By Cyril Tuohy
A noted life insurance industry equity research analyst has lowered his 2016 earnings estimates by between 1 percent and 2 percent. This reflects a “lower-for-longer” interest rate model as the 10-year Treasury drifts downward and the dollar strengthens.
In a research note to investors delivered ahead of fourth quarter earnings announcements, Keefe, Bruyette & Woods (KBW) analyst Ryan Krueger said his “forward operating estimates are now 1-2 percent below consensus” for the 11 life insurers followed by KBW.
Lower interest rates mean that insurance companies earn less on their fixed-income investments, leading investors to sour on the sector and dump their holdings.
After rising late in 2013 and the first part of 2014, interest rates have dropped back with the 10-year Treasury. Ten-year Treasury rates were 2.17 percent at the end of 2014 but fell to 1.68 percent Feb. 2.
In a December report to investors, Krueger said that any rerating of the life insurance sector was dependent on higher long-term interest rates and nonbank systemically important financial institution (SIFI) clarity, “neither of which seem particularly likely anytime soon.”
MetLife, which was labeled a SIFI last year, filed a court to the SIFI designation last month.
Krueger also said his top picks were VOYA Financial, Principal Financial Group and Reinsurance Company of America.
VOYA Financial’s improving profit margins, capital management and “tax assets” painted a positive “company-specific fundament story,” he said.
VOYA Financial is due to report earnings Feb. 11.
Principal Financial Group is attractive because of its shift to fee-based businesses, Krueger added.
Principal Financial Jan. 29 reported fourth quarter net income of $270.4 million, an increase of 16 percent over the year-ago period. The company also report 2014 net income of $1.1 billion, an increase of 26 percent over 2013.
Chairman and CEO Larry D. Zimpleman said that despite a strengthening U.S. dollar and lower interest rates, the company delivered “outstanding results.”
Reinsurance Group of America on Monday reported fourth quarter net income of $191 million, compared to $145 million in the year-ago quarter.
The company also reported full-year 2014 net income of $684 million, an increase from $418 million in 2013.
A stronger U.S. dollar had an adverse impact on its fourth quarter per-share results, the company also reported.
Prudential and Symetra are scheduled to release earnings announcements today after the markets close.
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