NU Online News Service, Aug. 26, 8:20 p.m. – U.S. life insurers suffered from declining capital adequacy levels in 2001 even though their risk-based capital ratios went up, according to a new report by a team led by Robert Blanchard, an analyst at Moody’s Investors Service, New York.

The National Association of Insurance Commissioners, Kansas City, Mo., developed the RBC ratio reporting system to give the insurance industry a standardized, easy-to-understand measure for gauging an insurer’s financial health. Insurers come up with RBC figures by dividing their “total adjusted capital,” or equity capital, by their “risk-weighted capital.”

Blanchard’s team looked at insurers’ capital another way, by dividing statutory capital by general account assets.

Because of realized and unrealized investment losses, and big dividend payments to shareholders, the ratio of statutory capital to general account assets fell to 10.4% in 2001, from 11.8% in 2000, the Moody’s analysts write.

When the analysts divided statutory capital by policyholder liabilities, they found the policyholder liability ratio fell to 12.9%, from 14.3%.

Another measure of economic capital adequacy, the ratio of assets that carry investment risk to capital, is also deteriorating, the analysts write.

The ratio increased to close to 200% in 2001, from less than 190% from 1997 to 2000.

Risk assets include common stock, real estate and low-rated bonds.

“Under-performing assets as a percentage of statutory capital has also increased,” the analysts write. “Both measures are expected to deteriorate in 2002 given the significant number of bonds downgraded to below investment grade, and higher bond default rates.”

The economic adequacy figures look worse than the RBC figures partly because the NAIC changed the rules for calculating assets and RBC ratios in January 2001, in ways that let life insurers pump up total industrywide statutory capital by $8.5 billion, the Moody’s analysts write.

When the analysts excluded the effects of the accounting changes from RBC calculations, the overall Dec. 31, 2001, life industry RBC ratio fell to 331%, from a reported average of 345%.

The U.S. life insurance industry still has enough capital to support its risks, but Moody’s may end up downgrading more life insurers if current trends persist, the analysts warn.

Credit losses, weak investment returns and shareholder pressure to use spare cash to buy back stock could be putting even more of a squeeze on life insurers’ capital this year, the analysts write.