Life insurers have underperformed the market due to negative news regarding macroeconomic situations, low interest rates, and regulatory uncertainties. These insurers include Prudential Financial (PRU), MetLife (MET), Aflac (AFL), Lincoln National Corp (LNC), and other companies that are part of the Financial Select Sector SPDR ETF (XLF).
Low interest rates not only hurt an insurer’s earnings, but they also increase the present value of insurance liabilities. For life insurers that provide protection policies as well as retirement and savings-oriented products, low interest rates also reduce the profitability of such spread-based products.
We outlined the impact of low interest rates in our insurance industry overview, An investor’s guide to the insurance business.
Prudential Financial’s (PRU) shares fell short of the performance of the Dow Jones Life Insurance Index, as well as the broader market. Over the last year, the Dow Jones Life Insurance Index was down -1%. Prudential’s shares underperformed the index by showing a -2% return. The returns of the life insurance index and the company remained low when compared to the broader market, which returned over 10%.
Prudential underperformed the property and casualty insurers, represented by the Dow Jones US Property and Casualty Index. Most life insurance contracts run over a longer duration compared to property and casualty products, many of which are renewed annually. These long-duration products bring additional risks for life insurers. This could impact the performance of life insurers with respect to property and casualty insurers in a scenario when indicators turn negative.
In the next article, we’ll take a closer look at Prudential’s valuation.