U.S. life insurers slumped in the third quarter, as the industry suffered due to weakness in financial markets and the economic recovery, according to a new report from Moody’s Investors Service.
The rating agency says that most publicly-traded U.S. life insurers reported lower operating earnings in the third quarter of 2011, compared with the previous quarter, noting that the industry’s profitability is still dependent on macroeconomic factors including volatility in the equity markets, interest rate levels and the state of the economic recovery.
“Net operating income for the industry declined by 17% between the second and third quarters,” says analyst and author of the report Manoj Jethani, “driven by the sharp equity market decline and interest rates falling to historical lows.”
While aggregate net income was up 46% during the quarter, MetLife and Prudential accounted for more than 100% of the increase, largely due to non-economic accounting items, Moody’s says. Excluding those two companies, net income dropped by 18%.
Nevertheless, Jethani notes that firms’ results were in line with their guidance, as well as Moody’s expectations for a gradual but uneven improvement in profitability, given unsettled economic conditions and continuing volatility in the equity markets.
The rating agency says that the markets also affected gross variable annuity sales, which declined for most insurers after having picked up in prior quarters. Fixed annuity sales continued to fall due to low interest rates, while individual life insurance sales were essentially flat, it says.
Notwithstanding the weak earnings, Moody’s says that financial flexibility remains strong for U.S. life insurers, as shareholders’ equity improved by 8% during the quarter. By the end of September, almost three-fourths of the companies Moody’s tracks had resumed share repurchases, with funding mainly through dividends on “excess” capital at operating companies, rather than debt-financed buybacks.
Still, it says that U.S. life insurers’ market capitalization dropped by 30% during the third quarter. And, accessing the debt and equity markets on favourable terms remains challenging for companies, which issued no new corporate debt in the three months ended September 30.
“Although the majority of companies are reporting lower income on both a quarterly and year-over-year basis,” Jethani says, “their annual earnings and capitalization will likely be helped by the improvement in the equity markets at the start of the fourth quarter, unless the markets reverse again and the economy slides back into recession.”