Barclays on U.S. Insurance/Life: 3Q11 Preview: Macro Headwinds Persist for Life Insurers; Valuations Are Attractive

Barclays on U.S. Insurance/Life: 3Q11 Preview: Macro Headwinds Persist for Life Insurers; Valuations Are Attractive by Jay Gelb

Gelb said, "Life insurers' 3Q11 results face headwinds from a slow economic recovery, as well as volatile equity markets, collapsing interest rates and a flattening yield curve. However, we view valuations as already reflecting the brunt of this impact on a reduced earnings profile. We are reducing our EPS estimates on average by 7% for FY2011 and 8% for FY2012. Our price targets are also being lowered to reflect overall valuation multiple compression in the Financials sector. Notably, the Life Insurers now trade at a P/E of 5.6x our revised 2012 outlook and 0.77x trailing book value ex-AOCI, which is approaching historical lows."

"Median operating EPS could decline 8% in 3Q11 versus a year ago as a result of
challenging macro conditions. Earnings growth is slowing primarily due to the decline in equity markets, the low interest rate environment and negative DAC unlocking from weak equity markets. Notably, our top Life insurance picks (MetLife (NYSE: MET), AFLAC (NYSE: AFL) & Prudential (NYSE: PRU)) have less sensitivity to falling interest rates than most life insurers. Meanwhile, Lincoln National (NYSE: LNC), Principal Financial (NYSE: PFG), Hartford (NYSE: HIG) and AIG (NYSE: AIG) likely are the most sensitive to falling rates."

"Life insurers' capital positions are strong, but macro volatility could cause
conservatism on the pace of share buybacks. If life insurers are confident in their
excess capital positions, we anticipate the pace of share buybacks could be robust
for some life insurers such as PRU, AMP, UNM, Ameriprise Financial (NYSE: AFL), and PFG. MET is expected to announce its share buyback plans in October (we anticipate an authorization of $1.0-$1.5bn). Meanwhile, LNC and HIG could become more conservative on the pace of buybacks."

Barclays maintains an OW rating on AFLAC, lowers PT from $63.00 to $50.00, raises FY11 EPS estimate from $6.25 to $6.40 and FY12 from $6.40 to $6.60.

Allstate maintained at EW, PT lowered from $32.00 to $29.00.

Ameriprise Financial at OW, slashes PT from $76.00 to $52.00, cuts FY11 EPS estimate from $5.50 to $4.70 and FY12 from $6.50 to $5.10.

Aon Corporation (NYSE: AON) at EW cut PT from $52.00 to 49.00.

Brown & Brown, Inc. (NYSE: BRO) at EW cut PT from $25.00 to $22.00.

Flagstone Reinsurance Holdings Ltd. (NYSE: FSR) at EW cut PT from $11.00 to $9.00, raises FY11 loss from -1.70 to -1.45.

MetLife Inc. (NYSE: MET) at OW, PT cut from $56.00 to $40.00, lowers FY11 EPS estimate from $5.35 to $5.00 and FY12 from $6.00 to $5.65.

PartnerRe Ltd. (NYSE: PRE) at OW, PT cut from $90.00 to $66.00, raises FY11 loss from -5.50 to -5.40.

Principal Financial Group at EW, PT lowered from $35.00 to $28.00, lowers FY11 EPS estimate from $2.95 to $2.80 and FY12 from $3.35 to $3.10.

Prudential Financial at OW, lowers PT from $77.00 to $60.00, cuts FY11 EPS estimate from $7.00 to $6.60 and FY12 from $8.25 to $7.35.

The Travelers Companies at OW, lowers PT from $70.00 to $60.00, cuts FY11 EPS estimate from $4.10 to $3.65.

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