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February 6, 2009updated 13 Apr 2017 8:57am

Insurers’ results go from bad to worse

As fourth-quarter 2008 results begin to roll in from US life insurers, the news is not good, with most failing to meet analysts or even their own earnings expectations by a wide margin Staff lay-offs are now the order of the day as insurers brace for what may be an even tougher 2009

By Charles Davis

As fourth-quarter 2008 results begin to roll in from US life insurers, the news is not good, with most failing to meet analysts’ or even their own earnings expectations by a wide margin. Staff lay-offs are now the order of the day as insurers brace for what may be an even tougher 2009. Charles Davis reports.

Early signs of fourth-quarter 2008 results are not encouraging for US life insurers, who continue to struggle with mounting losses from securities and the deterioration of the broader economy.

The first official shot across the bows came on 4 February when insurer Prudential Financial announced it had lost an eye-popping $1.64 billion, or $3.85 per share, compared with a profit of $792 million, or $1.75 per share, a year ago. Analysts were expecting a loss of $1.19 per share.

The company’s individual life and group insurance division posted adjusted operating income of $78 million, compared with $185 million in the prior-year period. The news was even more disturbing given that Prudential forecast an adjusted operating loss of between $1.10 and $1.30 a share in the period, excluding certain items, as recently as December.

Job cuts planned

Even before its fourth-quarter numbers came in, insurer Allstate announced it planned to cut about 1,000 jobs in its financial arm over the next two years through a combination of attrition and redundancies.

Allstate has about 38,000 full-time workers company-wide, including about 3,800 at Allstate Financial, which provides such products as life insurance, supplemental accident and health insurance and annuities. The job cuts were accompanied by a $1.13 billion fourth-quarter net loss, as it wrote down the value of the very sorts of investments that have dogged US insurers in recent months.

Allstate emphasised its core insurance underwriting operation “continued to produce strong underlying profitability”, but while earnings from underwriting slipped only modestly in the fourth quarter, to $243 million from $276 million, the insurer’s investment portfolio took heavy losses from the stock market’s plunge, and the fallout from those investments did the damage to the company’s earnings.

Net investment income, from sources such as dividends and interest on Allstate’s large bond portfolio, declined 18 percent in the latest quarter, to $1.33 billion, fueled in large part by $1.93 billion in “realised” capital losses – losses from selling securities at a loss, or from asset write-downs.

Days earlier, MetLife, the US’ largest life insurer, forecast fourth-quarter and 2009 earnings below analysts’ estimates, but reassured investors it remains well capitalised and expects a higher rate of growth than its competitors.

Despite lowering its expectations somewhat, MetLife said net profit in the fourth quarter would be up from a year earlier, helped by investment gains.

MetLife forecast fourth-quarter net income of $1.2 billion to $2 billion, or $1.50 to $2.55 a share, up from $1.1 billion, or $1.44 a share, a year earlier. Premiums, fees and other revenue are expected to rise to between $7.9 billion and $8.5 billion, from $7.7 billion.

The company expects net realised investment gains of $1.2 billion to $1.8 billion, reflecting relatively modest credit losses and substantial derivative gains.

MetLife said it forecasts fourth-quarter operating results ranging from a loss of $50 million to a profit of $150 million, or a loss of 5 cents a share to a profit of 20 cents a share. Analysts expected a profit of 83 cents a share.

MetLife forecast 2009 operating earnings of $3 billion to $3.3 billion, or $3.60 to $4.00 a share.

“With an 11 percent expected increase in top line results for 2008, MetLife’s core businesses continued to perform very well during the year, despite strong economic headwinds,” said Metlife chairman, CEO and president C Robert Henrikson in a statement.

“Furthermore, with a very strong excess capital position, a well-diversified investment portfolio and a diverse mix of businesses, MetLife continues to stand apart in the industry. We are well positioned for the future, though clearly we are not immune from several market factors impacting our bottom line results this quarter.”

Financial planning and insurance services specialist Ameriprise Financial reported that it lost $369 million, or $1.69 per share, in the fourth quarter. Comparing those results to the prior-year period, when the company posted net income of $255 million, or $1.08 per share, illustrates how far the stock market and financial sector have fallen.

Ameriprise took $420 million in pretax, net realised investment losses and is cutting costs across the business, having announced 300 layoffs the week before its earnings report. Total net revenue declined 40 percent, to $1.4 billion in the fourth quarter. Excluding market factors, core revenue was $1.8 billion, down 21 percent from the same period in 2007.

During a conference call following the earnings announcement, Ameriprise executives underscored the fact that, all things considered, the firm is in better shape than many of its competitors. Its balance sheet remains strong, with $6.2 billion in cash and cash equivalents, and it has applied for the federal government’s Troubled Assets Relief Program as a backup. The company’s investment portfolio is also strong, with just 5 percent of total assets rated below investment grade and less than 1 percent exposed to subprime mortgage assets.

Life insurers not alone

Life insurers can take some solace in the fact that the economic contagion knows no bounds. Property and casualty insurer Cigna, out in front of its own earnings report, said it would cut about 1,100 jobs and consolidate some offices because of the flagging economy and will not give pay raises to salaried employees in 2009.

Insurers Aetna and The Hartford also recently announced they were laying off workers to reduce expenses, protect profits and remain competitive.

Cigna expects to record an after-tax charge of $30 million to $40 million in the fourth quarter of 2008 as a result of the cost reduction efforts. About 80 percent of the charge represents severance and other expenses related to the layoffs.

The company signaled additional layoffs might be possible this year, saying in a federal filing: “The company’s review is ongoing and there may be additional charges in 2009.”

Safe to say that such reviews are ongoing throughout the insurance industry, as 2009 augurs to be one of the most troubled years in financial services history.

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