Profits of the nation's life and health insurers plummeted $9.9 billion to a mere $542.6 million in the first quarter of 2008, a 95% decline from $10.4 billion in the same period a year ago.
Profits -- made up of operating income from the business of writing insurance and realized gains/losses on investments -- were down for the first time since first-quarter 2005 and were the worst first-quarter industry results in the 15 years that TheStreet.com Ratings (and its predecessor Weiss Ratings) has followed the industry.
The industry suffered a decline in its operating results as well as a massive realized loss on investments. Operating income for the industry declined 28% to $11.9 billion in the first quarter of 2008, down $4.6 billion from $16.5 billion in 2007, while investment results turned negative in a big way.
Realized losses on investments totaled $5.3 billion, down from a positive $1.1 billion gain during the first quarter of 2007, primarily due to a writedown of the bond portfolio.
Insurance companies typically report fixed-income investments (the vast majority of their holdings) at the amortized value rather than marking to market each quarter. This is based on the theory that the securities are matched to liabilities and will be held through typical price fluctuations.
The exception to this is if the company has determined that the securities have suffered an "other-than-temporary impairment." This can be defined by a number of circumstances, one example of which is that the security's price has declined 25% or more for an extended period of time.
We're seeing this happen with the industry's multibillion-dollar holdings in mortgage-backed securities,
as predicted in February
Looking at the 10 companies with the largest year-over-year first-quarter profit decreases, we see that all of them are highly rated. Their financial strength ratings range from B- to A+, our top rating. They are all well-capitalized companies that should withstand the current environment.
Leading the pack of companies with the most overall losses industrywide are four AIG
subsidiaries -- AIG Annuity Insurance Company, Sunamerica Life Insurance Company, American General Life Insurance Company, and Variable Annuity Life Insurance Company -- that combined lost a total of $2.3 billion in the first quarter.
These four companies suffered a combined total loss on investments of $2.8 billion and a $629 million decline in operating results on the business of selling insurance and annuities. All four companies are major writers of fixed and variable annuities. The problems at AIG continue to unravel and even more are expected, given its behemoth financial web.
In terms of net premiums earned during the first quarter, the largest company on the list of worst profit decliners is Metropolitan Life Insurance Company, a unit of
. The company lost $5.4 million in the first quarter, down from a $594 million gain in the same period the prior year. The decline comes primarily from a realized loss on investments of $313 million, down from a positive $34 million a year ago.
In addition, death benefits and health claims were up $267 million and policy reserves increased $683 million; these were only mildly offset by a decline in annuity payouts and policy surrenders.
The highest-rated company on the list, with an A+ rating, is Teachers Insurance and Annuity Association of America, a unit of TIAA Family of Companies. The company has earned an A+ rating since 1998 with risk-adjusted capital ratios consistently far above regulatory requirements. However, first-quarter profits were down 80% from the prior year to $91 million, driven almost exclusively by investment losses as operating losses were only down a slight $27 million. The company booked $225 million in investment losses during the first quarter.
The only company on the list that actually increased operating profit was Prudential Insurance Company of America, a unit of
. Its earnings on the business of writing insurance and annuities increased $272 million during the first quarter, to $662 million from $389 million a year ago. However, a $330 million loss on investments drove down overall profit to a net loss of $238 million, compared to a $184 million net profit a year ago.
The only company on the list that bucked the trend and improved investment results by turning a first-quarter 2007 investment loss of $17 million into a $77 million gain was ING USA Annuity and Life Insurance Company, a unit of
ING USA Holding
. Its operating loss was $468 million, down from a $135 million gain a year ago. This operating loss was primarily caused by a $207 million increase in policy surrenders, a $260 million increase in fixed annuity reserves, but most significantly a $1.3 billion increase in transfers to separate accounts due to an increase in sales of variable life and annuities.
The company with the largest decline in operating results is Hartford Life Insurance Company, a unit of
Hartford Financial Services
. The company lost $456 million writing insurance and annuities, down from a positive $154.5 million a year ago.
Finally rounding out the list is Allstate Life Insurance Company, a unit of
, with a $337 million operating loss compounded by a $163 million loss on investments. Adding in policyholder dividends and taxes, the company lost a total of $346 million during the first quarter.
While general account invested assets continued to increase, the industry's separate account assets -- those tied to variable life and annuity products -- declined for the first time since the first quarter of 2003. Following two years of double-digit growth, separate account assets were down $17.3 billion, or 1%, to $1.74 trillion from $1.76 trillion a year ago. This reflects a decline in the equity market during the first quarter.
Despite an unrealized loss on investments of $8.3 billion, the industry's capital and surplus remained relatively flat, increasing a slight 0.6%, or $1.8 billion, to $321 billion from $319 billion a year ago. The industry overall remains extremely well capitalized.
TheStreet.com Ratings, Inc. makes its financial strength ratings for all life and health insurers available for free on the
Melissa Gannon is director of insurance and bank ratings for TheStreet.com Ratings, formerly Weiss Ratings, where she directs the operations of the company's insurance and bank ratings division.
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