Insurance companies

[DelayedInvestor]

Hi,

I hope this is the right place to ask this and I'm aware I'm probably missing some pretty basic but why are insurance companies so (seemingly) cheap?

Two examples here from yahoo finance:
Aviva: Price: 4.06, Cash per share: 6.78, Book value per share: 4.93, PE: 5.83
FBD: Price: 7.70, Cash per share: 8.59, Book value per share: 11.37, PE: 8.84

There are other like L&G that look like they problems with debt so it makes a bit more sense but these two feel like a bit of a headscratcher.

Thanks

[TheMotorcycleBoy]

Of interest?

LONDON, Aug 12 (Reuters) - British insurer Aviva (AV.L) pledged on Thursday to return at least 4 billion pounds ($5.5 billion) to shareholders, sending its shares surging, but activist investor Cevian Capital demanded more.

Cevian, which revealed in June it had built up a near 5% stake in the FTSE 100 company, promptly reiterated that Aviva should return 5 billion pounds of excess capital by the end of 2022.

"The at least four billion pounds excess capital return ... is a good start, but ... would not be enough to address the overcapitalisation and we expect the company to return five billion pounds by the end of next year," Cevian partner Niko Pakalén said. read more

Aviva has raised 7.5 billion pounds from selling eight businesses across the globe since the appointment of Amanda Blanc as chief executive in July 2020.

The life and general insurer, which has its main businesses in Britain, Canada and Ireland, had previously promised a "substantial" capital return.

"We've provided guidance earlier than expected ... we are accelerating the timing of the capital return," Blanc told a media call, adding that relations with Cevian were "constructive".

https://www.reuters.com/world/uk/aviva- ... 021-08-12/

[scrumpyjack]

Hi,

I hope this is the right place to ask this and I'm aware I'm probably missing some pretty basic but why are insurance companies so (seemingly) cheap?

Two examples here from yahoo finance:
Aviva: Price: 4.06, Cash per share: 6.78, Book value per share: 4.93, PE: 5.83
FBD: Price: 7.70, Cash per share: 8.59, Book value per share: 11.37, PE: 8.84

There are other like L&G that look like they problems with debt so it makes a bit more sense but these two feel like a bit of a headscratcher.

Thanks

Aviva has been such a serial destroyer of value for so long! The share price was over 1200p 20 years ago when it was called Commercial Union and the dividend 44p as I recall. The accounts of life insurers like Aviva are very opaque and I guess the market doesn't think the earnings per share is a meaningful figure. Anyway the new CEO is trying to sort it out and if she is successful it could go aa lot higher. OTOH if history repeats itself...!

ps Prudential has had to write off 75% of the value of its subsidiary Jackson Life in preparation for giving most of it to shareholders. Life Insurers can be a very effective path for losing money

[DelayedInvestor]

Thanks scrumpyjack and TheMotorcycleBoy. Lots of useful info there.

So I guess Aviva is looking like a potential turnaround.

Any thoughts on FBD? AFAIK they're the only indigenous insurance firm in Ireland. They have covid liabilities to deal with but it looks like the management were improving this before that.

[SalvorHardin]

There is a saying that insurance companies are basically investment trusts with an expensive hobby.

Their tendency to lose money on the underwriting and (hopefully) make it up on the investing does lead to the fairly common bad year.

Unfortunately general insurance is a business that primarily competes purely on price. Whilst life assurance is often prone to over optimistic forecasting. i.e. no moat to speak of

Hence the low rating of the sector.

[Dod101]

There is a saying that insurance companies are basically investment trusts with an expensive hobby.

Their tendency to lose money on the underwriting and (hopefully) make it up on the investing does lead to the fairly common bad year.

Unfortunately general insurance is a business that primarily competes purely on price. Whilst life assurance is often prone to over optimistic forecasting. i.e. no moat to speak of

Hence the low rating of the sector.

Well I do not often disagree with SalvorHardin but the quote was appropriate 20/30 years ago but not so much nowadays. In fact with most general insurers you can see quite easily that they mostly make an underwriting profit and not only that but their results are often reported on an each year basis so that you can see on a yearly basis whether they are making a profit. 'Bad years' are usually the result of hurricanes or some such but are usually followed up by several good years when rates 'harden', that is increase significantly to help restore profitability. When that happens, rates then begin to reduce and the whole cycle starts again.

