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U.S. life insurers ended 2001 with less capital even though their official risk-based capital ratios rose.

Analysts from Moodys Investors Service, New York, draw that conclusion in a report on the effects of recent changes in the rules for calculating risk-based capital ratios.

The National Association of Insurance Commissioners, Kansas City, Mo., came up with the RBC ratio to create a standard yardstick for measuring insurers financial health.

Insurers calculate the ratios by dividing total adjusted capital by risk-weighted capital. Insurers get more credit for low-risk investments, such as U.S. Treasury bonds, than for investments in real estate, common stock and low-grade corporate bonds.

The Moodys team set the RBC rules aside and measured insurers capital adequacy by dividing statutory capital by general account assets. Because of investment losses and dividend payments, the ratio of statutory capital to general account assets fell to 10.4% in 2001, from 11.8% in 2000.

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

“We still feel the industry is more than adequately capitalized,” says Robert Riegel, a Moodys analyst who helped work on the capital adequacy report. “Were just concerned about the trend.”

Life insurers are still stronger than they were in the early 1990s, when the ratio of statutory capital to general account assets fell below 9%. But adjusted capital adequacy ratios are now at their lowest level since 1995, Riegel says.

Thomas Upton, an analyst at Standard & Poors, New York, agrees that U.S. life insurers are still strongly capitalized but suffering a noticeable deterioration in capital reserves.

“At this point, I would say its a material decline,” Upton says. “In large part, its because of the economy.”

The Moodys capital adequacy figures look worse than the official RBC figures because the NAIC rules for calculating statutory capital and RBC ratios changed in January 2001. The new rules let life insurers pump up total industry-wide statutory capital by $8.5 billion, Moodys says.

Thanks to the new rules, “you get this spike up at year-end 2001, and it doesnt reflect reality,” Riegel says.

Credit losses, weak investment returns and shareholder pressure to use spare cash to buy back stock could squeeze life insurers capital more this year, the Moodys analysts write.

Hard-hit life insurance company executives might be tempted to base future business plans on the bleakest possible forecasts, but Upton says excessive pessimism can be as damaging as excessive optimism. Although some life insurers may have been too aggressive in their assumptions, “this is truly an extraordinary period,” Upton says.

No reasonable person could have expected a life insurer to come up with a five-year plan in 1997 that assumed the economy would be as weak in 2001 as it actually turned out to be, Upton says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 2, 2002. Copyright 2002 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.