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A Tidal Wave Of Red Ink

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Operating data for the Townsend 100 Composite of the 100 largest U.S. life insurance companies, comprising 85% of industry assets, shows $100 billion of net capital losses, $70 billion of new capital infusions, an $816 million net operating loss, and a 12% decline in total surplus funds in 2008.

Net capital losses of $100 billion in 2008 consumed 33% of surplus funds available on January 1, 2008, according to data from Insurance Consulting & Analysis, LLC. But the surplus decline was held to 12% after parent companies paid in $70 billion of new surplus in 2008, compared to a total $65 billion for the previous 11 years (1997-2007).

Table 1 shows the components of surplus changes for the Townsend 100 Companies for the last 5 years. Surplus includes the asset valuation reserve and the interest maintenance reserve, while operating gain excludes amortization of the interest maintenance reserve.

While financial turmoil in 2008 caused both realized and unrealized capital losses in the bond and stock portfolios of major life insurers, the loss of investment income on bonds and stocks turned a record $30 billion of operating earnings in 2007 into an operating loss in 2008. In the 20-year history of this series of reports, the life industry has never come close to reporting an operating loss.

While surplus infusions in 2008 exceeded total infusions for the past decade, the Townsend 100 Companies preserved capital by reducing shareholder dividend payments to $16.9 billion in 2008, well below aggregate dividends paid in each of 2005-2007.

Table 2 shows new surplus paid-in, shareholder dividends paid out, and the net result, for the Townsend 100 Companies for the last 12 years. Net surplus paid-in of $53 billion in 2008 nearly offset the $59 billion of net surplus paid-out in 2005-2007.

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 last 12 years.

Net investment yield declined 179 basis points from 1997 to 2005, from 7.66% to 5.87%, but recovered 7 basis points to 5.94% in 2007. The decline of 43 basis points in 2008, to a 5.51% industry yield, is the largest decline since drops of 51 and 47 basis points in 2002 and 2003, respectively, and the lowest industry yield ratio in 45 years.

Spurred by the decline in investment yield, return on mean equity was negative in 2008, following 5 consecutive years of 10% and 11% ROE’s for the life industry.

Capital ratios peaked at 12% at 12/31/99, then retreated to 11.6% at 12/31/07, before falling below 10% in 2008 (for the only time in the last 12 years).

The large table on page 18 shows the components of surplus changes for each of the individual companies in the Townsend 100.

While 22 of the Townsend 100 Companies had operating gains exceeding $500 million in 2007, only 14 companies reached this level in 2008.

Six companies earned more than $1 billion in 2008 (down from 8 companies in 2007): United Healthcare, $1.89 billion; AFLAC, $1.78 billion; American Life (DE), $1.24 billion; Northwestern Mutual, $1.12 billion; Teachers Insurance & Annuity, $1.11 billion; and Aetna Life, $1.06 billion.

Thirty-eight of the Townsend 100 Companies had an operating loss in 2008, compared to 8 and 13 companies in 2006 and 2007, respectively. Operating losses exceeded $500 million for 14 companies, passed $1 billion for 7 companies, and were more than $2 billion for three companies: Hartford Life & Annuity, $2.9 billion; AXA Equitable, $2.8 billion; and Hartford Life, $2.2 billion.

Only 3 companies had net capital gains exceeding $500 million in 2008 (down from 6 companies in 2007): Hartford Life, $1.66 billion; Riversource, $718 million; and Pacific Life, $504 million.

Ninety of the Townsend 100 Companies reported a net capital loss in 2008, compared to 88, 48, 31, 46, 44 and 58 companies, respectively, in 2002-2007. Largest net capital losses were posted by 3 subsidiaries of American International Group: AGC Life (a holding company for other AIG life subsidiaries with unrealized losses), $21.17 billion; AIG Annuity, $9.46 billion; and American General (TX), $9.38 billion.

While 21 companies each had total net capital losses exceeding $1 billion, 3 of the 21 companies had realized losses of less than $400 million. Largest realized net capital losses were: AIG Annuity, $8.13 billion; Variable Annuity, $4.73 billion; Teachers Insurance & Annuity, $4.45 billion; American General (TX), $4.16 billion; and Sunamerica Life, $2.73 billion.

Thirty of the Townsend 100 Companies reported both operating losses and net capital losses in 2008, compared to 11, 12, 20, 4, 3, 5, 1 and 7 companies, respectively, for 2000-2007.

Sixty-four of the Townsend 100 Companies paid in new surplus funds of $70.4 billion in 2008, up from 41 companies paying in $4.6 billion in 2007. Five AIG subsidiaries had paid-in surplus exceeding $3.7 billion per company.

In 2008, 48 of the Townsend 100 Companies paid shareholder dividends of $16.9 billion, down from 65 companies paying $21.4 billion in 2007 and 72 companies paying $21.6 billion in 2006. Shareholder dividends exceeded $1 billion for: United Healthcare, $2.195 billion; Great-West Life & Annuity, $1.77 billion; General American, $1.318 billion; Metropolitan Life, $1.318 billion; and AFLAC, $1.06 billion.

Only 10 companies paid more than $500 million, and only 28 of the Townsend 100 Companies paid more than $100 million in shareholder dividends in 2008, compared to 17 and 28 companies in 2007, and 14 and 44 companies, respectively, in 2006.

Largest aggregate surplus gains in 2008 were: New York Life & Annuity, $847 million; MetLife Insurance Company CT (formerly Travelers), $846 million; Genworth Life Insurance, $601 million; Principal Life, $539 million; and Aetna Life, $385 million.

Largest percentage surplus gains in 2008, excluding new surplus paid-in, were MetLife Insurance Company CT, 16%; Monumental Life, 12%; Principal Life, 12%; and Midland National, 9%.

Seventy of the Townsend 100 Companies had surplus declines in 2008, compared to 33 companies in 2007. The largest percentage surplus declines, and causes, were AXA Equitable (operating and capital losses), 54%; General American (shareholder dividends), 50%; MONY Life (capital losses), 47%; and Great-West Life & Annuity (shareholder dividends), 46%.

Frederick S. Townsend, president of the Townsend Independent Actuarial Research Alliance (TIARA), produces due diligence reports on life insurance companies and can be reached at [email protected]. Laurie Dallaire can be reached at [email protected]


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