Insurers on more solid footing this time

If the market continues to sink, investors and policyholders can feel more confident about the financial wherewithal of big life insurers than they did during the last downturn.

Since 2008-09, many insurers have taken steps to bolster cash reserves and reduce their holdings of high-risk investments, such as collateralized debt obligations.

“Holding companies are holding significantly more cash — double or triple the amounts they had in the past — to cover their debts if they are incapable of borrowing. Capital levels are substantially higher than in 2008 and that gives the companies the ability to weather any storm,” said Steven Schwartz, a life insurance analyst at Raymond James & Associates Inc.

“Over the last 18 to 24 months, companies have been proactive in selling out of riskier securities, like [collateralized-debt obligations], and giving up some yield for safety,” said Andrew Edelsberg, vice president at A.M. Best Co. Inc.

Insurers’ stock prices reflect just how far the companies have come since the darkest days of the financial crisis: The KBW Insurance Index closed last Thursday at 103.49, up 134% from its all-time low of 44.16 on March 6, 2009.

To be sure, the index tumbled along with other financial stocks Aug. 8, the first trading day after Standard & Poor’s unprecedented downgrade of the nation’s credit rating — falling by 9.83% to close at 96.52. The broader Dow Jones Industrial Average fell by 634.76 points, or 5.5%, to end at 10,809.85.

Not all insurers are out of the woods.

The threat of another recession is causing analysts to keep a close eye on insurers’ books, especially those companies that have recently snatched up mortgage-backed securities and other assets in an effort to capture more yield.

Among insurers that have purchased such securities are American Equity Investment Life Holdings Co. and Symetra Financial Corp. In the case of American Equity, the insurer bought $35 million in asset-backed securities related to railcars during the second quarter and $7.14 million in mortgage-backed securities. The carrier has largely pushed into higher investment-grade assets and has improved the quality of its portfolio, said American Equity’s chief investment officer Jeff Lorenzen.

In its second-quarter conference call two weeks ago, American International Group Inc. said it had recently invested money into “various asset classes,” earning an average yield between 4.5% and 6%.

Mark Herr, a spokesman for AIG, last week declined to specify whether those assets included asset-backed securities.

“There has been gradual re-risking of portfolios since 2010,” said David Paul, principal at Alirt Insurance Research.

Joel Levine, senior vice president and insurance analyst at Moody’s Investors Service, concurred.

“We’re aware that there are some companies that have dabbled in beaten-up [residential mortgage-backed securities], trying to buy securities at a nice discount,” he said.

Another sign of that additional risk can be found in insurers’ bond portfolios. At the end of last year, 64.2% of those portfolios were invested in triple, double or single A-rated investments, down from 66.1% two years earlier.

Even so, most analysts agree that insurers are better positioned to withstand the market’s tumult than they were a few years ago.

Unlike in 2008-09, many insurers now are sitting on relatively healthy reserves of excess capital and will keep a portion of the money on their balance sheets, said Andrew Kligerman, a managing director at UBS Securities LLC.

That capital provides them with a cushion to meet general obligations and ride out a second downturn.

“When you see things like what we’re seeing around the world, it predisposes companies to be more cautious,” Mr. Kligerman said. “Companies have really raised capital and have done all the right things to fortify balance sheets.”

MetLife Inc., for example, now holds as much as $9.5 billion in excess capital; it had about $4 billion going into 2008.

Further, risk-based capital ratios — that is, the amount of capital insurers hold on their books to offset investment risks and to cover certain obligations — have generally improved. In fact, some have improved to the level where they have been able to deploy excess funds to their holding companies.

HEALTHY RATIOS

Generally, insurance regulators will intercede if a carrier’s RBC ratio falls to 200% or below.

Prudential Insurance, for instance, started the year with an RBC ratio of 533% — far above its 400% benchmark. As a result, it was able to deliver a $1.2 billion dividend to its holding company.

As of June 30, the insurer’s RBC ratio is “comfortably above 400%,” Richard Carbone, Prudential’s chief finance officer, said during its second-quarter conference call.

MetLife’s RBC ratio, meanwhile, stood at 458% at the end of last year. The insurer expects to move about $4.8 billion in excess capital to its holding company by the end of 2011.

“The excess capital sitting on our insurance subsidiary doesn’t really become deployable until it gets to the holding company,” William Wheeler, chief financial officer at MetLife, said during the insurer’s second-quarter earnings call two weeks ago.

Both insurers calculate their RBC ratios annually.

Although it remains to be seen how insurers will fare in the latest market tumult, or even whether that volatility will go on for much longer, it is clear that most insurers are on relatively solid financial footing.

“We think the insurers learned their lesson since 2008,” Mr. Paul said. “The balance sheets are very strong if we go into a double-dip.”

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