BY FREDERICK S. TOWNSEND AND LAURIE DALLAIRE
One hundred companies, comprising 85% of life insurance industry assets, earned a record $30.4 billion in operating earnings in 2007, according to data from Insurance Consulting & Analysis, LLC, surpassing the previous record of $28 billion in 2005.
While shareholder dividends of $21.4 billion consumed 68% of operating earnings, and the industry recorded a net capital loss, increases in surplus paid-in and other accounting changes contributed to a 6.4% surplus gain for the life industry, the highest percentage gain since 11.6% in 2004.
Table 1 shows the components of surplus changes for the Townsend 100 Companies for the years 2003-2007. 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. Shareholder dividends have exceeded new surplus paid-in in 9 of the last 11 years, as the life industry tried to minimize capital accumulation and raise returns on equity.
New surplus paid-in of $4.6 billion in 2007 was the highest total since 2004, but still substantially lower than each of the years 2000-2004. Shareholder dividends of $21.4 billion fell short of the record $21.5 billion paid in 2006, resulting in a net surplus paid-out of $16.8 billion, down from 2005 and 2006 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 years 1997-2007.
Net investment yield declined 179 basis points from 1997 to 2005, from 7.66% to 5.87%, but recovered 7 basis points to 5.94% in 2007. The life industry yield of 5.87% in 2005 was its lowest 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 18-year history of these reports. Despite record earnings, and a 15% gain in earnings in 2007, the life industry ROE was only 10.2% in 2007.
Capital ratios peaked at 12.0% at 12/31/99, then declined to 10.1% at 12/31/02, before rising to 11.6% at 12/31/06. The 2007 improvement in the capital ratio can be attributed to both record operating earnings and increased capital contributions.