Accounting changes, brought about by National Association of Insurance Commissioners' Codification of Statement of Statutory Accounting Principles, effective Jan. 1, 2001, increased reported surplus for the life insurance industry in the first quarter of 2001. (Click here to view the complete Three Months 2001 Surplus Change)
One hundred thirty companies, comprising 85% of life industry assets, reported positive gross accounting changes of $8.8 billion in the first quarter of 2001, equal to 4.5% of their Dec. 31, 2000 composite surplus positions.
The table on page 38 shows the components of surplus changes for the 130 companies in the Townsend & Schupp Quarterly Review for the first quarter of 2001. Surplus includes the AVR (Asset Valuation Reserve) and the IMR (Interest Maintenance Reserve), while operating earnings exclude amortization of the IMR.
The largest positive cumulative effects of the accounting changes were experienced by Prudential Insurance Company of America with $2,248 million, Equitable Life Assurance (N.Y.) with $1,631 million, Northwestern Mutual Life with $730 million, Mass. Mutual with $612 million, and Teachers Ins. & Annuity with $400 million.
Current and former mutual companies benefited from setting up deferred income tax assets related to their policy dividend liabilities. For example, Prudential established a deferred tax liability of $2,347 million.
Prudential's largest components of its deferred tax assets were policy dividends of $741 million; reserves, $624 million; deferred acquisition costs, $539 million; net operating loss carryforwards, $278 million; and employee benefits, $216 million.
On the other hand, negative cumulative effects of the accounting changes were experienced by John Hancock with $407 million; Phoenix Home Life with $117 million; United Insurance with $89 million; and Aurora National Life (formerly Executive Life) with $76 million.
Table 1 shows the components of surplus changes for the T&S Composite in the first quarters of 2001 and 2000. Total surplus increased only 2.5% in 2001, as $8.7 billion of capital losses and shareholder dividends nearly offset the $8.8 billion cumulative effect of accounting changes.
Also, new surplus paid-in in the first quarter of 2001 rose by $1.7 billion over the 2000 first quarter, but net operating gains fell by $1.8 billion from 2000 to 2001.
Table 2 shows the trend of net surplus paid in/out for the T&S Composite. Surplus infusions were ample in 1991-1993 to overcome consumer solvency fears, meet rating agency demands, and meet the Dec. 31, 1993, risk-based capital standards.
But, net surplus outflow exceeded $4 billion annually in 1996-1999, because companies had built high capital ratios and were seeking to increase returns on retained equity.
Table 3 shows net investment yield on mean invested assets, return on mean equity, and capital ratio (total surplus to invested assets) for the T&S Composite of 130 companies for 1990-2000 and the first quarter of 2001.
Net investment yield fell from 9.09% to 7.10% in 10- 1/4 years. With new money rates at 5.2% for 10-year U.S. Treasuries and 6.2% for 15-year Fannie Mae and Ginnie Mae issues, portfolio rates should continue to decline.
Table 4 shows that 34 of 130 companies had operating losses, and 20 companies had both operating losses and capital losses. Both numbers were double the highs of the previous 8 years. The largest operating losses were Sun Life Assurance of Canada (U.S.) with $147 million and Anchor National with $108 million.
