瑞信-美股-保险行业-2019年Q2寿险行业预览：尽管利率很低但条件向好-2019.7.18-39页 (2).pdf

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.18 July 2019Americas/United StatesEquity ResearchLife Insurance Life Insurance 2Q19 Preview SECTOR FORECASTResearch AnalystsAndrew Kligerman212 325 5069andrew.kligermancredit-Wilma Burdis212 325 1594wilma.burdiscredit-Alvin Huang212 325 5064alvin.huangcredit-Jack Matten212 325 2322francis.mattencredit-Favorable Conditions,Despite Lower RatesWith the S&Ps 2Q19 point-to-point gain of 3.8%and daily average up 5.9%,the more equity sensitive variable annuity(VA)writers(in order of exposure)BHF,EQH,LNC,and PRU should benefit,as well as AMP,PFG,and VOYA in other businesses.Given a one-quarter reporting lag,companies with high private equity(PE)exposure should benefit,including BHF,MET,AIG and LNC.BHF,which has over 2%of invested assets in PE,should see an EPS benefit of$0.11.Our well above consensus estimates for BHF,LNC,and AIG are meaningfully boosted by higher alternatives performance.But,10-year Treasury rates fell in 2Q19and while the 10-year was(41)%negatively correlated to life stocks,lower rates may hurt sector earnings longer-term.We expect focus on this pressure,particularly for most sensitive ATH and FG,and to lesser degrees BHF,VOYA,LNC,and PFG.Underperform-rated UNM and BHF may be pressured intermediate-term,as lower yields on assets backing large legacy insurance blocks may trigger charges.New FASB accounting to be implemented in 2022 could compound this effect,including required discount rate updates.We expect slight mortality margin improvement y/y for RGA.Preliminary Center for Disease Control(CDC)data implies mortality was about(3)%lower in 2Q19 y/y.We project RGAs US&LatAm life benefit ratio at 89.0%in 2Q19 vs.91.4%y/y.BHF,EQH,LNC,and PRU could benefit to lesser extents.But,while CDC data can be useful,it is more reliable under extreme scenarios,which does not seem the case in 2Q19.We think Neutral-rated AIG will meet its guided sub-100%combined ratio.Our$1.22 EPS estimate vs.cons$1.14,is driven by favorable alternative investment results,lower cat losses,and lower loss reserves.PRU could post an Individual Life charge in its 2Q19 actuarial review.At its June 2019 investor day,management cited unfavorable mortality experience.PRU took a$(653)M charge in 2Q17 and a$(420)M charge in 2Q16 related to actuarial assumption changes in this segment.We still see upside for the life sector vs.the S&P 500 given favorable relative forward P/Es and like Outperform-rated VOYA,AMP and PRI,as their relatively capital light business models should perform well under most market scenarios.18 July 2019Life Insurance 2Q19 Preview2Equity Markets Added to 1Q19 Gains,but Rates PressuredMarket Results Should Boost Fee PerformanceDuring 2Q19,the S&P 500 daily average rose 5.9%,compared to a point-to-point gain of 3.8%in the quarter.This result well exceeded the 0.8%daily average gain in the prior quarter,despite 1Q19s point-to-point increase of 13.1%.Higher daily average markets imply potential upside for fee levels,as many insurers in our coverage collect fees on daily account balances.Our most equity sensitive names(in order of exposure)for variable annuity(VA)writers are BHF,EQH,LNC,and PRU,with AMP,VOYA,and PFG exposed to equity markets in other businesses,such as investment management and retirement.Retirement-focused VOYA and PFG and advice&wealth and asset management exposed AMP should see a boost in fees on higher daily average AUM.Additionally,variable annuity(VA)writers BHF,EQH,and LNC should benefit from higher daily account values.PRU should obtain an increase in fees in both its asset management and VA businesses.We estimate BHF will post$0.18 higher EPS due to lower deferred acquisition costs(DAC)on 2Q19s up market.BHF guides to a quarterly$0.07-0.11 per share increase per every 1%point-to-point gain in separate account return,with approximately two-thirds of separate account assets in equities and one-third held in bonds.BHFs guided quarterly sensitivities are 75%from DAC amortization and SOP reserve impacts and 25%from changes in fee income.But,BHF uses a static hedging program for its VA risks,which could see somewhat higher below the line hedging costs in the quarter.We estimate BHFs hedging costs to be$(100)million higher than its$(300)million base level,representing a$(0.87)impact to net EPS.BHF reported$(1.3)billion of below the line hedging costs in 1Q19.Interest Rates Fell to 2.00%from 2.42%Quarter-over-Quarter in 2Q19 The 10-year Treasury yield fell to 2.00%at quarter-end,down from 2.42%at 1Q19(see Figure 1).The average 10-year yield was 2.33%in 2Q19,lower than 2.65%average in 1Q19 and 2.91%in full-year 2018.Falling Treasury yields are generally negative for life insurance companies,though the impact is not as immediate as those of equity markets given slower