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Life Health > Life Insurance

Capital Losses Devastate Industry Surplus

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One hundred thirty companies, comprising 85% of life insurance industry assets, reported net capital losses exceeding three times their operating earnings in the third quarter of 2002, and net capital losses exceeding two times operating earnings for the first nine months of 2002.

Battered by a third consecutive year of stock market losses and high profile bond defaults, net capital losses for the 130 companies in nine months of 2002 exceeded the record high for the worst two full years combined. Losses were $5 billion in 1994, $7 billion in 2000, $10 billion in 2001 and $18 billion for nine months of 2002.

Data from the Life-Analyzer, a Townsend & Schupp Web-based information service, shows the sum of surplus, asset valuation reserve (AVR) and interest maintenance reserve (IMR), fell $4 billion in the third quarter and $11.6 billion in the first nine months of 2002.

Net capital losses were reported by 114 (88%) of the 130 companies, and declines in total surplus were reported by 86 (66%) of the 130. Surplus declines were aided by 37 (28%) of the 130 companies reporting operating losses and by 47 (39%) of the 119 stock companies paying shareholder dividends.

Table 1 shows the components of surplus changes for the 130 companies for the first three quarters of 2002, and for nine months of 2002 and 2001. Surplus includes the AVR and IMR, while operating earnings exclude amortization of the IMR.

Operating earnings declined $0.3 billion in nine months of 2002, compared to a $4.6 billion decline in nine months of 2001. While nine months of 2001 had death claims from 9/11 and a 40 basis-point decline in net investment yield, nine months of 2002 had a 56 basis-point decline in net investment yield, the largest drop in the last 12 years.

For nine months, net capital losses increased $5.8 billion, surplus paid-in reduced $0.5 billion and shareholder dividends reduced $2.2 billion. Table 2 shows net surplus paid-out of $2.3 billion may be the second-lowest net payout in the last seven years.

Surplus funds for the 130 companies declined 5.9% for nine months of 2002, only the second decline in nine years of writing this quarterly summary. But, for the third quarter, surplus fell for the fourth time in the last five years.

Table 3 shows that net investment yield fell 56 basis points from 7.08% in the full year 2001 to 6.52% in nine months of 2002. Operating earnings fell 3.5%, and annualized return on mean equity was only 5.7% for nine months of 2002. Return on mean equity continues a secular decline, is in single digits 11 consecutive years and is approaching half of the 10.6% ROE achieved in 1991.

Capital ratio (surplus funds to invested assets) for the 130 companies peaked at 11.9% on 12/31/99, but has declined for three years and is 9.4% at 9/30/02. This is the industrys lowest capital ratio since reporting 9.3% at 12/31/94.

Capital ratios for 12 companies dipped into a range of 3%-5%, a level not seen since the failures of Executive Life and Mutual Benefit in 1991. In the current low interest rate environment, companies with high asset leverage and lengthy bond maturities are exposed to interest rate risk, disintermediation risk and potential rating agency downgrades.

The table on page 24 shows components of surplus changes for the 130 companies in the T&S Industry Composite.

Led by Metropolitan, Prudential, New York Life and Travelers, 14 companies each earned more than $300 million in nine months of 2002 and aggregated 83% of the composite earnings.

Table 4 shows that 37 companies had an operating loss for nine months, a nine-year high. This number has increased for five years, which may reflect an unwillingness, or inability, to raise prices in a competitive environment.

One hundred fourteen (88%) of 130 companies had net capital losses for nine months of 2002, another nine-year high and five-year uptrend, just like the number of companies reporting operating losses.

Twenty-nine of the 130 companies reported both operating losses and net capital losses for nine months of 2002, another nine-year high and five-year uptrend.

Of the 119 stock companies, 31 (highest in nine years) received $4.1 billion of surplus paid-in, and 47 companies (lowest in five years) paid-out $6.4 billion of shareholder dividends, in nine months of 2002.

Sixteen companies paid-in $100 million or more of new surplus, led by Travelers, $1.5 billion; Jackson National, $0.5 billion; and Allianz, $0.3 billion. Eleven companies, led by Lincoln National, $0.7 billion, and Principal Life, $0.6 billion, paid-out shareholder dividends exceeding $200 million, and 10 of the 11 companies had a decline in total surplus.

Largest dollar surplus gains in nine months were made by Travelers, $1,551 million; Mass. Mutual, $457 million; and Transamerica Life Insurance Company, $339 million.

Excluding surplus paid-in, the largest percent surplus gains in nine months were made by Southland, 50%; American United, 20%; and Life Investors, 17%.

Surplus fell for 86 (66%) of the 130 companies in nine months of 2002, a nine-year high and six-year uptrend. Seventeen companies had declines exceeding $300 million, led by Equitable Life Assurance, $1,731 million; Prudential, $890 million; Northwestern Mutual, $879 million; Connecticut General, $804 million; and Manufacturers (US), $756 million.

Ten companies had declines in surplus exceeding 30%, and 19 companies had declines exceeding 20%, led by AIG SunAmerica, 57%; Hartford Life & Accident, 47%; Manufacturers (US), 43%; and Phoenix Life, 41%.

Comparing nine months of 2002 to nine months of 2001, Life-Analyzer data shows revenue gains of 8% in premium income, 1% in net investment income, and 3% in separate account fee income, for the 130 companies.

In the first nine months of 2002, Life-Analyzer data shows invested assets rose 8.5% in the general account, while assets declined 13.6% in separate accounts, for the 130 companies.

Nine Months 2002 Surplus Change (follow this link to view the large graphic)

Frederick Townsend, a founder of the Townsend & Schupp Company, is an investment banker in Hartford, Conn.

Reproduced from National Underwriter Life & Health/Financial Services Edition, January 13, 2003. Copyright 2003 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.


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