The persistent high inflation in the U.S. has increased the likelihood that the Fed will maintain higher interest rates for an extended period to combat inflation, as core inflation rates remain above the Fed’s target.

This environment poses challenges for consumer purchasing power and the Fed’s price stability goals but presents opportunities for insurance carriers with investments in fixed income, such as Globe Life (GL).

Globe Life, with over $26 billion in invested assets, benefits from higher yields on investments in fixed-income instruments thanks to higher rates.

The company’s recent earnings show a 7% increase in net investment income year-over-year, suggesting that Globe Life is well-positioned to continue generating strong investment earnings.

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Higher than expected inflation in the U.S. increases the likelihood that the Federal Reserve (Fed) will be forced to maintain a restrictive policy stance with higher interest rates for an extended period.

The latest Consumer Price Index (“CPI”) data from the Bureau of Labor Statistics revealed core inflation rose 3.2% in February on a year-over-year basis, remaining above the Fed’s 2% target and reinforcing expectations for ongoing rate hikes.

Higher inflation erodes consumer purchasing power and spending. It also poses major challenges for the Fed in guiding price stability.

As a result, Fed officials have signaled that their commitment to fighting inflation is “unconditional” and rates will likely remain higher for longer.

While this may hurt many industries, it provides big opportunities for insurance companies…

One insurer that appears well positioned for a prolonged higher rate environment is Globe Life (GL), a provider of life and supplemental health insurance products.

As of year-end 2023, Globe Life had over $26 billion in total invested assets and generated approximately 25% of total revenues from net investment income.

The company’s investment portfolio consists primarily of investment-grade corporate bonds, mortgage-backed securities, municipal bonds, and U.S. Treasuries.

With the Fed raising rates aggressively starting in March 2022, Globe Life has benefited as the yields on fixed-income instruments surged higher. The company reinvests premiums and maturing securities into new issues carrying prevailing elevated yields.

In Globe Life’s most recent quarterly earnings call in February 2024, management noted net investment income was up 7% year-over-year driven by higher reinvestment rates on fixed-income assets.

Globe Life has demonstrated an ability to consistently generate strong investment earnings and ROE even during prior rate hiking cycles, thanks to the benefits its fixed income portfolio realizes from higher reinvestment yields over time.

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However, the market does not appear to be fully pricing in this upside potential from persistently higher rates.

The company’s investment earnings will remain strong even if the Fed cuts rates going forward, as the company’s fixed-income holdings will continue realizing the benefits of yields resetting higher over time.

If inflation remains high, it may force the Fed to retain a restrictive monetary policy for longer. As Globe Life keeps investing in higher-yield fixed-income instruments, it is poised to generate outsized investment earnings and returns for longer.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research