Just recently, the CEO of United Services and Trust Corporation, L. Carlos Lara, wrote an article and shared his research on the current liquidity of life insurance companies: http://partners4prosperity.com/liquidity-of-life-insurance-industry.
He reviewed the balance sheets of these companies with one objective: to determine how liquid are they in being able to withstand a major downturn in the economy. The article pointed out that even highly profitable companies can run into financial trouble if they don’t have the liquidity to react to unforeseen events. Even if they have a stockpile of assets on their balance sheets, they can still struggle with cash flow issues when the market crashes if those assets are not liquid. Liquidity is the major concern when it comes to financial stability in the market.
To analyze liquidity, financial ratios are established to give leading indicators as to when the economy is going to drop off a cliff. As this liquidity analysis is being done on various insurance companies, Lara noted in the article how impressed he was with the strength the insurance industry proves out, over and over again. No other money intermediary in any financial market has this kind of liquidity.
Given the superior financial strength of the insurance industry, Lara and his team dug deep into the financials to find out why this is so. Here is what he found:
- 70% of the assets of life insurance companies are in AAA rated bonds, meaning they are liquid in and of themselves.
- Their yield has been close to 5% with no market risk attached.
As all the risks must be factored into an analysis, auditors are required to take the most conservative claims ratios. Each individual state has its own insurance department and applies these same conservative standards. This gives every life insurance company 50 separate sets of eyes examining them, so even though the economy has created a low interest rate environment for many years, the true test of the financial strength of these life insurance companies is in passing the test of liquidity, within all 50 states. Passing that test is a huge priority for these companies.
Another factor that is helping keep life insurance companies financially strong is their mortality experience. As people live longer and do not die, the reserves of cash grow and provide tremendous liquidity. Even though quantitative easing is going gang-busters (government printing tons of money) and this is the main reason interest rates are as low as anytime in our nation’s history, life insurance shows true growth as they can add to their reserves year after year.
In summary, when the top three rating agencies (Moody’s, Fitch’s, and Standard & Poor’s) give life insurance companies the thumbs up, you know they are doing something right. “U.S. life insurers can weather the storm!” these agencies are saying.
If you don’t know the value of adding life insurance to your retirement planning, you are missing out on a very solid and safe way to build your future. Email me with questions, I’m happy to help out: peter@moneymastery.com.
