Financial markets continued to cause turmoil in the second quarter of 2008, as net capital losses of $14.9 billion nearly doubled net operating gains of $7.5 billion 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 fell 3.6% in the first 3 months, and 4.7% in the first 6 months of 2008, for the Townsend 100.

Table 1 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.

For 6 months, net capital losses of $28.4 billion exceeded the sum of operating gains of $12.2 billion and new surplus paid-in of $12.3 billion. Six-month capital losses of $28.4 billion nearly wiped out the total capital gains of $35.6 billion reported by these same 100 companies during the 4 full years 2003-2006.

While 36 of the Townsend 100 Companies had surplus gains in the first 3 months of 2008, only 29 companies had surplus gains for the first 6 months of 2008.

Table 2 shows new surplus paid-in, shareholder dividends paid out, and the net result, for the Townsend 100 Companies for the full years 1997-2007 and for 6 months of 2008.

Surplus paid-in of $12.3 billion in the first 6 months of 2008 nearly broke the record for 12 months surplus paid-in of $13.4 billion in 2002 when several large mutual companies converted to stock companies.

The excess of surplus paid-in over shareholder dividends paid out, or net surplus paid-in, was $3.6 billion in 6 months of 2008, compared to deficits in the previous 5 full calendar years, 2003-2007. Net surplus paid-in for the full year 2008 may set a record for the 19-year history of these reports (1990-2008).

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 1997-2007, and for 6 months of 2008.

Net investment yield has been a constant 5.9% for the life industry for the last 4 years, 2004-2007, respectively, but fell 53 basis points in the first 6 months of 2008 to 5.4%. This reflects loss of investment income on troubled securities, and 10- to 30-year Treasury rates remaining below 5% during the last year.

Return on mean equity for the Townsend 100 Companies, slid to 8.1% in the first 6 months of 2008. This was down from 10% for first 6 months of 2006 and 9.9% for 6 months of 2007. If this continues, 2008 may show the lowest return on mean equity since reporting a 6.6% return for 12 months of 2001.

With net capital losses causing surplus declines for 71 of the Townsend 100 Companies, their capital ratio (total surplus funds to invested assets) fell from 11.6% to 10.9% in the first 6 months of 2008. This is the lowest ratio since 10.7% at 12/31/03.

The large table on page 46 shows components of surplus changes for each of the companies in the Townsend 100.

Only 32 of the Townsend 100 Companies had operating earnings of more than $100 million in 6 months of 2008, down from 38 companies in 6 months of 2007 and 39 companies in the same period of 2006.

Ten companies comprised 53% of the Townsend 100 Composite earnings: AFLAC, with $864 million; United Healthcare, $861 million; Metropolitan Life, $794 million; Allianz, $699 million; Aetna, $620 million; Mass. Mutual, $606 million; American Life, $561 million; TIAA, $523 million; Northwestern Mutual, $517 million; and MetLife CT, $24 million.

Two health insurance companies posted the largest operating gains, while Allianz Life of North America went from a $397 million operating loss in 6 months of 2007 to a $699 million operating gain in 6 months of 2008.

Allianz, American Equity, Aviva and Old Mutual are among the largest writers of equity indexed annuities, and it will be interesting to watch the impact on their financial results of any hedging defaults, and guaranteed benefits in a declining stock market.

Seventeen of the Townsend 100 Companies had operating losses, and 16 companies had both operating losses and net capital losses, in the first 6 months of 2008. Highest operating losses for 6 months of 2008 were reported by John Hancock Life (USA), $223 million; Hartford Life, $189 million; Genworth Life & Annuity, $172 million; MetLife Investors, $121 million; and Sun Life Canada US, $108 million.

Before the current financial crisis exploded, 73 of the Townsend 100 Companies had net capital gains in the first half of 2007 (up from 50 companies in 6 months of 2006). But only 15 companies had net capital gains in 6 months of 2008.

Largest net capital gains were reported by: Employers Re, $266 million; Transamerica Occidental, $240 million; John Hancock, $199 million; and Pacific Life, $101 million.

Largest net capital losses were reported by AGC Life, $5.6 billion; AIG Annuity, $2.5 billion; American General Life, $2.3 billion; SunAmerica, $1.8 billion; and Variable Annuity, $1.7 billion, all subsidiaries of American International Group. Adding in another AIG subsidiary, American Life, with $1.1 billion in net capital losses, the 6 companies comprised more than half ($15 billion) of the $28.4 billion total net capital losses for the Townsend 100 Companies.

With the U.S. government taking over 80% control of AIG in return for an $85 billion loan, it is possible that one or more of the above 6 companies may be sold by the time this article reaches readers. These 6 companies did have $9.6 billion of new surplus paid-in in the first half of 2008, offsetting some of the $15 billion in capital losses.

Only 35 (down from 42 in 2007 and 47 in 2006) of the Townsend 100 Companies paid shareholder dividends in the first half of 2008. Only 18 (down from 19 in 2007 and 26 in 2006) companies paid shareholder dividends exceeding $100 million in 6 months of 2008.

Six companies comprised 62% of the total $8.7 billion of shareholder dividends paid in the first half of 2008: Great-West Life & Annuity, $1,665 million; United Healthcare, $1,095 million; Prudential Insurance, $950 million; AFLAC, $758 million; John Hancock, $500 million; and Riversource, $400 million.

Seven companies had surplus gains exceeding $400 million in 6 months of 2007 (compared to 8, 4 and 6 companies in 6 months of 2004-2006): TIAA, with $3,321 million; Metropolitan, $1,439 million; Northwestern Mutual, $882 million; New York Life, $829 million; Transamerica Occidental, $544 million; AXA, $536 million; and Lincoln L&A, $521 million.

Excluding surplus paid-in, the largest percent gains in surplus for 6 months of 2007 were reported by Life Investors, 25%; Transamerica Occidental, 15%; and 14% each for John Hancock Variable, Monumental Life, and Sun Life Canada-US.

Surplus declined for 22 of the Townsend 100 Companies in 6 months of 2007, down from 30 companies in 6 months of 2007. Only 4 companies had double-digit declines (down from 10 companies in 6 months of 2006): Swiss Re, 22%; Reassure America, 20%; Genworth L&A, 12%; and United Healthcare, 12%.