US life insurers to focus on credit risk, accounting change as Q1 earnings start

US life insurers are expected to use their first-quarter earnings announcements to address concerns around credit, as well as the impact of a new accounting standard that many companies had to implement retroactively at the start of the 2023.

Worries about insurers' potential exposures to credit risk have been mounting as pressure on commercial real estate loans and collateralized loan obligations grows, especially in light of the recent turmoil seen in the banking sector.

"There's a lot around credit that is getting investors a little edgy," Credit Suisse analyst Andrew Kligerman said in an interview. "There's not a minute that goes by when you don't see a headline about some property that has been sold at a sharp discount to where it was valued."

Kligerman expects the results for the quarter to be "noisy" in light of the shift associated with long-duration targeted improvement (LDTI) accounting changes, which went into effect at the start of 2023 and significantly amend the accounting and disclosure requirements for long-duration insurance contracts.

Accounting for LDTI change

The impact of LDTI will be "all over the place," Kligerman said.

Several life insurers have already released full financial supplements that recast fiscal years 2021 and 2022 results under the new standards ahead of first-quarter earnings reports. Some companies will see decreases in retained earnings and accumulated other comprehensive income (AOCI), while others may benefit from the change.

For example, Reinsurance Group of America Inc. is forecast to see a net positive benefit to products that are core to its portfolio, Piper Sandler analyst John Barnidge said in an April 5 note.

"Further, LDTI accounting changes serve to smooth out the earnings volatility of quarters with seasonally elevated mortality experience with 1Qs historically having the greatest elevation," Barnidge said in the note.

Impact of rising stock market, interest rates

Interest rates continuing to march higher has created opportunities and a few challenges for life insurers.

Some companies have pre-indicated that variable investment income will be relatively unfavorable, Kligerman said.

But overall, higher interest rates are generally "good news" for life insurers, according to Carmi Margalit, a senior director for the life insurance sector at S&P Global Ratings.

"That means their spread-based businesses [such as] fixed annuities, a lot of different types of universal life are actually profitable again," Margalit said during an April 25 webinar on the outlook for US insurers. "It also means that it's easier for them to sell, so sales of these fixed spread-based products are also up significantly."

Although they will be partially offset by weaker-than-normal alternative investment results, life insurers should benefit from better equity markets and minimal COVID-19 losses, Wells Fargo analyst Elyse Greenspan said in an April 5 note.

Half and half

Earnings projections for the sector are mixed, with six of the top 15 publicly traded US life insurers for which analyst estimates are available expected to book year-over-year increases in earnings for the first quarter, according to analyst estimates compiled by S&P Global Market Intelligence. Eight of the 15 insurers are projected to see earnings increase sequentially from the fourth quarter of 2022.

A majority of insurers in the group are expected to post weaker revenue figures on a year-over-year basis. Only Voya Financial Inc., Unum Group and CNO Financial Group Inc. are projected to book year-over-year revenue growth.

Barnidge will be closely watching Aflac Inc., which is expected to see earnings and revenue decrease year over year but increase from the prior quarter, to see if Japan is beginning to return to a more normal post-COVID-19 environment, according to an April 23 note. MetLife Inc., Prudential Financial Inc. and RGA also have sizable Japan operations.

– Read S&P Global Market Intelligence's 2023 outlook for life insurers.  – Read about the 2023 outlook for US financial institutions across the board.