A.M. Best Special Report: 2005 L/H Impairments Bounce Off 2003-2004 Historical Lows.OLDWICK, N.J. -- The seven U.S. life/health company financial impairments recorded by A.M. Best Co. in 2005 continue a trend of low impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. since 2000, albeit not at the ultra-low levels of 2003 and 2004. The low impairment rates of the past three years--the focus of this study--reflect the stable financial markets and economy; the industry's efforts to diversify its asset portfolio; and consolidation that has eliminated from the market some of the more thinly capitalized insurers. The four financially impaired companies in each of 2003 and 2004 were the lowest counts and reflected the lowest annual impairment rate, at 0.25% (1-in-400 companies), in the history of A.M. Best's database, begun in 1976. Although 2005, at seven impairments, produces an annual impairment rate of 0.46% (1-in-217 companies), that still is about half the 30-year average annual impairment rate of 0.91% or 1-in-110 companies. The average annual impairment rate calculates the number of impairments against the number of companies in the industry in a given year and, therefore, allows meaningful comparisons between years. As long as the operating environment In computing, an operating environment is the environment in which users run programs, whether in a command line interface, such as in MS-DOS or the Unix shell, or in a graphical user interface, such as in the Macintosh operating system. remains stable and accident and health insurers maintain underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. and pricing discipline, the impairment rate is expected to remain low through 2006. This impairment report updates Best's Insolvency insolvency Condition in which liabilities exceed assets so that creditors cannot be paid. It is a financial condition that often precedes bankruptcy. In the context of equity, insolvency is the inability to pay debts as they become due; insolvency under the balance-sheet Study, Life/Health, U.S. Insurers 1976-2002, continuing a series of updates to the original insolvency study published in 1992. The new material covers 2003 through 2005; it also revises A.M. Best's historical database of impairments. As with the previous studies, the U.S. companies in this study include those that underwrite To insure; to sell an issue of stocks and bonds or to guarantee the purchase of unsold stocks and bonds after a public issue. The word underwrite has two meanings. life insurance, annuities and accident and health insurance. Excluded are managed care companies, which are reported in a separate study: HMO HMO health maintenance organization. HMO n. A corporation that is financed by insurance premiums and has member physicians and professional staff who provide curative and preventive medicine within certain financial, Impairments Hit All-Time Lows in 2003 and 2004, October 2005. With A&H companies historically comprising the largest portion of life/health industry impairments, improving profitability in this line has had a strong influence on the reduction of overall impairment rates. A.M. Best found that after-tax profit margins After-Tax Profit Margin A ratio of financial performance calculated by dividing net income after taxes, by net sales. A company's after-tax profit margin is important as it tells investors the percentage of money a company actually earns per dollar of sales. for A&H rose to a multiple-decade high of 5.4% in 2004 from nearly zero in 1999. After-tax profit margin, or return on revenue, is an important measure of profitability for the A&H industry; A&H insurers typically do not maintain large volumes of reserves or assets due to the short-term nature of their liabilities. A&H industry profitability, as in the property/casualty industry, is propagated by pricing and loss experience. In the past five years, A&H insurers generally have been imposing double-digit rate increases and exercising underwriting discipline, which has helped generate more favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. claims experience. The industry's combined ratio declined steadily to 99.7 in 2004 from 107.2 in 2001, where a ratio below 100 indicates an underwriting profit Underwriting profit is a term used in the insurance industry. It consists of the earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investment income earned on held premiums. . The 2004 underwriting profit was the industry's first since 1985. Profitability for life insurers has remained stable during the past five years, in spite of gyrations in the operating environment and premium income. Annuity companies were not as insulated in·su·late tr.v. in·su·lat·ed, in·su·lat·ing, in·su·lates 1. To cause to be in a detached or isolated position. See Synonyms at isolate. 2. from the operating environment. A.M. Best found that after-tax profit margins for annuity companies plunged for two years in 2001 and 2002 during the stock market sell-off, and then recovered somewhat. BestWeek subscribers can download a PDF (Portable Document Format) The de facto standard for document publishing from Adobe. On the Web, there are countless brochures, data sheets, white papers and technical manuals in the PDF format. copy of all full special reports at no additional cost or a combination of the PDF copies plus all related spreadsheet files of the report data at no additional cost from our Web site at www.bestweek.com. Nonsubscribers can download a PDF copy of the full special report (20 pages) for $85 or a combination of the PDF copy plus the spreadsheet file of the report data for $220 from our Web site at www.bestweek.com. Call customer service for more information, (908) 439-2200, ext. 5742. A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com. |
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