Since the financial crisis of 2008-2009, U.S. life insurers have boosted their capital positions, but face new challenges, new research reveals.
Goldman Sachs Asset Management, a unit of The Goldman Sachs Group Inc., New York, published this finding in a new white paper, “Returning Versus Investing Excess Capital: Looking Beyond Share Buybacks.”
The white paper shows that life insurers' risk-based capital (RBC) ratios now average near 450%, up from 400% before the 2007-2009 financial crisis.
The report notes, however, that continuing low interest rates continue to depress life insurers’ earnings, return on equity and share price performance. The report also observes that “accumulated earnings are resulting in capital generation in excess of current capital needs.”
To deploy excess capital, the white proposes that life insurers adopt a multi-asset class investment strategy that allocates funds according to a 3:1:1 formula of high yield bonds, hedge funds and private equity. The paper concludes this investment strategy will provide a 17.9% annualized return on shareholders’ committed capital over a 30-year period.
“For the private equity investment strategy, we finding that whenever the private equity net IRR [internal rate of return] exceeds 5.4%, the strategy outperforms a share buyback program in the long-term,” the paper states. “Similarly, within the context of the multi-asset class investment strategy, if the private equity net IRR exceeds 5.4%, the hedge fund return exceeds 3.6% and the high-yield return exceeds 2.8%, the strategy outperforms a share buyback program.
“This provides the insurer with a context around which to make a decision,” the paper adds. “If these levels of returns are deemed conservative, then the multi-asset class investment may be a more attractive ‘excess capital strategy’ than a share-buyback.”