9-Month Surplus For 100 Companies Rose Over 12%, A 10-Year Record

One hundred companies, comprising 82% of life insurance industry assets, reported a 12.1% gain in total surplus funds in the first 9 months of 2003, on the strength of a 64% gain in operating earnings, and contributing more new surplus than they paid out in shareholder dividends.

The 12.1% surplus gain for 9 months was the highest gain recorded in the 10-year history of this report, exceeding the record 11.7% gain for 9 months of 1997. The 3rd quarter surplus gain of 3% in 2003 was less than 3rd quarter gains of 3.8% and 5.1% in 1995 and 1997, respectively.

Only 12% of the Townsend 100 companies had an operating loss in 9 months of 2003, a sharp reversal from the rising trend of 12%, 23% and 29%, respectively, for 9 months of 2000-2002. Reductions in crediting rates on interest-sensitive products contributed to the growth in operating earnings from $9 billion to $15 billion from 2002 to 2003.

Although 82% of the Townsend 100 companies reported a net capital loss in 2003, down from 88% in 2002, net capital losses fell by 53%, from $7.8 billion to $3.6 billion.

Only 8% of the Townsend 100 companies reported both operating losses and net capital losses in 9 months of 2003, a sharp reversal from the rising trend of 8%, 13% and 22%, respectively, for 9 months of 2000-2002.

Surplus paid-in, less shareholder dividends paid out, was a positive $937 million for 9 months of 2003, as 28% of the Townsend 100 companies paid-in surplus (a 10-year high, exceeding the previous high of 24% in 2000 and 2002) and only 32% of the Townsend 100 companies paid shareholder dividends (a 10-year low, less than the previous low of 35% in 1994 and 1997).

Combining the effects of record operating earnings and net surplus paid-in (a reaction to rating agency downgrades and credit watches), only 9% of the Townsend 100 companies had a surplus decline in 9 months of 2003 (another 10-year low, less than the previous low of 10% in 1996).

Table 1 shows the components of surplus changes for the Townsend 100 companies in the first 3 quarters of 2003, and in the first 9 months of 2003 and 2002. Surplus includes the asset valuation reserve and the interest maintenance reserve, while operating gain excludes amortization of the interest maintenance reserve.

Table 2 shows new surplus paid-in, shareholder dividends paid out and the net result, for the Townsend 100 companies for the full years 1997-2002 and for 9 months of 2003.

Table 3 shows net investment yield on mean invested assets, return on mean equity and the capital ratio (total surplus to invested assets) for the Townsend 100 companies for the full years 1997-2002, and for 9 months of 2003.

Net investment yield declined 51 basis points in the full year 2002 and fell another 80 basis points in the first 9 months of 2003. Life insurers reacted by lowering both crediting rates and guaranteed rates on interest-sensitive products, with the net result being a 64% gain in operating profits in 9 months of 2003.

Return-on-mean equity is exceeding 9% for the 3rd time in the last 4 years but is unlikely to pass the 10.2% high mark of the last 7 years (set in 2000).

Capital ratios peaked at 12.1% at 12/31/99, then declined to 10.2% at 12/31/02. The 3-year decline in capital ratio may reverse itself in 2003, standing at 10.3% at 9/30/03. The slight improvement in capital ratio can be attributed to pressures from rating agencies and companies responding by contributing new capital.

The large table shows the components of surplus changes for each of the individual companies in the Townsend 100. Surplus includes the AVR and IMR, while operating gain excludes amortization of the IMR.

15 companies had operating gains exceeding $300 million in 9 months of 2003 (vs. 14 companies in 2002) and comprised 54% of the Townsend 100 composite earnings. Largest gains were: Metropolitan, $856 million; Teachers, $797 million; AFLAC, $768 million; Travelers, $596 million; and Hancock, $537 million.

Only 18 of the Townsend 100 companies had net capital gains in 9 months of 2003. Metropolitan Insurance & Annuity had the largest gain at $184 million, while the largest net capital losses were posted by Teachers with $575 million, and Hancock with $231 million.

While 28 companies in the Townsend 100 paid-in new surplus funds of $4.3 billion in 9 months of 2003, 4 companies in the American International Group accounted for 44% of the total: AGC Life, $829 million; AIG Annuity, $496 million; American General Life, $340 million; and VALIC, $225 million.

Similarly, 32 companies in the Townsend 100 paid shareholder dividends of $3.3 billion in 9 months of 2003, with 5 companies comprising 45% of the total: AFLAC, $408 million; Connecticut General, $300 million; Travelers, $280 million; Standard, $265 million; and Swiss Re, $240 million.

Largest aggregate surplus gains for 9 months of 2003 were: New York Life, $1.9 billon; Metropolitan Life, $1.7 billion; and AGC Life, $1.5 billion.

While only 9 of the Townsend 100 companies had surplus declines in 9 months of 2003, the largest percentage surplus declines were: the U.S. business of Canada Life, 60%; Pruco Life, 41%; and Employers Reassurance, 19%.

Frederick S. Townsend, an investment banker in Wolcott, Conn., is a founder of the Townsend & Schupp Company. He can be reached via e-mail at ftownsend@snet.net.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 30, 2004. Copyright 2004 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.