Life Industry Surplus Gain In 03 Was The Highest In 10 Years The 16.4% gain was fueled by strong operating earnings and positive net capital gains
By Frederick S. Townsend
One hundred companies, comprising 84% of life insurance industry assets, reported a 16.4% gain in total surplus funds in 2003, on the strength of a 42% gain in operating earnings, and positive net capital gains, according to data from National Underwriter Insurance Data Services (formerly Thomson Financial Insurance Solutions).

The 16.4% surplus gain in 2003 was the highest gain since a 19.4% surplus gain in 1993, when companies propped up surplus to build Risk-Based Capital ratios to counter rating agency downgrades and to assuage solvency scares.
This years surplus gain is attributed to a sharp reduction in crediting rates by life insurers on interest-sensitive products, and increased assets and management fees on variable products resulting from a recovery in the stock market, and net capital gains.
Only 12 of the Townsend 100 companies had an operating loss in 2003, a sharp reversal of the rising trend of 13, 19 and 26, respectively, for 2000-2002. Reductions in crediting rates on interest-sensitive products contributed to the growth in operating earnings from $16.7 billion to $23.7 billion from 2002 to 2003.
Just 48 of the Townsend 100 companies reported a net capital loss in 2003, down from 88 in 2002. Record net capital losses of $22.3 billion in 2002 improved to a net capital gain of $5.6 billion in 2003.
Only 4 of the Townsend 100 companies reported both operating losses and net capital losses in 2003, a sharp reversal from the rising trend of 11, 12 and 20, respectively, for 2000-2002.
Shareholder dividends paid out exceeded surplus paid-in in 2003 by $2.5 billion, when 64% of the total $9.2 billion in shareholder dividends were declared in the fourth quarter. Only 51 of the Townsend 100 companies declared shareholder dividends (the lowest total in 4 years), but only 39 of the Townsend 100 companies paid in surplus (the lowest total in 3 years).
Combining the effects of record operating earnings and stock market capital gains, only 10 of the Townsend 100 companies had a surplus decline in 2003, the best performance reported since only 8 companies had a surplus decline in 1997.
Table 1 shows the components of surplus changes for the Townsend 100 companies for the years 1999-2003. 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 years 1997-2003. The net result has been cyclical for the last 5 years, with net surplus paid-in in even years and net surplus paid out in odd years (like 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 years 1997-2003.
Net investment yield declined 51 basis points in 2002 and fell another 67 basis points in 2003. Life insurers reacted by lowering both crediting rates and guaranteed rates on interest-sensitive products, with the net result contributing to a 42% gain in operating profits in 2003.