US Life Insurance Companies to See Growth Earnings in 2023

In the realm of the US life insurance sector, the robust capital positions and substantial short-term liquidity of companies seem to act as a buffer against the pressure to offload real estate assets at distressed valuations. S&P Global Market Intelligence asserts that, despite potential challenges, any losses incurred in the commercial real estate (CRE) arena are expected to remain manageable within the confines of existing ratings sensitivities.

As we delve into the financial landscape, a positive outlook emerges, particularly in the third quarter of 2023. Earnings projections for the sector suggest an encouraging trajectory, with 10 out of the top 15 publicly traded U.S. life insurers poised to register year-over-year increases in earnings. Furthermore, among these insurers, a notable majority, precisely 9, are anticipated to witness sequential growth in earnings. This optimistic trend extends to revenue estimates as well, with over half of the insurers expected to report stronger figures on a year-over-year basis.

Despite the positive momentum, the U.S. life insurers are not immune to challenges. The impending third-quarter earnings season unfolds against the backdrop of higher interest rates, a dynamic annuities sector, and the palpable impact of the commercial real estate market on investment portfolios. On a positive note, the higher interest rates present a boon for life insurers during this period. However, challenges loom concerning weaker alternative investment returns and credit apprehensions, given the higher asset leverage and exposure to commercial real estate within the sector.

 

Elyse Greenspan, a Wells Fargo analyst, sheds light on the intricacies of the landscape, emphasizing that while some losses are expected, particularly in the office segment of commercial mortgage portfolios, they are not anticipated to be significant. The industry is poised to weather the challenges posed by CRE deterioration, thanks to the diversified and stable nature of the investment portfolios held by life insurers.

Curiously, the stock performance of many major U.S. life insurers in the third quarter diverged from leading indexes, marking a contrast with some of their smaller counterparts. Lincoln National, Principal Financial Group, and MetLife experienced significant stock declines, falling 19.6%, 14.1%, and 13.1%, respectively, year to date. In stark contrast, the S&P 500 recorded an 11.68% gain through the third quarter, and the S&P 500 U.S. Insurance Index saw a 1.01% growth.

US Life Insurance

Among the smaller players, a different narrative unfolded. Companies like Midwest Holding, F&G Annuities & Life, and Unum Group witnessed stock gains. Midwest Holding, in particular, stood out with a remarkable 105.3% growth in 2023 through the third quarter. Notably, many of the smaller players performing well in the market are attracting acquisition interest, contributing to their upward trajectory.

The underperformance of some major life insurers in 2023 is not without explanation. Analysts point out that several of the prominent names that witnessed a downturn this year had an exceptionally strong stock performance in 2022, making it challenging to replicate those gains in subsequent years.

In terms of individual challenges faced by major players, Lincoln’s $28 billion deal with Fortitude Re faced delays in closing during the second quarter, impacting the stock price. Moreover, difficulties with mortality earnings and the spread-based business further compounded the challenges for Lincoln.

Despite concerns surrounding the vulnerability of life insurers’ commercial real estate portfolios, the industry’s overall resilience becomes evident. A key factor contributing to this resilience is the strong diversification of insurer investment portfolios. Mike Siegel, Global Head of the Insurance Asset Management and Liquidity Solutions businesses at Goldman Sachs Asset Management, underscores the stability of these portfolios, noting that they are “fairly well diversified” in terms of geography and product type.

While acknowledging potential losses in the office segment of commercial mortgage portfolios, the impact is anticipated to be contained. Insurers are expected to adopt strategies such as extending loans, restructuring, and reducing interest rates to navigate these challenges. The overarching objective is to avoid foreclosure and assume responsibility for managing real estate assets.

In the realm of loan restructuring, a nuanced process unfolds. Whenever an insurer engages in restructuring a loan, it incurs a marked-down valuation to its market value, resulting in a recognizable loss. This strategic approach allows insurers to proactively address challenges while maintaining financial stability.

In conclusion, the U.S. life insurance sector, despite facing headwinds in the form of commercial real estate challenges, exhibits a commendable ability to navigate uncertainties. The combination of robust capital positions, positive earnings projections, and strategic approaches to challenges positions the industry to weather the evolving financial landscape effectively.

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