US publicly traded L/A insurers record 24.1% decline in total debt-to-capital ratio

Written by Adam Cadle

18/08/2011

US publicly traded life/annuity (L/A) insurers have seen their aggregate unadjusted total debt-to-capital ratio decline since 2011 to 24.1% at year-end 2020, with total debt outstanding decreasing by around $8bn (or 8.1%) to $91.4bn.

According to an AM Best report, the prolonged low interest rate environment has allowed publicly traded L/A insurers to strengthen their balance sheets by replacing higher-cost debt with often significantly lower-cost alternatives.

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 capitalisation, 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 US 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 $6.3bn 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 $97.3bn. 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 $11.7bn.

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