Major life insurance carriers have recently announced share buybacks. This is a sign that the companies are happy to use their own cash to reinvest in themselves and give shareholders a larger portion of the company and claims on future earnings.
Why all the repurchase activity?
By buying back stock, companies reduce the number of shares, or supply, on the market. That raises the value of shares still available, according to financial services industry consultant Michael White.
The other reason could be to dissuade shareholders from amassing a controlling stake.
“This strategy may also help improve financial ratios like return on assets (ROA) and return on equity (ROE),” he said in an email to InsuranceNewsNet. “Cash (an asset) is spent on purchasing (retiring) outstanding shares, thereby reducing equity. It will improve the earnings per share (EPS) and the price-earnings (P-E) ratio.
“It shows management believes in itself, that its company ‘is the best investment we could make.’ Secondarily, it improves those financial ratios,” he said. “It is perhaps done sometimes to shore up the value of a stock if management thinks the value of its stock on the market is discounted too much.”
Share buybacks, however, can sometimes come back to haunt companies.
They are a bad idea when shares are perceived to be overvalued, for example.
While many insurance company executives may have believed their stock to be undervalued three months ago, and therefore worthy of buying back, last month’s stock market correction has drained even more value from stocks.
The Dow Jones Industrial Index, which hit a record 18,312 on May 19, has since plunged 10.5 percent, closing at 16,374 on Thursday.
Critics of stock buybacks also say that buying back stock to boost per-share earnings to maximize the wealth of top executives and senior managers is not the best use of a company’s cash.
Here are some of the recently announced life insurance company stock buybacks.
Voya Financial spent $128 million to buy back more than 2.7 million shares of common stock in the second quarter, the company said in its second-quarter earnings report.
The company also announced July 1 that it had entered into another agreement to repurchase an additional $150 million worth of Voya common stock from another institution.
The announcement came on the heels of Voya’s investor day meeting June 2, during which the company told analysts that it had been authorized to repurchase as much as $750 million.
Prudential said that the company had bought 2.9 million shares of its common stock for $250 million during the second quarter.
The purchase had been previously authorized by the company’s directors in June 2014 to repurchase up to $1 billion of Prudential’s outstanding common stock during the 12-month period ending June 30, the company said.
LPL Financial said it had spent $86 million in buybacks for 2.1 million shares, “taking advantage of several periods when our stock traded at well below what we believed to be its intrinsic value,” Thomas D. Lux, acting chief financial officer for LPL, said in an Aug. 5 release.
At Primerica, where the company recently completed $150 million worth of buybacks, the board authorized a share repurchase program for the remainder of the year continuing through fiscal 2016, a period during which the company expects to buy back up to $200 million of its common stock.
“This $200 million repurchase authority represents an incremental $50 million above our previously stated plan to annually return $150 million plus dividends to shareholders through 2016,” CEO Glenn Williams said in a statement.
The action reflects the company’s positive long-term outlook and strong momentum, he also said.
Lincoln Financial said it had bought back 2.6 million shares at a cost of $150 million in the second quarter. Since June 30, 2014, the company has spent $850 million repurchasing as much as 15 million shares, the company also said.
Other life insurance companies such as CNO Financial Group announced common stock repurchases and dividends worth as much as $115 million in the second quarter.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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