Life Insurers Take a Hit From Shaky Market

Life insurers saw $26 billion of their capital and surplus take a hit from the shaky stock market during the first nine months of 2008, Ratings found.
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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 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) - Get Report

, suffered the largest decline in capital $3.2 billion. AGC Life Insurance Co. and American Life Insurance Co., units of


(AIG) - Get Report

, 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.


property/casualty insurers

who are getting hit from both investment losses and underwriting losses, life insurers continue to be profitable in their underwriting. Although underwriting income was down 27% year-over-year, the industry still earned $36.8 billion on underwriting.

A big threat to this underwriting profitability, however, is the decline in sales of variable annuities. The Association for Insured Retirement Solutions (NAVA) recently reported that the third-quarter sales of these products were down 18.1%, the continuation of a declining trend that started in May 2008. This, of course, is closely correlated with the decline in the equities market.

After factoring in a staggering $41 billion in realized investment losses, the industry had a net loss of $21.6 billion for the first nine months of the year compared to a $30.2 billion profit for the first nine months of 2007.

Although the data are not broken out, clearly most of the realized investment losses were derived from a regulatory requirement to recognize "other than temporary impairments" of securities even if the securities were not actually sold. Companies with successful asset/liability matching programs who are able to hold their assets to maturity will be able to recover their full investments assuming no defaults.

The four companies leading the industry with the largest declines in profits are all AIG subsidiaries -- AIG Annuity, American General Life, Variable Annuity Life, and Sunamerica Life -- and all are primarily annuity writers. Another AIG subsidiary, American Life, was the tenth biggest loser. Continued losses by AIG affiliates will clearly affect the holding company's ability to sell off its assets in order to

repay the federal government


It is worth pointing out the one company whose profits increased by more than $1 billion during the first nine months of the year over the prior year's results. General American Life, an affiliate of


(MET) - Get Report

, earned $1.1 billion through the third quarter of 2008 compared to a profit of $132 million for the same period in 2007. General American ran into trouble in the '90s and was placed under administrative supervision by the Missouri Department of Insurance in August 1999 but then MetLife grabbed it up soon after in January 2000.

Publicly traded insurance holding companies will begin reporting fourth-quarter earnings later this month, which will, no doubt, be even more dire considering the plunge in the market during the quarter. Data reflecting full industry results on all 900 insurers will become available in the spring. Ratings issues financial strength ratings on each of the nation's 8,600 banks and savings and loans which are available at no charge on the

Banks & Thrifts Screener

. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the

Insurers & HMOs Screener


Melissa Gannon is director of insurance and bank ratings for Ratings, formerly Weiss Ratings, where she directs the operations of the company's insurance and bank ratings division.

In keeping with TSC?s Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Gannon cannot provide investment advice or recommendations, she appreciates your feedback;

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