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October 19, 2008 at 04:00 PM
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.
