Improving rate environment and a favorable employment backdrop should keep the momentum alive in the life insurance space. Given the accelerated pace of rate hikes, life insurers should witness a boost in their investment income. The Federal Reserve’s rate hike in June 2018 marks the seventh increase since December 2015. The Central Bank has announced intentions of two more raises this year with three lined up in 2019 and a couple of in 2020.
Rising rates should help lower hedging costs and drive investment yields.
With growth in aging population, demand for retirement benefits’ products should always be on the rise. This in turn, should continue to benefit premiums.
Increasing disposable income on the back of consistent growth in the economy and a drop in the unemployment rate should perk up demand for life insurance and annuity products. Progress in the employment scenario raises optimism on the stocks among investors.
Also, given the healthy graph of U.S. corporate bond market and a stable real estate market owing to a strengthening job market, life insurers’ credit-related investment losses should stay below average. Bond yields have improved since Donald Trump’s Presidentship on expectations of better economic growth and higher inflation based on an expansive fiscal policy. If this trend continues, life insurers should gain enough traction.
Industry Lags in Terms of Shareholder Returns
Looking at shareholder returns over the past year, it appears that the broader economic recovery wasn’t enough for enhancing investors’ confidence in the industry’s growth prospect. The improving rate environment has been favoring life insurers since the Fed started tightening its monetary policy a couple of years back, given the high sensitivity of their business models to interest rates.
However, the rate still remains low for industry players to substantially profit from the same. Also, compliance with regulatory requirements always remains a challenge.
The Zacks Life Insurance Industry, a 14-stock group within the broader Zacks Finance Sector, has underperformed both the S&P 500 index and its own sector over the past year.
While the stocks in this industry have collectively lost 0.4%, the Zacks S&P 500 Composite and Zacks Finance Sector have rallied 15.4% and 7.8%, respectively.
One-Year Price Performance
Life Insurance Stocks Trading Cheap
Thanks to the underperformance of the industry over the past year, the valuation looks really cheap now. One might get a good perspective of the industry’s relative valuation by looking at its price-to- book ratio (P/BV), the most appropriate multiple for valuing life insurers because of large variations in their earnings results from one quarter to the next.
This ratio essentially measures a life insurer’s current market value relative to what it would be worth if it chooses to shut down.
The industry currently has a trailing 12-month P/BV ratio of 1.88, the lowest level over the preceding year. When compared with the highest level of 2.51 and 2.88 at the median level over that period, there is apparently plenty of room for upside left.
The space also looks inexpensive when compared with the market at large as the trailing 12-month P/BV ratio for the S&P 500 is 3.87 and the median level stands at 3.73.
Price-to-Book Ratio (TTM)
As finance stocks typically have a lower P/BV ratio, comparing life insurers with the S&P 500 index might not make sense to many investors. But a comparison of the group’s P/BV ratio with that of its border sector ensures that the group is trading at a decent discount. The Zacks Finance Sector’s trailing 12-month P/BV ratio of 2.49 and the median level of 2.54 for the same period are way above the Zacks Life Insurance Industry’s respective ratios.
Price-to-Book Ratio (TTM)
Underperformance Likely to Continue on Bleak Earnings Outlook
Increasing disposable income on the back of continued growth in the economy and a declining unemployment should push up demand for life insurance and annuity products. Improving employment scenario buoys hope for investors.
But what really matters to investors is whether this group has potential to perform better than the broader market in the quarters ahead. While the above ratio analysis shows that there is a solid value-oriented path ahead, one should not really consider the current price levels as good entry points unless there are convincing reasons to predict a rebound in the near term.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance is the earnings outlook for its member companies. Empirical research shows that a company’s earnings outlook significantly influences its stock performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for the industry as well as the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019 while the light blue line represents the same for 2018.
Price and Consensus: Zacks Life Insurance Industry
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.
Please note that the $1.97 EPS estimate for the industry for 2018 is not the actual bottom-up dollar EPS estimate for every company within the Zacks Life Insurance industry but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the industry’s earnings of $1.97 per share for 2018 but how this dollar number has evolved recently.
Current Fiscal Year EPS Estimate Revisions
As you can see here, the $1.97 EPS estimate for 2018 is flat since April end but up from $1.51 this time last year. In other words, although the sell-side analysts covering the companies in the Zacks Life Insurance industry have been steadily raising their estimates, they preferred to stay on the sidelines over the last two months.
Zacks Industry Rank Indicates Improvement Prospects
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all-member stocks.
The Zacks Life Insurance Industry currently carries a Zacks Industry Rank #76, placing it at the top 31% of more than 250 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.
Life Insurers Promise Long-Term Growth
While the near-term prospects look unwelcoming for investors, the long-term (3-5 years) EPS growth estimate for the Zacks Life Insurance industry appears promising. The group’s mean estimate of long-term EPS growth rate has been increasing since January 2018 to reach the current level of 19.9%. This compares favorably with 10.7% for the Zacks S&P 500 Composite.
Mean Estimate of Long-Term EPS Growth Rate
In fact, the basis of this long-terms EPS growth could be the recovery in top line that life insurers have been showing since the beginning of 2016.
Another important indication of a solid long-term prospect is the improvement in the group’s return on equity (ROE), a key metric for evaluating insurance stocks.
Strengthening of the economy should continue to favor performance of the industry. Trimming underwriting expenses and modestly increasing premium rates should help life insurers continue to improve net income. Product modification and re-pricing should enhance liability profiles and profitability while a beefed-up capital market should solidify the industry’s liquidity profile in the upcoming quarters and aid its participants to confront any unforeseen challenge.
With expectation that the equity market should remain favorable, variable annuity portfolios and other fee-driven businesses should perform better.
Implementation of The Department of Labor’s Fiduciary Rule might adversely impact insurers as they might find it hard to sell their retirement products abiding by regulatory requirements. Nonetheless, implementation has been delayed till Jul 1, 2019.
Also, keeping the long-term projections in mind, investors could take advantage of the cheap valuation and bet on a few life insurance stocks with a strong earnings outlook.
Below are three stocks with positive earnings estimate revisions and a bullish Zacks Rank. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
GWG Holdings, Inc. (GWGH): Headquartered in Minneapolis, MN, this insurer sports a Zacks Rank #1. The stock has lost 25.7% over the past year.
Price and Consensus: GWGH
FGL Holdings (FG): This Hamilton, Bermuda-based life insurer has shed 23.6% of its value over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 1.9% upward over the last 60 days. The stock carries a Zacks Rank #2 (Buy).
Price and Consensus: FG
American Equity Investment Life Holding Company (AEL): The EPS estimate for this West Des Moines, IO-based life insurer has moved 0.9% north for the current year over the last 60 days. The Zacks #2 Ranked stock has rallied 42.5% over the past year.
Price and Consensus: AEL
However, below are two stocks that carry a bearish Zacks Rank.
Genworth Financial, Inc. (GNW): Richmond, VA-based Genworth Financial carries a Zacks Rank #4 (Sell). The stock has rallied 20.9% over the past year.
Price and Consensus: GNW
Primerica, Inc. (PRI): Duluth, GA-based Primerica carries a Zacks Rank of 4. The Zacks Consensus Estimate for current-year EPS has been revised 0.8% downward over the last 60 days. The stock is a Zacks #4 Ranked player. The stock has surged 34.9% over the past year.
Price and Consensus: PRI
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