1st Quarter Surplus Inched Up 1.28%
One hundred thirty companies, comprising 85% of life industry assets, posted their lowest first quarter surplus gain in 10 years, as net capital losses and net shareholder dividends consumed 60% of modest operating earnings.
Data from the Townsend & Schupp Life Insurance Business Risk Analysis (LIBRA) Quarterly Review shows a 1.28% gain in total surplus (surplus, asset valuation reserve and interest maintenance reserve) in the first quarter of 2002.
Table 1 shows the components of surplus changes for the T&S Composite in the first quarters of 2002 and 2001. Surplus includes the AVR and IMR, while operating earnings exclude the amortization of the IMR.
Operating gain rose $0.9 billion, capital losses fell by $5.1 billion, surplus paid-in was $2.6 billion lower, shareholder dividends were $0.2 billion lower, and other changes (mostly accounting charges incurred in 2001) improved by $2.8 billion.
Table 2 shows the trend of net surplus paid-in/out for the T&S Composite. Surplus infusions were ample in 1991-93 to overcome consumer solvency fears, meet rating agency demands, and meet 12/31/93 risk-based capital standards.
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But, net surplus outflow exceeded $4 billion annually in 1996-2001 (except 2000), because many companies had built high capital ratios, and were seeking to increase returns on retained equity.
Table 3 shows the trends of net investment yield on mean invested assets, return on mean equity, and capital ratio (total surplus to invested assets) for the Composite.
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Net investment yield fell 201 basis points in 11 years, from 9.09% in 1990 to 7.08% in 2001, then fell a sharp 56 basis points to 6.52% in the first quarter of 2002. Based on historic experience, first quarter annualized yields are often predictive of the full years yield rate.
With new money rates at 4.78% for 10-year U.S. Treasuries, and 5.31% for 15-year FNMA and GNMA issues, yield rates should continue to decline.
Return on mean equity was 7.9% in the first quarter of 2002, and was less than 8% for the third time in five years. This could be the 11th consecutive year for the life industry to earn less than a 10% return on equity.
Capital ratios (total surplus to invested assets) for the life industry rose to a record high 11.9% at 12/31/99, but eased back to 10.6% at 3/31/02.