In 2016, life insurance stocks suffered through a drab year until Nov. 9. Then, the election of a certain blustery, pro-business real estate magnate as the next U.S. president triggered a wave of investor optimism.
Suddenly the outlook - more old folks, more rich folks, a strong stock market and rising interest rates - looked like a nearly picture perfect for the insurance trades.
Insurance has ranked a steady top 10 among the 33 sectors tracked by IBD during the fourth quarter. The life insurance industry group ranked No. 12 on Friday out of IBD's 197 industry groups , up from No. 84 rank 13 weeks ago.
IBD'S TAKE: Research has shown as much as 50% of a winning stock's strength is linked to the strength of its industry group and sector, and rising industries are a good starting point for CAN SLIM investors looking for leading stocks.
Measured by market capitalization, the 19-stock group ranks among the 25 largest industries. Names range from giants like MetLife ( MET ) and Prudential Financial ( PRU ) to recent IPO Athene Holding ( ATH ). MetLife and Prudential rose 12% and 28%, respectively, in 2016. Athene is up 21% since its Dec. 9 IPO.
Prudential's dividend currently yields 2.7%. MetLife yields 2.9%. Athene offers no dividend.
Top performers in the group lately include National Western Life ( NWLI ), Reinsurance Group of America ( RGA ), Sun Life Financial (SLF) and Primerica (PRI). The four stocks rose an average 35% in 2016.
A Reversal Of Fortune
Life insurers have been clear beneficiaries of the positive effects from the election of Republican Donald Trump as U.S. president that have rippled across the financial sector.
In October, investment bank Credit Suisse was cautious when it initiated coverage on the U.S. life insurance sector. It cited two concerns ahead of an election in which Democratic presidential candidate Hillary Clinton appeared all but assured of victory: increasing regulatory pressure and persistently low long-term interest rates.
"With both of these factors now looking significantly less strenuous, we are not surprised stocks have rapidly moved higher," Credit Suisse analysts said in a Nov. 21 report. "If long-term rates continue to march higher, so too will life insurance stocks."
However, there is still a significant amount of uncertainty regarding exactly how the Trump administration will affect the interest rate and regulatory landscape, Credit Suisse said.
If Trump and the Republican-led Congress can scale back regulatory rules such as those implemented under Dodd-Frank, it would benefit MetLife, Prudential and even AIG. All three are insurers of SIFI - systemically important financial institutions - essentially too big to fail banks, Credit Suisse said.
Fiduciary Rule Question
Another issue is whether the Trump administration will delay, change or shelve the new Department of Labor Fiduciary Rule, set to be phased in starting April 10. That rule expands the "investment advice fiduciary" definition under the Employee Retirement Income Security Act of 1974 (ERISA) to include insurance companies.
"A Republican administration and Congress should result in a more constructive regulatory approach, including, in our view, potentially less onerous nonbank SIFI oversight and DoL fiduciary standard rules," Barclays analyst Jay Gelb said in a Dec. 16 report on MetLife.
He rates MetLife stock as overweight with a price target of 66.
Growth, Cash Flow, Payouts
Since the Nov. 8 election, investor interest in life insurance stocks has concentrated on three areas: rates, regulation, and valuation, Goldman Sachs analysts said in a Dec. 19 report.
Goldman named Prudential to its "conviction list" with a price target of 115.
"The macro environment has improved for the sector … but (we) see the most upside at PRU given conservative assumptions as higher rates and a more favorable regulatory backdrop could lead to organic growth," Goldman analyst Michael Kovac said.
Meanwhile, MetLife has earned some upbeat analyst reports since it announced a spinoff of its U.S. retail business as Brighthouse Financial.
RBC Capital Markets analyst Mark Dwelle in a Dec. 16 note reiterated his outperform rating on MetLife and raised his price target to 63 from 61.
MetLife is likely to be more stable and a more predictable generator of free cash flow after it spins off Brighthouse in the first half of 2017, Dwelle said.
Earnings should improve as management embarks on major cost reduction efforts, plus, MetLife will be "well positioned to return significant amounts of capital to shareholders" after it completes its restructuring in 2017, Dwelle said.
The life insurance and annuities industry operates with a low level of market share concentration. The top four companies are estimated to account for 13% of total industry revenue in 2016, IBISWorld said.
Competition is not only fierce, but it is comprised of several significant nonpublic companies, including MassMutual, Northwestern Mutual, and New York Life. The largest publicly traded firms are MetLife and Prudential, with 3.6% and 3.1% market share, respectively, IBISWorld said.
Many of the largest industry operators, including MetLife and Prudential, have grown through acquisitions over the past five years, activity that is expected to continue.
MetLife acquired American International Group's American Life Insurance Company unit in 2010 in an attempt to expand its international operations.
Facing The Bond Yield/Savings Bind
Life insurers are one of the largest sources of investment capital in the U.S. The sector is the largest source of bond financing for domestic businesses, holding more than 18% of all U.S. corporate bonds, IBISWorld said.
Industry revenue rose at an annual growth rate of 2% for the five years ending in 2016, reaching $881.6 billion last year, IBISWorld reported. Growth is expected to be 2.3% over the next five years, it forecasts, starting with a 2.8% jump this year.
The 2017 U.S. Life-Annuity Insurance Outlook from EY (formerly Ernst & Young) cited sources saying that nearly three-quarters of new life insurance buyers are under age 55, and consumers aged 25 to 45 today purchase 4 in every 10 life insurance policies.
That has insurers spending hard on technology, including online and mobile applications, to reach that audience. EY tallies $4.6 billion in spending on what the industry calls InsurTech technologies. InsurTech and Big Data are seen as major disrupters within the industry, potentially redefining the way insurers handle risk management, service and marketing.
"Some may seek to build scale, distribution and InsurTech capabilities through M&A, partnerships and greenfield initiatives, while others may spin off business activities for regulatory and strategic reasons," the EY report said.
Growth in household wealth and an aging domestic population, as well as a growing workforce are expected to boost demand levels for life insurance and annuities products over the next few years, IBISWorld analyst Evan Hoffman said in a report.
The stock market affects life insurers through their vast investments. But maybe above all, at least in the near term, the life insurance industry's fortunes are linked to the yield on the 10-year Treasury note. Low bond yields have been the insurance industry bugbear for the past several years.
Life insurers have roughly 74% of their invested assets in bonds, according to EY. Nearly 49% of the industry's investment income is related to bonds , with 32% of income tied to stocks and a range of other investments including mortgage loans, contract loans and real estate holdings, IBISWorld reported.
So the economists' consensus forecasts for an average increase in bond yields to 2% in 2017, up from 1.7% in 2016 cited by EY, is good news for insurers. But it also creates a conundrum on the revenue side.
Low bond yields drove demand for alternative savings products, and 65% of life-annuity revenue now comes from those products, the EY report said.
As bond yields rise, that revenue is put at risk and has insurers carefully assessing the value of their savings offerings.
"Against this backdrop," EY noted, "it is not surprising that Fitch Ratings revised its outlook for U.S. life insurers to negative in September 2016."
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