The recent turmoil in the market for General Electric Co.’s bonds has started to remind investors that corporate borrowers sometimes fail to make their debt payments.
But, for now, life insurer stability trackers see tales of debt issuer problems as something interesting to think about, not as a symptom of a bad financial head cold, let alone anything more serious.
Analysts at S&P Global, Moody’s Investors Service, and the U.S. Treasury Department’s own Office for Financial Research have inspected life insurers’ tonsils in three new reports.
Deep Banerjee and other S&P analysts have made a data-driven case for something agents and brokers already know: publicly traded insurers and insurers controlled by private equity firms and other “alternative capital” providers tend to pursue strategies with more ups and downs than the policyholder-owned mutuals do.
The S&P analysts see the public companies offering more products with performance tied to shifts in stock prices and interest rates, and the alternative capital-provider-owned companies offering products backed pools of assets that expose the issuers to somewhat more investment risk than other issuers tend to take.
The S&P analysts see a tendency for life insurers to use what the insurers classify as “excess capital” to buy back stock or make acquisitions.
“We are starting to see early signs that capitalization will not get any stronger,” S&P says in a summary of the report.
But S&P expects to see most life insurers continue to have enough capital to support their ratings. “Capitalization will remain a key strength,” the company says.
The S&P report is behind a paywall.
Shachar Gonen and other analysts at Moody’s give a similar assessment in their 2019 life outlook report: the overall outlook for life insurers is still stable, rising interest rates are helping, capital remains strong, and portfolio asset quality is something interesting to think about.
U.S. life insurers had about 48% of their $4.4 trillion in general account assets invested in corporate debt securities in 2017, according to data from the American Council of Life Insurers’ ACLI 2018 Life Insurers Fact Book. In part because of the rules set by state insurance regulators, and the rating guidelines set by the rating agencies, life insurers tend to invest mainly in debt securities from companies with high credit ratings.
Life insurers’ continue to have high-quality, well-managed, diversified investment portfolios, but “we do see evidence of increasing risk,” the Moody’s analysts write in their report.
Corporate borrowers have been taking on more debt, and all types of lenders have eased their credit standards, the analysts write.