By Warren S. Hersch
The U.S. life insurance
industry remains financially strong despite pressures from the sluggish economic recovery and low interest rates, according to a new report.
discloses this finding in an October 2013 Special Comment: “U.S. Life Insurance: Industry Scorecard.” The report highlights the key credit factors Moody’s reviews when assessing insurers in this sector. The report is analogous to a Moody’s Credit Opinion, but covers a complete sector on a composite basis.
“In general, the sector is characterized by high levels of capitalization, solid liquidity, high-quality investment portfolios, good financial flexibility and profitability that has improved modestly over the last few years but remains under pressure,” the report states. “Companies have generally continued to de-leverage and de-risk their product portfolios and rationalize their allocation of capital to businesses in order to strengthen their credit profiles.”
The report lists the following among its median indicators for rated life insurance groups:
|Shareholders’ equity as % of total assets||8.4%||8.1%||8.0%||6.8%||4.9%
|Return on capital (one-year)||7.1%||6.1%||5.7%||6.5%||-0.2%
|Sharpe ratio of ROC (five-year)||147.5%||120.3%||—||—||—
|Adjusted financial leverage||22.1%||23.3%||23.2%||23.8%||28.2%
|Earnings coverage (one-year)||7.2x||6.4x||5.8x||5.4x||1.1x
|Cash flow coverage (one-year)||5.3x||3.8x||4.8x||4.4x||3.8x
Because of low interests and regulatory pressure to maintain high capital reserves, the report states, many companies are increasing prices and/or shifting to more capital-efficient products, such as indexed universal life (IUL) and variable universal life (VUL). Low interest rates, the report adds, also are depressing fixed annuities relative to alternative products.
For all of 2012, fixed indexed annuities outsold traditional fixed annuities, capturing 47 percent of the fixed annuity market.
“The competition in the FIA market
has intensified, as larger and more diversified companies have been entering the market, as well as aggressive companies owned by alternative investment management firms,” the report states.
Originally published on LifeHealthPro.com