US life insurers are expected to see growth during third-quarter earnings while wrestling with the impact of higher interest rates, a dynamic annuities sector and the commercial real estate market's effect on investment portfolios.
"Life insurer positives include the higher interest rates in the quarter," Wells Fargo analyst Elyse Greenspan said in a note. "The negatives are around weaker alternative investment returns and credit concerns given the higher asset leverage of the group and its CRE exposure."
Commercial real estate has been a hot topic for life insurers to address this year and has contributed to many of the large US life insurers experiencing a decline in stock value year to date through the third quarter.
Although life insurers are expected to see some losses, particularly in the office portion of their commercial mortgage portfolios, those losses are not expected to be material and the group is largely projected to weather CRE deterioration due to the diversified and stable nature of their investment portfolios.
Upbeat earnings expected
Earnings projections for the sector lean positive, with 10 of the top 15 publicly traded US life insurers for which analyst estimates are available expected to book year-over-year increases in earnings for the third quarter, according to analyst estimates compiled by S&P Global Market Intelligence. Of the 15 insurers, 9 are projected to see earnings increase sequentially.
Revenue estimates for the group also skew toward growth, with more than half of the insurers for which analyst estimates are available expected to report stronger revenue figures on a year-over-year basis.
The number of insurers estimated to book higher revenue is evenly split with those expected to record lower revenue when compared to the second quarter. Two insurers are expected to see no changes.
Strength in fixed annuities
Life insurers are also expected to focus on the sturdiness of the fixed annuity market as a central theme in their third-quarter results, CFRA analyst Cathy Seifert said in an interview.
"Investors are likely curious about the degree to which the year-to-date strength in this space is sustainable," Seifert said. "Given the increased allocation many life insurers have made to alternatives and private credit, investors are likely to want more details and color from management on asset allocation strategies going forward."
During the American Council of Life Insurers' annual conference in September, Jacqueline Veneziani, senior vice president and chief legal officer and secretary for Symetra Life Insurance Co., said she has been seeing a shift to fixed annuities this year.
"They're paying a fixed guaranteed higher rate than we've seen in the last few years in this macro environment," Veneziani said. "It's a testament to how our industry is able to offer products for all macro environments."
Speaking during the same conference, Jim Nelson, who serves as vice president and deputy general counsel of corporate and product for Allianz SE, said he has also been seeing people surrender old annuities to purchase different annuities.
"A lot of the annuity contracts that were purchased three, four, five years ago in a lower interest rate environment are not crediting the same rate of interest that somebody can get today in a higher interest rate environment," Nelson said. "That has played a part in the surrenders that we've seen."
Although some life insurers saw higher mortality in the second quarter, particularly across older age groups, Piper Sandler analyst John Barnidge said in an interview that "we are out of the depths of the pandemic" and noted that typically the third quarter seasonally has favorable mortality.
Most life insurers will also complete their annual assumption reviews during the third quarter. Greenspan pointed out that this will be the first time that life insurers will do the reviews in a post-long-duration targeted improvements environment.
Tom Jacobs contributed to the reporting of this article.