Industry Surplus Spurted In 4th Quarter

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 [email protected].

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.