Shareholder dividends paid out in first half were highest in 15 years

Movement of capital out of the life insurance industry exceeded operating earnings and produced a 1.4% ($3.6 billion) decline in surplus in the second quarter of 2005 for the Townsend 100 Composite of 100 life insurers with 84% of the life industry’s assets.

According to data produced by Insurance Consulting & Analysis, LLC, the decline in surplus in the second quarter held growth in total surplus funds to 0.2% for the first six months of 2005, the lowest percent gain in the last 11 years.

Table 1 shows the components of surplus changes for the Townsend 100 Companies for calendar years 2000-2004, and for six months of 2005. Surplus includes the asset valuation reserve and the interest maintenance reserve, while operating gain excludes amortization of the interest maintenance reserve.

In six months of both 2004 and 2005, only 9% of the Townsend 100 Companies had an operating loss, the lowest ratio since 5% in 1999. Although investment yield has been declining and suppressed earnings in 2001 and 2002, reductions in crediting rates sharply improved total earnings in 2003 and 2004, and in six months of 2005.

Net capital gains were modest in the first six months of 2005, while shareholder dividends exceeded operating earnings for the Townsend 100 Companies. One of the ways that life insurers can increase their ROE is to reduce the equity held in their companies, which they aggressively did in the first half of 2005.

In the first six months of 2005, Metropolitan Life had the highest operating gains of $932 million, the highest net capital gains of $916 million, the highest shareholder dividends of $3.2 billion and the largest surplus decline of $1.36 billion.

Table 2 shows net surplus paid-in, shareholder dividends paid out and the net result for the Townsend 100 Companies for the full years 1997-2004 and for six months of 2005. The excess of shareholder dividends paid out, over new surplus paid-in, totaled $15.1 billion in the first six months of 2005. That number is a record when compared to the 12-month totals for the 15 years between 1990 and 2004.

Twenty-two companies paid shareholder dividends exceeding $100 million, and just 7 companies comprised $9 billion of the total $13 billion of shareholder dividends paid in the first half of 2005: Metropolitan Life, $3.2 billion; Travelers, $1.5 billion; Prudential, $1.5 billion; Metropolitan Tower, $0.9 billion; United Healthcare, $0.9 billion; Aetna Life, $544 million; and John Hancock, $465 million.

Table 3 shows net investment yield on mean invested assets, return on mean equity and the capital ratio (total surplus to invested assets) for the Townsend 100 Companies for the full years 1997-2004, and for six months of 2005.

Net investment yield fell 29, 51, 47 and 21 basis points in 12 months of 2001-2004, respectively, but rose 2 basis points, from 5.90% to 5.92%, in the first six months of 2005. The flattening out of net investment yield, coupled with a sharp decline in crediting rates, has bolstered industry operating earnings for the last 30 months.

Return on mean equity for the Townsend 100 Companies fell to 10.3% for six months of 2005. Calendar year returns on mean equity exceeded 10% in 1990-91 and fell below 10% from 1992-2002, before rising to 11.1% in both 2003 and 2004.

However, with shareholder dividends consuming all of operating earnings, the capital ratio (total surplus funds to invested assets) for the Townsend 100 Companies fell to 10.8% in the first half of 2005. This remains near the high end of a range of 10.1% to 11.1% for the full calendar years 2001-2004.

The table on page 8 shows components of surplus changes for each of the companies in the Townsend 100.

Thirty-three of the Townsend 100 Companies had operating earnings of more than $100 million in six months of 2005, compared to 35 and 34 companies for six months of 2004 and 2003. Seven companies aggregated $4.6 billion of the Townsend 100 Composite earnings: Metropolitan Life, $932 million; United Healthcare, $742 million; AFLAC, $672 million; TIAA, $631 million; Prudential, $626 million; Travelers, $551 million; and Aetna Life, $436 million.

The highest operating losses for the first six months of 2005 were reported by General American with $144 million in losses and RGA Reinsurance with $103 million.

Five companies aggregated net capital gains of $2.4 billion in the first six months of 2005, compared to $3.5 billion total for the Townsend 100 Composite: Metropolitan Life, $916 million; SunAmerica Life, $422 million; John Hancock, $372 million; New York Life, $359 million; and AXA Equitable, $319 million.

Only 38 of the Townsend 100 Companies had net capital losses in the first six months of 2005, setting a six-year low. Largest net capital losses were: Travelers, $229 million; Primerica, $229 million; and Allianz, $160 million.

Six companies had surplus gains exceeding $400 million in six months of 2005 (down from 8 companies in six months of 2004): TIAA, $840 million; Northwestern Mutual, $602 million; MassMutual, $513 million; Principal, $464 million; AFLAC, $462 million; and SunAmerica, $404 million.

Excluding surplus paid-in, the largest percent gains in surplus for six months of 2005 were reported by ING Life of America with 20%; AFLAC, 16%; Security Life of Denver, 15%; and General American, 14%.

Surplus declined for 22 of the Townsend 100 Companies in six months of 2005, with the largest percent declines being Travelers Insurance, 48%; Metropolitan Tower, 44%; Metropolitan Life, 11%; and Primerica, 11%. These four companies paid a combined $5.8 billion of shareholder dividends in the first half of 2005, resulting in their surplus declines.

Frederick Townsend, of The Townsend Independent Actuarial Research Alliance, which produces Due Diligence Reviews on life insurance companies for distributors of their products, can be reached at ftownsend@snet.net. Laurie Dallaire is with Insurance Consulting & Analysis, LLC, which produces Quarterly Peer Company Analyses for CEOs and CFOs of life insurance companies.