Update on the Life Insurance Companies

5-18-09
Dan Ferris, S&A Digest

Yesterday, the government announced it would expand bailout efforts to include insurance companies, earmarking some of the $130 billion in remaining TARP funds to boost confidence in the sector

The reality is that the government can't possibly bail out 18% of the corporate bond market, the entire stock market, and a big chunk of the commercial real estate sector, (the total of the life insurer's asset reserves) not even if it spent 100% of the remaining $130 billion of TARP money on life insurers, which is highly unlikely.

According to a recent report by Bridgewater Associates, between ratings downgrades and actual losses, the 13 largest publicly traded U.S. life insurance companies would need about another $400 billion just to stay afloat. But what if that's not enough? Everything the government has spent so far hasn't been enough to fix anything.

It's a legitimate question, whether losses will be taken by the insurance companies, their investors, and their clients (which is what ought to happen) or whether they'll be taken by the taxpayers (which would be a real crime). I don't see how the government could put it on the taxpayer without risking hyperinflation. It would have to print trillions, which it has done already to no avail.

5-20-09

Wall st Journal says Met Life, one of the largest life insurers, has direct exposure to $36 Bil in commercial real estate. It has tangible equity of $19 Bil. If its commercial real estate investments incur a 25% loss, half of its tangible equity will be wiped out! This may trigger demands from state regulators to replace the loss capital at a time when its stocks will have been hard hit by the loss of its equity! This could set off a Run on the company as panicked policy holders seek to draw out as much of their cash as possible, as quickly as possible.

Insurance companies are in big danger because of their exposure not only to commercial real estate, where various estimated call for a default rate of 30% in $700 Bil worth of CRMBS, Commercial Mortgage Backed Securities, but also to variable annuities where they have guaranteed annuity holders a return of the S&P or better.

Corporate bonds, another "safe" investment for insurance companies, where default rates as high as 10% have been forecast, are yet another troubled area for life insurers.

It is very likely, according to my research that we will see the failure or insolvency of several of the biggest life insurance companies in the world.

What would happen if your life insurance carrier collapsed? http://silverpros.blogspot.com/2009/04/what-would-happen-if-your-life.html