In comparison to the mortgage malaria causing near-death for some financial institutions, the life insurance industry appears to be suffering from only a mild fever in early 2008.
One hundred companies, comprising 84% of life industry assets, reported a 3.6% decline in total surplus funds in the first quarter of 2008, as their net capital losses of $13.5 billion were nearly triple their $4.7 billion of operating earnings.
Only 36 of The Townsend 100 Companies reported a surplus gain in the first quarter of 2008. Twenty-five companies had operating losses, and another 32 companies had net capital losses that exceeded their operating earnings.
In 2007, The Townsend 100 Companies posted a record $30.4 billion of operating gains for 12 months, but in just the first 3 months of 2008 posted net capital losses equal to 44% of the prior year’s record 12-month operating gains.
Only 26 of The Townsend 100 had net capital gains in the first quarter of 2008. Companies with the largest net capital losses were AGC Life, $2.7 billion; AIG Annuity, $1.2 billion; American Life DE, $1.2 billion; and American General TX, $1 billion. All four companies are subsidiaries of American International Group.
Data from Insurance Consulting & Analysis, LLC, shows a low 1.5% increase in invested assets from 3/31/07 to 3/31/08, but a 2.3% decline in net investment income and a 38% decline in net operating gain from the first quarter of 2007 to 2008.
Table 1 shows the components of surplus changes for The Townsend 100 for the years 2003-2007 and the first quarter of 2008. Surplus includes the asset valuation reserve and interest maintenance reserve, while operating earnings exclude the amortization of the IMR.
Table 2 shows the trend of net surplus paid in/out for The Townsend 100. Surplus infusions were ample in 1991-93 to overcome consumer solvency fears, meet rating agency demands, and meet 12/31/93 risk-based capital standards.
But, net surplus paid in/out showed an outflow in 12 of the last 14 years, 1994-2007, because many companies had built high capital ratios, and were seeking to increase returns on retained equity. This trend is continuing in 2008.
Table 3 shows the trends of net investment yield on mean invested assets, return on mean equity, and capital ratio (total surplus to invested assets) for The Townsend 100.
Net investment yield fell 171 basis points in 10 years, from 9.09% in 1990 to 7.38% in 2000, then fell by 148 basis points in just 4 years, to 5.9% in 2004. After remaining a constant 5.9% for the last 4 calendar years 2004-2007, net yield fell to a 5.5% annualized rate in the first quarter of 2008.