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July 28, 2002 at 08:00 PM
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.
