LNC

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 

#size #value #momentum #profitability #assetgrowth #marketrisk #dividendyield #industry #issuance #macd 

AYA fintech network platform https://ayafintech.network/blog/stock-synopsis-life-insurers-emphasize-profit-margins-over-sales-growth-rates/

We delve into the 5 major economic themes of the U.S. presidential election between Biden and Trump in 2024. This election is a fundamental market event in light of the stark economic policy differences between the incumbent president Joseph Biden and the former president Donald Trump. These differences span both polar extremes of the congressional spectrum between Democrats and Republicans. Here we map out the key economic issues and asset market shifts, which may occur in case the global asset markets present useful opportunities for institutional investors, fund managers, and retail traders to garner early exposure to these major themes. These themes include the U.S. fiscal policy, tax deregulation, homeland trade industrial policy, Federal Reserve System monetary policy, and geopolitical support.

As of mid-March 2024, the latest presidential election polls show that Trump leads Biden by several single-digit percentage points in the major swing states. These polls span CNN, New York Times, Ipsos, Reuters, YouGov, and USA Today; and the 5 major swing states include Arizona, Georgia, Michigan, Pennsylvania, and Wisconsin. In this context, Trump is likely to win his second presidential bid in November 2024, if he survives numerous U.S. prosecution trials and investigations in due course.

We would expect to see significant shifts in the fiscal stance, because these shifts are more likely to happen under unification across the new U.S. administration and Congress. A clean sweep by either party, especially Republicans, would raise risks of a fresh fundamental fiscal expansion in all major fiscal policy domains (such as social security, health care, education, defense, commerce, and transportation). Typically, this sweep would boost U.S. total GDP growth, interest rates, and more broadly asset prices and returns, especially for U.S. stocks. By contrast, however, the probable shift in fiscal stance in 2024 is substantially smaller than the fiscal shift was back in 2020, as both U.S. presidential candidates seek to attract greater centrist support in swing states this time. With much lower unemployment, stubbornly higher inflation, and possible dovish interest rate cuts later from 2024 to 2026, any fiscal expansion would impact the U.S. economic policy outlook more than the growth outlook. The new U.S. government may reinforce the upward pressure on Treasury bond yields, recent greenback strength, and temporary gains in asset market valuation. In support of a steeper yield curve, the next fiscal expansion may thus fuel fresh worries about the premium for investors to hold longer-term Treasury bonds. In response, U.S. stock market investors can focus on the AI-driven tech stocks and some cyclical value stocks in trade, finance, and health care.

If the Republicans win majority seats in both chambers of the U.S. Congress, the new Trump administration would likely extend the individual income tax cuts, windfall credits, and other tax incentives from 2017 beyond January 2026. Although neither party has outlined the next tax agenda at this stage, a Republican sweep would lead to the consideration of both further corporate income tax breaks and fresh frameworks for financial deregulation. In contrast to the climate change reforms under President Biden’s Build Back Better legislation, the Trump administration would retain a friendlier policy stance toward fossil-fuel production, probably with less support for green energy resources such as nuclear plants and solar power panels. In this broader context of U.S. protectionism, a Republican sweep would seem favorable to the brighter outlook for after-tax profit margins in Corporate America. In response to Trump tax cuts, credits, and other tax incentives, the Biden administration introduces progressively higher taxes on large corporations and the richest residents in America. On balance, the tax shifts may turn out to be much more moderate for both parties than the prior election in 2020, because both Biden and Trump now seek to acquire greater centrist support in order to win the electoral-college votes in crucial swing states: Arizona, Georgia, Michigan, Pennsylvania, and Wisconsin. During election years, moving to the center remains the best policy principle in accordance with the median voter theorem.

