Life Insurers Take a Hit From Shaky Market

A shaky stock market ate away $26 billion of the capital and surplus of the nation's 900 life and health insurers during the first nine months of last year, according to a new analysis by TheStreet.com Ratings.

Insurers started 2008 with $329 billion in surplus and ended the third quarter with $303 billion. A $39 billion increase in unrealized investment losses was the primary cause of the decline. The industry also paid out $18 billion in stockholder dividends and reported a $20 billion decrease in nonadmitted assets. This was offset by a $15 billion increase in the asset valuation reserve and $42 billion of paid in surplus.

Prudential Insurance Co. of America, the largest insurance unit of Prudential Financial (PRU Quote), suffered the largest decline in capital $3.2 billion. AGC Life Insurance Co. and American Life Insurance Co., units of AIG (AIG Quote), lost $2.7 billion and $2.4 billion in capital, respectively, in the first nine months of the year.

In reaction to this decline in capital, the industry is asking its regulators for relief. Earlier this month, the National Association of Insurance Commissioners (NAIC) -- the industry's regulatory body -- met to discuss a request made by the American Council of Life Insurers (ACLI) in November to ease strict capital requirements.

No action was taken at the meeting, but the NAIC is accepting comments until Jan. 23 on the ACLI's proposal, which includes a request for relief in conservative reserving requirements on life insurance policies, a reduction in risk-based capital requirements for variable annuities and mortgage holdings, and a more favorable treatment of the tax benefits of declining asset values. A hearing will be held to discuss these proposals and the NAIC's response on Jan. 27.