Fed Puts Life and Annuity Real Estate Under Magnifying Glass
Analysis details: The Chicago Fed economists conducted the analysis to address concerns that life insurers’ large investments in office mortgages and in commercial mortgage-backed securities backed by offices could perform so poorly that the office slump might kill life insurers, cause a run on life insurers’ assets, and start or amplify financial system problems.
The economists wave off objections that life insurers are set up in such a way that the customers can’t run in and get their assets out.
“Runs in the insurance sector have occurred in the past,” the economists write.
In 1991, they report, policyholders ran on Executive Life, a company with large, poorly performing holdings in bonds issued by companies with low crediting ratings, and asked for policy withdrawals and annuity surrenders equal to about 30% of the value of the insurer’s life and annuity product liabilities.
The economists included all U.S. life insurers in their analysis but looked in depth only at a few dozen insurers that they believe could have more than $250 million in commercial real estate losses in a crisis.
They look at a crisis roughly comparable to the current slump, not a more severe slump.
In that scenario, losses in New York could cost life insurers about $2 billion, and losses in Los Angeles could cost them about $1.5 billion.
Losses could range from $500 million to $1 billion in San Francisco in Washington.
A majority of the insurers that would have losses would have losses amounting to less than 1% of their capital, and few are set up in such a way that they could lose more than 20% of their product liabilities and annuity assets to runs, the economists found.
Insurers could be especially vulnerable to runs if they have a significant share of certain kinds of institutional arrangements, such as funding-agreement-backed securities, or if they have a large share of annuities that can be surrendered without a penalty, the economists write.
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