turnover for fixed income investments.Note that the 10-year Treasury yield has risen slightly to 2.03%so far in 3Q19.Our most interest rate sensitive companies are ATH and FG,while BHF,VOYA,LNC,and PFG also have a high proportion of earnings sensitive to interest rates.Figure 1:10-Year and 2-Year Treasury Yields10-Year Treasury Yield2Q192Q183Q184Q18FY20181Q19Period End2.00%2.86%3.06%2.68%2.68%2.42%Period Average2.33%2.92%2.92%3.03%2.91%2.65%2-Year Treasury Yield2Q192Q183Q184Q18FY20181Q19Period End1.73%2.52%2.81%2.50%2.50%2.27%Period Average2.12%2.48%2.67%2.80%2.53%2.48%Source:Company reports,Credit Suisse estimatesATH cites an unfavorable interest rate environment as driving a slight delay in repositioning efforts around acquired LNC and VOYA assets due to 2Q19 deployment at lower yieldsthe company targets a longer-term 4.75%net investment earned rate after its repositioning,which the company expects to complete in 3Q19.FG guides to a 4.75%18 July 2019Life Insurance 2Q19 Preview3run-rate portfolio yield in full-year 2019,post completion of its portfolio repositioning into structured products in 4Q18.We think AMP will still benefit from average short-term interest rates in 2Q19,though there could be some noise from two offsetting factors:(i)AMP raised crediting rates by 7 basis points toward the end of 1Q19,which likely contributed to modest margin compression during 2Q19;and(ii)AMP launched its federal savings bank toward the end of 2Q19,which increased sweep income-eligible cash balances by roughly$2.0 billion.The company generates income by sweeping brokerage assets held in cash and collecting interest commensurate with the Federal funds rate in return,typically at a higher rate than that which it credits to customers.Taking higher crediting rates and higher sweep-eligible cash balances into account,we model for sweep income of$0.80 per share in 2Q19 on a spread of 205 bps,versus$0.79 quarter-over-quarter and$0.78 in 4Q18.One Quarter Lag for Private Equity Funds Likely to Benefit Reported ResultsWe expect alternative yields in the quarter to be strong for most life insurers,given a one-quarter lag on private equity(PE)reporting and robust markets in 1Q19.The Alternatives team expects solid 2Q19 returns across asset classes,including PE,credit,and real estate assets,though below last-twelve-months performance.Strong lagged PE performance could be further boosted by solid hedge fund(HF)returns for some insurers.See Figure 2 for our estimates of PE and HF exposure for the companies in our coverage,as of 1Q19.Figure 2:CS Estimated PE and HF Exposure as a%of Invested Assets1BHF2.2%1AIG1.2%2MET1.4%2EQH0.5%3AIG1.4%3VOYA0.5%4LNC1.4%4PRU0.5%5VOYA1.0%5ATH0.2%6UNM1.0%6MET0.2%7PRU0.7%7LNC0.2%8ATH0.7%8FG0.1%9PFG0.6%9PFG0.1%10FG0.6%10BHF0.1%11EQH0.5%11AFL 0.0%12RGA0.5%12AMP0.0%13AFL 0.4%13PRI0.0%14AMP0.0%14RGA0.0%15PRI0.0%15UNM0.0%Private Equity ExposureHedge Fund ExposureSource:Company reports,Credit Suisse estimates.Figures are as of 1Q19.Due to a one-quarter reporting lag on PE investments,insurers with likely higher PE allocations such as BHF,AIG,MET,LNC,and VOYA should report higher alternative yields in 2Q19 versus a weaker 1Q19.In particular,alternative yields should rebound in 2Q19 for BHF,as most of the companies alternatives are PE investments.BHFs 1Q19 EPS was impacted$(0.45)by lower alternative performance compared to the companys 2018 quarterly average.We could see a benefit of similar magnitude from higher alternative performance in 2Q19.AIG has approximately$4.4 billion of PE investments.We think gains on PE may be further supported by solid performance on AIGs$3.9 billon HF portfolio,which the 18 July 2019Life Insurance 2Q19 Preview4company does not report on a lag.For 2Q19,we are modeling for$246 million of alternative income,or 11.8%returns,compared to AIGs 8%return assumption.AIGs alternatives portfolio represents about 3%of invested assets.LNC reported that 1Q19 alternative yields were just 1%,compared to the companys long-term 10%expectation.LNC expects“significant improvement”in alternative returns in 2Q19,implying LNCs alternative returns should surpass 10%in 2Q19 given its large PE allocation.We could see a similar scenario at MET,which expects sustained low double-digit private equity performance in 2019.For ATH,we expect$116 million of alternative investment income in its Retirement Services segment on an alternative yield of 11.5%in 2Q19,down from 11.9%average yield from 2013-2017 but within targeted long-term 10-12%yield.Per its September 20 investor day,ATH allocates 4%of its assets to alternatives,higher than the 3%industry average.Per CFO Marty Klein,40%of ATHs alternative investments are marked on a real-time basis,with the remainder marked on a 1-or 3-month lag.This suggests that the impact from up markets in 1Q19 has likely been spread out over the two most recent