Is your life insurance policy at subprime risk?

[EV_Ares]

by Peter Cohan

Banks aren't the only financial institutions at risk due to their holdings of asset-backed securities (ABSs) -- which totaled $1.23 trillion in 2006. Life insurance companies -- which accept premiums in exchange for paying your heirs when you die or paying you a pension when you retire use the premiums to buy investments so when it comes time for them to pay a claim, they'll have the money. Unfortunately, life insurers have invested some of that money in ABSs -- which are bundles of mortgages, credit card receivables, auto loans, and leveraged buyout loans.

How big is the ABS exposure of life insurers? According to the Mortgage Bankers Association, life insurance companies own $289 billion worth of commercial mortgages which back many of the ABSs. I've analyzed seven leading life insurers and found that they hold a total of $165 billion in such ABSs -- 162% of their equity capital of $102 billion.

If you do business with one of these companies, it might be worth trying to figure out whether they are able to protect your future benefits from the loss of value in these possibly shaky investments. In particular, these two companies have the most "dodgy" assets -- including ABSs and mortgages -- as a percentage of their equity:

MetLife (NYSE: MET) has $91.3 billion worth of residential and commercial mortgage-backed securities and other asset-backed securities representing 263% of its $34.7 billion worth of equity.
Principal Financial Group (NYSE: PFG) has $12.3 billion worth of mortgage loans representing 156% of its $7.9 billion worth of equity.
These ratios do not automatically mean that your life insurance policies are in danger. But the ABS market is in a state of panic right now so the securities do not trade and therefore do not have a market price. Insurance accounting rules most likely do not require insurance companies to mark their ABS holdings to market. Therefore, the only thing that could cut the value would be a reduction in the credit rating of the ABSs. And such reductions are happening.

Regardless of the accounting value of the ABSs, should the insurance companies need the cash flows from them to pay a claim, they could face some financial stress. The question for policyholders is whether the insurers have enough other assets with true market value to make up the difference.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Link: http://www.bloggingstocks.com/2007/11/10/is-your-life-insurance-policy-at-subprime-risk/

[L0oniX]

1. All insurance companys are scams designed to screw you in your time of need.

[lonestarnot]

2. Stop them!

[donsu]

3. who can pay for life insurance besides the wealthy

nt