Fiduciary Rule Casts Long Shadow Over 1Q Earnings

Life and annuity companies begin releasing first quarter earnings this week and analysts will be hunting for as much guidance as possible on the Department of Labor’s fiduciary rule and how it will affect future company earnings.

Aflac, the Columbus, Ga.-based insurer, kicked off the earnings parade Tuesday by reporting net income of $731 million, or $1.74 per share diluted. Earnings, adjusted for investment gains, were $1.73 per share. Ten analysts surveyed by Zacks Investment Research expected earnings of $1.62 per share.

The company, which derives profits from Japan and the U.S., said it benefited from a stronger yen-dollar exchange rate.

The heaviest scrutiny, however, is expected to fall on carriers with the broadest exposure to variable annuities and fixed indexed annuities. Both product lines have been singled out by the DOL as having to meet a higher standard of care for agents looking to sell these product categories.

Top sellers of indexed annuity sales last year were Allianz Life, American Equity Investment Life, Great American, American International Group and Nationwide, according to LIMRA Secure Retirement Institute.

How the drop in indexed annuity sales will affect bottom-line profits depends on the annuity exposure of each carrier.

Voya Financial, with indexed annuity sales of $1.67 billion last year, and Lincoln Financial, with indexed annuity sales of $1.34 billion last year, could experience a 25 drop in sale of indexed annuity sales. But the losses will not have any major impact on overall earnings, said analyst with Keefe, Bruyette & Woods.

Analysts will also be looking for clues to future consolidation among commission-based agents and the nation’s broker-dealers since every financial professional touching retirement money is expected to act under a fiduciary standard of care.

The fiduciary standard will require a higher level of compliance from product manufacturers and their distributors. It is widely seen as raising costs for the industry in general, costs that some companies will not be able to absorb and still remaining profitable.

Since the rule is expected to affect commission revenue, broker-dealers are rethinking their business models and top executives have talked about a coming wave of consolidation as smaller shops merge with larger competitors.

“It is tough on the industry and on players when you have this much regulatory costs. We certainly feel it,” said Raymond James CEO Paul Reilly, in a first-quarter earnings call with analysts last week.

A Difficult Quarter for Equity-Sensitive Carriers

Questions about the fiduciary rule will yield clues about the industry’s near-term future, but it’s the earnings reports that will shed light on how life insurers performed over the three-month period that ended March 31.

And what a period of extreme volatility and turbulence it was.

The Standard & Poor’s 500 index ended the day Feb. 11 at 1,829, a 10.51 percent drop from the beginning of the year. By the time March 31 rolled around, the benchmark index had rebounded, closing higher by a fraction of a percentage point from where it began 2016.

“We expect a challenging quarter for equity-sensitive life insurers given the 5 percent average S&P decline and potential alternative investment income pressures,” wrote KBW analysts Ryan Krueger and Blake Mock.

KBW analysts expect first quarter earnings per share to dip 2 percent compared with the year-ago quarter for the 13 life insurers the analysts cover.

With interest rates low and 73.6 percent of invested assets among U.S. life and annuity carriers in bonds, according to data compiled by A.M. Best & Co. Inc., life insurers have been looking to generate yield to boost income in the face of slow premium growth.

That means taking on a little more risk through higher exposures to stocks and alternative investments. It is a strategy that served carriers well, as long as stock markets and alternative investments deliver steady returns.

But that was not the case in the first quarter of this year.

Aflac Chairman and CEO Daniel P. Amos, in a statement released Tuesday with company earnings, said low interest rates continued to make it difficult for insurance carriers to find higher yields in the marketplace without taking more risk.

“I would remind you that with interest rates at significantly depressed levels and a return to market volatility, it is difficult to invest cash flows at attractive yields while maintaining a prudent risk tolerance,” he said.

Among the carriers reporting first quarter earnings after markets close Wednesday are American Equity Investment Life Holding and CNO Financial.

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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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].