Life insurance stocks fall as investors fret over Q1

NEW YORK (Reuters) - Shares of U.S. life insurers, including Lincoln National (LNC.N) and Prudential Financial (PRU.N), fell on Monday as investors grew concerned that the sector will report that it took another beating in the first quarter.

Investors in life insurers, which report quarterly results in a few weeks, "should brace for another highly challenging earnings season," said Morgan Stanley analyst Nigel Dally, in a research note issued Monday titled "Earnings Outlook: More tough times."

The sector has already badly disappointed investors over the past two quarters, as investment losses and rising costs for variable annuities sales have eroded capital and triggered credit rating downgrades.

The Dow Jones U.S. Life Insurance Index .DJUSIL has fallen nearly 70 percent from its 52-week high of 671.67 points set last May 2, according to Reuters data, based on Friday's close. The index was down more than 3 percent on Monday.

Morgan Stanley's Dally said insurers were expected to be hit again by large writedowns on investments, as well as on goodwill and deferred acquisition costs, a common industry measure.

"Given the weak earnings, escalation in unrealized losses, and book value deterioration, we would not be surprised to see another round of potential ratings cuts," said Dally.

Lincoln National was the biggest drag on the Dow Jones life insurance index on Monday, by percentage, down nearly 8 percent at $6.36.

Investors are particularly concerned about debt payments the insurer has to meet on Monday and again next month, something that may be a greater hardship after a decline in its ratings cut it off from a federal commercial paper program, and it voluntarily withdrew another application for federal funding guarantees.

"LNC looks to be facing a liquidity squeeze that could ultimately see the company run out of cash," said Tradition Asiel Securities analyst Gary Kelly in a research note late on Friday.

Lincoln says it has the ability to meet its obligations through cash on hand and alternate sources of financing.

Prudential Financial (PRU.N) shares were also down on Monday, off more than 5 percent at $22.63. The No. 2 U.S. life insurer is one of a handful of life insurers likely to be hit in the first quarter by escalating deferred acquisition costs, or DAC, said Dally.

The Newark, New Jersey-based company recently moved to testing DAC balances on a quarterly, rather than annual, basis.

Under DAC, life insurers amortize the costs of acquiring new customers over a period of time. Many are expected to take DAC charges in the first quarter, reflecting equity market declines, which depress the performance of investment-linked retirement products sold by the sector.

The shares of numerous other life insurers also fell on Monday, including Protective Life (PL.N), off 4.5 percent, Unum Group (UNM.N), down 3.5 percent, and Assurant (AIZ.N), which declined 2.9 percent.

(Reporting by Lilla Zuill, editing by Matthew Lewis)