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Life Industry's Risk-Based Capital Ratio Hit Record High Last Year

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One hundred thirty companies, comprising 85% of life insurance industry assets, posted a record high composite Risk-Based Capital ratio of 278% in 2000, despite a reduction in surplus for 53 of the 130 companies.

The Townsend & Schupp Company’s LIBRA (Life Insurance Business Risk Analysis) Annual Review shows that the ratio of Total Adjusted Capital to Company Action Level Required Capital exceeded 270% for the fourth consecutive year.

At least 120 of the 130 companies exceeded a 200% RBC ratio, for the fifth consecutive year. Ninety-three companies (72%) had an RBC ratio exceeding 250%, and 49 companies (38%) exceeded a 300% RBC ratio.

Table 1 shows the actions imposed on companies that have less capital than required by the National Association of Insurance Commissioners’ Risk-Based Capital formula. As the RBC ratio falls, the corrective actions grow tougher.

None of the 130 companies in the T&S Industry Composite were subject to possible regulatory action at year-ends 1997-2000 (i.e., their RBC ratios all exceeded 125%).

Table 2 shows RBC ratios, and their distribution, for 130 major U.S. life insurers for 1993-2000. RBC ratios were first published in 1993. Five of the eight companies with RBC ratios under 200% in 2000 are health insurers.

The lowest RBC ratios in 2000 are 149% for LifeUSA, which had 30% growth in assets combined with capital losses, and 163% for LINA, which paid shareholder dividends equal to 17% of its prior-year surplus.

Because 122 of 130 companies exceeded a 200% RBC ratio in Table 2, Table 3 breaks down the current 130 LIBRA companies into broader groups for the five years 1996-2000.

Note that Table 2 shows the one-year distribution of the 130 largest companies ranked at each year-end 1993-2000, while Table 3 is the 5-year history of the 130 largest companies ranked by invested assets at 12/31/00.

Of the current 130 largest companies, 16 to 18 companies exceeded a 400% RBC ratio in 1997-2000, and 29 to 31 companies fell between 300-399% in 1998-2000.

Only 4 to 10 companies had RBC ratios in the 125-200% range during each of the individual years 1996-2000.

Table 4 shows that in 1998-2000, 40, 37 and 53 of the 130 companies reduced their total surplus, primarily through shareholder dividend payments. This reflects the desire to improve returns on equity, but puts downward pressure on their respective RBC ratios.

Frederick Townsend, a founder of The Townsend & Schupp Company, is an investment banker in Hartford, Conn.

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 4, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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