NU Online News Service, Aug. 5, 6:45 p.m. – Bad debt is probably not going to sink any U.S. life insurer any time soon, but investors should certainly be paying attention to the insurers' bond holdings, according to a new report from Lehman Brothers, New York.
"Today's balance-sheet irritant could become tomorrow's gaping hole," Lehman analysts Eric Berg and E. Stewart Johnson warn in the report.
Investors who buy bonds are lending money to the issuers. When money managers trade bonds on the secondary market, they factor in changes in the reputation of the borrowers, as well as changes in the interest rate environment, by adjusting the price from the initial face value, or "par value," and adjusting the effective yield, or "yield to maturity," from the stated rate.
The Lehman analysts define troubled bonds as issues that sell for less than half of par and trade at a yield to maturity of 18% or more.
