1、North America Equity Research01 October 2019Life Insurance 3Q19 OutlookMixed Fundamentals and Macro Challenges Merit Downbeat ViewInsurance-LifeJimmy S.Bhullar,CFA AC(1-212)622-Bloomberg JPMA BHULLAR Pablo S.Singzon(1-212)622-J.P.Morgan Securities LLCSee page 113 for analyst certification and import
2、ant disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor i
3、n making their investment decision.We are shifting our view on the life insurance sector from neutral to negative.Our outlook for business fundamentals is incrementally cautiousand we feel that consensus 2020 EPS estimates for most insurers are too high.Also,stock prices do not seem to have reacted
4、to the decline in interest rates.Reducing EPS estimates.We are lowering 2020 estimates for most companies to reflect the decline in new money yields,partly offset by higher accretion from share buybacks and other factors.Our projections for most insurers are below consensus.For 2020,we are considera
5、bly below consensus on AIG,HIG,and VOYA,but slightly above for AFL and UNM.For 3Q19,we feel that consensus estimates for ATH and RGA are especially high,while numbers for PFG seem conservative.In our view,life insurers will report mixed results in 3Q.We expect fee income to grow at a steady pace(giv
6、en higher average daily balances)and expect mortality/morbidity margins to be healthy.While we forecast core spreads to decline,reported spreads should benefit from elevated private equity income(reported on a 1-quarter lag).Conversely,organic growth in most products should be weak and some insurers
7、 could incur charges as part of their annual actuarial reviews.Plus,given the drop in rates,management teams are more likely to tone down 2020 expectations than talk up.Our long-term fundamental outlook is cautious.Most life insurers have ample capital flexibility for ongoing share buybacks and divi
8、dend hikes.Also,we expect competition in most products to be disciplined.Still,our models project insurers to report lackluster ROEs(12%on operating EPS and 9%on net EPS),close to their cost of equity.In addition,we remain wary of tail risk in legacy LTC and VA blocks.The macro backdrop has become m
9、ore challenging with the drop in rates.We estimate that new money yields in insurers portfolios declined over 20 bps in 3Q19 with the drop in Treasury yields and roughly flat credit spreads.New money yields in 2019 have more than reversed the uptick through all of 2018 and now stand at the lowest le
10、vel since late 2016.The EPS impact of low rates is modest in the near term but compounds over time.More importantly,sustained low rates could drive balance sheet charges in long-duration products such as LTC,VAs,and individual life.Valuation levels seem fair.The sector is trading at 1.3x BV ex.AOCI
11、and 9.0 x forward EPS,up from 1.1x and 7.7x,respectively,at 12/31/18.Whilenot stretched,we feel that valuations are reasonable considering the sectors ROE(close to cost of equity),business trends,and macro conditions.GL and LNC are our top picks and we remain negative on BHF.We remain Neutral on AIG
