S&P Global Ratings has said that the U.S. life insurance industry has strong capitalisation at a macro level, but warns that capitalisation varies by individual company.
Analysis by the global ratings agency finds that rather than reserve risk, it is asset risk that drives capital requirements for life insurance companies, with the proportion of required capital varying by type of liability and asset exposure on an insurer’s books.
Public-traded companies, says S&P, have a higher exposure to market-sensitive products, which means that their share of market risk is smaller than the mutual firms.
On the asset side of the equation, S&P warns that as seen with alternative capital-owned insurers having a greater share of investment/asset risk than other mutuals and public companies.
“The good news is that at a macro level, the U.S. life insurance industry has strong capitalization supporting its risk profile. But, not surprisingly, at a micro level, capitalization levels vary widely across individual insurers,” said S&P Global Ratings credit analyst Deep Banerjee.
S&P maintains its stable credit outlook on the U.S. life insurance sector, which includes its view that capitalisation will remain supportive of ratings.
“The consistent annual growth in the capital base since the last recession, as well as de-risking of capital-intensive products, has resulted in the industry retaining record levels of capital adequacy. But we are starting to see some early signs that capitalization will not get any stronger.
“We believe that insurers will use what they believe to be “excess capital” for external purposes such as shareholder returns and organic and inorganic growth opportunities. So capitalization will remain a key strength for the industry, but just don’t expect any more records,” says S&P.
The ratings agency continues to note that the U.S. life insurance industry, in aggregate, has about 10% capital redundancy at the ‘AA’ confidence level.
Overall, the firm expects capital levels to remain strong for the sector, adding that it does not expect it to get stronger at this point.
