The UK composite insurers (notably PRU & AV) have a business model which combines life assurance, asset management & general insurance. One way of looking at them is to consider them as investment funds with an operating business attached. Their investment funds are stuffed full of government & corporate bonds and have a much smaller percentage of equities than they used to prior to 2000.
As such, given that the BoE is determined to force the price of Gilts higher and corporate credit spreads are still very wide, they are a high-yielding version of a corporate bond fund, selling at a discount to NAV.
Their dividend yields are covered by their largely stable earnings from the existing life assurance book & their earnings from general insurance (rates are hardening in this market due to a scarcity of capital caused by the credit crunch/bear market).
They offer a recovery story with considerable upside and double-digit dividend yields whilst you wait for the recession to play out. Corporate credit spreads will normalise at some point in the future, equities will recover and PRU & AV will once again trade near to their embedded values (which will themselves rise as markets recover).
Solvency and worries about insurers having to raise capital via rights issues (which would lower those NAVs due to new shares being created) are the bear points but in their recent results announcements PRU said they had an IGD solvency surplus of £1.7 bln (and their new CEO is presumably less keen on buying large chunks of AIG than their recently-ousted old CEO Mark Tucker), which would fall by £350 mln if equity markets drop 40% from end-2008 levels.  AV said they had an IGD solvency surplus of £2.0 bln which would be reduced by £800 mln if equity markets fall 40% from end-2008 levels.

Composite insurers are high beta stocks and their share prices will always move faster than the FTSE, however the market has become too bearish on the sustainability of their capital positions.  Although share prices never move in a straight line, their discount to NAV will unwind as confidence returns to financial markets.

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Tags: AV, corporate bonds, credit crunch, credit spreads, dividend yields, gilts, IGD solvency, life assurance, NAV, PRU, stable earnings

This entry was posted on Friday, April 17th, 2009 at 10:20 am and is filed under Sectors. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.