12、 with a negative long-term bias,but expect 3Q results to be healthy.Conversely,our long-term bias on AFL is positive,but we feel that the risk-reward in the stock is negatively skewed in the near term.Life Insurance 3Q19 OutlookKey Positives:Capital flexibility for buybacksRational pricing in most p
13、roductsKey Negatives:Downside risk to consensus EPSPoor ROEsLow rates&risk of charges in 3Q2020 Estimate Changes:Reducing EPS:AEL,AFL,AIG,ATH,BHF,EQH,FG,GL,GNW,HIG,LNC,MET,PFG,RGA,UNM,VOYAIncreasing EPS:PRUNo Change:NoneBest Trade Ideas:Defensive long:GLHigh-beta long:LNCShort:BHFPair:long LNC,short
14、 BHFPlease visit our Bloomberg page onJPMA Bhullar 2North America Equity Research01 October 2019Jimmy S.Bhullar,CFA(1-212)622-Table of ContentsOutlook for Life Insurance Stocks Negative.5Lowering EPS Estimates.6AFLAC,Inc.35American Equity Investment Life.39American International Group.43Athene Holdi
15、ng.47AXA Equitable.50Brighthouse Financial.53FGL Holdings.57Genworth Financial,Inc.61Globe Life Inc.64Hartford Financial Services.67Lincoln National.70MetLife,Inc.73Principal Financial Group.76Prudential Financial.80Reinsurance Group of America.84Unum Group.88Voya Financial,Inc.923North America Equi
16、ty Research01 October 2019Jimmy S.Bhullar,CFA(1-212)622-Equity Ratings and Price TargetsMkt CapRatingPrice TargetCompanyTicker($mn)Price($)CurPrevCurEnd DatePrevEnd DateAFLAC,Inc.AFL US38,741.1352.32Nn/c57.00Dec-20n/cn/cAmerican Equity Investment LifeAEL US2,196.9824.20Nn/c29.00Dec-2032.00n/cAmerica
17、n International GroupAIG US48,453.4355.70Nn/c55.00Dec-20n/cn/cAthene HoldingATH US7,797.9242.06Nn/c61.00Dec-20n/cn/cAXA EquitableEQH US10,882.7822.16Nn/c27.00Dec-20n/cn/cBrighthouse FinancialBHF US4,558.7440.47UWn/c42.00Dec-20n/cn/cFGL HoldingsFG US1,733.187.98Nn/c11.00Dec-20n/cn/cGenworth Financial
18、,Inc.GNW US2,215.404.40Nn/cn/cn/cGlobe Life IncGL US10,654.6495.76OWn/c99.00Dec-2095.00n/cHartford Financial ServicesHIG US22,110.5360.61Nn/c57.00Dec-20n/cn/cLincoln NationalLNC US12,112.2660.32OWn/c92.00Dec-20n/cn/cMetLife,Inc.MET US44,137.0447.16OWn/c61.00Dec-20n/cn/cPrincipal Financial GroupPFG U
19、S15,919.2057.14Nn/c60.00Dec-20n/cn/cPrudential FinancialPRU US37,266.2889.95OWn/c115.00Dec-20n/cn/cReinsurance Group of AmericaRGA US10,033.75159.88Nn/c156.00Dec-20n/cn/cUnum GroupUNM US6,228.4229.72Nn/c49.00Dec-20n/cn/cVoya Financial,Inc.VOYA US7,637.9354.44UWn/c53.00Dec-20n/cn/cSource:Company data
20、,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 30 Sep 19.4North America Equity Research01 October 2019Jimmy S.Bhullar,CFA(1-212)622-J.P.Morgan Life Insurance CoverageSource:Bloomberg,Company reports,and J.P.Morgan estimates.Notes:All EPS estimates exclude realized gains/losses.Street
21、 estimates refer to Bloomberg consensus forecasts.P/E is based on J.P.Morgan estimates.NTM ROE refers to next-twelve-month earnings divided by current BV/Share.09/30/1912/31/2020192020 P/BV:JPM Estimates Street EstimatesNTMNTM 6/30/19 BV/Share:Annual DividendSharesMkt.Cap.Ticker Company NamePriceTar
22、getP/EP/ETotalEx.AOCI3Q-19201920203Q-1920192020EPSROETotalEx.AOCIPer ShareYield(MM)($,mil.)OverweightGLGlobe Life$95.76$9914.313.71.592.031.676.677.011.696.737.186.8214.4%$60.22$47.29$0.690.7%111.64$10,691LNCLincoln National$60.32$926.56.00.660.862.349.269.992.419.3510.349.6313.7%$91.91$70.31$1.482.
