Read Part 1: A Year Of Speedy Recovery For U.S. Insurers?
Life insurers managed to increase net income in the last few quarters by trimming underwriting expenses and with the help of a modest increase in premiums. While variable annuity portfolios and other fee-driven businesses will act in favor with equity markets improving, downward pressure on investment yields due to higher hedging costs will continue to mar profitability.
Moreover, life insurers have been suffering from spread compression on products like fixed annuities and universal life for years because of a low interest rate environment. In other words, for these products, life insurers primarily invest the accumulated premiums in long-term interest earnings assets unable to generate sufficient returns to match their future commitments to policyholders.
Now, following the closure of quantitative easing, an increase in interest rates seems imminent — perhaps sometime in the middle of 2015. With the advent of a higher-rate environment, life insurers will be relieved of the lingering downward pressure on spreads and operating fundamentals. This will lead to higher returns and profit margins.
In the meantime, insurers will continue to bank on alternative asset classes to optimize returns. But the addition of any risky asset class in their investment portfolios in hopes of better yield may result in further losses.
Recently, life insurers have been resorting to product modification and repricing which should enhance their liability profiles and profitability. While repricing of traditional products with attractive additional features will help earn more, product modification will lessen liabilities on insurers' part by shifting risks related to equity and hedging to policyholders.
A strong balance sheet position should also help life insurers to perform better. The industry's statutory capital level improved significantly in the last few quarters, with the help of steady retained earnings and effective capital management. A beefed-up capital market should keep the industry's liquidity profile strong over the upcoming quarters and help industry participants confront challenges.
Strengthening fundamentals of corporate bonds and improvement in the real estate market should keep credit-related investment losses lower than average. Further, with continued economic recovery and declining unemployment, disposable income is on the rise. This should lead to a rise in demand for life insurance and annuity products.
Stocks Worth Betting On
As you can see, there are plenty of reasons to be optimistic about U.S. life Insurers now. So one may consider buying some life insurance stocks that promise better performance based on their strong fundamentals and a favorable Zacks Rank.
