BOSTON (AP) – Shares of life insurance companies posted stronger gains than the broader market on Wednesday, as the continuing stock rally lifted expectations that insurance companies will post solid first-quarter results.
However analysts said they’re maintaining a cautious outlook because low interest rates continue to make it difficult for life insurers to generate strong returns from their investment portfolios.
Low rates “are still a significant drag on earnings and returns,” Citi Research analyst Erik Bass said in a note to clients.
Bass said life insurance company earnings reports to be issued in late April should benefit from this year’s 10 percent rise in the Standard & Poor’s 500 stock index, through Tuesday. However, he doesn’t expect earnings to be a significant catalyst for the stocks, noting that life insurers have already posted 14 percent gains on average this year.
Sterne Agee analyst John Nadel on Wednesday raised his first-quarter earnings estimates for life insurers by an average of 2.7 percent, citing the positive impact from the stock market’s recent performance.
However, Nadel said he sees risks in coming years from factors that include persistently low interest rates.
Insurance companies are major institutional investors in bonds, investing funds from policyholders’ premium payments and using the proceeds to pay out future claims and to generate profits.
Yields on many types of bonds remain extremely low, primarily because of the Federal Reserve policy of keeping short-term interest near zero to help stimulate the economy. For example the benchmark rate on the 10-year Treasury note recently fell to about 1.75 percent. That’s down from a high of 2.06 percent on March 11 as demand for low-risk assets continues to remain strong, despite the stock market’s recent gains.
Citi analyst Bass said he expects life insurers to “remain somewhat cautious in their outlook” given the recent pullback in interest rates and slow employment growth.