NorthAmericaEquityResearch21May2019LifeInsurancePrimerASimpleRoadmapforaComplicatedSectorInsurance--LifeJimmyS.Bhullar,CFAAC(1-212)622-6397jimmy.s.bhullar@jpmorgan.comBloombergJPMABHULLARPabloS.Singzon(1-212)622-2295pablo.s.singzon@jpmorgan.comJ.P.MorganSecuritiesLLCSeepage87foranalystcertificationandimportantdisclosures.J.P.Morgandoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.www.jpmorganmarkets.comThisreportdiscussesthebasicsofthelifeinsurancebusinessandprovidesabriefsynopsisofthemajorproductssoldbylifeinsurancecompanies.Additionally,thereporthighlightsthekeyfactorsthatdrivelifeinsurers’resultsandinfluencestockpriceperformance.Inourview,lifeinsuranceisarelativelymediocrebusinesswheremostfirmsstruggletoearnreturnsabovetheircostofcapital.Weattributethesector’spoorROEstothecommodity-natureofmostproducts,highdistributioncosts,andcompetitionfrommutualinsurerswithlowerreturnthresholds.Thefewcompaniesthathavebeenabletogenerateconsistentstrongreturnsincludethosewithnichebusinessmodels(TMK),presenceininternationalmarkets(AFL),ortax-advantagedstructures(ATH).Thelifeinsurancebusinessishighlyexposedtothemacroenvironment,especiallyinterestrates,theequitymarket,andcredittrends.Insurersderiveincomefromeitherfee-basedproductssuchasvariableannuities,DCplans,andassetmanagement(sensitivetotheequitymarket),spread-basedproductssuchasfixedannuitiesandfundingagreements(sensitivetointerestrates),ormortality/morbidityproductssuchasindividuallifeandgroupinsurance.Amajorityofportfoliosareinvestedinfixedincomesecuritiesandinvestmentincomeisamajorcomponentofrevenuesformostfirms.Hence,interestrates(particularlyon5-10yearcorporatebonds)affectmostfirms,albeittovaryingdegrees.Also,giventheirsizableinvestmentportfolios,insurersarehighlyexposedtodeteriorationincreditconditions...
