Would you consent to have your life or health insurer monitor your condition via a "wearable" device?
By Cyril Tuohy
A cursory look at life insurers’ profits in the second quarter would have you believe that the industry is making money hand over fist, but a closer look reveals accounting issues and foreign exchange rates were behind the gains, according to an industry analyst.
A group of 19 publicly traded life insurance underwriters followed by Moody’s Investors Service reported net income of $6.4 billion, a 67 percent gain compared to the year-ago period.
The increase wasn’t necessarily due to selling more of the industry staples. Life and disability insurance were laggards in the quarter, although annuities, as the industry knows by now, delivered stellar performance.
Moody’s analyst Shachar Gonen pointed to changes in accounting charges and hedging gains as interest rates declined as the reasons for the 67 percent rise in net income.
In the second quarter, the value of liabilities associated with derivative gains, which carriers use to hedge against declining interest rates, remained low, Gonen said in an interview with InsuranceNewsNet.
Dollar-yen foreign exchange rates were partly responsible for the $1.6 billion swing in second-quarter net income at Prudential, which was enough to affect the entire industry, Gonen said in a research note to clients.
Second-quarter net income “vastly overstates the change in underlying profitability,” said Gonen, an assistant vice president at Moody’s.
Sliced another way or looked at from the perspective of operating income, industry performance looks downright humdrum.
Second-quarter income from existing operations for the 19 carriers was $7.3 billion, a modest 9 percent increase compared to the year-ago quarter.
Aggregate individual life sales in the second quarter dropped 14 percent compared to the same period in 2013.
Three of the companies with the largest drops in sales reported declines ranging from 26 percent to 44 percent, Gonen said.
Lincoln Financial saw its life insurance sales decline 8 percent because of a drop in company-owned life insurance policies.
With Prudential raising prices to cut exposures to secondary guarantee universal life insurance, sales of individual universal life products dropped by 44 percent, or $75 million, the report said.
“We expect to see price increases continue, particularly in secondary guarantee universal life, as more companies respond to the relatively low interest rates and concern about regulatory reserve changes,” Gonen said.
Regulatory changes mean companies have to set aside higher reserves to pay for those guarantees or claims.
Fixed annuities, important performers for Voya, Symetra Financial and Protective, were the story in the second quarter.
Fixed annuity revenue totaled $3.8 billion, which was 92 percent higher compared to the year-ago period as interest rates rose compared to rates in the spring of 2013, Gonen said.
American International Group’s Life and Retirement unit led the increase with $1 billion in fixed annuities, nearly triple the $365 million the company generated in the year-ago period, the report said.
Higher revenues in the second quarter from fixed annuities offset a decline in variable annuities, which declined 17 percent to $11.2 billion as carriers trimmed variable annuity sales to reduce stock market exposure, Gonen said.
The top five sellers of variable annuities tracked by Moody’s — Lincoln Financial, Prudential, AIG Life and Retirement, MetLife, and Ameriprise — accounted for 98 percent of variable annuity sales in the second quarter, the report said.
“The concentration of this product line underscores the importance of companies remaining proactive in changing pricing and product features to prevent variable annuity sales from exceeding their own risk tolerance levels,” Gonen said.
Interest rates began rising in the spring of 2013 through the end of last year before starting to dip again in the first half of the year. Rates in the second quarter were still higher than they were in the second quarter of 2013.
Gonen said that with low interest rates carriers can expect to remain in a period of “spread compression and constrained earnings.” Spread compression occurs when the amount insurance companies earn from their fixed-income investments compared to what they are paying out on their liabilities begins to narrow.
Narrowing spreads will have an impact on fixed and variable annuities, disability insurance, long-term care insurance and interest-sensitive life business, and the industry can expect earnings growth in the low-single-digit range, he said.
“To manage interest rate risk," he added, "some insurers have shifted to less interest sensitive products.”
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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