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Sector Recommendation: Marketweight
We believe that bonds in the life insurance sector are fairly priced, due to what we
think are relatively tight spreads (from a historical standpoint) that are supported
by strong fundamentals. Historically we note that the sector has tended to be efficiently
priced relative to their high credit ratings, perhaps because most of the companies
that have actively traded bonds are large, extremely well capitalized (based on recent NAIC
risk-based capital ratios), well-managed, dominant in terms of market shares, and quite stable
due to their financial strength, traditional focus on relatively stable products, and solid
enterprise risk management. In other words, there should not be a material degree of operating
volatility in the industry which would cause spreads to diverge significantly from fair
value, in our opinion. An exception could be a period of economic recession where there is
a poor performing stock market combined with low interest rates and tight credit spreads,
which together could materialize in earnings erosion and some downgrades in the industry.
Bonds in the sector tend to trade close to each other, reflecting their similar ratings and the
fact that the companies with active debt issuance are the dominant companies.
Exhibit 1 shows the option-adjusted spread (OAS) trend for an index of life insurance
securities, along with the OAS trends of what we believe would be appropriate sectors to
compare to it.1 As one can see, life has been in a somewhat narrow range since mid-2003,
with the OAS ranging from 119 bps to 84 bps, with the most recent figure at 96. At the
same time, we see that with the exception of Property and Casualty (P&C) reinsurance, the
narrow range does not appear much different than other sectors.
In Exhibit 2, we expand on the trend by comparing the life insurance OAS to the OAS of
other sectors. We can see that since mid-2003, life insurance spreads have generally tightened
relative to high quality long-term corporates, and in the last years have ranged from
about 7 bps tighter to flat. A similar yet slightly more volatile trend can be seen in nonfinancials.
The spread trend of other financials has been quite different, with life insurance
widening to 2 bps cheap to other financials from 5 to 15 bps tight in 2003–2004. Most of
the recent widening with other financials is related to the banking sector, where spreads
have been consistently tight, and in turn we believe there may be some opportunities to
pick up spread in life insurers compared to large banks.
Sector Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Company Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Ameriprise Financial, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Assurant, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Genworth Financial Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Lincoln National Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
MetLife, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Principal Financial Group, Inc . . . . . . . . . . . . . . . . . . . . . . . . . .39
Prudential Financial, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Unum Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Addendum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
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