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Life Insurers' Outlook Bleak Amid Coronavirus-Led Economic Blip
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The Zacks Life Insurance industry comprises companies that offer life insurance coverages and retirement benefits to individuals and groups. The products include annuities, whole and term life insurance, accidental death insurance, health insurance, Medicare supplements and long-term healthcare policies.
The industry also includes companies providing wealth and asset management solutions.
Let us take a look at the industry’s three major themes: • The coronavirus-induced economic plight that forced the Federal Reserve to slash its interest rates to 0-0.25% makes life insurers prone to interest rate risks. Low interest rates are identified as hazardous for life insurance companies, given their rate-sensitive products and investments. Interest rate risk can materialize in various ways, impacting life insurers' earnings, capital and reserves, liquidity and competitiveness.
In times of persistently low interest rates, life insurers' income from investments becomes insufficient to meet the contractually guaranteed obligations of policyholders, which cannot be lowered.
Moreover, the rising incidence of COVID-19 cases poses a mortality threat to life insurers. A spike in mortality will induce higher claim payments by life insurers, which might drain their underwriting incomes. Driven by the current unfavorable conditions, last month, the rating agency A.M.Best revised its U.S. life/annuity industry’s market segment outlook to negative. Another rating firm Moody’s Investors Services is also of the opinion that if the economy decelerates drastically, business volumes of life insurers might take a hit. They could also face higher claims for certain types of insurance including trade credit and event cancellation insurance.
• In an effort to navigate the current low interest rate environment, industry players are finding new solutions and ways of working to maintain their sales and profitability. Insurers are refraining from selling long duration term life insurance. Prudential for example, stopped selling 30-year term life insurance. The companies also made changes to their product portfolio by moving away from guaranteed savings products toward protection products of unit-linked savings products, which pass the investment risks to policyholders.
• The life insurance industry, which has so far been operating mostly manually, stands witness to accelerated adoption of technology, which requires minimal physical interaction, in its operations due to the COVID-19 led disruption. As such, companies are using electronic applications, e-signatures and electronic policy delivery. This transition to technology is will facilitate the survival in the post-coronavirus world. Carriers started selling policies online that appeal to the tech-savvy population. At the same time, the use of real-time data is making premium calculation easier and reducing risk. Increased automation is expected to drive premium growth and boost efficiency. Moreover, adoption of technologies like artificial intelligence, robotic process automation, cognitive intelligence or blockchain should help life insurers curb operational costs and aid margin expansion.
Zacks Industry Rank Indicates Dull Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects for the near term.
The Zacks Life Insurance industry, within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #175, which places it in the bottom 31% of 253 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. In the last 12 months, the industry’s earnings estimate for 2020 has gone down by 24.2%.
Before we present a few life insurance stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags the S&P 500 and Sector
The Life Insurance industry has underperformed the Zacks S&P 500 composite as well as its own sector in the past year. The stocks in this industry have collectively lost 32.2% compared with the Finance sector and the Zacks S&P 500 composite’s decline of 22.2% and 4.6%, respectively.
One-Year Price Performance
Life Insurance Industry’s Current Valuation
On the basis of trailing 12-month price-to-book (P/B), which is commonly used for valuing insurance stocks, the industry is currently trading at 1.15X compared with the S&P 500’s 3.69X and the sector’s 2.02X.
Over the past five years, the industry has traded as high as 2.58X, as low as 0.91X and at the median of 1.84X.
Price-to-Book (P/B) Ratio (TTM)
Life Insurance Industry vs S&P 500
Price-to-Book (P/B) Ratio (TTM)
Life Insurance Industry vs Sector
Bottom Line
Insurers are likely to be hurt by COVID-19 led economic weakness, which will undermine prospects and perhaps even contract insurable exposures. Low interest rate will lead to new type of products, which will shield insurers from interest rate risk and equity market volatility.
Uptake of technologies will continue at full speed, which even after escalating operating expenses will enhance business operational efficiency.
American Equity Investment Life Holding Company (AEL - Free Report) : This Zacks #2 Ranked company is a full service underwriter of a broad line of annuity and insurance products with primary emphasis on the sale of fixed rate and index annuities. The stock’s earnings surpassed estimates in each of the trailing four quarters, the average being 53.38%.
Price and Consensus: AEL
MetLife, Inc. (MET - Free Report) : This company offers individual insurance, annuity and investment products apart from providing group insurance, retirement and savings products and services. Having operations globally, this entity has a Zacks Rank of 3 and its earnings surpassed estimates in three of the last four quarters by 12.67% on average. It missed the mark on one occasion.
Price and Consensus: MET
Lincoln National Corp. (LNC - Free Report) : Based in Philadelphia, PA, this company is a diversified life insurance and investment management company. Through its subsidiaries it sells life insurance, annuities, group protection and retirement plans services. The company’s 2020 earnings are expected to grow 112.1% compared with the industry’s increase of 0.3%. The stock carries a Zacks Rank #3.
Price and Consensus:LNC
Primerica, Inc. (PRI - Free Report) : This Zacks #3 Ranked company provides financial products and services. It assists its clients in meeting their needs for term life insurance, which it underwrites, and for mutual funds, variable annuities and other financial products. The stock’s earnings surpassed estimates in each of the previous four quarters, the average positive surprise being 3.69%.
