Tue, 8 May 2012
With the U.S. market for life insurance mature, firms are increasingly looking to Asia for growth, says Morningstar's Drew Woodbury.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Drew Woodbury. He was one of the six Morningstar equity analysts who were recently named Best on the Street by the Wall Street Journal. We're going to talk a little bit about the life insurance industry, his take for 2012, and his top picks.
Drew, thanks for joining me today.
Drew Woodbury: Thanks for having me.
Glaser: Let's talk a little bit about the life insurance industry right now. What are some of the big trends that you're seeing, that you're really keeping an eye on over this next year or two?
Woodbury: We're seeing a big trend with all the domestic life insurers. The U.S. market is a pretty mature market. So, all the people that are going to have life insurance for the most part already have it, and there are not too many growth opportunities here. So, what you have seen a lot of the insurers do, MetLife, Prudential, and Principal, to a smaller extent, is buy international businesses, mostly in Asia, to augment their growth over there.
Glaser: With purchasing those businesses though, are the insurers paying too much for these or are these businesses not as attractive as the domestic ones? What's the trend with profitability?
Woodbury: Both Prudential and Met actually purchased their businesses from American International Group, kind of on the tail end of the financial crisis. So, AIG was somewhat of a forced seller, so in general its prices were pretty good. It does assume a lot of growth in order to get to those prices that they paid. However, the growth pipeline is pretty good in those markets.
Glaser: If we look at valuation then, overall are there a lot of opportunities in that they're going to capture this growth in Asia, or would investors be paying too much for the stocks?
Woodbury: In general we don't think of life insurers particularly very favorably. There is a lot of negative competitive dynamics. Profitability is not very good, and there is a lot of fierce competition between them. Also, they're offering commodity products. All those things are negative and would take away from our enthusiasm in recommending the stocks. Right now they're slightly undervalued, but they're also very market-sensitive. A lot of their assets and their investment portfolio are market-sensitive and also some of the annuities and the guarantees that they provide are also market-sensitive. Even though they are undervalued, we don't necessarily want to recommend them at this time. We'd recommend them at a much wider margin of safety.
Glaser: When looking at the margin of safety, are there any other life insurers that would look attractive, maybe one name?
Woodbury: A company that we like a little bit more than the standard life insurers is Aflac. It has a really good business model in Japan and consistently high profitability. It [does not have a Morningstar Rating for stocks of 5 stars] yet, but it's maybe a name to keep an eye on a little more closely than the standard life insurer. The concern there, however, is that its investment portfolio is a little bit concentrated in Europe. So that trades around a lot with the European news recently, and that might be a concern for some investors to watch out for, too.
Glaser: You also cover some insurance companies outside of life insurance. Do any of those look attractively priced right now?
Woodbury: Right. We like the property and casualty insurance industry a little bit more, which you mentioned I also cover, and our topic in that industry is Allstate. So the company has seen profitability suffer a little bit recently through some catastrophe losses, and the market is pricing in an overly pessimistic scenario where these catastrophes stay for much longer or persist in the future. We think the company's business model, which has a lot more sticky customers than the average insurer, allows it to raise prices and should help address that profitability.
Glaser: Drew, congratulations and thanks for talking with me today.
Woodbury: Thanks for having me.
Glaser: For Morningstar, I'm Jeremy Glaser.