Insurance companies offer “a system of protection against loss in which a number of individuals agree to pay certain sums periodically for a guarantee that they will be compensated for loss…” (stolen directly from Webster’s New World Dictionary). For shareholders of publicly traded insurers, this has historically been an extraordinarily profitable investment. But the past two years have wiped out years of accumulated gains. As a matter of fact, the largest insurers are trading below their post 911 lows as well as their demutualization values. For example, Metlife (MET) was a customer-owned mutual organization up to April 2000, at which time the company offered public shares to its policyholders valued at $14.25 per share. Last I checked, Metlife was changing hands on the NYSE under $12, some nine years later.
What’s going on? Insurers are still writing policies and collecting premiums, admittedly at a slower pace for the last year or so. But after nine or more years of steadily increasing policy writing and premium collection, shareholders are now showing a capital loss. What is going on?
Warren Buffet famously built his business and fortune using the principle of constant and predictable cash flows offered by collecting premiums on insurance policies. But, in early 2008, with declining yields on the insurance investment portfolios, he publicly announced that insurers would have a tough year and don’t expect much from them. In hindsight, this was a massive understatement, especially coming from the icon of the financial world.
Now, two months into 2009, the large insurers continue to lose value for shareholders and the once prized investment portfolios have now become liabilities. Is this justified?
“Write-off of investments” is causing panic in the streets. Continued deflation of both stocks and bonds make would-be buyers hesitant.
In Metlife’s case, as well as many other insurers, the variable annuity has been one of their more profitable products to sell. Based on historic market returns, management makes long term profitability assumptions. When markets lag long term estimates, the asset side of the balance sheet shrinks. In extreme cases such as the current environment, two possibilities spook investors:
1) Rating agency downgrade (S&P did downgrade MET and others last week)
2) Forced capital raising at depressed prices
Ultimately, I believe the current massive deflation in market value of the large international insurers will prove a tremendous investment opportunity. But is now the time to try to catch the proverbial falling sword? Is Metlife, for example, at $11.70, a buy today? Five years from now we will look back and say this was an investment opportunity of a lifetime. For Metlife, the company will survive then thrive again. Over the short term we are in uncharted waters and no one can say for sure how low the share prices will go.
What to look for: The government is the lender of last resort and will need to step up and replace what is lost from declining assets. So far, from all appearances, coordinated efforts have not yet been effective. World governments, though, have the determination and staying power to win the battle.
My insurance company shopping list, all available on the NYSE, from best to worst is:
March 5, 2009 $U.S.
China Life Insurance (LFC) at 41.80
Prudential Finance (PRU) at 11.50
Allianz (AZ) at 6.00
Metlife (MET) at 11.70
Manulife (MFC) at 7.75
Sunlife (SLF) at 12.20
AXA (AXA) at 8.10
It’s interesting to note that only two of these companies are headquartered in the U.S.
Disclosure: None yet…