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.
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