Mixing 1Q Macro and Initial Bank Earnings: Outlook for Insurance

Banks began reporting 1Q results this week. Mixing the details reported by JPM, Citi, WFC and BoA against a backdrop of 1Q macro data presents a picture of what may lie ahead next week when TRV, CB, and MET report 1Q results.

Based on initial bank results, management did not report concerns regarding employment, consumer spending, or credit, despite market volatility, inflation fears, and war in the Middle East.

Outlook: Investment Income

Revenue growth for the banks that have reported was strongest in capital markets, trading, and fee-based businesses. The fact that banks’ revenue benefited from higher volatility and stronger asset values is a constructive indicator for insurers’ investment portfolios and investment income. The table below shows that Met may be next week’s standout candidate to benefit from strong investment income. Over the last six quarters, as shown in the table below, MET has derived a higher percentage of income from investment returns than CB and TRV. 

Outlook: Premiums

To gauge potential growth in insurance premiums, bank loan and deposit growth are used as proxies for commercial and consumer demand. JPM’s solid loan growth was driven, in part, by large corporate clients, WFC’s record loan growth was attributed to strong consumer lending, while C was the outlier and reported lackluster loan growth. Taken together, two of three banks reported strong loan growth. In fact, WFC’s growth was the strongest in several years. Equally important, loan growth was not weak despite a macro backdrop that included February’s weak jobs data, rising inflation throughout the quarter, and recent geopolitical unrest (see Macro section). 

Macro Trends

Market Performance Data: Investment Income / Premiums

The shaded portion of the chart below—January, February, March 1Q and into April—belies the volatility that permeated the quarter. Markets did rally to record levels just weeks after the quarter, but throughout January, February, and March the heightened volatility raised concerns that consumer confidence and demand would be shaken and impact demand. However, strong loan growth reported by two of three banks—and the absence of weakness—helps allay fears of consumer-related weakness that might have impacted the growth of insurance premiums. 

Employment Data: Premiums

We have written notes on the potential impact that a weaker labor market could have on group insurance premiums. MetLife, with a large proportion of group premiums, reports next week. Given volatility, it is very likely that Met reports February’s drop in payrolls and the 1Q rise in unemployment may have dampened 1Q growth and even the outlook for growth in future quarters. However, the weakening employment data—first drop in payrolls in at least a year, and rising unemployment—does not appear negative enough to drive a drop in total premiums. (Insurance: Contrary to Positive Estimates, Jobs Data Points to Headwinds)

Inflation Data: Claims Costs

We have written about the negative impact inflation, driven by tariffs, has on claims costs. Higher costs for auto parts and lumber attributed to tariffs, for example, push up costs to settle policyholder claims and drive down earnings.

Interesting inflation situation in 1Q

We have written that the most recent source of inflation, higher fuel costs, may actually lower claim costs for companies focused on writing auto insurance. In our note we make a case that a sustained increase in the price of gasoline may change driving habits (e.g., increases in work from home or carpooling) and reduce miles driven. If habits change and fewer miles are driven it should translate into lower claim costs. (Gas Prices, Benefit Ratios, and Inflation)

Linking Macro Trends to Potential EPS Impact

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

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