Investors wade back into U.S. life insurance stocks

NEW YORK (Reuters) - Investors are returning to U.S. life insurance stocks such as Genworth Financial and Hartford Financial, downtrodden in months past due to losses arising from the credit crisis, according to analysts.

"In terms of confidence, to some extent it has already come back," Jimmy Bhullar, an insurance analyst with J.P. Morgan, told the Standard & Poor's annual insurance conference. "Several stocks have gone up more than 100 percent in the last couple of months, but it might take time to return to historical levels."

He added: "Now investors are focused on the stocks that have the most upside." He pointed to the recent rise in shares of Genworth Financial Inc (GNW.N), Hartford Financial Services Group Inc (HIG.N) and Lincoln National Corp (LNC.N).

Genworth shares have risen from 71 cents last November to a Monday close at $6.60; Lincoln National shares quadrupled over the same period. Hartford shares have more than quadrupled just since March, finishing at $15.18 on Monday.

SHAKY GROUND

Life insurers were broadly hurt in the latter part of 2008 and into 2009 by weaker financial markets, which triggered investment losses and left the sector struggling with higher costs for annuity products that are affected when market values fall.

The situation got so bad for some that they went hat in hand to the U.S. government, asking to be included in the federal bailout designed to help ailing banks. Several insurers were recently approved for the program.

But there are strings attached to federal aid, including restrictions on compensation and spending, which corporate bosses have been wary to accept.

Bhullar said companies that do accept federal funds are indicating they have "underlying issues."

"From an investor standpoint it is not a good thing," he said.

Hartford Financial is expected to accept federal funds, while Lincoln National says it has not yet made up its mind. Others, including No. 2 U.S. life insurer Prudential Financial Inc (PRU.N), have declined aid.

While stock markets have rebounded, few are convinced that the risk of another selloff has passed for insurers.

"It is way too early to declare the worst is over," said David Havens, managing director at Hexagon Securities, also speaking at the S&P conference in Brooklyn.

Bhullar said investors can be fickle and will likely flee should losses continue to mount and stock markets once again decline.

MetLife Inc (MET.N) Chief Investment Officer Steve Kandarian, speaking at the conference on Monday, said he was closely watching the performance of corporate bonds, concerned that a prolonged recession could push default rates higher.

Life insurers hold about half their assets in bonds and are the single largest source of U.S. corporate bond financing, holding about 18 percent of total issuance, according to figures compiled by trade group American Council of Life Insurers.

Major ratings agencies have indicated there is greater likelihood of downgrades than upgrades for most parts of the insurance market. Earlier this year, S&P said it was concerned about a decline in the "overall credit-worthiness" of the life insurance sector in particular.

LESSONS LEARNED?

Stock analysts at the conference questioned whether some companies that had aggressively pursued sales of variable annuities -- a popular retirement product linked to stock market performance -- would now back down.

"The product has a future but I don't know that the companies that sell it have a future," said Bhullar." The plain vanilla product is still a very good product for the industry ... as long as the companies can manage the risk."

Numerous life insurers have said they will raise prices for annuities, given the risk that turbulent markets can leave insurers out of pocket, or scale back how much of this business they do. But some remain committed.

Frederick Crawford, Lincoln's chief financial officer, said the insurers curtailing sales are those who had been the first to pursue customers at the top of the market, and therefore, the most likely to be burned.

Lincoln has no plans to withdraw, he said, although it is trimming its costs, a reflection of the downturn in demand because of the broader economic crisis.

"We don't want to make any sharp right or left turns. We are going to make modifications, increasing pricing upward of 15 basis points or so, but we want to remain in the business," he said.

Life insurance stocks rose broadly on Tuesday, pushing the Dow Jones U.S. life insurance index .DJUSIL up over 2 percent.

(Reporting by Lilla Zuill; editing by John Wallace and Gerald E. McCormick)