Surplus Growth Was Flat In 2nd Quarter
Movement of capital out of the life insurance industry, coupled with modest capital losses, offset strong operating earnings and produced a modest 0.1% decline in surplus in the second quarter of 2004, for the Townsend 100 Composite of 100 life insurers with 84% of the life industrys assets.
According to data produced by Insurance Consulting & Analysis, LLC, lack of surplus growth in the second quarter held growth in total surplus funds to 3.1% for 6 months of 2004, the third lowest percent gain in the last 10 years.
Table 1 shows the components of surplus changes for the Townsend 100 Companies for calendar years 1999-2003, and for 6 months of 2004. Surplus includes the asset valuation reserve (AVR) and the interest maintenance reserve (IMR), while operating gain excludes amortization of the interest maintenance reserve.
In 6 months of 2004, only 9% of the Townsend 100 companies had an operating loss, the lowest ratio since 5% in 1999. Although investment yield has been declining and suppressed earnings in 2001 and 2002, large reductions in crediting rates improved total earnings in 2003 and 2004.
Return on mean equity for the Townsend 100 rose to 11.2% for 6 months of 2004, the highest return in the 15-year history of this column. Calendar year returns on mean equity exceeded 10% in 1990-91, and fell below 10% for the next 12 years, before rising to 11.1% in 2003.
Net capital gains and surplus paid-in were modest in 6 months of 2004, while shareholder dividends paid out consumed half of the Townsend 100 operating earnings. One of the ways that life insurers can increase their ROE is to reduce the equity held in their companies, which they aggressively did in the first half of 2004.
Table 2 shows new surplus paid-in, shareholder dividends paid out and the net result for the Townsend 100 companies for the full years 1997-2003 and for 6 months of 2004. The excess of shareholder dividends paid out, over new surplus paid-in, totaled $6.9 billion in the first 6 months of 2004. That number is a record when compared to the 12-months totals for the first 14 years of this column (1990-2003).
Sixteen companies paid shareholder dividends exceeding $100 million, while 12 companies paid shareholder dividends exceeding $200 million, and 7 companies paid shareholder dividends exceeding $400 million in the first half of 2004.
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 1997-2003, and for 6 months of 2004.
Net investment yield fell 29, 51 and 47 basis points in 12 months of 2001-2003, respectively, but only 4 basis points, from 6.11% to 6.07%, in the first 6 months of 2004. The flattening out of net investment yield, coupled with a sharp decline in crediting rates, has bolstered industry operating earnings for the last 18 months.
With increased earnings, return on mean equity rose for a third consecutive year, and is at its highest level (11.2%) in the 15-year history of this column.
But, with shareholder dividends consuming half of operating earnings, the capital ratio (total surplus funds to invested assets) for the Townsend 100 Companies remained at 10.7% in the first half of 2004. The capital ratio peaked at 12% at year-end 1999.
The table on page 32 shows components of surplus changes for each of the companies in the Townsend 100.
Of the Townsend 100 companies, 35% had operating earnings of more than $100 million in 6 months of 2004, compared to 34% and 17% for 6 months of 2003 and 2002. Six companies comprised one-third of the Townsend 100 Composite earnings: MetLife, $1,058 million; GE Capital, $1,030 million; SunAmerica, $640 million; AFLAC, $638 million; Hartford Life & Accident, $510 million; and Pacific Life, $477 million.
Highest operating losses for 6 months of 2004 were reported by MassMutual, $118 million; Employers Re, $61 million; and Aviva, $25 million.
Six companies had net capital gains exceeding $200 million (totaling $1.5 billion), while 5 companies had net capital losses exceeding $200 million (totaling $1.7 billion). The Townsend 100 aggregated net capital gains of $1.2 billion for 6 months of 2004.
American General Life of Texas had the highest net capital gain of $340 million, and GE Capital had the highest net capital loss of $459 million.
Five-year lows were set in 3 categories for the Townsend 100. Only 9 companies had operating losses, only 39 companies had net capital losses, and only 3 companies had both operating losses and net capital losses.
Eight companies had surplus gains exceeding $400 million in 6 months of 2004, led by AGC Life, $712 million; Metropolitan, $708 million; and Teachers, $690 million.
Excluding surplus paid-in, the largest percent gains in surplus for 6 months of 2004 were reported by GE Capital of NY (80%), Reassure America (43%), Penn Mutual (25%), GE Life & Annuity (23%), and Provident Life & Accident (22%).
Surplus declined for 21% of the Townsend 100 in 6 months of 2004, with the largest percent declines being First Colony (27%), Principal Life (24%), and Connecticut General (19%). These 3 companies paid a combined $2.2 billion of shareholder dividends in the first half of 2004, resulting in their surplus declines.
Frederick Townsend is an investment banker in Wolcott, Conn. He can be reached via e-mail at [email protected]. Laurie Dallaire is with Insurance Consulting and Analysis, LLC.
Reproduced from National Underwriter Edition, October 28, 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.