瑞信-美股-保险行业-美国寿险2018年Q4预览：宏观受压死差可能更有利-2019.1.25-25页.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.25 January 2019Americas/United StatesEquity ResearchLife Insurance Life Insurance 4Q18 Preview SECTOR FORECASTResearch AnalystsAndrew Kligerman212 325 5069andrew.kligermancredit-Wilma Burdis212 325 1594wilma.burdiscredit-Alvin Huang212 325 5064alvin.huangcredit-Jack Matten212 325 2322francis.mattencredit-Pressured Macros,Likely Favorable MortalityAs the life sector continues to appear undervalued,we like VOYA,PRI and MET into 4Q18.VOYA should produce double-digit EPS growth y/y,despite market pressures,and benefit from likely higher re-deployable capital and cost saving initiatives.We project PRI will post 18%year-over-year EPS growth,with 4Q18E EPS sensitivity of just(2)%to 4Q18s(14)%decline in the equity markets.MET will likely post solid results,given its relatively low equity sensitivity,and no surprises.Lower mortality rates in 4Q18 could provide a lift for RGA.Mortality rates in 4Q18 fell(1.9)%sequentially and(9.4)%y/y,based on Center for Disease Control(CDC)data.Although CDC data is best correlated with extreme scenarios such as the 1Q18 flu epidemic,it may imply a benefit to RGA and,to lesser degrees,BHF,EQH and LNC.Equity markets pressured 4Q18 results,but some of the downside has reversed in early 1Q19.The S&P 500 declined(14.0)%in 4Q18,reducing expected EPS for equity sensitive companies such as AMP and VOYA and variable annuity writers BHF,EQH,LNC and PRU.But,more than 540 bps of that underperformance has been reversed since 1Q19 started.Alternatives investment performance down in 4Q18,but one quarter lag for private equity(PE)funds and one month lag for hedge funds.PE firms one quarter reporting lag implies exposed insurers could post favorable alternatives performance in 4Q18 on strong 3Q18 performance.MET and LNC hold 75%and 90%of their alternatives portfolios in PE,likely benefitting this quarter,but reporting weaker alternatives performance in 1Q19 on a lag.ATH,PRU,and possibly others,have hedge fund and other holdings,and thus are likely to post reduced alternative income in 4Q18.Credit appears manageable,and we think Pacific Gas&Electric(PCG)exposure likely immaterial to results.The PCG bonds held by companies in our coverage are trading at 80%of par,on averagethus,credit losses should not be material.LNC has the highest exposure in the U.S.Life coverage universe at 2.1%of equity(ex.AOCI).Likely higher annuity sales at ATH,FG,BHF,EQH,LNC and PRU and pension risk transfer(PRT)activity at ATH,MET,PFG and PRU.We project 4Q18 double-digit y/y growth in fixed annuity sales and high single digits for variable annuities,supported by improved rates and removal of the DOL rule.We expect positive PRT developments in 4Q18 fueled by employers seeking to de-risk their balance sheets from pension liabilities.25 January 2019Life Insurance 4Q18 Preview2Sector Appears to have Upside Post 4Q18 Market DeclinesWith the life sector down(17.3)%in 4Q18 quarter-over-quarter compared to the S&Ps(14.0)%decline,we still think fundamentals are sound(for more information,see our January 2“Life Does Not Appear to be Dead”note).Per Figure 1,the life group is trading below its average historical 12-month forward P/E of 10.1x and below the sectors 12-month forward P/E relative to the S&P 500,indicating there may be upside as compared to the broader market.The life companies appear in line compared to other financials,with stock prices slightly underperforming relatively in 2018.We like VOYA,PRI and MET,given that they appear to have relatively more control over their success(regardless of market outcomes)as well as attractive valuations.Figure 1:Life Sector 12-Month Forward P/E Relative to S&P 500 and Other Financials(2012-Present)Relative 12-Month Forward P/E(5-Year)Life Insurance 12-Month Forward P/ES&P 500Broker DealersAsset ManagersBanksHigh12.1x74%67%80%84%Low6.6x47%48%57%71%Average10.1x61%56%69%78%Current7.8x51%61%68%74%Source:FactSet.Note:data as of 1/22/2019.Figure 2:Life Index Vs.S&P 500 and Related Financials Indices in 2018Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-180.70.80.91.01.11.2Life Insurance IndexS&P 500 IndexRelated Financials IndexS&P(6)%Life(25)%Related Financials(21)%Source:FactSet,Credit Suisse data.Related Financials includes Brokers,Asset Managers,and Banks.Life Insurance group includes AFL,AEL,AMP,ATH,BHF,LNC,MET,PFG,PRU,RGA,TMK,UNM and VOYA;Brokers group includes SCHW,AMTD,ETFC,RJF,and LPLA;Asset Managers group includes BLK,WETF,TROW,BEN,IVZ,AMG,JHG,EV,LM,FII,AB,CNS,WDR,BSIG,VRTS,APAM,and MN;Banks group includes GS,MS,BAC,C,JPM,WFC,CFG,PNC,STI,USB,BK,NTRS,STT,BBT,BKU,CMA,FITB,FHB,FRC,HBAN,KEY,RF,and ZION.VOYA has a robust capital and expense management strategy,in addition to attractive organic growth opportunities.In 4Q18,we think VOYA will