WASHINGTON — Three top insurers earned investors’ ire Thursday when they reported that both earnings and revenues missed analysts’ targets for the second quarter, primarily due to the continuing need for the life insurance industry to adjust to the sustained low interest rate environment that forced restatements of the value of annuities’ holdings.
At 1 p.m. Thursday, MetLife was down 10.98 percent, or $4.80 at $38.90; Prudential Financial was down 4.95 percent or $3.77 at $72.38; and Lincoln National Corporation down 4.46 percent or $2, at $42.80.
MetLife suffered the most, reporting operating earnings of $924 million, or 83 cents a share, vs. $1.765 billion, or $1.56 a share for the year-ago period.
According to Thomas A. Gallagher of Evercore, the primary cause was reserve adjustments ahead of the spinoff of its Brighthouse Financial retail unit later this year. This cut operating earnings by $257 million or 23 cents a share. The annual review of its retail variable annuity actuarial assumption review reduced earnings another $161 million or 15 cents a share. An adjustment to reinsurance receivables in Australia reduced earnings a further $44 million, or 4 cents a share.
Total revenue of $15.244 billion was 6 percent lower than a year ago.
As a result, MetLife CEO Steve Kandarian said in the company’s earnings conference call that the firm planned to cut expenses by 11 percent, or $1 billion annually, by 2019. Kandarian said this will include job cuts, although he declined to be specific. “In light of the significant headwinds our industry is facing, MetLife must do even more to avoid simply running in place,” he said.
Gallagher attributed the weakness in MetLife shares to “surprise and confusion around the sizeable variable annuity accounting charge, which is really being triggered by higher utilization assumptions on one of the more rich benefits within a portion of its block (dollar for dollar benefits),” and weaker than expected core earnings plus some incremental run rate drag associated with reserve charges for both life insurance and annuities.
“We believe there is much confusion over why lower utilization for MetLife’s variable annuity annuitization resulted in a big charge while peer PRU had a gain related to lower utilization for guarantees,” Gallagher said. He added that Evercore believes “the answer is driven by the fact that the lack of utilization of annuitization for MetLife is a sign that customers are using a more robust ‘dollar for dollar’ benefit guarantee, while the lack of utilization for Prudential doesn’t have a corresponding impact as they don’t have this guarantee,” because another feature of the Prudential product “contains a reasonable attractive guarantee in its own right.”
Prudential reported second quarter earnings of $921 million, or $2.04 per share, compared to $3.03 per share for the year-ago period.
The decline reflected a 64 cent per share charge due to the unfavorable impact from the actuarial review, 7 cents from favorable unlocking in variable annuities, and 5 cents from the unfavorable impact of early debt extinguishment costs in the corporate sector.
Gallagher expected $2.45 in profits for the period, and said the core results missed Evercore’s estimate of $2.55 a share and the consensus estimate of $2.50.
John Strangfeld, Prudential’s chairman and CEO, was positive about the results and disclosed that Pru, prompted by the results, planned to increase its share buybacks. He said Pru “delivered solid core results.”
He added that, “Overall, while market conditions continue to present challenges, we remain confident in our long term earnings outlook and ability to produce differentiated returns.
He said Pru produced strong sales growth in its U.S. and International protection businesses, and solid net flows in its asset management and retirement businesses.
He also said Pru was “pleased” with the structural changes made to manage the risks in its individual annuities business.
Pru reported U.S. individual life sales, based on annualized new business premiums, of $159 million, up 22 percent from the year-ago quarter. It reported individual annuities gross sales of $2.3 billion in the quarter, including $1.6 billion of variable annuities without retained exposure to equity market related living benefit guarantees. Pru also said it completed recapture of variable annuity living benefit risks from reinsurance captive on April 1.
Pru said assets under management grew to $1.05 trillion during the quarter, including a record-high $505 billion of unaffiliated third party institutional and retail assets under management at June 30, up 7 percent from a year earlier. Net inflows from both institutional and retail business, excluding money market, totaled $3.6 billion for the quarter, Pru said.
It also reported retirement gross deposits and sales for the quarter of $8.1 billion, including two new longevity reinsurance cases totaling $1.8 billion.
Lincoln Financial, however, appeared to be the victim, of a hasty exit from the life insurance sector by investors because its results were at least close to estimates.
Lincoln reported net income for the second quarter of $325 million, or $1.35 per diluted share available to common stockholders, compared to net income in the second quarter of 2015 of $344 million, or $1.35 per share.
Second quarter income from operations was $373 million, or $1.56 per share, compared to $371 million, or $1.46 per share for the 2015 period.
This was one cent below the Seeking Alpha consensus estimate of $1.56 in core earnings and $50 million below the consensus revenue estimate of $3.39 billion.
But Gallagher of Evercore said Lincoln results were in line with his consensus estimate and above his projection of $1.55 a share.
“A highlight for the quarter was the recovery of the unfavorable mortality experience which had caused some concern among investors,” and as Gallagher said late last month, likely played a role in the decision of Mark E. Konen to retire as head of Lincoln’s life insurance and retirement group effective in February.
“While the on-going volatility of mortality results in the life insurance segment still causes us some concern, we were relieved to see the improvement this quarter particularly considering weaker results reported in the first quarter of 2016 and the second quarter of 2015.
Dennis R. Glass, Lincoln president and CEO, said at the company’s earning conference call today that the second quarter results showed a “nice recovery” following disappointing first quarter results, as operating earnings per share increased 25 percent sequentially.
Like Kandarian at MetLife and Peter D. Hancock at AIG, he said “expense management” is “a key lever” to sustaining targeted growth.
He cited Lincoln’s “leading” distribution organizations, “combined with our manufacturing capabilities,” as continuing “to differentiate us from peers.
“We are driving sales growth right now in our individual life insurance and group protection businesses, while innovative product solutions across our annuity and retirement plan services businesses will help sales growth,” Glass said.
Lincoln reported that its life insurance business reported income from operations of $120 million, up 14 percent from $105 million in the prior-year quarter. As noted by Gallagher, Lincoln said the increase in earnings compared to the prior-year period was driven by mortality performing in line with expectations compared to elevated mortality in the prior-year period.
Lincoln also said that individual life insurance sales in the quarter were $164 million, a 6 percent increase from the prior-year quarter.
Total life insurance in-force of $675 billion grew 4 percent over the prior-year quarter, and average account values of $44 billion increased 3 percent, Lincoln said.
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