Uncategorized

Strong earnings spark recovery rally for insurance companies

| February 14, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Insurance companies have been reporting solid 4Q19 numbers—spurred in part by the bull market in equities that closed out the year— helping to fuel a relief rally in corporate bonds led by the higher beta credits within the sector. Brighthouse Financial (BHF) and American International Group (AIG) are leading the push tighter in the life insurance and property and casualty (P&C) segments, respectively. Investors should continue to build positions in BHF, where the issuer’s steep curve favors long bonds; but limited upside in AIG should encourage migration to outlier credits in the P&C space.

Bottom-line: Prior to yesterday’s recovery, AIG bonds have produced -1.54% excess return year-to-date. That compares with the top-20 issuer excess return of +12.1% (+20.4% total return) generated in F2019. Similarly, BHF bonds had generated -1.38% year-to-date excess returns prior to yesterday’s price move, compared with a top-5 issuer excess return of +16.3% (+26.0% total return) in F2019. AIG long bonds recently closed about -5 bp tighter off the local wides. BHF 2027s and 2047s, which we have written about previously (APS Strategy – BHF 30yr), were both about -10 bp tighter over the past two sessions. Investors should continue to position BHF bonds assertively, particularly the long bond 30-years, due to steepness of the issuer curve (Exhibit 1) and absolute levels that still insulate investors to potential longer-term credit downside. AIG bonds (Exhibit 2) are now trading at levels that offer limited near-term upside to the rest of the sector, but represent solid overall yield relative to the broader bank/financial sector. Investors should consider more actively targeting outlier credits within the P&C segment, such as AIZ (‘28s, ‘30s) and FFHCN.

Exhibit 1: BBB Life insurance paper – senior unsecured

Source: Bloomberg/TRACE indications only, Amherst Pierpont Securities

Brighthouse Financial (BHF: Baa3/BBB+/BBB): BHF’s results were extremely well-received by the equity market, as the share price spiked +15% in response to the announcement. The reaction was mostly due to positive developments in capital and the fact that they went right ahead with fairly aggressive share repurchases as profitability permitted. The big line items were the increase in capital measures (statutory total capital to $9.7 billion from $7.4 billion the prior year), the fact that reported profits doubled vs last 4Q (EPS $2.46), and again the repurchases ($500 million in additional repurchase authorization, on top of $600 million existing; $570 million repurchased since 2018). Notably on an adjusted GAAP basis they would have posted a $1.077 billion loss due to accounting changes impacting BHF’s derivatives portfolio. The quarterly results demonstrate good operating momentum, as equity markets maintain forward trajectory. Sales of their core products looked strong, and the capital increase of course is good for credit. Bondholders should be a little wary of how quick management has been to implement repurchases, as it doesn’t provide much flexibility for credit improvement if that continues to be their priority. Still, the main takeaways here are positive for both BHF equity and bondholders coming out of a fairly convincing 4Q19.

Exhibit 2: BBB P&C insurance curve – senior unsecured

Source: Bloomberg/TRACE indications, Amherst Pierpont Securities

American International Group (AIG: Baa1/BBB+/BBB+): AIG reported EPS of $1.03 beating the $0.99 consensus estimate. Most impressively, AIG met a key performance goal by booking an underwriting profit, with a combined ratio (all in underwriting costs to revenue) under 100% for the first time since 2007. CEO Deuperreault’s—in place since 2017—turnaround efforts are finally beginning to deliver on promises set over his tenure. To be fair, the business environment has been very helpful with low catastrophe losses helping drive profitability in 2019. For bondholders, success on the revitalization front over the past few years has significantly cooled investor calls to dramatically restructure AIG in the form of a split or spin-off of its multi-line insurance businesses, which would have unknown impacts to creditors. AIG also announced that they would be redeeming their $350 million AIG 4.35% ’45 euro-dollar notes on 03/20/20, which could suggest some issuance as they exit their earnings blackout period.

admin
john.killian@santander.us
1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles