Life Insurer Surplus Drops $77 Billion, Erasing Gain (Update2)

By Andrew Frye
Bloomberg News
January 8, 2009

Jan. 8 (Bloomberg) -- U.S. life insurers, led by MetLife Inc. and Prudential Financial Inc., lost $76.8 billion in surplus in 2008 on investment declines and costs guaranteeing retirement products, erasing six years of gains, Conning & Co. said.

Statutory surplus -- the difference between assets and liabilities -- fell 24 percent to $237.3 billion in 2008, according to a study released yesterday by the consulting firm. The industry may need to raise $50 billion in capital and undergo "significant" consolidation after the losses, Conning said.

Life insurers cut jobs, asked regulators to ease reserve standards and applied for government aid in the fourth quarter to replenish their dwindling capital cushion. Assets have slipped on declines in the value of corporate debt and mortgage investments held to back policies. Liabilities advanced after equity market drops increased the funds carriers needed to back guarantees of minimum returns made to some annuity customers.

"Life insurers took a double hit in 2008," said Terence Martin, a Conning analyst and author of the report. "A surplus reduction of this magnitude suggests that some insurance companies will be required to raise capital." He didn't name which companies may need the funds.

Insurance stocks plummeted last year, and companies including Prudential halted buybacks and slashed dividends to preserve capital. In October, New York-based MetLife sold $2.3 billion in shares and Hartford Financial Services Group Inc. got a $2.5 billion cash infusion from Germany's Allianz SE.

The 24-stock KBW Insurance Index fell 48 percent last year, with MetLife down 43 percent, Newark, New Jersey-based Prudential off 67 percent and Hartford declining 81 percent.

Streak Ends

Surplus declined 2.6 percent in 2001 and gained at least 3.4 percent every year since 2004, according to Conning.

"We expect that many life companies will build and maintain bigger capital cushions going forward," Jeffrey Schuman, an analyst at KBW Inc., said yesterday in a research note.

MetLife gained 11 cents to $32.55 at 9:44 a.m. in New York Stock Exchange composite trading. Newark, New Jersey-based Prudential advanced 59 cents, or 1.8 percent, to $32.65. Hartford, based in the Connecticut city of the same name, added 35 cents, or 2 percent, to $18.26.

Hartford, which reported a net loss of $2.6 billion in the third quarter, is seeking as much as $3.4 billion from Treasury's Troubled Asset Relief Program. Prudential, Lincoln National Corp. and Principal Financial Group Inc. have also said they applied for government aid.

Insurers that are downgraded by ratings firms because of diminished capital may lose sales to employers, Conning said, without naming vulnerable firms.

The American Council of Life Insurers successfully lobbied to state regulators to consider easing reserve requirements. The National Association of Insurance Commissioners is holding a hearing on Jan. 27 in Washington on regulatory reform.

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