A.M. Best Special Report: Surplus Notes Overview

OLDWICK, N.J.--()--In 2014, the volume of surplus notes issued reached a peak of 160 notes totaling $5.7 billion, and as of year-end 2014, there were 526 insurance carriers that held over 1,200 outstanding surplus notes totaling $47.8 billion, according to a new A.M. Best special report.

The Best’s Special Report, titled, “Surplus Notes Overview,” states that in terms of the total insurance industry, the life/annuity (L/A) segment had the largest holding of surplus notes at $29.0 billion, accounting for 7.9% of the industry’s total capital and surplus, excluding the asset valuation reserve. The property/casualty (P/C) segment had $14.9 billion in total surplus notes outstanding, accounting for 2.1%, while the health segment had the smallest dollar amount of total surplus notes outstanding at $3.9 billion, or 2.6% of the industry’s total capital and surplus. For those companies with outstanding surplus notes, the average percentage of surplus notes to total capital and surplus was 21.6% for P/C, 13.6% for L/A and 63.4% for health.

Since 2008, the number of surplus notes issued per year has more than doubled, averaging 97 new issuances a year. In 2014, each sector reached a peak in terms of the number of issuances, with P/C companies issuing 58 notes, L/A companies issuing 22 notes and health companies issuing 80 notes.

In 2014, another significant increase was seen as totals for L/A companies rose to $3.4 billion, while the P/C segment issued $1.4 billion in notes, the third largest total on record for one year. Prior to 2008, health companies did not issue surplus notes in large quantities, averaging only five notes a year; however, in 2014, there was a new peak of 80 notes issued, totaling $954.4 million, the highest total on record. In terms of the total dollar amounts issued for the last 15 years, the L/A segment comprised 57.9%, while P/C accounted for 33.3% and health, 8.7%.

In terms of issuances to affiliates, the insurance industry as a whole has issued 61.4% of all surplus notes to an affiliate or parent. An analysis by segment shows that 71.1% of health surplus notes outstanding are held by an affiliated company, compared to 52.6% within the L/A segment and 60.5% in the P/C segment.

The significant spike in the dollar amount of outstanding notes in 2009 can be attributed to the effects of the financial crisis and two main forces. First, capital issuance was needed to fund additional growth that was not able to be supported by existing capital, and second, the need to replace capital that had been depleted by losses from existing businesses and/or investment portfolios.

For the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=243565.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best
Jason Hopper, 908-439-2200, ext. 5016
Senior Industry Research Analyst – Credit
Rating Criteria - Research and Analytics
jason.hopper@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

Contacts

A.M. Best
Jason Hopper, 908-439-2200, ext. 5016
Senior Industry Research Analyst – Credit
Rating Criteria - Research and Analytics
jason.hopper@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com