One hundred companies, comprising 84% of life insurance industry assets, reported a record $28 billion in operating earnings in 2005, according to data from Insurance Consulting & Analysis, LLC. Operating earnings for the Townsend 100 Companies rose 130% from 2001 to 2005.
Earnings gains in the last four years arose from reductions in crediting rates by life insurers on interest-sensitive products, and increased assets and management fees on variable products resulting from a recovery in the stock market, and net capital gains.
However, significant increases in shareholder dividend payments held surplus growth to a modest 3.5% gain in 2005, after gains of 11.6% in 2004 and 16.7% in 2003. The latter was the highest gain since a 19.4% surplus gain in 1993, when companies propped up surplus to build risk-based capital ratios, to counter rating agency downgrades and to assuage solvency scares.
During 2003-2005, the payout ratio (shareholder dividends as a percent of operating earnings) for the Townsend 100 Companies showed an increasing trend of 37%, 56% and 74%, respectively. Life insurers are distributing their earnings, and keeping their capital growth down, to improve their returns on equity for shareholders.
Growth in aggregate dollar shareholder dividends has been accelerated by the conversion of several large mutual companies to stock companies: Metropolitan, Prudential, Equitable and John Hancock. Also, United Healthcare and AFLAC have been very profitable in the health insurance sector.
Only 10 of the Townsend 100 Companies had an operating loss in 2005, compared to 13, 19, 26, 12 and 7 companies, respectively, for 2000-2004. Losses exceeding $100 million were reported by Transamerica Occidental at $438 million and Fidelity & Guaranty at $195 million.
But, 46 of the Townsend 100 Companies reported a net capital loss in 2005, compared to 88, 48 and 31, respectively, in 2002-2004, as net capital gains fell sharply from $10 billion in 2004 to $5.9 billion in 2005. Largest net capital losses were posted by AGC Life at $387 million; Transamerica Occidental, $377 million; and Genworth Life, $361 million.
Only five of the Townsend 100 Companies reported both operating losses and net capital losses in 2005, compared to 11, 12, 20, 4 and 3 companies, respectively, for 2000-2004.
Shareholder dividend payments by the Townsend 100 Companies set a record of $20.7 billion in 2005, 10% over the previous record of $18.9 billion set in 2001 when several mutual companies converted to stock companies and paid large dividends to their new parent companies.
Shareholder dividends paid out exceeded surplus paid in by $22.9 billion in 2005, more than doubling the previous record of $9.4 billion in 2004. Surplus paid in for the Townsend 100 Companies set a record $13.4 billion in 2002 but has declined each year since then and was negative in 2005 (due to the acquisition of some Travelers business by Metropolitan Life).
Shareholder dividend payments alone resulted in surplus declines for 16 of the Townsend 100 Companies in 2005. In total, 29 companies had surplus declines in 2005, compared to only 10 companies in each of 2003 and 2004.
Table 1 shows the components of surplus changes for the Townsend 100 Companies for the years 2001-2005. Surplus includes the asset valuation reserve and the interest maintenance reserve, while operating gain excludes amortization of the interest maintenance reserve.
Table 2 shows new surplus paid in, shareholder dividends paid out and the net result for the Townsend 100 Companies for the years 1997-2005. Shareholder dividends have exceeded new surplus paid-in in seven of the last nine years, as the life industry tries to minimize capital accumulation and raise returns on equity.