IN/sights: Outlook & Trends for U.S. Insurers 2022

Amid rising inflation, geopolitical tensions and the lingering effects of the COVID-19 pandemic, U.S. insurers face several new challenges to navigate throughout the year. In May 2022, S&P Global Market Intelligence hosted a complimentary webinar in which subject matter experts from S&P Global Market Intelligence, S&P Dow Jones Indices and S&P Global Ratings discussed emerging trends facing the insurance industry throughout 2022. This blog summarizes some of the takeaways from the session.

Click here to listen to the full webinar.

Webinar Participants:

• Lynn Bachstetter, Head of the Global Financial Institutions Group, S&P Global Market Intelligence.
• John Iten, Senior Director and Property/Casualty Insurance Sector Lead in the North American Financial Services Group, S&P Global Ratings.
• Raghu Ramachandran, Head of Insurance Asset Channel, S&P Dow Jones Indices.
• Tim Zawacki, Principal Research Analyst, U.S. Insurance Industry, S&P Global Market Intelligence.

Key Takeaways:

The general outlook for P&C

• The outlook for the U.S. P&C primary sector remains stable. 86% of S&P Global Ratings credit ratings currently have stable outlooks, and there are approximately 11% that have negative outlooks. There have been no rating changes so far this year, although the P&C operations of AIG were assigned a negative outlook following the IPO of the company’s life and retirement business. In addition, RSUI was placed on credit watch positive after the announcement that its parent, Alleghany Corp., agreed to be acquired by Berkshire Hathaway.
• Commercial line writers benefit from a strong pricing environment. Companies in the sector continue to get good rate increases that are exceeding the loss cost trend, so margins are still expanding.
• On personal lines, the spike in material and labor costs caught insurers off guard. Companies responded by seeking approval for rate increases. These have started to flow through the P&Ls, but it will take time for rates to catch up with loss cost trends.
• Overall, industry debt issuance was active in the first quarter of 2022. The number of issues, both debt and hybrid, are expected to slow down, but there have been several very large issues so far this year. For example, AIG issued $6.5 billion of senior notes as part of its capital restructuring in preparation for its life and retirement IPO, and Progressive had a significant issue of $1.5 billion of notes.

The impact of inflation

• Low interest rates have challenged both P&C and life companies. It's led to some transformational decision-making by the likes of Principal and Prudential and several other prominent life and annuity companies to restructure their balance sheets and rely more heavily on the use of reinsurance to address some of the older liabilities that were written at a time of higher interest rates.
• On the P&C side, social inflation is still present. This is forcing commercial line companies with long-tail books of business to drive price increases. Companies continue to warn that social inflation has not gone away and that a lot of the favorable results being seen of late may be the result of some of the delayed court dockets as a result of the pandemic.
• Premium growth was exceptionally strong last year. This was the combination of a growing economy after the depths of the pandemic and strong rate increases carriers sought to be adequately compensated for social inflation risks.
• Due to these very low interest rates, there is no margin for error in P&C underwriting. With the 10-year back up over 3% now, some of the underwriting discipline could be lost, but caution should persist with inflation in the backdrop.
• On the investment side, as interest rates go up, the value of bonds go down. On an average insurance portfolio, that could represent a 10% loss in market value of bonds based on duration and interest rate movements. The other aspect is the real yield on bonds, so while companies are earning more on new money coming in, inflation is eating away at it. In addition, operating expenses are going up.

A look at annuities

• A lot of the major annuity companies pulled back in the second quarter of 2020 due to extreme volatility in the financial markets. Fast forward to 2021, there was a remarkable increase in sales even though rates remained quite low; products like the registered index-linked annuities performed very well. Companies were back in the market and growth was historically high, making it challenging to exceed this in 2022 even as companies develop new products to address retirement needs.
• Flow reinsurance agreements have provided capacity for the primary annuity companies to write significant amounts of business. This is like a risk-sharing function where a portion of the risk associated with certain types of annuities will be ceded under the flow reinsurance agreement. This has gained momentum and will likely support sales activities.
• The group annuity business and pension risk transfer have been very active. It's something that has attracted more regulatory attention recently as the number of companies that are using pension assets to buy a group annuity continues to grow

Auto rate actions

• The Manheim used vehicle index is something that many carriers watch closely, and it began to rise in the summer of 2020. In some situations used vehicle valuations have been incredibly high, which impacts average claim costs and severity, especially if a vehicle is a total loss after an accident.
• Severity is overwhelming, not just in terms of inflation, but also in terms of fatalities. Fatality statistics are back where they were 15 years ago, which is alarming given the safety technologies that have been introduced. This supports the need for higher rates given higher claim costs.

Expectations with Accumulated Other Comprehensive Income (AOCI)

• There was a dramatic impact last year in AOCI from the rise in interest rates for companies that report on a GAAP basis. 2021 saw a $20 billion decline in AOCI for companies rated by S&P Global Ratings, which offset earnings for the year and left aggregate shareholder equity essentially flat. It’s not a good story for companies that have reported so far this year, with another $12 billion decline showing in their AOCI. Fortunately, capital adequacy is a relative strength for the vast majority of the ratings, so there is capacity for absorbing this type of decline.

The investment scene

• ETF assets under management for insurance companies is up at $45 billion at the moment. Companies are getting more comfortable with fixed income ETFs.
• Insurance companies are investing more in alternative assets. This has been a steady trend since the global financial crisis because insurance companies don't have an immediate need for liquidity, especially life companies that have been the bigger players in this area. With persistent low rates, assets are also moving into more illiquid BA investments like private credit and private equity, due to the better yield.
• There is growth in Schedule D and other loan-backed securities. This includes collateralized loan obligations and asset-backed securities. In addition, unaffiliated bank loans have been an area of growth to a lesser extent, such as syndicated loans in the leveraged finance space.  
• The second half of 2021 also saw strong levels of mortgage loan acquisitions. There were a lot of maturities and disposals, so the net impact was not as dramatic as the acquisition activity would suggest. There is very strong participation in properties with a residential focus and less allocation in office space relative to historical trends. 

Active M&A

• M&A in 2021 was at the highest level in 16 years in the life and annuity space, driven by some foundational acquisitions by alternative asset managers. This included the sale of Allstate Life to Blackstone, Athene to Apollo and American National to Brookfield Asset Management’s new reinsurance vehicles. There will likely be strong block reinsurance transaction activity continuing through 2022. This already happened in the first quarter with a number of prominent deals.
• Some P&C companies with smaller life subsidiaries decided there were no longer benefits to being a multiline insurer. This was exacerbated by private equity firms investing in the life sector. In addition, life firms have been selling their P&C operations and reinsurers and specialty line writers have been favorite acquisition targets over the years.

Listen to the webinar here for more specifics on the M&A deals that have been taking place.