U.S. life insurers have more than adequate cash on hand to withstand a downturn comparable to the financial crisis of 2007-2009. But three major insurers have operating liquidity levels below the industry average, new research shows.
Moody’s Investors Service discloses this finding in a new report that examines U.S. life insurance operating companies. Moody’s compiled liquidity coverage ratios using data from the insurers’ annual statutory statements published between 2008 and 2013, plus data from Moody’s surveys covering institutional investment products.
The report reveals that average operating liquidity for U.S. life insurers are about 2.6 times liquidity needs under Moody’s stress test. This compares favorably with the companies’ operating liquidity before the financial crisis, when liquidity resources were only about double stressed liquidity needs.
“The life insurers in our rated population hold over $3 trillion of long term general account assets,” the report states. “[This compares with] over $700 billion of estimated surrenders in our stress scenario.
“These results were calculated using our stress assumptions, which are more conservative than those encountered during the financial crisis,” the report adds. “[The results also] included stress surrenders greater than one and a half times those encountered even in 2008.”
The report cautions that three major life insurers — AIG Life and Retirement (AIG L&R; A2 stable), MetLife (MET; Aa3 stable) and Prudential Financial (PRU; A1 stable) — have operating liquidity coverage ratios below the U.S. industry average:
- AIG L&R: 2.3x liquidity needs;
- Prudential: 2.1x; and
- MetLife: 2.0x.
The three companies do, however, have greater liquidity than they reported before the onset of the financial crisis. Contributing to MetLife’s subpar liquidity adequacy post-crisis is an excess “concentration in institutional investment liabilities.”
On a positive note, Moody’s indicates that a marked and sudden rise in interest rates would stress the three insurers’ liquidity, but that their cash reserves would be enough to honor policyholder claims or other financial pressures on their balance sheets.
“Under highly stressed rising interest rate scenarios, which would cause market values of bonds to decline sharply and surrenders to increase, all three companies’ liquidity buffers would dissipate considerably, but remain sufficient,” the report states.
The charts beginning on page 2 recap highlights from the report.
Currently, AIG L&R performs the best on Moody’s stress testing framework with liquidity coverage at 2.3x needs. Prudential Financial is next at 2.1x and Met follows at 2.0x.
In 2008, Prudential’s results were best of the three on Moody’s stress testing framework with 1.7x needs. MetLife was next at 1.6x and AIG L&R at 0.9x. (Exhibit 2).
Despite a significant loss of their institutional investment businesses, AIG L&R still holds a greater percentage of highly liquid liabilities than MetLife or Prudential, with a large legacy block of fixed annuities. (Exhibit 3).
However, AIG L&R’s liquidity ratio is still higher because it has a larger percentage of liquid assets than MetLife or Prudential, mostly in investment grade bonds (Exhibit 4).
When faced with the most severe scenario, all three companies drop significantly below 2013’s baseline results, but still above 1x liquidity needs. This is a positive stress testing outcome given that the results show liquidity adequacy under “extreme stress.”
However, the three companies would need to replenish liquidity resources to return to A/Aa-rated liquidity levels. (Exhibit 8; Exhibits 5-7 of the Moody’s report are not included in this summary).