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Q2 Life and Annuity Earnings Weather Looks... Fine: Analysts

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For U.S. life and annuity issuers, the weather has probably been too cloudy for a beach party, but it’s been fine for someone wearing short sleeves.

The idea that the life and annuity sector weather has been fine, but boring, has surfaced in a number of recent sector reviews released by credit market and securities analysts.

(Related: American Financial to Change Annuity Performance Reporting)

The issuers are preparing to start releasing their second-quarter earnings during a release season that will start this week and run until mid-August.

Here’s a look at what some of the analysts are saying.

Moody’s Investors Service: Deals

Bob Garofalo and other analysts at Moody’s have put out a report focusing on the impact of mergers and acquisitions on the life and annuity sectors.

The analysts say they believe the overall environment has performed greatly since the days of the 2007-2009 Great Recession financial crisis.

At this point, mergers and acquisitions are helping the sellers’ financial strength, by helping the sellers focus on core activities, and, in the case of the big, strong companies Moody’s rates, improving the buyers’ long-term prospects.

“However, we have likely understated the negative effects of transactions on the overall universe of buyers, because many deals by unrated buyers were excluded from the analysis,” the analysts say.

Because many insurers now have stronger balance sheets than they did a few years ago, their dealmaking activity is likely to continue, the analysts say.

“Although interest rates remain low, the industry has adapted, and insurers have rationalized transactions at these lower levels,” the analysts say. “An increase in rates would drive increased activity. However, the US economic outlook remains clouded, with a risk of an economic slowdown that would hinder M&A [mergers and acquisitions] activity. Of course, this would also potentially present opportunities for patient buyers.”

Fitch Ratings: Mortgage Investments

A year or two ago, credit analysts were worrying about life and annuity issuers’ growing exposure to investments in mortgages and mortgage-backed securities.

Nelson Ma and other Fitch analysts write in a new report the life insurers’ exposure to mortgages continue to grow, and that mortgages amounted to about 13% of life insurers’ invested assets at the end of 2018, up from 12.4% a year earlier, and compared with a historic allocation of about 8% to 12%.

“Insurers continued to see relative value in mortgages compared with other asset classes, and are driving exposures higher as they trade liquidity for yield,” Ma said in a statement about the figures.

But the analysts say life insurers’ mortgage investments to do fine.

A few years ago, they were wondering what problems in the retail world would do to life insurers’ commercial real estate and commercial real estate mortgage investments.

Now, “Fitch Ratings expects relatively stable commercial real estate fundamentals to continue to drive strong mortgage performance for U.S. life insurers over the next 12 to 24 months,” the company says.

Delinquencies in commercial mortgage-backed securities are low, partly because the commercial mortgage financing market is very liquid, the company says.

Keefe, Bruyette & Woods: Stock Prices

At Keefe, Bruyette & Woods, Ryan Krueger and Peter Xuan say that, as of July 11, life insurers’ stock prices had increased 24% since the depths of the mini crash that occurred in the fourth quarter of 2018.

From a securities analyst’s perspective, the stocks’ prices still look low, with average prices amounting to just 8.4 times the companies’ anticipated earnings per share, the analysts write.

But investors fear that the current economic expansion might be near the end, and cuts in interest rates could pinch, and those concerns are holding down stock prices, the analysts write.

— Read Earnings: AIG, Athene, AXA Equitable, Primerica, FGL, IHC, HC2, Triple-S, on ThinkAdvisor.

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