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.

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).

New surplus paid-in exceeded shareholder dividend payments in 2002 by $3 billion, the first time since 1993 that surplus contributions exceeded dividend payments. This helped retain surplus and replace surplus decimated by capital losses in 2000-2002.

Table 3 shows the trend in net investment yield, return on mean equity and capital ratio (total surplus to invested assets) for the composite for 1990-2002.

Net investment yield continued its downward trend in 2002, but portfolio yields are moving closer to guaranteed minimum interest rates on many life and annuity products.

Return on mean equity rebounded from 5.7% for nine months of 2002, to 8% for 12 months of 2002, with the strong fourth quarter results. But, it remains the fourth lowest return in the last 13 years.

Capital ratio for the composite peaked at 11.9% at Dec. 31, 1999, but steadily retreated to the 10% level at Dec. 31, 2002.

Table 4 shows a historical record of surplus changes for the fourth quarter and calendar year, and the number of 130 companies which experienced specified operating results in calendar years 1993-2001.

Surplus gain of 9% in the fourth quarter is the largest gain in the last 10 years, exceeding the 5.4% gain of 1993. However, the 12-month surplus gain of 2.2% is the third lowest gain in the last 10 years. The three lowest gains all occurred in 2000-2002.

Thirty-four of the 130 companies reported operating losses (the sixth consecutive year of an uptrend) and 26 companies reported both operating losses and capital losses (the fifth consecutive year of an uptrend). Capital losses were reported by 110 of 130 companies (the fifth consecutive year of an uptrend).

New surplus was paid in by 62 companies, a 10-year high. Only 66 companies paid shareholder dividends, down from 71 companies in both 2000 and 2001.

The large table on page 31 shows components of surplus changes for each of the 130 life insurers in the Insurance Research Group Analyzer database, comprising 85% of industry assets. Surplus includes the asset valuation reserve and the interest maintenance reserve, while operating gain excludes amortization of the IMR.

Thirteen companies (up from 11 in 2001) had operating earnings exceeding $500 million, led by Metropolitan Life with $1.96 billion. Twelve companies had operating losses exceeding $100 million, led by Connecticut General with $343 million.

Fifty-one of the 130 companies had net capital losses exceeding $100 million, led by Prudential with $1.4 billion, and Equitable Life Assurance with $1.2 billion. Only 20 companies reported net capital gains, led by John Hancock Variable with $201 million.

Sixty-four (nearly half) of the 130 companies reported a surplus decline in 2002, setting a new record for the third consecutive year. Over the last three years, companies have reported declines in surplus an average 45% of the time, contributing to the rating downgrades assigned by rating agencies.

Frederick S. Townsend is a founder of the Townsend & Schupp Company, an investment banking and credit research firm. He can be reached via e-mail at ftownsend@townsendandschupp.com.


Reproduced from National Underwriter Edition, April 28, 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.