Beruflich Dokumente
Kultur Dokumente
17 August 2011
Matthew Byrnes
(1-212) 622-0695 matthew.p.byrnes@jpmorgan.com J.P. Morgan Securities LLC
Sector Less Risky than in 2008 Higher capital ratios Increased liquidity Improved risk management Lower exposure to RMBS, CMBS Key Headwinds Low interest rates Weak equity market Sector Performance Down 19% YTD (S&P -3%) Down 20% in 3Q11 (S&P -10%) Valuations Current P/BV ex. AOCI: Current P/E (2012E): Trough P/BV: 0.4x (March 09) Trough P/E: 3x (March 09)
Table of Contents
Life Sector Less Vulnerable than in 2008...............................3 How 2011 Differs from 2008.....................................................4
Life Insurers Are Significantly Better Capitalized ....................................................4 Increased Liquidity, Less Short-Term Debt Reduce Risk..........................................4 Expanded Hedging Reduces Tail Risk .....................................................................5 Investment Portfolio Risk Manageable.....................................................................6 Product Changes Positive, But Guarantees Still a Concern .......................................6 Low Interest Rates Key Challenge for Life Insurers .................................................7 Earnings Highly Susceptible to Market Volatility.....................................................8
Return to Trough Valuations Unwarranted ............................8 Defensive Stocks Should Outperform N-T .............................9
Index of Tables
Table 1: Macro Conditions a Significant Headwind, But Industry Better Positioned than in 2008 ............................................................................................................3 Table 2: RBC Ratios Have Steadily Increased Over the Past 3 Years........................4 Table 3: Debt Levels Unchanged from '07 ...............................................................5 Table 4: Modest Near-Term Refinance Risk ............................................................5 Table 5: Commercial Paper Use Reduced ................................................................5 Table 6: Modest Portfolio Exposure to Distressed European Countries.....................6 Table 7: Most Insurers Have Raised Fees for VA Living Benefits and Reduced Guarantees ..............................................................................................................7 Table 8: Low Interest Rates Will Pressure Investment Income and EPS Estimates....8 Table 9: EPS Sensitivity to Changes in Macro Conditions........................................8
Index of Figures
Figure 1: Life Insurance: Historical P/BV ................................................................9 Figure 2: Life Insurance: Historical P/E...................................................................9
In our view, life insurers are better positioned to weather macro deterioration than in 2008 given healthier balance sheets and improved risk management. Most companies are holding significantly more capital and have increased holding company liquidity. In addition, while overall debt levels have not changed materially, insurers have extended maturities and are relying less on short-term financing (such as commercial paper), reducing near-term refinance risk. A number of companies, particularly those with more market-sensitive business mixes, have also added macro hedges to protect capital during a tail event. Investment portfolio risk appears manageable given reduced exposure to non-agency RMBS and lower-rated CMBS and modest holdings of European debt. Sustained low interest rates are our key concern, but this is more of a headwind for earnings than a threat to capital. In our opinion, most life insurers will not need to raise equity, even if the market revisits 2008-2009 lows. Therefore, we believe a return to trough valuations (0.4x P/BV ex. AOCI in March 2009) is not justified, even if markets deteriorate further.
Table 1: Macro Conditions a Significant Headwind, But Industry Better Positioned than in 2008
12/31/2007 Capital (RBC) Leverage (Debt-to-Capital) Liquidity (% of debt maturing in 3 years) Investment Portfolio Risk Commercial real estate Residential real estate Product Risk Median: 370% 25.9% 17.4% 12/31/2010 Median: 420% 25.1% 10.3%
Significant holdings of CMBS Sub-prime and Alt-A 2.4% of investments Aggressive VA living benefit features Reliance on securitizations in UL and term Limited VA hedging Limited overall tail-risk hedging
Mostly whole loans; reduced CMBS allocations RMBS primarily agency-backed; minimal sub-prime VA prices higher, features less generous UL prices higher, product designs more conservative More extensive VA hedging Increased use of macro hedging to protect capital
Hedging
Macro Factors: Interest Rates ('A' 5-7 Yr. Corporate Yield) Equity Market Volatility (VIX Index) U.S. Unemployment Rate
Source: Bloomberg, DataQuery, company reports, and J.P. Morgan estimates.
the use of short-term funding solutions, such as commercial paper, is much less prevalent. On average, companies only have 10.3% of their debt maturing in the next three years (down from 17.4% at 12/31/07). Companies are also retaining more cash at the holding company in the event a market dislocation prevents them from raising new funds. We believe most insurers have enough liquidity to cover interest payments and holding company expenses for 18-24 months without any additional sources of cash.
