Life and Annuity Issuers Watch for Interest Rate Hike Sunshine

What You Need to Know

Executives are hoping that Fed interest rate increases could increase the yields on insurers’ huge investment portfolios.
Higher rates could be a good thing for Prudential, the company’s vice chairman told analysts.
MetLife’s CEO said higher short-term rates could mean a flatter yield curve that would be less favorable to life insurers.

Many executives from the big, publicly traded U.S. life and annuity issuers have been talking to securities analysts this week about fourth-quarter COVID-19 mortality.

But executives have also had a chance to address a more cheerful topic: the possibility that interest rate increases, driven by efforts by the Federal Reserve Board to move the interest rate levers it controls, could increase the yields on the insurers’ huge investment portfolios.

The History

U.S. life insurers are using trillions of dollars in high-grade corporate bonds and other fixed income instruments to support life insurance, annuity, long-term care disability insurance and long-term care insurance benefits obligations.

The Federal Reserve moved to push interest rates down around 2001 to help homebuyers, corporate borrowers and the stock market cope with the effects of the Sept. 11 attacks and the dot-com bust. The Fed then pushed rates down again around 2009, in response to the 2007-2009 Great Recession, and once more in early 2021, in response to the start of the COVID-19 pandemic.

The latest round of rate cuts was particularly hard on life insurers because it came as they were dealing with the effects of the pandemic on product sales and the effect of COVID-19 and COVID-19 disruption on life insurance claims.

Some of the insurers’ executives have noted, on conference calls the companies held to go over fourth-quarter earnings with the securities analysts, that short-term rates were still very low in that quarter.

The Winds

Robert Falzon, Prudential Financial’s vice chairman, looked ahead toward future quarters, when he took an analyst’s question about the possible effects of wage inflation.

“The most significant impact of inflation would be rates,” Falzon said. “If inflation actually leads to higher rates, that’s a good thing for the [insurance] industry, and for us included as a part of that.”

Higher rates could be a strong, beneficial tail wind for Prudential, Falzon said.

Michel Khalaf, MetLife’s CEO, also talked about improving bond yields as one of the forces that could fill the company’s sails this year.

“Rising interest rates are an obvious one,” Khalaf said. “We are pleased that the Federal Reserve has signaled a return to more normal monetary policy.”

The Yield Curve

Life insurers tend to have an easier time profiting on bonds when long-term yields are considerably higher than short-term yields, because their huge size and stability gives them more ability than most other investors to buy and hold bonds for 10 years or more.

Life insurers can profit from the difference between long-term rates they earn on their long-term bonds and the much smaller on the savings accounts, money market accounts and other short-term, fixed-rate instruments where ordinary people typically put the cash they use to pay their bills.

Khalaf noted that one concern is that short-term rates look as if they may rise more and faster than long-term rates, and that the increase in short-term rates could lead to a flatter yield curve that would be less favorable for life insurers than a steeper yield curve.

The Earnings

Here’s a look at some of the results life, health and annuity issuers have released this week.

Prudential Financial: The Newark, New Jersey-based insurer is reporting $1.2 billion in net income for the fourth quarter of 2021 on $14 billion in revenue, up from $1 billion in net income on $15 billion in revenue for the fourth quarter of 2020.

The annuity unit produced $486 million in adjusted operating earnings on $1.2 billion in revenue, up from $440 million in earnings on $1.2 billion in revenue for the year-earlier quarter.

MetLife: MetLife is reporting $1.2 billion in net income for the fourth quarter of 2021 on $20 billion in revenue, up from $158 million in net income on $19 billion in revenue for the fourth quarter of 2021.