Stock Market Volatility Could Hammer Some Annuity Issuers: Analysts

What You Need to Know

Most of the effects of increased interest rates will take a long time to help insurer earnings.
Stock market volatility hurts variable annuity, asset management and retirement revenue quickly.
A 79% decrease in the number of COVID-19 deaths should help life insurers.
Big insurers can meet existing guarantees but may face pressure to tilt away from firm investment guarantees.

The financial wind howling outside may have knocked some shingles off some life and annuity issuers’ roofs in the second quarter.

A Morgan Stanley team led by Nigel Dally sizes up the companies’ storm resistance in a new earnings preview article. The second quarter ended June 30.

UnitedHealth Group, a health insurer, will kick off the new round of life, health and annuity issuer earnings releases by posting its results July 15.

Rising interest rates and a big drop in the number of COVID-19 deaths probably helped second-quarter results, but currency exchange rate fluctuations, weak performance at hedge funds and private equity funds, and the effects of rising interest rates on non-insurance operations probably added to the damage done by falling stock prices, the analysts say.

The average level of the S&P 500 Index was 8.1% lower in the second quarter than in the first quarter.

“This should serve as a headwind for the earnings of the more equity sensitive business lines, such as variable annuities, asset management and retirement,” the analysts note.

What It Means

The big, publicly traded life and annuity issuers that Morgan Stanley tracks are still doing fine, and they should have no trouble making good on the life and annuity guarantees they have already sold to your clients.

But securities analysts and investors may step up efforts to push issuers away from offering new, unhedged guarantees.

‘Headwinds’

On a sailboat, a tailwind is a helpful wind that comes up from the rear, fills the sails and makes the boat go fast.

A tailwind is a wind that hits the boat head-on and makes the boat zigzag to get anywhere.

Although the recent increase in interest rates is mostly a tailwind for life and annuity issuers, by increasing the rates they got on their trillions of dollars in corporate bonds, rising rates can also hurt the fee revenue that insurers get from managing fixed income portfolios for outside clients, the analysts say.

The analysts note that the value of many non-U.S. currencies fell when compared with the dollar in the second quarter, and that exchange rate fluctuations could affect insurers with big international operations, such as Aflac, MetLife and Prudential.

COVID-19

The number of COVID-19 deaths fell to about 32,000 in the second quarter, from 156,000 in the first quarter.

That could be a big help for insurers with large amounts of life insurance business on their books, but it likely won’t affect how investors see life, health and annuity issuers, because investors were already assuming that pandemic mortality would fall sharply in the second quarter, the analysts say.