Table 3: Debt Levels Unchanged from 07
Debt-to-capital (debt/total debt+equity) 2007 AFL AIZ CNO GNW HIG LNC MET NFP PFG PL PNX PRU RGA SYA TMK UNM Median 15.6% 19.6% 21.0% 35.1% 21.4% 30.8% 34.2% 27.6% 19.3% 49.6% 28.8% 17.3% 40.2% 25.7% 21.5% 25.9% 25.9% 2008 18.0% 19.0% 27.9% 40.6% 30.6% 34.3% 36.8% 29.3% 21.0% 52.8% 32.6% 27.0% 37.8% 25.1% 23.6% 25.3% 29.3% 2009 22.3% 17.4% 21.6% 35.2% 25.3% 31.5% 39.4% 41.8% 16.3% 50.1% 26.3% 25.3% 37.2% 23.3% 23.9% 23.9% 25.3% 2010 21.6% 18.3% 20.0% 35.8% 25.0% 32.6% 44.2% 33.6% 15.2% 46.2% 26.9% 22.8% 33.6% 18.7% 22.0% 25.1% 25.1% AFL AIZ CNO GNW HIG LNC MET NFP PFG PL PNX PRU RGA SYA TMK UNM Median
estimates
AFL Sovereign Debt Greece Ireland Italy Portugal Spain Total Sovereign Debt Financial Institutions Greece Ireland 525.0 Italy 186.0 Portugal 282.0 Spain 531.0 Total Financial Institutions 1,524.0 Total exposure as a % of investments as a % of total equity 2,571.0 2.9% 21.5% 310.0 737.0 1,047.0
AIZ
CNO
GNW
HIG
LNC
MET
PFG
PL
PNX
PRU
RGA
SYA
TMK
UNM
3.0 3.0
595.0 595.0
62.0 2,000.0 62.0 2,000.0 65.0 2,934.0 0.1% 0.5% 0.6% 5.7%
term care policies, but we expect older blocks to still be only marginally profitable. While we view these initiatives positively, we remain concerned about insurers exposure to guarantees as well as the potential for an uptick in product competition once equity market conditions improve (MET and HIG increased their VA guarantee rates in 2Q11).
Table 7: Most Insurers Have Raised Fees for VA Living Benefits and Reduced Guarantees
GMWB rider fees as % of AUM Prior Feature AMP AXA HIG LNC MFC MET NFS PRU SecureSource GWB for Life Lifetime Income Builder Selects i4LIFE Advantage Principal Plus for Life GMIB Plus L-Inc HD Lifetime 7 Fee 0.65% 0.65% 0.55% 0.40% 0.40% 0.80% 0.70% 0.60% Accum. % NA 7.0% NA 3.0%-6.0% 5.0% 6.0% 7.0% 7.0% Withdrawal % 6.0% 4.0%-7.0% 5.0%-8.0% NA 5.0% 6.0% 4.0%-7.0% 5.0%-8.0% Current Feature SecureSource Stages 2 GMIB with GWB for life conversion Future6 Lifetime Income Advantage 2.0 Income Plus for Life GMIB Max L-Inc (10% option) HD Lifetime Income Fee 0.95% 0.90% 0.85% 1.05% 1.00% 1.00% 1.20% 0.95% Accum. % 6.0% 4.0%-8.0% 6.0% 5.0% 5.0% 6.0% 10.0% 5.0% Withdrawal % 4.0%-7.0% 4.0%-6.0% 4.0%-5.0% 4.0%-5.0% 4.0%-5.0% 6.0% 3.0%-6.0% 3.0%-6.0%
Table 8: Low Interest Rates Will Pressure Investment Income and EPS Estimates
$ in millions
Portfolio Investment Yield (2010) Income (2010) AFL AIZ CNO GNW HIG LNC MET PFG PL PNX PRU RGA SYA TMK UNM Median 3.73% 4.83% 5.81% 4.66% 4.40% 5.47% 4.33% 5.34% 5.46% 5.98% 3.02% 5.60% 5.34% 6.19% 5.57% 3,007 703 1,348 3,266 4,392 4,541 17,615 3,581 1,684 845 8,628 1,218 1,199 706 2,496
Portfolio Portfolio Duration Turnover 10.7 7.3 8.8 5.8 5.4 6.0 6.0 3.8 5.9 4.4 7.1 9.0 5.7 9.0 7.6 6.0 9.4% 13.7% 11.4% 17.2% 18.5% 16.7% 16.7% 26.0% 17.0% 22.6% 14.1% 11.1% 17.5% 11.1% 13.2% 16.7%
Assumed New Portfolio Yield Portfolio Yield Money Yield after 1 Yr. Change (bps) 2.73% 3.83% 4.81% 3.66% 3.40% 4.47% 3.33% 4.34% 4.46% 4.98% 2.02% 4.60% 4.34% 5.19% 4.57% 3.63% 4.69% 5.69% 4.49% 4.21% 5.30% 4.16% 5.08% 5.29% 5.76% 2.88% 5.49% 5.16% 6.08% 5.43% (9) (14) (11) (17) (19) (17) (17) (26) (17) (23) (14) (11) (18) (11) (13) (17)
Invest. Income % Change in Invest. Income % Change in after 1 Yr. Invest. Income as %of Revenue Revenues 2,931 683 1,322 3,145 4,207 4,403 16,937 3,407 1,631 813 8,225 1,194 1,160 694 2,436 -2.5% -2.8% -2.0% -3.7% -4.2% -3.0% -3.8% -4.9% -3.1% -3.8% -4.7% -2.0% -3.3% -1.8% -2.4% -3.2% 14.2% 8.3% 33.4% 31.9% 16.1% 43.0% 33.2% 41.2% 53.9% 40.3% 26.9% 15.2% 65.2% 20.8% 24.5% 29.5% -0.4% -0.2% -0.7% -1.2% -0.7% -1.3% -1.3% -2.0% -1.7% -1.5% -1.3% -0.3% -2.1% -0.4% -0.6% -1.2%
Source: Company reports and J.P. Morgan estimates. Note: Most insurers should be able to offset part of the impact on revenues through crediting rate reductions, price increases, or other company actions.