Admiral though proves that it does not have to be like that, but they had the great advantage that they had no baggage when they started out and so were able to plan their business proposition from a clean sheet. Aviva does not have that luxury. General insurance does though compete almost solely on price and it depends on strong and firm management to make a profit since the tendency is to think that 'it will be alright on the night' and, a bit like building contractors, that getting the business is the be all and end all.

Dod

[DelayedInvestor]

Thanks SalvorHardin and Dod101. Those are good things to consider.

[TheMotorcycleBoy]

There are other like L&G that look like they problems with debt so it makes a bit more sense but these two feel like a bit of a headscratcher.

I believe that LGEN are no longer insurers. See here:

https://en.wikipedia.org/wiki/Legal_%26_General

a large part of business (probably I'm not an expert in them!) is pensions which is probably reasonably lucrative, if the holders die with lots of their savings still with the pension firm. But I'm speculating here.

I have some LGEN, in the "income part" of our folis. They seem to be a somewhat boring firm, but they also seem to be able to maintain an increasing dividend over time. How long this will last is beyond my ken, I did attempt to figure them out once upon a time, see Legal and General - what's going on?.

Matt

[Dod101]

There are other like L&G that look like they problems with debt so it makes a bit more sense but these two feel like a bit of a headscratcher.

I believe that LGEN are no longer insurers. See here:

https://en.wikipedia.org/wiki/Legal_%26_General

a large part of business (probably I'm not an expert in them!) is pensions which is probably reasonably lucrative, if the holders die with lots of their savings still with the pension firm. But I'm speculating here.

I have some LGEN, in the "income part" of our folis. They seem to be a somewhat boring firm, but they also seem to be able to maintain an increasing dividend over time. How long this will last is beyond my ken, I did attempt to figure them out once upon a time, see Legal and General - what's going on?.

Matt

It is not accurate to say that Legal and General are no longer insurers. They do not conduct general insurance having sold it but they still are very big in life insurance and annuities, both of which involve insurance. In fact they wrote £2.8 billion of Gross Written Premiums in 2020. They are huge in pensions and more or less as a result of that are big in asset management. Study the Annual Report rather than Wikipedia!

About half of their profit came from Institutional Retirement, that is pension schemes. They are somewhat boring but that is the nature of the business. It is also very long term and so there are unlikely to be major upsets. Obviously if investment returns took a major step backwards that could upset the apple cart but having survived the Covid problems they are very much on the right track, as they have been for at least most of the last 50 years.

Dod

[monabri]

ok, it's a 2019 HY results presentation but it defines the 5 main areas of business for LGEN.

https://www.legalandgeneralgroup.com/me ... -final.pdf

[Dod101]

ok, it's a 2019 HY results presentation but it defines the 5 main areas of business for LGEN.

https://www.legalandgeneralgroup.com/me ... -final.pdf

Thanks. You can get the same (updated obviously) figures in the 2020 Annual Report and the recent half year results, although your presentation gives a much clearer diagramatic picture.

Dod

[Stan]

Legal and General have been around for ages and whatever there doing seems to be very good in terms of capital growth and pretty well consistent dividends.

My personal favourite over the last 20 years or so.

[scrumpyjack]

There is a review in today's Torygraph asking exactly that question: Why is LGEN so cheap

https://www.telegraph.co.uk/investing/s ... l-general/

Their conclusion is basically that it is all fine but curiously then only rate it a Hold, which rather contradicts the detail of their analysis

[TheMotorcycleBoy]

As mentioned already, I attempted to put the sliderule on LGEN over here,

viewtopic.php?f=93&t=24117

I noticed that their cash flows and profits weren't easy to correlate, but no one else on TLF seemed willing to either help out (not that I expected it), or agree and say "oh yeah that could be why their valuation has stationary for sometime now". However several did volunteer some useful opinions on other points.

Matt

[scrumpyjack]

The DT says the market does not like their complexity and the opacity of insurance accounts. In the latest results bulk annuities were 41% of operating profits. This is very 'lumpy,' a small number of big deals. (£525m out of £1.3 bn op profit).

