April 27, 2015 Washington Wire

U.S. Life Insurers Began 2015 With Strong Balance Sheets

WASHINGTON – U.S. life insurers reported that they began the year well-capitalized with strong balance sheets resulting from favorable equity and credit markets throughout 2014. That’s according to the latest Goldman Sachs Asset Management annual survey of the insurance industry.

Insurers based in the Americas believe they are over-capitalized and have to increase credit and equity risk in their portfolios in order to maintain adequate yields.

The report concludes, however, that as easy global monetary policies have pushed yields to ultra-low to negative levels, insurers are finding it more difficult to find attractive investment opportunities. “Despite this pessimistic view, approximately one-third of insurers globally intend to increase overall portfolio risk, with the most significant risk appetite stemming from European, Middle East and Pan Asia markets,’ the report said.

In addition, the report said, “Insurers are anxious about the growth trajectory of the largest economies, particularly the U.S., and they are concerned about higher levels of volatility and deflation.”

Insurers believe equity asset classes will outperform credit assets this year and are looking to increase allocations to less liquid, private asset classes.

“Overall the industry is well-capitalized and insurers are generally comfortable with the level of risk their peers are taking,” the report said.

The report also notes that “insurers globally are facing increased regulatory requirements as international and national frameworks continue to evolve.”

The survey is especially timely because both the Senate and the House financial services committees plan to hold hearings on insurance regulatory issues this week. One topic to be discussed will be the Financial Stability Oversight Council (FSOC) process for determining which insurers should be overseen at the federal level. Another issue to be reviewed is the impact of international capital standards on the competitiveness of U.S. insurers.

Solvency II will go into effect on January 1, 2016, in Europe, the report noted.

“Given a 16-year transition period to fully implement certain components of the directive, the impact on European insurers is not expected to be severe,” the report said.

The report said the European Insurance and Occupational Pensions Authority (EIOPA) stress test results indicate insurers are generally sufficiently capitalized under the Solvency II regime. The report noted that Asian insurers are broadly moving towards regulatory standards similar to Solvency II or aligned with global Insurance Core Principles (ICPs).

As part of the Solvency Modernization Initiative (SMI), the report said, insurers in the U.S. are required to file their Own Risk and Solvency Assessment (ORSA) reports to internally assess their ability to withstand financial stress. “ORSA is an additional tool to the risk-based capital framework, and may create the need for insurers to alter product offerings and risk management policies based on their results,” GS said in the report.

According to the survey, 26 percent of insurers based in the Americas plan to increase their level of risk this year, while 11 percent said they plan to reduce risk. But 63 percent report they intend to maintain overall risk.

In general, the report said, insurers globally demonstrated strong demand for less liquid, private assets including commercial mortgage loans, infrastructure debt, middle market loans, private equity and real estate equity.

At the same time, insurers based in the Americas demonstrated the greatest appetite for commercial mortgage loans, private equity, middle market loans, U.S. securitized credit and infrastructure debt.

The report said insurers in the European, Middle Eastern and African markets intend to increase allocations to infrastructure debt, European equities, middle market loans, real estate equity and U.S. investment grade corporates. Pan Asian insurers intend to make the greatest net allocations to infrastructure debt and U.S. investment grade corporates, followed by private equity, European equities and infrastructure equity.

Insurers cited valuations of both commercial mortgage loans and infrastructure debt as reasons for not executing on their intended allocations from last year, the report said. The report said commercial mortgage loan market is facing increasing competition from the Commercial Mortgage-Backed Securities (CMBS) market, “which has recently pressured yields.” Infrastructure debt, while attractive for its long duration, faces strong demand and muted supply.

Insurers also noted that the lack of internal systems or personnel has deterred investments in both commercial mortgage loans and infrastructure debt.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].