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Will Earnings Growth Trend Of The Top 50 Insurers Continue?

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1st and 2nd quarter results were up smartly for industry leaders

With third quarter life insurer earnings announcements starting to trickle in, the question is: Will earnings continue the growth trend of the year’s first two quarters? Initial indications are mixed.

Although reported on a statutory as opposed to a GAAP basis, quarterly net income filings for the top 50 insurers from the National Association of Insurance Commissioners’ annual statement database via National Underwriter Insurance Data Services/Highline Data show quarterly net income is increasing.

For these top 50 insurers, net income increased 27% in second quarter 2005 over second quarter 2004 and 6% in first quarter 2005 over first quarter 2004, according to the statutory data.

For the top 10 companies, the increase in quarterly net income in second quarter 2005 over second quarter 2004 was 61.5% and for first quarter 2005 over first quarter 2004 the increase was 20%, the data indicates.

In a third quarter earnings preview, published on Oct. 20, UBS analysts, including Andrew Kligerman, write that trends for the quarter for covered companies are neutral to modestly positive with “minimal surprises.”

“Macro and industrywide trends were overall neutral to modestly positive for life insurers–with positives including equity market appreciation and rising [but still historically low] new money yields; and negatives including a flatter yield curve and greater regulatory pressures.”

One expectation the UBS report noted was that third quarter variable annuity sales would be flat year over year “in part due to increased regulatory scrutiny and guidelines over annuity product suitability and sales practices.”

UBS said it has a ‘neutral’ stance on the domestic life insurance sector, with the UBS life group trading in line with historical average price/equity and price/book multiples based on monthly data since 1992.

The average price/equity was 12.2 and the life group’s P/E on Oct. 19 was 11.9, according to the UBS report. The average P/B was 1.8 and the P/B on Oct. 19 was 1.5, the report said.

“Our conviction for future multiple expansion is not high since the life group’s prospects for stronger returns are contingent upon favorable macro conditions–as 8%+ annuity equity market appreciation, gradually rising mid-/long-term treasury yields, and a steeper yield curve is needed for stronger earnings growth,” the report said.

Among companies that had reported earnings at press time, MetLife Inc., New York, said operating earnings available to common shareholders totaled $780 million in third quarter 2005 compared with $618 million in third quarter 2004. MetLife reports operating earnings available to common shareholders on a non-GAAP basis.

Net income on a GAAP basis for MetLife was $773 million vs. $695 million in respective 2005 and 2004 third quarters.

Net income on a GAAP basis for companies including CIGNA, Philadelphia, and Jefferson-Pilot were both lower although for CIGNA, adjusted income from operations was $251 million in third quarter 2005 compared with $230 million in 2004.

For Jefferson-Pilot Financial, Greensboro, N.C., net income was down slightly to $130.8 million in third quarter 2005 compared with $133.8 million in 2004.

Many companies will be reporting earnings in the next few weeks. Shortly after press time, insurers including Prudential Financial, Newark, N.J., and Nationwide Financial, Columbus, Ohio, were due to release quarterly earnings reports.

For the top 50, net income increased 27% in 2Q 2005 over 2Q 2004 and 6% in 1Q 2005 over 1Q 2004


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