The insurance business is not an easy place to make money given the industry’s exposure to natural disasters and to competitive pricing pressures for what is essentially a commodity service. As such it can be equally hard for investors to make money from insurance stocks, however with a couple of insurance stocks vastly underperforming the market over the past year, opportunities may be emerging.
A look at the chart below highlights how vastly differently insurers can fare depending on where their exposures lie. In the past 12 months, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up a very healthy 17.85%. In comparison, two blue chip insurers have significantly outperformed the index, while two othershave significantly underperformed.
AMP (ASX: AMP) has suffered from unexpected losses within its income protection division, which has led to its share price rising just 4.4% over the past year. Based on consensus earnings for financial year (FY) 2014 provided by Morningstar, AMP should earn 35.4 cents per share (cps). With a current share price of $4.63 this puts the firm on a price-to-earnings (PE) ratio of 13.
QBE Insurance (ASX: QBE) has suffered from a number of well publicised issues and the expected benefits of a lower Australian dollar are yet to eventuate given the stubbornly high exchange rate. As a consequence, like AMP, QBE’s shares have also underperformed the index, rising 11.25%. With consensus earnings of 85 cps in FY 2014, the global insurer is trading on a forward PE of 17.3.
Insurance Australia Group (ASX: IAG) produced a much improved results for FY 2013, which helped boost its share price by 31.6%. With consensus earnings of 45.3 cps, the domestic insurer is trading on a PE of just 12.9.
Suncorp Group (ASX: SUN) has been the top performing stock of these four insurers with its share price appreciating by 41%. Consensus earnings for Suncorp are forecast at $1 in FY 2014, which suggests Suncorp is trading on a forward PE of 13 times.
Source: Google Finance
With the S&P/ASX 200 Index trading on a forward market multiple of 14.7 times, AMP, IAG and Suncorp don’t appear overvalued, while QBE will need some time to restore its full earnings power. For long-term investors, buying into the first three stocks at current prices could offer a reasonably priced entry point.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur owns shares in QBE Insurance.