Solid earnings results for one life insurance company and another asset management company provided a sign to investors that the life insurance sector has bounced back from midyear lows, according to an industry analyst.
The S&P 500 ticked up 0.73% for the week ending July 27 to 2,818.48, while the SNL U.S. Insurance Index rose 1.38% to 1,034.94.
Strong earnings reports from Aflac Inc. and Ameriprise Financial Inc. showed that the life insurance sector may have recovered from a period of uncertainty stemming from long-term care insurance woes, Sandler O'Neill analyst John Barnidge said.
Shares of Aflac rose 7.61% after posting a 16% rise in third-sector sales in its Japan segment and stronger year-over-year earnings figures. The third sector includes cancer, medical and income support products.
Executives on the company's earnings call attributed the strong rise in Japan to the company's newly introduced cancer products. Chairman, President and CEO Daniel Amos said enhanced benefit features, coupled with targeted promotions including television advertising and the biggest direct-mail campaign in the company's history, helped propel the segment.
Overall, the company reported net earnings of $832 million, or $1.07 per share, compared with $713 million, or 89 cents per share, in the year-ago quarter.
Meanwhile, Ameriprise, an asset management company with significant annuities segment, posted annuities revenue of $622 million, down slightly from the prior-year quarter's $627 million.
Barnidge pointed out that while the life insurers under his coverage scope performed well in the last week, that is just part of a three-week rally. The analyst said the recent uptick follows a broader trend for the life insurance sector, which tends to perform better in the second half of the year.
"Let's keep in mind that this group has not performed well for most of the year, pretty much," Barnidge said. "Until this point, they've been a major underperformer."
Both MetLife Inc. and Prudential Financial Inc. saw their shares jump in the five-day trading week, climbing 4.09% and 3.91% respectively.
On the verge of the two largest life insurers' earnings reports, Barnidge said investors and other analysts will be laser-focused on any news related to long-term care insurance.
With Prudential, Barnidge said observers will be watching the results of its annual actuarial assumption review, especially with respect to the company's long-term care segment. At year-end 2017, the company reported 215,267 long-term care policyholders and almost $5.3 billion in long-term care reserves.
With MetLife, however, Barnidge said "you never know" what may crop up. Earlier in the year, MetLife's CFO stepped down and the company announced accounting issues related to the company's calculation of variable annuity guarantees.
In addition, a Massachusetts regulator opened a probe into the company after the discovery that MetLife owes pension payments to hundreds of retirees.
Life insurers' exposure to liabilities in long-term care are still projected to lead to "material reserve changes" in 2018 and 2019, according to a Fitch Ratings report released July 26.
The rating agency believes many insurers "continue to be under-reserved for ultimate losses in [long-term care]." Fitch analyzed relaxed and aggressive assumptions that backed the initial underwriting, pricing, investment and reserving of those portfolios, particularly for policies written prior to the early 2000s.
"As insurers continue to test the cash flows and still-aggressive reserve assumptions associated with these liabilities, we believe many insurers will report material reserve charges," the report said.
In the property and casualty space, shares of Universal Insurance Holdings Inc. jumped more than 12.02%, the highest of any insurer tracked by S&P Global Market Intelligence, following a nearly $20 million year-over-year jump in reported net income.
The company recorded second-quarter net income of $46.1 million, or $1.29 per common share, up from $29.4 million, or 82 cents per common share, in the same quarter of 2017.
Keefe Bruyette & Woods analyst Arash Soleimani recently downgraded the company to "market perform" from "outperform" because of that sharp stock price increase. The analyst wrote in a research note that shares are trading at 9.4x his 2019 EPS estimate.
But Soleimani also raised his one-year price target to $44.00 from $39.00 and increased his 2018 EPS estimate to $4.65 from $4.05. He increased his 2019 projection to $4.45 from $4.15 and 2020 prediction to $4.60 from $4.35.