One hundred companies, comprising 84% of life industry assets, reported a modest 1.7% gain in total surplus funds in the first quarter of 2005, as interest rate spreads declined and shareholder dividends consumed half of operating earnings.
Data from Insurance Consulting & Analysis, LLC, shows a 1.7% gain in total surplus–which consists of surplus, asset valuation reserve and interest maintenance reserve–for the Townsend 100 in the first quarter of 2005, compared to a 3.2% gain in total surplus in the first quarter of 2004.
Net yield on mean invested assets dropped 25 basis points in the first quarter of 2005, compared to only a 21 basis point drop for the full 12 months of 2004.
Operating margins were squeezed by the decline in net investment yield, and return on mean equity fell below 10% in the first quarter of 2005, compared to returns exceeding 11% in the full calendar years 2003 and 2004.
Net capital gains and new surplus paid-in aggregated less than $1 billion, while shareholder dividend payments exceeded $3 billion in the first quarter of 2005. The net of these three items consumed one-third of operating gains.
Twenty-six of the Townsend 100 companies reported a decline in total surplus in the first quarter of 2005, primarily due to reduced operating margins and large shareholder dividend payments.
Table 1 shows the components of surplus changes for the Townsend 100 for the years 2000-2004 and the first quarter of 2005. Surplus includes the AVR and IMR, while operating earnings exclude the amortization of the IMR.
Table 2 shows the trend of net surplus paid in/out for the Townsend 100. Surplus infusions were ample in 1991-93 to overcome consumer solvency fears, meet rating agency demands and meet 12/31/93 risk-based capital standards.
But, net surplus paid in/out showed an outflow in 9 of the last 11 years (1994-2004), because many companies had built high capital ratios and were seeking to increase returns on retained equity. This trend appears to be continuing in 2005.
Table 3 shows the trends of net investment yield on mean invested assets, return on mean equity, and capital ratio (total surplus to invested assets) for the Townsend 100 companies.
Net investment yield fell 171 basis points in 10 years, from 9.09% in 1990 to 7.38% in 2000, then fell by 148 basis points in just 4 years, to 5.9% in 2004. Based on historic experience, first-quarter annualized yields often are predictive of the full year's yield rate.
Return on mean equity was 9.9% in the first quarter of 2005 and may have difficulty matching the 11.1% returns achieved in both 2003 and 2004. Much depends upon new money rates for the balance of 2005.
