S&P Global — 30 May 2024
Daily Update: May 30, 2024
US Insurance Industry Rests on Longer-Term Trends
By Nathan Hunt
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The US insurance industry is confronting secular changes this year. With higher interest rates, greater private equity investment and a slowdown in M&A activity for North American insurance brokers, the future of the industry is becoming clearer.
This year's biggest trend for US insurers looks to be stubbornly high interest rates and their benefit to investment income. The 10-year Treasury yield, a useful proxy for insurers' new money yields, sat at 3.88% as of Dec. 29, 2023. That’s more than 1.6% higher than at the start of 2022. Higher bond yields tend to generate higher investment income for insurers who have the luxury of time to buy and hold Treasurys. Even as interest rates are expected to decline in the latter half of the year, these higher bond yields will provide a medium- to long-term tailwind for the insurance industry.
The impact of inflation on customer premiums and the industry’s investment exposure to commercial real estate (CRE) will be of greater concern. Some insurance verticals have seen premiums increase well above inflation over the past two years. US life insurance companies have downplayed their exposure to CRE on earnings calls as the value of some office space has declined due to increasing remote work.
Regulatory scrutiny has also increased in the insurance sector, in part due to increasing private equity ownership of insurance companies. Insurance companies are appealing to asset managers as steady premiums provide a predictable flow of capital for investment. However, US regulators have noted the increased presence of private equity and alternative asset managers in the insurance space and have proposed fiduciary rules to protect against systemic risk and shield consumers from so-called junk fees related to retirement products.
M&A in the insurance space declined in the first quarter of 2024 compared with the previous quarter. The fall in dealmaking is broader than just the insurance space since higher interest rates increase borrowing costs for purchasers. But insurance companies remain attractive assets to many investors, so fewer insurance deals could mean a lack of engaged sellers.
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