The woes of the industry have been well-documented. Aggressive competition in the early part of this century resulted in the creation of high-risk products which came back to haunt the companies when the credit crunch hit. Low interest rates sliced returns on their big bond portfolios while falling stock prices battered their equity holdings. Profits dwindled to the vanishing point as the companies scrambled desperately to regroup, withdrawing most of their riskier products from the market and selling off assets.
How bad did it get? Look no further than Manulife Financial (MFC)(TSX:MFC). In late 2007, it was trading at over $42 a share. By the first week of March 2009, it had plunged to below $10 - a loss of more than 75%. It was a humbling experience for what had once been regarded as a blue-chip stock. The company was forced to cut its dividend in half and undertake a major reorganization while recording huge losses. A year ago, you could still buy the shares in the $11 range. Now, Manulife finally seems to be on the way back, with the stock closing at C$17.30, US$16.38 on Friday.
Although Sun Life Financial (SLF) (TSX:SLF) never cut its dividend, its share price was equally battered. In December 2007 it was trading in the C$55 range. Fifteen months later it was below $16 for a loss of more than 70%. Like Manulife, it went through a long period of regrouping and the stock is finally on the upswing again, closing on Friday at C$31.62, US$29.94.
It was the same story - in some cases even worse - with the big U.S. insurance firms. AIG International Group (AIG) was the most dramatic example, almost going under during the crash as its stock plummeted. The company only survived with the aid of a US$85 billion bailout from the Federal Reserve Board, the largest government bailout of a private company in U.S. history. Today the company is profitable again and the price is back in the US$44 range.
Like their Canadian counterparts, U.S. insurers have benefitted from the rise in interest rates, which improves returns from their bond portfolios. But they have also enjoyed good gains on the equity side as all the American indexes are in double-digit profit territory so far this year. We're seeing this reflected in their stock prices, which are on the rise in almost every case.
MetLife (MET), the largest life insurance company in the U.S., saw its share price drop from US$71 in October 2007 to US$12.22 in the first week of March 2009 - a loss of more than 80%. However, the company never applied for a federal government bail-out and in November 2010 it scooped up American Life Insurance Company (Alico) from AIG for what today looks like a bargain price of US$16.4 billion. Alico was one of the largest and most diversified international insurance companies in the world and the first foreign life insurance company licensed to sell in Japan. The acquisition transformed MetLife into a global life insurance and employee benefits powerhouse, with 90 million customers in more than 50 countries.
Today, MetLife is comfortably back in the black, its stock is trading at a 52-week high of US$47.52, and the company's prospects going forward appear strong.
First-quarter results beat analysts' estimates with the company reporting operating earnings of $1.6 billion ($1.48 per share, figures in U.S. dollars), up 12% over the first quarter of 2012. The importance of the Alico acquisition was reflected in the results as operating earnings in Asia increased 11% (12% on a constant currency basis) and while they grew by 21% (17% constant currency) in Europe, the Middle East and Africa (EMEA). Net income for the quarter was $956 million ($0.87 per share).
A week before the results came out, MetLife announced a whopping dividend increase of 48.6%, a sure sign that management and the directors are confident about the company's future. It was the first increase since 2007 and it brought the quarterly payment to $0.275 per share ($1.10 annually) for a yield of 2.3% based on the current price. CEO Steven A. Kandarian commented that the move "makes our dividend more competitive and demonstrates our commitment to delivering value to shareholders."
Even at the higher level, the payout ratio is only in the 20% range, leaving room for more dividend increases in the future.
The share price has moved up about 20% since the beginning of May but I think there is a lot more upside potential here over the medium to longer term. We do not have a life insurance company on our U.S. Primary Core list so I am adding MetLife with a one-year target of $52 on the shares.
Action now: Buy MetLife at $47.52.