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December 13, 2008 at 07:00 PM
The 100 largest U.S. life insurance companies, comprising 84% of industry assets, reported net capital losses of $77 billion in the first 9 months of 2008, equal to 25% of their $307 billion of total surplus funds at the beginning of 2008.
For 9 months of 2008, The Townsend 100 Companies partially offset the $77 billion of net capital losses with $41 billion of new surplus paid-in and $15 billion of net operating gains.
In the 3rd quarter alone, net capital losses were $48 billion, partially offset by $28 billion of new surplus paid-in and $3 billion of net operating gains. Expectations are that net capital losses in the 4th quarter will again exceed the sum of new surplus paid-in and net operating gains.
Data produced by Insurance Consulting & Analysis, LLC, shows that 83 of the 100 largest U.S. life insurers had a decline in total surplus funds in the first 9 months of 2008, and 24 companies had a surplus decline exceeding 20% of their surplus at the beginning of 2008.
Surplus funds for The Townsend 100 Companies fell 4.7% in the first half of 2008, and 6.8% in the third quarter. For 9 months, industry surplus fell 11.6%.
Table 1 shows the components of surplus changes for The Townsend 100 for the 5 years 2003-2007, and for the first 9 months of 2008. Surplus includes the asset valuation reserve and the interest maintenance reserve, while operating gain excludes amortization of the interest maintenance reserve.
With defaults on bonds and reduced dividends on stocks, net yield on mean invested assets declined by 47 basis points in the first 9 months of 2008, producing earnings in that period that were only 48% of earnings for 12 months of 2007. It appears that full year earnings for 2008 may fail to equal any of the last 5 years.
Table 2 shows new surplus paid-in, shareholder dividends paid out, and the net result, for The Townsend 100 Companies for the years 1997-2007 and for 9 months of 2008.
Surplus paid-in of $40.7 billion in 9 months of 2008 is triple the record high for 12 months ($13.3 billion in 2002, when several mutual insurers converted to stock companies).
Shareholder dividends of $13 billion in the first 9 months of 2008 may fail to reach the $20 billion mark for the full year 2008, falling short of the 2005-2007 annual payouts.
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 9 months of 2008.
Net investment yield fell 51, 47 and 21 basis points in 12 months of 2002-2004, respectively, then stayed at the 5.9% level from 2004 through 2007. During 2008, the industry net yield fell from 5.94% to 5.47%, sharply impacting industry earnings.
Return on mean equity for 9 months fell from 10.2% in 2007 to 6.8% in 2008, the lowest ROE since The Townsend 100 reported a 6.6% ROE in 2001.
Capital ratios peaked at 12% at 12/31/99, then fell for 3 years to 10.1% at 12/31/02, before rising to 11.6% at 12/31/07. The net capital losses incurred in 2008 have driven The Townsend 100 capital ratio back down to 10.1% at 9/30/08. If net capital losses in the 4th quarter drive the industry’s capital ratio below 10%, that would be the lowest industry ratio in the 12 years displayed in this table.
The large table on page 40 shows the components of surplus changes for each of the individual companies in The Townsend 100 Companies.
