Life, Health Insurers Hit by Mortgage-Backed Securities

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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.