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Most Big Life and Annuity Issuers Look Fine: Morgan Stanley

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Most of the big, publicly traded life and annuity issuers that Morgan Stanley tracks look as if they’re doing fine —and well enough to be using cash to buy back their own stock by the end of the year.

Nigel Dally and other Morgan Stanley securities analysts give that assessment in a new commentary on the insurers’ upcoming third-quarter earnings announcements.


The third quarter of the year ended Sept. 30.

The analysts say that many factors could, obviously, cause some of the life insurers Morgan Stanley follows to report third-quarter results that are terrible, and much worse than expected.

But investors have already responded to worries about the future by pushing life insurers’ stock prices down, the analysts write.

In spite of the COVID-19 pandemic, low interest rates, and reports of layoffs, at this point, “we expect the results to show a fundamental position stronger than what is reflected in current valuations,” the analysts write.

One reason for cautious optimism is that the issuers of most of the bonds in life insurers’ investment portfolios have been continuing to make their payments, the analysts write.

Some publicly traded companies show that they’re feeling strong, and have plenty of cash, by buying shares of their own stock back from other investors.  The Morgan Stanley analysts say the life insurer buyback activity indicator looks good.

Some publicly traded life insurers suspended stock buybacks while waiting to see what COVID-19 would to spending on life insurance death benefits.

Now, “with only a few exceptions, we expect companies to resume buybacks before year-end,” the analysts write.

Ameriprise, Equitable and Primerica have been buying back stock all year, and MetLife and Globe Life have returned to buying back stock, the analysts write.

The analysts are predicting that CNO Financial, Lincoln and Prudential will probably resume making buybacks, too.

The Insurers

Most of the 841 life and annuity issuers in the United States are owned by another company, one family, or a small group of investors. They do not sell stock to members of the general public. They have to file financial statements with state insurance regulators but not with the U.S. Securities and Exchange Commission.

About 100 of the life insurers are mutual insurers. Mutual insurers are owned by their policyholders. They file financial statements with state insurance regulators but not with the SEC.

Twenty-two North American companies have enough investors to be classified as publicly traded companies. Those companies must file regular earnings reports and other documents with the SEC.

Morgan Stanley follows 16 of the publicly traded companies.

Driving Factors

The analysts note that interest rates have been very low, and that COVID-19 did cause about 80,000 U.S. deaths in the third quarter.

But the analysts say life insurers’ investments in hedge funds and private equity funds probably did pretty well during the third quarter, and that COVID-19 deaths have led to a relatively small increase in the number of death claims.

The analysts say one major threat to the insurers’ earnings is actuarial reviews, or efforts to update the assumptions used in valuing insurance and annuity benefits obligations.

Many life insurers are using interest rate assumptions that now look too high, the analysts write.

“Even though most companies last year reduced their interest rate assumptions, we expect most will again be forced to revisit and further lower their assumptions this year, which will likely drive a round of charges across the industry,” the analysts write.

The analysts add that the overall economic environment is another big increase.

Falling interest rates and weak stock prices could hurt, the analysts write.

“A higher unemployment rate and prolonged impact from COVID-19 could also pressure share price performances,” the analysts warn.

— Read Interest Rate Assumption Changes Could Be the New Monster, on ThinkAdvisor.

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