Life Insurers Face 'Unprecedented Stress' - S&P

As with banks, the long-term survival of the life insurance industry is likely to be determined by its access to bailout funds. No one trusts insurers’ balance sheets, which face “unprecedented stress” according to S&P, so they aren’t able to raise capital privately. (Bloomberg)

U.S. life insurers…face “unprecedented stress” on holdings in bonds and commercial mortgages in the next 18 months, Standard & Poor’s said….“The U.S. is in the midst of perhaps its longest recession in a generation, and our economists believe it is just entering its most difficult phase,” the ratings firm said today in a statement….

Losses and profit declines have discouraged investors in the industry’s stocks and bonds and left life insurers waiting for a response from the Treasury on requests for federal bailout funds.

A recent Citigroup report tells a tale of high risk exposures on insurers’ balance sheets. A key point they make has much to do with what I told NPR last week: Despite the industry’s reputation for investing conservatively, a large chunk of its assets are parked in junk bonds, real estate, stocks, subprime and alt-a.

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As S&P highlighted, problems in commercial real estate loom very large. Life insurers have big exposure in this area:

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Wouldn’t you know it, insurers are sitting on billions of dollars worth of “unrealized” losses.

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Not a pretty picture…

Comments

[TJB:]

If you believe everything Standard and Poor's says Rolfe, I have some swampland in Florida and some AAA rated Collateralized Debt Obligations to sell you. - TJB

Apr 15 06:28 PM

[PaperGains:]

The first category "High Risk Investments" doesn't raise any eye brows. The real estate loans are an issue, but I seriously doubt that their survival depends on access to TARP money. If that's the worst of it, I'm ok.

If they had exposure to credit card loans, auto loans, leveraged loans, and what ever else the big banks have, I'd be concerned. Also, most of these smaller banks going out of business have their portfolios highly concentrated in real estate, like 80+%

When you look at the amount of cash these companies generate, I think the large companies will be just fine.

Besides, who believes anything the rating agencies say anymore.

papergains

Apr 16 01:56 AM

[sf123:]

The rating agencies have gone from super careless to super conservative. To them, nowadays, everything is at risk.

Apr 16 02:12 AM

[BadToTheBone:]

The chicken is not little and the sky is not falling. The real metric for a life insurer is excess capital.

Apr 16 06:43 AM

[Chris B:]

Of course, anybody who owns bonds or other fixed income securities is underwater right now because of market prices. However, those securities are still producing cash to some extent (default rates still <10%).

Banks have been sunk because they have had to mark these paper losses as negative income and balance sheet reductions, even for securities that have low default rates. The rules for insurance companies (AIG aside) are less clear. If they are able to hold their securities to maturity rather than being forced to sell at below PV, they might turn out to be great for investors. I suspect that the premium-collecting nature of life insurance companies, coupled with the predictability of their expenses, will allow them to do exactly that.

Apr 16 12:25 PM

[Between The...:]

The real stress test for insurers will be the next major disaster that requires significant payout for property and casualty insurers. Without a ton of cash on hand, liquidation of the assets at depressed prices could cripple or bankrupt the weaker insurers.

Life insurance can be run as a Ponzi scheme (income >= current liabilities, assets << long term liabilities) for a long time because people die at a very slow predictable rate in aggregate. However, even a small run to cash out life policies would render almost every big insurer insolvent due to their inability to raise capital.

Apr 16 06:13 PM