23、5%203.00$12,245METMetLife,Inc.$47.16$618.38.10.730.901.395.705.841.415.676.075.5910.7%$64.61$52.19$1.763.7%950.20$44,811PRUPrudential Financial$89.95$1157.47.00.590.953.2112.2012.773.0612.0613.0412.4013.2%$152.13$94.20$4.004.4%409.20$36,808NeutralAELAmerican Equity Life$24.20$296.06.10.630.900.984.0
24、23.980.994.044.043.9414.6%$38.46$26.91$0.281.2%90.78$2,197AFLAFLAC,Inc.$52.32$5712.111.71.371.771.084.314.471.074.354.474.3614.8%$38.14$29.54$1.082.1%746.49$39,056AIGAmerican International Group$55.70$5510.811.60.760.821.025.154.811.055.185.184.566.7%$73.63$67.90$1.282.3%869.70$48,442ATHAthene Holdi
25、ng$42.06$616.05.40.660.741.807.027.841.807.397.997.3312.8%$63.90$57.20$0.000.0%194.10$8,164EQHAXA Equitable Holdings,Inc.$22.16$275.14.80.730.781.104.344.571.074.294.684.4615.7%$30.22$28.44$0.602.7%491.00$10,881FGFGL Holdings$7.98$116.05.00.941.090.321.341.600.341.361.651.4319.6%$8.46$7.31$0.040.5%2
26、17.33$1,734GNWGenworth Financial$4.403.94.70.160.210.241.120.940.301.201.041.004.7%$27.32$21.34$0.000.0%503.30$2,215HIGHartford Financial$60.61$5711.511.71.481.461.225.265.161.225.295.505.0312.1%$41.00$41.55$1.202.0%365.10$22,129PFGPrincipal Financial$57.14$609.79.31.131.191.485.916.151.435.836.185.
27、9512.4%$50.38$48.05$2.203.9%278.20$15,896RGAReinsurance Group$159.88$15612.411.50.941.243.3412.8913.923.5113.1314.1913.3210.4%$170.64$128.54$2.801.8%62.54$10,000UNMUnum Group$29.72$495.55.10.660.641.375.445.841.385.445.795.6612.2%$45.10$46.26$1.143.8%212.30$6,310UnderweightBHFBrighthouse Financial$4
28、0.47$424.64.20.280.332.318.809.692.258.8910.069.447.8%$145.07$121.08$0.000.0%116.18$4,702VOYAVoya Financial,Inc.$54.44$539.99.20.811.161.395.505.921.405.496.195.7112.1%$67.51$47.04$0.601.1%148.00$8,0575North America Equity Research01 October 2019Jimmy S.Bhullar,CFA(1-212)622-Outlook for Life Insuran
29、ce Stocks NegativeWe feel that the risk-reward in life insurance stocks is negatively skewed given mixed business trends,the drop in rates,and strong YTD stock performance.We turned bullish on the sector at the beginning of 2019 due to an expected improvement in business trends(especially underwriti
30、ng margins and sales/net flows),the rise in rates through 2018,and the significant pullback in valuation levels(particularly in December).Life insurance stocks outperformed the broader market in the first half of the year despite the significant drop in interest rates.Also,while underwriting margins
31、 were healthy,the expected improvement in sales and flows did not materialize.As such,we shifted our view on the group to neutral in early July.However,since then,the interest rate environment has gotten even more challenging and our outlook for business trends is incrementally cautious.Meanwhile,li
32、fe stocks have traded in-line with the broader market thus far in the second half,which we feel is unwarranted.As such,our view of life insurance stocks is more downbeat.Although we believe that the overall sector is not too enticing,we feel that select stocks still are very attractive.Following is
33、a summary of our key investment ideas.Best Long for defensively positioned investors:GL.Our bullish view on GL(formerly TMK)reflects its superior ROE,steady free cash flow,and limited sensitivity to the equity market and interest rates.Although our price target implies limited upside potential,our o
34、utlook for trends in GLs business is considerably more upbeat than that for other high-quality defensive companies(such as AFL and RGA).We consider improving direct response margins and sales potential positive catalysts for the stock.Best Long for investors with a positive bias for the equity marke
35、t and interest rates:LNC.We believe that LNC offers the best risk-reward for investors who have a positive outlook for the macro environment.Although LNC is highly sensitive to both interest rates and the equity market,our outlook for business trends(margins,sales/flows)is more constructive than for
36、 other macro-exposed insurers such as BHF,EQH,PFG,and VOYA.Also,we feel that LNCs variable annuity block has less tail risk in an adverse macro scenario compared with VA businesses at BHF and EQH.Best short for investors with a negative macro stance:BHF.We expect sustained low interest rates,a weak
