Investors are understandably reluctant to put money into companies tied to the health of the European financial system. As one of the biggest, but also one of the best, insurance companies in Allianz (OTC:AZSEY) might be a company worth an exception. While low rates do compromise the company's ability to grow, quality underwriting and a healthy balance sheet make Allianz a value-priced name worth considering.
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A Clean Balance Sheet Means Less Pressure
By the standards of Solvency I and Solvency II, Allianz is in good shape with its balance sheet. There are some risks to the company's investment portfolio, due to its holdings of French and Italian sovereign debt, but the company seems to be well capitalized right now, barring a real meltdown in Europe.
That's relevant if investors consider the examples of other insurers like Aviva (NYSE:AV) and MetLife (NYSE:MET). Aviva's high level of debt to capital is forcing the company to restructure, likely leading the company to sell its U.S. insurance business at a time when industry valuations are very low. In the case of MetLife, it's not so much about the company being forced to divest businesses, as it is less flexible about expanding through M&A (say by buying the life insurance businesses of Aviva or Hartford (NYSE:HIG)) or returning capital to shareholders.
A clean balance sheet also means more growth opportunities as market prices improve. It takes capital to underwrite new insurance policies, and Allianz is one of the better-positioned European insurance companies with respect to its ability to leverage improving prices in Germany, France and Italy. In fact, one of the reasons that prices are rising is that fewer and fewer companies have the capital to allow them to write more business.
Rates Limit the Growth
One of the challenges facing all insurance companies (especially Allianz, MetLife, AXA (OTC:AXAHY) and Prudential PLC (NYSE:PUK)) in the life insurance business, are the low yields on their investment portfolios. Many insurance companies, even the best, make very thin long-term margins on their core underwriting and instead rely on the earnings of their investment portfolios. So when rates are as low as they are, that's problematic and it's even more so for the life insurance companies.
For the time being, Allianz is dealing with this by deprioritizing its annuities business (a business that has caused a lot of headaches for insurance companies over the last four years). Allianz is also looking to emerging markets like India for additional growth, as well as non-insurance operating units like asset management (including PIMCO).
The Bottom Line
Relative to a company like AllianceBernstein (NYSE:AB), Allianz's asset management business is in decent shape. And relative to many European life, health and P&C insurance companies, Allianz is doing well with premium growth, underwriting profits and its balance sheet.
I'm not expecting tremendous growth from Allianz over the next few years, but if the company can keep its return on equity around 10%, the valuation is compelling. Insurance companies currently sport high equity discount rates relative to past levels, but assuming that the world gets a little more normal by 2017, Allianz shares today ought to trade closer to the mid-teens.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.