Price and Consensus: PRI
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Life Insurers' Outlook Bleak Amid Coronavirus-Led Economic Blip
The Zacks Life Insurance industry comprises companies that offer life insurance coverages and retirement benefits to individuals and groups. The products include annuities, whole and term life insurance, accidental death insurance, health insurance, Medicare supplements and long-term healthcare policies.
The industry also includes companies providing wealth and asset management solutions.
Let us take a look at the industry’s three major themes:
• The coronavirus-induced economic plight that forced the Federal Reserve to slash its interest rates to 0-0.25% makes life insurers prone to interest rate risks. Low interest rates are identified as hazardous for life insurance companies, given their rate-sensitive products and investments. Interest rate risk can materialize in various ways, impacting life insurers' earnings, capital and reserves, liquidity and competitiveness.
In times of persistently low interest rates, life insurers' income from investments becomes insufficient to meet the contractually guaranteed obligations of policyholders, which cannot be lowered.
Moreover, the rising incidence of COVID-19 cases poses a mortality threat to life insurers. A spike in mortality will induce higher claim payments by life insurers, which might drain their underwriting incomes. Driven by the current unfavorable conditions, last month, the rating agency A.M.Best revised its U.S. life/annuity industry’s market segment outlook to negative. Another rating firm Moody’s Investors Services is also of the opinion that if the economy decelerates drastically, business volumes of life insurers might take a hit. They could also face higher claims for certain types of insurance including trade credit and event cancellation insurance.
• In an effort to navigate the current low interest rate environment, industry players are finding new solutions and ways of working to maintain their sales and profitability. Insurers are refraining from selling long duration term life insurance. Prudential for example, stopped selling 30-year term life insurance. The companies also made changes to their product portfolio by moving away from guaranteed savings products toward protection products of unit-linked savings products, which pass the investment risks to policyholders.
• The life insurance industry, which has so far been operating mostly manually, stands witness to accelerated adoption of technology, which requires minimal physical interaction, in its operations due to the COVID-19 led disruption. As such, companies are using electronic applications, e-signatures and electronic policy delivery. This transition to technology is will facilitate the survival in the post-coronavirus world. Carriers started selling policies online that appeal to the tech-savvy population. At the same time, the use of real-time data is making premium calculation easier and reducing risk. Increased automation is expected to drive premium growth and boost efficiency. Moreover, adoption of technologies like artificial intelligence, robotic process automation, cognitive intelligence or blockchain should help life insurers curb operational costs and aid margin expansion.
Zacks Industry Rank Indicates Dull Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects for the near term.
The Zacks Life Insurance industry, within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #175, which places it in the bottom 31% of 253 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. In the last 12 months, the industry’s earnings estimate for 2020 has gone down by 24.2%.
Before we present a few life insurance stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags the S&P 500 and Sector
The Life Insurance industry has underperformed the Zacks S&P 500 composite as well as its own sector in the past year. The stocks in this industry have collectively lost 32.2% compared with the Finance sector and the Zacks S&P 500 composite’s decline of 22.2% and 4.6%, respectively.
One-Year Price Performance
Life Insurance Industry’s Current Valuation
On the basis of trailing 12-month price-to-book (P/B), which is commonly used for valuing insurance stocks, the industry is currently trading at 1.15X compared with the S&P 500’s 3.69X and the sector’s 2.02X.
Over the past five years, the industry has traded as high as 2.58X, as low as 0.91X and at the median of 1.84X.
Price-to-Book (P/B) Ratio (TTM)
Life Insurance Industry vs S&P 500
Price-to-Book (P/B) Ratio (TTM)
Life Insurance Industry vs Sector
Bottom Line
Insurers are likely to be hurt by COVID-19 led economic weakness, which will undermine prospects and perhaps even contract insurable exposures. Low interest rate will lead to new type of products, which will shield insurers from interest rate risk and equity market volatility.
Uptake of technologies will continue at full speed, which even after escalating operating expenses will enhance business operational efficiency.
One stock in the Zacks Life insurance space currently holds a Zacks Rank #2 (Buy) while three carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
American Equity Investment Life Holding Company (AEL - Free Report) : This Zacks #2 Ranked company is a full service underwriter of a broad line of annuity and insurance products with primary emphasis on the sale of fixed rate and index annuities. The stock’s earnings surpassed estimates in each of the trailing four quarters, the average being 53.38%.
Price and Consensus: AEL
MetLife, Inc. (MET - Free Report) : This company offers individual insurance, annuity and investment products apart from providing group insurance, retirement and savings products and services. Having operations globally, this entity has a Zacks Rank of 3 and its earnings surpassed estimates in three of the last four quarters by 12.67% on average. It missed the mark on one occasion.
Price and Consensus: MET
Lincoln National Corp. (LNC - Free Report) : Based in Philadelphia, PA, this company is a diversified life insurance and investment management company. Through its subsidiaries it sells life insurance, annuities, group protection and retirement plans services. The company’s 2020 earnings are expected to grow 112.1% compared with the industry’s increase of 0.3%. The stock carries a Zacks Rank #3.
Price and Consensus:LNC
Primerica, Inc. (PRI - Free Report) : This Zacks #3 Ranked company provides financial products and services. It assists its clients in meeting their needs for term life insurance, which it underwrites, and for mutual funds, variable annuities and other financial products. The stock’s earnings surpassed estimates in each of the previous four quarters, the average positive surprise being 3.69%.
Price and Consensus: PRI
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
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