we believe the fair value range for the group is 1.0x-1.2x book value (ex. AOCI) and 8-10x forward EPS. While 2012 EPS estimates would need to be revisited if current interest rate and equity market conditions sustain, valuations appear to be discounting a considerably worse macro environment. Given life insurers improved balance sheets and risk management, we do not anticipate equity raises even if the markets return to 2008/2009 levels. Therefore, we believe a return to trough valuations (0.4x P/BV ex. AOCI and P/E of 3x in March 2009) would be unwarranted. On the other hand, investors are likely to assign a higher risk premium to the group than in the past, especially if market volatility remains elevated. Nonetheless, we believe the group offers compelling long-term upside and think the risk-reward for most life insurance stocks is attractive.
Figure 1: Life Insurance: Historical P/BV
Based on total book values
2.8 2.4 2.0 1.6 1.2 0.8 0.4 12/98 6/00 12/01 6/03 12/04 6/06 12/07 6/09 12/10
Actual P/BV Average P/BV
Average = 10.5
2.0 12/98 6/00 12/01 6/03 12/04 6/06 12/07 6/09 12/10
Actual P/E Average P/E
excess capital, strong free cash flow generation, and liability profiles that are less sensitive to market volatility. Low investment portfolio risk: If credit market conditions worsen, we expect investors to place increased emphasis on the perceived risk in a companys portfolio. Thus, we believe insurers with low allocations to European investments, structured securities, and commercial real estate would be viewed favorably. In our view, RGA, TMK, and UNM have the most conservative investment portfolio allocations. Below-average sensitivity to equity market declines or low interest rates: In a volatile market environment, we would favor companies whose earnings are driven by non-market-driven factors such as mortality or morbidity. Given their more predictable results, we believe these stocks would garner a premium P/E multiple relative to the group. Notable companies in this category include AFL, RGA, TMK, and UNM. International exposure: We expect results in companies international businesses (ex. Europe) to continue to generate healthy growth even if the U.S. economy weakens. In addition, low interest rates are less of a headwind in foreign businesses. The companies with the largest and best-positioned international businesses, in our view, are AFL, MET, PRU, and RGA. On the other hand, companies with the following characteristics are likely to perform poorly in the event of continued volatile equity markets and low interest rates: Cheap stocks with weak business fundamentals: In our view, with the entire sector trading below book value, investors should focus on higher-quality franchises as opposed to low-priced turnaround stories. We are especially concerned about further deterioration in operating trends at GNW and PNX if the macro environment worsens. Above-average sensitivity to equity markets and interest rates: If current market conditions continue, companies with high exposure to interest rates (LNC, MET, PL, SYA) and those with a significant presence in equity-sensitive products (HIG, LNC, PFG, PRU) should be the most affected. In the current environment, RGA (rated Overweight) is our best idea. We expect sustained high returns, strong operating trends, and limited exposure to macro conditions to enable RGA to outperform the group. While growth in the U.S. business is likely to be muted given low cession rates, margins should remain robust given a favorable pricing environment. Also, RGAs international business should grow at a double-digit rate as the company expands into new countries and increases its penetration rate in existing markets. RGA appears even more attractive in the current environment given its conservative investment portfolio, below-average exposure to low interest rates, and minimal earnings sensitivity to the equity market. The stock is currently valued at 0.9x book value (ex. AOCI) and 6.4x 2012E earnings, close to the group level. Given RGAs superior returns (12% ROE vs. 10% for the group) and lower risk profile, we believe a premium valuation is warranted. TMK and UNM (both rated Neutral) should also perform well in a volatile market environment. Both companies have considerable capital flexibility, belowaverage investment portfolio risk, and no equity market sensitivity. As a result, we expect both to continue repurchasing stock, which should drive healthy EPS growth
