Top-Down Macro, Bottom-Up Impact: Insurance EPS Downside as Macro Trends Upend Variable Investment Income

Earnings results among a number of the largest US life insurance companies have been fouled by lower-than-expected returns from variable investment income. These typically are higher-risk investments held outside firms’ core high-quality bond portfolios. As a result, strong sales, steady underwriting, business growth, and higher investment income—all of which normally would boost earnings and grow book value—instead have merely filled in for lackluster variable investment income. So how can you gain insight into future insurance earnings volatility from variable investments?

The purpose of this Insight article is to help you identify the types and levels of investments held outside the bond portfolio. To demonstrate the impact of lower variable investment returns, we track a variable-investments quote from a Q1 earnings call and show where the reference appears in earnings conference call slides, the statistical supplement, and in the 10-Q. We also show where to locate these investment returns on the FactSet Workstation.

Headwinds in the operating environment

Throughout the first two quarters of 2023, companies cited macro factors such as higher interest rates and inflation as culprits behind lower variable investment returns. There may be more of the same ahead. At this point in 3Q, VII uncertainty remains heightened because of continued concerns about Fed tightening, interest rates, and persistent inflation that is still above target levels.

As life insurance companies report earnings results in upcoming quarters, it is likely they will continue to discuss the headwinds from variable investment income.

The role of investments outside the traditional bond portfolio

Life insurance companies primarily invest in high-quality bond portfolios, which produce predictable, steady streams of investment income to help pay policy claims. To boost investment income, companies typically allocate a portion of their investment portfolios to higher risk, less liquid investments with the potential to generate higher returns.

This could include, for example, venture capital funds, limited partnerships, and hedge funds. A notable example is an insurance company that manages the world’s largest natural capital investment firm—essentially a timber management company—with a portfolio of over five million acres of forests globally.

The table below from MetLife’s most recent 10-Q breaks down the investment portfolio into different asset classes. The high-quality bond portfolio, outlined in red, accounts for about 65% of the total portfolio. MetLife's investments outside that portfolio include real estate, limited partnerships, and other invested assets. They are held to boost long-term, total investment income.

MetLife 1Q 2023 10-Q, page 4

It is understood that the additional investment income returns produced outside the core portfolio needs to be measured over a longer time period than traditional fixed income or equity investments. The reason is that non-core investments are likely to increase the volatility of investment returns in the short term, as has been happening recently. For that reason, they may require commitment to a decades-long time horizon to realize the outperformance.

Examples of tracking the challenge of non-core investments

Earnings conference call. While reviewing results on its most recent call, MetLife commented that its 55% drop in adjusted earnings was attributed to lower variable investment income. This income is produced from investments outside its traditional bond portfolio. Their venture capital and real estate investments were to blame. This was common across other insurance companies.

Earnings call slides. MetLife’s slides provided a bit more detail on the drop in variable investment income: venture capital, real estate returns, private equity, and “other.”

MetLife conference call slides, 1Q 2023, page 5

Statistical supplement table (YOY)

Public companies generally distribute a statistical supplement with their earnings call slides. Met’s statistical supplement below provides a breakout of investments. It includes returns for real estate, which the earnings slide shows drove the drop in variable investment income. Notably, the table does not break out “private equity” or “venture capital.”

MetLife statistical supplement, 1Q 2023, page 5

Impact eventually reported in the 10-Q

MetLife’s 55% drop in adjusted earnings is eventually reported in their Form 10-Q, highlighted below.

MetLife 1Q 2023 10-Q, page 4

FactSet Workstation

The detailed income statement in the industry tab on the FactSet Workstation breaks out investment income to show investment categories outside the traditional bond portfolio. The drop in the Real Estate Investment category is one of the key drivers of lower variable investment income referenced in Met's latest conference call.

In the workstation, search MET-US and click Financials > Income Statement. The Industry tab displays a detailed breakout of MetLife’s net investment income. While the categories may not match the “variable investment” categories stated in the earnings call, statistical supplement, or 10-Q, investment income is broken out beyond the traditional interest and investment income from the core portfolio.

Investments outside the bond portfolio matter

Returns earned on investments outside insurance companies’ traditional bond portfolios matter. Recent quarters demonstrate the volatility these investments can introduce into total returns, which can have significant impacts on earnings.

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.