Why These Insurance Stocks Are the Best Bets
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The various economic pressures in recent times marked a tough period for the insurance companies to generate profits organically. The companies were challenged to increase their market share, and were forced to resort to mergers and acquisitions to tap international growth.
These opportunities should help them grow globally in terms of earnings and market share. Discussed below are three insurance stocks which are heavily focusing on expansion via mergers and acquisitions. Let's find out what investing opportunities they bring to investors.
Prudential Financial (NYSE: PRU)
In January 2013, Prudential completed the acquisition of Hartford Financial's life insurance business for $615 million in cash. The company will possess Hartford's investment assets of around $7 billion. Prudential will pay off commissions to Hartford in order to provide reinsurance for 700,000 life policies.
Via this deal, it will be able to broaden its product offerings and strengthen its position in distribution expertise to meet growing demand. Prudential's life segment reported adjusted operating income of $99 million in the fourth quarter of 2012, which was impacted by $15 million of transaction costs spent for acquiring Hartford. Moving forward, as a part of the company's growth strategy, this deal will help its ROE increase 14% in 2013.
Other than its primary products such as life, health, and accidental policies, Prudential has witnessed significant growth in asset management and retirement saving plans from its international markets. With the acquisition of AIG Star and AIG Edison in 2011, Prudential has seen significant growth in the Japanese market. AIG Star, along with AIG Edison, accounted for 75% of its total operating earnings in the international markets. Investors can anticipate cost-savings from Star/Edison integration in 2013.
Sun Life Financial (NYSE: SLF)
Sun Life is expanding its relationship with the CIMB Group in Malaysia, with an intention of accelerating its market share growth internationally. It is planning a $293 million deal in Malaysia in order to capture Aviva's 49% stake in a joint venture with the CIMB Group.
This deal will help Sun Life grow in Southeast Asia, as it is considered the most favorable emerging market with a young population, growing economy, and high savings. With this deal, the company expects to attain its goal of meeting $250 million in earnings by 2015.
With its expansion into Southeast Asia, Philippines seems to be the main target with its GDP growth of 5% in 2012, and appears to be one of the most attractive markets to increase its market share. The company sees high scope for market penetration in the Philippines.
Last year, it saw an improvement in its earnings and mutual fund sales by 67% year over year, making Sun Life the country’s largest insurer. This compensated for the decline in sales in China and India because of structural changes.
MetLife (NYSE: MET)
The announcement of $2 billion acquisition of Provida, a pension fund administrator, will enhance MetLife's earnings by 20% by 2016. This deal will offer MetLife low capital investment products, driving high margins and high return on investments. Also, Provida will help MetLife expand in Asia and Europe, which will increase revenue contribution from international markets. It is expected that it will add 300 bps to its total earnings. Moreover, the company expects to meet its goal of achieving 12%-14% return on equity from international markets by 2016.
Apart with this acquisition, MetLife is also trying to enhance its bottom line via cost saving initiatives. Management is in the process of cutting its annual expenses, and is planning to save costs by $600 million. The company has been witnessing transition in its business over the past few years, either in the form of re-positioning itself in the international markets or shedding its banking unit.
In a strategic move to save costs, the company is shifting workers from high-cost locations such as California and Boston. These moves will be contributing cost savings of 60 bps to total earnings improving the ROE by 2016. These cost savings will be utilized for the company's technological upgradation in the future.
The bottom line
Investors can see long-term growth opportunities in these stocks as these firms have adopted several strategic moves to drive their earnings via mergers and acquisitions.
MetLife, with its strategic approach towards cost-savings, expects to meet its future ROE of 12%-14% by 2016, providing a good opportunity for investors. Prudential, with its Hartford acquisition, will enhance its product lines and market share. As for Sun Life, focusing on the Philippines and Malaysian markets via the Aviva acquisition will enhance the company's market share, thus driving its sales.
I recommend a buy for all the three stocks.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!