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Life Insurance Outlook: Low Interest Rate Woes to Continue

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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 as well as long-term healthcare policies.

The industry also includes companies that provide wealth and asset management solutions.

Let us take a look at the industry’s three major themes:

•    Mergers and acquisitions remain rife across the life insurance industry, as players look for opportunities to digitize their operations and expand into niche or specialty lines of business. Divestitures of non-core businesses or run-off blocks should continue as insurers regularly evaluate core competencies and consider options to boost them. This includes companies looking for opportunities to exit capital intensive businesses such as legacy holdings and annuity blocks of business.

•    Life insurers have been grappling with low interest rates that have put their business model under increased pressure and scrutiny. Undiversified life insurers with vast exposure to guaranteed savings products have been in rough waters due to low interest rates and have therefore become targets of takeovers by better-placed players. Interest rates also play a role in discounting of liabilities, which has a notable effect on insurers. In order to manage the bloated liabilities and reduce financial burden in this low interest rate environment, there have been a greater number of reinsurance transactions and bulk annuity deals. Players have 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 onto policyholders. Also, investment income of life insurers has taken a hit.

•    Life insurers have been gradually adopting technology in their daily operations. Carriers have 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 increase 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 growth.

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 #150, which places it in the bottom 41% 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 35.5%.
 
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 Outperforms S&P 500 and Sector

The Life Insurance industry has outperformed the Zacks S&P 500 composite as well as its own sector in the past year. The stocks in this industry have collectively gained 19.9% compared with the Finance sector and the Zacks S&P 500 composite’s increase of 12.5% and 17.6%, 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 1.7X compared with the S&P 500’s 4.39X and the sector’s 2.71X.
Over the past five years, the industry has traded as high as 2.59X, as low as 1.83X and at the median of 2.5X.

Price-to-Book (P/B) Ratio (TTM)

Life Insurance Industry v S&P 500


Price-to-Book (P/B) Ratio (TTM)

Life Insurance Industry v Sector

Bottom Line

Adoption of technologies should increase efficiency and reduce cost of operations. Changes made to product portfolio should reduce business risk profile. Added to these is the ongoing consolidation that will lead to increased competition and the survival of the fittest. All in all, a number of factors at play are set to change the face of the industry.
 
One stock in the Zacks Life insurance space currently sports a Zacks Rank #1 (Strong Buy) while three carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

American Equity Investment Life Holding Company (AEL - Free Report) : This Zacks Rank #1 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 consensus estimate increased 16.4% for 2019 and 1.2% for 2020 over the past 30 days.

Price and Consensus: AEL

Manulife Financial Corporation (MFC - Free Report) : The company provides financial advice, insurance, and wealth and asset management solutions to individuals, groups and institutions in Asia, Canada and the United States. The Toronto, Canada-based company carries a Zacks Rank #2 and surpassed estimates in the last reported quarter by 7.22%.

Price and Consensus: MFC

 

Primerica, Inc. (PRI - Free Report) : This Zacks Rank #2 company provides financial products and services. It assists its clients in meeting their needs for term life insurance, which it underwrites, and mutual funds, variable annuities and other financial products. The Zacks Consensus Estimate for 2019 moved 0.7% north in the past 60 days and 1.4% for 2020. It carries a Zacks Rank #2.

Price and Consensus: PRI

Aviva PLC (AVVIY - Free Report) : This is the leading provider of indexed annuity and indexed life insurance products. Its principal activity is the provision of financial products and services, focused on the following lines of business: long-term insurance and savings business, fund management and general insurance and health. The Zacks Consensus Estimate for this Zacks Rank #2 company moved up 2.5% for 2019 and 3.3% for 2020 in the past 30 days.

Price and Consensus: AVVIY




 

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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