Should North American Life Insurance Industry Stop Sponsoring Buybacks?

Life Insurance Industry

March 2, 2023 Among the US life insurance industry, shareholding is often the best option for improving TSR. And stock analysts seem to be calling for a buyout:

In the first half of 2022, during a conference call to discuss quarterly results, the word “buyout”, “purchase” or “control” was mentioned capital”. More than 300 times in total for 20. the largest life insurers in Canada and the United States by market capitalization. ์นด์ง€๋…ธ์‚ฌ์ดํŠธ
According to our research, redemption is not a significant factor in long-term product price performance for life insurers. But, of the top 20 North American life insurance companies, 18 made redemptions in the first two quarters of 2022, for a total of $14 billion. Corresponding to the total market value of one of the ten major life insurance companies.
In this blog post, we review the key findings from our recent research on the company’s dominant investment strategy to date and ways beyond buyouts that can drive higher performance.

Reliability of insurers and delivery

When you hear Wall Street ask about “life insurance companies’ return on capital as a percentage of cash flow or free cash flow,”.

What they’re really focusing on is the rate of return of the stock market. According to our research, over the past decade, publicly traded life insurers in Canada and the United States have returned approximately $275 billion in capital to shareholders. from a combined $190 billion in buybacks and $85 billion in dividends.

The use of shopping has become ubiquitous. Over the past decade, 17 of the top 20 publicly traded life insurance companies in North America have returned the equivalent of at least half of their stock to shareholders only through purchase, according to our research. The temptation to buy things is obvious but often misleading:

The share price is high.

A decrease in the number of shares outstanding increases earnings per share; assuming the P/E ratio remains constant, the stock price should rise. However, this does not take into account the value of the money paid. As part of the purchase and the effect it has on the price and the P/E ratio. Furthermore, this result does not mean that the management team. Makes important decisions in the company’s work or shows the creation of internal value. ์˜จ๋ผ์ธ์นด์ง€๋…ธ์‚ฌ์ดํŠธ

Marketing signals.

Analysts and investors have been convinced for many years to believe that life insurance companies are more efficient by returning large amounts of money to shareholders rather than investing it in the business, because many of these companies do not always reproduce more than the cost of capital.

The courage of an investor.

Redemption can indicate that the management team believes that the insurer has sufficient capital that can be delivered, which can boost the confidence of investors who are skeptical about the insurer’s financial security and capital adequacy. Buybacks do not create value by themselves. These are “left pocket, right pocket” transactions that transfer cash from the balance sheet to shareholders. Although the unsold shareholders own the majority of the company’s capital. Life insurer itself is relatively small and the profits of the investors remain the same.

A better way: focus on capital strengths

Our analysis found only a positive correlation between life insurers as a percentage of market capitalization. And annual TSR over the past decade, including most of the most recent IPOs. The study found even less correlation in the last two years between the speed of the return and the TSR.

This means that the way for life insurers to increase TSR in the long run will not be primarily by increasing returns. (Obviously, the lack of long-term correlation between TSR and market share strength also extends beyond the life insurance industry.) ๋ฐ”์นด๋ผ์‚ฌ์ดํŠธ

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