UPDATE 2-Credit Suisse cuts MetLife, Ameriprise; stocks dip

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BANGALORE, Oct 13 (Reuters) - Credit Suisse said the third quarter would be strong for most life insurers, particularly the variable annuity writers, but downgraded MetLife (MET.N) and Ameriprise Financial (AMP.N), saying profit from annuities may no longer support the companies' growth.

Shares of the largest U.S. life insurer, MetLife, fell as much as 3 percent, while those of Ameriprise, an asset manager and broker specializing in retirement plans, shed more than 2 percent. The KBW Insurance index .KIX was down about 2 percent at 107.65 Tuesday morning.

Although MetLife and Ameriprise are not among the most exposed to variable annuities relative to capital, valuation upside is expected to be constrained by their exposure, analyst Thomas Gallagher wrote in a note to clients.

However, the analyst said if MetLife buys AIG's (AIG.N) life insurance unit American Life Insurance Co (Alico), the stock could react positively -- a risk to his downgrade.

AIG, which is planning an initial public offering of Alico, was in talks with MetLife for a possible sale of the unit, sources told Reuters earlier this year.

"We believe that MetLife is interested in purchasing Alico from AIG for $10 billion to $12 billion. While we believe that this would be a good fit for MetLife at the right price, AIG may continue to pursue an IPO strategy instead of a sale to MetLife," the analyst wrote.

Gallagher said MetLife is taking market share, most evidently with premium growth across business lines, healthy sales and record variable annuity flows in the second quarter.

The analyst expects strong operating trends to persist.

"Our question is that as a top group life, disability and dental player already with 90 of the fortune 100 companies as customers, how much capacity is there for organic growth?" the analyst wrote.

STANCORP TO OUTPERFORM

Gallagher also upgraded StanCorp Financial Group (SFG.N), a provider of employee benefit products and services, to "outperform" citing the company's absence in the variable annuity space and higher chances of a buyout.

"Our upgrade is driven by our view that it's the cheapest stock in the sector vs. 2010 net income, which demonstrates both the quality of its investment portfolio and solid operating EPS visibility," the analyst said.

StanCorp shares rose as much as 2 percent to $40.80 Tuesday morning.

Variable annuities are much like mutual fund investments, except they include features such as a guaranteed stream of retirement income.

The analyst also made share-price target changes on many U.S. life insurers, including second-largest Prudential Financial (PRU.N) and Principal Financial Group (PFG.N) [ID:nWNAB8443]

"We expect little in terms of private equity write-ups but would expect to see positive hedge fund returns for companies including MetLife, Lincoln National Corp (LNC.N) and Hartford Financial Group Inc (HIG.N)," the analyst said. (Reporting by Anurag Kotoky in Bangalore; Editing by Maju Samuel, Ratul Ray Chaudhuri)