Zacks Industry Outlook Highlights: Protective Life, StanCorp Financial Group, China Life Insurance, WellPoint and UnitedHealth Group

CHICAGO, May 22, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Insurance, including Protective Life Corporation (NYSE: PL), StanCorp Financial Group Inc. (NYSE: SFG), China Life Insurance Co. Ltd. (NYSE: LFC), WellPoint Inc. (NYSE: WLP) and UnitedHealth Group, Inc. (NYSE: UNH).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at  

Link: http://www.zacks.com/commentary/27390/insurance-industry-stock-outlook-may-2013

A reduction in underwriting expenses and a modest increase in premiums have been helping life insurers increase net income in the last few quarters. But downward pressure on investment yields due to a low interest rates, higher hedging costs, lower income from the variable annuity business and more burdensome capital requirements will continue to mar profitability going forward. Also, low rates are spoiling life insurers' efforts to grow fixed annuities and universal life insurance sales.

As the Federal Reserve plans to hold interest rates at low levels through mid-2015, life insurers will have to seek alternative asset classes to optimize return from investments. However, the addition of any risky asset class in their investment portfolios with hopes of better yield may lead to further losses.

As the industry's statutory capital level fell sharply during the recession, life insurers will need to optimize their capital levels to address the ensuing challenges. In the short term, traditional sources of capital are expected to fulfill most of what life insurers need in order to stay in good shape. However, non-traditional sources of capital will take years to strengthen financials.

The underlying trends amid a recovering economy indicate stability in the sector over the medium term with respect to credit profile and financial prospects. However, higher-than-average asset losses, primarily resulting from their real estate exposure, will remain a major concern.

Further, the sluggish pace of economic recovery is making it difficult for life insurers to expand their customer base. In fact, insurers are struggling to even retain their existing clientele. Narrowed disposable income owing to high unemployment and huge credit card debt has made it difficult for Americans to invest in retirement products such as life insurance. Americans, primarily the youth, have significantly reduced expenditures on life insurance products, and are instead choosing alternative investments that promise better returns.

Though the carriers are transforming their products and businesses to make them attractive and profitable for customers, significant improvement in demand is not expected in the near term.

In December, Fitch Ratings has affirmed the credit outlook for the U.S. life insurance industry at stable for 2013. This action was primarily based on the expectation of insurers' improved liquidity and balance sheet strength.

However, the rating agency expects statutory capital growth to be moderate in 2013 given subdued earnings growth due to the low interest rate environment. Also, the agency does not expect a significant improvement in portfolio credit quality due to the expected weakness in investment income.

Currently, the life insurers with favorable Zacks Ranks worth considering includeProtective Life Corporation (NYSE: PL) and StanCorp Financial Group Inc. (NYSE: SFG) with a Zacks Rank #1 (Strong Buy), and China Life Insurance Co. Ltd. (NYSE: LFC) with a Zacks Rank #2 (Buy).

Health Insurers

As U.S. health insurers are preparing themselves to comply with the mandates of the health care reform, their financials are expected to remain strong. Broad-based moderation in utilization has been primarily boosting the bottom line of health insurers. Also, increased access to capital and better retention opportunities are helping them grow consistently despite tardy economic growth.

Moreover, the carriers have been witnessing better credit quality in the recent quarters, reflecting a moderate industry risk.

In 2010, the historic health care reform legislation – The Patient Protection and Affordable Care Act (PPACA) – was passed by the Congress with the intension of making health care facilities more affordable, preventing private health insurers from continuing with the pre-existing condition clause and at the same time reducing the number of uninsured by bringing in 32 million more people under coverage by 2019.

The legislation had many detractors who contested several of its stated benefits and considered it another entitlement program that the country can ill afford. Finally, in Jun 2012, the U.S. Supreme Court ruled in favor of the reform, rejuvenating the industry by removing major uncertainties. Further, Obama's re-election in Nov 2012 essentially ensured a future to the law.

While the legislative overhaul brings more regulatory scrutiny for private insurers such as WellPoint Inc. (NYSE: WLP) and UnitedHealth Group, Inc. (NYSE: UNH), the net negative effect is expected to be far softer than was initially feared.

Although the full implementation of PPACA will be in 2014, the industry is expected to see gradual changes through the reminder of 2013. While bringing more people under coverage will add prospects for growth, the requirement to reduce health care costs will lead to margin compression.

Also, while the reform will provide more cross-selling opportunities for health insurers, their overall profitability will be limited over the long run as the negative impact of Medicare Advantage payment cuts, industry taxes and restrictions on underwriting practices will more than offset the benefits of bringing more people under the umbrella.

Consequently, substantial growth in industry revenue is not expected until 2015 as insurers will be forced to adjust the benefits to comply with the health care legislation. Among others, providing coverage to everyone regardless of an expensive pre-existing condition would put their top lines at stake.

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