By

One hundred companies, comprising 84% of life industry assets, reported a strong gain in total surplus funds in the first quarter of 2004 on the strength of high operating earnings and net capital gains.

Data from Insurance Consulting & Analysis, LLC, shows a 3.2% gain in total surplus (surplus, asset valuation reserve and interest maintenance reserve) for The Townsend 100 in the first quarter of 2004.

Table 1 shows the components of surplus changes for the Townsend 100 for the years 1999-2003 and the first quarter of 2004. Surplus includes the AVR and IMR, while operating earnings exclude the amortization of the IMR.

Return on mean equity was 10.5% in the first quarter of 2004, reflecting improved interest margins as life and annuity insurers continue to reduce crediting rates on cash value products at a faster pace than the shrinkage in portfolio yield.

Net capital gains were reported in the first quarter of 2004 compared to massive net capital losses for the years 2000-2002, and large gains in 2003.

Both surplus paid-in and shareholder dividends were at modest levels in the first quarter of 2004. The net outflow of $571 million reduced the gain in surplus from a potential 3.5% to the actual 3.2%.

Table 2 shows the trend of net surplus paid in/out for the Townsend 100. Surplus infusions were ample in 1991-93 to overcome consumer solvency fears, meet rating agency demands and meet 12/31/93 risk-based capital standards.

But, net surplus paid in/out showed an outflow from 1994-1999, because many companies had built high capital ratios and were seeking to increase returns on retained equity.

With a 3.2% surplus gain in the first quarter of 2004, the life industry may not match the 16.7% gain for the full year 2003, but is likely to exceed gains ranging from 0.3% to 6.3% for the preceding 4 years, 1999-2002.

Table 3 shows the trends of net investment yield on mean invested assets, return on mean equity and capital ratio (total surplus to invested assets) for The Townsend 100 companies.

Net investment yield fell 171 basis points in 10 years, from 9.09% in 1990 to 7.38% in 2000, then fell by 149 basis points in just 3.25 years, to 5.89% in the first quarter of 2004. Based on historic experience, first-quarter annualized yields are often predictive of the full years yield rate.

However, declines of 29, 41 and 47 basis points in net investment yield in 2001-2003, respectively, may moderate in 2004. The first-quarter decline was only 22 basis points.

Return on mean equity was 10.5% in the first quarter of 2004. This is only the second time in 14 years that the life industry is reporting return on equity in double digits.

Higher returns on equity in 2003-2004 may be attributed to mutual companies converting to stock companies and seeking higher returns, and aggressive shareholder dividend policies in many companies, and delayed but sharp declines in crediting rates.

Capital ratios (total surplus to invested assets) for the life industry rose to a record high 11.97% at 12/31/99, but eased back to 10.74% at both 12/31/03 and 3/31/04.

The table on page 8 shows the components of surplus changes for The Townsend 100 companies for the first quarter of 2004. Surplus includes the AVR and IMR, while operating earnings exclude the amortization of the IMR.

Largest operating earnings in the first quarter were posted by Metropolitan with $567 million; Pacific Life, $504 million; Hartford Life & Accident, $363 million; AFLAC, $328 million; and SunAmerica, $311 million. These companies accounted for 34% of The Townsend 100 operating earnings.

Fifteen of The Townsend 100 companies had operating losses, and 5 companies had both operating losses and capital losses in the first quarter.

The largest operating losses were Allianz (a large writer of equity-indexed annuities) with $64 million, and ING USA Annuity & Life (formed by merging Equitable of Iowa, USG Annuity and Golden American) with $25 million.

Only 27 of The Townsend 100 companies had net capital losses in the first quarter of 2004. Only Prudential ($328 million) had net capital gains exceeding $200 million, and only Pacific Life ($392 million) had net capital losses exceeding $200 million.

Only 17 of The Townsend 100 companies received new surplus paid-in in the first quarter of 2004. Five AIG companies accounted for $763 million of the total $957 million paid-in.

Eighteen of The Townsend 100 companies paid out shareholder dividends in the first quarter of 2004. Five Connecticut-based companiesTravelers with $468 million; Hartford Life, $300 million; Hartford Life & Accident, $146 million; Connecticut General, $110 million; and Aetna, $100 millioncomprised 74% of the total shareholder dividends paid.

Surplus declined in the first quarter of 2004 for 16 of The Townsend 100 companies. Largest percentage declines were AmerUS at 15%; Travelers, 5.5%; and Hartford Life, 4.2%. The latter 2 declines arose from large shareholder dividends.

Excluding surplus paid-in, the largest percentage gains in surplus were ING Life of America at 26%; AIG Annuity, 12%; AFLAC, 11%; and Great-West, 11%.

Frederick Townsend is an investment banker in Wolcott, Conn. He can be reached via e-mail at ftownsend@snet.net. Laurie Dallaire is with Insurance Consulting and Analysis, LLC.


Reproduced from National Underwriter Edition, August 19, 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.