One hundred companies, comprising 84% of life industry assets, reported a strong 2.2% gain in total surplus funds in the first quarter of 2006, as operating gains and net capital gains improved over 2005 levels.

Data from Insurance Consulting & Analysis, L.L.C., shows a 2.2% gain in total surplus–which consists of surplus, asset valuation reserve (AVR) and interest maintenance reserve (IMR)–for The Townsend 100 in the first quarter of 2006, compared to a 1.7% gain in total surplus in the first quarter of 2005.

Net yield on mean invested assets rose to 5.83% in 2006′s first quarter from 5.65% in the first quarter of 2005, reflecting the upward movement in interest rate levels in the last 12 months.

Operating gains hit an annualized level of $30 billion for The Townsend 100, which would set a record if sustained for the full year 2006. Annualized return on mean equity of 11.3% for 2006 would also set a record high for the 17-year history of this series of articles.

Net capital gains were $2.4 billion in the first quarter of 2006 for The Townsend 100, compared to $5.9 billion for the full year 2005. However, a continuing rise in interest rates, or the impact of rising gas prices on corporate profits, could reduce capital gains in the remainder of 2006.

Twenty-nine of The Townsend 100 companies reported a decline in total surplus in the first quarter of 2006, compared to 26 companies in 2005′s first quarter, primarily due to large shareholder dividend payments.

Table 1 shows the components of surplus changes for The Townsend 100 for the years 2001-2005 and the first quarter of 2006. Surplus includes the AVR and IMR, while operating earnings exclude the amortization of the IMR.

Table 2 shows the trend of net surplus paid in/out for The Townsend 100. Surplus infusions were ample in 1991-1993 to overcome consumer solvency fears, meet rating agency demands, and meet Dec. 31, 1993, risk-based capital standards.

However, net surplus paid in/out showed an outflow in 10 of the last 12 years (1994-2005), because many companies had built high capital ratios and were seeking to increase returns on retained equity. This trend is continuing in 2006.

Table 3 shows the trends of net investment yield on mean invested assets, return on mean equity and capital ratio (total surplus to invested assets) for The Townsend 100 companies.

Net investment yield fell 171 basis points in 10 years, from 9.09% in 1990 to 7.38% in 2000, and then dropped by 148 basis points in just four years, to 5.90% in 2004. With the recent upturn in interest rates, industry net yield is flattening out.

Return on mean equity was 11.3% in the first quarter of 2006 and may surpass the 11.1% returns achieved in both 2003 and 2004.

Higher returns on equity in 2003-2004 may be attributed to mutual companies converting to stock companies and seeking higher returns, and aggressive shareholder dividend policies in many companies. ROE in 2006 reflects a record level of earnings on an equity base reduced by $20.7 billion of dividends in 2005.

Capital ratios (total surplus to invested assets) for the life industry hit a record high 11.97% at Dec. 31, 1999, but have been in a range of 10.1% to 11.2% for the six years 2001-2006.

The table on page 8 shows the components of surplus changes for The Townsend 100 companies for the first quarter of 2006.

Largest operating earnings in the first quarter were posted by Metropolitan with $453 million; AFLAC, $450 million; United Healthcare, $421 million; First Colony, $339 million; AXA Equitable, $323 million; and Teachers Insurance & Annuity, $310 million. These companies accounted for 31% of The Townsend 100′s operating earnings.

Only nine of The Townsend 100 companies had operating losses, but five companies had both operating losses and capital losses in the first quarter. Fidelity & Guaranty Life had a $39 million operating loss and a $25 million net capital loss.

Forty-one of The Townsend 100 companies had net capital losses in the first quarter. Largest net capital losses were reported by AGC Life with $175 million and First Colony with $139 million.

The largest net capital gains were recorded by Transamerica Occidental with $666 million and AXA Equitable with $484 million.

Only 18 of The Townsend 100 companies received new surplus paid-in in the first quarter, totaling a very modest $90 million. The largest infusions were American Equity Investors ($30 million) and AXA Equitable ($14 million).

Twenty-seven of The Townsend 100 companies paid out shareholder dividends in the first quarter. United Healthcare paid out $635 million; Aetna Life, $624 million; Principal, $425 million; AGC Life, $254 million; Connecticut General, $208 million; American General TX, $200 million; and Variable Annuity, $200 million. These companies comprised 70% of total shareholder dividends paid out.

Surplus declined for 29 of The Townsend 100 companies in the first quarter of 2006, up from 26 companies in the first quarter of 2005. Largest percentage declines were Aetna Life at 15% and United Healthcare at 9%, both due to their large dividend payments.

Excluding surplus paid-in, the largest percentage gains in surplus were Transamerica Occidental at 25% and First Colony at 20%.

Largest dollar gains in surplus in the first quarter were posted by AXA Equitable at $822 million and Transamerica Occidental at $702 million.