The 30-year Treasury Yield Just Hit A 19-year High. Life …
The life insurance company’s job is to ensure it has the financial capacity to meet the obligations it has assumed. Those obligations can be decades away, so the premiums collected are generally invested conservatively. Usually, life insurance companies try to align their investments with the timing of their obligations. Often called matching liabilities, this generally means that bonds are bought and held to maturity.
If a bond is held to maturity, changes in price and yield between purchase and maturity aren’t particularly important to a company’s long-term outcomes. So rising rates just mean that a life insurance company can reinvest maturing bonds into higher-yielding ones, generating more interest income. From a big-picture view, rising yields are a win for life insurance companies MetLife and Prudential.
Notably, nearly 73% of Prudential’s investment portfolio is held in bonds. For reference, equities account for only about 1% of its portfolio, with the other assets focused on mortgage securities. MetLife’s portfolio is a bit more aggressive, with bonds making up roughly 67% of the portfolio, stocks 0.02%, and mortgages and other institution-level assets (real estate and partnerships, for example) accounting for much of the rest. Still, the big story is the large bond exposure, which means that rising rates will boost the income these large life insurance companies produce.
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NYSE: PRU
Prudential Financial
Premium Feature
Moneyball Superscore
62/100
Today’s Change
(0.40%) $0.47
Current Price
$118.40
Key Data Points
Market Cap
$41BMarket cap calculated using publicly traded s outstanding only. Does not include unlisted, private, or dual-class non-traded s. Implied market cap may vary.
Day’s Range
$116.27 – $118.60
52wk Range
$91.89 – $127.72
Volume
3.2M
Avg Vol
1.8M
Dividend Yield
4.69%
There are other benefits, as well, since yields are used to calculate long-term liabilities. The math is complex, but higher rates reduce liabilities, freeing up capital for other purposes, such as selling more policies. And higher rates reduce the burden of guarantees on previously sold products. All in, rising yields are net positive for life insurance companies.
There are still some negatives to consider
That said, rising rates are not just positive. There are some notable negatives to think about, too, even though the positives outweigh them.
For example, bond prices and bond yields move in opposite directions. Essentially, existing bond prices fall so the yields the bonds offer match the current market yield. If such bonds are held to maturity, this dynamic isn’t that important, as noted above. However, it still reduces the value of a life insurer’s portfolio over the short term until existing bonds mature and can be rolled over to new, higher-yielding bonds. An insurance company’s book value can be pressured as yields rise.
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NYSE: MET
MetLife
Premium Feature
Moneyball Superscore
75/100
Today’s Change
(-0.32%) $-0.31
Current Price
$97.04
Key Data Points
Market Cap
$62BMarket cap calculated using publicly traded s outstanding only. Does not include unlisted, private, or dual-class non-traded s. Implied market cap may vary.
Day’s Range
$96.24 – $97.29
52wk Range
$67.33 – $100.93
Volume
7.3M
Avg Vol
3.5M
Dividend Yield
2.39%
Also, life insurance products sold when yields were lower may no longer be competitive with those currently available. That can lead some customers to ditch their old products and buy new ones. That churn can reduce the benefit that higher yields offer life insurance companies. The caveat here is that financial products tend to be fairly sticky, so this is ly to be an issue for a relatively small number of policies.
All in, higher yields are a win
Life insurance is a complex industry where companies must align their investments with their financial obligations. That materially changes the story for the bonds companies MetLife and Prudential own, as they are often held to maturity. This specific dynamic makes rising yields a win for life insurance companies, but there are other dynamics to consider, both positive and negative. All in, however, higher yields are ly to be a net positive, potentially for decades to come.
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About the Author
Reuben Gregg Brewer is a contributing Motley Fool stock market analyst covering energy, utilities, REITs, and consumer staples. He is the former director of research at Value Line Publishing, where he rose from mutual fund analyst to equity analyst before leading all research operations. Reuben holds a bachelor’s degree in psychology from SUNY Purchase, a master’s in social work from Columbia University, and an MBA from Regis University. He has been featured as a financial expert on CNBC and in the Financial Times, Barron’s, and InvestmentNews.
Stocks Mentioned
Prudential Financial
NYSE: PRU
$118.40
(+0.40%)+$0.47
Motley Fool Stock Advisor’s Latest Pick
—% Avg Return
MetLife
NYSE: MET
$97.04
(-0.32%)-$0.31
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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