Movement of capital out of the life insurance industry exceeded operating earnings and produced a 0.9% ($2.4 billion) decline in surplus in the second quarter of 2006, for the Townsend 100 Composite of 100 life insurers with 84% of the U.S. 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 1.3% for 6 months of 2006, one of the lowest percent gains in the last 12 years.

Table 1 shows the components of surplus changes for the Townsend 100 Companies for calendar years 2001-2005, and for 6 months of 2006. Surplus includes the asset valuation reserve and the interest maintenance reserve, while operating gain excludes amortization of the interest maintenance reserve.

While reductions in crediting rates sharply improved total earnings in the years 2003-2005, a continued flat yield curve and aggressive marketing of fixed annuities with attractive initial yields constrained operating earnings in the first half of 2006.

Net capital gains were modest in 6 months of 2006, and net surplus paid-out consumed 78% of operating earnings for the Townsend 100 Companies. One of the ways that life insurers can increase their return on equity is to reduce the equity held in their companies, which they aggressively did in 2005 and the first half of 2006.

Table 2 shows new surplus paid-in, shareholder dividends paid-out, and the net result, for the Townsend 100 Companies for the full years 1997-2005 and for 6 months of 2006. The excess of shareholder dividends paid-out, over new surplus paid-in, totaled $10.1 billion in 6 months of 2006, compared to $15.1 billion in the first 6 months of 2005. Those two 6-month numbers both exceed the 12-month numbers for any of the first 15 years of this article series (1990-2004).

Forty-seven of the Townsend 100 Companies paid shareholder dividends in the first half of 2006, with 26 companies each paying out more than $100 million. Six companies comprised $4.7 billion of the total $8.6 billion of shareholder dividends paid in the first half of 2006: Prudential with $1,081 million; Principal, $975 million; Aetna, $846 million; United Healthcare, $835 million; Connecticut General, $465 million; and AFLAC, $452 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 1997-2005, and for 6 months of 2006.

Net investment yield fell 29, 51, 47, 21 and 3 basis points in 12 months of 2001-2005, respectively, and another 9 basis points in the first 6 months of 2006, from 5.87% to 5.78%. Growth in operating earnings will likely be restrained until industry net yield reverses its downward trend.

Return on mean equity for the Townsend 100 Companies fell to 10% for 6 months of 2006. Calendar year returns on mean equity exceeded 10% in 1990-91, and fell below 10% from 1992-2002, before rising to the 11% level in 2003-2005.

With net surplus paid-out consuming 78% of operating earnings, the capital ratio (total surplus funds to invested assets) for the Townsend 100 Companies fell to 10.98% in the first half of 2006. This remains near the high end of a range of 10.1% to 11.1% for the full calendar years 2001-2005.

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

Thirty-nine of the Townsend 100 Companies had operating earnings of more than $100 million in 6 months of 2006, up from 34, 35 and 33 companies for 6 months of 2003-2005. Seven companies aggregated $4.5 billion of the $13 billion Townsend 100 Composite earnings: AFLAC with $913 million; United Healthcare, $899 million; Metropolitan, $704 million; TIAA, $679 million; Aetna, $439 million; AXA, $429 million; and Connecticut General, $406 million.

Eleven of the Townsend 100 Companies had operating losses, and 8 companies had both operating losses and net capital losses, in the first 6 months of 2006. Highest operating losses for 6 months of 2006 were reported by Prudential with $181 million; F&G, $99 million; Metlife Investors, $83 million; and RGA Reinsurance, $69 million.

In the first 6 months of 2006, 50 of the Townsend 100 Companies had net capital gains, and 50 had net capital losses. On balance, the Townsend 100 Composite reported $556 million of net capital gains. Highest net capital gains were Transamerica Occidental with $730 million; TIAA, $372 million; AXA, $263 million; and Prudential Retirement, $208 million.

Largest net capital losses were reported by Metropolitan Life with $360 million; AGC Life, $305 million; and New York Life, $230 million.

Six companies had surplus gains exceeding $400 million in 6 months of 2006 (compared to 8 and 4 companies in six months of 2004 and 2005): TIAA with $1,167 million; Transamerica Occidental, $816 million; AFLAC, $534 million; Metropolitan Life, $502 million; AXA Equitable, $432 million; and Great-West Life & Annuity, $411 million.

Excluding surplus paid-in, the largest percent gains in surplus for 6 months of 2006 were reported by Transamerica Occidental with 30%; Great-West Life & Annuity, 24%; and AFLAC, 13%.

Surplus declined for 30 of the Townsend 100 Companies in 6 months of 2006, and 10 companies had double-digit declines: Reassure America with 41%; Chase Insurance, 41%; Prudential, 20%; Metlife Investors, 20%; American International, 17%; Aetna, 14%; Swiss Re, 14%; Nationwide Life & Annuity, 13%; Pruco, 12%; and F&G, 11%.