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).
The 10-year Treasury yield is up another seven basis points to 2.46%, and bank investors continue to wrap their arms around the idea that real regulatory loosening is on the way. The XLF is higher by 1.7% vs. the S&P 500 being flat. KBE +2.15%, KRE +2%.
Bank of America (BAC +3%), Citigroup (C +1.7%), JPMorgan (JPM +2.2%), MetLife (MET +2.2%), Voya Financial (VOYA +3.3%), Northern Trust (NTRS +3.5%).
Oil is now ahead 4.6% to $51.72, helping the XLE to another 2.1% advance.
Tech (QQQ -1.4%) continues to struggle. Its decline today puts it lower by 1.1% since the election vs. the S&P's 2.8% advance, a 10% gain for the XLE, and a 14.5% move for the XLF.
The 10-year Treasury yield is up a whopping 10 basis points to 1.96%, surely a boon to yield-starved insurers. But for the larger players like MetLife (MET +5.2%), Prudential (PRU +4.2%), and AIG (AIG +1.6%), they may be able to look forward to end of their SIFI designations, and the boosted regulation and capital requirements that go with it (MetLife, of course, has already won a court case challenging its SIFI designation).
Trump is likely to nominate two or three new Fed governors, says Capital Alpha Partners' Ian Katz, who doesn't expect Janet Yellen to seek to stay on when her term as chairman expires in 2018. He doesn't expect this to happen right away, but look for a Trump Treasury to de-designate AIG and Prudential (and presumably drop the MetLife appeal).
Others enjoying the higher rates: Lincoln National (LNC +6.6%), Voya Financial (VOYA +5.2%), Primerica (PRI +10.4%)
Q3 adjusted operating earnings of $0.79 per share was shy of consensus by a penny, and by two cents from BTIG bull Mark Palmer's hope for $0.81. The miss, says Palmer, was probably due to a higher than expected share count.
The good news, says Palmer, is management appears to be moving past its caution on share repurchases by boosting the buyback authorization by $600M. This brings the total allowed to $883M - more inline with nearly $1B in excess capital. A $200M share repurchase agreement is set for Q4.
He reiterates his Buy rating and $50 price target (66% upside) based on 0.8x expected year-end book value (excl. AOCI).
In the green though is the banking sector - (KBE +0.2%), (KRE +0.4%) - which has been awaiting a real move higher in rates for years. A big move on the long end while short rates hold (for now) is an added boost as it widens the yield curve.
Bank of America (BAC +0.4%), Citigroup (C +0.4%), JPMorgan (JPM +0.4%), Wells Fargo (WFC +0.5%), PNC Financial (PNC +0.5%), Fifth Third (FITB +0.9%), U.S. Bancorp (USB +1.2%), BB& T(BBT +0.7%)
Other high-yield beneficiaries include: MetLife (MET +0.9%), Lincoln Financial (LNC +1.3%), Schwab (SCHW +0.4%), Voya Financial (VOYA +0.9%).
Michael S. Smith will be Voya Financial's (VOYA) new CFO effective Nov. 7, replacing Ewout L. Steenbergen, who is departing for another opportunity.
Smith joined Voya in 2009 and has served as CEO of Insurance Solutions at Voya and has had management oversight for the company's Closed Block Variable Annuity (CBVA) segment. Smith also served as chief risk officer and prior to that held the roles of CEO, CFO and CRO for Voya's Annuities business.
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),
In what doesn't sound like great news for the already-yield-starved insurance industry, cash balances are "ticking upward," says Zach Buchwald, head of BlackRock's insurance asset-management operation.
Buchwald: “In today’s environment, where every basis point is so precious, within your core fixed income, we want to be investing wisely and generating the best risk-adjusted returns we can, and a large cash balance doesn’t help.”
Nearly half of 315 insurers surveyed globally expect to boost cash holdings in coming months - that's up from 36% a year ago, says BlackRock. At issue are poor performance in alternative investments and credit concerns following a sizable narrowing in spreads this year.
Struggling insurers are past the point of expecting rising interest rates, says Buchwald. So - other than cash - where else will the money go? Allocations to private-equity appear to be set to rise, and outfits like AIG are turning to direct lending. At MetLife (NYSE:MET), commercial real estate loans hit a record last year.