A limp stock market, low interest rates and the strong dollar affecting non-Yen denominated holdings will likely make the third quarter earnings season a tough one for the life sector, according to a pair of analysts.
The developments caused life insurance company analysts at Keefe, Bruyette & Woods to trim third-quarter earnings estimates for life insurance carriers by 3 percent. They shaved full-year 2016 and 2017 earnings estimates by 2 percent each year.
The weakest stock market since the third quarter of 2011, low interest rates coinciding with annual actuarial reviews and a strong dollar amount to “a challenging quarter for many life insurers,” write KBW analysts Ryan Krueger and Blake Mock in a note to investors last week.
Aside from the more “regulatory clarity” around nonbank Systemically Important Financial Institutions (SIFI) and the Department of Labor’s conflict of interest rules, “we see few fundamental catalysts for the group outside of continued M&A by Asian buyers, which we view as limited to the few remaining smaller-cap life insurers,” the analysts wrote.
Potential “takeout candidates” all have drawbacks, they also wrote.
CNO Financial carriers long-term care exposures and Torchmark might be considered too large for potential buyers. Likewise, Primerica Inc. prefers independence and Reinsurance Group of America is a reinsurer, not a primary carrier, wrote Krueger and Mock.
Share repurchases “should remain healthy,” in the third quarter even if repurchase transaction volumes run lower than in the first three months of this year, the KBW analysts wrote.
Companies buy back their own stock to raise the value of shares that are still available on the market or to reduce or eliminate threats by shareholders looking for a controlling stake.
Meanwhile, early indications for companies with robust advisory business models that rely more heavily on fee income than on market performance or interest rates indicate a smoother earnings reporting period over the next two weeks
Two of the nation’s largest wealth management advisors, Ameriprise Financial Inc. in Minneapolis and Raymond James Financial Inc. in St. Petersburg, Florida, report quarterly earnings after market close on Wednesday.
Ameriprise management expects sturdy growth in the company’s Advice and Wealth Management (AWM) and segment, even if operating earnings growth is expected to be most compared with the previous quarter because of lower seasonal activity, according to Zacks Equity Research.
“Moreover, it anticipates a less robust earnings potential from the fixed annuities division in the quarter, given the anticipated headwind of lower long-term interest rates,” according to comments on Monday by Zacks Equity Research.
“Further, management’s expectations of improvement in productivity of the AWM segment as well as the recruiting pipeline will be reflected in the upcoming release,” Zacks said. ”Also, the launch of a new product with The Blackstone Group LP is expected to add flows in the quarters ahead.”
Ameriprise generates tens of millions of dollars in fees selling financial advice and the company’s robust assets under management and rising demand for advisory services should be continue into this quarter — so long as the company keeps a tight lid on expense management, Zacks analysts said.
Raymond James, which has recruited dozens of veteran advisors from wire houses and regional broker-dealers over the last 18 months, appears on track to deliver robust quarter and year-end performance, Zacks analysts wrote.
The Private Client Group, one of the company’s top performing segments, generates stable revenue through fees.
Acquisitions to boost its insurance unit indicate Raymond James is serious about diversifying its income streams, Zacks researchers wrote. However, “mounting expenses” in the form of higher compensation costs are beginning to sap the company earnings strength, Zacks added.
Noninterest expenses have increased at a compound annual growth rate of 11.4 percent over the last three fiscal years and have in the first nine months of 2015 as well, the analysts wrote.
“Additionally, compliance-related costs and increasing competition in the space will likely outweigh the company’s cost-control measures, resulting in higher costs,” Zacks researchers wrote.
The Charles Schwab Corp., the San Francisco-based banking, brokerage and financial advisor, last week reported third-quarter earnings of $376 million, an increase of 17 percent over the year-ago period.
Earnings came to 28 cents per share. Adjusted for nonrecurring gains, earnings came to 27 cents per share, company said.
The results beat Wall Street expectations. The average estimate of 11 analysts surveyed by Zacks Investment Research was for earnings of 26 cents per share.
The company posted revenue of $1.6 billion in the period, also beating forecasts. Six analysts surveyed by Zacks expected $1.58 billion, according to the Automated Insights and the Associated Press.
Schwab appears to have benefitted from market swoons as investors flocked to advisors during the latest quarter, which saw the Standard & Poor's 500 index drop 11 percent in just six days in August before bouncing back.
“Faced with economic uncertainty and the resulting market volatility, investors increasingly turned to our advice offerings throughout the quarter,” said CEO Walt Bettinger in a news release.
About 36,000 accounts enrolled in one of the company’s advisory solutions during the last three months, Bettinger said.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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