KBW analysts cut insurers' 2020 earnings to reflect prolonged lower interest rates

The expectation that interest rates are likely to be lower for longer has caused some analysts to cut their earnings forecasts for the industry.

Analysts at the investment bank Keefe, Bruyette & Woods (KBW) have cut 2020 estimates for life insurers’ earnings per share by 2 percent on average. It has also cut target prices for the companies’ shares.

KBW’s analysts assume 10-year rates in the 1.50 percent range and 100 basis points of additional fed funds cuts through the first half of 2010. It said the effect of the revised outlook on rates will see 1-3 percent reductions in earnings for life insurers.

“The economic impact compounds over time and is much more significant, but valuations are already depressed and reflect a lot of pessimism,” said KBW.

KBW sees property & casualty (P&C) insurance stocks as typically less sensitive to rising interest rates. It said their earnings will fall, but by less, estimating the impact at 0, 1 and 1.1 percent for the years 2019, 2020 and 2021 respectively.

“Notwithstanding the book value benefit from interest rate declines, we think falling interest rates are a net negative for P&C insurers; lower interest rates implies new money will be invested at lower yields and will pressure net investment income, insurers' lowest-risk and therefore highest-multiple earnings stream," said KBW.

It added: “However, most P&C underwriters' direct interest rate exposure is limited to their investment portfolios.”

KBW said it still expects “solid” earnings growth in the 2019-2021 period, boosted by “accelerating P&C rate increases in most commercial lines of business, reflecting re/insurers’ response to past years' inadequate returns.”

AIG and Third Point are among KBW’s top picks in the sector, on the grounds of improving core underwriting margins.

Yesterday, the European Central Bank cut the rate charged on bank deposits to -0.5 percent to encourage lending. The ECB left its headline borrowing rate at zero.

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