AIG staggered spectacularly last week, the first major insurer to require a bailout from the federal government. But American Interna-tional Group’s troubles raise the question: How badly might other insurers suffer for their investments?
Analysts agree life insurance companies generally have sought safer investments than other financial players, but in a year of nasty surprises, some argue that tanking valuations of both tangible and intangible investments could wound insurance companies, too. And one analyst says after AIG’s very public debacle, other insurers would do well to publicly distance themselves from its troubles.
New England states are home to a number of major life insurers, such as John Hancock, MassMutual and Sun Life Financial in Mas-sachusetts and The Hartford, Aetna and Phoenix in Connecticut – some of which have already taken losses because of their investments in AIG and Lehman Brothers.
But as far as their other investments, the problem is one of contagion, said A.M. Best assistant vice president Tom Rosendale.
Insurance companies are largely fixed-income investors; they own, too, residential and commercial mortgage-backed securities, asset-backed securities, credit card receivables and more, he said. If last week’s events lead to further economic downturns that create yet more mortgage defaults, those securities’ values erode even further.
However, he added, “They’re – to date – weathering this better than a lot of those financial services companies.”
Richard McMillan, a senior analyst with A.M. Best, said many of those securities’ market values are “significantly” below their book value because of lowered interest rates. It becomes something of a waiting game for insurers, he said: Those investments’ values should be back up by the time they reach maturity, so the wise thing is just to ride out the storm and anticipate better values ahead.
But Rachel Alt-Simmons, research director with TowerGroup, says such anxieties are overblown. Many life insurers simply don’t have enough security investments to be damaged by them, she said – such investments are miniscule, “a rounding error on these companies’ balance sheets.”
Insurers like Ambac Financial Group and Genworth Financial have seen troubles because they got themselves more heavily into these types of securities, she said, but other insurers smelled trouble coming and unloaded these investments early in the year.
Major insurers are also involved in commercial real estate, both in ownership and lending. Although commercial property prices are fal-ling, McMillan said insurers have limited their exposure by keeping carefully diverse portfolios. Besides, they’re still getting good income from these buildings, so they’re largely content to hang on until prices pick up.
A bigger concern might be from the flurry of panic surrounding the entire financial environment, Alt-Simmons said. In hearing that AIG is going down in flames, investors might figure insurance companies are all going to start seeing financial woes, too – that “guilt by asso-ciation” could make investors throw up their hands and pull their money from insurers’ investments, too.
That should spark some image control from these companies. “I haven’t seen a lot of publicity from insurance companies to distance themselves,” she said. “They should start talking about it now.”
