3 Ways You Can Add Life (Insurance!) to Your Portfolio

Rudy Martin

Quick — name an insurance company that needed a government bailout during the 2008-’09 financial collapse.

Let’s try that again. Name an insurance company other than AIG — which peddled credit default swaps like candy at a kids’ concert — that required rescue.

It’s hard to come up with one. But you’ll remember that hundreds of small and medium-sized banks failed during that time. And most of the banking industry’s big boys turned to the Fed or the Treasury to avert disaster.

After a quick rebound in early 2009 that lasted a little more than a year, the financial sector spent a couple years in investment purgatory before finally showing signs of life in recent months.

But if certain familiar names in this strengthening sector haven’t yet earned back your trust — by way of your savings or your investing dollars — you don’t have to miss out on this upswing.

My stock-rankings model doesn’t read headlines. Instead it’s looking at fundamentals, and those are screaming to buy financials. But profiting from this sector often means looking beyond the banks for the best opportunities.

So today let’s look at a segment of that industry … one that’s so financially stable that it not only largely survived the Great Recession intact, but also the Great Depression of the 1930s.

In fact, one of the companies that we’ll discuss today has been around since long before the Depression ever started. It’s 500% from its 2009 lows … and heading higher!

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A Better Way to Bank on Financials

The S&P 500 climbed 34% on a total-return basis over the past three years. During that time, the S&P Financial Sector Select Index advanced at less than half that pace at just 15%.

But let’s look at what’s happened just during the past year. The S&P Banks Select Industry Index, with a total return of 15.4%, has outpaced the broader market (as measured by the S&P 500’s total return) by 1.5%.

The picture looks even-better when you focus on activity so far in 2013.

Year-to-date, the bank-stock gauge has climbed 13.5%, outdistancing the total return of the broader market by a notable 3%.

However, as impressive as the recent performance of the banking group has been, the insurance sector seems to hold even-better promise.

A Better Twist on Buying Portfolio ‘Insurance’ …

In a period when everybody and his or her brother is cautioning against touching the bond market, insurance stocks hold some promise of portfolio stability and yield in addition to a distinct possibility of some handsome price appreciation.

The S&P Insurance Select Index has vaulted 18.4% on a total return basis so far this year, close to 5% better than the banking gauge and just shy of 8% above the overall market’s return.

An ETF that represents the insurance sector, the SPDR S&P Insurance ETF (KIE),

is up more than 16% year-to-date.

For the past year, the insurance index is up a whopping 27%, outdistancing the banks by 11.6% and walloping the S&P 500’s total return by 13.3%.

A trio of particularly interesting insurance stocks are showing up in my stock-screening research, and I’m keeping these worldwide players on my radar as a potential way to play a continued rise in financials.

With respective assets ranging from $283.8 billion to $709.3 billion and domiciles in the United Kingdom, China and the United States, they offer geographic as well as size diversity. The same goes for dividend returns, with these distinct offerings:

  • British insurer Aviva (AV), which is trading just a few cents shy of $310 a share, is in a transition phase but yielding 6.1%.
  • A relatively small company, China Life Insurance (LFC), trades just above $41 and currently yields a slim 1.1%. However, the stock has the potential for outsized growth thanks to a growing customer base in the world’s most-populous nation.
  • Mighty Prudential (PRU), established back in 1875, is starting to receive some serious attention from investors. It’s trading around $63.50 a share while yielding a bit more than investment-grade corporate bonds.

Here’s a visual look at each company …

And here’s a look at the fundamental picture on each …

Aviva

For much of the past year, following an investor revolt over poor share-price performance, Aviva has been taking steps to jettison marginal units and to shore up its core businesses.

The London-based firm has a new CEO in place and has been selling or reducing stakes in units and joint ventures in Spain, Russia, Malaysia, the Netherlands, the United States and in a number of Central European countries. It has also recently reduced its payrolls by close to 3,000 employees.

Although Aviva’s yield currently stands well-above the payout on U.S. investment-grade corporate bonds, its restructuring involves risk. For example, its latest cash dividend of 9 U.K. pence per share in March was 44% lower than a year earlier.

Here’s another way to play the global insurance space …

China Life

Even with its 140 million individual and group life policies in force, the potential for growth in the world’s-biggest nation should boost China Life’s profits and dividend payouts over time.

The firm reportedly has the most-extensive distribution and service network among all insurance companies operating in the huge nation.

Moreover, the investment income of China Life has shown substantial improvement over the past two years. The meteoric growth of China’s middle class should provide plenty of new policyholders for China Life in the coming years.

And finally, Newark, N.J.-based Prudential has managed to stay in business for well-over a century for its ability to offer a wide range of services throughout the globe and continue finding ways to reward its shareholders …

Prudential

As was the case with many of its financial industry brethren, Prudential’s stock price has gone nowhere over the past couple of years.

Prudential Financial Inc. (PRU) is up nearly 500% from its 2009 lows.

The diversified financial firm’s annual revenue has ballooned from $29.2 billion in fiscal 2008 to $32.2 billion in 2012. But erratic earnings have capped any sizeable advances in the price of Pru’s shares.

That could soon change, however.

Although fully diluted earnings for 2013’s first quarter were negative because of charges and investment losses, Pru’s revenue for the quarter was 13% higher than a year earlier. And adjusted operating earnings of $2.28 per share beat consensus estimates by 23%.

Pru’s base of business has become widely diversified in financial services, with operations in retirement planning and asset management in addition to a full range of insurance offerings.

With an asset base of more than $700 billion, making it one of the world’s largest insurance firms, Pru should be capable of generating some steady, sustainable growth for its shareholders.

These are just a few ideas in the financial sector that have been overlooked. It’s likely there are more buy ideas where these came from. Stay tuned!

Best wishes,

Rudy

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Your thoughts on “3 Ways You Can Add Life (Insurance!) to Your Portfolio”

  1. I love Rudy Martin. His latest UW, however names 2 substantially different prices for AV. Just under $10 and over $300. Probably a typo or something. My Trader shows $9.63. Hope that is correct.

  2. When I went to get a quote on Aviva (AV), the stock is listed at $9.95 per share when the article indicates a per share price of over $300 – am I looking at the right stock?

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