Big three US insurers set for earnings recovery

All three of the biggest US insurers, AIG, MetLife and Prudential Financial, are poised to post improved earnings for the first time in five quarters, giving some relief to a sector hurt by persistently low interest rates

The numbers provide some evidence that the industry can improve returns despite the Federal Reserve’s ultra-loose monetary policy, which has reduced the income insurers can produce from their vast bond-dominated investment portfolios.

Insurance earnings season gets into full swing this week after a relatively upbeat batch of results from US banks.

The three largest US insurers, which control a combined $2.2tn in assets, are all due to post rises in adjusted earnings per share, according to forecasts collated by Bloomberg.

Analysts point to better returns from hedge funds. Weak returns from alternative investments have weighed on results from all three companies in recent quarters.

Stronger stock markets, which bolster fees for insurers’ asset management operations, and efforts to trim expenses are also expected to improve the sector’s profits.

Big challenges remain, however. Shares in AIG, MetLife and Prudential Financial have rallied since the summer but they all trade at less than 70 per cent of the companies’ prospective book values — a sign of investor pessimism.

“The earnings set up this quarter is pretty good but these aren’t secular trends,” cautioned Randy Binner, at Virginia-based FBR Capital Markets. “The companies are benefiting from improvements in alternative investments but the year-on-year comparisons also reflect one-off items.”

Another risk for the sector are annual reviews that insurers make to their financial assumptions.

Ryan Krueger, at Keefe, Bruyette & Woods, said several insurers, including Lincoln National and Voya, conducted actuarial reviews in the third quarter.

The biggest forecast profits rise is for AIG. Peter Hancock, chief executive, is remodelling the company after he faced demands this year from activists Carl Icahn and John Paulson to consider a break-up of AIG’s life and non-life businesses.

Since the crisis, AIG has slimmed radically, jettisoning businesses from aircraft leasing to consumer finance, and in recent months it has sold both its mortgage insurance arm and a Lloyd’s of London franchise.

The biggest US insurer by market capitalisation, which has brushed aside the calls for a split, is expected on Wednesday to unveil that quarterly adjusted earnings per share have more than doubled on last year, according to the Bloomberg data.

AIG’s earnings a year ago were hit by restructuring charges and a negative performance from alternative investments.

Mr Binner added that AIG’s results this time would also benefit from a low level of losses across the property and casualty insurance industry.

MetLife, which in the summer set out plans to cut costs by more than a tenth in the face of low interest rates, is forecast to post a year-on-year rise in adjusted EPS of 82 per cent in the third quarter.

The anticipated improvement at Prudential Financial, which is focused on life insurance and asset management, is a more modest 4 per cent.

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