The Life insurance industry has performed well so far this year driven by improving unemployment level, growth in aging population and adoption of technology in daily operations.
The industry has gained 17.4% year to date, outperforming the Zacks S&P 500 composite’s increase of 14.9% and the Finance sector’s increase of 9.5%. Also, the life insurance industry is ranked #69 and is housed within the top 27% of the Zacks Industry Rank for 255 plus industries.
The industry’s price to book value multiple of 1.76 is much lower than the Zacks S&P 500 composite’s reading of 4.01. Given the growth prospects and undervaluation, this space offers attractive investment opportunities.
Here we focus on two life insurers, namely Voya Financial Inc. VOYA and Primerica, Inc. PRI.
While Voya operates as a retirement, investment, and employee benefits company in the United States, Primerica provides financial products to middle income households in the United States and Canada. Both these stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Factors Favoring the Industry
The Fed has kept interest rate unchanged within the target range of 2.25% to 2.5%, which is still higher than the near-zero level during the financial crisis. Life insurers invest a big chunk of the premiums so that they have enough funds at the time of claims payment or upon maturity. Thus, a better rate environment lends support to generate funds.
We believe a strong labor market, as evident from lower unemployment rate and rising wages, boosts policy sales even at higher premiums. Fed officials expect unemployment rate to be 3.5% and GDP to be 2.1% for 2019. A strong labor market drives policy sales even at higher premiums. Also, growth in aging population is driving demand for retirement benefit products.
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. The increased usage of health and fitness app over a period of time is aiding the cause. Moreover, adoption of technologies like artificial intelligence (AI), robotic process automation (RPA), cognitive intelligence (CI) or blockchain should help life insurers curb operational costs.
To insulate themselves from low rate environment, life insurers have lowered exposure to interest-sensitive product lines. They have revamped their portfolios by redesigning and re-pricing products with the potential to help in writing higher premiums. These insurers have also effectively reduced their underwriting expenses with a view to support bottom-line growth.
Coming back to Voya and Primerica, let’s now see how these life insurers have fared in terms of some of the key metrics.
Voya has outperformed both Primerica and the industry year to date. While shares of Voya have rallied 35.2%, Primerica has surged 24.2%.
Return on Equity (ROE)
Primerica with a return on equity of 22.9% exceeded the industry average of 8.3% as well as Voya’s ROE of 8.5%.
Price to book value is the best multiple used for valuing insurers. Compared with the life insurance industry’s P/B ratio of 1.76, Voya is undervalued with a reading of 0.82 while Primerica shares are expensive with a P/B ratio of 1.76.
Primerica’s dividend yield is 1.1%, while Voya’s is 0.1%. Both are below the industry’s average of 1.56%. Primerica thus has an edge over Voya.
Though Voya’s debt-to-equity ratio of 52.2 is higher than the industry average of 14.5, it is lower than Primerica’s ratio of 96.4. Hence, with lower leverage Voya scores better than Primerica.
Earnings Surprise History
Primerica’s earnings surpassed the Zacks Consensus Estimate in the last four quarters with the average being 4.62%. Voya outpaced expectations in three of the trailing four quarters with average positive surprise being 5.03%.
Primerica has an edge in this respect.
For Primerica, the Zacks Consensus Estimate for earnings per share is $8.13 for 2019, indicating a year-over-year increase of 10.9%. For 2020, the Zacks Consensus Estimate for earnings per share is pegged at $9.05, indicating a year-over-year rise of 11.4%.
For Voya, the Zacks Consensus Estimate for earnings per share is $5.50 for 2019, implying a year-over-year increase of 36.1%. For 2020, the Zacks Consensus Estimate for earnings per share is pegged at $6.34, indicating a year-over-year rise of 15.3%.
Voya scores better than Primerica.
Our comparative analysis shows Voya has an edge over Primerica with respect to price performance, leverage and valuation. Meanwhile, Primerica scores higher in terms of return on equity, dividend yield and growth projections.
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