For Subscribers

Get the complete article now!

Three analysts and top management from five sector firms examine the Life Insurance sector in this special 43-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info411.htm

TWST: Michelle, is a turnaround in earnings in 2002 achievable, in your view?

Ms. Giordano: I would agree with Al that you do have to have a turnaround in the equity market. Basically, what I am forecasting is roughly about 7%-8% equity market appreciation in 2002. In addition, we expect 3%-4% market appreciation in the third and fourth quarter of 2001. If these both occur, I think those earnings expectations can be met. Anything less than that (in terms of equity market appreciation) would cause earnings growth to slow because roughly 30% of industry earnings are linked to the equity markets.

TWST: Michelle, do you have two top picks today?

Ms. Giordano: AFLAC (NYSE:AFL) would be one of my top picks, and Manulife (NYSE:MFC) would be the other. AFLAC we’ve got rated a buy and we’ve got a 39 price target. Our estimates for 2001 and 2002 are 1.33 and 1.53, respectively. This is a company that has delivered superior earnings growth (16%-17%) over the last several years, both including and excluding the effect of the yen. This year, obviously, earnings growth, including the effect of the yen, is slower (10%) because of the negative movement in the yen versus the dollar. The true value of the company, in my view, lies in the fact that AFLAC understands how to make money in life insurance. AFLAC has created value-added products. It understands how to distribute those products, and it gives an incentive to its distributors to sell the product by paying them higher than average commission. They’ve utilized technology very well in terms of being able to automate a lot of processes, and that keeps their expenses low and allows them to deal in scale. It sells a high volume of low-ticket-sized policies. AFLAC has been very disciplined on the investment side, and it has taken advantage of its dual country status. It runs its capital very well, by repatriating profits out of Japan and into the US. Also, it borrows in yen and uses the money to repurchase shares. Management has been very disciplined. I think it’s extremely well positioned in Japan, not only right now in the third sector, which has been their leading sector, but I think they’re very well positioned to grow in the first sector, which is the traditional life sector and, increasingly, in the second sector, which is the property-casualty sector, where it has recently rolled out a new accident insurance product. It did have a slowdown in Japan sales in the second quarter, but I believe they will be on track for more positive sales growth in the fourth quarter. I think if you look at the impact of sales, because sales is not the revenue number — sales is only about 10% of their overall premium — it doesn’t really impact earnings. If you have a flat yen next year versus where we’re at, on average, this year, then the company should be able to generate roughly 15%-17% earnings growth. Also, over time, as the economy strengthens in Japan, it could be very well positioned to participate in the retirement savings market, and might perhaps pair up with an asset manager.

This special conference issue includes:

1) Life Insurance - In an in-depth (12,600 words) Analyst Roundtable, Alfred M. Capra, Managing Director at Putnam Lovell Securities Inc., Colin Devine, Managing Director at Salomon Smith Barney Inc. and Michelle A. Giordano, Vice President at J.P. Morgan Chase, examine the outlook for the sector including, reinsurance, Estate planning changes and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at twenty sector firms asked market insiders about the ability of management teams to create shareholder value.

3) CEO and Sponsored interviews (average 2,500 words). Top management of five sector firms examine the outlook for their firm and the sector.