By Cyril Tuohy
With many of the nation’s largest life insurers preparing to announce third quarter results over the next two to three weeks, analysts are looking for the industry to deliver earnings growth in the “low single-digit range,” according to Moody’s Investors Services.
Carriers have spent much of the year redesigning and repricing their fixed annuities, variable annuities (VA) and universal life with secondary guarantees (ULSG) portfolios, as they rebalance their exposures in an era of low interest rates.
Life insurance companies begin reporting third quarter earnings this week.
“Generally, given where rates in the market have been going, it’s a positive story,” Stefan Kahandaliyanage, an associate analyst with Moody’s Investors Service, said in an interview with InsuranceNewsNet.
He and his team expect “no negative earnings surprises.”
Life insurers are increasing prices and shifting their product mix away from fixed-rate annuities and capital-intensive products like ULSG to more efficient products like indexed universal life (IUL) and variable universal life (VUL), Kahandaliyanage said.
Earlier this month, Penn Mutual launched its Protection Guard Universal Life policy and, last month, John Hancock launched Protection SIUL, a survivorship indexed universal life insurance product.
Compared to the year-ago period, indexed universal life premiums rose 23 percent in the first half of the year, and variable universal life premiums increased 13 percent in the first half, according to statistics by LIMRA.
Ashley Durham, senior analyst with LIMRA, said indexed universal life and whole life products were the “biggest drivers of overall growth” among individual life insurance products in the first half of 2013.
She said that both products are well suited to a low interest rate environment and uncertain economic times because they offer buyers protection.
Sales of fixed-rate annuities are shrinking at the expense of fixed indexed annuities (FIA), with FIAs last year outselling traditional fixed-rate products. FIAs now make up 47 percent of the entire fixed annuity market as alternative investment management companies have entered the market, Moody’s also said.
“The fixed annuity market continues to shrink, with most companies de-emphasizing these products, as low interest rates and tight spreads make this line of business less profitable,” Kahandaliyanage wrote, in a co-authored research note to clients.
Fixed annuity sales of $34.5 billion in the first half of the year fell 6 percent compared to the year-ago period, according to LIMRA.
Total VA sales fell by about 7 percent in 2012 from 2011 and by another 3 percent through the first six months of this year compared to the first six months of 2012, as the nation’s top five VA writers consolidated their share of the market even further, Moody’s said.
Separately, LIMRA reported that VA sales of $73.7 billion in the first six months of this year were down 3 percent from the year-ago period.
Instead of competing for market share, VA writers are raising prices, lowering guaranteed benefits, dialing back on maximum allowable equity exposure and implementing auto-rebalancing features and targeted volatility funds to transfer more risk onto the contract holders. “VA writers continue to remain disciplined,” he said.
Other life insurers have sold their slow-growing annuities blocks of business to alternative risk managers and hedge funds who believe they can run those operations more efficiently.
Median life insurance company stock price is up 16 percent since the end of the second quarter, well ahead of the S&P 500, according to a separate report by Keefe, Bruyette & Woods. In a report to clients, KBW analysts said investors will “move beyond disappointment over the September Fed decision and realize that higher rates (and the positive benefits to the group) while delayed, are likely still in front of us.”
The Federal Reserve last month decided to continue buying billions of dollars’ worth of bonds, keeping interest rates low.
As carriers report earnings, Kahandaliyanage said life insurers will benefit from strong capitalization, good profitability thanks to a healthy stock market, liquid and well-diversified investment portfolios, strong operating cash flow and ample financial flexibility.
Industry challenges include protracted low interest rates volatility in earnings from legacy VA business, sluggish group and individual life insurance and annuity sales and pressure to return excess capital to shareholders in the form of share buybacks and dividends.
Although interest rates are expected to rise, they are still low enough to “continue to compress spread margins for fixed annuity and universal life insurance,” Kahandaliyanage also wrote.
Disability, long-term care, annuities and VAs with guarantees that were promised to policyholders at a time when interest rates were higher and the economy stronger mean life insurers still have to deliver on those promises when the yield on their fixed investments is historically low.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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