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.
Only 18 companies had operating gains exceeding $300 million in 9 months of 2008 (versus 22, 21 and 23, in 2005-2007, respectively). Largest gains were Metropolitan Life, $1,928 million; United Healthcare, $1,324 million; AFLAC, $1,177 million; Teachers Insurance & Annuity, $1,038 million; and Mass Mutual, $986 million.
Twenty-two of The Townsend 100 Companies had an operating loss in 9 months of 2008, up from 12 companies in 9 months of 2007. Largest operating losses were reported by AXA Equitable, $1,697 million; Hartford Life, $593 million; John Hancock Life (USA), $404 million; Sun Life Canada (US), $321 million; and Allstate Life, $311 million.
Eighty-nine of The Townsend 100 Companies had net capital losses for 9 months of 2008, compared to 37 companies in 2007. In the previous 8 years, 1999-2006, an average of 60 companies per year had net capital losses for 9 months.
Largest net capital gains were reported by Metropolitan Tower, $146 million; Employers Re, $132 million; and Primerica, $120 million. The largest net capital losses were reported by 6 subsidiaries of AIG, exceeding $3.6 billion in each company.
For the 16 companies with net capital losses exceeding $1 billion, Table 4 shows the breakdown between realized capital losses and unrealized capital losses (changes in market value of stocks and bonds held for sale).
AGC Life is a holding company and its unrealized losses reflect changes in surplus in subsidiary companies. Realized net capital losses exceeded $1 billion for 5 AIG subsidiaries, plus Teachers Insurance & Annuity and Allianz Life of North America.
Unrealized capital losses exceeded $1 billion for 4 AIG subsidiaries, plus AXA Equitable, Northwestern Mutual, Hartford Life & Accident, and Prudential.
Nineteen of The Townsend 100 Companies reported both operating losses and net capital losses in 9 months of 2008, up from 5 companies in 2007. In the previous 8 years, 1999-2006, an average of 9 companies per year had both operating losses and net capital losses at 9 months.
Thirty-two of the Townsend 100 paid in new surplus in 9 months of 2008, led by 5 AIG subsidiaries: AGC Life, $13.9 billion; American General TX, $6.1 billion; AIG Annuity, $5.8 billion; Variable Annuity Life, $3.0 billion; and Sunamerica, $3.0 billion.
Although a majority of The Townsend 100 Companies paid shareholder dividends in 9 months of 2006 and 2007, a record 53 and 51 companies, respectively, only 42 companies paid shareholder dividends in 9 months of 2008.
Largest payers of shareholder dividends were: United Healthcare, $1.7 billion, with a 21% surplus decline; Great-West Life & Annuity, $1.7 billion, with a 41% surplus decline; General American, $1.3 billion, with a 50% surplus decline; and Metropolitan Life, $1.3 billion, with a 7% surplus decline.
With 89 companies reporting net capital losses, and 42 companies paying shareholder dividends, 83 of The Townsend 100 Companies posted a surplus decline in the first 9 months of 2008. Largest percentage declines were: General American, 50%; Great-West L&A, 41%; and AXA Equitable, 38%.
Largest aggregate surplus gains for 9 months of 2008 were: MetLife CT (formerly Travelers), $1.0 billion; Genworth Life & Annuity, $0.4 billion; and John Hancock Life (USA), $0.3 billion.
Excluding surplus paid-in, the largest percentage gains in surplus for 9 months of 2008 were MetLife CT, 20%; Swiss Re, 10%; and Standard Insurance, 9%.
Frederick Townsend, President of Townsend Independent Actuarial Research Alliance (TIARA) produces due diligence reports on life insurers for insurers, distributors, and buyers of insurance products, and can be reached at email@example.com. Laurie Dallaire can be reached at Laurie.Dallaire@ic-a.com