They are on a forecast PE of 8.7 and a yield of 6.7%

I am happy to carry on holding but would not have too large a percentage in them. LGEN has been reliable for many many years (compared to Aviva for example), but Insurance companies can and do go t*ts up now and then! Not one for widows and orphans.

I really don't think you can use the normal metrics of cash flow etc with this sort of company.

[TheMotorcycleBoy]

The DT says the market does not like their complexity and the opacity of insurance accounts. In the latest results bulk annuities were 41% of operating profits. This is very 'lumpy,' a small number of big deals. (£525m out of £1.3 bn op profit).

They are on a forecast PE of 8.7 and a yield of 6.7%

I am happy to carry on holding but would not have too large a percentage in them. LGEN has been reliable for many many years (compared to Aviva for example), but Insurance companies can and do go t*ts up now and then! Not one for widows and orphans.

I really don't think you can use the normal metrics of cash flow etc with this sort of company.

I'm inclined to agree with you scrumpy. I have about 2.7% of our folis in them, at average price of 249p / share. I don't think I'll add to them unless they drop considerably and look too good to be true.

Matt

[Stan]

The DT says the market does not like their complexity and the opacity of insurance accounts. In the latest results bulk annuities were 41% of operating profits. This is very 'lumpy,' a small number of big deals. (£525m out of £1.3 bn op profit).

They are on a forecast PE of 8.7 and a yield of 6.7%

I am happy to carry on holding but would not have too large a percentage in them. LGEN has been reliable for many many years (compared to Aviva for example), but Insurance companies can and do go t*ts up now and then! Not one for widows and orphans.

I really don't think you can use the normal metrics of cash flow etc with this sort of company.

I must disagree with you about “not for widows and orphans” and say that they are definitely “for” Widows and Orphans.

[Dod101]

The DT says the market does not like their complexity and the opacity of insurance accounts. In the latest results bulk annuities were 41% of operating profits. This is very 'lumpy,' a small number of big deals. (£525m out of £1.3 bn op profit).

They are on a forecast PE of 8.7 and a yield of 6.7%

I am happy to carry on holding but would not have too large a percentage in them. LGEN has been reliable for many many years (compared to Aviva for example), but Insurance companies can and do go t*ts up now and then! Not one for widows and orphans.

I really don't think you can use the normal metrics of cash flow etc with this sort of company.

I must disagree with you about “not for widows and orphans” and say that they are definitely “for” Widows and Orphans.

I think that scrumpyjack is being much too cautious. The accounts are opaque but I have known the company professionally for about 50 years and they just get on with the job. A small number of big deals in bulk annuities? What does he expect? They are bulk annuities after all, a bit like I have read SJ say about Scottish Mortgage. You are not investing in one share, there 100 or so. Likewise you are not investing in a series of individual annuities, you are investing in bulk annuities with hundreds, maybe thousands of individual ones. He has told us he holds SMT; now that is not an investment for widows and orphans.

I suspect that the DT is probably correct as that is the only reason I can see for their price not being much higher. The same applies I suspect to Chesnara (half year results were published this morning) and Phoenix Holdings, to a lesser extent.

Dod

[scrumpyjack]

The DT says the market does not like their complexity and the opacity of insurance accounts. In the latest results bulk annuities were 41% of operating profits. This is very 'lumpy,' a small number of big deals. (£525m out of £1.3 bn op profit).

They are on a forecast PE of 8.7 and a yield of 6.7%

I am happy to carry on holding but would not have too large a percentage in them. LGEN has been reliable for many many years (compared to Aviva for example), but Insurance companies can and do go t*ts up now and then! Not one for widows and orphans.

I really don't think you can use the normal metrics of cash flow etc with this sort of company.

I must disagree with you about “not for widows and orphans” and say that they are definitely “for” Widows and Orphans.

I think that scrumpyjack is being much too cautious. The accounts are opaque but I have known the company professionally for about 50 years and they just get on with the job. A small number of big deals in bulk annuities? What does he expect? They are bulk annuities after all, a bit like I have read SJ say about Scottish Mortgage. You are not investing in one share, there 100 or so. Likewise you are not investing in a series of individual annuities, you are investing in bulk annuities with hundreds, maybe thousands of individual ones. He has told us he holds SMT; now that is not an investment for widows and orphans.

