The Life Insurance Industry is Strong in Times of Financial & Economic Stress
Updated: Mar 31, 2020
For over a century, the life insurance industry has shown its strength while withstanding the impact of events such as the Spanish flu pandemic of 1918, the Great Depression, World War II, 9/11, and the Great Recession, and it has met our obligations to policyholders even in the worst of times. We have no doubt that we will do the same in the face of COVID-19.
When it comes to periods of financial and economic stress, we have a significant advantage over other industries due to strict regulations designed to maintain insurer solvency and a conservative approach to asset management. Also important is the rating agencies’ continual — and very public — scrutiny of life insurance carriers financial strength and stability.
In light of the current economic and social environment, we wanted to share some information on the financial strength and factors to consider for our key life insurance carrier partners. Carriers hold reserves, which are assets required to support future liabilities. Reserving requirements are further enhanced by conservative assumptions. While the current standard of principles-based reserving (PBR) allows carriers to use their own mortality experience (if credible) when calculating policy reserves, stress testing uses extra mortality margin and various interest rate scenarios when calculating deterministic and stochastic reserves. In recent years, some carriers have added pandemic-specific stress tests that assume adverse conditions for both interest rates and short-term mortality.
Carriers maintain Risk-Based Capital (RBC) for asset risk, insurance risk, interest rate risk, and operating/general business risk. Our key life insurance carrier carrier partners usually hold many multiples of the capital required by regulation. To ensure reserves are adequate to pay out liability cash flows, carriers also undergo Asset Adequacy Testing. These tests include seven required interest rate scenarios and various tests on other key assumptions, such as mortality, persistency, and expenses.
Recent news should be heeded about the possible stress to the life insurance sector due to COVID-19’s impact on the securities markets and mortality rates. It remains to be seen what the Federal Reserve Board’s recent quantitative easing measures will ultimately achieve. Some industry watchers argue that persistent low interest rates could weaken the creditworthiness of some life insurance carriers. Nevertheless, our firm and M Financial believes that such risks can be mitigated by the overall asset quality, high capital levels, and significant stress testing the industry integrates into its daily business practices.
Key Carrier Partner Summaries (as of 03-23-20)
PACIFIC LIFE 
In 2019, Pacific Life, a subsidiary of Pacific Mutual Holding Company, a mutual company, recorded net income of $725 million and grew net admitted assets to $88.4 billion, while paying out more than $2.7 billion in life and annuity benefits.
In June 2019, Fitch Ratings upgraded Pacific Life’s financial strength rating from A+ to AA- due in part to Pacific Life’s strong capitalization and diversified product portfolios. M’s estimate is that Pacific Life has a current RBC ratio in the range of 650%.
The rating agencies surveyed based Pacific Life’s rating of Very Strong to Superior on the company’s strong capitalization and liquidity, strong underwriting performance, modest investment risk, and diversified earnings portfolio. Key risks generally focused on Pacific Life’s exposure to legacy variable annuities and an above- average concentration in lower quality investment-grade fixed income securities.
JOHN HANCOCK / MANULIFE 
John Hancock, owned by global life insurance company Manulife, maintains a high level of cash and liquidity, in part due to its large scale.
Generally, the surveyed rating agencies cite Manulife’s strong capital strength and diversification among geographies and business lines to support a Good to Superior rating. On the downside, Manulife has substantial long-tailed risk exposure through its long-term care insurance and variable annuity books of business.
For the year ending 12/31/2019, Manulife had high-grade short-term assets and cash on hand of nearly U.S. $14 billion and a 140% Life Insurance Capital Adequacy Test ratio that is well over the Canadian supervisory target of 100%. Manulife is not dependent on short-term borrowing or commercial paper to meet its operating liabilities. The company has a market cap of $39.6 billion as of 12/31/19, although that has declined significantly in recent weeks.
Prudential is noted for having a very strong balance sheet, operating performance, and enterprise risk management program. The company is a conservative investor, and low interest rates are expected to have a negative impact on net investment yield. The effect could be material in a severe scenario. While this volatility is likely to be reflected in Prudential’s earnings, such volatility is not outside expectations. Prudential’s strong balance sheet gives the insurer greater flexibility and access to sources of liquidity and capital markets. The company has strong liquidity as evidenced by having $4 billion of cash on hand as of 12/31/2019. As we understand it, Prudential has little exposure to bonds from companies that are expected to suffer most from COVID-19-related disruptions.
Nationwide is noted for its established market presence and leading position in the U.S. life insurance market. Rating agencies cited several strengths backing their positive view of Nationwide, including solid capitalization, a large diversified revenue base, and a well-diversified, high-quality investment portfolio. On the downside, the agencies anticipated challenges posed by the hedging strategies that supported the company’s growing book of variable annuity liabilities. As of 03/23/2020, Nationwide’s 2019 financial information was not available and therefore is not referenced in the preparation of this summary.
You can download the following carrier snapshots below: John Hancock Nationwide Pacific Life Prudential
 See Pacific Life Due Care Snapshot dated 03/23/2020 for additional details.
 See John Hancock Due Care Snapshot dated 03/23/2020 for additional details.
 See Prudential Due Care Snapshot dated 03/23/2020 for additional details.
 See Nationwide Due Care Snapshot dated 03/23/2020 for additional details.