Which insurance stock should you own?

Australia’s insurance companies have taken advantage of a lack of natural weather events and share prices have pushed higher and higher. Our top five listed insurance stocks have all managed to beat the market in the past year but investors are still pushing up their share prices. Here is a list of five alternatives for an investor looking to get into the sector.

QBE insurance (ASX: QBE)
QBE is by far Australia’s biggest pure insurance play. In the past 24 months, the company was hit by weather events in the US but still has a bright upside. QBE is in the middle of cutting costs and continues to have above-market investment returns. It has made over 140 acquisitions in the past 25 years and in its last year grew NPAT by 8%.

Suncorp (ASX: SUN)
Suncorp is a bank and insurer that operates under many different names including Vero, Shannons, AAMI, GIO and APIA. Since the GFC, the company has been paying down bad loans and credit, however it is now on a very healthy upwards trend. This stock is likely to go higher in the short to medium term despite having a current P/E of 24.

Insurance Australia Group (ASX: IAG)
IAG has outperformed all of its peers in the past year, rising almost 65%. At current prices, it represents significant value with a P/E of 11 and has a dividend of 4.1%. Morningstar predicts its EPS to jump to 50 cents per share and pay a dividend of around 31.8 cents. After upgrading its insurance margin from between 12.5% and 14.5% to between 16.8% and 17.2%, the market appears to have still undervalued the stocks. However, IAG’s history has been prone to risk and perhaps the market is factoring it in before getting carried away.

After its share price shed almost 12% in one day of trading last month, it seems investors were scared off by the company’s 13% reduction in profit forecasts. The forecast also raised concerns over the company’s ability to pay its dividend of 5.3%. When compared to other insurance stocks, AMP share price looks as though it may lag its peers in the short term.

Challenger (ASX: CGF)
Challenger is the dark horse among listed insurance stocks. However, with a market capital of only $2.2 billion, it managed to produce an NPAT of $222 million for the half year ended 31 December 2012. The EPS is expected to increase modestly over the next 3 years but with the number of retirees increasing in coming years, Challengers investment management focus on individuals’ financial security is likely to grow revenues healthily.

Foolish takeaway

Australia’s insurance stocks are trending higher, with solid results from both domestic and overseas operations, investors have realised the potential of the company’s to drive profits higher. With the exception of AMP, our top five insurance stocks are definitely worth a spot on your long term watchlist.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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