By Peter Passell With real estate values going downhill and
banks nationwide struggling to avoid being buried in the slide,
anxieties are focusing on yet another group of lenders: life
Last week, Travelers Corp. acknowledged large losses on its real
estate investments and chopped its dividend.
The news prompted worried investors to sell Travelers shares as
well as those of other major life insurers with sizable holdings of
real estate and ``junk bonds,'' sending their stock prices sharply
Some analysts warn that troubled assets have grown so large at
dozens of insurance companies that they could face the prospect of
bankruptcy - especially if the economy weakens further.
But most experts believe that a wave of bankruptcies putting
large numbers of policyholders at risk remains unlikely. Even a
lesser crisis of confidence in the life insurance industry, however,
could tighten the credit noose on many business borrowers, deepening
and lengthening the now-likely recession.
``It would be disaster to lose a major source of capital,''
concludes Eden Sarfaty, the head of the National Organization of
Health and Life Insurance Guarantee Associations.
Until the last decade, life insurance was the most predictable
of financial industries. Much premium income was invested in bonds,
mortgages and real estate, all of which were susceptible to
fluctuations in value.
But the death benefits and minimum investment returns promised
to policyholders were based on such conservative assumptions that
honestly managed insurance companies ran little risk of being unable
to pay their obligations.
But since the early 1980's, said Terry Lennon, a senior official
in New York State's Department of Insurance, ``life insurers have
been forced to change because other financial institutions
Banks and savings and loans were freed to pay depositors any
interest rate they chose, and the competition for savers' dollars
Companies guaranteed higher returns to policyholders, cutting
margins for investment error. Yet in an effort to maintain profits,
they sank more money in riskier assets, notably bonds from
IDS Financial Services in Minneapolis estimates that ``junk
bond'' holdings now represent 6.4 percent of life insurers' assets -
a sum roughly equal to the industry's net worth.
As important, life insurers spread their nets wider in search of
cash. Fixed annuities, effectively tax-deferred certificates of
deposit, were marketed to tax-conscious investors. And guaranteed
investment contracts - promises to pay fixed returns over periods as
long as 10 years - were sold by the billions to pension funds.
Much of this new business wqs profitable. But it increased the
probability that insurers would end up owing a lot of money at high
interest rates, even as the income on their investments was falling.
The savings and loan industry was trapped in just such a
predicament in the early 1980s. Without the sense of security
conferred by federal insurance, many would have lost the confidence
of depositers and been unable to attract new cash to meet old
IDS concludes that life insurers are now highly vulnerable to
economy-wide shocks that raise interest rates, or force corporate
borrowers into bankruptcy or undermine the value of commercial real
To test the degree of vulnerability, they estimated the likely
losses of each of the 100 largest companies in the event of a
moderate or a severe economic downturn.
In the ``moderate loss'' scenario, 18 would be at risk of
insolvency, leaving state guarantee funds to pay policyholders about
$3.1 billion. The ``severe loss'' scenario predicts that 34
companies might fail, with a total loss as high as $11. …