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.

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.

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.

Largest operating earnings in the first quarter were posted by Metropolitan, $463 million; Prudential, $199 million; American General, $199 million; Principal, $181 million; and Travelers, $155 million.

Table 4 shows trends in first quarter operating results, for the T&S Composite for the last 10 years.

Twenty-four of 130 companies had operating losses, and 17 companies had both operating losses and capital losses in 2002 (the highest such numbers in the last 10 years, except for 2001). The largest operating losses were General American, $61 million; Allmerica, $38 million; and Combined, $35 million.

Ninety-one (70%) of 130 companies had net capital losses in the first quarter of 2002, setting a record high for the third consecutive year, and setting a 10-year high.

Only Metropolitan had net capital gains exceeding $100 million. Met had $1.2 billion in capital gains, and the other 129 companies had an aggregate net capital loss of $2.4 billion. Largest capital losses were reported by Travelers, $280 million; Mass. Mutual, $214 million; Equitable of Iowa, $166 million; and Prudential, $162 million.

Only nine of the 118 stock companies received new surplus paid-in in the first quarter of 2002, a 3-year low, led by Travelers $1.488 billion, and AIG Annuity (formerly Western National), $146 million.

Thirty-four of the 118 stock companies paid shareholder dividends in the first quarter of 2002, led by Principal, $390 million; Travelers, $271 million; American General, $184 million; Variable Annuity, $158 million; and Bankers Life & Casualty, $158 million.

Surplus fell in the first quarter of 2002 for 63 (48%) of 130 companies, setting a record for the third consecutive year, and a 10-year high. Companies continue to lower their equity base to improve returns on equity.

Travelers and Metropolitan had surplus gains of $1.8 billion and $1.7 billion, respectively, while the other 128 companies had an aggregate surplus decline of $1.0 billion.

Largest dollar surplus declines were Equitable of Iowa, $176 million, and Phoenix Life, $148 million.

Excluding shareholder dividend payments, the largest percent declines in surplus were ING Ins. Co., 26%; Equitable of Iowa, 16%; Conseco Life, 13%; and Conseco Annuity, 12%.

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, July 29, 2002. Copyright 2002 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.