Life insurers’ operating earnings edged up more than 10 percent between 2012 and 2013, according to a new study.
ALIRT Insurance Research discloses this finding in an analysis of insurance company risk trends. The one-year “snapshot” surveys 10 metrics, among them statutory earnings, return on equity (ROE), annual percentage change in premiums written, investment returns, and others. What follows are key findings from the report.
After-tax statutory earnings
The report shows that statutory earnings of life insurers reached $44.4 billion in 2013. This compares with $40.4 billion in 2012 and $15.5 billion in 2011. The report attributes the increase in part to strong equity markets, which “allowed the release of sizeable statutory reserves related to variable annuity secondary guarantees.” Ninety-two of the 100 composite insurers had operating earnings for the year.
“Pure” capital ratio
The 2013 ALIRT Composite pure capital ratio improved modestly over the 2012 ratio (12.1 percent vs. 12 percent), the gain was helped by strong earnings. The improvement was offset, however, by net capital losses, increased shareholder dividends and capital returned to the parent company.
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The ALIRT Life Composite Total Surplus grew to $376.1 billion in 2013, up from $364.8 billion or 3.1 percent in 2012; and up from $343.5 billion in 2011, a 9.5 percent rise.
“The composite surplus [was] helped by continued strong earnings and rising equity markets (which are highly correlated with life insurance company earnings), as well as lower surplus strain due to declining premium volume,” the report notes.
Though surplus growth in 2013 was the lowest in five years, it was still sufficient to exceed weak general account invested asset growth of 2.3 pecent (the lowest since 2009, when investment losses were much higher), as premium volume remained soft and investment yield was near historical lows.
Decline in total surplus
Thirty-two of the composite insurers incurred a decline in surplus in 2013, the largest number of insurers since 2008. Reporting the largest declines in surplus were Aviva Life & Annuity (ALAC) (-59 percent) and MONY Life of New York (-47 percent). Both companies paid large shareholder dividends, representing capital returned to their former parent companies. As part of the terms of the Athene acquisition, ALAC agreed with the Iowa Insurance Department that it will not pay shareholder dividends without approval until at least October 2018.
Returns on equity / returns on assets
The report records a rise in both pre-tax and after-tax returns on equity. “2013 returns on equities were somewhat higher, benefiting from rising equity markets, which allows variable annuity reserves to be released, while declining industry premium volume reduces expenses and operating leverage,” the report states.
The study adds, however, that absent a rise in the second half of March, returns on both equity and assets may be “materially lower” in the first quarter of 2014.