs cannot be disregarded, especially those concerning the company’s poor financial strength. Distress in this last area seems fairly likely. Both Altman-Z and Piotroski-F scores acquire remarkably low values, at 0.15 and 3, respectively, indicating weak business operation and considerable chances of bankruptcy. Per-share revenue has also been declining over the past three years, and dividend yield is currently quite low, providing extra reasons to be cautious about this firm.

Nevertheless, Barrons, the Wall Street Journal, and their associates are recommending to buy or, at least, overweight the stock, as not only price but also EPS are expected to grow, reaching a $3.17 consensus for 2013 and a $3.47 consensus for 2014, considerably up from the current -$0.18, trailing twelve months.

Bottom line

The insurance business is a complicated one. Although it looked like a bad investment idea not long ago, most websites and journals now advise readers to pay attention to these stock and buy in most of the cases previously mentioned. 

Victor Selva has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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