One crude measure that may be used to measure trends in profitability<sup>is the ratio of capital a.d</sup> surplus to total assets; if this ratio declines over time, profitability<sup>must be on the decline and vice-versa.</sup> From 8.4 percent in 19;0, the capital-asset ratio for the industry slid<sup>to 7.2 percent in 1980 and declined</sup> further to 6.4 percent in 1990. But this ratio does not tell the full story, since<sup>it fails to include the</sup> MSVR--the special reserve standing behind both bonds and stocks,<sup>adding 20 percent or more to the size</sup> of the capital base. Under the MSVR system, capital gains<sup>from the common stock portfolio are</sup> channeled first into the MSVR and then into the surplus account<sup>only after reaching a prescribed</sup> maximum; losses are charged against this reserve in order to cushion<sup>surplus against market price</sup> fluctuations. Gains and losses on bondholdings are also channeled<sup>into the MSVR according to formulae</sup> set up under NAIC rules. Adding the MSVR to capital and surplus,<sup>the total capital ratio for the industry</sup> has been virtually unchanged for the past decade, standing at 8<sup>percent of assets in 1989, followed by a</sup> slight decline to 7.6 percent in 1990.

It must be noted, however, that capital-asset ratios deviate widely around this industry average. According to a special study by an ACLI task force on solvency problems,<sup>large insurance companies</sup> with assets over $5 billion showed average capital-asset ratios of 5.3<sup>percent, in sharp contrast to small</sup> companies with assets under $100 million where average ratios were 20 percent.<sup>Yet, the larger</sup> companies are often viewed as the stronger, financially sound companies while<sup>smaller companies have</sup> had a much worse record for insolvencies in recent years. Evidently, capital ratios<sup>are only one of many</sup> indicators of financial strength and profitability trends.

While there are no widely accepted measures of profits in the life insurance field, certain<sup>crude</sup> approximations are possible, using industry data compiled from annual statements.<sup>The base for such</sup> measures is capital and surplus, plus the security reserves of the MSVR at<sup>the beginning of each year.</sup> Industry earnings may then be defined as "net gains from operations"<sup>from which dividends to</sup> policyholders must be subtracted since they are a normal part of insurance<sup>practice. However, capital</sup> gains or losses on investment funds should also be factored in, since<sup>they reflect financial results of the</sup> companies in a given year.

If the definition of industry earnings is taken to include only realized capital gains (or losses),<sup>the</sup> profit ratios work out as shown in column A. If r:nrealized capital gains (or<sup>losses) are included in</sup> industry earnings, the results appear in column B, as follows:

||Column A|Column B|
|---|---|---|
|1985|_25.1%_|36.0%|
|1986|32.1|27.8|
|1987|16.3|2.0|
|1988|15.8|20.2|
|1989|22.4|31.7|
|1990|16.5|4.1|

These rough calculations illustrate the variability of industry earnings, regardless of the method used, and call into question the usefulness of such measures as a bepchmark<sup>for comparisons. Using data</sup> that include only realized capital gains and losses is probably the<sup>better of the two measures, but</sup> substantial unrealized losses cannot be totally ignored since they carry<sup>implications for later operating</sup> results.

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