ROE maybe not best valuation gauge for insurers - Morgan Stanley

|By:, SA News Editor

Be cautious about taking operating ROE at face value, says Nigel Dally, as the metric is easily influenced by financial engineering.

Excess capital, debt leverage, alternatives exposure, pension funding, below investment-grade exposure, and below-line charges can all lead to ROE adjustments.

Dally and team found that Athene (NYSE:ATH) and Aflac (NYSE:AFL) have substantially better-than-reported ROEs when adjusting for excess capital. MetLife (NYSE:MET) has worse-than-reported ROE when adjusting for sizable below-line charges since 2012.

No dummies, investors are pricing in at least some of these adjustments, but Athene looks like the most undervalued name, says Dally.

Most overvalued: Torchmark (NYSE:TMK). Dally reiterates an Underweight rating.

Source: Bloomberg