An improving economic backdrop, reflected by optimistic employment outlook, inflation approaching 2% and a growing GDP rate, is further testified by an increase in interest rate. The Fed has hiked rates six times since the financial crisis, of which, three were approved in 2017. The heightened pace clearly signals toward strengthening the U.S. economy.
Recently, the Fed has raised the interest rate by 25 basis points, currently standing at 1.75% under the new chairman Jerome Powell. With three expected hikes in 2019 and two more in 2020, the interest rate is expected to reach 3.4% at 2020-end.
Life insurers are a major beneficiary of the improving rate environment because of their sensitivity to interest rate. Though the life insurance companies have lowered exposure to interest-sensitive product lines, redesigning and re-pricing products, yet investment income forms a major component of the top line. Insurers reinvest premiums they receive from policy holders to pay future claims. An improving rate environment will favor better returns.
Also, the improving economy indicates more disposable income and hence people opting for more insurance coverages, will drive the premiums higher for life insurers. Fed officials project unemployment rate stay about 4.5% over the longer term.
The new tax rate effective January 2018 trims the tax burden by $1.5 trillion. A lower tax incidence will likely boost earnings.
The Life Insurance industry, currently ranked at #71 (among top 30% of the Zacks Industry Rank for 267 industries), has underperformed the S&P 500 in a year, registering a gain of 5.2%. The index has climbed 16.2%.
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Here we focus on two life insurers namely Torchmark Corporation TMK and Reinsurance Group of America, Incorporated RGA.
Torchmark provides annuities, whole and term life insurance, accidental death insurance, health insurance, Medicare supplements and long-term healthcare policies. It has a market capitalization of $9.2 billion. Whereas Reinsurance Group with a market cap of $9.9 billion is primarily engaged in traditional individual and group life, asset-intensive, critical illness and financial reinsurance services.
Both stocks carry a Zacks Rank #3 (Hold). It will be interesting to note which is better-positioned in terms of fundamentals.
Investors interested in the life insurance industry can consider a couple of better-ranked stocks like American Equity Investment Life Holding Company AEL and FGL Holdings FG, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1Rank stocks here.
Price Performance
Both Torchmark and Reinsurance Group have outpaced the industry in a year’s time. While Reinsurance Group shares have rallied 27.6%, the Torchmark stock has gained 10.2%. Reinsurance Group emerges a clear winner here.
Valuation
The price-to-book value metric is the best multiple used for valuing insurers. Compared with the Life Insurance Industry’s P/B ratio of 2.13, Torchmark is underpriced with a reading of 1.56. Meanwhile, Reinsurance Group is way cheaper with a trailing 12-month P/B multiple of 1.07. This round also goes to Reinsurance Group as the company’s shares are cheaper than Torchmark’s.
Debt-to-Equity
Torchmark’s debt-to-equity ratio of 23.4 and that of Reinsurance Group at 29.1 are respectively higher than the industry average of 8.9. However, with a lower leverage, Torchmark scores more than Reinsurance Group in this round.
Dividend Yield
Both Torchmark and Reinsurance Group have lower dividend yields compared with the industry average of 1.71%. Reinsurance Group with an yield of 1.26% has an edge over Torchmark with the same of 0.71%. Hence, Reinsurance Group has an edge over Torchmark on this front.
Return on Equity
Torchmark’s return on equity of 10.81% is higher than the industry’s average of 10.5% as well as Reinsurance Group’s 8.6%. Return on equity is a profitability measure, identifying how the company is effectively utilizing its shareholders’ money. Comparatively, Torchmark betters Reinsurance Group here.
Earnings Surprise History
With respect to the companies’ earnings surprise history, Torchmark has surpassed the Zacks Consensus Estimate in the last four quarters with an average beat of 1.48%. While Reinsurance Group has delivered positive surprises in two of the last four quarters with an average four-quarter beat of 8.52%.
Here too, Torchmark lies ahead of Reinsurance Group.
Earnings Estimate Revisions and Growth Projections
Torchmark’s estimates have increased 2.7% for 2018 but declined 0.3% for 2019 in the last 60 days. Whereas the consensus mark for Reinsurance Group has moved up 1.7% for 2018 and 1.3% for 2019.
For Torchmark, the Zacks Consensus Estimate for earnings per share is $6.03 for 2018, reflecting a year-over-year increase of 25.1%. For 2019, the consensus estimate is pegged at $6.51, representing a year-over-year rise of nearly 8%. Torchmark has a long-term expected earnings per share growth rate of 8%.
For Reinsurance Group, the Zacks Consensus Estimate for earnings per share is $12.50 for 2018, translating to a year-over-year gain of 15.3%. For 2019, the consensus mark for the metric is pegged at $13.41, indicating a 7.3% gain year over year. Reinsurance Group has long-term expected earnings per share growth of 9%.
This round slightly favors Reinsurance Group.
VGM Score
Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors. Torchmark with an impressive VGM Score of B has a visible vantage point over Reinsurance Group with an unfavorable VGM Score of C.
To Conclude
Our comparative analysis shows has Torchmark has a visible edge over Reinsurance Group with regards to leverage ratio, dividend yield, return on equity, VGM Score and an earnings surprise history. While Reinsurance Group beats on the yardsticks of price performance, valuation, earnings estimate revisions and growth projections. Therefore, Torchmark emerges as a more viable option than Reinsurance Group.
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