Estate Tax Reform is Not a Death Sentence for the Life Insurance Industry; Bear Stearns Analyst Believes Prospects For The Life Insurance Sector Remain Strong.

Business Editors

NEW YORK--(BUSINESS WIRE)--Feb. 22, 2001

Despite widespread prognostications that estate tax reform will crush the life insurance industry, Bear Stearns life insurance analyst Andrew Kligerman believes the effect on the sector will be minimal. While President Bush has pushed for a total abolishment of the estate tax, Kligerman points out the more likely result will be a moderate compromise that will have a small impact on life insurance companies. "Everyone is predicting doom and gloom for the life insurance industry and that is just not accurate," Kligerman said. "The reality is that the estate tax cut will not be catastrophic for the sector."

A More Moderate Cut

While there are several proposals being floated in Washington regarding estate tax reform, the Bear Stearns analyst believes a compromise bill is most likely. Currently three proposals appear to carry the most weight: President Bush's proposal to repeal the estate tax by 2009, a more moderate Republican proposal to raise the estate tax exemption to $10 million per individual, and a Democratic proposal to raise the exemption to $2 million per individual. Kligerman believes ultimately the final outcome will be an increase in the tax exemption to approximately $5 million to $7 million dollars per individual. "It seem to us that President Bush's proposal for full repeal is too extreme to represent a meaningful bargaining position," Kligerman said. "We believe the negotiated law will fall between the two major Democratic and Republican proposals." The Bear Stearns analyst anticipates an estate tax bill to be passed by the house in July and final reform signed by the President in October.

The Impact on the Industry

For many people a life insurance policy is a valuable estate-planning tool. Heirs of an estate can use the pay-out of a life insurance policy to pay off estate taxes. If Congress were to pass estate tax reform, increasing the exemption to $5 million to $7 million, individuals whose estates are below that threshold would have less incentive to purchase life insurance policies. It is for that reason many analysts believe the life insurance industry will suffer, but Kligerman disagrees.

According to his analysis, approximately 28 out of every 100 insurance policies sold are for a million dollars or more. Of that 28%, Kligerman estimates half (14%) are sold for estate tax purposes. If the estate tax exemption were increased to between $5 million to $7 million, Kligerman believes the insurance industry would lose approximately two-thirds of the 14% of insurance policies that are sold for estate tax purposes. However, due to the recurring nature of life insurance premiums (80%-90% of yearly fees come from recurring premiums), the first-year impact would be a decline in total revenue of only 1.5%, though it may have a more negative effect on long-term revenue and earnings. "The impact of estate tax reform just isn't that great," Kligerman said. "Neither reform nor repeal would substantially affect life insurance industry earnings, as new products are introduced over time to make up for any shortfall. Right now the stock market is irrationally predicting overly negative ramifications."

Kligerman believes that estate tax reform will have a marginal impact on industry revenues due to the large portion of life insurance going toward succession planning, the benefits of using life insurance to create liquidity in an illiquid estate, and the increase of financial planners using life insurance as a wealth-creation tool.

Stocks To Watch

With life insurance stocks trading at a discount, Kligerman believes there is significant potential for upside in the group. Strong annuity sales, an ability to generate stable earnings, and consolidation activity will help the sector outperform the market in the long term, according to the Bear Stearns analyst. In addition to his view that the life insurance group will increase to fair market value, Kligerman highlights several catalysts that could further boost the stocks, including the fact that the life insurance group is inversely correlated with changes in interest rates and could benefit from further interest rate reductions. Additionally, life insurance stocks have typically been a safe haven in times of economic uncertainty, and Kligerman believes this flight to quality will further help the industry. Finally, merger and acquisition activity should continue to spur interest in the life insurance group. Kligerman identifies several attractive takeout candidates, including American General (NYSE:AGC), Lincoln National (NYSE:LNC), Jefferson-Pilot (NYSE:JP), and Protective Life (NYSE:PL).

Kligerman believes foreign acquirers will likely use acquisitions to build their US operations quickly.

Members of the Press

To read the full report on estate tax reform and the life insurance industry or to speak with Andrew Kligerman, members of the press may call Russell Sherman at 212-272-5219.

Founded in 1923, Bear, Stearns & Co. Inc. is a leading worldwide investment banking and securities trading and brokerage firm, and the major subsidiary of The Bear Stearns Companies Inc. (NYSE:BSC). With approximately $26.3 billion in total capital, Bear Stearns serves governments, corporations, institutions and individuals worldwide. The company's business includes corporate finance and mergers and acquisitions, institutional equities and fixed income sales, trading and research, private client services, derivatives, foreign exchange and futures sales and trading, asset management and custody services. Through Bear, Stearns Securities Corp., it offers prime broker and broker dealer clearing services, including securities lending. Headquartered in New York City, the company has more than 11,200 employees located in domestic offices in Atlanta, Boston, Chicago, Dallas, Denver, Los Angeles, San Francisco and San Juan; and an international presence in Beijing, Buenos Aires, Dublin, Hong Kong, London, Lugano, Sao Paulo, Seoul, Shanghai, Singapore and Tokyo. For additional information about Bear Stearns, please visit the firm's Web site at www.bearstearns.com.

Any recommendation contained in this report may not be suitable for all investors. Moreover, although the information contained herein has been obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. Bear Stearns may make markets and effect transactions, including transactions contrary to any recommendations herein, or have positions in the securities mentioned herein (or options with respect thereto) and may also have performed investment banking services for the issuers of such securities. In addition, employees of Bear Stearns may have positions and effect transactions in the securities or options of the issuers mentioned herein and may serve as directors of such issuers. Copyright (c) 2001. All rights reserved by Bear, Stearns & Co. Inc.