U.S. life insurers enjoyed earnings growth in the second quarter, but macroeconomic factors are dampening future growth prospects, says Moody’s Investors Service in a new report.
The rating agency says that, in aggregate, the publicly-traded U.S. life insurers that it tracks reported higher operating earnings for the second quarter, compared with the same quarter last year. Operating earnings were up 9% year over year, and earnings totaled US$5.5 billion, it says.
“The same factors that have been in play over the past few quarters continued to drive the improvement in quarterly earnings on a year-over-year basis,” says Ann Perry, vice president and co-author of the report. “These factors include greater fee income on the back of higher equity-driven account balances, greater investment income on lower impairments and higher asset levels.”
Capital generation was modest, Moody’s notes, as the industry redeployed much of the net income into share buybacks and shareholder dividends. Nevertheless, statutory capital remains strong, it says. And, Moody’s still expects that risk-based capital ratios will gradually decline as companies seek to improve return on equity by deploying capital.
However, low interest rates continue to hamper life insurers’ efforts to obtain attractive yields on new investments, says Moody’s. Indeed, low rates, uneven equity market performance, and weak disability results remain a hindrance to earnings growth, it says.
In this environment, life insurers are adding higher yielding assets to their investment portfolios by marginally increasing allocations to alternative investments, private placements, and commercial mortgage loans, it reports.