Earnings

Brighter outlook seen for insurance industry Q2 earnings

By Doug Bailey

As insurers prepare to release second quarter financial results, it appears some, if not many, of the negative factors that have dragged earnings and profits for years have begun to diminish, and maybe even disappeared.

Results vary by sector, with life and health insurers expecting favorable outcomes, with even the battered property and casualty business showing some bright spots.

The high interest rate environments, rising stock market, supply chain improvements, and in some cases, rate relief from regulators have combined to produce what most analysts expect will be a fairly rosy picture going into the second half of the year.

But there a still few lingering problem areas.

Property and Casualty

Rising repair and replacement costs, catastrophic storms, and inadequate rates have plagued the P&C business for the last several years. But analysts expect this quarter will show rising premiums have boosted revenues.

“From an underwriting standpoint, definitely things have turned around in personal space,” said Jim Auden, managing director and property/casualty sector head for Fitch Ratings' North American insurance rating group. “It’s been a little unbalanced but some of the best performers in this space like GEICO and Progressive started turning things around in the second half of last year.

Progressive, in fact, already reported 2nd quarter earnings of $2.65 per share, which beat Wall Street consensus estimates of $1.99. Progressive’s bottom line improved more than five times since last year, with operating revenues of $18.3 billion, an $18.3 billion increase year over year.

“Revenue growth should remain pretty strong across the board in property casualty for the year,” said Auden. “Premiums are up like 10% over last year and they might taper off a bit - to, say 7-8% for the year fueled by continued very large rate increases in personal auto lines.”

The mutual insurers may be a little slower to bounce back, he said, but still expect a favorable 2nd quarter.

“The big thing is personal auto, which was a real surprise how bad things got in ‘22 and ‘23,” said Auden. “But there’s definitely been a big rate response that's leading to a turnaround in the results.”

A record-setting year for catastrophic storm damage has insurers on edge heading into what may be an even worse 2024. But, for now, relaxed inflation and few supply chain interruptions have aided the home and commercial property markets.

Travelers Insurance published interim financial results for the second quarter, showing a major turnaround in earnings. Core income of $585 million, or $2.51 per diluted share, benefited from excellent underlying results, favorable net prior year reserve development, and higher investment income, the company said.

“We…generated a strong bottom-line result in a quarter that included a record level of severe convective storms across the United States,” said Travelers chair and chief executive Alan Schnitzer.

Life Insurance

Analysts also expect improved results from the life insurance sector as companies benefitting from higher interest rates, rebalancing of investment portfolios and higher reinvestment rates.

“I expect stronger variable investment income benefiting life insurers,” said Jamies Tucker, senior director for life insurance at Fitch. “Typically, there’s a one-quarter lag. But comparing to the S&P return, which in the first quarter was close to 10%. It's not perfect, but we do expect some improvement there, which will benefit results. And then, additionally, it was a fairly strong quarter for the equity markets, so that translates into improvements in fee-based income. So, that's all generally positive.”

Mortality rates have remained elevated post-Pandemic, which is affecting claims, analysts note. However, most agree that either the higher excess mortality numbers are a temporary phenomenon or a new normal that can be accounted for going forward.

“There is some expectation that this level of mortality will persist over the coming years,” said Tucker. “We're not expecting any sort of material spike, so I don't I don't necessarily see that as a driver of results. The expectation is that it will remain at modestly elevated level compared with the pre-covid. It's become more of a new norm.”

Historically higher annuity sales have driven positive results and analysts think that trend will continue.

One potential problem area for earnings, however, is the continued losses in the commercial real estate portfolios held by insurers. Analysts expect more losses driven by rising costs and increased vacancies.

“Few people working in offices, reduces demand for commercial real estate,” said Tucker.

Health Insurance

After years of relative price stability in the difficult and complex health insurance market, the sector was hit by a dramatic slide in “utilization” during the pandemic. In other words, people stopped going to the doctor. That fact has thrown a wrench into predicting utilization levels, which have precipitously post-pandemic, disrupting earnings and projections and creating something of an adverse selection phenomenon among those returning to regular healthcare, as they were generally in poorer health.

“Several senior executives at companies with significant Medicaid operations have recently commented on higher-than-expected utilization rates among remaining Medicaid beneficiaries,” Fitch said in a recent report. “Uncertainty around rate adequacy can occur with a rapid change in composition of the risk pool, which appears to have been a consequence of the Medicaid redetermination process. The morbidity of the risk pool has deteriorated, but the precise causes of higher acuity within remaining Medicaid beneficiaries is currently unclear. However, we believe that one potential factor is adverse selection driven, in part, by the high level of disenrollment for procedural reasons.”

The long-term credit profiles of large U.S. health insurers participating in state Medicaid managed care programs should not be significantly affected by the recently reported increases in utilization, Fitch said. “However, modest, short-term margin pressure should emerge in the Medicaid line of business.”

Meanwhile, as enrollment periods for government health care programs take place in the second half of the year, pricing among competitors could vary substantially upsetting expectations and impacting earnings.

The companies with the largest exposures in the Medicare exchange market could be hit,” said Brad Ellis, senior director North American Insurance Ratings.

“For most companies, diversification, particularly in commercial group and individual exchange market, will also continue to be beneficial in helping to offset the temporary margin pressure in Medicaid,” Fitch said.