With interest rates trending somewhere between low and lower still, you don’t often see life insurers routinely beating or meeting Wall Street earnings estimates. But meeting or beating Wall Street was the story for the sector, judging from the crop of second-quarter results.
Who beat the Street?
The following insurers exceeded Zack's Investment Research analysts' expectations: middle market life and retirement specialist CNO Financial Group, disability insurer Unum Group, the financial services holding company Torchmark, supplemental insurer Aflac, global retirement company Principal Financial Group, life reinsurer Reinsurance Group of America, long-term care stalwart Genworth Financial and fixed indexed annuity giant American Financial Group.
Meeting Wall Street analysts’ expectations were Voya Financial, American Equity Investment Life and Lincoln National.
The big boys – MetLife and Prudential – fell to the back of the pack and missed analysts' estimates this go-around.
With so many insurers beating Wall Street expectations, it’s worth asking whether corporate managers really are doing a better job of running their companies. Are they finding ways to sell more life and annuity products, or are they cracking down on expenses and commission schedules?
Or have broader changes in the marketplace boosted company operating incomes, making insurers and their executives look good while coasting on cruise control?
“Expectations have been trending down based on interest rates,” said Erik Miller, senior financial analyst with A.M. Best & Co.
Lower interest rates mean that insurers can’t earn as much on their investments. This causes Wall Street analysts to revise their spreadsheets downward.
As Wall Street analysts lower their predictions of how companies will perform, it becomes easier for those companies to come in equal to or above expectations.
Any number of specific reasons influence life insurers' quarterly results, including mortality, reinsurance costs, currency swings, regulation and restructuring charges. These variables are baked into the quarterly estimates produced by analysts – in theory.
That’s why insurance industry specialists take the Wall Street community's expectations with a grain of salt.
Folks like A.M. Best’s William Pargeans said he doesn’t lose any sleep over whether every life insurer beat the quarterly expectations or came up short of them. The quarterly time horizon is way too short to divulge anything really meaningful about a company’s longer term operating performance.
“Large publicly traded companies taking an occasional quarterly charge here or there doesn’t translate into a meaningful run rate,” said Pargeans, A.M. Best assistant vice president.
Miller said analysts expect companies to benefit from the “pull forward” effect of agents and advisors hurrying to sell fixed indexed annuities and variable annuities before a new Department of Labor fiduciary rule goes into effect beginning next April.
Record Year Followed by a Slump?
Fixed indexed annuities are on track to finish the year with a record $60 billion in sales, a 10 percent increase from 2015, according to LIMRA.
Could the rush to sell more fixed indexed annuities have boosted life insurance industry performance?
Perhaps, as annuity premiums didn’t decline as much as people expected, Miller said.
Beginning next year, though, the fiduciary rule is expected to dampen indexed and variable annuity sales, at least in the short run, which is bound to affect expectations.
Some baby boomers are expected to use insurance products and solutions to fund their retirements, Pargeans said. But the benefits to life insurers will not be evident in the short term.
Yet a much bigger, longer-term trend that will affect life insurers over many quarters is the anticipated demand for guaranteed retirement income from retiring baby boomers.
With six weeks left in the third quarter, the life insurance results deck will be shuffled yet again for the third time this year.
Some companies likely will exceed expectations, others merely meet them and still others will fall short. Again, this all depends on the Street’s expectations, which could rise or fall still further.
“One quarter doesn’t tell a story,” said Pargeans. “One year often doesn’t tell a story.”
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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