Life Insurers are Being Pushed Towards “Alternative” Capital, Deloitte Says

Chris Westfall
Chris Westfall

Insurers will need to look beyond traditional sources of capital — such as reinsurance and stock sales — and mull alternatives if they want to successfully navigate the market over the next several years.

Whether its Reg XXX, embedded value or extreme mortality securitizations, life insurance carriers may discover that what has previously been considered “alternative” sources of capital may be their only way to raise cash to drive growth in the future, according to a presentation by Deloitte & Touche on Tuesday.

The collapse of the credit and stock markets has had a major impact on insurance capital. Life insurers have seen a 15 percent decline in overall capital levels between 2007 and the second quarter of 2009, according to Deloitte. P/C insurers have seen a ten percent decline, the firm said.

At the same time, regulators and credit rating agencies are demanding even greater levels of assets be held by life insurers.

Changes in regulatory-based capital levels by the National Association of Insurance Commissioners have been significant for U.S. insurers and the adoption of Solvency II has meant event greater changes for European carriers, Aniko Smith, a partner with Deloitte & Touche in Los Angeles.

Insurers need follow the capital markets for opportunities to securitize cash flows and raise capital, added Eric Clapprood, a senior manager with Deloitte Consulting in Connecticut.

“It means constantly monitoring of the capital markets so opportunities can be seized on a daily basis,” he said.

Despite the need, ccarriers looking to securitize will continue to find significant hurdles, said Douglas Sweeney, a senior manager with Deloitte Financial Advisory Services in New York.

“Given the current state of the market, it may be a challenge to find a wrapped product,” Sweeney said referencing the collapse of bond insurers like Ambac and MBIA that often guaranteed life securitizations.

Sweeney added that pricing in the securitized debt market also remains depressed. “While the market has started to recover, investors are still reluctant,” he said.

But despite the challenges, securitization is becoming an increasingly viable capital raising tool for life insurers. That is especially true when management is considering long term growth plans.

“When it comes to capital insurers need to consider not only to today’s book of business, but what they are looking to do in the future,” said Smith.