J.P. 摩根-美股-保险行业-寿险行业入门：一个复杂领域的简单路线图-2019.5.21-89页 (2).pdf

North America Equity Research21 May 2019 Life Insurance PrimerA Simple Roadmap for a Complicated SectorInsurance-LifeJimmy S.Bhullar,CFA AC(1-212)622-Bloomberg JPMA BHULLAR Pablo S.Singzon(1-212)622-J.P.Morgan Securities LLCSee page 87 for analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor inmaking their investment This report discusses the basics of the life insurance business and provides a brief synopsis of the major products sold by life insurance companies.Additionally,the report highlights the key factors that drive life insurers results and influence stock price performance.In our view,life insurance is a relatively mediocre business where most firms struggle to earn returns above their cost of capital.We attribute the sectors poor ROEs to the commodity-nature of most products,high distribution costs,and competition from mutual insurers with lower return thresholds.The few companies that have been able to generate consistent strong returns include those with niche business models(TMK),presence in international markets(AFL),or tax-advantaged structures(ATH).The life insurance business is highly exposed to the macro environment,especially interest rates,the equity market,and credit trends.Insurers derive income from either fee-based products such as variable annuities,DC plans,and asset management(sensitive to the equity market),spread-based products such as fixed annuities and funding agreements(sensitive to interest rates),or mortality/morbidity products such as individual life and group insurance.A majority of portfolios are invested in fixed income securities and investment income is a major component of revenues for most firms.Hence,interest rates(particularly on 5-10 year corporate bonds)affect most firms,albeit to varying degrees.Also,given their sizable investment portfolios,insurers are highly exposed to deterioration in credit conditions.Life insurers poor earnings quality merits a valuation discount.The primary valuation metrics for the sector include Price/Book(primarily BV ex.AOCI),P/E,or sum of the parts.The sector tends to trade in the 0.8-1.3x BV range,although multiples have varied from 0.5x(during credit stresses)to 1.5x(under optimistic macro conditions).Also,the group trades at a P/E discount to the overall market and other financial services firms.However,life stocks are not as cheap as they appear at first glance as companies make significant non-GAAP adjustments to net EPS when deriving“operating EPS”.In the past decade,net EPS for life insurers has averaged around 75%of operating EPS,well below 95%+for other financials.While our fundamental view of the business is lackluster,life stocks present very attractive risk-reward in select periods.Given their subpar franchises,most stocks are not great“buy-and-hold”vehicles.Still,life stocks tend to perform very well over shorter periods,either when the macro backdrop is improving(which is hard to predict)or when most investors are bearish on the group.Life insurers businesses are long-tail and shift very gradually.However,investor sentiment tends to change relatively fast.As such,we feel that being contrarian is a better investment strategy for the life group than peer sectors.The group performs poorly when credit deteriorates,but pullbacks due to fears of a credit crisis usually present the best buying opportunities,especially given the sticky nature of insurance liabilities.Life Insurance Industry PrimerKey Positives-Tax-advantaged status of many products boosts demand-Long duration of liabilities creates recurring revenues and makes EPS less sensitive to sales in a given year-Sticky nature of liabilities prevents life insurers from being forced sellers of investments in a credit downturnKey Negatives-Commodity nature of most products makes it difficult to differentiate and limits pricing power-High costs of distribution and competition from mutual companies holds back margins and returns-Long duration of liabilities makes many products highly susceptible to errors in underwriting and assumptions-Poor earnings quality merits valuation discount(on operating EPS)Valuation Methodologies-Price/Book Value ex.AOCI-Price/Total Book Value-Price/Earnings-Sum of the parts(for diversified cos.)Please visit our Bloomberg page atJPMA Bhullar 2North America Equity Research21 May 2019Jimmy S.Bhullar,CFA(1-212)622- Table of ContentsBackground on Life Insurance Industry.5Industry Structure.5Holding Company and State Regulatory Framework.6Distribution Channels.6Capital&Liquidity.7Investments.9Overview.10Major Investment Portfolio Allocations.10Interest Rates:Impact on Portfolio Yields and Book Values.11Insurance Accounting.12Attributes of a Strong Business Model.19Investing in Life Insurance Stocks.20Major Macro Themes that Affect the Life Sector.21Defensively Positioned Companies.26Valuations.26PRODUCT CAPSULES.30Variable