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.
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.
“Though the absence of meaningful business growth is a near term benefit to earnings, in the long run lack of growth coupled with the low investment returns may exert increasing pressure on industry earnings,” the report states. “This is already contributing to the rationalization of businesses by insurers, exits from business lines, changes to policy terms & conditions, sales of businesses, etc.”
Net capital gains / net capital losses
The survey adds that, despite strong equity markets in 2012 and 2013, net capital gains rose modestly (1.3 percent) in 2012. And net capital losses resulted in 2013, the -7.8 percent dip likely “due in significant part to hedging activities for variable annuities.”
Teachers Insurance & Annuity ($1.5 billion), Allianz Life of North America ($1.2 billion), and two Hartford Financial insurers ($1.2 billion for Hartford Life Ins. Co. and $854 million for Hartford Life & Accident) disclosed the highest net capital gains among the ALIRT Life Composite insurers in 2013. Gains for the last related to the increase in capitalization for subsidiary life insurer Hartford Life & Annuity.
The report’s statutory accounting of net capital gains and losses do not include changes in the market value of bonds held by life insurers. Statutory accounting rules value bonds at their book values, and thus statutory capital is impacted to a much lesser degree by changes in the market value of bonds, with gains or losses only recognized on bonds sold or impaired. This is in significant contrast to GAAP accounting where most bonds are carried at their market values, which results in much more significant changes in unrealized capital gains (losses) when interest rates fall (rise), which in turn affects shareholders’ equity as opposed to statutory surplus.
At year end, Dec. 31, 2013, the ALIRT Life Composite had unrealized gains of $97 billion on a market to market basis. Though still positive, this was down sharply from $244 billion in 2012, and is illustrative of how quickly unrealized gains or losses can change as a result of interest rate movements.
Net premiums / direct premiums
The charts below depict net and direct premiums written for the ALIRT Life Composite in 2013 which were, respectively, 9.2 percent and 5.8 percent below 2012 levels, the second largest decline exhibited by the industry in at least the last 20 years.
The reduced industry premiums in 2013 were due in part to sharply lower group annuity premiums for Prudential Insurance Company of America, which issued large amounts of terminal funding group annuity business in 2012. Also reducing premiums in 2013 were the sale of individual life insurance businesses by the Hartford (to Prudential) and Aviva Life & Annuity (to Global Atlantic Financial Group), and the reinsurance of a large block of annuities by Aviva to a Bermuda affiliate.
If these companies and three others that reported zero or negative net premiums in either 2012 or 2013 were excluded, the ALIRT Life Composite would have reported nearly flat direct premiums (-0.1 percent) and somewhat higher net premiums (+3.7 percent) in 2013.
Reporting among the largest declines in direct premiums written in 2013 (excluding the aforementioned companies) were major variable annuity writers, including MetLife Investors USA (-38 percent, down $4.9 billion), Pruco Life Insurance Co. (-33 percent, down $6.8 billion), and Ohio National Life (-19 percent, down $668 million). Other insurers with significant declines in direct premiums included:
- Security Life of Denver (-80 percent, down $3.4 billion);
- Connecticut General Life (-52 percent, down $4.4 billion); and
- Sun Life of Canada US (-43 percent, sold to Delaware Life Holdings in August 2013).
“The flat/declining premium volume in 2013, and the overall soft premiums since the financial crisis, reflects in part weak demand for the industry’s de-risked and more expensive product offerings amidst the economic doldrums of the last several years, and is also a function of carriers pulling back from certain product lines and/or distribution channels, or the outright exit from the industry altogether,” the report states. “Companies continue to adjust to the historically low investment returns, weaker than expected (or nonexistent) profitability for some existing products, policyholder behavior at odds with initial projections, and volatile equity markets since the dawn of the variable annuity product.”