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Life and Annuity Issuers Watch for Interest Rate Hike Sunshine

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What You Need to Know

  • Executives are hoping that Fed interest rate increases could increase the yields on insurers' huge investment portfolios.
  • Higher rates could be a good thing for Prudential, the company's vice chairman told analysts.
  • MetLife's CEO said higher short-term rates could mean a flatter yield curve that would be less favorable to life insurers.

Many executives from the big, publicly traded U.S. life and annuity issuers have been talking to securities analysts this week about fourth-quarter COVID-19 mortality.

But executives have also had a chance to address a more cheerful topic: the possibility that interest rate increases, driven by efforts by the Federal Reserve Board to move the interest rate levers it controls, could increase the yields on the insurers’ huge investment portfolios.

The History

U.S. life insurers are using trillions of dollars in high-grade corporate bonds and other fixed income instruments to support life insurance, annuity, long-term care disability insurance and long-term care insurance benefits obligations.

The Federal Reserve moved to push interest rates down around 2001 to help homebuyers, corporate borrowers and the stock market cope with the effects of the Sept. 11 attacks and the dot-com bust. The Fed then pushed rates down again around 2009, in response to the 2007-2009 Great Recession, and once more in early 2021, in response to the start of the COVID-19 pandemic.

The latest round of rate cuts was particularly hard on life insurers because it came as they were dealing with the effects of the pandemic on product sales and the effect of COVID-19 and COVID-19 disruption on life insurance claims.

Some of the insurers’ executives have noted, on conference calls the companies held to go over fourth-quarter earnings with the securities analysts, that short-term rates were still very low in that quarter.

The Winds

Robert Falzon, Prudential Financial’s vice chairman, looked ahead toward future quarters, when he took an analyst’s question about the possible effects of wage inflation.

“The most significant impact of inflation would be rates,” Falzon said. “If inflation actually leads to higher rates, that’s a good thing for the [insurance] industry, and for us included as a part of that.”

Higher rates could be a strong, beneficial tail wind for Prudential, Falzon said.

Michel Khalaf, MetLife’s CEO, also talked about improving bond yields as one of the forces that could fill the company’s sails this year.

“Rising interest rates are an obvious one,” Khalaf said. “We are pleased that the Federal Reserve has signaled a return to more normal monetary policy.”

The Yield Curve

Life insurers tend to have an easier time profiting on bonds when long-term yields are considerably higher than short-term yields, because their huge size and stability gives them more ability than most other investors to buy and hold bonds for 10 years or more.

Life insurers can profit from the difference between long-term rates they earn on their long-term bonds and the much smaller on the savings accounts, money market accounts and other short-term, fixed-rate instruments where ordinary people typically put the cash they use to pay their bills.

Khalaf noted that one concern is that short-term rates look as if they may rise more and faster than long-term rates, and that the increase in short-term rates could lead to a flatter yield curve that would be less favorable for life insurers than a steeper yield curve.

The Earnings

Here’s a look at some of the results life, health and annuity issuers have released this week.

Prudential Financial: The Newark, New Jersey-based insurer is reporting $1.2 billion in net income for the fourth quarter of 2021 on $14 billion in revenue, up from $1 billion in net income on $15 billion in revenue for the fourth quarter of 2020.

The annuity unit produced $486 million in adjusted operating earnings on $1.2 billion in revenue, up from $440 million in earnings on $1.2 billion in revenue for the year-earlier quarter.

MetLife: MetLife is reporting $1.2 billion in net income for the fourth quarter of 2021 on $20 billion in revenue, up from $124 million in net income on $19 billion in revenue for the fourth quarter of 2020.

The New York-based company’s U.S. group life mortality ratio, or ratio of benefits to premiums, increased to 106.3%, from 96.3% in the year-earlier quarter, and from 85.4% in the fourth quarter of 2019, before the COVID-19 pandemic began.

Globe Life: The McKinney, Texas-based life and health insurer is reporting $178 million in net income for the fourth quarter of 2021 on $1.3 billion in revenue, compared with $204 million in net income on $1.2 billion in revenue for the fourth quarter of 2020.

The company noted that the number of U.S. COVID-19 deaths was higher than it had expected, and that its ratio of claim costs to COVID-19 deaths was $3.7 million per 10,000 U.S. deaths in the fourth quarter. That was down from $3.9 million per 10,000 U.S. deaths in the third quarter, but up from an average of $3 million for the full year.

Company executives said on a call with securities analysts that life claims for policies sold since the pandemic started, and for policies sold through direct marketing programs, appeared to be performing in line with expectations, with no signs of anti-selection.

Reinsurance Group of America: The Chesterfield, Missouri-based life reinsurer is reporting $156 million in net income for the fourth quarter of 2021 on $4.4 billion in revenue, up from $132 million in net income on $4.1 billion in revenue for the fourth quarter of 2020.

The company estimates it shouldered $351 million in extra life, health and disability costs in the fourth quarter.

Horace Mann Educators Corp.: The Springfield, Illinois-based multiline carrier is reporting $41 million in net income for the fourth quarter of 2021 on $331 million in revenue, compared with $48 million in net income on $352 million in revenue for the fourth quarter of 2020.

The company recently closed on the acquisition of Madison National Life Insurance from Independence Holding.

Net annuity contract deposits increased 1.2%, to $104 million.

Horace Mann focuses on serving teachers, and its results suggest that teachers may have done a good job of protecting themselves from COVID-19: The company’s life mortality costs fell 3.8% between the fourth quarter of 2020 and the latest quarter, to $10 million.

Aflac: The Columbus, Georgia, life and health insurer is reporting $1 billion in net income for the fourth quarter of 2021 on $5.4 billion in revenue, compared with $951 million in net income on $9.5 billion in revenue for the fourth quarter of 2020.

Aflac gets much of its revenue from Japan, with most of the rest coming from sales of individual insurance products at U.S. work sites.

Aflac U.S. is reporting $261 million in pretax adjusted earnings on $1.4 billion in net earned premiums. Earnings were 40% higher than in the year-earlier quarter, but premiums were down 1.3%, because of the effects of the COVID-19 pandemic on sales.

Company executives said on a call with securities analysts that they have now trained about 7,000 agents to sell the company’s relatively new dental and vision products, and that quote activity accelerated in the last four months of 2021.

Cigna Corp.: The Bloomfield, Connecticut-based health insurer is reporting $1 billion in net income for the fourth quarter of 2021 on $46 billion in revenue, compared with $4.1 billion in net income on $42 billion in revenue for the fourth quarter of 2020.

The company ended the quarter providing or administering coverage for 17.1 million people at the end of the year, up from 16.7 million people a year earlier.

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The Federal Reserve building in Washington. (Photo: Shutterstock)