Hedge Funds Have Endorsed These Four Insurance Stocks

The insurance industry did not make huge moves during 2015, having registered a return of around 1.70%. However, in 2016, the insurance segment in the US is expected to continue its transformation, being affected by advances in technology, competition, and modest economic growth, as pointed out in an Ernst & Young report. The upcoming elections later this year also creates some uncertainty as there is a considerable level of probability of regulations and taxations in the industry. Moreover, the same as 2015 was marked by a number of M&A deals in the insurance industry, 2016 will represent a continuation of the same processes and more deals are expected to take place.

Meanwhile, the hedge fund sentiment towards insurance stocks has been mixed. In this article we are going to discuss top four most popular insurance stocks (excluding health care plan companies). We compile the hedge fund sentiment based on 13F filings of more than 700 investors, whose activity we track as part of our small-cap strategy. We believe that we can imitate some of the smart money investors’ picks that they are collectively bullish on, and, in this way, benefit from the resources and skills they employ while making their bets. However, our research showed that the best approach is to follow these funds into their top small-cap bets, which can outperform the market by as much as 95 basis points per month on average over the long run (see the details here).

#5 MGIC Investment Corp. (NYSE:MTG)

Investors with Long Positions (as of September 30): 47

Aggregate Value of Investors’ Holdings (as of September 30): $1.34 Billion

At the end of September the hedge funds and other institutional investors within our database held over 42% of MGIC’s outstanding shares. While the total number of these funds declined by two during the third quarter, the aggregate value of these holdings fell by almost 30%, mostly on account of an 18.2% drop registered by MGIC Investment Corp. (NYSE:MTG)’s stock price.

MGIC Investment Corp’s stock ended 2015 with losses of around 5%, but with a P/E ratio of 15.6 and a price/book multiple of 1.3, the stock is cheaper than many of its industry peers, the company may be a promising investment. Analysts are also optimistic on the company’s prospects and earlier this year BTIG Research and Compass Point reiterated ‘Buy’ ratings on the stock. However, Compass Point lowered its price target to $11.00 from $13.00. Also earlier this month, Goldman Sachs trimmed its price target on MGIC’s stock to $11.00 from $12.00. MGIC is expected to report its fourth-quarter and full-year results on January 21, with the consensus EPS amounting to $1.08, while the revenue estimate stands at $1.04 billion.

Out of the investors we track, the largest shareholder is Doug Silverman and Alexander Klabin’s Senator Investment Group, which owns 13.14 million shares. Other investors bullish on the stock include Rob Citrone’s Discovery Capital Management, John Paulson’s Paulson & Co., and John Griffin’s Blue Ridge Capital.

#4 Metlife Inc (NYSE:MET)

Investors with Long Positions (as of September 30): 47

Aggregate Value of Investors’ Holdings (as of September 30): $1.72 Billion

Metlife Inc (NYSE:MET) also saw a decline in popularity among the investors we follow, with the number of funds holding long positions having dropped by eight between July and September. On the other hand, the total value of the holdings of these investors slid by $980 million and they amassed just 3.30% of the company’s outstanding stock. More specifically, Richard S. Pzena‘s Pzena Asset Management trimmed its stake in the $51.06 billion insurance provider by 1% in the July-September period to 5.97 million shares. Jeffrey Tannenbaum’s Fir Tree is also bullish on the stock, holding 4.81 million shares, according to its latest 13F filing.

Last week, Metlife announced that it is going to separate a “substantial portion” of its US retail business. The company will retain its other reporting segments, such as Group, Voluntary and Worksite Benefits, Corporate Benefit Funding, Asia, Latin America, and Europe, the Middle East and Africa. The new company that will be separated from Metlife will include MetLife Insurance Company USA, General American Life Insurance Company, Metropolitan Tower Life Insurance Company, as well as some subsidiaries that have reinsured risks underwritten by Metlife Insurance Company USA, Metlife said in a statement. The new company will have $240 billion in assets and will include 50% of Metlife’s US Retail segment.

#3 FNF Group of Fidelity National Financial, Inc. (NYSE:FNF)

Investors with Long Positions (as of September 30): 47

Aggregate Value of Investors’ Holdings (as of September 30): $2.10 Billion

Next in line is FNF Group of Fidelity National Financial, Inc. (NYSE:FNF), whose stock inched down by 4% during the third quarter. The number of funds with long positions in the company remained unchanged during the same period, but smart money investors opted to reduce their exposure to the stock and the aggregate value of their holdings dropped by 15% during the third quarter.

The stock of FNF Group of Fidelity National Financial ended 2015 almost flat, but analysts see some potential upside, with the consensus price target on the stock amounting to $44.40. The company is scheduled to report its financial results for the fourth quarter on February 10, with the consensus EPS and revenue estimates currently amounting to $0.54 and $1.88 billion, respectively.

Among the funds we track, the largest stake is held by Keith Meister’s Corvex Capital, which reduced its stake by 6% to 19.37 million shares during the July-September period. Ricky Sandler’s Eminence Capital and Stephen Mandel’s Lone Pine Capital are two other investors bullish on Fidelity National Financial.

Chubb Corp (NYSE:CB) also made the list as 48 funds reported long positions in the company with a total value of $1.43 billion. The company registered an increase in popularity as as 23 more funds reported long positions in the company at the end of September. The increase in popularity comes on the back of Chubb Corp’s acquisition by ACE Limited (NYSE:ACE) in a stock and cash deal valued at $28.3 billion, which was completed last week.

#1 American International Group Inc (NYSE:AIG)

Investors with Long Positions (as of September 30): 94

Aggregate Value of Investors’ Holdings (as of September 30): $8.43 Billion

The total number of hedge funds holding shares of American International Group Inc (NYSE:AIG) in their equity portfolios slid by five during the third quarter, while the aggregate value of their holdings declined by 26%, amid a 7% fall registered by the stock during the same period.

Lately, the notorious activist investor Carl Icahn has been urging AIG’s management to break the company into three parts, namely life, property & casualty and mortgage insurance. This will remove the company from the ‘Systemically Important Financial System’ category and hence time consuming tougher restrictions. Another investor pushing for the three-part separation is John Paulson’s Paulson & Co. According to a filing with the SEC, Carl Icahn’s Icahn Capital owns around 42 million shares of AIG, while Paulson holds 14.60 million shares, as revealed in its last 13F filing.

American International Group has not made any announcements regarding the separation of its segments, but according to some reports, its Board of Directors was considering the spin-off of its mortgage-insurance business, which is, however, the smallest part of AIG. Nevertheless, AIG continues to boast strong fundamentals and the management has expressed devotion to increase the shareholder value by boosting its buyback program. In December, the board authorized expanding the buyback program by an additional $3.0 billion to $4.3 billion.

Disclosure: None