2011 was a bad year for life insurance stocks, but analysts are optimistic about 2012 — even with low interest rates looming.
Investors' concerns over low interest rates and equity market exposure helped contribute to the slump life insurers experienced over the course of the year, according to Keefe Bruyette & Woods Inc. analyst Jeff Schuman: The KBW Insurance Index TICKER:(KIX) sank by 17% year-to-date through Dec. 16, closing at 106.58.
But going into 2012, low interest rates aren't expected to eat into life insurance companies' profits drastically. Mr. Schuman forecasts that interest rates will remain flat and will have a negative impact of 1% to 3% on carriers' annual earnings per share.
Symetra Financial Corp. TICKER:(SYA), for instance, has an extensive portfolio of fixed-income products and therefore is viewed as having above-average levels of sensitivity to interest rates. Nonetheless, the carrier will take only a $0.02 per-share hit in 2012 due to low rates, according to the analyst.
Indeed, investor worries about low interest rates could present an opportunity for value-oriented buyers if insurers' share prices slide further, analysts said.
“These companies were beaten down to ridiculous levels, even if rates were to stay low for another year or two,” said Steven Schwartz, an analyst at
Raymond James & Associates Inc. Lincoln National Corp. TICKER:(LNC) and Protective Life Insurance Co. TICKER:(PL) are among his favorites. The two carriers have taken their lumps in 2011. Lincoln has seen its share price plunge 33%. Protective Life's stock is off 19%.
Interest rates aside, life insurers have a tailwind when it comes to demand for products with guarantees and the potential for growth in the middle market, Mr. Schwartz said.
Further, the carriers themselves have assured analysts that if the 10-year Treasury rate were to stay where it is, they would manage, Mr. Schuman noted. His research note indicated that Lincoln would have “little, if any” statutory-reserve impact for several years and only up to a $500 million impact in the years that followed.
What's more, carriers' capital ratios are still high and earnings growth in 2012 is expected to increase by 11%, thanks to rising revenue and increasing share repurchases, according to Mr. Schuman.
Still, the new year won't be free of obstacles. The biggest obstacle facing large insurers is the prospect of being classified as a systematically important financial institution under the Dodd Frank Act. Such a finding could place tighter restrictions on large life insurance carriers such as
Prudential Financial Inc. and
MetLife Inc., Mr. Schwartz noted. “That remains up in the air,” he added.
