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Life insurers’ earnings and ROE dip, but surplus rises in Q2

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Life insurers’ statutory earnings, though still positive, fell by 16.5 percent in the second quarter of 2014 compared to the year-ago period, according to a new report.

ALIRT Insurance Research discloses this finding in a study that examines the performance of life insurers during the first six months of 2014. The research also compares industry financial results in 2014 relative to those of prior years.

For the quarter ended June 30, after-tax statutory earnings totaled $8.6 billion, down from $10.3 billion recorded in the second quarter of 2013. For the first six months of 2014, statutory earnings totaled $16.2 billion, off by $6.3 billion from the $22.5 billion posted for the same period in 2013, a 28 percent decline.

The decline in statutory earnings, the report shows, reduced annualized returns on equity (ROE) and assets to levels not witnessed since 2011. The report attributes the declines in part to moderating equity market performance.

“Equity markets continued to increase in the first half of 2014 (the S&P 500 was up 6.1 percent), though at a much smaller rate than the last two years,” the report states. “Thus, variable product writers released a lower level of reserves, which led to somewhat lower returns on equity and assets in the first half of 2014.”

The report cites other factors for the industry’s less robust growth relative to recent years. Among them: low interests rates, a decline in the appeal of, and access to, current products, changes to the estate tax regime, a “weak” macroeconomic environment and “high persistency” of policies in force.

The research focuses particular attention on the industry’s low investment returns, which impact profitability.

“The low rates have…depressed the ability and perhaps more important the appetite for new business, which has led to a sluggish premium and revenue environment since the financial crisis,” the report states. “Premium volume on a direct basis actually declined in 2013 and the first half of 2014, so the top line for the industry seems to be under increasing pressure, despite gradual improvement in economic conditions.”

The following is a recap of industry financial results in 2014 and prior years.

Total surplus rose 4.0 percent (7.9 percent on an annualized basis) during the first half of 2014 for the ALIRT Life Industry Composite. Surplus growth increased to 2.9 percent in the second quarter from 1.0 percent in the first quarter.

Total surplus growth for the first half of 2014 was consistent with that of recent years. The ALIRT Life Composite rose to $391 billion in 2014 (as of June 30) from $376 billion in 2013 and $365 billion 2012.


Annualized six-month returns on equity trailed full-year 2013 ROE, as these charts show. The ALIRT research attributes the dip to “less robust equity markets” (the second quarter of 2014 notwithstanding).

The markets’ subpar performance reduced the amount of variable annuity-related reserves (connected with guaranteed minimum death, income, withdrawal and accumulation benefits) that “could be released into earnings.”  

Annualized net premiums increased by 14 percent in the first half of 2014, a rise that was “distorted by several very large transactions.” The research flags as the largest of these Hartford Life & Annuity’s cancellation of a reinsurance agreement with a captive company that yield $41 billion in premium.

Excluding these transactions, the report reveals that net premiums declined by 2 percent. “Direct premiums fell modestly, with notable declines in group annuities, individual health insurance and deposit funds, mostly offset by growth in individual annuities, group health and group life,” the report states.


The ALIRT Life Composite for quarterly net capital gains rose to $6.1 billion in the second quarter of 2014 from loss of $-6.5 billion in the second quarter of 2013. For the first six months of 2014, the net capital gain was $11.3 billion. This compares with a net loss of $-4.6 billion during the first half of 2013.

Though the industry’s net total return topped 5.5 percent at the close of the second quarter, net investment yield declined during the first half of the year. As the above chart shows, net investment yield was below 5 percent, a level inferior to that of 2013 and prior years.

Life insurers’ holdings of alternative investments, which increased in recent years, include interests in private equity, hedge funds, venture capital, real estate, among other assets. Listed in the Schedule BA of statutory filing statements, these assets totaled 4.5 percent of invested assets and 37 percent of surplus at the close of the second quarter.

“The rise in alternative assets reflected a search for higher returns and additional investment diversification, a rise in third-party investment managers for such assets, and increased insurer comfort with some [alternative] assets,” there report states.