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Goldman's Insurance Pair Trade: Prudential Financial Upgraded, Metlife Downgraded

Goldman's Insurance Pair Trade: Prudential Financial Upgraded, Metlife Downgraded
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Life insurance stocks have underperformed the S&P 500 index in 2018 despite an interest rate hike and flat overall performance in equity markets. Investors should be selective in the group, which still has "pockets of opportunity," according to Goldman Sachs.

The Analyst

  • Goldman Sachs' Alex Scott upgraded Prudential Financial Inc (NYSE: PRU) from Neutral to Buy with a price target lowered from $122 to $117.
  • The analyst downgraded Metlife Inc (NYSE: MET) from Buy to Neutral with a price target lowered from $54 to $52.

The Thesis

The weakness seen across multiple life insurance stocks can be attributed to four factors, Scott said in a Monday note:

  • Concerns surrounding legacy liabilities.
  • Yield curve inversion concerns.
  • Earnings streams are higher beta in nature.
  • Net income and operating earnings volatility.

The multiple woes impacting the industry imply the weakness in life insurance stocks is "somewhat warranted," but at the same time there are opportunities for investors, the analyst said. Investors should look for companies that boast above-average cash flow, the ability to grow business organically and the ability to contain or transfer higher-risk businesses.

Prudential Upgraded

Prudential should be able to achieve its previously announced cash flow target of producing $3.5 billion of deployable capital in 2019, Scott said. As it stands now, the company pays $1.4 billion to investors in dividends; share buybacks are assumed at $1.5 billion, he said.

The company could be left with $600 million for potential incremental deployment — a catalyst for which the company isn't receiving much credit, according to Goldman Sachs. 

Prudential's asset management business is "less capital intensive" and could benefit from favorable industrywide momentum among retail investors, the analyst said. The company faces growth opportunities in its retirement business, where flows will "continue to be solid," he said. 

Related Links: One Inc Is Changing The Digital Payments Space For Insurers

Metlife Downgraded

Metlife's first-quarter earnings report contained multiple "surprises," including stronger spreads generated by the retirement business and a rise in cost of crediting, Scott said. While a 7-basis point increase in base yields did offset the negative pricing impact in the quarter, investors should expect a "bit more pressure" on cost of crediting due to the increase in the three-month LIBOR rate, Scott said. 

Metlife's corporate segment performance in Q1 came in better than expected; this was attributed to a lower strategic investment expense, the analyst said. Metlife's $275-million guidance in strategic investment for the full year implies a 2-4-cent headwind for its earnings per share quarter-over-quarter, he said. 

Metlife's Q1 also showed higher-than-expected repurchase activit,  but when pressed to guide for buyback activity for the rest of the year, management said it is "more timing related," according to Goldman Sachs. Investors can assume from this that buybacks will "drop off" in the back half of 2018, Scott said. 

Price Action

Shares of Prudential Financial were trading higher by 0.66 percent at the time of publication Monday morning, while shares of Metlife were lower by 0.3 percent.

Related Link:

William Blair Cautious On North American P&C Insurance Market, Moves To Sidelines On Sapiens International

Latest Ratings for MET

Nov 2018Morgan StanleyMaintainsEqual-WeightEqual-Weight
Oct 2018UBSMaintainsNeutralNeutral
Aug 2018Credit SuisseMaintainsOutperformOutperform

View More Analyst Ratings for MET
View the Latest Analyst Ratings

Posted-In: Alex Scott Goldman Sachs insuranceAnalyst Color Upgrades Downgrades Price Target Analyst Ratings Best of Benzinga


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