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Capital Losses Reduce Surplus For 100 Companies In 1st Quarter

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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.

Return on mean equity, which ranged from a high of 11.1% to a low of 6.6% for the last 11 calendar years, 1997-2007, reflected the lower investment yield in 2008 and fell to an annualized ROE of 6.3% in the first quarter of 2008.

Capital ratios (total surplus to invested assets) for the life industry hit a record high 11.97% at 12/31/99, then fell to 10.1% in 2002 before rising steadily to 11.6% in 2007. With the industry decline in surplus in the first quarter of 2008, the capital ratio fell to 11%.

The table on page 8 shows the components of surplus changes for The Townsend 100 for the first quarter of 2008.

Largest operating earnings in the first quarter were posted by Allianz Life, $507 million; United Healthcare, $436 million; AFLAC, $419 million; Northwestern Mutual, $328 million; and Metropolitan Life, $317 million, totaling $2 billion of The Townsend 100′s $4.7 billion composite earnings.

Largest net capital gains were posted by Transamerica Occidental, $235 million; Pacific Life, $161 million; John Hancock, $128 million; and Hartford Life & Annuity, $105 million.

Only 8 of The Townsend 100 received new surplus paid-in in the first quarter, totaling a very modest $84 million. The largest infusions were Hartford Life, $83 million; Hartford Life & Accident, $25 million; and AGC Life, $16 million.

But, 23 of The Townsend 100 paid out shareholder dividends in the first quarter. United Healthcare, at $660 million; Great-West L&A, $300 million; Nationwide Life, $247 million; and Lincoln National, $200 million, comprised 53% of total shareholder dividends.

Surplus declined for 64 of The Townsend 100 companies in the first quarter of 2008. The 5 largest percentage declines were posted by subsidiaries of American International Group: AGC Life, off 34%; American International Life, off 28%; First Sunamerica, off 25%; AIG Annuity, off 22%; and AIG Life, off 22%.

Excluding surplus paid-in, the largest percentage gains in surplus were Pacific Life, up 9.5%; Transamerica Financial, up 8.7%; and Hartford Life & Annuity, up 8.5%.

Largest dollar gains in surplus in the first quarter were very low for the life industry historically; Pacific Life, $392 million, and Hartford Life & Annuity, $222 million.