For 100-company composite, 2-year gain was 30.8%

Townsend Chart

By Frederick s. Townsend and Laurie Dallaire

One hundred companies, comprising 84% of life insurance industry assets, reported an 11.6% gain in total surplus funds in 2004, on the strength of a record $26.8 billion in operating earnings, and $10 billion in net capital gains, according to data from Insurance Research & Consulting, LLC.

This follows on the heels of a 16.7% surplus gain in 2003, which was the highest gain since a 19.4% surplus gain in 1993. (In 1993, companies propped up surplus to build Risk-Based Capital ratios, to counter rating agency downgrades, and to assuage solvency scares.) Total surplus funds rose 30.8% in the two years 2003-2004.

Surplus gains in the last two years are 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.

Although net surplus paid-out (shareholder dividends minus new surplus paid-in) hit a record high of $9.4 billion in 2004, new highs in operating income and net capital gains enabled total surplus funds to rise in double digits for the second consecutive year.

Only 7 of the Townsend 100 companies had an operating loss in 2004, a sharp drop from 13, 19, 26 and 12 companies, respectively, for 2000-2003. Net yield on mean invested assets declined only 21 basis points in 2004, helping to stabilize profit margins.

Only 31 of the Townsend 100 companies reported a net capital loss in 2004, down from 88 and 48, respectively, in 2002 and 2003. Net capital losses of $17.9 billion in 2002 turned into $10 billion of net capital gains in both 2003 and 2004.

Only 3 of the Townsend 100 companies reported both operating losses and net capital losses in 2004, compared to 11, 12, 20 and 4 companies, respectively, for 2000-2003.

Shareholder dividends paid-out exceeded surplus paid-in in 2004 by a record $9.4 billion. While total shareholder dividends of $14.9 billion for the Townsend 100 companies were short of the record high of $18.9 billion in 2001 created by several large demutualizations, new surplus paid-in was only $5.5 billion in 2004 compared to an average $8.7 billion for 2000-2003.

Combining the effects of record operating earnings and stock market capital gains, only 10 of the Townsend 100 companies had a surplus decline in both 2003 and 2004, 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 2000-2004. 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 1997-2004. Shareholder dividends have exceeded new surplus paid-in in 6 of the last 8 years, as the life industry tries to minimize capital accumulation and raise returns on equity.

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 1997-2004.

Net investment yield declined 51 basis points in 2002, and 47 basis points in 2003, before moderating to a 21 basis point decline in 2004. Life industry yield fell to 5.9%, the first year below 6% in 40 years.

Spurred by strong operating earnings, return on mean equity in both 2003 and 2004 set a record high of 11.1% for the last 15 years. This reflects the impact of several large mutual companies converting to stock ownership and striving to achieve higher returns on equity, and sharp declines in crediting rates.

Capital ratios peaked at 12% at 12/31/99, then declined to 10.1% at 12/31/02. The 3-year decline in capital ratio reversed itself in 2003, rising to 11.1% at 12/31/04. The improvement in capital ratio can be attributed to the increase in operating earnings and achieving net capital gains in both 2003 and 2004.

The large table 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.

Twenty of the Townsend 100 companies had operating gains exceeding $500 million in 2004 and comprised 66% of the Townsend 100 composite earnings. Largest gains were Metropolitan, $2,467 million; United Healthcare, $1,444 million; Prudential, $1,331 million; AFLAC, $1,191 million; and GE Capital, $1,165 million.

Eight companies had net capital gains exceeding $400 million in 2004, and comprised 52% of the Townsend 100 composite net capital gains. Largest gains were Connecticut General, $988 million; Northwestern Mutual, $936 million; Prudential, $754 million; and Metropolitan, $562 million.

While 42 companies in the Townsend 100 paid in new surplus funds of $5.5 billion in 2004, two corporate transactions accounted for more than half of the total. Union Fidelity was restructured in the GE group of companies, and Prudential Retirement acquired Connecticut Generals pension business.

Meanwhile, 56 companies in the Townsend 100 paid shareholder dividends of $14.9 billion in 2004. Shareholder dividends exceeded: $100 million for 33 of 100 companies; $200 million for 23 companies; $300 million for 18 companies; $400 million for 13 companies; $500 million for 9 companies; and $700 million for 6 companies. Capital continues to flee the life industry.

Largest shareholder dividend payments were United Healthcare, $1,702 million; Principal, $1,124 million; IDS, $930 million; GE Capital, a movement of $827 million; Metropolitan, $797 million; and Monumental, $710 million.

Largest aggregate surplus gains in 2004 were: Prudential Retirement, $2.1 billion; TIAA, $1.6 billion; Northwestern Mutual, $1.5 billion; Metropolitan, $1.4 billion; SunAmerica, $1 billion; and New York Life, $1 billion.

Largest percentage surplus gains in 2004, excluding new surplus paid-in, were achieved by Prudential Retirement with its capitalization to absorb Connecticut Generals pension business, and a 54% increase by Reassure America with strong operating gains.

Only 7 of the Townsend 100 companies had surplus declines in 2004. The largest percentage surplus declines were First Colony, 27%; Employers Reassurance, 24%; Principal, 19%; and IDS, 16%. Employers Re had a large operating loss, while the other 3 companies paid large shareholder dividends.

Frederick S. Townsend, President of the Townsend Independent Actuarial Research Alliance (TIARA), can be reached at ftownsend@snet.net. Laurie Dallaire is president of Insurance Consulting & Analysis, LLC. She can be reached via e-mail at Laurie.Dallaire@ic-a.com.


Reproduced from National Underwriter Edition, April 1, 2005. Copyright 2005 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.