Moodys Sees Drop In Capital Adequacy

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.