I suspect that the DT is probably correct as that is the only reason I can see for their price not being much higher. The same applies I suspect to Chesnara (half year results were published this morning) and Phoenix Holdings, to a lesser extent.

Dod

Firstly I am not a widow or orphan!

I thought the banks were pretty safe too, before the GFC. That was a very expensive mistake. All these financial businesses, where there are vast assets and vast liabilities, and the small difference between them is the value of the business, are risky and that I think is one reason the market gives them such a low valuation. Any significant increase in liabilities results in the business value collapsing. Imagine what would happen to annuity insurers if a dramatic medical advance increased life expectancy by 20 years! As I mentioned earlier in this thread, Prudential has had to write off 75% of its US subsidiary Jackson, which is heavily into annuities. Insurers are risky and merely because one has carried on for a long time seemingly without dramas, that does not mean it is without risk.

So far LGEN has been well managed but the price has collapsed periodically in the past when the market gets the jitters (down to 42p in the GFC). They have done well for me, the price is well over twice my average cost and the dividend has been steadily maintained or increased. So I am happy to hold, or increase modestly as I did last year when they fell back.

But I can’t agree about SMT being riskier. They are pretty widely spread and the managers are able to move in and out of businesses depending on how they see the future. Companies like LGEN cannot suddenly move out of annuities if the situation changes.

Still we each need to make our own assessment of risks. I am happy for my SMT holding to be many times LGEN. I am also happy to continue to hold LGEN, and increase when the market wobbles and they fall unduly, but the GFC has made me warier of financial shares than I used to be.

[Dod101]

Firstly I am not a widow or orphan!

I thought the banks were pretty safe too, before the GFC. That was a very expensive mistake. All these financial businesses, where there are vast assets and vast liabilities, and the small difference between them is the value of the business, are risky and that I think is one reason the market gives them such a low valuation. Any significant increase in liabilities results in the business value collapsing. Imagine what would happen to annuity insurers if a dramatic medical advance increased life expectancy by 20 years! As I mentioned earlier in this thread, Prudential has had to write off 75% of its US subsidiary Jackson, which is heavily into annuities. Insurers are risky and merely because one has carried on for a long time seemingly without dramas, that does not mean it is without risk.

So far LGEN has been well managed but the price has collapsed periodically in the past when the market gets the jitters (down to 42p in the GFC). They have done well for me, the price is well over twice my average cost and the dividend has been steadily maintained or increased. So I am happy to hold, or increase modestly as I did last year when they fell back.

But I can’t agree about SMT being riskier. They are pretty widely spread and the managers are able to move in and out of businesses depending on how they see the future. Companies like LGEN cannot suddenly move out of annuities if the situation changes.

Still we each need to make our own assessment of risks. I am happy for my SMT holding to be many times LGEN. I am also happy to continue to hold LGEN, and increase when the market wobbles and they fall unduly, but the GFC has made me warier of financial shares than I used to be.

I am tempted to say that I will defer to your accountancy background as I had a lot of friends who were/are accountants and most were pretty good with numbers. Not so sure about risk assessment mind you. L & G has been through no end of crises and market routs in the time that I have taken a serious interest in them, including the 'oil shock' crisis of the early '70s and the subsequent hammering of the UK economy. I know little of that mind you as I was working abroad at the time but that period had to be as bad as anything since and L & G got by as I recall.

My holding in SMT is very much bigger than it is in L &G as well but that is of course mostly due to the spectacular gains last year in SMT. We all need to be on our guard continuously and as I have recalled several times, I sold most of my bank shares in January 2008. The only ones left were some Lloyds and HSBC. Thankfully I sold all HBOS and Barclays because I just did not like what I was seeing. I never held RBS because even a blind man could see that they were on the road to disaster. Incidentally L & G came through that crisis unscathed. They cut their dividend a bit but soon reinstated it again.

Again and again I come back to culture. It was all wrong for the banks and pretty good for L & G. It still is.

Dod