Insurers to Favor Deals Over Buybacks, Deloitte Says
U.S. life insurers will use cash for acquisitions rather than share repurchases after buybacks helped drive a rally last year, Deloitte LLP said in its 2014 industry outlook.
"Stock buybacks, which were an important part of the capital allocation story for 2013, may not be quite as appealing," Boris Lukan, a principal at Deloitte, said in an interview. "The financial community will want to see top-line growth as a more sustainable source of value creation."
The Standard & Poor's 500 index of life insurers rallied 60 percent last year as a rising equity market and higher interest rates reduced pressure on company balance sheets. Every insurer in the index now trades for at least its book value, or the assets left after subtracting liabilities.
"Publicly held carriers have been bolstering their share price by allocating excess capital to initiate stock buybacks," Deloitte said in the report. "There are indications that the impact of such a strategy may be playing out."
Erik Bass, an analyst at Citigroup Inc., projects repurchases of about 5.6 percent of shareholders' equity this year, and expects life insurers to boost dividends, according to a research note yesterday.
"With the rise in stock prices, we have seen some management teams become more price sensitive in their buyback activity," he wrote. "We expect a modest shift in emphasis to dividends or other forms of capital deployment such as mergers and acquisitions, deleveraging, or legal-entity restructurings."
Principal Financial Group said last month that it plans to repurchase fewer shares in 2014 than in recent years because other options for using capital provide better returns. The Des Moines, Iowa-based insurer may use some funds to repay debt, chief financial officer Terry Lillis said on a conference call with analysts.
Lincoln National Corp., the No. 2 seller of U.S. individual variable annuities, doubled last year, leading the S&P 500 life insurer gauge. The company repurchased $350 million of shares in the first nine months of 2013, chief financial officer Randy Freitag said on a conference call in October. The company, based in Radnor, Penn., evaluates deals by comparing them to the returns from repurchasing shares.
"The hurdle for other uses of capital was pretty high," Freitag said. "That's obviously changed a bit."
There will probably be continued interest in acquiring annuity blocks, after investment firms such as Apollo Global Management LLC and Guggenheim Partners LLC added such units, Lukan said. Some firms may divest closed blocks in transactions similar to Axa SA's $1 billion sale of obligations to Protective Life Corp., he said.
The largest insurers may turn to markets outside the U.S. for deals, as MetLife Inc. did last year when it acquired Chilean pension provider AFP Provida SA, Lukan said. Mid-sized firms are moving toward transactions after ignoring them during the financial crisis, he said.
"Some organizations allowed their corporate-development capabilities to atrophy," he said. "We are definitely seeing multiple mid-sized life and annuity players looking to rebuild capabilities."
Deloitte said deals may be constrained by increasing regulatory scrutiny. Benjamin Lawsky, New York's financial services regulator, required protections for policyholders before approving the Guggenheim and Apollo deals. Apollo's insurer won support from the Iowa regulator after saying it would hold extra reserves.
"Regulators have expressed concern that private-equity firms typically have a shorter-term business model than do traditional carriers," Deloitte said. "One critical question going forward is whether these capital market buyers may reconsider their recent attraction to the annuities industry."