Fitch Ratings Ltd., New York, is starting to calculate just what a great year 2003 was for U.S. life insurers.[@@]

Low interest rates were tough on sellers of some types of products, such as long-term disability insurance, but, overall, the stabilization of the investment markets cut losses realized on investments sold, written down or written off during the year to $3 billion, from $12 billion in 2002, according to a review written by Fitch analyst Julie Burke.

U.S. life insurers sucked $1 billion in capital from their holding companies and parent companies in 2002, but they did well enough in 2003 that dividend payments were $5 billion greater than capital contributions.

Although BBB-rated bonds paid only 1.31 percentage points more than comparable Treasury bonds at the end of 2003, down from a spread of 2.58 percentage points at the end of 2002, the high-yield default rate fell to 5%, from 16%, and companies that looked like goners in 2002 recovered enough to increase the recovery rate on defaulted bonds to 44%, from 22%.

Thanks to the strength of the bond market, the industry’s overall risk-based capital level increased to 352% at the end of 2003, from 320% a year earlier.

But mergers, acquisitions and proposed regulatory changes that would increase RBC requirements for variable annuity product guarantees probably will cause a decrease in the overall RBC level in coming years, Burke predicts.

Burke also predicts that U.S. life insurers’ shift toward investment-oriented products and away from products designed to protect consumers’ assets and incomes eventually will cause problems.

Despite the boost from the investment market rebound, “the 2 core drivers continue to be intense competitive pressures and changes in product mix,” Burke writes. “Even with better economic and capital market environments, Fitch believes these long-term negative fundamentals will not go away.”