generate 11%year-over-year pre-tax operating earnings(ex.notables)growth on solid business performance and significant costs saves.We expect strong continued Employee Benefits earnings increases from repricing in Stop Loss and 10%year-over-year pre-tax operating earnings(ex.notables)growth in Retirement.VOYA is likely to see some earnings declines year-over-year in Investment Management,owing to(11)%year-over-year decreases in AUM caused by the annuities divestiture in 2Q18 and 4Q18 market pressures.Management has indicated that it is on track to achieve its targeted$110-130 million annualized in stranded cost reductions from the divested annuities business,with guided$20 million annualized cost saves in 4Q18,and VOYA expecting$40-60 million 25 January 2019Life Insurance 4Q18 Preview3annualized to be realized by year-end 2019.VOYA recently announced an incremental$100 million of cost savings by year-end 2020 across segments.Capital management outlook is solid with a guided$250 million of repurchases during the quarter and anticipated initiation of a dividend by mid-2019.PRI poised for 18%year-over-year EPS growth in 4Q18E,with further catalysts to come in 2019.We expect 13%adjusted direct premium growth in the Term Life business,and think our projected 7%sales growth in Investment&Savings Products will pick up in early 2019 owing to the late 4Q18 launch of PRIs EZ-Key product.We like that PRIs modeled EPS sensitivity was just(2)%in the quarter for the(14)%dip in equity markets,and think the companys 2.1x invested assets to equity leverage versus 8.2x average for the life sector should allow it to maintain value under most economic scenarios.PRI guided to$200 million of full-year repurchases,implying$27 million in 4Q18over time,we think the company can exceed its implied return of 70-75%of operating earnings via buybacks and dividends.For more information,see our January 18 initiation“Primed for Offense and Defense.”MET will likely post solid results,given growing businesses and lower sensitivity to equity markets.We expect after-tax earnings(ex.notables)to increase 15%year-over-year in 4Q18,driven by modeled 20%-plus year-over-year growth in Group Benefits and Retirement&Income Solutions,as well as 8%growth in METs combined international segments.The spin-off of variable annuity(VA)assets through the BHF transaction significantly reduced METs exposure to equity markets.MET guides to eliminating$400 million run-rate of annual expense savings by year-end 2020.We expect material weaknesses to be remediated by the time MET posts its 10-K.Favorable Macro Trends through 3Q18 Mostly Reversed in 4Q18Equity Markets Post Sharp Declines The S&P 500 fell(14.0)%in 4Q18 from the end of 3Q18,and(6.2)%from year-end 2017.Our most equity sensitive names are VA writers BHF,EQH,LNC,and to a lesser extent,PRU.AMP and VOYA are exposed to equity markets in other businesses.We expect BHF,EQH,LNC,and PRU to be affected by lower fee income owing to market declines in equity-tied VA assets.These VA-concentrated companies are also likely to take unfavorable deferred acquisition cost(DAC)charges due to lower expected gross profits from VA policies.BHF guides to a quarterly$(0.09)per share decrease per every(1)%decline in separate account return,with approximately two-thirds of separate account assets in equities and one-third held in bonds.According to management,BHFs guided quarterly sensitives are“mostly”one-time DAC charges but also include reduced fee income.AMP is sensitive to equities,as nearly 75%of 2019E earnings are generated via its Advice&Wealth Management and Asset Management segments,with fees and commissions driven by asset balances largely tied to equity markets.We project AMPs EPS sensitivity to be(7)%on 4Q18s(14)%equity market decline.VOYA,though less sensitive to equity markets than some other companies in our coverage due to just 32%of Investment Management assets in equities,has guided to a$4-5 million change in earnings per 1%movement in the markets.This implies 4-5%EPS sensitivity to a 10%change in equities,including the effects of DAC.Note that the S&P is up 5.4%in 2019 year-to-datetherefore,we could see some reversals of these trends posted in 1Q19.Interest Rates Volatile,but Trended Down in 4Q18The 10-year Treasury yield fell to 2.68%at year-end 2018,down from 3.06%at the end of 3Q18 but up from 2.41%at the end of 2017(see Figure 3).But,the average 10-Year was 3.03%in 4Q18,higher than 2.92%in 3Q18 and significantly above 2.33%in 2017.Rising Treasury yields are generally positive for life insurance companies,so we expect 4Q18 25 January 2019Life Insurance 4Q18 Preview4results to be somewhat mixed,driven by interest rate volatility in the quarter.Note that the 10-year Treasury yield has risen to 2.72%so far in 1Q19.Figure 3:10-Year and 2-Year Treasury Yields10-Year Treasury