The Financial Analyst and a Mature Life Insurance Company

Abstract

from by Merrill Lynch, Pierce, Fenner & Smith Incorporated A life insurance company charges the costs of writing new business to its operations in the year in which the costs are incurred. Unlike companies in most other industries, it does not amortize such charges over a period of years. Thus, a life insurance company that steps up its volume of new business can slow its profit growth temporarily, while a less aggressive company can improve its results (also temporarily) by simply writing less. Further, life policies-especially whole life-are on a company's books for indefinite periods of time; and the extent of their profitability cannot be accurately ascertained until each policy has terminated. Net Operating Gains: Because of these conditions, which are normal to the operation of a life insurance company, we believe comparisons of net operating gains of companies with different rates of growth of insurance in force (new business less terminations) have little, if any, meaning. To compensate for variations in growth rates and for the cost of writing new business, we assign values, based on the specific type of insurance written, to the annual increase in insurance in force. We add these values to reported net operating gains, and we refer to the total as adjusted net gain from operations. We assign values as follows: Insurance Value Ordinary whole $20 per $1,000 Ordinary term 7 per 1,000 Group life -0Industrial half the increase in annual premium income Since these adjustments are based on average experience, we recognize that they are approximations, because of the variations in quality and duration of the policies on each company's books. We believe, however, that the values are generally conservative, especially in the case of group business to which we assign no credit but where some companies show consistent profits. Further, we have not varied our values to adjust for differences that exist in methods of accumulating reserves nor have we credited so-called deficiency reserves to earnings. We acknowledge the reserves in the same way we acknowledge participating business compared with non-participating when we consider the value of adjusted earnings in relation to the market price for a specific life insurance stock. Book Value: State regulatory bodies do not recognize life insurance in force as a part of assets. Life insurance in force, however, does represent a reservoir of value which should generate future earnings. At least part of these earnings will eventually find their way into surplus and become a part of shareholders' book value. To determine adjusted book value, we add to capital, surplus, and various contingency reserves the values based on the same ratios we use to adjust earnings. For ordinary whole life and term insurance, we apply the multiple to the actual amounts of life insurance in force; for industrial life, we add half of the annual premium income. This content downloaded from 157.55.39.100 on Thu, 25 Aug 2016 05:40:09 UTC All use subject to http://about.jstor.org/terms