Insurers with better capital and assets, as well as superior underwriting and growing earnings, offer investors good opportunities at this time, analysts say.
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Jukka Lipponen, CFAKeefe, Bruyette & [email protected]
Jeffrey SchumanKeefe, Bruyette & Woods
Valuations have changed significantly on asset concerns.
Asset issues continue to rule the life-insurance stocks, which are less exposed to subprime and other housing credits than other financials and have exposure to other credit markets.
It is a mixed picture from here: Expect more GAAP mark-to-market and impairment damage over 2008 and expect statutory capital positions to remain solid.
Thus, the implications are, for investors to buy selectively, based on their time horizon.
Favorite IdeasIn the large-cap space, specifically looking at the near-term and all-around picture, AFLAC Inc. (AFL) has strong capital and asset quality, margin expansion and a Japan sales catalyst in 2008-2009. In the small- and mid-cap arena, Assurant Inc. (AIZ) has a strong capital position and generation, high asset quality and excellent underwriting results.
In the intermediate term for Prudential Financial Inc. (PRU), the strong capital dwarfs asset issues, franchise value is unchanged despite the historic low P/E ratio, and asset marks and Japan expense muddy the first half of 2008, but we expect upside from there.
Also in the small- and mid-cap space, Phoenix Companies Inc. (PNX) has growing life and annuity earnings, its asset-management spin clarifies valuation, and the stock is trading at a significant discount to any reasonable estimate of "real" book value.
Baseline ScenarioIn our base scenario, the GAAP mark-to-market impact ranges from 1 percent (AFLAC, Torchmark Corp. (TMK), Universal American Corp. (UAM), and Unum Group Inc. (UNM)) to 11 percent (FBL Financial Group). The biggest exposure is to subprime and commercial mortgage backed securities.
In the STAT output, statutory capital holds up well in our scenario. The companies with the biggest capital margins (Prudential Financial, AFLAC, Ameriprise Financial (AMP), and Assurant) retain big margins in our scenario. Protective Life Corp. (PL) and Reinsurance Group of America Inc. (RGA-A) are well capitalized, but have smaller margins. The biggest area of potential loss exposure: corporate bonds.
GrowthThe individual life market continues to grow at a modest mid-single-digit pace. The rationalization of distribution costs remains a challenge.
