U.S. life and annuity issuers had to push against the economic winds in the second quarter, but most of them probably ended up doing pretty well.
Bob Jian Huang and other securities analysts at Morgan Stanley gave that assessment Monday in a new look at how the issuers that sell stock to the public might have performed in the second quarter.
The quarter ended June 30. Globe Life, a company that focuses on selling life insurance and products like Medicare supplement insurance, will kick off the second-quarter earnings release season July 23.
Huang and his colleagues are describing the publicly traded life and annuity issuers they are as getting through the "dog days of summer."
What it means: If the Morgan Stanley analysts are right, the mood at the insurers' home offices might be grim. But the insurers might stretch a little to persuade skittish consumers to complete purchases of life insurance policies and annuity contracts.
The positives: Bond yields are still higher than they were a few years ago. That may hurt homebuyers and companies that need to borrow money, but it's increasing what life and annuity issuers earn on the assets that support their life and annuity benefits obligations.
When the issuers put new money into their huge portfolios of corporate bonds and other fixed-rate investments, they're getting higher yields than they've been getting on the money invested back in the years when the Federal Reserve's federal funds rate was near 0%.
High yields are also helping the sales and profitability of "spread-based" annuities, such as fixed annuities, fixed indexed annuities and registered index-linked annuities, or RILAs, the analysts said.
For insurers that have big operations outside the United States, another factor that's a problem for other types of companies — geopolitical uncertainty hurting the value of the U.S. dollar — may also be a positive.
Companies like Aflac, MetLife, Principal, Prudential and Reinsurance Group of America may have hedged much of their exposure to currency fluctuations away, but the rising value of non-U.S. currencies may increase the dollar value of part of the companies' non-U.S. revenue, the analysts said.
The negatives: The analysts see many forces other than bond yields blowing against life and annuity issuers:
◆ Flu, COVID and other respiratory diseases caused an unexpected increase in mortality at some companies.
◆ Some companies are seeing softness in private equity investments and other alternative investment assets.
◆ The S&P 500 index was 11% higher on June 30 than on April 30, but the average daily level was 3% lower in the second quarter than in the first quarter.
The increase in the quarter-end index level might make investors happy, but financial services companies' fees depend on the daily values, and the drop in the daily average might hurt insurers' own fee revenue, the analysts said.
The analysts suggested that the drop in the average daily index level could be harder on life and annuity issuers with big investment management businesses and on the issuers that link more of their revenue to variable annuity account balances.
The mystery: The analysts suggested that one question is what all of the volatility did to consumer demand for products such as RILAs.
Credit: James Steidl/iStock
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