Sell-side analysts expect seven of the top 10 life insurers by market cap to report year-over-year operating EPS increases for the fourth quarter of 2016. The EPS estimate reflects mean analyst recommendations for each stock, as tracked by S&P Global Market Intelligence.
Rising interest rates and equity market performance during the quarter should play a major role for life insurers. The yield on the 10-year Treasury climbed 18 basis points in all of 2016 but jumped 85 basis points during the fourth quarter of that year. The increase in interest rates should help new money yields, as insurers are able to reinvest their capital at higher rates. But from a longer-term perspective, rates remain historically low. At the start of 2007, for instance, the 10-year Treasury was at 4.7%, versus only 2.5% at the start of 2017.
A rally in the U.S. equity markets also likely aided the group's operating performance, as the S&P 500 increased 4.65% during the quarter.
"Equity market levels drive management fee revenues for insurers with asset management businesses, such as [Principal Financial Group Inc. and Prudential Financial Inc.], and insurers with significant variable annuity books, including [Lincoln National Corp., MetLife Inc. and Prudential Financial]," RBC Capital Markets analysts said in a Jan. 13 research report.
Life insurers may also report a fair amount of share repurchases taken in the fourth quarter. Prudential Financial, for instance, has about $600 million in capacity to do buybacks and has been actively repurchasing shares. Through the first nine months of 2016, it repurchased roughly $1.4 billion in shares, and it was not alone. Aflac Inc. Lincoln and Voya Financial Inc. have also been active on the buyback front.
In previous quarters, a good source of earnings has been the purchase of group annuities for the purpose of pension risk transfers. Prudential Financial CEO John Strangfeld said on a third-quarter 2016 earnings call, according to a transcript, the retirement business saw "solid earnings," with strong net flows driven mostly by the pension risk transfer business, which closed on several transactions, including a $2.5 billion deal announced in September 2016. Prudential Financial might once again benefit in the fourth quarter from a pension risk transfer deal. On Oct. 6, 2016, United Technologies Corp. stated it would transfer roughly $775 million of pension liabilities to Prudential Insurance Co. of America.
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