More From Sean Millard
Leading Players in the US Annuity Industry
The market leader in the fixed annuity industry is Allianz Life Insurance Company of North America with 13% market share, followed by New York Life with 8%.
AIG’s Commercial Insurance segment sees increased income
AIG’s top line dipped marginally in 4Q14 when compared to 4Q13, driven by disciplined sales and underwriting in casualty products in commercial P&C.
AIG improves its capital structure in 4Q14
AIG repurchased $6.5 billion of high coupon debt, replacing it with lower coupon debt to help AIG reduce its interest burden by ~$249 million per year.
Gauging AIG’s stock performance and valuation
AIG’s shares appear to be currently undervalued despite the improvements in its operating and financial metrics.
How insurers manage their capital requirements
A company managing higher risk products must maintain a higher level of minimum capital compared to a company with a relatively lower level of risk.
What impacts an insurer’s profits?
In 2013, the top ten life and health insurance companies had just above 50% market share in terms of direct premiums written.
Underwriting profit: First leg of the profit machine
An underwriting loss is not unusual for an insurance company. In a soft pricing environment, pricing of P&C products is low due to intense competition.
How cost structures and distribution channels impact profit
As customers use Internet-based aggregators to purchase insurance policies, insurers use online sales to interact directly with customers and reduce costs.
How investment income drives profit
The impact of interest rate movements is lower in the P&C segment, as their products can be repriced annually to keep in line with interest rate movements.
How key drivers impact insurance sales
For P&C insurers such as AIG and ACE, various mandatory requirements may drive sales of vehicle, workers’ compensation, and homeowners insurance.
An insurer’s investments: Dominated by debt securities
A large portion of an insurer’s balance sheet contains lower-risk assets such as government bonds and high-grade corporate bonds.
The US insurance industry: Largest in the world
Insurance premiums have grown at a modest pace after a dip in 2009 due to the financial crisis, which the industry was able to navigate.
Life insurance, P&C insurance, and reinsurance
P&C products have commoditized characteristics, resulting in sharp competition in the market and business cycles. AIG and ACE are key players in this space.
Making sense of an insurer’s liabilities
Policyholder liabilities, or policyholder reserves, represent the future claims that may arise for the pool of policies the insurer writes.
How valuation of insurance companies works
Financial market movements not only impact income from invested assets, but also the value of assets carried at fair value on an insurer’s balance sheet.
How insurers are targeting new growth avenues
US insurance M&A activity picked up in 2014 after a two-year dip, as insurers try to capture growth opportunities in domestic and foreign markets.
Why should you invest in insurance ETFs?
Insurance ETFs are poised to gain from industry growth. As interest rates improve, insurers should see better earnings due to higher investment returns.
Reinsurers See Consistent Growth in Capital
When a large number of claims arises due to a catastrophe loss, insurers face a strain on capital. Then, reinsurers may bear a portion of the burden.
Prudential Financial Declared a G-SIFI
The G-SIFI designation was created to address the problem of “too-big-to-fail” financial institutions in the wake of the 2008 credit crisis.
Gauging Prudential Financial’s Valuation
Among its peers, Prudential remains in the middle of the valuation range, with companies like MetLife and Lincoln Financial showing a lower multiple.
A Closer Look at Prudential Financial’s Share Price Performance
Life insurers have underperformed the market due to negative news regarding macroeconomic situations, low interest rates, and regulatory uncertainties.
Prudential Financial Enjoys Strong Solvency Ratios
Prudential has comfortable solvency positions in its subsidiaries. In the US, Prudential Insurance’s solvency ratio was well above the target ratio of 400%.
A Closer Look at Prudential Financial’s Capital Structure
Prudential reported a capital capacity of ~$2 billion at the end of 2014, which is net of another ~$2 billion capital that it earmarked for debt reduction.
Prudential’s International Business Sees Strong Profitability
Prudential’s International Insurance business saw improved profitability after the acquisition of AIG Star and AIG Edison in 2011.
Stable Top-Line Evolution in Prudential’s International Business
Prudential’s third-party distribution channels provide access to a larger customer base, supplementing its captive distribution channels.
Japan: An Attractive Insurance Market for Prudential Financial
Since the Japanese market is mature and characterized by competitive pricing, Prudential competes in this market through customer service and distribution.
Prudential Financial Grows Its Assets Under Management
Prudential’s third-party assets managed on behalf of its customers increased by $35 billion, out of which $5 billion resulted from positive net inflows.
February 2015 Catastrophe Losses
February 2015 catastrophe losses came about due to winter weather, floods, and storms.
A Closer Look at the Costliest Catastrophes
Hurricanes Sandy, Ike, and Andrew remain near the top of the list of the costliest catastrophes in terms of insured losses.
Making Sense of Economic and Insured Losses
Insured losses are the ones that impact the profitability of insurance companies.
Fixed Annuity Sales Driven by Indexed Products in 2014
Sales for fixed annuities were higher in the second half of 2013. On an annual basis, fixed annuity sales increased more than 13% in 2014 compared to 2013.
Acquisitions Drive Growth in Prudential’s International Business
Setting up business operations in fast-growing emerging markets remains a key trend among insurers who primarily operate in mature markets.
Variable Annuity Sales Lower in 2014
Compared to 2013, variable annuity sales were down by ~3.6% in 2014, at around $140 billion, despite a strong performance in the equity markets.
