3rd Quarter Losses Create 9-Month Surplus Decline
One hundred thirty companies, comprising 85% of life insurance industry assets, incurred 9/11/01 death claims, net capital losses on stocks and bonds, and paid shareholder dividends in the third quarter of 2001 sufficient to completely erase their aggregate $5.7 billion surplus gain realized in the first six months of 2001.
Data from the Townsend & Schupp Life Insurance Business Risk Analysis Review shows that the sum of surplus, asset valuation reserve (AVR) and interest maintenance reserve (IMR), declined $7.5 billion in the third quarter of 2001, compared to surplus gains of $5.9 billion in nine months of 2000, and $5.7 billion in six months of 2001.
Table 1 shows the components of surplus changes for the 130 LIBRA companies for the first three quarters of 2001, and for nine months of 2001 and 2000. Surplus includes the AVR and IMR, while operating earnings exclude amortization of the IMR.
Comparing nine months of 2001 and 2000, operating earnings declined 35%, or $4.6 billion, with only $0.9 billion representing the year-over-year increase in death benefits incurred in the third quarter.
A 40-basis point decline in net investment yield, the largest since 1994, is the primary factor in lower industry earnings in 2001.
Uncertain financial markets–with the Dow Jones Index declining 9% from 9,606 on 9/10/01 to 8,848 on 9/28/01–contributed to net capital losses of $7 billion in the third quarter, and $12.5 billion for the nine months, of 2001.
The impact of 9/11/01 on financial markets vastly exceeded the mortality impact on the life insurance industry. Net capital losses in the third quarter of 2001 were $7 billion, compared to a $0.9 billion year-over-year increase in death benefits.
For nine months, surplus paid-in declined 46%, while shareholder dividends rose 20%. Thus, net surplus paid-in fell from a positive $1.3 billion in 2000 to a negative $4 billion in 2001. Table 2 shows that the full year 2001 would be the second highest year on record if the net outflow reaches $4.5 billion by 12/31/01.
Surplus funds for the 130 companies declined 0.9% for nine months of 2001, the only such decline in eight years of writing this quarterly news summary. Excluding the $8.8 billion of accounting changes identified as new NAIC Codification rules in 2001, surplus would have declined $10.7 billion, or 5.4%.
Table 3 shows that net investment yield fell 40 basis points from 7.4% in the full year 2000 to 7% in nine months of 2001. Operating earnings fell 35%, and return on equity was only 5.8%, for nine months of 2001.
The 11-year low for the full years 1990-2000 was 7% in 1994, when net investment yield fell 49 basis points in 1994 compared to 40 basis points so far in 2001.
Capital ratio (surplus funds to invested assets) for the 130 companies peaked at 11.9% on 12/31/99, and stands at 10.8% at 9/30/01, headed for a second year of decline. The industrys capital ratio was below 10.7% from 1968-1996.
The large table on page 15 shows components of surplus changes for the 130 companies in the T&S Industry Composite, comprising 85% of industry assets.
Led by Metropolitan Life, Teachers Insurance & Annuity, and SunAmerica, nine companies each earned more than $300 million in nine months of 2001, and aggregated 53% of the composite earnings.
Table 4 shows that 30 companies had an operating loss for nine months, an eight-year high, and nearly double the 16 companies with operating losses in 2000. This number has increased for four years, which may be indicative of unwillingness, or inability, to raise prices in a competitive environment.
Ninety-five (73%) of 130 companies had net capital losses for nine months of 2001, another eight-year high. Some losses may have been caused by restatement of previous years net capital gains, resulting in capital losses in 2001, caused by the new NAIC Codification of statutory accounting principles, effective 1/1/01.
Seventeen of the 130 companies reported both operating losses and net capital losses for nine months of 2001, another eight-year high.
Of the 117 stock companies, 25 companies (2nd highest in 8 years) received $4.6 billion of surplus paid-in, and 58 companies (an 8 year high) paid-out $8.6 billion of stockholder dividends, in nine months of 2001.
Multiple companies in the Hartford Life and SunAmerica groups accounted for 72% of the aggregate surplus paid-in.
Equitable of NY, Principal, Metropolitan, Travelers, Aetna, SunAmerica, Connecticut General and Lincoln National each paid more than $380 million of shareholder dividends in nine months of 2001, and each company reported a surplus decline. These eight companies accounted for 59% of the aggregate shareholder dividends.
Largest dollar surplus gains in nine months were made by Mass. Mutual, $1,145 million; GE Capital Assurance, $627 million; Northwestern Mutual, $515 million; and Hartford Life & Accident, $378 million.
Excluding surplus paid-in, the largest percent surplus gains in nine months were made by LifeUSA, 118%; Fortis Benefits, 30%; and Mass. Mutual, 23%.
Surplus fell for 69 (a majority) of the 130 companies in nine months of 2001. The largest dollar declines were experienced by New York Life, $833 million; Phoenix Life, $557 million; Metropolitan Life, $537 million; Connecticut General, $411 million; John Hancock, $357 million; and Aetna Life, $321 million.
Largest percentage declines in surplus were experienced by Life of North America, 39%; Phoenix, 30%; Fidelity & Guaranty, 29%; Allianz, 28%; and Liberty Life of Boston, 25%.
Frederick S. Townsend, a founder of The Townsend & Schupp Company, is an investment banker in Hartford, Conn.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 17, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.