The sector comprises life insurance coverages and retirement benefits to individuals and groups with products such as annuities, whole and term life insurance, accidental death insurance, health insurance, Medicare supplements, and long-term healthcare policies
With very large asset bases, relative to their equity capital – ratios of 10 to 1 are not unusual – the share price of life insurers leverages increasing returns earned on investmented assets, essentially bonds and commercial mortgages, as long as liabilities stay on their trendline
If and when interest rates edge higher for longer, the life insurers are the direct beneficiaries as bond purchases are rolled over at maturity – lower-rated bonds are replaced by the higher rates…
The other side of the coin – of course – is the insurers’ vulnerability to credit problems in their bond-oriented portfolios
While the environment of rising rates may turn out to be highly favorable in the short-to-medium term, the past decades of falling rates compelled the life insurers to seek alternative investments, which might be less liquid but carry more risk
This is true of the large presence of the insurers in commercial real estate (CRE), essentially comprised of mortgages (95% of total CRE)
According to FitchRatings, these mortgage loans constitute approx. 14% of U.S. life insurers’ portfolios, or 1.6x capital, as of Dec. 2022, above historic levels of 8%-12%, but stable year-on-year
Office and Retail, which represent 33% of all commercial mortgages) and Apartment Multi-family mortgages (30% of CREs) may have raised concerns but have been given a clean bill of health wth close to 90% of the mortgages in the top quality risk ratings (CM1 & CM2)
Investor focus
Investors may have shied away from insurers with above-average exposure to CREs such as
But size by market cap could have favored the smaller capitalization below $10 billion (classified as 'life insurance') since April '23
Now may be the turn of the top capitalization (classified as 'global insurance - multiline') to recover from their lagging peformance in the favorable interest rate environment