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Record Shareholder Dividends Depressed Surplus Growth In 2006

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One hundred companies, comprising 85% of life insurance industry assets, paid a record $21.6 billion in shareholder dividends in 2006, according to data from Insurance Consulting & Analysis LLC, surpassing the previous record of $20.7 billion in 2005.

Operating earnings of $26.3 billion in 2006 fell 6% from the record $28 billion set in 2005, and were 2% below the second-highest earnings of $26.8 billion, recorded in 2004. Life insurers began to ratchet up crediting rates on interest-sensitive policies in 2006, with a moderation in interest rate spreads.

Record shareholder dividend payments held surplus growth to a modest 5.6% gain in 2006, well below 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.

Fourteen companies paid more than $500 million, while 25 companies paid more than $300 million, and 44 of the Townsend 100 Companies paid more than $100 million in shareholder dividends in 2006. This reflects not only conversion of many large mutual companies to stock companies, but also consolidation of companies in the life industry.

Only 9 of the Townsend 100 had an operating loss in 2006, compared to 13, 19, 26, 12, 7 and 10 companies, respectively, for 2000-2005. The largest losses were reported by Transamerica Occidental, $510 million; OM Financial, $434 million; Allianz, $299 million; Employers Re, $266 million; and Jefferson-Pilot Life, $156 million.

Only 44 of the Townsend 100 Companies reported a net capital loss in 2006, compared to 88, 48, 31 and 46 companies, respectively, in 2002-2005, as net capital gains rose to $9.7 billion in 2006 from $5.9 billion in 2005. Largest net capital losses were posted by AGC Life, $651 million; Genworth Life, $397 million; and Life Investors, $245 million.

Only 1 of the Townsend 100 Companies reported both operating losses and net capital losses in 2006, compared to 11, 12, 20, 4, 3 and 5 companies, respectively, for 2000-2006. RGA Reinsurance had $65 million in operating losses and $12 million in net capital losses

Shareholder dividends paid-out exceeded surplus paid-in in by $19.9 billion in 2006, down slightly from $22.9 billion in 2005, but more than double the previous record of $9.4 billion in 2004. Surplus paid-in for the Townsend 100 Companies was only $1.6 billion in 2006, the second lowest amount in the last 10 years.

Table 1 shows the components of surplus changes for the Townsend 100 Companies for the years 2002-2006. 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 1997-2006. Shareholder dividends have exceeded new surplus paid-in in 8 of the last 10 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 1997-2006.

Net investment yield declined 151 basis points from 2000 to 2005, from 7.38% to 5.87%, but rose 5 basis points to 5.92% in 2006. The life industry yield of 5.87% in 2005 was its lowest yield 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 17-year history of these reports, but eased back to 10.8% in 2005 and 9.7% in 2006. Operating earnings in 2006 were short of 2004 and 2005 levels.

Capital ratios peaked at 12% on Dec. 31, 1999, then declined to 10.1% on Dec. 31, 2002, before rising to 11.3% on Dec. 31, 2006. The improvement in capital ratio can be attributed to both high operating earnings and achieving net capital gains in each year 2003-2006.

The large table on page 8 shows the components of surplus changes for each of the individual companies in the Townsend 100.

Eighteen of the Townsend 100 Companies had operating gains exceeding $500 million in 2006 and comprised 61% of the Townsend 100 composite earnings. Four companies earned more than $1 billion and accounted for 26% of the Townsend 100 composite earnings: United Healthcare, $2.192 billion; AFLAC, $1.66 billion; Teachers Insurance & Annuity, $1.59 billion; and Metropolitan Life, $1.32 billion.

Four companies had net capital gains exceeding $1 billion in 2006 and comprised 62% of the Townsend 100 composite net capital gains: Metropolitan Tower, $2.71 billion; Prudential, $1.15 billion; AXA Equitable, $1.11 billion; and Teachers Insurance & Annuity, $1.03 billion.

Thirty-nine of the Townsend 100 Companies paid in new surplus funds of $4.1 billion in 2006, up from only 29 companies that paid in $3.1 billion of new surplus in 2005.

The largest aggregate surplus gains in 2006 were Teachers Insurance & Annuity, $2.6 billion; Northwestern Mutual, $1.8 billion; and Axa Equitable, $1.7 billion.

The largest percentage surplus gains in 2006, excluding new surplus paid-in, were achieved by Pruco Life (AZ), 80%; Transamerica Occidental, 32%; Metropolitan Tower, 32%; United Healthcare, 32%; General American, 28%; AXA Equitable, 26%; John Hancock Life (USA), 23%; and CM Life, 22%.

Thirty-one of the Townsend 100 Companies had surplus declines in 2006. The largest percentage surplus declines were Chase Insurance, 41%; Reassure America, 36%; First Colony, 28%; and Connecticut General, 16%. All 4 companies paid large shareholder dividends.