Strong operating earnings, high capital gains and a decline in shareholder dividend payments produced a 4.3% gain in surplus in the first 6 months of 2007 for the Townsend 100 Composite of 100 life insurers with 84% of the U.S. life industry's assets.
According to data produced by Insurance Consulting & Analysis, LLC, surplus funds grew 2.4% in the first quarter, and 2.1% in the second quarter of 2007, creating the best surplus growth performance for 6 months since 2004.
Table 1 (see page 32) shows the components of surplus changes for the Townsend 100 Companies for the last 5 calendar years, and for 6 months of this year. 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 full years 1997-2006 and for 6 months of 2007. The excess of shareholder dividends paid out over new surplus paid in totaled $8.9 billion in 6 months of 2007, down from $15.1 billion and $10.1 billion in the first 6 months of 2005 and 2006, respectively. Nevertheless, the $8.9 billion net surplus paid-in in 6 months of 2007 exceeds the 12-month numbers for any of the first 15 years of this column (1990-2004).
Forty-two (down from 47 in 2006) of the Townsend 100 Companies paid shareholder dividends in the first half of 2007, with 19 (down from 26 in 2006) companies each paying out more than $100 million. Eight companies comprised 60% of the total $8.3 billion of shareholder dividends paid in the first half of 2007: United Healthcare, $1,120 million; Sunamerica, $700 million; AFLAC, $682 million; Aetna, $675 million; Nationwide, $475 million; AGC Life, $453 million; Principal, $450 million; and Lincoln, $442 million.
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 6 months of 2007.
Net investment yield fell 29, 51, 47, 21 and 3 basis points in 12 months of 2001-2005, respectively, before rising 5 basis points in 2006 to 5.92%. Life Industry yield has been a constant 5.9% from 2004 through 6 months of 2007. Ten to 30-year Treasury rates remain well below 5%, and are unchanged from mid-2006 to mid-2007.
Return on mean equity for the Townsend 100 Companies fell from 10% for 6 months of 2006 to 9.9% for 6 months of 2007, reflecting a higher retention of earnings. Calendar year returns on mean equity exceeded 10% in 1990-91, and fell below 10% from 1992-2002, before rising to the 11% level in 2003-2005.
With net surplus paid-out consuming only 45% of operating earnings, the capital ratio (total surplus funds to invested assets) for the Townsend 100 Companies rose to 11.55% in the first half of 2007. This is the highest capital ratio for the life industry since 2000, and is challenging the industry record of 11.97% set in 1999.
With a strong stock market, annuity sales have shifted from fixed annuities to variable annuities, reducing growth in general account assets and increasing separate account assets. This tends to push the capital ratio upward.
