"Fierce competition, over-capacity and low returns continue to put pressure on the industry," says Moody's, reinforcing its negative outlook on the global reinsurer sector (first changed to negative in June).
There are positive developments though, particularly a slowing in price declines. Moody's previously believed a 15-20% drop in cat prices next year a "distinct possibility," but says such a severe scenario has become less likely.
One reason for the slowing price decline, says Moody's, is non-traditional competitors like insurance linked securities (ILS) are having a tough year and have less scope to cut pricing.
The transfer via reinsurance of about 170K term life policies backed by more than $1.3B in reserves to a subsidiary of Reinsurance Group of America (NYSE:RGA) will free up about $200M of capital.
The deal also creates a pre-tax GAAP loss of $100M-$120M, but will have minimal ongoing impact to operating earnings.
"We are targeting product segments of the life insurance market that best match our lower-capital, higher-returns approach ... Over the past several quarters, we have successfully shifted sales to less capital-intensive products."
The team recommends going long Unum (NYSE:UNM) while shorting Reinsurance Group of America (NYSE:RGA), with Unum positively exposed to higher interest rates, but boosted competition a hinderance for RGA.
Unum last week was also recommended by BAML, which upgraded to Buy from Neutral. Analyst Seth Weiss noted Unum trading at 9.1x earnings vs. peers at 10.5x.
Alongside its upgrade of struggling Genworth and CNO Financial, Morgan Stanley downgrades a couple of better-performing names, cutting Reinsurance Group of America (RGA +0.1%) to Underweight from Equal Weight, and Ameriprise FInancial (AMP +1.1%) to Equal Weight from Overweight.
Tim Matson most recently was CIO of a JV between Cathay Life Insurance and Conning Asset Management. At RGA he'll be in charge of the company's investment policy and strategy, and manage all aspects of the $35B global asset portfolio.
Opening in the green while the rest of the reinsurance sector is lower is Reinsurance Group of America (RGA +0.8%) after being upgraded to Outperform at Raymond James, which cites valuation and overseas growth prospects.
Alongside Barclays' Jay Gelb's upgrade of Lincoln Financial (LNC +2.3%) to Overweight is a downgrade of Reinsurance Group of America (RGA -0.3%) to Equal Weight and cut in the price target to $81 from $88, citing increased competition in the life reinsurance market.
For Lincoln, Gelb has boosted confidence in the company's ability to generate strong earnings growth despite the low interest rate environment.
"AFL has a top-tier ROE as well as robust share buybacks, and should benefit in 2015 from the Japan Post partnership," writes Gelb, noting yen weakness will hurt GAAP earnings, but the company has hedged profit repatriation back to the States. AIG and HIG, he says, "should deliver substantial share buybacks along with attractive valuations and ultimately higher ROEs."
Captives are reinsurance units set up by life insurers to take on business from the parent, and, industrywide, the entities hold tens of billions of potential obligations to policyholders even as their financial disclosure and funding requirements are easier than that of the parent. For years, state regulators have raised concerns the setup is masking financial health.
Those in contact with the SEC over the matter include MetLife (MET), Genworth (GNW), Hartford (HIG), Protective Life (PL), and Reinsurance Group of America (RGA). In general the group says the captives are adequately funded and note the setup requires approval from state regulators where the insurer is based and from where the captive is located.
Protective LIfe - in a recent earnings filing - said discontinuation of the practice "could have a material adverse impact on the company's financial condition," and Reinsurance Group said it might have to increase prices.
Reinsurance Group of America Inc is an insurance holding company. The Company is engaged in the reinsurance of individual and group coverages for traditional life and health, longevity, disability income, asset-intensive and critical illness products.