With the U.S. Treasury sounding the siren for the possible U.S. default and potential effects of even postponing a debt ceiling increase deal, the life insurance industry is saying, "meh," at least with regard to their investment in Treasury securities being affected by the talks.
"In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression," the Treasury warned Thursday. "The U.S. dollar and Treasury securities are at the center of the international finance system. In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression."
The Treasury issued a report on the potential macroeconomic effect of debt brinksmanship and Secretary Jack Lew has taken to the press to urge Congress to "raise the debt limit immediately to avoid self-inflicted wounds that could impede economic growth and create uncertainty for families and businesses."
Life insurers are monitoring the situation closely, but don't want to comment on hypotheticals. However, investment surveys of the life insurance industry's general account assets show that they are mostly in fixed-income securities like corporate bonds and mortgage loans.
"Only 8 percent of our general account assets are held in long-term government bonds. In comparison, about half of our general account assets are in corporate debt," said Jack Dolan, a spokesman for the American Council of Life Insurers (ACLI).
The bond portfolios of the companies surveyed were heavily weighted toward corporates, which accounted for 62 percent of the total bond holdings, according to a report by Fitch released last month.
For example, among U.S. agencies at year-end 2012, Prudential Financial had about $17.4 billion in fair value U.S. Treasury securities and obligations available for sale, up from the previous year, but it had $159.33 billion in corporate securities, also up from the previous year, among its fixed maturities, available for sale.
