North American life insurers have solid balance sheets, but improving them much may be a challenge, says a new report from Fitch Ratings.
The rating agency released a special report examining the financial strength of U.S. and Canadian life companies, which says that the industry “continues to maintain balance sheet strength and reasonable debt-servicing capacity.”
Fitch reports that, in aggregate, financial leverage for companies in the publicly-traded life insurance universe has steadily increased since 2011. This has been driven by increased debt issuance, and a decline in shareholders’ equity that is partly due to a change in accounting rules.
However, it notes that the issuance of long-dated and perpetual securities is down this year, compared with 2012. Through the first eight months of 2013, US$5.8 billion of debt and preferred securities were issued in the U.S., and C$1.1 billion was issued in Canada.
And, Fitch says it believes the industry faces minimal near-term refinancing risk, noting that “only a modest portion of outstanding borrowings mature during the remainder of 2013 and throughout 2014.”
That said, Fitch notes that, while U.S. life insurers’ earnings have improved this year, thereby shoring up their financial position, it sees limited opportunity for this to continue. “The recent run-up in interest rates and equity market valuations, if sustained in the second half of 2013, would be primary drivers of further improvements,” it says. But, longer-term, Fitch says it believes that life insurers “face an uphill battle” in materially improving their financial strength from operating earnings “due to continuing low interest rates and uncertainty tied to a weak economic recovery.”