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.

Spurred by strong operating earnings, return on mean equity exceeded 9% for the third time in the last 4 years and set a record high of 10.8% for the 14-year history of this column. This reflects the impact of several large mutual companies converting to stock ownership and striving to achieve higher returns on equity.

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 reversed itself in 2003, rising to 10.8% at 12/31/03. The slight improvement in capital ratio can be attributed to the increase in operating earnings and achieving net capital gains in 2003.

The large table shows (see page 10) 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.

Sixteen companies had operating gains exceeding $500 million in 2003 and comprised 54% of the Townsend 100 composite earnings. Largest gains were Metropolitan, $1,492 million; Teachers, $1,202 million; Prudential, $1,183 million; AFLAC, $985 million; and AGC Life, $953 million.

Six companies had net capital gains exceeding $400 million in 2003 and comprised 81% of the Townsend 100 composite net capital gains. Largest gains were Northwestern Mutual, $1,297 million; Metropolitan, $1,002 million; Prudential, $650 million; Hartford Life & Accident, $624 million; Travelers, $512 million; and AGC Life, $466 million.

While 39 companies in the Townsend 100 paid-in new surplus funds of $6.7 billion in 2003, 5 companies in the American International Group and 3 companies in the Hartford Life Group accounted for 30% and 14% of the total, respectively.

Similarly, 51 companies in the Townsend 100 paid shareholder dividends of $9.2 billion in 2003, with 2 Metropolitan Life companies and 4 AIG companies, each group accounting for $1,646 million, or 18%, of the total shareholder dividends.

Some companies paid large shareholder dividends, to reduce surplus, after they sold off assets and liabilities in major business lines. Continental Assurance paid a $500 million dividend, and Connecticut General paid a $300 million dividend.

Largest aggregate surplus gains in 2003 were: New York Life, $2.1 billion; Northwestern Mutual, $1.9 billion; Prudential, $1.9 billion; and Hartford Life & Accident, $1.6 billion.

Largest percentage surplus gains in 2003 were 176% and 123%, respectively, for Federal Kemper Life (with $326 million of surplus paid-in on top of its beginning of year surplus of $167 million) and SunAmerica Life.

While only 10 of the Townsend 100 companies had surplus declines in 2003, the largest percentage surplus declines were Continental Assurance with 33% (after major business lines and paying a $500 million shareholder dividend), and 2 reinsurance companies, Employers Re with 17% (with an operating loss equal to 8% of surplus) and Swiss Re with 13% (after paying a shareholder dividend equal to 12% of surplus).

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 Edition, May 21, 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.