Prudential Financial Leads the Pension Risk Transfer Market
In November 2012, GM entered into a deal with Prudential to transfer its pension liabilities and assets, exceeding $25 billion.
How Catastrophes Impact a P&C Insurer’s Combined Ratio
The percentage points for catastrophe losses in the combined ratio have increased in recent years.
Catastrophe Losses and Profitability of P&C Insurers
Catastrophe losses are one of the key risks to P&C insurers because these losses negatively impact profitability and capital.
Prudential Financial’s Retirement Business Sees Consistent Growth
Prudential’s Retirement business in the United States provides corporate customers with retirement savings and income-oriented products and services.
Prudential’s Individual Annuities Show Improving Profitability
Disciplined sales and diversification in its product mix has helped Prudential improve its return on assets from ~0.4% in 2009 to the current ~1% ROA.
Prudential Financial’s US Distribution Network
Prudential’s customer base includes over 30 million individual customers and 25,000 corporate clients, consisting of more than half of the Fortune 500 list.
Prudential Financial is a Leading Life Insurer in the US
The US is Prudential’s most important market, contributing over 60% of the company’s pre-tax adjusted operating income and ~50% share of its equity in 2014.
Low yields impact AIG’s life insurance business earnings
Pre-tax operating income of AIG’s Consumer Life Insurance segment stood at $80 million in 4Q14, compared to $215 million in 4Q13.
Higher Premium Rates in Personal Auto and Home Insurance Lines
Auto insurance and homeowner’s insurance form two important product types of the personal lines business.
AIG’s commercial P&C business sees improved underwriting results
The combined ratio of AIG’s commercial P&C business improved in 4Q14, when compared with the 4Q13 ratio.
Personal Lines Rates Were Up 2% in February
The US personal lines businesses have seen improved profitability from the 2011 levels.
How Underwriting Cycles Impact the Top Line and the Bottom Line
The underwriting cycle moves between hard and soft market conditions, which have different sets of characteristics that determine the profitability of the insurance industry.
The Underwriting Profits of a Property and Casualty Insurer
The property and casualty insurance business is cyclical in nature. The underwriting cycle alternates between two phases: the hard market and the soft market.
MetLife is designated as a G-SIFI
A G-SII must also fulfill higher loss absorbency requirements for activities that are nontraditional and noninsurance in nature.
Reserve strengthening impacted AIG’s earnings negatively in 4Q14
In 4Q14, AIG’s operating income after tax was impacted by a charge of more than $500 million for reserve strengthening and other estimate changes.
AIG delivers on its financial objectives
AIG’s financial objectives focus on profitability improvement, expense management, and balance sheet growth, achieving a sustainable ROE.
AIG’s net income down in 4Q14, insurance operations earnings flat
AIG reported a net income dip from $2.0 billion in 4Q13 to $655 million in 4Q14, due to an after-tax charge of ~$800 million for debt retirement activities.
MetLife’s emerging market strategy fostering growth
From 2011–2013, MetLife’s emerging market businesses saw 11% cumulative annual growth rate in operating earnings. EMEA’s growth rate was 16.1%.
MetLife develops its employee benefits business across the globe
Latin America is a major contributor to MetLife’s business unit, with nearly half the revenue. EMEA follows, with a share of revenues of ~40% in 2013.
MetLife is delivering well in the strategy front
MetLife targeted $1 billion in expense savings, which the company is on track to achieve in 2015. Cumulative expense savings in 2014 exceeded $910 million.
MetLife’s well-diversified EMEA business
MetLife has exposure to many currencies, particularly the euro, the Polish zloty, and the Russian ruble, which diversifies its foreign exchange exposure.
MetLife’s Asia business show growth prospects
Contributing ~20% to the group’s operating earnings, the Asia business segment remains a key profit driver of MetLife.
MetLife is the largest player in Latin America
MetLife plans to grow its retail and group business in Latin America, capitalizing on the growing middle class, affluent class, and corporate needs.
Growth in MetLife’s Corporate Benefit Funding segment
MetLife gained 45% of the $3.8 billion pension closeout market in 2013. The company expects the closeout market to maintain its robustness in the near term.
MetLife is a key player in the US group insurance business
MetLife is the market leader in the Large market with ~30% of the market share, while its market share is slightly above 5% in the Middle market.
MetLife’s US Retail business becomes a profitable franchise
MetLife is working to develop direct sales channels, which would reduce the share of agent commissions in operating costs.
MetLife is a leading player in the US insurance industry
MetLife intends to grow its retail business and expects low single-digit growth in the long term.
MetLife’s valuation is close to historical mean
Over the last four years, MetLife’s price ranged between 0.5x–1.0x its book value per share. Its current price-to-book value multiple is ~0.8x.
MetLife pays consistent dividends
After several years of flat dividends (74 cents per share on an annual basis), MetLife increased its payout in 2Q13, as well as in the same quarter of 2014.
MetLife’s return on equity within target range
MetLife’s return on equity evolution shows recovery from 2008–2009 levels, although it has yet to reach that of the pre-crisis periods.
MetLife’s acquisitions deliver growth
MetLife purchased Alico from AIG in 2010, helping MetLife gain exposure to emerging economies where Alico was already operating.
MetLife – A globally diversified insurance company
MetLife is a market leader in the US and the largest life insurer in Mexico and Chile. It is among the leading players in Japan, Korea, and Poland.