Analysts reduce earnings outlook for life insurers

Although analysts are trimming third-quarter-earnings estimates for many life insurers, most remain upbeat about the long-term prospects for the sector

Although analysts are trimming third-quarter-earnings estimates for many life insurers, most remain upbeat about the long-term prospects for the sector.

In recent weeks, analysts have pared their estimates on Lincoln National Corp., MetLife Inc., Prudential Financial Inc. and The Hartford Financial Services Group Inc., noting that low interest rates and equity market volatility are likely to impair the insurers’ financial performance. The reductions came as life insurance stocks, like the stocks of other financial services companies, took a drubbing.

In the volatile month of August, for example, the well-known KBW Insurance Index dropped 9.83%, compared with a 13.16% drop in the KBW Bank Index and a 5.67% decline in the S&P 500. Year-to-date through Sept. 8, the insurance index fell 24.96%, compared with a 28.19% drop in the bank index and a 5.7% drop in the S&P 500.

“People are worried about interest rates, credit and the markets’ moving significantly lower — that’s what’s discounting the space,” said Randy Binner, vice president of life and property/casualty insurance at FBR Capital Markets.

Speaking last week at Keefe Bruyette & Woods Inc.’s insurance conference in New York, Mark B. Grier, a vice chairman of Prudential, told attendees: “It’s discouraging to see how correlated we’ve been with everyone else. The heightened correlations are more of a market phenomenon rather than a Prudential issue.”

Nevertheless, KBW last month knocked a few cents off its third-quarter-earnings expectations for Prudential, bringing its estimate down to $1.64 a share, from $1.70. Raymond James & Associates Inc., meanwhile, pruned its forecast for Prudential’s 2011 operating earnings to $6.76 a share, from $6.80.

Expectations have fallen for other insurers, as well.

FBR last month lowered its third-quarter-earnings expectations for The Hartford to 49 cents a share, from 95 cents, and pulled back its forecast for Lincoln to 78 cents a share, from $1.01. Raymond James, meanwhile, lowered its expectations for MetLife’s year-end operating earnings to $5.22, from $5.26.

Diminished expectations aside, many think that life insurers remain a good long-term investment — that is, if investors can stomach a little volatility in the short run.

‘BULLISH’

“We remain bullish on life insurance stocks,” said Steven Schwartz, an analyst with Raymond James.

“Stocks are selling near historical lows. They’re not at March 2009 levels, but they’re in line with 2001 and 2002,” Mr. Schwartz said.

As a group, life insurers are trading at about 78% of book value and are expected to post an average return on equity of 11.6% next year — suggesting that they are relatively cheap right now, according to data from FBR Capital Markets.

By comparison, insurance stocks traded at 125% of book value in 2007, with average estimated returns on equity of about 8%.

Although analysts generally have pegged life insurers as “outperformers” and are bullish on the sector, some companies are expected to shine brighter than others.

Primerica Inc. is a favorite of KBW analyst Jeffrey Schuman because of its earnings-per-share growth.

Meanwhile, analysts also look favorably on MetLife and Prudential because the insurers promise solid earnings growth and derive big chunks of revenue from outside the United States.

MetLife, for example, picked up about $5 billion — 30% of its total operating revenue — from its international business in the second quarter.

Much of that international business stems from pure insurance products, which provide an overall counterbalance to the equity-sensitive VA business in the United States, said William J. Toppeta, president of MetLife’s international business.

“Internationally, we have little dependency on international equity markets and interest rates,” he told attendees at last week’s KBW conference. “It’s an honest-to-God insurance business.”

In the end, it is up to investors to decide whether a cheap buy might be the best long-term bet.

“Every investor I’m talking to is handicapping their odds [against a recession] and extrapolating that onto the stock,” Mr. Binner said.

“If you want to sit that out and invest for five years, then these are great buys,” he said. “You have to decide whether the stocks are cheap.”

Email Darla Mercado at [email protected]