During the recent stock market downturn, investors sold shares of any company that has a connection to the life insurance industry, because they’re likely assuming that this market downturn is similar to the one in 2008. At that time, shares of famed global insurer American International Group (AIG) did a spectacular crash and burn due to tremendous corporate problems. Fortunately AIG – and companies throughout the financial sector – learned some hard lessons about financial management. AIG changed corporate leadership, divested businesses and dramatically strengthened their balance sheet.
Fast forward to the year 2020, and we’re presented with another big stock market downturn that fortunately bears no similarity in causation to the 2008 financial meltdown. Companies that sell life insurance – wholesale and retail – are in far stronger financial positions than they were in 2008. The market is now recognizing the quality among these modern companies, as evidenced by the fact that financial stocks have begun recovering from fire-sale prices.
I maintain a Buy List of companies that are producing strong earnings growth that currently have low valuations, as measured by their price/earnings ratios (P/Es). The list contains stocks from a wide variety of sectors, with the highest representation in the financial sector—most specifically among investment management, life insurance and annuity companies.
If you’re familiar with fundamental analysis, you know that a P/E ratio that’s down in the single digits could represent quite a bargain, as long as a company’s revenue and profits are also attractive. The 2020 P/Es at Ameriprise Financial (AMP), Athene (ATH) and Brighthouse Financial (BHF) fit those requirements. And those are just the first three excellent financial stocks as I go down my list alphabetically. There are more!
Is Ameriprise Financial (AMP) about to Do a Takeover?
Ameriprise Financial (AMP) just issued $500 million in senior 3.00% notes due April 2025. The company already had an impressive amount of excess capital, so the question becomes, “What does Ameriprise plan to do with this new influx of capital?” The two answers that quickly come to mind are (1) repurchase their own stock or (2) attempt to acquire an industry peer in the area of life insurance, annuities, retirement benefits and/or investments.
Ameriprise has a $12.7 billion market capitalization. All of the following industry peers have a significantly lower market cap (most below $5 billion), and they’re also experiencing multi-year earnings growth: Athene (ATH), Brighthouse Financial (BHF), CNA Financial (CNA), CNO Financial (CNO), Equitable Holdings (EQH), Lincoln National (LNC) and Voya Financial (VOYA).
While we’re sitting here debating whether to buy AMP for their potential share buybacks vs. any of their smaller peers for their potential acquisition, there’s a third possible scenario. A large financial company – possibly including a major bank or Berkshire Hathaway (BRK) – could swoop in and buy Ameriprise or any of these other companies.
Merger and acquisition (M&A) activity tends to be somewhat cyclical, often concentrated in a specific industry for a little while, then another industry the following year. Back in 2016, both chemical stocks in my Cabot Undervalued Stocks Advisor portfolios received buyout offers: Axiall (AXLL) and Chemtura (CHMT).
There’s been significant M&A action among investment and insurance companies this year. In February, mere days before the current market downturn commenced, investment banker Morgan Stanley (MS) announced the acquisition of discount broker E*TRADE (ETFC), and global investment manager Franklin Resources (BEN) announced the acquisition of Legg Mason (LM), a smaller investment peer.
The Most Likely Financial Stock Takeover Targets
If there’s any additional M&A activity within the investment/insurance space in 2020, it’s my assessment that the companies I mentioned herein are the most attractive potential takeover targets. After all, if you’re the CEO at a big company who’s looking to buy a smaller company that can add to your product lines and profits, which do you buy: a company that’s financially struggling, or a company that’s growing their profits each year? You buy the company with the attractive business model and growing profits!
I’m not surprised at this spate of financial industry consolidation, and I expect more M&A activity among investment management, life insurance and annuity companies. That’s because the multi-year trend toward lower asset management fees, expense ratios and sales charges is causing financial companies to search for additional ways to generate profit growth.
Investors should also be aware that CEO Warren Buffett of Berkshire Hathaway (BRK) has publicly stated his intention to buy another company. Berkshire has accumulated $125 billion in cash, up to $105 billion of which is available for M&A activity. Knowing that Mr. Buffett is already quite experienced with owning insurance companies, there’s a decent chance that his next buyout could be focused on the cheap valuations within this industry.
I continue to recommend that investors own stock in investment, life insurance and annuity companies because the shares are incredibly cheap, their balance sheets are strong and growing, and there’s already a current trend in place of increased M&A activity within this industry group.