Insurance: Higher Private Portfolio Investments, Extended Maturities, and (Finally) Fresh Macro Data

In this insurance sector analysis, we discuss the event of the week, the macro environment, and EPS implications. 

Summary: Event of the Week

Investment income produced by insurance company investment portfolios often exceeds the underwriting income produced by the main business of analyzing risk. Increasing investment income is a powerful lever available to increase company earnings. Aside from better stock picking in equity portfolios or credit performance in fixed income portfolios, investment income can also be increased by shifting asset classes or extending maturities.

While these changes can be rewarded with higher investment income, the changes can introduce greater investment risk. Such portfolio changes can be identified using FactSet’s detailed investment data found in company statutory financials. Importantly, the impact of these changes on portfolio ratings changes can also be identified.

Summary: Linking Macro Trends to EPS  

Jobs data declines less than expected (EPS: lower premiums)—The jobs data reported yesterday continued the worsening trend we had been following most recently using estimated data supplied in the wake of the government shutdown. The reported decline, measured by initial jobless claims, continued the worsening trend in jobs numbers, but the data showed fewer unemployment claims than expected. We reiterate that a continuation of this trend translates into declining employee headcount, which would impact premium revenue for companies with concentrations of group insurance sold to corporations.

Ongoing inflation (EPS: higher claims, higher benefit ratio)—Tariffs have been main reason attributed to the higher prices insurance companies must pay to purchase imported auto parts and lumber, for example, to settle claims. Unexpected price increases can drive up benefit ratios, which drive down EPS. PPI and CPI data are expected to be released next week.

Detail: Event of the Week 

The top two panels of data below show investment portfolio data by type and maturity for 2024 and 2014, and the bottom panel shows the change in the investment portfolio between the two periods. 

A dramatic shift in the in the asset class and maturity profile has occurred in the investment portfolio shown below between 2014 and 2024. The data from the statutory investment schedule (Company/Security - Summary Investment Schedules - FactSet) shows the investment in privately placed bonds increased from less than one-third to almost one-half of the portfolio, while maturities shifted from under 1-5 and 5-10 yr bands into 10-20 and over 20 yr maturity bands.

The shift seen in the portfolio above reflects the direction of an industry trend. The table below shows industry data over the same time period (Sectors & Insights - FactSet) that reflects a decline in 5-10 year investments into longer-dated 10-20 year maturities.

One question that should be asked is how the shift in asset class may have impacted the bond rating categories within the portfolio. The table below compares the same two type / maturity periods shown in the tables above. Interestingly, the higher rating categories—NAIC 1 and NAIC2—increased as a percentage of the portfolio, while the lower rating category percentages declined. This rating and maturity change could have been caused by a shift out of shorter-dated corporate 
bonds into longer-dated, higher-rated, privately placed bonds, for example.

Detail: Linking Macro Trends to EPS

Our Macro Tracker lists key economic data relevant to insurance company earnings. The right-hand column ties macro trends to the potential impact on company earnings.

Jobs and Inflation: Job data released yesterday showed ongoing deterioration. While claims were lower than expected (220,000 vs 230,000), unemployment data previously released showed a slight increase in the unemployment rate from 4.3% to 4.36%. In our prior reports we have highlighted the ongoing downturn in jobs data and the potential impact on group premiums.

Inflation will impact claim costs and push benefit ratios higher. Several companies and product lines were cited in prior reports to be at risk from deteriorating jobs data and ongoing inflation. The chart below shows the steady increase in CPI and PPI data, which translates into slightly higher prices for insurance companies to purchase imported car parts or lumber to resolve auto and homeowner claims. If these higher costs were not factored into underwriting policy premiums, the 
impact will be a higher-than-expected costs, and a rising benefit ratio and lower underwriting earnings.

Upcoming conference calls may reveal which companies were able to react quickly to unexpected, rising costs to adjust renewal premiums and quotes on new business.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.