AN INVESTMENT ANALYSIS APPROACH TO STOCK LIFE INSURANCE COMPANIES*

Abstract

Little has been written to guide investors in their quest to select common stocks issued by life insurance companies offering investment potential. This study sets forth an outline covering the major areas for analysis and applies the outline to the industry. Emphasis is given to those unique features resulting from the industry structure. The approach covers five sectors, industry life cycle, the company's position within the industry, earnings and dividends, financial statements, and management. First, the life insurance industry's life cycle was examined to determine its profitability for investors. After establishing the growth-phase characteristics of this industry, the other areas were presented to disclose what information was available and how to interpret these facts. Within the company, home office, and field force qualities were investigated to show which ones held promise of future profitability. The competiitively superior companies tend to be the life corporations that make the earliest and greatest use of the favorable industry trends. In the presentation of earnings and dividends, two characteristics were disclosed, the consistently low pay-out ratio and the general tendency to distribute stock dividends. To approximate the future long-run earnings for any life company, the past record for eleven years should be studied, 1945 through 1955. This is a representative cyclical period for the industry. Company financial statements offer quantitative facts to support the judgments. The company's annual report to owners, or to policyholders, emphasizes the management's viewpoint. However, it is the annual statements filed with the state authorities that contains carefully checked information, ready for the analyst's use. A cautious study of the assets and the liabilities is necessary, for the life company must be approached through its balance sheet. Next, the management to be evaluated include the directors, com-