Industry Surplus Spurted In 4th Quarter
By Frederick S. Townsend
Life insurance industry surplus rose an amazing 9% in the fourth quarter of 2002, prompted by a confluence of favorable developments, for 130 major U.S. life insurance companies comprising 85% of industry assets. In the first nine months of 2002, industry surplus had declined by 4.8%.
Data from the Analyzer, an Insurance Research Group (http://irg.informausa.com) Web-based information service, show that the sum of surplus, asset valuation reserve and interest maintenance reserve rose from $186.1 billion to $202.9 billion in the fourth quarter, after a decline of $14.2 billion in the first nine months of 2002.
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Operating earnings rose significantly. Industry executives attribute the earnings gain to reduced sales of variable products and related surplus strain, reductions in commissions paid to agents and other home-office economies, and the cumulative effects of reducing interest rates credited on fixed life and annuity products.
Operating earnings were $7.8 billion in the fourth quarter, compared to $8.2 billion for the first nine months of 2002. The LIBRA 130-company composite reported a modest net capital gain in the fourth quarter, compared to net capital losses of $18.4 billion in the first nine months.
Surplus paid-in set a record high in 2002, for the 130-company composite, with new surplus paid-in of $4.1 billion in the first nine months and $8.9 billion in the fourth quarter. The $13 billion paid-in surplus in 2002 broke the record high of $12.2 billion set in 2000.
Meanwhile, shareholder dividend payments were constrained to $10 billion, the lowest aggregate payout for the composite in the last three years.
Despite the strong fourth quarter, when all is said and done, it took $5.7 billion of accounting changes by 14 New York domiciled insurers to produce a $4.4 billion gain in total surplus for the 130-company composite in 2002.
In 2001, companies not domiciled in New York made $9.5 billion of accounting changes due to NAIC Codification standards (measures delayed for New York domiciled insurers), yet surplus funds declined by $0.5 billion. In 2002, the accounting changes for New York companies exceeded the gain in industry surplus.
Table 1 shows the components of surplus changes for the composite of 130 companies for the five years 1998-2002, respectively.
Although operating earnings for the composite rose from $12.6 billion in 2001 to $16 billion in 2002, industry earnings were still short of the record high $18.9 billion posted in 2000.
Net capital losses of $36 billion for 2000-2002 are equivalent to 18% of industry surplus at Dec. 31, 2002.
Excluding $14.8 billion of National Association of Insurance Commissioners Codification accounting changes in 2001 and 2002, life industry surplus has not increased since 1999, and would only be 1.8% higher than at year-end 1998.
Table 2 shows that the 121 stock companies in the 130-company composite set a record by paying in $13 billion of new surplus in 2002 ($8.9 billion in the fourth quarter alone). They paid only $10 billion in shareholder dividends (the lowest total in three of the last four years).