Annuities.34Product Overview.34Guarantee Riders.35Sales Drivers and Trends.36Profitability Drivers.37Major Competitors.38Distribution.39Key Industry Trends.40Traditional Fixed Annuities.41Product Overview.41Sales Drivers and Trends.42Profitability Drivers.43Major Competitors.43Distribution.44Key Industry Trends.45Index Annuities.46Product Overview.46Sales Drivers and Trends.47Guaranteed Living Benefit Rider.47Profitability Drivers.47Major Competitors.48Distribution.49Key Industry Trends.503North America Equity Research21 May 2019Jimmy S.Bhullar,CFA(1-212)622- Individual Life.51Product Overview.51Sales Drivers and Trends.54Profitability Drivers.55Major Competitors.55Distribution.56Key Industry Trends.56Group Life.58Product Overview.58Sales Drivers and Trends.58Profitability Drivers.58Major Competitors.59Distribution.59Key Industry Trends.60Group Disability.61Product Overview.61Sales Drivers and Trends.61Profitability Drivers.62Major Competitors.62Distribution.63Key Industry Trends.63Life Reinsurance.65Product Overview.65Sales Drivers and Trends.65Profitability Drivers.66Major Competitors.66Distribution.67Key Industry Trends.67Supplemental Health.68Product Overview.68Sales Drivers and Trends.68Profitability Drivers.68Major Competitors.69Distribution.71Key Industry Trends.71Long-Term Care.72Product Overview.72Sales Drivers and Trends.72Profitability Drivers.72Major Competitors.73Distribution.73Key Industry Trends.744North America Equity Research21 May 2019Jimmy S.Bhullar,CFA(1-212)622- Pension Risk Transfer.75Product Overview.75Sales Drivers and Trends.75Profitability Drivers.75Major Competitors.76Distribution.76Key Industry Trends.77Other Products.78Medicare Supplemental Health.78Dental and Vision.78Medical Stop Loss.79Glossary.81Index of Tables.85Index of Figures.865North America Equity Research21 May 2019Jimmy S.Bhullar,CFA(1-212)622- Background on Life Insurance IndustryMost large,publicly traded life U.S.insurers were initially formed as mutuals(owned by policyholders).However,after financial deregulation in the late 1990s,several large insurers(MET,PFG,and PRU,etc.)demutualized and become public firms.In an attempt to enhance their ROEs and increase their growth profiles,most newly public companies began shifting their product offerings away from pure protection products towards accumulation-oriented products such as annuities.In 2018,annuities comprised over half of net premium receipts compared to a quarter in the 1980s.Unlike traditional protection insurance,the economics and profitability of accumulation products is highly dependent on macro factors such as the equity market and interest rates.As a result,life insurers income statements and balance sheets have become more sensitive to the macro environment and the volatility in their results has increased over time.Industry StructureLife insurers are typically organized as either mutuals(owned by policyholders)or stock companies(owned by shareholders).Stock companies have more organizational flexibility than mutual insurers as they can be owned by various types of entities,including mutual companies.Also,they can raise capital more easily as public entities.In contrast,mutual insurers can only be owned by policyholders and have no access to equity capital markets.Given the advantages of stock ownership(and usually higher executive comp at public companies),several former mutual firms have converted to public companies via IPOs.In 2018,approximately three-fourths of all life insurers in the U.S.(or almost 600 firms)were structured as stock companies.Stock companies account for about three-fourths of overall industry assets.From a geographic standpoint,slightly over 10%of U.S.life insurers are foreign owned.Firms from Canada are the major foreign owners of U.S.life insurers,followed by Switzerland,Bermuda,and Japan.Although insurers from Europe and Canada(ING Groep,Aviva,Manulife)were active acquirers in the past,they have been deemphasizing their U.S.operations recently,especially those with variable annuity or long-term care exposure.The U.S.life insurance industry is a highly competitive and fragmented market,and typical market shares for the leading insurers is in the 4-8%range(by statutory assets).Also,the presence of large mutual insurers such as Mass Mutual and Northwestern has exacerbated price competition in certain products(whole life,term,and fixed annuities)as these firms are not bound by the same profitability targets as public stock companies.Given these competitive dynamics,the industry has naturally consolidated over time,and the number of life insurers has declined from a peak of 2,300 in the late 1980s to roughly 800 in 2018.Market consolidation in certain product lines(e.g.variable annuities)has also occurred organically with certain providers pulling out because of their weak competitive positions,either in terms of distribution access,product development,or