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Life Health > Life Insurance

9-Month 2006 Surplus Rose 3.1%

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Operating earnings declined 5% and shareholder dividends fell 20%, from 9 months of 2005 to 9 months of 2006, for the Townsend 100 U.S. life insurance companies, accounting for 84% of industry assets.

Data produced by Insurance Consulting & Analysis LLC shows operating earnings fell from a record $20.2 billion to $19.2 billion in the 9 months of 2005 and 2006, respectively, while shareholder dividend payments dropped from $16.3 billion to $13 billion, for the same period.

Although aggregate shareholder dividend payments declined 20%, the number of companies paying shareholder dividends in the first 9 months of 2006 hit a record high of 53 companies, obliterating the previous record of 45 companies in 2001 and 2005.

Lack of new investment in the life industry was further demonstrated in 9 months of 2006, when only 21 of The Townsend 100 paid in new surplus–the lowest total since 19 companies in 2001. Net of accounting reversals of previous surplus paid-in, the 100 showed a negative contribution to surplus of $1.2 billion.

Shareholder dividend payments plus the negative surplus paid-in totaled $14.2 billion, which consumed 74% of the $19.2 billion in operating earnings. However, surplus growth for 9 months of 2006 was 3.1%, compared to a growth rate of 1.3% for 6 months of 2006 (when the second quarter showed a surplus decline).

Table 1 shows the components of surplus changes for The Townsend 100 Companies for the 5 years 2001-2005 and for the first 9 months of 2006. Surplus includes the asset valuation reserve and the interest maintenance reserve, while operating gain excludes amortization of the interest maintenance reserve.

It appears that aggregate numbers in each category for the full year 2006 may fall short of 2005 totals.

Table 2 shows new surplus paid-in, shareholder dividends paid out and the net result for The Townsend 100 for the years 1997-2005 and for 9 months of 2006.

The year 2006 appears to have moderated from 2004 and 2005 levels.

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 9 months of 2006.

Net investment yield fell 51, 47, 21 and 3 basis points in 12 months of 2002-2005, respectively, but increased to a 9 basis point decline in 9 months of 2006. Life insurers reacted by lowering crediting rates on interest-sensitive products through 2005, with the net result being 3 consecutive years of record operating earnings.

As banks have become more aggressive with 5-year certificates of deposits paying interest in a range of 5% to 5.4%, crediting rates have moved up on many interest-sensitive life and annuity products, contributing to a narrowing of profit margins and a decline in operating earnings.

Return on mean equity was 11.2% for 6 months of 2004 (a record high for the 17-year history of this series) but fell to 9.8% for 9 months of 2006. The year 2006 will probably record the lowest return on mean equity in the last 4 years.

Capital ratios peaked at 12% on 12/31/99, then fell for 3 years to 10.1% on 12/31/02 before rising to the 11% level in 2004-2006. The capital ratio has been boosted for the last 4 years by record earnings, but has been depressed by shareholder dividend payments.

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

Twenty-one companies had operating gains exceeding $300 million in 9 months of 2006 (versus 14, 15, 18 and 22, in 2002-2005, respectively). Largest gains were United Healthcare, $1.43 billion; AFLAC, $1.25 billion; and Teachers Insurance & Annuity, $1.11 billion.

Eleven of The Townsend 100 Companies had an operating loss in 9 months of 2006–the third lowest number in the last 7 years. Largest operating losses were reported by Fidelity & Guaranty, $242 million; and MetLife Investors, $166 million.

Nearly half (44) of The Townsend 100 Companies had net capital losses for 9 months of 2006, up from 32 companies in 2005. Net capital gains for 9 months fell from $6.8 billion in 2005 to $4.1 billion in 2006. In the previous 7 years, 1998-2004, an average of 62 companies per year had net capital losses for 9 months.

Largest net capital gains were reported by AXA Equitable, $671 million; Teachers Insurance & Annuity, $671 million; and Transamerica Occidental, $529 million. The largest net capital losses were AGC Life, $347 million; Genworth Life, $163 million; and MetLife of Connecticut, $123 million.

Only 7 of The Townsend 100 Companies reported both operating losses and net capital losses in 9 months of 2006. In the previous 7 years, 1999-2005, an average of 9 companies per year had both operating losses and net capital losses at 9 months.

Largest aggregate surplus gains for months of 2006 were: Teachers Insurance & Annuity, $1.5 billion; AXA Equitable, $1.2 billion; Metropolitan Life, $1.1 billion; and Transamerica Occidental, $944 million.

Excluding surplus paid-in, the largest percent gains in surplus for 9 months of 2006 were reported by Transamerica Occidental, 32%; Great-West L&A, 22%; United Healthcare, 18%; and AFLAC, 18%.

With a record 53 companies (of the Townsend 100) paying shareholder dividends in 9 months of 2006, a total of 31 companies posted surplus declines. The largest percentage declines were: Chase Life Insurance & Annuity, 43%; Reassure America, 40%; and MetLife Investors, 31%.


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