Life insurers should deliver solid Q4 and full 2023 earnings, analyst says

Life insurers saw plenty in 2023: new reporting and reserving standards, a return of tougher proposed fiduciary rules, rising interest rates and, of course, strong sales.

That latter one counts for a lot. So much that analysts anticipate life insurers, despite some minor red flags, will post strong fourth-quarter and full-year 2023 earnings in the coming weeks.

When earnings reports start being released in about 10 days, life insurers are likely to report strong investment income. The 10-year Treasury yield, which serves as a benchmark for insurers' new money yields, has been growing over the past couple of years. As of Jan. 19, 2024, the 10-year Treasury yield sat at 4.15%, an increase from 1.63% at the start of 2022.

The industry has used this period of interest rate uncertainty to reposition their investment holdings, said Jamie Tucker, senior director with Fitch Ratings.

Fitch revised its sector outlook for North American life insurers from "neutral" to "improving" for 2024. Fitch expects the Fed's monetary tightening to cease and potentially pivot towards monetary easing.

"North American life insurers will still benefit from the higher interest rate environment in 2024 which will facilitate top line growth and enhance margins," Tucker said. "Strong balance sheets should partially mitigate potential slowdown in economic growth or macroeconomic volatility."

Life insurers with high commercial real estate holdings bear watching, Fitch noted recently. "Insurers most vulnerable to heightened pressure and losses will be those holding larger office concentrations and higher volumes of near-term maturities," Fitch said in a news release late last year.

Insurers report continued sales

Through three quarters, LIMRA and Wink, Inc. both reported record-setting annuity sales. In the first nine months of 2023, total annuity sales increased 21% to $270.6 billion, LIMRA found.

Those full-year sales numbers will likely be equally as impressive and Wall Street analysts will take note.

“We expect to continue to see strong growth in sales, led by fixed annuities, fixed annuities deferred and fixed indexed annuities in addition to pension risk transfer deal flow,” Tucker said.

Every bit of good economic news often comes with a negative side effect. Such is the nature of our highly interconnected financial system. For life insurers, higher interest rates brings stronger investment income, but also higher lapses and surrendered policies from consumers seeking greater gains.

“Certainly that has very much been an area of concern," Tucker said. “The lapses and surrenders certainly have increased, in some cases, increased materially from where they were. But as you're looking at it compared with insurers’ dynamic lapse rate assumptions, what they predicted in this interest-rate environment, then the rise in rates of lapses and surrenders are lower than expected.”

A rise in lapses and surrenders can lead to liquidity concerns for insurers, Tucker said, who might respond by selling fixed-income securities as a loss. There is not much evidence yet of that happening, he added.

“Some of the lapses are being recycled,” he explained. “So, it could be an annuitant or policyholder buying new policies and ultimately, it's self-funding from that standpoint.”

The credit quality for the life insurance sector remains strong, Tucker said during a recent Fitch webinar. This is large reflective of the higher interest rate environment and the benefits of higher reinvestment rates, improved spreads and enhanced margins.

“The U.S. economy has remained resilient in 2023, although we do expect a slowdown and continued macroeconomic volatility in 2024. But we do expect the U.S. will avoid a recession,” he said.

Mortality remains stubbornly high

An AM Best analysis shows that U.S. life insurers' paid death benefits increased dramatically following the pandemic, with the average amount of claims in 2020-2021 up 37.9% compared with the previous eight years.

As anticipated, COVID-19 was the main reason for the jump in claims. The report, “Mortality Risk Worsening Due to COVID-19,” stated that numbers were also impacted by the unavailability of medical care due to widespread lockdowns. A concurrent resurgence of substance abuse, as well other societal issues, also contributed to the increase in death claims at the time.

Mortality continues to be stubbornly high.

“There has been some excess residual mortality post-COVID, whether it's attributable to COVID, or just other elements," Tucker said. "From our standpoint, it’s difficult to predict, but we're not expecting mortality to necessarily materially affect industry wide results.”

The start of 2023 saw insurance companies transitioning to the new long-duration targeted improvements (LDTI) accounting standard. This new standard will continue to impact how financials are reported.

The LDTI accounting standard "significantly changes the accounting and disclosure requirements for long-duration insurance contracts," S&P Global Market Intelligence reported in May. Companies are now required to review and update cash flow assumptions used to measure liabilities for future policy benefits for traditional and limited-payment contracts at least on an annual basis.

Fitch has not seen any "material surprises" with the new accounting requirements, Tucker said.

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.