Dutch Treat

Canadians seemingly have a love affair with insurance. This magazine has covered many types over the years and helped people understand what products are out there and how to obtain the best rates. That is important, particularly for the Canadian MoneySaver demographic, which though it is trending younger, still skews towards the older.

Many fortunes have been made in this industry. In Canada, Fairfax Financial has been a major success story, with much of its portfolio operating in the insurance sector. In the United States, the conglomerate Berkshire Hathaway, headed by Warren Buffett, still makes oodles of money from this arena. Though insurance companies do fail and certainly sometimes go through difficult times, as a general rule they prosper.

That is one of the reasons for the recent purchase of Aegon N.V. (AEG-NYSE), a Dutch insurance provider. Like many other enterprises in the field, it also offers pension and asset management products. Like Manulife, this outfit had tremendous difficulties during the recession. Things were so bad that it required a bailout from the Dutch government. The dividend was eliminated. The stock price that had once crested $50 plummeted to the $3.50 level. Investors were not happy campers.

Fortunately a recovery followed the meltdown. The bottom line is comfortably black and a healthy dividend was restored, although it is still less than one-third of its peak. Though the stock price has doubled from its lows, from this end it appears that there is lots of upside. Purchased at $7.64, a triple in price is definitely possible, which would still leave this outfit trading far below previous heights.

Corporations in the insurance sphere tend to do very well in environments where stock prices are climbing. The past five years as a general rule have been good to AEG in that regard. However interest rates that have been cut to their lowest levels in history in many countries have not been favourable for this enterprise. That will likely change over the next few years, as rates will not rest at this diminutive base.

Though based in Europe, the majority of Aegon’s business is actually via the United States and its popular Transamerica brand. European operations are also substantial, but fortunately the company has limited exposure to the continent’s weakest countries.

When constructing a portfolio, diversification is an important issue. Buying into AEG gave the President’s Portfolio that I manage an additional European spin on top of huge French telecom operator Orange. Naturally this also offers exposure to the Euro, which though badly weakened recently will likely have another day in the sun. That seems to be the natural cycle of currencies. Ultimately, at Contra the Heard, we welcome all animals to the zoo and the view here is this pick broadens the corporate mix nicely.

As an aside, a number of MoneySaver readers have offered their questions and thanks for the Alpha Pro Tech (APTNYSE M) pick that was trading at around $1.35 when the article was published three years ago. Yes, this was a wild ride, with the stock going from under $2.00 to over $10.00 last August. Some of you have mentioned hoping for another pick like that and while I would love to have more, those are exceedingly rare. No question, Aegon will be far less exciting, but hopefully will also offer a lovely return.

Spurred by Alpha Pro, the PP jumped 23.9 percent last year. That brought the 15-year annualized return to 19.0 percent. But as we all likely know, past returns are not necessarily indicative of future returns.

Benj Gallander, MBA, Co-editor of "Contra the Heard", Toronto, ON (416) 354-2458, gall@pathcom.com, www.contratheheard.com