First-quarter earnings will reveal how well insurance companies are adapting to higher interest rates and taking advantage of a strong annuity sales environment.
Earning season takes off this week with some major life insurance companies reporting results, including Prudential and American International Group. Earnings calls with insurance executives should shed further light on sales trends, as well as changing investment decisions and the industry’s growing technology commitment.
But the underlying economic indicators remain troubling to some degree.
“Corporate America faces some of the same headwinds it did during fourth-quarter earnings season, including slow global economic growth, cost pressures from still-elevated (but easing) inflation, some currency drag from a stronger U.S. dollar last quarter compared with the year-ago quarter, and geopolitical instability, particularly in Eastern Europe and China, that has put some upward pressure on costs,” wrote Jeffrey Buchbinder, chief equity strategist for LPL Financial.
Rate hikes help bottom line
The Federal Reserve is expected to raise its benchmark interest rate for the 10th time on Wednesday. Another quarter-point rate increase on Wednesday would leave the Fed’s key rate at 5.1%, a 16-year high and a full 5 percentage points higher than in March 2022.
A significant portion of insurance companies’ investment portfolios are interest-rate dependent. An investment asset base, couple with secondary investments in real estate, hedge funds and other sources, means insurers are could see substantial earnings from the interest rate hikes to date.
Life insurers are tailoring offerings to take advantage of the consumer rush to protection-focused products. Likewise, they are tailoring products to cover a variety of living benefits such as critical illness and long-term care.
As a result, LIMRA is forecasting record-level sales in the $300+ billion range for the next several years.
Several insurers are also in the midst of expense-cutting efforts. Increasing investments in