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Issues the Fed focused on are not new: Life insurers have for
years been stocking up on assets that are hard to sell and
adding debt that expires relatively quickly to boost investment
returns, which have been hit by low interest rates.
The Fed noted that life insurers are more leveraged and face a
bigger liquidity gap between illiquid assets and liquid
liabilities than they have since the 2007-09 financial crisis.
Based on assets to equity, life insurers appear riskier than
property and casualty insurers, banks and broker-dealers, the
Fed said.
When the Fed highlights an industry in its biannual financial
stability report, investors and analysts take notice. That is
especially true now, as the industry frets about whether
President-elect Joe Biden could slap the "systemically important
financial institution" (SIFI) label on them once again.
Being a SIFI means a company's failure threatens the economy,
and therefore warrants tighter regulation. MetLife Inc <MET.N>,
Prudential Financial Inc <PRU.N> and American International
Group Inc <AIG.N> got that designation removed in recent years
after shrinking and de-risking their balance sheets and, in
MetLife's case, suing the government.
Though insurance executives recently assured Wall Street that
their capital and liquidity levels are solid under regulatory
requirements, the Fed's conclusions are hard to ignore, analysts
said.
"From the vantage point of having to dispose of something
quickly, it might be a little more challenging," said Credit
Suisse analyst Andrew Kligerman. "But these companies are doing
a fine job of matching the duration of assets and liabilities."
Credit analysts noted that life insurers have more capital than
before the financial crisis and have increased their cash
liquidity by borrowing and by reducing dividends and share
buybacks this year in response to the coronavirus pandemic.
Life insurers take premiums from customers and invest them to
generate income. When interest rates are low, it becomes harder
to do that with safe, liquid investments like Treasury bonds.
Over the past decade, the industry has weighted more of its
investments in long-term and less easily sold assets like
corporate bonds, commercial real estate and alternative assets
to generate more income. At the same time, life insurers have
boosted borrowing from short-term funding sources, like Federal
Home Loan Bank advances, which are cheaper than other types of
loans, to earn additional income.
That imbalance could harm life insurers' ability to handle
sudden claims, according to the Fed, but analysts said the
companies are handling their balance sheets prudently.
"They're utilizing their balance sheets to augment their
investment returns. That's appropriate," said Rosemarie
Mirabella of AM Best, a credit rating agency focused on
insurers.
The Fed report put life insurers alongside hedge funds as having
elevated leverage. It included a chart showing a measure of
leverage at life insurers being nearly four times that of
property and casualty insurers, based on assets to equity.
Another set of charts showed life insurers having 35% of assets
in "illiquid, risky" investments, while short-term funding
sources took up a bigger chunk of their liabilities.
Even so, analysts were reassured by third-quarter results that
showed major U.S. life insurers having adequate financial
measures.
(Reporting by Alwyn Scott; Editing by Lauren Tara LaCapra and
Steve Orlofsky)
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