BHF

Life insurers emphasize profit margins over sales growth rates.

We review and analyze the recent market share data in the U.S. life insurance industry. Our analysis shines light on the mainstream competitive advantages and industry rotation trends among U.S. life insurers. We remain cautious toward the long-term fundamental outlook for U.S. life insurers, but we are constructive on some individual stocks in light of the next wave of dovish interest rate pivots by the Federal Reserve System from mid-2024 to 2029. Recent actuarial studies show that climate change has recently caused significant increases in both the severity and frequency of rare disasters. Specifically, these disasters have become more severe and less rare due to extreme weather hazards. In summary, these disasters include floods, droughts, earthquakes, cyclones, typhoons, wildfires, heatwaves, storms, hurricanes, landslides, tornadoes, tsunamis, pandemic outbreaks, and even volcanic eruptions. Unless the major lifer insurers gradually and steadily raise their annuity premiums over the next few decades, these insurers would probably confront the new reality that their annuity premiums cannot completely cover extreme losses due to these climate hazards in the long run.

Over the next couple of decades, we can expect the major life insurers to experience modest returns on equity (ROE), slow sales growth rates, and relatively volatile profits, primarily due to higher hidden tail risk in legacy liabilities. However, the current macro backdrop continues to be relatively favorable with strong and solid stock market performance and asset market valuation in light of high interest rates near the recent peak of 5.25% to 5.5%. Despite recent concerns about midsize bank failures and higher delinquencies in the commercial real estate market, the fundamental prospects for some life insurers remain healthy and robust. Further, some life insurers may choose to continue their stock buyback programs (albeit at a slower pace). Overall, we are more upbeat about some lifer insurers with less risky legacy liabilities and strong and robust fortress balance sheets, such as Globe Life (GL), MetLife (MET), and Voya Financial Group (VOYA). At the same time, we would avoid high-beta life insurers with less common stock capital flexibility. These life insurers include Brighthouse Financial Group (BHF) and Lincoln National Corporation (LNC). For all practical purposes, our fundamental analysis focuses on the mainstream competitive advantages and market niches in the major life insurers. Specifically, we rank the top 25 life insurers in terms of their respective annuity premiums per year. These top 25 core life insurers account for more than 95% of total sales across the life insurance industry with $377 billion to $453 billion annual sales (life insurance premiums) as of May 2024. Some of the major life insurers remain private mutual investment companies, but not public corporations with liquid tradable stocks on NYSE, NASDAQ, and AMEX.

We expect the current decade of healthy stock market performance to boost both fees and assets under management for variable annuities, index annuities, longer-term care products, retirement plans, pension products, and many other asset management businesses for the top 25 major life insurers. As of mid-2024, high interest rates bode well for core profit margins in interest spread products such as index annuities, group insurance products, and interest-driven funding agreements for some of the major U.S. life insurers. Until the Federal Reserve System curtails inflation down to the long-run average inflation target of 2% to launch dovish interest rate pivots, the current real business cycle helps reduce the risk of reserve charges for all life insurers. In addition, this current cycle should help improve sales and profits in life insurance products that rely heavily on interest spreads between the prime interest rate and the federal funds rate over the Treasury term structure of interest rates. In this fundamental view, institutional investors would probably focus on the unique asset portfolios and capital levels for the major life insurers. We expect the major life insurers to experience substantially better common equity capital positions in the next few years, due to positive statutory income, modest credit asset impairment, and lower economic policy uncertainty in the current macro environment of strong and solid stock market performance with relatively high interest rates. The vast majority of life insurers attempt to derisk their legacy liabilities by shifting their sales targets toward interest-sensitive life insurance products. Also, these life insurers accelerate selling their runoff liabilities to shift focus away from life insurance products with guarantees and macro tailwinds. As these life insurers rotate their asset portfolios and capital levels, the consensus view seems to be the widespread medium-term anticipation of gradual rate cuts from mid-2024 or late-2024 to 2029. In this positive light, these major life insurers emphasize higher policy premiums and net profit margins over sales growth rates in the current decade.

We can expect the major life insurers to sustain low-double-digit returns on equity (ROE) in the reasonable range of 12% to 15% in the next few years. Given the ubiquitous use of stock buyback programs, the actual ROEs would probably be high-single-digit percentage points in the more realistic range of 8% to 10%. These near-term ROE adjustments are only slightly above the average cost of capital across the broader life insurance industry. In addition, we are wary of hidden tail risk in legacy liabilities for long-term care products, variable annuities, and universal life insurance blocks. New costs and charges from universal life for secondary guarantees (ULSG) may constrain common stock capital flexibility for several insurers, such as Allianz Life, Lincoln National Corporation (LNC), Prudential Financial Group (PRU), and Brighthouse Financial Group (BHF).

As of May 2024, the top 25 group of major life insurers now trades in the low target range of 0.95 to 1.15 times total book value with some AOCI accounting adjustments (although some of these life insurers are non-public, private mutual investment companies). Further, the P/E ratio for the same group of life insurers hovers from 7.5 to 9.3 in recent years. In fact, these life insurers trade at hefty historical discounts to the property and casualty (P&C) sector, the broader asset management industry, and the overall U.S. stock market. Investor sentiments are relatively negative on many life insurers due to the pervasive concerns about commercial real estate delinquencies, recent bank failures, and relatively high interest rates. In summary, our top pick for life insurance is Voya Financial Group (VOYA), and we continue to be bullish on Globe Life (GL), MetLife (MET), and New York Life. Across the rest of the life insurance industry, we remain cautious about Brighthouse Financial Group (BHF) and Lincoln National Corporation (LNC).

Many life insurers experience low to modest returns on equity (ROE) and sales growth rates due to intense competition from new entrants. Alternative asset managers act as cash cows to back these new entrants in the life insurance market. In recent decades, many life insurers have raised product prices and premiums due to near-zero or low interest rates, higher costs for financial hedges (especially for variable annuities), mispricing errors (for longer-term care insurance contracts), and higher costs of financial reserves (for both universal and term life insurance contracts). In the unique market for 401(k) retirement plans and pension products, fees have steadily declined in recent years, especially for the Baby-Boomers and Joneses. Post-Covid, the major life insurers regard the pandemic crisis as a rare standalone disaster with no semblance to climate disasters.

$PRU $MET $MCI $LNC $BHF $GL $JXN $EQH $VOYA $FNF $AVGO $QCOM $MU $AMAT $ASML $INTC 

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