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