Monday, December 7, 2015

No. 130: Surplus Notes—A Special Report from A. M. Best

On November 11, 2015, A. M. Best Company (Oldwick, NJ), a rating firm, issued a special report entitled "Surplus Notes Overview." Readers of The Insurance Forum over the years and readers of this blog are aware of my longtime keen interest in surplus notes. I also devoted a chapter to the subject in my new book, The Insurance Forum: A Memoir.

Contents of the Report
Best's report provides information about the aggregate amount of surplus notes outstanding in insurance companies at the end of various years from 2000 to 2014. By the end of 2014, for example, 526 insurance companies had issued 1,200 surplus notes. They totaled $47.8 billion, or 16.6 percent of the total capital (excluding asset valuation reserve) of the companies with surplus notes outstanding. The report breaks down the figures among life/annuity companies, property/casualty companies, and health companies. The report shows the rapid growth in the number of surplus notes issued in the last four years--from 59 in 2011, to 87 in 2012, to 136 in 2013, and to 160 in 2014.

Best's report also contains information about the maturity dates of surplus notes and about the interest rates on surplus notes. Also shown are the amount of surplus notes issued to affiliated companies and the amount of surplus notes issued to non-affiliated companies.

A Major Omission
Best's report does not identify insurance companies. In that respect, the report differs significantly from the type of report I showed each year in The Insurance Forum. For example, in my final tabulation, which was in the August 2013 issue, I showed data for each of the 178 insurance companies with at least $12 million of surplus notes outstanding at the end of 2012. For each company I showed the amount of surplus notes, the amount of total adjusted capital, and the ratio of surplus notes to total adjusted capital. Of the 178 companies, 42 had surplus notes equal to at least 50 percent of total adjusted capital. Of those, 19 had surplus notes equal to at least 100 percent of total adjusted capital.

Major companies have been using surplus notes extensively. For example, the tabulation in the August 2013 issue of The Insurance Forum shows 11 companies that each had more than $1 billion of surplus notes outstanding at the end of 2012. The companies, with amounts in parentheses to the nearest tenth of a billion dollars, are Ambac Assurance Corporation (1.2), AXA Equitable Life Insurance Company (1.5), Farmers Insurance Exchange (1.9), Lincoln National Life Insurance Company (1.3), Massachusetts Mutual Life Insurance Company (1.7), Metropolitan Life Insurance Company (1.7), Nationwide Mutual Insurance Company (2.1), New York Life Insurance Company (2.0), Northwestern Mutual Life Insurance Company (1.8), Pacific Life Insurance Company (1.6), and Teachers Insurance and Annuity Association of America (2.0).

Available Material
At my request, an A. M. Best Company official graciously gave me permission to offer the four-page report on surplus notes to my readers on a complimentary basis. The report is in color, which is helpful in reading the tables. I am also offering, in a separate complimentary package, the four-page relevant excerpt from the August 2013 issue of The Insurance Forum. Send an e-mail to and ask for the two packages relating to surplus notes.

My new book is available from Amazon. It is also available from us; ordering instructions are on our website at, and I will autograph it upon request.