risk management.In our opinion,consolidation will continue for the foreseeable future,albeit at a gradualpace.We expect M&A activity to be more prevalent in the form of block transactions than whole-company deals.Additionally,we expect large domestic insurers with capital flexibility for acquisitions to focus more on regions outside the U.S.given better returns and growth prospects in foreign markets.6North America Equity Research21 May 2019Jimmy S.Bhullar,CFA(1-212)622- Holding Company and State Regulatory FrameworkPublicly traded U.S.life insurers are generally organized as holding companies that own insurance subsidiaries.Most large public insurers such as PRU and MET own hundreds of subsidiaries,which are under the purview of states in which they are domiciled.Each state has its own standards for capital as well as product design/suitability,etc.Still,most abide by general regulations enforced by the National Association of Insurance Commissioners(NAIC),the standard-setting and regulatory support organization created by insurance regulators from the 50 states.Many companies operate in New York,which has harsher capital and business practice requirements than most states,under a separate subsidiary so as not to subject their operations in other states to NY requirements.Prior to the 2008 financial crisis,most large insurers opposed the state regulatory framework as they viewed it as a more inefficient structure than that for banks,which are under a federal regulatory regime.A few insurers were actively lobbying for an optional federal charter.However,state regulators proved to be much more company-friendly than bank regulators during the crisis,taking various actions to ensure the financial viability of the insurance sector,including loosening capital standards.As a result,while companies complain about the complexities of dealing with multiple state regulators(which makes it inefficient to design and introduce products,manage capital,set sales guidelines,etc.),most currently favor it over a potentially efficient,but“unfriendly”,national regulator.Some insurers(holding companies)also own non-regulated entities such as asset managers directly at the holdco level.Still,the primary source of income for most holding companies is cash flows from insurance subsidiaries,which help fund holdco expenses such as debt service(most debt is issued at the holdco level),holdco operating costs,dividends to shareholders,and share buybacks.Given the subsidiary and state regulatory state dividend standards,cash up-streamed from the subs to the holding companies(often referred to as subsidiary dividends)is subject to state dividend restrictions.Most states in the U.S.allow domiciled insurers to upstream the maximum of the previous years statutory earnings or 10%of unassigned statutory surplus.Any“extraordinary”or other dividend amounts beyond this typically require explicit approval from the states regulator.Distribution ChannelsLife insurers historically distributed products primarily through captive agents,but the industry has progressively become more reliant on independent agents over the past two decades.Insurers were initially attracted to independent distribution because of the potential for lower costs(exclusive agents receive more benefits and support than independent agents)and growth(immediate access to a broad sales network).In return,insurers have had to give up control over distribution,which has exposed them to more competition on prices and product features.Currently,public insurers(such as MetLife,Prudential,and Lincoln)rely more on third-party distributors,while distribution for mutual insurers(Northwestern,Mass Mutual,and New York Life)is heavily skewed towards captive/career agents.The number of career agents has been in long-term secular decline,primarily as insurers(especially public firms)have been increasing productivity requirements in order to lower costs and enhance distribution efficiency.Meanwhile,insurers have been expanding in non-agent channels(brokers,wirehouses,and banks),particularly for retirement-oriented products such as annuities.Most individual life insurance products are sold face-to-face,with only a marginal amount through online,mail,or other direct means.Distribution trends for the various products are discussed in the applicable product section beginning on page 30.7North America Equity Research21 May 2019Jimmy S.Bhullar,CFA(1-212)622- Capital&LiquidityInsurers manage their balance sheets at both the subsidiary and holding company level.We evaluate capital adequacy and balance sheet health using several metrics,with risk-based capital(RBC)and debt-to-capital ratios being the main ones.Meanwhile,we assess liquidity based on cash/liquid assets at the holding company.Unlike in the banking sector,the primary gating-factor for life insurance subsidiary capital levels are the rating agencies,not regulators.The k