Goldman Sachs Bearish On U.S Life Insurance Sector

By Santosh Nadgir
November 11, 2008

U.S. life insurers will see continued asset deterioration in the next 12 to 18 months and need to raise incremental capital, said a Goldman Sachs analyst, who assumed the sector coverage with a bearish view.

Shares of all major life insurers fell in early trade on the New York Stock Exchange following the report.

Goldman analyst Chris Neczypor said weak equity markets will decrease fee income, dislocated credit markets will hurt spread business and heightened scrutiny by rating agencies and regulators may result in increased capital requirements.

Neczypor assumed the coverage of major U.S. life insurers with a "cautious" view from Tom Cholnoky, who had a "neutral" view on the sector.

He recommended selling the shares of Hartford Financial Services Group Inc (HIG.N:), Lincoln National Corp (LNC.N:), Prudential Financial Inc (PRU.N:) and Principal Financial Group Inc (PFG.N:).

Principal Financial appears most at risk from continued asset deterioration, with the highest leverage to problematic asset classes, he said.

"With more institutional funding contracts due in the next two years and a slowing of incoming business from which to roll the funds, we believe capital raises are imminent," Neczypor said.

The analyst rated MetLife Inc (MET.N:) "neutral" on a relative basis, "given the less pressing near-term need to raise capital."

However, Neczypor said in the longer term, the sector's landscape will be dramatically different, as the industry's problems may force some of the smaller institutions to exit the business.

"Those who survive will be able to consolidate distribution, invest in appropriate capital markets infrastructure, and eventually lead the industry in capturing the opportunities associated with the baby-boomer retirement," he said.

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