Life vs PC Insurer

[LakesideB]

Hi Guys,

 

I recently read that 25Yr at Fairfax book. One thing that intrigued me was that Prem convinced the ICICI bank CEO to look at P&C Insurance instead of Life Insurance just as ICICI was about to enter the insurance business in India. I don't have the exact statement in front of me but from what I recall the reasoning was that with PC insurers all the value accrues to the shareholders and that was not the case with Life insurers.

 

Could someone elaborate on how Prem reached this conclusion?

 

Thanks

 

[Uccmal]

With life insurance the policy holders are the owners, of the assets, ahead of bondholders, and shareholders. 

 

Prem worries about a run on the bank occuring with life insurers.  He knows whereof he speaks having worked at confederation life, prior to its liquidation.  A run can occur when policy holders hear of problems and demand their funds.  If your float is tied up in stocks, and long bonds, and now private companies, this can be lethal. 

 

Notice that Buffett has no Life companies either.  AIG does but its relatively small as compared to the P&C company.  Also, Sun Americas business is spread among benefits, life, retirements products etc. 

 

Investing Life assets is much more restrictive and requires long term matching with potential liabilities.

 

 

 

 

[LakesideB]

Thanks Uccmal.

 

[twacowfca]

With life insurance the policy holders are the owners, of the assets, ahead of bondholders, and shareholders. 

 

Prem worries about a run on the bank occuring with life insurers.  He knows whereof he speaks having worked at confederation life, prior to its liquidation.  A run can occur when policy holders hear of problems and demand their funds.  If your float is tied up in stocks, and long bonds, and now private companies, this can be lethal. 

 

Notice that Buffett has no Life companies either.  AIG does but its relatively small as compared to the P&C company.  Also, Sun Americas business is spread among benefits, life, retirements products etc. 

 

Investing Life assets is much more restrictive and requires long term matching with potential liabilities.

 

Good answer.  Also life insurers are allowed to discount their future liabilities to pay claims many years in the future.  In that sense, P&C insurers have potentially more conservative accounting.

[constructive]

With life insurance the policy holders are the owners, of the assets, ahead of bondholders, and shareholders. 

...

A run can occur when policy holders hear of problems and demand their funds.

 

No different from P&C insurers, policy holders have the most senior claims.

 

Some types of life products are subject to redemption, but some aren't.

 

Notice that Buffett has no Life companies either.

 

Not true.

 

http://www.brkdirect.com/

Berkshire Hathaway Life Insurance Company of Nebraska and First Berkshire Hathaway Life Insurance Company

 

http://www.reuters.com/article/2012/11/30/us-caixbank-berkshire-idUSBRE8AT0S220121130

http://articles.marketwatch.com/2007-12-28/news/30782590_1_bond-insurer-triple-a-credit-ratings-ing-shares

General Re

"U.S.-based Berkshire Hathaway maintains an active business reinsuring life and health risks internationally through its subsidiary General Re, which accounts for about 15 percent of the conglomerate's total insurance premiums."

 

http://investors.symetra.com/phoenix.zhtml?c=213723&p=irol-faq#41246

Symetra Financial

"Berkshire Hathaway controlled entities continue to hold the original investment of 17,400,000 shares of Symetra common stock and warrants exercisable for the purchase of an additional 9,487,872 shares."

[mranski]

The economics of life insurers might be a consideration also.

It seems even more commoditized than P&C.

My life broker gave me a dozen insurer prices in about 30 seconds off his computer, for virtually the same policy. Not a lot of pricing power there for an insurer, so the margins must be pretty set and constrained.

Also, the life insurers changed the business model by guaranteeing stock market returns. So far this hasn't worked well.

 

 

 

 

[constructive]

I agree that many life insurance products are highly commoditized. But many P&C products are too.

 

Look at GEICO - one of the best insurers on the planet despite offering commodity products. Their moat is marketing, underwriting, customer service and technology.

 

Variable annuities are doing fine:

http://eba.benefitnews.com/news/prudential-touts-profitability-of-variable-annuity-business-bloomberg-2731410-1.html

 

Rumors of the life insurance industry's demise are much exaggerated. I think it's a major opportunity since the average US life insurer trades around 0.6x tangible book value.

[HJ]

The economics of life insurers might be a consideration also.

