2022 hasn’t been a good year for stock investing returns. Since January, the S&P 500 is down 25%, putting it firmly in bear market territory. The FTSE 100, on the other hand, has only fallen by 8%. However, some shares have fallen a lot further than that.
One sector that has taken a battering recently is insurance. In particular, I’ve been tracking two stocks I believe are in serious bargain territory.
Prudential
When it comes to growth stocks, the insurance sector doesn’t spring to mind. However, Prudential (LSE: PRU) is undoubtedly a growth business.
The company has reinvented itself lately. Its business model is now aligned solely to the long-term structural growth opportunities in Asia and Africa.
It offers a diversified suite of insurance products, including health and protection, which accounts for over a third of all new business profits.
Despite fast-rising prosperity, people in Asia still have low levels of insurance cover, with 39% of health and protection spend met by individuals directly. A large unmet need has created a vast health protection gap estimated at $1.8trn.
In the next 10 years, the size of the industry revenue pool across its core markets is expected to grow by $900bn. Translated to its Asia business, gross written premiums are projected to more than double in that time to over $60bn.
Of course, these are just estimates and there are no guarantees. At present, shareholders are more concerned with short-term headwinds. Rolling Covid restrictions in India, Malaysia and Singapore have dented margins. In Hong Kong, the closure of the border with Mainland China has resulted in overall annual premium equivalent (APE) in its largest market slump 10%.
Prudential’s share price is down 33% year-to-date. Yes, it could fall further. Nevertheless, I intend to buy its shares.
Legal & General
My second insurance stock pick is a traditional income one. Like Prudential, Legal & General (LSE: LGEN) has seen its share price plummet recently. It’s now down 29% year-to-date. This has had the effect of pushing up its forward dividend yield to 8.9%.
Normally, yields approaching 10% ring alarm bells. As a likely recession looms, dividend cuts can never be ruled out. However, I’m less concerned about L&G’s.
In the first half of 2022, it achieved 22% growth in cash generation and 14% growth in capital generation. The company remains confident in its ability to grow cash and capital faster than its dividend commitment.
This confidence is backed up by a number of growth drivers, including ageing demographics. As populations live longer, so too must their pensions. Organisations are increasingly turning to L&G to help them find solutions to their ongoing pension commitments. At the same time, individuals need to ensure that their retirement funds and other assets can finance longer retirements.
The accelerating share price sell-off is a direct result of the recent turmoil in the bond market. However, despite volatile markets, the group issued a press release to the effect that it hasn’t been forced to sell any gilts or bonds to shore up its capital position.
When markets are in turmoil, I always remember one of Warren Buffett’s classic quotes: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”. In L&G, I’m seeing such an opportunity and I’ll be buying.
