By Cyril Tuohy
With third-quarter earnings from life and long-term care insurance carriers rolling in this week, industry experts are looking closely at Genworth Financial and its long-term care claims review, as well as annual actuarial reviews at a half-dozen other large carriers.
The big story remains with Genworth, which is scheduled to report its quarterly earnings on Nov. 5, said Ryan Krueger, an analyst at Keefe, Bruyette & Woods.
Genworth's long-term care earnings increased to $124 million in 2013 from $74 million in 2012. Its $46 million in first-quarter earnings was “the best quarterly result in years,” KBW analysts said in an Oct. 12 note to investors.
But then the bottom fell out and Genworth could only muster $6 million in long-term care earnings in the second quarter because of higher-than-expected claims severity to both existing claim reserves and on new claims.
Genworth reported that the higher claims severity was due to a shift in the mix of claims, for which the company had to pay out on new claims with higher daily benefit amounts and on a greater proportion of lifetime benefits.
On existing claims, Genworth pointed to people living longer as a reason for the big decline in second-quarter earnings. The claims review will shed more light on that second-quarter decline, and analysts will be looking closely at the company’s claim reserves.
Investors expect Genworth to take a charge of “only a few hundred million,” but that the uncertainty regarding reserves “has caused continued weakness in the shares,” Krueger wrote in a separate report published Oct. 13.
Nevertheless, KBW raised its outlook on Genworth stock to “outperform” based on “overly discounted valuation and the view that long-term care risk, while very real over time, will not play out as badly as feared over the next couple of years.”
“Long-term care is a high-risk, long-duration business with a weak history,” KBW wrote. “By no means does this upgrade suggest we are dismissing some longer-term concerns.”
Other notes of interest to analysts this week will be the annual actuarial reviews conducted in the third quarter by Lincoln National, MetLife, Principal Financial, Prudential and Voya Financial. The actuarial reviews yield insight into the state of the industry.
Declining interest rates, falling equity markets and foreign currency weaknesses made September a tough month for life insurers, Krueger said in his note to clients.
“We generally aren’t expecting major interest rate-related balance sheet adjustments, although some are possible, and [variable annuity] policyholder behavior is also a risk,” he wrote in a third-quarter preview of life insurance carrier earnings.
Aflac, Ameriprise Financial, CNO Financial Group, Lincoln National, MetLife, Principal Financial and Symetra Financial are scheduled to report this week. Prudential and Voya Financial report next week.
On average for the 11 life and annuity companies that it covers, KBW expects year-over-year, earnings- per-share growth of 5 percent, and a 2 percent drop in earnings per share over the second quarter “with significant variations by company.”
One-off items affecting Genworth Financial, MetLife and Principal Financial are expected to account for the largest variances in year-over-year earnings performance, he said.
As many life carriers took balance sheet charges in 2012 to account for low interest rates, Krueger said, investors need not expect any major interest rate-related balance sheet adjustments in the third quarter, but that variable annuity policyholder behavior “remains a bit of an unknown.”
Voya Financial has indicated to analysts that charges to its variable annuity business could translate into an annual impact of around $150 million. Prudential has also incurred lapse-related charges, “and there is some concern another could be coming due to a higher lapse assumption,” Krueger wrote.
Annuities that are allowed to lapse mean they come off the books and cease to be part of a carrier’s revenue stream.
Lapse rates and their effect on earnings this quarter are “impossible to predict," Krueger wrote, "but we wouldn’t expect a charge, if there is one, to be more than a few hundred million.”
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 protected].
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