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.

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 years 1997-2005.

Net investment yield declined 151 basis points in the last five years, from 7.38% to 5.87%, but fell only three basis points in 2005. The life industry yield fell below 6% in 2004 and 2005, its lowest ratios since 1965.

Spurred by strong operating earnings, return on mean equity in both 2003 and 2004 set a record high of 11.1% for the 16-year history of this column but eased back to 10.8% in 2005. The last three years reflect the impact of large mutual companies converting to stock ownership and striving to achieve higher returns on equity, and sharp declines in life industry crediting rates on interest-sensitive products.

Capital ratios peaked at 12.0% at Dec. 31, 1999, then declined to 10.1% at Dec. 31, 2002. The three-year decline in capital ratio reversed itself in 2003, exceeding 11% at year-end 2004 and 2005. The improvement in capital ratio can be attributed to both the increase in operating earnings and achieving net capital gains in each year from 2003-2005.

The large table on page 8 shows the components of surplus changes for each of the individual companies in the Townsend 100. Surplus includes the AVR and IMR, while operating gain excludes amortization of the IMR.

Eighteen of the Townsend 100 Companies had operating gains exceeding $500 million in 2005 and comprised 60% of the Townsend 100 composite earnings. Five companies earned more than $1 billion and accounted for 27% of the Townsend 100 composite earnings: United Healthcare, $1.804 billion; Prudential, $1.706 billion; Teachers Insurance & Annuity, $1.55 billion; Metropolitan Life, $1.33 billion; and AFLAC, $1.243 billion.

Five companies had net capital gains exceeding $600 million in 2005 and comprised 74% of the Townsend 100 composite net capital gains: Metropolitan Life, $1.095 billion; New York Life, $936 million; Teachers Insurance & Annuity, $910 million; AXA Equitable, $876 million; and Northwestern Mutual, $610 million.

Only 29 companies in the Townsend 100 paid in new surplus funds in 2005, totaling $3.1 billion, down sharply from 42 companies totaling $5.5 billion in 2004. Two corporate transactions accounted for more than half of the 2004 paid-in surplus.

Meanwhile, 59 companies in the Townsend 100 paid record shareholder dividends of $20.7 billion in 2005, 39% higher than the previous record of 56 companies paying $14.9 billion in 2004. Shareholder dividends exceeded: $100 million for 36 of 100 companies; $200 million for 31 companies; $300 million for 22 companies; $400 million for 19 companies; $500 million for 13 companies; and $600 million for eight companies. Capital continues to flee the life industry.

Largest shareholder dividend payments in 2005 were Metropolitan Life, $3.2 billion; Travelers, $1.537 billion; Prudential, $1,486 billion; and United Healthcare, $1.4 billion.

Largest aggregate surplus gains in 2005 were Teachers Insurance & Annuity, $2.3 billion; Northwestern Mutual, $1.3 billion; AFLAC, $1.1 billion; and AXA Equitable, $1 billion.

Largest percentage surplus gains in 2005, excluding new surplus paid in, were achieved by ING Life of America, 50%; United Healthcare, 41%; AFLAC, 39%; and General American, 28%.

Twenty-nine of the Townsend 100 Companies had surplus declines in 2005. The largest percentage surplus declines were Travelers Insurance, 43%; Metropolitan Tower, 41%; Farmers New World, 40%; and Genworth Life & Annuity, 39%. All four companies paid large shareholder dividends in 2005.