U.S. and Canadian life insurance companies are using increased financial leverage, but their immediate refinancing risk remains relatively small, notes Fitch Ratings in a new report.
Fitch released a special report on Tuesday that analyzes the debt position of publicly-traded life insurance organizations, and examines changes in financial leverage and debt-servicing capacity over the last several years.
It notes that, in aggregate, financial leverage for the publicly traded life insurance universe has increased since 2009. “This has been driven by increased debt issuance, a decline in shareholders’ equity, a change in Fitch’s hybrid equity-credit criteria, and a change in GAAP accounting for deferred acquisition costs,” it reports.
Nevertheless, Fitch says it believes the industry faces minimal near-term refinancing risk since only a modest portion of outstanding borrowings mature in the second half of 2012 and 2013. And, it says issuance of long-dated and perpetual securities in July and August, primarily to pre-fund upcoming maturities, has been robust.
“The North American life insurance industry continues to maintain balance sheet strength and reasonable debt-servicing capacity that is within rating expectations,” it says, noting that life insurers’ operating performance has modestly improved so far this year.
However, Fitch also says it believes the industry will be challenged to make further material improvements in coverage metrics in 2012 and 2013 due to macroeconomic headwinds.