The US Life Insurance Sector: 2 Stocks To Buy, 2 To Sell

Goldman Sachs initiated coverage of the U.S.
life insurance sector
with a Neutral view, as the remaining
book value questions
offset its optimistic view of potential upside. Based on its four value drivers and a bottom-up company analysis, the firm initiated
Metlife Inc MET
Athene Holding Ltd ATH
with Buy ratings, while
Lincoln National Corporation LNC
Unum Group UNM
were initiated with Sell ratings.

Following the re-rating of life insurance stocks from about an 8.5x P/E to 11x since the middle of 2016, the firm said it concerns over the book value not fully reflecting the forward curve and spread compression remaining.

The four value drivers used by the firm include:

    1. Capital deployment, which it sees as a key element of earnings per share growth.
    2. Regulatory requirements, seen as a major constraint.
    3. Tools available to improve margins in a pressured environment.
    4. Legacy product risk.

Ratings/Price Targets

  • Metlife: Buy/$61.
  • Athene Holding: Buy/$63.
  • Lincoln National: Sell/$71.
  • Unum: Sell/$48.

Metlife: Goldman's Top Insurance Idea

Analyst Alex Scott said Metlife is its top idea, as he thinks its valuation of 10 times P/E on the estimated earnings for 2018 does not fully reflect the reduced risk and return on equity improvement opportunity. The stock also goes into Goldman's Conviction List.

The analyst clarified that the ROE improvement would come about from cost containment and improved capital deployment, which in turn would drive earnings growth.

"We believe that MET should also see value uplift as the market better appreciates the stability in the remaining business following the last 12 months that were highlighted by balance sheet and earnings volatility related to the company's US retail separation," the firm said.

See also: Jim Cramer Advises His Viewers On Metlife, Brighthouse Financial And B&G Foods

Athene Holding: Best Positioned To Deploy Capital

Goldman believes Athene Holdings is best positioned to deploy capital, which could fuel growth in a variety of interest rate scenarios. The firm sees the company to be its top pick among the higher-beta names, as excess capital and debt could help earnings per share growth.

The firm believes out of the $3.5 billion of combined debt and equity capacity, $750 million to $1.25 billion could be put to work in the near term. This, according to the firm, could lead to 7–13 percent earnings per share accretion, posing upside risk to its estimates, which assume deployment only through organic means.

Lincoln Pressured

The firm sees earnings and capital pressure for Lincoln from universal life insurance. While noting that the company has maintained its earnings power in its life insurance business through the cost of insurance increases and reinsurance captures, the firm said it expects a slowdown in the cost of insurance increases following impending litigation and regulatory scrutiny from the New York Department of Financial Services.

The firm said this could hurt earnings from the life insurance business. Additionally, the firm said it would pose some risk heading into the third quarter actuarial review as well as the goodwill review in the fourth quarter.

Unum: Valuation Downside Seen

Goldman sees downside to Unum's valuation, as it believes the closed block has negative value. Additionally, the firm said getting capital back out of the LTC business is less likely.

"Our roughly $800m negative value on the LTC business is reflective of the assumption that the cash drag continues for about 10 years, which we did not feel was overly punitive given the more than 20-year duration of the product," the firm said.

Related Link: Athene Holding Upgraded On Zero Debt And Bullish Growth Forecast
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