Both Republicans and Democrats seek to adopt a more forceful homeland industrial policy for fair trade, in response to anti-competitive trade practices, Section 301 violations, in China. A second Trump term would likely lead to more fundamental shifts in bilateral trade relations (especially U.S. bilateral trade relations with China and Europe). The Trump administration already imposed 10% across-the-board tariffs on all kinds of imports from China. To further contain the recent rise of China, the Biden administration applied restrictions on critical tech transfers, especially AI semiconductor microchips and graphical processing units (GPUs). More recently, the Congress passed new legislation to require the Chinese parent company, ByteDance, to divest the popular video-sharing app TikTok due to national security concerns. Any further trade barriers, such as higher tariffs and even embargoes, would likely boost the U.S. dollar at the margin. As a result, the stronger greenback would mean more competitive prices for U.S. imports. In this negative light, the prospect of broader tariffs, especially during a second Trump term, would likely lead global markets to anticipate a substantially stronger U.S. dollar against key Asian and European currencies, specifically yen, renminbi, euro, and sterling. Pervasive fears of higher tariffs may further weigh on non-U.S. stocks, funds, ADRs, and commodities. Additional U.S. government intervention can shine new light on historically gray areas such as anti-trust tech transfers and restrictions on foreign direct investment.

The U.S. presidential election outcome should not directly affect monetary policy decisions, especially subsequent dovish interest rate cuts, of the Federal Reserve System, which runs and operates independently of the White House and Congress. However, Trump has stated that he would not reappoint Fed Chair Jerome Powell when Powell’s term ends in 2026. In this broader scenario, we expect to see some sort of Fed subordination in response to global asset market concerns about the triple play of output, inflation, and the neutral interest rate. To the extent that the Federal Reserve Board prefers to keep the federal funds rate near the current peak of 5.25% to 5.5% as core inflation declines back down to the 2% average target, Fed Chair Jay Powell would probably prefer to delay dovish interest rate cuts in the next few quarters of 2024-2026. With Republican majority approval in Senate and House, the second Trump administration would likely appoint highly dovish successors to Fed Chair Jay Powell. As the successful Fed Chair appointments would be more conventional, future interest rate cuts would help with substantial improvements in the U.S. economy and stock market rally. In addition, more restrictive immigration policies and border controls would surface under a Republican administration, and then may lead to widespread fears and worries of relatively tighter labor market conditions. In light of this fundamental sea change, tighter labor supply would likely add to ubiquitous fears and worries of persistently higher inflation above the 2% target. These additional concerns are well beyond the mere monetary policy independence of the Fed.

A new second-term Republican administration and Congress would likely look less favorably on ongoing economic and military support for Ukraine in its war with Russia. The Republican majority House of Representatives has so far blocked an extension of foreign aid to Ukraine. Any further support for Ukraine would likely lead to a ceasefire, a peaceful resolution of the conflict in Eastern Europe, and more Russian oil and natural gas supplies available on the market. The adverse impact of the Russia-Ukraine war on world oil and natural gas supplies may be more modest, because OPEC+ countries continue to provide ample energy supplies despite economic sanctions from the U.S. and its western allies. Depending on the form of any resolution to the conflict, especially an interim ceasefire, U.S. and European assets may ultimately experience some further relief. However, global markets may anticipate tensions between the U.S. and its European allies on Ukraine, the Hamas-Israel war, trade, and the NATO. A new second-term Trump administration seems more likely to heighten restrictions on Iran and North Korea for better regional security. Hence, the upside tail from world energy supply disruptions may emerge from this broader context of geopolitical risks.

$PRU $MET $JXN $BAC $WFC $JPM $C $MS $GS $LNC $AIG $AEG $V $MA $BABA $BIDU $TME 

$TSM $ASML $KKR $INTC $MU $NVDA $QCOM $AVGO $AAPL $META $MSFT $AMZN $GOOG $GOOGL 

#size #value #momentum #profitability #assetgrowth #marketrisk #dividendyield #industry #revenuegrowth 

AYA fintech network platform https://ayafintech.network/blog/american-presidential-election-rematch-between-biden-and-trump/