Some women like fast cars and money. Others like it when their partners have large… vocabularies. Other women like when a would-be romantic dictates 18th-century French poetry. But you never know. You might one day meet a lovely woman who just can’t get enough conversation about life, accident, and supplemental insurance stocks.
If you find the one needle in the haystack who can’t wait to date you due to your incredible knowledge of the insurance industry… well, I’ve got you covered. There’s a lot of money to be made on insurance stocks in 2022.
The Merger Wave Continues
We can get one thing out of the way. It looks like the Omicron variant is burning through society quickly. Fortunately, this seems like a weaker, yet more contagious variant with fewer fatalities. This is a positive development for society… and the insurance industry.
Insurance stocks have been beaten down over the last 18 months. As a result, we saw a wave of mergers and acquisitions. From June to November, we had 249 deals worth about $34.2 billion, according to PwC. The industry saw seven megadeals. These deals included:
- Brookfield Asset Management’s planned purchase of American National Group for $5.1 billion.
- Great-West Life & Annuity Insurance’s planned buy of Prudential’s full-service retirement business for $3.6 billion.
- Chubb’s deal for Cigna’s life, accident, and supplemental benefits business in the Asia Pacific region and Turkey for $5.8 billion.
- Covéa Mutual Group Insurance Company’s purchase of PartnerRe Ltd. for $9 billion.
Consultancy PwC projects even more deal-making in the year ahead. These deals would drive up valuations across the space and potentially lead to significant gains in stocks across the space.
Value in Boring Assets
There are a wealth of opportunities to buy-and-hold insurance stocks right now. I know that it’s not the most exciting thing in the world. I know that it’s an industry that investors overlook on their way to finding bank and fintech stocks.
But the reality is that two catalysts offer remarkable upside in this new environment. The expected end of COVID-19 offers a positive behavioral catalyst for institutions to purchase their stocks. And, an expected wave of mergers and acquisitions should provide a solid boost to valuations across the sector.
Remember, insurance might be boring to many retail investors, but it’s a reliable cash-flow business for institutions and has been so for decades. Insurance is designed as a business where the house typically wins. It is a business that performs very well in times of economic expansion, in times of recession, and anywhere in between.
Here’s a Growth and Income Play
To start the year, check out CNA Financial (NYSE:CNA), a Chicago-based firm whose primary subsidiary is Continental Casualty Company. With a P/E ratio of 9 and a price-to-tangible book value of under 1, this stock is very inexpensive.
Its buyout multiple of 8.09 (EV/EBIT) offers a very attractive floor for this stock, as it has historically traded at 10.6x. I would argue that this stock likely won’t get purchased and taken private. But it would benefit from an uptick in valuations and offers potential upside in the months ahead of about $55 per share, the same price target offered by KBW.
That represents about a 20% upside from today’s share price on top of a 3.45% dividend.
I’m anticipating that this year will kick off a return to fundamentals and a further rotation into value as interest rates start to rise. So, let’s start with this boring industry as a buying opportunity.
The least I can do is give you the knowledge to pay for dinner with your insurance enthusiast. But you’re on your own after that…
Momentum Goes Positive
We’re off to a great start today. Market momentum went positive at 10:45 am. Huge moves in the IWM and IWC are showing that the market is ready for a nice Pre-FOMC drift higher. I’d look to make some fast trades over the next 24 hours and remain a tad cautious ahead of Wednesday’s release of the Fed’s minutes from its December meeting.
This start for the Russell 2000 gives me confidence right now. Despite concerns about inflation, remember that Russell stocks have extreme exposure to the US Dollar.