Insurance companies have had a great past 12 months, with American International Group (NYSE:AIG) up 50%, The Hartford Group (NYSE:HIG) up 60%, and Lincoln National Corporation (NYSE:LNC) up 70%. These impressive runs have still not even brought the companies' valuations to traditionally expensive levels.

AIG now trades at 0.76 times book value, The Hartford trades at 0.74 times book value, and Lincoln National trades at 0.84 times book value. This suggests that there could be further upside in the future as earnings continue to improve.

Each of these three companies was bailed out by the U.S. Treasury as part of the TARP program. As payment for the TARP funds, the Treasury was given warrants in these institutions. These warrants have since been sold to the public and are freely traded.

Warrants have very similar characteristics to call options. They give the holder the right to buy shares at a fixed price on or before a fixed future date. The warrants that the Treasury was given in these companies had a 10-year life -- so they provide very long-term leverage.

Another interesting aspect of these warrants is that the strike price is adjusted downward if a common stock dividend is paid above certain levels. The current dividends are above these adjustment thresholds for Hartford and Lincoln National, and as a result, each time a dividend is paid to shareholders, the warrants increase in value. Here's a quick overview of each of the companies and the warrants that trade on them.

AIG warrants
AIG is by far the biggest insurance company of the three, with a market cap of nearly $74 billion. Over the past few years, the government has sold off its significant stake in the company as the company has slowly sold off non-core operations and improved operational efficiency.

The warrants for this company expire on January 13, 2021, over seven years from now. They have a strike price of $45.00 and a dividend adjustment threshold of $0.675 per quarter. The company currently pays a dividend of $0.10 per quarter, so the strike price will probably not be adjusted downward for the next several years.

Here's a link to the prospectus with additional information.

The Hartford Group warrants
The Hartford Group is a much smaller company that AIG with a market cap of $14 billion. The company has received a lot of publicity for its recent turnaround efforts. The warrants on HIG have an expiration date of June 29, 2019 and a dividend adjustment threshold of $0.05 per share per quarter. The current divided is $0.15 per quarter, so the strike is being adjusted downward. After the most recent ex-dividend date of September 3, 2013, the strike price is $9.53, down from an original $9.79.

The dividend adjustment calculation is quite complicated so the company has added a section to their investor relations page which shows the current strike price. This makes the warrant $0.26 more valuable. As long as the common stock dividend remains above $0.05 per quarter, the strike price will continue to be reduced downward. For additional information, here's a link to the prospectus.

Lincoln National warrants
Lincoln National is roughly the same size as Hartford but has gotten much less attention. The warrants are also much less liquid than the other two discussed. This is partly because fewer of them were sold -- only 13 million Lincoln warrants were sold while 52 million HIG warrants were sold, and 75 million AIG warrants were sold. The company has beat expectations in three of the past four quarters, which shows that their earnings power is continually underestimated.

The warrants expire on July 10, 2019. They have a quarterly dividend adjustment threshold of $0.01 per share. The current dividend is $0.12 per quarter, so the strike is being adjusted downward. The current strike price is $10.606, down from an original $10.92. Here's a link to the prospectus.

Below is a table summarizing the relevant information for each of the warrants discussed above. The Lincoln National warrants are relatively illiquid, which can present an opportunity for patient investors who can pick a price they want to buy at and wait for the market to come to them. Investors who need to be able to get in and out of positions quickly should probably avoid that warrant, though.

 AIG WarrantHartford WarrantLincoln National Warrant
Current Stock Price ($) $49.95 $31.02 $42.25
Current Warrant Price ($) $19.15 $22.31 $33.14
Warrant Expiration Date January 13, 2021 June 29, 2019 July 10, 2019
Warrant Strike Price ($) $45.00 $9.53 $10.61
Time Til Expiration (years) 7.32 5.77 5.80
Total Stock Price Increase Required for Break-even (%) 28.43% 2.64% 3.55%
Stock CAGR Required for Break-even (%) 3.48% 0.45% 0.60%

All three of the warrants discussed present compelling value. The warrants for Hartford and Lincoln look especially compelling. Shares in those two companies need to rise at less than 1% per year going forward for the warrants to make money.

The companies have had great runs in the past 12 months, so some of this discount may be warranted (pun not intended), but all three still trade well below book value, so there is still value left if earnings continue to improve at current levels.

Also, the strike prices of the Hartford and Lincoln warrants are decreasing with the dividends paid to shareholders. This continual reduction in strike price means that even if shares don't increase over the coming years, the warrants will steadily increase in value.