37、equity market,and/or an uptick in credit losses to pressure the entire life insurance sector.However,we feel that BHF is more susceptible than peers given its higher-risk business mix(VAs comprise over half of capital and earnings)and challenging business trends(subpar margins and negative flows in
38、most major divisions).BHFs valuation seems enticing,but is not as attractive when considering its poor earnings quality.BHF trades at a sizable discount to the sector on operating EPS(4x vs.9x),but the discount is narrower on net EPS(7x vs.12x),and we believe that this is justified by the companys p
39、oor ROE,limited cash flow generation,and high tail risk.Most compelling 3-to 6-month pair trade:Long LNC,Short BHF.We expect both stocks to trade well if the equity market is strong and interest rates are rising.On the other hand,we feel that BHF has considerably more downside risk if macro conditio
40、ns worsen.We view eased concerns about LNCs VA exposure and BHFs continued poor results as catalysts for the trade.Avoid insurers exposed to a downturn in credit:We recommend avoiding insurers with high risk in portfolio allocations(ATH,FG,AIG),high asset leverage(AEL,FG),or lack of capital flexibil
41、ity to absorb losses(BHF,GNW).The J.P.Morgan Life Insurance Index has risen 20%thus far in 2019 versus a 19%increase in the S&P 500 Index and an 18%rise in the S&P Financials Index.In 2018,the life index declined 21%versus a 6%decrease in the S&P 500 Index and a 15%drop in the S&P Financials Index.B
42、est Trade Ideas:Defensive long:GLHigh-beta long:LNCShort:BHFPair:long LNC,short BHF6North America Equity Research01 October 2019Jimmy S.Bhullar,CFA(1-212)622-Lowering EPS EstimatesWe are lowering EPS estimates to reflect the continued decline in interest rates and a stronger US$.The slightly weaker
43、than expected equity market(1.2%in 3Q19 versus our 1.7%assumption)was also a negative,but its earnings impact was minimal.Partly offsetting these factors are more accretion from share buybacks given the decline in most companies stock prices,as well as lower cat load assumptions for insurers with P&
44、C businesses(AIG,HIG,and MET).We also expect variable investment income to be healthy,driven primarily by strong private equity returns,which are reported on a 1-quarter lag.Table 1:Summary of EPS Estimate ChangesPer share amountsCompany3Q19(Old)3Q19(New)2019(Old)2019(New)2020(Old)2020(New)Reasons f
45、or ChangeAEL0.984.034.024.023.98lower interest ratesAFL1.084.314.494.47lower interest ratesAIG0.971.025.115.154.844.81lower interest rates;decrease in 3Q19 cat load assumptionATH1.691.806.967.027.887.84lower interest rates and sales volumes,partly offset by higher buybacks and other adjustmentsBHF2.
46、318.828.809.769.69lower interest rates and equity market,less accretion from buybacksEQH1.104.344.584.57lower interest rates and less accretion from share repurchasesFG0.340.321.371.341.671.60lower interest rates,partially offset by more accretion from buybacksGL1.676.686.677.047.01lower interest ra
47、tesGNW0.241.120.950.94lower interest ratesHIG1.201.225.255.265.205.16lower interest rates and less accretion from share buybacksLNC2.349.279.2610.019.99lower interest rates partially offset by more accretion from share buybacksMET1.395.705.875.84lower rates and US$appreciation,partly offset by more
48、accretion from buybacksPFG1.451.485.905.916.216.15lower rates and US$appreciation,offset by more accretion from buybacks and 3Q19 encajePRU3.203.2112.1912.2012.7712.77more accretion from buybacks,partly offset by lower rates and margins at GibraltarRGA3.353.3412.9212.8914.0013.92lower interest rates
49、 and stronger US$UNM1.375.445.855.84lower interest rates and weaker UK pound,partially offset by more accretion from share buybacksVOYA1.395.515.505.965.92lower interest rates,partly offset by more accretion from share buybacksSource:J.P.Morgan estimates.Note:the“New”column is blank for periods with
50、 no change in estimates.7North America Equity Research01 October 2019Jimmy S.Bhullar,CFA(1-212)622-Table 2:EPS Sensitivity to Macro Factors%impact of a 10%increase in the S&P 500 Index/100 bps increase in interest rates to normalized 2019E EPS(excludes DAC and reserve adjustments)Source:Company repo