Mortality hike, virus recovery among life insurance themes for Q4'20 earnings

Analysts expect that life insurers will use fourth-quarter 2020 earnings calls to address mortality increases, while also pivoting to the future with signs of a recovery potentially on the horizon.

"Mortality is going to be worse than it was in the third quarter of 2020," Piper Sandler analyst John Barnidge said in an interview, noting however that he was not expecting it to be much worse than what was experienced in the second quarter of 2020 when the pandemic first started.

Moody's analyst Bob Garofalo said insurers have so far been able to withstand the higher mortality seen in the U.S., in part by using appropriate underwriting to mitigate its impact. Mortality among the insured population has been lower than that of the general population.

"Overall, for the sector, claims are higher than we would have expected, but I think the way they're being managed and mitigated is also probably a lot different than what we would have expected about a year ago," Garofalo told S&P Global Market Intelligence.

Keefe Bruyette & Woods analyst Ryan Krueger said in a note that there were around 140,000 deaths related to COVID-19 over the fourth quarter, an increase from 80,000 in the third quarter, and 125,000 in the second quarter. The life insurer with the most sensitivity to mortality is Reinsurance Group of America Inc., followed by Lincoln National Corp., he said.

Barnidge suggested that an area of great focus may be how life insurers are thinking about a recovery with a new presidential administration and what the implications of the COVID-19 vaccine distribution will be.

Aflac Inc., Globe Life Inc. and Principal Financial Group Inc. will be among the early reporters in the life insurance space and should give a "good look" into where the earnings season is headed, Barnidge said.

An S&P Global Market Intelligence analysis shows that nine of the 15 largest life insurers are expected to see year-over-year growth in fourth-quarter EPS.

Other core themes that Garofalo believes insurers may touch on include capitalization, interest rates, mergers and acquisitions and the influence of technology on the sector in the context of sales and products.

With respect to capitalization, Garofalo said companies have held up well throughout the pandemic and should continue to do so, but he pointed out that there are still some potential risks that exist around ratings migration.

In addition, life insurers may provide more color around the status of their commercial mortgage loans, Garofalo said, noting that the sector has a good investment mix and has mostly been able to mitigate problems there.

CreditSights analyst Josh Esterov said in an interview that metrics look "reasonably strong" so far in the commercial mortgage loan arena given the impacts of the pandemic, and while there may be some "pockets of weakness," he does not expect it will rise to the level of a major issue for most insurers.

Genworth Financial Inc., which recently said that its long-pending deal with China Oceanwide Holdings Ltd. is facing further delay, will probably limit its commentary during its earnings call to its near-term plans to address its 2021 debt maturities, and perhaps offer some detail around a potential partial IPO of its U.S. mortgage insurance business, Esterov said.

Looking to the future, S&P Global Ratings said in a note that 2021 will be a "tough year" for the life insurance companies it rates, although the insurers are expected to be able to navigate through obstacles without sustaining a "significant negative impact" on credit quality.

"In our view, life insurers will continue to deal with investment portfolio stress, muted earnings, challenges to distribution and elevated mortality claims," the release said.

However, strong capital position, access to relatively cheap capital to boost balance sheets, an active M&A market and healthy demand for life and retirement products, are among some of the factors that S&P Global Ratings believes may help offset some of the challenges.