Brian Zajac, 12.22.08, 06:00 PM ESTAfter a difficult year, insurers are hoping for a rebound. Bullish and bearish analysts offer their outlook.
It is easy, in hindsight, to see that life insurers were out of favor in 2008. Is this a buying opportunity, or will these stocks continue the downward trend? Liquidity concerns have dampened investment income. Some insurers, faced with investment losses, are trying to raise capital through the Troubled Assets Relief Program. San Francisco analytical research firm StarMine steered us to two highly ranked industry analysts, one a bull, the other a bear, to comment on the outlook for the industry.
StarMine cites Colin Devine, Managing Director for Citigroup Investment Research, as one of the most bullish analysts tracking insurance stocks.
The Watch List
Devine's stock selections have all seen steep declines in the market in 2008, but they fit in with his buying opportunity stance. All trade at less than seven times the next 12-month earnings estimates, according to Thomson IBES consensus figures. He is somewhat cautious about the fundamentals of Lincoln National (nyse: LNC - news - people ) but considers it to be a takeover target.
Picks
Ameriprise Financial (nyse: AMP - news - people )
Manulife Financial (nyse: MFC - news - people )
Lincoln National
Forbes Industry: Insurance
StarMine Industry: Insurance
Analyst Name: Andrew Kligerman
Company: UBS
Outlook: Bearish
UBS Managing Director & Senior Research Analyst Andrew Kligerman is among the most bearish of analysts tracking the insurance industry, according to StarMine.
The Big Trend
It is going to be a binary year, says Kligerman. He explains, "There are going to be big winners and big losers." He adds that we still have not seen the worst out of commercial mortgage-backed securities. The insurers that are most exposed to these investments will feel the pain as investment losses erode capital. Portfolio quality is critical to get insurers through these tough times. Kligerman's stock picks and pans follow this view.
The Misplaced Assumption
Not all life insurers are created equal. That is, they do not manage risk equally. Yet the industry tends to move in unison in the stock market. Life insurers have been hit hard in the market in 2008. Closer detail to each firm's investment portfolio is needed.
The Bold Prediction
From a merger and acquisition standpoint, MetLife (nyse: MET - news - people ) and Prudential (nyse: PRU - news - people ) will have opportunities to take advantage of those insurers in search of capital. Kligerman likes both companies because of their sound capital levels, liquidity and they have diverse and defensive investment portfolios.
The Watch List
Principal Financial Group (nyse: PFG - news - people ) is one stock, in particular, that Kligerman thinks investors should avoid. He says that Principal has some pluses, such as top-notch global asset management and pension businesses, with talented management. His concern is that the company has a higher risk in its investment portfolio. He points out that Principal's commercial mortgage-backed securities and commercial mortgage loan-related investments represent 150% of equity, highest of its peer group, and its corporate bonds are vulnerable to realized losses.
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