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December 29, 2004 at 07:00 PM
One hundred companies, comprising 84% of life insurance industry assets, reported a 5.6% gain in total surplus funds in the first 9 months of 2004, on the strength of a 27% gain in operating earnings, less a 140% increase in shareholder dividends paid.
According to data produced by Insurance Consulting & Analysis, LLC, operating earnings rose from $15 billion to $19.1 billion and shareholder dividends soared from $3.3 billion in the first 9 months of 2003 to $8 billion in the first 9 months of 2004.
The 5.6% surplus gain for 9 months exceeded the previous 10 years average of 4.5%. The third quarter surplus gain of 2.4% exceeded the previous 10 years average of 0.5%, as the 100 largest companies had surplus declines in the third quarter in four of the previous six years.
Table 1 shows the components of surplus changes for the Townsend 100 companies for the five years 1999-2003, and for the first 9 months of 2004. Surplus includes the asset valuation reserve and the interest maintenance reserve, while operating gain excludes amortization of the interest maintenance reserve.
Based on 9-month operating earnings of $19 billion, it appears the record $23.4 billion set in 2003 will be exceeded and that current net surplus paid-out (excess of shareholder dividend payments over surplus paid-in) of $8.3 billion will exceed the record $6.7 billion of net surplus paid-out in 2001.
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 and for 9 months 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 9 months of 2004.
Net investment yield fell 29, 51 and 47 basis points in 12 months of 2001-2003, respectively, moderating to a 30 basis point decline in 9 months of 2004. Life insurers reacted by lowering crediting rates on interest sensitive products, with the net result being a 27% gain in operating profits in nine months of 2004.
Return on mean equity was running at 11.2% after 6 months of 2004 (a record high for the 15-year history of this column) but fell to 10.8% for 9 months of 2004. The year 2004 probably will be only the second time in 15 years that ROE has been in double digits and may challenge the record 11.1% achieved in 2003.
Capital ratios peaked at 12% at 12/31/99, then declined to 10.1% at 12/31/02, before rising to 10.7% at 12/31/03. The life industry capital ratio advanced modestly to 10.8% at 9/30/04.
The large table on this page shows 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.
Eighteen companies had operating gains exceeding $300 million in 9 months of 2004 (vs. 15 and 14 companies in 2003 and 2002) and comprised 59% of the Townsend 100 composite earnings. Largest gains were Metropolitan, $1,446 million; GE Capital, $1,104 million; AFLAC, $931 million; and Prudential, $780 million.
