By Leslie Scism and Lauren Pollock
Two of the biggest themes in the market -- persistently low interest rates and the continued poor performance of hedge funds -- stung some insurers in the first quarter, as four of the most prominent companies in the sector reported sharply lower operating profits.
Insurers earn a substantial portion of their income from the investments they make with customers' premium dollars, holding them until claims are due. A protracted low-interest-rate environment in the U.S. and many other parts of the world has stung the industry broadly.
Analysts said the quarter was one of the worst in the past couple years for U.S. insurers. They have grappled with low interest rates since 2008, cutting expenses and raising fees on customers among other efforts to keep their profits intact. This quarter, some were let down by hedge funds, which on average lost about 1% in the first quarter, according to researcher HFR Inc. Insurers' portfolios mostly hold high-quality bonds, but some allocate a sliver to riskier holdings.
For the first quarter, life insurers MetLife Inc., Prudential Financial Inc. and Lincoln Financial Group reported lackluster investment income, while property and casualty giant Allstate Corp. logged a sharp increase in catastrophe losses for the quarter.
MetLife said weak hedge-fund performance dented its investment income, which declined 5.5% to $4.71 billion. That followed similar comments about hedge funds earlier in the week from American International Group Inc.
Prudential logged a slight 0.4% increase in investment income but said its business took a hit on fluctuations in a portfolio that includes hedge funds, private equity and real estate. Lincoln Financial blamed lower investment income for declines in fee income and earnings at its retirement plan services segment.
Among the major insurers that reported Wednesday, Chubb Ltd. was the only one to report an increase in operating income, a key measure in the insurance industry that excludes realized capital gains and losses in the companies' big investment portfolios.
Prudential shares declined 3.2% after hours, followed by MetLife, which dropped 3%. Operating earnings at both companies declined more than expected. The other stocks were little changed.
MetLife said in January that it would divest itself of a large chunk of its operations, as part of a plan to slim down and reduce some of the capital burden it would face under new federal regulations as "systemically important." In March, a federal judge ruled for MetLife in the New York company's challenge of the designation, and that ruling is now being appealed by the government.
Within the property and casualty market, Allstate had already warned that its results would take a big hit on catastrophe losses incurred in the period. The insurer primarily blamed hailstorms in the southern U.S., one of which was the largest to ever hurt the company. Its catastrophe losses grew to $827 million from $294 million a year earlier.
Those comments echo sentiments expressed in recent weeks by Travelers Cos., car insurer Progressive Corp. and Kemper Corp., all of which highlighted a spike in claims from punishing hailstorms in March.
Chubb, meanwhile, reported catastrophe losses declined to $258 million from $315 million a year earlier.
In all, at MetLife, the largest U.S. life insurer by assets, operating income declined to $1.33 billion, or $1.20 a share, from $1.64 billion, or $1.44 a share, a year earlier. Analysts polled by Thomson Reuters expected $1.38 a share. Revenue, meanwhile, slipped 2.5% to $16.61 billion.
At Prudential, which earns about half of its profit abroad, mostly from Japan, perating earnings declined to $997 million, or $2.18 a share, versus the $2.37 a share expected by analysts. Revenue at Prudential, with its annuities, retirement-income and asset-management businesses, fell 4.4% to $11.29 billion.
Lincoln Financial posted an 11% slide in operating income to $314 million, or $1.25 a share. Analysts had called for $1.49 a share.
Allstate, meanwhile, said operating earnings dropped 48% to $322 million, or 84 cents a share, while Wall Street predicted 68 cents a share. Revenue slipped 0.9% to $8.87 billion, though insurance premiums increased.
Chubb, formed earlier this year when ACE Ltd. acquired Chubb in a nearly $30 billion deal and took its name, reported operating earnings of $1.02 billion, or $2.26 a share, beating the $2.16 a share expected by analysts. Net premiums were $5.48 billion.
Corrections & Amplifications: Chubb's catastrophe losses declined to $258 million from $315 million a year earlier. The metric used in an earlier version of this article didn't take into account the recent merger of ACE and Chubb.
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