By Jim Connolly
The downward trend of dividends paid to policyholders in the last few years may be about to reverse as interest rates continue to creep upward.
Total dividends paid to policyholders for the top 50 companies dropped 5% in 2003 over 2002 after a 2% decline in 2001, according to data from the NAIC annual statement database as compiled by National Underwriter Insurance Data Services/Highline Data.
Dividends from ordinary life insurance policies declined 3% in 2003 over 2002, but increased 8% in 2002 over 2001, the data says. Changes in dividends paid from ordinary annuities were even more pronounced, according to the data. In 2003, there was an 11% drop in ordinary individual annuity dividends over 2002. This followed a 2% increase in 2002 over 2001.
The principal driver of these declines has been the decline in interest rates over the last 4-5 years, according to Paul Graham, vice president and chief actuary with the American Council of Life Insurers, Washington. Dividends are a return of excess money earned on contracts, and part of that excess is generated by interest accrued on contracts, he explains.
Another possible factor, Graham continues, is that there are fewer mutual insurance companies and consequently, fewer participating policies in which contract holders participate in the gains an insurer has experienced. Generally, dividends increase with duration, but there will be fewer of these policies being sold over time, he adds.
The 8% uptick in dividends paid to individual life policyholders in 2002 and the 2% increase in dividends paid to individual annuity contracts could be a reflection of a jump in interest rates in 2001, he says. The larger 11% decline in 2003 over 2002 for individual annuities could reflect annuities greater sensitivity to interest rates, Graham notes. The total value of an annuity is generating interest and therefore reflects current interest rates, he says. Additionally, annuities are tied to short-term interest rates that are prone to bigger changes than long-term rates, he adds.
If interest rates continue to increase in 2005, Graham says there could be a slight increase in policyholder dividends paid in 2006 as companies change crediting to contracts to reflect this rise.
In several instances, total dividends paid out in 2003 were less than the combined totals for ordinary life and ordinary annuities. Companies explained the reasons for the discrepancies, which ranged from rounding off totals, to sales of lines of business such as group life and group accident and health which reduced total dividends paid out, to negative dividends paid out from group life and annuities.
In a number of cases, reinsurance transactions such as one on a closed block of life insurance business completed by Metropolitan Life affected the total dividends paid to policyholders as opposed to individual lines of business.
AmerUs Life Insurance Company said dividends to policyholders were $66.5 million in 2003 and $68.3 million in 2002 and that the variance noted in the table was due to a reinsurance transaction.
American United Life said total policyholder dividends were affected by an outflow from group annuities and a big reinsurance treaty.
Other companies noted that there were non-dividend decisions that resulted in changes to dividends paid out.
Phoenix Life said a slight discrepancy between total dividends paid out in 2003 and ordinary life dividends in that year was a rounding issue. Total dividend numbers also were affected by the sale of group life and group accident and health business lines, a spokesperson said.
Pacific Life said that in 2003, there was a negative dividend from group life and annuity business of $143,610 that affected the total dividend number. A company spokesman also noted that for both individual life and annuity contracts, the majority of policyholders receive interest credits and not dividends.
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 11, 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.