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Sunday, December 19, 2010

An Undervalued Insurance Stock for 2011

An Undervalued Insurance Stock for 2011 ; The Hartford(HIG_), a besmirched insurer that accepted TARP money, has become an attractive investment. Its stock ranks fifth-cheapest among S&P 500 components, based on forward earnings. Analysts offer a middling view, with eight rating it "buy," 11 rating it "hold" and one ranking it "sell." Yet, The Hartford's value is compelling.

The stock has risen 11% in 2010, in accordance with the average large-cap. Its trailing earnings multiple of 11, forward earnings multiple of 7, book value multiple of 0.5 and cash flow multiple of 4.5 reflect discounts of 50%, 51%, 85% and 69% to insurance peer averages.

The Hartford held $46 billion of cash and equivalents at quarter's end and just $7 billion of debt, a reassuring sign for investors. Insurance stocks have been routine underperformers since the recession, despite cheap share prices. The Hartford, for example, has a five year-average earnings multiple of 20, but currently trades at a multiple of just 11. And fundamentals are clearly on the mend.

The Hartford swung to a third-quarter GAAP profit of $666 million, or $1.34 a share, from a loss of $220 million, or 79 cents, a year earlier. Revenue increased 26% to $6.6 billion. The gross and operating margins climbed from negative territory to 17% and 15%, respectively. Both margins are above insurance industry averages. Return on equity is modest, touching 5% in the latest quarter, less than the S&P 500 mean of 13%. Still, The Hartford is beating expectations. It exceeded analysts' consensus earnings estimate by just 0.2%, but its stock popped 8% on the announcement. Researcher Barclays is bullish, rating the sector "positive" and The Hartford "overweight."

Barclays is encouraged by The Hartford's new management team, which is focused on reducing its capital markets risk, namely, exposure to the U.S. equity market and downside from further strengthening of the yen. Volatility in its investment portfolio and elevated claims levels in its group disability business weighed on The Hartford's stock price in 2010.

Barclays is encouraged that management is addressing these two issues with additional hedging techniques and a commitment to amplify top-line growth. Insurers, which invest float, or the income derived from policies, in various stocks and bonds, are subject to capital swings when markets turn down. Oftentimes, a market downturn coincides with an economic recession and thus higher claims, making insurers doubly vulnerable. This is what happened during the subprime crisis when The Hartford required a now-repaid $3.4 billion government loan For the latest updates PRESS CTR + D or visit Stock Market news Today

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