Industry Surplus Growth Was Sluggish In First Six Months Of 2001
By Frederick S. Townsend
For 130 companies with 85% of life industry assets, total surplus posted its second lowest percent gain since 1994, in the first six months of 2000, despite the benefits of accounting changes from National Association of Insurance Commissioners codification.
NAIC codification of statutory accounting principles became effective Jan. 1, 2001. Codification impacts statutory financial reporting in many ways, including recognition of deferred tax assets and liabilities.
Codification effects resulted in a $8.9 billion increase in surplus due to the cumulative accounting changes, but part of that was offset by reclassification of prior years' net capital gains, resulting in a one-time increase in capital losses reported for the year 2001.
Operating gains of $7.4 billion and new surplus paid-in of $4.1 billion barely exceeded shareholder dividends of $5.8 billion and reported capital losses of $5.5 billion.
Data from the Townsend & Schupp Life Insurance Business Risk Analysis (LIBRA) Quarterly Review shows that the sum of surplus, asset valuation reserve (AVR) and interest maintenance reserve (IMR), rose 2.9% and 1.9% in six months of 2001 and 2000, compared to an average gain of 5.3% for 1995-1999. (See Table 4.)
Table 1 shows the components of surplus changes for the 130 LIBRA companies in the first two quarters of 2001, and in the first six months of 2001 and 2000. Surplus includes the AVR and the IMR, while operating earnings exclude amortization of the IMR.
Comparing six months of 2001 and 2000, all four basic sources of surplus gains fell. Operating earnings fell 19%, net capital losses rose sharply, new surplus paid-in fell 42%, and shareholder dividends rose 30%.
Table 2 shows net surplus paid-in exceeded shareholder dividends paid-out by $1.3 billion to $2.1 billion per year in 1991-1993, to meet consumer solvency fears, rating agency demands, and risk-based capital standards.
However, shareholder dividends paid-out exceeded surplus paid-in by $1.1 billion to $4.4 billion per year in 1994-2000, and by $7.5 billion in 1998, as stock life insurers sought to reduce equity and, thus, increase returns on equity.
For six months of 2001, surplus paid-in was $4.1 billion, exceeding all 12-month periods except 1993 ($4.7 billion) when risk-based capital standards became effective, and 2000 ($9.5 billion) when Metropolitan and John Hancock raised $6.4 billion in initial public offerings of common stock.
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 six months of 2001.
Annualized net yield of 7.06% for six months of 2001 is a 34 basis point drop from the full year 2000, and is the largest potential decline since 1992-1994, when net investment yield fell 51, 43 and 49 basis points.
The decline is not unexpected, since 10- and 30-year Treasury bonds were yielding 4.55% and 5.36% at 9/14/01, compared to 5.81% and 5.75% at 8/31/00.
Return on mean equity was only 7.4% in the first half of 2001, threatening to break 12-year lows of 7.0% in 1994, and 7.2% in 1998.
After Executive Life's failure in 1991, the life industry's capital ratio rose 63%, from 7.3% at 12/31/90, to 11.9% at 12/31/99, then fell to 11.5% at 6/30/01 as many companies reduced their capital.
The "capital ratio" is defined as the ratio of total surplus funds to general account invested assets (where the company is at risk for investment losses). This ratio has risen, in part, by a shift from general account to separate account assets (generated by the sale of variable life and variable annuity products).
