US life insurers are facing questions about their ability to cover a sudden rush of claims after the Federal Reserve highlighted liquidity and leverage risks in a report.
Reuters reports that issues the Fed has focused on in its biannual financial stability report are not new. Life insurers have for years been stocking up on assets that are hard to sell and adding debt that expires relatively quickly to boost investment returns, which have been hit by low interest rates.
The Fed report said that life insurers are more leveraged and face a bigger liquidity gap between illiquid assets and liquid liabilities than they have since the 2007-09 financial crisis. Based on assets to equity, life insurers appear riskier than property and casualty insurers, banks and broker-dealers, the Fed said.
When the Fed highlights an industry in its biannual financial stability report, investors and analysts take notice. That is especially true now, as the industry frets about whether President-elect Joe Biden could slap the “systemically important financial institution” (SIFI) label on them once again.
Being a SIFI means a company’s failure threatens the economy, and therefore warrants tighter regulation. MetLife, Prudential Financial and American International Group got that designation removed in recent years after shrinking and de-risking their balance sheets.
Though insurance executives recently assured Wall Street that their capital and liquidity levels are solid under regulatory requirements, the Fed’s conclusions are hard to ignore, analysts said.
Credit Suisse analyst Andrew Kligerman said, “From the vantage point of having to dispose of something quickly, it might be a little more challenging. But these companies are doing a fine job of matching the duration of assets and liabilities.”
Credit analysts noted that life insurers have more capital than before the financial crisis and have increased their cash liquidity by borrowing and by reducing dividends and share buybacks this year in response to the coronavirus pandemic.
Life insurers take premiums from customers and invest them to generate income. When interest rates are low, it becomes harder to do that with safe, liquid investments like Treasury bonds.
This imbalance could harm life insurers’ ability to handle sudden claims according to the Fed, but analysts said the companies are handling their balance sheets prudently.