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despite low interest rates and weak top-line growth. Higher unemployment could hold back UNMs disability margins and weigh on the stocks multiple, but we expect the companys overall results to hold up better than peers if the macro environment deteriorates further. We remain cautious on PNX (rated Underweight) and would also avoid GNW (rated Neutral) despite their depressed valuations. In our view, PNX deserves to trade at a sizable discount to the group given its low returns, poor operating trends, and weak financial health. We lack visibility into the timing of a turnaround in Genworths U.S. mortgage insurance business, which we believe is critical for the stocks valuation to recover. Among our Overweight-rated stocks, we expect HIG to perform worst in a poor macro environment due to its high sensitivity to the equity market and weak operating fundamentals in the annuity business. MET and PRU also have aboveaverage market sensitivity, but we see modest downside risk given superior operating trends and the large earnings contribution from international markets. Of the two, we prefer PRU as a result of its superior ROE potential, better operating trends (stronger growth in foreign business), and lower earnings sensitivity to interest rates. In our coverage universe, AFL has by far the most exposure to European investments and would likely underperform if credit conditions deteriorate. However, the companys core business has higher return potential than other insurers and has below-average exposure to the weak equity market and low interest rates. As a result, we expect the stock to outperform once concerns about Europe dissipate, even if the U.S. economy remains weak and the markets are volatile.
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Companies Recommended in This Report (all prices in this report as of market close on 16 August 2011) Genworth Financial, Inc. (GNW/$6.45/Neutral), Phoenix Companies (PNX/$1.92/Underweight), Reinsurance Group of America (RGA/$51.30/Overweight), Torchmark Corp (TMK/$36.16/Neutral), Unum Group (UNM/$23.02/Neutral)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Reinsurance Group of America, Unum Group, Genworth Financial, Inc. within the past 12 months. Client:J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc.. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc.. Investment Banking (next 3 months): J.P. Morgan expect to receive, or intend to seek, compensation for investment banking services in the next three months from Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies. Non-Investment Banking Compensation:J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Reinsurance Group of America, Torchmark Corp, Unum Group, Genworth Financial, Inc., Phoenix Companies.
Reinsurance Group of America (RGA) Price Chart
108 OW $57 90 OW $60
OW $50
OW $62
Date
OW $65 OW $67
Rating Share Price ($) 38.69 30.17 39.23 46.99 55.96 47.79 48.26 55.51 59.10 OW OW OW OW OW OW OW OW
Price Target ($) 51.00 42.00 50.00 57.00 64.00 62.00 60.00 65.00 67.00
72 Price($)
OW $51
OW $42
OW $64
54
36
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Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Dec 19, 2008.
12
75
N $24
OW $40
OW $44
Date
N $44
Rating Share Price ($) 29.42 20.65 20.27 26.60 30.52 29.39 36.84 36.27 38.21 40.74 42.99 43.17 N N N N OW OW OW OW OW OW N
Price Target ($) 32.00 27.00 24.00 31.50 35.50 35.50 40.00 42.00 43.00 44.00 44.00 44.00
60
N $27
OW $35.5
OW $43
N $32 45 Price($) 30
N $31.5
N $35.5
OW $42
OW $44
15
11-Jul-11
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Dec 19, 2008.
40
N $20
Date
N $26 N $24 N $27 N $26 N $28
Rating Share Price ($) 17.01 14.24 19.75 20.23 25.89 22.73 24.83 N N N N N N
Price Target ($) 22.00 20.00 26.00 24.00 27.00 26.00 28.00
30 Price($) 20
N $22
10
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Dec 19, 2008.
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Date
Rating Share Price ($) 3.34 5.28 12.10 13.84 18.50 15.79 12.77 12.58 9.06 7.82
Price Target ($) -15.00 16.00 18.00 17.00 15.00 13.00 12.00 10.00
19-Dec-08 N
N N N $15 N $16 N $17 N $12
14
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage May 08, 2009 - Oct 07, 2009.
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UW
14 Price($)
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] The analyst or analyst's team's coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Bhullar, Jimmy S: AFLAC, Inc. (AFL), American International Group (AIG), Assurant, Inc. (AIZ), Genworth Financial, Inc. (GNW), Hartford Financial Services (HIG), Lincoln National (LNC), MetLife, Inc. (MET), National Financial Partners (NFP), Phoenix Companies (PNX), Principal Financial Group (PFG), Protective Life (PL), Prudential Financial (PRU), Reinsurance Group of America (RGA), Symetra Financial (SYA), Torchmark Corp (TMK), Unum Group (UNM)
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*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
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