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Life Health > Annuities

Fed Puts Life and Annuity Real Estate Under Magnifying Glass

By Allison Bell

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What You Need to Know

  • Analysts estimate a severe crisis could cut 16 insurers' capital by more than 20%.
  • A majority of the insurers with significant losses would lose less than 1% of their capital.
  • Most have locked in most of their annuity assets and institutional product liabilities.

Problems with life and annuity issuers’ commercial real estate could cause headaches for the issuers in a severe crisis but are unlikely to knock down the U.S. financial system.

A severe slump could wipe out more than 20% of the capital at about 16 insurers, including four insurers with more than $10 billion in assets, according to a team of three researchers at the Federal Reserve Bank of Chicago.

But only about five of those insurers have life insurance policies, annuities, institutional arrangements or other products set up in such a way that the customers could run in and pull out more than about 20% of their assets or account value quickly, the researchers report.

“The evidence presented here is consistent with the interpretation that life insurers are asset insulators,” rather than companies that would make the heat from an asset-driven economic crisis hotter, the researchers write.

Jordan Brown, Ralf Meisenzahl and Andy Polacek present their analysis in a new paper prepared for the bank’s Economic Perspectives journal.

What it means: The Fed is counting on life insurers’ ability to lock your clients’ life and annuity assets in to stabilize the U.S. financial system.

Commercial real estate: The COVID-19 pandemic caused severe, short-term problems for hotels.

Since then, hotel revenue and hotel investments values have recovered, but some observers worry that the “work from home” efforts have caused a permanent effect on many U.S. employers’ need for office space.

Some owners have had a hard time finding tenants.

Meanwhile, because of an increase in interest rates in the past two years, owners that bought buildings using short-term, low-rate mortgage loans have had a hard time replacing the old loans with new loans that they can afford.

The office mortgage loan refinancing crisis and the COVID occupancy slump have pushed office prices down 40% or more in some markets.

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.

Credit: Shutterstock

Allison Bell

Think_Allison

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