An improved outlook for interest rates (higher) and the hope for an easing of the DOL's new fiduciary rule in a Trump administration mean it's time to shift money into the life insurance sector, says RBC's Mark Dwelle.
P&C insurers face weak pricing expectations, so the focus will be on accident-year margin pressure and the implications for reserves.
Downgraded to Sector Perform are Unum (UNM -1.6%) and Selective Insurance (SIGI -4.6%).
Favored pick in P&C is Chubb (CB -0.2%) as it's a "top underwriter" regardless of pricing, and has a clean balance sheet and attractive valuation.
Upgraded to Outperform are Hartford (HIG +0.5%) and Lincoln National (LNC -0.1%), with LNC a Top Pick thanks to its leverage to higher rates and eased DOL rule.
Top value ideas are AIG (AIG -0.1%) and Voya Financial (VOYA +0.5%). Top growth ideas: Arch (ACGL +0.6%), Principal Financial (PFG -1.1%). Top small-cap picks: American Equity (AEL +3.9%), Kinsale Capital (KNSL +1.1%). Top turnaround/self-help picks: MetLife (MET -0.6%), XL Group (XL -0.1%). Top defensive play: Marsh & McLennan (MMC).
Analyst Mark Dwelle expects 2017 U.S. sales to come in at the lower end of guidance due to Obamacare uncertainty and the restructuring of the sales force.
Aflac (NYSE:AFL), he says, also expects to be boosting IT investments and change its investment strategy. The insurer is among the least sensitive to interest rates among the stocks in his coverage universe, says Dwelle.
The price target is cut to $65 from $72. Last night's close was $69.62.
Started at Underperform is Aflac (NYSE:AFL), with analyst John Nadel noting recent outperformance, global low rates as pressuring investment income, and the growing spread between U.S. and Japanese rates as boosting hedging costs. The $75 price target compares to yesterday's close of $72.07.
Principal Financial Group (NYSE:PFG) also rates an Underperform, with Nadel noting more intense competition, exposure to FX and emerging markets volatility, and lower rates as maybe muting EPS growth and flatten margins.
MetLife (NYSE:MET), Prudential (NYSE:PRU), Lincoln National (NYSE:LNC), Reinsurance Group of America (NYSE:RGA), AIG, and Unum Group (NYSE:UNM),
Q2 operating earnings of $707M or $1.71 per share vs. $651M and $1.50 one year ago. This year's result was boosted by $0.09 per share from the stronger yen/dollar exchange rate.
5.9M shares bought back during quarter for $400M, bring YTD buys to $1B. Another 32.3M shares remain in buyback authorization.
Book value per share of $54.98 up from $48.22 three months earlier. Operating ROE of 18% in Q2, or 15.5% excluding the impact of the yen.
CEO Daniel Amos: "I would remind you that the low interest rate environment continues to be challenging for investments, especially with negative interest rates in Japan, making it difficult to invest cash flows at attractive yields while maintaining a prudent risk tolerance."
The outperformance of low-P/E stocks that marked H1 is behind us, says RBC's Jonathan Golub, and it's time for the "Stable Growers" to re-asset leadership. He cautions about putting money to work too quickly though, noting the pullback so far has been limited.