NU Online News Service, June 28, 3:52 p.m. – The investment market slump has forced Andrew Kligerman, an insurance analyst at Bear Stearns & Company Inc., New York, to reduce earnings-per-share estimates for key life insurers for the second time in less than two months.
Kligerman first cut his EPS estimates May 8. Now, he is responding to the continuing weakness in the S&P 500 stocks and the continuing deterioration in bond quality with a new round of cuts.
The analyst has put out a research note that trims his second-quarter EPS estimates to 51 cents per share, from 48 cents, for Prudential Financial Inc., Newark, N.J.; to 90 cents, from 91 cents, for Lincoln National Corp., Fort Wayne, Ind.; and to 80 cents, from 83 cents, for Nationwide Financial Services Inc., Columbus, Ohio.
But the size of the EPS cuts is relatively modest, and Kligerman’s index of life and annuity company share prices is down 5.9% for the second quarter, and 3.9% year-to-date.
Despite the EPS estimate changes, “we think the life group is relatively undervalued,” Kligerman writes.
Kligerman repeated earlier predictions that the publicly traded life insurers most likely to be affected by the stock-market doldrums will be certain financial-services giants that depend heavily on sales of variable annuities, variable life insurance and mutual funds.
“More than 30% of these companies’ 2002 operating EPS are estimated to come from equity-sensitive products,” Kligerman says. “However, each of these companies appears well-positioned to mitigate some or all of the EPS pressure through cost controls, share repurchases, and other means.
Kligerman is still high on MetLife Inc., New York, calling the company “the best large cap defensive play in this equity market environment.” MetLife has relatively low exposure to the stock-market problems, because less than 20% of its sales come from variable products, Kligerman writes.
The analyst also rates as “attractive” both Jefferson-Pilot Corp., Greensboro, N.C., and Protective Life Insurance Company, Birmingham, Ala., because both companies get less than 5% of their business from variable product sales.
Kligerman also assesses the effects of the financial woes of WorldCom Inc., Clinton, Miss.
The maximum effect will probably be about 2.1% of shareholders’ equity at the companies Kligerman covers, Kligerman says.
But the investment markets could see more corporate bankruptcies, meaning that life companies “are probably going to take a few more hits to book value” this year, Kligerman warns.