Insurers are under growing pressure from two fronts, each of which promises to be a key focus in earnings reports the next two weeks — depressed interest rates that could dampen investment income in coming years and tight markets that have put a lid on pricing power.
Analysts will be watching closely to see how the industry’s top insurers handle both problems, either of which could be enough to constrain earnings in coming quarters.
Allstate Corp. reports third-quarter results this Wednesday, followed by MetLife Inc. this Thursday. Sometime next week or shortly thereafter, American International Group Inc. and Berkshire Hathaway Inc. should come with their figures.
They follow Travelers Cos Inc. and Chubb Corp., which posted results last week. Travelers easily beat expectations on lower catastrophe losses but warned that interest rates at current levels could slash investment income the next three years. Chubb beat estimates but said competition in a weak economy was keeping up the pressure on rates.
“One of the key drivers for insurance companies is interest rates and the interest rate environment we’re in now is obviously detrimental to their investment returns,” said Craig Fehr, a financial services analyst at Edward Jones who covers Allstate.
“I think it’s about how you manage the premium growth side of the equation,” he said.
Interest rates on 10-year bonds have been sinking all year. They currently stand around 2.5 percent, not far off the multi-decade lows reached in late 2008 and early 2009.
Travelers said if it reinvested all of its maturities over the next three years at current interest rates, by the end of 2013 net investment income would be some $162 million lower than it is now. Through the first nine months of 2010, net investment income was $597 million.
Brokerage Sandler O’Neill, in an earnings preview earlier this month, said the insurers with the longest-duration portfolios and highest leverage — generally life insurers — stood to suffer the least.
A relatively smaller portion of most life insurers’ investment portfolios will mature in the next few years, meaning the companies will likely have to reinvest a relatively small amount of money at low yields, the analysts said.
The other issue is heavy competition at a time insurers lack substantial pricing power, which means rates are likely to stay fairly low.
Travelers was careful to say it would be able to grow premiums “if and when” the economy improved.
Allstate, the largest U.S.-listed home and auto insurer, is feeling pressure from high catastrophe losses and weakness in homeowners’ policies. Analysts will be watching for signs it has been able to boost premiums and turn the tide there.
MetLife, the biggest U.S. life insurer, has already said the profit hit it could take from low interest rates would not be material. That means investors will be able to focus more on its pending acquisition of AIG’s foreign life business.
That sale will be important for AIG’s results, as will its progress in repaying the U.S. government its massive $182.3 billion aid package. On an operating basis, analysts will be looking for further signs of the underlying stabilization that characterized AIG’s second-quarter results.
“I’m very interested in their operating results in a relatively weak life insurance market,” said Aite Group analyst Clark Troy of MetLife and AIG. “Life insurance demand hasn’t been at historic highs.”
The other major name yet to report is Warren Buffett’s Berkshire Hathaway. While Berkshire owns some 80 businesses, insurance is its biggest, and operating profits soared last quarter as strong underwriting profits offset falling investment income. Investors will watch for the same.
(Reporting by Ben Berkowitz, editing by Gerald E. McCormick)