Their balance sheets remain strong, but the key credit metrics for U.S. and Canadian life insurance companies are weak for their current ratings, says Fitch Ratings.
In a new report analyzing the North American life insurance industry, Fitch says that the industry “continues to maintain balance sheet strength and reasonable debt-servicing capacity”. However, it also warns that roughly half of the publicly traded life insurers have credit metrics, such as leverage and coverage levels, that fell outside median guidelines for their rating categories at the end of 2012.
In aggregate, financial leverage for these firms has steadily increased since 2009, Fitch reports; and, it was at a four-year high at the end of 2012. “This has been driven by increased debt issuance,” it says, along with a decline in shareholders’ equity due partly to an accounting change, and a change in Fitch’s hybrid equity credit criteria.
Leverage is lower among the Canadian life insurance companies, it says, as they use larger amounts of preferred debt in their capital structure than firms in the U.S., and Fitch counts these securities as equity.
However, it also notes that coverage ratios for Canadian life insurance companies appear lower than their peers in the U.S. due to accounting differences. And, while they improved in 2012, coverage ratios remain low for the three Canadian companies it rates; primarily due to poor performance by certain U.S. businesses.
Fitch expects those ratios to improve at certain companies in the year ahead, due to selloffs of underperforming operations, increased hedging, shifts in product mix, and product repricing. Still, it says the industry overall “will be challenged to make further material improvements in coverage metrics in the near to intermediate term due to macroeconomic headwinds, primarily a sustained low interest rate environment.”
Finally, Fitch also says it believes the industry faces minimal near-term refinancing risk, since only a small portion of their outstanding debt matures in 2013 and 2014.