By Leslie Scism and Lauren Pollock
Two of the biggest themes in the market -- persistently low
interest rates and the continued poor performance of hedge funds --
stung some insurers in the first quarter, as four of the most
prominent companies in the sector reported sharply lower operating
profits.
Insurers earn a substantial portion of their income from the
investments they make with customers' premium dollars, holding them
until claims are due. A protracted low-interest-rate environment in
the U.S. and many other parts of the world has stung the industry
broadly.
Analysts said the quarter was one of the worst in the past
couple years for U.S. insurers. They have grappled with low
interest rates since 2008, cutting expenses and raising fees on
customers among other efforts to keep their profits intact. This
quarter, some were let down by hedge funds, which on average lost
about 1% in the first quarter, according to researcher HFR Inc.
Insurers' portfolios mostly hold high-quality bonds, but some
allocate a sliver to riskier holdings.
For the first quarter, life insurers MetLife Inc., Prudential
Financial Inc. and Lincoln Financial Group reported lackluster
investment income, while property and casualty giant Allstate Corp.
logged a sharp increase in catastrophe losses for the quarter.
MetLife said weak hedge-fund performance dented its investment
income, which declined 5.5% to $4.71 billion. That followed similar
comments about hedge funds earlier in the week from American
International Group Inc.
Prudential logged a slight 0.4% increase in investment income
but said its business took a hit on fluctuations in a portfolio
that includes hedge funds, private equity and real estate. Lincoln
Financial blamed lower investment income for declines in fee income
and earnings at its retirement plan services segment.
Among the major insurers that reported Wednesday, Chubb Ltd. was
the only one to report an increase in operating income, a key
measure in the insurance industry that excludes realized capital
gains and losses in the companies' big investment portfolios.
Prudential shares declined 3.2% after hours, followed by
MetLife, which dropped 3%. Operating earnings at both companies
declined more than expected. The other stocks were little
changed.
MetLife said in January that it would divest itself of a large
chunk of its operations, as part of a plan to slim down and reduce
some of the capital burden it would face under new federal
regulations as "systemically important." In March, a federal judge
ruled for MetLife in the New York company's challenge of the
designation, and that ruling is now being appealed by the
government.
Within the property and casualty market, Allstate had already
warned that its results would take a big hit on catastrophe losses
incurred in the period. The insurer primarily blamed hailstorms in
the southern U.S., one of which was the largest to ever hurt the
company. Its catastrophe losses grew to $827 million from $294
million a year earlier.
Those comments echo sentiments expressed in recent weeks by
Travelers Cos., car insurer Progressive Corp. and Kemper Corp., all
of which highlighted a spike in claims from punishing hailstorms in
March.
Chubb, meanwhile, reported catastrophe losses declined to $258
million from $315 million a year earlier.
In all, at MetLife, the largest U.S. life insurer by assets,
operating income declined to $1.33 billion, or $1.20 a share, from
$1.64 billion, or $1.44 a share, a year earlier. Analysts polled by
Thomson Reuters expected $1.38 a share. Revenue, meanwhile, slipped
2.5% to $16.61 billion.
At Prudential, which earns about half of its profit abroad,
mostly from Japan, perating earnings declined to $997 million, or
$2.18 a share, versus the $2.37 a share expected by analysts.
Revenue at Prudential, with its annuities, retirement-income and
asset-management businesses, fell 4.4% to $11.29 billion.
Lincoln Financial posted an 11% slide in operating income to
$314 million, or $1.25 a share. Analysts had called for $1.49 a
share.
Allstate, meanwhile, said operating earnings dropped 48% to $322
million, or 84 cents a share, while Wall Street predicted 68 cents
a share. Revenue slipped 0.9% to $8.87 billion, though insurance
premiums increased.
Chubb, formed earlier this year when ACE Ltd. acquired Chubb in
a nearly $30 billion deal and took its name, reported operating
earnings of $1.02 billion, or $2.26 a share, beating the $2.16 a
share expected by analysts. Net premiums were $5.48 billion.
Corrections & Amplifications: Chubb's catastrophe losses
declined to $258 million from $315 million a year earlier. The
metric used in an earlier version of this article didn't take into
account the recent merger of ACE and Chubb.
Write to Leslie Scism at leslie.scism@wsj.com, Tess Stynes at
tess.stynes@wsj.com and Lauren Pollock at
lauren.pollock@wsj.com
(END) Dow Jones Newswires
May 05, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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