Investor activism in the life insurance space is likely to increase in 2016, according to new research.
S&P Capital IQ discloses this finding in a January 7 “MarketScope Advisor” report. The research makes several predictions in 2016 in the insurance space.
While noting that life insurers began 2016 in “relatively good shape” in respect to capital adequacy, the report warns that carriers face challenges in the year ahead. Among them: declining stock prices.
For the second year running, the report shows shares of life insurers under-performed the broader market, dipping 7.1 percent in 2015 after rising just one percent in 2014 (when the S&P 1500 was up nearly 11 percent).
“Having already placed multi-line insurers like American International Group in their crosshairs, we think activist investors will soon turn their attention to the laggards in the life insurance space and agitate for change,” the report states.
Investors’ concerns are in part due to still low profit margins compared to years past. Though earnings for the companies increased by 138 basis points, to 9.68 percent, through the third quarter of 2015, aggregate margins levels are “well below historical levels” and below those of other insurance sectors.
Multi-line insurers — Nationwide, State Farm, Allstate, among others — experienced the largest earnings contraction during 2015. Operating margins for these companies fell 196 basis points to 10.46 percent.
“Against the backdrop of margin pressure amid a still-low interest rate environment, and likely fueled by investor and consumer pressure, many insurers may be forced to conclude that a broad-based product and segment strategy is no longer a viable business model,” the report states. “Many will trim product offerings, selling or running off non-core and underperforming lines of business.
“The value of diversification versus a more streamlined approach will also be questioned,” the report adds. “This injects a degree of execution risk into the industry, further bifurcating insurers.”
The research notes that millennials — individuals born between 1981 and 1997 — have surpassed baby boomers (those born between 1946 and 1964) as the largest demographic group in 2015. These 75.3 million 18-34 year olds are, “very comfortable sharing and using technology.” And they generally don’t share the privacy concerns of older generations. As a result, the report warns of a rise in data breaches connected with the greater use and sharing of personal data and information.
“A sharp rise in insurer data breaches will likely draw the ire of consumer advocates and lawmakers and may renew calls for another revamp to the current state-based insurance regulatory system,” the report states.
See the report here.
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