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Life and health insurers' profits were all but wiped out in the first half of the year, according to a quarterly review of the nation's 1,000 insurers. The industry earned a mere $370 million in the six months through June, down 98% from $21 billion in the same period in 2007.

Seventeen AIG ( AIG) insurers contributed nearly half, or $9.5 billion, to the year-over-year decline. The 17 affiliates lost a combined $6.6 billion in the first half, compared with a $2.9 billion profit in the first half of 2007. American General, composed of AIG's seven domestic life insurers, came under fire in Congress last week for holding an expensive junket soon after AIG's mid-September government bailout. The unit lost $2 billion in the first half.

Conseco Life Insurance of Texas, a unit of Conseco Group ( CNO), contributed $1.5 billion to the decline, but this drop was primarily due to the divestiture of the unit's Bankers Life subsidiary. Conseco Life of Texas lost $20 million in the same period last year.

But losses were not confined to those 18 insurers. In fact, 247 companies, 24% of the industry, lost money during the first half. They were primarily annuity writers, with $134 billion in annuity premiums in 2007. Insurers that sell variable annuities earn fees associated with the value of the underlying assets.

When the value of those underlying assets declines, as has been the case over the last several months, fee income also falls. MetLife ( MET) recently lowered its third-quarter earnings guidance based on expected lower fee revenue.

Many annuity insurers, however, were still profitable through the second quarter. The table below shows the 10-largest annuity providers in the U.S. Through June 30, only John Hancock and Hartford Life, a unit of Hartford Financial Services Group ( HIG), lost money. However, all but four of the top insurers had realized capital losses on their investments.

Click here for larger image.
Source: NAIC Quarterly Statutory Statements via Highline Data

AXA Equitable Life Insurance, a unit of AXA Group ( AXA), is the largest annuity writer in the U.S. based on 2007 premiums. AXA Equitable has a B ("Good") TheStreet.com Financial Strength Rating.

Hartford Life Insurance, one of five Hartford insurance subsidiaries, suffered the largest net loss at $452.6 million for the six-month period. Hartford recently received a $2.5 billion capital infusion from Allianz ( AZ) and was rumored to be talking about a merger with MetLife.

Staggering Investment Losses

Overall, the industry suffered a $14.8 billion realized capital loss during the first half, which includes both the sale of investments as well as the writedown of those securities deemed "other than temporarily impaired." This loss compared to a $2.4 billion realized investment gain a year ago.

The chart below shows the first-half capital gains/losses of the L&H industry going back to 1991 when TheStreet.com Ratings, and its predecessor, Weiss Ratings, began following the industry. The investment losses so far this year clearly dwarf anything the industry has seen.

Click here for larger image.
Source: NAIC Quarterly Statutory Statements via Highline Data

Operating income from the business of writing insurance was down $5.3 billion, or 16%, to $28 billion in the first half of 2008 from $33.3 billion a year ago. This was despite a healthy $22 billion year-over-year increase in total premiums. First-half health insurance claims experienced a double-digit increase for the third year in a row, up $5.7 billion -- or 10.5% -- to $60 billion.

Included in operating results is income from investments, which is key to the maintenance of policy reserves held for payouts on long-term policies. Investment income for the six-month period declined $3.4 billion, or 4%.

Industry Capital Deteriorates

First-half industry capital and surplus declined for the first time since 2002, falling $5.2 billion, or 1.6%, to $319 billion at June 30. This was primarily driven by an $18 billion decline in unrealized capital gains, which was offset by increases in the asset valuation reserve, deferred taxes and surplus notes -- a form of subordinated debt typically counted as capital by regulators because of the strict repayment guidelines whereby companies must get regulatory approval for each payment.

Third-quarter results are expected to show further deterioration as the equity and mortgage-backed securities markets continued to plunge. The life, health and annuity insurance industry, however, remains strong overall. It has enjoyed record profits for many years, building up capital reserves and, so far, remaining healthy even though some of the largest market participants will undoubtedly look very different this time next year. It is only the depth and length of the crisis that remains uncertain.

TheStreet.com 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 TheStreet.com 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 TheStreet.com 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.

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