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Life Health > Life Insurance

Capital Outflow Exceeds Earnings In 9 Months Of 2005

By Frederick S. Townsend

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With a record $20.2 billion of operating earnings in the first nine months of 2005, the 100 largest U.S. life insurance companies, accounting for 84% of industry assets, paid shareholder dividends of $16.3 billion (an 81% payout ratio).

Additionally, corporate reorganizations for The Townsend 100 reduced previous surplus paid in by another $5 billion. The sum of shareholder dividend payments and a reduction in surplus paid in (by seven companies) totaled 105% of operating earnings.

Movement of capital from the life industry was demonstrated in nine months of 2005 by only 22 of The Townsend 100 Companies paying in new surplus, the lowest total since 19 companies in 2001, while 45 companies paid shareholder dividends, tying a record high set in 2001.

Large shareholder dividend payments and surplus declines included: MetLife, $3.2 billion with surplus down 11%; Travelers Insurance, $1.5 billion with a 44% surplus decline; Prudential Insurance, $1.5 billion with surplus off 8%; Metropolitan Tower, $0.9 billion with a 43% surplus decline; and Farmers New World, $0.6 billion with surplus down 42%.

Also, Connecticut General, $0.5 billion with a 6% surplus decline; Hartford Life & Accident, $0.5 billion with surplus off 17%; SunAmerica, $0.5 billion with a 3% surplus decline; Hartford Life, $0.4 billion with surplus down 1%; Transamerica Life, $0.4 billion with a 12% surplus decline; and GE Capital, $0.4 billion with surplus off 4%.

Data produced by Insurance Consulting & Analysis, LLC, shows operating earnings rose 5.7% from $19.1 billion to $20.2 billion, but shareholder dividends doubled from $8 billion to $16.3 billion from nine months of 2004 to nine months of 2005. Just the 11 companies listed above paid more than $10 billion in shareholder dividends.

Total surplus funds for The Townsend 100 Companies rose 2.3% in the third quarter of 2005, but a second-quarter decline in surplus held nine-month surplus growth to 2.6%.

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

Based on the nine-month data, it appears that current operating earnings of $20 billion are on track to exceed the yearly record of $26.8 billion set in 2004.

Table 2 shows new surplus paid in, shareholder dividends paid out and the net result for The Townsend 100 for the years 1997-2004 and for nine months of 2005.

Based on the nine-month data, the current shareholder dividends of $16.3 billion may break the yearly record of $18.9 billion paid in 2001, a year of major demutualizations and special one-time shareholder dividend payments by the new stock companies.

The nine months of 2005 net surplus paid out (excess of shareholder dividend payments over surplus paid in) of $19.5 billion already exceeds the yearly record $9.4 billion of net surplus paid out in 2004.

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 nine months of 2005.

Net investment yield fell 51, 47 and 21 basis points in 12 months of 2002-2004, respectively, moderating to a 16 basis point decline in nine months of 2005. Life insurers reacted by lowering crediting rates on interest-sensitive products during this time, with the net result being three consecutive years of record operating earnings.

Return on mean equity was running at 11.2% after six months of 2004 (a record high for the 16-year history of this column) but fell to 10.8% for nine months of 2005. The year 2005 will probably be only the fourth time in 16 years that ROE has been in double digits but short of the record 11.1% achieved in 2003.

Capital ratios peaked at 12% at 12/31/99, then fell three years to 10.1% at 12/31/02, before rising to 11% for nine months of 2005. The capital ratio has been boosted for the last three years by record earnings but depressed by shareholder dividend payments.

The large table on page 10 shows the components of surplus changes for each of the individual companies in The Townsend 100 Companies.

Twenty-two companies had operating gains exceeding $300 million in nine months of 2005 (vs. 18, 15 and 14 companies in 2004, 2003 and 2002) and comprised 67% of The Townsend 100 earnings. Largest gains were Prudential, $1,549 million; United Healthcare, $1,140 million; Metropolitan, $1,015 million; and AFLAC, $958 million.

Only nine of The Townsend 100 Companies had an operating loss in nine months of 2005, the second lowest number in the last six years. Largest operating losses were reported by RGA Re, $152 million; Fidelity & Guaranty, $144 million; and General American, $102 million.

Only 32 of The Townsend 100 had net capital losses for nine months of 2005, the lowest number since 18 companies in 1997. Net capital gains for nine months rose from $2.9 billion in 2004 to $6.8 billion in 2005. In the previous seven years, 1998-2004, an average of 62 companies per year had net capital losses for nine months.

Largest net capital gains were reported by Metropolitan, $1,029 million; SunAmerica, $582 million; Teachers Insurance & Annuity, $536 million; and John Hancock Life, $531 million. The largest net capital losses were posted by Primerica, $189 million, and General American, $144 million.

Only three of The Townsend 100 Companies reported both operating losses and net capital losses in nine months of 2005, the second lowest number in the last seven years. In the previous six years, 1999-2004, an average of 10 companies per year had both operating losses and net capital losses for nine months.

Largest aggregate surplus gains for nine months of 2005 were: Teachers Insurance & Annuity, $1.4 billion; Northwestern Mutual, $1.2 billion; IDS Life, $954 million; AFLAC, $750 million; and AXA Equitable, $678 million.

Excluding surplus paid in, the largest percent gains in surplus for nine months of 2005 were reported by United Healthcare, 31%; ING Life of America, 29%; and AFLAC, 26%.

Only 22 of The Townsend 100 had surplus declines in nine months of 2005, the third lowest number in the last eight years. The largest percentage surplus declines were: Travelers Insurance, 44%; Met Tower, 43%; Farmers, 42%; Life Investors, 12%; Transamerica Life, 12%; MetLife, 11%; and Prudential Retirement, 11%. All seven companies paid substantial shareholder dividends in nine months of 2005.

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