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Life Health > Life Insurance

9-Month Operating Earnings Hit Record High For Industry

By Frederick S. Townsend

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Operating earnings rose 16% in the first 9 months of 2007 for the Townsend 100 U.S. life insurance companies, which hold for 84% of industry assets.

Data produced by Insurance Consulting & Analysis, LLC, shows 9-month operating earnings rose from $19.2 billion to $22.3 billion, setting an industry record for 9-month operating earnings. If the Townsend 100 Companies earn $6 billion in the 4th quarter of 2007, they will set an industry record for a calendar year.

Net capital gains rose from $4.1 billion to $5.9 billion for 9 months, but are in jeopardy of incurring collateral debt obligation (CDO) losses in the 4th quarter from high-risk mortgage securities.

Shareholder dividend payments rose slightly from $13.0 billion to $13.2 billion, and consumed 47% of operating earnings and net capital gains. Total surplus funds increased 5.4% in the first 9 months of 2007, compared to 3.1% in 9 months of 2006.

Table 1 shows the components of surplus changes for The Townsend 100 Companies for the 5 years 2002-2006, and for the first 9 months of 2007. 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 and for 9 months of 2007.

If 4th quarter shareholder dividends are unchanged from 2006 to 2007, a record level of shareholder dividends will be established for the third consecutive year.

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 1997-2006, and for 9 months of 2007.

Net investment yield fell 51, 47 and 21 basis points in 12 months of 2002-2004, respectively, but may come in with a 5.9% industry yield for the 4th consecutive year in 2007.

As banks have incurred asset writedowns in 2007, they have lowered crediting rates on their certificates of deposit, enabling life insurers to expand margins on competing interest-sensitive products, and increase life industry operating earnings.

Return on mean equity for 9 months rose from 9.8% in 2006 to 10.5% in 2007, but was short of the 11.2% mark reported for 9 months of 2004 (a record high for the 18-year history of this column).

Capital ratios peaked at 12.0% on Dec. 31, 1999, then fell over 3 years to 10.1% on Dec. 31, 2002, before rising to 11.5% on Sept. 30, 2007. The capital ratio has been boosted for the last 5 years by record earnings, but depressed by large 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.

Twenty-three companies (a record) had operating gains exceeding $300 million in 9 months of 2007 (versus 14, 15, 18, 22 and 21, in 2002-2006, respectively). Largest gains were United Healthcare, $1.648 billion; Metropolitan Life, $1.415 billion; AFLAC, $1.324 billion; Prudential Insurance, $1.188 billion; and Teachers Insurance & Annuity, $1.055 billion.

Twelve of The Townsend 100 Companies had an operating loss in 9 months of 2007, the 4th lowest number in the last 8 years. Largest operating losses were reported by MetLife Investors, $466 million; Allianz Life, $329 million; Lincoln Life & Annuity, $190 million; and OM Financial Life, $114 million.

Only 37 of The Townsend 100 Companies had net capital losses for 9 months of 2007, down from 44 companies in 2006. In the previous 8 years, 1999-2006, an average of 60 companies per year had net capital losses for 9 months.

Largest net capital gains were reported by Northwestern Mutual, $1.037 billion; Teachers Insurance & Annuity, $746 million; and Transamerica Occidental, $553 million. The largest net capital losses were reported by Protective Life, $523 million; AGC Life, $425 million; and MetLife Insurance Company of CT, $415 million.

Only 5 of The Townsend 100 Companies reported both operating losses and net capital losses in 9 months of 2007. In the previous 8 years, 1999-2006, an average of 9 companies per year had both operating losses and net capital losses at 9 months.

Thirty-one of the Townsend 100 Companies paid in new surplus, but, net of accounting reversals of previous surplus paid-in, the 100 companies showed a negative contribution to surplus of $1.1 billion in 9 months of 2007.

Although aggregate shareholder dividend payments rose 2%, the number of companies paying shareholder dividends in the first 9 months of 2007 was only 51 companies, falling short of the record high of 53 companies in 9 months of 2006.

With a majority 51 companies (of the Townsend 100) paying shareholder dividends in 9 months of 2007, a total of 25 companies posted surplus declines. The largest percentage declines were: MetLife Investors USA, off 84%; Reassure America, off 35%; Life Investors, off 23%; Pruco Life of Arizona, off 21%;, and Swiss Re Life & Health, off 20%.

Large shareholder dividend payments and surplus declines included: Aetna Life, $994 million with a 6% surplus decline; Riversource Life, $800 million with a 12% surplus decline; AGC Life, $773 million with a 4% surplus decline; Lincoln National, $761 million with a 3% surplus decline; Great-West Life & Annuity, $548 million with a 10% surplus decline; and Variable Annuity Life, $525 million with a 2% surplus decline.

Two health insurers, United HealthCare and AFLAC, paid shareholder dividends of $1.5 billion and $0.8 billion, respectively, but had strong operating earnings and posted surplus gains of 14% and 12%, respectively, in the first 9 months of 2007.

Largest aggregate surplus gains for 9 months of 2007 were: Teachers Insurance & Annuity, $2.9 billion; Northwestern Mutual, $1.3 billion; and Metropolitan Life, $1.3 billion.

Excluding surplus paid-in, the largest percentage gains in surplus for 9 months of 2007 were reported by Monumental Life, 21%; Protective Life, 20%; and John Hancock Variable Life, 18%.

Frederick S. Townsend, President of Townsend & Schupp Capital Markets, can be reached at [email protected]. Laurie Dallaire, President of Insurance Consulting & Analysis, can be reached at [email protected].

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