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Could these 2 top ASX insurance stocks be undervalued?

The 2018 Financial Services Royal Commission hammered most of the S&P/ASX 200 Financials (INDEXASX: XFJ) index’s constituents share prices lower, as it revealed misconduct and poor management in various areas of the sector.

One sub-segment that was hit particularly hard was the insurance sector, with the fear of structural changes and removal of trailing commissions seeing investors head for the exit on the risk of lower long-term growth and earnings.

However, with the dust having settled on the Royal Commission and Commissioner Kenneth Hayne’s recommendations not as dire for the industry as once feared, could these top ASX insurance stocks be back in the buy zone?

Why QBE and NIB could be undervalued in 2019

Two of my personal favourites amongst the ASX insurers are QBE Insurance Group Ltd (ASX: QBE) and NIB Holdings Limited (ASX: NHF).

The QBE share price has climbed 26% higher so far this year to be one of the better-performing financial stocks on the market, outpacing the Big Four banking stocks and many of its fellow insurers.

However, I think with QBE’s recent pivot away from non-core areas to focus on the segments that it knows best, the company could see higher margins due to better pricing and operational knowledge in the short- to medium-term.

The company remains Australia’s second-largest global insurer after Insurance Australia Group Ltd (ASX: IAG) and at $12.46 per share, I think the company could push beyond its current $13.16 52-week high with a solid earnings result in August.

One of the few insurers to outperform QBE so far this year has been the NIB share price, which has surged 55% year-to-date in a bumper year for investors.

While the company’s CEO courted controversy in the last week or so for suggesting plans to scrap Medicare, the company has still been able to perform strongly while many of its Financials peers have struggled.

The private health insurer’s share price growth has been rocketing higher since the Coalition won the May 2019 Federal Election, given it unlocks a lot of potential growth that hadn’t been factored in given an expected Labor victory.

Labor had announced plans to limit health insurance premium increases and the shock election steal from Scott Morrison and Co has turned around the fortunes of not just NIB but all the ASX private health insurers.

Not all insurance stocks are created equal

While I think a relative value play potentially puts QBE and NIB in the buy zone, it’s not as simple as just picking any old stock in the sector.

One great example is the Challenger Ltd (ASX: CGF) share price, which has plummeted 23.3% lower so far this year on lower earnings and flow of funds.

Challenger’s share price has slumped over the last 12–18 months after the company announced significant impairments from the 2H 2018 global equities downturn and widening credit spread environment which hurt the company’s returns.

Challenger remains part wealth manager and part insurer, with most of its insurance operations sitting within its Challenger Life business – something that I don’t see as being a long-term growth sector here in Australia given the number of headwinds for margin expansion and protection.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia owns shares of Insurance Australia Group Limited. The Motley Fool Australia has recommended NIB Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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