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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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.