Improving economy reflected by rising interest rates, a growing gross domestic product (GDP), favorable employment backdrop as well as the tax cut should keep the momentum alive for life insurers.
Increasing interest rate has come as a boon to insurers with the Fed indicating two more hikes this year, lending an impression of aggressive rate increases. Despite life insurance companies having lowered exposure to interest-sensitive product lines, redesigning and re-pricing products, investment income still forms a major component of the top line. Insurers reinvest premiums they receive from policy holders to pay future claims. Thus, favorable interest rate environment will boost better returns.
Growth in aging population will drive demand for retirement benefits’ products. Also, the progressing economy indicates more disposable income and hence people opting for more insurance coverages, will drive premiums higher for life insurers.
A drop in the unemployment rate should perk up demand for life insurance and annuity products.
Unemployment rate came in at 3.9% for August with the GDP estimated to grow 2.8% for 2018 before averaging at 2.4% in 2019.
The Life Insurance industry is ranked at #22 (representing the top 9% of the Zacks Industry Rank for 255 industries) in spite of underperforming the Zacks S&P 500 Composite’s increase of 8.1% year to date. While the industry has declined 19.4%.
Here we focus on two life insurers, namely Torchmark Corporation (TMK - Free Report) and Reinsurance Group of America, Incorporated (RGA - Free Report) . While Torchmark provides annuities, whole and term life insurance, accidental death insurance, health insurance, Medicare supplements and long-term healthcare policies, Reinsurance Group is primarily engaged in traditional individual and group life, asset-intensive, critical illness and financial reinsurance services. While the former has a market capitalization of $9.2 billion, the latter’s metric records $9.9 billion.
It will be interesting to note which stock scores higher in terms of fundamentals.
Investors interested in the same space can also take a look at Primerica, Inc. (PRI - Free Report) and Athene Holding Ltd. (ATH - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
While Torchmark holds a Zacks Rank #2 (Buy), Reinsurance Group carries a Zacks Rank #4 (Sell).
Both Torchmark and Reinsurance Group have outpaced the industry year to date. While shares of Torchmark have lost 6.2%, Reinsurance Group stock saw a decline of 8.4%. Thus, Torchmark emerges a winner here.
The price to book value metric is the best multiple used for valuing insurers. Compared with the Life Insurance Industry’s P/B ratio of 1.80, Torchmark is underpriced with a reading of 1.74. Meanwhile, Reinsurance Group is way cheaper with a trailing 12-month P/B multiple of 1.07. This round clearly goes to Reinsurance Group as the company’s shares are cheaper than Torchmark’s.
Return on Equity
Torchmark’s return on equity of 11.23% lies below the industry average of 11.30%. The same is however, higher than Reinsurance Group’s 7.99%. Return on equity — a profitability measure — reflects how efficiently the company utilizes shareholders’ funds. Therefore, between Reinsurance Group and Torchmark, the latter is far better-positioned.
While Reinsurance Group’s debt-to-equity is noticeably higher than the industry average of 8.26%, Torchmark scores lower in this regard. Hence, Torchmark with a leverage ratio of 26.73% has a visible edge over Reinsurance Group’s 32.41% ratio.
Both Torchmark and Reinsurance Group have lower dividend yields compared with the industry average of 2.27%. Reinsurance Group with 1.68% yield has an edge over Torchmark’s 0.75% tally. Hence, Reinsurance Group is better off than Torchmark on this front.
Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors. Reinsurance Group with a favorable VGM Score of B has a visible vantage point over Torchmark with an unfavorable VGM Score of C.
Earnings Surprise History
As far as both companies’ surprise history are concerned, Torchmark surpassed the Zacks Consensus Estimate in all the last four quarters with an average beat of 1.68% while Reinsurance Group delivered a positive surprise in only one of the trailing four quarters with an average miss of 2.95%.
Evidently, Torchmark outshines Reinsurance Group in this round.
Earnings Estimate Revisions and Growth Projections
Torchmark’s 2018 estimates have moved 0.7% north and 0.5% up for 2019 over the past 60 days. Meanwhile, the Zacks Consensus Estimate for Reinsurance Group’s current-year earnings has been revised 0.4% downward while the same for 2019 bottom line has not witnessed any revision.
For Torchmark, the consensus mark for 2018 and 2019 earnings per share is estimated to rise 25.9% and 7.6%, respectively.
For Reinsurance Group, the consensus estimate for earnings per share in the current year is projected to increase 4.1% while for 2019, the bottom line is predicted to improve 17.6%.
In this case, Torchmark beats Reinsurance Group.
Torchmark is better placed than Reinsurance Group on the basis of a bullish Zacks rank, price performance, strong return on equity, leverage ratio, better earnings surprise history, encouraging earnings estimate revisions and growth projections. While taking yardsticks like valuation, an impressive dividend yield and the VGM Score into account, Reinsurance Group seems a healthier choice than Torchmark as a stock. Per our comparative analysis, Torchmark thus seems a more rewarding investment pick than Reinsurance Group.
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