While they may be in a lot better shape than they were just few short months ago, the big life insurance operators continue to be plagued by the residual effects of the global financial crisis. And that's likely to keep most life insurance company shares treading water - at least for the next quarter or two.

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Canadian Life Insurance Companies Fail to Make the Podium
2009 year-end results for much of the sector were underwhelming. While they did manage to push their results decisively back into the black, two of Canada's biggest operators in this space, Manulife (NYSE:MFC) and Sunlife (NYSE:SLF), failed to turn in a "medal-winning" performance, falling decidedly short of analysts' expectations. Gains due to a recovery in equity markets and a positively sloped yield curve were partially offset by higher than expected credit related writedowns.

Major U.S. player Prudential (NYSE:PRU) also managed to disappoint despite reporting its own earnings turnaround. Analysts noted that most of the company's reported profits stemmed from a one-time gain stemming from its recent sale of its interest in a joint-venture brokerage operation to Wells Fargo (NYSE:WFC).

Profits and Balance Sheets Still Highly Vulnerable
Investors' concerns about the sector are still focused on the possibility that the earnings recovery could be derailed by an unexpected rise in interest rates or a sudden plunge in equity markets. Such outcomes would reduce the value of the investment assets held by these companies against sizable liabilities, many of which come in the form of variable annuities. Fears that the amounts owed under these contracts exceeded the value of the assets meant to cover them prompted last year's panic selloff of the group.

Rating Agency Concerns
These ongoing industry uncertainties are now raising concerns about the recently announced deal by Metlife (NYSE:MET) to buy AIG's (NYSE:AIG) life insurance unit for $15 billion. Major credit rating agency Standard & Poor's has warned that it may have to cut Metlife's rating if the deal involves Met piling on too much debt to offer AIG a hefty cash payment as part of the deal. Sources are now saying that Metlife may have to raise about $7 billion to make such a cash payment, with the balance made up in Metlife shares.

The Bottom Line
The recent earnings disappointment in the life insurance space will probably force a rethink of the recently floated thesis that the sector was poised to enjoy a period of relative outperformance relative to the banks. While the chances of this happening over the long-term still remain intact due to huge business opportunities stemming from the aging demographic trend, any near-term upside remains directly tied to the performance of equity markets over the balance of the year. And at this point, nobody is expecting the markets to repeat last year's spectacular comeback. (To learn more, see The Industry Handbook: The Insurance Industry.)

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Tickers in this Article: MFC, PRU, MET, AIG, SLF, WFC

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