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US Insurers Encounter Coronavirus With Capital And Surplus Likely At Record High

The aggregate dollar value of the capital and surplus held by U.S. property and casualty and life insurers appears to have ended 2019 at a new high, a first look at newly released annual statutory data reveals.

The COVID-19 outbreak presents numerous risks and uncertainties to the outlooks for both sectors, with potential impacts looming for underwriting and investment results, alike. It remains far too early to quantify any potential effects of COVID-19 on industry results given the fluidity of a situation without recent precedent. Any continuation of record low interest rates and extreme market volatility would present considerable challenges. But the apparent rise in surplus has the industry, broadly speaking, positioned as well as could be expected to address a situation of unknown duration and severity.

Among the individual U.S. P&C and life entities for which year-end 2019 statutory results were available as of March 6, the vast majority showed increases in surplus from levels reported as of Dec. 31, 2018. Data referenced in this article is limited to individual entities with results available for both full-year 2018 and 2019.

The P&C sector saw surplus growth from 1,915, or 78.1%, of the 2,451 individual entities with data available, excluding companies classified by S&P Global Market Intelligence as state funds and/or residual markets. A total of 524 individual P&C entities showed year-over-year decreases, with the remaining 12 entities reporting no change.

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The life sector had a somewhat more balanced range of outcomes. A total of 431 individual entities posted increases in surplus, which represented 66.5% of available filers. The remaining 217 entities showed decreases.

The absolute amount of year-over-year changes in surplus among individual entities provides only part of the capital adequacy picture. Results remain subject to sometimes significant group-level consolidations and adjustments, affecting line items such as net income and dividends to stockholders, and year-end risk-based capital ratios will require further analysis. But the directional trend can offer some peace of mind during a volatile time.

Surplus strength did not occur across the board in either sector. Medical professional liability insurer NORCAL Mutual Insurance Co., as recently reported, experienced a 23.1% drop in its surplus during 2019 as adverse reserve development triggered a substantial net loss for the year.

A cursory review of individual capital and surplus account items on an aggregate basis finds that the U.S. P&C sector likely generated net income that was either roughly in line with or better than its strong 2018 results. The U.S. P&C industry, as measured by results disclosed in combined annual statements and by stand-alone individual entities, produced $61.13 billion in net income in 2018, up from $40.87 billion in 2017.

The U.S. life industry's 2018 net income, meanwhile, slipped to $37.92 billion in 2018 from $42.09 billion in 2017. The first look at 2019 results suggests that it likely rebounded to levels at least on par with, if not higher than, the 2017 tally.

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Changes in net unrealized capital gains and losses appear to have aided surplus levels across both sectors. On an unadjusted, aggregate basis, the individual P&C entities posted a $107.94 billion positive change in that line item during 2019, of which $71.48 billion pertained to National Indemnity Co. and other units of Berkshire Hathaway Inc. The Berkshire results reflect an unadjusted aggregation of disclosures by individual entities. For the life industry, the aggregate net change in unrealized capital gains and losses among individual filers on an unadjusted basis was $21.23 billion.

The combined P&C industry showed a negative change in net unrealized capital gains and losses of $36.61 billion in 2018, and its positive result of $56.90 billion in 2017 was the highest it had generated in at least two decades. Berkshire was also largely responsible for that outcome as the combined annual statement of National Indemnity showed a positive change of $33.83 billion.

The U.S. life industry also had a negative net change in net unrealized capital gains and losses in 2018 in a sum of $1.56 billion. Its highest positive annual change since the start of 2001 was an increase of $18.98 billion in 2014.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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