quarters,with slight benefit from 2Q19 market performance.Additionally,any gains from alternatives performance should be somewhat supported by gains in public equity holdings,which are allocated to the Corporate segment.We expect a boost to alternative yields in 2Q19 for PRU,given its$12 billion alternatives portfolio is about 28%allocated to PE.PRUs 1Q19 results were impacted about$(100)million,or$(0.24)per share,from variable investment income below PRUs long-term expectations,largely on lagged PE results from 4Q18.Volatility Relatively Unchanged in 2Q19The CBOE Volatility Index(VIX)(see Figure 3)remained stable in 2Q19 after normalizing in 1Q19,which likely implies modestly lower costs sequentially for VA writers.However,static hedging programs at BHF,which typically generate accounting losses in up markets,will likely more than offset any VIX related benefits for the company this quarter.EQH also reports some hedging costs below the line,though we expect that lower volatility and potential gains on interest rate hedges should offset up equity markets,resulting in total hedging costs in line with the companys$(175)million guided quarterly run-rate.Figure 3:Average CBOE Volatility Index Levels11.117.415.312.921.116.515.2051015202520171Q182Q183Q184Q181Q192Q19Average Daily VIX LevelSource:FactSetMortality Expected to Slightly Improve from Recent Experience We expect slight mortality margin improvement year-over-year for our exposed insurers(primarily RGA,but to a lesser extent,BHF,EQH,LNC,and PRU).We project RGAs US 18 July 2019Life Insurance 2Q19 Preview5and Latin America Traditional Life benefit ratio to improve from 91.4%in 2Q18 to our estimated 89.0%in 2Q19.The CDC described the 2018-2019 flu season,which ran through May 2019,as“moderately”severe,and longer-lasting than usual.Typically,flu season peaks during the first quarter,though this season featured an unusual“second wave”which carried well into the second quarter.Overall,this flu season was not as deadly as last season,which was noted for being particularly severe.Preliminary Center for Disease Control(CDC)data implies mortality was about(3)%lower in 2Q19 compared to 2Q18(see Figure 8).But,we note that these results are often revised upward as more data is reported,and are difficult rely upon,except for under more extreme scenarios.In addition,companies insured populations differ from the CDCs sample,and mortality-exposed insurers pools of mortality risks each differ from the overall insured population.Figure 4:Average Weekly Mortality Rates(3)%Lower Year-Over-Year in 2Q19 525155605251545851354555652Q173Q174Q171Q182Q183Q184Q181Q192Q19Average Weekly Deaths(in thousands)Average Weekly DeathsOverall AverageSource:Center for Disease Control.Note:mortality statistics only apply to the U.S.Modest USD Depreciation against JPY in 2Q19The average JPY/USD conversion rate was 109.95 in 2Q19,versus 110.20 in 1Q19 and 110.41 in 2018(see Figure 5).At the end of 2Q19,the JPY/USD rate was 107.74,down from 110.69 at 1Q19 and 109.72 at the end of 2018.With the exception of AFL,we do not think the dollars depreciation in 2Q19 is significant enough to materially affect 2Q19 earnings for our companies with Japan-based businesses.Per our estimates,2Q19 EPS for AFL(the company in our coverage most exposed to JPY,with over 70%of operating earnings from Japan),increased approximately$0.01 or 1%when compared to our 2Q19 expected EPS at average 1Q19 JPY/USD levels.Other companies with exposure to Japan include MET(per our estimate,approximately 15%of 2019 adjusted operating earnings as measured by Japan sales contribution)and RGA(14%APAC contribution to consolidated earnings,with sizable presence in Japan)again,a material impact on 2Q19 earnings appears unlikely based on the modest depreciation of the dollar in the quarter and these companies exposure.PRU generates approximately 40%of adjusted operating earnings in Japan.We do not think the JPY/USD rate will have a material impact on 2Q19 earnings as the company cites just 25%of Japans earnings,implying less than 10%of PRUs total earnings,as yen based.However,PRU benefits from hedging the JPY/USD rate at about 105 in 2019,compared to 111 in 2018.PRU maintains a 3-year rolling hedging program for its yen exposure,with next years rates typically set in November.18 July 2019Life Insurance 2Q19 Preview6Figure 5:Average Quarterly JPY/USD Exchange Rates 108.33109.16111.47112.69110.20109.951041081121161Q182Q183Q184Q181Q192Q19JPY/USDSource:FactSetExpect Little Foreign Exchange Impacts on Other International OperationsWe do not anticipate outsized currency impacts on international earnings,as foreign exchange rates were relatively stable in the regions in which our companies primarily operate(see Figure 6).Companies with further exposure to foreign earnings(excluding Japan)are listed below.We include esti