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Stock Strategist Industry Reports

Life Insurance is Still Risky Business

We think steering clear is the best approach for long-term investors.

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In recent years, the financial results and stock prices of the life insurance companies we cover have been on a roller coaster ride. Heading into the financial crisis, most of these insurers carried significant exposure to the failing financial markets on both sides of their balance sheets. As margins on traditional life insurance products were shrinking, the industry turned to alternative products--including variable annuities--to boost returns. In addition to offering new products, life insurers increased both their balance sheet leverage and their investment portfolio risk in an effort to achieve acceptable returns on equity.

Once considered a stable and consistent business model, nearly all of the life insurance companies that we cover were forced to raise capital during the financial crisis, frequently at prices that were highly dilutive to shareholders. Since then, the balance sheets of these companies have improved significantly, mostly due to the rally in the capital markets and the broader improvement in the economy. Even so, we think this business remains inherently risky, and fundamentally unattractive. With some exceptions, we think long-term investors are best served by steering clear.

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

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