Those in the US life insurance industry, and its associated markets, might be forgiven for experiencing some level of credit risk fatigue, such has been the volume of articles and content produced in the past year or so related to this topic.
A large part of this content – or, rather, criticism – has been related to asset managers buying or partnering with insurance companies in the US pension risk transfer market; the argument being that some of these firms are securing the benefits of American retirees with riskier, private assets, which goes against the requirement for plan sponsor trustees to select the ‘safest annuity available’ when choosing a de-risking provider, which in turn is impacted in part by its credit risk/rating.
But March delivered not one, not two, but three notable announcements relating to life insurer credit risk. First up, on 13th March, was ratings agency AM Best, which published a press release saying that there were more downgrades than upgrades in the US life and health insurance industry last year.
“Most US L/A insurers benefited from consistent profitability, bolstered by favorable interest rates, strong capitalization, and top-line growth in most of their core lines of business,” said Helen Andersen, Industry Analyst at AM Best.
“But they must contend with the potential for further interest rate cuts, increased use of higher risk assets, and the ongoing drag of legacy liabilities.”
Then six days later, supranational agency the International Association of Insurance Supervisors (IAIS) published a draft Issues Paper on structural shifts in the life insurance sector for consultation which referenced credit risk.
Finally, on 21st March, the US Federal Reserve was at it with Life Insurers’ Role in the Intermediation Chain of Public and Private Credit to Risky Firms, a note that referenced the intersection of life insurers and collateralized debt obligations, concluding that, “Life insurers’ exposure to below-investment-grade firm debt has boomed and now exceeds the industry’s exposure to subprime residential mortgage-backed securities in late 2007”.
Credit risk in the life settlement market is the risk that the insurance companies issuing the life insurance policies owned by a life settlement investor are unable or unwilling to meet the death benefit payments of the insured lives as they fall due. It is one of the main investment risks that life settlement asset managers need to be cognisant of when analysing life settlement policies for purchase.
While the recent noise has mainly focused on the credit investments made by life insurers, capital allocators who might be considering adding life settlements exposure to their alternative investment portfolios might be forgiven for putting two and two together raising an eyebrow here. But a closer look at the data should provide some level of comfort.
Asset management firm Conning’s research division publishes an annual report that analyses the life settlement market and the most recent edition, published in November last year, contains a table showing a list of insurance companies and the aggregate cash value each insurer is on the hook for in the market. The firm with the largest share, Massachusetts Mutual Life Ins. Co., was responsible for just 4.2% of the overall market exposure.
The data suggests that life settlement asset managers have plenty of options for diversification at the carrier level.
“The data speaks for itself,” said Adam Meltzer, Managing Partner at Apex Capital Partners.
“There are many different life insurers that we see in the life settlement market, and diversifying by carrier is absolutely an established practice for prudent portfolio construction in our industry.”
There were ten carriers with two per cent or more of market exposure last year, collectively accounting for 34% of overall market exposure. But the credit ratings of these firms are generally solid, something which leads life settlement bulls to argue that this supports the view that life insurers in the US are actually a strong risk counterparty for the life settlement market.
“The credit ratings of US life insurers are strong. These companies are heavily regulated, well capitalised and well run. It is actually a benefit to our market that life insurers are a risk counterparty – there are numerous asset classes where the counterparty is not nearly as robust as the ones we have in the life settlement market,” added Meltzer.
All the recent noise aside, carrier risk is something that the life settlement market has actually been ahead of the recent news on.
In May last year, when PHL Variable Life Insurance Company was put into rehabilitation by the Connecticut Insurance Department, life settlement asset managers holding PHL policies in their portfolios saw a marked decline in value down to $300,000 as Connecticut Commissioner Andrew Mais capped the payout until further notice, which, at the time of publishing, remains the case.
Jane Callanan, General Counsel for the Connecticut Insurance Department, told InsuranceNewsNet at the end of last year that: “The Rehabilitator continues to expect to present to the court the key terms of a rehabilitation plan by mid-2025. A complete plan of rehabilitation would be filed thereafter, with the plan confirmation process likely in late 2025”.
PHL’s woes go back many years, and some asset managers had removed their exposure to PHL before the rehabilitation order was served. While the life settlement market in aggregate is waiting to see the exact details of the rehabilitation plan, a significant chunk of the interest is to understand the potential impact at the industry level as opposed to the downside (or upside) to their PHL exposure.
And it might not be as bad as it could have been: In the InsuranceNewsNet article, when asked about potential Cost of Insurance increases, Callanan said that: “There are no current plans to pursue such an increase at this time”.
Whatever is next in what could be described as something of a zeitgeist in life insurer credit risk, industry insiders insist that the overall picture remains strong.
“Life settlement fund managers tend to diversify their portfolio in a myriad of ways – age, gender, life expectancy, state and carrier being just some of the considerations in the space,” said Meltzer.
“While there has recently been lots of talk about credit risk generally, it’s something that the industry has been managing and mitigating for two decades and diversifying by carrier will be a pillar of portfolio construction for the next 20 years.”