It seems even more commoditized than P&C.

My life broker gave me a dozen insurer prices in about 30 seconds off his computer, for virtually the same policy. Not a lot of pricing power there for an insurer, so the margins must be pretty set and constrained.

Also, the life insurers changed the business model by guaranteeing stock market returns. So far this hasn't worked well.

 

I have been having exactly this disucssion with some of my friends. 

 

On the one hand, exactly as you have put, there's very little differentiation on pricing, highly regulated, and seem to be a very commoditized business on the pricing side.  In addition, you have very large portion of the business that are organized as mutuals (at least within US),  New York Life, Northwestern Mutual, Mass Mutual, etc., which implies they are likely run for the agents and managements, like the investment banks prior to the crisis.  The differentiation among the companies seem to be on the investment side (the ones that fail, at least, are pretty much all caused by that).  The CEO's of Mass Mutual and New York Life both came from the investment side of the business.  The accountings of their liabilities are quite incomprehensible, and the minimum guarantees also seem to have trapped a lot of capital in a lot of very long term and hard to quantify committments.

 

On the other hand, the stocks are all trading at half the book (discount to ex AOCI book), 6-7 x earnings, and for the ones that have de-mutualized, PRU and MET, they are paying something of a dividend.  The bulk of the industry also seem to have overcome the issues caused by the minimum guarantees.  The question is really whether this valuation, together with the fact that the industry seem to be rationalizing, (writing less variable annuity for a start), compensate for the negatives over the intermediate term.  Is 1x book the right yardstick to think of the business?

 

 

[constructive]

Is 1x book the right yardstick to think of the business?

 

Clearly that depends on the prospective ROE.

 

http://media.ycharts.com/charts/9838d563ec1d82b62a2523a027948862.png

 

http://media.ycharts.com/charts/2e0e408a358bd5bd9dd32c81cba00f07.png

 

 

[Uccmal]

With life insurance the policy holders are the owners, of the assets, ahead of bondholders, and shareholders. 

...

A run can occur when policy holders hear of problems and demand their funds.

 

No different from P&C insurers, policy holders have the most senior claims.

 

Some types of life products are subject to redemption, but some aren't.

 

Notice that Buffett has no Life companies either.

 

 

In a liquidation this may be true, but there is a difference between picking over the carcass, and running a company into liquidation by withdrawing money.  Prem has made his stance very clear multiple times at AGMs over the years.  They even sold off the Federated Life division to get rid of the liability. 

 

Life Insurers are unloved because many of them are stuck in this rut right now where they have made promises of future returns, based on a higher interest rate environment, higher return environment.  I dont know the answer as to what constitues a good price for a life insurer in the current environment.  It would certainly require long term patience.

 

I was clearly wrong about Berkshire. 

[king888]

i thunk Prem didn't want ICICI to operate a Life insurance unit due to capital constraint.

If bank has life insurance unit , the liability of the policy forces the bank to increase tier1 capital. This rule also apply to Bank industry in Thailand so most of thai banks do not have majority stake in life issurer unless it has very strong capital base.

 

Life issurer in Asia is very profitable. For example ,AIA which dominate 50-60% of market share in Thailand , Hong Kong.  And most of life issurers are trading at 3-6x of book value.  The industry is in better shape here than in developed countries.

 

Edit: AIA market share in Thailand is around 30-35% .  50% was in 6-7 years ago. But the decrease is just market share but new premium written has been increasing for years.

[mranski]

Another undervalued life insurer .

 

http://seekingalpha.com/article/1363731-the-road-to-omaha-sighting-the-duck-as-an-elephant?source=yahoo

 

 

 

[constructive]

Interesting, thanks king888.

 

 

Following up on my comment about ROE and valuation, here's a range of what SYA might look like 4 years from now (currently earning 6% ROE and trading at 0.45x book).

                            ROE            P/B              Annualized Return

Conservative        6%            0.6                        13.9%

Base                    8%            0.8                        23.6%

Aggressive          10%          1.0                        31.9%

 

And GNW, currently earning 2% ROE and trading at 0.3x book.

                            ROE            P/B              Annualized Return

Conservative        4%            0.4                        10.7%

Base                    6%            0.6                        23.7%

Aggressive            8%            0.8                        34.2%

 

At these prices they don't have to have great results to be great trades.