Insurance stocks continue to struggle under the weight of low interest rates that seem to keep getting lower. The two insurance companies I will talk about in this article have solid capital positions and diversified businesses. The question is, will this be enough to shelter them from low interest rates? Will it be enough to shelter them from the COVID-19 storm?
Life insurance stocks facing major headwind as low interest rates appear to be here to stay
Life insurance assets are primarily financial in nature and are composed primarily of bonds and stocks. Liabilities mostly consist of obligations related to the policies sold to various individuals. Insurance companies invest their revenues and cash flows. The income from these investments is what ultimately pays their claims and obligations.
Life insurance companies have high duration liabilities, which means they have high reinvestment risk. So with declining interest rates, assets keep getting reinvested at lower and lower rates, which means lower and lower profits.
Sun Life: An insurance stock that will benefit from signs of early recovery
Sun Life Financial Inc. (TSX:SLF)(NYSE:SLF), like other life insurance companies, has already struggled with low rates. This struggle has just gotten worse, as low rates are here to stay for a while as economies struggle to survive.
These days, Sun Life has one more thing to worry about. The pandemic has created huge declines in reported net income. Market declines and assumption changes were among the culprits for its 37% Q1 drop.
But as a silver lining, Sun Life can proudly say that its underlying business was strong in its latest quarter. Results out of Asia (20% of total earnings) were strong. Furthermore, its wealth management division, MFS, finally halted the outflows. In the first quarter, MFS reported a solid $1.8 billion in net inflows, which is very significant.
Finally, Sun Life maintains its strong capital position and leverage ratio, which ultimately support its dividend. And as a final kicker, Sun Life’s businesses are showing real signs of recovery. Sun Life stock is yielding 4.3% today.
Manulife: This insurance stock benefits from diversification
Like Sun Life, Manulife Financial Corp. (TSX:MFC)(NYSE:MFC) is also well diversified both geographically and through business segments. Like Sun Life, Manulife is also vulnerable to market returns. Record low interest rates that show no signs of moving up anytime soon are problematic.
But the real possibility of defaults in the company’s bond portfolio is real. Driven by record unemployment and a significant economic slowdown, companies are suffering, which could hurt Manulife’s investment returns significantly. There is a lot of excess capital at Manulife, but still, the situation is precarious.
First-quarter results came in below expectations as Manulife took impairment charges and fair value adjustments on its oil and gas investments. The insurer also paid out many travel insurance claims resulting from the coronavirus disruptions.
Manulife stock is yielding a very generous 6.06% today.
Foolish bottom line
The insurance stocks discussed in this article certainly have solid dividend yields. But they also have hurdles to overcome. I like the fact that they have diversified into other businesses.
But the idea that rates will stay lower for longer presents a big headwind for these companies. Add these quality insurance stocks on weakness.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Karen Thomas has no position in any of the stocks mentioned.