Featured Articles:
- Dividend Stock Analysis: Is It Time To Buy ConocoPhillips?
- 7 Stocks Delivering Higher Dividends

Tuesday, August 4, 2009

* Has The Insurance Industry Finally Turned The Corner?

There are not many companies whose fortunes are as closely tied to the stock market as those in the insurance industry. When the market is climbing, insurers will often soar beyond the market, and will fall harder when the market declines. With the recent uptick in the market, is now a good time to consider insurance companies?

Insurance companies make money using a very simple formula: They collect premiums from customers, then invest the premiums while waiting for the claims to come in. Hopefully, the claims will be less than the investment value, thus providing a profit for the company. This industry relies heavily on actuaries. These are people who compute premium rates based on probabilities using statistical records based giving consideration to risks and other factors. A bad assumption here could lead to a premium that is too low resulting in an ultimate loss.

If you have ever filed a claim with an insurance company, you know what an onerous task it is to get money out of them. Looking at the claims portion of the equation, it is easy to under why they want to minimize claims paid. Each dollar they don't pay you and each additional day they hold unto dollars they do pay you, is additional investment income for the company.

During an extended bull market, it is easy to take for granted that the investment portion of the formula will be positive. However, a lesson the insurance industry recently had to relearn was that the stock market does not always go up. The collapse of American International Group, Inc. (AIG) in September from ill-chosen investments was a dramatic event for those invested in the industry.

Manulife Financial Corp. (MFC), North America's largest insurance company, also has struggled as a result of the declining equity markets. The Company has reported huge losses in excess of one billion Canadian dollars in the fourth quarter of 2008 and the first quarter of 2009. Much of which can be attributed to increasing reserves to cover long-term segregated fund and annuity guarantees. Segregated funds are popular investments similar to mutual funds but contain insurance contracts that limit risk for the investors.

Recently the sharp market rebound has provided relief to insurers such as MFC who had to set aside cash for guarantees on performance-based products. The increase in the market will also give the insurers a chance to rebuild capital and shuffle reserves.

Below are some insurers you may want to keep an eye on in the upcoming weeks, along with some company specific risks:
AFLAC Inc. (AFL) - Yield: 3.04% - Analysis
AFL may be overexposed to the financial service sector as a result of its holdings of European bank hybrid bonds. However, the company should not suffer significant losses from its hybrid portfolio.

Manulife Financial Corp. (MFC) - Yield: 3.73%
On Friday June 19th after the market closed, it was reported that MFC received an enforcement notice from the Ontario Securities Commission (OSC) relating to its disclosure before March 2009 of risks related to its variable annuity guarantee and segregated funds business. The preliminary conclusion of OSC staff is that the Company failed to meet its continuous disclosure obligations related to its exposure to market price risk in its segregated funds and variable annuity guaranteed products.

MetLife, Inc. (MET) - Yield: 2.17%
MET's risks are more of the general nature. They include a further decline in the equity markets coupled with need for additional capital and asbestos-related liability claims.

Prudential Financial, Inc. (PRU) - Yield: 1.33%
PRU's risks include currency conversion, new guaranteed minimum benefits, acquisition integration and a further sharp decline in the equity markets.

Sun Life Financial Inc. (SLF) - Yield: 3.66%
A large portion of SLF's fixed income portfolio is concentrated in the financial sector and rated BBB or below carries a higher risk of investment loss. As with the others, SLF also is susceptible a further decline in the equity markets.
Consider the risks before investing, but also keep in mind the best values come when a company is distressed.

Full Disclosure: Long AFL, MFC. See a list of all my income holdings here.

Tags: [AFL] [AIG] [MET] [MFC] [PRU] [SLF]

No comments:

Post a Comment

Popular Posts - Last 7 days