Morgan Stanley's Insurance Pair Trade: Voya Shares Upgraded, MetLife Downgraded

• Voya Financial Inc VOYA have appreciated 3.58 percent over the last month, while Metlife Inc MET shares are up 4.92 percent over the same period.
• Morgan Stanley’s Nigel Dally has upgraded the rating on Voya Financial from Equal-weight to Overweight, while raising the price target from $45 to $48. Dally has downgraded the rating on Metlife from Overweight to Equal-weight, while lowering the price target from $58 to $56.
• Dally expressed concern regarding the impact of adverse FX moves and spread compression on Metlife’s performance, while expecting Voya Financial’s results to improve.

Strong Fundamentals

Analyst Nigel Dally believes that Voya Financial’s “life insurance results will bounce back, its more fee-based operations will experience stronger growth, and capital management will remain among the most aggressive in the industry.”

Dally also stated that although the company reported disappointing results for the previous quarter, the numbers were solely driven by adverse mortality, which is expected to reverse.

The company’s fundamental prospects remain robust, with solid growth opportunities in Voya Financial’s multiple retirement and asset management businesses.

According to the Morgan Stanley report, the company’s “very strong capital management opportunities” reflect “organic cash flow generation and actions taken to extract trapped capital.”

Dally believes that there could be 15 percent upside to the stock.

Forecasts Do Not Reflect Challenges

For Metlife, Dally believes that “spread compression and adverse currency headwinds are not sufficiently reflected in forward estimates.”

Although Dally maintains a positive view on the company’s diversity and opportunities for international growth, he believes that near term challenges are not reflected “appropriately” in the consensus forecasts.

Dally expects management to highlight these challenges when it provides its forward guidance in December.

With about 10 percent upside potential to the stock, Dally believes that the risk-reward is mostly balanced.