Piper Sandler sees Life Insurance sector undervalued by 3.6%

On Monday, an analysis from Piper Sandler highlighted notable trends in the life insurance sector, suggesting that the industry is currently undervalued. According to the firm's valuation analysis, the S&P 1500 Life and Health Insurance Index, which serves as a barometer for the sector, is estimated to be undervalued by approximately 3.6% as of December 27th. This slight undervaluation marks a minimal change from the 3.7% undervaluation reported a week prior.

The assessment by Piper Sandler indicates that the undervaluation is attributed to recent movements in the market. Over the past week, the Life index saw an approximate increase of 86 basis points (bps), while the S&P 500 rose by about 68 bps.

Additionally, the U.S. 10-year treasury yield experienced a 10 bps increase. It is important to note that this analysis does not reflect the value of individual companies but rather the sector as a whole.

The valuation model used by Piper Sandler involves regression of the S&P 1500 Life and Health Insurance Index against two key financial indicators: the U.S. 10-year treasury yield and the S&P 500. This approach is deemed appropriate as it incorporates the primary drivers of earnings for life insurers, namely interest rates and the performance of the equity market.

The life insurance group has shown strong performance in the past, outpacing the market in 2021 and continuing through 2022 as the value trade excelled over growth. This trend has shifted in 2023 and into 2024 despite an improving health environment and the benefits of higher interest rates.

Yet, sector leaders like RGA demonstrate resilience, with InvestingPro data highlighting 15 consecutive years of dividend raises and strong liquidity metrics. Concerns over credit and the broader economic outlook have heightened, affecting the sector's valuation, though RGA maintains a healthy current ratio of 1.7, indicating solid financial stability.

Piper Sandler's analysis is backed by an approximate 80% R squared from the regression analysis, underscoring the reliability of the valuation method. The firm's approach to evaluating the life insurance sector takes into account the most significant factors influencing life insurers' business, providing a comprehensive view of the sector's market value.

In other recent news, Reinsurance Group of America (NYSE:RGA) announced significant developments. The company recently detailed a substantial reinsurance contract with John Hancock, a subsidiary of Manulife Financial Corporation (NYSE:MFC).

This quota-share arrangement, worth approximately $4.1 billion in liabilities, includes long-term care and structured settlements. Piper Sandler, which reiterated an Overweight rating on RGA's stock, views this contract as a positive development.

In an innovative move, RGA, in collaboration with technology firm CarePay, introduced Aspire, a platform designed to enhance health insurance portfolio management for insurers. This platform, which adheres to the General Data Protection Regulation (GDPR), aims to improve claims processing efficiency and overall sustainability.

RGA also reported record-breaking third-quarter results in 2024. The company saw a significant increase in adjusted operating earnings per share, reaching a record $6.13, and a robust return on equity of 15.5%. RGA's capital deployment also increased by 50% from 2023, totaling $1.4 billion. The company's growth was particularly strong in Asia, with significant contributions from Korea, China, and Hong Kong.

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