YieldFY20171Q182Q183Q184Q18FY2018Period End2.41%2.74%2.86%3.06%2.68%2.68%Period Average2.33%2.76%2.92%2.92%3.03%2.91%2-Year Treasury YieldFY20171Q182Q183Q184Q18FY2018Period End1.88%2.26%2.52%2.81%2.50%2.50%Period Average1.40%2.16%2.48%2.67%2.80%2.53%Source:FactSetOur most interest rate sensitive companies are ATH and FG,though we do not expect interest rate shifts in 4Q18 to materially impact their earnings.FG may benefit longer-term from trends in 4Q18,as the company completed most of its portfolio repositioning into structured products in the quarter.We think AMP will benefit from higher average short-term interest rates in 4Q18.The company generates income by sweeping brokerage assets held in cash to banks,receiving a short-term interest rate in return,typically at a higher rate than that which it credits to customers.Although the 2-year Treasury yield fell to 2.50%at year-end 2018 from 2.81%at the end of 3Q18,average rates in the quarter were 2.80%versus 2.67%in 3Q18(see Figure 3).Thus,we model for sweep income of$0.69 per share in 4Q18 versus$0.59 quarter-over-quarter,$0.53 in 2Q18 and$0.45 in 1Q18.Volatility Up Significantly in 4Q18The CBOE Volatility Index(VIX)(see Figure 3)spiked in 4Q18 after steadily declining from elevated levels in 1Q18 through the end of 3Q18.Life companies are likely buying more options in the interest of conservatismthis is especially true for insurers with dynamic hedging strategies,who sought static overlays to avoid the“whipsaw”effect of volatility on dynamic hedging programs.Higher volatility likely increased the costs of options,and thus hedging costs,in 4Q18.Equity indexed annuities(EIAs)policies have annual resets,with fixed hedging costs/pricing for the policyholder,and variable benefits.For VAs,volatility will likely imply higher costswhile we do not expect a dramatic increase in 4Q18,we could see sharp increases over time if volatility persists.But,we could see some VA writers benefitting from static programs already in place ahead of 4Q18,as static programs tend to generate gains in down markets.For instance,we expect BHF to post positive$0.08 net EPS in 4Q18,versus net losses of$(2.25)in 3Q18,$(2.01)in 2Q18,and$(0.56)in 1Q18.25 January 2019Life Insurance 4Q18 Preview5Figure 4:Average CBOE Volatility Index Levels11.711.410.910.317.415.312.921.121.105101520251Q172Q173Q174Q171Q182Q183Q184Q18Average Daily VIX LevelSource:FactSetLife Sector Showed High Correlation to a Down MarketFinancials overall suffered in 4Q18 from equity market volatility,falling long-term interest rates,and spread compression resulting from a flattening of the yield curve.We detailed earlier in the year that the historical correlation between life insurer prices and the S&P 500 appeared to have broken off somewhat in 1H18,with life insurers trading lower than implied by the historical relationship.In addition,insurer price-to-book ratio(ex.AOCI)ratios appeared to have also broken off somewhat in 1H18,with Treasury yields rising and life insurer multiples falling.Per Figure 5 and Figure 6,it appears that life insurers showed a strong correlation with declines in both equity markets and interest rates in 4Q18.The Credit Suisse U.S.Strategy team projects 15%-plus upside for the S&P 500 in 2019,which could imply growth for the life sector in 2019,assuming correlations hold.Further,life sector fundamentals generally appear solid,despite the decline of the CS U.S.Life insurance index in 4Q18.Figure 5:Life Insurance Price Index vs.S&P 5005060708090100Jan-17Apr-17Jul-17Oct-17Jan-18Apr-18Jul-18Oct-181,5002,0002,5003,0003,500Life Insurance Price IndexS&P 500 IndexS&P500 IndexLife Insurance Index Price1Q18r=83%2Q18r=(59)%2012-2018r=89%3Q18r=84%4Q18r=95%Source:Company reports,Credit Suisse estimates,SNL Kagan25 January 2019Life Insurance 4Q18 Preview6Figure 6:Life Insurance P/B(ex.AOCI)vs.10 year Treasury1.5%2.0%2.5%3.0%3.5%1.001.251.501.752.00Jan-17Apr-17Jul-17Oct-17Jan-18Apr-18Jul-18Oct-1810 Year Treasury YieldLife Insurance P/B(ex-AOCI)IndexLife Insurance P/B(ex-AOCI)10 year Treasury Yield1Q18r=(78)%2Q18r=5%3Q18r=73%2012-2018r=62%4Q18r=84%Source:Company reports,Credit Suisse estimates,SNL KaganCredit Exposure Appears Manageable,But Some Concerns about Pacific Gas&ElectricThough we have not seen widespread credit issues,we have heard recent investor concerns about insurers holdings in Pacific Gas&Electric(PCG).PCGs exposure to the California wildfires has driven the stock price down(41)%over the last 2 months as the company prepares to file for Chapter 11 bankruptcy protection.PCG secured$5.5 billion in financing on January 22,which allayed some worries.We looked at year-end 2017 statutory filings of our coverage to gauge sector exposure to PCG debt,and found that LNC and VOYA are more exposed within the life sector,with 2.1%and 1.8%of equity(ex-AOCI)(at cost),respectivel