Friday, December 18, 2009

Life Insurance Premiums Rising Due to Bad Real Estate Investments


For generations the life insurance industry was one of the largest single investors in real estate. The relationship for policy beneficiaries was almost perfect. Insurance companies needed a place to securely stash insurance premiums for years, even decades, awaiting the ultimate day when a death occurred and a payoff needed to be made. Investing in real estate provided an ideal vehicle.

Not anymore.

The slow-but-steady-and-predictable growth model of insurance companies investing in real estate long-term through purchases of properties or mortgages gave rise to the get-rich-faster model of real estate speculation. Buy and flip, instead of buy-and-hold.

Now, life insurance companies are looking at hundreds of billions of still unrealized real estate losses on their investment portfolios. Look at the list of companies and numbers below from Bloomberg.

You may be asking so what? Who cares? Unless you are a shareholder of these companies why pay attention to their losses?

Simple. Life insurance companies need to get the money they pay policy holders with from somewhere. If they are losing tens of billions on their investments, money they counted on through their actuarial tables to pay their policy holders when they all finally meet their Heavenly Reward, where do you think the money comes from to pay all the widows and orphans?

Easy answer.

From you, silly.

Life insurance rates are rising. Dramatically. Individuals will be paying hundreds of dollars more per year for a new term life policy, for example.

It also means that many insurance companies that looked solid on paper when you trusted them to pay your heirs may be not so solid anymore. If I was you I'd check my insurance company through the rating agency A.M. Best and really see how safe your money is.

As if death wasn't trouble enough....

Robert J. Abalos, Esq.

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Insurers May Lose $10 Billion on Commercial Property
By Andrew Frye

Dec. 16 (Bloomberg) -- U.S. life insurers, a group led by MetLife Inc. and Prudential Financial Inc., may post $10 billion in losses tied to commercial real estate over the next three years, Moody’s Investors Service said.

Defaults on property loans and declines in commercial mortgage-backed securities will “dampen earnings,” the ratings firm said in a statement. The loss estimate was increased from $7 billion earlier in the year, Robert Riegel, managing director at Moody’s, said in an interview today.

Life insurers use policyholder premiums to lend to property owners and buy commercial mortgage-backed securities. MetLife, which has about $50 billion of its $338 billion portfolio in commercial property loans and CMBS, and Prudential are bracing for losses as declining real estate values and occupancy strain borrowers. Life insurers have reduced their commercial property holdings and will record fewer losses than banks, Moody’s said.

“This is one of the key areas of concern going forward,” Riegel said.

North American insurers led by American International Group Inc. have posted more than $190 billion of writedowns and unrealized losses since 2007 tied to investments including securities linked to home loans and debt issued by builders and banks. Commercial mortgage losses tend to occur after homeowner defaults, MetLife and Prudential have said.

Allianz, Sun Life

Insurers based outside the U.S. are seeking to expand in commercial property and lending, and say distressed owners and lenders may lead to opportunities. Canada’s Sun Life Financial Inc. said last month was lifting its moratorium and may invest in commercial mortgages. Allianz SE, Germany’s biggest insurer, expects to find bargains in U.S. commercial property, finance head, Paul Achleitner, said in October.

The commercial mortgage default rate on loans held by U.S. banks more than doubled to 3.4 percent in the third quarter as vacancies rose and rents declined, Real Estate Econometrics LLC said Dec. 1.

Third-quarter defaults climbed from 1.37 percent a year earlier and 2.88 percent in the second quarter, the New York- based property research firm said. Default rates in the first three quarters of 2009 have been the highest since 1993, the firm said.

Insurance companies have been more conservative than other firms in their commercial property investments because they lost money during the market decline about 20 years ago, said Jamie Woodwell, vice president of commercial real estate research for the Washington-based Mortgage Bankers Association.

Lessons Learned

“They have learned from past missteps dealing with commercial real estate,” Moody’s Senior Vice President Jeffrey Berg said in the statement. Expected losses of $10 billion will be “manageable” and are unlikely to lead to many credit downgrades, he said.

Under a worst-case scenario, which Berg considers remote, losses may exceed $40 billion, which would lead to insurers having their grades cut by multiple levels.

Commercial real estate prices may fall as much as 55 percent from October 2007’s peak, Moody’s said last month.