Best’s: Public U.S. Life/Annuity Companies Reduced Leverage, Improved Liquidity
The prolonged low interest rate environment has allowed publicly traded life/annuity (L/A) insurers to strengthen their balance sheets by replacing higher-cost debt with often significantly lower-cost alternatives, according to a new AM Best special report.
The Best’s Special Report, titled, “Publicly Traded L/A Insurers Reduced Leverage, Improved Liquidity in 2020,” states that the aggregate unadjusted total debt-to-capital ratio for the 16 publicly traded L/A insurers followed for this report has declined since 2011, to 24.1% at year-end 2020. Total debt outstanding decreased by approximately $8 billion (or 8.1%) to $91.4 billion at year-end 2020.
In 2020, the financial leverage of a significant portion of the publicly traded companies declined to its lowest unadjusted level of the last 10 years. The overall decline in debt-to-capital ratios can be attributed to the industry’s record-high capitalization, which enhances the ability to use earnings for debt servicing as well as regular dividend payments.
Given the current interest rate environment and some uncertain views of the U.S. economy, many of the larger companies continue to de-leverage (the primary reason for the decline in debt). Prudential Financial reduced its total debt obligations by $6.3 billion in 2020, the largest dollar decrease of all the companies.
With uncertainty surrounding COVID-19 pandemic, many insurers turned to the Federal Home Loan Bank (FHLB) to tap into funds to bolster liquidity to prepare for a worst-case scenario. The aggregate borrowing for the L/A insurers grew year over year by approximately 18% in 2020, to $97.3 billion. Even though aggregate borrowing has increased steadily since 2014, it has been outpaced by collateral pledged, causing the borrow-to-collateral percentage to decline over the period.
Management’s track record of share repurchases and shareholder dividends is also considered in AM Best’s evaluation of operating leverage and expected coverage ratios. Given the uncertainty caused by COVID-19 in 2020, many companies paused their share repurchase programs and cut back on dividends to prepare financially for the worst. For the publicly traded companies, the aggregate capital returned to shareholders declined by 41% to $11.7 billion.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.