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Portfolio > Economy & Markets > Stocks

Life/annuity insurer stocks under pressure

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The stock prices of publicly traded life and annuity insurers in the United States logged a 6.4 percent decline during the first quarter after showing a moderate increase of 2 percent during the fourth quarter of 2015, according to a new report by credit-rating firm A.M. Best.

The report, “Pressures Remain for Publicly Traded Life/Annuity Insurers,” outlines several potential reasons for the decline, which was well below the 0.8 percent gain posted by the overall market during the quarter. These include:

    • Continued regulatory uncertainty, including the eventual requirements of the Systemically Important Financial Institution designation and the Department of Labor fiduciary ruling.
    • Continued low rates and equity volatility impacting the marketability of traditional life/annuity products (the Federal Reserve has hinted at potential rate hikes later this year).
    • Declining returns-on-equity that will likely continue to decline amid a modest increase in rates and the reinvestment of portfolios into lower-yielding investments.
    • Continued drag and subpar performance from legacy lines of business, particularly in long-term care and variable annuity segments (with living benefits).
    • High valuations relative to premium growth and returns on equity.

These trends are likely to continue, the report said.

Despite pressure on stock prices for the 21 publicly traded companies included in the report, the segment saw revenues increase 6.5 percent during the first quarter when compared with the same quarter last year. More than half of the companies reported an increase in revenues last year. Of note, Manulife Financial and Sun Life, both Canadian companies, reported revenue increases of 38.2 percent and 19.8 percent respectively. Prudential Financial reported the largest revenue decline during the quarter, a 7.9 percent decrease due to fewer premiums in its retirement business and lower realized investment gains, the report said.

The average operating return on equity for the first quarter of 2016 was 14.4 percent, which was relatively even to the 14.5 percent reported during the same period in 2015.

A.M. Best noted increasing pressure on spread-based businesses given the continued low interest rate environment.

“Interest-sensitive liabilities such as fixed annuities are pretty much at guaranteed minimum crediting rates, so there is less flexibility in adjusting crediting rates downward as had been in the past,” the report said. “In addition, some interest rate guarantees, or floors, remain in the 3 percent to 4 percent range, creating additional pressure on this business.”

See also:

Fed proposes change to capital reserve rules for insurance companies

Yellen left door open for rate increase after July, Allianz says

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