According to a new report from Fitch Ratings, pretax operating income rose approximately 65% on an aggregate basis in the first half of 2021 compared the first half of last year.
The increase reflects strong net investment income driven by alternatives, improved mortality experience, and higher account values from strong equity market performance.
Fitch’s report also showed that the average operating ROE in Fitch Ratings’ universe increased to 12.9% for 1H21 from 9.2% in 2020.
The sharp increase in net income benefited from realised investment gains due in part to derivatives and favourable one-time gains from M&A activity.
In the first half of this year, net realised investment gains of Fitch’s 16 life insurers grew to $5.0 billion, a significant increase from the $0.2 billion, reported in 2020.
One-time gains from M&A activity led to higher net income and included Metlife, Inc.’s 2Q21disposal of its property/casualty business to Farmers’ Group, a subsidiary of Zurich Insurance Group, and Voya Financial’s first quarter 2021 completion of the sale of its individual life business to Resolution Life Group and investment gain related to the transfer of assets to support its reinsurance agreements related to the subsequent sale.
Fitch expects earnings to moderate somewhat in 2H21 relative to 1H21 due to less favourable net investment income partially offset by improved life underwriting results as mortality and life insurance claims normalise to pre- pandemic levels.
Strong net investment income in 1H21 benefited from very strong performance of alternative investments, which is not expected to repeat in 2H21.
The rating agency also expects a less favourable net investment income in the second half of 2021, also considers ongoing pressure from low reinvestment rates due to low interest rates and tight credit spreads.
The 10-year Treasury rate increased to 1.45% at June 30, 2021 from 0.93% at the beginning of the year. Volatility in interest rates is expected to continue for the foreseeable future given uncertainty on Federal Reserve policy.
