It appears that 2010 may be a fairly good year after all for U.S. life insurers. Rebounding from the financial crisis, insurers continued to hold large cash and cash-equivalent assets, notes A.M. Best, but during 2009, such amounts began to decline as companies sought higher yields that were needed to back life and annuity products.

A.M. Best
issued its life insurance state-of-the-market report yesterday, on the heels of comments made by Doug Meyer, senior director, U.S. life insurance sector head at Fitch, who participated on a panel of experts at the Insurance Accounting & Systems Association’s (IASA) Executive EDGE conference in Oak Brook, Ill.

“Two years ago, Fitch rated U.S. life insurers ‘negative,’” he said. “For life companies, liquidity completely disappeared in late 2008 and early 2009. But we believe the industry is now stable.” Fitch’s rating of ‘A+’ for life insurers’ financial strength is the result of a number of key criteria, Meyer said. “One of the key concerns we’ve had is that insurers are dealing with a low rate environment affecting underwriting decisions. We also are concerned about an over-reach for yield.”

Meanwhile, A.M. Best Co.’s report, “Liquidity Model for U.S. Life Insurers (AMBLM),” indicated that industry liquidity levels declined in 2009 from 2008 levels. However, the ratios demonstrated that U.S. life insurance organizations continued to maintain sufficient liquidity while beginning to reinvest in less liquid assets. As a result, year-end 2009 statutory data on the 101 companies listed showed the average short-term ratio decreased to 204% from 213%, and the longer-term ratio decreased to 151% from 160%.

In addition, market conditions continue to weaken for residential and commercial mortgage-backed securities resulting in reduced AMBLM credits for 2009.
In 2009, investments in cash and cash equivalents declined from 2008 levels but remained higher than those seen from 2005 to 2007, reports A.M.Best.

The rating firm also reports that fixed annuity sales continued to benefit from the market turmoil in 2009, as sales increased from levels seen during 2008. As a result, aggregate general account annuity reserves ramped up in 2009. “Assets continue to be invested in higher quality, more liquid categories such as U.S. government securities. Partially offsetting this trend are greater allocations in less liquid residential and commercial mortgage backed securities as insurers continue to seek higher yields,” notes the A.M. Best report.

“Did the life insurance industry get caught with its pants down? Some companies, yes, but the industry overall has managed pretty well through the crisis,” noted Fitch’s Meyer.

The industry’s upward momentum is further validated by an SNL Financial analysis of second-quarter 2010 statutory insurance data, which states that U.S. Life companies reported vastly improved capital and surplus numbers of $294.1 billion in second-quarter 2010, up 17% from second-quarter 2009, as companies continue to report greater invested asset values. Quarterly net premiums and annuity considerations remained flat, however total revenue was up 3% from the prior-year period due to increased investment income.

As Jon Wright, SNL's Director of Insurance, notes: "Reserve strengthening significantly impacted performance in the second quarter, especially at many of the largest annuity insurers.”

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