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Stock Strategist Industry Reports

Dissecting Life Insurers' Investment Portfolios

Which companies' balance sheets reveal attractive risk/reward ratios?

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The second half of 2008 saw one of the worst performances for stock markets around the world in many decades, and the life insurance industry's performance was much worse. Large investment losses, combined with high leverage, made investors question the ability of many of these companies to survive without additional capital. The "arms race" over market share in the variable annuity space also caused its share of problems (the policies had financial guarantees built into them regardless of stock market performance), but the recent stabilization of the equity markets has moved the concern back to the investment portfolio. We remain concerned about these firms' capital adequacy given the small equity cushion most carry and the ongoing uncertainty in capital markets.

To quantify the exposure of the industry to each asset class it invests in, we took 11 life insurance companies and dissected each of their investment portfolios as of Dec. 31, 2008. The companies included in this analysis were  Prudential Financial (PRU),  MetLife (MET),  Lincoln National (LNC),  Hartford Insurance Group (HIG),  Genworth Financial (GNW),  Principal Financial (PFG),  Protective Life (PL),  Aflac (AFL),  Torchmark (TMK),  Unum Group (UNM), and  Manulife Financial (MFC). You can see the average percentage of assets that these firms have in each investment category in this chart.

Alan Rambaldini does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.