Life insurers performed well on the latest global liquidity stress test administered by Moody’s Investors Service, but the rating agency says in a new report that their liquidity positions have likely deteriorated this year.
Moody’s applied liquidity stress testing to 99 rated life insurance groups to measure their ability to liquidate investments and absorb realized losses under a scenario of heightened policyholder redemptions or surrenders. The test, which examined their books for the end of 2010, found insurers to be in a strong position, and improved from the previous year.
“The improvement in life insurers’ liquidity metrics last year was attributable to two main factors,” says analyst and author of the report, Manoj Jethani. “Prices of fixed-income and equity securities recovered during the year and companies migrated toward more liquid assets.”
Continuing improvement in global credit and equity markets in 2010 saw life insurers benefit from higher prices on their investments, which in turn increased the value of their liquid investments, Jethani says. U.S.-based companies, for example, recorded unrealized gains of US$79 billion on their bond portfolios at year-end 2010, compared with unrealized losses of US$12 billion at the end of 2009.
Another noticeable difference between the two years was the change in the composition of companies’ assets, as life insurers held relatively high amounts of investments in asset categories with 100% liquidity, and less in categories with more limited liquidity, than they did in 2009.
Nevertheless, Jethani says, insurers are not likely to show the same improvement in 2011. “We expect a deterioration in life insurers’ liquidity profiles in our year-end 2011 analysis due to declines in equity markets and increases in bond credit spreads.”
Additionally, this year companies have reduced the amount of liquid funds in their investment portfolios and increased the amount of longer-duration, higher-yielding, but less liquid securities, Moody’s says.