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.

Higher returns on equity in 2003-2004 may be attributed to mutual companies converting to stock companies and seeking higher returns, sharp declines in crediting rates, and aggressive shareholder dividend policies in many companies.

Capital ratios (total surplus to invested assets) for the life industry rose to a record high 11.97% at 12/31/99 and have been in a range of 10.1% to 11.1% for the 5 years in 2001-2005.

The table on page 8 shows the components of surplus changes for the Townsend 100 companies for the first quarter of 2004.

Largest operating earnings in the first quarter were posted by Metropolitan, $565 million; United Healthcare, $429 million; AFLAC, $350 million; Teachers Insurance & Annuity, $337 million; and Prudential, $304 million, accounting for 33% of the Townsend 100 operating earnings.

Twelve of the Townsend 100 companies had operating losses, but only 2 companies had both operating losses and capital losses in the first quarter. General American had a $200 million operating loss and a $176 million net capital loss.

Forty of the Townsend 100 companies had net capital losses in the first quarter. Largest net capital gains were recorded by AXA Equitable, $366 million, and Swiss Re, $205 million. Largest net capital losses were recorded by Primerica, $250 million, and Allianz, $182 million.

Only 14 of the Townsend 100 companies received new surplus paid-in in the first quarter, led by AGC Life with $130 million.

But, 25 of the Townsend 100 companies paid out shareholder dividends in the first quarter. United Healthcare, $575 million; Travelers, $450 million; Aetna, $322 million; John Hancock, $320 million; Hartford Life, $249 million; GE Capital, $225 million; Connecticut General, $221 million; Hartford Life & Accident, $118 million; and Lincoln National, $100 million, comprised 84% of the total shareholder dividends paid.

Surplus declined for 26 of the Townsend 100 companies in the first quarter of 2005, up from 16 companies in the first quarter of 2004. Largest percentage declines were Primerica (12%) and Country Life (7%), both arising from large net capital losses.

Excluding surplus paid-in, the largest percentage gains in surplus were Reassure America, 29%; Swiss Re, 12%; and AFLAC, 12%.

Largest dollar gains in surplus in the first quarter were posted by Metropolitan, $593 million; AXA, $486 million; Teachers, $430 million; and AFLAC, $342 million.

Frederick Townsend, of The Townsend Independent Actuarial Research Alliance, can be reached at ftownsend@snet.net. Laurie Dallaire is with Insurance Consulting and Analysis, LLC.