By Suzanne Barlyn
(Reuters) - U.S. life insurers' financial results will offer a glimpse into how well their investment portfolios will withstand volatile markets and prolonged low interest rates as the coronavirus crisis rolls on, analysts and industry sources said.
First quarter results, which insurers begin reporting later in April, will test strategies and investment products, such as types of derivatives contracts, that insurers use to protect against risk in volatile markets, said S&P analyst Deep Banerjee.
"This is a good checkpoint to see if the protection that insurers have bought from themselves is working or not," Banerjee said.
The industry has been taking on increasingly risky investments such as corporate bonds, hedge funds and hard assets like real estate for over a decade to offset low interest rates.
But during the coronavirus rout, the riskiest investments have taken the biggest haircuts.
For example, Bridgewater Associates LP, the RayDalio-led hedge fund firm famous for making money during the2008 financial crisis, posted double-digit losses as of March 18 amid sharp market declines sparked by the coronavirusoutbreak.
But the performance of even some of the most challenged industries is better than life insurers. The S&P Life & Health Insurance index <.SPLRCLIFE> is down roughly 43% since the market high on Feb. 19 as of Monday afternoon, compared with a near 22% decline for the S&P 500 (SPX).
First-quarter results could also reflect a sales slump, adding to concerns about falling asset values and low rates, analysts said.
People buy fewer life-insurance products during a recession, plus working from home presents roadblocks for salespeople.
"There is less office time and less time to build your pipeline," said Piper Sandler analyst John Barnidge.
Analysts have been lowering their estimates for the industry.
Quarterly estimates for MetLife Inc (N:MET) and Prudential Financial Inc (N:PRU) are down on average 6%, according to Refinitiv data.
But Wall Street's overall predictions do not reflect the full impact of the coronavirus because some analysts have not yet updated their models.
"There could be surprises," said Banerjee, noting that they would likely lead to lower results, not higher.
All kinds of companies across the United States are facing coronavirus issues, as the government has told people to stay home, limited travel and required certain businesses to close. [https://tmsnrt.rs/2R7wWYX]
The profit pressure life insurers are facing is nothing compared to what those at the center of the coronavirus pandemic are suffering, but it represents an unusual slice of corporate America.
One might think a life insurer's biggest challenge at this time would be that as many as 240,000 Americans might die from the coronavirus, according to a White House task force projection, leading to elevated claims.
But the industry's $4.2 trillion invested in markets that have gone haywire has become a more pressing concern, said Howard Mills, an independent senior adviser for Deloitte.
Insurers will not have problems paying claims, as horrible as the pandemic is, because of significant cash that regulators make them set aside, said Mills.
But investment returns are at the heart of insurers' profits. "Zero percent interest rates are seriously compounding the challenge and will hit the bottom line directly," Mills said.