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Actuarial assumption reviews likely to top life insurers' Q3 earnings dockets

As long-term care concerns continue to weigh on U.S. life insurers, annual assumption reviews are likely to dominate the conversation during third-quarter earnings season.

"Long-term care has been a really tough exposure," said Randy Binner, an analyst at B. Riley FBR. "The net of it is those trends are not positive ... people are expecting to see more details and the possibility of bad news from some of the companies."

Unum Group already announced a third-quarter reserve charge of $590 million, though that turned out to be a positive disclosure for the company. Its shares gained ground after the announcement as the charge was within management's previous guidance.

Prudential Financial Inc. in the second quarter took a $1.6 billion charge after removing its 1% morbidity improvement assumption for claims cost over a 20-year period. John Barnridge, an analyst for Sandler O'Neill, believes that some companies could follow Prudential's lead and also remove their morbidity improvement assumptions.

Bob Garofalo, an analyst for Moody's, expects to hear more about CNO Financial Group Inc.'s closure on a long-term care block with Wilton Reassurance Co. that took place in late September.

"That was a significant event for them as it lowered their future tail risk from exposure to long-term care," he said.

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A majority of the top 15 life insurers are expected to post year-over-year earnings increases in the third quarter, according to analyst estimates compiled by S&P Global Market Intelligence. Outside the long-term care business, life insurers are enjoying the tailwinds of a favorable environment with yields rising and equity markets climbing.

"I guess what I would say is the one thing that changed and does affect the way we model earnings is the S&P was up a lot in the third quarter," Binner said. "The S&P was up about 7% point to point and about 5% on average ... so we do adjust the numbers for that."

Another positive factor to consider is the yield on 10-year Treasury bonds, which is at levels not seen since 2011.

"That's a big deal," Binner said. "So I think whatever the impact of that is, is going to be much greater than whatever they report at earnings."

Annuity sales are also flowing smoothly, according to several analysts, who listed the low unemployment rate, steady retirement flow and the unlikely probability that annuities will be strictly regulated as some of the factors involved.

"We expect annuity sales to continue to be good," Binner said. "In general they should be good because the U.S. population is aging."

American Equity Investment Life Holding Co. in late May confirmed reports that it was in preliminary deal talks; Sandler's Barnridge expects more clarity on that subject when the company reports earnings, especially as it relates to the fixed-index annuity marketplace.

John Heagerty, a research analyst for Atlantic Equities, predicts that the "biggest focus" for MetLife Inc. will be its long-term care operations. Heagerty also noted that MetLife has a small exposure in Turkey that is vulnerable to a recent major devaluation in that country's currency.

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The template provides summary income statement, balance sheet, investment details and other exhibits insurance companies.