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

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 3^rd quarter surplus gain of 3% in 2003 was less than 3^rd 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.