WASHINGTON — Three top insurers earned investors' ire Thursday when they reported that both earnings and revenues missed analysts' targets for the second quarter, primarily due to the continuing need for the life insurance industry to adjust to the sustained low interest rate environment that forced restatements of the value of annuities' holdings.
At 1 p.m. Thursday, MetLife was down 10.98 percent, or $4.80 at $38.90; Prudential Financial was down 4.95 percent or $3.77 at $72.38; and Lincoln National Corporation down 4.46 percent or $2, at $42.80.
MetLife suffered the most, reporting operating earnings of $924 million, or 83 cents a share, vs. $1.765 billion, or $1.56 a share for the year-ago period.
According to Thomas A. Gallagher of Evercore, the primary cause was reserve adjustments ahead of the spinoff of its Brighthouse Financial retail unit later this year. This cut operating earnings by $257 million or 23 cents a share. The annual review of its retail variable annuity actuarial assumption review reduced earnings another $161 million or 15 cents a share. An adjustment to reinsurance receivables in Australia reduced earnings a further $44 million, or 4 cents a share.
Total revenue of $15.244 billion was 6 percent lower than a year ago.
As a result, MetLife CEO Steve Kandarian said in the company's earnings conference call that the firm planned to cut expenses by 11 percent, or $1 billion annually, by 2019. Kandarian said this will include job cuts, although he declined to be specific. "In light of the significant headwinds our industry is facing, MetLife must do even more to avoid simply running in place," he said.
Gallagher attributed the weakness in MetLife shares to "surprise and confusion around the sizeable variable annuity accounting charge, which is really being triggered by higher utilization assumptions on one of the more rich benefits within a portion of its block (dollar for dollar benefits)," and weaker than expected core earnings plus some incremental run rate drag associated with reserve charges for both life insurance and annuities.
"We believe there is much confusion over why lower utilization for MetLife's variable annuity annuitization resulted in a big charge while peer PRU had a gain related to lower utilization for guarantees," Gallagher said. He added that Evercore believes "the answer is driven by the fact that the lack of utilization of annuitization for MetLife is a sign that customers are using a more robust 'dollar for dollar' benefit guarantee, while the lack of utilization for Prudential doesn't have a corresponding impact as they don't have this guarantee," because another feature of the Prudential product "contains a reasonable attractive guarantee in its own right."
Prudential reported second quarter earnings of $921 million, or $2.04 per share, compared to $3.03 per share for the year-ago period.
The decline reflected a 64 cent per share charge due to the unfavorable impact from the actuarial review, 7 cents from favorable unlocking in variable annuities, and 5 cents from the unfavorable impact of early debt extinguishment costs in the corporate sector.
Gallagher expected $2.45 in profits for the period, and said the core results missed Evercore's estimate of $2.55 a share and the consensus estimate of $2.50.
John Strangfeld, Prudential's chairman and CEO, was positive about the results and disclosed that Pru, prompted by the results, planned to increase its share buybacks. He said Pru "delivered solid core results."
He added that, "Overall, while market conditions continue to present challenges, we remain confident in our long term earnings outlook and ability to produce differentiated returns.
He said Pru produced strong sales growth in its U.S. and International protection businesses, and solid net flows in its asset management and retirement businesses.
He also said Pru was "pleased" with the structural changes made to manage the risks in its individual annuities business.
Pru reported U.S. individual life sales, based on annualized new business premiums, of $159 million, up 22 percent from the year-ago quarter. It reported individual annuities gross sales of $2.3 billion in the quarter, including $1.6 billion of variable annuities without retained exposure to equity market related living benefit guarantees. Pru also said it completed recapture of variable annuity living benefit risks from reinsurance captive on April 1.
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Pru said assets under management grew to $1.05 trillion during the quarter, including a record-high $505 billion of unaffiliated third party institutional and retail assets under management at June 30, up 7 percent from a year earlier. Net inflows from both institutional and retail business, excluding money market, totaled $3.6 billion for the quarter, Pru said.
