Execs: No Need to Dump Energy Holdings

By Cyril Tuohy

Life insurance company exposures to energy holdings are “manageable” and don’t present enough of a financial disruption to justify major shifts in investment portfolios, carrier executives say.

In the wake of the oil price collapse, Wall Street analysts were looking for more detail on life insurance company investments in the oil and gas sector. Executives responded during recent fourth-quarter earnings calls.

Low oil prices have meant oil company slowdowns and analysts are even preparing for a spate of bankruptcies.

When a company files for bankruptcy protection, it becomes more difficult for its creditors to be repaid. Wall Street ratings agencies are expected to recalibrate their energy company ratings in light of lower energy prices.

With interest rates so low, insurance companies were willing to invest in bonds that paid a little more, yet also carried more risk.

So long as oil prices were high it was a risk worth taking and there was little concern that energy companies would make good on repaying their bond obligations. But with the oil price collapse, the model has suddenly come into question.

Higher-risk bonds, which have a greater probability of becoming impaired, have some overlap with the energy sector but still only make up only about 4.6 percent of the life insurance industry’s invested assets, according to analysts with Keefe, Bruyette & Woods.

Life insurers’ exposure to the highest-risk bonds, therefore, remains relatively small.

Downgrades Manageable

“While downgrades of holdings and some impairments may happen over time, we feel the impacts are very manageable and do not alter our financial or capital plans,” said Jack McGarry, Unum Group executive vice president and chief financial officer earlier this month.

Chattanooga, Tenn.-based Unum Group, which turned a profit of $226.1 million in the fourth quarter after a loss of $282.2 million in the year-ago quarter, surpassed Wall Street estimates.

About $5 billion, or 11.6 percent, of Unum’s fixed maturity securities are related to the energy sector, McGarry said. Managers are keeping close tabs on their exposures to securities issued by companies in the metals and mining sector, he added.

Though all corporate bonds related to the energy sector represent 7 percent of average life insurance sector invested assets, some life insurers have higher exposures — depending on the quality of the bonds — than others.

Among life insurers, Unum Group and Lincoln Financial have the largest overall energy exposures and Hartford and MetLife the lowest, according to Morgan Stanley analysts Nigel Dally and Tanmay Gupta in a research note to clients.

Lincoln Financial stopped investing in the energy sector a year ago, and has trimmed its fixed income energy exposure by nearly $1 billion since the end of 2014, said Lincoln Financial President and CEO Dennis Glass.

Lincoln Financial, based in Radnor, Pa., reported fourth-quarter 2015 net income of $283 million, a 19 percent drop compared to the year-ago period. Results came up short of analysts’ forecasts.

Clearly, there’s reason to keep a close eye on the portfolios as the past six months have turned into a lesson about how affected segments of an insurance carrier’s income streams swing from a gain to a loss.

Unum Group, which booked a net unrealized gain of $302.8 million on Sept. 30, reported a net unrealized loss of $51.4 million on Dec. 31, as credit spreads in the energy sector widened considerably, the company reported.

Oil Drillers Deserve Closest Scrutiny

For all the nervousness created by the drop in oil prices and the paper losses appearing on company financial statements, insurance executives on the whole said energy-related exposures were tolerable. Reasons cited for the comfort include the high percentage of energy-related exposures tied up in investment-grade securities and the diversification across subsectors of the energy market.

Oil drillers, as opposed to oil field services companies or refiners, represent the greatest risk Farm Bureau Life’s energy holdings, said Donald J. Seibel, chief financial officer and treasurer of FBL Financial Group, its parent company.

“While we currently do not see a need to take any impairment losses on our energy exposure we are watching this sector very closely,” Seibel said in a conference call with analysts.

About 8 percent of FBL Financial’s energy holdings were exposed to oil drilling companies, but only 6.3 percent of the West Des Moines, Iowa-based company’s total investments are exposed to the energy sector, he said.

“We believe our exposure to the troubled energy and metals and mining sector is limited and manageable,” said Jeffrey D. Lorenzen, chief investment officer with American Equity Investment Life Holding in Des Moines.

At the end of last year, the company’s energy holdings represented about 7.5 percent of its fixed maturity securities, Lorenzen said. About 95 percent of the energy-related securities are investment grade, he added.

American Equity, which reported fourth-quarter net income of $33.8 million on record sales of $2.1 billion, missed analysts’ estimates.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].