Posted on 07 May 2010
The U.S. insurance industry raised $38.6 billion in capital in 2009 through the first quarter of 2010, according to a special report issued today by Fitch Ratings' Insurance group. Generally, Fitch views the industry's capital raises as a positive factor in the rating process, because it addressed concerns regarding companies' capitalization, liquidity position, and overall financial flexibility.
The industry raised the majority of this capital in the second quarter of 2009 as the capital markets showed the first signs of opening after being essentially closed for the latter part of 2008 into the first quarter of 2009. Of this capital, approximately 78% was in the form of fixed income securities, the majority of which were senior notes and 22% was common equity.
Life insurers led the capital raising efforts for the industry with $26 billion, or 68% of the total amount, raised by all insurers. When Fitch includes multi-line insurers with large life operations, this total climbs to $32.7 billion, or 85% of the total. The capital position of the U.S. life insurers was more adversely impacted during the financial crisis over the past two years compared to non-life insurers primarily due to greater investment risk and higher asset leverage, which drove greater investment losses, and secondarily from higher reserves requirements from variable annuity guarantees.
Fitch expects the life insurance industry's average 2010 financial leverage (excluding accumulated other comprehensive income [AOCI]) to increase modestly given new issuances in 2010 is partially offset by equity growth from improved net income a primary result of easing realized investment losses. The life insurance industry's financial leverage was relatively unchanged in 2009 at 23.3% compared with 2008 at 23%, although up from 2007 levels at 20.9%. Fitch also expects the average interest coverage ratio (as measured by operating EBIT / interest expense, where EBIT is earnings excluding realized gains and losses and before interest and taxes) for life insurers may improve in 2010 relative to 2009 but remain below historical levels. The combination of lower operating earnings and higher interest expense put pressure on the life industry's average 2009 coverage, which was 11 times (x)to 12x, similarly to 2008, but much lower than 2007 at 14x to 15x.
In contrast to the life insurance industry, non-life insurers reduced their financial leverage and increased their interest coverage in 2009. (For more details on non-life insurers leverage and coverage, see Fitch's special report, 'Property/Casualty Insurers' Financial Leverage and Debt-Servicing Capacity,' published April 16, 2010 at 'www.fitchratings.com'.)