The Coming Annuity Squeeze: Genworth Financial (GNW)

Brutal cost-cutting and information-driven automation is reshaping the cozy world of annuities. While it won't be pretty, it might be lucrative.

It's not like we get to write this sentence every day: There appears to be fresh, new value in the dusty old world of annuities. It seems that, in this broken economy of ours, the coming changes to shear mundanity of insurance policies like annuities make for a beacon of investing hope. 

If, that is, you know where to look. 

The 3,000 Year-Old Boring Idea. 

Time, it seems, loves annuities. According to Edwin W. Kopf, who wrote a not-bad book called The Early History of Annuities, about 3,000 years ago a sophisticated transport annuity was popular in Babylon. The policy, guaranteed by plots of land, hedged the overland transport risk of goods manufactured in Phoenicia that traveled for sale to India and China. 

And not much has changed since the Babylonian take on FedEx, when it comes to annuities: One person charges another a massive upfront fee, in exchange for the promise to pay back a series of much smaller payments, usually starting at a much later date. The contract creates the illusion of certainty by balancing the risk of the size of the down payment and how much that payment can earn before it has to be paid back, with how long will each party will be around to exchange those payments and the costs to administer the entire contraption. Name an investment that is are simpler than an annuity. 

What makes the ancient financial machine compelling in the 21st-century is, like a new theme park being carved out in Westworld, the cozy business rain-forest of annuities is being torn asunder by Digital Age start-ups like New York-based Web automated annuities firm Blueprint Income.

And a look at what Blueprint Income is doing shows the violence to come. And clear feel for the winners that need to be backed. And the losers that needed to be avoided in annuities. 

Annuities Go the Way of Spotify

Blueprint Income likes to call itself the Kayak (the online travel service) of annuities. Blueprint Income is online marketplace for consumers to be matched to existing annuity policy providers. Customers fill out online forms. Their needs are culled and match to annuities providers. And when a deal is closed, Blueprint Income takes a cut. Most major annuity providers seem to be represented here, like Sentinel Security Life, Phoenix Fidelity, Oxford Life Insurance, and on and on. 

Blueprint Income deserves credit for streamlining the costs in annuities. According to Lauren Minches, the VP of Product and Marketing, who I spoke with over sandwiches, her firm slashes the commissions paid to brokers from a rich 3 percent, to just 1 percent. And her firm passes some of those savings to consumers. 

What’s news about Blueprint Income is, it is just one player of many driving cost-cutting through the annuities sector. Job-slashing tools like machine learning are blasting into all parts of the insurance industry. New York-based Lemonade is claiming to bring A.I. into “all things insurance.” And Tractable is selling machine-learning into accident processing for providers. Already, Insurance actuaries are beginning to wonder aloud of they will have jobs, as are life insurance creator and claims processors.

The industry has reason to worry: When a machine memorizes risk tables and process forms, what will the people do? The answer is, probably not very much. Just like in financial publishing, the cable TV industry and all the rest, there is going to be a whole lot less dollars flowing around the annuity sector. 

And won't that make for a hell of a short bet for institutional investors. 

The Big Annuity Short. 

The digital damage coming to the insurance sector that annuities operate in, is no secret. Big insurance is breaking down into smaller businesses that better manage the risks coming to the industry. About a year ago financial services mega shop, Voya Financial, announced that is was spinning off its $25 billion annuities business to a private equity team, lead by Apollo Group. Rebranded as Venerable. The operation would be yet another rebranding for Voya Financial. If you recall, it was created as part of a mandated renaming of ING, from a global broker dealer network, to mostly American insurance company, starting back in 2014. 

And a glance at Voya’s financial statements show just what a bad business insurance policies like annuities can become. Quarterly performance, year over year, dropped “161 percent” -- which of course not actually a numeric thing. It’s just what happens when in 2017 you make $661million in profits. And then in the same quarter in 2018 you lose $402 million The logic of numbers just can't describe the horror.

As much as we would love to recommend Voya as a shortable stock, its not actually technically in the annuities sector. But there is no shortage of direct exposure to the upside in the collapsing world of annuities. For that, it is tough to beat the stinker that is Richmond Virginia-based Genworth Financial. (GNW) This regional long term health care and annuities provider has been beaten down for nearly three years. Sellers have been outstripping buyers since mid 2015! The operation is trading at the princely sum of about $4 a share, for about $2.1 billion market cap. The comps here are well, ghastly: The price-to-earning ratio is just about $6 per dollar of earnings, when the industry average is nearly $30! And the return on equity is similarly ridiculous 3-ish, when the sector runs about 11. Think about what that implies!

What’s fantastic for shorts, is there was an simply insane jump in the stock price, when the firm nominaly beat earnings estimate earlier this quarter. But note, it also missed revenue by about 4 percent for the same period. Things are not getting better. 

Even better for the short trader, the firm announced it was being bought by chinese investing Oceanwide Holdings Groups. Which means the acquisition run up -- which is the killer for the short trader on companies this weak -- is already baked into this ticker. And not surprisingly, short interest on this bad-girl is creeping back up to Sept 2018 highs -- Or about 17 percent of the available volume. The world is going short on this one. 

To us, as long as this stock remains in the public eye, it’s as reasonable path to the exposure in the unraveling world of annuities as any. And by all means, spend 15 minutes on Blueprint Income and order up a policy. You will sense the power of the platform. You will very quickly come to see that it, and operations like it, will be the blueprint for disaster for other insurers like MetLife, Brighthouse Financial, and Prudential.

Heck, if you really wanted to be brave, we would even look at long-term 18 month ETF short play on the entire insurance sector. Because until somebody can explain exactly the difference between insurance and legacy ideas like cable TV and newspapers, all this is going the way of the printing press.