The North American life insurance industry continues to maintain reasonable balance sheet strength and debt-servicing capacity, according to a new report from Fitch. In fact, financial leverage among life insurers was at a four-year high as of the end of 2012, thanks to steady increases since 2009, which Fitch partially attributes to increased debt issuance and a decline in shareholders’ equity.
The report, “Life Insurers’ Financial Leverage and Debt-Servicing Capacity,” analyzes key credit metrics of life insurers in its ratings universe, of which roughly half had leverage and coverage that fell outside media guidelines for the rating categories at year-end-2012 with the most pronounced differences being at the higher rating levels, according to Fitch.
Indeed, despite gains in leverage, U.S. life insurers’ overall financial performance showed deterioration in 2012 and correspondingly, GAAP interest coverage declined to 6.1x; fixed-charge coverage, which includes preferred and hybrid dividends, declined to 5.7x.
Fitch believes U.S. insurers will be challenged to materially improve operating earnings-based coverage metrics in 2013 due to macroeconomic headwinds. Historically low interest rate levels have helped companies reduce their borrowing costs. The impact on earnings, however, has been much greater, reducing net investment income and interest margins on spread-based products.
Fitch does relay some hope, though, claiming that “the debt maturity structure of [it’s life insurance] universe appears well-laddered, with only a modest portion of outstanding borrowings maturing in 2013 and 2014,” and that the sector’s issuance of long-dated and perpetual securities in 2012, primarily to prefund upcoming maturities or acquisitions, was robust.
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