Life, annuity insurers keep appetite for long-term debt in check

OLDWICK: Long-term debt obligations among publicly traded U.S. life/annuity (L/A) insurance companies has declined by 14% over an eight-year span, to $89.3 billion in 2018 from $103.8 billion in 2010, according to a new AM Best report.

A new Best’s Special Report, titled, “Life/Annuity Companies’ Appetite for Long-Term Debt Kept in Check,” states that many of the 19 publicly traded L/A insurers followed for this report took advantage of lower financing costs to pay down their near-term debt maturities.

Most of those that have been able to take advantage of the low interest rates to issue long-term debt have already done so, either to fund business growth or for upcoming maturities. Short-term debt obligations have fluctuated, rising to a peak of $44.9 billion in 2014 from $34.1 billion in 2010, and was $37.9 billion in 2018.

The declining level of debt has lowered the aggregate debt-to-capital ratio to 30.5% at year-end 2018, from 39.3% at year-end 2010. The overall decline in debt-to-capital ratios also can be attributed to the industry’s record-high capitalization, which facilitates companies’ ability to use earnings for debt servicing, as well as regular dividend payments.

Given the current interest rate environment and some pessimistic views of the U.S. economy, many of the larger companies continue to deleverage, which remains the primary reason for the decline in debt.

L/A insurers also have been taking advantage of the low interest rate environment by issuing debt with lower associated coupons and using the proceeds to extinguish older debt with higher rates. Of the companies that had debt obligations as of August 2019, the average weighted average years to maturity was 12.4 years and the average weighted fixed coupon was 4.6%.

“Companies also are increasingly partnering with affiliated distribution channels, incubating fintech insurance startups through seed investments in their own organizations or acquiring fintech insurance-focused companies,” said Jason Hopper, associate director. “Depending on the scale of these initiatives, the moves could result in additional capital demands or an increase in debt issuance.”

The consistent decline in leverage for the publicly traded L/A companies is allowing them to continue to refinance older, more expensive debt. However, although most have adequate interest expense coverage levels, macroeconomic volatility could undermine their operating performance stability, highlighting the need to balance financial leverage and debt obligations against potential volatility in operating results.

Nevertheless, each of the L/A companies maintain strong risk-adjusted capitalization, supported by improved liquidity, which could help cushion the industry in the event of a recessionary environment over the next year or two.

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